Umali v.

CA
GR # 89561 | Sept. 13, 1990
Petitioner: Umali, De Castillo, Castillo , Rada, Abanez, Jalbuena, and Rivera
Respondent: CA, Bormaheco Inc, and Philippine Machinery Parts Manufacturing Co.
(Article 1345 of the Civil Code, Contracts)

DOCTRINE
There is absolute simulation, which renders the contract null and void, when the parties do not intend to
be bound at all by the same. The basic characteristic of this type
of simulation of contract is the fact that the apparent contract is not really desired or intended to either
produce legal effects or in any way alter the juridical situation of the parties.

FACTS
- Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Vda. de Castillo.
- The Castillo family are the owners of parcel of land located in Lucena City which was given as
security for a loan from the development Bank of the Philippines (DBP) for their failure to pay the
amortization, foreclosure of the said property was about to be initiated.
- This problem was made known to Santiago Rivera, who proposed to them the conversion into
subdivision of the four parcels of land adjacent to the mortgaged property to raise the necessary
fund.
- The idea was accepted by the Castillo family and to carry out the project, a memorandum of
agreement was executed by and between Slobec Realty and Development Inc. represented by
its president Santiago Rivera, and Castillo family.
- In this agreement, Santiago Rivera obliged himself to pay the Castillo family the sum of P70,000
immediately after the execution of the agreement and to pay additional amount of P40,000 after
the property has been converted into a subdivision.
- Rivera, with agreement approached Mr. Modesto Cervantes, president of defendant Bormaheco
and proposed to purchase from Bormaheco two tractors model D7 and D8 subsequently a sales
agreement was executed on December 28, 1970.
- On January 3, 1971, Slobec, through Rivera, executed in favor of Bormaheco a chattel
mortgage over the said equipment as security for the payment of the aforesaid balance of
P180,000. As further security of the aforementioned unpaid balance, Slobec obtained from
Insurance Corporation of the Philippines a security bond, with Insurance Corporation of the
Philippines (ICP) as surety and Slobec as principal, in favor of Bormaheco.
- The aforesaid surety bond was in turn secured by an agreement of counter-guaranty with real
estate mortgage executed by Rivera as President of Slobec and Mauricia Mur Vda. de Castillo,
Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and Leovina
Castillo Jalbuena as mortgagors and Insurance Corporation of the Philippines as mortgagee.
- In this agreement, ICP guaranteed the obligation of Slobec with Bormaheco in the amount of
P180,000.
- In giving the bond, ICP required that the Castillos mortgage to them the properties in question,
namely, four parcels of land covered by TCT in the name of the aforementioned mortgagors,
namely TCT no. 13114, 13115, 13116, and 13117 all of the Register of Deeds of Lucena City.
Meanwhile, for violation of the terms and conditions of the counter-guaranty agreement, the
properties of the Castillos were foreclosed by ICP as the highest bidder with a bid of P285,212, a
certificate of sale was issued by the provincial sheriff of Lucena City and TCT over the subject
parcels of land were issued.
- ICP sold to PM Parts the four parcels of land.
 - Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter addressed to
plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to vacate the subject
property.
- The heirs of the late Felipe Castillo filed an action for annulment of title.

CFI: Judgment is hereby rendered in favor of the plaintiffs – agreements etc - null and void for being
fictitious, spurious and without consideration.

CA: reversed

Hence this petition.

ISSUE/S
1. Whether or not there was a simulation of contract.
2. Whether or not there is necessity to pierce the veil of corporate entity of Bormaheco, ICP and PM
Parts, to determine whether they employed fraud in causing the foreclosure and subsequent sale
of the real properties belonging to petitioners.

PROVISIONS
Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties
do not intend to be bound at all; the latter, when the parties conceal their true agreement. (no provision
stated in the case)

