1
G.R. No. 206800, July 02, 2018
STRADCOM CORPORATION AND JOSE A. CHUA, Petitioners, v. JOYCE ANNABELLE L.
ORPILLA, Respondent.
DECISION
TIJAM, J.:
Before Us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by
petitioners Stradcom Corporation (Stradcom) and Jose A. Chua (Chua) (collectively referred to
as petitioners), assailing the Decision1 dated September 28, 2012 and Resolution2 dated April
17, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. 91150, which reversed the National
Labor Relations Commission (NLRC) Decision3 dated July 30, 2004 and Resolution 4 dated April
20, 2005 and reinstated the Labor Arbiter's (LA's) ruling5 dated September 30, 2003.
The Procedural and Factual Antecedents
The Version of Respondent Joyce Anabelle L. Orpilla
On November 15, 2001, Joyce Anabelle L. Orpilla (respondent) was employed by Stradcom as
Human Resources Administration Department (HRAD) Head, under a probationary status for six
months, with a monthly salary of P60,000. 6 Her duties included administrative and training
matters.7
On January 2, 2003, Chua, the President and Chief Executive Officer (CEO) of Stradcom,
issued a Memorandum addressed to the Chief Operating Officer (COO), Ramon G. Reyes
(Reyes), and Chief Financial Officer (CPO), Raul C. Pagdanganan (Pagdanganan), announcing
the reorganization of the HRAD.8 The pertinent portions of the memorandum provides:
1. The Training Section of the Department shall be spinned off and will form part of the Business
Operations. x x x (The Training Section shall be called Human Resources Training and
Development).
xxxx
3. Under the said reorganization, new sections shall be reporting to the following:
 The Human Resources Training and Development shall be reporting to Mr.
Ramon G. Reyes, COO.
 The Personnel and Administration shall be reporting to Mr. Raul
Pagdangan, CFO.
 Ms. Joyce Anabelle L. Orpilla and the Training Section will be reporting
directly to the COO. x x x9
After the turn-over of the documents and equipment of HRAD, respondent inquired from Chua
as to her status in the light of the said reorganization. Chua, on the other hand, replied that the
management has lost its trust and confidence in her and it would be better if she resigned.
Respondent protested the resignation and insisted that if there were charges against her, she
was open for formal investigation. Chua, however, was not able to come up with any charges.10
On January 9, 2003, a meeting was held wherein, Atty. Eric Gene Pilapil (Atty. Pilapil), the Chief
Legal Officer (CLO) offered a settlement to respondent in exchange for her employment,
otherwise, respondent would have to undergo the burden of litigation in pursuing the retention of
her employment.11 Atty. Pilapil set another meeting on January 13, 2003 with respondent, and
told her to take a leave in the meantime to think about the settlement offer. Atty. Pilapil also
assured respondent that she would continue to receive her salary.12
On January 13, 2003, per advice of Atty. Pilapil, respondent reported for work but the guards
refused her entry and advised her to take a leave of absence.13
Respondent claimed that she was informed by Accounting Manager, Mr. Arnold C. Ocampo, that
her January 15, 2003 salary was already deposited in her bank account which included the
proportionate 13th month pay for the year 2003 and was her last and final pay. After such,
respondent no longer received any kind of payment from petitioners. 14 Respondent claimed that
she was constructively dismissed on January 2, 2003 and turned into an actual dismissal on
January 15, 2003, when she received her last pay.15
On June 29, 2003, respondent filed a complaint for constructive dismissal with monetary claims
of backwages, attorney's fees and damages.16
The Version of Petitioners Stradcom Corporation and Jose A. Chua
On November 15, 2001, respondent was employed by Stradcom as HRAD Head, a managerial
position with a monthly salary of P60,000. 17 As HRAD Head, respondent's duties and
responsibilities included administration and personnel, and training matters.18
Sometime in December 2002, Pagdanganan gave instructions to respondent to commence
preparations for Stradcom's 2002 Christmas party. Chua also gave instructions to respondent to
include the Land Registration Systems, Inc. (Lares) officers and employees, an affiliate of
Stradcom in the Christmas party, to foster camaraderie and working relations between the two
companies.19
Contrary to Chua's instruction, respondent then called a staff lunch meeting for Stradcom's 2002
Christmas party, wherein respondent conveyed her intention of easing out Lares' employees
from the party.20
Later, it had come to Stradcom's attention that respondent was not comfortable with the idea to
include Lares in the Christmas party, as respondent appeared evasive on the queries about the
event made by Ms. May Marcelo, the Head Personnel and Administration of Lares.21 This matter
was brought to the attention of Chua, who decided to strip respondent of any responsibility in
organizing the Christmas party and transferred the same to another committee. As part of the
turnover, respondent furnished the committee with a copy of the initial budget which included the
catering services from G&W Catering Services at P250 per head.22
On December 16, 2002, Ms. Rowena Q. Samson (Samson) and Mr. Saturnino S. Galgana
(Galgana), members of the new Christmas party committee went to see Mrs. Myrna G. Sese
(Sese), the proprietress of the G&W Catering Services.23 They were surprised to find out that the
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price of the food was actually P200 per head and not P250 per head as represented by for employment, and using company personnel and resources for purposes not beneficial to the
respondent. Suspicious about the correct pricing, Samson and Galgana reported the matter to interest of Stradcom.36
the Stradcom's management. Stradcom began its investigation and interviewed some
employees regarding the conduct of respondent.24
The Ruling of the LA

After the investigation, Stradcom also discovered that respondent required her staff to prepare
On September 30, 2003, the LA rendered a Decision, which ruled that respondent was illegally
presentation/training materials/manuals using company resources for purposes not related to
dismissed and Chua is solidarily liable with Stradcom for the payment of the monetary awards to
the affairs of the company, on overtime and on Sundays.25
respondent.37 The dispositive portion of the LA Decision, provides:

Subsequently, Pagdanganan called for a conference with respondent, and discussed

WHEREFORE, decision is hereby rendered, as follows:
respondent's non-inclusion of Lares in Stradcom's Christmas party, the overpricing of the food,
and her moonlighting. Respondent made a bare deniat.26
1. Declaring that the complainant was illegally dismissed;
2. Declaring that the dismissal was effected in violation of the due process and notice
On January 3, 2003, Chua notified his employees about the reorganization of the HRAD and the
requirements; and
Business Operations Department.27 On the same date and as part of routine procedure,
3. Ordering respondents Stradcom Corporation and Jose A. Chua to pay complainant, jointly
respondent turned-over the necessary documents and equipment. 28 Respondent reported to
and severally, the total amount of EIGHT HUNDRED FORTY SEVEN THOUSAND PESOS
Reyes, her new immediate superior and secured the latter's approval for her leave of absence
(P847,000.00) representing her separation pay, backwages, moral and exemplary damages and
on the dates of January 3 in the afternoon up to January 6, 2003, due to personal reasons.
attorney fees.
Reyes approved her leave.29

The awards for separation pay, backwages and the corresponding 10% attorney's fees shall be
However, before respondent's scheduled leave, she approached Chua to discuss the
subject to further computation until the decision in this case becomes final and executory.
reorganization and her previous conference with Pagdanganan regarding her said infractions.
Chua told respondent that the management has lost its trust and confidence in her due to her
willful disobedience in excluding the employees of Lares in the Stradcom's Christmas party and The other claims are denied for lack of merit.
for willful breach of trust in connection with the canvassing of the caterer.30
SO ORDERED.38
Respondent explained her side and asked Chua for his advice. Chua replied that considering
her position is one that requires the trust and confidence of the management, it would be difficult
Aggrieved, petitioners seasonably filed a memorandum of appeal before the NLRC.
to force herself on the management. Thus, respondent conveyed her willingness to resign. In
view of this, Stradcom's officers agreed that any formal investigation on respondent was
unnecessary in view of her willingness to resign.31 The Ruling of the NLRC

However, on January 7, 2003, respondent reported for work and suprisedly informed Stradcom
that she would not resign. When Chua found out about the respondent's retraction of her
statement to resign, he instructed Atty. Pilapil to talk things through with respondent.32
On January 9, 2003, Atty. Pilapil invited respondent for dinner outside the company premises.
Respondent was given another chance regarding her said infractions. Respondent then
requested for four days leave to think things through and Atty. Pilapil adhered to request and
assured her that she will receive her pay while on leave. They likewise agreed that they would
meet again on January 13, 2003, outside the office to discuss respondent's final decision.33
Petitioners were shocked when they found out that respondent had filed a complaint for
constructive dismissal with monetary claims of backwages, attorney's fees and damages on
January 29, 2003.34
Petitioners contended that the dismissal of respondent was for just cause on the ground of loss
of trust and confidence and the same was in compliance with the due process
requirements.35 Petitioners further contended that the acts that caused the loss of trust and
confidence of the petitioners in the respondent were her mishandling of Stradcom's 2002
Christmas party, dishonesty in preparing the budget thereof, misrepresentation in her application
On July 30, 2004, the NLRC issued its Decision. It partially granted the appeal filed by
petitioners and modified the Decision of the LA. The NLRC ruled that respondent was validly
dismissed on the ground of loss and trust confidence, due to her mishandling of the 2002 budget
for the Christmas party. The NLRC awarded respondent her unpaid salary for the period of
January 16 to April 16, 2003, the date when she was formally advised of her disengagement
from service. Attorney's fees were also awarded.39 The decretal portion of the NLRC Decision
thus, reads:
WHEREFORE, in view of the foregoing considerations, the appeal is hereby PARTIALLY
GRANTED. The dispositive portion of the appealed Decision is hereby MODIFIED and another
one entered:
1. Declaring that Appellee, Joyce Anabelle L. Orpilla was validly dismissed and;
2. Ordering appellant corporation to pay her the following:
a) Withheld wages from January 16 to April 16, 2003 (P60,000.00 x 3   P195,000.00
plus 1/12 thereof as 13th month pay)

b) attorney's fees   P 19,500.00
    --------
  Total Award   P214,500.00
SO ORDERED.40
Respondent sought to reconsider the above-mentioned Decision but it was denied by the NLRC
in its Resolution41 dated April 20, 2005, for lack of merit.
Dismayed, respondent filed a petition for review on certiorari under Rule 65 with the CA.
The Ruling of the CA
On September 28, 2012, the CA reversed and set aside the NLRC and ruled that respondent
was illegally dismissed.42 The fallo of the CA Decision provides:
IN VIEW OF ALL THESE, the Petition is GRANTED. The assailed Decision and Resolution of
public respondent NLRC are SET ASIDE. The Decision of the Labor Arbiter dated September
30, 2003 is REINSTATED.
SO ORDERED.43
Petitioners promptly filed a Motion for Reconsideration but it was denied by the CA in its
Resolution dated April 17, 2013.44
Hence, the present petition.
The Issues
A. WHETHER OR NOT THE COURT OF APPEALS HAS COMMITTED SERIOUS AND
REVERSIBLE ERRORS IN REVERSING THE DECISION OF THE NATIONAL LABOR
RELATIONS COMMISSION AND FAULTING THE SAME WITH GRAVE ABUSE OF
DISCRETION BY FINDING THAT PETITIONERS HAS ILLEGALLY DISMISSED
RESPONDENT FROM HER EMPLOYMENT AS HEAD OF THE HUMAN RESOURCE
DEPARTMENT?
A.1 WHETHER OR NOT RESPONDENT HAS WILLFULLY DISOBEYED PETITIONERS'
LAWFUL AND REASONABLE INSTRUCTIONS?
A.2 WHETHER OR NOT RESPONDENT HAS COMMITTED FRAUD, MISREPRESENTATION,
DISHONESTY AND OTHER ACTS INIMICAL TO THE INTEREST OF THE PETITIONERS
WHILE BEING EMPLOYED BY THE PETITIONER?
A.3 WHETHER OR NOT REPONDENT HAS ENGAGED IN MOONLIGHTING ACTIVITIES AND
USED COMPANY PERSONNEL AND RESOURCES NOT IN LINE WITH THE BUSINESS OF
STRADCOM.
3
B. WHETHER OR NOT THE COURT OF APPEALS HAS COMMITTED SERIOUS AND
REVERSIBLE ERRORS IN REVERSING THE DECISION OF THE NATIONAL LABOR
RELATIONS COMMISSION AND FAULTING THE SAME WITH GRAVE ABUSE OF
DISCRETION BY FINDING THAT RESPONDENT WAS DEMOTED BY THE PETITIONERS
AND THE LATTER DID NOT ACCORD THE FORMER DUE PROCESS?
B.1 WHETHER OR NOT THE REORGANIZATION OF THE HUMAN RESOURCE AND
ADMINISTRATION (HRA) DEPARTMENT WAS A VALID EXERCISE OF MANAGEMENT
PREROGATIVE?
B.2 WHETHER OR NOT RESPONDENT WAS DENIED DUE PROCESS?
B.3 WHETHER OR NOT RESPONDENT VOLUNTARILY RESIGNED [FROM] HER
EMPLOYMENT WITH STRADCOM.
C. WHETHER OR NOT THE RESPONDENT IS ENTITLED TO BACKWAGES,
REINSTATEMENT OR SEPARATION PAY?
D. WHETHER OR NOT THE RESPONDENT IS ENTITLED MORAL AND EXEMPLARY
DAMAGES?
E. WHETHER OR NOT PETITIONER CHUA MAY BE HELD JOINTLY AND SEVERALLY
LIABLE WITH CO-PETITIONER STRADCOM FOR THE PAYMENT OF WHATEVER
MONETARY AWARD IN FAVOR OF RESPONDENT?45
The pivotal issue for Our resolution is whether or not respondent was validly dismissed from
employment on the ground of loss of trust and confidence.
The Court's Ruling
The petition is meritorious.
Generally, only errors of law are revived in petitions for review for certiorari, since this Court is
not a trier of facts. As such, the findings of facts and conclusion of the NLRC are generally
accorded not only great weight and respect but even clothed with finality and deemed binding on
this Court as long as they are supported by substantial evidence.46 However, if the factual
findings of the LA and the NLRC are conflicting, as in this case, the reviewing court may delve
into the records and examine for itself the questioned findings. 47 The exception, rather than the
general rule, applies in the present case since the LA and the CA found facts supporting the
conclusion that respondent was illegally dismissed, while the NLRC's factual findings
contradicted the LA's findings.
Under this situation, such conflicting factual findings are not binding on Us, and We retain the
authority to pass on the evidence presented and draw conclusions therefrom.48
After judicious review on the records of the case, this Court finds that the petitioners proved that
respondent was dismissed for a just cause.

The dismissal of respondent was founded on just cause - loss of trust and confidence
Among the just causes for termination is the employer's loss of trust and confidence in its
employee. Article 297 (c) [formerly Article 282] of the Labor Code provides that an employer
may terminate the services of an employee for fraud or willful breach of the trust reposed in
him/her.49 Article 297, provides:
Article 297. TERMINATION BY EMPLOYER.—An employer may terminate an employment for
any of the following causes:
(a) Serious misconduct or willful disobedience by the employee of the lawful orders of his
employer or representative in connection with his work;
(b) Gross and habitual neglect by the employee of his duties;
(c) Fraud or willful breach by the employee of the trust reposed in him by his employer or
duly authorized representative;
(d) Commission of a crime or offense by the employee against the person of his employer or any
immediate member of his family or his duly authorized representative; and
(e) Other causes analogous to the foregoing. (Emphasis ours)
In order for the said cause to be properly invoked, however, certain requirements must be
complied with, namely: (1) the employee concerned must be holding a position of trust and
confidence; and (2) there must be an act that would justify the loss of trust and confidence.50
The two classes of positions of trust were enunciated in the case of Alaska Milk Corporation, et
al. v. Ponce:51
(1) managerial employees whose primary duty consists of the management of the establishment
in which they are employed or of a department or a subdivision thereof, and to other officers or
members of the managerial staff; and (2) fiduciary rank-and-file employees, such as cashiers,
auditors, property custodians, or those who, in the normal exercise of their functions, regularly
handle significant amounts of money or property. These employees, though rank-and-file, are
routinely charged with the care and custody of the employer's money or property, and are, thus,
classified as occupying positions of trust and confidence.52
As regards a managerial employee, the mere existence of a basis for believing that such
employee has breached the trust of his employer would suffice for his dismissal. Hence, in the
case of managerial employees, proof beyond reasonable doubt is not required, it being sufficient
that there is some basis for such loss of confidence, such as when the employer has reasonable
ground to believe that the employee concerned is responsible for the purported misconduct, and
the nature of his participation therein renders him unworthy of the trust and confidence
demanded by his position.53
It is undisputed that at the time of respondent's dismissal, she was holding a managerial
position, which was HRAD Head of Stradcom and directly reported to the President, herein
Chua and other high ranking officials of Stradcom. Likewise, respondent performed key and
sensitive functions, as her duties and responsibilities included the administration, personnel and
training matters of the company. Respondent held a trust and critical position which required the
conscientious observance of the company rules and procedures.
4
The presence of the first requisite is thus certain. Anent to the second requisite, the Court finds
that the petitioners meet their burden of proving that the respondent's dismissal was for a just
cause.
The acts alleged to have caused the loss of trust and confidence of the petitioners in the
respondent was her mishandling of Stradcom's 2002 Christmas party, dishonesty in preparing
the budget thereof, misrepresentation in her application for employment, and using company
personnel and resources for purposes not beneficial to the interest of Stradcom. The evidence
on record support Stradcom's claims.
There was substantial evidence to support that respondent overpriced the food for the 2002
Christmas party. The overpricing was discovered by the new committee which took over the
preparations for the said party. It is undisputed that respondent was the one who initially
negotiated with G&W Catering Services. Respondent was also the one who prepared the budget
for the approval of the President, herein Chua. G&W billed Stradcom for food at the rate of Two
Hundred Pesos (P200) per head only, contrary to the Two Hundred Fifty (P250) per head
quoted by respondent, and the rental for chairs at Twenty-Eight Pesos (P28), in the aggregate
amount of Sixty-Three Thousand Eight Hundred Forty Pesos (P63,840) as evidenced by the
Affidavit of Sese, the proprietress of the G&W Catering Services. Clearly, the overpricing
amounted to dishonesty.
Also, respondent's overpricing of P250 per head for the Christmas party was corroborated by
Ms. Rowena Samson,54 Chua's Secretary of the President and CEO and Mr. Saturnino S.
Galgana,55 Stradcom's Purchasing Assistant, as evidenced by their affidavits dated March 18,
2003.
Furthermore, respondent was proven to have engaged in moonlighting activities and used
company personnel and resources for purposes not in line with the business interest of
Stradcom. In fact, respondent admitted that she actually took home some of the training
materials owned by the company without the latter's prior clearance and without disclosed
purpose.
Such dishonesty on the part of the respondent in carrying out her duties is prejudicial to the
interest of Stradcom and constitutes just cause to terminate her employment.
Considering the foregoing, this Court agrees with the findings of the NLRC that there was a just
cause for the respondent's dismissal. We emphasize that dismissal of a dishonest employee is
to the best interest not only of the management but also of labor.56 Stradcom, as an employer in
the exercise of self-protection, cannot be compelled to continue employing an employee who is
guilty of acts inimical to its interest.
Respondent is entitled to nominal damages for violation of her right to statutory procedural due
process
We note however that even if there is a just cause to terminate respondent's employment, her
right to due process was not satisfied.
On the matter of procedural due process, it is well-settled that the employer must furnish the
employee with two written notices before termination of employment can be legally

