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ONGKINGCO VS NLRC

BIENVENIDO ONGKINGCO, as President and GALERIA DE MAGALLANES CONDOMINIUM ASSOCIATION,

INC., Petitioners, v. NATIONAL LABOR RELATIONS COMMISSION and FEDERICO B. GUILAS, Respondents.

At fore, once again, is the jurisdictional tug of war between the National Labor Relations Commission (NLRC) and
the Securities & Exchange Commission (SEC) in this special civil action for certiorari under Rule 65 of the Revised
Rules of Court. It seeks to set aside the Resolutions of the NLRC in NLRC NCR Case No. 00-05-02780-92 (NLRC CA
No. 004329-93) dated 9 March 1995 and 4 April 1995 which reversed the decision of Labor Arbiter Oswald Lorenzo
and denied petitioners' motion for reconsideration, respectively.

Petitioner Galeria de Magallanes Condominium Association, Inc. (Galeria for brevity) is a non-stock, non-profit
corporation formed in accordance with R.A. No. 4726, otherwise known as the Condominium Act. "Its primary
purpose is to hold title to the common areas of the Galeria de Magallanes Condominium Project and to manage
and administer the same for the use and convenience of the residents and/or owners." 1 Petitioner Bienvenido
Ongkingco was the president of Galeria at the time private respondent filed his complaint.

On 1 September 1990, Galeria's Board of Directors appointed private respondent Federico B. Guilas as
Administrator/Superintendent. He was given a "monthly salary of P10,000 subject to review after five (5) months
and subsequently thereafter as Galeria's finances improved."2chanroblesvirtuallawlibrary

As Administrator, private respondent was tasked with the maintenance of the "performance and elegance of the
common areas of the condominium and external appearance of the compound thereof for the convenience and
comfort of the residents as well as to keep up the quality image, and hence the value of the investment for the
owners thereof."3chanroblesvirtuallawlibrary

However, on 17 March 1992, through a resolution passed by the Board of Directors of Galeria, private respondent
was not re-appointed as Administrator.

As a result, on 15 May 1992, private respondent instituted a complaint against petitioners for illegal dismissal and
non-payment of salaries with the NLRC.

In response, on 22 July 1992, petitioners filed a motion to dismiss alleging that it is the SEC, and not the labor
arbiter, which has jurisdiction over the subject matter of the complaint.

Labor Arbiter Lorenzo granted the aforestated motion to dismiss in his order dated 29 December 1992. He ruled,
thus:

A judicious calibration of the position taken by the contending parties preponderate clearly in favor of
respondents, that this case is within the jurisdiction of the Securities and Exchange Commission and not this Office
(Labor Arbiter).

Our reasons are as follows:

ONE. The Position of Administrator or Superintendent is a corporate position, whose appointment depended on
the Board of Directors. As such, the position of the administrator is a corporate creation.

TWO. Clearly from the respondent corporation's Articles of Incorporation, Art. V, Sec. 6 thereof, the appointment
and removal of the administrator is a prerogative that belongs to the Board, and thereby involves the exercise of
deliberate choice and faculty of discriminative selection.
2|Page

THIRD. Thus, we find lacking of merit the argument of complainant that since he is not a member of the
condominium association where he was formerly administrator, or is not a unit holder thereof, since a person's
relationship to a corporation is not determinative of the services performed but by the incidents of the
relationship as they exist. (PSBA v. LEANO, 127 SCRA 778.)

The resolution, therefore, of the other pending incident, which is the MOTION FOR SUBSTITUTION OF PARTIES is
hereby deferred for action by the SEC.

WHEREFORE, in view of all the foregoing considerations, this Office hereby orders the dismissal of the instant
action for reason of lack of jurisdiction. The complainant, if he is mindful should file this case with the Securities
and Exchange Commission.

SO ORDERED.4chanroblesvirtuallawlibrary

The NLRC, however, reversed the Labor Arbiter's order in its resolution dated 9 March 1995. It ruled in this wise:

We find merit in the appeal. It cannot be gainsaid that the complainant's cause of action in his complaint is illegal
dismissal which issue falls four square within the jurisdiction of the NLRC. This is so, because while it may be true
that the termination of the complainant was effected allegedly by a resolution of the Board of Directors of the
respondent association, this did not make the dispute intracorporate in nature. Moreover, We have taken note of
the fact that the complainant is neither a member of the association nor an officer thereof. Hence, We are more
convinced that he is an employee of the respondent association occupying the position of administrator who is in
(sic) charged with the function of managing and administering the building or condominium owned by the
members. Indeed, there is a whale of difference between a member of the association who is a part owner of the
building and a mere employee performing managerial and administrative functions which are necessary in the
usual undertaking of the respondent Association. The complainant falls under the second category.

And, to the point of being repetitious, it needs to be stressed that the fact that the complainant was removed by
the Board of Directors did not change the issue from an illegal dismissal case to an intracorporate one. For, what
remains to be resolved here is whether or not the complainant's removal from his position as Administrator was
for a just and valid cause and in compliance with due process. And, as the facts now stand, the issue is within the
scope of authority of the National Labor Relations Commission to resolve.

We simply could not agree with the conclusions of law made by the Arbiter a quo on the applicability of the
provisions of P.D. 902. Our view finds basis in the case of Gregorio Araneta University Foundation v. Antonio J.
Teodoro and NLRC (167 SCRA 79) wherein the Supreme Court had the occasion to clarify the jurisdiction of the
Securities and Exchange Commission and that of the NLRC. It (Supreme Court) held, thus

"x x x Relying on Philippine School of Business Administration, et al., (127 SCRA 778) and Dy, et al., vs. National
Labor Relations Commission, et al., (145 SCRA 211), Petitioner theorizes that since private respondent was a
corporate officer, the present controversy is within the jurisdiction of the Securities and Exchange Commission,
pursuant to P.D. 902-A, and not in the public respondent.

Without need of applying the rule on estoppel by laches against petitioner, its contention must fail on the ground
of misplaced reliance. As explained in Dy, the same is true with Philippine Business Administration, the
controversies therein were intra corporate in nature and squarely within the purview of Section 5(c), PD. 902-A
since the real question was the invalidity of the board of director's meeting wherein corporate officers involved
were not re-elected, resulting in the termination of their services." (Underscoring ours.)

As obtaining in this case, no intracorporate controversy exists, hence, the jurisdiction of the NLRC should be
sustained.
3|Page

WHEREFORE, finding merit on the appeal, the same is hereby, given due course. Accordingly, the Order appealed
from is declared Null and Void and is hereby, VACATED and SET ASIDE. Accordingly, let the records of the case be
remanded to the Arbitration Branch of origin for further proceedings. With the directive that the instant case be
given priority in the calendar of the Labor Arbiter for the speedy disposition hereon. Concomitant hereto, the
respondents are hereby directed to submit their position paper within ten (10) days from receipt hereof.

SO ORDERED.5chanroblesvirtuallawlibrary

Petitioners filed a motion for reconsideration but the same was denied in the NLRC's resolution dated 4 April
1995.6 Hence, the present recourse.

The petitioners raised a single issue:

THE PRIVATE RESPONDENT ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR COMMITTED GRAVE ABUSE
OF DISCRETION IN TAKING COGNIZANCE OF A SUBJECT MATTER THAT FELL WITHIN THE ORIGINAL AND EXCLUSIVE
JURISDICTION OF THE SEC.

The petition is granted.

Specifically delineated in P.D. 902-A are the cases over which the SEC exercises exclusive jurisdiction:

SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have 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 intra-corporate 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 property to cover all of 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 cover its liabilities, but is under the Management Committee created
pursuant to this Decree. (Underscoring ours.)

The Solicitor General contends that the case at bar falls outside the purview of the aforequoted provision. He
insists that private respondent was a mere employee of petitioner corporation being tasked mainly, as
administrator/superintendent, with the upkeep of the condominium's common areas. He, thus, maintains that
private respondent cannot be deemed a corporate officer because "it is the nature of one's functions and not the
nomenclature or title given to one's job which determines one's status in a
corporation."7chanroblesvirtuallawlibrary
4|Page

The contentions of public respondent lack merit. That private respondent is an officer of petitioner corporation
and not its mere employee cannot be questioned. The by-laws of the Galeria de Magallanes Condominium
Association specifically includes the Superintendent/Administrator in its roster of corporate officers:

ARTICLE IV

OFFICERS

Section 1. Executive Officers The Executive officers of the corporation shall be a President, a Vice President, a
Treasurer, all of whom shall be elected by the Board of Directors. They may be removed with or without cause at
any meeting by the concurrence of four directors. The Board of Directors may appoint a Superintendent or
Administrator and such other officers and employees and delineate their powers and duties as the Board shall find
necessary to manage the affairs of the corporation.8 (Underscoring ours.)

xxx.

Section 6. The Superintendent or Administrator The Board of Directors may appoint a Superintendent or
Administrator for the condominium project if the activities and financial condition of the Association so warrant. If
one is so appointed, he shall be the principal administrative officer of the Association. He shall attend to routinary
and day-to-day business and activities of the Association and shall keep regular officer hours for the purpose. He
shall have such other duties and powers as may be conferred upon him by the Board of Directors or delegated by
the President of the Association.

At the discretion of the Board of Directors, the work and duties of Superintendent or Administrator may be
entrusted to a juridical entity which is qualified and competent to perform such work. 9chanroblesvirtuallawlibrary

Closely approximating the dispute at bar is the recent case of Tabang v. NLRC.10 This Court, through Justice Florenz
D. Regalado, ruled that:

Contrary to the contention of petitioner, a medical director and a hospital administrator are considered as
corporate officers under the by-laws of respondent corporation. Section 2(i), Article I thereof states that one of the
powers of the Board of Trustees is "(t)o appoint a Medical Director, Comptroller/Administrator, Chiefs of Services
and such other officers as it may deem necessary and prescribe their powers and duties."

The president, vice-president, secretary and treasurer are commonly regarded as the principal or executive officers
of a corporation, and modern corporation statutes usually designate them as the officers of the corporation.
However, other offices are sometimes created by the charter or by-laws of a corporation, or the board of directors
may be empowered under the by-laws of a corporation to create additional offices as may be necessary.

It has been held that an "office" is created by the charter of the corporation and the officer is elected by the
directors or stockholders. On the other hand, an "employee" usually occupies no office and generally is employed
not by action of the directors or stockholders but by the managing officer of the corporation who also determines
the compensation to be paid to such employee.

In the case at bar, considering that herein petitioner, unlike an ordinary employee, was appointed by respondent
corporation's Board of Trustees in its memorandum of October 30, 1990, she is deemed an officer of the
corporation. Perforce, Section 5(c) of Presidential Decree No. 902-A, which provides that the SEC exercises
exclusive jurisdiction over controversies in the election or appointment of directors, trustees, officers or managers
of corporations, partnerships or associations, applies in the present dispute. Accordingly, jurisdiction over the
same is vested in the SEC, and not in the Labor Arbiter or the NLRC.
5|Page

Supplementing the afore-quoted ruling, in Lozon v. NLRC11 and Espino v. NLRC,12 citing Fortune Cement Corp. v.
NLRC,13 we declared that:

A corporate officer's dismissal is always a corporate act and/or an intra-corporate controversy and that nature is
not altered by the reason or wisdom which the Board of Directors may have in taking such action.

Based on the foregoing, we must rule that private respondent was indeed a corporate officer. He was appointed
directly by the Board of Directors not by any managing officer of the corporation and his salary was, likewise, set
by the same Board. Having thus determined, his dismissal or non-appointment is clearly an intra-corporate matter
and jurisdiction, therefore, properly belongs to the SEC and not the NLRC.

The respondents also attack the SEC's jurisdiction over the instant case on grounds that Guilas was not elected by
the Board of Directors but was merely appointed.

This particular argument baffles us. P.D. 902-A cannot be any clearer. Sec. 5(c) of said law expressly covers both
election and appointment of corporate directors, trustees, officers and managers. 14chanroblesvirtuallawlibrary

It is of no consequence, likewise, that the complaint of private respondent for illegal dismissal includes money
claims, jurisdiction remains with the SEC as ruled in the case of Cagayan de Oro Coliseum, Inc. v. Office of the
MOLE:15chanroblesvirtuallawlibrary

Although the reliefs sought by Chaves appear to fall under the jurisdiction of the labor arbiter as they are claims for
unpaid salaries and other remunerations for services rendered, a close scrutiny thereof shows that said claims are
actually part of the perquisites of his position in, and therefore interlinked with his relations with the corporation.
In Dy v. NLRC, the Court said: "(t)he question of remuneration involving as it does, a person who is not a mere
employee but a stockholder and officer, an integral part, it might be said, of the corporation, is not a simple labor
problem but a matter that comes within the area of corporate affairs and, management, and is in fact a corporate
controversy in contemplation of the Corporation Code."

WHEREFORE, the petition for certiorari is given DUE COURSE, the assailed resolutions of the NLRC are hereby
REVERSED and the Order of the Labor Arbiter dated 29 December 1992 REINSTATED.
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TABANG VS NLRC

PURIFICACION G. TABANG, Petitioner, v. NATIONAL LABOR RELATIONS COMMISSION and

PAMANA GOLDEN CARE MEDICAL CENTER FOUNDATION, INC., Respondents.

1. COMMERCIAL LAW; P.D. 902-A; EXCLUSIVE JURISDICTION OF SEC OVER INTRACORPORATE

CONTROVERSY; INTRACORPORATE CONTROVERSIES, EXPLAINED; CASE AT BENCH. — We agree with the
findings of the NLRC that it is the SEC which has jurisdiction over the case at bar. The charges against
herein private respondent partake of the nature of an intra-corporate controversy. The determination of the
rights of petitioner and the concomitant liability of private respondent arising from her ouster as a medical
director and/or hospital administrator, which are corporate offices, is an intra-corporate controversy subject
to the jurisdiction of the SEC. A corporate officer’s dismissal is always a corporate act, or an intra-corporate
controversy, and the nature is not altered by the reason or wisdom with which the Board of Directors may
have in taking such action. Also, an intra-corporate controversy is one which arises between a stockholder
and the corporation. There is no distinction, qualification, nor any exemption whatsoever. The provision is
broad and covers all kinds of controversies between stockholders and corporations. chanrob les virtua lawlib rary

2. ID.; ID.; ID.; OUSTER OF CORPORATE OFFICER IS AN INTRACORPORATE CONTROVERSY; CASE AT BAR.
— Contrary to the contention of petitioner, a medical director and a hospital administrator are considered as
corporate officers under the by-laws of respondent corporation. Section 2(i), Article I thereof states that one
of the powers of the Board of Trustees is "(t)o appoint a Medical Director, Comptroller/Administrator, Chiefs
of Services and such other officers as it may deem necessary and prescribe their powers and duties.." . .
Considering that petitioner, unlike an ordinary employee, was appointed by respondent corporation’s Board
of Trustees in its memorandum of October 30, 1990, she is deemed an officer of the corporation. Perforce,
Section 5(c) of Presidential Decree No. 902-A, which provides that the SEC exercises exclusive jurisdiction
over controversies in the election or appointment of directors, trustees, officers or managers of corporations,
partnerships or associations, applies in the present dispute. Accordingly, jurisdiction over the same is vested
in the SEC, and not in the Labor Arbiter or the NLRC.

3. ID.; ID.; ID.; ID.; OFFICER DISTINGUISHED FROM AN EMPLOYEE. — It has been held that an "office" is
created by the charter of the corporation and the officer is elected by the directors or stockholders. On the
other hand, an "employee" usually occupies no office and generally is employed not by action of the
directors or stockholders but by the managing officer of the corporation who also determines the
compensation to be paid to such employee.

4. ID.; ID.; ID.; ID.; JURISDICTION OF THE SEC NOT REMOVED BY OTHER CLAIMS INVOLVING CORPORATE
OFFICER; CASE AT BAR. — Even assuming that the monthly payment of P5,000.00 was a valid claim against
respondent corporation, this would not operate to effectively remove this case from the jurisdiction of the
SEC. In the case of Cagayan de Oro Coliseum, Inc. v. Office of the Minister of Labor and Employment, etc.,
Et Al., we ruled that "(a)lthough the reliefs sought by Chavez appear to fall under the jurisdiction of the
labor arbiter as they are claims for unpaid salaries and other remunerations for services rendered, a close
scrutiny thereof shows that said claims are actually part of the perquisites of his position in, and therefore
interlinked with his relations with the corporation. In Dy, Et Al. v. NLRC, Et Al., the Court said: ‘(t)he
question of remuneration involving as it does, a person who is not a mere employee but a stockholder and
officer, an integral part, it might be said, of the corporation, is not a simple labor problem but a matter that
comes within the area of corporate affairs and management and is in fact a corporate controversy in
contemplation of the Corporation Code."’ cralawnad

DECISION

This is a petition for certiorari which seeks to annul the resolution of the National Labor Relations
Commission (NLRC), dated June 26, 1995, affirming in toto the order of the labor arbiter, dated April 26,
1994, which dismissed petitioner’s complaint for illegal dismissal with money claims for lack of jurisdiction.

The records show that petitioner Purificacion Tabang was a founding member, a member of the Board of
8|Page

Trustees, and the corporate secretary of private respondent Pamana Golden Care Medical Center
Foundation, Inc., a non-stock corporation engaged in extending medical and surgical services.

On October 30, 1990, the Board of Trustees issued a memorandum appointing petitioner as Medical Director
and Hospital Administrator of private respondent’s Pamana Golden Care Medical Center in Calamba, Laguna.

Although the memorandum was silent as to the amount of remuneration for the position, petitioner claims
that she received a monthly retainer fee of five thousand pesos (P5,000.00) from private respondent, but
the payment thereof was allegedly stopped in November, 1991.

As medical director and hospital administrator, petitioner was tasked to run the affairs of the aforesaid
medical center and perform all acts of administration relative to its daily operations.

On May 1, 1993, petitioner was allegedly informed personally by Dr. Ernesto Naval that in a special meeting
held on April 30, 1993, the Board of Trustees passed a resolution relieving her of her position as Medical
Director and Hospital Administrator, and appointing the latter and Dr. Benjamin Donasco as acting Medical
Director and acting Hospital Administrator, respectively. Petitioner averred that she thereafter received a
copy of said board resolution.

On June 6, 1993, petitioner filed a complaint for illegal dismissal and non-payment of wages, allowances and
13th month pay before the labor arbiter.

Respondent corporation moved for the dismissal of the complaint on the ground of lack of jurisdiction over
the subject matter. It argued that petitioner’s position as Medical Director and Hospital Administrator was
interlinked with her position as member of the Board of Trustees, hence, her dismissal is an intra-corporate
controversy which falls within the exclusive jurisdiction of the Securities and Exchange Commission (SEC).

Petitioner opposed the motion to dismiss, contending that her position as Medical Director and Hospital
Administrator was separate and distinct from her position as member of the Board of Trustees. She claimed
that there is no intra-corporate controversy involved since she filed the complaint in her capacity as Medical
Director and Hospital Administrator, or as an employee of private respondent.

On April 26, 1994, the labor arbiter issued an order dismissing the complaint for lack of jurisdiction. He ruled
that the case falls within the jurisdiction of the SEC, pursuant to Section 5 of Presidential Decree No. 902-A.
1

Petitioner’s motion for reconsideration was treated as an appeal by the labor arbiter who consequently
ordered the elevation of the entire records of the case to public respondent NLRC for appellate review. 2

On appeal, respondent NLRC affirmed the dismissal of the case on the additional ground that "the position of
a Medical Director and Hospital Administrator is akin to that of an executive position in a corporate ladder
structure," hence, petitioner’s removal from the said position was an intra-corporate controversy within the
original and exclusive jurisdiction of the SEC. 3

Aggrieved by the decision, petitioner filed the instant petition which we find, however, to be without merit.

We agree with the findings of the NLRC that it is the SEC which has jurisdiction over the case at bar. The
charges against herein private respondent partake of the nature of an intra-corporate controversy. Similarly,
the determination of the rights of petitioner and the concomitant liability of private respondent arising from
her ouster as a medical director and/or hospital administrator, which are corporate offices, is an intra-
corporate controversy subject to the jurisdiction of the SEC.

Contrary to the contention of petitioner, a medical director and a hospital administrator are considered as
corporate officers under the by-laws of respondent corporation. Section 2(i), Article I thereof states that one
of the powers of the Board of Trustees is "(t)o appoint a Medical Director, Comptroller/Administrator, Chiefs
of Services and such other officers as it may deem necessary and prescribe their powers and duties." 4

The president, vice-president, secretary and treasurer are commonly regarded as the principal or executive
officers of a corporation, and modern corporation statutes usually designate them as the officers of the
corporation. 5 However, other offices are sometimes created by the charter or by-laws of a corporation, or
the board of directors may be empowered under the by-laws of a corporation to create additional offices as
may be necessary. 6
9|Page

It has been held that an "office" is created by the charter of the corporation and the officer is elected by the
directors or stockholders. 7 On the other hand, an "employee" usually occupies no office and generally is
employed not by action of the directors or stockholders but by the managing officer of the corporation who
also determines the compensation to be paid to such employee. 8 chan roble svi rtual lawlib rary

In the case at bar, considering that herein petitioner, unlike an ordinary employee, was appointed by
respondent corporation’s Board of Trustees in its memorandum of October 30, 1990, 9 she is deemed an
officer of the corporation. Perforce, Section 5(c) of Presidential Decree No. 902-A, which provides that the
SEC exercises exclusive jurisdiction over controversies in the election or appointment of directors, trustees,
officers or managers of corporations, partnerships or associations, applies in the present dispute.
Accordingly, jurisdiction over the same is vested in the SEC, and not in the Labor Arbiter or the NLRC.

Moreover, the allegation of petitioner that her being a member of the Board of Trustees was not one of the
considerations for her appointment is belied by the tenor of the memorandum itself. It states: "We hope
that you will uphold and promote the mission of our foundation," 10 and this cannot be construed other than
in reference to her position or capacity as a corporate trustee.

A corporate officer’s dismissal is always a corporate act, or an intra-corporate controversy, and the nature is
not altered by the reason or wisdom with which the Board of Directors may have in taking such action. 11
Also, an intra-corporate controversy is one which arises between a stockholder and the corporation. There is
no distinction, qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of
controversies between stockholders and corporations. 12

With regard to the amount of P5,000.00 formerly received by herein petitioner every month, the same
cannot be considered as compensation for her services rendered as Medical Director and Hospital
Administrator. The vouchers 13 submitted by petitioner show that the said amount was paid to her by
PAMANA, Inc., a stock corporation which is separate and distinct from herein private respondent. Although
the payments were considered advances to Pamana Golden Care, Calamba branch, there is no evidence to
show that the Pamana Golden Care stated in the vouchers refers to herein respondent Pamana Golden Care
Medical Center Foundation, Inc.

Pamana Golden Care is a division of Pamana, Inc., while respondent Pamana Golden Care Medical Center
Foundation, Inc. is a non-stock, non-profit corporation. It is stated in the memorandum of petitioner that
Pamana, Inc. is a stock and profit corporation selling pre-need plan for education, pension and health care.
The health care plan is called Pamana Golden Care Plan and the holders are called Pamana Golden Care
Card Holders or, simply, Pamana Members. 14

It is an admitted fact that herein petitioner is a retained physician of Pamana, Inc., whose patients are
holders of the Pamana Golden Care Card. In fact, in her complaint 15 filed before the Regional Trial Court of
Calamba, herein petitioner is asking, among others, for professional fees and/or retainer fees earned for her
treatment of Pamana Golden Care card holders. 16 Thus, at most, said vouchers can only be considered as
proof of payment of retainer fees made by Pamana, Inc. to herein petitioner as a retained physician of
Pamana Golden Care.

Moreover, even assuming that the monthly payment of P5,000.00 was a valid claim against respondent
corporation, this would not operate to effectively remove this case from the jurisdiction of the SEC. In the
case of Cagayan de Oro Coliseum, Inc. v. Office of the Minister of Labor and Employment etc., Et Al., 17 we
ruled that "(a)lthough the reliefs sought by Chavez appear to fall under the jurisdiction of the labor arbiter
as they are claims for unpaid salaries and other remuneration for services rendered, a close scrutiny thereof
shows that said claims are actually part of the perquisites of his position in, and therefore interlinked with,
his relations with the corporation. In Dy, Et Al., v. NLRC, Et Al., the Court said: ‘(t)he question of
remuneration involving as it does, a person who is not a mere employee but a stockholder and officer, an
integral part, it might be said, of the corporation, is not a simple labor problem but a matter that comes
within the area of corporate affairs and management and is in fact a corporate controversy in contemplation
of the Corporation Code.’" chanroble svirtual lawli brary: red

WHEREFORE, the questioned resolution of the NLRC is hereby AFFIRMED, without prejudice to petitioner’s
taking recourse to and seeking relief through the appropriate remedy in the proper forum.

SO ORDERED.
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11 | P a g e

GURREA VS LEZAMA

RICARDO GURREA, plaintiff-appellant,

vs.
JOSE MANUEL LEZAMA, ET AL., defendants-appellees.

Plaintiff instituted this action in the Court of First Instance of Iloilo to have Resolution No. 65 of the Board of
Directors of the La Paz Ice Plant and Cold Storage Co., Inc., removing him from his position of manager of said
corporation declared null and void and to recover damages incident thereto. The action is predicated on the
ground that said resolution was adopted in contravention of the provisions of the by-laws of the corporation, of
the Corporation Law and of the understanding, intention and agreement reached among its stockholders.

Defendant answered the complaint setting up as defense that plaintiff had been removed by virtue of a valid
resolution.

In connection with this complaint, plaintiff moved for the issuance of a writ of preliminary injunction to restrain
defendant Jose Manuel Lezama from managing the corporation pending the determination of this case, but after
hearing where parties presented testimonial and documentary evidence, the court denied the motion. Thereafter,
by agreement of the parties and without any trial on the merits, the case was submitted for judgment on the sole
legal question of whether plaintiff could be legally removed as manager of the corporation merely by resolution of
the board of directors or whether the affirmative vote of 2/3 of the paid shares of stocks was necessary for that
purpose. And passing upon this legal point, the trial court held that the removal of plaintiff was legal and dismissed
the complaint without pronouncement as to costs. Plaintiff appealed to the Court of Appeals but finding that the
question at issue is one of law, the latter certified the case to us for decision.

Section 33 of the Corporation Law provides: "Immediately after the election, the directors of a corporation must
organize by the election of a president, who must be one of their number, a secretary or clerk who shall be a
resident of the Philippines . . . and such other officers as may be provided for in the by-laws." The by-laws of the
instant corporation in turn provide that in the board of directors there shall be a president, a vice-president, a
secretary and a treasurer. These are the only ones mentioned therein as officers of the corporation. The manager
is not included although the latter is mentioned as the person in whom the administration of the corporation is
vested, and with the exception of the president, the by-laws provide that the officers of the corporation may be
removed or suspended by the affirmative vote of 2/3 of the corporation (Exhibit A).

