G.R. No.

113032 August 21, 1997

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L.
VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS &
REGINALD F. VILLASIS, petitioner,
vs.
RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD
SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S.
SALAS & HON. JUDGE PORFIRIO PARIAN, respondents.
HERMOSISIMA, JR., J.:
Up for review on certiorari are: (1) the Decision dated
September 6, 1993 and (2) the Order dated November 23,
1993 of Branch 33 of the Regional Trial Court of Iloilo City in
Criminal Cases Nos. 37097 and 37098 for estafa and
falsification of a public document, respectively. The judgment
acquitted the private respondents of both charges, but
petitioners seek to hold them civilly liable.
Private respondents Ricardo T. Salas, Salvador T. Salas,
Soledad Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas,
belonging to the same family, are the majority and controlling
members of the Board of Trustees of Western Institute of
Technology, Inc. (WIT, for short), a stock corporation engaged
in the operation, among others, of an educational institution.
According to petitioners, the minority stockholders of WIT,
sometime on June 1, 1986 in the principal office of WIT at La
Paz, Iloilo City, a Special Board Meeting was held. In
attendance were other members of the Board including one of
the petitioners Reginald Villasis. Prior to aforesaid Special
Board Meeting, copies of notice thereof, dated May 24, 1986,
were distributed to all Board Members. The notice allegedly
indicated that the meeting to be held on June 1, 1986
included Item No. 6 which states:
Possible implementation of Art. III, Sec. 6 of the
Amended By-Laws of Western Institute of Technology,
Inc. on compensation of all officers of the
corporation. 1
In said meeting, the Board of Trustees passed Resolution No.
48, s. 1986, granting monthly compensation to the private
respondents as corporate officers retroactive June 1,
1985, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly
seconded by Mrs. Soledad Tubilleja (accused), it was
unanimously resolved that:
The Officers of the Corporation be
granted monthly compensation for
services rendered as follows:
Chairman P9,000.00/month, Vice
Chairman P3,500.00/month,
Corporate Treasurer
P3,500.00/month and Corporate
Secretary P3,500.00/month,
retroactive June 1, 1985 and the
ten per centum of the net profits
shall be distributed equally among
the ten members of the Board of
Trustees. This shall amend and
superceed (sic) any previous
resolution.
There were no other business.
The Chairman declared the meeting adjourned at
5:11 P.M.
This is to certify that the foregoing minutes of the
regular meeting of the Board of Trustees of Western
Institute of Technology, Inc. held on March 30, 1986
is true and correct to the best of my knowledge and
belief. (Sgd) ANTONIO S. SALAS
Corporate Secretary 2

A few years later, that is, on March 13, 1991, petitioners

Homero Villasis, Prestod Villasis, Reginald Villasis and Dimas
Enriquez filed an affidavit-complaint against private
respondents before the Office of the City Prosecutor of Iloilo,
as a result of which two (2) separate criminal informations,
one for falsification of a public document under Article 171 of
the Revised Penal Code and the other for estafa under Article
315, par. 1(b) of the RPC, were filed before Branch 33 of the
Regional Trial Court of Iloilo City. The charge for falsification of
public document was anchored on the private respondents'
submission of WIT's income statement for the fiscal year
1985-1986 with the Securities and Exchange Commission
(SEC) reflecting therein the disbursement of corporate funds
for the compensation of private respondents based on
Resolution No. 4, series of 1986, making it appear that the
same was passed by the board on March 30, 1986, when in
truth, the same was actually passed on June 1, 1986, a date
not covered by the corporation's fiscal year 1985-1986
(beginning May 1, 1985 and ending April 30, 1986). The
Information for falsification of a public document states:
The undersigned City Prosecutor accuses RICARDO T.
SALAS, SALVADOR T. SALAS, SOLEDAD SALASTUBILLEJA, ANTONIO S. SALAS and RICHARD S.
SALAS (whose dates and places of birth cannot be
ascertained) of the crime of FALSIFICATION OF A
PUBLIC DOCUMENT, Art. 171 of the Revised Penal
Code, committed as follows:
That on or about the 10th day of
June, 1986, in the City of Iloilo,
Philippines and within the
jurisdiction of this Honorable Court,
the above-named accused, being
then the Chairman, Vice-Chairman,
Treasurer, Secretary, and Trustee
(who later became Secretary),
respectively, of the board of
trustees of the Western Institute of
Technology, Inc., a corporation duly
organized and existing under the
laws of the Republic of the
Philippines, conspiring and
confederating together and
mutually helping one another, to
better realized (sic) their purpose,
did then and there wilfully,
unlawfully and criminally prepare
and execute and subsequently
cause to be submitted to the
Securities and Exchange
Commission an income statement
of the corporation for the fiscal
year 1985-1986, the same being
required to be submitted every end
of the corporation fiscal year by the
aforesaid Commission, and
therefore, a public document,
including therein the disbursement
of the retroactive compensation of
accused corporate officers in the
amount of P186,470.70, by then
and there making it appear that
the basis thereof Resolution No. 4,
Series of 1986 was passed by the
board of trustees on March 30,
1986, a date covered by the
corporation's fiscal year 1985-1986
(i.e., from May 1, 1985 to April 30,
1986), when in truth and in fact, as
said accused well knew, no such
Resolution No. 48, Series of 1986
was passed on March 30, 1986.

CONTRARY TO LAW.
Iloilo City, Philippines, November 22,
1991. 3 [Emphasis ours].
The Information, on the other hand, for estafa reads:
The undersigned City Prosecutor accuses RICARDO
SALAS, SALVADOR T. SALAS, SOLEDAD SALASTUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS
(whose dates and places of birth cannot be
ascertained) of the crime of ESTAFA, Art. 315, par. 1
(b) of the Revised Penal Code, committed as follows:
That on or about the 1st day of
June, 1986, in the City of Iloilo,
Philippines, and within the
jurisdiction of this Honorable Court,
the above-named accused, being
then the Chairman, Vice-Chairman,
Treasurer, Secretary, and Trustee
(who later became Secretary),
respectively; of the Board of
Trustees of Western Institute of
Technology, Inc., a corporation duly
organized and existing under the
laws of the Republic of the
Philippines, conspiring and
confederating together and
mutually helping one another to
better realize their purpose, did
then and there wilfully, unlawfully
and feloniously defraud the said
corporation (and its stockholders)
in the following manner, to wit:
herein accused, knowing fully well
that they have no sufficient, lawful
authority to disburse let alone
violation of applicable laws and
jurisprudence, disbursed the funds
of the corporation by effecting
payment of their retroactive
salaries in the amount of
P186,470.00 and subsequently
paying themselves every 15th and
30th of the month starting June 15,
1986 until the present, in the
amount of P19,500.00 per month,
as if the same were their own, and
when herein accused were
informed of the illegality of these
disbursements by the minority
stockholders by way of objections
made in an annual stockholders'
meeting held on June 14, 1986 and
every year thereafter, they refused,
and still refuse, to rectify the same
to the damage and prejudice of the
corporation (and its stockholders)
in the total sum of P1,453,970.79
as of November 15, 1991.
CONTRARY TO LAW.
Iloilo City, Philippines, November 22,
1991. 4 [Emphasis ours]
Thereafter, trial for the two criminal cases, docketed as
Criminal Cases Nos. 37097 and 37098, was consolidated. After
a full-blown hearing, Judge Porfirio Parian handed down a
verdict of acquittal on both counts 5 dated September 6, 1993
without imposing any civil liability against the accused
therein.
Petitioners filed a Motion for Reconsideration 6 of the civil
aspect of the RTC Decision which was, however, denied in an
Order dated November 23, 1993. 7

Hence, the instant petition.

Significantly on December 8, 1994, a Motion for Intervention,
dated December 2, 1994, was filed before this Court by
Western Institute of Technology, Inc., supposedly one of the
petitioners herein, disowning its inclusion in the petition and
submitting that Atty. Tranquilino R. Gale, counsel for the other
petitioners, had no authority whatsoever to represent the
corporation in filing the petition. Intervenor likewise prayed for
the dismissal of the petition for being utterly without merit.
The Motion for Intervention was granted on January 16,
1995. 8
Petitioners would like us to hold private respondents civilly
liable despite their acquittal in Criminal Cases Nos. 37097 and
37098. They base their claim on the alleged illegal issuance
by private respondents of Resolution No. 48, series of 1986
ordering the disbursement of corporate funds in the amount
of P186,470.70 representing retroactive compensation as of
June 1, 1985 in favor of private respondents, board members
of WIT, plus P1,453,970.79 for the subsequent collective
salaries of private respondents every 15th and 30th of the
month until the filing of the criminal complaints against them
on March 1991. Petitioners maintain that this grant of
compensation to private respondents is proscribed under
Section 30 of the Corporation Code. Thus, private respondents
are obliged to return these amounts to the corporation with
interest.
We cannot sustain the petitioners. The pertinent section of the
Corporation Code provides:
Sec. 30. Compensation of directors In the absence
of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for
reasonable per diems: Provided, however, That any
such compensation (other than per diems) may be
granted to directors by the vote of the stockholders
representing at least a majority of the outstanding
capital stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income
tax of the corporation during the preceding year.
[Emphasis ours]
There is no argument that directors or trustees, as the case
may be, are not entitled to salary or other compensation when
they perform nothing more than the usual and ordinary duties
of their office. This rule is founded upon a presumption that
directors/trustees render service gratuitously, and that the
return upon their shares adequately furnishes the motives for
service, without compensation. 9 Under the foregoing section,
there are only two (2) ways by which members of the board
can be granted compensation apart from reasonable per
diems: (1) when there is a provision in the by-laws fixing their
compensation; and (2) when the stockholders representing a
majority of the outstanding capital stock at a regular or
special stockholders' meeting agree to give it to them.
This proscription, however, against granting compensation to
directors/trustees of a corporation is not a sweeping rule.
Worthy of note is the clear phraseology of Section 30 which
states: ". . . [T]he directors shall not receive any
compensation, as such directors, . . . ." The phrase as such
directors is not without significance for it delimits the scope of
the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees.
The unambiguous implication is that members of the board
may receive compensation, in addition to reasonable per
diems, when they render services to the corporation in a
capacity other than as directors/trustees. 10 In the case at
bench, Resolution No. 48, s. 1986 granted monthly
compensation to private respondents not in their capacity as
members of the board, but rather as officers of the

corporation, more particularly as Chairman, Vice-Chairman,

Treasurer and Secretary of Western Institute of Technology. We
quote once more Resolution No. 48, s. 1986 for easy
reference, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly
seconded by Mrs. Soledad Tubilleja (accused), it was
unanimously resolved that:
The Officers of the Corporation be
granted monthly compensation for
services rendered as follows:
Chairman P9,000.00/month, Vice
Chairman P3,500.00/month,
Corporate Treasurer
P3,500.00/month and Corporate
Secretary P3,500.00/month,
retroactive June 1, 1985 and the
ten per centum of the net profits
shall be distributed equally among
the ten members of the Board of
Trustees. This shall amend and
superceed (sic) any previous
resolution.
There were no other business.
The Chairman declared the meeting adjourned at
5:11 P.M.
This is to certify that the foregoing minutes of the
regular meeting of the Board of Trustees of Western
Institute of Technology, Inc. held on March 30, 1986
is true and correct to the best of my knowledge and
belief.
(Sgd) ANTONIO S. SALAS
Corporate Secretary 11 [Emphasis ours]
Clearly, therefore, the prohibition with respect to granting
compensation to corporate directors/trustees as suchunder
Section 30 is not violated in this particular case.
Consequently, the last sentence of Section 30 which provides:
. . . . . . . In no case shall the total yearly
compensation of directors, as such directors,
exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding
year. (Emphasis ours]
does not likewise find application in this case since the
compensation is being given to private respondents in their
capacity as officers of WIT and not as board members.
Petitioners assert that the instant case is a derivative suit
brought by them as minority shareholders of WIT for and on
behalf of the corporation to annul Resolution No. 48, s. 1986
which is prejudicial to the corporation.
We are unpersuaded. A derivative suit is an action brought by
minority shareholders in the name of the corporation to
redress wrongs committed against it, for which the directors
refuse to sue. 12 It is a remedy designed by equity and has
been the principal defense of the minority shareholders
against abuses by the majority. 13 Here, however, the case is
not a derivative suit but is merely an appeal on the civil
aspect of Criminal Cases Nos. 37097 and 37098 filed with the
RTC of Iloilo for estafa and falsification of public document.
Among the basic requirements for a derivative suit to prosper
is that the minority shareholder who is suing for and on behalf
of the corporation must allege in his complaint before the
proper forum that he is suing on a derivative cause of action
on behalf of the corporation and all other shareholders
similarly situated who wish to join. 14 This is necessary to vest
jurisdiction upon the tribunal in line with the rule that it is the
allegations in the complaint that vests jurisdiction upon the
court or quasi-judicial body concerned over the subject matter
and nature of the action. 15 This was not complied with by the
petitioners either in their complaint before the court a quo nor

in the instant petition which, in part, merely states that "this is

a petition for review on certiorari on pure questions of law to
set aside a portion of the RTC decision in Criminal Cases Nos.
37097 and 37098" 16 since the trial court's judgment of
acquittal failed to impose any civil liability against the private
respondents. By no amount of equity considerations, if at all
deserved, can a mere appeal on the civil aspect of a criminal
case be treated as a derivative suit.
Granting, for purposes of discussion, that this is a derivative
suit as insisted by petitioners, which it is not, the same is
outrightly dismissible for having been wrongfully filed in the
regular court devoid of any jurisdiction to entertain the
complaint. The ease should have been filed with the Securities
and Exchange Commission (SEC) which exercises original and
exclusive jurisdiction over derivative suits, they being intracorporate disputes, per Section 5 (b) of P.D. No. 902-A:
In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of
associations registered with it as expressly granted
under existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide cases
involving:
xxx xxx xxx
b) Controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members, or associates; between any
or all of them and the corporation, partnership or
association of which they are stockholders, members
or associates, respectively; and between such
corporation, partnership or association and the State
insofar as it concerns their individual franchise or
right to exist as such entity;
xxx xxx xxx
[Emphasis ours]
Once the case is decided by the SEC, the losing party may file
a petition for review before the Court of Appeals raising
questions of fact, of law, or mixed questions of fact and
law. 17 It is only after the case has ran this course, and not
earlier, can it be brought to us via a petition for review
on certiorari under Rule 45 raising only pure questions of
law.18 Petitioners, in pleading that we treat the instant petition
as a derivative suit, are trying to short-circuit the entire
process which we cannot here sanction.
As an appeal on the civil aspect of Criminal Cases Nos. 37097
and 37098 for falsification of public document and estafa,
which this petition truly is, we have to deny the petition just
the same. It will be well to quote the respondent court's
ratiocinations acquitting the private respondents on both
counts:
The prosecution wants this Court to believe and
agree that there is falsification of public document
because, as claimed by the prosecution, Resolution
No. 48, Series of 1986 (Exh. "1-E-1") was not taken
up and passed during the Regular Meeting of the
Board of Trustees of the Western Institute of
Technology (WIT), Inc. on March 30, 1986, but on
June 1, 1986 special meeting of the same board of
trustees.
This Court is reluctant to accept this claim of
falsification. The prosecution omitted to submit the
complete minutes of the regular meeting of the
Board of Trustees on March 30, 1986. It only
presented in evidence Exh. "C", which is page 5 or
the last page of the said minutes. Had the complete
minutes (Exh. "1") consisting of five (5) pages, been
submitted, it can be readily seen and understood
that Resolution No. 48, Series of 1986 (Exh. "1-E-1")
giving compensation to corporate officers, was

indeed included in Other Business, No. 6 of the

Agenda, and was taken up and passed on March 30,
1986. The mere fact of existence of Exh. "C" also
proves that it was passed on March 30, 1986 for Exh.
"C" is part and parcel of the whole minutes of the
Board of Trustees Regular Meeting on March 30,
1986. No better and more credible proof can be
considered other than the Minutes (Exh. "1") itself of
the Regular Meeting of the Board of Trustees on
March 30, 1986. The imputation that said Resolution
No. 48 was neither taken up nor passed on March 30,
1986 because the matter regarding compensation
was not specifically stated or written in the
Agenda and that the words "possible implementation
of said Resolution No. 48, was expressly written in
the Agenda for the Special Meeting of the Board on
June 1, 1986, is simply an implication. This evidence
by implication to the mind of the court cannot prevail
over the Minutes (Exh. "1") and cannot ripen into
proof beyond reasonable doubt which is demanded in
all criminal prosecutions.
This Court finds that under the Eleventh Article (Exh.
"3-D-1") of the Articles of Incorporation (Exh. "3-B")
of the Panay Educational Institution, Inc., now the
Western Institute of Technology, Inc., the officers of
the corporation shall receive such compensation as
the Board of Directors may provide. These Articles of
Incorporation was adopted on May 17, 1957 (Exh. "3E"). The Officers of the corporation and their
corresponding duties are enumerated and stated in
Sections 1, 2, 3 and 4 of Art. III of the Amended ByLaws of the Corporation (Exh. "4-A") which was
adopted on May 31, 1957. According to Sec. 6, Art. III
of the same By-Laws, all officers shall receive such
compensation as may be fixed by the Board of
Directors.
It is the perception of this Court that the grant of
compensation or salary to the accused in their
capacity as officers of the corporation, through
Resolution No. 48, enacted on March 30, 1986 by the
Board of Trustees, is authorized by both the Articles
of Incorporation and the By-Laws of the corporation.
To state otherwise is to depart from the clear terms
of the said articles and by-laws. In their defense the
accused have properly and rightly asserted that the
grant of salary is not for directors, but for their being
officers of the corporation who oversee the day to
day activities and operations of the school.
xxx xxx xxx
. . .[O]n the question of whether or not the accused
can be held liable for estafa under Sec. 1 (b) of Art.
315 of the Revised Penal Code, it is perceived by this
Court that the receipt and the holding of the money
by the accused as salary on basis of the authority
granted by the Articles and By-Laws of the
corporation are not tainted with abuse of confidence.
The money they received belongs to them and
cannot be said to have been converted and/or
misappropriated by them.
xxx xxx xxx

19

[Emphasis ours]
From the foregoing factual findings, which we find to be amply
substantiated by the records, it is evident that there is simply
no basis to hold the accused, private respondents herein,
civilly liable. Section 2(b) of Rule 111 on the New Rules on
Criminal Procedure provides:
Sec. 2. Institution of separate civil action.
xxx xxx xxx

(b) Extinction of the penal action does not carry with

it extinction of the civil, unless the extinction
proceeds from a declaration in a final judgment that
the fact from which the civil might arise did not exist.
[Emphasis ours]
Likewise, the last paragraph of Section 2, Rule 120 reads:
Sec. 2. Form and contents of judgment.
xxx xxx xxx
In case of acquittal, unless there is a clear showing
that the act from which the civil liability might arise
did not exist, the judgment shall make a finding on
the civil liability of the accused in favor of the
offended party. [Emphasis ours]
The acquittal in Criminal Cases Nos. 37097 and 37098 is not
merely based on reasonable doubt but rather on a finding that
the accused-private respondents did not commit the criminal
acts complained of. Thus, pursuant to the above rule and
settled jurisprudence, any civil action ex delicto cannot
prosper. Acquittal in a criminal action bars the civil action
arising therefrom where the judgment of acquittal holds that
the accused did not commit the criminal acts imputed to
them. 20
WHEREFORE, the instant petition is hereby DENIED with costs
against petitioners.
SO ORDERED.
Padilla, Bellosillo, Vitug and Kapunan, JJ., concur.

G.R. No. 168757

January 19, 2011

RENATO REAL, Petitioner,

vs.
SANGU PHILIPPINES, INC. and/ or KIICHI
ABE, Respondents.
DECISION
DEL CASTILLO, J.:
The perennial question of whether a complaint for illegal
dismissal is intra-corporate and thus beyond the jurisdiction of
the Labor Arbiter is the core issue up for consideration in this
case.
This Petition for Review on Certiorari assails the
Decision1 dated June 28, 2005 of the Court of Appeals (CA) in
CA-G.R. SP. No. 86017 which dismissed the petition
for certiorari filed before it.
Factual Antecedents
Petitioner Renato Real was the Manager of respondent
corporation Sangu Philippines, Inc., a corporation engaged in
the business of providing manpower for general services, like
janitors, janitresses and other maintenance personnel, to
various clients. In 2001, petitioner, together with 29 others
who were either janitors, janitresses, leadmen and
maintenance men, all employed by respondent corporation,
filed their respective Complaints2 for illegal dismissal against
the latter and respondent Kiichi Abe, the corporations VicePresident and General Manager. These complaints were later
on consolidated.
With regard to petitioner, he was removed from his position as
Manager through Board Resolution 2001-033adopted by
respondent corporations Board of Directors. Petitioner
complained that he was neither notified of the Board Meeting
during which said board resolution was passed nor formally
charged with any infraction. He just received from
respondents a letter4 dated March 26, 2001 stating that he
has been terminated from service effective March 25, 2001 for
the following reasons: (1) continuous absences at his post at
Ogino Philippines Inc. for several months which was
detrimental to the corporations operation; (2) loss of trust
and confidence; and, (3) to cut down operational expenses to
reduce further losses being experienced by respondent
corporation.
Respondents, on the other hand, refuted petitioners claim of
illegal dismissal by alleging that after petitioner was
appointed Manager, he committed gross acts of misconduct
detrimental to the company since 2000. According to them,
petitioner would almost always absent himself from work
without informing the corporation of his whereabouts and that
he would come to the office only to collect his salaries. As he
was almost always absent, petitioner neglected to supervise
the employees resulting in complaints from various clients
about employees performance. In one instance, petitioner
together with a few others, while apparently drunk, went to
the premises of one of respondents clients, Epson Precision
(Phils.) Inc., and engaged in a heated argument with the
employees therein. Because of this, respondent Abe allegedly
received a complaint from Epsons Personnel Manager
concerning petitioners conduct. Respondents likewise averred
that petitioner established a company engaged in the same
business as respondent corporations and even submitted
proposals for janitorial services to two of the latters clients.
Because of all these, the Board of Directors of respondent
corporation met on March 24, 2001 and adopted Board
Resolution No. 2001-03 removing petitioner as Manager.
Petitioner was thereafter informed of his removal through a
letter dated March 26, 2001 which he, however, refused to
receive.
Further, in what respondents believed to be an act of
retaliation, petitioner allegedly encouraged the employees
who had been placed in the manpower pool to file a complaint

for illegal dismissal against respondents. Worse, he later

incited those assigned in Epson Precision (Phils.) Inc., Ogino
Philippines Corporation, Hitachi Cable Philippines Inc. and
Philippine TRC Inc. to stage a strike on April 10 to 16, 2001.
Not satisfied, petitioner together with other employees also
barricaded the premises of respondent corporation. Such acts
respondents posited constitute just cause for petitioners
dismissal and that same was validly effected.
Rulings of the Labor Arbiter and the National Labor
Relations Commission
The Labor Arbiter in a Decision5 dated June 5, 2003 declared
petitioner and his co-complainants as having been illegally
dismissed and ordered respondents to reinstate complainants
to their former positions without loss of seniority rights and
other privileges and to pay their full backwages from the time
of their dismissal until actually reinstated and furthermore, to
pay them attorneys fees. The Labor Arbiter found no
convincing proof of the causes for which petitioner was
terminated and noted that there was complete absence of due
process in the manner of his termination.
Respondents thus appealed to the National Labor Relations
Commission (NLRC) and raised therein as one of the issues
the lack of jurisdiction of the Labor Arbiter over petitioners
complaint. Respondents claimed that petitioner is both a
stockholder and a corporate officer of respondent corporation,
hence, his action against respondents is an intra-corporate
controversy over which the Labor Arbiter has no jurisdiction.
The NLRC found such contention of respondents to be
meritorious. Aside from petitioners own admission in the
pleadings that he is a stockholder and at the same time
occupying a managerial position, the NLRC also gave weight
to the corporations General Information Sheet6 (GIS) dated
October 27, 1999 listing petitioner as one of its stockholders,
consequently his termination had to be effected through a
board resolution. These, the NLRC opined, clearly established
petitioners status as a stockholder and as a corporate officer
and hence, his action against respondent corporation is an
intra-corporate controversy over which the Labor Arbiter has
no jurisdiction. As to the other complainants, the NLRC ruled
that there was no dismissal. The NLRC however, modified the
appealed decision of the Labor Arbiter in a Decision 7 dated
February 13, 2004, the dispositive portion of which reads:
WHEREFORE, all foregoing premises considered, the appealed
Decision dated June 5, 2003 is hereby MODIFIED. Accordingly,
judgment is hereby rendered DISMISSING the complaint of
Renato Real for lack of jurisdiction. As to the rest of the
complainants, they are hereby ordered to immediately report
back to work but without the payment of backwages.
All other claims against respondents including attorneys fees
are DISMISSED for lack of merit.
SO ORDERED.
Still joined by his co-complainants, petitioner brought the case
to the CA by way of petition for certiorari.
Ruling of the Court of Appeals
Before the CA, petitioner imputed upon the NLRC grave abuse
of discretion amounting to lack or excess of jurisdiction in
declaring him a corporate officer and in holding that his action
against respondents is an intra-corporate controversy and
thus beyond the jurisdiction of the Labor Arbiter.
While admitting that he is indeed a stockholder of respondent
corporation, petitioner nevertheless disputed the declaration
of the NLRC that he is a corporate officer thereof. He posited
that his being a stockholder and his being a managerial
employee do not ipso facto confer upon him the status of a
corporate officer. To support this contention, petitioner called
the CAs attention to the same GIS relied upon by the NLRC
when it declared him to be a corporate officer. He pointed out
that although said information sheet clearly indicates that he
is a stockholder of respondent corporation, he is not an officer

thereof as shown by the entry "N/A" or "not applicable"

opposite his name in the officer column. Said column requires
that the particular position be indicated if the person is an
officer and if not, the entry "N/A". Petitioner further argued
that the fact that his dismissal was effected through a board
resolution does not likewise mean that he is a corporate
officer. Otherwise, all that an employer has to do in order to
avoid compliance with the requisites of a valid dismissal under
the Labor Code is to dismiss a managerial employee through a
board resolution. Moreover, he insisted that his action for
illegal dismissal is not an intra-corporate controversy as same
stemmed from employee-employer relationship which is well
within the jurisdiction of the Labor Arbiter. This can be
deduced and is bolstered by the last paragraph of the
termination letter sent to him by respondents stating that he
is entitled to benefits under the Labor Code, to wit:
In this connection (his dismissal) you are entitled to
separation pay and other benefits provided for under the
Labor Code of the Philippines.8 (Emphasis supplied)
In contrast, respondents stood firm that the action against
them is an intra-corporate controversy. It cited Tabang v.
National Labor Relations Commission9 wherein this Court
declared that "an intra-corporate controversy is one which
arises between a stockholder and the corporation;" that
"[t]here is no distinction, qualification, nor any exemption
whatsoever;" and that it is "broad and covers all kinds of
controversies between stockholders and corporations." In view
of this ruling and since petitioner is undisputedly a
stockholder of the corporation, respondents contended that
the action instituted by petitioner against them is an intracorporate controversy cognizable only by the appropriate
regional trial court. Hence, the NLRC correctly dismissed
petitioners complaint for lack of jurisdiction.
In the assailed Decision10 dated June 28, 2005, the CA sided
with respondents and affirmed the NLRCs finding that aside
from being a stockholder of respondent corporation, petitioner
is also a corporate officer thereof and consequently, his
complaint is an intra-corporate controversy over which the
labor arbiter has no jurisdiction. Said court opined that if it
was true that petitioner is a mere employee, the respondent
corporation would not have called a board meeting to pass a
resolution for petitioners dismissal considering that it was
very tedious for the Board of Directors to convene and to
adopt a resolution every time they decide to dismiss their
managerial employees. To support its finding, the CA likewise
cited Tabang. As to petitioners co-complainants, the CA
likewise affirmed the NLRCS finding that they were never
dismissed from the service. The dispositive portion of the CA
Decision reads:
WHEREFORE, the instant petition is hereby DISMISSED.
Accordingly, the assailed decision and resolution of the public
respondent National Labor Relations Commission in NLRC NCR
CA No. 036128-03 NLRC SRAB-IV-05-6618-01-B/05-6619-02B/05-6620-02-B/10-6637-01-B/10-6833-01-B, STANDS.
SO ORDERED.
Now alone but still undeterred, petitioner elevated the case to
us through this Petition for Review on Certiorari.
The Parties Arguments
Petitioner continues to insist that he is not a corporate officer.
He argues that a corporate officer is one who holds an
elective position as provided in the Articles of Incorporation or
one who is appointed to such other positions by the Board of
Directors as specifically authorized by its By-Laws. And, since
he was neither elected nor is there any showing that he was
appointed by the Board of Directors to his position as
Manager, petitioner maintains that he is not a corporate
officer contrary to the findings of the NLRC and the CA.
Petitioner likewise contends that his complaint for illegal
dismissal against respondents is not an intra-corporate

controversy. He avers that for an action or suit between a

stockholder and a corporation to be considered an intracorporate controversy, same must arise from intra-corporate
relations, i.e., an action involving the status of a stockholder
as such. He believes that his action against the respondents
does not arise from intra-corporate relations but rather from
employer-employee relations. This, according to him, was
even impliedly recognized by respondents as shown by the
earlier quoted portion of the termination letter they sent to
him.
For their part, respondents posit that what petitioner is
essentially assailing before this Court is the finding of the
NLRC and the CA that he is a corporate officer of respondent
corporation. To the respondents, the question of whether
petitioner is a corporate officer is a question of fact which, as
held in a long line of jurisprudence, cannot be the subject of
review under this Petition for Review on Certiorari. At any rate,
respondents insist that petitioner who is undisputedly a
stockholder of respondent corporation is likewise a corporate
officer and that his action against them is an intra-corporate
dispute beyond the jurisdiction of the labor tribunals. To
support this, they cited several jurisprudence such as Pearson
& George (S.E. Asia), Inc. v. National Labor Relations
Commission,11Philippine School of Business Administration v.
Leano,12 Fortune Cement Corporation v. National Labor
Relations Commission13 and again, Tabang v. National Labor
Relations Commission.14
Moreover, in an attempt to demolish petitioners claim that
the present controversy concerns employer-employee
relations, respondents enumerated the following facts and
circumstances: (1) Petitioner was an incorporator, stockholder
and manager of respondent company; (2) As an incorporator,
he was one of only seven incorporators of respondent
corporation and one of only four Filipino members of the
Board of Directors; (3) As stockholder, he has One Thousand
(1,000) of the Ten Thousand Eight Hundred (10,800) common
shares held by Filipino stockholders, with a par-value of One
Hundred Thousand Pesos (P100,000.00); (4) His appointment
as manager was by virtue of Section 1, Article IV of
respondent corporations By-Laws; (5) As manager, he had
direct management and authority over all of respondent
corporations skilled employees; (6) Petitioner has shown
himself to be an incompetent manager, unable to properly
supervise the employees and even causing friction with the
corporations clients by engaging in unruly behavior while in
clients premises; (7) As if his incompetence was not enough,
in a blatant and palpable act of disloyalty, he established
another company engaged in the same line of business as
respondent corporation; (8) Because of these acts of
incompetence and disloyalty, respondent corporation through
a Resolution adopted by its Board of Directors was finally
constrained to remove petitioner as Manager and declare his
office vacant; (9) After his removal, petitioner urged the
employees under him to stage an unlawful strike by leading
them to believe that they have been illegally dismissed from
employment.15Apparently, respondents intended to show from
this enumeration that petitioners removal pertains to his
relationship with respondent corporation, that is, his utter
failure to advance its interest and the prejudice caused by his
acts of disloyalty. For this reason, respondents see the action
against them not as a case between an employer and an
employee as what petitioner alleges, but one by an officer and
at same time a major stockholder seeking to be reinstated to
his former office against the corporation that declared his
position vacant.
Finally, respondents state that the fact that petitioner is being
given benefits under the Labor Code as stated in his
termination letter does not mean that they are recognizing
the employer-employee relations between them. They explain
that the benefits provided under the Labor Code were merely
made by respondent corporation as the basis in determining

petitioners compensation package and that same are merely

part of the perquisites of petitioners office as a director and
manager. It does not and it cannot change the intra-corporate
nature of the controversy. Hence, respondents pray that this
petition be dismissed for lack of merit.
Issues
From the foregoing and as earlier mentioned, the core issue to
be resolved in this case is whether petitioners complaint for
illegal dismissal constitutes an intra-corporate controversy
and thus, beyond the jurisdiction of the Labor Arbiter.
Our Ruling
Two-tier test in determining the existence of intra-corporate
controversy
Respondents strongly rely on this Courts pronouncement in
the 1997 case of Tabang v. National Labor Relations
Commission, to wit:
[A]n intra-corporate controversy is one which arises between
a stockholder and the corporation. There is no distinction,
qualification nor any exemption whatsoever. The provision is
broad and covers all kinds of controversies between
stockholders and corporations.16
In view of this, respondents contend that even if petitioner
challenges his being a corporate officer, the present case still
constitutes an intra-corporate controversy as petitioner is
undisputedly a stockholder and a director of respondent
corporation.
It is worthy to note, however, that before the promulgation of
the Tabang case, the Court provided in Mainland Construction
Co., Inc. v. Movilla17 a "better policy" in determining which
between the Securities and Exchange Commission (SEC) and
the Labor Arbiter has jurisdiction over termination
disputes,18 or similarly, whether they are intra-corporate or
not, viz:
The fact that the parties involved in the controversy are all
stockholders or that the parties involved are the stockholders
and the corporation does not necessarily place the dispute
within the ambit of the jurisdiction of the SEC (now the
Regional Trial Court19). The better policy to be followed in
determining jurisdiction over a case should be to
consider concurrent factors such as the status or
relationship of the parties or the nature of the
question that is subject of their controversy. In the
absence of any one of these factors, the SEC will not have
jurisdiction. Furthermore, it does not necessarily follow that
every conflict between the corporation and its stockholders
would involve such corporate matters as only SEC (now the
Regional Trial Court20) can resolve in the exercise of its
adjudicatory or quasi-judicial powers. (Emphasis ours)
And, while Tabang was promulgated later than Mainland
Construction Co., Inc., the "better policy" enunciated in the
latter appears to have developed into a standard approach in
classifying what constitutes an intra-corporate controversy.
This is explained lengthily in Reyes v. Regional Trial Court of
Makati, Br. 142,21 to wit:
Intra-Corporate Controversy
A review of relevant jurisprudence shows a development in
the Courts approach in classifying what constitutes an intracorporate controversy. Initially, the main consideration in
determining whether a dispute constitutes an intra-corporate
controversy was limited to a consideration of the intracorporate relationship existing between or among the parties.
The types of relationships embraced under Section 5(b) x x x
were as follows:
a) between the corporation, partnership or
association and the public;
b) between the corporation, partnership or
association and its stockholders, partners, members
or officers;

c) between the corporation, partnership or

association and the State as far as its franchise,
permit or license to operate is concerned; and
d) among the stockholders, partners or associates
themselves.
The existence of any of the above intra-corporate relations
was sufficient to confer jurisdiction to the SEC (now the RTC),
regardless of the subject matter of the dispute. This came to
be known as the relationship test.
However, in the 1984 case of DMRC Enterprises v. Esta del Sol
Mountain Reserve, Inc., the Court introduced the nature of the
controversy test. We declared in this case that it is not the
mere existence of an intra-corporate relationship that gives
rise to an intra-corporate controversy; to rely on the
relationship test alone will divest the regular courts of their
jurisdiction for the sole reason that the dispute involves a
corporation, its directors, officers, or stockholders. We saw
that there is no legal sense in disregarding or minimizing the
value of the nature of the transactions which gives rise to the
dispute.
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of
ascertaining whether the controversy itself is intra-corporate.
The controversy must not only be rooted in the existence of
an intra-corporate relationship, but must as well pertain to the
enforcement of the parties correlative rights and obligations
under the Corporation Code and the internal and intracorporate regulatory rules of the corporation. If the
relationship and its incidents are merely incidental to the
controversy or if there will still be conflict even if the
relationship does not exist, then no intra-corporate
controversy exists.
The Court then combined the two tests and declared that
jurisdiction should be determined by considering not only the
status or relationship of the parties, but also the nature of the
question under controversy. This two-tier test was adopted in
the recent case of Speed Distribution Inc. v. Court of Appeals:
To determine whether a case involves an intra-corporate
controversy, and is to be heard and decided by the branches
of the RTC specifically designated by the Court to try and
decide such cases, two elements must concur: (a) the status
or relationship of the parties, and (2) the nature of the
question that is the subject of their controversy.
The first element requires that the controversy must arise out
of intra-corporate or partnership relations between any or all
of the parties and the corporation, partnership, or association
of which they are not stockholders, members or associates,
between any or all of them and the corporation, partnership
or association of which they are stockholders, members or
associates, respectively; and between such corporation,
partnership, or association and the State insofar as it concerns
the individual franchises. The second element requires that
the dispute among the parties be intrinsically connected with
the regulation of the corporation. If the nature of the
controversy involves matters that are purely civil in character,
necessarily, the case does not involve an intra-corporate
controversy. [Citations omitted.]
Guided by this recent jurisprudence, we thus find no merit in
respondents contention that the fact alone that petitioner is a
stockholder and director of respondent corporation
automatically classifies this case as an intra-corporate
controversy. To reiterate, not all conflicts between the
stockholders and the corporation are classified as intracorporate. There are other factors to consider in determining
whether the dispute involves corporate matters as to consider
them as intra-corporate controversies.
What then is the nature of petitioners Complaint for Illegal
Dismissal? Is it intra-corporate and thus beyond the

jurisdiction of the Labor Arbiter? We shall answer this question

by using the standards set forth in the Reyes case.
No intra-corporate relationship between the parties
As earlier stated, petitioners status as a stockholder and
director of respondent corporation is not disputed. What the
parties disagree on is the finding of the NLRC and the CA that
petitioner is a corporate officer. An examination of the
complaint for illegal dismissal, however, reveals that the root
of the controversy is petitioners dismissal as Manager of
respondent corporation, a position which respondents claim to
be a corporate office. Hence, petitioner is involved in this case
not in his capacity as a stockholder or director, but as an
alleged corporate officer. In applying the relationship test,
therefore, it is necessary to determine if petitioner is a
corporate officer of respondent corporation so as to establish
the intra-corporate relationship between the parties. And
albeit respondents claim that the determination of whether
petitioner is a corporate officer is a question of fact which this
Court cannot pass upon in this petition for review
on certiorari, we shall nonetheless proceed to consider the
same because such question is not the main issue to be
resolved in this case but is merely collateral to the core issue
earlier mentioned.
Petitioner negates his status as a corporate officer by pointing
out that although he was removed as Manager through a
board resolution, he was never elected to said position nor
was he appointed thereto by the Board of Directors. While the
By-Laws of respondent corporation provides that the Board
may from time to time appoint such officers as it may deem
necessary or proper, he avers that respondents failed to
present any board resolution that he was appointed pursuant
to said By-Laws. He instead alleges that he was hired as
Manager of respondent corporation solely by respondent Abe.
For these reasons, petitioner claims to be a mere employee of
respondent corporation rather than as a corporate officer.
We find merit in petitioners contention.
"Corporate officers in the context of Presidential Decree No.
902-A are those officers of the corporation who are given that
character by the Corporation Code or by the corporations bylaws. There are three specific officers whom a corporation
must have under Section 25 of the Corporation Code. These
are the president, secretary and the treasurer. The number of
officers is not limited to these three. A corporation may have
such other officers as may be provided for by its by-laws like,
but not limited to, the vice-president, cashier, auditor or
general manager. The number of corporate officers is thus
limited by law and by the corporations by-laws."22
Respondents claim that petitioner was appointed Manager by
virtue of Section 1, Article IV of respondent corporations ByLaws which provides:
ARTICLE IV
OFFICER
Section 1. Election/Appointment Immediately after their
election, the Board of Directors shall formally organize by
electing the President, Vice-President, the Secretary at said
meeting.
The Board, may from time to time, appoint such other
officers as it may determine to be necessary or proper.
Any two (2) or more positions may be held concurrently by the
same person, except that no one shall act as President and
Treasurer or Secretary at the same time.
x x x x23 (Emphasis ours)
We have however examined the records of this case and we
find nothing to prove that petitioners appointment was made
pursuant to the above-quoted provision of respondent
corporations By-Laws. No copy of board resolution appointing
petitioner as Manager or any other document showing that he
was appointed to said position by action of the board was
submitted by respondents. What we found instead were mere

allegations of respondents in their various pleadings24 that

petitioner was appointed as Manager of respondent
corporation and nothing more. "The Court has stressed time
and again that allegations must be proven by sufficient
evidence because mere allegation is definitely not
evidence."25
It also does not escape our attention that respondents made
the following conflicting allegations in their Memorandum on
Appeal26 filed before the NLRC which cast doubt on
petitioners status as a corporate officer, to wit:
xxxx
24. Complainant-appellee Renato Real was appointed as the
manager of respondent-appellant Sangu on November 6,
1998. Priorly [sic], he was working at Atlas Ltd. Co. at Mito-shi,
Ibaraki-ken Japan. He was staying in Japan as an illegal alien
for the past eleven (11) years. He had a problem with his
family here in the Philippines which prompted him to
surrender himself to Japans Bureau of Immigration and was
deported back to the Philippines. His former employer, Mr.
Tsutomo Nogami requested Mr. Masahiko Shibata, one of
respondent-appellant Sangus Board of Directors, if
complainant-appellee Renato Real could work as one of its
employees here in the Philippines because he had been
blacklisted at Japans Immigration Office and could no longer
go back to Japan. And so it was arranged that he would
serve as respondent-appellant Sangus manager,
receiving a salary of P25,000.00. As such, he was tasked
to oversee the operations of the company. x x x (Emphasis
ours)
xxxx
As earlier stated, complainant-appellee Renato Real
was hired as the manager of respondent-appellant Sangu. As
such, his position was reposed with full trust and confidence. x
xx
While respondents repeatedly claim that petitioner was
appointed as Manager pursuant to the corporations By-Laws,
the above-quoted inconsistencies in their allegations as to
how petitioner was placed in said position, coupled by the fact
that they failed to produce any documentary evidence to
prove that petitioner was appointed thereto by action or with
approval of the board, only leads this Court to believe
otherwise. It has been consistently held that "[a]n office is
created by the charter of the corporation and the officer is
elected (or appointed) by the directors or
stockholders."27 Clearly here, respondents failed to prove that
petitioner was appointed by the board of directors. Thus, we
cannot subscribe to their claim that petitioner is a corporate
officer. Having said this, we find that there is no intracorporate relationship between the parties insofar as
petitioners complaint for illegal dismissal is concerned and
that same does not satisfy the relationship test.
Present controversy does not relate to intra-corporate dispute
We now go to the nature of controversy test. As earlier stated,
respondents terminated the services of petitioner for the
following reasons: (1) his continuous absences at his post at
Ogino Philippines, Inc; (2) respondents loss of trust and
confidence on petitioner; and, (3) to cut down operational
expenses to reduce further losses being experienced by the
corporation. Hence, petitioner filed a complaint for illegal
dismissal and sought reinstatement, backwages, moral
damages and attorneys fees. From these, it is not difficult to
see that the reasons given by respondents for dismissing
petitioner have something to do with his being a Manager of
respondent corporation and nothing with his being a director
or stockholder. For one, petitioners continuous absences in
his post in Ogino relates to his performance as Manager.
Second, respondents loss of trust and confidence in petitioner
stemmed from his alleged acts of establishing a company
engaged in the same line of business as respondent
corporations and submitting proposals to the latters clients

while he was still serving as its Manager. While we note that

respondents also claim these acts as constituting acts of
disloyalty of petitioner as director and stockholder, we,
however, think that same is a mere afterthought on their part
to make it appear that the present case involves an element
of intra-corporate controversy. This is because before the
Labor Arbiter, respondents did not see such acts to be disloyal
acts of a director and stockholder but rather, as constituting
willful breach of the trust reposed upon petitioner as
Manager.28 It was only after respondents invoked the Labor
Arbiters lack of jurisdiction over petitioners complaint in the
Supplemental Memorandum of Appeal29 filed before the NLRC
that respondents started considering said acts as such. Third,
in saying that they were dismissing petitioner to cut
operational expenses, respondents actually want to save on
the salaries and other remunerations being given to petitioner
as its Manager. Thus, when petitioner sought for
reinstatement, he wanted to recover his position as Manager,
a position which we have, however, earlier declared to be not
a corporate position. He is not trying to recover a seat in the
board of directors or to any appointive or elective corporate
position which has been declared vacant by the board.
Certainly, what we have here is a case of termination of
employment which is a labor controversy and not an intracorporate dispute. In sum, we hold that petitioners complaint
likewise does not satisfy the nature of controversy test.

"In an illegal dismissal case, the onus probandi rests on the

employer to prove that [the] dismissal of an employee is for a
valid cause."37 Here, as correctly observed by the Labor
Arbiter, respondents failed to produce any convincing proof to
support the grounds for which they terminated petitioner.
Respondents contend that petitioner has been absent for
several months, yet they failed to present any proof that
petitioner was indeed absent for such a long time. Also, the
fact that petitioner was still able to collect his salaries after his
alleged absences casts doubts on the truthfulness of such
charge. Respondents likewise allege that petitioner engaged
in a heated argument with the employees of Epson, one of
respondents clients. But just like in the charge of
absenteeism, there is no showing that an investigation on the
matter was done and that disciplinary action was imposed
upon petitioner. At any rate, we have reviewed the records of
this case and we agree with the Labor Arbiter that under the
circumstances, said charges are not sufficient bases for
petitioners termination. As to the charge of breach of trust
allegedly committed by petitioner when he established a new
company engaged in the same line of business as respondent
corporations and submitted proposals to two of the latters
clients while he was still a Manager, we again observe that
these are mere allegations without sufficient proof. To
reiterate, allegations must be proven by sufficient evidence
because mere allegation is definitely not evidence.38

With the elements of intra-corporate controversy being absent

in this case, we thus hold that petitioners complaint for illegal
dismissal against respondents is not intra-corporate. Rather, it
is a termination dispute and, consequently, falls under the
jurisdiction of the Labor Arbiter pursuant to Section 21730 of
the Labor Code.

Moreover, petitioners dismissal was effected without due

process of law.lawphi1 "The twin requirements of notice and
hearing constitute the essential elements of due process. The
law requires the employer to furnish the employee sought to
be dismissed with two written notices before termination of
employment can be legally effected: (1) a written notice
apprising the employee of the particular acts or omissions for
which his dismissal is sought in order to afford him an
opportunity to be heard and to defend himself with the
assistance of counsel, if he desires, and (2) a subsequent
notice informing the employee of the employers decision to
dismiss him. This procedure is mandatory and its absence
taints the dismissal with illegality."39 Since in this case,
petitioners dismissal was effected through a board resolution
and all that petitioner received was a letter informing him of
the boards decision to terminate him, the abovementioned
procedure was clearly not complied with. All told, we agree
with the findings of the Labor Arbiter that petitioner has been
illegally dismissed. And, as an illegally dismissed employee is
entitled to the two reliefs of backwages and
reinstatement,40 we affirm the Labor Arbiters judgment
ordering petitioners reinstatement to his former position
without loss of seniority rights and other privileges and
awarding backwages from the time of his dismissal until
actually reinstated. Considering that petitioner has to secure
the services of counsel to protect his interest and necessarily
has to incur expenses, we likewise affirm the award of
attorneys fees which is equivalent to 10% of the total
backwages that respondents must pay petitioner in
accordance with this Decision.

We take note of the cases cited by respondents and find them

inapplicable to the case at bar. Fortune Cement Corporation v.
National Labor Relations Commission31 involves a member of
the board of directors and at the same time a corporate
officer who claims he was illegally dismissed after he was
stripped of his corporate position of Executive Vice-President
because of loss of trust and confidence. On the other
hand, Philippine School of Business Administration v.
Leano32 and Pearson & George v. National Labor Relations
Commission33 both concern a complaint for illegal dismissal by
corporate officers who were not re-elected to their respective
corporate positions. The Court declared all these cases as
involving intra-corporate controversies and thus affirmed the
jurisdiction of the SEC (now the RTC)34 over them precisely
because they all relate to corporate officers and their removal
or non-reelection to their respective corporate positions. Said
cases are by no means similar to the present case because as
discussed earlier, petitioner here is not a corporate officer.
With the foregoing, it is clear that the CA erred in affirming the
decision of the NLRC which dismissed petitioners complaint
for lack of jurisdiction. In cases such as this, the Court
normally remands the case to the NLRC and directs it to
properly dispose of the case on the merits. "However, when
there is enough basis on which a proper evaluation of the
merits of petitioners case may be had, the Court may
dispense with the time-consuming procedure of remand in
order to prevent further delays in the disposition of the
case."35 "It is already an accepted rule of procedure for us to
strive to settle the entire controversy in a single proceeding,
leaving no root or branch to bear the seeds of litigation. If,
based on the records, the pleadings, and other evidence, the
dispute can be resolved by us, we will do so to serve the ends
of justice instead of remanding the case to the lower court for
further proceedings."36 We have gone over the records before
us and we are convinced that we can now altogether resolve
the issue of the validity of petitioners dismissal and hence,
we shall proceed to do so.
Petitioners dismissal not in accordance with law

WHEREFORE, the petition is hereby GRANTED. The assailed

June 28, 2005 Decision of the Court of Appeals insofar as it
affirmed the National Labor Relations Commissions dismissal
of petitioners complaint for lack of jurisdiction, is hereby
REVERSED and SET ASIDE. The June 5, 2003 Decision of the
Labor Arbiter with respect to petitioner Renato Real is
AFFIRMED and this case is ordered REMANDED to the National
Labor Relations Commission for the computation of
petitioners backwages and attorneys fees in accordance with
this Decision.
SO ORDERED.