effected.57 The first apprises the employee of the particular acts or omissions for which dismissal
is sought.58 The second informs the employee of the employer's decision to dismiss him.59
The case of Libcap Marketing Corp, et. al. v. Baquial60 explains:
The law and jurisprudence, on the other hand, allow the award of nominal damages in favor of
an employee in a case where a valid cause for dismissal exists but the employer fails to observe
due process in dismissing the employee. Financial assistance is granted as a measure of equity
or social justice, and is in the nature or takes the place of severance compensation.
On the other hand, nominal damages "may be awarded to a plaintiff whose right has been
violated or invaded by the defendant, for the purpose of vindicating or recognizing that right, and
not for indemnifying the plaintiff for any loss suffered by him. Its award is thus not for the
purpose of indemnification for a loss but for the recognition and vindication of a right." The
amount of nominal damages to be awarded the employee is addressed to the sound discretion
of the court, taking into consideration the relevant circumstances. (Citations omitted)61
As discussed above, the Court is given the latitude to determine the amount of nominal
damages to be awarded to an employee who was validly dismissed but whose due process
rights were violated. The two causes for a valid dismissal in the Labor Code are under Article
282, due to just causes and Article 283, based on authorized causes. These were differentiated
in the case of Jaka Food Processing Corp. v. Pacot,62 to wit:
A dismissal for just cause under Article 282 implies that the employee concerned has
committed, or is guilty of, some violation against the employer, i.e. the employee has committed
some serious misconduct, is guilty of some fraud against the employer, or, as in Agabon, he has
neglected his duties. Thus, it can be said that the employee himself initiated the dismissal
process.
On another breath, a dismissal for an authorized cause under Article 283 does not necessarily
imply delinquency or culpability on the part of the employee. Instead, the dismissal process is
initiated by the employer's exercise of his management prerogative, i.e. when the employer opts
to install labor saving devices, when he decides to cease business operations or when, as in this
case, he undertakes to implement a retrenchment program.
xxxx
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.63
Here, the cause for termination was loss of trust and confidence, thus due to the employee or
respondent's fault, but Stradcom failed to comply with the twin-notice requirement, thus, as a
measure of equity, We order Stradcom to pay respondent nominal damages in the amount of
P30,000.
5
The solidary liability of Chua as a corporate officer is not proper and must be recalled
It is well-settled that a corporation has its own legal personality separate and distinct from those
of its stockholders, directors or officers.64 Absence of any evidence that a corporate officer
and/or director has exceeded their authority, or their acts are tainted with malice or bad faith,
they cannot be held personally liable for their official acts. Here, there was neither any proof that
Chua acted without or in excess of his authority nor was motivated by personal ill-will towards
respondent to be solidarily liable with the company. We quote with affirmation the NLRC's
pronouncement, viz:
Finally, on the issue of whether or not the Labor Arbiter committed manifest error in ordering
appellant Chua solidarily liable with appellant corporation, we have to rule in the affirmative.
Appellant Chua cannot be made solidarily liable with appellant corporation for any award in favor
of appellee. Appellant corporation is separate and distinct from Appellant Chua.
xxxx
Appellant Chua's acts were official acts, done in his capacity as an officer of appellant
corporation on its behalf. There is no showing of any act, or that he acted without or in excess of
his authority or was motivated by personal ill-will toward appellee. Stated simply, appellant Chua
was merely doing his job. In fact, he even tried to save appelle from undue embarrassment.65
Respondent is not entitled to backwages separation pay, moral and exemplary damages, as
well as attorney's fees
With the sad reality that the respondent was not illegally dismissed, she is not entitled to
backwages. Backwages may be granted only when there is a finding that the dismissal is
illegal.66 Respondent's monetary claims for backwages, separation pay, moral and exemplary
damages, as well as attorney's fees must necessarily fail as a consequence of Our finding that
her dismissal was for a just cause and that the petitioners acted in good faith when they
terminated her services.67
WHEREFORE, premises considered, the petition is GRANTED. The assailed Court of Appeals
Decision dated September 28, 2012 and Resolution dated April17, 2013, are
hereby REVERSED and SET ASIDE, and the Decision of the National Labor Relations
Commission dated July 30, 2004, is REINSTATED but MODIFIED to the effect that backwages
and attorney's fees are hereby DELETED, and that Stradcom Corporation is liable to pay
respondent Joyce Anabelle L. Orpilla nominal damages in the amount of P30,000.
SO ORDERED.
FIRST DIVISION
April 4, 2017
G.R. No. 185024

JOSELITO HERNAND M. BUSTOS, Petitioners
vs.
MILLIANS SHOE, INC., SPOUSES FERNANDO AND AMELIA CRUZ, and the REGISTER OF
DEEDS OF MARIKINA CITY, Respondents
DECISION
SERENO, J.:
Before this Court is a Rule 45 Petition 1 assailing the Decision and the Resolution2 of the Court
of Appeals (CA). The CA did not find any grave abuse of discretion on the part of the Regional
Trial Court, Imus, Cavite, Branch 21 (RTC). The RTC had issued Orders 3 refusing to exclude the
subject property in the Stay Order pertaining to assets under rehabilitation of respondent Millians
Shoe, Inc. (MSI).
FACTS OF THE CASE
Spouses Fernando and Amelia Cruz owned a 464-square-meter lot covered by Transfer
Certificate of Title (TCT) No. N-126668.4 On 6 January 2004, the City Government of Marikina
levied the prope1iy for nonpayment of real estate taxes. The Notice of Levy was annotated on
the title on 8 January 2004. On 14 October 2004, the City Treasurer of Marikina auctioned off
the property, with petitioner Joselito Hernand M. Bustos emerging 'as the winning bidder.
Petitioner then applied for the cancellation of TCT No. N-126668. On 13 July 2006, the Regional
Trial Court, Marikina City, Branch 273, rendered a final and executory Decision ordering the
cancellation of the previous title and the issuance of a new one under the name of petitioner. 5
Meanwhile, notices of lis pendens were annotated on TCT No. N-126668 on 9 February
2005.6 These markings indicated that SEC Corp. Case No. 036-04, which was filed before the
RTC and involved the rehabilitation proceedings for MSI, covered the subject property and
included it in the Stay Order issued by the RTC dated 25 October 2004.7
On 26 September 2006, petitioner moved for the exclusion of the subject property from the Stay
Order.8 He claimed that the lot belonged to Spouses Cruz who were mere stockholders and
officers of MSL He further argued that since he had won the bidding of the property on 14
October 2004, or before the annotation of the title on 9 February 2005, the auctioned property
could no longer be part of the Stay Order.
The RTC denied the entreaty of petitioner. It ruled that because the period of redemption up to
15 October 2005 had not yet lapsed at the time of the issuance of the Stay Order on 25 October
2004, the ownership thereof had not yet been transferred to petitioner.9
10 11
Petitioner moved for reconsideration,   but to no avail.   He then filed an action
for certiorari before the CA. He asserted that the Stay Order undermined the taxing powers of
the local government unit. He also reiterated his arguments that Spouses Cruz owned the
property, and that the lot had already been auctioned to him.
In the assailed Decision dated 12 June 2008, the CA brushed aside the claim that the
suspension orders undermined the power to tax. As regards petitioner's main contention, the CA
ruled as follows:
6
In the case at bar, the delinquent tax payers were the Cruz Spouses who were the registered
owners of the said parcel of land at the time of the delinquency sale. The sale was held on
October 14, 2004 and the Cruz
Spouses had until October 15, 2005 within which to redeem the parcel of land. The stay order
was issued on October 25, 2004 and inscribed at the back of the title on February 9, 2005,
which is within the redemption period. The Cruz Spouses were still the owners of the land at the
time of the issuance of the stay order. The said parcel of land which secured several mortgage
liens for the account of MSI remains to be an asset of the Cruz Spouses, who are the
stockholders and/or officers of MSI, a close corporation. Incidentally, as an exception to the
general rule, in a close corporation, the stockholders and/or officers usually manage the
business of the corporation and are subject to all liabilities of directors, i.e. personally liable for
corporate debts and obligations. Thus, the Cruz Spouses being stockholders of MSI are
personally liable for the latter's debt and obligations.
Petitioner unsuccessfully moved for reconsideration. The CA maintained its ruling and even held
that his prayer to exclude the property was time-barred by the 10-day reglementary period to
oppose rehabilitation petitions under Rule 4, Section 6 of the Interim Rules of Procedure on
Corporate Rehabilitation
Before this Court, petitioner maintains three points: (1) the Spouses Cruz are not liable for the
debts of MSI; (2) the Stay Order undermines the taxing power of Marikina City; and (3) the time
bar rule does not apply to him, because he is not a creditor of MSI. 12
In their Comment, 13 respondents do not contest that Spouses Cruz own the subject property.
Rather, respondents assert that as stockholders and officers of a close corporation, they are
personally liable for its debts and obligations. Furthermore, they argue that since the
Rehabilitation Plan of MSI has been approved, petitioner can no longer assail the same.
ISSUE OF THE CASE
The controlling issue in this case is whether the CA correctly considered the properties of
Spouses Cruz answerable for the obligations of MSI.
If the answer is in the affirmative, then the courts a quo correctly ruled that the Stay Order
involving the assets of MSI included the property covered by TCT No. N-126668. Petitioner
would also be considered a creditor of MSI who must timely file an opposition to the proposed
rehabilitation plan of the corporation.
RULING OF THE COURT
We set aside rulings of the CA for lack of basis.
In finding the subject property answerable for the obligations of MSI, the CA characterized
respondent spouses as stockholders of a close corporation who, as such, are liable for its debts.
This conclusion is baseless.
To be considered a close corporation, an entity must abide by the requirements laid out in
Section 96 of the Corporation Code, which reads:
 7

Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of this liable for corporate torts unless the corporation has obtained reasonably adequate liability
Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock insurance. (Emphasis supplied)
of all classes, exclusive of treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be
As can be read in that provision, several requisites must be present for its applicability. None of
subject to one or more specified restrictions on transfer permitted by this Title; and (3) The
these were alleged in the case of Spouses Cruz. Neither did the RTC or the CA explain the
corporation shall not list in any stock exchange or make any public offering of any of its stock of
factual circumstances for this Court to discuss the personally liability of respondents to their
any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation
creditors because of corporate torts." 18
when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code.x x x. (Emphasis
supplied) We thus apply the general doctrine of separate juridical personality, which provides that a
corporation has a legal personality separate and distinct from that of people comprising it. 19 By
virtue of that doctrine, stockholders of a corporation enjoy the principle of limited liability: the
In San Juan Structural and Steel Fabricators. Inc. v. Court ol Appeals, 14 this Court held that a
corporate debt is not the debt of the stockholder.20 Thus, being an officer or a stockholder of a
narrow distribution of ownership does not, by itself, make a close corporation. Courts must look
corporation does not make one's property the property also of the corporation.21
into the articles of incorporation to find provisions expressly stating that (l) the number of
stockholders shall not exceed 20; or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation; or (3) the listing of the corporate stocks in any stock exchange Situs Development Corp. v. Asiatrust Bank22 is analogous to the case at bar.1âwphi1 We held
or making a public offering of those stocks is prohibited. therein that the parcels of land mortgaged to creditor banks were owned not by the corporation,
but by the spouses who were its stockholders. Applying the doctrine of separate juridical
personality, we ruled that the parcels of land of the spouses could not be considered part of the
Here, neither the CA nor the R TC showed its basis for finding that MSI is a close corporation.
corporate assets that could be subjected to rehabilitation proceedings.
The courts a quo did not at all refer to the Articles of Incorporation of MSI. The Petition
submitted by respondent in the rehabilitation proceedings before the RTC did not even include
those Articles of Incorporation among its attachments. 15 In rehabilitation proceedings, claims of creditors are limited to demands of whatever nature or
character against a debtor or its property, whether for money or otherwise.23 In several
cases,24 we have already held that stay orders should only cover those claims directed against
In effect, the CA and the RTC deemed MSI a close corporation based on the allegation of
corporations or their properties, against their guarantors, or their sureties who are not solidarily
Spouses Cruz that it was so. However, mere allegation is not evidence and is not equivalent to
liable with them, to the exclusion of accommodation mortgagors. 25 To repeat, properties merely
proof. 16 For this reason alone, the CA rulings should be set aside.
owned by stockholders cannot be included in the inventory of assets of a corporation under
rehabilitation.
 
Given that the true owner the subject property is not the corporation, petitioner cannot be
Furthermore, we find that the CA seriously erred in portraying the import of Section 97 of the considered a creditor of MSI but a holder of a claim against respondent spouses.26
Corporation Code. Citing that provision, the CA concluded that "in a close corporation, the
stockholders and/or officers usually manage the business of the corporation and are subject to
Rule 4, Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation, directs creditors
all liabilities of directors, i.e. personally liable for corporate debts and obligations." 17
of the debtor to file an opposition to petitions for rehabilitation within 10 days before the initial
hearing of rehabilitation proceedings. Since petitioner does not hold any claim over the
However, Section 97 of the Corporation Code only specifies that "the stockholders of the properties owned by MSI, the time-bar rule does not apply to him.
corporation shall be subject to all liabilities of directors." Nowhere in that provision do we find
any inference that stockholders of a close corporation are automatically liable for corporate
WHEREFORE, the Petition for review on certiorari filed by petitioner Joselito Hernand M. Bustos
debts and obligations.
is GRANTED. The Decision dated 12 June 2008 and Resolution dated 27 October 2008 of the
Court of Appeals in C.A.-G.R. SP. No. 100298 are REVERSED and SET ASIDE.
Parenthetically, only Section 100, paragraph 5, of the Corporation Code explicitly provides for
personal liability of stockholders of close corporation, viz:
SO ORDERED.

Sec. 100. Agreements by stockholders. -

FIRST DIVISION

xxxx [G.R. NO. 160039 : June 29, 2004]

RAYMUNDO ODANI SECOSA, EL BUENASENSO SYand DASSAD WAREHOUSINGand

5. To the extent that the stockholders are actively engaged in the management or operation of
PORT SERVICES, INCORPORATED, Petitioners, v. HEIRS OF ERWIN SUAREZ
the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary
FRANCISCO, Respondents.
duties to each other and among themselves. Said stockholders shall be personally
DECISION

YNARES-SANTIAGO, J.:
This is a Petition for Review under Rule 45 of the Rules of Court seeking the reversal of the
decision1 of the Court of Appeals dated February 27, 2003 in CA-G.R. CV No. 61868, which
affirmed in toto the June 19, 1998 decision2 of Branch 20 of the Regional Trial Court of Manila in
Civil Case No. 96-79554.
The facts are as follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year
physical therapy student of the Manila Central University, was riding a motorcycle along Radial
10 Avenue, near the Veteran Shipyard Gate in the City of Manila.At the same time, Petitioner,
Raymundo Odani Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the
same road. The truck was owned by petitioner, Dassad Warehousing and Port Services, Inc.
Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in turn
was being tailed by the Isuzu truck driven by Secosa.The three vehicles were traversing the
southbound lane at a fairly high speed.When Secosa overtook the sand and gravel truck, he
bumped the motorcycle causing Francisco to fall.The rear wheels of the Isuzu truck then ran
over Francisco, which resulted in his instantaneous death.Fearing for his life, petitioner Secosa
left his truck and fled the scene of the collision.3 ςrνll
Respondents, the parents of Erwin Francisco, thus filed an action for damages against
Raymond Odani Secosa, Dassad Warehousing and Port Services, Inc. and Dassads president,
El Buenasucenso Sy.The complaint was docketed as Civil Case No.96-79554 of the RTC of
Manila, Branch 20.
On June 19, 1998, after a full-blown trial, the court a quo rendered a decision in favor of herein
respondents, the dispositive portion of which states:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
WHEREFORE, premised on the foregoing, judgment is hereby rendered in favor of the plaintiffs
ordering the defendants to pay plaintiffs jointly and severally:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
1.The sum of P55,000.00 as actual and compensatory damages;chanroblesvirtuallawlibrary
2.The sum of P20,000.00 for the repair of the motorcycle;chanroblesvirtuallawlibrary
3.The sum of P100,000.00 for the loss of earning capacity;chanroblesvirtuallawlibrary
4.The sum of P500,000.00 as moral damages;chanroblesvirtuallawlibrary
5.The sum of P50,000.00 as exemplary damages;chanroblesvirtuallawlibrary
6.The sum of P50,000.00 as attorneys fees plus cost of suit.
SO ORDERED.
Petitioners appealed the decision to the Court of Appeals, which affirmed the appealed
decision in toto.4 ςrνll
Hence the present petition, based on the following arguments:
I.
8
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT THAT PETITIONER DASSAD DID NOT EXERCISE THE DILIGENCE OF
A GOOD FATHER OF A FAMILY IN THE SELECTION AND SUPERVISION OF ITS
EMPLOYEES WHICH IS NOT IN ACCORDANCE WITH ARTICLE 2180 OF THE NEW CIVIL
CODE AND RELATED JURISPRUDENCE ON THE MATTER.
II.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT IN HOLDING PETITIONER EL BUENASENSO SY SOLIDARILY LIABLE
WITH PETITIONERS DASSAD AND SECOSA IN VIOLATION OF THE CORPORATION LAW
AND RELATED JURISPRUDENCE ON THE MATTER.
III.
THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT OF APPEALS
AWARDING P500,000.00 AS MORAL DAMAGES IS MANIFESTLY ABSURD, MISTAKEN AND
UNJUST.5 ςrνll
The petition is partly impressed with merit.
On the issue of whether petitioner Dassad Warehousing and Port Services, Inc. exercised the
diligence of a good father of a family in the selection and supervision of its employees, we find
the assailed decision to be in full accord with pertinent provisions of law and established
jurisprudence.
Article 2176 of the Civil Code provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done.Such fault or negligence, if there is no pre-existing
contractual relation between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter.
On the other hand, Article 2180, in pertinent part, states:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
The obligation imposed by article 2176 is demandable not only for ones own acts or omissions,
but also for those of persons for whom one is responsible x x x.
Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged in any
business or industry x x x.
The responsibility treated of in this article shall cease when the persons herein mentioned prove
that they observed all the diligence of a good father of a family to prevent damage.
Based on the foregoing provisions, when an injury is caused by the negligence of an employee,
there instantly arises a presumption that there was negligence on the part of the employer either
in the selection of his employee or in the supervision over him after such selection.The
presumption, however, may be rebutted by a clear showing on the part of the employer that it
exercised the care and diligence of a good father of a family in the selection and supervision of
his employee.Hence, to evade solidary liability for quasi-delict committed by an employee, the
employer must adduce sufficient proof that it exercised such degree of care.6 ςrνll

