FIRST DIVISION
[G.R. No. 152542. July 8, 2004.]
MONFORT HERMANOS AGRICULTURAL DEVELOPMENT
CORPORATION, as represented by MA. ANTONIA M.
SALVATIERRA, petitioner, vs. ANTONIO B. MONFORT III, MA.
LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT,
ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ, EMILY
FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R.
PAYLADO, JOSE MARTIN M. RODRIGUEZ and COURT OF
APPEALS, respondents.
[G.R. No. 155472. July 8, 2004.]
ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON,
ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS
M. RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ,
ENCARNACION CECILIA R. PAYLADO, JOSE MARTIN M.
RODRIGUEZ, petitioners, vs. HON. COURT OF APPEALS,
MONFORT HERMANOS AGRICULTURAL DEVELOPMENT
CORPORATION, as represented by MA. ANTONIA M.
SALVATIERRA, and RAMON H. MONFORT, respondents.
Leon G. Moya, Jr. for Monfort Hermanos Agricultural Dev't Corp.
The Law Firm of Mirano Mirano & Mirano for A. Monfort III, et al.
SYNOPSIS
The case at bar involved the issue of capacity to sue of the officers
of the corporation who filed a complaint for forcible entry and
replevin on behalf of the corporation. The petition in G.R. No.
152542 assailed the decision of the Court of Appeals which ruled
that Ma. Antonia M. Salvatierra, President of Monfort Hermanos
Agricultural Development Corporation, had no legal capacity to
represent the corporation in the forcible entry case before the
Municipal Trial Court of Cadiz City. On the other hand, the petition
in G.R. No. 155472 sought to set aside the Decision of the Court of
Appeals where it refused to address, on jurisdictional
considerations, the issue of Ma. Antonia M. Salvatierra's capacity
to file a complaint for replevin on behalf of the corporation before
the Regional Trial Court of Cadiz City. The group of Antonio Monfort
III claimed that the March 31, 1997 Board Resolution authorizing
Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent
the corporation was void because the purported Members of the
Board who passed the same were not validly elected officers of the
corporation.
A corporation has no power except those expressly conferred on it
by the Corporation Code and those that are implied or incidental to
its existence. In turn, a corporation exercises said powers through
its board of directors and/or its duly authorized officers and agents.
Thus, it has been observed that the power of a corporation to sue
and be sued in any court is lodged with the board of directors that
exercises its corporate powers. Corollary thereto, corporations are
required under Section 26 of the Corporation Code to submit to the
SEC within thirty days after the election the names, nationalities and
residences of the elected directors, trustees and officers of the
Corporation. In the instant case, four of the six signatories to the
March 31, 1997 Board Resolution authorizing Ma. Antonia M.
Salvatierra and/or Ramon H. Monfort to represent the corporation
did not appear in the 1996 General Information Sheet submitted by
the corporation with the SEC. The said four Directors were allegedly
elected on October 16, 1996 but the SEC was informed thereof
more than two years later, or on November 11, 1998. The
corporation even failed to prove that the October 16, 1996 Minutes
was submitted to the SEC. In fact, the 1997 General Information
Sheet submitted by the corporation does not reflect the names of
the said four Directors. There is thus a doubt as to whether the four
signatories were indeed duly elected Members of the Board legally
constituted to bring suit in behalf of the Corporation.
SYLLABUS
1. COMMERCIAL LAW; CORPORATION LAW;
CORPORATIONS; POWER THEREOF TO SUE AND BE SUED IN
ANY COURT IS LODGED WITH THE BOARD OF DIRECTORS;
CASE AT BAR. — A corporation has no power except those
expressly conferred on it by the Corporation Code and those that
are implied or incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly
authorized officers and agents. Thus, it has been observed that the
power of a corporation to sue and be sued in any court is lodged
with the board of directors that exercises its corporate powers. In
turn, physical acts of the corporation, like the signing of documents,
can be performed only by natural persons duly authorized for the
purpose by corporate by-laws or by a specific act of the board of
directors.
2. ID.; ID.; ID.; REQUIRED TO SUBMIT TO THE
SECURITIES AND EXCHANGE COMMISSION A GENERAL
INFORMATION SHEET WITHIN THIRTY DAYS FOLLOWING
THE DATE OF THE ANNUAL STOCKHOLDER'S MEETING;
CASE AT BAR. — Corollary thereto, corporations are required
under Section 26 of the Corporation Code to submit to the SEC
within thirty (30) days after the election the names, nationalities and
residences of the elected directors, trustees and officers of the
Corporation. In the instant case, the six signatories to the March 31,
1997 Board Resolution authorizing Ma. Antonia M. Salvatierra
and/or Ramon H. Monfort to represent the Corporation, were: Ma.
Antonia M. Salvatierra, President; Ramon H. Monfort, Executive
Vice President; Directors Paul M. Monfort, Yvete M. Benedicto and
Jaqueline M. Yusay; and Ester S. Monfort, Secretary. However, the
names of the last four (4) signatories to the said Board Resolution
do not appear in the 1996 General Information Sheet submitted by
the Corporation with the SEC. Under said General Information
Sheet the composition of the Board is as follows: 1. Ma. Antonia M.
Salvatierra (Chairman); 2. Ramon H. Monfort (Member); 3. Antonio
H. Monfort, Jr., (Member); 4. Joaquin H. Monfort (Member); 5.
Francisco H. Monfort (Member) and 6. Jesus Antonio H. Monfort
(Member). There is thus a doubt as to whether Paul M. Monfort,
Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were
indeed duly elected Members of the Board legally constituted to
bring suit in behalf of the Corporation.
3. ID.; ID.; ID.; MANDATED TO INFORM THE SECURITIES
AND EXCHANGE COMMISSION FIFTEEN DAYS AFTER THE
DEATH, RESIGNATION OR CESSATION OF OFFICE OF ANY OF
ITS DIRECTORS, TRUSTEES OR OFFICERS. — In the case at
bar, the fact that four of the six Members of the Board listed in the
1996 General Information Sheet are already dead at the time the
March 31, 1997 Board Resolution was issued, does not
automatically make the four signatories (i.e., Paul M. Monfort, Yvete
M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said
Board Resolution (whose name do not appear in the 1996 General
Information Sheet) as among the incumbent Members of the Board.
This is because it was not established that they were duly elected
to replace the said deceased Board Members. To correct the
alleged error in the General Information Sheet, the retained
accountant of the Corporation informed the SEC in its November
11, 1998 letter that the non-inclusion of the lawfully elected directors
in the 1996 General Information Sheet was attributable to its
oversight and not the fault of the Corporation. This belated attempt,
however, did not erase the doubt as to whether an election was
indeed held. As previously stated, a corporation is mandated to
inform the SEC of the names and the change in the composition of
its officers and board of directors within 30 days after election if one
was held, or 15 days after the death, resignation or cessation of
office of any of its director, trustee or officer if any of them died,
resigned or in any manner, ceased to hold office. This, the
Corporation failed to do. The alleged election of the directors and
officers who signed the March 31, 1997 Board Resolution was held
on October 16, 1996, but the SEC was informed thereof more than
two years later, or on November 11, 1998. The 4 Directors
appearing in the 1996 General Information Sheet died between the
years 1984–1987, but the records do not show if such demise was
reported to the SEC.
4. ID.; ID.; ID.; ONLY LAWFULLY ELECTED MEMBERS OF
THE BOARD CAN CONFER VALID AUTHORITY FOR ANOTHER
TO SUE ON BEHALF OF THE CORPORATION. — What further
militates against the purported election of those who signed the
March 31, 1997 Board Resolution was the belated submission of
the alleged Minutes of the October 16, 1996 meeting where the
questioned officers were elected. The issue of legal capacity of Ma.
Antonia M. Salvatierra was raised before the lower court by the
group of Antonio Monfort III as early as 1997, but the Minutes of
said October 16, 1996 meeting was presented by the Corporation
only in its September 29, 1999 Comment before the Court of
Appeals. Moreover, the Corporation failed to prove that the same
October 16, 1996 Minutes was submitted to the SEC. In fact, the
1997 General Information Sheet submitted by the Corporation does
not reflect the names of the 4 Directors claimed to be elected on
October 16, 1996. Considering the foregoing, we find that Ma.
Antonia M. Salvatierra failed to prove that four of those who
authorized her to represent the Corporation were the lawfully
elected Members of the Board of the Corporation. As such, they
cannot confer valid authority for her to sue on behalf of the
corporation.
DECISION
YNARES-SANTIAGO, J.:
Before the Court are consolidated petitions for review of the
decisions of the Court of Appeals in the complaints for forcible entry
and replevin filed by Monfort Hermanos Agricultural Development
Corporation (Corporation) and Ramon H. Monfort against the
children, nephews, and nieces of its original incorporators
(collectively known as "the group of Antonio Monfort III").
The petition in G.R. No. 152542, assails the October 5, 2001
Decision1 of the Special Tenth Division of the Court of Appeals in
CA-G.R. SP No. 53652, which ruled that Ma. Antonia M. Salvatierra
has no legal capacity to represent the Corporation in the forcible
entry case docketed as Civil Case No. 534-C, before the Municipal
Trial Court of Cadiz City. On the other hand, the petition in G.R. No.
155472, seeks to set aside the June 7, 2002 Decision2 rendered by
the Special Former Thirteenth Division of the Court of Appeals in
CA-G.R. SP No. 49251, where it refused to address, on
jurisdictional considerations, the issue of Ma. Antonia M.
Salvatierra's capacity to file a complaint for replevin on behalf of the
Corporation in Civil Case No. 506-C before the Regional Trial Court
of Cadiz City, Branch 60.
Monfort Hermanos Agricultural Development Corporation, a
domestic private corporation, is the registered owner of a farm,
fishpond and sugar cane plantation known as Haciendas San
Antonio II, Marapara, Pinanoag and Tinampa-an, all situated in
Cadiz City.3 It also owns one unit of motor vehicle and two units of
tractors.4 The same allowed Ramon H. Monfort, its Executive Vice
President, to breed and maintain fighting cocks in his personal
capacity at Hacienda San Antonio.5
In 1997, the group of Antonio Monfort III, through force and
intimidation, allegedly took possession of the 4 Haciendas, the
produce thereon and the motor vehicle and tractors, as well as the
fighting cocks of Ramon H. Monfort.
In G.R. No. 155472:
On April 10, 1997, the Corporation, represented by its President,
Ma. Antonia M. Salvatierra, and Ramon H. Monfort, in his personal
capacity, filed against the group of Antonio Monfort III, a
complaint6 for delivery of motor vehicle, tractors and 378 fighting
cocks, with prayer for injunction and damages, docketed as Civil
Case No. 506-C, before the Regional Trial Court of Negros
Occidental, Branch 60.
The group of Antonio Monfort III filed a motion to dismiss
contending, inter alia, that Ma. Antonia M. Salvatierra has no
capacity to sue on behalf of the Corporation because the March 31,
1997 Board Resolution7 authorizing Ma. Antonia M. Salvatierra
and/or Ramon H. Monfort to represent the Corporation is void as
the purported Members of the Board who passed the same were
not validly elected officers of the Corporation.
On May 4, 1998, the trial court denied the motion to dismiss. 8 The
group of Antonio Monfort III filed a petition for certiorari with the
Court of Appeals but the same was dismissed on June 7,
2002.9 The Special Former Thirteenth Division of the appellate
court did not resolve the validity of the March 31, 1997 Board
Resolution and the election of the officers who signed it,
ratiocinating that the determination of said question is within the
competence of the trial court.
The motion for reconsideration filed by the group of Antonio Monfort
III was denied.10 Hence, they instituted a petition for review with this
Court, docketed as G.R. No. 155472.
In G.R. No. 152542:
On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the
Corporation a complaint for forcible entry, preliminary mandatory
injunction with temporary restraining order and damages against
the group of Antonio Monfort III, before the Municipal Trial Court
(MTC) of Cadiz City.11 It contended that the latter through force and
intimidation, unlawfully took possession of the 4 Haciendas and
deprived the Corporation of the produce thereon.
In their answer,12 the group of Antonio Monfort III alleged that they
are possessing and controlling the Haciendas and harvesting the
produce therein on behalf of the corporation and not for themselves.
They likewise raised the affirmative defense of lack of legal capacity
of Ma. Antonia M. Salvatierra to sue on behalf of the Corporation.
On February 18, 1998, the MTC of Cadiz City rendered a decision
dismissing the complaint.13 On appeal, the Regional Trial Court of
Negros Occidental, Branch 60, reversed the Decision of the MTCC
and remanded the case for further proceedings. 14
Aggrieved, the group of Antonio Monfort III filed a petition for review
with the Court of Appeals. On October 5, 2001, the Special Tenth
Division set aside the judgment of the RTC and dismissed the
complaint for forcible entry for lack of capacity of Ma. Antonia M.
Salvatierra to represent the Corporation. 15 The motion for
reconsideration filed by the latter was denied by the appellate
court.16
Unfazed, the Corporation filed a petition for review with this Court,
docketed as G.R. No. 152542 which was consolidated with G.R.
No. 155472 per Resolution dated January 21, 2004. 17
The focal issue in these consolidated petitions is whether or not Ma.
Antonia M. Salvatierra has the legal capacity to sue on behalf of the
Corporation.
The group of Antonio Monfort III claims that the March 31, 1997
Board Resolution authorizing Ma. Antonia M. Salvatierra and/or
Ramon H. Monfort to represent the Corporation is void because the
purported Members of the Board who passed the same were not
validly elected officers of the Corporation.
A corporation has no power except those expressly conferred on it
by the Corporation Code and those that are implied or incidental to
its existence. In turn, a corporation exercises said powers through
its board of directors and/or its duly authorized officers and agents.
Thus, it has been observed that the power of a corporation to sue
and be sued in any court is lodged with the board of directors that
exercises its corporate powers. In turn, physical acts of the
corporation, like the signing of documents, can be performed only
by natural persons duly authorized for the purpose by corporate by-
laws or by a specific act of the board of directors.18
Corollary thereto, corporations are required under Section 26 of the
Corporation Code to submit to the SEC within thirty (30) days after
the election the names, nationalities and residences of the elected
directors, trustees and officers of the Corporation. In order to keep
stockholders and the public transacting business with domestic
corporations properly informed of their organizational operational
status, the SEC issued the following rules:
xxx xxx xxx
2. A General Information Sheet shall be filed with this
Commission within thirty (30) days following the date of
the annual stockholders' meeting. No extension of said
period shall be allowed, except for very justifiable reasons
stated in writing by the President, Secretary, Treasurer or
other officers, upon which the Commission may grant an
extension for not more than ten (10) days.
2.A. Should a director, trustee or officer die,
resign or in any manner, cease to hold office,
the corporation shall report such fact to the
Commission with fifteen (15) days after such
death, resignation or cessation of office.
3. If for any justifiable reason, the annual meeting has to
be postponed, the company should notify the Commission
in writing of such postponement.
The General Information Sheet shall state, among
others, the names of the elected directors and
officers, together with their corresponding position
title… (Emphasis supplied)
In the instant case, the six signatories to the March 31, 1997 Board
Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H.
Monfort to represent the Corporation, were: Ma. Antonia M.
Salvatierra, President; Ramon H. Monfort, Executive Vice
President; Directors Paul M. Monfort, Yvete M. Benedicto and
Jaqueline M. Yusay; and Ester S. Monfort, Secretary. 19 However,
the names of the last four (4) signatories to the said Board
Resolution do not appear in the 1996 General Information Sheet
submitted by the Corporation with the SEC. Under said General
Information Sheet the composition of the Board is as follows:
1. Ma. Antonia M. Salvatierra (Chairman);
2. Ramon H. Monfort (Member);
3. Antonio H. Monfort, Jr., (Member);
4. Joaquin H. Monfort (Member);
5. Francisco H. Monfort (Member) and
6. Jesus Antonio H. Monfort (Member).20
There is thus a doubt as to whether Paul M. Monfort, Yvete M.
Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were indeed
duly elected Members of the Board legally constituted to bring suit
in behalf of the Corporation.21
In Premium Marble Resources, Inc. v. Court of Appeals,22 the Court
was confronted with the similar issue of capacity to sue of the
officers of the corporation who filed a complaint for damages. In the
said case, we sustained the dismissal of the complaint because it
was not established that the Members of the Board who authorized
the filing of the complaint were the lawfully elected officers of the
corporation. Thus –
The only issue in this case is whether or not the filing of
the case for damages against private respondent was
authorized by a duly constituted Board of Directors of the
petitioner corporation.
Petitioner, through the first set of officers, viz., Mario
Zavalla, Oscar Gan, Lionel Pengson, Jose Ma. Silva,
Aderito Yujuico and Rodolfo Millare, presented the
Minutes of the meeting of its Board of Directors held on
April 1, 1982, as proof that the filing of the case against
private respondent was authorized by the Board. On the
other hand, the second set of officers, viz., Saturnino G.
Belen, Jr., Alberto C. Nograles and Jose L.R. Reyes,
presented a Resolution dated July 30, 1986, to show that
Premium did not authorize the filing in its behalf of any suit
against the private respondent International Corporate
Bank.
Later on, petitioner submitted its Articles of Incorporation
dated November 6, 1979 with the following as Directors:
Mario C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel
Pengson, and Jose Ma. Silva.
However, it appears from the general information sheet
and the Certification issued by the SEC on August 19,
1986 that as of March 4, 1981, the officers and members
of the board of directors of the Premium Marble
Resources, Inc. were:
Alberto C. Nograles — President/Director
Fernando D. Hilario — Vice President/Director
Augusto I. Galace — Treasurer
Jose L.R. Reyes — Secretary/Director
Pido E. Aguilar — Director
Saturnino G. Belen, Jr. — Chairman of the
Board.
While the Minutes of the Meeting of the Board on April 1,
1982 states that the newly elected officers for the year
1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and
Rodolfo Millare, petitioner failed to show proof that this
election was reported to the SEC. In fact, the last entry in
their General Information Sheet with the SEC, as of 1986
appears to be the set of officers elected in March 1981.
We agree with the finding of public respondent Court of
Appeals, that "in the absence of any board resolution from
its board of directors the [sic] authority to act for and in
behalf of the corporation, the present action must
necessarily fail. The power of the corporation to sue and
be sued in any court is lodged with the board of directors
that exercises its corporate powers. Thus, the issue of
authority and the invalidity of plaintiff-appellant's
subscription which is still pending, is a matter that is also
addressed, considering the premises, to the sound
judgment of the Securities & Exchange Commission."
By the express mandate of the Corporation Code (Section
26), all corporations duly organized pursuant thereto are
required to submit within the period therein stated (30
days) to the Securities and Exchange Commission the
names, nationalities and residences of the directors,
trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:
"Sec. 26. Report of election of directors,
trustees and officers. — Within thirty (30) days
after the election of the directors, trustees and
officers of the corporation, the secretary, or any
other officer of the corporation, shall submit to
the Securities and Exchange Commission, the
names, nationalities and residences of the
directors, trustees and officers elected. xxx"
Evidently, the objective sought to be achieved by Section
26 is to give the public information, under sanction of oath
of responsible officers, of the nature of business, financial
condition and operational status of the company together
with information on its key officers or managers so that
those dealing with it and those who intend to do business
 with it may know or have the means of knowing facts
concerning the corporation's financial resources and
business responsibility.
The claim, therefore, of petitioners as represented by Atty.
Dumadag, that Zaballa, et al., are the incumbent officers
of Premium has not been fully substantiated. In the
absence of an authority from the board of directors, no
person, not even the officers of the corporation, can
validly bind the corporation.
In the case at bar, the fact that four of the six Members of the Board
listed in the 1996 General Information Sheet23 are already dead24 at
the time the March 31, 1997 Board Resolution was issued, does not
automatically make the four signatories (i.e., Paul M. Monfort, Yvete
M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said
Board Resolution (whose name do not appear in the 1996 General
Information Sheet) as among the incumbent Members of the Board.
This is because it was not established that they were duly elected
to replace the said deceased Board Members.
To correct the alleged error in the General Information Sheet, the
retained accountant of the Corporation informed the SEC in its
November 11, 1998 letter that the non-inclusion of the lawfully
elected directors in the 1996 General Information Sheet was
attributable to its oversight and not the fault of the
Corporation.25 This belated attempt, however, did not erase the
doubt as to whether an election was indeed held. As previously
stated, a corporation is mandated to inform the SEC of the names
and the change in the composition of its officers and board of
directors within 30 days after election if one was held, or 15 days
after the death, resignation or cessation of office of any of its
director, trustee or officer if any of them died, resigned or in any
manner, ceased to hold office. This, the Corporation failed to do.
The alleged election of the directors and officers who signed the
March 31, 1997 Board Resolution was held on October 16, 1996,
but the SEC was informed thereof more than two years later, or on
November 11, 1998. The 4 Directors appearing in the 1996 General
Information Sheet died between the years 1984 – 1987,26 but the
records do not show if such demise was reported to the SEC.
WHEREFORE, in view of all the foregoing, the petition in G.R. No.
152542 is DENIED. The October 5, 2001 Decision of the Special
Tenth Division of the Court of Appeals in CA-G.R. SP No. 53652,
which set aside the August 14, 1998 Decision of the Regional Trial
Court of Negros Occidental, Branch 60 in Civil Case No. 822, is
AFFIRMED.
In G.R. No. 155472, the petition is GRANTED and the June 7, 2002
Decision rendered by the Special Former Thirteenth Division of the
Court of Appeals in CA-G.R. SP No. 49251, dismissing the petition
filed by the group of Antonio Monfort III, is REVERSED and SET
ASIDE.
The complaint for forcible entry docketed as Civil Case No. 822
before the Municipal Trial Court of Cadiz City is DISMISSED. In
Civil Case No. 506-C with the Regional Trial Court of Negros
Occidental, Branch 60, the action for delivery of personal property
filed by Monfort Hermanos Agricultural Development Corporation is
likewise DISMISSED. With respect to the action filed by Ramon H.
Monfort for the delivery of 387 fighting cocks, the Regional Trial
Court of Negros Occidental, Branch 60, is ordered to effect the
corresponding substitution of parties.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Carpio, and Azcuna,
JJ., concur.

What further militates against the purported election of those who

signed the March 31, 1997 Board Resolution was the belated
submission of the alleged Minutes of the October 16, 1996 meeting
where the questioned officers were elected. The issue of legal
capacity of Ma. Antonia M. Salvatierra was raised before the lower
court by the group of Antonio Monfort III as early as 1997, but the
Minutes of said October 16, 1996 meeting was presented by the
Corporation only in its September 29, 1999 Comment before the
Court of Appeals.27 Moreover, the Corporation failed to prove that
the same October 16, 1996 Minutes was submitted to the SEC. In
fact, the 1997 General Information Sheet28 submitted by the
Corporation does not reflect the names of the 4 Directors claimed
to be elected on October 16, 1996.

Considering the foregoing, we find that Ma. Antonia M. Salvatierra

failed to prove that four of those who authorized her to represent
the Corporation were the lawfully elected Members of the Board of
the Corporation. As such, they cannot confer valid authority for her
to sue on behalf of the corporation.

The Court notes that the complaint in Civil Case No. 506-C, for
replevin before the Regional Trial Court of Negros Occidental,
Branch 60, has 2 causes of action, i.e., unlawful detention of the
Corporation's motor vehicle and tractors, and the unlawful detention
of the of 387 fighting cocks of Ramon H. Monfort. Since Ramon
sought redress of the latter cause of action in his personal capacity,
the dismissal of the complaint for lack of capacity to sue on behalf
of the corporation should be limited only to the corporation's cause
of action for delivery of motor vehicle and tractors. In view, however,
of the demise of Ramon on June 25, 1999,29 substitution by his heirs
is proper.
 EN BANC
[G.R. No. L-23145. November 29, 1968.]
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased.
RENATO D. TAYAG, ancillary administrator-appellee, vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito & Misa for oppositor-appellant.
SYLLABUS
1. REMEDIAL LAW; SPECIAL PROCEEDINGS;
SETTLEMENT OF ESTATE; WHEN ANCILLARY
ADMINISTRATION IS PROPER. — The ancillary administration is
proper, whenever a person dies, leaving in a country other than that
of his last domicile, property to be administered in the nature of
assets of the deceased liable for his individual debts or to be
distributed among his heirs (Johannes v. Harvey, 43 Phil. 175).
Ancillary administration is necessary or the reason for such
administration is because a grant of administration does not ex
proprio vigore have any effect beyond the limits of the country in
which it is granted. Hence, an administrator appointed in a foreign
state has no authority in the Philippines.
2. ID.; ID.; ID.; SCOPE OF POWER AND AUTHORITY OF
AN ANCILLARY ADMINISTRATOR. — No one could dispute the
power of an ancillary administrator to gain control and possession
of all assets of the decedent within the jurisdiction of the Philippines.
Such a power is inherent in his duty to settle her estate and satisfy
the claims of local creditors (Rule 84, Sec. 3, Rules of Court. Cf
Pavia v. De la Rosa, 8 Phil. 70; Liwanag v. Reyes, L-19159, Sept.
29, 1964; Ignacio v. Elchico, L-18937, May 16, 1967; etc.). It is a
general rule universally recognized that administration, whether
principal or ancillary, certainly extends to the assets of a decedent
found within the state or country where it was granted, the corollary
being "that an administrator appointed in one state or country has
no power over property in another state or country" (Leon and
Ghezzi v. Manufacturers Life Ins. Co., 90 Phil. 459).
3. ID.; ID.; ID.; ID.; CASE AT BAR. — Since, in the case at
bar, there is a refusal, persistently adhered to by the domiciliary
administrator in New York, to deliver the shares of stocks of
appellant corporation owned by the decedent to the ancillary
administrator in the Philippines, there was nothing unreasonable or
arbitrary in considering them as lost and requiring the appellant to
issue new certificates in lieu thereof. Thereby, the task incumbent
under the law on the ancillary administrator could be discharged
and his responsibility fulfilled. Any other view would result in the
compliance to a valid judicial order being made to depend on the
uncontrolled discretion of a party or entity.
4. CORPORATION LAW; CORPORATIONS; CONCEPT
AND NATURE. — A corporation is an artificial being created by
operation of law (Sec. 2, Act No. 1459). A corporation as known to
Philippine jurisprudence is a creature without any existence until it
has received the imprimatur of the state acting according to law. It
is logically inconceivable therefore that it will have rights and
privileges of a higher priority than that of its creator. More than that,
it cannot legitimately refuse to yield obedience to acts of its state
organs, certainly not excluding the judiciary, whenever called upon
to do so. A corporation is not in fact and in reality a person, but the
law treats it as though it were a person by process of fiction, or by
regarding it as an artificial person distinct and separate from its
individual stockholders (1 Fletcher, Cyclopedia Corporations, pp.
19-20)
DECISION
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary
administrator, the County Trust Company of New York, United
States of America, of the estate of the deceased Idonah Slade
Perkins, who died in New York City on March 27, 1960, to surrender
to the ancillary administrator in the Philippines the stock certificates
owned by her in a Philippine corporation, Benguet Consolidated,
Inc., to satisfy the legitimate claims of local creditors, the lower
court, then presided by the Honorable Arsenio Santos, now retired,
issued on May 18, 1964, an order of this tenor: "After considering
the motion of the ancillary administrator, dated February 11, 1964,
as well as the opposition filed by the Benguet Consolidated, Inc.,
the Court hereby (1) considers as lost for all purposes in connection
with the administration and liquidation of the Philippine estate of
Idonah Slade Perkins the stock certificates covering the 33,002
shares of stock standing in her name in the books of the Benguet
Consolidated, Inc., (2) orders said certificates cancelled, and (3)
directs said corporation to issue new certificates in lieu thereof, the
same to be delivered by said corporation to either the incumbent
ancillary administrator or to the Probate Division of this Court." 1
From such an order, an appeal was taken to this Court not by the
domiciliary administrator, the County Trust Company of New York,
but by the Philippine corporation, the Benguet Consolidated, Inc.
The appeal cannot possibly prosper. The challenged order
represents a response and expresses a policy, to paraphrase
Frankfurter, arising out of a specific problem, addressed to the
attainment of specific ends by the use of specific remedies, with full
and ample support from legal doctrines of weight and significance.
The facts will explain why. As set forth in the brief of appellant
Benguet Consolidated, Inc., Idonah Slade Perkins, who died on
March 27, 1960 in New York City, left among others, two stock
certificates covering 33,002 shares of appellant, the certificates
being in the possession of the County Trust Company of New York,
which as noted, is the domiciliary administrator of the estate of the
deceased.2 Then came this portion of the appellant's brief: "On
August 12, 1960, Prospero Sanidad instituted ancillary
administration proceedings in the Court of First Instance of Manila;
Lazaro A. Marquez was appointed ancillary administrator, and on
January 22, 1963, he was substituted by the appellee Renato D.
Tayag. A dispute arose between the domiciary administrator in New
York and the ancillary administrator in the Philippines as to which
of them was entitled to the possession of the stock certificates in
question. On January 27, 1964, the Court of First Instance of Manila
ordered the domiciliary administrator, County Trust Company, to
"produce and deposit" them with the ancillary administrator or with
the Clerk of Court. The domiciliary administrator did not comply with
the order, and on February 11, 1964, the ancillary administrator
petitioned the court to "issue an order declaring the certificate or
certificates of stocks covering the 33,002 shares issued in the name
of Idonah Slade Perkins by Benguet Consolidated, Inc., be declared
[or] considered as lost."3
It is to be noted further that appellant Benguet Consolidated, Inc.
admits that "it is immaterial" as far as it is concerned as to "who is
entitled to the possession of the stock certificates in question;
appellant opposed the petition of the ancillary administrator
because the said stock certificates are in existence, they are today
in the possession of the domiciliary administrator, the County Trust
Company, in New York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock
certificates cannot be declared or considered as lost. Moreover, it
would allege that there was a failure to observe certain
requirements of its by-laws before new stock certificates could be
issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks
merit. The challenged order constitutes an emphatic affirmation of
judicial authority sought to be emasculated by the wilful conduct of
the domiciliary administrator in refusing to accord obedience to a
court decree. How, then, can this order be stigmatized as illegal?
As is true of many problems confronting the judiciary, such a
response was called for by the realities of the situation. What cannot
be ignored is that conduct bordering on wilful defiance, if it had not
actually reached it, cannot without undue loss of judicial prestige,
be condoned or tolerated. For the law is not so lacking in flexibility
and resourcefulness as to preclude such a solution, the more so as
deeper reflection would make clear its being buttressed by
indisputable principles and supported by the strongest policy
considerations.
It can truly be said then that the result arrived at upheld and
vindicated the honor of the judiciary no less than that of the country.
Through this challenged order, there is thus dispelled the
atmosphere of contingent frustration brought about by the
persistence of the domiciliary administrator to hold on to the stock
certificates after it had, as admitted, voluntarily submitted itself to
the jurisdiction of the lower court by entering its appearance through
counsel on June 27, 1963, and filing a petition for relief from a
previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality
and effectiveness to what was decreed. For without it, what it had
been decided would be set at naught and nullified. Unless such a
blatant disregard by the domiciliary administrator, with residence
abroad, of what was previously ordained by a court order could be
thus remedied, it would have entailed, insofar as this matter was
concerned, not a partial but a well-nigh complete paralysis of
judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power
of the appellee ancillary administrator to gain control and
possession of all assets of the decedent within the jurisdiction of the
Philippines. Nor could it. Such a power is inherent in his duty to
settle her estate and satisfy the claims of local creditors.5 As Justice
Tuason speaking for this Court made clear, it is a "general rule
universally recognized" that administration, whether principal or
ancillary, certainly "extends to the assets of a decedent found within
the state or country where it was granted," the corollary being "that
an administrator appointed in one state or country has no power
over property in another state or country."6
It is to be noted that the scope of the power of the ancillary
administrator was, in an earlier case, set forth by Justice Malcolm.
Thus: "It is often necessary to have more than one administration
of an estate. When a person dies intestate owning property in the
country of his domicile as well as in a foreign country, administration
is had in both countries. That which is granted in the jurisdiction of
decedent's last domicile is termed the principal administration, while
any other administration is termed the ancillary administration. The
reason for the latter is because a grant of administration does not ex
proprio vigore have any effect beyond the limits of the country in
which it is granted. Hence, an administrator appointed in a foreign
state has no authority in the [Philippines]. The ancillary
administration is proper, whenever a person dies, leaving in a
country other than that of his last domicile, property to be
administered in the nature of assets of the deceased liable for his
individual debts or to be distributed among his heirs."7
It would follow then that the authority of the probate court to require
that ancillary administrator's right to "the stock certificates covering
the 33,002 shares ... standing in her name in the books of
[appellant] Benguet Consolidated, Inc...." be respected is equally
beyond question. For appellant is a Philippine corporation owing full
allegiance and subject to the unrestricted jurisdiction of local courts.
Its shares of stock cannot therefore be considered in any wise as
immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal
Revenue8 finds application. "In the instant case, the actual situs of
the shares of stock is in the Philippines, the corporation being
domiciled [here]." To the force of the above undeniable proposition,
not even appellant is insensible. It does not dispute it. Nor could it
successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a rather
conclusive fashion for the legality of the challenged order, how does
appellant, Benguet Consolidated, Inc. propose to carry the
extremely heavy burden of persuasion of precisely demonstrating
the contrary? It would assign as the basic error allegedly committed
by the lower court its "considering as lost the stock certificates
covering 33,002 shares of Benguet belonging to the deceased
Idonah Slade Perkins, ..."9 More specifically, appellant would stress
that the "lower court could not "consider as lost" the stock
certificates in question when, as a matter of fact, his Honor the trial
Judge knew, and does know, and it is admitted by the appellee, that
the said stock certificates are in existence and are today in the
possession of the domiciliary administrator in New York."10
There may be an element of fiction in the above view of the lower
court. That certainly does not suffice to call for the reversal of the
appealed order. Since there is a refusal, persistently adhered to by
the domiciliary administrator in New York, to deliver the shares of
stocks of Appellant Corporation owned by the decedent to the
ancillary administrator in the Philippines, there was nothing
unreasonable or arbitrary in considering them as lost and requiring
the appellant to issue new certificates in lieu thereof. Thereby, the
task incumbent under the law on the ancillary administrator could
be discharged and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial
order being made to depend on the uncontrolled discretion of the
party or entity, in this case domiciled abroad, which thus far has
shown the utmost persistence in refusing to yield obedience.
Certainly, appellant would not be heard to contend in all
seriousness that a judicial decree could be treated as a mere scrap
of paper, the court issuing it being powerless to remedy its flagrant
disregard.
It may be admitted of course that such alleged loss as found by the
lower court did not correspond exactly with the facts. To be more
blunt, the quality of truth may be lacking in such a conclusion arrived
at. It is to be remembered however, again to borrow from
Frankfurter, "that fictions which the law may rely upon in the pursuit
of legitimate ends have played an important part in its
development."11
Speaking of the common law in its earlier period, Cardozo could
state fictions "were devices to advance the ends of justice, [even if]
clumsy and at times offensive."12 Some of them have persisted
even to the present, that eminent jurist, noting "the quasi contract,
the adopted child, the constructive trust, all of flourishing vitality, to
attest the empire of "as if" today."13 He likewise noted "a class of
fictions of another order, the fiction which is a working tool of
thought, but which at times hides itself from view till reflection and
analysis have brought it to the light."14
What cannot be disputed, therefore, is the at times indispensable
role that fictions as such played in the law. There should be then on
the part of the appellant a further refinement in the catholicity of its
condemnation of such judicial technique. If ever an occasion did
call for the employment of a legal fiction to put an end to the
anomalous situation of a valid judicial order being disregarded with
apparent impunity, this is it. What is thus most obvious is that this
particular alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the
above contention by its invoking one of the provisions of its by-laws
which would set forth the procedure to be followed in case of a lost,
stolen or destroyed stock certificate; it would stress that in the event
of a contest or the pendency of an action regarding ownership of
such certificate or certificates of stock allegedly lost, stolen or
destroyed, the issuance of a new certificate or certificates would
await the "final decision by [a] court regarding the ownership
[thereof]."15
Such reliance is misplaced. In the first place, there is no such
occasion to apply such by-law. It is admitted that the foreign
domiciliary administrator did not appeal from the order now in
question. Moreover, there is likewise the express admission of
appellant that as far as it is concerned, "it is immaterial ... who is
entitled to the possession of the stock certificates ..." Even if such
were not the case, it would be a legal absurdity to impart to such a
provision conclusiveness and finality. Assuming that a contrariety
exists between the above by-law and the command of a court
decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution
overrides a statute, to which, however, the judiciary must yield
deference, when appropriately invoked and deemed applicable. It
would be most highly unorthodox, however, if a corporate by-law
would be accorded such a high estate in the jural order that a court
must not only take note of it but yield to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be
saddled unless the appealed order be set aside for its inconsistency
with one of its by-laws does not impress us. Its obedience to a lawful
court order certainly constitutes a valid defense, assuming that
such apprehension of a possible court action against it could
possibly materialize. Thus far, nothing in the circumstances as they
have developed gives substance to such a fear. Gossamer
possibilities of a future prejudice to appellant do not suffice to nullify
the lawful exercise of judicial authority.
4. What is more the view adopted by appellant Benguet
Consolidated, Inc. is fraught with implications at war with the basic
postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an
artificial being created by operation of law...."16 It owes its life to the
state, its birth being purely dependent on its will. As Berle so aptly
stated: "Classically, a corporation was conceived as an artificial
person, owing its existence through creation by a sovereign
power."17 As a matter of fact, the statutory language employed
owes much to Chief Justice Marshall, who in the Dartmouth College
decision defined a corporation precisely as "an artificial being,
invisible, intangible, and existing only in contemplation of law." 18
The well-known authority Fletcher could summarize the matter
thus: "A corporation is not in fact and in reality a person, but the law
treats it as though it were a person by process of fiction, or by
regarding it as an artificial person distinct and separate from its
individual stockholders.... It owes its existence to law. It is an
artificial person created by law for certain specific purposes, the
extent of whose existence, powers and liberties is fixed by its
charter."19 Dean Pound's terse summary, a juristic person, resulting
from an association of human beings granted legal personality by
the state, puts the matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the
basic theme of which to quote from Friedmann, "is the reality of the
group as a social and legal entity, independent of state recognition
and concession."21 A corporation as known to Philippine
jurisprudence is a creature without any existence until it has
received the imprimatur of the state according to law. It is logically
inconceivable therefore that it will have rights and privileges of a
higher priority than that of its creator. More than that, it cannot
legitimately refuse to yield obedience to acts of its state organs,
certainly not excluding the judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following
American law still of persuasive authority in our jurisdiction, comes
more often within the ken of the judiciary than the other two
coordinate branches. It institutes the appropriate court action to
enforce its right. Correlatively, it is not immune from judicial control
in those instances, where a duty under the law as ascertained in an
appropriate legal proceeding is cast upon it.
To assert that it can choose which court order to follow and which
to disregard is to confer upon it not autonomy which may be
conceded but license which cannot be tolerated. It is to argue that
it may, when so minded, overrule the state, the source of its very
existence; it is to contend that what any of its governmental organs
may lawfully require could be ignored at will. So extravagant a claim
cannot possibly merit approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs, 22 it
was shown that in a guardianship proceedings then pending in a
lower court, the United States Veterans Administration filed a
motion for the refund of a certain sum of money paid to the minor
under guardianship, alleging that the lower court had previously
granted its petition to consider the deceased father as not entitled
to guerilla benefits according to a determination arrived at by its
main office in the United States. The motion was denied. In seeking
a reconsideration of such order, the Administrator relied on an
American federal statute making his decisions "final and conclusive
on all questions of law or fact" precluding any other American
official to examine the matter anew, "except a judge or judges of
the United States court."23 Reconsideration was denied, and the
Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court.
Thus: "We are of the opinion that the appeal should be rejected.
The provisions of the U.S. Code, invoked by the appellant, make
the decisions of the U.S. Veterans' Administrator final and
conclusive when made on claims property submitted to him for
resolution; but they are not applicable to the present case, where
the Administrator is not acting as a judge but as a litigant. There is
a great difference between actions against the Administrator (which
must be filed strictly in accordance with the conditions that are
imposed by the Veterans' Act, including the exclusive review by
United States courts), and those actions where the Veterans'
Administrator seeks a remedy from our courts and submits to their
jurisdiction by filing actions therein. Our attention has not been
called to any law or treaty that would make the findings of the
Veterans' Administrator, in actions where he is a party, conclusive
on our courts. That, in effect, would deprive our tribunals of judicial
discretion and render them mere subordinate instrumentalities of
the Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our judiciary
to accept as final and conclusive, determinations made by foreign
governmental agencies. It is infinitely worse if through the absence
of any coercive power by our courts over juridical persons within
our jurisdiction, the force and effectivity of their orders could be
made to depend on the whim or caprice of alien entities. It is difficult
to imagine of a situation more offensive to the dignity of the bench
or the honor of the country.
Yet that would be the effect, even if unintended, of the proposition
to which appellant Benguet Consolidated seems to be firmly
committed as shown by its failure to accept the validity of the order
complained of; it seeks its reversal. Certainly we must at all pains
see to it that it does not succeed. The deplorable consequences
attendant on appellant prevailing attest to the necessity of negative
response from us. That is what appellant will get.
That is all then that this case presents. It is obvious why the appeal
cannot succeed. It is always easy to conjure extreme and even
oppressive possibilities. That is not decisive. It does not settle the
issue. What carries weight and conviction is the result arrived at,
the just solution obtained, grounded in the soundest of legal
doctrines and distinguished by its correspondence with what a
sense of realism requires. For through the appealed order, the
imperative requirement of justice according to law is satisfied and
national dignity and honor maintained.
WHEREFORE, the appealed order of the Honorable Arsenio
Santos, the Judge of the Court of First Instance, dated May 18,
1964, is affirmed. With costs against oppositor-appelant Benguet
Consolidated, Inc.
 SECOND DIVISION
[G.R. No. 125469. October 27, 1997.]
PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE
HONORABLE COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION and PUERTO AZUL LAND, INC.,
respondents.
Berenguer & Guno Law Firm for petitioner.
Siguion Reyna, Montecillo & Ongsiako for petitioner.
Herminio F: Valerio for Puerto Azul Land, Inc.
SYNOPSIS
This is a petition for review on Certiorari, filed by herein petitioner
assailing the resolution of respondent Court of Appeals which
affirmed the decision of the Securities and Exchange Commission
(SEC) ordering petitioner Philippine Stock Exchange, Inc. (PSE), to
allow respondent Puerto Azul Land, Inc. (PALI), to be listed in its
stock market, thus paving the way for the public offering of PALI's
shares. In the challenged decision, the appellate court ruled that
SEC had both jurisdiction and authority to look into the decision of
petitioner, pursuant to Section 3 of the Revised Securities Act in
relation to Section 6(j) and 6(m) of PD No. 902-A. Thereafter,
petitioner filed the instant petition. PSE submits that respondent CA
erred in ruling that the SEC had authority to order the PSE to list
the shares of PALI in the stock exchange. Moreover, the powers of
the SEC over stock exchanges are more limited as compared to its
authority over ordinary corporations, and lastly, the powers of the
SEC over stock exchanges under the Revised Securities Act are
specifically enumerated, and these do not include the power to
reverse the decisions of the stock exchange.
The Supreme Court affirmed that the SEC is the entity with the
primary say as to whether or not securities, including shares of
stock of a corporation, may be traded or not in the stock exchange.
But this is not to say, however, that the PSE's management
prerogative are under the absolute control of the SEC. The PSE is
after all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business. Thus,
notwithstanding the regulatory power of the SEC over the PSE, and
the resultant authority to reverse the PSE's decision in matters of
application for listing in the market, the SEC may exercise such
power only if the PSE's judgment is attended by bad faith. In sum,
the Court finds that the SEC had acted arbitrarily in arrogating unto
itself the discretion of approving the application for listing in the PSE
of private respondent PALI, since this is a matter addressed to the
sound discretion of the PSE, a corporate entity whose business
judgments are respected in the absence of bad faith. On the
contrary, PSE had acted with justified circumspection. Its action in
refusing the listing of PALI in the stock exchange is justified by law
and by the circumstance attendant to this case. Accordingly, the
Court grants the petition and the challenged decisions are reversed
and set aside.
SYLLABUS
1. COMMERCIAL LAW; PHILIPPINE STOCK EXCHANGE;
FUNCTIONS THEREOF. — It is undeniable that the petitioner PSE
is not an ordinary corporation, in that although it is clothed with the
markings of a corporate entity, it functions as the primary channel
through which the vessels of capital trade ply. The PSE's relevance
to the continued operation and filtration of the securities
transactions in the country gives it a distinct color of importance
such that government intervention in its affairs becomes justified, if
not necessary. Indeed, as the only operational stock exchange in
the country today, the PSE enjoys a monopoly of securities
transactions, and as such, it yields an immense influence upon the
country's economy.
2. ID.; SECURITIES AND EXCHANGE COMMISSION;
ENTITY WITH THE PRIMARY SAY AS TO WHETHER OR NOT
SECURITIES, INCLUDING SHARES OF STOCK OF A
CORPORATION, MAY BE TRADED OR NOT IN THE STOCK
EXCHANGE. — We affirm that the SEC is the entity with the
primary say as to whether or not securities, including shares of
stock of a corporation, may be traded or not in the stock exchange.
This is in line with the SEC's mission to ensure proper compliance
with the laws, such as the Revised Securities Act and to regulate
the sale and disposition of securities in the country. . . . The role of
the SEC in our national economy cannot be minimized. The
legislature, through the Revised Securities Act, Presidential Decree
No. 902-A, and other pertinent laws, has entrusted to it the serious
responsibility of enforcing all laws affecting corporations and other
forms of associations not otherwise vested in some other
government office.
3. ID.; ID.; SECTION 3 OF PRESIDENTIAL DECREE 902-
A GRANTS SECURITIES AND EXCHANGE COMMISSION
CONTROL AUTHORITY OVER PHILIPPINE STOCKS
EXCHANGE. — Section 3 of Presidential Decree 902-A, standing
alone, is enough authority to uphold the SEC's challenged control
authority over the petitioner PSE even as it provides that "the
Commission shall have absolute jurisdiction, supervision, and
control over all corporations, partnerships or associations, who are
the grantees of primary franchises and/or a license or permit issued
by the government to operate in the Philippines. . ." The SEC's
regulatory authority over private corporations encompasses a wide
margin of areas, touching nearly all of a corporation's concerns.
This authority springs from the fact that a corporation owes its
existence to the concession of its corporate franchise from the
state. The SEC's power to look into the subject ruling of the PSE,
therefore, may be implied from or be considered as necessary or
incidental to the carrying out of the SEC's express power to insure
fair dealing in securities traded upon a stock exchange or to ensure
the fair administration of such exchange. It is likewise, observed
that the principal function of the SEC is the supervision and control
over corporations, partnerships and associations with the end in
view that investment in these entities may be encouraged and
protected, and their activities pursued for the promotion of
economic development.
4. ID.; ID.; THE REGULATORY POWER OF SECURITIES
AND EXCHANGE COMMISSION OVER PHILIPPINE STOCKS
EXCHANGE MAY EXERCISE SUCH POWER ONLY IF THE
LATTER'S JUDGMENT IS ATTENDED BY BAD FAITH. —
Notwithstanding the regulatory power of the SEC over the PSE, and
the resultant authority to reverse the PSE's decision in matters of
application for listing in the market, the SEC may exercise such
power only if the PSE's judgment is attended by bad faith. In Board
of Liquidators vs. Kalaw, it was held 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 a breach of a known duty through some motive or interest
of ill will, partaking of the nature of fraud. . . . In any case, for the
purpose of determining whether PSE acted correctly in refusing the
application of PALI, the true ownership of the properties of PALI
need not be determined as an absolute fact. What is material is that
the uncertainty of the properties' ownership and alienability exists,
and this puts to question the qualification of PALI's public offering.
In sum, the Court finds that the SEC had acted arbitrarily in
arrogating unto itself the discretion of approving the application for
listing in the PSE of the private respondent PALI, since this a matter
addressed to the sound discretion of the PSE, a corporate entity,
whose business judgments are respected in the absence of bad
faith.
5. ID.; CORPORATION CODE; THE BOARD OF
DIRECTORS IS THE BUSINESS MANAGER OF THE
CORPORATION, AND SO LONG AS IT ACTS IN GOOD FAITH,
ITS ORDERS ARE NOT REVIEWABLE BY THE COURTS. — A
corporation is but an association of individuals, allowed to transact
under an assumed corporate name, and with a distinct legal
personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such a
body. As to its corporate and management decisions, therefore, the
state will generally not interfere with the same. Questions of policy
and management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to
substitute their 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.
ESTDIA
6. CIVIL LAW; LAND TITLES AND DEEDS;
INDEFEASIBILITY OF A TORRENS TITLE DOES NOT EXTEND
TO A TRANSFEREE WHO TAKES THE CERTIFICATE OF TITLE
WITH NOTICE OF A FLAW; CASE AT BAR. — The observation
that the title of PALI over its properties is absolute and can no longer
be assailed is of no moment. At this juncture, there is the claim that
the properties were owned by TDC and MSDC and were transferred
in violation of sequestration orders, to Rebecco Panlilio and later on
to PALI, besides the claim of the Marcoses that such properties
belong to the Marcos estate, and were held only in trust by Rebecco
Panlilio. It is also alleged by the petitioner that these properties
belong to naval and forest reserves, and therefore beyond private
dominion. If any of these claims is established to be true, the
certificates of title over the subject properties now held by PALI may
be disregarded, as it is an established rule that a registration of a
certificate of title does not confer ownership over the properties
described therein to the person named as owner. The inscription in
the registry, to be effective, must be made in good faith. The
defense of indefeasibility of a Torrens Title does not extend to a
transferee who takes the certificate of title with notice of a flaw.
DECISION
TORRES, JR., J.:
The Securities and Exchange Commission is the government
agency, under the direct general supervision of the Office of the
President, 1 with the immense task of enforcing the Revised
Securities Act, and all other duties assigned to it by pertinent laws.
Among its inumerable functions, and one of the most important, is
the supervision of all corporations, partnerships or associations,
who are grantees of primary franchise and/or a license or permit
issued by the government to operate in the Philippines. 2 Just how
far this regulatory authority extends, particularly, with regard to the
Petitioner Philippine Stock Exchange, Inc. is the issue in the case
at bar.
In this Petition for Review on Certiorari, petitioner assails the
resolution of the respondent Court of Appeals, dated June 27, 1996,
which affirmed the decision of the Securities and Exchange
Commission ordering the petitioner Philippine Stock Exchange, Inc.
to allow the private respondent Puerto Azul Land, Inc. to be listed
in its stock market, thus paving the way for the public offering of
PALI's shares.
The facts of the case are undisputed, and are hereby restated in
sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate
corporation, had sought to offer its shares to the public in order to
raise funds allegedly to develop its properties and pay its loans with
several banking institutions. In January, 1995, PALI was issued a
Permit to Sell its shares to the public by the Securities and
Exchange Commission (SEC). To facilitate the trading of its shares
among investors, PALI sought to course the trading of its shares
through the Philippine Stock Exchange, Inc. (PSE), for which
purpose it filed with the said stock exchange an application to list
its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a
perusal of PALI's application, recommended to the PSE's Board of
Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application,
the Board of Governors of the PSE received a letter from the heirs
of Ferdinand E. Marcos, claiming that the late President Marcos
was the legal and beneficial owner of certain properties forming part
of the Puerto Azul Beach Hotel and Resort Complex which PALI
claims to be among its assets and that the Ternate Development
Corporation, which is among the stockholders of PALI, likewise
appears to have been held and continue to be held in trust by one
Rebecco Panlilio for then President Marcos and now, effectively for
his estate, and requested PALI's application to be deferred. PALI
was requested to comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto
Azul Beach Hotel and Resort Complex were not claimed by PALI
as its assets. On the contrary, the resort is actually owned by
Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club,
entities distinct from PALI. Furthermore, the Ternate Development
Corporation owns only 1.20% of PALI. The Marcoses responded
that their claim is not confined to the facilities forming part of the
Puerto Azul Hotel and Resort Complex, thereby implying that they
are also asserting legal and beneficial ownership of other properties
titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol
Gunigundo of the Presidential Commission on Good Government
(PCGG) requesting for comments on the letters of the PALI and the
Marcoses. On March 4, 1996, the PSE was informed that the
Marcoses received a Temporary Restraining Order on the same
date, enjoining the Marcoses from, among others, "further
impeding, obstructing, delaying or interfering in any manner by or
any means with the consideration, processing and approval by the
PSE of the initial public offering of PALI." The TRO was issued by
Judge Martin S. Villarama, Executive Judge of the RTC of Pasig
City in Civil Case No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of
Governors of the PSE reached its decision to reject PALI's
application, citing the existence of serious claims, issues and
circumstances surrounding PALI's ownership over its assets that
adversely affect the suitability of listing PALI's shares in the stock
exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the
then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's
attention the action taken by the PSE in the application of PALI for
the listing of its shares with the PSE, and requesting that the SEC,
in the exercise of its supervisory and regulatory powers over stock
exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's
action on PALI's listing application and institute such measures as
are just and proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE,
attaching thereto the letter of PALI and directing the PSE to file its
comments thereto within five days from its receipt and for its
authorized representative to appear for an "inquiry" on the matter.
On April 22, 1996, the PSE submitted a letter to the SEC containing
its comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's
decision. The dispositive portion of the said order reads:
WHEREFORE, premises considered, and
invoking the Commissioner's authority and
jurisdiction under Section 3 of the Revised
Securities Act, in conjunction with Section 3, 6(j)
and 6(m) of Presidential Decree No. 902-A, the
decision of the Board of Governors of the
Philippine Stock Exchange denying the listing of
shares of Puerto Azul Land, Inc., is hereby set
aside, and the PSE is hereby ordered to
immediately cause the listing of the PALI shares
in the Exchange, without prejudice to its
authority to require PALI to disclose such other
material information it deems necessary for the
protection of the investigating public.