G.R. No. 174044

November 27, 2009

GLORIA V. GOMEZ, Petitioner,

vs.
PNOC DEVELOPMENT AND MANAGEMENT
CORPORATION (PDMC) - (formerly known as FILOIL
DEVELOPMENT AND MANAGEMENT CORPORATION
[FDMC]), Respondent.
DECISION
ABAD, J.:
This case is about what distinguishes a regular company
manager performing important executive tasks from a
corporate officer whose election and functions are governed
by the companys by-laws.
The Facts and the Case
Petitioner Gloria V. Gomez used to work as Manager of the
Legal Department of Petron Corporation, then a governmentowned corporation. With Petrons privatization, she availed of
the companys early retirement program and left that
organization on April 30, 1994. On the following day, May 1,
1994, however, Filoil Refinery Corporation (Filoil), also a
government-owned corporation, appointed her its corporate
secretary and legal counsel,1 with the same managerial rank,
compensation, and benefits that she used to enjoy at Petron.
But Filoil was later on also identified for privatization. To
facilitate its conversion, the Filoil board of directors created a
five-member task force headed by petitioner Gomez who had
been designated administrator.2 While documenting Filoils
assets, she found several properties which were not in the
books of the corporation. Consequently, she advised the
board to suspend the privatization until all assets have been
accounted for.
With the privatization temporarily shelved, Filoil underwent
reorganization and was renamed Filoil Development
Management Corporation (FDMC), which later became the
respondent PNOC Development Management Corporation
(PDMC). When this happened, Gomezs task force was
abolished and its members, including Gomez, were given
termination notices on March 5, 1996.3 The matter was then
reported to the Department of Labor and Employment on
March 7, 1996.4
Meantime, petitioner Gomez continued to serve as corporate
secretary of respondent PDMC. On September 23, 1996 its
president re-hired her as administrator and legal counsel of
the company.5 In accordance with company guidelines, it
credited her the years she served with the Filoil task force. On
May 24, 1998, the next president of PDMC extended her term
as administrator beyond her retirement age,6 pursuant to his
authority under the PDMC Approvals Manual.7 She was
supposed to serve beyond retirement from August 11, 1998 to
August 11, 2004. Meantime, a new board of directors for
PDMC took over the company.
On March 29, 1999 the new board of directors of respondent
PDMC removed petitioner Gomez as corporate secretary.
Further, at the boards meeting on October 21, 1999 the
board questioned her continued employment as administrator.
In answer, she presented the former presidents May 24, 1998
letter that extended her term. Dissatisfied with this, the board
sought the advice of its legal department, which expressed
the view that Gomezs term extension was an ultra vires act of
the former president. It reasoned that, since her position was
functionally that of a vice-president or general manager, her
term could be extended under the companys by-laws only
with the approval of the board. The legal department held that
her "de facto" tenure could be legally put to an end.8
Sought for comment, the Office of the Government Corporate
Counsel (OGCC) held the view that while respondent PDMCs
board did not approve the creation of the position of
administrator that Gomez held, such action should be deemed
ratified since the board had been aware of it since 1994. But

the OGCC ventured that the extension of her term beyond

retirement age should have been made with the boards
approval.9
Petitioner Gomez for her part conceded that as corporate
secretary, she served only as a corporate officer. But, when
they named her administrator, she became a regular
managerial employee. Consequently, the respondent PDMCs
board did not have to approve either her appointment as such
or the extension of her term in 1998.
Pending resolution of the issue, the respondent PDMCs board
withheld petitioner Gomezs wages from November 16 to 30,
1999, prompting her to file a complaint for non-payment of
wages, damages, and attorneys fees with the Labor Arbiter
on December 8, 1999.10 She later amended her complaint to
include other money claims.11
In a special meeting held on December 29, 1999 the
respondent PDMCs board resolved to terminate petitioner
Gomezs services retroactive on August 11, 1998, her
retirement date.12 On January 5, 2000 the board informed
petitioner of its decision.13 Thus, she further amended her
complaint to include illegal dismissal.14
Respondent PDMC moved to have petitioner Gomezs
complaint dismissed on ground of lack of jurisdiction. The
Labor Arbiter granted the motion15 upon a finding that Gomez
was a corporate officer and that her case involved an intracorporate dispute that fell under the jurisdiction of the
Securities and Exchange Commission (SEC) pursuant to
Presidential Decree (P.D.) 902-A.16 On motion for
reconsideration, the National Labor Relations Commission
(NLRC) Third Division set aside the Labor Arbiters order and
remanded the case to the arbitration branch for further
proceedings.17 The Third Division held that Gomez was a
regular employee, not a corporate officer; hence, her
complaint came under the jurisdiction of the Labor Arbiter.
Upon elevation of the matter to the Court of Appeals (CA) in
CA-G.R. SP 88819, however, the latter rendered a decision on
May 19, 2006,18 reversing the NLRC decision. The CA held that
since Gomezs appointment as administrator required the
approval of the board of directors, she was clearly a corporate
officer. Thus, her complaint is within the jurisdiction of the
Regional Trial Court (RTC) under P.D. 902-A, as amended by
Republic Act (R.A.) 8799.19 With the denial of her motion for
reconsideration,20 Gomez filed this petition for review on
certiorari under Rule 45.
The Issue Presented
The key issue in this case is whether or not petitioner Gomez
was, in her capacity as administrator of respondent PDMC, an
ordinary employee whose complaint for illegal dismissal and
non-payment of wages and benefits is within the jurisdiction
of the NLRC.
The Courts Ruling
Ordinary company employees are generally employed not by
action of the directors and stockholders but by that of the
managing officer of the corporation who also determines the
compensation to be paid such employees.21Corporate officers,
on the other hand, are elected or appointed 22 by the directors
or stockholders, and are those who are given that character
either by the Corporation Code or by the corporations bylaws.23
Here, it was the PDMC president who appointed petitioner
Gomez administrator, not its board of directors or the
stockholders. The president alone also determined her
compensation package. Moreover, the administrator was not
among the corporate officers mentioned in the PDMC by-laws.
The corporate officers proper were the chairman, president,
executive vice-president, vice-president, general manager,
treasurer, and secretary.24
Respondent PDMC claims, however, that since its board had
under its by-laws the power to create additional corporate

offices, it may be deemed to have simply ratified its

presidents creation of the corporate position of
administrator.25 But creating an additional corporate office
was definitely not respondent PDMCs intent based on its
several actions concerning the position of
administrator.1avvphi1
Respondent PDMC never told Gomez that she was a corporate
officer until the tail-end of her service after the board found
legal justification for getting rid of her by consulting its legal
department and the OGCC which supplied an answer that the
board obviously wanted. Indeed, the PDMC president first
hired her as administrator in May 1994 and then as
"administrator/legal counsel" in September 1996 without a
board approval. The president even extended her term in May
1998 also without such approval. The companys mindset
from the beginning, therefore, was that she was not a
corporate officer.
Respondent PDMC of course claims that as administrator
petitioner Gomez performed functions that were similar to
those of its vice-president or its general manager, corporate
positions that were mentioned in the companys by-laws. It
points out that Gomez was third in the line of command, next
only to the chairman and president,26and had been
empowered to make major decisions and manage the affairs
of the company.
But the relationship of a person to a corporation, whether as
officer or agent or employee, is not determined by the nature
of the services he performs but by the incidents of his
relationship with the corporation as they actually exist. 27 Here,
respondent PDMC hired petitioner Gomez as an ordinary
employee without board approval as was proper for a
corporate officer. When the company got her the first time, it
agreed to have her retain the managerial rank that she held
with Petron. Her appointment paper said that she would be
entitled to all the rights, privileges, and benefits that regular
PDMC employees enjoyed.28 This is in sharp contrast to what
the former PDMC presidents appointment paper stated: he
was elected to the position and his compensation depended
on the will of the board of directors.29
What is more, respondent PDMC enrolled petitioner Gomez
with the Social Security System, the Medicare, and the PagIbig Fund. It even issued certifications dated October 10,
2008,30 stating that Gomez was a permanent employee and
that the company had remitted combined contributions during
her tenure. The company also made her a member of the
PDMCs savings and provident plan31 and its retirement
plan.32 It grouped her with the managers covered by the
companys group hospitalization insurance.33 Likewise, she
underwent regular employee performance
appraisals,34 purchased stocks through the employee stock
option plan,35 and was entitled to vacation and emergency
leaves.36 PDMC even withheld taxes on her salary and
declared her as an employee in the official Bureau of Internal
Revenue forms.37 These are all indicia of an employeremployee relationship which respondent PDMC failed to
refute.
Estoppel, an equitable principle rooted on natural justice,
prevents a person from rejecting his previous acts and
representations to the prejudice of others who have relied on
them.38 This principle of law applies to corporations as well.
The PDMC in this case is estopped from claiming that despite
all the appearances of regular employment that it weaved
around petitioner Gomezs position it must have technically
hired her only as a corporate officer. The board and its officers
made her stay on and work with the company for years under
the belief that she held a regular managerial position.
That petitioner Gomez served concurrently as corporate
secretary for a time is immaterial. A corporation is not
prohibited from hiring a corporate officer to perform services
under circumstances which will make him an

employee.39 Indeed, it is possible for one to have a dual role of

officer and employee. In Elleccion Vda. De Lecciones v.
National Labor Relations Commission,40 the Court upheld NLRC
jurisdiction over a complaint filed by one who served both as
corporate secretary and administrator, finding that the money
claims were made as an employee and not as a corporate
officer.
WHEREFORE, the Court GRANTS the petition, REVERSES and
SETS ASIDE the decision dated May 19, 2006 and the
resolution dated August 15, 2006 of the Court of Appeals in
CA-G.R. SP 88819, and REINSTATES the resolution dated
November 22, 2002 of the National Labor Relations
Commissions Third Division in NLRC NCR 30-12-00856-99. Let
the records of this case be REMANDED to the arbitration
branch of origin for the conduct of further proceedings.
SO ORDERED.

G.R. No. 144767

March 21, 2002

DILY DANY NACPIL, petitioner,

vs.
INTERNATIONAL BROADCASTING
CORPORATION, respondent.
KAPUNAN, J.:
This is a petition for review on certiorari under Rule 45,
assailing the Decision of the Court of Appeals dated
November 23, 1999 in CA-G.R. SP No. 527551 and the
Resolution dated August 31, 2000 denying petitioner Dily
Dany Nacpil's motion for reconsideration. The Court of
Appeals reversed the decisions promulgated by the Labor
Arbiter and the National Labor Relations Commission (NLRC),
which consistently ruled in favor of petitioner.
Petitioner states that he was Assistant General Manager for
Finance/Administration and Comptroller of private respondent
Intercontinental Broadcasting Corporation (IBC) from 1996
until April 1997. According to petitioner, when Emiliano
Templo was appointed to replace IBC President Tomas Gomez
III sometime in March 1997, the former told the Board of
Directors that as soon as he assumes the IBC presidency, he
would terminate the services of petitioner. Apparently, Templo
blamed petitioner, along with a certain Mr. Basilio and Mr.
Gomez, for the prior mismanagement of IBC. Upon his
assumption of the IBC presidency, Templo allegedly harassed,
insulted, humiliated and pressured petitioner into resigning
until the latter was forced to retire. However, Templo refused
to pay him his retirement benefits, allegedly because he had
not yet secured the clearances from the Presidential
Commission on Good Government and the Commission on
Audit. Furthermore, Templo allegedly refused to recognize
petitioner's employment, claiming that petitioner was not the
Assistant General Manager/Comptroller of IBC but merely
usurped the powers of the Comptroller. Hence, in 1997,
petitioner filed with the Labor Arbiter a complaint for illegal
dismissal and non-payment of benefits.1wphi1.nt
Instead of filing its position paper, IBC filed a motion to
dismiss alleging that the Labor Arbiter had no jurisdiction over
the case. IBC contended that petitioner was a corporate
officer who was duly elected by the Board of Directors of IBC;
hence, the case qualifies as an intra-corporate dispute falling
within the jurisdiction of the Securities and Exchange
Commission (SEC). However, the motion was denied by the
Labor Arbiter in an Order dated April 22, 1998.2
On August 21, 1998, the Labor Arbiter rendered a Decision
stating that petitioner had been illegally dismissed. The
dispositive portion thereof reads:
WHEREFORE, in view of all the foregoing, judgment is
hereby rendered in favor of the complainant and
against all the respondents, jointly and severally,
ordering the latter:
1. To reinstate complainant to his former
position without diminution of salary or loss
of seniority rights, and with full backwages
computed from the time of his illegal
dismissal on May 16, 1997 up to the time of
his actual reinstatement which is tentatively
computed as of the date of this decision on
August 21, 1998 in the amount of
P1,231,750.00 (i.e., P75,000.00 a month x
15.16 months = P1,137,000.00 plus
13th month pay equivalent to 1/12 of P
1,137,000.00 = P94,750.00 or the total
amount of P 1,231,750.00). Should
complainant be not reinstated within ten
(10) days from receipt of this decision, he
shall be entitled to additional backwages
until actually reinstated.

2. Likewise, to pay complainant the

following:
a) P 2 Million as and for moral damages;
b) P500,000.00 as and for exemplary
damages; plus and (sic)
c) Ten (10%) percent thereof as and for
attorney's fees.
SO ORDERED.3
IBC appealed to the NLRC, but the same was dismissed in a
Resolution dated March 2, 1999, for its failure to file the
required appeal bond in accordance with Article 223 of the
Labor Code.4 IBC then filed a motion for reconsideration that
was likewise denied in a Resolution dated April 26, 1999. 5
IBC then filed with the Court of Appeals a petition for certiorari
under Rule 65, which petition was granted by the appellate
court in its Decision dated November 23, 1999. The
dispositive portion of said decision states:
WHEREFORE, premises considered, the petition for
Certiorari is GRANTED. The assailed decisions of the
Labor Arbiter and the NLRC are REVERSED and SET
ASIDE and the complaint is DISMISSED without
prejudice.
SO ORDERED.6
Petitioner then filed a motion for reconsideration, which was
denied by the appellate court in a Resolution dated August 31,
2000.
Hence, this petition.
Petitioner Nacpil submits that:
I.
THE COURT OF APPEALS ERRED IN FINDING THAT
PETITIONER WAS APPOINTED BY RESPONDENT'S
BOARD OF DIRECTORS AS COMPTROLLER. THIS
FINDING IS CONTRARY TO THE COMMON,
CONSISTENT POSITION AND ADMISSION OF BOTH
PARTIES. FURTHER, RESPONDENT'S BY-LAWS DOES
NOT INCLUDE COMPTROLLER AS ONE OF ITS
CORPORATE OFFICERS.
II.
THE COURT OF APPEALS WENT BEYOND THE ISSUE
OF THE CASE WHEN IT SUBSTITUTED THE NATIONAL
LABOR RELATIONS COMMISSION'S DECISION TO
APPLY THE APPEAL BOND REQUIREMENT STRICTLY IN
THE INSTANT CASE. THE ONLY ISSUE FOR ITS
DETERMINATION IS WHETHER NLRC COMMITTED
GRAVE ABUSE OF DISCRETION IN DOING THE SAME.7
The issue to be resolved is whether the Labor Arbiter had
jurisdiction over the case for illegal dismissal and nonpayment of benefits filed by petitioner. The Court finds that
the Labor Arbiter had no jurisdiction over the same.
Under Presidential Decree No. 902-A (the Revised Securities
Act), the law in force when the complaint for illegal dismissal
was instituted by petitioner in 1997, the following cases fall
under the exclusive of the SEC:
a) Devices or schemes employed by or any acts of
the board of directors, business associates, its
officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders,
partners, members of associations or organizations
registered with the Commission;
b) Controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members or associates; between any
or all of them and the corporation, partnership or
association of which they are stockholders, members
or associates, respectively; and between such
corporation, partnership or association and the State

insofar as it concerns their individual franchise or

right to exist as such entity;
c) Controversies in the election or appointment
of directors, trustees, officers, or managers of
such corporations, partnerships or
associations;
d) Petitions of corporations, partnerships, or
associations to be declared in the state of suspension
of payments in cases where the corporation,
partnership or association possesses property to
cover all of its debts but foresees the impossibility of
meeting them when they respectively fall due or in
cases where the corporation, partnership or
association has no sufficient assets to cover its
liabilities, but is under the Management Committee
created pursuant to this decree. (Emphasis supplied.)
The Court has consistently held that there are two elements to
be considered in determining whether the SEC has jurisdiction
over the controversy, to wit: (1) the status or relationship of
the parties; and (2) the nature of the question that is the
subject of their controversy.8
Petitioner argues that he is not a corporate officer of the IBC
but an employee thereof since he had not been elected nor
appointed as Comptroller and Assistant Manager by the IBC's
Board of Directors. He points out that he had actually been
appointed as such on January 11, 1995 by the IBC's General
Manager, Ceferino Basilio. In support of his argument,
petitioner underscores the fact that the IBC's By-Laws does
not even include the position of comptroller in its roster of
corporate officers.9 He therefore contends that his dismissal is
a controversy falling within the jurisdiction of the labor
courts.10
Petitioner's argument is untenable. Even assuming that he
was in fact appointed by the General Manager, such
appointment was subsequently approved by the Board of
Directors of the IBC.11 That the position of Comptroller is not
expressly mentioned among the officers of the IBC in the ByLaws is of no moment, because the IBC's Board of Directors is
empowered under Section 25 of the Corporation Code 12 and
under the corporation's By-Laws to appoint such other officers
as it may deem necessary. The By-Laws of the IBC
categorically provides:
XII. OFFICERS
The officers of the corporation shall consist of a
President, a Vice-President, a Secretary-Treasurer, a
General Manager, and such other officers as the
Board of Directors may from time to time does
fit to provide for. Said officers shall be elected
by majority vote of the Board of Directors and
shall have such powers and duties as shall
hereinafter provide (Emphasis supplied).13
The Court has held that in most cases the "by-laws may and
usually do provide for such other officers,"14 and that where a
corporate office is not specifically indicated in the roster of
corporate offices in the by-laws of a corporation, the board of
directors may also be empowered under the by-laws to create
additional officers as may be necessary.15
An "office" has been defined as a creation of the charter of a
corporation, while an "officer" as a person elected by the
directors or stockholders. On the other hand, an "employee"
occupies no office and is generally employed not by action of
the directors and stockholders but by the managing officer of
the corporation who also determines the compensation to be
paid to such employee.16
As petitioner's appointment as comptroller required the
approval and formal action of the IBC's Board of Directors to
become valid,17 it is clear therefore holds that petitioner is a
corporate officer whose dismissal may be the subject of a
controversy cognizable by the SEC under Section 5(c) of P.D.

902-A which includes controversies involving both election

and appointment of corporate directors, trustees, officers,
and managers.18 Had petitioner been an ordinary employee,
such board action would not have been required.
Thus, the Court of Appeals correctly held that:
Since complainant's appointment was approved
unanimously by the Board of Directors of the
corporation, he is therefore considered a corporate
officer and his claim of illegal dismissal is a
controversy that falls under the jurisdiction of the
SEC as contemplated by Section 5 of P.D. 902-A. The
rule is that dismissal or non-appointment of a
corporate officer is clearly an intra-corporate matter
and jurisdiction over the case properly belongs to the
SEC, not to the NLRC.19
As to petitioner's argument that the nature of his functions is
recommendatory thereby making him a mere managerial
officer, the Court has previously held that the relationship of a
person to a corporation, whether as officer or agent or
employee is not determined by the nature of the services
performed, but instead by the incidents of the relationship as
they actually exist.20
It is likewise of no consequence that petitioner's complaint for
illegal dismissal includes money claims, for such claims are
actually part of the perquisites of his position in, and therefore
linked with his relations with, the corporation. The inclusion of
such money claims does not convert the issue into a simple
labor problem. Clearly, the issues raised by petitioner against
the IBC are matters that come within the area of corporate
affairs and management, and constitute a corporate
controversy in contemplation of the Corporation Code.21
Petitioner further argues that the IBC failed to perfect its
appeal from the Labor Arbiter's Decision for its non-payment
of the appeal bond as required under Article 223 of the Labor
Code, since compliance with the requirement of posting of a
cash or surety bond in an amount equivalent to the monetary
award in the judgment appealed from has been held to be
both mandatory and jurisdictional.22 Hence, the Decision of
the Labor Arbiter had long become final and executory and
thus, the Court of Appeals acted with grave abuse of
discretion amounting to lack or excess of jurisdiction in giving
due course to the IBC's petition for certiorari, and in deciding
the case on the merits.
The IBC's failure to post an appeal bond within the period
mandated under Article 223 of the Labor Code has been
rendered immaterial by the fact that the Labor Arbiter did not
have jurisdiction over the case since as stated earlier, the
same is in the nature of an intra-corporate controversy. The
Court has consistently held that where there is a finding that
any decision was rendered without jurisdiction, the action
shall be dismissed. Such defense can be interposed at any
time, during appeal or even after final judgment.23 It is a wellsettled rule that jurisdiction is conferred only by the
Constitution or by law. It cannot be fixed by the will of the
parties; it cannot be acquired through, enlarged or diminished
by, any act or omission of the parties.24
Considering the foregoing, the Court holds that no error was
committed by the Court of Appeals in dismissing the case filed
before the Labor Arbiter, without prejudice to the filing of an
appropriate action in the proper court. 1wphi1.nt
It must be noted that under Section 5.2 of the Securities
Regulation Code (Republic Act No. 8799) which was signed
into law by then President Joseph Ejercito Estrada on July 19,
2000, the SEC's jurisdiction over all cases enumerated in
Section 5 of P.D. 902-A has been transferred to the Regional
Trial Courts.25
WHEREFORE, the petition is hereby DISMISSED and the
Decision of the Court of Appeals in CA-G.R. SP No. 52755
is AFFIRMED.SO ORDERED.

G.R. No. 117847 October 7, 1998

Market
Study

PEOPLE'S AIRCARGO AND WAREHOUSING CO.

INC., petitioner,
vs.
COURT OF APPEALS and STEFANI SAO, respondents.

Technica
l Study
Financial
Feasibilit
y Study

PANGANIBAN, J.:

Preparation of pertinent
documentation
requirements for the
application

Contracts entered into by a corporate president without

express prior board approval bind the corporation, when such
officer's apparent authority is estabished and when these
contracts are ratified by the corporation.

___________________________
__________________

The Case
This principle is stressed by the Court in rejecting the Petition
for Review of the February 28, 1994 Decision and the October
28, 1994 Resolution of the Court of Appeals in CA-GR CV No.
30670.
In a collection case 1 filed by Stefani Sao against People's
Aircargo and Warehousing Co., Inc., the Regional Trial Court
(RTC) of Pasay City, Branch 110, rendered a Decision 2 dated
October 26, 1990, the dispositive portion of which reads: 3
WHEREFORE, in light of all the foregoing,
Judgment is hereby rendered, ordering
[petitioner] to pay [private respondent] the
amount of sixty thousand (P60,000.00)
pesos representing payment of [private
respondents] services in preparing the
manual of operations and in the conduct of
a seminar for [petitioner]. The Counterclaim
is hereby dismissed.
Aggrieved by what he considered a minuscule award of
P60,000, private respondent appealed to the Court of
Appeals 4 (CA) which, in its Decision promulgated February 28,
1994, granted his prayer for P400,000, as follows: 5
WHEREFORE, PREMISES CONSIDERED, the
appealed judgment is hereby MODIFIED in
that [petitioner] is ordered to pay [private
respondent] the amount of four hundred
thousand pesos (P400,000.00) representing
payment of [private respondent's] services
in preparing the manual of operations and in
the conduct of a seminar for [petitioner].
As no new ground was raised by petitioner, reconsideration of
the above-mentioned Decision was denied in the Resolution
promulgated on October 28, 1994.
The Facts
Petitioner is a domestic corporation, which was organized in
the middle of 1986 to operate a customs bonded warehouse
at the old Manila International Airport in Pasay City. 6
To obtain a license for the corporation from the Bureau of
Customs, Antonio Punsalan Jr., the corporation president,
solicited a proposal from private respondent for the
preparation of a feasibility study. 7 Private respondent
submitted a letter-proposal dated October 17, 1986 ("First
Contract" hereafter) to Punsalan, which is reproduced
hereunder: 8
Dear Mr. Punsalan:
With reference to your request for
professional engineering consultancy
services for your proposed MIA Warehousing
Project may we offer the following outputs
and the corresponding rate and terms of
agreement:
================
================
=======
Project Feasibility Study
consisting of

The above services will be provided for a fee

of [p]esos 350,000.00 payable according to
the following schedule:
==========================
==========================
=
Fifty percent (50%) upon confirmation of the
agreement
Twenty-five percent (25%) 15 days after the
confirmation of the agreement
Twenty-five percent (25%) upon submission
of the specified outputs
The outputs will be completed and
submitted within 30 days upon confirmation
of the agreement and receipt by us of the
first fifty percent payment.
-------------------------------------------------------------------------------Thank you.
Yours truly, CONFORME:
(S)STEFANI C. SAO (S)ANTONIO C.
PUNSALAN, JR.
(T)STEFANI C. SAO (T)ANTONIO C.
PUNSALAN, JR.
Consultant for President,
PAIRCARGO
Industrial Engineering
Initially, Cheng Yong, the majority stockholder of petitioner,
objected to private respondent's offer, as another company
priced a similar proposal at only P15,000. 9 However, Punsalan
preferred private respondent's service because of the latter's
membership in the task force, which was supervising the
transition of the Bureau of Customs from the Marcos
government to the Aquino administration. 10
On October 17, 1986, pertitioner, through Punsalan, sent
private respondent a letter, confirming their agreement as
follows:
Dear Mr. Sao:
With regard to the services offered by your
company in your letter dated 13 October
1986, for the preparation of the necessary
study and documentations to support our
Application for Authority to Operate a public
Customs Bonded Warehouse located at the
old MIA Compound in Pasay City, please be
informed that our company is willing to hire
your services and will pay the amount of
THREE HUNDRED FIFTY THOUSAND PESOS
(P350,000.00) as follows:
P100,000.00 uppon signing of the
agreement;

150,000.00 on or before October 31,

1986, with the favorable Recommendation
of the CBW on our application.

53,333.0
0
15
March19
87
53,333.0
0

100,000.00 upon receipt of the study in

final form.
Very truly yours,
(S)ANTONIO C. PUNSALAN

30
March
1987
53,333.0
0

(T)ANTONIO C. PUNSALAN
President
CONFORME & RECEIVED from PAIRCARGO,
the
amount of ONE HUNDRED THOUSAND
PESOS
(P100,000.00), this 17th day of October,
1986

With is package, you are assured of the

highest service quality as our performance
record shows we always deliver no less.
Thank you very much.

as 1st Installment payment of the service

agreement

Yours truly,

dated October 13, 1986.

(T)STEFANI C. SAO

(S)STEFANI C. SAO

(S)STEFANI C. SAO
Industrial Engineering Consultant

(T)STEFANI C. SAO

CONFORME:

Accordingly, private respondent prepared a feasibility study

for petitioner which eventually paid him the balance of the
contract price, although not according to the schedule agreed
upon. 11
On December 4, 1986, upon Punsalan's request, private
respondent sent petitioner another letter-proposal ("Second
Contract" hereafter), which reads:
People's Air Cargo & Warehousing Co., Inc.

(S)ANTONIO C. PUNSALAN JR.

(T)PAIRCARGO CO. INC.
During the trial, the lower court observed that the Second
Contract bore, at the lower right portion of the letter, the
following notations in pencil:
1. Operations Manual
2. Seminar/workshop for your employees

Old MIA Compound, Metro Manila

P400,000 package deal

Attention: Mr. ANTONIO PUN[S]ALAN, JR.

50% upon completion of

seminar/workshop

President
Dear Mr. Pun[s]alan:
This is to formalize our proposal for
consultancy services to your company the
scope of which is defined in the attached
service description.
The total service you have decided to avail .
. . would be available upon signing of the
conforme below and would come [in] the
amount of FOUR HUNDRED THOUSAND
PESOS (P400,000.00) payable at the
schedule defined as follows (with the
balance covered by post-dated cheques):
Downpayment upon
signing conforme
P80,000.00
15
January
1987
53,333.0
0
30
January
1987
53,333.0
0
15
February
1987
53,333.0
0
28
February
1987

50% upon approval by the

Commissioner
The Manual has already been approved by
the Commissioner but payment has not yet
been made.
The lower left corner of the letter also contained the following
notations:
1st
letter
4 Dec.
1986
2nd
letter
15 June
1987
with
"Hinana
kit".
On January 10, 1987, Andy Villaceren, vice president of
petitioner, received the operations manual prepared by
private respondent. 12 Petitioner submitted said operations
manual to the Bureau of Customs is connection with the
former's application to operate a bonded warehouse;
thereafter, in May 1987, the Bureau issued to it a license to
operate, enabling it to become one of the three public bonded
warehouses at the international airport. 13 Private respondent
also conducted, in the third week of January 1987 in the
warehouse of petitioner, a three-day training seminar for the
latter's employees. 14
On March 25, 1987, private respondent joined the Bureau of
Customs as special assistant to then Commissioner Alex
Padilla, a position he held until he became technical assitant
to then Commissioner Miriam Defensor-Santiago on March 7,
1988. 15 Meanwhile, Punsalan sold his shares in petitionercorporation and resigned as its president in 1987. 16

On February 9, 1988, private respondent filed a collection suit

against petitioner. He allege that he had prepared an
operations manual for petitioner, conducted a seminarworkshop for its employees and delivered to it a computer
program; but that, despite demand, petitioner refused to pay
him for his services.
Petitioner, in its answer, denied that private respondent had
prepared an operations manual and a computer program or
conducted a seminar-workshop for its employees. It further
alleged that the letter-agreement was signed by Punsalan
without authority, "in collusion with [private respondent] in
order to unlawfully get some money from [petitioner]," and
despite his knowledge that a group of employees of the
company had been commissioned by the board of directors to
prepare an operations manual. 17
The trial court declared the Second Contract unenforceable or
simulated. However, since private respondent had actually
prepared the operations manual and conducted a training
seminar for petitioner and its employees, the trial court
awarded P60,000 to the former, on the ground that no one
should be unjustly enriched at the expense of another (Article
2142, Civil Code). The trial court determined the amount "in
light of the evidence presented by defendant on the usual
charges made by a leading consultancy firm on similar
services." 18
The Ruling of the Court of Appeals
To Respondent Court, the pivotal issue of private respondent's
appeal was the enforceability of the Second Contract. It noted
that petitioner did not appeal the Decision of the trial court,
implying that it had agreed to pay the P60,000 award. If the
contract was valid and enforceable, then petitioner should be
held liable for the full amount stated therein, not P60,000 as
held by the lower court.
Rejecting the finding of the trial court that the December 4,
1986 contract was simulated or unenforceable, the CA ruled in
favor of its validity and enforceability. According to the Court
of Appeals, the evidence on record shows that the president
of petititoner-corporation had entered into the First Contract,
which was similar to the Second Contract. Thus, petitioner had
clothed its president with apparent authority to enter into the
disputed agreement. As it had also become the practice of the
petitioner-corporation to allow its president to negotiate and
execute contracts necessary to secure its license as a
customs bonded warehouse without prior board approval, the
board itself, by its acts and through acquiescence, practically
laid aside the normal requirement of prior express approval.
The Second Contract was declared valid and binding on the
petitioner, which was held liable to private respondent in the
full amount of P400,000.
Disagreeing with the CA, petitioner lodged this petition before
us. 19
The Issues

The Court will overlook the lapse of petitioner in alleging

grave abuse of discretion as its ground for seeking reversal of
the assailed Decision. Although the Rules of Court specify
"reversible errors" as grounds for a petition for review under
Rule 45, the Court will lay aside for the nonce this procedural
lapse and consider the allegations of "grave abuse" as
statements of reversible errors of law.
Petitioner does not contest its liability; it merely disputes the
amount of such accountability. Hence, the resolution of this
petition rests on the sole issue of the enforceability and
validity of the Second Contract, more specifically: (1) whether
the president of the petitioner-corporation had apparent
authority to bind petitioner to the Second Contract; and (2)
whether the said contract was valid and not merely simulated.
The Court's Ruling
The petition is not meritorious.
First Issue:
Apparent Authority of a Corporate President
Petitioner argues that the disputed contract is unenforceable,
because Punsalan, its president, was not authorized by its
board of directors to enter into said contract.
The general rule is that, in the absence of authority from the
board of directors, no person, not even its officers, can validly
bind a corporation. 21 A corporation is a juridical person,
separate and distinct from its stockholders and members,
"having . . . powers, attributes and properties expressly
authorized by law or incident to its existence." 22
Being a juridical entity, a corporation may board of directors,
which exercises almost all corporate powers, lays down all
corporate business policies and is responsible for the
efficiency of management, 23 as provided in Section 23 of the
Corporation Code of the Philippines:
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 . . . .
Under this provision, the power and the responsibility to
decide whether the corporation should enter into a contract
that will bind the corporation is lodged in the board, subject to
the articles of incorporaration, bylaws, or relevant provisions
of law. 24 Howeever, just as a natural person may authorize
another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority of
such individuals to bind the corporation is generally derived
from law, corporate bylaws or authorization from the board,
either expressly or impliedly by habit, custom or acquiescence
in the general course of business, viz.: 25

II. . . . [I]n ruling that the subject letteragreement for services was binding on the
corporation notwithstanding the lack of any
board authority since it was the purported
"practice" to allow the president to enter
into contracts of said nature (citing one
previous instance of a similar contract)[;]
and

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.

III. . . . [I]n ruling that the subject letteragreement for services was a valid contract
and not merely simulated.

Accordingly, the appellate court ruled in this case that the

authority to act for and to bind a corporation may be
presumed from acts of recognition in other instances, wherein

Instead of alleging reversible errors, petitioner imputes "grave

abuse of discretion" to the Court of Appeals, viz.: 20
I. . . . [I]n ruling that the subject letteragreement for services was binding on the
corporation simply because it was entered
into by its president[;]

the power was in fact exercised without any objection from its
board or shareholders. Petitioner had previously allowed its
president to enter into the First Contract with private
respondent without a board resolution expressly authorizing
him; thus, it had clothed its president with apparent authority
to execute the subject contract.
Petitioner rebuts, arguing that a single isolated agreement
prior to the subject contract does not constitute
corporate practice, which Webster defines as "frequent or
custmary action." It cites Board of Liquidators v. Kalaw,26 in
which the practice of NACOCO allowing its general manager to
negotiate and execute contract in its copra trading activities
for and on its behalf, without prior board approval, was
inferred from sixty contract not one, as in present case
previously entered into by the corporation without such board
resolution.
Petitioner's argument is not persuasive. Apparent authority is
derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power
to act or, in other words, the apparent authority to act in
general, with which it clothes him; or (2) the acquiescence in
his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or beyond the scope of his
ordinary powers. 27 It requires presentation of evidence of
similar act(s) executed either in its favor or in favor of other
parties. 28 It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporale
officer with the power to bind the corporation.
In the case at bar, petitioner, through its president Antonio
Punsalan Jr., entered into the First Contract without first
securing board approval. Despite such lack of board approval,
petitioner did not object to or repudiate said contract, thus
"clothing" its president with the power to bind the corporation.
The grant of apparent authority to Punsalan is evident in the
testimony of Yong senior vice president, treasurer and
major stockholder of petitioner. Testifying on the First
Contract, he said: 29
A: Mr. [Punsalan] told me
that he prefer[s] Mr. Sao
because Mr. Sao is very
influential with the
Collector of Customs[s].
Because the Collector of
Custom[s] will be the one
to approve our project
study and I objected to
that, sir. And I said it [was
an exorbitant] price. And
Mr. Punsalan he is the
[p]resident, so he [gets]
his way.
Q: And so did the
company eventually pay
this P350,000.00 to Mr.
Sao?
A: Yes, sir.
The First Contract was consummated, implemented
and paid without a hitch.
Hence, private respondent should not be faulted for believing
that Punsalan's conformity to the contract in dispute was also
binding on petitioner. It is familiar doctrine that if a
corporation knowingly permits one of its officers, or any other
agent, to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do
those acts; and thus, the corporation will, as against anyone
who has in good faith dealt with it through such agent, be
estopped from denying the agent's authority. 30

Furthermore, private respondent prepared an operations

manual and conducted a seminar for the employees of
petitioner in accordance with their contract. Petitioner
accepted the operations manual, submitted it to the Bureau of
Customs and allowed the seminar for its employees. As a
result of its aforementioned actions, petitioner was given by
the Bureau of Customs a license to operate a bonded
warehouse. Granting arguendo then that the Second Contract
was outside the usual powers of the president, petitioner's
ratification of said contract and acceptance of benefits have
made it binding, nonetheless. The enforceability of contracts
under Article 1403(2) is ratified "by the acceptance of benefits
under them" under Article 1405.
Inasmuch as a corporate president is often given general
supervision and control over corporate operations, the strict
rule that said officer has no inherent power to act for the
corporation is slowly giving way to the realization that such
officer has certain limited powers in the transaction of the
usual and ordinary business of the corporation. 31 In the
absence of a charter or bylaw provision to the contrary, the
president is presumed to have the authority to act within the
domain of the general objectives of its business and within the
scope of his or her usual duties. 32
Hence, it has been held in other jurisdictions that the
president of a corporation possesses the power to enter into a
contract for the corporation, when the "conduct on the part of
both the president and the corporation [shows] that he had
been in the habit of acting in similar matters on behalf of the
company and that the company had authorized him so to act
and had recognized, approved and ratified his former and
similar actions." 33 Furthermore, a party dealing with the
president of a corporation is entitled to assume that he has
the authority to enter, on behalf of the corporation, into
contracts that are within the scope of the powers of said
corporation and that do not violate any statute or rule on
public policy. 34
Second Issue:
Alleged Simulation of the First Contract
As an alternative position, petitioner seeks to pare down its
liabilities by limiting its exposure from P400,000 to only
P60,000, the amount awarded by the RTC. Petitioner
capitalizes on the "badges of fraud" cited by the trial court in
declaring said contract either simulated or
unenforceable, viz.:
. . . The October 1986 transaction with
[private respondent] involved P350,000. The
same was embodied in a letter which bore
therein not only the conformity of
[petitioner's] then President Punsalan but
also drew a letter-confirmation from the
latter for, indeed, he was clothed with
authority to enter into the contract after the
same was brought to the attention and
consideration of [petitioner]. Not only that, a
[down payment] was made. In the alleged
agreement of December 4, 1986 subject of
the present case, the amount is even bigger
- P400,000.00. Yet, the alleged letteragreement drew no letter of confirmation.
And no [down payment] and postdated
checks were given. Until the filing of the
present case in February 1988, no written
demand for payment was sent to
[petitioner]. [Private respondent's] claim
that he sent one in writing, and one was
sent by his counsel who manifested that
"[h]e was looking for a copy in [his] files"
fails in light of his failure to present any
such copy. These and the following
considerations, to wit:

1) Despite the fact that no [down payment]

and/or postdated checks [partial payments]
(as purportedly stipulated in the alleged
contract) [was given, private respondent]
went ahead with the services[;]

them. Petitioner could have easily filed a third-party claim

against Punsalan if it believed that it had recourse against the
latter. Lastly, the mere fact that the contract price was six
times the alleged going rate does not invalidate it. 38 In short,
these "badges" do not establish simulation of said contract.

2) [There was a delay in the filing of the

present suit, more than a year after [private
respondent] allegedly completed his
services or eight months after the alleged
last verbal demand for payment made on
Punsalan in June 1987;

A fictitious and simulated agreement lacks consent which is

essential to a valid and enforceable contract. 39 A contract is
simulated if the parties do not intend to be bound at all
(absolutely simulated), 40 or if the parties conceal their true
agreement (relatively simulated). 41 In the case at bar,
petitioner received from private respondent a letter-offer
containing the terms of the former, including a stipulation of
the consideration for the latter's services. Punsalan's
conformity, as well as the receipt and use of the operations
manual, shows petitioner's consent to or, at the very least,
ratification of the contract. To repeat, petitioner even
submitted the manual to the Bureau of Customs and allowed
private respondent to conduct the seminar for its employees.
Private respondent heard no objection from the petitioner,
until he claimed payment for the services he had rendered.

3) Does not Punsalan's writing allegedly in

June 1987 on the alleged letter-agreement
of "your employees[,]" when it should have
been "our employees", as he was then still
connected with [petitioner], indicate that
the letter-agreement was signed by
Punsalan when he was no longer connected
with [petitioner] or, as claimed by
[petitioner], that Punsalan signed it without
[petitioner's] authority and must have been
done "in collusion with plaintiff in order to
unlawfully get some money from
[petitioner]?
4) If, as [private respondent] claims, the
letter was returned by Punsalan after
affixing thereon his conformity, how come . .
. when Punsalan allegedly visited [private
respondent] in his office at the Bureau of
Customs, in June 1987, Punsalan "brought"
(again?) the letter (with the pencil [notation]
at the left bottom portion allegedly already
written)?
5) How come . . . [private respondent] did
not even keep a copy of the alleged service
contract allegedly attached to the letteragreement?
6) Was not the letter-agreement a mere
draft, it bearing the corrections made by
Punsalan of his name (the letter "n" is
inserted before the last letter "o" in Antonio)
and of the spelling of his family name
(Punsalan, not Punzalan)?
7) Why was not Punsalan impleaded in the
case?
The issue of whether the contract is simulated or real is
factual in nature, and the Court eschews factual examinanon
in a petition for review under Rule 45 of the Rules of
Court. 35 This rule, however, admits of exceptions, one of
which is a conflict between the factual findings of the lower
and of the appellate courts 36 as in the case at bar.
After judicious deliberation, the Court agrees with the
appellate court that the alleged "badges of fraud" mentioned
earlier have not affected in any manner the perfection
thereof. First, the lack of payment (whether down, partial or
full payment), even after completion of private respondent's
obligations, imports only a defect in the performance of the
contract on the part of petitioner. Second, the delay in the
filing of action was not fatal to private respondent's cause.
Despite the lapse of one year after private respondent
completed his services or eight months after the alleged last
demand for payment in June 1987, the action was still filed
within the allowable period, considering that an action based
on a written contract prescribes only after ten years from the
time the right of action accrues. 37 Third, a misspelling in the
contract does not establish vitiation of consent, cause or
object of the contract. Fourth, a confirmation letter is not an
essential element of a contract, neither is it necessary to
perfect one.Fifth, private respondent's failure to implead the
corporate president does not establish collusion between

Contemporaneous and subsequent acts are also principal

factors in the determination of the will of the contracting
parties. 42 The circumstances outlined above do not establish
any intention to simulate the contract in dispute. On the
contrary, the legal presumption is always on the validity of
contracts. A corporation, by accepting benefits of a
transaction entered into without authority, has ratified the
agreement and is, therefore, bound by it. 43
WHEREFORE, the petition is hereby DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 144805 June 8, 2006

EDUARDO V. LINTONJUA, JR. and ANTONIO K.
LITONJUA, Petitioners,
vs.
ETERNIT CORPORATION (now ETERTON MULTIRESOURCES CORPORATION), ETEROUTREMER, S.A. and
FAR EAST BANK & TRUST COMPANY, Respondents.
DECISION
CALLEJO, SR., J.:
On appeal via a Petition for Review on Certiorari is the
Decision1 of the Court of Appeals (CA) in CA-G.R. CV No.
51022, which affirmed the Decision of the Regional Trial Court
(RTC), Pasig City, Branch 165, in Civil Case No. 54887, as well
as the Resolution2 of the CA denying the motion for
reconsideration thereof.
The Eternit Corporation (EC) is a corporation duly organized
and registered under Philippine laws. Since 1950, it had been
engaged in the manufacture of roofing materials and pipe
products. Its manufacturing operations were conducted on
eight parcels of land with a total area of 47,233 square
meters. The properties, located in Mandaluyong City, Metro
Manila, were covered by Transfer Certificates of Title Nos.
451117, 451118, 451119, 451120, 451121, 451122, 451124
and 451125 under the name of Far East Bank & Trust
Company, as trustee. Ninety (90%) percent of the shares of
stocks of EC were owned by Eteroutremer S.A. Corporation
(ESAC), a corporation organized and registered under the laws
of Belgium.3 Jack Glanville, an Australian citizen, was the
General Manager and President of EC, while Claude Frederick
Delsaux was the Regional Director for Asia of ESAC. Both had
their offices in Belgium.
In 1986, the management of ESAC grew concerned about the
political situation in the Philippines and wanted to stop its
operations in the country. The Committee for Asia of ESAC
instructed Michael Adams, a member of ECs Board of
Directors, to dispose of the eight parcels of land. Adams
engaged the services of realtor/broker Lauro G. Marquez so
that the properties could be offered for sale to prospective
buyers. Glanville later showed the properties to Marquez.
Marquez thereafter offered the parcels of land and the
improvements thereon to Eduardo B. Litonjua, Jr. of the
Litonjua & Company, Inc. In a Letter dated September 12,
1986, Marquez declared that he was authorized to sell the
properties for P27,000,000.00 and that the terms of the sale
were subject to negotiation.4
Eduardo Litonjua, Jr. responded to the offer. Marquez showed
the property to Eduardo Litonjua, Jr., and his brother Antonio
K. Litonjua. The Litonjua siblings offered to buy the property
for P20,000,000.00 cash. Marquez apprised Glanville of the
Litonjua siblings offer and relayed the same to Delsaux in
Belgium, but the latter did not respond. On October 28, 1986,
Glanville telexed Delsaux in Belgium, inquiring on his position/
counterproposal to the offer of the Litonjua siblings. It was
only on February 12, 1987 that Delsaux sent a telex to
Glanville stating that, based on the "Belgian/Swiss decision,"
the final offer was "US$1,000,000.00 and P2,500,000.00 to
cover all existing obligations prior to final liquidation." 5

Ermita Branch, and drafted an Escrow Agreement to expedite

the sale.7
Sometime later, Marquez and the Litonjua brothers inquired
from Glanville when the sale would be implemented. In a telex
dated April 22, 1987, Glanville informed Delsaux that he had
met with the buyer, which had given him the impression that
"he is prepared to press for a satisfactory conclusion to the
sale."8 He also emphasized to Delsaux that the buyers were
concerned because they would incur expenses in bank
commitment fees as a consequence of prolonged period of
inaction.9
Meanwhile, with the assumption of Corazon C. Aquino as
President of the Republic of the Philippines, the political
situation in the Philippines had improved. Marquez received a
telephone call from Glanville, advising that the sale would no
longer proceed. Glanville followed it up with a Letter dated
May 7, 1987, confirming that he had been instructed by his
principal to inform Marquez that "the decision has been taken
at a Board Meeting not to sell the properties on which Eternit
Corporation is situated."10
Delsaux himself later sent a letter dated May 22, 1987,
confirming that the ESAC Regional Office had decided not to
proceed with the sale of the subject land, to wit:
May 22, 1987
Mr. L.G. Marquez
L.G. Marquez, Inc.
334 Makati Stock Exchange Bldg.
6767 Ayala Avenue
Makati, Metro Manila
Philippines
Dear Sir:
Re: Land of Eternit Corporation
I would like to confirm officially that our Group has decided
not to proceed with the sale of the land which was proposed
to you.
The Committee for Asia of our Group met recently (meeting
every six months) and examined the position as far as the
Philippines are (sic) concerned. Considering [the] new political
situation since the departure of MR. MARCOS and a certain
stabilization in the Philippines, the Committee has decided not
to stop our operations in Manila. In fact, production has
started again last week, and (sic) to recognize the
participation in the Corporation.
We regret that we could not make a deal with you this time,
but in case the policy would change at a later state, we would
consult you again.
xxx
Yours sincerely,
(Sgd.)
C.F. DELSAUX
cc. To: J. GLANVILLE (Eternit Corp.)11
When apprised of this development, the Litonjuas, through
counsel, wrote EC, demanding payment for damages they had
suffered on account of the aborted sale. EC, however, rejected
their demand.

Marquez furnished Eduardo Litonjua, Jr. with a copy of the

telex sent by Delsaux. Litonjua, Jr. accepted the
counterproposal of Delsaux. Marquez conferred with Glanville,
and in a Letter dated February 26, 1987, confirmed that the
Litonjua siblings had accepted the counter-proposal of
Delsaux. He also stated that the Litonjua siblings would
confirm full payment within 90 days after execution and
preparation of all documents of sale, together with the
necessary governmental clearances.6

The Litonjuas then filed a complaint for specific performance

and damages against EC (now the Eterton Multi-Resources
Corporation) and the Far East Bank & Trust Company, and
ESAC in the RTC of Pasig City. An amended complaint was
filed, in which defendant EC was substituted by Eterton MultiResources Corporation; Benito C. Tan, Ruperto V. Tan, Stock Ha
T. Tan and Deogracias G. Eufemio were impleaded as
additional defendants on account of their purchase of ESAC
shares of stocks and were the controlling stockholders of EC.

The Litonjua brothers deposited the amount of

US$1,000,000.00 with the Security Bank & Trust Company,

In their answer to the complaint, EC and ESAC alleged that

since Eteroutremer was not doing business in the Philippines,
it cannot be subject to the jurisdiction of Philippine courts; the

Board and stockholders of EC never approved any resolution

to sell subject properties nor authorized Marquez to sell the
same; and the telex dated October 28, 1986 of Jack Glanville
was his own personal making which did not bind EC.
On July 3, 1995, the trial court rendered judgment in favor of
defendants and dismissed the amended complaint. 12 The fallo
of the decision reads:
WHEREFORE, the complaint against Eternit Corporation now
Eterton Multi-Resources Corporation and Eteroutremer, S.A. is
dismissed on the ground that there is no valid and binding
sale between the plaintiffs and said defendants.
The complaint as against Far East Bank and Trust Company is
likewise dismissed for lack of cause of action.
The counterclaim of Eternit Corporation now Eterton MultiResources Corporation and Eteroutremer, S.A. is also
dismissed for lack of merit.13
The trial court declared that since the authority of the
agents/realtors was not in writing, the sale is void and not
merely unenforceable, and as such, could not have been
ratified by the principal. In any event, such ratification cannot
be given any retroactive effect. Plaintiffs could not assume
that defendants had agreed to sell the property without a
clear authorization from the corporation concerned, that is,
through resolutions of the Board of Directors and
stockholders. The trial court also pointed out that the
supposed sale involves substantially all the assets of
defendant EC which would result in the eventual total
cessation of its operation.14
The Litonjuas appealed the decision to the CA, alleging that
"(1) the lower court erred in concluding that the real estate
broker in the instant case needed a written authority from
appellee corporation and/or that said broker had no such
written authority; and (2) the lower court committed grave
error of law in holding that appellee corporation is not legally
bound for specific performance and/or damages in the
absence of an enabling resolution of the board of
directors."15 They averred that Marquez acted merely as a
broker or go-between and not as agent of the corporation;
hence, it was not necessary for him to be empowered as such
by any written authority. They further claimed that an agency
by estoppel was created when the corporation clothed
Marquez with apparent authority to negotiate for the sale of
the properties. However, since it was a bilateral contract to
buy and sell, it was equivalent to a perfected contract of sale,
which the corporation was obliged to consummate.
In reply, EC alleged that Marquez had no written authority
from the Board of Directors to bind it; neither were Glanville
and Delsaux authorized by its board of directors to offer the
property for sale. Since the sale involved substantially all of
the corporations assets, it would necessarily need the
authority from the stockholders.
On June 16, 2000, the CA rendered judgment affirming the
decision of the RTC. 16 The Litonjuas filed a motion for
reconsideration, which was also denied by the appellate court.
The CA ruled that Marquez, who was a real estate broker, was
a special agent within the purview of Article 1874 of the New
Civil Code. Under Section 23 of the Corporation Code, he
needed a special authority from ECs board of directors to
bind such corporation to the sale of its properties. Delsaux,
who was merely the representative of ESAC (the majority
stockholder of EC) had no authority to bind the latter. The CA
pointed out that Delsaux was not even a member of the board
of directors of EC. Moreover, the Litonjuas failed to prove that
an agency by estoppel had been created between the parties.
In the instant petition for review, petitioners aver that
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS
NO PERFECTED CONTRACT OF SALE.

II
THE APPELLATE COURT COMMITTED GRAVE ERROR OF LAW IN
HOLDING THAT MARQUEZ NEEDED A WRITTEN AUTHORITY
FROM RESPONDENT ETERNIT BEFORE THE SALE CAN BE
PERFECTED.
III
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
GLANVILLE AND DELSAUX HAVE THE NECESSARY AUTHORITY
TO SELL THE SUBJECT PROPERTIES, OR AT THE VERY LEAST,
WERE KNOWINGLY PERMITTED BY RESPONDENT ETERNIT TO
DO ACTS WITHIN THE SCOPE OF AN APPARENT AUTHORITY,
AND THUS HELD THEM OUT TO THE PUBLIC AS POSSESSING
POWER TO SELL THE SAID PROPERTIES.17
Petitioners maintain that, based on the facts of the case, there
was a perfected contract of sale of the parcels of land and the
improvements thereon for "US$1,000,000.00
plus P2,500,000.00 to cover obligations prior to final
liquidation." Petitioners insist that they had accepted the
counter-offer of respondent EC and that before the counteroffer was withdrawn by respondents, the acceptance was
made known to them through real estate broker Marquez.
Petitioners assert that there was no need for a written
authority from the Board of Directors of EC for Marquez to
validly act as broker/middleman/intermediary. As broker,
Marquez was not an ordinary agent because his authority was
of a special and limited character in most respects. His only
job as a broker was to look for a buyer and to bring together
the parties to the transaction. He was not authorized to sell
the properties or to make a binding contract to respondent
EC; hence, petitioners argue, Article 1874 of the New Civil
Code does not apply.
In any event, petitioners aver, what is important and decisive
was that Marquez was able to communicate both the offer and
counter-offer and their acceptance of respondent ECs
counter-offer, resulting in a perfected contract of sale.
Petitioners posit that the testimonial and documentary
evidence on record amply shows that Glanville, who was the
President and General Manager of respondent EC, and
Delsaux, who was the Managing Director for ESAC Asia, had
the necessary authority to sell the subject property or, at
least, had been allowed by respondent EC to hold themselves
out in the public as having the power to sell the subject
properties. Petitioners identified such evidence, thus:
1. The testimony of Marquez that he was chosen by
Glanville as the then President and General Manager
of Eternit, to sell the properties of said corporation to
any interested party, which authority, as hereinabove
discussed, need not be in writing.
2. The fact that the NEGOTIATIONS for the sale of the
subject properties spanned SEVERAL MONTHS, from
1986 to 1987;
3. The COUNTER-OFFER made by Eternit through
GLANVILLE to sell its properties to the Petitioners;
4. The GOOD FAITH of Petitioners in believing
Eternits offer to sell the properties as evidenced by
the Petitioners ACCEPTANCE of the counter-offer;
5. The fact that Petitioners DEPOSITED the price of
[US]$1,000,000.00 with the Security Bank and that
an ESCROW agreement was drafted over the subject
properties;
6. Glanvilles telex to Delsaux inquiring
"WHEN WE (Respondents) WILL IMPLEMENT ACTION
TO BUY AND SELL";
7. More importantly, Exhibits "G" and "H" of the
Respondents, which evidenced the fact that
Petitioners offer was allegedly REJECTED by both
Glanville and Delsaux.18

Petitioners insist that it is incongruous for Glanville and

Delsaux to make a counter-offer to petitioners offer and
thereafter reject such offer unless they were authorized to do
so by respondent EC. Petitioners insist that Delsaux confirmed
his authority to sell the properties in his letter to Marquez, to
wit:
Dear Sir,
Re: Land of Eternit Corporation
I would like to confirm officially that our Group has decided
not to proceed with the sale of the land which was proposed
to you.
The Committee for Asia of our Group met recently (meeting
every six months) and examined the position as far as the
Philippines are (sic) concerned. Considering the new political
situation since the departure of MR. MARCOS and a certain
stabilization in the Philippines, the Committee has decided not
to stop our operations in Manila[.] [I]n fact production started
again last week, and (sic) to reorganize the participation in
the Corporation.
We regret that we could not make a deal with you this time,
but in case the policy would change at a later stage we would
consult you again.
In the meantime, I remain
Yours sincerely,
C.F. DELSAUX19
Petitioners further emphasize that they acted in good faith
when Glanville and Delsaux were knowingly permitted by
respondent EC to sell the properties within the scope of an
apparent authority. Petitioners insist that respondents held
themselves to the public as possessing power to sell the
subject properties.
By way of comment, respondents aver that the issues raised
by the petitioners are factual, hence, are proscribed by Rule
45 of the Rules of Court. On the merits of the petition,
respondents EC (now EMC) and ESAC reiterate their
submissions in the CA. They maintain that Glanville, Delsaux
and Marquez had no authority from the stockholders of
respondent EC and its Board of Directors to offer the
properties for sale to the petitioners, or to any other person or
entity for that matter. They assert that the decision and
resolution of the CA are in accord with law and the evidence
on record, and should be affirmed in toto.
Petitioners aver in their subsequent pleadings that respondent
EC, through Glanville and Delsaux, conformed to the written
authority of Marquez to sell the properties. The authority of
Glanville and Delsaux to bind respondent EC is evidenced by
the fact that Glanville and Delsaux negotiated for the sale of
90% of stocks of respondent EC to Ruperto Tan on June 1,
1997. Given the significance of their positions and their duties
in respondent EC at the time of the transaction, and the fact
that respondent ESAC owns 90% of the shares of stock of
respondent EC, a formal resolution of the Board of Directors
would be a mere ceremonial formality. What is important,
petitioners maintain, is that Marquez was able to
communicate the offer of respondent EC and the petitioners
acceptance thereof. There was no time that they acted
without the knowledge of respondents. In fact, respondent EC
never repudiated the acts of Glanville, Marquez and Delsaux.
The petition has no merit.
Anent the first issue, we agree with the contention of
respondents that the issues raised by petitioner in this case
are factual. Whether or not Marquez, Glanville, and Delsaux
were authorized by respondent EC to act as its agents relative
to the sale of the properties of respondent EC, and if so, the
boundaries of their authority as agents, is a question of fact.
In the absence of express written terms creating the
relationship of an agency, the existence of an agency is a fact
question.20 Whether an agency by estoppel was created or

whether a person acted within the bounds of his apparent

authority, and whether the principal is estopped to deny the
apparent authority of its agent are, likewise, questions of fact
to be resolved on the basis of the evidence on record. 21 The
findings of the trial court on such issues, as affirmed by the
CA, are conclusive on the Court, absent evidence that the trial
and appellate courts ignored, misconstrued, or misapplied
facts and circumstances of substance which, if considered,
would warrant a modification or reversal of the outcome of the
case.22
It must be stressed that issues of facts may not be raised in
the Court under Rule 45 of the Rules of Court because the
Court is not a trier of facts. It is not to re-examine and assess
the evidence on record, whether testimonial and
documentary. There are, however, recognized exceptions
where the Court may delve into and resolve factual issues,
namely:
(1) When the conclusion is a finding grounded entirely on
speculations, 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
fact are conflicting; (6) when the Court of Appeals, in making
its findings, went beyond the issues of the case and the same
is contrary to the admissions of both appellant and appellee;
(7) when the findings of the Court of Appeals are contrary to
those of the trial court; (8) when the findings of fact are
conclusions without citation of specific evidence on which
they are based; (9) when the Court of Appeals manifestly
overlooked certain relevant facts not disputed by the parties,
which, if properly considered, would justify a different
conclusion; and (10) when the findings of fact of the Court of
Appeals are premised on the absence of evidence and are
contradicted by the evidence on record.23
We have reviewed the records thoroughly and find that the
petitioners failed to establish that the instant case falls under
any of the foregoing exceptions. Indeed, the assailed decision
of the Court of Appeals is supported by the evidence on
record and the law.
It was the duty of the petitioners to prove that respondent EC
had decided to sell its properties and that it had empowered
Adams, Glanville and Delsaux or Marquez to offer the
properties for sale to prospective buyers and to accept any
counter-offer. Petitioners likewise failed to prove that their
counter-offer had been accepted by respondent EC, through
Glanville and Delsaux. It must be stressed that when specific
performance is sought of a contract made with an agent, the
agency must be established by clear, certain and specific
proof.24
Section 23 of Batas Pambansa Bilang 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.
Indeed, a corporation is a juridical person separate and
distinct from its members or stockholders and is not affected
by the personal rights,
obligations and transactions of the latter.25 It may act only
through its board of directors or, when authorized either by its
by-laws 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, by-laws, or relevant provisions of law.26

Under Section 36 of the Corporation Code, a corporation may

sell or convey its real properties, subject to the limitations
prescribed by law and the Constitution, as follows:
SEC. 36. Corporate powers and capacity. Every corporation
incorporated under this Code has the power and capacity:
xxxx
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such real
and personal property, including securities and bonds of other
corporations, as the transaction of a lawful business of the
corporation may reasonably and necessarily require, subject
to the limitations prescribed by the law and the Constitution.
The property of a corporation, however, is not the property of
the stockholders or members, and as such, may not be sold
without express authority from the board of
directors.27 Physical acts, like the offering of the properties of
the corporation for sale, or the acceptance of a counter-offer
of prospective buyers of such properties and the execution of
the deed of sale covering such property, can be performed by
the corporation only by officers or agents duly authorized for
the purpose by corporate by-laws or by specific acts of the
board of directors.28 Absent such valid
delegation/authorization, the rule is that the declarations of
an individual director relating to the affairs of the corporation,
but not in the course of, or connected with, the performance
of authorized duties of such director, are not binding on the
corporation.29
While a corporation may appoint agents to negotiate for the
sale of its real properties, the final say will have to be with the
board of directors through its officers and agents as
authorized by a board resolution or by its by-laws. 30An
unauthorized act of an officer of the corporation is not binding
on it unless the latter ratifies the same expressly or impliedly
by its board of directors. Any sale of real property of a
corporation by a person purporting to be an agent thereof but
without written authority from the corporation is null and void.
The declarations of the agent alone are generally insufficient
to establish the fact or extent of his/her authority. 31
By the contract of agency, a person binds himself to render
some service or to do something in representation on behalf
of another, with the consent or authority of the
latter.32 Consent of both principal and agent is necessary to
create an agency. The principal must intend that the agent
shall act for him; the agent must intend to accept the
authority and act on it, and the intention of the parties must
find expression either in words or conduct between them.33
An agency may be expressed or implied from the act of the
principal, from his silence or lack of action, or his failure to
repudiate the agency knowing that another person is acting
on his behalf without authority. Acceptance by the agent may
be expressed, or implied from his acts which carry out the
agency, or from his silence or inaction according to the
circumstances.34 Agency may be oral unless the law requires a
specific form.35However, to create or convey real rights over
immovable property, a special power of attorney is
necessary.36Thus, when a sale of a piece of land or any portion
thereof is through an agent, the authority of the latter shall be
in writing, otherwise, the sale shall be void.37
In this case, the petitioners as plaintiffs below, failed to
adduce in evidence any resolution of the Board of Directors of
respondent EC empowering Marquez, Glanville or Delsaux as
its agents, to sell, let alone offer for sale, for and in its behalf,
the eight parcels of land owned by respondent EC including
the improvements thereon. The bare fact that Delsaux may
have been authorized to sell to Ruperto Tan the shares of
stock of respondent ESAC, on June 1, 1997, cannot be used as
basis for petitioners claim that he had likewise been
authorized by respondent EC to sell the parcels of land.