How does an employer prove that he indeed exercised the diligence of a good father of a family
in the selection and supervision of his employee? The case of Metro Manila Transit Corporation
v. Court of Appeals7 is instructive:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
In fine, the party, whether plaintiff or defendant, who asserts the affirmative of the issue has the
burden of presenting at the trial such amount of evidence required by law to obtain a favorable
judgment8 . .. In making proof in its or his case, it is paramount that the best and most complete
evidence is formally entered.9 ςrνll
Coming now to the case at bar, while there is no rule which requires that testimonial evidence, to
hold sway, must be corroborated by documentary evidence, inasmuch as the witnesses
testimonies dwelt on mere generalities, we cannot consider the same as sufficiently persuasive
proof that there was observance of due diligence in the selection and supervision of employees.
Petitioners attempt to prove its deligentissimi patris familias in the selection and supervision of
employees through oral evidence must fail as it was unable to buttress the same with any other
evidence, object or documentary, which might obviate the apparent biased nature of the
testimony.10 ςrνll
Our view that the evidence for petitioner MMTC falls short of the required evidentiary quantum
as would convincingly and undoubtedly prove its observance of the diligence of a good father of
a family has its precursor in the underlying rationale pronounced in the earlier case of Central
Taxicab Corp. v. Ex-Meralco Employees Transportation Co., et al.,11 set amidst an almost
identical factual setting, where we held that:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
The failure of the defendant company to produce in court any record or other documentary proof
tending to establish that it had exercised all the diligence of a good father of a family in the
selection and supervision of its drivers and buses, notwithstanding the calls therefor by both the
trial court and the opposing counsel, argues strongly against its pretensions.
We are fully aware that there is no hard-and-fast rule on the quantum of evidence needed to
prove due observance of all the diligence of a good father of a family as would constitute a valid
defense to the legal presumption of negligence on the part of an employer or master whose
employee has by his negligence, caused damage to another. x x x (R) educing the testimony of
Albert to its proper proportion, we do not have enough trustworthy evidence left to go by. We are
of the considered opinion, therefore, that the believable evidence on the degree of care and
diligence that has been exercised in the selection and supervision of Roberto Leon y Salazar, is
not legally sufficient to overcome the presumption of negligence against the defendant company.
The above-quoted ruling was reiterated in a recent case again involving the Metro Manila Transit
Corporation,12 thus:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
In the selection of prospective employees, employers are required to examine them as to their
qualifications, experience, and service records.13 On the other hand, with respect to the
supervision of employees, employers should formulate standard operating procedures, monitor
their implementation, and impose disciplinary measures for breaches thereof. To establish these
factors in a trial involving the issue of vicarious liability, employers must submit concrete proof,
including documentary evidence.
In this case, MMTC sought to prove that it exercised the diligence of a good father of a family
with respect to the selection of employees by presenting mainly testimonial evidence on its
hiring procedure. According to MMTC, applicants are required to submit professional driving
licenses, certifications of work experience, and clearances from the National Bureau of
Investigation; to undergo tests of their driving skills, concentration, reflexes, and vision; and, to
9
complete training programs on traffic rules, vehicle maintenance, and standard operating
procedures during emergency cases.
xxx
Although testimonies were offered that in the case of Pedro Musa all these precautions were
followed, the records of his interview, of the results of his examinations, and of his service were
not presented.. . [T]here is no record that Musa attended such training programs and passed the
said examinations before he was employed. No proof was presented that Musa did not have any
record of traffic violations. Nor were records of daily inspections, allegedly conducted by
supervisors, ever presented.. . The failure of MMTC to present such documentary proof puts in
doubt the credibility of its witnesses.
Jurisprudentially, therefore, the employer must not merely present testimonial evidence to prove
that he observed the diligence of a good father of a family in the selection and supervision of his
employee, but he must also support such testimonial evidence with concrete or documentary
evidence. The reason for this is to obviate the biased nature of the employers testimony or that
of his witnesses.14 ςrνll
Applying the foregoing doctrines to the present case, we hold that petitioner Dassad
Warehousing and Port Services, Inc. failed to conclusively prove that it had exercised the
requisite diligence of a good father of a family in the selection and supervision of its employees.
Edilberto Duerme, the lone witness presented by Dassad Warehousing and Port Services, Inc.
to support its position that it had exercised the diligence of a good father of a family in the
selection and supervision of its employees, testified that he was the one who recommended
petitioner Raymundo Secosa as a driver to Dassad Warehousing and Port Services, Inc.; that it
was his duty to scrutinize the capabilities of drivers; and that he believed petitioner to be
physically and mentally fit for he had undergone rigid training and attended the PPA safety
seminar.15 ςrνll
Petitioner Dassad Warehousing and Port Services, Inc. failed to support the testimony of its lone
witness with documentary evidence which would have strengthened its claim of due diligence in
the selection and supervision of its employees.Such an omission is fatal to its position, on
account of which, Dassad can be rightfully held solidarily liable with its co-petitioner Raymundo
Secosa for the damages suffered by the heirs of Erwin Francisco.
However, we find that petitioner El Buenasenso Sy cannot be held solidarily liable with his co-
petitioners. While it may be true that Sy is the president of petitioner Dassad Warehousing and
Port Services, Inc., such fact is not by itself sufficient to hold him solidarily liable for the liabilities
adjudged against his co-petitioners.
It is a settled precept in this jurisdiction that a corporation is invested by law with a personality
separate from that of its stockholders or members.16 It has a personality separate and distinct
from those of the persons composing it as well as from that of any other entity to which it may be
related. Mere ownership by a single stockholder or by another corporation of all or nearly all of
the capital stock of a corporation is not in itself sufficient ground for disregarding the separate
corporate personality.17 A corporations authority to act and its liability for its actions are separate
and apart from the individuals who own it.18 ςrνll
The so-called veil of corporation fiction treats as separate and distinct the affairs of a corporation
and its officers and stockholders. As a general rule, a corporation will be looked upon as a legal
entity, unless and until sufficient reason to the contrary appears.When the notion of legal entity
 10

is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons.19 Also, the corporate entity may be
disregarded in the interest of justice in such cases as fraud that may work inequities among
members of the corporation internally, involving no rights of the public or third persons.In both
instances, there must have been fraud and proof of it. For the separate juridical personality of a
corporation to be disregarded, the wrongdoing must be clearly and convincingly established. 20 It
cannot be presumed.21 ςrνll
The records of this case are bereft of any evidence tending to show the presence of any
grounds enumerated above that will justify the piercing of the veil of corporate fiction such as to
hold the president of Dassad Warehousing and Port Services, Inc. solidarily liable with it.
The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of Dassad
Warehousing and Port Services, Inc., and not in the name of El Buenasenso Sy.Raymundo
Secosa is an employee of Dassad Warehousing and Port Services, Inc. and not of El
Buenasenso Sy.All these things, when taken collectively, point toward El Buenasenso Sys
exclusion from liability for damages arising from the death of Erwin Francisco.
Having both found Raymundo Secosa and Dassad Warehousing and Port Services, Inc. liable
for negligence for the death of Erwin Francisco on June 27, 1996, we now consider the question
of moral damages which his parents, herein respondents, are entitled to recover.Petitioners
assail the award of moral damages of P500,000.00 for being manifestly absurd, mistaken and
unjust.We are not persuaded.
xxx
Q: How did your family react to the death of Erwin Suarez Francisco?chanroblesvirtualawlibrary
A: All of my family and relatives were felt (sic) sorrow because they knew that my son is (sic)
good.
Q: We know that it is impossible to put money terms(s) [on] the life of [a] human, but since you
are now in court and if you were to ask this court how much would you and your family
compensate? (sic)
A: Even if they pay me millions, they cannot remove the anguish of my son (sic). 23 ςrνll
Moral damages are emphatically not intended to enrich a plaintiff at the expense of the
defendant. They are awarded to allow the former to obtain means, diversion or amusements that
will serve to alleviate the moral suffering he has undergone due to the defendants culpable
action and must, perforce, be proportional to the suffering inflicted.24 We have previously held as
proper an award of P500,000.00 as moral damages to the heirs of a deceased family member
who died in a vehicular accident. In our 2002 decision in Metro Manila Transit Corporation v.
Court of Appeals, et al.,25 we affirmed the award of moral damages of P500,000.00 to the heirs
of the victim, a mother, who died from injuries she sustained when a bus driven by an employee
of the petitioner hit her.In the case at bar, we likewise affirm the portion of the assailed decision
awarding the moral damages.

Under Article 2206, the spouse, legitimate and illegitimate descendants and ascendants of the Since the petitioners did not question the other damages adjudged against them by the court a
deceased may demand moral damages for mental anguish for the death of the deceased. The quo, we affirm the award of these damages to the Respondents.
reason for the grant of moral damages has been explained in this
WHEREFORE, the petition is DENIED.The assailed decision is AFFIRMED with the
wise:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
MODIFICATION that petitioner El Buenasenso Sy is ABSOLVED from any liability adjudged
.. . the award of moral damages is aimed at a restoration, within the limits possible, of the against his co-petitioners in this case.
spiritual status quo ante; and therefore, it must be proportionate to the suffering inflicted. The
Costs against petitioners.
intensity of the pain experienced by the relatives of the victim is proportionate to the intensity of
affection for him and bears no relation whatsoever with the wealth or means of the SO ORDERED.
offender.22 ςrνll
FIRST DIVISION
In the instant case, the spouses Francisco presented evidence of the searing pain that they felt
when the premature loss of their son was relayed to them. That pain was highly evident in the G.R. No. 171805               May 30, 2011
testimony of the father who was forever deprived of a son, a son whose untimely death came at
that point when the latter was nearing the culmination of every parents wish to educate their PHILIPPINE NATIONAL BANK, Petitioner,
children.The death of Francis has indeed left a void in the lives of the respondents. Antonio vs.
Francisco testified on the effect of the death of his son, Francis, in this MERELO B. AZNAR; MATIAS B. AZNAR III; JOSE L. AZNAR (deceased), represented by
manner:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ his heirs; RAMON A. BARCENILLA; ROSARIO T. BARCENILLA; JOSE B. ENAD
(deceased), represented by his heirs; and RICARDO GABUYA (deceased), represented by
Q: (Atty. Balanag) :What did you do when you learned that your son was killed on June 27, his heirs, Respondents.
1996?chanroblesvirtualawlibrary
x - - - - - - - - - - - - - - - - - - - - - - -x
A: (ANTONIO FRANCISCO) :I boxed the door and pushed the image of St. Nio telling why this
happened to us. G.R. No. 172021

Q: Mr. Witness, how did you feel when you learned of the untimely death of your son, Erwin MERELO B. AZNAR and MATIAS B. AZNAR III, Petitioners,
Suares (sic) ?chanroblesvirtualawlibrary vs.
PHILIPPINE NATIONAL BANK, Respondent.
A: Masakit po ang mawalan ng anak. Its really hard for me, the thought that my son is dead.
 11

DECISION xxxx

LEONARDO-DE CASTRO, J.: 3. The President then explained that in a special meeting of the stockholders previously called
for the purpose of putting up certain amount of ₱212,720.00 for the rehabilitation of the
Before the Court are two petitions for review on certiorari under Rule 45 of the Rules of Court Company, the following stockholders contributed the amounts indicated opposite their names:
both seeking to annul and set aside the Decision1 dated September 29, 2005 as well as the
Resolution2 dated March 6, 2006 of the Court of Appeals in CA-G.R. CV No. 75744, entitled CONTRIBUTED SURPLUS
"Merelo B. Aznar, Matias B. Aznar III, Jose L. Aznar (deceased) represented by his heirs,
Ramon A. Barcenilla (deceased) represented by his heirs, Rosario T. Barcenilla, Jose B. Enad MERELO B. AZNAR ₱50,000.00
(deceased) represented by his heirs, and Ricardo Gabuya (deceased) represented by his heirs
v. Philippine National Bank, Jose Garrido and Register of Deeds of Cebu City." The September
MATIAS B. AZNAR 50,000.00
29, 2005 Decision of the Court of Appeals set aside the Decision 3 dated November 18, 1998 of
the Regional Trial Court (RTC) of Cebu City, Branch 17, in Civil Case No. CEB-21511.
Furthermore, it ordered the Philippine National Bank (PNB) to pay Merelo B. Aznar; Matias B. JOSE L. AZNAR 27,720.00
Aznar III; Jose L. Aznar (deceased), represented by his heirs; Ramon A. Barcenilla (deceased),
represented by his heirs; Rosario T. Barcenilla; Jose B. Enad (deceased), represented by his RAMON A. BARCENILLA 25,000.00
heirs; and Ricardo Gabuya (deceased), represented by his heirs (Aznar, et al.), the amount of
their lien based on the Minutes of the Special Meeting of the Board of Directors 4 (Minutes) of the
ROSARIO T. BARCENILLA 25,000.00
defunct Rural Insurance and Surety Company, Inc. (RISCO) duly annotated on the titles of three
parcels of land, plus legal interests from the time of PNB’s acquisition of the subject properties
until the finality of the judgment but dismissing all other claims of Aznar, et al. On the other hand, JOSE B. ENAD 17,500.00
the March 6, 2006 Resolution of the Court of Appeals denied the Motion for Reconsideration
subsequently filed by each party. RICARDO GABUYA 17,500.00

The facts of this case, as stated in the Decision dated September 29, 2005 of the Court of
Appeals, are as follows:

In 1958, RISCO ceased operation due to business reverses. In plaintiffs’ desire to rehabilitate   212,720.00
RISCO, they contributed a total amount of ₱212,720.00 which was used in the purchase of the
three (3) parcels of land described as follows: xxxx

"A parcel of land (Lot No. 3597 of the Talisay-Minglanilla Estate, G.L.R.O. Record No. 3732)
situated in the Municipality of Talisay, Province of Cebu, Island of Cebu. xxx containing an area
of SEVENTY[-]EIGHT THOUSAND ONE HUNDRED EIGHTY[-]FIVE SQUARE METERS
(78,185) more or less. x x x" covered by Transfer Certificate of Title No. 8921 in the name of
Rural Insurance & Surety Co., Inc.";
And that the respective contributions above-mentioned shall constitute as their lien or interest on
the property described above, if and when said property are titled in the name of RURAL
INSURANCE & SURETY CO., INC., subject to registration as their adverse claim in pursuance
of the Provisions of Land Registration Act, (Act No. 496, as amended) until such time their
respective contributions are refunded to them completely.

"A parcel of land (Lot 7380 of the Talisay Minglanilla Estate, G.L.R.O. Record No. 3732), x x x x"
situated in the Municipality of Talisay, Province of Cebu, Island of Cebu. xxx containing an area
of THREE HUNDRED TWENTY[-]NINE THOUSAND FIVE HUNDRED FORTY[-]SEVEN Thereafter, various subsequent annotations were made on the same titles, including the Notice
SQUARE METERS (329,547), more or less. xxx" covered by Transfer Certificate of Title No. of Attachment and Writ of Execution both dated August 3, 1962 in favor of herein defendant
8922 in the name of Rural Insurance & Surety Co., Inc." and PNB, to wit:

"A parcel of land (Lot 1323 of the subdivision plan Psd-No. 5988), situated in the District of
Lahug, City of Cebu, Island of Cebu. xxx containing an area of FIFTY[-]FIVE THOUSAND SIX
HUNDRED FIFTY[-]THREE (55,653) SQUARE METERS, more or less." covered by Transfer
Certificate of Title No. 24576 in the name of Rural Insurance & Surety Co., Inc."
After the purchase of the above lots, titles were issued in the name of RISCO. The amount
contributed by plaintiffs constituted as liens and encumbrances on the aforementioned
properties as annotated in the titles of said lots. Such annotation was made pursuant to the
Minutes of the Special Meeting of the Board of Directors of RISCO (hereinafter referred to as the
"Minutes") on March 14, 1961, pertinent portion of which states:
On TCT No. 8921 for Lot 3597:
Entry No. 7416-V-4-D.B. – Notice of Attachment – By the Provincial Sheriff of Cebu, Civil Case
No. 47725, Court of First Instance of Manila, entitled "Philippine National Bank, Plaintiff, versus
Iluminada Gonzales, et al., Defendants", attaching all rights, interest and participation of the
defendant Iluminada Gonzales and Rural Insurance & Surety Co., Inc. of the two parcels of land
covered by T.C.T. Nos. 8921, Attachment No. 330 and 185.
Date of Instrument – August 3, 1962.

Date of Inscription – August 3, 1962, 3:00 P.M.
Entry No. 7417-V-4-D.B. – Writ of Execution – By the Court of First Instance of Manila,
commanding the Provincial Sheriff of Cebu, of the lands and buildings of the defendants, to
make the sum of Seventy[-]One Thousand Three Hundred Pesos (₱71,300.00) plus interest
etc., in connection with Civil Case No. 47725, File No. T-8021.
Date of Instrument – July 21, 1962.
Date of Inscription – August 3, 1962, 3:00 P.M.
Entry No. 7512-V-4-D.B. – Notice of Attachment – By the Provincial Sheriff of Cebu, Civil Case
Nos. IV-74065, 73929, 74129, 72818, in the Municipal Court of the City of Manila, entitled "Jose
Garrido, Plaintiff, versus Rural Insurance & Surety Co., Inc., et als., Defendants", attaching all
rights, interests and participation of the defendants, to the parcels of land covered by T.C.T.
Nos. 8921 & 8922 Attachment No. 186, File No. T-8921.
Date of the Instrument – August 16, 1962.
Date of Inscription – August 16, 1962, 2:50 P.M.
Entry No. 7513-V-4-D.B. – Writ of Execution – By the Municipal Court of the City of Manila,
commanding the Provincial Sheriff of Cebu, of the lands and buildings of the defendants, to
make the sum of Three Thousand Pesos (₱3,000.00), with interest at 12% per annum from July
20, 1959, in connection with Civil Case Nos. IV-74065, 73929, 74613 annotated above.
File No. T-8921
Date of the Instrument – August 11, 1962.
Date of the Inscription – August 16, 1962, 2:50 P.M.
On TCT No. 8922 for Lot 7380:
(Same as the annotations on TCT 8921)
On TCT No. 24576 for Lot 1328 (Corrected to Lot 1323-c per court order):
Entry No. 1660-V-7-D.B. – Notice of Attachment – by the Provincial Sheriff of Cebu, Civil Case
No. 47725, Court of First Instance of Manila, entitled "Philippine National Bank, Plaintiff, versus,
Iluminada Gonzales, et al., Defendants", attaching all rights, interest, and participation of the
defendants Iluminada Gonzales and Rural Insurance & Surety Co., Inc. of the parcel of land
herein described.
Attachment No. 330 & 185.
Date of Instrument – August 3, 1962.
Date of Inscription – August 3, 1962, 3:00 P.M.
Entry No. 1661-V-7-D.B. – Writ of Execution by the Court of First Instance of Manila
commanding the Provincial Sheriff of Cebu, of the lands and buildings of the defendants to make
the sum of Seventy[-]One Thousand Three Hundred Pesos (₱71,300.00), plus interest, etc., in
connection with Civil Case No. 47725.
12
File No. T-8921.
Date of the Instrument – July 21, 1962.
Date of the Inscription – August 3, 1962 3:00 P.M.
Entry No. 1861-V-7-D.B. - Notice of Attachment – By the Provincial Sheriff of Cebu, Civil Case
Nos. IV-74065, 73929, 74129, 72613 & 72871, in the Municipal Court of the City of Manila,
entitled "Jose Garrido, Plaintiff, versus Rural Insurance & Surety Co., Inc., et als., Defendants",
attaching all rights, interest and participation of the defendants, to the parcel of land herein
described.
Attachment No. 186.
File No. T-8921.
Date of the Instrument – August 16, 1962.
Date of the Instription – August 16, 1962 2:50 P.M.
Entry No. 1862-V-7-D.B. – Writ of Execution – by the Municipal Court of Manila, commanding
the Provincial Sheriff of Cebu, of the lands and buildings of the Defendants, to make the sum of
Three Thousand Pesos (P3,000.00), with interest at 12% per annum from July 20, 1959, in
connection with Civil Case Nos. IV-74065, 73929, 74129, 72613 & 72871 annotated above.
File No. T-8921.
Date of the Instrument – August 11, 1962.
Date of the Inscription – August 16, 1962 at 2:50 P.M.
As a result, a Certificate of Sale was issued in favor of Philippine National Bank, being the lone
and highest bidder of the three (3) parcels of land known as Lot Nos. 3597 and 7380, covered
by T.C.T. Nos. 8921 and 8922, respectively, both situated at Talisay, Cebu, and Lot No. 1328-C
covered by T.C.T. No. 24576 situated at Cebu City, for the amount of Thirty-One Thousand Four
Hundred Thirty Pesos (P31,430.00). Thereafter, a Final Deed of Sale dated May 27, 1991 in
favor of the Philippine National Bank was also issued and Transfer Certificate of Title No. 24576
for Lot 1328-C (corrected to 1323-C) was cancelled and a new certificate of title, TCT 119848
was issued in the name of PNB on August 26, 1991.
This prompted plaintiffs-appellees to file the instant complaint seeking the quieting of their
supposed title to the subject properties, declaratory relief, cancellation of TCT and reconveyance
with temporary restraining order and preliminary injunction. Plaintiffs alleged that the subsequent
annotations on the titles are subject to the prior annotation of their liens and encumbrances.
Plaintiffs further contended that the subsequent writs and processes annotated on the titles are
all null and void for want of valid service upon RISCO and on them, as stockholders. They
argued that the Final Deed of Sale and TCT No. 119848 are null and void as these were issued
only after 28 years and that any right which PNB may have over the properties had long become
stale.
Defendant PNB on the other hand countered that plaintiffs have no right of action for quieting of
title since the order of the court directing the issuance of titles to PNB had already become final
and executory and their validity cannot be attacked except in a direct proceeding for their
annulment. Defendant further asserted that plaintiffs, as mere stockholders of RISCO do not