From the above the following conclusion is clear: that we can only regard as officers of a corporation those who
are given that character either by the Corporation Law or by its by-laws. The rest can be considered merely as
employees or subordinate officials. And considering that plaintiff has been appointed manager by the board of
directors and as such does not have the character of an officer, the conclusion is inescapable that he can be
suspended or removed by said board of directors under such terms as it may see fit and not as provided for in the
by-laws. Evidently, the power to appoint carries with it the power to remove, and it would be incongruous to hold
that having been appointed by the board of directors he could only be removed by the stockholders.

The above interpretation finds also support in the American authorities. Fletcher, in his treatise, states the rule in
the following wise: "It is sometimes important to determine whether a person representing a corporation is to be
classed as an officer of the company or merely as an agent or employee, especially in construing statutes renting
only to 'officers' of corporations. Generally the officers of a corporation are enumerated in its charter or by-laws,
and include a president, vice-president, secretary, treasurer and sometimes others. The statutes in most of the
states expressly provide for the election of a president, secretary and treasurer, and then provide, that there shall
be such other officers, agents and factors as the corporation shall authorize for that purpose. If the charter
expressly enumerates who shall be officers of the company, a person whose position is not enumerated is not an
officer as to members of the corporation, since the charter is conclusive upon them" (Fletcher, Cyclopedia of the
12 | P a g e

Law of Private Corporations, Vol. II, p. 19). It has been likewise held "that the offices pertaining to a private
corporation are defined in its charter and by-laws, and that no other positions in the service of the corporation are
offices" (Ann. 53 A.L.R., 599).

Indeed, there are authorities galore that hold that a general manager is not an officer of a corporation, even if his
powers and influence may be as great as those of any officer in said organization.

Officers Distinguished from Mere Employees. — As already stated, both officers and employees are
agents of the corporation and the difference between them is largely one of degree; the officers are the
most important employees exercising greater authority or power in the management of the business.
Ordinarily, too, the principal offices are designated by statute, charter or by-law provisions, and specific
duties are imposed upon certain officers. Thus the state statute or a by-law may provide that stock
certificates shall be signed by the president and countersigned by the secretary or treasurer. The general
manager of a corporation is not ordinarily classed as an officer, but his powers and influence may be quite
as great as those of any person in the organization. (Grange, Corporation Law for Officers and Directors,
p. 432; Emphasis supplied.)

One distinction between officers and agents of a corporation lies in the manner of their creation. An
officer is created by the charter of the corporation, and the officer is elected by the directors or the
stockholders. An agency is usually created by the officers, or one or more of them, and the agent is
appointed by the same authority. It is clear that the two terms officers and agents are by no means
interchangeable. One, deriving its existence from the other, and being dependent upon that other for its
continuation, is necessarily restricted in its powers and duties, and such powers and duties, are not
necessarily the same as those pertaining to the authority creating it. The officers, as such, are the
corporation. An agent is an employee. "A mere employment, however liberally compensated, does not rise
to the dignity of an office." 21 Am and Eng. Enc. Law (2d Ed.) 836. In Wheeler and Wilson Mfg.
Co. vs. Lawson, 57 Wis. 400, 15 N. W. 398, it was held that under a statute requiring an affidavit to be
made by an officer of a corporation, the general agent or managing agent, within the state, of a foreign
corporation is not an officer. In Farmers' Loan and Trust Co. vs. Warring, 20 Wis. 305, service was made
upon the "principal agent" of a corporation holding in trust a railroad, when the statute required service
upon a "principal officer." In answering the question whether or not the agent was a principal officer the
court said: "It is evident he was not, and must be regarded only as an agent not an officer of any kind,
much less a principal officer." A ruling that a "general manager" of a corporation was not authorized to
verify pleadings, under a statute requiring verification by "an officer" was made in Meton vs. Isham
Wagon Co. (Sup.) 4 N. Y. Supp. 215. In Raleigh, etc. R. Co. vs. Pullman Co., 122 Ga. 704, 5O S.E. 1008 (4), it
was held that the term "general manager." as applied to one representing a corporation, and especially a
railroad corporation, imported an agent of a very extensive authority; but it was not ruled that even the
term "general manager" would import that the person holding that position was necessarily an officer of
the company. One distinction between an officer and an agent suggested in Commonwealth vs. Christian,
9 Phila. (Pa.) 558, is that on officer of a corporation, if illegally excluded from his office, may by mandamus
compel the corporation, to reinstate him; while an agent may be dismissed without cause, and his only
remedy would be compensation in damages. It would not be contended that the "general agent of the
defendant at Columbus," in the event of his discharge, could be reinstated by mandamus. We do not think
the general agent at Columbus was an officer of the defendant company. Therefore his alleged waiver of a
condition in the policy was not binding upon the company. (Vardeman vs. Penn. Mut. Life Ins. Co. 125 Ga.
117, 54 S.E. P. 66; Emphasis supplied.)

The plaintiff-predicates this action on said contract, and claims that the same being signed by the
defendant through its "general manager" if admitted evidence, would show sufficient authority prima
facie to do any act which the directors could authorize or ratify. The instrument in question being signed
by James W. Codle, "General Manager" and no evidence in the trial being produced showing the duties of
said manager or what kind of an office he was general manager of, the "general manager" without proof
13 | P a g e

as to the nature of services performed by the persons called "general manager", have no meaning in law,
excepting that the persons bearing the title is an employee who has been designated with a title. It does
not make him an officer of the company employing him. (Studerbaker Bros. Co. vs. R. M. Rose Co., 119
N.Y.S pp. 970, 97; Emphasis supplied.)

We therefore hold that plaintiff has been properly removed when the board of directors of the instant corporation
approved its Resolution No. 65 on June 3, 1948.

We will now clarify some of the points raised by the distinguished dissenter in his dissenting opinion.

The fact that the "manager" of the corporation in the several statutes enacted by Congress is held criminally liable
for violation of any of the penal provisions therein prescribed does not make him an "officer" of the corporation.
This liability flows from the nature of his duties which are delegated to him by the board of directors. He is paid for
them. Hence, he has to answer for them should he use it in violation of law. In the case of Robinson vs. Moark-
Nemo Consol Mining Co., et al., 163 S. W. 889, in connection with the liability of the manager, the court said:

Common justice and common sense demand that, where those in charge and control of the management
of a corporation direct it along paths of wrongdoing, they should be held accountable by law. . . . This
doctrine will prevent many wrongs, and have a salutary influence in bringing about the lawful and orderly
management of corporations.

It is claimed that the cases of Meton vs. Isham Wagon, 4 N.Y.S., 215 and State vs. Bergs, 217 N. W., 736, supporting
the theory that a manager is not necessarily an officer, are in illo tempore.1 It is submitted that we do not adopt a
rule just because it is new nor reject another just because it is old. We adopt a rule because it is a good and sound
rule. The fact however is that they are not the only authorities supporting that theory. Additional cases are cited by
Fletcher in support thereof, such as the cases of Vardeman vs. Penn. Mut. Life Ins. Co., supra Studebaker Bros.
Co. vs. R. M. Rose Co., supra.

The dissenting opinion quotes from Thompson and Fletcher to support the theory that the general manager of a
corporation may be considered as its principal officer even though not so mentioned in its charter or bylaws. We
have examined the cast cited in support of that theory but we have found that they are not in point. Thus, we have
found (1) that the parties involved are mostly outsiders who press their transactions against the corporation; (2)
that the point raised is whether the acts of the manager bind the corporation; (3) that the tendency of the courts is
to hold the corporation liable for the acts of the manager so long as they are within the powers granted, hence,
the courts emphasized the importance of the position of manager; and (4) the position of manager was discussed
from the point of view of an outsider and not from the internal organization of the corporation, or in accordance
with its charter or by-laws. In the present case, however, the parties are the manager and the corporation. And the
solution of the problem hinges on the internal government of the corporation where the charter and the by-laws
are necessarily involved in the determination of the rights of the parties. Indeed, it has been held: "But it is urged
that a corporation may have officers not recognized by the charter and by-laws. It is possible this may be as to
matters arising between strangers and the corporation." [Com. vs. Christian, 9 Phila. (Pa.) 556; emphasis supplied].

The cases on all fours with the present are those of State ex rel Blackwood vs. Brast, et al., 127 S. E. 507 and
Denton Milling Co. vs. Blewitt, 254 S. W. 236, 238, where the parties involved are the manager and the
corporation. The issue raised is the relation of the manager towards the corporation. The position of the manager
is discussed from the point of view of its internal government. And the holding of the court is that the manager is
the creation of the board of directors and the agent through whom the corporate duties of the board are
performed. Hence, the manager holds his position at the pleasure of the board. This stipulation is well expressed in
the following words of Thompson:
14 | P a g e

The word "manager" implies agency, control, and presumptively sufficient authority to bind a corporation
in a case in which the corporation was an actual party. It has been said that such agent must have the
same general supervision of the corporation as is associated with the office of cashier or secretary. By
whatever name he may be called, such, managing agent is a mere employee of the board of directors and
holds his position subject to the particular contract of employment; and unless the contract of employment
fixes his term of office, it may be terminated at the pleasure of the board. . . . The manager, like any other
appointed agent, is subject to removal when his term expires and on the request of the proper officer he
should turn over his business to the corporation and, where he refuses to comply, he may be restrained
from the further performance of work for the corporation. (Thompson on Corporations, Vol. III, 3rd., pp.
209-210; Emphasis supplied.)

It is not correct to hold that the theory that a manager is not classed as an officer of a corporation is only the
minority view. If we consider the states that hold that managers are merely agents or employees as among those
that hold the theory that managers are not necessarily officers, then our theory is supported by the majority view.
Indeed, this view is upheld by nine states, 2 whereas only six states adopt the view that managers are considered
principal officers of the corporation.3

The dissenting opinion quotes the provision of the bylaws relative to the administration of the affairs of the instant
corporation. It is there provided that the affairs of the corporation shall be successively administered by (1) the
stockholders; (2) the board of directors; and(3) the manager. From this it concludes that the manager should be
considered an officer.

The above enumeration only emphasizes the different organs through which the affairs of the corporation should
be administered and the order in which the powers should be exercised. The stockholders are the entity,
composing the whole corporation. The board of directors is the entity elected by the stockholders to manage the
affairs of the corporation. And the manager is the individual appointed by the board of directors to carry out the
powers delegated to him. In other words, the manager is the creation of the board of directors. He is an alter
ego of the board. As our law provides that only those enumerated in the charter or in the by-laws are considered
officers, the manager who has not been so enumerated therein, but only incidentally mentioned in the order of
management, cannot be considered an officer of the corporation within their purview.

The mere fact that the directors are not mentioned in the by-laws as officers does not deprive them of their
category as such for their character as officer is secured in the charter. The same is not true with the manager.
Customs and corporate usages cannot prevail over the express provisions of the charter and the by-laws.

There is no comparison between an appointee of the President, especially one in the judiciary, and the appointee
of the board of directors of a corporation. In the first case, removal is especially provided for by law and in the
second, the appointee holds office at the pleasure of the board. And with regard to the powers of the board of
director, to remove a manager of the corporation, Thompson has the following to say:

. . . Below the grade of director and such other officers as are elected by the corporation at large, the
general rule is that the officers of private corporations hold their offices during the will of the directors,
and are hence removable by the directors without assigning any cause for the removal, except so far as
their power may be restrained by contract with the particular officer, — just as any other employer may
discharge his employee. Speaking generally, it may be said that the power to appoint carries with it the
power to remove. . . . the directors who appoint a ministerial officer may undoubtedly remove him at
pleasure, and he has no remedy other than an action for damages against the corporation for a breach of
contract. . . . The ordinary ministerial and other lesser officers, however, hold their offices during the
pleasure of the directors and may be removed at will, without assigned cause. Of this class of officers and
agents are the secretary and treasurer of the corporation, the general manager, the assistant manager,
the field manager, the attorney of the company, an assistant horticulturist, and the bookkeepers.
(Thompson on Corporations, Vol. III, 521-523.)
15 | P a g e

PSBA VS LEANO

PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, MANILA, ANTONIO M. MAGTALAS, JOSE

ARANAS, JUAN D. LIM, JOSE F. PERALTA and BENJAMIN P. PAULINO, Petitioners, v. LABOR
ARBITER LACANDOLA S. LEANO of the National Labor Relations Commission and RUFINO R.
TAN, Respondents.

1. COMMERCIAL LAW; CORPORATION LAW; SECURITIES AND EXCHANGE COMMISSION; JURISDICTION

THEREOF VIS-A-VIS THE NATIONAL LABOR RELATIONS COMMISSION; CASE AT BAR. — The jurisdiction of
the Securities and Exchange Commission (SEC) vis-a-vis the National Labor Relations Commission (NLRC) is
in issue. An intracorporate controversy would call for SEC jurisdiction. A labor dispute, that of the NLRC.

2. ID.; ID.; INTRA-CORPORATE CONTROVERSIES; LEGALITY OF ELECTION OF CORPORATE DIRECTORS, IN

THE NATURE OF; CASE AT BAR. — Basically, therefore, the question is whether the election of directors on
August 1, 1981 and the election of officers on September 5, 1981, which resulted in TAN’s failure to be re-
elected, were validly held. This is the crux of the question that TAN has raised before the SEC. Even in his
position paper before the NLRC, TAN alleged that the election on August 1, 1981 of the three directors was
in contravention of the PSBA By-Laws providing that any vacancy in the Board shall be filled by a majority
vote of the stockholders at a meeting specially called for the purpose. Thus, he concludes, the Board
meeting on September 5, 1981 was tainted with irregularity on account of the presence of illegally elected
directors without whom the results could have been different. TAN invoked the same allegations in his
complaint filed with the SEC. So much so, that on December 17, 1981, the SEC (Case No. 2145) rendered a
Partial Decision annulling the election of the three directors and ordered the convening of a stockholders’
meeting for the purpose of electing new members of the Board. 9 The correctness of said conclusion is not
for us to pass upon in this case. TAN was present at said meeting and again sought the issuance of
injunctive relief from the SEC. The foregoing indubitably show that, fundamentally, the controversy is intra-
corporate in nature.

3. ID.; ID.; SECURITIES AND EXCHANGE COMMISSION; JURISDICTION; ORIGINAL AND EXCLUSIVE OVER
INTRA-CORPORATE CONTROVERSIES UNDER PRESIDENTIAL DECREE NO. 902-A; CASE AT BAR. —
Presidential Decree No. 902-A vests in the Securities and Exchange Commission original and exclusive
jurisdiction to hear and decide controversies involving the election of directors, officers, or managers of
corporations registered with the Commission, the relation between and among its stockholders, and between
them and the corporation. The instant case is not a case of dismissal. The situation is that of a corporate
office having been declared vacant, and of TAN’s not having been elected thereafter. The matter of whom to
elect is a prerogative that belongs to the Board, and involves the exercise of deliberate choice and the
faculty of discriminative selection. Generally speaking, the relationship of a person to a corporation, whether
as officer or as agent or employee, is not determined by the nature of the services performed, but by the
incidents of the relationship as they actually exist. (Bruce v. Travelers Ins. Co., 266 F2d 781, cited in 19
Am. Jur. 2d 526).

DECISION

MELENCIO-HERRERA, J.:

This Petition for Certiorari questions the jurisdiction of respondent Labor Arbiter over the present
controversy (No. NCR-9-20-81) involving private respondent-complainant, Rufino R. Tan (TAN), and
petitioners, the Philippine School of Business Administration (PSBA), a domestic corporation, and majority of
its Directors. chan roble s lawlib ra ry : rednad

TAN is one of the principal stockholders of PSBA. Before September 5, 1981, he was a Director and the
Executive Vice President enjoying salaries and allowances.
16 | P a g e

On August 1, 1981, at the PSBA Board of Directors’ regular meeting, three members were elected to fill
vacancies in the seven-man body.

On September 5, 1981, also during a regular meeting, the Board declared all corporate positions vacant
except those of the Chairman and President, and at the same time elected a new set of officers. TAN was
not re-elected as Executive Vice-President. 1

On September 16, 1981, TAN filed with the National Labor Relations Commission (NLRC) (National Capital
Region) a complaint for Illegal Dismissal against petitioners alleging that he was "summarily, illegally,
irregularly and improperly removed from his position as Executive Vice-President . . . without cause,
investigation or notice" (NLRC Case No. NCR-9-20-81) (the Labor Case, in brief).

On September 21, 1981, TAN also filed a one-million-peso damage suit against petitioners before the then
Court of First Instance of Rizal, Quezon City, for illegal and oppressive removal (Civil Case No. Q-33444).

And, on September 28, 1981, TAN lodged before the Securities and Exchange Commission (SEC) another
complaint against petitioners essentially questioning the validity of the PSBA elections of August 1, 1981 and
September 5, 1981, and of his "ouster" as Executive Vice-President (SEC Case No. 2145). chanrobles lawlib rary : re dnad

On October 13, 1981, SEC issued a subpoena duces tecum commanding the production of corporate
documents, books and records. 2

On October 15, 1981, respondent Labor Arbiter also issued a subpoena duces tecum to submit the same
books and documents. 3

Before the NLRC, petitioners moved for the dismissal of TAN’s complaint, invoking the principle against split
jurisdiction.

On October 22, 1981, petitioners availed of this Petition contending mainly that: jgc:chanrob les.com. ph

"1. The respondent labor arbiter illegally assumed jurisdiction over the complaint for ‘Illegal Dismissal’
because the failure of the private respondent to be re-elected to the corporate position of Executive Vice-
President was an intra-corporate question over which the Securities and Exchange Commission had already
assumed jurisdiction.

"2. The issuance by the respondent labor arbiter of a subpoena duces tecum was likewise without
jurisdiction especially if considered in the light of procedural and substantial requirements therefor such that
it is imperative that the supervising authority of this Honorable Court should be exercised to prevent a
substantial wrong and to do substantial justice." 4

TAN counter-argues that his sole and exclusive cause of action is illegal dismissal, falling within the
jurisdiction of the NLRC, for he was dismissed suddenly and summarily without cause in violation of his
constitutional rights to due process and security of tenure. He prays that his dismissal be declared illegal
and that his reinstatement be ordered with full backwages and without loss of other benefits. chan roble svirtualawl ibra ry

We issued a Temporary Restraining Order, enjoining respondent Labor Arbiter from proceeding in any
manner with the Labor Case, and subsequently gave due course to the Petition.

The jurisdiction of the SEC vis-a-vis the NLRC is in issue. An intracorporate controversy would call for SEC
jurisdiction. A labor dispute, that of the NLRC.

Relevant and pertinent it is to note that the PSBA is a domestic corporation duly organized and existing
under our laws. General management is vested in a Board of seven directors elected annually by the
stockholders entitled to vote, who serve until the election and qualification of their successors. Any vacancy
in the Board of Directors is filled by a majority vote of the subscribed capital stock entitled to vote at a
meeting specially called for the purpose, and the director or directors so chosen hold office for the unexpired
term. 5 Corporate officers are provided for, among them, the Executive Vice-President, who is elected by
the Board of Directors from their own number. 6 The officers receive such salaries or compensation as the
Board of Directors may fix. 7 The By-Laws likewise provide that should the position of any officer of the
corporation become vacant by reason of death, resignation, disqualification, or otherwise, the Board of
Directors, by a majority vote, may choose a successor or successors who shall hold office for the expired
17 | P a g e

term of his predecessor. 8

It was at a board regular monthly meeting held on August 1, 1981, that three directors were elected to fill
vacancies. And, it was at the regular Board Meeting of September 5, 1981 that all corporate positions were
declared vacant in order to effect a reorganization, and at the ensuing election of officers, TAN was not re-
elected as Executive Vice-President.

Basically, therefore, the question is whether the election of directors on August 1, 1981 and the election of
officers on September 5, 1981, which resulted in TAN’s failure to be re-elected, were validly held. This is the
crux of the question that TAN has raised before the SEC. Even in his position paper before the NLRC, TAN
alleged that the election on August 1, 1981 of the three directors was in contravention of the PSBA By-Laws
providing that any vacancy in the Board shall be filled by a majority vote of the stockholders at a meeting
specially called for the purpose. Thus, he concludes, the Board meeting on September 5, 1981 was tainted
with irregularity on account of the presence of illegally elected directors without whom the results could
have been different.

TAN invoked the same allegations in his complaint filed with the SEC. So much so, that on December 17,
1981, the SEC (Case No. 2145) rendered a Partial Decision annulling the election of the three directors and
ordered the convening of a stockholders’ meeting for the purpose of electing new members of the Board. 9
The correctness of said conclusion is not for us to pass upon in this case. TAN was present at said meeting
and again sought the issuance of injunctive relief from the SEC.

The foregoing indubitably show that, fundamentally, the controversy is intra-corporate in nature. It revolves
around the election of directors, officers or managers of the PSBA, the relation between and among its
stockholders, and between them and the corporation. Private respondent also contends that his "ouster" was
a scheme to intimidate him into selling his shares and to deprive him of his just and fair return on his
investment as a stockholder received through his salary and allowances as Executive Vice-President. Vis-a-
vis the NLRC, these matters fall within the jurisdiction of the SEC. Presidential Decree No. 902-A vests in the
Securities and Exchange Commission: jgc:cha nrob les.co m.ph

". . . original and exclusive jurisdiction to hear and decide cases involving: jgc:cha nrob les.c om.ph

"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 stockholders, partners, members of associations or organizations registered with the
Commission.

"b) Controversies arising out of intra-corporate 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 appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations. 10

This is not a case of dismissal. The situation is that of a corporate office having been declared vacant, and of
TAN’s not having been elected thereafter. The matter of whom to elect is a prerogative that belongs to the
Board, and involves the exercise of deliberate choice and the faculty of discriminative selection. Generally
speaking, the relationship of a person to a corporation, whether as officer or as agent or employee, is not
determined by the nature of the services performed, but by the incidents of the relationship as they actually
exist. 11

With the foregoing conclusion, it follows that the issuance of a subpoena duces tecum by the Labor Arbiter
will have to be set aside.

WHEREFORE, judgment is hereby rendered (1) ordering respondent Labor Arbiter to dismiss the complaint in
NLRC Case No. NCR-9-20-81 for lack of jurisdiction; (2) nullifying the subpoena duces tecum issued by him
in said case; and (3) declaring the Temporary Restraining Order heretofore issued permanent.
18 | P a g e
19 | P a g e

PEARSON & GEORGE VS NLRC

PEARSON & GEORGE, (S.E. ASIA), INC. petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION and LEOPOLDO LLORENTE, respondents.

In this special civil action for certiorari under Rule 65 of the Rules of Court, the petitioner seeks the annulment of
the decision of 22 April 19931 and order of 25 November 19932 of public respondent National Labor Relations
Commission (NLRC) in NLRC CA No. 0034-07-92 which, respectively, dismissed the petitioner's appeal from the
decision of the Labor Arbiter in NLRC NCR Case No. 00-04-02127-90 and denied the petitioner's motion for
reconsideration.

The petitioner insists that the Labor Arbiter and the NLRC do not have jurisdiction over the private respondent's
complaint for illegal dismissal arising out of his removal as Managing Director of the petitioner due to his non-
reelection and the abolition of the said position. It claims that the matter is intra-corporate and thus falls within
the exclusive jurisdiction of the Securities and Exchange Commission (SEC) pursuant to Section 5(c) of P.D. No. 902-
A.

In a Manifestation submitted in lieu of the required comment on the petition, the Office of the Solicitor General
agrees with the petitioner that the NLRC has no jurisdiction over the private respondent's complaint for illegal
dismissal and prays that the NLRC be granted a new period within which to file its own comment should it desire to
do so.

The NLRC filed its own comment contending that it has jurisdiction over the case because the private respondent
was not just an incorporator but also a Managing Director and a line officer or an employee of the petitioner with a
salary of P33,000.00 a month; hence, his complaint for illegal dismissal as such employee is within the jurisdiction
of the NLRC.

The private respondent does not meet the substantive issues raised by the petitioner but merely sets up the
following defenses: (1) the petition was filed long after the lapse of ten days provided for in Article 223 of the
Labor Code; (2) a special civil action for certiorari under Rule 65 is not the proper remedy because of the
aforementioned provision; (3) the petition is defective because it does not allege when the petitioner received the
NLRC decision; and (4) the petition raises factual issues.

In its Reply, the petitioner refutes the foregoing arguments of the private respondent by stating that (1) this Court
may take cognizance of petitions questioning the decisions of the NLRC on the ground of lack or excess of
jurisdiction or grave abuse of discretion inspite of Article 223 of the Labor Code making final the said decisions
after ten calendar days from receipt thereof; (2) the only way by which a labor case may reach this Court is
through a petition for certiorari, which must be filed within a reasonable time from receipt of the resolution
denying the motion for reconsideration of the decision of the Commission; (3) for purposes of showing the
timeliness of the petition, the petitioner has only to state, as it did, the date the order denying the motion for
reconsideration was received; and (4) in order to resolve the main issue raised in this petition, viz., whether the
NLRC has jurisdiction over this case, it was necessary to state the factual circumstances of the case.

After deliberating on the pleadings submitted by the parties, we resolved to give due course to this petition and to
require the parties to submit their respective memoranda.

The factual antecedents as culled from the pleadings are not in dispute:
20 | P a g e

Private respondent Leopoldo Llorente (hereinafter Llorente) was a member of the Board of Directors of the
petitioner. In its organizational meeting on 12 January 1989, the Board of Directors elected among themselves the
corporate officers. Llorente was elected as Vice-Chairman of the Board and as Managing Director for a term of one
year and until his successor should have been duly elected pursuant to the petitioner's by-laws.

On 29 January 1990, Llorente was preventively suspended, with pay, by reason of alleged anomalous transactions
entered by him, which were prejudicial to the interest of the petitioner.

In a letter dated 1 February 1990, Llorente demanded from the petitioner access to his room which the latter
allegedly sealed; compensation for his suspension or termination; and delivery of his stock certificates for 9,998
shares.

On 17 February 1990, the petitioner sent Llorente a letter requiring him to explain the acts enumerated therein
which he allegedly committed.

On 27 February 1990, Llorente, through his counsel, protested his suspension and requested an examination of the
supporting documents to enable him to explain the accusations leveled against him, but to no avail.

At the regular stockholders' meeting on 5 March 1990, the stockholders of the petitioner elected a new set of
directors. Llorente was not reelected. On the same day, the new Board of Directors held a meeting wherein it
elected a new set of officers and abolished the position of Managing Director.

On 12 March 1990, the petitioner's counsel informed Llorente of his non-reelection, the abolition of the position of
Managing Director, and his termination for cause.

