RECREATION AND AMUSEMENT ASSOCIATION OF THE PHILIPPINES, plaintiff-appellant,

vs.
THE CITY OF MANILA, THE MAYOR OF MANILA, THE CITY TREASURER OF MANILA, and
THE CHIEF OF POLICE OF MANILA, defendants-appellees.
Leandro H. Fernandez, Jr. for appellant.
City Fiscal Eugenio Angeles and Assistant Fiscal Eulogio S. Serrano for appellees.
FELIX, J.:
On March 30, 1954, the Recreation and Amusement Association of the Philippines, Inc., allegedly a
non-stock corporation organized and existing under the laws of the Philippines, whose 35 members
are licensed owner and operators in the City of Manila, of Five-Ball-Flipper-Action-Pinball machines
(also known as slot machines), filed a complaint in the Court of First Instance of said City praying
that a preliminary injunction be issued to restrain the City Mayor and the City Treasurer from
enforcing Ordinance No. 3628 passed by the Municipal Board of Manila on March 19, 1954, and
approved by the City Mayor on the following day, which reads as follows:
ORDINANCE NO. 3628.
AN ORDINANCE AMENDING SECTIONS SEVEN HUNDRED SEVENTY THREE AND
SEVEN HUNDRED SEVENTY FOUR ORDINANCE NUMBERED ONE THOUSAND SIX
HUNDRED KNOWN AS "THE REVISED ORDINANCES OF THE CITY OF MANILA", AS
LASTLY AMENDED BY HUNDRED FORTY SEVEN.
Be it ordained by the Municipal Board of the City of Manila, that:
SECTION 1. Sections seven hundred seventy-three and seven hundred seventy-four of
Ordinance Numbered One thousand six hundred, known as "The Revised Ordinances of the
City of Manila, as lastly amended by Ordinance Numbered Three thousand three hundred
forty-seven, are hereby amended to read as follows:
SEC. 773. Licenses. No person, entity or corporation shall install or cause to be installed
for the use of the public for compensation any mechanical contrivance or automatic
apparatus which functions through the introduction of money not otherwise prohibited by law
of weights and measure and not a gambling device, for purposes of amusement or of
confronting the weight of persons or things, or printing letters or numbers, or displaying
features inside the apparatus or reproducing recorded music including other kinds of
machines or apparatus without having first obtained a license therefor from the City
Treasurer. Such license must be posted on the apparatus concerned, Provided, that the
operation or maintenance of pinball machines, not otherwise failing under the category of
gambling device, shall not be allowed within a radius of two hundred (200) meters from any
church, hospital, institution of learning public market, plaza, and government buildings.
SEC. 774. Fees. There shall be paid for every license granted for the installation and use
of an apparatus provided in this chapter, an annual fee of P300 which is payable in advance:

Provided, that person-coin operated weighing or scale machines shall pay only an annual
fee of P12, payable in advance.
SEC. 2. This Ordinance shall take effect on its approval.
Enacted, March 19, 1954.
Approved, March 20, 1954.
It is further prayed in the complaint that the City Mayor and the Treasurer be compelled to issue
permits and licenses to the members of the said corporation upon compliance with the provisions of
the ordinance (No. 3347) enforced before the enactment of Ordinance No. 3628; that after hearing,
said ordinance he declared null and void, the writ of preliminary injunction be made permanent, and
that plaintiff be granted such other relief to which it may be entitled under the law.
Acting upon this complaint, the lower court required plaintiff to file, as it did file, a bond in the amount
of P2,000 for the issuance of a writ of preliminary injunction to restrain the defendant City Officials
from enforcing the ordinance in question, and said writ was actually issued on April 1, 1954.
Thereupon, Assistant City Fiscal filed on April 14, 1954, a motion to lift the writ of preliminary
injunction issued as well as a motion to dismiss on the ground that plaintiff has no legal capacity to
sue and that the complaint states no cause of action. Defendants argue that the complaint does not
state that plaintiff is the owner of any pinball machine to be affected by the ordinance in question; on
the contrary, it appears from the complaint that the real parties in interest are the individual members
of said organization whose names are not given. Such being the case, plaintiff association cannot be
in any way adversely affected by the enforcement of the questioned ordinance, from which it follows
that the complaint does not state a cause of action.
A supplement to the Motion to Dismiss and the Motion to lift the Preliminary Injunction was
subsequently filed on April 21, 1954, wherein defendants' counsel endeavors to substantiate its
previous contention by alleging, among others, that the ordinance subject of litigation is a valid
legislation and within the power of the Municipal Board to enact; that the power of the Board to
regulate slot machines is embodied in the Revised Charter of the City of Manila (section 18-(1) of
Republic Act No. 409); that the regulation of the operation and maintenance of this kind of machine
which they alleged to be inimical to the general welfare of the population especially the school
children, is a lawful exercise of the police power of the State (section 18-kk), Republic Act No. 409);
and that as it a discretionary function of the Mayor to deny or issue permits and licenses, he cannot
be compelled by mandamus to issue the same.
Upon defendants' motion, the hearing of the motion to dismiss was re-set for April 24, 1954, and on
that date the Court granted defendants' counsel a period of 5 days from April 26, 1954, to file an
answer to plaintiff's opposition to the motions to dismiss and to lift the preliminary injunction, and
another 5 days to plaintiff's counsel to reply, if necessary.
On May 7, 1954, plaintiff was served with a "Resolucion" dated April 30, 1954, issued by the trial
Judge, wherein the Court dismissed the complaint and dissolved the injunction issued thereby on the
ground that the City Mayor has discretionary power to issue or refuse the issuance of a license or
permit, declaring at the same time that Ordinance No. 3628 is valid and within the power of the
Municipal Board to enact. The motion for reconsideration filed by plaintiff having been denied, the

case was brought to us on appeal and in this instance plaintiff ascribes to the lower Court the
commission of the following errors:
1. In motu proprio resolving upon the constitutionality or Ordinance No. 3628 at said stage of the
proceeding (before defendants' answer and hearing on the merits), and consequently, in dissolving
the writ of preliminary injunction;
2. In finding the Mayor of Manila vested with discretionary powers to grant or refuse to issue
municipal licenses and permits, and that the same cannot be controlled by mandamus; and
3. In finding Ordinance No. 3628 valid and constitutional assuming that it had the power to do so at
such stage of the proceeding.
There is no dispute that the Municipal Board of the City of Manila passed Ordinance No. 3628
limiting the operation and maintenance of a certain kind of slot machine to areas not within the
radius of 200 hundred meters from any church, hospital, institution of learning, public market, plaza
and government buildings and that it increased the annual fee from P55 to P300 payable in
advance. It is likewise clear that at the expiration of the period allowed the parties within which to file
certain pleadings in connection with defendants' motion to dismiss, the Court issued a "Resolucion"
dated April 30, 1954, the dispositive part of which, translated into English, reads as follows:
In view of the foregoing consideration the Court is of the opinion and consequently declares
Ordinance No. 3628 of the City of Manila valid and that the writ of preliminary injunction
issued by this Court shall be dissolved with costs against plaintiff.
It is to be stated in this connection that defendants did not file in time their answer to plaintiff's
opposition to their two motions, but on May 4, 1954, and that is undoubtedly the reason why the
Court prepared its Resolution before the lapse of plaintiff's period to reply if necessary" (which was
conditioned on defendants' pleading which the latter failed to submit in time), though it was released
thereafter, or on May 7, 1956. It is true that the trial Judge, instead of ruling on the motion to dismiss
on either of the two grounds stated therein, namely, lack of legal capacity to sue and failure to state
a cause of action, elected to ignore the same and dismissed the complaint upon its own findings.
However, it is to be remembered that it was only the motion to dismiss that was set for hearing and
that section 3, Rule 8 of the Rules of Court provides for the manner in which such kind of motion
may be resolved:
SEC. 3. Order. After hearing the Court may deny or grant the motion or allow amendment
of pleading, or may defer the hearing and determination of the motion until the trial if the
ground alleged therein does not appear to be indubitable.
By arriving at a conclusion upholding the constitutionality of the ordinance and stating the reasons in
support of such declaration, the lower court though in effect it passed upon the merits of the case,
also assumed the lack of sufficient cause of action on the part of the plaintiff. Moreover, the question
relative to the constitutionality of a statute or ordinance is one of law which does not need to be
supported by evidence.

In the complaint filed with the lower court, plaintiff alleged that it was a non-stock corporation duly
organized and existing in accordance with the laws of the Philippines. Subsequent inquires from the
Securities and Exchange Commission and the Bureau of Commerce disclosed that the Recreation
and Amusement Association of the Philippines, Inc., is not registered and does not appear in the files
of said Offices. Most probably, owners and operators of such pin-ball machines met, put up their set
of officers and thus an association was formed, after which they merely folded their arms and
exerted no further effort to effectuate the necessary registration that would bestow juridicial
personality upon it. The right to be and to act as a corporation is not a natural or civil right any
person; such right as well as the right to enjoy the immunities and privileges resulting from
incorporation constitute a franchise and a corporation, therefore cannot be created except by or
under a special authority from the state (Vol. II, Tolentino's Commentaries and Jurisprudence on the
Commercial Law of the Philippines, p. 734). When there is no legal organization of a corporation, the
association of a group of men for business or other endeavors does not absorb the personality of the
group and merge it into the personality of another separate and independent entity which is not
given corporate life by the mere formation of the group. Such conglomeration of persons is
incompetent to act as a corporation, cannot create agents, or exercise by itself authority in its behalf.
(See Fay vs. Noble, 7 Cushing (Mass.) 188.)
Section 1-(c), Rule 8 of the Rules of Court provides for the grounds upon which an action may be
dismissed upon motion of defendant and one of them is "that the plaintiff has no legal capacity to
sue." The City Fiscal rightly capitalized on this basis because as far as the Court was concerned,
appellant herein, being an association not organized as a juridicial entity, did not possess the
personality to conduct or maintain an action. The term "lack of legal capacity to sue" means either
that the plaintiff does not have the necessary qualifications to appear in the case . . . or when he
does not have the character or representation which he claims, as, when he is not a duly appointed
executor or administrator of the estate he purports to represent, or that the plaintiff is not a
corporation duly registered in accordance with law. (I Moran's Comments on the Rules of Court, p.
168, 1952 ed.)
It may be argued that under the law plaintiff could be considered as a civil association, but in this
case plaintiff-appellant does not claim to be a civil association but a corporation and as such it has
no capacity to sue.
If from the records of the case We shall find, as We do: (1) that plaintiff has no legal capacity to sue;
(2) that the complaint states no cause of action; and (3) that a proper and adequate interpretation of
section 18, paragraph (1) and (kk) of Republic Act No. 409, would lead Us to conclude that
Ordinance No. 3628 of the City of Manila is valid, would We be justified in annuling or setting aside
the order of the Court dismissing this case, just because it was issued before the filing of defendants'
answer and before hearing on the merits but after defendants had submitted their motion to dismiss
and argued maintaining the constitutionality of said ordinance? On the strenght of the foregoing
considerations, the answer is obviously in the negative.
Wherefore, the order appealed from is hereby affirmed, with costs against appellant. It is so ordered.

In Republic v. Coalbrine International Philippines, Inc.,9 the Court cited instances

wherein the lack of authority of the person making the certification of nonforum shopping was remedied through subsequent compliance by the parties
therein. Thus,[w]hile there were instances where we have allowed the filing of
a certification against non-forum shopping by someone on behalf of a
corporation without the accompanying proof of authority at the time of its
filing, we did so on the basis of a special circumstance or compelling reason.
Moreover, there was a subsequent compliance by the submission of the proof
of authority attesting to the fact that the person who signed the certification
was duly authorized.

Cruz vs dalisay
In 1984, the National Labor Relations Commission issued an order against Qualitrans
Limousine Service, Inc. (QLSI) ordering the latter to reinstate the employees it terminated
and to pay them backwages. Quiterio Dalisay, Deputy Sheriff of the court, to satisfy the
backwages, then garnished the bank account of Adelio Cruz. Dalisay justified his act by
averring that Cruz was the owner and president of QLSI. Further, he claimed that the
counsel for the discharged employees advised him to garnish the account of Cruz.
ISSUE: Whether or not the action of Dalisay is correct.
HELD: No. What Dalisay did is tantamount to piercing the veil of corporate fiction. He
actually usurped the power of the court. He also overstepped his duty as a deputy sheriff.
His duty is merely ministerial and it is incumbent upon him to execute the decision of the
court according to its tenor and only against the persons obliged to comply. In this case, the
person judicially named to comply was QLSI and not Cruz. It is a well-settled doctrine both
in law and in equity that as a legal entity, a corporation has a personality distinct and
separate from its individual stockholders or members. The mere fact that one is president of
a corporation does not render the property he owns or possesses the property of the
corporation, since the president, as individual, and the corporation are separate entities.

HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C.

SOLANTE, and DORIS C. MAGLASANG, as Heirs of Deceased SPOUSES

RAYMUNDO I. CRYSTAL and DESAMPARADOS C. CRYSTAL, petitioners,

vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
TINGA, J.:
Before us is a Petition for Review1 of the Decision2 and Resolution3 of the
Court of Appeals dated 24 October 2005 and 31 March 2006, respectively, in
CA G.R. CV No. 72886, which affirmed the 8 June 2001 decision of the
Regional Trial Court, Branch 5, of Cebu City.4
The facts, as culled from the records, follow.
On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained
a P300,000.00 loan in behalf of the Cebu Contractors Consortium Co.
(CCCC) from the Bank of the Philippine Islands-Butuan branch (BPI-Butuan).
The loan was secured by a chattel mortgage on heavy equipment and
machinery of CCCC. On the same date, the spouses executed in favor of BPIButuan a Continuing Suretyship5 where they bound themselves as surety of
CCCC in the aggregate principal sum of not exceeding P300,000.00.
Thereafter, or on 29 March 1979, Raymundo Crystal executed a promissory
note6 for the amount of P300,000.00, also in favor of BPI-Butuan.
Sometime in August 1979, CCCC renewed a previous loan, this time from
BPI, Cebu City branch (BPI-Cebu City). The renewal was evidenced by a
promissory note7 dated 13 August 1979, signed by the spouses in their
personal capacities and as managing partners of CCCC. The promissory note
states that the spouses are jointly and severally liable with CCCC. It appears
that before the original loan could be granted, BPI-Cebu City required CCCC
to put up a security.
However, CCCC had no real property to offer as security for the loan; hence,
the spouses executed a real estate mortgage8 over their own real property on
22 September 1977.9 On 3 October 1977, they executed another real estate

mortgage over the same lot in favor of BPI-Cebu City, to secure an additional
loan of P20,000.00 of CCCC.10
CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they
became due. CCCC, as well as the spouses, failed to pay their obligations
despite demands. Thus, BPI resorted to the foreclosure of the chattel
mortgage and the real estate mortgage. The foreclosure sale on the chattel
mortgage was initially stalled with the issuance of a restraining order against
BPI.11 However, following BPIs compliance with the necessary requisites of
extrajudicial foreclosure, the foreclosure sale on the chattel mortgage was
consummated on 28 February 1988, with the proceeds amounting
to P240,000.00 applied to the loan from BPI-Butuan which had then
reached P707,393.90.12Meanwhile, on 7 July 1981, Insular Bank of Asia and
America (IBAA), through its Vice-President for Legal and Corporate Affairs,
offered to buy the lot subject of the two (2) real
estate mortgages and to pay directly the spouses indebtedness in exchange
for the release of the mortgages. BPI rejected IBAAs offer to pay.13
BPI filed a complaint for sum of money against CCCC and the spouses before
the Regional Trial Court of Butuan City (RTC Butuan), seeking to recover the
deficiency of the loan of CCCC and the spouses with BPI-Butuan. The trial
court ruled in favor of BPI. Pursuant to the decision, BPI instituted extrajudicial
foreclosure of the spouses mortgaged property.14
On 10 April 1985, the spouses filed an action for Injunction With Damages,
With A Prayer For A Restraining Order and/ or Writ of Preliminary
Injunction.15 The spouses claimed that the foreclosure of the real estate
mortgages is illegal because BPI should have exhausted CCCCs properties
first, stressing that they are mere guarantors of the renewed loans. They also
prayed that they be awarded moral and exemplary damages, attorneys fees,
litigation expenses and cost of suit. Subsequently, the spouses filed an
amended complaint,16 additionally alleging that CCCC had opened and
maintained a foreign currency savings account (FCSA-197) with bpi, Makati
branch (BPI-Makati), and that said FCSA was used as security for
a P450,000.00 loan also extended by BPI-Makati. The P450,000.00 loan was
allegedly paid, and thereafter the spouses demanded the return of the FCSA

passbook. BPI rejected the demand; thus, the spouses were unable to
withdraw from the said account to pay for their other obligations to BPI.
The trial court dismissed the spouses complaint and ordered them to pay
moral and exemplary damages and attorneys fees to BPI.17 It ruled that since
the spouses agreed to bind themselves jointly and severally, they are
solidarily liable for the loans; hence, BPI can validly foreclose the two real
estate mortgages. Moreover, being guarantors-mortgagors, the spouses are
not entitled to the benefit of exhaustion. Anent the FCSA, the trial court found
that CCCC originally had FCDU SA No. 197 with BPI, Dewey Boulevard
branch, which was transferred to BPI-Makati as FCDU SA 76/0035, at the
request of Desamparados Crystal. FCDU SA 76/0035 was thus closed, but
Desamparados Crystal failed to surrender the passbook because it was lost.
The transferred FCSA in BPI-Makati was the one used as security for
CCCCs P450,000.00 loan from BPI-Makati. CCCC was no longer allowed to
withdraw from FCDU SA No. 197 because it was already closed.
The spouses appealed the decision of the trial court to the Court of Appeals,
but their appeal was dismissed.18 The spouses moved for the reconsideration
of the decision, but the Court of Appeals also denied their motion for
reconsideration.19 Hence, the present petition.
Before the Court, petitioners who are the heirs of the spouses argue that the
failure of the spouses to pay the BPI-Cebu City loan of P120,000.00 was due
to BPIs illegal refusal to accept payment for the loan unless the P300,000.00
loan from BPI-Butuan would also be paid. Consequently, in view of BPIs
unjust refusal to accept payment of the BPI-Cebu City loan, the loan obligation
of the spouses was extinguished, petitioners contend.
The contention has no merit. Petitioners rely on IBAAs offer to purchase the
mortgaged lot from them and to directly pay BPI out of the proceeds thereof to
settle the loan.20 BPIs refusal to agree to such payment scheme cannot
extinguish the spouses loan obligation. In the first place, IBAA is not privy to
the loan agreement or the promissory note between the spouses and BPI.
Contracts, after all, take effect only between the parties, their successors in
interest, heirs

and assigns.21 Besides, under Art. 1236 of the Civil Code, the creditor is not
bound to accept payment or performance by a third person who has no
interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary. We see no stipulation in the promissory note which states that a third
person may fulfill the spouses obligation. Thus, it is clear that the spouses
alone bear responsibility for the same.
In any event, the promissory note is the controlling repository of the obligation
of the spouses. Under the promissory note, the spouses defined the
parameters of their obligation as follows:
On or before June 29, 1980 on demand, for value received, I/we
promise to pay, jointly and severally, to the BANK OF THE PHILIPPINE
ISLANDS, at its office in the city of Cebu Philippines, the sum of ONE
HUNDRED TWENTY THOUSAND PESOS (P120,0000.00), Philippine
Currency, subject to periodic installments on the principal as
follows: P30,000.00 quarterly amortization starting September 28, 1979.
x x x 22
A solidary obligation is one in which each of the debtors is liable for the entire
obligation, and each of the creditors is entitled to demand the satisfaction of
the whole obligation from any or all of the debtors. 23 A liability is solidary "only
when the obligation expressly so states, when the law so provides or when
the nature of the
obligation so requires."24 Thus, when the obligor undertakes to be "jointly and
severally" liable, it means that the obligation is solidary,25 such as in this case.
By stating "I/we promise to pay, jointly and severally, to the BANK OF THE
PHILIPPINE ISLANDS," the spouses agreed to be sought out and be
demanded payment from, by BPI. BPI did demand payment from them, but
they failed to comply with their obligation, prompting BPIs valid resort to the
foreclosure of the chattel mortgage and the real estate mortgages.
More importantly, the promissory note, wherein the spouses undertook to be
solidarily liable for the principal loan, partakes the nature of a suretyship and
therefore is an additional security for the loan. Thus we held in one case that if
solidary liability was instituted to "guarantee" a principal obligation, the law

deems the contract to be one of suretyship.26 And while a contract of a surety

is in essence secondary only to a valid principal obligation, the suretys liability
to the creditor or promisee of the principal is said to be direct, primary, and
absolute; in other words, the surety is directly and equally bound with the
principal. The surety therefore becomes liable for the debt or duty of another
even if he possesses no direct or personal interest over the obligations nor
does he receive any benefit therefrom.27
Petitioners contend that the Court of Appeals erred in not granting their
counterclaims, considering that they suffered moral damages in view of the
unjust refusal of BPI to accept the payment scheme proposed by IBAA and
the allegedly unjust and illegal foreclosure of the real estate mortgages on
their property.28 Conversely, they argue that the Court of Appeals erred in
awarding moral damages to BPI, which is a corporation, as well as exemplary
damages, attorneys fees and expenses of litigation.29
We do not agree. Moral damages are meant to compensate the claimant for
any physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation and similar
injuries unjustly caused.30 Such damages, to be recoverable, must be the
proximate result of a wrongful act or omission the factual basis for which is
satisfactorily established by the aggrieved party.31 There being no wrongful or
unjust act on the part of BPI in demanding payment from them and in seeking
the foreclosure of the chattel and real estate mortgages, there is no lawful
basis for award of damages in favor of the spouses.
Neither is BPI entitled to moral damages. A juridical person is generally not
entitled to moral damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock.32 The Court of Appeals found
BPI as "being famous and having gained its familiarity and respect not only in
the Philippines but also in the whole world because of its good will and good
reputation must protect and defend the same against any unwarranted suit
such as the case at bench."33 In holding that BPI is entitled to moral damages,
the Court of Appeals relied on the case of People v. Manero,34 wherein the
Court ruled that "[i]t is only when a juridical person has a good reputation that

is debased, resulting in social humiliation, that moral damages may be

awarded."35
We do not agree with the Court of Appeals. A statement similar to that made
by the Court in Manerocan be found in the case of Mambulao Lumber Co. v.
PNB, et al.,36 thus:
x x x Obviously, an artificial person like herein appellant corporation
cannot experience physical sufferings, mental anguish, fright, serious
anxiety, wounded feelings, moral shock or social humiliation which are
basis of moral damages. A corporation may have good reputation
which, if besmirched may also be a ground for the award of moral
damages. x x x (Emphasis supplied)
Nevertheless, in the more recent cases of ABS-CBN Corp. v. Court of
Appeals, et al.,37 and Filipinas Broadcasting Network, Inc. v. Ago Medical and
Educational Center-Bicol Christian College of Medicine (AMEC-BCCM),38 the
Court held that the statements in Manero and Mambulao were mere obiter
dicta, implying that the award of moral damages to corporations is not a hard
and fast rule. Indeed, while the Court may allow the grant of moral damages
to corporations, it is not automatically granted; there must still be proof of the
existence of the factual basis of the damage and its causal relation to the
defendants acts. This is so because moral damages, though incapable of
pecuniary estimation, are in the category of an award designed to
compensate the claimant for actual injurysuffered and not to impose a
penalty on the wrongdoer.39
The spouses complaint against BPI proved to be unfounded, but it does not
automatically entitle BPI to moral damages. Although the institution of a
clearly unfounded civil suit can at times be a legal
justification for an award of attorney's fees, such filing, however, has almost
invariably been held not to be a ground for an award of moral damages. The
rationale for the rule is that the law could not have meant to impose a penalty
on the right to litigate. Otherwise, moral damages must every time be awarded
in favor of the prevailing defendant against an unsuccessful plaintiff.40 BPI
may have been inconvenienced by the suit, but we do not see how it could

have possibly suffered besmirched reputation on account of the single suit

alone. Hence, the award of moral damages should be deleted.
The awards of exemplary damages and attorneys fees, however, are proper.
Exemplary damages, on the other hand, are imposed by way of example or
correction for the public good, when the party to a contract acts in a wanton,
fraudulent, oppressive or malevolent manner, while attorneys fees are
allowed when exemplary damages are awarded and when the party to a suit
is compelled to incur expenses to protect his interest.41 The spouses instituted
their complaint against BPI notwithstanding the fact that they were the ones
who failed to pay their obligations. Consequently, BPI was forced to litigate
and defend its interest. For these reasons, BPI is entitled to the awards of
exemplary damages and attorneys fees.
WHEREFORE, the petition is DENIED. The Decision and Resolution of the
Court of Appeals dated 24 October 2005 and 31 March 2006, respectively, are
hereby AFFIRMED, with the MODIFICATION that the award of moral
damages to Bank of the Philippine Islands is DELETED.
Costs against the petitioners.
SMITH, BELL & COMPANY (LTD.), petitioner,
vs.
JOAQUIN NATIVIDAD, Collector of Customs of the port of Cebu, respondent.
Ross and Lawrence for petitioner.
Attorney-General Paredes for respondent.
MALCOLM, J.:
A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against Joaquin Natividad, Collector of
Customs of the port of Cebu, Philippine Islands, to compel him to issue a certificate of Philippine
registry to the petitioner for its motor vessel Bato. The Attorney-General, acting as counsel for
respondent, demurs to the petition on the general ground that it does not state facts sufficient to
constitute a cause of action. While the facts are thus admitted, and while, moreover, the pertinent
provisions of law are clear and understandable, and interpretative American jurisprudence is found in
abundance, yet the issue submitted is not lightly to be resolved. The question, flatly presented, is,
whether Act. No. 2761 of the Philippine Legislature is valid or, more directly stated, whether the
Government of the Philippine Islands, through its Legislature, can deny the registry of vessels in its
coastwise trade to corporations having alien stockholders.

FACTS.
Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the laws of the Philippine
Islands. A majority of its stockholders are British subjects. It is the owner of a motor vessel known as
the Bato built for it in the Philippine Islands in 1916, of more than fifteen tons gross The Bato was
brought to Cebu in the present year for the purpose of transporting plaintiff's merchandise between
ports in the Islands. Application was made at Cebu, the home port of the vessel, to the Collector of
Customs for a certificate of Philippine registry. The Collector refused to issue the certificate, giving as
his reason that all the stockholders of Smith, Bell & Co., Ltd., were not citizens either of the United
States or of the Philippine Islands. The instant action is the result.
LAW.
The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30, 1906 but reenacting a
portion of section 3 of this Law, and still in force, provides in its section 1:
That until Congress shall have authorized the registry as vessels of the United States of
vessels owned in the Philippine Islands, the Government of the Philippine Islands is hereby
authorized to adopt, from time to time, and enforce regulations governing the transportation
of merchandise and passengers between ports or places in the Philippine Archipelago. (35
Stat. at L., 70; Section 3912, U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)
The Act of Congress of August 29, 1916, commonly known as the Jones Law, still in force, provides
in section 3, (first paragraph, first sentence), 6, 7, 8, 10, and 31, as follows.
SEC. 3. That no law shall be enacted in said Islands which shall deprive any person of life,
liberty, or property without due process of law, or deny to any person therein the equal
protection of the laws. . . .
SEC. 6. That the laws now in force in the Philippines shall continue in force and effect,
except as altered, amended, or modified herein, until altered, amended, or repealed by the
legislative authority herein provided or by Act of Congress of the United States.
SEC. 7. That the legislative authority herein provided shall have power, when not
inconsistent with this Act, by due enactment to amend, alter modify, or repeal any law, civil or
criminal, continued in force by this Act as it may from time to time see fit
This power shall specifically extend with the limitation herein provided as to the tariff to all
laws relating to revenue provided as to the tariff to all laws relating to revenue and taxation in
effect in the Philippines.
SEC. 8. That general legislative power, except as otherwise herein provided, is hereby
granted to the Philippine Legislature, authorized by this Act.
SEC. 10. That while this Act provides that the Philippine government shall have the authority
to enact a tariff law the trade relations between the islands and the United States shall

continue to be governed exclusively by laws of the Congress of the United States: Provided,
That tariff acts or acts amendatory to the tariff of the Philippine Islands shall not become law
until they shall receive the approval of the President of the United States, nor shall any act of
the Philippine Legislature affecting immigration or the currency or coinage laws of the
Philippines become a law until it has been approved by the President of the United
States: Provided further, That the President shall approve or disapprove any act mentioned
in the foregoing proviso within six months from and after its enactment and submission for
his approval, and if not disapproved within such time it shall become a law the same as if it
had been specifically approved.
SEC. 31. That all laws or parts of laws applicable to the Philippines not in conflict with any of
the provisions of this Act are hereby continued in force and effect." (39 Stat at L., 546.)
On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The first section of this law
amended section 1172 of the Administrative Code to read as follows:
SEC. 1172. Certificate of Philippine register. Upon registration of a vessel of domestic
ownership, and of more than fifteen tons gross, a certificate of Philippine register shall be
issued for it. If the vessel is of domestic ownership and of fifteen tons gross or less, the
taking of the certificate of Philippine register shall be optional with the owner.
"Domestic ownership," as used in this section, means ownership vested in some one or
more of the following classes of persons: (a) Citizens or native inhabitants of the Philippine
Islands; (b) citizens of the United States residing in the Philippine Islands; (c) any
corporation or company composed wholly of citizens of the Philippine Islands or of the
United States or of both, created under the laws of the United States, or of any State thereof,
or of thereof, or the managing agent or master of the vessel resides in the Philippine Islands
Any vessel of more than fifteen gross tons which on February eighth, nineteen hundred and
eighteen, had a certificate of Philippine register under existing law, shall likewise be deemed
a vessel of domestic ownership so long as there shall not be any change in the ownership
thereof nor any transfer of stock of the companies or corporations owning such vessel to
person not included under the last preceding paragraph.
Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the Administrative Code to
read as follows:
SEC. 1176. Investigation into character of vessel. No application for a certificate of
Philippine register shall be approved until the collector of customs is satisfied from an
inspection of the vessel that it is engaged or destined to be engaged in legitimate trade
and that it is of domestic ownership as such ownership is defined in section eleven hundred
and seventy-two of this Code.
The collector of customs may at any time inspect a vessel or examine its owner, master,
crew, or passengers in order to ascertain whether the vessel is engaged in legitimate trade
and is entitled to have or retain the certificate of Philippine register.

SEC. 1202. Limiting number of foreign officers and engineers on board vessels. No
Philippine vessel operating in the coastwise trade or on the high seas shall be permitted to
have on board more than one master or one mate and one engineer who are not citizens of
the United States or of the Philippine Islands, even if they hold licenses under section one
thousand one hundred and ninety-nine hereof. No other person who is not a citizen of the
United States or of the Philippine Islands shall be an officer or a member of the crew of such
vessel. Any such vessel which fails to comply with the terms of this section shall be required
to pay an additional tonnage tax of fifty centavos per net ton per month during the
continuance of said failure.
ISSUES.
Predicated on these facts and provisions of law, the issues as above stated recur, namely, whether
Act No 2761 of the Philippine Legislature is valid in whole or in part whether the Government of
the Philippine Islands, through its Legislature, can deny the registry of vessel in its coastwise trade
to corporations having alien stockholders .
OPINION.
1. Considered from a positive standpoint, there can exist no measure of doubt as to the power of the
Philippine Legislature to enact Act No. 2761. The Act of Congress of April 29, 1908, with its specific
delegation of authority to the Government of the Philippine Islands to regulate the transportation of
merchandise and passengers between ports or places therein, the liberal construction given to the
provisions of the Philippine Bill, the Act of Congress of July 1, 1902, by the courts, and the grant by
the Act of Congress of August 29, 1916, of general legislative power to the Philippine Legislature,
are certainly superabundant authority for such a law. While the Act of the local legislature may in a
way be inconsistent with the Act of Congress regulating the coasting trade of the Continental United
States, yet the general rule that only such laws of the United States have force in the Philippines as
are expressly extended thereto, and the abnegation of power by Congress in favor of the Philippine
Islands would leave no starting point for convincing argument. As a matter of fact, counsel for
petitioner does not assail legislative action from this direction (See U. S. vs. Bull [1910], 15 Phil., 7;
Sinnot vs. Davenport [1859] 22 How., 227.)
2. It is from the negative, prohibitory standpoint that counsel argues against the constitutionality of
Act No. 2761. The first paragraph of the Philippine Bill of Rights of the Philippine Bill, repeated again
in the first paragraph of the Philippine Bill of Rights as set forth in the Jones Law, provides "That no
law shall be enacted in said Islands which shall deprive any person of life, liberty, or property without
due process of law, or deny to any person therein the equal protection of the laws." Counsel says
that Act No. 2761 denies to Smith, Bell & Co., Ltd., the equal protection of the laws because it, in
effect, prohibits the corporation from owning vessels, and because classification of corporations
based on the citizenship of one or more of their stockholders is capricious, and that Act No. 2761
deprives the corporation of its properly without due process of law because by the passage of the
law company was automatically deprived of every beneficial attribute of ownership in the Bato and
left with the naked title to a boat it could not use .

