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SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE COURT OF APPEALS, THE CIVIL SERVICE
COMMISSION and AL-AMANAH INVESTMENT BANK OF THE PHILIPPINES, respondents.

DECISION
CHICO-NAZARIO, J.:

This is a petition for certiorari under Rule 65 of the Rules of Court of the Decision[1] of the Court of Appeals
of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission (CSC)
dated 11 August 1994 and 11 April 1995, respectively, which in turn affirmed Resolution No. 2309 of the Board
of Directors of the Al-Amanah Islamic Investment Bank of the Philippines (AIIBP) dated 13 December 1993,
finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the
Best Interest of the Service and dismissing him from the service, and its Resolution [2] of 15 December 1999
dismissing petitioners Motion for Reconsideration.
The records show that petitioner Sappari K. Sawadjaan was among the first employees of the Philippine
Amanah Bank (PAB) when it was created by virtue of Presidential Decree No. 264 on 02 August 1973. He rose
through the ranks, working his way up from his initial designation as security guard, to settling clerk,
bookkeeper, credit investigator, project analyst, appraiser/ inspector, and eventually, loans analyst. [3]
In February 1988, while still designated as appraiser/investigator, Sawadjaan was assigned to inspect the
properties offered as collaterals by Compressed Air Machineries and Equipment Corporation (CAMEC) for a
credit line of Five Million Pesos (P5,000,000.00). The properties consisted of two parcels of land covered by
Transfer Certificates of Title (TCTs) No. N-130671 and No. C-52576. On the basis of his Inspection and Appraisal
Report,[4] the PAB granted the loan application. When the loan matured on 17 May 1989, CAMEC requested an
extension of 180 days, but was granted only 120 days to repay the loan.[5]
In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989.[6]
In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No. 264 (which
created the PAB). All assets, liabilities and capital accounts of the PAB were transferred to the AIIBP, [7] and the
existing personnel of the PAB were to continue to discharge their functions unless discharged. [8] In the ensuing
reorganization, Sawadjaan was among the personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP, discovered
that TCT No. N-130671 was spurious, the property described therein non-existent, and that the property
covered by TCT No. C-52576 had a prior existing mortgage in favor of one Divina Pablico.
On 08 June 1993, the Board of Directors of the AIIBP created an Investigating Committee to look into the
CAMEC transaction, which had cost the bank Six Million Pesos (P6,000,000.00) in losses.[9] The subsequent
events, as found and decided upon by the Court of Appeals,[10] are as follows:

On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP] Chairman Roberto F. De Ocampo
charging him with Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best
Interest of the Service and preventively suspending him.

In his memorandum dated 8 September 1993, petitioner informed the Investigating Committee that he could
not submit himself to the jurisdiction of the Committee because of its alleged partiality. For his failure to appear
before the hearing set on 17 September 1993, after the hearing of 13 September 1993 was postponed due to
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the Manifestation of even date filed by petitioner, the Investigating Committee declared petitioner in default
and the prosecution was allowed to present its evidence ex parte.

On 08 December 1993, the Investigating Committee rendered a decision, the pertinent portions of which reads
as follows:

In view of respondent SAWADJAANS abject failure to perform his duties and assigned tasks as
appraiser/inspector, which resulted to the prejudice and substantial damage to the Bank, respondent should be
held liable therefore. At this juncture, however, the Investigating Committee is of the considered opinion that
he could not be held liable for the administrative offense of dishonesty considering the fact that no evidence
was adduced to show that he profited or benefited from being remiss in the performance of his duties. The
record is bereft of any evidence which would show that he received any amount in consideration for his non-
performance of his official duties.

This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his official
duties resulted to the prejudice and substantial damage to the Islamic Bank for which he should be held liable
for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.

Premises considered, the Investigating Committee recommends that respondent SAPPARI SAWADJAAN be
meted the penalty of SIX (6) MONTHS and ONE (1) DAY SUSPENSION from office in accordance with the Civil
Service Commissions Memorandum Circular No. 30, Series of 1989.

On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted Resolution No. 2309 finding
petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best
Interest of the Service and imposing the penalty of Dismissal from the Service.

On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the Resolution No. 2332 on 20
February 1994 reducing the penalty imposed on petitioner from dismissal to suspension for a period of six (6)
months and one (1) day.

On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection Board (MSPB).

On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal for lack of merit and
affirming Resolution No. 2309 dated 13 December 1993 of the Board of Directors of Islamic Bank.

On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners Motion for Reconsideration.

On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on the following assignment
of errors:

I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has committed a grave abuse
of discretion amounting to excess or lack of jurisdiction when it initiated and conducted administrative
investigation without a validly promulgated rules of procedure in the adjudication of administrative cases at the
Islamic Bank.
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II. Public respondent Civil Service Commission has committed a grave abuse of discretion amounting to
lack of jurisdiction when it prematurely and falsely assumed jurisdiction of the case not appealed to it, but to
the Merit System Protection Board.

III. Both the Islamic Bank and the Civil Service Commission erred in finding petitioner Sawadjaan of having
deliberately reporting false information and therefore guilty of Dishonesty and Conduct Prejudicial to the Best
Interest of the Service and penalized with dismissal from the service.

On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this Honorable Court pursuant
to Revised Administrative Circular No. 1-95, which took effect on 01 June 1995.

We do not find merit [in] the petition.

Anent the first assignment of error, a reading of the records would reveal that petitioner raises for the first time
the alleged failure of the Islamic Bank [AIIBP] to promulgate rules of procedure governing the adjudication and
disposition of administrative cases involving its personnel. It is a rule that issues not properly brought and
ventilated below may not be raised for the first time on appeal, save in exceptional circumstances (Casolita, Sr.
v. Court of Appeals, 275 SCRA 257) none of which, however, obtain in this case. Granting arguendo that the issue
is of such exceptional character that the Court may take cognizance of the same, still, it must fail. Section 26 of
Republic Act No. 6848 (1990) provides:

Section 26. Powers of the Board. The Board of Directors shall have the broadest powers to manage the Islamic
Bank, x x x The Board shall adopt policy guidelines necessary to carry out effectively the provisions of this Charter
as well as internal rules and regulations necessary for the conduct of its Islamic banking business and all matters
related to personnel organization, office functions and salary administration. (Italics ours)

On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled Prescribing Procedure and Sanctions to
Ensure Speedy Disposition of Administrative Cases directs, all administrative agencies to adopt and include in
their respective Rules of Procedure provisions designed to abbreviate administrative proceedings.

The above two (2) provisions relied upon by petitioner does not require the Islamic Bank [AIIBP] to promulgate
rules of procedure before administrative discipline may be imposed upon its employees. The internal rules of
procedures ordained to be adopted by the Board refers to that necessary for the conduct of its Islamic banking
business and all matters related to personnel organization, office functions and salary administration. On the
contrary, Section 26 of RA 6848 gives the Board of Directors of the Islamic Bank the broadest powers to manage
the Islamic Bank. This grant of broad powers would be an idle ceremony if it would be powerless to discipline
its employees.

The second assignment of error must likewise fail. The issue is raised for the first time via this petition
for certiorari. Petitioner submitted himself to the jurisdiction of the CSC. Although he could have raised the
alleged lack of jurisdiction in his Motion for Reconsideration of Resolution No. 94-4483 of the CSC, he did not
do so. By filing the Motion for Reconsideration, he is estopped from denying the CSCs jurisdiction over him, as
it is settled rule that a party who asks for an affirmative relief cannot later on impugn the action of the tribunal
as without jurisdiction after an adverse result was meted to him. Although jurisdiction over the subject matter
of a case may be objected to at any stage of the proceedings even on appeal, this particular rule, however,
means that jurisdictional issues in a case can be raised only during the proceedings in said case and during the
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appeal of said case (Aragon v. Court of Appeals, 270 SCRA 603). The case at bar is a petition [for] certiorari and
not an appeal.

But even on the merits the argument must falter. Item No. 1 of CSC Resolution No. 93-2387 dated 29 June 1993,
provides:

Decisions in administrative cases involving officials and employees of the civil service appealable to the
Commission pursuant to Section 47 of Book V of the Code (i.e., Administrative Code of 1987) including personnel
actions such as contested appointments shall now be appealed directly to the Commission and not to the MSPB.

In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically held:

. . . The functions of the MSPB relating to the determination of administrative disciplinary cases were, in other
words, re-allocated to the Commission itself.

Be that as it may, (i)t is hornbook doctrine that in order `(t)o ascertain whether a court (in this case,
administrative agency) has jurisdiction or not, the provisions of the law should be inquired into. Furthermore,
`the jurisdiction of the court must appear clearly from the statute law or it will not be held to exist.(Azarcon v.
Sandiganbayan, 268 SCRA 747, 757) From the provision of law abovecited, the Civil Service Commission clearly
has jurisdiction over the Administrative Case against petitioner.