On 11 April 1990, Llorente filed with the Labor Arbiter a complaint for unfair labor practice, illegal dismissal, and
illegal suspension alleging therein that he was dismissed without due process of law. The case was docketed as
NLRC NCR Case No. 00-04-02127-90.

Upon receipt of the summons, the petitioner filed a Motion to Dismiss alleging therein that the case falls within
the jurisdiction of the SEC and not of the NLRC.

In his order of 1 March 1991, the Labor Arbiter denied the said motion on the ground that Llorente was not merely
acting as a Director but was likewise doing the functions of a manager or line officer of the corporation.

The parties thereafter filed their respective position papers.

In a decision dated 18 May 1992, the Labor Arbiter found for Llorente, ruled that he was illegally terminated from
employment, and disposed as follows:

WHEREFORE, premises considered, judgment is hereby rendered finding the suspension and the eventual
dismissal as illegal and ordering respondent to:

1. Pay the complainant his full backwages from January 29, 1990 to date or in the amount of Nine
Hundred Twelve Thousand Seven Hundred Eighty (P912,780.00) Pesos;

2. To pay complainant attorney's fees equivalent to ten (10%) percent of his backwages;
21 | P a g e

3. This Office is cognizant of the fact that due to the instant case, the relations between the
parties is so strained that the reinstatement may no longer be feasible. Besides, there may be no
equivalent position as the Office of the Managing Director had been abolished; and

4. To pay complainant moral damages in the amount of Fifty Thousand (P50,000.00) Pesos.

The petitioner appealed to the NLRC from the said decision.

Relying on our decision in LEP International Philippines, Inc. vs. National Labor Relations Commission,3 the NLRC
dismissed the petitioner's appeal and affirmed the decision of the Labor Arbiter. It likewise denied the petitioner's
motion for reconsideration.

Hence, this petition for certiorari in support of which the petitioner asserts as follows:

THE NLRC ACTED WITHOUT JURISDICTION AND WITH GRAVE ABUSE OF DISCRETION IN ASSUMING
JURISDICTION OVER THE PRESENT CONTROVERSY BETWEEN PETITIONER AND PRIVATE RESPONDENT
WHO IS ADMITTEDLY ONE OF ITS INCORPORATORS/STOCKHOLDERS AND A CORPORATE OFFICER.

II

THE NLRC COMMITTED SERIOUS ERRORS AND ACTED WITH GRAVE ABUSE OF DISCRETION IN FINDING
THAT THE REMOVAL FROM OFFICE BY NON-REELECTION OF PRIVATE RESPONDENT IS ONE OF ILLEGAL
DISMISSAL CASE WHEREIN IT HAS JURISDICTION TO TRY AND DECIDE.

III

THE NLRC COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF DISCRETION, ASSUMING
WITHOUT CONCEDING THAT IT HAS JURISDICTION OVER THE PRESENT CONTROVERSY, THAT PRIVATE
RESPONDENT WAS ILLEGALLY DISMISSED FROM SERVICE.

The pith issue thus raised is whether it is the SEC or the NLRC which has jurisdiction over the complaint for illegal
dismissal which the private respondent had filed with the NLRC.

We agree with both the petitioner and the Office of the Solicitor General that the removal of Llorente as Managing
Director is purely an intra-corporate dispute which falls within the exclusive jurisdiction of the SEC and not of the
NLRC.

In reality, Llorente was not dismissed. If he lost the position of Managing Director, it was primarily because he was
not reelected as Director during the regular stockholders' meeting on 5 March 1990. The office of Managing
Director presupposes that its occupant is a Director; hence, one who is not a Director of the petitioner or who has
ceased to be a Director cannot be elected or appointed as a Managing Director. Elsewise stated, the holding of the
position of Director is a prerequisite for the election, appointment, or designation of Managing Director. If a
Managing Director should lose his position because he ceased to be a Director for any reason, such as non-
reelection as in the case of Llorente, such loss is not dismissal but failure to qualify or to maintain a prerequisite for
that position. Then too, the position of Managing Director was abolished.

Any question relating or incident to the election of the new Board of Directors, the non-reelection of Llorente as a
Director, his loss of the position of Managing Director, or the abolition of the said office are intra-corporate
matters. Disputes arising therefrom are intra-corporate disputes which, if unresolved within the corporate
22 | P a g e

structure of the petitioner, may be resolved in an appropriate action only by the SEC pursuant to its authority
under paragraphs (b) and (c), Section 5 of P.D. No. 902-A,4 which provide as follows:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of associations registered with it as expressly granted
under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:

xxx xxx xxx

(b) Controversies arising out of intra-corporate 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 appointments of directors, trustees, officers or managers of such
corporations, partnership or associations.

Thus, in Philippine School of Business Administration vs. Leano,5 we ruled that a complaint for illegal dismissal
arising from a Board of Directors' action declaring vacant all corporate positions except that of Chairman and
President, and from the non-reelection of the former Executive Vice-President during the ensuing election of
officers is not cognizable by the NLRC. Pertinent portions of our opinion therein read as follows:

Basically, therefore, the question is whether the election of directors on August 1, 1981 and the election
of officers on September 5, 1981, which resulted in TAN's failure to be re-elected, were validly held. This is
the crux of the question that TAN has raised before the SEC. Even in his position paper before the NLRC,
TAN alleged that the election on August 1, 1981 of the three directors was in contravention of the PSBA
By-Laws providing that any vacancy in the Board shall be filled by a majority vote of the stockholders at a
meeting specially called for the purpose. Thus, he concludes, the Board meeting on September 5, 1981
was tainted with irregularity on account of the presence of illegally elected directors without whom the
results could have been different.

TAN invoked the same allegations in his complaint filed with the SEC. So much so, that on December 17,
1981, the SEC (Case No. 2145) rendered a Partial Decision annulling the election of the three directors and
ordered the convening of a stockholders' meeting for the purpose of electing new members of the Board.
The correctness of said conclusion is not for us to pass upon in this case. TAN was present at said meeting
and again sought the issuance of injunctive relief from the SEC.

The foregoing indubitably show that, fundamentally, the controversy is intra-corporate in nature. It
revolves around the election of directors, officers or managers of the PSBA, the relation between and
among its stockholders, and between them and the corporation. Private respondent also contends that
his "ouster" was a scheme to intimidate him into selling his shares and to deprive him of his just and fair
return on his investment as a stockholder received through his salary and allowances as Executive Vice-
President. Vis-a-vis the NLRC, these matters fall within the jurisdiction of the SEC.

xxx xxx xxx

This is not a case of dismissal. The situation is that of a corporate office having been declared vacant, and
of TAN's not having been elected thereafter. The matter of whom to elect is a prerogative that belongs to
the Board, and involves the exercise of deliberate choice and the faculty of discriminative selection.
23 | P a g e

Generally speaking, the relationship of a person to a corporation, whether as officer or as agent or

employee, is not determined by the nature of the services performed, but by the incidents of the
relationship as they actually exist.

We reiterated this rule in Dy vs. National Labor Relations Commission,6 which involved an action for illegal
dismissal filed by a bank manager who was not reelected as such, and in Fortune Cement Corporation vs. National
Labor Relations Commission,7 which involved a complaint for illegal dismissal instituted by an Executive Vice-
President of the corporation who lost that position when he was dismissed as such by the Board of Directors for
loss of trust and confidence.

The reliance by the NLRC on LEP International Philippines, Inc. vs. National Labor Relations Commission is
misplaced. What was challenged in that case was not the jurisdiction of the respondent Commission but its act of
upholding the validity of the dismissal of LEP's Chief Executive, who was not a stockholder, much less a director, of
LEP but was merely a managerial employee of the said company.

WHEREFORE, the instant petition is GRANTED. The challenged decision of 22 April 1993 and order of 25 November
1993 of public respondent National Labor Relations Commission in NLRC Case No. 0034-07-92 and the decision of
18 May 1992 of the Labor Arbiter in NLRC NCR Case No. 00-04-02127-90 are hereby ANNULLED and SET ASIDE for
having been rendered without jurisdiction.

No pronouncement as to costs.
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25 | P a g e

REAH’S CORPORATION VS NLRC

REAHS CORPORATION, SEVERO CASTULO, ROMEO PASCUA, and DANIEL VALENZUELA, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION, BONIFACIO RED VICTORIA PADILLA, MA. SUSAN R. CALWIT, SONIA
DE LA CRUZ, SUSAN DE LA CRUZ, EDNA WAHINGON, NANCY B. CENITA and BENEDICTO A.
TULABING, respondents.

This is a petition for certiorari under Rule 65 of the Rules of Court to annul and set aside the decision dated 29 April
1994 rendered by the National Labor Relations Commission (NLRC) in NLRC Case No. 005024-93 entitled "Bonifacio
Red, et al., v. Reah's Corporation, et. al.", which affirmed the decision of the Labor arbiter holding individual
petitioners jointly and severally liable with petitioner Reah's Corporation to pay private respondents' claims for
underpayment of wages, holiday pay, 13th month pay and separation pay.

The facts, as culled by the labor arbiter from the position papers of both parties, are as follows.

Complainant Bonifacio Red alleges that he started working as a supervisor at the health and
sauna parlor of respondents from September 5, 1977 to November 6, 1990, with a salary of
P50.00, that the said establishment was closed by respondents on November 6, 1990, without
any notice and without paying his wages, separation pay and other benefits under the law; and
that he works a minimum of twelve (12) hours a day without being paid overtime.

Complainant Benedicto Tulabing alleges that he started on December 16, 1986 up to November
6, 1990 in the same establishment with a salary of P26.00 a day; that he works thirteen (13)
hours a day without payment of overtime pay.

Complainant Nancy Cenita and Susan Calwit alleges [sic] that they were hired as waitresses on
May 20, 1990 up to November 6, 1990 and paid on commission basis at P0.25 per bottle of beer
sold to or consumed by the customers and that they work ten (10) hours a day without being
paid overtime.

Complainants Edna Wahingon, Susan dela Cruz, Sonia dela Cruz and Victoria Padilla claims [sic]
working as attendants and were hired on different dates until November 6, 1990 All were paid on
commission basis at the rate of twenty (20%) percent of the service fee paid by the customers,
P90.00 and P110.00 respectively, for ordinary and VIP service; that they render(ed) eleven (11)
hours of work a day without being paid overtime; and that the closure of the health parlor was
illegal as they were not notified.

On the other hand, respondents allege that sometime in 1986, a certain Ms Soledad Domingo,
the sole proprietress and operator of Rainbow Sauna located at 316 Araneta Avenue, Quezon
City, offered to sell her business to respondent Reah's Corporation After the sale, all the assets of
Ms Domingo were turned over to respondent Reah's, which put a sing-along coffee shop and
massage clinic; that complainant Red started his employment on the first week of December
1988 as a roomboy at P50.00/day and was given living quarters inside the premises as he
requested; that sometime in March 1989, complainant Red asked permission to go to Bicol for a
period of ten (10) days, which was granted, and was given an advance money of P1,200.00 to
bring some girls from the province to work as attendants at the respondent's massage clinic, that
it was only on January 1, 1990 that complainant Red returned and was re-hired under the same
terms and conditions of his previous employment with the understanding that he will have to
refund the P1,200.00 cash advance given to him; that due to poor business, increase in the rental
26 | P a g e

cost and the failure of Meralco to reconnect the electrical services in the establishment, it
suffered losses leading to its closure. 1

On 6 May 1993, the labor arbiter rendered judgment dismissing private respondents' complaints for unfair labor
practice and illegal dismissal but upholding the claims for separation pay, underpayment of wages, holiday pay and
13th month pay. All eight (8) private respondents were awarded separation pay. However, only Bonifacio Red and
Benedicto Tulabing were declared entitled to the claimed labor standard benefits as the rest were found to have
been employed on commission basis. The labor arbiter further awarded attorney's fees to private respondents
Bonifacio Red and Benedicto Tulabing amounting to ten (10%) percent of their adjudged money claims.

Petitioners appealed the labor arbiter's decision to the NLRC, contending mainly that Article 283 of the Labor Code,
"exempts establishment(s) from payment of termination pay when the closure of business is due to serious
business losses or financial reverses"; that petitioners Castulo, Pascua and Valenzuela, while admittedly the acting
chairman of the board, board member and accountant — acting manager respectively of Reah's Corporation,
cannot be held jointly and severally liable with Reah's "unless there is evidence to show that the cause of the
closure of the business was due to the criminal negligence of the [respondent] officers.

The NLRC dismissed the appeal based on the following dispositions:

Anent the issue on separation pay, Article 283 of the Labor Code provides that "[T]he employer
may . . . terminate the employment of any employee due to . . . the closing or cessation of
operation of the establishment or undertaking . . . by serving a written notice on the workers and
the Ministry of Labor and Employment at least one (1) month before the intended date thereof. .
. . ." This, respondents failed to comply. Neither did respondents present any evidence to prove
that Reah's closure was really due to SERIOUS business losses or financial reverses. We only have
respondents' mere say-so on the matter.

The Supreme Court held in Basilio Balasbas vs. NLRC, et. al. (G.R. No. 85286, August 24, 1992, 3rd
Division, Romero, J.) that —

Under Article 283 of the Labor Code, the closure of a business establishment or
reduction of personnel is a ground for the termination of the services of any
employee unless the closing or retrenching is for the purpose of circumventing
the provision of the law. But while business reverses can be a just cause for
terminating employees, these must be sufficiently proved by the employer.
(Indino vs. NLRC, G.R. No. 80352, September 29, 1989, 178 SCRA 168).

Thus, we cannot but agree that complainants are entitled to the payment of separation pay. 2

Petitioners filed a motion for reconsideration but this was denied by the NLRC on 30 August 1994. In the present
petition, petitioners raise three (3) issues which, for brevity and clarity, may be simplified as follows:

I.

WHETHER OR NOT PETITIONERS-OFFICERS CAN BE HELD JOINTLY AND SEVERALLY LIABLE WITH
THE CORPORATION IN THE PAYMENT OF SEPARATION PAY TO PRIVATE RESPONDENTS UNDER
ARTICLE 283 OF THE LABOR CODE.

II.
27 | P a g e

WHETHER OR NOT THE OFFICERS OF REAH'S CORPORATION CAN BE HELD JOINTLY AND
SEVERALLY LIABLE WITH THE CORPORATION IN PAYMENT OF THE MONETARY CLAIMS AWARDED
PRIVATE RESPONDENTS IN THE ABSENCE OF ANY FINDING OF UNFAIR LABOR PRACTICES OR
ILLEGAL DISMISSAL.

III.

WHETHER OR NOT THERE IS LEGAL BASIS FOR THE NLRC TO AFFIRM THE AWARD OF 10%
ATTORNEY'S FEES TO PRIVATE RESPONDENTS.

Petitioners argue that since the charges of illegal dismissal and unfair labor practices were dismissed by the labor
arbiter, they cannot be held solidarily liable with the corporation for the payment of separation pay and labor
standard benefits to private respondents, when they used their business judgment to close the establishment
because of serious business losses. They contend that even if they were the top corporate officers of Reah's
corporation at the time they closed the business, the corporation has a personality that is separate and distinct
from its officers and stockholders. Since there was no finding that they violated Sec. 31 of the Corporation
Code 3 they cannot be held solidarily liable with the corporation. Petitioners further maintain that the corporation
also cannot be held liable because Article 283 of the Labor Code "orders payment of separation pay only when the
closure of the business is due to causes other than serious business losses or financial reverses".

Petitioners have obviously resorted to a misreading of the last sentence of Article 283 which provides that —

. . . In case of retrenchment to prevent losses and in cases of closures or cessation of operations

of establishment or undertaking not due to serious business losses or financial reverses, the
separation pay shall be equivalent to one (1) month pay or at least (1/2) month pay for every
year of service, whichever is higher. A fraction of at least six (6) months shall be considered as
one (1) whole year.

It is not the function of the law nor its intent to supplant the prerogative of management in running its business,
such as, to compel the latter to operate at a continuing loss. Thus, Article 283 provides as an authorized cause in
the termination of employment the "closing or cessation of operation of the establishment or undertaking".
However, the burden of proving that the termination was for a valid or authorized cause shall rest on the
employer.4 If the business closure is due to serious losses or financial reverses, the employer must present
sufficient proof of its actual or imminent losses; it must show proof that the cessation of or withdrawal from
business operations was bona fide in character.5

The grant of separation pay, as an incidence of termination of employment under Article 283, is a statutory
obligation on the part of the employer and a demandable right on the part of the employee, except only where the
closure or cessation of operations was due to serious business losses or financial reverses and there is sufficient
proof of this fact or condition. In the absence of such proof of serious business losses or financial reverses, the
employer closing his business is obligated to pay his employees and workers their separation pay.

The rule, therefore, is that in all cases of business closure or cessation of operation or undertaking of the
employer, the affected employee is entitled to separation pay. This is consistent with the state policy of treating
labor as a primary social economic force, affording full protection to its rights as well as its welfare. 6 The exception
is when the closure of business or cessation of operations is due to serious business losses or financial reverses;
duly proved, in which case, the right of affected employees to separation pay is lost for obvious reasons. In the
case at bar, the corporation's alleged serious business losses and financial reverses were not amply shown or
proved.
28 | P a g e

We now proceed to rule on the corollary issue of whether or not individual petitioners Castulo, Pascua and
Valenzuela should be held liable in solidum with the corporation (REAH's) in the payment to private respondents of
separation pay and labor standard benefits.

As a general rule established by legal fiction, the corporation has a personality separate and distinct from its
officers, stockholders and members. Hence, officers of a corporation are not personally liable for their official acts
unless it is shown that they have exceeded their authority. This fictional veil, however, can be pierced by the very
same law which created it when "the notion of the legal entity is used as a means to perpetrate fraud, an illegal
act, as a vehicle for the evasion of an existing obligation, and to confuse legitimate issues". Under the Labor Code,
for instance, when a corporation violates a provision declared to be penal in nature, the penalty shall be imposed
upon the guilty officer or officers of the corporation. 7

The Solicitor General, in behalf of private respondents, argues that the doctrine laid down in the case
of A.C. Ransom Labor Union-CCLU v. NLRC 8 should be applied to the case at bar. In that case, a judgment against a
corporation (A.C. Ransom) to reinstate its dismissed employees with back wages was declared to be a continuing
solidary liability of the company president and all who may have thereafter succeeded to said office after the
records failed to identify the officer or agents directly responsible for failure to pay the back wages of its
employees. The Court noted Ransom's subterfuge in organizing another family corporation while the case was on
litigation with the intent to phase out the existing corporation in case of an adverse decision, as what actually
happened when it ceased operations a few months after the labor arbiter ruled in favor of Ransom's employees.

The basis, said the Court, is found in Article 212(c) of the Labor Code which provides that "an employer includes
any person acting in the interest of an employer, directly or indirectly." "Since Ransom is an artificial person, it
must have an officer who can be presumed to be the employer, . . . . The corporation only in the technical sense is
the employer."

This ruling was eventually applied by the Court in the following cases: Maglutac v. NLRC 9 an illegal dismissal case,
where the most ranking officer of Commart, petitioner therein, was held solidarily liable with the corporation
which thereafter became insolvent and suspended operations; Chua v. NLRC, 10 also an illegal dismissal case,
where the vice-president of a corporation was held solidarily liable with the corporation for the payment of the
unpaid salaries of its president; and in Gudez v. NLRC, 11 where the president and treasurer were held solidarily
liable with the corporation which had ceased operations but failed to pay the wage and money claims of its
employees.

These cases, however, should be construed still as exceptions to the doctrine of separate personality of a
corporation which should remain as the guiding rule in determining corporate liability to its employees. At the very
least, as what we held in Pabalan v. NLRC, 12 to justify solidary liability, "there must be an allegation or showing
that the officers of the corporation deliberately or maliciously designed to evade the financial obligation of the
corporation to its employees", or a showing that the officers indiscriminately stopped its business to perpetrate an
illegal act, as a vehicle for the evasion of existing obligations, in circumvention of statutes, and to confuse
legitimate issues.

In the case at bar, the thrust of petitioners' arguments was aimed at confining liability solely to the corporation, as
if the entity were an automaton designed to perform functions at the push of a button. The issue, however, is not
limited to payment of separation pay under Article 283 but also payment of labor standard benefits such as
underpayment of wages, holiday pay and 13th month pay to two of the private respondents. While there is no
sufficient evidence to conclude that petitioners have indiscriminately stopped the entity's business, at the same
time, petitioners have opted to abstain from presenting sufficient evidence to establish the serious and adverse
financial condition of the company.

As the NLRC aptly stated.

29 | P a g e

Neither did respondents (petitioners) present any evidence to prove that Reah's closure was
really due to SERIOUS business losses or financial reverses. We only have respondents mere say-
so on the matter. 13

This uncaring attitude on the part of the officers of Reah's gives credence to the supposition that they simply
ignored the side of the workers who, more or less, were only demanding what is due them in accordance with law.
In fine, these officers were conscious that the corporation was violating labor standard provisions but they did not
act to correct these violations, instead, they abruptly closed business. Neither did they offer separation pay to the
employees as they conveniently resorted to a lame excuse that they suffered serious business losses, knowing fully
well that they had no substantial proof in their hands to prove such losses.

The findings of the NLRC did not indicate whether or not Reah's Corporation has continued its personality after it
had stopped operations when it closed its sing-along, coffee shop, and massage clinic in November 1990. But in its
petition, petitioners aver, among others, that the "company totally folded for lack of patrons, (disconnection of)
light and discontinuance of the leased premises [sic] for failure to pay the increased monthly rentals from P8,000
to P20,000." 14 Under the Rules of Evidence, petitioners are bound by the allegations contained in their pleading.
Since petitioners themselves have admitted that they have dissolved the corporation de facto, the Court presumes
that Reah's Corporation had become insolvent and therefore would be unable to satisfy the judgment in favor of
its employees. Under these circumstances, we cannot allow labor to go home with an empty victory. Neither
would it be oppressive to capital to hold petitioners Castulo, Pascua and Valenzuela solidarily liable with Reah's
Corporation because the law presumes that they have acted in the latter's interest when they obstinately refused
to grant the labor standard benefits and separation pay due private respondent-employees.

The last issue raised by petitioners is whether there is legal basis for the payment of 10% attorney's fees out of the
total amount awarded to private respondents Red and Tulabing. The Court finds this portion of the assailed
decision to have been rendered with grave abuse of discretion as both the labor arbiter and the NLRC failed to
make an express finding of fact and cite the applicable law to justify the grant of such award. Under Article 111 of
the Labor Code, 10% attorneys fees may be assessed only in cases where there is an unlawful withholding of
wages, 15 or under Article 222 — those arising from collective bargaining negotiations that may be charged against
union funds in an amount to be agreed upon by the parties None of these situations exists in the case at bar.

WHEREFORE, the decision of respondent National Labor Relations Commission is hereby AFFIRMED in so far as it
holds petitioners Castulo, Pascua, and Valenzuela jointly and severally liable with Reah's Corporation to pay all
private respondents separation pay and private respondents Red and Tulabing other monetary benefits but the
award of ten percent (10%) attorneys fees is hereby DELETED for lack of factual and legal basis.
30 | P a g e
31 | P a g e

MONTELINAO VS BACOLD-MURICA

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.

Tañada, Teehankee and Carreon for plaintiffs-appellants.

Hilado and Hilado for defendant-appellee.

REYES, J.B.L., J.:

Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros, in its Civil Case No.
2603, dismissing plaintiff's complaint that sought to compel the defendant Milling Company to increase plaintiff's
share in the sugar produced from their cane, from 60% to 62.33%, starting from the 1951-1952 crop
year.1äwphï1.ñët

It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the Limited co-
partnership Gonzaga and Company, had been and are sugar planters adhered to the defendant-appellee's sugar
central mill under identical milling contracts. Originally executed in 1919, said contracts were stipulated to be in
force for 30 years starting with the 1920-21 crop, and provided that the resulting product should be divided in the
ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was proposed to execute amended milling
contracts, increasing the planters' share to 60% of the manufactured sugar and resulting molasses, besides other
concessions, but extending the operation of the milling contract from the original 30 years to 45 years. To this
effect, a printed Amended Milling Contract form was drawn up. On August 20, 1936, the Board of Directors of the
appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No. 11, Acuerdo No. 1) granting further
concessions to the planters over and above those contained in the printed Amended Milling Contract. The bone of
contention is paragraph 9 of this resolution, that reads as follows:

ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936

xxx xxx xxx

Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta en consideracion a una

peticion de los plantadores hecha por un comite nombrado por los mismos, acuerda enmendar
el contrato de molienda enmendado medientelas siguentes:

xxx xxx xxx

9.a Que si durante la vigencia de este contrato de Molienda Enmendado, lascentrales azucareras,
de Negros Occidental, cuya produccion anual de azucar centrifugado sea mas de una tercera
parte de la produccion total de todas lascentrales azucareras de Negros Occidental, concedieren
a sus plantadores mejores condiciones que la estipuladas en el presente contrato, entonces esas
mejores condiciones se concederan y por el presente se entenderan concedidas a los platadores
que hayan otorgado este Contrato de Molienda Enmendado.

Appellants signed and executed the printed Amended Milling Contract on September 10, 1936, but a copy of the
resolution of August 10, 1936, signed by the Central's General Manager, was not attached to the printed contract
until April 17, 1937; with the notation —
32 | P a g e

Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado, otorgado por — y la
Bacolod-Murcia Milling Co., Inc.

In 1953, the appellants initiated the present action, contending that three Negros sugar centrals (La Carlota,
Binalbagan-Isabela and San Carlos), with a total annual production exceeding one-third of the production of all the
sugar central mills in the province, had already granted increased participation (of 62.5%) to their planters, and
that under paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had become
obligated to grant similar concessions to the plaintiffs (appellants herein). The appellee Bacolod-Murcia Milling Co.,
inc., resisted the claim, and defended by urging that the stipulations contained in the resolution were made
without consideration; that the resolution in question was, therefore, null and void ab initio, being in effect a
donation that was ultra vires and beyond the powers of the corporate directors to adopt.

After trial, the court below rendered judgment upholding the stand of the defendant Milling company, and
dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court.

We agree with appellants that the appealed decisions can not stand. It must be remembered that the controverted
resolution was adopted by appellee corporation as a supplement to, or further amendment of, the proposed
milling contract, and that it was approved on August 20, 1936, twenty-one days prior to the signing by appellants
on September 10, of the Amended Milling Contract itself; so that when the Milling Contract was executed, the
concessions granted by the disputed resolution had been already incorporated into its terms. No reason appears of
record why, in the face of such concessions, the appellants should reject them or consider them as separate and
apart from the main amended milling contract, specially taking into account that appellant Alfredo Montelibano
was, at the time, the President of the Planters Association (Exhibit 4, p. 11) that had agitated for the concessions
embodied in the resolution of August 20, 1936. That the resolution formed an integral part of the amended milling
contract, signed on September 10, and not a separate bargain, is further shown by the fact that a copy of the
resolution was simply attached to the printed contract without special negotiations or agreement between the
parties.