The guaranties extended by the Congress of the United States to the Philippine Islands have been
used in the same sense as like provisions found in the United States Constitution. While the "due
process of law and equal protection of the laws" clause of the Philippine Bill of Rights is couched in
slightly different words than the corresponding clause of the Fourteenth Amendment to the United
States Constitution, the first should be interpreted and given the same force and effect as the latter.
(Kepner vs. U.S. [1904], 195 U. S., 100; Sierra vs. Mortiga [1907], 204 U. S.,.470; U. S. vs. Bull
[1910], 15 Phil., 7.) The meaning of the Fourteenth Amendment has been announced in classic
decisions of the United States Supreme Court. Even at the expense of restating what is so well
known, these basic principles must again be set down in order to serve as the basis of this decision.
The guaranties of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill of
Rights, are universal in their application to all person within the territorial jurisdiction, without regard
to any differences of race, color, or nationality. The word "person" includes aliens. (Yick Wo vs.
Hopkins [1886], 118 U. S., 356; Truax vs. Raich [1915], 239 U. S., 33.) Private corporations, likewise,
are "persons" within the scope of the guaranties in so far as their property is concerned. (Santa
Clara County vs. Southern Pac. R. R. Co. [1886], 118.U. S., 394; Pembina Mining
Co. vs. Pennsylvania [1888],.125 U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford [1896],
164 U. S., 578.) Classification with the end in view of providing diversity of treatment may be made
among corporations, but must be based upon some reasonable ground and not be a mere arbitrary
selection (Gulf, Colorado & Santa Fe Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples of laws
held unconstitutional because of unlawful discrimination against aliens could be cited. Generally,
these decisions relate to statutes which had attempted arbitrarily to forbid aliens to engage in
ordinary kinds of business to earn their living. (State vs. Montgomery [1900], 94 Maine, 192,
peddling but see. Commonwealth vs. Hana [1907], 195 Mass., 262; Templar vs. Board of
Examiners of Barbers [1902], 131 Mich., 254, barbers; Yick Wo vs. Hopkins [1886], 118 U. S.,.356,
discrimination against Chinese; Truax vs. Raich [1915], 239 U. S., 33; In re Parrott [1880], 1 Fed ,
481; Fraser vs. McConway & Torley Co. [1897], 82 Fed , 257; Juniata Limestone Co. vs. Fagley
[1898], 187 Penn., 193, all relating to the employment of aliens by private corporations.)
A literal application of general principles to the facts before us would, of course, cause the inevitable
deduction that Act No. 2761 is unconstitutional by reason of its denial to a corporation, some of
whole members are foreigners, of the equal protection of the laws. Like all beneficient propositions,
deeper research discloses provisos. Examples of a denial of rights to aliens notwithstanding the
provisions of the Fourteenth Amendment could be cited. (Tragesser vs. Gray [1890], 73 Md., 250,
licenses to sell spirituous liquors denied to persons not citizens of the United States;
Commonwealth vs. Hana [1907], 195 Mass , 262, excluding aliens from the right to peddle;
Patsone vs. Commonwealth of Pennsylvania [1914], 232 U. S. , 138, prohibiting the killing of any
wild bird or animal by any unnaturalized foreign-born resident; Ex parte Gilleti [1915], 70 Fla., 442,
discriminating in favor of citizens with reference to the taking for private use of the common property
in fish and oysters found in the public waters of the State; Heim vs. McCall [1915], 239 U. S.,.175,
and Crane vs. New York [1915], 239 U. S., 195, limiting employment on public works by, or for, the
State or a municipality to citizens of the United States.)
One of the exceptions to the general rule, most persistent and far reaching in influence is, that
neither the Fourteenth Amendment to the United States Constitution, broad and comprehensive as it
is, nor any other amendment, "was designed to interfere with the power of the State, sometimes

termed its `police power,' to prescribe regulations to promote the health, peace, morals, education,
and good order of the people, and legislate so as to increase the industries of the State, develop its
resources and add to its wealth and prosperity. From the very necessities of society, legislation of a
special character, having these objects in view, must often be had in certain districts."
(Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans Gas Co. vs. Lousiana Light Co. [1885], 115
U.S., 650.) This is the same police power which the United States Supreme Court say "extends to so
dealing with the conditions which exist in the state as to bring out of them the greatest welfare in of
its people." (Bacon vs. Walker [1907], 204 U.S., 311.) For quite similar reasons, none of the
provision of the Philippine Organic Law could could have had the effect of denying to the
Government of the Philippine Islands, acting through its Legislature, the right to exercise that most
essential, insistent, and illimitable of powers, the sovereign police power, in the promotion of the
general welfare and the public interest. (U. S. vs. Toribio [1910], 15 Phil., 85; Churchill and
Tait vs. Rafferty [1915], 32 Phil., 580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.)
Another notable exception permits of the regulation or distribution of the public domain or the
common property or resources of the people of the State, so that use may be limited to its citizens.
(Ex parte Gilleti [1915], 70 Fla., 442; McCready vs. Virginia [1876], 94 U. S., 391;
Patsone vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.) Still another exception permits
of the limitation of employment in the construction of public works by, or for, the State or a
municipality to citizens of the United States or of the State. (Atkin vs. Kansas [1903],191 U. S., 207;
Heim vs. McCall [1915], 239 U.S., 175; Crane vs. New York [1915], 239 U. S., 195.) Even as to
classification, it is admitted that a State may classify with reference to the evil to be prevented; the
question is a practical one, dependent upon experience. (Patsone vs. Commonwealth of
Pennsylvania [1914], 232 U. S., 138.)
To justify that portion of Act no. 2761 which permits corporations or companies to obtain a certificate
of Philippine registry only on condition that they be composed wholly of citizens of the Philippine
Islands or of the United States or both, as not infringing Philippine Organic Law, it must be done
under some one of the exceptions here mentioned This must be done, moreover, having particularly
in mind what is so often of controlling effect in this jurisdiction our local experience and our
peculiar local conditions.
To recall a few facts in geography, within the confines of Philippine jurisdictional limits are found
more than three thousand islands. Literally, and absolutely, steamship lines are, for an Insular
territory thus situated, the arteries of commerce. If one be severed, the life-blood of the nation is lost.
If on the other hand these arteries are protected, then the security of the country and the promotion
of the general welfare is sustained. Time and again, with such conditions confronting it, has the
executive branch of the Government of the Philippine Islands, always later with the sanction of the
judicial branch, taken a firm stand with reference to the presence of undesirable foreigners. The
Government has thus assumed to act for the all-sufficient and primitive reason of the benefit and
protection of its own citizens and of the self-preservation and integrity of its dominion. (In
re Patterson [1902], 1 Phil., 93; Forbes vs. Chuoco, Tiaco and Crossfield [1910], 16 Phil., 534;.228
U.S., 549; In re McCulloch Dick [1918], 38 Phil., 41.) Boats owned by foreigners, particularly by such
solid and reputable firms as the instant claimant, might indeed traverse the waters of the Philippines
for ages without doing any particular harm. Again, some evilminded foreigner might very easily take
advantage of such lavish hospitality to chart Philippine waters, to obtain valuable information for
unfriendly foreign powers, to stir up insurrection, or to prejudice Filipino or American commerce.

Moreover, under the Spanish portion of Philippine law, the waters within the domestic jurisdiction are
deemed part of the national domain, open to public use. (Book II, Tit. IV, Ch. I, Civil Code; Spanish
Law of Waters of August 3, 1866, arts 1, 2, 3.) Common carriers which in the Philippines as in the
United States and other countries are, as Lord Hale said, "affected with a public interest," can only
be permitted to use these public waters as a privilege and under such conditions as to the
representatives of the people may seem wise. (See De Villata vs. Stanley [1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a case herein before
mentioned, Justice Holmes delivering the opinion of the United States Supreme Court said:
This statute makes it unlawful for any unnaturalized foreign-born resident to kill any wild bird
or animal except in defense of person or property, and `to that end' makes it unlawful for
such foreign-born person to own or be possessed of a shotgun or rifle; with a penalty of $25
and a forfeiture of the gun or guns. The plaintiff in error was found guilty and was sentenced
to pay the abovementioned fine. The judgment was affirmed on successive appeals. (231
Pa., 46; 79 Atl., 928.) He brings the case to this court on the ground that the statute is
contrary to the 14th Amendment and also is in contravention of the treaty between the United
States and Italy, to which latter country the plaintiff in error belongs .
Under the 14th Amendment the objection is twofold; unjustifiably depriving the alien of
property, and discrimination against such aliens as a class. But the former really depends
upon the latter, since it hardly can be disputed that if the lawful object, the protection of wild
life (Geer vs. Connecticut, 161 U.S., 519; 40 L. ed., 793; 16 Sup. Ct. Rep., 600), warrants the
discrimination, the, means adopted for making it effective also might be adopted. . . .
The discrimination undoubtedly presents a more difficult question. But we start with
reference to the evil to be prevented, and that if the class discriminated against is or
reasonably might be considered to define those from whom the evil mainly is to be feared, it
properly may be picked out. A lack of abstract symmetry does not matter. The question is a
practical one, dependent upon experience. . . .
The question therefore narrows itself to whether this court can say that the legislature of
Pennsylvania was not warranted in assuming as its premise for the law that resident
unnaturalized aliens were the peculiar source of the evil that it desired to prevent.
(Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed., 1050, 1052; 33 Sup. Ct. Rep., 692.)
Obviously the question, so stated, is one of local experience, on which this court ought to be
very slow to declare that the state legislature was wrong in its facts (Adams vs. Milwaukee,
228 U.S., 572, 583; 57 L. ed., 971,.977; 33 Sup. Ct. Rep., 610.) If we might trust popular
speech in some states it was right; but it is enough that this court has no such knowledge of
local conditions as to be able to say that it was manifestly wrong. . . .
Judgment affirmed.
We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation having alien stockholders,
is entitled to the protection afforded by the due-process of law and equal protection of the laws

clause of the Philippine Bill of Rights, nevertheless, Act No. 2761 of the Philippine Legislature, in
denying to corporations such as Smith, Bell &. Co. Ltd., the right to register vessels in the Philippines
coastwise trade, does not belong to that vicious species of class legislation which must always be
condemned, but does fall within authorized exceptions, notably, within the purview of the police
power, and so does not offend against the constitutional provision.
This opinion might well be brought to a close at this point. It occurs to us, however, that the
legislative history of the United States and the Philippine Islands, and, probably, the legislative
history of other countries, if we were to take the time to search it out, might disclose similar attempts
at restriction on the right to enter the coastwise trade, and might thus furnish valuable aid by which
to ascertain and, if possible, effectuate legislative intention.
3. The power to regulate commerce, expressly delegated to the Congress by the
Constitution, includes the power to nationalize ships built and owned in the United States by
registries and enrollments, and the recording of the muniments of title of American vessels.
The Congress "may encourage or it may entirely prohibit such commerce, and it may
regulate in any way it may see fit between these two extremes." (U.S. vs. Craig [1886], 28
Fed., 795; Gibbons vs. Ogden [1824], 9 Wheat., 1; The Passenger Cases [1849], 7 How.,
283.)
Acting within the purview of such power, the first Congress of the United States had not been long
convened before it enacted on September 1, 1789, "An Act for Registering and Clearing Vessels,
Regulating the Coasting Trade, and for other purposes." Section 1 of this law provided that for any
ship or vessel to obtain the benefits of American registry, it must belong wholly to a citizen or citizens
of the United States "and no other." (1 Stat. at L., 55.) That Act was shortly after repealed, but the
same idea was carried into the Acts of Congress of December 31, 1792 and February 18, 1793. (1
Stat. at L., 287, 305.).Section 4 of the Act of 1792 provided that in order to obtain the registry of any
vessel, an oath shall be taken and subscribed by the owner, or by one of the owners thereof, before
the officer authorized to make such registry, declaring, "that there is no subject or citizen of any
foreign prince or state, directly or indirectly, by way of trust, confidence, or otherwise, interested in
such vessel, or in the profits or issues thereof." Section 32 of the Act of 1793 even went so far as to
say "that if any licensed ship or vessel shall be transferred to any person who is not at the time of
such transfer a citizen of and resident within the United States, ... every such vessel with her tackle,
apparel, and furniture, and the cargo found on board her, shall be forefeited." In case of alienation to
a foreigner, Chief Justice Marshall said that all the privileges of an American bottom were ipso
facto forfeited. (U.S. vs. Willings and Francis [1807], 4 Cranch, 48.) Even as late as 1873, the
Attorney-General of the United States was of the opinion that under the provisions of the Act of
December 31, 1792, no vessel in which a foreigner is directly or indirectly interested can lawfully be
registered as a vessel of the United. States. (14 Op. Atty.-Gen. [U.S.], 340.)
These laws continued in force without contest, although possibly the Act of March 3, 1825, may have
affected them, until amended by the Act of May 28, 1896 (29 Stat. at L., 188) which extended the
privileges of registry from vessels wholly owned by a citizen or citizens of the United States to
corporations created under the laws of any of the states thereof. The law, as amended, made
possible the deduction that a vessel belonging to a domestic corporation was entitled to registry or
enrollment even though some stock of the company be owned by aliens. The right of ownership of

stock in a corporation was thereafter distinct from the right to hold the property by the corporation
(Humphreys vs. McKissock [1890], 140 U.S., 304; Queen vs. Arnaud [1846], 9 Q. B., 806; 29 Op.
Atty.-Gen. [U.S.],188.)
On American occupation of the Philippines, the new government found a substantive law in
operation in the Islands with a civil law history which it wisely continued in force Article fifteen of the
Spanish Code of Commerce permitted any foreigner to engage in Philippine trade if he had legal
capacity to do so under the laws of his nation. When the Philippine Commission came to enact the
Customs Administrative Act (No. 355) in 1902, it returned to the old American policy of limiting the
protection and flag of the United States to vessels owned by citizens of the United States or by
native inhabitants of the Philippine Islands (Sec. 117.) Two years later, the same body reverted to the
existing Congressional law by permitting certification to be issued to a citizen of the United States or
to a corporation or company created under the laws of the United States or of any state thereof or of
the Philippine Islands (Act No. 1235, sec. 3.) The two administration codes repeated the same
provisions with the necessary amplification of inclusion of citizens or native inhabitants of the
Philippine Islands (Adm. Code of 1916, sec. 1345; Adm. Code of 1917, sec. 1172). And now Act No.
2761 has returned to the restrictive idea of the original Customs Administrative Act which in turn was
merely a reflection of the statutory language of the first American Congress.
Provisions such as those in Act No. 2761, which deny to foreigners the right to a certificate of
Philippine registry, are thus found not to be as radical as a first reading would make them appear.
Without any subterfuge, the apparent purpose of the Philippine Legislature is seen to be to enact an
anti-alien shipping act. The ultimate purpose of the Legislature is to encourage Philippine shipbuilding. This, without doubt, has, likewise, been the intention of the United States Congress in
passing navigation or tariff laws on different occasions. The object of such a law, the United States
Supreme Court once said, was to encourage American trade, navigation, and ship-building by giving
American ship-owners exclusive privileges. (Old Dominion Steamship Co. vs. Virginia [1905], 198
U.S., 299; Kent's Commentaries, Vol. 3, p. 139.)
In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9 Wheat., 1) is found the
following:
Licensing acts, in fact, in legislation, are universally restraining acts; as, for example, acts
licensing gaming houses, retailers of spirituous liquors, etc. The act, in this instance, is
distinctly of that character, and forms part of an extensive system, the object of which is to
encourage American shipping, and place them on an equal footing with the shipping of other
nations. Almost every commercial nation reserves to its own subjects a monopoly of its
coasting trade; and a countervailing privilege in favor of American shipping is contemplated,
in the whole legislation of the United States on this subject. It is not to give the vessel an
American character, that the license is granted; that effect has been correctly attributed to
the act of her enrollment. But it is to confer on her American privileges, as
contradistinguished from foreign; and to preserve the. Government from fraud by foreigners,
in surreptitiously intruding themselves into the American commercial marine, as well as
frauds upon the revenue in the trade coastwise, that this whole system is projected.

The United States Congress in assuming its grave responsibility of legislating wisely for a new
country did so imbued with a spirit of Americanism. Domestic navigation and trade, it decreed, could
only be carried on by citizens of the United States. If the representatives of the American people
acted in this patriotic manner to advance the national policy, and if their action was accepted without
protest in the courts, who can say that they did not enact such beneficial laws under the allpervading police power, with the prime motive of safeguarding the country and of promoting its
prosperity? Quite similarly, the Philippine Legislature made up entirely of Filipinos, representing the
mandate of the Filipino people and the guardian of their rights, acting under practically autonomous
powers, and imbued with a strong sense of Philippinism, has desired for these Islands safety from
foreign interlopers, the use of the common property exclusively by its citizens and the citizens of the
United States, and protection for the common good of the people. Who can say, therefore, especially
can a court, that with all the facts and circumstances affecting the Filipino people before it, the
Philippine Legislature has erred in the enactment of Act No. 2761?
Surely, the members of the judiciary are not expected to live apart from active life, in monastic
seclusion amidst dusty tomes and ancient records, but, as keen spectators of passing events and
alive to the dictates of the general the national welfare, can incline the scales of their decisions
in favor of that solution which will most effectively promote the public policy. All the presumption is in
favor of the constitutionally of the law and without good and strong reasons, courts should not
attempt to nullify the action of the Legislature. "In construing a statute enacted by the Philippine
Commission (Legislature), we deem it our duty not to give it a construction which would be
repugnant to an Act of Congress, if the language of the statute is fairly susceptible of another
construction not in conflict with the higher law." (In re Guaria [1913], 24. Phil., 36; U.S. vs. Ten Yu
[1912], 24 Phil., 1.) That is the true construction which will best carry legislative intention into effect.
With full consciousness of the importance of the question, we nevertheless are clearly of the opinion
that the limitation of domestic ownership for purposes of obtaining a certificate of Philippine registry
in the coastwise trade to citizens of the Philippine Islands, and to citizens of the United States, does
not violate the provisions of paragraph 1 of section 3 of the Act of Congress of August 29, 1916 No
treaty right relied upon Act No. 2761 of the Philippine Legislature is held valid and constitutional .
STRONGHOLD INSURANCE COMPANY, INCORPORATED, Petitioner, v. INTERPACIFIC CONTAINER
SERVICES AND GLORIA DEE CHONG, Respondents.
DECISION
PEREZ, J.:
This is a Petition for Review on Certiorari1 assailing the 30 July 2010 Decision2 of the Court of Appeals in CAG.R. CV No. 80557, which affirmed the 7 October 2003 Decision of the Regional Trial Court (RTC) of
Caloocan City directing the petitioner Stronghold Insurance Company Incorporated to pay respondents
Interpacific Container Services and Gloria Dee Chong the sum of P550,000.00 representing their insurance
claim. The dispositive portion of the assailed decision reads:
chanRoble svirtualLawlibrary

WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The assailed decision dated October
7, 2003 of the Regional Trial Court of Caloocan City, Branch 130 is AFFIRMED with
the MODIFICATION that the P50,000.00 exemplary damages is hereby DELETED.
chanroblesvirtuallawlibrary

The Facts

Respondent Gloria Dee Chong is the owner of the Fuso truck with Plate No. PWH 512. The vehicle was
insured by petitioner Stronghold Insurance Company under Commercial Vehicle Policy No. 279675. 3The
comprehensive motor car insurance policy for P15,306.45 undertook to indemnify the insured against loss or
damage to the car and death or injury caused to third persons by reason of accident.
While the policy was in effect, the vehicle figured in an accident along National Highway in Brgy. Palihan,
Hermosa, Bataan resulting in the death of four (4) persons while seriously injuring three (3) others. Two (2)
vehicles were also heavily damaged as a result of the accident.
Pursuant to the provisions of the insurance contract, respondent Chong filed a claim for the recovery of the
proceeds of her policy in the amount of P550,000.00, broken down as follows:
Comprehensive Third Party Liability (CTPL)---- P 50,000.00
Own Damage (OD)----------------------------P300,000.00
Excess / Bodily Injury (BI)------------------- P100,000.00
Third Party Liability (TPL)-------------------- P100,000.00
Total---------------------------------------- P550,000.004
The claim was, however, denied by the insurance company on the ground that at the time the accident took
place the driver of the insured vehicle was heavily drunk as shown in the Pagpapatunayissued by Barangay
Chairman Rafael Torres and the Medico Legal Certificate which was signed by a certain Dr. Ferdinand
Bautista.
chanRoble svirtualLawlibrary

The denial of the claim prompted respondents to initiate an action for the recovery of sum of money against
petitioner before the RTC of Caloocan City, Branch 130. In their Complaint docketed as Civil Case No. C18278, respondents alleged that their claim was unjustly denied by the insurance company. They argued
that there was no sufficient proof to support the claim of the petitioner that the driver was drunk at the time
of the incident underscoring the lack of mention of such crucial fact in the police blotter report documenting
the incident. For lack of justifiable reasons to avoid the policy, respondents insisted that petitioner is liable to
deliver their claim pursuant to the terms of the insurance contract. 5
ChanRoblesVirtualawlibrary

In refuting the allegations in the complaint, petitioner averred that the intoxication of the driver of the
insured vehicle legally avoided the liability of the insurance company under the policy. Petitioner further
claimed that the insured violated Section 53 of Republic Act No. 4136 (Land Transportation and Traffic Code)
which prohibits driving of motor vehicles under the influence of alcohol. Since the driver of the insured
vehicle was found drunk at the time of the accident, the denial of the insurance claim of by the respondents
is therefore justified under provisions of the insurance contract and the existing statutes. 6
ChanRoblesVirtualawlibrary

After the pre-trial conference, trial on the merits ensued. During the hearing, both parties adduced
testimonial and documentary evidence to support their respective positions.
On 7 October 2003, the RTC rendered a Decision 7 in favor of the respondents thereby ordering the petitioner
to deliver the amount of P550,000.00 representing the proceeds of the insurance contract. According to the
court a quo, petitioner failed to prove by prima facie evidence that the driver of the insured vehicle was
indeed under the influence of alcohol at the time of the accident thereby making the avoidance of the policy
unjustified under the circumstances. The decretal portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered in favor of the [respondents] Interpacific Container Services
and Gloria Dee Chong and against the [petitioner] Stronghold Insurance. Co. Inc. as follows:
chanRoble svirtualLawlibrary

(1) Ordering the [petitioner] to pay [respondents] the (insurance claim) under the Third Party Liability
Insurance Policy and the Commercial Vehicle Policy Number 279675, in the total amount of FIVE HUNDRED
FIFTY THOUSAND PESOS (P550,000.00) broken down as follows:
Comprehensive Third Party Liability (CTPL)-------- P 50,000.00
Own Damage (OD)-------------------------------- P300,000.00
Excess / Bodily Injury (BI)------------------------ P100,000.00
TPL/PD ------------------------------------------- P100,000.00
Total -------------------------------------------- P550,000.00
plus interest of 12% per annum on the said amount, from February 12, 1997 the date of the accident until
fully paid.
chanRoble svirtualLawlibrary

(2) Ordering the [petitioner] to pay the amount of P50,000.00 as exemplary damages.
(3) Ordering the [petitioner] to pay the amount of P100,000.00 as and for attorney's fees.

(4) Ordering the [petitioner] to pay the costs of suit. The counterclaim of the [petitioner] is dismissed for
lack of merit.8
On appeal, the Court of Appeals affirmed the findings of the RTC that there was no violation of the contract
of insurance but deleted the award for exemplary damages. Resonating the ruling of the trial court, the
appellate court dismissed the pieces of evidence presented by the petitioner as mere hearsay without
evidentiary value. It underscored the absence of any statement in the police blotter report about the crucial
fact of intoxication. On the finding that there was a failure to prove that it is exempted from liability under
the contract of insurance, petitioner was adjudged as under obligation to pay respondents their insurance
claim in accordance with the provisions of the policy.9
chanroblesvirtuallawlibrary

ChanRoblesVirtualawlibrary

Arguing that the Court of Appeals erred in rendering the assailed Decision, petitioner filed this instant
Petition for Certiorari seeking the reversal of the appellate court's decision on the following grounds:
I
chanRoble svirtualLawlibrary

THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN NOT APPRECIATING THE CLEAR
EVIDENCE OF RESPONDENT'S DRIVER'S INTOXICATION AND DRUNKENNESS;
II.
THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN FINDING THE PETITIONER
LIABLE FOR THE CLAIMS OF THE RESPONDENTS IN THE ABSENCE OF PROOF;
III.
THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN AFFIRMING THE IMPOSITION
OF INTEREST WHICH IS CONTRARY TO LAW AND JURISPRUDENCE. 10
The Court's Ruling
chanroblesvirtuallawlibrary

The issue nestled in the contentions of parties is whether or not it was proven during the trial that the driver
of the insured vehicle was intoxicated at the time of the accident thereby precluding the respondents from
claiming the proceeds of the insurance policy.
In insisting that the factual findings reached by the lower courts were fallible, petitioner, in turn, is urging
this Court to calibrate the probative value of the evidence adduced during the trial, a task which we do not
routinely do, without running afoul to the basic tenet that this Court is not a trier of facts. As a rule, the
factual conclusion of the court a quo is for that reason recognized by this Court. However, upon a submission
that the finding of fact is not supported by the evidence on record, a review of the facts may be taken. Upon
proof of the submission, the findings of fact are accordingly corrected.
We reiterate, and follow, the established rule that factual findings of the trial court are.entitled to respect
and are not to be disturbed on appeal, unless of some facts and circumstances of weight and substance,
having been overlooked or misinterpreted, might materially affect the disposition of the case. 11 We apply the
rule in the case. The exception has not been shown.
Contrary to the claim of the petitioner, it miserably failed to prove the fact of intoxication during the trial.
Aside from the Medico Legal Certificate and the Pagpapatunay, which were stripped of evidentiary value
because of the dubious circumstances under which they were obtained, the petitioner did not adduce other
proof to justify the avoidance of the policy. It must be emphasized that the RTC doubted the authenticity of
the Medico Legal Certificate because of the attendant alteration and tampering on the face of the document.
In adopting the findings of the trial court, the appellate court reiterated the evidentiary rule that the party
alleging violation of the provision of the contract bears the burden of proof to prove the same.
The evident tampering of the medico legal certificate necessitated the presentation by the petitioner of
additional evidence to buttress his claim. For instance, petitioner could have adduced affidavits of witnesses
who were present at the scene of the accident to attest to the fact that the driver was intoxicated. It did not.
Upon the other hand, respondents duly established their right to claim the proceeds of a validly subsisting
contract of insurance. Such contract was never denied.
Simply put, he who alleges the affirmative of the issue has the burden of proof, and upon the plaintiff in a
civil case rested the burden of proof. Notably, in the course of trial in a civil case, once plaintiff makes out

a prima facie case in his favor, the duty or the burden of evidence shifts to defendant to controvert
plaintiffs prima facie case, otherwise, a verdict must be returned in favor of plaintiff. Moreover, in civil cases,
the party having the burden of proof must produce a preponderance of evidence thereon, with plaintiff
having to rely on the strength of his own evidence and not upon the weakness of the defendant's. The
concept of "preponderance of evidence" refers to evidence which is of greater weight or more convincing,
than that which is offered in opposition to it; at bottom, it means probability of truth. 12
ChanRoblesVirtualawlibrary

What further dampens petitioner's position is the absence of the crucial fact of intoxication in the blotter
report which officially documented the incident. Entries in police records made by a police officer in the
performance of the duty especially enjoined by law are prima facie evidence of the fact therein stated, and
their probative value may be substantiated or nullified by other competent evidence. 13 In this case, the lack
of statement to the effect that the driver was under the influence of alcohol in the said report is too
significant to escape the attention of this Court.
This case involves a contract of insurance, the authenticity and validity of which was uncontested. In
exempting insurers from liability under the contract, proof thereof must be clear, credible and convincing.
Fundamental is the rule that the contract is the law between the parties and, that absent any showing that
its provisions are wholly or in part contrary to law, morals, good customs, public order, or public policy, it
shall be enforced to the letter by the courts.14
ChanRoblesVirtualawlibrary

WHEREFORE, premises considered, the instant petition is hereby DENIED. The assailed Decision of the
Court of Appeals in CA-G.R. CV No. 80557 is hereby AFFIRMED.
SO ORDERED.

cralawla wlibrary

Timoteo Sarona vs. National Labor Relations Commission,

Royale Security Agency, et.al. [GR No. 185280, January 18,
2012]
Post under case digests, labor law at Wednesday, February 17, 2016 Posted by Schizophrenic Mind

FACTS: The petitioner, who was hired by Sceptre as a security guard, was asked by Karen Therese Tan,
Sceptre's Operations Manager, to submit a resignation letter as the same was supposedly required for
applying for a position at Royale.

Martin informed him that he would no longer be given any assignment per the instructions of Aida
Sabalones-Tan, general manager of Sceptre. This prompted him to file a complaint for illegal dismissal.
While complainant is entitled to backwages, we are aware that his stint with respondent Royale lasted
only for one (1) month and three (3) days such that it is our considered view that his backwages should
be limited to only three (3) months. The petitioner does not deny that he has received the full amount of
his backwages and separation pay as provided under the NLRC's November 2005 Decision. However, he
claims that this does not preclude this Court from modifying a decision that is tainted with grave abuse of
discretion or issued without jurisdiction.

ISSUE: Whether the petitioner's backwages should be limited to his salary for three (3) months

RULING: No. In case separation pay is awarded and reinstatement is no longer feasible, backwages shall
be computed from the time of illegal dismissal up to the finality of the decision should separation pay not
be paid in the meantime. It is the employee's actual receipt of the full amount of his separation pay that
will effectively terminate the employment of an illegaly dismissed employee. Otherwise, the employeremployee relationship subsists and the illegally dismissed employee is entitled to backwages, taking into
account the increases and other benefits, including the 13th month pay, that were received by his coemployees who are not dismissed. It is the obligation of the employer to pay an illegally dismissed
employee or worker the whole amount of the salaries or wages, plus all other benefits and bonuses and
general increases, to which he would have been normally entitled had he not been dismissed and had not
stopped working.

HEIRS OF FE TAN UY v. INTERNATIONAL EXCHANGE BANK, G.R. No.

166283, February 13, 2013
Corporation law; Personal liability of a director or officer. Before a director or officer of a corporation
can be held personally liable for corporate obligations, however, the following requisites must concur:
(1) the complainant must allege in the complaint that the director or officer assented to patently
unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2)
the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the circumstances that would warrant
the piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a
petition for review on certiorari under Rule 45, this Court can take cognizance of factual issues if the
findings of the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.
In this case, petitioners are correct to argue that it was not alleged, much less proven, that Uy
committed an act as an officer of Hammer that would permit the piercing of the corporate veil. A
reading of the complaint reveals that with regard to Uy, iBank did not demand that she be held liable
for the obligations of Hammer because she was a corporate officer who committed bad faith or gross
negligence in the performance of her duties such that the lifting of the corporate mask would be
merited. What the complaint simply stated is that she, together with her errant husband Chua, acted
as surety of Hammer, as evidenced by her signature on the Surety Agreement which was later found
by the RTC to have been forged.
Considering that the only basis for holding Uy liable for the payment of the loan was proven to be a
falsified document, there was no sufficient justification for the RTC to have ruled that Uy should be
held jointly and severally liable to iBank for the unpaid loan of Hammer. Neither did the CA explain its
affirmation of the RTCs ruling against Uy. The Court cannot give credence to the simplistic

declaration of the RTC that liability would attach directly to Uy for the sole reason that she was an
officer and stockholder of Hammer.
WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners,
vs.
FE CORAZON LABAYEN, Respondent.
DECISION
BRION, J.:
We review in this petition for review on certiorari the decision dated September 28, 2007 and the
resolution dated April 28, 2008 of the Court of Appeals (CA) in CA-G.R. CV No. 68289 that affirmed
with modification the decision of the Regional Trial Court (RTC), Branch 77, Quezon City.
1

The Factual Background

The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a management
and consultant firm. The petitioner, WPM International Trading, Inc. (WPM), is a domestic
corporation engaged in the restaurant business, while Warlito P. Manlapaz (Manlapaz) is its
president.
Sometime in 1990, WPM entered into a management agreement with the respondent, by virtue of
which the respondent was authorized to operate, manage and rehabilitate Quickbite, a restaurant
owned and operated by WPM. As part of her tasks, the respondent looked for a contractor who
would renovate the two existing Quickbite outlets in Divisoria, Manila and Lepanto St., University
Belt, Manila. Pursuant to the agreement, the respondent engaged the services of CLN Engineering
Services (CLN) to renovate Quickbite-Divisoria at the cost of P432,876.02.
On June 13, 1990, Quickbite-Divisorias renovation was finally completed, and its possession was
delivered to the respondent. However, out of the P432,876.02 renovation cost, only the amount
of P320,000.00 was paid to CLN, leaving a balance of P112,876.02.
Complaint for Sum of Money (Civil Case No. Q-90-7013)
On October 19, 1990, CLN filed a complaint for sum of money and damages before the RTC against
the respondent and Manlapaz, which was docketed as Civil Case No. Q-90-7013. CLN later
amended the complaint to exclude Manlapaz as defendant. The respondent was declared in default
for her failure to file a responsive pleading.
The RTC, in its January 28, 1991 decision, found the respondent liable to pay CLN actual damages
inthe amount of P112,876.02 with 12% interest per annum from June 18,1990 (the date of first
demand) and 20% of the amount recoverable as attorneys fees.
Complaint for Damages (Civil Case No. Q-92-13446)

Thereafter, the respondent instituted a complaint for damages against the petitioners, WPM and
Manlapaz. The respondent alleged that in Civil Case No. Q-90-7013, she was adjudged liable for a
contract that she entered into for and in behalf of the petitioners, to which she should be entitled to
reimbursement; that her participation in the management agreement was limited only to introducing
Manlapaz to Engineer Carmelo Neri (Neri), CLNs general manager; that it was actually Manlapaz
and Neri who agreed on the terms and conditions of the agreement; that when the complaint for
damages was filed against her, she was abroad; and that she did not know of the case until she
returned to the Philippines and received a copy of the decision of the RTC.
In her prayer, the respondent sought indemnification in the amount of P112,876.60 plus interest at
12%per annum from June 18, 1990 until fully paid; and 20% of the award as attorneys fees. She
likewise prayed that an award of P100,000.00 as moral damages and P20,000.00 as attorneys fees
be paid to her.
In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar Alcansajewho was
in-charge with the daily operations of the Quickbite outlets; that when Alcansaje left WPM, the
remaining directors were compelled to hire the respondent as manager; that the respondent had
entered intothe renovation agreement with CLN in her own personal capacity; that when he found
the amount quoted by CLN too high, he instructed the respondent to either renegotiate for a lower
price or to look for another contractor; that since the respondent had exceeded her authority as
agent of WPM, the renovation agreement should only bind her; and that since WPM has a separate
and distinct personality, Manlapaz cannot be made liable for the respondents claim.
Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by way of
counterclaim, for the award of P350,000.00 as moral and exemplary damages and P50,000.00
attorneys fees.
The RTC, through an order dated March 2, 1993 declared WPM in default for its failure to file a
responsive pleading.
The Decision of the RTC
In its decision, the RTC held that the respondent is entitled to indemnity from Manlapaz. The RTC
found that based on the records, there is a clear indication that WPM is a mere instrumentality or
business conduit of Manlapaz and as such, WPM and Manlapaz are considered one and the same.
The RTC also found that Manlapaz had complete control over WPM considering that he is its
chairman, president and treasurer at the same time. The RTC thus concluded that Manlapaz is liable
in his personal capacity to reimburse the respondent the amount she paid to CLN inconnection with
the renovation agreement.
The petitioners appealed the RTC decision with the CA. There, they argued that in view of the
respondents act of entering into a renovation agreement with CLN in excess of her authority as
WPMs agent, she is not entitled to indemnity for the amount she paid. Manlapaz also contended
that by virtue ofWPMs separate and distinct personality, he cannot be madesolidarily liable with
WPM.

The Ruling of the Court of Appeals

On September 28, 2007, the CA affirmed, with modification on the award of attorneys fees, the
decision of the RTC.The CA held that the petitioners are barred from raising as a defense the
respondents alleged lack of authority to enter into the renovation agreement in view of their tacit
ratification of the contract.
The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and the same based on
the following: (1) Manlapaz is the principal stockholder of WPM; (2) Manlapaz had complete control
over WPM because he concurrently held the positions of president, chairman of the board and
treasurer, in violation of the Corporation Code; (3) two of the four other stockholders of WPM are
employed by Manlapaz either directly or indirectly; (4) Manlapazs residence is the registered
principal office of WPM; and (5) the acronym "WPM" was derived from Manlapazs initials. The CA
applied the principle of piercing the veil of corporate fiction and agreed with the RTC that Manlapaz
cannot evade his liability by simply invoking WPMs separate and distinct personality.
After the CA's denial of their motion for reconsideration, the petitioners filed the present petition for
review on certiorari under Rule 45 of the Rules of Court.
The Petition
The petitioners submit that the CA gravely erred in sustaining the RTCs application of the principle
of piercing the veil of corporate fiction. They argue that the legal fiction of corporate personality could
only be discarded upon clear and convincing proof that the corporation is being used as a shield to
avoid liability or to commit a fraud. Since the respondent failed to establish that any of the
circumstances that would warrant the piercing is present, Manlapaz claims that he cannot be made
solidarily liable with WPM to answerfor damages allegedly incurred by the respondent.
The petitioners further argue that, assuming they may be held liable to reimburse to the
respondentthe amount she paid in Civil Case No. Q-90-7013, such liability is only limited to the
amount of P112,876.02, representing the balance of the obligation to CLN, and should not include
the twelve 12% percent interest, damages and attorneys fees.
The Issues
The core issues are: (1) whether WPM is a mere instrumentality, alter-ego, and business conduit of
Manlapaz; and (2) whether Manlapaz is jointly and severally liable with WPM to the respondent for
reimbursement, damages and interest.
Our Ruling
We find merit in the petition.
We note, at the outset, that the question of whether a corporation is a mere instrumentality or alterego of another is purely one of fact. This is also true with respect to the question of whether the
5

totality of the evidence adduced by the respondentwarrants the application of the piercing the veil of
corporate fiction doctrine.
6

Generally, factual findings of the lower courts are accorded the highest degree of respect, if not
finality. When adopted and confirmed by the CA, these findings are final and conclusive and may not
be reviewed on appeal, save in some recognized exceptions among others, when the judgment is
based on misapprehension of facts.
7

We have reviewed the records and found that the application of the principle of piercing the veil of
corporate fiction is unwarranted in the present case.
On the Application ofthe Principle of Piercing the Veil of Corporate Fiction
The rule is settled that a corporation has a personality separate and distinct from the persons acting
for and in its behalf and, in general, from the people comprising it. Following this principle, the
obligations incurred by the corporate officers, orother persons acting as corporate agents, are the
direct accountabilities ofthe corporation they represent, and not theirs. Thus, a director, officer or
employee of a corporation is generally not held personally liable for obligations incurred by the
corporation; it is only in exceptional circumstances that solidary liability will attach to them.
9

10

Incidentally, the doctrine of piercing the corporate veil applies only in three (3) basic instances,
namely: a) when the separate and distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud
cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or
c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and its
affairs so conducted as to make it merely aninstrumentality, agency, conduit or adjunct of another
corporation.
11

Piercing the corporate veil based on the alter ego theory requires the concurrence of three elements,
namely:
(1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of
its own;
(2) Such control must have beenused by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act
in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or
unjust loss complained of.
The absence of any ofthese elements prevents piercing the corporate veil.

