a.

Theories in the formation of a Corporation

b.1. Theory of Concession/Fiat Theory/Government Paternity Theory -

1. Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242

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. 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.

2. Ang Pue & Co., vs. Secretary of Commerce and Industry, 5 SCRA 645
G.R. No. L-17295 July 30, 1962

ANG PUE & COMPANY, ET AL., plaintiffs-appellants, vs. SECRETARY OF COMMERCE AND
INDUSTRY, defendant-appellee. DIZON, J.:

Action for declaratory relief filed in the Court of First Instance of Iloilo by Ang Pue & Company, Ang Pue and Tan
Siong against the Secretary of Commerce and Industry to secure judgment "declaring that plaintiffs could extend
for five years the term of the partnership pursuant to the provisions of plaintiffs' Amendment to the Article of Co-
partnership."

The answer filed by the defendant alleged, in substance, that the extension for another five years of the term of
the plaintiffs' partnership would be in violation of the provisions of Republic Act No. 1180.

It appears that on May 1, 1953, Ang Pue and Tan Siong, both Chinese citizens, organized the partnership Ang
Pue & Company for a term of five years from May 1, 1953, extendible by their mutual consent. The purpose of the
partnership was "to maintain the business of general merchandising, buying and selling at wholesale and retail,
particularly of lumber, hardware and other construction materials for commerce, either native or foreign." The
corresponding articles of partnership (Exhibit B) were registered in the Office of the Securities & Exchange
Commission on June 16, 1953.

On June 19, 1954 Republic Act No. 1180 was enacted to regulate the retail business. It provided, among other
things, that, after its enactment, a partnership not wholly formed by Filipinos could continue to engage in the retail
business until the expiration of its term.

On April 15, 1958 — prior to the expiration of the five-year term of the partnership Ang Pue & Company, but after
the enactment of the Republic Act 1180, the partners already mentioned amended the original articles of part
ownership (Exhibit B) so as to extend the term of life of the partnership to another five years. When the amended
articles were presented for registration in the Office of the Securities & Exchange Commission on April 16, 1958,
registration was refused upon the ground that the extension was in violation of the aforesaid Act.

From the decision of the lower court dismissing the action, with costs, the plaintiffs interposed this appeal.

The question before us is too clear to require an extended discussion. To organize a corporation or a partnership
that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right
but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. That
the State, through Congress, and in the manner provided by law, had the right to enact Republic Act No. 1180 and
to provide therein that only Filipinos and concerns wholly owned by Filipinos may engage in the retail business
can not be seriously disputed. That this provision was clearly intended to apply to partnership already existing at
the time of the enactment of the law is clearly showing by its provision giving them the right to continue engaging
in their retail business until the expiration of their term or life.

To argue that because the original articles of partnership provided that the partners could extend the term of the
partnership, the provisions of Republic Act 1180 cannot be adversely affect appellants herein, is to erroneously
assume that the aforesaid provision constitute a property right of which the partners can not be deprived without
due process or without their consent. The agreement contain therein must be deemed subject to the law existing
at the time when the partners came to agree regarding the extension. In the present case, as already stated, when
the partners amended the articles of partnership, the provisions of Republic Act 1180 were already in force, and
there can be not the slightest doubt that the right claimed by appellants to extend the original term of their
partnership to another five years would be in violation of the clear intent and purpose of the law aforesaid.

WHEREFORE, the judgment appealed from is affirmed, with costs.

3. Torres vs. Court of Appeals, 278 SCRA 793

G.R. No. 120138 September 5, 1997

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO L. JOCSON, JR., MELVIN S.
JURISPRUDENCIA, AUGUSTUS CESAR AZURA and EDGARDO D. PABALAN, petitioners,

vs.COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, TORMIL REALTY &
DEVELOPMENT CORPORATION, ANTONIO P. TORRES, JR., MA. CRISTINA T. CARLOS, MA. LUISA T.
MORALES and DANTE D. MORALES, respondents.

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioners seek to annul the
decision of the Court of Appeals in CA-G.R. SP. No. 31748 dated 23 May 1994 and its subsequent resolution
dated 10 May 1995 denying petitioners' motion for reconsideration.

The present case involves two separate but interrelated conflicts. The facts leading to the first controversy are as
follows:

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of Tormil Realty &
Development Corporation while private respondents who are the children of Judge Torres' deceased brother
Antonio A. Torres, constituted the minority stockholders. In particular, their respective shareholdings and positions
in the corporation were as follows:

Name of Stockholder Number of Percentage Position(s) Shares


Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./Chair
 Antonio P. Torres, Jr. 8,290 4.73 Director

Milagros P. Torres 33,430 19.10 Dir./Treasurer
 Ma. Jacinta P. Torres 8,290 4.73 Director

Josefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.
 Ma. Luisa T. Morales 7,790 4.45 Director

Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.
 Dante D. Morales 500 .28 Director1


In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an "estate planning" scheme under
which he assigned to Tormil Realty & Development Corporation (Tormil for brevity) various real properties he
owned and his shares of stock in other corporations in exchange for 225,972 Tormil Realty shares. Hence, on
various dates in July and August of 1984, ten (10) deeds of assignment were executed by the late Judge Torres:

ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES TO BE ISSUED


1. July 13, 1984 TCT 81834 Quezon City 13,252
 2. July 13, 1984 TCT 77008 Manila

TCT 144240 Quezon City TCT 65689 Manila 78,493

TCT 109200 Manila
3. July 13, 1984 TCT 374079 Makati 8,307 7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283

4. July 24, 1984 TCT 41527 Pasay
 8. Aug. 07, 1984 China banking Corp. Stocks 6,300
TCT 41528 Pasay 9,855

TCT 41529 Pasay 9. Aug. 20, 1984 Ayala Corp. Stocks 7,468

5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000 10. Aug. 29, 1984 Ayala Fund Stocks 1,322

6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737 ———


225,9722


Consequently, the aforelisted properties were duly recorded in the inventory of assets of Tormil Realty and the
revenues generated by the said properties were correspondingly entered in the corporation's books of account
and financial records.

Likewise, all the assigned parcels of land were duly registered with the respective Register of Deeds in the name
of Tormil Realty, except for the ones located in Makati and Pasay City.

At the time of the assignments and exchange, however, only 225,000 Tormil Realty shares remained
unsubscribed, all of which were duly issued to and received by Judge Torres (as evidenced by stock certificates
Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25).3

Due to the insufficient number of shares of stock issued to Judge Torres and the alleged refusal of private
respondents to approve the needed increase in the corporation's authorized capital stock (to cover the shortage of
972 shares due to Judge Torres under the "estate planning" scheme), on 11 September 1986, Judge Torres
revoked the two (2) deeds of assignment covering the properties in Makati and Pasay City.4

Noting the disappearance of the Makati and Pasay City properties from the corporation's inventory of assets and
financial records private respondents, on 31 March 1987, were constrained to file a complaint with the Securities
and Exchange Commission (SEC) docketed as SEC Case No. 3153 to compel Judge Torres to deliver to Tormil
corporation the two (2) deeds of assignment covering the aforementioned Makati and Pasay City properties which
he had unilaterally revoked and to cause the registration of the corresponding titles in the name of Tormil. Private
respondents alleged that following the disappearance of the properties from the corporation's inventory of assets,
they found that on October 24, 1986, Judge Torres, together with Edgardo Pabalan and Graciano Tobias, then
General Manager and legal counsel, respectively, of Tormil, formed and organized a corporation named "Torres-
Pabalan Realty and Development Corporation" and that as part of Judge Torres' contribution to the new
corporation, he executed in its favor a Deed of Assignment conveying the same Makati and Pasay City properties
he had earlier transferred to Tormil.

The second controversy — involving the same parties — concerned the election of the 1987 corporate board of
directors.

The 1987 annual stockholders meeting and election of directors of Tormil corporation was scheduled on 25 March
1987 in compliance with the provisions of its by-laws.

Pursuant thereto, Judge Torres assigned from his own shares, one (l) share each to petitioners Tobias, Jocson,
Jurisprudencia, Azura and Pabalan. These assigned shares were in the nature of "qualifying shares," for the sole
purpose of meeting the legal requirement to be able to elect them (Tobias and company) to the Board of Directors
as Torres' nominees.

The assigned shares were covered by corresponding Tormil Stock Certificates Nos. 030, 029, 028, 027, 026 and
at the back of each certificate the following inscription is found:

The present certificate and/or the one share it represents, conformably to the purpose and intention of the Deed of
Assignment dated March 6, 1987, is not held by me under any claim of ownership and I acknowledge that I hold
the same merely as trustee of Judge Manuel A. Torres, Jr. and for the sole purpose of qualifying me as Director;
 (Signature of Assignee)5

The reason behind the aforestated action was to remedy the "inequitable lopsided set-up obtaining in the
corporation, where, notwithstanding his controlling interest in the corporation, the late Judge held only a single
seat in the nine-member Board of Directors and was, therefore, at the mercy of the minority, a combination of any
two (2) of whom would suffice to overrule the majority stockholder in the Board's decision making functions."6

On 25 March 1987, the annual stockholders meeting was held as scheduled. What transpired therein was ably
narrated by Attys. Benito Cataran and Bayani De los Reyes, the official representatives dispatched by the SEC to
observe the proceedings (upon request of the late Judge Torres) in their report dated 27 March 1987:

xxx xxx xxx

The undersigned arrived at 1:55 p.m. in the place of the meeting, a residential bungalow in Urdaneta Village,
Makati, Metro Manila. Upon arrival, Josefina Torres introduced us to the stockholders namely: Milagros Torres,
Antonio Torres, Jr., Ma. Luisa Morales, Ma. Cristina Carlos and Ma. Jacinta Torres. Antonio Torres, Jr. questioned
our authority and personality to appear in the meeting claiming subject corporation is a family and private firm. We
explained that our appearance there was merely in response to the request of Manuel Torres, Jr. and that SEC
has jurisdiction over all registered corporations. Manuel Torres, Jr., a septuagenarian, argued that as holder of the
major and controlling shares, he approved of our attendance in the meeting.

At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty. Graciano Tobias, Atty. Rodolfo Jocson, Jr., Atty.
Melvin Jurisprudencia, and Atty. Augustus Cesar Azura arrived. Atty. Azura told the body that they came as
counsels of Manuel Torres, Jr. and as stockholders having assigned qualifying shares by Manuel Torres, Jr.

The stockholders' meeting started at 2:45 p.m. with Mr. Pabalan presiding after verbally authorized by Manuel
Torres, Jr., the President and Chairman of the Board. The secretary when asked about the quorum, said that there
was more than a quorum. Mr. Pabalan distributed copies of the president's report and the financial
statements. Antonio Torres, Jr. requested time to study the said reports and brought out the question of auditing
the finances of the corporation which he claimed was approved previously by the board. Heated arguments
ensued which also touched on family matters. Antonio Torres, Jr. moved for the suspension of the meeting but
Manuel Torres, Jr. voted for the continuation of the proceedings.

Mr. Pabalan suggested that the opinion of the SEC representatives be asked on the propriety of suspending the
meeting but Antonio Torres, Jr. objected reasoning out that we were just observers.

When the Chairman called for the election of directors, the Secretary refused to write down the names of
nominees prompting Atty. Azura to initiate the appointment of Atty. Jocson, Jr. as Acting Secretary.

Antonio Torres, Jr. nominated the present members of the Board. At this juncture, Milagros Torres cried out and
told the group of Manuel Torres, Jr. to leave the house.

Manuel Torres, Jr., together with his lawyers-stockholders went to the residence of Ma. Jacinta Torres in San
Miguel Village, Makati, Metro Manila. The undersigned joined them since the group with Manuel Torres, Jr. the one
who requested for S.E.C. observers, represented the majority of the outstanding capital stock and still constituted
a quorum.

At the resumption of the meeting, the following were nominated and elected as directors for the year 1987-1988:

1. Manuel Torres, Jr. 6. Melvin Jurisprudencia
2. Ma. Jacinta Torres 7. Augustus Cesar Azura
3. Edgardo Pabalan 8. Josefina Torres
4. Graciano Tobias 9. Dante Morales

5. Rodolfo Jocson, Jr.
After the election, it was resolved that after the meeting, the new board of directors shall convene for the election
of officers. xxx xxx xxx7

Consequently, on 10 April 1987, private respondents instituted a complaint with the SEC (SEC Case No. 3161)
praying in the main, that the election of petitioners to the Board of Directors be annulled.

Private respondents alleged that the petitioners-nominees were not legitimate stockholders of Tormil because the
assignment of shares to them violated the minority stockholders' right of pre-emption as provided in the
corporation's articles and by-laws.

Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated for joint hearing and adjudication.

On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a decision in favor of private respondents.
The dispositive portion thereof states, thus:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering and directing the respondents, particularly respondent Manuel A. Torres, Jr., to turn over and deliver to
TORMIL through its Corporate Secretary, Ma. Cristina T. Carlos: (a) the originals of the Deeds of Assignment
dated July 13 and 24, 1984 together with the owner's duplicates of Transfer Certificates of Title Nos. 374079 of the
Registry of Deeds for Makati, and 41527, 41528 and 41529 of the Registry of Deeds for Pasay City and/or to
cause the formal registration and transfer of title in and over such real properties in favor of TORMIL with the
proper government agency; (b) all corporate books of account, records and papers as may be necessary for the
conduct of a comprehensive audit examination, and to allow the examination and inspection of such accounting
books, papers and records by any or all of the corporate directors, officers and stockholders and/or their duly
authorized representatives or auditors;

2. Declaring as permanent and final the writ of preliminary injunction issued by the Hearing Panel on February 13,
1989;

3. Declaring as null and void the election and appointment of respondents to the Board of Directors and executive
positions of TORMIL held on March 25, 1987, and all their acts and resolutions made for and in behalf of TORMIL
by authority of and pursuant to such invalid appointment & election held on March 25, 1987;

4. Ordering the respondents jointly and severally, to pay the complainants the sum of ONE HUNDRED
THOUSAND PESOS (P100,000.00) as and by way of attorney's fees.8

Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No. 339). Thereafter, on 3 April 1991,
during the pendency of said appeal, petitioner Manuel A. Torres, Jr. died. However, notice thereof was brought to
the attention of the SEC not by petitioners' counsel but by private respondents in a Manifestation dated 24 April
1991.9

On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds that no administrator or legal
representative of the late Judge Torres' estate has yet been appointed by the Regional Trial Court of Makati where
Sp. Proc. No. M-1768 ("In Matter of the Issuance of the Last Will and Testament of Manuel A Torres, Jr.") was
pending. Two similar motions for suspension were filed by petitioners on 28 June 1993 and 9 July 1993.

On 19 July 1993, the SEC en banc issued an Order denying petitioners' aforecited motions on the following
ground:

Before the filing of these motions, the Commission en banc had already completed all proceedings and had
likewise ruled on the merits of the appealed cases. Viewed in this light, we thus feel that there is nothing left to be
done except to deny these motions to suspend proceedings. 10

On the same date, the SEC en banc rendered a decision, the dispositive portion of which reads, thus:
WHEREFORE, premises considered, the appealed decision of the hearing panel is hereby affirmed and all
motions pending before us incident to this appealed case are necessarily DISMISSED.

SO ORDERED. 11

Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the Court of Appeals by way of a
petition for review (docketed as CA-G.R. SP No. 31748).

On 23 May 1994, the Court of Appeals rendered a decision, the dispositive portion of which states:

WHEREFORE, the petition for review is DISMISSED and the appealed decision is accordingly affirmed.

SO ORDERED. 12

From the said decision, petitioners filed a motion for reconsideration which was denied in a resolution issued by
the Court of Appeals dated 10 May 1995. 13

Insisting on their cause, petitioners filed the present petition for review alleging that the Court of Appeals
committed the following errors in its decision:

(1)

WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A FULL LENGTH DECISION, WITHOUT THE
EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. — AC NO. 339 BEING PROPERLY BROUGHT BEFORE
IT FOR REVIEW AND RE-EXAMINATION, AN OMISSION RESULTING IN A CLEAR TRANSGRESSION OR
CURTAILMENT OF THE RIGHTS OF THE HEREIN PETITIONERS TO PROCEDURAL DUE PROCESS;

(2)

WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE RESPONDENT S.E.C., WHICH IS VOID FOR
HAVING BEEN RENDERED WITHOUT THE PROPER SUBSTITUTION OF THE DECEASED PRINCIPAL
PARTY-RESPONDENT IN S.E.C.-AC NO. 339 AND CONSEQUENTLY, FOR WANT OF JURISDICTION OVER
THE SAID DECEASED'S TESTATE ESTATE, AND MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NON-
SUBSTITUTION BY ITS APPLICATION OF THE CIVIL LAW CONCEPT OF NEGOTIORUM GESTIO;

(3)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL RECORD OF
S.E.C. — AC NO. 339 NOT HAVING ACTUALLY BEEN RE-EXAMINED, THAT S.E.C. CASE NO. 3153
INVOLVED A SITUATION WHERE PERFORMANCE WAS IMPOSSIBLE (AS CONTEMPLATED UNDER
ARTICLE 1191 OF THE CIVIL CODE) AND WAS NOT A MERE CASE OF LESION OR INADEQUACY OF
CAUSE (UNDER ARTICLE 1355 OF THE CIVIL CODE) AS SO ERRONEOUSLY CHARACTERIZED BY THE
RESPONDENT S.E.C.; and,

(4)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL RECORD OF
S.E.C. — AC NO. 339 NOT HAVING ACTUALLY BEEN EXAMINED, THAT THE RECORDING BY THE LATE
JUDGE MANUEL A. TORRES, JR. OF THE QUESTIONED ASSIGNMENT OF QUALIFYING SHARES TO HIS
NOMINEES, WAS AFFIRMED IN THE STOCK AND TRANSFER BOOK BY AN ACTING CORPORATE
SECRETARY AND MOREOVER, THAT ACTUAL NOTICE OF SAID ASSIGNMENT WAS TIMELY MADE TO THE
OTHER STOCKHOLDERS. 14

We shall resolve the issues in seriatim.

I
Petitioners insist that the failure to transmit the original records to the Court of Appeals deprived them of
procedural due process. Without the evidence and the original records of the proceedings before the SEC, the
Court of Appeals, petitioners adamantly state, could not have possibly made a proper appreciation and correct
determination of the issues, particularly the factual issues, they had raised on appeal. Petitioners also assert that
since the Court of Appeals allegedly gave due course to their petition, the original records should have been
forwarded to said court.

Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated 27 February 1991) which provides
that:

8. WHEN PETITION GIVEN DUE COURSE. — The Court of Appeals shall give due course to the petition only
when it shows prima facie that the court, commission, board, office or agency concerned has committed errors of
fact or law that would warrant reversal or modification of the order, ruling or decision sought to be reviewed. The
findings of fact of the court commission, board, office or agency concerned when supported by substantial
evidence shall be final.

xxx xxx xxx

11. TRANSMITTAL OF RECORD. — Within fifteen (15) days from notice that the petition has been given due
course, the court, commission, board, office or agency concerned shall transmit to the Court of Appeals the
original or a certified copy of the entire record of the proceeding under review. The record to be transmitted may
be abridged by agreement of all parties to the proceeding. The Court of Appeals may require or permit subsequent
correction or addition to the record.

Petitioners contend that the Court of Appeals had given due course to their petition as allegedly indicated by the
following acts:

a) it granted the restraining order applied for by the herein petitioners, and after hearing, also the writ of
preliminary injunction sought by them; under the original SC Circular No. 1-91, a petition for review may be given
due course at the onset (paragraph 8) upon a mere prima facie finding of errors of fact or law having been
committed, and such prima facie finding is but consistent with the grant of the extra-ordinary writ of preliminary
injunction;

b) it required the parties to submit "simultaneous memoranda" in its resolution dated October 15, 1993 (this is in
addition to the comment required to be filed by the respondents) and furthermore declared in the same resolution
that the petition will be decided "on the merits," instead of outrightly dismissing the same;

c) it rendered a full length decision, wherein: (aa) it expressly declared the respondent S.E.C. as having erred in
denying the pertinent motions to suspend proceedings; (bb) it declared the supposed error as having become a
non-issue when the respondent C.A. "proceeded to hear (the) appeal"; (cc) it formulated and applied its own
theory of negotiorum gestio in justifying the non-substitution of the deceased principal party in S.E.C. — AC No.
339 and moreover, its theory of di minimis non curat lex (this, without first determining the true extent of and the
correct legal characterization of the so-called "shortage" of Tormil shares;

and, (dd) it expressly affirmed the assailed decision of respondent S.E.C. 15

Petitioners' contention is unmeritorious.

There is nothing on record to show that the Court of Appeals gave due course to the petition. The fact alone that
the Court of Appeals issued a restraining order and a writ of preliminary injunction and required the parties to
submit their respective memoranda does not indicate that the petition was given due course. The office of an
injunction is merely to preserve the status quo pending the disposition of the case. The court can require the
submission of memoranda in support of the respective claims and positions of the parties without necessarily
giving due course to the petition. The matter of whether or not to give due course to a petition lies in the discretion
of the court.
It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised Administrative Circular No. 1-95
(which took effect on 1 June 1995) wherein the procedure for appeals from quasi-judicial agencies to the Court of
Appeals was clarified thus:

10. Due course. — If upon the filing of the comment or such other pleadings or documents as may be required or
allowed by the Court of Appeals or upon the expiration of the period for the filing thereof, and on the bases of the
petition or the record the Court of Appeals finds prima facie that the court or agency concerned has committed
errors of fact or law that would warrant reversal or modification of the award, judgment, final order or resolution
sought to be reviewed, it may give due course to the petition; otherwise, it shall dismiss the same. The findings of
fact of the court or agency concerned, when supported by substantial evidence, shall be binding on the Court of
Appeals.

11. Transmittal of record. — Within fifteen (15) days from notice that the petition has been given due course, the
Court of Appeals may require the court or agency concerned to transmit the original or a legible certified true copy
of the entire record of the proceeding under review. The record to be transmitted may be abridged by agreement
of all parties to the proceeding. The Court of Appeals may require or permit subsequent correction of or addition to
the record. (Emphasis ours.)

The aforecited circular now formalizes the correct practice and clearly states that in resolving appeals from quasi
judicial agencies, it is within the discretion of the Court of Appeals to have the original records of the proceedings
under review be transmitted to it. In this connection petitioners' claim that the Court of Appeals could not have
decided the case on the merits without the records being brought before it is patently lame. Indubitably, the Court
of Appeals decided the case on the basis of the uncontroverted facts and admissions contained in the pleadings,
that is, the petition, comment, reply, rejoinder, memoranda, etc. filed by the parties.

II

Petitioners contend that the decisions of the SEC and the Court of Appeals are null and void for being rendered
without the necessary substitution of parties (for the deceased petitioner Manuel A. Torres, Jr.) as mandated by
Sec. 17, Rule 3 of the Revised Rules of Court, which provides as follows:

Sec. 17. Death of party. — After a party dies and the claim is not thereby extinguished, the court shall order, upon
proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a
period of thirty (30) days, or within such time as may be granted. If the legal representative fails to appear within
said time, the court may order the opposing party to procure the appointment of a legal representative of the
deceased within a time to be specified by the court, and the representative shall immediately appear for and on
behalf of the interest of the deceased. The court charges involved in procuring such appointment, if defrayed by
the opposing party, may be recovered as costs. The heirs of the deceased may be allowed to be substituted for
the deceased, without requiring the appointment of an executor or administrator and the court may appoint
guardian ad litem for the minor heirs.

Petitioners insist that the SEC en banc should have granted the motions to suspend they filed based as they were
on the ground that the Regional Trial Court of Makati, where the probate of the late Judge Torres' will was
pending, had yet to appoint an administrator or legal representative of his estate.

We are not unaware of the principle underlying the aforequoted provision:

It has been held that when a party dies in an action that survives, and no order is issued by the Court for the
appearance of the legal representative or of the heirs of the deceased to be substituted for the deceased, and as
a matter of fact no such substitution has ever been effected, the trial held by the court without such legal
representative or heirs, and the judgment rendered after such trial, are null and void because the court acquired
no jurisdiction over the persons of the legal representative or of the heirs upon whom the trial and the judgment
are not binding. 16

As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M-1768 before the Regional Trial Court
of Makati for the ante-mortem probate of his holographic will which he had executed on 31 October 1986.
Testifying in the said proceedings, Judge Torres confirmed his appointment of petitioner Edgardo D. Pabalan as
the sole executor of his will and administrator of his estate. The proceedings, however, were opposed by the same
parties, herein private respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma. Cristina T. Carlos, 17 who
are nephew and nieces of Judge Torres, being the children of his late brother Antonio A. Torres.

It can readily be observed therefore that the parties involved in the present controversy are virtually the same
parties fighting over the representation of the late Judge Torres' estate. It should be recalled that the purpose
behind the rule on substitution of parties is the protection of the right of every party to due process. It is to ensure
that the deceased party would continue to be properly represented in the suit through the duly appointed legal
representative of his estate. In the present case, this purpose has been substantially fulfilled (despite the lack of
formal substitution) in view of the peculiar fact that both proceedings involve practically the same parties. Both
parties have been fiercely fighting in the probate proceedings of Judge Torres' holographic will for appointment as
legal representative of his estate. Since both parties claim interests over the estate, the rights of the estate were
expected to be fully protected in the proceedings before the SEC en banc and the Court of Appeals. In either
case, whoever shall be appointed legal representative of Judge Torres' estate (petitioner Pabalan or private
respondents) would no longer be a stranger to the present case, the said parties having voluntarily submitted to
the jurisdiction of the SEC and the Court of Appeals and having thoroughly participated in the proceedings.

The foregoing rationate finds support in the recent case of Vda. de Salazar v. CA, 18 wherein the Court expounded
thus:

The need for substitution of heirs is based on the right to due process accruing to every party in any proceeding.
The rationale underlying this requirement in case a party dies during the pendency of proceedings of a nature not
extinguished by such death, is that . . . the exercise of judicial power to hear and determine a cause implicitly
presupposes in the trial court, amongst other essentials, jurisdiction over the persons of the parties. That
jurisdiction was inevitably impaired upon the death of the protestee pending the proceedings below such that
unless and until a legal representative is for him duly named and within the jurisdiction of the trial court, no
adjudication in the cause could have been accorded any validity or binding effect upon any party, in representation
of the deceased, without trenching upon the fundamental right to a day in court which is the very essence of the
constitutionally enshrined guarantee of due process.

We are not unaware of several cases where we have ruled that a party having died in an action that survives, the
trial held by the court without appearance of the deceased's legal representative or substitution of heirs and the
judgment rendered after such trial, are null and void because the court acquired no jurisdiction over the persons of
the legal representatives or of the heirs upon whom the trial and the judgment would be binding. This general rule
notwithstanding, in denying petitioner's motion for reconsideration, the Court of Appeals correctly ruled that formal
substitution of heirs is not necessary when the heirs themselves voluntarily appeared, participated in the case and
presented evidence in defense of deceased defendant. Attending the case at bench, after all, are these particular
circumstances which negate petitioner's belated and seemingly ostensible claim of violation of her rights to due
process. We should not lose sight of the principle underlying the general rule that formal substitution of heirs must
be effectuated for them to be bound by a subsequent judgment. Such had been the general rule established not
because the rule on substitution of heirs and that on appointment of a legal representative are jurisdictional
requirements per se but because non-compliance therewith results in the undeniable violation of the right to due
process of those who, though not duly notified of the proceedings, are substantially affected by the decision
rendered therein . . . .

It is appropriate to mention here that when Judge Torres died on April 3, 1991, the SEC en banc had already fully
heard the parties and what remained was the evaluation of the evidence and rendition of the judgment.

Further, petitioners filed their motions to suspend proceedings only after more than two (2) years from the death of
Judge Torres. Petitioners' counsel was even remiss in his duty under Sec. 16, Rule 3 of the Revised Rules of
Court. 19 Instead, it was private respondents who informed the SEC of Judge Torres' death through a
manifestation dated 24 April 1991.
For the SEC en banc to have suspended the proceedings to await the appointment of the legal representative by
the estate was impractical and would have caused undue delay in the proceedings and a denial of justice. There
is no telling when the probate court will decide the issue, which may still be appealed to the higher courts.

In any case, there has been no final disposition of the properties of the late Judge Torres before the SEC. On the
contrary, the decision of the SEC en banc as affirmed by the Court of Appeals served to protect and preserve his
estate. Consequently, the rule that when a party dies, he should be substituted by his legal representative to
protect the interests of his estate in observance of due process was not violated in this case in view of its peculiar
situation where the estate was fully protected by the presence of the parties who claim interests therein either as
directors, stockholders or heirs.

Finally, we agree with petitioners' contention that the principle of negotiorum gestio 20 does not apply in the
present case. Said principle explicitly covers abandoned or neglected property or business.

III

Petitioners find legal basis for Judge Torres' act of revoking the assignment of his properties in Makati and Pasay
City to Tormil corporation by relying on Art. 1191 of the Civil Code which provides that:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.

Petitioners' contentions cannot be sustained. We see no justifiable reason to disturb the findings of SEC, as
affirmed by the Court of Appeals:

We sustain the ruling of respondent SEC in the decision appealed from (Rollo, pp. 45-46) that —

. . . the shortage of 972 shares would not be valid ground for respondent Torres to unilaterally revoke the deeds of
assignment he had executed on July 13, 1984 and July 24, 1984 wherein he voluntarily assigned to TORMIL real
properties covered by TCT No. 374079 (Makati) and TCT No. 41527, 41528 and 41529 (Pasay) respectively.

A comparison of the number of shares that respondent Torres received from TORMIL by virtue of the "deeds of
assignment" and the stock certificates issued by the latter to the former readily shows that TORMIL had
substantially performed what was expected of it. In fact, the first two issuances were in satisfaction to the
properties being revoked by respondent Torres. Hence, the shortage of 972 shares would never be a valid ground
for the revocation of the deeds covering Pasay and Quezon City properties.

In Universal Food Corp. vs. CA, the Supreme Court held:

The general rule is that rescission of a contract will not be permitted for a slight or carnal breach, but only for such
substantial and fundamental breach as would defeat the very object of the parties in making the agreement.

The shortage of 972 shares definitely is not substantial and fundamental breach as would defeat the very object of
the parties in entering into contract. Art. 1355 of the Civil Code also provides: "Except in cases specified by law,
lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue
influences." There being no fraud, mistake or undue influence exerted on respondent Torres by TORMIL and the
latter having already issued to the former of its 225,000 unissued shares, the most logical course of action is to
declare as null and void the deed of revocation executed by respondent Torres. (Rollo, pp. 45-46.) 21
The aforequoted Civil Code provision does not apply in this particular situation for the obvious reason that a
specific number of shares of stock (as evidenced by stock certificates) had already been issued to the late Judge
Torres in exchange for his Makati and Pasay City properties. The records thus disclose:

DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OF ASSIGNMENT ASSIGNED TO BE ISSUED

COMPLIANCE*

1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rd
 5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th
TCT 144240 Quezon City)
6. August 6, 1984 Manila Jockey Club Stocks 48,737
2. July 13, 1984 TCT 77008 Manila)
 5th
TCT 65689 Manila) 78,493 2nd

TCT 102200 Manila) 7. August 7, 1984 San Miguel Corp. Stocks 50,238
8th
3. July 13, 1984 TCT 374079 Makati 8,307 1st
8. August 7, 1984 China Banking Corp. Stocks 6,300
4. July 24, 1984 TCT 41527 Pasay
 6th
TCT 41528 Pasay) 9,855 4th

TCT 41529 Pasay) 9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th

10. August 29, 1984 Ayala Fund Stocks 1,322.1)


—————

TOTAL 225,972.3

*Order of stock certificate issuances by TORMIL to respondent Torres relative to the Deeds of Assignment he
executed sometime in July and August, 1984. 22 (Emphasis ours.)

Moreover, we agree with the contention of the Solicitor General that the shortage of shares should not have
affected the assignment of the Makati and Pasay City properties which were executed in 13 and 24 July 1984 and
the consideration for which have been duly paid or fulfilled but should have been applied logically to the last
assignment of property — Judge Torres' Ayala Fund shares — which was executed on 29 August 1984. 23

IV

Petitioners insist that the assignment of "qualifying shares" to the nominees of the late Judge Torres (herein
petitioners) does not partake of the real nature of a transfer or conveyance of shares of stock as would call for the
"imposition of stringent requirements (with respect to the) recording of the transfer of said shares." Anyway,
petitioners add, there was substantial compliance with the above-stated requirement since said assignments were
entered by the late Judge Torres himself in the corporation's stock and transfer book on 6 March 1987, prior to the
25 March 1987 annual stockholders meeting and which entries were confirmed on 8 March 1987 by petitioner
Azura who was appointed Assistant Corporate Secretary by Judge Torres.

Petitioners further argue that:

10.10. Certainly, there is no legal or just basis for the respondent S.E.C. to penalize the late Judge Torres by
invalidating the questioned entries in the stock and transfer book, simply because he initially made those entries
(they were later affirmed by an acting corporate secretary) and because the stock and transfer book was in his
possession instead of the elected corporate secretary, if the background facts herein-before narrated and the
serious animosities that then reigned between the deceased Judge and his relatives are to be taken into account;

xxx xxx xxx

10.12. Indeed it was a practice in the corporate respondent, a family corporation with only a measly number of
stockholders, for the late judge to have personal custody of corporate records; as president, chairman and
majority stockholder, he had the prerogative of designating an acting corporate secretary or to himself make the
needed entries, in instances where the regular secretary, who is a mere subordinate, is unavailable or intentionally
defaults, which was the situation that obtained immediately prior to the 1987 annual stockholders meeting of
Tormil, as the late Judge Torres had so indicated in the stock and transfer book in the form of the entries now in
question;

10.13. Surely, it would have been futile nay foolish for him to have insisted under those circumstances, for the
regular secretary, who was then part of a group ranged against him, to make the entries of the assignments in
favor of his nominees; 24

Petitioners' contentions lack merit.