It follows from the foregoing that the terms embodied in the resolution of August 20, 1936 were supported by the
same causa or consideration underlying the main amended milling contract; i.e., the promises and obligations
undertaken thereunder by the planters, and, particularly, the extension of its operative period for an additional 15
years over and beyond the 30 years stipulated in the original contract. Hence, the conclusion of the court below
that the resolution constituted gratuitous concessions not supported by any consideration is legally untenable.

All disquisition concerning donations and the lack of power of the directors of the respondent sugar milling
company to make a gift to the planters would be relevant if the resolution in question had embodied a separate
agreement after the appellants had already bound themselves to the terms of the printed milling contract. But this
was not the case. When the resolution was adopted and the additional concessions were made by the company,
the appellants were not yet obligated by the terms of the printed contract, since they admittedly did not sign it
until twenty-one days later, on September 10, 1936. Before that date, the printed form was no more than a
proposal that either party could modify at its pleasure, and the appellee actually modified it by adopting the
resolution in question. So that by September 10, 1936 defendant corporation already understood that the printed
terms were not controlling, save as modified by its resolution of August 20, 1936; and we are satisfied that such
was also the understanding of appellants herein, and that the minds of the parties met upon that basis. Otherwise
there would have been no consent or "meeting of the minds", and no binding contract at all. But the conduct of
the parties indicates that they assumed, and they do not now deny, that the signing of the contract on September
10, 1936, did give rise to a binding agreement. That agreement had to exist on the basis of the printed terms as
modified by the resolution of August 20, 1936, or not at all. Since there is no rational explanation for the
company's assenting to the further concessions asked by the planters before the contracts were signed, except as
further inducement for the planters to agree to the extension of the contract period, to allow the company now to
retract such concessions would be to sanction a fraud upon the planters who relied on such additional stipulations.
33 | P a g e

The same considerations apply to the "void innovation" theory of appellees. There can be no novation unless two
distinct and successive binding contracts take place, with the later designed to replace the preceding convention.
Modifications introduced before a bargain becomes obligatory can in no sense constitute novation in law.

Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not attached to the printed
contract until April 17, 1937. But, except in the case of statutory forms or solemn agreements (and it is not claimed
that this is one), it is the assent and concurrence (the "meeting of the minds") of the parties, and not the setting
down of its terms, that constitutes a binding contract. And the fact that the addendum is only signed by the
General Manager of the milling company emphasizes that the addition was made solely in order that the memorial
of the terms of the agreement should be full and complete.

Much is made of the circumstance that the report submitted by the Board of Directors of the appellee company in
November 19, 1936 (Exhibit 4) only made mention of 90%, the planters having agreed to the 60-40 sharing of the
sugar set forth in the printed "amended milling contracts", and did not make any reference at all to the terms of
the resolution of August 20, 1936. But a reading of this report shows that it was not intended to inventory all the
details of the amended contract; numerous provisions of the printed terms are alao glossed over. The Directors of
the appellee Milling Company had no reason at the time to call attention to the provisions of the resolution in
question, since it contained mostly modifications in detail of the printed terms, and the only major change was
paragraph 9 heretofore quoted; but when the report was made, that paragraph was not yet in effect, since it was
conditioned on other centrals granting better concessions to their planters, and that did not happen until after
1950. There was no reason in 1936 to emphasize a concession that was not yet, and might never be, in effective
operation.

There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of
the Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting
parties. The rule is that —

It is a question, therefore, in each case of the logical relation of the act to the corporate purpose
expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done
for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a
substantial, and not in a remote and fanciful sense, it may fairly be considered within charter powers. The
test to be applied is whether the act in question is in direct and immediate furtherance of the
corporation's business, fairly incident to the express powers and reasonably necessary to their exercise. If
so, the corporation has the power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp.
266-268)

As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and
whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them.

They hold such office charged with the duty to act for the corporation according to their best judgment,
and in so doing they cannot be controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss during depression, or close down at a
smaller loss, is a purely business and economic problem to be determined by the directors of the
corporation and not by the court. It is a well-known rule of law that questions of policy or of management
are left solely to the honest decision of officers and directors of a corporation, and the court is without
authority to substitute its judgment of the board of directors; the board is the business manager of the
corporation, and so long as it acts in good faith its orders are not reviewable by the courts. (Fletcher on
Corporations, Vol. 2, p. 390).

And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines, San Carlos and
Binalbagan (which produce over one-third of the entire annual sugar production in Occidental Negros) have
granted progressively increasing participations to their adhered planter at an average rate of
34 | P a g e

62.333% for the 1951-52 crop year;

64.2% for 1952-53;

64.3% for 1953-54;

64.5% for 1954-55; and

63.5% for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936, duty bound
to grant similar increases to plaintiffs-appellants herein.

WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed sentencing the
defendant-appellee to pay plaintiffs-appellants the differential or increase of participation in the milled sugar in
accordance with paragraph 9 of the appellee Resolution of August 20, 1936, over and in addition to the 60%
expressed in the printed Amended Milling Contract, or the value thereof when due, as follows:

0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants having received an
additional 2% corresponding to said year in October, 1953;

2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellants thereafter —
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;

with interest at the legal rate on the value of such differential during the time they were withheld; and the right is
reserved to plaintiffs-appellants to sue for such additional increases as they may be entitled to for the crop years
subsequent to those herein adjudged.

Costs against appellee, Bacolod-Murcia Milling Co.

35 | P a g e

BOARD OF LIQUIDATORS VS KALAW

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, plaintiff-
appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO GARCIA,3 and LEONOR
MOLL, defendants-appellees.

The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental organization
on May 7, 1940 by Commonwealth Act 518 avowedly for the protection, preservation and development of the
coconut industry in the Philippines. On August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant
that corporation the express power "to buy, sell, barter, export, and in any other manner deal in, coconut, copra,
and dessicated coconut, as well as their by-products, and to act as agent, broker or commission merchant of the
producers, dealers or merchants" thereof. The charter amendment was enacted to stabilize copra prices, to serve
coconut producers by securing advantageous prices for them, to cut down to a minimum, if not altogether
eliminate, the margin of middlemen, mostly aliens.4

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro Garcia were
members of the Board; defendant Leonor Moll became director only on December 22, 1947.

NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst the scores of
contracts executed by general manager Kalaw are the disputed contracts, for the delivery of copra, viz:

(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o. b., delivery: August
and September, 1947. This contract was later assigned to Louis Dreyfus & Co. (Overseas) Ltd.

(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long ton, f.o.b., Philippine
ports, to be shipped: September-October, 1947. This contract was also assigned to Louis Dreyfus & Co.
(Overseas) Ltd.

(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery: September, 1947.

(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f., Los Angeles,
California, delivery: November, 1947.

(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long tons, $164,00
per ton, c.i.f., New York, to be shipped in November, 1947.

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00 per ton, f.o.b., 3
Philippine ports, delivery: November, 1947.

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery: November and
December, 1947. This contract was assigned to Pacific Vegetable Co.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery:
December, 1947 and January, 1948. This contract was assigned to Pacific Vegetable Co.

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery:
January, 1948. This contract was assigned to Pacific Vegetable Co.
36 | P a g e

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature supervened. Four
devastating typhoons visited the Philippines: the first in October, the second and third in November, and the
fourth in December, 1947. Coconut trees throughout the country suffered extensive damage. Copra production
decreased. Prices spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export
facilities increased the time necessary to accumulate shiploads of copra. Quick turnovers became impossible,
financing a problem.

When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for approval.
It was not until December 22, 1947 when the membership was completed. Defendant Moll took her oath on that
date. A meeting was then held. Kalaw made a full disclosure of the situation, apprised the board of the impending
heavy losses. No action was taken on the contracts. Neither did the board vote thereon at the meeting of January
7, 1948 following. Then, on January 11, 1948, President Roxas made a statement that the NACOCO head did his
best to avert the losses, emphasized that government concerns faced the same risks that confronted private
companies, that NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long thereafter,
that is, on January 30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They
unanimously approved the contracts hereinbefore enumerated.

As was to be expected, NACOCO but partially performed the contracts, as follows:

Buyers Tons Delivered Undelivered

Pacific Vegetable Oil 2,386.45 4,613.55

Spencer Kellog None 1,000

Franklin Baker 1,000 500

Louis Dreyfus 800 2,200

Louis Dreyfus (Adamson contract of July 30, 1947) 1,150 850

Louis Dreyfus (Adamson Contract of August 14, 1947) 1,755 245

TOTALS 7,091.45 9,408.55

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil Co., in copra
delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog & Sons, P159,040.00.

But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance of Manila,
upon claims as follows: For the undelivered copra under the July 30 contract (Civil Case 4459); P287,028.00; for the
balance on the August 14 contract (Civil Case 4398), P75,098.63; for that per the September 12 contract reduced
to judgment (Civil Case 4322, appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-of-
court amicable settlement when the Kalaw management was already out. The corporation thereunder paid
Dreyfus P567,024.52 representing 70% of the total claims. With particular reference to the Dreyfus claims,
NACOCO put up the defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not
have license to do business here; and (2) failure to deliver was due to force majeure, the typhoons. To project the
utter unreasonableness of this compromise, we reproduce in haec verba this finding below:

x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co. (Overseas) Ltd.] against
Santiago Syjuco for non-delivery of copra also involving a claim of P345,654.68 wherein defendant set
up same defenses as above, plaintiff accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following
the same proportion, the claim of Dreyfus against NACOCO should have been compromised for only
37 | P a g e

P10,000.00, if at all. Now, why should defendants be held liable for the large sum paid as compromise by
the Board of Liquidators? This is just a sample to show how unjust it would be to hold defendants liable for
the readiness with which the Board of Liquidators disposed of the NACOCO funds, although there was
much possibility of successfully resisting the claims, or at least settlement for nominal sums like what
happened in the Syjuco case.5

All the settlements sum up to P1,343,274.52.

In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52 from general
manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It
charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil Code); and
defendant board members, including Kalaw, with bad faith and/or breach of trust for having approved the
contracts. The fifth amended complaint, on which this case was tried, was filed on July 2, 1959. Defendants
resisted the action upon defenses hereinafter in this opinion to be discussed.

The lower court came out with a judgment dismissing the complaint without costs as well as defendants'
counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid
salaries and cash deposit due the deceased Kalaw from NACOCO.

Plaintiff appealed direct to this Court.

Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.

Right at the outset, two preliminary questions raised before, but adversely decided by, the court below, arrest our
attention. On appeal, defendants renew their bid. And this, upon established jurisprudence that an appellate court
may base its decision of affirmance of the judgment below on a point or points ignored by the trial court or in
which said court was in error.6

1. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators has lost its
legal personality to continue with this suit.

Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1) under Section 3,
Rule 104, of the Rules of Court [which superseded Section 66 of the Corporation Law] 7 whereby, upon voluntary
dissolution of a corporation, the court may direct "such disposition of its assets as justice requires, and may
appoint a receiver to collect such assets and pay the debts of the corporation;" (2) under Section 77 of the
Corporation Law, whereby a corporation whose corporate existence is terminated, "shall nevertheless be
continued as a body corporate for three years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its
affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing
the business for which it was established;" and (3) under Section 78 of the Corporation Law, by virtue of which the
corporation, within the three year period just mentioned, "is authorized and empowered to convey all of its
property to trustees for the benefit of members, stockholders, creditors, and others interested." 8

It is defendants' pose that their case comes within the coverage of the second method. They reason out that suit
was commenced in February, 1949; that by Executive Order 372, dated November 24, 1950, NACOCO, together
with other government-owned corporations, was abolished, and the Board of Liquidators was entrusted with the
function of settling and closing its affairs; and that, since the three year period has elapsed, the Board of
Liquidators may not now continue with, and prosecute, the present case to its conclusion, because Executive Order
372 provides in Section 1 thereof that —
38 | P a g e

Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut Corporation, the National
Tobacco Corporation, the National Food Producer Corporation and the former enemy-owned or
controlled corporations or associations, . . . are hereby abolished. The said corporations shall be
liquidated in accordance with law, the provisions of this Order, and/or in such manner as the President of
the Philippines may direct; Provided, however, That each of the said corporations shall nevertheless be
continued as a body corporate for a period of three (3) years from the effective date of this Executive
Order for the purpose of prosecuting and defending suits by or against it and of enabling the Board of
Liquidators gradually to settle and close its affairs, to dispose of and, convey its property in the manner
hereinafter provided.

Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found impossible within the 3
year period to reduce disputed claims to judgment, nonetheless, "suits by or against a corporation abate when it
ceases to be an entity capable of suing or being sued" (Fisher, The Philippine Law of Stock Corporations, pp. 390-
391). Corpus Juris Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its
existence so that there must be statutory authority for prolongation of its life even for purposes of pending
litigation"9 and that suit "cannot be continued or revived; nor can a valid judgment be rendered therein, and a
judgment, if rendered, is not only erroneous, but void and subject to collateral attack." 10 So it is, that abatement
of pending actions follows as a matter of course upon the expiration of the legal period for liquidation, 11 unless
the statute merely requires a commencement of suit within the added time. 12 For, the court cannot extend the
time alloted by statute. 13

We, however, express the view that the executive order abolishing NACOCO and creating the Board of Liquidators
should be examined in context. The proviso in Section 1 of Executive Order 372, whereby the corporate existence
of NACOCO was continued for a period of three years from the effectivity of the order for "the purpose of
prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and
close its affairs, to dispose of and convey its property in the manner hereinafter provided", is to be read not as an
isolated provision but in conjunction with the whole. So reading, it will be readily observed that no time limit has
been tacked to the existence of the Board of Liquidators and its function of closing the affairs of the various
government owned corporations, including NACOCO.

By Section 2 of the executive order, while the boards of directors of the various corporations were abolished, their
powers and functions and duties under existing laws were to be assumed and exercised by the Board of
Liquidators. The President thought it best to do away with the boards of directors of the defunct corporations; at
the same time, however, the President had chosen to see to it that the Board of Liquidators step into the vacuum.
And nowhere in the executive order was there any mention of the lifespan of the Board of Liquidators. A glance at
the other provisions of the executive order buttresses our conclusion. Thus, liquidation by the Board of Liquidators
may, under section 1, proceed in accordance with law, the provisions of the executive order, "and/or in such
manner as the President of the Philippines may direct." By Section 4, when any property, fund, or project is
transferred to any governmental instrumentality "for administration or continuance of any project," the necessary
funds therefor shall be taken from the corresponding special fund created in Section 5. Section 5, in turn, talks of
special funds established from the "net proceeds of the liquidation" of the various corporations abolished. And by
Section, 7, fifty per centum of the fees collected from the copra standardization and inspection service shall accrue
"to the special fund created in section 5 hereof for the rehabilitation and development of the coconut industry."
Implicit in all these, is that the term of life of the Board of Liquidators is without time limit. Contemporary history
gives us the fact that the Board of Liquidators still exists as an office with officials and numerous employees
continuing the job of liquidation and prosecution of several court actions.

Not that our views on the power of the Board of Liquidators to proceed to the final determination of the present
case is without jurisprudential support. The first judicial test before this Court is National Abaca and Other Fibers
Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation, already dissolved, commenced suit
within the three-year extended period for liquidation. That suit was for recovery of money advanced to defendant
for the purchase of hemp in behalf of the corporation. She failed to account for that money. Defendant moved to
39 | P a g e

dismiss, questioned the corporation's capacity to sue. The lower court ordered plaintiff to include as co-party
plaintiff, The Board of Liquidators, to which the corporation's liquidation was entrusted by Executive Order 372.
Plaintiff failed to effect inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider. Ground:
excusable negligence, in that its counsel prepared the amended complaint, as directed, and instructed the board's
incoming and outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the
court and a copy of the same to defendant's counsel. She mailed the copy to the latter but failed to send the
original to the court. This motion was rejected below. Plaintiff came to this Court on appeal. We there said that
"the rule appears to be well settled that, in the absence of statutory provision to the contrary, pending actions by
or against a corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs."
We there said that "[o]ur Corporation Law contains no provision authorizing a corporation, after three (3) years
from the expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of
three (3) years." 14 However, these precepts notwithstanding, we, in effect, held in that case that the Board of
Liquidators escapes from the operation thereof for the reason that "[o]bviously, the complete loss of plaintiff's
corporate existence after the expiration of the period of three (3) years for the settlement of its affairs is what
impelled the President to create a Board of Liquidators, to continue the management of such matters as may then
be pending." 15 We accordingly directed the record of said case to be returned to the lower court, with instructions
to admit plaintiff's amended complaint to include, as party plaintiff, the Board of Liquidators.

Defendants' position is vulnerable to attack from another direction.

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed its assets in the
hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on behalf of the government.
It was an express trust. The legal interest became vested in the trustee — the Board of Liquidators. The beneficial
interest remained with the sole stockholder — the government. At no time had the government withdrawn the
property, or the authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we
cannot stay the hand of the Board of Liquidators from prosecuting this case to its final conclusion. 16 The provisions
of Section 78 of the Corporation Law — the third method of winding up corporate affairs — find application.

We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in this case.

2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their nineteenth special
defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw, and may not be deemed to have
survived after his death.18 They say that the controlling statute is Section 5, Rule 87, of the 1940 Rules of
Court.19 which provides that "[a]ll claims for money against the decedent, arising from contract, express or
implied", must be filed in the estate proceedings of the deceased. We disagree.

The suit here revolves around the alleged negligent acts of Kalaw for having entered into the questioned contracts
without prior approval of the board of directors, to the damage and prejudice of plaintiff; and is against Kalaw and
the other directors for having subsequently approved the said contracts in bad faith and/or breach of trust."
Clearly then, the present case is not a mere action for the recovery of money nor a claim for money arising from
contract. The suit involves alleged tortious acts. And the action is embraced in suits filed "to recover damages for
an injury to person or property, real or personal", which survive. 20

The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There, plaintiffs
sought to recover damages from defendant Llemos. The complaint averred that Llemos had served plaintiff by
registered mail with a copy of a petition for a writ of possession in Civil Case 4824 of the Court of First Instance at
Catbalogan, Samar, with notice that the same would be submitted to the Samar court on February 23, 1960 at 8:00
a.m.; that in view of the copy and notice served, plaintiffs proceeded to the said court of Samar from their
residence in Manila accompanied by their lawyers, only to discover that no such petition had been filed; and that
defendant Llemos maliciously failed to appear in court, so that plaintiffs' expenditure and trouble turned out to be
40 | P a g e

in vain, causing them mental anguish and undue embarrassment. Defendant died before he could answer the
complaint. Upon leave of court, plaintiffs amended their complaint to include the heirs of the deceased. The heirs
moved to dismiss. The court dismissed the complaint on the ground that the legal representative, and not the
heirs, should have been made the party defendant; and that, anyway, the action being for recovery of money,
testate or intestate proceedings should be initiated and the claim filed therein. This Court, thru Mr. Justice Jose B.
L. Reyes, there declared:

Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the Rules of Court,
those concerning claims that are barred if not filed in the estate settlement proceedings (Rule 87, sec. 5)
and those defining actions that survive and may be prosecuted against the executor or administrator
(Rule 88, sec. 1), it is apparent that actions for damages caused by tortious conduct of a defendant (as in
the case at bar) survive the death of the latter. Under Rule 87, section 5, the actions that are abated by
death are: (1) claims for funeral expenses and those for the last sickness of the decedent; (2) judgments
for money; and (3) "all claims for money against the decedent, arising from contract express or implied."
None of these includes that of the plaintiffs-appellants; for it is not enough that the claim against the
deceased party be for money, but it must arise from "contract express or implied", and these words (also
used by the Rules in connection with attachments and derived from the common law) were construed
in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194,

"to include all purely personal obligations other than those which have their source
in delict or tort."

Upon the other hand, Rule 88, section 1, enumerates actions that survive against a decedent's executors
or administrators, and they are: (1) actions to recover real and personal property from the estate; (2)
actions to enforce a lien thereon; and (3) actions to recover damages for an injury to person or property.
The present suit is one for damages under the last class, it having been held that "injury to property" is
not limited to injuries to specific property, but extends to other wrongs by which personal estate is
injured or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously cause a
party to incur unnecessary expenses, as charged in this case, is certainly injury to that party's property
(Javier vs. Araneta, L-4369, Aug. 31, 1953).

The ruling in the preceding case was hammered out of facts comparable to those of the present. No cogent reason
exists why we should break away from the views just expressed. And, the conclusion remains: Action against the
Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia survives.

The preliminaries out of the way, we now go to the core of the controversy.

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the controverted
contracts without the prior approval of the corporation's directorate. Plaintiff leans heavily on NACOCO's
corporate by-laws. Article IV (b), Chapter III thereof, recites, as amongst the duties of the general manager, the
obligation: "(b) To perform or execute on behalf of the Corporation upon prior approval of the Board, all contracts
necessary and essential to the proper accomplishment for which the Corporation was organized."

Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general manager's
position in the corporate structure. A rule that has gained acceptance through the years is that a corporate officer
"intrusted with the general management and control of its business, has implied authority to make any contract or
do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. 21 As
such officer, "he may, without any special authority from the Board of Directors perform all acts of an ordinary
nature, which by usage or necessity are incident to his office, and may bind the corporation by contracts in matters
arising in the usual course of business. 22
41 | P a g e

The problem, therefore, is whether the case at bar is to be taken out of the general concept of the powers of a
general manager, given the cited provision of the NACOCO by-laws requiring prior directorate approval of NACOCO
contracts.

The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this enterprise are
copra sales for future delivery. The movement of the market requires that sales agreements be entered into, even
though the goods are not yet in the hands of the seller. Known in business parlance as forward sales, it is
concededly the practice of the trade. A certain amount of speculation is inherent in the undertaking. NACOCO was
much more conservative than the exporters with big capital. This short-selling was inevitable at the time in the
light of other factors such as availability of vessels, the quantity required before being accepted for loading, the
labor needed to prepare and sack the copra for market. To NACOCO, forward sales were a necessity. Copra could
not stay long in its hands; it would lose weight, its value decrease. Above all, NACOCO's limited funds necessitated
a quick turnover. Copra contracts then had to be executed on short notice — at times within twenty-four hours. To
be appreciated then is the difficulty of calling a formal meeting of the board.

Such were the environmental circumstances when Kalaw went into copra trading.

Long before the disputed contracts came into being, Kalaw contracted — by himself alone as general manager —
for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw signed some 60 such contracts for the
sale of copra to divers parties. During that period, from those copra sales, NACOCO reaped a gross profit of
P3,631,181.48. So pleased was NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it
voted to grant him a special bonus "in recognition of the signal achievement rendered by him in putting the
Corporation's business on a self-sufficient basis within a few months after assuming office, despite numerous
handicaps and difficulties."

These previous contract it should be stressed, were signed by Kalaw without prior authority from the board. Said
contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to
prove one thing: Obviously, NACOCO board met the difficulties attendant to forward sales by leaving the adoption
of means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.

Liberally spread on the record are instances of contracts executed by NACOCO's general manager and submitted to
the board after their consummation, not before. These agreements were not Kalaw's alone. One at least was
executed by a predecessor way back in 1940, soon after NACOCO was chartered. It was a contract of lease
executed on November 16, 1940 by the then general manager and board chairman, Maximo Rodriguez, and A.
Soriano y Cia., for the lease of a space in Soriano Building On November 14, 1946, NACOCO, thru its general
manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca. On December 22,
1947, when the controversy over the present contract cropped up, the board voted to approve a lease contract
previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. On
the same date, the board gave its nod to a contract for renewal of the services of Dr. Manuel L. Roxas. In fact, also
on that date, the board requested Kalaw to report for action all copra contracts signed by him "at the meeting
immediately following the signing of the contracts." This practice was observed in a later instance when, on
January 7, 1948, the board approved two previous contracts for the sale of 1,000 tons of copra each to a certain
"SCAP" and a certain "GNAPO".

And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2% of Smith, Bell and
Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. Such ratification was necessary
because, as stated by Kalaw in that same meeting, "under an existing resolution he is authorized to give a
brokerage fee of only 1% on sales of copra made through brokers." On January 15, 1947, the brokerage fee
agreements of 1-1/2% on three export contracts, and 2% on three others, for the sale of copra were approved by
the board with a proviso authorizing the general manager to pay a commission up to the amount of 1-1/2%
"without further action by the Board." On February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the
42 | P a g e

sale of 2,000 tons of copra was favorably acted upon by the board. On March 19, 1947, a 2% brokerage
commission was similarly approved by the board for Pacific Trading Corporation on the sale of 2,000 tons of copra.

It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by the
board, not the sales contracts themselves. And even those fee agreements were submitted only when the
commission exceeded the ceiling fixed by the board.

Knowledge by the board is also discernible from other recorded instances.1äwphï1.ñët

When the board met on May 10, 1947, the directors discussed the copra situation: There was a slow downward
trend but belief was entertained that the nadir might have already been reached and an improvement in prices
was expected. In view thereof, Kalaw informed the board that "he intends to wait until he has signed contracts to
sell before starting to buy copra."23

In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current: The copra
market appeared to have become fairly steady; it was not expected that copra prices would again rise very high as
in the unprecedented boom during January-April, 1947; the prices seemed to oscillate between $140 to $150 per
ton; a radical rise or decrease was not indicated by the trends. Kalaw continued to say that "the Corporation has
been closing contracts for the sale of copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24

We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:

521. In connection with the buying and selling of copra the Board inquired whether it is the practice of the
management to close contracts of sale first before buying. The General Manager replied that this practice
is generally followed but that it is not always possible to do so for two reasons:

(1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease buying even
when it does not have actual contracts of sale since the suspension of buying by the Nacoco will result in
middlemen taking advantage of the temporary inactivity of the Corporation to lower the prices to the
detriment of the producers.

(2) The movement of the market is such that it may not be practical always to wait for the consummation
of contracts of sale before beginning to buy copra.

The General Manager explained that in this connection a certain amount of speculation is unavoidable.
However, he said that the Nacoco is much more conservative than the other big exporters in this
respect.25

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general
practice, custom, and policy, the general manager may bind the company without formal authorization of the
board of directors. 26 In varying language, existence of such authority is established, by proof of the course of
business, the usage and practices of the company and by the knowledge which the board of directors has, or must
be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. 27 So also,

x x x authority to act for and bind a corporation may be presumed from acts of recognition in other
instances where the power was in fact exercised. 28

x x x Thus, when, in the usual course of business of a corporation, an officer has been allowed in his
official capacity to manage its affairs, his authority to represent the corporation may be implied from the
manner in which he has been permitted by the directors to manage its business.29
43 | P a g e

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute
contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws
were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that
board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

4. But if more were required, we need but turn to the board's ratification of the contracts in dispute on January 30,
1948, though it is our (and the lower court's) belief that ratification here is nothing more than a mere formality.

Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or
contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original
authority;" and that " [t]he corporation and the other party to the transaction are in precisely the same position as
if the act or contract had been authorized at the time." 30 The language of one case is expressive: "The adoption or
ratification of a contract by a corporation is nothing more or less than the making of an original contract. The
theory of corporate ratification is predicated on the right of a corporation to contract, and any ratification or
adoption is equivalent to a grant of prior authority." 31

Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the moment it was
constituted." 32 By corporate confirmation, the contracts executed by Kalaw are thus purged of whatever vice or
defect they may have. 33

In sum, a case is here presented whereunder, even in the face of an express by-law requirement of prior approval,
the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations.
And, the conclusion inevitably is that the embattled contracts remain valid.

5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or breach of trust" in
the board's ratification of the contracts without prior approval of the board. For, in reality, all that we have on the
government's side of the scale is that the board knew that the contracts so confirmed would cause heavy losses.

As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior approval.
Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first thrown on the way only
when the contracts turned out to be unprofitable for NACOCO.

Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru
some motive or interest or ill will; it partakes of the nature of fraud. 34 Applying this precept to the given facts
herein, we find that there was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong,"
or "breach of a known duty," or "Some motive or interest or ill will" that "partakes of the nature of fraud."

Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to serve their own
private interests, or to pocket money at the expense of the corporation. 35 We have had occasion to affirm that
bad faith contemplates a "state of mind affirmatively operating with furtive design or with some motive of self-
interest or ill will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes
with approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close examination of all
the reported cases, although there are many dicta not easily reconcilable, yet I have found no judgment or decree
which has held directors to account, except when they have themselves been personally guilty of some fraud on
the corporation, or have known and connived at some fraud in others, or where such fraud might have been
prevented had they given ordinary attention to their duties. . . ." Plaintiff did not even dare charge its defendant-
directors with any of these malevolent acts.
44 | P a g e

Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates of fairness. They
did not think of raising their voice in protest against past contracts which brought in enormous profits to the
corporation. By the same token, fair dealing disagrees with the idea that similar contracts, when unprofitable,
should not merit the same treatment. Profit or loss resulting from business ventures is no justification for turning
one's back on contracts entered into. The truth, then, of the matter is that — in the words of the trial court — the
ratification of the contracts was "an act of simple justice and fairness to the general manager and the best interest
of the corporation whose prestige would have been seriously impaired by a rejection by the board of those
contracts which proved disadvantageous." 37

The directors are not liable." 38

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions. Result: Copra
production was impaired, prices spiralled, warehouses destroyed. Quick turnovers could not be expected. NACOCO
was not alone in this misfortune. The record discloses that private traders, old, experienced, with bigger facilities,
were not spared; also suffered tremendous losses. Roughly estimated, eleven principal trading concerns did run
losses to about P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra marketing department of
NACOCO, observed that from late 1947 to early 1948 "there were many who lost money in the trade." 39 NACOCO
was not immune from such usual business risk.

The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus & Co. by pleading in
its answers force majeure as an affirmative defense and there vehemently asserted that "as a result of the said
typhoons, extensive damage was caused to the coconut trees in the copra producing regions of the Philippines and
according to estimates of competent authorities, it will take about one year until the coconut producing regions
will be able to produce their normal coconut yield and it will take some time until the price of copra will reach
normal levels;" and that "it had never been the intention of the contracting parties in entering into the contract in
question that, in the event of a sharp rise in the price of copra in the Philippine market produce by force
majeure or by caused beyond defendant's control, the defendant should buy the copra contracted for at
exorbitant prices far beyond the buying price of the plaintiff under the contract." 40

A high regard for formal judicial admissions made in court pleadings would suffice to deter us from permitting
plaintiff to stray away therefrom, to charge now that the damage suffered was because of Kalaw's negligence, or
for that matter, by reason of the board's ratification of the contracts. 41

Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual obligations. Stock
accessibility was no problem. NACOCO had 90 buying agencies spread throughout the islands. It could purchase
2,000 tons of copra a day. The various contracts involved delivery of but 16,500 tons over a five-month period.
Despite the typhoons, NACOCO was still able to deliver a little short of 50% of the tonnage required under the
contracts.

As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of damage and wrong is
here absent. There cannot be an actionable wrong if either one or the other is wanting. 43

7. On top of all these, is that no assertion is made and no proof is presented which would link Kalaw's acts —
ratified by the board — to a matrix for defraudation of the government. Kalaw is clear of the stigma of bad faith.
Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that he had authority to enter into the
contracts, that he did so in the best interests of the corporation; that he entered into the contracts in pursuance of
an overall policy to stabilize prices, to free the producers from the clutches of the middlemen. The prices for which
NACOCO contracted in the disputed agreements, were at a level calculated to produce profits and higher than
those prevailing in the local market. Plaintiff's witness, Barretto, categorically stated that "it would be foolish to
45 | P a g e

think that one would sign (a) contract when you are going to lose money" and that no contract was executed "at a
price unsafe for the Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO envisioned a profit of
around P752,440.00. 46

Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with NACOCO's Chief
Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and quotations from abroad were
guideposts to him.

Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the coming of
unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in his duty. He exerted efforts
to stave off losses. He asked the Philippine National Bank to implement its commitment to extend a P400,000.00
loan. The bank did not release the loan, not even the sum of P200,000.00, which, in October, 1947, was approved
by the bank's board of directors. In frustration, on December 12, 1947, Kalaw turned to the President, complained
about the bank's short-sighted policy. In the end, nothing came out of the negotiations with the bank. NACOCO
eventually faltered in its contractual obligations.

That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would seem to be
supported by the fact that even as the contracts were being questioned in Congress and in the NACOCO board
itself, President Roxas defended the actuations of Kalaw. On December 27, 1947, President Roxas expressed his
desire "that the Board of Directors should reelect Hon. Maximo M. Kalaw as General Manager of the National
Coconut Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been openly disputed,
the board, at its regular meeting, appointed Maximo M. Kalaw as acting general manager of the corporation.

Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co., Inc., L-15092,
May 18, 1962:

"They (the directors) hold such office charged with the duty to act for the corporation according to their best
judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss during a business depression, or closed down
at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation,
and not by the court. It is a well known rule of law that questions of policy of management are left solely to the
honest decision of officers and directors of a corporation, and the court is without authority to substitute its
judgment for the judgment of the board of directors; the board is the business manager of the corporation,
and so long as it acts in good faith its orders are not reviewable by the courts." (Fletcher on Corporations, Vol. 2, p.
390.) 48

Kalaw's good faith, and that of the other directors, clinch the case for defendants
46 | P a g e
47 | P a g e

MEAD VS MCCULOUGH

CHARLES W. MEAD, plaintiff-appellant,

vs.
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND CONSTRUCTION COMPANY, defendant-appellants.

This action was originally brought by Charles W. Mead against Edwin C. McCullough, Thomas L. Hartigan, Frank E. Green, and
Frederick H. Hilbert. Mead has died since the commencement of the action and the case is now going forward in the name of
his administrator as plaintiff.

The complaint contains three causes of action, which are substantially as follows: The first, for salary; the second, for profits;
and the third, for the value of the personal effects alleged to have been left Mead and sold by the defendants.

A joint and several judgment was rendered by default against each and all of the defendants for the sum of $3,450.61 gold. The
defendant McCullough alone having made application to have this judgment set aside, the court granted this motion, vacating
the judgment as to him only, the judgment as to the other three defendants remaining undisturbed.1awphi1.net

At the new trial, which took place some two or three years later and after the death of Mead, the judgment was rendered upon
merits, dismissing the case as to the first and second causes of action and for the sum of $1,200 gold in the plaintiff's favor on
the third cause of action. From this judgment both parties appealed and have presented separate bills of exceptions. No appeal
was taken by the defendant McCullough from the ruling of the court denying a recovery on his cross complaint.

On March 15, 1902, the plaintiff (Mead will be referred to as the plaintiff in this opinion unless it is otherwise stated) and the
defendant organized the "Philippine Engineering and Construction Company," the incorporators being the only stockholders
and also the directors of said company, with general ordinary powers. Each of the stockholders paid into the company $2,000
mexican currency in cash, with the exception of Mead, who turned over to the company personal property in lieu of cash.

Shortly after the organization, the directors held a meeting and elected the plaintiff as general manager. The plaintiff held this
position with the company for nine months, when he resigned to accept the position of engineer of the Canton and Shanghai
Railway Company. Under the organization the company began business about April 1, 102.itc-alf

The contract and work undertaken by the company during the management of Mead were the wrecking contract with the Navy
Department at Cavite for the raising of the Spanish ships sunk by Admiral Dewey; the contract for the construction of certain
warehouses for the quartermaster department; the construction of a wharf at Fort McKinley for the Government; The
supervision of the construction of the Pacific Oriental Trading Company's warehouse; and some other odd jobs not specifically
set out in the record.

Shortly after the plaintiff left the Philippine Islands for China, the other directors, the defendants in this case, held a meeting on
December 24, 1903, for the purpose of discussing the condition of the company at that time and determining what course to
pursue. They did on that date enter into the following contract with the defendant McCullough, to wit:1awphil.net

For value received, this contract and all the rights and interests of the Philippine Engineering and construction
Company in the same are hereby assigned to E. C. McCullough of Manila, P. I.

(Sgd.) E. C. McCULLOUGH,
President, Philippine Engineering and
Construction Company.

(Sgd.) F. E. GREEN, Treasurer.

(Sgd.) THOMAS L. HARTIGAN, Secretary.

The contract reffered to in the foregoing document was known as the wrecking contract with the naval authorities.

On the 28th of the same month, McCullough executed and signed the following instrumental:
48 | P a g e

For value received, and having the above assignment from my associates in the Philippine Engineering and
Construction Company, I hereby transfer my right, title, and interest in the within contract, with the exception of one
sixth, which I hereby retain, to R. W. Brown, H. D. C. Jones, John T. Macleod, and T. H. Twentyman.

The assignees of the wrecking contract, including McCullough, formed was not known as the "Manila Salvage Association." This
association paid to McCullough $15,000 Mexican Currency cash for the assignment of said contract. In addition to this payment,
McCullough retained a one-sixth interest in the new company or association.

The plaintiff insists that he was received as general manager of the first company a salary which was not to be less than $3,500
gold (which amount he was receiving as city engineer at the time of the corporation of the company), plus 20 per cent of the
net profits which might be derived from the business; while McCullough contends that the plaintiff was to receive only his
necessary expenses unless the company made a profit, when he could receive $3,500 per year and 20 per cent of the profits.
The contract entered into between the board of directors and the plaintiffs as to the latter's salary was a verbal one. The
plaintiff testified that this contract was unconditional and that his salary, which was fixed at $3,500 gold, was not dependent
upon the success of the company, but that his share of the profits was to necessarily depend upon the net income. On the
other hand, McCullough, Green and Hilbert testify that the salary of the plaintiff was to be determined according to whether or
not the company was successful in its operations; that if the company made gains, he was to receive $3,5000 gold, and a
percentage, but that if the company did not make any profits, he was to receive only his necessary living expenses.

It is strongly urged that the plaintiff would not have accepted the management of the company upon such conditions, as he was
receiving from the city of Manila a salary of $3,500 gold. This argument is not only answered by the positive and direct
testimony of three of the defendants, but also by the circumstances under which this company was organized and principal
object, which was the raising of the Spanish ships. The plaintiff put no money into the organization, the defendants put but
little: just sufficient to get the work of raising the wrecks under way. This venture was a risky one. All the members of the
company realized that they were undertaking a most difficult and expensive project. If they were successful, handsome profits
would be realized; while if they were unsuccessful, all the expenses for the hiring of machinery, launches, and labor would be a
total loss. The plaintiff was in complete charge and control of this work and was to receive, according to the great
preponderance of the evidence, in case the company made no profits, sufficient amount to cover his expenses, which included
his room, board, transportation, etc. The defendants were to furnish money out of their own private funds to meet these
expenses, as the original $8,000 Mexican currency was soon exhausted in the work thus undertaken. So the contract entered
into between the directors and the plaintiff as to the latter's salary was a contingent one.

It is admitted that the plaintiff received $1.500 gold for his services, and whether he is entitled to receive an additional amount
depends upon the result of the second cause of action.

The second cause of action is more difficult to determine. On this point counsel for the plaintiff has filed a very able and
exhaustive brief, dealing principally with the facts.

It is urged that the net profits accruing to the company after the completion of all the contracts (except the salvage contract)
made before the plaintiff resigned as manager and up to the time the salvage contract was transferred to McCullough and from
him to the new company, amounted to $5,628.37 gold. This conclusion is reached, according to the memorandum of counsel
for the plaintiff which appears on pages 38 and 39 of the record, in the following manner:

Profits from the construction of warehouses for the Government $6,962.54

Profits from the construction of the wall at Fort McKinley 500.00

Profits from the inspection of the construction of the P. O. T. 1,000.00

warehouse

Profits obtained from the projects (according to Mead's 1,000.00

calculations)

Total 9,462.54
49 | P a g e

In this same memorandum, the expense for the operation of the company during Mead's management, consisting of rents, the
hire of one muchacho, the publication of various notices, the salary of an engineer for four months, and plaintiff's salary for
nine months, amounts to $3,834.17 gold. This amount, deducted from the sum total of profits, leaves $5,628.37 gold.

Counsel for the plaintiff, in order to show conclusively as they assert that the company, after paying all expenses and
indebtedness, had a considerable balance to its credit, calls attention to Exhibit K. This balance reads as follows:

Abstract copy of ledger No. 3, folios 276-277. Philippine Engineering and Construction Company.

Then follow the debits and credits, with a balance in favor of the company of $10,728.44 Mexican currency. This account
purports to cover the period from July 1, 1902, to April 1, 1903. Ledger No. 3, above mentioned, is that the defendant
McCullough and not one of the books of the company.

It was this exhibit that the lower court based its conclusion when it found that on January 25, 1903, after making the transfer of
the salvage contract to McCullough, the company was in debt $2,278.30 gold. The balance of $10,728.44 Mexican currency
deducted from the $16,439.40 Mexican currency (McCullough's losses in the Manila Salvage Association) leaves $2,278.30
United States currency at the then existing rate of exchange. In Exhibit K, McCullough charged himself with the $15,000
Mexican currency which he received from his associates in the new company, but did not credit himself with the $16,439.40
Mexican currency, losses in said company, for the reason that on April 1, 1903, said losses had not occurred. It must be borne in
mind that Exhibit K is an abstract from a ledger.

The defendant McCullough, in order to show in detail his transactions with the old company, presented Exhibits 1 and 2. These
accounts read as follows:

Detailed account of the receipts and disbursements of E. C. McCullough and the Philippine Engineering and
Construction Company.

Then follow the debits ad credits. These two accounts cover the period from March 5 1902, to June 9, 1905. According to
Exhibit No. 1, the old company was indebted to McCullough in the sum of $14,918.75 Mexican currency, and according to
Exhibit No. 2 he indebtedness amounted to $6,358.15 Mexican currency. The debits and credits in these two exhibits are
exactly the me with the following exceptions; I Exhibit No. 1, McCullough credits himself with the $10,000 Mexican currency
(the amount borrowed from the bank and deposited with the admiral as a guarantee for the faithful performance of the salvage
contract); while in Exhibit No. 2 he credits himself with this $10,000 and at he same time charges himself with this amount. In
the same exhibit (No. 2) he credits himself with $16,439.40 Mexican currency, his losses in the new company, received from
said company. Eliminating entirely from these two exhibits the $10,000 Mexican currency, the $15,000 Mexican currency, and
the $16,39.40 Mexican currency, the balance shown in McCullough's favor is exactly the same in both exhibits. This balance
amounts to $4,918.75 Mexian currency.

According to McCullough's accounts in Exhibits 1 and 2 the profits derived from the construction of the Government warehouse
amounted to $4,005.02 gold, while the plaintiff contends that these profits amounted to $6,962.54 gold. The plaintiff, during
his management of the old company, made a contract with the Government for the construction of these are house and
commenced work. After he resigned and left for China, McCullough took charge of and completed the said warehouse.
McCullough gives a complete, detailed statements of express for the completion of this work, showing the dates, to whom paid,
and for what purpose. He also gives the various amounts he received from the Government with the amounts of the receipt of
the same. On the first examination, McCullough testified that the total amount received from the Government for the
construction of these warehouse was $1,123 gold. The case was suspended for the purpose of examination the records of the
Auditor and the quater master, to determine the exact amount paid for this work. As a result of this examination, the vouchers
show an additional amount of about $5,000 gold, paid in checks. These checks show that the same were endorsed by the
plaintiff and collected by him from the Hongkong and Shanghai Banking Corporation. This money was not handled by
McCullough and as it was collected by the plaintiff, it must be presumed, in the absence of proof, that it was disbursed by him.
McCullough did not charge himself with the $2,5000 gold, alleged to have been profits from the construction of the wall at Fort
McKinley, the inspection of the construction of the P. O. T. warehouse, and other projects. This work was done under the
management of the plaintiff and it is not shown that the profits from these contracts ever reached the ands of McCullough.
McCullough was not the treasurer of the company at that time. The other items which the plaintiff insist that McCullough had
no right to credit himself with are the following:
50 | P a g e

Date To whom paid. Amount (Mex. currency).

Jan. 30, 1903 Green $2,000.00

Feb. 2, 1903 McCullough 1,300.00

Feb. 2, 1903 Green 1,027.92

Feb. 19, 1905 P. O. T. Co. note 2,236.80

May 23, 1905 Hilbert 1,856.02

June 9, 1905 Hartigan 1,225.00

McCullough says that these amounts represents cash borrowed from the evidence parties to carry on the operations of the old
company while it was trying to raise the sunken vessels. There is no proof to the contrary, and McCullough's testimony on this
point is strongly corroborated by the fact that the work done by the company in attempting to raise theses vessels was it first
undertaking. The company had made no profits while tat work was going on under the management of the plaintiff, but its
expenses greatly exceeded that of the original $8,000 Mexican currency. It was necessary to borrow money to continue that
work. These amounts, having been borrowed, were outstanding debts when McCullough took charge for the purpose of
completing the warehouses and winding up the business of the old company. These amounts do not represent payments or
refunds of the original capital. McCullough did not credit himself with any amount for his services for supervising the
completion of the warehouses, nor for liquidating or winding up the company's affairs. We think that the amount of $4,918.75
Mexican currency, balance in McCullough's favor up to this point, represents a fair, equitable, and just settlement.

So far we have referred to the Philippine Engineering and Construction Company as the "company," without any attempt to
define its legal status.

The plaintiff and defendants organized this company with a capital stock of $100,000 Mexican currency, each paying in on the
organization $2,000 Mexican currency. The remainder, $9,000, according to the articles of agreement, were to be offered to
the public in shares of $100 Mexican currency, each. The names of all the organizers appear in the articles of agreement, which
articles were duly inscribed in the commercial register. The purpose for which this organization was affected were to engage in
general engineering and construction work, and operating under the name of the "Philippine Engineering and Construction
Company." during its active existence, it engaged in the business of attempting to rise the sunken Spanish fleet, constructing
under contract warehouses and a wharf for the United States Government, supervising the construction of a warehouse for a
private firm, and some assay work. It was, therefore, an industrial civil partnership, as distinguished from a commercial one; a
civil partnership in the mercantile form, an anonymous partnership legally constituted in the city of Manila.

The articles of agreement appeared in a public document and were duly inscribed in the commercial register. To the extent of
this inscription the corporation partook of the form of a mercantile one and as such must e governed by articles 151 to 174 of
the Code of Commerce, in so far as these provisions are not in conflict with the Civil Code (art. 1670, Civil Code); but the direct
and principal law applicable is the Civil Code. Those provisions of the Code of Commerce are applicable subsidiary.

This partnership or stock company (sociedad anonima) upon the execution of the public instrument in which is articles of
agreement appear, and the contribution of funds and personal property, became a juridicial person — an artificial being,
invisible, intangible and existing only in contemplation of law — with the power to hold, buy, and ell property, and to use and
be sued — a corporation — not a general copartnership nor a limited copartnership. (Arts. 37, 38,1656 of the Civil Code;
Compania Agricola de Ultimar vs. Reyes et al., 4 Phil. Rep., 2; and Chief Justice Marshall's definition of a corporation, 17 U. S.,
518.)

The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridicial person — a
corporation. Such inscription only operated to show that it partook of the form of a commercial corporation. (Compania
Agricola de Ultimar vs. Reyes et al., supra.)

Did a majority of the stockholders, who were at the same time a majority of the directors of this corporation, have the power
under the law and its articles of agreement, to sell or transfer to one of its members the assets of said corporation?
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In the first article of the statutes of incorporation it is stated tat by virtue of a public document the organizers, whose names
are given in full, agreed to form a sociedad anonima. Article II provides that the organizers should be the directors an
administrators until the second general meeting, and until their successors were duly elected and installed. The third provides
that the sociedad should run for ninety-nine years from the date of the execution of its articles of agreement. Article IV sets
forth the object or purpose of the organization. Article V makes the capital $100,000 Mexican currency, divided into one
thousand shares at $100 Mexican currency each. Article VI provides that each shareholder should be considered as a coowner
in the assets of the company and entitled to participate in the profits in proportion to the amount of his stock. Article VII fixed
the time of holding general meetings and the manner of calling special meetings of the stockholders. Article VIII provides that
the board of directors shall be elected annually. Article IX provides for the filing of vacancies in the board of directors. Article X
provides that "the board of directors shall elect the officers of the sociedad and have under is charge the administration of the
said sociedad." Article XI: "In all the questions with reference to the administration of the affairs of the sociedad, it shall be
necessary to secure the unanimous vote of the board of directors, and at least three of said board must be provides that all of
the stock, except that which was divided among the organizers should remain in the treasury subject to the disposition of the
board of directors. Article XIII reads: "In all the meetings of the stockholders, a majority vote of the stockholders present shall
be necessary to determine any question discussed." The fourteenth articles authorizes the board of directors to adopt such
rules and regulations for the government of the sociedad as it should deem proper, which were not in conflict with its statutes.

When the sale or transfer heretofore mentioned took place, there were present four directors, all of whom gave their consent
to that sale or transfer. The plaintiff was then about and his express consent to make this transfer or sale was not obtained. He
was, before leaving, one of the directors in this corporation, and although he had resigned as manager, he had not resigned as a
director. He accepted the position of engineer of the Canton and Shanghai Railway Company, knowing that his duties as such
engineer would require his whole time and attention and prevent his returning to the Philippine Islands for at least a year or
more. The new position which he accepted in China was incompatible with his position as director in the Philippine Engineering
and Construction Company, a corporation whose sphere of operations was limited to the Philippine Islands. These facts are
sufficient to constitute an abandoning or vacating of hid position as director in said corporation. (10 Cyc., 741.) Consequently,
the transfer or sale of the corporation's assets to one of its members was made by the unanimous consent of all the directors in
the corporation at that time.

There were only five stockholders in this corporation at any time, four of whom were the directors who made the sale, and the
other the plaintiff, who was absent in China when the said sale took place. The sale was, therefore, made by the unanimous
consent of four-fifths of all the stockholders. Under the articles of incorporation, the stockholders and directors had general
ordinary powers. There is nothing in said articles which expressly prohibits the sale or transfer of the corporate property to one
of the stockholders of said corporation.

Is there anything in the law which prohibits such a sale or transfer? To determine this question, it is necessary to examine, first,
the provisions of the Civil Code, and second, those provisions (art. 151 to 174) of the Code o ] Commerce.

Articles 1700 to 1708 of the Civil Code deal with the manner of dissolving a corporation. There is nothing in these articles which
expressly or impliedly prohibits the sale of corporate property to one of its members, nor a dissolution of a corporation in this
manner. Neither is there anything in articles 151 to 174 of the Code of Commerce which prohibits the dissolution of a
corporation by such sale or transfer.

The articles of incorporation must include:

xxx xxx xxx

The submission to the vote of the majority of the meeting of members, duly called and held, of such matters as may
properly be brought before the same. (No. 10, art. 151, Code of Commerce.)

Article XIII of the corporation's statutes expressly provides that "in all the meetings of the stockholders, a majority vote of the
stockholders present shall be necessary to determine any question discussed."

The sale or transfer to one of its members was a matter which a majority of the stockholders could very properly consider. But
it i said that if the acts and resolutions of a majority of the stockholders in a corporation are binding in every case upon the
minority, the minority would be completely wiped out and their rights would be wholly at the mercy of the abuses of the
majority.
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Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there are exceptions to this
rule. There must necessarily be a limit upon the power of the majority. Without such a limit the will of the majority would be
absolute and irresistible and might easily degenerate into an arbitrary tyranny. The reason for these limitations is that in every
contract of partnership (and a corporation can be something fundamental and unalterable which is beyond the power of the
majority of the stockholders, and which constitutes the rule controlling their actions. this rule which must be observed is to be
found in the essential compacts of such partnership, which gave served as a basis upon which the members have united, and
without which it is not probable that they would have entered not the corporation. Notwithstanding these limitations upon the
power of the majority of the stockholders, their (the majority's) resolutions, when passed in good faith and for a just cause,
deserve careful consideration and are generally binding upon the minority.

Eixala, in his work entitled "Instituciones del Derecho Mercantil de España," speaking of sociedades anonimas, says:

The resolutions of the boards passed by a majority vote are valid . . . and authority for passing such resolutions is
unlimited, provided that the original contract is not broken by them, the partnership funds not devoted to foreign
purposes, or the partnerships transformed, or changes made which are against public policy or which infringe upon
the rights of third persons.

The supreme court of Spain, in its decision dated June 30, 1888, said:

In order to be valid and binding upon dissenting members, it s an indispensable requisite that resolutions passed by a
general meeting of stockholders conform absolutely to the contracts and conditions of the articles of the association,
which are to be strictly construed.

That resolutions passed within certain limitations by a majority of the stockholders of a corporation are binding upon the
minority, is therefore recognized by the Spanish authorities.

Power of private corporation to alienate property. — This power of absolute alienability of corporate property applies
especially to private corporations that are established solely for the purpose of trade or manufacturing and in which
he public has no direct interest. While this power is spoken of as belonging to the corporation it must be observed
that the authorities point out that the trustees or directors of a corporation do not possess the power to dispose of
the corporate property so as to virtually end the existence of the corporation and prevent it from carrying on the
business for which it was incorporated. (Thompson on Corporation, second edition, sec. 2416, and cases cited
thereunder.)

