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Pacific Rehouse Corp. v. CA March 24, 2014 | Reyes | Piercing the Corporate Veil

PETITIONER: PACIFIC REHOUSE CORPORATION RESPONDENT: COURT OF APPEALS and EXPORT AND INDUSTRY BANK, INC.,

SUMMARY: Judgment was rendered against EIB Securities. This case reached the SC which ruled in favor of the petitioners, for the return of the DMCI shares of stock to them. The writ of execution went unsatisfied, so they filed an alias writ, which was sought to be enforced against Export Bank, the alleged parent corporation of EIB. The SC did not allow this, saying the court did not acquire jurisdiction over Export Bank, and that the alter ego doctrine did not apply.

DOCTRINE: There must be a perpetuation of fraud or at least a fraudulent or illegal purpose behind the control to justify pierc- ing the veil of corporate fiction.

FACTS:

EIB Securities sold 32,180,000 shares of DMCI belonging to respondents. The lower court rendered judgment, ordering EIB to return the shares to the respondents. This ruling reached the SC and attained finality. Writ of execution issued, but was unsatisfiied.

Respondents then filed for issuance of an alias writ to hold Export and Industry Bank liable because EIB Securities is a wholly-owned controlled and dominated subsidiary of Export snd Industry Bank, and is thus a mere alter ego and business conduit.

EIB Securities opposed, saying it has a separate corporate per- sonality, distinct from Export Bank.

RTC ruled that E-securities is a mere business conduit of Ex- port Bank and pierced the veil of corporate fiction.

Respondent questioned this, saying it was not impleaded as a party to the case. This was denied, and directed garnishment of P1.4B, the total amount of the 32.18M DMCI shares. RTC said that since they are the same entity, service of summons upon E-Securities bestowed jurisdiction over the parent and subsidiary.

CA issued 60-day TRO enjoining the execution of the RTC orders granting ther alias writ. Then they issued writ of pre- liminary injunction. Then they ruled in the merits, saying that the alter ego theory cannot be sustained because ownership by a parent corporation of a subsidiary is not enough justification to pierce the veil. Proof must be shown, apart from mere own- ership, that Export Bank misused the corporate fiction of E- Securities.

Mere interlocking of directors not enough

Export Bank does not have complete control over business policies and affairs They went to the SC.

ISSUE: W/N CA erred in ruling that alter ego doctrine is inapplicable NO

RATIO: Export Bank argues that it was never impleaded in the earlier case between E-Securities and Pacific Rehouse.

However, the SC held that in the case of Kukan International v. Reyes, compliance with the recognized modes of acquiring jurisdiction cannot be dispensed with even in piercing the veil of corporate fiction:

Piercing the veil is applied only to determine liability. It is not available to confer jurisdiction it has not ac- quired over a party not impleaded in the case.

In other words, a corporation not impleaded in a suit cannot be subject to the court’s process of piercing the veil of its corporate fiction.

Court must first acquire jurisdiction over the parties before piercing its corporate veil; otherwise, it cannot pierce because such action offends the corporation’s right to due process. Jurisdiction is acquire by service of summons. Without sum- mons or voluntary submission, any judgment over such person is null and void.

In this case, Export Bank was not served with summons, nor voluntarily appeared before the court.

Export Bank has consistently disputed RTC jurisdic- tion by filing of Omnibus Motion by way of special appearance

It was not pleaded as a party

It was never served with summons

It did not voluntarily appear before RTC

Alter ego doctrine is not applicable

Where one corporation is organized and controlled, and its affairs conducted so that it is in fact a mere in- strumentality of the other, the fiction of the instru- mentality may be disregarded.

Stock control not enough. Must be such domination of finances, policies, and practices, that the controlled corporation has no separate mind, will or existence of its own. Control must be exercised at the time the acts complained of took place.

Three pronged test

o

Complete domination (above mentioned)

o

Control must have been used to commit fraud or wrong, to perpetuate violation of a statutory or other positive legal duty, or dis- honest and unjust act in contravention of plaintiff’s legal right

o

The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of

Absence of any one of these prevents piercing of the corporate veil in applying the alter ego doctrine.

The RTC said alter ego because of the ff:

o

EIB Securities was only reactivated in 2002- 2003 to serve as the securities brokerage arm of said parent corporation bank,

o

its capital was supplied by Export Bank be- cause EIB was cash strapped

o

Offices located in the same building

o

They share key directors and corporate of- ficers

o

It was admitted in the Bank’s financial statements that EIB is a controlled subsidi- ary

o

Same lawyers

o

Control was prevailing during the time the acts complained of happened

However, these were not pleaded properly in accord- ance with ROC, and were merely raised in the Mo- tion for Issuance of Alias writ.

Nonetheless, there must be a perpetuation of fraud or at least a fraudulent or illegal purpose behind the con- trol to justify piercing the veil. In this case, there is none.

The 32.8 M shares were originally bought at 0.38 per share, and were sold at 0.24. The proceeds were used to buy back 61M KPP shares. Unexpectedly, the total amount of the DMCI shares ballooned to 1.4B, which did not inure to E-Securities benefit nor Export Bank.

Ownership by single stockholder of all or substantial- ly all stock is not sufficient, in the absence of fraud and other public policy considerations.

RULING: Petition is DENIED.