This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29,
1996, which was, however denied by the Commission in its May 9,
1996 Order which states:
WHEREFORE, premises considered, the
Commission finds no compelling reason to
reconsider its order dated April 24, 1996, and in
the light of recent developments on the adverse
claim against the PALI properties, PSE should
require PALI to submit full disclosure of material
facts and information to protect the investing
public. In this regard, PALI is hereby ordered to
amend its registration statements filed with the
Commission to incorporate the full disclosure of
these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals
on May 17, 1996 a Petition for Review (with Application for Writ of
Preliminary Injunction and Temporary Restraining Order), assailing
the above mentioned orders of the SEC, submitting the following as
errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN ISSUING THE
ASSAILED ORDERS WITHOUT POWER,
JURISDICTION, OR AUTHORITY; SEC HAS NO
POWER TO ORDER THE LISTING AND SALE OF
SHARES OF PALI WHOSE ASSETS ARE
SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN FINDING THAT PSE
ACTED IN AN ARBITRARY AND ABUSIVE
MANNER IN DISAPPROVING PALI'S LISTING
APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL
AND VOID FOR ALLOWING FURTHER
DISPOSITION OF PROPERTIES IN CUSTODIA
LEGIS AND WHICH FORM PART OF
NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT
PROPERLY PROMULGATED AND ITS
IMPLEMENTATION AND APPLICATION IN THIS
CASE VIOLATES THE DUE PROCESS CLAUSE
OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review
and subsequently, a Comment and Motion to Dismiss. On June 10,
1996, PSE fled its Reply to Comment and Opposition to Motion to
Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution
dismissing the PSE's Petition for Review. Hence, this Petition by
the PSE.
The appellate court had ruled that the SEC had both jurisdiction and
authority to look into the decision of the petitioner PSE, pursuant to
Section 3 3 of the Revised Securities Act in relation to Section 6(j)
and 6(m) 4 of P.D. No. 902-A, and Section 38(b)5 of the Revised
Securities Act, and for the purpose of ensuring fair administration
of the exchange. Both as a corporation and as a stock exchange,
the petitioner is subject to public respondent's jurisdiction,
regulation and control. Accepting the argument that the public
respondent has the authority merely to supervise or regulate, would
amount to serious consequences, considering that the petitioner is
a stock exchange whose business is impressed with public interest.
Abuse is not remote if the public respondent is left without any
system of control. If the securities act vested the public respondent
with jurisdiction and control over all corporations; the power to
authorize the establishment of stock exchanges; the right to
supervise and regulate the same; and the power to alter and
supplement rules of the exchange in the listing or delisting of
securities, then the law certainly granted to the public respondent
the plenary authority over the petitioner; and the power of review
necessarily comes within its authority.
All in all, the court held that PALI complied with all the requirements
for public listing, affirming the SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary
and abusive manner in disapproving the application of
PALI for listing of its shares in the face of the following
considerations:
1. PALI has clearly and admittedly complied with the
Listing Rules and full disclosure requirements of the
Exchange;
2. In applying its clear and reasonable standards on the
suitability for listing of shares, PSE has failed to justify
why it acted differently on the application of PALI, as
compared to the IPOs of other companies similarly
situated that were allowed listing in the Exchange;
3. It appears that the claims and issues on the title to
PALI's properties were even less serious than the
claims against the assets of the other companies in
that, the assertions of the Marcoses that they are
owners of the disputed properties were not
substantiated enough to overcome the strength of a
title to properties issued under the Torrens System as
evidence of ownership thereof;
4. No action has been filed in any court of competent
jurisdiction seeking to nullify PALI's ownership over
the disputed properties, neither has the government
instituted recovery proceedings against these
properties. Yet the import of PSE's decision in denying
PALI's application is that it would be PALI, not the
Marcoses that must go to court to prove the legality of
its ownership on these properties before its shares
can be listed.
In addition, the argument that the PALI properties belong to the
Military/Naval Reservation does not inspire belief. The point is, the
PALI properties are now titled. A property losses its public character
the moment it is covered by a title. As a matter of fact, the titles
have long been settled by a final judgment; and the final decree
having been registered, they can no longer be re-opened
considering that the one year period has already passed. Lastly, the
determination of what standard to apply in allowing PALI's
application for listing, whether the discretion method or the system
of public disclosure adhered to by the SEC, should be addressed
to the Securities Commission, it being the government agency that
exercises both supervisory and regulatory authority over all
corporations.
On August 15, 19961 the PSE, after it was granted an extension,
filed the instant Petition for Review on Certiorari, taking exception
to the rulings of the SEC and the Court of Appeals. Respondent
PALI filed its Comment to the petition on October 17, 1996. On the
same date, the PCGG filed a Motion for Leave to file a Petition for
Intervention. This was followed up by the PCGG's Petition for
Intervention on October 21, 1996. A supplemental Comment was
filed by PALI on October 25, 1997. The Office of the Solicitor
General, representing the SEC and the Court of Appeals, likewise
filed its Comment on December 26, 1996. In answer to the PCGG's
motion for leave to file petition for intervention, PALI filed its
Comment thereto on January 17, 1997, whereas the PSE filed its
own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the
comments of respondent PALI (October 17, 1996) and the Solicitor
General (December 26, 1996). On May 16, 1997, PALI filed its
Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC
had authority to order the PSE to list the shares of PALI in the stock
exchange. Under presidential decree No. 902-A, the powers of the
SEC over stock exchanges are more limited as compared to its
authority over ordinary corporations. In connection with this, the
powers of the SEC over stock exchanges under the Revised
Securities Act are specifically enumerated, and these do not include
the power to reverse the decisions of the stock exchange.
Authorities are in abundance even in the United States, from which
the country's security policies are patterned, to the effect of giving
the Securities Commission less control over stock exchanges,
which in turn are given more lee-way in making the decision
whether or not to allow corporations to offer their stock to the public
through the stock exchange. This is in accord with the "business
judgment rule" whereby the SEC and the courts are barred from
intruding into business judgments of corporations, when the same
are made in good faith. the said rule precludes the reversal of the
decision of the PSE to deny PALI's listing application, absent a
showing of bad faith on the part of the PSE. Under the listing rules
of the PSE, to which PALI had previously agreed to comply, the
PSE retains the discretion to accept or reject applications for listing.
Thus, even if an issuer has complied with the PSE listing rules and
requirements, PSE retains the discretion to accept or reject the
issuer's listing application if the PSE determines that the listing shall
not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over
sequestered corporations, nor with corporations whose properties
are under sequestration. A reading of Republic of the Philippines
vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal
that the properties of PALI, which were derived from the Ternate
Development Corporation (TDC) and the Monte del Sol
Development Corporation (MSDC). are under sequestration by the
PCGG, and subject of forfeiture proceedings in the Sandiganbayan.
This ruling of the Court is the "law of the case" between the Republic
and TDC and MSDC. It categorically declares that the assets of
these corporations were sequestered by the PCGG on March 10,
1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that
PALI's ownership over its properties can no longer be questioned,
since certificates of title have been issued to PALI and more than
one year has since lapsed, is erroneous and ignores well settled
jurisprudence on land titles. That a certificate of title issued under
the Torrens System is a conclusive evidence of ownership is not an
absolute rule and admits certain exceptions. It is fundamental that
forest lands or military reservations are non-alienable. Thus, when
a title covers a forest reserve or a government reservation, such
title is void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance
on the alleged policy of "full disclosure" to uphold the listing of
PALI's shares with the PSE, in the absence of a clear mandate for
the effectivity of such policy. As it is, the case records reveal the
truth that PALI did not comply with the listing rules and disclosure
requirements. In fact, PALI's documents supporting its application
contained misrepresentations and misleading statements, and
concealed material information. The matter of sequestration of
PALI's properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALI's
application.
It is undeniable that the petitioner PSE is not an ordinary
corporation, in that although it is clothed with the markings of a
corporate entity, it functions as the primary channel through which
the vessels of capital trade ply. The PSE's relevance to the
continued operation and filtration of the securities transactions in
the country gives it a distinct color of importance such that
government intervention in its affairs becomes justified, if not
necessarily. Indeed, as the only operational stock exchange in the
country today, the PSE enjoys a monopoly of securities
transactions, and as such, it yields an immense influence upon the
country's economy.
Due to this special nature of stock exchanges, the country's
lawmakers has seen it wise to give special treatment to the
administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of
jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the special
mandate to be vigilant in the supervision of the affairs of stock
exchanges so that the interests of the investing public may be fully
safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough
authority to uphold the SEC's challenged control authority over the
petitioner PSE even as it provides that "the Commission shall have
absolute jurisdiction, supervision, and control over all corporations,
partnerships or associations, who are the grantees of primary
franchises and/or a license or permit issued by the government to
operate in the Philippines. . ." The SEC's regulatory authority over
private corporations encompasses a wide margin of areas, touching
nearly all of a corporation's concerns. This authority springs from
the fact that a corporation owes its existence to the concession of
its corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE,
therefore, may be implied from or be considered as necessary or
incidental to the carrying out of the SEC's express power to insure
fair dealing in securities traded upon a stock exchange or to ensure
the fair administration of such exchange. 7 It is, likewise, observed
that the principal function of the SEC is the supervision and control
over corporations, partnerships and associations with the end in
view that investment in these entities may be encouraged and
protected, and their activities for the promotion of economic
development. 8
Thus, it was in the alleged exercise of this authority that the SEC
reversed the decision of the PSE to deny the application for listing
in the stock exchange of the private respondent PALI. The SEC's
action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to
whether or not securities, including shares of stock of a corporation,
may be traded or not in the stock exchange. This is in line with the
SEC's mission to ensure proper compliance with the laws, such as
the Revised Securities Act and to regulate the sale and disposition
of securities in the country. 9 As the appellate court explains:
Paramount policy also supports the authority of
the public respondent to review petitioner's
denial of the listing. Being a stock exchange, the
petitioner performs a function that is vital to the
national economy, as the business is affected
with public interest. As a matter of fact, it has
often been said that the economy moves on the
basis of the rise and fall of stocks being traded.
By its economic power, the petitioner certainly
can dictate which and how many users are
allowed to sell securities thru the facilities of a
stock exchange, if allowed to interpret its own
rules liberally as it may please. Petitioner can
either allow or deny the entry to the market of
securities. To repeat, the monopoly, unless
accompanied by control, becomes subject to
abuse; hence, considering public interest, then
it should be subject to government regulation.

The role of the SEC in our national economy cannot be minimized.
The legislature, through the Revised Securities Act, Presidential
Decree No. 902-A, and other pertinent laws, has entrusted to it the
serious responsibility of enforcing all laws affecting corporations
and other forms of associations not otherwise vested in some other
government office. 10
This is not to say, however, that the PSE's management
prerogatives are under the absolute control of the SEC. The PSE
is, alter all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business. One of the
PSE's main concerns, as such, is still the generation of profit for its
stockholders. Moreover, the PSE has all the rights pertaining to
corporations, including the right to sue and be sued, to hold property
in its own name, to enter (or not to enter) into contracts with third
persons, and to perform all other legal acts within its allocated
express or implied powers.
A corporation is but an association of individuals, allowed to
transact under an assumed corporate name, and with a distinct
legal personality. In organizing itself as a collective body, it waives
no constitutional immunities and perquisites appropriate to such a
body. 11 As to its corporate and management decisions, therefore,
the state will generally not interfere with the same. Questions of
policy and of management are left to the honest decision of the
officers and directors of a corporation, and the courts are without
authority to substitute their 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. 12
Thus, notwithstanding the regulatory power of the SEC over the
PSE, and the resultant authority to reverse the PSE's decision in
matters of application for listing in the market, the SEC may
exercise such power only if the PSE's judgment is attended by bad
faith. In Board of Liquidators vs. Kalaw,13 it was held 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 a breach of a known duty through some motive or
interest of ill will, partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI,
the PSE considered important facts, which, in the general scheme,
brings to serious question the qualification of PALI to sell its shares
to the public through the stock exchange. During the time for
receiving objections to the application, the PSE heard from the
representative of the late President Ferdinand E. Marcos and his
family who claim the properties of the private respondent to be part
of the Marcos estate. In time, the PCGG confirmed this claim. In
fact, an order of sequestration has been issued covering the
properties of PALI, and suit for reconveyance to the state has been
filed in the Sandiganbayan Court. How the properties were
effectively transferred, despite the sequestration order, from the
TDC and MSDC to Rebecco Panlilio, and to the private respondent
PALI, in only a short span of time, are not yet explained to the Court,
but it is clear that such circumstances give rise to serious doubt as
to the integrity of PALI as a stock issuer. The petitioner was in the
right when it refused application of PALI, for a contrary ruling was
not to the best interest of the general public. The purpose of the
Revised Securities Act, after all, is to give adequate and effective
protection to the investing public against fraudulent
representations, or false promises, and the imposition of worthless
ventures. 14
It is to be observed that the U.S. Securities Act emphasized its
avowed protection to acts detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth
in securities" Act, was designed not only to
provide investors with adequate information
upon which to base their decisions to buy and
sell securities, but also to protect legitimate
business seeking to obtain capital through
honest presentation against competition from
crooked promoters and to prevent fraud in the
sale of securities. (Tenth Annual Report, U.S.
Securities & Exchange Commission, p. 14).
As has been pointed out, the effects of such an
act are chiefly (1) prevention of excesses and
fraudulent transactions, merely by requirement
of that their details be revealed; (2) placing the
market during the early stages of the offering of
a security a body of information, which
operating indirectly through investment services
and expert investors, will tend to produce a
more accurate appraisal of a security, . . . Thus,
the Commission may refuse to permit a
registration statement to become effective if it
appears on its face to be incomplete or
inaccurate in any material respect, and
empower the Commission to issue a stop order
suspending the effectiveness of any registration
statement which is found to include any untrue
statement of a material fact or to omit to state
any material fact required to be stated therein or
necessary to make the statements therein not
misleading. (Idem).
Also, as the primary market for securities, the PSE has established
its name and goodwill, and it has the right to protect such goodwill
by maintaining a reasonable standard of propriety in the entities
who choose to transact through its facilities. It was reasonable for
the PSE, therefore, to exercise its judgment in the manner it deems
appropriate for its business identity, as long as no rights are
trampled upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of
government absolutism is a thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute
and can no longer be assailed is of no moment. At this juncture,
there is the claim that the properties were owned by TDC and
MSDC and were transferred in violation of sequestration orders, to
Rebecco Panlilio and later on to PALI, besides the claim of the
Marcoses that such properties belong to the Marcos estate, and
were held only in trust by Rebecco Panlilio. It is also alleged by the
petitioner that these properties belong to naval and forest reserves,
and therefore beyond private dominion. If any of these claims is
established to be true, the certificates of title over the subject
properties now held by PALI map be disregarded, as it is an
established rule that a registration of a certificate of title does not
confer ownership over the properties described therein to the
person named as owner. The inscription in the registry, to be
effective, must be made in good faith. The defense of indefeasibility
of a Torrens Title does not extend to a transferee who takes the
certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted
correctly in refusing the application of PALI, the true ownership of
the properties of PALI need not be determined as an absolute fact.
What is material is that the uncertainty of the properties' ownership
and alienability exists, and this puts to question the qualification of
PALI's public offering. In sum, the Court finds that the SEC had
acted arbitrarily in arrogating unto itself the discretion of approving
the application for listing in the PSE of the private respondent PALI,
since this is a matter addressed to the sound discretion of the PSE,
a corporation entity, whose business judgments are respected in
the absence of bad faith.
The question as to what policy is, or should be relied upon in
approving the registration and sale of securities in the SEC is not
for the Court to determine, but is left to the sound discretion of the
Securities and Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in performing its other
functions under pertinent laws, the Revised Securities Act, under
Section 3 thereof, gives the SEC the power to promulgate such
rules and regulations as it may consider appropriate in the public
interest for the enforcement of the said laws. The second paragraph
of Section 4 of the said law, on the other hand, provides that no
security, unless exempt by law, shall be issued, endorsed, sold,
transferred or in any other manner conveyed to the public, unless
registered in accordance with the rules and regulations that shall be
promulgated in the public interest and for the protection of investors
by the Commission. Presidential Decree No. 902-A, on the other
hand, provides that the SEC, as regulatory agency, has supervision
and control over all corporations and over the securities market as
a whole, and as such, is given ample authority in determining
appropriate policies. Pursuant to this regulatory authority, the SEC
has manifested that it has adopted the policy of "full material
disclosure" where all companies, listed or applying for listing, are
required to divulge truthfully and accurately, all material information
about themselves and the securities they sell, for the protection of
the investing public, and under pain of administrative, criminal and
civil sanctions. In connection with this, a fact is deemed material if
it tends to induce or otherwise effect the sale or purchase of its
securities. 15 While the employment of this policy is recognized and
sanctioned by the laws, nonetheless, the Revised Securities Act
sets substantial and procedural standards which a proposed issuer
of securities must satisfy. 16 Pertinently, Section 9 of the Revised
Securities Act sets forth the possible Grounds for the Rejection of
the registration of a security:
— The Commission may reject a registration statement
and refuse to issue a permit to sell the securities included
in such registration statement if it finds that —
(1) The registration statement is on its face incomplete or
inaccurate in any material respect or includes any
untrue statement of a material fact or omits to state a
material fact required to be stated therein or
necessary to make the statements therein not
misleading; or
(2) The issuer or registrant —
(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the
provisions of this Act, or the rules promulgated
pursuant thereto, or any order of the
Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the
Commission may, in the public interest and for
the protection of investors, impose before the
security can be registered;
(iv) has been engaged or is engaged or is about to
engage in fraudulent transaction;
(v) is in any way dishonest or is not of good repute;
or
(vi) does not conduct its business in accordance with
law or is engaged in a business that is illegal or
contrary to government rules and regulations.
themselves, and of the issuer, to be determined by the Securities
and Exchange Commission. This measure was meant to protect the
interests of the investing public against fraudulent and worthless
securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The
absolute reliance on the full disclosure method in the registration of
securities is, therefore, untenable. As it is, the Court finds that the
private respondent PALI, on at least two points (nos. 1 and 5) has
failed to support the propriety of the issue of its shares with unfailing
clarity, thereby lending support to the conclusion that the PSE acted
correctly in refusing the listing of PALI in its stock exchange. This
does not discount the effectivity of whatever method the SEC, in the
exercise of its vested authority, chooses in setting the standard for
public offerings of corporations wishing to do so. However, the SEC
must recognize and implement the mandate of the law, particularly
the Revised Securities Act, the provisions of which cannot be
amended or supplanted by mere administrative issuance.
In resume, the Court finds that the PSE has acted with justified
circumspection, discounting, therefore, any imputation of
arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is justified
by the law and by the circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court
hereby GRANTS the Petition for Review on Certiorari. The
Decisions of the Court of Appeals and the Securities and Exchange
Commission dated July 27, 1996 and April 24, 1996 respectively,
are hereby REVERSED and SET ASIDE, and a new Judgment is
hereby ENTERED, affirming the decision of the Philippine Stock
Exchange to deny the application for listing of the private
respondent Puerto Azul Land, Inc.
SO ORDERED.
Regalado and Puno, JJ., concur.
Mendoza, J., concurs in the result.

(3) The enterprise or the business of the issuer is not

shown to be sound or to be based on sound business
principles;

(4) An officer, member of the board of directors, or

principal stockholder of the issuer is disqualified to be
such officer, director or principal stockholder; or

(5) The issuer or registrant has not shown to the

satisfaction of the Commission that the sale of its
security would not work to the prejudice of the public
interest or as a fraud upon the purchasers or
investors. (Emphasis Ours)

