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Juridical Personality – Full Text

The undisputed facts are summarized by the Court of Appeals as follows:


VIRGINIA O. GOCHAN, FELIX Y. GOCHAN III, MAE GOCHAN-EFANN, LOUISE Y. GOCHAN,
ESTEBAN Y. GOCHAN JR., DOMINIC Y. GOCHAN, FELIX O. GOCHAN III,
MERCEDES R. GOCHAN, ALFREDO R. GOCHAN, ANGELINA R. GOCHAN- Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with
HERNAEZ, MARIA MERCED R. GOCHAN, CRISPO R. GOCHAN JR., MARION R. the SEC on June, 1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan,
GOCHAN, MACTAN REALTY DEVELOPMENT CORPORATION and FELIX GOCHAN Tomasa Gochan, Esteban Gochan and Crispo Gochan as its incorporators.
& SONS REALTY CORPORATION, petitioners, vs. RICHARD G. YOUNG, DAVID G.
YOUNG, JANE G. YOUNG-LLABAN, JOHN D. YOUNG JR., MARY G. YOUNG-HSU Felix Gochan Sr.s daughter, Alice, mother of [herein respondents], inherited 50 shares of
and ALEXANDER THOMAS G. YOUNG as heirs of Alice Gochan; the INTESTATE stock in Gochan Realty from the former.
ESTATE OF JOHN D. YOUNG SR.; and CECILIA GOCHAN-UY and MIGUEL C. UY,
for themselves and on behalf and for the benefit of FELIX GOCHAN & SONS Alice died in 1955, leaving the 50 shares to her husband, John Young, Sr.
REALTY CORPORATION, respondents.
In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children,
DECISION herein [respondents] Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary
Young Hsu and Alexander Thomas Young.
PANGANIBAN, J.:

Having earned dividends, these stocks numbered 179 by 20 September 1979.


A court or tribunals jurisdiction over the subject matter is determined by the allegations
in the complaint. The fact that certain persons are not registered as stockholders in the books
of the corporation will not bar them from filing a derivative suit, if it is evident from the Five days later (25 September), at which time all the children had reached the age of majority,
allegations in the complaint that they are bona fide stockholders. In view of RA 8799, intra- their father John Sr., requested Gochan Realty to partition the shares of his late wife by
corporate controversies are now within the jurisdiction of courts of general jurisdiction, no cancelling the stock certificates in his name and issuing in lieu thereof, new stock certificates
longer of the Securities and Exchange Commission. in the names of [herein respondents].

On 17 October 1979, respondent Gochan Realty refused, citing as reason, the right of first
The Case
refusal granted to the remaining stockholders by the Articles of Incorporation.

On 21, 1990, [sic] John, Sr. died, leaving the shares to the [respondents].
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. The
Petition assails the February 28, 1996 Decision[1] of the Court of Appeals (CA), as well as its On 8 February 1994, [respondents] Cecilia Gochan Uy and Miguel Uy filed a complaint with
December 18, 1997 Resolution denying petitioners Motion for Reconsideration. The dispositive the SEC for issuance of shares of stock to the rightful owners, nullification of shares of stock,
part of the CA Decision reads as follows: reconveyance of property impressed with trust, accounting, removal of officers and directors
and damages against respondents. A Notice of Lis Pendens was annotated as [sic] real
WHEREFORE, the petition as far as the heirs of Alice Gochan, is DISMISSED, without properties of the corporation.
prejudice to filing the same in the regular courts.
On 16 March 1994, [herein petitioners] moved to dismiss the complaint alleging that: (1) the
SO ORDERED.[2] SEC ha[d] no jurisdiction over the nature of the action; (2) the [respondents] [were] not the
real parties-in-interest and ha[d] no capacity to sue; and (3) [respondents] causes of action
[were] barred by the Statute of Limitations.
In dismissing the Complaint before the SEC regarding only Alice Gochans heirs but not
the other complainants, the CA effectively modified the December 9, 1994 Order of the hearing
officer[3] of the Securities and Exchange Commission (SEC). The Order, which was affirmed in The motion was opposed by herein [respondents].
full by the SEC en banc, dismissed the entire case.
On 29 March 1994, [petitioners] filed a Motion for cancellation of Notice of Lis
Pendens. [Respondents] opposed the said motion.
The Facts

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Juridical Personality – Full Text
On 9 December 1994, the SEC, through its Hearing Officer, granted the motion to dismiss Section 5. Derivative Suit. No action shall be brought by stockholder in the right of a
and ordered the cancellation of the notice of lis pendens annotated upon the titles of the corporation unless the complainant was a stockholder at the time the questioned transaction
corporate lands. In its order, the SEC opined: occurred as well as at the time the action was filed and remains a stockholder during the
pendency of the action. x x x.
In the instant case, the complaint admits that complainants Richard G. Young, David G.
Young, Jane G. Young Llaban, John D. Young, Jr., Mary G. Young Hsu and Alexander The rule is in accord with well settled jurisprudence holding that a stockholder bringing a
Thomas G. Young, who are the children of the late Alice T. Gochan and the late John D. derivative action must have been [so] at the time the transaction or act complained of [took]
Young, Sr. are suing in their own right and as heirs of and/or as the beneficial owners of the place. (Pascual vs. Orozco, 19 Phil. 82; Republic vs. Cuaderno, 19 SCRA 671; San Miguel
shares in the capital stock of FGSRC held in trust for them during his lifetime by the late Corporation vs. Khan, 176 SCRA 462-463) The language of the rule is mandatory, strict
John D. Young. Moreover, it has been shown that said complainants ha[d] never been x x x compliance with the terms thereof thus being a condition precedent, a jurisdictional
stockholder[s] of record of FGSRC to confer them with the legal capacity to bring and requirement to the filing of the instant action.
maintain their action. Conformably, the case cannot be considered as an intra-corporate
controversy within the jurisdiction of this Commission. Otherwise stated, proof of compliance with the requirement must be sufficiently established
for the action to be given due course by this Commission. The failure to comply with this
The complainant heirs base what they perceived to be their stockholders rights upon the fact jurisdictional requirement on derivative action must necessarily result in the dismissal of the
of their succession to all the rights, property and interest of their father, John D. Young, instant complaint. (pp. 77-79, Rollo)
Sr. While their heirship is not disputed, their right to compel the corporation to register John
D. Youngs Sr. shares of stock in their names cannot go unchallenged because the devolution [Respondents] moved for a reconsideration but the same was denied for being pro-forma.
of property to the heirs by operation of law in succession is subject to just obligations of the
deceased before such property passes to the heirs. Conformably, until therefore the estate is
settled and the payment of the debts of the deceased is accomplished, the heirs cannot as a [Respondents] appealed to the SEC en banc, contending, among others, that the SEC ha[d]
matter of right compel the delivery of the shares of stock to them and register such transfer in jurisdiction over the case.
the books of the corporation to recognize them as stockholders. The complainant heirs
succeed to the estate of [the] deceased John D. Young, Sr. but they do not thereby become [Petitioners], on the other hand, contend that the appeal was 97 days late, beyond the 30-day
stockholders of the corporation. period for appeals.

Moreover, John D. [Young Sr.s] shares of stocks form part of his estate which is the subject of On 3 March 1995, the SEC en banc ruled for the [petitioners,] holding that the [respondents]
Special Proceedings No. 3694-CEB in the Regional Trial Court of Cebu, Branch VIII, [par. 4 of motion for reconsideration did not interrupt the 30-day period for appeal because said motion
the complaint]. As complainants clearly claim[,] the Intestate Estate of John D. Young, Sr. was pro-forma.[4]
has an interest in the subject matter of the instant case. However, actions for the recovery or
protection of the property [such as the shares of stock in question] may be brought or Aggrieved, herein respondents then filed a Petition for Review with the Court of Appeals.
defended not by the heirs but by the executor or administrator thereof.

Complainants further contend that the alleged wrongful acts of the corporation and its
Ruling of the Court of Appeals
directors constitute fraudulent devices or schemes which may be detrimental to the
stockholders. Again, the injury [is] perceived[,] as is alleged[,] to have been suffered by
complainants as stockholders, which they are not. Admittedly, the SEC has no jurisdiction
over a controversy wherein one of the parties involved is not or not yet a stockholder of the The Court of Appeals ruled that the SEC had no jurisdiction over the case as far as the
corporation. [SEC vs. CA, 201 SCRA 134]. heirs of Alice Gochan were concerned, because they were not yet stockholders of the
corporation. On the other hand, it upheld the capacity of Respondents Cecilia Gochan Uy and
her spouse Miguel Uy. It also held that the intestate Estate of John Young Sr. was an
Further, by the express allegation of the complaint, herein complainants bring this action as indispensable party.
[a] derivative suit on their own behalf and on behalf of respondent FGSRC.
The appellate court further ruled that the cancellation of the notice of lis pendens on the
Section 5, Rule III of the Revised Rules of Procedure in the Securities and Exchange titles of the corporate real estate was not justified. Moreover, it declared that respondents
Commission provides:

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Juridical Personality – Full Text
Motion for Reconsideration before the SEC was not pro forma; thus, its filing tolled the appeal no effect either against or in favor of anyone; it cannot create, modify or extinguish the juridical
period. relation to which it refers.[9] Thus, Cecilia remains a stockholder of the corporation in view of
the nullity of the Contract of Sale. Although she was no longer registered as a stockholder in
Hence, this Petition.[5] the corporate records as of the filing of the case before the SEC, the admitted allegations in the
Complaint made her still a bona fide stockholder of Felix Gochan & Sons Realty Corporation
(FGSRC), as between said parties.
The Issues
In any event, the present controversy, whether intra-corporate or not, is no longer
cognizable by the SEC, in view of RA 8799, which transferred to regional trial courts the formers
jurisdiction over cases involving intra-corporate disputes.
These are the issues presented before us:
A. Whether or not the Spouses Uy have the personality to file an action before the
SEC against Gochan Realty Corporation. Action Has Not Prescribed

B. Whether or not the Spouses Uy could properly bring a derivative suit in the name
of Gochan Realty to redress wrongs allegedly committed against it for
which the directors refused to sue. Petitioners contend that the statute of limitations already bars the Uy spouses action, be
it one for annulment of a voidable contract or one based upon a written contract. The
C. Whether or not the intestate estate of John D. Young Sr. is an indispensable party Complaint, however, contains respondents allegation that the sale of the shares of stock was
in the SEC case considering that the individual heirs shares are still in not merely voidable, but was void ab initio. Below we quote its relevant portion:
the decedent stockholders name.
D. Whether or not the cancellation of [the] notice of lis pendens was justified 38. That on November 21, 1979, respondent Felix Gochan & Sons Realty Corporation did not
considering that the suit did not involve real properties owned by Gochan have unrestricted retained earnings in its books to cover the purchase price of the 208 shares
Realty.[6] of stock it was then buying from complainant Cecilia Gochan Uy, thereby rendering said
purchase null and void ab initio for being violative of the trust fund doctrine and contrary to
In addition, the Court will determine the effect of Republic Act No. 8799[7] on this case. law, morals good customs, public order and public policy;

Necessarily, petitioners contention that the action has prescribed cannot be


The Courts Ruling
sustained. Prescription cannot be invoked as a ground if the contract is alleged to be void ab
initio.[10] It is axiomatic that the action or defense for the declaration of nullity of a contract
does not prescribe.[11]
The Petition has no merit. In view of the effectivity of RA 8799, however, the case should
be remanded to the proper regional trial court, not to the Securities and Exchange Commission.
Second Issue: Derivative Suit and the Spouses Uy
First Issue:
Personality of the Spouses Uy to File a Suit Before the SEC

Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal standing to Petitioners also contend that the action filed by the Spouses Uy was not a derivative suit,
bring the suit before the SEC on February 8, 1994, because the latter were no longer because the spouses and not the corporation were the injured parties. The Court is not
stockholders at the time. Allegedly, the stocks had already been purchased by the convinced. The following quoted portions of the Complaint readily shows allegations of injury
corporation. Petitioners further assert that, being allegedly a simple contract of sale cognizable to the corporation itself:
by the regular courts, the purchase by Gochan Realty of Cecilia Gochan Uys 210 shares does
not come within the purview of an intra-corporate controversy. 16. That on information and belief, in further pursuance of the said conspiracy and for the
fraudulent purpose of depressing the value of the stock of the Corporation and to induce the
As a general rule, the jurisdiction of a court or tribunal over the subject matter is
minority stockholders to sell their shares of stock for an inadequate consideration as
determined by the allegations in the complaint.[8] For purposes of resolving a motion to dismiss,
aforesaid, respondent Esteban T. Gochan . . ., in violation of their duties as directors and
Cecilia Uys averment in the Complaint -- that the purchase of her stocks by the corporation
officers of the Corporation . . ., unlawfully and fraudulently appropriated [for] themselves the
was null and void ab initio is deemed admitted. It is elementary that a void contract produces
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Juridical Personality – Full Text
funds of the Corporation by drawing excessive amounts in the form of salaries and cash with respect to the cause of action dealing with the registration of the shares in the names of
advances. . . and by otherwise charging their purely personal expenses to the Corporation. the heirs of Alice.
Petitioners further claim that the Estate of John Young Sr. was not properly
xxxxxxxxx represented. They claim that when the estate is under administration, suits for the recovery or
protection of the property or rights of the deceased may be brought only by the administrator
41. That the payment of P1,200,000.00 by the Corporation to complainant Cecilia Gochan Uy or executor as approved by the court.[14] The rules relative to this matter do not, however, make
for her shares of stock constituted an unlawful, premature and partial liquidation and any such categorical and confining statement.
distribution of assets to a stockholder, resulting in the impairment of the capital of the
Corporation and prevented it from otherwise utilizing said amount for its regular and lawful Section 3 of Rule 3 of the Rules of Court, which is cited by petitioner in support of their
business, to the damage and prejudice of the Corporation, its creditors, and of complainants position, reads:
as minority stockholders;[12]
Sec. 3. Representatives as parties. - Where the action is allowed to be prosecuted or defended
As early as 1911, this Court has recognized the right of a single stockholder to file by a representative or someone acting in a fiduciary capacity, the beneficiary shall be
derivative suits. In its words: included in the title of the case and shall be deemed to be the real party in interest. A
representative may be a trustee of an express trust, a guardian, an executor or administrator,
or a party authorized by law or these Rules. An agent acting in his own name and for the
[W]here corporate directors have committed a breach of trust either by their frauds, ultra benefit of an undisclosed principal may sue or be sued without joining the principal except
vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy when the contract involves things belonging to the principal.
the wrong, a single stockholder may institute that suit, suing on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong
done directly to the corporation and indirectly to the stockholders.[13] Section 2 of Rule 87 of the same Rules, which also deals with administrators, states:

In the present case, the Complaint alleges all the components of a derivative suit. The Sec. 2. Executor or administrator may bring or defend actions which survive. - For the recovery
allegations of injury to the Spouses Uy can coexist with those pertaining to the corporation. The or protection of the property or rights of the deceased, an executor or administrator may
personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on bring or defend, in the right of the deceased, actions for causes which survive.
behalf of the corporation. It merely gives rise to an additional cause of action for damages
against the erring directors. This cause of action is also included in the Complaint filed before The above-quoted rules, while permitting an executor or administrator to represent or to
the SEC. bring suits on behalf of the deceased, do not prohibit the heirs from representing the
deceased. These rules are easily applicable to cases in which an administrator has already been
The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit appointed. But no rule categorically addresses the situation in which special proceedings for
of the corporation. The reason is that, as earlier discussed, the allegations of the Complaint the settlement of an estate have already been instituted, yet no administrator has been
make them out as stockholders at the time the questioned transaction occurred, as well as at appointed. In such instances, the heirs cannot be expected to wait for the appointment of an
the time the action was filed and during the pendency of the action. administrator; then wait further to see if the administrator appointed would care enough to file
a suit to protect the rights and the interests of the deceased; and in the meantime do nothing
while the rights and the properties of the decedent are violated or dissipated.
Third Issue: Capacity of the Intestate Estate of John D. Young Sr.
The Rules are to be interpreted liberally in order to promote their objective of securing a
just, speedy and inexpensive disposition of every action and proceeding.[15] They cannot be
interpreted in such a way as to unnecessarily put undue hardships on litigants. For the
Petitioners contend that the Intestate Estate of John D. Young Sr. is not an indispensable protection of the interests of the decedent, this Court has in previous instances[16] recognized
party, as there is no showing that it stands to be benefited or injured by any court judgment. the heirs as proper representatives of the decedent, even when there is already an administrator
It would be useful to point out at this juncture that one of the causes of action stated in appointed by the court. When no administrator has been appointed, as in this case, there is all
the Complaint filed with the SEC refers to the registration, in the name of the other heirs of the more reason to recognize the heirs as the proper representatives of the deceased. Since the
Alice Gochan Young, of 6/14th of the shares still registered under the name of John D. Young Rules do not specifically prohibit them from representing the deceased, and since no
Sr. Since all the shares that belonged to Alice are still in his name, no final determination can administrator had as yet been appointed at the time of the institution of the Complaint with
be had without his estate being impleaded in the suit. His estate is thus an indispensable party the SEC, we see nothing wrong with the fact that it was the heirs of John D. Young Sr. who
represented his estate in the case filed before the SEC.
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Fourth Issue In the light of the Resolution issued by this Court in AM No. 00-8-10-SC,[21] the Court
Notice of Lis Pendens Administrator and the Securities and Exchange Commission should be directed to cause the
transfer of the records of SEC Case No. 02-94-4674 to the appropriate court of general
jurisdiction.
On the issue of the annotation of the Notice of Lis Pendens on the titles of the properties
of the corporation and the other respondents, we still find no reason to disturb the ruling of WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED,
the Court of Appeals. subject to the modification that the case be remanded to the proper regional trial court. The
December 9, 1994 Order of Securities and Exchange Commission hearing officer dismissing
Under the third, fourth and fifth causes of action of the Complaint, there are allegations the Complaint and directing the cancellation of the notice of lis pendens, as well as the March
of breach of trust and confidence and usurpation of business opportunities in conflict with 3, 1995 Order denying complainants motion for reconsideration are REVERSED and SET
petitioners fiduciary duties to the corporation, resulting in damage to the Corporation. Under ASIDE. Pursuant to AM No. 00-8-10-SC, the Office of the Court Administrator and the SEC
these causes of action, respondents are asking for the delivery to the Corporation of possession are DIRECTED to cause the actual transfer of the records of SEC Case No. 02-94-4674 to the
of the parcels of land and their corresponding certificates of title. Hence, the suit necessarily appropriate regional trial court.
affects the title to or right of possession of the real property sought to be reconveyed. The Rules
of Court[17] allows the annotation of a notice of lis pendens in actions affecting the title or right SO ORDERED.
of possession of real property.[18] Thus, the Court of Appeals was correct in reversing the SEC
UNION BANK OF THE PHILIPPINES, petitioner, vs. THE HONORABLE COURT OF
Order for the cancellation of the notice of lis pendens.
APPEALS, COMMISSIONER FE ELOISA C. GLORIA, ATTY. MANOLITO SOLLER, IN
The fact that respondents are not stockholders of the Mactan Realty Development THEIR CAPACITY AS CHAIRPERSON AND MEMBER, RESPECTIVELY, OF THE
Corporation and the Lapu-Lapu Real Estate Corporation does not make them non-parties to HEARING PANEL OF THE SECURITIES AND EXCHANGE COMMISSION, EULOGIO
this case. To repeat, the jurisdiction of a court or tribunal over the subject matter is determined O. YUTINGCO, CAROLINE YUTINGCO-YAO, THERESA I. LAO, NIKON INDUSTRIAL
by the allegations in the Complaint. In this case, it is alleged that the aforementioned CORPORATION, NIKOLITE INDUSTRIAL CORPORATION, THAMES PHILIPPINES,
corporations are mere alter egos of the directors-petitioners, and that the former acquired the INC., 2000 INDUSTRIES CORPORATION, TRADE HOPE INDUSTRIAL
properties sought to be reconveyed to FGSRC in violation of the directors-petitioners fiduciary CORPORATION, FIRST UNI-BRANDS FOOD CORPORATION, INTEGRAL STEEL
duty to FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals CORPORATION, CLARION PRINTING HOUSE, INC., NIKON PLAZA, INC., NIKON
composing it will be treated as identical[19] if, as alleged in the present case, the corporate entity LAND CORPORATION, EYCO PROPERTIES, INC., INTERIM RECEIVERS AMELIA
is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an B. CABAL,as representative of SGV, INOCENCIO R. DEZA, JR., as representative
alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. of PNB, and FLORENCIO B. ORENDAIN of EYCO, respondents.

DECISION
Effect of RA 8799
ROMERO, J.:

It has been about a year since the Thai baht plummeted to a record low and sparked the
While we sustain the appellate court, the case can no longer be remanded to the SEC. As
downspin of most of Asias other currencies including our very own peso. The Philippines has
earlier stated, RA 8799, which became effective on August 8, 2000, transferred SECs
not suffered as much from the full impact of the regions worst financial turmoil when most
jurisdiction over cases involving intra-corporate disputes to courts of general jurisdiction or to
neighboring economies are still sluggishly inching their way towards recovery. Tested economic
the regional trial courts.[20] Section 5.2 thereof reads as follows:
initiatives often hailed for helping save the country from losing its hard-earned gains cannot
hide the fact that some businesses are still going downhill in light of serious liquidity problems
5.2. The Commissions jurisdiction over all cases enumerated under Section 5 of Presidential resulting from said crisis. Private respondents present predicament is one such example and
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate from which they now intend to free themselves.
Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction over these The road to recovery seems elusive though. Private respondents bid to salvage their
cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate collapsing business by seeking suspension of payments a statutory device allowing distressed
disputes submitted for final resolution which should be resolved within one (1) year from the debtors to defer payment of their debts now faces a major hindrance as petitioner challenges
enactment of this Code. The Commission shall retain jurisdiction over pending suspension of their recourse to said remedy.
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.
The records disclose the following antecedent facts:

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On September 16, 1997, private respondents EYCO Group of Companies (EYCO),[1] Eulogio O. Bank of Commerce
Yutingco, Caroline Yutingco-Yao, and Theresa T. Lao (the Yutingcos), all of whom are
controlling stockholders of the aforementioned corporations, jointly filed with the SEC Westmont Bank
a Petition for the Declaration of Suspension of Payment[s], Formation and Appointment
of Rehabilitation Receiver/Committee, Approval of Rehabilitation Plan with Alternative
Prayer for Liquidation and Dissolution of Corporations[2] alleging, among other things, The other creditor Banks will be informed as often as needed.
that, the present combined financial condition of the petitioners clearly indicates that their
assets are more than enough to pay off the credits but that due to factors beyond control and Without notifying the members of the consortium, petitioner, however, decided to break
anticipation of the management xxx the inability of the EYCO Group of Companies to meet away from the group by suing private respondents in the regular courts. These cases are:
the obligations as they fall due on the schedule agreed with the [creditors] has now become a
stark reality.[3] In a footnote to said petition[4] the Yutingcos justified their inclusion as co- Civil Case No. 97-2184 (Union Bank of the Philippines v. Nikon Industrial Corporation, et
petitioners before the SEC on the ground that they had personally bound themselves to al.) for Sum of Money with Application for Preliminary Attachment filed before the
EYCOs creditor under a J.S.S. Clause (Joint Several Solidary Guaranty). Regional Trial Court of Makati, Branch 148, on September 23, 1997;[9]

Upon finding the above petition to be sufficient in form and substance, the SEC Hearing Civil Case No. 5360-V-97 (Union Bank of the Philippines v. Eulogio and Bee Kuan Yutingco, et
Panel then composed of Manolito S. Soller, George P. Palmares and Rommel G. Olivia issued al.,) for Annulment, Rescission of Titles/Injunction with prayer for Issuance of
an order[5] dated September 19, 1997 setting its hearing on October 22, 1997.At the same time, Preliminary Mandatory Injunction filed before the Regional Trial Court of Valenzuela,
said panel also directed the suspension of all actions, claims and proceedings against private Branch 172, on September 24, 1997;[10]
respondents pending before any court, tribunal, office, board and/or commission.
Meanwhile, some of private respondents creditor, composed mainly of twenty-two (22) Civil Case No. 66477 (Union Bank of the Philippines v. Eulogion and Bee Kuan Yutingco, et
domestic banks (the consortium)[6] including herein petitioner Union Bank of the al.) for Annulment, Rescission of Titles/Injunction with prayer for Issuance of
Philippines,[7] also convened on September 19, 1997 for the purpose of deciding their options Preliminary Mandatory Injunction filed before the Regional Trial Court of Pasig City,
in the event that private respondents invoke the provisions of Presidential Decree No. 902-A, Branch 157, on September 26, 1997;
as amended. The minutes[8] embodying the terms agreed upon by the consortium in said
meeting provided, inter alia, for the following: Civil Case No. 66479 (Union Bank of the Philippines v. Eulogio and Bee Kuan Yutingco, et
al.) for Annulment, Rescission of Titles/Injunction with Prayer for Issuance of
. . . In response to this, the following were actions agreed upon by all the creditor banks Preliminary Mandatory Injunction filed before the Regional Trial Court of Pasig City,
present: Branch 159, on September 24, 1997; and

Hire a lawyer to advise the banks on the legal matters of suspension of payments. Atty. Civil Case No. 66478 (Union Bank of the Philippines v. Eulogion and Bee Kuan Yutingco, and
Balgos was engaged to be the legal counsel. Enrique Yao) for Annulment, Rescission of Titles/Injunction with prayer for Issuance of
Preliminary Mandatory Injunction filed before the Regional Trial Court of Pasig City,
Form a management committee to represent all the creditor banks. This will be composed of Branch 158, on September 25, 1997.
the first seven banks with the highest exposures, namely:
In the meantime, the SEC issued an order[11] on October 3, 1997, appointing (a) Amelia
Philippine National Bank B. Cabal of SGV & Co., as common representative; (b) Inoncencio Deza, Jr., of the Philippine
National Bank as representative of the creditor-banks; and (c) Atty. Florencio B. Orendain as
representative of the EYCO Group and the Yutingcos, to act collectively as interim receivers of
Far East Bank and Trust Co. the distressed corporations.