12

In the present case, the attendantcircumstances do not establish that WPM is a mere alter ego of
Manlapaz.
Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not show that
WPM was organized and controlled, and its affairs conducted in a manner that made it merely an
instrumentality, agency, conduit or adjunct ofManlapaz. As held in Martinez v. Court of Appeals, the
mere ownership by a singlestockholder of even all or nearly all of the capital stocks ofa corporation
is not by itself a sufficient ground to disregard the separate corporate personality. To disregard the
separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly
established.
13

14

Likewise, the records of the case do not support the lower courts finding that Manlapaz had control
or domination over WPM or its finances. That Manlapaz concurrentlyheld the positions of president,
chairman and treasurer, or that the Manlapazs residence is the registered principal office of WPM,
are insufficient considerations to prove that he had exercised absolutecontrol over WPM.
In this connection, we stress thatthe control necessary to invoke the instrumentality or alter ego rule
is not majority or even complete stock control but such domination of finances, policies and practices
that the controlled corporation has, so tospeak, no separate mind, will or existence of its own, and is
but a conduit for its principal. The control must be shown to have been exercised at the time the acts
complained of took place. Moreover, the control and breach of duty must proximately cause the
injury or unjust loss for which the complaint is made.
Here, the respondent failed to prove that Manlapaz, acting as president, had absolute control over
WPM. Even granting that he exercised a certain degree of control over the finances, policies and
practices of WPM, in view of his position as president, chairman and treasurer of the corporation,
such control does not necessarily warrant piercing the veil of corporate fiction since there was not a
single proof that WPM was formed to defraud CLN or the respondent, or that Manlapaz was guilty of
bad faith or fraud.
1wphi1

On the contrary, the evidence establishes that CLN and the respondent knew and acted on the
knowledgethat they were dealing with WPM for the renovation of the latters restaurant, and not with
Manlapaz. That WPM later reneged on its monetary obligation to CLN, resulting to the filing of a civil
case for sum of money against the respondent, does not automatically indicate fraud, in the absence
of any proof to support it.
This Court also observed that the CA failed to demonstrate how the separate and distinct
personalityof WPM was used by Manlapaz to defeat the respondents right for reimbursement.
Neither was there any showing that WPM attempted to avoid liability or had no property against
which to proceed.
Since no harm could be said to have been proximately caused by Manlapaz for which the latter
could be held solidarily liable with WPM, and considering that there was no proof that WPM had
insufficient funds, there was no sufficient justification for the RTC and the CA to have ruled that
Manlapaz should be held jointly and severally liable to the respondent for the amount she paid to
CLN. Hence, only WPM is liable to indemnify the respondent.

Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon and thus, must
be done with caution. It can only be done if it has been clearly established that the separate and
distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a
deception. The court must be certain that the corporate fiction was misused to such an extent that
injustice, fraud, or crime was committed against another, in disregard of its rights; it cannot be
presumed.
15

On the Award of Moral Damages

On the award of moral damages, we find the same in order in view of WPM's unjustified refusal to
pay a just debt. Under Article 2220 of the New Civil Code, moral damages may be awarded in
cases of a breach of contract where the defendant acted fraudulently or in bad faith or was guilty of
gross negligence amounting to bad faith.
16

In the present case, when payment for the balance of the renovation cost was demanded, WPM,
instead of complying with its obligation, denied having authorized the respondent to contract in its
behalf and accordingly refused to pay. Such cold refusal to pay a just debt amounts to a breach of
contract in bad faith, as contemplated by Article 2220. Hence, the CA's order to pay moral damages
was in order.
WHEREFORE, in light of the foregoing, the decision dated September 28, 2007 of the Court of
Appeals in CA-G.R. CV No. 68289 is MODIFIED and.that petitioner Warlito P. Manlapaz is
ABSOLVED from any liability under the renovation agreement.
SO ORDERED.
KUKAN INTERNATIONAL CORPORATION, Petitioner,
vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of Manila,
Branch 21, and ROMEO M. MORALES, doing business under the name and style "RM Morales
Trophies and Plaques," Respondents.
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January 23,
2008 Decision1and the April 16, 2008 Resolution2 rendered by the Court of Appeals (CA) in CA-G.R.
SP No. 100152.
The assailed CA decision affirmed the March 12, 20073 and June 7, 20074 Orders of the Regional
Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173, entitled Romeo M. Morales,
doing business under the name and style RM Morales Trophies and Plaques v. Kukan, Inc. In the
said orders, the RTC disregarded the separate corporate identities of Kukan, Inc. and Kukan

International Corporation and declared them to be one and the same entity. Accordingly, the RTC
held Kukan International Corporation, albeit not impleaded in the underlying complaint of Romeo M.
Morales, liable for the judgment award decreed in a Decision dated November 28, 2002 5 in favor of
Morales and against Kukan, Inc.
The Facts
Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of signages
in a building being constructed in Makati City. Morales tendered the winning bid and was awarded
the PhP 5 million contract. Some of the items in the project award were later excluded resulting in
the corresponding reduction of the contract price to PhP 3,388,502. Despite his compliance with his
contractual undertakings, Morales was only paid the amount of PhP 1,976,371.07, leaving a balance
of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite demands. Shortchanged, Morales
filed a Complaint6 with the RTC against Kukan, Inc. for a sum of money, the case docketed as Civil
Case No. 99-93173 and eventually raffled to Branch 17 of the court.
Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial ensued.
However, starting November 2000, Kukan, Inc. no longer appeared and participated in the
proceedings before the trial court, prompting the RTC to declare Kukan, Inc. in default and paving
the way for Morales to present his evidence ex parte.
On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan, Inc.,
disposing as follows:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan,
Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED
TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum from
February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorneys
fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.
For lack of factual foundation, the counterclaim is DISMISSED.
IT IS SO ORDERED.7
After the above decision became final and executory, Morales moved for and secured a writ of
execution8 against Kukan, Inc. The sheriff then levied upon various personal properties found at what

was supposed to be Kukan, Inc.s office at Unit 2205, 88 Corporate Center, Salcedo Village, Makati
City. Alleging that it owned the properties thus levied and that it was a different corporation from
Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit of Third-Party Claim. Notably,
KIC was incorporated in August 2000, or shortly after Kukan, Inc. had stopped participating in Civil
Case No. 99-93173.
In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30, 2003. In it,
Morales prayed, applying the principle of piercing the veil of corporate fiction, that an order be issued
for the satisfaction of the judgment debt of Kukan, Inc. with the properties under the name or in the
possession of KIC, it being alleged that both corporations are but one and the same entity. KIC
opposed Morales motion. By Order of May 29, 20039as reiterated in a subsequent order, the court
denied the omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true relationship
between the two, Morales filed a Motion for Examination of Judgment Debtors dated May 4, 2005. In
this motion Morales sought that subponae be issued against the primary stockholders of Kukan, Inc.,
among them Michael Chan, a.k.a. Chan Kai Kit. This too was denied by the trial court in an Order
dated May 24, 2005.10
Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who eventually
granted the motion. The case was re-raffled to Branch 21, presided by public respondent Judge
Amor Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate Fiction to
declare KIC as having no existence separate from Kukan, Inc. This time around, the RTC, by Order
dated March 12, 2007, granted the motion, the dispositive portion of which reads:
WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby declares
as follows:
1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the same
corporation;
2. the levy made on the properties of Kukan International Corp. is hereby valid;
3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay the
amount awarded to plaintiff pursuant to the decision of November [28], 2002 which has long
been final and executory.
SO ORDERED.
From the above order, KIC moved but was denied reconsideration in another Order dated June 7,
2007.
KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7, 2007 RTC
Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which states:
WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders dated
March 12, 2007 and June 7, 2007 of the court a quo are both AFFIRMED. No costs.
SO ORDERED.11
The CA later denied KICs motion for reconsideration in the assailed resolution.
Hence, the instant petition for review, with the following issues KIC raises for the Courts
consideration:
1. There is no legal basis for the [CA] to resolve and declare that petitioners Constitutional
Right to Due Process was not violated by the public respondent in rendering the Orders
dated March 12, 2007 and June 7, 2007 and in declaring petitioner to be liable for the
judgment obligations of the corporation "Kukan, Inc." to private respondent as petitioner is
a stranger to the case and was never made a party in the case before the trial court nor was
it ever served a summons and a copy of the complaint.
2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12,
2007 and June 7, 2007 rendered by public respondent declaring the petitioner liable to the
judgment obligations of the corporation "Kukan, Inc." to private respondent are valid as said
orders of the public respondent modify and/or amend the trial courts final and executory
decision rendered on November 28, 2002.
3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12,
2007 and June 7, 2007 rendered by public respondent declaring the petitioner [KIC] and the
corporation "Kukan, Inc." as one and the same, and, therefore, the Veil of Corporate Fiction
between them be pierced as the procedure undertaken by public respondent which the
[CA] upheld is not sanctioned by the Rules of Court and/or established jurisprudence
enunciated by this Honorable Supreme Court.12
In gist, the issues to be resolved boil down to the question of, first, whether the trial court can, after
the judgment against Kukan, Inc. has attained finality, execute it against the property of KIC; second,
whether the trial court acquired jurisdiction over KIC; and third, whether the trial and appellate courts
correctly applied, under the premises, the principle of piercing the veil of corporate fiction.
The Ruling of the Court
The petition is meritorious.
First Issue: Against Whom Can a Final and
Executory Judgment Be Executed

The preliminary question that must be answered is whether or not the trial court can, after adjudging
Kukan, Inc. liable for a sum of money in a final and executory judgment, execute such judgment debt
against the property of KIC.
The poser must be answered in the negative.
In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over the
execution of its judgment:
A case in which an execution has been issued is regarded as still pending so that all proceedings on
the execution are proceedings in the suit. There is no question that the court which rendered the
judgment has a general supervisory control over its process of execution, and this power carries with
it the right to determine every question of fact and law which may be involved in the execution.
We reiterated the above holding in Javier v. Court of Appeals 14 in this wise: "The said branch has a
general supervisory control over its processes in the execution of its judgment with a right to
determine every question of fact and law which may be involved in the execution."
The courts supervisory control does not, however, extend as to authorize the alteration or
amendment of a final and executory decision, save for certain recognized exceptions, among which
is the correction of clerical errors. Else, the court violates the principle of finality of judgment and its
immutability, concepts which the Court, in Tan v. Timbal,15 defined:
As we held in Industrial Management International Development Corporation vs. NLRC:
It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to settlement of
rights of the parties. Once a decision or order becomes final and executory, it is removed from the
power or jurisdiction of the court which rendered it to further alter or amend it. It thereby becomes
immutable and unalterable and any amendment or alteration which substantially affects a final and
executory judgment is null and void for lack of jurisdiction, including the entire proceedings held for
that purpose. An order of execution which varies the tenor of the judgment or exceeds the terms
thereof is a nullity. (Emphasis supplied.)
Republic v. Tango16 expounded on the same principle and its exceptions:
Deeply ingrained in our jurisprudence is the principle that a decision that has acquired finality
becomes immutable and unalterable. As such, it may no longer be modified in any respect even
if the modification is meant to correct erroneous conclusions of fact or law and whether it will be
made by the court that rendered it or by the highest court of the land. x x x
The doctrine of finality of judgment is grounded on the fundamental principle of public policy and
sound practice that, at the risk of occasional error, the judgment of courts and the award of quasijudicial agencies must become final on some definite date fixed by law. The only exceptions to the
general rule are the correction of clerical errors, the so-called nunc pro tunc entries which cause no
prejudice to any party, void judgments, and whenever circumstances transpire after the finality of the

decision which render its execution unjust and inequitable. None of the exceptions obtains here to
merit the review sought. (Emphasis added.)
So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment, order the
execution of its final decision in a manner as would amount to its prohibited alteration or
modification?
We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan,
Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED
TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum from
February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorneys
fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.
x x x x (Emphasis supplied.)
As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the
aforementioned awards to Morales. Thus, making KIC, thru the medium of a writ of execution,
answerable for the above judgment liability is a clear case of altering a decision, an instance of
granting relief not contemplated in the decision sought to be executed. And the change does not fall
under any of the recognized exceptions to the doctrine of finality and immutability of judgment. It is a
settled rule that a writ of execution must conform to the fallo of the judgment; as an inevitable
corollary, a writ beyond the terms of the judgment is a nullity.17
Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an examination
of the other issues raised by KIC would be proper.
Second Issue: Propriety of the RTC
Assuming Jurisdiction over KIC
The next issue turns on the validity of the execution the trial court authorized against KIC and its
property, given that it was neither made a party nor impleaded in Civil Case No. 99-93173, let alone
served with summons. In other words, did the trial court acquire jurisdiction over KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to the
jurisdiction of the trial court owing to its filing of four (4) pleadings adverted to earlier, namely: (a) the
Affidavit of Third-Party Claim;18 (b) the Comment and Opposition to Plaintiffs Omnibus Motion;19 (c)
the Motion for Reconsideration of the RTC Order dated March 12, 2007; 20 and (d) the Motion for
Leave to Admit Reply.21 The CA, citing Section 20, Rule 14 of the Rules of Court, stated that "the
procedural rule on service of summons can be waived by voluntary submission to the courts
jurisdiction through any form of appearance by the party or its counsel." 22
We cannot give imprimatur to the appellate courts appreciation of the thrust of Sec. 20, Rule 14 of
the Rules in concluding that the trial court acquired jurisdiction over KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire jurisdiction over
the parties in a civil case:
Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other hand,
jurisdiction over the defendants in a civil case is acquired either through the service of summons
upon them or through their voluntary appearance in court and their submission to its authority.
(Emphasis supplied.)
In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security Corporation,
stating: "[I]n civil cases, the trial court acquires jurisdiction over the person of the defendant either by
the service of summons or by the latters voluntary appearance and submission to the authority of
the former."
The courts jurisdiction over a party-defendant resulting from his voluntary submission to its authority
is provided under Sec. 20, Rule 14 of the Rules, which states:
Section 20. Voluntary appearance. The defendants voluntary appearance in the actions shall be
equivalent to service of summons. The inclusion in a motion to dismiss of other grounds aside from
lack of jurisdiction over the person of the defendant shall not be deemed a voluntary appearance.
To be sure, the CAs ruling that any form of appearance by the party or its counsel is deemed as
voluntary appearance finds support in the kindred Republic v. Ker & Co., Ltd. 25 and De Midgely v.
Ferandos.26
Republic and De Midgely, however, have already been modified if not altogether superseded 27 by La
Naval Drug Corporation v. Court of Appeals,28 wherein the Court essentially ruled and elucidated on
the current view in our jurisdiction, to wit: "[A] special appearance before the courtchallenging its
jurisdiction over the person through a motion to dismiss even if the movant invokes other grounds
is not tantamount to estoppel or a waiver by the movant of his objection to jurisdiction over his
person; and such is not constitutive of a voluntary submission to the jurisdiction of the court." 29
In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it is
conceded that it raised affirmative defenses through its aforementioned pleadings, KIC never
abandoned its challenge, however implicit, to the RTCs jurisdiction over its person. The challenge
was subsumed in KICs primary assertion that it was not the same entity as Kukan, Inc. Pertinently,

in its Comment and Opposition to Plaintiffs Omnibus Motion dated May 20, 2003, KIC entered its
"special but not voluntary appearance" alleging therein that it was a different entity and has a
separate legal personality from Kukan, Inc. And KIC would consistently reiterate this assertion in all
its pleadings, thus effectively resisting all along the RTCs jurisdiction of its person. It cannot be
overemphasized that KIC could not file before the RTC a motion to dismiss and its attachments in
Civil Case No. 99-93173, precisely because KIC was neither impleaded nor served with summons.
Consequently, KIC could only assert and claim through its affidavits, comments, and motions filed by
special appearance before the RTC that it is separate and distinct from Kukan, Inc.
Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection to the
courts lack of jurisdiction over its person. It would defy logic to say that KIC unequivocally submitted
itself to the jurisdiction of the RTC when it strongly asserted that it and Kukan, Inc. are different
entities. In the scheme of things obtaining, KIC had no other option but to insist on its separate
identity and plead for relief consistent with that position.
Third Issue: Piercing the
Veil of Corporate Fiction
The third and main issue in this case is whether or not the trial and appellate courts correctly applied
the principle of piercing the veil of corporate entitycalled also as disregarding the fiction of a
separate juridical personality of a corporationto support a conclusion that Kukan, Inc. and KIC are
but one and the same corporation with respect to the contract award referred to at the outset. This
principle finds its context on the postulate that a corporation is an artificial being invested with a
personality separate and distinct from those of the stockholders and from other corporations to which
it may be connected or related.31
In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission, 32 the
Court revisited the subject principle of piercing the veil of corporate fiction and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a
mere collection of individuals or an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation unifying the group. Another
formulation of this doctrine is that when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect the rights of third
parties, disregard the legal fiction that two corporations are distinct entities and treat them as
identical or as one and the same.
Whether the separate personality of the corporation should be pierced hinges on obtaining
facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be done
with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or
when necessary in the interest of justice. x x x (Emphasis supplied.)
The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:
While a corporation may exist for any lawful purpose, the law will regard it as an association of
persons or, in case of two corporations, merge them into one, when its corporate legal entity is used

as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The
doctrine applies only when such corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or
where a corporation is the mere alter ego or business conduit of a person, or where the corporation
is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing must be established
clearly and convincingly. It cannot be presumed.33 (Emphasis supplied.)
Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to due
process when, in the execution of its November 28, 2002 Decision, the court authorized the
issuance of the writ against KIC for Kukan, Inc.s judgment debt, albeit KIC has never been a party to
the underlying suit. As a counterpoint, Morales argues that KICs specific concern on due process
and on the validity of the writ to execute the RTCs November 28, 2002 Decision would be mooted if
it were established that KIC and Kukan, Inc. are indeed one and the same corporation.
Morales contention is untenable.
The principle of piercing the veil of corporate fiction, and the resulting treatment of two related
corporations as one and the same juridical person with respect to a given transaction, is basically
applied only to determine established liability;34 it is not available to confer on the court a jurisdiction
it has not acquired, in the first place, over a party not impleaded in a case. Elsewise put, a
corporation not impleaded in a suit cannot be subject to the courts process of piercing the veil of its
corporate fiction. In that situation, the court has not acquired jurisdiction over the corporation and,
hence, any proceedings taken against that corporation and its property would infringe on its right to
due process. Aguedo Agbayani, a recognized authority on Commercial Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x
This is so because the doctrine of piercing the veil of corporate fiction comes to play only during the
trial of the case after the court has already acquired jurisdiction over the corporation. Hence, before
this doctrine can be applied, based on the evidence presented, it is imperative that the court must
first have jurisdiction over the corporation.35 x x x (Emphasis supplied.)
The implication of the above comment is twofold: (1) the court must first acquire jurisdiction over the
corporation or corporations involved before its or their separate personalities are disregarded; and
(2) the doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over
a cause of action duly commenced involving parties duly brought under the authority of the court by
way of service of summons or what passes as such service.
The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the matter of
the time and manner of raising the principle in question, it is undisputed that no full-blown trial
involving KIC was had when the RTC disregarded the corporate veil of KIC. The reason for this
actuality is simple and undisputed: KIC was not impleaded in Civil Case No. 99-93173 and that the
RTC did not acquire jurisdiction over it. It was dragged to the case after it reacted to the improper

execution of its properties and veritably hauled to court, not thru the usual process of service of
summons, but by mere motion of a party with whom it has no privity of contract and after the
decision in the main case had already become final and executory. As to the propriety of a plea for
the application of the principle by mere motion, the following excerpts are instructive:
Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and is not
available to settle important questions of law, or to dispose of the merits of the case. A motion is
usually a proceeding incidental to an action, but it may be a wholly distinct or independent
proceeding. A motion in this sense is not within this discussion even though the relief demanded is
denominated an "order."
A motion generally relates to procedure and is often resorted to in order to correct errors which have
crept in along the line of the principal actions progress. Generally, where there is a procedural defect
in a proceeding and no method under statute or rule of court by which it may be called to the
attention of the court, a motion is an appropriate remedy. In many jurisdictions, the motion has
replaced the common-law pleas testing the sufficiency of the pleadings, and various common-law
writs, such as writ of error coram nobis and audita querela. In some cases, a motion may be one of
several remedies available. For example, in some jurisdictions, a motion to vacate an order is a
remedy alternative to an appeal therefrom.
Statutes governing motions are given a liberal construction.36 (Emphasis supplied.)
The bottom line issue of whether Morales can proceed against KIC for the judgment debt of Kukan,
Inc.assuming hypothetically that he can, applying the piercing the corporate veil principle
resolves itself into the question of whether a mere motion is the appropriate vehicle for such
purpose.
Verily, Morales espouses the application of the principle of piercing the corporate veil to hold KIC
liable on theory that Kukan, Inc. was out to defraud him through the use of the separate and distinct
personality of another corporation, KIC. In net effect, Morales adverted motion to pierce the veil of
corporate fiction dated January 3, 2007 stated a new cause of action, i.e., for the liability of judgment
debtor Kukan, Inc. to be borne by KIC on the alleged identity of the two corporations. This new
cause of action should be properly ventilated in another complaint and subsequent trial where the
doctrine of piercing the corporate veil can, if appropriate, be applied, based on the evidence
adduced. Establishing the claim of Morales and the corresponding liability of KIC for Kukan Inc.s
indebtedness could hardly be the subject, under the premises, of a mere motion interposed after the
principal action against Kukan, Inc. alone had peremptorily been terminated. After all, a complaint is
one where the plaintiff alleges causes of action.
In any event, the principle of piercing the veil of corporate fiction finds no application to the instant
case.
As a general rule, courts should be wary of lifting the corporate veil between corporations, however
related. Philippine National Bank v. Andrada Electric Engineering Company37 explains why:

A corporation is an artificial being created by operation of law. x x x It has a personality separate and
distinct from the persons composing it, as well as from any other legal entity to which it may be
related. This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of another corporation. For reasons
of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed against third persons.
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to be applied. It must be certain that the corporate
fiction was misused to such an extent that injustice, fraud, or crime was committed against another,
in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never unintended may result from an erroneous
application.
This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising from a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives or
to cover up an otherwise blatant violation of the prohibition against forum-shopping. Only in these
and similar instances may the veil be pierced and disregarded. (Emphasis supplied.)
In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and convincing
proof that the separate and distinct personality of the corporation was purposefully employed to
evade a legitimate and binding commitment and perpetuate a fraud or like wrongdoings. To be sure,
the Court has, on numerous occasions,38 applied the principle where a corporation is dissolved and
its assets are transferred to another to avoid a financial liability of the first corporation with the result
that the second corporation should be considered a continuation and successor of the first entity.
In those instances when the Court pierced the veil of corporate fiction of two corporations, there was
a confluence of the following factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second corporation to avoid a
financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such that the second
corporation should be considered as a continuation and successor of the first corporation.
In the instant case, however, the second and third factors are conspicuously absent. There is,
therefore, no compelling justification for disregarding the fiction of corporate entity separating Kukan,
Inc. from KIC. In applying the principle, both the RTC and the CA miserably failed to identify the
presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on the
following premises and arguments:
While it is true that a corporation has a separate and distinct personality from its stockholder, director
and officers, the law expressly provides for an exception. When Michael Chan, the Managing
Director of defendant Kukan, Inc. (majority stockholder of the newly formed corporation [KIC])
confirmed the award to plaintiff to supply and install interior signages in the Enterprise Center he
(Michael Chan, Managing Director of defendant Kukan, Inc.) knew that there was no sufficient
corporate funds to pay its obligation/account, thus implying bad faith on his part and fraud in
contracting the obligation. Michael Chan neither returned the interior signages nor tendered payment
to the plaintiff. This circumstance may warrant the piercing of the veil of corporation fiction. Having
been guilty of bad faith in the management of corporate matters the corporate trustee, director or
officer may be held personally liable. x x x
Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the
circumstances of the case. x x x [A]nd the circumstances are: the signature of Michael Chan,
Managing Director of Kukan, Inc. appearing in the confirmation of the award sent to the plaintiff;
signature of Chan Kai Kit, a British National appearing in the Articles of Incorporation and signature
of Michael Chan also a British National appearing in the Articles of Incorporation [of] Kukan
International Corp. give the impression that they are one and the same person, that Michael Chan
and Chan Kai Kit are both majority stockholders of Kukan International Corp. and Kukan, Inc.
holding 40% of the stocks; that Kukan International Corp. is practically doing the same kind of
business as that of Kukan, Inc.39 (Emphasis supplied.)
As is apparent from its disquisition, the RTC brushed aside the separate corporate existence of
Kukan, Inc. and KIC on the main argument that Michael Chan owns 40% of the common shares of
both corporations, obviously oblivious that overlapping stock ownership is a common business
phenomenon. It must be remembered, however, that KICs properties were the ones seized upon
levy on execution and not that of Kukan, Inc. or of Michael Chan for that matter. Mere ownership by
a single stockholder or by another corporation of a substantial block of shares of a corporation does
not, standing alone, provide sufficient justification for disregarding the separate corporate
personality.40 For this ground to hold sway in this case, there must be proof that Chan had control or
complete dominion of Kukan and KICs finances, policies, and business practices; he used such
control to commit fraud; and the control was the proximate cause of the financial loss complained of
by Morales. The absence of any of the elements prevents the piercing of the corporate veil. 41 And
indeed, the records do not show the presence of these elements.
On the other hand, the CA held:
In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x x x
worth more than three million pesos although it had only Php5,000.00 paid-up capital; [KIC] was
incorporated shortly before Kukan, Inc. suddenly ceased to appear and participate in the trial; [KICs]
purpose is related and somewhat akin to that of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan
Kai Kit, holds forty percent of the outstanding stocks, while he formerly held the same amount of
stocks in Kukan Inc. These would lead to the inescapable conclusion that Kukan, Inc. committed
fraudulent representation by awarding to the private respondent the contract with full knowledge that

it was not in a position to comply with the obligation it had assumed because of inadequate paid-up
capital. It bears stressing that shareholders should in good faith put at the risk of the business,
unencumbered capital reasonably adequate for its prospective liabilities. The capital should not be
illusory or trifling compared with the business to be done and the risk of loss.
Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan, a.k.a.
Chan Kai Kit has the largest block of shares in both business enterprises. The emergence of the
former was cleverly timed with the hasty withdrawal of the latter during the trial to avoid the financial
liability that was eventually suffered by the latter. The two companies have a related business
purpose. Considering these circumstances, the obvious conclusion is that the creation of Kukan
International Corporation served as a device to evade the obligation incurred by Kukan, Inc. and yet
profit from the goodwill attained by the name "Kukan" by continuing to engage in the same line of
business with the same list of clients.42 (Emphasis supplied.)
Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of the
business activities in which both corporations are engaged as a jumping board to its conclusion that
the creation of KIC "served as a device to evade the obligation incurred by Kukan, Inc." The
appellate court, however, left a gaping hole by failing to demonstrate that Kukan, Inc. and its
stockholders defrauded Morales. In fine, there is no showing that the incorporation, and the separate
and distinct personality, of KIC was used to defeat Morales right to recover from Kukan, Inc. Judging
from the records, no serious attempt was made to levy on the properties of Kukan, Inc. Morales
could not, thus, validly argue that Kukan, Inc. tried to avoid liability or had no property against which
to proceed.
Morales further contends that Kukan, Inc.s closure is evidenced by its failure to file its 2001 General
Information Sheet (GIS) with the Securities and Exchange Commission. However, such fact does not
necessarily mean that Kukan, Inc. had altogether ceased operations, as Morales would have this
Court believe, for it is stated on the face of the GIS that it is only upon a failure to file the corporate
GIS for five (5) consecutive years that non-operation shall be presumed.
The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up capital of
PhP 5,000 is not an indication of the intent on the part of its management to defraud creditors. Paidup capital is merely seed money to start a corporation or a business entity. As in this case, it merely
represented the capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up capitalization of
PhP 5,000 is not and should not be taken as a reflection of the firms capacity to meet its recurrent
and long-term obligations. It must be borne in mind that the equity portion cannot be equated to the
viability of a business concern, for the best test is the working capital which consists of the liquid
assets of a given business relating to the nature of the business concern.
lawphil

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a
badge of fraud, for it is in compliance with Sec. 13 of the Corporation Code, 43 which only requires a
minimum paid-up capital of PhP 5,000.
1avvphi1

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and controlled as
they are by the same stockholders, stands without factual basis. It is true that Michael Chan, a.k.a.
Chan Kai Kit, owns 40% of the outstanding capital stock of both corporations. But such

circumstance, standing alone, is insufficient to establish identity. There must be at least a substantial
identity of stockholders for both corporations in order to consider this factor to be constitutive of
corporate identity.
It would not avail Morales any to rely44 on General Credit Corporation v. Alsons Development and
Investment Corporation.45 General Credit Corporation is factually not on all fours with the instant
case. There, the common stockholders of the corporations represented 90% of the outstanding
capital stock of the companies, unlike here where Michael Chan merely represents 40% of the
outstanding capital stock of both KIC and Kukan, Inc., not even a majority of it. In that case,
moreover, evidence was adduced to support the finding that the funds of the second corporation
came from the first. Finally, there was proof in General Credit Corporation of complete control, such
that one corporation was a mere dummy or alter ego of the other, which is absent in the instant case.
Evidently, the aforementioned case relied upon by Morales cannot justify the application of the
principle of piercing the veil of corporate fiction to the instant case. As shown by the records, the
name Michael Chan, the similarity of business activities engaged in, and incidentally the word
"Kukan" appearing in the corporate names provide the nexus between Kukan, Inc. and KIC. As
illustrated, these circumstances are insufficient to establish the identity of KIC as the alter ego or
successor of Kukan, Inc.
It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly, those who
seek to pierce the veil must clearly establish that the separate and distinct personalities of the
corporations are set up to justify a wrong, protect fraud, or perpetrate a deception. In the concrete
and on the assumption that the RTC has validly acquired jurisdiction over the party concerned,
Morales ought to have proved by convincing evidence that Kukan, Inc. was collapsed and thereafter
KIC purposely formed and operated to defraud him. Morales has not to us discharged his burden.
WHEREFORE, the petition is hereby GRANTED. The CAs January 23, 2008 Decision and April 16,
2008 Resolution in CA-G.R. SP No. 100152 are hereby REVERSED and SET ASIDE. The levy
placed upon the personal properties of Kukan International Corporation is hereby ordered lifted and
the personal properties ordered returned to Kukan International Corporation. The RTC of Manila,
Branch 21 is hereby directed to execute the RTC Decision dated November 28, 2002 against Kukan,
Inc. with reasonable dispatch.
RICARDO GURREA, plaintiff-appellant,
vs.
JOSE MANUEL LEZAMA, ET AL., defendants-appellees.
Fulgencio Vega and Felix D. Bacabac for appellant.
Jose Manuel Lezama for appellees.
Jose Manuel Lezama and Genivera F. de Lezama. Domingo B. Lauren for the other appellees.
BAUTISTA ANGELO, J.:
Plaintiff instituted this action in the Court of First Instance of Iloilo to have Resolution No. 65 of the
Board of Directors of the La Paz Ice Plant and Cold Storage Co., Inc., removing him from his

position of manager of said corporation declared null and void and to recover damages incident
thereto. The action is predicated on the ground that said resolution was adopted in contravention of
the provisions of the by-laws of the corporation, of the Corporation Law and of the understanding,
intention and agreement reached among its stockholders.
Defendant answered the complaint setting up as defense that plaintiff had been removed by virtue of
a valid resolution.
In connection with this complaint, plaintiff moved for the issuance of a writ of preliminary injunction to
restrain defendant Jose Manuel Lezama from managing the corporation pending the determination
of this case, but after hearing where parties presented testimonial and documentary evidence, the
court denied the motion. Thereafter, by agreement of the parties and without any trial on the merits,
the case was submitted for judgment on the sole legal question of whether plaintiff could be legally
removed as manager of the corporation merely by resolution of the board of directors or whether the
affirmative vote of 2/3 of the paid shares of stocks was necessary for that purpose. And passing
upon this legal point, the trial court held that the removal of plaintiff was legal and dismissed the
complaint without pronouncement as to costs. Plaintiff appealed to the Court of Appeals but finding
that the question at issue is one of law, the latter certified the case to us for decision.
Section 33 of the Corporation Law provides: "Immediately after the election, the directors of a
corporation must organize by the election of a president, who must be one of their number, a
secretary or clerk who shall be a resident of the Philippines . . . and such other officers as may be
provided for in the by-laws." The by-laws of the instant corporation in turn provide that in the board of
directors there shall be a president, a vice-president, a secretary and a treasurer. These are the only
ones mentioned therein as officers of the corporation. The manager is not included although the
latter is mentioned as the person in whom the administration of the corporation is vested, and with
the exception of the president, the by-laws provide that the officers of the corporation may be
removed or suspended by the affirmative vote of 2/3 of the corporation (Exhibit A).
From the above the following conclusion is clear: that we can only regard as officers of a corporation
those who are given that character either by the Corporation Law or by its by-laws. The rest can be
considered merely as employees or subordinate officials. And considering that plaintiff has been
appointed manager by the board of directors and as such does not have the character of an officer,
the conclusion is inescapable that he can be suspended or removed by said board of directors under
such terms as it may see fit and not as provided for in the by-laws. Evidently, the power to appoint
carries with it the power to remove, and it would be incongruous to hold that having been appointed
by the board of directors he could only be removed by the stockholders.
The above interpretation finds also support in the American authorities. Fletcher, in his treatise,
states the rule in the following wise: "It is sometimes important to determine whether a person
representing a corporation is to be classed as an officer of the company or merely as an agent or
employee, especially in construing statutes renting only to 'officers' of corporations. Generally the
officers of a corporation are enumerated in its charter or by-laws, and include a president, vicepresident, secretary, treasurer and sometimes others. The statutes in most of the states expressly
provide for the election of a president, secretary and treasurer, and then provide, that there shall be
such other officers, agents and factors as the corporation shall authorize for that purpose. If the

charter expressly enumerates who shall be officers of the company, a person whose position is not
enumerated is not an officer as to members of the corporation, since the charter is conclusive upon
them" (Fletcher, Cyclopedia of the Law of Private Corporations, Vol. II, p. 19). It has been likewise
held "that the offices pertaining to a private corporation are defined in its charter and by-laws, and
that no other positions in the service of the corporation are offices" (Ann. 53 A.L.R., 599).
Indeed, there are authorities galore that hold that a general manager is not an officer of a
corporation, even if his powers and influence may be as great as those of any officer in said
organization.
Officers Distinguished from Mere Employees. As already stated, both officers and
employees are agents of the corporation and the difference between them is largely one of
degree; the officers are the most important employees exercising greater authority or power
in the management of the business. Ordinarily, too, the principal offices are designated by
statute, charter or by-law provisions, and specific duties are imposed upon certain officers.
Thus the state statute or a by-law may provide that stock certificates shall be signed by the
president and countersigned by the secretary or treasurer. The general manager of a
corporation is not ordinarily classed as an officer, but his powers and influence may be quite
as great as those of any person in the organization. (Grange, Corporation Law for Officers
and Directors, p. 432; Emphasis supplied.)
One distinction between officers and agents of a corporation lies in the manner of their
creation. An officer is created by the charter of the corporation, and the officer is elected by
the directors or the stockholders. An agency is usually created by the officers, or one or
more of them, and the agent is appointed by the same authority. It is clear that the two terms
officers and agents are by no means interchangeable. One, deriving its existence from the
other, and being dependent upon that other for its continuation, is necessarily restricted in its
powers and duties, and such powers and duties, are not necessarily the same as those
pertaining to the authority creating it. The officers, as such, are the corporation. An agent is
an employee. "A mere employment, however liberally compensated, does not rise to the
dignity of an office."21 Am and Eng. Enc. Law (2d Ed.) 836. In Wheeler and Wilson Mfg.
Co. vs. Lawson, 57 Wis. 400, 15 N. W. 398, it was held that under a statute requiring an
affidavit to be made by an officer of a corporation, the general agent or managing agent,
within the state, of a foreign corporation is not an officer. In Farmers' Loan and Trust
Co. vs. Warring, 20 Wis. 305, service was made upon the "principal agent" of a corporation
holding in trust a railroad, when the statute required service upon a "principal officer." In
answering the question whether or not the agent was a principal officer the court said: "It is
evident he was not, and must be regarded only as an agent not an officer of any kind, much
less a principal officer." A ruling that a "general manager" of a corporation was not authorized
to verify pleadings, under a statute requiring verification by "an officer" was made in
Meton vs. Isham Wagon Co. (Sup.) 4 N. Y. Supp. 215. In Raleigh, etc. R. Co. vs. Pullman
Co., 122 Ga. 704, 5O S.E. 1008 (4), it was held that the term "general manager." as applied
to one representing a corporation, and especially a railroad corporation, imported an agent
of a very extensive authority; but it was not ruled that even the term "general manager"
would import that the person holding that position was necessarily an officer of the company.
One distinction between an officer and an agent suggested in Commonwealth vs. Christian,

9 Phila. (Pa.) 558, is that on officer of a corporation, if illegally excluded from his office, may
by mandamus compel the corporation, to reinstate him; while an agent may be dismissed
without cause, and his only remedy would be compensation in damages. It would not be
contended that the "general agent of the defendant at Columbus," in the event of his
discharge, could be reinstated by mandamus. We do not think the general agent at
Columbus was an officer of the defendant company. Therefore his alleged waiver of a
condition in the policy was not binding upon the company. (Vardeman vs. Penn. Mut. Life Ins.
Co. 125 Ga. 117, 54 S.E. P. 66; Emphasis supplied.)
The plaintiff-predicates this action on said contract, and claims that the same being signed
by the defendant through its "general manager" if admitted evidence, would show sufficient
authority prima facie to do any act which the directors could authorize or ratify. The
instrument in question being signed by James W. Codle, "General Manager" and no
evidence in the trial being produced showing the duties of said manager or what kind of an
office he was general manager of, the "general manager" without proof as to the nature of
services performed by the persons called "general manager", have no meaning in law,
excepting that the persons bearing the title is an employee who has been designated with a
title. It does not make him an officer of the company employing him. (Studerbaker Bros.
Co. vs. R. M. Rose Co., 119 N.Y.S pp. 970, 97; Emphasis supplied.)
We therefore hold that plaintiff has been properly removed when the board of directors of the instant
corporation approved its Resolution No. 65 on June 3, 1948.
We will now clarify some of the points raised by the distinguished dissenter in his dissenting opinion.
The fact that the "manager" of the corporation in the several statutes enacted by Congress is held
criminally liable for violation of any of the penal provisions therein prescribed does not make him an
"officer" of the corporation. This liability flows from the nature of his duties which are delegated to
him by the board of directors. He is paid for them. Hence, he has to answer for them should he use it
in violation of law. In the case of Robinson vs. Moark-Nemo Consol Mining Co., et al., 163 S. W. 889,
in connection with the liability of the manager, the court said:
Common justice and common sense demand that, where those in charge and control of the
management of a corporation direct it along paths of wrongdoing, they should be held
accountable by law. . . . This doctrine will prevent many wrongs, and have a salutary
influence in bringing about the lawful and orderly management of corporations.
It is claimed that the cases of Meton vs. Isham Wagon, 4 N.Y.S., 215 and State vs. Bergs, 217 N. W.,
736, supporting the theory that a manager is not necessarily an officer, are in illo tempore.1 It is
submitted that we do not adopt a rule just because it is new nor reject another just because it is old.
We adopt a rule because it is a good and sound rule. The fact however is that they are not the only
authorities supporting that theory. Additional cases are cited by Fletcher in support thereof, such as
the cases of Vardeman vs. Penn. Mut. Life Ins. Co., supraStudebaker Bros. Co. vs. R. M. Rose
Co., supra.