A reading of the foregoing grounds reveals the intention of the

lawmakers to make the registration and issuance of securities
dependent, to a certain extent, on the merits of the securities
 EN BANC
[G.R. No. 147402. January 14, 2004.]
ENGR. RANULFO C. FELICIANO, in his capacity as General
Manager of the Leyte Metropolitan Water District (LMWD),
Tacloban City, petitioner, vs. COMMISSION ON AUDIT,
Chairman CELSO D. GANGAN, Commissioners RAUL C.
FLORES and EMMANUEL M. DALMAN, and Regional Director
of COA Region VIII, respondents.
Nathanille P. Roa for petitioner.
The Solicitor General for respondent.
SYNOPSIS
Petitioner assailed before the Supreme Court the Resolution of the
respondent Commission on Audit denying his request for COA to
cease all audit services, and to stop charging auditing fees to Leyte
Metropolitan Water District (LMWD) as well as to refund all auditing
fees previously paid by it. Among other things, the petitioner
maintained that Local Water Districts (LWDs) are not government-
owned and controlled corporations with original charters that would
place it within the audit jurisdiction of COA. He further argued that
LWDs are private corporations.
The Constitution vests in the COA audit jurisdiction over
government-owned and controlled corporations with original
charters, as well as government-owned or controlled corporations
without original charters. The nature or purpose of the corporation
is not material in determining COA's audit jurisdiction. Neither is the
manner of creation of a corporation, whether under a general or
special law. The determining factor of COA's audit jurisdiction is
government ownership or control of the corporation. Here, the Court
held that the Local Water District is a government-owned or
controlled corporation subject to audit jurisdiction of the COA.
According to the Court, LWDs are not private corporations because
they are not created under the Corporation Code. LWDs are not
registered with the Securities and Exchange Commission. LWDs
have no articles of incorporation, no incorporators and no
stockholders or members. There is no private party involved as co-
owner in the creation of an LWD. There are no stockholders or
members to elect the board of directors of LWDs as in the case of
corporations registered with the Securities and Exchange
Commission. The local mayor or the provincial governor appoints
the directors of LWDs for a fixed term of office. The board of
directors of LWDs are not co-owners of the LWDs. The board of
directors and other personnel of LWDs are government employees
subject to civil service laws and anti-graft laws. LWDs derive their
legal existence and power from Presidential Decree 198, which
constitutes their special charter. Since under the Constitution only
government-owned or controlled corporations may have special
charters, LWDs can validly exist only if they are government-owned
or controlled. To claim that LWDs are private corporations with a
special charter is to admit that their existence is constitutionally
infirm.
SYLLABUS
1. CONSTITUTIONAL LAW; CONSTITUTIONAL
COMMISSIONS; COMMISSION ON AUDIT; AUDIT
JURISDICTION. — The Constitution and existing laws mandate
COA to audit all government agencies, including government-
owned and controlled corporations ("GOCCs") with original
charters. An LWD is a GOCC with an original charter. Section 2 (1),
Article IX-D of the Constitution provides for COA's audit jurisdiction,
as follows:
...The COA's audit jurisdiction extends not only to government
"agencies or instrumentalities", but also to "government-owned and
controlled corporations with original charters" as well as "other
government-owned or controlled corporations" without original
charters.
2. ID.; ID.; ID.; NATURE OR PURPOSE AND MANNER OF
CREATION OF CORPORATION IMMATERIAL IN DETERMINING
AUDIT JURISDICTION THEREOF. — Petitioner forgets that the
constitutional criterion on the exercise of COA's audit jurisdiction
depends on the government's ownership or control of a corporation.
The nature of the corporation, whether it is private, quasi-public, or
public is immaterial. The Constitution vests in the COA audit
jurisdiction over "government-owned and controlled corporations
with original charters", as well as "government-owned or controlled
corporations" without original charters. GOCCs with original
charters are subject to COA pre-audit, while GOCCs without
original charters are subject to COA post-audit. GOCCs without
original charters refer to corporations created under the Corporation
Code but are owned or controlled by the government. The nature
or purpose of the corporation is not material in determining COA's
audit jurisdiction. Neither is the manner of creation of a corporation,
whether under a general or special law.
3. ID.; ID.; ID.; GOVERNMENT OWNERSHIP AND
CONTROL OF THE CORPORATION, DETERMINING FACTOR
OF AUDIT JURISDICTION THEREOF. — The determining factor
of COA's audit jurisdiction is government ownership or control of
the corporation. In Philippine Veterans Bank Employees Union-
NUBE v. Philippine Veterans Bank, the Court even ruled that the
criterion of ownership and control is more important than the issue
of original charter, thus: This point is important because the
Constitution provides in its Article IX-B, Section 2 (1) that "the Civil
Service embraces all branches, subdivisions, instrumentalities, and
agencies of the Government, including government-owned or
controlled corporations with original charters." As the Bank is not
owned or controlled by the Government although it does have an
original charter in the form of R.A. No. 3518, it clearly does not fall
under the Civil Service and should be regarded as an ordinary
commercial corporation. Section 28 of the said law so provides. The
consequence is that the relations of the Bank with its employees
should be governed by the labor laws, under which in fact they have
already been paid some of their claims.
4. ID.; ID.; ID.; PERSONNEL THEREOF ARE PROHIBITED
FROM RECEIVING ANY KIND OF COMPENSATION FROM ANY
GOVERNMENT ENTITY; EXCEPTION. — Section 18 of RA 6758
prohibits COA personnel from receiving any kind of compensation
from any government entity except "compensation paid directly by
COA out of its appropriations and contributions." Thus, RA 6758
itself recognizes an exception to the statutory ban on COA
personnel receiving compensation from GOCCs. In Tejada v.
Domingo, the Court declared: There can be no question that
Section 18 of Republic Act No. 6758 is designed to strengthen
further the policy . . . to preserve the independence and integrity of
the COA, by explicitly PROHIBITING: (1) COA officials and
employees from receiving salaries, honoraria, bonuses, allowances
or other emoluments from any government entity, local government
unit, GOCCs and government financial institutions, except such
compensation paid directly by the COA out of its appropriations and
contributions, and (2) government entities, including GOCCs,
government financial institutions and local government units from
assessing or billing other government entities, GOCCs, government
financial institutions or local government units for services rendered
by the latter's officials and employees as part of their regular
functions for purposes of paying additional compensation to said
officials and employees. . . . The first aspect of the strategy is
directed to the COA itself, while the second aspect is addressed
directly against the GOCCs and government financial institutions.
Under the first, COA personnel assigned to auditing units of GOCCs
or government financial institutions can receive only such salaries,
allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to are
the cost of audit services earlier mentioned which cannot include
the extra emoluments or benefits now claimed by petitioners. The
COA is further barred from assessing or billing GOCCs and
government financial institutions for services rendered by its
personnel as part of their regular audit functions for purposes of
paying additional compensation to such personnel. . . .
5. ID.; ID.; ID.; ACTUAL AUDIT COST MUST BE PAID BY
GOVERNMENT-OWNED AND CONTROLLED CORPORATIONS
DIRECTLY TO THE COA AND NOT TO COA AUDITORS. — In
Tejada, the Court explained the meaning of the word "contributions"
in Section 18 of RA 6758, which allows COA to charge GOCCs the
cost of its audit services: . . . the contributions from the GOCCs are
limited to the cost of audit services which are based on the actual
cost of the audit function in the corporation concerned plus a
reasonable rate to cover overhead expenses. The actual audit cost
shall include personnel services, maintenance and other operating
expenses, depreciation on capital and equipment and out-of-pocket
expenses. In respect to the allowances and fringe benefits granted
by the GOCCs to the COA personnel assigned to the former's
auditing units, the same shall be directly defrayed by COA from its
own appropriations . . . COA may charge GOCCs "actual audit cost"
but GOCCs must pay the same directly to COA and not to COA
auditors. Petitioner has not alleged that COA charges LWDs
auditing fees in excess of COA's "actual audit cost" Neither has
petitioner alleged that the auditing fees are paid by LWDs directly
to individual COA auditors. Thus, petitioner's contention must fail.
6. ID.; NATIONAL ECONOMY AND PATRIMONY;
PROHIBITION AGAINST CREATION OF PRIVATE
CORPORATIONS BY SPECIAL CHARTERS. — The Constitution
recognizes two classes of corporations. The first refers to private
corporations created under a general law. The second refers to
government-owned or controlled corporations created by special
charters. Section 16, Article XII of the Constitution provides: . . . The
Constitution emphatically prohibits the creation of private
corporations except by a general law applicable to all citizens. The
purpose of this constitutional provision is to ban private
corporations created by special charters, which historically gave
certain individuals, families or groups special privileges denied to
other citizens. In short, Congress cannot enact a law creating a
private corporation with a special charter. Such legislation would be
unconstitutional. Private corporations may exist only under a
general law. If the corporation is private, it must necessarily exist
under a general law. Stated differently, only corporations created
under a general law can qualify as private corporations. Under
existing laws, that general law is the Corporation Code. except that
the Cooperative Code governs the incorporation of cooperatives.
7. ID.; ID.; ID.; ONLY GOVERNMENT-OWNED AND
CONTROLLED CORPORATIONS MAY HAVE SPECIAL
CHARTERS; LOCAL WATER DISTRICTS WERE CREATED
PURSUANT TO A SPECIAL LAW. — The Constitution authorizes
Congress to create government-owned or controlled corporations
through special charters. Since private corporations cannot have
special charters, it follows that Congress can create corporations
with special charters only if such corporations are government-
owned or controlled. Obviously, LWDs are not private corporations
because they are not created under the Corporation Code. LWDs
are not registered with the Securities and Exchange Commission.
Section 14 of the Corporation Code states that "[A]ll corporations
organized under this code shall file with the Securities and
Exchange Commission articles of incorporation . . . ." LWDs have
no articles of incorporation, no incorporators and no stockholders
or members. There are no stockholders or members to elect the
board directors of LWDs as in the case of all corporations registered
with the Securities and Exchange Commission. The local mayor or
the provincial governor appoints the directors of LWDs for a fixed
term of office. This Court has ruled that LWDs are not created under
the Corporation Code, thus: From the foregoing pronouncement, it
is clear that what has been excluded from the coverage of the CSC
are those corporations created pursuant to the Corporation Code.
Significantly, petitioners are not created under the said code, but on
the contrary, they were created pursuant to a special law and are
governed primarily by its provision.
8. ID.; ID.; ID.; LOCAL WATER DISTRICTS DERIVE THEIR
LEGAL EXISTENCE AND POWER FROM PRESIDENTIAL
DECREE 198. — LWDs exist by virtue of PD 198, which constitutes
their special charter. Since under the Constitution only government-
owned or controlled corporations may have special charters, LWDs
can validly exist only if they are government-owned or controlled.
To claim that LWDs are private corporations with a special charter
is to admit that their existence is constitutionally infirm. Unlike
private corporations, which derive their legal existence and power
from the Corporation Code, LWDs derive their legal existence and
power from PD 198. Sections 6 and 25 of PD 198 provide: . . . .
Clearly, LWDs exist as corporations only by virtue of PD 198, which
expressly confers on LWDs corporate powers. Section 6 of PD 198
provides that LWDs "shall exercise the powers, rights and privileges
given to private corporations under existing laws." Without PD 198,
LWDs would have no corporate powers. Thus, PD 198 constitutes
the special enabling charter of LWDs. The ineluctable conclusion is
that LWDs are government-owned and controlled corporations with
a special charter.
9. ID.; ID.; ID.; LOCAL WATER DISTRICTS ARE OWNED
AND CONTROLLED BY THE GOVERNMENT. — Certainly, the
government owns and controls LWDs. The government organizes
LWDs in accordance with a specific law, PD 198. There is no private
party involved as co-owner in the creation of an LWD. Just prior to
the creation of LWDs, the national or local government owns and
controls all their assets. The government controls LWDs because
under PD 198 the municipal or city mayor, or the provincial
governor, appoints all the board directors of an LWD for a fixed term
of six years. The board directors of LWDs are not co-owners of the
LWDs. LWDs have no private stockholders or members. The board
directors and other personnel of LWDs are government employees
subject to civil service laws and anti-graft laws. While Section 8 of
PD 198 states that "[N]o public official shall serve as director" of an
LWD, it only means that the appointees to the board of directors of
LWDs shall come from the private sector. Once such private sector
representatives assume office as directors, they become public
officials governed by the civil service law and anti-graft laws.
Otherwise, Section 8 of PD 198 would contravene Section 2 (1),
Article IX-B of the Constitution declaring that the civil service
includes "government-owned or controlled corporations with
original charters."
10. ID.; ID.; ID.; LOCAL WATER DISTRICT IS A PUBLIC
NOT A PRIVATE ENTITY. — If LWDs are neither GOCCs with
original charters nor GOCCs without original charters, then they
would fall under the term "agencies or instrumentalities" of the
government and thus still subject to COA's audit jurisdiction.
However, the stark and undeniable fact is that the government owns
LWDs. Section 45 of PD 198 recognizes government ownership of
LWDs when Section 45 states that the board of directors may
dissolve an LWD only on the condition that "another public entity
has acquired the assets of the district and has assumed all
obligations and liabilities attached thereto." The implication is clear
that an LWD is a public and not a private entity.
11. ID.; ID.; ID.; LOCAL WATER DISTRICT IS SUBJECT TO
THE AUDIT JURISDICTION OF THE COMMISSION ON AUDIT.
— Petitioner does not allege that some entity other than the
government owns or controls LWDs. Instead, petitioner advances
the theory that the "Water District's owner is the District itself."
Assuming for the sake of argument that an LWD is "self-owned," as
petitioner describes an LWD, the government in any event controls
all LWDs. First, government officials appoint all LWD directors to a
fixed term of office. Second, any per diem of LWD directors in
excess of P50 is subject to the approval of the Local Water Utilities
Administration, and directors can receive no other compensation for
their services to the LWD. Third, the Local Water Utilities
Administration can require LWDs to merge or consolidate their
facilities or operations. This element of government control subjects
LWDs to COA's audit jurisdiction.
12. ID.; ID.; ID.; LOCAL WATER DISTRICTS DO NOT
BECOME PRIVATE ENTITIES THROUGH THE TRANSFER OF
OWNERSHIP OF WATER FACILITIES FROM LOCAL
GOVERNMENT UNITS TO THEIR RESPECTIVE WATER
DISTRICTS. — Petitioner argues that upon the enactment of PD
198, LWDs became private entities through the transfer of
ownership of water facilities from local government units to their
respective water districts as mandated by PD 198. Petitioner is
grasping at straws. Privatization involves the transfer of
government assets to a private entity. Petitioner concedes that the
owner of the assets transferred under Section 6 (c) of PD 198 is no
other than the LWD itself. The transfer of assets mandated by PD
198 is a transfer of the water systems facilities "managed, operated
by or under the control of such city, municipality or province to such
(water) district." In short, the transfer is from one government entity
to another government entity. PD 198 is bereft of any indication that
the transfer is to privatize the operation and control of water system.
13. ID.; ID.; ID.; LOCAL WATER DISTRICTS ARE NOT
EXEMPTED FROM COA'S AUDIT JURISDICTION. — PD 198
cannot prevail over the Constitution. No amount of clever legislation
can exclude GOCCs like LWDs from COA's audit jurisdiction.
Section 3, Article IX-C of the Constitution outlaws any scheme or
devise to escape COA's audit jurisdiction, thus: Sec. 3. No law shall
be passed exempting any entity of the Government or its subsidiary
in any guise whatever, or any investment of public funds, from the
jurisdiction of the Commission on Audit. The framers of the
Constitution added Section 3, Article IX-D of the Constitution
precisely to annul provisions of Presidential Decrees, like that of
Section 20 of PD 198, that exempt GOCCs from COA audit. There
is an irreconcilable conflict between the second sentence of Section
20 of PD 198 prohibiting COA auditors from auditing LWDs and
Sections 2 (1) and 3, Article IX-D of the Constitution vesting in COA
the power to audit all GOCCs. We rule that the second sentence of
Section 20 of PD 198 is unconstitutional since it violates Sections 2
(1) and 3, Article IX-D of the Constitution.
14. ID.; ID.; PHRASE "GOVERNMENT-OWNED AND
CONTROLLED CORPORATIONS WITH ORIGINAL CHARTERS"
DEFINED. — The phrase "government-owned and controlled
corporations with original charters" means GOCCs created under
special laws and not under the general incorporation law. There is
no difference between the term "original charters" and "special
charters". The Court clarified this in National Service Corporation v.
NLRC by citing the deliberations in the Constitutional Commission,
as follows: . . . . Again, in Davao City Water District v. Civil Service
Commission, the Court reiterated the meaning of the phrase
"government-owned and controlled corporations with original
charters" in this wise: By "government-owned or controlled
corporation with original charter", We mean government-owned or
controlled corporation created by a special law and not under the
Corporation Code of the Philippines. Thus, in the case of Lumanta
v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA 79, 82).
We held: "The Court, in National Service Corporation (NASECO) v.
National Labor Relations Commission, G.R. No. 69870,
promulgated on 29 November 1988, quoting extensively from the
deliberations of the 1986 Constitutional Commission in respect of
the intent and meaning of the new phrase 'with original charter', in
effect held that government-owned and controlled corporations with
original charter refer to corporations chartered by special law as
distinguished from corporations organized under our general
incorporation statute — the Corporation Code. In NASECO, the
company involved had been organized under the general
incorporation statute and was a subsidiary of the National
Investment Development Corporation (NIDC) which in turn was a
subsidiary of the Philippine National Bank, a bank chartered by a
special statute. Thus, government-owned or controlled corporations
like NASECO are effectively, excluded from the scope of the Civil
Service."
15. ID.; ID.; NO PROHIBITION ON CREATION OF
SEVERAL GOVERNMENT-OWNED AND CONTROLLED
CORPORATIONS OF THE SAME CLASS UNDER ONE SPECIAL
ENABLING CHARTER. — Petitioner further contends that a law
must create directly and explicitly a GOCC in order that it may have
an original charter. In short, petitioner argues that one special law
cannot serve as enabling law for several GOCCs but only for one
GOCC. Section 16. Article XII of the Constitution mandates that
"Congress shall not, except by general law". Provide for the creation
of private corporations. Thus, the Constitution prohibits one special
law to create one private corporation requiring instead a "general
law" to create private corporations. In contrast the same Section 16
states that "Government-owned or controlled corporations may be
created or established by special charters." Thus, the Constitution
permits Congress to create a GOCC with a special charter. There
is, however, no prohibition on Congress to create several GOCCs
of the same class under one special enabling charter. The rationale
behind the prohibition on private corporations having special
charters does not apply to GOCCs. There is no danger of creating
special privileges to certain individuals, families or groups if there is
one special law creating each GOCC. Certainly, such danger will
not exist whether one special law creates one GOCC, or one
special enabling law creates several GOCCs. Thus, Congress may
create GOCCs either by special charters specific to each GOCC, or
by one special enabling charter applicable to a class of GOCCs,
like PD 198 which applies only to LWDs.
16. POLITICAL LAW; LOCAL GOVERNMENT CODE;
SANGGUNIANG BAYAN HAS NO POWER TO CREATE A
CORPORATE ENTITY THAT WILL OPERATE ITS WATER
WORKS SYSTEM. — Petitioner's contention that the Sangguniang
Bayan resolution creates the LWDs assumes that the Sangguniang
Bayan has the power to create corporations. This is a patently
baseless assumption. The Local Government Code does not vest
in the Sangguniang Bayan the power to create corporations. What
the Local Government Code empowers the Sangguniang Bayan to
do is to provide for the establishment of a waterworks system
"subject to existing laws". Thus, Section 447 (5) (vii) of the Local
Government Code provides: . . . . The Sangguniang Bayan may
establish a waterworks system only in accordance with the
provisions of PD 198. The Sangguniang Bayan has no power to
create a corporate entity that will operate its waterworks system.
However, the Sangguniang Bayan may avail of existing enabling
laws, like PD 198, to form and incorporate a water district. Besides,
even assuming for the sake of argument that the Sangguniang
Bayan has the power to create corporations, the LWDs would
remain government-owned or controlled corporations subject to
COA's audit jurisdiction. The resolution of the Sangguniang Bayan
would constitute an LWD's special charter, making the LWD a
government-owned and controlled corporation with an original
charter. In any event, the Court has already ruled in Baguio Water
District v. Trajano that the Sangguniang Bayan resolution is not the
Special Charter of LWD, thus: While it is true that a resolution of a
local sanggunian is still necessary for the final creation of a district,
this Court is of the opinion that said resolution cannot be considered
as its charter, the same being intended only to implement the
provisions of said decree.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari1 to annul the Commission on Audit’s
("COA") Resolution dated 3 January 2000 and the Decision dated
30 January 2001 denying the Motion for Reconsideration. The COA
denied petitioner Ranulfo C. Feliciano’s request for COA to cease
all audit services, and to stop charging auditing fees, to Leyte
Metropolitan Water District ("LMWD"). The COA also denied
petitioner’s request for COA to refund all auditing fees previously
paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited
the accounts of LMWD. Subsequently, LMWD received a letter from
COA dated 19 July 1999 requesting payment of auditing fees. As
General Manager of LMWD, petitioner sent a reply dated 12
October 1999 informing COA’s Regional Director that the water
district could not pay the auditing fees. Petitioner cited as basis for
his action Sections 6 and 20 of Presidential Decree 198 ("PD
198")2 , as well as Section 18 of Republic Act No. 6758 ("RA 6758").
The Regional Director referred petitioner’s reply to the COA
Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional
Director asking for refund of all auditing fees LMWD previously paid
to COA.
On 16 March 2000, petitioner received COA Chairman Celso D.
Gangan’s Resolution dated 3 January 2000 denying his requests.
Petitioner filed a motion for reconsideration on 31 March 2000,
which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to
the petition were resolutions of the Visayas Association of Water
Districts (VAWD) and the Philippine Association of Water Districts
(PAWD) supporting the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COA’s audit
jurisdiction over local water districts in Davao City Water District
v. Civil Service Commission and Commission on Audit,3 as
follows:
The above-quoted provision [referring to Section 3(b) PD
198] definitely sets to naught petitioner’s contention that
they are private corporations. It is clear therefrom that the
power to appoint the members who will comprise the
members of the Board of Directors belong to the local
executives of the local subdivision unit where such
districts are located. In contrast, the members of the
Board of Directors or the trustees of a private corporation
are elected from among members or stockholders
thereof. It would not be amiss at this point to emphasize
that a private corporation is created for the private
purpose, benefit, aim and end of its members or
stockholders. Necessarily, said members or stockholders
should be given a free hand to choose who will compose
the governing body of their corporation. But this is not the
case here and this clearly indicates that petitioners are not
private corporations.
The COA also denied petitioner’s request for COA to stop charging
auditing fees as well as petitioner’s request for COA to refund all
auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion
amounting to lack or excess of jurisdiction by auditing LMWD and
requiring it to pay auditing fees. Petitioner raises the following
issues for resolution:
1. Whether a Local Water District ("LWD") created under PD
198, as amended, is a government-owned or controlled
corporation subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits
COA’s certified public accountants from auditing local
water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from
charging government-owned and controlled corporations
auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws4 mandate COA to audit all
government agencies, including government-owned and controlled
corporations ("GOCCs") with original charters. An LWD is a GOCC
with an original charter. Section 2(1), Article IX-D of the Constitution
provides for COA’s audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the
power, authority and duty to examine, audit, and settle all
accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or
held in trust by, or pertaining to, the Government, or any
of its subdivisions, agencies, or
instrumentalities, including government-owned and
controlled corporations with original charters, and on
a post-audit basis: (a) constitutional bodies, commissions
and offices that have been granted fiscal autonomy under
this Constitution; (b) autonomous state colleges and
universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-
governmental entities receiving subsidy or equity, directly
or indirectly, from or through the government, which are
required by law or the granting institution to submit to such
audit as a condition of subsidy or equity. However, where
the internal control system of the audited agencies is
inadequate, the Commission may adopt such measures,
including temporary or special pre-audit, as are necessary
and appropriate to correct the deficiencies. It shall keep
the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers
and other supporting papers pertaining thereto.
(Emphasis supplied)
The COA’s audit jurisdiction extends not only to government
"agencies or instrumentalities," but also to "government-owned and
controlled corporations with original charters" as well as "other
government-owned or controlled corporations" without original
charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a
re-examination of a doctrine backed by a long line of cases
culminating in Davao City Water District v. Civil Service
Commission5 and just recently reiterated in De Jesus v.
Commission on Audit.6 Petitioner maintains that LWDs are not
government-owned and controlled corporations with original
charters. Petitioner even argues that LWDs are private
corporations. Petitioner asks the Court to consider certain
interpretations of the applicable laws, which would give a "new
perspective to the issue of the true character of water districts." 7
Petitioner theorizes that what PD 198 created was the Local Waters
Utilities Administration ("LWUA") and not the LWDs. Petitioner
claims that LWDs are created "pursuant to" and not created directly
by PD 198. Thus, petitioner concludes that PD 198 is not an
"original charter" that would place LWDs within the audit jurisdiction
of COA as defined in Section 2(1), Article IX-D of the Constitution.
Petitioner elaborates that PD 198 does not create LWDs since it
does not expressly direct the creation of such entities, but only
provides for their formation on an optional or voluntary
basis.8 Petitioner adds that the operative act that creates an LWD
is the approval of the Sanggunian Resolution as specified in PD
198.
Petitioner’s contention deserves scant consideration.
We begin by explaining the general framework under the
fundamental law. The Constitution recognizes two classes of
corporations. The first refers to private corporations created under
a general law. The second refers to government-owned or
controlled corporations created by special charters. Section 16,
Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for
the formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good
and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private
corporations except by a general law applicable to all citizens.9 The
purpose of this constitutional provision is to ban private
corporations created by special charters, which historically gave
certain individuals, families or groups special privileges denied to
other citizens.10
In short, Congress cannot enact a law creating a private corporation
with a special charter. Such legislation would be unconstitutional.
Private corporations may exist only under a general law. If the
corporation is private, it must necessarily exist under a general law.
Stated differently, only corporations created under a general law
can qualify as private corporations. Under existing laws, that
general law is the Corporation Code,11 except that the Cooperative
Code governs the incorporation of cooperatives.12
The Constitution authorizes Congress to create government-owned
or controlled corporations through special charters. Since private
corporations cannot have special charters, it follows that Congress
can create corporations with special charters only if such
corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are not
created under the Corporation Code. LWDs are not registered with
the Securities and Exchange Commission. Section 14 of the
Corporation Code states that "[A]ll corporations organized under
this code shall file with the Securities and Exchange Commission
articles of incorporation x x x." LWDs have no articles of
incorporation, no incorporators and no stockholders or members.
There are no stockholders or members to elect the board directors
of LWDs as in the case of all corporations registered with the
Securities and Exchange Commission. The local mayor or the
provincial governor appoints the directors of LWDs for a fixed term
of office. This Court has ruled that LWDs are not created under the
Corporation Code, thus:
From the foregoing pronouncement, it is clear that what
has been excluded from the coverage of the CSC are
those corporations created pursuant to the Corporation
Code. Significantly, petitioners are not created under
the said code, but on the contrary, they were created
pursuant to a special law and are governed primarily
by its provision.13 (Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their special
charter. Since under the Constitution only government-owned or
controlled corporations may have special charters, LWDs can
validly exist only if they are government-owned or controlled. To
claim that LWDs are private corporations with a special charter is
to admit that their existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and
power from the Corporation Code, LWDs derive their legal
existence and power from PD 198. Sections 6 and 25 of PD
19814 provide:
Section 6. Formation of District. — This Act is the
source of authorization and power to form and
maintain a district. For purposes of this Act, a district
shall be considered as a quasi-public corporation
performing public service and supplying public
wants. As such, a district shall exercise the powers,
rights and privileges given to private corporations
under existing laws, in addition to the powers granted
in, and subject to such restrictions imposed, under
this Act.
(a) The name of the local water district, which shall
include the name of the city, municipality, or province, or
region thereof, served by said system, followed by the
words "Water District".
(b) A description of the boundary of the district. In the case
of a city or municipality, such boundary may include all
lands within the city or municipality. A district may include
one or more municipalities, cities or provinces, or portions
thereof.
(c) A statement completely transferring any and all
waterworks and/or sewerage facilities managed,
operated by or under the control of such city, municipality
or province to such district upon the filing of resolution
forming the district.
(d) A statement identifying the purpose for which the
district is formed, which shall include those purposes
outlined in Section 5 above.
(e) The names of the initial directors of the district with the
date of expiration of term of office for each.
(f) A statement that the district may only be dissolved on
the grounds and under the conditions set forth in Section
44 of this Title.
(g) A statement acknowledging the powers, rights and
obligations as set forth in Section 36 of this Title.
Nothing in the resolution of formation shall state or infer
that the local legislative body has the power to dissolve,
alter or affect the district beyond that specifically provided
for in this Act.
If two or more cities, municipalities or provinces, or any
combination thereof, desire to form a single district, a
similar resolution shall be adopted in each city,
municipality and province.
xxx
Sec. 25. Authorization. — The district may exercise all
the powers which are expressly granted by this Title
or which are necessarily implied from or incidental to
the powers and purposes herein stated. For the
purpose of carrying out the objectives of this Act, a district
is hereby granted the power of eminent domain, the
exercise thereof shall, however, be subject to review by
the Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198,
which expressly confers on LWDs corporate powers. Section 6
of PD 198 provides that LWDs "shall exercise the powers, rights
and privileges given to private corporations under existing laws."
Without PD 198, LWDs would have no corporate powers. Thus, PD
198 constitutes the special enabling charter of LWDs. The
ineluctable conclusion is that LWDs are government-owned and
controlled corporations with a special charter.
The phrase "government-owned and controlled corporations with
original charters" means GOCCs created under special laws and
not under the general incorporation law. There is no difference
between the term "original charters" and "special charters." The
Court clarified this in National Service Corporation v. NLRC15 by
citing the deliberations in the Constitutional Commission, as
follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is
resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending
my original proposed amendment to
now read as follows: "including
government-owned or controlled
corporations WITH ORIGINAL
 CHARTERS." The purpose of this
amendment is to indicate that
government corporations such as the
GSIS and SSS, which have original
charters, fall within the ambit of the
civil service. However, corporations
which are subsidiaries of these
chartered agencies such as the
Philippine Airlines, Manila Hotel and
Hyatt are excluded from the coverage
of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the
Committee say?
MR. FOZ. Just one question, Mr. Presiding
Officer. By the term "original
charters," what exactly do we
mean?
MR. ROMULO. We mean that they were created by
law, by an act of Congress, or by
special law.
MR. FOZ. And not under the general corporation
law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and
clarification, the Committee accepts
the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created
by the general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
Again, in Davao City Water District v. Civil Service
Commission,16 the Court reiterated the meaning of the phrase
"government-owned and controlled corporations with original
charters" in this wise:
By "government-owned or controlled corporation with original
charter," We mean government owned or controlled
corporation created by a special law and not under the
Corporation Code of the Philippines. Thus, in the case of
Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA
79, 82), We held:
"The Court, in National Service Corporation (NASECO) v.
National Labor Relations Commission, G.R. No. 69870,
promulgated on 29 November 1988, quoting extensively from
the deliberations of the 1986 Constitutional Commission in
respect of the intent and meaning of the new phrase ‘with
original charter,’ in effect held that government-owned and
controlled corporations with original charter refer to
corporations chartered by special law as distinguished from
corporations organized under our general incorporation
statute — the Corporation Code. In NASECO, the company
involved had been organized under the general incorporation
statute and was a subsidiary of the National Investment
Development Corporation (NIDC) which in turn was a subsidiary of
the Philippine National Bank, a bank chartered by a special statute.
Thus, government-owned or controlled corporations like NASECO
are effectively, excluded from the scope of the Civil Service."
(Emphasis supplied)
Petitioner’s contention that the Sangguniang Bayan resolution
creates the LWDs assumes that the Sangguniang Bayan has the
power to create corporations. This is a patently baseless
assumption. The Local Government Code17 does not vest in the
Sangguniang Bayan the power to create corporations. 18 What the
Local Government Code empowers the Sangguniang Bayan to do
is to provide for the establishment of a waterworks system "subject
to existing laws." Thus, Section 447(5)(vii) of the Local Government
Code provides:
SECTION 447. Powers, Duties, Functions and
Compensation. — (a) The sangguniang bayan, as the
legislative body of the municipality, shall enact
ordinances, approve resolutions and appropriate funds
for the general welfare of the municipality and its
inhabitants pursuant to Section 16 of this Code and in the
proper exercise of the corporate powers of the
municipality as provided for under Section 22 of this
Code, and shall:
xxx
(vii) Subject to existing laws, provide for the
establishment, operation, maintenance, and
repair of an efficient waterworks system to
supply water for the inhabitants; regulate the
construction, maintenance, repair and use of
hydrants, pumps, cisterns and reservoirs;
protect the purity and quantity of the water
supply of the municipality and, for this purpose,
extend the coverage of appropriate ordinances
over all territory within the drainage area of said
water supply and within one hundred (100)
meters of the reservoir, conduit, canal,
aqueduct, pumping station, or watershed used
in connection with the water service; and
regulate the consumption, use or wastage of
water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only
in accordance with the provisions of PD 198. The Sangguniang
Bayan has no power to create a corporate entity that will operate its
waterworks system. However, the Sangguniang Bayan may avail
of existing enabling laws, like PD 198, to form and incorporate a
water district. Besides, even assuming for the sake of argument that
the Sangguniang Bayan has the power to create corporations, the
LWDs would remain government-owned or controlled corporations
subject to COA’s audit jurisdiction. The resolution of the
Sangguniang Bayan would constitute an LWD’s special charter,
making the LWD a government-owned and controlled corporation
with an original charter. In any event, the Court has already ruled
in Baguio Water District v. Trajano19 that the Sangguniang Bayan
resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is
still necessary for the final creation of a district, this Court
is of the opinion that said resolution cannot be considered
as its charter, the same being intended only to implement
the provisions of said decree.
Petitioner further contends that a law must create directly and
explicitly a GOCC in order that it may have an original charter. In
short, petitioner argues that one special law cannot serve as
enabling law for several GOCCs but only for one GOCC. Section
16, Article XII of the Constitution mandates that "Congress shall
not, except by general law,"20 provide for the creation of private
corporations. Thus, the Constitution prohibits one special law to
create one private corporation, requiring instead a "general law" to
create private corporations. In contrast, the same Section 16 states
that "Government-owned or controlled corporations may be
created or established by special charters." Thus, the
Constitution permits Congress to create a GOCC with a special
charter. There is, however, no prohibition on Congress to create
several GOCCs of the same class under one special enabling
charter.
The rationale behind the prohibition on private corporations having
special charters does not apply to GOCCs. There is no danger of
creating special privileges to certain individuals, families or groups
if there is one special law creating each GOCC. Certainly, such
danger will not exist whether one special law creates one GOCC,
or one special enabling law creates several GOCCs. Thus,
Congress may create GOCCs either by special charters specific to
each GOCC, or by one special enabling charter applicable to a
class of GOCCs, like PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations
because Section 6 of PD 19821 declares that LWDs "shall be
considered quasi-public" in nature. Petitioner’s rationale is that only
private corporations may be deemed "quasi-public" and not public
corporations. Put differently, petitioner rationalizes that a public
corporation cannot be deemed "quasi-public" because such
corporation is already public. Petitioner concludes that the term
"quasi-public" can only apply to private corporations. Petitioner’s
argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of
COA’s audit jurisdiction depends on the government’s ownership or
control of a corporation. The nature of the corporation, whether it is
private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over
"government-owned and controlled corporations with original
charters," as well as "government-owned or controlled
corporations" without original charters. GOCCs with original
charters are subject to COA pre-audit, while GOCCs without
original charters are subject to COA post-audit. GOCCs without
original charters refer to corporations created under the Corporation
Code but are owned or controlled by the government. The nature
or purpose of the corporation is not material in determining COA’s
audit jurisdiction. Neither is the manner of creation of a corporation,
whether under a general or special law.
The determining factor of COA’s audit jurisdiction is government
ownership or control of the corporation. In Philippine Veterans
Bank Employees Union-NUBE v. Philippine Veterans
Bank,22 the Court even ruled that the criterion of ownership and
control is more important than the issue of original charter, thus:
This point is important because the Constitution provides
in its Article IX-B, Section 2(1) that "the Civil Service
embraces all branches, subdivisions, instrumentalities,
and agencies of the Government, including government-
owned or controlled corporations with original
charters." As the Bank is not owned or controlled by
the Government although it does have an original
charter in the form of R.A. No. 3518,23 it clearly does
not fall under the Civil Service and should be
regarded as an ordinary commercial corporation.
Section 28 of the said law so provides. The consequence
is that the relations of the Bank with its employees should
be governed by the labor laws, under which in fact they
have already been paid some of their claims. (Emphasis
supplied)
Certainly, the government owns and controls LWDs. The
government organizes LWDs in accordance with a specific law, PD
198. There is no private party involved as co-owner in the creation
of an LWD. Just prior to the creation of LWDs, the national or local
government owns and controls all their assets. The government
controls LWDs because under PD 198 the municipal or city mayor,
or the provincial governor, appoints all the board directors of an
LWD for a fixed term of six years.24 The board directors of LWDs
are not co-owners of the LWDs. LWDs have no private stockholders
or members. The board directors and other personnel of LWDs are
government employees subject to civil service laws 25 and anti-graft
laws.26
While Section 8 of PD 198 states that "[N]o public official shall serve
as director" of an LWD, it only means that the appointees to the
board of directors of LWDs shall come from the private sector. Once
such private sector representatives assume office as directors, they
become public officials governed by the civil service law and anti-
graft laws. Otherwise, Section 8 of PD 198 would contravene
Section 2(1), Article IX-B of the Constitution declaring that the civil
service includes "government-owned or controlled corporations
with original charters."
If LWDs are neither GOCCs with original charters nor GOCCs
without original charters, then they would fall under the term
"agencies or instrumentalities" of the government and thus still
subject to COA’s audit jurisdiction. However, the stark and
undeniable fact is that the government owns LWDs. Section 4527 of
PD 198 recognizes government ownership of LWDs when Section
45 states that the board of directors may dissolve an LWD only on
the condition that "another public entity has acquired the assets
of the district and has assumed all obligations and liabilities
attached thereto." The implication is clear that an LWD is a public
and not a private entity.
Petitioner does not allege that some entity other than the
government owns or controls LWDs. Instead, petitioner advances
the theory that the "Water District’s owner is the District
itself."28 Assuming for the sake of argument that an LWD is "self-
owned,"29 as petitioner describes an LWD, the government in any
event controls all LWDs. First, government officials appoint all LWD
directors to a fixed term of office. Second, any per diem of LWD
directors in excess of P50 is subject to the approval of the Local
Water Utilities Administration, and directors can receive no other
compensation for their services to the LWD.30 Third, the Local
Water Utilities Administration can require LWDs to merge or
consolidate their facilities or operations. 31 This element of
government control subjects LWDs to COA’s audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs
became private entities through the transfer of ownership of water
facilities from local government units to their respective water
districts as mandated by PD 198. Petitioner is grasping at straws.
Privatization involves the transfer of government assets to a private
entity. Petitioner concedes that the owner of the assets transferred
under Section 6 (c) of PD 198 is no other than the LWD itself. 32 The
transfer of assets mandated by PD 198 is a transfer of the water
systems facilities "managed, operated by or under the control of
such city, municipality or province to such (water) district."33 In
short, the transfer is from one government entity to another
government entity. PD 198 is bereft of any indication that the
transfer is to privatize the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the
government owns and controls LWDs, Section 20 of PD 198
prevents COA from auditing LWDs. 34 Section 20 of PD 198
provides:
Sec. 20. System of Business Administration. — The
Board shall, as soon as practicable, prescribe and define
by resolution a system of business administration and
accounting for the district, which shall be patterned upon
and conform to the standards established by the
Administration. Auditing shall be performed by a
certified public accountant not in the government
service. The Administration may, however, conduct
annual audits of the fiscal operations of the district to be
performed by an auditor retained by the Administration.
Expenses incurred in connection therewith shall be borne
equally by the water district concerned and the
Administration.35 (Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or
any government auditor for that matter, from auditing LWDs.
Petitioner asserts that this is the import of the second sentence of
Section 20 of PD 198 when it states that "[A]uditing shall be
performed by a certified public accountant not in the government
service."36
PD 198 cannot prevail over the Constitution. No amount of clever
legislation can exclude GOCCs like LWDs from COA’s audit
jurisdiction. Section 3, Article IX-C of the Constitution outlaws any
scheme or devise to escape COA’s audit jurisdiction, thus:
 sequestration of up to 94
Sec. 3. No law shall be passed exempting any entity of percent of all the shares in
the Government or its subsidiary in any guise whatever, the United Coconut Planters
or any investment of public funds, from the jurisdiction of Bank. The charter of the
the Commission on Audit. (Emphasis supplied) UCPB, through a
presidential decree,
The framers of the Constitution added Section 3, Article IX-D of the exempted it from the
Constitution precisely to annul provisions of Presidential Decrees, jurisdiction of the
like that of Section 20 of PD 198, that exempt GOCCs from COA Commission on Audit, it
audit. The following exchange in the deliberations of the being a private organization.
Constitutional Commission elucidates this intent of the framers:
MR. OPLE: I propose to add a new So these are the fetuses of
section on line 9, page 2 of future abuse that we are
the amended committee slaying right here with this
report which reads: NO LAW additional section.
SHALL BE PASSED
EXEMPTING ANY ENTITY May I repeat the
OF THE GOVERNMENT amendment, Madam
OR ITS SUBSIDIARY IN President: NO LAW SHALL
ANY GUISE WHATEVER, BE PASSED EXEMPTING
OR ANY INVESTMENTS ANY ENTITY OF THE
OF PUBLIC FUNDS, FROM GOVERNMENT OR ITS
THE JURISDICTION OF SUBSIDIARY IN ANY
THE COMMISSION ON GUISE WHATEVER, OR
AUDIT. ANY INVESTMENTS OF
PUBLIC FUNDS, FROM
May I explain my reasons on THE JURISDICTION OF
record. THE COMMISSION ON
AUDIT.
We know that a number of
entities of the government THE PRESIDENT: May we know the position of
took advantage of the the Committee on the
absence of a legislature in proposed amendment of
the past to obtain Commissioner Ople?
presidential decrees MR. JAMIR: If the honorable
exempting themselves Commissioner will change
from the jurisdiction of the the number of the section to
Commission on Audit, one 4, we will accept the
notable example of which is amendment.
the Philippine National Oil MR. OPLE: Gladly, Madam President.
Company which is really an Thank you.
empty shell. It is a holding MR. DE CASTRO: Madam President, point of
corporation by itself, and inquiry on the new
strictly on its own account. amendment.
Its funds were not very THE PRESIDENT: Commissioner de Castro is
impressive in quantity but recognized.
underneath that shell there MR. DE CASTRO: Thank you. May I just ask a
were billions of pesos in a few questions of
multiplicity of companies. Commissioner Ople.
The PNOC — the empty
shell — under a presidential Is that not included in
decree was covered by the Section 2 (1) where it states:
jurisdiction of the "(c) government-owned or
Commission on Audit, but controlled corporations and
the billions of pesos their subsidiaries"? So that if
invested in different these government-owned
corporations underneath it and controlled corporations
were exempted from the and their subsidiaries are
coverage of the Commission subjected to the audit of the
on Audit. COA, any law exempting
certain government
Another example is the corporations or subsidiaries
United Coconut Planters will be already
Bank. The Commission on unconstitutional.
Audit has determined that
the coconut levy is a form of So I believe, Madam
taxation; and that, therefore, President, that the proposed
these funds attributed to the amendment is unnecessary.
shares of 1,400,000 coconut
farmers are, in effect, public MR. MONSOD: Madam President, since this
funds. And that was, I think, has been accepted, we
the basis of the PCGG in would like to reply to the
undertaking that last major
 point raised by
Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will
please proceed.
MR. MONSOD: I think the Commissioner is
trying to avoid the situation
that happened in the past,
because the same provision
was in the 1973 Constitution
and yet somehow a law or a
decree was passed where
certain institutions were
exempted from audit. We
are just reaffirming,
emphasizing, the role of the
Commission on Audit so that
this problem will never arise
in the future.37
There is an irreconcilable conflict between the second sentence of
Section 20 of PD 198 prohibiting COA auditors from auditing LWDs
and Sections 2(1) and 3, Article IX-D of the Constitution vesting in
COA the power to audit all GOCCs. We rule that the second
sentence of Section 20 of PD 198 is unconstitutional since it violates
Sections 2(1) and 3, Article IX-D of the Constitution.
On the Legality of COA’s
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit
services violate the prohibition in Section 18 of RA 6758, 38 which
states:
Sec. 18. Additional Compensation of Commission on
Audit Personnel and of other Agencies. – In order to
preserve the independence and integrity of the
Commission on Audit (COA), its officials and employees
are prohibited from receiving salaries, honoraria,
bonuses, allowances or other emoluments from any
government entity, local government unit, government-
owned or controlled corporations, and government
financial institutions, except those compensation paid
directly by COA out of its appropriations
and contributions.
Government entities, including government-owned or
controlled corporations including financial institutions and
local government units are hereby prohibited from
assessing or billing other government entities, including
government-owned or controlled corporations including
financial institutions or local government units for services
rendered by its officials and employees as part of their
regular functions for purposes of paying additional
compensation to said officials and employees. (Emphasis
supplied)
Claiming that Section 18 is "absolute and leaves no
doubt,"39 petitioner asks COA to discontinue its practice of charging
auditing fees to LWDs since such practice allegedly violates the
law.
Petitioner’s claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any
kind of compensation from any government entity except
"compensation paid directly by COA out of its appropriations
and contributions." Thus, RA 6758 itself recognizes an exception
to the statutory ban on COA personnel receiving compensation
from GOCCs. In Tejada v. Domingo,40 the Court declared:
There can be no question that Section 18 of Republic Act
No. 6758 is designed to strengthen further the policy x x
x to preserve the independence and integrity of the COA,
by explicitly PROHIBITING: (1) COA officials and
employees from receiving salaries, honoraria, bonuses,
allowances or other emoluments from any government
entity, local government unit, GOCCs and government
financial institutions, except such compensation paid
directly by the COA out of its appropriations and
contributions, and (2) government entities, including
GOCCs, government financial institutions and local
government units from assessing or billing other
government entities, GOCCs, government financial
institutions or local government units for services
rendered by the latter’s officials and employees as part of
their regular functions for purposes of paying additional
compensation to said officials and employees.
xxx
The first aspect of the strategy is directed to the COA
itself, while the second aspect is addressed directly
against the GOCCs and government financial
institutions. Under the first, COA personnel assigned
to auditing units of GOCCs or government financial
institutions can receive only such salaries,
allowances or fringe benefits paid directly by the COA
out of its appropriations and contributions. The
contributions referred to are the cost of audit services
earlier mentioned which cannot include the extra
emoluments or benefits now claimed by petitioners.
The COA is further barred from assessing or billing
GOCCs and government financial institutions for services
rendered by its personnel as part of their regular audit
functions for purposes of paying additional compensation
to such personnel. x x x. (Emphasis supplied)
In Tejada, the Court explained the meaning of the word
"contributions" in Section 18 of RA 6758, which allows COA to
charge GOCCs the cost of its audit services:
x x x the contributions from the GOCCs are limited to the
cost of audit services which are based on the actual cost
of the audit function in the corporation concerned plus a
reasonable rate to cover overhead expenses. The actual
audit cost shall include personnel services, maintenance
and other operating expenses, depreciation on capital
and equipment and out-of-pocket expenses. In respect to
the allowances and fringe benefits granted by the GOCCs
to the COA personnel assigned to the former’s auditing
units, the same shall be directly defrayed by COA from its
own appropriations x x x. 41
COA may charge GOCCs "actual audit cost" but GOCCs must pay
the same directly to COA and not to COA auditors. Petitioner has
not alleged that COA charges LWDs auditing fees in excess of
COA’s "actual audit cost." Neither has petitioner alleged that the
auditing fees are paid by LWDs directly to individual COA auditors.
Thus, petitioner’s contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3
January 2000 and the Decision dated 30 January 2001 denying
petitioner’s Motion for Reconsideration are AFFIRMED. The
second sentence of Section 20 of Presidential Decree No. 198 is
declared VOID for being inconsistent with Sections 2 (1) and 3,
Article IX-D of the Constitution. No costs.
SO ORDERED.
Davide, Jr., C.J., Puno, Vitug, Panganiban, Quisumbing, Ynares-
Santiago, Sandoval-Gutierrez, Austria-Martinez, Corona, Carpio-
Morales, Callejo, Sr., and Azcuna, and Tinga, JJ., concur.
 EN BANC
G.R. No. 88404 October 18, 1990
PHILIPPINE LONG DISTANCE TELEPHONE CO.
[PLDT], petitioner, vs. THE NATIONAL
TELECOMMUNICATIONS COMMISSION AND CELLCOM, INC.,
(EXPRESS TELECOMMUNICATIONS CO., INC.
[ETCI]), respondents.
Alampan & Manhit Law Offices for petitioner.
Gozon, Fernandez, Defensor & Parel for private respondent.
DECISION
MELENCIO-HERRERA, J.:
Petitioner Philippine Long Distance Telephone Company (PLDT)
assails, by way of certiorari and Prohibition under Rule 65, two (2)
Orders of public respondent National Telecommunications
Commission (NTC), namely, the Order of 12 December 1988
granting private respondent Express Telecommunications Co., Inc.
(ETCI) provisional authority to install, operate and maintain a
Cellular Mobile Telephone System in Metro-Manila (Phase A) in
accordance with specified conditions, and the Order, dated 8 May
1988, denying reconsideration.
On 22 June 1958, Rep. Act No. 2090, was enacted, otherwise
known as "An Act Granting Felix Alberto and Company,
Incorporated, a Franchise to Establish Radio Stations for Domestic
and Transoceanic Telecommunications." Felix Alberto & Co., Inc.
(FACI) was the original corporate name, which was changed to
ETCI with the amendment of the Articles of Incorporation in 1964.
Much later, "CELLCOM, Inc." was the name sought to be adopted
before the Securities and Exchange Commission, but this was
withdrawn and abandoned.
On 13 May 1987, alleging urgent public need, ETCI filed an
application with public respondent NTC (docketed as NTC Case
No. 87-89) for the issuance of a Certificate of Public Convenience
and Necessity (CPCN) to construct, install, establish, operate and
maintain a Cellular Mobile Telephone System and an Alpha
Numeric Paging System in Metro Manila and in the Southern Luzon
regions, with a prayer for provisional authority to operate Phase A
of its proposal within Metro Manila.
PLDT filed an Opposition with a Motion to Dismiss, based primarily
on the following grounds: (1) ETCI is not capacitated or qualified
under its legislative franchise to operate a systemwide telephone or
network of telephone service such as the one proposed in its
application; (2) ETCI lacks the facilities needed and indispensable
to the successful operation of the proposed cellular mobile
telephone system; (3) PLDT has itself a pending application with
NTC, Case No. 86-86, to install and operate a Cellular Mobile
Telephone System for domestic and international service not only
in Manila but also in the provinces and that under the "prior
operator" or "protection of investment" doctrine, PLDT has the
priority or preference in the operation of such service; and (4) the
provisional authority, if granted, will result in needless,
uneconomical and harmful duplication, among others.
In an Order, dated 12 November 1987, NTC overruled PLDT's
Opposition and declared that Rep. Act No. 2090 (1958) should be
liberally construed as to include among the services under said
franchise the operation of a cellular mobile telephone service.
In the same Order, ETCI was required to submit the certificate of
registration of its Articles of Incorporation with the Securities and
Exchange Commission, the present capital and ownership structure
of the company and such other evidence, oral or documentary, as
may be necessary to prove its legal, financial and technical
capabilities as well as the economic justifications to warrant the
setting up of cellular mobile telephone and paging systems. The
continuance of the hearings was also directed.
After evaluating the reconsideration sought by PLDT, the NTC, in
October 1988, maintained its ruling that liberally construed,
applicant's franchise carries with it the privilege to operate and
maintain a cellular mobile telephone service.
On 12 December 1988, NTC issued the first challenged Order.
Opining that "public interest, convenience and necessity further
demand a second cellular mobile telephone service provider and
finds PRIMA FACIE evidence showing applicant's legal, financial
and technical capabilities to provide a cellular mobile service using
the AMPS system," NTC granted ETCI provisional authority to
install, operate and maintain a cellular mobile telephone system
initially in Metro Manila, Phase A only, subject to the terms and
conditions set forth in the same Order. One of the conditions
prescribed (Condition No. 5) was that, within ninety (90) days from
date of the acceptance by ETCI of the terms and conditions of the
provisional authority, ETCI and PLDT "shall enter into an
interconnection agreement for the provision of adequate
interconnection facilities between applicant's cellular mobile
telephone switch and the public switched telephone network and
shall jointly submit such interconnection agreement to the
Commission for approval."
In a "Motion to Set Aside the Order" granting provisional authority,
PLDT alleged essentially that the interconnection ordered was in
violation of due process and that the grant of provisional authority
was jurisdictionally and procedurally infirm. On 8 May 1989, NTC
denied reconsideration and set the date for continuation of the
hearings on the main proceedings. This is the second questioned
Order.
PLDT urges us now to annul the NTC Orders of 12 December 1988
and 8 May 1989 and to order ETCI to desist from, suspend, and/or
discontinue any and all acts intended for its implementation.
On 15 June 1989, we resolved to dismiss the petition for its failure
to comply fully with the requirements of Circular No. 1-88. Upon
satisfactory showing, however, that there was, in fact, such
compliance, we reconsidered the order, reinstated the Petition, and
required the respondents NTC and ETCI to submit their respective
Comments.
On 27 February 1990, we issued a Temporary Restraining Order
enjoining NTC to "Cease and Desist from all or any of its on-going
proceedings and ETCI from continuing any and all acts intended or
related to or which will amount to the implementation/execution of
its provisional authority." This was upon PLDT's urgent
manifestation that it had been served an NTC Order, dated 14
February 1990, directing immediate compliance with its Order of 12
December 1988, "otherwise the Commission shall be constrained
to take the necessary measures and bring to bear upon PLDT the
full sanctions provided by law."
We required PLDT to post a bond of P 5M. It has complied, with the
statement that it was "post(ing) the same on its agreement and/or
consent to have the same forfeited in favor of Private Respondent
ETCI/CELLCOM should the instant Petition be dismissed for lack
of merit." ETCI took exception to the sufficiency of the bond
considering its initial investment of approximately P 225M, but
accepted the forfeiture proferred.
ETCI moved to have the TRO lifted, which we denied on 6 March
1990. We stated, however, that the inaugural ceremony ETCI had
scheduled for that day could proceed, as the same was not covered
by the TRO.
PLDT relies on the following grounds for the issuance of the Writs
prayed for:
1. Respondent NTC's subject order effectively
licensed and/or authorized a corporate
entity without any franchise to operate a
public utility, legislative or otherwise, to
 establish and operate a telecommunications
system.
2. The same order validated stock transactions
of a public service enterprise contrary to
and/or in direct violation of Section 20(h) of
the Public Service Act.
3. Respondent NTC adjudicated in the same
order a controverted matter that was not
heard at all in the proceedings under which
it was promulgated.
As correctly pointed out by respondents, this being a special civil
action for certiorari and Prohibition, we only need determine if NTC
acted without jurisdiction or with grave abuse of discretion
amounting to lack or excess of jurisdiction in granting provisional
authority to ETCI under the NTC questioned Orders of 12
December 1988 and 8 May 1989.
The case was set for oral argument on 21 August 1990 with the
parties directed to address, but not limited to, the following issues:
(1) the status and coverage of Rep. Act No. 2090 as a franchise;
(2) the transfer of shares of stock of a corporation holding a CPCN;
and (3) the principle and procedure of interconnection. The parties
were thereafter required to submit their respective Memoranda,
with which they have complied.
We find no grave abuse of discretion on the part of NTC, upon the
following considerations:
1. NTC Jurisdiction
There can be no question that the NTC is the regulatory agency of
the national government with jurisdiction over all
telecommunications entities. It is legally clothed with authority and
given ample discretion to grant a provisional permit or authority. In
fact, NTC may, on its own initiative, grant such relief even in the
absence of a motion from an applicant.
Sec. 3. Provisional Relief. — Upon the filing of
an application, complaint or petition or at any
stage thereafter, the Board may grant on motion
of the pleaders or on its own initiative, the relief
prayed for, based on the pleading, together with
the affidavits and supporting documents
attached thereto, without prejudice to a final
decision after completion of the hearing which
shall be called within thirty (30) days from grant
of authority asked for. (Rule 15, Rules of
Practice and Procedure Before the Board of
Communications (now NTC).
What the NTC granted was such a provisional authority, with a
definite expiry period of eighteen (18) months unless sooner
renewed, and which may be revoked, amended or revised by the
NTC. It is also limited to Metro Manila only. What is more, the main
proceedings are clearly to continue as stated in the NTC Order of 8
May 1989.
The provisional authority was issued after due hearing, reception of
evidence and evaluation thereof, with the hearings attended by
various oppositors, including PLDT. It was granted only after
a prima facie showing that ETCI has the necessary legal, financial
and technical capabilities and that public interest, convenience and
necessity so demanded.
PLDT argues, however, that a provisional authority is nothing short
of a Certificate of Public Convenience and Necessity (CPCN) and
that it is merely a "distinction without a difference." That is not so.
Basic differences do exist, which need not be elaborated on. What
should be borne in mind is that provisional authority would be
meaningless if the grantee were not allowed to operate. Moreover,
it is clear from the very Order of 12 December 1988 itself that its
scope is limited only to the first phase, out of four, of the proposed
nationwide telephone system. The installation and operation of an
alpha numeric paging system was not authorized. The provisional
authority is not exclusive. Its lifetime is limited and may be revoked
by the NTC at any time in accordance with law. The initial
expenditure of P130M more or less, is rendered necessary even
under a provisional authority to enable ETCI to prove its capability.
And as pointed out by the Solicitor General, on behalf of the NTC,
if what had been granted were a CPCN, it would constitute a final
order or award reviewable only by ordinary appeal to the Court of
Appeals pursuant to Section 9(3) of BP Blg. 129, and not by
certiorari before this Court.
The final outcome of the application rests within the exclusive
prerogative of the NTC. Whether or not a CPCN would eventually
issue would depend on the evidence to be presented during the
hearings still to be conducted, and only after a full evaluation of the
proof thus presented.
2. The Coverage of ETCI's Franchise
Rep. Act No. 2090 grants ETCI (formerly FACI) "the right and
privilege of constructing, installing, establishing and operating in the
entire Philippines radio stations for reception and transmission of
messages on radio stations in the foreign and domestic public fixed
point-to-point and public base, aeronautical and land mobile
stations, ... with the corresponding relay stations for the reception
and transmission of wireless messages on radiotelegraphy and/or
radiotelephony ...." PLDT maintains that the scope of the franchise
is limited to "radio stations" and excludes telephone services such
as the establishment of the proposed Cellular Mobile Telephone
System (CMTS). However, in its Order of 12 November 1987, the
NTC construed the technical term "radiotelephony" liberally as to
include the operation of a cellular mobile telephone system. It said:
In resolving the said issue, the Commission
takes into consideration the different definitions
of the term "radiotelephony." As defined by the
New International Webster Dictionary the term
"radiotelephony" is defined as a telephone
carried on by aid of radiowaves without
connecting wires. The International
Telecommunications Union (ITU) defines a
"radiotelephone call" as a "telephone call,
originating in or intended on all or part of its
route over the radio communications channels
of the mobile service or of the mobile satellite
service." From the above definitions, while
under Republic Act 2090 a system-wide
telephone or network of telephone service by
means of connecting wires may not have been
contemplated, it can be construed liberally that
the operation of a cellular mobile telephone
service which carries messages, either voice or
record, with the aid of radiowaves or a part of its
route carried over radio communication
channels, is one included among the services
under said franchise for which a certificate of
public convenience and necessity may be
applied for.
The foregoing is the construction given by an administrative agency
possessed of the necessary special knowledge, expertise and
experience and deserves great weight and respect (Asturias Sugar
Central, Inc. v. Commissioner of Customs, et al., L-19337,
September 30, 1969, 29 SCRA 617). It can only be set aside on
proof of gross abuse of discretion, fraud, or error of law (Tupas
Local Chapter No. 979 v. NLRC, et al., L-60532-33, November 5,
1985, 139 SCRA 478). We discern none of those considerations
sufficient to warrant judicial intervention.
3. The Status of ETCI Franchise
PLDT alleges that the ETCI franchise had lapsed into nonexistence
for failure of the franchise holder to begin and complete construction
of the radio system authorized under the franchise as explicitly
required in Section 4 of its franchise, Rep. Act No. 2090. 1 PLDT
also invokes Pres. Decree No. 36, enacted on 2 November 1972,
which legislates the mandatory cancellation or invalidation of all
franchises for the operation of communications services, which
have not been availed of or used by the party or parties in whose
name they were issued.
However, whether or not ETCI, and before it FACI, in contravention
of its franchise, started the first of its radio telecommunication
stations within (2) years from the grant of its franchise and
completed the construction within ten (10) years from said date; and
whether or not its franchise had remained unused from the time of
its issuance, are questions of fact beyond the province of this Court,
besides the well-settled procedural consideration that factual issues
are not subjects of a special civil action for certiorari (Central Bank
of the Philippines vs. Court of Appeals, G.R. No. 41859, 8 March
1989, 171 SCRA 49; Ygay vs. Escareal, G.R. No. 44189, 8
February 1985, 135 SCRA 78; Filipino Merchant's Insurance Co.,
Inc. vs. Intermediate Appellate Court, G.R. No. 71640, 27 June
1988, 162 SCRA 669). Moreover, neither Section 4, Rep. Act No.
2090 nor Pres. Decree No. 36 should be construed as self-
executing in working a forfeiture. Franchise holders should be given
an opportunity to be heard, particularly so, where, as in this case,
ETCI does not admit any breach, in consonance with the rudiments
of fair play. Thus, the factual situation of this case differs from that
in Angeles Ry Co. vs. City of Los Angeles (92 Pacific Reporter 490)
cited by PLDT, where the grantee therein admitted its failure to
complete the conditions of its franchise and yet insisted on a decree
of forfeiture.
More importantly, PLDT's allegation partakes of a Collateral attack
on a franchise Rep. Act No. 2090), which is not allowed. A franchise
is a property right and cannot be revoked or forfeited without due
process of law. The determination of the right to the exercise of a
franchise, or whether the right to enjoy such privilege has been
forfeited by non-user, is more properly the subject of the prerogative
writ of quo warranto, the right to assert which, as a rule, belongs to
the State "upon complaint or otherwise" (Sections 1, 2 and 3, Rule
66, Rules of Court), 2 the reason being that the abuse of a franchise
is a public wrong and not a private injury. A forfeiture of a franchise
will have to be declared in a direct proceeding for the purpose
brought by the State because a franchise is granted by law and its
unlawful exercise is primarily a concern of Government.
A ... franchise is ... granted by law, and its ...
unlawful exercise is the concern primarily of the
Government. Hence, the latter as a rule is the
party called upon to bring the action for such ...
unlawful exercise of franchise. (IV-B V.
FRANCISCO, 298 [1963 ed.], citing Cruz vs.
Ramos, 84 Phil. 226).
4. ETCI's Stock Transactions
ETCI admits that in 1964, the Albertos, as original owners of more
than 40% of the outstanding capital stock sold their holdings to the
Orbes. In 1968, the Albertos re-acquired the shares they had sold
to the Orbes. In 1987, the Albertos sold more than 40% of their
shares to Horacio Yalung. Thereafter, the present stockholders
acquired their ETCI shares. Moreover, in 1964, ETCI had increased
its capital stock from P40,000.00 to P360,000.00; and in 1987, from
P360,000.00 to P40M.
PLDT contends that the transfers in 1987 of the
shares of stock to the new stockholders amount
to a transfer of ETCI's franchise, which needs
Congressional approval pursuant to Rep. Act
No. 2090, and since such approval had not been
obtained, ETCI's franchise had been
invalidated. The provision relied on reads, in
part, as follows:
SECTION 10. The grantee shall not lease,
transfer, grant the usufruct of, sell or assign this
franchise nor the rights and privileges acquired
thereunder to any person, firm, company,
corporation or other commercial or legal entity
nor merge with any other person, company or
corporation organized for the same purpose,
without the approval of the Congress of the
Philippines first had. ...
It should be noted, however, that the foregoing provision is, directed
to the "grantee" of the franchise, which is the corporation itself and
refers to a sale, lease, or assignment of that franchise. It does not
include the transfer or sale of shares of stock of a corporation by
the latter's stockholders.
The sale of shares of stock of a public utility is governed by another
law, i.e., Section 20(h) of the Public Service Act (Commonwealth
Act No. 146). Pursuant thereto, the Public Service Commission
(now the NTC) is the government agency vested with the authority
to approve the transfer of more than 40% of the subscribed capital
stock of a telecommunications company to a single transferee,
thus:
SEC. 20. Acts requiring the approval of the
Commission. Subject to established stations
and exceptions and saving provisions to the
contrary, it shall be unlawful for any public
service or for the owner, lessee or operator
thereof, without the approval and authorization
of the Commission previously had
xxx xxx xxx
(h) To sell or register in its books the transfer or
sale of shares of its capital stock, if the result of
that sale in itself or in connection with another
previous sale, shall be to vest in the transferee
more than forty per centum of the subscribed
capital of said public service. Any transfer made
in violation of this provision shall be void and of
no effect and shall not be registered in the books
of the public service corporation. Nothing herein
contained shall be construed to prevent the
holding of shares lawfully acquired. (As
amended by Com. Act No. 454).
In other words, transfers of shares of a public utility corporation
need only NTC approval, not Congressional authorization. What
transpired in ETCI were a series of transfers of shares starting in
1964 until 1987. The approval of the NTC may be deemed to have
been met when it authorized the issuance of the provisional
authority to ETCI. There was full disclosure before the NTC of the
transfers. In fact, the NTC Order of 12 November 1987 required
ETCI to submit its "present capital and ownership structure."
Further, ETCI even filed a Motion before the NTC, dated 8
December 1987, or more than a year prior to the grant of provisional
authority, seeking approval of the increase in its capital stock from
P360,000.00 to P40M, and the stock transfers made by its
stockholders.
A distinction should be made between shares of stock, which are
owned by stockholders, the sale of which requires only NTC
approval, and the franchise itself which is owned by the corporation
as the grantee thereof, the sale or transfer of which requires
Congressional sanction. Since stockholders own the shares of
stock, they may dispose of the same as they see fit. They may not,
however, transfer or assign the property of a corporation, like its
franchise. In other words, even if the original stockholders had
transferred their shares to another group of shareholders, the
franchise granted to the corporation subsists as long as the
corporation, as an entity, continues to exist The franchise is not
thereby invalidated by the transfer of the shares. A corporation has
a personality separate and distinct from that of each stockholder. It
has the right of continuity or perpetual succession (Corporation
Code, Sec. 2).
To all appearances, the stock transfers were not just for the purpose
of acquiring the ETCI franchise, considering that, as heretofore
stated, a series of transfers was involved from 1964 to 1987. And,
contrary to PLDT's assertion, the franchise was not the only
property of ETCI of meaningful value. The "zero" book value of
ETCI assets, as reflected in its balance sheet, was plausibly
explained as due to the accumulated depreciation over the years
entered for accounting purposes and was not reflective of the actual
value that those assets would command in the market.
But again, whether ETCI has offended against a provision of its
franchise, or has subjected it to misuse or abuse, may more
properly be inquired into in quo warranto proceedings instituted by
the State. It is the condition of every franchise that it is subject to
amendment, alteration, or repeal when the common good so
requires (1987 Constitution, Article XII, Section 11).
5. The NTC Interconnection Order
In the provisional authority granted by NTC to ETCI, one of the
conditions imposed was that the latter and PLDT were to enter into
an interconnection agreement to be jointly submitted to NTC for
approval.
PLDT vehemently opposes interconnection with its own public
switched telephone network. It contends: that while PLDT
welcomes interconnections in the furtherance of public interest,
only parties who can establish that they have valid and subsisting
legislative franchises are entitled to apply for a CPCN or provisional
authority, absent which, NTC has no jurisdiction to grant them the
CPCN or interconnection with PLDT; that the 73 telephone systems
operating all over the Philippines have a viability and feasibility
independent of any interconnection with PLDT; that "the NTC is not
empowered to compel such a private raid on PLDT's legitimate
income arising out of its gigantic investment;" that "it is not public
interest, but purely a private and selfish interest which will be served
by an interconnection under ETCI's terms;" and that "to compel
PLDT to interconnect merely to give viability to a prospective
competitor, which cannot stand on its own feet, cannot be justified
in the name of a non-existent public need" (PLDT Memorandum,
pp. 48 and 50).
PLDT cannot justifiably refuse to interconnect.
Rep. Act No. 6849, or the Municipal Telephone Act of 1989,
approved on 8 February 1990, mandates interconnection providing
as it does that "all domestic telecommunications carriers or utilities
... shall be interconnected to the public switch telephone network."
Such regulation of the use and ownership of telecommunications
systems is in the exercise of the plenary police power of the State
for the promotion of the general welfare. The 1987 Constitution
recognizes the existence of that power when it provides.
SEC. 6. The use of property bears a social
function, and all economic agents shall
contribute to the common good. Individuals and
private groups, including corporations,
cooperatives, and similar collective
organizations, shall have the right to own,
establish, and operate economic enterprises,
subject to the duty of the State to promote
distributive justice and to intervene when the
common good so demands (Article XII).
The interconnection which has been required of PLDT is a form of
"intervention" with property rights dictated by "the objective of
government to promote the rapid expansion of telecommunications
services in all areas of the Philippines, ... to maximize the use of
telecommunications facilities available, ... in recognition of the vital
role of communications in nation building ... and to ensure that all
users of the public telecommunications service have access to all
other users of the service wherever they may be within the
Philippines at an acceptable standard of service and at reasonable
cost" (DOTC Circular No. 90-248). Undoubtedly, the encompassing
objective is the common good. The NTC, as the regulatory agency
of the State, merely exercised its delegated authority to regulate the
use of telecommunications networks when it decreed
interconnection.
The importance and emphasis given to interconnection dates back
to Ministry Circular No. 82-81, dated 6 December 1982, providing:
Sec. 1. That the government encourages the
provision and operation of public mobile
telephone service within local sub-base
stations, particularly, in the highly
commercialized areas;
Sec. 5. That, in the event the authority to
operate said service be granted to other
applicants, other than the franchise holder, the
franchise operator shall be under obligation to
enter into an agreement with the domestic
telephone network, under an interconnection
agreement;
Department of Transportation and Communication (DOTC) Circular
No. 87-188, issued in 1987, also decrees:
12. All public communications carriers shall
interconnect their facilities pursuant to
comparatively efficient interconnection (CEI) as
defined by the NTC in the interest of economic
efficiency.
The sharing of revenue was an additional feature considered in
DOTC Circular No. 90-248, dated 14 June 1990, laying down the
"Policy on Interconnection and Revenue Sharing by Public
Communications Carriers," thus:
WHEREAS, it is the objective of government to
promote the rapid expansion of
telecommunications services in all areas of the
Philippines;
WHEREAS, there is a need to maximize the use
of telecommunications facilities available and
encourage investment in telecommunications
infrastructure by suitably qualified service
providers;
WHEREAS, in recognition of the vital role of
communications in nation building, there is a
need to ensure that all users of the public
telecommunications service have access to all
other users of the service wherever they may be
within the Philippines at an acceptable standard
of service and at reasonable cost.
WHEREFORE, the following Department
policies on interconnection and revenue sharing
are hereby promulgated:
1. All facilities offering public
telecommunication services
shall be interconnected into
the nationwide
telecommunications
network/s.
xxx xxx xxx
4. The interconnection of
networks shall be effected in
a fair and non-discriminatory
 manner and within the
shortest time-frame
practicable.
5. The precise points of
interface between service
operators shall be as
defined by the NTC; and the
apportionment of costs and
division of revenues
resulting from
interconnection of
telecommunications
networks shall be as
approved and/or prescribed
by the NTC.
xxx xxx xxx
Since then, the NTC, on 12 July 1990, issued Memorandum
Circular No. 7-13-90 prescribing the "Rules and Regulations
Governing the Interconnection of Local Telephone Exchanges and
Public Calling Offices with the Nationwide Telecommunications
Network/s, the Sharing of Revenue Derived Therefrom, and for
Other Purposes."
The NTC order to interconnect allows the parties themselves to
discuss and agree upon the specific terms and conditions of the
interconnection agreement instead of the NTC itself laying down the
standards of interconnection which it can very well impose. Thus it
is that PLDT cannot justifiably claim denial of clue process. It has
been heard. It will continue to be heard in the main proceedings. It
will surely heard in the negotiations concerning the interconnection
agreement.
As disclosed during the hearing, the interconnection sought by
ETCI is by no means a "parasitic dependence" on PLDT. The ETCI
system can operate on its own even without interconnection, but it
will be limited to its own subscribers. What interconnection seeks to
accomplish is to enable the system to reach out to the greatest
number of people possible in line with governmental policies laid
down. Cellular phones can access PLDT units and vice versa in as
wide an area as attainable. With the broader reach, public interest
and convenience will be better served. To be sure, ETCI could
provide no mean competition (although PLDT maintains that it has
nothing to fear from the "innocuous interconnection"), and eat into
PLDT's own toll revenue cream PLDT revenue," in its own words),
but all for the eventual benefit of all that the system can reach.
6. Ultimate Considerations
The decisive consideration are public need, public interest, and the
common good. Those were the overriding factors which motivated
NTC in granting provisional authority to ETCI. Article II, Section 24
of the 1987 Constitution, recognizes the vital role of communication
and information in nation building. It is likewise a State policy to
provide the environment for the emergence of communications
structures suitable to the balanced flow of information into, out of,
and across the country (Article XVI, Section 10, Ibid.). A modern
and dependable communications network rendering efficient and
reasonably priced services is also indispensable for accelerated
economic recovery and development. To these public and national
interests, public utility companies must bow and yield.
Despite the fact that there is a virtual monopoly of the telephone
system in the country at present. service is sadly inadequate.
Customer demands are hardly met, whether fixed or mobile. There
is a unanimous cry to hasten the development of a modern,
efficient, satisfactory and continuous telecommunications service
not only in Metro Manila but throughout the archipelago. The need
therefor was dramatically emphasized by the destructive
earthquake of 16 July 1990. It may be that users of the cellular
mobile telephone would initially be limited to a few and to highly
commercialized areas. However, it is a step in the right direction
towards the enhancement of the telecommunications infrastructure,
the expansion of telecommunications services in, hopefully, all
areas of the country, with chances of complete disruption of
communications minimized. It will thus impact on, the total
development of the country's telecommunications systems and
redound to the benefit of even those who may not be able to
subscribe to ETCI.
Free competition in the industry may also provide the answer to a
much-desired improvement in the quality and delivery of this type
of public utility, to improved technology, fast and handy mobile
service, and reduced user dissatisfaction. After all, neither PLDT
nor any other public utility has a constitutional right to a monopoly
position in view of the Constitutional proscription that no franchise
certificate or authorization shall be exclusive in character or shall
last longer than fifty (50) years (ibid., Section 11; Article XIV Section
5, 1973 Constitution; Article XIV, Section 8, 1935 Constitution).
Additionally, the State is empowered to decide whether public
interest demands that monopolies be regulated or prohibited (1987
Constitution. Article XII, Section 19).
WHEREFORE, finding no grave abuse of discretion, tantamount to
lack of or excess of jurisdiction, on the part of the National
Telecommunications Commission in issuing its challenged Orders
of 12 December 1988 and 8 May 1989 in NTC Case No. 87-39, this
Petition is DISMISSED for lack of merit. The Temporary Restraining
Order heretofore issued is LIFTED. The bond issued as a condition
for the issuance of said restraining Order is declared forfeited in
favor of private respondent Express Telecommunications Co., Inc.
Costs against petitioner.
SO ORDERED.
Paras, Feliciano, Padilla, Sarmiento, Cortes, Griño-Aquino and
Regalado, JJ., concur.
Separate Opinions
GUTIERREZ, JR., J., dissenting:
I share with the rest of the Court the desire to have a "modern,
efficient, satisfactory, and continuous telecommunications service"
in the Philippines. I register this dissent, however, because I believe
that any frustrations over the present state of telephone services do
not justify our affirming an illegal and inequitable order of the
National Telecommunications Commission (NTC). More so when it
appears that the questioned order is not really a solution to the
problems bugging our telephone industry.
My dissent is based on three primary considerations, namely:
(1) The Court has sustained nothing less than the desire of
respondent ETCI to set-up a profitable business catering to an
affluent clientele through the use of billions of pesos worth of
another company's properties. No issues of public welfare, breaking
up of monopolies, or other high sounding principles are involved.
The core question is purely and simply whether or not to grant
ETCI's desire for economic gains through riding on another firm's
investments.
(2) The Court has permitted respondent ETCI to operate a
telephone system without a valid legislative franchise. It strains the
imagination too much to interpret a legislative franchise authorizing
"radio stations" as including the provisional permit for a
sophisticated telephone system which has absolutely nothing to do
with radio broadcasts and transmissions. The Court subverts the
legislative will when it validates a provisional permit on the basis of
authority which never envisioned much less intended its use for a
regular telephone system catering to thousands of individual
receiver units. There is nothing in Rep. Act No. 2090 which remotely
suggests a cellular mobile telephone system.
(3) The authority given by Rep. Act No. 2090 has expired. ETCI is
not only riding on another company's investments and using
legislative authority for a purpose never dreamed of by the
legislators but is also trying to extract life from and resurrect an
unused and dead franchise.
My principal objection to the disputed NTC order arises from the
fact that respondent Express Telecommunications Co. Inc. (ETCI)
cannot exist without using the facilities of Philippine Long Distance
Telephone Co. (PLDT). Practically all of its business will be
conducted through another company's property.
While pretending to set up a separate phone company, ETCI's
cellular phones would be useless most of the time, if not all the time,
unless they use PLDT lines. It would be different if ETCI phone
owners would primarily communicate with one another and tap into
PLDT lines only rarely or occasionally.
To compare ETCI with the Government Telephone System (GTS)
or with an independent phone company serving a province or city
is misleading. The defunct GTS was set up to connect government
offices and personnel with one another. It could exist independently
and was not primarily or wholly dependent on PLDT connections. A
provincial or city system serves the residents of a province or city.
It primarily relies on its own investments and infrastructure. It asks
for PLDT services only when long distance calls to another country,
city, or province have to be made.
I can, therefore, understand PLDT's reluctance Since it has its own
franchise to operate exactly the same services which ETCI is
endeavoring to establish. PLDT would be using its own existing
lines. Under the Court's decision, it would be compelled to allow
another company to use those same lines in direct competition with
the lines owner. The cellular system is actually only an adjunct to a
regular telephone system, not a separate and independent system.
As an adjunct and component unit or as a parasite (if a foreign
body) it must be fed by the mother organism or unit if it is to survive.
Under the disputed order, ETCI will be completely dependent upon
its use of the P16 billions worth of infrastructure which PLDT has
built over several decades. The vaunted payment of compensation
everytime an ETCI phone taps into a PLDT line is illusory. There
can be no adequate payment for the use of billions of pesos of
investments built up over 60 years. Moreover, it is actually the
phone owner or consumer who pays the fee. The rate will be fixed
by Government and will be based on the consumer's best interests
and capacity, ignoring or subordinating the petitioner's investments.
Payment will depend on how much the phone user should be
charged for making a single phone call and will disregard the
millions of pesos that ETCI will earn through its use of billions of
pesos worth of another company's investments and properties.
The "hated monopoly" and "improved services" arguments are not
only misleading but also illusory.
To sustain the questioned NTC order will not in any way improve
telephone services nor would any monopoly be dismantled. The
answer to inadequate telephone facilities is better administrative
supervision. The NTC should pay attention to its work and compel
PLDT to improve its services instead of saddling with the burden of
carrying another company's system.
For better services, what the country needs is to improve the
existing system and provide enough telephone lines for all who
really need them. The proposed ETCI cellular phones will serve
mostly those who can afford to tide in expensive cars and
who already have two or three telephones in their offices and
residences. Cellular phones should legally and fairly be provided by
PLDT as just another facet of its expansion program.
The mass of applicants for new telephones will not benefit from
cellular phones. In fact, if PLDT is required by NTC to open up new
exchanges or interconnections for the rich ETCI consumers, this
will mean an equivalent number of low income or middle income
applicants who will have to wait longer for their own PLDT lines.
The Court's resolution favors the conveniences of the rich at the
expense of the necessities of the poor. *
I agree with the petitioner that what NTC granted is not merely
provisional authority but what is in effect a regular certificate of
public convenience and necessity or "CPCN".
Starting with seven cell sites for 3,000 subscribers in Metro Manila,
the cellular mobile system will establish 67 cell sites beginning
October 1991. The initial expenses alone will amount to P130
million. At page 8 of its Comment, ETCI admits that that "the
provisional authority to operate will be useless to ETCI if it does not
put up the system and interconnnect said system with the existing
PLDT network."(Emphasis supplied) The completion of
interconnection arrangements, the setting up of expensive
installations, the requirements as to maintenance and operation,
and other conditions found in the NTC order are anything but
provisional.
The authority given to ETCI is entirely different from the provisional
authority given to MERALCO or oil companies to increase the price
of oil or electricity or to bus and jeepney operators to raise fares a
few centavos. In these cases the need for increases is not only
urgent but is usually a foregone conclusion dictated by pressing
circumstances. Further hearings are needed only to fix the amount
which will be finally authorized. The NTC orders can also be easily
revoked. Increased prices of oil or rates of transportation services
can be lowered or struck down if the preliminary determinations are
wrong. In the instant case, NTC has authorized a new company to
start operations even if the issues have not been thoroughly
threshed out. There is no urgent need which warrants operations
before a final permit is granted. Once in operation, there can be no
cancelling or revocation of the authority to operate, no dismantling
of thousands of cellular phones and throwing to waste of over P100
million worth of investments in fixed facilities. Theoretically, it can
be done but it is clear from the records that what was granted is
really a CPCN.
There is no dispute that a legislative franchise is necessary for the
operation of a telephone system. The NTC has no jurisdiction to
grant the authority. The fact that ETCI has to rely on a 1958
legislative franchise shows that only Congress can give the
franchise which will empower NTC to issue the certificate or CPCN.
Rep. Act No. 2090 is a franchise for the construction and operation
of radio stations. Felix Alberto and Co. Inc. (FACI) was authorized
in the operation of those radio stations to acquire and handle
transmitters, receivers, electrical machinery and other related
devises. The use of radio telephone was never intended or
envisioned for a regular telephone company. "Radio telephony" is
governed and circumscribed by the basic purpose of operating
radio stations. Telephony may be used only to enable
communications between the stations, to transmit a radio message
to a station where it would be transcribed into a form suitable for
delivery to the intended recipient. FACI was authorized to
communicate to, between, and among its radio stations. There is
no authority for thousands of customers to be talking to PLDT
subscribers directly. FACI was never given authority by Rep. Act
2090 to operate switching facilities, wire-line transmissions, and
telecommunication stations of a telephone company. The entire
records can be scrutinized and they will show that ETCI has all but
ignored and kept silent about the purpose of its alleged franchise-
which is for the real operation of radio stations. There can be no
equating of "radio stations" with a complete cellular mobile
telephone system. The two are poles apart.
The most liberal interpretation can not possibly read in a 1958
franchise for radio stations, the authority for a mobile cellular
system vintage 1990. No amount of liberal interpretation can supply
the missing requirement. And besides, we are not interpreting a
Constitution which is intended to cover changing situations and
must be read liberally. Legislative franchises are always
construed strictly against the franchise.
The remedy is for ETCI to go to Congress. I regret that in dismissing
this petition, we may be withholding from Congress the courtesy we
owe to it as a co-equal body and denigrating its power to examine
whether or not ETCI really deserves a legislative franchise.
My third point has to do with the sudden resurrection of a dead
franchise and its coming to life in an entirely different form-no longer
a radio station but a modern telephone company.
I have searched the records in vain for any plan of ETCI to operate
radio stations. It has not operated and does not plan to operate
radio stations. Its sole objective is to set up a telephone company.
For that purpose, it should go to Congress and get a franchise for
a telephone company. NTC cannot give it such a franchise.
Section 10 of Rep. Act No. 2090 prohibits the transfer of the
franchise and the rights and privileges under that franchise without
the express approval of Congress. No amount of legal niceties can
cloak the fact that ETCI is not FACI, that the franchise was sold by
FACI to ETCI, and that the permit given by NTC to ETCI is based
on a purchased franchise.
When the owners of FACI sold out their stocks, the 3,900 shares
were on paper worth only 35 centavos each. The company had no
assets and physical properties. All it had was the franchise, for
whatever it was worth. The buyers paid P4,618,185.00 for the
company's stocks, almost all of the amount intended for the
franchise. It was, therefore, a sale or transfer of the franchise in
violation of the express terms of Rep. Act No. 2090 which call for
approval by Congress.
ETCI tried to show a series of transactions involving the sales of
almost all of its stocks. Not only are the circumstances surrounding
the transfers quite suspicious, but they were effected without the
approval and authorization of the Commission as required by law.
Sec. 4 of Rep. Act No. 2090 also provides that the franchise shall
be void unless the construction of radio stations is begun within two
years or June 22, 1960 and completed within ten years or June 22,
1968.
As of April 14, 1987, ETCI formally admitted that it was still in the
pre-operating stage. Almost 30 years later, it had not even started
the business authorized by the franchise. It is only now that it
proposes to construct, not radio stations, but a telephone system.
During the oral arguments and in its memorandum, ETCI presented
proof of several radio station construction permits. A construction
permit authorizes a construction but does not prove it. There is no
proof that the entire construction of all stations was completed
within ten years. In fact, there is not the slightest intimation that
ETCI, today, is operating radio stations. What it wants is to set up
a telephone system.
In addition to the franchise being void under its own charter, P.D.
36 on November 2, 1972, cancelled all unused or dormant
legislative franchises. Rep. Act No. 2090, having been voided by its
own Section 4, suffered a second death if that is at all possible.
The violations of law-(1) the giving of life to an already dead
franchise, (2) the transfer of ownership against an express statutory
provision, and (3) the use of a franchise for radio stations to justify
the setting up of a cellular mobile telephone system are too glaring
for us to ignore on the basis of "respect" for a questionable NTC
order and other purely technical considerations. We should not
force PLDT to open its lines to enable a competitor to operate a
system which cannot survive unless it uses PLDT properties.
The NTC bases its order on alleged grounds of public need, public
interest, and the common good. There is no showing that these
considerations will be satisfied, at least sufficient to warrant a
strained interpretation of legal provisions. Any slight improvement
which the expensive ETCI project will accomplish cannot offset its
violation of law and fair dealing.
I, THEREFORE, VOTE to GRANT the petition.
Fernan, C.J., Narvasa, Gancayco, Bidin and Medialdea, JJ. concur.
CRUZ, J., concurring and dissenting:
As one of the many dissatisfied customers of PLDT, I should have
no objection to the grant of the provisional authority to ETCI. I have
none. Its admission will improve communication facilities in the
country conformably to the constitutional objective. It will also keep
PLDT on its toes and encourage it to correct its deficient service in
view of the competition.
I fully agree with all the rulings in the ponencia except the approval
of the requirement for PLDT to interconnect with ETCI. I think it
violates due process. It reminds me of the story of the little red hen
who found some rice and asked who would help her plant it. None
of the animals in the farm was willing and neither did they help in
watering, harvesting and finally cooking it. But when she asked,
"Who will help me eat the rice?" everyone wanted to join in. The
little red hen is like PLDT.
If ETCI wants to operate its own telephone system, it should rely on
its own resources instead of riding piggy-back on PLDT. It seems
to me rather unfair for the Government to require PLDT to share
with a newcomer and potential rival what it took PLDT tremendous
effort and long years and billions of pesos to build.
The case of Republic of the Philippines v. PLDT, 26 SCRA 620, is
not applicable because it was the Government itself that was there
seeking interconnection of its own telephone system, with PLDT.
The Court recognized the obvious public purpose that justified the
special exercise (by the Government of the power of eminent
domain. But in the case before us, the intended beneficiary is a
private enterprise primarily organized for profit and, indeed, to
compete with PLDT. In effect, the Government is forcing PLDT to
surrender its competitive advantage and share its resources with
ETCI, which may not only supplement but, possibly, even ultimately
supplant PLDT. I do not think government authority extends that far.
The majority disposes of the question of due process by simply
saying that PLDT will have frill opportunity to be heard in the
ascertainment of the just compensation ETCI will have to pay for
the interconnection. That is not the issue. What PLDT is objecting
to is not the amount of the just compensation but the
interconnection itself that is being forced upon it.
I feel there is no due process where private property is taken by the
Government from one private person and given to another private
person for the latter's direct benefit. The fact that compensation is
paid is immaterial; the flaw lies in the taking itself (Davidson v. New
Orleans, 90 U.S. 97). The circumstance that PLDT is a public utility
is no warrant for taking undue liberties with its property, which is
protected by the Bill of Rights. "Public need" cannot be a blanket
justification for favoring one investor against another in
contravention of the system of free enterprise. If PLDT has misused
its franchise, I should think the solution is to revoke its authority, not
to force it to share its resources with its private competitors.
The rule is that where it is the legislature itself that directly calls for
the expropriation of private property, its determination of the thing
to be condemned and the purpose of the taking is conclusive on the
courts (City of Manila v. Chinese Community, 40 Phil. 349). But
where the power of eminent domain is exercised only by a delegate
of the legislature, like ETCI, the courts may inquire into the
necessity or propriety of the expropriation and, when warranted,
pronounce its invalidity (Republic of the Philippines v. La Orden de
PO Benedictinos de Filipinas, 1 SCRA 649). I think this is what the
Court should do in the case at bar.
A final point. It is argued that requiring ETCI to start from scratch
(as PLDT did) and import its own equipment would entail a
tremendous outflow of foreign currency we can ill afford at this time.
Perhaps so. But we must remember that the Bill of Rights is not a
marketable commodity, like a piece of machinery. Due process is
an indispensable requirement that cannot be assessed in dollar and
cents.
Fernan, C.J., and Narvasa, J., concur.
Separate Opinions
GUTIERREZ, JR., J., dissenting:
I share with the rest of the Court the desire to have a "modern,
efficient, satisfactory, and continuous telecommunications service"
in the Philippines. I register this dissent, however, because I believe
that any frustrations over the present state of telephone services do
not justify our affirming an illegal and inequitable order of the
National Telecommunications Commission (NTC). More so when it
appears that the questioned order is not really a solution to the
problems bugging our telephone industry.
My dissent is based on three primary considerations, namely:
(1) The Court has sustained nothing less than the desire of
respondent ETCI to set-up a profitable business catering to an
affluent clientele through the use of billions of pesos worth of
another company's properties. No issues of public welfare, breaking
up of monopolies, or other high sounding principles are involved.
The core question is purely and simply whether or not to grant
ETCI's desire for economic gains through riding on another firm's
investments.
(2) The Court has permitted respondent ETCI to operate a
telephone system without a valid legislative franchise. It strains the
imagination too much to interpret a legislative franchise authorizing
"radio stations" as including the provisional permit for a
sophisticated telephone system which has absolutely nothing to do
with radio broadcasts and transmissions. The Court subverts the
legislative will when it validates a provisional permit on the basis of
authority which never envisioned much less intended its use for a
regular telephone system catering to thousands of individual
receiver units. There is nothing in Rep. Act No. 2090 which remotely
suggests a cellular mobile telephone system.
(3) The authority given by Rep. Act No. 2090 has expired. ETCI is
not only riding on another company's investments and using
legislative authority for a purpose never dreamed of by the
legislators but is also trying to extract life from and resurrect an
unused and dead franchise.
My principal objection to the disputed NTC order arises from the
fact that respondent Express Telecommunications Co. Inc. (ETCI)
cannot exist without using the facilities of Philippine Long Distance
Telephone Co. (PLDT). Practically all of its business will be
conducted through another company's property.
While pretending to set up a separate phone company, ETCI's
cellular phones would be useless most of the time, if not all the time,
unless they use PLDT lines. It would be different if ETCI phone
owners would primarily communicate with one another and tap into
PLDT lines only rarely or occasionally.
To compare ETCI with the Government Telephone System (GTS)
or with an independent phone company serving a province or city
is misleading. The defunct GTS was set up to connect government
offices and personnel with one another. It could exist independently
and was not primarily or wholly dependent on PLDT connections. A
provincial or city system serves the residents of a province or city.
It primarily relies on its own investments and infrastructure. It asks
for PLDT services only when long distance calls to another country,
city, or province have to be made.
I can, therefore, understand PLDT's reluctance Since it has its own
franchise to operate exactly the same services which ETCI is
endeavoring to establish. PLDT would be using its own existing
lines. Under the Court's decision, it would be compelled to allow
another company to use those same lines in direct competition with
the lines owner. The cellular system is actually only an adjunct to a
regular telephone system, not a separate and independent system.
As an adjunct and component unit or as a parasite (if a foreign
body) it must be fed by the mother organism or unit if it is to survive.
Under the disputed order, ETCI will be completely dependent upon
its use of the P16 billions worth of infrastructure which PLDT has
built over several decades. The vaunted payment of compensation
everytime an ETCI phone taps into a PLDT line is illusory. There
can be no adequate payment for the use of billions of pesos of
investments built up over 60 years. Moreover, it is actually the
phone owner or consumer who pays the fee. The rate will be fixed
by Government and will be based on the consumer's best interests
and capacity, ignoring or subordinating the petitioner's investments.
Payment will depend on how much the phone user should be
charged for making a single phone call and will disregard the
millions of pesos that ETCI will earn through its use of billions of
pesos worth of another company's investments and properties.
The "hated monopoly" and "improved services" arguments are not
only misleading but also illusory.
To sustain the questioned NTC order will not in any way improve
telephone services nor would any monopoly be dismantled. The
answer to inadequate telephone facilities is better administrative
supervision. The NTC should pay attention to its work and compel
PLDT to improve its services instead of saddling with the burden of
carrying another company's system.
For better services, what the country needs is to improve the
existing system and provide enough telephone lines for all who
really need them. The proposed ETCI cellular phones will serve
mostly those who can afford to tide in expensive cars and
who already have two or three telephones in their offices and
residences. Cellular phones should legally and fairly be provided by
PLDT as just another facet of its expansion program.
The mass of applicants for new telephones will not benefit from
cellular phones. In fact, if PLDT is required by NTC to open up new
exchanges or interconnections for the rich ETCI consumers, this
will mean an equivalent number of low income or middle income
applicants who will have to wait longer for their own PLDT lines.
The Court's resolution favors the conveniences of the rich at the
expense of the necessities of the poor. *
I agree with the petitioner that what NTC granted is not merely
provisional authority but what is in effect a regular certificate of
public convenience and necessity or "CPCN".
Starting with seven cell sites for 3,000 subscribers in Metro Manila,
the cellular mobile system will establish 67 cell sites beginning
October 1991. The initial expenses alone will amount to P130
million. At page 8 of its Comment, ETCI admits that that "the
provisional authority to operate will be useless to ETCI if it does not
put up the system and interconnnect said system with the existing
PLDT network."(Emphasis supplied) The completion of
interconnection arrangements, the setting up of expensive
installations, the requirements as to maintenance and operation,
and other conditions found in the NTC order are anything but
provisional.
The authority given to ETCI is entirely different from the provisional
authority given to MERALCO or oil companies to increase the price
of oil or electricity or to bus and jeepney operators to raise fares a
few centavos. In these cases the need for increases is not only
urgent but is usually a foregone conclusion dictated by pressing
circumstances. Further hearings are needed only to fix the amount
which will be finally authorized. The NTC orders can also be easily
revoked. Increased prices of oil or rates of transportation services
can be lowered or struck down if the preliminary determinations are
wrong. In the instant case, NTC has authorized a new company to
start operations even if the issues have not been thoroughly
threshed out. There is no urgent need which warrants operations
before a final permit is granted. Once in operation, there can be no
cancelling or revocation of the authority to operate, no dismantling
of thousands of cellular phones and throwing to waste of over P100
million worth of investments in fixed facilities. Theoretically, it can
be done but it is clear from the records that what was granted is
really a CPCN.
There is no dispute that a legislative franchise is necessary for the
operation of a telephone system. The NTC has no jurisdiction to
grant the authority. The fact that ETCI has to rely on a 1958
legislative franchise shows that only Congress can give the
franchise which will empower NTC to issue the certificate or CPCN.
Rep. Act No. 2090 is a franchise for the construction and operation
of radio stations. Felix Alberto and Co. Inc. (FACI) was authorized
in the operation of those radio stations to acquire and handle
transmitters, receivers, electrical machinery and other related
devises. The use of radio telephone was never intended or
envisioned for a regular telephone company. "Radio telephony" is
governed and circumscribed by the basic purpose of operating
radio stations. Telephony may be used only to enable
communications between the stations, to transmit a radio message
to a station where it would be transcribed into a form suitable for
delivery to the intended recipient. FACI was authorized to
communicate to, between, and among its radio stations. There is
no authority for thousands of customers to be talking to PLDT
subscribers directly. FACI was never given authority by Rep. Act
2090 to operate switching facilities, wire-line transmissions, and
telecommunication stations of a telephone company. The entire
records can be scrutinized and they will show that ETCI has all but
ignored and kept silent about the purpose of its alleged franchise-
which is for the real operation of radio stations. There can be no
equating of "radio stations" with a complete cellular mobile
telephone system. The two are poles apart.
The most liberal interpretation can not possibly read in a 1958
franchise for radio stations, the authority for a mobile cellular
system vintage 1990. No amount of liberal interpretation can supply
the missing requirement. And besides, we are not interpreting a
Constitution which is intended to cover changing situations and
must be read liberally. Legislative franchises are always
construed strictly against the franchise.
The remedy is for ETCI to go to Congress. I regret that in dismissing
this petition, we may be withholding from Congress the courtesy we
owe to it as a co-equal body and denigrating its power to examine
whether or not ETCI really deserves a legislative franchise.
My third point has to do with the sudden resurrection of a dead
franchise and its coming to life in an entirely different form-no longer
a radio station but a modern telephone company.
I have searched the records in vain for any plan of ETCI to operate
radio stations. It has not operated and does not plan to operate
radio stations. Its sole objective is to set up a telephone company.
For that purpose, it should go to Congress and get a franchise for
a telephone company. NTC cannot give it such a franchise.
Section 10 of Rep. Act No. 2090 prohibits the transfer of the
franchise and the rights and privileges under that franchise without
the express approval of Congress. No amount of legal niceties can
cloak the fact that ETCI is not FACI, that the franchise was sold by
FACI to ETCI, and that the permit given by NTC to ETCI is based
on a purchased franchise.
When the owners of FACI sold out their stocks, the 3,900 shares
were on paper worth only 35 centavos each. The company had no
assets and physical properties. All it had was the franchise, for
whatever it was worth. The buyers paid P4,618,185.00 for the
company's stocks, almost all of the amount intended for the
franchise. It was, therefore, a sale or transfer of the franchise in
violation of the express terms of Rep. Act No. 2090 which call for
approval by Congress.
ETCI tried to show a series of transactions involving the sales of
almost all of its stocks. Not only are the circumstances surrounding
the transfers quite suspicious, but they were effected without the
approval and authorization of the Commission as required by law.
Sec. 4 of Rep. Act No. 2090 also provides that the franchise shall
be void unless the construction of radio stations is begun within two
years or June 22, 1960 and completed within ten years or June 22,
1968.
As of April 14, 1987, ETCI formally admitted that it was still in the
pre-operating stage. Almost 30 years later, it had not even started
the business authorized by the franchise. It is only now that it
proposes to construct, not radio stations, but a telephone system.
During the oral arguments and in its memorandum, ETCI presented
proof of several radio station construction permits. A construction
permit authorizes a construction but does not prove it. There is no
proof that the entire construction of all stations was completed
within ten years. In fact, there is not the slightest intimation that
ETCI, today, is operating radio stations. What it wants is to set up
a telephone system.
In addition to the franchise being void under its own charter, P.D.
36 on November 2, 1972, cancelled all unused or dormant
legislative franchises. Rep. Act No. 2090, having been voided by its
own Section 4, suffered a second death if that is at all possible.
The violations of law-(1) the giving of life to an already dead
franchise, (2) the transfer of ownership against an express statutory
provision, and (3) the use of a franchise for radio stations to justify
the setting up of a cellular mobile telephone system are too glaring
for us to ignore on the basis of "respect" for a questionable NTC
order and other purely technical considerations. We should not
force PLDT to open its lines to enable a competitor to operate a
system which cannot survive unless it uses PLDT properties.
The NTC bases its order on alleged grounds of public need, public
interest, and the common good. There is no showing that these
considerations will be satisfied, at least sufficient to warrant a
strained interpretation of legal provisions. Any slight improvement
which the expensive ETCI project will accomplish cannot offset its
violation of law and fair dealing.
I, THEREFORE, VOTE to GRANT the petition.
Fernan, C.J., Narvasa, Gancayco, Bidin and Medialdea, JJ.,
concur.
CRUZ, J., concurring and dissenting:
As one of the many dissatisfied customers of PLDT, I should have
no objection to the grant of the provisional authority to ETCI. I have
none. Its admission will improve communication facilities in the
country conformably to the constitutional objective. It will also keep
PLDT on its toes and encourage it to correct its deficient service in
view of the competition.
I fully agree with all the rulings in the ponencia except the approval
of the requirement for PLDT to interconnect with ETCI. I think it
violates due process. It reminds me of the story of the little red hen
who found some rice and asked who would help her plant it. None
of the animals in the farm was willing and neither did they help in
watering, harvesting and finally cooking it. But when she asked,
"Who will help me eat the rice?" everyone wanted to join in. The
little red hen is like PLDT.
If ETCI wants to operate its own telephone system, it should rely on
its own resources instead of riding piggy-back on PLDT. It seems
to me rather unfair for the Government to require PLDT to share
with a newcomer and potential rival what it took PLDT tremendous
effort and long years and billions of pesos to build.

