PHILIPPINE STOCK EXCHANGE, MENDOZA, and

EN BANC Respondents. SERENO, JJ.

WILSON P. GAMBOA, G.R. No. 176579

Petitioner,
Present:
- versus -

CORONA, C.J.,

FINANCE SECRETARY MARGARITO B. CARPIO,

TEVES, FINANCE UNDERSECRETARY JOHN
P. SEVILLA, AND COMMISSIONER VELASCO, JR.,
RICARDO ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT LEONARDO-DE CASTRO,
(PCGG) IN THEIR CAPACITIES AS CHAIR
AND MEMBERS, RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL, BRION,

CHAIRMAN ANTHONI SALIM OF FIRST PERALTA,

PACIFIC CO., LTD. IN HIS CAPACITY AS
DIRECTOR OF METRO PACIFIC ASSET BERSAMIN,
HOLDINGS INC., CHAIRMAN MANUEL V.
PANGILINAN OF PHILIPPINE LONG DEL CASTILLO,
DISTANCE TELEPHONE COMPANY (PLDT)
IN HIS CAPACITY AS MANAGING ABAD,
DIRECTOR OF FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L. NAZARENO OF
VILLARAMA, JR.,
PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY, CHAIR FE BARIN OF THE
SECURITIES EXCHANGE COMMISSION, and PEREZ,
PRESIDENT FRANCIS LIM OF THE
 The Antecedents

PABLITO V. SANIDAD and Promulgated:

ARNO V. SANIDAD, The facts, according to petitioner Wilson P. Gamboa, a stockholder of

Philippine Long Distance Telephone Company (PLDT), are as follows: 1
Petitioners-in-Intervention. June 28, 2011

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
On 28 November 1928, the Philippine Legislature enacted Act No. 3436
which granted PLDT a franchise and the right to engage in
telecommunications business. In 1969, General Telephone and Electronics
Corporation (GTE), an American company and a major PLDT stockholder,
sold 26 percent of the outstanding common shares of PLDT to PTIC. In
1977, Prime Holdings, Inc. (PHI) was incorporated by several persons,
DECISION
including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became
the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of
Assignment executed by PTIC stockholders Ramon Cojuangco and
Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by
PHI were sequestered by the Presidential Commission on Good
Government (PCGG). The 111,415 PTIC shares, which represent about
CARPIO, J.: 46.125 percent of the outstanding capital stock of PTIC, were later declared
by this Court to be owned by the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment

The Case
This is an original petition for prohibition, injunction, declaratory relief and
declaration of nullity of the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the government of
the Republic of the Philippines to Metro Pacific Assets Holdings, Inc.
(MPAH), an affiliate of First Pacific Company Limited (First Pacific).
firm, acquired the remaining 54 percent of the outstanding capital stock of
PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC)
of the Philippine Government announced that it would sell the 111,415
PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC,
through a public bidding to be conducted on 4 December 2006.
Subsequently, the public bidding was reset to 8 December 2006, and only
two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia
Presidio Capital, submitted their bids. Parallax won with a bid of P25.6
billion or US$510 million.
Thereafter, First Pacific announced that it would exercise its right of first
refusal as a PTIC stockholder and buy the 111,415 PTIC shares by
matching the bid price of Parallax. However, First Pacific failed to do so by
the 1 February 2007 deadline set by IPC and instead, yielded its right to
PTIC itself which was then given by IPC until 2 March 2007 to buy the
PTIC shares. On 14 February 2007, First Pacific, through its subsidiary,
MPAH, entered into a Conditional Sale and Purchase Agreement of the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of
PTIC, with the Philippine Government for the price of P25,217,556,000 or
US$510,580,189. The sale was completed on 28 February 2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine
Government of 46.125 percent of PTIC shares is actually an indirect sale of
12 million shares or about 6.3 percent of the outstanding common shares of
PLDT. With the sale, First Pacifics common shareholdings in PLDT
increased from 30.7 percent to 37 percent, thereby increasing the
common shareholdings of foreigners in PLDT to about 81.47
percent. This violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a public utility
to not more than 40 percent.3
On the other hand, public respondents Finance
Secretary Margarito B. Teves, Undersecretary John P. Sevilla, and PCGG
Commissioner Ricardo Abcede allege the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since engaged in the
business of investment holdings. PTIC held 26,034,263 PLDT common
shares, or 13.847 percent of the total PLDT outstanding common shares.
PHI, on the other hand, was incorporated in 1977, and became the owner of
111,415 PTIC shares or 46.125 percent of the outstanding capital stock of
PTIC by virtue of three Deeds of Assignment executed by
Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares
held by PHI were sequestered by the PCGG, and subsequently declared by
this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of
the Philippines in accordance with this Courts decision4 which became final
and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which
represent 6.4 percent of the outstanding common shares of stock of PLDT,
and designated the Inter-Agency Privatization Council (IPC), composed of
the Department of Finance and the PCGG, as the disposing entity. An
invitation to bid was published in seven different newspapers from 13 to 24
November 2006. On 20 November 2006, a pre-bid conference was held,
and the original deadline for bidding scheduled on 4 December 2006 was
reset to 8 December 2006. The extension was published in nine different
newspapers.
During the 8 December 2006 bidding, Parallax Capital Management LP
emerged as the highest bidder with a bid of P25,217,556,000. The
government notified First Pacific, the majority owner of PTIC shares, of the
bidding results and gave First Pacific until 1 February 2007 to exercise its
right of first refusal in accordance with PTICs Articles of Incorporation.
First Pacific announced its intention to match Parallaxs bid.
On 31 January 2007, the House of Representatives (HR) Committee on
Good Government conducted a public hearing on the particulars of the then
impending sale of the 111,415 PTIC shares.
Respondents Teves and Sevilla were among those who attended the public
hearing. The HR Committee Report No. 2270 concluded that: (a) the
auction of the governments 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b) First
Pacifics intended acquisition of the governments 111,415 PTIC shares
resulting in First Pacifics 100% ownership of PTIC will not violate the
40 percent constitutional limit on foreign ownership of a public utility
since PTIC holds only 13.847 percent of the total outstanding common
shares of PLDT.5 On 28 February 2007, First Pacific completed the
acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC
conducted a public bidding for the sale of 111,415 PTIC shares or 46
percent of the outstanding capital stock of PTIC (the remaining 54 percent
of PTIC shares was already owned by First Pacific and its affiliates); (b)
Parallax offered the highest bid amounting to P25,217,556,000; (c) pursuant
to the right of first refusal in favor of PTIC and its shareholders granted in
PTICs Articles of Incorporation, MPAH, a First Pacific affiliate, exercised
its right of first refusal by matching the highest bid offered for PTIC shares
on 13 February 2007; and (d) on 28 February 2007, the sale was
consummated when MPAH paid IPC P25,217,556,000 and the government
delivered the certificates for the 111,415 PTIC shares.
Respondent Pangilinan denies the other allegations of facts of petitioner.
On 28 February 2007, petitioner filed the instant petition for prohibition,
injunction, declaratory relief, and declaration of nullity of sale of the
111,415 PTIC shares. Petitioner claims, among others, that the sale of the
111,415 PTIC shares would result in an increase in First Pacifics common
shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined
with Japanese NTT DoCoMos common shareholdings in PLDT, would
result to a total foreign common shareholdings in PLDT of 51.56 percent
which is over the 40 percent constitutional limit.6 Petitioner asserts:
If and when the sale is completed, First Pacifics equity in PLDT
will go up from 30.7 percent to 37.0 percent of its common or
voting- stockholdings, x x x. Hence, the consummation of the sale
will put the two largest foreign investors in PLDT First Pacific and
Japans NTT DoCoMo, which is the worlds largest wireless
telecommunications firm, owning 51.56 percent of PLDT common
equity. x x x With the completion of the sale, data culled from the
official website of the New York Stock Exchange
(www.nyse.com) showed that those foreign entities, which own at
least five percent of common equity, will collectively own 81.47
percent of PLDTs common equity. x x x
x x x as the annual disclosure reports, also
referred to as Form 20-K reports x x x which
PLDT submitted to the New York Stock
Exchange for the period 2003-2005, revealed
that First Pacific and several other foreign
entities breached the constitutional limit of 40
percent ownership as early as 2003. x x x7
Petitioner raises the following issues: (1) whether the consummation of the
then impending sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of a public utility; (2) whether
public respondents committed grave abuse of discretion in allowing the sale
of the 111,415 PTIC shares to First Pacific; and (3) whether the sale of
common shares to foreigners in excess of 40 percent of the entire
subscribed common capital stock violates the constitutional limit on foreign
ownership of a public utility.8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion
for Leave to Intervene and Admit Attached Petition-in-Intervention. In the
Resolution of 28 August 2007, the Court granted the motion and noted the
Petition-in-Intervention.
Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking,
among others, to enjoin and/or nullify the sale by respondents of the
111,415 PTIC shares to First Pacific or assignee. Petitioners-in-intervention
claim that, as PLDT subscribers, they have a stake in the outcome of the
controversy x x x where the Philippine Government is completing the sale
of government owned assets in [PLDT], unquestionably a public utility, in
violation of the nationality restrictions of the Philippine Constitution.

The Issue
This Court is not a trier of facts. Factual questions such as those raised by
petitioner,9 which indisputably demand a thorough examination of the
evidence of the parties, are generally beyond this Courts jurisdiction.
Adhering to this well-settled principle, the Court shall confine the resolution
of the instant controversy solely on the threshold and purely legal issue of
whether the term capital in Section 11, Article XII of the Constitution refers
to the total common shares only or to the total outstanding capital stock
(combined total of common and non-voting preferred shares) of PLDT, a
public utility.
The Ruling of the Court
The petition is partly meritorious.
Petition for declaratory relief treated as petition for mandamus
At the outset, petitioner is faced with a procedural barrier. Among the
remedies petitioner seeks, only the petition for prohibition is within the
original jurisdiction of this court, which however is not exclusive but is
concurrent with the Regional Trial Court and the Court of Appeals. The
actions for declaratory relief,10 injunction, and annulment of sale are not
embraced within the original jurisdiction of the Supreme Court. On this
ground alone, the petition could have been dismissed outright.
While direct resort to this Court may be justified in a petition for
prohibition,11 the Court shall nevertheless refrain from discussing the
grounds in support of the petition for prohibition since on 28 February
2007, the questioned sale was consummated when MPAH paid
IPC P25,217,556,000 and the government delivered the certificates for the
111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition of the
term capital in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy, the Court treats the petition for
declaratory relief as one for mandamus.12
In Salvacion v. Central Bank of the Philippines,13 the Court treated the
petition for declaratory relief as one for mandamus considering the grave
injustice that would result in the interpretation of a banking law. In that
case, which involved the crime of rape committed by a foreign tourist
against a Filipino minor and the execution of the final judgment in the civil
case for damages on the tourists dollar deposit with a local bank, the Court
declared Section 113 of Central Bank Circular No. 960, exempting foreign
currency deposits from attachment, garnishment or any other order or
process of any court, inapplicable due to the peculiar circumstances of the
case. The Court held that injustice would result especially to a citizen
aggrieved by a foreign guest like accused x x x that would negate Article 10
of the Civil Code which provides that in case of doubt in the interpretation
or application of laws, it is presumed that the lawmaking body intended
right and justice to prevail. The Court therefore required respondents
Central Bank of the Philippines, the local bank, and the accused to comply
with the writ of execution issued in the civil case for damages and to release
the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court
similarly brushed aside the procedural infirmity of the petition for
declaratory relief and treated the same as one for mandamus.
In Alliance, the issue was whether the government unlawfully excluded
petitioners, who were government employees, from the enjoyment of rights
to which they were entitled under the law. Specifically, the question was:
Are the branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled corporations
included among the four employers under Presidential Decree No. 851
which are required to pay their employees x x x a thirteenth (13th) month
pay x x x ? The Constitutional principle involved therein affected all
government employees, clearly justifying a relaxation of the technical rules
of procedure, and certainly requiring the interpretation of the assailed
presidential decree.
In short, it is well-settled that this Court may treat a petition for declaratory
relief as one for mandamus if the issue involved has far-reaching
implications. As this Court held in Salvacion:
The Court has no original and exclusive jurisdiction over a petition
for declaratory relief. However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching
implications and raises questions that should be resolved, it
may be treated as one for mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation of the term
capital in Section 11, Article XII of the Constitution. He prays that this
Court declare that the term capital refers to common shares only, and that
such shares constitute the sole basis in determining foreign equity in a
public utility. Petitioner further asks this Court to declare any ruling
inconsistent with such interpretation unconstitutional.
The interpretation of the term capital in Section 11, Article XII of the
Constitution has far-reaching implications to the national economy. In fact,
a resolution of this issue will determine whether Filipinos are masters, or
second class citizens, in their own country. What is at stake here is whether
Filipinos or foreigners will have effective control of the national economy.
Indeed, if ever there is a legal issue that has far-reaching implications to the
entire nation, and to future generations of Filipinos, it is the threshhold legal
issue presented in this case.
The Court first encountered the issue on the definition of the term capital in
Section 11, Article XII of the Constitution in the case of Fernandez
v. Cojuangco, docketed as G.R. No. 157360.16 That case involved the same
public utility (PLDT) and substantially the same private respondents.
Despite the importance and novelty of the constitutional issue raised therein
and despite the fact that the petition involved a purely legal question, the
Court declined to resolve the case on the merits, and instead denied the
same for disregarding the hierarchy of courts.17 There, petitioner Fernandez
assailed on a pure question of law the Regional Trial Courts Decision of 21
February 2003 via a petition for review under Rule 45. The Courts
Resolution, denying the petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to
finally settle this purely legal issue which is of transcendental importance
to the national economy and a fundamental requirement to a faithful
adherence to our Constitution. The Court must forthwith seize such
opportunity, not only for the benefit of the litigants, but more significantly
for the benefit of the entire Filipino people, to ensure, in the words of the
Constitution, a self-reliant and independent national economy effectively
controlled by Filipinos.18 Besides, in the light of vague and confusing
positions taken by government agencies on this purely legal issue, present
and future foreign investors in this country deserve, as a matter of basic
fairness, a categorical ruling from this Court on the extent of their
participation in the capital of public utilities and other nationalized
businesses.
Despite its far-reaching implications to the national economy, this purely
legal issue has remained unresolved for over 75 years since the 1935
Constitution. There is no reason for this Court to evade this ever recurring
fundamental issue and delay again defining the term capital, which appears
not only in Section 11, Article XII of the Constitution, but also in Section 2,
Article XII on co-production and joint venture agreements for the
development of our natural resources,19 in Section 7, Article XII on
ownership of private lands,20 in Section 10, Article XII on the reservation of
certain investments to Filipino citizens,21 in Section 4(2), Article XIV on
the ownership of educational institutions,22 and in Section 11(2), Article
XVI on the ownership of advertising companies.23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As such, he has
the right to question the subject sale, which he claims to violate the
nationality requirement prescribed in Section 11, Article XII of the
Constitution. If the sale indeed violates the Constitution, then there is a
possibility that PLDTs franchise could be revoked, a dire consequence
directly affecting petitioners interest as a stockholder.
More importantly, there is no question that the instant petition raises matters
of transcendental importance to the public. The fundamental and threshold
legal issue in this case, involving the national economy and the economic
welfare of the Filipino people, far outweighs any perceived impediment in
the legal personality of the petitioner to bring this action.
In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit
on matters of transcendental importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the issue concerns a
public right and the object of mandamus is to obtain the enforcement
of a public duty, the people are regarded as the real parties in interest;
and because it is sufficient that petitioner is a citizen and as such is
interested in the execution of the laws, he need not show that he has any
legal or special interest in the result of the action. In the aforesaid case,
the petitioners sought to enforce their right to be informed on matters of
public concern, a right then recognized in Section 6, Article IV of the 1973
Constitution, in connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or otherwise
effectively promulgated. In ruling for the petitioners legal standing, the
Court declared that the right they sought to be enforced is a public right
recognized by no less than the fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further
declared that when a mandamus proceeding involves the assertion of a
public right, the requirement of personal interest is satisfied by the
mere fact that petitioner is a citizen and, therefore, part of the general
public which possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public funds
may not have been involved under the questioned contract for the
development, management and operation of the Manila International
Container Terminal, public interest [was] definitely involved considering
the important role [of the subject contract] . . . in the economic
development of the country and the magnitude of the financial
consideration involved. We concluded that, as a consequence, the
disclosure provision in the Constitution would constitute sufficient authority
for upholding the petitioners standing. (Emphasis supplied)
Clearly, since the instant petition, brought by a citizen, involves matters of
transcendental public importance, the petitioner has the
requisite locus standi. The above provision substantially reiterates Section 5, Article XIV of the
1973 Constitution, thus:

Definition of the Term Capital in

Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the 1987
Constitution mandates the Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations
or associations organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under
the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to
their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)
Section 5. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations
or associations organized under the laws of the Philippines at
least sixty per centum of the capital of which is owned by such
citizens, nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under
the condition that it shall be subject to amendment, alteration, or
repeal by the National Assembly when the public interest so
requires. The State shall encourage equity participation in public
utilities by the general public. The participation of foreign
investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in the capital thereof.
(Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8,
Article XIV of the 1935 Constitution, viz:
Section 8. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be
 granted except to citizens of the Philippines or to corporations
or other entities organized under the laws of the Philippines
sixty per centum of the capital of which is owned by citizens of
the Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than
fifty years. No franchise or right shall be granted to any individual,
firm, or corporation, except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when
the public interest so requires. (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional
Commission, reminds us that the Filipinization provision in the 1987
Constitution is one of the products of the spirit of nationalism which
gripped the 1935 Constitutional Convention.25 The 1987 Constitution
provides for the Filipinization of public utilities by requiring that any form
of authorization for the operation of public utilities should be granted only
to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens. The provision is [an express] recognition of
the sensitive and vital position of public utilities both in the national
economy and for national security.26 The evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public
utilities, which may be inimical to the national interest.27 This specific
provision explicitly reserves to Filipino citizens control of public utilities,
pursuant to an overriding economic goal of the 1987 Constitution: to
conserve and develop our patrimony28 and ensure a self-reliant and
independent national economy effectively controlled by Filipinos.29
Any citizen or juridical entity desiring to operate a public utility must
therefore meet the minimum nationality requirement prescribed in Section
11, Article XII of the Constitution. Hence, for a corporation to be granted
authority to operate a public utility, at least 60 percent of its capital must be
owned by Filipino citizens.
The crux of the controversy is the definition of the term capital. Does the
term capital in Section 11, Article XII of the Constitution refer to common
shares or to the total outstanding capital stock (combined total of common
and non-voting preferred shares)?
Petitioner submits that the 40 percent foreign equity limitation in domestic
public utilities refers only to common shares because such shares are
entitled to vote and it is through voting that control over a corporation is
exercised. Petitioner posits that the term capital in Section 11, Article XII of
the Constitution refers to the ownership of common capital stock subscribed
and outstanding, which class of shares alone, under the corporate set-up of
PLDT, can vote and elect members of the board of directors. It is
undisputed that PLDTs non-voting preferred shares are held mostly by
Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on
16 June 1973 by then President Ferdinand Marcos, requiring every
applicant of a PLDT telephone line to subscribe to non-voting preferred
shares to pay for the investment cost of installing the telephone line. 32
Petitioners-in-intervention basically reiterate petitioners arguments and
adopt petitioners definition of the term capital.33 Petitioners-in-intervention
allege that the approximate foreign ownership of common capital stock of
PLDT x x x already amounts to at least 63.54% of the total outstanding
common stock, which means that foreigners exercise significant control
over PLDT, patently violating the 40 percent foreign equity limitation in
public utilities prescribed by the Constitution.
Respondents, on the other hand, do not offer any definition of the term
capital in Section 11, Article XII of the Constitution. More importantly,
private respondents Nazareno and Pangilinan of PLDT do not dispute that
more than 40 percent of the common shares of PLDT are held by
foreigners.