Power to dispose of all property. — Where there are no creditors, and no stockholder objects, a corporation, as
against all other persons but the state, may sell and dispose of all its property. The state in its sovereign capacity may
question the power of the corporation to do so, but with these exceptions such as a sale is void. A rule of general
application is that a corporation of a purely private business character, one which owes no special duty to the public,
and is not given the right of eminent domain, where exigencies of its business require it or when the circumstances
are such that it can no longer continue the business with profit, may sell and dispose of all its property, pay its debts,
divide the remaining assets and wind up the affairs of the corporation. (Id., sec. 2417.)

When directors or officers may dispose of all the property. — It is within the dominion of the managing officers and
agents of the corporation to dispose of all the corporate property under certain circumstances; and this may be done
without reference to the assent or authority of the stockholders. This disposition of the property may be temporarily
by lease, or permanently by absolute conveyance. But it can only be done in the course of the corporate business and
for the furtherance of the purposes of the incorporation. The board of directors possess this power when the
corporation becomes involved and by reason of its embarrassed or insolvent condition is unable either to pay its
debts or to secure capital and funds for the further prosecution of its enterprise, and especially where creditors are
pressing their claims and demands and are threatening to or have instituted actions to enforce their claims. This
power of the directors to alienate the property is conceded where it is regarded as of imperative necessity. (If., sec.
2418, and case cited.)

When majority stockholder may dispose of all corporate property. — Another rule that permits a majority of the
stockholders to dispose of all the corporate property and wind up the business, is where the corporation has became
insolvent, and the disposition of the property is necessary to pay the debt; or where from any cause the business is a
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failure, and the best interest of the corporation and all the stockholders require it, then the majority have clearly the
power to dispose of all the property even as against the protests of a minority. It would be a harsh rule that could
permit one stockholder, or any minority of the stockholders, to hold the majority to their investment where the
continuation of the business would be at a loss and where there was no prospect or hope that the enterprise could be
made profitable. The rule as stated by some courts is that the majority stockholders may dispose of the property
when just cause exists; and this just cause is usually defined to be the unprofitableness of the business and where its
continuation would be ruinous to the corporation and against the interest of stockholders. (Id., sec. 2424, and cases
cited.)

Nothing is better settled in the law of corporations than the doctrine that a corporation has the same capacity and
power as a natural person to dispose of the convey its property, real or personal, provided it does not do so for a
purpose which is foreign to the objects for which it was created, and provided, further, it violates no charter or
statutory restriction, on rule of law based upon public policy. . . .This power need not be expressly conferred upon a
corporation by its charter. It is implied as an incident to its ownership of property, unless there is some clear
restriction in this charter or in some statute. (Clark and Marshall's Private Corporations, sec. 152, and cases cited.)

A purely private business corporation, like a manufacturing or trading company, which is not given the right of
eminent domain, and which owes no special duties to the public, may certainly sell and convey absolutely the whole
of its property, when the exigencies of its business require it to do so, or when the circumstances are such that it can
no longer profitably continue its business, provided the transaction is not in fraud of the rights of creditors, or in
violation of charter or statutory restrictions. And, by the weight of authority, this may be done a majority of the
stockholders against the dissent of the minority. (Id., sec. 160, and cases cited.)

The above citations are taken from the works of the most eminent writers on corporation law. The citation of cases in support
of the rules herein announced are too numerous to insert.

From these authorities it appears to be well settled, first, that a private corporation, which owes no special duty to the public
and which has not been given the right of eminent domain, has the absolute right and power as against the whole world except
the state, to sell and dispose of all of its property; second, that the board of directors, has the power, without referrence to the
assent or authority of the stockholders, when the corporation is in failing circumstances or insolvent or when it can no longer
continue the business with profit, and when it is regarded as an imperative necessity; third, that a majority of the stockholders
or directors, even against the protest of the minority, have this power where, from any cause, the business is a failure and the
best interest of the corporation and all the stockholders require it.

May officer or directors of the corporation purchase the corporate property? The authorities are not uniform on this question,
but on the general proposition whether a director or an officer may deal with the corporation, we think the weight of authority
is that he may. (Merrick vs. Peru Coal Co., 61 Ill., 472; Harts et al. vs. Brown et al., 77 Ill., 226; Twin-Lick Oil Company vs.
Marbury, 91 U.S., 587; Whitwell vs, Warner, 20 Vt., 425; Smith vs. Lansing, 22 N.Y., 520; City of St. Loius vs. Alexander, 23 Mo.,
483; Beach et al vs. Miller, 130 Ill., 162.)

While a corporation remains solvent, we can see no reason why a director or officer, by the authority of a majority of the
stockholders or board of managers, may not deal with the corporation, loan it money or buy property from it, in like manner as
a stranger. So long as a purely private corporation remains solvent, its directors are agents or trustees for the stockholders.
They owe no duties or obligations to others. But the moment such a corporation becomes insolvent, its directors are trustees of
all the creditors, whether they are members of the corporation or not, and must manage its property and assets with strict
regard to their interest; and if they are themselves creditors while the insolvent corporation is under their management, they
will not be permitted to secure to themselves by purchasing the corporate property or otherwise any personal advantage over
the other creditors. Nevertheless, a director or officer may in good faith and for an adequate consideration purchase from a
majority of the directors or stockholders the property even of an insolvent corporation, and a sale thus made to him is valid and
binding upon the minority. (Beach et al. vs. Miller, supra; Twin-Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7 Wall.,
299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New Hamphshire Insurance Company, 43 N. H., 263; Morawetz on
Corporations (first edition), sec. 579; Haywood vs. Lincoln Lumber Company et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60;
Lippincott vs. Shaw Carriage Company, 21 Fed. Rep., 577.)

In the case of the Twin-Lick Oil Company vs. Marbury, supra, the complaint was a corporation organized under the laws of West
Virginia, engaged in the business of raising and selling petroleum. It became very much embarrased and a note was given
secured by a deed of trust, conveying all the property rights, and franchise of the corporation to William Thomas to secure the
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payment of said note, with the usual power of sale in default of payment. The property was sold under the deed of trust; was
bought in by defendant's agent for his benefit, and conveyed to him the same year. The defendant was at the time of these
transactions a stockholder and director in the company. At the time the defendant's money became due there was no apparent
possibility of the corporation's paying it at any time. The corporation was then insolvent. The property was sold by the trustee
and bough in by the defendant at a fair and open sale and at a reasonable price. The sale and purchase was the only mode left
to the defendant to make his money. The court said:

That a director of a joint-stock corporation occupies one of those fiduciary relations where his dealings with the
subject-matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is
viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest
morality, and which has received the clearest recognition in this court and others. (Koehler vs. Iron., 2 Black, 715;
Drury vs. Cross, 7 Wall., 299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co vs. Sherman, 30 Barb., 553; Hoffman
S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The general doctrine, however, in regard to contracts of this class, is,
not that they are absolutely void, but that they are voidable at the election of the party whose interest has been so
represented by the party claiming under it. We say, this is the general rule; for there may be cases where such
contracts would be void ab initio; as when an agent to sell buys of himself, and by his power of attorney conveys to
himself that which he was authorized to sell. but even here, acts which amount t a ratification by the principal may
validate the sale.

The present case is not one of that class. While it is true that the defendant, a s a director of the corporation, was
bound by all those rules of conscientious fairness which courts of equity have imposed as the guides for dealing in
such cases, it can not be maintained that any rule forbids one director among several from loaning money to the
corporation when the money is needed, and the transaction is open, and otherwise free from blame. No adjudged
case has gone so far as this. Such a doctrine, while it would afford little protection to the corporation against actual
fraud or oppression, would deprive it of the air of those most interested in giving aid judiciously, and best qualified to
judge of the necessity of that aid, and of the extent to which it may safely be given.

There are in such a transaction three distinct parties whose interest is affected by it; namely, the lender, the
corporation, and the stockholders of the corporation.

The directors are the officers or agents of the corporation, and represent the interests of the abstract legal entity, and
of those who own the shares of its stock. One of the objects of creating a corporation by law is to enable it to make
contracts; and these contracts may be made with its stockholders as well as with others. In some classes of
corporations, as in mutual insurance companies, the main object of the act of the incorporation is to enable the
company to make contracts which its stockholders, or with persons who become stockholders by the very act of
making the contract of insurance. It is very true, that as a stockholder, in making a contract of any kind with the
corporation of which he is a member, is in some sense dealing with a creature of which he is a part, and holds a
common interest with the other stockholders, who, with him, constitute the whole of that artificial entity, he is
properly held to a larger measure of candor and good faith than if he were not a stockholder. So, when the lender is a
director, charged, with others, with the control and management of the affairs of the corporation, representing in this
regard the aggregated interest of all the stockholders, his obligation, if he becomes a party to a contract with the
company, to candor and fair dealing, is increased in the precise degree that his representative character has given
him power and control derived from the confidence reposed in him by the stockholders who appointed him their
agent. If he should be a sole director, or one of a smaller number vested with certain powers, this obligation would be
still stronger, and his acts subject to more severe scrutiny, and their validity determined by more rigid principles of
morality, and freedom from motives of selfishness. All this falls far short, however, of holding that no such contract
can be made which will be valid; . . . .

In the case of Hancock vs. Holbrook et al. (40 La. Ann., 53), the court said:

As a strictly legal question, the right of a board of directors of a corporation to apply it property to the payment of its
debts, and the right of the majority of stockholders present at a meeting called for the purpose to ratify such action
and to dissolve the corporation, can not be questioned.

But were such action is taken at the instance, and through the influence of the president of the corporation, and were
the debt to which the property is applied is one for which he is himself primarily liable, and specially where he
subsequently acquires, in his personal right, the proerty thus disposed of, such circumstances undoubtedly subject his
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acts to severe scrutiny, and oblige him to establish that he acted with the utmost candor and fair-dealing for the
interest of the corporation, and without taint of selfish motive.

The sale or transfer of the corporate property in the case at bar was made by three directors who were at the same time a
majority of stockholders. If a majority of the stockholders have a clear and a better right to sell the corporate property than a
majority of the directors, then it can be said that a majority of the stockholders made this sale or transfer to the defendant
McCullough.

What were the circumstances under which said sale was made? The corporation had been going from bad to worse. The work
of trying to raise the sunken Spanish fleet had been for several months abandoned. The corporation under the management of
the plaintiff had entirely failed in this undertaking. It had broken its contract with the naval authorities and the $10,000
Mexican currency deposited had been confiscated. It had no money. It was considerably in debt. It was a losing concern and a
financial failure. To continue its operation meant more losses. Success was impossible. The corporation was civilly dead and had
passed into the limbo of utter insolvency. The majority of the stockholders or directors sold the assets of this corporation,
thereby relieving themselves and the plaintiff of all responsibility. This was only the wise and sensible thing for them to do.
They acted in perfectly good faith and for the best interests of all the stockholders. "It would be a harsh rule that would permit
one stockholder, or any minority of stockholders to hold a majority to their investment where a continuation of the business
would be at a loss and where there was no prospect or hope that the enterprise would be profitable."

The above sets forth the condition of this insolvent corporation when the defendant McCullough proposed to the majority of
stockholders to take over the assets and assume all responsibility for the payment of the debts and the completion of the
warehouses which had been undertaken. The assets consisted of office furniture of a value of less than P400, the uncompleted
contract for the construction of the Government warehouses, and the wrecking contract. The liabilities amounted to at least
$19,645.74 Mexican currency. $9,645.74 Mexican currency of this amount represented borrowed money, and $10,000 Mexican
currency was the deposit with the naval authorities which had been confiscated and which was due the bank. McCullough's
profits on the warehouse contract amounted to almost enough to the pay the amounts which the corporation had borrowed
from its members. The wrecking contract which had been broken was of no value to the corporation for the reason that the
naval authorities absolutely refused to have anything further to do with the Philippine Engineering and Construction Company.
They the naval authorities) had declined to consider the petition of the corporation for an extension in which to raise the
Spanish fleet, and had also refused to reconsider their action in confiscating the deposit. They did agree, however, that if the
defendant McCullough would organize a new association, that they would give the new concern an extension of time and
would reconsider the question of forfeiture of the amount deposited. Under these circumstances and conditions, McCullough
organized the Manila Salvage Company, sold five-sixth of this wrecking contract to the new company for $15,000 Mexican
currency and retained one-sixth as his share of the stock in the new concern. The Manila Salvage company paid to the bank the
$10,000 Mexican currency which had been borrowed to deposit with the naval authorities, and began operations. All of the
$10,000 Mexican currency so deposited was refund to the new company except P2,000. The new association failed and
McCullough, by reason of this failure, lost over $16,000 Mexican currency. These facts show that McCullough acted in good
faith in purchasing the old corporation's assets, and that he certainly paid for the same a valuable consideration.

But cancel for the plaintiff say: "The board of directors possessed only ordinary powers of administration (Article X of the
Articles of incorporation), which in no manner empowered it either to transfer or to authorize the transfer of the assets of the
company to McCullough (art. 1773, Civil Code; decisions of the supreme court of Spain of April 2, 1862, and July 8, 1903)."

Article X of the articles of incorporation above referred to provides that the board of directors shall elect the officers of the
corporation and "have under its charge the administration of the said corporation." Articles XI reads: "In all the questions with
reference to the administration of the affairs of the corporation, it shall be necessary to secure the unanimous vote of the
board of directors, and at least three of said board must be present in order to constitute a legal meeting." It will be noted that
article X statute a legal meeting." It will be noted that Article X placed the administration of the affairs of the corporation in the
hands of the board of directors. If Article XI had been omitted, it is clear that under the rules which govern business of that
character, and in view of the fact that before the plaintiff left this country and abandoned his office as director, there were only
five directors in the corporation, then three would have been sufficient to constitute a quorum and could perform all the duties
and exercise all the powers conferred upon the board under this article. It would not have been necessary to obtain the
consent of all three of such members which constituted the quorum in order that a solution affecting the administration of the
corporation should be binding, as two votes — a majority of the quorum — would have been sufficient for this purpose. (Buell
vs. Buckingham & Co., 16 Iowa, 284; 2 Kent. Com., 293; Cahill vs. Kalamazoo Mutual Insurance Company, 2 Doug. (Mich.), 124;
Sargent vs. Webster, 13 Met., 497; In re Insurance Company, 22 Wend., 591; Ex parte Wilcox, 7 Cow., 402; id., 527, note a.)
56 | P a g e

It might appear on first examination that the organizers of this corporation when they asserted the first part of Article XI
intended that no resolution affecting the administration of the affairs should be binding upon the corporation unless the
unanimous consent of the entire board was first obtained; but the reading of the last part of this same article shows clearly that
the said organizers had no such intention, for they said: "At least three of said board must be present in order to constitute a
legal meeting." Now, if three constitute a legal meeting, three were sufficient to transact business, three constituted the
quorum, and, under the above-cited authorities, two of the three would be sufficient to pass binding resolutions relating to the
administration of the corporation.

If the clause "have under in charge and administer the affairs of the corporation" refers to the ordinary business transactions of
the corporation and does not include the power to sell the corporate property and to dissolve the corporation when it becomes
insolvent — a change we admit organic and fundamental — then the majority of the stockholders in whom the ultimate and
controlling power lies must surely have the power to do so.

Article 1713 of the Civil Code reads:

An agency stated in general terms only includes acts of administration.

In order to compromise, alienate, mortgage, or execute any other act of strict ownership an express commission is
required.

This article appears in title 9, chapter 1 of the Civil Code, which deals with the character, form, and kind of agency. Now, were
the positions of Hilbert, Green, Hartigan, and McCullough that the agents within the meaning of the article above quoted when
the assets of the corporation were transferred or sold to McCullough? If so, it would appear from said article that in order to
make the sale valid, an express commission would be required. This provision of law is based upon the broad principles of
sound reason and public policy. There is a manifest impropriety in allowing the same person to act as the agent of the seller and
to become himself the buyer. In such cases, there arises so often a conflict between duty and interest. "The wise policy of the
law put the sting of a disability into the temptation, as a defensive weapon against the strength of the danger which lies in the
situation."

Hilbert, Green, and Hartigan were not only all creditors at the time the sale or transfer of the assets of the insolvent corporation
was made, but they were also directors and stockholders. In addition to being a creditor, McCullough sustained the corporation
the double relation of a stockholder and president. The plaintiff was only a stockholder. He would have been a creditor to the
extent of his unpaid salary if the corporation had been a profitable instead of a losing concern.

But as we have said when the sale or transfer under consideration took place, there were three directors present, and all voted
in favor of making this sale. It was not necessary for the president, McCullough, to vote. There was a quorum without him: a
quorum of the directors, and at the same time a majority of the stockholders.

A corporation is essential a partnership, except in form. "The directors are the trustees or managing partners, and the
stockholders are the cestui que trust and have a joint interest in all the property and effects of the corporation." (Per Walworth,
Ch., in Robinson vs. Smith, 3 Paige, 222, 232; 5 idem, 607; Slee vs. Bloom, 19 Johns., 479; Hoyt vs. Thompson, 1 Seld., 320.)

The Philippine Engineering and Construction Company was an artificial person, owning its property and necessarily acting by its
agents; and these agents were the directors. McCullough was then an agent or a trustee, and the stockholders the principal. Or
say (as corporation was insolvent) that he was an agent or trustee and the creditors were the beneficiaries. This being the true
relation, then the rules of the law (art. 1713 of the Civil Code) applicable to sales and purchases by agents and trustees would
not apply to the purchase in question for the reason that there was a quorum without McCullough, and for the further reason
that an officer or director of a corporation, being an agent of an artificial person and having a joint interest in the corporate
property, is not such an agent as that treated of in article 1713 of the Civil Code.

Again, McCullough did not represent the corporation in this transaction. It was represented by a quorum of the board of
directors, who were at the same time a majority of the stockholders. Ordinarily, McCullough's duties as president were to
preside at the meetings, rule on questions of order, vote in case of a tie, etc. He could not have voted in this transaction
because there was no tie.
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The acts of Hilbert, Green, Hartigan, and McCullough in this transaction, in view of the relations which they bore to the
corporation, are subject to the most severe scrutiny. They are obliged to establish that they acted with the utmost candor and
fair dealing for the interest of the corporation, and without taint motives. We have subjected their conduct to this test, and,
under the evidence, we believe it has safely emerged from the ordeal.

Transaction which only accomplish justice, which are done in good faith and operate legal injury to no one, lack the
characteristics of fraud and are not to be upset because the relations of the parties give rise to suspicions which are
fully cleared away. (Hancock vs. Holbrook, supra.)

We therefore conclude that the sale or transfer made by the quorum of the board of directors — a majority of the stockholders
— is valid and binding upon the majority-the plaintiff. This conclusion is not in violation of the articles of incorporation of the
Philippine Engineering and Construction Company. Nor do we here announce a doctrine contrary to that announced by the
supreme court of Spain in its decisions dated April 2, 1862, and July 8, 1903.

As to the third cause of action, it is insisted: First, that the court erred in holding the defendant McCullough responsible for the
personal effects of the plaintiff; and second, that the court erred in finding that the effects left by the plaintiff were worth
P2,400.

As we have said, the plaintiff was the manager of the Philippine Engineering Company from April 1, 1902, up to January 1, 1903.
Sometimes during the previous month of December he resigned to accept a position in China, but did not leave Manila until
about January 20. He remained in Manila about twenty days after he severed his connection with the company. He lived in
rooms in the same building which was rented by the company and were the company had its offices. When he started for China
he left his personal effects in those rooms, having turned the same over to one Paulsen. Testifying on this point the plaintiff
said:

Q. To whom did you turn over these personal effects on leaving here? — A. To Mr. Paulsen.

Q. Have you demanded payment of this sum [referring to the value of his personal effects]? — A. On leaving for China
I gave Mr. Haussermann power of attorney to represent me in this case and demand payment.

Q. Please state whether or not you have an inventory of these effects. — A. I had an inventory which was in my
possession but it was lost when the company took all of the books and carried them away from the office.

Q. Can you give a list or a partial list of your effect? — A. I remember some of the items. There was a complete
bedroom set, two marble tables, one glass bookcase, chairs, all of the household effects I used when I was living in
the Botanical Garden as city engineer, one theodolite, which I bought after commencing work with the company.

Q. How much do you estimate to be the total reasonable value of these effects? — A. The total would not be less than
$1,200 gold.

Counsel for the plaintiff, on page 56 of their brief, say:

Mr. McCullough, in his testimony (pp. 39 and 40) admits full knowledge of and participation in the removal and sale of
the effects and states that he took the proceeds and considered them part of the assets of the company. He further
admits that Mr. Haussermann made a demand for the proceeds of Mr. Mead's personal effects (p. 44).

McCullough's testimony, referred by the counsel, is as follows:

Q. At the time Mr. Mead left for China, in the building where the office was and in the office, there were left some of
the personal effects of Mr. Mead. What do you know about these effects, a list of which is Exhibit B? — A. Nothing
appearing in this Exhibit B was never delivered to the Philippine Engineering and Construction Company, according to
my list.

Q. Do you know what became of these effects? — A. No, sir. I have no idea. I never saw them. I never heard these
effects talked about. I only heard something said about certain effects which Mr. Mead had in his living room.
58 | P a g e

Q. Do you know what became of the bed of Mr. Mead? — A. I know there were effects, such as a bed, washstand,
chairs, table, and other things, which are used in a living room, and that they were in Mr. Mead's room. These effects
were sent to the warehouse of the Pacific Oriental Trading Company, together with the office furniture. We had to
vacate the building where the offices were and we had to take out everything therein. These things were deposited in
the warehouse of the Pacific Oriental Trading Company and were finally sold by that company and the money turned
over to me.

Q. How much? — A. P49.97.

Q. What did you do with this money? — A. I took it and considered it part of the assets of the company. All of the
other effects of the office were sold at the same time and brought P347.16.

Q. Did Mr. Mead leave anyone in charge of his effects when he left Manila? — A. I think he left Paulsen in charge, but
Paulsen did not take these effects, so when we vacated the office we had to move them.

Q. Did Paulsen continue occupying the living room where these effects were and did he use these effects? — A. I do
not know because I was in the office for three months before we vacated.

Q. Don't you know that it is a fact that Mr. Haussermann, as representative of Mr. Mead, demanded of you and the
company the payment of the salary which was due Mr. Mead and the value of his personal effects? — A. Yes, sir.

As to the value of these personal effects, Hartigan, testifying as witness for the defendant, said:

I think the personal effects were sold for P50. His personal effects consisted of ordinary articles, such as a person
would use who had to be going from one place to another all the time, as Mr. Mead. I know that all those effects
were sold for less than P100, if I am not mistaken.

The foregoing is the material testimony with reference to the defendant McCullough's responsibility and the value of the
personal effects of the plaintiff.

McCullough was a member of the company and was responsible as such for the rents where the offices were located. The
company had no further use for the building after the plaintiff resigned. The vacating of the building was the proper thing to do.
The office furniture was removed and stored in a place where it cost nothing for rents. When Hilbert, member of the company,
went to the office to remove the company's office furniture, he found no one in charge of the plaintiff's personal effects. He
took them and stored them in the same place and later sold them, together with the office furniture, and turned the entire
amount over to defendant McCullough.

Paulsen, in whose charge Mead left his effects, apparently took no interest in caring for them. Was the company to leave
Mead's personal effects in that building and take the chances of having to continue to pay rents, solely on account of the
plaintiff's property remaining there? The company had reason to believe that it would have to continue paying these rents, as
they had rented the building and authorized the plaintiff to occupy rooms therein.

The plaintiff knew when he left for China that he would be away a long time. He had accepted a position of importance, and
which he knew would require his personal attention. He did not gather up his personal effects, but left them in the room in
charge of Paulsen. Paulsen took no interest in caring for them, but apparently left these effects to take care of them selves. The
plaintiff did not even carry with him an inventory of these effects, but attempted on the trial to give a list of them and did give a
partial list of the things he left in his room; but it is not shown that all this things were there when Herbert removed the office
furniture and some of the plaintiff's effects. The fact that the plaintiff remained in Manila some twenty days after resigning and
never cared for his own effects but left them in the possession of an irresponsible person, shows extreme negligence on his
part. He exhibited a reckless indifference to the consequences of leaving his effects in the lease premises. The law imposes on
every person the duty of using ordinary care against injury or damages. What constitutes ordinary care depends upon the
circumstances of each particular case and the danger reasonably to be apprehended.
59 | P a g e

McCullough did not have anything personally to do with these effects at any time. He only accepted the money which Herbert
turned over to him. He, personally, did not contribute in any way whatsoever to the loss of the property, neither did he as a
member of the corporation do so.

The plaintiff gave an estimate of the value of the effects which he left in his rooms and placed this value at P2,400. He did not
give a complete list of the effects so left, neither did he give the value of a single item separately. The plaintiff's testimony is so
indefinite and uncertain that i t is impossible to determine with any degree of certainty just what these personal effects
consisted of and their values, especially when we take into consideration the significant fact that these effects were abondoned
by Paulsen. On the other hand, w have before us the positive testimony of Hilbert as to the amount received for the plaintiff's
personal effects, the testimony of Hartigan that the same were sold for less than P100, and the testimony of McCullough as to
the amount turned over to him by Herbert.

So we conclude that the great preponderance of evidence as to the value of these effects is in the favor of the contention of the
defendant. Their value therefore be fixed at P49.97.

For these reasons the judgment appealed from as to the first and second causes of action is hereby affirmed. Judgment
appealed from as to the third cause of action is reduced to P49.97, without costs.
60 | P a g e
61 | P a g e

PRIME WHITE CEMENT CORPORATION, Petitioner, vs. HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO
TE, Respondents.

Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement Corporation seeking the reversal of the
decision * of the then Intermediate Appellate Court, the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in toto. 1chanrobles virtual law library

The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted, to wit:

On or about the 16th day of July, 1969, plaintiff and defendant corporation thru its President, Mr. Zosimo Falcon and Justo C.
Trazo, as Chairman of the Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff was obligated to act as
the exclusive dealer and/or distributor of the said defendant corporation of its cement products in the entire Mindanao area for
a term of five (5) years and proving (sic) among others that:

a. The corporation shall, commencing September, 1970, sell to and supply the plaintiff, as dealer with 20,000 bags (94 lbs/bag)
of white cement per month;chanrobles virtual law library

b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, per bag of white cement, FOB Davao and
Cagayan de Oro ports;chanrobles virtual law library

c. The plaintiff shall, every time the defendant corporation is ready to deliver the good, open with any bank or banking
institution a confirmed, unconditional, and irrevocable letter of credit in favor of the corporation and that upon certification by
the boat captain on the bill of lading that the goods have been loaded on board the vessel bound for Davao the said bank or
banking institution shall release the corresponding amount as payment of the goods so shipped.