It is precisely the brewing family discord between Judge Torres and private respondents — his nephew and nieces
that should have placed Judge Torres on his guard. He should have been more careful in ensuring that his actions
(particularly the assignment of qualifying shares to his nominees) comply with the requirements of the law.
Petitioners cannot use the flimsy excuse that it would have been a vain attempt to force the incumbent corporate
secretary to register the aforestated assignments in the stock and transfer book because the latter belonged to the
opposite faction. It is the corporate secretary's duty and obligation to register valid transfers of stocks and if said
corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel
performance. 25 In other words, there are remedies within the law that petitioners could have availed of, instead of
taking the law in their own hands, as the cliche goes.

Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of Appeals:

We likewise sustain respondent SEC when it ruled, interpreting Section 74 of the Corporation Code, as follows
(Rollo, p. 45):

In the absence of (any) provision to the contrary, the corporate secretary is the custodian of corporate records.
Corollarily, he keeps the stock and transfer book and makes proper and necessary entries therein.

Contrary to the generally accepted corporate practice, the stock and transfer book of TORMIL was not kept by Ms.
Maria Cristina T. Carlos, the corporate secretary but by respondent Torres, the President and Chairman of the
Board of Directors of TORMIL. In contravention to the above cited provision, the stock and transfer book was not
kept at the principal office of the corporation either but at the place of respondent Torres.

These being the obtaining circumstances, any entries made in the stock and transfer book on March 8, 1987 by
respondent Torres of an alleged transfer of nominal shares to Pabalan and Co. cannot therefore be given any
valid effect. Where the entries made are not valid, Pabalan and Co. cannot therefore be considered stockholders
of record of TORMIL. Because they are not stockholders, they cannot therefore be elected as directors of
TORMIL. To rule otherwise would not only encourage violation of clear mandate of Sec. 74 of the Corporation
Code that stock and transfer book shall be kept in the principal office of the corporation but would likewise open
the flood gates of confusion in the corporation as to who has the proper custody of the stock and transfer book
and who are the real stockholders of records of a certain corporation as any holder of the stock and transfer book,
though not the corporate secretary, at pleasure would make entries therein.

The fact that respondent Torres holds 81.28% of the outstanding capital stock of TORMIL is of no moment and is
not a license for him to arrogate unto himself a duty lodged to (sic) the corporate secretary. 26

All corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple family
corporation is not an exemption. Such corporations cannot have rules and practices other than those established
by law.

WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED.

SO ORDERED.
 b.2. Theory of Enterprise Entity

1.Philippine Stock Exchange, Inc. Vs. Court of Appeals, 281 SCRA 232
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.

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.

(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 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.
 B. Attributes of the Corporation

a. Artificial Being

1. PNB vs. Andrada Electric & Engineering Co., 381 SCRA 244
G.R. No. 142936 April 17, 2002

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners, vs.

ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.

PANGANIBAN, J.:

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

Statement of the Case

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

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

The Facts

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

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

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

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

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

‘(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine generating set[s];
‘(e) Installation of turbine and diesel generating sets including transformer, switchboard, electrical wirings and pipe
provided those stated units are completely supplied with their accessories;

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

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

‘(a) Supply of electrical devices; ‘(f) Supply of parts and related works for turbine
generator;
‘(b) Extra mechanical works;
‘(g) Supply of electrical equipment for machinery;
‘(c) Extra fabrication works;
‘(h) Supply of diesel engine parts and other related
‘(d) Supply of materials and consumable items; works including fabrication of parts.’


‘(e) Electrical shop repair;

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

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

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

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

"The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground that the
complaint failed to state sufficient allegations to establish a cause of action against both defendants, inasmuch as
there is lack or want of privity of contract between the plaintiff and the two defendants, the PNB and NASUDECO,
said defendants citing Article 1311 of the New Civil Code, and the case law ruling in Salonga v. Warner Barnes &
Co., 88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214.

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

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

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

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

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

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

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

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

‘WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant Corporation, Philippine
National Bank (PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA
SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally the former the following:
‘1. The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from September 25,
1980 until fully paid;
‘2. The sum of P102,724.76 as attorney’s fees; and,
‘3. Costs.
‘SO ORDERED.
‘Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO

‘Judge’"3
Ruling of the Court of Appeals

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

Hence, this Petition.5

Issues

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

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

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

Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid debts of
PASUMIL to respondent.

This Court’s Ruling

The Petition is meritorious.

Main Issue:

Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of Court.
7 To this rule, however, there are some exceptions enumerated in Fuentes v. Court of Appeals.8 After a careful

scrutiny of the records and the pleadings submitted by the parties, we find that the lower courts misappreciated
the evidence presented.9 Overlooked by the CA were certain relevant facts that would justify a conclusion different
from that reached in the assailed Decision.10

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

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

Piercing the Corporate

Veil Not Warranted

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

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

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

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

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

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

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

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

A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the
assets as the highest bidder at the public auction conducted.39 The bank was justified in foreclosing the mortgage,
because the PASUMIL account had incurred arrearages of more than 20 percent of the total outstanding
obligation.40 Thus, DBP had not only a right, but also a duty under the law to foreclose the subject properties.41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired PASUMIL’s assets that DBP had
foreclosed and purchased in the normal course. Petitioner bank was likewise tasked to manage temporarily the
operation of such assets either by itself or through a subsidiary corporation.44

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

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

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

No Merger or Consolidation

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

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

The merger, however, does not become effective upon the mere agreement of the constituent corporations.
55 Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of

stockholders and creditors, there must be an express provision of law authorizing them.56 For a valid merger or
consolidation, the approval by the Securities and Exchange Commission (SEC) of the articles of merger or
consolidation is required.57 These articles must likewise be duly approved by a majority of the respective
stockholders of the constituent corporations.58

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

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

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

the contrary.63

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement as to
costs. SO ORDERED.
 2. Vasquez vs. Borja, 74 Phil. 560
G.R. No. L-48930 February 23, 1944
ANTONIO VAZQUEZ, petitioner, vs. FRANCISCO DE BORJA, respondent.
x---------------------------------------------------------x
G.R. No. L-48931 February 23, 1944
FRANCISCO DE BORJA, petitioner, vs. ANTONIO VAZQUEZ, respondent.
OZAETA, J.:
This action was commenced in the Court of First Instance of Manila by Francisco de Borja against Antonio
Vazquez and Fernando Busuego to recover from them jointly and severally the total sum of P4,702.70 upon three
alleged causes of action, to wit: First, that in or about the month of January, 1932, the defendants jointly and
severally obligated themselves to sell to the plaintiff 4,000 cavans of palay at P2.10 per cavan, to be delivered
during the month of February, 1932, the said defendants having subsequently received from the plaintiff in virtue
of said agreement the sum of P8,400; that the defendants delivered to the plaintiff during the months of February,
March, and April, 1932, only 2,488 cavans of palay of the value of P5,224.80 and refused to deliver the balance of
1,512 cavans of the value of P3,175.20 notwithstanding repeated demands. Second, that because of defendants'
refusal to deliver to the plaintiff the said 1,512 cavans of palay within the period above mentioned, the plaintiff
suffered damages in the sum of P1,000. And, third, that on account of the agreement above mentioned the plaintiff
delivered to the defendants 4,000 empty sacks, of which they returned to the plaintiff only 2,490 and refused to
deliver to the plaintiff the balance of 1,510 sacks or to pay their value amounting to P377.50; and that on account
of such refusal the plaintiff suffered damages in the sum of P150.

The defendant Antonio Vazquez answered the complaint, denying having entered into the contract mentioned in
the first cause of action in his own individual and personal capacity, either solely or together with his codefendant
Fernando Busuego, and alleging that the agreement for the purchase of 4,000 cavans of palay and the payment
of the price of P8,400 were made by the plaintiff with and to the Natividad-Vasquez Sabani Development Co., Inc.,
a corporation organized and existing under the laws of the Philippines, of which the defendant Antonio Vazquez
was the acting manager at the time the transaction took place. By way of counterclaim, the said defendant alleged
that he suffered damages in the sum of P1,000 on account of the filing of this action against him by the plaintiff
with full knowledge that the said defendant had nothing to do whatever with any and all of the transactions
mentioned in the complaint in his own individual and personal capacity.

The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to the plaintiff the sum of
P3,175.20 plus the sum of P377.50, with legal interest on both sums, and absolving the defendant Fernando
Busuego (treasurer of the corporation) from the complaint and the plaintiff from the defendant Antonio Vazquez'
counterclaim. Upon appeal to the Court of Appeals, the latter modified that judgment by reducing it to the total sum
of P3,314.78, with legal interest thereon and the costs. But by a subsequent resolution upon the defendant's
motion for reconsideration, the Court of Appeals set aside its judgment and ordered that the case be remanded to
the court of origin for further proceedings. The defendant Vazquez, not being agreeable to that result, filed the
present petition for certiorari (G.R. No. 48930) to review and reverse the judgment of the Court of Appeals; and
the plaintiff Francisco de Borja, excepting to the resolution of the Court of Appeals whereby its original judgment
was set aside and the case was ordered remanded to the court of origin for further proceedings, filed a cross-
petition for certiorari (G.R. No. 48931) to maintain the original judgment of the Court of Appeals.

The original decision of the Court of Appeals and its subsequent resolutions on reconsideration read as follows:

Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-apelante vendio al demandante 4,000

cavanes de palay al precio de P2.10 el cavan, de los cuales, dicho demandante solamente recibio 2,583 cavanes;
y que asimismo recibio para su envase 4,000 sacos vacios. Esta provbado que de dichos 4,000 sacos vacios
solamente se entregaron, 2,583 quedando en poder del demandado el resto, y cuyo valor es el de P0.24 cada
uno. Presentada la demanda contra los demandados Antonio Vazquez y Fernando Busuego para el pago de la
cantidad de P4,702.70, con sus intereses legales desde el 1.o de marzo de 1932 hasta su completo pago y las
costas, el Juzgado de Primera Instancia de Manila el asunto condenando a Antonio Vazquez a pagar al
demandante la cantidad de P3,175.20, mas la cantidad de P377.50, con sus intereses legales, absolviendo al
demandado Fernando Busuego de la demanda y al demandante de la reconvencion de los demandados, sin
especial pronunciamiento en cuanto a las costas. De dicha decision apelo el demandado Antonio Vazquez,
apuntado como principal error el de que el habia sido condenado personalmente, y no la corporacion por el
representada.

Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a favor de Francisco de Borja de
los 4,000 cavanes de palay fue en su capacidad de Presidente interino y Manager de la corporacion Natividad-
Vazquez Sabani Development Co., Inc. Asi resulta del Exh. 1, que es la copia al carbon del recibo otorgado por el
demandado Vazquez, y cuyo original lo habia perdido el demandante, segun el. Asi tambien consta en los libros
de la corporacion arriba mencionada, puesto que en los mismos se ha asentado tanto la entrada de los P8,400,
precio del palay, como su envio al gobierno en pago de los alquileres de la Hacienda Sabani. Asi mismo lo
admitio Francisco de Borja al abogado Sr. Jacinto Tomacruz, posterior presidente de la corporacion sucesora en
el arrendamiento de la Sabani Estate, cuando el solicito sus buenos oficios para el cobro del precio del palay no
entregado. Asi igualmente lo declaro el que hizo entrega de parte del palay a Borja, Felipe Veneracion, cuyo
testimonio no ha sido refutado. Y asi se deduce de la misma demanda, cuando se incluyo en ella a Fernando
Busuego, tesorero de la Natividad-Vazquez Sabani Development Co., Inc.

Siendo esto asi, la principal responsable debe ser la Natividad-Vazquez Sabani Development Co., Inc., que
quedo insolvente y dejo de existir. El Juez sentenciador declaro, sin embargo, al demandado Vazquez
responsable del pago de la cantidad reclamada por su negligencia al vender los referidos 4,000 cavanes de palay
sin averiguar antes si o no dicha cantidad existia en las bodegas de la corporacion.

Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a Francisco de Borja, el mismo
demandado vendio a Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el cavan, y decimos 'despues' porque
esta ultima venta aparece asentada despues de la primera. Segun esto, el apelante no solamente obro con
negligencia, sino interviniendo culpa de su parte, por lo que de acuerdo con los arts. 1102, 1103 y 1902 del
Codigo Civil, el debe ser responsable subsidiariamente del pago de la cantidad objecto de la demanda.

En meritos de todo lo expuesto, se confirma la decision apelada con la modificacion de que el apelante debe
pagar al apelado la suma de P2,295.70 como valor de los 1,417 cavanes de palay que dejo de entregar al
demandante, mas la suma de P339.08 como importe de los 1,417 sacos vacios, que dejo de devolver, a razon de
P0.24 el saco, total P3,314.78, con sus intereses legales desde la interposicion de la demanda y las costas de
ambas instancias.

Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre de 1942, y alegandose en la

misma que cuando el apelante vendio los 1,500 cavanes de palay a Ah Phoy, la corporacion todavia tenia
bastante existencia de dicho grano, y no estando dicho extremo suficientemente discutido y probado, y pudiendo
variar el resultado del asunto, dejamos sin efecto nuestra citada decision, y ordenamos la devolucion de la causa
al Juzgado de origen para que reciba pruebas al efecto y dicte despues la decision correspondiente.

Upon consideration of the motion of the attorney for the plaintiff-appellee in case CA-G.R. No. 8676, Francisco de
Borja vs. Antonio Vasquez et al., praying, for the reasons therein given, that the resolution of December 22, 1942,
be reconsidered: Considering that said resolution remanding the case to the lower court is for the benefit of the
plaintiff-appellee to afford him opportunity to refute the contention of the defendant-appellant Antonio Vazquez,
motion denied.

The action is on a contract, and the only issue pleaded and tried is whether the plaintiff entered into the contract
with the defendant Antonio Vazquez in his personal capacity or as manager of the Natividad-Vazquez Sabani
Development Co., Inc. The Court of Appeals found that according to the preponderance of the evidence "the sale
made by Antonio Vazquez in favor of Francisco de Borja of 4,000 cavans of palay was in his capacity as acting
president and manager of the corporation Natividad-Vazquez Sabani Development Co., Inc." That finding of fact is
final and, it resolving the only issue involved, should be determinative of the result.

The Court of Appeals doubly erred in ordering that the cause be remanded to the court of origin for further trial to
determine whether the corporation had sufficient stock of palay at the time appellant sold, 1500 cavans of palay to
Kwong Ah Phoy. First, if that point was material to the issue, it should have been proven during the trial; and the
statement of the court that it had not been sufficiently discussed and proven was no justification for ordering a new
trial, which, by the way, neither party had solicited but against which, on the contrary, both parties now vehemently
protest. Second, the point is, in any event, beside the issue, and this we shall now discuss in connection with the
original judgment of the Court of Appeals which the plaintiff cross-petitioner seeks to maintain.

The action being on a contract, and it appearing from the preponderance of the evidence that the party liable on
the contract is the Natividad-Vazquez Sabani Development Co., Inc. which is not a party herein, the complaint
should have been dismissed. Counsel for the plaintiff, in his brief as respondent, argues that altho by the
preponderance of the evidence the trial court and the Court of Appeals found that Vazquez celebrated the contract
in his capacity as acting president of the corporation and altho it was the latter, thru Vazquez, with which the
plaintiff had contracted and which, thru Vazquez, had received the sum of P8,400 from Borja, and altho that was
true from the point of view of a legal fiction, "ello no impede que tambien sea verdad lo alegado en la demanda de
que la misma persona de Vasquez fue la que contrato con Borja y que la misma persona de Vasquez fue quien
recibio la suma de P8,400." But such argument is invalid and insufficient to show that the president of the
corporation is personally liable on the contract duly and lawfully entered into by him in its behalf.

It is well known that a corporation is an artificial being invested by law with a personality of its own, separate and
distinct from that of its stockholders and from that of its officers who manage and run its affairs. The mere fact that
its personality is owing to a legal fiction and that it necessarily has to act thru its agents, does not make the latter
personally liable on a contract duly entered into, or for an act lawfully performed, by them for an in its behalf. The
legal fiction by which the personality of a corporation is created is a practical reality and necessity. Without it no
corporate entities may exists and no corporate business may be transacted. Such legal fiction may be disregarded
only when an attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose. No such thing has
been alleged or proven in this case. It has not been alleged nor even intimated that Vazquez personally benefited
by the contract of sale in question and that he is merely invoking the legal fiction to avoid personal liability. Neither
is it contended that he entered into said contract for the corporation in bad faith and with intent to defraud the
plaintiff. We find no legal and factual basis upon which to hold him liable on the contract either principally or
subsidiarily.

The trial court found him guilty of negligence in the performance of the contract and held him personally liable on
that account. On the other hand, the Court of Appeals found that he "no solamente obro con negligencia, sino
interveniendo culpa de su parte, por lo que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe
ser responsable subsidiariamente del pago de la cantidad objeto de la demanda." We think both the trial court and
the Court of Appeals erred in law in so holding. They have manifestly failed to distinguish a contractual from an
extracontractual obligation, or an obligation arising from contract from an obligation arising from culpa aquiliana.
The fault and negligence referred to in articles 1101-1104 of the Civil Code are those incidental to the fulfillment or
nonfullfillment of a contractual obligation; while the fault or negligence referred to in article 1902 is the culpa
aquiliana of the civil law, homologous but not identical to tort of the common law, which gives rise to an obligation
independently of any contract. (Cf. Manila R.R. Co. vs. Cia. Trasatlantica, 38 Phil., 875, 887-890;
Cangco vs. Manila R.R. Co., 38 Phil. 768.) The fact that the corporation, acting thru Vazquez as its manager, was
guilty of negligence in the fulfillment of the contract, did not make Vazquez principally or even subsidiarily liable for
such negligence. Since it was the corporation's contract, its nonfulfillment, whether due to negligence or fault or to
any other cause, made the corporation and not its agent liable.

On the other hand if independently of the contract Vazquez by his fault or negligence cause damaged to the
plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But then the plaintiff's cause of action
should be based on culpa aquiliana and not on the contract alleged in his complaint herein; and Vazquez' liability
would be principal and not merely subsidiary, as the Court of Appeals has erroneously held. No such cause of
action was alleged in the complaint or tried by express or implied consent of the parties by virtue of section 4 of
Rule 17. Hence the trial court had no jurisdiction over the issue and could not adjudicate upon it (Reyes vs. Diaz,
G.R. No. 48754.) Consequently it was error for the Court of Appeals to remand the case to the trial court to try and
decide such issue.

It only remains for us to consider petitioner's second assignment of error referring to the lower courts' refusal to
entertain his counterclaim for damages against the respondent Borja arising from the bringing of this action. The
lower courts having sustained plaintiff's action. The finding of the Court of Appeals that according to the
preponderance of the evidence the defendant Vazquez celebrated the contract not in his personal capacity but as
acting president and manager of the corporation, does not warrant his contention that the suit against him is
malicious and tortious; and since we have to decide defendant's counterclaim upon the facts found by the Court of
Appeals, we find no sufficient basis upon which to sustain said counterclaim. Indeed, we feel that a a matter of
moral justice we ought to state here that the indignant attitude adopted by the defendant towards the plaintiff for
having brought this action against him is in our estimation not wholly right. Altho from the legal point of view he
was not personally liable for the fulfillment of the contract entered into by him on behalf of the corporation of which
he was the acting president and manager, we think it was his moral duty towards the party with whom he
contracted in said capacity to see to it that the corporation represented by him fulfilled the contract by delivering
the palay it had sold, the price of which it had already received. Recreant to such duty as a moral person, he has
no legitimate cause for indignation. We feel that under the circumstances he not only has no cause of action
against the plaintiff for damages but is not even entitled to costs.

The judgment of the Court of Appeals is reversed, and the complaint is hereby dismissed, without any finding as to
costs.

Separate Opinions

PARAS, J., dissenting:

Upon the facts of this case as expressly or impliedly admitted in the majority opinion, the plaintiff is entitled to a
judgment against the defendant. The latter, as acting president and manager of Natividad-Vazquez Sabani
Development Co., Inc., and with full knowledge of the then insolvent status of his company, agreed to sell to the
plaintiff 4,000 cavans of palay. Notwithstanding the receipt from the plaintiff of the full purchase price, the
defendant delivered only 2,488 cavans and failed and refused to deliver the remaining 1,512 cavans and failed
and refused to deliver the remaining 1,512 cavans and a quantity of empty sacks, or their value. Such failure
resulted, according to the Court of First Instance of Manila and the Court of Appeals, from his fault or negligence.

It is true that the cause of action made out by the complaint is technically based on a contract between the plaintiff
and Natividad-Vazquez Sabani Development Co., Inc. which is not a party to this case. Nevertheless, inasmuch
as it was proven at the trial that the defendant was guilty of fault in that he prevented the performance of the
plaintiff's contract and also of negligence bordering on fraud which cause damage to the plaintiff, the error of
procedure should not be a hindrance to the rendition of a decision in accordance with the evidence actually
introduced by the parties, especially when in such a situation we may order the necessary amendment of the
pleadings, or even consider them correspondingly amended.

As already stated, the corporation of which the defendant was acting president and manager was, at the time he
made the sale of the plaintiff, known to him to be insolvent. As a matter of fact, said corporation was soon
thereafter dissolved. There is admitted damage on the part of the plaintiff, proven to have been inflicted by reason
of the fault or negligence of the defendant. In the interest of simple justice and to avoid multiplicity of suits I am
therefore impelled to consider the present action as one based on fault or negligence and to sentence the
defendant accordingly. Otherwise, he would be allowed to profit by his own wrong under the protective cover of
the corporate existence of the company he represented. It cannot be pretended that any advantage under the sale
inured to the benefit of Natividad-Vazquez Sabani Development Co., Inc. and not of the defendant personally,
since the latter undoubtedly owned a considerable part of its capital.
 3. International Express Travel & Tour Services, Inc. Vs. Court Of Appeals, 343
SCRA 674

[G.R. No. 119002. October 19, 2000.]

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., Petitioner, v. HON. COURT
OF APPEALS, HENRI KAHN, PHILIPPINES FOOTBALL FEDERATION, Respondents.

DECISION KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former offered its services as a travel agency
to the latter. 1

The offer was accepted.chanrob1es virtua1 1aw 1ibrary

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to
the South East Asian Games in Kuala Lumpur as well as various other trips to the People’s Republic
of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets
received, the Federation made two partial payments, both in September of 1989, in the total
amount of P176,467.50. 2

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand
letter requesting for the amount of P265,894.33. 3 On 30 October 1989, the Federation, through
the Project Gintong Alay, paid the amount of P31,603.00. 4

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial
payment for the outstanding balance of the Federation. 5 Thereafter, no further payments were
made despite repeated demands.chanrob1es virtua1 1aw 1ibrary

This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued
Henri Kahn in his personal capacity and as President of the Federation and impleaded the
Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid
balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly
guaranteed the said obligation. 6

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation
owed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred
that the petitioner has no cause of action against him either in his personal capacity or in his official
capacity as president of the Federation. He maintained that he; did not guarantee payment but
merely acted as an agent of the Federation which has a separate and distinct juridical personality. 7

On the other hand, the Federation failed to file its answer, hence, was declared in default by the
trial court. 8

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared
Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said
ruling, the trial court rationalized:chanrob1es virtual 1aw library

Defendant Henri Kahn would have been correct in his contentions had it been duly established that
defendant Federation is a corporation The trouble, however, is that neither the plaintiff nor the
defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant
Federation. In paragraph 2 of its complaint, plaintiff asserted that "defendant Philippine Football
Federation is a sports association . . ." This has not been denied by defendant Henri Kahn in his
Answer. Being the President of defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the
plaintiff that it is a mere sports association if it were a domestic corporation. But he did not.

x x x

A voluntary unincorporated association, like defendant Federation has no power to enter into, or to
ratify, a contract. The contract entered into by its officers or agents on behalf of such association is
not binding on, or enforceable against it. The officers or agents are themselves personally liable.
x x x9

The dispositive portion of the trial court’s decision reads:chanrob1es virtual 1aw library

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal
sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the
date the complaint was filed, until the principal obligation is fully liquidated; and another sum of
P15,000.00 for attorney’s fees.chanrob1es virtua1 1aw 1ibrary

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the
defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn. 10

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the
respondent court rendered a decision reversing the trial court, the decretal portion of said decision
reads:chanrob1es virtual 1aw library

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET
ASIDE and another one is rendered dismissing the complaint against defendant Henri S. Kahn. 11

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation.
It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the
Federation, he should not be held liable for the same as said entity has a separate and distinct
personality from its officers.

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the
Federation be held liable for the unpaid obligation. The same was denied by the appellate court in
its resolution of 8 February 1995, where it stated that:chanrob1es virtua1 1aw 1ibrary

As to the alternative prayer for the Modification of the Decision by expressly declaring in the
dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid
obligation, it should be remembered that the trial court dismissed the complaint against the
Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the
Philippine Football Federation is not a party to this appeal and consequently, no judgment may be
pronounced by this Court against the PFF without violating the due process clause, let alone the
fact that the judgment dismissing the complaint against it, had already become final by virtue of
the plaintiff’s failure to appeal therefrom. The alternative prayer is therefore similarly DENIED. 12

Petitioner now seeks recourse to this Court and alleges that the respondent court committed the
following assigned errors: 13

A. THE, HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT WITH
THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING
THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE, WHO REPRESENTED THE PFF AS HAVING
CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT HENRI
KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF, HAVING
NEGOTIATED WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF,
MADE A PARTIAL PAYMENT AN ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE, THE
HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT
THE PFF IS SOLELY LIABLE FOR THE OBLIGATION.chanrob1es virtua1 1aw 1ibrary

The resolution of the case at bar hinges on the determination of the existence of the Philippine
Football Federation as a juridical person. In the assailed decision, the appellate court recognized the
existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise known as
the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604
as the laws from which said Federation derives its existence.chanrob1es virtua1 1aw 1ibrary

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the
juridical existence of national sports associations. This may be gleaned from the powers and
functions granted to these associations. Section 14 of R.A. 3135 provides:chanrob1es virtual 1aw
library
SECTION 14. Functions, powers and duties of Associations. — The National Sports’ Association shall
have the following functions, powers and duties:chanrob1es virtual 1aw library

1. To adopt a constitution and by-laws for their internal organization and government.

2. To raise funds by donations benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose;

4. To affiliate with international or regional sports’ Associations after due consultation with the
executive committee;

x x x

13. To perform such other acts as may be necessary for the proper accomplishment of their
purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:chanrob1es virtual 1aw
library

SECTION. 8. Functions, Powers, and Duties of National Sports Association. — The National sports
associations shall have the following functions, powers, and duties:chanrob1es virtual 1aw library

1. Adopt a Constitution and By-Laws for their internal organization and government which shall be
submitted to the Department and any amendment hereto shall take effect upon approval by the
Department: Provided, however, That no team, school, club, organization or entity shall be
admitted as a voting member of an association unless 60 per cent of the athletes composing said
team, school, club, organization or entity are Filipino citizens.

2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of
the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and Asian
Games, for the promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with the
Department;

x x x

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate that these
entities may acquire a juridical personality. The power to purchase, sell, lease and encumber
property are acts which may only be done by persons, whether natural or artificial, with juridical
capacity. However, while we agree with the appellate court that national sports associations may be
accorded corporate status, such does not automatically take place by the mere passage of these
laws.chanrob1es virtua1 1aw 1ibrary

It is a basic postulate that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act. We cannot agree with
the view of the appellate court; and the private respondent that the Philippine Football Federation
came into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D.
604 any provision creating the Philippine Football Federation. These laws merely recognized the
existence of national sports associations and provided the manner by which these entities may
acquire juridical personality. Section 11 of R.A. 3135 provides:chanrob1es virtual 1aw library

SECTION 11. National Sports’ Association; organization and recognition. — A National Association
shall be organized for each individual sports in the Philippines in the manner hereinafter provided to
constitute the Philippine Amateur Athletic Federation. Applications for recognition as a National
Sports’ Association shall be filed with the executive committee together with, among others, a copy
of the constitution and by-laws and a list of the members of the proposed association, and a filing
fee of ten pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said association
will promote the purposes of this Act and particularly section three thereof. No application shall be
held pending for more than three months after the filing thereof without any action having been
taken thereon by the executive committee. Should the application be rejected, the reasons for such
rejection shall be clearly stated in a written communication to the applicant. Failure to specify the
reasons for the rejection shall not affect the application which shall be considered as unacted upon:
Provided however, That until the executive committee herein provided shall have been formed,
applications for recognition shall be passed upon by the duly elected members of the present
executive committee of the Philippine Amateur Athletic Federation. The said executive committee
shall be dissolved upon the organization of the executive committee herein provided: Provided,
further, That the functioning executive committee is charged with the responsibility of seeing to it
that the National Sports’ Associations are formed and organized within six months from and after
the passage of this Act.chanrob1es virtua1 1aw 1ibrary

Section 7 of P.D. 604, similarly provides:chanrob1es virtual 1aw library

SECTION 7. National Sports Associations: — Application for accreditation or recognition as a

national sports association for each individual sport in the Philippines shall be filed with the
Department together with, among others, a copy of the Constitution and By-Laws and a list of the
members of the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national sports
association to be organized will promote the objectives of this Decree and has substantially
complied with the rules and regulations of the Department: Provided, That the Department may
withdraw accreditation or recognition for violation of this Decree and such rules and regulations
formulated by it.

The Department shall supervise the national sports association: Provided, That the latter shall have
exclusive technical control over the development and promotion of the particular sport for which
they are organized.

Clearly the above cited provisions require that before an entity may be considered as a national
sports association, such entity must be recognized by the accrediting organization, the Philippine,
Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports
Development under P.D. 604.

This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove the
juridical existence of the Federation, Henri Kahn attached to his motion for reconsideration before
the trial court a copy of the constitution and by-laws of the Philippine, Football Federation.
Unfortunately, the same does not prove that said Federation has indeed been recognized and
accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and
Sports Development. Accordingly, we rule that the Philippine Football Federation is not a national
sports association within the purview of the aforementioned laws and does not have corporate
existence of its own.chanrob1es virtua1 1aw 1ibrary

Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid
obligations of the unincorporated Philippine Football Federation. It is a settled principal in
corporation law that any person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and becomes personally liable for contract entered into or
for other acts performed as such agent. 14 As president of the Federation, Henri Kahn is presumed
to have known about the corporate existence or non-existence of the Federation. We cannot
subscribe to the position taken by the appellate court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny the corporate existence of the Federation
because it had contracted and dealt with the Federation in such a manner as to recognize and in
effect admit its existence. 15 The doctrine of corporation by estoppel is mistakenly applied by the
respondent court to the petitioner. The application of the doctrine applies to a third party only when
he tries to escape liabilities on a contract from which he has benefited on the irrelevant ground of
defective incorporation. 16 In the case at bar, the petitioner is not trying to escape liability from the
contract but rather is the one claiming from the contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the
Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.

SO ORDERED.
 B. Creature of Law

C. Right of Succession

1. SME Bank, Inc. Vs. De Guzman, G.R. Nos. 184517 and G.R. No. 186641, October 8, 2013
G.R. No. 184517 October 8, 2013

SME BANK INC., ABELARDO P. SAMSON, OLGA SAMSON and AURELIO VILLAFLOR, JR., Petitioners,

vs.PEREGRIN T. DE GUZMAN,EDUARDO M. AGUSTIN, JR., ELICERIO GASPAR, , RICARDO GASPAR JR.,
EUFEMIA ROSETE, FIDEL ESPIRITU, SIMEONESPIRITU, JR., and LIBERATO MANGOBA, Respondents.

x-----------------------x

G.R. No. 186641

SME BANK INC., ABELARDO P. SAMSON, OLGA SAMSON and AURELIO VILLAFLOR, JR., Petitioners,vs.

ELICERIO GASPAR, RICARDO GASPAR, JR., EUFEMIA ROSETE, FIDEL ESPIRITU, SIMEONESPIRITU, JR.,
and LIBERATO MANGOBA, Respondents.

DECISION SERENO, CJ.:

Security of tenure is a constitutionally guaranteed right.1 Employees may not be terminated from their regular
employment except for just or authorized causes under the Labor Code2 and other pertinent laws. A mere change
in the equity composition of a corporation is neither a just nor an authorized cause that would legally permit the
dismissal of the corporation’s employees en masse.

Before this Court are consolidated Rule 45 Petitions for Review on Certiorari3 assailing the Decision4 and
Resolution5 of the Court of Appeals(CA) in CA-G.R. SP No. 97510 and its Decision6 and Resolution7 in CA-G.R.
SP No. 97942.

The facts of the case are as follows:

Respondent employees Elicerio Gaspar (Elicerio), Ricardo Gaspar, Jr.(Ricardo), Eufemia Rosete (Eufemia), Fidel
Espiritu (Fidel), Simeon Espiritu, Jr. (Simeon, Jr.), and Liberato Mangoba (Liberato) were employees of Small and
Medium Enterprise Bank, Incorporated (SME Bank).Originally, the principal shareholders and corporate directors
of the bank were Eduardo M. Agustin, Jr. (Agustin) and Peregrin de Guzman, Jr. (De Guzman).