Traders Royal Bank Aside from commencing suits in the regular courts, petitioner also vehemently opposed
private respondents petition for suspension of payments in the SEC by filing a Motion to
Dismiss on October 22, 1997.[12] It contended that the SEC was bereft of jurisdiction over such
Allied Banking Corporation petition on the ground that the inclusion of the Yutingcos in the petition cannot be allowed
since the authority and power of the Commission under the (sic) virtue of [the] law applies only
Philippine Commercial and International Bank to corporations, partnership[s] and other forms of associations, and not to individual
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petitioners who are not clearly covered by P.D. 902-A as amended. According to petitioner, what a Consolidated Intervention and Counter-Motion for Contempt and for the Imposition of
should have been applied instead was the provision on suspension of payments under Act No. Disciplinary Measures Against Petitioners Counsel[17] both dated November 3, 1997
1956, otherwise known as the Insolvency Law, which mandated the filing of the petition in the claiming that they were not impleaded at all by petitioner in its petition before the appellate
Regional Trial Court and not in the SEC. Finally, petitioner disputed private respondents court when in fact they had actual, material, direct and legal interest in the outcome of said
recourse to suspension of payments alleging that the latter prejudiced their creditors by case as owners of at least eighty-five percent (85%) of private respondents
fraudulently disposing of corporate properties within the 30-day period prior to the filing of obligations. Moreover, they opposed said petition because of petitioners ostensible failure to
such petition. exhaust administrative remedies in the consortium and in the SEC and for being guilty of
forum-shopping in the appellate court as its Motion to Dismiss in the SEC was yet to be resolved
Subsequently, a creditors meeting was again convened pursuant to SECs earlier order at the time.
dated September 19, 1997, wherein the matter of creating a management committee (the
Mancom) was submitted for resolution. Apparently, only petitioner opposed the creation of said Petitioner, however, countered intervenors motion in its Opposition to Urgent Motion
Mancom as it filed earlier with the SEC its Motion to Dismiss. for Intervention and Reply to the Comment-in-Intervention,[18] vehemently challenging the
existence of a consortium, its membership therein, the intervenors ownership of at least eighty-
The SEC Hearing Panel composed of Hon. Fe Eloisa C. Gloria and Manolito S. Soller five percent (85%) of private respondents obligations and their due representation of the twenty-
subsequently issued an Omnibus Order[13] on October 27, 1997, directing this time the two (22) creditor banks, the existence of an agreement drawn up during the September 19,
creation of the Mancom consisting of seven (7) members; four (4) of whom shall come from the 1997 meeting regarding the satisfaction of the individual exposures of the creditor banks, and
creditor banks, one (1) from the non-bank creditors, one (1) from the petitioners and one (1) to its consent to the creation of the Mancom. It also denied intervenors accusation of forum-
be appointed by the SEC. Moreover, the panel likewise granted an earlier Urgent Motion for shopping and non-exhaustion of administrative remedies on the ground that it was acting with
Reconsideration filed by creditor banks which sought to annotate the September 19, 1997 a sense of urgency, the Hearing Panel having already created the Mancom and was about to
suspension order on the titles of the properties of the private respondent corporations. In appoint the members thereof at the same time.
issuing said order, the panel resolved that the interest of private respondents and their
creditors could be best served if such Mancom is created. It is noteworthy, however, that this After several exchanges of pleadings between the parties, the Court of Appeals First
directive expressly stated that the same was without prejudice to the resolution of petitioners Division finally rendered its assailed decision[19] on December 22, 1997, granting intervention
Motion to Dismiss whose scheduled hearing was set by petitioner itself on October 29, 1997. of the seven (7) creditor banks named above while dismissing the petition for failure to exhaust
administrative remedies and forum-shopping. Nothing in the said decision, however, indicates
Aggrieved, petitioner immediately took recourse to the Court of Appeals on October 29, that the appellate court squarely confronted the issue of jurisdiction raised earlier by petitioner.
1997 by filing therewith a Petition for Certiorari with Prayer for the Issuance of a
Temporary Restraining Order and/or Writ of Preliminary Injunction [14] under Rule 65 of Without moving for reconsideration of the appellate courts decision, petitioner elevated
the 1997 Rules of Civil Procedure. It imputed grave abuse of discretion on the part of the SEC the said matter to this Court through a Petition for Certiorari with Prayer for the Issuance
Hearing Panel in precipitately issuing the suspension order dated September 19, 1997 and in of a Temporary Restraining Order and/or Writ of Preliminary Injunction [20]filed on
prematurely directing the creation of the Mancom prior to the scheduled hearing of its Motion December 29 1997. Petitioner, however, seasonably amended[21] the same on January 5, 1998.
to Dismiss on October 29, 1997. Petitioner lamented that these actions of the panel deprived it
of due process by effectively rendering moot and academic its Motion to Dismiss which allegedly Upon being notified by petitioner that the SEC Hearing Panel had already appointed
presented a prejudicial question to the propriety of creating a Mancom. Furthermore, it insisted members of the proposed Mancom on January 5, 1998,[22] this Court issued a resolution[23] on
that jurisdiction over private respondents petition properly pertained to the Regional Trial January 6, 1998, granting the temporary restraining order (TRO) prayed for in the petition
Courts under Act No. 1956 and that, in any event, private respondents were not entitled to and requiring all the respondents to comment thereon.
suspension of payments since they had already committed fraudulent dispositions of their Both EYCO and the Yutingcos duly filed their Comment[24] on January 14, 1998 asking
properties. the Court to cite petitioner and its counsel for contempt because of deliberate forum shopping,
Without giving due course to Union Banks petition, the appellate court issued assailing the propriety of the temporary restraining order which we issued, and arguing that
a resolution[15] on October 31, 1997 directing private respondents to submit their comment on Union Banks petition should be dismissed outright for (1) categorizing it as having been filed
the petition while temporarily restraining the SEC from appointing the members of Mancom, both under Rule 45 and Rule 65 of the 1997 Rules of Civil Procedure; (2) failing to move for
annotating the suspension orders on the titles of the properties of private respondents, and reconsideration before the Court of Appeals; (3) failing to implead indispensable parties; (4)
taking further proceedings with regard to the suspension of payments and/or rehabilitation. raising factual allegations of fraud; (5) forum shopping; and (6) failing to exhaust administrative
remedies.
Meanwhile, members of so-called steering committee of the consortium composed of the
Philippine National Bank, Far East Bank and Trust Company, Allied Bank, Traders Royal Bank, On January 27, 1998, the intervenors before the appellate court also came to as through
Philippine Commercial International Bank, Bank of Commerce, and Westmont Bank (the an Urgent Manifestation,[25] seeking the outright dismissal of the petition on grounds of
Intervenors) filed with the appellate court an Urgent Motion for Intervention[16] and forum-shopping and failure to implead them as indispensable parties which allegedly violated

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Section 4, Rule 45 of the 1997 Rules of Civil Procedure requiring that the petition should state It is already a well-settled jurisprudential precept that jurisdiction over a subject matter
the name of the appealing party as the petitioner and the adverse party as respondent. is conferred by law.[30] In this regard, the pertinent provision of law conferring jurisdiction upon
the SEC over petitions for suspension of payments such as the one filed earlier by private
For their part, the interim receivers who are also impleaded as private respondents in the respondents provides:
instant petition, filed their own Comment[26] on January 30, 1998, likewise contending that
petitioner failed to exhaust administrative remedies when it leap-frogged to the Court of Appeals
and that, in any case, the SEC had jurisdiction to entertain private respondents petition for SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and
suspension of payments. Exchange Commission over corporations, partnerships and other forms of association
registered with it as expressly granted under existing law and decrees, it shall have original
In response to the respective comments of private respondents and interim receivers, and exclusive jurisdiction to hear and decide cases involving.
petitioner filed its Consolidated Reply and Opposition[27] on February 5, 1998, reiterating its
earlier position that (1) the SEC had no jurisdiction to entertain private respondents petition xxxxxxxxx
for suspension of payments; (2) private respondents are already bankrupt because of the
alleged fraudulent disposition they have made and hence, are no longer entitled to the remedy
of suspension of payments; (3) prior motion for reconsideration is not indispensable when, as (a) Petitions of corporations, partnerships or associations to be declared in the state of
in this case, there is an actual threat that the Mancom members would soon be appointed; (4) suspension of payments in cases where the corporation, partnership or association
intervenors are not indispensable parties; and (5) there is no forum-shopping. possesses sufficient property to cover all its debts but foresees the impossibility of
meeting then when they respectively fall due or in case where the corporation,
Complaining that daily interests on its outstanding debts continue mounting by the partnership or association has no sufficient assets to cover its liabilities, but is under the
millions and that the work of SEC-appointed interim receivers has been paralyzed for quite management of a Rehabilitation Receiver or Management Committee created pursuant to
some time, private respondents filed an Urgent Motion[28] on February 12, 1998 praying that this Decree. (As added by P.D. No. 1758).
the temporary restraining order be lifted for the preservation of their assets and to pave the
way for rehabilitation. They likewise asked, among other things, that their motion to cite As state earlier, it is precisely on the basis of above provision that petitioner now avers
petitioner and its counsel for contempt be immediately resolved. that the SEC cannot validly entertain private respondents petition for suspension of
Petitioner, in turn, filed a Motion to Cite Yutingcos and Their Counsel in payments. Its reason is that the law vesting jurisdiction upon the SEC to hear petitions of this
Contempt[29] for allegedly misleading this Court in stating that Union Bank failed to pay the kind limits itself to petitions filed only by corporations, partnerships or associations. Petitioner
required deposit for costs, that they were not served a copy of the Amended Petition, and that thus asserts that the petition filed by private respondents with the SEC should have been
they never nominated Sycip, Gorres, Velayo & Co. (the SGV) is rehabilitation receiver. dismissed because it was not such a kind of petition filed solely by corporations when it
impleaded as co-petitioners the Yutingcos who are individual persons upon whom said body
As may be gleaned from the above factual account, there are only two basic and cannot acquire jurisdiction.
outstanding issues in the instant case which require our resolution, namely:
We fully agree with petitioner in contending that the SECs jurisdiction on matters of
suspension of payments is confined only to those initiated by corporations, partnerships or
(1) Whether the SEC can validly acquire jurisdiction over a petition for suspension of associations. Actually, this is not the first time that the Court has encountered an issue as the
payments filed pursuant to Section 5(d) of P.D. No. 902 A, as amended, when such one at bar. It has made a similar pronouncement in the seminal case of Chung Ka Bio v.
petition joins as co-petitioners the petitioning corporate entities AND individual Intermediate Appellate Court, et al.,[31] likewise involving a petition for suspension of payments
stockholders thereof; and filed by a corporate entity and an individual stockholder, where we ruled that:

(1) Whether petitioner engaged in forum-shopping and failed to exhaust administrative This section [referring to Section 5 (d) of P.D. No. 902-A, as amended] clearly does not allow a
remedies in taking direct recourse to the Court of Appeals to challenge the assumption of mere individual to file the petition which is limited to corporations, partnerships or
jurisdiction by the SEC Hearing panel over private respondents petition for suspension of associations. Administrative agencies like the SEC are tribunals of limited jurisdiction and, as
payments. such, can exercise only those powers which are specifically granted to them by their enabling
statutes. Consequently, where no authority is granted to hear petitions of individuals for
We shall discuss this issues seriatim. suspension of payments, such petitions are beyond the competence of the SEC. x x x.

The circumstance that Ching is a co-signer in the corporations promissory notes, collateral or
guarantee or security agreements, does not make him a proper party. Jurisdiction over the
I. Jurisdiction of the Securities and Exchange Commission.
subject matter must exist as a matter of law and cannot be fixed by agreement of the parties,
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Juridical Personality – Full Text
acquired through, or waived, enlarged or diminished by, any act or omission; neither can it be That the Court never dismissed a petition for suspension of payments as the cases involved
conferred by acquiescence of the tribunal. Hence, Alfredo Ching, as a mere individual, cannot in Chung Ka Bio and MPPI is not without legal basis. The reason is to be found in Section 1,
be allowed as a co-petitioner in SEC Case No. 2250. [Underscoring supplied] Rule XXIII of the REVISED RULES OF PROCEDURE IN THE SECURITIES AND EXCHANGE
COMMISSION (As amended on April 25, 1993) which was promulgated pursuant to the rule-
This Court reinforced further the above dictum in Traders Royal Bank v. Court of Appeals, making powers vested in the SEC by P.D. No. 902-A, as amended. It states:
et al.,[32] a sequel to Chung Ka Bio, where we declared:
SECTION 1. Provisions of the Rules of Court. --- The provisions of the Rules of Court, unless
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM [Philippine inconsistent, shall have suppletory effect on those Rules. (Amended). [Underscoring
Blooming Mills], the SEC could not assume jurisdiction over his person and properties. The Supplied].
Securities and Exchange Commission was empowered, as rehabilitation receiver, to take
custody and control of the assets and properties of PBM only not over private individuals, Since we have painstakingly probed said SEC rules but unearthed nothing that squarely
except stockholders in an intra-corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. treats of a situation where an individual and a corporate entity both filed together a petition
1758). Being a nominal party in SEC Case No. 2250, Chings properties were not included in for suspension of payments, recourse must then be had to the Rules of Court which is
the rehabilitation receivership that the SEC constituted to take custody of PBMs expressly made suppletory to the SEC rules. In this regard, we find Section 11, Rule 3 of the
assets. Therefore, the petitioner bank was not barred from filing a suit against Ching, as a 1997 Rules of Civil Procedure applicable which provides:
surety for PBM. An anomalous situation would arise if individual sureties for debtor
corporations may escape liability by simply co-filing with the corporation a petition for SEC. 11. Misjoinder and non-joinder of parties. --- Neither misjoinder nor non-joinder of
suspension of payments in the SEC whose jurisdiction is limited only to corporations and parties is ground for dismissal of an action. Parties may be dropped or added by order or the
their corporate assets. [Underscoring supplied] court on motion of any party or on its own initiative at any stage of the action and on such
terms as are just.Any claim against a misjoined party may be severed and proceeded with
Very recently, we reiterated said pronouncements in Modern Paper Products, Inc. et al., v. separately. (11a) [Underscoring supplied]
Court of Appeals, et al.,[33] viz.:
From the foregoing, it is thus clear that in a case of misjoinder of parties --- which in this
The Court of Appeal was correct in concluding that the SEC lacked or exceeded its case is the co-filing of the petition for suspension of payments by both the Yutingcos and the
jurisdiction when it included the Co spouses under a state of suspension of payments EYCO group --- the remedy has never been to dismiss the petition in its entirety but to dismiss
together with MPPI. x x x it only as against the party upon whom the tribunal or body cannot acquire jurisdiction. The
result, therefore, is that the petition with respect to EYCO shall subsist and may be validly
It is axiomatic that jurisdiction is conferred by the Constitution or by law. It is indubitably acted upon by the SEC. The Yutingcos, on the other hand, shall be dropped from the petition
clear from the aforequoted Section 5 (d) that only corporations, partnerships, and and be required to pursue their remedies in the regular courts of competent jurisdiction.[34]
associations --- NOT private individuals --- can file with the SEC petitions to be declared in a We are, of course, aware of the argument advanced by petitioner that the petition should
state of suspension of payments. It logically follows that the SEC does not have jurisdiction to be entirely dismissed and taken out of the SECs jurisdiction on account of the alleged
entertain petitions for suspension of payments filed by parties other than corporations, insolvency of private respondents. In this regard, petitioner theorizes that private respondents
partnerships or associations. x x x [Underscoring supplied]. have already become insolvent when they allegedly disposed of a substantial portion of their
properties in fraud of creditors, hence, suspension of payments with the SEC is not the proper
Notwithstanding the foregoing conclusions, this Court, however, does not subscribe to the remedy.
theory espoused by petitioner that the case filed by private respondents should be dismissed
outright in its entirety. The reason is that while it is true that the SEC cannot acquire Such argument does not persuade us. Petitioners allegation of fraudulent dispositions of
jurisdiction over an individual filing a petition for suspension of payments together with a private respondents assets and the supposed insolvency of the latter are hardly of any
corporate entity, a closer scrutiny of Chung Ka Bio and MPPI does not in any manner suggest, consequence to the assumption of jurisdiction by the SEC over the nature or subject matter of
even tangentially, that a petition as the one at bar must be dismissed likewise with respect to the petition for suspension of payments. Aside from the fact that these allegations are
the corporate co-petitioner. What Chung Ka Bio and MPPI respectively declared was that evidentiary in nature and still remains to be proved, we have likewise consistently ruled that
Alfredo Ching, as a mere individual, cannot be allowed as a co-petitioner in SEC Case No. what determines the nature of an action, as well as which court or body has jurisdiction over
2250 and respondent Court of Appeals was correct in ordering the dismissal of the petition it, are the allegations of the complaint, or a petition as in this case, and the character of the
for suspension of payments insofar as the Co spouses were concerned. [Underscoring relief sought.[35] That the merits of the case after due proceedings are later found to veer away
supplied] from the claims asserted by EYCO in its petition, as when it is shown later that it is actually

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Juridical Personality – Full Text
insolvent and may not be entitled to suspension of payments, does not divest the SEC at all of thirty days after receipt by the appellant of notice of such decision, ruling or order." Such
its jurisdiction already acquired at its inception through the allegations made in the petition. procedure being available, could have been resorted to by petitioner which, however, it chose
to forego. Furthermore, by taking up the matter with the SEC, it could still have obtained an
Neither are we convinced by petitioners reasoning that the Yutingcos and the corporate injunction which it similarly sought from the appellate court via its petition
entities making up the EYCO Group, on the basis of the footnote [36] that the former were filing for certiorari because the said body has been empowered by Section 6 (a) of P.D. No. 902-A "to
the petition because they bound themselves as surety to the corporate obligations, should be issue preliminary or permanent injunctions whether prohibitory or mandatory, in all cases in
considered as mere individuals who should file their petition for suspension of payments with which it has jurisdiction...." Finally, petitioner itself hardly concealed the fact that it distrusted
the regular courts pursuant to Section 2 of the Insolvency Law.[37] We do not see any legal altogether the whole mechanism of appeal to the SEC en banc, which is why it did not find
ground which should lead one to such conclusion. The doctrine of piercing the veil of corporate resort thereto imperative. Thus, it explicitly stated that "it is a given that SEC will not reverse
fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies itself, therefore, any reconsideration or appeal en banc would be a mere exercise of futility,
when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud [particularly] when public respondent Associate Commissioner Fe Gloria is the acting
or defend crime.[38] Chairperson of SEC."[41] What basis does petitioner have in casting doubt on the integrity and
competence of the SEC en banc? This baseless, even reckless, reasoning hardly deserves
an iota of attention. It cannot justify a procedural short-cut quite contrary to law. If this were
II. Non-Exhaustion of Administrative Remedies and Forum-Shopping so, then the SEC en banc would not have been empowered at all by the statute to take
cognizance of appeals from its subordinate units.But the lawmakers, having faith in a collegial
body such as the SEC en banc, precisely empowered it to act as such appellate body. Whatever
opinion petitioner entertains with respect to the SEC's competence cannot override the fact
Equally weak is petitioners challenge on the Court of Appeals decision dismissing its
that the law mandates recourse thereto.
petition for certiorari for failure to exhaust administrative remedies. Its complaint that the SEC
Hearing Panel was acting without jurisdiction in conducting proceedings relative to private As to the issue of forum-shopping, we fully subscribe to the Court of Appeals in ruling
respondents petition and for rendering moot and academic its Motion to Dismiss does not that such violation existed when it declared:
justify the procedural short-cut it took to the appellate court. Basic is the rule which has been
consistently held by this Court in a long line of cases that before a party is allowed to seek the
"Finally, the charge that petitioner is guilty of forum shopping --- which is the institution of
intervention of the court, it is a pre-condition that should have availed of all the means of
two or more actions or proceedings grounded on the same cause --- cannot unceremoniously
administrative processes afforded by him. Hence, if a remedy within the administrative
be glossed over. It is patent that the instant petition and the pending motion to dismiss before
machinery can still be resorted to by giving the administrative officer concerned every
the SEC raise identical issues, namely, lack of jurisdiction and the propriety of the
opportunity to decide on a matter that comes within his jurisdiction, then such remedy should
suspension of payments."[42] [Underscoring supplied]
be exhausted first before the courts judicial power can be sought. The premature invocation of
courts intervention is fatal to ones cause of action.[39] That this is the prevailing rule is aptly
explained thus: Actually, even a simple perusal of the pleadings filed by petitioner before this Court reveals
that it has been continuously reiterating the same arguments that it had earlier raised in its
Motion to Dismiss and its Petition for Certiorari before the appellate court.Hence, we do not see
The underlying principle of the rule of exhaustion of administrative remedies rests on the
why the appellate court's decision on this aspect should not be sustained.
presumption that the administrative agency, if afforded a complete chance to pass upon the
matter, will decide the same correctly. There are both legal and practical reasons for the WHEREFORE, the instant petition is hereby DENIED for lack of merit. Finding neither
principle. The administrative process is intended to provide less expensive and more speedy reversible error nor grave abuse of discretion amounting to lack or excess of jurisdiction on the
solutions to disputes. Where the enabling statute indicates a procedure for administrative part of the Court of Appeals, its decision dated December 22, 1997 is AFFIRMED. Furthermore,
review and provides a system of administrative appeal or reconsideration, the courts --- for the Temporary Restraining Order (TRO) issued by this Court in its resolution order of January
reason of law, comity, and convenience --- will not entertain a case unless the available 6, 1988, is hereby LIFTED and/or DISSOLVED. However, the Securities and Exchange
administrative remedies have been resorted to and the appropriate authorities have been Commission is directed to drop from the petition for suspension of payments filed before it the
given an opportunity to act and correct the errors committed in the administrative forum.[40] names of Eulogio O. Yutingco, Caroline Yutingco-Yao, and Theresa T. Lao without prejudice to
their filing a separate petition in the Regional Trial Courts.
In this case, petitioner was actually not without remedy to correct what it perceived and
supposed was an erroneous assumption of jurisdiction by the SEC without having recourse Cost against petitioner.
immediately to the Court of Appeals. Under Section 6 (m) of P.D. No. 902-A, it has been SO ORDERED.
expressly provided that "the decision, ruling or order of any such Commissioner, bodies,
boards, committees and/or officer may be appealed to the Commission sitting en banc within

Page 10 of 53
Juridical Personality – Full Text
LUXURIA HOMES, INC., and/or AIDA M. POSADAS, petitioners, vs. HONORABLE COURT and a hollow blocks factory for P60,000.00. Private respondents also claimed that petitioner
OF APPEALS, JAMES BUILDER CONSTRUCTION and/or JAIME T. Posadas agreed that private respondents will develop the land into a first class subdivision thru
BRAVO, respondents. a management contract and that petitioner Posadas is unjustly refusing to comply with her
obligation to finalize the said management contract.
DECISION The prayer in the complaint of the private respondents before the trial court reads as
MARTINEZ, J.: follows:

This petition for review assails the decision of the respondent Court of Appeals dated WHEREFORE, premises considered, it is respectfully prayed of this Honorable Court that
March 15, 1996,[1] which affirmed with modification the judgment of default rendered by the after hearing/trial judgment be rendered ordering defendant to:
Regional Trial Court of Muntinlupa, Branch 276, in Civil Case No. 92-2592 granting all the
reliefs prayed for in the complaint of private respondent James Builder Construction and/or a) Comply with its obligation to deliver/finalize Management Contract of its land in Sucat,
Jaime T. Bravo. Muntinlupa, Metro Manila and to pay plaintiff its balance in the amount of P1,708,489.00;

As culled from the record, the facts are as follows:


b) Pay plaintiff moral and exemplary damages in the amount of P500,000.00;
Petitioner Aida M. Posadas and her two (2) minor children co-owned a 1.6 hectare property
in Sucat, Muntinlupa, which was occupied by squatters. Petitioner Posadas entered into c) Pay plaintiff actual damages in the amount of P500,000.00
negotiations with private respondent Jaime T. Bravo regarding the development of the said (Bunkhouse/warehouse P300,000.00, Hollow-block factory P60,000.00, lumber, cement,
property into a residential subdivision. On May 3, 1989, she authorized private respondent to etc., P120,000.00, guard P20,000.00);
negotiate with the squatters to leave the said property. With a written authorization,
respondent Bravo buckled down to work and started negotiations with the squatters.
d) Pay plaintiff attorneys fee of P50,000 plus P700 per appearance in court and 5% of that
Meanwhile, some seven (7) months later, on December 11, 1989, petitioner Posadas and which may be awarded by the court to plaintiff re its monetary claims;
her two (2) children, through a Deed of Assignment, assigned the said property to petitioner
Luxuria Homes, Inc., purportedly for organizational and tax avoidance purposes. Respondent e) Pay cost of this suit.[3]
Bravo signed as one of the witnesses to the execution of the Deed of Assignment and the Articles
of Incorporation of petitioner Luxuria Homes, Inc.
On September 27, 1993, the trial court declared petitioner Posadas in default and allowed
Then sometime in 1992, the harmonious and congenial relationship of petitioner Posadas the private respondents to present their evidence ex-parte. On March 8, 1994, it ordered
and respondent Bravo turned sour when the former supposedly could not accept the petitioner Posadas, jointly and in solidum with petitioner Luxuria Homes, Inc., to pay private
management contracts to develop the 1.6 hectare property into a residential subdivision, the respondents as follows:
latter was proposing. In retaliation, respondent Bravo demanded payment for services rendered
in connection with the development of the land. In his statement of account dated 21 August 1. x x x the balance of the payment for the various services performed by Plaintiff with respect
1991[2] respondent demanded the payment of P1,708,489.00 for various services rendered, i.e., to the land covered by TCT NO. 167895 previously No. 158290 in the total amount
relocation of squatters, preparation of the architectural design and site development plan, of P1,708,489.00.
survey and fencing.
Petitioner Posadas refused to pay the amount demanded. Thus, in September 1992, 2. x x x actual damages incurred for the construction of the warehouses/bunks, and for the
private respondents James Builder Construction and Jaime T. Bravo instituted a complaint for materials used in the total sum of P1,500,000.00.
specific performance before the trial court against petitioners Posadas and Luxuria Homes,
Inc. Private respondents alleged therein that petitioner Posadas asked them to clear the subject 3. Moral and exemplary damages of P500,000.00.
parcel of land of squatters for a fee of P1,100,000.00 for which they were partially paid the
amount of P461,511.50, leaving a balance of P638,488.50. They were also supposedly asked to
4. Attorneys fee of P50,000.00.
prepare a site development plan and an architectural design for a contract price of P450,000.00
for which they were partially paid the amount of P25,000.00, leaving a balance
of P425,000.00. And in anticipation of the signing of the land development contract, they had 5. And cost of this proceedings.
to construct a bunkhouse and warehouse on the property which amounted to P300,000.00,

Page 11 of 53
Juridical Personality – Full Text
Defendant Aida Posadas as the Representative of the Corporation Luxuria Homes, evidencing payments made by petitioner Posadas to respondents Bravo for squatter relocation,
Incorporated, is further directed to execute the management contract she committed to do, architectural design, survey and fencing.
also in consideration of the various undertakings that Plaintiff rendered for her.[4]
Respondents prepared the architectural design, site development plan and survey in
connection with petitioner Posadas application with the Housing and Land Regulatory Board
Aggrieved by the aforecited decision, petitioners appealed to respondent Court of Appeals, (HLRUB) for the issuance of the Development Permit, Preliminary Approval and Locational
which, as aforestated, affirmed with modification the decision of the trial court. The appellate Clearance.[6]Petitioner benefited from said services as the Development Permit and the
court deleted the award of moral damages on the ground that respondent James Builder Locational Clearance were eventually issued by the HLURB in her favor. Petitioner Posadas is
Construction is a corporation and hence could not experience physical suffering and mental therefore liable to pay for these services rendered by respondents. The contract price for the
anguish. It also reduced the award of exemplary damages. The dispositive portion of the survey of the land is P140,000.00. Petitioner made partial payments totaling P130,000.00
decision reads: leaving a payable balance of P10,000.00.

WHEREFORE, the decision appealed from is hereby AFFIRMED with the modification that the In his testimony,[7] he alleged that the agreed price for the preparation of the site
award of moral damages is ordered deleted and the award of exemplary damages to the development plan is P500,000.00 and that the preparation of the architectural designs is
plaintiffs-appellee should only be in the amount of FIFTY THOUSAND (P50,000.00) PESOS.[5] for P450,000, or a total of P950,000.00 for the two contracts. In his complaint however,
respondent Bravo alleged that he was asked to prepare the site development plan and the
architectural designs x x x for a contract price of P450,000.00 x x x.[8] The discrepancy or
Petitioners motion for reconsideration was denied, prompting the filing of this petition for inconsistency was never reconciled and clarified.
review before this Court.
We reiterate that we cannot award an amount higher than what was claimed in the
On January 15, 1997, the Third Division of this Court denied due course to this petition complaint. Consequently for the preparation of both the architectural design and site
for failing to show convincingly any reversible error on the part of the Court of Appeals. This development plan, respondent is entitled to the amount of P450,000.00 less partial payments
Court however deleted the grant of exemplary damages and attorneys fees. The Court also made in the amount of P25,000.00. In Policarpio v. RTC of Quezon City,[9] it was held that a
reduced the trial courts award of actual damages from P1,500,000.00 to P500,000.00 court is bereft of jurisdiction to award, in a judgment by default, a relief other than that
reasoning that the grant should not exceed the amount prayed for in the complaint. In the specifically prayed for in the complaint.
prayer in the complaint respondents asked for actual damages in the amount of P500,000.00
only. As regards the contracts for the ejectment of squatters and fencing, we believe however
that respondents failed to show proof that they actually fulfilled their commitments
Still feeling aggrieved with the resolution of this Court, petitioners filed a motion for therein. Aside from the bare testimony of respondent Bravo, no other evidence was presented
reconsideration. On March 17, 1997, this Court found merit in the petitioners motion for to show that all the squatter were ejected from the property. Respondent Bravo failed to show
reconsideration and reinstated this petition for review. how many shanties or structures were actually occupying the property before he entered the
From their petition for review and motion for reconsideration before this Court, we now same, to serve as basis for concluding whether the task was finished or not. His testimony
synthesize the issues as follows: alone that he successfully negotiated for the ejectment of all the squatters from the property
will not suffice.
1. Were private respondents able to present ex-parte sufficient evidence to
substantiate the allegations in their complaint and entitle them to their prayers? Likewise, in the case of fencing, there is no proof that it was accomplished as
alleged. Respondent Bravo claims that he finished sixty percent (60%) of the fencing project but
2. Can petitioner Luxuria Homes, Inc., be held liable to private respondents for the he failed to present evidence showing the area sought to be fenced and the actual area fenced
transactions supposedly entered into between petitioner Posadas and private by him. We therefore have no basis to determining the veracity respondents allegations. We
respondents? cannot assume that the said services rendered for it will be unfair to require petitioner to pay
the full amount claimed in case the respondents obligations were not completely fulfilled.
3. Can petitioners be compelled to enter into a management contract with private
respondents? For respondents failure to show proof of accomplishment of the aforesaid services, their
claims cannot be granted. In P.T. Cerna Corp. v. Court of Appeals,[10] we ruled that in civil
Petitioners who were declared in default assert that the private respondents who presented cases, the burden of proof rests upon the party who, as determined by the pleadings or the
their evidence ex-parte nonetheless utterly failed to substantiate the allegations in their nature of the case, asserts the affirmative of an issue. In this case the burden lies on the
complaint and as such cannot be entitled to the reliefs prayed for. complainant, who is duty bound to prove the allegations in the complaint. As this Court has
A perusal of the record shows that petitioner Posadas contracted respondents Bravo to held, he who alleges a fact has the burden of proving it and A MERE ALLEGATION IS NOT
render various services for the initial development of the property as shown by vouchers EVIDENCE.

