G.R. No. 171993 December 12, 2011 its net income for his work as General Manager.
its net income for his work as General Manager. Respondent will also be granted 30% of
MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners,
vs.
ALFREDO M. JOSON, Respondent.
DECISION
PEREZ, J.:
In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein
petitioners Marc II Marketing, Inc. and Lucila V. Joson assailed the Decision 1 dated 20
June 2005 of the Court of Appeals in CA-G.R. SP No. 76624 for reversing and setting
aside the Resolution2 of the National Labor Relations Commission (NLRC) dated 15
October 2002, thereby affirming the Labor Arbiter’s Decision 3 dated 1 October 2001
finding herein respondent Alfredo M. Joson’s dismissal from employment as illegal. In
the questioned Decision, the Court of Appeals upheld the Labor Arbiter’s jurisdiction
over the case on the basis that respondent was not an officer but a mere employee of
petitioner Marc II Marketing, Inc., thus, totally disregarding the latter’s allegation of
intra-corporate controversy. Nonetheless, the Court of Appeals remanded the case to
the NLRC for further proceedings to determine the proper amount of monetary awards
that should be given to respondent.
Assailed as well is the Court of Appeals Resolution 4 dated 7 March 2006 denying their
Motion for Reconsideration.
Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized
and existing under and by virtue of the laws of the Philippines. It is primarily engaged in
buying, marketing, selling and distributing in retail or wholesale for export or import
household appliances and products and other items. 5 It took over the business
operations of Marc Marketing, Inc. which was made non-operational following its
incorporation and registration with the Securities and Exchange Commission (SEC).
Petitioner Lucila V. Joson (Lucila) is the President and majority stockholder of petitioner
corporation. She was also the former President and majority stockholder of the defunct
Marc Marketing, Inc.
Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager,
incorporator, director and stockholder of petitioner corporation.
The controversy of this case arose from the following factual milieu:
Before petitioner corporation was officially incorporated,6 respondent has already been
engaged by petitioner Lucila, in her capacity as President of Marc Marketing, Inc., to
work as the General Manager of petitioner corporation. It was formalized through the
execution of a Management Contract7 dated 16 January 1994 under the letterhead of
Marc Marketing, Inc.8 as petitioner corporation is yet to be incorporated at the time of its
execution. It was explicitly provided therein that respondent shall be entitled to 30% of
its net profit to compensate for the possible loss of opportunity to work overseas. 9
Pending incorporation of petitioner corporation, respondent was designated as the
General Manager of Marc Marketing, Inc., which was then in the process of winding up
its business. For occupying the said position, respondent was among its corporate
officers by the express provision of Section 1, Article IV10 of its by-laws.11
On 15 August 1994, petitioner corporation was officially incorporated and registered with
the SEC. Accordingly, Marc Marketing, Inc. was made non-operational. Respondent
continued to discharge his duties as General Manager but this time under petitioner
corporation.
Pursuant to Section 1, Article IV12 of petitioner corporation’s by-laws,13 its corporate
officers are as follows: Chairman, President, one or more Vice-President(s), Treasurer
and Secretary. Its Board of Directors, however, may, from time to time, appoint such
other officers as it may determine to be necessary or proper.
Per an undated Secretary’s Certificate,14 petitioner corporation’s Board of Directors
conducted a meeting on 29 August 1994 where respondent was appointed as one of its
corporate officers with the designation or title of General Manager to function as a
managing director with other duties and responsibilities that the Board of Directors may
provide and authorized.15
Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its
operations, as evidenced by an Affidavit of Non-Operation16 dated 31 August 1998, due
to poor sales collection aggravated by the inefficient management of its affairs. On the
same date, it formally informed respondent of the cessation of its business operation.
Concomitantly, respondent was apprised of the termination of his services as General
Manager since his services as such would no longer be necessary for the winding up of
its affairs.17
Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim
against petitioners before the Labor Arbiter which was docketed as NLRC NCR Case
No. 00-03-04102-99.
In his complaint, respondent averred that petitioner Lucila dismissed him from his
employment with petitioner corporation due to the feeling of hatred she harbored
towards his family. The same was rooted in the filing by petitioner Lucila’s estranged
husband, who happened to be respondent’s brother, of a Petition for Declaration of
Nullity of their Marriage.18
For the parties’ failure to settle the case amicably, the Labor Arbiter required them to
submit their respective position papers. Respondent complied but petitioners opted to
file a Motion to Dismiss grounded on the Labor Arbiter’s lack of jurisdiction as the case
involved an intra-corporate controversy, which jurisdiction belongs to the SEC [now with
the Regional Trial Court (RTC)].19 Petitioners similarly raised therein the ground of
prescription of respondent’s monetary claim.
On 5 September 2000, the Labor Arbiter issued an Order20 deferring the resolution of
petitioners’ Motion to Dismiss until the final determination of the case. The Labor Arbiter
also reiterated his directive for petitioners to submit position paper. Still, petitioners did
not comply. Insisting that the Labor Arbiter has no jurisdiction over the case, they
instead filed an Urgent Motion to Resolve the Motion to Dismiss and the Motion to
Suspend Filing of Position Paper.
In an Order21 dated 15 February 2001, the Labor Arbiter denied both motions and
declared final the Order dated 5 September 2000. The Labor Arbiter then gave
petitioners a period of five days from receipt thereof within which to file position paper,
otherwise, their Motion to Dismiss will be treated as their position paper and the case
will be considered submitted for decision.
Petitioners, through counsel, moved for extension of time to submit position paper.
Despite the requested extension, petitioners still failed to submit the same. Accordingly,
the case was submitted for resolution.
On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its
decretal portion reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered declaring
[respondent’s] dismissal from employment illegal. Accordingly, [petitioners] are hereby
ordered:
1. To reinstate [respondent] to his former or equivalent position without loss of seniority
rights, benefits, and privileges;
2. Jointly and severally liable to pay [respondent’s] unpaid wages in the amount of
₱450,000.00 per month from [26 March 1996] up to time of dismissal in the total amount
of ₱6,300,000.00;
3. Jointly and severally liable to pay [respondent’s] full backwages in the amount of
₱450,000.00 per month from date of dismissal until actual reinstatement which at the
time of promulgation amounted to ₱21,600,000.00;
4. Jointly and severally liable to pay moral damages in the amount of ₱100,000.00 and
attorney’s fees in the amount of 5% of the total monetary award. 22 [Emphasis supplied.]
In the aforesaid Decision, the Labor Arbiter initially resolved petitioners’ Motion to
Dismiss by finding the ground of lack of jurisdiction to be without merit. The Labor
Arbiter elucidated that petitioners failed to adduce evidence to prove that the present
case involved an intra-corporate controversy. Also, respondent’s money claim did not
arise from his being a director or stockholder of petitioner corporation but from his
position as being its General Manager. The Labor Arbiter likewise held that respondent
was not a corporate officer under petitioner corporation’s by-laws. As such,
respondent’s complaint clearly arose from an employer-employee relationship, thus,
subject to the Labor Arbiter’s jurisdiction.
The Labor Arbiter then declared respondent’s dismissal from employment as illegal.
Respondent, being a regular employee of petitioner corporation, may only be dismissed
for a valid cause and upon proper compliance with the requirements of due process.
The records, though, revealed that petitioners failed to present any evidence to justify
respondent’s dismissal.
Aggrieved, petitioners appealed the aforesaid Labor Arbiter’s Decision to the NLRC.
In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving
credence to the Secretary’s Certificate, which evidenced petitioner corporation’s Board
of Directors’ meeting in which a resolution was approved appointing respondent as its
corporate officer with designation as General Manager. Therefrom, the NLRC reversed
and set aside the Labor Arbiter’s Decision dated 1 October 2001 and dismissed
respondent’s Complaint for want of jurisdiction.23
The NLRC enunciated that the validity of respondent’s appointment and termination
from the position of General Manager was made subject to the approval of petitioner
corporation’s Board of Directors. Had respondent been an ordinary employee, such
board action would not have been required. As such, it is clear that respondent was a
corporate officer whose dismissal involved a purely intra-corporate controversy. The
NLRC went further by stating that respondent’s claim for 30% of the net profit of the
corporation can only emanate from his right of ownership therein as stockholder,
director and/or corporate officer. Dividends or profits are paid only to stockholders or
directors of a corporation and not to any ordinary employee in the absence of any profit
sharing scheme. In addition, the question of remuneration of a person who is not a mere
employee but a stockholder and officer of a corporation is not a simple labor problem.
Such matter comes within the ambit of corporate affairs and management and is an
intra-corporate controversy in contemplation of the Corporation Code.24
When respondent’s Motion for Reconsideration was denied in another
Resolution25 dated 23 January 2003, he filed a Petition for Certiorari with the Court of
Appeals ascribing grave abuse of discretion on the part of the NLRC.
On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring
that the Labor Arbiter has jurisdiction over the present controversy. It upheld the finding
of the Labor Arbiter that respondent was a mere employee of petitioner corporation, who
has been illegally dismissed from employment without valid cause and without due
process. Nevertheless, it ordered the records of the case remanded to the NLRC for the
determination of the appropriate amount of monetary awards to be given to respondent.
The Court of Appeals, thus, decreed:
WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is
DECLARED to have jurisdiction over the controversy. The records are REMANDED to
the NLRC for further proceedings to determine the appropriate amount of monetary
awards to be adjudged in favor of [respondent]. Costs against the [petitioners] in
solidum.26
Petitioners moved for its reconsideration but to no avail. 27
Petitioners are now before this Court with the following assignment of errors:
THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF
DISCRETION IN DECIDING THAT THE NLRC HAS THE JURISDICTION IN
RESOLVING A PURELY INTRA-CORPORATE MATTER WHICH IS COGNIZABLE BY
THE SECURITIES AND EXCHANGE COMMISSION/REGIONAL TRIAL COURT.
ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER
THE CASE, STILL THE COURT OF APPEALS SERIOUSLY ERRED IN NOT RULING
THAT THERE IS NO EMPLOYER-EMPLOYEE RELATIONSHIP BETWEEN
[RESPONDENT] ALFREDO M. JOSON AND MARC II MARKETING, INC.
[PETITIONER CORPORATION].
ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER THE
CASE, THE COURT OF APPEALS ERRED IN NOT RULING THAT THE LABOR
ARBITER COMMITTED GRAVE ABUSE OF DISCRETION IN AWARDING
MULTI-MILLION PESOS IN COMPENSATION AND BACKWAGES BASED ON THE
PURPORTED GROSS INCOME OF [PETITIONER CORPORATION].
THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE
OF DISCRETION IN NOT MAKING ANY FINDINGS AND RULING THAT [PETITIONER
LUCILA] SHOULD NOT BE HELD SOLIDARILY LIABLE IN THE ABSENCE OF
EVIDENCE OF MALICE AND BAD FAITH ON HER PART.28
Petitioners fault the Court of Appeals for having sustained the Labor Arbiter’s finding
that respondent was not a corporate officer under petitioner corporation’s by-laws. They
insist that there is no need to amend the corporate by-laws to specify who its corporate
officers are. The resolution issued by petitioner corporation’s Board of Directors
appointing respondent as General Manager, coupled with his assumption of the said
position, positively made him its corporate officer. More so, respondent’s position, being
a creation of petitioner corporation’s Board of Directors pursuant to its by-laws, is a
corporate office sanctioned by the Corporation Code and the doctrines previously laid
down by this Court. Thus, respondent’s removal as petitioner corporation’s General
Manager involved a purely intra-corporate controversy over which the RTC has
jurisdiction.
Petitioners further contend that respondent’s claim for 30% of the net profit of petitioner
corporation was anchored on the purported Management Contract dated 16 January
1994. It should be noted, however, that said Management Contract was executed at the
time petitioner corporation was still nonexistent and had no juridical personality yet.
Such being the case, respondent cannot invoke any legal right therefrom as it has no
legal and binding effect on petitioner corporation. Moreover, it is clear from the Articles
of Incorporation of petitioner corporation that respondent was its director and
stockholder. Indubitably, respondent’s claim for his share in the profit of petitioner
corporation was based on his capacity as such and not by virtue of any
employer-employee relationship.