In June 2001, SME Bank experienced financial difficulties. To remedy the situation, the bank officials proposed its
sale to Abelardo Samson(Samson).8

Accordingly, negotiations ensued, and a formal offer was made to Samson. Through his attorney-in-fact, Tomas S.
Gomez IV, Samson then sent formal letters (Letter Agreements) to Agustin and De Guzman, demanding the
following as preconditions for the sale of SME Bank’s shares of stock:

4. You shall guarantee the peaceful turn over of all assets as well as the peaceful transition of management of the
bank and shall terminate/retire the employees we mutually agree upon, upon transfer of shares in favor of our
group’s nominees;

xxxx

7. All retirement benefits, if any of the above officers/stockholders/board of directors are hereby waived upon
consummation [sic] of the above sale. The retirement benefits of the rank and file employees including the
managers shall be honored by the new management in accordance with B.R. No. 10, S. 1997.9

Agustin and De Guzman accepted the terms and conditions proposed by Samson and signed the conforme
portion of the Letter Agreements.10
Simeon Espiritu (Espiritu), then the general manager of SME Bank, held a meeting with all the employees of the
head office and of the Talaveraand Muñoz branches of SME Bank and persuaded them to tender their
resignations,11 with the promise that they would be rehired upon reapplication. His directive was allegedly done at
the behest of petitioner Olga Samson.12

Relying on this representation, Elicerio,13 Ricardo,14 Fidel,15 Simeon, Jr.,16 and Liberato17 tendered their
resignations dated 27 August 2001. As for Eufemia, the records show that she first tendered a resignation letter
dated27 August 2001,18 and then a retirement letter dated September 2001.19

Elicerio,20 Ricardo,21 Fidel,22 Simeon, Jr.,23 and Liberato24 submitted application letters on 11 September 2001.
Both the resignation letters and copies of respondent employees’ application letters were transmitted by Espiritu to
Samson’s representative on 11 September 2001.25

On 11 September 2001, Agustin and De Guzman signified their conformity to the Letter Agreements and sold
86.365% of the shares of stock of SME Bank to spouses Abelardo and Olga Samson. Spouses Samson then
became the principal shareholders of SME Bank, while Aurelio Villaflor, Jr. was appointed bank president. As it
turned out, respondent employees, except for Simeon, Jr.,26 were not rehired. After a month in service, Simeon, Jr.
again resigned on October 2001.27

Respondent-employees demanded the payment of their respective separation pays, but their requests were
denied.1âwphi1

Aggrieved by the loss of their jobs, respondent employees filed a Complaint before the National Labor Relations
Commission (NLRC)– Regional Arbitration Branch No. III and sued SME Bank, spouses Abelardo and Olga
Samson and Aurelio Villaflor (the Samson Group) for unfair labor practice; illegal dismissal; illegal deductions;
underpayment; and nonpayment of allowances, separation pay and 13th month pay.28 Subsequently, they
amended their Complaint to include Agustin and De Guzman as respondents to the case.29

On 27 October 2004, the labor arbiter ruled that the buyer of an enterprise is not bound to absorb its employees,
unless there is an express stipulation to the contrary. However, he also found that respondent employees were
illegally dismissed, because they had involuntarily executed their resignation letters after relying on
representations that they would be given their separation benefits and rehired by the new management.
Accordingly, the labor arbiter decided the case against Agustin and De Guzman, but dismissed the Complaint
against the Samson Group, as follows:

WHEREFORE, premises considered, judgment is hereby rendered ordering respondents Eduardo Agustin, Jr. and
Peregrin De Guzman to pay complainants’ separation pay in the total amount of ₱339,403.00 detailed as follows:

Elicerio B. Gaspar = P 5,837.00 Fidel E. Espiritu = ₱29,185.00

Ricardo B. Gaspar, Jr. = ₱11,674.00 Simeon B. Espiritu, Jr. = ₱26,000.00

Liberato B. Mangoba = ₱64,207.00 Eufemia E. Rosete = ₱202,510.00


All other claims including the complaint against Abelardo Samson, Olga Samson and Aurelio Villaflor are hereby
DISMISSED for want of merit.

SO ORDERED.30

Dissatisfied with the Decision of the labor arbiter, respondent employees, Agustin and De Guzman brought
separate appeals to the NLRC. Respondent employees questioned the labor arbiter’s failure to award backwages,
while Agustin and De Guzman contended that they should not be held liable for the payment of the employees’
claims.

The NLRC found that there was only a mere transfer of shares – and therefore, a mere change of management –
from Agustin and De Guzman to the Samson Group. As the change of management was not a valid ground to
terminate respondent bank employees, the NLRC ruled that they had indeed been illegally dismissed. It further
ruled that Agustin, De Guzman and the Samson Group should be held jointly and severally liable for the
employees’ separation pay and backwages, as follows:

WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. Respondents are hereby
Ordered to jointly and severally pay the complainants backwages from 11 September 2001 until the finality of this
Decision, separation pay at one month pay for every year of service, ₱10,000.00 and ₱5,000.00 moral and
exemplary damages, and five (5%) percent attorney’s fees.

Other dispositions are AFFIRMED. SO ORDERED.31

On 28 November 2006, the NLRC denied the Motions for Reconsideration filed by Agustin, De Guzman and the
Samson Group.32

Agustin and De Guzman filed a Rule 65 Petition for Certiorari with the CA, docketed as CA-G.R. SP No. 97510.
The Samson Group likewise filed a separate Rule 65 Petition for Certiorari with the CA, docketed as CA-G.R. SP
No. 97942. Motions to consolidate both cases were not acted upon by the appellate court.

On 13 March 2008, the CA rendered a Decision in CA-G.R. SP No.97510 affirming that of the NLRC. The fallo of
the CA Decision reads:

WHEREFORE, in view of the foregoing, the petition is DENIED. Accordingly, the Decision dated May 8, 2006, and
Resolution dated November 28, 2006 of the National Labor Relations Commission in NLRC NCR CA No.
043236-05 (NLRC RAB III-07-4542-02) are hereby AFFIRMED. SO ORDERED.33

Subsequently, CA-G.R. SP No. 97942 was disposed of by the appellate court in a Decision dated 15 January
2008, which likewise affirmed that of the NLRC. The dispositive portion of the CA Decision states:

WHEREFORE, premises considered, the instant Petition for Certiorari is denied, and the herein assailed May 8,
2006 Decision and November 28, 2006 Resolution of the NLRC are hereby AFFIRMED. SO ORDERED.34

The appellate court denied the Motions for Reconsideration filed by the parties in Resolutions dated 1 September
200835 and 19 February 2009.36

The Samson Group then filed two separate Rule 45 Petitions questioning the CA Decisions and Resolutions in
CA-G.R. SP No. 97510 and CA-G.R. SP No. 97942. On 17 June 2009, this Court resolved to consolidate both
Petitions.37

THE ISSUES

Succinctly, the parties are asking this Court to determine whether respondent employees were illegally dismissed
and, if so, which of the parties are liable for the claims of the employees and the extent of the reliefs that may be
awarded to these employees.

THE COURT’S RULING

The instant Petitions are partly meritorious.

Respondent employees were illegally dismissed.

As to Elicerio Gaspar, Ricardo Gaspar, Jr., Fidel Espiritu, Eufemia Rosete and Liberato Mangoba

The Samson Group contends that Elicerio, Ricardo, Fidel, and Liberato voluntarily resigned from their posts, while
Eufemia retired from her position. As their resignations and retirements were voluntary, they were not dismissed
from their employment.38 In support of this argument, it presented copies of their resignation and retirement
letters,39 which were couched in terms of gratitude.
We disagree. While resignation letters containing words of gratitude may indicate that the employees were not
coerced into resignation,40 this fact alone is not conclusive proof that they intelligently, freely and voluntarily
resigned. To rule that resignation letters couched in terms of gratitude are, by themselves, conclusive proof that
the employees intended to relinquish their posts would open the floodgates to possible abuse. In order to
withstand the test of validity, resignations must be made voluntarily and with the intention of relinquishing the
office, coupled with an act of relinquishment.41 Therefore, in order to determine whether the employees truly
intended to resign from their respective posts, we cannot merely rely on the tenor of the resignation letters, but
must take into consideration the totality of circumstances in each particular case.

Here, the records show that Elicerio, Ricardo, Fidel, and Liberato only tendered resignation letters because they
were led to believe that, upon reapplication, they would be reemployed by the new management.42 As it turned
out, except for Simeon, Jr., they were not rehired by the new management. Their reliance on the representation
that they would be reemployed gives credence to their argument that they merely submitted courtesy resignation
letters because it was demanded of them, and that they had no real intention of leaving their posts. We therefore
conclude that Elicerio, Ricardo, Fidel, and Liberato did not voluntarily resign from their work; rather, they were
terminated from their employment.

As to Eufemia, both the CA and the NLRC discussed her case together with the cases of the rest of respondent-
employees. However, a review of the records shows that, unlike her co-employees, she did not resign; rather, she
submitted a letter indicating that she was retiring from her former position.43

The fact that Eufemia retired and did not resign, however, does not change our conclusion that illegal dismissal
took place.

Retirement, like resignation, should be an act completely voluntary on the part of the employee. If the intent to
retire is not clearly established or if the retirement is involuntary, it is to be treated as a discharge.44

In this case, the facts show that Eufemia’s retirement was not of her own volition. The circumstances could not be
more telling. The facts show that Eufemia was likewise given the option to resign or retire in order to fulfill the
precondition in the Letter Agreements that the seller should "terminate/retire the employees [mutually agreed
upon] upon transfer of shares" to the buyers.45 Thus, like her other co-employees, she first submitted a letter of
resignation dated 27 August 2001.46 For one reason or another, instead of resigning, she chose to retire and
submitted a retirement letter to that effect.47 It was this letter that was subsequently transmitted to the
representative of the Samson Group on 11 September 2001.48

In San Miguel Corporation v. NLRC,49 we have explained that involuntary retirement is tantamount to dismissal, as
employees can only choose the means and methods of terminating their employment, but are powerless as to the
status of their employment and have no choice but to leave the company. This rule squarely applies to Eufemia’s
case. Indeed, she could only choose between resignation and retirement, but was made to understand that she
had no choice but to leave SME Bank. Thus, we conclude that, similar to her other co-employees, she was
illegally dismissed from employment.

The Samson Group further argues50 that, assuming the employees were dismissed, the dismissal is legal because
cessation of operations due to serious business losses is one of the authorized causes of termination under Article
283 of the Labor Code.51

Again, we disagree.

The law permits an employer to dismiss its employees in the event of closure of the business establishment.
52 However, the employer is required to serve written notices on the worker and the Department of Labor at least

one month before the intended date of closure.53 Moreover, the dismissed employees are entitled to separation
pay, except if the closure was due to serious business losses or financial reverses.54 However, to be exempt from
making such payment, the employer must justify the closure by presenting convincing evidence that it actually
suffered serious financial reverses.55
In this case, the records do not support the contention of SME Bank that it intended to close the business
establishment. On the contrary, the intention of the parties to keep it in operation is confirmed by the provisions of
the Letter Agreements requiring Agustin and De Guzman to guarantee the "peaceful transition of management of
the bank" and to appoint "a manager of [the Samson Group’s] choice x x x to oversee bank operations."

Even assuming that the parties intended to close the bank, the records do not show that the employees and the
Department of Labor were given written notices at least one month before the dismissal took place. Moreover,
aside from their bare assertions, the parties failed to substantiate their claim that SME Bank was suffering from
serious financial reverses.

In fine, the argument that the dismissal was due to an authorized cause holds no water.

Petitioner bank also argues that, there being a transfer of the business establishment, the innocent transferees no
longer have any obligation to continue employing respondent employees,56 and that the most that they can do is
to give preference to the qualified separated employees; hence, the employees were validly dismissed.57

The argument is misleading and unmeritorious. Contrary to petitioner bank’s argument, there was no transfer of
the business establishment to speak of, but merely a change in the new majority shareholders of the corporation.

There are two types of corporate acquisitions: asset sales and stock sales.58 In asset sales, the corporate
entity59 sells all or substantially all of its assets60 to another entity. In stock sales, the individual or corporate
shareholders61 sell a controlling block of stock62 to new or existing shareholders.

In asset sales, the rule is that the seller in good faith is authorized to dismiss the affected employees, but is liable
for the payment of separation pay under the law.63 The buyer in good faith, on the other hand, is not obliged to
absorb the employees affected by the sale, nor is it liable for the payment of their claims.64 The most that it may
do, for reasons of public policy and social justice, is to give preference to the qualified separated personnel of the
selling firm.65

In contrast with asset sales, in which the assets of the selling corporation are transferred to another entity, the
transaction in stock sales takes place at the shareholder level. Because the corporation possesses a personality
separate and distinct from that of its shareholders, a shift in the composition of its shareholders will not affect its
existence and continuity. Thus, notwithstanding the stock sale, the corporation continues to be the employer of its
people and continues to be liable for the payment of their just claims. Furthermore, the corporation or its new
majority share holders are not entitled to lawfully dismiss corporate employees absent a just or authorized cause.

In the case at bar, the Letter Agreements show that their main object is the acquisition by the Samson Group of
86.365% of the shares of stock of SME Bank.66 Hence, this case involves a stock sale, whereby the transferee
acquires the controlling shares of stock of the corporation. Thus, following the rule in stock sales, respondent
employees may not be dismissed except for just or authorized causes under the Labor Code.

Petitioner bank argues that, following our ruling in Manlimos v. NLRC,67 even in cases of stock sales, the new
owners are under no legal duty to absorb the seller’s employees, and that the most that the new owners may do is
to give preference to the qualified separated employees.68 Thus, petitioner bank argues that the dismissal was
lawful.

We are not persuaded.

Manlimos dealt with a stock sale in which a new owner or management group acquired complete ownership of the
corporation at the shareholder level.69 The employees of the corporation were later "considered terminated, with
their conformity"70 by the new majority shareholders. The employees then re-applied for their jobs and were
rehired on a probationary basis. After about six months, the new management dismissed two of the employees for
having abandoned their work, and it dismissed the rest for committing "acts prejudicial to the interest of the new
management."71 Thereafter, the employees sought reinstatement, arguing that their dismissal was illegal, since
they "remained regular employees of the corporation regardless of the change of management."72
In disposing of the merits of the case, we upheld the validity of the second termination, ruling that "the parties are
free to renew the contract or not [upon the expiration of the period provided for in their probationary contract of
employment]."73 Citing our pronouncements in Central Azucarera del Danao v. Court of Appeals,74 San Felipe Neri
School of Mandaluyong, Inc. v. NLRC,75 and MDII Supervisors & Confidential Employees Association v.
Presidential Assistant on Legal Affairs,76 we likewise upheld the validity of the employees’ first separation from
employment, pronouncing as follows:

A change of ownership in a business concern is not proscribed bylaw. In Central Azucarera del Danao vs. Court of
Appeals, this Court stated:

There can be no controversy for it is a principle well-recognized, that it is within the employer’s legitimate sphere
of management control of the business to adopt economic policies or make some changes or adjustments in their
organization or operations that would insure profit to itself or protect the investment of its stockholders. As in the
exercise of such management prerogative, the employer may merge or consolidate its business with another, or
sellor dispose all or substantially all of its assets and properties which may bring about the dismissal or
termination of its employees in the process. Such dismissal or termination should not however be interpreted in
such a manner as to permit the employer to escape payment of termination pay. For such a situation is not
envisioned in the law. It strikes at the very concept of social justice.

In a number of cases on this point, the rule has been laid down that the sale or disposition must be motivated by
good faith as an element of exemption from liability. Indeed, an innocent transferee of a business establishment
has no liability to the employees of the transfer or to continue employer them. Nor is the transferee liable for past
unfair labor practices of the previous owner, except, when the liability therefor is assumed by the new employer
under the contract of sale, or when liability arises because of the new owner’s participation in thwarting or
defeating the rights of the employees.

Where such transfer of ownership is in good faith, the transferee is under no legal duty to absorb the transferor’s
employees as there is no law compelling such absorption. The most that the transferee may do, for reasons of
public policy and social justice, is to give preference to the qualified separated employees in the filling of
vacancies in the facilities of the purchaser.

Since the petitioners were effectively separated from work due to a bona fide change of ownership and they were
accordingly paid their separation pay, which they freely and voluntarily accepted, the private respondent
corporation was under no obligation to employ them; it may, however, give them preference in the hiring. x x x.
(Citations omitted)

We take this opportunity to revisit our ruling in Manlimos insofar as it applied a doctrine on asset sales to a stock
sale case. Central Azucarera del Danao, San Felipe Neri School of Mandaluyong and MDII Supervisors
&Confidential Employees Association all dealt with asset sales, as they involved a sale of all or substantially all of
the assets of the corporation. The transactions in those cases were not made at the shareholder level, but at the
corporate level. Thus, applicable to those cases were the rules in asset sales: the employees may be separated
from their employment, but the seller is liable for the payment of separation pay; on the other hand, the buyer in
good faith is not required to retain the affected employees in its service, nor is it liable for the payment of their
claims.

The rule should be different in Manlimos, as this case involves a stock sale. It is error to even discuss transfer of
ownership of the business, as the business did not actually change hands. The transfer only involved a change in
the equity composition of the corporation. To reiterate, the employees are not transferred to a new employer, but
remain with the original corporate employer, notwithstanding an equity shift in its majority shareholders. This being
so, the employment status of the employees should not have been affected by the stock sale. A change in the
equity composition of the corporate shareholders should not result in the automatic termination of the employment
of the corporation’s employees. Neither should it give the new majority shareholders the right to legally dismiss the
corporation’s employees, absent a just or authorized cause.

The right to security of tenure guarantees the right of employees to continue in their employment absent a just or
authorized cause for termination. This guarantee proscribes a situation in which the corporation procures the
severance of the employment of its employees – who patently still desire to work for the corporation – only
because new majority stockholders and a new management have come into the picture. This situation is a clear
circumvention of the employees’ constitutionally guaranteed right to security of tenure, an act that cannot be
countenanced by this Court.

It is thus erroneous on the part of the corporation to consider the employees as terminated from their employment
when the sole reason for so doing is a change of management by reason of the stock sale. The conformity of the
employees to the corporation’s act of considering them as terminated and their subsequent acceptance of
separation pay does not remove the taint of illegal dismissal. Acceptance of separation pay does not bar the
employees from subsequently contesting the legality of their dismissal, nor does it estop them from challenging
the legality of their separation from the service.77

We therefore see it fit to expressly reverse our ruling in Manlimos insofar as it upheld that, in a stock sale, the
buyer in good faith has no obligation to retain the employees of the selling corporation; and that the dismissal of
the affected employees is lawful, even absent a just or authorized cause.

As to Simeon Espiritu, Jr.

The CA and the NLRC discussed the case of Simeon, Jr. together with that of the rest of respondent-employees.
However, a review of the records shows that the conditions leading to his dismissal from employment are different.
We thus discuss his circumstance separately.

The Samson Group contends that Simeon, Jr., likewise voluntarily resigned from his post.78 According to them, he
had resigned from SME Bank before the share transfer took place.79

Upon the change of ownership of the shares and the management of the company, Simeon, Jr. submitted a letter
of application to and was rehired by the new management.80 However, the Samson Group alleged that for purely
personal reasons, he again resigned from his employment on 15 October 2001.81

Simeon, Jr., on the other hand, contends that while he was reappointed by the new management after his letter of
application was transmitted, he was not given a clear position, his benefits were reduced, and he suffered a
demotion in rank.82 These allegations were not refuted by the Samson Group.

We hold that Simeon, Jr. was likewise illegally dismissed from his employment.

Similar to our earlier discussion, we find that his first courtesy resignation letter was also executed involuntarily.
Thus, it cannot be the basis of a valid resignation; and thus, at that point, he was illegally terminated from his
employment. He was, however, rehired by SME Bank under new management, although based on his allegations,
he was not reinstated to his former position or to a substantially equivalent one.83 Rather, he even suffered a
reduction in benefits and a demotion in rank.84 These led to his submission of another resignation letter effective
15 October 2001.85

We rule that these circumstances show that Simeon, Jr. was constructively dismissed. In

Peñaflor v. Outdoor Clothing Manufacturing Corporation,86 we have defined constructive dismissal as follows:

Constructive dismissal is an involuntary resignation by the employee due to the harsh, hostile, and unfavorable
conditions set by the employer and which arises when a clear discrimination, insensibility, or disdain by an
employer exists and has become unbearable to the employee.87

Constructive dismissal exists where there is cessation of work, because "continued employment is rendered
impossible, unreasonable or unlikely, as an offer involving a demotion in rank or a diminution in pay" and other
benefits.88

These circumstances are clearly availing in Simeon, Jr.’s case. He was made to resign, then rehired under
conditions that were substantially less than what he was enjoying before the illegal termination occurred. Thus, for
the second time, he involuntarily resigned from his employment. Clearly, this case is illustrative of constructive
dismissal, an act prohibited under our labor laws.

II

SME Bank, Eduardo M. Agustin, Jr. and Peregrin de Guzman, Jr. are liable for illegal dismissal.

Having ruled on the illegality of the dismissal, we now discuss the issue of liability and determine who among the
parties are liable for the claims of the illegally dismissed employees.

The settled rule is that an employer who terminates the employment of its employees without lawful cause or due
process of law is liable for illegal dismissal.89

None of the parties dispute that SME Bank was the employer of respondent employees. The fact that there was a
change in the composition of its shareholders did not affect the employer-employee relationship between the
employees and the corporation, because an equity transfer affects neither the existence nor the liabilities of a
corporation. Thus, SME Bank continued to be the employer of respondent employees notwithstanding the equity
change in the corporation. This outcome is in line with the rule that a corporation has a personality separate and
distinct from that of its individual shareholders or members, such that a change in the composition of its
shareholders or members would not affect its corporate liabilities.

Therefore, we conclude that, as the employer of the illegally dismissed employees before and after the equity
transfer, petitioner SME Bank is liable for the satisfaction of their claims.

Turning now to the liability of Agustin, De Guzman and the Samson Group for illegal dismissal, at the outset we
point out that there is no privity of employment contracts between Agustin, De Guzman and the Samson Group,
on the one hand, and respondent employees on the other. Rather, the employment contracts were between SME
Bank and the employees. However, this fact does not mean that Agustin, De Guzman and the Samson Group may
not be held liable for illegal dismissal as corporate directors or officers. In Bogo-Medellin Sugarcane Planters
Association, Inc. v. NLRC,90 we laid down the rule as regards the liability of corporate directors and officers in
illegal dismissal cases, as follows:

Unless they have exceeded their authority, corporate officers are, as a general rule, not personally liable for their
official acts, because a corporation, by legal fiction, has a personality separate and distinct from its officers,
stockholders and members. However, this fictional veil may be pierced whenever the corporate personality is used
as a means of perpetuating a fraud or an illegal act, evading an existing obligation, or confusing a legitimate issue.
In cases of illegal dismissal, corporate directors and officers are solidarily liable with the corporation, where
terminations of employment are done with malice or in bad faith.91 (Citations omitted)

Thus, in order to determine the respective liabilities of Agustin, De Guzman and the Samson Group under the
afore-quoted rule, we must determine, first, whether they may be considered as corporate directors or officers;
and, second, whether the terminations were done maliciously or in bad faith.

There is no question that both Agustin and De Guzman were corporate directors of SME Bank. An analysis of the
facts likewise reveals that the dismissal of the employees was done in bad faith. Motivated by their desire to
dispose of their shares of stock to Samson, they agreed to and later implemented the precondition in the Letter
Agreements as to the termination or retirement of SME Bank’s employees. However, instead of going through the
proper procedure, the bank manager induced respondent employees to resign or retire from their respective
employments, while promising that they would be rehired by the new management. Fully relying on that promise,
they tendered courtesy resignations or retirements and eventually found themselves jobless. Clearly, this
sequence of events constituted a gross circumvention of our labor laws and a violation of the employees’
constitutionally guaranteed right to security of tenure. We therefore rule that, as Agustin and De Guzman are
corporate directors who have acted in bad faith, they may be held solidarily liable with SME Bank for the
satisfaction of the employees’ lawful claims.
As to spouses Samson, we find that nowhere in the records does it appear that they were either corporate
directors or officers of SME Bank at the time the illegal termination occurred, except that the Samson Group had
already taken over as new management when Simeon, Jr. was constructively dismissed. Not being corporate
directors or officers, spouses Samson were not in legal control of the bank and consequently had no power to
dismiss its employees.

Respondent employees argue that the Samson Group had already taken over and conducted an inventory before
the execution of the share purchase agreement.92 Agustin and De Guzman likewise argued that it was at Olga
Samson’s behest that the employees were required to resign from their posts.93 Even if this statement were true, it
cannot amount to a finding that spouses Samson should be treated as corporate directors or officers of SME
Bank. The records show that it was Espiritu who asked the employees to tender their resignation and or retirement
letters, and that these letters were actually tendered to him.94 He then transmitted these letters to the
representative of the Samson Group.95 That the spouses Samson had to ask Espiritu to require the employees to
resign shows that they were not in control of the corporation, and that the former shareholders – through Espiritu –
were still in charge thereof. As the spouses Samson were neither corporate officers nor directors at the time the
illegal dismissal took place, we find that there is no legal basis in the present case to hold them in their personal
capacities solidarily liable with SME Bank for illegally dismissing respondent employees, without prejudice to any
liabilities that may have attached under other provisions of law.

Furthermore, even if spouses Samson were already in control of the corporation at the time that Simeon, Jr. was
constructively dismissed, we refuse to pierce the corporate veil and find them liable in their individual steads.
There is no showing that his constructive dismissal amounted to more than a corporate act by SME Bank, or that
spouses Samson acted maliciously or in bad faith in bringing about his constructive dismissal.

Finally, as regards Aurelio Villaflor, while he may be considered as a corporate officer, being the president of SME
Bank, the records are bereft of any evidence that indicates his actual participation in the termination of respondent
employees. Not having participated at all in the illegal act, he may not be held individually liable for the satisfaction
of their claims.

III

Respondent employees are entitled to separation pay, full backwages, moral damages, exemplary damages and
attorney’s fees.

The rule is that illegally dismissed employees are entitled to (1) either reinstatement, if viable, or separation pay if
reinstatement is no longer viable; and (2) backwages.96

Courts may grant separation pay in lieu of reinstatement when the relations between the employer and the
employee have been so severely strained; when reinstatement is not in the best interest of the parties; when it is
no longer advisable or practical to order reinstatement; or when the employee decides not to be reinstated.97 In
this case, respondent employees expressly pray for a grant of separation pay in lieu of reinstatement. Thus,
following a finding of illegal dismissal, we rule that they are entitled to the payment of separation pay equivalent to
their one-month salary for every year of service as an alternative to reinstatement.

Respondent employees are likewise entitled to full backwages notwithstanding the grant of separation pay. In
Santos v. NLRC,98 we explained that an award of backwages restores the income that was lost by reason of the
unlawful dismissal, while separation pay "provides the employee with 'the wherewithal during the period that he is
looking for another employment."99 Thus, separation pay is a proper substitute only for reinstatement; it is not an
adequate substitute for both reinstatement and backwages.100 Hence, respondent employees are entitled to the
grant of full backwages in addition to separation pay.

As to moral damages, exemplary damages and attorney's fees, we uphold the appellate court's grant thereof
based on our finding that the forced resignations and retirement were fraudulently done and attended by bad faith.

WHEREFORE, premises considered, the instant Petitions for Review are PARTIALLY GRANTED.
The assailed Decision and Resolution of the Court of Appeals in CA G.R. SP No. 97510 dated 13 March 2008
and 1 September 2008,respectively, are hereby REVERSED and SET ASIDE insofar as it held Abelardo P.
Samson, Olga Samson and Aurelio Villaflor, Jr. solidarily liable for illegal dismissal.

The assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 97942 dated 15 January 2008
and 19 February 2009,respectively, are likewise REVERSED and SETASIDE insofar as it held Abelardo P.
Samson, Olga Samson and Aurelio Villaflor, Jr. solidarily liable for illegal dismissal.

We REVERSE our ruling in Manlimos v. NLRC insofar as it upheld that, in a stock sale, the buyer in good faith has
no obligation to retain the employees of the selling corporation, and that the dismissal of the affected employees is
lawful even absent a just or authorized cause.

SO ORDERED.

D. Creature with Enumerated Powers, Attributes and Properties

1. Monfort Hermanos Agricultural Dev. Corp. Vs. Monfort, III, 434 SCRA 27
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.

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); 4. Joaquin H. Monfort (Member);
2. Ramon H. Monfort (Member); 5. Francisco H. Monfort (Member) and
3. Antonio H. Monfort, Jr., (Member); 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 Jose L.R. Reyes — Secretary/Director
Fernando D. Hilario — Vice President/Director Pido E. Aguilar — Director
Augusto I. Galace — Treasurer 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.

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.

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.
 C. Entitlement to Constitutional Guarantees

1. Stonehill vs. Diokno, 20 SCRA 383

G.R. No. L-19550 June 19, 1967

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL BECK, petitioners,vs.

HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in his capacity as
Acting Director, National Bureau of Investigation; SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I.
PLANA and MANUEL VILLAREAL, JR. and ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN,
Municipal Court of Manila; JUDGE ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES
CALUAG, Court of First Instance of Rizal-Quezon City Branch, and JUDGE DAMIAN JIMENEZ, Municipal
Court of Quezon City, respondents.

CONCEPCION, C.J.:

Upon application of the officers of the government named on the margin1 — hereinafter referred to as
Respondents-Prosecutors — several judges2 — hereinafter referred to as Respondents-Judges — issued, on
different dates,3 a total of 42 search warrants against petitioners herein4 and/or the corporations of which they
were officers,5 directed to the any peace officer, to search the persons above-named and/or the premises of their
offices, warehouses and/or residences, and to seize and take possession of the following personal property to wit:

Books of accounts, financial records, vouchers, correspondence, receipts, ledgers, journals, portfolios, credit
journals, typewriters, and other documents and/or papers showing all business transactions including
disbursements receipts, balance sheets and profit and loss statements and Bobbins (cigarette wrappers).

as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or "used or intended to
be used as the means of committing the offense," which is described in the applications adverted to above as
"violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and the Revised Penal Code."

Alleging that the aforementioned search warrants are null and void, as contravening the Constitution and the
Rules of Court — because, inter alia: (1) they do not describe with particularity the documents, books and things
to be seized; (2) cash money, not mentioned in the warrants, were actually seized; (3) the warrants were issued to
fish evidence against the aforementioned petitioners in deportation cases filed against them; (4) the searches and
seizures were made in an illegal manner; and (5) the documents, papers and cash money seized were not
delivered to the courts that issued the warrants, to be disposed of in accordance with law — on March 20, 1962,
said petitioners filed with the Supreme Court this original action for certiorari, prohibition, mandamus and
injunction, and prayed that, pending final disposition of the present case, a writ of preliminary injunction be issued
restraining Respondents-Prosecutors, their agents and /or representatives from using the effects seized as
aforementioned or any copies thereof, in the deportation cases already adverted to, and that, in due course,
thereafter, decision be rendered quashing the contested search warrants and declaring the same null and void,
and commanding the respondents, their agents or representatives to return to petitioners herein, in accordance
with Section 3, Rule 67, of the Rules of Court, the documents, papers, things and cash moneys seized or
confiscated under the search warrants in question.

In their answer, respondents-prosecutors alleged, 6 (1) that the contested search warrants are valid and have
been issued in accordance with law; (2) that the defects of said warrants, if any, were cured by petitioners'
consent; and (3) that, in any event, the effects seized are admissible in evidence against herein petitioners,
regardless of the alleged illegality of the aforementioned searches and seizures.

On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the petition. However, by
resolution dated June 29, 1962, the writ was partially lifted or dissolved, insofar as the papers, documents and
things seized from the offices of the corporations above mentioned are concerned; but, the injunction was
maintained as regards the papers, documents and things found and seized in the residences of petitioners herein.
7
Thus, the documents, papers, and things seized under the alleged authority of the warrants in question may be
split into two (2) major groups, namely: (a) those found and seized in the offices of the aforementioned
corporations, and (b) those found and seized in the residences of petitioners herein.

As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the
contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations
have their respective personalities, separate and distinct from the personality of herein petitioners, regardless of
the amount of shares of stock or of the interest of each of them in said corporations, and whatever the offices they
hold therein may be.8 Indeed, it is well settled that the legality of a seizure can be contested only by the party
whose rights have been impaired thereby,9 and that the objection to an unlawful search and seizure is purely
personal and cannot be availed of by third parties. 10 Consequently, petitioners herein may not validly object to the
use in evidence against them of the documents, papers and things seized from the offices and premises of the
corporations adverted to above, since the right to object to the admission of said papers in evidence
belongs exclusively to the corporations, to whom the seized effects belong, and may not be invoked by the
corporate officers in proceedings against them in their individual capacity. 11 Indeed, it has been held:

. . . that the Government's action in gaining possession of papers belonging to the corporation did not relate to nor
did it affect the personal defendants. If these papers were unlawfully seized and thereby the constitutional rights of
or any one were invaded, they were the rights of the corporation and not the rights of the other defendants. Next, it
is clear that a question of the lawfulness of a seizure can be raised only by one whose rights have been invaded.
Certainly, such a seizure, if unlawful, could not affect the constitutional rights of defendants whose property had
not been seized or the privacy of whose homes had not been disturbed; nor could they claim for themselves the
benefits of the Fourth Amendment, when its violation, if any, was with reference to the rights of another. Remus
vs. United States (C.C.A.)291 F. 501, 511. It follows, therefore, that the question of the admissibility of the
evidence based on an alleged unlawful search and seizure does not extend to the personal defendants but
embraces only the corporation whose property was taken. . . . (A Guckenheimer & Bros. Co. vs. United States,
[1925] 3 F. 2d. 786, 789, Emphasis supplied.)

With respect to the documents, papers and things seized in the residences of petitioners herein, the
aforementioned resolution of June 29, 1962, lifted the writ of preliminary injunction previously issued by this
Court, 12 thereby, in effect, restraining herein Respondents-Prosecutors from using them in evidence against
petitioners herein.

In connection with said documents, papers and things, two (2) important questions need be settled, namely: (1)
whether the search warrants in question, and the searches and seizures made under the authority thereof, are
valid or not, and (2) if the answer to the preceding question is in the negative, whether said documents, papers
and things may be used in evidence against petitioners herein.1äwphï1.ñët

Petitioners maintain that the aforementioned search warrants are in the nature of general warrants and that
accordingly, the seizures effected upon the authority there of are null and void. In this connection, the
Constitution 13 provides:

The right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches
and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be determined by the
judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and
particularly describing the place to be searched, and the persons or things to be seized.

Two points must be stressed in connection with this constitutional mandate, namely: (1) that no warrant shall issue
but upon probable cause, to be determined by the judge in the manner set forth in said provision; and (2) that the
warrant shall particularly describe the things to be seized.