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And the rules do not change even if the defendant is declared in default. In the leading surreptitiously formed Luxuria Homes, Inc., and transferred the subject parcel of land to it to
case of Lopez v. Mendezona,[11] this Court ruled that after entry of judgment in default against evade payment and defraud creditors, including private respondents. This allegation does not
a defendant who has neither appeared nor answered, and before final judgment in favor of the find support in the evidence on record.
plaintiff, the latter must establish by competent evidence all the material allegations of his
complaint upon which he bases his prayer for relief. In De los Santos v. De la Cruz[12] this On the contrary we hold that respondents Court of Appeals committed a reversible error
Court declared that a judgment by default against a defendant does not imply a waiver of rights when it upheld the factual finding of the trial court that petitioners liability was aggravated by
except that of being heard and of presenting evidence in his favor. It does not imply admission the fact that Luxuria Homes, Inc., was formed by petitioner Posadas after demand for payment
by the defendant of the facts and causes of action of the plaintiff, because the codal section had been made, evidently for her to evade payment of her obligation, thereby showing that the
requires the latter to adduce his evidence in support of his allegations as an indispensable transfer of her property to Luxuria Homes, Inc., was in fraud of creditors.
condition before final judgment could be given in his favor. Nor could it be interpreted as an We easily glean from the record that private respondents sent demand letters on 21 August
admission by the defendant that the plaintiffs causes of action finds support in the law or that 1991 and 14 September 1991, or more than a year and a half after the execution of the Deed
the latter is entitled to the relief prayed for. of Assignment on 11 December 1989, and the issuance of the Articles of Incorporation of
We explained the rule in judgments by default in Pascua v. Florendo,[13] where we said petitioner Luxuria Homes on 26 January 1990. And, the transfer was made at the time the
that nowhere is it stated that the complainants are automatically entitled to the relief prayed relationship between petitioner Posadas and private respondents was supposedly very
for, once the defendants are declared in default. Favorable relief can be granted only after the pleasant. In fact the Deed of Assignment dated 11 December 1989 and the Articles of
court has ascertained that the evidence offered and the facts proven by the presenting party Incorporation of Luxuria Homes, Inc., issued 26 January 1990 were both signed by respondent
warrant the grant of the same. Otherwise it would be meaningless to require presentation of Bravo himself as witness. It cannot be said then that the incorporation of petitioner Luxuria
evidence if everytime the other party is declared in default, a decision would automatically be Homes and the eventual transfer of the subject property to it were in fraud of private respondent
rendered in favor of the non-defaulting party and exactly according to the tenor of his as such were done with the full knowledge of respondent Bravo himself.
prayer. In Lim Tanhu v. Ramolete[14] we elaborated and said that a defaulted defendant is not Besides petitioner Posadas is not the majority stockholder of petitioner Luxuria Homes,
actually thrown out of court. The rules see to it that any judgment against him must be in Inc., as erroneously stated by the lower court. The Articles of Incorporation of petitioner Luxuria
accordance with law. The evidence to support the plaintiffs cause is, of course, presented in his Homes, Inc., clearly show that petitioner Posadas owns approximately 33% only of the capital
absence, but the court is not supposed to admit that which is basically incompetent. Although stock.Hence petitioner Posadas cannot be considered as an alter ego of petitioner Luxuria
the defendant would not be in a position to object, elementary justice requires that only legal Homes, Inc.
evidence should be considered against him. If the evidence presented should not be sufficient
to justify a judgment for the plaintiff, the complaint must be dismissed. And if an unfavorable To disregard the separate juridical personality of a corporation, the wrongdoing must be
judgment should be justifiable, it cannot exceed the amount or be different in kind from what clearly and convincingly established. It cannot be presumed. This is elementary. Thus
is prayed for in the complaint. in Bayer-Roxas v. Court of Appeals,[17] we said that the separate personality of the
corporation may be disregarded only when the corporation is used as a cloak or cover for fraud
The prayer for actual damages in the amount of P500,000.00, supposedly for the or illegality, or to work injustice, or where necessary for the protection of the
bunkhouse/warehouse, hollow-block factory, lumber, cement, guard, etc., which the trial court creditors. Accordingly in Del Rosario v. NLRC,[18] where the Philsa International Placement
granted and even increased to P1,500,000.00, and which this Court would have rightly reduced and Services Corp. was organized and registered with the POEA in 1981, several years before
to the amount prayed for in the complaint, was not established, as shown upon further review the complainant was filed a case in 1985, we held that this cannot imply fraud.
of the record. No receipts or vouchers were presented by private respondents to show that they
actually spent the amount. In Salas v. Court of Appeals,[15] we said that the burden of proof Obviously in the instant case, private respondents failed to show proof that petitioner
of the damages suffered is on the party claiming the same. It his duty to present evidence to Posadas acted in bad faith. Consequently since private respondents failed to show that
support his claim for actual damages. If he failed to do so, he has only himself to blame if no petitioner Luxuria Homes, Inc., was a party to any of the supposed transactions, not even to
award for actual damages is handed down. the agreement to negotiate with and relocate the squatters, it cannot be held liable, nay jointly
and in solidum, to pay private respondents. In this case since it was petitioner Aida M. Posadas
In fine, as we declared in PNOC Shipping & Transport Corp. v. Court of who contracted respondent Bravo to render the subject services, only she is liable to pay the
Appeals,[16] basic is the rule that to recover actual damages, the amount of loss must not only amounts adjudged herein.
be capable of proof but must actually be proven with reasonable degree of certainty, premised
upon competent proof or best evidence obtainable of the actual amount thereof. We now resolved the third and final issue. Private respondents urge the court to compel
petitioners to execute a management contract with them on the basis of the authorization letter
We go to the second issue of whether Luxuria Homes, Inc., was a party to the transactions dated May 3, 1989. The full text of Exh D reads:
entered into by petitioner Posadas and private respondents and thus could be held jointly and
severally with petitioner Posadas. Private respondents contend that petitioner Posadas

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I hereby certify that we have duly authorized the bearer, Engineer Bravo to negotiate, in our Adm. Matter No. R-181-P July 31, 1987
behalf, the ejectment of squatters from our property of 1.6 hectares, more or less, in Sucat,
Muntinlupa. This authority is extended to him as the representatives of the Managers, under ADELIO C. CRUZ, complainant,
our agreement for them to undertake the development of said area and the construction of vs.
housing units intended to convert the land into a first class subdivision. QUITERIO L. DALISAY, Deputy Sheriff, RTC, Manila, respondents.

The aforecited document is nothing more than a to-whom-it-may-concern authorization RESOLUTION


letter to negotiate with the squatters. Although it appears that there was an agreement for the
development of the area, there is no showing that same was never perfected and
finalized. Private respondents presented in evidence only drafts of a proposed management FERNAN, J.:
contract with petitioners handwritten marginal notes but the management contract was not
put in its final form. The reason why there was no final uncorrected draft was because the In a sworn complaint dated July 23, 1984, Adelio C. Cruz charged Quiterio L. Dalisay, Senior
parties could not agree on the stipulations of said contract, which even the private respondents Deputy Sheriff of Manila, with "malfeasance in office, corrupt practices and serious
admitted as found by the trial court.[19] As a consequence the management drafts submitted by irregularities" allegedly committed as follows:
the private respondents should at best be considered as mere unaccepted offers. We find no
cogent reason, considering that the parties no longer are in a harmonious relationship, for the 1. Respondent sheriff attached and/or levied the money belonging to complainant Cruz when
execution of a contract to develop a subdivision. he was not himself the judgment debtor in the final judgment of NLRC NCR Case No. 8-
It is fundamental that there can be no contract in the true sense in the absence of the 12389-91 sought to be enforced but rather the company known as "Qualitrans Limousine
element of agreement, or of mutual assent of the parties. To compel petitioner Posadas, whether Service, Inc.," a duly registered corporation; and,
as representatives of petitioners Luxuria Homes or in her personal capacity, to execute a
management contract under the terms and conditions of private respondents would be to 2. Respondent likewise caused the service of the alias writ of execution upon complainant
violate the principle of consensuality of contracts. In Philippine National bank v. Court of who is a resident of Pasay City, despite knowledge that his territorial jurisdiction covers
Appeals,[20] we held that if the assent is wanting on the part of one who contracts, his act has Manila only and does not extend to Pasay City.
no more efficacy than if it had been done under duress or by a person of unsound mind. In
ordering petitioner Posadas to execute a management contract with private respondents, the In his Comments, respondent Dalisay explained that when he garnished complainant's cash
trial court in effect is putting her under duress. deposit at the Philtrust bank, he was merely performing a ministerial duty. While it is true
The parties are bound to fulfill the stipulations in a contract only upon its perfection. At that said writ was addressed to Qualitrans Limousine Service, Inc., yet it is also a fact that
anytime prior to the perfection of a contract, unaccepted offers and proposals remain as such complainant had executed an affidavit before the Pasay City assistant fiscal stating that he is
and cannot be considered as binding commitments; hence not demandable. the owner/president of said corporation and, because of that declaration, the counsel for the
plaintiff in the labor case advised him to serve notice of garnishment on the Philtrust bank.
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed decision dated March
15, 1996, of respondent Honorable Court of Appeals and its Resolution dated August 12, 1996, On November 12, 1984, this case was referred to the Executive Judge of the Regional Trial
are MODIFIED ordering PETITIONER AIDA M. POSADAS to pay PRIVATE RESPONDENTS the Court of Manila for investigation, report and recommendation.
amount of P435,000.00 as balance for the preparation of the architectural design, site
development plan and survey. All other claims of respondents are hereby DENIED for lack of
Prior to the termination of the proceedings, however, complainant executed an affidavit of
merit.
desistance stating that he is no longer interested in prosecuting the case against respondent
SO ORDERED Dalisay and that it was just a "misunderstanding" between them. Upon respondent's motion,
the Executive Judge issued an order dated May 29, 1986 recommending the dismissal of the
case.

It has been held that the desistance of complainant does not preclude the taking of
disciplinary action against respondent. Neither does it dissuade the Court from imposing the
appropriate corrective sanction. One who holds a public position, especially an office directly
connected with the administration of justice and the execution of judgments, must at all
times be free from the appearance of impropriety.1
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We hold that respondent's actuation in enforcing a judgment against complainant who is not This is a petition to review the decision of respondent Court of Appeals, dated August 3,
the judgment debtor in the case calls for disciplinary action. Considering the ministerial 1989, in CA-GR CV No. 15412, entitled "Buenaflor M. Castillo Umali, et al. vs. Philippine
nature of his duty in enforcing writs of execution, what is incumbent upon him is to ensure Machinery Parts Manufacturing Co., Inc., et al.," 1 the dispositive portion whereof provides:
that only that portion of a decision ordained or decreed in the dispositive part should be the
subject of execution.2 No more, no less. That the title of the case specifically names WHEREFORE, viewed in the light of the entire record, the judgment appealed
complainant as one of the respondents is of no moment as execution must conform to that from must be, as it is hereby REVERSED. In lieu thereof, a judgment is
directed in the dispositive portion and not in the title of the case. hereby rendered-

The tenor of the NLRC judgment and the implementing writ is clear enough. It directed 1) Dismissing the complaint, with cost against plaintiffs;
Qualitrans Limousine Service, Inc. to reinstate the discharged employees and pay them full
backwages. Respondent, however, chose to "pierce the veil of corporate entity" usurping a
power belonging to the court and assumed improvidently that since the complainant is the 2) Ordering plaintiffs-appellees to vacate the subject properties; and
owner/president of Qualitrans Limousine Service, Inc., they are one and the same. It is a
well-settled doctrine both in law and in equity that as a legal entity, a corporation has a 3) Ordering plaintiffs-appellees to pay upon defendants' counterclaims:
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 a) To defendant-appellant PM Parts: (i) damages consisting of
property of the corporation, since the president, as individual, and the corporation are the value of the fruits in the subject parcels of land of which
separate entities.3 they were deprived in the sum of P26,000.00 and (ii)
attorney's fees of P15,000.00
Anent the charge that respondent exceeded his territorial jurisdiction, suffice it to say that
the writ of execution sought to be implemented was dated July 9, 1984, or prior to the b) To defendant-appellant Bormaheco: (i) expenses of
issuance of Administrative Circular No. 12 which restrains a sheriff from enforcing a court litigation in the amount of P5,000.00 and (ii) attorney's fees
writ outside his territorial jurisdiction without first notifying in writing and seeking the of P15,000.00.
assistance of the sheriff of the place where execution shall take place.
SO ORDERED.
ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L. Dalisay NEGLIGENT in the
enforcement of the writ of execution in NLRC Case-No. 8-12389-91, and a fine equivalent to
three [3] months salary is hereby imposed with a stern warning that the commission of the The original complaint for annulment of title filed in the court a quo by herein petitioners
same or similar offense in the future will merit a heavier penalty. Let a copy of this Resolution included as party defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM
be filed in the personal record of the respondent. Parts), Insurance Corporation of the Philippines (ICP), Bormaheco, Inc., (Bormaheco) and
Santiago M. Rivera (Rivera). A Second Amended Complaint was filed, this time impleading
Santiago M. Rivera as party plaintiff.
SO ORDERED.
During the pre-trial conference, the parties entered into the following stipulation of facts:
G.R. No. 89561 September 13, 1990
As between all parties: Plaintiff Buenaflor M. Castillo is the
BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, judicial administratrix of the estate of Felipe Castillo in
BERTILLA C. RADA, MARIETTA C. ABAÑEZ, LEOVINA C. JALBUENA and SANTIAGO M. Special Proceeding No. 4053, pending before Branch IX, CFI
RIVERA, petitioners, of Quezon (per Exhibit A) which intestate proceedings was
vs. instituted by Mauricia Meer Vda. de Castillo, the previous
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS administratrix of the said proceedings prior to 1970 (per
MANUFACTURING CO., INC., respondents. exhibits A-1 and A-2) which case was filed in Court way back
in 1964;
REGALADO, J.:
b) The four (4) parcels of land described in paragraph 3 of
the Complaint were originally covered by TCT No. T-42104
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and Tax Dec. No. 14134 with assessed value of P3,100.00; h) That from at least the months of October, November and
TCT No. T 32227 and Tax Dec. No. 14132, with assessed December 1970 and January 1971, Modesto N. Cervantes
value of P5,130,00; TCT No. T-31762 and Tax Dec. No. was the Vice-President of Bormaheco, Inc. later President
14135, with assessed value of P6,150.00; and TCT No. T- thereof, and also he is one of the Board of Directors of PM
42103 with Tax Dec. No. 14133, with assessed value of Parts; on the other hand, Atty. Martin M. De Guzman was
P3,580.00 (per Exhibits A-2 and B, B-1 to B-3 C, C-1 -to C3 the legal counsel of Bormaheco, Inc., later Executive Vice-
President thereof, and who also is the legal counsel of
c) That the above-enumerated four (4) parcels of land were Insurance Corporation of the Philippines and PM Parts; that
the subject of the Deed of Extra-Judicial Partition executed Modesto N. Cervantes served later on as President of PM
by the heirs of Felipe Castillo (per Exhibit D) and by virtue Parts, and that Atty. de Guzman was retained by Insurance
thereof the titles thereto has (sic) been cancelled and in lieu Corporation of the Philippines specifically for foreclosure
thereof, new titles in the name of Mauricia Meer Vda. de purposes only;
Castillo and of her children, namely: Buenaflor, Bertilla,
Victoria, Marietta and Leovina, all surnamed Castillo has i) Defendant Bormaheco, Inc. on November 25, 1970 sold to
(sic) been issued, namely: TCT No. T-12113 (Exhibit E ); TCT Slobec Realty and Development, Inc., represented by
No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit G ) and Santiago Rivera, President, one (1) unit Caterpillar Tractor
TCT No. T13117 (Exhibit H ) D-7 with Serial No. 281114 evidenced by a contract marked
Exhibit J and Exhibit I for Bormaheco, Inc.;
d) That mentioned parcels of land were submitted as
guaranty in the Agreement of Counter-Guaranty with j) That the Surety Bond No. 14010 issued by co-defendant
Chattel-Real Estate Mortgage executed on 24 October 1970 ICP was likewise secured by an Agreement with Counter-
between Insurance Corporation of the Philippines and Slobec Guaranty with Real Estate Mortgage executed by Slobec
Realty Corporation represented by Santiago Rivera (Exhibit Realty & Development, Inc., Mauricia Castillo Meer,
1); Buenaflor Castillo, Bertilla Castillo, Victoria Castillo,
Marietta Castillo and Leovina Castillo, as mortgagors in favor
e) That based on the Certificate of Sale issued by the Sheriff of ICP which document was executed and ratified before
of the Province of Quezon in favor of Insurance Corporation notary public Alberto R. Navoa of the City of Manila on
of the Philippines it was able to transfer to itself the titles October 24,1970;
over the lots in question, namely: TCT No. T-23705 (Exhibit
M), TCT No. T 23706 (Exhibit N ), TCT No. T-23707 (Exhibit k) That the property mortgaged consisted of four (4) parcels
0) and TCT No. T 23708 (Exhibit P); of land situated in Lucena City and covered by TCT Nos. T-
13114, T13115,
f) That on 10 April 1975, the Insurance Corporation of the T-13116 and T-13117 of the Register of Deeds of Lucena
Philippines sold to PM Parts the immovables in question (per City;
Exhibit 6 for PM Parts) and by reason thereof, succeeded in
transferring unto itself the titles over the lots in dispute, l) That the tractor sold by defendant Bormaheco, Inc. to
namely: per TCT No. T-24846 (Exhibit Q ), per TCT No. T- Slobec Realty & Development, Inc. was delivered to
24847 (Exhibit R ), TCT No. T-24848 (Exhibit), TCT No. T- Bormaheco, Inc. on or about October 2,1973, by Mr.
24849 (Exhibit T ); Menandro Umali for purposes of repair;

g) On 26 August l976, Mauricia Meer Vda. de Castillo' m) That in August 1976, PM Parts notified Mrs. Mauricia
genther letter to Modesto N. Cervantes stating that she and Meer about its ownership and the assignment of Mr.
her children refused to comply with his demands (Exhibit V- Petronilo Roque as caretaker of the subject property;
2);

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n) That plaintiff and other heirs are harvest fruits of the s) That on 28 September 1973, Atty. Martin M. de Guzman,
property (daranghita) which is worth no less than Pl,000.00 as counsel of Insurance Corporation of the Philippines
per harvest. purchased at public auction for said corporation the four (4)
parcels of land subject of tills case (per Exhibit L), and which
As between plaintiffs and document was presented to the Register of Deeds on 1
defendant Bormaheco, Inc October 1973;

o) That on 25 November 1970, at Makati, Rizal, Same Rivera, t) Although it appears that the realties in issue has (sic) been
in representation of the Slobec Realty & Development sold by Insurance Corporation of the Philippines in favor of
Corporation executed in favor of Bormaheco, Inc., PM Parts on 1 0 April 1975, Modesto N. Cervantes, formerly
represented by its Vice-President Modesto N. Cervantes a Vice- President and now President of Bormaheco, Inc., sent
Chattel Mortgage concerning one unit model CAT D7 his letter dated 9 August 1976 to Mauricia Meer Vda. de
Caterpillar Crawler Tractor as described therein as security Castillo (Exhibit V), demanding that she and her children
for the payment in favor of the mortgagee of the amount of should vacate the premises;
P180,000.00 (per Exhibit K) that Id document was
superseded by another chattel mortgage dated January 23, u) That the Caterpillar Crawler Tractor Model CAT D-7 which
1971 (Exhibit 15); was received by Slobec Realty Development Corporation was
actually reconditioned and repainted. " 2
p) On 18 December 1970, at Makati, Rizal, the Bormaheco,
Inc., represented by its Vice-President Modesto Cervantes We cull the following antecedents from the decision of respondent Court of Appeals:
and Slobec Realty Corporation represented by Santiago
Rivera executed the sales agreement concerning the sale of Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de
one (1) unit Model CAT D7 Caterpillar Crawler Tractor as Castillo. The Castillo family are the owners of a parcel of land located in
described therein for the amount of P230,000.00 (per Exhibit Lucena City which was given as security for a loan from the Development
J) which document was superseded by the Sales Agreement Bank of the Philippines. For their failure to pay the amortization, foreclosure
dated January 23,1971 (Exhibit 16); 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
q) Although it appears on the document entitled Chattel the four (4) parcels of land adjacent to the mortgaged property to raise the
Mortgage (per Exhibit K) that it was executed on 25 necessary fund. The Idea was accepted by the Castillo family and to carry out
November 1970, and in the document entitled Sales the project, a Memorandum of Agreement (Exh. U p. 127, Record) was
Agreement (per Exhibit J) that it was executed on 18 executed by and between Slobec Realty and Development, Inc., represented
December 1970, it appears in the notarial register of the by its President Santiago Rivera and the Castillo family. In this agreement,
notary public who notarized them that those two documents Santiago Rivera obliged himself to pay the Castillo family the sum of
were executed on 11 December 1970. The certified xerox P70,000.00 immediately after the execution of the agreement and to pay the
copy of the notarial register of Notary Public Guillermo additional amount of P400,000.00 after the property has been converted into
Aragones issued by the Bureau of Records Management is a subdivision. Rivera, armed with the agreement, Exhibit U , approached Mr.
hereto submitted as Exhibit BB That said chattel mortgage Modesto Cervantes, President of defendant Bormaheco, and proposed to
was superseded by another document dated January 23, purchase from Bormaheco two (2) tractors Model D-7 and D-8 Subsequently,
1971; a Sales Agreement was executed on December 28,1970 (Exh. J, p. 22,
Record).
r) That on 23 January 1971, Slobec Realty Development
Corporation, represented by Santiago Rivera, received from On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development,
Bormaheco, Inc. one (1) tractor Caterpillar Model D-7 Inc., represented by its President, Santiago Rivera, executed a Sales
pursuant to Invoice No. 33234 (Exhibits 9 and 9-A, Agreement over one unit of Caterpillar Tractor D-7 with Serial No. 281114, as
Bormaheco, Inc.) and delivery receipt No. 10368 (per evidenced by the contract marked Exhibit '16'. As shown by the contract, the
Exhibits 10 and 10-A for Bormaheco, Inc price was P230,000.00 of which P50,000.00 was to constitute a down
Page 17 of 53
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payment, and the balance of P180,000.00 payable in eighteen monthly and by virtue of said conveyance, PM Parts transferred unto itself the titles
installments. On the same date, Slobec, through Rivera, executed in favor of over the lots in dispute so that said parcels of land are now covered by TCT
Bormaheco a Chattel Mortgage (Exh. K, p. 29, Record) over the said Nos. T-24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49, Rec.).
equipment as security for the payment of the aforesaid balance of
P180,000.00. As further security of the aforementioned unpaid balance, Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a
Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with letter dated August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo
ICP (Insurance Corporation of the Phil.) as surety and Slobec as principal, in requesting her and her children to vacate the subject property, who (Mrs.
favor of Bormaheco, as borne out by Exhibit '8' (p. 111, Record). The Castillo) in turn sent her reply expressing her refusal to comply with his
aforesaid surety bond was in turn secured by an Agreement of Counter- demands.
Guaranty with Real Estate Mortgage (Exhibit I, p. 24, Record) executed by
Rivera as president of Slobec and Mauricia Meer Vda. de Castillo, Buenaflor
Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and On September 29, 1976, the heirs of the late Felipe Castillo, particularly
Leovina Castillo Jalbuena, as mortgagors and Insurance Corporation of the plaintiff Buenaflor M. Castillo Umali as the appointed administratrix of the
Philippines (ICP) as mortgagee. In this agreement, ICP guaranteed the properties in question filed an action for annulment of title before the then
obligation of Slobec with Bormaheco in the amount of P180,000.00. In giving Court of First Instance of Quezon and docketed thereat as Civil Case No.
the bond, ICP required that the Castillos mortgage to them the properties in 8085. Thereafter, they filed an Amended Complaint on January 10, 1980 (p.
question, namely, four parcels of land covered by TCTs in the name of the 444, Record). On July 20, 1983, plaintiffs filed their Second Amended
aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116 and Complaint, impleading Santiago M. Rivera as a party plaintiff (p. 706,
13117 all of the Register of Deeds for Lucena City. Record). They contended that all the aforementioned transactions starting
with the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. I),
Certificate of Sale (Exh. L) and the Deeds of Authority to Sell, Sale and the
On the occasion of the execution on January 23, 1971, of the Sales Affidavit of Consolidation of Ownership (Annexes F, G, H, I) as well as the
Agreement Exhibit '16', Slobec, represented by Rivera received from Deed of Sale (Annexes J, K, L and M) are void for being entered into in fraud
Bormaheco the subject matter of the said Sales Agreement, namely, the and without the consent and approval of the Court of First Instance of
aforementioned tractor Caterpillar Model D-7 as evidenced by Invoice No. Quezon, (Branch IX) before whom the administration proceedings has been
33234 (Exhs. 9 and 9-A, p. 112, Record) and Delivery Receipt No. 10368 pending. Plaintiffs pray that the four (4) parcels of land subject hereof be
(Exhs. 10 and 10-A, p. 113). This tractor was known by Rivera to be a declared as owned by the estate of the late Felipe Castillo and that all
reconditioned and repainted one [Stipulation of Facts, Pre-trial Order, par. Transfer Certificates of Title Nos. 13114,13115,13116,13117, 23705, 23706,
(u)]. 23707, 23708, 24846, 24847, 24848 and 24849 as well as those appearing
as encumbrances at the back of the certificates of title mentioned be declared
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty as a nullity and defendants to pay damages and attorney's fees (pp. 71071 1,
Agreement (Exh. 1), the properties of the Castillos were foreclosed by ICP As Record).
the highest bidder with a bid of P285,212.00, a Certificate of Sale was issued
by the Provincial Sheriff of Lucena City and Transfer Certificates of Title over In their amended answer, the defendants controverted the complaint and
the subject parcels of land were issued by the Register of Deeds of Lucena alleged, by way of affirmative and special defenses that the complaint did not
City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T- state facts sufficient to state a cause of action against defendants; that
23708 (Exhs. M to P, pp. 38-45). The mortgagors had one (1) year from the plaintiffs are not entitled to the reliefs demanded; that plaintiffs are estopped
date of the registration of the certificate of sale, that is, until October 1, 1974, or precluded from asserting the matters set forth in the Complaint; that
to redeem the property, but they failed to do so. Consequently, ICP plaintiffs are guilty of laches in not asserting their alleged right in due time;
consolidated its ownership over the subject parcels of land through the that defendant PM Parts is an innocent purchaser for value and relied on the
requisite affidavit of consolidation of ownership dated October 29, 1974, as face of the title before it bought the subject property (p. 744, Record). 3
shown in Exh. '22'(p. 138, Rec.). Pursuant thereto, a Deed of Sale of Real
Estate covering the subject properties was issued in favor of ICP (Exh. 23, p.
139, Rec.). After trial, the court a quo rendered judgment, with the following decretal
portion:
On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil.
Machinery Parts Manufacturing Co. (PM Parts) the four (4) parcels of land WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
against the defendants, declaring the following documents:
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Agreement of Counter-Guaranty with Chattel-Real Estate 1. In holding and finding that the actions entered into between petitioner
Mortgage dated October 24,1970 (Exhibit 1); Rivera with Cervantes are all fair and regular and therefore binding between
the parties thereto;
Sales Agreement dated December 28, 1970 (Exhibit J)
2. In reversing the decision of the lower court, not only based on erroneous
Chattel Mortgage dated November 25, 1970 (Exhibit K) conclusions of facts, erroneous presumptions not supported by the evidence
on record but also, holding valid and binding the supposed payment by ICP
of its obligation to Bormaheco, despite the fact that the surety bond issued it
Sales Agreement dated January 23, 1971 (Exhibit 16); had already expired when it opted to foreclose extrajudically the mortgage
executed by the petitioners;
Chattel Mortgage dated January 23, 1971 (Exhibit 17);
3. In aside the finding of the lower court that there was necessity to pierce
Certificate of Sale dated September 28, 1973 executed by the the veil of corporate existence; and
Provincial Sheriff of Quezon in favor of Insurance
Corporation of the Philippines (Exhibit L); 4. In reversing the decision of the lower court of affirming the same 5

null and void for being fictitious, spurious and without consideration. I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as President
Consequently, Transfer Certificates of Title Nos. T 23705, T-23706, T23707 of Slobec Realty and Development Company (Slobec) and Mode Cervantes, as Vice-President
and T-23708 (Exhibits M, N, O and P) issued in the name of Insurance of Bormaheco, such as the Sales Agreement, 6 Chattel Mortgage 7 and the Agreement of
Corporation of the Philippines, are likewise null and void. Counter-Guaranty with Chattel/Real Estate Mortgage, 8 are all fraudulent and simulated and
should, therefore, be declared nun and void. Such allegation is premised primarily on the fact
The sale by Insurance Corporation of the- Philippines in favor of defendant that contrary to the stipulations agreed upon in the Sales Agreement (Exhibit J), Rivera never
Philippine Machinery Parts Manufacturing Co., Inc., over Id four (4) parcels made any advance payment, in the alleged amount of P50,000.00, to Bormaheco; that the
of land and Transfer Certificates of Title Nos. T 24846, T-24847, T-24848 and tractor was received by Rivera only on January 23, 1971 and not in 1970 as stated in the
T-24849 subsequently issued by virtue of said sale in the name of Philippine Chattel Mortgage (Exhibit K); and that when the Agreement of Counter-Guaranty with
Machinery Parts Manufacturing Co., Inc., are similarly declared null and Chattel/Real Estate Mortgage was executed on October 24, 1970, to secure the obligation of
void, and the Register of Deeds of Lucena City is hereby directed to issue, in ICP under its surety bond, the Sales Agreement and Chattel Mortgage had not as yet been
lieu thereof, transfer certificates of title in the names of the plaintiffs, except executed, aside from the fact that it was Bormaheco, and not Rivera, which paid the premium
Santiago Rivera. for the surety bond issued by ICP

Orders the defendants jointly and severally to pay the plaintiffs moral At the outset, it will be noted that petitioners submission under the first assigned error
damages in the sum of P10,000.00, exemplary damages in the amount of hinges purely on questions of fact. Respondent Court of Appeals made several findings to the
P5,000.00, and actual litigation expenses in the sum of P6,500.00. effect that the questioned documents are valid and binding upon the parties, that there was
no fraud employed by private respondents in the execution thereof, and that, contrary to
Defendants are likewise ordered to pay the plaintiffs, jointly and severally, petitioners' allegation, the evidence on record reveals that petitioners had every intention to
the sum of P10,000.00 for and as attomey's fees. With costs against the be bound by their undertakings in the various transactions had with private respondents. It
defendants. is a general rule in this jurisdiction that findings of fact of said appellate court are final and
conclusive and, thus, binding on this Court in the absence of sufficient and convincing
proof, inter alia, that the former acted with grave abuse of discretion. Under the
SO ORDERED. 4
circumstances, we find no compelling reason to deviate from this long-standing
jurisprudential pronouncement.
As earlier stated, respondent court reversed the aforequoted decision of the trial court and
rendered the judgment subject of this petition- In addition, the alleged failure of Rivera to pay the consideration agreed upon in the Sales
Agreement, which clearly constitutes a breach of the contract, cannot be availed of by the
Petitioners contend that respondent Court of Appeals erred: guilty party to justify and support an action for the declaration of nullity of the contract.