The dissenting opinion quotes from Thompson and Fletcher to support the theory that the general
manager of a corporation may be considered as its principal officer even though not so mentioned in
its charter or bylaws. We have examined the cast cited in support of that theory but we have found
that they are not in point. Thus, we have found (1) that the parties involved are mostly outsiders who
press their transactions against the corporation; (2) that the point raised is whether the acts of the
manager bind the corporation; (3) that the tendency of the courts is to hold the corporation liable for
the acts of the manager so long as they are within the powers granted, hence, the courts
emphasized the importance of the position of manager; and (4) the position of manager was
discussed from the point of view of an outsider and not from the internal organization of the
corporation, or in accordance with its charter or by-laws. In the present case, however, the parties
are the manager and the corporation. And the solution of the problem hinges on the internal
government of the corporation where the charter and the by-laws are necessarily involved in the
determination of the rights of the parties. Indeed, it has been held: "But it is urged that a corporation
may have officers not recognized by the charter and by-laws. It is possible this may be as to matters
arising between strangers and the corporation." [Com. vs. Christian, 9 Phila. (Pa.) 556; emphasis
supplied].
The cases on all fours with the present are those of State ex rel Blackwood vs. Brast, et al., 127 S.
E. 507 and Denton Milling Co. vs. Blewitt, 254 S. W. 236, 238, where the parties involved are the
manager and the corporation. The issue raised is the relation of the manager towards the
corporation. The position of the manager is discussed from the point of view of its internal
government. And the holding of the court is that the manager is the creation of the board of directors
and the agent through whom the corporate duties of the board are performed. Hence, the manager
holds his position at the pleasure of the board. This stipulation is well expressed in the following
words of Thompson:
The word "manager" implies agency, control, and presumptively sufficient authority to bind a
corporation in a case in which the corporation was an actual party. It has been said that such
agent must have the same general supervision of the corporation as is associated with the
office of cashier or secretary. By whatever name he may be called, such, managing agent is
a mere employee of the board of directors and holds his position subject to the particular
contract of employment; and unless the contract of employment fixes his term of office, it
may be terminated at the pleasure of the board. . . . The manager, like any other appointed
agent, is subject to removal when his term expires and on the request of the proper officer he
should turn over his business to the corporation and, where he refuses to comply, he may be
restrained from the further performance of work for the corporation. (Thompson on
Corporations, Vol. III, 3rd., pp. 209-210; Emphasis supplied.)
It is not correct to hold that the theory that a manager is not classed as an officer of a corporation is
only the minority view. If we consider the states that hold that managers are merely agents or
employees as among those that hold the theory that managers are not necessarily officers, then our
theory is supported by the majority view. Indeed, this view is upheld by nine states, 2 whereas only six
states adopt the view that managers are considered principal officers of the corporation. 3
The dissenting opinion quotes the provision of the bylaws relative to the administration of the affairs
of the instant corporation. It is there provided that the affairs of the corporation shall be successively

administered by (1) the stockholders; (2) the board of directors; and(3) the manager. From this it
concludes that the manager should be considered an officer.
The above enumeration only emphasizes the different organs through which the affairs of the
corporation should be administered and the order in which the powers should be exercised. The
stockholders are the entity, composing the whole corporation. The board of directors is the entity
elected by the stockholders to manage the affairs of the corporation. And the manager is the
individual appointed by the board of directors to carry out the powers delegated to him. In other
words, the manager is the creation of the board of directors. He is an alter egoof the board. As our
law provides that only those enumerated in the charter or in the by-laws are considered officers, the
manager who has not been so enumerated therein, but only incidentally mentioned in the order of
management, cannot be considered an officer of the corporation within their purview.
The mere fact that the directors are not mentioned in the by-laws as officers does not deprive them
of their category as such for their character as officer is secured in the charter. The same is not true
with the manager. Customs and corporate usages cannot prevail over the express provisions of the
charter and the by-laws.
There is no comparison between an appointee of the President, especially one in the judiciary, and
the appointee of the board of directors of a corporation. In the first case, removal is especially
provided for by law and in the second, the appointee holds office at the pleasure of the board. And
with regard to the powers of the board of director, to remove a manager of the corporation,
Thompson has the following to say:
. . . Below the grade of director and such other officers as are elected by the corporation at
large, the general rule is that the officers of private corporations hold their offices during the
will of the directors, and are hence removable by the directors without assigning any cause
for the removal, except so far as their power may be restrained by contract with the particular
officer, just as any other employer may discharge his employee. Speaking generally, it
may be said that the power to appoint carries with it the power to remove. . . . the directors
who appoint a ministerial officer may undoubtedly remove him at pleasure, and he has no
remedy other than an action for damages against the corporation for a breach of
contract. . . . The ordinary ministerial and other lesser officers, however, hold their offices
during the pleasure of the directors and may be removed at will, without assigned cause. Of
this class of officers and agents are the secretary and treasurer of the corporation, the
general manager, the assistant manager, the field manager, the attorney of the company, an
assistant horticulturist, and the bookkeepers. (Thompson on Corporations, Vol. III, 521-523.)
Wherefore, the decision appealed from is affirmed, with costs against appellant.
CITIBANK, N.A., petitioner, vs. HON. SEGUNDINO G. CHUA, SANTIAGO M. KAPUNAN and LUIS
L. VICTOR, ASSOCIATE JUSTICES OF THE HON. COURT OF APPEALS, THIRD DIVISION,
MANILA, HON. LEONARDO B. CANARES, Judge of Regional, Trial Court of Cebu, Branch 10, and
SPOUSES CRESENCIO AND ZENAIDA VELEZ, respondents.
SYLLABUS

1. COMMERCIAL LAW; PRIVATE CORPORATIONS; LEVELS OF CONTROL IN CORPORATE

HIERARCHY; BOARD OF DIRECTORS MAY VALIDLY DELEGATE SOME FUNCTIONS TO
INDIVIDUAL OFFICERS OR AGENTS. In the corporate hierarchy, there are three levels of
control: (1) the board of directors, which is responsible for corporate policies and the general
management of the business affairs of the corporation; (2) the officers, who in theory execute the
policies laid down by the board, but in practice often have wide latitude in determining the course of
business operations; and (3) the stockholders who have the residual power over fundamental
corporate changes, like amendments of the articles of incorporation. However, just as a natural
person may authorize another to do certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to individual officers or agents appointed by it.
2. ID.; ID.; HOW CORPORATE POWERS CONFERRED UPON CORPORATE OFFICERS OR
AGENTS; EXERCISE OF POWERS INCIDENTAL TO EXPRESS POWERS CONFERRED.
Corporate powers may be directly conferred upon corporate officers or agents by statute, the articles
of incorporation, the by-laws or by resolution or other act of the board of directors. In addition, an
officer who is not a director may also appoint other agents when so authorized by the by-laws or by
the board of directors. Such are referred to as express powers. There are also powers incidental to
express powers conferred. It is a fundamental principle in the law of agency that every delegation of
authority, whether general or special, carries with it, unless the contrary be expressed, implied
authority to do all of those acts, naturally and ordinarily done in such cases, which are reasonably
necessary and proper to be done in order to carry into effect the main authority conferred. Since the
by-laws are a source of authority for corporate officers and agents of the corporation, a resolution of
the Board of Directors of Citibank appointing an attorney in fact to represent and bind it during the
pre-trial conference of the case at bar is not necessary because its by-laws allow its officers, the
Executing Officer and the Secretary Pro-Tem, to execute a power of attorney to a designated bank
officer, William W. Ferguson in this case, clothing him with authority to direct and manage corporate
affairs.
3. ID.; ID.; ADOPTION OF BY-LAWS; PROVISION OF SECTION 46 OF CORPORATION CODE
REFERRING TO EFFECTIVITY OF CORPORATE BY-LAWS APPLICABLE ONLY TO DOMESTIC
CORPORATIONS. A corporation can submit its by-laws, prior to incorporation, or within one
month after receipt of official notice of the issuance of its certificate of incorporation by the SEC.
When the third paragraph of the above provision mentions "in all cases", it can only refer to these
two options; i.e., whether adopted prior to incorporation or within one month after incorporation, the
by-laws shall be effective only upon the approval of the SEC. But even more important, said
provision starts with the phrase "Every corporation formed under this Code", which can only refer to
corporations incorporated in the Philippines. Hence, Section 46, in so far as it refers to the effectivity
of corporate by-laws, applies only to domestic corporations and not to foreign corporations.
4. ID.; FOREIGN CORPORATIONS; ISSUANCE OF LICENSE TO TRANSACT BUSINESS IN THE
PHILIPPINES; REQUISITES; GRANT OF LICENSE IN EFFECT APPROVAL BY SEC OF FOREIGN
CORPORATION'S BY-LAWS. Section 125 of the same Code requires that a foreign corporation
applying for a license to transact business in the Philippines must submit, among other documents,
to the SEC, a copy of its articles of incorporation and by-laws, certified in accordance with law.
Unless these documents are submitted, the application cannot be acted upon by the SEC. In the
following section, the Code specifies when the SEC can grant the license applied for. Section 126

provides in part: "SEC. 126. Issuance of a license. If the Securities and Exchange Commission is
satisfied that the applicant has complied with all the requirements of this Code and other special
laws, rules and regulations, the Commission shall issue a license to the applicant to transact
business in the Philippines for the purpose or purposes specified in such license . . ." Since the SEC
will grant a license only when the foreign corporation has complied with all the requirements of law, it
follows that when it decides to issue such license, it is satisfied that the applicant's by-laws, among
the other documents, meet the legal requirements. This, in effect, is an approval of the foreign
corporations by-laws. It may not have been made in express terms, still it is clearly an approval.
Therefore, petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and
effective in the Philippines.
5. CIVIL LAW; AGENCY; SPECIAL POWER OF ATTORNEY; WHEN POWER OF ATTORNEY
COMPREHENSIVE ENOUGH TO INCLUDE AUTHORITY TO APPEAR AT PRE-TRIAL
CONFERENCE. It is also error on the part of the Court of Appeals to state that the power of
attorney given to the four (4) Citibank employees is not a special power of attorney as required in
paragraph 3, Article 1878 of the Civil Code and Section 1 (a), Rule 20 of the Rules of Court. In the
case of Tropical Homes, Inc. vs. Villaluz, the special power of attorney executed by petitioner bank
therein contained the following pertinent terms "to appear for and in its behalf in the aboveentitled case in all circumstances where its appearance is required and to bind it in all said
instances". The court ruled that: "Although the power of attorney in question does not specifically
mention the authority of petitioner's counsel to appear and bind the petitioner at the pre-trial
conference, the terms of said power of attorney are comprehensive enough as to include the
authority to appear for the petitioner at the pre-trial conference."
6. ID.; ID.; ID.; LEGAL COUNSEL APPOINTED TO REPRESENT BANK IN COURT PURSUANT TO
BY-LAW PROVISION CONSIDERED AN EMPLOYEE FOR A SPECIAL PURPOSE. Attorney was
sufficient under the by-law provision authorizing Ferguson to delegate any of his functions to any
one or more employees of the petitioner bank. A reasonable interpretation of this provision would
include an appointment of a legal counsel to represent the bank in court, for, under the
circumstances, such legal counsel can be considered, and in fact was considered by the petitioner
bank, an employee for a special purpose. Furthermore, Ferguson, who heads the Philippine office
thousands of miles away from its main office in the United States, must be understood to have
sufficient powers to act promptly in order to protect the interests of his principal.
7. REMEDIAL LAW; CIVIL PROCEDURE; PRECIPITATE ORDERS OF DEFAULT FROWNED
UPON BY SUPREME COURT; REASON THEREFOR; WHEN PARTY MAY BE PROPERLY
DEFAULTED. We reiterate the previous admonitions of this Court against "precipitate orders of
default as these have the effect of denying the litigant the chance to be heard. While there are
instances, to be sure, when a party may be properly defaulted, these should be the exceptions
rather than the rule and should be allowed only in clear cases of an obstinate refusal or inordinate
neglect to comply with the orders of the court. Absent such a showing, the party must be given every
reasonable opportunity to present his side and to refute the evidence of the adverse party in
deference to due process of law".
8. LEGAL ETHICS; AUTHORITY OF ATTORNEYS TO BIND CLIENTS. Under Rule 138, Section
23 of the Rules of Court, an attorney has authority to bind his client in any case by an agreement in

relation thereto made in writing, and this authority would include taking appeals and all matters of
ordinary judicial procedure. But he cannot, without special authority, compromise his client's litigation
or receive anything in discharge of a client's claim but the full amount in cash. The special powers of
attorney separately executed by Florencia Tarriela and William W. Ferguson granted to J.P. Garcia &
Associates are very explicit in their terms as to the counsel's authority in the case at bar.
DECISION
CAMPOS, JR., J p:
Petitioner is a foreign commercial banking corporation duly licensed to do business in the
Philippines. Private respondents, spouses Cresencio and Zenaida Velez, were good clients of
petitioner bank's branch in Cebu until March 14, 1986 when they filed a complaint for specific
performance and damages against it in Civil Case No. CEB-4751 before the Regional Trial Court of
Cebu, Branch 10.
Private respondents alleged in their complaint that the petitioner bank extended to them credit lines
sufficiently secured with real estate and chattel mortgages on equipment. They claim that petitioner
offered them special additional accommodation of Five Million Pesos (P5,000,000.00) to be availed
of in the following manner:
"a. Defendant would and did purchase check or checks from the plaintiffs by exchanging it with
defendant's manager's check on a regular daily basis as reflected in the defendant's own ledger
furnished to plaintiffs;
b. It was further agreed that on the following day, defendant CITIBANK would again purchase from
the plaintiffs, check or checks, by exchanging the same with defendant's manager's check, which
check, however, will be deposited by the plaintiffs with their other banks to cover the check or checks
previously issued by the plaintiffs mentioned above;
c. The same regular and agreed activity would be undertaken by the plaintiffs and defendant
CITIBANK herein every banking day thereafter;" 1
This arrangement started on September 4, 1985 until March 11, 1986, when private respondents
tried to exchange with petitioner bank six checks amounting to P3,095,000.00 but petitioner bank
allegedly refused to continue with the arrangement even after repeated demands. Instead, petitioner
bank suggested to private respondents that the total amount covered by the "arrangement be
restructured to thirty (30) months with prevailing interest rate on the diminishing balance". 2 Private
respondents agreed to such a proposal. Then as a sign of good faith, they issued and delivered a
check for P75,000.00 in favor of petitioner bank which was refused by the latter demanding instead
full payment of the entire amount.
For the failure of petitioner bank to comply with this restructuring agreement private respondents
sued for specific performance and damages.

Petitioner bank has a different version of the business relationship that existed between it and
private respondents. Thus:
". . . starting sometime on September 4 of 1985, he (private respondent Crescencio Velez) deposited
his unfunded personal checks with his current account with the petitioner. But prior to depositing said
checks, he would present his personal checks to a bank officer asking the latter to have his personal
checks immediately credited as if it were a cash deposit and at the same time assuring the bank
officer that his personal checks were fully funded. Having already gained the trust and confidence of
the officers of the bank because of his past transactions, the bank's officer would always
accommodate his request. After his requests are granted which is done by way of the bank officer
affixing his signature on the personal checks, private respondent Cresencio Velez would then
deposit his priorly approved personal checks to his current account and at the same time withdraw
sums of money from said current account by way of petitioner bank's manager's check. Private
respondent would then deposit petitioner bank's manager's check to his various current accounts in
other commercial banks to cover his previously deposited unfunded personal checks with petitioner
bank. Naturally, petitioner bank and its officers never discovered that his personal check deposits
were unfunded. On the contrary, it gave the petitioner bank the false impression that private
respondent's construction business was doing very well and that he was one big client who could be
trusted. This deceptive and criminal scheme he did every banking day without fail from September 4,
1985 up to March 11, 1986. The amounts that he was depositing and withdrawing during this period
(September 4, 1985 to March 11, 1986) progressively became bigger. It started at P46,000.00 on
September 4, 1985 and on March 11, 1986 the amount of deposit and withdrawal already reached
over P3,000,000.00. At this point in time (March 11, 1986), the private respondent Cresencio Velez
presumably already feeling that sooner or later he would be caught and that he already wanted to
cash in on his evil scheme, decided to run away with petitioner's money. On March 11, 1986, he
deposited various unfunded personal checks totalling P3,095,000.00 and requested a bank officer
that the same be credited as cash and after securing the approval of said bank officer, deposited his
various personal checks in the amount of P3,095,000.00 with his current account and at the same
time withdrew the sum of P3,244,000.00 in the form of petitioner's manager's check. Instead of using
the proceeds of his withdrawals to cover his unfunded personal checks, he ran away with petitioner
bank's money. Thus, private respondent Cresencio Velez's personal checks deposited with petitioner
bank on March 11, 1986 in the total aggregate amount of P3,095,000.00 bounced. The checks
bounced after said personal checks were made the substantial basis of his withdrawing the sum of
P3,244,000.00 from his current account with petitioner bank." 3
Subsequently, on August 19, 1986, petitioner bank filed a criminal complaint against private
respondents for violation of Batas Pambansa Blg. 22 (Bouncing Checks Law) and estafa (six counts)
under Article 315 par. 2(d) of the Revised Penal Code. On April 28, 1988, the investigating fiscal
recommended the filing of an information against private respondents for violations of the mentioned
laws.
On June 13, 1989, petitioner bank submitted its answer to the complaint filed by private
respondents. In the Order dated February 20, 1990, the case was set for pre-trial on March 30, 1990
and petitioner bank was directed to submit its pre-trial brief at least 3 days before the pre-trial
conference. Petitioner bank only filed its pre-trial brief on March 30, 1990.

On March 30, 1990, the date of the pre-trial conference, counsel for petitioner bank appeared,
presenting a special power of attorney executed by Citibank officer Florencia Tarriela in favor of
petitioner bank's counsel, the J.P. Garcia & Associates, to represent and bind petitioner bank at the
pre-trial conference of the case at bar.
Inspite of this special power of attorney, counsel for private respondents orally moved to declare
petitioner bank as in default on the ground that the special power of attorney was not executed by
the Board of Directors of Citibank. Petitioner bank was then required to file a written opposition to
this oral motion to declare it as in default. In said opposition petitioner bank attached another special
power of attorney made by William W. Ferguson, Vice President and highest ranking officer of
Citibank, Philippines, constituting and appointing the J.P. Garcia & Associates to represent and bind
the BANK at the pre-trial conference and/or trial of the case of "Cresencio Velez, et al. vs. Citibank,
N.A.". 4 In an Order dated April 23, 1990, respondent judge denied private respondents' oral motion
to declare petitioner bank as in default and set the continuation of the pre-trial conference for May 2,
1990.
On the scheduled pre-trial conference, private respondents reiterated, by way of asking for
reconsideration, their oral motion to declare petitioner bank as in default for its failure to appear
through an authorized agent and that the documents presented are not in accordance with the
requirements of the law. Petitioner bank again filed on May 14, 1990 its opposition thereto, stating as
follows:
". . . While it has been the practice of Citibank to appoint its counsels as its attorney-in-fact in civil
cases because it considers said counsels equivalent to a Citibank employee, yet, in order to avoid
further arguments on the matter, the defendant Citibank will secure another power of attorney from
Mr. William W. Ferguson in favor of its employee/s who will represent the defendant Citibank in the
pre-trial conferences of this case. As soon as the said special power of attorney is secured, the
defendant will present it before this Honorable Court and in pursuance therewith, the defendant
hereby makes a reservation to present such document as soon as available." 5
In compliance with the above promise, petitioner bank filed a manifestation, dated May 23, 1990,
attaching therewith a special power of attorney executed by William W. Ferguson in favor of Citibank
employees to represent and bind Citibank on the pre-trial conference of the case at bar. 6
On August 15, 1990, respondent judge issued an order declaring petitioner bank as in default. This
order, received by petitioner bank on September 27, 1990, cited the following as reason for the
declaration of default:
"Defendant-bank, although a foreign corporation, is bound by Philippine laws when doing and
conducting business in the Philippines (Sec. 129, B.P. Blg. 68), and its corporate powers could only
be exercised by its Board of Directors (Sec. 23, B.P. Blg. 68). The exercise by the Board of Directors
of such power could only be valid if it bears the approval of the majority of the Board (Sec. 25, par. 2,
Corporation Code). The records does not show the requisite document. The alleged authority
(Special Power of Attorney, Annex "A") executed by Mr. William W. Ferguson in favor of the alleged
Citibank employees, assuming the same to be a delegable authority, to represent the defendant in

the pre-trial conference, made no mention of J.P. Garcia & Associates as one of the employees of
the defendant.
It stands to reason therefore, that the defendant-bank has no proper representation during the pretrial conference on May 2, 1990 for purposes of Sec. 2, Rule 20 of the Rules of Court." 7
On October 1, 1990, petitioner bank filed a motion for reconsideration of the above order but it was
denied on December 10, 1990.
Petitioner bank then filed a petition for certiorari, prohibition and mandamus with preliminary
injunction and/or temporary restraining order with the Court of Appeals. On June 26, 1991, the Court
of Appeals dismissed the petition on the following grounds:
". . . In the first place, petitioner admitted that it did not and could not present a Board resolution from
the bank's Board of Directors appointing its counsel, Atty. Julius Z. Neri, as its attorney-in-fact to
represent and bind it during the pre-trial conference of this case. This admission is contained on
pages 12 and 13 of the instant petition.
In the second place, the "By-Laws" of petitioner which on its face authorizes (sic) the appointment of
an attorney-in-fact to represent it in any litigation, has not been approved by the Securities and
Exchange Commission, as required by Section 46 of the Corporation Code of the Philippines.
Apparently, the "By-Laws" in question was (sic) approved under the laws of the United States, but
there is no showing that the same was given the required imprimatur by the Securities and
Exchange Commission. Since petitioner is a foreign corporation doing business in the Philippines, it
is bound by all laws, rules and regulations applicable to domestic corporations (Sec. 129,
Corporation Code).
In the third place, no special power of attorney was presented authorizing petitioner's counsel of
record, Atty. Julius Neri and/or J.P. Garcia Associates, to appear for and in behalf of petitioner during
the pre-trial.
What petitioner exhibited to the court a quo was a general power of attorney given to one William W.
Ferguson who in turn executed a power of attorney in favor of five (5) (sic) Citibank employees to act
as attorney-in-fact in Civil Case No. CEB-4751. Yet, during the pre-trial not one of said employees
appeared, except counsel who is not even a bank employee.
Furthermore, even assuming the validity of the power of attorney issued by petitioner in favor of
Ferguson as well as the power of attorney he issued to five (5) (sic) Citibank employees, said power
of attorney has not been shown to be a Special Power of Attorney precisely intended not only to
represent the bank at the pre-trial of the case on a certain date but also to enter into any
compromise as required in paragraph 3, Article 1878 of the Civil Code and Section 1 (a), Rule 20,
Rules of Court." 8
Hence, this instant petition.

Petitioner bank contends that no board resolution was necessary for its legal counsel, Atty. Julius Z.
Neri, or Citibank employees to act as its attorney-in-fact in the case at bar because petitioner bank's
by-laws grant to its Executing Officer and Secretary Pro-Tem the power to delegate to a Citibank
officer, in this case William W. Ferguson, the authority to represent and defend the bank and its
interests.
Furthermore, it contends that the Court of Appeals erred in holding that the by-laws of petitioner
bank cannot be given effect because it did not have the imprimatur of the Securities and Exchange
Commission (SEC) as required by Section 46 of the Corporation Code of the Philippines.
Private respondents refute both contentions. They assail the authority of petitioner bank's legal
counsel to appear at the pre-trial conference on two grounds, namely: first, that the authority did not
come from the Board of Directors which has the exclusive right to exercise corporate powers; and
second, that the authority granted to the Executing Officer in the by-laws was ineffective because the
same were not submitted to, nor approved by, the SEC.
There are thus two issues in this case. First, whether a resolution of the board of directors of a
corporation is always necessary for granting authority to an agent to represent the corporation in
court cases. And second, whether the by-laws of the petitioner foreign corporation which has
previously been granted a license to do business in the Philippines, are effective in this jurisdiction. If
the by-laws are valid and a board resolution is not necessary as petitioner bank claims, then the
declaration of default would have no basis.
In the corporate hierarchy, there are three levels of control: (1) the board of directors, which is
responsible for corporate policies and the general management of the business affairs of the
corporation; (2) the officers, who in theory execute the policies laid down by the board, but in
practice often have wide latitude in determining the course of business operations; and (3) the
stockholders who have the residual power over fundamental corporate changes, like amendments of
the articles of incorporation. However, just as a natural person may authorize another to do certain
acts in his behalf, so may the board of directors of a corporation validly delegate some of its
functions to individual officers or agents appointed by it.
Section 23 of the Corporation Code of the Philippines in part 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.
xxx xxx xxx" (Emphasis supplied).
Thus, although as a general rule, all corporate powers are to be exercised by the board of directors,
exceptions are made where the Code provides otherwise.

Section 25 of said Code provides that the directors of the corporation shall elect its corporate
officers, and further provides as follows:
"SEC. 25. Corporate officers; quorum. . . . The directors or trustees and officers to be elected
shall perform the duties enjoined on them by law and by the by-laws of the corporation . . ."
Furthermore, Section 47 of the same Code enumerates what may be contained in the by-laws,
among which is a provision for the "qualifications, duties and compensation of directors or trustees,
officers and employees". (Emphasis supplied.)
Taking all the above provisions of law together, it is clear that corporate powers may be directly
conferred upon corporate officers or agents by statute, the articles of incorporation, the by-laws or by
resolution or other act of the board of directors. In addition, an officer who is not a director may also
appoint other agents when so authorized by the by-laws or by the board of directors. Such are
referred to as express powers. 9 There are also powers incidental to express powers conferred. It is
a fundamental principle in the law of agency that every delegation of authority, whether general or
special, carries with it, unless the contrary be expressed, implied authority to do all of those acts,
naturally and ordinarily done in such cases, which are reasonably necessary and proper to be done
in order to carry into effect the main authority conferred. 10
Since the by-laws are a source of authority for corporate officers and agents of the corporation, a
resolution of the Board of Directors of Citibank appointing an attorney in fact to represent and bind it
during the pre-trial conference of the case at bar is not necessary because its by-laws allow its
officers, the Executing Officer and the Secretary Pro-Tem, ** to execute a power of attorney to a
designated bank officer, William W. Ferguson in this case, clothing him with authority to direct and
manage corporate affairs. The relevant provision in the general power of attorney granted to him are
as follows:
"A. That the Executing Officer and the Secretary Pro-Tem are of full age, competent to act in the
premises, to me personally known, and that they are authorized to execute this instrument by virtue
of the powers granted to them pursuant to the By-Laws of the Bank and the laws of the United
States of America, and that the Executing Officer said that he, on the one hand, hereby revokes and
cancels any instrument of power of attorney previously executed on behalf of the Bank for use in the
PHILIPPINES, in favor of WILLIAM W. FERGUSON (hereinafter referred to as the "Attorney-in-fact"),
of legal age, a Banker, and now residing in the PHILIPPINES, and that he (the Executing Officer), on
the other hand, does hereby authorize and empower the Attorney-in-fact, acting in the name or on
behalf of the Bank, or any of its Branches, or any interest it or they may have or represent, said
revocation and authorization to be effective as of this date as follows:
xxx xxx xxx
XVII. To represent and defend the Bank and its interest before any and all judges and courts, of all
classes and jurisdictions, in any action, suit or proceeding in which the Bank may be a party or may
be interested in administrative, civil, criminal, contentious or contentious-administrative matters, and
in all kinds of lawsuits, recourses or proceedings of any kind or nature, with complete and absolute

representation of the Bank, whether as plaintiff or defendant, or as an interested party for any reason
whatsoever . . .
xxx xxx xxx
XXI. To substitute or delegate this Power of Attorney in whole or in part in favor of such one or more
employees of the Bank, as he may deem advisable, but without divesting himself of any of the
powers granted to him by this Power of Attorney; and to grant and execute in favor of any one or
more such employees, powers of attorney containing all or such authorizations, as he may deem
advisable. . . " 11
Since paragraph XXI above specifically allows Ferguson to delegate his powers in whole or in part,
there can be no doubt that the special power of attorney in favor, first, of J.P. Garcia & Associates
and later, of the bank's employees, constitutes a valid delegation of Ferguson's express power
(under paragraph XVII above) to represent petitioner bank in the pre-trial conference in the lower
court.
This brings us to the second query: whether petitioner bank's by-laws, which constitute the basis for
Ferguson's special power of attorney in favor of petitioner bank's legal counsel are effective,
considering that petitioner bank has been previously granted a license to do business in the
Philippines.
The Court of Appeals relied on Section 46 of the Corporation Code to support its conclusion that the
by-laws in question are without effect because they were not approved by the SEC. Said section
reads as follows:
"SEC. 46. Adoption of by-laws. Every corporation formed under this Code must, within one (1)
month after receipt of official notice of the issuance of its certificate of incorporation by the Securities
and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this
Code. For the adoption of by-laws by the corporation, the affirmative vote of the stockholders
representing at least a majority of the outstanding capital stock, or of at least a majority of the
members in the case of non-stock corporations, shall be necessary. The by-laws shall be signed by
the stockholders or members voting for them and shall be kept in the principal office of the
corporation, subject to the inspection of the stockholders or members during office hours; and a copy
thereof, duly certified to by a majority of the directors or trustees and countersigned by the secretary
of the corporation, shall be filed with the Securities and Exchange Commission which shall be
attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior
to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators
and submitted to the Securities and Exchange Commission, together with the articles of
incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code."

A careful reading of the above provision would show that a corporation can submit its by-laws, prior
to incorporation, or within one month after receipt of official notice of the issuance of its certificate of
incorporation by the SEC. When the third paragraph of the above provision mentions "in all cases", it
can only refer to these two options; i.e., whether adopted prior to incorporation or within one month
after incorporation, the by-laws shall be effective only upon the approval of the SEC. But even more
important, said provision starts with the phrase "Every corporation formed under this Code", which
can only refer to corporations incorporated in the Philippines. Hence, Section 46, in so far as it refers
to the effectivity of corporate by-laws, applies only to domestic corporations and not to foreign
corporations.
On the other hand, Section 125 of the same Code requires that a foreign corporation applying for a
license to transact business in the Philippines must submit, among other documents, to the SEC, a
copy of its articles of incorporation and by-laws, certified in accordance with law. Unless these
documents are submitted, the application cannot be acted upon by the SEC. In the following section,
the Code specifies when the SEC can grant the license applied for. Section 126 provides in part:
"SEC. 126. Issuance of a license. If the Securities and Exchange Commission is satisfied that the
applicant has complied with all the requirements of this Code and other special laws, rules and
regulations, the Commission shall issue a license to the applicant to transact business in the
Philippines for the purpose or purposes specified in such license . . ."
Since the SEC will grant a license only when the foreign corporation has complied with all the
requirements of law, it follows that when it decides to issue such license, it is satisfied that the
applicant's by-laws, among the other documents, meet the legal requirements. This, in effect, is an
approval of the foreign corporations by-laws. It may not have been made in express terms, still it is
clearly an approval. Therefore, petitioner bank's by-laws, though originating from a foreign
jurisdiction, are valid and effective in the Philippines.
In pursuance of the authority granted to him by petitioner bank's by-laws, its Executing Officer
appointed William W. Ferguson, a resident of the Philippines, as its Attorney-in-Fact empowering the
latter, among other things, to represent petitioner bank in court cases. In turn, William W. Ferguson
executed a power of attorney in favor of J.P. Garcia & Associates (petitioner bank's counsel) to
represent petitioner bank in the pre-trial conference before the lower court. This act of delegation is
explicity authorized by paragraph XXI of his own appointment, which we have previously cited.
It is also error for the Court of Appeals to insist that the special power of attorney, presented by
petitioner bank authorizing its counsel, Atty. Julius Neri and/or J.P. Garcia & Associates, to appear for
and in behalf of petitioner bank during the pre-trial, is not valid. The records do not sustain this
finding. We quote with approval the contention of petitioner bank as it is borne by the records, to wit:
". . . The records of this case would show that at the start, the petitioner, thru counsel, presented a
special power of attorney executed by then Citibank Officer Florencio (sic) J. Tarriela which was
marked as Exhibit "1" in the pre-trial of this case . . . This is precisely the reason why the court
denied, in an Order dated April 23, 1990 . . . the private respondent's oral motion to declare the
defendant in fault. The said special power of attorney executed by Florencio (sic) J. Tarriela was
granted by Mr. Rafael B. Buenaventura, who was then the Senior Vice-President of Citibank and the

highest ranking office of Citibank in the Philippines. Considering that at the time of the presentation
of the said special power of attorney Rafael B. Buenaventura was no longer connected with Citibank,
the petitioner again presented another special power of attorney executed by William W. Ferguson in
favor of J.P. Garcia & Associates, . . .
Finding that the authority of William W. Ferguson to delegate his authority to act for and in behalf of
the bank in any civil suit is limited to individuals who are employees of the bank the petitioner again
on May 23, 1990 presented another special power of attorney dated May 16, 1990 wherein William
W. Ferguson appointed as attorney-in-fact the following employees of petitioner, namely: Roberto
Reyes, Nemesio Solomon, Aimee Yu and Tomas Yap. The said special power of attorney was filed
and presented by the petitioner through its Manifestation filed in the Trial Court on May 23,
1990, . . ." 12
Under Rule 138, Section 23 of the Rules of Court, an attorney has authority to bind his client in any
case by an agreement in relation thereto made in writing, and this authority would include taking
appeals and all matters of ordinary judicial procedure. But he cannot, without special authority,
compromise his client's litigation or receive anything in discharge of a client's claim but the full
amount in cash. The special powers of attorney separately executed by Florencia Tarriela and
William W. Ferguson granted to J.P. Garcia & Associates are very explicit in their terms as to the
counsel's authority in the case at bar. We quote the relevant provisions of the special powers of
attorney showing sufficient compliance with the requirements of Section 23, Rule 138, to wit:
"That the BANK further authorized the said J.P. GARCIA & ASSOCIATES to enter into an amicable
settlement, stipulation of facts and/or compromise agreement with the party or parties involved under
such terms and conditions which the said J.P. GARCIA & ASSOCIATES may deem reasonable
(under parameters previously defined by the principal) and execute and sign said documents as may
be appropriate.
HEREBY GIVING AND GRANTING unto J.P. GARCIA & ASSOCIATES full power and authority
whatsoever requisite necessary or proper to be done in or about the premises, as fully to all intents
and purposes as the BANK might or could lawfully do or cause to be done under and by virtue of
these presents." 13
It is also error on the part of the Court of Appeals to state that the power of attorney given to the four
(4) Citibank employees is not a special power of attorney as required in paragraph 3, Article 1878 of
the Civil Code and Section 1 (a), Rule 20 of the Rules of Court. In the case of Tropical Homes, Inc.
vs. Villaluz, 14 the special power of attorney executed by petitioner bank therein contained the
following pertinent terms "to appear for and in its behalf in the above-entitled case in all
circumstances where its appearance is required and to bind it in all said instances". The court ruled
that:
"Although the power of attorney in question does not specifically mention the authority of petitioner's
counsel to appear and bind the petitioner at the pre-trial conference, the terms of said power of
attorney are comprehensive enough as to include the authority to appear for the petitioner at the pretrial conference."