have any legal or equitable right over the properties of the corporation. PNB posited that even if
plaintiff’s monetary lien had not expired, their only recourse was to require the reimbursement or
refund of their contribution.51awphi1
Aznar, et al., filed a Manifestation and Motion for Judgment on the Pleadings 6 on October 5,
1998. Thus, the trial court rendered the November 18, 1998 Decision, which ruled against PNB
on the basis that there was an express trust created over the subject properties whereby RISCO
was the trustee and the stockholders, Aznar, et al., were the beneficiaries or the cestui que trust.
The dispositive portion of the said ruling reads:
WHEREFORE, judgment is hereby rendered as follows:
a) Declaring the Minutes of the Special Meeting of the Board of Directors of RISCO approved on
March 14, 1961 (Annex "E," Complaint) annotated on the titles to subject properties on May 15,
1962 as an express trust whereby RISCO was a mere trustee and the above-mentioned
stockholders as beneficiaries being the true and lawful owners of Lots 3597, 7380 and 1323;
b) Declaring all the subsequent annotations of court writs and processes, to wit: Entry No. 7416-
V-4-D.B., 7417-V-4-D.B., 7512-V-4-D.B., and 7513-V-4-D.B. in TCT No. 8921 for Lot 3597 and
TCT No. 8922 for Lot 7380; Entry No. 1660-V-7-D.B., Entry No. 1661-V-7-D.B., Entry No. 1861-
V-7-D.B., Entry No. 1862-V-7-D.B., Entry No. 4329-V-7-D.B., Entry No. 3761-V-7-D.B. and Entry
No. 26522 v. 34, D.B. on TCT No. 24576 for Lot 1323-C, and all other subsequent annotations
thereon in favor of third persons, as null and void;
c) Directing the Register of Deeds of the Province of Cebu and/or the Register of Deeds of Cebu
City, as the case may be, to cancel all these annotations mentioned in paragraph b) above the
titles;
d) Directing the Register of Deeds of the Province of Cebu to cancel and/or annul TCTs Nos.
8921 and 8922 in the name of RISCO, and to issue another titles in the names of the plaintiffs;
and
e) Directing Philippine National Bank to reconvey TCT No. 119848 in favor of the plaintiffs.7
PNB appealed the adverse ruling to the Court of Appeals which, in its September 29, 2005
Decision, set aside the judgment of the trial court. Although the Court of Appeals agreed with the
trial court that a judgment on the pleadings was proper, the appellate court opined that the
monetary contributions made by Aznar, et al., to RISCO can only be characterized as a loan
secured by a lien on the subject lots, rather than an express trust. Thus, it directed PNB to pay
Aznar, et al., the amount of their contributions plus legal interest from the time of acquisition of
the property until finality of judgment.lawphil The dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Judgment is hereby SET ASIDE.
A new judgment is rendered ordering Philippine National Bank to pay plaintiffs-appellees the
amount of their lien based on the Minutes of the Special Meeting of the Board of Directors duly
annotated on the titles, plus legal interests from the time of appellants’ acquisition of the subject
properties until the finality of this judgment.
All other claims of the plaintiffs-appellees are hereby DISMISSED.8
Both parties moved for reconsideration but these were denied by the Court of Appeals. Hence,
each party filed with this Court their respective petitions for review on certiorari under Rule 45 of
the Rules of Court, which were consolidated in a Resolution9 dated October 2, 2006.
13
In PNB’s petition, docketed as G.R. No. 171805, the following assignment of errors were raised:
I
THE COURT OF APPEALS ERRED IN AFFIRMING THE FINDINGS OF THE TRIAL COURT
THAT A JUDGMENT ON THE PLEADINGS WAS WARRANTED DESPITE THE EXISTENCE
OF GENUINE ISSUES OF FACTS ALLEGED IN PETITIONER PNB’S ANSWER.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF
RESPONDENTS TO REFUND OR REPAYMENT OF THEIR CONTRIBUTIONS HAD NOT
PRESCRIBED AND/OR THAT THE MINUTES OF THE SPECIAL MEETING OF THE BOARD
OF DIRECTORS OF RISCO CONSTITUTED AS AN EFFECTIVE ADVERSE CLAIM.
III
THE COURT OF APPEALS ERRED IN NOT CONSIDERING THE DISMISSAL OF THE
COMPLAINT ON GROUNDS OF RES JUDICATA AND LACK OF CAUSE OF ACTION
ALLEGED BY PETITIONER IN ITS ANSWER.10
On the other hand, Aznar, et al.’s petition, docketed as G.R. No. 172021, raised the following
issue:
THE COURT OF APPEALS ERRED IN CONCLUDING THAT THE CONTRIBUTIONS MADE
BY THE STOCKHOLDERS OF RISCO WERE MERELY A LOAN SECURED BY THEIR LIEN
OVER THE PROPERTIES, SUBJECT TO REIMBURSEMENT OR REFUND, RATHER THAN
AN EXPRESS TRUST.11
Anent the first issue raised in G.R. No. 171805, PNB argues that a judgment on the pleadings
was not proper because its Answer, 12 which it filed during the trial court proceedings of this case,
tendered genuine issues of fact since it did not only deny material allegations in Aznar, et al.’s
Complaint13 but also set up special and affirmative defenses. Furthermore, PNB maintains that,
by virtue of the trial court’s judgment on the pleadings, it was denied its right to present evidence
and, therefore, it was denied due process.
The contention is meritorious.
The legal basis for rendering a judgment on the pleadings can be found in Section 1, Rule 34 of
the Rules of Court which states that "[w]here an answer fails to tender an issue, or otherwise
admits the material allegations of the adverse party’s pleading, the court may, on motion of that
party, direct judgment on such pleading. x x x."
Judgment on the pleadings is, therefore, based exclusively upon the allegations appearing in the
pleadings of the parties and the annexes, if any, without consideration of any evidence
aliunde.14 However, when it appears that not all the material allegations of the complaint were
admitted in the answer for some of them were either denied or disputed, and the defendant has
set up certain special defenses which, if proven, would have the effect of nullifying plaintiff’s
main cause of action, judgment on the pleadings cannot be rendered.15
In the case at bar, the Court of Appeals justified the trial court’s resort to a judgment on the
pleadings in the following manner:
Perusal of the complaint, particularly, Paragraph 7 thereof reveals:
 14

"7. That in their desire to rehabilitate RISCO, the above-named stockholders contributed a total sale on December 27, 1962, hence, any right, if any, jurisdiction has already ruled th
amount of Ph₱212,720.00 which was used in the purchase of the above-described parcels of which PNB had over subject properties had long become PNB was entitled to a final deed
land, which amount constituted liens and encumbrances on subject properties in favor of the stale; sale;
above-named stockholders as annotated in the titles adverted to above, pursuant to the Minutes
of the Special Meeting of the Board of Directors of RISCO approved on March 14, 1961, a copy
of which is hereto attached as Annex "E". 14. That plaintiffs continue to have possession of subject 13) Par. 14 is denied as plaintiffs a
properties and of their corresponding titles, but they never not in actual possession of the la
On the other hand, defendant in its Answer, admitted the aforequoted allegation with the received any process concerning the petition filed by PNB and if they were, their possessi
qualification that the amount put up by the stockholders was "used as part payment" for the to have TCT 24576 over Lot 1323-C surrendered and/or was as trustee for the creditors
properties. Defendant further averred that plaintiff’s liens and encumbrances annotated on the cancelled; RISCO like PNB;
titles issued to RISCO constituted as "loan from the stockholders to pay part of the purchase
price of the properties" and "was a personal obligation of RISCO and was thus not a claim 15. That there is a cloud created on the aforementioned 14) Par. 15 is denied as the cou
adverse to the ownership rights of the corporation." With these averments, We do not find error titles of RISCO by reason of the annotate writs, processes orders directing the issuance of titl
on the part of the trial court in rendering a judgment on the pleadings. For one, the qualification and proceedings caused by Jose Garrido and PNB which to PNB in lieu of TCT 24576 and TC
made by defendant in its answer is not sufficient to controvert the allegations raised in the were apparently valid or effective, but which are in truth 8922 are valid judgments whi
complaint. As to defendants’ contention that the money contributed by plaintiffs was in fact a and in fact invalid and ineffective, and prejudicial to said cannot be set aside in a collate
"loan" from the stockholders, reference can be made to the Minutes of the Special Meeting of titles and to the rights of the plaintiffs, which should be proceeding like the instant case.18
the Board of Directors, from which plaintiffs-appellees anchored their complaint, in order to removed and the titles quieted.17
ascertain the true nature of their claim over the properties. Thus, the issues raised by the parties
can be resolved on the basis of their respective pleadings and the annexes attached thereto and Furthermore, apart from refuting the aforecited material allegations made by Aznar, et al., PNB
do not require further presentation of evidence aliunde.16 also indicated in its Answer the special and affirmative defenses of (a) prescription; (b) res
judicata; (c) Aznar, et al., having no right of action for quieting of title; (d) Aznar, et al.’s lien
However, a careful reading of Aznar, et al.’s Complaint and of PNB’s Answer would reveal that
being ineffective and not binding to PNB; and (e) Aznar, et al.’s having no personality to file the
both parties raised several claims and defenses, respectively, other than what was cited by the
suit.19
Court of Appeals, which requires the presentation of evidence for resolution, to wit:
From the foregoing, it is indubitably clear that it was error for the trial court to render a judgment
Complaint (Aznar, et al.) Answer (PNB) on the pleadings and, in effect, resulted in a denial of due process on the part of PNB because it
was denied its right to present evidence. A remand of this case would ordinarily be the
11. That these subsequent annotations on the titles of the appropriate course of action. However, in the interest of justice and in order to expedite the
10) Par. 11 is denied as the loan from
properties in question are subject to the prior annotation of the stockholders to pay part of the resolution of this case which was filed with the trial court way back in 1998, the Court finds it
liens and encumbrances of the above-named purchase price of the properties was proper to already resolve the present controversy in light of the existence of legal grounds that
stockholders per Entry No. 458-V-7-D.B. inscribed on TCT a personal obligation of RISCO and would dispose of the case at bar without necessity of presentation of further evidence on the
No. 24576 on May 15, 1962 and per Entry No. 6966-V-4- was thus not a claim adverse to the other disputed factual claims and defenses of the parties.
D.B. on TCT No. 8921 and TCT No. 8922 on May 15, ownership rights of the corporation;
A thorough and comprehensive scrutiny of the records would reveal that this case should be
1962;
dismissed because Aznar, et al., have no title to quiet over the subject properties and their true
cause of action is already barred by prescription.
12. That these writs and processes annotated on the titles 11) Par. 12 is denied as in fact notice
are all null and void for total want of valid service upon to RISCO had been sent to its last At the outset, the Court agrees with the Court of Appeals that the agreement contained in the
RISCO and the above-named stockholders considering known address at Plaza Goite, Minutes of the Special Meeting of the RISCO Board of Directors held on March 14, 1961 was a
that as early as sometime in 1958, RISCO ceased Manila; loan by the therein named stockholders to RISCO. We quote with approval the following
operations as earlier stated, and as early as May 15, discussion from the Court of Appeals Decision dated September 29, 2005:
1962, the liens and encumbrances of the above-named
stockholders were annotated in the titles of subject Careful perusal of the Minutes relied upon by plaintiffs-appellees in their claim, showed that their
properties; contributions shall constitute as "lien or interest on the property" if and when said properties are
titled in the name of RISCO, subject to registration of their adverse claim under the Land
Registration Act, until such time their respective contributions are refunded to them completely.
13. That more particularly, the Final Deed of Sale (Annex 12) Par. 13 is denied for no law
"G") and TCT No. 119848 are null and void as these were requires the final deed of sale to be It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and
issued only after 28 years and 5 months (in the case of executed immediately after the end leave of no doubt upon the intention of the contracting parties, the literal meaning of its stipulation
the Final Deed of Sale) and 28 years, 6 months and 29 the redemption period. Moreover, shall control. When the language of the contract is explicit leaving no doubt as to the intention of
days (in the case of TCT 119848) from the invalid auction another court of competent

the drafters thereof, the courts may not read into it any other intention that would contradict its
plain import.
The term lien as used in the Minutes is defined as "a discharge on property usually for the
payment of some debt or obligation. A lien is a qualified right or a proprietary interest which may
be exercised over the property of another. It is a right which the law gives to have a debt
satisfied out of a particular thing. It signifies a legal claim or charge on property; whether real or
personal, as a collateral or security for the payment of some debt or obligation." Hence, from
the use of the word "lien" in the Minutes, We find that the money contributed by plaintiffs-
appellees was in the nature of a loan, secured by their liens and interests duly annotated on the
titles. The annotation of their lien serves only as collateral and does not in any way vest
ownership of property to plaintiffs.20 (Emphases supplied.)
We are not persuaded by the contention of Aznar, et al., that the language of the subject
Minutes created an express trust.
Trust is the right to the beneficial enjoyment of property, the legal title to which is vested in
another. It is a fiduciary relationship that obliges the trustee to deal with the property for the
benefit of the beneficiary. Trust relations between parties may either be express or implied. An
express trust is created by the intention of the trustor or of the parties. An implied trust comes
into being by operation of law.21
Express trusts, sometimes referred to as direct trusts, are intentionally created by the direct and
positive acts of the settlor or the trustor - by some writing, deed, or will or oral declaration. It is
created not necessarily by some written words, but by the direct and positive acts of the
parties.22 This is in consonance with Article 1444 of the Civil Code, which states that "[n]o
particular words are required for the creation of an express trust, it being sufficient that a trust is
clearly intended."
In other words, the creation of an express trust must be manifested with reasonable certainty
and cannot be inferred from loose and vague declarations or from ambiguous circumstances
susceptible of other interpretations.23
No such reasonable certitude in the creation of an express trust obtains in the case at bar. In
fact, a careful scrutiny of the plain and ordinary meaning of the terms used in the Minutes does
not offer any indication that the parties thereto intended that Aznar, et al., become beneficiaries
under an express trust and that RISCO serve as trustor.
Indeed, we find that Aznar, et al., have no right to ask for the quieting of title of the properties at
issue because they have no legal and/or equitable rights over the properties that are derived
from the previous registered owner which is RISCO, the pertinent provision of the law is Section
2 of the Corporation Code (Batas Pambansa Blg. 68), which states that "[a] corporation is an
artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence."
As a consequence thereof, a corporation has a personality separate and distinct from those of
its stockholders and other corporations to which it may be connected.24 Thus, we had previously
ruled in Magsaysay-Labrador v. Court of Appeals 25 that the interest of the stockholders over the
properties of the corporation is merely inchoate and therefore does not entitle them to intervene
in litigation involving corporate property, to wit:
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote,
conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in
15
sheer expectancy of a right in the management of the corporation and to share in the profits
thereof and in the properties and assets thereof on dissolution, after payment of the corporate
debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the property of the
corporation, it does not vest the owner thereof with any legal right or title to any of the property,
his interest in the corporate property being equitable or beneficial in nature. Shareholders are in
no legal sense the owners of corporate property, which is owned by the corporation as a distinct
legal person.26
In the case at bar, there is no allegation, much less any proof, that the corporate existence of
RISCO has ceased and the corporate property has been liquidated and distributed to the
stockholders. The records only indicate that, as per Securities and Exchange Commission (SEC)
Certification27 dated June 18, 1997, the SEC merely suspended RISCO’s Certificate of
Registration beginning on September 5, 1988 due to its non-submission of SEC required reports
and its failure to operate for a continuous period of at least five years.
Verily, Aznar, et al., who are stockholders of RISCO, cannot claim ownership over the properties
at issue in this case on the strength of the Minutes which, at most, is merely evidence of a loan
agreement between them and the company. There is no indication or even a suggestion that the
ownership of said properties were transferred to them which would require no less that the said
properties be registered under their names. For this reason, the complaint should be dismissed
since Aznar, et al., have no cause to seek a quieting of title over the subject properties.
At most, what Aznar, et al., had was merely a right to be repaid the amount loaned to RISCO.
Unfortunately, the right to seek repayment or reimbursement of their contributions used to
purchase the subject properties is already barred by prescription.
Section 1, Rule 9 of the Rules of Court provides that when it appears from the pleadings or the
evidence on record that the action is already barred by the statute of limitations, the court shall
dismiss the claim, to wit:
Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed
waived. However, when it appears from the pleadings or the evidence on record that the court
has no jurisdiction over the subject matter, that there is another action pending between the
same parties for the same cause, or that the action is barred by a prior judgment or by statute
of limitations, the court shall dismiss the claim. (Emphasis supplied.)
In Feliciano v. Canoza,28 we held:
We have ruled that trial courts have authority and discretion to dismiss an action on the ground
of prescription when the parties’ pleadings or other facts on record show it to be indeed time-
barred x x x; and it may do so on the basis of a motion to dismiss, or an answer which sets up
such ground as an affirmative defense; or even if the ground is alleged after judgment on the
merits, as in a motion for reconsideration; or even if the defense has not been asserted at all, as
where no statement thereof is found in the pleadings, or where a defendant has been declared
in default. What is essential only, to repeat, is that the facts demonstrating the lapse of the
prescriptive period, be otherwise sufficiently and satisfactorily apparent on the record;
either in the averments of the plaintiffs complaint, or otherwise established by the
evidence.29 (Emphasis supplied.)
The pertinent Civil Code provision on prescription which is applicable to the issue at hand is
Article 1144(1), to wit:

The following actions must be brought within ten years from the time the right of action accrues:
1. Upon a written contract;
2. Upon an obligation created by law;
3. Upon a judgment. (Emphasis supplied.)
Moreover, in Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 30 we held that the term
"written contract" includes the minutes of the meeting of the board of directors of a corporation,
which minutes were adopted by the parties although not signed by them, to wit:
Coming now to the question of prescription raised by defendant Lepanto, it is contended by the
latter that the period to be considered for the prescription of the claim regarding participation in
the profits is only four years, because the modification of the sharing embodied in the
management contract is merely verbal, no written document to that effect having been
presented. This contention is untenable. The modification appears in the minutes of the special
meeting of the Board of Directors of Lepanto held on August 21, 1940, it having been made
upon the authority of its President, and in said minutes the terms of modification had been
specified. This is sufficient to have the agreement considered, for the purpose of applying the
statute of limitations, as a written contract even if the minutes were not signed by the parties (3
A.L.R., 2d, p. 831). It has been held that a writing containing the terms of a contract if adopted
by two persons may constitute a contract in writing even if the same is not signed by either of
the parties (3 A.L.R., 2d, pp. 812-813). Another authority says that an unsigned agreement the
terms of which are embodied in a document unconditionally accepted by both parties is a written
contract (Corbin on Contracts, Vol. I, p. 85).31
Applied to the case at bar, the Minutes which was approved on March 14, 1961 is considered as
a written contract between Aznar, et al., and RISCO for the reimbursement of the contributions
of the former. As such, the former had a period of ten (10) years from 1961 within which to
enforce the said written contract. However, it does not appear that Aznar, et al., filed any action
for reimbursement or refund of their contributions against RISCO or even against PNB. Instead
the suit that Aznar, et al., brought before the trial court only on January 28, 1998 was one to
quiet title over the properties purchased by RISCO with their contributions. It is unmistakable
that their right of action to claim for refund or payment of their contributions had long prescribed.
Thus, it was reversible error for the Court of Appeals to order PNB to pay Aznar, et al., the
amount of their liens based on the Minutes with legal interests from the time of PNB’s acquisition
of the subject properties.
In view of the foregoing, it is unnecessary for the Court to pass upon the other issues raised by
the parties.
WHEREFORE, the petition of Aznar, et al., in G.R. No. 172021 is DENIED for lack of merit. The
petition of PNB in G.R. No. 171805 is GRANTED. The Complaint, docketed as Civil Case No.
CEB-21511, filed by Aznar, et al., is hereby DISMISSED. No costs.
SO ORDERED.
EN BANC
April 18, 2017
G.R. No. 207246
16
JOSE M. ROY III, Petitioner
vs.
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND EXCHANGE COMMISSION,
and PHILIPPINE LONG DISTANCE TELEPHONE COMP ANY,, Respondents
x-----------------------x
WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE,
ANTONIO V. PESINA, JR., MODESTO MARTINY. MAMON III, and GERARDO C.
EREBAREN, Petitioners-in-Intervention,
x-----------------------x
PHILIPPINE STOCK EXCHANGE, INC. Respondent-in-Intervention,
x-----------------------x
SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-Intervention.
RESOLUTION
CAGUIOA, J.:
Before the Court is the Motion for Reconsideration dated January 19, 2017 1 (the Motion) filed by
petitioner Jose M. Roy III (movant) seeking the reversal and setting aside of the Decision dated
November 22, 20162 (the Decision) which denied the movant's petition, and declared that the
Securities and Exchange Commission (SEC) did not commit grave abuse of discretion in issuing
Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) as the same was in compliance
with, and in fealty to, the decision of the Court in Gamboa v. Finance Secretary
Teves,3 (Gamboa Decision) and the resolution4 denying the Motion for Reconsideration
therein (Gamboa Resolution).
The Motion presents no compelling and new arguments to justify the reconsideration of the
Decision.
The grounds raised by movant are: (1) He has the requisite standing because this case is one of
transcendental importance; (2) The Court has the constitutional duty to exercise judicial review
over any grave abuse of discretion by any instrumentality of government; (3) He did not rely on
an obiter dictum; and (4) The Court should have treated the petition as the appropriate device to
explain the Gamboa Decision.
The Decision has already exhaustively discussed and directly passed upon these grounds.
Movant's petition was dismissed based on both procedural and substantive grounds.
Regarding the procedural grounds, the Court ruled that petitioners (movant and petitioners-in-
intervention) failed to sufficiently allege and establish the existence of a case or controversy
and locus standi on their part to warrant the Court's exercise of judicial review; the rule on the
hierarchy of courts was violated; and petitioners failed to implead indispensable parties such as
the Philippine Stock Exchange, Inc. and Shareholders' Association of the Philippines, Inc. 5
In connection with the failure to implead indispensable parties, the Court's Decision held:
Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest
without whom there can be no final determination of an action. Indispensable parties are those

with such a material and direct interest in the controversy that a final decree would necessarily
affect their rights, so that the court cannot proceed without their presence. The interests of such
indispensable parties in the subject matter of the suit and the relief are so bound with those of
the other parties that their legal presence as parties to the proceeding is an absolute necessity
and a complete and efficient determination of the equities and rights of the parties is not possible
if they are not joined.
Other than PLDT, the petitions failed to join or implead other public utility corporations subject to
the same restriction imposed by Section 11, Article XII of the Constitution. These corporations
are in danger of losing their franchise and property if they are found not compliant with the
restrictive interpretation of the constitutional provision under review which is being espoused by
petitioners. They should be afforded due notice and opportunity to be heard, lest they be
deprived of their property without due process.
Not only are public utility corporations other than PLDT directly and materially affected by the
outcome of the petitions, their shareholders also stand to suffer in case they will be forced to
divest their shareholdings to ensure compliance with the said restrictive interpretation of the term
"capital". As explained by SHAREPHIL, in five corporations alone, more than Php158 Billion
worth of shares must be divested by foreign shareholders and absorbed by Filipino investors if
petitioners' position is upheld.
Petitioners' disregard of the rights of these other corporations and numerous shareholders
constitutes another fatal procedural flaw, justifying the dismissal of their petitions. Without
giving all of them their day in court, they will definitely be deprived of their property
without due process of law. 6
This is highlighted to clear any misimpression that the Gamboa Decision
and Gamboa Resolution made a categorical ruling on the meaning of the word "capital" under
Section 11, Article XII of the Constitution only in respect of, or only confined to, respondent
Philippine Long Distance Telephone Company (PLDT). Nothing is further from the truth. Indeed,
a fair reading of the Gamboa Decision and Gamboa Resolution shows that the Court's
pronouncements therein would affect all public utilities, and not just respondent PLDT.
On the substantive grounds, the Court disposed of the issue on whether the SEC gravely
abused its discretion in ruling that respondent PLDT is compliant with the limitation on foreign
ownership under the Constitution and other relevant laws as without merit. The Court reasoned
that "in the absence of a definitive ruling by the SEC on PLDT's compliance with the capital
requirement pursuant to the Gamboa Decision and Resolution, any question relative to the
inexistent ruling is premature."7
In resolving the other substantive issue raised by petitioners, the Court held that:
[E]ven if the resolution of the procedural issues were conceded in favor of petitioners, the
petitions, being anchored on Rule 65, must nonetheless fail because the SEC did not commit
grave abuse of discretion amounting to lack or excess of jurisdiction when it issued SEC-MC No.
8. To the contrary, the Court finds SEC-MC No. 8 to have been issued in fealty to the Gamboa
Decision and Resolution.8
To belabor the point, movant's petition is not a continuation of the Gamboa case as
the Gamboa Decision attained finality on October 18, 2012, and thereafter Entry of Judgment
was issued on December 11, 2012.9
17
As regards movant's repeated invocation of the transcendental importance of the Gamboa case,
this does not ipso facto accord locus standi to movant. Being a new petition, movant had the
burden to justify his locus standi in his own petition. The Court, however, was not persuaded by
his justification.
Pursuant to the Court's constitutional duty to exercise judicial review, the Court has conclusively
found no grave abuse of discretion on the part of SEC in issuing SEC-MC No. 8.
The Decision has painstakingly explained why it considered as obiter dictum that
pronouncement in the Gamboa Resolution that the constitutional requirement on Filipino
ownership should "apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation."[[9-a]] The Court stated that:
[T]he fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are
definite, clear and unequivocal. While there is a passage in the body of the Gamboa Resolution
that might have appeared contrary to the fallo of the Gamboa Decision x x x the definiteness
and clarity of the fallo of the Gamboa Decision must control over the obiter dictum in
the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign ownership
requirement to "each class of shares, regardless of differences in voting rights, privileges and
restrictions." 10
To the Court's mind and, as exhaustively demonstrated in the Decision, the dispositive portion of
the Gamboa Decision was in no way modified by the Gamboa Resolution.
The heart of the controversy is the interpretation of Section 11, Article XII of the Constitution,
which provides: "No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose
capital is owned by such citizens x x x."
The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires is
"[fJull [and legal] beneficial ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights x x x must rest in the hands of Filipino nationals x x
x." 11 And, precisely that is what SEC-MC No. 8 provides, viz.: "x x x For purposes of
determining compliance [with the constitutional or statutory ownership], the required percentage
of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of
stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares
of stock, whether or not entitled to vote x x x." 12
In construing "full beneficial ownership," the Implementing Rules and Regulations of the Foreign
Investments Act of 1991 (FIA-IRR) provides:
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered held by Philippine
citizens or Philippine nationals. 13
In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing Rules and
Regulations of the Securities Regulation Code (SRC-IRR) as:
[A]ny person who, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power (which includes the power to vote or direct

the voting of such security) and/or investment returns or power (which includes the power to
dispose of, or direct the disposition of such security) x x x. 14
Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which is in
consonance with the concept of "full beneficial ownership" in the FIA-IRR, is, as stressed in the
Decision, relevant in resolving only the question of who is the beneficial owner or has beneficial
ownership of each "specific stock" of the public utility company whose stocks are under
review. If the Filipino has the voting power of the "specific stock", i.e., he can vote the stock or
direct another to vote for him, or the Filipino has the investment power over the "specific
stock", i.e., he can dispose of the stock or direct another to dispose of it for him, or both, i.e., he
can vote and dispose of that "specific stock" or direct another to vote or dispose it for
him, then such Filipino is the "beneficial owner" of that "specific stock." Being considered
Filipino, that "specific stock" is then to be counted as part of the 60% Filipino ownership
requirement under the Constitution. The right to the dividends, jus fruendi - a right emanating
from ownership of that "specific stock" necessarily accrues to its Filipino "beneficial owner."
Once more, this is emphasized anew to disabuse any notion that the dividends accruing to any
particular stock are determinative of that stock's "beneficial ownership." Dividend declaration is
dictated by the corporation's unrestricted retained earnings. On the other hand, the corporation's
need of capital for expansion programs and special reserve for probable contingencies may limit
retained earnings available for dividend declaration. 15 It bears repeating here that the Court in
the Gamboa Decision adopted the foregoing definition of the term "capital" in Section 11, Article
XII of the 1987 Constitution in express recognition of the sensitive and vital position of public
utilities both in the national economy and for national security, so that the evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public utilities, which may
be inimical to the national interest. 16 This purpose prescinds from the "benefits"/dividends that
are derived from or accorded to the particular stocks held by Filipinos vis-a-vis the stocks held
by aliens. So long as Filipinos have controlling interest of a public utility corporation, their
decision to declare more dividends for a particular stock over other kinds of stock is their sole
prerogative - an act of ownership that would presumably be for the benefit of the public utility
corporation itself. Thus, as explained in the Decision:
In this regard, it would be apropos to state that since Filipinos own at least 60% of the
outstanding shares of stock entitled to vote directors, which is what the Constitution precisely
requires, then the Filipino stockholders control the corporation, i.e., they dictate corporate
actions and decisions, and they have all the rights of ownership including, but not limited to,
offering certain preferred shares that may have greater economic interest to foreign investors -
as the need for capital for corporate pursuits (such as expansion), may be good for the
corporation that they own. Surely, these "true owners" will not allow any dilution of their
ownership and control if such move will not be beneficial to them. 17
Finally, as to how the SEC will classify or treat certain stocks with voting rights held by a trust
fund that is created by the public entity whose compliance with the limitation on foreign
ownership under the Constitution is under scrutiny, and how the SEC will determine if such
public utility does, in fact, control how the said stocks will be voted, and whether, resultantly, the
trust fund would be considered as Philippine national or not - lengthily discussed in the
dissenting opinion of Justice Carpio - is speculative at this juncture. The Court cannot engage in
guesswork. Thus, there is need of an actual case or controversy before the Court may exercise
its power of judicial review. The movant's petition is not that actual case or controversy.
Thus, the discussion of Justice Carpio' s dissenting opinion as to the voting preferred shares
created by respondent PLDT, their acquisition by BTF Holdings, Inc., which appears to be a
18
wholly-owned company of the PLDT Beneficial Trust Fund (BTF), and whether or not it is
respondent PLDT's management that controls BTF and BTF Holdings, Inc. - all these are factual
matters that are outside the ambit of this Court's review which, as stated in the beginning, is
confined to determining whether or not the SEC committed grave abuse of discretion in issuing
SEC-MC No. 8; that is, whether or not SEC-MC No. 8 violated the ruling of the Court in Gamboa
v. Finance Secretary Teves,  18 and the resolution in Heirs of Wilson P. Gamboa v. Finance Sec.
Teves19denying the Motion for Reconsideration therein as to the proper understanding of
"capital".
To be sure, it would be more prudent and advisable for the Court to await the SEC's prior
determination of the citizenship of specific shares of stock held in trust - based on proven
facts - before the Court proceeds to pass upon the legality of such determination.
As to whether respondent PLDT is currently in compliance with the Constitutional provision
regarding public utility entities, the Court must likewise await the SEC's determination thereof
applying SEC-MC No. 8. After all, as stated in the Decision, it is the SEC which is the
government agency with the competent expertise and the mandate of law to make such
determination.
In conclusion, the basic issues raised in the Motion having been duly considered and passed
upon by the Court in the Decision and no substantial argument having been adduced to warrant
the reconsideration sought, the Court resolves to DENY the Motion with FINALITY.
WHEREFORE, the subject Motion for Reconsideration is hereby DENIED WITH FINALITY. No
further pleadings or motions shall be entertained in this case. Let entry of final judgment be
issued immediately.
SO ORDERED.
EN BANC
G.R. No. 176579               October 9, 2012
HEIRS OF WILSON P. GAMBOA,* Petitioners,
vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P.
SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND
MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI
SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC
ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR
OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE
LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND
EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.
RESOLUTION
CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the
Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan), 2 (3)
Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and Exchange Commission
(SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on
behalfofthe SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a
Consolidated Comment on behalf of the State, 6 declaring expressly that it agrees with the
Court's definition of the term "capital" in Section 11, Article XII of the Constitution. During the
Oral Arguments on 26 June 2012, the OSG reiterated its position consistent with the Court's 28
June 2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital"
in Section 11, Article XII of the Constitution has far-reaching implications to the national
economy. In fact, a resolution of this issue will determine whether Filipinos are masters, or
second-class citizens, in their own country. What is at stake here is whether Filipinos or
foreigners will have effective control of the Philippine national economy. Indeed, if ever there is
a legal issue that has far-reaching implications to the entire nation, and to future generations of
Filipinos, it is the threshold legal issue presented in this case.
Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the
interpretation of the term "capital" in Section 11, Article XII of the Constitution undoubtedly
demand an immediate adjudication of this issue. Simply put, the far-reaching implications of
this issue justify the treatment of the petition as one for mandamus. 7
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to
resolve the case although the petition for declaratory relief could be outrightly dismissed for
being procedurally defective. There, appellant admittedly had already committed a breach of the
Public Service Act in relation to the Anti-Dummy Law since it had been employing non-
American aliens long before the decision in a prior similar case. However, the main issue
in Luzon Stevedoring was of transcendental importance, involving the exercise or enjoyment of
rights, franchises, privileges, properties and businesses which only Filipinos and qualified
corporations could exercise or enjoy under the Constitution and the statutes. Moreover, the
same issue could be raised by appellant in an appropriate action. Thus, in Luzon
Stevedoring the Court deemed it necessary to finally dispose of the case for the guidance of all
concerned, despite the apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the supposed procedural defect of the
petition and the pivotal legal issue involved, resemble those in Luzon
Stevedoring. Consequently, in the interest of substantial justice and faithful adherence to the
Constitution, we opted to resolve this case for the guidance of the public and all concerned
parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
19
Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long
been settled and defined to refer to the total outstanding shares of stock, whether voting or non-
voting. In fact, movants claim that the SEC, which is the administrative agency tasked to enforce
the 60-40 ownership requirement in favor of Filipino citizens in the Constitution and various
statutes, has consistently adopted this particular definition in its numerous opinions. Movants
point out that with the 28 June 2011 Decision, the Court in effect introduced a "new" definition or
"midstream redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the
term "capital" found in various economic provisions of the 1935, 1973 and 1987 Constitutions.
There has never been a judicial precedent interpreting the term "capital" in the 1935, 1973 and
1987 Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the
Court in defining the term "capital" in its 28 June 2011 Decision modified, reversed, or set aside
the purported long-standing definition of the term "capital," which supposedly refers to the total
outstanding shares of stock, whether voting or non-voting. To repeat, until the present case
there has never been a Court ruling categorically defining the term "capital" found in the various
economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the
term "capital" as referring to both voting and non-voting shares (combined total of common and
preferred shares) are, in the first place, conflicting and inconsistent. There is no basis
whatsoever to the claim that the SEC and the DOJ have consistently and uniformly adopted a
definition of the term "capital" contrary to the definition that this Court adopted in its 28 June
2011 Decision.
In DOJ Opinion No. 130, s. 1985, 10 dated 7 October 1985, the scope of the term "capital" in
Section 9, Article XIV of the 1973 Constitution was raised, that is, whether the term "capital"
includes "both preferred and common stocks." The issue was raised in relation to a stock-swap
transaction between a Filipino and a Japanese corporation, both stockholders of a domestic
corporation that owned lands in the Philippines. Then Minister of Justice Estelito P. Mendoza
ruled that the resulting ownership structure of the corporation would
be unconstitutional because 60% of the voting stock would be owned by Japanese while
Filipinos would own only 40% of the voting stock, although when the non-voting stock is added,
Filipinos would own 60% of the combined voting and non-voting stock. This ownership
structure is remarkably similar to the current ownership structure of PLDT. Minister
Mendoza ruled:
xxxx
Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common
and preferred) while the Japanese investors control sixty percent (60%) of the common (voting)
shares.
It is your position that x x x since Section 9, Article XIV of the Constitution uses the word
"capital," which is construed "to include both preferred and common shares" and "that
where the law does not distinguish, the courts shall not distinguish."
xxxx
In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in
question may not be constitutionally upheld. While it may be ordinary corporate practice to