Moreover, the evidence of petitioners shows that Adams and

Glanville acted on the authority of Delsaux, who, in turn,
acted on the authority of respondent ESAC, through its
Committee for Asia,38 the Board of Directors of respondent
ESAC,39 and the Belgian/Swiss component of the management
of respondent ESAC.40 As such, Adams and Glanville engaged
the services of Marquez to offer to sell the properties to
prospective buyers. Thus, on September 12, 1986, Marquez
wrote the petitioner that he was authorized to offer for sale
the property forP27,000,000.00 and the other terms of the
sale subject to negotiations. When petitioners offered to
purchase the property for P20,000,000.00, through Marquez,
the latter relayed petitioners offer to Glanville; Glanville had
to send a telex to Delsaux to inquire the position of
respondent ESAC to petitioners offer. However, as admitted
by petitioners in their Memorandum, Delsaux was unable to
reply immediately to the telex of Glanville because Delsaux
had to wait for confirmation from respondent ESAC.41 When
Delsaux finally responded to Glanville on February 12, 1987,
he made it clear that, based on the "Belgian/Swiss decision"
the final offer of respondent ESAC was US$1,000,000.00
plus P2,500,000.00 to cover all existing obligations prior to
final liquidation.42 The offer of Delsaux emanated only from
the "Belgian/Swiss decision," and not the entire management
or Board of Directors of respondent ESAC. While it is true that
petitioners accepted the counter-offer of respondent ESAC,
respondent EC was not a party to the transaction between
them; hence, EC was not bound by such acceptance.
While Glanville was the President and General Manager of
respondent EC, and Adams and Delsaux were members of its
Board of Directors, the three acted for and in behalf of
respondent ESAC, and not as duly authorized agents of
respondent EC; a board resolution evincing the grant of such
authority is needed to bind EC to any agreement regarding
the sale of the subject properties. Such board resolution is not
a mere formality but is a condition sine qua non to bind
respondent EC. Admittedly, respondent ESAC owned 90% of
the shares of stocks of respondent EC; however, the mere fact
that a corporation owns a majority of the shares of stocks of
another, or even all of such shares of stocks, taken alone, will
not justify their being treated as one corporation. 43
It bears stressing that in an agent-principal relationship, the
personality of the principal is extended through the facility of
the agent. In so doing, the agent, by legal fiction, becomes
the principal, authorized to perform all acts which the latter
would have him do. Such a relationship can only be effected
with the consent of the principal, which must not, in any way,
be compelled by law or by any court.44
The petitioners cannot feign ignorance of the absence of any
regular and valid authority of respondent EC empowering
Adams, Glanville or Delsaux to offer the properties for sale
and to sell the said properties to the petitioners. A person
dealing with a known agent is not authorized, under any
circumstances, blindly to trust the agents; statements as to
the extent of his powers; such person must not act negligently
but must use reasonable diligence and prudence to ascertain
whether the agent acts within the scope of his authority. 45 The
settled rule is that, persons dealing with an assumed agent
are bound at their peril, and 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 prove it.46 In
this case, the petitioners failed to discharge their burden;
hence, petitioners are not entitled to damages from
respondent EC.
It appears that Marquez acted not only as real estate broker
for the petitioners but also as their agent. As gleaned from the
letter of Marquez to Glanville, on February 26, 1987, he
confirmed, for and in behalf of the petitioners, that the latter
had accepted such offer to sell the land and the
improvements thereon. However, we agree with the ruling of

the appellate court that Marquez had no authority to bind

respondent EC to sell the subject properties. A real estate
broker is one who negotiates the sale of real properties. His
business, generally speaking, is only to find a purchaser who
is willing to buy the land upon terms fixed by the owner. He
has no authority to bind the principal by signing a contract of
sale. Indeed, an authority to find a purchaser of real property
does not include an authority to sell.47
Equally barren of merit is petitioners contention that
respondent EC is estopped to deny the existence of a
principal-agency relationship between it and Glanville or
Delsaux. For an agency by estoppel to exist, the following
must be established: (1) the principal manifested a
representation of the agents authority or knowlingly allowed
the agent to assume such authority; (2) the third person, in
good faith, relied upon such representation; (3) relying upon
such representation, such third person has changed his
position to his detriment.48 An agency by estoppel, which is
similar to the doctrine of apparent authority, requires proof of
reliance upon the representations, and that, in turn, needs
proof that the representations predated the action taken in
reliance.49Such proof is lacking in this case. In their
communications to the petitioners, Glanville and Delsaux
positively and unequivocally declared that they were acting
for and in behalf of respondent ESAC.
Neither may respondent EC be deemed to have ratified the
transactions between the petitioners and respondent ESAC,
through Glanville, Delsaux and Marquez. The transactions and
the various communications inter se were never submitted to
the Board of Directors of respondent EC for ratification.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for
lack of merit. Costs against the petitioners.
SO ORDERED.

G.R. No. 170891

November 24, 2009

MANUEL C. ESPIRITU, JR., AUDIE LLONA, FREIDA F.

ESPIRITU, CARLO F. ESPIRITU, RAFAEL F. ESPIRITU,
ROLANDO M. MIRABUNA, HERMILYN A. MIRABUNA, KIM
ROLAND A. MIRABUNA, KAYE ANN A. MIRABUNA, KEN
RYAN A. MIRABUNA, JUANITO P. DE CASTRO, GERONIMA
A. ALMONITE and MANUEL C. DEE, who are the officers
and directors of BICOL GAS REFILLING PLANT
CORPORATION, Petitioners,
vs.
PETRON CORPORATION and CARMEN J. DOLOIRAS,
doing business under the name "KRISTINA PATRICIA
ENTERPRISES," Respondents.
DECISION
ABAD, J.:
This case is about the offense or offenses that arise from the
reloading of the liquefied petroleum gas cylinder container of
one brand with the liquefied petroleum gas of another brand.
The Facts and the Case
Respondent Petron Corporation (Petron) sold and distributed
liquefied petroleum gas (LPG) in cylinder tanks that carried its
trademark "Gasul."1 Respondent Carmen J. Doloiras owned
and operated Kristina Patricia Enterprises (KPE), the exclusive
distributor of Gasul LPGs in the whole of Sorsogon.2 Jose
Nelson Doloiras (Jose) served as KPEs manager.
Bicol Gas Refilling Plant Corporation (Bicol Gas) was also in
the business of selling and distributing LPGs in Sorsogon but
theirs carried the trademark "Bicol Savers Gas." Petitioner
Audie Llona managed Bicol Gas.
In the course of trade and competition, any given distributor
of LPGs at times acquired possession of LPG cylinder tanks
belonging to other distributors operating in the same area.
They called these "captured cylinders." According to Jose,
KPEs manager, in April 2001 Bicol Gas agreed with KPE for
the swapping of "captured cylinders" since one distributor
could not refill captured cylinders with its own brand of LPG.
At one time, in the course of implementing this arrangement,
KPEs Jose visited the Bicol Gas refilling plant. While there, he
noticed several Gasul tanks in Bicol Gas possession. He
requested a swap but Audie Llona of Bicol Gas replied that he
first needed to ask the permission of the Bicol Gas owners.
That permission was given and they had a swap involving
around 30 Gasul tanks held by Bicol Gas in exchange for
assorted tanks held by KPE.
KPEs Jose noticed, however, that Bicol Gas still had a number
of Gasul tanks in its yard. He offered to make a swap for these
but Llona declined, saying the Bicol Gas owners wanted to
send those tanks to Batangas. Later Bicol Gas told Jose that it
had no more Gasul tanks left in its possession. Jose observed
on almost a daily basis, however, that Bicol Gas trucks which
plied the streets of the province carried a load of Gasul tanks.
He noted that KPEs volume of sales dropped significantly
from June to July 2001.
On August 4, 2001 KPEs Jose saw a particular Bicol Gas truck
on the Maharlika Highway. While the truck carried mostly Bicol
Savers LPG tanks, it had on it one unsealed 50-kg Gasul tank
and one 50-kg Shellane tank. Jose followed the truck and
when it stopped at a store, he asked the driver, Jun Leorena,
and the Bicol Gas sales representative, Jerome Misal, about
the Gasul tank in their truck. They said it was empty but,
when Jose turned open its valve, he noted that it was not.
Misal and Leorena then admitted that the Gasul and Shellane
tanks on their truck belonged to a customer who had them
filled up by Bicol Gas. Misal then mentioned that his manager
was a certain Rolly Mirabena.
Because of the above incident, KPE filed a complaint 3 for
violations of Republic Act (R.A.) 623 (illegally filling up
registered cylinder tanks), as amended, and Sections 155
(infringement of trade marks) and 169.1 (unfair competition)

of the Intellectual Property Code (R.A. 8293). The complaint

charged the following: Jerome Misal, Jun Leorena, Rolly
Mirabena, Audie Llona, and several John and Jane Does,
described as the directors, officers, and stockholders of Bicol
Gas. These directors, officers, and stockholders were
eventually identified during the preliminary investigation.
Subsequently, the provincial prosecutor ruled that there was
probable cause only for violation of R.A. 623 (unlawfully filling
up registered tanks) and that only the four Bicol Gas
employees, Mirabena, Misal, Leorena, and petitioner Llona,
could be charged. The charge against the other petitioners
who were the stockholders and directors of the company was
dismissed.
Dissatisfied, Petron and KPE filed a petition for review with the
Office of the Regional State Prosecutor, Region V, which
initially denied the petition but partially granted it on motion
for reconsideration. The Office of the Regional State
Prosecutor ordered the filing of additional informations against
the four employees of Bicol Gas for unfair competition. It
ruled, however, that no case for trademark infringement was
present. The Secretary of Justice denied the appeal of Petron
and KPE and their motion for reconsideration.
Undaunted, Petron and KPE filed a special civil action for
certiorari with the Court of Appeals4 but the Bicol Gas
employees and stockholders concerned opposed it, assailing
the inadequacy in its certificate of non-forum shopping, given
that only Atty. Joel Angelo C. Cruz signed it on behalf of
Petron. In its Decision5 dated October 17, 2005, the Court of
Appeals ruled, however, that Atty. Cruzs certification
constituted sufficient compliance. As to the substantive
aspect of the case, the Court of Appeals reversed the
Secretary of Justices ruling. It held that unfair competition
does not necessarily absorb trademark infringement.
Consequently, the court ordered the filing of additional
charges of trademark infringement against the concerned
Bicol Gas employees as well.
Since the Bicol Gas employees presumably acted under the
direct order and control of its owners, the Court of Appeals
also ordered the inclusion of the stockholders of Bicol Gas in
the various charges, bringing to 16 the number of persons to
be charged, now including petitioners Manuel C. Espiritu, Jr.,
Freida F. Espiritu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando
M. Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna,
Kaye Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. de
Castro, Geronima A. Almonite, and Manuel C. Dee (together
with Audie Llona), collectively, petitioners Espiritu, et al. The
court denied the motion for reconsideration of these
employees and stockholders in its Resolution dated January 6,
2006, hence, the present petition for review 6before this Court.
The Issues Presented
The petition presents the following issues:
1. Whether or not the certificate of non-forum
shopping that accompanied the petition filed with the
Court of Appeals, signed only by Atty. Cruz on behalf
of Petron, complied with what the rules require;
2. Whether or not the facts of the case warranted the
filing of charges against the Bicol Gas people for:
a) Filling up the LPG tanks registered to
another manufacturer without the latters
consent in violation of R.A. 623, as
amended;
b) Trademark infringement consisting in
Bicol Gas use of a trademark that is
confusingly similar to Petrons registered
"Gasul" trademark in violation of section
155 also of R.A. 8293; and
c) Unfair competition consisting in passing
off Bicol Gas-produced LPGs for Petron-

produced Gasul LPG in violation of Section

168.3 of R.A. 8293.
The Courts Rulings
First. Petitioners Espiritu, et al. point out that the certificate
of non-forum shopping that respondents KPE and Petron
attached to the petition they filed with the Court of Appeals
was inadequate, having been signed only by Petron, through
Atty. Cruz.
But, while procedural requirements such as that of submittal
of a certificate of non-forum shopping cannot be totally
disregarded, they may be deemed substantially complied with
under justifiable circumstances.7 One of these circumstances
is where the petitioners filed a collective action in which they
share a common interest in its subject matter or raise a
common cause of action. In such a case, the certification by
one of the petitioners may be deemed sufficient. 8
Here, KPE and Petron shared a common cause of action
against petitioners Espiritu, et al., namely, the violation of
their proprietary rights with respect to the use of Gasul tanks
and trademark. Furthermore, Atty. Cruz said in his certification
that he was executing it "for and on behalf of the Corporation,
and co-petitioner Carmen J. Doloiras."9Thus, the object of the
requirement to ensure that a party takes no recourse to
multiple forums was substantially achieved. Besides, the
failure of KPE to sign the certificate of non-forum shopping
does not render the petition defective with respect to Petron
which signed it through Atty. Cruz.10 The Court of Appeals,
therefore, acted correctly in giving due course to the petition
before it.
Second. The Court of Appeals held that under the facts of the
case, there is probable cause that petitioners Espiritu, et al.
committed all three crimes: (a) illegally filling up an LPG tank
registered to Petron without the latters consent in violation of
R.A. 623, as amended; (b) trademark infringement which
consists in Bicol Gas use of a trademark that is confusingly
similar to Petrons registered "Gasul" trademark in violation of
Section 155 of R.A. 8293; and (c) unfair competition which
consists in petitioners Espiritu, et al. passing off Bicol Gasproduced LPGs for Petron-produced Gasul LPG in violation of
Section 168.3 of R.A. 8293.
Here, the complaint adduced at the preliminary investigation
shows that the one 50-kg Petron Gasul LPG tank found on the
Bicol Gas truck "belonged to [a Bicol Gas] customer who had
the same filled up by BICOL GAS."11In other words, the
customer had that one Gasul LPG tank brought to Bicol Gas
for refilling and the latter obliged.
R.A. 623, as amended,12 punishes any person who, without the
written consent of the manufacturer or seller of gases
contained in duly registered steel cylinders or tanks, fills the
steel cylinder or tank, for the purpose of sale, disposal or
trafficking, other than the purpose for which the manufacturer
or seller registered the same. This was what happened in this
case, assuming the allegations of KPEs manager to be true.
Bicol Gas employees filled up with their firms gas the tank
registered to Petron and bearing its mark without the latters
written authority. Consequently, they may be prosecuted for
that offense.
But, as for the crime of trademark infringement, Section 155
of R.A. 8293 (in relation to Section 17013 ) provides that it is
committed by any person who shall, without the consent of
the owner of the registered mark:
1. Use in commerce any reproduction, counterfeit,
copy or colorable imitation of a registered mark or
the same container or a dominant feature thereof in
connection with the sale, offering for sale,
distribution, advertising of any goods or services
including other preparatory steps necessary to carry
out the sale of any goods or services on or in

connection with which such use is likely to cause

confusion, or to cause mistake, or to deceive; or
2. Reproduce, counterfeit, copy or colorably imitate a
registered mark or a dominant feature thereof and
apply such reproduction, counterfeit, copy or
colorable imitation to labels, signs, prints, packages,
wrappers, receptacles or advertisements intended to
be used in commerce upon or in connection with the
sale, offering for sale, distribution, or advertising of
goods or services on or in connection with which
such use is likely to cause confusion, or to cause
mistake, or to deceive.
KPE and Petron have to show that the alleged infringer, the
responsible officers and staff of Bicol Gas, used Petrons Gasul
trademark or a confusingly similar trademark on Bicol Gas
tanks with intent to deceive the public and defraud its
competitor as to what it is selling.14 Examples of this would be
the acts of an underground shoe manufacturer in Malabon
producing "Nike" branded rubber shoes or the acts of a local
shirt company with no connection to La Coste, producing and
selling shirts that bear the stitched logos of an open-jawed
alligator.
Here, however, the allegations in the complaint do not show
that Bicol Gas painted on its own tanks Petrons Gasul
trademark or a confusingly similar version of the same to
deceive its customers and cheat Petron. Indeed, in this case,
the one tank bearing the mark of Petron Gasul found in a
truck full of Bicol Gas tanks was a genuine Petron Gasul tank,
more of a captured cylinder belonging to competition. No
proof has been shown that Bicol Gas has gone into the
business of distributing imitation Petron Gasul LPGs.
As to the charge of unfair competition, Section 168.3 (a) of
R.A. 8293 (also in relation to Section 170) describes the acts
constituting the offense as follows:
168.3. In particular, and without in any way limiting the scope
of protection against unfair competition, the following shall be
deemed guilty of unfair competition:
(a) Any person, who is selling his goods and gives them the
general appearance of goods of another manufacturer or
dealer, either as to the goods themselves or in the wrapping
of the packages in which they are contained, or the devices or
words thereon, or in any other feature of their appearance,
which would be likely to influence purchasers to believe that
the goods offered are those of a manufacturer or dealer, other
than the actual manufacturer or dealer, or who otherwise
clothes the goods with such appearance as shall deceive the
public and defraud another of his legitimate trade, or any
subsequent vendor of such goods or any agent of any vendor
engaged in selling such goods with a like purpose;
Essentially, what the law punishes is the act of giving ones
goods the general appearance of the goods of another, which
would likely mislead the buyer into believing that such goods
belong to the latter. Examples of this would be the act of
manufacturing or selling shirts bearing the logo of an alligator,
similar in design to the open-jawed alligator in La Coste shirts,
except that the jaw of the alligator in the former is closed, or
the act of a producer or seller of tea bags with red tags
showing the shadow of a black dog when his competitor is
producing or selling popular tea bags with red tags showing
the shadow of a black cat.
Here, there is no showing that Bicol Gas has been giving its
LPG tanks the general appearance of the tanks of Petrons
Gasul. As already stated, the truckfull of Bicol Gas tanks that
the KPE manager arrested on a road in Sorsogon just
happened to have mixed up with them one authentic Gasul
tank that belonged to Petron.
The only point left is the question of the liability of the
stockholders and members of the board of directors of Bicol
Gas with respect to the charge of unlawfully filling up a steel

cylinder or tank that belonged to Petron. The Court of Appeals

ruled that they should be charged along with the Bicol Gas
employees who were pointed to as directly involved in overt
acts constituting the offense.1avvphi1
Bicol Gas is a corporation. As such, it is an entity separate and
distinct from the persons of its officers, directors, and
stockholders. It has been held, however, that corporate
officers or employees, through whose act, default or omission
the corporation commits a crime, may themselves be
individually held answerable for the crime.15
Jose claimed in his affidavit that, when he negotiated the
swapping of captured cylinders with Bicol Gas, its manager,
petitioner Audie Llona, claimed that he would be consulting
with the owners of Bicol Gas about it. Subsequently, Bicol Gas
declined the offer to swap cylinders for the reason that the
owners wanted to send their captured cylinders to Batangas.
The Court of Appeals seized on this as evidence that the
employees of Bicol Gas acted under the direct orders of its
owners and that "the owners of Bicol Gas have full control of
the operations of the business."16
The "owners" of a corporate organization are its stockholders
and they are to be distinguished from its directors and
officers. The petitioners here, with the exception of Audie
Llona, are being charged in their capacities as stockholders of
Bicol Gas. But the Court of Appeals forgets that in a
corporation, the management of its business is generally
vested in its board of directors, not its
stockholders.17 Stockholders are basically investors in a
corporation. They do not have a hand in running the day-today business operations of the corporation unless they are at
the same time directors or officers of the corporation. Before a
stockholder may be held criminally liable for acts committed
by the corporation, therefore, it must be shown that he had
knowledge of the criminal act committed in the name of the
corporation and that he took part in the same or gave his
consent to its commission, whether by action or inaction.
The finding of the Court of Appeals that the employees "could
not have committed the crimes without the consent,
[abetment], permission, or participation of the owners of Bicol
Gas"18 is a sweeping speculation especially since, as
demonstrated above, what was involved was just one Petron
Gasul tank found in a truck filled with Bicol Gas tanks.
Although the KPE manager heard petitioner Llona say that he
was going to consult the owners of Bicol Gas regarding the
offer to swap additional captured cylinders, no indication was
given as to which Bicol Gas stockholders Llona consulted. It
would be unfair to charge all the stockholders involved, some
of whom were proved to be minors.19 No evidence was
presented establishing the names of the stockholders who
were charged with running the operations of Bicol Gas. The
complaint even failed to allege who among the stockholders
sat in the board of directors of the company or served as its
officers.
The Court of Appeals of course specifically mentioned
petitioner stockholder Manuel C. Espiritu, Jr. as the registered
owner of the truck that the KPE manager brought to the police
for investigation because that truck carried a tank of Petron
Gasul. But the act that R.A. 623 punishes is the unlawful filling
up of registered tanks of another. It does not punish the act of
transporting such tanks. And the complaint did not allege that
the truck owner connived with those responsible for filling up
that Gasul tank with Bicol Gas LPG.
WHEREFORE, the Court REVERSES and SETS ASIDE the
Decision of the Court of Appeals in CA-G.R. SP 87711 dated
October 17, 2005 as well as its Resolution dated January 6,
2006, the Resolutions of the Secretary of Justice dated March
11, 2004 and August 31, 2004, and the Order of the Office of
the Regional State Prosecutor, Region V, dated February 19,
2003. The Court REINSTATES the Resolution of the Office of
the Provincial Prosecutor of Sorsogon in I.S. 2001-9231

(inadvertently referred in the Resolution itself as I.S. 20019234), dated February 26, 2002. The names of petitioners
Manuel C. Espiritu, Jr., Freida F. Espititu, Carlo F. Espiritu,
Rafael F. Espiritu, Rolando M. Mirabuna, Hermilyn A. Mirabuna,
Kim Roland A. Mirabuna, Kaye Ann A. Mirabuna, Ken Ryan A.
Mirabuna, Juanito P. De Castro, Geronima A. Almonite and
Manuel C. Dee are ORDERED excluded from the charge.
SO ORDERED.

G. R. No. 173333
August 13, 2008
LUCIA MAGALING, PARALUMAN R. MAGALING,
MARCELINA MAGALING-TABLADA, and BENITO R.
MAGALING (Heirs of the late Reynaldo
Magaling), petitioners,
vs.
PETER ONG, respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari1 filed
under Rule 45 of the Rules of Court, as amended, seeking the
reversal of the Decision2 and Amended Decision3 both of the
Court of Appeals, dated 31 August 2005 and 28 June 2006,
respectively, in CA-G.R. CV No. 70954, entitled, "Peter Ong v.
Spouses Reynaldo Magaling and Lucia Magaling, and Thermo
Loans and Credit Corporation." The assailed rulings reversed
and set aside the Decision4 of the Regional Trial Court (RTC),
Branch 13, Lipa City, Batangas, which made petitioner Lucia
Magaling, together with her spouse, Reynaldo Magaling,5 and
Termo6 Loans & Credit Corporation, jointly and severally liable
to respondent Peter Ong for the corporate obligation of the
aforenamed corporation as adjudged in the
RTC Decision dated 23 June 1999.
As culled from the record, the antecedent facts of the present
petition are as follows:
On 30 September 1998, respondent Peter Ong (Ong)
instituted with the RTC a Complaint7 for the collection of the
sum of P389,000.00, with interest, attorneys fees and costs
of suit, with prayer for issuance of a writ of preliminary
attachment against the spouses Reynaldo Magaling and Lucila
Magaling (Spouses Magaling) and Termo Loans & Credit
Corporation (Termo Loans). The Complaintalleged that:
3. Defendants Sps. Reynaldo Magaling and Lucila
Magaling are the controlling stockholders/owners of
Thermo (sic) Loans and Credit Corp. and had used
the corporation as mere alter ego or adjunct to evade
the payment of valid obligation;
4. On or about December 1994, defendant Reynaldo
Magaling, (sic) approached plaintiff in his store at
Lipa City and induced him to lend him money and/or
his company Thermo (sic) Loans and Credit Corp.
with undertaking to pay interest at the rate of two
and a half (2 %) percent per month. Defendant
gave assurance that he and his company Thermo
(sic) Loans and Credit Corp. will be able to pay the
loan. Without the assurance plaintiff would not have
lent the money;
5. Based on the assurance and representation of
Reynaldo Magaling, Peter Ong extended loan to
defendants. As of September 1997, the principal loan
extended to defendants stands atP350,000.00. The
interest thereon computed at 2 % per month
is P8,750.00 per month;
6. In acknowledgment of the loan, on or about
September 1997, defendants issued and tendered to
plaintiff series of postdated checks more particularly
described as follows:
Planters Bank
Check No.

Date

0473400

Sept. 22, 1997

0473401

Oct. 22, 1997

0473402

Nov. 22, 1997

0473403

Dec. 22, 1997

0473404

Jan. 22, 1998

0473405

Feb. 22, 1998

0473406

Feb. 22, 1998

which were issued for payment of interest and

principal loan of P350,000.00. However, only check
nos. 473400 and 473401 were cleared by the bank.
Check no. 473402 was likewise dishonored but it was
subsequently replaced with cash x x x;
7. Despite demands, oral and written, defendants
Sps. Reynaldo and Lucila Magaling and/or Thermo
(sic) Loans and Credit Corp. unjustifiably and illegally
failed, refused and neglected and still fail, refuse and
neglect to pay to the prejudice and damage of
plaintiff. As of June 30, 1998, defendants obligation
stands at P389,043.96 inclusive of interest;
It was alleged further that Reynaldo Magaling, as President of
Termo Loans, together with the corporations treasurer, a
certain Mrs. L. Rosita, signed a Promissory Note8 in favor of
Ong for the amount of P300,000.00 plus a monthly interest of
2.5%.
Because of the failure of Termo Loans to pay its outstanding
obligation despite demand, Ong filed the above-mentioned
complaint praying that Spouses Magaling and Termo Loans be
ordered to pay, jointly and severally, the principal amount
of P389,000.00, plus interest, attorneys fees and costs of suit.
In addition to the preceding entreaty, Ong asked for the
issuance of the writ of preliminary attachment pursuant to
Section 1(d), Rule 57 of the Rules of Court, as amended.
On 7 October 1998, acting on Ongs prayer for the issuance of
a writ of preliminary attachment grounded on the allegation
that Spouses Magaling "were guilty of fraud in contracting the
obligation subject of the complaint for sum of money" 9; and
finding the same to be impressed with merit, the RTC issued
an Order10 directing the issuance of the writ11 prayed for upon
the filing of a bond in the amount of P390,000.00.
Meanwhile, on 3 November 1998, Ong moved to amend the
above complaint "to correct the name ofLucila Magaling
to Lucia Magaling."12 In an Order13 dated 9 November 1998,
the RTC granted the aforesaid motion and admitted
Ongs Amended Complaint14 dated 29 October 1998.
In their defense, Spouses Magaling alleged in their Answer
with Counterclaim15 dated 12 November 1998, that:
[P]laintiff (Peter Ong) on its (sic) own invested money
with Termo Loans and Credit Corp. x x x without any
inducement from answering defendants much less
assurance that Termo Loans will be able to pay the
loan. Plaintiff got attracted with the rate of interest
being given by Termo Loans to money placements
and this is the reason why plaintiff, at its own risk,
invested money with Termo Loans.
xxxx
The alleged checks appear to have been issued by
Termo Loans as a corporation and answering
defendants are not even signatories thereto.
Furthermore, the Promissory Note x x x was issued
by Termo Loans and not by defendants in their
individual capacity.
The Spouses Magaling further clarified that:
There could be no fraud on the part of Reynaldo
Magaling regarding the post-dated checks because
he is not even a signatory thereto. The alleged
assurances/warranties to plaintiff are mere after
thoughts to make answering defendants personally
answerable for corporate obligations of Termo Loans,
and to give semblance of merit to plaintiffs
application for attachment.

For its part, Termo Loans failed to file an Answer; thus, upon
Ongs motion, the RTC declared said corporation in default
and allowed Ong to present evidence ex parte.
Pursuant to the writ of preliminary attachment earlier issued,
and evidenced by the Sheriffs Return16dated 27 November
1998, the Sheriff17 of RTC, Br. 13 of Lipa City, caused the
attachment of two (2) parcels of land covered by Transfer
Certificates of Title No. T-109347 and No. T-75559, both in the
names of the Spouses Magaling.
The Spouses Magaling expectedly moved for the
reconsideration of the 7 October 1998 Order of the RTC
granting the writ of preliminary attachment, arguing that:
The Writ of Preliminary Attachment x x x was
improperly or irregularly issued as there is no
existing ground to support the issuance of an
attachment.
Plaintiff nakedly alleged that the individual
defendants are guilty of fraud in contracting the
obligation. Nevertheless, a perusal of the Amended
Complaint and the annexes thereto readily reveals
that the obligation subject of the present case is
corporate in character and not personal obligations
of the individual defendants.18
In an Order19 dated 19 February 1999, the RTC found that
Spouses Magalings Motion to Discharge Attachment 20 was
impressed with merit based on the following reasons:
FIRSTLY, it appears that the obligation was incurred
by Termo Loans and Credit Corporation x x x. It is
therefore a corporate liability and not the personal
obligation of herein movants. As correctly stated by
the movants, a corporation has a personality
separate and distinct from that of the stockholders
and officers.
SECONDLY, the checks which bounced do not bear
the signatures of herein movants. It is indeed
implausible that movants will give assurances
concerning checks they did not sign.
THIRDLY, the obligation appears to have been
incurred in 1994 x x x. "Fraud" was alleged in
connection with the checks that bounced, and which
appear to have been issued only in 1998 by way of
renewal of plaintiffs money placement. It appears
therefore that if there was indeed fraud, the same
was not committed simultaneously with the inception
of the obligation.
On 23 June 1999, the RTC promulgated the first of two
decisions in this case. Ruling in favor of Ong, and against
Termo Loans, the dispositive portion reads:
WHEREFORE, the Court finds for the plaintiff and
against the defendant-corporation and hereby orders
the latter to pay the former the following amounts:
1. The sum of P350,000.00 representing principal
obligation;
2. Interest at the rate of 2.5% per month from date of
default until full payment (sic)
3. P20,000.00 as and for attorneys fees;
4. The expenses of litigation; and
5. The cost of suit.21
On 11 August 1999, Ong filed a motion22 for execution of the
above, which the RTC granted23 on 18 October 1999. The Writ
of Execution24 was subsequently issued by the RTC on 1 March
2000. On 26 April 2000, the Sheriffs Return25 was filed before
the RTC manifesting that the Writ of Execution earlier issued
was being returned unsatisfied in view of the fact that Termo
Loans had ceased to exist or had been dissolved.
In a parallel development, trial on the merits concerning
Ongs cause of action against the Spouses Magaling ensued.
On 5 February 2001, in complete contrast to its first decision,
the RTC promulgated its second decision holding the Spouses
Magaling free and clear of any obligation or liability with
respect to the sum of money claimed by Ong. The trial court
ruled in this wise:

Records show that the subject obligation is the

obligation of defendant corporation. The Nonnegotiable Promissory Note No. 551 dated November
25, 1994 (Exh. B, p. 3) evidencing plaintiffs money
placement belongs to/or is owned by defendant
Thermo (sic) Loans and Credit Corporation.
Defendant Reynaldo Magaling only signed said
Promissory Note in his capacity as President of the
corporation. Even plaintiffs documentary evidence
shows that the obligation subject matter of the
instant case is a corporate one for which the
stockholders and officers of Thermo (sic) Loans and
Credit Corporation are not personally answerable. For
being its President, defendant Magalings act of
convincing the plaintiff in investing money with the
corporation granting without admitting it to be true is
an act in usual course of business of said corporation.
Thus, Thermo (sic) Loans and Credit Corporation has
a personality separate and distinct from that of
Reynaldo Magaling who happens to be only a
stockholder thereof and president at that time.
xxxx
Furthermore, the Planters Development Bank Checks
(Exh. A A-3) which were allegedly issued by
defendant Reynaldo Magaling to herein plaintiff were
corporate checks under the account name of Thermo
(sic) Loans and Credit Corporation with defendant
Reynaldo Magaling not even a signatory thereof. In
fact, plaintiffs demand letter dated February 24,
1998 (Exh. F) is addressed to the corporation and not
to Reynaldo Magaling. A stockholder as a rule is not
directly, individually and/or personally liable for the
indebtedness of the corporation (citation omitted).
Hence, Reynaldo Magaling being a mere stockholder
of Thermo (sic) Loans and Credit Corporation cannot
be held personally liable for the corporate debt
incurred by it.26
The fallo of the foregoing decision thus states:
WHEREFORE, foregoing premises considered, the
instant Complaint against defendants-spouses
Magaling is hereby DISMISSED for lack of merit.27
Ong appealed the instant case to the Court of Appeals.
In a Decision dated 31 August 2005, the appellate court
reversed and set aside the ruling of the RTC,viz:
WHEREFORE, the foregoing considered, the instant
appeal is hereby GRANTED. The assailed decision is
REVERSED and SET ASIDE and a new one entered
declaring appellee spouses Magaling jointly and
severally liable to appellant Peter Ong for the
corporate obligation of Thermo (sic) Loans adjudged
in the decision of the trial court dated 23 June 1999.28
The Court of Appeals, in reversing the 5 February 2001
Decision of the RTC, found that the general rule that corporate
officers cannot be held personally liable for corporate debt
when they act in good faith and within the scope of their
authority in executing a contract for and in behalf of the
corporation, cannot apply to the spouses Magaling. The Court
of Appeals pierced the veil of corporate fiction and held the
spouses Magaling solidarily liable with Termo Loans for the
corporate obligations of the latter since it found that Reynaldo
Magaling was grossly negligent in managing the affairs of the
said corporation.
The Spouses Magaling moved for the reconsideration of the
aforequoted decision. But not to be outdone, Ong likewise
filed a motion for reconsideration, albeit partial, that is,
insofar as the issue of the propriety of the discharge of the
writ of preliminary attachment was concerned.
The Spouses Magalings motion for reconsideration was
denied by the Court of Appeals in itsAmended Decision dated
28 June 2006. Deciding affirmatively on Ongs propositions,
the Court of Appeals explained in the same Amended
Decision that:
With respect to appellants prayer, he invited Our
attention to his assignment of error in his Appellants

Brief where he sought the nullification of the Order of

the trial court discharging the writ of attachment. He
argued that the said Order granting such discharge
had the effect of prejudging the merits of the case at
a time when Thermo (sic) Loans and Credit Corp. had
not even filed its answer to the complaint. Indeed,
We find that such discharge, even before the issues
were joined, prematurely adjudicated the merits of
the case on the lack of personal liability of appellees,
and without the latter even posting a counter bond.
Therefore, as prayed for by appellant, the discharge
of attachment is declared illegal and the writ of
attachment is declared effective and subsisting.29
And the dispositive part of the Amended Decision provides:
WHEREFORE, the foregoing considered, the partial
motion for reconsideration of appellant is GRANTED.
Accordingly, the Order discharging the writ of
attachment is SET ASIDE and the Writ of Attachment
is hereby declared effective and subsisting.
Appellees motion for reconsideration is DENIED.30
Hence, the present petition premised on the following
arguments31:
I.
THE COURT OF APPEALS ACTED WITH GRAVE ABUSE
OF DISCRETION AND IN EXCESS OF JURISDICTION IN
RELYING ON A GROUND RAISED ONLY FOR THE FIRST
TIME ON APPEAL, TO MAKE REYNALDO MAGALING
PERSONALLY LIABLE FOR CORPORATE LIABILITY; and
II.
THE COURT OF APPEALS ACTED WITH GRAVE ABUSE
OF DISCRETION AND IN EXCESS OF JURISDICTION IN
REINSTATING THE PRELIMINARY ATTACHMENT.
At the outset, we note that while the instant suit is
denominated as a "Petition for Review onCertiorari," under
Rule 45 of the Revised Rules of Court, the allegations for the
allowance of this petition are that the appellate court
committed grave abuse of discretion amounting to lack or
excess of jurisdiction in reversing the decision dated 5
February 2001 of the RTC. This is a procedural error. This
being an appeal by certiorari, under Rule 45 of the Revised
Rules of Court, this Courts power to review is generally
limited to questions of law and errors of judgment. 32 Under
this mode of appeal, this Court is precluded from entertaining
errors of jurisdiction or grave abuse of discretion a question
which may be appropriately addressed through a petition
for certiorari under Rule 65 of the Revised Rules of Court. In
any case, to put an end to the present controversy, in
accordance with the liberal spirit pervading the Revised Rules
of Court and in the interest of justice, this Court decided to
treat the present petition for certiorari as an appeal
by certiorari, considering that it was filed33 within 15 days
from receipt of the Amended Decision of the Court of Appeals
denying petitioners motion for reconsideration.
In the case at bar, the Spouses Magaling claim that the Court
of Appeals gravely abused its discretion when it (1) held the
Spouses Magaling equally liable with Termo Loans with regard
to the financial liability of the latter; and (2) reinstated the
writ of preliminary attachment.
In ruling against the Spouses Magaling on the sole issue of
whether or not they "may be held personally liable for the
corporate obligation of Thermo (sic) Loans in favor of Peter
Ong,"34 the Court of Appeals debunked the ratiocination of the
RTC that "the checks issued by appellee Reynaldo Magaling
were all corporate checks under the account name of Thermo
(sic) Loans to which he was not even a signatory (of) x x x
(and) that the demand letter was addressed to Thermo (sic)
Loans and not to Reynaldo Magaling."35 It took note of the
following:
Appellee Reynaldo Magaling testified that as
president of Thermo (sic) Loans from 1994 up to
1997, it was his duty and responsibility to supervise

the personnel and the operation of the corporation.

(Citation omitted.) The Articles of Incorporation of
Thermo (sic) Loans where he was incorporator and
director states its primary purpose was to engage in
the business of a lending investor, lending money to
persons and entities under the terms and conditions
allowed by law. Renaldo (sic) Magaling likewise
admitted that there are other twenty more different
companies also dealing in financing or lending
business. (Citation omitted.) Thus, while it is true that
there may have been no fraud at the inception of the
transaction with appellant Peter Ong, and from 1994
to 1997, he was paid his monthly interest of 2.5% on
his investment or P8,750.00 monthly, the degree of
diligence required of Reynaldo Magaling as director
and president of Thermo (sic) Loans was not shown
to have been exercised by him as expected from the
highest officer of the said company.
Reynaldo Magaling resigned as president of Thermo
(sic) Loans in 1998 when the company already
became insolvent. He admitted that when he
resigned, nobody took over as president of the
company. Neither were the investors informed about
the bankruptcy thereof, and nor was any bankruptcy
or insolvency or suspension of payments proceedings
instituted to protect the assets of the corporation and
the interest of its investors. As director and president
of the company, he seemed to know nothing at all
about its operations, nor could he produce any
financial document like the companys financial
statement, and in his own words, he conveniently
gave all the responsibilities to the manager x x x.
Considering the nature of the business of Thermo
(sic) Loans and other lending companies of appellee
Reynaldo Magaling. It behooved him to have
exercised utmost diligence in running the affairs of
Thermo (sic) Loans to protect its interest and its
investors. Miserably, he failed in this respect that the
trial court even commented that he seemed not to
know anything about the operation of his business.
(Citation omitted.)
It then concluded that:
Clearly, Reynaldo Magaling was grossly negligent in
directing the affairs of Thermo (sic) Loans without
due regard to the plight of its investors and thus
should be held jointly and severally liable for the
corporate obligation of Thermo (sic) Loans to
appellant Peter Ong.36
In asking this Court to reverse and set aside the abovequoted Decision, as well as the Amended Decision, of the
Court of Appeals, the petitioners contend that the appellate
court failed to appreciate several important facts: 1) that the
issue of whether or not a corporate debt or credit can be the
debt or credit of a stockholder was alleged for the first time on
appeal; 2) that "the Amended Complaint did not allege that
Reynaldo Magaling was guilty of gross negligence or bad faith
in directing the affairs of the corporation"37; 3) that the
solvency of Termo Loans was never put in issue or raised by
Ong; and 4) that negligence "is not one of the grounds
provided for by Rule 57 of the Rules of Court that will warrant
(the) issuance of preliminary attachment."38
Ong, in traversing the allegations in support of the present
petition, argues in his Comment that he brought up the issue
of Reynaldo Magalings negligence in managing the affairs of
Termo Loans in his Memorandum before the RTC where he
stated that:
Being President, it is incumbent upon Reynaldo
Magaling to know the financial condition of his
company. He was found wanting and did not know
the financial condition of his company. How many
creditors does the company have? He was supposed
to know that as President but he does not know. One
glaring fact that stands out is that these creditors are
left with an empty bag and cannot collect because of

the negligence of Reynaldo Magaling in running his

financing companies.39
From the preceding arguments and counter-arguments, the
threshold issues proper for this Courts consideration are,
given the facts of the case, whether or not the Court of
Appeals erred in: 1) making the Spouses Magaling and Termo
Loans jointly and severally liable to Ong for the obligation
incurred by the corporation; and 2) reinstating the writ of
preliminary attachment issued against two (2) real properties
of the Spouses Magaling.
The petition is not meritorious.
It is basic that 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.40 The
general rule is that obligations incurred by the corporation,
acting through its directors, officers and employees, are its
sole liabilities, and vice versa.
There are times, however, when solidary liabilities may be
incurred and the veil of corporate fiction may be pierced.
Exceptional circumstances warranting such disregard of a
separate personality are summarized as follows:
1. When directors and trustees or, in appropriate
case, 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;
(c) are guilty of conflict of interest to the
prejudice of the corporation, its stockholders
or members, and other persons;41
2. When a director or officer has consented to the
issuance of watered down stocks or who, having
knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto;42
3. When a director, trustee or officer has
contractually agreed or stipulated to hold himself
personally and solidarily liable with the
corporation;43 or
4. When a director, trustee or officer is made, by
specific provision of law, personally liable for his
corporate action.44
In making the Spouses Magaling co-defendants of Termo
Loans, Ong alleged in his Complaint for Sum of Money filed
with the RTC that the spouses Reynaldo Magaling and Lucia
Magaling were the controlling stockholders and/or owners of
Termo Loans, and that they had used the corporation to evade
the payment of a valid obligation. The appellate court
eventually found the Spouses Magaling equally liable with
Termo Loans for the sum of money sought to be collected by
Ong.
As explained above, to hold a director, a trustee or an officer
personally liable for the debts of the corporation and, thus,
pierce the veil of corporate fiction, bad faith or gross
negligence by the director, trustee or officer in directing the
corporate affairs must be established clearly and convincingly.
Bad faith is a question of fact and is evidentiary. Bad faith
does not connote bad judgment or negligence. It imports a
dishonest purpose or some moral obliquity and conscious
wrongdoing. It means breach of a known duty through some ill
motive or interest. It partakes of the nature of fraud. 45
In the present case, there is nothing substantial on record to
show that Reynaldo Magaling, as President of Termo Loans,
has, indeed, acted in bad faith in inviting Ong to invest in
Termo Loans and/or in obtaining a loan from Ong for said
corporation in order to warrant his personal liability. From all
indications, the proceeds of the investment and/or loan were
indeed utilized by Termo Loans. Likewise, bad faith does not
arise just because a corporation fails to pay its obligations,
because the inability to pay ones obligation is not
synonymous with fraudulent intent not to honor the
obligations.46
The foregoing discussion notwithstanding, this Court still
cannot totally absolve Reynaldo Magaling from any liability

considering his gross negligence in directing the affairs of

Termo Loans; thus, he must be made personally liable for the
debt of Termo Loans to Ong.
In order to pierce the veil of corporate fiction, for reasons of
negligence by the director, trustee or officer in the conduct of
the transactions of the corporation, such negligence must be
gross. Gross negligence is one that is characterized by the
want of even slight care, acting or omitting to act in a
situation where there is a duty to act, not inadvertently but
willfully and intentionally with a conscious indifference to
consequences insofar as other persons may be affected; 47 and
must be established by clear and convincing evidence.
Parenthetically, gross or willful negligence could amount to
bad faith.48
In the case at bar, in their Memorandum filed before the RTC,
the Spouses Magaling argued that "theAmended
Complaint did not allege that Reynaldo Magaling was guilty of
gross negligence or bad faith in directing the affairs of the
corporation"; and that respondent Ong was not able to adduce
evidence to offset the effect of the particular allegation.
Hence, they insist that it was unfair for the appellate court to
conclude that Reynaldo Magaling failed to exercise the
necessary diligence in running Termo Loans.
We disagree.
Petitioners argument is that Ong failed to actually allege in
the complaint Reynaldo Magalings gross negligence in
running Termo Loans as basis for making the subject sum of
money a personal liability of Reynaldo. For them, it is, thus,
too late in the day to raise the alleged gross negligence of
Termo Loans President, Reynaldo Magaling, as this matter has
not been pleaded before the RTC. Or simply put, issues raised
for the first time on appeal and not raised timely in the
proceedings in the lower court are barred for being violative of
basic due process.
Generally, laws, theories, issues and arguments not
adequately brought to the attention of the lower court need
not be, and ordinarily will not be, considered by a reviewing
court, as they cannot be raised for the first time on
appeal49 and, as such, are deemed to have been waived. Basic
consideration of due process impels this rule. 50 In the case at
bar, however, the issue respecting Reynaldo Magalings gross
negligence was seasonably raised in the proceedings before
the RTC. The testimonial evidence elicited from Reynaldo
Magaling himself during his cross-examination in the RTC
bears out his wanton disregard of the transactions of Termo
Loans, particularly in consideration of the fact that he was the
latters President.
It cannot be said that the Spouses Magaling were not given an
opportunity to refute the issue of his supposed gross
negligence in directing the affairs of Termo Loans when the
same, having been established by his own testimony during
cross-examination, could have been objected to at the time it
was made. Objection to evidence cannot be raised for the first
time on appeal; when a party desires the court to reject the
evidence offered, he must so state in the form of objection.
Without such objection, he cannot raise the question for the
first time on appeal. That the Spouses Magaling were not able
to present evidence to the contrary was solely due to the
ineffectiveness of their counsel in rebutting the evidence
unearthed and brought to light during the witness
presentation in court. Their counsel could have clarified in the
re-direct examination the matters revealed during crossexamination, but he did not do so.
Reynaldo Magalings gross negligence became apparent,
undeniable and proven during the course of the proceedings
in the trial court. Reynaldo Magaling was the lone witness
presented in court to belie the claim of Ong. On crossexamination, he (Reynaldo Magaling) clearly and plainly shed
light on how Termo Loans was run under his aegis, to wit:
ATTY. NG:
Q.
Mr. witness, this company that you have, this
Flagship Lending Corporation, you said . When was
this established, Mr. witness?
A.
I think it is in 1998, more or less, sir.

Q.
1998. How about this First Solid Lending
Corporation, when was this put up?
A.
I cannot remember also when it started
operating, sir.
COURT:
Q.
So, when did you first realize that you have
difficulty in receiving payments from borrowers?
A.
In the later part of .
Q.
19 ..?
A.
In 1998, Your Honor.
Q.
And in 1998 you did not tell Peter Ong that
there was difficulty in receiving payments from the
borrowers?
A.
He knew about it, Your Honor.
Q.
You cannot presume that the investor knows
that you have difficulty. You have to tell the investor.
Did you tell him?
A.
It was told to him by our manager, what was
happening, Your Honor.
Q.
Your Manager. But you, yourself did not tell
him?
A.
I cannot remember, Your Honor.
COURT:
Q.
So, there was absolutely no occasion for you to
tell him even in passing in his store that there is
danger in the P300,000.00 investment?
A.
No, Your Honor.
Q.
How about the other investors? Did you not also
tell them of such a situation that you were in in your
company?
A.
No, Your Honor.
Q.
Why not?
A.
I did not tell that to investors, what is
going on for fear that they might be afraid of
what is happening, Your Honor.51
xxxx
ATTY. NG:
Q.
Mr. Witness, was there a formal bankruptcy
proceedings filed in dissolving the company?
xxxx
WITNESS:
A.
I do not know, sir.
ATTY. NG:
Q.
Being the President, you do not know or you
refused to know?
A.
No, sir. I resigned at that time in 1998, sir.
COURT:
Q.
And who took over as President?
A.
Nobody took over, Your Honor.
Q.
How about the investors? Did they get all their
money?
WITNESS:
A.
I do not know, Your Honor.
ATTY. NG:
Q.
As of the time that you were still the President,
were there other investors in the company, is it not,
aside from Peter Ong?
A.
Yes, sir.
Q.
Do you know how much was the investment of
the other persons aside from Peter Ong?
xxxx
WITNESS:
A.
Like me, I have invested, sir.
ATTY. NG:
Q.
How much?