In particular, respondent Nazarenos Memorandum, consisting of 73 pages,
harps mainly on the procedural infirmities of the petition and the supposed
violation of the due process rights of the affected foreign common
shareholders. Respondent Nazareno does not deny petitioners allegation of
foreigners dominating the common shareholdings of
PLDT. Nazarenostressed mainly that the petition seeks to divest foreign
common shareholders purportedly exceeding 40% of the total common
shareholdings in PLDT of their ownership over their shares. Thus, the
foreign natural and juridical PLDT shareholders must be impleaded in this
suit so that they can be heard.34 Essentially, Nazareno invokes denial of due
process on behalf of the foreign common shareholders.
While Nazareno does not introduce any definition of the term capital, he
states that among the factual assertions that need to be established to
counter petitioners allegations is the uniform interpretation by
government agencies (such as the SEC), institutions and corporations
(such as the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred shares and
common shares in controlling interest in view of testing compliance
with the 40% constitutional limitation on foreign ownership in public
utilities.35
Similarly, respondent Manuel V. Pangilinan does not define the term capital
in Section 11, Article XII of the Constitution. Neither does he refute
petitioners claim of foreigners holding more than 40 percent of PLDTs
common shares. Instead, respondent Pangilinan focuses on the procedural
flaws of the petition and the alleged violation of the due process rights of
foreigners. Respondent Pangilinan emphasizes in his Memorandum (1) the
absence of this Courts jurisdiction over the petition; (2) petitioners lack of
standing; (3) mootness of the petition; (4) non-availability of declaratory
relief; and (5) the denial of due process rights. Moreover,
respondent Pangilinan alleges that the issue should be whether owners of
shares in PLDT as well as owners of shares in companies holding shares in
PLDT may be required to relinquish their shares in PLDT and in those
companies without any law requiring them to surrender their shares and also
without notice and trial.
Respondent Pangilinan further asserts that Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders
of the utility company as a condition for keeping their shares in the
utility company. According to him, Section 11 does not authorize taking
one persons property (the shareholders stock in the utility company) on the
basis of another partys alleged failure to satisfy a requirement that is a
condition only for that other partys retention of another piece of property
(the utility company being at least 60% Filipino-owned to keep its
franchise).36
The OSG, representing public respondents Secretary Margarito Teves,
Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and
Chairman Fe Barin, is likewise silent on the definition of the term capital. In
its Memorandum37 dated 24 September 2007, the OSG also limits its
discussion on the supposed procedural defects of the petition, i.e. lack of
standing, lack of jurisdiction, non-inclusion of interested parties, and lack of
basis for injunction. The OSG does not present any definition or
interpretation of the term capital in Section 11, Article XII of the
Constitution. The OSG contends that the petition actually partakes of a
collateral attack on PLDTs franchise as a public utility, which in effect
requires a full-blown trial where all the parties in interest are given their day
in court.38
Respondent Francisco Ed Lim, impleaded as President and Chief Executive
Officer of the Philippine Stock Exchange (PSE), does not also define the
term capital and seeks the dismissal of the petition on the following
grounds: (1) failure to state a cause of action against Lim; (2) the PSE
allegedly implemented its rules and required all listed companies, including
PLDT, to make proper and timely disclosures; and (3) the reliefs prayed for
in the petition would adversely impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who
claimed to be a stockholder of record of PLDT, contended that the term
capital in the 1987 Constitution refers to shares entitled to vote or the
common shares. Fernandez explained thus:
The forty percent (40%) foreign equity limitation in public utilities
prescribed by the Constitution refers to ownership of shares of
stock entitled to vote, i.e., common shares, considering that it is
through voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in
imposing limitations and restrictions on fully nationalized and
partially nationalized activities is for Filipino nationals to be
always in control of the corporation undertaking said activities.
Otherwise, if the Trial Courts ruling upholding respondents
arguments were to be given credence, it would be possible for the
ownership structure of a public utility corporation to be divided
into one percent (1%) common stocks and ninety-nine percent
(99%) preferred stocks. Following the Trial Courts ruling adopting
respondents arguments, the common shares can be owned entirely
by foreigners thus creating an absurd situation wherein foreigners,
who are supposed to be minority shareholders, control the public
utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted
to apply to both the beneficial ownership and the controlling
interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation
in public utilities prescribed by the Constitution refers to
ownership of shares of stock entitled to vote, i.e., common shares.
Furthermore, ownership of record of shares will not suffice but it
must be shown that the legal and beneficial ownership rests in the
hands of Filipino citizens. Consequently, in the case of petitioner
PLDT, since it is already admitted that the voting interests of
foreigners which would gain entry to petitioner PLDT by the
acquisition of SMART shares through the Questioned Transactions
is equivalent to 82.99%, and the nominee arrangements between
the foreign principals and the Filipino owners is likewise admitted,
there is, therefore, a violation of Section 11, Article XII of the
Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April
14, 1987 cited by the Trial Court to support the proposition that the
meaning of the word capital as used in Section 11, Article XII of
the Constitution allegedly refers to the sum total of the shares
subscribed and paid-in by the shareholder and it allegedly is
immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as
stated in the FIA which took effect in 1991 or way after said
opinions were rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as between the
law and an opinion rendered by an administrative agency, the law
indubitably prevails. Moreover, said Opinions are merely advisory
and cannot prevail over the clear intent of the framers of the
Constitution.
 In the same vein, the SECs construction of Section 11, Article XII
of the Constitution is at best merely advisory for it is the courts
that finally determine what a law means.39
On the other hand, respondents therein, Antonio O. Cojuangco, Manuel
V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B.
Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa,
Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued
that the term capital in Section 11, Article XII of the Constitution includes
preferred shares since the Constitution does not distinguish among classes
of stock, thus:
16. The Constitution applies its foreign ownership limitation on the
corporations capital, without distinction as to classes of shares.
xxx
In this connection, the Corporation Code which was already in
force at the time the present (1987) Constitution was drafted
defined outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. The term
outstanding capital stock, as used in this Code, means the total
shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares.
Section 137 of the Corporation Code also does not distinguish
between common and preferred shares, nor exclude either class of
shares, in determining the outstanding capital stock (the capital) of
a corporation. Consequently, petitioners suggestion to reckon
PLDTs foreign equity only on the basis of PLDTs outstanding
common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in common
use.
xxxx
17. But even assuming that resort to the proceedings of the
Constitutional Commission is necessary, there is nothing in the
Record of the Constitutional Commission (Vol. III) which
petitioner misleadingly cited in the Petition x x x which supports
petitioners view that only common shares should form the basis for
computing a public utilitys foreign equity.
xxxx
18. In addition, the SEC the government agency primarily responsible
for implementing the Corporation Code, and which also has the
responsibility of ensuring compliance with the Constitutions
foreign equity restrictions as regards nationalized activities
x x x has categorically ruled that both common and preferred
shares are properly considered in determining outstanding capital
stock and the nationality composition thereof.40
We agree with petitioner and petitioners-in-intervention. The term capital in
Section 11, Article XII of the Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus in the present case only
to common shares,41 and not to the total outstanding capital stock
comprising both common and non-voting preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or
preferred, thus:
Sec. 6. Classification of shares. - The shares of stock of stock
corporations may be divided into classes or series of shares, or
both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as preferred or
redeemable shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the shares
or series of shares may have a par value or have no par value as
may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies,
public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in
case of liquidation and in the distribution of dividends, or such
other preferences as may be stated in the articles of incorporation
which are not violative of the provisions of this Code: Provided,
That preferred shares of stock may be issued only with a stated par
value. The Board of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares
of stock or any series thereof: Provided, That such terms and
conditions shall be effective upon the filing of a certificate thereof
with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed
fully paid and non-assessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a
consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital
and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose
of insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation provide for non-voting shares
in the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
 8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the
vote necessary to approve a particular corporate act as provided in
this Code shall be deemed to refer only to stocks with voting
rights.
Indisputably, one of the rights of a stockholder is the right to participate in
the control or management of the corporation.43 This is exercised through
his vote in the election of directors because it is the board of directors that
controls or manages the corporation.44 In the absence of provisions in the
articles of incorporation denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the
right to vote in the election of directors and on other matters, on the theory
that the preferred shareholders are merely investors in the corporation for
income in the same manner as bondholders.45 In fact, under the Corporation
Code only preferred or redeemable shares can be deprived of the right to
vote.46 Common shares cannot be deprived of the right to vote in any
corporate meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is invalid.47
Considering that common shares have voting rights which translate to
control, as opposed to preferred shares which usually have no voting rights,
the term capital in Section 11, Article XII of the Constitution refers only to
common shares. However, if the preferred shares also have the right to vote
in the election of directors, then the term capital shall include such preferred
shares because the right to participate in the control or management of the
corporation is exercised through the right to vote in the election of
directors. In short, the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election
of directors.
This interpretation is consistent with the intent of the framers of the
Constitution to place in the hands of Filipino citizens the control and
management of public utilities. As revealed in the deliberations of the
Constitutional Commission, capital refers to the voting stock or controlling
interest of a corporation, to wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated
local or Filipino equity and foreign equity; namely, 60-40 in
Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this
question: Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the
members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted from
the UP draft is 60 percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed capital
stock, because unless declared delinquent, unpaid capital stock
shall be entitled to vote.
 MR. VILLEGAS. The portion accepted by the Committee is the
deletion of the phrase voting stock or controlling interest.
MR. VILLEGAS. That is right.

MR. AZCUNA. Hence, without the Davide amendment, the

MR. NOLLEDO. Thank you. committee report would read: corporations or associations at least
sixty percent of whose CAPITAL is owned by such citizens.

With respect to an investment by one corporation in another

corporation, say, a corporation with 60-40 percent equity invests in MR. VILLEGAS. Yes.
another corporation which is permitted by the
Corporation Code, does the Committee adopt the grandfather rule?

MR. AZCUNA. So if the Davide amendment is lost, we are stuck

with 60 percent of the capital to be owned by citizens.
MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. AZCUNA. But the control can be with the foreigners even
MR. VILLEGAS. Yes. 48 if they are the minority. Let us say 40 percent of the capital is
owned by them, but it is the voting capital, whereas, the
Filipinos own the nonvoting shares. So we can have a situation
where the corporation is controlled by foreigners despite being
the minority because they have the voting capital. That is the
xxxx anomaly that would result here.

MR. AZCUNA. May I be clarified as to that portion that was

accepted by the Committee.
MR. BENGZON. No, the reason we eliminated the word stock
as stated in the 1973 and 1935 Constitutions is that according
to Commissioner Rodrigo, there are associations that do not
have stocks. That is why we say CAPITAL.