Petitioners further avow that even if the present case does not pose an intra-corporate
controversy, still, the Labor Arbiter’s multi-million peso awards in favor of respondent
were erroneous. The same was merely based on the latter’s self-serving computations
without any supporting documents.
Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with
petitioner corporation. There was neither allegation nor iota of evidence presented to
show that she acted with malice and bad faith in her dealings with respondent. Moreover,
the Labor Arbiter, in his Decision, simply concluded that petitioner Lucila was jointly and
severally liable with petitioner corporation without making any findings thereon. It was,
therefore, an error for the Court of Appeals to hold petitioner Lucila solidarily liable with
petitioner corporation.
From the foregoing arguments, the initial question is which between the Labor Arbiter or
the RTC, has jurisdiction over respondent’s dismissal as General Manager of petitioner
corporation. Its resolution necessarily entails the determination of whether respondent
as General Manager of petitioner corporation is a corporate officer or a mere employee
of the latter.
While Article 217(a)229 of the Labor Code, as amended, provides that it is the Labor
Arbiter who has the original and exclusive jurisdiction over cases involving termination
or dismissal of workers when the person dismissed or terminated is a corporate officer,
the case automatically falls within the province of the RTC. The dismissal of a corporate
officer is always regarded as a corporate act and/or an intra-corporate controversy.30
Under Section 531 of Presidential Decree No. 902-A, intra-corporate controversies are
those controversies arising out of intra-corporate or partnership relations, between and
among stockholders, members or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and
the State insofar as it concerns their individual franchise or right to exist as such entity. It
also includes controversies in the election or appointments of directors,
trustees, officers or managers of such corporations, partnerships or associations.32
Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the
controversy, the status or relationship of the parties and the nature of the question that
is the subject of their controversy must be taken into consideration. 33
In Easycall Communications Phils., Inc. v. King, this Court held that in the context of
Presidential Decree No. 902-A, corporate officers are those officers of a corporation who
are given that character either by the Corporation Code or by the corporation’s by-laws.
Section 2534 of the Corporation Code specifically enumerated who are these corporate
officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4) such other officers as
may be provided for in the by-laws.35
The aforesaid Section 25 of the Corporation Code, particularly the phrase "such other
officers as may be provided for in the by-laws," has been clarified and elaborated in this
Court’s recent pronouncement in Matling Industrial and Commercial Corporation v.
Coros, where it held, thus:
Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws
in order to be considered as a corporate office. Thus, the creation of an office pursuant
to or under a [b]y-[l]aw enabling provision is not enough to make a position a corporate
office. [In] Guerrea v. Lezama [citation omitted] the first ruling on the matter, held that
the only officers of a corporation were those given that character either by the
Corporation Code or by the [b]y-[l]aws; the rest of the corporate officers could be
considered only as employees or subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King [citation omitted]:
An "office" is created by the charter of the corporation and the officer is elected by the
directors or stockholders. On the other hand, an employee occupies no office and
generally is employed not by the action of the directors or stockholders but by the
managing officer of the corporation who also determines the compensation to be paid to
such employee.
xxxx
This interpretation is the correct application of Section 25 of the Corporation Code,
which plainly states that the corporate officers are the President, Secretary, Treasurer
and such other officers as may be provided for in the [b]y-[l]aws. Accordingly, the
corporate officers in the context of PD No. 902-A are exclusively those who are given
that character either by the Corporation Code or by the corporation’s [b]y[l]aws.
A different interpretation can easily leave the way open for the Board of Directors to
circumvent the constitutionally guaranteed security of tenure of the employee by the
expedient inclusion in the [b]y-[l]aws of an enabling clause on the creation of just any
corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency administering
the Corporation Code, adopted a similar interpretation of Section 25 of the Corporation
Code in its Opinion dated November 25, 1993 [citation omitted], to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever
are the corporate officers enumerated in the by-laws are the exclusive Officers of the
corporation and the Board has no power to create other Offices without amending first
the corporate [b]y-laws. However, the Board may create appointive positions other
than the positions of corporate Officers, but the persons occupying such
positions are not considered as corporate officers within the meaning of Section
25 of the Corporation Code and are not empowered to exercise the functions of the
corporate Officers, except those functions lawfully delegated to them. Their functions
and duties are to be determined by the Board of Directors/Trustees.36 [Emphasis
supplied.]
A careful perusal of petitioner corporation’s by-laws, particularly paragraph 1, Section 1,
Article IV,37 would explicitly reveal that its corporate officers are composed only of: (1)
Chairman; (2) President; (3) one or more Vice-President; (4) Treasurer; and (5)
Secretary.38 The position of General Manager was not among those enumerated.
Paragraph 2, Section 1, Article IV of petitioner corporation’s by-laws, empowered its
Board of Directors to appoint such other officers as it may determine necessary or
proper.39 It is by virtue of this enabling provision that petitioner corporation’s Board of
Directors allegedly approved a resolution to make the position of General Manager a
corporate office, and, thereafter, appointed respondent thereto making him one of its
corporate officers. All of these acts were done without first amending its by-laws so as to
include the General Manager in its roster of corporate officers.
With the given circumstances and in conformity with Matling Industrial and Commercial
Corporation v. Coros, this Court rules that respondent was not a corporate officer of
petitioner corporation because his position as General Manager was not specifically
mentioned in the roster of corporate officers in its corporate by-laws. The enabling
clause in petitioner corporation’s by-laws empowering its Board of Directors to create
additional officers, i.e., General Manager, and the alleged subsequent passage of a
board resolution to that effect cannot make such position a corporate office. Matling
clearly enunciated that the board of directors has no power to create other corporate
offices without first amending the corporate by-laws so as to include therein the newly
created corporate office. Though the board of directors may create appointive positions
other than the positions of corporate officers, the persons occupying such positions
cannot be viewed as corporate officers under Section 25 of the Corporation Code. 40 In
view thereof, this Court holds that unless and until petitioner corporation’s by-laws is
amended for the inclusion of General Manager in the list of its corporate officers, such
position cannot be considered as a corporate office within the realm of Section 25 of the
Corporation Code.
This Court considers that the interpretation of Section 25 of the Corporation Code laid
down in Matling safeguards the constitutionally enshrined right of every employee to
security of tenure. To allow the creation of a corporate officer position by a simple
inclusion in the corporate by-laws of an enabling clause empowering the board of
directors to do so can result in the circumvention of that constitutionally well-protected
right.41
It is also of no moment that respondent, being petitioner corporation’s General Manager,
was given the functions of a managing director by its Board of Directors. As held in
Matling, the only officers of a corporation are those given that character either by the
Corporation Code or by the corporate by-laws. It follows then that the corporate officers
enumerated in the by-laws are the exclusive officers of the corporation while the rest
could only be regarded as mere employees or subordinate officials. 42 Respondent, in
this case, though occupying a high ranking and vital position in petitioner corporation but
which position was not specifically enumerated or mentioned in the latter’s by-laws, can
only be regarded as its employee or subordinate official. Noticeably, respondent’s
compensation as petitioner corporation’s General Manager was set, fixed and
determined not by the latter’s Board of Directors but simply by its President, petitioner
Lucila. The same was not subject to the approval of petitioner corporation’s Board of
Directors. This is an indication that respondent was an employee and not a corporate
officer.
To prove that respondent was petitioner corporation’s corporate officer, petitioners
presented before the NLRC an undated Secretary’s Certificate showing that
corporation’s Board of Directors approved a resolution making respondent’s position of
General Manager a corporate office. The submission, however, of the said undated
Secretary’s Certificate will not change the fact that respondent was an employee. The
certification does not amount to an amendment of the by-laws which is needed to make
the position of General Manager a corporate office.
Moreover, as has been aptly observed by the Court of Appeals, the board resolution
mentioned in that undated Secretary’s Certificate and the latter itself were obvious
fabrications, a mere afterthought. Here we quote with conformity the Court of Appeals
findings on this matter stated in this wise:
The board resolution is an obvious fabrication. Firstly, if it had been in existence since
[29 August 1994], why did not [herein petitioners] attach it to their [M]otion to [D]ismiss
filed on [26 August 1999], when it could have been the best evidence that [herein
respondent] was a corporate officer? Secondly, why did they report the [respondent]
instead as [herein petitioner corporation’s] employee to the Social Security System
[(SSS)] on [11 October 1994] or a later date than their [29 August 1994] board resolution?
Thirdly, why is there no indication that the [respondent], the person concerned himself,
and the [SEC] were furnished with copies of said board resolution? And, lastly, why is
the corporate [S]ecretary’s [C]ertificate not notarized in keeping with the customary
procedure? That is why we called it manipulative evidence as it was a shameless sham
meant to be thrown in as a wild card to muddle up the [D]ecision of the Labor Arbiter to
the end that it be overturned as the latter had firmly pointed out that [respondent] is not a
corporate officer under [petitioner corporation’s by-laws]. Regrettably, the [NLRC]
swallowed the bait hook-line-and sinker. It failed to see through its nature as a belatedly
manufactured evidence. And even on the assumption that it were an authentic board
resolution, it did not make [respondent] a corporate officer as the board did not first and
properly create the position of a [G]eneral [M]anager by amending its by-laws.
(2) The scope of the term "officer" in the phrase "and such other officers as may be
provided for in the by-laws["] (Sec. 25, par. 1), would naturally depend much on the
provisions of the by-laws of the corporation. (SEC Opinion, [4 December 1991.]) If the
by-laws enumerate the officers to be elected by the board, the provision is conclusive,
and the board is without power to create new offices without amending the by-laws.
(SEC Opinion, [19 October 1971.])
(3) If, for example, the general manager of a corporation is not listed as an officer, he is
to be classified as an employee although he has always been considered as one of the
principal officers of a corporation [citing De Leon, H. S., The Corporation Code of the
Philippines Annotated, 1993 Ed., p. 215.]43 [Emphasis supplied.]
That respondent was also a director and a stockholder of petitioner corporation will not
automatically make the case fall within the ambit of intra-corporate controversy and be
subjected to RTC’s jurisdiction. To reiterate, not all conflicts between the stockholders
and the corporation are classified as intra-corporate. Other factors such as the status or
relationship of the parties and the nature of the question that is the subject of the
controversy44 must be considered in determining whether the dispute involves corporate
matters so as to regard them as intra-corporate controversies.45 As previously
discussed, respondent was not a corporate officer of petitioner corporation but a mere
employee thereof so there was no intra-corporate relationship between them. With
regard to the subject of the controversy or issue involved herein, i.e., respondent’s
dismissal as petitioner corporation’s General Manager, the same did not present or
relate to an intra-corporate dispute. To note, there was no evidence submitted to show
that respondent’s removal as petitioner corporation’s General Manager carried with it his
removal as its director and stockholder. Also, petitioners’ allegation that respondent’s
claim of 30% share of petitioner corporation’s net profit was by reason of his being its
director and stockholder was without basis, thus, self-serving. Such an allegation was
tantamount to a mere speculation for petitioners’ failure to substantiate the same.
In addition, it was not shown by petitioners that the position of General Manager was
offered to respondent on account of his being petitioner corporation’s director and
stockholder. Also, in contrast to NLRC’s findings, neither petitioner corporation’s by-laws
nor the Management Contract stated that respondent’s appointment and termination
from the position of General Manager was subject to the approval of petitioner
corporation’s Board of Directors. If, indeed, respondent was a corporate officer whose
termination was subject to the approval of its Board of Directors, why is it that his
termination was effected only by petitioner Lucila, President of petitioner corporation?
The records are bereft of any evidence to show that respondent’s dismissal was done
with the conformity of petitioner corporation’s Board of Directors or that the latter had a
hand on respondent’s dismissal. No board resolution whatsoever was ever presented to
that effect.
With all the foregoing, this Court is fully convinced that, indeed, respondent, though
occupying the General Manager position, was not a corporate officer of petitioner
corporation rather he was merely its employee occupying a high-ranking position.
Accordingly, respondent’s dismissal as petitioner corporation’s General Manager did not
amount to an intra-corporate controversy. Jurisdiction therefor properly belongs with the
Labor Arbiter and not with the RTC.
Having established that respondent was not petitioner corporation’s corporate officer but
merely its employee, and that, consequently, jurisdiction belongs to the Labor Arbiter,
this Court will now determine if respondent’s dismissal from employment is illegal.