A.
P1.8 Million, sir.
Q.
That is your share in the company?
A.
No. That is not a share, sir.
Q.
So, that is your investment in the company?
A.
That is my investment, sir.
Q.
How about the other persons who also invested
money with your company?
A.
I do not know that, sir.
Q.
Can you produce the financial statement of
Thermo (sic) Loans, Mr. witness?
A.
(No answer).
COURT:
Q.
So, as President, you do not know who are the
other investor?
A.
I know the Directors, but the other investors, I
do not know, Your Honor.
Q.
Who is in-charged (sic) of the company?
A.
As of now, Your Honor?
Q.
As of now?
A.
Our manager, Your Honor.
ATTY. NG:
Q.
But because you were the President, you also
supervised your manager, is it not?
A.
Yes, sir.
Q.
To your knowledge, can you name some of the
other persons who also invested in your company, if
you know?
A.
Yes, sir.
Q.
Can you name them?
A.
The Directors listed there, sir.
Q.
How much did the Directors invest in this
company?
A.
That I do not know, sir.
COURT:
Q.
Upon insolvency, the fact that Thermo (sic)
Loans became insolvent in 1998, did all the investors
get their money?
A.
Many are saying that they will get their money,
Your Honor.
Q.
But did they actually get their money
investment?
A.
The others were not able to get back, Your
Honor.
Q.
Did they file a case against you?
A.
No charges were filed against me, Your Honor.
Q.
How about Thermo (sic) Loans?
A.
I do not know, Your Honor.
Q.
So, this is the only case filed by an investor
against Thermo (sic) Loans?
A.
Yes, Your Honor.
ATTY. NG:
Q.
Mr. Witness, going back to your relationship
with Mr. Peter Ong, were you the one who convinced
Peter Ong to invest in your company, the Thermo
(sic) Loans?
A.
I do not remember that, sir.
COURT:
Q.
But you talked to him about the interest and the
principal?
A.
Yes, Your Honor.
Q.
But you did not mention to him that you have
other lending companies?
A.
In that matter, I do not remember, Your
Honor.
ATTY. NG:

Q.
Mr. Witness, when this company, Thermo (sic)
Loans pulled (sic) it up, "nagsarado," it was a de
facto, there was no. who got hold of the assets of
the company?
A.
I do not know that, sir.
Q.
Why?
A.
Because I am not only attending to that
company, I have so many other companies, sir.
COURT:
Q.
You did not go after your P1.8 Million?
A.
Nomore (sic), Your Honor, because "akoy
kinukunsensya rin ng aking sarili, bilang
Katolikoy ayaw ko nang makasali pa sa ibang
bagay na sa banda rooy pera lang ho iyon."
Q.
"Nakukunsiyensya ka" but you were not being
bothered for the money of the other investors? How
can that be? Your conscience bothers you?
A.
If I will think about it, I might get sick. I
did not bother to run after my investment for
reason of health x x x.
ATTY. NG:
Q.
Okay, Mr. Witness, considering that you are a
businessman engaged in similar lines of lending
company and being the President, the former
President of Themo (sic) Loans, you had . you were
furnished with final. with financial statement of the
company was it not?
A.
I do not remember that, sir.
COURT:
Q.
You did not call a meeting of the Directors and
other stock holders that your company is going
down?
A.
No more, Your Honor, because no Directors
attended the meeting.
Q.
But you called a meeting?
A.
Yes, Your Honor. I called a meeting but nobody
attended the meeting.
ATTY. NG:
Q.
Where are now the financial records of the
company?
A.
That I do not know, sir.
Q.
How about your own personal records? Your
personal copy of the financial statement of the
company, considering that your classification in
Rotary Club is financial services?
A.
I do not know where it was placed, sir.
Q.
So, you are telling this Court that you cannot
produce anymore the financial statement related to
this company, is it?
A.
No, sir. Not like that.
Q.
Where you tried to retrieve or will you try to
retrieve the financial statement of this company?
A.
I gave all the responsibilities to the
manager, sir.52
Reynaldo Magalings very own testimony gave reason for the
appellate courts finding of gross negligence on his part.
Instead of the intended effect of refuting the supposition that
Termo Loans was assiduously managed, Reynaldo Magalings
foregoing testimony only convincingly displayed his gross
negligence in the conduct of the affairs of Termo Loans. From
our standpoint, his casual manner, insouciance and
nonchalance, nay, indifference, to the predicament of the
distressed corporation glaringly exhibited a lackadaisical
attitude from a top office of a corporation, a conduct totally
abhorrent in the corporate world.
Reynaldo Magaling is not a novice in the field of commerce.
He is a seasoned businessman running several lending
companies. During his cross- examination, he admitted that

he had, aside from Termo Loans, various other lending

companies, to wit:
ATTY. NG:
Q.
Mr. witness, you said that you are a
businessman by profession?
WITNESS:
A.
Yes, sir.
xxxx
ATTY. NG:
Q.
In 1994 when you got this alleged investment
from Peter Ong, what were the businesses that you
own or control at that time?
xxxx
WITNESS:
A.
I did not receive the investment of Peter Ong, it
was the company who received, sir.
ATTY. NG:
Q.
Okay. But what were your businesses that
you had at that time?
A.
Lending companies, sir.
Q.
What are the names of that lending companies
that you had?
A.
Thermo Loans, sir.
Q.
Aside from Thermo Loans?
A.
First Solid Lending Company, sir.
Q.
What else?
A.
Mediator Lending Company, sir.
Q.
What else?
A.
Beneficial Lending Company, sir.
Q.
What else?
A.
Vintage Lending Company, sir.
Q.
What else?
A.
New Profile Lending Company, sir.
Q.
What else?
A.
Smart Cash Lending Company, sir.
Q.
What else?
A.
Cash Line Lending Company, sir.
Q.
What else?
A.
Insight Lending Company, sir.
Q.
What else?
A.
Antigo Lending Company, sir.
Q.
What else?
A.
Flagship Lending Company, sir.
Q.
What else?
COURT:
Q.
So, what happened to all these lending
companies now?
A.
They are okay, Your Honor.
ATTY. NG:
Q.
Do you mean to tell this Honorable Court that
all these companies are now doing well and still
existing including Thermo Loans?
A.
Thermo Loans was insolvent at that time, sir.
But you did not ask those insolvent. I have so many
companies that are already insolvent. But you
did not ask about the company that are
solvent.
COURT:
Q.
Among those companies which you
mentioned, which of those are solvent and
which are not?
A.
All of those I mentioned except Thermo Loans,
Your Honor.53
xxxx

COURT:
Q.
And Peter Ong could have not parted with the
Three Hundred Thousand pesos (P300,000.00)
investment if he did not talk to you?
A.
He talked to me, Your Honor.
ATTY. NG:
Q.
He talked to you? Now, that you admitted .
COURT:
Q.
Who was the one who made the offer for him to
invest? Was he the one who voluntarily invested the
money or you were the one who convinced him to
invest the P300,000.00 money to Thermo Loans
Lending and Credit Corporation?
A.
I cannot remember, Your Honor, because due to
the lapse of time. It was in 1994.54
xxxx
COURT:
Q.
So, what you are saying now is that, your
manager and Peter Ong made preliminary talks
about Peter Ong investing in Thermo Loans and
Credit Corporation and thereafter, you also talked
with Peter Ong about Peter Ongs investing in
Thermo Loans?
A.
Yes, Your Honor.
Q.
What about after that?
A.
After four (4) years that investment was in
1994 up to 1998, Your Honor, and this last in the
year 1999, the corporation became insolvent, Your
Honor.55
xxxx
ATTY. NG:
xxxx
Q.
What happened when Mr. witness, how did
Thermo Loans become bankrupt?
A.
The reason is that, the borrowers did not pay,
sir.56
Accordingly, the Court of Appeals observed correctly when it
succinctly stated that, "[c]learly, Reynaldo Magaling was
grossly negligent in directing the affairs of Thermo (sic) Loans
without due regard to the plight of its investors and thus
should be held jointly and severally liable for the corporate
obligation of Thermo (sic) Loans to appellant Peter Ong."
On the propriety of the RTCs discharge of the preliminary
attachment, we hew to the provisions of the law and
jurisprudence.
A writ of preliminary attachment is a provisional remedy by
virtue of which a plaintiff or other proper party may, at the
commencement of the action or at any time thereafter, have
the property of the adverse party taken into the custody of
the court as security for the satisfaction of the judgment that
may be recovered.57 The chief purpose of the remedy of
attachment is to secure a contingent lien on defendants
property until plaintiff can, by appropriate proceedings, obtain
a judgment and have such property applied to its satisfaction,
or to make some provision for unsecured debts in cases where
the means of satisfaction thereof are liable to be removed
beyond the jurisdiction, or improperly disposed of or
concealed, or otherwise placed beyond the reach of
creditors.58
For the provisional remedy to issue, Sec. 1, Rule 57 of the
Rules of Court, as amended, provides that:
SECTION 1. Grounds upon which attachment may
issue. At the commencement of the action or at any
time before entry of judgment, a plaintiff or any
proper party may have the property of the adverse
party attached as security for the satisfaction of any
judgment that may be recovered in the following
cases:
(a) In an action for the recovery of a specified
amount of money or damages, other than moral and

exemplary, on a cause of action arising from law,

contract, quasi-contract, delict or quasi-delict against
a party who is about to depart from the Philippines
with intent to defraud his creditors;
(b) In an action for money or property embezzled or
fraudulently misapplied or converted to his own use
by a public officer, or an officer of a corporation, or
an attorney, factor, broker, agent, or clerk, in the
course of his employment as such, or by any other
person in a fiduciary capacity, or for a willful violation
of duty;
(c) In an action to recover possession of property
unjustly or fraudulently taken, detained or converted,
when the property, or any part thereof, has been
concealed, removed, or disposed of to prevent its
being found or taken by the applicant or an
authorized person;
(d) In an action against a party who has been guilty
of a fraud in contracting the debt or incurring the
obligation upon which the action is brought, or in the
performance thereof;
(e) In an action against a party who has removed or
disposed of his property, or is about to do so, with
intent to defraud his creditors; or
(f) In an action against a party who does not reside
and is not found in the Philippines, or on whom
summons may be served by publication.
Once the writ of preliminary attachment is issued, the same
rule provides for two ways by which it can be dissolved or
discharged.
First, the writ of preliminary attachment may be discharged
upon a security given, i.e., a counter-bond, viz:
SEC. 12. Discharge of attachment upon giving
counter-bound. After a writ of attachment has been
enforced, the party whose property has been
attached, or the person appearing on his behalf, may
move for the discharge of the attachment wholly or
in part on the security given.The court shall, after
due notice and hearing, order the discharge of
the attachment if the movant makes a cash
deposit, or files a counter-bond executed to
the attaching party with the clerk of the court
where the application is made, in an amount
equal to that fixed by the court in the order of
attachment, exclusive of costs. But if the
attachment is sought to be discharged with respect
to a particular property, the counter-bond shall be
equal to the value of that property as determined by
the court. In either case, the cash deposit or the
counter-bond shall secure the payment of any
judgment that the attaching party may recover in the
action. A notice of the deposit shall forthwith be
served on the attaching party. Upon the discharge of
an attachment in accordance with the provisions of
this section, the property attached, or the proceeds
of any sale thereof, shall be delivered to the party
making the deposit or giving the counter-bond, or to
the person appearing on his behalf, the deposit or
counter-bond aforesaid standing in place of the
property so released. Should such counter-bond for
any reason be found to be, or become insufficient,
and the party furnishing the same fail to file an
additional counter-bond, the attaching party may
apply for a new order of attachment. (Emphasis
supplied.)
Second, said provisional remedy must be shown to have been
irregularly or improperly issued, to wit:
SEC. 13. Discharge of attachment on other grounds.
The party whose property has been ordered
attached may file a motion with the court in which
the action is pending, before or after levy or even
after the release of the attached property, for an
order to set aside or discharge the attachment on
the ground that the same was improperly or

irregularly issued or enforced, or that the bond

is insufficient. If the attachment is excessive, the
discharge shall be limited to the excess. If the motion
be made on affidavits on the part of the movant but
not otherwise, the attaching party may oppose the
motion by counter-affidavits or other evidence in
addition to that on which the attachment was
made. After due notice and hearing, the court
shall order the setting aside or the
corresponding discharge of the attachment if it
appears that it was improperly or irregularly
issued or enforced, or that the bond is
insufficient, or that the attachment is
excessive, and the defect is not cured
forthwith. (Emphasis supplied.)
In the case at bar, there is no question that no counter bond
was given by the Spouses Magaling for the discharge or
dissolution of the writ of preliminary attachment, as their
position is that the provisional remedy was irregularly or
improperly issued. They sought the discharge or dissolution of
the writ based on Sec. 13, Rule 57 of the Rules of Court, as
amended. Under said provision, when the attachment is
challenged for having been illegally or improperly issued,
there must be a hearing, with the burden of proof to sustain
the writ being on the attaching creditor.59 That hearing
embraces not only the right to present evidence but also a
reasonable opportunity to know the claims of the opposing
parties and meet them. It means a fair and open
hearing.60 Herein, there is no showing that a hearing was
conducted prior to the issuance of the 19 February 1999 Order
of the RTC discharging or dissolving the writ of preliminary
attachment. That Ong was able to file an opposition to the
motion of the Spouses Magaling to discharge the preliminary
attachment is of no moment. The written opposition filed is
not equivalent to a hearing. The absence of a hearing before
the RTC bars the discharge of the writ of preliminary
attachment for the simple reason that the discharge or
dissolution of said writ, whether under Sec. 12 or Sec. 13 of
Rule 57 of the Rules of Court, as amended, shall be granted
only "after due notice and hearing."
WHEREFORE, premises considered, the instant petition
is DENIED. Accordingly, the assailed 31 August
2005 Decision and 28 June 2006 Amended Decision, both of
the Court of Appeals in CA-G.R. CV No. 70954, are
hereby AFFIRMED. Costs against petitioners, heirs of
Reynaldo Magaling.
SO ORDERED.

G.R. No. 170735

December 17, 2007
IMMACULADA L. GARCIA, petitioner,
vs.
SOCIAL SECURITY COMMISSION LEGAL AND
COLLECTION, SOCIAL SECURITY SYSTEM, respondents.
DECISION
CHICO-NAZARIO, J.:
This is petition for review on Certiorari under Rule 45 of the
Rules of Court is assailing the 2 June 2005 Decision 1and 8
December 2005 Resolution2 both of the Court of Appeals in
CA-G.R. SP No. 85923. the appellate court affirmed the --Order and --- Resolution both of the Social Security
Commission (SSC) in SSC Case No. 10048, finding Immaculada
L. Garcia (Garcia), the sole surviving director of Impact
Corporation, petitioner herein, liable for unremitted, albeit
collected, SSS contributions.
Petitioner Immaculada L. Garcia, Eduardo de Leon, Ricardo de
Leon, Pacita Fernandez, and Consuelo Villanueva were
directors3 of Impact Corporation. The corporation was
engaged in the business of manufacturing aluminum tube
containers and operated two factories. One was a "slug"
foundry-factory located in Cuyapo, Nueva Ecija, while the
other was an Extrusion Plant in Cainta, Metro Manila, which
processed the "slugs" into aluminum collapsible tubes and
similar containers for toothpaste and other related products.
Records show that around 1978, Impact Corporation started
encountering financial problems. By 1980, labor unrest
besieged the corporation.
In March 1983, Impact Corporation filed with the Securities
and Exchange Commission (SEC) a Petition for Suspension of
Payments,4 docketed as SEC Case No. 02423, in which it
stated that:
[Impact Corporation] has been and still is engaged in
the business of manufacturing aluminum tube
containers x x x.
xxxx
In brief, it is an on-going, viable, and profitable
enterprise.
On 8 May 1985, the union of Impact Corporation filed a Notice
of Strike with the Ministry of Labor which was followed by a
declaration of strike on 28 July 1985. Subsequently, the
Ministry of Labor certified the labor dispute for compulsory
arbitration to the National Labor Relations Commission (NLRC)
in an Order5 dated 25 August 1985. The Ministry of Labor, in
the same Order, noted the inability of Impact Corporation to
pay wages, 13th month pay, and SSS remittances due to cash
liquidity problems. A portion of the order reads:
On the claims of unpaid wages, unpaid 13th month
pay and non-remittance of loan amortization and SSS
premiums, we are for directing the company to pay
the same to the workers and to remit loan
amortizations and SSS premiums previously
deducted from their wages to the Social Security
System. Such claims were never contested by the
company both during the hearing below and in our
office. In fact, such claims were admitted by the
company although it alleged cash liquidity as the
main reason for such non-payment.
WHEREFORE, the dispute at Impact Corporation is
hereby certified to the National Labor Relations
Commission for compulsory arbitration in accordance
with Article 264 (g) of the Labor Code, as amended.
xxxx
The company is directed to pay all the entitled
workers unpaid wages, unpaid 13th month pay and
to remit to the Social Security System loan
amortizations and SSS premiums previously
deducted from the wages of the workers.6
On 3 July 1985, the Social Security System (SSS), through its
Legal and Collection Division (LCD), filed a case before the
SSC for the collection of unremitted SSS premium
contributions withheld by Impact Corporation from its

employees. The case which impleaded Impact Corporation as

respondent was docketed as SSC Case No. 10048. 7
Impact Corporation was compulsorily covered by the SSS as
an employer effective 15 July 1963 and was assigned
Employer I.D. No. 03-2745100-21.
In answer to the allegations raised in SSC Case No. 10048,
Impact Corporation, through its then Vice President Ricardo de
Leon, explained in a letter dated 18 July 1985 that it had been
confronted with strikes in 1984 and layoffs were effected
thereafter. It further argued that the P402,988.93 is
erroneous. It explained among other things, that its
operations had been suspended and that it was waiting for
the resolution on its Petition for Suspension of Payments by
the SEC under SEC Case No. 2423. Despite due notice, the
corporation failed to appear at the hearings. The SSC ordered
the investigating team of the SSS to determine if it can still
file its claim for unpaid premium contributions against the
corporation under the Petition for Suspension of Payments.
In the meantime, the Petition for Suspension of Payments was
dismissed which was pending before the SEC in an
Order8 dated 12 December 1985. Impact Corporation resumed
operations but only for its winding up and dissolution. 9 Due to
Impact Corporations liability and cash flow problems, all of its
assets, namely, its machineries, equipment, office furniture
and fixtures, were sold to scrap dealers to answer for its
arrears in rentals.
On 1 December 1995, the SSS-LCD filed an amended
Petition10 in SSC Case No. 10048 wherein the directors of
Impact Corporation were directly impleaded as respondents,
namely: Eduardo de Leon, Ricardo de Leon,11Pacita Fernandez,
Consuelo Villanueva, and petitioner. The amounts sought to
be collected totaled P453,845.78 and P10,856.85 for the
periods August 1980 to December 1984 and August 1981 to
July 1984, respectively, and the penalties for late remittance
at the rate of 3% per month from the date the contributions
fell due until fully paid pursuant to Section 22(a) of the Social
Security Law,12 as amended, in the amounts of P49,941.67
andP2,474,662.82.
Period
August 1980 to December 1984
August 1981 to July 1984

Unremitted Amount
P 453,845.78
P 10,856.85

Summonses were not served upon Eduardo de Leon, Pacita

Fernandez, and Consuelo Villanueva, their whereabouts
unknown. They were all later determined to be deceased. On
the other hand, due to failure to file his responsive pleading,
Ricardo de Leon was declared in default.
Petitioner filed with the SSC a Motion to Dismiss13 on grounds
of prescription, lack of cause of action and cessation of
business, but the Motion was denied for lack of merit. 14 In her
Answer with Counterclaim15 dated 20 May 1999, petitioner
averred that Impact Corporation had ceased operations in
1980. In her defense, she insisted that she was a mere
director without managerial functions, and she ceased to be
such in 1982. Even as a stockholder and director of Impact
Corporation, petitioner contended that she cannot be made
personally liable for the corporate obligations of Impact
Corporation since her liability extended only up to the extent
of her unpaid subscription, of which she had none since her
subscription was already fully paid. The petitioner raised the
same arguments in her Position Paper. 16
On 23 January 1998, Ricardo de Leon died following the death,
too, of Pacita Fernandez died on 7 February 2000. In an Order
dated 11 April 2000, the SSC directed the System to check if
Impact Corporation had leviable properties to which the
investigating team of respondent SSS manifested that the
Impact Corporation had already been dissolved and its assets
disposed of.17
In a Resolution dated 28 May 2003, the Social Security
Commission ruled in favor of SSS and declared petitioner
liable to pay the unremitted contributions and penalties,
stating the following:

(3

WHEREFORE, premises considered, this Commission

finds, and so holds, that respondents Impact
Corporation and/or Immaculada L. Garcia, as director
and responsible officer of the said corporation, is
liable to pay the SSS the amounts of P442,988.93,
representing the unpaid SS contributions of their
employees for the period August 1980 to December
1984, not inclusive, and P10,856.85, representing the
balance of the unpaid SS contributions in favor of
Donato Campos, Jaime Mascarenas, Bonifacio Franco
and Romeo Fullon for the period August 1980 to
December 1984, not inclusive, as well as the 3% per
month penalty imposed thereon for late payment in
the amounts of P3,194,548.63 and P78,441.33,
respectively, computed as of April 30, 2003. This is
without prejudice to the right of the SSS to collect the
penalties accruing after April 30, 2003 and to
institute other appropriate actions against the
respondent corporation and/or its responsible
officers.
Should the respondents pay their liability for unpaid
SSS contributions within sixty (60) days from receipt
of a copy of this Resolution, the 3% per month
penalty for late payment thereof shall be deemed
condoned pursuant to SSC Res. No. 397-S.97, as
amended by SSC Res. Nos. 112-S.98 and 982-S.99,
implementing the provision on condonation of
penalty under Section 30 of R.A. No. 8282.
In the event the respondents fail to pay their
liabilities within the aforestated period, let a writ of
execution be issued, pursuant to Section 22 (c) [2] of
the SS Law, as amended, for the satisfaction of their
liabilities to the SSS.18
Petitioner filed a Motion for Reconsideration19 of the aforequoted Decision but it was denied for lack of merit in an
Order20 dated 4 August 2004, thus:
Nowhere in the questioned Resolution dated May 28,
2003 is it stated that the other directors of the
defunct Impact Corporation are absolved from their
contribution and penalty liabilities to the SSS. It is
certainly farthest from the intention of the petitioner
SSS or this Commission to pin the entire liability of
Impact Corporation on movant Immaculada L. Garcia,
to the exclusion of the directors of the corporation
namely: Eduardo de Leon, Ricardo de Leon, Pacita
Fernandez and Conzuelo Villanueva, who were all
impleaded as parties-respondents in this case.
The case record shows that there was failure of
service of summonses upon respondents Eduardo de
Leon, Pacita Fernandez and Conzuelo Villanueva, who
are all deceased, for the reason that their
whereabouts are unknown. Moreover, neither the
legal heirs nor the estate of the defaulted respondent
Ricardo de Leon were substituted as partiesrespondents in this case when he died on January 23,
1998. Needless to state, the Commission did not
acquire jurisdiction over the persons or estates of the
other directors of Impact Corporation, hence, it could
not validly render any pronouncement as to their
liabilities in this case.
Furthermore, the movant cannot raise in a motion for
reconsideration the defense that she was no longer a
director of Impact Corporation in 1982, when she was
allegedly eased out by the managing directors of
Impact Corporation as purportedly shown in the Deed
of Sale and Assignment of Shares of Stock dated
January 22, 1982. This defense was neither pleaded
in her Motion to Dismiss dated January 17, 1996 nor
in her Answer with Counterclaim dated May 18, 1999
and is, thus, deemed waived pursuant to Section 1,
Rule 9 of the 1997 Rules of Civil Procedure, which has
suppletory application to the Revised Rules of
Procedure of the Commission.
Finally, this Commission has already ruled in the
Order dated April 27, 1999 that since the original

Petition was filed by the SSS on July 3, 1985, and was

merely amended on December 1, 1995 to implead
the responsible officers of Impact Corporation,
without changing its causes of action, the same was
instituted well within the 20-year prescriptive period
provided under Section 22 (b) of the SS Law, as
amended, considering that the contribution
delinquency assessment covered the period August
1980 to December 1984.
In view thereof, the instant Motion for
Reconsideration is hereby denied for lack of merit.
Petitioner elevated her case to the Court of Appeals via a
Petition for Review. Respondent SSS filed its Comment dated
20 January 2005, and petitioner submitted her Reply thereto
on 4 April 2005.
The Court of Appeals, applying Section 28(f) of the Social
Security Law,21 again ruled against petitioner. It dismissed the
petitioners Petition in a Decision dated 2 June 2005, the
dispositive portion of which reads:
WHEREFORE, premises considered, the petition is
DISMISSED for lack of merit. The assailed Resolution
dated 28 May 2003 and the Order dated 4 August
2004 of the Social Security Commission are
AFFIRMED in toto.22
Aggrieved, petitioner filed a Motion for Reconsideration of the
appellate courts Decision but her Motion was denied in a
Resolution dated 8 December 2005.
Hence, the instant Petition in which petitioner insists that the
Court of Appeals committed grave error in holding her solely
liable for the collected but unremitted SSS premium
contributions and the consequent late penalty payments due
thereon. Petitioner anchors her Petition on the following
arguments:
I. SECTION 28(F) OF THE SSS LAW PROVIDES THAT A
MANAGING HEAD, DIRECTOR OR PARTNER IS LIABLE
ONLY FOR THE PENALTIES OF THE EMPLOYER
CORPORATION AND NOT FOR UNPAID SSS
CONTRIBUTIONS OF THE EMPLOYER CORPORATION.
II. UNDER THE SSS LAW, IT IS THE MANAGING HEADS,
DIRECTORS OR PARTNERS WHO SHALL BE LIABLE
TOGETHER WITH THE CORPORATION. IN THIS CASE,
PETITIONER HAS CEASED TO BE A STOCKHOLDER OF
IMPACT CORPORATION IN 1982. EVEN WHILE SHE
WAS A STOCKHOLDER, SHE NEVER PARTICIPATED IN
THE DAILY OPERATIONS OF IMPACT CORPORATION.
III. UNDER SECTION 31 OF THE CORPORATION CODE,
ONLY DIRECTORS, TRUSTEES OR OFFICERS WHO
PARTICIPATE IN UNLAWFUL ACTS OR ARE GUILTY OF
GROSS NEGLIGENCE AND BAD FAITH SHALL BE
PERSONALLY LIABLE. OTHERWISE, BEING A MERE
STOCKHOLDER, SHE IS LIABLE ONLY TO THE EXTENT
OF HER SUBSCRIPTION.
IV. IMPACT CORPORATION SUFFERED IRREVERSIBLE
ECONOMIC LOSSES, EVENTS WHICH WERE NEITHER
DESIRED NOR CAUSED BY ANY ACT OF THE
PETITIONER. THUS, BY REASON OF FORTUITOUS
EVENTS, THE PETITIONER SHOULD BE ABSOLVED
FROM LIABILITY.
V. RESPONDENT SOCIAL SECURITY SYSTEM FAILED
MISERABLY IN EXERTING EFFORTS TO ACQUIRE
JURISDICTION OVER THE LEVIABLE ASSETS OF
IMPACT CORPORATION, PERSON/S AND/OR ESTATE/S
OF THE OTHER DIRECTORS OR OFFICERS OF IMPACT
CORPORATION.
VI. THE HONORABLE COMMISSION SERIOUSLY ERRED
IN NOT RENDERING A JUDGMENT BY DEFAULT
AGAINST THE DIRECTORS UPON WHOM IT ACQUIRED
JURISDICTION.
Based on the foregoing, petitioner prays that the Decision
dated 2 June 2005 and the Resolution dated 8 December 2005
of the Court of Appeals be reversed and set aside, and a new
one be rendered absolving her of any and all liabilities under
the Social Security Law.

In sum, the core issue to be resolved in this case is whether or

not petitioner, as the only surviving director of Impact
Corporation, can be made solely liable for the corporate
obligations of Impact Corporation pertaining to unremitted
SSS premium contributions and penalties therefore.
As a covered employer under the Social Security Law, it is the
obligation of Impact Corporation under the provisions of
Sections 18, 19 and 22 thereof, as amended, to deduct from
its duly covered employees monthly salaries their shares as
premium contributions and remit the same to the SSS,
together with the employers shares of the contributions to
the petitioner, for and in their behalf.
From all indications, the corporation has already been
dissolved. Respondents are now going after petitioner who is
the only surviving director of Impact Corporation.
A cursory review of the alleged grave errors of law committed
by the Court of Appeals above reveals there seems to be no
dispute as to the assessed liability of Impact Corporation for
the unremitted SSS premiums of its employees for the period
January 1980 to December 1984.
There is also no dispute as to the fact that the employees SSS
premium contributions have been deducted from their salaries
by Impact Corporation.
Petitioner in assailing the Court of Appeals Decision,
distinguishes the penalties from the unremitted or unpaid SSS
premium contributions. She points out that although the
appellate court is of the opinion that the concerned officers of
an employer corporation are liable for the penalties for nonremittance of premiums, it still affirmed the SSC Resolution
holding petitioner liable for the unpaid SSS premium
contributions in addition to the penalties.
Petitioner avers that under the aforesaid provision, the liability
does not include liability for the unremitted SSS premium
contributions.
Petitioners argument is ridiculous. The interpretation
petitioner would like us to adopt finds no support in law or in
jurisprudence. While the Court of Appeals Decision provided
that Section 28(f) refers to the liabilities pertaining to penalty
for the non-remittance of SSS employee contributions, holding
that it is distinct from the amount of the supposed SSS
remittances, petitioner mistakenly concluded that Section
28(f) is applicable only to penalties and not to the liability of
the employer for the unremitted premium contributions.
Clearly, a simplistic interpretation of the law is untenable. It is
a rule in statutory construction that every part of the statute
must be interpreted with reference to the context, i.e., that
every part of the statute must be considered together with
the other parts, and kept subservient to the general intent of
the whole enactment.23 The liability imposed as contemplated
under the foregoing Section 28(f) of the Social Security Law
does not preclude the liability for the unremitted amount.
Relevant to Section 28(f) is Section 22 of the same law.
SEC. 22. Remittance of Contributions. -- (a) The
contributions imposed in the preceding Section shall
be remitted to the SSS within the first ten (10) days
of each calendar month following the month for
which they are applicable or within such time as the
Commission may prescribe. Every employer required
to deduct and to remit such contributions shall be
liable for their payment and if any contribution is not
paid to the SSS as herein prescribed, he shall pay
besides the contribution a penalty thereon of three
percent (3%) per month from the date the
contribution falls due until paid. If deemed expedient
and advisable by the Commission, the collection and
remittance of contributions shall be made quarterly
or semi-annually in advance, the contributions
payable by the employees to be advanced by their
respective employers:Provided, That upon separation
of an employee, any contribution so paid in advance
but not due shall be credited or refunded to his
employer.
Under Section 22(a), every employer is required to deduct
and remit such contributions penalty refers to the 3% penalty

that automatically attaches to the delayed SSS premium

contributions. The spirit, rather than the letter of a law
determines construction of a provision of law. It is a cardinal
rule in statutory construction that in interpreting the meaning
and scope of a term used in the law, a careful review of
the whole law involved, as well as the intendment of the law,
must be made.24 Nowhere in the provision or in the Decision
can it be inferred that the persons liable are absolved from
paying the unremitted premium contributions.
Elementary is the rule that when laws or rules are clear, it is
incumbent upon the judge to apply them regardless of
personal belief or predilections - when the law is unambiguous
and unequivocal, application not interpretation thereof is
imperative.25 However, where the language of a statute is
vague and ambiguous, an interpretation thereof is resorted to.
An interpretation thereof is necessary in instances where a
literal interpretation would be either impossible or absurd or
would lead to an injustice. A law is deemed ambiguous when
it is capable of being understood by reasonably well-informed
persons in either of two or more senses.26 The fact that a law
admits of different interpretations is the best evidence that it
is vague and ambiguous.27 In the instant case, petitioner
interprets Section 28(f) of the Social Security Law as
applicable only to penalties and not to the liability of the
employer for the unremitted premium contributions.
Respondents present a more logical interpretation that is
consistent with the provisions as a whole and with the
legislative intent behind the Social Security Law.
This Court cannot be made to accept an interpretation that
would defeat the intent of the law and its legislators. 28
Petitioner also challenges the finding of the Court of Appeals
that under Section 28(f) of the Social Security Law, a mere
director or officer of an employer corporation, and not
necessarily a "managing" director or officer, can be held liable
for the unpaid SSS premium contributions.
Section 28(f) of the Social Security Law provides the following:
(f) If the act or omission penalized by this Act be
committed by an association, partnership,
corporation or any other institution, its managing
head, directors or partners shall be liable to the
penalties provided in this Act for the offense.
This Court agrees in petitioners observation that the SSS did
not even deny nor rebut the claim that petitioner was not the
"managing head" of Impact Corporation. However, the Court
of Appeals rightly held that petitioner, as a director of Impact
Corporation, is among those officers covered by Section 28(f)
of the Social Security Law.
Petitioner invokes the rule in statutory construction
called ejusdem generic; that is, where general words follow an
enumeration of persons or things, by words of a particular and
specific meaning, such general words are not to be construed
in their widest extent, but are to be held as applying only to
persons or things of the same kind or class as those
specifically mentioned. According to petitioner, to be held
liable under Section 28(f) of the Social Security Law, one must
be the "managing head," "managing director," or "managing
partner." This Court though finds no need to resort to
statutory construction. Section 28(f) of the Social Security Law
imposes penalty on:
(1) the managing head;
(2) directors; or
(3) partners, for offenses committed by a juridical
person
The said provision does not qualify that the director or partner
should likewise be a "managing director" or "managing
partner."29 The law is clear and unambiguous.
Petitioner nonetheless raises the defense that under Section
31 of the Corporation Code, only directors, trustees or officers
who participate in unlawful acts or are guilty of gross
negligence and bad faith shall be personally liable, and that
being a mere stockholder, she is liable only to the extent of
her subscription.

Section 31 of the Corporation Code, stipulating on the liability

of directors, trustees, or officers, 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.
Basic is the rule that a corporation is invested by law with a
personality separate and distinct from that of the persons
composing it as well as from that of any other legal entity to
which it may be related. 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. Following this, the general rule applied is that obligations
incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. 30 A director,
officer, and employee of a corporation are generally not held
personally liable for obligations incurred by the corporation.
Being a mere fiction of law, however, there are peculiar
situations or valid grounds that can exist to warrant the
disregard of its independent being and the lifting of the
corporate veil. This situation might arise when a corporation is
used to evade a just and due obligation or to justify a wrong,
to shield or perpetrate fraud, to carry out other similar
unjustifiable aims or intentions, or as a subterfuge to commit
injustice and so circumvent the law.31 Thus, Section 31 of the
Corporation Law provides:
Taking a cue from the above provision, a corporate director, a
trustee or an officer, may be held solidarily liable with the
corporation in the following instances:
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;
(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.
4. When a director, trustee or officer is made, by
specific provision of law, personally liable for his
corporate action. 32
The aforesaid provision states:
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.
The situation of petitioner, as a director of Impact Corporation
when said corporation failed to remit the SSS premium
contributions falls exactly under the fourth situation. Section
28(f) of the Social Security Law imposes a civil liability for any
act or omission pertaining to the violation of the Social
Security Law, to wit:

(f) If the act or omission penalized by this Act be

committed by an association, partnership,
corporation or any other institution, its managing
head, directors or partners shall be liable to the
penalties provided in this Act for the offense.
In fact, criminal actions for violations of the Social Security
Law are also provided under the Revised Penal Code. The
Social Security Law provides, in Section 28 thereof, to wit:
(h) Any employer who, after deducting the monthly
contributions or loan amortizations from his
employees compensation, fails to remit the said
deductions to the SSS within thirty (30) days from
the date they became due shall be presumed to have
misappropriated such contributions or loan
amortizations and shall suffer the penalties provided
in Article Three hundred fifteen of the Revised Penal
Code.
(i) Criminal action arising from a violation of the
provisions of this Act may be commenced by the SSS
or the employee concerned either under this Act or in
appropriate cases under the Revised Penal Code: x x
x.
Respondents would like this Court to apply another exception
to the rule that the persons comprising a corporation are not
personally liable for acts done in the performance of their
duties.
The Court of Appeals in the appealed Decision stated:
Anent the unpaid SSS contributions of Impact
Corporations employees, the officers of a
corporation are liable in behalf of a corporation,
which no longer exists or has ceased operations.
Although as a rule, the officers and members of a
corporation are not personally liable for acts done in
performance of their duties, this rule admits of
exception, one of which is when the employer
corporation is no longer existing and is unable to
satisfy the judgment in favor of the employee, the
officers should be held liable for acting on behalf of
the corporation. Following the foregoing
pronouncement, petitioner, as one of the directors of
Impact Corporation, together with the other directors
of the defunct corporation, are liable for the unpaid
SSS contributions of their employees.33
On the other hand, the SSC, in its Resolution, presented this
discussion:
Although as a rule, the officers and members of a
corporation are not personally liable for acts done in
the performance of their duties, this rule admits of
exceptions, one of which is when the employer
corporation is no longer existing and is unable to
satisfy the judgment in favor of the employee, the
officers should be held liable for acting on behalf of
the corporation. x x x.34
The rationale cited by respondents in the two preceding
paragraphs need not have been applied because the personal
liability for the unremitted SSS premium contributions and the
late penalty thereof attaches to the petitioner as a director of
Impact Corporation during the period the amounts became
due and demandable by virtue of a direct provision of law.
Petitioners defense that since Impact Corporation suffered
irreversible economic losses, and by reason of fortuitous
events, she should be absolved from liability, is also
untenable. The evidence adduced totally belies this claim. A
reference to the copy of the Petition for Suspension of
Payments filed by Impact Corporation on 18 March 1983
before the SEC contained an admission that:
"[I]t has been and still is engaged in business" and
"has been and still is engaged in the business of
manufacturing aluminum tube containers" and "in
brief, it is an on-going, viable, and profitable
enterprise" which has "sufficient assets" and "actual
and potential income-generation capabilities."

The foregoing document negates petitioners assertion and

supports the contention that during the period involved
Impact Corporation was still engaged in business and was an
ongoing, viable, profitable enterprise. In fact, the latest SSS
form RIA submitted by Impact Corporation is dated 7 May
1984. The assessed SSS premium contributions and penalty
are obligations imposed upon Impact Corporation by law, and
should have been remitted to the SSS within the first 10 days
of each calendar month following the month for which they
are applicable or within such time as the SSC prescribes.35
This Court also notes the evident failure on the part of SSS to
issue a judgment in default against Ricardo de Leon, who was
the vice-president and officer of the corporation, upon his
non-filing of a responsive pleading after summons was served
on him. As can be gleaned from Section 11 of the SSS Revised
Rules of Procedure, the Commissioner is mandated to render a
decision either granting or denying the petition. Under the
aforesaid provision, if respondent fails to answer within the
time prescribed, the Hearing Commissioner may, upon motion
of petitioner, or motu proprio, declare respondent in default
and proceed to receive petitioners evidence ex parteand
thereafter recommend to the Commission either the granting
or denial of the petition as the evidence may warrant.36
On a final note, this Court sees it proper to quote verbatim
respondents prefatory statement in their Comment:
The Social Security System is a government agency
imbued with a salutary purpose to carry out the
policy of the State to establish, develop, promote and
perfect a sound and viable tax exempt social security
system suitable to the needs of the people
throughout the Philippines which shall promote social
justice and provide meaningful protection to
members and their beneficiaries against the hazards
of disability, sickness, maternity, old-age, death and
other contingencies resulting in loss of income or
financial burden.
The soundness and viability of the funds of the SSS in
turn depends on the contributions of its covered
employee and employer members, which it invests in
order to deliver the basic social benefits and
privileges to its members. The entitlement to and
amount of benefits and privileges of the covered
members are contribution-based. Both the soundness
and viability of the funds of the SSS as well as the
entitlement and amount of benefits and privileges of
its members are adversely affected to a great extent
by the non-remittance of the much-needed
contributions.37
The sympathy of the law on social security is toward its
beneficiaries. This Court will not turn a blind eye on the
perpetration of injustice. This Court cannot and will not allow
itself to be made an instrument nor be privy to any attempt at
the perpetration of injustice.
Following the doctrine laid down in Laguna Transportation Co.,
Inc. v. Social Security System,38 this Court rules that although
a corporation once formed is conferred a juridical personality
separate and distinct from the persons comprising it, it is but
a legal fiction introduced for purposes of convenience and to
subserve the ends of justice. The concept cannot be extended
to a point beyond its reasons and policy, and when invoked in
support of an end subversive of this policy, will be disregarded
by the courts.
WHEREFORE, pursuant to the foregoing, the Decision of the
Court of Appeals dated 2 June 2005 in CA-G.R. SP No. 85923 is
hereby AFFIRMED WITH FINALITY. Petitioner Immaculada L.
Garcia, as sole surviving director of Impact Corporation is
hereby ORDERED to pay for the collected and unremitted SSS
contributions of Impact Corporation. The case
is REMANDED to the SSS for computation of the exact
amount and collection thereof.
SO ORDERED.

G.R. No. 154532

October 27, 2006
PETRON CORPORATION AND PETER C.
MALIGRO, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION AND CHITO
S. MANTOS, respondents.

DECISION

GARCIA, J.:
Assailed and sought to be set aside in this petition for review
under Rule 45 of the Rules of Court is theResolution dated
November 26, 20011 of the Court of Appeals (CA) in CA-G.R.
SP No. 67702, dismissing the petition for certiorari thereat
filed by the herein petitioners on the ground that the
Verification and Certification on Non-Forum Shopping was
defective because co-petitioner Peter C. Maligro was not a
signatory thereto, as reiterated in its subsequent Resolution
of July 16, 2002,2 denying the petitioners' motion for
reconsideration.
The facts:
Petitioner Petron Corporation (Petron), a corporation duly
organized and existing under the laws of the Philippines, is
engaged in the refining, sale and distribution of petroleum
and other related products, while its co-petitioner Peter C.
Maligro was the former Visayas Operations Assistant Manager
of Petron's Visayas-Mindanao District Office at Lahug, Cebu
City.
On May 15, 1990, Petron, through its Cebu District Office,
hired the herein private respondent Chito S. Mantos, an
Industrial Engineer, as a managerial, professional and
technical employee with initial designation as a Bulk Plant
Engineering Trainee. He attained regular employment status
on November 15, 1990 and was later on designated as a Bulk
Plant Relief Supervisor, remaining as such for the next five
years while being assigned to the different plants and offices
of Petron within the Visayas area.
It was while assigned at Petron's Cebu District Office with
petitioner Peter Maligro as his immediate superior, when
Mantos, thru a Notice of Disciplinary Action dated October 29,
1996,3 a copy of which was received by him on November 18,
1996,4 was suspended for 30 days from November 1 to 30,
1996 for violating company rules and regulations regarding
Absence Without Leave (AWOL), not having reported for work
during the period August 5 to 27, 1996.
Subsequently, in a notice Termination of Services bearing date
November 20, 19965 and received by him on November 25,
1996,6 Mantos' services were altogether terminated effective
December 1, 1996, by reason of his continued absences from
August 28, 1996 onwards, as well as for
Insubordination/Discourtesy for making false accusations
against his superior.
Meanwhile, on November 8, 1996, contending that he has
been constructively dismissed as of August 5, 1996, Mantos
filed with the National Labor Relations Commission, Regional
Arbitration Branch (NLRC-RAB), Cebu City, a complaint for
illegal dismissal and other monetary claims against Petron
and/or Peter C. Maligro. The case was docketed as NLRC RABVII Case No. 11-1439-96.
In his complaint, Mantos made the following allegations:
xxx He had an unblemished record in his service with
[Petron]. Intrigues and professional jealousies,
however, have prevailed over the work atmosphere
in [Petron]. This became more particularly true in
regard to his close relationship with Jaime "Boy"
Tamayo, then the VISMIN Operations Manager who
later left the company to migrate to Canada. His
closeness to Tamayo has caused problems with his
relationship with Peter Maligro, Visayas Operations
Assistant Manager, who has been after his neck for

sometime. Maligro's hatred on him became evident

when he was assigned to Nasipit Bulk Plant at
Nasipit, Agusan del Norte for two (2) months or so.
He was deprived of his usual P1,000.00 a day per
diem. He was also deprived of the usual facilities
such as the service vehicle and the use and access to
lighterage services.
Because of the tremendous work pressure, he
availed and was granted a vacation leave in March
1996. Before he reported back to work he was
summoned to the office of Peter Paul Shotwell. There,
he was advised by [Petron's] officers to resign from
[Petron] as they were instructed by superiors that he
should quit as they no longer liked him. Failing to
convince him he was later offered to avail of
[Petron's] early retirement program dubbed as
"Manpower Reduction Program" or MRP. Thereafter
he was advised to avail of his remaining vacation
leave while they process his MRP papers. After his
vacation, he was no longer allowed to report back at
his assignment at Mactan Aviation Facilities but
directly to Maligro at the Cebu District Office. While
being designated as Operations Engineer, he was
assigned only menial tasks such as recopying
errands, digging up files, drafting and redrafting
memoranda and other mere clerical works. On
August 5, 1996, Maligro bad-mouthed him in the
presence of his co-employees for alleged
dissatisfaction of his work as a mere clerk. What
[Petron and Maligro] have done to him amounts to
constructive dismissal. Hence, his complaint. 7 (Words
in brackets supplied.)
For their part, Petron and Maligro averred that Mantos was
dismissed for just and valid causes effective December 1,
1996, asserting that:
xxx complainant [Mantos] incurred absences without
leave (AWOL) on August 5 to 27, 1996 inclusive. He
failed to comply with the instruction of a superior for
him to report for work at the Cebu City District office
and to submit a formal explanation of his AWOL.
From August 28, 1996, up to the filing of
respondents' position paper, complainant has not
reported for work but continued to receive the salary
for the months of August, September and October 2,
1996. An investigation was conducted on September
2, 1996 but complainant failed to appear. Instead he
sent two (2) letters thru his counsel accusing
respondent Maligro of certain acts humiliating and
prejudicing him. After a series of hearings, [Petron's]
Investigation Committee in a report and
recommendation of November 19, 1996,
recommended that after a 30-day suspension,
complainant should be subjected to a more severe
penalty. Hence, they deny complainant's claims. 8
In a decision dated June 30, 1998, Labor Arbiter Dominador A.
Almirante declared Mantos to have been constructively
dismissed but ruled that only Petron could be held liable to
him for separation pay in lieu of reinstatement and the cash
equivalent of his certificate of stocks, less his personal
accountabilities. More specifically, the decision dispositively
states:
WHEREFORE, foregoing premises considered,
judgment is hereby rendered ordering the
respondent Petron Corporation VISMIN District Office
to pay complainant the amount of One Hundred Two
thousand Nine Hundred Twenty-Eight Pesos and
41/100 (P102,928.41) representing the separation
pay for his six (6) years of service at P15,420.00 a
month, the cash equivalent of his certificate of stocks
minus his outstanding account, computed as follows:
a.

Separation Pay:
P15,420.00 x 6 years

b.

Cash equivalent of certificate of stocks

Total
Minus
Net Award
SO ORDERED. 9
Explains the Labor Arbiter in his decision:
It is an established fact that for his absences from
August 5 to August 27, 1996, complainant was
imposed the penalty of suspension for thirty (30)
days from November 1 to 30, 1996 per the letter of
respondent Maligro to complainant dated October 29,
1996 (Annex "D"). From respondents' Annex "6"
which is a memorandum of November 19, 1996
containing the report of the Investigation Committee
it is shown therein that the summons in this case was
received by respondents on November 14, 1996. The
following day, November 15, 1996, the Committee
met to determine the factual basis of the charges of
absence without leave and insubordination against
complainant. The Committee was convened seven
(7) days after the filing of the complaint herein on
November 8, 1996.
We find that the foregoing factual milieu militates
badly against the cause for the respondents. It
appears that the Investigation Committee was
belatedly constituted as an afterthought after the
respondents received the summons in this case. For
his AWOL, complainant was already sufficiently
penalized by suspension for thirty (30) days, the
maximum penalty authorized by law. In fact,
complainant was still serving his suspension when
the Committee was convened and issued the
memorandum of November 19, 1996 recommending
his dismissal for AWOL and insubordination. The
insubordination aspect stemmed from complainant's
accusation in his complaint for constructive dismissal
and withholding of his stock certificates. The
imposition of the penalty of dismissal smacks of a
desire to get even for complainant's filing of a
complaint against the respondents. Anyway, the
penalty of dismissal was too harshly and
[d]isproportionately imposed on the complainant
considering his length of service.
Furthermore, there is in an (sic) unrebutted evidence
for the complainant that earlier while being assigned
directly under respondent Maligro at the Cebu
District Office, with the designation as Operations
Engineer, he was assigned only menial tasks like
recopying errands, digging up files, drafting and
redrafting memoranda and other clerical works.
We find that respondents' act was tantamount to
constructive dismissal xxx Under such
circumstances, the continuance of complainant's
employment with respondent corporation has been
rendered impossible, unreasonable and unlikely.
There exists also a demotion in rank.
xxx xxx xxx
We find therefore that complainant was illegally
dismissed from the service. He should have been
reinstated to his former position without loss of
seniority rights. We find however, that the filing of
this complaint has spawned strained relationship
between the parties. Hence, reinstatement is no
longer practical and feasible. Instead complainant
should be awarded his separation pay equivalent to
one (1) month pay per year of service. He is not
however entitled to backwages. He is not completely

free from blame in his separation from the service.

He committed absences without leave. xxx
xxx xxx xxx
Complainant is also entitled to the cash equivalent of
his certificate of stocks admitted in respondent's
Exhibit "7" to be P66,600.00. From the total award
shall be deducted the amount of P56,191.59
complainant's outstanding account to respondent.
The rest of the claims are hereby ordered dismissed
for lack of merit not having been substantiated by
clear and convincing evidence. Respondent Peter C.
Maligro is hereby absolved from any liability hereof
there being no showing that he acted in bad faith
and in excess of his authority in dealing with the
complainant. 10
Both dissatisfied, the parties questioned the aforementioned
Labor Arbiter's decision: Petron and Maligro, by way of an
appeal to the NLRC at Cebu City, accompanied by a P102,
928.41 surety bond in favor of Mantos; and the latter, by a
motion for reconsideration which the NLRC eventually treated
as an appeal.
On July 31, 2000, the NLRC reversed the findings of the Labor
Arbiter regarding Mantos' constructive dismissal as of
November 1, 1996 and considered him to have been illegally
dismissed only on December 1, 1996. In the same decision,
the NLRC adjudged Maligro solidarily liable with Petron, and
accordingly modified the Labor Arbiter's decision as follows:
WHEREFORE, the questioned Decision is MODIFIED in
that complainant was illegally suspended from
November 1-30, 1996 and was ILLEGALLY DISMISSED
on December 1, 1996, accordingly and as discussed,
he should be paid separation pay based on his one
month salary (P15,420.00) per year of service
computed until the month of promulgation (July,
2000) of this Decision. In addition, complainant is
entitled to full backwages from November 1, 1996
until July, 2000.
The finding below of cash equivalent of certificate of
stocks in the amount of P66,600.00 is deleted. The
accountability of complainant in the amount of
P56,191.59 shall be deleted from his total awards.
Complainant is likewise entitled to ten percent (10%)
of the total awards by way of attorney's fees.
The foregoing liabilities are solidary against
respondents Petron Corporation and Peter C. Maligro.
SO ORDERED.11
Justifying its decision, the NLRC explained that Mantos failed
to prove that he had to quit his job on August 5, 1996 because
his continued employment was rendered impossible,
unbearable and unlikely. On the other hand, Petron and
Maligro did not observe the requisite procedural due process
considering that (1) the alleged Notice of Violation of
Company Rules and Regulations dated August 27, 1996 which
preceded the suspension of Mantos was not received by the
latter; and (2) no separate notice for the two new charges of
Absence Without Leave (AWOL) starting August 28, 1996 and
Insubordination/Discourtesy for making false accusations
against his superior, were sent to Mantos prior to the Notice of
Termination dated November 20, 1996 based on the
report/recommendation dated November 19, 1996 of the
Investigation Committee. Furthermore, the Commission noted
that on the day after Petron and Maligro received the
summons with respect to Mantos' complaint with the NLRCRAB, the Investigation Committee was immediately convened
regarding Mantos' continued absences beginning August 28,
1996 with Maligro himself being a member of said committee.
With their motion for reconsideration having been denied by
the NLRC in its Resolution of August 31, 2001,12 the petitioners
elevated the case via certiorari to the CA in CA-G.R. SP No.
67702.
As stated at the threshold hereof, the CA, in its
assailed Resolution of November 26, 2001, outrightly
dismissed the petition for being defective in form because

only petitioner Petron signed the verification and certification

on non-forum shopping without its co-petitioner Peter Maligro
likewise signing the same.
Their motion for reconsideration having been denied by the
CA in its second impugned Resolution of July 16, 2002, the
petitioners are now with us via the present recourse on the
following grounds:13
A. THE COURT OF APPEALS ERRED IN DISMISSING
PETITIONERS' PETITION FOR CERTIORARI ON THE
GROUND THAT THE SAME FAILED TO COMPLY WITH
THE RULE ON CERTIFICATION ON NON-FORUM
SHOPPING CONSIDERING THAT:
1. THERE WAS SUBSTANTIAL COMPLIANCE
BY PETITIONERS WITH THE REQUIREMENTS
ON CERTIFICATION OF NON-FORUM
SHOPPING.
2. THERE WAS A REASONABLE CAUSE FOR
PETITIONER MALIGRO'S FAILURE TO ATTACH
A VERIFICATION/CERTIFICATION OF NONFORUM SHOPPING.
B. THE OUTRIGHT DISMISSAL OF THE PETITION BY
THE COURT OF APPEALS WOULD DEFEAT
SUBSTANTIAL JUSTICE CONSIDERING THAT THE NLRC
COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION
IN FINDING THAT:
1. PRIVATE RESPONDENT'S COMPLAINT FOR
ILLEGAL DISMISSAL WAS NOT FILED AS A
MALICIOUS SCHEME AGAINST PETITIONERS,
DESPITE OVERWHELMING EVIDENCE ON
RECORD.
2. PETITIONERS DISMISSED PRIVATE
RESPONDENT MANTOS WITHOUT
OBSERVING THE REQUISITE PROCEDURAL
DUE PROCESS BECAUSE PETITIONERS
ALLEGEDLY DID NOT PROVE THAT MANTOS
RECEIVED THE NOTICE OF VIOLATION OF
COMPANY RULES DATED 27 AUGUST 1996
AS WELL AS THE TWO TELEGRAMS
REQUIRING MANTOS TO REPORT FOR WORK,
CONTRARY TO SUBSTANTIAL EVIDENCE ON
RECORD.
3. THAT PETITIONERS DISMISSED MANTOS
WITHOUT OBSERVING THE REQUISITE
PROCEDURAL DUE PROCESS BECAUSE
PETITIONERS ALLEGEDLY DID NOT SEND A
NOTICE OF VIOLATION OF COMPANY RULES
TO PRIVATE RESPONDENT FOR THE
OFFENSES THAT HE COMMITTED FOR THE
SECOND TIME, DESPITE CONTRARY
EVIDENCE ON RECORD.
4. THAT PETITIONERS DID NOT SHOW HOW
THE INVESTIGATION COMMITTEE THAT
INVESTIGATED MANTOS' VIOLATIONS OF
COMPANY RULES WAS CREATED AND THAT
THE SAME WAS BIASED AGAINST MANTOS
MERELY BECAUSE ITS CHAIRMAN WAS
MANTOS' SUPERIOR, DESPITE CONTRARY
EVIDENCE ON RECORD.
5. THAT PETITIONER PETER C. MALIGRO IS
SOLIDARILY LIABLE WITH PETITIONER
PETRON CORPORATION FOR THE LATTER'S
ALLEGED LIABILITY TO MANTOS
NOTWITHSTANDING THE ABSENCE OF
EVIDENCE INDICATING THAT MALIGRO
ACTED WITH BAD FAITH AGAINST MANTOS.
6. THAT PRIVATE RESPONDENT IS ENTITLED
TO AWARD OF FULL BACKWAGES FROM 1
NOVEMBER 1996 UNTIL JULY 2000 AND TO
THE OTHER MONETARY AWARDS MADE BY
THE NLRC.
In his Comment,14 the private respondent avers, among
others, that the petitioners' petition for certiorari in CA-G.R.