classify corporate shares into common voting shares and preferred non-voting shares, any
arrangement which attempts to defeat the constitutional purpose should be eschewed. Thus,
the resultant equity arrangement which would place ownership of 60% 11 of the common
(voting) shares in the Japanese group, while retaining 60% of the total percentage of
common and preferred shares in Filipino hands would amount to circumvention of the
principle of control by Philippine stockholders that is implicit in the 60% Philippine
nationality requirement in the Constitution. (Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9,
Article XIV of the 1973 Constitution includes "both preferred and common stocks" treated as the
same class of shares regardless of differences in voting rights and privileges. Minister Mendoza
stressed that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution is
not complied with unless the corporation "satisfies the criterion of beneficial ownership" and
that in applying the same "the primordial consideration is situs of control."
On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman
Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied
the Voting Control Test, that is, using only the voting stock to determine whether a corporation
is a Philippine national. The Opinion states:
Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national
because: (1) sixty percent (60%) of its outstanding capital stock entitled to vote is owned by
a Philippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF will accrue to
the benefit of Philippine nationals. Still pursuant to the Control Test, MLRC’s investment in
60% of BFDC’s outstanding capital stock entitled to vote shall be deemed as of Philippine
nationality, thereby qualifying BFDC to own private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals,
considering that: (1) sixty percent (60%) of their respective outstanding capital stock entitled
to vote is owned by a Philippine national (i.e., by the Trustee, in the case of MLRC; and by
MLRC, in the case of BFDC); and (2) at least 60% of their respective board of directors are
Filipino citizens. (Boldfacing and italicization supplied)
Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-40
ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. At the same time, these opinions highlight the conflicting, contradictory, and
inconsistent positions taken by the DOJ and the SEC on the definition of the term "capital" found
in the economic provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC rules and
regulations because only the SEC en banc can adopt rules and regulations. As expressly
provided in Section 4.6 of the Securities Regulation Code, 12 the SEC cannot delegate to any of
its individual Commissioner or staff the power to adopt any rule or regulation. Further, under
Section 5.1 of the same Code, it is the SEC as a collegial body, and not any of its legal
officers, that is empowered to issue opinions and approve rules and regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any
department or office of the Commission, an individual Commissioner or staff member of the
Commission except its review or appellate authority and its power to adopt, alter and
supplement any rule or regulation.
20
The Commission may review upon its own initiative or upon the petition of any interested party
any action of any department or office, individual Commissioner, or staff member of the
Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with
transparency and shall have the powers and functions provided by this Code, Presidential
Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing Company
Act and other existing laws. Pursuant thereto the Commission shall have, among others, the
following powers and functions:
xxxx
(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such rules,
regulations and orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions
that have the effect of SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of
the Code, only the SEC en banc can "issue opinions" that have the force and effect of rules or
regulations. Section 4.6 of the Code bars the SEC en banc from delegating to any individual
Commissioner or staff the power to adopt rules or regulations. In short, any opinion of
individual Commissioners or SEC legal officers does not constitute a rule or regulation of
the SEC.
The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its
individual commissioners or legal staff, is empowered to issue opinions which have the same
binding effect as SEC rules and regulations, thus:
JUSTICE CARPIO:
So, under the law, it is the Commission En Banc that can issue an
SEC Opinion, correct?
COMMISSIONER GAITE:13
That’s correct, Your Honor.
JUSTICE CARPIO:
Can the Commission En Banc delegate this function to an SEC officer?
COMMISSIONER GAITE:
Yes, Your Honor, we have delegated it to the General Counsel.
JUSTICE CARPIO:
It can be delegated. What cannot be delegated by the Commission En Banc to a commissioner
or an individual employee of the Commission?
COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...
JUSTICE CARPIO:
What cannot be delegated, among others, is the power to adopt or amend rules and regulations,
correct?
COMMISSIONER GAITE:
That’s correct, Your Honor.
JUSTICE CARPIO:
So, you combine the two (2), the SEC officer, if delegated that power, can issue an
opinion but that opinion does not constitute a rule or regulation, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, all of these opinions that you mentioned they are not rules and regulations, correct?
COMMISSIONER GAITE:
They are not rules and regulations.
JUSTICE CARPIO:
If they are not rules and regulations, they apply only to that particular situation and will not
constitute a precedent, correct?
COMMISSIONER GAITE:
Yes, Your Honor.14 (Emphasis supplied)
Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules
and opinions on behalf of the SEC, has adopted even the Grandfather Rule in determining
compliance with the 60-40 ownership requirement in favor of Filipino citizens mandated by the
Constitution for certain economic activities. This prevailing SEC ruling, which the SEC correctly
adopted to thwart any circumvention of the required Filipino "ownership and control," is laid
down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v.
McArthur Mining, Inc., et al.,15 to wit:
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of
our natural resources. Necessarily, therefore, the Rule interpreting the constitutional
provision should not diminish that right through the legal fiction of corporate ownership
and control. But the constitutional provision, as interpreted and practiced via the 1967 SEC
Rules, has favored foreigners contrary to the command of the Constitution. Hence, the
Grandfather Rule must be applied to accurately determine the actual participation, both
direct and indirect, of foreigners in a corporation engaged in a nationalized activity or
business.
21
Compliance with the constitutional limitation(s) on engaging in nationalized activities must be
determined by ascertaining if 60% of the investing corporation’s outstanding capital stock is
owned by "Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If such
investing corporation is in turn owned to some extent by another investing corporation, the same
process must be observed. One must not stop until the citizenships of the individual or natural
stockholders of layer after layer of investing corporations have been established, the very
essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather
Rule. In one of the discussions on what is now Article XII of the present Constitution, the
framers made the following exchange:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and
foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with the question: ‘Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on
the paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP
Law Center who provided us a draft. The phrase that is contained here which we adopted from
the UP draft is ‘60 percent of voting stock.’
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution to engage in certain economic
activities applies not only to voting control of the corporation, but also to the beneficial
ownership of the corporation. Thus, in our 28 June 2011 Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership
of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-
Philippine national[s]." (Emphasis supplied)
Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine
whether a corporation is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions
which respondents relied upon, is merely preliminary and an opinion only of such officers. To
repeat, any such opinion does not constitute an SEC rule or regulation. In fact, many of these
opinions contain a disclaimer which expressly states: "x x x the foregoing opinion is based
solely on facts disclosed in your query and relevant only to the particular issue raised therein
and shall not be used in the nature of a standing rule binding upon the Commission in
other cases whether of similar or dissimilar circumstances."16 Thus, the opinions clearly
make a caveat that they do not constitute binding precedents on any one, not even on the SEC
itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are
neither conclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine that
any interpretation of the law that administrative or quasi-judicial agencies make is only
preliminary, never conclusive on the Court. The power to make a final interpretation of the law,
in this case the term "capital" in Section 11, Article XII of the 1987 Constitution, lies with this
Court, not with any other government entity.
In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals17 and Philippine Long Distance Telephone
Company v. National Telecommunications Commission18 in arguing that the Court has already
defined the term "capital" in Section 11, Article XII of the 1987 Constitution.19
The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court
of Appeals20 and Philippine Long Distance Telephone Company v. National Telecommunications
Commission,21 the Court did not define the term "capital" as found in Section 11, Article XII of the
1987 Constitution. In fact, these two cases never mentioned, discussed or cited Section 11,
Article XII of the Constitution or any of its economic provisions, and thus cannot serve as
precedent in the interpretation of Section 11, Article XII of the Constitution. These two
cases dealt solely with the determination of the correct regulatory fees under Section 40(e) and
(f) of the Public Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of
other public services and/or in the regulation or fixing of their rates, twenty centavos for each
one hundred pesos or fraction thereof, of the capital stock subscribed or paid, or if no shares
have been issued, of the capital invested, or of the property and equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or
fraction thereof, of the increased capital. (Emphasis supplied)
The Court’s interpretation in these two cases of the terms "capital stock subscribed or paid,"
"capital stock" and "capital" does not pertain to, and cannot control, the definition of the term
"capital" as used in Section 11, Article XII of the Constitution, or any of the economic provisions
of the Constitution where the term "capital" is found. The definition of the term "capital" found in
the Constitution must not be taken out of context. A careful reading of these two cases reveals
that the terms "capital stock subscribed or paid," "capital stock" and "capital" were defined solely
to determine the basis for computing the supervision and regulation fees under Section 40(e)
and (f) of the Public Service Act.
III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land,
embodies the ideals that the Constitution intends to achieve.22 The Preamble reads:
22
We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and
humane society, and establish a Government that shall embody our ideals and aspirations,
promote the common good, conserve and develop our patrimony, and secure to ourselves
and our posterity, the blessings of independence and democracy under the rule of law and a
regime of truth, justice, freedom, love, equality, and peace, do ordain and promulgate this
Constitution. (Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State
policy the development of a national economy "effectively controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:
Section 10. The Congress shall, upon recommendation of the economic and planning agency,
when the national interest dictates, reserve to citizens of the Philippines or to corporations or
associations at least sixty per centum of whose capital is owned by such citizens, or such higher
percentage as Congress may prescribe, certain areas of investments. The Congress shall enact
measures that will encourage the formation and operation of enterprises whose capital is wholly
owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and patrimony,
the State shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its national
jurisdiction and in accordance with its national goals and priorities.23
Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned
by such citizens, or such higher percentage as Congress may prescribe, certain areas of
investments." Thus, in numerous laws Congress has reserved certain areas of investments to
Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned by
Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or
R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for
Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping
Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No.
9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage
Decree or P.D. No. 1521.
With respect to public utilities, the 1987 Constitution specifically ordains:
Section 11. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment, alteration,
or repeal by the Congress when the common good so requires. The State shall encourage
equity participation in public utilities by the general public. The participation of foreign investors
in the governing body of any public utility enterprise shall be limited to their proportionate share
in its capital, and all the executive and managing officers of such corporation or association must
be citizens of the Philippines. (Emphasis supplied)

This provision, which mandates the Filipinization of public utilities, requires that any form of
authorization for the operation of public utilities shall be granted only to "citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at least
sixty per centum of whose capital is owned by such citizens." "The provision is [an express]
recognition of the sensitive and vital position of public utilities both in the national
economy and for national security."24
The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1)
Filipino citizens, or (2) corporations or associations at least 60 percent of whose "capital" is
owned by Filipino citizens. Hence, in the case of individuals, only Filipino citizens can validly own
and operate a public utility. In the case of corporations or associations, at least 60 percent of
their "capital" must be owned by Filipino citizens. In other words, under Section 11, Article XII
of the 1987 Constitution, to own and operate a public utility a corporation’s capital must
at least be 60 percent owned by Philippine nationals.
IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress
enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended,
which defined a "Philippine national" as follows:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the capital
stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%)
of the capital stock outstanding and entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent (60%) of the members of the
Board of Directors of each of both corporations must be citizens of the Philippines, in order that
the corporation, shall be considered a "Philippine national." (Boldfacing, italicization and
underscoring supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen,
or a domestic corporation at least "60% of the capital stock outstanding and entitled to vote"
is owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such term as
provided in its predecessor statute, Executive Order No. 226 or the Omnibus Investments Code
of 1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this Code states:
Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership
or association wholly-owned by citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
23
trustee of funds for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the
benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stock in a registered enterprise, at least sixty per cent (60%) of the capital
stock outstanding and entitled to vote of both corporations must be owned and held by the
citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that the corporation
shall be considered a Philippine national. (Boldfacing, italicization and underscoring supplied)
Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is
not a ‘Philippine national’ x x x shall do business
x x x in the Philippines x x x without first securing from the Board of Investments a written
certificate to the effect that such business or economic activity x x x would not conflict with the
Constitution or laws of the Philippines." 27 Thus, a "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. This means, of course, that only a
"Philippine national" can own and operate a public utility.
In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments
Code of 1987 was a reiteration of the meaning of such term as provided in Article 14 of
the Omnibus Investments Code of 1981,28 to wit:
Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership
or association wholly owned by citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the
benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stock in a registered enterprise, at least sixty per cent (60%) of the capital
stock outstanding and entitled to vote of both corporations must be owned and held by the
citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that the corporation
shall be considered a Philippine national. (Boldfacing, italicization and underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not
a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x without first securing a
written certificate from the Board of Investments to the effect that such business or economic
activity x x x would not conflict with the Constitution or laws of the Philippines." 29 Thus, a "non-
Philippine national" cannot own and operate a reserved economic activity like a public utility.
Again, this means that only a "Philippine national" can own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 5186 30 or the Investment
Incentives Act, which took effect on 16 September 1967, contained a similar definition of a
"Philippine national," to wit:
(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association
wholly owned by citizens of the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty per cent of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee is a Philippine National and
at least sixty per cent of the fund will accrue to the benefit of Philippine Nationals: Provided, That
where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at

least sixty per cent of the capital stock outstanding and entitled to vote of both corporations must
be owned and held by the citizens of the Philippines and at least sixty per cent of the members
of the Board of Directors of both corporations must be citizens of the Philippines in order that the
corporation shall be considered a Philippine National. (Boldfacing, italicization and underscoring
supplied)
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took
effect on 30 September 1968, if the investment in a domestic enterprise by non-Philippine
nationals exceeds 30% of its outstanding capital stock, such enterprise must obtain prior
approval from the Board of Investments before accepting such investment. Such approval
shall not be granted if the investment "would conflict with existing constitutional provisions and
laws regulating the degree of required ownership by Philippine nationals in the enterprise." 31 A
"non-Philippine national" cannot own and operate a reserved economic activity like a public
utility. Again, this means that only a "Philippine national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino
citizen, or a domestic corporation "at least sixty percent (60%) of the capital stock
outstanding and entitled to vote" is owned by Filipino citizens. A domestic corporation is a
"Philippine national" only if at least 60% of its voting stock is owned by Filipino citizens. This
definition of a "Philippine national" is crucial in the present case because the FIA reiterates and
clarifies Section 11, Article XII of the 1987 Constitution, which limits the ownership and operation
of public utilities to Filipino citizens or to corporations or associations at least 60% Filipino-
owned.
The FIA is the basic law governing foreign investments in the Philippines, irrespective of the
nature of business and area of investment. The FIA spells out the procedures by which non-
Philippine nationals can invest in the Philippines. Among the key features of this law is the
concept of a negative list or the Foreign Investments Negative List.32 Section 8 of the law states:
SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment
Negative List]. - The Foreign Investment Negative List shall have two 2 component
lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine nationals by
mandate of the Constitution and specific laws.
b. List B shall contain the areas of activities and enterprises regulated pursuant to law:
1. which are defense-related activities, requiring prior clearance and authorization from the
Department of National Defense [DND] to engage in such activity, such as the manufacture,
repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance,
explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is
specifically authorized, with a substantial export component, to a non-Philippine national by the
Secretary of National Defense; or
2. which have implications on public health and morals, such as the manufacture and distribution
of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna
and steam bathhouses and massage clinics. (Boldfacing, underscoring and italicization
supplied)
Section 8 of the FIA enumerates the investment areas "reserved to Philippine
nationals." Foreign Investment Negative List A consists of "areas of activities reserved to
Philippine nationals by mandate of the Constitution and specific laws," where foreign
24
equity participation in any enterprise shall be limited to the maximum percentage
expressly prescribed by the Constitution and other specific laws. In short, to own and
operate a public utility in the Philippines one must be a "Philippine national" as defined in
the FIA. The FIA is abundant notice to foreign investors to what extent they can invest in
public utilities in the Philippines.
To repeat, among the areas of investment covered by the Foreign Investment Negative List A is
the ownership and operation of public utilities, which the Constitution expressly reserves to
Filipino citizens and to corporations at least 60% owned by Filipino citizens. In other words,
Negative List A of the FIA reserves the ownership and operation of public utilities only to
"Philippine nationals," defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x
x x or (3) a corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or (4) a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one hundred percent (100%) of
the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the
Omnibus Investments Code of 1981, to the enactment of the Omnibus Investments Code of
1987, and to the passage of the present Foreign Investments Act of 1991, or for more than
four decades, the statutory definition of the term "Philippine national" has been uniform
and consistent: it means a Filipino citizen, or a domestic corporation at least 60% of
the voting stock is owned by Filipinos. Likewise, these same statutes have uniformly and
consistently required that only "Philippine nationals" could own and operate public
utilities in the Philippines. The following exchange during the Oral Arguments is revealing:
JUSTICE CARPIO:
Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991, x x x?
And the FIA of 1991 took effect in 1991, correct? That’s over twenty (20) years ago, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine nationals can
own and operate public utilities[], correct?
COMMISSIONER GAITE:
Yes, Your Honor.
JUSTICE CARPIO:
And the same Foreign Investments Act of 1991 defines a "Philippine national" either as a citizen
of the Philippines, or if it is a corporation at least sixty percent (60%) of the voting stock is owned
by citizens of the Philippines, correct?
COMMISSIONER GAITE:

Correct, Your Honor.
JUSTICE CARPIO:
And, you are also aware that under the predecessor law of the Foreign Investments Act of 1991,
the Omnibus Investments Act of 1987, the same provisions apply: x x x only Philippine nationals
can own and operate a public utility and the Philippine national, if it is a corporation, x x x sixty
percent (60%) of the capital stock of that corporation must be owned by citizens of the
Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to the Omnibus Investments Act of 1987, under the Omnibus Investments Act of
1981, the same rules apply: x x x only a Philippine national can own and operate a public utility
and a Philippine national, if it is a corporation, sixty percent (60%) of its x x x voting stock, must
be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to that, under [the]1967 Investments Incentives Act and the Foreign Company
Act of 1968, the same rules applied, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, for the last four (4) decades, x x x, the law has been very consistent – only a
Philippine national can own and operate a public utility, and a Philippine national, if it is a
corporation, x x x at least sixty percent (60%) of the voting stock must be owned by
citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.33 (Emphasis supplied)
Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which
categorically prescribe that certain economic activities, like the ownership and operation of
public utilities, are reserved to corporations "at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines." Foreign
Investment Negative List A refers to "activities reserved to Philippine nationals by mandate of
the Constitution and specific laws." The FIA is the basic statute regulating foreign
investments in the Philippines. Government agencies tasked with regulating or monitoring
foreign investments, as well as counsels of foreign investors, should start with the FIA in
determining to what extent a particular foreign investment is allowed in the Philippines. Foreign
investors and their counsels who ignore the FIA do so at their own peril. Foreign investors and
25
their counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so
also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately
raise a red flag. There are already numerous opinions of SEC legal officers that cite the
definition of a "Philippine national" in Section 3(a) of the FIA in determining whether a particular
corporation is qualified to own and operate a nationalized or partially nationalized business in
the Philippines. This shows that SEC legal officers are not only aware of, but also rely on and
invoke, the provisions of the FIA in ascertaining the eligibility of a corporation to engage in
partially nationalized industries. The following are some of such opinions:
1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;
2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine Overseas
Employment Administration;
3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S.
Calma;
4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los
Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S.
Arbolado.
The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine
national" in the FIA signifies their lack of integrity and competence in resolving issues on the 60-
40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution.
The PSE President argues that the term "Philippine national" defined in the FIA should be limited
and interpreted to refer to corporations seeking to avail of tax and fiscal incentives under
investment incentives laws and cannot be equated with the term "capital" in Section 11, Article
XII of the 1987 Constitution. Pangilinan similarly contends that the FIA and its predecessor
statutes do not apply to "companies which have not registered and obtained special incentives
under the schemes established by those laws."
Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any
enterprise. Tax and fiscal incentives to investments are granted separately under the Omnibus
Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed Articles 44 to
56 of Book II of the Omnibus Investments Code of 1987, which articles previously regulated
foreign investments in nationalized or partially nationalized industries.
The FIA is the applicable law regulating foreign investments in nationalized or partially
nationalized industries. There is nothing in the FIA, or even in the Omnibus Investments Code of
1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or its
predecessor statutes do not apply to enterprises not availing of tax and fiscal incentives under
the Code. The FIA and its predecessor statutes apply to investments in all domestic enterprises,
whether or not such enterprises enjoy tax and fiscal incentives under the Omnibus Investments
Code of 1987 or its predecessor statutes. The reason is quite obvious – mere non-availment