None of these requirements has been complied with in the contested warrants. Indeed, the same were issued
upon applications stating that the natural and juridical person therein named had committed a "violation of Central
Ban Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code." In other words,
no specific offense had been alleged in said applications. The averments thereof with respect to the offense
committed were abstract. As a consequence, it was impossible for the judges who issued the warrants to have
found the existence of probable cause, for the same presupposes the introduction of competent proof that the
party against whom it is sought has performed particular acts, or committed specific omissions, violating a given
provision of our criminal laws. As a matter of fact, the applications involved in this case do not allege any specific
acts performed by herein petitioners. It would be the legal heresy, of the highest order, to convict anybody of a
"violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code," —
as alleged in the aforementioned applications — without reference to any determinate provision of said laws or

To uphold the validity of the warrants in question would be to wipe out completely one of the most fundamental
rights guaranteed in our Constitution, for it would place the sanctity of the domicile and the privacy of
communication and correspondence at the mercy of the whims caprice or passion of peace officers. This is
precisely the evil sought to be remedied by the constitutional provision above quoted — to outlaw the so-called
general warrants. It is not difficult to imagine what would happen, in times of keen political strife, when the party in
power feels that the minority is likely to wrest it, even though by legal means.

Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this
Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court 14 by providing in its counterpart,
under the Revised Rules of Court 15 that "a search warrant shall not issue but upon probable cause in connection
with one specific offense." Not satisfied with this qualification, the Court added thereto a paragraph, directing that
"no search warrant shall issue for more than one specific offense."

The grave violation of the Constitution made in the application for the contested search warrants was
compounded by the description therein made of the effects to be searched for and seized, to wit:

Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit
journals, typewriters, and other documents and/or papers showing all business transactions including
disbursement receipts, balance sheets and related profit and loss statements.

Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of
petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the
seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus openly
contravening the explicit command of our Bill of Rights — that the things to be seized be particularly described —
as well as tending to defeat its major objective: the elimination of general warrants.

Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors maintain that, even if the
searches and seizures under consideration were unconstitutional, the documents, papers and things thus seized
are admissible in evidence against petitioners herein. Upon mature deliberation, however, we are unanimously of
the opinion that the position taken in the Moncado case must be abandoned. Said position was in line with the
American common law rule, that the criminal should not be allowed to go free merely "because the constable has
blundered," 16 upon the theory that the constitutional prohibition against unreasonable searches and seizures is
protected by means other than the exclusion of evidence unlawfully obtained, 17 such as the common-law action
for damages against the searching officer, against the party who procured the issuance of the search warrant and
against those assisting in the execution of an illegal search, their criminal punishment, resistance, without liability
to an unlawful seizure, and such other legal remedies as may be provided by other laws.

However, most common law jurisdictions have already given up this approach and eventually adopted the
exclusionary rule, realizing that this is the only practical means of enforcing the constitutional injunction against
unreasonable searches and seizures. In the language of Judge Learned Hand:

As we understand it, the reason for the exclusion of evidence competent as such, which has been unlawfully
acquired, is that exclusion is the only practical way of enforcing the constitutional privilege. In earlier times the
action of trespass against the offending official may have been protection enough; but that is true no longer. Only
in case the prosecution which itself controls the seizing officials, knows that it cannot profit by their wrong will that
wrong be repressed.18

In fact, over thirty (30) years before, the Federal Supreme Court had already declared:
If letters and private documents can thus be seized and held and used in evidence against a citizen accused of an
offense, the protection of the 4th Amendment, declaring his rights to be secure against such searches and
seizures, is of no value, and, so far as those thus placed are concerned, might as well be stricken from the
Constitution. The efforts of the courts and their officials to bring the guilty to punishment, praiseworthy as they are,
are not to be aided by the sacrifice of those great principles established by years of endeavor and suffering which
have resulted in their embodiment in the fundamental law of the land.19

This view was, not only reiterated, but, also, broadened in subsequent decisions on the same Federal
Court. 20 After reviewing previous decisions thereon, said Court held, in Mapp vs. Ohio (supra.):

. . . Today we once again examine the Wolf's constitutional documentation of the right of privacy free from
unreasonable state intrusion, and after its dozen years on our books, are led by it to close the only courtroom door
remaining open to evidence secured by official lawlessness in flagrant abuse of that basic right, reserved to all
persons as a specific guarantee against that very same unlawful conduct. We hold that all evidence obtained by
searches and seizures in violation of the Constitution is, by that same authority, inadmissible in a State.

Since the Fourth Amendment's right of privacy has been declared enforceable against the States through the Due
Process Clause of the Fourteenth, it is enforceable against them by the same sanction of exclusion as it used
against the Federal Government. Were it otherwise, then just as without the Weeks rule the assurance against
unreasonable federal searches and seizures would be "a form of words," valueless and underserving of mention
in a perpetual charter of inestimable human liberties, so too, without that rule the freedom from state invasions of
privacy would be so ephemeral and so neatly severed from its conceptual nexus with the freedom from all brutish
means of coercing evidence as not to permit this Court's high regard as a freedom "implicit in the concept of
ordered liberty." At the time that the Court held in Wolf that the amendment was applicable to the States through
the Due Process Clause, the cases of this Court as we have seen, had steadfastly held that as to federal officers
the Fourth Amendment included the exclusion of the evidence seized in violation of its provisions. Even Wolf
"stoutly adhered" to that proposition. The right to when conceded operatively enforceable against the States, was
not susceptible of destruction by avulsion of the sanction upon which its protection and enjoyment had always
been deemed dependent under the Boyd, Weeks and Silverthorne Cases. Therefore, in extending the substantive
protections of due process to all constitutionally unreasonable searches — state or federal — it was logically and
constitutionally necessarily that the exclusion doctrine — an essential part of the right to privacy — be also
insisted upon as an essential ingredient of the right newly recognized by the Wolf Case. In short, the admission of
the new constitutional Right by Wolf could not tolerate denial of its most important constitutional privilege, namely,
the exclusion of the evidence which an accused had been forced to give by reason of the unlawful seizure. To
hold otherwise is to grant the right but in reality to withhold its privilege and enjoyment. Only last year the Court
itself recognized that the purpose of the exclusionary rule to "is to deter — to compel respect for the constitutional
guaranty in the only effectively available way — by removing the incentive to disregard it" . . . .

The ignoble shortcut to conviction left open to the State tends to destroy the entire system of constitutional
restraints on which the liberties of the people rest. Having once recognized that the right to privacy embodied in
the Fourth Amendment is enforceable against the States, and that the right to be secure against rude invasions of
privacy by state officers is, therefore constitutional in origin, we can no longer permit that right to remain an empty
promise. Because it is enforceable in the same manner and to like effect as other basic rights secured by its Due
Process Clause, we can no longer permit it to be revocable at the whim of any police officer who, in the name of
law enforcement itself, chooses to suspend its enjoyment. Our decision, founded on reason and truth, gives to the
individual no more than that which the Constitution guarantees him to the police officer no less than that to which
honest law enforcement is entitled, and, to the courts, that judicial integrity so necessary in the true administration
of justice. (emphasis ours.)

Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit of the constitutional
injunction against unreasonable searches and seizures. To be sure, if the applicant for a search warrant has
competent evidence to establish probable cause of the commission of a given crime by the party against whom
the warrant is intended, then there is no reason why the applicant should not comply with the requirements of the
fundamental law. Upon the other hand, if he has no such competent evidence, then it is not possible for the Judge
to find that there is probable cause, and, hence, no justification for the issuance of the warrant. The only possible
explanation (not justification) for its issuance is the necessity of fishing evidence of the commission of a crime.
But, then, this fishing expedition is indicative of the absence of evidence to establish a probable cause.

Moreover, the theory that the criminal prosecution of those who secure an illegal search warrant and/or make
unreasonable searches or seizures would suffice to protect the constitutional guarantee under consideration,
overlooks the fact that violations thereof are, in general, committed By agents of the party in power, for, certainly,
those belonging to the minority could not possibly abuse a power they do not have. Regardless of the handicap
under which the minority usually — but, understandably — finds itself in prosecuting agents of the majority, one
must not lose sight of the fact that the psychological and moral effect of the possibility 21 of securing their
conviction, is watered down by the pardoning power of the party for whose benefit the illegality had been
committed.

In their Motion for Reconsideration and Amendment of the Resolution of this Court dated June 29, 1962,
petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House No. 2008, Dewey Boulevard, House
No. 1436, Colorado Street, and Room No. 304 of the Army-Navy Club, should be included among the premises
considered in said Resolution as residences of herein petitioners, Harry S. Stonehill, Robert P. Brook, John J.
Brooks and Karl Beck, respectively, and that, furthermore, the records, papers and other effects seized in the
offices of the corporations above referred to include personal belongings of said petitioners and other effects
under their exclusive possession and control, for the exclusion of which they have a standing under the latest
rulings of the federal courts of federal courts of the United States. 22

We note, however, that petitioners' theory, regarding their alleged possession of and control over the
aforementioned records, papers and effects, and the alleged "personal" nature thereof, has Been Advanced, not in
their petition or amended petition herein, but in the Motion for Reconsideration and Amendment of the Resolution
of June 29, 1962. In other words, said theory would appear to be readjustment of that followed in said petitions, to
suit the approach intimated in the Resolution sought to be reconsidered and amended. Then, too, some of the
affidavits or copies of alleged affidavits attached to said motion for reconsideration, or submitted in support
thereof, contain either inconsistent allegations, or allegations inconsistent with the theory now advanced by
petitioners herein.

Upon the other hand, we are not satisfied that the allegations of said petitions said motion for reconsideration, and
the contents of the aforementioned affidavits and other papers submitted in support of said motion, have
sufficiently established the facts or conditions contemplated in the cases relied upon by the petitioners; to warrant
application of the views therein expressed, should we agree thereto. At any rate, we do not deem it necessary to
express our opinion thereon, it being best to leave the matter open for determination in appropriate cases in the
future.

We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby, abandoned; that the
warrants for the search of three (3) residences of herein petitioners, as specified in the Resolution of June 29,
1962, are null and void; that the searches and seizures therein made are illegal; that the writ of preliminary
injunction heretofore issued, in connection with the documents, papers and other effects thus seized in said
residences of herein petitioners is hereby made permanent; that the writs prayed for are granted, insofar as the
documents, papers and other effects so seized in the aforementioned residences are concerned; that the
aforementioned motion for Reconsideration and Amendment should be, as it is hereby, denied; and that the
petition herein is dismissed and the writs prayed for denied, as regards the documents, papers and other effects
seized in the twenty-nine (29) places, offices and other premises enumerated in the same Resolution, without
special pronouncement as to costs.

It is so ordered.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

CASTRO, J., concurring and dissenting:

From my analysis of the opinion written by Chief Justice Roberto Concepcion and from the import of the
deliberations of the Court on this case, I gather the following distinct conclusions:
1. All the search warrants served by the National Bureau of Investigation in this case are general warrants and are
therefore proscribed by, and in violation of, paragraph 3 of section 1 of Article III (Bill of Rights) of the Constitution;

2. All the searches and seizures conducted under the authority of the said search warrants were consequently
illegal;

3. The non-exclusionary rule enunciated in Moncado vs. People, 80 Phil. 1, should be, and is declared,
abandoned;

4. The search warrants served at the three residences of the petitioners are expressly declared null and void the
searches and seizures therein made are expressly declared illegal; and the writ of preliminary injunction
heretofore issued against the use of the documents, papers and effect seized in the said residences is made
permanent; and

5. Reasoning that the petitioners have not in their pleadings satisfactorily demonstrated that they have legal
standing to move for the suppression of the documents, papers and effects seized in the places other than the
three residences adverted to above, the opinion written by the Chief Justice refrains from expressly declaring as
null and void the such warrants served at such other places and as illegal the searches and seizures made
therein, and leaves "the matter open for determination in appropriate cases in the future."

It is precisely the position taken by the Chief Justice summarized in the immediately preceding paragraph
(numbered 5) with which I am not in accord.

I do not share his reluctance or unwillingness to expressly declare, at this time, the nullity of the search warrants
served at places other than the three residences, and the illegibility of the searches and seizures conducted under
the authority thereof. In my view even the exacerbating passions and prejudices inordinately generated by the
environmental political and moral developments of this case should not deter this Court from forthrightly laying
down the law not only for this case but as well for future cases and future generations. All the search warrants,
without exception, in this case are admittedly general, blanket and roving warrants and are therefore admittedly
and indisputably outlawed by the Constitution; and the searches and seizures made were therefore unlawful. That
the petitioners, let us assume in gratia argumente, have no legal standing to ask for the suppression of the
papers, things and effects seized from places other than their residences, to my mind, cannot in any manner
affect, alter or otherwise modify the intrinsic nullity of the search warrants and the intrinsic illegality of the searches
and seizures made thereunder. Whether or not the petitioners possess legal standing the said warrants are void
and remain void, and the searches and seizures were illegal and remain illegal. No inference can be drawn from
the words of the Constitution that "legal standing" or the lack of it is a determinant of the nullity or validity of a
search warrant or of the lawfulness or illegality of a search or seizure.

On the question of legal standing, I am of the conviction that, upon the pleadings submitted to this Court the
petitioners have the requisite legal standing to move for the suppression and return of the documents, papers and
effects that were seized from places other than their family residences.

Our constitutional provision on searches and seizures was derived almost verbatim from the Fourth Amendment to
the United States Constitution. In the many years of judicial construction and interpretation of the said
constitutional provision, our courts have invariably regarded as doctrinal the pronouncement made on the Fourth
Amendment by federal courts, especially the Federal Supreme Court and the Federal Circuit Courts of Appeals.

The U.S. doctrines and pertinent cases on standing to move for the suppression or return of documents, papers
and effects which are the fruits of an unlawful search and seizure, may be summarized as follows; (a) ownership
of documents, papers and effects gives "standing;" (b) ownership and/or control or possession — actual or
constructive — of premises searched gives "standing"; and (c) the "aggrieved person" doctrine where the search
warrant and the sworn application for search warrant are "primarily" directed solely and exclusively against the
"aggrieved person," gives "standing."

An examination of the search warrants in this case will readily show that, excepting three, all were directed against
the petitioners personally. In some of them, the petitioners were named personally, followed by the designation,
"the President and/or General Manager" of the particular corporation. The three warrants excepted named three
corporate defendants. But the "office/house/warehouse/premises" mentioned in the said three warrants were also
the same "office/house/warehouse/premises" declared to be owned by or under the control of the petitioners in all
the other search warrants directed against the petitioners and/or "the President and/or General Manager" of the
particular corporation. (see pages 5-24 of Petitioners' Reply of April 2, 1962). The searches and seizures were to
be made, and were actually made, in the "office/house/warehouse/premises" owned by or under the control of the
petitioners.

Ownership of matters seized gives "standing."

Ownership of the properties seized alone entitles the petitioners to bring a motion to return and suppress, and
gives them standing as persons aggrieved by an unlawful search and seizure regardless of their location at the
time of seizure. Jones vs. United States, 362 U.S. 257, 261 (1960) (narcotics stored in the apartment of a friend of
the defendant); Henzel vs. United States, 296 F. 2d. 650, 652-53 (5th Cir. 1961), (personal and corporate papers
of corporation of which the defendant was president), United States vs. Jeffers, 342 U.S. 48 (1951) (narcotics
seized in an apartment not belonging to the defendant); Pielow vs. United States, 8 F. 2d 492, 493 (9th Cir. 1925)
(books seized from the defendant's sister but belonging to the defendant); Cf. Villano vs. United States, 310 F. 2d
680, 683 (10th Cir. 1962) (papers seized in desk neither owned by nor in exclusive possession of the defendant).

In a very recent case (decided by the U.S. Supreme Court on December 12, 1966), it was held that under the
constitutional provision against unlawful searches and seizures, a person places himself or his property within a
constitutionally protected area, be it his home or his office, his hotel room or his automobile:

Where the argument falls is in its misapprehension of the fundamental nature and scope of Fourth Amendment
protection. What the Fourth Amendment protects is the security a man relies upon when he places himself or his
property within a constitutionally protected area, be it his home or his office, his hotel room or his automobile.
There he is protected from unwarranted governmental intrusion. And when he puts some thing in his filing cabinet,
in his desk drawer, or in his pocket, he has the right to know it will be secure from an unreasonable search or an
unreasonable seizure. So it was that the Fourth Amendment could not tolerate the warrantless search of the hotel
room in Jeffers, the purloining of the petitioner's private papers in Gouled, or the surreptitious electronic
surveilance in Silverman. Countless other cases which have come to this Court over the years have involved a
myriad of differing factual contexts in which the protections of the Fourth Amendment have been appropriately
invoked. No doubt, the future will bring countless others. By nothing we say here do we either foresee or foreclose
factual situations to which the Fourth Amendment may be applicable. (Hoffa vs. U.S., 87 S. Ct. 408 (December 12,
1966). See also U.S. vs. Jeffers, 342 U.S. 48, 72 S. Ct. 93 (November 13, 1951). (Emphasis supplied).

Control of premises searched gives "standing."

Independent of ownership or other personal interest in the records and documents seized, the petitioners have
standing to move for return and suppression by virtue of their proprietary or leasehold interest in many of the
premises searched. These proprietary and leasehold interests have been sufficiently set forth in their motion for
reconsideration and need not be recounted here, except to emphasize that the petitioners paid rent, directly or
indirectly, for practically all the premises searched (Room 91, 84 Carmen Apts; Room 304, Army & Navy Club;
Premises 2008, Dewey Boulevard; 1436 Colorado Street); maintained personal offices within the corporate offices
(IBMC, USTC); had made improvements or furnished such offices; or had paid for the filing cabinets in which the
papers were stored (Room 204, Army & Navy Club); and individually, or through their respective spouses, owned
the controlling stock of the corporations involved. The petitioners' proprietary interest in most, if not all, of the
premises searched therefore independently gives them standing to move for the return and suppression of the
books, papers and affects seized therefrom.

In Jones vs. United States, supra, the U.S. Supreme Court delineated the nature and extent of the interest in the
searched premises necessary to maintain a motion to suppress. After reviewing what it considered to be the
unduly technical standard of the then prevailing circuit court decisions, the Supreme Court said (362 U.S. 266):

We do not lightly depart from this course of decisions by the lower courts. We are persuaded, however, that it is
unnecessarily and ill-advised to import into the law surrounding the constitutional right to be free from
unreasonable searches and seizures subtle distinctions, developed and refined by the common law in evolving the
body of private property law which, more than almost any other branch of law, has been shaped by distinctions
whose validity is largely historical. Even in the area from which they derive, due consideration has led to the
discarding of those distinctions in the homeland of the common law. See Occupiers' Liability Act, 1957, 5 and 6
Eliz. 2, c. 31, carrying out Law Reform Committee, Third Report, Cmd. 9305. Distinctions such as those between
"lessee", "licensee," "invitee," "guest," often only of gossamer strength, ought not be determinative in fashioning
procedures ultimately referable to constitutional safeguards. See also Chapman vs. United States, 354 U.S. 610,
616-17 (1961).

It has never been held that a person with requisite interest in the premises searched must own the property seized
in order to have standing in a motion to return and suppress. In Alioto vs. United States, 216 F. Supp. 48 (1963), a
Bookkeeper for several corporations from whose apartment the corporate records were seized successfully
moved for their return. In United States vs. Antonelli, Fireworks Co., 53 F. Supp. 870, 873 (W D. N. Y. 1943), the
corporation's president successfully moved for the return and suppression is to him of both personal and
corporate documents seized from his home during the course of an illegal search:

The lawful possession by Antonelli of documents and property, "either his own or the corporation's was entitled to
protection against unreasonable search and seizure. Under the circumstances in the case at bar, the search and
seizure were unreasonable and unlawful. The motion for the return of seized article and the suppression of the
evidence so obtained should be granted. (Emphasis supplied).

Time was when only a person who had property in interest in either the place searched or the articles seize had
the necessary standing to invoke the protection of the exclusionary rule. But in MacDonald vs. Unite States, 335
U.S. 461 (1948), Justice Robert Jackson joined by Justice Felix Frankfurter, advanced the view that "even a guest
may expect the shelter of the rooftree he is under against criminal intrusion." This view finally became the official
view of the U.S. Supreme Court and was articulated in United States vs. Jeffers, 432 U.S 48 (1951). Nine years
later, in 1960, in Jones vs. Unite States, 362 U.S. 257, 267, the U.S. Supreme Court went a step further. Jones
was a mere guest in the apartment unlawfully searched but the Court nonetheless declared that the exclusionary
rule protected him as well. The concept of "person aggrieved by an unlawful search and seizure" was enlarged to
include "anyone legitimately on premise where the search occurs."

Shortly after the U.S. Supreme Court's Jones decision the U.S. Court of Appeals for the Fifth Circuit held that the
defendant organizer, sole stockholder and president of a corporation had standing in a mail fraud prosecution
against him to demand the return and suppression of corporate property. Henzel vs. United States, 296 F 2d 650,
652 (5th Cir. 1961), supra. The court conclude that the defendant had standing on two independent grounds: First
— he had a sufficient interest in the property seized, and second — he had an adequate interest in the premises
searched (just like in the case at bar). A postal inspector had unlawfully searched the corporation' premises and
had seized most of the corporation's book and records. Looking to Jones, the court observed:

Jones clearly tells us, therefore, what is not required qualify one as a "person aggrieved by an unlawful search
and seizure." It tells us that appellant should not have been precluded from objecting to the Postal Inspector's
search and seizure of the corporation's books and records merely because the appellant did not show ownership
or possession of the books and records or a substantial possessory interest in the invade premises . . . (Henzel
vs. United States, 296 F. 2d at 651). .

Henzel was soon followed by Villano vs. United States, 310 F. 2d 680, 683, (10th Cir. 1962). In Villano, police
officers seized two notebooks from a desk in the defendant's place of employment; the defendant did not claim
ownership of either; he asserted that several employees (including himself) used the notebooks. The Court held
that the employee had a protected interest and that there also was an invasion of privacy.
Both Henzel and Villano considered also the fact that the search and seizure were "directed at" the moving
defendant. Henzel vs. United States, 296 F. 2d at 682; Villano vs. United States, 310 F. 2d at 683.

In a case in which an attorney closed his law office, placed his files in storage and went to Puerto Rico, the Court
of Appeals for the Eighth Circuit recognized his standing to move to quash as unreasonable search and seizure
under the Fourth Amendment of the U.S. Constitution a grand jury subpoena duces tecum directed to the
custodian of his files. The Government contended that the petitioner had no standing because the books and
papers were physically in the possession of the custodian, and because the subpoena was directed against the
custodian. The court rejected the contention, holding that

Schwimmer legally had such possession, control and unrelinquished personal rights in the books and papers as
not to enable the question of unreasonable search and seizure to be escaped through the mere procedural device
of compelling a third-party naked possessor to produce and deliver them. Schwimmer vs. United States, 232 F. 2d
855, 861 (8th Cir. 1956).

Aggrieved person doctrine where the search warrant s primarily directed against said person gives "standing."

The latest United States decision squarely in point is United States vs. Birrell, 242 F. Supp. 191 (1965, U.S.D.C.
S.D.N.Y.). The defendant had stored with an attorney certain files and papers, which attorney, by the name of
Dunn, was not, at the time of the seizing of the records, Birrell's attorney. * Dunn, in turn, had stored most of the
records at his home in the country and on a farm which, according to Dunn's affidavit, was under his (Dunn's)
"control and management." The papers turned out to be private, personal and business papers together with
corporate books and records of certain unnamed corporations in which Birrell did not even claim ownership. (All of
these type records were seized in the case at bar). Nevertheless, the search in Birrell was held invalid by the court
which held that even though Birrell did not own the premises where the records were stored, he had "standing" to
move for the return of all the papers and properties seized. The court, relying on Jones vs. U.S., supra; U.S. vs.
Antonelli Fireworks Co., 53 F. Supp. 870, Aff'd 155 F. 2d 631: Henzel vs. U.S., supra; and Schwimmer vs. U.S.,
supra, pointed out that

It is overwhelmingly established that the searches here in question were directed solely and exclusively against
Birrell. The only person suggested in the papers as having violated the law was Birrell. The first search warrant
described the records as having been used "in committing a violation of Title 18, United States Code, Section
1341, by the use of the mails by one Lowell M. Birrell, . . ." The second search warrant was captioned: "United
States of America vs. Lowell M. Birrell. (p. 198)

Possession (actual or constructive), no less than ownership, gives standing to move to suppress. Such was the
rule even before Jones. (p. 199)

If, as thus indicated Birrell had at least constructive possession of the records stored with Dunn, it matters not
whether he had any interest in the premises searched. See also Jeffers v. United States, 88 U.S. Appl. D.C. 58,
187 F. 2d 498 (1950), affirmed 432 U.S. 48, 72 S. Ct. 93, 96 L. Ed. 459 (1951).

The ruling in the Birrell case was reaffirmed on motion for reargument; the United States did not appeal from this
decision. The factual situation in Birrell is strikingly similar to the case of the present petitioners; as in Birrell, many
personal and corporate papers were seized from premises not petitioners' family residences; as in Birrell, the
searches were "PRIMARILY DIRECTED SOLETY AND EXCLUSIVELY" against the petitioners. Still both types of
documents were suppressed in Birrell because of the illegal search. In the case at bar, the petitioners connection
with the premises raided is much closer than in Birrell.

Thus, the petitioners have full standing to move for the quashing of all the warrants regardless whether these were
directed against residences in the narrow sense of the word, as long as the documents were personal papers of
the petitioners or (to the extent that they were corporate papers) were held by them in a personal capacity or
under their personal control.

Prescinding a from the foregoing, this Court, at all events, should order the return to the petitioners
all personal and private papers and effects seized, no matter where these were seized, whether from their
residences or corporate offices or any other place or places. The uncontradicted sworn statements of the
petitioners in their, various pleadings submitted to this Court indisputably show that amongst the things seized
from the corporate offices and other places were personal and private papers and effects belonging to the
petitioners.

If there should be any categorization of the documents, papers and things which where the objects of the unlawful
searches and seizures, I submit that the grouping should be: (a) personal or private papers of the petitioners were
they were unlawfully seized, be it their family residences offices, warehouses and/or premises owned and/or
possessed (actually or constructively) by them as shown in all the search and in the sworn applications filed in
securing the void search warrants and (b) purely corporate papers belonging to corporations. Under such
categorization or grouping, the determination of which unlawfully seized papers, documents and things
are personal/private of the petitioners or purely corporate papers will have to be left to the lower courts which
issued the void search warrants in ultimately effecting the suppression and/or return of the said documents.

And as unequivocally indicated by the authorities above cited, the petitioners likewise have clear legal standing to
move for the suppression of purely corporate papers as "President and/or General Manager" of the corporations
involved as specifically mentioned in the void search warrants.

Finally, I must articulate my persuasion that although the cases cited in my disquisition were criminal prosecutions,
the great clauses of the constitutional proscription on illegal searches and seizures do not withhold the mantle of
their protection from cases not criminal in origin or nature.

2. Bache & Co. Vs. Ruiz, 37 SCRA 823

[G.R. No. L-32409. February 27, 1971.]

BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. JUDGE
VIVENCIO M. RUIZ, MISAEL P. VERA, in his capacity as Commissioner of Internal
Revenue, ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ, MIMIR
DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE, JOHN DOE, and JOHN
DOE, Respondents.

San Juan, Africa, Gonzales & San Agustin, for Petitioners.

Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista,

Solicitor Pedro A. Ramirez and Special Attorney Jaime M. Maza for Respondents.

DECISION VILLAMOR, J.:

This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of
preliminary mandatory and prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., a
corporation duly organized and existing under the laws of the Philippines, and its President,
Frederick E. Seggerman, pray this Court to declare null and void Search Warrant No. 2-M-70 issued
by respondent Judge on February 25, 1970; to order respondents to desist from enforcing the same
and/or keeping the documents, papers and effects seized by virtue thereof, as well as from
enforcing the tax assessments on petitioner corporation alleged by petitioners to have been made
on the basis of the said documents, papers and effects, and to order the return of the latter to
petitioners. We gave due course to the petition but did not issue the writ of preliminary injunction
prayed for therein.

The pertinent facts of this case, as gathered from record, are as follows:chanrob1es virtual 1aw
library

On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a letter
addressed to respondent Judge Vivencio M. Ruiz requesting the issuance of a search warrant
against petitioners for violation of Section 46(a) of the National Internal Revenue Code, in relation
to all other pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209, and
authorizing Revenue Examiner Rodolfo de Leon, one of herein respondents, to make and file the
application for search warrant which was attached to the letter.

In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness,
respondent Arturo Logronio, went to the Court of First Instance of Rizal. They brought with them
the following papers: respondent Vera’s aforesaid letter-request; an application for search warrant
already filled up but still unsigned by respondent De Leon; an affidavit of respondent Logronio
subscribed before respondent De Leon; a deposition in printed form of respondent Logronio already
accomplished and signed by him but not yet subscribed; and a search warrant already
accomplished but still unsigned by respondent Judge.
At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed his
Deputy Clerk of Court to take the depositions of respondents De Leon and Logronio. After the
session had adjourned, respondent Judge was informed that the depositions had already been
taken. The stenographer, upon request of respondent Judge, read to him her stenographic notes;
and thereafter, respondent Judge asked respondent Logronio to take the oath and warned him that
if his deposition was found to be false and without legal basis, he could be charged for perjury.
Respondent Judge signed respondent de Leon’s application for search warrant and respondent
Logronio’s deposition, Search Warrant No. 2-M-70 was then sign by respondent Judge and
accordingly issued.

Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the search
warrant petitioners at the offices of petitioner corporation on Ayala Avenue, Makati, Rizal.
Petitioners’ lawyers protested the search on the ground that no formal complaint or transcript of
testimony was attached to the warrant. The agents nevertheless proceeded with their search which
yielded six boxes of documents.

On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying that
the search warrant be quashed, dissolved or recalled, that preliminary prohibitory and mandatory
writs of injunction be issued, that the search warrant be declared null and void, and that the
respondents be ordered to pay petitioners, jointly and severally, damages and attorney’s fees. On
March 18, 1970, the respondents, thru the Solicitor General, filed an answer to the petition. After
hearing, the court, presided over by respondent Judge, issued on July 29, 1970, an order
dismissing the petition for dissolution of the search warrant. In the meantime, or on April 16, 1970,
the Bureau of Internal Revenue made tax assessments on petitioner corporation in the total sum of
P2,594,729.97, partly, if not entirely, based on the documents thus seized. Petitioners came to this
Court.

The petition should be granted for the following reasons:chanrob1es virtual 1aw library

1. Respondent Judge failed to personally examine the complainant and his witness.

The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Court
are:jgc:chanrobles.com.ph

"(3) The right of the people to be secure in their persons, houses, papers and effects against
unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon
probable cause, to be determined by the judge after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing the place to be
searched, and the persons or things to be seized." (Art. III, Sec. 1, Constitution.)

"SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue but upon
probable cause in connection with one specific offense to be determined by the judge or justice of
the peace after examination under oath or affirmation of the complainant and the witnesses he may
produce, and particularly describing the place to be searched and the persons or things to be
seized.

"No search warrant shall issue for more than one specific offense.

"SEC. 4. Examination of the applicant. — The judge or justice of the peace must, before issuing the
warrant, personally examine on oath or affirmation the complainant and any witnesses he may
produce and take their depositions in writing, and attach them to the record, in addition to any
affidavits presented to him." (Rule 126, Revised Rules of Court.)

The examination of the complainant and the witnesses he may produce, required by Art. III, Sec.
1, par. 3, of the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should
be conducted by the judge himself and not by others. The phrase "which shall be determined by the
judge after examination under oath or affirmation of the complainant and the witnesses he may
produce," appearing in the said constitutional provision, was introduced by Delegate Francisco as
an amendment to the draft submitted by the Sub-Committee of Seven. The following discussion in
the Constitutional Convention (Laurel, Proceedings of the Philippine Constitutional Convention, Vol.
III, pp. 755-757) is enlightening:jgc:chanrobles.com.ph

"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano.

En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la
justicia mediante el registro inmediato y la incautacion del cuerpo del delito, no cree Su Señoria
que causaria cierta demora el procedimiento apuntado en su enmienda en tal forma que podria
frustrar los fines de la justicia o si Su Señoria encuentra un remedio para esto casos con el fin de
compaginar los fines de la justicia con los derechos del individuo en su persona, bienes etcetera,
etcetera.

"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Señoria pregunta por la
siguiente razon: el que solicita un mandamiento de registro tiene que hacerlo por escrito y ese
escrito no aparecer en la Mesa del Juez sin que alguien vaya el juez a presentar ese escrito o
peticion de sucuestro. Esa persona que presenta el registro puede ser el mismo denunciante o
alguna persona que solicita dicho mandamiento de registro. Ahora toda la enmienda en esos casos
consiste en que haya peticion de registro y el juez no se atendra solamente a sea peticion sino que
el juez examiner a ese denunciante y si tiene testigos tambin examiner a los testigos.

"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese denunciante por escrito
siempre requeriria algun tiempo?.

"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo lo
posible las vejaciones injustas con la expedicion arbitraria de los mandamientos de registro. Creo
que entre dos males debemos escoger. el menor.

x x x

"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are
incorporating in our constitution something of a fundamental character. Now, before a judge could
issue a search warrant, he must be under the obligation to examine personally under oath the
complainant and if he has any witness, the witnesses that he may produce . . ."cralaw virtua1aw
library

The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and
candid, for it requires the judge, before issuing a search warrant, to "personally examine on oath or
affirmation the complainant and any witnesses he may produce . . ."cralaw virtua1aw library

Personal examination by the judge of the complainant and his witnesses is necessary to enable him
to determine the existence or non-existence of a probable cause, pursuant to Art. III, Sec. 1, par.
3, of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit
the issuance of warrants except "upon probable cause." The determination of whether or not a
probable cause exists calls for the exercise of judgment after a judicial appraisal of facts and should
not be allowed to be delegated in the absence of any rule to the contrary.