SP No. 67702 cannot alter the factual findings of the Labor

Arbiter as affirmed by the NLRC. He argues that the sole office
of a writ of certiorari is to correct jurisdictional errors including
grave abuse of discretion amounting to lack or excess of
jurisdiction, and does not include correction of the NLRC's
evaluation of the evidence, whose factual findings are
generally accorded not only great respect but even finality.
The petition is partly meritorious.
Concededly, the fact that only Petron, minus its co-petitioner
Peter C. Maligro, executed and signed the Verification and
Certification on Non-Forum Shopping,15 attached to the
petition for certiorari in CA-G.R. SP No. 67702, is a cause for
the dismissal of that petition, conformably with Section 5, Rule
7 of the Rules of Court which expressly requires that the
certification against forum shopping must have to be certified
under oath by "the plaintiff or principal party," and failure to
comply therewith shall cause the dismissal of the action.16
Be that as it may, we hold that the CA erred in outrightly
dismissing CA-G.R. SP No. 67702 solely on the ground that
therein co-petitioner Peter Maligro failed to equally sign the
verification and certification on non-forum shopping.
It must be remembered that the petitioners in CA-G.R. SP No.
67702 are Petron and its operations assistant manager, Peter
Maligro. Evidently, Maligro was included in the complaint filed
by Mantos in NLRC RAB-VII Case No. 11-1439-96 in Maligro's
capacity as Petron's corporate officer. Maligro has no separate
and distinct personality from that of Petron, undoubtedly the
direct employer of Mantos against which any award in the
latter's favor is enforceable. With Petron being the real partyin interest in that case and not Maligro, the latter's failure to
equally sign the verification and certification on non-forum
shopping should not have merited the CA's outright dismissal
of the certiorari petition in CA-G.R. SP No. 67702.
In outrightly dismissing the petition, the CA relied on Loquias
v. Office of the Ombudsman.17 The appellate court's reliance
on that case is misplaced. For, in the subsequent case
of Micro Sales Operation Network and Willy Bendol v. NLRC,
et. al., 18 wherein the CA based its dismissal of the therein
similarly defective petition for certiorari on the strength
of Loquias, this Court ruled:
The Court of Appeals relied on Loquias v. Office of the
Ombudsman, which held that a certification on nonforum shopping signed by only one of two or more
petitioners is defective, unless he was duly
authorized by his co-petitioner. However, the said
ruling applies when the co-parties are being sued in
their individual capacities. Note that the petitioners
in Loquias are the mayor, vice-mayor, and three
members of the municipal board of San Miguel,
Zamboanga del Sur. The said co-parties were
charged with violation of Republic Act No. 3019 15 in
their various capacities.
In the instant case, the petitioners are the
company and its operations manager, Willy
Bendol. The latter was impleaded simply
because he was a co-respondent in the illegal
dismissal complaint. He has no interest in this
case separate and distinct from the company,
which was the direct employer of private
respondents. Any award of reinstatement,
backwages, and attorney's fees in favor of
private respondents will be enforced against
the company as the real party in interest in an
illegal dismissal case. Petitioner Bendol is
clearly a mere nominal party in the case. His
failure to sign the verification and certification
on non-forum shopping is not a ground for the
dismissal of the petition. The appellate court
erred in dismissing outright petitioners' special
civil action for certiorari solely on that ground.
(Emphasis supplied.)
In any event, considering that Maligro derives his standing or
personality in the case from Petron, the certification on nonforum shopping executed and signed only by the corporation

benefited Maligro such that the attachment of said

certification to the petition in CA-G.R. SP No. 67702 should be
deemed substantial compliance with the rule on certification
on non-forum shopping.
We have, therefore, opted to give due course to the present
petition. And realizing that a remand of this case to the CA
would only entail further delay in the proceedings, we deemed
it prudent to resolve the controversy to finally put it to a rest.
In the review of NLRC decisions through the special civil action
of certiorari, resolution is confined only to issues of jurisdiction
and grave abuse of discretion on the part of the labor tribunal.
The Court refrains from reviewing factual assessments of
lower courts and agencies exercising adjudicative functions,
such as the NLRC. 19
Here, however, we are constrained to make a review of the
records and a re-examination of the questioned NLRC findings
to arrive at a complete, just and proper determination of the
case.
Essentially, the issue posed is the validity of private
respondent's dismissal.
The validity of an employee's dismissal hinges on the
satisfaction of two substantive requirements, to wit: (1) the
employee was accorded due process, basic of which are the
opportunity to be heard and to defend himself; and (2) the
dismissal must be for any of the causes provided for in Article
282 of the Labor Code.20
The illegality of the act of dismissal constitutes discharge
without just cause, while the illegality in the manner of
dismissal is dismissal without due process.21
Here, private respondent was successively charged with two
(2) sets of offenses and separately penalized for each set.
The first set of infractions consisted of private respondent's
being AWOL from August 5 to 27, 1996 and
Insubordination/Discourtesy as set forth in the Notice of
Violation of Company Rules and Regulations dated August 27,
1996,22 for which he was penalized with suspension for 30
days effective November 1 to 30, 1996 but only for the charge
of being AWOL. The second set, as contained in the Notice of
Violation of Company Rules and Regulations (EM 300) dated
November 12, 199623 consisted also of being AWOL, this time
beginning August 28, 1996, and Insubordination/Discourtesy
for making false accusations against his superior, for which he
wasdismissed effective December 1, 1996.
Private respondent did not report for work starting August 5,
1996 due to his belief that he has already been dismissed as
of said date. But since he failed to prove his allegation of clear
acts of harassment and humiliation, which had allegedly
become so unbearable as to leave him with no choice but to
forego his continued employment, we uphold the legality of
his suspension due to his unauthorized absences from August
5 to 27, 1996.
With respect to respondent's dismissal, however, we find the
same unjustified.
Under paragraph (a), Article 282 of the Labor Code, 24 an
employer may terminate the services of an employee for his
willful disobedience of the employer's lawful orders in
connection with his work.
Verily, the employer's rules, instructions or commands, in
order to be a ground for discharge on the score of
disobedience, must be reasonable and lawful, must be known
to the employee, and must pertain to the duties for which his
services were engaged.25
From the foregoing, it is clear that the factual basis for the
petitioners' charge of insubordination against the private
respondent, i.e., making false accusations against his superior
cannot constitute a just cause for dismissal. The so-called
accusations are embodied in the complaint filed by the private
respondent in NLRC RAB-VII Case No. 11-1439-96, in which
complaint he believed himself to have been constructively
dismissed as of August 5, 1996. By no stretch of imagination
can the filing of such complaint constitute insubordination. If,
as asserted by the private respondent, he had been
constructively dismissed as of August 5, 1996, such assertion

could not have risen to the level of false accusation against

his superior.
On the other hand, while respondent has indeed been absent
from August 28, 1996, the penalty of dismissal therefor is too
harsh considering that all the while, he deemed himself to
have been already dismissed as early as August 5, 1996.
Besides, private respondent has already been penalized with
suspension for his unauthorized absences, which notice of
suspension he only received on November 18, 1996.
Likewise, the petitioners failed to prove that they complied
with the requisites of procedural due process in dismissing
private respondent.
It is horn-book law that an employee sought to be dismissed
must be served two (2) written notices before termination of
employment: a notice to apprise the employee of the
particular acts or omissions for which his dismissal is sought;
and the subsequent notice to inform him of the employer's
decision to discharge him from the service. 26 The procedure is
mandatory and non-observance thereof renders the dismissal
illegal and void.27
Here, while the private respondent received the Notice of
Disciplinary Action dated October 29, 1996 informing him of
his suspension, and the Memorandum dated November 20,
1996 terminating his services, he did not receive any prior
notice[s] apprising him of the particular acts for which his
suspension and/or termination were being sought.
As rightly found by the NLRC, the private respondent was not
given the following notices, to wit: (1) the Notice of Violation
of Company Rules and Regulations dated August 27, 1996 on
his AWOL from August 5 to 27, 1996 and
Insubordination/Discourtesy with notice of an investigation on
September 2, 1996; and (2) the Notice dated November 12,
1996 on the second set of charges of AWOL starting August
28, 1996 and Insubordination/Discourtesy for allegedly
making false accusations against his superior with notice of
the investigation on November 15, 1996.
As borne by the records, it was only in their motion for
reconsideration of the NLRC decision that the petitioners
proffered the delivery records of a private courier to show that
the aforementioned notices, as well as two alleged telegrams
requiring the private respondent to report for work, 28 were in
fact sent to the latter. But, a perusal of said delivery records
does not bear the petitioners' claim. For, apart from the
private respondent's full name, Chito S. Mantos, being written
in block letters on the said delivery records, there is no other
way of knowing whether it was really him who received the
notices or that another person could have received the same
in his behalf.29 Verily, said delivery records do not substantially
show respondent's receipt of the notices in question.
Given the above, we cannot give credence to petitioners'
claim that as early as August 27, 1996, the date of the notice
allegedly sent to the respondent informing him of the first
set of offenses, the latter already knew that a committee was
going to investigate him for infractions of company rules and
regulations in connection with thesecond set and that he was
invited to attend the investigating committee's scheduled
hearing.
We, therefore, lend concurrence to the common findings of
both the NLRC and the Labor Arbiter that the committee which
investigated the alleged second set of offenses and which
eventually led to the committee's recommendation for his
dismissal was created only on November 15, 1996 or a day at
the heels of the petitioners' receipt on November 14, 1996 of
the summons issued in NLRC RAB-VII Case No. 11-1439-96.
With the reality that no notice of any investigation was timely
served on the private respondent, the latter's filing of his
complaint for illegal dismissal in NLRC RAB-VII Case No. 111439-96 on November 8, 1996 could not be said to have been
made to preempt the investigation regarding his alleged
offenses as he was yet unaware of any such investigation.
Moreover, as the NLRC rightly observed:
We note from the records that although complainant
quit working starting August 5, 1996 because he felt
he was "constructively dismissed" he did not file

outright the present complaint. Instead, he wrote

respondent Maligro on October 18, 1996, thru
counsel asking an explanation why no case for illegal
dismissal with damages would be filed against
respondents. When he therefore finally filed the
present case on Novemeber 8, 1996, that showed his
lingering belief that he was constructively dismissed
although from the viewpoint of respondents, he was
already penalized with "grave suspension" for his
AWOL from August 5-27, 1996. In short, the filing of
the complaint was not a "malicious scheme" on the
part of the complainant contrary to the contention of
respondents. 30
Petitioners' failure to comply with the two-notice requirement
as shown above, let alone the lack of just cause for
terminating the services of private respondent, rendered the
latter's dismissal illegal.
In fine, we rule and so hold that the NLRC did not gravely
abuse its discretion in declaring the illegality of private
respondent's dismissal.
We are, however, with the petitioners in their submission that
the NLRC erred in holding petitioner Peter Maligro jointly and
severally liable with petitioner Petron for the money claims of
the private respondent.
Settled is the rule in this jurisdiction that a corporation is
invested by law with a legal personality separate and distinct
from those acting for and in its behalf and, in general, from
the people comprising it.31 Thus, obligations incurred by
corporate officers acting as corporate agents are not theirs
but the direct accountabilities of the corporation they
represent.32 True, solidary liabilities may at times be incurred
by corporate officers, but only when exceptional
circumstances so warrant.33 For instance, in labor cases,
corporate directors and officers may be held solidarily liable
with the corporation for the termination of employment if
done with malice or in bad faith.34
In the present case, the apparent basis for the NLRC in holding
petitioner Maligro solidarily liable with Petron were its findings
that (1) the Investigation Committee was created a day after
the summons in NLRC RAB-VII Case No. 11-1439-96 was
received, with Maligro no less being the chairman thereof; and
(2) the basis for the charge of insubordination was the private
respondent's alleged making of false accusations against
Maligro.
Those findings, however, cannot justify a finding of personal
liability on the part of Maligro inasmuch as said findings do
not point to Maligro's extreme personal hatred and animosity
with the respondent. It cannot, therefore, be said that Maligro
was motivated by malice and bad faith in connection with
private respondent's dismissal from the service.
If at all, what said findings show are the illegality itself of
private respondent's dismissal, the lack of just cause therefor
and the non-observance of procedural due process. Verily, the
creation of the investigation committee and said committee's
consideration of the insubordination charge against the
private respondent, were merely aimed to cover up the illegal
dismissal or to give it a semblance of legality.
Besides, the fact that Maligro himself was the committee
chairman is not itself sufficient to impute bad faith on his part
or attribute bias against him. It is undisputed that Maligro was
private respondent's superior, being Petron's Operations
Assistant Manager for Visayas and Mindanao. It is thus logical
for him to be part of the committee that will investigate
private respondent's alleged infractions of company rules and
regulations. As well, the committee was composed of three
other Petron officers as members, and nowhere is there any
showing that Maligro, as committee chairman, influenced the
other committee members to side against the private
respondent.
In any event, it must be stressed that private respondent's
allegation of bad faith on the part of Maligro was not
established in this case. We quote the NLRC's finding in this
regard:

Whether he really caught the ire of his immediate

supervisor (respondent Maligro) in view of his alleged
closeness to the previous one who migrated to
Canada, and whether or not he was assigned to
menial clerical jobs when his designation was that of
Operations Engineer, were not clearly established by
complainant.35
Lastly, as to the award of backwages, we refer to Article 279
of the Labor Code (as amended by Section 34 of R.A. 6715)
which provides that an employee who is unjustly dismissed
from work is entitled to reinstatement without loss of seniority
rights and other privileges, and to the payment of his full
backwages, inclusive of allowances, and other benefits or
their monetary equivalent computed from the time his
compensation was withheld from him (which, as a rule, is from
the time of his illegal dismissal) up to the time of his actual
reinstatement. Similarly, under R.A. 6715,36 employees who
are illegally dismissed are entitled to full backwages, inclusive
of allowances and other benefits or their monetary equivalent,
computed from the time their actual compensation was
withheld from them up to the time of their actual
reinstatement but if reinstatement is no longer possible, the
backwages shall be computed from the time of their illegal
termination up to the finality of the decision.37
Since the circumstances obtaining in this case do not warrant
private respondent's reinstatement in the light of the
antagonism generated by this litigation which must have
caused a severe strain in the parties' employer-employee
relationship, an award of separation pay in lieu of
reinstatement, equivalent to one month pay for every year of
service, in addition to full backwages, allowances, and other
benefits or the monetary equivalent thereof, is in order. The
award of attorney's fees is sanctioned by law and must be
upheld.
WHEREFORE, the assailed Resolution of the Court of Appeals
is SET ASIDE, and the NLRC decision dated July 31, 2000
is AFFIRMED with the MODIFICATION that (1) private
respondent Chito S. Mantos is awarded separation pay
equivalent to one month pay for every year of service and full
backwages, other privileges and benefits or to the monetary
equivalent thereof, computed from the date of his illegal
dismissal on December 1, 1996 until the finality of this
decision; and (2) petitioner Peter C. Maligro
is ABSOLVED from any liability adjudged against co-petitioner
Petron Corporation.
Costs against the petitioners.
SO ORDERED.

G.R. No. 145817

October 19, 2011
URBAN BANK, INC, Petitioner,
vs.
MAGDALENO M. PEA, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 145822
DELFIN C. GONZALEZ, JR., BENJAMIN L. DE LEON, and
ERIC L. LEE, Petitioners,
vs.
MAGDALENO M. PEA, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 162562
MAGDALENO M. PEA, Petitioner,
vs.
URBAN BANK, INC., TEODORO BORLONGAN, DELFIN C.
GONZALEZ, JR., BENJAMIN L. DE LEON, P. SIERVO H.
DIZON, ERIC L. LEE, BEN T. LIM, JR., CORAZON BEJASA,
and ARTURO MANUEL, JR.,Respondents.
DECISION
SERENO, J.:
These consolidated petitions began as a simple case for
payment of services rendered and for reimbursement of costs.
The case spun a web of suits and counter-suits because of: (1)
the size of the award for agents fee rendered in favor of Atty.
Magdaleno Pea (Pea) PhP24,000,000 rendered by the
trial court; (2) the controversial execution of the full judgment
award of PhP28,500,000 (agents fee plus reimbursement for
costs and other damages) pending appeal; and (3) the finding
of solidary liability against Urban Bank, Inc., and several of its
corporate officers and directors together with the concomitant
levying and sale in execution of the personal (even conjugal)
properties of those officers and directors; and (4) the fact that
assets with declared conservative values of at least PhP181
Million which, together with those with undeclared values
could reach very much more than such amount, 1 were levied
or sold on execution pending appeal to satisfy the PhP28.5
Million award in favor of Atty. Pea. Incidentally, two
supersedeas bonds worth PhP80 Million (2.8 times the amount
of the judgment) were filed by Urban Bank and some of its
officers and directors to stay the execution pending appeal.
Had the four attendant circumstances not afflicted the original
case, it would have been an open-and-shut review where this
Court, applying even just the minimum equitable principle
against unjust enrichment would have easily affirmed the
grant of fair recompense to Atty. Pea for services he
rendered for Urban Bank if such had been ordered by the trial
court.
That Atty. Pea should be paid something by Urban Bank is
not in dispute the Court of Appeals (CA) and the Regional
Trial Court (RTC) of Bago City, agreed on that. What they
disagreed on is the basis and the size of the award. The trial
court claims that the basis is an oral contract of agency and
the award should be PhP28,5000,000; while, the appellate
court said that Atty. Pea can only be paid under the legal
principle against unjust enrichment, and the total award in his
favor should only amount to PhP3,000,000.
In the eyes of the trial court, the controlling finding is that
Atty. Pea should be believed when he testified that in a
telephone conversation, the president of Urban Bank, Teodoro
Borlongan, a respondent herein, agreed to pay him for his
services 10% of the value of the property then worth
PhP240,000,000, or PhP24,000,000. Costs and other awards
additionally amount to PhP4,500,000, for a total award of
PhP28,500,000 according to the trial court. To the Court of
Appeals, such an award has no basis, as in fact, no contract of
agency exists between Atty. Pea and Urban Bank. Hence,
Atty. Pea should only be recompensed according to the
principle of unjust enrichment, and that he should be awarded
the amount of PhP3,000,000 only for his services and
reimbursements of costs.
The disparity in the size of the award given by the trial court
vis--vis that of the Court of Appeals (PhP28,500,000 v.
PhP3,000,000) must be placed in the context of the service

that Atty. Pea proved that he rendered for Urban Bank. As

the records bear, Atty. Peas services consisted of causing
the departure of unauthorized sub-tenants in twenty-three
commercial establishments in an entertainment compound
along Roxas Boulevard. It involved the filing of ejectment suits
against them, Peas personal defense in the counter-suits
filed against him, his settlement with them to the tune of
PhP1,500,000, which he advanced from his own funds, and his
retention of security guards and expenditure for other costs
amounting to more or less PhP1,500,000. There is no claim by
Atty. Pea of any service beyond those. He claims damages
from the threats to his life and safety from the angry tenants,
as well as a vexatious collection suit he had to face from a
creditor-friend from whom he borrowed PhP3,000,000 to
finance the expenses for the services he rendered Urban
Bank.
At the time the award of PhP28,500,000 by the trial court
came out in 1999, the net worth of Urban Bank was
PhP2,219,781,104.2 While the bank would be closed by the
Bangko Sentral ng Pilipinas (BSP) a year later for having
unilaterally declared a bank holiday contrary to banking rules,
there was no reason to believe that at the time such award
came out it could not satisfy a judgment of PhP28,500,000, a
sum that was only 1% of its net worth, and a miniscule 0.2%
of its total assets of PhP11,933,383,630.3 In fact, no allegation
of impending insolvency or attempt to abscond was ever
raised by Atty. Pea and yet, the trial court granted execution
pending appeal.
Interestingly, Pea had included as co-defendants with Urban
Bank in the RTC case, several officers and board directors of
Urban Bank. Not all board directors were sued, however. With
respect to those included in the complaint, other than against
Teodoro Borlongan, Corazon Bejasa, and Arturo Manuel, no
evidence was ever offered as to their individual actions that
gave rise to Atty. Peas cause of action the execution of the
agency contract and its breach and yet, these officers and
directors were made solidarily liable by the trial court with
Urban Bank for the alleged breach of the alleged corporate
contract of agency. Execution pending appeal was also
granted against them for this solidary liability resulting in the
levy and sale in execution pending appeal of not only
corporate properties of Urban Bank but also personal
properties of the individual bank officers and directors. It
would have been interesting to find out what drove Atty. Pea
to sue the bank officers and directors of Urban Bank and why
he chose to sue only some, but not all of the board directors
of Urban Bank, but there is nothing on the record with which
this analysis can be pursued.
Before us are: (a) the Petitions of Urban Bank (G. R. No.
145817) and the De Leon Group (G R. No. 145822)
questioning the propriety of the grant of execution pending
appeal, and (b) the Petition of Atty. Pea (G. R. No. 162562)
assailing the CAs decision on the substantive merits of the
case with respect to his claims of compensation based on an
agency agreement.
Ordinarily, the final resolution by the Supreme Court of an
appeal from a trial court decision would have automatic,
generally-understood consequences on an order issued by the
trial court for execution pending appeal. But this is no
ordinary case, and the magnitude of the disproportions in this
case is too mind-boggling that this Court must exert extra
effort to correct whatever injustices have been occasioned in
this case. Thus, our dispositions will include detailed
instructions for several judicial officials to implement.
At core, these petitions can be resolved if we answer the
following questions:
1. What is the legal basis for an award in favor of
Pea for the services he rendered to Urban Bank?
Should it be a contract of agency the fee for which
was orally agreed on as Pea claims? Should it be the
application of the Civil Code provisions on unjust
enrichment? Or is it to be based on something else or
a combination of the legal findings of both the RTC
and the CA? How much should the award be?

2. Are the officers and directors of Urban Bank liable

in their personal capacities for the amount claimed
by Pea?
3. What are the effects of our answers to questions
(1) and (2), on the various results of the execution
pending appeal that happened here?
Factual Background of the Controversy
Urban Bank, Inc. (both petitioner and respondent in these two
consolidated cases),4 was a domestic Philippine corporation,
engaged in the business of banking.5 The eight individual
respondents in G. R. No. 162562 were officers and members
of Urban Banks board of directors, who were sued in their
official and personal capacities.6On the other hand, Benjamin
L. De Leon, Delfin C. Gonzalez, Jr., and Eric L. Lee, (hereinafter
the de Leon Group), are the petitioners in G. R. No. 145822
and are three of the same bank officers and directors, who
had separately filed the instant Petition before the Court.
Petitioner-respondent Atty. Magdaleno M. Pea (Pea)7 is a
lawyer by profession and was formerly a stockholder, director
and corporate secretary of Isabel Sugar Company, Inc. (ISCI). 8
ISCI owned a parcel of land9 located in Pasay City (the Pasay
property).10 In 1984, ISCI leased the Pasay property for a
period of 10 years.11 Without its consent12 and in violation of
the lease contract,13 the lessee subleased the land to several
tenants, who in turn put up 23 establishments, mostly beer
houses and night clubs, inside the compound. 14 In 1994, a few
months before the lease contract was to expire, ISCI informed
the lessee15 and his tenants16 that the lease would no longer
be renewed and that it intended to take over the Pasay
property17 for the purpose of selling it.18
Two weeks before the lease over the Pasay property was to
expire, ISCI and Urban Bank executed a Contract to Sell,
whereby the latter would pay ISCI the amount of
PhP241,612,000 in installments for the Pasay property.19Both
parties agreed that the final installment of PhP25,000,000
would be released by the bank upon ISCIs delivery of full and
actual possession of the land, free from any tenants. 20 In the
meantime, the amount of the final installment would be held
by the bank in escrow. The escrow provision in the Contract to
Sell, thus, reads:
"The SELLER (ISCI) agrees that from the proceeds of the
purchase prices of the subject Property (Pasay property), the
BUYER (Urban Bank) shall withhold the amount of PHP
25,000,000.00 by way of escrow and shall release this amount
to the SELLER only upon its delivery to the BUYER of the full
and actual possession and control of the Subject Property, free
from tenants, occupants, squatters or other structures or from
any liens, encumbrances, easements or any other obstruction
or impediment to the free use and occupancy by the buyer of
the subject Property or its exercise of the rights to ownership
over the subject Property, within a period of sixty (60) days
from the date of payment by the BUYER of the purchase price
of the subject Property net of the amounts authorized to be
deducted or withheld under Item II (a) of this
Contract.21 (Emphasis supplied)
ISCI then instructed Pea, who was its director and corporate
secretary, to take over possession of the Pasay
property22 against the tenants upon the expiration of the
lease. ISCIs president, Mr. Enrique G. Montilla III (Montilla),
faxed a letter to Pea, confirming the latters engagement as
the corporations agent to handle the eviction of the tenants
from the Pasay property, to wit:23
MEMORANDUM
TO: Atty. Magdaleno M. Pena
Director
FROM: Enrique G. Montilla III
President
DATE: 26 November 1994
You are hereby directed to recover and take possession of the
property of the corporation situated at Roxas Boulevard
covered by TCT No. 5382 of the Register of Deeds for Pasay
City immediately upon the expiration of the contract of lease
over the said property on 29 November 1994. For this purpose

you are authorized to engage the services of security guards

to protect the property against intruders. You may also
engage the services of a lawyer in case there is a need to go
to court to protect the said property of the corporation. In
addition you may take whatever steps or measures are
necessary to ensure our continued possession of the property.
(sgd.) ENRIQUE G. MONTILLA III
President24
On 29 November 1994, the day the lease contract was to
expire, ISCI and Urban Bank executed a Deed of Absolute
Sale25 over the Pasay property for the amount agreed upon in
the Contract to Sell, but subject to the above escrow
provision.26 The title to the land was eventually transferred to
the name of Urban Bank on 05 December 1994.27
On 30 November 1994, the lessee duly surrendered
possession of the Pasay property to ISCI, 28 but the
unauthorized sub-tenants refused to leave the
area.29 Pursuant to his authority from ISCI, Pea had the gates
of the property closed to keep the sub-tenants out.30 He also
posted security guards at the property,31 services for which he
advanced payments.32 Despite the closure of the gates and
the posting of the guards, the sub-tenants would come back in
the evening, force open the gates, and proceed to carry on
with their businesses.33 On three separate occasions, the subtenants tried to break down the gates of the property, threw
stones, and even threatened to return and inflict greater harm
on those guarding it.34
In the meantime, a certain Marilyn G. Ong, as representative
of ISCI, faxed a letter to Urban Bank addressed to
respondent Corazon Bejasa, who was then the banks Senior
Vice-President requesting the issuance of a formal authority
for Pea.35 Two days thereafter, Ms. Ong faxed another letter
to the bank, this time addressed to its president, respondent
Teodoro Borlongan.36 She repeated therein the earlier request
for authority for Pea, since the tenants were questioning
ISCIs authority to take over the Pasay property. 37
In response to the letters of Ms. Ong, petitioner-respondent
bank, through individual respondents Bejasa and Arturo E.
Manuel Senior Vice-President and Vice-President,
respectively advised Pea38 that the bank had noted the
engagement of his services by ISCI and stressed that ISCI
remained as the lawyers principal.39
To prevent the sub-tenants from further appropriating the
Pasay property,40 petitioner-respondent Pea, as director and
representative of ISCI, filed a complaint for injunction 41 (the
First Injunction Complaint) with the RTC-Pasay City. 42 Acting on
ISCIs prayer for preliminary relief, the trial court favorably
issued a temporary restraining order (TRO),43 which was duly
implemented.44 At the time the First Injunction Complaint was
filed, a new title to the Pasay property had already been
issued in the name of Urban Bank.45
On 19 December 1994, when "information reached the judge
that the Pasay property had already been transferred by ISCI
to Urban Bank, the trial court recalled the TRO and issued a
break-open order for the property. According to Pea, it was
the first time that he was apprised of the sale of the land by
ISCI and of the transfer of its title in favor of the bank." 46 It is
not clear from the records how such information reached the
judge or what the break-open order was in response to.
On the same day that the TRO was recalled, petitionerrespondent Pea immediately contacted ISCIs president, Mr.
Montilla, who in turn confirmed the sale of the Pasay property
to Urban Bank.47 Pea told Mr. Montilla that because of the
break-open order of the RTC-Pasay City, he (Pea) would be
recalling the security guards he had posted to secure the
property. Mr. Montilla, however, asked him to suspend the
planned withdrawal of the posted guards, so that ISCI could
get in touch with petitioner-respondent bank regarding the
matter.48
Later that same day, Pea received a telephone call from
respondent Bejasa. After Pea informed her of the situation,
she allegedly told him that Urban Bank would be retaining his
services in guarding the Pasay property, and that he should
continue his efforts in retaining possession thereof. He

insisted, however, on talking to the Banks president.

Respondent Bejasa gave him the contact details of
respondent Borlongan, then president of Urban Bank. 49
The facts regarding the following phone conversation and
correspondences are highly-controverted. Immediately after
talking to respondent Bejasa, Pea got in touch with Urban
Banks president, respondent Borlongan. Pea explained that
the policemen in Pasay City were sympathetic to the tenants
and were threatening to force their way into the premises. He
expressed his concern that violence might erupt between the
tenants, the city police, and the security guards posted in the
Pasay property. Respondent Borlongan supposedly assured
him that the bank was going to retain his services, and that
the latter should not give up possession of the subject land.
Nevertheless, petitioner-respondent Pea demanded a written
letter of authority from the bank. Respondent Borlongan
acceded and instructed him to see respondent Bejasa for the
letter.50
In the same telephone conversation, respondent Borlongan
allegedly asked Pea to maintain possession of the Pasay
property and to represent Urban Bank in any legal action that
might be instituted relative to the property. Pea supposedly
demanded 10% of the market value of the property as
compensation and attorneys fees and reimbursement for all
the expenses incurred from the time he took over land until
possession was turned over to Urban Bank. Respondent
Borlongan purportedly agreed on condition that possession
would be turned over to the bank, free of tenants, not later
than four months; otherwise, Pea would lose the 10%
compensation and attorneys fees. 51
Later that afternoon, Pea received the banks letter dated 19
December 1994, which was signed by respondents Bejasa and
Manuel, and is quoted below:
This is to confirm the engagement of your services as the
authorized representative of Urban Bank, specifically to hold
and maintain possession of our abovecaptioned property
[Pasay property] and to protect the same from former tenants,
occupants or any other person who are threatening to return
to the said property and/or interfere with your possession of
the said property for and in our behalf.
You are likewise authorized to represent Urban Bank in any
court action that you may institute to carry out the
aforementioned duties, and to prevent any intruder, squatter
or any other person not otherwise authorized in writing by
Urban [B]ank from entering or staying in the
premises.52 (Emphasis supplied)
On even date, ISCI sent Urban Bank a letter, which
acknowledged ISCIs engagement of Pea and commitment to
pay for any expenses that may be incurred in the course of his
services. ISCIs letter reads:
This has reference to your property located along Roxas
Boulevard, Pasay City [Pasay property] which you purchased
from Isabela Sugar Company under a Deed of Absolute Sale
executed on December 1, 1994.
In line with our warranties as the Seller of the said property
and our undertaking to deliver to you the full and actual
possession and control of said property, free from tenants,
occupants or squatters and from any obstruction or
impediment to the free use and occupancy of the property by
Urban Bank, we have engaged the services of Atty. Magdaleno
M. Pea to hold and maintain possession of the property and
to prevent the former tenants or occupants from entering or
returning to the premises. In view of the transfer of the
ownership of the property to Urban Bank, it may be necessary
for Urban Bank to appoint Atty. Pea likewise as its authorized
representative for purposes of holding/maintaining continued
possession of the said property and to represent Urban Bank
in any court action that may be instituted for the
abovementioned purposes.
It is understood that any attorneys fees, cost of litigation and
any other charges or expenses that may be incurred relative
to the exercise by Atty. Pea of his abovementioned duties
shall be for the account of Isabela Sugar Company and any

loss or damage that may be incurred to third parties shall be

answerable by Isabela Sugar Company.53 (Emphasis supplied)
The following narration of subsequent proceedings is
uncontroverted.
Pea then moved for the dismissal of ISCIs First Injunction
Complaint, filed on behalf of ISCI, on the ground of lack of
personality to continue the action, since the Pasay property,
subject of the suit, had already been transferred to Urban
Bank.54 The RTC-Pasay City dismissed the complaint and
recalled its earlier break-open order.55
Thereafter, petitioner-respondent Pea, now in representation
of Urban Bank, filed a separate complaint56 (the Second
Injunction Complaint) with the RTC-Makati City, to enjoin the
tenants from entering the Pasay property.57Acting on Urban
Banks preliminary prayer, the RTC-Makati City issued a TRO. 58
While the Second Injunction Complaint was pending, Pea
made efforts to settle the issue of possession of the Pasay
property with the sub-tenants. During the negotiations, he
was exposed to several civil and criminal cases they filed in
connection with the task he had assumed for Urban Bank, and
he received several threats against his life.59 The sub-tenants
eventually agreed to stay off the property for a total
consideration of PhP1,500,000.60Pea advanced the payment
for the full and final settlement of their claims against Urban
Bank.61
Pea claims to have borrowed PhP3,000,000 from one of his
friends in order to maintain possession thereof on behalf of
Urban Bank.62 According to him, although his creditor-friend
granted him several extensions, he failed to pay his loan when
it became due, and it later on became the subject of a
separate collection suit for payment with interest and
attorneys fees.63 This collection suit became the basis for
Atty. Peas request for discretionary execution pending
appeal later on.
On 07 February 1995, within the four-month period allegedly
agreed upon in the telephone conversation, Pea formally
informed Urban Bank that it could already take possession of
the Pasay property.64 There was however no mention of the
compensation due and owed to him for the services he had
rendered.
On 31 March 1995, the bank subsequently took actual
possession of the property and installed its own guards at the
premises.65
Pea thereafter made several attempts to contact
respondents Borlongan and Bejasa by telephone, but the bank
officers would not take any of his calls. On 24 January 1996, or
nearly a year after he turned over possession of the Pasay
property, Pea formally demanded from Urban Bank the
payment of the 10% compensation and attorneys fees
allegedly promised to him during his telephone conversation
with Borlongan for securing and maintaining peaceful
possession of the property.66
Proceedings on the Complaint for Compensation
On 28 January 1996, when Urban Bank refused to pay for his
services in connection with the Pasay property, Pea filed a
complaint67 for recovery of agents compensation and
expenses, damages and attorneys fees in RTC-Bago City in
the province of Negros Occidental.68 Interestingly, Pea sued
only six out of the eleven members of the Board of the
Directors of Urban Bank.69 No reason was given why the six
directors were selected and the others excluded from Peas
complaint. In fact, as pointed out, Atty. Pea mistakenly
impleaded as a defendant, Ben Y. Lim, Jr., who was never even
a member of the Board of Directors of Urban Bank; while, Ben
T. Lim, Sr., father and namesake of Ben Y. Lim, Jr., who had
been a director of the bank, already passed away in 1997.70
In response to the complaint of Atty. Pea, Urban Bank and
individual bank officers and directors argued that it was ISCI,
the original owners of the Pasay property, that had engaged
the services of Pea in securing the premises; and,
consequently, they could not be held liable for the expenses
Pea had incurred.71

On 28 May 1999, the RTC-Bago City72 ruled in favor of Pea,

after finding that an agency relationship had indeed been
created between him and Urban Bank. The eight directors and
bank officers were found to be solidarily liable with the bank
for the payment of agencys fees. The trial court thus ordered
Urban Bank and all eight defendant bank directors and
officers whom Pea sued to pay the total amount of
PhP28,500,000 (excluding costs of suit):
WHEREFORE, premised from the foregoing, judgment is
hereby rendered ordering defendants to pay plaintiff jointly
and severally the following amounts:
1. P24,000,000 as compensation for plaintiffs
services plus the legal rate of interest from the time
of demand until fully paid;
2. P3,000,000 as reimbursement of plaintiffs
expenses;
3. P1,000,000 as and for attorneys fees;
4. P500,000 as exemplary damages;
5. Costs of suit.
SO ORDERED.73
Urban Bank and the individual defendant bank directors and
officers filed a common Notice of Appeal,74 which was given
due course.75 In the appeal, they questioned the factual
finding that an agency relationship existed between the bank
and Pea.76
Although they put up a single defense in the proceedings in
the lower court, Urban Bank and individual defendants
contracted different counsel and filed separate Briefs on
appeal in the appellate court.
In its Brief,77 Urban Bank78 assigned as errors the trial courts
reliance on the purported oral contract of agency and Peas
claims for compensation during the controverted telephone
conversation with Borlongan, which were allegedly incredible.
Meanwhile, Benjamin L. de Leon, Delfin Gonzalez, Jr., and Eric
L. Lee (the De Leon Group),79 the petitioners in the instant
Petition docketed as G. R. No. 145822, argued that, even on
the assumption that there had been an agency contract with
the bank, the trial court committed reversible error in holding
them as bank directors solidarily liable with the
corporation.80
On the other hand, Teodoro Borlongan, Corazon M. Bejasa,
Arturo Manuel, Jr., Ben Y. Lim, Jr., and P. Siervo H. Dizon (the
Borlongan Group)81 reiterated similar arguments as those of
the De Leon Group, adding that the claimed compensation of
10% of the purchase price of the Pasay property was not
reasonable.82
Pea refuted all of their arguments83 and prayed that the trial
courts Decision be affirmed.84
Acting favorably on the appeal, the Court of
Appeals85 annulled the Decision of the RTC-Bago City and
ruled that no agency relationship had been created.
Nevertheless, it ordered Urban Bank to reimburse Pea for his
expenses and to give him reasonable compensation for his
efforts in clearing the Pasay property of tenants in the amount
of PhP3,000,000, but absolved the bank directors and officers
from solidary liability. The dispositive portion of the CA
decision reads as follows:
WHEREFORE, in view of the foregoing considerations, the May
28, 2000 Decision [sic] and the October 19, 2000 [sic] Special
Order of the RTC of Bago City, Branch 62,86 are hereby
ANNULLED AND SET ASIDE. However, the plaintiff-appellee
[Pea] in CA GR CV No. 65756 is awarded the amount of P3
Million as reimbursement for his expenses as well as
reasonable compensation for his efforts in clearing Urban
Banks property of unlawful occupants. The award of
exemplary damages, attorneys fees and costs of suit are
deleted, the same not having been sufficiently proven. The
petition for Indirect Contempt against all the respondents is
DISMISSED for utter lack of merit. 87 (Emphasis supplied)
Pea duly filed a Motion for Reconsideration of the
unfavorable CA Decision.88 The appellate court, however,
denied his motion.89 The CA Decision and Resolution were

appealed by Pea to this Court, through one of the three

consolidated Rule 45 Petitions before us (G. R. No. 162562).
Execution Pending Appeal
On 07 June 1999, prior to the filing of the notice of appeal of
Urban Bank and individual bank officers,90 Pea moved for
execution pending appeal91 of the Decision rendered by the
RTC-Bago City,92 which had awarded him a total of
PhP28,500,000 in compensation and damages.93
In supporting his prayer for discretionary execution, Pea
cited the pending separate civil action for collection filed
against him by his creditor-friend, who was demanding
payment of a PhP3,000,000 loan.94 According to Pea, he had
used the proceeds of the loan for securing the banks Pasay
property. No other reason for the prayer for execution pending
appeal was given by Pea other than this collection suit. 95
In opposition to the motion, Urban Bank countered that the
collection case was not a sufficient reason for allowing
execution pending appeal.96
On 29 October 1999, the RTC-Bago City, through Judge Henry
J. Trocino,97 favorably granted Peas motion and issued a
Special Order authorizing execution pending appeal. 98 In
accordance with this Special Order, Atty. Josephine MutiaHagad, the clerk of court and ex officio sheriff, issued a Writ of
Execution99 on the same day.100The Special Order and Writ of
Execution were directed at the properties owned by Urban
Bank as well as the properties of the eight individual bank
directors and officers.
On 04 November 1999, affected by the trial courts grant of
execution pending appeal, Urban Bank101 filed a Rule 65
Petition with the CA to enjoin the Special Order and Writ of
Execution issued by the trial court with a prayer for a TRO. 102
On 09 November 1999, the appellate court favorably granted
the TRO and preliminarily prohibited the implementation of
the Special Order and Writ of Execution.103
On 12 January 2000, the CA eventually granted Urban Banks
Rule 65 Petition, and the RTCs Special Order and Writ of
Execution, which permitted execution pending appeal, were
annulled. The appellate court ruled:104
WHEREFORE, the instant petition is GRANTED. The Special
Order and writ of execution, both dated October 29, 1999, are
ANNULLED and SET ASIDE.
Respondents are directed to desist from further implementing
the writ of execution and to lift the garnishment and levy
made pursuant thereto. 105
On 02 February 2000, Pea moved for the reconsideration of
the CAs Decision;106 while petitioners filed their corresponding
Comment/Opposition
thereto.107
During the pendency of Peas Motion for Reconsideration,
Urban Bank declared a bank holiday on 26 April 2000 and was
placed under receivership of the Philippine Deposit Insurance
Corporation (PDIC).108
In its Amended Decision dated 18 August 2000, the
CA109 favorably granted Peas Motion for Reconsideration,
and reversed its earlier Decision to allow execution pending
appeal.110 The appellate court found that the bank holiday
declared by the BSP after the promulgation of its earlier
Decision, PDICs receivership of Urban Bank, and the
imminent insolvency thereof constituted changes in the
banks conditions that would justify execution pending
appeal.111
On 29 August 2000, Urban Bank and its officers moved for the
reconsideration of the Amended Decision.112 The De Leon
Group subsequently filed several Supplemental Motions for
Reconsideration.113 Thereafter, respondents Teodoro
Borlongan and Corazon M. Bejasa also filed their separate
Supplemental Motion for Reconsideration,114 as did petitioner
Ben T. Lim, Jr.115
On 19 October 2000, the Court of Appeals denied the motion
for reconsideration for lack of merit and the other subsequent
Supplemental Motions for Reconsideration for being filed out
of time.116 The appellate court also ordered Pea to post an

dant

indemnity bond.117 The Amended Decision and the Resolution

were the subjects of several Rule 45 Petitions filed by Urban
Bank and individual petitioners (G. R. Nos. 145817, 145818
and 145822).
On the same day the CA denied its Motion for
Reconsideration, the De Leon Group immediately moved for
the stay of execution pending appeal upon the filing of a
supersedeas bond.118
On 31 October 2000, the CA119 granted the stay of the
execution upon the filing by the De Leon Group of a
PhP40,000,000 bond in favor of Pea.120 Pea moved for the
reconsideration of the stay order.121
1avvphil
In its Resolution dated 08 December 2000,122 the appellate
court denied Peas Motion for Reconsideration and a stay
order over the execution pending appeal was issued in favor
of the De Leon Group, after they had filed their supersedeas
bond.123 The stay of execution pending appeal, however,
excluded Urban Bank.124
On 08 December 2000, Pea posted his indemnity bond as
required by the CA.125
As mentioned earlier, Urban Bank, the De Leon Group, and the
Borlongan Group filed around December 2000 separate Rule
45 Petitions in this Court, to assail the unfavorable CA
Amended Decision and Resolution that affirmed the execution
pending appeal. The details of these Rule 45 Petitions will be
discussed in detail later on.
In the meantime, Export and Industry Bank (EIB) submitted its
proposal for rehabilitation of Urban Bank to the BSP, and
requested that the troubled bank be removed from
receivership of the PDIC. On 12 July 2001, or almost a year
after the Court of Appeals amended its decision to allow
execution pending appeal, the rehabilitation plan of Urban
Bank was approved by the Monetary Board of the BSP.126 Thus,
the Monetary Board subsequently lifted PDICs statutory
receivership of the bank.127
On 14 September 2001, Urban Bank, trying to follow the lead
of the De Leon Group, made a similar request with the Court
of Appeals for approval of its own supersedeas bond, 128 for the
same amount of PhP40,000,000, and prayed that the
execution of the RTC-Bago Citys Decision against it be stayed
as well.129
Sometime in September and October 2001, Urban Bank began
receiving notices of levy and garnishment over its properties.
After it received Notice of the impending public execution sale
of its shares in the Tagaytay Highlands International Golf
Club,130 Urban Bank reiterated its request for the approval of
the supersedeas bond with the Court of Appeals and the
issuance of the corresponding stay order. 131
The appellate court, however, merely noted Urban Banks
motion on the ground that there was no showing whether a
petition to the Supreme Court had been filed or given due
course or denied.132
After the denial by the Court of Appeals of Urban Banks
motion for approval of its supersedeas bond, some of the
levied properties of Urban Bank and the other bank officers
were sold on public auction. The table below lists the
properties that appear on record to have been levied and/or
sold on execution pending appeal and the approximate value
of some of these properties. They do not include properties
covered by the Petition docketed as G. R. No. 145818.
Table of Levied, Garnished and/or Executed Properties Pending
Appeal
1avvphi1
Property Description

Three Club Shares

Tagaytay Highlands
International Golf
Club133

Estimated Value or Price

at Public Auction
As of 06 December
1999, one share was
selling at P1.6 Million.134

Total Amount
4,800,000

Three Club Shares in

Makati Sports, Club,
Inc. (MSCI) [Covered
by Stock Certificate
Nos. A-1893, A-2305
and B-762]135

As of 06 December
1999, MSCI Club Shares
"A" and "B" were selling
at PhP650,000 and
PhP700,000,
respectively.136

2,000,000137 Atty. Pe
the win
in the a
togethe
creditor
Roberto
Atty. Ra

85 Condominium Units The highest bid price

in the Urban Bank
obtained for the
Plaza, Makati City138
condominium units was
PhP1M at the time of the
execution sale.139

85,000,000 Interve
purchas
condom
the auc
P1M ea
of P10

A 155 sqm.
condominium unit,
Makati City (CCT No.
57697) 141

12,400,000

A 12.5 sqm.
condominium parking
space (Parking Three,
Unit P-46) in Makati
City (CCT No.
57698)143

Estimates are based on

report of Urban Bank142

A 64,677 sqm. land in

Tagaytay City (TCT No.
20471)144

Value based on estimate

of Urban Bank145

One Club Share in

Manila Polo Club (No.
3433)146

Borlongans club share

was estimated to be
valued at P1,000,000.147

One Club Share in

Subic Bay Yacht
Club149

One club share was

estimated to be valued
at P500,000.150

500,000

35,572,350

Notice
Executi
1,000,000 Persona
dated 2
2000148
500,000

One Club Share in

As of 06 December
Baguio Country Club151 1999, one share was
selling at P870,000.152

870,000

One Club Share in

MSCI153

As of 06 December
1999, MSCI Club Shares
"A" and "B" were selling
at PhP650,000 and
PhP700,000
respectively.154

650,000

Real Property155

No estimate available on
record.

One Club Share in

Manila Polo Club (No.
3818)156

Gonzales club share

was estimated to be
valued at P4,000,000.157

One Club Share in

Baguio Country
Club.159

Gonzales club share

was estimated to be
valued at P1,077,000.160

1,077,000

One Club Share in

Alabang Country Club
(Member No. 550)161

Gonzales club share

was estimated to be
valued at P2,000,000.162

2,000,000

30,585 shares of stock

in D. C. Gonzales, Jr.,

P20.00 per share164

Notice
Executi
4,000,000 Persona
dated 2
2000158

611,700

Inc.163

Real Property190
2,000

40 Shares of stock in
D. C. Gonzales, Jr.,
Inc.165

P50.00 per share166

One Club Share in

Manila Polo Club (with
Associate
Membership) [No.
0597]167

De Leons Share was

estimated at P4 M for
the share and P1.05 M
for the associate
membership.168

One Club Share in

MSCI (Stock
Certificate No. A175)170

De Leons share was

estimated at
P450,000.171

450,000

One Club Share in

Baguio Country Club
(5523)172

As of 06 December
1999, one share was
selling at least
P870,000.173

870,000

One Club Share in

Manila Polo Club
(2038)174

Lees club share was

estimated to be valued
at P4,000,000.175

One Club Share in

Manila Golf Club,
Inc.177

Lees club share was

estimated to be valued
at P15,750,000.178

15,750,000

One Club Share in Sta.

Elena Golf Club, Inc.
(Class "A" Share) 179

Lees club share was

estimated to be valued
at P2,000,000.180

2,000,000

Two Club Shares in

Tagaytay Highlands
Intl Golf Club, Inc. 181

Lees club shares were

estimated to be valued
at P1,000,000.182

1,000,000

One Club Share in

Subic Yacht Club184

Lees club share was

estimated to be valued
at P500,000.185

500,000

60,757 Shares of
stock in EQL
Properties, Inc.186

P20.00 per share

1,214,140

40 Shares of stock in
EQL Properties, Inc. 187

P50.00 per share

2,000

5,050,000

zon

100,000

Cash garnished from

BPI Account188

Real Property189

4,000,000

No estimated value.