The case of Republic of the Philippines v. PLDT, 26 SCRA 620, is

not applicable because it was the Government itself that was there
seeking interconnection of its own telephone system, with PLDT.
The Court recognized the obvious public purpose that justified the
special exercise (by the Government of the power of eminent
domain. But in the case before us, the intended beneficiary is a
private enterprise primarily organized for profit and, indeed, to
compete with PLDT. In effect, the Government is forcing PLDT to
surrender its competitive advantage and share its resources with
ETCI, which may not only supplement but, possibly, even ultimately
supplant PLDT. I do not think government authority extends that far.
The majority disposes of the question of due process by simply
saying that PLDT will have frill opportunity to be heard in the
ascertainment of the just compensation ETCI will have to pay for
the interconnection. That is not the issue. What PLDT is objecting
to is not the amount of the just compensation but the
interconnection itself that is being forced upon it.

I feel there is no due process where private property is taken by the

Government from one private person and given to another private
person for the latter's direct benefit. The fact that compensation is
paid is immaterial; the flaw lies in the taking itself (Davidson v. New
Orleans, 90 U.S. 97). The circumstance that PLDT is a public utility
is no warrant for taking undue liberties with its property, which is
protected by the Bill of Rights. "Public need" cannot be a blanket
justification for favoring one investor against another in
contravention of the system of free enterprise. If PLDT has misused
its franchise, I should think the solution is to revoke its authority, not
to force it to share its resources with its private competitors.

The rule is that where it is the legislature itself that directly calls for
the expropriation of private property, its determination of the thing
to be condemned and the purpose of the taking is conclusive on the
courts (City of Manila v. Chinese Community, 40 Phil. 349). But
where the power of eminent domain is exercised only by a delegate
of the legislature, like ETCI, the courts may inquire into the
necessity or propriety of the expropriation and, when warranted,
pronounce its invalidity (Republic of the Philippines v. La Orden de
PO Benedictinos de Filipinas, 1 SCRA 649). I think this is what the
Court should do in the case at bar.

A final point. It is argued that requiring ETCI to start from scratch

(as PLDT did) and import its own equipment would entail a
tremendous outflow of foreign currency we can ill afford at this time.
Perhaps so. But we must remember that the Bill of Rights is not a
marketable commodity, like a piece of machinery. Due process is
an indispensable requirement that cannot be assessed in dollar and
cents.

Fernan, C.J., and Narvasa, J., concur.

 EN BANC in the present action, but, also, over a month before the filing of the
case (May 29, 1958) in which said judgment was rendered.
[G.R. No. L-20850. November 29, 1965] Moreover, appellee purchased the shares of stock of Insular Farms
as the highest bidder at an auction sale held at the instance of
THE EDWARD J. NELL COMPANY, petitioner, vs. PACIFIC a bank to which said shares had been pledged as security for an
FARMS, INC., respondent. obligation of Insular Farms in favor of said bank. It has, also, been
established that the appellee had paid P285,126.99 for said shares
Agrava & Agrava for petitioner. of stock, apart from the sum of P10,000.00 it, likewise, paid for the
Araneta, Mendoza & Papa for respondent. other assets of Insular Farms.

DECISION Neither is it claimed that these transactions have resulted in the

CONCEPCION, J.:
Appeal by certiorari, taken by Edward J. Nell Co. — hereinafter
referred to as appellant — from a decision of the Court of Appeals.
On October 9, 1958, appellant secured in Civil Case No. 58579 of
the Municipal Court of Manila against Insular Farms, Inc. —
hereinafter referred to as Insular Farms a judgment for the sum of
P1,853.80 — representing the unpaid balance of the price of a
pump sold by appellant to Insular Farms — with interest on said
sum, plus P125.00 as attorney's fees and P84.00 as costs. A writ
of execution, issued after the judgment had become final, was, on
August 14, 1959, returned unsatisfied, stating that Insular Farms
had no leviable property. Soon thereafter, or on November 13,
1959, appellant filed with said court the present action against
Pacific Farms, Inc. — hereinafter referred to as appellee — for the
collection of the judgment aforementioned, upon the theory that
appellee is the alter ego of Insular Farms, which appellee has
denied. In due course, the municipal court rendered judgment
dismissing appellant's complaint. Appellant appealed, with the
same result, to the court of first instance and, subsequently, to the
Court of Appeals. Hence this appeal by certiorari, upon the ground
that the Court of Appeals had erred: (1) in not holding the appellee
liable for said unpaid obligation of the Insular Farms; and (2) in not
granting attorney's fees to appellant.
consolidation or merger of the Insular Farms and appellee herein.
On the contrary, appellant's theory to the effect that appellee is
an alter ego of the Insular Farms negates such consolidation or
merger, for a corporation cannot be its own alter ego.
It is urged, however, that said P10,000.00 paid by appellee for other
assets of Insular Farms is a grossly inadequate price, because,
appellant now claims, said assets were worth around P285,126.99,
and that, consequently, the sale must be considered fraudulent.
However, the sale was submitted to and approved by the Securities
and Exchange Commission. It must be presumed, therefore, that
the price paid was fair and reasonable. Moreover, the only issue
raised in the court of origin was whether or not appellee is an alter
ego of Insular Farms. The question of whether the aforementioned
sale of assets for P10,000.00 was fraudulent or not, had not been
put in issue in said court. Hence, it may, not be raised on appeal.
Being a mere consequence of the first assignment of error, which
is thus clearly untenable, appellant's second assignment of error
needs no discussion.
WHEREFORE, the decision appealed from is hereby affirmed, with
costs against the appellant. It is so ordered.

With respect to the first ground, it should be noted that appellant's Bengzon, C.J., Bautista Angelo, Reyes, J.B.L., Dizon, Regala,
complaint in the municipal court was anchored upon the theory that Makalintal, Bengzon. J.P., and Zaldivar, JJ., concur.
appellee is an alter ego of Insular Farms, because the former had
purchased all or substantially all of the shares of stock, as well as Barrera, J., is on leave.
the real and personal properties of the latter, including the pumping
equipment sold by appellant to Insular Farms. The record shows
that, on March 21, 1958, appellee purchased 1,000 shares of stock
of Insular Farms for P285,126.99; that, thereupon, appellee sold
said shares of stock to certain individuals, who forthwith
reorganized said corporation; and that the board of directors
thereof, as reorganized, then caused its assets, including its
leasehold rights over a public land in Bolinao, Pangasinan, to be
sold to herein appellee for P10,000.00. We agree with the Court of
Appeals that these facts do not prove that the appellee is an alter
ego of Insular Farms, or is liable for its debts. The rule is set forth
in Fletcher Cyclopedia Corporations, Vol. 15, Sec. 7122, pp. 160-
161, as follows:

Generally where one corporation sells or otherwise

transfers all of its assets to another corporation, the latter
is not liable for the debts and liabilities of the transferor,
except: (1) where the purchaser expressly or impliedly
agrees to assume such 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 entered into fraudulently in order to escape
liability for such debts.

In the case at bar, there is neither proof nor allegation that appellee
had expressly or impliedly agreed to assume the debt of Insular
Farms in favor of appellant herein, or that the appellee is a
continuation of Insular Farms, or that the sale of either the shares
of stock or the assets of Insular Farms to the appellee has been
entered into fraudulently, in order to escape liability for the debt of
the Insular Farms in favor of appellant herein. In fact, these sales
took place (March, 1958) not only over six (6) months before the
rendition of the judgment (October 9, 1958) sought to be collected
 FIRST DIVISION
[G.R. No. 129459. September 29, 1998.]
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC.,
petitioner, vs. COURT OF APPEALS, MOTORICH SALES
CORPORATION, NENITA LEE GRUENBERG, ACL
DEVELOPMENT CORP. and JNM REALTY AND
DEVELOPMENT CORP., respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; SALE; TRANSFER OR SALE
OF CORPORATE PROPERTY BY THE CORPORATION'S
TREASURER WITHOUT ANY AUTHORITY FROM THE BOARD
OF DIRECTORS IS NULL AND VOID. — Indubitably, a corporation
may act only through its board of directors or, when authorized
either by its bylaws or by its board resolution, through its officers or
agents in the normal course of business. The general principles of
agency govern the relation between the corporation and its officers
or agents, subject to the articles of incorporation, bylaws, or
relevant provisions of law. Thus, this Court has held that " 'a
corporate officer or agent may represent and bind the corporation
in transactions with third persons to the extent that the authority to
do so has been conferred upon him, and this includes powers which
have been intentionally conferred, and also such powers as, in the
usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by
custom and usage, as usually pertaining to the particular officer or
agent, and such apparent powers as the corporation has caused
persons dealing with the officer or agent to believe that it has
conferred.' “Furthermore, the Court has also recognized the rule
that "persons dealing with an assumed agent, whether the assumed
agency be a general or special one, are bound at their peril, if they
would hold the principal liable, to ascertain not only the fact of
agency but also the nature and extent of authority, and in case
either is controvert, the burden of proof is upon them to establish it
(Harry Keeler vs. Rodriguez, 4 Phil. 19)." Unless duly authorized, a
treasurer, whose powers are limited, cannot bind the corporation in
a sale of its assets. In the case at bar, Respondent Motorich
categorically denies that it ever authorized Nenita Gruenberg, its
treasurer, to sell the subject parcel of land. Consequently, petitioner
had the burden of proving that Nenita Gruenberg was in fact
authorized to represent and bind Motorich in the transaction.
Petitioner failed to discharge this burden. Its offer of evidence
before the trial court contained no proof of such authority. It has not
shown any provision of said respondent's articles of incorporation,
bylaws or board resolution to prove that Nenita Gruenberg
possessed such power. That Nenita Gruenberg is the treasurer of
Motorich does not free petitioner from the responsibility of
ascertaining the extent of her authority to represent the corporation.
Petitioner cannot assume that she, by virtue of her position, was
authorized to sell the property of the corporation. Selling is
obviously foreign to a corporate treasurer's function, which
generally has been described as "to receive and keep the funds of
the corporation and to disburse them in accordance with the
authority given him by the board or the properly authorized officers."
Neither was such real estate sale shown to be a normal business
activity of Motorich. The primary purpose of Motorich is marketing,
distribution, export and import in relation to a general
merchandising business. Unmistakably, its treasurer is not cloaked
with actual or apparent authority to buy or sell real property, an
activity which falls way beyond the scope of her general authority.
2. ID.; ID.; A CONTRACT THAT IS CONSIDERED
INEXISTENT AND VOID FROM THE BEGINNING IS NOT
SUSCEPTIBLE TO RATIFICATION.— As a general rule, the acts
of corporate officers within the scope of their authority are binding
on the corporation. But when these officers exceed their authority,
their actions "cannot bind the corporation, unless it has ratified such
acts or is estopped from disclaiming them." In this case, there is a
clear absence of proof that Motorich ever authorized Nenita
Gruenberg, or made it appear to any third person that she had the
authority, to sell its land or to receive the earnest money. Neither
was there any proof that Motorich ratified, expressly or impliedly,
the contract. Petitioner rests its argument on the receipt which,
however, does not prove the fact of ratification. The document is a
handwritten one, not a corporate receipt, and it bears only Nenita
Gruenberg's signature. Certainly, this document alone does not
prove that her acts were authorized or ratified by Motorich. Article
1318 of the Civil Code lists the requisites of a valid and perfected
contract: "(1) consent of the contracting parties; (2) object certain
which is the subject matter of the contract; (3) cause of the
obligation which is established." As found by the trial court and
affirmed by the Court of Appeals, there is no evidence that
Gruenberg was authorized to enter into the contract of sale, or that
the said contract was ratified by Motorich. This factual finding of the
two courts is binding on this Court. As the consent of the seller was
not obtained, no contract to bind the obligor was perfected.
Therefore, there can be no valid contract of sale between petitioner
and Motorich. Because Motorich had never given a written
authorization to Respondent Gruenberg to sell its parcel of land, we
hold that the February 14, 1989 Agreement entered into by the latter
with petitioner is void under Article 1874 of the Civil Code. Being
inexistent and void from the beginning, said contract cannot be
ratified.
3. COMMERCIAL LAW; CORPORATION CODE;
PIERCING THE CORPORATE VEIL IS NOT JUSTIFIED IN CASE
AT BAR. — We stress that the corporate fiction should be set aside
when it becomes a shield against liability for fraud, illegality or
inequity committed on third persons. The question of piercing the
veil of corporate fiction is essentially, then, matter of proof. In the
present case, however, the Courts finds no reason to pierce the
corporate veil of Respondent Motorich. Petitioner utterly failed to
establish that said corporation was formed, or that it is operated, for
the purpose of shielding any alleged fraudulent or illegal activities
of its officers or stockholders; or that the said veil was used to
conceal fraud, illegality or inequity at the expense of third persons
like petitioner.
4. ID.; ID.; PRIVATE RESPONDENT CORPORATION IS
NOT A CLOSE CORPORATION AS DEFINED UNDER SECTION
96 OF THE CORPORATION CODE. — The articles of
incorporation of Motorich Sales Corporation does not contain any
provision stating that (1) the number of stockholders shall not
exceed 20, or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation, or (3) listing its stocks in any stock
exchange or making a public offering of such stocks is prohibited.
From its articles, it is clear that Respondent Motorich is not a close
corporation. Motorich does not become one either, just because
Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock. The "[m]ere ownership by a single
stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personalities." So, too, a
narrow distribution of ownership does not, by itself, make a close
corporation.
5. CIVIL LAW, DAMAGES; AWARD OF ATTORNEY'S
FEES IS NOT JUSTIFIED IN CASE AT BAR; PETITIONER WAS
A VICTIM OF ITS OWN OFFICERS NEGLIGENCE IN ENTERING
INTO A CONTRACT WITH AN UNAUTHORIZED OFFICER OF
ANOTHER CORPORATION. — We sustain the findings of both the
trial and the appellate courts that the foregoing allegations lack
factual bases. Hence, an award of damages or attorney's fees
cannot be justified. The amount paid as "earnest money" was not
proven to have redounded to the benefit of Respondent Motorich.
Petitioner claims that said amount was deposited to the account of
Respondent Motorich, because "it was deposited with the account
of Aren Commercial c/o Motorich Sales Corporation." Respondent
Gruenberg, however, disputes the allegations of petitioner. In any
event, Gruenberg offered to return the amount to petitioner ". . .
since the sale did not push through." Moreover, we note that Andres
Co is not a neophyte in the world of corporate business. He has
been the president of Petitioner Corporation for more than ten years
and has also served as chief executive of two other corporate
entities. Co cannot feign ignorance of the scope of the authority of
a corporate treasurer such as Gruenberg. Neither can he be
oblivious to his duty to ascertain the scope of Gruenberg's
authorization to enter into a contract to sell a parcel of land
belonging to Motorich. Indeed, petitioner's claim of fraud and bad
faith is unsubstantiated and fails to persuade the Court. Indubitably,
petitioner appears to be the victim of its own officer's negligence in
entering into a contract with and paying an unauthorized officer of
another corporation.
DECISION
PANGANIBAN, J.:
May corporate treasurer, by herself and without any authorization
from he board of directors, validly sell a parcel of land owned by the
corporation?. May the veil of corporate fiction be pierced on the
mere ground that almost all of the shares of stock of the corporation
are owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in
resolving the Petition for Review on Certiorari before us, assailing
the March 18, 1997 Decision 1 of the Court of Appeals 2 in CA GR
CV No. 46801 which, in turn, modified the July 18, 1994 Decision
of the Regional Trial Court of Makati, Metro Manila, Branch 63 3 in
Civil Case No. 89-3511. The RTC dismissed both the Complaint
and the Counterclaim filed by the parties. On the other hand, the
Court of Appeals ruled:
WHEREFORE, premises considered, the appealed
decision is AFFIRMED WITH MODIFICATION ordering
defendant-appellee Nenita Lee Gruenberg to REFUND or
return to plaintiff-appellant the downpayment of
P100,000.00 which she received from plaintiff-appellant.
There is no pronouncement as to costs. 4
The petition also challenges the June 10, 1997 CA Resolution
denying reconsideration. 5
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel
Fabricators, Inc.'s amended complaint alleged that on 14
February 1989, plaintiff-appellant entered into an
agreement with defendant-appellee Motorich Sales
Corporation for the transfer to it of a parcel of land identified
as Lot 30, Block 1 of the Acropolis Greens Subdivision
located in the District of Murphy, Quezon City. Metro
Manila, containing an area of Four Hundred Fourteen (414)
square meters, covered by TCT No. (362909) 2876: that
as stipulated in the Agreement of 14 February 1989,
plaintiff-appellant paid the downpayment in the sum of One
Hundred Thousand (P100,000.00) Pesos, the balance to
be paid on or before March 2, 1989; that on March 1, 1989.
Mr. Andres T. Co, president of plaintiff-appellant
corporation, wrote a letter to defendant-appellee Motorich
Sales Corporation requesting for a computation of the
balance to be paid: that said letter was coursed through
defendant-appellee's broker. Linda Aduca, who wrote the
computation of the balance: that on March 2, 1989, plaintiff-
appellant was ready with the amount corresponding to the
balance, covered by Metrobank Cashier's Check No.
004223, payable to defendant-appellee Motorich Sales
Corporation; that plaintiff-appellant and defendant-
appellee Motorich Sales Corporation were supposed to
meet in the office of plaintiff-appellant but defendant-
appellee's treasurer, Nenita Lee Gruenberg, did not
appear; that defendant-appellee Motorich Sales
Corporation despite repeated demands and in utter
disregard of its commitments had refused to execute the
Transfer of Rights/Deed of Assignment which is necessary
to transfer the certificate of title; that defendant ACL
Development Corp. is impleaded as a necessary party
since Transfer Certificate of Title No. (362909) 2876 is still
in the name of said defendant; while defendant JNM Realty
& Development Corp. is likewise impleaded as a necessary
party in view of the fact that it is the transferor of right in
favor of defendant-appellee Motorich Sales Corporation:
that on April 6, 1989, defendant ACL Development
Corporation and Motorich Sales Corporation entered into a
Deed of Absolute Sale whereby the former transferred to
the latter the subject property; that by reason of said
transfer, the Registry of Deeds of Quezon City issued a
new title in the name of Motorich Sales Corporation,
represented by defendant-appellee Nenita Lee Gruenberg
and Reynaldo L. Gruenberg, under Transfer Certificate of
Title No. 3571; that as a result of defendants-appellees
Nenita Lee Gruenberg and Motorich Sales Corporation's
bad faith in refusing to execute a formal Transfer of
Rights/Deed of Assignment, plaintiff-appellant suffered
moral and nominal damages which may be assessed
against defendants-appellees in the sum of Five Hundred
Thousand (500,000.00) Pesos; that as a result of
defendants-appellees Nenita Lee Gruenberg and Motorich
Sales Corporation's unjustified and unwarranted failure to
execute the required Transfer of Rights/Deed of
Assignment or formal deed of sale in favor of plaintiff-
appellant, defendants-appellees should be assessed
exemplary damages in the sum of One Hundred Thousand
(P100,000.00) Pesos; that by reason of defendants-
appellees' bad faith in refusing to execute a Transfer of
Rights/Deed of Assignment in favor of plaintiff-appellant,
the latter lost the opportunity to construct a residential
building in the sum of One Hundred Thousand
(P100,000.00) Pesos; and that as a consequence of
defendants-appellees Nenita Lee Gruenberg and Motorich
Sales Corporation's bad faith in refusing to execute a deed
of sale in favor of plaintiff-appellant, it has been constrained
to obtain the services of counsel at an agreed fee of One
Hundred Thousand (P100,000.00) Pesos plus appearance
fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales
Corporation and Nenita Lee Gruenberg interposed as
affirmative defense that the President and Chairman of
Motorich did not sign the agreement adverted to in par. 3
of the amended complaint; that Mrs. Gruenberg's signature
on the agreement (ref: par. 3 of Amended Complaint) is
inadequate to bind Motorich. The other signature, that of
Mr. Reynaldo Gruenberg, President and Chairman of
Motorich, is required: that plaintiff knew this from the very
beginning as it was presented a copy of the Transfer of
Rights (Annex B of amended complaint) at the time the
Agreement (Annex B of amended complaint) was signed;
that plaintiff-appellant itself drafted the Agreement and
insisted that Mrs. Gruenberg accept the P100,000.00 as
earnest money; that granting, without admitting, the
enforceability of the agreement, plaintiff-appellant
nonetheless failed to pay in legal tender within the
stipulated period (up to March 2, 1989); that it was the
understanding between Mrs. Gruenberg and plaintiff-
appellant that the Transfer of Rights/Deed of Assignment
will be signed only upon receipt of cash payment; thus they
agreed that if the payment be in check, they will meet at a
bank designated by plaintiff-appellant where they will
encash the check and sign the Transfer of Rights/Deed.
However, plaintiff-appellant informed Mrs. Gruenberg of
the alleged availability of the check, by phone, only after
banking hours.
 On the basis of the evidence, the court a quo rendered the
judgment appealed from[,] dismissing plaintiff-appellant's
complaint, ruling that:
The issue to be resolved is: whether plaintiff had
the right to compel defendants to execute a
deed of absolute sale in accordance with the
agreement of February 14, 1989: and if so,
whether plaintiff is entitled to damage.
As to the first question, there is no evidence to
show that defendant Nenita Lee Gruenberg was
indeed authorized by defendant corporation.
Motorich Sales, to dispose of that property
covered by T.C.T. No. (362909) 2876. Since the
property is clearly owned by the corporation.
Motorich Sales, then its disposition should be
governed by the requirement laid down in Sec.
40. of the Corporation Code of the Philippines,
to wit:
Sec. 40, Sale or other disposition of
assets. Subject to the provisions of
existing laws on illegal combination
and monopolies, a corporation may
by a majority vote of its board of
directors . . . sell, lease, exchange,
mortgage, pledge or otherwise
dispose of all or substantially all of
its property and assets including its
goodwill . . . when authorized by the
vote of the stockholders
representing at least two third (2/3)
of the outstanding capital stock . . .
No such vote was obtained by
defendant Nenita Lee Gruenberg
for that proposed sale[;] neither was
there evidence to show that the
supposed transaction was ratified
by the corporation. Plaintiff should
have been on the look out under
these circumstances. More so,
plaintiff himself [owns] several
corporations (tsn dated August 16,
1993, p. 3) which makes him
knowledgeable on corporation
matters.
Regarding the question of
damages, the Court likewise, does
not find substantial evidence to hold
defendant Nenita Lee Gruenberg
liable considering that she did not in
anyway misrepresent herself to be
authorized by the corporation to sell
the property to plaintiff (tsn dated
September 27, 1991, p. 8).
In the light of the foregoing, the
Court hereby renders judgment
DISMISSING the complaint at
instance for lack of merit.
"Defendants" counterclaim is also
DISMISSED for lack of basis.
(Decision, pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced
hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and
between:
MOTORICH SALES
CORPORATION, a
corporation duly organized
and existing under and by
virtue of Philippine Laws,
with principal office address
at 5510 South Super Hi-way
cor. Balderama St., Pio del
Pilar. Makati, Metro Manila,
represented herein by its
Treasurer, NENITA LEE
GRUENBERG, hereinafter
referred to as the
TRANSFEROR;
— and —
SAN JUAN STRUCTURAL
& STEEL FABRICATORS, a
corporation duly organized
and existing under and by
virtue of the laws of the
Philippines, with principal
office address at Sumulong
Highway, Barrio
Mambungan, Antipolo,
Rizal, represented herein by
its President, ANDRES T.
CO, hereinafter referred to
as the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of
a parcel of land identified as Lot 30 Block 1 of
the ACROPOLIS GREENS SUBDIVISION
located at the District of Murphy, Quezon City,
Metro Manila, containing an area of FOUR
HUNDRED FOURTEEN (414) SQUARE
METERS, covered by a TRANSFER OF
RIGHTS between JNM Realty & Dev. Corp. as
the Transferor and Motorich Sales Corp. as the
Transferee;
NOW, THEREFORE, for and in consideration of
the foregoing premises, the parties have agreed
as follows:
1. That the purchase price shall be at
FIVE THOUSAND TWO
HUNDRED PESOS (P5,200.00)
per square meter; subject to the
following terms:
a. Earnest money amounting to
ONE HUNDRED THOUSAND
PESOS (P100,000.00), will be
paid upon the execution of this
agreement and shall form part of
the total purchase price;
b. Balance shall be payable on or
before March 2, 1989;
2. That the monthly amortization for
the month of February 1989 shall be
for the account of the Transferor;
and that the monthly amortization
starting March 21, 1989 shall be for
the account of the Transferee;
The transferor warrants that he [sic] is the lawful
owner of the above-described property and that
there [are] no existing liens and/or
encumbrances of whatsoever nature;
 In case of failure by the Transferee to pay the
balance on the date specified on 1, (b), the
earnest money shall be forfeited in favor of the
Transferor.
That upon full payment of the balance, the
TRANSFEROR agrees to execute a
TRANSFER OF RIGHTS/DEED OF
ASSIGNMENT in favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have
hereunto set their hands this 14th day of
February, 1989 at Greenhills, San Juan, Metro
Manila, Philippines.
MOTORICH SALES CORPORATION SAN
JUAN STRUCTURAL & STEEL
FABRICATORS
TRANSFEROR TRANSFEREE
[SGD.] [SGD.]
By. NENITA LEE GRUENBERG By: ANDRES
T. CO
Treasurer President
Signed In the presence of:
[SGD.]
[SGD.]
———————— ———————————6
In its recourse before the Court of Appeals, petitioner insisted:
1. Appellant is entitled to
compel the appellees to
execute a Deed of Absolute
Sale in accordance with the
Agreement of February 14,
1989,
2. Plaintiff is entitled to
damages. 7
As stated earlier, the Court of Appeals debunked petitioner's
arguments and affirmed the Decision of the RTC with the
modification that Respondent Nenita Lee Gruenberg was ordered
to refund P100,000 to petitioner, the amount remitted as
"downpayment" or "earnest money." Hence, this petition before us. 8
The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing the veil of
corporate fiction is applicable in the instant case
II. Whether or not the appellate court may consider matters
which the parties failed to raise in the lower court
III. Whether or not there is a valid and enforceable contract
between the petitioner and the respondent corporation
IV. Whether or not the Court of Appeals erred in holding that
there is a valid correction/substitution of answer in the
transcript of stenographic note[s].
V. Whether or not respondents are liable for damages and
attorney's fees 9
The Court synthesized the foregoing and will thus discuss
them seriatim as follows:
1. Was there a valid contract of sale between petitioner and
Motorich?
2. May the doctrine of piercing the veil of corporate fiction be
applied to Motorich?
3. Is the alleged alteration of Gruenberg's testimony as recorded
in the transcript of stenographic notes material to the
disposition of this case?
4. Are respondents liable for damages and attorney's fees?
The Court's Ruling
The petition is devoid of merit.
First Issue:
Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges
that on February 14, 1989, it entered through its president, Andres
Co, into the disputed Agreement with Respondent Motorich Sales
Corporation, which was in turn allegedly represented by its
treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen
Gruenberg and Co affixed their signatures on the contract they both
consented to be bound by the terms thereof." Ergo, petitioner
contends that the contract is binding on the two corporations. We
do not agree.
True, Gruenberg and Co signed on February 14, 1989, the
Agreement, according to which a lot owned by Motorich Sales
Corporation was purportedly sold. Such contract, however, cannot
bind Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its
stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express
authorization from the corporation's board of directors. 10 Section
23 of BP 68, otherwise known as the Corporation Code of the
Philippines, provides;
Sec. 23. The Board of Directors or Trustees. —
Unless otherwise provided in this Code, the
corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trustees to be elected from among the holders
of stocks, or where there is no stock, from
among the members of the corporation, who
shall hold office for one (1) year and until their
successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors
or, when authorized either by its bylaws or by its board resolution,
through its officers or agents in the normal course of business. The
general principles of agency govern the relation between the
corporation and its officers or agents, subject to the articles of
incorporation, bylaws, or relevant provisions of law. 11 Thus, this
Court has held that "a corporate officer or agent may represent and
bind the corporation in transactions with third persons to the extent
that the authority to do so has been conferred upon him, and this
includes powers which have been intentionally conferred, and also
such powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused persons dealing with the
officer or agent to believe that it has conferred." 12
Furthermore, the Court has also recognized the rule that "persons
dealing with an assumed agent, whether the assumed agency be a
general or special one bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted,
the burden of proof is upon them to establish it (Harry Keeler v.
Rodriguez, 4 Phil. 19)." 13 Unless duly authorized, a treasurer,
whose powers are limited, cannot bind the corporation in a sale of
its assets. 14
In the case at bar, Respondent Motorich categorically denies that it
ever authorized Nenita Gruenberg, its treasurer, to sell the subject
parcel of land. 15 Consequently, petitioner had the burden of
proving that Nenita Gruenberg was in fact authorized to represent
and bind Motorich in the transaction. Petitioner failed to discharge
this burden. Its offer of evidence before the trial court contained no
proof of such authority. 16 It has not shown any provision of said
respondent's articles of incorporation, bylaws or board resolution to
prove that Nenita Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free
petitioner from the responsibility of ascertaining the extent of her
authority to represent the corporation. Petitioner cannot assume
that she, by virtue of her position, was authorized to sell the property
of the corporation. Selling is obviously foreign to a corporate
treasurer's function, which generally has been described as "to
receive and keep the funds of the corporation, and to disburse them
in accordance with the authority given him by the board or the
properly authorized officers." 17
Neither was such real estate sale shown to be a normal business
activity of Motorich. The primary purpose of Motorich is marketing,
distribution, export and import in relation to a general
merchandising business. 18 Unmistakably, its treasurer is not
cloaked with actual or apparent authority to buy or sell real property,
an activity which falls way beyond the scope of her general
authority.
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
Art. 1874. When a sale of a piece of land or any
interest therein is through an agent, the
authority of the latter shall be in writing:
otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are
necessary in the following case:
xxx xxx xxx
(5) To enter any contract by which the
ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable
consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich has ratified
said contract of sale because of its "acceptance of benefits," as
evidenced by the receipt issued by Respondent
Gruenberg. 19 Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of
their authority are binding on the corporation. But when these
officers exceed their authority, their actions "cannot bind the
corporation, unless it has ratified such acts or is estopped from
disclaiming them." 20
In this case, there is a clear absence of proof that Motorich ever
authorized Nenita Gruenberg, or made it appear to any third person
that she had the authority, to sell its land or to receive the earnest
money. Neither was there any proof that Motorich ratified, expressly
or impliedly, the contract. Petitioner rests its argument on the
receipt which, however, does not prove the fact of ratification. The
document is a hand-written one, not a corporate receipt, and it
bears only Nenita Gruenberg's signature. Certainly, this document
alone does not prove that her acts were authorized or ratified by
Motorich.
Art. 1318 of the Civil Code lists the requisites of a valid and
perfected contract: "(1) consent of the contracting parties; (2) object
certain which is the subject matter of the contract; (3) cause of the
obligation which is established." As found by the trial court 21 and
affirmed by the Court of Appeals, 22 there is no evidence that
Gruenberg was authorized to enter into the contract of sale, or that
the said contract was ratified by Motorich. This factual finding of the
two courts is binding on this Court. 23 As the consent of the seller
was not obtained, no contract to bind the obligor was perfected.
Therefore, there can be no valid contract of sale between petitioner
and Motorich.
Because Motorich had never given a written authorization to
Respondent Gruenberg to sell its parcel of land, we hold that the
February 14, 1989 Agreement entered into by the latter with
petitioner is void under Article 1874 of the Civil Code. Being
inexistent and void from the beginning, said contract cannot be
ratified. 24
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich
should be pierced, because the latter is a close corporation. Since
"Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned
all or almost all or 99.866% to be accurate, of the subscribed capital
stock" 25 of Motorich, petitioner argues that Gruenberg needed no
authorization from the board to enter into the subject contract. 26 It
adds that, being solely owned by the Spouses Gruenberg, the
company can treated as a close corporation which can be bound by
the acts of its principal stockholder who needs no specific authority.
The Court is not persuaded.
First, petitioner itself concedes having raised the issue
belatedly, 27 not having done so during the trial, but only when it
filed its sur-rejoinder before the Court of Appeals. 28 Thus, this
Court cannot entertain said issue at this late stage of the
proceedings. It is well-settled the points of law, theories and
arguments not brought to the attention of the trial court need not be,
and ordinarily will not be, considered by a reviewing court, as they
cannot be raised for the first time on appeal. 29 Allowing petitioner
to change horses in midstream, as it were, is to run roughshod over
the basic principles of fair play, justice and due process.
Second, even if the above mentioned argument were to be
addressed at this time, the Court still finds no reason to uphold it.
True, one of the advantages of a corporate form of business
organization is the limitation of an investor's liability to the amount
of the investment. 30 This feature flows from the legal theory that a
corporate entity is separate and distinct from its stockholders.
However, the statutorily granted privilege of a corporate veil may be
used only for legitimate purposes. 31 On equitable considerations,
the veil can be disregarded when it is utilized as a shield to commit
fraud, illegality or inequity; defeat public convenience; confuse
legitimate issues; or serve as a mere alter ego or business conduit
of a person or an instrumentality, agency or adjunct of another
corporation. 32
Thus, the Court has consistently ruled that "[w]hen the fiction is
used as a means of perpetrating a fraud or an illegal act or as
vehicle for the evasion of an existing obligation, the circumvention
of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime, the veil with which
the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals." 33
We stress that the corporate fiction should be set aside when it
becomes a shield against liability for fraud, illegality or inequity
committed on third persons. The question of piercing the veil of
corporate fiction is essentially, then, a matter of proof. In the present
case, however, the Court finds no reason to pierce the corporate
veil of Respondent Motorich. Petitioner utterly failed to establish
that said corporation was formed, or that it is operated, for the
purpose of shielding any alleged fraudulent or illegal activities of its
officers or stockholders; or that the said veil was used to conceal
fraud, illegality or inequity at the expense of third persons like
petitioner.
Petitioner claims that Motorich is a close corporation. We rule that
it is not. Section 96 of the Corporation Code defines a close
corporation as follows:
Sec. 96. Definition and Applicability of Title. —
A close corporation, within the meaning of this
Code, is one whose articles of incorporation
provide that: (1) All of the corporation's issued
stock of all classes, exclusive of treasury
shares, shall be held of record by not more than
a specified number of persons, not exceeding
twenty (20); (2) All of the issued stock of all
classes shall be subject to one or more specified
restrictions on transfer permitted by this Title;
and (3) The corporation shall not list in any stock
exchange or make any public offering of any of
its stock of any class. Notwithstanding the
foregoing, a corporation shall be deemed not a
close corporation when at least two-thirds (2/3)
of its voting stock or voting rights is owned or
controlled by another corporation which is not a
close corporation within the meaning of this
Code. . . . .
The articles of incorporation 34 of Motorich Sales Corporation does
not contain any provision stating that (1) the number of stockholders
shall not exceed 20, or (2) a preemption of shares is restricted in
favor of any stockholder or of the corporation, or (3) listing its stocks
in any stock exchange or making a public offering of such stocks is
prohibited. From its articles, it is clear that Respondent Motorich is
not a close corporation. 35 Motorich does not become one either,
just because Spouses Reynaldo and Nenita Gruenberg owned
99.866% of its subscribed capital stock. The "[m]ere ownership by
a single stockholder or by another corporation of all or capital stock
of a corporation is not of itself sufficient ground for disregarding the
separate corporate personalities." 36 So, too, a narrow distribution
of ownership does not, by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of
Appeals 37 wherein the Court ruled that ". . . petitioner corporation
is classified as a close corporation and, consequently, a board
resolution authorizing the sale or mortgage of the subject property
is not necessary to bind the corporation for the action of its
president." 38 But the factual milieu in Dulay is not on all fours with
the present case. In Dulay, the sale of real property was contracted
by the president of a close corporation with the knowledge and
acquiescence of its board of directors. 39 In the present case,
Motorich is not a close corporation, as previously discussed, and
the agreement was entered into by the corporate treasurer without
the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where
"an action by a director, who singly is the controlling stockholder,
may be considered as a binding corporate act and a board action
as nothing more than a mere formality." 40 The present case,
however, is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg
own "almost 99.866%" of Respondent Motorich. 41 Since Nenita is
not the sole controlling stockholder of Motorich, the aforementioned
exception does not apply. Granting arguendo that the corporate veil
of Motorich is to be disregarded, the subject parcel of land would
then be treated as conjugal property of Spouses Gruenberg,
because the same was acquired during their marriage. There being
no indication that said spouses, who appear to have been married
before the effectivity of the Family Code, have agreed to a different
property regime, their property relations would be governed by
conjugal partnership of gains. 42 As a consequence, Nenita
Gruenberg could not have effected a sale of the subject lot because
"[t]here is no co-ownership between the spouses in the properties
of the conjugal partnership of gains. Hence, neither spouse can
alienate in favor of another his or interest in the partnership or in
any property belonging to it; neither spouse can ask for a partition
of the properties before the partnership has been legally
dissolved." 43
Assuming further, for the sake of argument, that the spouses'
property regime is the absolute community of property, the sale
would still be invalid. Under this regime, "alienation of community
property must have the written consent of the other spouse or he
authority of the court without which the disposition or encumbrance
is void." 44 Both requirements are manifestly absent in the instant
case.
Third Issue:
Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the transcript
of stenographic notes (TSN):
Q Did you ever represent to Mr. Co that you were authorized
by the corporation to sell the property?
A Yes, sir. 45
Petitioner claims that the answer "Yes" was crossed out,
and, in its place was written a "No" with an initial scribbled
above it. 46 This, however, is insufficient to prove that Nenita
Gruenberg was authorized to represent Respondent
Motorich in the sale of its immovable property. Said excerpt
be understood in the context of her whole testimony. During
her cross-examination. Respondent Gruenberg testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all along that you [were] not
authorized?
A Yes, sir.
Q You stated on direct examination that you did not
represent that you were authorized to sell the property?
A Yes, sir.
Q But you also did not say that you were not authorized to
sell the property, you did not tell that to Mr. Co, is that
correct?
A That was not asked of me.
Q Yes, just answer it.
A I just told them that I was the treasurer of the corporation
and it [was] also the president who [was] also authorized to
sign on behalf of the corporation.
Q You did not say that you were not authorized nor did you
say that you were authorized?
A Mr. Co was very interested to purchase the property and
he offered to put up a P100,000.00 earnest money at that
time. That was our first meeting.
Clearly then, Nenita Gruenberg did not testify that Motorich had
authorized her to sell its property. On the other hand, her testimony
demonstrates that the president of Petitioner Corporation, in his
great desire to buy the property, threw caution to the wind by
offering and paying the earnest money without first verifying
Gruenberg's authority to sell the lot.
Fourth Issue:
Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's fees, alleging
that "[i]n an utter display of malice and bad faith, respondents
attempted and succeeded in impressing on the trial court and [the]
Court of Appeals that Gruenberg did not represent herself as
authorized by Respondent Motorich despite the receipt issued by
the former specifically indicating that she was signing on behalf of
Motorich Sales Corporation. Respondent Motorich likewise acted in
bad faith when it claimed it did not authorize Respondent
Gruenberg and that the contract [was] not binding, [insofar] as it
[was] concerned, despite receipt and enjoyment of the proceeds of
Gruenberg's act." 48 Assuming that Respondent Motorich was not a
party to the alleged fraud, petitioner maintains that Respondent
Gruenberg should be held liable because she "acted fraudulently
and in bad faith [in] representing herself as duly authorized by
[R]espondent [C]orporation." 49

As already stated, we sustain the findings of both the trial and the
appellate courts that the foregoing allegations lack factual bases.
Hence, an award of damages or attorney's fees cannot be justified.
The amount paid as "earnest money" was not proven to have
redounded to the benefit of Respondent Motorich. Petitioner claims
that said amount was deposited to the account of Respondent
Motorich, because "it was deposited with the account of Aren
Commercial c/o Motorich Sales Corporation." 50 Respondent
Gruenberg, however, disputes the allegations of petitioner. She
testified as follows:

Q You voluntarily accepted the P100,000.00, as a matter of

fact, that was encashed, the check was encashed.
A Yes. sir, the check was paid in my name and I deposit[ed]
it.
Q In your account?
A Yes, sir. 51
In any event, Gruenberg offered to return the amount to
petitioner ". . . since the sale did not push through." 52

Moreover, we note that Andres Co is not a neophyte in the world of

corporate business. He has been the president of Petitioner
Corporation for more than ten years and has also served as chief
executive of two other corporate entities. 53 Co cannot feign
ignorance of the scope of the authority of a corporate treasurer such
as Gruenberg. Neither can he be oblivious to his duty to ascertain
the scope of Gruenberg's authorization to enter into a contract to
sell a parcel of land belonging to Motorich.