Anent the third assignment of error, we likewise do not find merit in petitioners proposition that he should not
be liable, as in the first place, he was not qualified to perform the functions of appraiser/investigator because
he lacked the necessary training and expertise, and therefore, should not have been found dishonest by the
Board of Directors of Islamic Bank [AIIBP] and the CSC. Petitioner himself admits that the position of
appraiser/inspector is one of the most serious [and] sensitive job in the banking operations. He should have
been aware that accepting such a designation, he is obliged to perform the task at hand by the exercise of more
than ordinary prudence. As appraiser/investigator, he is expected, among others, to check the authenticity of
the documents presented by the borrower by comparing them with the originals on file with the proper
government office. He should have made it sure that the technical descriptions in the location plan on file with
the Bureau of Lands of Marikina, jibe with that indicated in the TCT of the collateral offered by CAMEC, and that
the mortgage in favor of the Islamic Bank was duly annotated at the back of the copy of the TCT kept by the
Register of Deeds of Marikina. This, petitioner failed to do, for which he must be held liable. That he did not
profit from his false report is of no moment. Neither the fact that it was not deliberate or willful, detracts from
the nature of the act as dishonest. What is apparent is he stated something to be a fact, when he really was not
sure that it was so.

WHEREFORE, above premises considered, the instant Petition is DISMISSED, and the assailed Resolutions of the
Civil Service Commission are hereby AFFIRMED.

On 24 March 1999, Sawadjaans counsel notified the court a quo of his change of address,[11] but apparently
neglected to notify his client of this fact. Thus, on 23 July 1999, Sawadjaan, by himself, filed a Motion for New
Trial[12] in the Court of Appeals based on the following grounds: fraud, accident, mistake or excusable negligence
and newly discovered evidence. He claimed that he had recently discovered that at the time his employment
was terminated, the AIIBP had not yet adopted its corporate by-laws. He attached a Certification[13] by the
Securities and Exchange Commission (SEC) that it was only on 27 May 1992 that the AIIBP submitted its draft
by-laws to the SEC, and that its registration was being held in abeyance pending certain corrections being made
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thereon. Sawadjaan argued that since the AIIBP failed to file its by-laws within 60 days from the passage of Rep.
Act No. 6848, as required by Sec. 51 of the said law, the bank and its stockholders had already forfeited its
franchise or charter, including its license to exist and operate as a corporation,[14] and thus no longer have the
legal standing and personality to initiate an administrative case.
Sawadjaans counsel subsequently adopted his motion, but requested that it be treated as a motion for
reconsideration.[15] This motion was denied by the court a quo in its Resolution of 15 December 1999.[16]
Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of the Rules of Court
challenging the above Decision and Resolution of the Court of Appeals on the ground that the court a quo erred:
i) in ignoring the facts and evidences that the alleged Islamic Bank has no valid by-laws; ii) in ignoring the facts
and evidences that the Islamic Bank lost its juridical personality as a corporation on 16 April 1990; iii) in ignoring
the facts and evidences that the alleged Islamic Bank and its alleged Board of Directors have no jurisdiction to
act in the manner they did in the absence of a valid by-laws; iv) in not correcting the acts of the Civil Service
Commission who erroneously rendered the assailed Resolutions No. 94-4483 and No. 95-2754 as a result of
fraud, falsification and/or misrepresentations committed by Farouk A. Carpizo and his group, including Roberto
F. de Ocampo; v) in affirming an unconscionably harsh and/or excessive penalty; and vi) in failing to consider
newly discovered evidence and reverse its decision accordingly.
Subsequently, petitioner Sawadjaan filed an Ex-parte Urgent Motion for Additional Extension of Time to
File a Reply (to the Comments of Respondent Al-Amanah Investment Bank of the Philippines),[17] Reply (to
Respondents Consolidated Comment,)[18] and Reply (to the Alleged Comments of Respondent Al-Amanah
Islamic Bank of the Philippines).[19] On 13 October 2000, he informed this Court that he had terminated his
lawyers services, and, by himself, prepared and filed the following: 1) Motion for New Trial; [20] 2) Motion to
Declare Respondents in Default and/or Having Waived their Rights to Interpose Objection to Petitioners Motion
for New Trial;[21] 3) Ex-Parte Urgent Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G.
Reyes, Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of Court & to Inhibit them from
Appearing in this Case Until they Can Present Valid Evidence of Legal Authority;[22] 4) Opposition/Reply (to
Respondent AIIBPs Alleged Comment);[23] 5) Ex-Parte Urgent Motion to Punish Atty. Reynaldo A. Pineda for
Contempt of Court and the Issuance of a Commitment Order/Warrant for His Arrest;[24] 6) Reply/Opposition (To
the Formal Notice of Withdrawal of Undersigned Counsel as Legal Counsel for the Respondent Islamic Bank with
Opposition to Petitioners Motion to Punish Undersigned Counsel for Contempt of Court for the Issuance of a
Warrant of Arrest);[25] 7) Memorandum for Petitioner;[26] 8) Opposition to SolGens Motion for Clarification with
Motion for Default and/or Waiver of Respondents to File their Memorandum; [27] 9) Motion for Contempt of
Court and Inhibition/Disqualification with Opposition to OGCCs Motion for Extension of Time to File
Memorandum;[28] 10) Motion for Enforcement (In Defense of the Rule of Law);[29] 11) Motion and Opposition
(Motion to Punish OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and
Dominador R. Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant for their Arrest; and Opposition
to their Alleged Manifestation and Motion Dated February 5, 2002); [30] 12) Motion for Reconsideration of Item
(a) of Resolution dated 5 February 2002 with Supplemental Motion for Contempt of Court; [31] 13) Motion for
Reconsideration of Portion of Resolution Dated 12 March 2002;[32] 14) Ex-Parte Urgent Motion for Extension of
Time to File Reply Memorandum (To: CSC and AIIBPs Memorandum);[33] 15) Reply Memorandum (To: CSCs
Memorandum) With Ex-Parte Urgent Motion for Additional Extension of time to File Reply Memorandum (To:
AIIBPs Memorandum);[34] and 16) Reply Memorandum (To: OGCCs Memorandum for Respondent AIIBP).[35]
Petitioners efforts are unavailing, and we deny his petition for its procedural and substantive flaws.
The general rule is that the remedy to obtain reversal or modification of the judgment on the merits is
appeal. This is true even if the error, or one of the errors, ascribed to the court rendering the judgment is its
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lack of jurisdiction over the subject matter, or the exercise of power in excess thereof, or grave abuse of
discretion in the findings of fact or of law set out in the decision. [36]
The records show that petitioners counsel received the Resolution of the Court of Appeals denying his
motion for reconsideration on 27 December 1999. The fifteen day reglamentary period to appeal under Rule 45
of the Rules of Court therefore lapsed on 11 January 2000. On 23 February 2000, over a month after receipt of
the resolution denying his motion for reconsideration, the petitioner filed his petition for certiorari under Rule
65.
It is settled that a special civil action for certiorari will not lie as a substitute for the lost remedy of
appeal,[37] and though there are instances[38] where the extraordinary remedy of certiorari may be resorted to
despite the availability of an appeal,[39] we find no special reasons for making out an exception in this case.
Even if we were to overlook this fact in the broader interests of justice and treat this as a special civil action
for certiorari under Rule 65,[40] the petition would nevertheless be dismissed for failure of the petitioner to show
grave abuse of discretion. Petitioners recurrent argument, tenuous at its very best, is premised on the fact that
since respondent AIIBP failed to file its by-laws within the designated 60 days from the effectivity of Rep. Act
No. 6848, all proceedings initiated by AIIBP and all actions resulting therefrom are a patent nullity. Or, in his
words, the AIIBP and its officers and Board of Directors,

. . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic Bank, file administrative
charges and investigate petitioner in the manner they did and allegedly passed Board Resolution No. 2309 on
December 13, 1993 which is null and void for lack of an (sic) authorized and valid by-laws. The CIVIL SERVICE
COMMISSION was therefore affirming, erroneously, a null and void Resolution No. 2309 dated December 13,
1993 of the Board of Directors of Al-Amanah Islamic Investment Bank of the Philippines in CSC Resolution No.
94-4483 dated August 11, 1994. A motion for reconsideration thereof was denied by the CSC in its Resolution
No. 95-2754 dated April 11, 1995. Both acts/resolutions of the CSC are erroneous, resulting from fraud,
falsifications and misrepresentations of the alleged Chairman and CEO Roberto F. de Ocampo and the alleged
Director Farouk A. Carpizo and his group at the alleged Islamic Bank.[41]