TOTAL VALUE

No estimated value.
181,919,190

The sum of PhP181,919,190 does not include many other

properties and it is not difficult to believe that the total value
reached more than that.191 In summary, the
Notice covered
of Sale on
estimated
values and/or purchase prices at the auction sale of
Execution on
the
properties of Urban Bank and its officers amounted to no
Personal
Property
less
than PhP181,919,190 already. This amounts to almost six
dated 25
August
2000 times the value of the award given by the trial court.
Otherwise stated, Pea, as judgment creditor, was overly
secured by the levied and/or garnished properties for the
amount of PhP28,500,000, where the judgment award was
still subject of reversal on appeal.
On 22 October 2001, Urban Bank, with respect to its pending
Rule 45 Petition in this Court, moved for the approval of its
PhP40,000,000 supersedeas bond192 and requested that the
Court stay the execution pending appeal.193 Pea opposed the
motion on the ground that it had already been rendered moot
and academic by the sale of the properties of the bank. 194
On 23 October 2002, or almost a year after some of the
condominium units were sold in a public auction, EIB, as the
No records
available
successor
of Urban Bank, expressed to the sheriff of RTC-Bago
as to properties
City an intent to redeem the said condominium units.195 Thus,
levied, EIB
garnished
or three managers checks in the total amount of
tendered
196
executed
pending
PhP22,108,800
to redeem the properties that were
appeal.previously under the name of Urban Bank.197 Although the trial
court noted the banks Manifestation,198 the sheriff returned
EIBs
Notice the
of Sale
onmanagers checks. Thus, on 29 October 2002, EIB,
through
Execution
on a motion, was prompted to turn over the checks to
the
trial court itself.199
Personal
Property
dated 25
August
When
Urban Bank supposedly failed to redeem the
2000 condominium units according to the sheriff, 200 final Certificates
of Sale were issued in favor of Unimega on 04 November
2002.201 Upon the latters motion, RTC-Bago City, in its Order
dated 13 November 2002, ordered the Register of Deeds of
Makati to transfer the Condominium Certificates of Title to the
name of Unimega.202 It has not been shown, though, whether
this Order was followed.
This Court, acting on Urban Banks earlier motion to approve
its supersedeas bond, granted the same in its Resolution
dated 19 November 2001.203 Pea moved for reconsideration
of the approval,204 but his motion was subsequently denied by
Notice the
of Sale
on205
Court.
Execution on
Proceedings
Personal
Property in the Supreme Court (G. R. Nos. 145817, 145818
& 145822)
dated 25
August
206
2000 On 21 December 2000, Urban Bank, represented by its
receiver, PDIC,207 filed a Rule 45 Petition with this Court
(docketed as G. R. No. 145817) to assail the CAs Amended
Decision and Resolution granting execution pending
appeal.208 In response, Pea moved for the denial of the
petition on the grounds of lack merit, violation of the rule
against forum shopping, and non-payment of docket fees,
among others.209 In a separate Comment,210 Pea also argued
that the appellate court had committed no error when it
considered the banks "imminent insolvency" as a good
reason for upholding the validity of the execution pending
appeal.
On the other hand, the Borlongan Group211 filed a separate
Rule 45 Petition questioning the same Decision and
Resolution, docketed as G. R. No. 145818. 212 This Court
initially denied their petition on the ground that it failed to
sufficiently show that the CA committed reversible
order.213 The Borlongan Group twice moved for the
No records available
reconsideration of the denial of their petition; but the Court
as to properties
nonetheless denied both motions for lack of merit. 214This
levied, garnished or
denial of the petition in G. R. No. 145818 became final and
executed pending
executory, with the issuance of the Entry of Judgment. 215
appeal.
Meanwhile, another Rule 45 Petition (G. R. No. 145822)216 was
filed by the De Leon Group, assailing the same Decisions of
the appellate court. The Court also preliminarily denied this
petition on the ground that the De Leon Group failed to file

the appeal within the reglementary period and to pay certain

fees.217
Despite the denial of the Rule 45 Petition in G. R. No. 145822
filed by the De Leon Group, the Court nonetheless ordered
that the case be consolidated with Urban Banks own Rule 45
Petition in G. R. No. 145817.218 The Court subsequently gave
due course to both of these petitions.219 In compliance with
the Courts Order,220 Urban Bank221 and the De Leon
Group222 filed their respective Memoranda.
As detailed earlier, the Court granted and approved Urban
Banks supersedeas bond and stayed the execution pending
appeal.
Considering the favorable stay of execution pending appeal,
EIB, as the new owner and successor of Urban Bank,
immediately wrote to tell223 the corporate secretary of MSCI
not to effect the cancellation or transfer of Urban Banks three
MSCI stock certificates previously sold in a public
auction. 224 In reply, MSCI explained that since there was no
injunction or stay order, it had no other option but to comply
with the trial courts Order for the transfer. Eventually,
however, it could not effect the transfer of one of the shares
to Pea because a club share had already been previously
registered in his name, and the clubs bylaws prohibited a
natural person from owning more than one
share.225 Meanwhile, one of the winning bidders in the public
auction sale of the MSCI shares wrote to the latter to demand
that the club share previously owned by Urban Bank be
transferred to him.226
On 04 February 2002, considering the conflicting claims of
Urban Bank (through EIB) and the winning bidders of the club
shares, MSCI filed a Motion for Clarification of the Courts
Resolution staying the execution pending appeal. 227
In its Motion for Clarification dated 06 August 2002, Urban
Bank likewise requested clarification of whether the stay order
suspended, as well, its right to redeem the properties sold at a
public auction.228 The copy of Urban Banks motion for
clarification intended for Pea was mistakenly sent to the
wrong counsel.
In its Resolution dated 13 November 2002, the Court
explained that its earlier stay order prohibited the MSCI from
transferring the shares, and that the one-year period for
redemption of the banks properties was likewise suspended:
WHEREFORE, the Court hereby RESOLVES to clarify that as a
consequence of its approval of the supersedeas bond, the
running of the one-year period for petitioner Urban Bank to
redeem the properties sold at the public auctions held on
October 4, 11 and 25, 2001 as well as the consolidation of the
titles in favor of the buyers, is SUSPENDED OR STAYED. MSCI
is also prohibited from transferring petitioner Urban Banks
MSCI club shares to the winning bidders in the execution sale
held on October 11, 2001.229 (Emphasis supplied)
On 09 December 2002, Pea moved that the Courts
Resolution be recalled, because he was not given an
opportunity to be heard on Urban Banks Motion for
Clarification, which was sent to a different
counsel.230Interposing its objection, the bank argued that the
error in mistakenly sending the Motion for clarification to a
different counsel was by sheer inadvertence, 231 but Pea was
nonetheless aware of the motion, and that the
Courts clarification did not create or diminish his rights in any
case.232
The Motion for Clarification filed by Urban Bank, the Courts
Resolution dated 13 November 2002 and Peas Omnibus
Motion praying for the recall of the said Resolution became
the subject of an administrative case (Administrative Case No.
6332), which was treated as a separate matter and later on
de-consolidated with the instant Petitions.233 The Court had
even called for an executive session234 in which Pea, among
others, appeared and was questioned by the then members of
the Courts First Division, namely retired Chief Justice Hilario
Davide, Justices Jose Vitug, Antonio Carpio and Adolfo Azcuna.
Although the Petitions had earlier been assigned to Justice
Carpio, he has since taken no part in the proceedings of this
case and this resulted in the re-raffling of the Petitions. The

transfer and unloading of the case by the subsequently

assigned Justices as well as Peas numerous motions for
inhibition and/or re-raffle has likewise cause considerable
delay in the disposition of the instant Petitions and the
Administrative Case.
Unimega, which was the winning bidder of some of the
publicly executed condominium units of Urban Bank, moved
to intervene in the case and to have the Courts same
Resolution suspending the one-year period of redemption of
the properties be reconsidered.235 Unimega claimed that
ownership of the banks titles to the 10 condominium units
had already been transferred to the former at the time the
Court issued the Resolution; and, thus, there was no more
execution to be suspended or stayed. Only Urban
Bank236 opposed the motion237 of intervenor Unimega on the
ground that the latter was not a buyer in good faith, and that
the purchase price was grossly disproportional to the fair
market value of the condominium units.238
The Court eventually granted the Motion to Intervene
considering that the intervenors title to the condominium
units purchased at the public auction would be affected,
favorably or otherwise, by the judgment of the Court in this
case. However, it held in abeyance the resolution of
intervenors Motion for Reconsideration, which might preempt
the decision with respect to the propriety of execution
pending appeal.239 Thereafter, the bank adopted its earlier
Opposition to the intervention as its answer to Unimegas
petition-in-intervention.240 Also in answer thereto, the De Leon
Group adopted its earlier Manifestation and Comment.241
Intervenor Unimega then requested that a writ of possession
be issued in its favor covering the 10 condominium units sold
during the public auction.242 The Court required the parties to
file their comments on the request.243The Lim244 and
Borlongan Groups245 manifested separately that they would
not be affected by a resolution of the request of intervenor
Unimega, since the latter was not among the contending
parties to the incident. Pea similarly interposed no objection
to the issuance of the writ of possession.246 In contrast, Urban
Bank opposed the application of Unimega on the ground that
the latter was not entitled to possession of the levied
properties, because the rules of extrajudicial foreclosure were
not applicable to execution sales under Rule 39, and that
intervenor was also not a buyer in good faith. 247 In a similar
vein, the De Leon Group opposed the application for a writ of
possession, and further argued that the Court had already
suspended the running of the one-year period of redemption
in the execution sale.248 Accordingly, intervenor Unimega
countered that the right of redemption of the levied properties
had already expired without having been exercised by the
judgment debtor.249
In summary, the Court shall resolve the substantial issues in
the following: (a) the Petition of Pea (G. R. No. 162562)
assailing the CAs decision on the substantive merits of the
case with respect to his claims of compensation based on an
agency agreement; and (b) the Petitions of Urban Bank (G. R.
No. 145817) and the De Leon Group (G R. No. 145822)
questioning the propriety of the grant of execution pending
appeal.
OUR RULING
I
Pea is entitled to payment for compensation for services
rendered as agent of Urban Bank, but on the basis of the
principles of unjust enrichment and quantum meruit, and not
on the purported oral contract.
The Court finds that Pea should be paid for services rendered
under the agency relationship that existed between him and
Urban Bank based on the civil law principle against unjust
enrichment, but the amount of payment he is entitled to
should be made, again, under the principle against unjust
enrichment and on the basis of quantum meruit.
In a contract of agency, agents bind themselves to render
some service or to do something in representation or on
behalf of the principal, with the consent or authority of the
latter.250 The basis of the civil law relationship of agency is

representation, 251 the elements of which include the

following: (a) the relationship is established by the parties
consent, express or implied; (b) the object is the execution of
a juridical act in relation to a third person; (c) agents act as
representatives and not for themselves; and (d) agents act
within the scope of their authority.252
Whether or not an agency has been created is determined by
the fact that one is representing and acting for another.253 The
law makes no presumption of agency; proving its existence,
nature and extent is incumbent upon the person alleging it.254
With respect to the status of Atty. Peas relationship with
Urban Bank, the trial and the appellate courts made
conflicting findings that shall be reconciled by the Court. On
one end, the appellate court made a definitive ruling that no
agency relationship existed at all between Pea and the bank,
despite the services performed by Pea with respect to the
Pasay property purchased by the bank. Although the Court of
Appeals ruled against an award of agents compensation, it
still saw fit to award Pea with Ph3,000,000 for expenses
incurred for his efforts in clearing the Pasay property of
tenants.255 On the other extreme, the trial court heavily relied
on the sole telephone conversation between Pea and Urban
Banks President to establish that the principal-agent
relationship created between them included an agreement to
pay Pea the huge amount of PhP24,000,000. In its defense,
Urban Bank insisted that Pea was never an agent of the
bank, but an agent of ISCI, since the latter, as seller of the
Pasay property committed to transferring it free from tenants.
Meanwhile, Pea argues on the basis of his successful and
peaceful ejectment of the sub-tenants, who previously
occupied the Pasay property.
Based on the evidence on records and the proceedings below,
the Court concludes that Urban Bank constituted Atty. Pea as
its agent to secure possession of the Pasay property. This
conclusion, however, is not determinative of the basis of the
amount of payment that must be made to him by the bank.
The context in which the agency was created lays the basis
for the amount of compensation Atty. Pea is entitled to.
The transactional history and context of the sale between ISCI
and Urban Bank of the Pasay property, and Atty. Peas
participation in the transfer of possession thereof to Urban
Bank provide crucial linkages that establish the nature of the
relationship between the lawyer and the landowner-bank.
The evidence reveals that at the time that the Contract to Sell
was executed on 15 November 1994, and even when the
Deed of Absolute Sale was executed two weeks later on 29
November 1994, as far as Urban Bank was concerned, Pea
was nowhere in the picture. All discussions and
correspondences were between the President and Corporate
Secretary of Urban Bank, on one hand, and the President of
ISCI, on the other. The title to the Pasay property was
transferred to Urban Bank on 5 December 1994. Interestingly,
Pea testifies that it was only on 19 December 1994 that he
learned that the land had already been sold by ISCI to Urban
Bank, notwithstanding the fact that Pea was a director of
ISCI. Pea was not asked to render any service for Urban
Bank, neither did he perform any service for Urban Bank at
that point.
ISCI undertook in the Contract to Sell, to physically deliver the
property to Urban Bank, within 60 days from 29 November
1994,256 under conditions of "full and actual possession and
control ..., free from tenants, occupants, squatters or other
structures or from any liens, encumbrances, easements or any
other obstruction or impediment to the free use and
occupancy by the buyer of the subject Property or its exercise
of the rights to ownership over the subject Property...." 257 To
guarantee this undertaking, ISCI agreed to the escrow
provision where PhP25,000,000 (which is a little over 10% of
the value of the Pasay property) would be withheld by Urban
Bank from the total contract price until there is full
compliance with this undertaking.
Apparently to ensure that ISCI is able to deliver the property
physically clean to Urban Bank, it was ISCIs president,
Enrique Montilla who directed on 26 November 1994 one of its
directors, Pea, to immediately recover and take possession

of the property upon expiration of the contract of lease on 29

November 1994.258 Pea thus first came into the picture as a
director of ISCI who was constituted as its agent to recover
the Pasay property against the lessee as well as the subtenants who were occupying the property in violation of the
lease agreement.259 He was able to obtain possession of the
property from the lessee on the following day, but the
unauthorized sub-tenants refused to vacate the property.
It was only on 7 December 1994, that Urban Bank was
informed of the services that Pea was rendering for ISCI. The
faxed letter from ISCIs Marilyn Ong reads:
Atty. Magdaleno M. Pea, who has been assigned by
Isabela Sugar Company, Inc., to take charge of
inspecting the tenants would like to request an authority
similar to this from the Bank, as new owners. Can you please
issue something like this today as he needs this.260
Two days later, on 9 December 1994, ISCI sent Urban Bank
another letter that reads:
Dear Mr. Borlongan, I would like to request for an
authorization from Urban Bank as per attached immediately
as the tenants are questioning the authority of the
people there who are helping us to take over
possession of the property. (Emphasis supplied)261
It is clear from the above that ISCI was asking Urban Bank for
help to comply with ISCIs own contractual obligation with the
bank under the terms of the sale of the Pasay property. Urban
Bank could have ignored the request, since it was exclusively
the obligation of ISCI, as the seller, to deliver a clean property
to Urban Bank without any help from the latter.
A full-bodied and confident interpretation of the contracts
between ISCI and Urban Bank should have led the latter to
inform the unauthorized sub-tenants that under its obligation
as seller to Urban Bank, it was under duty and had continuing
authority to recover clean possession of the property, despite
the transfer of title. Yet, what unauthorized sub-tenant,
especially in the kind of operations being conducted within
the Pasay property, would care to listen or even understand
such argument?
Urban Bank thus chose to cooperate with ISCI without
realizing the kind of trouble that it would reap in the process.
In an apparent attempt to allow the efforts of ISCI to secure
the property to succeed, it recognized Peas role in helping
ISCI, but stopped short of granting him authority to act on its
behalf. In response to the two written requests of ISCI, Urban
Bank sent this letter to Pea on 15 December 1994:
This is to advise you that we have noted the engagement of
your services by Isabela Sugar Company to recover
possession of the Roxas Boulevard property formerly covered
by TCT No. 5382, effective November 29, 1994. It is
understood that your services have been contracted by
and your principal remains to be the Isabela Sugar
Company, which as seller of the property and under the
terms of our Contract to Sell dated November 29, 1994, has
committed to deliver the full and actual possession of the said
property to the buyer, Urban Bank, within the stipulated
period. 262 (Emphasis supplied)
Up to this point, it is unmistakable that Urban Bank was
staying clear from making any contractual commitment to
Pea and conveyed its sense that whatever responsibilities
arose in retaining Pea were to be shouldered by ISCI.
According to the RTC-Bago City, in the reversed Decision, Atty.
Pea only knew of the sale between ISCI and Urban Bank at
the time the RTC-Pasay City recalled the TRO and issued a
break-open order:
" when information reached the (Pasay City) judge that the
Pasay property had already been transferred by ISCI to Urban
Bank, the trial court recalled the TRO and issued a break-open
order for the property. According to Pea, it was the first time
that he was apprised of the sale of the land by ISCI and of the
transfer of its title in favor of the bank."263
There is something contradictory between some of the trial
courts factual findings and Peas claim that it was only on 19
December 1994 that he first learned of the sale of the

property to Urban Bank. It is difficult to believe Pea on this

point considering: (1) that he was a board director of ISCI and
a sale of this significant and valuable property of ISCI requires
the approval of the board of directors of ISCI; and (2) that ISCI
twice requested Urban Bank for authority to be issued in his
favor (07 and 9 December 1994), 12 and 10 days before 19
December 1994, since it would be contrary to human
experience for Pea not to have been informed by an officer
of ISCI beforehand that a request for authority for him was
being sent to Urban Bank.
The sequence of fast-moving developments, edged with a
sense of panic, with respect to the decision of the RTC-Pasay
City to recall the temporary restraining order and issue a
break-open order on 19 December 1994 in the First Injunction
Complaint, is highly enlightening to this Court.
First, Pea allegedly called up the president of ISCI, Montilla,
who, according to Pea, confirmed to him that the Pasay
property had indeed been sold to Urban Bank.
Second, Pea allegedly told Montilla that he (Pea) would be
withdrawing his guards from the property because of the
break-open order from the RTC-Pasay City.
Third, Montilla requested Pea to suspend the withdrawal of
the guards while ISCI gets in touch with Urban Bank.
Fourth, apparently in view of Montillas efforts, Bejasa, an
officer of Urban Bank called Pea and according to the latter,
told him that Urban Bank would continue retaining his
services and for him to please continue with his effort to
secure the property.
Fifth, this statement of Bejasa was not enough for Pea and he
insisted that he be enabled to talk with no less than the
President of Urban Bank, Borlongan. At this point, Bejasa gave
him the phone number of Borlongan.
Sixth, immediately after the conversation with Bejasa, Pea
calls Borlongan and tells Borlongan that violence might erupt
in the property because the Pasay City policemen, who were
sympathetic to the tenants, were threatening to force their
way through the property.
At this point, if indeed this conversation took place, which
Borlongan contests, what would have been the response of
Borlongan? Any prudent president of a bank, which has just
purchased a PhP240,000,000 property plagued by
unauthorized and unruly sub-tenants of the previous owner,
would have sought to continue the possession of ISCI, thru
Pea, and he would have agreed to the reasonable requests of
Pea. Borlongan could also have said that the problem of
having the sub-tenants ejected is completely ISCIs and ISCI
should resolve the matter on its own that without bothering
the bank, with all its other problems. But the specter of
violence, especially as night was approaching in a newlybought property of Urban Bank, was not something that any
publicly-listed bank would want publicized. To the extent that
the violence could be prevented by the president of Urban
Bank, it is expected that he would opt to have it prevented.
But could such response embrace the following legal
consequences as Pea claims to have arisen from the
telephone conversation with Borlongan: (1) A contract of
agency was created between Pea and Urban Bank whereby
Borlongan agreed to retain the services of Pea directly; (2)
This contract of agency was to be embodied in a written letter
of authority from Urban Bank; and (3) The agency fee of Pea
was to be 10% of the market value as "attorneys fees and
compensation" and reimbursement of all expenses of Pea
from the time he took over the land until possession is turned
over to Urban Bank.
This Court concludes that the legal consequences described in
statements (1) and (2) above indeed took place and that the
facts support them. However, the evidence does not support
Peas claim that Urban Bank agreed to "attorneys fees and
compensation" of 10% of the market value of the property.
Urban Banks letter dated 19 December 1994 confirmed in no
uncertain terms Peas designation as its authorized
representative to secure and maintain possession of the Pasay
property against the tenants. Under the terms of the letter,
petitioner-respondent bank confirmed his engagement (a) "to

hold and maintain possession" of the Pasay property; (b) "to

protect the same from former tenants, occupants or any other
person who are threatening to return to the said property
and/or interfere with your possession of the said property for
and in our behalf"; and (c) to represent the bank in any
instituted court action intended to prevent any intruder from
entering or staying in the premises.264
These three express directives of petitioner-respondent banks
letter admits of no other construction than that a specific and
special authority was given to Pea to act on behalf of the
bank with respect to the latters claims of ownership over the
property against the tenants. Having stipulated on the due
execution and genuineness of the letter during pretrial,265 the
bank is bound by the terms thereof and is subject to the
necessary consequences of Peas reliance thereon. No
amount of denial can overcome the presumption that we give
this letter that it means what it says.
In any case, the subsequent actions of Urban Bank resulted in
the ratification of Peas authority as an agent acting on its
behalf with respect to the Pasay property. By ratification, even
an unauthorized act of an agent becomes an authorized act of
the principal.266
Both sides readily admit that it was Pea who was responsible
for clearing the property of the tenants and other occupants,
and who turned over possession of the Pasay property to
petitioner-respondent bank.267 When the latter received full
and actual possession of the property from him, it did not
protest or refute his authority as an agent to do so. Neither
did Urban Bank contest Peas occupation of the premises, or
his installation of security guards at the site, starting from the
expiry of the lease until the property was turned over to the
bank, by which time it had already been vested with
ownership thereof. Furthermore, when Pea filed the Second
Injunction Complaint in the RTC-Makati City under the name of
petitioner-respondent bank, the latter did not interpose any
objection or move to dismiss the complaint on the basis of his
lack of authority to represent its interest as the owner of the
property. When he successfully negotiated with the tenants
regarding their departure from its Pasay property, still no
protest was heard from it. After possession was turned over to
the bank, the tenants accepted PhP1,500,000 from Pea, in
"full and final settlement" of their claims against Urban Bank,
and not against ISCI.268
In all these instances, petitioner-respondent bank did not
repudiate the actions of Pea, even if it was fully aware of his
representations to third parties on its behalf as owner of the
Pasay property. Its tacit acquiescence to his dealings with
respect to the Pasay property and the tenants spoke of its
intent to ratify his actions, as if these were its own. Even
assuming arguendo that it issued no written authority, and
that the oral contract was not substantially established, the
bank duly ratified his acts as its agent by its acquiescence and
acceptance of the benefits, namely, the peaceful turnover of
possession of the property free from sub-tenants.
Even if, however, Pea was constituted as the agent of Urban
Bank, it does not necessarily preclude that a third party would
be liable for the payment of the agency fee of Pea. Nor does
it preclude the legal fact that Pea while an agent of Urban
Bank, was also an agent of ISCI, and that his agency from the
latter never terminated. This is because the authority given to
Pea by both ISCI and Urban Bank was common to secure
the clean possession of the property so that it may be turned
over to Urban Bank. This is an ordinary legal phenomenon
that an agent would be an agent for the purpose of pursuing a
shared goal so that the common objective of a transferor and
a new transferee would be met.
Indeed, the Civil Code expressly acknowledged instances
when two or more principals have granted a power of attorney
to an agent for a common transaction.269 The agency
relationship between an agent and two principals may even
be considered extinguished if the object or the purpose of the
agency is accomplished.270 In this case, Peas services as an
agent of both ISCI and Urban Bank were engaged for one
shared purpose or transaction, which was to deliver the
property free from unauthorized sub-tenants to the new owner

 a task that Pea was able to achieve and is entitled to

receive payment for.
That the agency between ISCI and Pea continued, that ISCI is
to shoulder the agency fee and reimbursement for costs of
Pea, and that Urban Bank never agreed to pay him a 10%
agency fee is established and supported by the following:
First, the initial agency relationship between ISCI and Pea
persisted. No proof was ever offered that the letter of 26
November 1994 of Mr. Montilla of ISCI to Pea, for the latter
"to immediately recover and take possession of the property
upon expiration of the contract of lease on 29 November
1994" was terminated. It is axiomatic that the appointment of
a new agent for the same business or transaction revokes the
previous agency from the day on which notice thereof was
given to the former agent.271 If it is true that the agency
relationship was to be borne by Urban Bank alone, Pea
should have demonstrated that his previous agency
relationship with ISCI is incompatible with his new relationship
with Urban Bank, and was thus terminated.
Second, instead, what is on the record is that ISCI confirmed
the continuation of this agency between Pea and itself and
committed to pay for the services of Pea, in its letter to
Urban Bank dated 19 December 1994 which reads:
In line with our warranties as the Seller of the said property
and our undertaking to deliver to you the full and actual
possession and control of said property, free from tenants,
occupants or squatters and from any obstruction or
impediment to the free use and occupancy of the property by
Urban Bank, we have engaged the services of Atty. Magdaleno
M. Pea to hold and maintain possession of the property and
to prevent the former tenants or occupants from entering or
returning to the premises. In view of the transfer of the
ownership of the property to Urban Bank, it may be necessary
for Urban Bank to appoint Atty. Pea likewise as its authorized
representative for purposes of holding/maintaining continued
possession of the said property and to represent Urban Bank
in any court action that may be instituted for the
abovementioned purposes.
It is understood that any attorneys fees, cost of litigation and
any other charges or expenses that may be incurred relative
to the exercise by Atty. Pea of his abovementioned duties
shall be for the account of Isabela Sugar Company and any
loss or damage that may be incurred to third parties shall be
answerable by Isabela Sugar Company.272 (Emphasis supplied)
Third, Pea has never shown any written confirmation of his
10% agency fee, whether in a note, letter, memorandum or
board resolution of Urban Bank. An agency fee amounting to
PhP24,000,000 is not a trifling amount, and corporations do
not grant their presidents unilateral authority to bind the
corporation to such an amount, especially not a banking
corporation which is closely supervised by the BSP for being a
business seriously imbued with public interest. There is
nothing on record except the self-serving testimony of Pea
that Borlongan agreed to pay him this amount in the
controverted telephone conversation.
Fourth, while ordinarily, uncontradicted testimony will be
accorded its full weight, we cannot grant full probative value
to the testimony of Pea for the following reasons: (a) Pea is
not a credible witness for testifying that he only learned of the
sale of the property of 19 December 1994 when the acts of
ISCI, of Urban Bank and his own up to that point all indicated
that he must have known about the sale to Urban Bank; and
(b) it is incredible that Urban Bank will agree to add another
PhP24,000,000 to the cost of the property by agreeing to the
agency fee demanded by Pea. No prudent and reasonable
person would agree to expose his corporation to a new
liability of PhP24,000,000 even if, in this case, a refusal would
lead to the Pasay City policemen and unauthorized subtenants entering the guarded property and would possibly
erupt in violence.
Peas account of an oral agreement with Urban Bank for the
payment of PhP24,000,000 is just too much for any court to
believe. Whatever may be the agreement between Pea and
ISCI for compensation is not before this Court. This is not to

say, however, that Urban Bank has no liability to Pea. It has.

Payment to him is required because the Civil Code demands
that no one should be unjustly enriched at the expense of
another. This payment is to be measured by the standards of
quantum meruit.
Amount of Compensation
Agency is presumed to be for compensation. But because in
this case we find no evidence that Urban Bank agreed to pay
Pea a specific amount or percentage of amount for his
services, we turn to the principle against unjust enrichment
and on the basis of quantum meruit.
Since there was no written agreement with respect to the
compensation due and owed to Atty. Pea under the letter
dated 19 December 1994, the Court will resort to determining
the amount based on the well-established rules on quantum
meruit.
Agency is presumed to be for compensation. 273 Unless the
contrary intent is shown, a person who acts as an agent does
so with the expectation of payment according to the
agreement and to the services rendered or results
effected.274 We find that the agency of Pea comprised of
services ordinarily performed by a lawyer who is tasked with
the job of ensuring clean possession by the owner of a
property. We thus measure what he is entitled to for the legal
services rendered.
A stipulation on a lawyers compensation in a written contract
for professional services ordinarily controls the amount of fees
that the contracting lawyer may be allowed to collect, unless
the court finds the amount to be unconscionable. 275 In the
absence of a written contract for professional services, the
attorneys fees are fixed on the basis of quantum
meruit,276 i.e., the reasonable worth of the attorneys
services.277 When an agent performs services for a principal at
the latters request, the law will normally imply a promise on
the part of the principal to pay for the reasonable worth of
those services.278 The intent of a principal to compensate the
agent for services performed on behalf of the former will be
inferred from the principals request for the agents. 279
In this instance, no extra-ordinary skills employing advanced
legal training nor sophisticated legal maneuvering were
required to be employed in ejecting 23 sub-tenants who have
no lease contract with the property owner, and whose only
authority to enter the premises was unlawfully given by a
former tenant whose own tenancy has clearly expired. The 23
sub-tenants operated beer houses and nightclubs, ordinary
retail establishments for which no sophisticated structure
prevented easy entry. After Pea succeeded in locking the
gate of the compound, the sub-tenants would open the
padlock and resume their businesses at night. Indeed, it
appears that only security guards, chains and padlocks were
needed to keep them out. It was only the alleged connivance
of Pasay City policemen that Peas ability to retain the
possession was rendered insecure. And how much did it take
Pea to enter into a settlement agreement with them and
make all these problems go away? By Peas own account,
PhP1,500,000 only. That means that each tenant received an
average of PhP65,217.40 only. Surely, the legal services of
Pea cannot be much more than what the sub-tenants were
willing to settle for in the first place. We therefore award him
the equivalent amount of PhP1,500,000 for the legal and
other related services he rendered to eject the illegally
staying tenants of Urban Banks property.
The Court of Appeals correctly reversed the trial court and
found it to have acted with grave abuse of discretion in
granting astounding monetary awards amounting to a total of
PhP28,500,000 without any basis.280 For the lower court to
have latched on to the self-serving claims of a telephone
agreement as sufficient support for extending a multi-million
peso award is highly irregular. Absent any clear basis for the
amount of the lawyers compensation, the trial court should
have instinctively resorted to quantum meruit, instead of
insisting on a figure with circumstantial and spurious
justification.

We cannot also agree with the Decision penned by Judge

Edgardo L. Catilo characterizing Penas 10% fee as believable
because it is nearly congruent to the PhP25 Million retention
money held in escrow for ISCI until a clean physical and legal
turn-over of the property is effected:
We now come to the reasonableness of the compensation
prayed for by the plaintiff which is 10% of the current market
value which defendants claim to be preposterous and
glaringly excessive. Plaintiff [Pea] testified that defendant
Borlongan agreed to such an amount and this has not been
denied by Ted Borlongan. The term "current market value of
the property" is hereby interpreted by the court to mean the
current market value of the property at the time the contract
was entered into. To interpret it in accordance with the
submission of the plaintiff that it is the current market value of
the property at the time payment is made would be
preposterous. The only evidence on record where the court
can determine the market value of the property at the time
the contract of agency was entered into between plaintiff and
defendant is the consideration stated in the sales agreement
between Isabela Sugar Company, Inc. and Urban bank which
is P241,612,000.00. Ten percent of this amount is a
reasonable compensation of the services rendered by the
plaintiff considering the "no cure, no pay" arrangement
between the parties and the risks which plaintiff had to
undertake.281
In the first place, the Decision of Judge Catilo makes Peas
demand of an agency fee of PhP24 Million, an additional
burden on Urban Bank. The Decision does not make the
retention money responsible for the same, or acquit Urban
Bank of any liability to ISCI if it pays the PhP24 Million directly
to Pena instead of ISCI. In the second place, the amount of
money that is retained by transferees of property transactions
while the transferor is undertaking acts to ensure a clean and
peaceful transfer to the transferee does not normally
approximate a one-to-one relationship to the services of
ejecting unwanted occupants. They may be inclusive of other
costs, and not only legal costs, with enough allowances for
contingencies, and may take into consideration other
liabilities as well. The amount can even be entirely arbitrary,
and may have been caused by the practice followed by Urban
Bank as advised by its officers and lawyers or by industry
practice in cases where an expensive property has some
tenancy problems. In other words, Judge Catilos statement is
a non sequitur, is contrary to normal human experience, and
sounds like an argument being made to fit Peas demand for
a shocking pay-out.
In any case, 10% of the purchase price of the Pasay property
a staggering PhP24,161,200 is an unconscionable amount,
which we find reason to reduce. Neither will the Court accede
to the settlement offer of Pea to Urban Bank of at least
PhP38,000,000 for alleged legal expenses incurred during the
course of the proceedings,282 an amount that he has not
substantiated at any time.
Lawyering is not a business; it is a profession in which duty to
public service, not money, is the primary consideration. 283 The
principle of quantum meruit applies if lawyers are employed
without a price agreed upon for their services, in which case
they would be entitled to receive what they merit for their
services, or as much as they have earned.284 In fixing a
reasonable compensation for the services rendered by a
lawyer on the basis of quantum meruit, one may consider
factors such as the time spent and extent of services
rendered; novelty and difficulty of the questions involved;
importance of the subject matter; skill demanded; probability
of losing other employment as a result of acceptance of the
proffered case; customary charges for similar services;
amount involved in the controversy and the resulting benefits
for the client; certainty of compensation; character of
employment; and professional standing of the lawyer. 285
Hence, the Court affirms the appellate courts award of
PhP3,000,000 to Pea, for expenses incurred corresponding to
the performance of his services. An additional award of
PhP1,500,000 is granted to him for the services he performed

as a lawyer in securing the rights of Urban Bank as owner of

the Pasay property.
II
The corporate officers and directors of Urban Bank are not
solidarily or personally liable with their properties for the
corporate liability of Urban Bank to Atty. Pea.
The obligation to pay Peas compensation, however, falls
solely on Urban Bank. Absent any proof that individual
petitioners as bank officers acted in bad faith or with gross
negligence or assented to a patently unlawful act, they cannot
be held solidarily liable together with the corporation for
services performed by the latters agent to secure possession
of the Pasay property. Thus, the trial court had indeed
committed grave abuse of discretion when it issued a ruling
against the eight individual defendant bank directors and
officers and its Decision should be absolutely reversed and set
aside.
A corporation, as a juridical entity, may act only through its
directors, officers and employees.286 Obligations incurred as a
result of the acts of the directors and officers as corporate
agents are not their personal liabilities but those of the
corporation they represent.287 To hold a director or an officer
personally liable for corporate obligations, two 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.288 "To hold a director, a trustee or an officer personally
liable for the debts of the corporation and, thus, pierce the
veil of corporate fiction, bad faith or gross negligence by the
director, trustee or officer in directing the corporate affairs
must be established clearly and convincingly."289
Pea failed to allege and convincingly show that individual
defendant bank directors and officers assented to patently
unlawful acts of the bank, or that they were guilty of gross
negligence or bad faith. Contrary to his claim, the
Complaint290 in the lower court never alleged that individual
defendants acquiesced to an unlawful act or were grossly
negligent or acted in bad faith.291 Neither is there any specific
allegation of gross negligence or action in bad faith that is
attributable to the individual defendants in performance of
their official duties.
In any event, Pea did not adduce any proof that the eight
individual defendants performed unlawful acts or were grossly
negligent or in bad faith. Aside from the general allegation
that they were corporate officers or members of the board of
directors of Urban Bank, no specific acts were alleged and
proved to warrant a finding of solidary liability. At most,
petitioners Borlongan, Bejasa and Manuel were identified as
those who had processed the agency agreement with Pea
through their telephone conversations with him and/or written
authorization letter.
Aside from Borlongan, Bejasa and Manuel, Atty. Pea in the
complaint pointed to no specific act or circumstance to justify
the inclusion of Delfin C. Gonzalez, Jr., Benjamin L. de Leon, P.
Siervo H. Dizon, Eric L. Lee, and Ben T. Lim, Jr., except for the
fact that they were members of the Board of Directors of
Urban Bank at that time. That the five other members of the
Board of Directors were excluded from Peas complaint
highlights the peculiarity of their inclusion. What is more, the
complaint mistakenly included Ben Y. Lim, Jr., who had not
even been a member of the Board of Directors of Urban Bank.
In any case, his father and namesake, Ben T. Lim, Sr., who had
been a director of the bank at that time, had already passed
away in 1997.
In ruling for the solidary liability of the other bank directors,
the decision of the trial court hinged solely on the purported
admission of Arturo Manuel, Jr., that the transactions with Atty.
Pea were approved by the Board of Directors:
In this case, plaintiff testified as to the personal participation
of defendants Ted Borlongan and Corazon Bejasa in the
subject transaction. On the other hand, with respect to the
other defendants, it was the defendants themselves, through

witness Arturo Manuel, Jr., who admitted that all the

transactions involved in this case were approved by the board
of directors. Thus, the court has sufficient basis to hold the
directors jointly and severally liable with defendant Urban
Bank, Inc.292 (Emphasis supplied)
The Decision of the RTC-Bago City must be utterly rejected on
this point because its conclusion of any cause of action, much
less actual legal liability on the part of Urban Banks corporate
officers and directors are shorn of any factual finding. That
they assented to the transactions of the bank with respect to
Atty. Peas services without any showing that these
corporate actions were patently unlawful or that the officers
were guilty of gross negligence or bad faith is insufficient to
hold them solidarily liable with Urban Bank. It seems absurd
that the trial court will hold the impleaded selected members
of the Board of Directors only, but not the others who also
purportedly approved the transactions. Neither is the reason
behind the finding of "solidariness" with Urban Bank in such
liability explained at all. It is void for completely being devoid
of facts and the law on which the finding of liability is based.
The Court of Appeals correctly rejected the claim of personal
liability against the individual petitioners when it held as
follows:
The plaintiff-appellees complaint before the court a quo does
not point to any particular act of either one or all of the
defendants-appellants that will subject them to personal
liability. His complaint merely asserts that defendant
Borlongan and Atty. Bejasa acted for and in behalf of Urban
Bank in securing his services in protecting the banks newly
acquired property. Hence, We cannot allow the same. 293
Pea had argued that individual defendant bank directors and
officers should be held personally and solidarily liable with
petitioner-respondent bank, since they failed to argue for
limited corporate liability.294 The trial court subscribed to his
reasoning and held that the failure to resort to the said
defense constituted a waiver on the part of individual
defendants.295 The Court is not persuaded.
As the complainant on the trial court level, Pea carried the
burden of proving that the eight individual defendants
performed specific acts that would make them personally
liable for the obligations of the corporation. This he failed to
do. He cannot capitalize on their alleged failure to offer a
defense, when he had not discharged his responsibility of
establishing their personal liabilities in the first place. This
Court cannot sustain the individual liabilities of the bank
officers when Pea, at the onset, has not persuasively
demonstrated their assent to patently unlawful acts of the
bank, or that they were guilty of gross negligence or bad faith,
regardless of the weaknesses of the defenses raised. This is
too basic a requirement that this Court must demand
sufficient proof before we can disregard the separate legal
personality of the corporation from its offices.
Hence, only Urban Bank, not individual defendants, is liable to
pay Peas compensation for services he rendered in securing
possession of the Pasay property. Its liability in this case is,
however, without prejudice to its possible claim against ISCI
for reimbursement under their separate agreements.
III
Considering the absolute nullification of the trial courts
Decision, the proceedings arising from the execution pending
appeal based on the said Decision is likewise completely
vacated.
Since the trial courts main Decision awarding PhP28,500,000
in favor of Pea has been nullified above, the execution
pending appeal attendant thereto, as a result, no longer has
any leg to stand on and is thus completely vacated.
To recall, prior to the filing of Urban Bank of its notice of
appeal in the main case,296 Pea moved on 07 June 1999 for
execution pending appeal297 of the Decision,298 which had
awarded him a total of PhP28,500,000 in compensation and
damages.299 In supporting his prayer for discretionary
execution, Pea cited no other reason than the pending
separate civil action for collection filed against him by a
creditor, who was demanding payment of a PhP3,000,000

loan.300 According to him, he had used the proceeds of the

loan for securing the banks Pasay property.301 In opposition to
the motion, Urban Bank countered that the collection case
was not a sufficient reason for allowing execution pending
appeal.302
Favorably acting on Peas motion, the RTC-Bago City, through
Judge Henry J. Trocino,303 issued a Special Order authorizing
execution pending appeal on the basis of Peas indebtedness
to his creditor-friend.304 In accordance with this Special Order,
Atty. Josephine Mutia-Hagad, the clerk of court and ex officio
sheriff, expeditiously issued a Writ of Execution on the same
day.305 The trial courts Special Order and Writ of Execution
were the subjects of a Rule 65 Petition filed by Urban Bank
with the CA.306
Both the Special Order and Writ of Execution are nullified for
two reasons:
(1) Since the Decision of the RTC-Bago City is
completely vacated, all its issuances pursuant to the
Decision, including the Special Order and the Writ of
Execution are likewise vacated; and
(2) The Special Order authorizing execution pending
appeal based on the collection suit filed against Atty.
Pea had no basis under the Rules of Court, and the
same infirmity thus afflicts the Writ of Execution
issued pursuant thereto.
Since the Decision of the RTC-Bago City is vacated, all orders
and writs pursuant thereto are likewise vacated.
Considering that the Special Order and Writ of Execution was
a result of the trial courts earlier award of PhP28,500,000, the
nullification or complete reversal of the said award necessarily
translates to the vacation as well of the processes arising
therefrom, including all the proceedings for the execution
pending appeal.
Considering the unconscionable award given by the trial court
and the unjustified imposition of solidary liability against the
eight bank officers, the Court is vacating the Decision of the
RTC-Bago City Decision. The trial court erroneously made
solidarily liable Urban Banks directors and officers without
even any allegations, much less proof, of any acts of bad
faith, negligence or malice in the performance of their duties.
In addition, the trial court mistakenly anchored its astounding
award of damages amounting PhP28,500,000 on the basis of
the mere account of Atty. Pea of a telephone conversation,
without even considering the surrounding circumstances and
the sheer disproportion to the legal services rendered to the
bank.
A void judgment never acquires finality.307 In contemplation of
law, that void decision is deemed non-existent.308Quod nullum
est, nullum producit effectum.309 Hence, the validity of the
execution pending appeal will ultimately hinge on the courts
findings with respect to the decision in which the execution is
based.
Although discretionary execution can proceed independently
while the appeal on the merits is pending, the outcome of the
main case will greatly impact the execution pending appeal,
especially in instances where as in this case, there is a
complete reversal of the trial courts decision. Thus, if the
decision on the merits is completely nullified, then the
concomitant execution pending appeal is likewise without any
effect. In fact, the Rules of Court expressly provide for the
possibility of reversal, complete or partial, of a final judgment
which has been executed on appeal.310 Precisely, the
execution pending appeal does not bar the continuance of the
appeal on the merits, for the Rules of Court explicitly provide
for restitution according to equity and justice in case the
executed judgment is reversed on appeal.311
Considering that the Decision of the RTC-Bago City has been
completely vacated and declared null and void, it produces no
effect whatsoever. Thus, the Special Order and its
concomitant Writ of Execution pending appeal is likewise
annulled and is also without effect. Consequently, all levies,
garnishment and sales executed pending appeal are declared
null and void, with the concomitant duty of restitution under
the Rules of Court, as will be discussed later on.

In any case, the trial courts grant of execution pending

appeal lacks sufficient basis under the law and jurisprudence.
We rule that the pendency of a collection suit by a third party
creditor which credit was obtained by the winning judgment
creditor in another case, is not a sufficiently good reason to
allow execution pending appeal as the Rules of Court provide.
Execution pending appeal is an extraordinary remedy allowed
only when there are reasons to believe that the judgment
debtor will not be able to satisfy the judgment debt if the
appeals process will still have to be awaited. It requires proof
of circumstances such as insolvency or attempts to escape,
abscond or evade a just debt.
In Florendo v. Paramount Insurance, Corp.,312 the Court
explained that the execution pending appeal is an exception
to the general rule that execution issues as a matter of right,
when a judgment has become final and executory:
As such exception, the courts discretion in allowing it must be
strictly construed and firmly grounded on the existence of
good reasons. "Good reasons," it has been held, consist of
compelling circumstances that justify immediate execution
lest the judgment becomes illusory. The circumstances must
be superior, outweighing the injury or damages that might
result should the losing party secure a reversal of the
judgment. Lesser reasons would make of execution pending
appeal, instead of an instrument of solicitude and justice, a
tool of oppression and inequity. (Emphasis supplied)
Indeed, the presence or the absence of good reasons remains
the yardstick in allowing the remedy of execution pending
appeal, which should consist of exceptional circumstances of
such urgency as to outweigh the injury or damage that the
losing party may suffer, should the appealed judgment be
reversed later.313 Thus, the Court held that even the financial
distress of the prevailing company is not sufficient reason to
call for execution pending appeal:
In addressing this issue, the Court must stress that the
execution of a judgment before its finality must be founded
upon good reasons. The yardstick remains the presence or the
absence of good reasons consisting of exceptional
circumstances of such urgency as to outweigh the injury or
damage that the losing party may suffer, should the appealed
judgment be reversed later. Good reason imports a superior
circumstance that will outweigh injury or damage to the
adverse party. In the case at bar, petitioner failed to show
"paramount and compelling reasons of urgency and justice."
Petitioner cites as good reason merely the fact that "it is a
small-time building contractor that could ill-afford the
protracted delay in the reimbursement of the advances it
made for the aforesaid increased costs of . . . construction of
the [respondent's] buildings."
Petitioner's allegedly precarious financial condition, however,
is not by itself a jurisprudentially compelling circumstance
warranting immediate execution. The financial distress of a
juridical entity is not comparable to a case involving a natural
person such as a very old and sickly one without any
means of livelihood, an heir seeking an order for support and
monthly allowance for subsistence, or one who dies.
Indeed, the alleged financial distress of a corporation does not
outweigh the long standing general policy of enforcing only
final and executory judgments. Certainly, a juridical entity like
petitioner corporation has, other than extraordinary
execution, alternative remedies like loans, advances, internal
cash generation and the like to address its precarious financial
condition. (Emphasis supplied)
In Philippine Bank of Communications v. Court of
Appeals,314 the Court denied execution pending appeal to a
juridical entity which allegedly was in financial distress and
was facing civil and criminal suits with respect to the
collection of a sum of money. It ruled that the financial
distress of the prevailing party in a final judgment which was
still pending appeal may not be likened to the situation of a
natural person who is ill, of advanced age or dying as to justify
execution pending appeal:
It is significant to stress that private respondent Falcon is a
juridical entity and not a natural person. Even assuming that it

was indeed in financial distress and on the verge of facing civil

or even criminal suits, the immediate execution of a judgment
in its favor pending appeal cannot be justified as Falcons
situation may not be likened to a case of a natural person who
may be ill or may be of advanced age. Even the danger of
extinction of the corporation will not per se justify a
discretionary execution unless there are showings of other
good reasons, such as for instance, impending insolvency of
the adverse party or the appeal being patently dilatory. But
even as to the latter reason, it was noted in Aquino vs.
Santiago (161 SCRA 570 [1988]), that it is not for the trial
judge to determine the merit of a decision he rendered as this
is the role of the appellate court. Hence, it is not within
competence of the trial court, in resolving a motion for
execution pending appeal, to rule that the appeal is patently
dilatory and rely on the same as its basis for finding good
reason to grant the motion. Only an appellate court can
appreciate the dilatory intent of an appeal as an additional
good reason in upholding an order for execution pending
appeal which may have been issued by the trial court for
other good reasons, or in cases where the motion for
execution pending appeal is filed with the appellate court in
accordance with Section 2, paragraph (a), Rule 39 of the 1997
Rules of Court.
What is worse, only one case was actually filed against Falcon
and this is the complaint for collection filed by Solidbank. The
other cases are "impending", so it is said. Other than said
Solidbank case, Falcons survival as a body corporate cannot
be threatened by anticipated litigation. This notwithstanding,
and even assuming that there was a serious threat to Falcons
continued corporate existence, we hold that it is not
tantamount nor even similar to an impending death of a
natural person. The material existence of a juridical person is
not on the same plane as that of human life. The survival of a
juridical personality is clearly outweighed by the long standing
general policy of enforcing only final and executory
judgments. (Emphasis supplied)
In this case, the trial court supported its discretionary grant of
execution based on the alleged collection suit filed against
Pea by his creditor friend for PhP3,000,000:
It has been established that the plaintiff secured the loan for
the purpose of using the money to comply with the mandate
of defendant bank to hold and maintain possession of the
parcel of land in Pasay City and to prevent intruders and
former tenants from occupying the said property. The purpose
of the loan was very specific and the same was made known
to defendant bank through defendant Teodoro Borlongan. The
loan was not secured for some other purpose. Truth to tell, the
plaintiff accomplished his mission in clearing the property of
tenants, intruders and squatters, long before the deadline
given him by the defendant bank. The plaintiff was assured by
no less than the President of defendant bank of the
availability of funds for his compensation and reimbursement
of his expenses. Had he been paid by defendant bank soon
after he had fulfilled his obligation, he could have settled his
loan obligation with his creditor.
Defendants were benefitted by the services rendered by the
plaintiff. While plaintiff has complied with the undertaking, the
defendants, however, failed to perform their obligation to the
plaintiff.
The plaintiff stands to suffer greatly if the collection case
against him is not addressed. Firstly, as shown in Exhibit "C",
plaintiffs total obligation with Roberto Ignacio as of May 1999
is PhP24,192,000.00. This amount, if left unpaid, will continue
to increase due to interest charges being imposed by the
creditor to the prejudice of plaintiff. Secondly, a preliminary
attachment has already been issued and this would restrict
the plaintiff from freely exercising his rights over his property
during the pendency of the case.
In their opposition, defendants claim that plaintiffs
indebtedness is a ruse, however, defendants failed to adduce
evidence to support its claim.
The court finds that the pendency of the case for collection of
money against plaintiff is a good reason for immediate
execution. 315

The mere fact that Atty. Pea was already subjected to a

collection suit for payment of the loan proceeds he used to
perform his services for Urban Bank is not an acceptable
reason to order the execution pending appeal against the
bank. Financial distress arising from a lone collection suit and
not due to the advanced age of the party is not an urgent or
compelling reason that would justify the immediate levy on
the properties of Urban Bank pending appeal. That Pea
would made liable in the collection suit filed by his creditorfriend would not reasonably result in rendering illusory the
final judgment in the instant action for agents compensation.
Peas purported difficulty in paying the loan proceeds used to
perform his services does not outweigh the injury or damages
that might result should Urban Bank obtain a reversal of the
judgment, as it did in this case. Urban Bank even asserts that
the collection suit filed against Pea was a mere ruse to
provide justification for the execution pending appeal, no
matter how flimsy.316 As quoted above, the trial court noted
Atty. Peas total obligation to his creditor-friend as of May
1999 was already the incredible amount of PhP24,192,000.00,
even when the Complaint dated 03 April 1999 itself, which
spawned the collection suit included only a prayer for
payment of PhP3,500,000 with attorneys fees of
PhP100,000.317 It seems absurd that Atty. Pea would agree to
obtaining a loan from his own friend, when the Promissory
Notes provided for a penalty of 5% interest per month or 60%
per annum for delay in the payment.318 It sounds more like a
creative justification of the immediate execution of the
PhP28.5 Million judgment notwithstanding the appeal.
In fact, the Court of Appeals noted Atty. Peas admission of
sufficient properties to answer for any liability arising from the
collection suit arising from his creditor-friend. In initially
denying the execution pending appeal, the appellate court
held that:
On the other hand, private respondents claim that the only
way he could pay his indebtedness to Roberto Ignacio is
through the money that he expects to receive from petitioners
in payment of his services is belied by his testimony at the
hearing conducted by the trial court on the motion for
execution pending appeal wherein petitioners were able to
secure an admission from him that he has some assets which
could be attached by Roberto Ignacio and that he would
probably have other assets left even after the attachment. 319
Hence, to rule that a pending collection suit against Atty.
Pea, which has not been shown to result in his insolvency,
would be to encourage judgment creditors to indirectly and
indiscriminately instigate collection suits or cite pending
actions, related or not, as a "good reason" to routinely avail of
the remedy of discretionary execution.320 As an exception to
the general rule on execution after final and executory
judgment, the reasons offered by Atty. Pea to justify
execution pending appeal must be strictly construed.
Neither will the Court accept the trial courts unfounded
assumption that Urban Banks appeal was merely dilatory, as
in fact, the PhP28,500,000 award given by the trial court was
overturned by the appellate court and eventually by this
Court.
Moreover, at the time the Special Order of Judge Henry
Trocio of the RTC-Bago City came out in 1999, Urban Bank
had assets worth more than PhP11 Billion and had a net worth
of more than PhP2 Billion. There was no reason then to
believe that Urban Bank could not satisfy a judgment of
PhP28,500,000, a sum that was only 1% of its net worth, and
1/5 of 1% of its total assets of PhP11,933,383,630.321 Urban
Bank was even given a Solvency, Liquidity and Management
Rating of 82.89 over 100 by no less than the BSP322 and
reportedly had liquid assets amounting to PhP2,036,878. 323 In
fact, no allegation of impending insolvency or attempt to
abscond was ever raised by Atty. Pea and yet, the trial court
granted execution pending appeal.
Since the original order granting execution pending appeal
was completely void for containing no justifiable reason, it
follows that any affirmance of the same by the Court of
Appeals is likewise void.

The Decision of the Court of Appeals in the case docketed as

CA-G.R. SP No. 55667, finding a new reason for granting
execution pending appeal, i.e., the receivership of Urban
Bank, is likewise erroneous, notwithstanding this Courts
ruling in Lee v. Trocino.324 In accordance with the subsequent
Resolution of the Court in abovementioned case of Lee v.
Trocino,325 we directly resolve the issue of the insufficiency of
the reasons that led to the grant of execution pending appeal.
In cases where the two or more defendants are made
subsidiarily or solidarily liable by the final judgment of the trial
court, discretionary execution can be allowed if all the
defendants have been found to be insolvent. Considering that
only Urban Bank, and not the other eight individual
defendants, was later on considered by the Court of Appeals
to have been "in danger of insolvency," is not sufficient reason
to allow execution pending appeal, since the liability for the
award to Pea was made (albeit, mistakenly) solidarily liable
together with the bank officers.
In Flexo Manufacturing Corp. v. Columbus Food, Inc., and
Pacific Meat Company, Inc.,326 both Columbus Food, Inc.,
(Columbus Food) and Pacific Meat Company, Inc., (Pacific
Meat) were found by the trial court therein to be solidarily
liable to Flexo Manufacturing, Inc., (Flexo Manufacturing) for
the principal obligation of PhP2,957,270.00. The lower court
also granted execution pending appeal on the basis of the
insolvency of Columbus Food, even if Pacific Meat was not
found to be insolvent. Affirming the reversal ordered by the
Court of Appeals, this Court ruled that since there was another
party who was solidarily liable to pay for the judgment debt,
aside from the insolvent Columbus Food, there was no good
reason to allow the execution pending appeal:
Regarding the state of insolvency of Columbus, the case of
Philippine National Bank v. Puno, held:
"While this Court in several cases has held that insolvency of
the judgment debtor or imminent danger thereof is a good
reason for discretionary execution, otherwise to await a final
and executory judgment may not only diminish but may
nullify all chances for recovery on execution from said
judgment debtor, We are constrained to rule otherwise in this
particular case. In the aforecited cases, there was either only
one defeated party or judgment debtor who was, however,
insolvent or there were several such parties but all were
insolvent, hence the aforesaid rationale for discretionary
execution was present. In the case at bar, it is undisputed
that, assuming MMIC is insolvent, its co-defendant PNB is not.
It cannot, therefore, be plausibly assumed that the judgment
might become illusory; if MMIC cannot satisfy the judgment,
PNB will answer for it. It will be observed that, under the
dispositive portion of the judgment hereinbefore quoted, the
liability of PNB is either subsidiary or solidary.
Thus, when there are two or more defendants and one is not
insolvent, the insolvency of a co-defendant is not a good
reason to justify execution pending appeal if their liability
under the judgment is either subsidiary or solidary. In this
case, Pacific was adjudged to be solidarily liable with
Columbus. Therefore, the latter is not the only party that may
be answerable to Flexo. Its insolvency does not amount to a
good reason to grant execution pending appeal. (Emphasis
supplied)
Similarly, the trial court in this case found Urban Bank and all
eight individual bank officers solidarily liable to Atty. Pea for
the payment of the PhP28,500,000 award. Hence, had the
judgment been upheld on appeal, Atty. Pea could have
demanded payment from any of the nine defendants. Thus, it
was a mistake for the Court of Appeals to have affirmed
execution pending appeal based solely on the receivership of
Urban Bank, when there were eight other individual
defendants, who were solidarily liable but were not shown to
have been insolvent. Since Urban Banks co-defendants were
not found to have been insolvent, there was no good reason
for the Court of Appeals to immediately order execution
pending appeal, since Atty. Peas award could have been
satisfied by the eight other defendants, especially when the
de Leon Group filed its supersedeas bond.