MR. AZCUNA. We should not eliminate the phrase controlling
interest.
MR. BENGZON. In the case of stock corporations, it is
assumed.49 (Emphasis supplied)
In explaining the definition of a Philippine national, the Implementing
Rules and Regulations of the Foreign Investments Act of 1991 provide:
Thus, 60 percent of the capital assumes, or should result in, controlling
interest in the corporation. Reinforcing this interpretation of the term
capital, as referring to controlling interest or shares entitled to vote, is the
definition of a Philippine national in the Foreign Investments Act of
1991,50 to wit:
SEC. 3. Definitions. - As used in this Act:
a. The term Philippine national shall mean a citizen of the
Philippines; or a domestic partnership or association wholly owned
by citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty percent (60%)
of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines; or a corporation
organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote
is wholly owned by Filipinos or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent (60%) of the fund
will accrue to the benefit of Philippine nationals: Provided, That
where a corporation and its non-Filipino stockholders own stocks
in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must
be owned and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of each of
both corporations must be citizens of the Philippines, in order that
the corporation, shall be considered a Philippine national.
(Emphasis supplied)
b. Philippine national shall mean a citizen of the Philippines or a
domestic partnership or association wholly owned by the citizens
of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty percent [60%] of the
capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where
the trustee is a Philippine national and at least sixty percent [60%]
of the fund will accrue to the benefit of the Philippine
nationals; Provided,that where a corporation its non-Filipino
stockholders own stocks in a Securities and Exchange Commission
[SEC] registered enterprise, at least sixty percent [60%] of the
capital stock outstanding and entitled to vote of both corporations
must be owned and held by citizens of the Philippines and at least
sixty percent [60%] of the members of the Board of Directors of
each of both corporation must be citizens of the Philippines, in
order that the corporation shall be considered a Philippine national.
The control test shall be applied for this purpose.
 Compliance with the required Filipino ownership of a
corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens
or Philippine nationals, mere legal title is not enough to meet
the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is essential.
Thus, stocks, the voting rights of which have been assigned or
transferred to aliens cannot be considered held by Philippine
citizens or Philippine nationals.
Individuals or juridical entities not meeting the
aforementioned qualifications are considered as non-Philippine
nationals. (Emphasis supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned capital
required in the Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise, the corporation is
considered as non-Philippine national[s].
Under Section 10, Article XII of the Constitution, Congress may reserve to
citizens of the Philippines or to corporations or associations at least
sixty per centum of whose capital is owned by such citizens, or such higher
percentage as Congress may prescribe, certain areas of investments. Thus,
in numerous laws Congress has reserved certain areas of investments to
Filipino citizens or to corporations at least sixty percent of the capital of
which is owned by Filipino citizens. Some of these laws are: (1) Regulation
of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro,
Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas
Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping
Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology
Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or
P.D. No. 1521. Hence, the term capital in Section 11, Article XII of the
Constitution is also used in the same context in numerous lawsreserving
certain areas of investments to Filipino citizens.
To construe broadly the term capital as the total outstanding capital stock,
including both common and non-voting preferred shares, grossly
contravenes the intent and letter of the Constitution that the State shall
develop a self-reliant and independent national economy effectively
controlled by Filipinos. A broad definition unjustifiably disregards who
owns the all-important voting stock, which necessarily equates to control of
the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to the
term capital. Let us assume that a corporation has 100 common shares
owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso (P1.00)
per share. Under the broad definition of the term capital, such corporation
would be considered compliant with the 40 percent constitutional limit on
foreign equity of public utilities since the overwhelming majority, or more
than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.
In the example given, only the foreigners holding the common shares have
voting rights in the election of directors, even if they hold only 100 shares.
The foreigners, with a minuscule equity of less than 0.001 percent, exercise
control over the public utility. On the other hand, the Filipinos, holding
more than 99.999 percent of the equity, cannot vote in the election of
directors and hence, have no control over the public utility. This starkly
circumvents the intent of the framers of the Constitution, as well as the clear
language of the Constitution, to place the control of public utilities in the
hands of Filipinos. It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and
in fact exists in the present case.
Holders of PLDT preferred shares are explicitly denied of the right to vote
in the election of directors. PLDTs Articles of Incorporation expressly state
that the holders of Serial Preferred Stock shall not be entitled to vote at
any meeting of the stockholders for the election of directors or for any
other purpose or otherwise participate in any action taken by the
corporation or its stockholders, or to receive notice of any meeting of
stockholders.51
On the other hand, holders of common shares are granted the exclusive right
to vote in the election of directors. PLDTs Articles of Incorporation 52 state
that each holder of Common Capital Stock shall have one vote in respect of
each share of such stock held by him on all matters voted upon by the
stockholders, and the holders of Common Capital Stock shall have the
exclusive right to vote for the election of directors and for all other
purposes.53
In short, only holders of common shares can vote in the election of
directors, meaning only common shareholders exercise control over PLDT.
Conversely, holders of preferred shares, who have no voting rights in the
election of directors, do not have any control over PLDT. In fact, under
PLDTs Articles of Incorporation, holders of common shares have voting
rights for all purposes, while holders of preferred shares have no voting
right for any purpose whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a
majority of the common shares of PLDT. In fact, based on PLDTs 2010
General Information Sheet (GIS),54which is a document required to be
submitted annually to the Securities and Exchange
Commission,55 foreigners hold 120,046,690 common shares of PLDT
whereas Filipinos hold only 66,750,622 common shares.56 In other words,
foreigners hold 64.27% of the total number of PLDTs common shares,
while Filipinos hold only 35.73%. Since holding a majority of the common
shares equates to control, it is clear that foreigners exercise control over
PLDT. Such amount of control unmistakably exceeds the allowable 40
percent limit on foreign ownership of public utilities expressly mandated in
Section 11, Article XII of the Constitution.
Moreover, the Dividend Declarations of PLDT for 2009, 57 as submitted to
the SEC, shows that per share the SIP58 preferred shares earn a pittance in
dividends compared to the common shares. PLDT declared dividends for
the common shares at P70.00 per share, while the declared dividends for the
preferred shares amounted to a measly P1.00 per share.59 So the preferred
shares not only cannot vote in the election of directors, they also have very
little and obviously negligible dividend earning capacity compared to
common shares.
As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of
PLDT common shares is P5.00 per share, whereas the par value of preferred
shares is P10.00 per share. In other words, preferred shares have twice the
par value of common shares but cannot elect directors and have only 1/70 of
the dividends of common shares. Moreover, 99.44% of the preferred shares
are owned by Filipinos while foreigners own only a minuscule 0.56% of the
preferred shares.61 Worse, preferred shares constitute 77.85% of the
authorized capital stock of PLDT while common shares constitute only
22.15%.62 This undeniably shows that beneficial interest in PLDT is not
with the non-voting preferred shares but with the common shares, blatantly
violating the constitutional requirement of 60 percent Filipino control and
Filipino beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding capital
stock must rest in the hands of Filipinos in accordance with the
constitutional mandate. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the States grant of authority to operate a public
utility. The undisputed fact that the PLDT preferred shares, 99.44% owned
by Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT
common shares earn, grossly violates the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and
earn less than 60 percent of the dividends, of PLDT. This directly
contravenes the express command in Section 11, Article XII of the
Constitution that [n]o franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to
x x xcorporations x x x organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens x x x.
To repeat, (1) foreigners own 64.27% of the common shares of PLDT,
which class of shares exercises the sole right to vote in the election of
directors, and thus exercise control over PLDT; (2) Filipinos own only
35.73% of PLDTs common shares, constituting a minority of the voting
stock, and thus do not exercise control over PLDT; (3) preferred shares,
99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn
only 1/70 of the dividends that common shares earn;63 (5) preferred shares
have twice the par value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of PLDT and common
shares only 22.15%. This kind of ownership and control of a public utility is
a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00
have a current stock market value of P2,328.00 per share,64 while PLDT
preferred shares with a par value of P10.00 per share have a current stock
market value ranging from only P10.92 to P11.06 per share,65 is a glaring
confirmation by the market that control and beneficial ownership of PLDT
rest with the common shares, not with the preferred shares.
Indisputably, construing the term capital in Section 11, Article XII of the
Constitution to include both voting and non-voting shares will result in the
abject surrender of our telecommunications industry to foreigners,
amounting to a clear abdication of the States constitutional duty to limit
control of public utilities to Filipino citizens. Such an interpretation
certainly runs counter to the constitutional provision reserving certain areas
of investment to Filipino citizens, such as the exploitation of natural
resources as well as the ownership of land, educational institutions and
advertising businesses. The Court should never open to foreign control what
the Constitution has expressly reserved to Filipinos for that would be a
betrayal of the Constitution and of the national interest. The Court must
perform its solemn duty to defend and uphold the intent and letter of the
Constitution to ensure, in the words of the Constitution, a self-reliant and
independent national economy effectively controlled by Filipinos.
Section 11, Article XII of the Constitution, like other provisions of the
Constitution expressly reserving to Filipinos specific areas of investment,
such as the development of natural resources and ownership of land,
educational institutions and advertising business, is self-executing. There is
no need for legislation to implement these self-executing provisions of the
Constitution. The rationale why these constitutional provisions are self-
executing was explained in Manila Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is
necessary to enforce a constitutional mandate, the presumption
now is that all provisions of the constitution are self-executing. If
the constitutional provisions are treated as requiring legislation
instead of self-executing, the legislature would have the power to
ignore and practically nullify the mandate of the fundamental law.
This can be cataclysmic. That is why the prevailing view is, as it
has always been, that
. . . in case of doubt, the Constitution should be considered self-
executing rather than non-self-executing. . . . Unless the contrary
is clearly intended, the provisions of the Constitution should be
considered self-executing, as a contrary rule would give the
legislature discretion to determine when, or whether, they shall
be effective. These provisions would be subordinated to the will of
the lawmaking body, which could make them entirely meaningless
by simply refusing to pass the needed implementing statute.
(Emphasis supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then Associate
Justice Reynato S. Puno, later Chief Justice, agreed that constitutional
provisions are presumed to be self-executing. Justice Puno stated:
Courts as a rule consider the provisions of the Constitution as self-
executing, rather than as requiring future legislation for their
enforcement. The reason is not difficult to discern. For if they are
not treated as self-executing, the mandate of the fundamental
law ratified by the sovereign people can be easily ignored and
nullified by Congress. Suffused with wisdom of the ages is the
unyielding rule that legislative actions may give breath to
constitutional rights but congressional inaction should not
suffocate them.
Thus, we have treated as self-executing the provisions in the Bill of
Rights on arrests, searches and seizures, the rights of a person
under custodial investigation, the rights of an accused, and the
privilege against self-incrimination. It is recognized that legislation
is unnecessary to enable courts to effectuate constitutional
provisions guaranteeing the fundamental rights of life, liberty and
the protection of property. The same treatment is accorded to
constitutional provisions forbidding the taking or damaging of
property for public use without just compensation. (Emphasis
supplied)
Thus, in numerous cases,67 this Court, even in the absence of implementing
legislation, applied directly the provisions of the 1935, 1973 and 1987
Constitutions limiting land ownership to Filipinos. In Soriano
v. Ong Hoo,68 this Court ruled:
x x x As the Constitution is silent as to the effects or consequences
of a sale by a citizen of his land to an alien, and as both the citizen
and the alien have violated the law, none of them should have a
recourse against the other, and it should only be the State that
should be allowed to intervene and determine what is to be done
with the property subject of the violation. We have said that what
the State should do or could do in such matters is a matter of public
policy, entirely beyond the scope of judicial authority. (Dinglasan,
et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27,
1956.) While the legislature has not definitely decided what
policy should be followed in cases of violations against the
constitutional prohibition, courts of justice cannot go beyond
by declaring the disposition to be null and void as violative of
the Constitution. x x x (Emphasis supplied)
To treat Section 11, Article XII of the Constitution as not self-executing
would mean that since the 1935 Constitution, or over the last 75 years, not
one of the constitutional provisions expressly reserving specific areas of
investments to corporations, at least 60 percent of the capital of which is
owned by Filipinos, was enforceable. In short, the framers of the 1935,
1973 and 1987 Constitutions miserably failed to effectively reserve to
Filipinos specific areas of investment, like the operation by corporations of
public utilities, the exploitation by corporations of mineral resources, the
ownership by corporations of real estate, and the ownership of educational
institutions. All the legislatures that convened since 1935 also miserably
failed to enact legislations to implement these vital constitutional provisions
that determine who will effectively control the national economy, Filipinos
or foreigners. This Court cannot allow such an absurd interpretation of the
Constitution.
This Court has held that the SEC has both regulatory and adjudicative
functions.69 Under its regulatory functions, the SEC can be compelled by
mandamus to perform its statutory duty when it unlawfully neglects to
perform the same. Under its adjudicative or quasi-judicial functions, the
SEC can be also be compelled by mandamus to hear and decide a possible
violation of any law it administers or enforces when it is mandated by law
to investigate such violation.
Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory
function to reject or disapprove the Articles of Incorporation of any
corporation where the required percentage of ownership of the capital
stock to be owned by citizens of the Philippines has not been complied
with as required by existing laws or the Constitution. Thus, the SEC is
the government agency tasked with the statutory duty to enforce the
nationality requirement prescribed in Section 11, Article XII of the
Constitution on the ownership of public utilities. This Court, in a petition
for declaratory relief that is treated as a petition for mandamus as in the
present case, can direct the SEC to perform its statutory duty under the law,
a duty that the SEC has apparently unlawfully neglected to do based on the
2010 GIS that respondent PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code, 71 the SEC is vested
with the power and function to suspend or revoke, after proper notice
and hearing, the franchise or certificate of registration of corporations,
partnerships or associations, upon any of the grounds provided by
law. The SEC is mandated under Section 5(d) of the same Code with the
power and function to investigate x x x the activities of persons to ensure
compliance with the laws and regulations that SEC administers or enforces.
The GIS that all corporations are required to submit to SEC annually should
put the SEC on guard against violations of the nationality requirement
prescribed in the Constitution and existing laws. This Court can compel the
SEC, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, to hear and decide a possible violation of
Section 11, Article XII of the Constitution in view of the ownership
structure of PLDTs voting shares, as admitted by respondents and as stated
in PLDTs 2010 GIS that PLDT submitted to SEC.
WHEREFORE, we PARTLY GRANT the petition and rule that the term
capital in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital
stock (common and non-voting preferred shares). Respondent Chairperson
of the Securities and Exchange Commission is DIRECTED to apply this
definition of the term capital in determining the extent of allowable foreign
ownership in respondent Philippine Long Distance Telephone Company,
and if there is a violation of Section 11, Article XII of the Constitution, to
impose the appropriate sanctions under the law.
SO ORDERED.
March 19, 2014
G.R. No. 177493
ERIC GODFREY STANLEY LIVESEY, Petitioner,
vs.
BINSWANGER PHILIPPINES, INC. and KEITH
ELLIOT, Respondent.
DECISION
BRION, J.:
We resolve this petition for review on certiorari1 assailing the
decision2 dated August 18, 2006 and the resolution3dated March 29,
2007 of the Court of Appeals (CA) in CA-G.R. SP No. 94461.
The Antecedents
In December 2001, petitioner Eric Godfrey Stanley Livesey filed a
complaint for illegal dismissal with money claims4against CBB
Philippines Strategic Property Services, Inc. (CBB) and Paul Dwyer.
CBB was a domestic corporation engaged in real estate brokerage
and Dwyer was its President.
Designated as Acting Member in lieu of Associate Justice Estela M.
Perlas-Bernabe, per Special Order No. 1650 dated March 13, 2014.
Livesey alleged that on April 12, 2001, CBB hired him as Director
and Head of Business Space Development, with a monthly salary of
US$5,000.00; shareholdings in CBB’s offshore parent company; and
other benefits. In August 2001, he was appointed as Managing
Director and his salary was increased to US$16,000.00 a month.
Allegedly, despite the several deals for CBB he drew up, CBB failed
to pay him a significant portion of his salary. For this reason, he was
compelled to resign on December 18, 2001. He claimed CBB owed
him US$23,000.00 in unpaid salaries.
CBB denied liability. It alleged that it engaged Livesey as a corporate
officer in April 2001: he was elected Vice-President (with a salary of
P75,000.00/month), and thereafter, he became President (at
P1,200,000.00/year). It claimed that Livesey was later designated as
Managing Director when it became an extension office of its principal
in Hongkong.5
On December 17, 2001, Livesey demanded that CBB pay him
US$25,000.00 in unpaid salaries and, at the same time, tendered his
resignation. CBB posited that the labor arbiter (LA) had no
jurisdiction as the complaint involved an intra-corporate dispute.
In his decision dated September 20, 2002,6 LA Jaime M. Reyno
found that Livesey had been illegally dismissed. LA Reyno ordered
CBB to reinstate Livesey to his former position as Managing Director
and to pay him US$23,000.00 in accrued salaries (from July to
December 2001), and US$5,000.00 a month in back salaries from
January 2002 until reinstatement; and 10% of the total award as
attorney’s fees.
Thereafter, the parties entered into a compromise agreement7 which
LA Reyno approved in an order dated November 6, 2002.8 Under the
agreement, Livesey was to receive US$31,000.00 in full satisfaction
of LA Reyno’s decision, broken down into US$13,000.00 to be paid
by CBB to Livesey or his authorized representative upon the signing
of the agreement; US$9,000.00 on or before June 30, 2003; and
US$9,000.00 on or before September 30, 2003. Further, the
agreement provided that unless and until the agreement is fully
satisfied, CBB shall not: (1) sell, alienate, or otherwise dispose of all
or substantially all of its assets or business; (2) suspend,
discontinue, or cease its entire, or a substantial portion of its
business operations; (3) substantially change the nature of its
business; and (4) declare bankruptcy or insolvency.
CBB paid Livesey the initial amount of US$13,000.00, but not the
next two installments as the company ceased operations. In reaction,
Livesey moved for the issuance of a writ of execution. LA Eduardo
G. Magno granted the writ,9 but it was not enforced. Livesey then
filed a motion for the issuance of an alias writ of execution,10 alleging
that in the process of serving respondents the writ, he learned "that
respondents, in a clear and willful attempt to avoid their liabilities to
complainant x x x have organized another corporation, [Binswanger]
Philippines, Inc."11 He claimed that there was evidence showing that
CBB and Binswanger Philippines, Inc. (Binswanger) are one and the
same corporation, pointing out that CBB stands for Chesterton
Blumenauer Binswanger.12 Invoking the doctrine of piercing the veil
of corporate fiction, Livesey prayed that an alias writ of execution be
issued against respondents Binswanger and Keith Elliot, CBB’s
former President, and now Binswanger’s President and Chief
Executive Officer (CEO).
The Compulsory Arbitration Rulings
In an order13 dated March 22, 2004, LA Catalino R. Laderas denied
Livesey’s motion for an alias writ of execution, holding that the
doctrine of piercing the corporate veil was inapplicable in the case.
He explained that the stockholders of the two corporations were not
the same. Further, LA Laderas stressed that LA Reyno’s decision
had already become final and could no longer be altered or modified
to include additional respondents.
Livesey filed an appeal which the National Labor Relations
Commission (NLRC) granted in its decision14 dated September 7,
2005. It reversed LA Laderas’ March 22, 2004 order and declared
the respondents jointly and severally liable with CBB for LA Reyno’s
decision15 of September 20, 2002 in favor of Livesey. The
respondents moved for reconsideration, filed by an Atty. Genaro S.
Jacosalem,16 not by their counsel of record at the time, Corporate
Counsels Philippines, Law Offices. The NLRC denied the motion in
its resolution of January 6, 2006.17The respondents then sought
relief from the CA through a petition for certiorari under Rule 65 of
the Rules of Court.
The respondents charged the NLRC with grave abuse of discretion
for holding them liable to Livesey and in exercising jurisdiction over
an intra-corporate dispute. They maintained that Binswanger is a
separate and distinct corporation from CBB and that Elliot signed the
compromise agreement in CBB’s behalf, not in his personal capacity.
It was error for the NLRC, they argued, when it applied the doctrine
of piercing the veil of corporate fiction to the case, despite the
absence of clear evidence in that respect.
For his part, Livesey contended that the petition should be dismissed
outright for being filed out of time. He claimed that the respondents’
counsel of record received a copy of the NLRC resolution denying
their motion for reconsideration as early as January 19, 2006, yet the
petition was filed only on May 15, 2006. He insisted that in any
event, there was ample evidence supporting the application of the
doctrine of piercing the veil of corporate fiction to the case.
The CA Decision
The CA granted the petition,18 reversed the NLRC decision19 of
September 7, 2005 and reinstated LA Laderas’ order20 of March 22,
2004. The CA found untenable Livesey’s contention that the petition
for certiorari was filed out of time, stressing that while there was no
valid substitution or withdrawal of the respondents’ former counsel,
the NLRC impliedly recognized Atty. Jacosalem as their new counsel
when it resolved the motion for reconsideration which he filed.
On the merits of the case, the CA disagreed with the NLRC finding
that the respondents are jointly and severally liable with CBB in the
case. It emphasized that the mere fact that Binswanger and CBB
have the same President is not in itself sufficient to pierce the veil of
corporate fiction of the two entities, and that although Elliot was
formerly CBB’s President, this circumstance alone does not make
him answerable for CBB’s liabilities, there being no proof that he was
motivated by malice or bad faith when he signed the compromise
agreement in CBB’s behalf; neither was there proof that Binswanger
was formed, or that it was operated, for the purpose of shielding
fraudulent or illegal activities of its officers or stockholders or that the
corporate veil was used to conceal fraud, illegality or inequity at the
expense of third persons like Livesey.
Livesey moved for reconsideration, but the CA denied the motion in
its resolution dated March 29, 2007.21 Hence, the present petition.
The Petition
Livesey prays for a reversal of the CA rulings on the basis of the
following arguments:
1. The CA erred in not denying the respondents’ petition for certiorari
dated May 12, 2006 for being filed out of time.
Livesey assails the CA’s reliance on the Court’s pronouncement in
Rinconada Telephone Co., Inc. v. Hon. Buenviaje22 to justify its ruling
that the receipt on March 17, 2006 by Atty. Jacosalem of the NLRC’s
denial of the respondents’ motion for reconsideration was the
reckoning date for the filing of the petition for certiorari, not the
receipt of a copy of the same resolution on January 19, 2006 by the
respondents’ counsel of record, the Corporate Counsels Philippines,
Law Offices. The cited Court’s pronouncement reads:
In view of respondent judge’s recognition of Atty. Santos as new
counsel for petitioner without even a valid substitution or withdrawal
of petitioner’s former counsel, said new counsel logically awaited for
service to him of any action taken on his motion for reconsideration.
Respondent judge’s sudden change of posture in insisting that Atty.
Maggay is the counsel of record is, therefore, a whimsical and
capricious exercise of discretion that prevented petitioner and Atty.
Santos from taking a timely appeal[.]23
With the above citation, Livesey points out, the CA opined that a
copy of the NLRC resolution denying the respondents’ motion for
reconsideration should have been served on Atty. Jacosalem and no
longer on the counsel of record, so that the sixty (60)-day period for
the filing of the petition should be reckoned from March 17, 2006
when Atty. Jacosalem secured a copy of the resolution from the
NLRC (the petition was filed by a Jeffrey Jacosalem on May 15,
2006).24 Livesey submits that the CA’s reliance on Rinconada was
misplaced. He argues that notwithstanding the signing by Atty.
Jacosalem of the motion for reconsideration, it was only proper that
the NLRC served a copy of the resolution on the Corporate Counsels
Philippines, Law Offices as it was still the respondents’ counsel at
the time.25 He adds that Atty. Jacosalem never participated in the
NLRC proceedings because he did not enter his appearance as the
respondents’ counsel before the labor agency; further, he did not
even indicate his office address on the motion for reconsideration he
signed.
2. The CA erred in not applying the doctrine of piercing the veil of
corporate fiction to the case.
Livesey bewails the CA’s refusal to pierce Binswanger’s corporate
veil in his bid to make the company and Elliot liable, together with
CBB, for the judgment award to him. He insists that CBB and
Binswanger are one and the same corporation as shown by the
"overwhelming evidence" he presented to the LA, the NLRC and the
CA, as follows:
a.CBB stands for "Chesterton Blumenauer Binswanger."26
 b.After executing the compromise agreement with him,
through Elliot, CBB ceased operations following a
transaction where a substantial amount of CBB shares
changed hands. Almost simultaneously with CBB’s closing
(in July 2003), Binswanger was established with its
headquarters set up beside CBB’s office at Unit 501, 5/F
Peninsula Court Building in Makati City. 27
c.Key CBB officers and employees moved to Binswanger led
by Elliot, former CBB President who became Binswanger’s
President and CEO; Ferdie Catral, former CBB Director and
Head of Operations; Evangeline Agcaoili and Janet Pei.
d.Summons served on Binswanger in an earlier labor case
was received by Binswanger using CBB’s receiving stamp.28
e.A Leslie Young received on August 23, 2003 an online
query on whether CBB was the same as Blumaneuver
Binswanger (BB). Signing as Web Editor, Binswanger/CBB,
Young replied via e-mail:29
We are known as either CBB (Chesterton Blumenauer Binswanger)
or as Chesterton Petty Ltd. in the Philippines. Contact info for our
office in Manila is as follows:
Manila Philippines
CBB Philippines Unit 509, 5th Floor
Peninsula Court, Paseo de Roxas corner Makati Avenue
1226 Makati City Philippines Contact: Keith Elliot
f. In a letter dated August 21, 2003,30 Elliot noted a Binswanger bid
solicitation for a project with the Philippine National Bank (PNB)
which
was actually a CBB project as shown by a CBB draft proposal to
PNB dated January 24, 2003.31
g.The affidavit32 dated October 1, 2003 of Hazel de Guzman, another
former CBB employee who also filed an illegal dismissal case
against the company, attested to the existence of Livesey’s
documentary evidence in his own case and who deposed that at one
time, Elliot told her of CBB’s plan to close the corporation and to
organize another for the purpose of evading CBB’s liabilities.
h.The findings33 of facts of LA Veneranda C. Guerrero who ruled in
De Guzman’s favor that bolstered his own evidence in the present
case.
3. The CA erred in not holding Elliot liable for the judgment award.
Livesey questions the CA’s reliance on Laperal Development
Corporation v. Court of Appeals,34 Sunio, et al. v. NLRC, et al.,35 and
Palay, Inc., et al. v. Clave, etc., et al.,36 in support of its ruling that
Elliot is not liable to him for the LA’s award. He argues that in these
cases, the Court upheld the separate personalities of the
corporations and their officers/employees because there was no
evidence that the individuals sought to be held liable were in bad
faith or that there were badges of fraud in their actions against the
aggrieved party or parties in said cases. He reiterates his submission
to the CA that the circumstances of the present case are different
from those of the cited cases. He posits that the closure of CBB and
its immediate replacement by Binswanger could not have been
possible without Elliot’s guiding hand, such that when CBB ceased
operations, Elliot (CBB’s President and CEO) moved to Binswanger
in the same position. More importantly, Livesey points out, as
signatory for CBB in the compromise agreement between him
(Livesey) and CBB, Elliot knew that it had not been and would never
be fully satisfied.
Livesey thus laments Elliot’s devious scheme of leaving him an
unsatisfied award, stressing that Elliot was the chief orchestrator of
CBB and Binswanger’s fraudulent act of evading the full satisfaction
of the compromise agreement. In this light, he submits that the
Court’s ruling in
A.C. Ransom Labor Union-CCLU v. NLRC,37 which deals with the
issue of who is liable for the worker’s backwages when a corporation
ceases operations, should apply to his situation.
The Respondents’Position
Through their comment38 and memorandum,39 the respondents pray
that the petition be denied for the following reasons:
1. The NLRC had no jurisdiction over the dispute between Livesey
and CBB/Dwyer as it involved an intra-corporate controversy; under
Republic Act No. 8799, the Regional Trial Court exercises jurisdiction
over the case.
As shown by the records, Livesey was appointed as CBB’s
Managing Director during the relevant period and was also a
shareholder, making him a corporate officer.
2.There was no employer-employee relationship between Livesey
and Binswanger. Under Article 217 of the Labor Code, the labor
arbiters and the NLRC have jurisdiction only over disputes where
there is an employer- employee relationship between the parties.
3.The NLRC erred in applying the doctrine of piercing the veil of
corporate fiction to the case based only on mere assumptions. Point
by point, they take exception to Livesey’s submissions as follows:
a.The e-mail statement in reply to an online query of Young
(CBB’s Web Editor) that CBB is known as Chesterton
Blumenauer Binswanger or Chesterton Petty. Ltd. to
establish a connection between CBB and Binswanger is
inconclusive as there was no mention in the statement of
Binswanger Philippines, Inc.
b.The affidavit of De Guzman, former CBB Associate
Director, who also resigned from the company like Livesey,
has no probative value as it was self-serving and contained
only misrepresentation of facts, conjectures and surmises.
c.When Binswanger was organized and incorporated, CBB
had already been abandoned by its Board of Directors and
no longer subsidized by CBB-Hongkong; it had no business
operations to work with.
d.The mere transfer of Elliot and Catral from CBB to
Binswanger is not a ground to pierce the corporate veil in the
present case absent a clear evidence supporting the
application of the doctrine. The NLRC applied the doctrine
on the basis only of LA Guerrero’s decision in the De
Guzman case.
e.The respondents’ petition for certiorari was filed on time.
Atty. Jacosalem, who was presumed to have been engaged
as the respondents’ counsel, was deemed to have received
a copy of the NLRC resolution (denying the motion for
reconsideration) on March 17, 2006 when he requested and
secured a copy from the NLRC. The petition was filed on
May 15, 2006 or fifty-nine (59)days from March 17, 2006.
Atty. Jacosalem may have failed to indicate his address on
the motion for reconsideration he filed but that is not a
reason for him to be deprived of the notices and processes
of the case.
The Court’s Ruling
The procedural question
The respondents’ petition for certiorari before the CA was filed out of
time. The sixty (60)-day filing period under Rule 65 of the Rules of
Court should have been counted from January 19, 2006, the date of
receipt of a copy of the NLRC resolution denying the respondents’
motion for reconsideration by the Corporate Counsels Philippines,
Law Offices which was the respondents’ counsel of record at the
time. The respondents cannot insist that Atty. Jacosalem’s receipt of
a copy of the resolution on March 17, 2006 as the reckoning date for
the filing of the petition as we shall discuss below.
The CA chided the NLRC for serving a copy of the resolution on the
Corporate Counsels Philippines, Law Offices, instead of on Atty.
Jacosalem as it believed that the labor tribunal impliedly recognized
Atty. Jacosalem as the respondents’ counsel when it acted on the
motion for reconsideration that he signed. As we see it, the fault was
not on the NLRC but on Atty. Jacosalem himself as he left no
forwarding address with the NLRC, a serious lapse that even he
admitted.40 This is a matter that cannot just be taken for granted as it
betrays a careless legal representation that can cause adverse
consequences to the other party.
To our mind, Atty. Jacosalem’s non-observance of a simple, but
basic requirement in the practice of law lends credence to Livesey’s
claim that the lawyer did not formally enter his appearance before
the NLRC as the respondents’ new counsel; if it had been otherwise,
he would have supplied his office address to the NLRC. Also, had he
exercised due diligence in the performance of his duty as counsel,
he could have inquired earlier with the NLRC and should not have
waited as late as March 17, 2006 about the outcome of the
respondents’ motion for reconsideration which was filed as early as
October 28, 2005.
To reiterate, the filing of the respondents’ petition for certiorari should
have been reckoned from January 19, 2006 when a copy of the
subject NLRC resolution was received by the Corporate Counsels
Philippines, Law Offices, which, as of that date, had not been
discharged or had withdrawn and therefore remained to be the
respondents’ counsel of record. Clearly, the petition for certiorari was
filed out of time. Section 6(a), Rule III of the NLRC Revised Rules of
Procedure provides that "[f]or purposes of appeal, the period shall be
counted from receipt of such decisions, resolutions, or orders by the
counsel or representative of record."
We now come to the issue of whether the NLRC had jurisdiction over
the controversy between Livesey and CBB/Dwyer on the ground that
it involved an intra-corporate dispute.
Based on the facts of the case, we find this issue to have been
rendered academic by the compromise agreement between Livesey
and CBB and approved by LA Reyno.41 That CBB reneged in the
fulfillment of its obligation under the agreement is no reason to revive
the issue and further frustrate the full settlement of the obligation as
agreed upon.
The substantive aspect of the case
Even if we rule that the respondents’ appeal before the CA had been
filed on time, we believe and so hold that the appellate court
committed a reversible error of judgment in its challenged decision.
The NLRC committed no grave abuse of discretion in reversing LA
Laderas’ ruling as there is substantial evidence in the records that
Livesey was prevented from fully receiving his monetary entitlements
under the compromise agreement between him and CBB, with Elliot
signing for CBB as its President and CEO. Substantial evidence is
more than a scintilla; it means such relevant evidence as a
reasonable mind might accept as adequate to support a
conclusion.42
Shortly after Elliot forged the compromise agreement with Livesey,
CBB ceased operations, a corporate event that was not disputed by
the respondents. Then Binswanger suddenly appeared. It was
established almost simultaneously with CBB’s closure, with no less
than Elliot as its President and CEO. Through the confluence of
events surrounding CBB’s closure and Binswanger’s sudden
emergence, a reasonable mind would arrive at the conclusion that
Binswanger is CBB’s alter ego or that CBB and Binswanger are one
and the same corporation. There are also indications of badges of
fraud in Binswanger’s incorporation. It was a business strategy to
evade CBB’s financial liabilities, including its outstanding obligation
to Livesey.
The respondents impugned the probative value of Livesey’s
documentary evidence and insist that the NLRC erred in applying the
doctrine of piercing the veil of corporate fiction in the case to avoid
liability. They consider the NLRC conclusions as mere assumptions.
We disagree.
It has long been settled that the law vests a corporation with a
personality distinct and separate from its stockholders or members.
In the same vein, a corporation, by legal fiction and convenience, is
an entity shielded by a protective mantle and imbued by law with a
character alien to the persons comprising it.43 Nonetheless, the
shield is not at all times impenetrable and cannot be extended to a
point beyond its reason and policy. Circumstances might deny a