Nowhere in petitioners voluminous pleadings is there a showing that the court a quo committed grave
abuse of discretion amounting to lack or excess of jurisdiction reversible by a petition for certiorari. Petitioner
already raised the question of AIIBPs corporate existence and lack of jurisdiction in his Motion for New
Trial/Motion for Reconsideration of 27 May 1997 and was denied by the Court of Appeals. Despite the volume
of pleadings he has submitted thus far, he has added nothing substantial to his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business, has
shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact, here represented by
the Office of the Government Corporate Counsel, the principal law office of government-owned corporations,
one of which is respondent bank.[42] At the very least, by its failure to submit its by-laws on time, the AIIBP may
be considered a de facto corporation[43] whose right to exercise corporate powers may not be inquired into
collaterally in any private suit to which such corporations may be a party.[44]
Moreover, a corporation which has failed to file its by-laws within the prescribed period does not ipso
facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of Registration of
Corporations,[45] details the procedures and remedies that may be availed of before an order of revocation can
be issued. There is no showing that such a procedure has been initiated in this case.
In any case, petitioners argument is irrelevant because this case is not a corporate controversy, but a labor
dispute; and it is an employers basic right to freely select or discharge its employees, if only as a measure of self-
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protection against acts inimical to itsinterest.[46]Regardless of whether AIIBP is a corporation, a partnership, a
sole proprietorship, or a sari-sari store, it is an undisputed fact that AIIBP is the petitioners employer. AIIBP
chose to retain his services during its reorganization, controlled the means and methods by which his work was
to be performed, paid his wages, and, eventually, terminated his services.[47]
And though he has had ample opportunity to do so, the petitioner has not alleged that he is anything other
than an employee of AIIBP. He has neither claimed, nor shown, that he is a stockholder or an officer of the
corporation. Having accepted employment from AIIBP, and rendered his services to the said bank, received his
salary, and accepted the promotion given him, it is now too late in the day for petitioner to question its existence
and its power to terminate his services. One who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact no corporation. [48]
Even if we were to consider the facts behind petitioner Sawadjaans dismissal from service, we would be
hard pressed to find error in the decision of the AIIBP.
As appraiser/investigator, the petitioner was expected to conduct an ocular inspection of the properties
offered by CAMEC as collaterals and check the copies of the certificates of title against those on file with the
Registry of Deeds. Not only did he fail to conduct these routine checks, but he also deliberately misrepresented
in his appraisal report that after reviewing the documents and conducting a site inspection, he found the CAMEC
loan application to be in order. Despite the number of pleadings he has filed, he has failed to offer an alternative
explanation for his actions.
When he was informed of the charges against him and directed to appear and present his side on the
matter, the petitioner sent instead a memorandum questioning the fairness and impartiality of the members of
the investigating committee and refusing to recognize their jurisdiction over him. Nevertheless, the investigating
committee rescheduled the hearing to give the petitioner another chance, but he still refused to appear before
it.
Thereafter, witnesses were presented, and a decision was rendered finding him guilty of dishonesty and
dismissing him from service. He sought a reconsideration of this decision and the same committee whose
impartiality he questioned reduced their recommended penalty to suspension for six months and one day. The
board of directors, however, opted to dismiss him from service.
On appeal to the CSC, the Commission found that Sawadjaans failure to perform his official duties greatly
prejudiced the AIIBP, for which he should be held accountable. It held that:

. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the performance of his duties as
appraiser/inspector. Had respondent performed his duties as appraiser/inspector, he could have easily noticed
that the property located at Balintawak, Caloocan City covered by TCT No. C-52576 and which is one of the
properties offered as collateral by CAMEC is encumbered to Divina Pablico. Had respondent reflected such fact
in his appraisal/inspection report on said property the ISLAMIC BANK would not have approved CAMECs loan of
P500,000.00 in 1987 and CAMECs P5 Million loan in 1988, respondent knowing fully well the Banks policy of not
accepting encumbered properties as collateral.

Respondent SAWADJAANs reprehensible act is further aggravated when he failed to check and verify from the
Registry of Deeds of Marikina the authenticity of the property located at Mayamot, Antipolo, Rizal covered by
TCT No. N-130671 and which is one of the properties offered as collateral by CAMEC for its P5 Million loan in
1988. If he only visited and verified with the Register of Deeds of Marikina the authenticity of TCT No. N-130671
he could have easily discovered that TCT No. N-130671 is fake and the property described therein non-existent.
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...

This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his official
duties resulted to the prejudice and substantial damage to the ISLAMIC BANK for which he should be held liable
for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE. [49]

From the foregoing, we find that the CSC and the court a quo committed no grave abuse of discretion when
they sustained Sawadjaans dismissal from service. Grave abuse of discretion implies such capricious and
whimsical exercise of judgment as equivalent to lack of jurisdiction, or, in other words, where the power is
exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and it must be so patent
and gross as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to
act at all in contemplation of law.[50] The records show that the respondents did none of these; they acted in
accordance with the law.
WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of 30 March 1999 affirming
Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission, and its Resolution of 15 December
1999 are hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.
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G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,


vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,


vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY
EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No.
66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The
plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was
dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff
the amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly;
plus 15% of the amount awarded to plaintiff as attorney's fees from July 2,1966, until full
payment is made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses
aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required
to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the
amount of Pl84,878.74 with interest from the filing of the cross-complaints until the amount is
fully paid; plus moral and exemplary damages in the amount of P184,878.84 with interest from
the filing of the cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.
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Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another
P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants
Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is
required to indemnify the defendants Bormaheco and the Cervanteses the amount of P20,000.00
as attorney's fees and the amount of P4,379.21, per year from 1966 with legal rate of interest up
to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as
attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith.
The fact that the properties of the Bormaheco and the Cervanteses were attached and that they
were required to file a counterbond in order to dissolve the attachment, is not an act of bad faith.
When a man tries to protect his rights, he should not be saddled with moral or exemplary
damages. Furthermore, the rights exercised were provided for in the Rules of Court, and it was
the court that ordered it, in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for
it only secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would
be liable for damages in performing an act which is clearly within its power and which is the
reason for its being, then nobody would engage in the insurance business. No further claim or
counter-claim for or against anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of
Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales
contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare
parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No.
PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety
executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the
balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto
Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds used
in the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to a
new corporation proposed by Lim to expand his airline business. They executed two (2) separate indemnity
agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by
Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors
principally agree and bind themselves jointly and severally to indemnify and hold and save harmless Pioneer
from and against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever
DEFECTIVE CORPORATION
11
kind and nature which Pioneer may incur in consequence of having become surety upon the bond/note and to
pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts of money which it
or its representatives should or may pay or cause to be paid or become liable to pay on them of whatever kind
and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of
chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that Lim
transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office of
the Register of Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to the Chattel
Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety.
Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of
Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of
the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary
attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they
were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being
exposed to litigation and for recovery of the sums of money they advanced to Lim for the purchase of the
aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's
complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against
all the defendants was dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF


PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS
OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A
REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS
IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk
of liability under the surety bond in favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to
DEFECTIVE CORPORATION
12
P295,000.00, hence, plaintiffs instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to institute
the instant action as it does not stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from
defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present
any evidence that it is the attorney-in-fact of the reinsurance company, authorized to institute
an action for and in behalf of the latter. To qualify a person to be a real party in interest in whose
name an action must be prosecuted, he must appear to be the present real owner of the right
sought to be enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has
been held that the real party in interest is the party who would be benefited or injured by the
judgment or the party entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88
Phil. 125, 131). By real party in interest is meant a present substantial interest as distinguished
from a mere expectancy or a future, contingent, subordinate or consequential interest (Garcia v.
David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v.
Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in
interest as it has already been paid by the reinsurer the sum of P295,000.00 — the bulk of
defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer,
the former was able to foreclose extra-judicially one of the subject airplanes and its spare engine,
realizing the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the sum
of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is patent that
plaintiff has been overpaid in the amount of P33,383.72 considering that the total amount it had
paid to JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has already
been paid by the reinsurance company of the amount plaintiff has paid to JDA as surety of
defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New Civil Code). (Rollo-
84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was paid
by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties herein both
in their answers in the court below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even
assuming hypothetically that it was paid by its reinsurer, still none of the respondents had any interest in the
matter since the reinsurance is strictly between the petitioner and the re-insurer pursuant to section 91 of the
Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to recover from
respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable considering
that whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the
parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:
DEFECTIVE CORPORATION
13
xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to
JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim against
defendants, considering the amount it has realized from the sale of the mortgaged properties?
(Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in
favor of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with
the said amount the bulk of its alleged liability to JDA under the said surety bond, it is plain that
on this score it no longer has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for
the amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the
latter, Pioneer says: The reinsurers opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety Corporation is
representing the reinsurers to recover the amount.' In other words, insofar as the amount paid
to it by the reinsurers Pioneer is suing defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as
attorney-in- fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has
no right to institute and maintain in its own name an action for the benefit of the reinsurers. It is
well-settled that an action brought by an attorney-in-fact in his own name instead of that of the
principal will not prosper, and this is so even where the name of the principal is disclosed in the
complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be
prosecuted in the name of the real party in interest.' This provision is mandatory.
The real party in interest is the party who would be benefitted or injured by the
judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a real party in
interest, that there is no law permitting an action to be brought by an attorney-
in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and
Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L-
22347,1968, 23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00
from the reinsurers, the uninsured portion of what it paid to JDA is the difference between the
two amounts, or P3,666.28. This is the amount for which Pioneer may sue defendants, assuming
that the indemnity agreement is still valid and effective. But since the amount realized from the
sale of the mortgaged chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare
DEFECTIVE CORPORATION
14
engine, or a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has
no more claim against defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this
admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to the
petitioner. Therefore, the petitioner's argument that the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as insured and the reinsuring company pursuant to Section 91
(should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are
acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time
Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to actions
or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA.
380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured against
the wrongdoer or the person who has violated the contract. If the amount paid by the insurance
company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover
the deficiency from the person causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil.
1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of
Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the insurer, it is
provided in said article that the insurer is deemed subrogated to the rights of the insured against
the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the
aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision,
the real party in interest with regard to the portion of the indemnity paid is the insurer and not
the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as
against the respondents for the reason that the petitioner was not the real party in interest in the complaint
and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been
dismissed on the premise that the evidence on record shows that it is entitled to recover from the counter
indemnitors. It does not, however, cite any grounds except its allegation that respondent "Maglanas defense
and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.
DEFECTIVE CORPORATION
15
On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its
finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective
after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to
issue the bond provided that the same would be mortgaged to it, but this was not possible
because the planes were still in Japan and could not be mortgaged here in the Philippines. As
soon as the aircrafts were brought to the Philippines, they would be mortgaged to Pioneer
Insurance to cover the bond, and this indemnity agreement would be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have impaired and
rendered insufficient the security under the chattel mortgage and there is thus no
other sufficient security for the claim sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no other security for the
claim sought to be enforced by this action, which necessarily means that the indemnity
agreement had ceased to have any force and effect at the time this action was instituted. Sec 2,
Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes
and spare parts, no longer has any further action against the defendants as indemnitors to
recover any unpaid balance of the price. The indemnity agreement was ipso jure extinguished
upon the foreclosure of the chattel mortgage. These defendants, as indemnitors, would be
entitled to be subrogated to the right of Pioneer should they make payments to the latter.
Articles 2067 and 2080 of the New Civil Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of foreclosure


precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer
as surety having made of the payments to JDA, the alternative remedies open to Pioneer were
as provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
foreclosure and the instant suit. Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the purchaser to recover any unpaid
balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance
Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention that
Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of
DEFECTIVE CORPORATION
16
JDA as vendor, having subrogated it in such rights. Nor may the application of the provision be
validly opposed on the ground that these defendants and defendant Maglana are not the vendee
but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974,
61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
discharged these defendants from any liability as alleged indemnitors. The change of the maturity
dates of the obligations of Lim, or SAL extinguish the original obligations thru novations thus
discharging the indemnitors.

The principal hereof shall be paid in eight equal successive three months interval
installments, the first of which shall be due and payable 25 August 1965, the
remainder of which ... shall be due and payable on the 26th day x x x of each
succeeding three months and the last of which shall be due and payable 26th May
1967.

However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and
JDA, modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three month interval
installments the first of which shall be due and payable 4 September 1965, the
remainder of which ... shall be due and payable on the 4th day ... of each
succeeding months and the last of which shall be due and payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates
different from that fixed in the aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the installments, the 15th of each
succeeding three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected twice, were
done without the knowledge, much less, would have it believed that these defendants Maglana
(sic). Pioneer's official Numeriano Carbonel would have it believed that these defendants and
defendant Maglana knew of and consented to the modification of the obligations. But if that
were so, there would have been the corresponding documents in the form of a written notice to
as well as written conformity of these defendants, and there are no such document. The
consequence of this was the extinguishment of the obligations and of the surety bond secured
by the indemnity agreement which was thereby also extinguished. Applicable by analogy are the
rulings of the Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563,
and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without the consent
of the guarantor extinguishes the guaranty The mere failure on the part of the
creditor to demand payment after the debt has become due does not of itself
constitute any extension time referred to herein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v.
Climacom et al. (C.A.) 36 O.G. 1571.
DEFECTIVE CORPORATION
17
Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the surety
bond, the failure of JDA to present its claim to Pioneer within ten days from default of Lim or SAL
on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the
indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement
from his co-debtors if such payment is made after the obligation has prescribed
or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety
by reason of the filing of the instant case against them and the attachment and garnishment of
their properties. The instant action is clearly unfounded insofar as plaintiff drags these
defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was to do
business through the corporate vehicle but who failed to incorporate the entity in which they
had chosen to invest? How are the losses to be treated in situations where their contributions to
the intended 'corporation' were invested not through the corporate form? This Petition presents
these fundamental questions which we believe were resolved erroneously by the Court of
Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto partnership
among them was created, and that as a consequence of such relationship all must share in the losses and/or
gains of the venture in proportion to their contribution. The petitioner, therefore, questions the appellate
court's findings ordering him to reimburse certain amounts given by the respondents to the petitioner as their
contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total
amount of P184,878.74 as correctly found by the trial court, with interest from the filing of the
cross-complaints until the amount is fully paid. Defendant Lim should pay one-half of the said
amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received the amount of Pl51,000.00 from
defendants Bormaheco and Maglana representing the latter's participation in the ownership of
DEFECTIVE CORPORATION
18
the subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121,
96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name occupy the position of partners
inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons
associate themselves together under articles to purchase property to carry on a business, and
their organization is so defective as to come short of creating a corporation within the statute,
they become in legal effect partners inter se, and their rights as members of the company to the
property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A.
268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons associated
themselves as a corporation for the development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them contracted to pay a third the difference in
the proportionate value of the land conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an action between them for an
accounting, and its capital stock was treated as partnership assets, sold, and the proceeds
distributed among them in proportion to the value of the property contributed by each (Shorb v.
Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for ordinarily persons
cannot be made to assume the relation of partners, as between themselves, when their purpose
is that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S.
461, 472, 29 L.Ed. 688), and it should be implied only when necessary to do justice between the
parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which
is never legally formed does not become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as such in an action for settlement
of the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership
relation between certain stockholders and other stockholders, who were also directors, will not
be implied in the absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23).
(Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during
the pretrial despite notification. In his answer, the petitioner denied having received any amount from
respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court, however, found
through Exhibit 58, that the petitioner received the amount of P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes and spare parts. The
record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the respondents
despite his representations to them. This gives credence to the cross-claims of the respondents to the effect
that they were induced and lured by the petitioner to make contributions to a proposed corporation which was
never formed because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:
DEFECTIVE CORPORATION
19
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to
expand his airline business. Lim was to procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the required permits for the operation
thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged receipt thereof. Cervantes, likewise, delivered
his share of the undertaking. Lim in an undertaking sometime on or about August 9,1965,
promised to incorporate his airline in accordance with their agreement and proceeded to acquire
the planes on his own account. Since then up to the filing of this answer, Lim has refused, failed
and still refuses to set up the corporation or return the money of Maglana. (Record on Appeal,
pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third
party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase
two airplanes and spare parts from Japan which the latter considered as their lawful contribution
and participation in the proposed corporation to be known as SAL. Arrangements and
negotiations were undertaken by defendant Lim. Down payments were advanced by defendants
Bormaheco and the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement
among the defendants, defendant Lim in connivance with the plaintiff, signed and executed the
alleged chattel mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time of this trickery and
misrepresentation of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic)
allegedly executed by defendant Lim, thereby forcing them to file an adverse claim in the form
of third party claim. Notwithstanding repeated oral demands made by defendants Bormaheco
and Cervanteses, to defendant Lim, to surrender the possession of the two planes and their
accessories and or return the amount advanced by the former amounting to an aggregate sum
of P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted and refused
to comply with them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership
was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses
of the proposed corporation. The record shows that the petitioner was acting on his own and not in behalf of
his other would-be incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is AFFIRMED.

SO ORDERED.
DEFECTIVE CORPORATION
20
G.R. No. 156759 June 5, 2013

ALLEN A. MACASAET, NICOLAS V. QUIJANO, JR., ISAIAS ALBANO, LILY REYES, JANET BAY, JESUS R. GALANG,
AND RANDY HAGOS, Petitioners,
vs.
FRANCISCO R. CO, JR., Respondent.

DECISION

BERSAMIN, J.:

To warrant the substituted service of the summons and copy of the complaint, the serving officer must first
attempt to effect the same upon the defendant in person. Only after the attempt at personal service has become
futile or impossible within a reasonable time may the officer resort to substituted service.