It seems incongruous for Atty. Pea to be accorded the benefit

of erroneously impleading several bank directors, who had no
direct hand in the transaction, but at the same time,
concentrating solely on Urban Banks inability to pay to justify
execution pending appeal, regardless of the financial capacity
of its other co-defendants. Worse, he capitalized on the
insolvency and/or receivership of Urban Bank to levy or
garnish properties of the eight other individual defendants,
who were never shown to have been incapable of paying the
judgment debt in the first place. The disposition on the
execution pending appeal may have been different had Atty.
Pea filed suit against Urban Bank alone minus the bank
officers and the same bank was found solely liable for the
award and later on declared under receivership.
In addition, a judgment creditor of a bank, which has been
ordered by the BSP to be subject of receivership, has to fall in
line like every other creditor of the bank and file its claim
under the proper procedures for banks that have been taken
over by the PDIC. Under Section 30 of Republic Act No. 7653,
otherwise known as the New Central Bank Act, which
prevailed at that time, once a bank is under receivership, the
receiver shall immediately gather and take charge of all the
assets and liabilities of the bank and administer the same for
the benefit of its creditors and all of the banks assets shall be
considered as under custodial legis and exempt from any
order of garnishment, levy, attachment or execution.327 In the
Minute Resolution of the Monetary Board of the BSP, Urban
Bank was not only prevented from doing business in the
Philippines but its asset and affairs were placed under
receivership as provided for under the same law. 328 In fact,
even Pea himself assured the PDIC, as receiver of Urban
Bank, that he would not schedule or undertake execution
sales of the banks assets for as long as the bank remains in
receivership.329 Until the approval of the rehabilitation or the
initiation of the liquidation proceedings, all creditors of the
bank under receivership shall stand on equal footing with
respect to demanding satisfaction of their debts, and cannot
be extended preferred status by an execution pending appeal
with respect to the banks assets:
[t]o execute the judgment would unduly deplete the assets
of respondent bank to the obvious prejudice of other creditors.
After the Monetary Board has declared that a bank is insolvent
and has ordered it to cease operations, the Board becomes
the trustee of its assets for the equal benefit of all the
depositors and creditors. After its insolvency, one creditor
cannot obtain an advantage or preference over another by an
attachment, execution or otherwise. Until there is an approved
rehabilitation or the initiation of the liquidation proceedings,
creditors of the bank stand on equal footing with respect to
demanding satisfaction of their debts, and cannot be afforded
special treatment by an execution pending appeal with
respect to the banks assets.330 (Emphasis supplied)
Moreover, assuming that the CA was correct in finding a
reason to justify the execution pending appeal because of the
supervening event of Urban Banks closure, the assumption
by the EIB of the liabilities of Urban Bank meant that any
execution pending appeal can be granted only if EIB itself is
shown to be unable to satisfy Peas judgment award of
PhP28,500,000. That is not at all the case. In just one
particular sale on execution herein, EIB offered to answer in
cash for a substantial part of Peas claims, as evidenced by
EIBs capacity and willingness to redeem the executed
properties (condominium units sold to intervenor Unimega) by
tendering managers checks for more than PhP22
Million331 which is already 77.57% of Peas total award from
the trial court.332 The fact that EIBs offer to take over Urban
Bank means it was able to satisfy the BSPs concern that all
legitimate liabilities of Urban Bank be duly discharged.
As an exception to the general rule that only final judgments
may be executed,333 the grant of execution pending appeal
must perforce be based on "good reasons." These reasons
must consist of compelling or superior circumstances
demanding urgency which will outweigh the injury or
damages suffered, should the losing party secure a reversal of
the judgment or final order.334 The circumstances that would

reasonably justify superior urgency, demanding interim

execution of Peas claims for compensation and/or damages,
have already been settled by the financial capacity of the
eight other co-defendants, the approval of the supersedeas
bonds, the subsequent takeover by EIB, and the successor
banks stable financial condition,335 which can answer for the
judgment debt. Thus, Peas interest as a judgment creditor is
already well-protected.
While there is a general rule that a final and executory
judgment in the main case will render moot and academic a
petition questioning the exercise of the trial courts discretion
in allowing execution pending appeal, we find it necessary to
rule categorically on this question because of the magnitude
of the aberrations that attended the execution pending appeal
in the Decision of the RTC-Bago City.
Irregularities in the Levy and Sale on Execution Pending
Appeal
Assuming that the Special Order granting execution pending
appeal were valid, issues have been raised on alleged
irregularities that mar the levy and sale on execution of the
properties of Urban Bank and its officers and directors. Many
of the facts have not been sufficiently litigated before the trial
and appellate courts for us to fully rule on the issue,
nevertheless, from what is on record, the following are the
observations of this Court:
First, contrary to the general rules on execution, no
opportunity was given to Urban Bank or the other codefendants to pay the judgment debt in cash or certified
check.336 Before proceeding on the levying and garnishing
personal and real properties, demand must be made by the
sheriff against the judgment debtors, Urban Bank and the
eight other individual bank officers, for the immediate
payment of the award subject of the execution pending
appeal. It has not been shown whether Urban Bank and its
officers and directors were afforded such an opportunity.
Instead of garnishing personal properties of the bank, the
sheriff inexplicably proceeded to levy substantial real
properties of the bank and its officers at the onset.
Second, assuming that Urban Bank and its officers did not
possess sufficient cash or funds to pay for the judgment debt
pending appeal, they should have been given the option to
choose which of their properties to be garnished and/or levied.
In this case, Urban Bank exercised its option by presenting to
the sheriff various parcels of land, whose values amount to
more than PhP76,882,925 and were sufficient to satisfy the
judgment debt.337Among those presented by the bank, only
the property located in Tagaytay was levied upon by the
sheriff.338 No sufficient reason was raised why the banks
chosen properties were rejected or inadequate for purposes of
securing the judgment debt pending appeal. Worse, the
Sheriff proceeded with garnishing and levying on as many
properties of Urban Bank and its officers, in disregard of their
right to choose under the rules.
Third, the public auction sales conducted in the execution
pending appeal sold more properties of Urban Bank and the
directors than what was sufficient to satisfy the debt. Indeed,
the conservative value of the properties levied herein by the
sheriff amounting to more than PhP181,919,190, consisting of
prime condominium units in the heart of the Makati Business
district, a lot in Tagaytay City, shares in exclusive clubs, and
shares of stock, among others, was more than sufficient to
answer for the PhP28,500,000 judgment debt six times over.
Rather than stop when the properties sold had approximated
the monetary award, the execution sale pending appeal
continued and unduly benefitted Atty. Pea, who, as judgment
creditor and, at times, the winning bidder, purchased most of
the properties sold.
Fourth, it was supremely disconcerting how Urban Bank,
through its successor EIB, was unduly deprived of the
opportunity to redeem the properties, even after presenting
managers checks339 equal to the purchase price of the
condominium units sold at the execution sale. No reason was
offered by the trial court340 or the sheriff341 for rejecting the
redemption price tendered by EIB in order to recover the

properties executed and sold in public auction pending

appeal.
Finally, the Court cannot turn a blind eye to the fact that there
was already a sufficient supersedeas bond given to answer for
whatever monetary award will be given in the end. To recall,
the De Leon Group had already tendered a supersedeas bond
of PhP40,000,000 in the Court of Appeals to prevent execution
pending appeal over their properties. In fact, even Urban Bank
tendered a separate supersedeas bond of equal amount with
this Court, for a total of PhP80,000,000 to secure any
judgment to be awarded to Atty. Pea. That execution sales
over the properties of judgment debtors proceeded despite
the three-fold value of securities compared to the amount of
the award indicates bad faith, if not malice, with respect to
the conduct of the execution pending appeal.
Inasmuch as the RTC Decision has already been vacated and
an independent finding has been made by this Court of the
complete nullity of the order granting execution pending
appeal, it follows that all acts pursuant to such order and its
writ are also void. It does not follow however, that the Courts
Decision in Co v. Sillador,342 is nullified, inasmuch as an
equally-important legal doctrine the immutability of
Supreme Court final decisions is also to be considered. In
any case, the factual circumstances and the ruling on that
case were limited to the actions of Sheriff Allan Sillador with
respect to properties levied under the same Special Order and
Writ of Execution, which were subject of third party claims
made by the spouses of Teodoro Borlongan, Corazon Bejasa
and Arturo Manuel, Jr.343 It does not encompass other specific
events and acts committed in the course of the execution
pending appeal that may warrant administrative or
disciplinary actions. Having said that, this Court leaves it to
the parties to explore avenues for redress in such a situation.
The observation on the irregularities above-enumerated are
made for the purpose of correcting the injustice that has been
committed herein, by allowing the Court to pursue the
question of who was responsible for such gross violation of the
rules on execution, and for the Court to find measures to
improve the safeguards against abuse of court processes. It is
for this reason that the Office of the Court Administrator will
be given a special task by the Court on this matter. Judge
Henry Trocino of RTC-Bago City, who issued the Special Order
and had supervisory authority over the proceedings of the
execution pending appeal, would have been included under
such administrative investigation by the Office of the Court
Administrator, were it not for his retirement from the judicial
service.
The Courts Suspension Order of Execution Pending Appeal
Acting on Atty. Peas Omnibus Motion dated 09 December
2002344 and Unimegas Motion for Reconsideration dated 10
December 2002345 with respect to the Courts Order dated 13
November 2002346 that clarified the earlier stay order against
the execution pending appeal,347 the Court hereby denies both
motions. The Court is fully correct in suspending the period for
the running of the redemption period of the properties of
Urban Bank and its officers and directors that were levied and
subject of execution sale to satisfy the judgment debt in favor
of Atty. Pea, the Court having conclusively determined that
the supersedeas bond filed was sufficient and considering the
subsequent finding that the said execution pending appeal
lacks any sufficient ground for the grant thereof.
As to the theory of Atty. Pea that the actuations of Justice
Carpio, the then ponente of this case, in drafting the
questioned Order should positively impact his motion for
reconsideration of the same, the Court finds this argument
utterly devoid of merit.
In the first place, that questioned Order was not the decision
of only a single member of the Court, Justice Carpio, but of the
entire division to which he belonged, then composed of retired
Chief Justice Hilario Davide, Justices Jose Vitug, Consuelo
Ynares-Santiago and Adolfo Azcuna. This Order was affirmed
by the same Division as its duly-promulgated order. In relation
to this, the affirmation by the Division of this Order
demonstrates that there is no truth to Atty. Peas claim that
Justice Carpio fabricated the Order.

In the second place, Atty. Peas claim of undue interest

against Justice Carpio specifically with respect to the latter
having the instant case transferred to his new Division, is
based on ignorance of the system of assignment of cases in
the Supreme Court. When a reorganization of the Court takes
place in the form of a change in the composition of Divisions,
due to the retirement or loss of a member, the Justices do not
thereby lose their case assignments but bring the latter with
them to their new Divisions.348 The cases are then transferred
to the Justices new Divisions, by way of the corresponding
request from each justice. Each justice is in fact, required to
make this request, otherwise the rollo of the cases of which he
is Member-in-Charge will be retained by a Division in which he
is no longer a member. Indeed, Atty. Peas imagination has
gotten the better of him.
Thirdly, his insinuation (which he denies) that Justice Carpio
may have been bribed because the latter has a new Mercedes
Benz349 is highly offensive and has no place where his points
should have been confined to legal reasons and arguments.
Incidentally, Atty. Pea has voiced the fear in the Letter of
Complaint filed in the Courts Committee on Ethics and Ethical
Standards,350 which he brought against the ponente of this
Decision, that she will suppress material information regarding
the issuance of the Order suspending the redemption period
because of her close relationship to Justice Carpio. Contrary to
this fear, this Decision is frontally disposing of this claim by
stating that there is no basis to believe that the questioned
Order was anything than the joint decision of the five
members of the then First Division, and that his arguments in
his motion to reconsider does not persuade this Court to vary
in any form the questioned order. Moreover, our disposition of
this case renders moot his motion to reconsider the order.
It must be emphasized that the prolonged resolution of the
procedural issue in the Petitions in G. R. Nos. 145817 and
145822 on the execution pending appeal is due in no small
part to the delays arising from Peas peculiar penchant for
filing successive motions for inhibition and re-raffle.351 The
Court cannot sanction Peas repeated requests for voluntary
inhibition of members of the Court based on the sole ground
of his own self-serving allegations of lack of faith and trust,
and would like to reiterate, at this point, the policy of the
Court not to tolerate acts of litigants who, for just about any
conceivable reason, seek to disqualify a judge (or justice) for
their own purpose, under a plea of bias, hostility, prejudice or
prejudgment.352 The Court cannot allow the unnecessary and
successive requests for inhibition, lest it opens the floodgates
to forum-shopping where litigants look for a judge more
friendly and sympathetic to their cause than previous ones. 353
Restitution of the Banks Executed Properties
The Court is still confronted with the supervening acts related
to the execution pending appeal and the reversal of the award
of damages, which affect the rights of the parties as well as of
the intervenors to the case, specifically, intervenor Unimega.
In completely resolving the differing claims and performing its
educational function, the Court shall briefly encapsulate and
restate the operational rules governing execution pending
appeal when there has been a reversal of the trial courts
Decision on the award of damages in order to guide the
parties as well as the bench and bar in general. The necessity
of making these detailed instructions is prompted by the most
natural question an ordinary person with a sense of justice will
ask after reading the facts: How can an obligation to pay for
the services of a lawyer so that 23 unwanted tenants leave a
corporation's property lead to the loss or the impairment of
use of more than PhP181 Million worth of properties of that
corporation and of its officers and directors? Obviously, this
Court must undertake corrective actions swiftly.
The rule is that, where the executed judgment is reversed
totally or partially, or annulled on appeal or otherwise the
trial court may, on motion, issue such orders of restitution or
reparation of damages as equity and justice may warrant
under the circumstances.354 The Rules of Court precisely
provides for restitution according to equity, in case the
executed judgment is reversed on appeal.355 "In an execution
pending appeal, funds are advanced by the losing party to the

prevailing party with the implied obligation of the latter to

repay the former, in case the appellate court cancels or
reduces the monetary award." 356
In disposing of the main case subject of these Petitions, the
Court totally reversed the staggering amount of damages
given by the trial court, and limited on a quantum meruit
basis the agents compensation to PhP4,500,000 only.
However, properties of Urban Bank and individual petitioners
have been garnished and levied upon in the amount of
supposedly more than PhP85,399,350.357
Applying the foregoing rules, petitioner-respondent bank is
entitled to complete and full restitution of its levied
properties, subject to the payment of the PhP4,500,000.
Meanwhile, petitioners bank officers, all of whom have not
been found individually or solidarily liable, are entitled to full
restitution of all their properties levied upon and garnished,
since they have been exonerated from corporate liability with
respect to the banks agency relationship with Pea.
Considering the monetary award to Pea and the levy on and
execution of some of its properties pending appeal, Urban
Bank, now EIB, may satisfy the judgment in the main case and
at the same time fully recover all the properties executed
owing to the complete reversal of the trial courts awarded
damages. It must immediately and fully pay the judgment
debt before the entire lot of levied properties, subject of the
execution pending appeal, is restored to it.358
Due to the complete reversal of the trial courts award for
damages, which was the basis of the Special Order and Writ of
Execution allowing execution pending appeal, intervenor
Unimega and other bidders who participated in the public
auction sales are liable to completely restore to petitionerrespondent bank all of the properties sold and purchased
therein. Although execution pending appeal is sanctioned
under the rules and jurisprudence, when the executed
decision is reversed, the premature execution is considered to
have lost its legal bases. The situation necessarily requires
equitable restitution to the party prejudiced thereby. 359 As a
matter of principle, courts are authorized at any time to order
the return of property erroneously ordered to be delivered to
one party, if the order is found to have been issued without
jurisdiction.360
As a purchaser of properties under an execution sale, with an
appeal on the main case still pending, intervenor Unimega
knew or was bound to know that its title to the properties,
purchased in the premature public auction sale, was
contingent on the outcome of the appeal and could possibly
be reversed. Until the judgment on the main case on which
the execution pending appeal hinges is rendered final and
executory in favor of the prevailing judgment creditor, it is
incumbent on the purchasers in the execution sale to preserve
the levied properties. They shall be personally liable for their
failure to do so, especially if the judgment is reversed, as in
this case.361 In fact, if specific restitution becomes
impracticable such as when the properties pass on to
innocent third parties the losing party in the execution even
becomes liable for the full value of the property at the time of
its seizure, with interest. The Court has ruled:
When a judgment is executed pending appeal and
subsequently overturned in the appellate court, the party who
moved for immediate execution should, upon return of the
case to the lower court, be required to make specific
restitution of such property of the prevailing party as he or
any person acting in his behalf may have acquired at the
execution sale. If specific restitution becomes impracticable,
the losing party in the execution becomes liable for the full
value of the property at the time of its seizure, with interest.
While the trial court may have acted judiciously under the
premises, its action resulted in grave injustice to the private
respondents. It cannot be gainsaid that it is incumbent upon
the plaintiffs in execution (Arandas) to return whatever they
got by means of the judgment prior to its reversal. And if
perchance some of the properties might have passed on to
innocent third parties as happened in the case at bar, the
Arandas are duty bound nonetheless to return the

corresponding value of said properties as mandated by the

Rules. (Emphasis supplied)362
In this case, the rights of intervenor Unimega to the 10
condominium units bought during the public auction sale
under the Special Order are rendered nugatory by the reversal
of the award of unconscionable damages by the trial court. It
cannot claim to be an innocent third-party purchaser of the
levied condominium units, since the execution sale was
precisely made pending appeal. It cannot simply assume that
whatever inaction or delay was incurred in the process of the
appeal of the main Decision would automatically render the
remedy dilatory in character.363 Whatever rights were acquired
by intervenor Unimega from the execution sale under the trial
courts Special Orders are conditional on the final outcome of
the appeal in the main case. Unlike in auction sales arising
from final and executory judgments, both the judgment
creditor and the third parties who participate in auction sales
pending appeal are deemed to knowingly assume and
voluntarily accept the risks of a possible reversal of the
decision in the main case by the appellate court.
Therefore, intervenor Unimega is required to restore the
condominium units to Urban Bank. Although the intervenor
has caused the annotation of the sale and levied on the titles
to those units, the titles have remained under the name of the
bank, owing to the supersedeas bond it had filed and the
Courts own orders that timely suspended the transfer of the
titles and further execution pending appeal.
The obligation to restore the properties to petitionerrespondent bank is, however, without prejudice to the
concurrent right of intervenor Unimega to the return of the
PhP10,000,000 the latter paid for the condominium units,
which Pea received as judgment creditor in satisfaction of
the trial courts earlier Decision.364Consequently, intervenors
earlier request for the issuance of a writ of possession 365 over
those units no longer has any leg to stand on. Not being
entitled to a writ of possession under the present
circumstances, Unimegas ex parte petition is consequently
denied.
Upon the reversal of the main Decision, the levied properties
itself, subject of execution pending appeal must be returned
to the judgment debtor, if those properties are still in the
possession of the judgment creditor, plus compensation to the
former for the deprivation and the use thereof.366 The
obligation to return the property itself is likewise imposed on a
third-party purchaser, like intervenor Unimega, in cases
wherein it directly participated in the public auction sale, and
the title to the executed property has not yet been
transferred. The third-party purchaser shall, however, be
entitled to reimbursement from the judgment creditor, with
interest.
Considering the foregoing points, the Court adopts with
modification the rules of restitution expounded by retired
Justice Florenz D. Regalado in his seminal work on civil
procedure,367 which the appellate court itself cited earlier. 368 In
cases in which restitution of the prematurely executed
property is no longer possible, compensation shall be made in
favor of the judgment debtor in the following manner:
a. If the purchaser at the public auction is the
judgment creditor, he must pay the full value of the
property at the time of its seizure, with interest.
b. If the purchaser at the public auction is a third
party, and title to the property has already been
validly and timely transferred to the name of that
party, the judgment creditor must pay the amount
realized from the sheriffs sale of that property, with
interest.
c. If the judgment award is reduced on appeal, the
judgment creditor must return to the judgment
debtor only the excess received over and above that
to which the former is entitled under the final
judgment, with interest.
In summary, Urban Bank is entitled to complete restoration
and return of the properties levied on execution considering
the absolute reversal of the award of damages, upon the

payment of the judgment debt herein amounting to

PhP4,500,000, with interest as indicated in the dispositive
portion. With respect to individual petitioners, they are
entitled to the absolute restitution of their executed
properties, except when restitution has become impossible, in
which case Pea shall be liable for the full value of the
property at the time of its seizure, with interest. Whether
Urban Bank and the bank officers and directors are entitled to
any claim for damages against Pea and his indemnity bond is
best ventilated before the trial court, as prescribed under the
procedural rules on execution pending appeal.
WHEREFORE, the Court DENIES Atty. Magdaleno Peas
Petition for Review dated 23 April 2004 (G. R. No. 162562) and
AFFIRMS WITH MODIFICATION the Court of Appeals Decision
dated 06 November 2003 having correctly found that the
Regional Trial Court of Bago City gravely abused its discretion
in awarding unconscionable damages against Urban Bank,
Inc., and its officers. The Decision of the Regional Trial Court of
Bago City dated 28 May 1999 is hence VACATED.
Nevertheless, Urban Bank, Inc., is ORDERED to pay Atty. Pea
the amount of PhP3,000,000 as reimbursement for his
expenses and an additional PhP1,500,000 as compensation
for his services, with interest at 6% per annum from 28 May
1999, without prejudice to the right of Urban Bank to invoke
payment of this sum under a right of set-off against the
amount of PhP25,000,000 that has been placed in escrow for
the benefit of Isabela Sugar Company, Inc. The Complaint
against the eight other individual petitioners, namely Teodoro
Borlongan (+), Delfin C. Gonzales, Jr., Benjamin L. de Leon, P.
Siervo G. Dizon, Eric L. Lee, Ben Y. Lim, Jr., Corazon Bejasa,
and Arturo Manuel, Jr., is hereby DISMISSED.
The Petitions for Review on Certiorari filed by petitioners
Urban Bank (G. R. No. 145817) and Benjamin L. de Leon,
Delfin Gonzalez, Jr., and Eric L. Lee (G. R. No. 145822) are
hereby GRANTED under the following conditions:
a. Urban Bank, Teodoro Borlongan, Delfin C.
Gonzalez, Jr., Benjamin L. de Leon, P. Siervo H. Dizon,
Eric L. Lee, Ben Y. Lim, Jr., Corazon Bejasa, and Arturo
Manuel, Jr., (respondent bank officers) shall be
restored to full ownership and possession of all
properties executed pending appeal;
b. If the property levied or garnished has been sold
on execution pending appeal and Atty. Magdaleno
Pea is the winning bidder or purchaser, he must
fully restore the property to Urban Bank or
respondent bank officers, and if actual restitution of
the property is impossible, then he shall pay the full
value of the property at the time of its seizure, with
interest;
c. If the property levied or garnished has been sold to
a third party purchaser at the public auction, and title
to the property has not been validly and timely
transferred to the name of the third party, the
ownership and possession of the property shall be
returned to Urban Bank or respondent bank officers,
subject to the third partys right to claim restitution
for the purchase price paid at the execution sale
against the judgment creditor;
d. If the purchaser at the public auction is a third
party, and title to the property has already been
validly and timely transferred to the name of that
party, Atty. Pea must pay Urban Bank or respondent
bank officers the amount realized from the sheriffs
sale of that property, with interest from the time the
property was seized.
The Omnibus Motion dated 09 December 2002 filed by Atty.
Pea and Motion for Reconsideration dated 10 December
2002 filed by Unimega with respect to the Courts Order dated
13 November 2002 is hereby DENIED.
The Office of the Court Administrator is ordered to conduct an
investigation into the possible administrative liabilities of Atty.
Josephine Mutia-Hagad, the then RTC-Bago Citys Clerk of
Court, and Allan D. Sillador, the then Deputy Sheriff of Bago
City, for the irregularities attending the execution pending

appeal in this case, including all judicial officers or sheriffs in

the various places in which execution was implemented, and
to submit a report thereon within 120 days from receipt of this
Decision.
The Office of the Court Administrator is also directed to make
recommendations for the prevention of abuses of judicial
processes in relation to executions, especially those pending
appeal, whether thru administrative circulars from this Court
or thru a revision of the Rules of Court, within 30 days from
submission of the report on administrative liabilities adverted
to above. Let a copy of the Courts Decision in this case be
sent to the Office of the Court Administrator.
The Presiding Judge of RTC Bago City shall make a full report
on all incidents related to the execution in this case, including
all returns on the writ of execution herein.
Because so much suspicious circumstances have attended the
execution in this case by the Regional Trial Court of Bago City,
the proceedings with respect to any restitution due and owing
under the circumstances shall be transferred to the Regional
Trial Court in the National Capital Region, Makati City, a court
with venue to hear cases involving Urban Bank/Export and
Industry Bank whose headquarters is located in Makati City.
The Executive Judge of the Regional Trial Court of Makati City
is ordered to include the execution of the Decision and the
proceedings for the restitution of the case in the next
available raffle.
The Regional Trial Court of Makati City, to which the case shall
be raffled, is hereby designated as the court that will fully
implement the restorative directives of this Decision with
respect to the execution of the final judgment, return of
properties wrongfully executed, or the payment of the value
of properties that can no longer be restored, in accordance
with Section 5, Rule 39 of the Rules of Court. The parties are
directed to address the implementation of this part of the
Decision to the sala to which the case will be raffled.
No pronouncement as to costs.
SO ORDERED.

G.R. No. 126200

August 16, 2001

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
HONORABLE COURT OF APPEALS and REMINGTON
INDUSTRIAL SALES CORPORATION, respondents.
KAPUNAN, J.:
Before the Court is a petition for review on certiorari under
Rule 45 of the Rules of Court, seeking a review of the Decision
of the Court of Appeals dated October 6, 1995 and the
Resolution of the same court dated August 29, 1996.
The facts are as follows:
Marinduque Mining-Industrial Corporation (Marinduque
Mining), a corporation engaged in the manufacture of pure
and refined nickel, nickel and cobalt in mixed sulfides; copper
ore/concentrates, cement and pyrite conc., obtained from the
Philippine National Bank (PNB) various loan accommodations.
To secure the loans, Marinduque Mining executed on October
9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage
in favor of PNB. The mortgage covered all of Marinduque
Mining's real properties, located at Surigao del Norte, Sipalay,
Negros Occidental, and at Antipolo, Rizal, including the
improvements thereon. As of November 20, 1980, the loans
extended by PNB amounted to P4 Billion, exclusive of interest
and charges.1
On July 13, 1981, Marinduque Mining executed in favor of PNB
and the Development Bank of the Philippines (DBP) a second
Mortgage Trust Agreement. In said agreement, Marinduque
Mining mortgaged to PNB and DBP all its real properties
located at Surigao del Norte, Sipalay, Negros Occidental, and
Antipolo, Rizal, including the improvements thereon. The
mortgage also covered all of Marinduque Mining's chattels, as
well as assets of whatever kind, nature and description which
Marinduque Mining may subsequently acquire in substitution
or replenishment or in addition to the properties covered by
the previous Deed of Real and Chattel Mortgage dated
October 7, 1978. Apparently, Marinduque Mining had also
obtained loans totaling P2 Billion from DBP, exclusive of
interest and charges.2
On April 27, 1984, Marinduque Mining executed in favor of
PNB and DBP an Amendment to Mortgage Trust Agreement by
virtue of which Marinduque Mining mortgaged in favor of PNB
and DBP all other real and personal properties and other real
rights subsequently acquired by Marinduque Mining.3
For failure of Marinduque Mining to settle its loan obligations,
PNB and DBP instituted sometime on July and August 1984
extrajudicial foreclosure proceedings over the mortgaged
properties.
The events following the foreclosure are narrated by DBP in its
petition, as follows:
In the ensuing public auction sale conducted
on August 31, 1984, PNB and DBP emerged and were
declared the highest bidders over the foreclosed real
properties, buildings, mining claims, leasehold rights
together with the improvements thereon as well as
machineries [sic] and equipments [sic] of MMIC
located at Nonoc Nickel Refinery Plant at Surigao del
Norte for a bid price of P14,238,048,150.00 [and]
[o]ver the foreclosed chattels of MMIC located at
Nonoc Refinery Plant at Surigao del Norte, PNB and
DBP as highest bidders, bidded for P170,577,610.00
(Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP). For
the foreclosed real properties together with all the
buildings, major machineries & equipment and other
improvements of MMIC located at Antipolo, Rizal,
likewise held on August 31, 1984, were sold to PNB
and DBP as highest bidders in the sum of
P1,107,167,950.00 (Exhs. "10" to "10-X"-PNB/ DBP).
At the auction sale conducted on September 7,
1984[,] over the foreclosed real properties, buildings,

& machineries/equipment of MMIC located at Sipalay,

Negros Occidental were sold to PNB and DBP, as
highest bidders, in the amount of P2,383,534,000.00
and P543,040.000.00 respectively (Exhs. "8" to "8BB", "9" to "90-GGGGGG"-PNB/DBP).
Finally, at the public auction sale conducted on
September 18, 1984 on the foreclosed personal
properties of MMIC, the same were sold to PNB and
DBP as the highest bidder in the sum of
P678,772,000.00 (Exhs. "11" and "12-QQQQQ"-PNB).
PNB and DBP thereafter thru a Deed of Transfer
dated August 31, 1984, purposely, in order to ensure
the continued operation of the Nickel refinery plant
and to prevent the deterioration of the assets
foreclosed, assigned and transferred to Nonoc Mining
and Industrial Corporation all their rights, interest
and participation over the foreclosed properties of
MMIC located at Nonoc Island, Surigao del Norte for
an initial consideration of P14,361,000,000.00 (Exh.
"13"-PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6,
1984, PNB and DBP assigned and transferred in favor
of Maricalum Mining Corp. all its rights, interest and
participation over the foreclosed properties of MMIC
at Sipalay, Negros Occidental for an initial
consideration of P325,800,000.00 (Exh. "14"PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to
Proclamation No. 50 as amended, again assigned,
transferred and conveyed to the National
Government thru [sic] the Asset Privatization Trust
(APT) all its existing rights and interest over the
assets of MMIC, earlier assigned to Nonoc Mining and
Industrial Corporation, Maricalum Mining Corporation
and Island Cement Corporation (Exh. "15" & "15-A"
PNB/DBP).4
In the meantime, between July 16, 1982 to October 4, 1983,
Marinduque Mining purchased and caused to be delivered
construction materials and other merchandise from
Remington Industrial Sales Corporation (Remington) worth
P921,755.95. The purchases remained unpaid as of August 1,
1984 when Remington filed a complaint for a sum of money
and damages against Marinduque Mining for the value of the
unpaid construction materials and other merchandise
purchased by Marinduque Mining, as well as interest,
attorney's fees and the costs of suit.
On September 7, 1984, Remington's original complaint was
amended to include PNB and DBP as co-defendants in view of
the foreclosure by the latter of the real and chattel mortgages
on the real and personal properties, chattels, mining claims,
machinery, equipment and other assets of Marinduque
Mining.5
On September 13, 1984, Remington filed a second amended
complaint to include as additional defendant, the Nonoc
Mining and Industrial Corporation (Nonoc Mining). Nonoc
Mining is the assignee of all real and personal properties,
chattels, machinery, equipment and all other assets of
Marinduque Mining at its Nonoc Nickel Factory in Surigao del
Norte.6
On March 26, 1986, Remington filed a third amended
complaint including the Maricalum Mining Corporation
(Maricalum Mining) and Island Cement Corporation (Island
Cement) as co-defendants. Remington asserted that
Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum
Mining and Island Cement must be treated in law as one and
the same entity by disregarding the veil of corporate fiction
since:
1. Co-defendants NMIC, Maricalum and Island
Cement which are newly created entities are

practically owned wholly by defendants PNB and

DBP, and managed by their officers, aside from the
fact that the aforesaid co-defendants NMIC,
Maricalum and Island Cement were organized in such
a hurry and in such suspicious circumstances by codefendants PNB and DBP after the supposed
extrajudicial foreclosure of MMIC's assets as to make
their supposed projects assets, machineries and
equipment which were originally owned by codefendant MMIC beyond the reach of creditors of the
latter.
2. The personnel, key officers and rank-and-file
workers and employees of co-defendants NMIC,
Maricalum and Island Cement creations of codefendants PNB and DBP were the personnel of codefendant MMIC such that . . . practically there has
only been a change of name for all legal purpose and
intents
3. The places of business not to mention the mining
claims and project premises of co-defendants NMIC,
Maricalum and Island Cement likewise used to be the
places of business, mining claims and project
premises of co-defendant MMIC as to make the
aforesaid co-defendants NMIC, Maricalum and Island
Cement mere adjuncts and subsidiaries of codefendants PNB and DBP, and subject to their control
and management.
On top of everything, co-defendants PNB, DBP NMIC,
Maricalum and Island Cement being all corporations
created by the government in the pursuit of business
ventures should not be allowed to ignore, x x x or
obliterate with impunity nay illegally, the financial
obligations of x x x MMIC whose operations codefendants PNB and DBP had highly financed before
the alleged extrajudicial foreclosure of defendant
MMIC's assets, machineries and equipment to the
extent that major policies of co-defendant MMIC were
being decided upon by co-defendants PNB and DBP
as major financiers who were represented in its board
of directors forming part of the majority thereof
which through the alleged extrajudicial foreclosure
culminated in a complete take-over by co-defendants
PNB and DBP bringing about the organization of their
co-defendants NMIC, Maricalum and Island Cement
to which were transferred all the assets, machineries
and pieces of equipment of co-defendant MMIC used
in its nickel mining project in Surigao del Norte,
copper mining operation in Sipalay, Negros
Occidental and cement factory in Antipolo, Rizal to
the prejudice of creditors of co-defendant MMIC such
as plaintiff Remington Industrial Sales Corporation
whose stockholders, officers and rank-and-file
workers in the legitimate pursuit of its business
activities, invested considerable time, sweat and
private money to supply, among others, codefendant MMIC with some of its vital needs for its
operation, which co-defendant MMIC during the time
of the transactions material to this case became x x
x co-defendants PNB and DBP's instrumentality,
business conduit, alter ego, agency (sic), subsidiary
or auxiliary corporation, by virtue of which it
becomes doubly necessary to disregard the
corporation fiction that co-defendants PNB, DBP,
MMIC, NMIC, Maricalum and Island Cement, six (6)
distinct and separate entities, when in fact and in
law, they should be treated as one and the same at
least as far as plaintiff's transactions with codefendant MMIC are concerned, so as not to defeat
public convenience, justify wrong, subvert justice,
protect fraud or confuse legitimate issues involving
creditors such as plaintiff, a fact which all defendants

were as (sic) still are aware of during all the time

material to the transactions subject of this case.7
On April 3, 1989, Remington filed a motion for leave to file a
fourth amended complaint impleading the Asset Privatization
Trust (APT) as co-defendant. Said fourth amended complaint
was admitted by the lower court in its Order dated April 29,
1989.
On April 10, 1990, the Regional Trial Court (RTC) rendered a
decision in favor of Remington, the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered in favor of
the plaintiff, ordering the defendants Marinduque
Mining & Industrial Corporation, Philippine National
Bank, Development Bank of the Philippines, Nonoc
Mining and Industrial Corporation, Maricalum Mining
Corporation, Island Cement Corporation and Asset
Privatization Trust to pay, jointly and severally, the
sum of P920,755.95, representing the principal
obligation, including the stipulated interest as of June
22, 1984, plus ten percent (10%) surcharge per
annum by way of penalty, until the amount is fully
paid; the sum equivalent to 10% of the amount due
as and for attorney's fees; and to pay the costs.8
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining,
Island Cement and APT, the Court of Appeals, in its Decision
dated October 6, 1995, affirmed the decision of the RTC.
Petitioner filed a Motion for Reconsideration, which was
denied in the Resolution dated August 29, 1996.
Hence, this petition, DBP maintaining that Remington has no
cause of action against it or PNB, nor against their
transferees, Nonoc Mining, Island Cement, Maricalum Mining,
and the APT.
On the other hand, private respondent Remington submits
that the transfer of the properties was made in fraud of
creditors. The presence of fraud, according to Remington,
warrants the piercing of the corporate veil such that
Marinduque Mining and its transferees could be considered as
one and the same corporation. The transferees, therefore, are
also liable for the value of Marinduque Mining's purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,9 cited by
the Court of Appeals in its decision,10 this Court declared:
It is an elementary and 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.
However, when the notion of legal entity is used to
defeat public convenience, justify wrong, protect
fraud, or defend crime, the law will regard the
corporation as an association of persons or in case of
two corporations, merge them into one". (Koppel
[Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher
Encyclopedia of Corporation, Permanent Ed., pp. 135136; U.S. vs. Milwaukee Refrigeration Transit Co., 142
Fed., 247, 255 per Sanborn, J.). x x x.
In accordance with the foregoing rule, this Court has
disregarded the separate personality of the corporation where
the corporate entity was used to escape liability to third
parties.11 In this case, however, we do not find any fraud on
the part of Marinduque Mining and its transferees to warrant
the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose
on the mortgage when the past due account had incurred
arrearages of more than 20% of the total outstanding
obligation. Section 1 of Presidential Decree No. 385 (The Law
on Mandatory Foreclosure) provides:
It shall be mandatory for government financial
institutions, after the lapse of sixty (60) days from
the issuance of this decree, to foreclose the collateral
and/or securities for any loan, credit accommodation,

and/or guarantees granted by them whenever the

arrearages on such account, including accrued
interest and other charges, amount to at least twenty
percent (20%) of the total outstanding obligations,
including interest and other charges, as appearing in
the books of account and/or related records of the
financial institution concerned. This shall be without
prejudice to the exercise by the government financial
institution of such rights and/or remedies available to
them under their respective contracts with their
debtors, including the right to foreclose on loans,
credits, accommodations and/or guarantees on which
the arrearages are less than twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the duty
under said law, to foreclose upon the subject properties. The
banks had no choice but to obey the statutory command.
The import of this mandate was lost on the Court of Appeals,
which reasoned that under Article 19 of the Civil Code, "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." The appellate
court, however, did not point to any fact evidencing bad faith
on the part of the Marinduque Mining and its transferees.
Indeed, it skirted the issue entirely by holding that the
question of actual fraudulent intent on the part of the
interlocking directors of DBP and Marinduque Mining was
irrelevant because:
As aptly stated by the appellee in its brief, "x x x
where the corporations have directors and officers in
common, there may be circumstances under which
their interest as officers in one company may
disqualify them in equity from representing both
corporations in transactions between the two. Thus,
where one corporation was 'insolvent and indebted
to another, it has been held that the directors of the
creditor corporation were disqualified, by reason of
self-interest, from acting as directors of the debtor
corporation in the authorization of a mortgage or
deed of trust to the former to secure such
indebtedness x x x" (page 105 of the Appellee's
Brief). In the same manner that "x x x when the
corporation is insolvent, its directors who are its
creditors can not secure to themselves any
advantage or preference over other creditors. They
can not thus take advantage of their fiduciary
relation and deal directly with themselves, to the
injury of others in equal right. If they do, equity will
set aside the transaction at the suit of creditors of
the corporation or their representatives, without
reference to the question of any actual fraudulent
intent on the part of the directors, for the right of the
creditors does not depend upon fraud in fact, but
upon the violation of the fiduciary relation to the
directors." x x x (page 106 of the Appellee's Brief)
We also concede that "x x x directors of insolvent
corporation, who are creditors of the company, can
not secure to themselves any preference or
advantage over other creditors in the payment of
their claims. It is not good morals or good law. The
governing body of officers thereof are charged with
the duty of conducting its affairs strictly in the
interest of its existing creditors, and it would be a
breach of such trust for them to undertake to give
any one of its members any advantage over any
other creditors in securing the payment of his debts
in preference to all others. When validity of these
mortgages, to secure debts upon which the directors
were indorsers, was questioned by other creditors of
the corporation, they should have been classed as
instruments rendered void by the legal principle
which prevents directors of an insolvent corporation

from giving themselves a preference over outside

creditors. x x x" (page 106-107 of the Appellee's
Brief.)12
The Court of Appeals made reference to two principles in
corporation law. The first pertains to transactions between
corporations with interlocking directors resulting in the
prejudice to one of the corporations. This rule does not apply
in this case, however, since the corporation allegedly
prejudiced (Remington) is a third party, not one of the
corporations with interlocking directors (Marinduque Mining
and DBP).
The second principle invoked by respondent court involves
"directors x x x who are creditors" which is also inapplicable
herein. Here, the creditor of Marinduque Mining is DBP, not
the directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its
creation of Nonoc Mining, Maricalum and Island Cement. As
Remington itself concedes, DBP is not authorized by its
charter to engage in the mining business.13The creation of the
three corporations was necessary to manage and operate the
assets acquired in the foreclosure sale lest they deteriorate
from non-use and lose their value. In the absence of any
entity willing to purchase these assets from the bank, what
else would it do with these properties in the meantime? Sound
business practice required that they be utilized for the
purposes for which they were intended.
Remington also asserted in its third amended complaint that
the use of Nonoc Mining, Maricalum and Island Cement of the
premises of Marinduque Mining and the hiring of the latter's
officers and personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not
among those acquired by DBP in the foreclosure sale,
convenience and practicality dictated that the corporations so
created occupy the premises where these assets were found
instead of relocating them. No doubt, many of these assets
are heavy equipment and it may have been impossible to
move them. The same reasons of convenience and
practicality, not to mention efficiency, justified the hiring by
Nonoc Mining, Maricalum and Island Cement of Marinduque
Mining's personnel to manage and operate the properties and
to maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate
fiction applies only when such corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or
defend crime.14 To disregard the separate juridical personality
of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.15 In this
case, the Court finds that Remington failed to discharge its
burden of proving bad faith on the part of Marinduque Mining
and its transferees in the mortgage and foreclosure of the
subject properties to justify the piercing of the corporate veil.
The Court of Appeals also held that there exists in
Remington's favor a "lien" on the unpaid purchases of
Marinduque Mining, and as transferee of these purchases,
DBP should be held liable for the value thereof.
In the absence of liquidation proceedings, however, the claim
of Remington cannot be enforced against DBP. Article 2241 of
the Civil Code provides:
ARTICLE 2241. With reference to specific movable
property of the debtor, the following claims or liens
shall be preferred:
xxx

xxx

xxx

(3) Claims for the unpaid price of movables sold, on

said movables, so long as they are in the possession
of the debtor, up to the value of the same; and if the
movable has been resold by the debtor and the price
is still unpaid, the lien may be enforced on the price;
this right is not lost by the immobilization of the thing
by destination, provided it has not lost its form,

substance and identity, neither is the right lost by

the sale of the thing together with other property for
a lump sum, when the price thereof can be
determined proportionally;
(4) Credits guaranteed with a pledge so long as the
things pledged are in the hands of the creditor, or
those guaranteed by a chattel mortgage, upon the
things pledged or mortgaged, up to the value
thereof;
xxx

xxx

xxx

say that nothing in the law shows any such

limitation. If we are to interpret this portion of the
Code as intended only for insolvency cases, then
other creditor-debtor relationships where there are
concurrence of credits would be left without any rules
to govern them, and it would render purposeless the
special laws on insolvency.17
Upon motion by appellants, however, the Court reconsidered
its decision. Justice J.B.L. Reyes, speaking for the Court,
explained the reasons for the reversal:

In Barretto vs. Villanueva,16 the Court had occasion to

construe Article 2242, governing claims or liens over specific
immovable property. The facts that gave rise to the case were
summarized by this Court in its resolution as follows:

A. The previous decision failed to take fully into

account the radical changes introduced by the Civil
Code of the Philippines into the system of priorities
among creditors ordained by the Civil Code of 1889.

x x x Rosario Cruzado sold all her right, title, and

interest and that of her children in the house and lot
herein involved to Pura L. Villanueva for P19,000.00.
The purchaser paid P1,500 in advance, and executed
a promissory note for the balance of P17,500.00.
However, the buyer could only pay P5,500 on
account of the note, for which reason the vendor
obtained judgment for the unpaid balance. In the
meantime, the buyer Villanueva was able to secure a
clean certificate of title (No. 32626), and mortgaged
the property to appellant Magdalena C. Barretto,
married to Jose C. Baretto, to secure a loan of
P30,000.03, said mortgage having been duly
recorded.

Pursuant to the former Code, conflicts among

creditors entitled to preference as to specific real
property under Article 1923 were to be resolved
according to an order of priorities established by
Article 1927, whereby one class of creditors could
exclude the creditors of lower order until the claims
of the former were fully satisfied out of the proceeds
of the sale of the real property subject of the
preference, and could even exhaust proceeds if
necessary.

Pura Villanueva defaulted on the mortgage loan in

favor of Barretto. The latter foreclosed the mortgage
in her favor, obtained judgment, and upon its
becoming final asked for execution on 31 July 1958.
On 14 August 1958, Cruzado filed a motion for
recognition for her "vendor's lien" in the amount of
P12,000.00, plus legal interest, invoking Articles
2242, 2243, and 2249 of the new Civil Code. After
hearing, the court below ordered the "lien" annotated
on the back of Certificate of Title No. 32526, with the
proviso that in case of sale under the foreclosure
decree the vendor's lien and the mortgage credit of
appellant Barretto should be paid pro rata from the
proceeds. Our original decision affirmed this order of
the Court of First Instance of Manila.
In its decision upholding the order of the lower court, the
Court ratiocinated thus:
Article 2242 of the new Civil Code enumerates the
claims, mortgages and liens that constitute an
encumbrance on specific immovable property, and
among them are:
"(2) For the unpaid price of real property sold, upon
the immovable sold"; and
"(5) Mortgage credits recorded in the Registry of
Property."
Article 2249 of the same Code provides that "if there
are two or more credits with respect to the same
specific real property or real rights, they shall be
satisfied pro-rata, after the payment of the taxes and
assessments upon the immovable property or real
rights."
Application of the above-quoted provisions to the
case at bar would mean that the herein appellee
Rosario Cruzado as an unpaid vendor of the property
in question has the right to share pro-rata with the
appellants the proceeds of the foreclosure sale.
xxx

xxx

xxx

As to the point made that the articles of the Civil

Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to

Under the system of the Civil Code of the Philippines,

however, only taxes enjoy a similar absolute
preference. All the remaining thirteen classes of
preferred creditors under Article 2242 enjoy no
priority among themselves, but must be paid pro
rata, i.e., in proportion to the amount of the
respective credits. Thus, Article 2249 provides:
"If there are two or more credits with respect to the
same specific real property or real rights, they shall
be satisfied pro rata, after the payment of the taxes
and assessments upon the immovable property or
real rights."
But in order to make this prorating fully effective, the
preferred creditors enumerated in Nos. 2 to 14 of
Article 2242 (or such of them as have credits
outstanding) must necessarily be convened, and the
import of their claims ascertained. It is thus apparent
that the full application of Articles 2249 and 2242
demands that there must be first some proceeding
where the claims of all the preferred creditors may
be bindingly adjudicated, such as insolvency, the
settlement of decedent's estate under Rule 87 of the
Rules of Court, or other liquidation proceedings of
similar import.
This explains the rule of Article 2243 of the new Civil
Code that
"The claims or credits enumerated in the two
preceding articles shall be considered as mortgages
or pledges of real or personal property, or
liens within the purview of legal provisions governing
insolvency x x x (Italics supplied).
And the rule is further clarified in the Report of the
Code Commission, as follows
"The question as to whether the Civil Code and the
Insolvency Law can be harmonized is settled by this
Article (2243). The preferences named in Articles
2261 and 2262 (now 2241 and 2242) are to be
enforced in accordance with the Insolvency Law."
(Italics supplied)
Thus, it becomes evident that one preferred
creditor's third-party claim to the proceeds of a
foreclosure sale (as in the case now before us) is not
the proceeding contemplated by law for the
enforcement of preferences under Article 2242,
unless the claimant were enforcing a credit for taxes

that enjoy absolute priority. If none of the claims is

for taxes, a dispute between two creditors will not
enable the Court to ascertain the pro rata dividend
corresponding to each, because the rights of the
other creditors likewise enjoying preference under
Article 2242 can not be ascertained. Wherefore, the
order of the Court of First Instance of Manila now
appealed from, decreeing that the proceeds of the
foreclosure sale be apportioned only between
appellant and appellee, is incorrect, and must be
reversed. [Emphasis supplied]
The ruling in Barretto was reiterated in Phil. Savings Bank vs.
Hon. Lantin, Jr., etc., et al.,18 and in two cases both entitled
Development Bank of the Philippines vs. NLRC.19
Although Barretto involved specific immovable property, the
ruling therein should apply equally in this case where specific
movable property is involved. As the extrajudicial foreclosure
instituted by PNB and DBP is not the liquidation proceeding
contemplated by the Civil Code, Remington cannot claim its
pro rata share from DBP.
WHEREFORE, the petition is GRANTED. The decision of the
Court of Appeals dated October 6, 1995 and its Resolution
promulgated on August 29, 1996 is REVERSED and SET ASIDE.
The original complaint filed in the Regional Trial Court in CV
Case No. 84-25858 is hereby DISMISSED.
SO ORDERED.