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Equity and fair play dictates that one who commits a breach of his contract may not seek affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct
refuge under the protective mantle of the law. of another corporation. 15

The evidence of record, on an overall calibration, does not convince us of the validity of In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP
petitioners' contention that the contracts entered into by the parties are either absolutely and PM Parts, alleging that these corporations employed fraud in causing the foreclosure and
simulated or downright fraudulent. subsequent sale of the real properties belonging to petitioners While we do not discount the
possibility of the existence of fraud in the foreclosure proceeding, neither are we inclined to
There is absolute simulation, which renders the contract null and void, when the parties do apply the doctrine invoked by petitioners in granting the relief sought. It is our considered
not intend to be bound at all by the same. 9 The basic characteristic of this type of simulation opinion that piercing the veil of corporate entity is not the proper remedy in order that the
of contract is the fact that the apparent contract is not really desired or intended to either foreclosure proceeding may be declared a nullity under the circumstances obtaining in the
produce legal effects or in any way alter the juridical situation of the parties. The subsequent legal case at bar.
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 In the first place, the legal corporate entity is disregarded only if it is sought to hold the
Bormaheco, concomitant with the execution of the Agreement of Counter-Guaranty with officers and stockholders directly liable for a corporate debt or obligation. In the instant case,
Chattel/Real Estate Mortgage, conduce to the conclusion that petitioners had every intention petitioners do not seek to impose a claim against the individual members of the three
to be bound by these contracts. The occurrence of these series of transactions between corporations involved; on the contrary, it is these corporations which desire to enforce an
petitioners and private respondents is a strong indication that the parties actually intended, alleged right against petitioners. Assuming that petitioners were indeed defrauded by private
or at least expected, to exact fulfillment of their respective obligations from one another. 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
Neither will an allegation of fraud prosper in this case where petitioners failed to show that not intend to hold the officers and/or members of respondent corporations personally liable
they were induced to enter into a contract through the insidious words and machinations of therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale,
private respondents without which the former would not have executed such contract. To set which relief may be obtained without having to disregard the aforesaid corporate fiction
aside a document solemnly executed and voluntarily delivered, the proof of fraud must be attaching to respondent corporations. Secondly, petitioners failed to establish by clear and
clear and convincing. 10 We are not persuaded that such quantum of proof exists in the case convincing evidence that private respondents were purposely formed and operated, and
at bar. thereafter transacted with petitioners, with the sole intention of defrauding the latter.

The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP The mere fact, therefore, that the businesses of two or more corporations are interrelated is
does not per se affect the validity of the bond. Petitioners themselves admit in their present not a justification for disregarding their separate personalities, 16 absent sufficient showing
petition that Rivera executed a Deed of Sale with Right of Repurchase of his car in favor of that the corporate entity was purposely used as a shield to defraud creditors and third
Bormaheco and agreed that a part of the proceeds thereof shall be used to pay the premium persons of their rights.
for the bond. 11 In effect, Bormaheco accepted the payment of the premium as an agent of ICP
The execution of the deed of sale with a right of repurchase in favor of Bormaheco under such III. The main issue for resolution is whether there was a valid foreclosure of the mortgaged
circumstances sufficiently establishes the fact that Rivera recognized Bormaheco as an agent properties by ICP Petitioners argue that the foreclosure proceedings should be declared null
of ICP Such payment to the agent of ICP is, therefore, binding on Rivera. He is now estopped and void for two reasons, viz.: (1) no written notice was furnished by Bormaheco to ICP anent
from questioning the validity of the suretyship contract. the failure of Slobec in paying its obligation with the former, plus the fact that no receipt was
presented to show the amount allegedly paid by ICP to Bormaheco; and (b) at the time of the
II. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore foreclosure of the mortgage, the liability of ICP under the surety bond had already expired.
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 Respondent court, in finding for the validity of the foreclosure sale, declared:
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 Now to the question of whether or not the foreclosure by the ICP of the real
officers and stockholders. 12 The doctrine applies when the corporate fiction is used to defeat estate mortgage was in the exercise of a legal right, We agree with the
public convenience, justify wrong, protect fraud, or defend crime, 13 or when it is made as a appellants that the foreclosure proceedings instituted by the ICP was in the
shield to confuse the legitimate issues 14 or where a corporation is the mere alter ego or exercise of a legal right. First, ICP has in its favor the legal presumption that
business conduit of a person, or where the corporation is so organized and controlled and its it had indemnified Bormaheco by reason of Slobec's default in the payment of

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its obligation under the Sales Agreement, especially because Bormaheco of any of the installments when due shall make the entire obligation immediately due and
consented to ICPs foreclosure of the mortgage. This presumption is in demandable. 21
consonance with pars. R and Q Section 5, Rule 5, * New Rules of Court
which provides that it is disputably presumed that private transactions have It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the
been fair and regular. likewise, it is disputably presumed that the ordinary obligation expressly assumed therein. We have repeatedly held that the extent of a surety's
course of business has been followed: Second, ICP had the right to proceed at liability is determined only by the clause of the contract of suretyship as well as the
once to the foreclosure of the mortgage as mandated by the provisions of Art. conditions stated in the bond. It cannot be extended by implication beyond the terms the
2071 Civil Code for these further reasons: Slobec, the principal debtor, was contract. 22
admittedly insolvent; Slobec's obligation becomes demandable by reason of
the expiration of the period of payment; and its authorization to foreclose the
mortgage upon Slobec's default, which resulted in the accrual of ICPS Fundamental likewise is the rule that, except where required by the provisions of the
liability to Bormaheco. Third, the Agreement of Counter-Guaranty with Real contract, a demand or notice of default is not required to fix the surety's liability. 23 Hence,
Estate Mortgage (Exh. 1) expressly grants to ICP the right to foreclose the real where the contract of suretyship stipulates that notice of the principal's default be given to
estate mortgage in the event of 'non-payment or non-liquidation of the entire the surety, generally the failure to comply with the condition will prevent recovery from the
indebtedness or fraction thereof upon maturity as stipulated in the contract'. surety. There are certain instances, however, when failure to comply with the condition will
This is a valid and binding stipulation in the absence of showing that it is not extinguish the surety's liability, such as a failure to give notice of slight defaults, which
contrary to law, morals, good customs, public order or public policy. (Art. are waived by the obligee; or on mere suspicion of possible default; or where, if a default
1306, New Civil Code). 17 exists, there is excuse or provision in the suretyship contract exempting the surety for
liability therefor, or where the surety already has knowledge or is chargeable with knowledge
of the default. 24
1. Petitioners asseverate that there was no notice of default issued by Bormaheco to ICP
which would have entitled Bormaheco to demand payment from ICP under the suretyship
contract. In the case at bar, the suretyship contract expressly provides that ICP shag not be liable for
any claim not filed in writing within thirty (30) days from the expiration of the bond. In its
decision dated May 25 1987, the court a quocategorically stated that '(n)o evidence was
Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein ICP and presented to show that Bormaheco demanded payment from ICP nor was there any action
Slobec undertook to guarantee the payment of the balance of P180,000.00 payable in taken by Bormaheco on the bond posted by ICP to guarantee the payment of plaintiffs
eighteen (18) monthly installments on one unit of Model CAT D-7 Caterpillar Crawler Tractor, obligation. There is nothing in the records of the proceedings to show that ICP indemnified
pertinently provides in part as follows: Bormaheco for the failure of the plaintiffs to pay their obligation. " 25 The failure, therefore, of
Bormaheco to notify ICP in writing about Slobec's supposed default released ICP from liability
1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under under its surety bond. Consequently, ICP could not validly foreclose that real estate mortgage
this BOND will expire Twelve (I 2) months from date hereof. Furthermore, it is executed by petitioners in its favor since it never incurred any liability under the surety bond.
hereby agreed and understood that the INSURANCE CORPORATION OF THE It cannot claim exemption from the required written notice since its case does not fall under
PHILIPPINES will not be liable for any claim not presented in writing to the any of the exceptions hereinbefore enumerated.
Corporation within THIRTY (30) DAYS from the expiration of this BOND, and
that the obligee hereby waives his right to bring claim or file any action Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any
against Surety and after the termination of one (1) year from the time his documentary evidence. Section 1, Rule 131 of the Rules of Court provides that the burden of
cause of action accrues. 18 evidence lies with the party who asserts an affirmative allegation. Since ICP failed to duly
prove the fact of payment, the disputable presumption that private transactions have been
The surety bond was dated October 24, 1970. However, an annotation on the upper fair and regular, as erroneously relied upon by respondent Court of Appeals, finds no
part thereof states: "NOTE: EFFECTIVITY DATE OF THIS BOND SHALL BE ON application to the case at bar.
JANUARY 22, 1971." 19
2. The liability of a surety is measured by the terms of his contract, and, while he is liable to
On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance of the full extent thereof, such liability is strictly limited to that assumed by its terms. 26 While
P180,000.00 shall be payable in eighteen (18) monthly installments. 20 The Promissory Note ordinarily the termination of a surety's liability is governed by the provisions of the contract of
executed by Slobec on even date in favor of Bormaheco further provides that the obligation suretyship, where the obligation of a surety is, under the terms of the bond, to terminate at a
shall be payable on or before February 23, 1971 up to July 23, 1972, and that non-payment specified time, his obligation cannot be enlarged by an unauthorized extension thereof. 27This

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is an exception to the general rule that the obligation of the surety continues for the same its name, as well as the certificate of sale, must be declared null and void since they cannot
period as that of the principal debtor. 28 be considered altogether free of the taint of bad faith.

It is possible that the period of suretyship may be shorter than that of the principal WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET
obligation, as where the principal debtor is required to make payment by installments. 29 In ASIDE, and judgment is hereby rendered declaring the following as null and void: (1)
the case at bar, the surety bond issued by ICP was to expire on January 22, 1972, twelve (1 Certificate of Sale, dated September 28,1973, executed by the Provincial Sheriff of Quezon in
2) months from its effectivity date, whereas Slobec's installment payment was to end on July favor of the Insurance Corporation of the Philippines; (2) Transfer Certificates of Title Nos. T-
23, 1972. Therefore, while ICP guaranteed the payment by Slobec of the balance of 23705, T-23706, T-23707 and T-23708 issued in the name of the Insurance Corporation of
P180,000.00, such guaranty was valid only for and within twelve (1 2) months from the date the Philippines; (3) the sale by Insurance Corporation of the Philippines in favor of Philippine
of effectivity of the surety bond, or until January 22, 1972. Thereafter, from January 23, Machinery Parts Manufacturing Co., Inc. of the four (4) parcels of land covered by the
1972 up to July 23, 1972, the liability of Slobec became an unsecured obligation. The default aforesaid certificates of title; and (4) Transfer Certificates of Title Nos. T-24846, T-24847, T-
of Slobec during this period cannot be a valid basis for the exercise of the right to foreclose by 24848 and T24849 subsequently issued by virtue of said sale in the name of the latter
ICP since its surety contract had already been terminated. Besides, the liability of ICP was corporation.
extinguished when Bormaheco failed to file a written claim against it within thirty (30) days
from the expiration of the surety bond. Consequently, the foreclosure of the mortgage, after The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of Title
the expiration of the surety bond under which ICP as surety has not incurred any liability, Nos. T-24846, T-24847, T24848 and T-24849 in the name of Philippine Machinery Parts
should be declared null and void. Manufacturing Co., Inc. and to issue in lieu thereof the corresponding transfer certificates of
title in the name of herein petitioners, except Santiago Rivera.
3. Lastly, it has been held that where The guarantor holds property of the principal as
collateral surety for his personal indemnity, to which he may resort only after payment by The foregoing dispositions are without prejudice to such other and proper legal remedies as
himself, until he has paid something as such guarantor neither he nor the creditor can resort may be available to respondent Bormaheco, Inc. against herein petitioners.
to such collaterals. 30
SO ORDERED.
The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being
issued for and in consideration of the obligations assumed by the Mortgagee-Surety Company
under the terms and conditions of ICP Bond No. 14010 in behalf of Slobec Realty
Development Corporation and in favor of Bormaheco, Inc. 31 There is no doubt that said
Agreement of Counter-Guaranty is issued for the personal indemnity of ICP Considering that
the fact of payment by ICP has never been established, it follows, pursuant to the doctrine
above adverted to, that ICP cannot foreclose on the subject properties,

IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it
acquired a valid title over the subject properties. The submission is without merit and the
conclusion is specious
G.R. No. L-47673 October 10, 1946

We have stated earlier that the doctrine of piercing the veil of corporate fiction is not
applicable in this case. However, its inapplicability has no bearing on the good faith or bad KOPPEL (PHILIPPINES), INC., plaintiff-appellant,
faith of private respondent PM Parts. It must be noted that Modesto N. Cervantes served as vs.
Vice-President of Bormaheco and, later, as President of PM Parts. On this fact alone, it cannot ALFREDO L. YATCO, Collector of Internal Revenue, defendant-appellee.
be said that PM Parts had no knowledge of the aforesaid several transactions executed
between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the HILADO, J.:
Executive Vice-President of Bormaheco, was also the legal counsel of ICP and PM Parts. These
facts were admitted without qualification in the stipulation of facts submitted by the parties This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court of First
before the trial court. Hence, the defense of good faith may not be resorted to by private Instance of Manila in civil case No. 51218 of said court dismissing said corporation's
respondent PM Parts which is charged with knowledge of the true relations existing between complaint for the recovery of the sum of P64,122.51 which it had paid under protest to the
Bormaheco, ICP and herein petitioners. Accordingly, the transfer certificates of title issued in
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Collector of Internal Revenue on October 30, 1936, as merchant sales tax. The main facts of Copy of the plaintiff's letter to purchaser is hereto attached and made a part hereof
the case were stipulated in the court below as follows: as Exhibit D. On the basis of these quotations, orders were placed by the local
purchasers, copies of which orders are hereto attached as Exhibits E and E-1.
AGREED STATEMENT OF FACTS
A cable was then sent to Koppel Industrial Car and Equipment company giving
Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the instructions to ship the merchandise to Manila forwarding the customer's order.
Solicitor General and undersigned Assistant Attorney of the Bureau of Justice and, Sample of said cable is hereto attached as Exhibit F. The bills of lading were usually
with leave of this Honorable Court, hereby respectfully stipulated and agree to the made to "order" and indorsed in blank with notation to the effect that the buyer be
following facts, to wit: notified of the shipment of the goods covered in the bills of lading; commercial
invoices were issued by Koppel Industrial Car and Equipment Company in the names
of the purchasers and certificates of insurance were likewise issued in their names,
I. That plaintiff is a corporation duly organized and existing under and by virtue of or in the name of Koppel Industrial Car and Equipment Company but indorsed in
the laws of the Philippines, with principal office therein at the City of Manila, the blank and attached to drafts drawn by Koppel Industrial Car and Equipment
capital stock of which is divided into thousand (1,000) shares of P100 each. The Company on the purchasers, which were forwarded through foreign banks to local
Koppel Industrial Car and Equipment company, a corporation organized and existing banks. Samples of the bills of lading are hereto attached as Exhibits F-1, I-1, I-2 and
under the laws of the State of Pennsylvania, United States of America, and not I-3. Bills of ladings, Exhibits I-1, I-2 and I-3, may equally have been employed, but
licensed to do business in the Philippines, owned nine hundred and ninety-five (995) said Exhibits I-1, I-2 and I-3 have no connection with the transaction covered by
shares out of the total capital stock of the plaintiff from the year 1928 up to and Exhibits B to G, inclusive. The purchasers secured the shipping papers by
including the year 1936, and the remaining five (5) shares only were and are owned arrangement with the banks, and thereupon received and cleared the shipments. If
one each by officers of the plaintiff corporation. the merchandise were of European origin, and if there was not sufficient time to
forward the documents necessary for clearance, through foreign banks to local
II. That plaintiff, at all times material to this case, was and now is duly licensed to banks, to the purchasers, the Koppel Industrial Car and Equipment company did, in
engage in business as a merchant and commercial broker in the Philippines; and was many cases, send the documents directly from Europe to plaintiff with instructions to
and is the holder of the corresponding merchant's and commercial broker's privilege turn these documents over to the purchasers. In many cases, where sales was
tax receipts. effected on the basis of C. I. F. Manila, duty paid, plaintiff advanced the sums
required for the payment of the duty, and these sums, so advanced, were in every
III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer in case reimbursed to plaintiff by Koppel Industrial Car and Equipment Company. The
lieu of Mr. Alfredo L. Yatco. price were payable by drafts agreed upon in each case and drawn by Koppel
Industrial Car and Equipment Company on respective purchasers through local
banks, and payments were made to the banks by the purchasers on presentation and
IV. That during the period from January 1, 1929, up to and including December 31, delivery to them of the above-mentioned shipping documents or copies thereof. A
1932, plaintiff transacted business in the Philippines in the following manner, with sample of said drafts is hereto attached as Exhibit G. Plaintiff received by way of
the exception of the transactions which are described in paragraphs V and VI of this compensation a percentage of the profits realized on the above transactions as fixed
stipulation: in paragraph 6 of the plaintiff's contract with Koppel Industrial Car and Equipment
Company, which contract is hereto attached as Exhibit H, and suffered its
When a local buyer was interested in the purchase of railway materials, machinery, corresponding share in the losses resulting from some of the transactions.
and supplies, it asked for price quotations from plaintiff. Atypical form of such
request is attached hereto and made a part hereof as Exhibit A. (Exhibit A represents That the total gross sales from January 1, 1929, up to and including December 31,
typical transactions arising from written requests for quotations, while Exhibits B to 1932, effected in the foregoing manner and under the above specified conditions,
G, inclusive, are typical transactions arising from verbal requests for quotation.) amount to P3, 596,438.84.
Plaintiff then cabled for the quotation desired for Koppel Industrial Car and
Equipment Company. A sample of the pertinent cable is hereto attached and made a
part hereof as Exhibit B. Koppel Industrial Car and Equipment Company answered V. That when a local sugar central was interested in the purchase of railway
by cable quoting its cost price, usually A. C. I. F. Manila cost price, which was later materials, machinery and supplies, it secured quotations from, and placed the
followed by a letter of confirmation. A sample of the said cable quotation and of the corresponding orders with, the plaintiff in substantially the same manner as outlined
letter of confirmation are hereto attached and made a part hereof as Exhibits C and in paragraph IV of this stipulation, with the only difference that the purchase orders
C-1. Plaintiff, however, quoted by Koppel Industrial Car and Equipment Company. which were agreed to by the central and the plaintiff are similar to the sample hereto

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attached and made a part hereof as Exhibit I. Typical samples of the bills of lading demands by plaintiff, to return to the plaintiff said sum of P64,122.51 or any part
covering the herein transaction are hereto attached and made a part hereto as thereof.
Exhibits I-1, I-2 and I-3. The value of the sales carried out in the manner mentioned
in this paragraph is P133,964.98. xxx xxx xxx

VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila, Philippines, That the parties hereby reserve the right to present additional
placed an option with Koppel Industrial Car and Equipment Company, through evidence in support of their respective contentions.
plaintiff, to purchase within three months a pair of Atlas-Diesel Marine Engines.
Koppel Industrial Car and Equipment Company purchased said Diesel Engines in
Stockholm, Sweden, for $16,508.32. The suppliers drew a draft for the amount of Manila, Philippines, December 26, 1939
$16,508.32 on the Koppel Industrial Car and Equipment Company, which paid the
amount covered by the draft. Later, Miguel J. Ossorio definitely called the deal off, (Sgd.) ROMAN OZAETA
and as Koppel Industrial Car and Equipment Company could not ship to or draw on Solicitor General
said Mr. Miguel J. Ossorio, it in turn drew another draft on plaintiff for the same
amount at six months sight, with the understanding that Koppel Industrial Car and (Sgd.) ANTONIO CAÑIZARES
Equipment Company would reimburse plaintiff when said engines were disposed of. Assistant Attorney
Plaintiff honored the draft and debited the said sum of $16,508.32 to merchandise
account. The engines were left stored at Stockholm, Sweden. On April 1, 1930, a new
local buyer, Mr. Cesar Barrios, of Iloilo, Philippines, was found and the same engines (Sgd.) E. P. REVILLA
were sold to him for $21,000 (P42,000) C. I. F. Hongkong. The engines were shipped Attorney for the Plaintiff
to Hongkong and a draft for $21,000 was drawn by Koppel Industrial Car and 3rd Floor, Perez Samanillo Bldg., Manila
Equipment Company on Mr. Cesar Barrios. After the draft was fully paid by Mr.
Barrios, Koppel Industrial Car and Equipment Company reimbursed plaintiff with Both parties adduced some oral evidence in clarification of or addition to their agreed
cost price of $16,508.32 and credited it with $1,152.95 as its share of the profit on statement of facts. A preponderance of evidence has established, besides the facts
the transaction. Exhibits J and J-1 are herewith attached and made integral parts of thus stipulated, the following:
this stipulation with particular reference to paragraph VI hereof.
(a) The shares of stock of plaintiff corporation were and are all owned by
VII. That plaintiff's share in the profits realized out of these transactions described in Koppel Industries Car and Equipment Company of Pennsylvania, U. S. A.,
paragraphs IV, V and VI hereof totaling P3,772,403.82, amounts to P132,201.30; and exceptive which were necessary to qualify the Board of Directors of said
that plaintiff within the time provided by law returned the aforesaid amount plaintiff corporation;
P132,201.30 for the purpose of the commercial broker's 4 per cent tax and paid
thereon the sum P5,288.05 as such tax. (b) In the transactions involved herein the plaintiff corporation acted as the
representative of Koppel Industrial Car and Equipment Company only, and
VIII. That defendant demanded of the plaintiff the sum of P64,122.51 as the not as the agent of both the latter company and the respective local
merchants' sales tax of 1% per cent on the amount of P3,772,403.82, representing purchasers — plaintiff's principal witness, A.H. Bishop, its resident Vice-
the total gross value of the sales mentioned in paragraphs IV, V and VI hereof, President, in his testimony invariably referred to Koppel Industrial Car and
including the 25 per cent surcharge for the late payment of the said tax, which tax Equipment Co. as "our principal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except
and surcharge were determined after the amount of P5,288.05 mentioned in that at the bottom of page 10 to the top of page 11, the witness stated that
paragraph VI hereof was deducted. they had "several principal" abroad but that "our principal abroad was, for
the years in question, Koppel Industrial Car and Equipment Company," and
IX. That plaintiff, on October 30, 1936, paid under protest said sum of P64,122.51 in on page 68, he testified that what he actually said was ". . . but
order to avoid further penalties, levy and distraint proceedings. our principal abroad" and not "our principal abroad" — as to which it is very
significant that neither this witness nor any other gave the name of even a
single other principal abroad of the plaintiff corporation;
X. That defendant, on November 10, 1936, overruled plaintiff's protest, and
defendant has failed and refused and still fails and refuses, notwithstanding

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(c) The plaintiff corporation bore alone incidental expenses — as, for As to the single transaction described in paragraph VI of the same agreed statement
instance, cable expenses-not only those of its own cables but also those of its of facts, discarding the Ossorio option which anyway was called off, "On April 1,
"principal" (t.s.n., pp. 52, 53); 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines, was found and the
same engines were sold to him for $21,000(P42,000) C.I.F. Hongkong." (Emphasis
(d) the plaintiff's "share in the profits" realized from the transactions in which supplied.).
it intervened was left virtually in the hands of Koppel Industrial Car and
Equipment Company (t.s.n., p. 51); (j) Exhibit H contains the following paragraph:

(e) Where drafts were not paid by the purchasers, the local banks were It is clearly understood that the intent of this contract is that the broker shall
instructed not to protest them but to refer them to plaintiff which was fully perform only the functions of a broker as set forth above, and shall not take
empowered by Koppel Industrial Car and Equipment company to instruct the possession of any of the materials or equipment applying to said orders or perform
banks with regards to disposition of the drafts and documents (t.s.n., p. 50; any acts or duties outside the scope of a broker; and in no sense shall this contract
Exhibit G);lawphil.net be construed as granting to the broker the power to represent the principal as its
agent or to make commitments on its behalf.
(f) Where the goods were European origin, consular invoices, bill of lading,
and, in general, the documents necessary for clearance were sent directly to The Court of First Instance held for the defendant and dismissed plaintiff's complaint with
plaintiff (t.s.n., p. 14); costs to it.

(g) If the plaintiff had in stock the merchandise desired by local buyers, it Upon this appeal, seven errors are assigned to said judgment as follows:.
immediately filled the orders of such local buyers and made delivery in the
Philippines without the necessity of cabling its principal in America either for 1. That the court a quo erred in not holding that appellant is a domestic corporation
price quotations or confirmation or rejection of that agreed upon between it distinct and separate from, and not a mere branch of Koppel Industrial Car and
and the buyer (t.s.n., pp. 39-43); Equipment Co.;

(h) Whenever the deliveries made by Koppel Industrial Car and Equipment 2. the court a quo erred in ignoring the ruling of the Secretary of Finance, dated
Company were incomplete or insufficient to fill the local buyer's orders, January 31, 1931, Exhibit M;
plaintiff used to make good the deficiencies by deliveries from its own local
stock, but in such cases it charged its principal only the actual cost of the
merchandise thus delivered by it from its stock and in such transactions 3. the court a quo erred in not holding that a character of a broker is determined by
plaintiff did not realize any profit (t.s.n., pp. 53-54); the nature of the transaction and not by the basis or measure of his compensation;

(i) The contract of sale involved herein were all perfected in the Philippines. 4. The court a quo erred in not holding that appellant acted as a commercial broker
in the transactions covered under paragraph VI of the agreed statement of facts;
Those described in paragraph IV of the agreed statement of facts went through the
following process: (1) "When a local buyer was interested in the purchase of railway 5. The court a quo erred in not holding that appellant acted as a commercial broker
materials, machinery, and supplies, it asked for price quotations from plaintiff"; (2) in the transactions covered under paragraph v of the agreed statement of facts;
"Plaintiff then cabled for the quotation desired from Koppel Industrial Car and
Equipment Company"; (3) "Plaintiff, however, quoted to the purchaser a selling price 6. The court a quo erred in not holding that appellant acted as a commercial broker
above the figures quoted by Koppel Industrial Car and Equipment Company"; (4) "On in the sole transaction covered under paragraph VI of the agreed statement of facts;
the basis of these quotations, orders were placed by the local purchasers . . ."
7. the court a quo erred in dismissing appellant's complaint.
Those described in paragraph V of said agreed statement of facts were transacted "in
substantially the same manner as outlined in paragraph IV." The lower court found and held that Koppel (Philippines), Inc. is a mere dummy or brach
("hechura") of Koppel industrial Car and Equipment Company. The lower court did not deny

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Juridical Personality – Full Text
legal personality to Koppel (Philippines), Inc. for any and all purposes, but in effect its By most courts the entity is normally regarded but is disregarded to prevent injustice,
conclusion was that, in the transactions involved herein, the public interest and convenience or the distortion or hiding of the truth, or to let in a just defense. (1 Fletcher,
would be defeated and what would amount to a tax evasion perpetrated, unless resort is had Cyclopedia of Corporation, Permanent Edition, pp. 139,140; emphasis supplied.)
to the doctrine of "disregard of the corporate fiction."
Another rule is that, when the corporation is the mere alter ego, or business conduit
I. In its first assignment of error appellant submits that the trial court erred in not holding of a person, it may de disregarded." (1 Fletcher, Cyclopedia of Corporation,
that it is a domestic corporation distinct and separate from and not a mere branch of Koppel Permanent Edition, p. 136.)
Industrial Car and Equipment Company. It contends that its corporate existence as
Philippine corporation can not be collaterally attacked and that the Government is estopped Manifestly, the principle is the same whether the "person" be natural or artificial.
from so doing. As stated above, the lower court did not deny legal personality to appellant for
any and all purposes, but held in effect that in the transaction involved in this case the
public interest and convenience would be defeated and what would amount to a tax evasion A very numerous and growing class of cases wherein the corporate entity is
perpetrated, unless resort is had to the doctrine of "disregard of the corporate fiction." In disregarded is that (it is so organized and controlled, and its affairs are so conducted,
other words, in looking through the corporate form to the ultimate person or corporation as to make it merely an instrumentality, agency, conduit or adjunct of another
behind that form, in the particular transactions which were involved in the case submitted to corporation)." (1 Fletcher, Cyclopedia of Corporation, Permanent ed., pp. 154, 155.)
its determination and judgment, the court did so in order to prevent the contravention of the
local internal revenue laws, and the perpetration of what would amount to a tax evasion, While we recognize the legal principle that a corporation does not lose its entity by
inasmuch as it considered — and in our opinion, correctly — that appellant Koppel the ownership of the bulk or even the whole of its stock, by another corporation
(Philippines), Inc. was a mere branch or agency or dummy ("hechura") of Koppel Industrial (Monongahela Co. vs. Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79 Am. St. Rep., 685)
Car and Equipment Co. The court did not hold that the corporate personality of Koppel yet it is equally well settled and ignore corporate forms." (Colonial Trust Co. vs.
(Philippines), Inc., would also be disregarded in other cases or for other purposes. It would Montello Brick Works, 172 Fed., 310.)
have had no power to so hold. The courts' action in this regard must be confined to the
transactions involved in the case at bar "for the purpose of adjudging the rights and liabilities Where it appears that two business enterprises are owned, conducted and controlled
of the parties in the case. They have no jurisdiction to do more." (1 Flethcer, Cyclopedia of by the same parties, both law and equity will, when necessary to protect the rights of
Corporation, Permanent ed., p. 124, section 41.) third persons, disregard the legal fiction that two corporations are distinct entities,
and treat them as identical. (Abney vs. Belmont Country Club Properties, Inc., 279
A leading and much cited case puts it as follows: Pac., 829.)