of tax and fiscal incentives by a non-Philippine national cannot exempt it from Section 11,
Article XII of the Constitution regulating foreign investments in public utilities. In fact, the
Board of Investments’ Primer on Investment Policies in the Philippines,34 which is given out
to foreign investors, provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen activities do not qualify for
incentives, (i.e., the activity is not listed in the IPP, and they are not exporting at least 70% of
their production) may go ahead and make the investments without seeking incentives. They
only have to be guided by the Foreign Investments Negative List (FINL).
The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other
areas outside of this list are fully open to foreign investors. (Emphasis supplied)
V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the
Constitution to engage in certain economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation. To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership
of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-
Philippine national[s]." (Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock
is held by "a trustee of funds for pension or other employee retirement or separation benefits,"
the trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA
provides that "for stocks to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial
ownership of the stocks, coupled with appropriate voting rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to
voting control of the corporation but also to the beneficial ownership of the corporation, it is
therefore imperative that such requirement apply uniformly and across the board to all classes of
shares, regardless of nomenclature and category, comprising the capital of a corporation. Under
the Corporation Code, capital stock 35 consists of all classes of shares issued to stockholders,
that is, common shares as well as preferred shares, which may have different rights, privileges
or restrictions as stated in the articles of incorporation.36
The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but
disallows denial of the right to vote in specific corporate matters. Thus, common shares have the
right to vote in the election of directors, while preferred shares may be denied such right.
Nonetheless, preferred shares, even if denied the right to vote in the election of directors, are
entitled to vote on the following corporate matters: (1) amendment of articles of incorporation; (2)
increase and decrease of capital stock; (3) incurring, creating or increasing bonded
indebtedness; (4) sale, lease, mortgage or other disposition of substantially all corporate assets;
26
(5) investment of funds in another business or corporation or for a purpose other than the
primary purpose for which the corporation was organized; (6) adoption, amendment and repeal
of by-laws; (7) merger and consolidation; and (8) dissolution of corporation.37
Since a specific class of shares may have rights and privileges or restrictions different from the
rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens
in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but
also to shares without voting rights. Preferred shares, denied the right to vote in the election of
directors, are anyway still entitled to vote on the eight specific corporate matters mentioned
above. Thus, if a corporation, engaged in a partially nationalized industry, issues a
mixture of common and preferred non-voting shares, at least 60 percent of the common
shares and at least 60 percent of the preferred non-voting shares must be owned by
Filipinos. Of course, if a corporation issues only a single class of shares, at least 60 percent of
such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply separately to each class of shares,
whether common, preferred non-voting, preferred voting or any other class of
shares. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens
clearly breathes life to the constitutional command that the ownership and operation of public
utilities shall be reserved exclusively to corporations at least 60 percent of whose capital is
Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens
to each class of shares, regardless of differences in voting rights, privileges and restrictions,
guarantees effective Filipino control of public utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of shares insures that the "controlling interest"
in public utilities always lies in the hands of Filipino citizens. This addresses and extinguishes
Pangilinan’s worry that foreigners, owning most of the non-voting shares, will exercise greater
control over fundamental corporate matters requiring two-thirds or majority vote of all
shareholders.
VI.
Intent of the framers of the Constitution
While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the
Constitutional Commission to support his claim that the term "capital" refers to the total
outstanding shares of stock, whether voting or non-voting, the following excerpts of the
deliberations reveal otherwise. It is clear from the following exchange that the term "capital"
refers to controlling interest of a corporation, thus:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and
foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on
the paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP
Law Center who provided us a draft. The phrase that is contained here which we adopted
from the UP draft is "60 percent of voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the Corporation Code,
does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.39
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting
stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such
citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to
be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let
us say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the
Filipinos own the nonvoting shares. So we can have a situation where the corporation is
controlled by foreigners despite being the minority because they have the voting capital.
That is the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and
1935 Constitutions is that according to Commissioner Rodrigo, there are associations
that do not have stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."
MR. BENGZON. In the case of stock corporations, it is assumed. 40 (Boldfacing and
underscoring supplied)
Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the
corporation.
The use of the term "capital" was intended to replace the word "stock" because associations
without stocks can operate public utilities as long as they meet the 60-40 ownership requirement
in favor of Filipino citizens prescribed in Section 11, Article XII of the Constitution. However, this
did not change the intent of the framers of the Constitution to reserve exclusively to Philippine
nationals the "controlling interest" in public utilities.
27
During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the
nationalists in the Convention."41 The same battle-cry resulted in the nationalization of the public
utilities.42 This is also the same intent of the framers of the 1987 Constitution who adopted the
exact formulation embodied in the 1935 and 1973 Constitutions on foreign equity limitations in
partially nationalized industries.
The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s
interpretation of the term "capital." In its Consolidated Comment, the OSG explains that the
deletion of the phrase "controlling interest" and replacement of the word "stock" with the term
"capital" were intended specifically to extend the scope of the entities qualified to operate public
utilities to include associations without stocks. The framers’ omission of the phrase "controlling
interest" did not mean the inclusion of all shares of stock, whether voting or non-voting. The
OSG reiterated essentially the Court’s declaration that the Constitution reserved exclusively to
Philippine nationals the ownership and operation of public utilities consistent with the State’s
policy to "develop a self-reliant and independent national economy effectively controlled by
Filipinos."
As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total
outstanding capital stock, treated as a single class regardless of the actual classification of
shares, grossly contravenes the intent and letter of the Constitution that the "State shall develop
a self-reliant and independent national economy effectively controlled by Filipinos." We
illustrated the glaring anomaly which would result in defining the term "capital" as the total
outstanding capital stock of a corporation, treated as a single class of shares regardless of the
actual classification of shares, to wit:
Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000
non-voting preferred shares owned by Filipinos, with both classes of share having a par value of
one peso (₱ 1.00) per share. Under the broad definition of the term "capital," such corporation
would be considered compliant with the 40 percent constitutional limit on foreign equity of public
utilities since the overwhelming majority, or more than 99.999 percent, of the total outstanding
capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity
of less than 0.001 percent, exercise control over the public utility. On the other hand, the
Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of directors
and hence, have no control over the public utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear language of the Constitution, to place the control
of public utilities in the hands of Filipinos. x x x
Further, even if foreigners who own more than forty percent of the voting shares elect an all-
Filipino board of directors, this situation does not guarantee Filipino control and does not in any
way cure the violation of the Constitution. The independence of the Filipino board members so
elected by such foreign shareholders is highly doubtful. As the OSG pointed out, quoting Justice
George Sutherland’s words in Humphrey’s Executor v. US,44 "x x x it is quite evident that one
who holds his office only during the pleasure of another cannot be depended upon to maintain
an attitude of independence against the latter’s will." Allowing foreign shareholders to elect a
controlling majority of the board, even if all the directors are Filipinos, grossly circumvents the
letter and intent of the Constitution and defeats the very purpose of our nationalization laws.
VII.
Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:
The participation of foreign investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital, and all the executive and managing officers
of such corporation or association must be citizens of the Philippines.
During the Oral Arguments, the OSG emphasized that there was never a question on the intent
of the framers of the Constitution to limit foreign ownership, and assure majority Filipino
ownership and control of public utilities. The OSG argued, "while the delegates disagreed as to
the percentage threshold to adopt, x x x the records show they clearly understood that Filipino
control of the public utility corporation can only be and is obtained only through the election of a
majority of the members of the board."
Indeed, the only point of contention during the deliberations of the Constitutional Commission on
23 August 1986 was the extent of majority Filipino control of public utilities. This is evident from
the following exchange:
THE PRESIDENT. Commissioner Jamir is recognized.
MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the
phrase "two thirds of whose voting stock or controlling interest," and instead substitute the words
"SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will read: "No franchise,
certificate, or any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under the laws
of the Philippines at least SIXTY PERCENT OF WHOSE CAPITAL is owned by such citizens."
xxxx
THE PRESIDENT: Will Commissioner Jamir first explain?
MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous
sections in which we fixed the Filipino equity to 60 percent as against 40 percent for foreigners.
It is only in this Section 15 with respect to public utilities that the committee proposal was
increased to two-thirds. I think it would be better to harmonize this provision by providing that
even in the case of public utilities, the minimum equity for Filipino citizens should be 60 percent.
MR. ROMULO. Madam President.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. My reason for supporting the amendment is based on the discussions I have
had with representatives of the Filipino majority owners of the international record carriers, and
the subsequent memoranda they submitted to me. x x x
Their second point is that under the Corporation Code, the management and control of a
corporation is vested in the board of directors, not in the officers but in the board of directors.
The officers are only agents of the board. And they believe that with 60 percent of the equity, the
Filipino majority stockholders undeniably control the board. Only on important corporate acts can
the 40-percent foreign equity exercise a veto, x x x.
x x x x45
MS. ROSARIO BRAID. Madam President.
28
THE PRESIDENT. Commissioner Rosario Braid is recognized.
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum
by the spokesman of the Philippine Chamber of Communications on why they would like to
maintain the present equity, I am referring to the 66 2/3. They would prefer to have a 75-25 ratio
but would settle for 66 2/3. x x x
xxxx
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of
two-thirds rather than the 60 percent?
MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino
citizens.
x x x x46
While they had differing views on the percentage of Filipino ownership of capital, it is clear that
the framers of the Constitution intended public utilities to be majority Filipino-owned and
controlled. To ensure that Filipinos control public utilities, the framers of the Constitution
approved, as additional safeguard, the inclusion of the last sentence of Section 11, Article XII of
the Constitution commanding that "[t]he participation of foreign investors in the governing body
of any public utility enterprise shall be limited to their proportionate share in its capital, and all
the executive and managing officers of such corporation or association must be citizens of the
Philippines." In other words, the last sentence of Section 11, Article XII of the Constitution
mandates that (1) the participation of foreign investors in the governing body of the corporation
or association shall be limited to their proportionate share in the capital of such entity; and (2) all
officers of the corporation or association must be Filipino citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing
officers of the corporation or association to be Filipino citizens specifically to prevent
management contracts, which were designed primarily to circumvent the Filipinization of public
utilities, and to assure Filipino control of public utilities, thus:
MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a
phrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES." I have with me their position paper.
THE PRESIDENT. The Commissioner may proceed.
MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which
Commissioner Romulo mentioned – Philippine Global Communications, Eastern
Telecommunications, Globe Mackay Cable – are 40-percent owned by foreign multinational
companies and 60-percent owned by their respective Filipino partners. All three, however, also
have management contracts with these foreign companies – Philcom with RCA, ETPI with Cable
and Wireless PLC, and GMCR with ITT. Up to the present time, the general managers of these
carriers are foreigners. While the foreigners in these common carriers are only minority owners,
the foreign multinationals are the ones managing and controlling their operations by virtue of
their management contracts and by virtue of their strength in the governing bodies of these
carriers.47
xxxx

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose
an amendment with respect to the operating management of public utilities, and in this
amendment, we are associated with Fr. Bernas, Commissioners Nieva and Rodrigo.
Commissioner Rosario Braid will state this amendment now.
Thank you.
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. This is still on Section 15.
MS. ROSARIO BRAID. Yes.
MR. VILLEGAS. Yes, Madam President.
xxxx
MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES
BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."
This will prevent management contracts and assure control by Filipino citizens. Will the
committee assure us that this amendment will insure that past activities such as management
contracts will no longer be possible under this amendment?
xxxx
FR. BERNAS. Madam President.
THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first part?
MR. BENGZON. Let us hear it.
FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which
reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF
ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF AND..."
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY
OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that
correct?
MR. VILLEGAS. Yes.
29
MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept
the amendment. Is that all right with Commissioner Rosario Braid?
MS. ROSARIO BRAID. Yes.
xxxx
MR. DE LOS REYES. The governing body refers to the board of directors and trustees.
MR. VILLEGAS. That is right.
MR. BENGZON. Yes, the governing body refers to the board of directors.
MR. REGALADO. It is accepted.
MR. RAMA. The body is now ready to vote, Madam President.
VOTING
xxxx
The results show 29 votes in favor and none against; so the proposed amendment is approved.
xxxx
THE PRESIDENT. All right. Can we proceed now to vote on Section 15?
MR. RAMA. Yes, Madam President.
THE PRESIDENT. Will the chairman of the committee please read Section 15?
MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any
other form of authorization for the operation of a public utility shall be granted except to citizens
of the Philippines or to corporations or associations organized under the laws of the Philippines
at least 60 PERCENT OF WHOSE CAPITAL is owned by such citizens." May I request
Commissioner Bengzon to please continue reading.
MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING
BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND
MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE
CITIZENS OF THE PHILIPPINES."
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE
EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS
RENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any such
franchise or right be granted except under the condition that it shall be subject to amendment,
alteration, or repeal by Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public."
VOTING
xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is
approved.48 (Emphasis supplied)
The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on
the limited participation of foreign investors in the governing body of public utilities, is a
reiteration of the last sentence of Section 5, Article XIV of the 1973 Constitution, 49 signifying its
importance in reserving ownership and control of public utilities to Filipino citizens.
VIII.
The undisputed facts
There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27%
of the common shares of PLDT, which class of shares exercises the sole right to vote in the
election of directors, and thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDT’s
common shares, constituting a minority of the voting stock, and thus Filipinos do not control
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred
shares earn only 1/70 of the dividends that common shares earn; 50 (5) preferred shares have
twice the par value of common shares; and (6) preferred shares constitute 77.85% of the
authorized capital stock of PLDT and common shares only 22.15%.
Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the
question of whether PLDT violated the 60-40 ownership requirement in favor of Filipino citizens
in Section 11, Article XII of the 1987 Constitution. Such question indisputably calls for a
presentation and determination of evidence through a hearing, which is generally outside the
province of the Court’s jurisdiction, but well within the SEC’s statutory powers. Thus, for obvious
reasons, the Court limited its decision on the purely legal and threshold issue on the definition of
the term "capital" in Section 11, Article XII of the Constitution and directed the SEC to apply such
definition in determining the exact percentage of foreign ownership in PLDT.
IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:
xxxx
5. For the Honorable Court to issue a declaratory relief that ownership of common or voting
shares is the sole basis in determining foreign equity in a public utility and that any other
government rulings, opinions, and regulations inconsistent with this declaratory relief be
declared unconstitutional and a violation of the intent and spirit of the 1987 Constitution;
6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in
excess of 40 percent of the total subscribed common shareholdings; and
7. For the Honorable Court to direct the Securities and Exchange Commission and
Philippine Stock Exchange to require PLDT to make a public disclosure of all of its foreign
shareholdings and their actual and real beneficial owners.
Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to
perform its statutory duty to investigate whether "the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines has been complied with [by PLDT] as
30
required by x x x the Constitution." 51 Such plea clearly negates SEC’s argument that it was not
impleaded.
Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers
to order the SEC’s compliance with its directive contained in the 28 June 2011 Decision in view
of the far-reaching implications of this case. In Domingo v. Scheer,52 the Court dispensed with
the amendment of the pleadings to implead the Bureau of Customs considering (1) the unique
backdrop of the case; (2) the utmost need to avoid further delays; and (3) the issue of public
interest involved. The Court held:
The Court may be curing the defect in this case by adding the BOC as party-petitioner. The
petition should not be dismissed because the second action would only be a repetition of the
first. In Salvador, et al., v. Court of Appeals, et al., we held that this Court has full powers, apart
from that power and authority which is inherent, to amend the processes, pleadings,
proceedings and decisions by substituting as party-plaintiff the real party-in-interest. The Court
has the power to avoid delay in the disposition of this case, to order its amendment as to
implead the BOC as party-respondent. Indeed, it may no longer be necessary to do so
taking into account the unique backdrop in this case, involving as it does an issue of
public interest. After all, the Office of the Solicitor General has represented the petitioner in the
instant proceedings, as well as in the appellate court, and maintained the validity of the
deportation order and of the BOC’s Omnibus Resolution. It cannot, thus, be claimed by the State
that the BOC was not afforded its day in court, simply because only the petitioner, the
Chairperson of the BOC, was the respondent in the CA, and the petitioner in the instant
recourse. In Alonso v. Villamor, we had the occasion to state:
There is nothing sacred about processes or pleadings, their forms or contents. Their sole
purpose is to facilitate the application of justice to the rival claims of contending
parties. They were created, not to hinder and delay, but to facilitate and promote, the
administration of justice. They do not constitute the thing itself, which courts are always striving
to secure to litigants. They are designed as the means best adapted to obtain that thing. In other
words, they are a means to an end. When they lose the character of the one and become the
other, the administration of justice is at fault and courts are correspondingly remiss in the
performance of their obvious duty.53 (Emphasis supplied)
In any event, the SEC has expressly manifested 54 that it will abide by the Court’s decision
and defer to the Court’s definition of the term "capital" in Section 11, Article XII of the
Constitution. Further, the SEC entered its special appearance in this case and argued
during the Oral Arguments, indicating its submission to the Court’s jurisdiction. It is
clear, therefore, that there exists no legal impediment against the proper and immediate
implementation of the Court’s directive to the SEC.
PLDT is an indispensable party only insofar as the other issues, particularly the factual
questions, are concerned. In other words, PLDT must be impleaded in order to fully resolve the
issues on (1) whether the sale of 111,415 PTIC shares to First Pacific violates the constitutional
limit on foreign ownership of PLDT; (2) whether the sale of common shares to foreigners
exceeded the 40 percent limit on foreign equity in PLDT; and (3) whether the total percentage of
the PLDT common shares with voting rights complies with the 60-40 ownership requirement in
favor of Filipino citizens under the Constitution for the ownership and operation of PLDT. These
issues indisputably call for an examination of the parties’ respective evidence, and thus are
clearly within the jurisdiction of the SEC. In short, PLDT must be impleaded, and must
necessarily be heard, in the proceedings before the SEC where the factual issues will be
thoroughly threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule on
the factual issues raised by Gamboa, except the single and purely legal issue on the definition of
the term "capital" in Section 11, Article XII of the Constitution. The Court confined the resolution
of the instant case to this threshold legal issue in deference to the fact-finding power of the SEC.
Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal
issue in this case even without the participation of PLDT since defining the term "capital" in
Section 11, Article XII of the Constitution does not, in any way, depend on whether PLDT was
impleaded. Simply put, PLDT is not indispensable for a complete resolution of the purely legal
question in this case.55 In fact, the Court, by treating the petition as one for mandamus,56 merely
directed the SEC to apply the Court’s definition of the term "capital" in Section 11, Article XII of
the Constitution in determining whether PLDT committed any violation of the said constitutional
provision. The dispositive portion of the Court’s ruling is addressed not to PLDT but solely
to the SEC, which is the administrative agency tasked to enforce the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.
Since the Court limited its resolution on the purely legal issue on the definition of the term
"capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC to investigate
any violation by PLDT of the 60-40 ownership requirement in favor of Filipino citizens under the
Constitution,57 there is no deprivation of PLDT’s property or denial of PLDT’s right to due
process, contrary to Pangilinan and Nazareno’s misimpression. Due process will be afforded to
PLDT when it presents proof to the SEC that it complies, as it claims here, with Section 11,
Article XII of the Constitution.
X.
Foreign Investments in the Philippines
Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may
result in a sudden flight of existing foreign investors to "friendlier" countries and simultaneously
deterring new foreign investors to our country. In particular, the PSE claims that the 28 June
2011 Decision may result in the following: (1) loss of more than ₱ 630 billion in foreign
investments in PSE-listed shares; (2) massive decrease in foreign trading transactions; (3) lower
PSE Composite Index; and (4) local investors not investing in PSE-listed shares.58
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’
apprehension. Without providing specific details, he pointed out the depressing state of the
Philippine economy compared to our neighboring countries which boast of growing economies.
Further, Dr. Villegas explained that the solution to our economic woes is for the government to
"take-over" strategic industries, such as the public utilities sector, thus:
JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have additional information on whether this
high FDI59 countries in East Asia have allowed foreigners x x x control [of] their public utilities, so
that we can compare apples with apples.
DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of ours find an industry
strategic, their solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their solution is to
make sure that those industries are in the hands of state enterprises. So, in these
countries, nationalization means the government takes over. And because their
31
governments are competent and honest enough to the public, that is the solution. x x
x 60 (Emphasis supplied)
If government ownership of public utilities is the solution, then foreign investments in our public
utilities serve no purpose. Obviously, there can never be foreign investments in public utilities if,
as Dr. Villegas claims, the "solution is to make sure that those industries are in the hands of
state enterprises." Dr. Villegas’s argument that foreign investments in telecommunication
companies like PLDT are badly needed to save our ailing economy contradicts his own theory
that the solution is for government to take over these companies. Dr. Villegas is barking up the
wrong tree since State ownership of public utilities and foreign investments in such industries
are diametrically opposed concepts, which cannot possibly be reconciled.
In any event, the experience of our neighboring countries cannot be used as argument to decide
the present case differently for two reasons. First, the governments of our neighboring countries
have, as claimed by Dr. Villegas, taken over ownership and control of their strategic public
utilities like the telecommunications industry. Second, our Constitution has specific provisions
limiting foreign ownership in public utilities which the Court is sworn to uphold regardless of the
experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership and operation of public
utilities to Filipino citizens, or corporations or associations at least 60 percent of whose capital
belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines appears to be more liberal in
allowing foreign investors to own 40 percent of public utilities, unlike in other Asian countries
whose governments own and operate such industries.
XI.
Prospective Application of Sanctions
In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the
application and imposition of appropriate sanctions against PLDT if found violating Section 11,
Article XII of the Constitution.1avvphi1
As discussed, the Court has directed the SEC to investigate and determine whether PLDT
violated Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only after
the SEC has determined PLDT’s violation, if any exists at the time of the commencement of the
administrative case or investigation, that the SEC may impose the statutory sanctions against
PLDT. In other words, once the 28 June 2011 Decision becomes final, the SEC shall impose the
appropriate sanctions only if it finds after due hearing that, at the start of the administrative case
or investigation, there is an existing violation of Section 11, Article XII of the Constitution. Under
prevailing jurisprudence, public utilities that fail to comply with the nationality requirement under
Section 11, Article XII and the FIA can cure their deficiencies prior to the start of the
administrative case or investigation.61
XII.
Final Word
The Constitution expressly declares as State policy the development of an economy
"effectively controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly
reserves the ownership and operation of public utilities to Philippine nationals, who are defined
in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or associations at
least 60 percent of whose capital with voting rights belongs to Filipinos. The FIA’s
implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens
or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full