In the same manner, the power of attorney granted to petitioner bank's employees should be
considered a special power of attorney. The relevant portion reads:
"WHEREAS, the Bank is the Defendant in Civil Case No. CEB-4751, entitled "Cresencio Velez, et al.
vs. Citibank, N.A.," pending before the Regional Trial Court of Cebu City, Branch X;
NOW, THEREFORE, under and by virtue of Article XXI of the Power of Attorney executed by the
Bank in favor of the Attorney-in-Fact (Annex "A"), which provision is quoted above, the Attorney-inFact has nominated, designated and appointed, as by these presents he nominates, designates and
appoints, as his substitutes and delegates, with respect to the said Power of Attorney, ROBERTO
REYES, Vice President and/or NEMESIO SOLOMON, JR., Manager, AIMEE YU, Assistant Vice
President and/or TOMAS YAP, Assistant Manager (hereinafter referred to as the "DELEGATES"), all
of legal age, citizens of the Republic of the Philippines and with business address at Citibank Center,
Paseo de Roxas, Makati, Metro Manila, Philippines, the Attorney-in-Fact hereby granting, conferring
and delegating such authorities and binding the Bank in the Pre-Trial Conference and/or Trial of the
abovementioned case, pursuant to Rule 20 of the Revised Rules of Court, to the DELEGATES. The
attorney-in-Fact furthermore hereby ratifying and confirming all that the DELEGATES shall lawfully
do or cause to be done under and by virtue of these presents." 15
From the outset, petitioner bank showed a willingness, if not zeal, in pursuing and defending this
case. It even acceded to private respondent's insistence on the question of proper representation
during the pre-trial by presenting not just one, but three, special powers of attorney. Initially, the
special power of attorney was executed by Florencia Tarriela in favor of J.P. Garcia & Associates,
petitioner bank's counsel. Private respondents insisted that this was not proper authority required by
law. To avoid further argument, a second special power of attorney was presented by petitioner
bank, executed by William W. Fersugon, the highest ranking officer of Citibank in the Philippines, in
favor of its counsel J.P. Garcia & Associates. But since the authority to delegate of William A.
Fersugon in favor of an agent is limited to bank employees, another special power of attorney from
Wiliam W. Fersugon in favor of the Citibank employees was presented. But the respondent trial court
judge disregarded all these and issued the assailed default order. There is nothing to show that
petitioner bank "miserably failed to oblige"; on the contrary, three special powers of attorney manifest
prudence and diligence on petitioner bank's part.
In fact, there was no need for the third power of attorney because we believe that the second power
of attorney was sufficient under the by-law provision authorizing Fersugon to delegate any of his
functions to any one or more employees of the petitioner bank. A reasonable interpretation of this
provision would include an appointment of a legal counsel to represent the bank in court, for, under
the circumstances, such legal counsel can be considered, and in fact was considered by the
petitioner bank, an employee for a special purpose. Furthermore, Fersugon, who heads the
Philippine office thousands of miles away from its main office in the United States, must be
understood to have sufficient powers to act promptly in order to protect the interests of his principal.
We reiterate the previous admonitions of this Court against "precipitate orders of default as these
have the effect of denying the litigant the chance to be heard. While there are instances, to be sure,
when a party may be properly defaulted, these should be the exceptions rather than the rule and
should be allowed only in clear cases of an obstinate refusal or inordinate neglect to comply with the

orders of the court. Absent such a showing, the party must be given every reasonable opportunity to
present his side and to refute the evidence of the adverse party in deference to due process of law".
16
Considering further that petitioner bank has a meritorious defense and that the amount in contest is
substantial, the litigants should be allowed to settle their claims on the arena of the court based on a
trial on the merits rather than on mere technicalities.
WHEREFORE, in view of the foregoing, the petition is hereby GRANTED. The decision of the Court
of Appeals dated June 26, 1991 and its resolution denying the motion for reconsideration of
petitioner bank dated September 26, 1991 are both REVERSED and SET ASIDE. The order of
default issued on August 15, 1990 in Civil Case CEB-4751 of the Regional Trial Court of Cebu is
ANNULLED and SET ASIDE and the case is hereby REMANDED to the court of origin for further
proceedings.
SO ORDERED.
ADVANCE PAPER CORPORATION and GEORGE HAW, in his capacity as President of
Advance Paper Corporation, Petitioners,
vs.
ARMA TRADERS CORPORATION, MANUEL TING, CHENG GUI and BENJAMIN
NG, Respondents.
x-------------------------------------------------x
ANTONIO TAN and UY SENG KEE WILLY, Respondents.
DECISION
BRION, J.:
Before us is a Petition for Review seeking to set aside the Decision of the Court of Appeals (CA) in
CA-G.R. CV No. 71499 dated March 31, 2006 and the Resolution dated March 7, 2007. The
Decision reversed and set aside the ruling of the Regional Trial Court (RTC) of Manila, Branch 18 in
Civil Case No. 94-72526 which ordered Arma Traders Corporation (Arma Traders) to pay Advance
Paper Corporation (Advance Paper) the sum of P15,321,798.25 with interest, and P1,500,000.00 for
attorneys fees, plus the cost of the suit.
1

Factual Antecedents
Petitioner Advance Paper is a domestic corporation engaged in the business of producing, printing,
manufacturing, distributing and selling of various paper products. Petitioner George Haw (Haw) is
the President while his wife, Connie Haw, is the General Manager.
4

Respondent Arma Traders is also a domestic corporation engaged in the wholesale and distribution
of school and office supplies, and novelty products. Respondent Antonio Tan (Tan) was formerly the
6

President while respondent Uy Seng Kee Willy (Uy) is the Treasurer of Arma Traders. They
represented Arma Traders when dealing with its supplier, Advance Paper, for about 14 years.
7

On the other hand, respondents Manuel Ting, Cheng Gui and Benjamin Ng worked for Arma Traders
as Vice-President, General Manager and Corporate Secretary, respectively.
9

On various dates from September to December 1994, Arma Traders purchased on credit notebooks
and other paper products amounting to P7,533,001.49 from Advance Paper.
10

Upon the representation of Tan and Uy, Arma Traders also obtained three loans from Advance Paper
in November 1994 in the amounts of P3,380,171.82, P1,000,000.00, and P3,408,623.94 or a total
of P7,788,796.76. Arma Traders needed the loan to settle its obligations to other suppliers because
its own collectibles did not arrive on time. Because of its good business relations with Arma Traders,
Advance Paper extended the loans.
11

12

13

As payment for the purchases on credit and the loan transactions, Arma Traders issued 82
postdated checks payable to cash or to Advance Paper. Tan and Uy were Arma Traders authorized
bank signatories who signed and issued these checks which had the aggregate amount
of P15,130,636.87.
14

15

Advance Paper presented the checks to the drawee bank but these were dishonored either for
"insufficiency of funds" or "account closed." Despite repeated demands, however, Arma Traders
failed to settle its account with Advance Paper.
16

On December 29, 1994, the petitioners filed a complaint for collection of sum of money with
application for preliminary attachment against Arma Traders, Tan, Uy, Ting, Gui, and Ng.
17

Claims of the petitioners

The petitioners claimed that the respondents fraudulently issued the postdated checks as payment
for the purchases and loan transactions knowing that they did not have sufficient funds with the
drawee banks.
18

To prove the purchases on credit, the petitioners presented the summary of the transactions and
their corresponding sales invoices as their documentary evidence.
19

During the trial, Haw also testified that within one or two weeks upon delivery of the paper products,
Arma Traders paid the purchases in the form of postdated checks. Thus, he personally collected
these checks on Saturdays and upon receiving the checks, he surrendered to Arma Traders the
original of the sales invoices while he retained the duplicate of the invoices.
20

To prove the loan transactions, the petitioners presented the copies of the checks which Advance
Paper issued in favor of Arma Traders. The petitioners also filed a manifestation dated June 14,
1995, submitting a bank statement from Metrobank EDSA Kalookan Branch. This was to show that
Advance Papers credit line with Metrobank has been transferred to the account of Arma Traders as
payee from October 1994 to December 1994.
21

22

Moreover, Haw testified to prove the loan transactions. When asked why he considered extending
the loans without any collateral and loan agreement or promissory note, and only on the basis of the
issuance of the postdated checks, he answered that it was because he trusted Arma Traders since it
had been their customer for a long time and that none of the previous checks ever bounced.
23

Claims of the respondents

The respondents argued that the purchases on credit were spurious, simulated and fraudulent
since there was no delivery of the P7,000,000.00 worth of notebooks and other paper products.

24

During the trial, Ng testified that Arma Traders did not purchase notebooks and other paper products
from September to December 1994. He claimed that during this period, Arma Traders concentrated
on Christmas items, not school and office supplies. He also narrated that upon learning about the
complaint filed by the petitioners, he immediately looked for Arma Traders records and found no
receipts involving the purchases of notebooks and other paper products from Advance Paper.
25

As to the loan transactions, the respondents countered that these were the personal obligations of
Tan and Uy to Advance Paper. These loans were never intended to benefit the respondents.
The respondents also claimed that the loan transactions were ultra vires because the board of
directors of Arma Traders did not issue a board resolution authorizing Tan and Uy to obtain the loans
from Advance Paper. They claimed that the borrowing of money must be done only with the prior
approval of the board of directors because without the approval, the corporate officers are acting in
excess of their authority or ultra vires. When the acts of the corporate officers are ultra vires, the
corporation is not liable for whatever acts that these officers committed in excess of their
authority. Further, the respondents claimed that Advance Paper failed to verify Tan and Uys
authority to transact business with them. Hence, Advance Paper should suffer the consequences.
26

The respondents accused Tan and Uy for conspiring with the petitioners to defraud Arma Traders
through a series of transactions known as rediscounting of postdated checks. In rediscounting, the
respondents explained that Tan and Uy would issue Arma Traders postdated checks to the
petitioners in exchange for cash, discounted by as much as 7% to 10% depending on how long were
the terms of repayment. The rediscounted percentage represented the interest or profit earned by
the petitioners in these transactions.
27

Tan did not file his Answer and was eventually declared in default.
On the other hand, Uy filed his Answer dated January 20, 1995 but was subsequently declared in
default upon his failure to appear during the pre-trial. In his Answer, he admitted that Arma Traders
together with its corporate officers have been transacting business with Advance Paper. He claimed
that he and Tan have been authorized by the board of directors for the past 13 years to issue checks
in behalf of Arma Traders to pay its obligations with Advance Paper. Furthermore, he admitted
that Arma Traders checks were issued to pay its contractual obligations with Advance
Paper. However, according to him, Advance Paper was informed beforehand that Arma Traders
checks were funded out of the P20,000,000.00 worth of collectibles coming from the provinces.
Unfortunately, the expected collectibles did not materialize for unknown reasons.
28

29

30

31

32

Ng filed his Answer and claimed that the management of Arma Traders was left entirely to Tan and
Uy. Thus, he never participated in the companys daily transactions.
33

34

Atty. Ernest S. Ang, Jr. (Atty. Ang), Arma Traders Vice-President for Legal Affairs and Credit and
Collection, testified that he investigated the transactions involving Tan and Uy and discovered that
they were financing their own business using Arma Traders resources. He also accused Haw for
conniving with Tan and Uy in fraudulently making Arma Traders liable for their personal debts. He
based this conclusion from the following: First, basic human experience and common sense tell us
that a lender will not agree to extend additional loan to another person who already owes a
substantial sum from the lender in this case, petitioner Advance Paper. Second,there was no other
document proving the existence of the loan other than the postdated checks. Third, the total of the
purchase and loan transactions vis--vis the total amount of the postdated checks did not
tally. Fourth, he found out that the certified true copy of Advance Papers report with the Securities
and Exchange Commission (SEC report) did not reflect the P15,000,000.00 collectibles it had with
Arma Traders.
35

Atty. Ang also testified that he already filed several cases of estafa and qualified theft against Tan
and Uy and that several warrants of arrest had been issued against them.
36

In their pre-trial brief, the respondents named Sharow Ong, the secretary of Tan and Uy, to testify
on how Tan and Uy conspired with the petitioners to defraud Arma Traders. However, the
respondents did not present her on the witness stand.
37

The RTC Ruling

On June 18, 2001, the RTC ruled that the purchases on credit and loans were sufficiently proven by
the petitioners. Hence, the RTC ordered Arma Traders to pay Advance Paper the sum
of P15,321,798.25 with interest, and P1,500,000.00 for attorneys fees, plus the cost of the suit.
The RTC held that the respondents failed to present hard, admissible and credible evidence to prove
that the sale invoices were forged or fictitious, and that the loan transactions were personal
obligations of Tan and Uy. Nonetheless, the RTC dismissed the complaint against Tan, Uy, Ting, Gui
and Ng due to the lack of evidence showing that they bound themselves, either jointly or solidarily,
with Arma Traders for the payment of its account.
38

Arma Traders appealed the RTC decision to the CA.

The CA Ruling
The CA held that the petitioners failed to prove by preponderance of evidence the existence of the
purchases on credit and loans based on the following grounds:
First, Arma Traders was not liable for the loan in the absence of a board resolution authorizing Tan
and Uy to obtain the loan from Advance Paper. The CA acknowledged that Tan and Uy were Arma
Traders authorized bank signatories. However, the CA explained that this is not sufficient because
the authority to sign the checks is different from the required authority to contract a loan.
39

40

Second, the CA also held that the petitioners presented incompetent and inadmissible evidence to
prove the purchases on credit since the sales invoices were hearsay. The CA pointed out that
Haws testimony as to the identification of the sales invoices was not an exception to the hearsay
rule because there was no showing that the secretaries who prepared the sales invoices are already
dead or unable to testify as required by the Rules of Court. Further, the CA noted that the
secretaries were not identified or presented in court.
41

42

43

Third, the CA ruling heavily relied on Ngs Appellants Brief which made the detailed description of
the "badges of fraud." The CA averred that the petitioners failed to satisfactorily rebut the badges of
fraud which include the inconsistencies in:
44

45

(1) "Exhibit E-26," a postdated check, which was allegedly issued in favor of Advance Paper
but turned out to be a check payable to Top Line, Advance Papers sister company;
46

(2) "Sale Invoice No. 8946," an evidence to prove the existence of the purchases on credit,
whose photocopy failed to reflect the amount stated in the duplicate copy, and;
47

(3) The SEC report of Advance Paper for the year ended 1994 reflected its account
receivables amounting to P219,705.19 only an amount far from the
claimed P15,321,798.25 receivables from Arma Traders.
48

Hence, the CA set aside the RTCs order for Arma Traders to pay Advance Paper the sum
of P15,321,798.25, P1,500,000.00 for attorneys fees, plus cost of suit. It affirmed the RTC
decision dismissing the complaint against respondents Tan, Uy, Ting, Gui and Ng. The CA also
directed the petitioners to solidarily pay each of the respondents their counterclaims of P250,000.00
as moral damages, P250,000.00 as exemplary damages, and P250,000.00 as attorneys fees.
49

50

51

The Petition
The petitioners raise the following arguments.
First, Arma Traders led the petitioners to believe that Tan and Uy had the authority to obtain loans
since the respondents left the active and sole management of the company to Tan and Uy since
1984. In fact, Ng testified that Arma Traders stockholders and board of directors never conducted a
meeting from 1984 to 1995. Therefore, if the respondents position will be sustained, they will have
the absurd power to question all the business transactions of Arma Traders. Citing Lipat v. Pacific
Banking Corporation, the petitioners said that if a corporation knowingly permits one of its officers or
any other agent to act within the scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts; thus, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from denying the agents authority.
52

53

Second, the petitioners argue that Haws testimony is not hearsay. They emphasize that Haw has
personal knowledge of the assailed purchases and loan transactions because he dealt with the
customers, and supervised and directed the preparation of the sales invoices and the deliveries of
the goods. Moreover, the petitioners stress that the respondents never objected to the admissibility
of the sales invoices on the ground that they were hearsay.
54

55

Third, the petitioners dispute the CAs findings on the existence of the badges of fraud. The
petitioners countered:
(1) The discrepancies between the figures in the 15 out of the 96 photocopies and duplicate
originals of the sales invoices amounting to P4,624.80 an insignificant amount
compared to the total purchases of P7,533,001.49 may have been caused by the failure
to put the carbon paper. Besides, the remaining 81 sales invoices are
uncontroverted. The petitioners also raise the point that this discrepancy is a nonissue
because the duplicate originals were surrendered in the RTC.
56

57

(2) The respondents misled Haw during the cross-examination and took his answer out of
context. The petitioners argue that this maneuver is insufficient to discredit Haws entire
testimony.
58

59

(3) Arma Traders should be faulted for indicating Top Line as the payee in Exhibit E-26 or
PBC check no. 091014. Moreover, Exhibit E-26 does not refer to PBC check no. 091014 but
to PBC check no. 091032 payable to the order of cash.
60

(4) The discrepancy in the total amount of the checks which is P15,130,363.87 as against
the total obligation of P15,321,798.25 does not necessarily prove that the transactions are
spurious.
61

(5) The difference in Advance Papers accounts receivables in the SEC report and in Arma
Traders obligation with Advance Paper was based on non-existent evidence because Exhibit
294-NG does not pertain to any balance sheet. Moreover, the term "accounts receivable" is
not synonymous with "cause of action." The respondents cannot escape their liability by
simply pointing the SEC report because the petitioners have established their cause of
action that the purchases on credit and loan transactions took place, the respondents
issued the dishonored checks to cover their debts, and they refused to settle their obligation
with Advance Paper.
62

63

The Case for the Respondents

The respondents argue that the Petition for Review should be dismissed summarily because of the
following procedural grounds: first, for failure to comply with A.M. No. 02-8-13-SC; and second, the
CA decision is already final and executory since the petitioners filed their Motion for Reconsideration
out of time. They explain that under the rules of the CA, if the last day for filing of any pleading falls
on a Saturday not a holiday, the same must be filed on said Saturday, as the Docket and Receiving
Section of the CA is open on a Saturday.
64

65

The respondents argue that while as a general rule, a corporation is estopped from denying the
authority of its agents which it allowed to deal with the general public; this is only true if the person
dealing with the agent dealt in good faith. In the present case, the respondents claim that the
petitioners are in bad faith because the petitioners connived with Tan and Uy to make Arma Traders
liable for the non-existent deliveries of notebooks and other paper products. They also insist that
the sales invoices are manufactured evidence.
66

67

68

As to the loans, the respondents aver that these were Tan and Uys personal obligations with
Advance Paper. Moreover, while the three cashiers checks were deposited in the account of Arma
Traders, it is likewise true that Tan and Uy issued Arma Traders checks in favor of Advance Paper.
All these checks are evidence of Tan, Uy and Haws systematic conspiracy to siphon Arma Traders
corporate funds.
69

70

The respondents also seek to discredit Haws testimony on the basis of the following. First, his
testimony as regards the sales invoices is hearsay because he did not personally prepare these
documentary evidence. Second, Haw suspiciously never had any written authority from his own
Board of Directors to lend money. Third,the respondents also questioned why Advance Paper
granted the P7,000,000.00 loan without requiring Arma Traders to present any collateral or
guarantees.
71

72

The Issues
The main procedural and substantive issues are:
I. Whether the petition for review should be dismissed for failure to comply with A.M. No. 028-13-SC.
II. Whether the petition for review should be dismissed on the ground of failure to file the
motion for reconsideration with the CA on time.
III. Whether Arma Traders is liable to pay the loans applying the doctrine of apparent
authority.
IV. Whether the petitioners proved Arma Traders liability on the purchases on credit by
preponderance of evidence.
The Court's Ruling
We grant the petition.
The procedural issues.
First, the respondents correctly cited A.M. No. 02-8-13-SC dated February 19, 2008 which refer to
the amendment of the 2004 Rules on Notarial Practice. It deleted the Community Tax Certificate
among the accepted proof of identity of the affiant because of its inherent unreliability. The
petitioners violated this when they used Community Tax Certificate No. 05730869 in their Petition for
Review. Nevertheless, the defective jurat in the Verification/Certification of Non-Forum Shopping is
not a fatal defect because it is only a formal, not a jurisdictional, requirement that the Court may
waive. Furthermore, we cannot simply ignore the millions of pesos at stake in this case. To do so
might cause grave injustice to a party, a situation that this Court intends to avoid.
73

74

Second, no less than the CA itself waived the rules on the period to file the motion for
reconsideration. A review of the CA Resolution dated March 7, 2007, reveals that the petitioners
75

Motion for Reconsideration was denied because the allegations were a mere rehash of what the
petitioners earlier argued not because the motion for reconsideration was filed out of time.
The substantive issues.
Arma Traders is liable to pay the
loans on the basis of the doctrine of
apparent authority.
The doctrine of apparent authority provides that a corporation will be estopped from denying the
agents authority if it knowingly permits one of its officers or any other agent to act within the scope
of an apparent authority, and it holds him out to the public as possessing the power to do those
acts. The doctrine of apparent authority does not apply if the principal did not commit any acts or
conduct which a third party knew and relied upon in good faith as a result of the exercise of
reasonable prudence. Moreover, the agents acts or conduct must have produced a change of
position to the third partys detriment.
76

77

In Inter-Asia Investment Industries v. Court of Appeals, we explained:

78

Under this provision [referring to Sec. 23 of the Corporation Code], the power and 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 incorporation, bylaws, or relevant provisions of law. However,
just as a natural person who 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.:
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 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 person dealing
with the officer or agent to believe that it has conferred.
[A]pparent 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, within or beyond the scope of his ordinary powers. It requires presentation of
evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the
quantity of similar acts which establishes apparent authority, but the vesting of a corporate
officer with the power to bind the corporation. [emphases and underscores ours]
In Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals, we ruled that the doctrine of
apparent authority is applied when the petitioner, through its president Antonio Punsalan Jr., entered
79

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.
"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." "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."
80

81

In the present petition, we do not agree with the CAs findings that Arma Traders is not liable to pay
the loans due to the lack of board resolution authorizing Tan and Uy to obtain the loans. To begin
with, Arma Traders Articles of Incorporation provides that the corporation may borrow or raise
money to meet the financial requirements of its business by the issuance of bonds, promissory
notes and other evidence of indebtedness. Likewise, it states that Tan and Uy are not just ordinary
corporate officers and authorized bank signatories because they are also Arma
Traders incorporators along with respondents Ng and Ting, and Pedro Chao. Furthermore, the
respondents, through Ng who is Arma Traders corporate secretary, incorporator, stockholder and
director, testified that the sole management of Arma Traders was left to Tan and Uy and that he
and the other officers never dealt with the business and management of Arma Traders for 14
years. He also confirmed that since 1984 up to the filing of the complaint against Arma
Traders, its stockholders and board of directors never had its meeting.
82

83

Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them to transact with third
persons without the necessary written authority from its non-performing board of directors. Arma
Traders failed to take precautions to prevent its own corporate officers from abusing their powers.
Because of its own laxity in its business dealings, Arma Traders is now estopped from denying Tan
and Uys authority to obtain loan from Advance Paper.
We also reject the respondents claim that Advance Paper, through Haw, connived with Tan and Uy.
The records do not contain any evidence to prove that the loan transactions were personal to Tan
and Uy. A different conclusion might have been inferred had the cashiers checks been issued in
favor of Tan and Uy, and had the postdated checks in favor of Advance Paper been either Tan and/or
Uys, or had the respondents presented convincing evidence to show how Tan and Uy conspired
with the petitioners to defraud Arma Traders. We note that the respondents initially intended to
present Sharow Ong, the secretary of Tan and Uy, to testify on how Advance Paper connived with
Tan and Uy. As mentioned, the respondents failed to present her on the witness stand.
84

The respondents failed to object to

the admissibility of the sales invoices
on the ground that they are hearsay
The rule is that failure to object to the offered evidence renders it admissible, and the court cannot,
on its own, disregard such evidence. When a party desires the court to reject the evidence offered,
it must so state in the form of a timely objection and it cannot raise the objection to the evidence for
85

the first time on appeal. Because of a partys failure to timely object, the evidence becomes part of
the evidence in the case. Thereafter, all the parties are considered bound by any outcome arising
from the offer of evidence properly presented.
86

In Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberato M. Ureta, however, we held:

87

[H]earsay evidence whether objected to or not cannot be given credence for having no probative
value. This principle, however, has been relaxed in cases where, in addition to the failure to object
to the admissibility of the subject evidence, there were other pieces of evidence presented or
there were other circumstances prevailing to support the fact in issue. (emphasis and
underscore ours; citation omitted)
1wphi1

We agree with the respondents that with respect to the identification of the sales invoices, Haws
testimony was hearsay because he was not present during its preparation and the secretaries who
prepared them were not presented to identify them in court. Further, these sales invoices do not fall
within the exceptions to the hearsay rule even under the "entries in the course of business" because
the petitioners failed to show that the entrant was deceased or was unable to testify.
88

89

But even though the sales invoices are hearsay, nonetheless, they form part of the records of the
case for the respondents failure to object as to the admissibility of the sales invoices on the ground
that they are hearsay. Based on the records, the respondents through Ng objected to the offer "for
the purpose [to] which they are being offered" only not on the ground that they were hearsay.
90

91

The petitioners have proven their

claims for the unpaid purchases on
credit by preponderance of evidence.
We are not convinced by the respondents argument that the purchases are spurious because no
less than Uy admitted that all the checks issued were in payments of the contractual
obligations of the Arma Traders with Advance Paper. Moreover, there are other pieces of
evidence to prove the existence of the purchases other than the sales invoices themselves. For one,
Arma Traders postdated checks evince the existence of the purchases on credit. Moreover, Haw
testified that within one or two weeks, Arma Traders paid the purchases in the form of postdated
checks. He personally collected these checks on Saturdays and upon receiving the checks, he
surrendered to Arma Traders the original of the sales invoices while he retained the duplicate of the
invoices.
92

93

The respondents attempted to impugn the credibility of Haw by pointing to the inconsistencies they
can find from the transcript of stenographic notes. However, we are not persuaded that these
inconsistencies are sufficiently pervasive to affect the totality of evidence showing the general
relationship between Advance Paper and Arma Traders.
Additionally, the issue of credibility of witnesses is to be resolved primarily by the trial court because
it is in the better position to assess the credibility of witnesses as it heard the testimonies and
observed the deportment and manner of testifying of the witnesses. Accordingly, its findings are
entitled to great respect and will not be disturbed on appeal in the absence of any showing that the

trial court overlooked, misunderstood, or misapplied some facts or circumstances of weight and
substance which would have affected the result of the case.
94

In the present case, the RTC judge took into consideration the substance and the manner by which
Haw answered each propounded questions to him in the witness stand. Hence, the minor
inconsistencies in Haws testimony notwithstanding, the RTC held that the respondents claim that
the purchase and loan transactions were spurious is "not worthy of serious consideration." Besides,
the respondents failed to convince us that the RTC judge overlooked, misunderstood, or misapplied
some facts or circumstances of weight and substance which would have affected the result of the
case.
On the other hand, we agree with the petitioners that the discrepancies in the photocopy of the sales
invoices and its duplicate copy have been sufficiently explained. Besides, this is already a non-issue
since the duplicate copies were surrendered in the RTC. Furthermore, the fact that the value of
Arma Traders' checks does not tally with the total amount of their obligation with Advance Paper is
not inconsistent with the existence of the purchases and loan transactions.
95

As against the case and the evidence Advance Paper presented, the respondents relied on the core
theory of an alleged conspiracy between Tan, Uy and Haw to defraud Arma Traders. However, the
records are bereft of supporting evidence to prove the alleged conspiracy. Instead, the respondents
simply dwelled on the minor inconsistencies from the petitioners' evidence that the respondents
appear to have magnified. From these perspectives, the preponderance of evidence thus lies heavily
in the petitioners' favor as the RTC found. For this reason, we find the petition meritorious.
WHEREFORE, premises considered, we GRANT the petition. The decision dated March 31, 2006
and the resolution dated March 7, 2007 of the Court of Appeals in CA-G.R. CV No. 71499 are
REVERSED and SET ASIDE. The Regional Trial Court decision in Civil Case No. 94-72526 dated
June 18, 2001 is REINSTATED. No costs.
SO ORDERED.

BANATE vs PH COUNTRYSIDE

Before the Court is a petition for review on certiorari[1] assailing the December 19,
2003 decision[2] and the May 5, 2004 resolution[3] of the Court of Appeals (CA) in
CA-G.R. CV No. 74332. The CA decision reversed the Regional Trial Court (RTC)
decision[4] of June 27, 2001 granting the petitioners complaint for specific
performance and damages against the respondent Philippine Countryside Rural
Bank, Inc. (PCRB).[5]

THE FACTUAL ANTECEDENTS

On July 22, 1997, petitioner spouses Rosendo Maglasang and Patrocinia Monilar
(spouses Maglasang) obtained a loan (subject loan) from PCRB
for P1,070,000.00. The subject loan was evidenced by a promissory note and was
payable on January 18, 1998. To secure the payment of the subject loan, the
spouses Maglasang executed, in favor of PCRB a real estate mortgage over their
property, Lot 12868-H-3-C, [6] including the house constructed thereon (collectively
referred to as subject properties), owned by petitioners Mary Melgrid and
Bonifacio Cortel (spouses Cortel), the spouses Maglasangs daughter and son-inlaw, respectively. Aside from the subject loan, the spouses Maglasang obtained two
other loans from PCRB which were covered by separate promissory notes [7] and
secured by mortgages on their other properties.
Sometime in November 1997 (before the subject loan became due), the spouses
Maglasang and the spouses Cortel asked PCRBs permission to sell the subject
properties. They likewise requested that the subject properties be released from the
mortgage since the two other loans were adequately secured by the other
mortgages. The spouses Maglasang and the spouses Cortel claimed that the PCRB,
acting through its Branch Manager, Pancrasio Mondigo, verbally agreed to their
request but required first the full payment of the subject loan. The spouses
Maglasang and the spouses Cortel thereafter sold to petitioner Violeta Banate the
subject properties for P1,750,000.00. The spouses Magsalang and the spouses
Cortel used the amount to pay the subject loan with PCRB. After settling the
subject loan, PCRB gave the owners duplicate certificate of title of Lot 12868-H-3C to Banate, who was able to secure a new title in her name. The title, however,
carried the mortgage lien in favor of PCRB, prompting the petitioners to request
from PCRB a Deed of Release of Mortgage. As PCRB refused to comply with the

petitioners request, the petitioners instituted an action for specific performance

before the RTC to compel PCRB to execute the release deed.
The petitioners additionally sought payment of damages from PCRB, which,
they claimed, caused the publication of a news report stating that they
surreptitiously caused the transfer of ownership of Lot 12868-H-3-C. The
petitioners considered the news report false and malicious, as PCRB knew of the
sale of the subject properties and, in fact, consented thereto.
PCRB countered the petitioners allegations by invoking the cross-collateral
stipulation in the mortgage deed which states:
1.
That as security for the payment of the loan or advance in
principal sum of one million seventy thousand pesos only
(P1,070,000.00) and such other loans or advances already obtained, or
still to be obtained by the MORTGAGOR(s) as MAKER(s), COMAKER(s) or GUARANTOR(s) from the MORTGAGEE plus interest at
the rate of _____ per annum and penalty and litigation charges payable on
the dates mentioned in the corresponding promissory notes, the
MORTGAGOR(s) hereby transfer(s) and convey(s) to MORTGAGEE by
way of first mortgage the parcel(s) of land described hereunder, together
with the improvements now existing for which may hereafter be made
thereon, of which MORTGAGOR(s) represent(s) and warrant(s) that
MORTGAGOR(s) is/are the absolute owner(s) and that the same is/are
free from all liens and encumbrances;
TRANSFER CERTIFICATE OF TITLE NO. 82746[8]

Accordingly, PCRB claimed that full payment of the three loans, obtained by the
spouses Maglasang, was necessary before any of the mortgages could be released;
the settlement of the subject loan merely constituted partial payment of the total
obligation. Thus, the payment does not authorize the release of the subject
properties from the mortgage lien.

PCRB considered Banate as a buyer in bad faith as she was fully aware of the
existing mortgage in its favor when she purchased the subject properties from the
spouses Maglasang and the spouses Cortel. It explained that it allowed the release
of the owners duplicate certificate of title to Banate only to enable her to annotate
the sale. PCRB claimed that the release of the title should not indicate the
corresponding release of the subject properties from the mortgage constituted
thereon.
After trial, the RTC ruled in favor of the petitioners. It noted that the
petitioners, as necessitous men, could not have bargained on equal footing with
PCRB in executing the mortgage, and concluded that it was a contract of
adhesion. Therefore, any obscurity in the mortgage contract should not benefit
PCRB.[9]
The RTC observed that the official receipt issued by PCRB stated that the
amount owed by the spouses Maglasang under the subject loan was only
about P1.2 million; that Mary Melgrid Cortel paid the subject loan using the check
which Banate issued as payment of the purchase price; and that PCRB authorized
the release of the title further indicated that the subject loan had already been
settled. Since the subject loan had been fully paid, the RTC considered the
petitioners as rightfully entitled to a deed of release of mortgage, pursuant to the
verbal agreement that the petitioners made with PCRBs branch manager, Mondigo.
Thus, the RTC ordered PCRB to execute a deed of release of mortgage over the
subject properties, and to pay the petitioners moral damages and attorneys fees.[10]
On appeal, the CA reversed the RTCs decision. The CA did not consider as valid
the petitioners new agreement with Mondigo, which would novate the original
mortgage contract containing the cross-collateral stipulation. It ruled that Mondigo
cannot orally amend the mortgage contract between PCRB, and the spouses
Maglasang and the spouses Cortel; therefore, the claimed commitment allowing
the release of the mortgage on the subject properties cannot bind PCRB. Since the

cross-collateral stipulation in the mortgage contract (requiring full settlement of all

three loans before the release of any of the mortgages) is clear, the parties must
faithfully comply with its terms. The CA did not consider as material the release of
the owners duplicate copy of the title, as it was done merely to allow the
annotation of the sale of the subject properties to Banate.[11]
Dismayed with the reversal by the CA of the RTCs ruling, the petitioners filed the
present appeal by certiorari, claiming that the CA ruling is not in accord with
established jurisprudence.
THE PETITION
The petitioners argue that their claims are consistent with their agreement with
PCRB; they complied with the required full payment of the subject loan to allow
the release of the subject properties from the mortgage.
Having carried out their part of the bargain, the petitioners maintain that PCRB
must honor its commitment to release the mortgage over the subject properties.
The petitioners disregard the cross-collateral stipulation in the mortgage
contract, claiming that it had been novated by the subsequent agreement with
Mondigo. Even assuming that the cross-collateral stipulation subsists for lack of
authority on the part of Mondigo to novate the mortgage contract, the petitioners
contend that PCRB should nevertheless return the amount paid to settle the subject
loan since the new agreement should be deemed rescinded.
The basic issues for the Court to resolve are as follows:
1. Whether the purported agreement between the petitioners and Mondigo
novated the mortgage contract over the subject properties and is thus binding
upon PCRB.

2. If the first issue is resolved negatively, whether Banate can demand

restitution of the amount paid for the subject properties on the theory that the
new agreement with Mondigo is deemed rescinded.
THE COURTS RULING
We resolve to deny the petition.
The purported agreement did not novate the mortgage
contract, particularly the cross- collateral stipulation
thereon
Before we resolve the issues directly posed, we first dwell on the
determination of the nature of the cross-collateral stipulation in the mortgage
contract. As a general rule, a mortgage liability is usually limited to the amount
mentioned in the contract. However, the amounts named as consideration in a
contract of mortgage do not limit the amount for which the mortgage may stand as
security if, from the four corners of the instrument, the intent to secure future and
other indebtedness can be gathered. This stipulation is valid and binding between
the parties and is known as the blanket mortgage clause (also known as the dragnet
clause).[12]
In the present case, the mortgage contract indisputably provides that the
subject properties serve as security, not only for the payment of the subject loan,
but also for such other loans or advances already obtained, or still to be
obtained. The cross-collateral stipulation in the mortgage contract between the
parties is thus simply a variety of a dragnet clause. After agreeing to such
stipulation, the petitioners cannot insist that the subject properties be released from
mortgage since the security covers not only the subject loan but the two other loans
as well.