The Case

Petitioners – defendants in a suit for libel brought by respondent – appeal the decision promulgated on March
8, 20021 and the resolution promulgated on January 13, 2003,2 whereby the Court of Appeals (CA) respectively
dismissed their petition for certiorari, prohibition and mandamus and denied their motion for reconsideration.
Thereby, the CA upheld the order the Regional Trial Court (RTC), Branch 51, in Manila had issued on March 12,
2001 denying their motion to dismiss because the substituted service of the summons and copies of the
complaint on each of them had been valid and effective.3

Antecedents

On July 3, 2000, respondent, a retired police officer assigned at the Western Police District in Manila, sued
Abante Tonite, a daily tabloid of general circulation; its Publisher Allen A. Macasaet; its Managing Director
Nicolas V. Quijano; its Circulation Manager Isaias Albano; its Editors Janet Bay, Jesus R. Galang and Randy Hagos;
and its Columnist/Reporter Lily Reyes (petitioners), claiming damages because of an allegedly libelous article
petitioners published in the June 6, 2000 issue of Abante Tonite. The suit, docketed as Civil Case No. 00-97907,
was raffled to Branch 51 of the RTC, which in due course issued summons to be served on each defendant,
including Abante Tonite, at their business address at Monica Publishing Corporation, 301-305 3rd Floor, BF
Condominium Building, Solana Street corner A. Soriano Street, Intramuros, Manila.4

In the morning of September 18, 2000, RTC Sheriff Raul Medina proceeded to the stated address to effect the
personal service of the summons on the defendants. But his efforts to personally serve each defendant in the
address were futile because the defendants were then out of the office and unavailable. He returned in the
afternoon of that day to make a second attempt at serving the summons, but he was informed that petitioners
were still out of the office. He decided to resort to substituted service of the summons, and explained why in
his sheriff’s return dated September 22, 2005,5 to wit:

SHERIFF’S RETURN

This is to certify that on September 18, 2000, I caused the service of summons together with copies of complaint
and its annexes attached thereto, upon the following:
DEFECTIVE CORPORATION
21
1. Defendant Allen A. Macasaet, President/Publisher of defendant AbanteTonite, at Monica Publishing
Corporation, Rooms 301-305 3rd Floor, BF Condominium Building, Solana corner A. Soriano Streets,
Intramuros, Manila, thru his secretary Lu-Ann Quijano, a person of sufficient age and discretion working
therein, who signed to acknowledge receipt thereof. That effort (sic) to serve the said summons
personally upon said defendant were made, but the same were ineffectual and unavailing on the ground
that per information of Ms. Quijano said defendant is always out and not available, thus, substituted
service was applied;

2. Defendant Nicolas V. Quijano, at the same address, thru his wife Lu-Ann Quijano, who signed to
acknowledge receipt thereof. That effort (sic) to serve the said summons personally upon said defendant
were made, but the same were ineffectual and unavailing on the ground that per information of (sic) his
wife said defendant is always out and not available, thus, substituted service was applied;

3. Defendants Isaias Albano, Janet Bay, Jesus R. Galang, Randy Hagos and Lily Reyes, at the same address,
thru Rene Esleta, Editorial Assistant of defendant AbanteTonite, a person of sufficient age and discretion
working therein who signed to acknowledge receipt thereof. That effort (sic) to serve the said summons
personally upon said defendants were made, but the same were ineffectual and unavailing on the
ground that per information of (sic) Mr. Esleta said defendants is (sic) always roving outside and
gathering news, thus, substituted service was applied.

Original copy of summons is therefore, respectfully returned duly served.

Manila, September 22, 2000.

On October 3, 2000, petitioners moved for the dismissal of the complaint through counsel’s special appearance
in their behalf, alleging lack of jurisdiction over their persons because of the invalid and ineffectual substituted
service of summons. They contended that the sheriff had made no prior attempt to serve the summons
personally on each of them in accordance with Section 6 and Section 7, Rule 14 of the Rules of Court. They
further moved to drop Abante Tonite as a defendant by virtue of its being neither a natural nor a juridical person
that could be impleaded as a party in a civil action.

At the hearing of petitioners’ motion to dismiss, Medina testified that he had gone to the office address of
petitioners in the morning of September 18, 2000 to personally serve the summons on each defendant; that
petitioners were out of the office at the time; that he had returned in the afternoon of the same day to again
attempt to serve on each defendant personally but his attempt had still proved futile because all of petitioners
were still out of the office; that some competent persons working in petitioners’ office had informed him that
Macasaet and Quijano were always out and unavailable, and that Albano, Bay, Galang, Hagos and Reyes were
always out roving to gather news; and that he had then resorted to substituted service upon realizing the
impossibility of his finding petitioners in person within a reasonable time.

On March 12, 2001, the RTC denied the motion to dismiss, and directed petitioners to file their answers to the
complaint within the remaining period allowed by the Rules of Court,6 relevantly stating:

Records show that the summonses were served upon Allen A. Macasaet, President/Publisher of defendant
AbanteTonite, through LuAnn Quijano; upon defendants Isaias Albano, Janet Bay, Jesus R. Galang, Randy Hagos
and Lily Reyes, through Rene Esleta, Editorial Assistant of defendant Abante Tonite (p. 12, records). It is apparent
in the Sheriff’s Return that on several occasions, efforts to served (sic) the summons personally upon all the
DEFECTIVE CORPORATION
22
defendants were ineffectual as they were always out and unavailable, so the Sheriff served the summons by
substituted service.

Considering that summonses cannot be served within a reasonable time to the persons of all the defendants,
hence substituted service of summonses was validly applied. Secretary of the President who is duly authorized
to receive such document, the wife of the defendant and the Editorial Assistant of the defendant, were
considered competent persons with sufficient discretion to realize the importance of the legal papers served
upon them and to relay the same to the defendants named therein (Sec. 7, Rule 14, 1997 Rules of Civil
Procedure).

WHEREFORE, in view of the foregoing, the Motion to Dismiss is hereby DENIED for lack of merit..

Accordingly, defendants are directed to file their Answers to the complaint within the period still open to them,
pursuant to the rules.

SO ORDERED.

Petitioners filed a motion for reconsideration, asserting that the sheriff had immediately resorted to substituted
service of the summons upon being informed that they were not around to personally receive the summons,
and that Abante Tonite, being neither a natural nor a juridical person, could not be made a party in the action.

On June 29, 2001, the RTC denied petitioners’ motion for reconsideration.7 It stated in respect of the service of
summons, as follows:

The allegations of the defendants that the Sheriff immediately resorted to substituted service of summons upon
them when he was informed that they were not around to personally receive the same is untenable. During the
hearing of the herein motion, Sheriff Raul Medina of this Branch of the Court testified that on September 18,
2000 in the morning, he went to the office address of the defendants to personally serve summons upon them
but they were out. So he went back to serve said summons upon the defendants in the afternoon of the same
day, but then again he was informed that the defendants were out and unavailable, and that they were always
out because they were roving around to gather news. Because of that information and because of the nature of
the work of the defendants that they are always on field, so the sheriff resorted to substituted service of
summons. There was substantial compliance with the rules, considering the difficulty to serve the summons
personally to them because of the nature of their job which compels them to be always out and unavailable.
Additional matters regarding the service of summons upon defendants were sufficiently discussed in the Order
of this Court dated March 12, 2001.

Regarding the impleading of Abante Tonite as defendant, the RTC held, viz:

"Abante Tonite" is a daily tabloid of general circulation. People all over the country could buy a copy of "Abante
Tonite" and read it, hence, it is for public consumption. The persons who organized said publication obviously
derived profit from it. The information written on the said newspaper will affect the person, natural as well as
juridical, who was stated or implicated in the news. All of these facts imply that "Abante Tonite" falls within the
provision of Art. 44 (2 or 3), New Civil Code. Assuming arguendo that "Abante Tonite" is not registered with the
Securities and Exchange Commission, it is deemed a corporation by estoppels considering that it possesses
attributes of a juridical person, otherwise it cannot be held liable for damages and injuries it may inflict to other
persons.
DEFECTIVE CORPORATION
23
Undaunted, petitioners brought a petition for certiorari, prohibition, mandamusin the CA to nullify the orders
of the RTC dated March 12, 2001 and June 29, 2001.

Ruling of the CA

On March 8, 2002, the CA promulgated its questioned decision,8 dismissing the petition for certiorari,
prohibition, mandamus, to wit:

We find petitioners’ argument without merit. The rule is that certiorari will prosper only if there is a showing of
grave abuse of discretion or an act without or in excess of jurisdiction committed by the respondent Judge. A
judicious reading of the questioned orders of respondent Judge would show that the same were not issued in a
capricious or whimsical exercise of judgment. There are factual bases and legal justification for the assailed
orders. From the Return, the sheriff certified that "effort to serve the summons personally xxx were made, but
the same were ineffectual and unavailing xxx.

and upholding the trial court’s finding that there was a substantial compliance with the rules that allowed the
substituted service.