claim for corporate personality, under the "doctrine of piercing the
veil of corporate fiction."
Piercing the veil of corporate fiction is an equitable doctrine
developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful
purposes.44 Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-legitimate
purposes, such as to evade a just and due obligation, or to justify a
wrong, to shield or perpetrate fraud or to carry out similar or
inequitable considerations, other unjustifiable aims or intentions,45 in
which case, the fiction will be disregarded and the individuals
composing it and the two corporations will be treated as identical. 46
In the present case, we see an indubitable link between CBB’s
closure and Binswanger’s incorporation. CBB ceased to exist only in
name; it re-emerged in the person of Binswanger for an urgent
purpose
— to avoid payment by CBB of the last two installments of its
monetary obligation to Livesey, as well as its other financial liabilities.
Freed of CBB’s liabilities, especially that owing to Livesey,
Binswanger can continue, as it did continue, CBB’s real estate
brokerage business.
Livesey’s evidence, whose existence the respondents never denied,
converged to show this continuity of business operations from CBB
to Binswanger.1âwphi1 It was not just coincidence that Binswanger
is engaged in the same line of business CBB embarked on: (1) it
even holds office in the very same building and on the very same
floor where CBB once stood; (2) CBB’s key officers, Elliot, no less,
and Catral moved over to Binswanger, performing the tasks they
were doing at CBB; (3) notwithstanding CBB’s closure, Binswanger’s
Web Editor (Young), in an e-mail correspondence, supplied the
information that Binswanger is "now known" as either CBB
(Chesterton Blumenauer Binswanger or as Chesterton Petty, Ltd., in
the Philippines; (4) the use of Binswanger of CBB’s paraphernalia
(receiving stamp) in connection with a labor case where Binswanger
was summoned by the authorities, although Elliot claimed that he
bought the item with his own money; and (5) Binswanger’s takeover
of CBB’s project with the PNB.
While the ostensible reason for Binswanger’s establishment is to
continue CBB’s business operations in the Philippines, which by
itself is not illegal, the close proximity between CBB’s
disestablishment and Binswanger’s coming into existence points to
an unstated but urgent consideration which, as we earlier noted, was
to evade CBB’s unfulfilled financial obligation to Livesey under the
compromise agreement.47
This underhanded objective, it must be stressed, can only be
attributed to Elliot as it was apparent that Binswanger’s stockholders
had nothing to do with Binswanger’s operations as noted by the
NLRC and which the respondents did not deny. 48 Elliot was well
aware of the compromise agreement between Livesey and CBB, as
he "agreed and accepted" the terms of the agreement49 for CBB. He
was also well aware that the last two installments of CBB’s obligation
to Livesey were due on June 30, 2003 and September 30, 2003.
These installments were not met and the reason is that after the
alleged sale of the majority of CBB’s shares of stock, it closed down.
With CBB’s closure, Livesey asked why people would buy into a
corporation and simply close it down immediately thereafter?50 The
answer
— to pave the way for CBB’s reappearance as Binswanger. Elliot’s
"guiding hand," as Livesey puts it, is very much evident in CBB’s
demise and Binswanger’s creation. Elliot knew that CBB had not fully
complied with its financial obligation under the compromise
agreement. He made sure that it would not be fulfilled when he
allowed CBB's closure, despite the condition in the agreement that
"unless and until the Compromise Amount has been fully settled and
paid by the Company in favor of Mr. Livesey, the Company shall not
x x x suspend, discontinue, or cease its entire or a substantial portion
of its business operations[.]"51
What happened to CBB, we believe, supports Livesey's assertion
that De Guzman, CBB's former Associate Director, informed him that
at one time Elliot told her of CBB 's plan to close the corporation and
organize another for the purpose of evading CBB 's liabilities to
Livesey and its other financial liabilities.52 This wrongful intent we
cannot and must not condone, for it will give a premium to an
iniquitous business strategy where a corporation is formed or used
for a non-legitimate purpose, such as to evade a just and due
obligation.53 We, therefore, find Elliot as liable as Binswanger for
CBB 's unfulfilled obligation to Livesey.
WHEREFORE, premises considered, we hereby GRANT the
petition. The decision dated August 18, 2006 and the Resolution
dated March 29, 2007 of the Court of Appeals are SET ASIDE.
Binswanger Philippines, Inc. and Keith Elliot (its President and CEO)
are declared jointly and severally liable for the second and third
installments of CBB 's liability to Eric Godfrey Stanley Livesey under
the compromise agreement dated October 14, 2002. Let the case
record be remanded to the National Labor Relations Commission for
execution of this Decision.
Costs against the respondents.
SO ORDERED.
G.R. No. 195580 April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP.,
TESORO MINING AND DEVELOPMENT, INC., and
MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule
45 filed by Narra Nickel and Mining Development Corp. (Narra),
Tesoro Mining and Development, Inc. (Tesoro), and McArthur
Mining Inc. (McArthur), which seeks to reverse the October 1,
2010 Decision1 and the February 15, 2011 Resolution of the
Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated
Mines Corp. (Redmont), a domestic corporation organized and
existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring
with the Department of Environment and Natural Resources
(DENR), it learned that the areas where it wanted to undertake
exploration and mining activities where already covered by
Mineral Production Sharing Agreement (MPSA) applications of
petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara
Marie Mining, Inc. (SMMI), filed an application for an MPSA and
Exploration Permit (EP) with the Mines and Geo-Sciences Bureau
(MGB), Region IV-B, Office of the Department of Environment
and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering
an area of over 1,782 hectares in Barangay Sumbiling,
Municipality of Bataraza, Province of Palawan and EPA-IVB-44
which includes an area of 3,720 hectares in Barangay Malatagao,
Bataraza, Palawan. The MPSA and EP were then transferred to
Madridejos Mining Corporation (MMC) and, on November 6,
2006, assigned to petitioner McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources and
Development Corporation and Patricia Louise Mining &
Development Corporation (PLMDC) which previously filed an
application for an MPSA with the MGB, Region IV-B, DENR on
January 6, 1992. Through the said application, the DENR issued
MPSA-IV-1-12 covering an area of 3.277 hectares in barangays
Calategas and San Isidro, Municipality of Narra, Palawan.
Subsequently, PLMDC conveyed, transferred and/or assigned its
rights and interests over the MPSA application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR
Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-
47) over 3,402 hectares in Barangays Malinao and Princesa
Urduja, Municipality of Narra, Province of Palawan. SMMI
subsequently conveyed, transferred and assigned its rights and
interest over the said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators
(POA) of the DENR three (3) separate petitions for the denial of
petitioners’ applications for MPSA designated as AMA-IVB-153,
AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital
stock of McArthur, Tesoro and Narra are owned and controlled by
MBMI Resources, Inc. (MBMI), a 100% Canadian corporation.
Redmont reasoned that since MBMI is a considerable stockholder
of petitioners, it was the driving force behind petitioners’ filing of
the MPSAs over the areas covered by applications since it knows
that it can only participate in mining activities through
corporations which are deemed Filipino citizens. Redmont argued
that given that petitioners’ capital stocks were mostly owned by
MBMI, they were likewise disqualified from engaging in mining
activities through MPSAs, which are reserved only for Filipino
citizens.
In their Answers, petitioners averred that they were qualified
persons under Section 3(aq) of Republic Act No. (RA) 7942 or the
Philippine Mining Act of 1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this
Act, the following terms, whether in singular or plural, shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with
capacity to contract, or a corporation, partnership, association, or
cooperative organized or authorized for the purpose of engaging
in mining, with technical and financial capability to undertake
mineral resources development and duly registered in
accordance with law at least sixty per cent (60%) of the capital of
which is owned by citizens of the Philippines: Provided, That a
legally organized foreign-owned corporation shall be deemed a
qualified person for purposes of granting an exploration permit,
financial or technical assistance agreement or mineral processing
permit.
Additionally, they stated that their nationality as applicants is
immaterial because they also applied for Financial or Technical
Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for
McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra,
which are granted to foreign-owned corporations. Nevertheless,
they claimed that the issue on nationality should not be raised
since McArthur, Tesoro and Narra are in fact Philippine Nationals
as 60% of their capital is owned by citizens of the Philippines.
They asserted that though MBMI owns 40% of the shares of
PLMC (which owns 5,997 shares of Narra),3 40% of the shares of
MMC (which owns 5,997 shares of McArthur)4 and 40% of the
shares of SLMC (which, in turn, owns 5,997 shares of
Tesoro),5 the shares of MBMI will not make it the owner of at least
60% of the capital stock of each of petitioners. They added that
the best tool used in determining the nationality of a corporation is
the "control test," embodied in Sec. 3 of RA 7042 or the Foreign
Investments Act of 1991. They also claimed that the POA of
DENR did not have jurisdiction over the issues in Redmont’s
petition since they are not enumerated in Sec. 77 of RA 7942.
Finally, they stressed that Redmont has no personality to sue
them because it has no pending claim or application over the
areas applied for by petitioners.
On December 14, 2007, the POA issued a Resolution
disqualifying petitioners from gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified
applicants to engage in mining activities. On the other hand,
[Redmont] having filed its own applications for an EPA over the
areas earlier covered by the MPSA application of respondents
may be considered if and when they are qualified under the law.
The violation of the requirements for the issuance and/or grant of
permits over mining areas is clearly established thus, there is
reason to believe that the cancellation and/or revocation of
permits already issued under the premises is in order and open
the areas covered to other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents,
McArthur Mining Inc., Tesoro Mining and Development, Inc., and
Narra Nickel Mining and Development Corp. as, DISQUALIFIED
for being considered as Foreign Corporations. Their Mineral
Production Sharing Agreement (MPSA) are hereby x x x
DECLARED NULL AND VOID.6
The POA considered petitioners as foreign corporations being
"effectively controlled" by MBMI, a 100% Canadian company and
declared their MPSAs null and void. In the same Resolution, it
gave due course to Redmont’s EPAs. Thereafter, on February 7,
2008, the POA issued an Order7 denying the Motion for
Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and
Tesoro filed a joint Notice of Appeal8 and Memorandum of
Appeal9 with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal10 and Memorandum of
Appeal.11
In their respective memorandum, petitioners emphasized that
they are qualified persons under the law. Also, through a letter,
they informed the MAB that they had their individual MPSA
applications converted to FTAAs. McArthur’s FTAA was
denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s
MPSA application was converted to AFTA-IVB-0813 on May 28,
2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on
March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the
MAB, Redmont filed a Complaint15 with the Securities and
Exchange Commission (SEC), seeking the revocation of the
certificates for registration of petitioners on the ground that they
are foreign-owned or controlled corporations engaged in mining in
violation of Philippine laws. Thereafter, Redmont filed on
September 1, 2008 a Manifestation and Motion to Suspend
Proceeding before the MAB praying for the suspension of the
proceedings on the appeals filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the
Regional Trial Court of Quezon City, Branch 92 (RTC) a
Complaint16 for injunction with application for issuance of a
temporary restraining order (TRO) and/or writ of preliminary
injunction, docketed as Civil Case No. 08-63379. Redmont
prayed for the deferral of the MAB proceedings pending the
resolution of the Complaint before the SEC.
But before the RTC can resolve Redmont’s Complaint and
applications for injunctive reliefs, the MAB issued an Order on
September 10, 2008, finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication
Board hereby REVERSES and SETS ASIDE the Resolution
dated 14 December 2007 of the Panel of Arbitrators of Region IV-
B (MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and
2007-03, and its Order dated 07 February 2008 denying the
Motions for Reconsideration of the Appellants. The Petition filed
by Redmont Consolidated Mines Corporation on 02 January 2007
is hereby ordered DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an
Order18 granting Redmont’s application for a TRO and setting the
case for hearing the prayer for the issuance of a writ of
preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for
Reconsideration19 of the September 10, 2008 Order of the MAB.
Subsequently, it filed a Supplemental Motion for
Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmont’s Motion for
Reconsideration and Supplemental Motion for Reconsideration,
Redmont filed before the RTC a Supplemental Complaint21 in Civil
Case No. 08-63379.
On October 6, 2008, the RTC issued an Order22 granting the
issuance of a writ of preliminary injunction enjoining the MAB
from finally disposing of the appeals of petitioners and from
resolving Redmont’s Motion for Reconsideration and Supplement
Motion for Reconsideration of the MAB’s September 10, 2008
Resolution.
On July 1, 2009, however, the MAB issued a second Order
denying Redmont’s Motion for Reconsideration and Supplemental
Motion for Reconsideration and resolving the appeals filed by
petitioners.
Hence, the petition for review filed by Redmont before the CA,
assailing the Orders issued by the MAB. On October 1, 2010, the
CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The
assailed Orders, dated September 10, 2008 and July 1, 2009 of
the Mining Adjudication Board are reversed and set aside. The
findings of the Panel of Arbitrators of the Department of
Environment and Natural Resources that respondents McArthur,
Tesoro and Narra are foreign corporations is upheld and,
therefore, the rejection of their applications for Mineral Product
Sharing Agreement should be recommended to the Secretary of
the DENR.
With respect to the applications of respondents McArthur, Tesoro
and Narra for Financial or Technical Assistance Agreement
(FTAA) or conversion of their MPSA applications to FTAA, the
matter for its rejection or approval is left for determination by the
Secretary of the DENR and the President of the Republic of the
Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the
Motion for Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there was
doubt as to the nationality of petitioners when it realized that
petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of
paragraph 7 of Department of Justice (DOJ) Opinion No. 020,
Series of 2005, adopting the 1967 SEC Rules which implemented
the requirement of the Constitution and other laws pertaining to
the exploitation of natural resources, the CA used the
"grandfather rule" to determine the nationality of petitioners. It
provided:
Shares belonging to corporations or partnerships at least 60% of
the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality. Thus, if
100,000 shares are registered in the name of a corporation or
partnership at least 60% of the capital stock or capital,
respectively, of which belong to Filipino citizens, all of the shares
shall be recorded as owned by Filipinos. But if less than 60%, or
say, 50% of the capital stock or capital of the corporation or
partnership, respectively, belongs to Filipino citizens, only 50,000
shares shall be recorded as belonging to aliens.24(emphasis
supplied)
In determining the nationality of petitioners, the CA looked into
their corporate structures and their corresponding common
shareholders. Using the grandfather rule, the CA discovered that
MBMI in effect owned majority of the common stocks of the
petitioners as well as at least 60% equity interest of other majority
shareholders of petitioners through joint venture agreements. The
CA found that through a "web of corporate layering, it is clear that
one common controlling investor in all mining corporations
involved x x x is MBMI."25 Thus, it concluded that petitioners
McArthur, Tesoro and Narra are also in partnership with, or
privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA
applications of petitioners into FTAA applications suspicious in
nature and, as a consequence, it recommended the rejection of
petitioners’ MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining
areas, the CA pointed out that the POA has jurisdiction over them
and that it also has the power to determine the of nationality of
petitioners as a prerequisite of the Constitution prior the
conferring of rights to "co-production, joint venture or production-
sharing agreements" of the state to mining rights. However, it
also stated that the POA’s jurisdiction is limited only to the
resolution of the dispute and not on the approval or rejection of
the MPSAs. It stipulated that only the Secretary of the DENR is
vested with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December
14, 2007 Resolution which considered petitioners McArthur,
Tesoro and Narra as foreign corporations. Nevertheless, the CA
determined that the POA’s declaration that the MPSAs of
McArthur, Tesoro and Narra are void is highly improper.
While the petition was pending with the CA, Redmont filed with
the Office of the President (OP) a petition dated May 7, 2010
seeking the cancellation of petitioners’ FTAAs. The OP rendered
a Decision26 on April 6, 2011, wherein it canceled and revoked
petitioners’ FTAAs for violating and circumventing the
"Constitution x x x[,] the Small Scale Mining Law and
Environmental Compliance Certificate as well as Sections 3 and 8
of the Foreign Investment Act and E.O. 584."27 The OP, in
affirming the cancellation of the issued FTAAs, agreed with
Redmont stating that petitioners committed violations against the
abovementioned laws and failed to submit evidence to negate
them. The Decision further quoted the December 14, 2007 Order
of the POA focusing on the alleged misrepresentation and claims
made by petitioners of being domestic or Filipino corporations
and the admitted continued mining operation of PMDC using their
locally secured Small Scale Mining Permit inside the area earlier
applied for an MPSA application which was eventually transferred
to Narra. It also agreed with the POA’s estimation that the filing of
the FTAA applications by petitioners is a clear admission that
they are "not capable of conducting a large scale mining
operation and that they need the financial and technical
assistance of a foreign entity in their operation, that is why they
sought the participation of MBMI Resources, Inc."28 The Decision
further quoted:
The filing of the FTAA application on June 15, 2007, during the
pendency of the case only demonstrate the violations and lack of
qualification of the respondent corporations to engage in mining.
The filing of the FTAA application conversion which is allowed
foreign corporation of the earlier MPSA is an admission that
indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate
documents of MBMI Resources, Inc. furnished its stockholders in
their head office in Canada suggest that they are conducting
operation only through their local counterparts.29
The Motion for Reconsideration of the Decision was further
denied by the OP in a Resolution30 dated July 6, 2011. Petitioners
then filed a Petition for Review on Certiorari of the OP’s Decision
and Resolution with the CA, docketed as CA-G.R. SP No.
120409. In the CA Decision dated February 29, 2012, the CA
affirmed the Decision and Resolution of the OP. Thereafter,
petitioners appealed the same CA decision to this Court which is
now pending with a different division.
Thus, the instant petition for review against the October 1, 2010
Decision of the CA. Petitioners put forth the following errors of the
CA:
I.
The Court of Appeals erred when it did not dismiss the
case for mootness despite the fact that the subject matter
of the controversy, the MPSA Applications, have already
been converted into FTAA applications and that the same
have already been granted.
II.
The Court of Appeals erred when it did not dismiss the
case for lack of jurisdiction considering that the Panel of
Arbitrators has no jurisdiction to determine the nationality
of Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the
case on account of Redmont’s willful forum shopping.
IV.
The Court of Appeals’ ruling that Narra, Tesoro and
McArthur are foreign corporations based on the
"Grandfather Rule" is contrary to law, particularly the
express mandate of the Foreign Investments Act of 1991,
as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the
exceptions to the res inter alios acta rule.
VI.
The Court of Appeals erred when it concluded that the
conversion of the MPSA Applications into FTAA
Applications were of "suspicious nature" as the same is
based on mere conjectures and surmises without any
shred of evidence to show the same.31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the
instant case as moot is without merit.
Basically, a case is said to be moot and/or academic when it
"ceases to present a justiciable controversy by virtue of
supervening events, so that a declaration thereon would be of no
practical use or value."32 Thus, the courts "generally decline
jurisdiction over the case or dismiss it on the ground of
mootness."33
The "mootness" principle, however, does accept certain
exceptions and the mere raising of an issue of "mootness" will not
deter the courts from trying a case when there is a valid reason to
do so. In David v. Macapagal-Arroyo (David), the Court provided
four instances where courts can decide an otherwise moot case,
thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and
paramount public interest is involved;
3.) When constitutional issue raised requires formulation
of controlling principles to guide the bench, the bar, and
the public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant case.
We of this Court note that a grave violation of the Constitution,
specifically Section 2 of Article XII, is being committed by a
foreign corporation right under our country’s nose through a
myriad of corporate layering under different, allegedly, Filipino
corporations. The intricate corporate layering utilized by the
Canadian company, MBMI, is of exceptional character and
involves paramount public interest since it undeniably affects the
exploitation of our Country’s natural resources. The
corresponding actions of petitioners during the lifetime and
existence of the instant case raise questions as what principle is
to be applied to cases with similar issues. No definite ruling on
such principle has been pronounced by the Court; hence, the
disposition of the issues or errors in the instant case will serve as
a guide "to the bench, the bar and the public."35 Finally, the instant
case is capable of repetition yet evading review, since the
Canadian company, MBMI, can keep on utilizing dummy Filipino
corporations through various schemes of corporate layering and
conversion of applications to skirt the constitutional prohibition
against foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error
presented by petitioners since both involve the conversion of
MPSA applications to FTAA applications. Petitioners propound
that the CA erred in ruling against them since the questioned
MPSA applications were already converted into FTAA
applications; thus, the issue on the prohibition relating to MPSA
applications of foreign mining corporations is academic. Also,
petitioners would want us to correct the CA’s finding which
deemed the aforementioned conversions of applications as
suspicious in nature, since it is based on mere conjectures and
surmises and not supported with evidence.
We disagree.
The CA’s analysis of the actions of petitioners after the case was
filed against them by respondent is on point. The changing of
applications by petitioners from one type to another just because
a case was filed against them, in truth, would raise not a few
sceptics’ eyebrows. What is the reason for such conversion? Did
the said conversion not stem from the case challenging their
citizenship and to have the case dismissed against them for being
"moot"? It is quite obvious that it is petitioners’ strategy to have
the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded
to every action done by the court or appropriate government
agency: on January 2, 2007, Redmont filed three separate
petitions for denial of the MPSA applications of petitioners before
the POA. On June 15, 2007, petitioners filed a conversion of their
MPSA applications to FTAAs. The POA, in its December 14,
2007 Resolution, observed this suspect change of applications
while the case was pending before it and held:
The filing of the Financial or Technical Assistance Agreement
application is a clear admission that the respondents are not
capable of conducting a large scale mining operation and that
they need the financial and technical assistance of a foreign entity
in their operation that is why they sought the participation of
MBMI Resources, Inc. The participation of MBMI in the
corporation only proves the fact that it is the Canadian company
that will provide the finances and the resources to operate the
mining areas for the greater benefit and interest of the same and
not the Filipino stockholders who only have a less substantial
financial stake in the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during
the pendency of the case only demonstrate the violations and
lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is
allowed foreign corporation of the earlier MPSA is an admission
that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate
documents of MBMI Resources, Inc. furnished its stockholders in
their head office in Canada suggest that they are conducting
operation only through their local counterparts.36
On October 1, 2010, the CA rendered a Decision which partially
granted the petition, reversing and setting aside the September
10, 2008 and July 1, 2009 Orders of the MAB. In the said
Decision, the CA upheld the findings of the POA of the DENR that
the herein petitioners are in fact foreign corporations thus a
recommendation of the rejection of their MPSA applications were
recommended to the Secretary of the DENR. With respect to the
FTAA applications or conversion of the MPSA applications to
FTAAs, the CA deferred the matter for the determination of the
Secretary of the DENR and the President of the Republic of the
Philippines.37
In their Motion for Reconsideration dated October 26, 2010,
petitioners prayed for the dismissal of the petition asserting that
on April 5, 2010, then President Gloria Macapagal-Arroyo signed
and issued in their favor FTAA No. 05-2010-IVB, which rendered
the petition moot and academic. However, the CA, in a
Resolution dated February 15, 2011 denied their motion for being
a mere "rehash of their claims and defenses."38 Standing firm on
its Decision, the CA affirmed the ruling that petitioners are, in fact,
foreign corporations. On April 5, 2011, petitioners elevated the
case to us via a Petition for Review on Certiorari under Rule 45,
questioning the Decision of the CA. Interestingly, the OP
rendered a Decision dated April 6, 2011, a day after this petition
for review was filed, cancelling and revoking the FTAAs, quoting
the Order of the POA and stating that petitioners are foreign
corporations since they needed the financial strength of MBMI,
Inc. in order to conduct large scale mining operations. The OP
Decision also based the cancellation on the misrepresentation of
facts and the violation of the "Small Scale Mining Law and
Environmental Compliance Certificate as well as Sections 3 and 8
of the Foreign Investment Act and E.O. 584."39 On July 6, 2011,
the OP issued a Resolution, denying the Motion for
Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10, 2011,
made known to the Court the fact of the OP’s Decision and
Resolution. In their Reply, petitioners chose to ignore the OP
Decision and continued to reuse their old arguments claiming that
they were granted FTAAs and, thus, the case was moot.
Petitioners filed a Manifestation and Submission dated October
19, 2012,40 wherein they asserted that the present petition is moot
since, in a remarkable turn of events, MBMI was able to
sell/assign all its shares/interest in the "holding companies" to
DMCI Mining Corporation (DMCI), a Filipino corporation and, in
effect, making their respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have
this case dismissed for being "moot." Their final act, wherein
MBMI was able to allegedly sell/assign all its shares and interest
in the petitioner "holding companies" to DMCI, only proves that
they were in fact not Filipino corporations from the start. The
recent divesting of interest by MBMI will not change the stand of
this Court with respect to the nationality of petitioners prior the
suspicious change in their corporate structures. The new
documents filed by petitioners are factual evidence that this Court
has no power to verify.
The only thing clear and proved in this Court is the fact that the
OP declared that petitioner corporations have violated several
mining laws and made misrepresentations and falsehood in their
applications for FTAA which lead to the revocation of the said
FTAAs, demonstrating that petitioners are not beyond going
against or around the law using shifty actions and strategies.
Thus, in this instance, we can say that their claim of mootness is
moot in itself because their defense of conversion of MPSAs to
FTAAs has been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners’
nationality, whether Filipino or foreign. In their previous petitions,
they had been adamant in insisting that they were Filipino
corporations, until they submitted their Manifestation and
Submission dated October 19, 2012 where they stated the
alleged change of corporate ownership to reflect their Filipino
ownership. Thus, there is a need to determine the nationality of
petitioner corporations.
Basically, there are two acknowledged tests in determining the
nationality of a corporation: the control test and the grandfather
rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the
controlling interests in enterprises engaged in the exploitation of
natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of
the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality. Thus, if
100,000 shares are registered in the name of a corporation or
partnership at least 60% of the capital stock or capital,
respectively, of which belong to Filipino citizens, all of the shares
shall be recorded as owned by Filipinos. But if less than 60%, or
say, 50% of the capital stock or capital of the corporation or
partnership, respectively, belongs to Filipino citizens, only 50,000
shares shall be counted as owned by Filipinos and the other
50,000 shall be recorded as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating
"shares belonging to corporations or partnerships at least 60% of
the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality," pertains to the control
test or the liberal rule. On the other hand, the second part of the
DOJ Opinion which provides, "if the percentage of the Filipino
ownership in the corporation or partnership is less than 60%, only
the number of shares corresponding to such percentage shall be
counted as Philippine nationality," pertains to the stricter, more
stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in
advocating the application of the "control test" under RA 7042, as
amended by RA 8179, otherwise known as the Foreign
Investments Act (FIA), rather than using the stricter grandfather
rule. The pertinent provision under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the
Philippines; or a domestic partnership or association wholly
owned by the citizens of the Philippines; a corporation organized
under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is
wholly owned by Filipinos or a trustee of funds for pension or
other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent (60%) of
the fund will accrue to the benefit of Philippine nationals:
Provided, That were a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stock outstanding and entitled to vote of each
of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the
Board of Directors, in order that the corporation shall be
considered a Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on
in the instant case since the definition of a "Philippine National"
under Sec. 3 of the FIA does not provide for it. They further claim
that the grandfather rule "has been abandoned and is no longer
the applicable rule."41 They also opined that the last portion of
Sec. 3 of the FIA admits the application of a "corporate layering"
scheme of corporations. Petitioners claim that the clear and
unambiguous wordings of the statute preclude the court from
construing it and prevent the court’s use of discretion in applying
the law. They said that the plain, literal meaning of the statute
meant the application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the
FIA; but if it is used to circumvent the Constitution and pertinent
laws, then it becomes illegal. Further, the pronouncement of
petitioners that the grandfather rule has already been abandoned
must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal,
petroleum and other mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be
alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the
State. The State may directly undertake such activities, or it may
enter into co-production, joint venture or production-sharing
agreements with Filipino citizens, or corporations or associations
at least sixty per centum of whose capital is owned by such
citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years,
and under such terms and conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned
corporations involving either technical or financial assistance for
large-scale exploration, development, and utilization of minerals,
petroleum, and other mineral oils according to the general terms
and conditions provided by law, based on real contributions to the
economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of
local scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State
entering into different types of agreements for the exploration,
development, and utilization of natural resources with entities who
are deemed Filipino due to 60 percent ownership of capital is
pertinent to this case, since the issues are centered on the
utilization of our country’s natural resources or specifically,
mining. Thus, there is a need to ascertain the nationality of
petitioners since, as the Constitution so provides, such
agreements are only allowed corporations or associations "at
least 60 percent of such capital is owned by such citizens." The
deliberations in the Records of the 1986 Constitutional
Commission shed light on how a citizenship of a corporation will
be determined:
Mr. BENNAGEN: Did I hear right that the Chairman’s
interpretation of an independent national economy is freedom
from undue foreign control? What is the meaning of undue foreign
control?
MR. VILLEGAS: Undue foreign control is foreign control which
sacrifices national sovereignty and the welfare of the Filipino in
the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the
word "undue"? Why not simply freedom from foreign control? I
think that is the meaning of independence, because as phrased, it
still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation because
if, for example, we retain the 60/40 possibility in the cultivation of
natural resources, 40 percent involves some control; not total
control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose
some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the
phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated
local or Filipino equity and foreign equity; namely, 60-40 in
Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the
question: ‘Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on
the paid-up capital stock of a corporation’? Will the Committee
please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the
members of the team from the UP Law Center who provided us
with a draft. The phrase that is contained here which we adopted
from the UP draft is ‘60 percent of the voting stock.’
MR. NOLLEDO: That must be based on the subscribed capital
stock, because unless declared delinquent, unpaid capital stock
shall be entitled to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests
in another corporation which is permitted by the Corporation
Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the
Constitution to apply the grandfather rule in cases where
corporate layering is present.
Elementary in statutory construction is when there is conflict
between the Constitution and a statute, the Constitution will
prevail. In this instance, specifically pertaining to the provisions
under Art. XII of the Constitution on National Economy and
Patrimony, Sec. 3 of the FIA will have no place of application. As
decreed by the honorable framers of our Constitution, the
grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005
provides:
The above-quoted SEC Rules provide for the manner of
calculating the Filipino interest in a corporation for purposes,
among others, of determining compliance with nationality
requirements (the ‘Investee Corporation’). Such manner of
computation is necessary since the shares in the Investee
Corporation may be owned both by individual stockholders
(‘Investing Individuals’) and by corporations and partnerships
(‘Investing Corporation’). The said rules thus provide for the
determination of nationality depending on the ownership of the
Investee Corporation and, in certain instances, the Investing
Corporation.
Under the above-quoted SEC Rules, there are two cases in
determining the nationality of the Investee Corporation. The first
case is the ‘liberal rule’, later coined by the SEC as the Control
Test in its 30 May 1990 Opinion, and pertains to the portion in
said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares
belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality.’ Under the liberal Control Test, there
is no need to further trace the ownership of the 60% (or more)
Filipino stockholdings of the Investing Corporation since a
corporation which is at least 60% Filipino-owned is considered as
Filipino.
The second case is the Strict Rule or the Grandfather Rule
Proper and pertains to the portion in said Paragraph 7 of the 1967
SEC Rules which states, "but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only
the number of shares corresponding to such percentage shall be
counted as of Philippine nationality." Under the Strict Rule or
Grandfather Rule Proper, the combined totals in the Investing
Corporation and the Investee Corporation must be traced (i.e.,
"grandfathered") to determine the total percentage of Filipino
ownership.
Moreover, the ultimate Filipino ownership of the shares must first
be traced to the level of the Investing Corporation and added to
the shares directly owned in the Investee Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion,
the Grandfather Rule or the second part of the SEC Rule applies
only when the 60-40 Filipino-foreign equity ownership is in doubt
(i.e., in cases where the joint venture corporation with Filipino and
foreign stockholders with less than 60% Filipino stockholdings [or
59%] invests in other joint venture corporation which is either 60-
40% Filipino-alien or the 59% less Filipino). Stated differently,
where the 60-40 Filipino- foreign equity ownership is not in doubt,
the Grandfather Rule will not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds
that this case calls for the application of the grandfather rule
since, as ruled by the POA and affirmed by the OP, doubt
prevails and persists in the corporate ownership of petitioners.
Also, as found by the CA, doubt is present in the 60-40 Filipino
equity ownership of petitioners Narra, McArthur and Tesoro, since
their common investor, the 100% Canadian corporation––MBMI,
funded them. However, petitioners also claim that there is "doubt" Name Nationality Number of Amount Amount Paid
only when the stockholdings of Filipinos are less than 60%.43 Shares Subscribed