Right after the plaintiff entered into the aforesaid dealership agreement, he placed an advertisement in a national, circulating
newspaper the fact of his being the exclusive dealer of the defendant corporation's white cement products in Mindanao area,
more particularly, in the Manila Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even congratulated by his
business associates, so much so, he was asked by some of his businessmen friends and close associates if they can be his
sub-dealer in the Mindanao area.chanroblesvirtualawlibrarychanrobles virtual law library

Relying heavily on the dealership agreement, plaintiff sometime in the months of September, October, and December, 1969,
entered into a written agreement with several hardware stores dealing in buying and selling white cement in the Cities of
Davao and Cagayan de Oro which would thus enable him to sell his allocation of 20,000 bags regular supply of the said
commodity, by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After the plaintiff was assured by his
supposed buyer that his allocation of 20,000 bags of white cement can be disposed of, he informed the defendant corporation
in his letter dated August 18, 1970 that he is making the necessary preparation for the opening of the requisite letter of credit
to cover the price of the due initial delivery for the month of September, 1970 (Exhibit B), looking forward to the defendant
corporation's duty to comply with the dealership agreement. In reply to the aforesaid letter of the plaintiff, the defendant
corporation thru its corporate secretary, replied that the board of directors of the said defendant decided to impose the
following conditions:

a. Delivery of white cement shall commence at the end of November, 1970;chanrobles virtual law library

b. Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered;chanrobles virtual law
library

c. The price of white cement was priced at P13.30 per bag;chanrobles virtual law library

d. The price of white cement is subject to readjustment unilaterally on the part of the defendant;chanrobles virtual law library

e. The place of delivery of white cement shall be Austurias (sic);chanrobles virtual law library
62 | P a g e

f. The letter of credit may be opened only with the Prudential Bank, Makati Branch;chanrobles virtual law library

g. Payment of white cement shall be made in advance and which payment shall be used by the defendant as guaranty in the
opening of a foreign letter of credit to cover costs and expenses in the procurement of materials in the manufacture of white
cement. (Exhibit C).

xxx xxx xxxchanrobles virtual law library

Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R, L, and N) were made by the plaintiff to the
defendant, however, defendant refused to comply with the same, and plaintiff by force of circumstances was constrained to
cancel his agreement for the supply of white cement with third parties, which were concluded in anticipation of, and pursuant
to the said dealership agreement.chanroblesvirtualawlibrarychanrobles virtual law library

Notwithstanding that the dealership agreement between the plaintiff and defendant was in force and subsisting, the defendant
corporation, in violation of, and with evident intention not to be bound by the terms and conditions thereof, entered into an
exclusive dealership agreement with a certain Napoleon Co for the marketing of white cement in Mindanao (Exhibit T) hence,
this suit. (Plaintiff's Record on Appeal, pp. 86-90). 2chanrobles virtual law library

After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of P3,302,400.00 as actual damages,
P100,000.00 as moral damages, and P10,000.00 as and for attorney's fees and costs. The appellate court affirmed the said
decision mainly on the following basis, and We quote:

There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed the dealership agreement Exhibit "A", they were the
President and Chairman of the Board, respectively, of defendant-appellant corporation. Neither is the genuineness of the said
agreement contested. As a matter of fact, it appears on the face of the contract itself that both officers were duly authorized to
enter into the said agreement and signed the same for and in behalf of the corporation. When they, therefore, entered into the
said transaction they created the impression that they were duly clothed with the authority to do so. It cannot now be said that
the disputed agreement which possesses all the essential requisites of a valid contract was never intended to bind the
corporation as this avoidance is barred by the principle of estoppel. 3chanrobles virtual law library

In this petition for review, petitioner Prime White Cement Corporation made the following assignment of errors. 4

Ichanrobles virtual law library

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE UNPRECEDENTED DEPARTURES FROM THE
CODIFIED PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION ONLY
WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS.

IIchanrobles virtual law library

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED
JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERS OF THE CORPORATION.

IIIchanrobles virtual law library

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE, PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL
CODE.

IVchanrobles virtual law library

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE
AS TO WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.
63 | P a g e

Vchanrobles virtual law library

IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES
WITH COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE
OF JUDICIAL PROCEEDINGS.

There is only one legal issue to be resolved by this Court: whether or not the "dealership agreement" referred by the President
and Chairman of the Board of petitioner corporation is a valid and enforceable contract. We do not agree with the conclusion of
the respondent Court that it is.chanroblesvirtualawlibrarychanrobles virtual law library

Under the Corporation Law, which was then in force at the time this case arose, 5as well as under the present Corporation Code,
all corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. 6 Although it cannot
completely abdicate its power and responsibility to act for the juridical entity, the Board may expressly delegate specific powers
to its President or any of its officers. In the absence of such express delegation, a contract entered into by its President, on
behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. Implied
ratification may take various forms - like silence or acquiescence; by acts showing approval or adoption of the contract; or by
acceptance and retention of benefits flowing therefrom. 7 Furthermore, even in the absence of express or implied authority by
ratification, the President as such may, as a general rule, bind the corporation by a contract in the ordinary course of business,
provided the same is reasonable under the circumstances. 8 These rules are basic, but are all general and thus quite flexible.
They apply where the President or other officer, purportedly acting for the corporation, is dealing with a third person, i. e., a
person outside the corporation.chanroblesvirtualawlibrarychanrobles virtual law library

The situation is quite different where a director or officer is dealing with his own corporation. In the instant case respondent Te
was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He was
what is often referred to as a "self-dealing" director.chanroblesvirtualawlibrarychanrobles virtual law library

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. 9 In case his
interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate
managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a
matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the stockholders." 10 In the case of Gokongwei v. Securities and Exchange
Commission, this Court quoted with favor from Pepper v. Litton, 11thus:

. . . He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. . . . He cannot
utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may
not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis.
....

On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the contract is fair and
reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is
made. Section 32 of the Corporation Code provides, thus:

Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are
present:chanrobles virtual law library

1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to
constitute a quorum for such meeting;chanrobles virtual law library

2. That the vote of such director or trustee was not necessary for the approval of the contract;chanrobles virtual law library

3. That the contract is fair and reasonable under the circumstances; andchanrobles virtual law library
64 | P a g e

4. That in the case of an officer, the contract with the officer has been previously authorized by the Board of
Directors.chanroblesvirtualawlibrarychanrobles virtual law library

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and
reasonable under the circumstances.

Although the old Corporation Law which governs the instant case did not contain a similar provision, yet the cited provision
substantially incorporates well-settled principles in corporate law. 12chanrobles virtual law library

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a person
other than a director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of
the petitioner corporation changes the whole situation. First of all, We believe that the contract was neither fair nor
reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of
white cement per month, for five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a
businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in
general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner
corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14
months later. He must have known that within that period of six years, there would be a considerable rise in the price of white
cement. In fact, respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the
middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow for
an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole five years
of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would require such
a provision. In fact, this unfairness in the contract is also a basis which renders a contract entered into by the President, without
authority from the Board of Directors, void or voidable, although it may have been in the ordinary course of business. We
believe that the fixed price of P9.70 per bag for a period of five years was not fair and reasonable. Respondent Te, himself,
when he subsequently entered into contracts to resell the cement to his "new dealers" Henry Wee 13 and Gaudencio
Galang 14 stipulated as follows:

The price of white cement shall be mutually determined by us but in no case shall the same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang, on October 13, 1967. A similar
contract with Prudencio Lim was made on December 29, 1969. 15 All of these contracts were entered into soon after his
"dealership agreement" with petitioner corporation, and in each one of them he protected himself from any increase in the
market price of white cement. Yet, except for the contract with Henry Wee, the contracts were for only two years from
October, 1970. Why did he not protect the corporation in the same manner when he entered into the "dealership agreement"?
For that matter, why did the President and the Chairman of the Board not do so either? As director, specially since he was the
other party in interest, respondent Te's bounden duty was to act in such manner as not to unduly prejudice the corporation. In
the light of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the corporation; he was
attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the
"dealership agreement" or that they were fully aware of its provisions. The contract was therefore not valid and this Court
cannot allow him to reap the fruits of his disloyalty.chanroblesvirtualawlibrarychanrobles virtual law library

As a result of this action which has been proven to be without legal basis, petitioner corporation's reputation and goodwill have
been prejudiced. However, there can be no award for moral damages under Article 2217 and succeeding articles on Section 1 of
Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.chanroblesvirtualawlibrarychanrobles virtual law library

In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court dated March 30, 1984 and August 6,
1984, respectively, are hereby SET ASIDE. Private respondent Alejandro Te is hereby ordered to pay petitioner corporation the
sum of P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.chanroblesvirtualawlibrarychanrobles
virtual law library

SO ORDERED.
65 | P a g e

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners,

vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.

PANGANIBAN, J.:

Basic is the rule that a corporation has a legal personality distinct and separate from the persons and entities owning it. The
corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience,
insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or
management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the
resulting public auction by the Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMIL’s
contractual debts to respondent.

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision1 of the Court of Appeals (CA) in CA-GR CV No. 57610. The
decretal portion of the challenged Decision reads as follows:

"WHEREFORE, the judgment appealed from is hereby AFFIRMED."2

The Facts

The factual antecedents of the case are summarized by the Court of Appeals as follows:

"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly organized, existing, and
operating under the laws of the Philippines, with office and principal place of business at Nos. 794-812 Del Monte
[A]venue, Quezon City, while the defendant [herein petitioner] Philippine National Bank (herein referred to as PNB), is
a semi-government corporation duly organized, existing and operating under the laws of the Philippines, with office
and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas, the other defendant, the National Sugar
Development Corporation (NASUDECO in brief), is also a semi-government corporation and the sugar arm of the PNB,
with office and principal place of business at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the
defendant Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and operating under the
1975 laws of the Philippines, and had its business office before 1975 at Del Carmen, Floridablanca, Pampanga; that
the plaintiff is engaged in the business of general construction for the repairs and/or construction of different kinds of
machineries and buildings; that on August 26, 1975, the defendant PNB acquired the assets of the defendant
PASUMIL that were earlier foreclosed by the Development Bank of the Philippines (DBP) under LOI No. 311; that the
defendant PNB organized the defendant NASUDECO in September, 1975, to take ownership and possession of the
assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills; that prior to
October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for electrical rewinding and repair, most
of which were partially paid by the defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally,
on October 29, 1971, the plaintiff and the defendant PASUMIL entered into a contract for the plaintiff to perform the
following, to wit –

‘(a) Construction of one (1) power house building;

‘(b) Construction of three (3) reinforced concrete foundation for three (3) units 350 KW diesel engine
generating set[s];

‘(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo
generator sets;

‘(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine generating
set[s];
66 | P a g e

‘(e) Installation of turbine and diesel generating sets including transformer, switchboard, electrical wirings
and pipe provided those stated units are completely supplied with their accessories;

‘(f) Relocating of 2,400 V transmission line, demolition of all existing concrete foundation and drainage
canals, excavation, and earth fillings – all for the total amount of P543,500.00 as evidenced by a contract,
[a] xerox copy of which is hereto attached as Annex ‘A’ and made an integral part of this complaint;’

that aside from the work contract mentioned-above, the defendant PASUMIL required the plaintiff to perform extra
work, and provide electrical equipment and spare parts, such as:

‘(a) Supply of electrical devices;

‘(b) Extra mechanical works;

‘(c) Extra fabrication works;

‘(d) Supply of materials and consumable items;

‘(e) Electrical shop repair;

‘(f) Supply of parts and related works for turbine generator;

‘(g) Supply of electrical equipment for machinery;

‘(h) Supply of diesel engine parts and other related works including fabrication of parts.’

that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P250,000.00, leaving an unpaid
balance, as of June 27, 1973, amounting to P527,263.80, as shown in the Certification of the chief accountant of the
PNB, a machine copy of which is appended as Annex ‘C’ of the complaint; that out of said unpaid balance of
P527,263.80, the defendant PASUMIL made a partial payment to the plaintiff of P14,000.00, in broken amounts,
covering the period from January 5, 1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the
defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO, failed and refused to pay the
plaintiff their just, valid and demandable obligation; that the President of the NASUDECO is also the Vice-President of
the PNB, and this official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this official
to pay the outstanding obligation of the defendant PASUMIL, inasmuch as the defendant PNB and NASUDECO now
owned and possessed the assets of the defendant PASUMIL, and these defendants all benefited from the works, and
the electrical, as well as the engineering and repairs, performed by the plaintiff; that because of the failure and
refusal of the defendants to pay their just, valid, and demandable obligations, plaintiff suffered actual damages in the
total amount of P513,263.80; and that in order to recover these sums, the plaintiff was compelled to engage the
professional services of counsel, to whom the plaintiff agreed to pay a sum equivalent to 25% of the amount of the
obligation due by way of attorney’s fees. Accordingly, the plaintiff prayed that judgment be rendered against the
defendants PNB, NASUDECO, and PASUMIL, jointly and severally to wit:

‘(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual interest of 14%
from the time the obligation falls due and demandable;

‘(2) Condemning the defendants to pay attorney’s fees amounting to 25% of the amount claim;

‘(3) Ordering the defendants to pay the costs of the suit.’

"The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground that the
complaint failed to state sufficient allegations to establish a cause of action against both defendants, inasmuch as
there is lack or want of privity of contract between the plaintiff and the two defendants, the PNB and NASUDECO,
67 | P a g e

said defendants citing Article 1311 of the New Civil Code, and the case law ruling in Salonga v. Warner Barnes & Co.,
88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214.

"The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the same order, that
court directed the defendants to file their answer to the complaint within 15 days.

"In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to wit:

‘That the complaint does not state a sufficient cause of action against the defendant NASUDECO because:
(a) NASUDECO is not x x x privy to the various electrical construction jobs being sued upon by the plaintiff
under the present complaint; (b) the taking over by NASUDECO of the assets of defendant PASUMIL was
solely for the purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial law
powers of the President under the Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI No. 311)
authorized or commanded the PNB or its subsidiary corporation, the NASUDECO, to assume the corporate
obligations of PASUMIL as that being involved in the present case; and, (d) all that was mentioned by the
said letter of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or its
subsidiary corporation the NASUDECO, to make a study of, and submit [a] recommendation on the
problems concerning the same.’

"By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of the present suit, which
it [labeled] as unfounded or baseless, the defendant NASUDECO was constrained to litigate and incur litigation
expenses in the amount of P50,000.00, which plaintiff should be sentenced to pay. Accordingly, NASUDECO prayed
that the complaint be dismissed and on its counterclaim, that the plaintiff be condemned to pay P50,000.00 in
concept of attorney’s fees as well as exemplary damages.

"In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss, namely: (1) the complaint
states no cause of action against the defendant PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the
complaint and that the alleged services rendered by the plaintiff to the defendant PASUMIL upon which plaintiff’s suit
is erected, was rendered long before PNB took possession of the assets of the defendant PASUMIL under LOI No. 189-
A; (3) that the PNB take-over of the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose of
reconditioning the sugar central so that PASUMIL may resume its operations in time for the 1974-75 milling season,
and that nothing in the said LOI No. 189-A, as well as in LOI No. 311, authorized or directed PNB to assume the
corporate obligation/s of PASUMIL, let alone that for which the present action is brought; (4) that PNB’s management
and operation under LOI No. 311 did not refer to any asset of PASUMIL which the PNB had to acquire and thereafter
[manage], but only to those which were foreclosed by the DBP and were in turn redeemed by the PNB from the DBP;
(5) that conformably to LOI No. 311, on August 15, 1975, the PNB and the Development Bank of the Philippines (DBP)
entered into a ‘Redemption Agreement’ whereby DBP sold, transferred and conveyed in favor of the PNB, by way of
redemption, all its (DBP) rights and interest in and over the foreclosed real and/or personal properties of PASUMIL, as
shown in Annex ‘C’ which is made an integral part of the answer; (6) that again, conformably with LOI No. 311, PNB
pursuant to a Deed of Assignment dated October 21, 1975, conveyed, transferred, and assigned for valuable
consideration, in favor of NASUDECO, a distinct and independent corporation, all its (PNB) rights and interest in and
under the above ‘Redemption Agreement.’ This is shown in Annex ‘D’ which is also made an integral part of the
answer; [7] that as a consequence of the said Deed of Assignment, PNB on October 21, 1975 ceased to managed and
operate the above-mentioned assets of PASUMIL, which function was now actually transferred to NASUDECO. In
other words, so asserted PNB, the complaint as to PNB, had become moot and academic because of the execution of
the said Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to assume the corporate
obligations of PASUMIL, including the alleged obligation upon which this present suit was brought; and [9] that, at
most, what was granted to PNB in this respect was the authority to ‘make a study of and submit recommendation on
the problems concerning the claims of PASUMIL creditors,’ under sub-par. 5 LOI No. 311.

"In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to incur expenses in this
case, hence it is entitled to claim attorney’s fees in the amount of at least P50,000.00. Accordingly, PNB prayed that
the complaint be dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay defendant PNB the
sum of P50,000.00 as attorney’s fees, aside from exemplary damages in such amount that the court may seem just
and equitable in the premises.
68 | P a g e

"Summons by publication was made via the Philippines Daily Express, a newspaper with editorial office at 371
Bonifacio Drive, Port Area, Manila, against the defendant PASUMIL, which was thereafter declared in default as
shown in the August 7, 1981 Order issued by the Trial Court.

"After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads:

‘WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant Corporation,
Philippine National Bank (PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) and
PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally the former the
following:

‘1. The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from
September 25, 1980 until fully paid;

‘2. The sum of P102,724.76 as attorney’s fees; and,

‘3. Costs.

‘SO ORDERED.

‘Manila, Philippines, September 4, 1986.

'(SGD) ERNESTO S. TENGCO

‘Judge’"3

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a corporation to take over
and operate the business of another corporation, while disavowing or repudiating any responsibility, obligation or liability
arising therefrom.4

Hence, this Petition.5

Issues

In their Memorandum, petitioners raise the following errors for the Court’s consideration:

"I

The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid corporate debts of
PASUMIL, a corporation whose corporate existence has not been legally extinguished or terminated, simply because
of petitioners[’] take-over of the management and operation of PASUMIL pursuant to the mandates of LOI No. 189-A,
as amended by LOI No. 311.

"II

The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling enunciated in Edward J. Nell
Co. v. Pacific Farms, 15 SCRA 415."6

Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid debts of PASUMIL to
respondent.
69 | P a g e

This Court’s Ruling

The Petition is meritorious.

Main Issue:

Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of Court. 7 To this rule,
however, there are some exceptions enumerated in Fuentes v. Court of Appeals.8 After a careful scrutiny of the records and the
pleadings submitted by the parties, we find that the lower courts misappreciated the evidence presented. 9 Overlooked by the
CA were certain relevant facts that would justify a conclusion different from that reached in the assailed Decision. 10

Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because their takeover of the latter’s
foreclosed assets did not make them assignees. On the other hand, respondent asserts that petitioners and PASUMIL should be
treated as one entity and, as such, jointly and severally held liable for PASUMIL’s unpaid obligation.1âwphi1.nêt

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided
the former acted in good faith and paid adequate consideration for such assets, except when any of the following
circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction
amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the
selling corporation, and (4) where the transaction is fraudulently entered into in order to escape liability for those debts. 11

Piercing the Corporate

Veil Not Warranted

A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes,
and properties expressly authorized by law or incident to its existence.12 It has a personality separate and distinct from the
persons composing it, as well as from any other legal entity to which it may be related.13 This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the
corporation is just an alter ego of a person or of another corporation.14 For reasons of public policy and in the interest of justice,
the corporate veil will justifiably be impaled15 only when it becomes a shield for fraud, illegality or inequity committed against
third persons.16

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. 17 A court should be mindful of
the milieu where it is to be applied.18 It must be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its rights.19 The wrongdoing must be clearly and convincingly
established; it cannot be presumed.20 Otherwise, an injustice that was never unintended may result from an erroneous
application.21

This Court has pierced the corporate veil to ward off a judgment credit,22 to avoid inclusion of corporate assets as part of the
estate of the decedent,23 to escape liability arising from a debt,24 or to perpetuate fraud and/or confuse legitimate
issues25 either to promote or to shield unfair objectives26 or to cover up an otherwise blatant violation of the prohibition against
forum-shopping.27 Only in these and similar instances may the veil be pierced and disregarded.28

The question of whether a corporation is a mere alter ego is one of fact.29 Piercing the veil of corporate fiction may be allowed
only if the following elements concur: (1) control -- not mere stock control, but complete domination -- not only of finances, but
of policy and business practice in respect to the transaction attacked, must have been such that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own; (2) such control must have been used by the
defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest
and an unjust act in contravention of plaintiff’s legal right; and (3) the said control and breach of duty must have proximately
caused the injury or unjust loss complained of.30
70 | P a g e

We believe that the absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First,
other than the fact that petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the
disregard of corporate personalities.31 Second, there is no evidence that their juridical personality was used to commit a fraud
or to do a wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or
instrumentality of another entity or person.32 Third, respondent was not defrauded or injured when petitioners acquired the
assets of PASUMIL.33

Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing
evidence to justify the setting aside of the separate corporate personality rule.34 However, it utterly failed to discharge this
burden;35 it failed to establish by competent evidence that petitioner’s separate corporate veil had been used to conceal fraud,
illegality or inequity.36

While we agree with respondent’s claim that the assets of the National Sugar Development Corporation (NASUDECO) can be
easily traced to PASUMIL,37 we are not convinced that the transfer of the latter’s assets to petitioners was fraudulently entered
into in order to escape liability for its debt to respondent.38

A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the assets as the
highest bidder at the public auction conducted.39 The bank was justified in foreclosing the mortgage, because the PASUMIL
account had incurred arrearages of more than 20 percent of the total outstanding obligation.40 Thus, DBP had not only a right,
but also a duty under the law to foreclose the subject properties.41

Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired PASUMIL’s assets that DBP had foreclosed and
purchased in the normal course. Petitioner bank was likewise tasked to manage temporarily the operation of such assets either
by itself or through a subsidiary corporation.44

PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6 of Act No.
3135.45 These assets were later conveyed to PNB for a consideration, the terms of which were embodied in the Redemption
Agreement.46 PNB, as successor-in-interest, stepped into the shoes of DBP as PASUMIL’s creditor.47 By way of a Deed of
Assignment,48 PNB then transferred to NASUDECO all its rights under the Redemption Agreement.

In Development Bank of the Philippines v. Court of Appeals,49 we had the occasion to resolve a similar issue. We ruled that PNB,
DBP and their transferees were not liable for Marinduque Mining’s unpaid obligations to Remington Industrial Sales
Corporation (Remington) after the two banks had foreclosed the assets of Marinduque Mining. We likewise held that
Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining to justify the piercing of the
corporate veil.

In the instant case, the CA erred in affirming the trial court’s lifting of the corporate mask.50 The CA did not point to any fact
evidencing bad faith on the part of PNB and its transferee.51 The corporate fiction was not used to defeat public convenience,
justify a wrong, protect fraud or defend crime.52 None of the foregoing exceptions was shown to exist in the present case.53 On
the contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot allow.

No Merger or Consolidation

Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by virtue of LOI Nos.
189-A and 311, which expressly authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners contend
that their takeover of the operations of PASUMIL did not involve any corporate merger or consolidation, because the latter had
never lost its separate identity as a corporation.

A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger,
on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives
and continues the combined business.54

The merger, however, does not become effective upon the mere agreement of the constituent corporations.55 Since a merger
or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there
must be an express provision of law authorizing them.56 For a valid merger or consolidation, the approval by the Securities and
71 | P a g e

Exchange Commission (SEC) of the articles of merger or consolidation is required.57 These articles must likewise be duly
approved by a majority of the respective stockholders of the constituent corporations.58

In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure
prescribed under Title IX of the Corporation Code59 was not followed.

In fact, PASUMIL’s corporate existence, as correctly found by the CA, had not been legally extinguished or terminated.60 Further,
prior to PNB’s acquisition of the foreclosed assets, PASUMIL had previously made partial payments to respondent for the
former’s obligation in the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and, from
January 5, 1974 to May 23, 1974, another P14,000.

Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent.61 LOI No. 11 explicitly
provides that PNB shall study and submit recommendations on the claims of PASUMIL’s creditors. 62 Clearly, the corporate
separateness between PASUMIL and PNB remains, despite respondent’s insistence to the contrary. 63

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement as to costs.

SO ORDERED.
72 | P a g e
73 | P a g e

ASSOCIATED BANK, petitioner,

vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.

PANGANIBAN, J.:

In a merger, does the surviving corporation have a right to enforce a contract entered into by the absorbed
company subsequent to the date of the merger agreement, but prior to the issuance of a certificate of merger by the Securities
and Exchange Commission?

The Case

This is a petition for review under Rule 45 of the Rules of Court, seeking to set aside the Decision 1 of the Court of Appeals 2 in
CA-GR CV No. 26465 promulgated on January 30, 1996, which answered the above question in the negative. The challenged
Decision reversed and set aside the October 17, 1986 Decision 3 in Civil Case No. 85-32243, promulgated by the Regional Trial
Court of Manila, Branch 48, which disposed of the controversy in favor of herein petitioner as follows: 4

WHEREFORE, judgment is hereby rendered in favor of the plaintiff Associated Bank. The defendant
Lorenzo Sarmiento, Jr. is ordered to pay plaintiff:

1. The amount of P4,689,413.63 with interest thereon at 14% per annum until fully paid;

2. The amount of P200,000.00 as and for attorney's fees; and

3. The costs of suit.

On the other hand, the Court of Appeals resolved the case in this wise: 5

WHEREFORE, premises considered, the decision appealed from, dated October 17, 1986 is REVERSED and
SET ASIDE and another judgment rendered DISMISSING plaintiff-appellee's complaint, docketed as Civil
Case No. 85-32243. There is no pronouncement as to costs.

The Facts

The undisputed factual antecedents, as narrated by the trial court and adopted by public respondent, are as follows: 6

. . . [O]n or about September 16, 1975 Associated Banking Corporation and Citizens Bank and Trust
Company merged to form just one banking corporation known as Associated Citizens Bank, the surviving
bank. On or about March 10, 1981, the Associated Citizens Bank changed its corporate name to
Associated Bank by virtue of the Amended Articles of Incorporation. On September 7, 1977, the
defendant executed in favor of Associated Bank a promissory note whereby the former undertook to pay
the latter the sum of P2,500,000.00 payable on or before March 6, 1978. As per said promissory note, the
defendant agreed to pay interest at 14% per annum, 3% per annum in the form of liquidated damages,
compounded interests, and attorney's fees, in case of litigation equivalent to 10% of the amount due. The
defendant, to date, still owes plaintiff bank the amount of P2,250,000.00 exclusive of interest and other
charges. Despite repeated demands the defendant failed to pay the amount due.

xxx xxx xxx

. . . [T]he defendant denied all the pertinent allegations in the complaint and alleged as affirmative
and[/]or special defenses that the complaint states no valid cause of action; that the plaintiff is not the
proper party in interest because the promissory note was executed in favor of Citizens Bank and Trust
74 | P a g e

Company; that the promissory note does not accurately reflect the true intention and agreement of the
parties; that terms and conditions of the promissory note are onerous and must be construed against the
creditor-payee bank; that several partial payments made in the promissory note are not properly applied;
that the present action is premature; that as compulsory counterclaim the defendant prays for attorney's
fees, moral damages and expenses of litigation.