Furthermore, the CA ruled:

Anent the issue raised by petitioners that "Abante Tonite is neither a natural or juridical person who may be a
party in a civil case," and therefore the case against it must be dismissed and/or dropped, is untenable.

The respondent Judge, in denying petitioners’ motion for reconsideration, held that:

xxxx

Abante Tonite’s newspapers are circulated nationwide, showing ostensibly its being a corporate entity, thus the
doctrine of corporation by estoppel may appropriately apply.

An unincorporated association, which represents itself to be a corporation, will be estopped from denying its
corporate capacity in a suit against it by a third person who relies in good faith on such representation.

There being no grave abuse of discretion committed by the respondent Judge in the exercise of his jurisdiction,
the relief of prohibition is also unavailable.

WHEREFORE, the instant petition is DENIED. The assailed Orders of respondent Judge are AFFIRMED.

SO ORDERED.9

On January 13, 2003, the CA denied petitioners’ motion for reconsideration.10

Issues

Petitioners hereby submit that:

1. THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN HOLDING THAT THE TRIAL COURT
ACQUIRED JURISDICTION OVER HEREIN PETITIONERS.
DEFECTIVE CORPORATION
24
2. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR BY SUSTAINING THE INCLUSION OF ABANTE
TONITE AS PARTY IN THE INSTANT CASE.11

Ruling

The petition for review lacks merit.

Jurisdiction over the person, or jurisdiction in personam –the power of the court to render a personal judgment
or to subject the parties in a particular action to the judgment and other rulings rendered in the action – is an
element of due process that is essential in all actions, civil as well as criminal, except in actions in rem or quasi
in rem. Jurisdiction over the defendantin an action in rem or quasi in rem is not required, and the court acquires
jurisdiction over an actionas long as it acquires jurisdiction over the resthat is thesubject matter of the action.
The purpose of summons in such action is not the acquisition of jurisdiction over the defendant but mainly to
satisfy the constitutional requirement of due process.12

The distinctions that need to be perceived between an action in personam, on the one hand, and an action
inrem or quasi in rem, on the other hand, are aptly delineated in Domagas v. Jensen,13 thusly:

The settled rule is that the aim and object of an action determine its character. Whether a proceeding is in rem,
or in personam, or quasi in rem for that matter, is determined by its nature and purpose, and by these only. A
proceeding in personam is a proceeding to enforce personal rights and obligations brought against the person
and is based on the jurisdiction of the person, although it may involve his right to, or the exercise of ownership
of, specific property, or seek to compel him to control or dispose of it in accordance with the mandate of the
court. The purpose of a proceeding in personam is to impose, through the judgment of a court, some
responsibility or liability directly upon the person of the defendant. Of this character are suits to compel a
defendant to specifically perform some act or actions to fasten a pecuniary liability on him. An action in
personam is said to be one which has for its object a judgment against the person, as distinguished from a
judgment against the property to determine its state. It has been held that an action in personam is a proceeding
to enforce personal rights or obligations; such action is brought against the person. As far as suits for injunctive
relief are concerned, it is well-settled that it is an injunctive act in personam. In Combs v. Combs, the appellate
court held that proceedings to enforce personal rights and obligations and in which personal judgments are
rendered adjusting the rights and obligations between the affected parties is in personam. Actions for recovery
of real property are in personam.

On the other hand, a proceeding quasi in rem is one brought against persons seeking to subject the property of
such persons to the discharge of the claims assailed. In an action quasi in rem, an individual is named as
defendant and the purpose of the proceeding is to subject his interests therein to the obligation or loan
burdening the property. Actions quasi in rem deal with the status, ownership or liability of a particular property
but which are intended to operate on these questions only as between the particular parties to the proceedings
and not to ascertain or cut off the rights or interests of all possible claimants. The judgments therein are binding
only upon the parties who joined in the action.

As a rule, Philippine courts cannot try any case against a defendant who does not reside and is not found in the
Philippines because of the impossibility of acquiring jurisdiction over his person unless he voluntarily appears in
court; but when the case is an action in rem or quasi in rem enumerated in Section 15, Rule 14 of the Rules of
Court, Philippine courts have jurisdiction to hear and decide the case because they have jurisdiction over the
res, and jurisdiction over the person of the non-resident defendant is not essential. In the latter instance,
DEFECTIVE CORPORATION
25
extraterritorial service of summons can be made upon the defendant, and such extraterritorial service of
summons is not for the purpose of vesting the court with jurisdiction, but for the purpose of complying with the
requirements of fair play or due process, so that the defendant will be informed of the pendency of the action
against him and the possibility that property in the Philippines belonging to him or in which he has an interest
may be subjected to a judgment in favor of the plaintiff, and he can thereby take steps to protect his interest if
he is so minded. On the other hand, when the defendant in an action in personam does not reside and is not
found in the Philippines, our courts cannot try the case against him because of the impossibility of acquiring
jurisdiction over his person unless he voluntarily appears in court.14

As the initiating party, the plaintiff in a civil action voluntarily submits himself to the jurisdiction of the court by
the act of filing the initiatory pleading. As to the defendant, the court acquires jurisdiction over his person either
by the proper service of the summons, or by a voluntary appearance in the action. 15

Upon the filing of the complaint and the payment of the requisite legal fees, the clerk of court forthwith issues
the corresponding summons to the defendant.16 The summons is directed to the defendant and signed by the
clerk of court under seal. It contains the name of the court and the names of the parties to the action; a direction
that the defendant answers within the time fixed by the Rules of Court; and a notice that unless the defendant
so answers, the plaintiff will take judgment by default and may be granted the relief applied for.17 To be attached
to the original copy of the summons and all copies thereof is a copy of the complaint (and its attachments, if
any) and the order, if any, for the appointment of a guardian ad litem. 18

The significance of the proper service of the summons on the defendant in an action in personam cannot be
overemphasized. The service of the summons fulfills two fundamental objectives, namely: (a) to vest in the court
jurisdiction over the person of the defendant; and (b) to afford to the defendant the opportunity to be heard
on the claim brought against him.19 As to the former, when jurisdiction in personam is not acquired in a civil
action through the proper service of the summons or upon a valid waiver of such proper service, the ensuing
trial and judgment are void.20 If the defendant knowingly does an act inconsistent with the right to object to the
lack of personal jurisdiction as to him, like voluntarily appearing in the action, he is deemed to have submitted
himself to the jurisdiction of the court.21 As to the latter, the essence of due process lies in the reasonable
opportunity to be heard and to submit any evidence the defendant may have in support of his defense. With
the proper service of the summons being intended to afford to him the opportunity to be heard on the claim
against him, he may also waive the process.21 In other words, compliance with the rules regarding the service
of the summons is as much an issue of due process as it is of jurisdiction.23

Under the Rules of Court, the service of the summons should firstly be effected on the defendant himself
whenever practicable. Such personal service consists either in handing a copy of the summons to the defendant
in person, or, if the defendant refuses to receive and sign for it, in tendering it to him.24 The rule on personal
service is to be rigidly enforced in order to ensure the realization of the two fundamental objectives earlier
mentioned. If, for justifiable reasons, the defendant cannot be served in person within a reasonable time, the
service of the summons may then be effected either (a) by leaving a copy of the summons at his residence with
some person of suitable age and discretion then residing therein, or (b) by leaving the copy at his office or
regular place of business with some competent person in charge thereof.25 The latter mode of service is known
as substituted service because the service of the summons on the defendant is made through his substitute.

It is no longer debatable that the statutory requirements of substituted service must be followed strictly,
faithfully and fully, and any substituted service other than that authorized by statute is considered
ineffective.26 This is because substituted service, being in derogation of the usual method of service, is
DEFECTIVE CORPORATION
26
extraordinary in character and may be used only as prescribed and in the circumstances authorized by
statute.27 Only when the defendant cannot be served personally within a reasonable time may substituted
service be resorted to. Hence, the impossibility of prompt personal service should be shown by stating the
efforts made to find the defendant himself and the fact that such efforts failed, which statement should be
found in the proof of service or sheriff’s return.28 Nonetheless, the requisite showing of the impossibility of
prompt personal service as basis for resorting to substituted service may be waived by the defendant either
expressly or impliedly.29

There is no question that Sheriff Medina twice attempted to serve the summons upon each of petitioners in
person at their office address, the first in the morning of September 18, 2000 and the second in the afternoon
of the same date. Each attempt failed because Macasaet and Quijano were "always out and not available" and
the other petitioners were "always roving outside and gathering news." After Medina learned from those
present in the office address on his second attempt that there was no likelihood of any of petitioners going to
the office during the business hours of that or any other day, he concluded that further attempts to serve them
in person within a reasonable time would be futile. The circumstances fully warranted his conclusion. He was
not expected or required as the serving officer to effect personal service by all means and at all times,
considering that he was expressly authorized to resort to substituted service should he be unable to effect the
personal service within a reasonable time. In that regard, what was a reasonable time was dependent on the
circumstances obtaining. While we are strict in insisting on personal service on the defendant, we do not cling
to such strictness should the circumstances already justify substituted service instead. It is the spirit of the
procedural rules, not their letter, that governs.30

In reality, petitioners’ insistence on personal service by the serving officer was demonstrably superfluous. They
had actually received the summonses served through their substitutes, as borne out by their filing of several
pleadings in the RTC, including an answer with compulsory counterclaim ad cautelam and a pre-trial brief ad
cautelam. They had also availed themselves of the modes of discovery available under the Rules of Court. Such
acts evinced their voluntary appearance in the action.