Indeed, petitioner's claim of fraud and bad faith is unsubstantiated

and fails to persuade the Court. Indubitably, petitioner appears to
be the victim of its own officer's negligence in entering into a
contract with and paying an unauthorized officer of another
corporation.

As correctly ruled by the Court of Appeals, however, Nenita

Gruenberg should be ordered to return to petitioner the amount she
received as earnest money, as "no one shall enrich himself at the
expense of another." 54 a principle embodied in Article 2154 of Civil
Code. 55 Although there was no binding relation between them,
petitioner paid Gruenberg on the mistaken belief that she had the
authority to sell the property of Motorich. 56 Article 2155 of Civil
Code provides that "[p]ayment by reason of a mistake in the
contruction or application of a difficult question of law may come
within the scope of the preceding article."

WHEREFORE, the petition is hereby DENIED and the assailed

Decision is AFFIRMED.

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

 THIRD DIVISION
[G.R. No. 131889. March 12, 2001.]
VIRGINIA O. GOCHAN, FELIX Y. GOCHAN III, MAE GOCHAN-
EFANN, LOUISE Y. GOCHAN, ESTEBAN Y. GOCHAN JR.,
DOMINIC Y. GOCHAN, FELIX O. GOCHAN III, MERCEDES R.
GOCHAN, ALFREDO R. GOCHAN, ANGELINA R. GOCHAN-
HERNAEZ, MARIA MERCED R. GOCHAN, CRISPO R. GOCHAN
JR., MARION R. GOCHAN, MACTAN REALTY DEVELOPMENT
CORPORATION and FELIX GOCHAN & SONS REALTY
CORPORATION, petitioners, vs. RICHARD G. YOUNG, DAVID
G. YOUNG, JANE G. YOUNG-LLABAN, JOHN D. YOUNG JR.,
MARY G. YOUNG-HSU and ALEXANDER THOMAS G. YOUNG
as heirs of Alice Gochan; the INTESTATE ESTATE OF JOHN D.
YOUNG SR.; and CECILIA GOCHAN-UY and MIGUEL C. UY, for
themselves and on behalf and for the benefit of FELIX
GOCHAN & SONS REALTY CORPORATION, respondents.
Antonio R. Bautista & Partners for petitioners.
Ernesto T. Morales and Jose R. Ebro, Jr. for private respondents.
SYNOPSIS
Felix Gochan and Sons Realty Corporation was registered with the
SEC in June, 1951. Felix Gochan Sr.'s daughter, Alice, mother of
herein respondents, inherited 50 shares of stock in Gochan Realty
from the former. Alice died in 1955, leaving the 50 shares to her
husband, John Young Sr. When all the children had already
reached the age of majority, their father John Sr., requested
Gochan Realty to partition the shares of his late wife by canceling
the stock certificates in his name and issuing in lieu thereof, new
stock certificates in the names of respondents. Respondent
Gochan Realty refused, citing as reason, the right of first refusal
granted to the remaining stockholders by the Articles of
Incorporation. John Sr. died, leaving the shares to the respondents.
Cecilia Gochan Uy and Miguel Uy filed a complaint with the SEC
for issuance of shares of stock to the rightful owners, nullification of
shares of stock, reconveyance of property impressed with trust,
accounting, removal of officers and directors and damages against
respondents. A Notice of Lis Pendens was annotated at the titles of
the real properties of the corporation. Petitioners moved to dismiss
the complaint alleging that: (1) the SEC had no jurisdiction over the
nature of the action; (2) the respondents were not the real parties-
in-interest and had no capacity to sue; and (3) respondents' causes
of action were barred by the Statute of Limitations. The SEC,
through its Hearing Officer, granted the motion to dismiss and
ordered the cancellation of the notice of lis pendens annotated upon
the titles of the corporate lands. The SEC ruled that it has no
jurisdiction over a controversy wherein one of the parties involved
is not or not yet a stockholder of the corporation. On appeal, the
Court of Appeals ruled that the SEC had no jurisdiction over the
case as far as the heirs of Alice Gochan were concerned, because
they were not yet stockholders of the corporation. On the other
hand, it upheld the capacity of respondents Cecilia Gochan Uy and
her spouse Miguel Uy. Hence, the present appeal.
The Supreme Court denied the petition. According to the Court, the
jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint. For the purposes of
resolving the motion to dismiss filed by private respondent Cecilia
Uy with the SEC, her averment in the complaint — that the
purchase of her stocks by the corporation was null and void ab initio
— is deemed admitted. The Court stressed that a void contract
produces no effect either against or in favor of anyone; it cannot
create, modify or extinguish the juridical relation to which it refers.
Thus, Cecilia remains a stockholder of the corporation in view of the
nullity of the Contract of Sale. Although she was no longer
registered as a stockholder in the corporate records as of the filing
of the case before the SEC, the admitted allegations in the
complaint made her still a bona fide stockholder of Felix Gochan &
Realty Corporation as between said parties. The Court, however,
ruled that the present controversy, whether intra-corporate or not,
is longer cognizable by the SEC, in view of RA 8799, which
transferred to regional trial courts the former's jurisdiction over
cases involving intra-corporate disputes. The Court remanded the
case to the proper regional trial court for proper disposition.
SYLLABUS
1. MERCANTILE LAW; PRIVATE CORPORATIONS;
SECURITIES AND EXCHANGE COMMISSION; PRIVATE
RESPONDENT HAS LEGAL PERSONALITY TO FILE A SUIT
BEFORE A COMMISSION AS SHE STILL REMAINS A
STOCKHOLDER OF THE CORPORATION IN VIEW OF THE
NULLITY OF THE SALE OF HER STOCKS TO THE
CORPORATION; ISSUE OF PERSONALITY BECAME MOOT
AND ACADEMIC IN VIEW OF RA 8799, WHICH TRANSFERRED
TO THE REGIONAL TRIAL COURTS THE COMMISSION'S
JURISDICTION OVER CASES INVOLVING INTRA-CORPORATE
DISPUTE. — As a general rule, the jurisdiction of a court or tribunal
over the subject matter is determined by the allegations in the
complaint. For purposes of resolving a motion to dismiss, Cecilia
Uy's averment in the Complaint — that the purchase of her stocks
by the corporation was null and void ab initio — is deemed admitted.
It is elementary that a void contract produces no effect either
against or in favor of anyone; it cannot create, modify or extinguish
the juridical relation to which it refers. Thus, Cecilia remains a
stockholder of the corporation in view of the nullity of the Contract
of Sale. Although she was no longer registered as a stockholder in
the corporate records as of the filing of the case before the SEC,
the admitted allegations in the Complaint made her still a bona fide
stockholder of Felix Gochan & Sons Realty Corporation (FGSRC),
as between said parties. In any event, the present controversy,
whether intra-corporate or not, is no longer cognizable by the SEC,
in view of RA 8799, which transferred to regional trial courts the
former's jurisdiction over cases involving intra-corporate disputes.
2. ID.; ID.; PERSONAL INJURY SUFFERED BY THE
SPOUSES CANNOT DISQUALIFY THEM FROM FILING A
DERIVATIVE SUIT ON BEHALF OF THE CORPORATION AS
SAID INJURY MERELY GIVES RISE TO AN ADDITIONAL CAUSE
OF ACTION FOR DAMAGES AGAINST THE ERRING
DIRECTORS. — In the present case, the Complaint alleges all the
components of a derivative suit. The allegations of injury to the
Spouses Uy can coexist with those pertaining to the corporation.
The personal injury suffered by the spouses cannot disqualify them
from filing a derivative suit on behalf of the corporation. It merely
gives rise to an additional cause of action for damages against the
erring directors. This cause of action is also included in the
Complaint filed before the SEC. The Spouses Uy have the capacity
to file a derivative suit in behalf of and for the benefit of the
corporation. The reason is that, as earlier discussed, the allegations
of the Complaint make them out as stockholders at the time the
questioned transaction occurred, as well as at the time the action
was filed and during the pendency of the action.
3. REMEDIAL LAW; SPECIAL PROCEEDINGS; THE
RULES DO NOT PROHIBIT THE HEIRS FROM REPRESENTING
THE DECEASED IN CASES WHERE THE SPECIAL
PROCEEDINGS FOR THE SETTLEMENT OF AN ESTATE HAVE
ALREADY BEEN INSTITUTED YET NO ADMINISTRATOR HAS
YET BEEN APPOINTED. — The rules, while permitting an executor
or administrator to represent or to bring suits on behalf of the
deceased, do not prohibit the heirs from representing the deceased.
These rules are easily applicable to cases in which an administrator
has already been appointed. But no rule categorically addresses
the situation in which special proceedings for the settlement of an
estate have already been instituted, yet no administrator has been
appointed. In such instances, the heirs cannot be expected to wait
for the appointment of an administrator; then wait further to see if
the administrator appointed would care enough to file a suit to
protect the rights and the interests of the deceased; and in the
meantime do nothing while the rights and the properties of the
decedent are violated or dissipated. The Rules are to be interpreted
liberally in order to promote their objective of securing a just, speedy
and inexpensive disposition of every action and proceeding. They
cannot be interpreted in such a way as to unnecessarily put undue
hardships on litigants. For the protection of the interests of the
decedent, this Court has in previous instances recognized the heirs
as proper representatives of the decedent, even when there is
already an administrator appointed by the court. When no
administrator has been appointed, as in this case, there is all the
more reason to recognize the heirs as the proper representatives
of the deceased. Since the Rules do not specifically prohibit them
from representing the deceased, and since no administrator had as
yet been appointed at the time of the institution of the Complaint
with the SEC, we see nothing wrong with the fact that it was the
heirs of John D. Young Sr. who represented his estate in the case
filed before the SEC.
4. ID.; CIVIL PROCEDURE; NOTICE OF LIS PENDENS;
PROPER IN CASES AFFECTING THE TITLE TO OR RIGHT OF
POSSESSION OF THE REAL PROPERTY SOUGHT TO BE
RECONVEYED; CASE AT BAR. — Under the third, fourth and fifth
causes of action of the Complaint, there are allegations of breach
of trust and confidence and usurpation of business opportunities in
conflict with petitioners' fiduciary duties to the corporation, resulting
in damage to the Corporation. Under these causes of action,
respondents are asking for the delivery to the Corporation of
possession of the parcels of land and their corresponding
certificates of title. Hence, the suit necessarily affects the title to or
right of possession of the real property sought to be reconveyed.
The Rules of Court allows the annotation of a notice of lis pendens
in actions affecting the title or right of possession of real property.
Thus, the Court of Appeals was correct in reversing the SEC Order
for the cancellation of the notice of lis pendens.
5. ID.; ACTIONS; PRESCRIPTION; CANNOT BE INVOKED
IF CONTRACT IS ALLEGED TO BE VOID. — Petitioners'
contention that the action has prescribed cannot be sustained.
Prescription cannot be invoked as a ground if the contract is alleged
to be void ab initio. It is axiomatic that the action or defense for the
declaration of nullity of a contract does not prescribe.
DECISION
PANGANIBAN, J.:
A court or tribunal's jurisdiction over the subject matter is
determined by the allegations in the complaint. The fact that certain
persons are not registered as stockholders in the books of the
corporation will not bar them from filing a derivative suit, if it is
evident from the allegations in the complaint that they are bona fide
stockholders. In view of RA 8799, intra-corporate controversies are
now within the jurisdiction of courts of general jurisdiction, no longer
of the Securities and Exchange Commission. 1âwphi1.nêt
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court. The Petition assails the February 28, 1996
Decision1 of the Court of Appeals (CA), as well as its December 18,
1997 Resolution denying petitioner's Motion for Reconsideration.
The dispositive part of the CA Decision reads as follows:
"WHEREFORE, the petition as far as the heirs of Alice
Gochan, is DISMISSED, without prejudice to filing the
same in the regular courts.
SO ORDERED."2
In dismissing the Complaint before the SEC regarding only Alice
Gochan's heirs but not the other complainants, the CA effectively
modified the December 9, 1994 Order of the hearing officer3 of the
Securities and Exchange Commission (SEC). The Order, which
was affirmed in full by the SEC en banc, dismissed the entire case.
The Facts
The undisputed facts are summarized by the Court of Appeals as
follows:
"Felix Gochan and Sons Realty Corporation (Gochan
Realty, for brevity) was registered with the SEC on June,
1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong,
Pedro Gochan, Tomasa Gochan, Esteban Gochan and
Crispo Gochan as its incorporators.
"Felix Gochan Sr.'s daughter, Alice, mother of [herein
respondents], inherited 50 shares of stock in Gochan
Realty from the former.
"Alice died in 1955, leaving the 50 shares to her husband,
John Young, Sr.
"In 1962, the Regional Trial Court of Cebu adjudicated
6/14 of these shares to her children, herein [respondents]
Richard Young, David Young, Jane Young Llaban, John
Young Jr., Mary Young Hsu and Alexander Thomas
Young.
"Having earned dividends, these stocks numbered 179 by
20 September 1979.
"Five days later (25 September), at which time all the
children had reached the age of majority, their father John
Sr., requested Gochan Realty to partition the shares of his
late wife by cancelling the stock certificates in his name
and issuing in lieu thereof, new stock certificates in the
names of [herein respondents].
"On 17 October 1979, respondent Gochan Realty
refused, citing as reason, the right of first refusal granted
to the remaining stockholders by the Articles of
Incorporation.
"On 21, 1990, [sic] John, Sr. died, leaving the shares to
the [respondents].
"On 8 February 1994, [respondents] Cecilia Gochan Uy
and Miguel Uy filed a complaint with the SEC for issuance
of shares of stock to the rightful owners, nullification of
shares of stock, reconveyance of property impressed with
trust, accounting, removal of officers and directors and
damages against respondents. A Notice of Lis Pendens
was annotated as [sic] real properties of the corporation.
"On 16 March 1994, [herein petitioners] moved to dismiss
the complaint alleging that: (1) the SEC ha[d] no
jurisdiction over the nature of the action; (2) the
[respondents] [were] not the real parties-in-interest and
ha[d] no capacity to sue; and (3) [respondents'] causes of
action [were] barred by the Statute of Limitations.
"The motion was opposed by herein [respondents].
"On 29 March 1994, [petitioners'] filed a Motion for
cancellation of Notice of Lis Pendens. [Respondents]
opposed the said motion.
"On 9 December 1994, the SEC, through its Hearing
Officer, granted the motion to dismiss and ordered the
cancellation of the notice of lis pendens annotated upon
the titles of the corporate lands. In its order, the SEC
opined:
'In the instant case, the complaint admits that
complainants Richard G. Young, David G.
Young, Jane G. Young Llaban, John D. Young,
Jr., Mary G. Young Hsu and Alexander Thomas
G. Young, who are the children of the late Alice
T. Gochan and the late John D. Young, Sr. are
suing in their own right and as heirs of and/or as
the beneficial owners of the shares in the capital
stock of FGSRC held in trust for them during his
lifetime by the late John D. Young. Moreover, it
has been shown that said complainants ha[d]
never been x x x stockholder[s] of record of
FGSRC to confer them with the legal capacity to
bring and maintain their action. Conformably,
the case cannot be considered as an intra-
corporate controversy within the jurisdiction of
this Commission.
'The complainant heirs base what they
perceived to be their stockholders' rights upon
the fact of their succession to all the rights,
property and interest of their father, John D.
Young, Sr. While their heirship is not disputed,
their right to compel the corporation to register
John D. Young's Sr. shares of stock in their
names cannot go unchallenged because the
devolution of property to the heirs by operation
of law in succession is subject to just obligations
of the deceased before such property passes to
the heirs. Conformably, until therefore the
estate is settled and the payment of the debts of
the deceased is accomplished, the heirs cannot
as a matter of right compel the delivery of the
shares of stock to them and register such
transfer in the books of the corporation to
recognize them as stockholders. The
complainant heirs succeed to the estate of [the]
deceased John D. Young, Sr. but they do not
thereby become stockholders of the
corporation.
'Moreover, John D. [Young Sr.'s] shares of
stocks form part of his estate which is the
subject of Special Proceedings No. 3694-CEB
in the Regional Trial Court of Cebu, Branch VIII,
[par. 4 of the complaint]. As complainants
clearly claim[,] the Intestate Estate of John D.
Young, Sr. has an interest in the subject matter
of the instant case. However, actions for the
recovery or protection of the property [such as
the shares of stock in question] may be brought
or defended not by the heirs but by the executor
or administrator thereof.
'Complainants further contend that the alleged
wrongful acts of the corporation and its directors
constitute fraudulent devices or schemes which
may be detrimental to the stockholders. Again,
the injury [is] perceived[,] as is alleged[,] to have
been suffered by complainants as stockholders,
which they are not. Admittedly, the SEC has no
jurisdiction over a controversy wherein one of
the parties involved is not or not yet a
stockholder of the corporation. [SEC vs. CA,
201 SCRA 134].
'Further, by the express allegation of the
complaint, herein complainants bring this action
as [a] derivative suit on their own behalf and on
behalf of respondent FGSRC.
'Section 5, Rule III of the Revised Rules of
Procedure in the Securities and Exchange
Commission provides:
'Section 5. Derivative Suit. No action
shall be brought by stockholder in the
right of a corporation unless the
complainant was a stockholder at the
time the questioned transaction
occurred as well as at the time the
action was filed and remains a
stockholder during the pendency of
the action. x x x.'
'The rule is in accord with well settled
jurisprudence holding that a stockholder
bringing a derivative action must have been [so]
at the time the transaction or act complained of
[took] place. (Pascual vs. Orozco, 19 Phil. 82;
Republic vs. Cuaderno, 19 SCRA 671; San
Miguel Corporation vs. Khan, 176 SCRA 462-
463) The language of the rule is mandatory,
strict compliance with the terms thereof thus
being a condition precedent, a jurisdictional
requirement to the filing of the instant action.
'Otherwise stated, proof of compliance with the
requirement must be sufficiently established for
the action to be given due course by this
Commission. The failure to comply with this
jurisdictional requirement on derivative action
must necessarily result in the dismissal of the
instant complaint.' (pp. 77-79, Rollo)
"[Respondents] moved for a reconsideration but the same
was denied for being pro-forma.
"[Respondents] appealed to the SEC en banc,
contending, among others, that the SEC ha[d] jurisdiction
over the case.
"[Petitioners], on the other hand, contend that the appeal
was 97 days late, beyond the 30-day period for appeals.
"On 3 March 1995, the SEC en banc ruled for the
[petitioners,] holding that the [respondents'] motion for
reconsideration did not interrupt the 30-day period for
appeal because said motion was pro-forma."4
Aggrieved, herein respondents then filed a Petition for Review with
the Court of Appeals.
Ruling of the Court of Appeals
The Court of Appeals ruled that the SEC had no jurisdiction over
the case as far as the heirs of Alice Gochan were concerned,
because they were not yet stockholders of the corporation. On the
other hand, it upheld the capacity of Respondents Cecilia Gochan
Uy and her spouse, Miguel Uy. It also held that the Intestate Estate
of John Young Sr. was an indispensable party.
The appellate court further ruled that the cancellation of the notice
of lis pendens on the titles of the corporate real estate was not
justified. Moreover, it declared that respondents' Motion for
Reconsideration before the SEC was not pro forma; thus, its filing
tolled the appeal period.
Hence, this Petition.5
The Issues
These are the issues presented before us:
"A. Whether or not the Spouses Uy have the personality
to file an action before the SEC against Gochan Realty
Corporation.
"B. Whether or not the Spouses Uy could properly bring a
derivative suit in the name of Gochan Realty to redress
wrongs allegedly committed against it for which the
directors refused to sue.
"C. Whether or not the intestate estate of John D. Young
Sr. is an indispensable party in the SEC case considering
that the individual heirs' shares are still in the decedent
stockholder's name.
"D. Whether or not the cancellation of [the] notice of lis
pendens was justified considering that the suit did not
involve real properties owned by Gochan Realty."6
In addition, the Court will determine the effect of Republic Act
No.87997 on this case.
The Court's Ruling
The Petition has no merit. In view of the effectivity of RA 8799,
however, the case should be remanded to the proper regional trial
court, not to the Securities and Exchange Commission.
First Issue:
Personality of the Spouses Uy to File a Suit Before the SEC
Petitioners argue that Spouses Cecilia and Miguel Uy had no
capacity or legal standing to bring the suit before the SEC on
February 8, 1994, because the latter were no longer stockholders
at the time. Allegedly, the stocks had already been purchased by
the corporation. Petitioners further assert that, being allegedly a
simple contract of sale cognizable by the regular courts, the
purchase by Gochan Realty of Cecilia Gochan Uy's 210 shares
does not come within the purview of an intra-corporate controversy.
As a general rule, the jurisdiction of a court or tribunal over the
subject matter is determined by the allegations in the
complaint.8 For purposes of resolving a motion to dismiss, Cecilia
Uy's averment in the Complaint -that the purchase of her stocks by
the corporation was null and void ab initio - is deemed admitted. It
is elementary that a void contract produces no effect either against
or in favor of anyone; it cannot create, modify or extinguish the
juridical relation to which it refers.9 Thus, Cecilia remains a
stockholder of the corporation in view of the nullity of the Contract
of Sale. Although she was no longer registered as a stockholder in
the corporate records as of the filing of the case before the SEC,
the admitted allegations in the Complaint made her still a bona fide
stockholder of Felix Gochan & Sons Realty Corporation (FGSRC),
as between said parties.
In any event, the present controversy, whether intra-corporate or
not, is no longer cognizable by the SEC, in view of RA 8799, which
transferred to regional trial courts the former's jurisdiction over
cases involving intra-corporate disputes.
Action Has Not Prescribed
Petitioners contend that the statute of limitations already bars the
Uy spouses' action, be it one for annulment of a voidable contract
or one based upon a written contract. The Complaint, however,
contains respondents' allegation that the sale of the shares of stock
was not merely voidable, but was void ab initio. Below we quote its
relevant portion:
"38. That on November 21, 1979, respondent Felix
Gochan & Sons Realty Corporation did not have
unrestricted retained earnings in its books to cover the
purchase price of the 208 shares of stock it was then
buying from complainant Cecilia Gochan Uy, thereby
rendering said purchase null and void ab initio for being
violative of the trust fund doctrine and contrary to law,
morals good customs, public order and public policy;"
Necessarily, petitioners' contention that the action has prescribed
cannot be sustained. Prescription cannot be invoked as a ground if
the contract is alleged to be void ab initio. 10 It is axiomatic that the
action or defense for the declaration of nullity of a contract does not
prescribe.11
Second Issue:
Derivative Suit and the Spouses Uy
Petitioners also contend that the action filed by the Spouses Uy was
not a derivative suit, because the spouses and not the corporation
were the injured parties. The Court is not convinced. The following
quoted portions of the Complaint readily shows allegations of injury
to the corporation itself:
"16. That on information and belief, in further pursuance
of the said conspiracy and for the fraudulent purpose of
depressing the value of the stock of the Corporation and
to induce the minority stockholders to sell their shares of
stock for an inadequate consideration as aforesaid,
respondent Esteban T. Gochan . . ., in violation of their
duties as directors and officers of the Corporation . . .,
unlawfully and fraudulently appropriated [for] themselves
the funds of the Corporation by drawing excessive
amounts in the form of salaries and cash advances. . .
and by otherwise charging their purely personal expenses
to the Corporation."
xxx xxx xxx
"41. That the payment of P1,200,000.00 by the
Corporation to complainant Cecilia Gochan Uy for her
shares of stock constituted an unlawful, premature and
partial liquidation and distribution of assets to a
stockholder, resulting in the impairment of the capital of
the Corporation and prevented it from otherwise utilizing
said amount for its regular and lawful business, to the
damage and prejudice of the Corporation, its creditors,
and of complainants as minority stockholders;"12
As early as 1911, this Court has recognized the right of a single
stockholder to file derivative suits. In its words:
"[W]here corporate directors have committed a breach of
trust either by their frauds, ultra vires acts, or negligence,
and the corporation is unable or unwilling to institute suit
to remedy the wrong, a single stockholder may institute
that suit, suing on behalf of himself and other stockholders
 and for the benefit of the corporation, to bring about a
redress of the wrong done directly to the corporation and
indirectly to the stockholders."13
In the present case, the Complaint alleges all the components of a
derivative suit. The allegations of injury to the Spouses Uy can
coexist with those pertaining to the corporation. The personal injury
suffered by the spouses cannot disqualify them from filing a
derivative suit on behalf of the corporation. It merely gives rise to
an additional cause of action for damages against the erring
directors. This cause of action is also included in the Complaint filed
before the SEC.
The Spouses Uy have the capacity to file a derivative suit in behalf
of and for the benefit of the corporation. The reason is that, as
earlier discussed, the allegations of the Complaint make them out
as stockholders at the time the questioned transaction occurred, as
well as at the time the action was filed and during the pendency of
the action.
Third Issue:
Capacity of the Intestate Estate of John D. Young Sr.
Petitioners contend that the Intestate Estate of John D. Young Sr.
is not an indispensable party, as there is no showing that it stands
to be benefited or injured by any court judgement.
It would be useful to point out at this juncture that one of the causes
of action stated in the Complaint filed with the SEC refers to the
registration, in the name of the other heirs of Alice Gochan Young,
of 6/14th of the shares still registered under the name of John D.
Young Sr. Since all the shares that belonged to Alice are still in his
name, no final determination can be had without his estate being
impleaded in the suit. His estate is thus an indispensable party with
respect to the cause of action dealing with the registration of the
shares in the names of the heirs of Alice.
Petitioners further claim that the Estate of John Young Sr. was not
properly represented. They claim that "when the estate is under
administration, suits for the recovery or protection of the property or
rights of the deceased may be brought only by the administrator or
executor as approved by the court."14 The rules relative to this
matter do not, however, make any such categorical and confining
statement.
Section 3 of Rule 3 of the Rules of Court, which is cited by
petitioners in support of their position, reads:
"Sec. 3. Representatives as parties. - Where the action is
allowed to be prosecuted or defended by a representative
or someone acting in a fiduciary capacity, the beneficiary
shall be included in the title of the case and shall be
deemed to be the real party in interest. A representative
may be a trustee of an express trust, a guardian, an
executor or administrator, or a party authorized by law or
these Rules. An agent acting in his own name and for the
benefit of an undisclosed principal may sue or be sued
without joining the principal except when the contract
involves things belonging to the principal."
Section 2 of Rule 87 of the same Rules, which also deals with
administrators, states:
"Sec. 2. Executor or administrator may bring or defend
actions which survive. -For the recovery or protection of
the property or rights of the deceased, an executor or
administrator may bring or defend, in the right of the
deceased, actions for causes which survive."
The above-quoted rules, while permitting an executor or
administrator to represent or to bring suits on behalf of the
deceased, do not prohibit the heirs from representing the
deceased. These rules are easily applicable to cases in which an
administrator has already been appointed. But no rule categorically
addresses the situation in which special proceedings for the
settlement of an estate have already been instituted, yet no
administrator has been appointed. In such instances, the heirs
cannot be expected to wait for the appointment of an administrator;
then wait further to see if the administrator appointed would care
enough to file a suit to protect the rights and the interests of the
deceased; and in the meantime do nothing while the rights and the
properties of the decedent are violated or dissipated.1âwphi1.nêt
The Rules are to be interpreted liberally in order to promote their
objective of securing a just, speedy and inexpensive disposition of
every action and proceeding.15 They cannot be interpreted in such
a way as to unnecessarily put undue hardships on litigants. For the
protection of the interests of the decedent, this Court has in
previous instances16 recognized the heirs as proper
representatives of the decedent, even when there is already an
administrator appointed by the court. When no administrator has
been appointed, as in this case, there is all the more reason to
recognize the heirs as the proper representatives of the deceased.
Since the Rules do not specifically prohibit them from representing
the deceased, and since no administrator had as yet been
appointed at the time of the institution of the Complaint with the
SEC, we see nothing wrong with the fact that it was the heirs of
John D. Young Sr. who represented his estate in the case filed
before the SEC.
Fourth Issue
Notice of Lis Pendens
On the issue of the annotation of the Notice of Lis Pendens on the
titles of the properties of the corporation and the other respondents,
we still find no reason to disturb the ruling of the Court of Appeals.
Under the third, fourth and fifth causes of action of the Complaint,
there are allegations of breach of trust and confidence and
usurpation of business opportunities in conflict with petitioners'
fiduciary duties to the corporation, resulting in damage to the
Corporation. Under these causes of action, respondents are asking
for the delivery to the Corporation of possession of the parcels of
land and their corresponding certificates of title. Hence, the suit
necessarily affects the title to or right of possession of the real
property sought to be reconveyed. The Rules of Court17 allows the
annotation of a notice of lis pendens in actions affecting the title or
right of possession of real property. 18 Thus, the Court of Appeals
was correct in reversing the SEC Order for the cancellation of the
notice of lis pendens.
The fact that respondents are not stockholders of the Mactan Realty
Development Corporation and the Lapu-Lapu Real Estate
Corporation does not make them non-parties to this case. To
repeat, the jurisdiction of a court or tribunal over the subject matter
is determined by the allegations in the Complaint. In this case, it is
alleged that the aforementioned corporations are mere alter egos
of the directors-petitioners, and that the former acquired the
properties sought to be re conveyed to FGSRC in violation of the
directors-petitioners' fiduciary duty to FGSRC. The notion of
corporate entity will be pierced or disregarded and the individuals
composing it will be treated as identical 19 if, as alleged in the
present case, the corporate entity is being used as a cloak or cover
for fraud or illegality; as a justification for a wrong; or as an alter
ego, an adjunct, or a business conduit for the sole benefit of the
stockholders.
Effect of RA 8799

While we sustain the appellate court, the case can no longer be

remanded to the SEC. As earlier stated, RA 8799, which became
effective on August 8, 2000, transferred SEC's jurisdiction over
cases involving intra-corporate disputes to courts of general
jurisdiction or to the regional trial courtS. 20 Section 5.2 thereof reads
as follows:

"5.2. The Commission's jurisdiction over all cases

enumerated under Section 5 of Presidential Decree No.
902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court:
Provided, That the Supreme Court in the exercise of its
authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over these cases.
The Commission shall retain jurisdiction over pending
cases involving intra-corporate disputes submitted for
final resolution which should be resolved within one (1)
year from the enactment of this Code. The Commission
shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000
until finally disposed."

In the light of the Resolution issued by this Court in AM No. 00-8-

10-SC,21 the Court Administrator and the Securities and Exchange
Commission should be directed to cause the transfer of the records
of SEC Case No. 02-94-4674 to the appropriate court of general
jurisdiction.

WHEREFORE, the Petition is hereby DENIED and the assailed

Decision AFFIRMED, subject to the modification that the case be
remanded to the proper regional trial court. The December 9, 1994
Order of Securities and Exchange Commission hearing officer
dismissing the Complaint and directing the cancellation of the
notice of lis pendens, as well as the March 3, 1995 Order denying
complainants' motion for reconsideration are REVERSED and SET
ASIDE. Pursuant to AM No. 00-8-10-SC, the Office of the Court
Administrator and the SEC are DIRECTED to cause the actual
transfer of the records of SEC Case No.02-94-467 4 to the
appropriate regional trial court.