RULING & RATIO

1. NO
- Petitioners aver that the transactions entered into between Santiago M. Rivera, as President of Slobec
Realty and Development Company (Slobec) and Mode Cervantes, as Vice-President of Bormaheco, such
as the Sales Agreement, Chattel Mortgage 7 and the Agreement of Counter-Guaranty with Chattel/Real
Estate Mortgage, are all fraudulent and simulated and should, therefore, be declared null and void. Such
allegation is premised primarily on the fact that contrary to the stipulations agreed upon in the Sales
Agreement, Rivera never made any advance payment, in the alleged amount of P50,000.00, to
Bormaheco; that the tractor was received by Rivera only on January 23, 1971 and not in 1970 as stated
in the Chattel Mortgage and that when the Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage was executed on October 24, 1970, to secure the obligation of ICP under its surety bond, the
Sales Agreement and Chattel Mortgage had not as yet been executed, aside from the fact that it was
Bormaheco, and not Rivera, which paid the premium for the surety bond issued by ICP
- Absolute simulation renders the contract null and void, when the parties do not intend to be bound by
the same.—There is absolute simulation, which renders the contract null and void, when the parties do
not intend to be bound at all by the same. The basic characteristic of this type
of simulation of contract is the fact that the apparent contract is not really desired or intended to either
produce legal effects or in any way alter the juridical situation of the parties. The subsequent act of Rivera
in receiving and making use of the tractor subject matter of the Sales Agreement and Chattel Mortgage,
and the simultaneous issuance of a surety bond in favor of Bormaheco, concomitant with the execution of
the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage, conduce to the conclusion that
petitioners had every intention to be bound by these contracts. The occurrence of these series of
transactions between petitioners and private respondents is a strong indication that the parties actually
intended, or at least expected, to exact fulfillment of their respective obligations from one another.

- Neither will an allegation of fraud prosper in this case where petitioners failed to show that they were
induced to enter into a contract through the insidious words and machinations of private respondents
without which the former would not have executed such contract. To set aside a document solemnly
executed and voluntarily delivered, the proof of fraud must be clear and convincing. 10 We are not
persuaded that such quantum of proof exists in the case at bar
2. NO
- Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the
legal fiction that a corporation is an entity with a juridical personality separate and distinct from its
members or stockholders may be disregarded. In such cases, the corporation will be considered as a
mere association of persons. The members or stockholders of the corporation will be considered as the
corporation, that is, liability will attach directly to the officers and stockholders. The doctrine applies when
the 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.

While we do not discount the possibility of the existence of fraud in the foreclosure proceeding, neither
are we inclined to apply the doctrine invoked by petitioners in granting the relief sought. It is our
considered opinion that piercing the veil of corporate entity is not the proper remedy in order that the
foreclosure proceeding may be declared a nullity under the circumstances obtaining in the legal case at
bar.

In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and
stockholder directly liable for a corporate debt or obligation. In the instant case, petitioners do not seek to
impose a claim against the individual members of the three corporations involved; on the contrary, it is
these corporations which desire to enforce an alleged right against petitioners. Assuming that petitioners
were indeed defrauded by private respondents in the foreclosure of the mortgaged properties, this fact
alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction, since
petitioners do not intend to hold the officers and/or members of respondent corporations personally liable
therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief
may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent
corporations.

Secondly, petitioners failed to establish by clear and convincing evidence that private respondents were
purposely formed and operated, and thereafter transacted with petitioners, with the sole intention of
defrauding the latter. The mere fact, therefore, that the businesses of two or more corporations are
interrelated is not a justification for disregarding their separate personalities, absent sufficient showing
that the corporate entity was purposely used as a shield to defraud creditors and third persons of their
rights.

DISPOSITION

WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET ASIDE, and
judgment is hereby rendered declaring the following as null and void: (1) Certificate of Sale, dated
September 28,1973, executed by the Provincial Sheriff of Quezon in favor of the Insurance Corporation of
the Philippines; (2) Transfer Certificates of Title Nos. T-23705, T-23706, T-23707 and T-23708 issued in
the name of the Insurance Corporation of the Philippines; (3) the sale by Insurance Corporation of the
Philippines in favor of Philippine Machinery Parts Manufacturing Co., Inc. of the four (4) parcels of land
covered by the aforesaid certificates of title; and (4) Transfer Certificates of Title Nos. T-24846, T-24847,
T-24848 and T24849 subsequently issued by virtue of said sale in the name of the latter corporation.

The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of Title Nos. T-
24846, T-24847, T24848 and T-24849 in the name of Philippine Machinery Parts Manufacturing Co., Inc.
and to issue in lieu thereof the corresponding transfer certificates of title in the name of herein petitioners,
except Santiago Rivera.

The foregoing dispositions are without prejudice to such other and proper legal remedies as may be
available to respondent Bormaheco, Inc. against herein petitioners.