The assertion of petitioners that "doubt" only exists when theMadridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
stockholdings are less than 60% fails to convince this Court. Corporation
DOJ
Opinion No. 20, which petitioners quoted in their petition, only
MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
made an example of an instance where "doubt" as to the Inc.
ownership of the corporation exists. It would be ludicrous to limit
the application of the said word only to the instances whereLauro
the L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
stockholdings of non-Filipino stockholders are more than 40% of
the total stockholdings in a corporation. The corporations Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
interested in circumventing our laws would clearly strive to have
"60% Filipino Ownership" at face value. It would be senseless for A. Agcaoili
Manuel Filipino 1 PhP 1,000.00 PhP 1,000.00
these applying corporations to state in their respective articles of
Michael T. Mason
incorporation that they have less than 60% Filipino stockholders American 1 PhP 1,000.00 PhP 1,000.00
since the applications will be denied instantly. Thus, various
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
corporate schemes and layerings are utilized to circumvent the
application of the Constitution. Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis supplied)
Obviously, the instant case presents a situation which exhibits a
scheme employed by stockholders to circumvent the law, creating
Interestingly, looking at the corporate structure of MMC, we take
a cloud of doubt in the Court’s mind. To determine, therefore, the note that it has a similar structure and composition as McArthur.
actual participation, direct or indirect, of MBMI, the grandfather In fact, it would seem that MBMI is also a major investor and
rule must be used.
"controls"45 MBMI and also, similar nominal shareholders were
present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar
McArthur Mining, Inc. (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell
(Cawkell):
To establish the actual ownership, interest or participation of
MBMI in each of petitioners’ corporate structure, they have to be Madridejos Mining Corporation
"grandfathered."