The petitioners, however, claim that their agreement with Mondigo must be
deemed to have novated the mortgage contract. They posit that the full payment of
the subject loan extinguished their obligation arising from the mortgage contract,
including the stipulated cross-collateral provision. Consequently, consistent with
their theory of a novated agreement, the petitioners maintain that it devolves upon
PCRB to execute the corresponding Deed of Release of Mortgage.
We find the petitioners argument unpersuasive. Novation, in its broad
concept, may either be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of
the former; it is merely modificatory when the old obligation subsists to the extent
that it remains compatible with the amendatory agreement. An extinctive novation
results either by changing the object or principal conditions (objective or real), or
by substituting the person of the debtor or subrogating a third person in the rights
of the creditor (subjective or personal). Under this mode, novation would
have dual functions one to extinguish an existing obligation, the other to substitute
a new one in its place requiring a conflux of four essential requisites: (1) a previous
valid obligation; (2) an agreement of all parties concerned to a new contract; (3)
the extinguishment of the old obligation; and (4) the birth of a valid new
obligation.[13]
The second requisite is lacking in this case. Novation presupposes not only
the extinguishment or modification of an existing obligation but, more importantly,
the creation of a valid new obligation.[14] For the consequent creation of a new
contractual obligation, consent of both parties is, thus, required. As a general rule,
no form of words or writing is necessary to give effect to a novation.
Nevertheless, where either or both parties involved are juridical entities, proof that
the second contract was executed by persons with the proper authority to bind their
respective principals is necessary.[15]

Section 23 of the Corporation Code[16] expressly provides that the corporate

powers of all corporations shall be exercised by the board of directors. The power
and the responsibility to decide whether the corporation should enter into a
contract that will bind the corporation are lodged in the board, subject to the
articles of incorporation, bylaws, or relevant provisions of law. In the absence of
authority from the board of directors, no person, not even its officers, can validly
bind a corporation.
However, 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 its officers, committees or agents. The authority of these
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.[17]
The authority of a corporate officer or agent in dealing with third persons
may be actual or apparent. Actual authority is either express or implied. The extent
of an agents express authority is to be measured by the power delegated to him by
the corporation, while the extent of his implied authority is measured by his prior
acts which have been ratified or approved, or their benefits accepted by his
principal.[18] The doctrine of apparent authority, on the other hand, with special
reference to banks, had long been recognized in this jurisdiction. The existence of
apparent authority 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, within or beyond the scope of his ordinary powers.

Accordingly, the authority to act for and to bind a corporation may be presumed
from acts of recognition in other instances when the power was exercised without
any objection from its board or shareholders.[19]
Notably, the petitioners action for specific performance is premised on the
supposed actual or apparent authority of the branch manager, Mondigo, to release
the subject properties from the mortgage, although the other obligations remain
unpaid. In light of our discussion above, proof of the branch managers authority
becomes indispensable to support the petitioners contention. The petitioners make
no claim that Mondigo had actual authority from PCRB, whether express or
implied. Rather, adopting the trial courts observation, the petitioners posited that
PCRB should be held liable for Mondigos commitment, on the basis of the latters
apparent authority.
We disagree with this position.
Under the doctrine of apparent authority, acts and contracts of the agent, as
are within the apparent scope of the authority conferred on him, although no actual
authority to do such acts or to make such contracts has been conferred, bind the
principal.[20] The principals liability, however, is limited only to third persons who
have been led reasonably to believe by the conduct of the principal that such
actual authority exists, although none was given. In other words, apparent authority
is determined only by the acts of the principal and not by the acts of the agent.
[21]
There can be no apparent authority of an agent without acts or conduct on the
part of the principal; such acts or conduct must have been known and relied upon
in good faith as a result of the exercise of reasonable prudence by a third party as
claimant, and such acts or conduct must have produced a change of position to the
third partys detriment.[22]
In the present case, the decision of the trial court was utterly silent on the
manner by which PCRB, as supposed principal, has clothed or held out its branch
manager as having the power to enter into an agreement, as claimed by petitioners.

No proof of the course of business, usages and practices of the bank about, or
knowledge that the board had or is presumed to have of, its responsible officers
acts regarding bank branch affairs, was ever adduced to establish the branch
managers apparent authority to verbally alter the terms of mortgage contracts.
[23]
Neither was there any allegation, much less proof, that PCRB ratified Mondigos
act or is estopped to make a contrary claim.[24]
Further, we would be unduly stretching the doctrine of apparent authority
were we to consider the power to undo or nullify solemn agreements validly
entered into as within the doctrines ambit. Although a branch manager, within his
field and as to third persons, is the general agent and is in general charge of the
corporation, with apparent authority commensurate with the ordinary business
entrusted him and the usual course and conduct thereof,[25] yet the power to modify
or nullify corporate contracts remains generally in the board of directors. [26] Being
a mere branch manager alone is insufficient to support the conclusion that
Mondigo has been clothed with apparent authority to verbally alter terms of written
contracts, especially when viewed against the telling circumstances of this case:
the unequivocal provision in the mortgage contract; PCRBs vigorous denial that
any agreement to release the mortgage was ever entered into by it; and, the fact
that the purported agreement was not even reduced into writing considering its
legal effects on the parties interests. To put it simply, the burden of proving the
authority of Mondigo to alter or novate the mortgage contract has not been
established.[27]
It is a settled rule that persons dealing with an agent are bound at their peril,
if they would hold the principal liable, to ascertain not only the fact of agency but
also the nature and extent of the agents authority, and in case either is controverted,
the burden of proof is upon them to establish it. [28] As parties to the mortgage
contract, the petitioners are expected to abide by its terms. The subsequent

purported agreement is of no moment, and cannot prejudice PCRB, as it is beyond

Mondigos actual or apparent authority, as above discussed.
Rescission has no legal basis; there can be
no restitution of the amount paid
The petitioners, nonetheless, invoke equity and alternatively pray for the
restitution of the amount paid, on the rationale that if PCRBs branch manager was
not authorized to accept payment in consideration of separately releasing the
mortgage, then the agreement should be deemed rescinded, and the amount paid by
them returned.
PCRB, on the other hand, counters that the petitioners alternative prayer has
no legal and factual basis, and insists that the clear agreement of the parties was for
the full payment of the subject loan, and in return, PCRB would deliver the title to
the subject properties to the buyer, only to enable the latter to obtain a transfer of
title in her own name.
We agree with PCRB. Even if we were to assume that the purported
agreement has been sufficiently established, since it is not binding on the bank for
lack of authority of PCRBs branch manager, then the prayer for restitution of the
amount paid would have no legal basis. Of course, it will be asked: what then is the
legal significance of the payment made by Banate? Article 2154 of the Civil Code
reads:
Art 2154. If something is received when there is no right to demand it, and
it was unduly delivered through mistake, the obligation to return it arises.

Notwithstanding the payment made by Banate, she is not entitled to recover

anything from PCRB under Article 2154. There could not have been any payment
by mistake to PCRB, as the check which Banate issued as payment was to her copetitioner Mary Melgrid Cortel (the payee), and not to PCRB. The same check was

simply endorsed by the payee to PCRB in payment of the subject loan that the
Maglasangs owed PCRB.[29]
The mistake, if any, was in the perception of the authority of Mondigo, as
branch manager, to verbally alter the mortgage contract, and not as to whether the
Cortels, as sellers, were entitled to payment. This mistake (on Mondigos lack of
authority to alter the mortgage) did not affect the validity of the payment made to
the bank as the existence of the loan was never disputed. The dispute was merely
on the effect of the payment on the security given.[30]
Consequently, no right to recover accrues in Banates favor as PCRB never
dealt with her. The borrowers-mortgagors, on the other hand, merely paid what was
really owed. Parenthetically, the subject loan was due on January 18, 1998, but was
paid sometime in November 1997. It appears, however, that at the time the
complaint was filed, the subject loan had already matured. Consequently, recovery
of the amount paid, even under a claim of premature payment, will not prosper.
In light of these conclusions, the claim for moral damages must necessarily
fail. On the alleged injurious publication, we quote with approval the CAs ruling
on the matter, viz:
Consequently, there is no reason to hold [respondent] PCRB liable to
[petitioners] for damages. x x x [Petitioner] Maglasang cannot hold [respondent]
PCRB liable for the publication of the extra-judicial sale. There was no evidence
submitted to prove that [respondent] PCRB authored the words Mortgagors
surreptitiously caused the transfer of ownership of Lot 12868-H-3-C xx x
contained in the publication since at the bottom was x x x Sheriff Teofilo C. Soon,
Jr.s name. Moreover, there was not even an iota of proof which shows damage on
the part of [petitioner] Mary Melgrid M. Cortel[VAC1] .[31]

WHEREFORE, we DENY the petitioners petition for review

on certiorari for lack of merit, and AFFIRM the decision of the Court of Appeals

dated December 19, 2003 and its resolution dated May 5, 2004 in CA-G.R. CV No.
74332. No pronouncement as to costs.
SO ORDERED.

PHILPORT SERVICE VS GO

Assailed and sought to be set aside in this petition for review on certiorari is
the Decision[1] dated 19 January 2004 of the Court of Appeals (CA) in CA-G.R. CV
No. 73827, reversing an earlier decision of the Regional Trial Court (RTC) of
Davao City and accordingly dismissing the derivative suit instituted by petitioner
Eliodoro C. Cruz for and in behalf of the stockholders of co-petitioner Filipinas
Port Services, Inc. (Filport, hereafter).
The case is actually an intra-corporate dispute involving Filport, a domestic
corporation engaged in stevedoring services with principal office in Davao City. It
was initially instituted with the Securities and Exchange Commission (SEC) where
the case hibernated and remained unresolved for several years until it was
overtaken by the enactment into law, on 19 July 2000, of Republic Act (R.A.) No.
8799, otherwise known as the Securities Regulation Code. From the SEC and
consistent with R.A. No. 8799, the case was transferred to the RTC of Manila,
Branch 14, sitting as a corporate court. Subsequently, upon respondents motion, the
case eventually landed at the RTC of Davao City where it was docketed as Civil
Case No. 28,552-2001. RTC-Davao City, Branch 10, ruled in favor of the
petitioners prompting respondents to go to the CA in CA-G.R. CV No. 73827.This
time, the respondents prevailed, hence, this petition for review by the petitioners.
The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filports president from 1968
until he lost his bid for reelection as Filports president during the general

stockholders meeting in 1991, wrote a letter[2] to the corporations Board of

Directors questioning the boards creation of the following positions with a monthly
remuneration of P13,050.00 each, and the election thereto of certain members of
the board, to wit:
Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)
Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)
Asst. Vice-President for Finance - Mary Jean D. Co (Director)
Asst. Vice-President for Administration - Henry Chua (Director)
Special Asst. to the Chairman - Arsenio Lopez Chua (Director)
Special Asst. to the President - Fortunato V. de Castro

In his aforesaid letter, Cruz requested the board to take necessary

action/actions to recover from those elected to the aforementioned positions the
salaries they have received.
On 15 September 1992, the board met and took up Cruzs letter. The records
do not show what specific action/actions the board had taken on the letter.
Evidently, whatever action/actions the board took did not sit well with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport and its
stockholders, among which is herein co-petitioner Mindanao Terminal and
Brokerage Services, Inc. (Minterbro), filed with the SEC a petition [3] which he
describes as a derivative suit against the herein respondents who were then the
incumbent members of Filports Board of Directors, for alleged acts of
mismanagement detrimental to the interest of the corporation and its shareholders
at large, namely:
1. creation of an executive committee in 1991 composed of seven (7) members of
the board with compensation of P500.00 for each member per meeting, an
office which, to Cruz, is not provided for in the by-laws of the corporation
and whose function merely duplicates those of the President and General
Manager;
2. increase in the emoluments of the Chairman, Vice-President, Treasurer and
Assistant General Manager which increases are greatly disproportionate to

the volume and character of the work of the directors holding said
positions;
3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate
Planning, Operations, Finance and Administration, and the election thereto
of board members Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D. Co
and Henry Chua, respectively; and
4. creation of the additional positions of Special Assistants to the President and
the Board Chairman, with Fortunato V. de Castro and Arsenio Lopez Chua
elected to the same, the directors elected/appointed thereto not doing any
work to deserve the monthly remuneration of P13,050.00 each.

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that
despite demands made upon the respondent members of the board of directors to
desist from creating the positions in question and to account for the amounts
incurred in creating the same, the demands were unheeded. Cruz thus prayed that
the respondent members of the board of directors be made to pay Filport, jointly
and severally, the sums of money variedly representing the damages incurred as a
result of the creation of the offices/positions complained of and the aggregate
amount of the questioned increased salaries.
In their common Answer with Counterclaim,[4] the respondents denied the
allegations of mismanagement and materially averred as follows:
1. the creation of the executive committee and the grant of per diems for the
attendance of each member are allowed under the by-laws of the
corporation;
2. the increases in the salaries/emoluments of the Chairman, Vice-President,
Treasurer and Assistant General Manager were well within the financial
capacity of the corporation and well-deserved by the officers elected
thereto; and
3. the positions of AVPs for Corporate Planning, Operations, Finance and
Administration were already in existence during the tenure of Cruz as
president of the corporation, and were merely recreated by the Board,
adding that all those appointed to said positions of Assistant Vice
Presidents, as well as the additional position of Special Assistants to the
Chairman and the President, rendered services to deserve their
compensation.

In the same Answer, respondents further averred that Cruz and his co-petitioner
Minterbro, while admittedly stockholders of Filport, have no authority nor standing
to bring the so-called derivative suit for and in behalf of the corporation; that
respondent Mary Jean D. Co has already ceased to be a corporate director and so
with Fortunato V. de Castro, one of those holding an assailed position; and that no
demand to cease and desist from further committing the acts complained of was
made upon the board. By way of affirmative defenses, respondents asserted that (1)
the petition is not duly verified by petitioner Filport which is the real party-ininterest; (2) Filport, as represented by Cruz and Minterbro, failed to exhaust
remedies for redress within the corporation before bringing the suit; and (3) the
petition does not show that the stockholders bringing the suit are joined as nominal
parties. In support of their counterclaim, respondents averred that Cruz filed the
alleged derivative suit in bad faith and purely for harassment purposes on account
of his non-reelection to the board in the 1991 general stockholders meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491)
hibernated with the SEC for a long period of time. With the enactment of R.A. No.
8799, the case was first turned over to the RTC of Manila, Branch 14, sitting as a
corporate court. Thereafter, on respondents motion, it was eventually transferred to
the RTC of Davao City whereat it was docketed as Civil Case No. 28,5522001 and raffled to Branch 10 thereof.
On 10 December 2001, RTC-Davao City rendered its decision[5] in the case.
Even as it found that (1) Filports Board of Directors has the power to create
positions not provided for in the by-laws of the corporation since the board is the
governing body; and (2) the increases in the salaries of the board chairman, vicepresident, treasurer and assistant general manager are reasonable, the trial court
nonetheless rendered judgment against the respondents by ordering the directors
holding the positions of Assistant Vice President for Corporate Planning, Special
Assistant to the President and Special Assistant to the Board Chairman to refund to

the corporation the salaries they have received as such officers considering that
Filipinas Port Services is not a big corporation requiring multiple executive
positions and that said positions were just created for accommodation.We quote
the fallo of the trial courts decision.
WHEREFORE, judgment is rendered ordering:
Edgar C. Trinidad under the third and fourth causes of action to restore to the
corporation the total amount of salaries he received as assistant vice president for
corporate planning; and likewise ordering Fortunato V. de Castro and Arsenio
Lopez Chua under the fourth cause of action to restore to the corporation the
salaries they each received as special assistants respectively to the president and
board chairman. In case of insolvency of any or all of them, the members of the
board who created their positions are subsidiarily liable.
The counter claim is dismissed.

From the adverse decision of the trial court, herein respondents went on appeal to
the CA in CA-G.R. CV No. 73827.
In its decision[6] of 19 January 2004, the CA, taking exceptions to the findings of
the trial court that the creation of the positions of Assistant Vice President for
Corporate Planning, Special Assistant to the President and Special Assistant to the
Board Chairman was merely for accommodation purposes, granted the respondents
appeal, reversed and set aside the appealed decision of the trial court and
accordingly dismissed the so-called derivative suit filed by Cruz, et al., thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the
challenged decision is REVERSED and SET ASIDE, and a new one
entered DISMISSING Civil Case No. 28,552-2001 with no pronouncement as to
costs.
SO ORDERED.

Intrigued, and quite understandably, by the fact that, in its decision, the CA, before
proceeding to address the merits of the appeal, prefaced its disposition with the
statement reading [T]he appeal is bereft of merit,[7] thereby contradicting the
very fallo of its own decision and the discussions made in the body thereof,
respondents filed with the appellate court a Motion For Nunc Pro Tunc Order,

[8]

thereunder praying that the phrase [T]he appeal is bereft of merit, be corrected to
read [T]he appeal is impressed with merit. In its resolution[9] of 23 April 2004, the
CA granted the respondents motion and accordingly effected the desired
correction.
Hence, petitioners present recourse.
Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we
shall formulate the issues as follows:
1. Whether the CA erred in holding that Filports Board of Directors
acted within its powers in creating the executive committee and
the positions of AVPs for Corporate Planning, Operations, Finance
and Administration, and those of the Special Assistants to the
President and the Board Chairman, each with corresponding
remuneration, and in increasing the salaries of the positions of
Board Chairman, Vice-President, Treasurer and Assistant General
Manager; and
2. Whether the CA erred in finding that no evidence exists to prove that
(a) the positions of AVP for Corporate Planning, Special Assistant
to the President and Special Assistant to the Board Chairman were
created
merely
for
accommodation,
and
(b)
the
salaries/emoluments corresponding to said positions were actually
paid to and received by the directors appointed thereto.

For their part, respondents, aside from questioning the propriety of the instant
petition as the same allegedly raises only questions of fact and not of law, also put
in issue the purported derivative nature of the main suit initiated by petitioner
Eliodoro C. Cruz allegedly in representation of and in behalf of Filport and its
stockholders.
The petition is bereft of merit.
It is axiomatic that in petitions for review on certiorari under Rule 45 of the Rules
of Court, only questions of law may be raised and passed upon by the Court.
Factual findings of the CA are binding and conclusive and will not be reviewed or

disturbed on appeal.[10] Of course, the rule is not cast in stone; it admits of certain
exceptions, such as when the findings of fact of the appellate court are at variance
with those of the trial court,[11] as here. For this reason, and for a proper and
complete resolution of the case, we shall delve into the records and reexamine the
same.
The governing body of a corporation is its board of directors. Section 23 of the
Corporation Code[12] explicitly provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be exercised, all
business conducted and all property of the corporation shall be controlled and held
by a board of directors. Thus, with the exception only of some powers expressly
granted by law to stockholders (or members, in case of non-stock corporations),
the board of directors (or trustees, in case of non-stock corporations) has the sole
authority to determine policies, enter into contracts, and conduct the ordinary
business of the corporation within the scope of its charter, i.e., its articles of
incorporation, by-laws and relevant provisions of law. Verily, the authority of the
board of directors is restricted to the management of the regular business affairs of
the corporation, unless more extensive power is expressly conferred.
The raison detre behind the conferment of corporate powers on the board of
directors is not lost on the Court. Indeed, the concentration in the board of the
powers of control of corporate business and of appointment of corporate officers
and managers is necessary for efficiency in any large organization. Stockholders
are too numerous, scattered and unfamiliar with the business of a corporation to
conduct its business directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise the conduct of
corporate business.[13]
In the present case, the boards creation of the positions of Assistant Vice Presidents
for Corporate Planning, Operations, Finance and Administration, and those of the
Special Assistants to the President and the Board Chairman, was in accordance
with the regular business operations of Filport as it is authorized to do so by the
corporations by-laws, pursuant to the Corporation Code.
The election of officers of a corporation is provided for under Section 25 of the
Code which reads:

Sec. 25. Corporate officers, quorum. Immediately after their election, the
directors of a corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the
by-laws. (Emphasis supplied.)

In turn, the amended Bylaws of Filport[14] provides the following:

Officers of the corporation, as provided for by the by-laws,
shall be elected by the board of directors at their first meeting after the
election of Directors. xxx
The officers of the corporation shall be a Chairman of the Board,
President, a Vice-President, a Secretary, a Treasurer, a General Manager
and such other officers as the Board of Directors may from time to
time provide, and these officers shall be elected to hold office until their
successors are elected and qualified. (Emphasis supplied.)

Likewise, the fixing of the corresponding remuneration for the positions in

question is provided for in the same by-laws of the corporation, viz:
xxx The Board of Directors shall fix the compensation of the
officers and agents of the corporation. (Emphasis supplied.)
Unfortunately, the bylaws of the corporation are silent as to the creation by its
board of directors of an executive committee. Under Section 35[15] of the
Corporation Code, the creation of an executive committee must be provided for in
the bylaws of the corporation.
Notwithstanding the silence of Filports bylaws on the matter, we cannot rule
that the creation of the executive committee by the board of directors is illegal or
unlawful. One reason is the absence of a showing as to the true nature and
functions of said executive committee considering that the executive committee,
referred to in Section 35 of the Corporation Code which is as powerful as the board
of directors and in effect acting for the board itself, should be distinguished from
other committees which are within the competency of the board to create at
anytime and whose actions require ratification and confirmation by the board.
[16]
Another reason is that, ratiocinated by both the two (2) courts below, the Board

of Directors has the power to create positions not provided for in Filports bylaws
since the board is the corporations governing body, clearly upholding the power of
its board to exercise its prerogatives in managing the business affairs of the
corporation.
As well, it may not be amiss to point out that, as testified to and admitted by
petitioner Cruz himself, it was during his incumbency as Filport president that the
executive committee in question was created, and that he was even the one who
moved for the creation of the positions of the AVPs for Operations, Finance and
Administration. By his acquiescence and/or ratification of the creation of the
aforesaid offices, Cruz is virtually precluded from suing to declare such acts of the
board as invalid or illegal. And it makes no difference that he sues in behalf of
himself and of the other stockholders. Indeed, as his voice was not heard in protest
when he was still Filports president, raising a hue and cry only now leads to the
inevitable conclusion that he did so out of spite and resentment for his nonreelection as president of the corporation.
With regard to the increased emoluments of the Board Chairman, Vice-President,
Treasurer and Assistant General Manager which are supposedly disproportionate to
the volume and nature of their work, the Court, after a judicious scrutiny of the
increase vis--vis the value of the services rendered to the corporation by the
officers concerned, agrees with the findings of both the trial and appellate courts as
to the reasonableness and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate their evidence as to
the alleged acts of mismanagement by the then incumbent board. A perusal of the
records, however, reveals that petitioners merely relied on the testimony of Cruz in
support of their bold claim of mismanagement. To the mind of the Court, Cruz
testimony on the matter of mismanagement is bereft of any foundation. As it were,
his testimony consists merely of insinuations of alleged wrongdoings on the part of
the board. Without more, petitioners posture of mismanagement must fall and with
it goes their prayer to hold the respondents liable therefor.
But even assuming, in gratia argumenti, that there was mismanagement resulting
to corporate damages and/or business losses, still the respondents may not be held
liable in the absence, as here, of a showing of bad faith in doing the acts
complained of.

If the cause of the losses is merely error in business judgment, not amounting to
bad faith or negligence, directors and/or officers are not liable. [17] For them to be
held accountable, the mismanagement and the resulting losses on account thereof
are not the only matters to be proven; it is likewise necessary to show that the
directors and/or officers acted in bad faith and with malice in doing the assailed
acts. Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of a known duty through some motive or interest or ill-will partaking of the
nature of fraud.[18] We have searched the records and nowhere do we find a
dishonest purpose or some moral obliquity, or conscious doing of a wrong on the
part of the respondents that partakes of the nature of fraud.
We thus extend concurrence to the following findings of the CA, affirmatory of
those of the trial court:
xxx As a matter of fact, it was during the term of appellee Cruz, as
president and director, that the executive committee was created. What is more, it
was appellee himself who moved for the creation of the positions of assistant vice
presidents for operations, for finance, and for administration. He should not be
heard to complain thereafter for similar corporate acts.
The increase in the salaries of the board chairman, president, treasurer, and
assistant general manager are indeed reasonable enough in view of the
responsibilities assigned to them, and the special knowledge required, to be able
to effectively discharge their respective functions and duties.

Surely, factual findings of trial courts, especially when affirmed by the CA, are
binding and conclusive on this Court.
There is, however, a factual matter over which the CA and the trial court parted
ways. We refer to the accommodation angle.
The trial court was with petitioner Cruz in saying that the creation of the positions
of the three (3) AVPs for Corporate Planning, Special Assistant to the President and
Special Assistant to the Board Chairman, each with a salary of P13,050.00 a
month, was merely for accommodation purposes considering that Filport is not a

big corporation requiring multiple executive positions. Hence, the trial courts order
for said officers to return the amounts they received as compensation.
On the other hand, the CA took issue with the trial court and ruled that Cruzs
accommodation theory is not based on facts and without any evidentiary
substantiation.
We concur with the line of the appellate court. For truly, aside from Cruzs bare and
self-serving testimony, no other evidence was presented to show the fact of
accommodation. By itself, the testimony of Cruz is not enough to support his claim
that accommodation was the underlying factor behind the creation of the
aforementioned three (3) positions.
It is elementary in procedural law that bare allegations do not constitute evidence
adequate to support a conclusion. It is basic in the rule of evidence that he who
alleges a fact bears the burden of proving it by the quantum of proof required. Bare
allegations, unsubstantiated by evidence, are not equivalent to proof under the
Rules of Court.[19] The party having the burden of proof must establish his case by
a preponderance of evidence.[20]
Besides, the determination of the necessity for additional offices and/or positions in
a corporation is a management prerogative which courts are not wont to review in
the absence of any proof that such prerogative was exercised in bad faith or with
malice.
Indeed, it would be an improper judicial intrusion into the internal affairs of Filport
were the Court to determine the propriety or impropriety of the creation of offices
therein and the grant of salary increases to officers thereof. Such are corporate
and/or business decisions which only the corporations Board of Directors can
determine.
So it is that in Philippine Stock Exchange, Inc. v. CA, [21] the Court unequivocally
held:
Questions of policy or of management are left solely to the honest
decision of the board as the business manager of the corporation, and the
court is without authority to substitute its judgment for that of the board,
and as long as it acts in good faith and in the exercise of honest judgment

in the interest of the corporation, its orders are not reviewable by the
courts.

In a last-ditch attempt to salvage their cause, petitioners assert that the CA went
beyond the issues raised in the court of origin when it ruled on the absence of
receipt of actual payment of the salaries/emoluments pertaining to the positions of
Assistant Vice-President for Corporate Planning, Special Assistant to the Board
Chairman and Special Assistant to the President. Petitioners insist that the issue of
nonpayment was never raised by the respondents before the trial court, as in fact,
the latter allegedly admitted the same in their Answer With Counterclaim.
We are not persuaded.
By claiming that Filport suffered damages because the directors appointed to the
assailed positions are not doing anything to deserve their compensation, petitioners
are saddled with the burden of proving that salaries were actually paid. Since the
trial court, in effect, found that the petitioners successfully proved payment of the
salaries when it directed the reimbursements of the same, respondents necessarily
have to raise the issue on appeal. And the CA rightly resolved the issue when it
found that no evidence of actual payment of the salaries in question was actually
adduced. Respondents alleged admission of the fact of payment cannot be inferred
from a reading of the pertinent portions of the parties respective initiatory
pleadings. Respondents allegations in their Answer With Counterclaim that the
officers corresponding to the positions created performed the work called for in
their positions or deserve their compensation, cannot be interpreted to mean that
they were actually paid such compensation. Directly put, the averment that one
deserves ones compensation does not necessarily carry the implication that such
compensation was actually remitted or received. And because payment was not
duly proven, there is no evidentiary or factual basis for the trial court to direct
respondents to make reimbursements thereof to the corporation.
This brings us to the respondents claim that the case filed by the petitioners
before the SEC, which eventually landed in RTC-Davao City as Civil Case No.
28,552-2001, is not a derivative suit, as maintained by the petitioners.
We sustain the petitioners.

Under the Corporation Code, where a corporation is an injured party, its

power to sue is lodged with its board of directors or trustees. But an individual
stockholder may be permitted to institute a derivative suit in behalf of the
corporation in order to protect or vindicate corporate rights whenever the officials
of the corporation refuse to sue, or when a demand upon them to file the necessary
action would be futile because they are the ones to be sued, or because they hold
control of the corporation.[22] In such actions, the corporation is the real party-ininterest while the suing stockholder, in behalf of the corporation, is only a nominal
party.[23]
Here, the action below is principally for damages resulting from alleged
mismanagement of the affairs of Filport by its directors/officers, it being alleged
that the acts of mismanagement are detrimental to the interests of Filport. Thus, the
injury complained of primarily pertains to the corporation so that the suit for relief
should be by the corporation. However, since the ones to be sued are the
directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may
validly institute a derivative suit to vindicate the alleged corporate injury, in which
case Cruz is only a nominal party while Filport is the real party-in-interest. For
sure, in the prayer portion of petitioners petition before the SEC, the reliefs
prayed were asked to be made in favor of Filport.
Besides, the requisites before a derivative suit can be filed by a stockholder
are present in this case, to wit:
a) the party bringing suit should be a shareholder as of the time of the act
or transaction complained of, the number of his shares not being
material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief but the
latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the suit.
[24]

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought

without success to have its board of directors remedy what he perceived as wrong
when he wrote a letter requesting the board to do the necessary action in his
complaint; and (3) the alleged wrong was in truth a wrong against the stockholders
of the corporation generally, and not against Cruz or Minterbro, in particular. In the
end, it is Filport, not Cruz which directly stands to benefit from the suit. And while
it is true that the complaining stockholder must show to the satisfaction of the court
that he has exhausted all the means within his reach to attain within the corporation
itself the redress for his grievances, or actions in conformity to his wishes,
nonetheless, where the corporation is under the complete control of the principal
defendants, as here, there is no necessity of making a demand upon the directors.
The reason is obvious: a demand upon the board to institute an action and
prosecute the same effectively would have been useless and an exercise in futility.
In fine, we rule and so hold that the petition filed with the SEC at the instance of
Cruz, which ultimately found its way to the RTC of Davao City as Civil Case No.
28,552-2001, is a derivative suit of which Cruz has the necessary legal standing to
institute.
WHEREFORE, the petition is DENIED and the challenged decision of the CA
is AFFIRMED in all respects.

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the
Collector of Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de
Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty,
allegedly due from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic
corporation organized under the laws of the Philippines with an original authorized capital stock of
P22,000.00, which was subsequently increased to P200,000.00, among others, to it "proporcionar,
operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling

alleys), mesas de billar y pool, y toda clase de juegos no prohibidos por leyes generales y
ordenanzas generales; y desarollar y cultivar deportes de toda clase y denominacion cualquiera
para el recreo y entrenamiento saludable de sus miembros y accionistas" (sec. 2, Escritura de
Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a provision
relative to dividends and their distribution, although it is covenanted that upon its dissolution, the
Club's remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in
Cebu (Art. 27, Estatutos del Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the
government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short
orders to its members and their guests. The bar-restaurant was a necessary incident to the operation
of the club and its golf-course. The club is operated mainly with funds derived from membership fees
and dues. Whatever profits it had, were used to defray its overhead expenses and to improve its
golf-course. In 1951. as a result of a capital surplus, arising from the re-valuation of its real
properties, the value or price of which increased, the Club declared stock dividends; but no actual
cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club
has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B4, B-9(a) and B-7 licenses. In a letter dated December 22, 1852, the Collector of Internal Revenue
assessed against and demanded from the Club, the following sums:
As percentage tax on its gross receipts
during the tax years 1946 to 1951
Surcharge therein

P9,599.07
2,399.77

As fixed tax for the years 1946 to 1952

Compromise penalty

70.00
500.00

The Club wrote the Collector, requesting for the cancellation of the assessment. The request having
been denied, the Club filed the instant petition for review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and
percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under
which the assessment was made, in connection with the operation of its bar and restaurant, during
the periods mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.
Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a
business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for
each calendar year or fraction thereof in which such person shall engage in said business." Section
183 provides in general that "the percentage taxes on business shall be payable at the end of each
calendar quarter in the amount lawfully due on the business transacted during each quarter; etc."
And section 191, same Tax Code, provides "Percentage tax . . . Keepers of restaurants, refreshment
parlors and other eating places shall pay a tax three per centum, and keepers of bar and cafes
where wines or liquors are served five per centum of their gross receipts . . .". It has been held that
the liability for fixed and percentage taxes, as provided by these sections, does not ipso factoattach
by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator
thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary

meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the
motive, and the term business when used without qualification, should be construed in its plain and
ordinary meaning, restricted to activities for profitor livelihood (The Coll. of Int. Rev. v. Manila Lodge
No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959,
giving full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al. [International Club of
Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which are similar to the ones at bar; Manila
Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and cultivate sports of all class and
denomination, for the healthful recreation and entertainment of its stockholders and members; that
upon its dissolution, its remaining assets, after paying debts, shall be donated to a charitable
Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and
dues; that the Club's bar and restaurant catered only to its members and their guests; that there was
in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from
its bar and restaurant was used to defray its overall overhead expenses and to improve its golfcourse (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business
of an operator of bar and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact
does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary
adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily
incidental to the primary object of developing and cultivating sports for the healthful recreation and
entertainment of the stockholders and members. That a Club makes some profit, does not make it a
profit-making Club. As has been remarked a club should always strive, whenever possible, to have
surplus (Jesus Sacred Heart College v. Collector of Int. Rev., G.R. No. L-6807, May 24, 1954;
Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23, 1956).
1wph1.t

It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a
stock corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is
divided into shares, does not detract from the finding of the trial court that it is not engaged in the
business of operator of bar and restaurant. What is determinative of whether or not the Club is
engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar
rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of
the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the
method of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is
not engaged in the business as a barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital
stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at
bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution
of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock
corporation, within the contemplation of the corporation law.
A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit,
nonstock organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE
Elks Club, et al., supra), which is not the case in the present appeal.
Having arrived at the conclusion that respondent Club is not engaged in the business as an operator
of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is
not liable for any penalty, much less of a compromise penalty.

WHEREFORE, the decision appealed from is affirmed without costs.

REPUBLIC OF THE PHILIPPINES, represented by the PHILIPPINE RECLAMATION AUTHORITY
(PRA),Petitioner,
vs.
CITY OF PARANAQUE, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, on pure
questions of law, assailing the January 8, 2010 Order 1 of the Regional Trial Court, Branch 195,
Parafiaque City (RTC), which ruled that petitioner Philippine Reclamation Authority (PRA) is a
government-owned and controlled corporation (GOCC), a taxable entity, and, therefore, . not exempt
from payment of real property taxes. The pertinent portion of the said order reads:
In view of the finding of this court that petitioner is not exempt from payment of real property taxes,
respondent Paraaque City Treasurer Liberato M. Carabeo did not act xxx without or in excess of
jurisdiction, or with grave abuse of discretion amounting to lack or in excess of jurisdiction in issuing
the warrants of levy on the subject properties.
WHEREFORE, the instant petition is dismissed. The Motion for Leave to File and Admit Attached
Supplemental Petition is denied and the supplemental petition attached thereto is not admitted.
The Public Estates Authority (PEA) is a government corporation created by virtue of Presidential
Decree (P.D.) No. 1084 (Creating the Public Estates Authority, Defining its Powers and Functions,
Providing Funds Therefor and For Other Purposes) which took effect on February 4,
1977 to provide a coordinated, economical and efficient reclamation of lands, and the administration
and operation of lands belonging to, managed and/or operated by, the government with the object of
maximizing their utilization and hastening their development consistent with public interest.
On February 14, 1979, by virtue of Executive Order (E.O.) No. 525 issued by then President
Ferdinand Marcos, PEA was designated as the agency primarily responsible for integrating, directing
and coordinating all reclamation projects for and on behalf of the National Government.
On October 26, 2004, then President Gloria Macapagal-Arroyo issued E.O. No. 380 transforming
PEA into PRA, which shall perform all the powers and functions of the PEA relating to reclamation
activities.
By virtue of its mandate, PRA reclaimed several portions of the foreshore and offshore areas of
Manila Bay, including those located in Paraaque City, and was issued Original Certificates of Title
(OCT Nos. 180, 202, 206, 207, 289, 557, and 559) and Transfer Certificates of Title (TCT Nos.
104628, 7312, 7309, 7311, 9685, and 9686) over the reclaimed lands.