SO ORDERED.
Melo, Vitug, Gonzaga-Reyes, and Sandoval-Gutierrez, JJ., concur.
 THIRD DIVISION
[G.R. No. 164846. June 18, 2008.]
STA. MONICA INDUSTRIAL AND DEVELOPMENT
CORPORATION, petitioner, vs. THE DEPARTMENT OF
AGRARIAN REFORM REGIONAL DIRECTOR FOR REGION III,
PROVINCIAL AGRARIAN REFORM OFFICER OF BULACAN,
MUNICIPAL AGRARIAN REFORM OFFICER OF CALUMPIT,
BULACAN, and BASILIO DE GUZMAN, respondents.
DECISION
REYES, R.T., J p:
ANG Malawak na Batas sa Repormang Pangsakahan ay binuo
upang makalaya ang mga magsasaka mula sa tali ng kahirapan at
paghahari ng may-ari ng lupa.
Kapag ang kathang-isip na korporasyon ay ginamit na tabing sa
katulad na pyudal na pang-aalipin, ang matayog na hangarin ng
batas pambukid ay nabibigo at ang mismong suliranin na nais
lunasan nito ay nananatili.
Ang belo ng kathang-isip na korporasyon ay pupunitin kapag ito ay
ginamit sa maling hangarin at di-tapat na layunin.
The Comprehensive Agrarian Reform Law 1 was designed
precisely to liberate peasant-farmers from the clutches of
landlordism and poverty.
When corporate fiction is used as a mere smokescreen to the same
form of feudal servitude, the lofty aim of the agrarian law is thwarted
and the very problem which the law seeks to solve is perpetrated.
The veil of corporate fiction will be pierced when used for improper
purposes and unfair objectives.
Before Us is a petition for review on certiorari of the Decision 2 of
the Court of Appeals (CA) dismissing the petition of Sta. Monica
Industrial and Development Corporation (Sta. Monica) to annul the
Order 3 of the Regional Director, Region III, Department of Agrarian
Reform (DAR) placing the landholdings of Asuncion Trinidad under
the Comprehensive Agrarian Reform Program (CARP).
The Facts
Trinidad is the owner of five parcels of land with a total area of 4.69
hectares in Iba Este, Calumpit, Bulacan. Private respondent Basilio
de Guzman is the agricultural leasehold tenant of Trinidad.
cCTESa
On April 29, 1976, a leasehold contract denominated as
"Kasunduan ng Buwisan sa Sakahan" was executed between
Trinidad and de Guzman. 5 As an agricultural leasehold tenant, de
Guzman was issued Certificates of Land Transfer on July 22, 1981.
6
Desiring to have an emancipation patent over the land under his
tillage, de Guzman filed a petition for the issuance of patent in his
name with the Office of the Regional Director of the DAR. 7 The
Legal Services Division of the DAR duly sent notices to Trinidad
requiring her to comment. Instead of complying, Trinidad filed a
motion for bill of particulars. 8
After due proceedings, the Regional Director issued the Order 9
granting the petition of de Guzman, with the following disposition:
WHEREFORE, in light of the foregoing analysis and the reasons
indicated thereon, an ORDER is hereby issued as follows:
1. PLACING under the coverage of Operation Land Transfer
(OLT) pursuant to PD 27/Executive Order No. 228 the landholdings
of Asuncion Trinidad with an area of 10.6800 hectares, more or
less, located at Iba Este, Calumpit, Bulacan, without prejudice to
the exercise of her retention rights if qualified under the law.
2. DIRECTING the MARO of Calumpit, Bulacan and the
PARO of Baliuag, Bulacan to cause the generation and issuance of
Emancipation Patent in favor of the petitioner and other qualified
farmer-beneficiaries over the said landholding in accordance with
the actual area of tillages.
Trinidad filed a motion for reconsideration but her motion was
denied.
A year later, petitioner Sta. Monica filed a petition for certiorari and
prohibition with the CA assailing the order of the Regional Director.
In its petition, Sta. Monica claimed that while it is true that Asuncion
Trinidad was the former registered owner of a parcel of land with an
area of 83,689 square meters, the said landholding was sold on
January 27, 1986.
Petitioner was able to acquire 39,547 square meters of the Trinidad
property. After the sale, petitioner sought the registration of the
portion pertaining to it before the Register of Deeds of the Province
of Bulacan. Consequently, a corresponding Transfer Certificate of
Title, with No. 301408 (now TCT No. RT 70512) was issued in favor
of petitioner.
It was asserted that there was a denial of due process of law
because it was not furnished a notice of coverage under the CARP
law.
In his comment on the petition, de Guzman argued that the alleged
sale of the landholding is illegal due to the lack of requisite
clearance from the DAR. The said clearance is required under P.D.
No. 27, the Tenant Emancipation Decree, which prohibits transfer
of covered lands except to tenant-beneficiaries. According to de
Guzman, since no clearance was sought from, and granted by, the
DAR, the sale in favor of petitioner by Trinidad is inexistent and
void. Hence, Trinidad remained the owner of the disputed property.
CA Disposition
On May 26, 2004, the CA rendered a decision dismissing the
petition of Sta. Monica, disposing as follows:
WHEREFORE, premises considered, the instant petition is hereby
DENIED for lack of merit.
SO ORDERED.
The CA held that Sta. Monica is not a real party-in-interest because
it cannot be considered as an owner of the land it bought from
Trinidad, thus:
It appears from the records of this case that the sale between
Trinidad and the petitioner is enjoined by Department Memorandum
Circular No. 2-A, implementing the provisions of Presidential
Decree (P.D.) No. 27, which prohibits the transfer of ownership of
landholdings covered by P.D. No. 27 after 21 October 1972 without
the requisite clearance from the DAR except to the tenant-
beneficiary. Thus, the title to the subject landholding remained with
the previous owner, Asuncion Trinidad. This effectively deprives the
petitioner of interest to question the orders of the Regional Director
of the DAR relative to the latter's directive placing the subject
landholding under the coverage of Operation Land Transfer and the
subsequent issuance of an Emancipation Patent in favor of private
respondent de Guzman. One having no right or interest to protect
cannot invoke the jurisdiction of the court as a party plaintiff (in this
case petitioner) in an action. A real party in interest is the party who
stands to be benefited or injured by the judgment in the suit, or the
party entitled to the avails of the suit. 18 (Citations omitted)
The CA added that even assuming that Sta. Monica is a real party-
in-interest, it was not denied due process because it had
constructive notice of the proceeding which involved its property:
Even assuming, without admitting, that petitioner is the real party in
interest by reason of the sale of the subject landholding in its favor,
it cannot be said that petitioner was denied due process because
of lack of notice of the proceedings before the DAR. It is significant
to note that Asuncion Trinidad is the treasurer of petitioner, based
on the corporation's General Information Sheet. While it cannot be
said that there was proper notice to the corporation, being a
corporate officer of the petitioner, there was at least constructive
notice of the fact that there was a proceeding which involved the
property of the corporation of which it may be deprived should an
adverse decision be rendered by the DAR.
The CA also ruled that the assailed orders of the Regional Director
have already attained finality because it was not appealed to the
DAR Secretary.
Furthermore, the assailed orders have long become final and
executory, there being no appeal undertaken to the Secretary of the
Department of Agrarian Reform. Citing Fortich vs. Corona, et al.,
the Supreme Court aptly ruled in this wise:
"The orderly administration of justice requires that the
judgments/resolutions of a court or quasi-judicial body must reach
a point of finality set by law, rules and regulations. The noble
purpose is to write finis to disputes once and for all. This is a
fundamental principle in our justice system, without which there
would be no end to litigations. Utmost respect and adherence to this
principle must always be maintained by those who wield the power
of adjudication. Any act which violates such principle must
immediately be struck down."
The rule on finality of decisions, orders or resolutions of a judicial,
quasi-judicial, or administrative body is not a question of technicality
but of substance and merit, the underlying consideration therefore
being the protection of the substantive rights of the winning party.
Just as a losing party has the right to file an appeal within the
prescribed period, the winning party also has the correlative right to
enjoy the finality of the resolution of his/her case. 20 CDESIA
Sta. Monica sought reconsideration but it was denied. Hence, the
present recourse. 21
Issue
Sta. Monica seeks reversal of the CA decision on the lone ground
that THE ASSAILED DECISION AND RESOLUTION OF THE
COURT OF APPEALS ARE CONTRARY TO EXISTING LAWS,
RELEVANT JURISPRUDENCE ON THE MATTER AND THE
FACTUAL CIRCUMSTANCES. 22
Our Ruling
The petition is bereft of merit.
Trinidad is still deemed the owner of
the agricultural land sold to Sta.
Monica; no need for separate notice
of coverage under the CARP law.
The crux of the petition lies in the requirement of notice of coverage
under the CARP law. The statute requires a notice of coverage to
be furnished and sent to the landowner. 23 Notice is part of the
constitutional right to due process of law. It informs the landowner
of the State's intention to acquire a private land upon payment of
just compensation and gives him the opportunity to present
evidence that his landholding is not covered or is otherwise excused
from the agrarian law.
There is no dispute that a notice of coverage was duly sent to
Trinidad. Records show that she participated in the DAR
proceedings. As to her, the constitutional requirement of due
process was met and satisfied.
Petitioner Sta. Monica, however, claims that it is the owner of the
agricultural land awarded to de Guzman. It acquired the land from
Trinidad by sale in 1986 and it was issued a transfer certificate of
title. Sta. Monica claims denial of due process of law because it was
not furnished the required notice of coverage under the CARP law.
Respondent de Guzman, on the other hand, contends that the sale
between Trinidad and Sta. Monica is null and void because it is a
prohibited transaction under Presidential Decree No. 27 (P.D. No.
27), as amended. de Guzman also claims that Trinidad is a
corporate officer of Sta. Monica. It was her duty to inform Sta.
Monica of the pending proceeding with the DAR. 25 He maintains
that Sta. Monica was not denied due process because there was
constructive notice. Sta. Monica was sufficiently informed of the
pending DAR proceedings.
Records disclose that there was indeed a deed of sale between
Trinidad and Sta. Monica over the agricultural land awarded to de
Guzman. Sta. Monica was also issued a new transfer certificate of
title over the land. If We rely solely on the sale, it is a foregone
conclusion that Sta. Monica was denied due process of law. As the
owner on record of the agricultural land, it should have been given
a notice of coverage.
However, there is much to be said of the attendant circumstances
that lead Us to conclude that notice of coverage to Trinidad is also
sufficient notice to Sta. Monica. Moreover, We find that the sale
between Trinidad and Sta. Monica was a mere ruse to frustrate the
implementation of the agrarian law.
First, the sale to Sta. Monica is prohibited. P.D. No. 27, as
amended, forbids the transfer or alienation of covered agricultural
lands after October 21, 1972 except to the tenant-beneficiary. The
agricultural land awarded to de Guzman is covered by P.D. No. 27.
He was awarded a certificate of land transfer in July 22, 1981. The
sale to Sta. Monica in 1986 is void for being contrary to law. 27
Trinidad remained the owner of the agricultural land.
In Heirs of Batongbacal v. Court of Appeals, 28 involving the similar
issue of sale of a covered agricultural land under P.D. No. 27, this
Court held:
Clearly, therefore, Philbanking committed breach of obligation as
an agricultural lessor. As the records show, private respondent was
not informed about the sale between Philbanking and petitioner,
and neither was he privy to the transfer of ownership from Juana
Luciano to Philbanking. As an agricultural lessee, the law gives him
the right to be informed about matters affecting the land he tills,
without need for him to inquire about it. CETDHA
xxx xxx xxx
In other words, transfer of ownership over tenanted rice and/or corn
lands after October 21, 1972 is allowed only in favor of the actual
tenant-tillers thereon. Hence, the sale executed by Philbanking on
January 11, 1985 in favor of petitioner was in violation of the
aforequoted provision of P.D. 27 and its implementing guidelines,
and must thus be declared null and void. 29 (Underscoring
supplied)
Second, buyer Sta. Monica is owned and controlled by Trinidad and
her family. Records show that Trinidad, her husband and two sons
own more than 98% 30 of the outstanding capital stock of Sta.
Monica. They are all officers of the corporation. 31 There are only
two non-related incorporators who own less than one percent of the
outstanding capital stock of Sta. Monica and who are not officers of
the corporation.
To be sure, Trinidad and her family exercise absolute control of the
corporate affairs of Sta. Monica. As owners of 98% of the
outstanding capital stock, they are the beneficial owners of all the
assets of the company, including the agricultural land sold by
Trinidad to Sta. Monica.
Third, Trinidad and her counsel failed to notify the DAR of the prior
sale to Sta. Monica during the administrative proceedings. Worse,
Trinidad feigned ignorance of the sale by filing a motion for bill of
particulars seeking specifics from de Guzman of her alleged
landholdings which are subject of his petition with the DAR.
It is highly unusual and unbelievable for her not to know, or at least
be aware, of the sale to Sta. Monica. She herself signed the deed
of sale as seller. She is also a stockholder and officer of Sta.
Monica. More importantly, she cannot feign ignorance of de
Guzman's claim because he was her agricultural tenant since the
1970s. She knows, or at least ought to know, that the subject matter
of the petition with the DAR was her own landholding, which she
sold to Sta. Monica in direct violation of P.D. No. 27.
The apparent lack of candor is heightened by the fact that both
Trinidad and Sta. Monica are represented by the same counsel,
Atty. Ramon Gutierrez. We cannot stretch our credulity on how
Trinidad filed a motion for bill of particulars with the DAR seeking
specifics on the sale to Sta. Monica when she herself signed for the
vendor as a party to the transaction.
It is the duty of Atty. Gutierrez to inform the DAR, at the very first
opportunity, of the sale to Sta. Monica. He was utterly remiss of this
duty. Instead of informing the DAR, Trinidad and her counsel
engaged in wild goose chase and stonewalling, feigning ignorance
when they ought to have informed the DAR of the sale to Sta.
Monica. Atty. Gutierrez is reminded that, as an officer of the court,
he owes it the duty of candor, honesty and fairness. 32
Fourth, it was only after an adverse decision against Trinidad that
Sta. Monica suddenly filed a petition for certiorari with the CA
questioning the lack of notice of coverage under the CARP law. It
is highly unlikely that Sta. Monica, an artificial being acting only
through its duly authorized representatives, was not sufficiently
informed or had no constructive knowledge of the DAR
proceedings.
Trinidad and by extension, her family members, were informed or
should be sufficiently aware of the DAR proceedings. They are all
stockholders and corporate officers of Sta. Monica. They knew,
they ought to know, that Sta. Monica would suffer damage should
the DAR award, as it awarded, the agricultural land to de Guzman.
As directors and corporate officers, they owe a duty of care to the
corporation to inform it of the pending proceedings with the DAR.
Fifth, the ultimate factor that betrays Trinidad and Sta. Monica is the
continued payment of lease rentals by de Guzman. Records show
that de Guzman paid and continued to pay lease rentals to Trinidad
even after she sold the land to Sta. Monica. The receipt 33 dated
May 30, 2002 discloses that de Guzman paid 40 cavans of palay
to Clodinaldo dela Cruz, the authorized representative of Trinidad,
as lease rentals for the agricultural land.
It is incredible that Trinidad would still continue to collect lease
rentals from de Guzman if she had long sold the agricultural land to
Sta. Monica in 1986. The continued payment of lease rentals
indicates that Trinidad never sold the agricultural land to Sta.
Monica. Evidently, the sale was a mere ruse to skirt coverage under
the comprehensive agrarian reform law.
All these circumstances indicate that Trinidad has remained as the
real owner of the agricultural land sold to Sta. Monica. The sale to
Sta. Monica is not valid because it is prohibited under P.D. No. 27.
More importantly, it must be deemed as a mere ploy to evade the
applicable provisions of the agrarian law.
But it is a fiat that the corporate vehicle cannot be used as a shield
to protect fraud or justify wrong. Thus, the veil of corporate fiction
will be pierced when it is used to defeat public convenience and
subvert public policy.
Considering that Trinidad remained to be the true and legal owner
of the agricultural land, there is no need for another notice of
coverage to be sent or furnished to Sta. Monica. At the very least,
the notice to her is already notice to Sta. Monica because the
corporation acted as a mere conduit of Trinidad. The CA correctly
dismissed the petition of Sta. Monica to annul the orders of the
Regional Director placing the agricultural land of Trinidad under the
agrarian reform law.
Final Note
This case can be viewed as a microcosm of the persistent agrarian
reform problem in Our country. For one, it illustrates the arduous
legal battle that tenant-farmers have to endure in order to be finally
freed from the bondage of the soil. De Guzman battled for almost
eight years to acquire the agricultural land from Trinidad. Others are
not as equally lucky. For another, it shows the subtle but illegal
measures taken by landowners to evade coverage under the CARP
law.
Of course, there are also tales of landowners who unduly suffer
either the abuse of some farmers or the harsh consequences of the
law.
In hindsight, it is quite ironic that We are still faced with the same
agrarian reform problem which We have sought to eradicate
several years ago when the CARP law was first introduced. Feudal
system of land ownership still persists in the countryside and most
farmers are still tied to their bondage. It is more ironic when the
problem is taken in its historical context, the CARP law being the
fifth land reform law passed since President Quezon.
To Our mind, part of the problem lies with the CARP law itself. As
crafted, the law has its own loopholes. It provides for a long list of
exclusions. Some landowners used these exclusions to go around
the law. There is now a growing trend of land conversion in the
countryside suspiciously to evade coverage under the CARP law.
Of course, the solution to this problem lies with Congress. It is high
time We sounded the call for a more realistic, rational
comprehensive agrarian reform law.
The dubious use of seemingly legal means to sidestep the CARP
law persists. Corporate law is resorted to by way of circling around
the agrarian law. As this case illustrates, agricultural lands are being
transferred, simulated or otherwise, to corporations which are fully
or at least predominantly controlled by former landowners, now
called stockholders. Through this strategy, it is anticipated that the
corporation, by virtue of its corporate fiction, will shield the
landowners from agricultural claims of tenant-farmers.
The use of corporate fiction as a means to evade legal liability is not
new. This scheme or device has long been perceived to be used in
other fields of law, notably taxation to minimize payment of tax with
varying degrees of success and acceptability. But the continued
employment of the scheme in agrarian cases is not only deplorable;
it is alarming. It is time to put a lid on the cap.
WHEREFORE, the petition is DENIED. The appealed Decision of
the Court of Appeals is AFFIRMED.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Chico-Nazario and Brion, * JJ.,
concur.
 SECOND DIVISION
[G.R. No. 155639. April 22, 2009.]
JANUARIA A. RIVERA, petitioner, vs. UNITED
LABORATORIES, INC., respondent.
DECISION
BRION, J.:
Before the Court is the case of a retired employee who continued
working after her retirement, and who now claims retirement pay
differential for the subsequent work she undertook. The retiree is
Januaria A. Rivera (Rivera) now before the Court on a petition for
review on certiorari under Rule 45 of the Rules of Court.1 She seeks
to set aside the decision of the Court of Appeals (CA)2 and its
subsequent resolution denying her motion for reconsideration. 3 The
assailed CA decision set aside the decision of the National Labor
Relations Commission (NLRC) decision dismissing Rivera's
appeal,4 and remanded the case to the Labor Arbiter for hearing on
the merits.
The Factual Background
Rivera commenced employment with respondent United
Laboratories, Inc. (UNILAB) on April 7, 1958 as senior
manufacturing pharmacist. She later became Director of UNILAB's
Manufacturing Division.
In 1959, UNILAB adopted a comprehensive retirement plan 5 (the
plan or retirement plan) supported by a retirement fund, consisting
of Trust Fund A where it would put in its contributions for the
account of the member-employee (member) and Trust Fund B
consisting of the contributions of the members themselves. The
parties do not dispute that under the plan, a member is compulsorily
retired upon reaching the normal retirement date which is the date
when the member has reached age 60 or has completed 30 years
of service, whichever comes first.
In 1988, Rivera completed 30 years of service and UNILAB retired
her pursuant to the terms of the plan effective December 31, 1988.
Based on her monthly salary of ₱28,000.00 at that time, and at one
month's terminal basic salary for every year of service, Rivera's
retirement benefits amounted to ₱860,473.12 from Trust Fund A
and ₱186,858.21 from Trust Fund B, for a total of ₱1,047,331.33. 6
Rivera's accrued retirement benefits under Trust Fund A and Trust
Fund B were withdrawn from the retirement fund and deposited in
Trust Fund C, a special account from which she could make
withdrawals as she pleased. A manual computation prepared by the
company showed that the full amount of Rivera's retirement pay
was transferred to Trust Fund C.7
At Rivera's request, UNILAB allowed her to continue working for the
company; she was even promoted to the position of Assistant Vice-
President on January 1, 1989, with a basic monthly salary of
₱50,034.00, and a fixed monthly allowance of ₱8,900.00. She
rendered service to the company in this capacity until the end of
1992, at which time, Rivera retired from employment with the
company (as distinguished from retirement from the plan), as
UNILAB put it and as evidenced by a personnel action notice dated
February 19, 1993.8
From 1993 to 1994, Rivera served as a personal consultant under
contract with the Active Research and Management Corporation
(ARMCO) in 1993 and with Fil-Asia Business Consultants (Fil-Asia)
in 1994. These are UNILAB’s sister companies which assigned
Rivera to render service involving UNILAB. Submitted in evidence
were Rivera's contracts with the two corporations. 9
On December 16, 1992, the company amended its retirement plan,
providing, among others, for an increase in retirement benefits from
one (1) month to one-and-a-half (1.5) months of terminal basic
salary for every year of service.10 The amendment also provides
that "[T]he effective date of normal or mandatory retirement from
the Plan is 30 days after an employee reaches his/her 60th birthday.
The effective date applies to all rank and file as well as
KPs."111avvphi1
In a letter dated January 7, 1995 to UNILAB, 12 Rivera asked that
her retirement benefits be increased in accordance with the
amended retirement program based on her December 31, 1992
terminal basic salary, multiplied by her thirty four (34) years of
service with the company. UNILAB did not reply to this letter and
Rivera made two follow-up letters, one dated December 18,
199513 and the other, February 12, 1996,14 reiterating her demand
for additional retirement benefits.
UNILAB denied Rivera’s request in a letter dated February 26,
1996.15 The company explained that since the upgrade of the
retirement benefit formula occurred in December 1992, the
upgraded formula does not apply to her; what applied to her case
is the formula that governed in 1988, the year she compulsory
retired from the plan.
Rivera sought legal assistance and in a letter dated July 24,
1996,16 lawyer Katz N. Tierra demanded a recomputation of
Rivera's retirement pay under the plan and under the retirement
law. UNILAB again rejected the demand in its letter dated August
5, 1996.17
On August 9, 1996, Rivera sought relief from the NLRC in an action
against UNILAB for recovery of unpaid retirement pay differential.
In defense, UNILAB argued that the complaint was filed out of time
as it was filed only on August 9, 1996. UNILAB prayed for the
dismissal of the complaint on the ground of prescription. Invoking
Article 291 of the Labor Code,18 it maintained that Rivera's cause of
action accrued when the company's retirement plan was amended
considering that the action was triggered by the additional benefit
provided by the amendment to the retirement plan on December
16, 1992.
Rivera disagreed with UNILAB's position, arguing that the three-
year period within which to file her complaint should be counted, not
from December 16, 1992, but from February 26, 1996 when the
company had "categorically" denied her letter demanding payment
of the unpaid balance of her retirement benefits.
The Arbitration Rulings
Labor Arbiter Manuel R. Caday dismissed the complaint for lack of
merit in an order dated November 7, 1997.19 The Labor Arbiter
found that Rivera’s cause of action did not accrue only on February
26, 1996 when her third letter was answered by UNILAB; it accrued
on January 15, 1993 when she received the company's check in
payment of her retirement benefits after she was retired on
December 31, 1992. According to the Arbiter, the company stood
firm in its position that the amended retirement plan did not apply to
Rivera and the company had not wavered in this stand; UNILAB’s
reply to Rivera's third letter was nothing but a reiteration of its denial
of Rivera’s demand that she be covered by the amended retirement
plan.
Arbiter Caday rejected Rivera's contention that under Article 1155
of the Civil Code, "written extrajudicial demand," like letters,
effectively interrupted the running of the three-year prescriptive
period. He pointed out that while it is true that Article 1155 of the
Civil Code was mentioned in Manuel L. Quezon University
Association v. Manuel L. Quezon Educational Institution Inc.,20 the
Court did not categorically state that it superseded Article 291
because the said demand letter amounted to nothing, the cause of
action having already prescribed.
Separately from the prescription issue, the Labor Arbiter found that
Rivera was not entitled to the upgraded benefits under the
company's amended retirement plan because she was
compulsorily retired on April 7, 1988. Thus, her retirement benefits
should be computed based on her last monthly basic pay in April
1988 and not in December 1992.
Rivera appealed to the NLRC. In a decision promulgated on August
18, 1998,21 the NLRC denied the appeal for lack of merit, thereby
affirming the Labor Arbiter's order of November 7, 1997. Rivera
moved for the reconsideration of the decision, but the NLRC denied
the motion in a resolution promulgated on January 29, 1997. 22
Rivera elevated the case to the CA by way of a petition
for certiorari under Rule 65 of the Rules of Court,23 questioning the
NLRC's ruling that her claims for additional retirement benefits had
prescribed.
The CA ruled in favor of Rivera. In a decision promulgated on
December 21, 2001,24 it set aside the assailed decision and
resolution of the NLRC, but remanded the case to the Labor Arbiter
for hearing on the merits. It found that Rivera's claim for retirement
had not yet prescribed at the time of its filing on August 9, 1996.
The appellate court held that even assuming that Rivera's cause of
action did arise on January 15, 1993, when she received her
retirement pay check from the company, the running of the three-
year prescriptive period was effectively interrupted by Rivera's first
letter to UNILAB on January 7, 1995, when she demanded
additional retirement benefits under the 1992 amended retirement
plan.
In upholding Rivera's claim, the CA relied on De Guzman v. Court
of Appeals25 where the Court ruled that based on Article 1155 of the
Civil Code, the three-year prescriptive period for money claims in
labor cases can be interrupted by a claim filed with the proper
judicial or quasi-judicial forum, by an extrajudicial demand on the
employer, or by the employer's acknowledgment of its debt or
obligation. De Guzman cited the Manuel L. Quezon
University ruling.26
To the CA, the running of the prescriptive period (that began on
January 15, 1993) stopped when Rivera made the extrajudicial
demand on UNILAB through her January 7, 1995 letter, 27 leaving
her with one year and eight days more of the three-year period, or
up to about March 5, 1997, within which to file her claim. Thus,
when Rivera brought her case to the NLRC on August 9, 1996, it
was well within the prescriptive period.
The CA however avoided ruling on the merits of the case by reason
of what it recognized as "an existing controversy as to the crucial
fact of when precisely petitioner retired from respondent
company for purposes of determining whether or not she is covered
by respondent's amended retirement plan so as to fix the amount
of retirement benefits."
UNILAB moved for a reconsideration of the CA decision on grounds
that the CA erred: in entertaining the petition which was filed beyond
the 60-day period allowed by the Rules of Court; and, in ruling that
Rivera's cause of action had not prescribed. On the other hand,
Rivera filed a partial motion for reconsideration of the decision
asking the CA to resolve the remaining issues raised in the petition.
On October 16, 2002, the CA promulgated its resolution denying
both motions for lack of merit. 28 Hence, the present petition.
The Petition
The petition asks the Court to exercise its power of review over the
questioned decision and resolution of the CA on the following
grounds:
1. They are not in accord with applicable decisions of the
Court;
2. They contravene the provisions of the Constitution on
the promotion of "social justice" and "protection to labor";
and
3. The CA and NLRC records of the case are sufficient to
resolve the entire controversy.
The petition then proceeds to show that Rivera's claim for unpaid
retirement benefits differential should have been disposed of by the
CA on the basis of the records before it, considering that the
appellate court made specific factual findings culled from the
parties' respective submissions in resolving the prescription issue.
Rivera contends that: the CA's factual findings based on UNILAB's
admissions show that she continued in the employ and service of
the company from April 7, 1958 until December 31, 1994; her so-
called first and second "retirements" in 1988 and 1992, as well as
"consultancy" up to the end of 1994, "were a brilliant but a devious
scheme" by UNILAB to deprive her of benefits due her; she lost
millions of pesos in benefits when she was made to retire a second
time on December 31, 1992, and to immediately assume thereafter
a "consultancy" that lasted until December 31, 1994, but was given
retirement benefits based only on her 1988 pay scale and under the
old retirement plan.
Rivera further contends that even without UNILAB's admissions,
the factual findings of the CA are borne out by the records which
unequivocally established that there was no break in her
employment with the company. Even prior to Rivera's so-called
retirement on December 31, 1992, her services were already
subject of a consultancy contract dated October 15, 1992 with
ARMCO,29 which UNILAB used to maintain her services under a
purported "contract of hire"; Rivera’s compensation package
exposed ARMCO's consultancy contract with her as a "monumental
sham."
Rivera submits that a cursory examination of the corporate records
of UNILAB and ARMCO on file with the Securities and Exchange
Commission (SEC)30 discloses that ARMCO and UNILAB have six
(6) common directors, a common chairman of the board, a common
corporate secretary, a common treasurer and two (2) other
common officers. UNILAB continued to use Rivera’s services for
the period January to December 1994 through another conduit, FIL-
ASIA, pursuant to a letter-agreement dated January 3,
1994.31 Comparing FIL-ASIA's corporate records with those of
ARMCO and UNILAB, Rivera points out that the three (3)
corporations have a common president, a common corporate
secretary, and a common assistant secretary. Moreover, FIL-ASIA
has three (3) common directors with UNILAB and also three (3)
common directors with ARMCO, with which it has likewise two (2)
common officers; both FIL-ASIA and ARMCO have the same
business address and telephone numbers.32
Rivera posits that in the light of these incontrovertible facts,
UNILAB, ARMCO and FIL-ASIA are one and the same corporation.
She opines that the "veil of corporate fiction may be pierced when
the same is made as a shield to confuse the legitimate issues." She
maintains that when her "agreement" with FIL-ASIA expired on
December 31, 1994, she had completed thirty six (36) years, eight
(8) months and twenty four (24) days of continuous service with
UNILAB.
Rivera considers the check for ₱1,175,666.2233 that she received
on January 15, 1993 as retirement benefits falls short of the correct
amount due her; the amount paid was computed on the basis of her
1988 salary scale, not on her last salary as of December 31, 1994.
She adds that there were modifications and changes to the
retirement plan prior to January 15, 1993, but were formally made
known only in a memorandum dated June 1, 1993; 34 thus, the
January 15, 1993 check did not include the modifications and
changes in the benefits mentioned in the memorandum.
Rivera submits that the provisions of the retirement plan on
compulsory retirement age and maximum years of service were
deemed waived, when UNILAB continued to employ the services of
Rivera for six (6) more years after 1988, or until December 31,
1994. Under these facts, Rivera contends, the "monthly basic pay"
that should serve as basis in computing her retirement benefits
should be the prevailing pay in December 1994, not that of April
1988, as waiver of the provisions of the retirement plan had
intervened.
Rivera explains that in December 1994, her aggregate monthly
compensation was already ₱78,460.60 and her aggregate annual
compensation package was equivalent to fourteen (14)
months.35 Thus, her average monthly compensation in 1994 was
ninety-one thousand five hundred thirty-six pesos and sixty-seven
centavos (₱91,536.67), arrived at by multiplying the aggregate
monthly compensation of ₱78,460.00 by 14 months and dividing
the product by 12. By multiplying her aggregate monthly
compensation by 1.5 (the salary benefit per year of service) and by
her 36.67 years of service, she arrived at a total of Five Million Thirty
Four Thousand Nine Hundred Seventy Four Pesos and thirty
centavos (₱5,034,974.30), from which is deducted ₱1,175,666.22
[the retirement benefits paid earlier by UNILAB]. This computation
leaves a balance or differential of Three Million Eight Hundred Fifty
Nine Thousand Three Hundred Eight Pesos and eight centavos
(₱3,859,308.08) as retirement benefits still due her.
In the alternative, Rivera contends that in the absence of any
company retirement plan applicable to her after April 7, 1988, the
"New Retirement Law" (R.A. No. 7641) that took effect on January
7, 1993 should apply to her, since she was actually separated from
the service only on December 31, 1994. She claims she is still
entitled to additional retirement benefits at least under R.A. No.
7641 for her services to UNILAB from April 8, 1988 to December
31, 1994, or a period of six (6) years and eight (8) months.
Rivera prays that judgment be rendered: (1) ordering UNILAB to
pay her retirement benefits differential of ₱3,859,308.08 with 12%
interest per annum from the time of filing of the complaint on August
9, 1996; (2) ordering UNILAB to pay her 10% attorney's fees; and
(3) in the alternative, ordering UNILAB to pay her retirement
benefits under the law on retirement, R.A. No. 7641, for a period of
six (6) years and eight (8) months based on her last average
aggregate monthly compensation of ₱91,536.67.
The Case for UNILAB
In a memorandum dated June 18, 2003,36 UNILAB defines the
issues raised by the petition to be: (1) whether the CA committed
grave or reversible error, or decided questions not in accord with
law or the applicable decision of the Court, in remanding the case
to the Labor Arbiter for hearing on the merits and reception of
evidence; and (2) whether the instant petition should be dismissed
because it raises questions of fact, and not solely questions of law
as required under Rule 45 of the Rules of Court.
UNILAB contends that the CA properly remanded the case to the
Labor Arbiter; a decision from this Court is premature as a decision
on the merits now from this Court would disregard and violate the
doctrine of judicial hierarchy. It argues that the present case
involves a dispute over a benefit arising from employment that
under Article 217 of the Labor Code, falls within the original and
exclusive jurisdiction of Labor Arbiters to hear and decide to the
exclusion of all other courts, quasi-judicial bodies or tribunals; Labor
Arbiters, by reason of their training, experience and background are
in a better position to resolve labor controversies, citing Alejandro
v. CA37 in support of its position.
UNILAB vehemently opposes Rivera's plea that the Court decide
the present case on the merits, arguing that her cited ruling – First
Asian Transport and Shipping Agency v. Ople38 – does not apply. It
argues that in First Asian, the parties were heard and evidence
were presented before the Director of the National Seamen Board
made his factual findings; only then was the petition filed before this
Court who, at that point, had findings from below as basis for its
ruling on the merits.
UNILAB further argues that the records of the case are not
complete for a determination of the factual issues, for it did not have
the opportunity to present its evidence on Rivera's factual
allegations. It submits that deciding the case at this point would
result in a denial of due process to the company.
On the second issue, UNILAB contends that Rivera comes to the
Court through a petition for certiorari under Rule 45 of the Rules of
Court that only allows questions of law. It maintains that an
examination of the petition would show that Rivera did not distinctly
raise questions of law but, in fact, raised questions of fact. The
petition, UNILAB posits, "is beyond the Office of the Court" as it is
not a trier of facts.
While it admits that the Court has laid down several exceptions to
the rule that only questions of law shall be raised in an appeal
by certiorari under Rule 45,39 the exceptions, however, presuppose
that findings of fact have been made by the CA, the trial courts or
the administrative agencies. UNILAB points out that in this case,
the Labor Arbiter, the NLRC and the CA have not made any findings
of fact on the matters alleged by Rivera. UNILAB prays that the
petition be denied for lack of merit and the decision dated January
29, 1999, be affirmed.
On the prescription question, UNILAB disputes the CA findings that
the running of the prescriptive period on Rivera's claim for
retirement benefits differential was interrupted by her extra-judicial
demand.40 It insists that Rivera's claim had already prescribed,
having been paid on January 15, 1993 the exact amount of her
retirement benefits as evidenced by a voucher for
₱1,175,666.22.41 It submits that the benefit is not paid unless the
employee is excluded from the retirement plan; this exclusion from
the coverage of the retirement plan is something that Rivera was
very much aware of when she voluntarily received the amount
representing her retirement benefits on January 15, 1993. It
concludes that if Rivera had any cause of action, it accrued on
January 15, 1993, not on January 7, 1995 when she wrote the
company demanding for additional retirement benefits.
The Submitted Issues
The submissions of the parties present the following issues for
resolution.
1. Whether the petition is in compliance with the
requirement of Section 1, Rule 45 of the Rules of Court,
that it shall raise only questions of law;
 2. Whether the CA erred in ruling that petitioner's claim for
additional retirement benefits had not prescribed; and
3. Whether the CA erred in remanding the case to the
Labor Arbiter for hearing on the merits.
The Court’s Ruling
We deny the petition for lack of merit.
The Threshold Issue.
The threshold issue of whether the petition raises only questions of
law appropriate for a petition for review on certiorari is not a novel
question for the Court. In Traverse Development Corporation v.
DBP,42 reflecting our rulings in a number of cases, we definitively
stated that a "question of law" exists when the doubt or difference
arises as to what the law is on a certain state of facts, and does not
call for an examination of the probative value of the evidence
presented by the parties-litigants. On the other hand, a "question of
fact" exists when the doubt or controversy arises as to the truth or
falsity of the alleged facts. Simply put, when there is no dispute as
to fact, the question of the correctness of the conclusion drawn the
given facts, is a question of law."
Simple as it may seem, determining the true nature and extent of
the distinction is not always easy. In a case involving a "question of
law" the resolution of the issue must rest solely on what the law
provides for a given set of facts drawn from the evidence presented.
Once it is clear that the issue invites a review of the probative value
of the evidence presented, the question posed is one of fact. If the
query requires a re-evaluation of the credibility of witnesses, or the
existence or relevance of surrounding circumstances and their
relation to each other, the issue in that query is factual.
The petition asks for a review of the CA's assailed ruling remanding
the case to the Labor Arbiter for hearing on the merits. This
necessarily requires a determination of whether the parties’
submissions sufficiently provide a basis for the appellate court to
decide the case on the merits. In order to resolve this issue, as we
held in Cucueco v. Court of Appeals,43 we only need to look into the
pleadings and the parties’ submissions without necessarily going
into the truth or falsity of the allegations and submissions made.
Again in Cucueco, we stated that the test of whether a question is
one of law or of fact is not the appellation given to such question by
the party raising the question; rather, it is whether the appellate
court can determine the issue raised without reviewing or
evaluating the evidence, in which case, question for resolution is
one of law; otherwise, the issue involves a question of fact.
In the present case, we find that the issue raised by the petition -
whether the CA erred in remanding the case to the Labor Arbiter for
hearing on the merits – can be resolved by the Court without having
to review or evaluate the evidence presented. We do not need to
evaluate the evidence as they are largely undisputed as will be
shown below. We thus conclude that the petition is not procedurally
nor substantively defective under the terms of Rule 45 of the Rules
of Court. If we rule on issues of fact at all, our ruling is by way of
exception as discussed below.
The Prescription Issue.
We agree with the CA’s conclusion that Rivera's cause of action
had not prescribed when she filed her claim with the Labor Arbiter
on August 9, 1996. As UNILAB contended, Rivera's claim for
retirement pay differential only accrued on January 15, 1993 when
she received her retirement pay check. It could not have accrued
on December 31, 1988 as what was clearly due her then was her
retirement pay up to that date, a matter that is not disputed. On the
other hand, the first opportunity for her to claim her retirement pay
differential corresponding to her claimed continuous work up to
December 31, 1992 came only on January 15, 1993 when she
received her final pay that did not include her service after
December 31, 1988. However, the running of the prescriptive
period was effectively interrupted by her first letter to the respondent
on January 7, 1995 when she demanded additional retirement
benefits under the 1992 amended retirement plan. 44
It should be noted in this regard that Articles 1139 to 1155 of the
Civil Code provide the general law on prescription of actions. Under
Article 1139, actions prescribe by the mere lapse of time prescribed
by law. That law may either be the Civil Code or special laws as
specifically mandated by Article 1148. In labor cases, the special
law on prescription is Article 291 of the Labor Code which provides:
Article 291. Money Claims. – All money claims arising from
employer-employee relations accruing during the effectivity of this
Code shall be filed within three (3) years from the time the cause of
action accrued; otherwise they shall be barred forever.
The Labor Code has no specific provision on when a monetary
claim accrues. Thus, again the general law on prescription applies.
Article 1150 of the Civil Code provides that –
Article 1150. The time for prescription for all kinds of actions, when
there is no special provision which ordains otherwise, shall be
counted from the day they may be brought.
The day the action may be brought is the day a claim started as a
legal possibility.45 For the petitioner in the present case, this date
came when she learned that she was being paid on the basis of her
December 31, 1988 retirement computations for the retirement that
she claimed to have occurred on December 31, 1992.
How prescription operates is another matter that the general law,
rather than the Labor Code, governs since the Labor Code is silent
on the matter. Under Article 1155 –
The prescription of actions is interrupted when they are filed with
the court, when there is a written extrajudicial demand by the
creditors, and when there is any written acknowledgment of the
debt by the debtor.
In the present case, the earliest incident covered by Article 1155 is
the extrajudicial demand which came on January 7, 1995. As the
CA correctly computed, the period for prescription started to run on
January 15, 1993, and was interrupted on January 7, 1995. UNILAB
only answered the petitioner’s January 7, 1995 letter on February
26, 1996, with a categorical denial of the petitioner’s demand; the
running of the prescription period re-started on the date of this
denial, but again stopped again on August 9, 1996, when the
complaint before the NLRC was filed. Adding all the running periods
yields a total of less than three (3) years; hence, the petitioner
seasonably filed her monetary claim when she filed her complaint
before the NLRC.
In ruling on the prescription issue, the CA cited De Guzman v. Court
of Appeals46 where we ruled that based on Article 1155, the three-
year prescriptive period can be interrupted by a claim filed at the
proper judicial or quasi-judicial forum, an extra-judicial demand on
the employer or the employer's acknowledgment of its debt or
obligation. De Guzman, in turn, cited the case of Manuel L. Quezon
University Association v. Manuel L. Quezon Educational Institution
(MLQU)47 which UNILAB argues to be a mere obiter
dictum. Whether or not the MLQU decision controls is a non-issue
as the above discussion of the applicable laws shows and as
confirmed by the CA in De Guzman:48
Thus, contrary to respondent's contention that such a
pronouncement in the MLQU case was merely an obiter dictum,
this judicial declaration that the prescriptive period for labor-related
money claims can be interrupted by an extra-judicial demand on the
employer is indeed a controlling principle as confirmed in the
aforesaid De Guzman case.
Therefore, when petitioner made that extra-judicial demand upon
respondent via her January 7, 1995 letter. The running of the filing
period was stopped until February 26, 1996 when answered
petitioner's demand such that she was left with one year and eight
days more of the three-year period of up to about March 5, 1997
within which to file her claim.
When petitioner then brought her case to the NLRC on August 9,
1996 it was well within the prescriptive period.
To Remand or not to Remand?
In the assailed ruling, the appellate court withheld action on the
substantive aspect of the case because, "there is an existing
controversy as to the crucial fact of when precisely petitioner
retired from respondent company for purposes of determining
whether or not she is covered by respondent's amended retirement
plan so as to fix the amount of her retirement benefits."49
Pleading old age, Rivera fervently asks the Court for a decision on
the merits of the case. She submits that "the appellate court and
the NLRC records of the case are sufficient to resolve the entire
controversy."50 She adds that the appellate court, in resolving the
issue of whether Rivera's claim for unpaid differential in retirement
benefits has prescribed, made specific factual findings culled from
the parties' respective submissions.
UNILAB, on the other hand, sees nothing improper in the remand
of the case to the Labor Arbiter. It contends that deciding the case
now would disregard the doctrine of judicial hierarchy, 51 invoking
Article 217 of the Labor Code of the Philippines 52 which grants labor
arbiters "original and exclusive jurisdiction to hear and decide x x x
all other claims arising from employer-employee relations x x x."
Further, UNILAB submits that the records of the case are not
complete for a determination of the factual issues because the
company had no opportunity to respond and present its evidence
on Rivera's factual allegations; deciding the case at this stage
would result in a denial of the company’s right to due process.
We note that this case is now almost thirteen (13) years old as
Rivera's complaint was filed on August 9, 1996. Given this stark
reality and the fact that Rivera is around 78 years old at this time
(she was 72 years old when the petition was filed in December
2002),53 we can understand why she entreats the Court not to send
the case back to the Labor Arbiter. In fact, we find her reason a
compelling one, provided that there are enough undisputed facts
that we can consider in arriving at a decision on the merits.
Our examination of the records of the case tells us that the parties
have freely made factual allegations in the course of the dispute
without any major dispute on any material factual issue. Thus,
contrary to the CA’s ruling, we hold that we are in the position to
completely rule on the case. If the full facts are not before us as
UNILAB contends, whatever gaps there are either not material to a
ruling on the merits or can be deduced from the undisputed facts,
as the discussions below will show.
While this Court is indeed not a trier of facts, the examination of
facts at our level is not without precedent. In a ruling of the Court
made in Quisumbing v. Court of Appeals,54 we held:
It may rightly be said that to fully ventilate the question as to whether
or not private respondent was repurchasing the land not to preserve
the same for himself and his but for speculation and profit, the
natural cause of action to take would be to remand this case to the
trial court for it to conduct further proceedings in order to enable
petitioner to present evidence to sustain their aforesaid
contention. A close examination of the records of this case,
however, convinced us that such a time-consuming procedure may
be properly dispensed with for being unnecessary to resolve the
issue at hand. We encounter several facts of record, none of which
is denied by the private respondent which by themselves,
sufficiently support the allegation of the petitioner that the private
respondent is repurchasing the land in question merely for
speculative and profit purposes and not to uphold the policy of the
State regarding the grant of homesteads.
Also, in Velasco v. Court of Appeals,55 the Court declared -
x x x going over the extended pleadings of both parties, the Court
immediately was impressed that substantial justice may not be
timely achieved, if we should decide the case upon such a technical
ground alone. We have carefully read all the allegations and
arguments of the parties, very ably and comprehensively
expounded by evidently knowledgeable and unusually competent
counsel, and we feel we can better serve the interests of justice by
broadening the scope of our inquiry, for as the record before Us
stands, We see that there is enough basis for us to end the basic
controversy between the parties here and now x x x.
To the same effect is the ruling in Ortigas and Company, Limited
Partnership v. Ruiz56 where we held that it will resolve a case on
the merits to prevent delays even if the petition was brought to the
Court only on a procedural incident.
Also, the argument that we will be violating the doctrine of the
hierarchy of courts if we act on the case is misplaced. The case had
gone through the labor tribunals and the CA who had all the
opportunity to rule on the substantive aspect of the case, yet they
failed to do so, or were sidetracked by the issue of prescription. In
this already lengthy process, the parties presented their respective
factual positions, all of which are now before us for ready
examination. Under the circumstances, we shall not serve the ends
of justice if we go back to square one and start all over again. As
we already stated, the material facts on record necessary for a
definitive ruling are sufficient. For clarity and convenience, we
enumerate these facts hereunder.
1. Rivera completed 30 years of service with the company
in 1988. The company compulsorily retired her on
December 31, 1988, under the company's pre-1992
retirement plan whose Section 1, Article IV provided that:
Any member (manager or non-manager) shall be retired
on December 31 of the year during which he attained age
60 or has rendered 30 years of service, whichever comes
first and shall be entitled to the full normal retirement
benefits as provided for in the succeeding Article V of the
retirement plan document x x x .
The plan is supported by a retirement fund with the
following components:
(a) Trust Fund A which consists of contributions
made exclusively by the company for the
 account of each member based on actuarial
estimates, and
(b) Trust Fund B which consists of contributions
from the members themselves.
When Rivera retired, her accrued retirement benefits
under Trust Fund A and Trust Fund B were withdrawn
from the retirement Fund and deposited in Trust Fund C,
a special investment account from which she could make
withdrawals as she pleased. Rivera made withdrawals
from Trust Fund C, specifically ₱50,000.00 and
P40,000.00 in May and October 1991, respectively,57 and
₱200,000.00 in June 1992.58
2. Rivera continued to work for UNILAB until the end of
1992 and was made Assistant Vice-President in January
1989. Effective December 31, 1992, UNILAB declared her
retired from employment and gave her the balance of
what remained at Trust Fund C with accrued interests.
3. In December 1992, the retirement plan was amended
which provided the following terms:
1. The retirement benefit has been increased
from 1 month to 1.5 months of Terminal Basic
Salary per year of service.
2. The effective date of normal or mandatory
retirement from the Plan is 30 days after an
employee reaches his/her 60th birthday. This
effective date applies to all rank and file as well
as KPs’.
The Plan provides for full vesting of benefits to all
employees who leave the company after reaching the age
of 55, regardless of the number of service years.
4. As of December 31, 1992, Rivera's retirement benefits
in Trust Fund C amounted to ₱1,175,666.22 including
interests net of Rivera’s withdrawals of ₱650,000.00. On
January 15, 1993, Rivera received her retirement pay
check in the amount of ₱1,175,666.22.
5. From 1993 to 1994, Rivera continued to work as a
personal consultant at ARMCO in 1993 and at FIL-ASIA
in 1994. These companies have interlocking directorates
and common facilities with UNILAB. The work she was
assigned still pertained to UNILAB.
Under these facts, we deem it undisputed that Rivera did retire from
the company on December 31, 1988 after thirty (30) of service
pursuant to the terms of the company’s retirement plan. This was a
mandatory retirement and she had no claim relating to the
completeness of the retirement pay she received as of that date.
That Rivera continued working with UNILAB is another undisputed
matter. What is uncertain is whether this was at her request as
UNILAB alleges, but the source of initiative that gave rise to this
renewed employment does not materially affect our consideration.
What we find material is the undisputed fact that Rivera had no
objection to her renewed employment after her December 31, 1988
retirement. Of utmost materiality, too, is a clear understanding of
what her December 31, 1988 retirement signified – a conclusion of
law drawn from the given facts.
Retirement in its ordinary signification is the termination of an
employee’s service upon reaching retirement age. 59 Prior to the
Retirement Pay Law (R.A. 7641),60 Article 287 of the Labor Code
simply provided that -
Any employee may be retired upon reaching the retirement age
established in the collective bargaining agreement or other
applicable employment contract… the employee shall be entitled to
receive such retirement benefits as he may have earned under
existing laws and any collective bargaining or other agreement.
Section 13 of the Rules to Implement the Labor Code, on the other
hand, provided that –
In the absence of any collective bargaining agreement or other
applicable agreement concerning terms and conditions of
employment which provides for retirement at an older age, an
employee may be retired upon reaching the age of sixty (60) years.
These were the governing laws at the end of 1988 when the
petitioner compulsorily retired under the UNILAB retirement plan.
Thus, her retirement was governed by the applicable agreement
which was the UNILAB retirement plan. Under the terms of this pre-
1992 plan (as quoted above), her retirement was mandatory as she
had reached 30 years of service,61 a characterization that we do not
find to be disputed by the parties. In fact, we note nowhere in her
submissions before the Labor Arbiter, the NLRC, the CA and even
before the Court, did Rivera categorically dispute the claim of
UNILAB that she completed her 30th year of service with the
company and was declared retired from the plan on this basis
effective December 31, 1988.
"Retirement" as a fact carries with it certain legal effects, one of
which is the retired employee’s termination of the services with the
company as of the retirement date, in this case December 31,
1988.62 With this retirement, her coverage by the UNILAB
retirement plan ceased based on the express terms of the plan. As
a consequence, Rivera’s retirement pay was computed; her
accrued retirement benefits under Trust Fund A and Trust Fund B
of the plan were withdrawn, and deposited in Trust Fund C from
which she could make withdrawals. In fact, Rivera did make
withdrawals from Trust Fund C – ₱50,000.00 in May and
₱400,000.00 in October 199163 and P200, 000.00 in June
1992.64 Thus, there is no question that Rivera accepted her
retirement and its benefits in 1988.
A twist in Rivera’s case is that she continued working beyond the
compulsory separation from service that resulted from her
retirement. Whether she could or could not resume working with the
company is, as a rule, a consensual matter for the parties to agree
upon, limited only by company policies and the applicable terms of
the retirement plan. To be sure, there is no limitation by law that
barred her from continuing her work with UNILAB; even the above-
quoted Implementing Rules, in setting the retirement age at 60,
deferred to the parties’ agreement. Her employment terms under
this renewed employment are based on what she and the company
agreed upon. Whether these terms included renewed coverage in
the retirement plan is an evidentiary gap that could have been
conclusively shown by evidence of deductions of contributions to
the plan after 1988. Two indicators, however, tell us that no such
coverage took place. The first is that the terms of the retirement
plan, before and after its 1992 amendment, continued to exclude
those who have rendered 30 years of service or have reached 60
years of age. Therefore, the plan could not have covered her. The
second is the absence of evidence of, or of any demand for, any
reimbursement of what Rivera would have paid as contributions to
the plan had her coverage and deductions continued after 1988.
Thus, we conclude that her renewed service did not have the
benefit of any retirement plan coverage.
Could she have availed of retirement benefits under the Retirement
Pay Law that was signed by President Ramos on December 9,
1992 and became effective on December 31 of that year?
Unfortunately for her, the answer is still in the negative as she did
not qualify under the terms of that law when she was retired
effective December 31, 1992. At that point, she was not covered by
any applicable retirement plan, as heretofore discussed. In the
absence of a plan, the Retirement Pay Law requires that an
employee must have served for at least five (5) years to be entitled
to coverage.65 As of December 31, 2002, her service without any
retirement plan coverage was only four (4) years, i.e. from January
1, 1989 to December 31, 1992.
In considering her renewed employment period, we have not
included the years 1993-1994 for three reasons.
First, based on Rivera's extra-judicial demand for the
balance of her retirement pay, especially the first two
letters,66 she counted thirty four (34) years of service with
UNILAB starting April 7, 1958 up to December 31, 1992,
thereby excluding the years 1993 to 1994 from her service
record. The evidence on record shows that Rivera herself
conceded these last two years as periods when she
worked as a consultant.67 Given this concession and in
the absence of evidence showing that her principals
controlled her as to the means, manner and the results of
her work, we cannot conclude that an employment
relationship existed.
Second, that indeed there was no employer-employee
relationship in her service with ARMCO in 1993 and with
FIL-ASIA Business Consultants, Inc. in 1994 is supported,
not only by the records we referred to in the above reason,
but by the consultancy contracts Rivera herself marked as
Exhibits "J" and "P" in her appeal to the NLRC.
Third, we cannot accept the Rivera’s theory that her
employment service with UNILAB extended to 1994
because her last two years with ARMCO and FIL-ASIA
were in fact services rendered to UNILAB as consultant.
To achieve this result, Rivera asks us to pierce the veil of
the separate corporate identities of UNILAB and its
affiliate corporations. On this point, the case of John F.
McLeod v. NLRC, G.R. No. 146667. January 23, 2007,
instructively tells that:
While a corporation may exist for any lawful purpose, the law will
regard it as an association of persons or, in case of two
corporations, merge them into one, when its corporate legal entity
is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate fiction. The doctrine applies only when
such corporate fiction is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, or when it is made as a shield
to confuse the legitimate issues, or where a corporation is the mere
alter ego or business conduit of a person, or where the corporation
is so organized and controlled and its affairs are so conducted as
to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.
take judicial notice of, for companies to continue to avail of the
expertise and experience of their retired employees by retaining
them either as employees or as consultants. Nor can Rivera claim
she had been shortchanged, or in any manner prejudiced by her
consultancy services and her relationship with her principals, or
placed in a disadvantaged position that would merit special
consideration from this Court. From the totality of the evidence
presented, she appears to have openly embraced the consultancy
services she was assigned, knowing fully well the conditions under
which she was serving, and receiving benefits that cannot be
described as negligible. Under these circumstances, we find it too
late in the day for her to complain that she was given a run-around
as ARMCO and FIL-ASIA were simply conduits of UNILAB, and we
see no need to engage in piercing the veil of these corporate
entities that she advocates.68
Thus, by the strict standards of law, we cannot grant Rivera’s
petition. Interestingly, the same conclusion obtains if the case were
to be viewed solely from the ordinary norms of fairness. We go out
of our way to say this in light of what Rivera stated in her demand
letter of January 7, 1995 to UNILAB; she felt aggrieved because the
retirement benefits she received were less than what other
employees – with less years of service, with lower rates of pay, or
with lower rank – received.69 Apparently, Rivera failed to realize that
she cannot compare herself with these other employees because
she and they were not in the same situation; these other employees
retired later and under retirement plan terms that, by then and for
various reasons not attributable to any company wrongdoing, had
been enhanced. Both in law and under the common concept of
fairness, there is inequitable treatment only if persons under the
same situation or circumstances are treated differently. Rivera was
not so treated by UNILAB; rather, she was given her just due under
the specific rules that applied to her. Hence, we cannot likewise
recognize the validity of Rivera’s claim even from the point of view
of justice administered according to ordinary norms of fairness.
WHEREFORE, premises considered, we hereby DENY the petition
and DISMISS the claim of Januaria A. Rivera for unpaid retirement
pay differential for lack of merit. Costs against the petitioner.
SO ORDERED.
ARTURO D. BRION
Associate Justice

To disregard the separate juridical personality of a corporation, the

wrongdoing must be established clearly and convincingly. It cannot
be presumed.

As in this cited case, we see no basis in the present case to

conclude that UNILAB committed any fraud or illegality in
employing a retired employee whose knowledge, experience and
expertise the company recognized, as an employee or as a
consultant. We note that Rivera had already been an Assistant Vice
President with UNILAB – an "old timer" in a senior position based
on the responsibilities she carried – when she entered into the
consultancy contracts. What UNILAB did, in itself, is not an illegality;
on the contrary, it is a recognized practice in this country, a fact we
 THIRD DIVISION
[G.R. No. 170689. March 17, 2009.]
PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and
PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION
(PANREA), petitioners, vs. NATIONAL LABOR RELATIONS
COMMISSION (NLRC), PANTRANCO NORTH EXPRESS, INC.
(PNEI), PHILIPPINE NATIONAL BANK (PNB), PHILIPPINE
NATIONAL BANK-MANAGEMENT AND DEVELOPMENT
CORPORATION (PNB-MADECOR), and MEGA PRIME REALTY
AND HOLDINGS CORPORATION (MEGA PRIME), respondents.
[G.R. No. 170705. March 17, 2009.]
PHILIPPINE NATIONAL BANK, petitioner, vs. PANTRANCO
EMPLOYEES ASSOCIATION, INC. (PEA-PTGWO),
PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION
(PANREA) AND PANTRANCO ASSOCIATION OF CONCERNED
EMPLOYEES (PACE), ET AL., PHILIPPINE NATIONAL BANK-
MANAGEMENT DEVELOPMENT CORPORATION (PNB-
MADECOR), and MEGA PRIME REALTY HOLDINGS, INC.,
respondents.
DECISION
NACHURA, J.:
Before us are two consolidated petitions assailing the Court of
Appeals (CA) Decision1 dated June 3, 2005 and its
Resolution2 dated December 7, 2005 in CA-G.R. SP No. 80599.
In G.R. No. 170689, the Pantranco Employees Association (PEA)
and Pantranco Retrenched Employees Association (PANREA) pray
that the CA decision be set aside and a new one be entered,
declaring the Philippine National Bank (PNB) and PNB
Management and Development Corporation (PNB-Madecor) jointly
and solidarily liable for the ₱722,727,150.22 National Labor
Relations Commission (NLRC) judgment in favor of the Pantranco
North Express, Inc. (PNEI) employees;3 while in G.R. No. 170705,
PNB prays that the auction sale of the Pantranco properties be
declared null and void.4
The facts of the case, as found by the CA,5 and established in
Republic of the Phils. v. NLRC,6 Pantranco North Express, Inc. v.
NLRC,7 and PNB MADECOR v. Uy,8 follow:
The Gonzales family owned two corporations, namely, the PNEI
and Macris Realty Corporation (Macris). PNEI provided
transportation services to the public, and had its bus terminal at the
corner of Quezon and Roosevelt Avenues in Quezon City. The
terminal stood on four valuable pieces of real estate (known as
Pantranco properties) registered under the name of Macris. 9 The
Gonzales family later incurred huge financial losses despite
attempts of rehabilitation and loan infusion. In March 1975, their
creditors took over the management of PNEI and Macris. By 1978,
full ownership was transferred to one of their creditors, the National
Investment Development Corporation (NIDC), a subsidiary of the
PNB.
Macris was later renamed as the National Realty Development
Corporation (Naredeco) and eventually merged with the National
Warehousing Corporation (Nawaco) to form the new PNB
subsidiary, the PNB-Madecor.
In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI),
a company owned by Gregorio Araneta III. In 1986, PNEI was
among the several companies placed under sequestration by the
Presidential Commission on Good Government (PCGG) shortly
after the historic events in EDSA. In January 1988, PCGG lifted the
sequestration order to pave the way for the sale of PNEI back to the
private sector through the Asset Privatization Trust (APT). APT thus
took over the management of PNEI.
In 1992, PNEI applied with the Securities and Exchange
Commission (SEC) for suspension of payments. A management
committee was thereafter created which recommended to the SEC
the sale of the company through privatization. As a cost-saving
measure, the committee likewise suggested the retrenchment of
several PNEI employees. Eventually, PNEI ceased its operation.
Along with the cessation of business came the various labor claims
commenced by the former employees of PNEI where the latter
obtained favorable decisions.
On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of
Execution10 commanding the NLRC Sheriffs to levy on the assets
of PNEI in order to satisfy the ₱722,727,150.22 due its former
employees, as full and final satisfaction of the judgment awards in
the labor cases. The sheriffs were likewise instructed to proceed
against PNB, PNB-Madecor and Mega Prime.11 In implementing
the writ, the sheriffs levied upon the four valuable pieces of real
estate located at the corner of Quezon and Roosevelt Avenues, on
which the former Pantranco Bus Terminal stood. These properties
were covered by Transfer Certificate of Title (TCT) Nos. 87881-
87884, registered under the name of PNB-
Madecor.12 Subsequently, Notice of Sale of the foregoing real
properties was published in the newspaper and the sale was set on
July 31, 2002. Having been notified of the auction sale, motions to
quash the writ were separately filed by PNB-Madecor and Mega
Prime, and PNB. They likewise filed their Third-Party
Claims.13 PNB-Madecor anchored its motion on its right as the
registered owner of the Pantranco properties, and Mega Prime as
the successor-in-interest. For its part, PNB sought the nullification
of the writ on the ground that it was not a party to the labor case. 14 In
its Third-Party Claim, PNB alleged that PNB-Madecor was indebted
to the former and that the Pantranco properties
would answer for such debt. As such, the scheduled auction sale of
the aforesaid properties was not legally in order. 15
On September 10, 2002, the Labor Arbiter declared that the subject
Pantranco properties were owned by PNB-Madecor. It being a
corporation with a distinct and separate personality, its assets could
not answer for the liabilities of PNEI. Considering, however, that
PNB-Madecor executed a promissory note in favor of PNEI for
₱7,884,000.00, the writ of execution to the extent of the said
amount was concerned was considered valid. 16
PNB’s third-party claim – to nullify the writ on the ground that it has
an interest in the Pantranco properties being a creditor of PNB-
Madecor, – on the other hand, was denied because it only had an
inchoate interest in the properties.17
The dispositive portion of the Labor Arbiter’s September 10, 2002
Resolution is quoted hereunder:
WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega
Prime Holdings, Inc. is hereby GRANTED and concomitantly the
levies made by the sheriffs of the NLRC on the properties of PNB
Madecor should be as it (sic) is hereby LIFTED subject to the
payment by PNB Madecor to the complainants the amount of
₱7,884,000.00.
The Motion to Quash and Third Party Claim of PNB is hereby
DENIED.
The Motion to Quash of PNB Madecor and Mega Prime Holdings,
Inc. is hereby PARTIALLY GRANTED insofar as the amount of the
writ exceeds ₱7,884,000.00.
The Motion for Recomputation and Examination of Judgment
Awards is hereby DENIED for want of merit.
The Motion to Expunge from the Records claimants/complainants
Opposition dated August 3, 2002 is hereby DENIED for lack of
merit.
SO ORDERED.18
On appeal to the NLRC, the same was denied and the Labor
Arbiter’s disposition was affirmed.19 Specifically, the NLRC
concluded as follows:
(1) PNB-Madecor and Mega Prime contended that it
would be impossible for them to comply with the
requirement of the labor arbiter to pay to the PNEI
employees the amount of ₱7.8 million as a condition to
the lifting of the levy on the properties, since the credit
was already garnished by Gerardo Uy and other creditors
of PNEI. The NLRC found no evidence that Uy had
satisfied his judgment from the promissory note, and
opined that even if the credit was in custodia legis, the
claim of the PNEI employees should enjoy preference
under the Labor Code.
(2) The PNEI employees contested the finding that PNB-
Madecor was indebted to the PNEI for only ₱7.8 million
without considering the accrual of interest. But the NLRC
said that there was no evidence that demand was made
as a basis for reckoning interest.
(3) The PNEI employees further argued that the labor
arbiter may not properly conclude from a decision of
Judge Demetrio Macapagal Jr. of the RTC of Quezon City
that PNB-Madecor was the owner of the properties as his
decision was reconsidered by the next presiding judge,
nor from a decision of the Supreme Court that PNEI was
a mere lessee of the properties, the fact being that the
transfer of the properties to PNB-Madecor was done to
avoid satisfaction of the claims of the employees with the
NLRC and that as a result of a civil case filed by Mega
Prime, the subsequent sale of the properties by PNB to
Mega Prime was rescinded. The NLRC pointed out that
while the Macapagal decision was set aside by Judge
Bruselas and hence, his findings could not be invoked by
the labor arbiter, the titles of PNB-Madecor are conclusive
and there is no evidence that PNEI had ever been an
owner. The Supreme Court had observed in its decision
that PNEI owed back rentals of ₱8.7 million to PNB-
Madecor.
(4) The PNEI employees faulted the labor arbiter for not
finding that PNEI, PNB, PNB-Madecor and Mega Prime
were all jointly and severally liable for their claims. The
NLRC underscored the fact that PNEI and Macris were
subsidiaries of NIDC and had passed through and were
under the Asset Privatization Trust (APT) when the labor
claims accrued. The labor arbiter was correct in not
granting PNB’s third-party claim because at the time the
causes of action accrued, the PNEI was managed by a
management committee appointed by the PNB as the
new owner of PNRI (sic) and Macris through a deed of
assignment or transfer of ownership. The NLRC says at
length that the same is not true with PNB-Madecor which
is now the registered owner of the properties. 20
The parties’ separate motions for reconsideration were likewise
denied.21 Thereafter, the matter was elevated to the CA by
PANREA, PEA-PTGWO and the Pantranco Association of
Concerned Employees. The latter group, however, later withdrew
its petition. The former employees’ petition was docketed as CA-
G.R. SP No. 80599.
PNB-Madecor and Mega Prime likewise filed their separate petition
before the CA which was docketed as CA-G.R. SP No. 80737, but
the same was dismissed.22
In view of the ₱7,884,000.00 debt of PNB-Madecor to PNEI, on
June 23, 2004, an auction sale was conducted over the Pantranco
properties to satisfy the claim of the PNEI employees, wherein
CPAR Realty was adjudged as the highest bidder. 23
On June 3, 2005, the CA rendered the assailed decision affirming
the NLRC resolutions.
The appellate court pointed out that PNB, PNB-Madecor and Mega
Prime are corporations with personalities separate and distinct from
PNEI. As such, there being no cogent reason to pierce the veil of
corporate fiction, the separate personalities of the above
corporations should be maintained. The CA added that the
Pantranco properties were never owned by PNEI; rather, their titles
were registered under the name of PNB-Madecor. If PNB and PNB-
Madecor could not answer for the liabilities of PNEI, with more
reason should Mega Prime not be held liable being a mere
successor-in-interest of PNB-Madecor.
Unsatisfied, PEA-PTGWO and PANREA filed their motion for
reconsideration;24 while PNB filed its Partial Motion for
Reconsideration.25 PNB pointed out that PNB-Madecor was made
to answer for ₱7,884,000.00 to the PNEI employees by virtue of the
promissory note it (PNB-Madecor) earlier executed in favor of
PNEI. PNB, however, questioned the June 23, 2004 auction sale
as the ₱7.8 million debt had already been satisfied pursuant to this
Court’s decision in PNB MADECOR v. Uy.26
Both motions were denied by the appellate court. 27
In two separate petitions, PNB and the former PNEI employees
come up to this Court assailing the CA decision and resolution. The
former PNEI employees raise the lone error, thus:
The Honorable Court of Appeals palpably departed from the
established rules and jurisprudence in ruling that private
respondents Pantranco North Express, Inc. (PNEI), Philippine
National Bank (PNB), Philippine National Bank Management and
Development Corporation (PNB-MADECOR), Mega Prime Realty
and Holdings, Inc. (Mega Prime) are not jointly and severally
answerable to the ₱722,727,150.22 Million NLRC money judgment
awards in favor of the 4,000 individual members of the Petitioners. 28
They claim that PNB, through PNB-Madecor, directly benefited
from the operation of PNEI and had complete control over the funds
of PNEI. Hence, they are solidarily answerable with PNEI for the
unpaid money claims of the employees. 29 Citing A.C. Ransom
Labor Union-CCLU v. NLRC,30 the employees insist that where the
employer corporation ceases to exist and is no longer able to satisfy
the judgment awards in favor of its employees, the owner of the
employer corporation should be made jointly and severally
liable.31 They added that malice or bad faith need not be proven to
make the owners liable.
On the other hand, PNB anchors its petition on this sole assignment
of error, viz.:
THE AUCTION SALE OF THE PROPERTY COVERED BY TCT
NO. 87884 INTENDED TO PARTIALLY SATISFY THE CLAIMS OF
FORMER WORKERS OF PNEI IN THE AMOUNT OF
₱7,884,000.00 (THE AMOUNT OF PNB-MADECOR’S
PROMISSORY NOTE IN FAVOR OF PNEI) IS NOT IN ORDER AS
THE SAID PROPERTY IS NOT OWNED BY PNEI. FURTHER,
THE SAID PROMISSORY NOTE HAD ALREADY BEEN
GARNISHED IN FAVOR OF GERARDO C. UY WHICH LED TO
THREE (3) PROPERTIES UNDER THE NAME OF PNB-
MADECOR, NAMELY TCT NOS. 87881, 87882 AND 87883,
BEING LEVIED AND SOLD ON EXECUTION IN THE "PNB-
MADECOR VS. UY" CASE (363 SCRA 128 [2001]) AND
"GERARDO C. UY VS. PNEI" (CIVIL CASE NO. 95-72685, RTC
MANILA, BRANCH 38).32
PNB insists that the Pantranco properties could no longer be levied
upon because the promissory note for which the Labor Arbiter held
PNB-Madecor liable to PNEI, and in turn to the latter’s former
employees, had already been satisfied in favor of Gerardo C. Uy. It
added that the properties were in fact awarded to the highest
bidder. Besides, says PNB, the subject properties were not owned
by PNEI, hence, the execution sale thereof was not validly
effected.33
Both petitions must fail.
G.R. No. 170689
Stripped of the non-essentials, the sole issue for resolution raised
by the former PNEI employees is whether they can attach the
properties (specifically the Pantranco properties) of PNB, PNB-
Madecor and Mega Prime to satisfy their unpaid labor claims
against PNEI.
We answer in the negative.
First, the subject property is not owned by the judgment debtor, that
is, PNEI. Nowhere in the records was it shown that PNEI owned the
Pantranco properties. Petitioners, in fact, never alleged in any of
their pleadings the fact of such ownership. What was established,
instead, in PNB MADECOR v. Uy34 and PNB v. Mega Prime Realty
and Holdings Corporation/Mega Prime Realty and Holdings
Corporation v. PNB35 was that the properties were owned by
Macris, the predecessor of PNB-Madecor. Hence, they cannot be
pursued against by the creditors of PNEI.
We would like to stress the settled rule that the power of the court
in executing judgments extends only to properties unquestionably
belonging to the judgment debtor alone. 36 To be sure, one man’s
goods shall not be sold for another man’s debts. 37 A sheriff is not
authorized to attach or levy on property not belonging to the
judgment debtor, and even incurs liability if he wrongfully levies
upon the property of a third person.38
Second, PNB, PNB-Madecor and Mega Prime are corporations
with personalities separate and distinct from that of PNEI. PNB is
sought to be held liable because it acquired PNEI through NIDC at
the time when PNEI was suffering financial reverses. PNB-Madecor
is being made to answer for petitioners’ labor claims as the owner
of the subject Pantranco properties and as a subsidiary of PNB.
Mega Prime is also included for having acquired PNB’s shares over
PNB-Madecor.
The general rule is that a corporation has a personality separate
and distinct from those of its stockholders and other corporations to
which it may be connected.39 This is a fiction created by law for
convenience and to prevent injustice.40 Obviously, PNB, PNB-
Madecor, Mega Prime, and PNEI are corporations with their own
personalities. The "separate personalities" of the first three
corporations had been recognized by this Court in PNB v. Mega
Prime Realty and Holdings Corporation/Mega Prime Realty and
Holdings Corporation v. PNB41 where we stated that PNB was only
a stockholder of PNB-Madecor which later sold its shares to Mega
Prime; and that PNB-Madecor was the owner of the Pantranco
properties. Moreover, these corporations are registered as
separate entities and, absent any valid reason, we maintain their
separate identities and we cannot treat them as one.
Neither can we merge the personality of PNEI with PNB simply
because the latter acquired the former. Settled is the rule that where
one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for
the debts and liabilities of the transferor. 42
Lastly, while we recognize that there are peculiar circumstances or
valid grounds that may exist to warrant the piercing of the corporate
veil, 43 none applies in the present case whether between PNB and
PNEI; or PNB and PNB-Madecor.
Under the doctrine of "piercing the veil of corporate fiction," the
court looks at the corporation as a mere collection of individuals or
an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation
unifying the group.44 Another formulation of this doctrine is that
when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as
identical or as one and the same.45
Whether the separate personality of the corporation should be
pierced hinges on obtaining facts appropriately pleaded or proved.
However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate
veil when it is misused or when necessary in the interest of justice.
After all, the concept of corporate entity was not meant to promote
unfair objectives.46
As between PNB and PNEI, petitioners want us to disregard their
separate personalities, and insist that because the company, PNEI,
has already ceased operations and there is no other way by which
the judgment in favor of the employees can be satisfied, corporate
officers can be held jointly and severally liable with the company.
Petitioners rely on the pronouncement of this Court in A.C. Ransom
Labor Union-CCLU v. NLRC47 and subsequent cases.48
This reliance fails to persuade. We find the aforesaid decisions
inapplicable to the instant case.
For one, in the said cases, the persons made liable after the
company’s cessation of operations were the officers and agents of
the corporation. The rationale is that, since the corporation is an
artificial person, it must have an officer who can be presumed to be
the employer, being the person acting in the interest of the
employer. The corporation, only in the technical sense, is the
employer.49 In the instant case, what is being made liable is another
corporation (PNB) which acquired the debtor corporation (PNEI).
Moreover, in the recent cases Carag v. National Labor Relations
Commission50 and McLeod v. National Labor Relations
Commission,51 the Court explained the doctrine laid down in AC
Ransom relative to the personal liability of the officers and agents
of the employer for the debts of the latter. In AC Ransom, the Court
imputed liability to the officers of the corporation on the strength of
the definition of an employer in Article 212(c) (now Article 212[e]) of
the Labor Code. Under the said provision, employer includes any
person acting in the interest of an employer, directly or indirectly,
but does not include any labor organization or any of its officers or
agents except when acting as employer. It was clarified in Carag
and McLeod that Article 212(e) of the Labor Code, by itself, does
not make a corporate officer personally liable for the debts of the
corporation. It added that the governing law on personal liability of
directors or officers for debts of the corporation is still Section
3152 of the Corporation Code.
More importantly, as aptly observed by this Court in AC Ransom, it
appears that Ransom, foreseeing the possibility or probability of
payment of backwages to its employees, organized Rosario to
replace Ransom, with the latter to be eventually phased out if the
strikers win their case. The execution could not be implemented
against Ransom because of the disposition posthaste of its leviable
assets evidently in order to evade its just and due
obligations.53 Hence, the Court sustained the piercing of the
corporate veil and made the officers of Ransom personally liable for
the debts of the latter.
Clearly, what can be inferred from the earlier cases is that the
doctrine of piercing the corporate veil applies only in three (3) basic
areas, namely: 1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of
another corporation.54 In the absence of malice, bad faith, or a
specific provision of law making a corporate officer liable, such
corporate officer cannot be made personally liable for corporate
liabilities.55
Applying the foregoing doctrine to the instant case, we quote with
approval the CA disposition in this wise:
It would not be enough, then, for the petitioners in this case, the
PNEI employees, to rest on their laurels with evidence that PNB
was the owner of PNEI. Apart from proving ownership, it is
necessary to show facts that will justify us to pierce the veil of
corporate fiction and hold PNB liable for the debts of PNEI. The
burden undoubtedly falls on the petitioners to prove their affirmative
allegations. In line with the basic jurisprudential principles we have
explored, they must show that PNB was using PNEI as a mere
adjunct or instrumentality or has exploited or misused the corporate
privilege of PNEI.
We do not see how the burden has been met. Lacking proof of a
nexus apart from mere ownership, the petitioners have not provided
us with the legal basis to reach the assets of corporations separate
and distinct from PNEI.56
Assuming, for the sake of argument, that PNB may be held liable
for the debts of PNEI, petitioners still cannot proceed against the
Pantranco properties, the same being owned by PNB-Madecor,
notwithstanding the fact that PNB-Madecor was a subsidiary of
PNB. The general rule remains that PNB-Madecor has a
personality separate and distinct from PNB. The mere fact that a
corporation owns all of the stocks of another corporation, taken
alone, is not sufficient to justify their being treated as one entity. If
used to perform legitimate functions, a subsidiary’s separate
existence shall be respected, and the liability of the parent
corporation as well as the subsidiary will be confined to those
arising in their respective businesses. 57
In PNB v. Ritratto Group, Inc.,58 we outlined the circumstances
which are useful in the determination of whether a subsidiary is but
a mere instrumentality of the parent-corporation, to wit:
1. The parent corporation owns all or most of the capital
stock of the subsidiary;
2. The parent and subsidiary corporations have common
directors or officers;
3. The parent corporation finances the subsidiary;
4. The parent corporation subscribes to all the capital
stock of the subsidiary or otherwise causes its
incorporation;
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and other
expenses or losses of the subsidiary;
7. The subsidiary has substantially no business except
with the parent corporation or no assets except those
conveyed to or by the parent corporation;
8. In the papers of the parent corporation or in the
statements of its officers, the subsidiary is described as a
department or division of the parent corporation, or its
business or financial responsibility is referred to as the
parent corporation’s own;
9. The parent corporation uses the property of the
subsidiary as its own;
10. The directors or executives of the subsidiary do not
act independently in the interest of the subsidiary, but take
their orders from the parent corporation;
11. The formal legal requirements of the subsidiary are
not observed.
None of the foregoing circumstances is present in the instant case.
Thus, piercing of PNB-Madecor’s corporate veil is not warranted.
Being a mere successor-in-interest of PNB-Madecor, with more
reason should no liability attach to Mega Prime.
G.R. No. 170705
In its petition before this Court, PNB seeks the annulment of the
June 23, 2004 execution sale of the Pantranco properties on the
ground that the judgment debtor (PNEI) never owned said lots. It
likewise contends that the levy and the eventual sale on execution
of the subject properties was null and void as the promissory note
on which PNB-Madecor was made liable had already been
satisfied.
It has been repeatedly stated that the Pantranco properties which
were the subject of execution sale were owned by Macris and later,
the PNB-Madecor. They were never owned by PNEI or PNB.
Following our earlier discussion on the separate personalities of the
different corporations involved in the instant case, the only entity
which has the right and interest to question the execution sale and
the eventual right to annul the same, if any, is PNB-Madecor or its
successor-in-interest. Settled is the rule that proceedings in court
must be instituted by the real party in interest.
A real party in interest is the party who stands to be benefited or
injured by the judgment in the suit, or the party entitled to the avails
of the suit.59 "Interest" within the meaning of the rule means material
interest, an interest in issue and to be affected by the decree, as
distinguished from mere interest in the question involved, or a mere
incidental interest.60 The interest of the party must also be personal
and not one based on a desire to vindicate the constitutional right
of some third and unrelated party.61 Real interest, on the other
hand, means a present substantial interest, as distinguished from a
mere expectancy or a future, contingent, subordinate, or
consequential interest.62