Nor can we sustain petitioners’ contention that Abante Tonite could not be sued as a defendant due to its not
being either a natural or a juridical person. In rejecting their contention, the CA categorized Abante Tonite as a
corporation by estoppel as the result of its having represented itself to the reading public as a corporation
despite its not being incorporated. Thereby, the CA concluded that the RTC did not gravely abuse its discretion
in holding that the non-incorporation of Abante Tonite with the Securities and Exchange Commission was of no
consequence, for, otherwise, whoever of the public who would suffer any damage from the publication of
articles in the pages of its tabloids would be left without recourse. We cannot disagree with the CA, considering
that the editorial box of the daily tabloid disclosed that basis, nothing in the box indicated that Monica Publishing
Corporation had owned Abante Tonite.

WHEREFORE, the Court AFFIRMS the decision promulgated on March 8, 2002; and ORDERS petitioners to pay
the costs of suit.

SO ORDERED.
DEFECTIVE CORPORATION
27
RIDGEWOOD ESTATE, INC. G.R. No. 166751
(Erroneously sued as Camella
Homes), Present:
Petitioner,
PUNO, J., Chairman,
SANDOVAL-GUTIERREZ,
CORONA,
- versus - AZCUNA, and
GARCIA, JJ.

Promulgated:
EXPEDITO BELAOS,
Respondent. June 8, 2006
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

PUNO, J.:

This is a petition for review of the decision of the Court of Appeals dated July 28, 2004 and its resolution
dated January 19, 2005 in CA-G.R. SP No. 77836. The Court of Appeals affirmed the order of the Regional Trial
Court of Manila in Civil Case No. 02-103764 denying the motion to dismiss filed by herein petitioner Ridgewood
Estate, Inc.

Petitioner is a subdivision developer that sells properties under the trade


name Camella Homes. Respondent Expedito Belaos entered into a contract to sell with petitioner for the
purchase of a house and lot at Tierra Nevada, Gen. Trias, Cavite. Pursuant thereto, respondent issued several
postdated checks in favor of petitioner as amortization for the property. Petitioner, however, failed to construct
the house. Thus, respondent, in a letter dated April 16, 2000, rescinded the contract to sell and demanded the
return of the amounts he had paid to petitioner, as well as the postdated checks. Petitioner remitted to
respondent the sum of P299,908.00, equivalent to the down payment and six monthly amortizations previously
paid by respondent, but it nonetheless continued to encash the other postdated checks, to the prejudice of
respondent.

Respondent filed before the Regional Trial Court of Manila a complaint for damages against Camella Homes
for encashing the postdated checks despite repeated demands to return them and refrain from encashing them
in view of the recission of the contract to sell.

Petitioner filed a motion to dismiss. It argued that Camella Homes is not a real party-in-interest and the
complaint states no cause of action as the contract to sell was entered into by and
DEFECTIVE CORPORATION
28
between Expedito L. Belaos and Ridgewood Estate, Inc. It further argued that the complaint was defective
since Camella Homes is not a natural or juridical person, hence, it is not an entity authorized by law to be a party
to a civil suit.

The trial court denied the motion to dismiss. It applied the doctrine on corporation by estoppel under Section
21 of the Corporation Code which states:

Section 21. Corporation by estoppel.All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.

Petitioner filed a petition for certiorari before the Court of Appeals. In addition to its contention
that Camella Homes was not a real party-in-interest, petitioner also raised the argument that the trial court had
no jurisdiction over the suit, as the subject matter of the complaint was within the exclusive jurisdiction of the
Housing and Land Use Regulatory Board (HLURB).

In its decision dated July 28, 2004, the Court of Appeals dismissed the petition. It held:

Private respondents complaint contains allegations that Ridgewood Estates (sic)


deliberately and intentionally encashed the postdated checks despite knowledge of the
contracts recission. Respondent prayed for the award of actual, moral and exemplary damages
due to his humiliation and loss of credibility with the banking community and among his
colleagues caused by petitioners alleged malicious acts.

Respondent Belaos is not claiming refund or any other claim from a subdivision
developer. He does not demand for specific performance of contractual and statutory obligations
of delivering the property to him. In the cases that reached the Supreme Court, the ruling has
consistently been that the NHA or the HLURB has jurisdiction over complaints arising from
contracts between the subdivision developer and the lot buyer or those aimed at compelling the
subdivision developer to comply with its contractual and statutory obligations to make the
subdivision a better place to live in. It has already been admitted by both parties that the contract
has already been rescinded and that Ridgewood returned the downpayment [sic] and some of
the postdated checks. Hence, the Court a quo has jurisdiction over the action for damages.[1]

Petitioner filed a motion for reconsideration which was denied by the Court of Appeals in its resolution
dated January 19, 2005.
DEFECTIVE CORPORATION
29
Petitioner raises the following arguments in the case at bar:

1. That the honorable court failed to consider that the lower court acted with grave abuse of
discretion when the latter assumed jurisdiction over a matter which the law already vests
with the Housing and Land Use Regulatory Board.

2. That a perusal of the order of the lower court reveals that it committed grave abuse of
discretion when it anchored itself on an erroneous finding that Camella Homes allegedly is a
corporation by estoppel.

3. That the Honorable Court of Appeals failed to consider that the lower court committed grave
abuse of discretion when it failed to consider that the complaint filed by private respondent
has no cause of action for failure to implead the real party in interest.

4. That the Honorable Court of Appeals failed to consider that the lower court committed grave
abuse of discretion when it ordered Camella Homes, which has no legal capacity to be sued[,]
to submit an answer.[2]

We affirm the decision of the Court of Appeals.

First, the trial court correctly assumed jurisdiction over the complaint filed by respondent against
petitioner.

Section 1 of Presidential Decree No. 1344 provides for the jurisdiction of HLURB (then National Housing
Authority), thus:

Sec. 1. In the exercise of its function to regulate the real estate trade and business and in
addition to its powers provided for in Presidential Decree No. 957, the National Housing Authority
shall have exclusive jurisdiction to hear and decide the cases of the following nature:

a. Unsound real estate business practices;

b. Claims involving refund and any other claims filed by subdivision lot or condominium
unit buyer against the project owner, developer, dealer, broker or salesman; and

c. Cases involving specific performance of contractual and statutory obligations filed by


buyers of subdivision lot or condominium unit against the owner, developer, dealer, broker or
salesman.

The Court held in Roxas v. Court of Appeals[3] that the mere relationship between the parties, i.e., that
of being subdivision owner/developer and subdivision lot buyer, does not automatically vest jurisdiction in the
HLURB. For an action to fall within the exclusive jurisdiction of the HLURB, the decisive element is the nature of
the action as enumerated in Section 1 of P.D. No. 1344. The HLURB has jurisdiction over complaints aimed at
compelling the subdivision developer to comply with its contractual and statutory obligations.
DEFECTIVE CORPORATION
30

The complaint filed by respondent against petitioner was one for damages. It prayed for the payment of
moral, actual and exemplary damages by reason of petitioners malicious encashment of the checks even after
the rescission of the contract to sell between them. Respondent claimed that because of petitioners malicious
and fraudulent acts, he suffered humiliation and embarrassment in several banks, causing him to lose his
credibility and good standing among his colleagues.[4] Such action falls within the jurisdiction of regular courts,
not the HLURB.