If any general rule can be laid down, in the present state of authority, it is that a . . . the legal fiction of distinct corporate existence will be disregarded in a case where
corporation will be looked upon as a legal entity as a general rule, and until sufficient a corporation is so organized and controlled and its affairs are so conducted, as to
reason to the contrary appears; but, when the notion of legal entity is used to defeat make it merely an instrumentality or adjunct of another corporation. (Hanter vs.
public convinience, justify wrong, protect fraud, or defend crime, the law will regard Baker Motor Vehicle Co., 190 Fed., 665.)
the corporation as an association of persons. (1 Fletcher Cyclopedia of Corporation
[Permanent Edition], pp. 135, 136; United States vs. Milwaukee Refrigeration Transit In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458, 464), the Supreme
Co., 142 Fed., 247, 255, per Sanborn, J.) Court of the United States disregarded the artificial personality of the subsidiary coal
company in order to avoid that the parent corporation, the Lehigh Valley R. Co., should be
In his second special defense appellee alleges "that the plaintiff was and is in fact a branch or able, through the fiction of that personality, to evade the prohibition of the Hepburn Act
subsidiary of Koppel Industrial Car and Equipment Co., a Pennsylvania corporation not against the transportation by railroad companies of the articles and commodities described
licensed to do business in the Philippines but actually doing business here through the therein.
plaintiff; that the said foreign corporation holds 995 of the 1,000 shares of the plaintiff's
capital stock, the remaining five shares being held by the officers of the plaintiff herein in Chief Justice White, speaking for the court, said:
order to permit the incorporation thereof and to enable its aforesaid officers to act as directors
of the plaintiff corporation; and that plaintiff was organized as a Philippine corporation for the
purpose of evading the payment by its parent foreign corporation of merchants' sales tax on . . . Coming to discharge this duty it follows, in view of the express prohibitions of the
the transactions involved in this case and others of similar nature." commodities clause, it must be held that while the right of a railroad company as a
stockholder to use its stock ownership for the purpose of a bona fide separate

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Juridical Personality – Full Text
administration of the affairs of a corporation in which it has a stock interest may not was adopted in order to avoid paying the 1½ per cent merchants sales tax. Neither can we
be denied, the use of such stock ownership in substance for the purpose of conceive how the Philippine corporation could avoid following the directions of the American
destroying the entity of a producing, etc., corporation, and commingling its affairs in corporation held 99.5 per cent of the capital stock of the Philippine corporation. In the
administration with the affairs of the railroad company, so as to make the two present instance, we note that Koppel (Philippines), Inc., was represented in the Philippines
corporations virtually one, brings the railroad company so voluntarily acting as to by its "resident Vice-President." This fact necessarily leads to the inference that the
such producing, etc., corporation within the prohibitions of the commodities clause. corporation had at least a Vice-President, and presumably also a President, who were not
In other words, that by operation and effect of the commodities clause there is duty resident in the Philippines but in America, where the parent corporation is domiciled. If
cast upon a railroad company proposing to carry in interstate commerce the product Koppel (Philippines), Inc., had been intended to operate as a regular domestic corporation in
of a producing, etc., corporation in which it has a stock interest, not to abuse such the Philippines, where it was formed, the record and the evidence do not disclose any reason
power so as virtually to do by indirection that which the commodities clause why all its officers should not reside and perform their functions in the Philippines.
prohibits, — a duty which plainly would be violated by the unnecessary commingling
of the affairs of the producing company with its own, so as to cause them to be one Other facts appearing from the evidence, and presently to be stated, strengthen our
and inseparable. conclusion, because they can only be explained if the local entity is considered as a mere
subsidiary, branch or agency of the parent organization. Plaintiff charged the parent
Corrobarative authorities can be cited in support of the same proposition, which we deem corporation no more than actual cost — without profit whatsoever — for merchandise
unnecessary to mention here. allegedly of its own to complete deficiencies of shipments made by said parent corporation
(t.s.n., pp. 53, 54) — a fact which could not conceivably have been the case if plaintiff had
From the facts hereinabove stated, as established by a preponderance of the evidence , acted in such transactions as an entirely independent entity doing business — for profit, of
particularly those narrated in paragraph (a), (b), (c), (d), (e),(f), (h), (i), and (j) after the agreed course — with the American concern. There has been no attempt even to explain, if the latter
statement of facts, we find that, in so far as the sales involved herein are concerned, Koppel situation really obtained, why these two corporations should have thus departed from the
(Philippines), Inc., and Koppel Industrial Car and Equipment company are to all intents and ordinary course of business. Plaintiff was charged by the American corporation with the cost
purposes one and the same; or, to use another mode of expression, that, as regards those even of the latter's cable quotations — from ought that appears from the evidence, this can
transactions, the former corporation is a mere branch, subsidiary or agency of the latter. To only be comprehended by considering plaintiff as such a subsidiary, branch or agency of the
our mind, this is conclusively borne out by the fact, among others, that the amount of he so- parent entity, in which case it would be perfectly understandable that for convenient
called "share in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole, accounting purposes and the easy determination of the profits or losses of the parent
unbridled control of Koppel Industrial Car and Equipment Company. If, in their relations with corporation's Philippines should be charged against the Philippine office and set off against
each other, Koppel (Philippines), Inc., was considered and intended to function as a bona its receipts, thus separating the accounts of said branch from those which the central
fide separate corporation, we can not conceive how this arrangement could have been organization might have in other countries. The reference to plaintiff by local banks, under a
adopted, for if there was any factor in its business as to which it would in that case naturally standing instruction of the parent corporation, of unpaid drafts drawn on Philippine
have been opposed to being thus controlled, it must have been precisely the amount customers by said parent corporation, whenever said customers dishonored the drafts, and
of profit which it could endeavor and hope to earn. No group of businessmen could be the fact that the American corporation had previously advised said banks that plaintiff in
expected to organize a mercantile corporation — the ultimate end of which could only be those cases was "fully empowered to instruct (the banks) with regard to the disposition of the
profit — if the amount of that profit were to be subjected to such a unilateral control of drafts and documents" (t.s.n., p. 50), in the absence of any other satisfactory explanation
another corporation, unless indeed the former has previously been designed by the naturally give rise to the inference that plaintiff was a subsidiary, branch or agency of the
incorporators to serve as a mere subsidiary, branch or agency of the latter. Evidently, Koppel American concern, rather than an independent corporation acting as a broker. For, without
Industrial Car and Equipment Company made us of its ownership of the overwhelming such positive explanation, this delegation of power is indicative of the relations between
majority — 99.5% — of the capital stock of the local corporation to control the operations of central and branch offices of the same business enterprise, with the latter acting under
the latter to such an extent that it had the final say even as to how much should be allotted instructions already given by the former. Far from disclosing a real separation between the
to said local entity in the so-called sharing in the profits. We can not overlook the fact that in two entities, particularly in regard to the transactions in question, the evidence reveals such
the practical working of corporate organizations of the class to which these two entities commongling and interlacing of their activities as to render even incomprehensible certain
belong, the holder or holders of the controlling part of the capital stock of the corporation, accounting operations between them, except upon the basis that the Philippine corporation
particularly where the control is determined by the virtual ownership of the totality of the was to all intents and purposes a mere subsidiary, branch, or agency of the American parent
shares, dominate not only the selection of the Board of Directors but, more often than not, entity. Only upon this basis can it be comprehended why it seems not to matter at all how
also the action of that Board. Applying this to the instant case, we can not conceive how the much profit would be allocated to plaintiff, or even that no profit at all be so allocated to it, at
Philippine corporation could effectively go against the policies, decisions, and desires of the any given time or after any given period.
American corporation with regards to the scheme which was devised through the
instrumentality of the contract Exhibit H, as well as all the other details of the system which
Page 27 of 53
Juridical Personality – Full Text
As already stated above, under the evidence the sales in the Philippines of the railway sanction of section 2741 of the Revised Administrative Code. Which only goes to show the
materials, machinery and supplies imported here by Koppel Industrial Car and Equipment illegality of the whole scheme. We are not here concerned with the impossibility of collecting
Company could have been as conviniently and efficiently transacted and handled — if not the merchants' sales tax, as a mere incidental consequence of transactions legal in
more so — had said corporation merely established a branch or agency in the Philippines and themselves and innocent in their purpose. We are dealing with a scheme the primary, not to
obtained license to do business locally; and if it had done so and said sales had been effected say the sole, object of which the evasion of the payment of such tax. It is this aim of the
by such branch or agency, there seems to be no dispute that the 1½ per cent merchants' scheme that makes it illegal.
sales tax then in force would have been collectible. So far as we can discover, there would be
only one, but very important, difference between the two schemes — a difference in tax We have said above that the contracts of sale involved herein were all perfected in the
liability on the ground that the sales were made through another and distinct corporation, as Philippines. From the facts stipulated in paragraph IV of the agreed statement of facts, it
alleged broker, when we have seen that this latter corporation is virtually owned by the clearly appears that the Philippine purchasers had to wait for Koppel Industrial Car and
former, or that they practically one and the same, is to sanction a circumvention of our tax Equipment Company to communicate its cost prices to Koppel (Philippines), Inc., were
laws, and permit a tax evasion of no mean proportions and the consequent commission of a perfected in the Philippines. In those cases where no such price quotations from the
grave injustice to the Government. Not only this; it would allow the taxpayer to do by American corporation were needed, of course, the sales effected in those cases described in
indirection what the tax laws prohibited to be done directly (non-payment of legitimate taxes), paragraph V of the agreed statement of facts were, as expressed therein, transacted "in
paraphrasing the United States Supreme Court in United States vs. Lehigh Valley R. substantially the same manner as outlined in paragraph VI." Even the single transaction
Co., supra. described in paragraph VI of the agreed statement of facts was also perfected in the
Philippines, because the contracting parties were here and the consent of each was given
The act of one corporation crediting or debiting the other for certain items, expenses or even here. While it is true that when the contract was thus perfected in the Philippines the pair of
merchandise sold or disposed of, is perfectly compatible with the idea of the domestic entity Atlas-Diesel Marine Engines were in Sweden and the agreement was to deliver them C.I.F.
being or acting as a mere branch, agency or subsidiary of the parent organization. Such Hongkong, the contract of sale being consensual — perfected by mere consent — (Civil Code,
operations were called for any way by the exigencies or convenience of the entire business. article 1445; 10 Manresa, 4th ed., p. 11), the location of the property and the place of delivery
Indeed, accounting operation such as these are invitable, and have to be effected in the did not matter in the question of where the agreement was perfected.
ordinary course of business enterprise extends its trade to another land through a branch
office, or through another scheme amounting to the same thing. In said paragraph VI, we read the following, as indicating where the contract was perfected,
considering beforehand that one party, Koppel (Philippines),Inc., which in contemplation of
If plaintiff were to act as broker in the Philippines for any other corporation, entity or person, law, as to that transaction, was the same Koppel Industrial Car Equipment Co., was in the
distinct from Koppel Industrial Car and Equipment company, an entirely different question Philippines:
will arise, which, however, we are not called upon, nor in a position, to decide.
. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines, was
As stated above, Exhibit H contains to the following paragraph: found and the same engines were sold to him for $21,000 (P42,000) C.I.F. Hongkong .
. . (Emphasis supplied.)
It is clearly understood that the intent of this contract is that the broker shall
perform only the functions of a broker as set forth above, and shall not take Under the revenue law in force when the sales in question took place, the merchants' sales
possession of any of the materials or equipment applying to said orders or perform tax attached upon the happening of the respective sales of the "commodities, goods, wares,
any acts or duties outside the scope of a broker; and in no sense shall this contract and merchandise" involved, and we are clearly of opinion that such "sales" took place upon
be construed as granting to the broker the power to represent the principal as its the perfection of the corresponding contracts. If such perfection took place in the Philippines,
agent or to make commitments on its behalf. the merchants' sales tax then in force here attached to the transactions.

The foregoing paragraph, construed in the light of other facts noted elsewhere in this Even if we should consider that the Philippine buyers in the cases covered by paragraph IV
decision, betrays, we think a deliberate intent, through the medium of a scheme devised with and V of the agreed statement of facts, contracted with Koppel Industrial Car and Equipment
great care, to avoid the payment of precisely the 1½ per cent merchants' sales tax in force in company, we will arrive at the same final result. It can not be denied in that case that said
the Philippines before, at the time of, and after, the making of the said contract Exhibit H. If American corporation contracted through Koppel (Philippines), Inc., which was in the
this were to be allowed, the payment of a tax, which directly could not have been avoided, Philippines. The real transaction in each case of sale, in final effect, began with an offer of
could be evaded by indirection, consideration being had of the aforementioned peculiar sale from the seller, said American corporation, through its agent, the local corporation, of
relations between the said American and local corporations. Such evasion, involving as it the railway materials, machinery, and supplies at the prices quoted, and perfected or
would, a violation of the former Internal Revenue Law, would even fall within the penal completed by the acceptance of that offer by the local buyers when the latter, accepting those
Page 28 of 53
Juridical Personality – Full Text
prices, placed their orders. The offer could not correctly be said to have been made by the CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR RELATIONS
local buyers when they asked for price quotations, for they could not rationally be taken to COMMISSION, (First Division); and Norberto Marabe, Rodolfo Raquel, Cristobal
have bound themselves to buy before knowing the prices. And even if we should take into Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador,
consideration the fact that the american corporation contracted, at least partly, through Rogello Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Aifredo Albera,
correspondence, according to article 54 of the Code of Commerce, the respective contracts Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe
were completed from the time of the acceptance by the local buyers, which happened in the Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and
Philippines. Ruben Robalos, respondents.

Contracts executed through correspondence shall be completed from the time an DECISION
answer is made accepting the proposition or the conditions by which the latter may be
modified." (Code of Commerce, article 54; emphasis supplied.) HERMOSISIMA, JR., J.:

A contract is as a rule considered as entered into at the place where the place it is The corporate mask may be lifted and the corporate veil may be pierced when a corporation
performed. So where delivery is regarded as made at the place of delivery." (13 C. J., is just but the alter ego of a person or of another corporation. Where badges of fraud exist;
580-81, section 581.) where public convenience is defeated; where a wrong is sought to be justified thereby, the
corporate fiction or the notion of legal entity should come to naught. The law in these instances
will regard the corporation as a mere association of persons and, in case of two corporations,
(In the consensual contract of sale delivery is not needed for its perfection.)
merge them into one.

II. Appellant's second assignment of error can be summarily disposed of. It is clear that the Thus, where a sister corporation is used as a shield to evade a corporations subsidiary
ruling of the Secretary of Finance, Exhibit M, was not binding upon the trial court, much less liability for damages, the corporation may not be heard to say that it has a personality separate
upon this tribunal, since the duty and power of interpreting the laws is primarily a function and distinct from the other corporation. The piercing of the corporate veil comes into play.
of the judiciary. (Ortua vs. Singson Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be
This special civil action ostensibly raises the question of whether the National Labor
excused from abiding by this legal principle, nor can it properly be heard to say that it relied
Relations Commission committed grave abuse of discretion when it issued a break-open order
on the Secretary's ruling and that, therefore, the courts should not now apply an
to the sheriff to be enforced against personal property found in the premises of petitioners sister
interpretation at variance therewith. The rule of stare decisis is undoubtedly entitled to more
company.
respect in the construction of statutes than the interpretations given by officers of the
administrative branches of the government, even those entrusted with the administration of Petitioner Concept Builders, Inc., a domestic corporation, with principal office
particular laws. But this court, in Philippine Trust Company and Smith, Bell and Co. vs. at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the construction
Mitchell(59 Phil., 30, 36), said: business. Private respondents were employed by said company as laborers, carpenters and
riggers.
. . . The rule of stare decisis is entitled to respect. Stability in the law, particularly in
On November, 1981, private respondents were served individual written notices of
the business field, is desirable. But idolatrous reverence for precedent, simply as
termination of employment by petitioner, effective on November 30, 1981. It was stated in the
precedent, no longer rules. More important than anything else is that court should be
individual notices that their contracts of employment had expired and the project in which they
right. . . .
were hired had been completed.

III. In the view we take of the case, and after the disposition made above of the first Public respondent found it to be, the fact, however, that at the time of the termination of
assignment of error, it becomes unnecessary to make any specific ruling on the third, fourth, private respondents employment, the project in which they were hired had not yet been finished
fifth, sixth, and seventh assignments of error, all of which are necessarily disposed of and completed. Petitioner had to engage the services of sub-contractors whose workers
adversely to appellant's contention. performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice
Wherefore, he judgment appealed from is affirmed, with costs of both instances against and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against
appellant. So ordered. petitioner.

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Juridical Personality – Full Text
On December 19, 1984, the Labor Arbiter rendered judgment1 ordering petitioner to On November 23, 1989, private respondents filed a Motion for Issuance of a Break-Open
reinstate private respondents and to pay them back wages equivalent to one year or three Order, alleging that HPPI and petitioner corporation were owned by the same incorporator!
hundred working days. stockholders. They also alleged that petitioner temporarily suspended its business operations
in order to evade its legal obligations to them and that private respondents were willing to post
On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the an indemnity bond to answer for any damages which petitioner and HPPI may suffer because
motion for reconsideration filed by petitioner on the ground that the said decision had already of the issuance of the break-open order.
become final and executory.2
In support of their claim against HPPI, private respondents presented duly certified copies
On October 16, 1986, the NLRC Research and Information Department made the finding of the General Informations Sheet, dated May 15, 1987, submitted by petitioner to the
that private respondents backwages amounted to P199,800.00.3 Securities and Exchange Commission (SEC) and the General Information Sheet,
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to dated May 15, 1987, submitted by HPPI to the Securities and Exchange Commission.
execute the Decision, dated December 19, 1984. The writ was partially satisfied through The General Information Sheet submitted by the petitioner1 revealed the following:
garnishment of sums from petitioners debtor, the Metropolitan Waterworks and Sewerage
Authority, in the amount of P81,385.34. Said amount was turned over to the cashier of the
NLRC. 1. Breakdown of Subscribed Capital

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing Name of Stockholder Amount Subscribed
the sheriff to collect from herein petitioner the sum of P117,414.76, representing the balance
of the judgment award, and to reinstate private respondents to their former positions.
HPPI P6,999,500.00
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of
execution on petitioner through the security guard on duty but the service was refused on the Antonio W. Lim 2,900,000.00
ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a Dennis S. Cuyegkeng 300.00
second alias writ of execution.
Elisa C. Lim 100,000.00
The said writ had not been enforced by the special sheriff because, as stated in his
progress report, dated November 2, 1989:
Teodulo R. Dino 100.00
1. All the employees inside petitioners premises at 355 Maysan Road, Valenzuela, Metro
Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by Virgilio O. Casino 100.00
respondent;
2. Board of Directors
2. Levy was made upon personal properties he found in the premises;
Antonio W. Lim Chairman
3. Security guards with high-powered guns prevented him from removing the properties he
had levied upon.4 Dennis S. Cuyegkeng Member

The said special sheriff recommended that a break-open order be issued to enable him to Elisa C. Lim Member
enter petitioners premises so that he could proceed with the public auction sale of the aforesaid
personal properties on November 7, 1989.
Teodulo R. Dino Member
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor
Arbiter alleging that the properties sought to be levied upon by the sheriff were owned by Hydro Virgilio O. Casino Member
(Phils.), Inc. (HPPI) of which he is the Vice-President.
3. Corporate Officers
Page 30 of 53
Juridical Personality – Full Text
Antonio W. Lim President Teodulo R. Dino Member

Dennis S. Cuyegkeng Assistant to the President 3. Corporate Officers

Elisa 0. Lim Treasurer Antonio W. Lim President

Virgilio O. Casino Corporate Secretary Dennis S. Cuyegkeng Assistant to the President

4. Principal Office Elisa O. Lim Treasurer

355 Maysan Road Virgilio O. Casino Corporate Secretary

Valenzuela, Metro Manila.5 4. Principal Office

On the other hand, the General Information Sheet of HPPI revealed the following: 355 Maysan Road, Valenzuela, Metro Manila.6

1. Breakdown of Subscribed Capital On February 1, 1990, HPPI filed an Opposition to private respondents motion for issuance
of a break-open order, contending that HPPI is a corporation which is separate and distinct
Name of Stockholder Amount Subscribed from petitioner. HPPI also alleged that the two corporations are engaged in two different kinds
of businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in
construction.
Antonio W. Lim P400,000.00
On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents
Elisa C. Lim 57,700.00 motion for break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside
AWL Trading 455,000.00 the order of the Labor Arbiter, issued a break-open order and directed private respondents to
file a bond. Thereafter, it directed the sheriff to proceed with the auction sale of the properties
Dennis S. Cuyegkeng 40,100.00 already levied upon. It dismissed the third-party claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a
Teodulo R. Dino 100.00 Resolution, dated December 3, 1992.
Hence, the resort to the present petition.
Virgilio O. Casino 100.00
Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the
2. Board of Directors execution of its decision despite a third-party claim on the levied property. Petitioner further
contends, that the doctrine of piercing the corporate veil should not have been applied, in this
case, in the absence of any showing that it created HPPI in order to evade its liability to private
Antonio W. Lim Chairman
respondents. It also contends that HPPI is engaged in the manufacture and sale of steel,
concrete and iron pipes, a business which is distinct and separate from petitioners construction
Elisa C. Lim Member business. Hence, it is of no consequence that petitioner and HPPI shared the same premises,
the same President and the same set of officers and subscribers.7
Dennis S. Cuyegkeng Member
We find petitioners contention to be unmeritorious.

Virgilio O. Casino Member


Page 31 of 53
Juridical Personality – Full Text
It is a fundamental principle of corporation law that a corporation is an entity separate 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
and distinct from its stockholders and from other corporations to which it may be the violation of a statutory or other positive legal duty, or dishonest and unjust act in
connected.8 But, this separate and distinct personality of a corporation is merely a fiction contravention of plaintiffs legal rights; and
created by law for convenience and to promote justice.9 So, when the notion of separate
juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
crime, or is used as a device to defeat the labor laws, 10 this separate personality of the complained of.
corporation may be disregarded or the veil of corporate fiction pierced.11 This is true likewise
when the corporation is merely an adjunct, a business conduit or an alter ego of another
corporation.12 The absence of any one of these elements prevents piercing the corporate veil. in applying the
instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with
The conditions under which the juridical entity may be disregarded vary according to the how the corporation operated and the individual defendants relationship to that operation. 14
peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid
down, but certainly, there are some probative factors of identity that will justify the application Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper
of the doctrine of piercing the corporate veil, to wit: corporation, a sham or a subterfuge is purely one of fact.15

1. Stock ownership by one or common ownership of both corporations. In this case, the NLRC noted that, while petitioner claimed that it ceased its business
operations on April 29, 1986, it filed an Information Sheet with the Securities and Exchange
Commission on May 15, 1987, stating that its office address is at 355 Maysan Road,
2. Identity of directors and officers. Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on the
same day, a similar information sheet stating that its office address is at 355 Maysan Road,
3. The manner of keeping corporate books and records. Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
4. Methods of conducting the business.13

Both information sheets were filed by the same Virgilio O. Casino as the corporate secretary of
The SEC en banc explained the instrumentality rule which the courts have applied in both corporations. It would also not be amiss to note that both corporations had
disregarding the separate juridical personality of corporations as follows: the same president, the same board of directors, the same corporate officers, and substantially
the same subscribers.
Where one corporation is so organized and controlled and its affairs are conducted so that it is,
in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the From the foregoing, it appears that, among other things, the respondent (herein petitioner) and
instrumentality may be disregarded. The control necessary to invoke the rule is not majority or the third-party claimant shared the same address and/or premises. Under this circumstances,
even complete stock control but such domination of finances, policies and practices that the (sic) it cannot be said that the property levied upon by the sheriff were not of respondents.16
controlled corporation has, so to speak, no separate mind, will or existence of its own, and is
but a conduit for its principal. It must be kept in mind that the control must be shown to have
been exercised at the time the acts complained of took place. Moreover, the control and breach Clearly, petitioner ceased its business operations in order to evade the payment to private
of duty must proximately cause the injury or unjust loss for which the complaint is made. respondents of backwages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to petitioner corporation.
The test in determining the applicability of the doctrine of piercing the veil of corporate
fiction is as follows: The facts in this case are analogous to Claparols v. Court of Industrial Relations17 where
we had the occasion to rule:
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 Respondent courts findings that indeed the Claparols Steel and Nail Plant, which ceased
corporate entity as to this transaction had at the time no separate mind, will or existence of its operation of June 30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the
own; next day, July 1, 1957, up to December 7, 1962, when the latter finally ceased to operate, were
not disputed by petitioner. it is very clear that the latter corporation was a continuation and
successor of the first entity x x x. Both predecessors and successor were owned and controlled
by petitioner Eduardo Claparols and there was no break in the succession and continuity of the
Page 32 of 53
Juridical Personality – Full Text
same business. This avoiding-the-liability scheme is very patent, considering that 90% of the TUASON, J.:
subscribed shares of stock of the Claparols Steel Corporation (the second corporation) was
owned by respondent x x x Claparols himself, and all the assets of the dissolved Claparols This is a three-cornered contest between the purchasers, the seller, and the mortgagee of
Steel and Nail Plant were turned over to the emerging Claparols Steel Corporation. certain portions (approximately 40,703 square meters) of a big block of residential land in the
district of Santa Mesa, Manila. The plaintiff, which is the purchaser, and the mortgagee
It is very obvious that the second corporation seeks the protective shield of a corporate elevated this appeal. Though not an appellant, the seller and mortgagor has made
fiction whose veil in the present case could, and should, be pierced as it was deliberately and assignments of error in her brief, some to strengthen the judgment and others for the
maliciously designed to evade its financial obligation to its employees. purpose of new trial.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property
subject of the execution, private respondents had no other recourse but to apply for a break- The case is extremely complicated and multiple issues were raised.
open order after the third-party claim of HPPI was dismissed for lack of merit by the NLRC.
This is in consonance with Section 3, Rule VII of the NLRC Manual of Execution of Judgment The salient facts in so far as they are not controverted are these. Paz Tuason de Paterno is the
which provides that: registered owner of the aforesaid land, which was subdivided into city lots. Most of these lots
were occupied by lessees who had contracts of lease which were to expire on December
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his 31,1952, and carried a stipulation to the effect that in the event the owner and lessor should
representative entry to the place where the property subject of execution is located or kept, the decide to sell the property the lessees were to be given priority over other buyers if they
judgment creditor may apply to the Commission or Labor Arbiter concerned for a break-open should desire to buy their leaseholds, all things being equal. Smaller lots were occupied by
order. tenants without formal contract.

Furthermore, our perusal of the records shows that the twin requirements of due notice In 1940 and 1941 Paz Tuason obtained from Jose Vidal several loans totalling P90,098 and
and hearing were complied with. Petitioner and the third-party claimant were given the constituted a first mortgage on the aforesaid property to secure the debt. In January and
opportunity to submit evidence in support of their claim. April, 1943, she obtained additional loans of P30,000 and P20,000 upon the same security.
On each of the last-mentioned occasions the previous contract of mortgage was renewed and
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break- the amounts received were consolidated. In the first novated contract the time of payment
open order issued by the Labor Arbiter. was fixed at two years and in the second and last at four years. New conditions not relevant
here were also incorporated into the new contracts.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial
agencies supported by substantial evidence are binding on this Court and are entitled to great
respect, in the absence of showing of grave abuse of a discretion.18 There was, besides, a separate written agreement entitled "Penalidad del Documento de
Novacion de Esta Fecha" which, unlike the principal contracts, was not registered. The tenor
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, of this separate agreement, all copies, of which were alleged to have been destroyed or lost,
dated April 23, 1992 and December 3, 1992, are AFFIRMED. was in dispute and became the subject of conflicting evidence. The lower court did not make
categorical findings on this point, however, and it will be our task to do so at the appropriate
SO ORDERED. place in this decision.

In 1943 Paz Tuason decided to sell the entire property for the net amount of P400,000 and
entered into negotiations with Gregorio Araneta, Inc. for this purpose. The result of the
negotiations was the execution on October 19, 1943, of a contract called "Promesa de Compra
y Venta" and identified as Exhibit "1." This contract provided that subject to the preferred
G.R. No. L-2886 August 22, 1952 right of the lessees and that of Jose Vidal as mortgagee, Paz Tuason would sell to Gregorio
Araneta, Inc. and the latter would buy for the said amount of P400,000 the entire estate
under these terms.
GREGORIO ARANETA, INC., plaintiff-appellant,
vs.
PAZ TUASON DE PATERNO and JOSE VIDAL, defendants-appellants. El precio sera pagado como sigue: un 40 por ciento juntamente con la carta de
aceptacion del arrendatario, un 20 por ciento delprecio al otorgarse la escritura de
compromiso de venta, y el remanente 40 por ciento al otorgarse la escritura de venta
Page 33 of 53
Juridical Personality – Full Text
definitiva, la cual sera otorgada despues de que se habiese canceladola hipoteca a 12. Si la mencionada cantidad de P190,000 excediere del 90 por ciento de la cantidad
favor de Jose Vidal que pesa sobre dichos lotes. Lacomision del 5 por ciento que que Gregorio Araneta, Inc., tuviere que vender a dicho comprador, el saldo sera
corresponde a Jose Araneta serapagada al otorgarse la escritura de compromiso de pagado inmediatamente por Paz Tuazon, tomandolo de las cantidades que reciba de
venta. los arrendatarios como precio de venta.