Specifically, in proceedings to set aside an execution sale, the real

party in interest is the person who has an interest either in the
property sold or the proceeds thereof. Conversely, one who is not
interested or is not injured by the execution sale cannot question its
validity.63

In justifying its claim against the Pantranco properties, PNB alleges

that Mega Prime, the buyer of its entire stockholdings in PNB-
Madecor was indebted to it (PNB). Considering that said
indebtedness remains unpaid, PNB insists that it has an interest
over PNB-Madecor and Mega Prime’s assets.

Again, the contention is bereft of merit. While PNB has an apparent

interest in Mega Prime’s assets being the creditor of the latter for a
substantial amount, its interest remains inchoate and has not yet
ripened into a present substantial interest, which would give it the
standing to maintain an action involving the subject properties. As
aptly observed by the Labor Arbiter, PNB only has an inchoate right
to the properties of Mega Prime in case the latter would not be able
to pay its indebtedness. This is especially true in the instant case,
as the debt being claimed by PNB is secured by the accessory
contract of pledge of the entire stockholdings of Mega Prime to
PNB-Madecor.64

The Court further notes that the Pantranco properties (or a portion
thereof ) were sold on execution to satisfy the unpaid obligation of
PNB-Madecor to PNEI. PNB-Madecor was thus made liable to the
former PNEI employees as the judgment debtor of PNEI. It has long
been established in PNB-Madecor v. Uy and other similar cases
that PNB-Madecor had an unpaid obligation to PNEI amounting to
more or less ₱7 million which could be validly pursued by the
creditors of the latter. Again, this strengthens the proper parties’
right to question the validity of the execution sale, definitely not
PNB.

Besides, the issue of whether PNB has a substantial interest over

the Pantranco properties has already been laid to rest by the Labor
Arbiter.65 It is noteworthy that in its Resolution dated September 10,
2002, the Labor Arbiter denied PNB’s Third-Party Claim primarily
because PNB only has an inchoate right over the Pantranco
properties.66 Such conclusion was later affirmed by the NLRC in its
Resolution dated June 30, 2003.67 Notwithstanding said
conclusion, PNB did not elevate the matter to the CA via a petition
for review. Hence it is presumed to be satisfied with the adjudication
therein.68 That decision of the NLRC has become final as against
PNB and can no longer be reviewed, much less reversed, by this
Court.69 This is in accord with the doctrine that a party who has not
appealed cannot obtain from the appellate court any affirmative
relief other than the ones granted in the appealed decision. 70

WHEREFORE, premises considered, the petitions are hereby

DENIED for lack of merit.

SO ORDERED.
 THIRD DIVISION
[G.R. No. 136456. October 24, 2000.]
HEIRS OF RAMON DURANO, SR., RAMON DURANO III, AND
ELIZABETH HOTCHKISS DURANO, petitioners, vs. SPOUSES
ANGELES SEPULVEDA UY AND EMIGDIO BING SING UY,
SPOUSES FAUSTINO ALATAN AND VALERIANA GARRO,
AURELIA MATA, SILVESTRE RAMOS, HERMOGENES TITO,
TEOTIMO GONZALES, PRIMITIVA GARRO, JULIAN GARRO,
ISMAEL GARRO, BIENVENIDO CASTRO, GLICERIO BARRIGA,
BEATRIZ CALZADA, ANDREA MATA DE BATULAN, TEOFISTA
ALCALA, FILEMON LAVADOR, CANDELARIO LUMANTAO,
GAVINO QUIMBO, JUSTINO TITO, MARCELINO GONZALES,
SALVADOR DAYDAY, VENANCIA REPASO, LEODEGARIO
GONZALES, and RESTITUTA GONZALES, respondents.
Rodrigo Berenguer & Guno for petitioners.
Batiguin & Batiguin Law Office for respondents.
SYNOPSIS
This action stemmed from an action for damages filed by petitioners
against respondents. In that case, petitioners accused respondents
of officiating a "hate campaign" against them by lodging complaints
over petitioners' so-called invasion of respondents' alleged
properties. Later however, the petitioners moved to dismiss their
complaint. The trial court granted the motion to dismiss and trial
proceeded only on the counterclaim. In their counterclaim,
respondents demanded damages arising from petitioners' act of
depriving them of their possession and property. On March 8, 1990,
the trial court rendered a decision upholding respondents'
counterclaim and ordered the return of several of the subject
properties. The trial court's decision was appealed to the Court of
Appeals which, in turn, affirmed the said decision and ordered the
return of the property to all the respondents-claimants. Hence this
petition.
The Court of Appeals is imbued with sufficient discretion to review
matters, not otherwise assigned as errors on appeal, if it finds that
their consideration is necessary in arriving at a complete and just
resolution of this case. In this case, the Court of Appeals ordered
the return of the properties to respondents merely as a legal
consequence of the finding that respondents had a better right of
possession than petitioners over the disputed properties, the former
being possessors in the concept of owner. The return of the
properties to several of the respondents was premised upon the
factual finding that these lands were outside the properties claimed
by petitioners. In respect of the other properties, the records
indicate that respondents' possession has ripened into ownership
by acquisitive prescription. The properties were conveyed to
respondents by purchase or inheritance, and in each case the
respondents were in actual, continuous, open and adverse
possession of the properties. They exercised rights of ownership
over the lands and were unaware of anyone claiming to be the
owner of these lands. Each of them had already completed the ten-
year prescriptive period.
SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; APPEAL;
APPELLATE COURT, IMBUED WITH SUFFICIENT DISCRETION
TO REVIEW MATTERS INCLUDING UNASSIGNED ERRORS. —
The Court of Appeals is not limited to reviewing only those errors
assigned by appellant, but also those that are closely related to or
dependent on an assigned error. In other words, the Court of
Appeals is imbued with sufficient discretion to review matters, not
otherwise assigned as errors on appeal, if it finds that their
consideration is necessary in arriving at a complete and just
resolution of the case.
2. ID.; EVIDENCE; FRAUD IN ISSUANCE OF
CERTIFICATE OF TITLE CANNOT BE COLLATERALLY
ATTACKED IN AN ACTION FOR RECONVEYANCE AND
DAMAGES. — Fraud in the issuance of a certificate of title may be
raised only in an action expressly instituted for that purpose, and
not collaterally as in the instant case which is an action for
reconveyance and damages.
3. ID.; EVIDENCE; FACTUAL FINDINGS OF TRIAL
COURT, SUSTAINED ON APPEAL, IS FINAL AND BINDING
UPON REVIEWING COURT. — The return of the properties to
respondents Repaso, Tito and Gonzales was premised upon the
factual finding that these lands were outside the properties claimed
by petitioners under TCT Nos. T-103 and T-104. Such factual
finding of the RTC, sustained by the Court of Appeals, is now final
and binding upon this Court.
4. ID.; ID.; DISPUTABLE PRESUMPTIONS; EVIDENCE
WILLFULLY SUPPRESSED WOULD BE ADVERSE IF
PRODUCED; CASE AT BAR. — Non-production of the alleged
reconstituted titles of Cepoc despite demand therefor gives rise to
a presumption (unrebutted by petitioners) that such evidence, if
produced, would be adverse to petitioners.
5. CIVIL LAW; PROPERTY; ORDINARY ACQUISITIVE
PRESCRIPTION; POSSESSION OF THING IN GOOD FAITH AND
WITH JUST TITLE FOR TEN YEARS, REQUIRED; IN
COMPUTING TEN YEAR PERIOD, CLAIMANT MAY TACK HIS
POSSESSION TO THAT OF HIS PREDECESSOR-IN-INTEREST.
— Ordinary acquisitive prescription, in the case of immovable
property, requires possession of the thing in good faith and with just
title, for a period of ten years. A possessor is deemed to be "in good
faith" when he is not aware of any flaw in his title or mode of
acquisition of the property. On the other hand, there is "just title"
when the adverse claimant came into possession of the property
through one of the modes for acquiring ownership recognized by
law, but the grantor was not the owner or could not transmit any
right. The claimant by prescription may compute the ten-year period
by tacking his possession to that of his grantor of predecessor-in-
interest.
6. ID.; ID.; ID.; ID.; QUESTION OF WHETHER
PREDECESSOR-IN-INTEREST HAD TITLE TO CONVEY,
IRRELEVANT. — Whether respondents' predecessors-in-interest
in fact had title to convey is irrelevant under the concept of just title
and for purposes of prescription.
7. ID.; ID.; ALTERNATIVE RIGHTS OF OWNER AGAINST
BUILDERS IN BAD FAITH; RIGHTS OF OWNER. — Since
petitioners knew fully well the defect in their titles, they were
correctly held by the Court of Appeals to be builders in bad faith.
The owner of the land has three alternative rights: (1) to appropriate
what has been built without any obligation to pay indemnity therefor,
or (2) to demand that the builder remove what he had built, or (3) to
compel the builder to pay the value of the land. In any case, the
landowner is entitled to damages under Article 451, abovecited.
8. ID.; ID.; ID.; BASIS OF DAMAGES. — The right of the
owner of the land to recover damages from a builder in bad faith is
clearly provided for in Article 451 of the Civil Code. Although said
Article 451 does not elaborate on the basis for damages, the Court
perceives that it should reasonably correspond with the value of the
properties lost or destroyed as a result of the occupation in bad
faith, as well as the fruits (natural, industrial or civil) from those
properties that the owner of the land reasonably expected to obtain.
9. ID.; SALES; PURCHASERS OF LAND IN ADVERSE
POSSESSION OF ANOTHER, DUTY-BOUND TO EXERCISE
REASONABLE CAUTION; WHERE THERE IS FAILURE TO
EXERCISE SAID CAUTION, BUYER MAY BE CONSIDERED
BUYER IN BAD FAITH. — A purchaser of a parcel of land cannot
close his eyes to facts which should put a reasonable man upon his
guard, such as when the property subject of the purchase is in the
possession of persons other than the seller. A buyer who could not
have failed to know or discover that the land sold to him was in the
adverse possession of another is a buyer in bad faith.
10. ID.; ID.; ID.; ID.; ACTS CONSTITUTING A PURCHASE
IN BAD FAITH. — The purchase of the property by petitioner
Ramon Durano III from Durano & Co. could not be said to have
been in good faith. It is not disputed that Durano III acquired the
property with full knowledge of respondents' occupancy thereon.
There even appears to be undue haste in the conveyance of the
property to Durano III, as the bulldozing operations by Durano &
Co. were still underway when the deed of sale to Durano III was
executed on September 15, 1970.
11. ID.; LAND REGISTRATION AND TITLES;
NOTARIZATION OF DEED OF SALE, ESSENTIAL TO ITS
REGISTRABILITY AND THE VALIDITY OF CERTIFICATES OF
TITLE. — The unregistrability of the deed of sale is a serious defect
that should affect the validity of the certificates of title. Notarization
of the deed of sale is essential to its registrability, and the action of
the Register of Deeds in allowing the registration of the
unacknowledged deed of sale was unauthorized and did not render
validity to the registration of the document.
12. ID.; ID.; GENERALLY, TORRENS TITLES CAN BE
ATTACKED ONLY WITHIN A YEAR FROM ISSUANCE OF
DECREE OF REGISTRATION; THEREAFTER, AGGRIEVED
PARTY MAY BRING AN ACTION FOR RECONVEYANCE
AND/OR DAMAGES. — The rule on indefeasibility of title, i.e., that
Torrens titles can be attacked for fraud only within one year from
the date of issuance of the decree of registration, does not
altogether deprive an aggrieved party of a remedy at law. As
clarified by the Court in Javier vs. Court of Appeals — The decree
(of registration) becomes incontrovertible and can no longer be
reviewed after one (1) year from the date of the decree so that the
only remedy of the landowner whose property has been wrongfully
or erroneously registered in another's name is to bring an ordinary
action in court for reconveyance, which is an action in personam
and is always available as long as the property has not passed to
an innocent third party for value. If the property has passed into the
hands of an innocent purchaser for value, the remedy is an action
for damages.
13. ID.; DAMAGES; GUIDING PRINCIPLES. — We sustain
the view of the lower courts that the disparity between respondents'
affidavits and their tax declarations on the amount of damages
claimed should not preclude or defeat respondents' right to
damages, which is guaranteed by Article 451. Under Article 2224
of the Civil Code: Temperate or moderate damages, which are
more than nominal but less than compensatory damages, may be
recovered when the court finds that some pecuniary loss has been
suffered but its amount cannot, from the nature of the case, be
proved with certainty. We also uphold the award of litigation
expenses and attorney's fees, it being clear that petitioners' acts
compelled respondents to litigate and incur expenses to regain
rightful possession and ownership over the disputed property.
14. COMMERCIAL LAW; CORPORATIONS; PIERCING
THE VEIL OF CORPORATE FICTION; TEST IN DETERMINING
APPLICABILITY; CASE AT BAR. — The test in determining the
applicability of the doctrine of piercing the veil of corporate fiction is
a follows: 1. Control, not mere majority or complete stock control,
but complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the
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 fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and
unjust acts in contravention of plaintiffs legal rights; and 3. The
aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of. The absence of any one of these
elements prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned
with reality and not form, with how the corporation operated and the
individual defendant's relationship to that operation. The facts show
that shortly after the purported sale by Cepco to Durano & Co., the
latter sold the property to petitioner Ramon Durano III, who
immediately procured the registration of the property in his name.
Obviously, Durano & Co. was used by petitioners merely as an
instrumentality to appropriate the disputed property for themselves.
DECISION
GONZAGA-REYES, J.:
Petitioners seek the reversal of the decision of the First Division of
the Court of Appeals dated November 14, 1997 in CA-G.R. CV No.
27220, entitled "Heirs of Ramon Durano, Sr., et. al. versus Spouses
Angeles Supelveda Uy, et. al.", and the resolution of the Court of
Appeals dated October 29, 1998 which denied petitioners’ motion
for reconsideration.
The antecedents of this case may be traced as far back as August
1970; it involves a 128-hectare parcel of land located in the barrios
of Dunga and Cahumayhumayan, Danao City. On December 27,
1973, the late Congressman Ramon Durano, Sr., together with his
son Ramon Durano III, and the latter’s wife, Elizabeth Hotchkiss
Durano (petitioners in the herein case), instituted an action for
damages against spouses Angeles Supelveda Uy and Emigdio
Bing Sing Uy, spouses Faustino Alatan and Valeriana Garro,
spouses Rufino Lavador and Aurelia Mata, Silvestre Ramos,
Hermogenes Tito, Teotimo Gonzales, Primitiva Garro, Julian Garro,
Ismael Garro, Bienvenido Castro, Glicerio Barriga, Beatriz Calzada,
Andrea Mata de Batulan, Teofista Alcala, Filemon Lavador,
Candelario Lumantao, Gavino Quimbo, Justino Tito, Marcelino
Gonzales, Salvador Dayday, Venancia Repaso, Leodegario
Gonzales, Jose de la Calzada, Restituta Gonzales, and Cosme
Ramos (herein respondents1 ) before Branch XVII of the then Court
of First Instance of Cebu, Danao City.
In that case, docketed as Civil Case No. DC-56, petitioners accused
respondents of officiating a "hate campaign" against them by
lodging complaints in the Police Department of Danao City in
August 1970, over petitioners’ so-called "invasion" of respondents’
alleged properties in Cahumayhumayan, Danao City. This was
followed by another complaint sent by respondents to the President
of the Philippines in February 1971, which depicted petitioners as
"oppressors", "landgrabbers" and "usurpers" of respondents’
alleged rights. Upon the direction of the President, the Department
of Justice through City Fiscal Jesus Navarro and the Philippine
Constabulary of Cebu simultaneously conducted investigations on
the matter. Respondents’ complaints were dismissed as
"baseless", and they appealed the same to the Secretary of Justice,
who called for another investigation to be jointly conducted by the
Special Prosecutor and the Office of the City Fiscal of Danao City.
During the course of said joint investigation, respondents
Hermogenes Tito and Salvador Dayday again lodged a complaint
with the Office of the President, airing the same charges of
"landgrabbing". The investigations on this new complaint, jointly
conducted by the 3rd Philippine Constabulary Zone and the
Citizens Legal Assistance Office resulted in the finding that
"(petitioners) should not be held answerable therefor." 2
Petitioners further alleged in their complaint before the CFI that
during the course of the above investigations, respondents kept
spreading false rumors and damaging tales which put petitioners
into public contempt and ridicule.3
In their Answer, respondents lodged their affirmative defenses,
demanded the return of their respective properties, and made
counterclaims for actual, moral and exemplary damages.
Respondents stated that sometime in the early part of August 1970
and months thereafter they received mimeographed notices dated
August 2, 1970 and signed by the late Ramon Durano, Sr.,
informing them that the lands which they are tilling and residing in,
formerly owned by the Cebu Portland Cement Company (hereafter,
"Cepoc"), had been purchased by Durano & Co., Inc. The notices
also declared that the lands were needed by Durano & Co. for
planting to sugar and for roads or residences, and directed
respondents to immediately turn over the said lands to the
representatives of the company. Simultaneously, tall bamboo poles
with pennants at the tops thereof were planted in some areas of the
lands and metal sheets bearing the initials "RMD" were nailed to
posts.
As early as the first week of August 1970, and even before many of
the respondents received notices to vacate, men who identified
themselves as employees of Durano & Co. proceeded to bulldoze
the lands occupied by various respondents, destroying in their wake
the plantings and improvements made by the respondents therein.
On some occasions, respondents alleged, these men fired shots in
the air, purportedly acting upon the instructions of petitioner Ramon
Durano III and/or Ramon Durano, Jr. On at least one instance,
petitioners Ramon Durano III and Elizabeth Hotchkiss Durano were
seen on the site of the bulldozing operations.
On September 15, 1970, Durano & Co. sold the disputed property
to petitioner Ramon Durano III, who procured the registration of
these lands in his name under TCT No. T-103 and TCT No. T-104.
Respondents contended that the display of force and the known
power and prestige of petitioners and their family restrained them
from directly resisting this wanton depredation upon their property.
During that time, the mayor of Danao City was Mrs. Beatriz Durano,
wife of Ramon Durano, Sr. and mother of petitioner Ramon Durano
III. Finding no relief from the local police, who respondents said
merely laughed at them for daring to complain against the Duranos,
they organized themselves and sent a letter to then President
Ferdinand Marcos reporting dispossession of their properties and
seeking a determination of the ownership of the land. This
notwithstanding, the bulldozing operations continued until the City
Fiscal was requested by the Department of Justice to conduct an
investigation on the matter. When, on July 27, 1971, the City Fiscal
announced that he would be unable to conduct a preliminary
investigation, respondents urged the Department of Justice to
conduct the preliminary investigation. This was granted, and the
investigations which spanned the period March 1972 to April 1973
led to the conclusion that respondents’ complaint was untenable. 4
In their counterclaim, respondents alleged that petitioners’ acts
deprived most of them of their independent source of income and
have made destitutes of some of them. Also, petitioners have done
serious violence to respondents’ spirit, as citizens and human
beings, to the extent that one of them had been widowed by the
emotional shock that the damage and dispossession has
caused.5 Thus, in addition to the dismissal of the complaint,
respondents demanded actual damages for the cost of the
improvements they made on the land, together with the damage
arising from the dispossession itself; moral damages for the
anguish they underwent as a result of the high-handed display of
power by petitioners in depriving them of their possession and
property; as well as exemplary damages, attorney’s fees and
expenses of litigation.
Respondents’ respective counterclaims --- referring to the
improvements destroyed, their values, and the approximate areas
of the properties they owned and occupied --- are as follows:
a) TEOFISTA ALCALA - Tax Declaration No. 00223;
.2400 ha.; bulldozed on August, 10, 1970. Improvements
destroyed consist of 47 trees, 10 bundles beatilis firewood
and 2 sacks of cassava, all valued at P5,437.00. (Exh. B,
including submarkings)
b) FAUSTINO ALATAN and VALERIANA GARRO - Tax
Declaration No. 30758; .2480 ha.; Tax Declaration No.
32974; .8944 ha.; Tax Declaration No. 38908; .8000 ha.;
Bulldozed on September 9, 1970; Improvements
destroyed consist of 682 trees, a cornfield with one cavan
per harvest 3 times a year, valued at P71,770.00;
Bulldozed on March 13, 1971; 753 trees, 1,000 bundles
beatilis firewood every year, valued at P29,100.00; Cut
down in the later part of March, 1971 - 22 trees, 1,000
bundles beatilis firewood every year, 6 cavans corn
harvest per year, valued at P1,940.00 or a total value of
P102,810.00. (Exh. C, including submarkings)
c) ANDREA MATA DE BATULAN - Tax Declaration No.
33033; .4259 has.; bulldozed on September 11, 1970.
Improvements destroyed consist of 512 trees and 15
sacks cassava all valued at P79,425.00. (Exh. D,
including submarkings)
d) GLICERIO BARRIGA - Tax Declaration No. 32290;
.4000 ha.; bulldozed on September 10, 1990.
Improvements destroyed consist of 354 trees, cassava
field if planted with corn good for one liter, 30 cavans
harvest a year of corn, and one resthouse, all valued at
P35,500.00. (Exh. E, including submarkings)
e) BEATRIZ CALZADA - Tax Declaration No. 03449; .900
ha.; Bulldozed on June 16, 1971. Improvements
destroyed consist of 2,864 trees, 1,600 bundles of beatilis
firewood, 12 kerosene cans cassava every year and 48
cavans harvest a year of corn all valued at P34,800.00.
(Exh. F, including submarkings)
f) BIENVENIDO CASTRO - Tax Declaration No. 04883;
.6000 ha.; bulldozed on September 10, 1970.
Improvements destroyed consist of 170 trees, 10 sacks
cassava every year, 500 bundles beatilis firewood every
year, 60 cavans corn harvest per year, all valued at
(5,550.00. (Exh. G, including submarkings)
g) ISMAEL GARRO - Tax Declaration No. 7185; 2 has.
Bulldozed in August, 1970. Improvements destroyed
consist of 6 coconut trees valued at P1,800.00. Bulldozed
on February 3, 1971 - improvements destroyed consist of
607 trees, a corn field of 5 cavans produce per harvest
thrice a year, all valued at P67,890.00. (Exh. H, including
submarkings)
h) JULIAN GARRO - Tax Declaration No. 28653; 1 ha.;
Bulldozed in the latter week of August, 1970.
Improvements destroyed consist of 365 trees, 1 bamboo
grove, 1 tisa, 1,000 bundles of beatilis firewood, 24
cavans harvest a year of corn, all valued at P46,060.00.
(Exh. I, including submarkings)
i) PRIMITIVA GARRO - Tax Declaration No. 28651; .3000
ha.; Bulldozed on September 7, 1970. Improvements
destroyed consist of 183 trees, 10 pineapples, a cassava
field, area if planted with corn good for ½ liter, sweet
potato, area if planted with corn good for ½ liter all valued
at P10,410.00. (Exh. J, including submarkings)
j) TEOTIMO GONZALES - Tax Declaration No. 38159;
.8644 ha.; Tax Declaration No. 38158; .8000 ha.;
Bulldozed on September 10, 1970 - improvements
destroyed consist of 460 trees valued at P20,000.00.
Bulldozed on December 10, 1970 - Improvements
destroyed consist of 254 trees valued at P65,600.00 - or
a total value of P85,600.00. (Exh. K, including
submarkings)
k) LEODEGARIO GONZALES - Tax Declaration No.
36884; Bulldozed on February 24, 1971. Improvements
destroyed consist of 946 trees, 40 ubi, 15 cavans harvest
a year of corn, all valued at P72,270.00. (Exh. L, including
submarkings)
l) FILEMON LAVADOR - Tax Declaration No. 14036; 1
ha.; Bulldozed on February 5, 1971. Improvements
destroyed consist of 675 trees and 9 cavans harvest a
year of corn all valued at P63,935.00. (Exh. M, including
submarkings)
m) CANDELARIO LUMANTAO - Tax Declaration No.
18791; 1.660 ha. Bulldozed on the second week of
August, 1970 - Improvements destroyed consist of 1,377
trees, a cornfield with 3 cavans per harvest thrice a year
and a copra dryer all valued at P193,960.00. Bulldozed
on February 26, 1971 - Improvements destroyed consist
of 44 trees, one pig pen and the fence thereof and the
chicken roost all valued at P12,650.00. Tax Declaration
No. 33159; 3.500 has. Bulldozed in the last week of
March, 1971 - Improvements destroyed consist of 13
trees valued at P1,550.00. Bulldozed in the latter part
consist of 6 Bamboo groves and Ipil-Ipil trees valued at
P700.00 with total value of P208,860.00. (Exh. N,
including submarkings)
n) AURELIA MATA - Tax Declaration No. 38071; .3333
ha.; Bulldozed sometime in the first week of March, 1971
- Improvements destroyed consist of 344 trees and 45
cavans corn harvest per year valued at P30,965.00. (Exh.
Q, including submarkings)
o) GAVINO QUIMBO - Tax Declaration No. 33231;
2.0978 has.; Tax Declaration No. 24377; .4960 ha. (.2480
ha. Belonging to your defendant) Bulldozed on
September 12, 1970 - Improvements destroyed consist of
200 coconut trees and 500 banana fruit trees valued at
P68,500.00. Bulldozed on consist of 59 trees, 20 sacks
cassava and 60 cavans harvest a year of corn valued at
P9,660.00 or a total value of P78,160.00. (Exh. R,
including submarkings)
p) SILVESTRE RAMOS - Tax Declaration No. 24288;
1.5568 has.; Bulldozed on February 23, 1971. -
Improvements destroyed consist of 737 trees, a cornfield
with 3 cavans per harvest 3 times a year and 50 bundles
of beatilis firewood, all valued at P118,170.00. (Exh. S,
including submarkings)
q) MARCELINO GONZALES - Tax Declaration No.
34057; .4049 ha. Bulldozed on March 20, 1972 -
Improvements destroyed consist of 5 coconut trees and 9
cavans harvest a year of corn valued at P1,860.00.
Bulldozed on July 4, 1972 - destroying 19 coconut trees
valued at P5,700.00 or a total value of P7,560.00. (Exh.
U, including submarkings)
r) JUSTINO TITO -Tax Declaration No. 38072; .2000
has.; Bulldozed on February 25, 1971 - Improvements
destroyed consist of 338 trees and 5 kamongay all valued
at P29,650.00. (Exh. T, including submarkings)
s) EMIGDIO BING SING UY and ANGELES
SEPULVEDA UY - Transfer Certificate of Title No. T-35
(Register of Deeds of Danao City); 140.4395 has.; Area
bulldozed- 20.000 has. Bulldozed on August 5, 6 and 7,
1970 - destroying 565 coconut trees, 2-1/2 yrs. old,
65,422 banana groves with 3,600 mango trees, 3 years
old, grafted and about to bear fruit valued at P212,260.00.
Bulldozed on November 24, 1970 and on February 16,
1971 - destroying 8,520 madri-cacao trees and 24
cylindrical cement posts boundaries valued at
P18,540.00. Bulldozed on November 24, 1970 -
destroying 90 coconut trees, 3 years old cornfield at 40
cavans per harvest and at 3 harvests a year (120 cavans)
valued at P31,800.00. Bulldozed on February 16, 1971 -
destroying 25,727 trees and sugarcane field value
P856,725.00 or a total value of P1,123,825.00. (Exh. V,
including submarkings)
t) SALVADOR DAYDAY - Tax Declaration No.
(unnumbered) dated September 14, 1967; 4.000 has.
Bulldozed on May 6, 1971 - destroying 576 trees, 9
cavans yearly of corn, 30 kerosene cans of cassava
yearly valued at P4,795.00. Bulldozed from March 26,
1973 to the first week of April, 1973 - destroying 108 trees
and cornland, 6 cavans harvest per year valued at
P53,900.00 or a total value of P58,695.00. (Exh. A,
including submarkings)
u) VENANCIA REPASO - Tax Declaration No. 18867;
1.1667 has. Bulldozed on April 15, 1971 - Improvements
destroyed were 775 trees, 500 abaca, about to be reaped,
and being reaped 3 times a year 2 bamboo groves all
valued at P47,700.00. (Exh. O, including submarkings)
v) HERMOGENES TITO - Tax Declaration No. 38009;
over one (1) ha. Bulldozed in the latter part of September,
1970 - destroying 1 coconut tree, 18 sacks of corn per
year valued at P1,020.00. Bulldozed on March 15, 1973 -
destroying 2 coconut trees, 5 buri trees, 1 bamboo grove
valued at P1,400.00. Bulldozed on March 26, 1974 -
destroying 3 coconut trees valued at P1,500.00 with a
total value of P3,920.00. (Exh. P, including
submarkings).6
On April 22, 1975, petitioners moved to dismiss their complaint with
the trial court. The trial court granted the motion to dismiss, without
prejudice to respondents’ right to proceed with their counterclaim.
Hence, the trial proceeded only on the counterclaim.
On September 23, 1980, this Court issued a resolution in
Administrative Matter No. 6290 changing the venue of trial in Civil
Case No. DC-56 to the Regional Trial Court of Cebu City. The
change was mainly in line with the transfer of Judge Bernardo Ll.
Salas, who presided over the case in Danao City, to Cebu City.
The parties agreed to dispense with pre-trial, and for the evidence-
in-chief to be submitted by way of affidavits together with a schedule
of documentary exhibits, subject to additional direct examination,
cross examination and presentation of rebuttal evidence by the
parties.
The trial court and later, the Court of Appeals, took note of the
following portions of affidavits submitted by petitioners:
xxx City Fiscal Jesus Navarro said that in August, 1967, he issued
subpoenas to several tenants in Cahumayhumayan upon
representation by Cepoc, the latter protesting failure by the tenants
to continue giving Cepoc its share of the corn produce. He learned
from the tenants that the reason why they were reluctant and as a
matter of fact some defaulted in giving Cepoc its share, was that Uy
Bing Sepulveda made similar demands to them for his share in the
produce, and that they did not know to whom the shares should be
given.
xxx xxx xxx
Jesus Capitan said that he is familiar with the place
Cahumayhumayan and that the properties in said locality were
acquired by Durano and Company and Ramon Durano III, but
formerly owned by Cepoc.
When the properties of Ramonito Durano were cultivated, the
owners of the plants requested him that they be given something
for their effort even if the properties do not belong to them but to
Cepoc, and that he was directed by Ramonito Durano to do a listing
of the improvements as well as the owners. After he made a listing,
this was given to Ramonito who directed Benedicto Ramos to do
payment.
When he was preparing the list, they did not object to the removal
of the plants because the counterclaimants understood that the
lands did not belong to them, but later and because of politics a
complaint was filed, and finally that when he was doing the listing,
the improvements were even pointed to him by the
counterclaimants themselves. (Exh. 48, Records, p. 385-386).
xxx xxx xxx
Ruperto Rom said that he had an occasion to work at Cepoc from
1947 to 1950 together with Benedicto and Tomas Ramos, the latter
a capataz of the Durano Sugar Mills. Owner of the properties,
subject of the complaint, was Cepoc.
The persons who eventually tilled the Cepoc properties were
merely allowed to do cultivation if planted to corn, and for Cepoc to
be given a share, which condition was complied with by all including
the counterclaimants. He even possessed one parcel which he
planted to coconuts, jackfruit trees and other plants. (Exh. 51,
Records, pp. 383-384)
xxx xxx xxx
Co-defendant Ramon Durano III said that he agreed with the
dismissal of the complaint because his father’s wish was
reconciliation with the defendants following the death of Pedro
Sepulveda, father of Angeles Sepulveda Uy, but inspite of the
dismissal of the complaint, the defendants still prosecuted their
counterclaim.
The disputed properties were owned formerly by Cepoc, and then
of the latter selling the properties to Durano and Company and then
by the latter to him as of September 15, 1970. As a matter of fact,
TCT T-103 and T-104 were issued to him and that from that time
on, he paid the taxes.
At the time he purchased the properties, they were not occupied by
the defendants. The first time he learned about the alleged
bulldozing of the improvements was when the defendants filed the
complaint of land grabbing against their family with the Office of the
President and the attendant publicity. Precisely his family filed the
complaint against them. (Exh. 57, Records, pp. 723-730)
xxx xxx xxx
Congressman Ramon Durano said he is familiar with the properties,
being owned originally by Cepoc. Thereafter they were purchased
by Durano and Company and then sold to Ramon Durano III, the
latter now the owner. He filed a motion to dismiss the case against
Angeles Sepulveda et al. as a gesture of respect to the deceased
Pedro Sepulveda, father of Angeles Sepulveda, and as a Christian,
said Pedro Sepulveda being the former Mayor of Danao, if only to
stop all misunderstanding between their families.
xxx xxx xxx
He was the one who did the discovery of the properties that
belonged to Cepoc, which happened when he was doing mining
work near Cahumayhumayan and without his knowledge extended
his operation within the area belonging to Cepoc. After Cepoc
learned of the substantial coal deposits, the property was claimed
by Cepoc and then a survey was made to relocate the muniments.
Eventually he desisted doing mining work and limited himself within
the confines of his property that was adjacent to Cepoc’s property.
All the claimants except Sepulveda Uy were occupants of the
Cepoc properties. Durano and Company purchased the property
adjacent to Cepoc, developed the area, mined the coal and had the
surveyed area planted with sugar cane, and finally the notices to
the occupants because of their intention to plant sugar cane and
other crops (T.S. N. December 4, 1985, pp. 31-32, 44-54, RTC
Decision, pp. 16-19, Records, pp. 842-845).7
Petitioners also presented Court Commissioner, Engineer Leonidas
Gicain, who was directed by the trial court to conduct a field survey
of the disputed property. Gicain conducted surveys on the areas
subjected to bulldozing, including those outside the Cepoc
properties. The survey --- which was based on TCT No. T-103 and
TCT No. T-104, titled in the name of Ramon Durano III, and TCT
No. 35, in the name of respondent Emigdio Bing Sing Uy --- was
paid for by petitioners.8
Respondents, for their part, also presented their affidavits and
supporting documentary evidence, including tax declarations
covering such portions of the property as they formerly inhabited
and cultivated.
On March 8, 1990, the RTC issued a decision upholding
respondents’ counterclaim. The dispositive portion of said decision
reads:
"THE FOREGOING CONSIDERED, judgment is hereby rendered
in favor of the counter claimants and against the plaintiffs directing
the latter to pay the former:
a) With respect to Salvador Dayday ₱ 14,400.00
b) With respect to Teofista Alcala 4,400.00
c) With respect to Faustino Alatan 118,400.00
d) With respect to Andrea Mata de Batulan 115,050.00
e) With respect to Glicerio Barriga 35,500.00
f) With respect to Beatriz Galzada 70,300.00
g) With respect to Bienvenido Castro 5,000.00
h) With respect to Ismael Garro 66,060.00
i) With respect to Julian Garro 48,600.00
j) With respect to Primitiva Garro 13,000.00
k) With respect to Teotimo Gonzales 63,200.00
l) With respect to Leodegario Gonzales 85,300.00
m) With respect to Filemon Lavador 70,860.00
n) With respect to Venancia Repaso 101,700.00
o) With respect to Candelario Lumantao 192,550.00
p) With respect to Hermogenes Tito 1,200.00
q) With respect to Aurelia Mata 28,560.00
r) With respect to Gavino Quimbo 81,500.00
s) With respect to Silvestre Ramos 101,700.00
t) With respect to Justino Tito 27,800.00
u) With respect to Marcelino Gonzales 2,360.00
v) With respect to Angeles Supelveda 902,840.00
₱120,000.00 should be the figure in terms of litigation expenses
and a separate amount of ₱100,000.00 as attorney’s fees.
Return of the properties to Venancia Repaso, Hermogenes Tito and
Marcelino Gonzales is hereby directed.
With respect to counter claimant Angeles Sepulveda Uy, return of
the property to her should be with respect to the areas outside of
the Cepoc property, as mentioned in the sketch, Exhibit 56-A.
Finally with costs against the plaintiffs.
SO ORDERED. 9
The RTC found that the case preponderated in favor of
respondents, who all possessed their respective portions of the
property covered by TCT Nos. T-103 and T-104 thinking that they
were the absolute owners thereof. A number of these respondents
alleged that they inherited these properties from their parents, who
in turn inherited them from their own parents. Some others came
into the properties by purchase from the former occupants thereof.
They and their predecessors were responsible for the plantings and
improvements on the property. They were the ones who sought for
the properties to be tax-declared in their respective names, and
they continually paid the taxes thereto. Respondents maintained
that they were unaware of anyone claiming adverse possession or
ownership of these lands until the bulldozing operations in 1970.
As for Venancia Repaso, Hermogenes Tito and Marcelino
Gonzales, the Court found that the properties they laid claim to were
not part of the land that was purchased by Durano & Co. from
Cepoc. Thus, it found the bulldozing of these lands by petitioners
totally unjustified and ordered not only the total reimbursement of
useful and necessary expenses on the properties but also the
return of these properties to Repaso, Tito and Gonzales,
respectively. As for all the other respondents, the RTC found their
possession of the properties to be in the concept of owner and
adjudged them to be builders in good faith. Considering that
petitioners in the instant case appropriated the improvements on
the areas overran by the bulldozers, the RTC ruled that "(t)he right
of retention to the improvements necessarily should be secured (in
favor of respondents) until reimbursed not only of the necessary but
also useful expenses."10
On the matter of litigation expenses and attorney’s fees, the RTC
observed that the trial period alone consisted of forty (40) trial dates
spread over a period of sixteen (16) years. At the time, respondents
were represented by counsel based in Manila, and the trial court
took into consideration the travel, accommodation and
miscellaneous expenses of their lawyer that respondents must
have shouldered during the trial of the case.
Dissatisfied, petitioners appealed the RTC decision to the Court of
Appeals, which, in turn, affirmed the said decision and ordered the
return of the property to all the respondents-claimants, in effect
modifying the RTC decision which allowed return only in favor of
respondents Repaso, Tito and Gonzales.
In its decision, the Court of Appeals upheld the factual findings and
conclusions of the RTC, including the awards for actual damages,
attorney’s fees and litigation expenses, and found additionally that
the issuance of TCT Nos. T-103 and T-104 in the name of Ramon
Durano III was attended by fraud. Evaluating the evidence before
it, the Court of Appeals observed that the alleged reconstituted titles
of Cepoc over the property, namely, TCT No. (RT-38) (T-14457) -4
and TCT No. (RT-39) (T-14456) -3 (Exhibits "19" and "20" of this
case), which were claimed to be the derivative titles of TCT Nos. T-
103 and T-104, were not submitted in evidence before the RTC.
Thus, in an Order dated June 15, 1988, the RTC ordered Exhibits
"19" and "20" deleted from petitioners’ Offer of Exhibits. The Court
of Appeals further noted that even among the exhibits subsequently
produced by petitioners before the RTC, said Exhibits "19" and "20"
were still not submitted.11 Moreover, Cepoc had no registered title
over the disputed property as indicated in TCT Nos. T-103 and T-
104. Thus:
TRANSFER CERTIFICATE OF TITLE
NO. - 103 -xxx xxx
IT IS FURTHER CERTIFIED that said land was originally registered
on the N.A. day of N.A., in the year nineteen hundred and N.A. in
Registration Book No. N.A. page N.A. of the Office of the Register
of Deeds of N.A., as Original Certificate of Title No. N.A., pursuant
to a N.A. patent granted by the President of the Philippines, on
the N.A. day of N.A., in the year nineteen hundred and N.A., under
Act No. N.A.
This certificate is a transfer from Transfer Certificate of Title No.
(RT-39) (T-14456) -3 which is cancelled by virtue hereof in so far
as the above described land is concerned.
xxx xxx
TRANSFER CERTIFICATE OF TITLE
NO. T - 104 -xxx xxx
IT IS FURTHER CERTIFIED that said land was originally registered
on the N.A. day of N.A., in the year nineteen hundred and N.A. in
Registration Book No. N.A. page N.A. of the Office of the Register
of Deeds of N.A., as Original Certificate of Title No. N.A., pursuant
to a N.A. patent granted by the President of the Philippines, on
the N.A. day of N.A., in the year nineteen hundred and N.A., under
Act No. N.A.
This certificate is a transfer from Transfer Certificate of Title
No. (RT-38) (T-14457) -4 which is cancelled by virtue hereof in so
far as the above described land is concerned. 12
From the foregoing, the Court of Appeals concluded that the
issuance of the TCT Nos. T-103 and T-104 in favor of petitioner
Ramon Durano III was attended by fraud; hence, petitioners could
not invoke the principle of indefeasibility of title. Additionally, the
Court of Appeals found that the alleged Deed of Absolute Sale,
undated, between Cepoc Industries, Inc. and Durano & Co. was not
notarized and thus, unregistrable.
The Court of Appeals went on to state that while, on the one hand,
no valid issuance of title may be imputed in favor of petitioners from
the private Deed of Sale and the alleged reconstituted titles of
Cepoc that were not presented in evidence, respondents, in
contrast --- who although admittedly had no registered titles in their
names --- were able to demonstrate possession that was public,
continuous and adverse --- or possession in the concept of owner,
and which was much prior (one or two generations back for many
of respondents) to the claim of ownership of petitioners.
Thus, the Court of Appeals ordered the return of the properties
covered by TCT Nos. T-103 and T-104 to all respondents who
made respective claims thereto. Corollarily, it declared that
petitioners were possessors in bad faith, and were not entitled to
reimbursement for useful expenses incurred in the conversion of
the property into sugarcane lands. It also gave no merit to
petitioners’ allegation that the actual damages awarded by the trial
court were excessive, or to petitioners’ argument that they should
not have been held personally liable for any damages imputable to
Durano & Co.
Following is the dispositive portion of the decision of the Court of
Appeals:
WHEREFORE, the appealed decision of the lower court in Civil
Case No. DC-56 is hereby AFFIRMED with MODIFICATION
ordering the return of the respective subject properties to all the
defendants-appellees, without indemnity to the plaintiffs-appellants
as regards whatever improvements made therein by the latter. In
all other respects, said decision in affirmed.
Costs against plaintiffs-appellants.
SO ORDERED.13
On October 29, 1998, the Court of Appeals denied petitioners’
motion for reconsideration for lack of merit. Hence, this petition.
Petitioners assign the following errors from the CA decision:
1. The Court of Appeals erred in granting relief to the
respondents who did not appeal the decision of the
lower court.
2. The Court of Appeals erred in collaterally attacking
the validity of the title of petitioner Ramon Durano III.
3. The respondents should not have been adjudged
builders in good faith.
4. The petitioners should not be held personally liable
for damages because of the doctrine of separate
corporate personality.
5. It was an error to hold that the respondents had
proved the existence of improvements on the land by
preponderance of evidence, and in awarding
excessive damages therefor.
6. It was error to direct the return of the properties to
respondents Venancia Repaso, Hermogenes Tito
and Marcelino Gonzales.
7. The award of litigation expenses and attorney’s fees
was erroneous.
8. The petitioners are not possessors in bad faith.
On their first assignment of error, petitioners contend that before
the Court of Appeals, they only questioned that portion of the RTC
decision which directed the return of the properties to respondents
Repaso, Tito and Gonzales. They argued that the return of the
properties to all the other respondents by the Court of Appeals was
erroneous because it was not among the errors assigned or argued
by petitioners on appeal. Besides, since respondents themselves
did not appeal from the RTC decision on the issue of return of the
physical possession of the property, it is understood that judgment
as to them has already become final by operation of law. To support
its argument, petitioners cited the cases of Madrideo vs. Court of
Appeals14 and Medida vs. Court of Appeals15 , which held that
"whenever an appeal is taken in a civil case an appellee who has
not himself appealed cannot obtain from the appellate court any
affirmative relief other than the ones granted in the decision of the
court below."
Rule 51 of the New Rules of Civil Procedure provides:
Sec. 8. Questions that may be decided. --- No error which does not
affect the jurisdiction over the subject matter or the validity of the
judgment appealed from or the proceedings therein will be
considered unless stated in the assignment of errors, or closely
related to or dependent on an assigned error and properly argued
in the brief, save as the court may pass upon plain errors and
clerical errors.
We find untenable petitioners’ argument that since no party
(whether petitioners or respondents) appealed for the return of the
properties to respondents other than Repaso, Tito and Gonzales,
that portion of the RTC decision that awards damages to such other
respondents is final and may no longer be altered by the Court of
Appeals. A reading of the provisions of Section 8, Rule 51,
aforecited, indicates that the Court of Appeals is not limited to
reviewing only those errors assigned by appellant, but also those
that are closely related to or dependent on an assigned error. 16 In
other words, the Court of Appeals is imbued with sufficient
discretion to review matters, not otherwise assigned as errors on
appeal, if it finds that their consideration is necessary in arriving at
a complete and just resolution of the case. In this case, the Court
of Appeals ordered the return of the properties to respondents
merely as a legal consequence of the finding that respondents had
a better right of possession than petitioners over the disputed
properties, the former being possessors in the concept of owner.
Thus, it held ---
Plaintiffs-appellants have to return possession of the subject
property, not only to defendants-appellees Venancia Repaso,
Hermogenes Tito and Marcelino Gonzales but to all other
defendants-appellees herein, by virtue of the latter’s priority in time
of declaring the corresponding portions of the subject properties in
their name and/or their predecessors-in-interest coupled with actual
possession of the same property through their predecessors-in-
interest in the concept of an owner. Plaintiffs-appellants who had
never produced in court a valid basis by which they are claiming
possession or ownership over the said property cannot have a
better right over the subject properties than defendants-appellees.17
Moreover, petitioners’ reliance on the Madrideo and Medida cases
is misplaced. In the Madrideo case, the predecessors-in-interest of
the Llorente Group sold the disputed property to the Alcala Group,
who in turn sold the same to the spouses Maturgo. The RTC
adjudged the spouses Maturgo purchasers in good faith, such that
they could retain their title to the property, but held that the Lllorente
Group was unlawfully divested of its ownership of the property by
the Alcala Group. The Alcala Group appealed this decision to the
Court of Appeals, who denied the appeal and ordered the
reinstatement in the records of the Registry of Deeds of the Original
Certificates of Title of the predecessors-in-interest of the Llorente
Group. In setting aside the decision of the Court of Appeals, this
Court held that no relief may be afforded in favor of the Llorente
Group to the prejudice of the spouses Maturgo, who --- the Court
carefully emphasized --- were third parties to the appeal, being
neither appellants nor appellees before the Court of Appeals, and
whose title to the disputed property was confirmed by the RTC. The
application of the ruling in Madrideo to the instant case bears no
justification because it is clear that petitioners, in appealing the RTC
decision, impleaded all the herein respondents.
Meanwhile, in the Medida case, petitioners (who were the
appellees before the Court of Appeals) sought the reversal of a
finding of the RTC before the Supreme Court. The Court explained
that since petitioners failed to appeal from the RTC decision, they -
-- as appellees before the Court of Appeals --- could only argue for
the purpose of sustaining the judgment in their favor, and could not
ask for any affirmative relief other than that granted by the court
below. The factual milieu in Medida is different from that of the
instant case, where the return of the properties to respondents was
not an "affirmative relief" sought by respondents but an
independent determination of the Court of Appeals proceeding from
its findings that respondents were long-standing possessors in the
concept of owner while petitioners were builders in bad faith.
Certainly, under such circumstances, the Court of Appeals is not
precluded from modifying the decision of the RTC in order to accord
complete relief to respondents.
Moving now to the other errors assigned in the petition, the return
of the properties to respondents Repaso, Tito and Gonzales was
premised upon the factual finding that these lands were outside the
properties claimed by petitioners under TCT Nos. T-103 and T-104.
Such factual finding of the RTC, sustained by the Court of Appeals,
is now final and binding upon this Court.
In respect of the properties supposedly covered by TCT Nos. T-103
and T-104, the Court of Appeals basically affirmed the findings of
the RTC that respondents have shown prior and actual possession
thereof in the concept of owner, whereas petitioners failed to
substantiate a valid and legitimate acquisition of the property ---
considering that the alleged titles of Cepoc from which TCT Nos. T-
103 and T-104 were supposed to have derived title were not
produced, and the deed of sale between Cepoc and Durano & Co.
was unregistrable.
The records clearly bear out respondents’ prior and actual
possession; more exactly, the records indicate that respondents’
possession has ripened into ownership by acquisitive prescription.
Ordinary acquisitive prescription, in the case of immovable
property, requires possession of the thing in good faith and with just
title,18 for a period of ten years.19 A possessor is deemed to be "in
good faith" when he is not aware of any flaw in his title or mode of
acquisition of the property.20 On the other hand, there is "just title"
when the adverse claimant came into possession of the property
through one of the modes for acquiring ownership recognized by
law, but the grantor was not the owner or could not transmit any
right.21 The claimant by prescription may compute the ten-year
period by tacking his possession to that of his grantor or
predecessor-in-interest.22
The evidence shows that respondents successfully complied with
all the requirements for acquisitive prescription to set in. The
properties were conveyed to respondents by purchase or
inheritance, and in each case the respondents were in actual,
continuous, open and adverse possession of the properties. They
exercised rights of ownership over the lands, including the regular
payment of taxes and introduction of plantings and improvements.
They were unaware of anyone claiming to be the owner of these
lands other than themselves until the notices of demolition in 1970
--- and at the time each of them had already completed the ten-year
prescriptive period either by their own possession or by obtaining
from the possession of their predecessors-in-interest. Contrary to
the allegation of petitioners that the claims of all twenty-two (22)
respondents were lumped together and indiscriminately sustained,
the lower courts (especially the RTC) took careful consideration of
the claims individually, taking note of the respective modes and
dates of acquisition. Whether respondents’ predecessors-in-
interest in fact had title to convey is irrelevant under the concept of
just title and for purposes of prescription.
Thus, respondents’ counterclaim for reconveyance and damages
before the RTC was premised upon a claim of ownership as
indicated by the following allegations:
(Y)our defendants are owners and occupants of different parcels of
land located in Barrio Cahumayhumayan, your defendants having
occupied these parcels of land for various periods by themselves or
through their predecessors-in-interest, some for over fifty years,
and some with titles issued under the Land Registration Act;
xxxxx 23
Respondents’ claim of ownership by acquisitive prescription (in
respect of the properties covered by TCT Nos. T-103 and T-104)
having been duly alleged and proven, the Court deems it only
proper that such claim be categorically upheld. Thus, the decision
of the Court of Appeals insofar as it merely declares those
respondents possessors in the concept of owner is modified to
reflect the evidence on record which indicates that such possession
had been converted to ownership by ordinary prescription.
Turning now to petitioners’ claim to ownership and title, it is
uncontested that their claim hinges largely on TCT Nos. T-103 and
T-104, issued in the name of petitioner Ramon Durano III. However,
the validity of these certificates of title was put to serious doubt by
the following: (1) the certificates reveal the lack of registered title of
Cepoc to the properties;24 (2) the alleged reconstituted titles of
Cepoc were not produced in evidence; and (3) the deed of sale
between Cepoc and Durano & Co. was unnotarized and thus,
unregistrable.
It is true that fraud in the issuance of a certificate of title may be
raised only in an action expressly instituted for that purpose,25 and
not collaterally as in the instant case which is an action for
reconveyance and damages. While we cannot sustain the Court of
Appeals’ finding of fraud because of this jurisdictional impediment,
we observe that the above-enumerated circumstances indicate
none too clearly the weakness of petitioners’ evidence on their
claim of ownership. For instance, the non-production of the alleged
reconstituted titles of Cepoc despite demand therefor gives rise to
a presumption (unrebutted by petitioners) that such evidence, if
produced, would be adverse to petitioners. 26 Also, the
unregistrability of the deed of sale is a serious defect that should
affect the validity of the certificates of title. Notarization of the deed
of sale is essential to its registrability, 27 and the action of the
Register of Deeds in allowing the registration of the
unacknowledged deed of sale was unauthorized and did not render
validity to the registration of the document. 28
Furthermore, a purchaser of a parcel of land cannot close his eyes
to facts which should put a reasonable man upon his guard, such
as when the property subject of the purchase is in the possession
of persons other than the seller.29 A buyer who could not have failed
to know or discover that the land sold to him was in the adverse
possession of another is a buyer in bad faith.30 In the herein case,
respondents were in open possession and occupancy of the
properties when Durano & Co. supposedly purchased the same
from Cepoc. Petitioners made no attempt to investigate the nature
of respondents’ possession before they ordered demolition in
August 1970.
In the same manner, the purchase of the property by petitioner
Ramon Durano III from Durano & Co. could not be said to have
been in good faith. It is not disputed that Durano III acquired the
property with full knowledge of respondents’ occupancy thereon.
There even appears to be undue haste in the conveyance of the
property to Durano III, as the bulldozing operations by Durano &
Co. were still underway when the deed of sale to Durano III was
executed on September 15, 1970. There is not even an indication
that Durano & Co. attempted to transfer registration of the property
in its name before it conveyed the same to Durano III.
In the light of these circumstances, petitioners could not justifiably
invoke the defense of indefeasibility of title to defeat respondents’
claim of ownership by prescription. The rule on indefeasibility of
title, i.e., that Torrens titles can be attacked for fraud only within one
year from the date of issuance of the decree of registration, does
not altogether deprive an aggrieved party of a remedy at law. As
clarified by the Court in Javier vs. Court of Appeals31 ---
The decree (of registration) becomes incontrovertible and can no
longer be reviewed after one (1) year from the date of the decree
so that the only remedy of the landowner whose property has been
wrongfully or erroneously registered in another’s name is to bring
an ordinary action in court for reconveyance, which is an action in
personam and is always available as long as the property has not
passed to an innocent third party for value. If the property has
passed into the hands of an innocent purchaser for value, the
remedy is an action for damages.
In the instant case, respondents’ action for reconveyance will
prosper, it being clear that the property, wrongfully registered in the
name of petitioner Durano III, has not passed to an innocent
purchaser for value.
Since petitioners knew fully well the defect in their titles, they were
correctly held by the Court of Appeals to be builders in bad faith.
The Civil Code provides:
Art. 449. He who builds, plants or sows in bad faith on the land of
another, loses what is built, planted or sown without right of
indemnity.
Art. 450. The owner of the land on which anything has been built,
planted or sown in bad faith may demand the demolition of the work,
or that the planting or sowing be removed, in order to replace things
in their former condition at the expense of the person who built,
planted or sowed; or he may compel the builder or planter to pay
the price of the land, and the sower the proper rent.
Art. 451. In the cases of the two preceding articles, the landowner
is entitled to damages from the builder, planter or sower.
Based on these provisions, the owner of the land has three
alternative rights: (1) to appropriate what has been built without any
obligation to pay indemnity therefor, or (2) to demand that the
builder remove what he had built, or (3) to compel the builder to pay
the value of the land.32 In any case, the landowner is entitled to
damages under Article 451, abovecited.
We sustain the return of the properties to respondents and the
payment of indemnity as being in accord with the reliefs under the
Civil Code.
On petitioners’ fifth assignment of error that respondents had not
proved the existence of improvements on the property by
preponderance of evidence, and that the damages awarded by the
lower courts were excessive and not actually proved, the Court
notes that the issue is essentially factual. Petitioners, however,
invoke Article 2199 of the Civil Code which requires actual damages
to be duly proved. Passing upon this matter, the Court of Appeals
cited with approval the decision of the RTC which stated:
The counter claimants made a detail of the improvements that were
damaged. Then the query, how accurate were the listings,
supposedly representing damaged improvements. The Court
notes, some of the counter claimants’ improvements in the tax
declarations did not tally with the listings as mentioned in their
individual affidavits. Also, others did not submit tax declarations
supporting identity of the properties they possessed. The disparity
with respect to the former and absence of tax declarations with
respect to the latter, should not be a justification for defeating right
of reimbursement. As a matter of fact, no controverting evidence
was presented by the plaintiffs that the improvements being
mentioned individually in the affidavits did not reflect the actual
improvements that were overran by the bulldozing operation. Aside
from that, the City Assessor, or any member of his staff, were not
presented as witnesses. Had they been presented by the plaintiffs,
the least that can be expected is that they would have enlightened
the Court the extent of their individual holdings being developed in
terms of existing improvements. This, the plaintiffs defaulted. It
might be true that there were tax declarations, then presented as
supporting documents by the counter claimants, but then
mentioning improvements but in variance with the listings in the
individual affidavits. This disparity similarly cannot be accepted as
a basis for the setting aside of the listing of improvements being
adverted to by the counter claimants in their affidavits. This Court
is not foreclosing the possibility that the tax declarations on record
were either table computations by the Assessor or his deputy, or
tax declarations whose entries were merely copied from the old tax
declarations during the period of revision. (RTC Decision, p. 36,
Records, p. 862)33
The right of the owner of the land to recover damages from a builder
in bad faith is clearly provided for in Article 451 of the Civil Code.
Although said Article 451 does not elaborate on the basis for
damages, the Court perceives that it should reasonably correspond
with the value of the properties lost or destroyed as a result of the
occupation in bad faith, as well as the fruits (natural, industrial or
civil) from those properties that the owner of the land reasonably
expected to obtain. We sustain the view of the lower courts that the
disparity between respondents’ affidavits and their tax declarations
on the amount of damages claimed should not preclude or defeat
respondents’ right to damages, which is guaranteed by Article 451.
Moreover, under Article 2224 of the Civil Code:
Temperate or moderate damages, which are more than nominal but
less than compensatory damages, may be recovered when the
court finds that some pecuniary loss has been suffered but its
amount cannot, from the nature of the case, be proved with
certainty.
We also uphold the award of litigation expenses and attorney’s
fees, it being clear that petitioners’ acts compelled respondents to
litigate and incur expenses to regain rightful possession and
ownership over the disputed property.34
The last issue presented for our resolution is whether petitioners
could justifiably invoke the doctrine of separate corporate
personality to evade liability for damages. The Court of Appeals
applied the well-recognized principle of "piercing the corporate
veil", i.e., the law will regard the act of the corporation as the act of
its individual stockholders when it is shown that the corporation was
used merely as an alter ego by those persons in the commission of
fraud or other illegal acts.
The test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control,
but complete domination, not only of finances but of policy
and business practice in respect to the transaction
attacked so that the 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 fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust acts in contravention of plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the
corporate veil". In applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant’s
relationship to that operation.35
The question of whether a corporation is a mere alter ego is purely
one of fact.36 The Court sees no reason to reverse the finding of the
Court of Appeals. The facts show that shortly after the purported
sale by Cepco to Durano & Co., the latter sold the property to
petitioner Ramon Durano III, who immediately procured the
registration of the property in his name. Obviously, Durano & Co.
was used by petitioners merely as an instrumentality to appropriate
the disputed property for themselves.
WHEREFORE, the instant petition is DENIED. The decision of the
Court of Appeals is MODIFIED to declare respondents with claims
to the properties covered by Transfer Certificate of Title Nos. T-103
and T-104 owners by acquisitive prescription to the extent of their
respective claims. In all other respects, the decision of the Court of
Appeals is AFFIRMED. Costs against petitioners.
SO ORDERED.
Melo, (Chairman), Vitug, and Panganiban, JJ., concur.
Purisima, J., no part.
 THIRD DIVISION
[G.R. No. 140923. September 16, 2005.]
MANUEL M. MENDOZA and EDGARDO A. YOTOKO,
petitioners, vs. BANCO REAL DEVELOPMENT BANK (now
LBC Development Bank), respondent.
Castillo Laman Tan Pantaleon & San Jose for petitioners.
Florabelle U. Uy for respondent.
SYLLABUS
COMMERCIAL LAW; CORPORATION LAW; CORPORATIONS;
DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY;
THE VEIL WHICH THE LAW COVERS AND ISOLATES THE
CORPORATION FROM ITS DIRECTORS, OFFICERS OR
EMPLOYEES WILL BE LIFTED WHEN THE CORPORATION IS
USED BY ANY OF THEM AS A CLOAK OR COVER FOR FRAUD
OR ILLEGALITY OR INJUSTICE; CASE AT BAR. — The general
rule is that obligations incurred by a corporation, acting through its
directors, officers or employees, are its sole liabilities. However, the
veil with which the law covers and isolates the corporation from its
directors, officers or employees will be lifted when the corporation
is used by any of them as a cloak or cover for fraud or illegality or
injustice. Here, the fraud was committed by petitioners to the
prejudice of respondent bank. It bears emphasis that as reported
by the sheriff, TVI is no longer doing business at its given address
and its whereabouts cannot be established as yet. Both the trial
court and the Court of Appeals thus concluded that petitioners
succeeded to hide the chattels, preventing the sheriff to foreclose
the mortgage. Obviously, they acted in bad faith to defraud
respondent bank. In fine, we hold that the Appellate Court, in
affirming the Decision of the trial court, correctly ruled that
petitioners, not TVI, are the ones personally liable to respondent
bank for the payment of the loan.
DECISION
SANDOVAL-GUTIERREZ, J.:
Before us is a petition for review on certiorari1, assailing the
Decision2 of the Court of Appeals dated September 21, 1998 in CA-
G.R. No. 41544, entitled "Banco Real Development Bank, plaintiff,
versus, Technica Video Inc., et. al., Manuel M. Mendoza, et. al.,
defendants" and Resolution dated December 3, 1999.
The petition alleges inter alia that on August 7, 1985, the Board of
Directors of Technical Video, Inc. (TVI) passed a Resolution
authorizing its President, Eduardo A. Yotoko, petitioner, or its
General Manager-Secretary-Treasurer, Manuel M. Mendoza, also
a petitioner, to apply for and secure a loan from the Pasay City
Banco Real Development Bank (now LBC Development Bank),
herein respondent.
On September 11, 1985, respondent bank extended a loan of
₱500,000.00 to TVI. In his capacity as General Manager, petitioner
Mendoza executed a promissory note and chattel mortgage over
195 units of Beta video machines and their equipment and
accessories belonging to TVI in favor of respondent bank.
On October 3, 1986, TVI and two other video firms, Fox Video and
Galactica Video, organized a new corporation named FGT Video
Network Inc. (FGT). It was registered with the Securities and
Exchange Commission.3 Petitioner Mendoza was the concurrent
President of FGT and Operating General Manager of TVI. Thus, the
office of TVI had to be transferred to the building of FGT for easier
monitoring of the distribution and marketing aspects of the
business.
For TVI’s failure to pay its loan upon maturity, respondent bank, on
January 26, 1987, filed with the Office of the Clerk of Court of the
Regional Trial Court (RTC), Pasay City, a petition for Extra Judicial
Foreclosure and Sale of Chattel Mortgage.
However, the Sheriff’s Report/Return4 dated January 27, 1987
shows that TVI is no longer doing business at its given address;
that its General Manager, Mr. Manuel M. Mendoza, is presently
employed at FGT Video Network with offices at the Philcemcor
Bldg., No. 4 Edsa cor. Connecticut St., Greenhills, San Juan, Metro
Manila; that when asked about the whereabouts of the video
machines, in the presence of the representative of respondent bank
and its counsel, Mr. Mendoza denied any knowledge of their
whereabouts; and that action on respondent’s petition is indefinitely
postponed until further notice from the bank.
Respondent then wrote TVI demanding the surrender of the video
machines. In his letter dated February 19, 1987, petitioner Mendoza
requested the bank to give him "additional time to enable us to pay
our total obligations" and proposed a repayment scheme to start
not later than March 10, 1987.5 Still, no payment was received by
the bank. TVI simply refused and ignored the demand and kept
silent as to the whereabouts of the video machines.
Meanwhile, in a case entitled "Republic of the Philippines, plaintiff
vs. FGT Video Network Inc., Manuel Mendoza, Alfredo C.
Ongyangco, Eric Apolonio, Susan Yang ang Eduardo A. Yotoko,
defendants," the RTC, Branch 167, Pasig City issued a search
warrant. The agents of the National Bureau of Investigation (NBI)
confiscated at the offices of FGT 638 machines and
equipment including the 195 Beta machines mortgaged with
respondent bank.
On May 29, 1987, upon motion of FGT and herein petitioners, the
same court issued another Order directing the NBI to release and
return the said machines to them.
However, Columbia Pictures Inc., Orion Pictures Corp., Paramount
Pictures Corp., Universal City Studios Inc., The Walt Disney
Company and Warner Bros. filed with this Court a petition
for certiorari6 assailing the Order of the lower court.
On June 18, 1987, this Court issued a temporary restraining order
enjoining the RTC from enforcing its assailed order. The machines
and equipment were left in the custody of the NBI until the petition
for certiorari shall have been resolved with finality.
On July 13, 1990, respondent bank filed with the RTC, Branch 110,
Pasig City,7 a complaint for collection of a sum of money8 against
TVI, FGT and petitioners. Only petitioners filed their joint answer to
the complaint.
In their joint answer, petitioners specifically denied the allegations
in the complaint, raising the defense that the loan is purely a
corporate indebtedness of TVI.
On April 29, 1991, the trial court rendered a Decision, holding that:
"As by these considerations, the Court finds that TVI was the mere
alter ego or business conduit of Yotoko and Mendoza, and
additionally considering 1) that Mendoza disclaimed knowledge of
the whereabouts of the TVI mortgaged property at the time plaintiff’s
petition for extrajudicial foreclosure was being effected, and 2) that
Mendoza and Yotoko transferred the mortgaged property to FGT
without first securing plaintiff’s consent despite their awareness that
under the chattel mortgage, such consent was necessary, the
doctrine of corporate entity must be pierced and the two must be
held personally liable for TVI’s obligation to plaintiff for said doctrine
cannot be used to defeat public convenience, justify wrong, protect
fraud or avoid a legal obligation."
The dispositive portion of the trial court’s Decision reads:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff
and against defendants TECHNICA VIDEO, INC., Mendoza and
Yotoko, ordering them,
 1) to pay plaintiff the sum of ₱500,000.00 plus interests,
charges and penalties as agreed upon in the promissory
note of September 11, 1985, until the same is fully paid;
2) to pay plaintiff the sum equivalent to ten (10%) of the total
unpaid obligation as and for attorney’s fees, and
3) to pay the costs.