In the case at bar, no personal examination at all was conducted by respondent Judge of the
complainant (respondent De Leon) and his witness (respondent Logronio). While it is true that the
complainant’s application for search warrant and the witness’ printed-form deposition were
subscribed and sworn to before respondent Judge, the latter did not ask either of the two any
question the answer to which could possibly be the basis for determining whether or not there was
probable cause against herein petitioners. Indeed, the participants seem to have attached so little
significance to the matter that notes of the proceedings before respondent Judge were not even
taken. At this juncture it may be well to recall the salient facts. The transcript of stenographic notes
(pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the hearing of this case in the court
below shows that per instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy
Clerk of Court, took the depositions of the complainant and his witness, and that stenographic
notes thereof were taken by Mrs. Gaspar. At that time respondent Judge was at the sala hearing a
case. After respondent Judge was through with the hearing, Deputy Clerk Gonzales, stenographer
Gaspar, complainant De Leon and witness Logronio went to respondent Judge’s chamber and
informed the Judge that they had finished the depositions. Respondent Judge then requested the
stenographer to read to him her stenographic notes. Special Deputy Clerk Gonzales testified as
follows:jgc:chanrobles.com.ph

"A And after finishing reading the stenographic notes, the Honorable Judge requested or instructed
them, requested Mr. Logronio to raise his hand and warned him if his deposition will be found to be
false and without legal basis, he can be charged criminally for perjury. The Honorable Court told Mr.
Logronio whether he affirms the facts contained in his deposition and the affidavit executed before
Mr. Rodolfo de Leon.

"Q And thereafter?

"A And thereafter, he signed the deposition of Mr. Logronio.

"Q Who is this he?

"A The Honorable Judge.

"Q The deposition or the affidavit?

"A The affidavit, Your Honor."cralaw virtua1aw library

Thereafter, respondent Judge signed the search warrant.

The participation of respondent Judge in the proceedings which led to the issuance of Search
Warrant No. 2-M-70 was thus limited to listening to the stenographer’s readings of her notes, to a
few words of warning against the commission of perjury, and to administering the oath to the
complainant and his witness. This cannot be consider a personal examination. If there was an
examination at all of the complainant and his witness, it was the one conducted by the Deputy
Clerk of Court. But, as stated, the Constitution and the rules require a personal examination by the
judge. It was precisely on account of the intention of the delegates to the Constitutional Convention
to make it a duty of the issuing judge to personally examine the complainant and his witnesses that
the question of how much time would be consumed by the judge in examining them came up
before the Convention, as can be seen from the record of the proceedings quoted above. The
reading of the stenographic notes to respondent Judge did not constitute sufficient compliance with
the constitutional mandate and the rule; for by that manner respondent Judge did not have the
opportunity to observe the demeanor of the complainant and his witness, and to propound initial
and follow-up questions which the judicial mind, on account of its training, was in the best position
to conceive. These were important in arriving at a sound inference on the all-important question of
whether or not there was probable cause.

2. The search warrant was issued for more than one specific offense.

Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National Internal
Revenue Code in relation to all other pertinent provisions thereof particularly Secs. 53, 72, 73, 208
and 209." The question is: Was the said search warrant issued "in connection with one specific
offense," as required by Sec. 3, Rule 126?

To arrive at the correct answer it is essential to examine closely the provisions of the Tax Code
referred to above. Thus we find the following:chanrob1es virtual 1aw library

Sec. 46(a) requires the filing of income tax returns by corporations.

Sec. 53 requires the withholding of income taxes at source.

Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false and
fraudulent returns.

Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply the
information required under the Tax Code.

Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures any
article subject to a specific tax, without having paid the privilege tax therefore, or who aids or abets
in the conduct of illicit distilling, rectifying, compounding, or illicit manufacture of any article subject
to specific tax . . .," and provides that in the case of a corporation, partnership, or association, the
official and/or employee who caused the violation shall be responsible.

Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of output
removed, or to pay the tax due thereon.

The search warrant in question was issued for at least four distinct offenses under the Tax Code.
The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax returns), which
are interrelated. The second is the violation of Sec. 53 (withholding of income taxes at source). The
third is the violation of Sec. 208 (unlawful pursuit of business or occupation); and the fourth is the
violation of Sec. 209 (failure to make a return of receipts, sales, business or gross value of output
actually removed or to pay the tax due thereon). Even in their classification the six above-
mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72 and 73 are under
Title II (Income Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on Business and
Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA 383),
is not applicable, because there the search warrants were issued for "violation of Central Bank
Laws, Internal Revenue (Code) and Revised Penal Code;" whereas, here Search Warrant No 2-M-70
was issued for violation of only one code, i.e., the National Internal Revenue Code. The distinction
more apparent than real, because it was precisely on account of the Stonehill incident, which
occurred sometime before the present Rules of Court took effect on January 1, 1964, that this
Court amended the former rule by inserting therein the phrase "in connection with one specific
offense," and adding the sentence "No search warrant shall issue for more than one specific
offense," in what is now Sec. 3, Rule 126. Thus we said in Stonehill:jgc:chanrobles.com.ph

"Such is the seriousness of the irregularities committed in connection with the disputed search
warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court
that ‘a search warrant shall not issue but upon probable cause in connection with one specific
offense.’ Not satisfied with this qualification, the Court added thereto a paragraph, directing that ‘no
search warrant shall issue for more than one specific offense.’"

3. The search warrant does not particularly describe the things to be seized.

The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70
in this manner:jgc:chanrobles.com.ph

"Unregistered and private books of accounts (ledgers, journals, columnars, receipts and
disbursements books, customers ledgers); receipts for payments received; certificates of stocks
and securities; contracts, promissory notes and deeds of sale; telex and coded messages; business
communications, accounting and business records; checks and check stubs; records of bank
deposits and withdrawals; and records of foreign remittances, covering the years 1966 to
1970."cralaw virtua1aw library

The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3,
Rule 126 of the Revised Rules of Court, that the warrant should particularly describe the things to
be seized.

I n S t o n e h i l l , t h i s C o u r t , s p e a k i n g t h r u M r. C h i e f J u s t i c e Ro b e r t o C o n c e p c i o n ,
said:jgc:chanrobles.com.ph

"The grave violation of the Constitution made in the application for the contested search warrants
was compounded by the description therein made of the effects to be searched for and seized, to
wit:chanrob1es virtual 1aw library

‘Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers,

portfolios, credit journals, typewriters, and other documents and/or paper showing all business
transactions including disbursement receipts, balance sheets and related profit and loss
statements.’

"Thus, the warrants authorized the search for and seizure of records pertaining to all business
transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The
warrants sanctioned the seizure of all records of the petitioners and the aforementioned
corporations, whatever their nature, thus openly contravening the explicit command of our Bill of
Rights — that the things to be seized be particularly described — as well as tending to defeat its
major objective: the elimination of general warrants."cralaw virtua1aw library

While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the said
warrant nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the elimination of
general warrants, for the language used therein is so all-embracing as to include all conceivable
records of petitioner corporation, which, if seized, could possibly render its business inoperative.

In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to explain
the purpose of the requirement that the warrant should particularly describe the place to be
searched and the things to be seized, to wit:jgc:chanrobles.com.ph

". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that a
search warrant should particularly describe the place to be searched and the things to be seized.
The evident purpose and intent of this requirement is to limit the things to be seized to those, and
only those, particularly described in the search warrant — to leave the officers of the law with no
discretion regarding what articles they shall seize, to the end that ‘unreasonable searches and
seizures’ may not be made, — that abuses may not be committed. That this is the correct
interpretation of this constitutional provision is borne out by American authorities."cralaw virtua1aw
library

The purpose as thus explained could, surely and effectively, be defeated under the search warrant
issued in this case.

A search warrant may be said to particularly describe the things to be seized when the description
therein is as specific as the circumstances will ordinarily allow (People v. Rubio; 57 Phil. 384); or
when the description expresses a conclusion of fact — not of law — by which the warrant officer
may be guided in making the search and seizure (idem., dissent of Abad Santos, J.,); or when the
things described are limited to those which bear direct relation to the offense for which the warrant
is being issued (Sec. 2, Rule 126, Revised Rules of Court). The herein search warrant does not
conform to any of the foregoing tests. If the articles desired to be seized have any direct relation to
an offense committed, the applicant must necessarily have some evidence, other than those
articles, to prove the said offense; and the articles subject of search and seizure should come in
handy merely to strengthen such evidence. In this event, the description contained in the herein
disputed warrant should have mentioned, at least, the dates, amounts, persons, and other
pertinent data regarding the receipts of payments, certificates of stocks and securities, contracts,
promissory notes, deeds of sale, messages and communications, checks, bank deposits and
withdrawals, records of foreign remittances, among others, enumerated in the warrant.

Respondents contend that certiorari does not lie because petitioners failed to file a motion for
reconsideration of respondent Judge’s order of July 29, 1970. The contention is without merit. In
the first place, when the questions raised before this Court are the same as those which were
squarely raised in and passed upon by the court below, the filing of a motion for reconsideration in
said court before certiorari can be instituted in this Court is no longer a prerequisite. (Pajo, etc., Et.
Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the rule requiring the filing of a motion for
reconsideration before an application for a writ of certiorari can be entertained was never intended
to be applied without considering the circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In
the case at bar time is of the essence in view of the tax assessments sought to be enforced by
respondent officers of the Bureau of Internal Revenue against petitioner corporation, On account of
which immediate and more direct action becomes necessary. (Matute v. Court of Appeals, Et Al., 26
SCRA 768.) Lastly, the rule does not apply where, as in this case, the deprivation of petitioners’
fundamental right to due process taints the proceeding against them in the court below not only
with irregularity but also with nullity. (Matute v. Court of Appeals, Et Al., supra.)

It is next contended by respondents that a corporation is not entitled to protection against

unreasonable search and seizures. Again, we find no merit in the contention.

"Although, for the reasons above stated, we are of the opinion that an officer of a corporation which
is charged with a violation of a statute of the state of its creation, or of an act of Congress passed
in the exercise of its constitutional powers, cannot refuse to produce the books and papers of such
corporation, we do not wish to be understood as holding that a corporation is not entitled to
immunity, under the 4th Amendment, against unreasonable searches and seizures. A corporation
is, after all, but an association of individuals under an assumed name and with a distinct legal
entity. In organizing itself as a collective body it waives no constitutional immunities appropriate to
such body. Its property cannot be taken without compensation. It can only be proceeded against by
due process of law, and is protected, under the 14th Amendment, against unlawful
discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)

"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different rule
applied to a corporation, the ground that it was not privileged from producing its books and papers.
But the rights of a corporation against unlawful search and seizure are to be protected even if the
same result might have been achieved in a lawful way." (Silverthorne Lumber Company, Et. Al. v.
United States of America, 251 U.S. 385, 64 L. ed. 319.)

In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a
corporation to object against unreasonable searches and seizures, thus:jgc:chanrobles.com.ph

"As regards the first group, we hold that petitioners herein have no cause of action to assail the
legality of the contested warrants and of the seizures made in pursuance thereof, for the simple
reason that said corporations have their respective personalities, separate and distinct from the
personality of herein petitioners, regardless of the amount of shares of stock or the interest of each
of them in said corporations, whatever, the offices they hold therein may be. Indeed, it is well
settled that the legality of a seizure can be contested only by the party whose rights have been
impaired thereby, and that the objection to an unlawful search and seizure is purely personal and
cannot be availed of by third parties. Consequently, petitioners herein may not validly object to the
use in evidence against them of the documents, papers and things seized from the offices and
premises of the corporations adverted to above, since the right to object to the admission of said
papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and
may not be invoked by the corporate officers in proceedings against them in their individual
capacity . . ."cralaw virtua1aw library

In the Stonehill case only the officers of the various corporations in whose offices documents,
papers and effects were searched and seized were the petitioners. In the case at bar, the
corporation to whom the seized documents belong, and whose rights have thereby been impaired,
is itself a petitioner. On that score, petitioner corporation here stands on a different footing from
the corporations in Stonehill.

The tax assessments referred to earlier in this opinion were, if not entirely — as claimed by
petitioners — at least partly — as in effect admitted by respondents — based on the documents
seized by virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the assessments were
made some one and one-half months after the search and seizure on February 25, 1970, is a
strong indication that the documents thus seized served as basis for the assessments. Those
assessments should therefore not be enforced.

PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued by
respondent Judge is declared null and void; respondents are permanently enjoined from enforcing
the said search warrant; the documents, papers and effects seized thereunder are ordered to be
returned to petitioners; and respondent officials the Bureau of Internal Revenue and their
representatives are permanently enjoined from enforcing the assessments mentioned in Annex "G"
of the present petition, as well as other assessments based on the documents, papers and effects
seized under the search warrant herein nullified, and from using the same against petitioners in any
criminal or other proceeding. No pronouncement as to costs.

Separate Opinions

BARREDO, J., concurring:chanrob1es virtual 1aw library

I concur.

I agree with the ruling that the search warrants in question violates the specific injunction of
Section 3, Rule 126 that "No search warrant shall issue for more than one specific offense." There
is no question in my mind that, as very clearly pointed out by Mr. Justice Villamor, the phrase "for
violation of Section 46 (a) of the National Internal Revenue Code in relation to all other pertinent
provisions thereof, particularly Sections 53, 72, 73, 208 and 209" refers to more than one specific
offense, considering that the violation of Section 53 which refers to withholding of income taxes at
the sources, Section 208 which punishes pursuit of business or occupation without payment of the
corresponding specific or privilege taxes, and Section 209 which penalizes failure to make a return
of receipts sales, business or gross value output actually removed or to pay the taxes thereon in
connection with Title V on Privilege Taxes on Business and Occupation can hardly be absorbed in a
charge of alleged violation of Section 46(a), which merely requires the filing of income tax returns
by corporations, so as to constitute with it a single offense. I perceive here the danger that the
result of the search applied for may be used as basis not only for a charge of violating Section
46(a) but also and separately of Section 53, 208 and 209. Of course, it is to be admitted that
Sections 72 and 73, also mentioned in the application, are really directly related to Section 46(a)
because Section 72 provides for surcharges for failure to render, returns and for rendering false and
fraudulent returns and Section 73 refers to the penalty for failure to file returns or to pay the
corresponding tax. Taken together, they constitute one single offense penalized under Section 73. I
am not and cannot be in favor of any scheme which amounts to an indirect means of achieving that
which not allowed to be done directly. By merely saying that a party is being charged with violation
of one section of the code in relation to a number of other sections thereof which in truth have no
clear or direct bearing with the first is to me condemnable because it is no less than a shotgun
device which trenches on the basic liberties intended to be protected by the unequivocal limitations
imposed by the Constitution and the Rules of Court on the privilege to secure a search warrant with
the aggravating circumstance of being coupled with an attempt to mislead the judge before whom
the application for its issuance is presented.

I cannot close this brief concurrence without expressing my vehement disapproval of the action
taken by respondent internal revenue authorities in using the documents and papers secured
during the search, the legality of which was pending resolution by the court, as basis of an
assessment, no matter how highly motivated such action might have been. This smacks of lack of
respect, if not contempt for the court and is certainly intolerable. At the very least, it appears as an
attempt to render the court proceedings moot and academic, and dealing as this case does with
constitutionally protected rights which are part and parcel of the basic concepts of individual liberty
and democracy, the government agents should have been the first ones to refrain from trying to
make a farce of these court proceedings. Indeed, it is to be regretted that the government agents
and the court have acted irregularly, for it is highly doubtful if it would be consistent with the
sacredness of the rights herein found to have been violated to permit the filing of another
application which complies with the constitutional requirements above discussed and the making of
another search upon the return of the papers and documents now in their illegal possession. This
could be an instance wherein taxes properly due the State will probably remain unassessed and
unpaid only because the ones in charge of the execution of the laws did not know how to respect
basic constitutional rights and liberties.

3. Bataan Shipyard & Engineering Co., Inc. Vs. PCGG, G.R. No. L-75885, May 27, 1987
G.R. No. 75885 May 27, 1987

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner, vs.PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA,
COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S. DOROMAL,
CAPT. JORGE B. SIACUNCO, et al., respondents.

NARVASA, J.:

Challenged in this special civil action of certiorari and prohibition by a private corporation known as the Bataan
Shipyard and Engineering Co., Inc. are: (1) Executive Orders Numbered 1 and 2, promulgated by President
Corazon C. Aquino on February 28, 1986 and March 12, 1986, respectively, and (2) the sequestration, takeover,
and other orders issued, and acts done, in accordance with said executive orders by the Presidential Commission
on Good Government and/or its Commissioners and agents, affecting said corporation.

1. The Sequestration, Takeover, and Other Orders Complained of

a. The Basic Sequestration Order

The sequestration order which, in the view of the petitioner corporation, initiated all its misery was issued on April
14, 1986 by Commissioner Mary Concepcion Bautista. It was addressed to three of the agents of the Commission,
hereafter simply referred to as PCGG. It reads as follows:

RE: SEQUESTRATION ORDER

By virtue of the powers vested in the Presidential Commission on Good Government, by authority of the President
of the Philippines, you are hereby directed to sequester the following companies.

1. Bataan Shipyard and Engineering Co., Inc. 6. Trident Management Co.
(Engineering Island Shipyard and Mariveles Shipyard) 7. New Trident Management
2. Baseco Quarry 8. Bay Transport
3. Philippine Jai-Alai Corporation 9. And all affiliate companies of Alfredo "Bejo"
4. Fidelity Management Co., Inc. Romualdez

5. Romson Realty, Inc.
You are hereby ordered:

1. To implement this sequestration order with a minimum disruption of these companies' business activities.

2. To ensure the continuity of these companies as going concerns, the care and maintenance of these assets until
such time that the Office of the President through the Commission on Good Government should decide otherwise.

3. To report to the Commission on Good Government periodically.

Further, you are authorized to request for Military/Security Support from the Military/Police authorities, and such
other acts essential to the achievement of this sequestration order. 1
b. Order for Production of Documents

On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the PCGG, addressed a letter
dated April 18, 1986 to the President and other officers of petitioner firm, reiterating an earlier request for the
production of certain documents, to wit:

1. Stock Transfer Book 4. Audited Financial Statements such as Balance
2. Legal documents, such as: Sheet, Profit & Loss and others from 1973 to
2.1. Articles of Incorporation December 31, 1985.
2.2. By-Laws 5. Monthly Financial Statements for the current year
2.3. Minutes of the Annual Stockholders Meeting from up to March 31, 1986.
1973 to 1986 6. Consolidated Cash Position Reports from January
2.4. Minutes of the Regular and Special Meetings of to April 15, 1986.
the Board of Directors from 1973 to 1986 7. Inventory listings of assets up dated up to March
2.5. Minutes of the Executive Committee Meetings 31, 1986.
from 1973 to 1986 8. Updated schedule of Accounts Receivable and
2.6. Existing contracts with suppliers/contractors/ Accounts Payable.
others. 9. Complete list of depository banks for all funds with
3. Yearly list of stockholders with their corresponding the authorized signatories for withdrawals thereof.
share/stockholdings from 1973 to 1986 duly certified 10. Schedule of company investments and
by the Corporate Secretary. placements. 2


The letter closed with the warning that if the documents were not submitted within five days, the officers would be
cited for "contempt in pursuance with Presidential Executive Order Nos. 1 and 2."

c. Orders Re Engineer Island

(1) Termination of Contract for Security Services

A third order assailed by petitioner corporation, hereafter referred to simply as BASECO, is that issued on April 21,
1986 by a Capt. Flordelino B. Zabala, a member of the task force assigned to carry out the basic sequestration
order. He sent a letter to BASECO's Vice-President for Finance, 3 terminating the contract for security services
within the Engineer Island compound between BASECO and "Anchor and FAIRWAYS" and "other civilian security
agencies," CAPCOM military personnel having already been assigned to the area,

(2) Change of Mode of Payment of Entry Charges

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck Owners and Contractors,"
particularly a "Mr. Buddy Ondivilla National Marine Corporation," advising of the amendment in part of their
contracts with BASECO in the sense that the stipulated charges for use of the BASECO road network were made
payable "upon entry and not anymore subject to monthly billing as was originally agreed upon." 4

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of BASECO with
Deltamarine Integrated Port Services, Inc., in virtue of which the latter undertook to introduce improvements
costing approximately P210,000.00 on the BASECO wharf at Engineer Island, allegedly then in poor condition,
avowedly to "optimize its utilization and in return maximize the revenue which would flow into the government
coffers," in consideration of Deltamarine's being granted "priority in using the improved portion of the wharf ahead
of anybody" and exemption "from the payment of any charges for the use of wharf including the area where it may
install its bagging equipments" "until the improvement remains in a condition suitable for port operations." 5 It
seems however that this contract was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO
Management Team," advised Deltamarine by letter dated July 30, 1986 that "the new management is not in a
position to honor the said contract" and thus "whatever improvements * * (may be introduced) shall be deemed
unauthorized * * and shall be at * * (Deltamarine's) own risk." 6

e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan

By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent, Mayor Melba O.
Buenaventura, "to plan and implement progress towards maximizing the continuous operation of the BASECO
Sesiman Rock Quarry * * by conventional methods;" but afterwards, Commissioner Bautista, in representation of
the PCGG, authorized another party, A.T. Abesamis, to operate the quarry, located at Mariveles, Bataan, an
agreement to this effect having been executed by them on September 17, 1986. 7

f. Order to Dispose of Scrap, etc.

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor Buenaventura was also
"authorized to clean and beautify the Company's compound," and in this connection, to dispose of or sell "metal
scraps" and other materials, equipment and machineries no longer usable, subject to specified guidelines and
safeguards including audit and verification. 8

g. The TAKEOVER Order

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeover by the PCGG of
BASECO, "the Philippine Dockyard Corporation and all their affiliated companies." 9 Diaz invoked the provisions of
Section 3 (c) of Executive Order No. 1, empowering the Commission —

* * To provisionally takeover in the public interest or to prevent its disposal or dissipation, business enterprises and
properties taken over by the government of the Marcos Administration or by entities or persons close to former
President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the
appropriate authorities.

A management team was designated to implement the order, headed by Capt. Siacunco, and was given the
following powers:

1. Conducts all aspects of operation of the subject revenues are duly accounted for; and disburses funds
companies; only as may be necessary;
2. Installs key officers, hires and terminates personnel 5. Does actions including among others, seeking of
as necessary; military support as may be necessary, that will ensure
3. Enters into contracts related to management and compliance to this order;
operation of the companies; 6. Holds itself fully accountable to the Presidential
4. Ensures that the assets of the companies are not Commission on Good Government on all aspects
dissipated and used effectively and efficiently; related to this take-over order.


h. Termination of Services of BASECO Officers

Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M. Valdez, Gilberto
Pasimanero, and Benito R. Cuesta I, advising of the termination of their services by the PCGG. 10

2. Petitioner's Plea and Postulates

It is the foregoing specific orders and acts of the PCGG and its members and agents which, to repeat, petitioner
BASECO would have this Court nullify. More particularly, BASECO prays that this Court-

1) declare unconstitutional and void Executive Orders Numbered 1 and 2;

2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently issued and acts done on
the basis thereof, inclusive of the takeover order of July 14, 1986 and the termination of the services of the
BASECO executives. 11

a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders

While BASECO concedes that "sequestration without resorting to judicial action, might be made within the context
of Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom Constitution was promulgated, under
the principle that the law promulgated by the ruler under a revolutionary regime is the law of the land, it ceased to
be acceptable when the same ruler opted to promulgate the Freedom Constitution on March 25, 1986 wherein
under Section I of the same, Article IV (Bill of Rights) of the 1973 Constitution was adopted providing, among
others, that "No person shall be deprived of life, liberty and property without due process of law." (Const., Art. I V,
Sec. 1)." 12

It declares that its objection to the constitutionality of the Executive Orders "as well as the Sequestration Order * *
and Takeover Order * * issued purportedly under the authority of said Executive Orders, rests on four fundamental
considerations: First, no notice and hearing was accorded * * (it) before its properties and business were taken
over; Second, the PCGG is not a court, but a purely investigative agency and therefore not competent to act as
prosecutor and judge in the same cause; Third, there is nothing in the issuances which envisions any proceeding,
process or remedy by which petitioner may expeditiously challenge the validity of the takeover after the same has
been effected; and Fourthly, being directed against specified persons, and in disregard of the constitutional
presumption of innocence and general rules and procedures, they constitute a Bill of Attainder." 13

b. Re Order to Produce Documents

It argues that the order to produce corporate records from 1973 to 1986, which it has apparently already complied
with, was issued without court authority and infringed its constitutional right against self-incrimination, and
unreasonable search and seizure. 14

c. Re PCGG's Exercise of Right of Ownership and Management

BASECO further contends that the PCGG had unduly interfered with its right of dominion and management of its
business affairs by —

1) terminating its contract for security services with Fairways & Anchor, without the consent and against the will of
the contracting parties; and amending the mode of payment of entry fees stipulated in its Lease Contract with
National Stevedoring & Lighterage Corporation, these acts being in violation of the non-impairment clause of the
constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with Deltamarine Integrated
Port Services, Inc., giving the latter free use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry at Sesiman,
Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S. Mendoza; GM
Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R. Cuesta I; 19
7) planning to elect its own Board of Directors; 20
8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's premises at Mariveles * *
rolls of cable wires, worth P600,000.00 on May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have been buried
therein. 22
3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Many misconceptions and much doubt about the matter of sequestration, takeover and freeze orders have been
engendered by misapprehension, or incomplete comprehension if not indeed downright ignorance of the law
governing these remedies. It is needful that these misconceptions and doubts be dispelled so that uninformed and
useless debates about them may be avoided, and arguments tainted b sophistry or intellectual dishonesty be
quickly exposed and discarded. Towards this end, this opinion will essay an exposition of the law on the matter. In
the process many of the objections raised by BASECO will be dealt with.

4. The Governing Law

a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit command of the Provisional
Constitution, ordained by Proclamation No. 3, 23 that the President-in the exercise of legislative power which she
was authorized to continue to wield "(until a legislature is elected and convened under a new Constitution" —
"shall give priority to measures to achieve the mandate of the people," among others to (r)ecover ill-gotten
properties amassed by the leaders and supporters of the previous regime and protect the interest of the people
through orders of sequestration or freezing of assets or accounts." 24

b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates that "vast
resources of the government have been amassed by former President Ferdinand E. Marcos, his immediate family,
relatives, and close associates both here and abroad." 25 Upon these premises, the Presidential Commission on
Good Government was created, 26 "charged with the task of assisting the President in regard to (certain specified)
matters," among which was precisely-

* * The recovery of all in-gotten wealth accumulated by former President Ferdinand E. Marcos, his immediate
family, relatives, subordinates and close associates, whether located in the Philippines or abroad, including
the takeover or sequestration of all business enterprises and entities owned or controlled by them, during his
administration, directly or through nominees, by taking undue advantage of their public office and/or using their
powers, authority, influence, connections or relationship. 27

In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of its mission, the
PCGG was granted "power and authority" to do the following particular acts, to wit:

1. To sequester or place or cause to be placed under its control or possession any building or office wherein any
ill-gotten wealth or properties may be found, and any records pertaining thereto, in order to prevent their
destruction, concealment or disappearance which would frustrate or hamper the investigation or otherwise prevent
the Commission from accomplishing its task.

2. To provisionally take over in the public interest or to prevent the disposal or dissipation, business enterprises
and properties taken over by the government of the Marcos Administration or by entities or persons close to
former President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the
appropriate authorities.

3. To enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot
and academic, or frustrate or otherwise make ineffectual the efforts of the Commission to carry out its task under
this order. 28

So that it might ascertain the facts germane to its objectives, it was granted power to conduct investigations;
require submission of evidence by subpoenae ad testificandum and duces tecum; administer oaths; punish for
contempt. 29 It was given power also to promulgate such rules and regulations as may be necessary to carry out
the purposes of * * (its creation). 30

c. Executive Order No. 2

Executive Order No. 2 gives additional and more specific data and directions respecting "the recovery of ill-gotten
properties amassed by the leaders and supporters of the previous regime." It declares that:

1) * * the Government of the Philippines is in possession of evidence showing that there are assets and properties
purportedly pertaining to former Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close
relatives, subordinates, business associates, dummies, agents or nominees which had been or were acquired by
them directly or indirectly, through or as a result of the improper or illegal use of funds or properties owned by the
government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of their office, authority, influence, connections or relationship, resulting in their
unjust enrichment and causing grave damage and prejudice to the Filipino people and the Republic of the
Philippines:" and
2) * * said assets and properties are in the form of bank accounts, deposits, trust accounts, shares of stocks,
buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personal
properties in the Philippines and in various countries of the world." 31

Upon these premises, the President-

1) froze "all assets and properties in the Philippines in which former President Marcos and/or his wife, Mrs. Imelda
Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents, or nominees have
any interest or participation;

2) prohibited former President Ferdinand Marcos and/or his wife * *, their close relatives, subordinates, business
associates, duties, agents, or nominees from transferring, conveying, encumbering, concealing or dissipating said
assets or properties in the Philippines and abroad, pending the outcome of appropriate proceedings in the
Philippines to determine whether any such assets or properties were acquired by them through or as a result of
improper or illegal use of or the conversion of funds belonging to the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their
official position, authority, relationship, connection or influence to unjustly enrich themselves at the expense and to
the grave damage and prejudice of the Filipino people and the Republic of the Philippines;

3) prohibited "any person from transferring, conveying, encumbering or otherwise depleting or concealing such
assets and properties or from assisting or taking part in their transfer, encumbrance, concealment or dissipation
under pain of such penalties as are prescribed by law;" and

4) required "all persons in the Philippines holding such assets or properties, whether located in the Philippines or
abroad, in their names as nominees, agents or trustees, to make full disclosure of the same to the Commission on
Good Government within thirty (30) days from publication of * (the) Executive Order, * *. 32

d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is empowered, "with the
assistance of the Office of the Solicitor General and other government agencies, * * to file and prosecute all cases
investigated by it * * as may be warranted by its findings." 34 All such cases, whether civil or criminal, are to be
filed "with the Sandiganbayan which shall have exclusive and original jurisdiction thereof." 35 Executive Order No.
14 also pertinently provides that civil suits for restitution, reparation of damages, or indemnification for
consequential damages, forfeiture proceedings provided for under Republic Act No. 1379, or any other civil
actions under the Civil Code or other existing laws, in connection with * * (said Executive Orders Numbered 1 and
2) may be filed separately from and proceed independently of any criminal proceedings and may be proved by a
preponderance of evidence;" and that, moreover, the "technical rules of procedure and evidence shall not be
strictly applied to* * (said)civil cases." 36

5. Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:

1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the previous regime"; 37

a) more particularly, that ill-gotten wealth (was) accumulated by former President Ferdinand E. Marcos, his
immediate family, relatives, subordinates and close associates, * * located in the Philippines or abroad, * * (and)
business enterprises and entities (came to be) owned or controlled by them, during * * (the Marcos)
administration, directly or through nominees, by taking undue advantage of their public office and/or using their
powers, authority, influence, Connections or relationship; 38

b) otherwise stated, that "there are assets and properties purportedly pertaining to former President Ferdinand E.
Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates,
dummies, agents or nominees which had been or were acquired by them directly or indirectly, through or as a
result of the improper or illegal use of funds or properties owned by the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their
office, authority, influence, connections or relationship, resulting in their unjust enrichment and causing grave
damage and prejudice to the Filipino people and the Republic of the Philippines"; 39

c) that "said assets and properties are in the form of bank accounts. deposits, trust. accounts, shares of stocks,
buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personal
properties in the Philippines and in various countries of the world;" 40 and

2) that certain "business enterprises and properties (were) taken over by the government of the Marcos
Administration or by entities or persons close to former President Marcos. 41

6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's plan "to recover all ill-gotten
wealth."

Neither can there be any debate about the proposition that assuming the above described factual premises of the
Executive Orders and Proclamation No. 3 to be true, to be demonstrable by competent evidence, the recovery
from Marcos, his family and his dominions of the assets and properties involved, is not only a right but a duty on
the part of Government.

But however plain and valid that right and duty may be, still a balance must be sought with the equally compelling
necessity that a proper respect be accorded and adequate protection assured, the fundamental rights of private
property and free enterprise which are deemed pillars of a free society such as ours, and to which all members of
that society may without exception lay claim.

* * Democracy, as a way of life enshrined in the Constitution, embraces as its necessary components freedom of
conscience, freedom of expression, and freedom in the pursuit of happiness. Along with these freedoms are
included economic freedom and freedom of enterprise within reasonable bounds and under proper control. * *
Evincing much concern for the protection of property, the Constitution distinctly recognizes the preferred position
which real estate has occupied in law for ages. Property is bound up with every aspect of social life in a
democracy as democracy is conceived in the Constitution. The Constitution realizes the indispensable role which
property, owned in reasonable quantities and used legitimately, plays in the stimulation to economic effort and the
formation and growth of a solid social middle class that is said to be the bulwark of democracy and the backbone
of every progressive and happy country. 42

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will have to be duly
established by adequate proof in each case, in a proper judicial proceeding, so that the recovery of the ill-gotten
wealth may be validly and properly adjudged and consummated; although there are some who maintain that the
fact-that an immense fortune, and "vast resources of the government have been amassed by former President
Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad," and they have
resorted to all sorts of clever schemes and manipulations to disguise and hide their illicit acquisitions-is within the
realm of judicial notice, being of so extensive notoriety as to dispense with proof thereof, Be this as it may, the
requirement of evidentiary substantiation has been expressly acknowledged, and the procedure to be followed
explicitly laid down, in Executive Order No. 14.

b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits

Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten wealth" as the
evidence at hand may reveal, there is an obvious and imperative need for preliminary, provisional measures to
prevent the concealment, disappearance, destruction, dissipation, or loss of the assets and properties subject of
the suits, or to restrain or foil acts that may render moot and academic, or effectively hamper, delay, or negate
efforts to recover the same.
7. Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These are: (1) sequestration; (2)
freeze orders; and (3) provisional takeover.

Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-gotten wealth." The
remedy of "provisional takeover" is peculiar to cases where "business enterprises and properties (were) taken
over by the government of the Marcos Administration or by entities or persons close to former President
Marcos." 43

a. Sequestration

By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten" means to
place or cause to be placed under its possession or control said property, or any building or office wherein any
such property and any records pertaining thereto may be found, including "business enterprises and entities,"-for
the purpose of preventing the destruction, concealment or dissipation of, and otherwise conserving and
preserving, the same-until it can be determined, through appropriate judicial proceedings, whether the property
was in truth will- gotten," i.e., acquired through or as a result of improper or illegal use of or the conversion of
funds belonging to the Government or any of its branches, instrumentalities, enterprises, banks or financial
institutions, or by taking undue advantage of official position, authority relationship, connection or influence,
resulting in unjust enrichment of the ostensible owner and grave damage and prejudice to the State. 44 And this,
too, is the sense in which the term is commonly understood in other jurisdictions. 45

b. "Freeze Order"

A "freeze order" prohibits the person having possession or control of property alleged to constitute "ill-gotten
wealth" "from transferring, conveying, encumbering or otherwise depleting or concealing such property, or from
assisting or taking part in its transfer, encumbrance, concealment, or dissipation." 46 In other words, it commands
the possessor to hold the property and conserve it subject to the orders and disposition of the authority decreeing
such freezing. In this sense, it is akin to a garnishment by which the possessor or ostensible owner of property is
enjoined not to deliver, transfer, or otherwise dispose of any effects or credits in his possession or control, and
thus becomes in a sense an involuntary depositary thereof. 47

c. Provisional Takeover

In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction between "ill
gotten" "business enterprises and entities" (going concerns, businesses in actual operation), generally, as to which
the remedy of sequestration applies, it being necessarily inferred that the remedy entails no interference, or the
least possible interference with the actual management and operations thereof; and "business enterprises which
were taken over by the government government of the Marcos Administration or by entities or persons close to
him," in particular, as to which a "provisional takeover" is authorized, "in the public interest or to prevent disposal
or dissipation of the enterprises." 48 Such a "provisional takeover" imports something more than sequestration or
freezing, more than the placing of the business under physical possession and control, albeit without or with the
least possible interference with the management and carrying on of the business itself. In a "provisional takeover,"
what is taken into custody is not only the physical assets of the business enterprise or entity, but the business
operation as well. It is in fine the assumption of control not only over things, but over operations or on- going
activities. But, to repeat, such a "provisional takeover" is allowed only as regards "business enterprises * * taken
over by the government of the Marcos Administration or by entities or persons close to former President Marcos."

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional, contingent character of the remedies just
described. Indeed the law plainly qualifies the remedy of take-over by the adjective, "provisional." These remedies
may be resorted to only for a particular exigency: to prevent in the public interest the disappearance or dissipation
of property or business, and conserve it pending adjudgment in appropriate proceedings of the primary issue of
whether or not the acquisition of title or other right thereto by the apparent owner was attended by some vitiating
anomaly. None of the remedies is meant to deprive the owner or possessor of his title or any right to the property
sequestered, frozen or taken over and vest it in the sequestering agency, the Government or other person. This
can be done only for the causes and by the processes laid down by law.

That this is the sense in which the power to sequester, freeze or provisionally take over is to be understood and
exercised, the language of the executive orders in question leaves no doubt. Executive Order No. 1 declares that
the sequestration of property the acquisition of which is suspect shall last "until the transactions leading to such
acquisition * * can be disposed of by the appropriate authorities." 49 Executive Order No. 2 declares that the
assets or properties therein mentioned shall remain frozen "pending the outcome of appropriate proceedings in
the Philippines to determine whether any such assets or properties were acquired" by illegal means. Executive
Order No. 14 makes clear that judicial proceedings are essential for the resolution of the basic issue of whether or
not particular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.

e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command

There is thus no cause for the apprehension voiced by BASECO 50 that sequestration, freezing or provisional
takeover is designed to be an end in itself, that it is the device through which persons may be deprived of their
property branded as "ill-gotten," that it is intended to bring about a permanent, rather than a passing, transitional
state of affairs. That this is not so is quite explicitly declared by the governing rules.

Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these provisional
remedies. Section 26 of its Transitory Provisions, 51 lays down the relevant rule in plain terms, apart from
extending ratification or confirmation (although not really necessary) to the institution by presidential fiat of the
remedy of sequestration and freeze orders:

SEC. 26. The authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986 in
relation to the recovery of ill-gotten wealth shag remain operative for not more than eighteen months after the
ratification of this Constitution. However, in the national interest, as certified by the President, the Congress may
extend said period.

A sequestration or freeze order shall be issued only upon showing of a prima facie case. The order and the list of
the sequestered or frozen properties shall forthwith be registered with the proper court. For orders issued before
the ratification of this Constitution, the corresponding judicial action or proceeding shall be filed within six months
from its ratification. For those issued after such ratification, the judicial action or proceeding shall be commenced
within six months from the issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding is commenced
as herein provided. 52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the provisional remedy of
preliminary attachment, or receivership. 53 By attachment, a sheriff seizes property of a defendant in a civil suit so
that it may stand as security for the satisfaction of any judgment that may be obtained, and not disposed of, or
dissipated, or lost intentionally or otherwise, pending the action. 54 By receivership, property, real or personal,
which is subject of litigation, is placed in the possession and control of a receiver appointed by the Court, who
shall conserve it pending final determination of the title or right of possession over it. 55 All these remedies —
sequestration, freezing, provisional, takeover, attachment and receivership — are provisional, temporary,
designed for-particular exigencies, attended by no character of permanency or finality, and always subject to the
control of the issuing court or agency.

g. Remedies, Non-Judicial

Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of no moment.
The Solicitor General draws attention to the writ of distraint and levy which since 1936 the Commissioner of
Internal Revenue has been by law authorized to issue against property of a delinquent taxpayer. 56 BASECO itself
declares that it has not manifested "a rigid insistence on sequestration as a purely judicial remedy * * (as it feels)
that the law should not be ossified to a point that makes it insensitive to change." What it insists on, what it
pronounces to be its "unyielding position, is that any change in procedure, or the institution of a new one, should
conform to due process and the other prescriptions of the Bill of Rights of the Constitution." 57 It is, to be sure, a
proposition on which there can be no disagreement.

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of personal property
in replevin suits, sequestration and provisional takeover writs may issue ex parte. 58 And as in preliminary
attachment, receivership, and delivery of personality, no objection of any significance may be raised to the ex
parte issuance of an order of sequestration, freezing or takeover, given its fundamental character of temporariness
or conditionality; and taking account specially of the constitutionally expressed "mandate of the people to recover
ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the
people;" 59 as well as the obvious need to avoid alerting suspected possessors of "ill-gotten wealth" and thereby
cause that disappearance or loss of property precisely sought to be prevented, and the fact, just as self-evident,
that "any transfer, disposition, concealment or disappearance of said assets and properties would frustrate,
obstruct or hamper the efforts of the Government" at the just recovery thereof. 60

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there exist a prima facie factual
foundation, at least, for the sequestration, freeze or takeover order, and adequate and fair opportunity to contest it
and endeavor to cause its negation or nullification. 61

Both are assured under the executive orders in question and the rules and regulations promulgated by the PCGG.

a. Prima Facie Evidence as Basis for Orders

Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and due
process." 62 Executive Order No. 2 declares that with respect to claims on allegedly "ill-gotten" assets and
properties, "it is the position of the new democratic government that President Marcos * * (and other parties
affected) be afforded fair opportunity to contest these claims before appropriate Philippine authorities." 63 Section
7 of the Commission's Rules and Regulations provides that sequestration or freeze (and takeover) orders issue
upon the authority of at least two commissioners, based on the affirmation or complaint of an interested
party, or motu proprio when the Commission has reasonable grounds to believe that the issuance thereof is
warranted. 64 A similar requirement is now found in Section 26, Art. XVIII of the 1987 Constitution, which requires
that a "sequestration or freeze order shall be issued only upon showing of a prima facie case." 65

b. Opportunity to Contest

And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party may seek to
set aside a writ of sequestration or freeze order, viz:

SECTION 5. Who may contend.-The person against whom a writ of sequestration or freeze or hold order is
directed may request the lifting thereof in writing, either personally or through counsel within five (5) days from
receipt of the writ or order, or in the case of a hold order, from date of knowledge thereof.

SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio for good cause shown, the
Commission may lift the writ or order unconditionally or subject to such conditions as it may deem necessary,
taking into consideration the evidence and the circumstance of the case. The resolution of the commission may be
appealed by the party concerned to the Office of the President of the Philippines within fifteen (15) days from
receipt thereof.

Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not expressly
imposed by some rule or regulation as a condition to warrant the sequestration or freezing of property
contemplated in the executive orders in question, it would nevertheless be exigible in this jurisdiction in which the
Rule of Law prevails and official acts which are devoid of rational basis in fact or law, or are whimsical and
capricious, are condemned and struck down. 66

9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the validity and propriety of
sequestration, freeze and takeover orders, it should be dispelled by the fact that these particular remedies and the
authority of the PCGG to issue them have received constitutional approbation and sanction. As already
mentioned, the Provisional or "Freedom" Constitution recognizes the power and duty of the President to enact
"measures to achieve the mandate of the people to * * * (recover ill- gotten properties amassed by the leaders and
supporters of the previous regime and protect the interest of the people through orders of sequestration or
freezing of assets or accounts." And as also already adverted to, Section 26, Article XVIII of the 1987
Constitution 67 treats of, and ratifies the "authority to issue sequestration or freeze orders under Proclamation No.
3 dated March 25, 1986."

The institution of these provisional remedies is also premised upon the State's inherent police power, regarded, as
t lie power of promoting the public welfare by restraining and regulating the use of liberty and property," 68 and as
"the most essential, insistent and illimitable of powers * * in the promotion of general welfare and the public
interest," 69 and said to be co-extensive with self-protection and * * not inaptly termed (also) the'law of overruling
necessity." "70

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the PCGG is not, and was
never intended to act as, a judge. Its general function is to conduct investigations in order to collect
evidence establishing instances of "ill-gotten wealth;" issue sequestration, and such orders as may be warranted
by the evidence thus collected and as may be necessary to preserve and conserve the assets of which it takes
custody and control and prevent their disappearance, loss or dissipation; and eventually file and prosecute in the
proper court of competent jurisdiction all cases investigated by it as may be warranted by its findings. It does not
try and decide, or hear and determine, or adjudicate with any character of finality or compulsion, cases involving
the essential issue of whether or not property should be forfeited and transferred to the State because "ill-gotten"
within the meaning of the Constitution and the executive orders. This function is reserved to the designated court,
in this case, the Sandiganbayan. 71 There can therefore be no serious regard accorded to the accusation, leveled
by BASECO, 72 that the PCGG plays the perfidious role of prosecutor and judge at the same time.

11. Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed by the record, hereafter to be
discussed, the petition cannot succeed. The writs of certiorari and prohibition prayed for will not be issued.

The facts show that the corporation known as BASECO was owned or controlled by President Marcos "during his
administration, through nominees, by taking undue advantage of his public office and/or using his powers,
authority, or influence, " and that it was by and through the same means, that BASECO had taken over the
business and/or assets of the National Shipyard and Engineering Co., Inc., and other government-owned or
controlled entities.

12. Organization and Stock Distribution of BASECO

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * * incorporated as a domestic
private corporation * * (on Aug. 30, 1972) by a consortium of Filipino shipowners and shipping executives. Its main
office is at Engineer Island, Port Area, Manila, where its Engineer Island Shipyard is housed, and its main shipyard
is located at Mariveles Bataan." 73 Its Articles of Incorporation disclose that its authorized capital stock is
P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with a value of P12,000,000.00 have been
subscribed, and on said subscription, the aggregate sum of P3,035,000.00 has been paid by the
incorporators. 74 The same articles Identify the incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas,
(2) Anthony P. Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7)
Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12)
Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders, namely: (1)
Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6)
Rodolfo Torres. As of this year, 1986, there were twenty (20) stockholders listed in BASECO's Stock and Transfer
Book. 75 Their names and the number of shares respectively held by them are as follows:

1. Jose A. Rojas 1,248 shares 12. United Phil. Lines 1,240 shares
2. Severino G. de la Cruz 1,248 shares 13. Renato M. Tanseco 8 shares
3. Emilio T. Yap 2,508 shares 14. Fidel Ventura 8 shares
4. Jose Fernandez 1,248 shares 15. Metro Bay Drydock 136,370 shares
5. Jose Francisco 128 shares 16. Manuel Jacela 1 share
6. Manuel S. Mendoza 96 shares 17. Jonathan G. Lu 1 share
7. Anthony P. Lee 1,248 shares 18. Jose J. Tanchanco 1 share
8. Hilario M. Ruiz 32 shares 19. Dioscoro Papa 128 shares
9. Constante L. Fariñas 8 shares 20. Edward T. Marcelo 4 shares
10. Fidelity Management, Inc. 65,882 shares TOTAL 218,819 shares.

11. Trident Management 7,412 shares

13 Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel Corporation, or
NASSCO, a government-owned or controlled corporation, the latter's shipyard at Mariveles, Bataan, known as the
Bataan National Shipyard (BNS), and — except for NASSCO's Engineer Island Shops and certain equipment of
the BNS, consigned for future negotiation — all its structures, buildings, shops, quarters, houses, plants,
equipment and facilities, in stock or in transit. This it did in virtue of a "Contract of Purchase and Sale with Chattel
Mortgage" executed on February 13, 1973. The price was P52,000,000.00. As partial payment thereof, BASECO
delivered to NASSCO a cash bond of P11,400,000.00, convertible into cash within twenty-four (24) hours from
completion of the inventory undertaken pursuant to the contract. The balance of P41,600,000.00, with interest at
seven percent (7%) per annum, compounded semi-annually, was stipulated to be paid in equal semi-annual
installments over a term of nine (9) years, payment to commence after a grace period of two (2) years from date of
turnover of the shipyard to BASECO. 76

14. Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to P24,311,550.00, about eight
(8) months later. A document to this effect was executed on October 9, 1973, entitled "Memorandum Agreement,"
and was signed for NASSCO by Arturo Pacificador, as Presiding Officer of the Board of Directors, and David R.
Ines, as General Manager. 77 This agreement bore, at the top right corner of the first page, the word "APPROVED"
in the handwriting of President Marcos, followed by his usual full signature. The document recited that a down
payment of P5,862,310.00 had been made by BASECO, and the balance of P19,449,240.00 was payable in equal
semi-annual installments over nine (9) years after a grace period of two (2) years, with interest at 7% per annum.

15. Acquisition of 300 Hectares from Export Processing Zone Authority

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles from the Export
Processing Zone Authority for the price of P10,047,940.00 of which, as set out in the document of sale,
P2,000.000.00 was paid upon its execution, and the balance stipulated to be payable in installments. 78

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with the intervention of
President Marcos, acquired ownership of the rest of the assets of NASSCO which had not been included in the
first two (2) purchase documents. This was accomplished by a deed entitled "Contract of Purchase and
Sale," 79 which, like the Memorandum of Agreement dated October 9, 1973 supra also bore at the upper right-
hand corner of its first page, the handwritten notation of President Marcos reading, "APPROVED, July 29, 1973,"
and underneath it, his usual full signature. Transferred to BASECO were NASSCO's "ownership and all its titles,
rights and interests over all equipment and facilities including structures, buildings, shops, quarters, houses, plants
and expendable or semi-expendable assets, located at the Engineer Island, known as the Engineer Island Shops,
including all the equipment of the Bataan National Shipyards (BNS) which were excluded from the sale of NBS to
BASECO but retained by BASECO and all other selected equipment and machineries of NASSCO at J.
Panganiban Smelting Plant." In the same deed, NASSCO committed itself to cooperate with BASECO for the
acquisition from the National Government or other appropriate Government entity of Engineer Island.
Consideration for the sale was set at P5,000,000.00; a down payment of P1,000,000.00 appears to have been
made, and the balance was stipulated to be paid at 7% interest per annum in equal semi annual installments over
a term of nine (9) years, to commence after a grace period of two (2) years. Mr. Arturo Pacificador again signed for
NASSCO, together with the general manager, Mr. David R. Ines.

17. Loans Obtained

It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the last available
Japanese war damage fund of $19,000,000.00," to pay for "Japanese made heavy equipment (brand new)." 80 On
September 3, 1975, it got another loan also from the NDC in the amount of P30,000,000.00 (id.). And on January
28, 1976, it got still another loan, this time from the GSIS, in the sum of P12,400,000.00. 81 The claim has been
made that not a single centavo has been paid on these loans. 82

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO. The first was
contained in a letter dated September 5, 1977 of Hilario M. Ruiz, BASECO president. 83 The second was
embodied in a confidential memorandum dated September 16, 1977 of Capt. A.T. Romualdez. 84 They further
disclose the fine hand of Marcos in the affairs of BASECO, and that of a Romualdez, a relative by affinity.

a. BASECO President's Report

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had been "no orders or
demands for ship construction" for some time and expressed the fear that if that state of affairs persisted,
BASECO would not be able to pay its debts to the Government, which at the time stood at the not inconsiderable
amount of P165,854,000.00. 85 He suggested that, to "save the situation," there be a "spin-off (of their)
shipbuilding activities which shall be handled exclusively by an entirely new corporation to be created;" and
towards this end, he informed Marcos that BASECO was —

* * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding loan to BASECO amounting
to P341.165M and assuming and converting a portion of BASECO's shipbuilding loans from REPACOM
amounting to P52.2M or a total of P83.365M as NDC's equity contribution in the new corporation. LUSTEVECO
will participate by absorbing and converting a portion of the REPACOM loan of Bay Shipyard and Drydock, Inc.,
amounting to P32.538M.86

b. Romualdez' Report

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened with the following
caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission
FROM: Capt. A.T. Romualdez.
Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan obligations due chiefly to the
fact that "orders to build ships as expected * * did not materialize."
He advised that five stockholders had "waived and/or assigned their holdings inblank," these being: (1) Jose A.
Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that
"Mr. Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major heart attack," he made the following
quite revealing, and it may be added, quite cynical and indurate recommendation, to wit:

* * (that) their replacements (be effected) so we can register their names in the stock book prior to the
implementation of your instructions to pass a board resolution to legalize the transfers under SEC regulations;

2. By getting their replacements, the families cannot question us later on; and

3. We will owe no further favors from them. 87

He also transmitted to Marcos, together with the report, the following documents: 88

1. Stock certificates indorsed and assigned in blank with assignments and waivers; 89
2. The articles of incorporation, the amended articles, and the by-laws of BASECO;
3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in "Engineer Island", Port Area,
Manila;
4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering "Engineer Island";
5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure and equipment at Mariveles,
Bataan;
6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and equipment at Engineer Island,
Port Area Manila;
7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of land at Mariveles, Bataan;
8. List of BASECO's fixed assets;
9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of P30,000,000.00;
10. BASECO-REPACOM Agreement dated May 27, 1975;
11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the housing facilities for BASECO's
rank-and-file employees. 90
Capt. Romualdez also recommended that BASECO's loans be restructured "until such period when BASECO will
have enough orders for ships in order for the company to meet loan obligations," and that —

An LOI may be issued to government agencies using floating equipment, that a linkage scheme be applied to a
certain percent of BASECO's net profit as part of BASECO's amortization payments to make it justifiable for you,
Sir. 91

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of BASECO, yet he has
presented a report on BASECO to President Marcos, and his report demonstrates intimate familiarity with the
firm's affairs and problems.

19. Marcos' Response to Reports

President Marcos lost no time in acting on his subordinates' recommendations, particularly as regards the "spin-
off" and the "linkage scheme" relative to "BASECO's amortization payments."

a. Instructions re "Spin-Off"

Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo Velasco of the
Philippine National Oil Company and Chairman Constante Fariñas of the National Development Company,
directing them "to participate in the formation of a new corporation resulting from the spin-off of the shipbuilding
component of BASECO along the following guidelines:
a. Equity participation of government shall be through LUSTEVECO and NDC in the amount of P115,903,000
consisting of the following obligations of BASECO which are hereby authorized to be converted to equity of the
said new corporation, to wit:

1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)

2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of non- voting shares.

For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days after receiving their
president's memorandum, Messrs. Hilario M. Ruiz, Constante L. Fariñas and Geronimo Z. Velasco, in
representation of their respective corporations, executed a PRE-INCORPORATION AGREEMENT dated October
20, 1977. 93 In it, they undertook to form a shipbuilding corporation to be known as "PHIL-ASIA SHIPBUILDING
CORPORATION," to bring to realization their president's instructions. It would seem that the new corporation
ultimately formed was actually named "Philippine Dockyard Corporation (PDC)." 94

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On February 14, 1978, he
issued Letter of Instructions No. 670 addressed to the Reparations Commission REPACOM the Philippine
National Oil Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and the National Development
Company (NDC). What is commanded therein is summarized by the Solicitor General, with pithy and not
inaccurate observations as to the effects thereof (in italics), as follows:

* * 1) the shipbuilding equipment procured by BASECO through reparations be transferred to NDC subject to
reimbursement by NDC to BASECO (of) the amount of s allegedly representing the handling and incidental
expenses incurred by BASECO in the installation of said equipment (so instead of NDC getting paid on its loan to
BASECO, it was made to pay BASECO instead the amount of P18.285M); 2) the shipbuilding equipment procured
from reparations through EPZA, now in the possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.)
be transferred to LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus) transferred be invested
by LUSTEVECO, acting through PNOC and NDC, as the government's equity participation in a shipbuilding
corporation to be established in partnership with the private sector.

xxx xxx xxx

And so, through a simple letter of instruction and memorandum, BASECO's loan obligation to NDC and
REPACOM * * in the total amount of P83.365M and BSD's REPACOM loan of P32.438M were wiped out and
converted into non-voting preferred shares. 95

20. Evidence of Marcos'

Ownership of BASECO

It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the control by
President Marcos of BASECO has been sufficiently shown.

Other evidence submitted to the Court by the Solicitor General proves that President Marcos not only exercised
control over BASECO, but also that he actually owns well nigh one hundred percent of its outstanding stock.

It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819 shares of stock
outstanding, ostensibly owned by twenty (20) stockholders. 96 Four of these twenty are juridical persons: (1) Metro
Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity Management, Inc., 65,882 shares; (3) Trident
Management, 7,412 shares; and (4) United Phil. Lines, 1,240 shares. The first three corporations, among
themselves, own an aggregate of 209,664 shares of BASECO stock, or 95.82% of the outstanding stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that found in Malacanang
shortly after the sudden flight of President Marcos, were certificates corresponding to more than ninety-five
percent (95%) of all the outstanding shares of stock of BASECO, endorsed in blank, together with deeds of
assignment of practically all the outstanding shares of stock of the three (3) corporations above mentioned (which
hold 95.82% of all BASECO stock), signed by the owners thereof although not notarized. 97

More specifically, found in Malacanang (and now in the custody of the PCGG) were:

1) the deeds of assignment of all 600 outstanding shares of Fidelity Management Inc. — which supposedly owns
as aforesaid 65,882 shares of BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of Metro Bay Drydock Corporation
— which allegedly owns 136,370 shares of BASECO stock;
3) the deeds of assignment of 800 outstanding shares of Trident Management Co., Inc. — which allegedly owns
7,412 shares of BASECO stock, assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares of BASECO stock; that is, all
but 5 % — all endorsed in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the BASECO
stockholders were still in possession of their respective stock certificates and had "never endorsed * * them in
blank or to anyone else," 100 that denial is exposed by his own prior and subsequent recorded statements as a
mere gesture of defiance rather than a verifiable factual declaration.

By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10 days "to
SUBMIT, as undertaken by him, * * the certificates of stock issued to the stockholders of * * BASECO as of April
23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for extension; and in his motion
dated October 2, 1986, he declared inter alia that "said certificates of stock are in the possession of third parties,
among whom being the respondents themselves * * and petitioner is still endeavoring to secure copies thereof
from them." 102 On the same day he filed another motion praying that he be allowed "to secure copies of the
Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other Certificates, of Stock of petitioner's
stockholders in possession of respondents." 103

In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that counsel's
aforestated motion to secure copies of the stock certificates "confirms the fact that stockholders of petitioner
corporation are not in possession of * * (their) certificates of stock," and the reason, according to him, was "that
95% of said shares * * have been endorsed in blank and found in Malacañang after the former President and his
family fled the country." To this manifestation BASECO's counsel replied on November 5, 1986, as already
mentioned, Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105

21. Facts Justify Issuance of Sequestration and Takeover Orders

In the light of the affirmative showing by the Government that, prima facie at least, the stockholders and directors
of BASECO as of April, 1986 109 were mere "dummies," nominees or alter egos of President Marcos; at any rate,
that they are no longer owners of any shares of stock in the corporation, the conclusion cannot be avoided that
said stockholders and directors have no basis and no standing whatever to cause the filing and prosecution of the
instant proceeding; and to grant relief to BASECO, as prayed for in the petition, would in effect be to restore the
assets, properties and business sequestered and taken over by the PCGG to persons who are "dummies,"
nominees or alter egos of the former president.

From the standpoint of the PCGG, the facts herein stated at some length do indeed show that the private
corporation known as BASECO was "owned or controlled by former President Ferdinand E. Marcos * * during his
administration, * * through nominees, by taking advantage of * * (his) public office and/or using * * (his) powers,
authority, influence * *," and that NASSCO and other property of the government had been taken over by
BASECO; and the situation justified the sequestration as well as the provisional takeover of the corporation in the
public interest, in accordance with the terms of Executive Orders No. 1 and 2, pending the filing of the requisite
actions with the Sandiganbayan to cause divestment of title thereto from Marcos, and its adjudication in favor of
the Republic pursuant to Executive Order No. 14.

As already earlier stated, this Court agrees that this assessment of the facts is correct; accordingly, it sustains the
acts of sequestration and takeover by the PCGG as being in accord with the law, and, in view of what has thus far
been set out in this opinion, pronounces to be without merit the theory that said acts, and the executive orders
pursuant to which they were done, are fatally defective in not according to the parties affected prior notice and
hearing, or an adequate remedy to impugn, set aside or otherwise obtain relief therefrom, or that the PCGG had
acted as prosecutor and judge at the same time.

22. Executive Orders Not a Bill of Attainder

Neither will this Court sustain the theory that the executive orders in question are a bill of attainder. 110 "A bill of
attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its essence is the substitution of a
legislative for a judicial determination of guilt." 112

In the first place, nothing in the executive orders can be reasonably construed as a determination or declaration of
guilt. On the contrary, the executive orders, inclusive of Executive Order No. 14, make it perfectly clear that any
judgment of guilt in the amassing or acquisition of "ill-gotten wealth" is to be handed down by a judicial tribunal, in
this case, the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In the second place, no
punishment is inflicted by the executive orders, as the merest glance at their provisions will immediately make
apparent. In no sense, therefore, may the executive orders be regarded as a bill of attainder.

23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures

BASECO also contends that its right against self incrimination and unreasonable searches and seizures had been
transgressed by the Order of April 18, 1986 which required it "to produce corporate records from 1973 to 1986
under pain of contempt of the Commission if it fails to do so." The order was issued upon the authority of Section 3
(e) of Executive Order No. 1, treating of the PCGG's power to "issue subpoenas requiring * * the production of
such books, papers, contracts, records, statements of accounts and other documents as may be material to the
investigation conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing with its power to
"require all persons in the Philippines holding * * (alleged "ill-gotten") assets or properties, whether located in the
Philippines or abroad, in their names as nominees, agents or trustees, to make full disclosure of the same * *."
The contention lacks merit.

It is elementary that the right against self-incrimination has no application to juridical persons.

While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute,
it does not follow that a corporation, vested with special privileges and franchises, may refuse to show its hand
when charged with an abuse ofsuchprivileges * * 113

Relevant jurisprudence is also cited by the Solicitor General. 114

* * corporations are not entitled to all of the constitutional protections which private individuals have. * * They are
not at all within the privilege against self-incrimination, although this court more than once has said that the
privilege runs very closely with the 4th Amendment's Search and Seizure provisions. It is also settled that an
officer of the company cannot refuse to produce its records in its possession upon the plea that they will either
incriminate him or may incriminate it." (Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the
Solicitor General's).

* * The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It
received certain special privileges and franchises, and holds them subject to the laws of the state and the
limitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its
rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserve
right in the legislature to investigate its contracts and find out whether it has exceeded its powers. It would be a
strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not,
in the exercise of sovereignty, inquire how these franchises had been employed, and whether they had been
abused, and demand the production of the corporate books and papers for that purpose. The defense amounts to
this, that an officer of the corporation which is charged with a criminal violation of the statute may plead the
criminality of such corporation as a refusal to produce its books. To state this proposition is to answer it. While an
individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does
not follow that a corporation, vested with special privileges and franchises may refuse to show its hand when
charged with an abuse of such privileges. (Wilson v. United States, 55 Law Ed., 771, 780 [emphasis, the Solicitor
General's])
At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures protection to
individuals required to produce evidence before the PCGG against any possible violation of his right against self-
incrimination. It gives them immunity from prosecution on the basis of testimony or information he is compelled to
present. As amended, said Section 4 now provides that —

xxx xxx xxx

The witness may not refuse to comply with the order on the basis of his privilege against self-incrimination; but no
testimony or other information compelled under the order (or any information directly or indirectly derived from
such testimony, or other information) may be used against the witness in any criminal case, except a prosecution
for perjury, giving a false statement, or otherwise failing to comply with the order.

The constitutional safeguard against unreasonable searches and seizures finds no application to the case at bar
either. There has been no search undertaken by any agent or representative of the PCGG, and of course no
seizure on the occasion thereof.

24. Scope and Extent of Powers of the PCGG

One other question remains to be disposed of, that respecting the scope and extent of the powers that may be
wielded by the PCGG with regard to the properties or businesses placed under sequestration or provisionally
taken over. Obviously, it is not a question to which an answer can be easily given, much less one which will suffice
for every conceivable situation.

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion over property
sequestered, frozen or provisionally taken over. AS already earlier stressed with no little insistence, the act of
sequestration; freezing or provisional takeover of property does not import or bring about a divestment of title over
said property; does not make the PCGG the owner thereof. In relation to the property sequestered, frozen or
provisionally taken over, the PCGG is a conservator, not an owner. Therefore, it can not perform acts of strict
ownership; and this is specially true in the situations contemplated by the sequestration rules where, unlike cases
of receivership, for example, no court exercises effective supervision or can upon due application and hearing,
grant authority for the performance of acts of dominion.

Equally evident is that the resort to the provisional remedies in question should entail the least possible
interference with business operations or activities so that, in the event that the accusation of the business
enterprise being "ill gotten" be not proven, it may be returned to its rightful owner as far as possible in the same
condition as it was at the time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business sequestered or
provisionally taken over, much like a court-appointed receiver, 115 such as to bring and defend actions in its own
name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as
may be necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin or
restrain any actual or threatened commission of acts by any person or entity that may render moot and academic,
or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect contempt in
accordance with the Rules of Court; and seek and secure the assistance of any office, agency or instrumentality of
the government. 116 In the case of sequestered businesses generally (i.e., going concerns, businesses in current
operation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator,
caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to him; Limitations
Thereon

Now, in the special instance of a business enterprise shown by evidence to have been "taken over by the
government of the Marcos Administration or by entities or persons close to former President Marcos," 117 the
PCGG is given power and authority, as already adverted to, to "provisionally take (it) over in the public interest or
to prevent * * (its) disposal or dissipation;" and since the term is obviously employed in reference to going
concerns, or business enterprises in operation, something more than mere physical custody is connoted; the
PCGG may in this case exercise some measure of control in the operation, running, or management of the
business itself. But even in this special situation, the intrusion into management should be restricted to the
minimum degree necessary to accomplish the legislative will, which is "to prevent the disposal or dissipation" of
the business enterprise. There should be no hasty, indiscriminate, unreasoned replacement or substitution of
management officials or change of policies, particularly in respect of viable establishments. In fact, such a
replacement or substitution should be avoided if at all possible, and undertaken only when justified by
demonstrably tenable grounds and in line with the stated objectives of the PCGG. And it goes without saying that
where replacement of management officers may be called for, the greatest prudence, circumspection, care and
attention - should accompany that undertaking to the end that truly competent, experienced and honest managers
may be recruited. There should be no role to be played in this area by rank amateurs, no matter how wen
meaning. The road to hell, it has been said, is paved with good intentions. The business is not to be experimented
or played around with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight should
never be lost sight of the ultimate objective of the whole exercise, which is to turn over the business to the
Republic, once judicially established to be "ill-gotten." Reason dictates that it is only under these conditions and
circumstances that the supervision, administration and control of business enterprises provisionally taken over
may legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG may properly exercise
the prerogative to vote sequestered stock of corporations, granted to it by the President of the Philippines through
a Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG, "pending the outcome of
proceedings to determine the ownership of * * (sequestered) shares of stock," "to vote such shares of stock as it
may have sequestered in corporations at all stockholders' meetings called for the election of directors, declaration
of dividends, amendment of the Articles of Incorporation, etc." The Memorandum should be construed in such a
manner as to be consistent with, and not contradictory of the Executive Orders earlier promulgated on the same
matter. There should be no exercise of the right to vote simply because the right exists, or because the stocks
sequestered constitute the controlling or a substantial part of the corporate voting power. The stock is not to be
voted to replace directors, or revise the articles or by-laws, or otherwise bring about substantial changes in policy,
program or practice of the corporation except for demonstrably weighty and defensible grounds, and always in the
context of the stated purposes of sequestration or provisional takeover, i.e., to prevent the dispersion or undue
disposal of the corporate assets. Directors are not to be voted out simply because the power to do so exists.
Substitution of directors is not to be done without reason or rhyme, should indeed be shunned if at an possible,
and undertaken only when essential to prevent disappearance or wastage of corporate property, and always
under such circumstances as assure that the replacements are truly possessed of competence, experience and
probity.

In the case at bar, there was adequate justification to vote the incumbent directors out of office and elect others in
their stead because the evidence showed prima facie that the former were just tools of President Marcos and
were no longer owners of any stock in the firm, if they ever were at all. This is why, in its Resolution of October 28,
1986; 118 this Court declared that —

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and
holding of a stockholders' meeting for the election of directors as authorized by the Memorandum of the President
* * (to the PCGG) dated June 26, 1986, particularly, where as in this case, the government can, through its
designated directors, properly exercise control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons who appear in this case on behalf of
BASECO have failed to show any right or even any shareholding in said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in the
management of the company's affairs should henceforth be guided and governed by the norms herein laid down.
They should never for a moment allow themselves to forget that they are conservators, not owners of the
business; they are fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the premises,
required.