Paz Tuason se obliga a entregar mediante un propio las cartasque dirigira a este In furtherance of this promise to buy and sell, letters were sent the lessees giving them until
efecto a los arrendatarios, de conformidad con el formulario adjunto, que se marca August 31, 1943, an option to buy the lots they occupied at the price and terms stated in said
como Apendice A. letters. Most of the tenants who held contracts of lease took advantage of the opportunity
thus extended and after making the stipulated payments were giving their deeds of
Expirado el plazo arriba mencionado, Paz Tuason otorgara las escrituras conveyance. These sales, as far as the record would show, have been respected by the seller.
correspondientes de venta a los arrendatarios que hayan decidido comprar sus
respectivos lotes. With the elimination of the lots sold or be sold to the tenants there remained unencumbered,
except for the mortgage to Jose Vidal, Lots 1, 8-16 and 18 which have an aggregate area of
9. Los alquieres correspondientes a este año se prorratearan entre la vendedora y el 14,810.20 square meters; and on December 2, 1943, Paz Tuason and Gregorio Araneta, Inc.
comprador, correspondiendo al comprador los alquileres correspondientes a executed with regard to these lots an absolute deed of sale, the terms of which, except in two
Noviembre y Diciembre de este año y asimismo sera por cuenta del comprador el respects, were similar to those of the sale to the lessees. This deed, copy of which is attached
amillaramiento correspondiente a dichos meses. to the plaintiff's complaint as Exhibit A, provided, among other things, as follows:

10. Paz Tuason, reconoce haver recibido en este acto de Gregorio Araneta, Inc., la The aforesaid lots are being sold by he Vendor to the Vendee separately at the prices
suma de Ciento Noventa Mil Pesos (P190,000)como adelanto del precio de venta que mentioned in paragraph (6) of the aforesaid contract entitled "Promesa de Compra y
Gregorio Araneta, Inc., tuviere que pagar a Paz Tuason. Venta," making a total sum of One Hundred Thirty-Nine Thousand Eighty-three
pesos and Thirty-two centavos (P139,083.32), ninety (90%) per cent of which amount,
i.e., the sum of One Hundred Twenty-five Thousand One Hundred Seventy-four Pesos
La cantidad que Paz Tuason recibe en este acto sera aplicadapor ella a saldar su and Ninety-nine centavos (P125,174.99), the Vendor acknowledges to have received
deuda con Jose Vidal, los amillaramientos, sobre el utilizado por Paz Tuason para by virtue of the advance of One Hundred Ninety Thousand (P190,000) Pesos made by
otros fines. the Vendee to the Vendor upon the execution of the aforesaid contract entitled
"Promesa de Compra y Venta". The balance of Sixty-Four Thousand Eight Hundred
11. Una vez determinados los lotes que Paz Tuason podra vendera Gregorio Araneta, Twenty-five Pesos and One centavo (P64,825.01) between the sum of P125,174.99,
Inc., Paz Tuason otorgara una escritura deventa definitiva sobre dichos lotes a favor has been returned by the Vendor to the Vendee, which amount the Vendee
de Gregorio Araneta, Inc. acknowledges to have received by these presents;

Gregorio Araneta, Inc., pagara el precio de venta como sigue: 90 por ciento del mismo The aforesaid sum of P190,000 was delivered by the Vendee to the Vendor by virtue
al otorgarse la escritura de venta definitiva descontandose de la cantidad que of four checks issued by the Vendee against the Bank of the Philippine Islands, as
entonces se tenga que pagar de adelanto de P190,000 que se entrega en virtud de follows:
esta escritura. El 10 por ciento remanente se pagara a Paz Tuazon, una vez se haya
cancelado la hipoteca que pesa actualmente sobre el terreno.
No. C-286445 in favor of Paz Tuason de Paterno P13,476.62

No obstante la dispuesto en el parrafo 8, cualquier arrendatario que decida comprar No. C-286444 in favor of the City Treasurer, 3,373.38
el lote que occupa con contrato de arrendamiento podra optar por pedir el Manila
otorgamiento inmediato a su favor el acto de la escritura de venta definitiva pagando No. C-286443 in favor of Jose Vidal 30,000.00
en el acto el 50 por ciento del precio (ademas del 40 por ciento que debio incluir en
No. C-286442 in favor of Jose Vidal 143,150.00
su carta de aceptacion) y el remanente de 10 por ciento inmediatemente despues de
cancelarse la hipoteca que pesa sobre el terreno. Total P190,000.00

Page 34 of 53
Juridical Personality – Full Text
The return of the sum of P64,825.01 was made by the Vendor to the Vendee in a
Por:
liquidation which reads as follows:
(Fdo.) "M.J. GONZALEZ

Hemos recibido de Da. Paz Tuason de Paterno la cantidad


de Sesenta y Cuatro mil Ochocientos Veinticinco Pesos y In view of the foregoing liquidation, the vendor acknowledges fully and
un centimo (P64,825.01) enconcepto de devolucion que unconditionally, having received the sum of P125,174.99 of the present legal
nos hace del excesode lo pagadoa ella de P190,000.00 currency and hereby expressly declares that she will not hold the Vendee responsible
for any loss that she might suffer due to the fact that two of the checks paid to her by
Menos el 90% de P139,083.32, importe de los lotes que the Vendee were issued in favor of Jose Vidal and the latter has, up to the present
vamos a comprar 125,174.99 time, not yet collected the same.
Exceso 64,825.01
The ten (10%) per cent balance of the purchase price not yet paid in the total sum of
P13,908.33 will be paid by the Vendee to the Vendor when the existing mortgage over
Cheque BIF No. D-442988 de Simplicio del Rosario 21,984.20 the property sold by the Vendor to the Vendee is duly cancelled in the office of the
Cheque PNB No. 177863-K de L.E. Dumas 21,688.60 Register of Deeds, or sooner at the option of the Vendee.
Cheque PNB No. 267682-K de Alfonso Sycip 20,000.00
This Deed of Sale is executed by the Vendor free from all liens and encumbrances,
Cheque PNB No. 83940 de Josefina de Pabalan 4,847.96
with the only exception of the existing lease contracts on parcels Nos. 1, 10, 11, and
Billetes recibidos de Alfonso Sycip 42.96 16, which lease contracts will expire on December 31, 1953, with the understanding,
P68,563.21 however, that this sale is being executed free from any option or right on the part of
the lessees to purchase the lots respectively leased by them.

Menos las comisiones de 5 % recibidas de It is therefore clearly understood that the Vendor will pay the existing mortgage on
Josefina de Pabalan P538.60 her property in favor of Jose Vidal.
L.E. Dumas 1,084.43
The liquidation of the amounts respectively due between the Vendor and the Vendee
Angela S. Tuason 1,621.94 3,244.97
in connection with the rents and real estate taxes as stipulated in paragraph (9) of
P65,318.24 the contract entitled "Promesa de Compara y Venta" will be adjusted between the
Menos cheque BIF No. C-288642 a favor de Da. parties in a separate document.
Paz Tuason de Paterno que le entregamos como
exceso 493.23 Should any of the aforesaid lessees of lots Nos. 2, 3, 4, 5, 6, 7, 9 and 17 fail to carry
P64,825.01 out their respective obligations under the option to purchase exercised by them so
that the rights of the lessee to purchase the respective property leased by him is
cancelled, the Vendor shall be bound to sell the same to the herein Vendee, Gregorio
Manila, Noviembre 2, 1943 Araneta, Incorporated, in conformity with the terms and conditions provided in the
aforesaid contract of "Promesa de Compra y Venta";

GREGORIO ARANETA, INCORPORATED


The documentary stamps to be affixed to this deed will be for the account of the
Por;
Vendor while the expenses for the registration of this document will be for the
(Fdo.) "JOSE ARANETA
account of the Vendee.
Presidente

The remaining area of the property of the Vendor subject to Transfer Certificates of
Recibido cheque No. C-288642 BIF-P493.23 Title Nos. 60471 and 60472, are lots Nos. 2, 3, 4, 5, 6, 7, 9, and 17, all of the
Consolidation of lots Nos. 20 and 117 of plan II-4755, G.L.R.O. Record No. 7680.

Page 35 of 53
Juridical Personality – Full Text
Before the execution of the above deed, that is, on October 20, 1943, the day immediately escritura segun la escalade "Ballentine", descontando, sin embargo, de dichas cantidades
following the signing of the agreement to buy and sell, Paz Tuason had offered to Vidal the cualesquiera que la demandante haya estadorecibiendo como alquileres de los terrenos
check for P143,150 mentioned in Exhibit A, in full settlement of her mortgage obligation, but supuestamentevendidos a ella." The court based its opinion that Exhibit 1. His Honor, Judge
the mortgagee had refused to receive that check or to cancel the mortgage, contending that by Sotero Rodas, agreedwith the defendant that under paragraph 8 of Exhibit 1 there was to be
the separate agreement before mentioned payment of the mortgage was not to be effected no absolute sale to Gregorio Araneta, Inc., unless Vidal's mortgage was cancelled.
totally or partially before the end of four years from April, 1943.
In our opinion the trial court was in error in its interpretation of Exhibit 1. The contemplated
Because of this refusal of Vidal's Paz Tuason, through Atty. Alfonso Ponce Enrile, commenced execution of an absolute deed of sale was not contingent on the cancellation of Vidal's
an action against the mortgagee in October or the early paret of November 1943. the record of mortgage. What Exhibit 1 did provide (eleventh paragraph) was that such deed of absolute
that case was destroyed and no copy of the complaint was presented in evidence. Attached to sale should be executed "una vez determinado los lotes que Paz Tuason podra vender a
the complaint or deposited with the clerk of court by Attorney Ponce Enrile simultaneously Gregorio Araneta, Inc." The lots which could be sold to Gregorio Araneta, Inc. were definitely
with the docketing of the suit were the check for P143,150 previously turned down by Vidal, known by October 31, 1943, which was the expiry of the tenants' option to buy, and the lots
another certified check for P12,932.61, also drawn by Gregorio Araneta, Inc., in favor of included in the absolute of which the occupants' option to buy lapsed unconditionally. Such
Vidal, and one ordinary check for P30,000 issued by Paz Tuazon. These three checks were deed as Exhibit A was then in a condition to be made.
supposed to cover the whole indebtedness to Vidal including the principal and interest up to
that time and the penalty provided in the separate agreement. Vidal's mortgage was not an obstacle to the sale. An amount had been set aside to take care
of it, and the parties, it would appear, were confident that the suit against the mortgagee
But the action against Vidal never came on for trial and the record and the checks were would succeed. The only doubt in their minds was in the amount to which Vidal was entitled.
destroyed during the war operations in January or February, 1945; and neither was the case The failure of the court to try and decide that the case was not foreseen either.
reconstituted afterward. This failure of the suit for the cancellation of Vidal's mortgage,
coupled with the destruction of the checks tendered to the mortgagee, the nullification of the This refutes, were think, the charge that there was undue rush on the part of the plaintiff to
bank deposit on which those checks had been drawn, and the tremendous rise of real estate push across the sale. The fact that simultaneously with Exhibit A similar deeds were given
value following the termination of the war, gave occasion to the breaking off the schemes the lessees who had elected to buy their leaseholds, which comprise an area about twice as
outlined in Exhibits 1 and A; Paz Tuason after liberation repudiated them for the reasons to big as the lots described in Exhibit A, and the further fact that the sale to the lessees have
be hereafter set forth. The instant action was the offshoot, begun by Gregorio Araneta, Inc. to never been questioned and the proceeds thereof have been received by the defendant, should
compel Paz Tuason to deliver to the plaintiff a clear title to the lots described in Exhibit A free add to dispel any suspicion of bad faith on the part of the plaintiff. If anyone was in a hurry it
from all liens and encumbrances, and a deed of cancellation of the mortgage to Vidal. Vidal could have been the defendant. The clear preponderance of the evidence that Paz Tuason was
came into the case in virtue of a summon issued by order of the court, and filed a cross-claim pressed for cash and that the payment of the mortgage was only an incident, or a necessary
against Paz Tuazon to foreclose his mortgage. means to effectuate the sale. Otherwise she could have settled her mortgage obligation merely
by selling a portion of her estate, say, some of the lots leased to tenants who, except two who
It should be stated that the outset that all the parties are in agreement that Vidal's loans are were in concentration camps, were only too anxious to buy and own the lots on which their
still outstanding. Paz Tuason's counsel concede that the tender of payment to Vidal was houses were built.
legally defective and did not operate to discharge the mortgage, while the plaintiff is
apparently uninterested in this feature of the case considering the matter one largely between Whatever the terms of Exhibit 1, the plaintiff and the defendant were at perfect liberty to
the mortgagor and the mortgagee, although to a certain degree this notion is incorrect. At any make a new agreement different from or even contrary to the provisions of that document.
rate, the points of discord between Paz Tuason and Vidal concern only the accrual of interest The validity of the subsequent sale must of necessity depend on what it said and not on the
on the loans, Vidal's claim to attorney's fees, and the application of the debt moratorium law provisions of the promise to buy and sell.
which the debtor now invokes. These matters will be taken up in the discussion of the
controversy between Paz Tuason and Jose Vidal.
It is as possible proof or fraud that the discrepancies between the two documents bear some
attention. It was alleged that Attorneys Salvador Araneta and J. Antonio Araneta who the
The principal bone of contention between Gregorio Araneta, Inc., and Paz Tuason was the defendant said had been her attorneys and had drawn Exhibit A, and not informed or had
validity of the deed of sale of Exhibit A on which the suit was predicated. The lower court's misinformed her about its contents; that being English, she had not read the deed of sale;
judgment was that this contract was invalid and was so declared, "sin per juicio de que la that if she had not trusted the said attorneys she would not have been so foolish as to affix
demandada Paz Tuason de Paterno pague a la entidad demandante todas las cantidades que her signature to a contract so one-sided.
habia estado recibiendo de lareferida entidad demandante, en concepto de pago de
losterrenos, en moneda corriente, segun el cambio que debiaregir al tiempo de otorgarse la
Page 36 of 53
Juridical Personality – Full Text
The evidence does not support the defendant. Except in two particulars, Exhibit A was a porque mi madre quiere pagar al señor Vidal, y que es una verguenza, siendo entre
substantial compliance with Exhibit 1 in furtherance of which Exhibit A was made. One parientes, tener que venir por este; era lo que yo dije al señor Salvador Araneta.
departure was the proviso that 10 per cent of the purchase price should be paid only after
Vidal's mortgage should have been cancelled. This provisional deduction was not onerous or xxx xxx xxx
unusual. It was not onerous or unusual that the vendee should withhold a relatively small
portion of the purchase price before all the impediments to the final consummation of the
sale had been removed. The tenants who had bought their lots had been granted the privilege P. No recuerda usted tambien dijo al señor Salvador Araneta que usted no comulgaba
to deduct as much as 40 per cent of the stipulated price pending discharge of the mortgage, con ella (su madre) en este asunto?
although his percentage was later reduced to 10 as in the case of Gregorio Araneta, Inc. It
has also been that the validity of the sales to the tenants has not been contested; that these R. Si, Señor; porque yo creia que mi madre solamente queria anular esta venta, pero
sales embraced in the aggregate 24,245.40 square meters for P260,916.68 as compared to cuando me dijo el señor La O y sus abogados que, encima de quitar la propiedad,
14,811.20 square meters sold to Gregorio Araneta, Inc. for P139,083.32; that the seller has todavia tendria ella que pagar al señor Vidal, este no veso claro.
already received from the tenant purchasers 90 per cent of the purchase money.
xxx xxx xxx
There is good reason to believe that had Gregorio Araneta, Inc. not insisted on charging to the
defendant the loss of the checks deposited with the court, the sale in question would have P. Ahora bien; de tal suerte que, tal como nosotros desperendemos de su testimonio,
gone the smooth way of the sales to the tenants. Thus Dindo Gonzales, defendant's son, tanto, usted como, su madre, esteban muy conformes en la venta, es asi?
declared:
R. Si, señor.
P. Despues de haberse presentado esta demanda, recuerda usted haber tenido
conversacion con Salvador Araneta acerca de este asunto?
The other stipulation embodied in Exhibit A which had no counterpart in Exhibit 1 was that
by which Gregorio Araneta Inc. would hold Paz Tuason liable for the lost checks and which,
R. Si Señor. as stated, appeared to be at the root of the whole trouble between the plaintiff and the
defendant.
P. Usted fue quien se acerco al señor Salvador Araneta?
The stipulation reads:
R. Si, señor.
In view of the foregoing liquidation, the Vendor acknowledges fully and
P. Quiero usted decir al Honorable Juzgado que era lo que usted dijo al señor unconditionally, having received the sum of P125,174.99 of the present legal
Salvador Araneta? currency and hereby expressly declares that she will not hold the Vendee responsible
for any loss that she might suffer due to the fact that two of the checks paid to her by
R. No creo que es propio que yo diga, por tratarse de mi madre. the Vendee were used in favor of Jose Vidal and the latter has, up to the present
time, not yet collected the same.
P. En otras palabras, usted quiere decir que no quiere usted que se vuelva decir o
repetir ante este Honorable Juzgado lo que usted dijo al señor Salvador Araneta, It was argued that no person in his or her right senses would knowingly have agreed to a
pues, se trata de su madre? covenant so iniquitous and unreasonable.

R. No, señor. In the light of all the circumstances, it is difficult to believe that the defendant was deceived
into signing Exhibit A, in spite of the provision of which she and her son complaint.
Intelligent and well educated who had been managing her affairs, she had an able attorney
P. Puede usted decirnos que quiso usted decir cuando que no quisiera decir? who was assisting her in the suit against Vidal, a case which was instituted precisely to carry
into effect Exhibit A or Exhibit 1, and a son who is leading citizen and a business-man and
R. Voy a decir lo que Salvador Araneta, yo me acerque a Don Salvador Araneta, y yo knew the English language very well if she did not. Dindo Gonzalez took active part in, if he
le dije que es una verguenza de que nosotros, en la familia tengamos que ir a la Corte was not the initiator of the negotiations that led to the execution of Exhibit 1, of which he was
por este, y tambien dije que mi madre de por si quiere vender el terreno a ellos, an attesting witness besides. If the defendant signed Exhibit A without being apprised of its
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import, it can hardly be conceived that she did not have her attorney or her son read it to her It will at once be noted that this principle does not fit in with the facts of the case at bar.
afterward. The transaction involved the alienation of property then already worth a fortune Gregorio Araneta, Inc. had long been organized and engaged in real estate business. The
and now assessed by the defendant at several times higher. Doubts in defendant's veracity corporate entity was not used to circumvent the law or perpetrate deception. There is no
are enhanced by the fact that she denied or at least pretended in her answer to be ignorant of denying that Gregorio Araneta, Inc. entered into the contract for itself and for its benefit as a
the existence of Exhibit A, and that only after she was confronted with the signed copy of the corporation. The contract and the roles of the parties who participated therein were exactly as
document on the witness did she spring up the defense of fraud. It would look as if she they purported to be and were fully revealed to the seller. There is no pretense, nor is there
gambled on the chance that no signed copy of the deed had been saved from the war. She reason to suppose, that if Paz Tuason had known Jose Araneta to Gregorio Araneta, Inc's
could not have forgotten having signed so important a document even if she had not president, which she knew, she would not have gone ahead with the deal. From her point of
understood some of its provisions. view and from the point of view of public interest, it would have made no difference, except for
the brokerage fee, whether Gregorio Araneta, Inc. or Jose Araneta was the purchaser. Under
From the unreasonableness and inequity of the aforequoted Exhibit A it is not to be these circumstances the result of the suggested disregard of a technicality would be, not to
presumed that the defendant did not understand it. It was highly possible that she did not stop the commission of deceit by the purchaser but to pave the way for the evasion of a
attach much importance to it, convinced that Vidal could be forced to accept the checks and legitimate and binding commitment buy the seller. The principle invoked by the defendant is
not foreseeing the fate that lay in store for the case against the mortgagee. resorted to by the courts as a measure or protection against deceit and not to open the door
to deceit. "The courts," it has been said, "will not ignore the corporate entity in order to
further the perpetration of a fraud." (18 C.J.S. 381.)
Technical objections are made against the deed of sale.
The corporate theory aside, and granting for the nonce that Jose Araneta and Gregorio
First of these is that Jose Araneta, since deceased, was defendant's agent and at the same Araneta, Inc. were identical and that the acts of one where the acts of the other, the relation
time the president of Gregorio Araneta, Inc. between the defendant and Jose Araneta did not fall within the purview of article 1459 of the
Spanish Civil Code.1
The trial court found that Jose Araneta was not Paz Tuason's agent or broker. This finding is
contrary to the clear weight of the evidence, although the point would be irrelevant, if the Agency is defined in article 1709 in broad term, and we have not come across any
court were right in its holding that Exhibit A was void on another ground, i.e., it was commentary or decision dealing directly with the precise meaning of agency as employed in
inconsistent with Exhibit 1. article 1459. But in the opinion of Manresa(10 Manresa 4th ed. 100), agent in the sense there
used is one who accepts another's representation to perform in his name certain acts of more
Without taking into account defendant's Exhibit 7 and 8, which the court rejected and which, or less transcendency, while Scaevola (Vol. 23, p. 403) says that the agent's in capacity to buy
in our opinion, should have been admitted, Exhibit 1 is decisive of the defendant's assertion. his principal's property rests in the fact that the agent and the principal form one juridicial
In paragraph 8 of Exhibit 1 Jose Araneta was referred to as defendant's agent or broker "who person. In this connection Scaevola observes that the fear that greed might get the better of
acts in this transaction" and who as such was to receive a commission of 5 per cent, although the sentiments of loyalty and disinterestedness which should animate an administrator or
the commission was to be charged to the purchasers, while in paragraph 13 the defendant agent, is the reason underlying various classes of incapacity enumerated in article 1459. And
promised, in consideration of Jose Araneta's services rendered to her, to assign to him all her as American courts commenting on similar prohibition at common law put it, the law does
right, title and interest to and in certain lots not embraced in the sales to Gregorio Araneta, not trust human nature to resist the temptations likely to arise of antogonism between the
Inc. or the tenants. interest of the seller and the buyer.

However, the trial court hypothetically admitting the existence of the relation of principal and So the ban of paragraph 2 of article 1459 connotes the idea of trust and confidence; and so
agent between Paz Tuason and Jose Araneta, pointed out that not Jose Araneta but Gregorio where the relationship does not involve considerations of good faith and integrity the
Araneta, Inc. was the purchaser, and cited the well-known distinction between the prohibition should not and does not apply. To come under the prohibition, the agent must be
corporation and its stockholders. In other words, the court opined that the sale to Gregorio in a fiduciary with his principal.
Araneta, Inc. was not a sale to Jose Araneta the agent or broker.
Tested by this standard, Jose Araneta was not an agent within the meaning of article 1459.
The defendant would have the court ignore this distinction and apply to this case the other By Exhibits 7 and 8 he was to be nothing more than a go-between or middleman between the
well-known principle which is thus stated in 18 C.J.S. 380: "The courts, at law and in equity, defendant and the purchaser, bringing them together to make the contract themselves. There
will disregard the fiction of corporate entity apart from the members of the corporation when was no confidence to be betrayed. Jose Araneta was not authorize to make a binding contract
it is attempted to be used as a means of accomplishing a fraud or an illegal act.". for the defendant. He was not to sell and he did not sell the defendant's property. He was to
look for a buyer and the owner herself was to make, and did make, the sale. He was not to fix
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the price of the sale because the price had been already fixed in his commission. He was not which Gregorio Araneta, Inc. had a deposit in the certification stated that they were to be
to make the terms of payment because these, too, were clearly specified in his commission. In "void if not presented for payment date of acceptance" office (Bank) within 90 days from date
fine, Jose Araneta was left no power or discretion whatsoever, which he could abuse to his of acceptance."
advantage and to the owner's prejudice.
Under banking laws and practice, by the clarification" the funds represented by the check
Defendant's other ground for repudiating Exhibit A is that the law firm of Araneta & Araneta were transferred from the credit of the maker to that of the payee or holder, and, for all
who handled the preparation of that deed and represented by Gregorio Araneta, Inc. were her intents and purposes, the latter became the depositor of the drawee bank, with rights and
attorneys also. On this point the trial court's opinion is likewise against the defendant. duties of one such relation." But the transfer of the corresponding funds from the credit of
the depositor to that of that of the payee had to be co-extensive with the life of the checks,
Since attorney Ponce Enrile was the defendant's lawyer in the suit against Vidal, it was not which in the case was 90 days. If the checks were not presented for payment within that
likely that she employed Atty. Salvador Araneta and J. Antonio Araneta as her attorneys in period they became invalid and the funds were automatically restored to the credit of the
her dealings with Gregorio Araneta, Inc., knowing, as she did, their identity with the buyer. If drawer though not as a current deposit but as special deposit. This is the consensus of the
she had needed legal counsels, in this transaction it seems certain that she would have evidence for both parties which does not materially differ on this proposition.
availed herself of the services of Mr. Ponce Enrile who was allegedly representing her in
another case to pave the way for the sale. The checks were never collected and the account against which they were drawn was not
used or claimed by Gregorio Araneta, Inc.; and since that account "was opened during the
The fact that Attys. Salvador and Araneta and J. Antonio Araneta drew Exhibits 1 and A, Japanese occupation and in Japanese currency," the checks "became obsolete as the account
undertook to write the letters to the tenants and the deeds of sale to the latter, and charged subject thereto is considered null and void in accordance with Executive Order No. 49 of the
the defendant the corresponding fees for all this work, did not themselves prove that they President of the Philippines", according to the Bank.
were the seller's attorneys. These letters and documents were wrapped up with the
contemplated sale in which Gregorio Araneta, Inc. was interested, and could very well have Whether the Bank of the Philippines could lawfully limit the negotiability of certified checks to
been written by Attorneys Araneta and Araneta in furtherance of Gregorio Araneta's own a period less than the period provided by the Statute of Limitations does not seem material.
interest. In collecting the fees from the defendant they did what any other buyer could have The limitation imposed by the Bank as to time would adversely affect the payee, Jose Vidal,
appropriately done since all such expenses normally were to be defrayed by the seller. who is not trying to recover on the instruments but on the contrary rejected them from the
outset, insisting that the payment was premature. As far as Vidal was concerned, it was of no
Granting that Attorney Araneta and Araneta were attorneys for the defendant, yet they were importance whether the certification was or was not restricted. On the other hand, neither
not forbidden to buy the property in question. Attorneys are only prohibited from buying their the plaintiff nor the defendant now insists that Vidal should present, or should have
client's property which is the subject of litigation. (Art. 1459, No. 5, Spanish Civil Code.) The presented, the checks for collection. They in fact agree that the offer of those checks to Vidal
questioned sale was effected before the subject thereof became involved in the present action. did not, for technical reason, work to wipe out the mortgage.
There was already at the time of the sale a litigation over this property between the defendant
and Vidal, but Attys. Salvador Araneta and J. Antonio Araneta were not her attorneys in that But as to Gregorio Araneta and Paz Tuason, the conditions specified in the certification and
case. the prevailing regulations of the Bank were the law of the case. Not only this, but they were
aware of and abided by those regulations and practice, as instanced by the fact that the
From the pronouncement that Exhibit A is valid, however, it does not follow that the parties presented testimony to prove those regulations and practice. And that Gregorio
defendant should be held liable for the loss of the certified checks attached to the complaint Araneta, Inc. knew that Vidal had not cashed the checks within 90 days is not, and could not
against Vidal or deposited with the court, or of the funds against which they had been issued. successfully be denied.
The matter of who should bear this loss does not depend upon the validity of the sale but on
the extent and scope of the clause hereinbefore quoted as applied to the facts of the present In these circumstances, the stipulation in Exhibit A that the defendant or seller "shall not
case. hold the vendee responsible for any loss of these checks" was unconscionable, void and
unenforceable in so far as the said stipulation would stretch the defendant's liability for this
The law and the evidence on this branch of the case revealed these facts, of some of which checks beyond 90 days. It was not in accord with law, equity or good conscience to hold a
passing mention has already been made. party responsible for something he or she had no access to and could not make use of but
which was under the absolute control and disposition of the other party. To make Paz Tuason
responsible for those checks after they expired and when they were absolutely useless would
The aforesaid checks, one for P143,150 and one for P12,932.61, were issued by Gregorio be like holding an obligor to answer for the loss or destruction of something which the obligee
Araneta, Inc. and payable to Vidal, and were drawn against the Bank of the Philippines with
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kept in its safe with no power given the obligor to protect it or interfere with the obligee's It is obvious that Vidal had a right to judgment for his credit and to foreclose the mortgage if
possession. the credit was not paid.