It was not disputed that respondent worked as petitioner corporation’s General Manager
from its incorporation on 15 August 1994 until he was dismissed on 30 June 1997. The
cause of his dismissal was petitioner corporation’s cessation of business operations due
to poor sales collection aggravated by the inefficient management of its affairs.
In termination cases, the burden of proving just and valid cause for dismissing an
employee from his employment rests upon the employer. The latter's failure to
discharge that burden would necessarily result in a finding that the dismissal is
unjustified.46
Under Article 283 of the Labor Code, as amended, one of the authorized causes in
terminating the employment of an employee is the closing or cessation of operation of
the establishment or undertaking. Article 283 of the Labor Code, as amended, reads,
thus:
ART. 283. Closure of establishment and reduction of personnel. – The employer may
also terminate the employment of any employee due to the installation of labor
saving-devices, redundancy, retrenchment to prevent losses or the closing or cessation
of operation of the establishment or undertaking unless the closing is for the purpose of
circumventing the provisions of this Title, by serving a written notice on the workers and
the Department of Labor and Employment at least one (1) month before the intended
date thereof. x x x In case of retrenchment to prevent losses and in cases of closures or
cessation of operations of establishment or undertaking not due to serious business
losses or financial reverses, the separation pay shall be equivalent to one (1) month pay
or to at least one-half (1/2) month pay for every year of service, whichever is higher. A
fraction of at least six (6) months shall be considered one (1) whole year. [Emphasis
supplied.]
From the afore-quoted provision, the closure or cessation of operations of establishment
or undertaking may either be due to serious business losses or financial reverses or
otherwise. If the closure or cessation was due to serious business losses or financial
reverses, it is incumbent upon the employer to sufficiently and convincingly prove the
same. If it is otherwise, the employer can lawfully close shop anytime as long as it was
bona fide in character and not impelled by a motive to defeat or circumvent the tenurial
rights of employees and as long as the terminated employees were paid in the amount
corresponding to their length of service.47
Accordingly, under Article 283 of the Labor Code, as amended, there are three
requisites for a valid cessation of business operations: (a) service of a written notice to
the employees and to the Department of Labor and Employment (DOLE) at least one
month before the intended date thereof; (b) the cessation of business must be bona fide
in character; and (c) payment to the employees of termination pay amounting to one
month pay or at least one-half month pay for every year of service, whichever is higher.
In this case, it is obvious that petitioner corporation’s cessation of business operations
was not due to serious business losses. Mere poor sales collection, coupled with
mismanagement of its affairs does not amount to serious business losses. Nonetheless,
petitioner corporation can still validly cease or close its business operations because
such right is legally allowed, so long as it was not done for the purpose of circumventing
the provisions on termination of employment embodied in the Labor Code. 48 As has
been stressed by this Court in Industrial Timber Corporation v. Ababon, thus:
Just as no law forces anyone to go into business, no law can compel anybody to
continue the same. It would be stretching the intent and spirit of the law if a court
interferes with management's prerogative to close or cease its business operations just
because the business is not suffering from any loss or because of the desire to provide
the workers continued employment.49
A careful perusal of the records revealed that, indeed, petitioner corporation has
stopped and ceased business operations beginning 30 June 1997. This was evidenced
by a notarized Affidavit of Non-Operation dated 31 August 1998. There was also no
showing that the cessation of its business operations was done in bad faith or to
circumvent the Labor Code. Nevertheless, in doing so, petitioner corporation failed to
comply with the one-month prior written notice rule. The records disclosed that
respondent, being petitioner corporation’s employee, and the DOLE were not given a
written notice at least one month before petitioner corporation ceased its business
operations. Moreover, the records clearly show that respondent’s dismissal was effected
on the same date that petitioner corporation decided to stop and cease its operation.
Similarly, respondent was not paid separation pay upon termination of his employment.
As respondent’s dismissal was not due to serious business losses, respondent is
entitled to payment of separation pay equivalent to one month pay or at least one-half
month pay for every year of service, whichever is higher. The rationale for this was laid
down in Reahs Corporation v. National Labor Relations Commission, 50 thus:
The grant of separation pay, as an incidence of termination of employment under Article
283, is a statutory obligation on the part of the employer and a demandable right on the
part of the employee, except only where the closure or cessation of operations was due
to serious business losses or financial reverses and there is sufficient proof of this fact
or condition. In the absence of such proof of serious business losses or financial
reverses, the employer closing his business is obligated to pay his employees and
workers their separation pay.
The rule, therefore, is that in all cases of business closure or cessation of operation or
undertaking of the employer, the affected employee is entitled to separation pay. This is
consistent with the state policy of treating labor as a primary social economic force,
affording full protection to its rights as well as its welfare. The exception is when the
closure of business or cessation of operations is due to serious business losses or
financial reverses duly proved, in which case, the right of affected employees to
separation pay is lost for obvious reasons.51 [Emphasis supplied.]
As previously discussed, respondent’s dismissal was due to an authorized cause,
however, petitioner corporation failed to observe procedural due process in effecting
such dismissal. In Culili v. Eastern Telecommunications Philippines, Inc., 52 this Court
made the following pronouncements, thus:
x x x there are two aspects which characterize the concept of due process under the
Labor Code: one is substantive — whether the termination of employment was based on
the provision of the Labor Code or in accordance with the prevailing jurisprudence; the
other is procedural — the manner in which the dismissal was effected.
Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:
(d) In all cases of termination of employment, the following standards of due process
shall be substantially observed:
xxxx
For termination of employment as defined in Article 283 of the Labor Code, the
requirement of due process shall be deemed complied with upon service of a written
notice to the employee and the appropriate Regional Office of the Department of Labor
and Employment at least thirty days before effectivity of the termination, specifying the
ground or grounds for termination.
In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:
The requirement of law mandating the giving of notices was intended not only to enable
the employees to look for another employment and therefore ease the impact of the loss
of their jobs and the corresponding income, but more importantly, to give the
Department of Labor and Employment (DOLE) the opportunity to ascertain the verity of
the alleged authorized cause of termination.53 [Emphasis supplied].
The records of this case disclosed that there was absolutely no written notice given by
petitioner corporation to the respondent and to the DOLE prior to the cessation of its
business operations. This is evident from the fact that petitioner corporation effected
respondent’s dismissal on the same date that it decided to stop and cease its business
operations. The necessary consequence of such failure to comply with the one-month
prior written notice rule, which constitutes a violation of an employee’s right to statutory
due process, is the payment of indemnity in the form of nominal damages.54 In Culili v.
Eastern Telecommunications Philippines, Inc., this Court further held:
In Serrano v. National Labor Relations Commission [citation omitted], we noted that "a
job is more than the salary that it carries." There is a psychological effect or a stigma in
immediately finding one’s self laid off from work. This is exactly why our labor laws have
provided for mandating procedural due process clauses. Our laws, while recognizing the
right of employers to terminate employees it cannot sustain, also recognize the
employee’s right to be properly informed of the impending severance of his ties with the
company he is working for. x x x.
x x x Over the years, this Court has had the opportunity to reexamine the sanctions
imposed upon employers who fail to comply with the procedural due process
requirements in terminating its employees. In Agabon v. National Labor Relations
Commission [citation omitted], this Court reverted back to the doctrine in Wenphil
Corporation v. National Labor Relations Commission [citation omitted] and held that
where the dismissal is due to a just or authorized cause, but without observance of the
due process requirements, the dismissal may be upheld but the employer must pay an
indemnity to the employee. The sanctions to be imposed however, must be stiffer than
those imposed in Wenphil to achieve a result fair to both the employers and the
employees.
In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue
from Agabon, held that since there is a clear-cut distinction between a dismissal due to a
just cause and a dismissal due to an authorized cause, the legal implications for
employers who fail to comply with the notice requirements must also be treated
differently:
Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under
Article 282 but the employer failed to comply with the notice requirement, the sanction to
be imposed upon him should be tempered because the dismissal process was, in effect,
initiated by an act imputable to the employee; and (2) if the dismissal is based on an
authorized cause under Article 283 but the employer failed to comply with the notice
requirement, the sanction should be stiffer because the dismissal process was initiated
by the employer's exercise of his management prerogative. 55 [Emphasis supplied.]
Thus, in addition to separation pay, respondent is also entitled to an award of nominal
damages. In conformity with this Court’s ruling in Culili v. Eastern Telecommunications
Philippines, Inc. and Shimizu Phils. Contractors, Inc. v. Callanta, both citing Jaka Food
Processing Corporation v. Pacot,56 this Court fixed the amount of nominal damages to
₱50,000.00.
With respect to petitioners’ contention that the Management Contract executed between
respondent and petitioner Lucila has no binding effect on petitioner corporation for
having been executed way before its incorporation, this Court finds the same
meritorious.
Section 19 of the Corporation Code expressly provides:
Sec. 19. Commencement of corporate existence. - A private corporation formed or
organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon
the incorporators, stockholders/members and their successors shall constitute a body
politic and corporate under the name stated in the articles of incorporation for the period
of time mentioned therein, unless said period is extended or the corporation is sooner
dissolved in accordance with law. [Emphasis supplied.]
Logically, there is no corporation to speak of prior to an entity’s incorporation. And no
contract entered into before incorporation can bind the corporation.
As can be gleaned from the records, the Management Contract dated 16 January 1994
was executed between respondent and petitioner Lucila months before petitioner
corporation’s incorporation on 15 August 1994. Similarly, it was done when petitioner
Lucila was still the President of Marc Marketing, Inc. Undeniably, it cannot have any
binding and legal effect on petitioner corporation. Also, there was no evidence
presented to prove that petitioner corporation adopted, ratified or confirmed the
Management Contract. It is for the same reason that petitioner corporation cannot be
considered estopped from questioning its binding effect now that respondent was
invoking the same against it. In no way, then, can it be enforced against petitioner
corporation, much less, its provisions fixing respondent’s compensation as General
Manager to 30% of petitioner corporation’s net profit. Consequently, such percentage
cannot be the basis for the computation of respondent’s separation pay. This finding,
however, will not affect the undisputed fact that respondent was, indeed, the General
Manager of petitioner corporation from its incorporation up to the time of his dismissal.
Accordingly, this Court finds it necessary to still remand the present case to the Labor
Arbiter to conduct further proceedings for the sole purpose of determining the
compensation that respondent was actually receiving during the period that he was the
General Manager of petitioner corporation, this, for the proper computation of his
separation pay.
As regards petitioner Lucila’s solidary liability, this Court affirms the same.
As a rule, corporation has a personality separate and distinct from its officers,
stockholders and members such that corporate officers are not personally liable for their
official acts unless it is shown that they have exceeded their authority. However, this
corporate veil can be pierced when the notion of the legal entity is used as a means to
perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and
to confuse legitimate issues. Under the Labor Code, for instance, when a corporation
violates a provision declared to be penal in nature, the penalty shall be imposed upon
the guilty officer or officers of the corporation.57
Based on the prevailing circumstances in this case, petitioner Lucila, being the
President of petitioner corporation, acted in bad faith and with malice in effecting
respondent’s dismissal from employment. Although petitioner corporation has a valid
cause for dismissing respondent due to cessation of business operations, however, the
latter’s dismissal therefrom was done abruptly by its President, petitioner Lucila.
Respondent was not given the required one-month prior written notice that petitioner
corporation will already cease its business operations. As can be gleaned from the
records, respondent was dismissed outright by petitioner Lucila on the same day that
petitioner corporation decided to stop and cease its business operations. Worse,
respondent was not given separation pay considering that petitioner corporation’s
cessation of business was not due to business losses or financial reverses.
WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005
and 7 March 2006, respectively, of the Court of Appeals in CA-G.R. SP No. 76624 are
hereby AFFIRMED with the MODIFICATION finding respondent’s dismissal from
employment legal but without proper observance of due process. Accordingly, petitioner
corporation, jointly and solidarily liable with petitioner Lucila, is hereby ordered to pay
respondent the following; (1) separation pay equivalent to one month pay or at least
one-half month pay for every year of service, whichever is higher, to be computed from
the commencement of employment until termination; and (2) nominal damages in the
amount of ₱50,000.00.