On May 22, 1986, the defendant was declared as if in default for failure to appear at the Pre-Trial
Conference despite due notice.

A Motion to Lift Order of Default and/or Reconsideration of Order dated May 22, 1986 was filed by
defendant's counsel which was denied by the Court in [an] order dated September 16, 1986 and the
plaintiff was allowed to present its evidence before the Court ex-parte on October 16, 1986.

At the hearing before the Court ex-parte, Esteban C. Ocampo testified that . . . he is an accountant of the
Loans and Discount Department of the plaintiff bank; that as such, he supervises the accounting section
of the bank, he counterchecks all the transactions that transpired during the day and is responsible for all
the accounts and records and other things that may[ ]be assigned to the Loans and Discount Department;
that he knows the [D]efendant Lorenzo Sarmiento, Jr. because he has an outstanding loan with them as
per their records; that Lorenzo Sarmiento, Jr. executed a promissory note No. TL-2649-77 dated
September 7, 1977 in the amount of P2,500,000.00 (Exhibit A); that Associated Banking Corporation and
the Citizens Bank and Trust Company merged to form one banking corporation known as the Associated
Citizens Bank and is now known as Associated Bank by virtue of its Amended Articles of Incorporation;
that there were partial payments made but not full; that the defendant has not paid his obligation as
evidenced by the latest statement of account (Exh. B); that as per statement of account the outstanding
obligation of the defendant is P5,689,413.63 less P1,000,000.00 or P4,689,413.63 (Exh. B, B-1); that a
demand letter dated June 6, 1985 was sent by the bank thru its counsel (Exh. C) which was received by
the defendant on November 12, 1985 (Exh. C, C-1, C-2, C-3); that the defendant paid only P1,000,000.00
which is reflected in the Exhibit C.

Based on the evidence presented by petitioner, the trial court ordered Respondent Sarmiento to pay the bank his remaining
balance plus interests and attorney's fees. In his appeal, Sarmiento assigned to the trial court several errors, namely: 7

I The [trial court] erred in denying appellant's motion to dismiss appellee bank's complaint on the ground
of lack of cause of action and for being barred by prescription and laches.

II The same lower court erred in admitting plaintiff-appellee bank's amended complaint while defendant-
appellant's motion to dismiss appelle bank's original complaint and using/availing [itself of] the new
additional allegations as bases in denial of said appellant's motion and in the interpretation and
application of the agreement of merger and Section 80 of BP Blg. 68, Corporation Code of the Philippines.

III The [trial court] erred and gravely abuse[d] its discretion in rendering the two as if in default orders
dated May 22, 1986 and September 16, 1986 and in not reconsidering the same upon technical grounds
which in effect subvert the best primordial interest of substantial justice and equity.

IV The court a quo erred in issuing the orders dated May 22, 1986 and September 16, 1986 declaring
appellant as if in default due to non-appearance of appellant's attending counsel who had resigned from
the law firm and while the parties [were] negotiating for settlement of the case and after a one million
peso payment had in fact been paid to appellee bank for appellant's account at the start of such
negotiation on February 18, 1986 as act of earnest desire to settle the obligation in good faith by the
interested parties.

V The lower court erred in according credence to appellee bank's Exhibit B statement of account which
had been merely requested by its counsel during the trial and bearing date of September 30, 1986.

VI The lower court erred in accepting and giving credence to appellee bank's 27-year-old witness Esteban
C. Ocampo as of the date he testified on October 16, 1986, and therefore, he was merely an eighteen-
75 | P a g e

year-old minor when appellant supposedly incurred the foisted obligation under the subject PN No. TL-
2649-77 dated September 7, 1977, Exhibit A of appellee bank.

VII The [trial court] erred in adopting appellee bank's Exhibit B dated September 30, 1986 in its decision
given in open court on October 17, 1986 which exacted eighteen percent (18%) per annum on the foisted
principal amount of P2.5 million when the subject PN, Exhibit A, stipulated only fourteen percent (14%)
per annum and which was actually prayed for in appellee bank's original and amended complaints.

VIII The appealed decision of the lower court erred in not considering at all appellant's affirmative
defenses that (1) the subject PN No. TL-2649-77 for P2.5 million dated September 7, 1977, is merely an
accommodation pour autrui of any actual consideration to appellant himself and (2) the subject PN is a
contract of adhesion, hence, [it] needs [to] be strictly construed against appellee bank — assuming for
granted that it has the right to enforce and seek collection thereof.

IX The lower court should have at least allowed appellant the opportunity to present countervailing
evidence considering the huge amounts claimed by appellee bank (principal sum of P2.5 million which
including accrued interests, penalties and cost of litigation totaled P4,689,413.63) and appellant's
affirmative defenses — pursuant to substantial justice and equity.

The appellate court, however, found no need to tackle all the assigned errors and limited itself to the question of "whether
[herein petitioner had] established or proven a cause of action against [herein private respondent]." Accordingly,
Respondent Court held that the Associated Bank had no cause of action against Lorenzo Sarmiento Jr., since said bank was
not privy to the promissory note executed by Sarmiento in favor of Citizens Bank and Trust Company (CBTC). The court ruled
that the earlier merger between the two banks could not have vested Associated Bank with any interest arising from the
promissory note executed in favor of CBTC after such merger.

Thus, as earlier stated, Respondent Court set aside the decision of the trial court and dismissed the complaint. Petitioner
now comes to us for a reversal of this ruling. 8

Issues

In its petition, petitioner cites the following "reasons": 9

I The Court of Appeals erred in reversing the decision of the trial court and in declaring that petitioner has
no cause of action against respondent over the promissory note.

II The Court of Appeals also erred in declaring that, since the promissory note was executed in favor of
Citizens Bank and Trust Company two years after the merger between Associated Banking Corporation
and Citizens Bank and Trust Company, respondent is not liable to petitioner because there is no privity of
contract between respondent and Associated Bank.

III The Court of Appeals erred when it ruled that petitioner, despite the merger between petitioner and
Citizens Bank and Trust Company, is not a real party in interest insofar as the promissory note executed in
favor of the merger.

In a nutshell, the main issue is whether Associated Bank, the surviving corporation, may enforce the promissory note made
by private respondent in favor of CBTC, the absorbed company, after the merger agreement had been signed.

The Court's Ruling

The petition is impressed with merit.

The Main Issue:

Associated Bank Assumed
All Rights of CBTC
76 | P a g e

Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the
combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving
corporation. 10 Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs or
liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as
well as their liabilities. 11

The merger, however, does not become effective upon the mere agreement of the constituent corporations. The procedure
to be followed is prescribed under the Corporation Code. 12 Section 79 of said Code requires the approval by the Securities
and Exchange Commission (SEC) of the articles of merger which, in turn, must have been duly approved by a majority of the
respective stockholders of the constituent corporations. The same provision further states that the merger shall be effective
only upon the issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for determining
when the merged or absorbed corporation ceases to exist; and when its rights, privileges, properties as well as liabilities pass
on to the surviving corporation.

Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of Merger, 13 which Associated Banking
Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into, provided that its effectivity "shall, for all
intents and purposes, be the date when the necessary papers to carry out this [m]erger shall have been approved by the
Securities and Exchange Commission." 14 As to the transfer of the properties of CBTC to ABC, the agreement provides:

10. Upon effective date of the Merger, all rights, privileges, powers, immunities, franchises, assets and
property of [CBTC], whether real, personal or mixed, and including [CBTC's] goodwill and tradename, and
all debts due to [CBTC] on whatever act, and all other things in action belonging to [CBTC] as of the
effective date of the [m]erger shall be vested in [ABC], the SURVIVING BANK, without need of further act
or deed, unless by express requirements of law or of a government agency, any separate or specific deed
of conveyance to legally effect the transfer or assignment of any kind of property [or] asset is required, in
which case such document or deed shall be executed accordingly; and all property, rights, privileges,
powers, immunities, franchises and all appointments, designations and nominations, and all other rights
and interests of [CBTC] as trustee, executor, administrator, registrar of stocks and bonds, guardian of
estates, assignee, receiver, trustee of estates of persons mentally ill and in every other fiduciary capacity,
and all and every other interest of [CBTC] shall thereafter be effectually the property of [ABC] as they
were of [CBTC], and title to any real estate, whether by deed or otherwise, vested in [CBTC] shall not
revert or be in any way impaired by reason thereof; provided, however, that all rights of creditors and all
liens upon any property of [CBTC] shall be preserved and unimpaired and all debts, liabilities, obligations,
duties and undertakings of [CBTC], whether contractual or otherwise, expressed or implied, actual or
contingent, shall henceforth attach to [ABC] which shall be responsible therefor and may be enforced
against [ABC] to the same extent as if the same debts liabilities, obligations, duties and undertakings have
been originally incurred or contracted by [ABC], subject, however, to all rights, privileges, defenses, set-
offs and counterclaims which [CBTC] has or might have and which shall pertain to [ABC]. 15

The records do not show when the SEC approved the merger. Private respondent's theory is that it took effect on the date of
the execution of the agreement itself, which was September 16, 1975. Private respondent contends that, since he issued the
promissory note to CBTC on September 7, 1977 — two years after the merger agreement had been executed — CBTC could
not have conveyed or transferred to petitioner its interest in the said note, which was not yet in existence at the time of the
merger. Therefore, petitioner, the surviving bank, has no right to enforce the promissory note on private respondent; such
right properly pertains only to CBTC.

Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that petitioner no longer
has any interest in the promissory note. A closer perusal of the merger agreement leads to a different conclusion. The
provision quoted earlier has this other clause:

Upon the effective date of the [m]erger, all references to [CBTC] in any deed, documents, or other papers
of whatever kind or nature and wherever found shall be deemed for all intents and purposes, references
to [ABC], the SURVIVING BANK, as if such references were direct references to [ABC]. . . . 6 (Emphasis
supplied)

Thus, the fact that the promissory note was executed after the effectivity date of the merger does not militate against
petitioner. The agreement itself clearly provides that all contracts — irrespective of the date of execution — entered into in
77 | P a g e

the name of CBTC shall be understood as pertaining to the surviving bank, herein petitioner. Since, in contrast to the earlier
aforequoted provision, the latter clause no longer specifically refers only to contracts existing at the time of the merger, no
distinction should be made. The clause must have been deliberately included in the agreement in order to protect the
interests of the combining banks; specifically, to avoid giving the merger agreement a farcical interpretation aimed at
evading fulfillment of a due obligation.

Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the note shall be construed,
under the very provisions of the merger agreement, as a reference to petitioner bank, "as if such reference [was a] direct
reference to" the latter "for all intents and purposes."

No other construction can be given to the unequivocal stipulation. Being clear, plain and free of ambiguity, the provision
must be given its literal
meaning 17 and applied without a convoluted interpretation. Verba lelegis non est recedendum. 18

In light of the foregoing, the Court holds that petitioner has a valid cause of action against private respondent. Clearly, the
failure of private respondent to honor his obligation under the promissory note constitutes a violation of petitioner's right to
collect the proceeds of the loan it extended to the former.

Secondary Issues:
Prescription, Laches, Contract
Pour Autrui, Lack of Consideration

No Prescription
or Laches

Private respondent's claim that the action has prescribed, pursuant to Article 1149 of the Civil Code, is legally untenable.
Petitioner's suit for collection of a sum of money was based on a written contract and prescribes after ten years from the
time its right of action arose. 19 Sarmiento's obligation under the promissory note became due and demandable on March 6,
1978. Petitioner's complaint was instituted on August 22, 1985, before the lapse of the ten-year prescriptive period.
Definitely, petitioner still had every right to commence suit against the payor/obligor, the private respondent herein.

Neither is petitioner's action barred by laches. The principle of laches is a creation of equity, which is applied not to penalize
neglect or failure to assert a right within a reasonable time, but rather to avoid recognizing a right when to do so would
result in a clearly inequitable situation 20 or in an injustice. 21 To require private respondent to pay the remaining balance of
his loan is certainly not inequitable or unjust. What would be manifestly unjust and inequitable is his contention that CBTC is
the proper party to proceed against him despite the fact, which he himself asserts, that CBTC's corporate personality has
been dissolved by virtue of its merger with petitioner. To hold that no payee/obligee exists and to let private respondent
enjoy the fruits of his loan without liability is surely most unfair and unconscionable, amounting to unjust enrichment at the
expense of petitioner. Besides, this Court has held that the doctrine of laches is inapplicable where the claim was filed within
the prescriptive period set forth under the law. 22

No Contract
Pour Autrui

Private respondent, while not denying that he executed the promissory note in the amount of P2,500,000 in favor of CBTC,
offers the alternative defense that said note was a contract pour autrui.

A stipulation pour autrui is one in favor of a third person who may demand its fulfillment, provided he communicated his
acceptance to the obligor before its revocation. An incidental benefit or interest, which another person gains, is not
sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. 23

Florentino vs. Encarnacion Sr. 24 enumerates the requisites for such contract: (1) the stipulation in favor of a third person
must be a part of the contract, and not the contract itself; (2) the favorable stipulation should not be conditioned or
compensated by any kind of obligation; and (3) neither of the contracting parties bears the legal representation or
authorization of the third party. The "fairest test" in determining whether the third person's interest in a contract is a
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stipulation pour autrui or merely an incidental interest is to examine the intention of the parties as disclosed by their
contract. 25

We carefully and thoroughly perused the promissory note, but found no stipulation at all that would even resemble a
provision in consideration of a third person. The instrument itself does not disclose the purpose of the loan contract. It
merely lays down the terms of payment and the penalties incurred for failure to pay upon maturity. It is patently devoid of
any indication that a benefit or interest was thereby created in favor of a person other than the contracting parties. In fact,
in no part of the instrument is there any mention of a third party at all. Except for his barefaced statement, no evidence was
proffered by private respondent to support his argument. Accordingly, his contention cannot be sustained. At any rate, if
indeed the loan actually benefited a third person who undertook to repay the bank, private respondent could have availed
himself of the legal remedy of a third-party complaint. 26 That he made no effort to implead such third person proves the
hollowness of his arguments.

Consideration

Private respondent also claims that he received no consideration for the promissory note and, in support thereof, cites
petitioner's failure to submit any proof of his loan application and of his actual receipt of the amount loaned. These
arguments deserve no merit. Res ipsa loquitur. The instrument, bearing the signature of private respondent, speaks for itself.
Respondent Sarmiento has not questioned the genuineness and due execution thereof. No further proof is necessary to
show that he undertook to pay P2,500,000, plus interest, to petitioner bank on or before March 6, 1978. This he failed to do,
as testified to by petitioner's accountant. The latter presented before the trial court private respondent's statement of
account 27 as of September 30, 1986, showing an outstanding balance of P4,689,413.63 after deducting P1,000,000.00 paid
seven months earlier. Furthermore, such partial payment is equivalent to an express acknowledgment of his obligation.
Private respondent can no longer backtrack and deny his liability to petitioner bank. "A person cannot accept and reject the
same instrument." 28

WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE and the Decision of RTC-Manila, Branch 48, in Civil
Case No. 26465 is hereby REINSTATED.

SO ORDERED.
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FILIPINAS PORT SERVICES, INC., petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, PATERNO LIBOON, SEGUNDO AQUINO, JOVITO BULAY, DOMINGO
NAVOA, DELFIN BERMEJO, CELEDONIO MANCUBAT, ALBERTO MAHINAY, SR., TEODULO SILAYA, SANTOS
ARGUIDO, JUANITO LABANON, FLORENCIO MIRANTES, LUCIO BARRERA, VICENTE GILDORE, LEON FUENTES,
CASIMIRO MAGSAYO, FERNANDO MORIENTE, MATIAS ORBITA, SR., FRANCISCO PARDILLO, ILDEFONSO JUMILLA

This is a petition for clarification with prayer for preliminary injunction filed by Filipinas Port Services, Inc.
(hereinafter referred to as Filport) seeking to clarify two conflicting decisions rendered by this Court in cases
involving identical or similar parties, facts and issues.

The antecedent facts of the case are as follows:

In view of the government policy which ordained that cargo handling operations should be limited to only one
cargo handling operator-contractor for every port (under Customs Memorandum Order 28075, later on
superseded by General Ports Regulations of the Philippine Ports Authority) the different stevedoring and arrastre
corporations operating in the Port of Davao were integrated into a single dockhandlers corporation, known as the
Davao Dockhandlers, Inc., which was registered with the Securities and Exchange Commission on July 13, 1976.

Due to the late receipt of its permit to operate at the Port of Davao from the Bureau of Customs, Davao
Dockhandlers, Inc., which was subsequently renamed Filport, actually started its operation on February 16, 1977.

As a result of the merger, Section 118, Article X of the General Guidelines on The Integration of
Stevedoring/Arrastre Services (PPA Administrative Order No. 13-77) mandated Filport to draw its personnel
complements from the merging operators, as follows:

Sec. 118. Absorption of labor.—Subject to the provisions of the immediate preceding section,
and consistent with the actual operational requirements of the new management, all labor force together
with its necessary personnel complement, of the merging operators shall be absorbed by the merged or
integrated organization to constitute its labor force. (Emphasis supplied)

Thus, Filport's labor force was mostly taken from the integrating corporations, among them the private
respondents.

On February 4,1987, private respondent Paterno Liboon and 18 others filed a complaint with the Department of
Labor and Employment Regional Office in Davao City, alleging that they were employees of Filport since 1955
through 1958 up to December 31, 1986 when they retired; that they were paid retirement benefits computed
from February 16,1977 up to December 31, 1986 only; and that taking into consideration their continuous length
of service, they are entitled to be paid retirement benefits differentials from the time they started working with
the predecessors of Filport up to the time they were absorbed by the latter in 1977 (p. 15, Rollo).

Finding Filport a mere alter ego of the different integrating corporations, the Labor Arbiter held Filport liable for
retirement benefits due private respondents for services rendered prior to February 16, 1977. Said decision was
affirmed by the NLRC on appeal.

Filport filed a petition for certiorari with the Supreme Court docketed as G.R. No. 85704, claiming that it is an
entirely new corporation with a separate juridical personality from the integrating corporations; and that Filport is
not a successor-employer, liable for the obligations of private respondents' previous employers, as shown clearly
in the memorandum dated November 21,1978 of PPA Assistant General Manager Maximo S. Dumlao, Jr., to wit:

21 November 1978
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MEMORANDUM

TO: The Officer-in-Charge

PMU Davao

FROM: The AGM for Operations

SUBJECT: Clarification of Sec. 116 of PPA Administrative

Order No. 13-77 of New Organization's Liability.

In reply to your telegram dated November 16, 1978, Sec. 116 of PPA Administrative Order #13-77 is hereby quoted
for clarification:

New Organization's Liability—The integrated cargo-handling organization shall be absolutely free from any liability
or obligation of the merging operators who shall continue to be individually liable for their respective liabilities or
obligations, if any. (emphasis supplied) ...

xxx xxx xxx

The new organization's liability shall be the payment of salaries, benefits and all other money due the employee as
a result of his employment, starting on the date of his service in the newly integrated organization.

In answer to your query, therefore, the absorption of an employee into a newly integrated organization does not
include the carry over of his length of service.

s/t MAXIMO S. DUMLAO, JR.

Asst. General Manager

While G.R. No. 85704 was still pending decision by this Court, Josefino Silva, another employee of Filport,
instituted a suit against Filport and Damasticor (one of the defunct stevedoring firms) claiming for retirement
benefits for services rendered prior to February 19, 1977. The labor arbiter found for Josefino Silva and said
decision was affirmed by the NLRC.

Filport filed a petition for certiorari with the Supreme Court docketed as G.R. No. 86026. On August 31, 1989, this
Court, through the First Division, rendered a decision, holding that:

Petitioner (Filport) cannot be held liable for the payment of the retirement pay of private respondent (Josefino
Silva) while in the employ of DAMASTICOR ... who is held responsible for the same as the labor contract is in
personam and cannot be passed on to the petitioner." (Rollo, p. 7)

In so ruling, the First Division relied heavily on the case of Fernando v. Angat Labor Union (5 SCRA 248) where it
was held that unless expressly assumed, labor contracts are not enforceable against a transferee of an enterprise
labor contracts being in personam.

Per entry of judgment, the aforesaid decision became final and executory on November 24, 1989 (p. 87, Rollo).

On September 3, 1990, however, this Court, through the Second Division, dismissed the petition in G.R. No. 85704
"for failure to sufficiently show that the questioned judgment is tainted with grave abuse of discretion."
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Per entry of judgment, said resolution became final and executory on December 4, 1 990 (p. 108, Rollo).

Hence, the instant petition for clarification with prayer for preliminary injunction to enjoin the respondents from
enforcing the decision in G.R. No. 85704 until further orders of this Court.

We see no reason to disturb the findings of fact of the public respondent, supported as they are by substantial
evidence in the light of the well established principle that findings of administrative agencies which have acquired
expertise because their jurisdiction is confined to specific matters are generally accorded not only respect but at
times even finality, and that judicial review by this Court on labor cases does not go so far as to evaluate the
sufficiency of the evidence upon which the Labor Arbiter and the NLRC based their determinations but are limited
to issues of jurisdiction or grave abuse of discretion. (National Federation of Labor Union v. Ople, 143 SCRA 129).

In the case filed by private respondent Paterno Liboon et al against Filport, the findings of the NLRC in its
November 27, 1987 decision are categorical:

In resolving the issues, the Labor Arbiter concludes as follows:

The eventual incorporation of the arrastre/stevedoring firms and their subsequent registration with the
Securities and Exchange Commission on July 13, 1975 brought to the fore the interlocking ownership of
the new corporation.

xxx xxx xxx

Subsequent amendment of its Articles of Incorporation highlighted by the renaming of the Davao
Dockhandlers, Inc. to Filipinas Port Services, Inc. did not diminish the fact that the ownership and
constituency of the new corporation are basically Identical with the previous owners.

It is, therefore, the considered view of this Office that respondent Filport being a mere alter ego of the
different merging companies has at the very least, the obligation not only to absorb into its employ
workers of the dissolved companies, but also to absorb the length of service earned by the absorbed
employees from their former employers.

xxx xxx xxx

We are in full accord with, and hereby sustain, the findings and conclusions of the Labor Arbiter. Under
the circumstances, respondent-appellant is a successor-employer. As a successor entity, it is answerable
to the lawful obligations of the predecessor employers, herein integrees. This Commission has so held
under the principle of 'substitution' that the successor firm is liable to (sic) the obligations of the
predecessor employer, notwithstanding the change in management or even personality, of the new
contracting employer." (Lakas Ng Manggagawang Filipino (LAKAS] v. Tarlac Electrical Cooperative, Inc. et
al., NLRC Case No. RB III-1 57-75, January 28,1978, En Banc). ... The Supreme Court earlier upheld the
"Substitutionary" doctrine in the case of Benguet Consolidated, Inc. vs. BOI Employees & Workers Union,
(G.R. L-24711, April 30, 1968, 23 SCRA 465). (pp. 35 & 37, Rollo)

Said findings were reiterated in the case filed by Josefino Silva against Filport where the NLRC, in its decision dated
January 19, 1988, further ruled that:

... As We have ruled in the similar case involving herein appellant, the latter is deemed a survivor entity
because it continued in an essentially unchanged manner the business operators of the predecessor
arrastre and port service operators, hiring substantially the same workers, including herein appellee, of
the integree predecessors, using substantially the same facilities, with similar working conditions and line
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of business, and employing the same corporate control, although under a new management and
corporate personality. (G.R. No. 86026, p. 35, Rollo)

Thus, granting that Filport had no contract whatsoever with the private respondents regarding the services
rendered by them prior to February 16, 1977, by the fact of the merger, a succession of employment rights and
obligations had occurred between Filport and the private respondents. The law enforced at the time of the merger
was Section 3 of Act No. 2772 which took effect on March 6, 1918. Said law provides:

Sec. 3. Upon the perfecting, as aforesaid, of a consolidation made in the manner herein provided, the
several corporations parties thereto shall be deemed and taken as one corporation, upon the terms and
conditions set forth in said agreement; or, upon the perfecting of a merger, the corporation merged shall
be deemed and taken as absorbed by the other corporation and incorporated in it; and all and singular
rights, privileges, and franchises of each of said corporations, and all property, real and personal, and all
debts due on whatever account, belonging to each of such corporations, shall be taken and deemed as
transferred to and vested in the new corporation formed by the consolidation, or in the surviving
corporation in case of merger, without further act or deed; and the title to real estate, either by deed or
otherwise, under the laws of the Philippine Islands vested in either corporation, shall not be deemed in
any way impaired by reason of this Act: Provided, however, That the rights of creditors and all liens upon
the property of either of said corporations shall be preserved unimpaired; and all debts liabilities, and
duties of said corporations shall thenceforth attach to the new corporation in case of a consolidation, or
to the surviving corporation in case of a merger, and be enforced against said new corporation or
surviving corporation as if said debts, liabilities, and duties had been incurred or contracted by it.

As earlier stated, it was mandated that Filport shall absorb all labor force and necessary personnel complement of
the merging operators, thus, clearly indicating the intention to continue the employer-employee relationships of
the individual companies with its employees through Filport.

The alleged memorandum of the PPA Assistant General Manager exonerating Filport from any liability arising from
and as a result of the merger is contrary to public policy and is violative of the workers' right to security of tenure.
Said memorandum was issued in response to a query of the PMU Officer-in-Charge and was not even published
nor made known to the workers who came to know of its existence only at the hearing before the NLRC. (G.R. No.
86026, pp. 93-94, Rollo)

The principle involved in the case cited by the First Division (Fernando v. Angat Labor Union [supra]) applies only
when the transferee is an entirely new corporation with a distinct personality from the integrating firms and NOT
where the transferee was found to be merely an alter ego of the different merging firms, as in this
case.1âwphi1 Thus, Filport has the obligation not only to absorb the workers of the dissolved companies but also
to include the length of service earned by the absorbed employees with their former employees as well. To rule
otherwise would be manifestly less than fair, certainly, less than just and equitable.

Finally, to deny the private respondents the fruits of their labor corresponding to the time they worked with their
previous employers would render at naught the constitutional provisions on labor protection. In interpreting the
protection to labor and social justice provisions of the Constitution and the labor laws, and rules and regulations
implementing the constitutional mandate, the Supreme Court has always adopted the liberal approach which
favors the exercise of labor rights. (EuroLinea Phils., Inc. v. NLRC, 156 SCRA 83).

WHEREFORE, the Resolution of the Second Division of this Court in G.R. No. 85704 dated September 3, 1990 is
hereby REITERATED.
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