G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M.
SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO
ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE,
MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL
CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for
respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San
Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction,
with prayer for issuance of writ of preliminary injunction,
arose out of two cases filed by petitioner with the Securities
and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent
San Miguel Corporation, filed with the Securities and
Exchange Commission (SEC) a petition for "declaration of
nullity of amended by-laws, cancellation of certificate of filing
of amended by- laws, injunction and damages with prayer for
a preliminary injunction" against the majority of the members
of the Board of Directors and San Miguel Corporation as an
unwilling petitioner. The petition, entitled "John Gokongwei Jr.
vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio
Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas,
Antonio Prieto and San Miguel Corporation", was docketed as
SEC Case No. 1375.
As a first cause of action, petitioner alleged that on
September 18, 1976, individual respondents amended by
bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961,
when the outstanding capital stock of respondent corporation
was only P70,139.740.00, divided into 5,513,974 common
shares at P10.00 per share and 150,000 preferred shares at
P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,047 with a
total par value of P301,270,430.00. It was contended that
according to section 22 of the Corporation Law and Article VIII
of the by-laws of the corporation, the power to amend,
modify, repeal or adopt new by-laws may be delegated to the
Board of Directors only by the affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up
capital stock of the corporation, which 2/3 should have been
computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted
without authority and in usurpation of the power of the
stockholders.
As a second cause of action, it was alleged that the authority
granted in 1961 had already been exercised in 1962 and
1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the
membership of the Board of Directors had changed since the
authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the
questioned amendment, petitioner had all the qualifications to
be a director of respondent corporation, being a Substantial
stockholder thereof; that as a stockholder, petitioner had
acquired rights inherent in stock ownership, such as the rights
to vote and to be voted upon in the election of directors; and
that in amending the by-laws, respondents purposely provided

for petitioner's disqualification and deprived him of his vested

right as afore-mentioned hence the amended by-laws are null
and void. 1
As additional causes of action, it was alleged that corporations
have no inherent power to disqualify a stockholder from being
elected as a director and, therefore, the questioned act
is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose
M. Soriano, while representing other corporations, entered
into contracts (specifically a management contract) with
respondent corporation, which was allowed because the
questioned amendment gave the Board itself the prerogative
of determining whether they or other persons are engaged in
competitive or antagonistic business; that the portion of the
amended bylaws which states that in determining whether or
not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship,
is unreasonable and oppressive and, therefore, void; and that
the portion of the amended by-laws which requires that "all
nominations for election of directors ... shall be submitted in
writing to the Board of Directors at least five (5) working days
before the date of the Annual Meeting" is likewise
unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be
declared null and void and the certificate of filing thereof be
cancelled, and that individual respondents be made to pay
damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case,
petitioner filed with the Securities and Exchange Commission
an "Urgent Motion for Production and Inspection of
Documents", alleging that the Secretary of respondent
corporation refused to allow him to inspect its records despite
request made by petitioner for production of certain
documents enumerated in the request, and that respondent
corporation had been attempting to suppress information from
its stockholders despite a negative reply by the SEC to its
query regarding their authority to do so. Among the
documents requested to be copied were (a) minutes of the
stockholder's meeting field on March 13, 1961, (b) copy of the
management contract between San Miguel Corporation and A.
Soriano Corporation (ANSCOR); (c) latest balance sheet of San
Miguel International, Inc.; (d) authority of the stockholders to
invest the funds of respondent corporation in San Miguel
International, Inc.; and (e) lists of salaries, allowances,
bonuses, and other compensation, if any, received by Andres
M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of
Documents" was opposed by respondents, alleging, among
others that the motion has no legal basis; that the demand is
not based on good faith; that the motion is premature since
the materiality or relevance of the evidence sought cannot be
determined until the issues are joined, that it fails to show
good cause and constitutes continued harrasment, and that
some of the information sought are not part of the records of
the corporation and, therefore, privileged.
During the pendency of the motion for production,
respondents San Miguel Corporation, Enrique Conde, Miguel
Ortigas and Antonio Prieto filed their answer to the petition,
denying the substantial allegations therein and stating, by
way of affirmative defenses that "the action taken by the
Board of Directors on September 18, 1976 resulting in the ...
amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board
on March 13, 1961 and long prior thereto has never been
revoked of SMC"; that contrary to petitioner's claim, "the vote
requirement for a valid delegation of the power to amend,
repeal or adopt new by-laws is determined in relation to the
total subscribed capital stock at the time the delegation of
said power is made, not when the Board opts to exercise said
delegated power"; that petitioner has not availed of his intracorporate remedy for the nullification of the amendment,

which is to secure its repeal by vote of the stockholders

representing a majority of the subscribed capital stock at any
regular or special meeting, as provided in Article VIII, section I
of the by-laws and section 22 of the Corporation law, hence
the, petition is premature; that petitioner is estopped from
questioning the amendments on the ground of lack of
authority of the Board. since he failed, to object to other
amendments made on the basis of the same 1961
authorization: that the power of the corporation to amend its
by-laws is broad, subject only to the condition that the by-laws
adopted should not be respondent corporation inconsistent
with any existing law; that respondent corporation should not
be precluded from adopting protective measures to minimize
or eliminate situations where its directors might be tempted
to put their personal interests over t I hat of the corporation;
that the questioned amended by-laws is a matter of internal
policy and the judgment of the board should not be interfered
with: That the by-laws, as amended, are valid and binding and
are intended to prevent the possibility of violation of criminal
and civil laws prohibiting combinations in restraint of trade;
and that the petition states no cause of action. It was,
therefore, prayed that the petition be dismissed and that
petitioner be ordered to pay damages and attorney's fees to
respondents. The application for writ of preliminary injunction
was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed
their opposition to the petition, denying the material
averments thereof and stating, as part of their affirmative
defenses, that in August 1972, the Universal Robina
Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began
acquiring shares therein. until September 1976 when its total
holding amounted to 622,987 shares: that in October 1972,
the Consolidated Foods Corporation (CFC) likewise began
acquiring shares in respondent (corporation. until its total
holdings amounted to P543,959.00 in September 1976; that
on January 12, 1976, petitioner, who is president and
controlling shareholder of Robina and CFC (both closed
corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and
Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the
stockholder "in his effort to secure for himself and in
representation of Robina and CFC interests, a seat in the
Board of Directors of SMC", that in the stockholders' meeting
of March 18, 1976, petitioner was rejected by the stockholders
in his bid to secure a seat in the Board of Directors on the
basic issue that petitioner was engaged in a competitive
business and his securing a seat would have subjected
respondent corporation to grave disadvantages; that
"petitioner nevertheless vowed to secure a seat in the Board
of Directors at the next annual meeting; that thereafter the
Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages,
exemplary damages, expenses of litigation and attorney's
fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of
the motion for production and inspection of documents was
filed by all the respondents. This was duly opposed by
petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr.
and Eduardo R. Visaya were allowed to intervene as
oppositors and they accordingly filed their oppositionsintervention to the petition.
On December 29, 1976, the Securities and Exchange
Commission resolved the motion for production and inspection
of documents by issuing Order No. 26, Series of 1977, stating,
in part as follows:

Considering the evidence submitted before

the Commission by the petitioner and
respondents in the above-entitled case, it is
hereby ordered:
1. That respondents produce and permit the
inspection, copying and photographing, by
or on behalf of the petitioner-movant, John
Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent
San Miguel Corporation held on March 13,
1961, which are in the possession, custody
and control of the said corporation, it
appearing that the same is material and
relevant to the issues involved in the main
case. Accordingly, the respondents should
allow petitioner-movant entry in the
principal office of the respondent
Corporation, San Miguel Corporation on
January 14, 1977, at 9:30 o'clock in the
morning for purposes of enforcing the rights
herein granted; it being understood that the
inspection, copying and photographing of
the said documents shall be undertaken
under the direct and strict supervision of
this Commission. Provided, however, that
other documents and/or papers not
heretofore included are not covered by this
Order and any inspection thereof shall
require the prior permission of this
Commission;
2. As to the Balance Sheet of San Miguel
International, Inc. as well as the list of
salaries, allowances, bonuses,
compensation and/or remuneration received
by respondent Jose M. Soriano, Jr. and
Andres Soriano from San Miguel
International, Inc. and/or its successors-ininterest, the Petition to produce and inspect
the same is hereby DENIED, as petitionermovant is not a stockholder of San Miguel
International, Inc. and has, therefore, no
inherent right to inspect said documents;
3. In view of the Manifestation of petitionermovant dated November 29, 1976,
withdrawing his request to copy and inspect
the management contract between San
Miguel Corporation and A. Soriano
Corporation and the renewal and
amendments thereof for the reason that he
had already obtained the same, the
Commission takes note thereof; and
4. Finally, the Commission holds in
abeyance the resolution on the matter of
production and inspection of the authority of
the stockholders of San Miguel Corporation
to invest the funds of respondent
corporation in San Miguel International, Inc.,
until after the hearing on the merits of the
principal issues in the above-entitled case.
This Order is immediately executory upon
its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its
reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet
to be heard, respondent corporation issued a notice of special
stockholders' meeting for the purpose of "ratification and
confirmation of the amendment to the By-laws", setting such
meeting for February 10, 1977. This prompted petitioner to
ask respondent Commission for a summary judgment insofar
as the first cause of action is concerned, for the alleged

reason that by calling a special stockholders' meeting for the

aforesaid purpose, private respondents admitted the invalidity
of the amendments of September 18, 1976. The motion for
summary judgment was opposed by private respondents.
Pending action on the motion, petitioner filed an "Urgent
Motion for the Issuance of a Temporary Restraining Order",
praying that pending the determination of petitioner's
application for the issuance of a preliminary injunction and/or
petitioner's motion for summary judgment, a temporary
restraining order be issued, restraining respondents from
holding the special stockholder's meeting as scheduled. This
motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an
order denying the motion for issuance of temporary
restraining order. After receipt of the order of denial,
respondents conducted the special stockholders' meeting
wherein the amendments to the by-laws were ratified. On
February 14, 1977, petitioner filed a consolidated motion for
contempt and for nullification of the special stockholders'
meeting.
A motion for reconsideration of the order denying petitioner's
motion for summary judgment was filed by petitioner before
respondent Commission on March 10, 1977. Petitioner alleges
that up to the time of the filing of the instant petition, the said
motion had not yet been scheduled for hearing. Likewise, the
motion for reconsideration of the order granting in part and
denying in part petitioner's motion for production of record
had not yet been resolved.
In view of the fact that the annul stockholders' meeting of
respondent corporation had been scheduled for May 10, 1977,
petitioner filed with respondent Commission a Manifestation
stating that he intended to run for the position of director of
respondent corporation. Thereafter, respondents filed a
Manifestation with respondent Commission, submitting a
Resolution of the Board of Directors of respondent corporation
disqualifying and precluding petitioner from being a candidate
for director unless he could submit evidence on May 3, 1977
that he does not come within the disqualifications specified in
the amendment to the by-laws, subject matter of SEC Case
No. 1375. By reason thereof, petitioner filed a manifestation
and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents
were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioner's
irreparable damage and prejudice, Allegedly despite a
subsequent Manifestation to prod respondent Commission to
act, petitioner was not heard prior to the date of the
stockholders' meeting.
Petitioner alleges that there appears a deliberate and
concerted inability on the part of the SEC to act hence
petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that
respondent corporation has been investing corporate funds in
other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 17
1/2 of the Corporation Law, he filed with respondent
Commission, on January 20, 1977, a petition seeking to have
private respondents Andres M. Soriano, Jr. and Jose M.
Soriano, as well as the respondent corporation declared guilty
of such violation, and ordered to account for such investments
and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private
respondents, to which a consolidated motion to strike and to
declare individual respondents in default and an opposition ad
abundantiorem cautelam were filed by petitioner. Despite the
fact that said motions were filed as early as February 4, 1977,
the commission acted thereon only on April 25, 1977, when it
denied respondents' motion to dismiss and gave them two (2)

days within which to file their answer, and set the case for
hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders'
meeting, including in the Agenda thereof, the following:
6. Re-affirmation of the authorization to the
Board of Directors by the stockholders at
the meeting on March 20, 1972 to invest
corporate funds in other companies or
businesses or for purposes other than the
main purpose for which the Corporation has
been organized, and ratification of the
investments thereafter made pursuant
thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed
with the SEC an urgent motion for the issuance of a writ of
preliminary injunction to restrain private respondents from
taking up Item 6 of the Agenda at the annual stockholders'
meeting, requesting that the same be set for hearing on May
3, 1977, the date set for the second hearing of the case on
the merits. Respondent Commission, however, cancelled the
dates of hearing originally scheduled and reset the same to
May 16 and 17, 1977, or after the scheduled annual
stockholders' meeting. For the purpose of urging the
Commission to act, petitioner filed an urgent manifestation on
May 3, 1977, but this notwithstanding, no action has been
taken up to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is
petitioner's contention before this Court that respondent
Commission gravely abused its discretion when it failed to act
with deliberate dispatch on the motions of petitioner seeking
to prevent illegal and/or arbitrary impositions or limitations
upon his rights as stockholder of respondent corporation, and
that respondent are acting oppressively against petitioner, in
gross derogation of petitioner's rights to property and due
process. He prayed that this Court direct respondent SEC to
act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining
order restraining private respondents from disqualifying or
preventing petitioner from running or from being voted as
director of respondent corporation and from submitting for
ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual
stockholders' meeting on May 10, 1977, or from Making
effective the amended by-laws of respondent corporation,
until further orders from this Court or until the Securities and
Ex-change Commission acts on the matters complained of in
the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition,
alleging that after a restraining order had been issued by this
Court, or on May 9, 1977, the respondent Commission served
upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375);
denying petitioner's motion for reconsideration, with its
supplement, of the order of the Commission denying in part
petitioner's motion for production of documents, petitioner's
motion for reconsideration of the order denying the issuance
of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioner's consolidated
motion to declare respondents in contempt and to nullify the
stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375),
allowing petitioner to run as a director of respondent
corporation but stating that he should not sit as such if
elected, until such time that the Commission has decided the
validity of the bylaws in dispute, and denying deferment of
Item 6 of the Agenda for the annual stockholders' meeting;
and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375),
denying petitioner's motion for reconsideration of the order of

respondent Commission denying petitioner's motion for

summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1)
that respondent Commission acted with indecent haste and
without circumspection in issuing the aforesaid orders to
petitioner's irreparable damage and injury; (2) that it acted
without jurisdiction and in violation of petitioner's right to due
process when it decided en banc an issue not raised before it
and still pending before one of its Commissioners, and without
hearing petitioner thereon despite petitioner's request to have
the same calendared for hearing , and (3) that the
respondents acted oppressively against the petitioner in
violation of his rights as a stockholder, warranting immediate
judicial intervention.
It is prayed in the supplemental petition that the SEC orders
complained of be declared null and void and that respondent
Commission be ordered to allow petitioner to undertake
discovery proceedings relative to San Miguel International.
Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on
the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and
Jose M. Soriano filed their comment, alleging that the petition
is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged
in business competitive and antagonistic to that of respondent
San Miguel Corporation, it appearing that the owns and
controls a greater portion of his SMC stock thru the Universal
Robina Corporation and the Consolidated Foods Corporation,
which corporations are engaged in business directly and
substantially competing with the allied businesses of
respondent SMC and of corporations in which SMC has
substantial investments. Further, when CFC and Robina had
accumulated investments. Further, when CFC and Robina had
accumulated shares in SMC, the Board of Directors of SMC
realized the clear and present danger that competitors or
antagonistic parties may be elected directors and thereby
have easy and direct access to SMC's business and trade
secrets and plans;
(2) that the amended by law were adopted to preserve and
protect respondent SMC from the clear and present danger
that business competitors, if allowed to become directors, will
illegally and unfairly utilize their direct access to its business
secrets and plans for their own private gain to the irreparable
prejudice of respondent SMC, and, ultimately, its stockholders.
Further, it is asserted that membership of a competitor in the
Board of Directors is a blatant disregard of no less that the
Constitution and pertinent laws against combinations in
restraint of trade;
(3) that by laws are valid and binding since a corporation has
the inherent right and duty to preserve and protect itself by
excluding competitors and antogonistic parties, under the law
of self-preservation, and it should be allowed a wide latitude in
the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC
Cases Nos. 1375 and 1423 was due to petitioner's own acts or
omissions, since he failed to have the petition to
suspend, pendente lite the amended by-laws calendared for
hearing. It was emphasized that it was only on April 29, 1977
that petitioner calendared the aforesaid petition for
suspension (preliminary injunction) for hearing on May 3,
1977. The instant petition being dated May 4, 1977, it is
apparent that respondent Commission was not given a chance
to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was,
it has become moot and academic because respondent
Commission has acted on the pending incidents, complained
of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed
his comment, alleging that the petition has become moot and

academic for the reason, among others that the acts of

private respondent sought to be enjoined have reference to
the annual meeting of the stockholders of respondent San
Miguel Corporation, which was held on may 10, 1977; that in
said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as
director; and that in the same meeting, Item 6 of the Agenda
was discussed, voted upon, ratified and confirmed. Further it
was averred that the questions and issues raised by petitioner
are pending in the Securities and Exchange Commission which
has acquired jurisdiction over the case, and no hearing on the
merits has been had; hence the elevation of these issues
before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that
the petition presents justiciable questions for the
determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and
oppresively against petitioner, warranting the intervention of
this Court; (2) a derivative suit, such as the instant case, is
not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and
confirmation of Item 6 of the Agenda of the annual
stockholders' meeting of May 10, 1977 did not render the
case moot; that the amendment to the bylaws which
specifically bars petitioner from being a director is void since
it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a
separate comment, alleging that after receiving a copy of the
restraining order issued by this Court and noting that the
restraining order did not foreclose action by it, the
Commission en banc issued Orders Nos. 449, 450 and 451 in
SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it
states that Order No. 450 which denied deferment of Item 6 of
the Agenda of the annual stockholders' meeting of respondent
corporation, took into consideration an urgent manifestation
filed with the Commission by petitioner on May 3, 1977 which
prayed, among others, that the discussion of Item 6 of the
Agenda be deferred. The reason given for denial of deferment
was that "such action is within the authority of the corporation
as well as falling within the sphere of stockholders' right to
know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their
investments are the ones directly affected." It was alleged
that the main petition has, therefore, become moot and
academic.
On September 29,1977, petitioner filed a second
supplemental petition with prayer for preliminary injunction,
alleging that the actuations of respondent SEC tended to
deprive him of his right to due process, and "that all possible
questions on the facts now pending before the respondent
Commission are now before this Honorable Court which has
the authority and the competence to act on them as it may
see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues
for resolution;
(1) whether or not the provisions of the amended by-laws of
respondent corporation, disqualifying a competitor from
nomination or election to the Board of Directors are valid and
reasonable;
(2) whether or not respondent SEC gravely abused its
discretion in denying petitioner's request for an examination
of the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of
discretion in allowing discussion of Item 6 of the Agenda of
the Annual Stockholders' Meeting on May 10, 1977, and the
ratification of the investment in a foreign corporation of the
corporate funds, allegedly in violation of section 17-1/2 of the
Corporation Law.

I
Whether or not amended by-laws are valid is purely a legal
question which public interest requires to be resolved
It is the position of the petitioner that "it is not necessary to
remand the case to respondent SEC for an appropriate ruling
on the intrinsic validity of the amended by-laws in compliance
with the principle of exhaustion of administrative remedies",
considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal
question. There is no factual dispute as to what the provisions
are and evidence is not necessary to determine whether such
amended by-laws are valid as framed and approved ... ";
second: "it is for the interest and guidance of the public that
an immediate and final ruling on the question be made ... ";
third: "petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice
against petitioner ... ", and "Commissioner Sulit ... approved
the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC
would only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano
similarly pray that this Court resolve the legal issues raised by
the parties in keeping with the "cherished rules of procedure"
that "a court should always strive to settle the entire
controversy in a single proceeding leaving no root or branch
to bear the seeds of future ligiation", citingGayong v.
Gayos. 3 To the same effect is the prayer of San Miguel
Corporation that this Court resolve on the merits the validity
of its amended by laws and the rights and obligations of the
parties thereunder, otherwise "the time spent and effort
exerted by the parties concerned and, more importantly, by
this Honorable Court, would have been for naught because
the main question will come back to this Honorable Court for
final resolution." Respondent Eduardo R. Visaya submits a
similar appeal.
It is only the Solicitor General who contends that the case
should be remanded to the SEC for hearing and decision of
the issues involved, invoking the latter's primary jurisdiction
to hear and decide case involving intra-corporate
controversies.
It is an accepted rule of procedure that the Supreme Court
should always strive to settle the entire controversy in a
single proceeding, leaving nor root or branch to bear the
seeds of future litigation. 4 Thus, in Francisco v. City of
Davao, 5 this Court resolved to decide the case on the merits
instead of remanding it to the trial court for further
proceedings since the ends of justice would not be subserved
by the remand of the case. In Republic v. Security Credit and
Acceptance Corporation, et al., 6 this Court, finding that the
main issue is one of law, resolved to decide the case on the
merits "because public interest demands an early disposition
of the case", and in Republic v. Central Surety and Insurance
Company, 7 this Court denied remand of the third-party
complaint to the trial court for further proceedings, citing
precedent where this Court, in similar situations resolved to
decide the cases on the merits, instead of remanding them to
the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public
interest demand an early disposition of the case; or (c) where
the trial court had already received all the evidence presented
by both parties and the Supreme Court is now in a position,
based upon said evidence, to decide the case on its
merits. 8 It is settled that the doctrine of primary jurisdiction
has no application where only a question of law is
involved. 8a Because uniformity may be secured through
review by a single Supreme Court, questions of law may
appropriately be determined in the first instance by
courts. 8b In the case at bar, there are facts which cannot be
denied, viz.: that the amended by-laws were adopted by the
Board of Directors of the San Miguel Corporation in the

exercise of the power delegated by the stockholders

ostensibly pursuant to section 22 of the Corporation Law; that
in a special meeting on February 10, 1977 held specially for
that purpose, the amended by-laws were ratified by more
than 80% of the stockholders of record; that the foreign
investment in the Hongkong Brewery and Distellery, a beer
manufacturing company in Hongkong, was made by the San
Miguel Corporation in 1948; and that in the stockholders'
annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were
ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a
competitor from nomination or election to the Board of
Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in
purely a question of law. 9 Whether the by-law is in conflict
with the law of the land, or with the charter of the corporation,
or is in a legal sense unreasonable and therefore unlawful is a
question of law. 10 This rule is subject, however, to the
limitation that where the reasonableness of a by-law is a mere
matter of judgment, and one upon which reasonable minds
must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have exercised
their authority. 11
Petitioner claims that the amended by-laws are invalid and
unreasonable because they were tailored to suppress the
minority and prevent them from having representation in the
Board", at the same time depriving petitioner of his "vested
right" to be voted for and to vote for a person of his choice as
director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose
M. Soriano and San Miguel Corporation content that ex.
conclusion of a competitor from the Board is legitimate
corporate purpose, considering that being a competitor,
petitioner cannot devote an unselfish and undivided Loyalty to
the corporation; that it is essentially a preventive measure to
assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged
with the promotion of the corporate enterprise; that access to
confidential information by a competitor may result either in
the promotion of the interest of the competitor at the expense
of the San Miguel Corporation, or the promotion of both the
interests of petitioner and respondent San Miguel Corporation,
which may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by
destroying free competition to the detriment of the consuming
public. It is further argued that there is not vested right of any
stockholder under Philippine Law to be voted as director of a
corporation. It is alleged that petitioner, as of May 6, 1978,
has exercised, personally or thru two corporations owned or
controlled by him, control over the following shareholdings in
San Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325
shares; (b) Universal Robina Corporation 738,647 shares;
(c) CFC Corporation 658,313 shares, or a total of 1,403,285
shares. Since the outstanding capital stock of San Miguel
Corporation, as of the present date, is represented by
33,139,749 shares with a par value of P10.00, the total shares
owned or controlled by petitioner represents 4.2344% of the
total outstanding capital stock of San Miguel Corporation. It is
also contended that petitioner is the president and substantial
stockholder of Universal Robina Corporation and CFC
Corporation, both of which are allegedly controlled by
petitioner and members of his family. It is also claimed that
both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and
substantially competing with the alleged businesses of San
Miguel Corporation, and of corporations in which SMC has
substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S

CORPORATIONS AND SAN MIGUEL CORPORATION

measure of self- protection, disqualify a competitor from

nomination and election to its Board of Directors.

According to respondent San Miguel Corporation, the areas of,

competition are enumerated in its Board the areas of
competition are enumerated in its Board Resolution dated
April 28, 1978, thus:

It is recognized by an authorities that 'every corporation has

the inherent power to adopt by-laws 'for its internal
government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. 12 At
common law, the rule was "that the power to make and adopt
by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled
throughout the United States that in the absence of positive
legislative provisions limiting it, every private corporation has
this inherent power as one of its necessary and inseparable
legal incidents, independent of any specific enabling provision
in its charter or in general law, such power of self-government
being essential to enable the corporation to accomplish the
purposes of its creation. 13

Product Line Estimated Market Share Total

1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of
competition affecting SMC involved product sales of over P400
million or more than 20% of the P2 billion total product sales
of SMC. Significantly, the combined market shares of SMC and
CFC-Robina in layer pullets dressed chicken, poultry and hog
feeds ice cream, instant coffee and woven fabrics would result
in a position of such dominance as to affect the prevailing
market factors.
It is further asserted that in 1977, the CFC-Robina group was
in direct competition on product lines which, for SMC,
represented sales amounting to more than ?478 million. In
addition, CFC-Robina was directly competing in the sale of
coffee with Filipro, a subsidiary of SMC, which product line
represented sales for SMC amounting to more than P275
million. The CFC-Robina group (Robitex, excluding Litton Mills
recently acquired by petitioner) is purportedly also in direct
competition with Ramie Textile, Inc., subsidiary of SMC, in
product sales amounting to more than P95 million. The areas
of competition between SMC and CFC-Robina in 1977
represented, therefore, for SMC, product sales of more than
P849 million.
According to private respondents, at the Annual Stockholders'
Meeting of March 18, 1976, 9,894 stockholders, in person or
by proxy, owning 23,436,754 shares in SMC, or more than
90% of the total outstanding shares of SMC, rejected
petitioner's candidacy for the Board of Directors because they
"realized the grave dangers to the corporation in the event a
competitor gets a board seat in SMC." On September 18,
1978, the Board of Directors of SMC, by "virtue of powers
delegated to it by the stockholders," approved the
amendment to ' he by-laws in question. At the meeting of
February 10, 1977, these amendments were confirmed and
ratified by 5,716 shareholders owning 24,283,945 shares, or
more than 80% of the total outstanding shares. Only 12
shareholders, representing 7,005 shares, opposed the
confirmation and ratification. At the Annual Stockholders'
Meeting of May 10, 1977, 11,349 shareholders, owning
27,257.014 shares, or more than 90% of the outstanding
shares, rejected petitioner's candidacy, while 946
stockholders, representing 1,648,801 shares voted for him. On
the May 9, 1978 Annual Stockholders' Meeting, 12,480
shareholders, owning more than 30 million shares, or more
than 90% of the total outstanding shares. voted against
petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS
OF DIRECTORS EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by
laws were adopted by the Board of Directors of San Miguel
Corporation a-, a measure of self-defense to protect the
corporation from the clear and present danger that the
election of a business competitor to the Board may cause
upon the corporation and the other stockholders inseparable
prejudice. Submitted for resolution, therefore, is the issue
whether or not respondent San Miguel Corporation could, as a

In this jurisdiction, under section 21 of the Corporation Law, a

corporation may prescribe in its by-laws "the qualifications,
duties and compensation of directors, officers and
employees ... " This must necessarily refer to a qualification in
addition to that specified by section 30 of the Corporation
Law, which provides that "every director must own in his right
at least one share of the capital stock of the stock corporation
of which he is a director ... " InGovernment v. El Hogar, 14 the
Court sustained the validity of a provision in the corporate bylaw requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00,
which shall be held as security for their action, on the ground
that section 21 of the Corporation Law expressly gives the
power to the corporation to provide in its by-laws for the
qualifications of directors and is "highly prudent and in
conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED
DIRECTOR
Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the
act of incorporation and lawfully enacted by-laws and not
forbidden by law." 15 To this extent, therefore, the stockholder
may be considered to have "parted with his personal right or
privilege to regulate the disposition of his property which he
has invested in the capital stock of the corporation, and
surrendered it to the will of the majority of his fellow
incorporators. ... It cannot therefore be justly said that the
contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is
authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any
corporation may amend its articles of incorporation by a vote
or written assent of the stockholders representing at least
two-thirds of the subscribed capital stock of the corporation If
the amendment changes, diminishes or restricts the rights of
the existing shareholders then the disenting minority has only
one right, viz.: "to object thereto in writing and demand
payment for his share." Under section 22 of the same law, the
owners of the majority of the subscribed capital stock may
amend or repeal any by-law or adopt new by-laws. It cannot
be said, therefore, that petitioner has a vested right to be
elected director, in the face of the fact that the law at the
time such right as stockholder was acquired contained the
prescription that the corporate charter and the by-law shall be
subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide
for the qualifications of its directors, the next question that
must be considered is whether the disqualification of a
competitor from being elected to the Board of Directors is a
reasonable exercise of corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE

CORPORATION AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a
private corporation are not regarded as trustees, there cannot
be any doubt that their character is that of a fiduciary insofar
as the corporation and the stockholders as a body are
concerned. As agents entrusted with the management of the
corporation for the collective benefit of the stockholders,
"they occupy a fiduciary relation, and in this sense the relation
is one of trust." 18 "The ordinary trust relationship of directors
of a corporation and stockholders", according to Ashaman v.
Miller, 19 "is not a matter of statutory or technical law. It
springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the
property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and
are ultimately the only beneficiaries thereof * * *.
20

Justice Douglas, in Pepper v. Litton, emphatically restated

the standard of fiduciary obligation of the directors of
corporations, thus:
A director is a fiduciary. ... Their powers are
powers in trust. ... He who is in such
fiduciary position cannot serve himself first
and his cestuis second. ... He cannot
manipulate the affairs of his corporation to
their detriment and in disregard of the
standards of common decency. He cannot
by the intervention of a corporate entity
violate the ancient precept against serving
two masters ... He cannot utilize his inside
information and strategic position for his
own preferment. He cannot violate rules of
fair play by doing indirectly through the
corporation what he could not do so directly.
He cannot violate rules of fair play by doing
indirectly though the corporation what he
could not do so directly. He cannot use his
power for his personal advantage and to the
detriment of the stockholders and creditors
no matter how absolute in terms that power
may be and no matter how meticulous he is
to satisfy technical requirements. For that
power is at all times subject to the equitable
limitation that it may not be exercised for
the aggrandizement, preference or
advantage of the fiduciary to the exclusion
or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co.,
said:

21

it was

... A person cannot serve two hostile and

adverse master, without detriment to one of
them. A judge cannot be impartial if
personally interested in the cause. No more
can a director. Human nature is too weak
-for this. Take whatever statute provision
you please giving power to stockholders to
choose directors, and in none will you find
any express prohibition against a discretion
to select directors having the company's
interest at heart, and it would simply be
going far to deny by mere implication the
existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a
stockholder in a competing company from being a director,
the same reasoning would apply to disqualify the wife and
immediate member of the family of such stockholder, on
account of the supposed interest of the wife in her husband's
affairs, and his suppose influence over her. It is perhaps true
that such stockholders ought not to be condemned as selfish
and dangerous to the best interest of the corporation until

tried and tested. So it is also true that we cannot condemn as

selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of
control in this corporation as in many others is perhaps
carried on not altogether in the spirit of brotherly love and
affection. The only test that we can apply is as to whether or
not the action of the Board is authorized and sanctioned by
law. ... . 22
These principles have been applied by this Court in previous
cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH
RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF
HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS
IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION,
HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to
Fletcher, that corporations have the power to make by-laws
declaring a person employed in the service of a rival company
to be ineligible for the corporation's Board of Directors. ... (A)n
amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation
whose business is in competition with or is antagonistic to the
other corporation is valid."24 This is based upon the principle
that where the director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the
other. Such an amendment "advances the benefit of the
corporation and is good." An exception exists in New Jersey,
where the Supreme Court held that the Corporation Law in
New Jersey prescribed the only qualification, and therefore the
corporation was not empowered to add additional
qualifications. 25 This is the exact opposite of the situation in
the Philippines because as stated heretofore, section 21 of the
Corporation Law expressly provides that a corporation may
make by-laws for the qualifications of directors. Thus, it has
been held that an officer of a corporation cannot engage in a
business in direct competition with that of the corporation
where he is a director by utilizing information he has received
as such officer, under "the established law that a director or
officer of a corporation may not enter into a competing
enterprise which cripples or injures the business of the
corporation of which he is an officer or director. 26
It is also well established that corporate officers "are not
permitted to use their position of trust and confidence to
further their private interests." 27 In a case where directors of
a corporation cancelled a contract of the corporation for
exclusive sale of a foreign firm's products, and after
establishing a rival business, the directors entered into a new
contract themselves with the foreign firm for exclusive sale of
its products, the court held that equity would regard the new
contract as an offshoot of the old contract and, therefore, for
the benefit of the corporation, as a "faultless fiduciary may
not reap the fruits of his misconduct to the exclusion of his
principal. 28
The doctrine of "corporate opportunity" 29 is precisely a
recognition by the courts that the fiduciary standards could
not be upheld where the fiduciary was acting for two entities
with competing interests. This doctrine rests fundamentally on
the unfairness, in particular circumstances, of an officer or
director taking advantage of an opportunity for his own
personal profit when the interest of the corporation justly calls
for protection. 30
It is not denied that a member of the Board of Directors of the
San Miguel Corporation has access to sensitive and highly
confidential information, such as: (a) marketing strategies and
pricing structure; (b) budget for expansion and diversification;
(c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with
other firms.
It is obviously to prevent the creation of an opportunity for an
officer or director of San Miguel Corporation, who is also the

officer or owner of a competing corporation, from taking

advantage of the information which he acquires as director to
promote his individual or corporate interests to the prejudice
of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial
sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy
his loyalty to both corporations and place the performance of
his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San
Diego, supra the court sustained as valid and reasonable an
amendment to the by-laws of a bank, requiring that its
directors should not be directors, officers, employees, agents,
nominees or attorneys of any other banking corporation,
affiliate or subsidiary thereof. Chief Judge Parker,
in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal
of information concerning the business and
plans of a bank which would likely be
injurious to the bank if known to another
bank, and it was reasonable and prudent to
enlarge this minimum disqualification to
include any director, officer, employee,
agent, nominee, or attorney of any other
bank in California. The Ashkins case, supra,
specifically recognizes protection against
rivals and others who might acquire
information which might be used against the
interests of the corporation as a legitimate
object of by-law protection. With respect to
attorneys or persons associated with a firm
which is attorney for another bank, in
addition to the direct conflict or potential
conflict of interest, there is also the danger
of inadvertent leakage of confidential
information through casual office
discussions or accessibility of files.
Defendant's directors determined that its
welfare was best protected if this
opportunity for conflicting loyalties and
potential misuse and leakage of confidential
information was foreclosed.
In McKee the Court further listed qualificational by-laws
upheld by the courts, as follows:
(1) A director shall not be directly or
indirectly interested as a stockholder in any
other firm, company, or association which
competes with the subject corporation.

director of San Miguel Corporation, he would absent himself

from meetings at which confidential matters would be
discussed, would not detract from the validity and
reasonableness of the by-laws here involved. Apart from the
impractical results that would ensue from such arrangement,
it would be inconsistent with petitioner's primary motive in
running for board membership which is to protect his
investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted
principles underlying a director's duty of fidelity to the
corporation, for the policy of the law is to encourage and
enforce responsible corporate management. As explained by
Oleck: 31 "The law win not tolerate the passive attitude of
directors ... without active and conscientious participation in
the managerial functions of the company. As directors, it is
their duty to control and supervise the day to day business
activities of the company or to promulgate definite policies
and rules of guidance with a vigilant eye toward seeing to it
that these policies are carried out. It is only then that directors
may be said to have fulfilled their duty of fealty to the
corporation."
Sound principles of corporate management counsel against
sharing sensitive information with a director whose fiduciary
duty of loyalty may well require that he disclose this
information to a competitive arrival. These dangers are
enhanced considerably where the common director such as
the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to
appropriate for the benefit of his own corporation the
corporate plans and policies of the corporation where he sits
as director.
Indeed, access by a competitor to confidential information
regarding marketing strategies and pricing policies of San
Miguel Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance
knowledge by the competitor of the strategies for the
development of existing or new markets of existing or new
products could enable said competitor to utilize such
knowledge to his advantage. 32
There is another important consideration in determining
whether or not the amended by-laws are reasonable. The
Constitution and the law prohibit combinations in restraint of
trade or unfair competition. Thus, section 2 of Article XIV of
the Constitution provides: "The State shall regulate or prohibit
private monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall
be snowed."
Article 186 of the Revised Penal Code also provides:

(2) A director shall not be the immediate

member of the family of any stockholder in
any other firm, company, or association
which competes with the subject
corporation,

Art. 186. Monopolies and combinations in

restraint of trade. The penalty of prision
correccional in its minimum period or a fine
ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:

(3) A director shall not be an officer, agent,

employee, attorney, or trustee in any other
firm, company, or association which
compete with the subject corporation.

1. Any person who shall enter into any

contract or agreement or shall take part in
any conspiracy or combination in the form
of a trust or otherwise, in restraint of trade
or commerce or to prevent by artificial
means free competition in the market.

(4) A director shall be of good moral

character as an essential qualification to
holding office.
(5) No person who is an attorney against the
corporation in a law suit is eligible for
service on the board. (At p. 7.)
These are not based on theorical abstractions but on human
experience that a person cannot serve two hostile masters
without detriment to one of them.
The offer and assurance of petitioner that to avoid any
possibility of his taking unfair advantage of his position as

2. Any person who shag monopolize any

merchandise or object of trade or
commerce, or shall combine with any other
person or persons to monopolize said
merchandise or object in order to alter the
price thereof by spreading false rumors or
making use of any other artifice to restrain
free competition in the market.
3. Any person who, being a manufacturer,
producer, or processor of any merchandise

or object of commerce or an importer of any

merchandise or object of commerce from
any foreign country, either as principal or
agent, wholesale or retailer, shall combine,
conspire or agree in any manner with any
person likewise engaged in the
manufacture, production, processing,
assembling or importation of such
merchandise or object of commerce or with
any other persons not so similarly engaged
for the purpose of making transactions
prejudicial to lawful commerce, or of
increasing the market price in any part of
the Philippines, or any such merchandise or
object of commerce manufactured,
produced, processed, assembled in or
imported into the Philippines, or of any
article in the manufacture of which such
manufactured, produced, processed, or
imported merchandise or object of
commerce is used.
There are other legislation in this jurisdiction, which prohibit
monopolies and combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or
combinations in restraint of trade are aimed at raising levels
of competition by improving the consumers' effectiveness as
the final arbiter in free markets. These laws are designed to
preserve free and unfettered competition as the rule of trade.
"It rests on the premise that the unrestrained interaction of
competitive forces will yield the best allocation of our
economic resources, the lowest prices and the highest
quality ... ." 34 they operate to forestall concentration of
economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and
combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly
restraining competition or unduly obstructing the course of
trade. 36
The terms "monopoly", "combination in restraint of trade" and
"unfair competition" appear to have a well defined meaning in
other jurisdictions. A "monopoly" embraces any combination
the tendency of which is to prevent competition in the broad
and general sense, or to control prices to the detriment of the
public. 37 In short, it is the concentration of business in the
hands of a few. The material consideration in determining its
existence is not that prices are raised and competition
actually excluded, but that power exists to raise prices or
exclude competition when desired. 38Further, it must be
considered that the Idea of monopoly is now understood to
include a condition produced by the mere act of individuals.
Its dominant thought is the notion of exclusiveness or unity, or
the suppression of competition by the qualification of interest
or management, or it may be thru agreement and concert of
action. It is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the
contentions of petitioner are not in accord with reality. The
election of petitioner to the Board of respondent Corporation
can bring about an illegal situation. This is because an express
agreement is not necessary for the existence of a combination
or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants
conformed to the arrangements, 41 and what is to be
considered is what the parties actually did and not the words
they used. For instance, the Clayton Act prohibits a person
from serving at the same time as a director in any two or
more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the
elimination of competition between them would constitute
violation of any provision of the anti-trust laws. 42 There is
here a statutory recognition of the anti-competitive dangers
which may arise when an individual simultaneously acts as a

director of two or more competing corporations. A common

director of two or more competing corporations would have
access to confidential sales, pricing and marketing information
and would be in a position to coordinate policies or to aid one
corporation at the expense of another, thereby stifling
competition. This situation has been aptly explained by
Travers, thus:
The argument for prohibiting competing
corporations from sharing even one director
is that theinterlock permits the coordination
of policies between nominally independent
firms to an extent that competition between
them may be completely eliminated.
Indeed, if a director, for example, is to be
faithful to both corporations, some
accommodation must result. Suppose X is a
director of both Corporation A and
Corporation B. X could hardly vote for a
policy by A that would injure B without
violating his duty of loyalty to B at the same
time he could hardly abstain from voting
without depriving A of his best judgment. If
the firms really do compete in the sense
of vying for economic advantage at the
expense of the other there can hardly be
any reason for an interlock between
competitors other than the suppression of
competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of
the U. S. Congress on section 9 of the Clayton Act, it was
established that: "By means of the interlocking directorates
one man or group of men have been able to dominate and
control a great number of corporations ... to the detriment of
the small ones dependent upon them and to the injury of the
public. 44
Shared information on cost accounting may lead to price
fixing. Certainly, shared information on production, orders,
shipments, capacity and inventories may lead to control of
production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and
cost conditions of the products of San Miguel Corporation, the
essence of competition in a free market for the purpose of
serving the lowest priced goods to the consuming public
would be frustrated, The competitor could so manipulate the
prices of his products or vary its marketing strategies by
region or by brand in order to get the most out of the
consumers. Where the two competing firms control a
substantial segment of the market this could lead to collusion
and combination in restraint of trade. Reason and experience
point to the inevitable conclusion that the inherent tendency
of interlocking directorates between companies that are
related to each other as competitors is to blunt the edge of
rivalry between the corporations, to seek out ways of
compromising opposing interests, and thus eliminate
competition. As respondent SMC aptly observes, knowledge
by CFC-Robina of SMC's costs in various industries and regions
in the country win enable the former to practice price
discrimination. CFC-Robina can segment the entire consuming
population by geographical areas or income groups and
change varying prices in order to maximize profits from every
market segment. CFC-Robina could determine the most
profitable volume at which it could produce for every product
line in which it competes with SMC. Access to SMC pricing
policy by CFC-Robina would in effect destroy free competition
and deprive the consuming public of opportunity to buy goods
of the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain
extent, engaged in agriculture, then the election of petitioner
to the Board of SMC may constitute a violation of the
prohibition contained in section 13(5) of the Corporation Law.

Said section provides in part that "any stockholder of more

than one corporation organized for the purpose of engaging in
agriculture may hold his stock in such corporations solely for
investment and not for the purpose of bringing about or
attempting to bring about a combination to exercise control of
incorporations ... ."
Neither are We persuaded by the claim that the by-law was
Intended to prevent the candidacy of petitioner for election to
the Board. If the by-law were to be applied in the case of one
stockholder but waived in the case of another, then it could be
reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms,
applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally
upon all persons of a class. Besides, before petitioner can be
declared ineligible to run for director, there must be hearing
and evidence must be submitted to bring his case within the
ambit of the disqualification. Sound principles of public policy
and management, therefore, support the view that a by-law
which disqualifies a competition from election to the Board of
Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public
policy, wide latitude may be accorded to the corporation in
adopting measures to protect legitimate corporation interests.
Thus, "where the reasonableness of a by-law is a mere matter
of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have expressed
their authority. 45
Although it is asserted that the amended by-laws confer on
the present Board powers to perpetua themselves in power
such fears appear to be misplaced. This power, but is very
nature, is subject to certain well established limitations. One
of these is inherent in the very convert and definition of the
terms "competition" and "competitor". "Competition" implies
a struggle for advantage between two or more forces, each
possessing, in substantially similar if not Identical degree,
certain characteristics essential to the business sought. It
means an independent endeavor of two or more persons to
obtain the business patronage of a third by offering more
advantageous terms as an inducement to secure trade. 46 The
test must be whether the business does in fact compete, not
whether it is capable of an indirect and highly unsubstantial
duplication of an isolated or non-characteristics activity. 47 It
is, therefore, obvious that not every person or entity engaged
in business of the same kind is a competitor. Such factors as
quantum and place of business, Identity of products and area
of competition should be taken into consideration. It is,
therefore, necessary to show that petitioner's business covers
a substantial portion of the same markets for similar products
to the extent of not less than 10% of respondent corporation's
market for competing products. While We here sustain the
validity of the amended by-laws, it does not follow as a
necessary consequence that petitioner is ipso
facto disqualified. Consonant with the requirement of due
process, there must be due hearing at which the petitioner
must be given the fullest opportunity to show that he is not
covered by the disqualification. As trustees of the corporation
and of the stockholders, it is the responsibility of directors to
act with fairness to the stockholders. 48 Pursuant to this
obligation and to remove any suspicion that this power may
be utilized by the incumbent members of the Board to
perpetuate themselves in power, any decision of the Board to
disqualify a candidate for the Board of Directors should be
reviewed by the Securities behind Exchange Commission en
banc and its decision shall be final unless reversed by this
Court on certiorari. 49 Indeed, it is a settled principle that
where the action of a Board of Directors is an abuse of
discretion, or forbidden by statute, or is against public policy,
or is ultra vires, or is a fraud upon minority stockholders or

creditors, or will result in waste, dissipation or misapplication

of the corporation assets, a court of equity has the power to
grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion
in denying petitioner's request for an examination of the
records of San Miguel International Inc., a fully owned
subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its
memorandum that petitioner's claim that he was denied
inspection rights as stockholder of SMC "was made in the
teeth of undisputed facts that, over a specific period,
petitioner had been furnished numerous documents and
information," to wit: (1) a complete list of stockholders and
their stockholdings; (2) a complete list of proxies given by the
stockholders for use at the annual stockholders' meeting of
May 18, 1975; (3) a copy of the minutes of the stockholders'
meeting of March 18,1976; (4) a breakdown of SMC's P186.6
million investment in associated companies and other
companies as of December 31, 1975; (5) a listing of the
salaries, allowances, bonuses and other compensation or
remunerations received by the directors and corporate
officers of SMC; (6) a copy of the US $100 million Euro-Dollar
Loan Agreement of SMC; and (7) copies of the minutes
of all meetings of the Board of Directors from January 1975 to
May 1976, with deletions of sensitive data, which deletions
were not objected to by petitioner.
Further, it was averred that upon request, petitioner was
informed in writing on September 18, 1976; (1) that SMC's
foreign investments are handled by San Miguel International,
Inc., incorporated in Bermuda and wholly owned by SMC; this
was SMC's first venture abroad, having started in 1948 with
an initial outlay of ?500,000.00, augmented by a loan of
Hongkong $6 million from a foreign bank under the personal
guaranty of SMC's former President, the late Col. Andres
Soriano; (2) that as of December 31, 1975, the estimated
value of SMI would amount to almost P400 million (3) that the
total cash dividends received by SMC from SMI since 1953 has
amount to US $ 9.4 million; and (4) that from 1972-1975, SMI
did not declare cash or stock dividends, all earnings having
been used in line with a program for the setting up of
breweries by SMI
These averments are supported by the affidavit of the
Corporate Secretary, enclosing photocopies of the aforementioned documents. 51
Pursuant to the second paragraph of section 51 of the
Corporation Law, "(t)he record of all business transactions of
the corporation and minutes of any meeting shall be open to
the inspection of any director, member or stockholder of the
corporation at reasonable hours."
The stockholder's right of inspection of the corporation's
books and records is based upon their ownership of the assets
and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership
or interest be termed an equitable ownership, a beneficial
ownership, or a ownership. 52This right is predicated upon the
necessity of self-protection. It is generally held by majority of
the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised
by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the
corporation. 53 In other words, the inspection has to be
germane to the petitioner's interest as a stockholder, and has
to be proper and lawful in character and not inimical to the
interest of the corporation. 54 In Grey v. Insular Lumber, 55 this
Court held that "the right to examine the books of the
corporation must be exercised in good faith, for specific and
honest purpose, and not to gratify curiosity, or for specific and
honest purpose, and not to gratify curiosity, or for speculative
or vexatious purposes. The weight of judicial opinion appears

to be, that on application for mandamus to enforce the right,

it is proper for the court to inquire into and consider the
stockholder's good faith and his purpose and motives in
seeking inspection. 56 Thus, it was held that "the right given
by statute is not absolute and may be refused when the
information is not sought in good faith or is used to the
detriment of the corporation." 57 But the "impropriety of
purpose such as will defeat enforcement must be set up the
corporation defensively if the Court is to take cognizance of it
as a qualification. In other words, the specific provisions take
from the stockholder the burden of showing propriety of
purpose and place upon the corporation the burden of
showing impropriety of purpose or motive. 58 It appears to be
the general rule that stockholders are entitled to full
information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain
such information, especially where it appears that the
company is being mismanaged or that it is being managed for
the personal benefit of officers or directors or certain of the
stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and
records of a corporation for a lawful purpose is a matter of
law, the right of such stockholder to examine the books and
records of a wholly-owned subsidiary of the corporation in
which he is a stockholder is a different thing.
Some state courts recognize the right under certain
conditions, while others do not. Thus, it has been held that
where a corporation owns approximately no property except
the shares of stock of subsidiary corporations which are
merely agents or instrumentalities of the holding company,
the legal fiction of distinct corporate entities may be
disregarded and the books, papers and documents of all the
corporations may be required to be produced for
examination, 60 and that a writ of mandamus, may be granted,
as the records of the subsidiary were, to all incontents and
purposes, the records of the parent even though subsidiary
was not named as a party. 61 mandamus was likewise held
proper to inspect both the subsidiary's and the parent
corporation's books upon proof of sufficient control or
dominion by the parent showing the relation of principal or
agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was
refused where the subsidiary corporation is a separate and
distinct corporation domiciled and with its books and records
in another jurisdiction, and is not legally subject to the control
of the parent company, although it owned a vast majority of
the stock of the subsidiary. 63 Likewise, inspection of the books
of an allied corporation by stockholder of the parent company
which owns all the stock of the subsidiary has been refused on
the ground that the stockholder was not within the class of
"persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that
the contractual right of former stockholders to inspect books
and records of the corporation included the right to inspect
corporation's subsidiaries' books and records which were in
corporation's possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held
entitled to inspect the records of a controlled subsidiary
corporation which used the same offices and had Identical
officers and directors.
In his "Urgent Motion for Production and Inspection of
Documents" before respondent SEC, petitioner contended that
respondent corporation "had been attempting to suppress
information for the stockholders" and that petitioner, "as
stockholder of respondent corporation, is entitled to copies of
some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the
petitioner notwithstanding the fact that no harm would be
caused thereby to the corporation." 67 There is no question
that stockholders are entitled to inspect the books and

records of a corporation in order to investigate the conduct of

the management, determine the financial condition of the
corporation, and generally take an account of the stewardship
of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is
wholly owned by respondent San Miguel Corporation and,
therefore, under its control, it would be more in accord with
equity, good faith and fair dealing to construe the statutory
right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records
of such wholly subsidiary which are in respondent
corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion
in allowing the stockholders of respondent corporation to
ratify the investment of corporate funds in a foreign
corporation
Petitioner reiterates his contention in SEC Case No. 1423 that
respondent corporation invested corporate funds in SMI
without prior authority of the stockholders, thus violating
section 17-1/2 of the Corporation Law, and alleges that
respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SEC's position is that submission of the
investment to the stockholders for ratification is a sound
corporate practice and should not be thwarted but
encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to
"invest its funds in any other corporation or business or for
any purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so
authorized by the affirmative vote of stockholders holding
shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done
solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders
holding shares entitling them to exercise at least two-thirds of
the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer
manufacturing facilities by SMC was an investment in the
same business stated as its main purpose in its Articles of
Incorporation, which is to manufacture and market beer. It
appears that the original investment was made in 1947-1948,
when SMC, then San Miguel Brewery, Inc., purchased a beer
brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for
the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru
the organization of SMI in Bermuda as a tax free
reorganization.
Under these circumstances, the ruling in De la Rama v. Manao
Sugar Central Co., Inc., supra, appears relevant. In said case,
one of the issues was the legality of an investment made by
Manao Sugar Central Co., Inc., without prior resolution
approved by the affirmative vote of 2/3 of the stockholders'
voting power, in the Philippine Fiber Processing Co., Inc., a
company engaged in the manufacture of sugar bags. The
lower court said that "there is more logic in the stand that if
the investment is made in a corporation whose business is
important to the investing corporation and would aid it in its
purpose, to require authority of the stockholders would be to
unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and,
quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or
securities. A private corporation, in order
to accomplish is purpose as stated in its

articles of incorporation, and subject to the

limitations imposed by the Corporation Law,
has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds,
securities, and other evidence of
indebtedness of any domestic or foreign
corporation. Such an act, if done in
pursuance of the corporate purpose, does
not need the approval of stockholders; but
when the purchase of shares of another
corporation is done solely for investment
and not to accomplish the purpose of its
incorporation, the vote of approval of the
stockholders is necessary. In any case, the
purchase of such shares or securities must
be subject to the limitations established by
the Corporations law; namely, (a) that no
agricultural or mining corporation shall be
restricted to own not more than 15% of the
voting stock of nay agricultural or mining
corporation; and (c) that such holdings shall
be solely for investment and not for the
purpose of bringing about a monopoly in
any line of commerce of combination in
restraint of trade." The Philippine
Corporation Law by Sulpicio S. Guevara,
1967 Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. A
private corporation has the power to invest
its corporate funds "in any other corporation
or business, or for any purpose other than
the main purpose for which it was
organized, provide that 'its board of
directors has been so authorized in a
resolution by the affirmative vote of
stockholders holding shares in the
corporation entitling them to exercise at
least two-thirds of the voting power on such
a propose at a stockholders' meeting called
for that purpose,' and provided further, that
no agricultural or mining corporation shall in
anywise be interested in any other
agricultural or mining corporation. When the
investment is necessary to accomplish its
purpose or purposes as stated in its articles
of incorporation the approval of the
stockholders is not necessary."" (Id., p. 108)
(Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no
authority to make the assailed investment, there is no
question that a corporation, like an individual, may ratify and
thereby render binding upon it the originally unauthorized
acts of its officers or other agents. 70 This is true because the
questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or
contract which is within the corporate powers, but which is
defective from a supported failure to observe in its execution
the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding
two-thirds of the voting power. This requirement is for the
benefit of the stockholders. The stockholders for whose
benefit the requirement was enacted may, therefore, ratify
the investment and its ratification by said stockholders
obliterates any defect which it may have had at the outset.
"Mere ultra vires acts", said this Court in Pirovano, 71 "or those
which are not illegal and void ab initio, but are not merely
within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when
ratified by the stockholders.
Besides, the investment was for the purchase of beer
manufacturing and marketing facilities which is apparently

relevant to the corporate purpose. The mere fact that

respondent corporation submitted the assailed investment to
the stockholders for ratification at the annual meeting of May
10, 1977 cannot be construed as an admission that
respondent corporation had committed an ultra vires act,
considering the common practice of corporations of
periodically submitting for the gratification of their
stockholders the acts of their directors, officers and
managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it
prays that petitioner be allowed to examine the books and
records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of
respondent San Miguel Corporation, six (6) Justices, namely,
Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and
De Castro, voted to sustain the validity per se of the amended
by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of
petitioner John Gokongwei, Jr. to run and if elected to sit as
director of respondent San Miguel Corporation being decided,
after a new and proper hearing by the Board of Directors of
said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating
and acting en banc and ultimately to this Court. Unless
disqualified in the manner herein provided, the prohibition in
the afore-mentioned amended by-laws shall not apply to
petitioner.
The afore-mentioned six (6) Justices, together with Justice
Fernando, voted to declare the issue on the validity of the
foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity
of the amended by-laws, pending hearing by this Court on the
applicability of section 13(5) of the Corporation Law to
petitioner.
Justice Fernando reserved his vote on the validity of subject
amendment to the by-laws but otherwise concurs in the
result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr.,
Fernandez and Guerrero filed a separate opinion, wherein they
voted against the validity of the questioned amended bylaws
and that this question should properly be resolved first by the
SEC as the agency of primary jurisdiction. They concur in the
result that petitioner may be allowed to run for and sit as
director of respondent SMC in the scheduled May 6, 1979
election and subsequent elections until disqualified after
proper hearing by the respondent's Board of Directors and
petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of
this Court.
In resume, subject to the qualifications aforestated judgment
is hereby rendered GRANTING the petition by allowing
petitioner to examine the books and records of San Miguel
International, Inc. as specified in the petition. The petition,
insofar as it assails the validity of the amended by- laws and
the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED.
No costs.