This Court, however, finds it proper to still remand the records to the Labor Arbiter to
conduct further proceedings for the sole purpose of determining the compensation that
respondent was actually receiving during the period that he was the General Manager of
petitioner corporation for the proper computation of his separation pay.
Costs against petitioners.
SO ORDERED.
G.R. No. L-43350 December 23, 1937
CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio P. Dizon for appellant.
Sumulong, Lavides and Sumulong for appellee.
LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance of Manila absolving the
defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of
Linao, town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title
No. 217 of the land records of Cagayan, a copy of which is in evidence as Exhibit 1. To
guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August 14,
1929, executed in favor of the Philippine National Bank a first mortgage on the four
parcels of land above-mentioned. A second mortgage in favor of the same bank was in
April of 1930 executed by Tabora over the same lands to guarantee the payment of
another loan amounting to P7,000. A third mortgage on the same lands was executed
on April 16, 1930 in favor of Severina Buzon to whom Tabora was indebted in the sum
of P2,9000. These mortgages were registered and annotations thereof appear at the
back of transfer certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso
de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by
him was sold to the plaintiff company, said to under process of incorporation, in
consideration of one peso (P1) subject to the mortgages in favor of the Philippine
National Bank and Severina Buzon and, to the condition that the certificate of title to said
lands shall not be transferred to the name of the plaintiff company until the latter has
fully and completely paid Tabora's indebtedness to the Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of Commerce and
Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of
directors of said company adopted a resolution (Exhibit G) authorizing its president,
Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for
P42,000. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of
sale executed before a notary public by the terms of which the plaintiff sold ceded and
transferred to the defendant all its right, titles, and interest in and to the four parcels of
land described in transfer certificate in turn obligated himself to shoulder the three
mortgages hereinbefore referred to. Exhibit C is a promisory note for P25,300. drawn by
the defendant in favor of the plaintiff, payable after one year from the date thereof.
Exhibit D is a deed of mortgage executed before a notary public in accordance with
which the four parcels of land were given a security for the payment of the promissory
note, Exhibit C. All these three instrument were dated February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, on
January 25, 1934, brought this action in the Court of First Instance of Manila praying that
judgment be rendered against the defendant for the sum of P25,300, with interest at
legal rate from the date of the filing of the complaint, and the costs of the suits. After trial,
the court below, on December 18, 1934, rendered judgment absolving the defendant,
with costs against the plaintiff. Plaintiff presented a motion for new trial on January 14,
1935, which motion was denied by the trial court on January 19 of the same year. After
due exception and notice, plaintiff has appealed to this court and makes an assignment
of various errors.
In dismissing the complaint against the defendant, the court below, reached the
conclusion that Exhibit B is invalid because of vice in consent and repugnancy to law.
While we do not agree with this conclusion, we have however voted to affirm the
judgment appealed from the reasons which we shall presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff
herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said
company was affected later on October 22, 1930 (Exhibit 2). In other words, the transfer
was made almost five months before the incorporation of the company. Unquestionably,
a duly organized corporation has the power to purchase and hold such real property as
the purposes for which such corporation was formed may permit and for this purpose
may enter into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14,
Act No. 1459). But before a corporation may be said to be lawfully organized, many
things have to be done. Among other things, the law requires the filing of articles of
incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that all
the requirements of law have been complied with (sec. 334, par. 31 Code of Civil
Procedure), in the case before us it can not be denied that the plaintiff was not yet
incorporated when it entered into a contract of sale, Exhibit A. The contract itself
referred to the plaintiff as "una sociedad en vias de incorporacion." It was not even a de
facto corporation at the time. Not being in legal existence then, it did not possess
juridical capacity to enter into the contract.
Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation of
corporations are general offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute, or certain acts are
required to be done, they are terms of the offer, and must be complied with substantially
before legal corporate existence can be acquired. (14 C. J., sec. 111, p. 118.)
That a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business, would
seem to be self evident. . . . A corporation, until organized, has no being, franchises or
faculties. Nor do those engaged in bringing it into being have any power to bind it by
contract, unless so authorized by the charter there is not a corporation nor does it
possess franchise or faculties for it or others to exercise, until it acquires a complete
existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance Company, 107 Ill.,
652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not
between Manuel Tabora and a non-existent corporation but between the Manuel Tabora
as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his
wife and others, as mere promoters of a corporations on the other hand. For reasons
that are self-evident, these promoters could not have acted as agent for a projected
corporation since that which no legal existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa
mere. This is not saying that under no circumstances may the acts of promoters of a
corporation be ratified by the corporation if and when subsequently organized. There are,
of course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs.
207 et seq.), but under the peculiar facts and circumstances of the present case we
decline to extend the doctrine of ratification which would result in the commission of
injustice or fraud to the candid and unwary.(Massachusetts rule, Abbott vs. Hapgood,
150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English
cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke
Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be
observed that Manuel Tabora was the registered owner of the four parcels of land,
which he succeeded in mortgaging to the Philippine National Bank so that he might have
the necessary funds with which to convert and develop them into fishery. He appeared
to have met with financial reverses. He formed a corporation composed of himself, his
wife, and a few others. From the articles of incorporation, Exhibit 2, it appears that out of
the P48,700, amount of capital stock subscribed, P45,000 was subscribed by Manuel
Tabora himself and P500 by his wife, Rufina Q. de Tabora; and out of the P43,300,
amount paid on subscription, P42,100 is made to appear as paid by Tabora and P200
by his wife. Both Tabora and His wife were directors and the latter was treasurer as well.
In fact, to this day, the lands remain inscribed in Tabora's name. The defendant always
regarded Tabora as the owner of the lands. He dealt with Tabora directly. Jose Ventura,
president of the plaintiff corporation, intervened only to sign the contract, Exhibit B, in
behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels
of land, always treated Tabora as the owner of the same. (See Exhibits E and F.) Two
civil suits (Nos. 1931 and 38641) were brought against Tabora in the Court of First
Instance of Manila and in both cases a writ of attachment against the four parcels of land
was issued. The Philippine National Bank threatened to foreclose its mortgages. Tabora
approached the defendant Sandiko and succeeded in the making him sign Exhibits B, C,
and D and in making him, among other things, assume the payment of Tabora's
indebtedness to the Philippine National Bank. The promisory note, Exhibit C, was made
payable to the plaintiff company so that it may not attached by Tabora's creditors, two of
whom had obtained writs of attachment against the four parcels of land.
If the plaintiff corporation could not and did not acquire the four parcels of land here
involved, it follows that it did not possess any resultant right to dispose of them by sale
to the defendant, Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer from Manuel
Tabora to the Cagayan Fishing Development Company, Inc., which transfer is
evidenced by Exhibit A, was subject to a condition precedent (condicion suspensiva),
namely, the payment of the mortgage debt of said Tabora to the Philippine National
Bank, and that this condition not having been complied with by the Cagayan Fishing
Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise &
Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at
the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing Development
Company, Inc. was null because at the time it was affected the corporation was
non-existent, we deem it unnecessary to discuss this point.lawphil.net
The decision of the lower court is accordingly affirmed, with costs against the appellant.
So Ordered.
G.R. No. L-48627
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners
vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents.
CRUZ, J.:
We gave limited due course to this petition on the question of the solidary liability of the
petitioners with their co-defendants in the lower court 1 because of the challenge to the
following paragraph in the dispositive portion of the decision of the respondent court: *
1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of
P50,000.00 for the preparation of the project study and his technical services that led to
the organization of the defendant corporation, plus P10,000.00 attorney's fees; 2
The petitioners claim that this order has no support in fact and law because they had no
contract whatsoever with the private respondent regarding the above-mentioned
services. Their position is that as mere subsequent investors in the corporation that was
later created, they should not be held solidarily liable with the Filipinas Orient Airways, a
separate juridical entity, and with Barretto and Garcia, their co-defendants in the lower
court, ** who were the ones who requested the said services from the private
respondent. 3
We are not concerned here with the petitioners' co-defendants, who have not appealed
the decision of the respondent court and may, for this reason, be presumed to have
accepted the same. For purposes of resolving this case before us, it is not necessary to
determine whether it is the promoters of the proposed corporation, or the corporation
itself after its organization, that shall be responsible for the expenses incurred in
connection with such organization.
The only question we have to decide now is whether or not the petitioners themselves
are also and personally liable for such expenses and, if so, to what extent.
The reasons for the said order are given by the respondent court in its decision in this
wise:
As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the
preparation of the project study and the pre-organizational services in the amount of
P50,000.00, not only the defendant corporation but the other defendants including
defendants Caram should be jointly and severally liable for this amount. As we above
related it was upon the request of defendants Barretto and Garcia that plaintiff handled
the preparation of the project study which project study was presented to defendant
Caram so the latter was convinced to invest in the proposed airlines. The project study
was revised for purposes of presentation to financiers and the banks. It was on the basis
of this study that defendant corporation was actually organized and rendered
operational. Defendants Garcia and Caram, and Barretto became members of the
Board and/or officers of defendant corporation. Thus, not only the defendant corporation
but all the other defendants who were involved in the preparatory stages of the
incorporation, who caused the preparation and/or benefited from the project study and
the technical services of plaintiff must be liable. 4
It would appear from the above justification that the petitioners were not really involved
in the initial steps that finally led to the incorporation of the Filipinas Orient Airways.
Elsewhere in the decision, Barretto was described as "the moving spirit." The finding of
the respondent court is that the project study was undertaken by the private respondent
at the request of Barretto and Garcia who, upon its completion, presented it to the
petitioners to induce them to invest in the proposed airline. The study could have been
presented to other prospective investors. At any rate, the airline was eventually
organized on the basis of the project study with the petitioners as major stockholders
and, together with Barretto and Garcia, as principal officers.
The following portion of the decision in question is also worth considering:
... Since defendant Barretto was the moving spirit in the pre-organization work of
defendant corporation based on his experience and expertise, hence he was logically
compensated in the amount of P200,000.00 shares of stock not as industrial partner but
more for his technical services that brought to fruition the defendant corporation. By the
same token, We find no reason why the plaintiff should not be similarly compensated not
only for having actively participated in the preparation of the project study for several
months and its subsequent revision but also in his having been involved in the
pre-organization of the defendant corporation, in the preparation of the franchise, in
inviting the interest of the financiers and in the training and screening of personnel. We
agree that for these special services of the plaintiff the amount of P50,000.00 as
compensation is reasonable. 5
The above finding bolsters the conclusion that the petitioners were not involved in the
initial stages of the organization of the airline, which were being directed by Barretto as
the main promoter. It was he who was putting all the pieces together, so to speak. The
petitioners were merely among the financiers whose interest was to be invited and who
were in fact persuaded, on the strength of the project study, to invest in the proposed
airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify making the
petitioners, as principal stockholders thereof, responsible for its obligations. As a bona
fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts
as duly authorized by its officers and directors.
In the light of these circumstances, we hold that the petitioners cannot be held
personally liable for the compensation claimed by the private respondent for the
services performed by him in the organization of the corporation. To repeat, the
petitioners did not contract such services. It was only the results of such services that
Barretto and Garcia presented to them and which persuaded them to invest in the
proposed airline. The most that can be said is that they benefited from such services,
but that surely is no justification to hold them personally liable therefor. Otherwise, all the
other stockholders of the corporation, including those who came in later, and regardless
of the amount of their share holdings, would be equally and personally liable also with
the petitioners for the claims of the private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our
impression is that it is opposed to the imposition of solidary responsibility upon the
Carams but seems to be willing, in a vague, unexpressed offer of compromise, to accept
joint liability. While it is true that it does here and there disclaim total liability, the thrust of
the petition seems to be against the imposition of solidary liability only rather than
against any liability at all, which is what it should have categorically argued.
Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly and
severally, under the first paragraph of the dispositive portion of the challenged decision.
So holding, we find it unnecessary to examine at this time the rules on solidary
obligations, which the parties-needlessly, as it turns out have belabored unto death.
WHEREFORE, the petition is granted. The petitioners are declared not liable under the
challenged decision, which is hereby modified accordingly. It is so ordered.
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT,
INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S.
LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the decision of the Court of Appeals
in CA-G.R. CV No. 66195 which modified the decision of the then Court of First Instance
of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197)
against all defendants (respondents in G.R. No. 84197) was dismissed but in all other
respects the trial court's decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to
pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees
from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary
damages.
It is found in the records that the cross party plaintiffs incurred additional miscellaneous
expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S.
Lim is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half
and Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary damages in
the amount of P184,878.84 with interest from the filing of the cross-complaints until the
amount is fully paid; plus moral and exemplary damages in the amount of P50,000.00
for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and
another P20,000.00 to Constancio B. Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants
Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead,
plaintiff is required to indemnify the defendants Bormaheco and the Cervanteses the
amount of P20,000.00 as attorney's fees and the amount of P4,379.21, per year from
1966 with legal rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of
P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this action was filed in
good faith. The fact that the properties of the Bormaheco and the Cervanteses were
attached and that they were required to file a counterbond in order to dissolve the
attachment, is not an act of bad faith. When a man tries to protect his rights, he should
not be saddled with moral or exemplary damages. Furthermore, the rights exercised
were provided for in the Rules of Court, and it was the court that ordered it, in the
exercise of its discretion.
No damage is decided against Malayan Insurance Company, Inc., the third-party
defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an
insurance company would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then nobody would engage in the
insurance business. No further claim or counter-claim for or against anybody is declared
by this Court. (Rollo - G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business
as owner-operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into
and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A
Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718,
arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July
18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R.
No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor
of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare
parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana
(respondents in both petitions) contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be their contributions to a
new corporation proposed by Lim to expand his airline business. They executed two (2)
separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed
by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors principally
agree and bind themselves jointly and severally to indemnify and hold and save
harmless Pioneer from and against any/all damages, losses, costs, damages, taxes,
penalties, charges and expenses of whatever kind and nature which Pioneer may incur
in consequence of having become surety upon the bond/note and to pay, reimburse and
make good to Pioneer, its successors and assigns, all sums and amounts of money
which it or its representatives should or may pay or cause to be paid or become liable to
pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in
favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in
favor of the former. It was stipulated therein that Lim transfer and convey to the surety
the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register
of Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to
the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776),
respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request
payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage
before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third
party claim alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a
writ of preliminary attachment against Lim and respondents, the Cervanteses,
Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against
Lim alleging that they were not privies to the contracts signed by Lim and, by way of
counterclaim, sought for damages for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects the
trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED
THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD
ALREADY COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN
FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO
RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS
DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured
its risk of liability under the surety bond in favor of JDA and subsequently collected the
proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation
to Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of
the amount of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is
not the real party in interest to institute the instant action as it does not stand to be
benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount
from defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not
even present any evidence that it is the attorney-in-fact of the reinsurance company,
authorized to institute an action for and in behalf of the latter. To qualify a person to be a
real party in interest in whose name an action must be prosecuted, he must appear to be
the present real owner of the right sought to be enforced (Moran, Vol. I, Comments on
the Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is the
party who would be benefited or injured by the judgment or the party entitled to the
avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party
in interest is meant a present substantial interest as distinguished from a mere
expectancy or a future, contingent, subordinate or consequential interest (Garcia v.
David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414;
Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting
47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real
party in interest as it has already been paid by the reinsurer the sum of P295,000.00 —
the bulk of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its
reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes
and its spare engine, realizing the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance
amounting to P295,000.00, it is patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess
of P298,666.28 would be tantamount to unjust enrichment as it has already been paid
by the reinsurance company of the amount plaintiff has paid to JDA as surety of
defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no
person should unjustly enrich himself at the expense of another (Article 22, New Civil
Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its finding
that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never
been raised by any of the parties herein both in their answers in the court below and in
their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming
hypothetically that it was paid by its reinsurer, still none of the respondents had any
interest in the matter since the reinsurance is strictly between the petitioner and the
re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not applicable considering that
whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money
was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?
2. If the answer to the preceding question is in the negative, has Pioneer still any claim
against defendants, considering the amount it has realized from the sale of the
mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the surety bond it had
executed in favor of JDA, collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its alleged liability to JDA under the
said surety bond, it is plain that on this score it no longer has any right to collect to the
extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of
action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance &
Surety Corporation is representing the reinsurers to recover the amount.' In other words,
insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their
attorney-in-fact.
But in the first place, there is not the slightest indication in the complaint that Pioneer is
suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most important of
all, Pioneer has no right to institute and maintain in its own name an action for the
benefit of the reinsurers. It is well-settled that an action brought by an attorney-in-fact in
his own name instead of that of the principal will not prosper, and this is so even where
the name of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be
prosecuted in the name of the real party in interest.' This provision is mandatory. The
real party in interest is the party who would be benefitted or injured by the judgment or is
the party entitled to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a real party in interest,
that there is no law permitting an action to be brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil.
Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23
SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the
difference between the two amounts, or P3,666.28. This is the amount for which Pioneer
may sue defendants, assuming that the indemnity agreement is still valid and effective.
But since the amount realized from the sale of the mortgaged chattels are P35,000.00
for one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00,
Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against
defendants. (Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the appellate
court. Considering this admitted payment, the only issue that cropped up was the effect
of payment made by the reinsurers to the petitioner. Therefore, the petitioner's argument
that the respondents had no interest in the reinsurance contract as this is strictly
between the petitioner as insured and the reinsuring company pursuant to Section 91
(should be Section 98) of the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the same rights by subrogation as
are acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v.
Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in general applicable to
actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55
S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing the
loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald
Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany
Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the indemnity from the insurer,
it is provided in said article that the insurer is deemed subrogated to the rights of the
insured against the wrongdoer and if the amount paid by the insurer does not fully cover
the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently,
under this legal provision, the real party in interest with regard to the portion of the
indemnity paid is the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an
attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner was
not the real party in interest in the complaint and, therefore, has no cause of action
against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors
should not have been dismissed on the premise that the evidence on record shows that
it is entitled to recover from the counter indemnitors. It does not, however, cite any
grounds except its allegation that respondent "Maglanas defense and evidence are
certainly incredible" (p. 12, Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete with evidence
to substantiate its finding that the counter-indemnitors are not liable to the petitioner.
The trial court stated:
Apart from the foregoing proposition, the indemnity agreement ceased to be valid and
effective after the execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved,
agreed to issue the bond provided that the same would be mortgaged to it, but this was
not possible because the planes were still in Japan and could not be mortgaged here in
the Philippines. As soon as the aircrafts were brought to the Philippines, they would be
mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would
be cancelled.
The following is averred under oath by Pioneer in the original complaint:
The various conflicting claims over the mortgaged properties have impaired and
rendered insufficient the security under the chattel mortgage and there is thus no other
sufficient security for the claim sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there is no other security
for the claim sought to be enforced by this action, which necessarily means that the
indemnity agreement had ceased to have any force and effect at the time this action
was instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the
planes and spare parts, no longer has any further action against the defendants as
indemnitors to recover any unpaid balance of the price. The indemnity agreement was
ipso jure extinguished upon the foreclosure of the chattel mortgage. These defendants,
as indemnitors, would be entitled to be subrogated to the right of Pioneer should they
make payments to the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's election of the remedy of
foreclosure precludes any further action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last installments to JDA and
Pioneer as surety having made of the payments to JDA, the alternative remedies open
to Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto
Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage both by
extrajudicial foreclosure and the instant suit. Such being the case, as provided by the
aforementioned provisions, Pioneer shall have no further action against the purchaser to
recover any unpaid balance and any agreement to the contrary is void.' Cruz, et al. v.
Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from through the contention
that Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising
the rights of JDA as vendor, having subrogated it in such rights. Nor may the application
of the provision be validly opposed on the ground that these defendants and defendant
Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal Motors
Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
discharged these defendants from any liability as alleged indemnitors. The change of
the maturity dates of the obligations of Lim, or SAL extinguish the original obligations
thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three months interval
installments, the first of which shall be due and payable 25 August 1965, the remainder
of which ... shall be due and payable on the 26th day x x x of each succeeding three
months and the last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum executed by SAL or
Lim and JDA, modifying the maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal successive three month interval
installments the first of which shall be due and payable 4 September 1965, the
remainder of which ... shall be due and payable on the 4th day ... of each succeeding
months and the last of which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes bearing maturity
dates different from that fixed in the aforesaid memorandum; the due date of the first
installment appears as October 15, 1965, and those of the rest of the installments, the
15th of each succeeding three months, that of the last installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity dates, effected twice,
were done without the knowledge, much less, would have it believed that these
defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed
that these defendants and defendant Maglana knew of and consented to the
modification of the obligations. But if that were so, there would have been the
corresponding documents in the form of a written notice to as well as written conformity
of these defendants, and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured by the indemnity
agreement which was thereby also extinguished. Applicable by analogy are the rulings
of the Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553,
563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty The mere failure on the part of the creditor to
demand payment after the debt has become due does not of itself constitute any
extension time referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd.,
v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants,
as supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in
the surety bond, the failure of JDA to present its claim to Pioneer within ten days from
default of Lim or SAL on every installment, released Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru
the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his
co-debtors if such payment is made after the obligation has prescribed or became
illegal.
These defendants are entitled to recover damages and attorney's fees from Pioneer and
its surety by reason of the filing of the instant case against them and the attachment and
garnishment of their properties. The instant action is clearly unfounded insofar as
plaintiff drags these defendants and defendant Maglana.' (Record on Appeal, pp.
363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose agreement was to
do business through the corporate vehicle but who failed to incorporate the entity in
which they had chosen to invest? How are the losses to be treated in situations where
their contributions to the intended 'corporation' were invested not through the corporate
form? This Petition presents these fundamental questions which we believe were
resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim
to incorporate, a de facto partnership among them was created, and that as a
consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution. The petitioner, therefore, questions the
appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-defendants' cross-claims in
the total amount of P184,878.74 as correctly found by the trial court, with interest from
the filing of the cross-complaints until the amount is fully paid. Defendant Lim should pay
one-half of the said amount to Bormaheco and the Cervanteses and the other one-half
to defendant Maglana. It is established in the records that defendant Lim had duly
received the amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject airplanes and spare
parts (Exhibit 58). In addition, the cross-party plaintiffs incurred additional expenses,
hence, the total sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter and
the laws of the state relating thereto and not by the rules governing partners (Cannon v.
Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that
persons who attempt, but fail, to form a corporation and who carry on business under
the corporate name occupy the position of partners inter se (Lynch v. Perryman, 119 P.
229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves
together under articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a corporation within the statute,
they become in legal effect partners inter se, and their rights as members of the
company to the property acquired by the company will be recognized (Smith v.
Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369).
So, where certain persons associated themselves as a corporation for the development
of land for irrigation purposes, and each conveyed land to the corporation, and two of
them contracted to pay a third the difference in the proportionate value of the land
conveyed by him, and no stock was ever issued in the corporation, it was treated as a
trustee for the associates in an action between them for an accounting, and its capital
stock was treated as partnership assets, sold, and the proceeds distributed among them
in proportion to the value of the property contributed by each (Shorb v. Beaudry, 56 Cal.
446). However, such a relation does not necessarily exist, for ordinarily persons cannot
be made to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6
S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied only when
necessary to do justice between the parties; thus, one who takes no part except to
subscribe for stock in a proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of the
alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership
relation between certain stockholders and other stockholders, who were also directors,
will not be implied in the absence of an agreement, so as to make the former liable to
contribute for payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W.
210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his
failure to appear during the pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents Bormaheco, the Cervanteses and
Maglana. The trial court and the appellate court, however, found through Exhibit 58, that
the petitioner received the amount of P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to
petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation with
the respondents despite his representations to them. This gives credence to the
cross-claims of the respondents to the effect that they were induced and lured by the
petitioner to make contributions to a proposed corporation which was never formed
because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and
Maglana to expand his airline business. Lim was to procure two DC-3's from Japan and
secure the necessary certificates of public convenience and necessity as well as the
required permits for the operation thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim
acknowledged receipt thereof. Cervantes, likewise, delivered his share of the
undertaking. Lim in an undertaking sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their agreement and proceeded to acquire the
planes on his own account. Since then up to the filing of this answer, Lim has refused,
failed and still refuses to set up the corporation or return the money of Maglana. (Record
on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer,
counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the answering defendants to
purchase two airplanes and spare parts from Japan which the latter considered as their
lawful contribution and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant Lim. Down payments
were advanced by defendants Bormaheco and the Cervanteses and Constancio
Maglana (Exh. E- 1). Contrary to the agreement among the defendants, defendant Lim
in connivance with the plaintiff, signed and executed the alleged chattel mortgage and
surety bond agreement in his personal capacity as the alleged proprietor of the SAL.