Second, we observe that respondents complaint was actually directed against herein petitioner,
Ridgewood Estate, Inc., although it named Camella Homes as respondent therein. The complaint itself referred
to Ridgewood Estate, Inc. as the authorized representative of Camella Homes. Petitioner cannot use the lack of
juridical personality by Camella Homes as reason to evade its liability, if any, to petitioner. Petitioner admittedly
uses the name Camella Homes as its business name. Hence, to the buyers, Camella Homes and Ridgewood
Estate, Inc. are one and the same. A reading of the complaint would show that respondent was essentially suing
petitioner, it being the seller of the house and lot he intended to purchase. We agree with the Court of Appeals
ruling that the remedy in this case is not the dismissal of the case but the joinder of the proper party.[5] The
appellate court correctly explained:

Dismissal of the complaint is not the remedy since the Court a quo properly acquired
jurisdiction [over] the action for damages. In its pleadings before the trial court,
defendant Camella Homes alleges that it is not a juridical entity, not the real party in interest and
pointed to Ridgewood Estates [sic], Inc. as the party liable to Belaos. In its petition before [u]s,
Ridgewood Estates [sic], Inc. erroneously sued as Camella Homes presented itself as one of the
developers of Camella Homes, specifically that of Tierra Nevada Subdivision of which
respondent Belaos is a buyer, then it claims to be the real party in interest in the controversy by
admitting it entered into a Contract to Sell with Belaos, [then] tries to exculpate Camella Homes
by alleging that the latter is not a juridical entity and alleges that it is the HLURB which has
jurisdiction over the controversy.

The Regional Trial Court did not commit grave abuse of discretion in denying the motion
to dismiss and ordering defendant Camella Homes to file an answer. Assuming arguendo that
petitioner Ridgewood is a separate entity from Camella Homes, defendant CamellaHomes
may implead the former. Private respondent Belaos may file a motion to amend his complaint so
as to implead the real party in interest. Parties may be dropped or added by order of the court
on motion of any party or on its own initiative at any stage of the action and on such terms as
are just. (Sec. 11, Rule 3 of the 1997 Rules of Civil Procedure)[6]

We, therefore, find that the trial court did not err in denying petitioners motion to dismiss.

IN VIEW WHEREOF, the petition is DENIED.

SO ORDERED.
DEFECTIVE CORPORATION
31
DEFECTIVE CORPORATION
32
G.R. No. 125221 June 19, 1997

REYNALDO M. LOZANO, petitioner,


vs.
HON. ELIEZER R. DE LOS SANTOS, Presiding Judge, RTC, Br. 58, Angeles City; and ANTONIO ANDA, respondents.

PUNO, J.:

This petition for certiorari seeks to annul and set aside the decision of the Regional Trial Court, Branch 58,
Angeles City which ordered the Municipal Circuit Trial Court, Mabalacat and Magalang, Pampanga to dismiss
Civil Case No. 1214 for lack of jurisdiction.

The facts are undisputed. On December 19, 1995, petitioner Reynaldo M. Lozano filed Civil Case No. 1214 for
damages against respondent Antonio Anda before the Municipal Circuit Trial Court (MCTC), Mabalacat and
Magalang, Pampanga. Petitioner alleged that he was the president of the Kapatirang Mabalacat-Angeles
Jeepney Drivers' Association, Inc. (KAMAJDA) while respondent Anda was the president of the Samahang
Angeles-Mabalacat Jeepney Operators' and Drivers' Association, Inc. (SAMAJODA); in August 1995, upon the
request of the Sangguniang Bayan of Mabalacat, Pampanga, petitioner and private respondent agreed to
consolidate their respective associations and form the Unified Mabalacat-Angeles Jeepney Operators' and
Drivers Association, Inc. (UMAJODA); petitioner and private respondent also agreed to elect one set of officers
who shall be given the sole authority to collect the daily dues from the members of the consolidated association;
elections were held on October 29, 1995 and both petitioner and private respondent ran for president;
petitioner won; private respondent protested and, alleging fraud, refused to recognize the results of the
election; private respondent also refused to abide by their agreement and continued collecting the dues from
the members of his association despite several demands to desist. Petitioner was thus constrained to file the
complaint to restrain private respondent from collecting the dues and to order him to pay damages in the
amount of P25,000.00 and attorney's fees of P500.00. 1

Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that jurisdiction was lodged
with the Securities and Exchange Commission (SEC). The MCTC denied the motion on February 9, 1996. 2 It
denied reconsideration on March 8, 1996. 3

Private respondent filed a petition for certiorari before the Regional Trial Court, Branch 58, Angeles City. 4 The
trial court found the dispute to be intracorporate, hence, subject to the jurisdiction of the SEC, and ordered the
MCTC to dismiss Civil Case No. 1214 accordingly. 5 It denied reconsideration on May 31, 1996. 6

Hence this petition. Petitioner claims that:

THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION AND SERIOUS ERROR OF LAW IN CONCLUDING THAT THE SECURITIES
AND EXCHANGE COMMISSION HAS JURISDICTION OVER A CASE OF DAMAGES BETWEEN
HEADS/PRESIDENTS OF TWO (2) ASSOCIATIONS WHO INTENDED TO CONSOLIDATE/MERGE
THEIR ASSOCIATIONS BUT NOT YET [SIC] APPROVED AND REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION.7
DEFECTIVE CORPORATION
33
The jurisdiction of the Securities and Exchange Commission (SEC) is set forth in Section 5 of Presidential Decree
No. 902-A. Section 5 reads as follows:

Sec. 5. . . . [T]he Securities and Exchange Commission [has] original and exclusive jurisdiction to
hear and decide cases involving:

(a) Devices or schemes employed by or any acts of the board of directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.

(b) Controversies arising out of intracorporate or partnership relations, between and among
stockholders, members or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members, or associates, respectively;
and between such corporation, partnership or association and the state insofar as it concerns
their individual franchise or right to exist as such entity.

(c) Controversies in the election or appointment of directors, trustees, officers or managers of


such corporations, partnerships or associations.

(d) Petitions of corporations, partnerships or associations to be declared in the state of


suspension of payments in cases where the corporation, partnership or association possesses
sufficient property to cover all its debts but foresees the impossibility of meeting them when they
respectively fall due or in cases where the corporation, partnership or association has no
sufficient assets to over its liabilities, but is under the management of a Rehabilitation Receiver
or Management Committee created pursuant to this Decree.

The grant of jurisdiction to the SEC must be viewed in the light of its nature and function under the
law. 8 This jurisdiction is determined by a concurrence of two elements: (1) the status or relationship of
the parties; and (2) the nature of the question that is the subject of their controversy. 9

The first element requires that the controversy must arise out of intracorporate or partnership relations
between and among stockholders, members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively; and between
such corporation, partnership or association and the State in so far as it concerns their individual
franchises. 10 The second element requires that the dispute among the parties be intrinsically connected with
the regulation of the corporation, partnership or association or deal with the internal affairs of the corporation,
partnership or association. 11 After all, the principal function of the SEC is the supervision and control of
corporations, partnership and associations with the end in view that investments in these entities may be
encouraged and protected, and their entities may be encouraged and protected, and their activities pursued for
the promotion of economic development. 12

There is no intracorporate nor partnership relation between petitioner and private respondent. The controversy
between them arose out of their plan to consolidate their respective jeepney drivers' and operators'
associations into a single common association. This unified association was, however, still a proposal. It had not
been approved by the SEC, neither had its officers and members submitted their articles of consolidation is
accordance with Sections 78 and 79 of the Corporation Code. Consolidation becomes effective not upon mere
DEFECTIVE CORPORATION
34
13
agreement of the members but only upon issuance of the certificate of consolidation by the SEC. When the
SEC, upon processing and examining the articles of consolidation, is satisfied that the consolidation of the
corporations is not inconsistent with the provisions of the Corporation Code and existing laws, it issues a
certificate of consolidation which makes the reorganization official. 14 The new consolidated corporation comes
into existence and the constituent corporations dissolve and cease to exist. 15

The KAMAJDA and SAMAJODA to which petitioner and private respondent belong are duly registered with the
SEC, but these associations are two separate entities. The dispute between petitioner and private respondent
is not within the KAMAJDA nor the SAMAJODA. It is between members of separate and distinct associations.
Petitioner and private respondent have no intracorporate relation much less do they have an intracorporate
dispute. The SEC therefore has no jurisdiction over the complaint.

The doctrine of corporation by estoppel 16 advanced by private respondent cannot override jurisdictional
requirements. Jurisdiction is fixed by law and is not subject to the agreement of the parties. 17 It cannot be
acquired through or waived, enlarged or diminished by, any act or omission of the parties, neither can it be
conferred by the acquiescence of the court. 18

Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and
unfairness. 19 It applies when persons assume to form a corporation and exercise corporate functions and enter
into business relations with third person. Where there is no third person involved and the conflict arises only
among those assuming the form of a corporation, who therefore know that it has not been registered, there is
no corporation by estoppel. 20

IN VIEW WHEREOF, the petition is granted and the decision dated April 18, 1996 and the order dated May 31,
1996 of the Regional Trial Court, Branch 58, Angeles City are set aside. The Municipal Circuit Trial Court of
Mabalacat and Magalang, Pampanga is ordered to proceed with dispatch in resolving Civil Case No. 1214. No
costs.

SO ORDERED.