On February 19, 2003, then Paraaque City Treasurer Liberato M. Carabeo (Carabeo) issued
Warrants of Levy on PRAs reclaimed properties (Central Business Park and Barangay San Dionisio)
located in Paraaque City based on the assessment for delinquent real property taxes made by then
Paraaque City Assessor Soledad Medina Cue for tax years 2001 and 2002.
On March 26, 2003, PRA filed a petition for prohibition with prayer for temporary restraining order
(TRO) and/or writ of preliminary injunction against Carabeo before the RTC.
On April 3, 2003, after due hearing, the RTC issued an order denying PRAs petition for the issuance
of a temporary restraining order.
On April 4, 2003, PRA sent a letter to Carabeo requesting the latter not to proceed with the public
auction of the subject reclaimed properties on April 7, 2003. In response, Carabeo sent a letter
stating that the public auction could not be deferred because the RTC had already denied PRAs
TRO application.
On April 25, 2003, the RTC denied PRAs prayer for the issuance of a writ of preliminary injunction
for being moot and academic considering that the auction sale of the subject properties on April 7,
2003 had already been consummated.
On August 3, 2009, after an exchange of several pleadings and the failure of both parties to arrive at
a compromise agreement, PRA filed a Motion for Leave to File and Admit Attached Supplemental
Petition which sought to declare as null and void the assessment for real property taxes, the levy
based on the said assessment, the public auction sale conducted on April 7, 2003, and the
Certificates of Sale issued pursuant to the auction sale.
On January 8, 2010, the RTC rendered its decision dismissing PRAs petition. In ruling that PRA was
not exempt from payment of real property taxes, the RTC reasoned out that it was a GOCC under
Section 3 of P.D. No. 1084. It was organized as a stock corporation because it had an authorized
capital stock divided into no par value shares. In fact, PRA admitted its corporate personality and
that said properties were registered in its name as shown by the certificates of title. Therefore, as a
GOCC, local tax exemption is withdrawn by virtue of Section 193 of Republic Act (R.A.) No. 7160
Local Government Code (LGC) which was the prevailing law in 2001 and 2002 with respect to real
property taxation. The RTC also ruled that the tax exemption claimed by PRA under E.O. No. 654
had already been expressly repealed by R.A. No. 7160 and that PRA failed to comply with the
procedural requirements in Section 206 thereof.
Not in conformity, PRA filed this petition for certiorari assailing the January 8, 2010 RTC Order based
on the following GROUNDS
I
THE TRIAL COURT GRAVELY ERRED IN FINDING THAT PETITIONER IS LIABLE TO PAY REAL
PROPERTY TAX ON THE SUBJECT RECLAIMED LANDS CONSIDERING

THAT PETITIONER IS AN INCORPORATED INSTRUMENTALITY OF THE NATIONAL

GOVERNMENT AND IS, THEREFORE, EXEMPT FROM PAYMENT OF REAL PROPERTY TAX
UNDER SECTIONS 234(A) AND 133(O) OF REPUBLIC ACT 7160 OR THE LOCAL
GOVERNMENT CODE VIS--VIS MANILA INTERNATIONAL AIRPORT AUTHORITY V. COURT OF
APPEALS.
II
THE TRIAL COURT GRAVELY ERRED IN FAILING TO CONSIDER THAT RECLAIMED LANDS
ARE PART OF THE PUBLIC DOMAIN AND, HENCE, EXEMPT FROM REAL PROPERTY TAX.
PRA asserts that it is not a GOCC under Section 2(13) of the Introductory Provisions of the
Administrative Code. Neither is it a GOCC under Section 16, Article XII of the 1987 Constitution
because it is not required to meet the test of economic viability. Instead, PRA is a government
instrumentality vested with corporate powers and performing an essential public service pursuant to
Section 2(10) of the Introductory Provisions of the Administrative Code. Although it has a capital
stock divided into shares, it is not authorized to distribute dividends and allotment of surplus and
profits to its stockholders. Therefore, it may not be classified as a stock corporation because it lacks
the second requisite of a stock corporation which is the distribution of dividends and allotment of
surplus and profits to the stockholders.
It insists that it may not be classified as a non-stock corporation because it has no members and it is
not organized for charitable, religious, educational, professional, cultural, recreational, fraternal,
literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like
chambers as provided in Section 88 of the Corporation Code.
Moreover, PRA points out that it was not created to compete in the market place as there was no
competing reclamation company operated by the private sector. Also, while PRA is vested with
corporate powers under P.D. No. 1084, such circumstance does not make it a corporation but merely
an incorporated instrumentality and that the mere fact that an incorporated instrumentality of the
National Government holds title to real property does not make said instrumentality a GOCC.
Section 48, Chapter 12, Book I of the Administrative Code of 1987 recognizes a scenario where a
piece of land owned by the Republic is titled in the name of a department, agency or instrumentality.
Thus, PRA insists that, as an incorporated instrumentality of the National Government, it is exempt
from payment of real property tax except when the beneficial use of the real property is granted to a
taxable person. PRA claims that based on Section 133(o) of the LGC, local governments cannot tax
the national government which delegate to local governments the power to tax.
It explains that reclaimed lands are part of the public domain, owned by the State, thus, exempt from
the payment of real estate taxes. Reclaimed lands retain their inherent potential as areas for public
use or public service. While the subject reclaimed lands are still in its hands, these lands remain
public lands and form part of the public domain. Hence, the assessment of real property taxes made
on said lands, as well as the levy thereon, and the public sale thereof on April 7, 2003, including the
issuance of the certificates of sale in favor of the respondent Paraaque City, are invalid and of no
force and effect.

On the other hand, the City of Paraaque (respondent) argues that PRA since its creation
consistently represented itself to be a GOCC. PRAs very own charter (P.D. No. 1084) declared it to
be a GOCC and that it has entered into several thousands of contracts where it represented itself to
be a GOCC. In fact, PRA admitted in its original and amended petitions and pre-trial brief filed with
the RTC of Paraaque City that it was a GOCC.
Respondent further argues that PRA is a stock corporation with an authorized capital stock divided
into 3 million no par value shares, out of which 2 million shares have been subscribed and fully paid
up. Section 193 of the LGC of 1991 has withdrawn tax exemption privileges granted to or presently
enjoyed by all persons, whether natural or juridical, including GOCCs.
Hence, since PRA is a GOCC, it is not exempt from the payment of real property tax.
THE COURTS RULING
The Court finds merit in the petition.
Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a GOCC as
follows:
SEC. 2. General Terms Defined. x x x x
(13) Government-owned or controlled corporation refers to any agency organized as a stock or nonstock corporation, vested with functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its instrumentalities either wholly, or,
where applicable as in the case of stock corporations, to the extent of at least fifty-one
(51) percent of its capital stock: x x x.
On the other hand, Section 2(10) of the Introductory Provisions of the Administrative Code defines a
government "instrumentality" as follows:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. x x x
From the above definitions, it is clear that a GOCC must be "organized as a stock or non-stock
corporation" while an instrumentality is vested by law with corporate powers. Likewise, when the law
makes a government instrumentality operationally autonomous, the instrumentality remains part of
the National Government machinery although not integrated with the department framework.
When the law vests in a government instrumentality corporate powers, the instrumentality does not
necessarily become a corporation. Unless the government instrumentality is organized as a stock or

non-stock corporation, it remains a government instrumentality exercising not only governmental but
also corporate powers.
Many government instrumentalities are vested with corporate powers but they do not become stock
or non-stock corporations, which is a necessary condition before an agency or instrumentality is
deemed a GOCC. Examples are the Mactan International Airport Authority, the Philippine Ports
Authority, the University of the Philippines, and Bangko Sentral ng Pilipinas. All these government
instrumentalities exercise corporate powers but they are not organized as stock or non-stock
corporations as required by Section 2(13) of the Introductory Provisions of the Administrative Code.
These government instrumentalities are sometimes loosely called government corporate entities.
They are not, however, GOCCs in the strict sense as understood under the Administrative Code,
which is the governing law defining the legal relationship and status of government entities. 2
Correlatively, Section 3 of the Corporation Code defines a stock corporation as one whose "capital
stock is divided into shares and x x x authorized to distribute to the holders of such shares dividends
x x x." Section 87 thereof defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." Further, Section 88 provides that nonstock corporations are "organized for charitable, religious, educational, professional, cultural,
recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry,
agriculture and like chambers."
Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it
has capital stock divided into shares; and (2) that it is authorized to distribute dividends and
allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be
properly classified as a stock corporation. As for non-stock corporations, they must have members
and must not distribute any part of their income to said members. 3
In the case at bench, PRA is not a GOCC because it is neither a stock nor a non-stock corporation. It
cannot be considered as a stock corporation because although it has a capital stock divided into no
par value shares as provided in Section 74 of P.D. No. 1084, it is not authorized to distribute
dividends, surplus allotments or profits to stockholders. There is no provision whatsoever in P.D. No.
1084 or in any of the subsequent executive issuances pertaining to PRA, particularly, E.O. No.
525,5 E.O. No. 6546 and EO No. 7987 that authorizes PRA to distribute dividends, surplus allotments
or profits to its stockholders.
PRA cannot be considered a non-stock corporation either because it does not have members. A
non-stock corporation must have members.8 Moreover, it was not organized for any of the purposes
mentioned in Section 88 of the Corporation Code. Specifically, it was created to manage all
government reclamation projects.
Furthermore, there is another reason why the PRA cannot be classified as a GOCC. Section 16,
Article XII of the 1987 Constitution provides as follows:
Section 16. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned or controlled corporations may be created

or established by special charters in the interest of the common good and subject to the test of
economic viability.
The fundamental provision above authorizes Congress to create GOCCs through special charters on
two conditions: 1) the GOCC must be established for the common good; and 2) the GOCC must
meet the test of economic viability. In this case, PRA may have passed the first condition of common
good but failed the second one - economic viability. Undoubtedly, the purpose behind the creation of
PRA was not for economic or commercial activities. Neither was it created to compete in the market
place considering that there were no other competing reclamation companies being operated by the
private sector. As mentioned earlier, PRA was created essentially to perform a public service
considering that it was primarily responsible for a coordinated, economical and efficient reclamation,
administration and operation of lands belonging to the government with the object of maximizing
their utilization and hastening their development consistent with the public interest. Sections 2 and 4
of P.D. No. 1084 reads, as follows:
Section 2. Declaration of policy. It is the declared policy of the State to provide for a coordinated,
economical and efficient reclamation of lands, and the administration and operation of lands
belonging to, managed and/or operated by the government, with the object of maximizing their
utilization and hastening their development consistent with the public interest.
Section 4. Purposes. The Authority is hereby created for the following purposes:
(a) To reclaim land, including foreshore and submerged areas, by dredging, filling or other
means, or to acquire reclaimed land;
(b) To develop, improve, acquire, administer, deal in, subdivide, dispose, lease and sell any
and all kinds of lands, buildings, estates and other forms of real property, owned, managed,
controlled and/or operated by the government.
(c) To provide for, operate or administer such services as may be necessary for the efficient,
economical and beneficial utilization of the above properties.
The twin requirement of common good and economic viability was lengthily discussed in the case of
Manila International Airport Authority v. Court of Appeals,9 the pertinent portion of which reads:
Third, the government-owned or controlled corporations created through special charters are those
that meet the two conditions prescribed in Section 16, Article XII of the Constitution.
The first condition is that the government-owned or controlled corporation must be established for
the common good. The second condition is that the government-owned or controlled corporation
must meet the test of economic viability. Section 16, Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and subject to the test of
economic viability.

The Constitution expressly authorizes the legislature to create "government-owned or controlled

corporations" through special charters only if these entities are required to meet the twin conditions
of common good and economic viability. In other words, Congress has no power to create
government-owned or controlled corporations with special charters unless they are made to comply
with the two conditions of common good and economic viability. The test of economic viability
applies only to government-owned or controlled corporations that perform economic or commercial
activities and need to compete in the market place. Being essentially economic vehicles of the State
for the common good meaning for economic development purposes these government-owned
or controlled corporations with special charters are usually organized as stock corporations just like
ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and performing
governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every modern
State must provide its citizens. These instrumentalities need not be economically viable since the
government may even subsidize their entire operations. These instrumentalities are not the
"government-owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or public
services. However, when the legislature creates through special charters corporations that perform
economic or commercial activities, such entities known as "government-owned or controlled
corporations" must meet the test of economic viability because they compete in the market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines
and similar government-owned or controlled corporations, which derive their incometo meet
operating expenses solely from commercial transactions in competition with the private sector. The
intent of the Constitution is to prevent the creation of government-owned or controlled corporations
that cannot survive on their own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the test of
economic performance. We know what happened in the past. If a government corporation loses,
then it makes its claim upon the taxpayers' money through new equity infusions from the government
and what is always invoked is the common good. That is the reason why this year, out of a budget of
P115 billion for the entire government, about P28 billion of this will go into equity infusions to support
a few government financial institutions. And this is all taxpayers' money which could have been
relocated to agrarian reform, to social services like health and education, to augment the salaries of
grossly underpaid public employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common good,"
this becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable. And so, Madam President, I
reiterate, for the committee's consideration and I am glad that I am joined in this proposal by
Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC
TEST," together with the common good.
1wphi1

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The significant addition,
however, is the phrase "in the interest of the common good and subject to the test of economic
viability." The addition includes the ideas that they must show capacity to function efficiently in
business and that they should not go into activities which the private sector can do better. Moreover,
economic viability is more than financial viability but also includes capability to make profit and
generate benefits not quantifiable in financial terms.
Clearly, the test of economic viability does not apply to government entities vested with corporate
powers and performing essential public services. The State is obligated to render essential public
services regardless of the economic viability of providing such service. The non-economic viability of
rendering such essential public service does not excuse the State from withholding such essential
services from the public.
However, government-owned or controlled corporations with special charters, organized essentially
for economic or commercial objectives, must meet the test of economic viability. These are the
government-owned or controlled corporations that are usually organized under their special charters
as stock corporations, like the Land Bank of the Philippines and the Development Bank of the
Philippines. These are the government-owned or controlled corporations, along with governmentowned or controlled corporations organized under the Corporation Code, that fall under the definition
of "government-owned or controlled corporations" in Section 2(10) of the Administrative Code.
[Emphases supplied]
This Court is convinced that PRA is not a GOCC either under Section 2(3) of the Introductory
Provisions of the Administrative Code or under Section 16, Article XII of the 1987 Constitution. The
facts, the evidence on record and jurisprudence on the issue support the position that PRA was not
organized either as a stock or a non-stock corporation. Neither was it created by Congress to
operate commercially and compete in the private market. Instead, PRA is a government
instrumentality vested with corporate powers and performing an essential public service pursuant to
Section 2(10) of the Introductory Provisions of the Administrative Code. Being an incorporated
government instrumentality, it is exempt from payment of real property tax.
Clearly, respondent has no valid or legal basis in taxing the subject reclaimed lands managed by
PRA. On the other hand, Section 234(a) of the LGC, in relation to its Section 133(o), exempts PRA
from paying realty taxes and protects it from the taxing powers of local government units.
Sections 234(a) and 133(o) of the LGC provide, as follows:

SEC. 234. Exemptions from Real Property Tax The following are exempted from payment of the
real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person.
xxxx
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. [Emphasis supplied]
It is clear from Section 234 that real property owned by the Republic of the Philippines (the Republic)
is exempt from real property tax unless the beneficial use thereof has been granted to a taxable
person. In this case, there is no proof that PRA granted the beneficial use of the subject reclaimed
lands to a taxable entity. There is no showing on record either that PRA leased the subject reclaimed
properties to a private taxable entity.
This exemption should be read in relation to Section 133(o) of the same Code, which prohibits local
governments from imposing "taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities x x x." The Administrative Code allows real property owned by the
Republic to be titled in the name of agencies or instrumentalities of the national government. Such
real properties remain owned by the Republic and continue to be exempt from real estate tax.
Indeed, the Republic grants the beneficial use of its real property to an agency or instrumentality of
the national government. This happens when the title of the real property is transferred to an agency
or instrumentality even as the Republic remains the owner of the real property. Such arrangement
does not result in the loss of the tax exemption, unless "the beneficial use thereof has been granted,
for consideration or otherwise, to a taxable person." 10
The rationale behind Section 133(o) has also been explained in the case of the Manila International
Airport Authority,11 to wit:
Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While the
1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."

When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed and
there must be clear language in the law imposing the tax. Any doubt whether a person, article or
activity is taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government instrumentality
from local taxation, such exemption is construed liberally in favor of the national government
instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to
reduce the amount of money that has to be handled by government in the course of its operations.
For these reasons, provisions granting exemptions to government agencies may be construed
liberally, in favor of non tax-liability of such agencies.
There is, moreover, no point in national and local governments taxing each other, unless a sound
and compelling policy requires such transfer of public funds from one government pocket to another.
There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is when
the legislature clearly intended to tax government instrumentalities for the delivery of essential public
services for sound and compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any doubt whether
such power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the
Code, local governments cannot tax national government instrumentalities. As this Court held in
Basco v. Philippine Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the powers
vested in the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on
the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision
can regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activities or enterprise using the power to tax as "a tool
for regulation." (U.S. v. Sanchez, 340 US 42)
The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it. [Emphases supplied]
The Court agrees with PRA that the subject reclaimed lands are still part of the public domain,
owned by the State and, therefore, exempt from payment of real estate taxes.
Section 2, Article XII of the 1987 Constitution reads in part, as follows:
Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils,
all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and utilization of natural resources
shall be under the full control and supervision of the State. The State may directly undertake such
activities, or it may enter into co-production, joint venture, or production-sharing agreements with
Filipino citizens, or corporations or associations at least 60 per centum of whose capital is owned by
such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for
not more than twenty-five years, and under such terms and conditions as may provided by law. In
cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the
development of waterpower, beneficial use may be the measure and limit of the grant.
Similarly, Article 420 of the Civil Code enumerates properties belonging to the State:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. [Emphases supplied]
Here, the subject lands are reclaimed lands, specifically portions of the foreshore and offshore areas
of Manila Bay. As such, these lands remain public lands and form part of the public domain. In the
case of Chavez v. Public Estates Authority and AMARI Coastal Development Corporation, 12 the Court
held that foreshore and submerged areas irrefutably belonged to the public domain and were
inalienable unless reclaimed, classified as alienable lands open to disposition and further declared
no longer needed for public service. The fact that alienable lands of the public domain were
transferred to the PEA (now PRA) and issued land patents or certificates of title in PEAs name did
not automatically make such lands private. This Court also held therein that reclaimed lands retained
their inherent potential as areas for public use or public service.

As the central implementing agency tasked to undertake reclamation projects nationwide, with
authority to sell reclaimed lands, PEA took the place of DENR as the government agency charged
with leasing or selling reclaimed lands of the public domain. The reclaimed lands being leased or
sold by PEA are not private lands, in the same manner that DENR, when it disposes of other
alienable lands, does not dispose of private lands but alienable lands of the public domain. Only
when qualified private parties acquire these lands will the lands become private lands. In the hands
of the government agency tasked and authorized to dispose of alienable of disposable lands of the
public domain, these lands are still public, not private lands.
Furthermore, PEA's charter expressly states that PEA "shall hold lands of the public domain" as well
as "any and all kinds of lands." PEA can hold both lands of the public domain and private lands.
Thus, the mere fact that alienable lands of the public domain like the Freedom Islands are
transferred to PEA and issued land patents or certificates of title in PEA's name does not
automatically make such lands private.13
Likewise, it is worthy to mention Section 14, Chapter 4, Title I, Book III of the Administrative Code of
1987, thus:
SEC 14. Power to Reserve Lands of the Public and Private Dominion of the Government.(1)The President shall have the power to reserve for settlement or public use, and for specific public
purposes, any of the lands of the public domain, the use of which is not otherwise directed by law.
The reserved land shall thereafter remain subject to the specific public purpose indicated until
otherwise provided by law or proclamation.
Reclaimed lands such as the subject lands in issue are reserved lands for public use. They are
properties of public dominion. The ownership of such lands remains with the State unless they are
withdrawn by law or presidential proclamation from public use.
Under Section 2, Article XII of the 1987 Constitution, the foreshore and submerged areas of Manila
Bay are part of the "lands of the public domain, waters x x x and other natural resources" and
consequently "owned by the State." As such, foreshore and submerged areas "shall not be
alienated," unless they are classified as "agricultural lands" of the public domain. The mere
reclamation of these areas by PEA does not convert these inalienable natural resources of the State
into alienable or disposable lands of the public domain. There must be a law or presidential
proclamation officially classifying these reclaimed lands as alienable or disposable and open to
disposition or concession. Moreover, these reclaimed lands cannot be classified as alienable or
disposable if the law has reserved them for some public or quasi-public use.
As the Court has repeatedly ruled, properties of public dominion are not subject to execution or
foreclosure sale.14 Thus, the assessment, levy and foreclosure made on the subject reclaimed lands
by respondent, as well as the issuances of certificates of title in favor of respondent, are without
basis.
WHEREFORE, the petition is GRANTED. The January 8, 2010 Order of the Regional Trial Court,
Branch 195, Paraaque City, is REVERSED and SET ASIDE. All reclaimed properties owned by the

Philippine Reclamation Authority are hereby declared EXEMPT from real estate taxes. All real estate
tax assessments, including the final notices of real estate tax delinquencies, issued by the City of
Paraaque on the subject reclaimed properties; the assailed auction sale, dated April 7, 2003; and
the Certificates of Sale subsequently issued by the Paraaque City Treasurer in favor of the City of
Paraaque, are all declared VOID.
SO ORDERED.
JOSE CATRLA MENDOZA

JOSE A. BERNAS, CECILE H. CHENG, VICTOR AFRICA, JESUS B. MARAMARA, JOSE T. FRONDOSO,
IGNACIO T. MACROHON, JR., AND PAULINO T. LIM, ACTING IN THEIR CAPACITY AS INDIVIDUAL
DIRECTORS OF MAKATI SPORTS CLUB, INC., AND ON BEHALF OF THE BOARD OF DIRECTORS OF
MAKATI SPORTS CLUB, Petitioners, v. JOVENCIO F. CINCO, VICENTE R. AYLLON, RICARDO G.
LIBREA, SAMUEL L. ESGUERRA, ROLANDO P. DELA CUESTA, RUBEN L. TORRES, ALEX Y. PARDO,
MA. CRISTINA SIM, ROGER T. AGUILING, JOSE B. QUIMSON, CELESTINO L. ANG, ELISEO V.
VILLAMOR, FELIPE L. GOZON, CLAUDIO B. ALTURA, ROGELIO G. VILLAROSA, MANUEL R.
SANTIAGO, BENJAMIN A. CARANDANG, REGINA DE LEON-HERLIHY, CARLOS Y. RAMOS, JR.,
ALEJANDRO Z. BARIN, EFRENILO M. CAYANGA AND JOHN DOES, Respondents.
[G.R. NOS. 163368-69]
JOVENCIO F. CINCO, RICARDO G. LIBREA AND ALEX Y. PARDO, Petitioners, v. JOSE A. BERNAS,
CECILE H. CHENG AND IGNACIO A. MACROHON, Respondents.
DECISION
PEREZ, J.:
Before us are two consolidated Petitions for Review on Certiorari1 assailing the 28 April 2003 Decision and
the 27 April 2004 Resolution of the Court of Appeals in CA-G.R. SP No. 62683, 2 which declared the 17
December 1997 Special Stockholders Meeting of the Makati Sports Club invalid for having been improperly
called but affirmed the actions taken during the Annual Stockholders Meeting held on 20 April 1998, 19 April
1999 and 17 April 2000. The dispositive portion of the assailed decision reads:
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WHEREFORE, foregoing considered, the instant petition for review is hereby GRANTED. The appealed
Decision dated December 12, 2000 of the SEC en banc is SET ASIDE and the Decision dated April 20, 1998
of the Hearing Officer is REINSTATED and AMENDED as follows:
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1.

The supposed Special Stockholders Meeting of December 17, 1997 was prematurely or
invalidly called by the [Cinco Group]. It therefore failed to produce any legal effects and
did not effectively remove [the Bernas Group] as directors of the Makati Sports Club,
Inc.;
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2.

The expulsion of petitioner Jose A. Bernas as well as the public auction of his share[s] is
hereby declared void and without legal effect;
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3.

The ratification of the removal of [the Bernas Group] as directors, the expulsion of
petitioner Bernas and the sale of his share by the defendants and by the stockholders held
in their Regular Stockholders Meeting held in April of 1998, 1999 and 2000, is void and
produces no effects as they were not the proper party to cause the ratification;
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4.

All other actions of the [Cinco Group] and stockholders taken during the Regular
Stockholders Meetings held in April 1998, 1999 and 2000, including the election of the
[Cinco Group] as directors after the expiration of the term of office of petitioners as
directors, are hereby declared valid;
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5.

No awards for damages and attorneys fees.3

The Facts
Makati Sports Club (MSC) is a domestic corporation duly organized and existing under Philippine laws for the
primary purpose of establishing, maintaining, and providing social, cultural, recreational and athletic
activities among its members.
Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H. Cheng, Victor Africa, Jesus
Maramara, Jose T. Frondoso, Ignacio T. Macrohon and Paulino T. Lim (Bernas Group) were among the
Members of the Board of Directors and Officers of the corporation whose terms were to expire either in 1998
or 1999.
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea and Alex Y. Pardo (Cinco Group) are the
members and stockholders of the corporation who were elected Members of the Board of Directors and
Officers of the club during the 17 December 1997 Special Stockholders Meeting.
The antecedent events of the meeting and its results, follow:

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Alarmed with the rumored anomalies in handling the corporate funds, the MSC Oversight Committee
(MSCOC), composed of the past presidents of the club, demanded from the Bernas Group, who were then
incumbent officers of the corporation, to resign from their respective positions to pave the way for the
election of new set of officers.4 Resonating this clamor were the stockholders of the corporation
representing at least 100 shares who sought the assistance of the MSCOC to call for a special stockholders
meeting for the purpose of removing the sitting officers and electing new ones. 5Pursuant to such request,
the MSCOC called a Special Stockholders Meeting and sent out notices 6 to all stockholders and members
stating therein the time, place and purpose of the meeting. For failure of the Bernas Group to secure an
injunction before the Securities Commission (SEC), the meeting proceeded wherein Jose A. Bernas, Cecile H.
Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T. Macrohon, Jr. and Paulino T. Lim were
removed from office and, in their place and stead, Jovencio F. Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger
T. Aguiling, Rogelio G. Villarosa, Armando David, Norberto Maronilla, Regina de Leon-Herlihy and Claudio B.
Altura, were elected.7
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Aggrieved by the turn of events, the Bernas Group initiated an action before the Securities Investigation and
Clearing Department (SICD) of the SEC docketed as SEC Case No. 5840 seeking for the nullification of the
17 December 1997 Special Stockholders Meeting on the ground that it was improperly called. Citing Section
28 of the Corporation Code, the Bernas Group argued that the authority to call a meeting lies with the
Corporate Secretary and not with the MSCOC which functions merely as an oversight body and is not vested
with the power to call corporate meetings. For being called by the persons not authorized to do so, the
Bernas Group urged the SEC to declare the 17 December 1997 Special Stockholders Meeting, including the
removal of the sitting officers and the election of new ones, be nullified.
For their part, the Cinco Group insisted that the 17 December 1997 Special Stockholders Meeting is
sanctioned by the Corporation Code and the MSC by-laws. In justifying the call effected by the MSCOC, they
reasoned that Section 258 of the MSC by-laws merely authorized the Corporate Secretary to issue notices of
meetings and nowhere does it state that such authority solely belongs to him. It was further asseverated by
the Cinco Group that it would be useless to course the request to call a meeting thru the Corporate
Secretary because he repeatedly refused to call a special stockholders meeting despite demands and even
filed a suit to restrain the holding of a special meeting. 9
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Meanwhile, the newly elected directors initiated an investigation on the alleged anomalies in administering
the corporate affairs and after finding Bernas guilty of irregularities, 10 the Board resolved to expel him from
the club by selling his shares at public auction.11 After the notice12requirement was complied with, Bernas
shares was accordingly sold for P902,000.00 to the highest bidder.

Prior to the resolution of SEC Case No. 5840, an Annual Stockholders Meeting was held on 20 April 1998
pursuant to Section 8 of the MSC bylaws.13 During the said meeting, which was attended by 1,017
stockholders representing 2/3 of the outstanding shares, the majority resolved to approve, confirm and
ratify, among others, the calling and holding of 17 December 1997 Special Stockholders Meeting, the acts
and resolutions adopted therein including the removal of Bernas Group from the Board and the election of
their replacements.14
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Due to the filing of several petitions for and against the removal of the Bernas Group from the Board
pending before the SEC resulting in the piling up of legal controversies involving MSC, the SEC En Banc, in
its Decision15 dated 30 March 1999, resolved to supervise the holding of the 1999 Annual Stockholders
Meeting. During the said meeting, the stockholders once again approved, ratified and confirmed the holding
of the 17 December 1997 Special Stockholders Meeting.
The conduct of the 17 December 1997 Special Stockholders Meeting was likewise ratified by the
stockholders during the 2000 Annual Stockholders Meeting which was held on 17 April 2000. 16
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On 9 May 2000, the SICD rendered a Decision17 in SEC Case No. 12-97-5840 finding, among others, that the
17 December 1997 Special Stockholders Meeting and the Annual Stockholders Meeting conducted on 20
April 1998 and 19 April 1999 are invalid. The SICD likewise nullified the expulsion of Bernas from the
corporation and the sale of his share at the public auction. The dispositive portion of the said decision
reads:
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WHEREFORE, in view of the foregoing considerations this Office, through the undersigned Hearing Officer,
hereby declares as follows:
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(1) The supposed Special Stockholders Meeting of December 17, 1997 was prematurely or invalidly called
by the [the Cinco Group]. It therefore failed to produce any legal effects and did not effectively remove [the
Bernas Group] as directors of the Makati Sports Club, Inc.
(2) The April 20, 1998 meeting was not attended by a sufficient number of valid proxies. No quorum could
have been present at the said meeting. No corporate business could have been validly completed and/or
transacted during the said meeting. Further, it was not called by the validly elected Corporate Secretary
Victor Africa nor presided over by the validly elected president Jose A. Bernas. Even if the April 20, 1998
meeting was valid, it could not ratify the December 17, 1997 meeting because being a void meeting, the
December 17, 1997 meeting may not be ratified.
(3) The April 1998 meeting was null and void and therefore produced no legal effect.
(4) The April 1999 meeting has not been raised as a defense in the Answer nor assailed in a supplemental
complaint. However, it has been raised by [the Cinco Group] in a manifestation dated April 21, 1999 and in
their position paper dated April 8, 2000. Its legal effects must be the subject of this Decision in order to put
an end to the controversy at hand. In the first place, by [the Cinco Groups] own admission, the alleged
attendance at the April 1999 meeting amounted to less than 2/3 of the stockholders entitled to vote, the
minimum number required to effect a removal. No removal or ratification of a removal may be effected by
less than 2/3 vote of the stockholders. Further, it cannot ratify the December 1997 meeting for failure to
adhere to the requirement of the By-laws on notice as explained in paragraph (2) above, even if it was
accompanied by valid proxies, which it was not.
(5) The [the Cinco Group], their agents, representatives and all persons acting for and conspiring on their
behalf, are hereby permanently enjoined from carrying into effect the resolutions and actions adopted during
the 17 December 1997 and April 20, 1998 meetings and of the Board of Directors and/or other stockholders
meetings resulting therefrom, and from performing acts of control and management of the club.
(6) The expulsion of complainant Jose A. Bernas as well as the public auction of his share is hereby declared
void and without legal effect, as prayed for. While it is true that [the Cinco Group] were not restrained from
acting as directors during the pendency of this case, their tenure as directors prior to this Decision is in the
nature of de facto directors of a de facto Board. Only the ordinary acts of administration which [the Cinco
Group] carried out de facto in good faith are valid. Other acts, such as political acts and the expulsion or
other disciplinary acts imposed on the [the Bernas Group] may not be appropriately taken by de facto
officers because the legality of their tenure as directors is not complete and subject to the outcome of this
case.