The answering defendants learned for the first time of this trickery and
misrepresentation of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic)
allegedly executed by defendant Lim, thereby forcing them to file an adverse claim in the
form of third party claim. Notwithstanding repeated oral demands made by defendants
Bormaheco and Cervanteses, to defendant Lim, to surrender the possession of the two
planes and their accessories and or return the amount advanced by the former
amounting to an aggregate sum of P 178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply with them. (Record on
Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case, necessarily,
no de facto partnership was created among the parties which would entitle the petitioner
to a reimbursement of the supposed losses of the proposed corporation. The record
shows that the petitioner was acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.
G.R. No. L-20993 September 28, 1968
RIZAL LIGHT & ICE CO., INC., petitioner,
vs.
THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE
COMMISSION, respondents.
----------------------------
G.R. No. L-21221 September 28, 1968
RIZAL LIGHT & ICE CO., INC., petitioner,
vs.
THE PUBLIC SERVICE COMMISSION and MORONG ELECTRIC CO.,
INC., respondents.
Amado A. Amador, Jr. for petitioner.
Atilano C. Bautista and Pompeyo F. Olivas for respondents.
ZALDIVAR, J.:
These two cases, being interrelated, are decided together.
Case G.R. No. L-20993 is a petition of the Rizal Light & Ice Co., Inc. to review and set
aside the orders of respondent Public Service Commission, 1 dated August 20, 1962,
and February 15, 1963, in PSC Case No. 39716, cancelling and revoking the certificate
of public convenience and necessity and forfeiting the franchise of said petitioner. In the
same petition, the petitioner prayed for the issuance of a writ of preliminary injunction ex
parte suspending the effectivity of said orders and/or enjoining respondents
Commission and/or Municipality of Morong, Rizal, from enforcing in any way the
cancellation and revocation of petitioner's franchise and certificate of public
convenience during the pendency of this appeal. By resolution of March 12, 1963, this
Court denied the petition for injunction, for lack of merit.
Case G. R. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to review and
set aside the decision of the Commission dated March 13, 1963 in PSC Case No.
62-5143 granting a certificate of public convenience and necessity to respondent
Morong Electric Co., Inc. 2 to operate an electric light, heat and power service in the
municipality of Morong, Rizal. In the petition Rizal Light & Ice Co., Inc. also prayed for
the issuance of a writ of preliminary injunction ex parte suspending the effectivity of said
decision. Per resolution of this Court, dated May 6, 1963, said petition for injunction was
denied.
The facts, as they appear in the records of both cases, are as follows:
Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business address at
Morong, Rizal. On August 15, 1949, it was granted by the Commission a certificate of
public convenience and necessity for the installation, operation and maintenance of an
electric light, heat and power service in the municipality of Morong, Rizal.
In an order dated December 19, 1956, the Commission required the petitioner to appear
before it on February 18, 1957 to show cause why it should not be penalized for violation
of the conditions of its certificate of public convenience and the regulations of the
Commission, and for failure to comply with the directives to raise its service voltage and
maintain them within the limits prescribed in the Revised Order No. 1 of the Commission,
and to acquire and install a kilowattmeter to indcate the load in kilowatts at any particular
time of the generating unit. 3
For failure of the petitioner to appear at the hearing on February 18, 1957, the
Commission ordered the cancellation and revocation of petitioner's certificate of public
convenience and necessity and the forfeiture of its franchise. Petitioner moved for
reconsideration of said order on the ground that its manager, Juan D. Francisco, was
not aware of said hearing. Respondent municipality opposed the motion alleging that
petitioner has not rendered efficient and satisfactory service and has not complied with
the requirements of the Commission for the improvement of its service. The motion was
set for hearing and Mr. Pedro S. Talavera, Chief, Industrial Division of the Commission,
was authorized to conduct the hearing for the reception of the evidence of the parties. 4
Finding that the failure of the petitioner to appear at the hearing set for February 18,
1957 — the sole basis of the revocation of petitioner's certificate — was really due to the
illness of its manager, Juan D. Francisco, the Commission set aside its order of
revocation. Respondent municipality moved for reconsideration of this order of
reinstatement of the certificate, but the motion was denied.
In a petition dated June 25, 1958, filed in the same case, respondent municipality
formally asked the Commission to revoke petitioner's certificate of public convenience
and to forfeit its franchise on the ground, among other things, that it failed to comply with
the conditions of said certificate and franchise. Said petition was set for hearing jointly
with the order to show cause. The hearings had been postponed several times.
Meanwhile, inspections had been made of petitioner's electric plant and installations by
the engineers of the Commission, as follows: April 15, 1958 by Engineer Antonio M. Alli;
September 18, 1959, July 12-13, 1960, and June 21-24, 1961, by Engineer Meliton S.
Martinez. The inspection on June 21-24, 1961 was made upon the request of the
petitioner who manifested during the hearing on December 15, 1960 that improvements
have been made on its service since the inspection on July 12-13, 1960, and that, on the
basis of the inspection report to be submitted, it would agree to the submission of the
case for decision without further hearing.
When the case was called for hearing on July 5, 1961, petitioner failed to appear.
Respondent municipality was then allowed to present its documentary evidence, and
thereafter the case was submitted for decision.
On July 7, 1961, petitioner filed a motion to reopen the case upon the ground that it had
not been furnished with a copy of the report of the June 21-24, 1961 inspection for it to
reply as previously agreed. In an order dated August 25, 1961, petitioner was granted a
period of ten (10) days within which to submit its written reply to said inspection report,
on condition that should it fail to do so within the said period the case would be
considered submitted for decision. Petitioner failed to file the reply. In consonance with
the order of August 25, 1961, therefore, the Commission proceeded to decide the case.
On July 29, 1962 petitioner's electric plant was burned.
In its decision, dated August 20, 1962, the Commission, on the basis of the inspection
reports of its aforenamed engineers, found that the petitioner had failed to comply with
the directives contained in its letters dated May 21, 1954 and September 4, 1954, and
had violated the conditions of its certificate of public convenience as well as the rules
and regulations of the Commission. The Commission concluded that the petitioner
"cannot render the efficient, adequate and satisfactory electric service required by its
certificate and that it is against public interest to allow it to continue its operation."
Accordingly, it ordered the cancellation and revocation of petitioner's certificate of public
convenience and the forfeiture of its franchise.
On September 18, 1962, petitioner moved for reconsideration of the decision, alleging
that before its electric plant was burned on July 29, 1962, its service was greatly
improved and that it had still existing investment which the Commission should protect.
But eight days before said motion for reconsideration was filed, or on September 10,
1962, Morong Electric, having been granted a municipal franchise on May 6, 1962 by
respondent municipality to install, operate and maintain an electric heat, light and power
service in said municipality — approved by the Provincial Board of Rizal on August 31,
1962 — filed with the Commission an application for a certificate of public convenience
and necessity for said service. Said application was entitled "Morong Electric Co., Inc.,
Applicant", and docketed as Case No. 62-5143.
Petitioner opposed in writing the application of Morong Electric, alleging among other
things, that it is a holder of a certificate of public convenience to operate an electric light,
heat and power service in the same municipality of Morong, Rizal, and that the approval
of said application would not promote public convenience, but would only cause ruinous
and wasteful competition. Although the opposition is dated October 6, 1962, it was
actually received by the Commission on November 8, 1962, or twenty four days after the
order of general default was issued in open court when the application was first called
for hearing on October 15, 1962. On November 12, 1962, however, the petitioner filed a
motion to lift said order of default. But before said motion could be resolved, petitioner
filed another motion, dated January 4, 1963, this time asking for the dismissal of the
application upon the ground that applicant Morong Electric had no legal personality
when it filed its application on September 10, 1962, because its certificate of
incorporation was issued by the Securities and Exchange Commission only on October
17, 1962. This motion to dismiss was denied by the Commission in a formal order
issued on January 17, 1963 on the premise that applicant Morong Electric was a de
facto corporation. Consequently, the case was heard on the merits and both parties
presented their respective evidence. On the basis of the evidence adduced, the
Commission, in its decision dated March 13, 1963, found that there was an absence of
electric service in the municipality of Morong and that applicant Morong Electric, a
Filipino-owned corporation duly organized and existing under the laws of the Philippines,
has the financial capacity to maintain said service. These circumstances, considered
together with the denial of the motion for reconsideration filed by petitioner in Case No.
39715 on February, 15, 1963, such that as far as the Commission was concerned the
certificate of the petitioner was already declared revoked and cancelled, the
Commission approved the application of Morong Electric and ordered the issuance in its
favor of the corresponding certificate of public convenience and necessity.1awphîl.nèt
On March 8, 1963, petitioner filed with this Court a petition to review the decision in
Case No. 39715 (now G. R. No. L-20993). Then on April 26, 1963, petitioner also filed a
petition to review the decision in Case No. 62-5143 (now G. R. No. L-21221).
In questioning the decision of the Commission in Case No. 39715, petitioner contends:
(1) that the Commission acted without or in excess of its jurisdiction when it delegated
the hearing of the case and the reception of evidence to Mr. Pedro S. Talavera who is
not allowed by law to hear the same; (2) that the cancellation of petitioner's certificate of
public convenience was unwarranted because no sufficient evidence was adduced
against the petitioner and that petitioner was not able to present evidence in its defense;
(3) that the Commission failed to give protection to petitioner's investment; and (4) that
the Commission erred in imposing the extreme penalty of revocation of the certificate.
In questioning the decision in Case No. 62-5143, petitioner contends: (1) that the
Commission erred in denying petitioner's motion to dismiss and proceeding with the
hearing of the application of the Morong Electric; (2) that the Commission erred in
granting Morong Electric a certificate of public convenience and necessity since it is not
financially capable to render the service; (3) that the Commission erred when it made
findings of facts that are not supported by the evidence adduced by the parties at the
trial; and (4) that the Commission erred when it did not give to petitioner protection to its
investment — a reiteration of the third assignment of error in the other case.1awphîl.nèt
We shall now discuss the appeals in these two cases separately.
G.R. No. L-20993
1. Under the first assignment of error, petitioner contends that while Mr. Pedro S.
Talavera, who conducted the hearings of the case below, is a division chief, he is not a
lawyer. As such, under Section 32 of Commonwealth Act No. 146, as amended, the
Commission should not have delegated to him the authority to conduct the hearings for
the reception of evidence of the parties.
We find that, really, Mr. Talavera is not a lawyer. 5 Under the second paragraph of
Section 32 of Commonwealth Act No. 146, as amended, 6 the Commission can only
authorize a division chief to hear and investigate a case filed before it if he is a lawyer.
However, the petitioner is raising this question for the first time in this appeal. The record
discloses that petitioner never made any objection to the authority of Mr. Talavera to
hear the case and to receive the evidence of the parties. On the contrary, we find that
petitioner had appeared and submitted evidence at the hearings conducted by Mr.
Talavera, particularly the hearings relative to the motion for reconsideration of the order
of February 18, 1957 cancelling and revoking its certificate. We also find that, through
counsel, petitioner had entered into agreements with Mr. Talavera, as hearing officer,
and the counsel for respondent municipality, regarding procedure in order to abbreviate
the proceedings. 7 It is only after the decision in the case turned out to be adverse to it
that petitioner questioned the proceedings held before Mr. Talavera.