To the extent that the contract Exhibit A would hold the vendor responsible for those checks There is no dispute as to the amount of the principal and there is agreement that the loans
after they had lapsed, the said contract was without consideration. The checks having made in 1943, in Japanese war notes, should be computed under the Ballantyne conversion
become obsolete, the benefit in exchange for which the defendant had consented to be table. As has been said, where the parties do not see eye-to-eye was in regard to the
responsible for them had vanished. The sole motivation on her part for the stipulation was mortgagee's claim to attorney's fees and interest from October, 1943, which was reached a
the fact that by the checks the mortgage might or was to be released. After 90 days the considerable amount. It was contended that, having offered to pay Vidal her debt in that
defendant stood to gain absolutely nothing by them, which had become veritable scraps of month, the defendant was relieved thereafter from paying such interest.
paper, while the ownership of the deposit had reverted to the plaintiff which alone could
withdraw and make use of it. It is to be recalled that Paz Tuason deposited with the court three checks which were
intended to cover the principal and interest up to October, 1943, plus the penalty provided in
What the plaintiff could and should have done if the disputed stipulation was to be kept alive the instrument "Penalidad del Documento de Novacion de Esta Fecha." The mortgagor
was to keep the funds accessible for the purpose of paying the mortgage, by writing new maintains that although these checks may not have constituted a valid payment for the
checks either to Vidal or to the defendant, as was done with the check for P30,000, or placing purpose of discharging the debt, yet they did for the purpose of stopping the running of
the deposit at the defendant's disposal. The check for P30,000 intended for the penalty interest. The defendant draws attention to the following citations:
previously had been issued in the name of Vidal and certified, too, but by mutual agreement
it was changed to an ordinary check payable to Paz Tuason. Although that check was also An offer in writing to pay a particular sum of money or to deliver a written instrument
deposited with the court and lost, its loss undoubtedly was imputable to the defendant's or specific personal property is, if rejected, equivalent to the actual production and
account, and she did not seem to disown her liability for it. tender of the money, instrument or property. (Sec. 24, Rule 123.)

Let it be remembered that the idea of certifying the lost checks was all the plaintiff's. The It is not accord with either the letter or the spirit of the law to impose upon the
plaintiff would not trust the defendant and studiously so arranged matters that she could not person affecting a redemption of property, in addition to 12 per cent interest per
by any possibility put a finger on the money. For all the practical intents and purposes the annum up to the time of the offer to redeem, a further payment of 6 per cent per
plaintiff dealt directly with the mortgagee and excluded the defendant from meddling in the annum from the date of the officer to redeem. (Fabros vs. Villa Agustin, 18 Phil., 336.)
manner of payment to Vidal. And let it also be kept in mind that Gregorio Araneta, Inc. was
not a mere accommodator in writing these checks. It was as much interested in the
cancellation of the mortgage as Paz Tuason. A tender by the debtor of the amount of this debt, if made in the proper manner, will
suspend the running of interest on the debt for the time of such tender. (30 Am. Jur.,
42.)
Coming down to Vidal's cross-claim Judge Rodas rendered no judgment other than declaring
that the mortgage remained intact and subsisting. The amount to be paid Vidal was not
named and the question whether interest and attorney's fees were due was not passed upon. In the case of Fabrosa vs. Villa Agustin, supra, a parcel of land had been sold on execution to
The motion for reconsideration of the decision by Vidal's attorney's praying that Paz Tuason one Tabliga. Within the period of redemption Fabros, to whom the land had been mortgaged
be sentenced to pay the creditor P244,917.90 plus interest at the rate of 1 percent monthly by the execution debtor, had offered to redeem the land from the execution creditor and
from September 10, 1948 and that the mortgaged property be ordered sold in case of default purchaser at public auction. The trial court ruled that the redemptioner was not obliged to
within 90 days, and another motion by the defendant seeking specification of the amount she pay the stipulated interest of 12 per cent after he offered to redeem the property; nevertheless
had to pay the mortgagee were summarily denied by Judge Potenciano Pecson, to whom the he was sentenced to pay 6 per cent interest from the date of the offer.
motions were submitted, Judge Rodas by that time having been appointed to the Court of
Appeals. This court on appeal held that "there is no reason for this other (6 per cent) interest, which
appears to be a penalty for delinquency while there was no delinquency." The court cited an
All the facts and evidence on this subject are on the record, however, and we may just as well earlier decision, Martinez vs. Campbell, 10 Phil., 626, where this doctrine was laid down:
determine from these facts and evidence the amount to which the mortgagee is entitled, "When the right of redemption is exercised within the term fixed by section 465 of the Code of
instead of remanding the case for new trial, if only to avoid further delay if the disposition of Civil Procedure, and an offer is made of the amount due for the repurchase of the property to
this case. which said right refers, it is neither reasonable nor just that the repurchaser should pay
interest on the redemption money after the time when he offered to repurchase and tendered
the money therefor."
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In the light of these decisions and law, the next query is; Did the mortgagor have the right To say, as Vidal says, that the debtor could not pay the mortgage within four years and, at
under the contract to pay the mortgage on October 20, 1943? The answer to this question the same time, that there would be penalty if she paid after that period, would be a
requires an inquiry into the provision of the "Penalidad del Documento de Novacion de Esta contradiction. Moreover, adequate remedy was provided for failure to pay or after the
Fecha." expiration of the mortgage: increased rate or interest, foreclosure of the mortgage, and
attorney's fees.
Vidal introduced oral evidence to the effect that he reserved unto himself in that agreement
the right "to accept or refuse the total payment of the loan outstanding . . ., if at the time of It is therefore to be concluded that the defendant's offer to pay Vidal in October, 1943, was in
such offer of payment he considered it advantageous to his interest." This was gist of Vidal's accordance with the parties' contract and terminated the debtor's obligation to pay interest.
testimony and that of Lucio M. Tiangco, one of Vidal's former attorneys who, as notary public, The technical defects of the consignation had to do with the discharge of the mortgage, which
had authenticated the document. Vidal's above testimony was ordered stricken out as is conceded on all sides to be still in force because of the defects. But the matter of the
hearsay, for Vidal was blind and, according to him, only had his other lawyer read the suspension of the running of interest on the loan stands of a different footing and is governed
document to him. by different principles. These principles regard reality rather than technicality, substance
rather than form. Good faith of the offer or and ability to make good the offer should in simple
We are of the opinion that the court erred in excluding Vidal's statement. There is no reason justice excuse the debtor from paying interest after the offer was rejected. A debtor can not be
to suspect that Vidal's attorney did not correctly read the paper to him. The reading was a considered delinquent who offered checks backed by sufficient deposit or ready to pay cash if
contemporaneous incident of the writing and the circumstances under which the document the creditor chose that means of payment. Technical defects of the offer cannot be adduced to
was read precluded every possibility of design, premeditation, or fabrication. destroy its effects when the objection to accept the payment was based on entirely different
grounds. If the creditor had told the debtor that he wanted cash or an ordinary check, which
Vidal now seems to think Paz Tuason should have tendered, certainly Vidal's wishes would
Nevertheless, Vidal's testimony, like the testimony of Lucio M. Tiangco's, was based on have been fulfilled, gladly.
recollection which, with the lapse of time, was for from infallible. By contrast, the testimony
of Attorneys Ponce Enrile, Salvador Araneta, and J. Antonio Araneta does not suffer from
such weakness and is entitled to full faith and credit. The document was the subject of a The plain truth was that the mortgagee bent all his efforts to put off the payment, and thanks
close and concerted study on their part with the object of finding the rights and obligations of to the defects which he now, with obvious inconsistency, points out, the mortgage has not
the mortgagee and the mortgagor in the premises and mapping out the course to be pursued. perished with the checks.
And the results of their study and deliberation were translated into concrete action and
embodied in a letter which has been preserved. In line with the results of their study, action Falling within the reasons for the stoppage of interest are attorney's fees. In fact there is less
was instituted in court to compel acceptance by Vidal of the checks consigned with the merit in the claim for attorney's fees than in the claim for interest; for the creditor it was who
complaint, and before the suit was commenced, and with the document before him, Atty. by his refusal brought upon himself this litigation, refusal which, as just shown, resulted
Ponce Enrile, in behalf of his client, wrote Vidal demanding that he accept the payment and greatly to his benefit.
execute a deed of cancellation of the mortgage. In his letter Atty. Ponce Enrile reminded Vidal
that the recital in the "Penalidad del Documento de Novacion de Esta Fecha" was "to the Vidal, however, is entitled to the penalty, a point which the debtor seems to a grant. The
effect that should the debtor wish to pay the debt before the expiration of the period the suspension of the running of the interest is premised on the thesis that the debt was
reinstated (two years) such debtor would have to pay, in addition to interest due, the penalty considered paid as of the date the offer to pay the principal was made. It is precisely the
of P30,000 — this is in addition to the penalty clause of 10 per cent of the total amount due mortgagor's contention that he was to pay said penalty if and when she paid the mortgage
inserted in the document of mortgage of January 20, 1943." before the expiration of the four-year period provided in the mortgage contract. This penalty
was designed to take the place of the interest which the creditor would be entitled to collect if
Atty. Ponce Enrile's concept of the agreement, formed after mature and careful reading of it, the duration of the mortgage had not been cut short and from which interest the debtor has
jibes with the only possible reason for the insertion of the penalty provision. There was no been relieved. "In obligations with a penalty clause the penalty shall substitute indemnity for
reason for the penalty unless it was for defendant's paying her debt before the end of the damages and the payment of interest. . ." (Art. 1152, Civil Code of Spain.).
agreed period. It was to Vidal's interest that the mortgage be not settled in the near future,
first, because his money was earning good interest and was guaranteed by a solid security, To summarize, the following are our findings and decision:
and second, which was more important, he, in all probability, shared the common belief that
Japanese war notes were headed for a crash and that four years thence, judging by the
trends of the war, the hostilities would be over. The contract of sale Exhibit A was valid and enforceable, but the loss of the checks for
P143,150 and P12,932.61 and invalidation of the corresponding deposit is to be borne by the
buyer. Gregorio Araneta, Inc. the value of these checks as well as the several payments made

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by Paz Tuason to Gregorio Araneta, Inc. shall be deducted from the sum of P190,000 which
December 22, 1952
the buyer advanced to the seller on the execution of Exhibit 1.

The buyer shall be entitled to the rents on the land which was the subject of the sale, rents
TUASON, J.:
which may have been collected by Paz Tuason after the date of the sale.

The motion for reconsideration of the plaintiff, Gregorio Araneta, Inc., and the defendant, Paz
Paz Tuason shall pay Jose Vidal the amount of the mortgage and the stipulated interest up to
Tuason de Paterno, are in large part devoted to the question, extensively discussed in the
October 20,1943, plus the penalty of P30,000, provided that the loans obtained during the
decision, of the validity of the contract of sale Exhibit A. The arguments are not new and at
Japanese occupation shall be reduced according to the Ballantyne scale of payment, and
least were given due consideration in the deliberation and study of the case. We find no
provided that the date basis of the computation as to the penalty is the date of the filing of
reason for disturbing our decision on this phase of the case.
the suit against Vidal.

The plaintiff-appellant's alternative proposition — to wit: "Should this Honorable Court


Paz Tuason shall pay the amount that shall have been found due under the contracts of
declare that the purchase price was not paid and that plaintiff has to bear the loss due to the
mortgage within 90 days from the time the court's judgment upon the liquidation shall have
invalidation of the occupation currency, its loss should be limited to: (a) the purchase price of
become final, otherwise the property mortgaged shall be ordered sold provided by law.
P139,083.32 less P47,825.70 which plaintiff paid and the defendant actually collected during
the occupation, or the sum of P92,233.32, or at most, (b) the purchase price of the lot in the
Vidal's mortgage is superior to the purchaser's right under Exhibit A, which is hereby sum of P139,083.32," — as well as the alleged over-payment by the defendant-appellee, may
declared subject to said mortgage. Should Gregorio Araneta, Inc. be forced to pay the be taken up in the liquidation under the reservation in the judgment that "the court (below)
mortgage, it will be subrogated to the right of the mortgagee. shall hold a rehearing for the purpose of liquidation as herein provided" and "shall also hear
and decide all other controversies relative to the liquidation which may have been overlooked
This case will be remanded to the court of origin with instruction to hold a rehearing for the in this decision, in the manner not inconsistent with the above findings and judgment."
purpose of liquidation as herein provided. The court also shall hear and decide all other
controversies relative to the liquidation which may have been overlooked at this decision, in a These payments and disbursement are matters of accounting which, not having been put
manner not inconsistent with the above findings and judgment. directly in issue or given due attention at the trial and in the appealed decision, can better be
treshed out in the proposed rehearing where each party will have an opportunity to put
The mortgagor is not entitled to suspension of payment under the debt moratorium law or forward his views and reasons, with supporting evidence if necessary, on how the various
orders. Among other reasons: the bulk of the debt was a pre-war obligation and the items in question should be regarded and credited, in the light of our decision.
moratorium as to such obligations has been abrogated unless the debtor has suffered war
damages and has filed claim for them; there is no allegation or proof that she has. In the As to Jose Vidal's motion: There is nothing to add to or detract from what has been said in
second place, the debtor herself caused her creditor to be brought into the case which the decision relative to the interest on the loans and attorney's fees. There are no substantial
resulted in the filing of the cross-claim to foreclose the mortgage. In the third place, prompt features of the case that have not been weighed carefully in arriving at our conclusions. It is
settlement of the mortgage is necessary to the settlement of the dispute and liquidation our considered opinion that the decision is in accord with law, reason and equity.
between Gregorio Araneta, Inc. and Paz Tuason. If for no other reason, Paz Tuason would do
well to forego the benefits of the moratorium law.
The vehement protest that this court should not modify the conclusion of the lower court on
interest and attorney's fees is actually and entirely contrary to the cross-claimant's own
There shall be no special judgments as to costs of either instance. suggestion in his brief. From page 20 of his brief, we copy these passages:

Paras, C.J., Pablo, Bengzon, Padilla, Bautista Angelo and Labrador, JJ., concur. We submit that this Honorable Court is in a position now to render judgment in the
foreclosure of mortgage suit as no further issue of fact need be acted upon by the
trial court. Defendant Paz Tuason has admitted the amount of capital due. That is a
fact. She only requests that interest be granted up to October 20,1943, and that the
moratorium law be applied. Whether this is possible or not is a legal question, which
can be decided by this court. Unnecessary loss of time and expenses to the parties
RESOLUTION

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herein will be avoided by this Honorable Court by rendering judgment in the In the second motion for reconsideration by defendant-appellee it is urged that the sale be
foreclosure of mortgage suit as follows: resolved for failure of plaintiff-appellant to pay the entire purchase price of the property sold.

xxx xxx xxx Rescission of the contract, it is true, was alternative prayer in the cross-complaint, but the
trial court declared the sale void in accordance with the main contention of the defendant,
In reality, the judgment did not adjudicate the foreclosure of the mortgage nor did it fix the and passed no judgment on the matter of rescission. For this reason, and because rescission
amount due on the mortgage. The pronouncement that the mortgage was in full force and was not pressed on appeal, we deemed unnecessary, if not uncalled for, any pronouncement
effect was a conclusion which the mortgagor did not and does not now question. There was touching this point.
therefore virtually no decision that could be executed.
In the second place, the nonpayment of a portion, albeit big portion, of the price was not, in
Vidal himself moved in the Court of First Instance for amendment of the decision alleging, our opinion, such failure as would justify recission under Articles 1124 and 1505 et seq. of
correctly, that "the court failed to act on the cross-claim of Jose Vidal dated April 22, 1947, the Civil Code of Spain, which was still in force when this case was tried. "The general rule is
where he demanded foreclosure of the mortgage . . . ." That motion like Paz Tuason's motion that recission will not be permitted for a slight or casual breach of the contract, but only for
to complete the judgment, was summarily denied. such breaches as are so substantial and fundamental as to defeat the object of the parties."
(Song Fo & Co. vs. Hawaiian-Philippine Co., 47 Phil., 821, 827.)
In strict accordance with the procedure, the case should have been remanded to the court of
origin for further proceedings in the form stated by Paz Tuason's counsel. Both the mortgagor In the present case, the vendee did not fail or refuse to pay by plan or design, granting there
and the mortgagee agree on this. We did not follow the above course believing it best, in the was failure or refusal to pay. As a matter of fact, the portion of the purchase price which is
interest of the parties themselves and following Vidal's attorney's own suggestion, to decide said not to have been satisfied until now was actually received by checks by the vendor and
the controversies between Vidal and Paz Tuason upon the records and the briefs already deposited by her with the court in the suit against Vidal, in accordance with the
submitted. understanding if not express agreement between vendor and vendee. The question of who
should bear the loss of this amount, the checks having been destroyed and the funds against
which they were drawn having become of no value, was one of the most bitterly debated
The three motions for reconsideration are denied. issues, and in adjudging the vendee to be the party to shoulder the said loss and ordering the
said vendee to pay the amount to the vendor, this Court's judgment was not, and was not
Paras, C.J., Pablo, Bengzon, Padilla, Montemayor, Jugo, Bautista Angelo and Labrador, intended to be, in the nature of an extension of time of payment. In contemplation of the Civil
JJ., concur. Code there was no default, except possibly in connection with the alleged overcharges by the
vendee arising from honest mistakes of accounting, mistakes which, by our decision, are to
be corrected in a new trial thereby ordered.

The second motion for reconsideration is, therefore, denied.

RESOLUTION

January 26, 1953


G.R. No. L-20214 March 17, 1923

TUASON, J.:

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Juridical Personality – Full Text
G. C. ARNOLD, plaintiff-appellant, P106,277.50. A short time previous to that date, the San Francisco corporation became
vs. involved in financial trouble, and all of its assets were turned over to a "creditors' committee."
WILLITS & PATTERSON, LTD., defendant-appellee. When this statement was received, the "creditors' committee" immediately protested its
allowance. An attempt was made without success to adjust the matter on a friendly basis and
Fisher, DeWitt, Perkins and Brady for appellant. without litigation. January 10, 1922, the plaintiff brought this action to recover from the
Ross and Lawrence for appellee. defendant the sum of P106,277.50 with legal interest and costs, and written instruments
known in the record as Exhibits A and B were attached to, and made a part of, the complaint.
STATEMENT
For answer, the defendant admits the formal parts of the complaint, the execution of Exhibit
A and denies each and every other allegation, except as specifically admitted, and alleges that
For a number of years prior to the times alleged in the complaint, the plaintiff was in the what is known as Exhibit B was signed by Willits without the authority of the defendant
employ of the International Banking Corporation of Manila, and it is conceded that he is a corporation or the firm of Willits & Patterson, and that it is not an agreement which was ever
competent and experienced business man. July 31, 1916, C. D. Willits and I. L. Patterson entered into with the plaintiff by the defendant or the firm, and, as a separate defense and
were partners doing business in San Francisco, California, under the name of Willits & counterclaim, it alleges that on the 30th of June, 1920, there was a balance due and owing
Patterson. The plaintiff was then in San Francisco, and as a result of negotiations the plaintiff the plaintiff from the defendant under the contract Exhibit A of the sum of P8,741.05. That
and the firm entered into a written contract, known in the record as Exhibit A, by which the his salary from June 30, 1920, to July 31, 1921, under Exhibit A was $400 per month, or a
plaintiff was employed as the agent of the firm in the Philippine Islands for certain purposes total of P10,400. That about July 6, 1921, the plaintiff wrongfully took P30,000 from the
for the period of five years at a minimum salary of $200 per month and travelling expenses. assets of the firm, and that he is now indebted to the firm in the sum of P10,858.95, with
The plaintiff returned to Manila and entered on the discharge of his duties under the interest and costs, from which it prays judgement.
contract. As a result of plaintiff's employment and the world war conditions, the business of
the firm in the Philippines very rapidly increased and grew beyond the fondest hopes of either
party. A dispute arose between the plaintiff and the firm as to the construction of Exhibit A as The plaintiff admits that he withdrew the P30,000, but alleges that it was with the consent
to the amount which plaintiff should receive for his services. Meanwhile Patterson retired and authority of the defendant, and denies all other new matter in the answer.
from the firm and Willits became the sole owner of its assets. For convenience of operation
and to serve his own purpose, Willits organized a corporation under the laws of California Upon such issues a trial was had, and the lower court rendered judgment in favor of the
with its principal office at San Francisco, in and by which he subscribed for, and became the defendant as prayed for in its counterclaim, from which the plaintiff appeals, contending that
exclusive owner of all the capital stock except a few shares for organization purposes only, the trial court erred in not holding that the contract between the parties is that which is
and the name of the firm was used as the name of the corporation. A short time after that embodied in Exhibits A and B, and that the defendant assumed all partnership obligations,
Willits came to Manila and organized a corporation here known as Willits & Patterson, Ltd., in and in failing to render judgment for the plaintiff, as prayed for, and in dismissing his
and to which he again subscribed for all of the capital stock except the nominal shares complaint, and denying plaintiff's motion for a new trial.
necessary to qualify the directors. In legal effect, the San Francisco corporation took over and
acquired all of the assets and liabilities of the Manila corporation. At the time that Willits was
in Manila and while to all intents and purposes he was the sole owner of the stock of
corporations, there was a conference between him and the plaintiff over the disputed
construction of Exhibit A. As a result of which another instrument, known in the record as
Exhibit B, was prepared in the form of a letter which the plaintiff addressed to Willits at JOHNS, J.:
Manila on November 10, 1919, the purpose of which was to more clearly define and specify
the compensation which the plaintiff was to receive for his services. Willits received and In their respective briefs opposing counsel agree that the important questions involved are
confirmed this letter by signing the name of Willits & Patterson, By C.d. Willits. At the time "what was the contract under which the plaintiff rendered services for five years ending July
both corporations were legally organized, and there is nothing in the corporate minutes to 31, 1921," and "what is due the plaintiff under that contract." Plaintiff contends that his
show that Exhibit B was ever formally ratified or approved by either corporation. After its services were performed under Exhibits A and B, and that the defendant assumed all of the
organization, the Manila corporation employed a regular accountant whose duty it was to obligations of the original partnership under Exhibit A, and is now seeking to deny its liability
audit the accounts of the company and render financial statements both for the use of the under, and repudiate, Exhibit B. The defendant admits that Exhibit A was the original
local banks and the local and parent corporations at San Francisco. From time to time and in contract between Arnold and the firm of Willits & Patterson by which he came to the
the ordinary course of business such statements of account were prepared by the accountant Philippine Islands, and that it was therein agreed that he was to be employed for a period of
and duly forwarded to the home office, and among other things was a statement of July 31, five years as the agent of Willits & Patterson in the Philippine Islands to operate a certain oil
1921, showing that there was due and owing the plaintiff under Exhibit B the sum of mill, and to do such other business as might be deemed advisable for which he was to

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receive, first, the travelling expenses of his wife and self from San Francisco to Manila, On all other business, such as the Cooperative Coconut Products Co.
second, the minimum salary of $200 per month, third, a brokerage of 1 per cent upon all account, or any other business we may undertake as agents or managers,
purchases and sales of merchandise, except for the account of the coconut oil mill, fourth, half the profits are to be credited to my account and half to the Profit & Loss
one-half of the profits on any transaction in the name of the firm or himself not provided for account of Willits & Patterson, Ltd., Manila.
in the agreement. That the agreement also provided that if it be found that the business was
operated at a loss, Arnold should receive a monthly salary of $400 during such period. That Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd.,
the business was operated at a loss from June 30, 1920, to July 31, 1921, and that for such Manila, have their own funds invested in the capital stock or a corporation, I
reason, he was entitled to nothing more than a salary of $400 per month, or for that period of course do not participate in the earnings of such stock, any more than
P10,400. Adding this amount to the P8,741.05, which the defendant admits he owed Arnold Willits & Patterson would participate in the earnings of stock held by me on
on June 30, 1920, makes a total of P19,141.05, leaving a balance due the defendant as set my account.
out in the counterclaim. In other words, that the plaintiff's compensation was measured by,
and limited to, the above specified provisions in the contract Exhibit A, and that the
defendant corporation is not bound by the terms or provisions of Exhibit B, which is as If the foregoing conforms to your understanding of our agreement, please
follows: confirm below.

WILLITS & PATTERSON, LTD. Yours faithfully,

MANILA, P. I., Nov. 10, 1919. (Sgd.) G. C. ARNOLD

CHAS. D. WILLITS, Esq., Confirmed:

Present. WILLITS & PATTERSON

DEAR MR. WILLITS: My understanding of the intent of my agreement with By (Sgd.) CHAS. D. WILLITS
Willits & Patterson is as under:
There is no dispute about any of the following facts: That at the inception C.D. Willits and I.
Commissions. Willits & Patterson, San Francisco, pay me a commission of L. Patterson constituted the firm of Willits & Patterson doing business in the City of San
one per cent on all purchases made for them in the Philippines or sales made Francisco; that later Patterson retired from the firm, and Willits acquired all of his interests
to them by Manila and one per cent on all sales made for them in the and thereafter continued the business under the name and style of Willits & Patterson; that
Philippines, or purchases made from them by Manila. If such purchases or the original contract Exhibit A was made between the plaintiff and the old firm at San
sales are on an f. o. b. basis the commission is on the f. o. b. price; if on a c. Francisco on July 31, 1916, to cover a period of five years from that date; that plaintiff
i. f. basis the commission is computed on the c. i. f. price entered upon the discharged of his duties and continued his services in the Philippine Islands
to someone for the period of five years; that on November 10, 1919, and as a result of
conferences between Willits and the plaintiff, Exhibit B was addressed and signed in the
These commissions are credited to me in San Francisco. manner and form above stated in the City of Manila. A short time prior to that date Willits
organized a corporation in San Francisco, in the State of California, which took over and
I do not participate in any profits on business transacted between Willits & acquired all of the assets of the firm's business in California then being conducted under the
Patterson, San Francisco, and Willits & Patterson, Ltd., Manila. name and style of Willits & Patterson; that he subscribed for all of the capital stock of the
corporation, and that in truth and in fact he was the owner of all of its capital stock. After
Profits. On all business transacted between Willits & Patterson, Ltd. and this was done he caused a new corporation to be organized under the laws of the Philippine
others than Willits & Patterson, San Francisco, half the profits are to be Islands with principal office at Manila, which took over and acquired all the business and
credited to my account and half to the Profit & Loss account of Willits & assets of the firm of Willits & Patterson in the Philippine Islands, in and to which, in legal
Patterson, Ltd., Manila. effect, he subscribed for all of its capital stock, and was the owner of all of its stock. After
both corporations were organized the above letter was drafted and signed. The plaintiff
contends that the signing of Exhibit B in the manner and under the conditions in which it

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Juridical Personality – Full Text
was signed, and through the subsequent acts and conduct of the parties, was ratified and, in It is very apparent that, under the conditions then existing, the signing of Exhibit B was for
legal effect, became and is now binding upon the defendant. the mutual interests of both parties, and that if the contract Exhibit A was to be enforced
according to its terms, that Arnold might well contend for a much larger sum of money for his
It will be noted that Exhibit B was executed in Manila, and that at the time it was signed by services. In truth and in fact Willits and both corporations recognized his employment and
Willits, he was to all intents and purposes the legal owner of all the stock in both accepted the benefits of his services. He continued his employment and rendered his services
corporations. It also appears from the evidence that the parent corporation at San Francisco after the corporation were organized and Exhibit B was signed just the same as he did before,
took over and acquired all of the assets and liabilities of the local corporation at Manila. That and both corporations recognized and accepted his services. Although the plaintiff was
after it was organized the Manila corporation kept separate records and account books of its president of the local corporation, the testimony is conclusive that both of them were what is
own, and that from time to time financial statements were made and forwarded to the home known as a one man corporation, and Willits, as the owner of all of the stock, was the force
office, from which it conclusively appears that plaintiff was basing his claim for services upon and dominant power which controlled them. After Exhibit B was signed it was recognized by
Exhibit A, as it was modified by Exhibit B. That at no time after Exhibit B was signed was Willits that the plaintiff's services were to be performed and measured by its term and
there ever any dispute between plaintiff and Willits as to the compensation for plaintiff's provisions, and there never was any dispute between plaintiff and Willits upon that question.
services. That is to say, as between the plaintiff and Willits, Exhibit B was approved, followed
and at all times in force and effect, after it was signed November 10, 1919. It appears from an The controversy first arose after the corporation was in financial trouble and the appointment
analysis of Exhibit B that it was for the mutual interest of both parties. From a small of what is known in the record as a "creditors' committee." There is no claim or pretense that
beginning, the business was then in a very flourishing conditions and growing fast, and the there was any fraud or collusion between plaintiff and Willits, and it is very apparent that
profits were very large and were running into big money. Exhibit B was to the mutual interest of both parties. It is elementary law that if Exhibit B is a
binding contract between the plaintiff and Willits and the corporations, it is equally binding
Among other things, Exhibit A provided: "(a) That the net profits from said coconut oil upon the creditors' committee. It would not have any higher or better legal right than the
business shall be divided in equal shares between the said parties hereto; (b) that Arnold corporation itself, and could not make any defense which it could not make. It is very
should receive a brokerage of 1 per cent from all purchases and sales of merchandise, except significant that the claim or defense which is now interposed by the creditors' committee was
for the account of the coconut mills; (c) that the net profits from all other business should be never made or asserted at any previous time by the defendant, and that it never was made by
divided in equal half shares between the parties hereto." Willits, and it is very apparent that if he had remained in control of the corporation, it would
never have made the defense which is now made by the creditors' committee. The record is
conclusive that at the time he signed Exhibit B, Willits was, in legal effect, the owner and
Under the above provisions, the plaintiff might well contend that he was entitled to one-half holder of all the stock in both corporations, and that he approved it in their interest, and to
of all the profits and a brokerage of 1 per cent from all purchases and sales, except those for protect them from the plaintiff having and making a much larger claim under Exhibit A. As a
the account of the coconut oil mills, which under the volume of business then existing would matter of fact, it appears from the statement of Mr. Larkin, the accountant, in the record that
run into a very large sum of money. It was for such reason and after personal conferences if plaintiff's cause of action was now founded upon Exhibit A, he would have a claim for more
between them, and to settle all disputed questions, that Exhibit B was prepared and signed. than P160,000.