(7) No awards for damages and attorneys fees.18

On appeal, the SEC En Banc, in its 12 December 2000 Decision19 reversed the findings of the SICD and
validated the holding of the 17 December 1997 Special Stockholders Meeting as well as the Annual
Stockholders Meeting held on 20 April 1998 and 19 April 1999.
On 28 April 2003, the Court of Appeals rendered a Decision 20 declaring the 17 December 1997 Special
Stockholders Meeting invalid for being improperly called but affirmed the actions taken during the Annual
Stockholders Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000.
In a Resolution21 dated 27 April 2004, the appellate court refused to reconsider its earlier decision.
Aggrieved by the disquisition of the Court of Appeals, both parties elevated the case before this Court by
filing their respective Petitions for Review on Certiorari. While the Bernas Group agrees with the disquisition
of the appellate court that the Special Stockholders Meeting is invalid for being called by the persons not
authorized to do so, they urge the Court to likewise invalidate the holding of the subsequent Annual
Stockholders Meetings invoking the application of the holdover principle. The Cinco Group, for its part,
insists that the holding of 17 December 1997 Special Stockholders Meeting is valid and binding underscoring
the overwhelming ratification made by the stockholders during the subsequent annual stockholders
meetings and the previous refusal of the Corporate Secretary to call a special stockholders meeting despite
demand. For the resolution of the Court are the following issues:
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The Issues
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I.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE 17 DECEMBER 1997
SPECIAL STOCKHOLDERS MEETING IS INVALID; AND
II.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO NULLIFY THE HOLDING OF
THE ANNUAL STOCKHOLDERS MEETING ON 20 APRIL 1998, 19 APRIL 1999 AND 17 APRIL 2000.
The Courts Ruling
The Corporation Code laid down the rules on the removal of the Directors of the corporation by
providing, inter alia, the persons authorized to call the meeting and the number of votes required for the
purpose of removal, thus:
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Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may be removed from
office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding
capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to propose such removal at the meeting. A
special meeting of the stockholders or members of a corporation for the purpose of removal of
directors or trustees, or any of them, must be called by the secretary on order of the president or
on the written demand of the stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand
or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed
directly to the stockholders or members by any stockholder or member of the corporation signing the
demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal,
must be given by publication or by written notice prescribed in this Code. Removal may be with or without
cause: Provided, That removal without cause may not be used to deprive minority stockholders or members
of the right of representation to which they may be entitled under Section 24 of this Code. (Emphasis
supplied)
Corollarily, the pertinent provisions of MSC by-laws which govern the manner of calling and sending of
notices of the annual stockholders meeting and the special stockholders meeting provide:
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SEC. 8. Annual Meetings. The annual meeting of stockholders shall be held at the Clubhouse on the third
Monday of April of every year unless such day be a holiday in which case the annual meeting shall be held
on the next succeeding business day. At such meeting, the President shall render a report to the
stockholders of the clubs.
xxxx
SEC. 10. Special Meetings. Special meetings of stockholders shall be held at the Clubhouse when called by
the President or by the Board of Directors or upon written request of the stockholders representing not less
than one hundred (100) shares. Only matters specified in the notice and call will be taken up at special
meetings.
xxxx
SEC. 25. Secretary.
The Secretary shall keep the stock and transfer book and the corporate seal, which
he shall stamp on all documents requiring such seal, fill and sign together with the President, all the
certificates of stocks issued, give or caused to be given all notices required by law of these By-laws as well
as notices of all meeting of the Board and of the stockholders; shall certify as to quorum at meetings; shall
approve and sign all correspondence pertaining to the Office of the Secretary; shall keep the minutes of all
meetings of the stockholders, the Board of Directors and of all committees in a book or books kept for that
purpose; and shall be acting President in the absence of the President and Vice-:President. The Secretary
must be a citizen and a resident of the Philippines. The Secretary shall keep a record of all the addresses
and telephone numbers of all stockholders. 22
Textually, only the President and the Board of Directors are authorized by the by-laws to call a special
meeting. In cases where the person authorized to call a meeting refuses, fails or neglects to call a meeting,
then the stockholders representing at least 100 shares, upon written request, may file a petition to call a
special stockholders meeting.
In the instant case, there is no dispute that the 17 December 1997 Special Stockholders Meeting was called
neither by the President nor by the Board of Directors but by the MSCOC. While the MSCOC, as its name
suggests, is created for the purpose of overseeing the affairs of the corporation, nowhere in the by-laws
does it state that it is authorized to exercise corporate powers, such as the power to call a special meeting,
solely vested by law and the MSC by-laws on the President or the Board of Directors.
The board of directors is the directing and controlling body of the corporation. It is a creation of the
stockholders and derives its power to control and direct the affairs of the corporation from them. The board
of directors, in drawing to itself the power of the corporation, occupies a position of trusteeship in relation to
the stockholders, in the sense that the board should exercise not only care and diligence, but utmost good
faith in the management of the corporate affairs.23
re darclaw

The underlying policy of the Corporation Code is that the business and affairs of a corporation must be
governed by a board of directors whose members have stood for election, and who have actually been
elected by the stockholders, on an annual basis. Only in that way can the continued accountability to
shareholders, and the legitimacy of their decisions that bind the corporations stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of power by the directors or officers
over the properties that they do not own.24
redarclaw

Even the Corporation Code is categorical in stating that a corporation exercises its powers through its board
of directors and/or its duly authorized officers and agents, except in instances where the Corporation Code
requires stockholders approval for certain specific acts:
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SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers
of all the 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 and trustees x x x.
A corporations board of directors is understood to be that body which (1) exercises all powers provided for
under the Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all the
property of the corporation. Its members have been characterized as trustees or directors clothed with
fiduciary character.25
redarclaw

It is ineluctably clear that the fiduciary relation is between the stockholders and the board of directors and
who are vested with the power to manage the affairs of the corporation. The ordinary trust relationship of
directors of a corporation and stockholders is not a matter of statutory or technical law. 26 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.27 Equity recognizes that stockholders are the proprietors of the
corporate interests and are ultimately the only beneficiaries thereof.28 Should the board fail to perform its
fiduciary duty to safeguard the interest of the stockholders or commit acts prejudicial to their interest, the
law and the by-laws provide mechanisms to remove and replace the erring director.29
re darclaw

Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in the MSC by-laws can
it be gathered that the Oversight Committee is authorized to step in wherever there is breach of fiduciary
duty and call a special meeting for the purpose of removing the existing officers and electing their
replacements even if such call was made upon the request of shareholders. Needless to say, the MSCOC is
neither empowered by law nor the MSC by-laws to call a meeting and the subsequent ratification made by
the stockholders did not cure the substantive infirmity, the defect having set in at the time the void act was
done. The defect goes into the very authority of the persons who made the call for the meeting. It is apt to
recall that illegal acts of a corporation which contemplate the doing of an act which is contrary to law, morals
or public order, or contravenes some rules of public policy or public duty, are, like similar transactions
between individuals, void.30 They cannot serve as basis for a court action, nor acquire validity by
performance, ratification or estoppel.31 The same principle can apply in the present case. The void election
of 17 December 1997 cannot be ratified by the subsequent Annual Stockholders Meeting.
A distinction should be made between corporate acts or contracts which are illegal and those which are
merely ultra vires. The former contemplates the doing of an act which are contrary to law, morals or public
policy or public duty, and are, like similar transactions between individuals, void. They cannot serve as basis
of a court action nor acquire validity by performance, ratification or estoppel. Mere ultra vires acts, on the
other hand, or those which are not illegal or 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.32 The 17 December 1997 Meeting belongs to the category of the latter, that is, it is void ab
initio and cannot be validated.
Consequently, such Special Stockholders Meeting called by the Oversight Committee cannot have any legal
effect. The removal of the Bernas Group, as well as the election of the Cinco Group, effected by the
assembly in that improperly called meeting is void, and since the Cinco Group has no legal right to sit in the
board, their subsequent acts of expelling Bernas from the club and the selling of his shares at the public
auction, are likewise invalid.
The Cinco Group cannot invoke the application of de facto officership doctrine to justify the actions taken
after the invalid election since the operation of the principle is limited to third persons who were originally
not part of the corporation but became such by reason of voting of government- sequestered shares. 33
In Cojuangco v. Roxas,34 the Court deemed the directors who were elected through the voting of
government of sequestered shares who assumed office in good faith as de facto officers, viz:
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In the light of the foregoing discussion, the Court finds and so holds that the PCGG has no right to vote
the sequestered shares of petitioners including the sequestered corporate shares. Only their
owners, duly authorized representatives or proxies may vote the said shares. Consequently, the election of
private respondents Adolfo Azcuna, Edison Coseteng and Patricio Pineda as members of the board of
directors of SMC for 1990-1991 should be set aside.
However, petitioners cannot be declared as duly elected members of the board of directors thereby. An
election for the purpose should be held where the questioned shares may be voted by their owners and/or
their proxies. Such election may be held at the next shareholders meeting in April 1991 or at such date as
may be set under the by-laws of SMC.
Private respondents in both cases are hereby declared to be de facto officers who in good faith
assumed their duties and responsibilities as duly elected members of the board of directors of the
SMC. They are thereby legally entitled to emoluments of the office including salary, fees and other
compensation attached to the office until they vacate the same. (Emphasis supplied)
Apparently, the assumption of office of the Cinco Group did not bear parallelism with the factual milieu
in Cojuangco and as such they cannot be considered as de facto officers and thus, they are without colorable
authority to authorize the removal of Bernas and the sale of his shares at the public auction. They cannot

bind the corporation to third persons who acquired the shares of Bernas and such third persons cannot be
deemed as buyer in good faith.35
re darclaw

The case would have been different if the petitioning stockholders went directly to the SEC and sought its
assistance to call a special stockholders meeting citing the previous refusal of the Corporate Secretary to
call a meeting. Where there is an officer authorized to call a meeting and that officer refuses, fails, or
neglects to call a meeting, the SEC can assume jurisdiction and issue an order to the petitioning stockholder
to call a meeting pursuant to its regulatory and administrative powers to implement the Corporation Code. 36
This is clearly provided for by Section 50 of the Corporation Code which we quote:
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Sec. 50. Regular and special meetings of stockholders or members. x x x

xxxx
Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange
Commission, upon petition of a stockholder or member, and on a showing of good cause therefore, may
issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by
giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall
preside thereat until at least majority of the stockholders or members present have chosen one of their
member[s] as presiding officer.
As early as Ponce v. Encarnacion, etc. and Gapol,37 the Court of First Instance (now the SEC)38 is empowered
to call a meeting upon petition of the stockholder or member and upon showing of good cause, thus:
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On the showing of good cause therefore, the court may authorize a stockholder to call a meeting and to
preside thereat until the majority stockholders representing a majority of the stock present and permitted to
be voted shall have chosen one among them to preside it. And this showing of good cause therefor exists
when the court is apprised of the fact that the by-laws of the corporation require the calling of a general
meeting of the stockholders to elect the board of directors but the call for such meeting has not been done. 39
The same jurisprudential rule resonates in Philippine National Construction Corporation v. Pabion,40where the
Court validated the order of the SEC to compel the corporation to conduct a stockholders meeting in the
exercise of its regulatory and administrative powers to implement the Corporation Code:
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SEC's assumption of jurisdiction over this case is proper, as the controversy involves the election of PNCC's
directors. Petitioner does not really contradict the nature of the question presented and agrees that there is
an intra-corporate question involved.
xxxx
Prescinding from the above premises, it necessarily follows that SEC can compel PNCC to hold a
stockholders' meeting for the purpose of electing members of the latter's board of directors.
xxxx
As respondents point out, the SEC's action is also justified by its regulatory and administrative powers to
implement the Corporation Code, specifically to compel the PNCC to hold a stockholders' meeting for
election purposes.41
Given the broad administrative and regulatory powers of the SEC outlined under Section 50 of the
Corporation Code and Section 6 of Presidential Decree (PD) No. 902-A, the Cinco Group cannot claim that if
was left without recourse after the Corporate Secretary previously refused to heed its demand to call a
special stockholders meeting. If it be true that the Corporate Secretary refused to call a meeting despite
fervent demand from the MSCOC, the remedy of the stockholders would have been to file a petition to the
SEC to direct him to call a meeting by giving proper notice required under the Code. To rule otherwise
would open the floodgates to abuse where any stockholder, who consider himself aggrieved by certain
corporate actions, could call a special stockholders meeting for the purpose of removing the sitting officers
in direct violation of the rules pertaining to the call of meeting laid down in the by-laws.
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.42 The by-laws of a corporation are its own private laws which

substantially have the same effect as the laws of the corporation. They are in effect written into the
charter. In this sense they become part of the fundamental law of the corporation with which the
corporation and its directors and officers must comply.43 The general rule is that a corporation, through its
board of directors, should act in the manner and within the formalities, if any, prescribed in its charter or by
the general law. Thus, directors must act as a body in a meeting called pursuant to the law or the
corporations by-laws, otherwise, any action taken therein may be questioned by the objecting director or
shareholder.44
redarclaw

Certainly, the rules set in the by-laws are mandatory for every member of the corporation to respect. They
are the fundamental law of the corporation with which the corporation and its officers and members must
comply. It is on this score that we cannot upon the other hand sustain the Bernas Groups stance that the
subsequent annual stockholders meetings were invalid.
First, the 20 April 1998 Annual Stockholders Meeting was valid because it was sanctioned by Section 8 45 of
the MSC bylaws. Unlike in Special Stockholders Meeting46 wherein the bylaws mandated that such meeting
shall be called by specific persons only, no such specific requirement can be obtained under Section 8.
Second, the 19 April 1999 Annual Stockholders Meeting is likewise valid because in addition to the fact that
it was conducted in accordance to Section 8 of the MSC bylaws, such meeting was supervised by the SEC in
the exercise of its regulatory and administrative powers to implement the Corporation Code. 47
re darclaw

Needless to say, the conduct of SEC supervised Annual Stockholders Meeting gave rise to the presumption
that the corporate officers who won the election were duly elected to their positions and therefore can be
rightfully considered as de jure officers. As de jure officials, they can lawfully exercise functions and legally
perform such acts that are within the scope of the business of the corporation except ratification of actions
that are deemed void from the beginning.
Considering that a new set of officers were already duly elected in 1998 and 1999 Annual Stockholders
Meetings, the Bernas Group cannot be permitted to use the holdover principle as a shield to perpetuate in
office. Members of the group had no right to continue as directors of the corporation unless reelected by the
stockholders in a meeting called for that purpose every year. 48 They had no right to hold-over brought
about by the failure to perform the duty incumbent upon them. 49 If they were sure to be reelected, why did
they fail, neglect, or refuse to call the meeting to elect the members of the board? 50
redarclaw

Moreover, it is fundamental rule that factual findings of quasi-judicial agencies like the SEC, if supported by
substantial evidence, are generally accorded not only great respect but even finality, and are binding upon
this Court unless it was shown that the quasi-judicial agencies had arbitrarily disregarded evidence before it
had misapprehended evidence to such an extent as to compel a contrary conclusion if such evidence had
been properly appreciated.51 It is not the function of this Court to analyze or weigh all over again the
evidence and credibility of witnesses presented before the lower court, tribunal, or office, as we are not trier
of facts.52 Our jurisdiction is limited to reviewing and revising errors of law imputed to the lower court, the
latters finding of facts being conclusive and not reviewable by this Court. 53 However, when it can be shown
that administrative bodies grossly misappreciated evidence of such nature as to compel a contrary
conclusion, the Court will not hesitate to reverse its factual findings. 54 In the case at bar, the incongruent
findings of the SEC on the one hand, and the Court of Appeals on the other, constrained the Court to review
the records to ascertain which body correctly appreciated the facts vis--vis the standing statutory and
jurisprudential principles.
After finding that the ruling of the appellate court was in accordance with the existing laws and
jurisprudence as exhaustively discussed above, we hereby quote with approval its disquisition:

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(1) The supposed Special Stockholders Meeting of 17 December 1997 was prematurely or invalidly called by
the [Cinco Group]. It therefore failed to produce any legal effects and did not effectively remove [the
Bernas Group] as directors of the Makati Sports Club, Inc.;
(2) The expulsion of [Bernas] as well as the public auction of his shares is hereby declared void and without
legal effect;
(3) The ratification of the removal of [the Bernas Group] as directors, the expulsion of Bernas and the sale
of his share by the [Cinco Group] and by the stockholders held in their Regular Stockholders Meeting held in
April of 1998, 1999 and 2000, is void and produces no effects as they were not the proper party to cause
the ratification;

(4) All other actions of the [Cinco Group] and stockholders taken during the Regular Stockholders Meetings
held in April 1998, 1999 and 2000, including the election of the [Cinco Group] as directors after the
expiration of the term of office of [Bernas Group] as directors, are hereby declared valid. 55
In fine, we hold that 17 December 1997 Special Stockholders Meeting is null and void and produces no
effect; the resolution expelling the Bernas Group from the corporation and authorizing the sale of Bernas
shares at the public auction is likewise null and void. The subsequent Annual Stockholders Meeting held on
20 April 1998, 19 April 1999 and 17 April 2000 are valid and binding except the ratification of the removal of
the Bernas Group and the sale of Bernas shares at the public auction effected by the body during the said
meetings. The expulsion of the Bernas Group and the subsequent auction of Bernas shares are void from
the very beginning and therefore the ratifications effected during the subsequent meetings cannot be
sustained. A void act cannot be the subject of ratification.56
redarclaw

WHEREFORE, premises considered, the petitions of Jose A. Bernas, Cecile H. Cheng, Victor Africa, Jesus B.
Maramara, Jose T. Frondoso, Ignacio A. Macrohon and Paulino T. Lim in G.R. Nos. 163356-57 and of Jovencio
Cinco, Ricardo Librea and Alex Y. Pardo in G.R. Nos. 163368-69 are hereby DENIED. The assailed Decision
dated 28 April 2003 and Resolution dated 27 April 2004 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.

cralawla wlibrary

SOURCE: DONNINA C. HALLEY VS. PRINTWELL, INC. (G.R. No. 157549, 30 MAY 2011,
BERSAMIN, J)SUBJECTS: TRUST FUND DOCTRINE, JUDGE COPYING MEMORANDUM OF
PARTY. (BRIEF TITLE: HALLEY VS. PRINTWELL).
The trust fund doctrineenunciates a
xxx rule that the property of a corporation is a trust fund for the payment of creditors, but such
property can be called a trust fund only by way of analogy or metaphor. As between the
corporation itself and its creditors it is a simple debtor, and as between its creditors and
stockholders its assets are in equity a fund for the payment of its debts.[1][32]
The trust fund doctrine, first enunciated in the American case of Wood v. Dummer,[2][33]was
adopted in our jurisdiction in Philippine Trust Co. v. Rivera,[3][34]where this Court declared that:
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets
for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802) xxx[4][35]
We clarify that the trust fund doctrine is not limited to reaching the stockholders unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only
the capital stock, but also other property and assets generally regarded in equity as a trust fund
for the payment of corporate debts.[5][36]All assets and property belonging to the corporation held
in trust for the benefit of creditors that were distributed or in the possession of the stockholders,
regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of
its claim.

NATIONAL
TELECOMMUNICATIONS
COMMISSION, petitioner,
vs. HONORABLE COURT OF APPEALS and PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY, respondents.
DECISION
PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court
seeking to modify the October 30, 1996 Decision[1] and the January 27, 1997 Resolution[2] of the
Court of Appeals[3] in CA-G.R. SP No. 34063.
The antecedent facts that matter can be culled as follows:
Sometime in 1988, the National Telecommunications Commission (NTC) served on the
Philippine Long Distance Telephone Company (PLDT) the following assessment notices and
demands for payment:

1. the amount of P7,495,161.00 as supervision and regulation fee under Section 40 (e)
of the PSA for the said year, 1988, computed at P0.50 per P100.00 of the Protestants
(PLDT) outstanding capital stock as at December 31, 1987 which then consisted of
Serial Preferred Stock amounting to P1,277,934,390.00 (Billion) and Common Stock
of P221,097,785 (Million) or a total of P1,499,032,175.00 (Billion).
2. the amount of P9.0 Million as permit fee under Section 40 (f) of the PSA for the
approval of the protestants increase of its authorized capital stock from P2.7 Billion to
P4.5 Billion; and
3. the amounts of P12,261,600.00 and P33,472,030.00 as permit fees under Section 40
(g) of the PSA in connection with the Commissions decisions in NTC Cases Nos. 8613 and 87-008 respectively, approving the Protestants equity participation in the Fiber
Optic Interpacific Cable systems and X-5 Service Improvement and Expansion
Program.[4]
In its two letter-protests[5] dated February 23, 1988 and July 14, 1988, and position
papers[6] dated November 8, 1990 and March 12, 1991, respectively, the PLDT challenged the
aforesaid assessments, theorizing inter alia that:

(a) The assessments were being made to raise revenues and not as mere
reimbursements for ctual regulatory expenses in violation of the doctrine in PLDT vs.
PSC, 66 SCRA 341 [1975];
(b) The assessment under Section 40 (e) should only have been on the basis of the par
values of private respondents outstanding capital stock;
(c) Petitioner has no authority to compel private respondents payment of the assessed
fees under Section 40 (f) for the increase of its authorized capital stock since
petitioner did not render any supervisory or regulatory activity and incurred no
expenses in relation thereto.
x x x[7]
On September 29, 1993, the NTC rendered a Decision[8] in NTC Case No. 90-223, denying the
protest of PLDT and disposing thus:

FOR ALL THE FOREGOING, finding PLDTs protest to be without merit, the
Commission has no alternative but to uphold the law and DENIES the protest of
PLDT. Unless otherwise restrained by a competent court of law, the Common Carrier
Authorization Department (CCAD) is hereby directed to update its assessments and
collections on PLDT and all public telecommunications carriers for the payment of
the fees in accordance with the provisions of Section 40 (e) (f) and (g) of the Revised
NTC Schedule of Fees and Charges.
This decision takes effect immediately.
SO ORDERED.
On October 22, 1993, PLDT interposed a Motion for Reconsideration,[9] which was denied
by NTC in an Order[10] issued on May 3, 1994.
On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of Appeals, which
came out with its questioned Decision of October 30, 1996, modifying the disposition of NTC as
follows:

"WHEREFORE, the assailed decision and order of the respondent Commission dated
September 29, 1993 and May 03, 1994, respectively, in NTC Case No. 90-223 are

hereby MODIFIED. The Commission is ordered to recompute its assessments and

demands for payment from petitioner PLDT as follows:
A. For annual supervision and regulation fees (SRF) under Section 40 (e) of the
Public Service Act, as amended, they should be computed at fifty centavos for each
one hundred pesos or fraction thereof of the par value of the capital stock subscribed
or paid excluding stock dividends, premiums or capital in excess of par.
B. For permit fees for the approval of petitioners increase of authorized capital stock
under Section 40 (f) of the same Act, they should be computed at fifty for each one
hundred pesos or fraction thereof, regardless of any regulatory service or expense
incurred by respondent.
On November 20, 1996, NTC moved for partial reconsideration of the abovementioned
Decision, with respect to the basis of the assessment under Section 40(e), i.e., par value of the
subscribed capital stock. It also sought a partial reconsideration of the fee of fifty (P0.50)
centavos for the issuance or increasing of the capital stock under Section 40 (f).[11]
With the denial of its motions for reconsideration by the Resolution of the Court of Appeals
dated January 27, 1997, petitioner found its way to this Court via the present Petition; posing as
sole issue:

WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT THE

COMPUTATION OF SUPERVISION AND REGULATION FEES UNDER
SECTION 40 (F) OF THE PUBLIC SERVICE ACT SHOULD BE BASED ON
THE PAR VALUE OF THE SUBSCRIBED CAPITAL STOCK.
Simply put, the submission of NTC is that the fee under Section 40 (e) should be based on
the market value of PLDTs outstanding capital stock inclusive of stock dividends and premium,
and not on the par value of PLDTs capital stock excluding stock dividends and premium, as
contended by PLDT.
Succinct and clear is the ruling of this Court in the case of Philippine Long Distance
Telephone Company vs. Public Service Commission, 66 SCRA 341, that the basis for
computation of the fee to be charged by NTC on PLDT, is the capital stock subscribed or
paid and not, alternatively, the property and equipment.
The law in point is clear and categorical. There is no room for construction. It simply calls
for application. To repeat, the fee in question is based on the capital stock subscribed or paid,
nothing less nothing more.

It bears stressing that it is not the NTC that imposed such a fee. It is the legislature
itself. Since Congress has the power to exercise the State inherent powers of Police Power,
Eminent Domain and Taxation, the distinction between police power and the power to tax, which
could be significant if the exercising authority were mere political subdivisions (since delegation
by it to such political subdivisions of one power does not necessarily include the other), would
not be of any moment when, as in the case under consideration, Congress itself exercises the
power. All that is to be done would be to apply and enforce the law when sufficiently definitive
and not constitutional infirm.
The term capital and other terms used to describe the capital structure of a corporation are of
universal acceptance, and their usages have long been established in jurisprudence. Briefly,
capital refers to the value of the property or assets of a corporation. The capital subscribed is the
total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay
for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is
the amount that the corporation receives, inclusive of the premiums if any, in consideration of the
original issuance of the shares.In the case of stock dividends, it is the amount that the corporation
transfers from its surplus profit account to its capital account. It is the same amount that can
loosely be termed as the trust fund of the corporation. The Trust Fund doctrine considers this
subscribed capital as a trust fund for the payment of the debts of the corporation, to which the
creditors may look for satisfaction. Until the liquidation of the corporation, no part of the
subscribed capital may be returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends must never impair the
subscribed capital; subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the consideration therefor.[12]
In the same way that the Court in PLDT vs. PSC has rejected the value of the property and
equipment as being the proper basis for the fee imposed by Section 40(e) of the Public Service
Act, as amended by Republic Act No. 3792, so also must the Court disallow the idea of
computing the fee on the par value of [PLDTs] capital stock subscribed or paid excluding stock
dividends, premiums, or capital in excess of par. Neither, however, is the assessment made by the
National Telecommunications Commission on the basis of the market value of the subscribed or
paid-in capital stock acceptable since it is itself a deviation from the explicit language of the law.
From the pleadings on hand, it can be gleaned that the assessment for supervision and
regulation fee under Section 40(e) made by NTC for 1988, computed at P0.50 per 100 of
PLDTs outstanding capital stock as of December 31, 1987, amounted to P7,495,161.00. The
same was based on the amount of P1,277,934,390.00 of serial preferred stocks and
P221,097,785.00 of common stocks or a total of P1,499,032,175.00. The assessment was
reported to include stock dividends, premium on issued common shares and premium on
preferred shares converted into common stock.[13] The actual capital paid or the amount of capital
stock paid and for which PLDT received actual payments were not disclosed or extant in the

records before the Court. The only other item available is the amount assessed by petitioner from
PLDT, which had been based on market value of the outstanding capital stock on given dates.[14]
All things studiedly considered, and mindful of the aforesaid ruling of this Court in the case
of Philippine Long Distance Telephone Company vs. Public Service Commission, it should be
reiterated that the proper basis for the computation of subject fee under Section 40(e) of the
Public Service Act, as amended by Republic Act No. 3792, is the capital stock subscribed or
paid and not, alternatively, the property and equipment.
WHEREFORE, the decision of the Court of Appeals, dated October 30, 1996, and its
Resolution, dated January 27, 1997, in CA G.R. SP No. 34063, as well as the decision of the
National Telecommunication Commission, dated September 29, 1993, and Order, dated May 3,
1994, in NTC case No. 90-223, are hereby SET ASIDE and the National Telecommunication
Commission is hereby ordered to make a re-computation of the fee to be imposed on Philippine
Long Distance Telephone Company on the basis of the latters capital stock subscribed or paid
and strictly in accordance with the foregoing disquisition and conclusion.
No pronouncement as to costs.
SO ORDERED.

CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES,

XERXES NAVARRO, MARIA ANTONIA TEMPLO and MEDICAL
CENTER
PARAAQUE,
INC., petitioners,
vs. ANGELES
BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO, ROMEO
FUNTILA, TERESITA GAYANILO, RUSTICO JIMENEZ, ARACELI JO,
ESMERALDA MEDINA, CECILIA MONTALBAN, VIRGILIO OBLEPIAS,
CARMENCITA PARRENO, CESAR REYES, REYNALDO SAVET,
SERAPIO TACCAD, VICENTE VALDEZ, SALVACION VILLAMORA,
and HUMBERTO VILLAREAL, respondents.

DECISION
QUISUMBING, J.:

For review on certiorari is the Partial Judgment dated November 26,

2001 in Civil Case No. 01-0140, of the Regional Trial Court (RTC) of
Paraaque City, Branch 258. The trial court declared the February 9, 2001,
election of the board of directors of the Medical Center Paraaque, Inc. (MCPI)
valid. The Partial Judgment dismissed petitioners first cause of action,
specifically, to annul said election for depriving petitioners their voting rights
and to be voted on as members of the board.
[1]

The facts, as culled from records, are as follows:

Petitioners and the respondents are stockholders of MCPI, with the former
holding Class B shares and the latter owning Class A shares.
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue,
Sucat, Paraaque City. It was organized sometime in September 1977. At the
time of its incorporation, Act No. 1459, the old Corporation Law was still in
force and effect. Article VII of MCPIs original Articles of Incorporation, as
approved by the Securities and Exchange Commission (SEC) on October 26,
1977, reads as follows:
SEVENTH. That the authorized capital stock of the corporation is TWO MILLION
(P2,000,000.00) PESOS, Philippine Currency, divided into TWO THOUSAND
(2,000) SHARES at a par value of P100 each share, whereby the ONE THOUSAND
SHARES issued to, and subscribed by, the incorporating stockholders shall be
classified as Class A shares while the other ONE THOUSAND unissued shares shall
be considered as Class B shares. Only holders of Class A shares can have the right to
vote and the right to be elected as directors or as corporate officers. (Stress
supplied)
[2]

On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was
amended, to read thus:
SEVENTH. That the authorized capital stock of the corporation is FIVE MILLION
(P5,000,000.00) PESOS, divided as follows:
CLASS NO. OF SHARES PAR VALUE
A 1,000 P1,000.00

B 4,000 P1,000.00
Only holders of Class A shares have the right to vote and the right to be elected as
directors or as corporate officers. (Emphasis supplied)
[3]

The foregoing amendment was approved by the SEC on June 7, 1983.

While the amendment granted the right to vote and to be elected as directors
or corporate officers only to holders of Class A shares, holders of Class B
stocks were granted the same rights and privileges as holders of Class A
stocks with respect to the payment of dividends.
On September 9, 1992, Article VII was again amended to provide as
follows:
SEVENTH: That the authorized capital stock of the corporation is THIRTY TWO
MILLION PESOS (P32,000,000.00) divided as follows:
CLASS NO. OF SHARES PAR VALUE
A 1,000 P1,000.00
B 31,000 1,000.00
Except when otherwise provided by law, only holders of Class A shares have the
right to vote and the right to be elected as directors or as corporate officers (Stress
and underscoring supplied).
[4]

The SEC approved the foregoing amendment on September 22, 1993.

On February 9, 2001, the shareholders of MCPI held their annual
stockholders meeting and election for directors. During the course of the
proceedings, respondent Rustico Jimenez, citing Article VII, as amended, and
notwithstanding MCPIs history, declared over the objections of herein
petitioners, that no Class B shareholder was qualified to run or be voted upon
as a director. In the past, MCPI had seen holders of Class B shares voted for
and serve as members of the corporate board and some Class B share
owners were in fact nominated for election as board members. Nonetheless,
Jimenez went on to announce that the candidates holding Class A shares

were the winners of all seats in the corporate board. The petitioners protested,
claiming that Article VII was null and void for depriving them, as Class B
shareholders, of their right to vote and to be voted upon, in violation of the
Corporation Code (Batas Pambansa Blg. 68), as amended.
On March 22, 2001, after their protest was given short shrift, herein
petitioners filed a Complaint for Injunction, Accounting and Damages,
docketed as Civil Case No. CV-01-0140 before the RTC of Paraaque City,
Branch 258. Said complaint was founded on two (2) principal causes of
action, namely:
a. Annulment of the declaration of directors of the MCPI made during the February 9,
2001 Annual Stockholders Meeting, and for the conduct of an election whereat all
stockholders, irrespective of the classification of the shares they hold, should be
afforded their right to vote and be voted for; and
b. Stockholders derivative suit challenging the validity of a contract entered into by
the Board of Directors of MCPI for the operation of the ultrasound unit.
[5]

Subsequently, the complaint was amended to implead MCPI as partyplaintiff for purposes only of the second cause of action.
Before the trial court, the herein petitioners alleged that they were
deprived of their right to vote and to be voted on as directors at the annual
stockholders meeting held on February 9, 2001, because respondents had
erroneously relied on Article VII of the Articles of Incorporation of MCPI,
despite Article VII being contrary to the Corporation Code, thus null and void.
Additionally, respondents were in estoppel, because in the past, petitioners
were allowed to vote and to be elected as members of the board. They further
claimed that the privilege granted to the Class A shareholders was more in the
nature of a right granted to founders shares.
In their Answer, the respondents averred that the provisions of Article VII
clearly and categorically state that only holders of Class A shares have the
exclusive right to vote and be elected as directors and officers of the
corporation. They denied that the exclusivity was intended only as a privilege
granted to founders shares, as no such proviso is found in the Articles of

Incorporation. The respondents further claimed that the exclusivity of the right
granted to Class A holders cannot be defeated or impaired by any subsequent
legislative enactment, e.g.the New Corporation Code, as the Articles of
Incorporation is an intra-corporate contract between the corporation and its
members; between the corporation and its stockholders; and among the
stockholders. They submit that to allow Class B shareholders to vote and be
elected as directors would constitute a violation of MCPIs franchise or charter
as granted by the State.
At the pre-trial, the trial court ruled that a partial judgment could be
rendered on the first cause of action and required the parties to submit their
respective position papers or memoranda.
On November 26, 2001, the RTC rendered the Partial Judgment, the
dispositive portion of which reads:
WHEREFORE, viewed in the light of the foregoing, the election held on February 9,
2001 is VALID as the holders of CLASS B shares are not entitled to vote and be voted
for and this case based on the First Cause of Action is DISMISSED.
SO ORDERED.

[6]

In finding for the respondents, the trial court ruled that corporations had
the power to classify their shares of stocks, such as voting and non-voting
shares, conformably with Section 6 of the Corporation Code of the
Philippines. It pointed out that Article VII of both the original and amended
Articles of Incorporation clearly provided that only Class A shareholders could
vote and be voted for to the exclusion of Class B shareholders, the exception
being in instances provided by law, such as those enumerated in Section 6,
paragraph 6 of the Corporation Code. The RTC found merit in the
respondents theory that the Articles of Incorporation, which defines the rights
and limitations of all its shareholders, is a contract between MCPI and its
shareholders. It is thus the law between the parties and should be strictly
enforced as to them. It brushed aside the petitioners claim that the Class A
shareholders were in estoppel, as the election of Class B shareholders to the
corporate board may be deemed as a mere act of benevolence on the part of
[7]

the officers. Finally, the court brushed aside the founders shares theory of the
petitioners for lack of factual basis.
Hence, this petition submitting the sole legal issue of whether or not the
Court a quo, in rendering the Partial Judgment dated November 26, 2001, has
decided a question of substance in a way not in accord with law and
jurisprudence considering that:
1. Under the Corporation Code, the exclusive voting right and right to be voted
granted by the Articles of Incorporation of the MCPI to Class A shareholders is null
and void, or already extinguished;
2. Hence, the declaration of directors made during the February 9, 2001 Annual
Stockholders Meeting on the basis of the purported exclusive voting rights is null and
void for having been done without the benefit of an election and in violation of the
rights of plaintiffs and Class B shareholders; and
3. Perforce, another election should be conducted to elect the directors of the MCPI,
this time affording the holders of Class B shares full voting right and the right to be
voted.
[8]

The issue for our resolution is whether or not holders of Class B shares of
the MCPI may be deprived of the right to vote and be voted for as directors in
MCPI.
Before us, petitioners assert that Article VII of the Articles of Incorporation
of MCPI, which denied them voting rights, is null and void for being contrary to
Section 6 of the Corporation Code. They point out that Section 6 prohibits the
deprivation of voting rights except as to preferred and redeemable shares
only. Hence, under the present law on corporations, all shareholders,
regardless of classification, other than holders of preferred or redeemable
shares, are entitled to vote and to be elected as corporate directors or officers.
Since the Class B shareholders are not classified as holders of either
preferred or redeemable shares, then it necessarily follows that they are
entitled to vote and to be voted for as directors or officers.

The respondents, in turn, maintain that the grant of exclusive voting rights
to Class A shares is clearly provided in the Articles of Incorporation and is in
accord with Section 5 of the Corporation Law (Act No. 1459), which was the
prevailing law when MCPI was incorporated in 1977. They likewise submit that
as the Articles of Incorporation of MCPI is in the nature of a contract between
the corporation and its shareholders and Section 6 of the Corporation Code
could not retroactively apply to it without violating the non-impairment
clause of the Constitution.
[9]

[10]

We find merit in the petition.

When Article VII of the Articles of Incorporation of MCPI was amended in
1992, the phrase except when otherwise provided by law was inserted in the
provision governing the grant of voting powers to Class A shareholders. This
particular amendment is relevant for it speaks of a law providing for
exceptions to the exclusive grant of voting rights to Class A stockholders.
Which law was the amendment referring to? The determination of which law to
apply is necessary. There are two laws being cited and relied upon by the
parties in this case. In this instance, the law in force at the time of the 1992
amendment was the Corporation Code (B.P. Blg. 68), not the Corporation Law
(Act No. 1459), which had been repealed by then.
We find and so hold that the law referred to in the amendment to Article VII
refers to the Corporation Code and no other law. At the time of the
incorporation of MCPI in 1977, the right of a corporation to classify its shares
of stock was sanctioned by Section 5 of Act No. 1459. The law repealing Act
No. 1459, B.P. Blg. 68, retained the same grant of right of classification of
stock shares to corporations, but with a significant change. Under Section 6
of B.P. Blg. 68, the requirements and restrictions on voting rights were
explicitly provided for, such that no share may be deprived of voting rights
except those classified and issued as preferred or redeemable shares, unless
otherwise provided in this Code and that there shall always be a class or
series of shares which have complete voting rights. Section 6 of the
Corporation Code being deemed written into Article VII of the Articles of
Incorporation of MCPI, it necessarily follows that unless Class B shares of
MCPI stocks are clearly categorized to be preferred or redeemable shares,
the holders of said Class B shares may not be deprived of their voting rights.

Note that there is nothing in the Articles of Incorporation nor an iota of

evidence on record to show that Class B shares were categorized as either
preferred or redeemable shares. The only possible conclusion is that Class B
shares fall under neither category and thus, under the law, are allowed to
exercise voting rights.
One of the rights of a stockholder is the right to participate in the control
and management of the corporation that is exercised through his vote. The
right to vote is a right inherent in and incidental to the ownership of corporate
stock, and as such is a property right. The stockholder cannot be deprived of
the right to vote his stock nor may the right be essentially impaired, either by
the legislature or by the corporation, without his consent, through amending
the charter, or the by-laws.
[11]

Neither do we find merit in respondents position that Section 6 of the

Corporation Code cannot apply to MCPI without running afoul of the nonimpairment clause of the Bill of Rights. Section 148 of the Corporation Code
expressly provides that it shall apply to corporations in existence at the time of
the effectivity of the Code. Hence, the non-impairment clause is inapplicable
in this instance. When Article VII of the Articles of Incorporation of MCPI were
amended in 1992, the board of directors and stockholders must have been
aware of Section 6 of the Corporation Code and intended that Article VII be
construed in harmony with the Code, which was then already in force and
effect. Since Section 6 of the Corporation Code expressly prohibits the
deprivation of voting rights, except as to preferred and redeemable shares,
then Article VII of the Articles of Incorporation cannot be construed as granting
exclusive voting rights to Class A shareholders, to the prejudice of Class B
shareholders, without running afoul of the letter and spirit of the Corporation
Code.
[12]

The respondents then take the tack that the phrase except when
otherwise provided by law found in the amended Articles is only a handwritten
insertion and could have been inserted by anybody and that no board
resolution was ever passed authorizing or approving said amendment.
Said contention is not for this Court to pass upon, involving as it does a
factual question, which is not proper in this petition. In an appeal via certiorari,

only questions of law may be reviewed. Besides, respondents did not

adduce persuasive evidence, but only bare allegations, to support their
suspicion. The presumption that in the amendment process, the ordinary
course of business has been followed and that official duty has been
regularly performed on the part of the SEC, applies in this case.
[13]

[14]

[15]

WHEREFORE, the petition is GRANTED. The Partial Judgment dated

November 26, 2001 of the Regional Trial Court of Paraaque City, Branch 258,
in Civil Case No. 01-0140 is REVERSED AND SET ASIDE. No
pronouncement as to costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, and Carpio, JJ., concur.