This Court in several cases has ruled that objection to the delegation of authority to hear
a case filed before the Commission and to receive the evidence in connection therewith
is a procedural, not a jurisdictional point, and is waived by failure to interpose timely the
objection and the case had been decided by the Commission. 8 Since petitioner has
never raised any objection to the authority of Mr. Talavera before the Commission, it
should be deemed to have waived such procedural defect, and consonant with the
precedents on the matter, petitioner's claim that the Commission acted without or in
excess of jurisdiction in so authorizing Mr. Talavera should be dismissed. 9
2. Anent the second assigned error, the gist of petitioner's contention is that the
evidence — consisting of inspection reports — upon which the Commission based its
decision is insufficient and untrustworthy in that (1) the authors of said reports had not
been put to test by way of cross-examination; (2) the reports constitute only one side of
the picture as petitioner was not able to present evidence in its defense; (3) judicial
notice was not taken of the testimony of Mr. Harry B. Bernardino, former mayor of
respondent municipality, in PSC Case No. 625143 (the other case, G. R. No. L-21221)
to the effect that the petitioner had improved its service before its electric power plant
was burned on July 29, 1962 — which testimony contradicts the inspection reports; and
(4) the Commission acted both as prosecutor and judge — passing judgment over the
very same evidence presented by it as prosecutor — a situation "not conducive to the
arrival at just and equitable decisions."
Settled is the rule that in reviewing the decision of the Public Service Commission this
Court is not required to examine the proof de novo and determine for itself whether or
not the preponderance of evidence really justifies the decision. The only function of this
Court is to determine whether or not there is evidence before the Commission upon
which its decision might reasonably be based. This Court will not substitute its discretion
for that of the Commission on questions of fact and will not interfere in the latter's
decision unless it clearly appears that there is no evidence to support it. 10 Inasmuch as
the only function of this Court in reviewing the decision of the Commission is to
determine whether there is sufficient evidence before the Commission upon which its
decision can reasonably be based, as it is not required to examine the proof de novo,
the evidence that should be made the basis of this Court's determination should be only
those presented in this case before the Commission. What then was the evidence
presented before the Commission and made the basis of its decision subject of the
present appeal? As stated earlier, the Commission based its decision on the inspection
reports submitted by its engineers who conducted the inspection of petitioner's electric
service upon orders of the Commission. 11 Said inspection reports specify in detail the
deficiencies incurred, and violations committed, by the petitioner resulting in the
inadequacy of its service. We consider that said reports are sufficient to serve
reasonably as bases of the decision in question. It should be emphasized, in this
connection that said reports, are not mere documentary proofs presented for the
consideration of the Commission, but are the results of the Commission's own
observations and investigations which it can rightfully take into
consideration, 12 particularly in this case where the petitioner had not presented any
evidence in its defense, and speaking of petitioner's failure to present evidence, as well
as its failure to cross-examine the authors of the inspection reports, petitioner should not
complain because it had waived not only its right to cross-examine but also its right to
present evidence. Quoted hereunder are the pertinent portions of the transcripts of the
proceedings where the petitioner, through counsel, manifested in clear language said
waiver and its decision to abide by the last inspection report of Engineer Martinez:
Proceedings of December 15, 1960
COMMISSION:
It appears at the last hearing of this case on September 23, 1960, that an engineer of
this Commission has been ordered to make an inspection of all electric services in the
province of Rizal and on that date the engineer of this Commission is still undertaking
that inspection and it appears that the said engineer had actually made that inspection
on July 12 and 13, 1960. The engineer has submitted his report on November 18, 1960
which is attached to the records of this case.
ATTY. LUQUE (Councel for Petitioner):
... (W)e respectfully state that while the report is, as I see it attached to the records, clear
and very thorough, it was made sometime July of this year and I understand from the
respondent that there is some improvement since this report was made ... we
respectfully request that an up-to-date inspection be made ... . An inspector of this
Commission can be sent to the plant and considering that the engineer of this
Commission, Engineer Meliton Martinez, is very acquainted to the points involved we
pray that his report will be used by us for the reason that he is a technical man and he
knows well as he has done a good job and I think our proposition would expedite the
matter. We sincerely believe that the inspection report will be the best evidence to
decide this matter.
xxx xxx xxx
ATTY. LUQUE:
... This is a very important matter and to show the good faith of respondent in this case
we will not even cross-examine the engineer when he makes a new report. We will
agree to the findings and, your honor please, considering as we have manifested before
that Engineer Martinez is an experienced engineer of this Commission and the points
reported by Engineer Martinez on the situation of the plant now will prevent the
necessity of having a hearing, of us bringing new evidence and complainant bringing
new evidence. ... .
xxx xxx xxx
COMMISSION (to Atty. Luque):
Q Does the Commission understand from the counsel for applicant that if the
motion is granted he will submit this order to show cause for decision without any further
hearing and the decision will be based on the report of the engineer of this Commission?
A We respectfully reply in this manner that we be allowed or be given an
opportunity just to read the report and 99%, we will agree that the report will be the basis
of that decision. We just want to find out the contents of the report, however, we request
that we be furnished with a copy of the report before the hearing so that we will just
make a manifestation that we will agree.
COMMISSION (to Atty. Luque):
Q In order to prevent the delay of the disposition of this case the Commission
will allow counsel for the applicant to submit his written reply to the report that the
engineer of this Commission. Will he submit this case without further hearing upon the
receipt of that written reply?
A Yes, your honor.
Proceedings of August 25, 1961
ATTY. LUQUE (Counsel for petitioner):
In order to avoid any delay in the consideration of this case we are respectfully move
(sic) that instead of our witnesses testifying under oath that we will submit a written reply
under oath together with the memorandum within fifteen (15) days and we will furnish a
copy and upon our submission of said written reply under oath and memorandum we
consider this case submitted. This suggestion is to abbreviate the necessity of
presenting witnesses here which may prolong the resolution of this case.
ATTY. OLIVAS (Counsel for respondent municipality):
I object on the ground that there is no resolution by this Commission on the action to
reopen the case and second this case has been closed.
ATTY. LUQUE:
With regard to the testimony on the ground for opposition we respectfully submit to this
Commission our motion to submit a written reply together with a memorandum. Also as
stated to expedite the case and to avoid further hearing we will just submit our written
reply. According to our records we are furnished with a copy of the report of July 17,
1961. We submit your honor.
xxx xxx xxx
COMMISSION:
To give applicant a chance to have a day in court the Commission grants the request of
applicant that it be given 10 days within which to submit a written reply on the report of
the engineer of the Commission who inspected the electric service, in the municipality of
Morong, Rizal, and after the submission of the said written reply within 10 days from
today this case will be considered submitted for decision.
The above-quoted manifestation of counsel for the petitioner, specifically the statement
referring to the inspection report of Engineer Martinez as the "best evidence to decide
this matter," can serve as an argument against petitioner's claim that the Commision
should have taken into consideration the testimony of Mr. Bernardino. But the primary
reasons why the Commission could not have taken judicial cognizance of said testimony
are: first, it is not a proper subject of judicial notice, as it is not a "known" fact — that is,
well established and authoritatively settled, without qualification and
contention; 13 second, it was given in a subsequent and distinct case after the
petitioner's motion for reconsideration was heard by the Commission en banc and
submitted for decision, 14 and third, it was not brought to the attention of the Commission
in this case through an appropriate pleading. 15
Regarding the contention of petitioner that the Commission had acted both as
prosecutor and judge, it should be considered that there are two matters that had to be
decided in this case, namely, the order to show cause dated December 19, 1956, and
the petition or complaint by respondent municipality dated June 25, 1958. Both matters
were heard jointly, and the record shows that respondent municipality had been allowed
to present its evidence to substantiate its complaint. It can not be said, therefore, that in
this case the Commission had acted as prosecutor and judge. But even assuming, for
the sake of argument, that there was a commingling of the prosecuting and investigating
functions, this exercise of dual function is authorized by Section 17(a) of Commonwealth
Act No. 146, as amended, under which the Commission has power "to investigate, upon
its own initiative or upon complaint in writing, any matter concerning any public service
as regards matters under its jurisdiction; to, require any public service to furnish safe,
adequate, and proper service as the public interest may require and warrant; to enforce
compliance with any standard, rule, regulation, order or other requirement of this Act or
of the Commission ... ." Thus, in the case of Collector of Internal Revenue vs. Estate of F.
P. Buan, L-11438, July 31, 1958, this Court held that the power of the Commission to
cancel and revoke a certificate of public convenience and necessity may be exercised
by it even without a formal charge filed by any interested party, with the only limitation
that the holder of the certificate should be given his day in court.
It may not be amiss to add that when prosecuting and investigating duties are delegated
by statute to an administrative body, as in the case of the Public Service Commission,
said body may take steps it believes appropriate for the proper exercise of said duties,
particularly in the manner of informing itself whether there is probable violation of the law
and/or its rules and regulations. It may initiate an investigation, file a complaint, and then
try the charge as preferred. So long as the respondent is given a day in court, there can
be no denial of due process, and objections to said procedure cannot be sustained.
3. In its third assignment of error, petitioner invokes the "protection-of-investment rule"
enunciated by this Court in Batangas Transportation Co. vs. Orlanes 16 in this wise:
The Government having taken over the control and supervision of all public utilities, so
long as an operator under a prior license complies with the terms and conditions of his
license and reasonable rules and regulations for its operation and meets the reasonable
demands of the public, it is the duty of the Commission to protect rather than to destroy
his investment by the granting of the second license to another person for the same
thing over the same route of travel. The granting of such a license does not serve its
convenience or promote the interests of the public.
The above-quoted rule, however, is not absolute, for nobody has exclusive right to
secure a franchise or a certificate of public convenience. 17 Where, as in the present
case, it has been shown by ample evidence that the petitioner, despite ample time and
opportunity given to it by the Commission, had failed to render adequate, sufficient and
satisfactory service and had violated the important conditions of its certificate as well as
the directives and the rules and regulations of the Commission, the rule cannot apply.
To apply that rule unqualifiedly is to encourage violation or disregard of the terms and
conditions of the certificate and the Commission's directives and regulations, and would
close the door to other applicants who could establish, operate and provide adequate,
efficient and satisfactory service for the benefit and convenience of the inhabitants. It
should be emphasized that the paramount consideration should always be the public
interest and public convenience. The duty of the Commission to protect investment of a
public utility operator refers only to operators of good standing — those who comply with
the laws, rules and regulations — and not to operators who are unconcerned with the
public interest and whose investments have failed or deteriorated because of their own
fault. 18
4. The last assignment of error assails the propriety of the penalty imposed by the
Commission on the petitioner — that is, the revocation of the certificate and the
forfeiture of the franchise. Petitioner contends that the imposition of a fine would have
been sufficient, as had been done by the Commission in cases of a similar nature.
It should be observed that Section 16(n) of Commonwealth Act No. 146, as amended,
confers upon the Commission ample power and discretion to order the cancellation and
revocation of any certificate of public convenience issued to an operator who has
violated, or has willfully and contumaciously refused to comply with, any order, rule or
regulation of the Commission or any provision of law. What matters is that there is
evidence to support the action of the Commission. In the instant case, as shown by the
evidence, the contumacious refusal of the petitioner since 1954 to comply with the
directives, rules and regulations of the Commission, its violation of the conditions of its
certificate and its incapability to comply with its commitment as shown by its inadequate
service, were the circumstances that warranted the action of the Commission in not
merely imposing a fine but in revoking altogether petitioner's certificate. To allow
petitioner to continue its operation would be to sacrifice public interest and convenience
in favor of private interest.
A grant of a certificate of public convenience confers no property rights but is a mere
license or privilege, and such privilege is forfeited when the grantee fails to comply with
his commitments behind which lies the paramount interest of the public, for public
necessity cannot be made to wait, nor sacrificed for private convenience. (Collector of
Internal Revenue v. Estate of F. P. Buan, et al., L-11438 and Santiago Sambrano, et al.
v. PSC, et al., L-11439 & L-11542-46, July 31, 1958)
(T)he Public Service Commission, ... has the power to specify and define the terms and
conditions upon which the public utility shall be operated, and to make reasonable rules
and regulations for its operation and the compensation which the utility shall receive for
its services to the public, and for any failure to comply with such rules and regulations or
the violation of any of the terms and conditions for which the license was granted, the
Commission has ample power to enforce the provisions of the license or even to revoke
it, for any failure or neglect to comply with any of its terms and provisions. (Batangas
Trans. Co. v. Orlanes, 52 Phil. 455, 460; emphasis supplied)
Presumably, the petitioner has in mind Section 21 of Commonwealth Act No. 146, as
amended, which provides that a public utility operator violating or failing to comply with
the terms and conditions of any certificate, or any orders, decisions or regulations of the
Commission, shall be subject to a fine and that the Commission is authorized and
empowered to impose such fine, after due notice and hearing. It should be noted,
however, that the last sentence of said section states that the remedy provided therein
"shall not be a bar to, or affect any other remedy provided in this Act but shall be
cumulative and additional to such remedy or remedies." In other words, the imposition of
a fine may only be one of the remedies which the Commission may resort to, in its
discretion. But that remedy is not exclusive of, or has preference over, the other
remedies. And this Court will not substitute its discretion for that of the Commission, as
long as there is evidence to support the exercise of that discretion by the Commission.