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the execution of
certain contracts, inclusive of the termination of the employment of some of its executives, 119 this Court cannot,
in the present state of the evidence on record, pass upon them. It is not necessary to do so. The issues arising
therefrom may and will be left for initial determination in the appropriate action. But the Court will state that absent
any showing of any important cause therefor, it will not normally substitute its judgment for that of the PCGG in
these individual transactions. It is clear however, that as things now stand, the petitioner cannot be said to have
established the correctness of its submission that the acts of the PCGG in question were done without or in
excess of its powers, or with grave abuse of discretion.

In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among other things "to
require * * the petitioner * * to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of the
stock certificates alleged to be in its possession or accessible to it, mentioned and described in Annex 'P' of its
petition, (and other pleadings) * * within ten (10) days from notice." 106 In a motion filed on December 5,
1986, 107 BASECO's counsel made the statement, quite surprising in the premises, that "it will negotiate with the
owners (of the BASECO stock in question) to allow petitioner to borrow from them, if available, the certificates
referred to" but that "it needs a more sufficient time therefor" (sic). BASECO's counsel however eventually had to
confess inability to produce the originals of the stock certificates, putting up the feeble excuse that while he had
"requested the stockholders to allow * * (him) to borrow said certificates, * * some of * * (them) claimed that they
had delivered the certificates to third parties by way of pledge and/or to secure performance of obligations, while
others allegedly have entrusted them to third parties in view of last national emergency." 108 He has conveniently
omitted, nor has he offered to give the details of the transactions adverted to by him, or to explain why he had not
impressed on the supposed stockholders the primordial importance of convincing this Court of their present
custody of the originals of the stock, or if he had done so, why the stockholders are unwilling to agree to some sort
of arrangement so that the originals of their certificates might at the very least be exhibited to the Court. Under the
circumstances, the Court can only conclude that he could not get the originals from the stockholders for the simple
reason that, as the Solicitor General maintains, said stockholders in truth no longer have them in their possession,
these having already been assigned in blank to then President Marcos.

D. Corporate Social Responsibility

1. Professional Service, Inc. Vs. CA, 611 SCRA 282

G.R. No. 126297 February 11, 2008
PROFESSIONAL SERVICES, INC., petitioner,vs.

THE COURT OF APPEALS and NATIVIDAD and ENRIQUE AGANA, respondents,
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 126467 February 11, 2008
NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA, JR., EMMA AGANA
ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE AGANA, petitioners,vs.THE COURT OF
APPEALS and JUAN FUENTES, respondents,
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 127590 February 11, 2008
MIGUEL AMPIL, petitioner,vs.THE COURT OF APPEALS and NATIVIDAD AGANA and ENRIQUE
AGANA, respondents.
RESOLUTION SANDOVAL-GUTIERREZ, J.:
As the hospital industry changes, so must the laws and jurisprudence governing hospital liability. The immunity
from medical malpractice traditionally accorded to hospitals has to be eroded if we are to balance the interest of
the patients and hospitals under the present setting.

Before this Court is a motion for reconsideration filed by Professional Services, Inc. (PSI), petitioner in G.R. No.
126297, assailing the Court’s First Division Decision dated January 31, 2007, finding PSI and Dr. Miguel Ampil,
petitioner in G.R. No. 127590, jointly and severally liable for medical negligence.

A brief revisit of the antecedent facts is imperative.

On April 4, 1984, Natividad Agana was admitted at the Medical City General Hospital (Medical City) because of
difficulty of bowel movement and bloody anal discharge. Dr. Ampil diagnosed her to be suffering from "cancer of
the sigmoid." Thus, on April 11, 1984, Dr. Ampil, assisted by the medical staff1 of Medical City, performed an
anterior resection surgery upon her. During the surgery, he found that the malignancy in her sigmoid area had
spread to her left ovary, necessitating the removal of certain portions of it. Thus, Dr. Ampil obtained the consent of
Atty. Enrique Agana, Natividad’s husband, to permit Dr. Juan Fuentes, respondent in G.R. No. 126467, to perform
hysterectomy upon Natividad.

Dr. Fuentes performed and completed the hysterectomy. Afterwards, Dr. Ampil took over, completed the operation
and closed the incision. However, the operation appeared to be flawed. In the corresponding Record of Operation
dated April 11, 1984, the attending nurses entered these remarks:

sponge count lacking 2

announced to surgeon searched done (sic) but to no avail continue for closure.

After a couple of days, Natividad complained of excruciating pain in her anal region. She consulted both Dr. Ampil
and Dr. Fuentes about it. They told her that the pain was the natural consequence of the surgical operation
performed upon her. Dr. Ampil recommended that Natividad consult an oncologist to treat the cancerous nodes
which were not removed during the operation.

On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek further treatment.
After four (4) months of consultations and laboratory examinations, Natividad was told that she was free of cancer.
Hence, she was advised to return to the Philippines.

On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two (2) weeks thereafter, her
daughter found a piece of gauze protruding from her vagina. Dr. Ampil was immediately informed. He proceeded
to Natividad’s house where he managed to extract by hand a piece of gauze measuring 1.5 inches in width. Dr.
Ampil then assured Natividad that the pains would soon vanish.

Despite Dr. Ampil’s assurance, the pains intensified, prompting Natividad to seek treatment at the Polymedic
General Hospital. While confined thereat, Dr. Ramon Gutierrez detected the presence of a foreign object in her
vagina -- a foul-smelling gauze measuring 1.5 inches in width. The gauze had badly infected her vaginal vault. A
recto-vaginal fistula had formed in her reproductive organ which forced stool to excrete through the vagina.
Another surgical operation was needed to remedy the situation. Thus, in October 1984, Natividad underwent
another surgery.

On November 12, 1984, Natividad and her husband filed with the Regional Trial Court, Branch 96, Quezon City a
complaint for damages against PSI (owner of Medical City), Dr. Ampil and Dr. Fuentes.

On February 16, 1986, pending the outcome of the above case, Natividad died. She was duly substituted by her
above-named children (the Aganas).

On March 17, 1993, the trial court rendered judgment in favor of spouses Agana finding PSI, Dr. Ampil and Dr.
Fuentes jointly and severally liable. On appeal, the Court of Appeals, in its Decision dated September 6, 1996,
affirmed the assailed judgment with modification in the sense that the complaint against Dr. Fuentes was
dismissed.

PSI, Dr. Ampil and the Aganas filed with this Court separate petitions for review on certiorari. On January 31,
2007, the Court, through its First Division, rendered a Decision holding that PSI is jointly and severally liable with
Dr. Ampil for the following reasons: first, there is an employer-employee relationship between Medical City and Dr.
Ampil. The Court relied on Ramos v. Court of Appeals,2 holding that for the purpose of apportioning responsibility
in medical negligence cases, an employer-employee relationship in effect exists between hospitals and their
attending and visiting physicians; second, PSI’s act of publicly displaying in the lobby of the Medical City the
names and specializations of its accredited physicians, including Dr. Ampil, estopped it from denying the existence
of an employer-employee relationship between them under the doctrine of ostensible agency or agency by
estoppel; and third, PSI’s failure to supervise Dr. Ampil and its resident physicians and nurses and to take an
active step in order to remedy their negligence rendered it directly liable under the doctrine of corporate
negligence.

In its motion for reconsideration, PSI contends that the Court erred in finding it liable under Article 2180 of the Civil
Code, there being no employer-employee relationship between it and its consultant, Dr. Ampil. PSI stressed that
the Court’s Decision in Ramos holding that "an employer-employee relationship in effect exists between hospitals
and their attending and visiting physicians for the purpose of apportioning responsibility" had been reversed in a
subsequent Resolution.3 Further, PSI argues that the doctrine of ostensible agency or agency by
estoppel cannot apply because spouses Agana failed to establish one requisite of the doctrine, i.e., that Natividad
relied on the representation of the hospital in engaging the services of Dr. Ampil. And lastly, PSI maintains that
the doctrine of corporate negligence is misplaced because the proximate cause of Natividad’s injury was Dr.
Ampil’s negligence.
The motion lacks merit.

As earlier mentioned, the First Division, in its assailed Decision, ruled that an employer-employee relationship "in
effect" exists between the Medical City and Dr. Ampil. Consequently, both are jointly and severally liable to the
Aganas. This ruling proceeds from the following ratiocination in Ramos:

We now discuss the responsibility of the hospital in this particular incident. The unique practice (among private
hospitals) of filling up specialist staff with attending and visiting "consultants," who are allegedly not hospital
employees, presents problems in apportioning responsibility for negligence in medical malpractice
cases. However, the difficulty is only more apparent than real.

In the first place, hospitals exercise significant control in the hiring and firing of consultants and in the
conduct of their work within the hospital premises. Doctors who apply for "consultant" slots, visiting or
attending, are required to submit proof of completion of residency, their educational qualifications; generally,
evidence of accreditation by the appropriate board (diplomate), evidence of fellowship in most cases, and
references. These requirements are carefully scrutinized by members of the hospital administration or by a review
committee set up by the hospital who either accept or reject the application. This is particularly true with
respondent hospital.

After a physician is accepted, either as a visiting or attending consultant, he is normally required to attend
clinico-pathological conferences, conduct bedside rounds for clerks, interns and residents, moderate
grand rounds and patient audits and perform other tasks and responsibilities, for the privilege of being
able to maintain a clinic in the hospital, and/or for the privilege of admitting patients into the hospital. In
addition to these, the physician’s performance as a specialist is generally evaluated by a peer review
committee on the basis of mortality and morbidity statistics, and feedback from patients, nurses, interns
and residents. A consultant remiss in his duties, or a consultant who regularly falls short of the minimum
standards acceptable to the hospital or its peer review committee, is normally politely terminated.

In other words, private hospitals hire, fire and exercise real control over their attending and visiting "consultant"
staff. While "consultants" are not, technically employees, a point which respondent hospital asserts in
denying all responsibility for the patient’s condition, the control exercised, the hiring, and the right to
terminate consultants all fulfill the important hallmarks of an employer-employee relationship, with the
exception of the payment of wages. In assessing whether such a relationship in fact exists, the control
test is determining. Accordingly, on the basis of the foregoing, we rule that for the purpose of allocating
responsibility in medical negligence cases, an employer-employee relationship in effect exists between
hospitals and their attending and visiting physicians. This being the case, the question now arises as to
whether or not respondent hospital is solidarily liable with respondent doctors for petitioner’s condition.

The basis for holding an employer solidarily responsible for the negligence of its employee is found in Article 2180
of the Civil Code which considers a person accountable not only for his own acts but also for those of others
based on the former’s responsibility under a relationship of partia ptetas.

Clearly, in Ramos, the Court considered the peculiar relationship between a hospital and its consultants on the
bases of certain factors. One such factor is the "control test" wherein the hospital exercises control in the hiring
and firing of consultants, like Dr. Ampil, and in the conduct of their work.

Actually, contrary to PSI’s contention, the Court did not reverse its ruling in Ramos. What it clarified was that the
De Los Santos Medical Clinic did not exercise control over its consultant, hence, there is no employer-employee
relationship between them. Thus, despite the granting of the said hospital’s motion for reconsideration, the
doctrine in Ramos stays, i.e., for the purpose of allocating responsibility in medical negligence cases, an
employer-employee relationship exists between hospitals and their consultants.

In the instant cases, PSI merely offered a general denial of responsibility, maintaining that consultants, like Dr.
Ampil, are "independent contractors," not employees of the hospital. Even assuming that Dr. Ampil is not an
employee of Medical City, but an independent contractor, still the said hospital is liable to the Aganas.
In Nograles, et al. v. Capitol Medical Center, et al.,4 through Mr. Justice Antonio T. Carpio, the Court held:

The question now is whether CMC is automatically exempt from liability considering that Dr. Estrada is an
independent contractor-physician.

In general, a hospital is not liable for the negligence of an independent contractor-physician. There is, however, an
exception to this principle. The hospital may be liable if the physician is the "ostensible" agent of the hospital.
(Jones v. Philpott, 702 F. Supp. 1210 [1988]) This exception is also known as the "doctrine of apparent
authority." (Sometimes referred to as the apparent or ostensible agency theory. [King v. Mitchell, 31 A.D.3rd 958,
819 N.Y. S.2d 169 (2006)]. x x x

The doctrine of apparent authority essentially involves two factors to determine the liability of an independent
contractor-physician.

The first factor focuses on the hospital’s manifestations and is sometimes described as an inquiry whether the
hospital acted in a manner which would lead a reasonable person to conclude that the individual who was alleged
to be negligent was an employee or agent of the hospital. (Diggs v. Novant Health, Inc., 628 S.E.2d 851 (2006)
citing Hylton v. Koontz, 138 N.C. App. 629 (2000). In this regard, the hospital need not make express
representations to the patient that the treating physician is an employee of the hospital; rather a
representation may be general and implied. (Id.)

The doctrine of apparent authority is a specie of the doctrine of estoppel. Article 1431 of the Civil Code provides
that "[t]hrough estoppel, an admission or representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying thereon." Estoppel rests on this rule: "Whether a
party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or omission,
be permitted to falsify it. (De Castro v. Ginete, 137 Phil. 453 [1969], citing Sec. 3, par. A, Rule 131 of the Rules of
Court. See also King v. Mitchell, 31 A.D.3rd 958, 819 N.Y.S.2d 169 [2006]). xxx

The second factor focuses on the patient’s reliance. It is sometimes characterized as an inquiry on whether the
plaintiff acted in reliance upon the conduct of the hospital or its agent, consistent with ordinary care and prudence.
(Diggs v. Novant Health, Inc.)

PSI argues that the doctrine of apparent authority cannot apply to these cases because spouses Agana failed
to establish proof of their reliance on the representation of Medical City that Dr. Ampil is its employee.

The argument lacks merit.

Atty. Agana categorically testified that one of the reasons why he chose Dr. Ampil was that he knew him to be a
staff member of Medical City, a prominent and known hospital.

Q Will you tell us what transpired in your visit to Dr. Ampil?

A Well, I saw Dr. Ampil at the Medical City, I know him to be a staff member there, and I told him about the
case of my wife and he asked me to bring my wife over so she could be examined. Prior to that, I have known Dr.
Ampil, first, he was staying in front of our house, he was a neighbor, second, my daughter was his student in the
University of the East School of Medicine at Ramon Magsaysay; and when my daughter opted to establish a
hospital or a clinic, Dr. Ampil was one of our consultants on how to establish that hospital. And from there, I have
known that he was a specialist when it comes to that illness.

Atty. Agcaoili

On that particular occasion, April 2, 1984, what was your reason for choosing to contact Dr. Ampil in connection
with your wife’s illness?
A First, before that, I have known him to be a specialist on that part of the body as a surgeon; second, I have
known him to be a staff member of the Medical City which is a prominent and known hospital. And third,
because he is a neighbor, I expect more than the usual medical service to be given to us, than his ordinary
patients.5

Clearly, PSI is estopped from passing the blame solely to Dr. Ampil. Its act of displaying his name and those of the
other physicians in the public directory at the lobby of the hospital amounts to holding out to the public that it offers
quality medical service through the listed physicians. This justifies Atty. Agana’s belief that Dr. Ampil was a
member of the hospital’s staff. It must be stressed that under the doctrine of apparent authority, the
question in every case is whether the principal has by his voluntary act placed the agent in such a
situation that a person of ordinary prudence, conversant with business usages and the nature of the
particular business, is justified in presuming that such agent has authority to perform the particular act in
question.6 In these cases, the circumstances yield a positive answer to the question.

The challenged Decision also anchors its ruling on the doctrine of corporate responsibility.7 The duty of
providing quality medical service is no longer the sole prerogative and responsibility of the physician. This is
because the modern hospital now tends to organize a highly-professional medical staff whose competence and
performance need also to be monitored by the hospital commensurate with its inherent responsibility to provide
quality medical care.8 Such responsibility includes the proper supervision of the members of its medical
staff. Accordingly, the hospital has the duty to make a reasonable effort to monitor and oversee the
treatment prescribed and administered by the physicians practicing in its premises.

Unfortunately, PSI had been remiss in its duty. It did not conduct an immediate investigation on the reported
missing gauzes to the great prejudice and agony of its patient. Dr. Jocson, a member of PSI’s medical staff, who
testified on whether the hospital conducted an investigation, was evasive, thus:

Q We go back to the operative technique, this was signed by Dr. Puruganan, was this submitted to the hospital?
A Yes, sir, this was submitted to the hospital with the record of the patient.
Q Was the hospital immediately informed about the missing sponges?
A That is the duty of the surgeon, sir.
Q As a witness to an untoward incident in the operating room, was it not your obligation, Dr., to also report to
the hospital because you are under the control and direction of the hospital?
A The hospital already had the record of the two OS missing, sir.
Q If you place yourself in the position of the hospital, how will you recover.
A You do not answer my question with another question.
Q Did the hospital do anything about the missing gauzes?
A The hospital left it up to the surgeon who was doing the operation, sir.
Q Did the hospital investigate the surgeon who did the operation?
A I am not in the position to answer that, sir.
Q You never did hear the hospital investigating the doctors involved in this case of those missing sponges, or
did you hear something?
xxxxxx
A I think we already made a report by just saying that two sponges were missing, it is up to the hospital to make
the move.
Atty. Agana
Precisely, I am asking you if the hospital did a move, if the hospital did a move.
A I cannot answer that.
Court
By that answer, would you mean to tell the Court that you were aware if there was such a move done by the
hospital?
A I cannot answer that, your honor, because I did not have any more follow-up of the case that happened until
now.9

The above testimony obviously shows Dr. Jocson’s lack of concern for the patients. Such conduct is reflective of
the hospital’s manner of supervision. Not only did PSI breach its duty to oversee or supervise all persons who
practice medicine within its walls, it also failed to take an active step in fixing the negligence committed. This
renders PSI, not only vicariously liable for the negligence of Dr. Ampil under Article 2180 of the Civil Code, but
also directly liable for its own negligence under Article 2176.
Moreover, there is merit in the trial court’s finding that the failure of PSI to conduct an investigation "established
PSI’s part in the dark conspiracy of silence and concealment about the gauzes." The following testimony of Atty.
Agana supports such findings, thus:
Q You said you relied on the promise of Dr. Ampil and despite the promise you were not able to obtain the said
record. Did you go back to the record custodian?
A I did not because I was talking to Dr. Ampil. He promised me.
Q After your talk to Dr. Ampil, you went to the record custodian?
A I went to the record custodian to get the clinical record of my wife, and I was given a portion of the records
consisting of the findings, among them, the entries of the dates, but not the operating procedure and operative
report.10
In sum, we find no merit in the motion for reconsideration.
WHEREFORE, we DENY PSI’s motion for reconsideration with finality.
SO ORDERED.
 E. Criminal Liability

1. Espiritu vs. Petron Corp., G.R. No. 170891, Nov. 24, 2009
G.R. No. 170891 November 24, 2009

MANUEL C. ESPIRITU, JR., AUDIE LLONA, FREIDA F. ESPIRITU, CARLO F.

ESPIRITU, RAFAEL F. ESPIRITU, ROLANDO M. MIRABUNA, HERMILYN A.
MIRABUNA, KIM ROLAND A. MIRABUNA, KAYE ANN A. MIRABUNA, KEN RYAN A.
MIRABUNA, JUANITO P. DE CASTRO, GERONIMA A. ALMONITE and MANUEL C.
DEE, who are the officers and directors of BICOL GAS REFILLING PLANT
CORPORATION, Petitioners,

vs.

PETRON CORPORATION and CARMEN J. DOLOIRAS, doing business under the
name "KRISTINA PATRICIA ENTERPRISES," Respondents.

DECISION

ABAD, J.:

This case is about the offense or offenses that arise from the reloading of the liquefied
petroleum gas cylinder container of one brand with the liquefied petroleum gas of another
brand.

The Facts and the Case

Respondent Petron Corporation (Petron) sold and distributed liquefied petroleum gas
(LPG) in cylinder tanks that carried its trademark "Gasul."1 Respondent Carmen J.
Doloiras owned and operated Kristina Patricia Enterprises (KPE), the exclusive distributor
of Gasul LPGs in the whole of Sorsogon.2 Jose Nelson Doloiras (Jose) served as KPE’s
manager.

Bicol Gas Refilling Plant Corporation (Bicol Gas) was also in the business of selling and
distributing LPGs in Sorsogon but theirs carried the trademark "Bicol Savers Gas."
Petitioner Audie Llona managed Bicol Gas.

In the course of trade and competition, any given distributor of LPGs at times acquired
possession of LPG cylinder tanks belonging to other distributors operating in the same
area. They called these "captured cylinders." According to Jose, KPE’s manager, in April
2001 Bicol Gas agreed with KPE for the swapping of "captured cylinders" since one
distributor could not refill captured cylinders with its own brand of LPG. At one time, in the
course of implementing this arrangement, KPE’s Jose visited the Bicol Gas refilling plant.
While there, he noticed several Gasul tanks in Bicol Gas’ possession. He requested a
swap but Audie Llona of Bicol Gas replied that he first needed to ask the permission of
the Bicol Gas owners. That permission was given and they had a swap involving around
30 Gasul tanks held by Bicol Gas in exchange for assorted tanks held by KPE.

KPE’s Jose noticed, however, that Bicol Gas still had a number of Gasul tanks in its yard.
He offered to make a swap for these but Llona declined, saying the Bicol Gas owners
wanted to send those tanks to Batangas. Later Bicol Gas told Jose that it had no more
Gasul tanks left in its possession. Jose observed on almost a daily basis, however, that
Bicol Gas’ trucks which plied the streets of the province carried a load of Gasul tanks. He
noted that KPE’s volume of sales dropped significantly from June to July 2001.

On August 4, 2001 KPE’s Jose saw a particular Bicol Gas truck on the Maharlika
Highway. While the truck carried mostly Bicol Savers LPG tanks, it had on it one unsealed
50-kg Gasul tank and one 50-kg Shellane tank. Jose followed the truck and when it
stopped at a store, he asked the driver, Jun Leorena, and the Bicol Gas sales
representative, Jerome Misal, about the Gasul tank in their truck. They said it was empty
but, when Jose turned open its valve, he noted that it was not. Misal and Leorena then
admitted that the Gasul and Shellane tanks on their truck belonged to a customer who
had them filled up by Bicol Gas. Misal then mentioned that his manager was a certain
Rolly Mirabena.

Because of the above incident, KPE filed a complaint3 for violations of Republic Act (R.A.)
623 (illegally filling up registered cylinder tanks), as amended, and Sections 155
(infringement of trade marks) and 169.1 (unfair competition) of the Intellectual Property
Code (R.A. 8293). The complaint charged the following: Jerome Misal, Jun Leorena,
Rolly Mirabena, Audie Llona, and several John and Jane Does, described as the
directors, officers, and stockholders of Bicol Gas. These directors, officers, and
stockholders were eventually identified during the preliminary investigation.

Subsequently, the provincial prosecutor ruled that there was probable cause only for
violation of R.A. 623 (unlawfully filling up registered tanks) and that only the four Bicol
Gas employees, Mirabena, Misal, Leorena, and petitioner Llona, could be charged. The
charge against the other petitioners who were the stockholders and directors of the
company was dismissed.

Dissatisfied, Petron and KPE filed a petition for review with the Office of the Regional
State Prosecutor, Region V, which initially denied the petition but partially granted it on
motion for reconsideration. The Office of the Regional State Prosecutor ordered the filing
of additional informations against the four employees of Bicol Gas for unfair competition.
It ruled, however, that no case for trademark infringement was present. The Secretary of
Justice denied the appeal of Petron and KPE and their motion for reconsideration.

Undaunted, Petron and KPE filed a special civil action for certiorari with the Court of
Appeals4 but the Bicol Gas employees and stockholders concerned opposed it, assailing
the inadequacy in its certificate of non-forum shopping, given that only Atty. Joel Angelo
C. Cruz signed it on behalf of Petron. In its Decision5 dated October 17, 2005, the Court
of Appeals ruled, however, that Atty. Cruz’s certification constituted sufficient compliance.
As to the substantive aspect of the case, the Court of Appeals reversed the Secretary of
Justice’s ruling. It held that unfair competition does not necessarily absorb trademark
infringement. Consequently, the court ordered the filing of additional charges of trademark
infringement against the concerned Bicol Gas employees as well.

Since the Bicol Gas employees presumably acted under the direct order and control of its
owners, the Court of Appeals also ordered the inclusion of the stockholders of Bicol Gas
in the various charges, bringing to 16 the number of persons to be charged, now including
petitioners Manuel C. Espiritu, Jr., Freida F. Espiritu, Carlo F. Espiritu, Rafael F. Espiritu,
Rolando M. Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna, Kaye Ann A.
Mirabuna, Ken Ryan A. Mirabuna, Juanito P. de Castro, Geronima A. Almonite, and
Manuel C. Dee (together with Audie Llona), collectively, petitioners Espiritu, et al. The
court denied the motion for reconsideration of these employees and stockholders in its
Resolution dated January 6, 2006, hence, the present petition for review6 before this
Court.

The Issues Presented

The petition presents the following issues:

1. Whether or not the certificate of non-forum shopping that accompanied the petition filed
with the Court of Appeals, signed only by Atty. Cruz on behalf of Petron, complied with
what the rules require;

2. Whether or not the facts of the case warranted the filing of charges against the Bicol
Gas people for:

a) Filling up the LPG tanks registered to another manufacturer without the latter’s consent
in violation of R.A. 623, as amended;

b) Trademark infringement consisting in Bicol Gas’ use of a trademark that is confusingly

similar to Petron’s registered "Gasul" trademark in violation of section 155 also of R.A.
8293; and

c) Unfair competition consisting in passing off Bicol Gas-produced LPGs for Petron-
produced Gasul LPG in violation of Section 168.3 of R.A. 8293.

The Court’s Rulings

First. Petitioners Espiritu, et al. point out that the certificate of non-forum shopping that
respondents KPE and Petron attached to the petition they filed with the Court of Appeals
was inadequate, having been signed only by Petron, through Atty. Cruz.

But, while procedural requirements such as that of submittal of a certificate of non-forum

shopping cannot be totally disregarded, they may be deemed substantially complied with
under justifiable circumstances.7 One of these circumstances is where the petitioners filed
a collective action in which they share a common interest in its subject matter or raise a
common cause of action. In such a case, the certification by one of the petitioners may be
deemed sufficient.8

Here, KPE and Petron shared a common cause of action against petitioners Espiritu, et
al., namely, the violation of their proprietary rights with respect to the use of Gasul tanks
and trademark. Furthermore, Atty. Cruz said in his certification that he was executing it
"for and on behalf of the Corporation, and co-petitioner Carmen J. Doloiras."9 Thus, the
object of the requirement – to ensure that a party takes no recourse to multiple forums –
was substantially achieved. Besides, the failure of KPE to sign the certificate of non-forum
shopping does not render the petition defective with respect to Petron which signed it
through Atty. Cruz.10 The Court of Appeals, therefore, acted correctly in giving due course
to the petition before it.

Second. The Court of Appeals held that under the facts of the case, there is probable
cause that petitioners Espiritu, et al. committed all three crimes: (a) illegally filling up an
LPG tank registered to Petron without the latter’s consent in violation of R.A. 623, as
amended; (b) trademark infringement which consists in Bicol Gas’ use of a trademark that
is confusingly similar to Petron’s registered "Gasul" trademark in violation of Section 155
of R.A. 8293; and (c) unfair competition which consists in petitioners Espiritu, et al.
passing off Bicol Gas-produced LPGs for Petron-produced Gasul LPG in violation of
Section 168.3 of R.A. 8293.

Here, the complaint adduced at the preliminary investigation shows that the one 50-kg
Petron Gasul LPG tank found on the Bicol Gas’ truck "belonged to [a Bicol Gas] customer
who had the same filled up by BICOL GAS."11 In other words, the customer had that one
Gasul LPG tank brought to Bicol Gas for refilling and the latter obliged.

R.A. 623, as amended,12 punishes any person who, without the written consent of the
manufacturer or seller of gases contained in duly registered steel cylinders or tanks, fills
the steel cylinder or tank, for the purpose of sale, disposal or trafficking, other than the
purpose for which the manufacturer or seller registered the same. This was what
happened in this case, assuming the allegations of KPE’s manager to be true. Bicol Gas
employees filled up with their firm’s gas the tank registered to Petron and bearing its mark
without the latter’s written authority. Consequently, they may be prosecuted for that
offense.

But, as for the crime of trademark infringement, Section 155 of R.A. 8293 (in relation to
Section 17013 ) provides that it is committed by any person who shall, without the consent
of the owner of the registered mark:

1. Use in commerce any reproduction, counterfeit, copy or colorable imitation of a

registered mark or the same container or a dominant feature thereof in connection with
the sale, offering for sale, distribution, advertising of any goods or services including other
preparatory steps necessary to carry out the sale of any goods or services on or in
connection with which such use is likely to cause confusion, or to cause mistake, or to
deceive; or

2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant

feature thereof and apply such reproduction, counterfeit, copy or colorable imitation to
labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be
used in commerce upon or in connection with the sale, offering for sale, distribution, or
advertising of goods or services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive.

KPE and Petron have to show that the alleged infringer, the responsible officers and staff
of Bicol Gas, used Petron’s Gasul trademark or a confusingly similar trademark on Bicol
Gas tanks with intent to deceive the public and defraud its competitor as to what it is
selling.14 Examples of this would be the acts of an underground shoe manufacturer in
Malabon producing "Nike" branded rubber shoes or the acts of a local shirt company with
no connection to La Coste, producing and selling shirts that bear the stitched logos of an
open-jawed alligator.

Here, however, the allegations in the complaint do not show that Bicol Gas painted on its
own tanks Petron’s Gasul trademark or a confusingly similar version of the same to
deceive its customers and cheat Petron. Indeed, in this case, the one tank bearing the
mark of Petron Gasul found in a truck full of Bicol Gas tanks was a genuine Petron Gasul
tank, more of a captured cylinder belonging to competition. No proof has been shown that
Bicol Gas has gone into the business of distributing imitation Petron Gasul LPGs.

As to the charge of unfair competition, Section 168.3 (a) of R.A. 8293 (also in relation to
Section 170) describes the acts constituting the offense as follows:

168.3. In particular, and without in any way limiting the scope of protection against unfair
competition, the following shall be deemed guilty of unfair competition:

(a) Any person, who is selling his goods and gives them the general appearance of goods
of another manufacturer or dealer, either as to the goods themselves or in the wrapping of
the packages in which they are contained, or the devices or words thereon, or in any
other feature of their appearance, which would be likely to influence purchasers to believe
that the goods offered are those of a manufacturer or dealer, other than the actual
manufacturer or dealer, or who otherwise clothes the goods with such appearance as
shall deceive the public and defraud another of his legitimate trade, or any subsequent
vendor of such goods or any agent of any vendor engaged in selling such goods with a
like purpose;
Essentially, what the law punishes is the act of giving one’s goods the general
appearance of the goods of another, which would likely mislead the buyer into believing
that such goods belong to the latter. Examples of this would be the act of manufacturing
or selling shirts bearing the logo of an alligator, similar in design to the open-jawed
alligator in La Coste shirts, except that the jaw of the alligator in the former is closed, or
the act of a producer or seller of tea bags with red tags showing the shadow of a black
dog when his competitor is producing or selling popular tea bags with red tags showing
the shadow of a black cat.

Here, there is no showing that Bicol Gas has been giving its LPG tanks the general
appearance of the tanks of Petron’s Gasul. As already stated, the truckfull of Bicol Gas
tanks that the KPE manager arrested on a road in Sorsogon just happened to have mixed
up with them one authentic Gasul tank that belonged to Petron.

The only point left is the question of the liability of the stockholders and members of the
board of directors of Bicol Gas with respect to the charge of unlawfully filling up a steel
cylinder or tank that belonged to Petron. The Court of Appeals ruled that they should be
charged along with the Bicol Gas employees who were pointed to as directly involved in
overt acts constituting the offense.
1avvphi1

Bicol Gas is a corporation. As such, it is an entity separate and distinct from the persons
of its officers, directors, and stockholders. It has been held, however, that corporate
officers or employees, through whose act, default or omission the corporation commits a
crime, may themselves be individually held answerable for the crime.15

Jose claimed in his affidavit that, when he negotiated the swapping of captured cylinders
with Bicol Gas, its manager, petitioner Audie Llona, claimed that he would be consulting
with the owners of Bicol Gas about it. Subsequently, Bicol Gas declined the offer to swap
cylinders for the reason that the owners wanted to send their captured cylinders to
Batangas. The Court of Appeals seized on this as evidence that the employees of Bicol
Gas acted under the direct orders of its owners and that "the owners of Bicol Gas have
full control of the operations of the business."16

The "owners" of a corporate organization are its stockholders and they are to be
distinguished from its directors and officers. The petitioners here, with the exception of
Audie Llona, are being charged in their capacities as stockholders of Bicol Gas. But the
Court of Appeals forgets that in a corporation, the management of its business is
generally vested in its board of directors, not its stockholders.17 Stockholders are basically
investors in a corporation. They do not have a hand in running the day-to-day business
operations of the corporation unless they are at the same time directors or officers of the
corporation. Before a stockholder may be held criminally liable for acts committed by the
corporation, therefore, it must be shown that he had knowledge of the criminal act
committed in the name of the corporation and that he took part in the same or gave his
consent to its commission, whether by action or inaction.

The finding of the Court of Appeals that the employees "could not have committed the
crimes without the consent, [abetment], permission, or participation of the owners of Bicol
Gas"18 is a sweeping speculation especially since, as demonstrated above, what was
involved was just one Petron Gasul tank found in a truck filled with Bicol Gas tanks.
Although the KPE manager heard petitioner Llona say that he was going to consult the
owners of Bicol Gas regarding the offer to swap additional captured cylinders, no
indication was given as to which Bicol Gas stockholders Llona consulted. It would be
unfair to charge all the stockholders involved, some of whom were proved to be minors.
19 No evidence was presented establishing the names of the stockholders who were

charged with running the operations of Bicol Gas. The complaint even failed to allege who
among the stockholders sat in the board of directors of the company or served as its
officers.