As previously discussed, McArthur acquired its MPSA applicationName Nationality Number of Amount Amount Paid
from MMC, which acquired its application from SMMI. McArthur Shares Subscribed
has a capital stock of ten million pesos (PhP 10,000,000) divided
Olympic Mines Filipino 6,663 PhP 6,663,000.00 PhP 0
into 10,000 common shares at one thousand pesos (PhP 1,000)&
per share, subscribed to by the following:44
 60% effective equity interest in the Olympic Properties.46 Quoting
the said Annual report:
Development
On September 9, 2004, the Company and Olympic Mines &
Corp.
Development Corporation ("Olympic") entered into a series of
MBMI Canadian 3,331 PhP 3,331,000.00 agreements including a Property Purchase and Development
PhP 2,803,900.00
Resources, Agreement (the Transaction Documents) with respect to three
nickel laterite properties in Palawan, Philippines (the "Olympic
Inc. Properties"). The Transaction Documents effectively establish a
joint venture between the Company and Olympic for purposes of
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
developing the Olympic Properties. The Company holds directly
and indirectly an initial 60% interest in the joint venture. Under
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
certain circumstances and upon achieving certain milestones, the
Company may earn up to a 100% interest, subject to a 2.5% net
Esguerra revenue royalty.47 (emphasis supplied)
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Thus, as demonstrated in this first corporation, McArthur, when it
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
is "grandfathered," company layering was utilized by MBMI to
gain control over McArthur. It is apparent that MBMI has more
Hernando than 60% or more equity interest in McArthur, making the latter a
foreign corporation.
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Tesoro Mining and Development, Inc.
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell Tesoro, which acquired its MPSA application from SMMI, has a
Total 10,000 PhP 10,000,000.00 capital stock of ten million pesos (PhP 10,000,000) divided into
PhP 2,809,900.00
ten thousand (10,000) common shares at PhP 1,000 per share,
as demonstrated below:
(emphasis supplied)
[[reference
Noticeably, Olympic Mines & Development Corporation (Olympic) = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudenc
did not pay any amount with respect to the number of shares they e/2014/april2014/195580.pdf]]
subscribed to in the corporation, which is quite absurd since
Olympic is the major stockholder in MMC. MBMI’s 2006 Annual
Report sheds light on why Olympic failed to pay any amount with Name Nationality Number of Amount Amou
respect to the number of shares it subscribed to. It states that
Olympic entered into joint venture agreements with several Shares Subscribed
Philippine companies, wherein it holds directly and indirectly a
 [[reference
Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudenc
e/2014/april2014/195580.pdf]]
Mining, Inc.

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

Name Nationality Number of Amount Amou

Resources, Inc. Shares Subscribed

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 Ph

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Development

Esguerra Corp.
Manuel A. Filipino 1 PhP 1,000.00 PhP Resources,
MBMI 1,000.00 Canadian 3,331 PhP 3,331,000.00 PhP 2,7

Agcaoili Inc.
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1
Total 10,000 PhP PhP 2,708,174.60
10,000,000.00 Esguerra
(emphasis supplied)
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1

Except for the name "Sara Marie Mining, Inc.," the table above Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1
shows exactly the same figures as the corporate structure of
petitioner McArthur, down to the last centavo. All the other Hernando
shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili,
Mason and Cawkell. The figures under "Nationality," "Number of Michael T. Mason American 1 PhP 1,000.00 PhP 1
Shares," "Amount Subscribed," and "Amount Paid" are exactly
the same. Delving deeper, we scrutinize SMMI’s corporate Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1
structure:
Total 10,000 PhP PhP 2,8
10,000,000.00
Sara Marie Mining, Inc.
(emphasi
After subsequently studying SMMI’s corporate structure, it is not
Shares Subscribed
farfetched for us to spot the glaring similarity between SMMI and
MMC’s corporate structure. Again, the presence of identical Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,6
stockholders, namely: Olympic, MBMI, Amanti Limson (Limson),
Esguerra, Salazar, Hernando, Mason and Cawkell. The figures
under the headings "Nationality," "Number of Shares," "Amount Mining &
Subscribed," and "Amount Paid" are exactly the same except for
the amount paid by MBMI which now reflects the amount of two Development
million seven hundred ninety four thousand pesos (PhP
2,794,000). Oddly, the total value of the amount paid is two Corp.
million eight hundred nine thousand nine hundred pesos (PhP
2,809,900). MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,1

Accordingly, after "grandfathering" petitioner Tesoro and factoring Resources, Inc.

in Olympic’s participation in SMMI’s corporate structure, it is clear
that MBMI is in control of Tesoro and owns 60% or more equity Higinio C. Filipino 1 PhP 1,000.00 PhP 1
interest in Tesoro. This makes petitioner Tesoro a non-Filipino
corporation and, thus, disqualifies it to participate in the Mendoza, Jr.
exploitation, utilization and development of our natural resources.
Henry E. Filipino 1 PhP 1,000.00 PhP 1
Narra Nickel Mining and Development Corporation
Fernandez
Moving on to the last petitioner, Narra, which is the transferee
and assignee of PLMDC’s MPSA application, whose corporate Manuel A. Filipino 1 PhP 1,000.00 PhP 1
structure’s arrangement is similar to that of the first two
petitioners discussed. The capital stock of Narra is ten million Agcaoili
pesos (PhP 10,000,000), which is divided into ten thousand
common shares (10,000) at one thousand pesos (PhP 1,000) per Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1
share, shown as follows:
Bocalan
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudenc Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1
e/2014/april2014/195580.pdf]]
Robert L. American 1 PhP 1,000.00 PhP 1

Name Nationality Number of Amount Amount Paid

McCurdy

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1

 Total 10,000 PhP PhP 2,800,000.00 (emphasis
10,000,000.00 (emphasis supplied) supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason,
Agcaoili and Esguerra, is present in this corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine
PLMDC’s corporate structure:
Yet again, the usual players in petitioners’ corporate structures
are present. Similarly, the amount of money paid by the 2nd tier
majority stock holder, in this case, Palawan Alpha South
Resources and Development Corp. (PASRDC), is zero.
Studying MBMI’s Summary of Significant Accounting Policies
dated October 31, 2005 explains the reason behind the intricate
corporate layering that MBMI immersed itself in:

Name Nationality Number of Amount AmountJOINT

Paid VENTURES The Company’s ownership interests in
Shares Subscribed various mining ventures engaged in the acquisition, exploration
Palawan Alpha South Filipino 6,596 PhP PhPand
0 development of mineral properties in the Philippines is
Resources Development 6,596,000.00 described as follows:
Corporation
(a) Olympic Group
MBMI Resources, Canadian 3,396 PhP PhP
3,396,000.00 2,796,000.00
The Philippine companies holding the Olympic Property, and the
Inc. ownership and interests therein, are as follows:
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Olympic- Philippines (the "Olympic Group")
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E. Fernandez Filipino 1 PhP 1,000.00 Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Pursuant to the Olympic joint venture agreement the Company
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
holds directly and indirectly an effective equity interest in the
Olympic Property of 60.0%. Pursuant to a shareholders’
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
agreement, the Company exercises joint control over the
Kenneth Cawkell Canadian 1 PhP 1,000.00 companies in the Olympic Group.
PhP 1,000.00
Total 10,000 PhP PhP(b) Alpha Group
10,000,000.00 2,708,174.60
The Philippine companies holding the Alpha Property, and the
ownership interests therein, are as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and
indirectly an effective equity interest in the Alpha Property of
60.4%. Pursuant to a shareholders’ agreement, the Company
exercises joint control over the companies in the Alpha
Group.48 (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that
petitioners McArthur, Tesoro and Narra are not Filipino since
MBMI, a 100% Canadian corporation, owns 60% or more of their
equity interests. Such conclusion is derived from grandfathering
petitioners’ corporate owners, namely: MMI, SMMI and PLMDC.
Going further and adding to the picture, MBMI’s Summary of
Significant Accounting Policies statement– –regarding the "joint
venture" agreements that it entered into with the "Olympic" and
"Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations boils
down to MBMI, Olympic or corporations under the "Alpha" group
wherein MBMI has joint venture agreements with, practically
exercising majority control over the corporations mentioned. In
effect, whether looking at the capital structure or the underlying
relationships between and among the corporations, petitioners
are NOT Filipino nationals and must be considered foreign since
60% or more of their capital stocks or equity interests are owned
by MBMI.
Application of the res inter alios acta rule
Petitioners question the CA’s use of the exception of the res inter
alios acta or the "admission by co-partner or agent" rule and
"admission by privies" under the Rules of Court in the instant
case, by pointing out that statements made by MBMI should not
be admitted in this case since it is not a party to the case and that
it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or
declaration of a partner or agent of the party within the scope of
his authority and during the existence of the partnership or
agency, may be given in evidence against such party after the
partnership or agency is shown by evidence other than such act
or declaration itself. The same rule applies to the act or
declaration of a joint owner, joint debtor, or other person jointly
interested with the party.
Sec. 31. Admission by privies.- Where one derives title to
property from another, the act, declaration, or omission of the
latter, while holding the title, in relation to the property, is
evidence against the former.
Petitioners claim that before the above-mentioned Rule can be
applied to a case, "the partnership relation must be shown, and
that proof of the fact must be made by evidence other than the
admission itself."49 Thus, petitioners assert that the CA erred in
finding that a partnership relationship exists between them and
MBMI because, in fact, no such partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130
of the Rules by stating that "by entering into a joint venture, MBMI
have a joint interest" with Narra, Tesoro and McArthur. They
challenged the conclusion of the CA which pertains to the close
characteristics of
"partnerships" and "joint venture agreements." Further, they
asserted that before this particular partnership can be formed, it
should have been formally reduced into writing since the capital
involved is more than three thousand pesos (PhP 3,000). Being
that there is no evidence of written agreement to form a
partnership between petitioners and MBMI, no partnership was
created.
We disagree.
A partnership is defined as two or more persons who bind
themselves to contribute money, property, or industry to a
common fund with the intention of dividing the profits among
themselves.50 On the other hand, joint ventures have been
deemed to be "akin" to partnerships since it is difficult to
distinguish between joint ventures and partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of
their association are so similar and closely akin to a partnership
that it is ordinarily held that their rights, duties, and liabilities are
to be tested by rules which are closely analogous to and
substantially the same, if not exactly the same, as those which
govern partnership. In fact, it has been said that the trend in the
law has been to blur the distinctions between a partnership and a
joint venture, very little law being found applicable to one that
does not apply to the other.51
Though some claim that partnerships and joint ventures are
totally different animals, there are very few rules that differentiate
one from the other; thus, joint ventures are deemed "akin" or
similar to a partnership. In fact, in joint venture agreements, rules
and legal incidents governing partnerships are applied.52
Accordingly, culled from the incidents and records of this case, it
can be assumed that the relationships entered between and
among petitioners and MBMI are no simple "joint venture
agreements." As a rule, corporations are prohibited from entering
into partnership agreements; consequently, corporations enter
into joint venture agreements with other corporations or
partnerships for certain transactions in order to form "pseudo
partnerships."
Obviously, as the intricate web of "ventures" entered into by and
among petitioners and MBMI was executed to circumvent the
legal prohibition against corporations entering into partnerships,
then the relationship created should be deemed as
"partnerships," and the laws on partnership should be applied.
Thus, a joint venture agreement between and among
corporations may be seen as similar to partnerships since the
elements of partnership are present.
Considering that the relationships found between petitioners and
MBMI are considered to be partnerships, then the CA is justified
in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with
Narra, Tesoro and McArthur.
Panel of Arbitrators’ jurisdiction
We affirm the ruling of the CA in declaring that the POA has
jurisdiction over the instant case. The POA has jurisdiction to
settle disputes over rights to mining areas which definitely involve
the petitions filed by Redmont against petitioners Narra, McArthur
and Tesoro. Redmont, by filing its petition against petitioners, is
asserting the right of Filipinos over mining areas in the Philippines
against alleged foreign-owned mining corporations. Such claim
constitutes a "dispute" found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by the
parties for the decision, the panel shall have exclusive and
original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
 (b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v.
Macroasia Corp.:53
The phrase "disputes involving rights to mining areas" refers to
any adverse claim, protest, or opposition to an application for
mineral agreement. The POA therefore has the jurisdiction to
resolve any adverse claim, protest, or opposition to a pending
application for a mineral agreement filed with the concerned
Regional Office of the MGB. This is clear from Secs. 38 and 41 of
the DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of
publication/posting/radio announcements, the authorized
officer(s) of the concerned office(s) shall issue a certification(s)
that the publication/posting/radio announcement have been
complied with. Any adverse claim, protest, opposition shall be
filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned
Regional Office or through any concerned PENRO or CENRO for
filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of
this Act and these implementing rules and regulations. Upon final
resolution of any adverse claim, protest or opposition, the Panel
of Arbitrators shall likewise issue a certification to that effect
within five (5) working days from the date of finality of resolution
thereof. Where there is no adverse claim, protest or opposition,
the Panel of Arbitrators shall likewise issue a Certification to that
effect within five working days therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements
under this Section are fully complied with and any adverse
claim/protest/opposition is finally resolved by the Panel of
Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the
Certification issued by the Panel of Arbitrators as provided in
Section 38 hereof, the concerned Regional Director shall initially
evaluate the Mineral Agreement applications in areas outside
Mineral reservations. He/She shall thereafter endorse his/her
findings to the Bureau for further evaluation by the Director within
fifteen (15) working days from receipt of forwarded documents.
Thereafter, the Director shall endorse the same to the secretary
for consideration/approval within fifteen working days from receipt
of such endorsement.
In case of Mineral Agreement applications in areas with Mineral
Reservations, within fifteen (15) working days from receipt of the
Certification issued by the Panel of Arbitrators as provided for in
Section 38 hereof, the same shall be evaluated and endorsed by
the Director to the Secretary for consideration/approval within
fifteen days from receipt of such endorsement. (emphasis
supplied)
It has been made clear from the aforecited provisions that the
"disputes involving rights to mining areas" under Sec. 77(a)
specifically refer only to those disputes relative to the applications
for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or
oppositions to a mining right application is further elucidated by
Secs. 219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.-
Notwithstanding the provisions of Sections 28, 43 and 57 above,
any adverse claim, protest or opposition specified in said sections
may also be filed directly with the Panel of Arbitrators within the
concerned periods for filing such claim, protest or opposition as
specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
xxxx
The Regional Director or concerned Regional Director shall also
cause the posting of the application on the bulletin boards of the
Bureau, concerned Regional office(s) and in the concerned
province(s) and municipality(ies), copy furnished the barangays
where the proposed contract area is located once a week for two
(2) consecutive weeks in a language generally understood in the
locality. After forty-five (45) days from the last date of
publication/posting has been made and no adverse claim, protest
or opposition was filed within the said forty-five (45) days, the
concerned offices shall issue a certification that
publication/posting has been made and that no adverse claim,
protest or opposition of whatever nature has been filed. On the
other hand, if there be any adverse claim, protest or opposition,
the same shall be filed within forty-five (45) days from the last
date of publication/posting, with the Regional Offices concerned,
or through the Department’s Community Environment and Natural
Resources Officers (CENRO) or Provincial Environment and
Natural Resources Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of Arbitrators. However
previously published valid and subsisting mining claims are
exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements
under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director
and resolved by the Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the
"disputes involving rights to mining areas" under Sec. 77(a)
specifically refer only to those disputes relative to the applications
for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or
oppositions to a mining right application is further elucidated by
Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.-
Notwithstanding the provisions of Sections 28, 43 and 57 above,
any adverse claim, protest or opposition specified in said sections
may also be filed directly with the Panel of Arbitrators within the
concerned periods for filing such claim, protest or opposition as
specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
xxxx
The Regional Director or concerned Regional Director shall also
cause the posting of the application on the bulletin boards of the
Bureau, concerned Regional office(s) and in the concerned
province(s) and municipality(ies), copy furnished the barangays
where the proposed contract area is located once a week for two
(2) consecutive weeks in a language generally understood in the
locality. After forty-five (45) days from the last date of
publication/posting has been made and no adverse claim, protest
or opposition was filed within the said forty-five (45) days, the
concerned offices shall issue a certification that
publication/posting has been made and that no adverse claim,
protest or opposition of whatever nature has been filed. On the
other hand, if there be any adverse claim, protest or opposition,
the same shall be filed within forty-five (45) days from the last
date of publication/posting, with the Regional offices concerned,
or through the Department’s Community Environment and Natural
Resources Officers (CENRO) or Provincial Environment and
Natural Resources Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of Arbitrators. However,
previously published valid and subsisting mining claims are
exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements
under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director
and resolved by the Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA
to resolve any adverse claim, opposition, or protest relative to
mining rights under Sec. 77(a) of RA 7942 is confined only to
adverse claims, conflicts and oppositions relating to applications
for the grant of mineral rights.
POA’s jurisdiction is confined only to resolutions of such adverse
claims, conflicts and oppositions and it has no authority to
approve or reject said applications. Such power is vested in the
DENR Secretary upon recommendation of the MGB Director.
Clearly, POA’s jurisdiction over "disputes involving rights to
mining areas" has nothing to do with the cancellation of existing
mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA
unquestionably has jurisdiction to resolve disputes over MPSA
applications subject of Redmont’s petitions. However, said
jurisdiction does not include either the approval or rejection of the
MPSA applications, which is vested only upon the Secretary of
the DENR. Thus, the finding of the POA, with respect to the
rejection of petitioners’ MPSA applications being that they are
foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that
it is the regular courts, not the POA, that has jurisdiction over the
MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the
statute in force at the time of the commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary
Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall
exercise exclusive original jurisdiction:
1. In all civil actions in which the subject of the litigation is
incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from
Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.—
x x x Within thirty (30) days, after the submission of the
case by the parties for the decision, the panel shall have
exclusive and original jurisdiction to hear and decide the
following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over
any and all disputes involving rights to mining areas. One such
dispute is an MPSA application to which an adverse claim,
protest or opposition is filed by another interested applicant. In 1âwphi1
the case at bar, the dispute arose or originated from MPSA
applications where petitioners are asserting their rights to mining
areas subject of their respective MPSA applications. Since
respondent filed 3 separate petitions for the denial of said
applications, then a controversy has developed between the
parties and it is POA’s jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while
what petitioners filed with the DENR Regional Office or any
concerned DENRE or CENRO are MPSA applications. Thus POA
has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA
applications under the doctrine of primary jurisdiction. Euro-med
Laboratories v. Province of Batangas55 elucidates:
The doctrine of primary jurisdiction holds that if a case is such
that its determination requires the expertise, specialized training
and knowledge of an administrative body, relief must first be
obtained in an administrative proceeding before resort to the
courts is had even if the matter may well be within their proper
jurisdiction.
Whatever may be the decision of the POA will eventually reach
the court system via a resort to the CA and to this Court as a last
recourse.
Selling of MBMI’s shares to DMCI
As stated before, petitioners’ Manifestation and Submission dated
October 19, 2012 would want us to declare the instant petition
moot and academic due to the transfer and conveyance of all the
shareholdings and interests of MBMI to DMCI, a corporation duly
organized and existing under Philippine laws and is at least 60%
Philippine-owned.56 Petitioners reasoned that they now cannot be
considered as foreign-owned; the transfer of their shares
supposedly cured the "defect" of their previous nationality. They
claimed that their current FTAA contract with the State should
stand since "even wholly-owned foreign corporations can enter
into an FTAA with the State."57Petitioners stress that there should
no longer be any issue left as regards their qualification to enter
into FTAA contracts since they are qualified to engage in mining
activities in the Philippines. Thus, whether the "grandfather rule"
or the "control test" is used, the nationalities of petitioners cannot
be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any
bearing in the instant case and said fact should be disregarded.
The manifestation can no longer be considered by us since it is
being tackled in G.R. No. 202877 pending before this
Court. Thus, the question of whether petitioners, allegedly a
1âwphi1
Philippine-owned corporation due to the sale of MBMI's
shareholdings to DMCI, are allowed to enter into FTAAs with the
State is a non-issue in this case.
In ending, the "control test" is still the prevailing mode of
determining whether or not a corporation is a Filipino corporation,
within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled
to undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the
Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership
in the corporation, then it may apply the "grandfather rule."
WHEREFORE, premises considered, the instant petition is
DENIED. The assailed Court of Appeals Decision dated October
1, 2010 and Resolution dated February 15, 2011 are hereby
AFFIRMED.
SO ORDERED.
G.R. No. L-27155 May 18, 1978
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO
GUECO and THE PHILIPPINE AMERICAN GENERAL
INSURANCE COMPANY, INC., respondents.
Medina, Locsin, Coruña, & Sumbillo for petitioner.
Manuel Lim & Associates for private respondents.
ANTONIO, J.:
Certiorari to review the decision of the Court of Appeals which
affirmed the judgment of the Court of First Instance of Manila in
Civil Case No. 34185, ordering petitioner, as third-party
defendant, to pay respondent Rita Gueco Tapnio, as third-party
plaintiff, the sum of P2,379.71, plus 12% interest per annum from
September 19, 1957 until the same is fully paid, P200.00
attorney's fees and costs, the same amounts which Rita Gueco
Tapnio was ordered to pay the Philippine American General
Insurance Co., Inc., to be paid directly to the Philippine American
General Insurance Co., Inc. in full satisfaction of the judgment
rendered against Rita Gueco Tapnio in favor of the former; plus
P500.00 attorney's fees for Rita Gueco Tapnio and costs. The
basic action is the complaint filed by Philamgen (Philippine
American General Insurance Co., Inc.) as surety against Rita
Gueco Tapnio and Cecilio Gueco, for the recovery of the sum of
P2,379.71 paid by Philamgen to the Philippine National Bank on
behalf of respondents Tapnio and Gueco, pursuant to an
indemnity agreement. Petitioner Bank was made third-party
defendant by Tapnio and Gueco on the theory that their failure to
pay the debt was due to the fault or negligence of petitioner.
The facts as found by the respondent Court of Appeals, in
affirming the decision of the Court of First Instance of Manila, are
quoted hereunder:
Plaintiff executed its Bond, Exh. A, with defendant
Rita Gueco Tapnio as principal, in favor of the
Philippine National Bank Branch at San
Fernando, Pampanga, to guarantee the payment
of defendant Rita Gueco Tapnio's account with
said Bank. In turn, to guarantee the payment of
whatever amount the bonding company would
pay to the Philippine National Bank, both
defendants executed the indemnity agreement,
Exh. B. Under the terms and conditions of this
indemnity agreement, whatever amount the
plaintiff would pay would earn interest at the rate
of 12% per annum, plus attorney's fees in the
amount of 15 % of the whole amount due in case
of court litigation.
The original amount of the bond was for
P4,000.00; but the amount was later reduced to
P2,000.00.
It is not disputed that defendant Rita Gueco
Tapnio was indebted to the bank in the sum of
P2,000.00, plus accumulated interests unpaid,
which she failed to pay despite demands. The
Bank wrote a letter of demand to plaintiff, as per
Exh. C; whereupon, plaintiff paid the bank on
September 18, 1957, the full amount due and
owing in the sum of P2,379.91, for and on
account of defendant Rita Gueco's obligation
(Exhs. D and D-1).
Plaintiff, in turn, made several demands, both
verbal and written, upon defendants (Exhs. E and
F), but to no avail.
Defendant Rita Gueco Tapnio admitted all the
foregoing facts. She claims, however, when
demand was made upon her by plaintiff for her to
pay her debt to the Bank, that she told the Plaintiff
that she did not consider herself to be indebted to
the Bank at all because she had an agreement
with one Jacobo-Nazon whereby she had leased
to the latter her unused export sugar quota for the
1956-1957 agricultural year, consisting of 1,000
piculs at the rate of P2.80 per picul, or for a total
of P2,800.00, which was already in excess of her
obligation guaranteed by plaintiff's bond, Exh. A.
This lease agreement, according to her, was with
the knowledge of the bank. But the Bank has
placed obstacles to the consummation of the
lease, and the delay caused by said obstacles
forced 'Nazon to rescind the lease contract. Thus,
Rita Gueco Tapnio filed her third-party complaint
against the Bank to recover from the latter any
and all sums of money which may be adjudged
against her and in favor of the plaitiff plus moral
damages, attorney's fees and costs.
Insofar as the contentions of the parties herein
are concerned, we quote with approval the
following findings of the lower court based on the
evidence presented at the trial of the case:
It has been established during the
trial that Mrs. Tapnio had an
export sugar quota of 1,000 piculs
for the agricultural year 1956-1957
which she did not need. She
agreed to allow Mr. Jacobo C.
Tuazon to use said quota for the
consideration of P2,500.00 (Exh.
"4"-Gueco). This agreement was
called a contract of lease of sugar
allotment.
At the time of the agreement, Mrs.
Tapnio was indebted to the
Philippine National Bank at San
Fernando, Pampanga. Her
indebtedness was known as a
crop loan and was secured by a
mortgage on her standing crop
including her sugar quota
allocation for the agricultural year
corresponding to said standing
crop. This arrangement was
necessary in order that when Mrs.
Tapnio harvests, the P.N.B.,
having a lien on the crop, may
effectively enforce collection
against her. Her sugar cannot be
exported without sugar quota
allotment Sometimes, however, a
planter harvest less sugar than her
quota, so her excess quota is
utilized by another who pays her
for its use. This is the arrangement
entered into between Mrs. Tapnio
and Mr. Tuazon regarding the
former's excess quota for 1956-
1957 (Exh. "4"-Gueco).
Since the quota was mortgaged to
the P.N.B., the contract of lease
had to be approved by said Bank,
The same was submitted to the
branch manager at San Fernando,
Pampanga. The latter required the
parties to raise the consideration
of P2.80 per picul or a total of
 P2,800.00 (Exh. "2-Gueco")
informing them that "the minimum
lease rental acceptable to the
Bank, is P2.80 per picul." In a
letter addressed to the branch
manager on August 10, 1956, Mr.
Tuazon informed the manager that
he was agreeable to raising the
consideration to P2.80 per picul.
He further informed the manager
that he was ready to pay said
amount as the funds were in his
folder which was kept in the bank.
Explaining the meaning of
Tuazon's statement as to the
funds, it was stated by him that he
had an approved loan from the
bank but he had not yet utilized it
as he was intending to use it to
pay for the quota. Hence, when he
said the amount needed to pay
Mrs. Tapnio was in his folder
which was in the bank, he meant
and the manager understood and
knew he had an approved loan
available to be used in payment of
the quota. In said Exh. "6-Gueco",
Tuazon also informed the
manager that he would want for a
notice from the manager as to the
time when the bank needed the
money so that Tuazon could sign
the corresponding promissory
note.
Further Consideration of the evidence discloses
that when the branch manager of the Philippine
National Bank at San Fernando recommended
the approval of the contract of lease at the price of
P2.80 per picul (Exh. 1 1-Bank), whose
recommendation was concurred in by the Vice-
president of said Bank, J. V. Buenaventura, the
board of directors required that the amount be
raised to 13.00 per picul. This act of the board of
directors was communicated to Tuazon, who in
turn asked for a reconsideration thereof. On
November 19, 1956, the branch manager
submitted Tuazon's request for reconsideration to
the board of directors with another
recommendation for the approval of the lease at
P2.80 per picul, but the board returned the
recommendation unacted upon, considering that
the current price prevailing at the time was P3.00
per picul (Exh. 9-Bank).
The parties were notified of the refusal on the part
of the board of directors of the Bank to grant the
motion for reconsideration. The matter stood as it
was until February 22, 1957, when Tuazon wrote
a letter (Exh. 10-Bank informing the Bank that he
was no longer interested to continue the deal,
referring to the lease of sugar quota allotment in
favor of defendant Rita Gueco Tapnio. The result
is that the latter lost the sum of P2,800.00 which
she should have received from Tuazon and which
she could have paid the Bank to cancel off her
indebtedness,
The court below held, and in this holding we
concur that failure of the negotiation for the lease
of the sugar quota allocation of Rita Gueco
Tapnio to Tuazon was due to the fault of the
directors of the Philippine National Bank, The
refusal on the part of the bank to approve the
lease at the rate of P2.80 per picul which, as
 stated above, would have enabled Rita Gueco
Tapnio to realize the amount of P2,800.00 which
was more than sufficient to pay off her
indebtedness to the Bank, and its insistence on
the rental price of P3.00 per picul thus
unnecessarily increasing the value by only a
difference of P200.00. inevitably brought about
the rescission of the lease contract to the damage
and prejudice of Rita Gueco Tapnio in the
aforesaid sum of P2,800.00. The
unreasonableness of the position adopted by the
board of directors of the Philippine National Bank
in refusing to approve the lease at the rate of
P2.80 per picul and insisting on the rate of P3.00
per picul, if only to increase the retail value by
only P200.00 is shown by the fact that all the
accounts of Rita Gueco Tapnio with the Bank
were secured by chattel mortgage on standing
crops, assignment of leasehold rights and
interests on her properties, and surety bonds,
aside from the fact that from Exh. 8-Bank, it
appears that she was offering to execute a real
estate mortgage in favor of the Bank to replace
the surety bond This statement is further
bolstered by the fact that Rita Gueco Tapnio
apparently had the means to pay her obligation
fact that she has been granted several value of
almost P80,000.00 for the agricultural years from
1952 to 56. 1
Its motion for the reconsideration of the decision of the Court of
Appeals having been denied, petitioner filed the present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000
piculs of sugar quota allocation of respondent Rita Gueco Tapnio
by Jacobo C. Tuazon was due to the unjustified refusal of
petitioner to approve said lease contract, and its unreasonable
insistence on the rental price of P3.00 instead of P2.80 per picul;
and
(2) In not holding that based on the statistics of sugar price and
prices of sugar quota in the possession of the petitioner, the
latter's Board of Directors correctly fixed the rental of price per
picul of 1,000 piculs of sugar quota leased by respondent Rita
Gueco Tapnio to Jacobo C. Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota of
Tapnio, it has the right, both under its own Charter and under the
Corporation Law, to safeguard and protect its rights and interests
under the deed of assignment, which include the right to approve
or disapprove the said lease of sugar quota and in the exercise of
that authority, its
Board of Directors necessarily had authority to determine and fix
the rental price per picul of the sugar quota subject of the lease
between private respondents and Jacobo C. Tuazon. It argued
further that both under its Charter and the Corporation Law,
petitioner, acting thru its Board of Directors, has the perfect right
to adopt a policy with respect to fixing of rental prices of export
sugar quota allocations, and in fixing the rentals at P3.00 per
picul, it did not act arbitrarily since the said Board was guided by
statistics of sugar price and prices of sugar quotas prevailing at
the time. Since the fixing of the rental of the sugar quota is a
function lodged with petitioner's Board of Directors and is a
matter of policy, the respondent Court of Appeals could not
substitute its own judgment for that of said Board of Directors,
which acted in good faith, making as its basis therefore the
prevailing market price as shown by statistics which were then in
their possession.
Finally, petitioner emphasized that under the appealed judgment,
it shall suffer a great injustice because as a creditor, it shall be
deprived of a just claim against its debtor (respondent Rita Gueco
Tapnio) as it would be required to return to respondent Philamgen
the sum of P2,379.71, plus interest, which amount had been
previously paid to petitioner by said insurance company in behalf
of the principal debtor, herein respondent Rita Gueco Tapnio, and
without recourse against respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction
in proceedings of this nature is limited to reviewing only errors of
law, accepting as conclusive the factual fin dings of the Court of
Appeals upon its own assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50 per picul
between Rita Gueco Tapnio and Jacobo C. Tuazon was executed
on April 17, 1956. This contract was submitted to the Branch
Manager of the Philippine National Bank at San Fernando,
Pampanga. This arrangement was necessary because Tapnio's
indebtedness to petitioner was secured by a mortgage on her
standing crop including her sugar quota allocation for the
agricultural year corresponding to said standing crop. The latter
required the parties to raise the consideration to P2.80 per picul,
the minimum lease rental acceptable to the Bank, or a total of
P2,800.00. Tuazon informed the Branch Manager, thru a letter
dated August 10, 1956, that he was agreeable to raising the
consideration to P2.80 per picul. He further informed the manager
that he was ready to pay the said sum of P2,800.00 as the funds
were in his folder which was kept in the said Bank. This referred
to the approved loan of Tuazon from the Bank which he intended
to use in paying for the use of the sugar quota. The Branch
Manager submitted the contract of lease of sugar quota allocation
to the Head Office on September 7, 1956, with a recommendation
for approval, which recommendation was concurred in by the
Vice-President of the Bank, Mr. J. V. Buenaventura. This
notwithstanding, the Board of Directors of petitioner required that
the consideration be raised to P3.00 per picul.
Tuazon, after being informed of the action of the Board of
Directors, asked for a reconsideration thereof. On November 19,
1956, the Branch Manager submitted the request for
reconsideration and again recommended the approval of the
lease at P2.80 per picul, but the Board returned the
recommendation unacted, stating that the current price prevailing
at that time was P3.00 per picul.
On February 22, 1957, Tuazon wrote a letter, informing the Bank
that he was no longer interested in continuing the lease of sugar
quota allotment. The crop year 1956-1957 ended and Mrs.
Tapnio failed to utilize her sugar quota, resulting in her loss in the
sum of P2,800.00 which she should have received had the lease
in favor of Tuazon been implemented.
It has been clearly shown that when the Branch Manager of
petitioner required the parties to raise the consideration of the
lease from P2.50 to P2.80 per picul, or a total of P2,800-00, they
readily agreed. Hence, in his letter to the Branch Manager of the
Bank on August 10, 1956, Tuazon informed him that the minimum
lease rental of P2.80 per picul was acceptable to him and that he
even offered to use the loan secured by him from petitioner to pay
in full the sum of P2,800.00 which was the total consideration of
the lease. This arrangement was not only satisfactory to the
Branch Manager but it was also approves by Vice-President J. V.
Buenaventura of the PNB. Under that arrangement, Rita Gueco
Tapnio could have realized the amount of P2,800.00, which was
more than enough to pay the balance of her indebtedness to the
Bank which was secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her sugar
quota for the crop year 1956-1957 was due to the disapproval of
the lease by the Board of Directors of petitioner. The issue,
therefore, is whether or not petitioner is liable for the damage
caused.
As observed by the trial court, time is of the essence in the
approval of the lease of sugar quota allotments, since the same
must be utilized during the milling season, because any allotment
which is not filled during such milling season may be reallocated
by the Sugar Quota Administration to other holders of
allotments. 3 There was no proof that there was any other person
at that time willing to lease the sugar quota allotment of private
respondents for a price higher than P2.80 per picul. "The fact that
there were isolated transactions wherein the consideration for the
lease was P3.00 a picul", according to the trial court, "does not
necessarily mean that there are always ready takers of said price.
" The unreasonableness of the position adopted by the
petitioner's Board of Directors is shown by the fact that the
difference between the amount of P2.80 per picul offered by
Tuazon and the P3.00 per picul demanded by the Board
amounted only to a total sum of P200.00. Considering that all the
accounts of Rita Gueco Tapnio with the Bank were secured by
chattel mortgage on standing crops, assignment of leasehold
rights and interests on her properties, and surety bonds and that
she had apparently "the means to pay her obligation to the Bank,
as shown by the fact that she has been granted several sugar
crop loans of the total value of almost P80,000.00 for the
agricultural years from 1952 to 1956", there was no reasonable
basis for the Board of Directors of petitioner to have rejected the
lease agreement because of a measly sum of P200.00.
While petitioner had the ultimate authority of approving or
disapproving the proposed lease since the quota was mortgaged
to the Bank, the latter certainly cannot escape its responsibility of
observing, for the protection of the interest of private
respondents, that degree of care, precaution and vigilance which
the circumstances justly demand in approving or disapproving the
lease of said sugar quota. The law makes it imperative that every
person "must in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and observe
honesty and good faith, 4 This petitioner failed to do. Certainly, it
knew that the agricultural year was about to expire, that by its
disapproval of the lease private respondents would be unable to
utilize the sugar quota in question. In failing to observe the
reasonable degree of care and vigilance which the surrounding
circumstances reasonably impose, petitioner is consequently
liable for the damages caused on private respondents. Under
Article 21 of the New Civil Code, "any person who wilfully causes
loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the
damage." The afore-cited provisions on human relations were
intended to expand the concept of torts in this jurisdiction by
granting adequate legal remedy for the untold number of moral
wrongs which is impossible for human foresight to specifically
provide in the statutes. 5
A corporation is civilly liable in the same manner as natural
persons for torts, because "generally speaking, the rules
governing the liability of a principal or master for a tort committed
by an agent or servant are the same whether the principal or
master be a natural person or a corporation, and whether the
servant or agent be a natural or artificial person. All of the
authorities agree that a principal or master is liable for every tort
which he expressly directs or authorizes, and this is just as true of
a corporation as of a natural person, A corporation is liable,
therefore, whenever a tortious act is committed by an officer or
agent under express direction or authority from the stockholders
or members acting as a body, or, generally, from the directors as
the governing body." 6
WHEREFORE, in view of the foregoing, the decision of the Court
of Appeals is hereby AFFIRMED.
[G.R. Nos. 116124-25. November 22, 2000]
BIBIANO O. REYNOSO, IV, petitioner, vs.
HON. COURT OF APPEALS and
 GENERAL CREDIT
CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
Assailed in this petition for review is the consolidated
decision of the Court of Appeals dated July 7, 1994,
which reversed the separate decisions of the Regional
Trial Court of Pasig City and the Regional Trial Court of
Quezon City in two cases between petitioner Reynoso
and respondent General Credit Corporation (GCC).
Sometime in the early 1960s, the Commercial Credit
Corporation (hereinafter, CCC), a financing and
investment firm, decided to organize franchise
companies in different parts of the country, wherein it
shall hold thirty percent (30%) equity. Employees of the
CCC were designated as resident managers of the
franchise companies. Petitioner Bibiano O. Reynoso, IV
was designated as the resident manager of the franchise
company in Quezon City, known as the Commercial
Credit Corporation of Quezon City (hereinafter, CCC-
QC).
CCC-QC entered into an exclusive management
contract with CCC whereby the latter was granted the
management and full control of the business activities of
the former. Under the contract, CCC-QC shall sell,
discount and/or assign its receivables to
CCC. Subsequently, however, this discounting
arrangement was discontinued pursuant to the so-called
DOSRI Rule, prohibiting the lending of funds by
corporations to its directors, officers, stockholders and
other persons with related interests therein.
On account of the new restrictions imposed by the
Central Bank policy by virtue of the DOSRI Rule, CCC
decided to form CCC Equity Corporation, (hereinafter,
CCC-Equity), a wholly-owned subsidiary, to which CCC
transferred its thirty (30%) percent equity in CCC-QC,
together with two seats in the latters Board of Directors.
Under the new set-up, several officials of Commercial
Credit Corporation, including petitioner Reynoso, became
employees of CCC-Equity. While petitioner continued to
be the Resident Manager of CCC-QC, he drew his
salaries and allowances from CCC-Equity. Furthermore,
although an employee of CCC-Equity, petitioner, as well
as all employees of CCC-QC, became qualified members
of the Commercial Credit Corporation Employees
Pension Plan.
As Resident Manager of CCC-QC, petitioner oversaw
the operations of CCC-QC and supervised its
employees. The business activities of CCC-QC pertain to
the acceptance of funds from depositors who are issued
interest-bearing promissory notes. The amounts
deposited are then loaned out to various
borrowers. Petitioner, in order to boost the business
activities of CCC-QC, deposited his personal funds in the
company. In return, CCC-QC issued to him its interest-
bearing promissory notes.
On August 15, 1980, a complaint for sum of money
with preliminary attachment,[1] docketed as Civil Case No.
Q-30583, was instituted in the then Court of First
Instance of Rizal by CCC-QC against petitioner, who had
in the meantime been dismissed from his employment by
CCC-Equity. The complaint was subsequently amended
in order to include Hidelita Nuval, petitioners wife, as a
party defendant.[2] The complaint alleged that petitioner
embezzled the funds of CCC-QC amounting to
P1,300,593.11. Out of this amount, at least P630,000.00
was used for the purchase of a house and lot located at
No. 12 Macopa Street, Valle Verde I, Pasig City. The
property was mortgaged to CCC, and was later
foreclosed.
In his amended Answer, petitioner denied having
unlawfully used funds of CCC-QC and asserted that the
sum of P1,300,593.11 represented his money
placements in CCC-QC, as shown by twenty-three (23)
checks which he issued to the said company.[3]
The case was subsequently transferred to the
Regional Trial Court of Quezon City, Branch 86, pursuant
to the Judiciary Reorganization Act of 1980.
On January 14, 1985, the trial court rendered its
decision, the decretal portion of which states:
Premises considered, the Court finds the complaint
without merit. Accordingly, said complaint is
hereby DISMISSED.
By reason of said complaint, defendant Bibiano
Reynoso IV suffered degradation, humiliation and
mental anguish.
On the counterclaim, which the Court finds to be
meritorious, plaintiff corporation is hereby ordered:
a) to pay defendant the sum of P185,000.00 plus
14% interest per annum from October 2, 1980 until
fully paid;
b) to pay defendant P3,639,470.82 plus interest
thereon at the rate of 14% per annum from June
24, 1981, the date of filing of Amended Answer,
until fully paid; from this amount may be deducted
the remaining obligation of defendant under the
promissory note of October 24, 1977, in the sum
of P9,738.00 plus penalty at the rate of 1% per
month from December 24, 1977 until fully paid;
c) to pay defendants P200,000.00 as moral
damages;
d) to pay defendants P100,000.00 as exemplary
damages;
e) to pay defendants P25,000.00 as and for
attorney's fees; plus costs of the suit.
SO ORDERED.
Both parties appealed to the then Intermediate
Appellate Court. The appeal of Commercial Credit
Corporation of Quezon City was dismissed for failure to
pay docket fees. Petitioner, on the other hand, withdrew
his appeal.
Hence, the decision became final and, accordingly, a
Writ of Execution was issued on July 24,
1989.[4] However, the judgment remained Corporation by the deputy sheriff of the court was
unsatisfied, prompting petitioner to file a Motion for Alias
[5]
erroneous.
Writ of Execution, Examination of Judgment Debtor, and
In his Opposition to the Omnibus Motion, petitioner
to Bring Financial Records for Examination to
insisted that General Credit Corporation is just the new
Court. CCC-QC filed an Opposition to petitioners
name of Commercial Credit Corporation; hence, General
motion,[6] alleging that the possession of its premises and
Credit Corporation and Commercial Credit Corporation
records had been taken over by CCC.
should be treated as one and the same entity.
Meanwhile, in 1983, CCC became known as the
On February 13, 1992, the Regional Trial Court of
General Credit Corporation.
Quezon City denied the Omnibus Motion.[12] On March 5,
On November 22, 1991, the Regional Trial Court of 1992, it issued an Order directing the issuance of an alias
Quezon City issued an Order directing General Credit writ of execution.[13]
Corporation to file its comment on petitioners motion for
Previously, on February 21, 1992, General Credit
alias writ of execution.[7] General Credit Corporation filed a
Corporation instituted a complaint before the Regional
Special Appearance and Opposition on December 2,
Trial Court of Pasig against Bibiano Reynoso IV and
1991,[8] alleging that it was not a party to the case, and
Edgardo C. Tanangco, in his capacity as Deputy Sheriff
therefore petitioner should direct his claim against CCC-
of Quezon City,[14] docketed as Civil Case No. 61777,
QC and not General Credit Corporation. Petitioner filed
praying that the levy on its parcel of land located in
his reply,[9] stating that the CCC-QC is an adjunct
Pasig, Metro Manila and covered by Transfer Certificate
instrumentality, conduit and agency of
of Title No. 29940 be declared null and void, and that
CCC. Furthermore, petitioner invoked the decision of the
defendant sheriff be enjoined from consolidating
Securities and Exchange Commission in SEC Case No.
ownership over the land and from further levying on other
2581, entitled, Avelina G. Ramoso, et al., Petitioner
properties of General Credit Corporation to answer for
versus General Credit Corp., et al., Respondents, where
any liability under the decision in Civil Case No. Q-30583.
it was declared that General Credit Corporation, CCC-
Equity and other franchised companies including CCC- The Regional Trial Court of Pasig, Branch 167, did
QC were declared as one corporation. not issue a temporary restraining order. Thus, General
Credit Corporation instituted two (2) petitions for certiorari
On December 9, 1991, the Regional Trial Court of
with the Court of Appeals, docketed as CA-G.R. SP No.
Quezon City ordered the issuance of an alias writ of
27518[15] and CA-G.R. SP No. 27683. These cases were
execution.[10] On December 20, 1991, General Credit
later consolidated.
Corporation filed an Omnibus Motion,[11] alleging that SEC
Case No. 2581 was still pending appeal, and maintaining
that the levy on properties of the General Credit
 On July 7, 1994, the Court of Appeals rendered a
decision in the two consolidated cases, the dispositive
portion of which reads:
WHEREFORE, in SP No. 27518 we declare the
issue of the respondent court's refusal to issue a
restraining order as having been rendered moot by
our Resolution of 7 April 1992 which, by way of
injunctive relief, provided that "the respondents
and their representatives are hereby enjoined from