SO ORDERED."

Upon appeal by herein petitioners, the Court of Appeals rendered

its Decision dated September 21, 1998, affirming in toto the
Decision of the trial court. Petitioners’ motion for reconsideration
was denied in its Resolution dated December 3, 1999.

Hence, the instant petition.

The basic issue for our resolution is whether herein petitioners are
personally liable for TVI’s indebtedness of ₱500,000.00 with
respondent bank.

Both the trial court and the Appellate Court found that the petitioners
transferred the Beta video machines from TVI to FGT without the
consent of respondent bank. Also, upon inquiry of the sheriff,
petitioner Mendoza declined knowledge of the whereabouts of the
mortgaged video machines. Moreover, the fact that the NBI seized
the video machines from FGT glaringly shows that petitioners
transferred the same from TVI. More importantly, a comparison of
the list of video machines in the Chattel Mortgage Contract and the
list of video machines seized by the NBI from FGT shows that they
have the same serial numbers.

The courts below also found that TVI is petitioners’ mere alter ego
or business conduit. They control the affairs of TVI. Among its
stockholders or directors, they were the only ones who became
incorporators of FGT. They transferred the assets of TVI to FGT.

The general rule is that obligations incurred by a corporation, acting

through its directors, officers or employees, are its sole liabilities.
However, the veil with which the law covers and isolates the
corporation from its directors, officers or employees will be lifted
when the corporation is used by any of them as a cloak or cover for
fraud or illegality or injustice.9 Here, the fraud was committed by
petitioners to the prejudice of respondent bank. It bears emphasis
that as reported by the sheriff, TVI is no longer doing business at
its given address and its whereabouts cannot be established as yet.

Both the trial court and the Court of Appeals thus concluded that
petitioners succeeded to hide the chattels, preventing the sheriff to
foreclose the mortgage. Obviously, they acted in bad faith to
defraud respondent bank.

In fine, we hold that the Appellate Court, in affirming the Decision

of the trial court, correctly ruled that petitioners, not TVI, are the
ones personally liable to respondent bank for the payment of the
loan.

WHEREFORE, the petition is DENIED. Costs against petitioners.

SO ORDERED.

Panganiban, (Chairman), Corona, Carpio-Morales, and Garcia, JJ.,

concur.
 THIRD DIVISION
[G.R. No. 167560. September 17, 2008.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
DOMINADOR MENGUITO, respondent.
DECISION
AUSTRIA-MARTINEZ, J p:
Before the Court is a Petition for Review on Certiorari under Rule
45 of the Rules of Court, assailing the March 31, 2005 Decision 1
of the Court of Appeals (CA) which reversed and set aside the Court
of Tax Appeals (CTA) April 2, 2002 Decision 2 and October 10,
2002 Resolution 3 ordering Dominador Menguito (respondent) to
pay the Commissioner of Internal Revenue (petitioner) deficiency
income and percentage taxes and delinquency interest.
Based on the Joint Stipulation of Facts and Admissions 4 of the
parties, the CTA summarized the factual and procedural
antecedents of the case, the relevant portions of which read:
Petitioner Dominador Menguito [herein respondent] is a Filipino
citizen, of legal age, married to Jeanne Menguito and is engaged in
the restaurant and/or cafeteria business. For the years 1991, 1992
and 1993, its principal place of business was at Gloriamaris, CCP
Complex, Pasay City and later transferred to Kalayaan Bar (Copper
Kettle Cafeteria Specialist or CKCS), Departure Area, Ninoy Aquino
International Airport, Pasay City. During the same years, he also
operated a branch at Club John Hay, Baguio City carrying the
business name of Copper Kettle Cafeteria Specialist (Joint
Stipulation of Facts and Admissions, p. 133, CTA records).
xxx xxx xxx
Subsequently, BIR Baguio received information that Petitioner
[herein respondent] has undeclared income from Texas
Instruments and Club John Hay, prompting the BIR to conduct
another investigation. Through a letter dated July 28, 1997,
Spouses Dominador Menguito and Jeanne Menguito (Spouses
Menguito) were informed by the Assessment Division of the said
office that they have underdeclared sales totaling P48,721,555.96
(Exhibit 11, p. 83, BIR records). This was followed by a Preliminary
Ten (10) Day Letter dated August 11, 1997, informing Petitioner
[herein respondent] that in the investigation of his 1991, 1992 and
1993 income, business and withholding tax case, it was found out
that there is still due from him the total sum of P34,193,041.55 as
deficiency income and percentage tax.
On September 2, 1997, the assessment notices subject of the
instant petition were issued. These were protested by Ms. Jeanne
Menguito, through a letter dated September 28, 1997 (Exhibit 14,
p. 112, BIR Records), on the ground that the 40% deduction
allowed on their computed gross revenue, is unrealistic. Ms.
Jeanne Menguito requested for a period of thirty (30) days within
which to coordinate with the BIR regarding the contested
assessment.
On October 10, 1997, BIR Baguio replied, informing the Spouses
Menguito that the source of assessment was not through the
disallowance of claimed expenses but on data received from Club
John Hay and Texas Instruments Phils., Inc. Said letter gave the
spouses ten (10) days to present evidence (Exhibit 15, p. 110, BIR
Records).
In an effort to clear an alleged confusion regarding Copper Kettle
Cafeteria Specialist (CKCS) being a sole proprietorship owned by
the Spouses, and Copper Kettle Catering Services, Inc. (CKCS,
Inc.) being a corporation with whom Texas Instruments and Club
John Hay entered into a contract, Petitioner [respondent] submitted
to BIR Baguio a photocopy of the SEC Registration of Copper Kettle
Catering Services, Inc. on March 23, 1999 (pp. 134-141, BIR
Records).
On April 12, 1999, BIR Baguio wrote a letter to Spouses Menguito,
informing the latter that a reinvestigation or reconsideration cannot
be given due course by the mere submission of an uncertified
photocopy of the Certificate of Incorporation. Thus, it avers that the
amendment issued is still valid and enforceable.
On May 26, 1999, Petitioner [respondent] filed the present case,
praying for the cancellation and withdrawal of the deficiency income
tax and percentage tax assessments on account of prescription,
whimsical factual findings, violation of procedural due process on
the issuance of assessment notices, erroneous address of notices
and multiple credit/investigation by the Respondent [petitioner] of
Petitioner's [respondent's] books of accounts and other related
records for the same tax year.
Instead of filing an Answer, Respondent [herein petitioner] moved
to dismiss the instant petition on July 1, 1999, on the ground of lack
of jurisdiction. According to Respondent [petitioner], the
assessment had long become final and executory when Petitioner
[respondent] failed to comply with the letter dated October 10, 1997.
Petitioner opposed said motion on July 21, 1999, claiming that the
final decision on Petitioner's [respondents] protest is the April 12,
1999 letter of the Baguio Regional Office; therefore, the filing of the
action within thirty (30) days from receipt of the said letter was
seasonably filed. Moreover, Petitioner [respondent] asserted that
granting that the April 12, 1999 letter in question could not be
construed to mean as a denial or final decision of the protest, still
Petitioner's [respondent's] appeal was timely filed since
Respondent [petitioner] issued a Warrant of Distraint and/or Levy
against the Petitioner [respondent] on May 3, 1999, which warrant
constituted a final decision of the Respondent [petitioner] on the
protest of the taxpayer.
On September 3, 1999, this Court denied Respondent's
[petitioner's] 'Motion to Dismiss' for lack of merit.
Respondent [petitioner] filed his Answer on September 24, 1999,
raising the following Special and Affirmative Defenses:
xxx xxx xxx
5. Investigation disclosed that for taxable years 1991, 1992
and 1993, petitioner [respondent] filed false or fraudulent income
and percentage tax returns with intent to evade tax by under
declaring his sales.
6. The alleged duplication of investigation of petitioner
[respondent] by the BIR Regional Office in Baguio City and by the
Revenue District Office in Pasay City is justified by the finding of
fraud on the part of the petitioner [respondent], which is an
exception to the provision in the Tax Code that the examination and
inspection of books and records shall be made only once in a
taxable year (Section 235, Tax Code). At any rate, petitioner
[respondent], in a letter dated July 18, 1994, waived his right to the
consolidation of said investigation.
7. The aforementioned falsity or fraud was discovered on
August 5, 1997. The assessments were issued on September 2,
1997, or within ten (10) years from the discovery of such falsity or
fraud (Section 223, Tax Code). Hence, the assessments have not
prescribed.
8. Petitioner's [respondent's] allegation that the
assessments were not properly addressed is rendered moot and
academic by his acknowledgment in his protest letter dated
September 28, 1997 that he received the assessments.
9. Respondent [petitioner] complied with the provisions of
Revenue Regulations No. 12-85 by informing petitioner
[respondent] of the findings of the investigation in letters dated July
28, 1997 and August 11, 1997 prior to the issuance of the
assessments.
10. Petitioner [respondent] did not allege in his administrative
protest that there was a duplication of investigation, that the
assessments have prescribed, that they were not properly
addressed, or that the provisions of Revenue Regulations No. 12-
85 were not observed. Not having raised them in the administrative
level, petitioner [respondent] cannot raise the same for the first time
on appeal (Aguinaldo Industries Corp. vs. Commissioner of Internal
Revenue, 112 SCRA 136).
11. The assessments were issued in accordance with law and
regulations.
12. All presumptions are in favor of the correctness of tax
assessments (CIR vs. Construction Resources of Asia, Inc., 145
SCRA 67), and the burden to prove otherwise is upon petitioner
[respondent]. 5 (Emphasis supplied)
On April 2, 2002, the CTA rendered a Decision, the dispositive
portion of which reads:
Accordingly, Petitioner [herein respondent] is ORDERED to PAY
the Respondent [herein petitioner] the amount of P11,333,233.94
and P2,573,655.82 as deficiency income and percentage tax
liabilities, respectively for taxable years 1991, 1992 and 1993 plus
20% delinquency interest from October 2, 1997 until full payment
thereof.
SO ORDERED.
Respondent filed a motion for reconsideration but the CTA denied
the same in its Resolution of October 10, 2002.
Through a Petition for Review filed with the CA, respondent
questioned the CTA Decision and Resolution mainly on the ground
that Copper Kettle Catering Services, Inc. (CKCS, Inc.) was a
separate and distinct entity from Copper Kettle Cafeteria Specialist
(CKCS); the sales and revenues of CKCS, Inc. could not be
ascribed to CKCS; neither may the taxes due from one, charged to
the other; nor the notices to be served on the former, coursed
through the latter. 9 Respondent cited the Joint Stipulation in which
petitioner acknowledged that its (respondent's) business was called
Copper Kettle Cafeteria Specialist, not Copper Kettle Catering
Services, Inc.
Based on the unrefuted 11 CTA summary, the CA rendered the
Decision assailed herein, the dispositive portion of which reads:
WHEREFORE, the instant petition is GRANTED. Reversing the
assailed Decision dated April 2, 2002 and Resolution dated October
10, 2002, the deficiency income tax and percentage income tax
assessments against petitioner in the amounts of P11,333,233.94
and P2,573,655.82 for taxable years 1991, 1992 and 1993 plus the
20% delinquency interest thereon are annulled.
SO ORDERED.
Petitioner filed a motion for reconsideration but the CA denied the
same in its October 10, 2002 Resolution.
Hence, herein recourse to the Court for the reversal of the CA
decision and resolution on the following grounds:
I we will need more time to review and sort the records that may have
The Court of Appeals erred in reversing the decision of the Court of
Tax Appeals and in holding that Copper Kettle Cafeteria Specialist
owned by respondent and Copper Kettle Catering Services, Inc.
owned and managed by respondent's wife are not one and the
same.
II
The Court of Appeals erred in holding that respondent was denied
due process for failure of petitioner to validly serve respondent with
the post-reporting and pre-assessment notices as required by law.
On the first issue, the CTA has ruled that CKCS, Inc. and CKCS are
one and the same corporation because "[t]he contract between
Texas Instruments and Copper Kettle was signed by petitioner's
[respondent's] wife, Jeanne Menguito as proprietress."
However, the CA reversed the CTA on these grounds:
Respondent's [herein petitioner's] allegation that Copper Kettle
Catering Services, Inc. and Copper Kettle Cafeteria Specialists are
not distinct entities and that the under-declared sales/revenues of
Copper Kettle Catering Services, Inc. pertain to Copper Kettle
Cafeteria Specialist are belied by the evidence on record. In the
Joint Stipulation of Facts submitted before the tax court, respondent
[petitioner] admitted "that petitioner's [herein respondent's]
business name is Copper Kettle Cafeteria Specialist."
Also, the Certification of Club John Hay and Letter dated July 9,
1997 of Texas Instruments both addressed to respondent indicate
that these companies transacted with Copper Kettle Catering
Services, Inc., owned and managed by JEANNE G. MENGUITO,
NOT petitioner Dominador Menguito. The alleged under-declared
sales income subject of the present assessments were shown to
have been earned by Copper Kettle Catering Services, Inc. in its
commercial transaction with Texas Instruments and Camp John
Hay; NOT by petitioner's dealing with these companies. In fact,
there is nothing on record which shows that Texas Instruments and
Camp John Hay conducted business relations with Copper Kettle
Cafeteria Specialist, owned by herein petitioner Dominador
Menguito. In the absence, therefore, of clear and convincing
evidence showing that Copper Kettle Cafeteria Specialist and
Copper Kettle Catering Services, Inc. are one and the same,
respondent can NOT validly impute alleged underdeclared sales
income earned by Copper Kettle Catering Services, Inc. as sales
income of Copper Kettle Cafeteria Specialist. 15 (Emphasis
supplied)
Respondent is adamant that the CA is correct. Many times in the
past, the BIR had treated CKCS separately from CKCS, Inc.: from
May 1994 to June 1995, the BIR sent audit teams to examine the
books of account and other accounting records of CKCS, and
based on said audits, respondent was held liable for deficiency
taxes, all of which he had paid. 16 Moreover, the certifications 17
issued by Club John Hay and Texas Instruments identify the
concessionaire operating therein as CKCS, Inc., owned and
managed by his spouse Jeanne Menguito, and not CKCS.
Petitioner impugns the findings of the CA, claiming that these are
contradicted by evidence on record consisting of a reply to the
September 2, 1997 assessment notice of BIR Baguio which Jeanne
Menguito wrote on September 28, 1997, to wit:
We are in receipt of the assessment notice you have sent us, dated
September 2, 1997. Having taken hold of the same only now
following our travel overseas, we were not able to respond
immediately and manifest our protest. Also, with the impending
termination of our businesses at 19th Tee, Club John Hay and at
Texas Instruments, Loakan, Baguio City, we have already started
the transfer of our records and books in Baguio City to Manila that
to be presented relative to the assessment . . . . (Emphasis
supplied)
Petitioner insists that said reply confirms that the assessment notice
is directed against the businesses which she and her husband,
respondent herein, own and operate at Club John Hay and Texas
Instruments, and establishes that she is protesting said notice not
just for herself but also for respondent.
Moreover, petitioner argues that if it were true that CKCS, Inc. and
CKCS are separate and distinct entities, respondent could have
easily produced the articles of incorporation of CKCS, Inc.; instead,
what respondent presented was merely a photocopy of the
incorporation articles. Worse, petitioner adds, said document was
not offered in evidence before the CTA, but was presented only
before the CA.
Petitioner further insists that CKCS, Inc. and CKCS are merely
employing the fiction of their separate corporate existence to evade
payment of proper taxes; that the CTA saw through their ploy and
rightly disregarded their corporate individuality, treating them
instead as one taxable entity with the same tax base and liability;
23 and that the CA should have sustained the CTA.
In effect, petitioner would have the Court resolve a purely factual
issue of whether or not there is substantial evidence that CKCS,
Inc. and CKCS are one and the same taxable entity.
As a general rule, the Court does not venture into a trial of facts in
proceedings under Rule 45 of the Rules of Courts, for its only
function is to review errors of law. The Court declines to inquire into
errors in the factual assessment of the CA, for the latter's findings
are conclusive, especially when these are synonymous to those of
the CTA. But when the CA contradicts the factual findings of the
CTA, the Court deems it necessary to determine whether the CA
was justified in doing so, for one basic rule in taxation is that the
factual findings of the CTA, when supported by substantial
evidence, will not be disturbed on appeal unless it is shown that the
CTA committed gross error in its appreciation of facts.
The Court finds that the CA gravely erred when it ignored the
substantial evidence on record and reversed the CTA.
In a number of cases, the Court has shredded the veil of corporate
identity and ruled that where a corporation is merely an adjunct,
business conduit or alter ego of another corporation or when they
practice fraud on our internal revenue laws, he fiction of their
separate and distinct corporate identities shall be disregarded, and
both entities treated as one taxable person, subject to assessment
for the same taxable transaction.
The Court considers the presence of the following circumstances,
to wit: when the owner of one directs and controls the operations of
the other, and the payments effected or received by one are for the
accounts due from or payable to the other; 30 or when the
properties or products of one are all sold to the other, which in turn
immediately sells them to the public, 31 as substantial evidence in
support of the finding that the two are actually one juridical taxable
personality.
In the present case, overwhelming evidence supports the CTA in
disregarding the separate identity of CKCS, Inc. from CKCS and in
treating them as one taxable entity.
First, in respondent's Petition for Review before the CTA, he
expressly admitted that he "is engaged in restaurant and/or
cafeteria business" and that "[i]n 1991, 1992 and 1993, he also
operated a branch at Club John Hay, Baguio City with a business
name of Copper Kettle Cafeteria Specialist." 32 Respondent
repeated such admission in the Joint Stipulation. 33 And then in
Exhibit "1" 34 for petitioner, a July 18, 1994 letter sent by Jeanne
Menguito to BIR, Baguio City, she stated thus:
"in connection with the investigation of Copper Kettle Cafeteria
Specialist which is located at 19th Tee Club John Hay, Baguio City
under letter of authority nos. 0392897, 0392898, and 0392690
dated May 16, 1994, investigating my income, business, and
withholding taxes for the years 1991, 1992, and 1993." 35
(Emphasis supplied)
Jeanne Menguito signed the letter as proprietor of Copper Kettle
Cafeteria Specialist. 36 Related to Exhibit "1" is petitioner's Exhibit
"14", which is another letter dated September 28, 1997, in which
Jeanne Menguito protested the September 2, 1997 assessment
notices directed at Copper Kettle Cafeteria Specialist and referred
to the latter as "our business at 19th Tee Club John Hay and at
Texas Instruments". 37 Taken along with the Joint Stipulation,
Exhibits "A" through "C" and the August 3, 1993 Certification of
Camp John Hay, Exhibits "1" and "14", confirm that respondent,
together with his spouse Jeanne Menguito, own, operate and
manage a branch of Copper Kettle Cafeteria Specialist, also called
Copper Kettle Catering Services at Camp John Hay.
Moreover, in Exhibits "A" to "A-1", 38 Exhibits "B" to "B-1" 39 and
Exhibits "C" to "C-1" 40 which are lists of concessionaires that
operated in Club John Hay in 1992, 1993 and 1991, respectively,
41 it appears that there is no outlet with the name "Copper Kettle
Cafeteria Specialist" as claimed by respondent. The name that
appears in the lists is "19th TEE CAFETERIA (Copper Kettle, Inc.)."
However, in the light of the express admission of respondent that in
1991, 1992 and 1993, he operated a branch called Copper Kettle
Cafeteria Specialist in Club John Hay, the entries in Exhibits "A"
through "C" could only mean that said branch refers to "19th Tee
Cafeteria (Copper Kettle, Inc.)." There is no evidence presented by
respondent that contradicts this conclusion.
In addition, the August 9, 1993 Certification issued by Club John
Hay that "COPPER KETTLE CATERING SERVICES owned and
managed by MS. JEANNE G. MENGUITO is a concessionaire in
John Hay since July 1991 up to the present and is operating the
outlet 19TH TEE CAFETERIA AND THE TEE BAR" 42 convincingly
establishes that respondent's branch which he refers to as Copper
Kettle Cafeteria Specialist at Club John Hay also appears in the
latter's records as "Copper Kettle Catering Services" with an outlet
called "19th Tee Cafeteria and The Tee Bar".
Second, in Exhibit "8" 43 and Exhibit "E", 44 Texas Instruments
identified the concessionaire operating its canteen as "Copper
Kettle Catering Services, Inc." 45 and/or "COPPER KETTLE
CAFETERIA SPECIALIST SVCS". 46 It being settled that
respondent's "Copper Kettle Cafeteria Specialist" is also known as
"Copper Kettle Catering Services", and that respondent and Jeanne
Menguito both own, manage and act as proprietors of the business,
Exhibit "8" and Exhibit "E" further establish that, through said
business, respondent also had taxable transactions with Texas
Instruments.
In view of the foregoing facts and circumstances, the Articles of
Incorporation of CKCS, Inc. — a certified true copy of which
respondent attached only to his Reply filed with the CA 47 — cannot
insulate it from scrutiny of its real identity in relation to CKCS. It is
noted that said Articles of Incorporation of CKCS, Inc. was issued
in 1989, but documentary evidence indicate that after said date,
CKCS, Inc. has also assumed the name CKCS, and vice-versa. The
most concrete indication of this practice is the 1991 Quarterly
Percentage Tax Returns covering the business name/trade "19th
Tee Camp John Hay". In said returns, the taxpayer is identified as
"Copper Kettle Cafeteria Specialist" 48 or CKCS, not CKCS, Inc.
Yet, in several documents already cited, the purported owner of
19th Tee Bar at Club John Hay is CKCS, Inc.
All these pieces of evidence buttress the finding of the CTA that in
1991, 1992 and 1993, respondent, together with his spouse Jeanne
Menguito, owned and operated outlets in Club John Hay and Texas
Instruments under the names Copper Kettle Cafeteria Specialist or
CKCS and Copper Kettle Catering Services or Copper Kettle
Catering Services, Inc..
Turning now to the second issue.
In respondent's Petition for Review with the CTA, he questioned the
validity of the Assessment Notices, all dated September 2, 1997,
issued by BIR, Baguio City against him on the following grounds:
 1. The assessment notices, based on income and
percentage tax returns filed for 1991, 1992 and 1993,
were issued beyond the three-year prescriptive
period under Section 203 of the Tax Code;
2. The assessment notices were addressed to Copper
Kettle Specialist, Club John Hay, Baguio City,
despite notice to petitioner that respondent's
principal place of business was at the CCP Complex,
Pasay City.
3. The assessment notices were issued in violation of
the requirement of Revenue Regulations No. 12-85,
dated November 27, 1985, that the taxpayer be
issued a post-reporting notice and pre-assessment
notice before the preliminary findings of deficiency
may ripen into a formal assessment; 52 and
4. The assessment notices did not give respondent a
15-day period to reply to the findings of deficiency.
The Court notes that nowhere in his Petition for Review did
respondent deny that he received the September 2, 1997
assessment notices. Instead, during the trial, respondent's witness,
Ma. Theresa Nalda (Nalda), testified that she informed the BIR,
Baguio City "that there was no Notice or letter, that we did not
receive, perhaps, because they were not addressed to Mr.
Menguito's head office."
The CTA correctly upheld the validity of the assessment notices.
Citing Section 223 of the Tax Code which provides that the
prescriptive period for the issuance of assessment notices based
on fraud is 10 years, the CTA ruled that the assessment notices
issued against respondent on September 2, 1997 were timely
because petitioner discovered the falsity in respondent's tax returns
for 1991, 1992 and 1993 only on February 19, 1997. 55 Moreover,
in accordance with Section 2 of Revenue Regulations No. 12-85,
which requires that assessment notices be sent to the address
indicated in the taxpayer's return, unless the latter gives a notice of
change of address, the assessment notices in the present case
were sent by petitioner to Camp John Hay, for this was the address
respondent indicated in his tax returns. 56 As to whether said
assessment notices were actually received, the CTA correctly held
that since respondent did not testify that he did not receive said
notices, it can be presumed that the same were actually sent to and
received by the latter. The Court agrees with the CTA in considering
as hearsay the testimony of Nalda that respondent did not receive
the notices, because Nalda was not competent to testify on the
matter, as she was employed by respondent only in June 1998,
whereas the assessment notices were sent on September 2, 1997.
Anent compliance with the requirements of Revenue Regulations
No. 12-85, the CTA held:
BIR records show that on July 28, 1997, a letter was issued by BIR
Baguio to Spouses Menguito, informing the latter of their supposed
underdeclaration of sales totaling P48,721,555.96 and giving them
5 days to communicate any objection to the results of the
investigation (Exhibit 11, p. 83, BIR Records). Records likewise
reveal the issuance of a Preliminary Ten (10) Day Letter on August
11, 1997, informing Petitioner [respondent herein] that the sum of
P34,193,041.55 is due from him as deficiency income and
percentage tax (Exhibit 13, p. 173, BIR Records). Said letter gave
the Petitioner [respondent herein] a period of ten (10) days to
submit his objection to the proposed assessment, either personally
or in writing, together with any evidence he may want to present.
xxx xxx xxx
As to Petitioner's allegation that he was given only ten (10) days to
reply to the findings of deficiency instead of fifteen (15) days
granted to a taxpayer under Revenue Regulations No. 12-85, this
Court believes that when Respondent [petitioner herein] gave the
Petitioner [respondent herein] on October 10, 1997 an additional
period of ten (10) days to present documentary evidence or a total
of twenty (20) days, there was compliance with Revenue
Regulations No. 12-85 and the latter was amply given opportunity
to present his side . . .
The CTA further held that respondent was estopped from raising
procedural issues against the assessment notices, because these
were not cited in the September 28, 1997 letter-protest which his
spouse Jeanne Menguito filed with petitioner.
On appeal by respondent, 60 the CA resolved the issue, thus:
Moreover, if the taxpayer denies ever having received an
assessment from the BIR, it is incumbent upon the latter to prove
by competent evidence that such notice was indeed received by the
addressee. Here, respondent [petitioner herein] merely alleged that
it "forwarded" the assessment notices to petitioner [respondent
herein]. The respondent did not show any proof of mailing, registry
receipt or acknowledgment receipt signed by the petitioner
[respondent herein]. Since respondent [petitioner herein] has not
adduced sufficient evidence that petitioner [respondent herein] had
in fact received the pre-assessment notice and post-reporting
notice required by law, it cannot be assumed that petitioner
[respondent herein] had been served said notices.
No other ground was cited by the CA for the reversal of the finding
of the CTA on the issue.
The CA is gravely mistaken.
In their Petition for Review with the CTA, respondent expressly
stated that "[s]ometime in September 1997, petitioner [respondent
herein] received various assessment notices, all dated 02
September 1997, issued by BIR-Baguio for alleged deficiency
income and percentage taxes for taxable years ending 31
December 1991, 1992 and 1993 . . . ." 62 In their September 28,
1997 protest to the September 2, 1997 assessment notices,
respondent, through his spouses Jeanne Menguito, acknowledged
that "[they] are in receipt of the assessment notice you have sent
us, dated September 2, 1997 . . . ."
Respondent is therefore estopped from denying actual receipt of
the September 2, 1997 assessment notices, notwithstanding the
denial of his witness Nalda.
As to the address indicated on the assessment notices, respondent
cannot question the same for it is the said address which appears
in its percentage tax returns. 64 While respondent claims that he
had earlier notified petitioner of a change in his business address,
no evidence of such written notice was presented. Under Section
11 of Revenue Regulations No. 12-85, respondent's failure to give
written notice of change of address bound him to whatever
communications were sent to the address appearing in the tax
returns for the period involved in the investigation.
Thus, what remain in question now are: whether petitioner issued
and mailed a post-reporting notice and a pre-assessment notice;
and whether respondent actually received them.
There is no doubt that petitioner failed to prove that it served on
respondent a post-reporting notice and a pre-assessment notice.
Exhibit "11" 66 of petitioner is a mere photocopy of a July 28, 1997
letter it sent to respondent, informing him of the initial outcome of
the investigation into his sales, and the release of a preliminary
assessment upon completion of the investigation, with notice for the
latter to file any objection within five days from receipt of the letter.
"Exhibit 13" 67 of petitioner is also a mere photocopy of an August
11, 1997 Preliminary Ten (10) Day Letter to respondent, informing
him that he had been found to be liable for deficiency income and
percentage tax and inviting him to submit a written objection to the
proposed assessment within 10 days from receipt of notice. But
nowhere on the face of said documents can be found evidence that
these were sent to and received by respondent. Nor is there
separate evidence, such as a registry receipt of the notices or a
certification from the Bureau of Posts, that petitioner actually mailed
said notices.
However, while the lack of a post-reporting notice and pre-
assessment notice is a deviation from the requirements under
Section 1 68 and Section 2 69 of Revenue Regulations No. 12-85,
the same cannot detract from the fact that formal assessments were
issued to and actually received by respondents in accordance with
Section 228 of the National Internal Revenue Code which was in
effect at the time of assessment.

It should be emphasized that the stringent requirement that an

assessment notice be satisfactorily proven to have been issued and
released or, if receipt thereof is denied, that said assessment notice
have been served on the taxpayer, 70 applies only to formal
assessments prescribed under Section 228 of the National Internal
Revenue Code, but not to post-reporting notices or pre-assessment
notices. The issuance of a valid formal assessment is a substantive
prerequisite to tax collection, 71 for it contains not only a
computation of tax liabilities but also a demand for payment within
a prescribed period, thereby signaling the time when penalties and
interests begin to accrue against the taxpayer and enabling the
latter to determine his remedies therefor. Due process requires that
it must be served on and received by the taxpayer.

A post-reporting notice and pre-assessment notice do not bear the

gravity of a formal assessment notice. The post-reporting notice
and pre-assessment notice merely hint at the initial findings of the
BIR against a taxpayer and invites the latter to an "informal"
conference or clarificatory meeting. Neither notice contains a
declaration of the tax liability of the taxpayer or a demand for
payment thereof. Hence, the lack of such notices inflicts no
prejudice on the taxpayer for as long as the latter is properly served
a formal assessment notice. In the case of respondent, a formal
assessment notice was received by him as acknowledged in his
Petition for Review and Joint Stipulation; and, on the basis thereof,
he filed a protest with the BIR, Baguio City and eventually a petition
with the CTA.

WHEREFORE, the petition is GRANTED. The March 31, 2005

Decision of the Court of Appeals is REVERSED and SET ASIDE
and the April 2, 2002 Decision and October 10, 2002 Resolution of
the Court of Tax Appeals are REINSTATED.

SO ORDERED.

Ynares-Santiago, Chico-Nazario, Nachura and Reyes, JJ., concur.