The record recites that "the defendant admits that from July 31, 1916 to July 31, 1921, the Thompson on Corporations, 2d ed., vol. I, section 10, says:
plaintiff faithfully performed all the duties incumbent upon him under his contract of
employment, it being understood, however, that this admission does not include an
admission that the plaintiff placed a proper interpretation upon his right to remuneration The proposition that a corporation has an existence separate and distinct from its
under said contract of employment." membership has its limitations. It must be noted that this separate existence is for
particular purposes. It must also be remembered that there can be no corporate
existence without persons to compose it; there can be no association without
It being admitted that the plaintiff worked "under his contract of employment" for the period associates. This separate existence is to a certain extent a legal fiction. Whenever
of five years, the question naturally arises, for whom was he working? His contract was made necessary for the interests of the public or for the protection or enforcement of the
with the original firm of Willits & Patterson, and that firm was dissolved and it ceased to rights of the membership, courts will disregard this legal fiction and operate upon
exist, and all of its assets were merged in, and taken over by, the parent corporation at San both the corporation and the persons composing it.
Francisco. In the very nature of things, after the corporation was formed, the plaintiff could
not and did not continue to work for the firm, and, yet, he continued his employment for the
full period of five years. For whom did he work after the partnership was merged in the In the same section, the author quotes from a decision in 49 Ohio State, 1371; 15 L. R. A.,
corporation and ceased to exist? 145, in which the Supreme Court of Ohio says:

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"So long as a proper use is made of the fiction that a corporation is an entity apart SEC. 656. In accordance with a well-known rule of the law of agency, notice to
from its shareholders, it is harmless, and, because convenient, should not be called corporate officers or agents within the scope or apparent scope of their authority is
in question; but where it is urged to an end subversive of its policy, or such is the attributed to the corporation.
issue, the fiction must be ignored, and the question determined whether the act in
question, though done by shareholders, — that is to say, by the persons uniting in SEC. 667. As a general rule, if a corporation with knowledge of its agents
one body, — was done simply as individuals, and with respect to their individual unauthorized act received and enjoys the benefits thereof, it impliedly ratifies the
interest as shareholders, or was done ostensibly as such, but, as a matter of fact, to unauthorized act if it is one capable of ratification by parol.
control the corporation, and affect the transaction of its business, in the same
manner as if the act had been clothed with all the formalities of a corporate act. This
must be so, because, the stockholders having a dual capacity, and capable of acting In its article on corporations, Corpus Juris, in section 2241 says:
in either, and a possible interest to conceal their character when acting in their
corporate capacity, the absence of the formal evidence of the character of the act Ratification by a corporation of a transaction not previously authorized is more easily
cannot preclude judicial inquiry on the subject. If it were otherwise, then in that inferred where the corporation receives and retains property under it, and as a
department of the law fraud would enjoy an immunity awarded to it in no other." general rule where a corporation, through its proper officers or board, takes and
retains the benefits of the unauthorized act or contract of an officer or agent, with full
Where the stock of a corporation is owned by one person whereby the corporation knowledge of all the material facts, it thereby ratifies and becomes bound by such act
functions only for the benefit of such individual owner, the corporation and the of contract, together with all the liabilities and burdens resulting therefrom, and in
individual should be deemed to be the same. (U. S. Gypsum Co. vs. Mackay Wall some jurisdiction this rule is, in effect, declared by statute. Thus the corporation is
Plaster Co., 199 Pac., 249.) liable on the ground of ratification where, with knowledge of the facts, it accepts the
benefit of services rendered under an unauthorized contract of employment . . . .
Ruling Case Law, vol. 7, section 663, says:
Applying the law to the facts.
While of course a corporation cannot ratify a contract which is strictly ultra vires, and
which it in the first instance could not have made, it may by ratification render Mr. Larkin, an experienced accountant, was employed by the local corporation, and from time
binding on it a contract, entered into on its behalf by its officers or agents without to time and in the ordinary course of business made and prepared financial statements
authority. As a general rule such ratification need not be manifested by any voted or showing its assets and liabilities, true copies of which were sent to the home office in San
formal resolution of the corporation or be authenticated by the corporate seal; no Francisco. It appears upon their face that plaintiff's compensation was made and founded on
higher degree of evidence is requisite in establishing ratification on the part of a Exhibit B, and that such statements were made and prepared by the accountant on the
corporation, than is requisite in showing an antecedent authorization. assumption that Exhibit B was in full force and effect as between the plaintiff and the
defendant. In the course of business in the early part of 1920, plaintiff, as manager of the
defendant, sold 500 tons of oil for future delivery at P740 per ton. Due to break in the
xxx xxx xxx market, plaintiff was able to purchase the oil at P380 per ton or a profit of P180,000.

SEC. 666. The assent or approval of a corporation to acts done on its account may be It appears from Exhibit B under the heading of "Profits" that:
inferred in the same manner that the absent of a natural person may be, and it is
well settled that where a corporation with full knowledge of the unauthorized act of
its officer or agents acquiesces in and consents to such acts, it thereby ratifies them, On all the business transacted between Willits & Patterson, Ltd. and others than
especially where the acquiescence results in prejudice to a third person. Willits & Patterson, San Francisco, half the profit are to be credited to may account
and half to the Profit & Loss account Willits & Patterson, Ltd., Manila.
xxx xxx xxx
The purchasers paid P105,000 on the contracts and gave their notes for P75,000, and it was
agreed that all of the oil purchased should be held as security for the full payment of the
SEC. 669. So, when, in the usual course of business of a corporation, an officer has purchase price. As a result, the defendant itself received the P105,000 in cash, P75,000 in
been allowed in his official capacity to manage its affair, his authority to represent notes, and still holds the 500 tons of oil as security for the balance of the purchase price.
the corporation may be inferred from the manner in which he has been permitted by This transaction was shown in the semi-annual financial statement for the period ending
the directors to transact its business. December 31, 1920. That is to say, the business was transacted by and through the plaintiff,
and the defendant received and accepted all of the profits on the deal, and the statement
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which was rendered gave him a credit for P90,737.88, or half the profit as provided in the Jesus B. Santos and Cornelio Antiquera for petitioners.
contract Exhibit B, with interest. Teodoro Padilla for respondents.

Although the previous financial statements show upon their face that the account of plaintiff REYES, J.B.L., J.:
was credit with several small items on the same basis, it was not until the 23d of March,
1921, that any objection was ever made by anyone, and objection was made for the first time The issue before us in the correctness of the decision of the Court of Appeals that, under the
by the creditors' committee in a cable of that date. circumstances of record, there was justification for disregarding the corporate entity of the
Park Rite Co., Inc., and holding its controlling stockholders personally responsible for a
As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now judgment against the corporation.
binding upon the defendant corporation, and the plaintiff is entitled to recover for his services
on that writing as it modified the original contract Exhibit A. The Court of Appeals found that the Park Rite Co., Inc., a Philippine corporation, was
originally organized on or about April 15, 1947, with a capital stock of 1,500 shares at P1.00
It appears from the statement prepared by accountant Larkin founded upon Exhibit B that a share. The corporation leased from Rafael Perez Rosales y Samanillo a vacant lot on Juan
the plaintiff is entitled to recover P106,277.50. It is very apparent that his statement was Luna street (Manila) which it used for parking motor vehicles for a consideration.
based upon the assumption that there was a net profit of P180,000 on the 500 tons of oil, of
which the plaintiff was entitled to one-half. It turned out that in operating its parking business, the corporation occupied and used not
only the Samanillo lot it had leased but also an adjacent lot belonging to the respondents-
In the absence of any other proof, we have the right to assume that the 500 tons of oil was appellees Padilla, without the owners' knowledge and consent. When the latter discovered the
worth the amount which the defendant paid for them at the time of the purchase or P380 per truth around October of 1947, they demanded payment for the use and occupation of the lot.
ton, and the record shows that the defendant took and now has the possession of all of the oil
secure the payment of the price at which it was sold. Hence, the profit on the deal to the The corporation (then controlled by petitioners Cirilo Parades and Ursula Tolentino, who had
defendant at the time of the sale would amount to the difference between what the defendant purchased and held 1,496 of its 1,500 shares) disclaimed liability, blaming the original
paid for the oil and the amount which it received for the oil at the time it sold the oil. It incorporators, McConnel, Rodriguez and Cochrane. Whereupon, the lot owners filed against it
appears that at the time of the sale the defendant only received P105,000 in cash, and that it a complaint for forcible entry in the Municipal Court of Manila on 7 October 1947 (Civil Case
took and accepted the promissory notes of Cruz & Tan Chong Say, the purchasers, for No. 4031).
P75,000 more which have been collected and may never be. Hence, it must follow that the
amount evidence by the notes cannot now be deemed or treated as profits on the deal and
cannot be until such times as the notes are paid. Judgment was rendered in due course on 13 November 1947, ordering the Park Rite Co., Inc.
to pay P7,410.00 plus legal interest as damages from April 15, 1947 until return of the lot.
Restitution not having been made until 31 January 1948, the entire judgment amounted to
The judgment of the lower court is reversed, and a money judgment will be entered here in P11,732.50. Upon execution, the corporation was found without any assets other than
favor of the plaintiff and against the defendant for the sum of P68,527.50, with thereon at the P550.00 deposited in Court. After their application to the judgment credit, there remained a
rate of 6 per cent per annum from the 10th day of January, 1922. In addition thereto, balance of P11,182.50 outstanding and unsatisfied.
judgment will be rendered against the defendant in substance and to the effect that the
plaintiff is the owner of an undivided one-half interest in the promissory notes for P75,000
which were executed by Cruz & Tan Chong Say, as a part of the purchase price of the oil, and The judgment creditors then filed suit in the Court of First Instance of Manila against the
that he is entitled to have and receive one-half of all the proceeds from the notes or either of corporation and its past and present stockholders, to recover from them, jointly and severally,
them, and that also he have judgment against the defendant for costs. So ordered. the unsatisfied balance of the judgment, plus legal interest and costs. The Court of First
Instance denied recovery; but on appeal, the Court of Appeals (CA-G.R. No. 8434-R) reversed,
finding that the corporation was a mere alter ego or business conduit of the principal
G.R. No. L-10510 March 17, 1961 stockholders that controlled it for their own benefit, and adjudged them responsible for the
amounts demanded by the lot owners, as follows:
M. MC CONNEL, W. P. COCHRANE, RICARDO RODRIGUEZ, ET AL., petitioners,
vs. WHEREFORE, premises considered, the decision appealed from is reversed.
THE COURT OF APPEALS and DOMINGA DE LOS REYES, assisted by her husband, Defendants-appellees Cirilo Paredes and Ursula Tolentino are hereby declared liable
SABINO PADILLA,respondents. to the plaintiffs-appellants for the rentals due on the lot in question from August 22,
1947 to January 31, 1948 at the rate of P1,235.00 a month, with legal interest
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thereon from the time of the filing of the complaint. Deducting the P550.00 which persons were merely qualifying shares and that to all intents and purposes the
was paid at the time when the corporation was already acquired by the said spouses Cirilo Paredes and Ursula Tolentino composed the so-called Park Rite Co.,
defendants-appellees Cirilo Paredes and Ursula Tolentino, they are hereby ordered to Inc. That the corporation was a mere extension of their personality is shown by the fact
pay to plaintiffs-appellants Dominga de los Reyes and Sabino Padilla the sum of that the office of Cirilo Paredes and that of Park Rite Co., Inc. were located in the same
P6,036.66 with legal interest therein from the time of the filing of the complaint until building, in the same floor and in the same room — at 507 Wilson Building. This is
fully paid. further shown by the fact that the funds of the corporation were kept by Cirilo Paredes
in his own name (p. 14, November 8, 1950, T.S.N.) The corporation itself had no visible
Defendant-appellee RICARDO RODRIGUEZ is hereby ordered to pay to the plaintiffs- assets, as correctly found by the trial court, except perhaps the toll house, the wire
appellants Dominga de los Reyes and Sabino Padilla the sum of P1,742.64 with legal fence around the lot and the signs thereon. It was for this reason that the judgment
interest thereon from the time of the filing of the complaint and until it is fully paid. against it could not be fully satisfied. (Emphasis supplied).
In addition thereto the defendants-appellees Cirilo Paredes, Ursula Tolentino and
Ricardo Rodriguez shall pay the costs proportionately in both instances. The facts thus found can not be varied by us, and conclusively show that the corporation is a
mere instrumentality of the individual stockholder's, hence the latter must individually
IT IS SO ORDERED. answer for the corporate obligations. While the mere ownership of all or nearly all of the
capital stock of a corporation is a mere business conduit of the stockholder, that conclusion
is amply justified where it is shown, as in the case before us, that the operations of the
Cirilo Paredes and Ursula Tolentino then resorted to this court. We granted certiorari. corporation were so merged with those of the stockholders as to be practically
indistinguishable from them. To hold the latter liable for the corporation's obligations is not
On the main issue whether the individual stockholders maybe held liable for obligations to ignore the corporation's separate entity, but merely to apply the established principle that
contracted by the corporation, this Court has already answered the question in the such entity can not be invoked or used for purposes that could not have been intended by the
affirmative wherever circumstances have shown that the corporate entity is being used as law that created that separate personality.
an alter ego or business conduit for the sole benefit of the stockholders, or else to defeat
public convenience, justify wrong, protect fraud, or defend crime (Koppel [Phil.] Inc. vs. Yatco, The petitioners-appellants insist that the Court could have no jurisdiction over an action to
77 Phil. 496; Arnold vs. Willits and Patterson, 44 Phil. 364). enforce a judgment within five (5) years from its rendition, since the Rules of Court provide
for enforcement by mere motion during those five years. The error of this stand is apparent,
The Court of Appeals has made express findings to the following effect: because the second action, originally begun in the Court of First Instance, was not an action
to enforce the judgment of the Municipal Court, but an action to have non-parties to the
There is no question that a wrong has been committed by the so-called Park Rite Co., judgment held responsible for its payment.
Inc., upon the plaintiffs when it occupied the lot of the latter without its prior
knowledge and consent and without paying the reasonable rentals for the occupation Finding no error in the judgment appealed from, the same is hereby affirmed, with costs
of said lot. There is also no doubt in our mind that the corporation was a mere alter against petitioners-appellants Cirilo Paredes and Ursula Tolentino.
ego or business conduit of the defendants Cirilo Paredes and Ursula Tolentino, and
before them — the defendants M. McConnel, W. P. Cochrane, and Ricardo Rodriguez.
The evidence clearly shows that thesepersons completely dominated and controlled the MARUBENI CORPORATION, RYOICHI TANAKA, RYOHEI KIMURA and SHOICHI
corporation and that the functions of the corporation were solely for their benefits. ONE, petitioners, vs. FELIX LIRAG, respondent.

When it was originally organized on or about April 15, 1947, the original DECISION
incorporators were M. McConnel, W. P. Cochrane, Ricardo Rodriguez, Benedicto M. PARDO, J.:
Dario and Aurea Ordrecio with a capital stock of P1,500.00 divided into 1,500 shares
at P1.00 a share. McConnel and Cochrane each owned 500 shares, Ricardo
Rodriguez 408 shares, and Dario and Ordrecio 1 share each. It is obvious that the The case is an appeal via certiorari to annul and set aside the decision[1] of the Court of
shares of the last two named persons were merely qualifying shares. Then or about Appeals finding petitioners Ryoichi Tanaka, Ryohei Kimura and Shoichi One, as officers of
August 22, 1947 the defendants Cirilo Paredes and Ursula Tolentino purchased petitioner Marubeni Corporation, jointly and severally liable with the corporation for the
1,496 shares of the said corporation and the remaining four shares were acquired by commission claimed by respondent Felix Lirag in the amount of six million (P6,000,000.00)
Bienvenido J. Claudio, Quintin C. Paredes, Segundo Tarictican, and Paulino Marquez pesos arising from an oral consultancy agreement.
at one share each. It is obvious that the last four shares bought by these four
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Petitioner Marubeni Corporation (hereafter, Marubeni) is a foreign corporation organized Petitioner Shoichi One submitted a separate answer raising similar arguments.
and existing under the laws of Japan. It was doing business in the Philippines through its duly
licensed, wholly owned subsidiary, Marubeni Philippines Corporation. Petitioners Ryoichi With regard to petitioner Ryohei Kimura, the trial court did not acquire jurisdiction over
Tanaka, Ryohei Kimura and Shoichi One were officers of Marubeni assigned to its Philippine his person because he was recalled to the principal office in Tokyo, Japan before the complaint
branch.[2] and the summons could be served on him.

On January 27, 1989, respondent Felix Lirag filed with the Regional Trial Court, Makati a During the pre-trial conferences held on September 18 and October 16, 1989 and on
complaint[3] for specific performance and damages claiming that petitioners owed him the sum January 24, March 15 and May 17, 1990, no amicable settlement was reached. Trial on the
of P6,000,000.00 representing commission pursuant to an oral consultancy agreement with merits ensued.
Marubeni. Lirag claimed that on February 2, 1987, petitioner Ryohei Kimura hired his On April 29, 1993, the trial court promulgated a decision and ruled that respondent is
consultancy group for the purpose of obtaining government contracts of various entitled to a commission. Respondent was led to believe that there existed an oral consultancy
projects. Petitioner Kimura authorized him to work on the following projects: (1) National agreement. Hence, he performed his part of the agreement and helped petitioners get the
Telephone Project, (2) Regional Telecommunications Project; (3) Cargo Handling Equipment; (4) project. The dispositive portion of the decision reads:
Maritime Communications; (5) Philippine National Railways Depot; and (6) Bureau of Posts
(Phase II).[4] Petitioners promised to pay him six percent (6%) consultancy fee based on the total
costs of the projects obtained. WHEREFORE, defendants are ordered, jointly and severally, to pay to the plaintiff: (1) the
amount of P6,000,000.00, with interest at the legal rate (12% per annum) from January 10,
The consultancy agreement was not reduced into writing because of the mutual 1989 until fully paid; (2) 20% of this amount to serve as reimbursement of plaintiffs attorneys
trust between Marubeni and the Lirag family.[5] Their close business and personal relationship fees; and (3) to pay the cost of the suit.
dates back to 1960, when respondents family was engaged in the textile fabric manufacturing
business, in which Marubeni supplied the needed machinery, equipment, spare parts and raw SO ORDERED.
materials.[6]
In compliance with the agreement, respondent Lirag made representations with various Makati, Metro Manila, April 29, 1993.
government officials, arranged for meetings and conferences, relayed pertinent information as
well as submitted feasibility studies and project proposals, including pertinent documents [Original Signed]
required by petitioners. As petitioners had been impressed with respondents performance, six SALVADOR P. DE GUZMAN, Jr.
(6) additional projects were given to his group under the same undertaking.[7] Pairing Judge[9]
One of the projects handled by respondent Lirag, the Bureau of Post project, amounting On May 26, 1993, petitioners interposed an appeal from the decision to the Court of
to P100,000,000.00 was awarded to the Marubeni-Sanritsu tandem.[8] Despite respondents Appeals.[10]
repeated formal verbal demands for payment of the agreed consultancy fee, petitioners did not
pay. In response to the first demand letter, petitioners promised to reply within fifteen (15) After due proceedings, on October 9, 1997, the Court of Appeals promulgated a decision
days, but they did not do so. affirming the decision of the trial court. The Court of Appeals ruled that preponderance of
evidence favored the existence of a consultancy agreement between the parties. It upheld the
Pursuant to the consultancy agreement, respondent claimed a commission of six percent factual findings of the trial court, thus:
(6%) of the total contract price, or a total of P6,000,000.00, or in the alternative, that he be paid
the same amount by way of damages or as the reasonable value of the services he rendered to
petitioners, and further claimed twenty percent (20%) of the amount recoverable as attorneys Plaintiffs evidence details the efforts he exerted after having been extended an appointment
fees and the costs of suit. by Marubeni as its consultant. He tendered a thanksgiving dinner for the defendants at the
Nandau Restaurant; he and Napoleon Rama visited Marubenis Morihiko Maruyama in the
In their answer, petitioners denied the consultancy agreement. Petitioner Ryohei Kimura latters office during which they discussed the BOP II project. He arranged several conferences
did not have the authority to enter into such agreement in behalf of Marubeni. Only Mr. between the Marubeni officials and Postmaster General Angelito Banayo. In one meeting
Morihiko Maruyama, the general manager, upon issuance of a special power of attorney by the which took place in the office of Mr. Banayo at Liwasang Bonifacio, a Mr. Ida, the General
principal office in Tokyo, Japan, could enter into any contract in behalf of the corporation. Mr. Manager of Sanritsu, was conspicuously present. Mr. Banayo testified that Mr. Ida told him
Maruyama did not discuss with respondent Lirag any of the matters alleged in the complaint, that Sanritsu was representing Marubeni in the BOP II project (tsn., 6/11/90, pp. 15-17;
nor agreed to the payment of commission. Moreover, Marubeni did not participate in the 5/15/91, pp. 10-12). At least thirty (30) conferences between plaintiff and defendants took
bidding for the Bureau of Post project, nor benefited from the supposed project. Thus, place at the Marubeni offices, lasting at least two hours each meeting. Eventually, the bid
petitioners moved for the dismissal of the complaint. was awarded by the Bureau of Post to Sanritsu. Aware that Sanritsu represented Marubeni,

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and in fact Marubeni assigned Sanritsu to enter its bid, plaintiff sent his bill for his services An assiduous scrutiny of the testimonial and documentary evidence extant leads us to the
to the defendants in a letter dated April 20, 1988. This was followed by a letter dated conclusion that the evidence could not support a solid conclusion that a consultancy
September 26, 1990 of plaintiffs counsel. This time Mr. Tanaka asked for 15 days within agreement, oral or written, was agreed between petitioners and
which to contact their Head Office to seek instructions.[11] respondent. Respondent attempted to fortify his own testimony by presenting several
corroborative witnesses. However, what was apparent in the testimonies of these witnesses was
The Court of Appeals relied on the doctrine of admission by silence [12] in upholding the the fact that they learned about the existence of the consultancy agreement only because that
existence of a consultancy agreement, noting that petitioner Tanakas reaction to respondents was what respondent told them.[23]
September 26, 1988 demand letter was not consistent with their claim that there was no In civil cases, he who alleges a fact has the burden of proving it; a mere allegation is not
consultancy agreement. On the contrary, it lent credence to respondents claim that they had evidence.[24] He must establish his cause by a preponderance of evidence,[25] which respondent
an existing consultancy agreement. Petitioner Tanakas response dated October 13, 1988 to the failed to establish in the instant case.
demand letter of September 26, 1988 reads:
Assuming for the sake of argument that an oral consultancy agreement has been perfected
Referring to your letter dated September 26, 1988, we are pleased to inform you that the between the parties, respondent Lirag could not still claim fees on the project that has not been
issue is currently being reviewed by us and we would like to reply to you within fifteen (15) awarded to Marubeni.
days.[13] If respondents contentions were to be taken as truth, he would be entitled to 6% consulting
fee based on the total cost of the projects obtained,[26] or on success basis.[27] However, even
The Court of Appeals observed that if indeed there were no consultancy agreement, it respondent admitted that the Bureau of Post project was not awarded to Marubeni, but to
would have been easy for petitioners to simply deny respondents claim. Yet, they did not do Sanritsu.[28]Marubeni did not even join the bidding for the Bureau of Post project.
so. The conglomeration of these circumstances bolstered the existence of the oral consultancy
agreement. The dispositive portion of the decision reads: Respondent could not claim from Sanritsu because of the absence of any agreement
between him and the latter. When asked to clarify whether he has an existing consultancy
agreement with Sanritsu, respondent answered in the negative, thus:
WHEREFORE, the decision appealed from is hereby AFFIRMED.[14]
COURT:
Hence, this appeal.[15]
One clarificatory question-
In this appeal, petitioners raise the following issues: (1) whether or not there was a
Do you have any consultancy service contract with Marubeni/San Ritsu do you have?
consultancy agreement between petitioners and respondent; and corollary to this, (2) whether
or not respondent is entitled to receive a commission if there was, in fact, a consultancy A: No, sir. I have only Consultancy Agreement on verbal basis with Marubeni.[29]
agreement.[16]
Hence, how could he be entitled to the 6% commission, when it was not his client who
We find the appeal meritorious. won in the bidding?
In deciding this appeal, we rely on the rule that a party who has the burden of proof in a Respondent tried to justify his commission of roughly about P6,000,000.00 in the guise
civil case must establish his case by a preponderance of evidence.[17] When the evidence of the that Marubeni and Sanritsu are sister corporations, thereby implying the need to pierce the
parties is in equipoise, or when there is a doubt as to where the preponderance of evidence lies, veil of corporate fiction. Respondent claimed that Marubeni as the supplier and real contractor
the party with the burden of proof fails and the petition must thus be denied.[18] of the project hired and sub-contracted the project to Sanritsu.
As a general rule, factual findings of the Court of Appeals are conclusive on the parties We believe that this line of reasoning is too far-fetched. Not because two foreign companies
and are not reviewed by the Supreme Courtand they carry even more weight when the Court of came from the same country and closely worked together on certain projects would the
Appeals affirmed the factual findings of the trial court. It is not the function of the Supreme conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction.
Court to weigh anew the evidence passed upon by the Court of Appeals. [19] Moreover, only
questions of law may be raised before the Supreme Court in a petition for review under Rule To disregard the separate juridical personality of a corporation, the wrongdoing must be
45 of the Revised Rules of Court.[20] clearly and convincingly established. It cannot be presumed. The separate personality of the
corporation may be disregarded only when the corporation is used as a cloak or cover for fraud
However, the rule is subject to exceptions,[21] such as when the conclusion is grounded on or illegality, or to work injustice, or where necessary for the protection of creditors.[30] We could
speculations, surmises, or conjectures,[22] as in the instant case. not just rely on respondents testimony regarding the existence of the Marubeni-Sanritsu

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tandem to justify his claim for payment of commission. This conclusion is too conjectural to be it difficult to arrange a meeting with Postmaster General Angelito Banayo because of petitioners
believed. reputation of engaging in questionable transactions.[35] Suddenly, through the intervention of
respondent, the postmaster general became accessible to petitioners. This became possible
Aside from the self-serving testimony of respondent regarding the existence of a close because of respondents close personal relationship with the postmaster general, his trusted
working relationship between Marubeni and Sanritsu, there was nothing that would support and long-time friend.[36]Respondent testified, to wit:
the conclusion that Sanritsu was an agent of Marubeni. Mr. Lito Banayo, whom respondent
presented to corroborate his testimony on this particular issue said, thus: Q: In other words you are saying that Marubeni and San Ritsu representatives had a
conference with the Post Master General Banayo in connection with this Project?
ATTY. VALERO
A: Yes and I was the one who made the arrangement.[37]
My question is- do you know for a fact whether the impression you have about Japanese
Trading Firm working through Agents was the relationship between Marubeni and San In another instance, respondent said, thus:
Ritsu when Mr. Iida said that they were working together?
WITNESS:
A: I did not know for a fact because I did not see any contract between Marubeni and San
Ritsu presented to me.[31] What we have done by that first, Mr. Banayo went to Tokyo and when he was in Tokyo we
were able to arrange the Marubeni representative in Tokyo to meet and talk with Mr.
Contrary to the trial courts finding that petitioners led respondent to believe that they Banayo in Tokyo
hired respondents services as consultant, the evidence proved otherwise. Petitioner Shoichi
One, one of the officers of Marubeni Phils., testified that at the onset, Marubeni Phils. informed COURT:
respondent that it had no authority to commit to anything, as it all depended on the decision Mr?
of the principal headquarters in Tokyo, Japan. However, respondent Lirag insisted on providing
assistance to Marubeni to get coveted government contracts because Marubeni might A. Banayo, the Post Master General and representatives of Marubeni in Tokyo - this was
encounter difficulties due to discrimination from the government.[32] Despite such knowledge, done because of my intervention.[38]
respondent said that its alright with him as he believes Marubeni was an old time friend so he
wanted to work for those projects.[33] Hence, how could petitioners be guilty of misleading Any agreement entered into because of the actual or supposed influence which the party
respondent on the acceptance of the latters offer of consultancy service? has, engaging him to influence executive officials in the discharge of their duties, which
contemplates the use of personal influence and solicitation rather than an appeal to the
With regard to the Court of Appeals ratiocination that petitioner Tanakas response dated judgment of the official on the merits of the object sought is contrary to public
October 13, 1988 to the demand letter of September 26, 1988, amounted to an implied policy.[39] Consequently, the agreement, assuming that the parties agreed to the consultancy,
admission of the consultancy agreement, the records showed that, to the contrary, this fact is null and void as against public policy.[40] Therefore, it is unenforceable before a court of
strengthened petitioners allegation that Marubeni Phils. lacked the requisite authority to enter justice.[41]
into any binding agreement.
In light of the foregoing, we rule that the preponderance of evidence established no
As explained by petitioner Shoichi One, Marubeni Phils. could enter into a consultancy consultancy agreement between petitioners and respondent from which the latter could anchor
agreement only after submitting a recommendation to the principal headquarters in Tokyo, his claim for a six percent (6%) consultancy fee on a project that was not awarded to petitioners.
Japan. If the office in Tokyo, Japan agrees to hire consultants, it would then give a power of
attorney to its general manager in Manila authorizing the latter to enter into such agreement. WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals[42] is hereby
SET ASIDE. Civil Case No. 89-3037 filed before the Regional Trial Court, Branch 143, Makati
In the instant case, the parties did not reach the second stage as the headquarters in City is hereby DISMISSED.
Tokyo, Japan did not see it fit to hire a consultant as they decided not to participate in the
bidding. Hence, no consultancy agreement was perfected, whether oral or written. There was No costs.
no absolute acceptance of respondents offer of consultancy services. SO ORDERED.
Assuming arguendo that the petitioner accepted respondents offer of consultancy services,
we could not give legal imprimatur to the agreement. The service rendered by respondent
contemplated the exploitation of personal influence and solicitation on a public officer.
Respondent said that petitioners sought out his services because they needed somebody
who can help them penetrate and establish goodwill with the government.[34] Petitioners found

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