conducting an auction sale (on execution) of
petitioner's properties as well as initiating similar
acts of levying (upon) and selling on execution
other properties of said petitioner". The injunction
thus granted, as modified by the words in
parenthesis, shall remain in force until Civil Case
No. 61777 shall have been finally terminated.
In SP No. 27683, we grant the petition for certiorari
and accordingly NULLIFY and SET ASIDE, for
having been issued in excess of jurisdiction, the
Order of 13 February 1992 in Civil Case No. Q-
30583 as well as any other order or process
through which the petitioner is made liable under
the judgment in said Civil Case No. Q-30583.
No damages and no costs.
SO ORDERED. [16]
Hence, this petition for review anchored on the
following arguments:
1. THE HONORABLE COURT OF APPEALS
ERRED IN CA-G.R. SP NO. 27683 WHEN IT
NULLIFIED AND SET ASIDE THE 13 FEBRUARY
1992 ORDER AND OTHER ORDERS OR
PROCESS OF BRANCH 86 OF THE REGIONAL
TRIAL COURT OF QUEZON CITY THROUGH
WHICH GENERAL CREDIT CORPORATION IS
MADE LIABLE UNDER THE JUDGMENT THAT
WAS RENDERED IN CIVIL CASE NO. Q-30583.
2. THE HONORABLE COURT OF APPEALS
ERRED IN CA-G.R. SP NO. 27518 WHEN IT
ENJOINED THE AUCTION SALE ON
EXECUTION OF THE PROPERTIES OF
GENERAL CREDIT CORPORATION AS WELL
AS INITIATING SIMILAR ACTS OF LEVYING
UPON AND SELLING ON EXECUTION OF
OTHER PROPERTIES OF GENERAL CREDIT
CORPORATION.
3. THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT GENERAL CREDIT
CORPORATION IS A STRANGER TO CIVIL
CASE NO. Q-30583, INSTEAD OF, DECLARING
THAT COMMERCIAL CREDIT CORPORATION
OF QUEZON CITY IS THE ALTER EGO,
INSTRUMENTALITY, CONDUIT OR ADJUNCT
OF COMMERCIAL CREDIT CORPORATION AND
ITS SUCCESSOR GENERAL CREDIT
CORPORATION.
At the outset, it must be stressed that there is no
longer any controversy over petitioners claims against his
former employer, CCC-QC, inasmuch as the decision in
Civil Case No. Q-30583 of the Regional Trial Court of
Quezon City has long become final and executory. The
only issue, therefore, to be resolved in the instant petition
is whether or not the judgment in favor of petitioner may
be executed against respondent General Credit
Corporation. The latter contends that it is a corporation
separate and distinct from CCC-QC and, therefore, its
properties may not be levied upon to satisfy the monetary
judgment in favor of petitioner. In short, respondent
raises corporate fiction as its defense. Hence, we are
necessarily called upon to apply the doctrine of piercing
the veil of corporate entity in order to determine if
General Credit Corporation, formerly CCC, may be held
liable for the obligations of CCC-QC.
The petition is impressed with merit.
A corporation is an artificial being created by
operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized
by law or incident to its existence.[17] It is an artificial being
invested by law with a personality separate and distinct from those of
the persons composing it as well as from that of any other legal
entity to which it may be related.[18] It was evolved to make possible
the aggregation and assembling of huge amounts of capital upon
which big business depends. It also has the advantage of non-
dependence on the lives of those who compose it even as it enjoys
certain rights and conducts activities of natural persons.
Precisely because the corporation is such a prevalent
and dominating factor in the business life of the country,
the law has to look carefully into the exercise of powers
by these artificial persons it has created.
Any piercing of the corporate veil has to be done with
caution. However, the Court will not hesitate to use its
supervisory and adjudicative powers where the corporate
fiction is used as an unfair device to achieve an
inequitable result, defraud creditors, evade contracts and
obligations, or to shield it from the effects of a court
decision. The corporate fiction has to be disregarded
when necessary in the interest of justice.
In First Philippine International Bank v. Court of
Appeals, et al.,[19] we held:
When the fiction is urged as a means of
perpetrating a fraud or an illegal act or as a vehicle
for the evasion of an existing obligation, the
circumvention of statutes, the achievement or
perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with
which the law covers and isolates the corporation
from the members or stockholders who compose it
will be lifted to allow for its consideration merely as
an aggregation of individuals.
Also in the above-cited case, we stated that this
Court has pierced the veil of corporate fiction in
numerous cases where it was used, among others, to
avoid a judgment credit;[20] to avoid inclusion of corporate
assets as part of the estate of a decedent;[21] to avoid
liability arising from debt;[22] when made use of as a shield
to perpetrate fraud and/or confuse legitimate issues; [23] or
to promote unfair objectives or otherwise to shield them.[24]
In the appealed judgment, the Court of Appeals
sustained respondents arguments of separateness and
its character as a different corporation which is a non-
party or stranger to this case.
The defense of separateness will be disregarded
where the business affairs of a subsidiary corporation are
so controlled by the mother corporation to the extent that
it becomes an instrument or agent of its parent. But even
when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate
fiction applies only when such fiction is used to defeat
public convenience, justify wrong, protect fraud or defend
crime.[25]
We stated in Tomas Lao Construction v. National
Labor Relations Commission,[26] that the legal fiction of a
corporation being a judicial entity with a distinct and
separate personality was envisaged for convenience and
to serve justice. Therefore, it should not be used as a
subterfuge to commit injustice and circumvent the law.
Precisely for the above reasons, we grant the instant
petition.
It is obvious that the use by CCC-QC of the same
name of Commercial Credit Corporation was intended to
publicly identify it as a component of the CCC group of
companies engaged in one and the same business, i.e.,
investment and financing. Aside from CCC-Quezon City,
other franchise companies were organized such as CCC-
North Manila and CCC-Cagayan Valley. The organization
of subsidiary corporations as what was done here is
usually resorted to for the aggrupation of capital, the
ability to cover more territory and population, the
decentralization of activities best decentralized, and the
securing of other legitimate advantages. But when the
mother corporation and its subsidiary cease to act in
good faith and honest business judgment, when the
corporate device is used by the parent to avoid its liability
for legitimate obligations of the subsidiary, and when the
corporate fiction is used to perpetrate fraud or promote
injustice, the law steps in to remedy the problem. When
that happens, the corporate character is not necessarily
abrogated. It continues for legitimate
objectives. However, it is pierced in order to remedy
injustice, such as that inflicted in this case.
Factually and legally, the CCC had dominant control
of the business operations of CCC-QC. The exclusive
management contract insured that CCC-QC would be
managed and controlled by CCC and would not deviate
from the commands of the mother corporation. In addition
to the exclusive management contract, CCC appointed
its own employee, petitioner, as the resident manager of
CCC-QC.
Petitioners designation as resident manager implies
that he was placed in CCC-QC by a superior authority. In
fact, even after his assignment to the subsidiary
corporation, petitioner continued to receive his salaries,
allowances, and benefits from CCC, which later became
respondent General Credit Corporation. Not only
that. Petitioner and the other permanent employees of
CCC-QC were qualified members and participants of the
Employees Pension Plan of CCC.
 There are other indications in the record which attest
to the applicability of the identity rule in this case,
namely: the unity of interests, management, and control;
the transfer of funds to suit their individual corporate
conveniences; and the dominance of policy and practice
by the mother corporation insure that CCC-QC was an
instrumentality or agency of CCC.
As petitioner stresses, both CCC and CCC-QC were
engaged in the same principal line of business involving
a single transaction process. Under their discounting
arrangements, CCC financed the operations of CCC-
QC. The subsidiary sold, discounted, or assigned its
accounts receivables to CCC.
The testimony of Joselito D. Liwanag, accountant
and auditor of CCC since 1971, shows the pervasive and
intensive auditing function of CCC over CCC-QC.[27] The
two corporations also shared the same office
space. CCC-QC had no office of its own.
The complaint in Civil Case No. Q-30583, instituted
by CCC-QC, was even verified by the director-
representative of CCC. The lawyers who filed the
complaint and amended complaint were all in-house
lawyers of CCC.
The challenged decision of the Court of Appeals
states that CCC, now General Credit Corporation, is not
a formal party in the case. The reason for this is that the
complaint was filed by CCC-QC against petitioner. The
choice of parties was with CCC-QC. The judgment award
in this case arose from the counterclaim which petitioner
set up against CCC-QC.
The circumstances which led to the filing of the
aforesaid complaint are quite revealing. As narrated
above, the discounting agreements through which CCC
controlled the finances of its subordinates became
unlawful when Central Bank adopted the DOSRI
prohibitions. Under this rule the directors, officers, and
stockholders are prohibited from borrowing from their
company. Instead of adhering to the letter and spirit of
the regulations by avoiding DOSRI loans altogether, CCC
used the corporate device to continue the prohibited
practice. CCC organized still another corporation, the
CCC-Equity Corporation. However, as a wholly owned
subsidiary, CCC-Equity was in fact only another name for
CCC. Key officials of CCC, including the resident
managers of subsidiary corporations, were appointed to
positions in CCC-Equity.
In order to circumvent the Central Banks disapproval
of CCC-QCs mode of reducing its DOSRI lender
accounts and its directive to follow Central Bank
requirements, resident managers, including petitioner,
were told to observe a pseudo-compliance with the
phasing out orders. For his unwillingness to satisfactorily
conform to these directives and his reluctance to resort to
illegal practices, petitioner earned the ire of his
employers. Eventually, his services were terminated, and
criminal and civil cases were filed against him.
Petitioner issued twenty-three checks as money
placements with CCC-QC because of difficulties faced by
the firm in implementing the required phase-out
program. Funds from his current account in the Far East
Bank and Trust Company were transferred to CCC-
QC. These monies were alleged in the criminal
complaints against him as having been stolen.Complaints
for qualified theft and estafa were brought by CCC-QC
against petitioner. These criminal cases were later
dismissed. Similarly, the civil complaint which was filed
with the Court of First Instance of Pasig and later
transferred to the Regional Trial Court of Quezon City
was dismissed, but his counterclaims were granted.
Faced with the financial obligations which CCC-QC
had to satisfy, the mother firm closed CCC-QC, in
obvious fraud of its creditors. CCC-QC, instead of
opposing its closure, cooperated in its own
demise. Conveniently, CCC-QC stated in its opposition to
the motion for alias writ of execution that all its properties
and assets had been transferred and taken over by CCC.
Under the foregoing circumstances, the contention of
respondent General Credit Corporation, the new name of
CCC, that the corporate fiction should be appreciated in
its favor is without merit.
Paraphrasing the ruling in Claparols v. Court of
Industrial Relations,[28] reiterated in Concept Builders Inc.
v. National Labor Relations,[29] it is very obvious that
respondent seeks the protective shield of a corporate
fiction whose veil the present case could, and should, be
pierced as it was deliberately and maliciously designed to
evade its financial obligation of its employees.
If the corporate fiction is sustained, it becomes a
handy deception to avoid a judgment debt and work an
injustice. The decision raised to us for review is an
invitation to multiplicity of litigation. As we stated
in Islamic Directorate vs. Court of Appeals,[30] the ends of
justice are not served if further litigation is encouraged
when the issue is determinable based on the records.
A court judgment becomes useless and ineffective if
the employer, in this case CCC as a mother corporation,
is placed beyond the legal reach of the judgment creditor
who, after protracted litigation, has been found entitled to
positive relief. Courts have been organized to put an end
to controversy. This purpose should not be negated by
an inapplicable and wrong use of the fiction of the
corporate veil.
WHEREFORE, the decision of the Court of Appeals
is hereby REVERSED and ASIDE. The injunction against
the holding of an auction sale for the execution of the
decision in Civil Case No. Q-30583 of properties of
General Credit Corporation, and the levying upon and
selling on execution of other properties of General Credit
Corporation, is LIFTED.
SO ORDERED.
G.R. No. 90580 April 8, 1991
RUBEN SAW, DIONISIO SAW, LINA S. CHUA, LUCILA S.
RUSTE AND EVELYN SAW, petitioners,
vs.
HON. COURT OF APPEALS, HON. BERNARDO P. PARDO,
Presiding Judge of Branch 43, (Regional Trial Court of
Manila), FREEMAN MANAGEMENT AND DEVELOPMENT
CORPORATION, EQUITABLE BANKING CORPORATION,
FREEMAN INCORPORATED, SAW CHIAO LIAN, THE
REGISTER OF DEEDS OF CALOOCAN CITY, and DEPUTY
SHERIFF ROSALIO G. SIGUA, respondents.
Benito O. Ching, Jr. for petitioners.
William R. Vetor for Equitable Banking Corp.
Pineda, Uy & Janolo for Freeman, Inc. and Saw Chiao.
CRUZ, J.:
A collection suit with preliminary attachment was filed by
Equitable Banking Corporation against Freeman, Inc. and Saw
Chiao Lian, its President and General Manager. The petitioners
moved to intervene, alleging that (1) the loan transactions
between Saw Chiao Lian and Equitable Banking Corp. were not
approved by the stockholders representing at least 2/3 of
corporate capital; (2) Saw Chiao Lian had no authority to contract
such loans; and (3) there was collusion between the officials of
Freeman, Inc. and Equitable Banking Corp. in securing the loans.
The motion to intervene was denied, and the petitioners appealed
to the Court of Appeals.
Meanwhile, Equitable and Saw Chiao Lian entered into a
compromise agreement which they submitted to and was
approved by the lower court. But because it was not complied
with, Equitable secured a writ of execution, and two lots owned by
Freeman, Inc. were levied upon and sold at public auction to
Freeman Management and Development Corp.
The Court of Appeals1 sustained the denial of the petitioners'
motion for intervention, holding that "the compromise agreement
between Freeman, Inc., through its President, and Equitable
Banking Corp. will not necessarily prejudice petitioners whose
rights to corporate assets are at most inchoate, prior to the
dissolution of Freeman, Inc. . . . And intervention under Sec. 2,
Rule 12 of the Revised Rules of Court is proper only when one's
right is actual, material, direct and immediate and not simply
contingent or expectant."
It also ruled against the petitioners' argument that because they
had already filed a notice of appeal, the trial judge had lost
jurisdiction over the case and could no longer issue the writ of
execution.
The petitioners are now before this Court, contending that:
1. The Honorable Court of Appeals erred in holding that
the petitioners cannot intervene in Civil Case No. 88-
44404 because their rights as stockholders of Freeman
are merely inchoate and not actual, material, direct and
immediate prior to the dissolution of the corporation;
2. The Honorable Court of Appeals erred in holding that
the appeal of the petitioners in said Civil Case No. 88-
44404 was confined only to the order denying their motion
to intervene and did not divest the trial court of its
jurisdiction over the whole case.
The petitioners base their right to intervene for the protection of
their interests as stockholders on Everett v. Asia Banking
Corp.2 where it was held:
The well-known rule that shareholders cannot ordinarily
sue in equity to redress wrongs done to the corporation,
but that the action must be brought by the Board of
Directors, . . . has its exceptions. (If the corporation [were]
under the complete control of the principal defendants, . .
. it is obvious that a demand upon the Board of Directors
to institute action and prosecute the same effectively
would have been useless, and the law does not require
litigants to perform useless acts.
Equitable demurs, contending that the collection suit against
Freeman, Inc, and Saw Chiao Lian is essentially in
personam and, as an action against defendants in their personal
capacities, will not prejudice the petitioners as stockholders of the
corporation. The Everett case is not applicable because it
involved an action filed by the minority stockholders where the
board of directors refused to bring an action in behalf of the
corporation. In the case at bar, it was Freeman, Inc. that was
being sued by the creditor bank.
Equitable also argues that the subject matter of the intervention
falls properly within the original and exclusive jurisdiction of the
Securities and Exchange Commission under P.D. No. 902-A. In
fact, at the time the motion for intervention was filed, there was
pending between Freeman, Inc. and the petitioners SEC Case
No. 03577 entitled "Dissolution, Accounting, Cancellation of
Certificate of Registration with Restraining Order or Preliminary
Injunction and Appointment of Receiver." It also avers in its
Comment that the intervention of the petitioners could have only
caused delay and prejudice to the principal parties.
On the second assignment of error, Equitable maintains that the
petitioners' appeal could only apply to the denial of their motion
for intervention and not to the main case because their
personality as party litigants had not been recognized by the trial
court.
After examining the issues and arguments of the parties, the
Court finds that the respondent court committed no reversible
error in sustaining the denial by the trial court of the petitioners'
motion for intervention.
In the case of Magsaysay-Labrador v. Court of Appeals,3 we ruled
as follows:
Viewed in the light of Section 2, Rule 12 of the Revised
Rules of Court, this Court affirms the respondent court's
holding that petitioners herein have no legal interest in the
subject matter in litigation so as to entitle them to
intervene in the proceedings below. In the case of
Batama Farmers' Cooperative Marketing Association, Inc.
v. Rosal, we held: "As clearly stated in Section 2 of Rule
12 of the Rules of Court, to be permitted to intervene in a
pending action, the party must have a legal interest in the
matter in litigation, or in the success of either of the
parties or an interest against both, or he must be so
situated as to be adversely affected by a distribution or
other disposition of the property in the custody of the
court or an officer thereof."
To allow intervention, [a] it must be shown that the
movant has legal interest in the matter in litigation, or
otherwise qualified; and [b] consideration must be given
as to whether the adjudication of the rights of the original
parties may be delayed or prejudiced, or whether the
intervenor's rights may be protected in a separate
proceeding or not. Both requirements must concur as the
first is not more important than the second.
The interest which entitles a person to intervene in a suit
between other parties must be in the matter in litigation
and of such direct and immediate character that the
intervenor will either gain or lose by the direct legal
operation and effect of the judgment. Otherwise, if
persons not parties of the action could be allowed to
intervene, proceedings will become unnecessarily
complicated, expensive and interminable. And this is not
the policy of the law.
The words "an interest in the subject" mean a direct
interest in the cause of action as pleaded, and which
would put the intervenor in a legal position to litigate a fact
alleged in the complaint, without the establishment of
which plaintiff could not recover.
 Here, the interest, if it exists at all, of petitioners-movants
is indirect, contingent, remote, conjectural, consequential
and collateral. At the very least, their interest is purely
inchoate, or in sheer expectancy of a right in the
management of the corporation and to share in the profits
thereof and in the properties and assets thereof on
dissolution, after payment of the corporate debts and
obligations.
While a share of stock represents a proportionate or
aliquot interest in the property of the corporation, it does
not vest the owner thereof with any legal right or title to
any of the property, his interest in the corporate property
being equitable or beneficial in nature. Shareholders are
in no legal sense the owners of corporate property, which
is owned by the corporation as a distinct legal person.
On the second assignment of error, the respondent court
correctly noted that the notice of appeal was filed by the
petitioners on October 24, 1988, upon the denial of their motion to
intervene, and the writ of execution was issued by the lower court
on January 30, 1989. The petitioners' appeal could not have
concerned the "whole" case (referring to the decision) because
the petitioners "did not appeal the decision as indeed they cannot
because they are not parties to the case despite their being
stockholders of respondent Freeman, Inc." They could only
appeal the denial of their motion for intervention as they were
never recognized by the trial court as party litigants in the main
case.
Intervention is "an act or proceeding by which a third person is
permitted to become a party to an action or proceeding between
other persons, and which results merely in the addition of a new
party or parties to an original action, for the purpose of hearing
and determining at the same time all conflicting claims which may
be made to the subject matter in litigation.4
It is not an independent proceeding, but an ancillary and
supplemental one which, in the nature of things, unless otherwise
provided for by the statute or Rules of Court, must be in
subordination to the main proceeding.5 It may be laid down as a
general rule that an intervenor is limited to the field of litigation
open to the original parties.6
In the case at bar, there is no more principal action to be resolved
as a writ of execution had already been issued by the lower court
and the claim of Equitable had already been satisfied. The
decision of the lower court had already become final and in fact
had already been enforced. There is therefore no more principal
proceeding in which the petitioners may intervene.
As we held in the case of Barangay Matictic v. Elbinias:7
An intervention has been regarded, as merely "collateral
or accessory or ancillary to the principal action and not an
independent proceedings; and interlocutory proceeding
dependent on and subsidiary to, the case between the
original parties." (Fransisco, Rules of Court, Vol. 1, p.
721). With the final dismissal of the original action, the
complaint in intervention can no longer be acted upon. In
the case of Clareza v. Resales, 2 SCRA 455, 457-458, it
was stated that:
That right of the intervenor should merely be in
aid of the right of the original party, like the
plaintiffs in this case. As this right of the plaintiffs
had ceased to exist, there is nothing to aid or fight
for. So the right of intervention has ceased to
exist.
Consequently, it will be illogical and of no useful purpose
to grant or even consider further herein petitioner's prayer
for the issuance of a writ of mandamus to compel the
lower court to allow and admit the petitioner's complaint in
 intervention. The dismissal of the expropriation case has
no less the inherent effect of also dismissing the motion
for intervention which is but the unavoidable
consequence.
The Court observes that even with the denial of the petitioners'
motion to intervene, nothing is really lost to them. The denial did
1âwphi1
not necessarily prejudice them as their rights are being litigated in
the case now before the Securities and Exchange Commission
and may be fully asserted and protected in that separate
proceeding.
WHEREFORE, the petition is DENIED, with costs against the
petitioners. It is so ordered.
G.R. No. 102970 May 13, 1993
LUZAN SIA, petitioner,
vs.
COURT OF APPEALS and SECURITY BANK and TRUST
COMPANY, respondents.
Asuncion Law Offices for petitioner.
Cauton, Banares, Carpio & Associates for private respondent.
DAVIDE, JR., J.:
The Decision of public respondent Court of Appeals in CA-G.R.
CV No. 26737, promulgated on 21 August 1991,1reversing and
setting aside the Decision, dated 19 February 1990, 2 of Branch
47 of the Regional Trial Court (RTC) of Manila in Civil Case No.
87-42601, entitled "LUZAN SIA vs. SECURITY BANK and
TRUST CO.," is challenged in this petition for review
on certiorari under Rule 45 of the Rules Court.
Civil Case No. 87-42601 is an action for damages arising out of
the destruction or loss of the stamp collection of the plaintiff
(petitioner herein) contained in Safety Deposit Box No. 54 which
had been rented from the defendant pursuant to a contract
denominated as a Lease Agreement. 3 Judgment therein was
rendered in favor of the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of the plaintiff and
against the defendant, Security Bank & Trust
Company, ordering the defendant bank to pay the
plaintiff the sum of —
a) Twenty Thousand Pesos (P20,000.00),
Philippine Currency, as actual damages;
b) One Hundred Thousand Pesos (P100,000.00),
Philippine Currency, as moral damages; and
c) Five Thousand Pesos (P5,000.00), Philippine
Currency, as attorney's fees and legal expenses.
The counterclaim set up by the defendant are
hereby dismissed for lack of merit.
No costs.
SO ORDERED.4
The antecedent facts of the present controversy are summarized
by the public respondent in its challenged decision as follows:
The plaintiff rented on March 22, 1985 the Safety
Deposit Box No. 54 of the defendant bank at its
Binondo Branch located at the Fookien Times
Building, Soler St., Binondo, Manila wherein he
placed his collection of stamps. The said safety
deposit box leased by the plaintiff was at the
bottom or at the lowest level of the safety deposit
boxes of the defendant bank at its aforesaid
Binondo Branch.
During the floods that took place in 1985 and
1986, floodwater entered into the defendant
bank's premises, seeped into the safety deposit
box leased by the plaintiff and caused, according
to the plaintiff, damage to his stamps collection.
The defendant bank rejected the plaintiff's claim
for compensation for his damaged stamps
collection, so, the plaintiff instituted an action for
damages against the defendant bank.
The defendant bank denied liability for the
damaged stamps collection of the plaintiff on the
basis of the "Rules and Regulations Governing
the Lease of Safe Deposit Boxes" (Exhs. "A-1",
"1-A"), particularly paragraphs 9 and 13, which
reads (sic):
"9. The liability of the Bank by reason of the lease,
is limited to the exercise of the diligence to
prevent the opening of the safe by any person
other than the Renter, his authorized agent or
legal representative;
xxx xxx xxx
"13. The Bank is not a depository of the contents
of the safe and it has neither the possession nor
the control of the same. The Bank has no interest
whatsoever in said contents, except as herein
provided, and it assumes absolutely no liability in
connection therewith."
The defendant bank also contended that its
contract with the plaintiff over safety deposit box
No. 54 was one of lease and not of deposit and,
therefore, governed by the lease agreement
(Exhs. "A", "L") which should be the applicable
law; that the destruction of the plaintiff's stamps
collection was due to a calamity beyond obligation
on its part to notify the plaintiff about the
floodwaters that inundated its premises at
Binondo branch which allegedly seeped into the
safety deposit box leased to the plaintiff.
The trial court then directed that an ocular
inspection on (sic) the contents of the safety
deposit box be conducted, which was done on
December 8, 1988 by its clerk of court in the
presence of the parties and their counsels. A
report thereon was then submitted on December
12, 1988 (Records, p. 98-A) and confirmed in
open court by both parties thru counsel during the
hearing on the same date (Ibid., p. 102) stating:
"That the Safety Box Deposit No.
54 was opened by both plaintiff
Luzan Sia and the Acting Branch
Manager Jimmy B. Ynion in the
presence of the undersigned,
plaintiff's and defendant's counsel.
Said Safety Box when opened
contains two albums of different
sizes and thickness, length and
 width and a tin box with printed
word 'Tai Ping Shiang Roast Pork
in pieces with Chinese designs
and character."
Condition of the above-stated Items —
"Both albums are wet, moldy and badly damaged.
1. The first album measures 10 1/8 inches in
length, 8 inches in width and 3/4 in thick. The
leaves of the album are attached to every page
and cannot be lifted without destroying it, hence
the stamps contained therein are no longer
visible.
2. The second album measure 12 1/2 inches in
length, 9 3/4 in width 1 inch thick. Some of its
pages can still be lifted. The stamps therein can
still be distinguished but beyond restoration.
Others have lost its original form.
3. The tin box is rusty inside. It contains an album
with several pieces of papers stuck up to the
cover of the box. The condition of the album is the
second abovementioned album."5
The SECURITY BANK AND TRUST COMPANY, hereinafter
referred to as SBTC, appealed the trial court's decision to the
public respondent Court of Appeals. The appeal was docketed as
CA-G.R. CV No. 26737.
In urging the public respondent to reverse the decision of the trial
court, SBTC contended that the latter erred in (a) holding that the
lease agreement is a contract of adhesion; (b) finding that the
defendant had failed to exercise the required diligence expected
of a bank in maintaining the safety deposit box; (c) awarding to
the plaintiff actual damages in the amount of P20,000.00, moral
damages in the amount of P100,000.00 and attorney's fees and
legal expenses in the amount of P5,000.00; and (d) dismissing
the counterclaim.
On 21 August 1991, the respondent promulgated its decision the
dispositive portion of which reads:
WHEREFORE, the decision appealed from is
hereby REVERSED and instead the appellee's
complaint is hereby DISMISSED. The appellant
bank's counterclaim is likewise DISMISSED. No
costs.6
In reversing the trial court's decision and absolving SBTC from
liability, the public respondent found and ruled that:
a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" )
constitutes the terms and conditions of the contract of lease
which the appellee (now petitioner) had voluntarily and knowingly
executed with SBTC;
b) the contract entered into by the parties regarding Safe Deposit
Box No. 54 was not a contract of deposit wherein the bank
became a depositary of the subject stamp collection; hence, as
contended by SBTC, the provisions of Book IV, Title XII of the
Civil Code on deposits do not apply;
c) The following provisions of the questioned lease agreement of
the safety deposit box limiting SBTC's liability:
9. The liability of the bank by reason of the lease,
is limited to the exercise of the diligence to
prevent the opening of the Safe by any person
other than the Renter, his authorized agent or
legal representative.
 xxx xxx xxx
13. The bank is not a depository of the contents of
the Safe and it has neither the possession nor the
control of the same. The Bank has no interest
whatsoever in said contents, except as herein
provided, and it assumes absolutely no liability in
connection therewith.
are valid since said stipulations are not contrary to law, morals,
good customs, public order or public policy; and
d) there is no concrete evidence to show that SBTC failed to
exercise the required diligence in maintaining the safety deposit
box; what was proven was that the floods of 1985 and 1986,
which were beyond the control of SBTC, caused the damage to
the stamp collection; said floods were fortuitous events which
SBTC should not be held liable for since it was not shown to have
participated in the aggravation of the damage to the stamp
collection; on the contrary, it offered its services to secure the
assistance of an expert in order to save most of the stamps, but
the appellee refused; appellee must then bear the lose under the
principle of "res perit domino."
Unsuccessful in his bid to have the above decision reconsidered
by the public respondent, 7 petitioner filed the instant petition
wherein he contends that:
I environmental circumstance of said safety deposit box after the
IT WAS A GRAVE ERROR OR AN ABUSE OF
DISCRETION ON THE PART OF THE
RESPONDENT COURT WHEN IT RULED THAT
RESPONDENT SBTC DID NOT FAIL TO
EXERCISE THE REQUIRED DILIGENCE IN
MAINTAINING THE SAFETY DEPOSIT BOX OF
THE PETITIONER CONSIDERING THAT
SUBSTANTIAL EVIDENCE EXIST (sic)
PROVING THE CONTRARY.
II
THE RESPONDENT COURT SERIOUSLY
ERRED IN EXCULPATING PRIVATE
RESPONDENT FROM ANY LIABILITY
WHATSOEVER BY REASON OF THE
PROVISIONS OF PARAGRAPHS 9 AND 13 OF
THE AGREEMENT (EXHS. "A" AND "A-1").
III
THE RESPONDENT COURT SERIOUSLY
ERRED IN NOT UPHOLDING THE AWARDS OF
THE TRIAL COURT FOR ACTUAL AND MORAL
DAMAGES, INCLUDING ATTORNEY'S FEES
AND LEGAL EXPENSES, IN FAVOR OF THE
PETITIONER.8
We subsequently gave due course the petition and required both
parties to submit their respective memoranda, which they
complied with.9
Petitioner insists that the trial court correctly ruled that SBTC had
failed "to exercise the required diligence expected of a bank
maintaining such safety deposit box . . . in the light of the
floods of 1985 and 1986." He argues that such a conclusion is
supported by the evidence on record, to wit: SBTC was fully
cognizant of the exact location of the safety deposit box in
question; it knew that the premises were inundated by
floodwaters in 1985 and 1986 and considering that the bank is
guarded twenty-four (24) hours a day , it is safe to conclude that it
was also aware of the inundation of the premises where the
safety deposit box was located; despite such knowledge,
however, it never bothered to inform the petitioner of the flooding
or take any appropriate measures to insure the safety and good
maintenance of the safety deposit box in question.
SBTC does not squarely dispute these facts; rather, it relies on
the rule that findings of facts of the Court of Appeals, when
supported by substantial exidence, are not reviewable on appeal
by certiorari. 10
The foregoing rule is, of course, subject to certain exceptions
such as when there exists a disparity between the factual findings
and conclusions of the Court of Appeals and the trial
court. 11 Such a disparity obtains in the present case.
As We see it, SBTC's theory, which was upheld by the public
respondent, is that the "Lease Agreement " covering Safe Deposit
Box No. 54 (Exhibit "A and "1") is just that — a contract of lease
— and not a contract of deposit, and that paragraphs 9 and 13
thereof, which expressly limit the bank's liability as follows:
9. The liability of the bank by reason of the lease,
is limited to the exercise of the diligence to
prevent the opening of the Safe by any person
other than the Renter, his autliorized agent or
legal representative;
xxx xxx xxx
13. The bank is not a depository of the contents of
the Safe and it has neither the possession nor the
control of the same. The Bank has no interest
whatsoever said contents, except as herein
provided, and it assumes absolutely no liability in
connection therewith. 12
are valid and binding upon the parties. In the challenged decision,
the public respondent further avers that even without such a
limitation of liability, SBTC should still be absolved from any
responsibility for the damage sustained by the petitioner as it
appears that such damage was occasioned by a fortuitous event
and that the respondent bank was free from any participation in
the aggravation of the injury.
We cannot accept this theory and ratiocination. Consequently,
this Court finds the petition to be impressed with merit.
In the recent case CA Agro-Industrial Development Corp. vs.
Court of Appeals, 13 this Court explicitly rejected the contention
that a contract for the use of a safety deposit box is a contract of
lease governed by Title VII, Book IV of the Civil Code. Nor did We
fully subscribe to the view that it is a contract of deposit to be
strictly governed by the Civil Code provision on deposit; 14 it is, as
We declared, a special kind of deposit. The prevailing rule in
American jurisprudence — that the relation between a bank
renting out safe deposit boxes and its customer with respect to
the contents of the box is that of a bailor and bailee, the bailment
for hire and mutual benefit 15 — has been adopted in this
jurisdiction, thus:
In the context of our laws which authorize banking
institutions to rent out safety deposit boxes, it is
clear that in this jurisdiction, the prevailing rule in
the United States has been adopted. Section 72
of the General Banking Act [R.A. 337, as
amended] pertinently provides:
"Sec. 72. In addition to the operations specifically
authorized elsewhere in this Act, banking
institutions other than building and loan
associations may perform the following services:
(a) Receive in custody funds,
documents, and valuable objects,
 and rent safety deposit boxes for
the safequarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted
under subsections (a), (b) and (c) of this section
as depositories or as agents. . . ."(emphasis
supplied)
Note that the primary function is still found within
the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and
other valuable objects for safekeeping. The
renting out of the safety deposit boxes is not
independent from, but related to or in conjunction
with, this principal function. A contract of deposit
may be entered into orally or in writing (Art. 1969,
Civil Code] and, pursuant to Article 1306 of the
Civil Code, the parties thereto may establish such
stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not
contrary to law, morals, good customs, public
order or public policy. The depositary's
responsibility for the safekeeping of the objects
deposited in the case at bar is governed by Title I,
Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its
obligation, it is found guilty of fraud, negligence,
delay or contravention of the tenor of the
agreement [Art. 1170, id.]. In the absence of any
stipulation prescribing the degree of diligence
required, that of a good father of a family is to be
observed [Art. 1173, id.]. Hence, any stipulation
exempting the depositary from any liability arising
from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being
contrary to law and public policy. In the instant
case, petitioner maintains that conditions 13 and
l4 of the questioned contract of lease of the safety
deposit box, which read:
"13. The bank is a depositary of the contents of
the safe and it has neither the possession nor
control of the same.
"14. The bank has no interest whatsoever in said
contents, except as herein expressly provided,
and it assumes absolutely no liability in
connection therewith."
are void as they are contrary to law and public
policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are
inconsistent with the respondent Bank's
responsibility as a depositary under Section 72 (a)
of the General Banking Act. Both exempt the
latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise
reasonable diligence only with respect to who
shall be admitted to any rented safe, to wit:
"8. The Bank shall use due
diligence that no unauthorized
person shall be admitted to any
rented safe and beyond this, the
Bank will not be responsible for
the contents of any safe rented
from it."
Furthermore condition 13 stands on a wrong
premise and is contrary to the actual practice of
the Bank. It is not correct to assert that the Bank
has neither the possession nor control of the
contents of the box since in fact, the safety
deposit box itself is located in its premises and is
under its absolute control; moreover, the
respondent Bank keeps the guard key to the said
box. As stated earlier, renters cannot open their
respective boxes unless the Bank cooperates by
presenting and using this guard key. Clearly then,
to the extent above stated, the foregoing
conditions in the contract in question are void and
ineffective. It has been said:
"With respect to property
deposited in a safe-deposit box by
a customer of a safe-deposit
company, the parties, since the
relation is a contractual one, may
by special contract define their
respective duties or provide for
increasing or limiting the liability of
the deposit company, provided
such contract is not in violation of
law or public policy. It must clearly
appear that there actually was
such a special contract, however,
in order to vary the ordinary
obligations implied by law from the
relationship of the parties; liability
of the deposit company will not be
enlarged or restricted by words of
doubtful meaning. The company,
in renting safe-deposit boxes,
cannot exempt itself from liability
for loss of the contents by its own
fraud or negligence or that, of its
agents or servants, and if a
provision of the contract may be
construed as an attempt to do so,
it will be held ineffective for the
purpose. Although it has been
held that the lessor of a safe-
deposit box cannot limit its liability
for loss of the contents thereof
through its own negligence, the
view has been taken that such a
lessor may limit its liability to some
extent by agreement or stipulation
."[10 AM JUR 2d., 466]. (citations
omitted) 16
It must be noted that conditions No. 13 and No. 14 in the Contract
of Lease of Safety Deposit Box in CA Agro-Industrial
Development Corp. are strikingly similar to condition No. 13 in the
instant case. On the other hand, both condition No. 8 in CA Agro-
Industrial Development Corp. and condition No. 9 in the present
case limit the scope of the exercise of due diligence by the banks
involved to merely seeing to it that only the renter, his authorized
agent or his legal representative should open or have access to
the safety deposit box. In short, in all other situations, it would
seem that SBTC is not bound to exercise diligence of any kind at
all. Assayed in the light of Our aforementioned pronouncements
in CA Agro-lndustrial Development Corp., it is not at all difficult to
conclude that both conditions No. 9 and No. 13 of the "Lease
Agreement" covering the safety deposit box in question (Exhibits
"A" and "1") must be stricken down for being contrary to law and
public policy as they are meant to exempt SBTC from any liability
for damage, loss or destruction of the contents of the safety
deposit box which may arise from its own or its agents' fraud,
negligence or delay. Accordingly, SBTC cannot take refuge under
the said conditions.
Public respondent further postulates that SBTC cannot be held
responsible for the destruction or loss of the stamp collection
because the flooding was a fortuitous event and there was no
showing of SBTC's participation in the aggravation of the loss or
injury. It states:
Article 1174 of the Civil Code provides:
 "Except in cases expressly
specified by the law, or when it is
otherwise declared by stipulation,
or when the nature of the
obligation requires the assumption
of risk, no person shall be
responsible for those events which
could not be foreseen, or which,
though foreseen, were inevitable.'
In its dissertation of the phrase "caso
fortuito" the Enciclopedia Jurisdicada
Española 17 says: "In a legal sense and, consequently, also in
relation to contracts, a "caso fortuito" prevents (sic) 18 the following
essential characteristics: (1) the cause of the unforeseen ands
unexpected occurrence, or of the failure of the debtor to comply with
his obligation, must be independent of the human will; (2) it must be
impossible to foresee the event which constitutes the "caso
fortuito," or if it can be foreseen, it must be impossible to avoid; (3) the
occurrence must be such as to render it impossible for one debtor to
fulfill his obligation in a normal manner; and (4) the obligor must be
free from any participation in the aggravation of the injury resulting to
the creditor." (cited in Servando vs. Phil., Steam Navigation
Co., supra). 19
Here, the unforeseen or unexpected inundating
floods were independent of the will of the
appellant bank and the latter was not shown to
have participated in aggravating damage (sic) to
the stamps collection of the appellee. In fact, the
appellant bank offered its services to secure the
assistance of an expert to save most of the then
good stamps but the appelle refused and let (sic)
these recoverable stamps inside the safety
deposit box until they were ruined. 20
Both the law and authority cited are clear enough and require no
further elucidation. Unfortunately, however, the public respondent
failed to consider that in the instant case, as correctly held by the
trial court, SBTC was guilty of negligence. The facts constituting
negligence are enumerated in the petition and have been
summarized in thisponencia. SBTC's negligence aggravated the
injury or damage to the stamp collection. SBTC was aware of the
floods of 1985 and 1986; it also knew that the floodwaters
inundated the room where Safe Deposit Box No. 54 was located.
In view thereof, it should have lost no time in notifying the
petitioner in order that the box could have been opened to
retrieve the stamps, thus saving the same from further
deterioration and loss. In this respect, it failed to exercise the
reasonable care and prudence expected of a good father of a
family, thereby becoming a party to the aggravation of the injury
or loss. Accordingly, the aforementioned fourth characteristic of a
fortuitous event is absent Article 1170 of the Civil Code, which
reads:
Those who in the performance of their obligation
are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof,
are liable for damages,
thus comes to the succor of the petitioner. The destruction or loss
of the stamp collection which was, in the language of the trial
court, the "product of 27 years of patience and
diligence" 21 caused the petitioner pecuniary loss; hence, he must
be compensated therefor.
We cannot, however, place Our imprimatur on the trial court's
award of moral damages. Since the relationship between the
petitioner and SBTC is based on a contract, either of them may
be held liable for moral damages for breach thereof only if said
party had acted fraudulently or in bad faith. 22 There is here no
proof of fraud or bad faith on the part of SBTC.
WHEREFORE, the instant petition is hereby GRANTED. The
challenged Decision and Resolution of the public respondent
Court of Appeals of 21 August 1991 and 21 November 1991,
respectively, in CA-G.R. CV No. 26737, are hereby SET ASIDE
and the Decision of 19 February 1990 of Branch 47 of the
Regional Trial Court of Manila in Civil Case No. 87-42601 is
hereby REINSTATED in full, except as to the award of moral
damages which is hereby set aside.

Costs against the private respondent.

SO ORDERED.