The Court of Appeals of course specifically mentioned petitioner stockholder Manuel C.

Espiritu, Jr. as the registered owner of the truck that the KPE manager brought to the
police for investigation because that truck carried a tank of Petron Gasul. But the act that
R.A. 623 punishes is the unlawful filling up of registered tanks of another. It does not
punish the act of transporting such tanks. And the complaint did not allege that the truck
owner connived with those responsible for filling up that Gasul tank with Bicol Gas LPG.

WHEREFORE, the Court REVERSES and SETS ASIDE the Decision of the Court of
Appeals in CA-G.R. SP 87711 dated October 17, 2005 as well as its Resolution dated
January 6, 2006, the Resolutions of the Secretary of Justice dated March 11, 2004 and
August 31, 2004, and the Order of the Office of the Regional State Prosecutor, Region V,
dated February 19, 2003. The Court REINSTATES the Resolution of the Office of the
Provincial Prosecutor of Sorsogon in I.S. 2001-9231 (inadvertently referred in the
Resolution itself as I.S. 2001-9234), dated February 26, 2002. The names of petitioners
Manuel C. Espiritu, Jr., Freida F. Espititu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando M.
Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna, Kaye Ann A. Mirabuna, Ken
Ryan A. Mirabuna, Juanito P. De Castro, Geronima A. Almonite and Manuel C. Dee are
ORDERED excluded from the charge.

SO ORDERED.

2. Ching vs. Secretary of Justice, 481 SCRA 609

G. R. No. 164317 February 6, 2006

ALFREDO CHING, Petitioner,


vs.

THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-
VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch
52; RIZAL COMMERCIAL BANKING CORP. and THE PEOPLE OF THE
PHILIPPINES, Respondents.

DECISION

CALLEJO, SR., J.:

Before the Court is a petition for review on certiorari of the Decision1 of the Court of
Appeals (CA) in CA-G.R. SP No. 57169 dismissing the petition for certiorari, prohibition
and mandamus filed by petitioner Alfredo Ching, and its Resolution2 dated June 28, 2004
denying the motion for reconsideration thereof.

Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI).
Sometime in September to October 1980, PBMI, through petitioner, applied with the Rizal
Commercial Banking Corporation (respondent bank) for the issuance of commercial
letters of credit to finance its importation of assorted goods.3

Respondent bank approved the application, and irrevocable letters of credit were issued
in favor of petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner
signed 13 trust receipts4 as surety, acknowledging delivery of the following goods:

T/R Nos.
 Date Granted

Maturity Date

Principal

Description of Goods

1845

12-05-80

03-05-81

P1,596,470.05

79.9425 M/T "SDK" Brand Synthetic Graphite Electrode

1853

12-08-80

03-06-81

P198,150.67

3,000 pcs. (15 bundles) Calorized Lance Pipes

1824

11-28-80

02-26-81

P707,879.71

One Lot High Fired Refractory Tundish Bricks

1798

11-21-80

02-19-81

P835,526.25

5 cases spare parts for CCM

1808

11-21-80

02-19-81

P370,332.52

200 pcs. ingot moulds

 2042

01-30-81

04-30-81

P469,669.29

High Fired Refractory Nozzle Bricks

1801

11-21-80

02-19-81

P2,001,715.17

Synthetic Graphite Electrode [with] tapered pitch filed nipples

1857

12-09-80

03-09-81

P197,843.61

3,000 pcs. (15 bundles calorized lance pipes [)]

1895

12-17-80

03-17-81

P67,652.04

Spare parts for Spectrophotometer

1911

12-22-80

03-20-81

P91,497.85

50 pcs. Ingot moulds

2041

01-30-81

04-30-81

P91,456.97
50 pcs. Ingot moulds

2099

02-10-81

05-11-81

P66,162.26

8 pcs. Kubota Rolls for rolling mills

2100

02-10-81

05-12-81

P210,748.00

Spare parts for Lacolaboratory Equipment5

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with
authority to sell but not by way of conditional sale, pledge or otherwise; and in case such
goods were sold, to turn over the proceeds thereof as soon as received, to apply against
the relative acceptances and payment of other indebtedness to respondent bank. In case
the goods remained unsold within the specified period, the goods were to be returned to
respondent bank without any need of demand. Thus, said "goods, manufactured products
or proceeds thereof, whether in the form of money or bills, receivables, or accounts
separate and capable of identification" were respondent bank’s property.

When the trust receipts matured, petitioner failed to return the goods to respondent bank,
or to return their value amounting to ₱6,940,280.66 despite demands. Thus, the bank
filed a criminal complaint for estafa6 against petitioner in the Office of the City Prosecutor
of Manila.

After the requisite preliminary investigation, the City Prosecutor found probable cause
estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to
Presidential Decree (P.D.) No. 115, otherwise known as the Trust Receipts Law. Thirteen
(13) Informations were filed against the petitioner before the Regional Trial Court (RTC) of
Manila. The cases were docketed as Criminal Cases No. 86-42169 to 86-42181, raffled to
Branch 31 of said court.

Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice.
The appeal was dismissed in a Resolution7 dated March 17, 1987, and petitioner moved
for its reconsideration. On December 23, 1987, the Minister of Justice granted the motion,
thus reversing the previous resolution finding probable cause against petitioner.8 The City
Prosecutor was ordered to move for the withdrawal of the Informations.

This time, respondent bank filed a motion for reconsideration, which, however, was
denied on February 24, 1988.9 The RTC, for its part, granted the Motion to Quash the
Informations filed by petitioner on the ground that the material allegations therein did not
amount to estafa.10

In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoñez,
11 holding that the penal provision of P.D. No. 115 encompasses any act violative of an
obligation covered by the trust receipt; it is not limited to transactions involving goods
which are to be sold (retailed), reshipped, stored or processed as a component of a
product ultimately sold. The Court also ruled that "the non-payment of the amount
covered by a trust receipt is an act violative of the obligation of the entrustee to pay."12

On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against
petitioner before the Office of the City Prosecutor of Manila. The case was docketed as
I.S. No. 95B-07614.

Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that
there was no probable cause to charge petitioner with violating P.D. No. 115, as
petitioner’s liability was only civil, not criminal, having signed the trust receipts as surety.
13 Respondent bank appealed the resolution to the Department of Justice (DOJ) via

petition for review, alleging that the City Prosecutor erred in ruling:

1. That there is no evidence to show that respondent participated in the misappropriation

of the goods subject of the trust receipts;

2. That the respondent is a mere surety of the trust receipts; and

3. That the liability of the respondent is only civil in nature.14

On July 13, 1999, the Secretary of Justice issued Resolution No. 25015 granting the
petition and reversing the assailed resolution of the City Prosecutor. According to the
Justice Secretary, the petitioner, as Senior Vice-President of PBMI, executed the 13 trust
receipts and as such, was the one responsible for the offense. Thus, the execution of said
receipts is enough to indict the petitioner as the official responsible for violation of P.D.
No. 115. The Justice Secretary also declared that petitioner could not contend that P.D.
No. 115 covers only goods ultimately destined for sale, as this issue had already been
settled in Allied Banking Corporation v. Ordoñez,16 where the Court ruled that P.D. No.
115 is "not limited to transactions in goods which are to be sold (retailed), reshipped,
stored or processed as a component of a product ultimately sold but covers failure to turn
over the proceeds of the sale of entrusted goods, or to return said goods if unsold or not
otherwise disposed of in accordance with the terms of the trust receipts."

The Justice Secretary further stated that the respondent bound himself under the terms of
the trust receipts not only as a corporate official of PBMI but also as its surety; hence, he
could be proceeded against in two (2) ways: first, as surety as determined by the
Supreme Court in its decision in Rizal Commercial Banking Corporation v. Court of
Appeals;17 and second, as the corporate official responsible for the offense under P.D. No.
115, via criminal prosecution. Moreover, P.D. No. 115 explicitly allows the prosecution of
corporate officers "without prejudice to the civil liabilities arising from the criminal offense."
Thus, according to the Justice Secretary, following Rizal Commercial Banking
Corporation, the civil liability imposed is clearly separate and distinct from the criminal
liability of the accused under P.D. No. 115.

Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13
Informations against petitioner for violation of P.D. No. 115 before the RTC of Manila. The
cases were docketed as Criminal Cases No. 99-178596 to 99-178608 and consolidated
for trial before Branch 52 of said court. Petitioner filed a motion for reconsideration, which
the Secretary of Justice denied in a Resolution18 dated January 17, 2000.

Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA,
assailing the resolutions of the Secretary of Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE
ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS
PROSECUTION DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED
TO PROVE HIS PARTICIPATION IN THE ALLEGED TRANSACTIONS.

2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE

ABUSE OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY
CONTINUED PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME
INCURRED IN THE TERMINATION OF THE PRELIMINARY INVESTIGATION THAT
SHOULD JUSTIFY THE DISMISSAL OF THE INSTANT CASE.

3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY

PROSECUTOR ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN
EXCESS OF JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF THE
PETITIONER DESPITE LACK OF SUFFICIENT BASIS.19

In his petition, petitioner incorporated a certification stating that "as far as this Petition is
concerned, no action or proceeding in the Supreme Court, the Court of Appeals or
different divisions thereof, or any tribunal or agency. It is finally certified that if the affiant
should learn that a similar action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal
or agency, it hereby undertakes to notify this Honorable Court within five (5) days from
such notice."20

In its Comment on the petition, the Office of the Solicitor General alleged that -

A.

THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT

PETITIONER ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE
CHARGED AND THAT THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF
VIOLATION OF P.D. [No.] 115 IN RELATION TO ARTICLE 315, PAR. 1(B) OF THE
REVISED PENAL CODE.

B.

THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE DELAY HAS

MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE,
JUSTIFYING ITS DISMISSAL.

C.

THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND

MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF
THE DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE
DISMISSED.21

On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and
on procedural grounds. On the procedural issue, it ruled that (a) the certification of non-
forum shopping executed by petitioner and incorporated in the petition was defective for
failure to comply with the first two of the three-fold undertakings prescribed in Rule 7,
Section 5 of the Revised Rules of Civil Procedure; and (b) the petition for certiorari,
prohibition and mandamus was not the proper remedy of the petitioner.

On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of
Justice were correctly issued for the following reasons: (a) petitioner, being the Senior
Vice-President of PBMI and the signatory to the trust receipts, is criminally liable for
violation of P.D. No. 115; (b) the issue raised by the petitioner, on whether he violated P.D.
No. 115 by his actuations, had already been resolved and laid to rest in Allied Bank
Corporation v. Ordoñez;22 and (c) petitioner was estopped from raising the

City Prosecutor’s delay in the final disposition of the preliminary investigation because he
failed to do so in the DOJ.

Thus, petitioner filed the instant petition, alleging that:

THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE

GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED
THEREIN WAS DEFECTIVE.

II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS
COMMITTED BY THE SECRETARY OF JUSTICE IN COMING OUT WITH THE
ASSAILED RESOLUTIONS.23

The Court will delve into and resolve the issues seriatim.

The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He
claims that the rules of procedure should be used to promote, not frustrate, substantial
justice. He insists that the Rules of Court should be construed liberally especially when,
as in this case, his substantial rights are adversely affected; hence, the deficiency in his
certification of non-forum shopping should not result in the dismissal of his petition.

The Office of the Solicitor General (OSG) takes the opposite view, and asserts that
indubitably, the certificate of non-forum shopping incorporated in the petition before the
CA is defective because it failed to disclose essential facts about pending actions
concerning similar issues and parties. It asserts that petitioner’s failure to comply with the
Rules of Court is fatal to his petition. The OSG cited Section 2, Rule 42, as well as the
ruling of this Court in Melo v. Court of Appeals.24

We agree with the ruling of the CA that the certification of non-forum shopping petitioner
incorporated in his petition before the appellate court is defective. The certification reads:

It is further certified that as far as this Petition is concerned, no action or proceeding in the
Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or
agency.

It is finally certified that if the affiant should learn that a similar action or proceeding has
been filed or is pending before the Supreme Court, the Court of Appeals, or different
divisions thereof, of any other tribunal or agency, it hereby undertakes to notify this
Honorable Court within five (5) days from such notice.25

Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition
should be accompanied by a sworn certification of non-forum shopping, as provided in
the third paragraph of Section 3, Rule 46 of said Rules. The latter provision reads in part:

SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. —

The petition shall contain the full names and actual addresses of all the petitioners and
respondents, a concise statement of the matters involved, the factual background of the
case and the grounds relied upon for the relief prayed for.

xxx

The petitioner shall also submit together with the petition a sworn certification that he has
not theretofore commenced any other action involving the same issues in the Supreme
Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency;
if there is such other action or proceeding, he must state the status of the same; and if he
should thereafter learn that a similar action or proceeding has been filed or is pending
before the Supreme Court, the Court of Appeals, or different divisions thereof, or any
other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other
tribunal or agency thereof within five (5) days therefrom. xxx

Compliance with the certification against forum shopping is separate from and
independent of the avoidance of forum shopping itself. The requirement is mandatory.
The failure of the petitioner to comply with the foregoing requirement shall be sufficient
ground for the dismissal of the petition without prejudice, unless otherwise provided.26

Indubitably, the first paragraph of petitioner’s certification is incomplete and unintelligible.

Petitioner failed to certify that he "had not heretofore commenced any other action
involving the same issues in the Supreme Court, the Court of Appeals or the different
divisions thereof or any other tribunal or agency" as required by paragraph 4, Section 3,
Rule 46 of the Revised Rules of Court.

We agree with petitioner’s contention that the certification is designed to promote and
facilitate the orderly administration of justice, and therefore, should not be interpreted with
absolute literalness. In his works on the Revised Rules of Civil Procedure, former
Supreme Court Justice Florenz Regalado states that, with respect to the contents of the
certification which the pleader may prepare, the rule of substantial compliance may be
availed of.27 However, there must be a special circumstance or compelling reason which
makes the strict application of the requirement clearly unjustified. The instant petition has
not alleged any such extraneous circumstance. Moreover, as worded, the certification
cannot even be regarded as substantial compliance with the procedural requirement.
Thus, the CA was not informed whether, aside from the petition before it, petitioner had
commenced any other action involving the same issues in other tribunals.

On the merits of the petition, the CA ruled that the petitioner failed to establish that the
Secretary of Justice committed grave abuse of discretion in finding probable cause
against the petitioner for violation of estafa under Article 315, paragraph 1(b) of the
Revised Penal Code, in relation to P.D. No. 115. Thus, the appellate court ratiocinated:

Be that as it may, even on the merits, the arguments advanced in support of the petition
are not persuasive enough to justify the desired conclusion that respondent Secretary of
Justice gravely abused its discretion in coming out with his assailed Resolutions.
Petitioner posits that, except for his being the Senior Vice-President of the PBMI, there is
no iota of evidence that he was a participes crimines in violating the trust receipts sued
upon; and that his liability, if at all, is purely civil because he signed the said trust receipts
merely as a xxx surety and not as the entrustee. These assertions are, however, too dull
that they cannot even just dent the findings of the respondent Secretary, viz:

"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:

‘xxx If the violation or offense is committed by a corporation, partnership, association or

other judicial entities, the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising from the criminal offense.’

"There is no dispute that it was the respondent, who as senior vice-president of PBM,
executed the thirteen (13) trust receipts. As such, the law points to him as the official
responsible for the offense. Since a corporation cannot be proceeded against criminally
because it cannot commit crime in which personal violence or malicious intent is required,
criminal action is limited to the corporate agents guilty of an act amounting to a crime and
never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401;
Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent of said receipts
is enough to indict him as the official responsible for violation of PD 115.

"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods
which are ultimately destined for sale and not goods, like those imported by PBM, for use
in manufacture. This issue has already been settled in the Allied Banking Corporation
case, supra, where he was also a party, when the Supreme Court ruled that PD 115 is
‘not limited to transactions in goods which are to be sold (retailed), reshipped, stored or
processed as a component or a product ultimately sold’ but ‘covers failure to turn over the
proceeds of the sale of entrusted goods, or to return said goods if unsold or disposed of
in accordance with the terms of the trust receipts.’

"In regard to the other assigned errors, we note that the respondent bound himself under
the terms of the trust receipts not only as a corporate official of PBM but also as its surety.
It is evident that these are two (2) capacities which do not exclude the other. Logically, he
can be proceeded against in two (2) ways: first, as surety as determined by the Supreme
Court in its decision in RCBC vs. Court of Appeals, 178 SCRA 739; and, secondly, as the
corporate official responsible for the offense under PD 115, the present case is an
appropriate remedy under our penal law.

"Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without prejudice
to the civil liabilities arising from the criminal offense’ thus, the civil liability imposed on
respondent in RCBC vs. Court of Appeals case is clearly separate and distinct from his
criminal liability under PD 115.’"28

Petitioner asserts that the appellate court’s ruling is erroneous because (a) the
transaction between PBMI and respondent bank is not a trust receipt transaction; (b) he
entered into the transaction and was sued in his capacity as PBMI Senior Vice-President;
(c) he never received the goods as an entrustee for PBMI, hence, could not have
committed any dishonesty or abused the confidence of respondent bank; and (d) PBMI
acquired the goods and used the same in operating its machineries and equipment and
not for resale.

The OSG, for its part, submits a contrary view, to wit:

34. Petitioner further claims that he is not a person responsible for the offense allegedly
because "[b]eing charged as the Senior Vice-President of Philippine Blooming Mills
(PBM), petitioner cannot be held criminally liable as the transactions sued upon were
clearly entered into in his capacity as an officer of the corporation" and that [h]e never
received the goods as an entrustee for PBM as he never had or took possession of the
goods nor did he commit dishonesty nor "abuse of confidence in transacting with RCBC."
Such argument is bereft of merit.

35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not
exculpate him from any liability. Petitioner’s responsibility as the corporate official of PBM
who received the goods in trust is premised on Section 13 of P.D. No. 115, which
provides:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance with
the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal
Code. If the violation or offense is committed by a corporation, partnership, association or
other juridical entities, the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising from the criminal offense.
(Emphasis supplied)

36. Petitioner having participated in the negotiations for the trust receipts and having
received the goods for PBM, it was inevitable that the petitioner is the proper corporate
officer to be proceeded against by virtue of the PBM’s violation of P.D. No. 115.29

The ruling of the CA is correct.

In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts of
a quasi-judicial officer may be assailed by the aggrieved party via a petition for certiorari
and enjoined (a) when necessary to afford adequate protection to the constitutional rights
of the accused; (b) when necessary for the orderly administration of justice; (c) when the
acts of the officer are without or in excess of authority; (d) where the charges are
manifestly false and motivated by the lust for vengeance; and (e) when there is clearly no
prima facie case against the accused.31 The Court also declared that, if the officer
conducting a preliminary investigation (in that case, the Office of the Ombudsman) acts
without or in excess of his authority and resolves to file an Information despite the
absence of probable cause, such act may be nullified by a writ of certiorari.32

Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the
Information shall be prepared by the Investigating Prosecutor against the respondent only
if he or she finds probable cause to hold such respondent for trial. The Investigating
Prosecutor acts without or in excess of his authority under the Rule if the Information is
filed against the respondent despite absence of evidence showing probable cause
therefor.34 If the Secretary of Justice reverses the Resolution of the Investigating
Prosecutor who found no probable cause to hold the respondent for trial, and orders such
prosecutor to file the Information despite the absence of probable cause, the Secretary of
Justice acts contrary to law, without authority and/or in excess of authority. Such
resolution may likewise be nullified in a petition for certiorari under Rule 65 of the Revised
Rules of Civil Procedure.35

A preliminary investigation, designed to secure the respondent against hasty, malicious

and oppressive prosecution, is an inquiry to determine whether (a) a crime has been
committed; and (b) whether there is probable cause to believe that the accused is guilty
thereof. It is a means of discovering the person or persons who may be reasonably
charged with a crime. Probable cause need not be based on clear and convincing
evidence of guilt, as the investigating officer acts upon probable cause of reasonable
belief. Probable cause implies probability of guilt and requires more than bare suspicion
but less than evidence which would justify a conviction. A finding of probable cause needs
only to rest on evidence showing that more likely than not, a crime has been committed
by the suspect.36
However, while probable cause should be determined in a summary manner, there is a
need to examine the evidence with care to prevent material damage to a potential
accused’s constitutional right to liberty and the guarantees of freedom and fair play37 and
to protect the State from the burden of unnecessary expenses in prosecuting alleged
offenses and holding trials arising from false, fraudulent or groundless charges.38

In this case, petitioner failed to establish that the Secretary of Justice committed grave
abuse of discretion in issuing the assailed resolutions. Indeed, he acted in accord with
law and the evidence.

Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within
the meaning of this Decree, is any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this Decree as entrustee,
whereby the entruster, who owns or holds absolute title or security interests over certain
specified goods, documents or instruments, releases the same to the possession of the
entrustee upon the latter’s execution and delivery to the entruster of a signed document
called a "trust receipt" wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or otherwise dispose of the
goods, documents or instruments with the obligation to turn over to the entruster the
proceeds thereof to the extent of the amount owing to the entruster or as appears in the
trust receipt or the goods, documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes substantially equivalent to any of the following:

1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale; Provided, That, in
the case of goods delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title over the goods
whether in its original or processed form until the entrustee has complied fully with his
obligation under the trust receipt; or (c) to load, unload, ship or otherwise deal with them
in a manner preliminary or necessary to their sale; or

2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver

them to a principal; or c) to effect the consummation of some transactions involving
delivery to a depository or register; or d) to effect their presentation, collection or renewal.

The sale of goods, documents or instruments by a person in the business of selling

goods, documents or instruments for profit who, at the outset of the transaction, has, as
against the buyer, general property rights in such goods, documents or instruments, or
who sells the same to the buyer on credit, retaining title or other interest as security for
the payment of the purchase price, does not constitute a trust receipt transaction and is
outside the purview and coverage of this Decree.

An entrustee is one having or taking possession of goods, documents or instruments

under a trust receipt transaction, and any successor in interest of such person for the
purpose of payment specified in the trust receipt agreement.39 The entrustee is obliged to:
(1) hold the goods, documents or instruments in trust for the entruster and shall dispose
of them strictly in accordance with the terms and conditions of the trust receipt; (2)
receive the proceeds in trust for the entruster and turn over the same to the entruster to
the extent of the amount owing to the entruster or as appears on the trust receipt; (3)
insure the goods for their total value against loss from fire, theft, pilferage or other
casualties; (4) keep said goods or proceeds thereof whether in money or whatever form,
separate and capable of identification as property of the entruster; (5) return the goods,
documents or instruments in the event of non-sale or upon demand of the entruster; and
(6) observe all other terms and conditions of the trust receipt not contrary to the
provisions of the decree.40

The entruster shall be entitled to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the extent of the amount
owing to the entruster or as appears in the trust receipt, or to the return of the goods,
documents or instruments in case of non-sale, and to the enforcement of all other rights
conferred on him in the trust receipt; provided, such are not contrary to the provisions of
the document.41

In the case at bar, the transaction between petitioner and respondent bank falls under the
trust receipt transactions envisaged in P.D. No. 115. Respondent bank imported the
goods and entrusted the same to PBMI under the trust receipts signed by petitioner, as
entrustee, with the bank as entruster. The agreement was as follows:

And in consideration thereof, I/we hereby agree to hold said goods in trust for the said
BANK as its property with liberty to sell the same within ____days from the date of the
execution of this Trust Receipt and for the Bank’s account, but without authority to make
any other disposition whatsoever of the said goods or any part thereof (or the proceeds)
either by way of conditional sale, pledge or otherwise.

I/we agree to keep the said goods insured to their full value against loss from fire, theft,
pilferage or other casualties as directed by the BANK, the sum insured to be payable in
case of loss to the BANK, with the understanding that the BANK is, not to be chargeable
with the storage premium or insurance or any other expenses incurred on said goods.

In case of sale, I/we further agree to turn over the proceeds thereof as soon as received
to the BANK, to apply against the relative acceptances (as described above) and for the
payment of any other indebtedness of mine/ours to the BANK. In case of non-sale within
the period specified herein, I/we agree to return the goods under this Trust Receipt to the
BANK without any need of demand.

I/we agree to keep the said goods, manufactured products or proceeds thereof, whether
in the form of money or bills, receivables, or accounts separate and capable of
identification as property of the BANK.42

It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a
matter of public policy, the failure of person to turn over the proceeds of the sale of the
goods covered by a trust receipt or to return said goods, if not sold, is a public nuisance
to be abated by the imposition of penal sanctions.43

The Court likewise rules that the issue of whether P.D. No. 115 encompasses
transactions involving goods procured as a component of a product ultimately sold has
been resolved in the affirmative in Allied Banking Corporation v. Ordoñez.44 The law
applies to goods used by the entrustee in the operation of its machineries and equipment.
The non-payment of the amount covered by the trust receipts or the non-return of the
goods covered by the receipts, if not sold or otherwise not disposed of, violate the
entrustee’s obligation to pay the amount or to return the goods to the entruster.

In Colinares v. Court of Appeals,45 the Court declared that there are two possible
situations in a trust receipt transaction. The first is covered by the provision which refers
to money received under the obligation involving the duty to deliver it (entregarla) to the
owner of the merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to return it (devolvera) to the owner.46 Thus,
failure of the entrustee to turn over the proceeds of the sale of the goods covered by the
trust receipts to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt is a crime under P.D. No. 115, without need
of proving intent to defraud. The law punishes dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of the entruster, regardless of whether the
latter is the owner or not. A mere failure to deliver the proceeds of the sale of the goods, if
not sold, constitutes a criminal offense that causes prejudice, not only to another, but
more to the public interest.47

The Court rules that although petitioner signed the trust receipts merely as Senior Vice-
President of PBMI and had no physical possession of the goods, he cannot avoid
prosecution for violation of P.D. No. 115.

The penalty clause of the law, Section 13 of P.D. No. 115 reads:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance with
the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal
Code. If the violation or offense is committed by a corporation, partnership, association
1âwphi1

or other juridical entities, the penalty provided for in this Decree shall be imposed upon
the directors, officers, employees or other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising from the criminal offense.

The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under
paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of
confidence. It may be committed by a corporation or other juridical entity or by natural
persons. However, the penalty for the crime is imprisonment for the periods provided in
said Article 315, which reads:

ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of the
means mentioned hereinbelow shall be punished by:

1st. The penalty of prision correccional in its maximum period to prision mayor in its
minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed
22,000 pesos; and if such amount exceeds the latter sum, the penalty provided in this
paragraph shall be imposed in its maximum period, adding one year for each additional
10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years.
In such cases, and in connection with the accessory penalties which may be imposed and
for the purpose of the other provisions of this Code, the penalty shall be termed prision
mayor or reclusion temporal, as the case may be;

2nd. The penalty of prision correccional in its minimum and medium periods, if the
amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to prision correccional in its
minimum period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such amount does not
exceed 200 pesos, provided that in the four cases mentioned, the fraud be committed by
any of the following means; xxx

Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or board of directors, officers, or
other officials or employees responsible for the offense. The rationale is that such officers
or employees are vested with the authority and responsibility to devise means necessary
to ensure compliance with the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in the violations of the law.48

If the crime is committed by a corporation or other juridical entity, the directors, officers,
employees or other officers thereof responsible for the offense shall be charged and
penalized for the crime, precisely because of the nature of the crime and the penalty
therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized
for a crime punishable by imprisonment.49 However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both
fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty,
may be fined.50

A crime is the doing of that which the penal code forbids to be done, or omitting to do
what it commands. A necessary part of the definition of every crime is the designation of
the author of the crime upon whom the penalty is to be inflicted. When a criminal statute
designates an act of a corporation or a crime and prescribes punishment therefor, it
creates a criminal offense which, otherwise, would not exist and such can be committed
only by the corporation. But when a penal statute does not expressly apply to
corporations, it does not create an offense for which a corporation may be punished. On
the other hand, if the State, by statute, defines a crime that may be committed by a
corporation but prescribes the penalty therefor to be suffered by the officers, directors, or
employees of such corporation or other persons responsible for the offense, only such
individuals will suffer such penalty.51 Corporate officers or employees, through whose act,
default or omission the corporation commits a crime, are themselves individually guilty of
the crime.52

The principle applies whether or not the crime requires the consciousness of wrongdoing.
It applies to those corporate agents who themselves commit the crime and to those, who,
by virtue of their managerial positions or other similar relation to the corporation, could be
deemed responsible for its commission, if by virtue of their relationship to the corporation,
they had the power to prevent the act.53 Moreover, all parties active in promoting a crime,
whether agents or not, are principals.54 Whether such officers or employees are benefited
by their delictual acts is not a touchstone of their criminal liability. Benefit is not an
operative fact.

In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind
the cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl
Warren, a corporate officer cannot protect himself behind a corporation where he is the
actual, present and efficient actor.55

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs
against the petitioner.

SO ORDERED.

3. Ildefonso S. Crisologo vs. People of the Philippines, G.R. No. 199481, December 3, 2012
4. Gosiaco vs. Ching, G.R. No. 173807, April 16, 2009
5.Ambassador Hotel, Inc. Vs. Social Security System, G.R. No. 194137, June 21, 2017
6. Ty, et. Al vs. NBI Supervising Agent Jemil, et. Al., G.R. No. 182147, December 15, 2010;

F. Moral Damages
 1. ABS-CBN vs. Court of Appeals, 301 SCRA 589
2. Filipinas Broadcasting Networks, Inc. Vs. Ago Medical and Educational Center, et. Al., G.R. No 141994, January
17, 2005
3.Crystal vs. BPI, G.R. No. 172428, November 28, 2008

G. Determination of Nationality of Corporations for purposes of determining whether or not it would be allowed to engage in
areas of activities where the Constitution or law requires a minimum Filipino ownership.

H. Practice of Profession

GR: Corporations cannot engage in the practice of profession

1. Ulep vs. The Legal Clinic, 223 SCRA 378 (1997)

2. Samahan ng Optometrists vs. Acebedo Int’l Corp., G.R. No. 117097, March 21, 1997;
3.Acebedo Optical Company, Inc., vs. CA, G.R. No. 100152, March 31, 2000

Exceptions:

1. R.A. 9266, sec. 37 - Architectural Firm includes corporations.

“SECTION 37. Limitation to the Registration of a Firm, Company, Partnership, Corporation or

Association. - The practice of architecture is a professional service, admission to which shall be determined upon
the basis of individual personal qualifications. However, a firm, company, partnership, corporation or association
may be registered or licensed as such for the practice of architecture under the following conditions:
(a) Only Filipino citizens properly registered and licensed as architects under this Act may, among
themselves, or together with allied technical professionals, form and obtain registration as a firm, company,
partnership, association or corporation for the practice of architecture;
(b) Registered and licensed architects shall compose at least seventy-five percent (75%) of the owners,
shareholders, members incorporators, directors, executive officers, as the case may be;
(c) Individual members of such firm, partnership association or corporation shall be responsible for their
individual and collective acts as an entity and as provided by law;
(d) Such firm, partnership, association or corporation shall be registered with the Securities and Exchange
Commission and Board.”

2. R.A. 10587, Sec. 25, Environmental Planning Act of 2013

Section 25. Consulting Firms, Partnerships, Corporations, Associations and Foundations Engaged in
Environmental Planning Practice. – A consulting firm, partnership, corporation, association or foundation may
engage in the practice of environmental planning in the Philippines: Provided, That it complies with the
following requirements:
(a) The consulting firm, partnership, corporation or association applies for and is issued a Certificate of
Registration by the Board and the Commission to engage in the practice of environmental planning in the
Philippines: Provided, That the majority of the partners of the partnership are registered and licensed
environmental planners: Provided, further, That the majority of the Members of the Board of Directors or
Members of corporations shall be registered and licensed environmental planners; and
(b) The practice of the consulting firm, partnership, corporation or association in environmental planning shall
be carried out by duly registered and licensed environmental planners.

Classifications of Corporations

Statutory classes of corporations:

A.Stock or non-stock (Section 3)

B.Private Corporation created under a General Law and Corporation created by Special Law, Government Owned and
Controlled Corporations (GOCC) (Section 4, BP 68)

Applicable Law - Special Law vs. Corporation Code

Applicable Rules: Regular Rules of Court or Interim Rules on Intra-Corporate Disputes;

What is an intra-corporate dispute?

Cases:
 1. VITALIANO N. AGUIRRE II and FIDEL N. AGUIRRE, vs. FQB+7, INC., NATHANIEL D. BOCOBO, PRISCILA
BOCOBO and ANTONIO DE VILLA, G.R. No. 170770 January 9, 2013;
2. Yujuico vs. Quiambao, et.al., G.R. No. 168639, January 29, 2007;
3.Matling Industrial & Commercial Corp. Vs. Coros, G.R. No. 157802, October 12, 2010;
4.Reyes vs. Regional Trial Court of Makati, et. Al., G.R. No. 165744, August 11, 2008.

Nationality of Corporations

1. People vs. Quashsa, 93 Phil. 333

2. Gamboa vs. Teves, G.R. No. 176579, June 28, 2011
3. Gamboa vs. Teves, G.R. No. 176579, October 9, 2012

New Test: SEC - MC No. 8, Series of 2013, “Guidelines on Compliance with Filipino-Foreign Ownership Requirements
Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized
Activities”

4. Jose Roy, III, vs. Chairperson Teresita Herbosa, et. Al., G.R. No. 207246, Nov. 22, 2016

5. Narra Nickel Mining and Development Corp. Vs. Redmont Consilidated Mines, G.R. No. 195580, April 2, 2014
6. Strategic Alliance Development Corp. Vs. Radstock Secuirites Limited, 607 SCRA 413
7. Unchuan vs. Lozada, 585 SCRA 421
8. Tatad vs. Garcia, Jr., 243 SCRA 436 (1995)
9. Hontiveros - Baraquel, et. Al., vs. Toll Regulatory Board, et. Al., G.R. No. 181293, Feb. 23, 2015