G. R. No. L-21221
Coming now to the other case, let it be stated at the outset that before any certificate
may be granted, authorizing the operation of a public service, three requisites must be
complied with, namely: (1) the applicant must be a citizen of the Philippines or of the
United States, or a corporation or co-partnership, association or joint-stock company
constituted and organized under the laws of the Philippines, sixty per centum at least of
the stock or paid-up capital of which belongs entirely to citizens of the Philippines or of
the United States; 19 (2) the applicant must be financially capable of undertaking the
proposed service and meeting the responsibilities incident to its operation; 20 and (3) the
applicant must prove that the operation of the public service proposed and the
authorization to do business will promote the public interest in a proper and suitable
manner. 21
As stated earlier, in the decision appealed from, the Commission found that Morong
Electric is a corporation duly organized and existing under the laws of the Philippines,
the stockholders of which are Filipino citizens, that it is financially capable of operating
an electric light, heat and power service, and that at the time the decision was rendered
there was absence of electric service in Morong, Rizal. While the petitioner does not
dispute the need of an electric service in Morong, Rizal, 22 it claims, in effect, that
Morong Electric should not have been granted the certificate of public convenience and
necessity because (1) it did not have a corporate personality at the time it was granted a
franchise and when it applied for said certificate; (2) it is not financially capable of
undertaking an electric service, and (3) petitioner was rendering efficient service before
its electric plant was burned, and therefore, being a prior operator its investment should
be protected and no new party should be granted a franchise and certificate of public
convenience and necessity to operate an electric service in the same locality.
1. The bulk of petitioner's arguments assailing the personality of Morong Electric dwells
on the proposition that since a franchise is a contract, 23 at least two competent parties
are necessary to the execution thereof, and parties are not competent except when they
are in being. Hence, it is contended that until a corporation has come into being, in this
jurisdiction, by the issuance of a certificate of incorporation by the Securities and
Exchange Commission (SEC) it cannot enter into any contract as a corporation. The
certificate of incorporation of the Morong Electric was issued by the SEC on October 17,
1962, so only from that date, not before, did it acquire juridical personality and legal
existence. Petitioner concludes that the franchise granted to Morong Electric on May 6,
1962 when it was not yet in esse is null and void and cannot be the subject of the
Commission's consideration. On the other hand, Morong Electric argues, and to which
argument the Commission agrees, that it was a de facto corporation at the time the
franchise was granted and, as such, it was not incapacitated to enter into any contract or
to apply for and accept a franchise. Not having been incapacitated, Morong Electric
maintains that the franchise granted to it is valid and the approval or disapproval thereof
can be properly determined by the Commission.
Petitioner's contention that Morong Electric did not yet have a legal personality on May 6,
1962 when a municipal franchise was granted to it is correct. The juridical personality
and legal existence of Morong Electric began only on October 17, 1962 when its
certificate of incorporation was issued by the SEC. 24 Before that date, or pending the
issuance of said certificate of incorporation, the incorporators cannot be considered
as de facto corporation. 25 But the fact that Morong Electric had no corporate existence
on the day the franchise was granted in its name does not render the franchise invalid,
because later Morong Electric obtained its certificate of incorporation and then accepted
the franchise in accordance with the terms and conditions thereof. This view is
sustained by eminent American authorities. Thus, McQuiuin says:
The fact that a company is not completely incorporated at the time the grant is made to it
by a municipality to use the streets does not, in most jurisdictions, affect the validity of
the grant. But such grant cannot take effect until the corporation is organized. And in
Illinois it has been decided that the ordinance granting the franchise may be presented
before the corporation grantee is fully organized, where the organization is completed
before the passage and acceptance. (McQuillin, Municipal Corporations, 3rd Ed., Vol.
12, Chap. 34, Sec. 34.21)
Fletcher says:
While a franchise cannot take effect until the grantee corporation is organized, the
franchise may, nevertheless, be applied for before the company is fully organized.
A grant of a street franchise is valid although the corporation is not created until
afterwards. (Fletcher, Cyclopedia Corp. Permanent Edition, Rev. Vol. 6-A, Sec. 2881)
And Thompson gives the reason for the rule:
(I)n the matter of the secondary franchise the authorities are numerous in support of the
proposition that an ordinance granting a privilege to a corporation is not void because
the beneficiary of the ordinance is not fully organized at the time of the introduction of
the ordinance. It is enough that organization is complete prior to the passage and
acceptance of the ordinance. The reason is that a privilege of this character is a mere
license to the corporation until it accepts the grant and complies with its terms and
conditions. (Thompson on Corporations, Vol. 4, 3rd Ed., Sec. 2929) 26
The incorporation of Morong Electric on October 17, 1962 and its acceptance of the
franchise as shown by its action in prosecuting the application filed with the Commission
for the approval of said franchise, not only perfected a contract between the respondent
municipality and Morong Electric but also cured the deficiency pointed out by the
petitioner in the application of Morong EIectric. Thus, the Commission did not err in
denying petitioner's motion to dismiss said application and in proceeding to hear the
same. The efficacy of the franchise, however, arose only upon its approval by the
Commission on March 13, 1963. The reason is that —
Under Act No. 667, as amended by Act No. 1022, a municipal council has the power to
grant electric franchises, subject to the approval of the provincial board and the
President. However, under Section 16(b) of Commonwealth Act No. 146, as amended,
the Public Service Commission is empowered "to approve, subject to constitutional
limitations any franchise or privilege granted under the provisions of Act No. 667, as
amended by Act No. 1022, by any political subdivision of the Philippines when, in the
judgment of the Commission, such franchise or privilege will properly conserve the
public interests and the Commission shall in so approving impose such conditions as to
construction, equipment, maintenance, service, or operation as the public interests and
convenience may reasonably require, and to issue certificates of public convenience
and necessity when such is required or provided by any law or franchise." Thus, the
efficacy of a municipal electric franchise arises, therefore, only after the approval of the
Public Service Commission. (Almendras vs. Ramos, 90 Phil. 231) .
The conclusion herein reached regarding the validity of the franchise granted to Morong
Electric is not incompatible with the holding of this Court in Cagayan Fishing
Development Co., Inc. vs. Teodoro Sandiko 27 upon which the petitioner leans heavily in
support of its position. In said case this Court held that a corporation should have a full
and complete organization and existence as an entity before it can enter into any kind of
a contract or transact any business. It should be pointed out, however, that this Court
did not say in that case that the rule is absolute or that under no circumstances may the
acts of promoters of a corporation be ratified or accepted by the corporation if and when
subsequently organized. Of course, there are exceptions. It will be noted that American
courts generally hold that a contract made by the promoters of a corporation on its
behalf may be adopted, accepted or ratified by the corporation when organized. 28
2. The validity of the franchise and the corporate personality of Morong Electric to
accept the same having been shown, the next question to be resolved is whether said
company has the financial qualification to operate an electric light, heat and power
service. Petitioner challenges the financial capability of Morong Electric, by pointing out
the inconsistencies in the testimony of Mr. Jose P. Ingal, president of said company,
regarding its assets and the amount of its initial investment for the electric plant. In this
connection it should be stated that on the basis of the evidence presented on the matter,
the Commission has found the Morong Electric to be "financially qualified to install,
maintain and operate the proposed electric light, heat and power service." This is
essentially a factual determination which, in a number of cases, this Court has said it will
not disturb unless patently unsupported by evidence. An examination of the record of
this case readily shows that the testimony of Mr. Ingal and the documents he presented
to establish the financial capability of Morong Electric provide reasonable grounds for
the above finding of the Commission.
It is now a very well-settled rule in this jurisdiction that the findings and conclusions of
fact made by the Public Service Commission, after weighing the evidence adduced by
the parties in a public service case, will not be disturbed by the Supreme Court unless
those findings and conclusions appear not to be reasonably supported by evidence. (La
Mallorca and Pampanga Bus Co. vs. Mercado, L-19120, November 29, 1965)
For purposes of appeal, what is decisive is that said testimonial evidence provides
reasonable support for the Public Service Commission's findings of financial capacity on
the part of applicants, rendering such findings beyond our power to disturb. (Del Pilar
Transit vs. Silva, L-21547, July 15, 1966)
It may be worthwhile to mention in this connection that per inspection report dated
January 20, 1964 29 of Mr. Meliton Martinez of the Commission, who inspected the
electric service of Morong on January 15-16, 1964, Morong Electric "is serving electric
service to the entire area covered by its approved plan and has constructed its line in
accordance with the plans and specifications approved by the Commission." By reason
thereof, it was recommended that the requests of Morong Electric (1) for the withdrawal
of its deposit in the amount of P1,000.00 with the Treasurer of the Philippines, and (2)
for the approval of Resolution No. 160 of the Municipal Council of Morong, Rizal,
exempting the operator from making the additional P9,000.00 deposit mentioned in its
petition, dated September 16, 1963, be granted. This report removes any doubt as to
the financial capability of Morong Electric to operate and maintain an electric light, heat
and power service.
conflicting evidence in the two related cases, is a conclusion of fact which this Court will
not disturb.
And it has been held time and again that where the Commission has reached a
conclusion of fact after weighing the conflicting evidence, that conclusion must be
respected, and the Supreme Court will not interfere unless it clearly appears that there is
no evidence to support the decision of the Commission. (La Mallorca and Pampanga
Bus Co., Inc. vs. Mercado, L-19120, November 29, 1965 citing Pangasinan Trans. Co.,
Inc. vs. Dela Cruz, 96 Phil. 278)
For that matter, petitioner's pretension that it has a prior right to the operation of an
electric service in Morong, Rizal, is not tenable; and its plea for protection of its
investment, as in the previous case, cannot be entertained.
WHEREFORE, the two decisions of the Public Service Commission, appealed from,
should be, as they are hereby affirmed, with costs in the two cases against petitioner
Rizal Light & Ice Co., Inc. It is so ordered.

3. With the financial qualification of Morong Electric beyond doubt, the remaining
question to be resolved is whether, or not, the findings of fact of the Commission
regarding petitioner's service are supported by evidence. It is the contention of the
petitioner that the Commission made some findings of fact prejudicial to its position but
which do not find support from the evidence presented in this case. Specifically,
petitioner refers to the statements or findings that its service had "turned from bad to
worse," that it miserably failed to comply with the oft-repeated promises to bring about
the needed improvement, that its equipment is unserviceable, and that it has no longer
any plant site and, therefore, has discredited itself. Petitioner further states that such
statements are not only devoid of evidentiary support but contrary to the testimony of its
witness, Mr. Harry Bernardino, who testified that petitioner was rendering efficient and
satisfactory service before its electric plant was burned on July 29, 1962.

On the face of the decision appealed from, it is obvious that the Commission in
describing the kind of service petitioner was rendering before its certificate was ordered
revoked and cancelled, took judicial notice of the records of the previous case (PSC
Case No. 39715) where the quality of petitioner's service had been squarely put in issue.
It will be noted that the findings of the Commission were made notwithstanding the fact
that the aforementioned testimony of Mr. Bernardino had been emphasized and pointed
out in petitioner's Memorandum to the Commission. 30 The implication is simple: that as
between the testimony of Mr. Bernardino and the inspection reports of the engineers of
the Commission, which served as the basis of the revocation order, the Commission
gave credence to the latter. Naturally, whatever conclusion or finding of fact that the
Commission arrived at regarding the quality of petitioner's service are not borne out by
the evidence presented in this case but by evidence in the previous case. 31 In this
connection, we repeat, the conclusion, arrived at by the Commission after weighing the