beneficial ownership of the stocks, coupled with appropriate voting rights is essential." In
effect, the FIA clarifies, reiterates and confirms the interpretation that the term "capital" in
Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as
with full beneficial ownership. This is precisely because the right to vote in the election of
directors, coupled with full beneficial ownership of stocks, translates to effective control of a
corporation.
Any other construction of the term "capital" in Section 11, Article XII of the Constitution
contravenes the letter and intent of the Constitution. Any other meaning of the term "capital"
openly invites alien domination of economic activities reserved exclusively to Philippine
nationals. Therefore, respondents’ interpretation will ultimately result in handing over effective
control of our national economy to foreigners in patent violation of the Constitution, making
Filipinos second-class citizens in their own country.
Filipinos have only to remind themselves of how this country was exploited under the Parity
Amendment, which gave Americans the same rights as Filipinos in the exploitation of natural
resources, and in the ownership and control of public utilities, in the Philippines. To do this the
1935 Constitution, which contained the same 60 percent Filipino ownership and control
requirement as the present 1987 Constitution, had to be amended to give Americans parity
rights with Filipinos. There was bitter opposition to the Parity Amendment 62 and many Filipinos
eagerly awaited its expiration. In late 1968, PLDT was one of the American-controlled public
utilities that became Filipino-controlled when the controlling American stockholders divested in
anticipation of the expiration of the Parity Amendment on 3 July 1974. 63 No economic suicide
happened when control of public utilities and mining corporations passed to Filipinos’ hands
upon expiration of the Parity Amendment.
Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by
the Parity Amendment, effectively giving foreigners parity rights with Filipinos, but this
time even without any amendment to the present Constitution. Worse, movants’
interpretation opens up our national economy to effective control not only by Americans but
also by all foreigners, be they Indonesians, Malaysians or Chinese, even in the absence of
reciprocal treaty arrangements. At least the Parity Amendment, as implemented by the
Laurel-Langley Agreement, gave the capital-starved Filipinos theoretical parity – the same rights
as Americans to exploit natural resources, and to own and control public utilities, in the United
States of America. Here, movants’ interpretation would effectively mean a unilateral opening up
of our national economy to all foreigners, without any reciprocal arrangements. That would
mean that Indonesians, Malaysians and Chinese nationals could effectively control our mining
companies and public utilities while Filipinos, even if they have the capital, could not control
similar corporations in these countries.
The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and
control requirement for public utilities like PLOT. Any deviation from this requirement
necessitates an amendment to the Constitution as exemplified by the Parity Amendment. This
Court has no power to amend the Constitution for its power and duty is only to faithfully apply
and interpret the Constitution.
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings
shall be entertained.
SO ORDERED.
THIRD DIVISION
32
G.R. No. 195580               April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and
McArthur Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision 1 and the
February 15, 2011 Resolution of the Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a
domestic corporation organized and existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring with the Department of
Environment and Natural Resources (DENR), it learned that the areas where it wanted to
undertake exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an
application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau
(MGB), Region IV-B, Office of the Department of Environment and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares
in Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which
includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and
EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006,
assigned to petitioner McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and
Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an
application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the
said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in
barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC
conveyed, transferred and/or assigned its rights and interests over the MPSA application in favor
of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-
AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa
Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred
and assigned its rights and interest over the said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3)
separate petitions for the denial of petitioners’ applications for MPSA designated as AMA-IVB-
153, AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian

corporation. Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it
was the driving force behind petitioners’ filing of the MPSAs over the areas covered by
applications since it knows that it can only participate in mining activities through corporations
which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks
were mostly owned by MBMI, they were likewise disqualified from engaging in mining activities
through MPSAs, which are reserved only for Filipino citizens.
In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of
Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether
in singular or plural, shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a
corporation, partnership, association, or cooperative organized or authorized for the purpose of
engaging in mining, with technical and financial capability to undertake mineral resources
development and duly registered in accordance with law at least sixty per cent (60%) of the
capital of which is owned by citizens of the Philippines: Provided, That a legally organized
foreign-owned corporation shall be deemed a qualified person for purposes of granting an
exploration permit, financial or technical assistance agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial because they also
applied for Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09
for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreign-
owned corporations. Nevertheless, they claimed that the issue on nationality should not be
raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital
is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the
shares of PLMC (which owns 5,997 shares of Narra), 3 40% of the shares of MMC (which owns
5,997 shares of McArthur)4 and 40% of the shares of SLMC (which, in turn, owns 5,997 shares
of Tesoro),5 the shares of MBMI will not make it the owner of at least 60% of the capital stock of
each of petitioners. They added that the best tool used in determining the nationality of a
corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act
of 1991. They also claimed that the POA of DENR did not have jurisdiction over the issues in
Redmont’s petition since they are not enumerated in Sec. 77 of RA 7942. Finally, they stressed
that Redmont has no personality to sue them because it has no pending claim or application
over the areas applied for by petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining
MPSAs. It held:
[I]t is clearly established that respondents are not qualified applicants to engage in mining
activities. On the other hand, [Redmont] having filed its own applications for an EPA over the
areas earlier covered by the MPSA application of respondents may be considered if and when
they are qualified under the law. The violation of the requirements for the issuance and/or grant
of permits over mining areas is clearly established thus, there is reason to believe that the
cancellation and/or revocation of permits already issued under the premises is in order and open
the areas covered to other qualified applicants.
xxxx
33
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro
Mining and Development, Inc., and Narra Nickel Mining and Development Corp. as,
DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production Sharing
Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.6
The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a
100% Canadian company and declared their MPSAs null and void. In the same Resolution, it
gave due course to Redmont’s EPAs. Thereafter, on February 7, 2008, the POA issued an
Order7 denying the Motion for Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal10 and Memorandum of Appeal.11
In their respective memorandum, petitioners emphasized that they are qualified persons under
the law. Also, through a letter, they informed the MAB that they had their individual MPSA
applications converted to FTAAs. McArthur’s FTAA was denominated as AFTA-IVB-0912 on May
2007, while Tesoro’s MPSA application was converted to AFTA-IVB-0813 on May 28, 2007, and
Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint15 with the Securities and Exchange Commission (SEC), seeking the revocation of the
certificates for registration of petitioners on the ground that they are foreign-owned or controlled
corporations engaged in mining in violation of Philippine laws. Thereafter, Redmont filed on
September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying
for the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon
City, Branch 92 (RTC) a Complaint 16 for injunction with application for issuance of a temporary
restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 08-
63379. Redmont prayed for the deferral of the MAB proceedings pending the resolution of the
Complaint before the SEC.
But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the
MAB issued an Order on September 10, 2008, finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and
SETS ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B
(MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07
February 2008 denying the Motions for Reconsideration of the Appellants. The Petition filed by
Redmont Consolidated Mines Corporation on 02 January 2007 is hereby ordered DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s application
for a TRO and setting the case for hearing the prayer for the issuance of a writ of preliminary
injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration 19 of the
September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for
Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion
for Reconsideration, Redmont filed before the RTC a Supplemental Complaint 21 in Civil Case
No. 08-63379.

On October 6, 2008, the RTC issued an Order 22 granting the issuance of a writ of preliminary
injunction enjoining the MAB from finally disposing of the appeals of petitioners and from
resolving Redmont’s Motion for Reconsideration and Supplement Motion for Reconsideration of
the MAB’s September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for
Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed
by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by
the MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September
10, 2008 and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The
findings of the Panel of Arbitrators of the Department of Environment and Natural Resources
that respondents McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore,
the rejection of their applications for Mineral Product Sharing Agreement should be
recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or
Technical Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the
matter for its rejection or approval is left for determination by the Secretary of the DENR and the
President of the Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by
petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of
Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
implemented the requirement of the Constitution and other laws pertaining to the exploitation of
natural resources, the CA used the "grandfather rule" to determine the nationality of petitioners.
It provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital
stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital
of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares
shall be recorded as belonging to aliens.24 (emphasis supplied)
In determining the nationality of petitioners, the CA looked into their corporate structures and
their corresponding common shareholders. Using the grandfather rule, the CA discovered that
MBMI in effect owned majority of the common stocks of the petitioners as well as at least 60%
equity interest of other majority shareholders of petitioners through joint venture agreements.
The CA found that through a "web of corporate layering, it is clear that one common controlling
34
investor in all mining corporations involved x x x is MBMI."25 Thus, it concluded that petitioners
McArthur, Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA
applications suspicious in nature and, as a consequence, it recommended the rejection of
petitioners’ MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the
POA has jurisdiction over them and that it also has the power to determine the of nationality of
petitioners as a prerequisite of the Constitution prior the conferring of rights to "co-production,
joint venture or production-sharing agreements" of the state to mining rights. However, it also
stated that the POA’s jurisdiction is limited only to the resolution of the dispute and not on the
approval or rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested
with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which
considered petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the
CA determined that the POA’s declaration that the MPSAs of McArthur, Tesoro and Narra are
void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the President (OP)
a petition dated May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a
Decision26 on April 6, 2011, wherein it canceled and revoked petitioners’ FTAAs for violating and
circumventing the "Constitution x x x[,] the Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O.
584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating
that petitioners committed violations against the abovementioned laws and failed to submit
evidence to negate them. The Decision further quoted the December 14, 2007 Order of the POA
focusing on the alleged misrepresentation and claims made by petitioners of being domestic or
Filipino corporations and the admitted continued mining operation of PMDC using their locally
secured Small Scale Mining Permit inside the area earlier applied for an MPSA application which
was eventually transferred to Narra. It also agreed with the POA’s estimation that the filing of the
FTAA applications by petitioners is a clear admission that they are "not capable of conducting a
large scale mining operation and that they need the financial and technical assistance of a
foreign entity in their operation, that is why they sought the participation of MBMI Resources,
Inc."28 The Decision further quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting
operation only through their local counterparts.29
The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the
OP’s Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA
Decision dated February 29, 2012, the CA affirmed the Decision and Resolution of the OP.
Thereafter, petitioners appealed the same CA decision to this Court which is now pending with a
different division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners
put forth the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that
the subject matter of the controversy, the MPSA Applications, have already been converted into
FTAA applications and that the same have already been granted.
II.
The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering
that the Panel of Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and
McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful
forum shopping.
IV.
The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations based on
the "Grandfather Rule" is contrary to law, particularly the express mandate of the Foreign
Investments Act of 1991, as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.
VI.
The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into
FTAA Applications were of "suspicious nature" as the same is based on mere conjectures and
surmises without any shred of evidence to show the same.31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot is without
merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable
controversy by virtue of supervening events, so that a declaration thereon would be of no
practical use or value."32 Thus, the courts "generally decline jurisdiction over the case or dismiss
it on the ground of mootness."33
The "mootness" principle, however, does accept certain exceptions and the mere raising of an
issue of "mootness" will not deter the courts from trying a case when there is a valid reason to
do so. In David v. Macapagal-Arroyo (David), the Court provided four instances where courts
can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
35
2.) The exceptional character of the situation and paramount public interest is involved;
3.) When constitutional issue raised requires formulation of controlling principles to guide the
bench, the bar, and the public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant case. We of this Court note that a
grave violation of the Constitution, specifically Section 2 of Article XII, is being committed by a
foreign corporation right under our country’s nose through a myriad of corporate layering under
different, allegedly, Filipino corporations. The intricate corporate layering utilized by the
Canadian company, MBMI, is of exceptional character and involves paramount public interest
since it undeniably affects the exploitation of our Country’s natural resources. The corresponding
actions of petitioners during the lifetime and existence of the instant case raise questions as
what principle is to be applied to cases with similar issues. No definite ruling on such principle
has been pronounced by the Court; hence, the disposition of the issues or errors in the instant
case will serve as a guide "to the bench, the bar and the public."35 Finally, the instant case is
capable of repetition yet evading review, since the Canadian company, MBMI, can keep on
utilizing dummy Filipino corporations through various schemes of corporate layering and
conversion of applications to skirt the constitutional prohibition against foreign mining in
Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by petitioners since
both involve the conversion of MPSA applications to FTAA applications. Petitioners propound
that the CA erred in ruling against them since the questioned MPSA applications were already
converted into FTAA applications; thus, the issue on the prohibition relating to MPSA
applications of foreign mining corporations is academic. Also, petitioners would want us to
correct the CA’s finding which deemed the aforementioned conversions of applications as
suspicious in nature, since it is based on mere conjectures and surmises and not supported with
evidence.
We disagree.
The CA’s analysis of the actions of petitioners after the case was filed against them by
respondent is on point. The changing of applications by petitioners from one type to another just
because a case was filed against them, in truth, would raise not a few sceptics’ eyebrows. What
is the reason for such conversion? Did the said conversion not stem from the case challenging
their citizenship and to have the case dismissed against them for being "moot"? It is quite
obvious that it is petitioners’ strategy to have the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every action done by the
court or appropriate government agency: on January 2, 2007, Redmont filed three separate
petitions for denial of the MPSA applications of petitioners before the POA. On June 15, 2007,
petitioners filed a conversion of their MPSA applications to FTAAs. The POA, in its December
14, 2007 Resolution, observed this suspect change of applications while the case was pending
before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear admission
that the respondents are not capable of conducting a large scale mining operation and that they
need the financial and technical assistance of a foreign entity in their operation that is why they
sought the participation of MBMI Resources, Inc. The participation of MBMI in the corporation

only proves the fact that it is the Canadian company that will provide the finances and the
resources to operate the mining areas for the greater benefit and interest of the same and not
the Filipino stockholders who only have a less substantial financial stake in the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting
operation only through their local counterparts.36
On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing
and setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said
Decision, the CA upheld the findings of the POA of the DENR that the herein petitioners are in
fact foreign corporations thus a recommendation of the rejection of their MPSA applications
were recommended to the Secretary of the DENR. With respect to the FTAA applications or
conversion of the MPSA applications to FTAAs, the CA deferred the matter for the determination
of the Secretary of the DENR and the President of the Republic of the Philippines.37
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal
of the petition asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed
and issued in their favor FTAA No. 05-2010-IVB, which rendered the petition moot and
academic. However, the CA, in a Resolution dated February 15, 2011 denied their motion for
being a mere "rehash of their claims and defenses." 38 Standing firm on its Decision, the CA
affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners
elevated the case to us via a Petition for Review on Certiorari under Rule 45, questioning the
Decision of the CA. Interestingly, the OP rendered a Decision dated April 6, 2011, a day after
this petition for review was filed, cancelling and revoking the FTAAs, quoting the Order of the
POA and stating that petitioners are foreign corporations since they needed the financial
strength of MBMI, Inc. in order to conduct large scale mining operations. The OP Decision also
based the cancellation on the misrepresentation of facts and the violation of the "Small Scale
Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the
Foreign Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a Resolution, denying
the Motion for Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the
fact of the OP’s Decision and Resolution. In their Reply, petitioners chose to ignore the OP
Decision and continued to reuse their old arguments claiming that they were granted FTAAs
and, thus, the case was moot. Petitioners filed a Manifestation and Submission dated October
19, 2012,40 wherein they asserted that the present petition is moot since, in a remarkable turn of
events, MBMI was able to sell/assign all its shares/interest in the "holding companies" to DMCI
Mining Corporation (DMCI), a Filipino corporation and, in effect, making their respective
corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed for being
"moot." Their final act, wherein MBMI was able to allegedly sell/assign all its shares and interest
in the petitioner "holding companies" to DMCI, only proves that they were in fact not Filipino
corporations from the start. The recent divesting of interest by MBMI will not change the stand of
this Court with respect to the nationality of petitioners prior the suspicious change in their
36
corporate structures. The new documents filed by petitioners are factual evidence that this Court
has no power to verify.
The only thing clear and proved in this Court is the fact that the OP declared that petitioner
corporations have violated several mining laws and made misrepresentations and falsehood in
their applications for FTAA which lead to the revocation of the said FTAAs, demonstrating that
petitioners are not beyond going against or around the law using shifty actions and strategies.
Thus, in this instance, we can say that their claim of mootness is moot in itself because their
defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or
foreign. In their previous petitions, they had been adamant in insisting that they were Filipino
corporations, until they submitted their Manifestation and Submission dated October 19, 2012
where they stated the alleged change of corporate ownership to reflect their Filipino ownership.
Thus, there is a need to determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a corporation: the
control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other
laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural
resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital
stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital
of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares
shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to
aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the
second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in
the corporation or partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as Philippine nationality," pertains to the stricter, more
stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of
the "control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign
Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent provision
under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership
or association wholly owned by the citizens of the Philippines; a corporation organized under the
laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and

entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That were a
corporation and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned and held by citizens
of the Philippines and at least sixty percent (60%) of the members of the Board of Directors, in
order that the corporation shall be considered a Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further
claim that the grandfather rule "has been abandoned and is no longer the applicable
rule."41 They also opined that the last portion of Sec. 3 of the FIA admits the application of a
"corporate layering" scheme of corporations. Petitioners claim that the clear and unambiguous
wordings of the statute preclude the court from construing it and prevent the court’s use of
discretion in applying the law. They said that the plain, literal meaning of the statute meant the
application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent
the Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of
petitioners that the grandfather rule has already been abandoned must be discredited for lack of
basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils,
all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of agricultural lands, all other
natural resources shall not be alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the State. The State may directly
undertake such activities, or it may enter into co-production, joint venture or production-sharing
agreements with Filipino citizens, or corporations or associations at least sixty per centum of
whose capital is owned by such citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years, and under such terms and
conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of
minerals, petroleum, and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and general welfare of the
country. In such agreements, the State shall promote the development and use of local scientific
and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different types of
agreements for the exploration, development, and utilization of natural resources with entities
who are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since
the issues are centered on the utilization of our country’s natural resources or specifically,
mining. Thus, there is a need to ascertain the nationality of petitioners since, as the Constitution
so provides, such agreements are only allowed corporations or associations "at least 60 percent
of such capital is owned by such citizens." The deliberations in the Records of the 1986
Constitutional Commission shed light on how a citizenship of a corporation will be determined:
37
Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national
economy is freedom from undue foreign control? What is the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty
and the welfare of the Filipino in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply
freedom from foreign control? I think that is the meaning of independence, because as phrased,
it still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the
60/40 possibility in the cultivation of natural resources, 40 percent involves some control; not
total control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and
foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on
the paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP
Law Center who provided us with a draft. The phrase that is contained here which we adopted
from the UP draft is ‘60 percent of the voting stock.’
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the Corporation Code,
does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes.42 (emphasis supplied)
 38

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather
rule in cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the Constitution and a
statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions
under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will
have no place of application. As decreed by the honorable framers of our Constitution, the
grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality requirements
(the ‘Investee Corporation’). Such manner of computation is necessary since the shares in the
Investee Corporation may be owned both by individual stockholders (‘Investing Individuals’) and
by corporations and partnerships (‘Investing Corporation’). The said rules thus provide for the
determination of nationality depending on the ownership of the Investee Corporation and, in
certain instances, the Investing Corporation.
since their common investor, the 100% Canadian corporation––MBMI, funded them. However,
petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than
60%.43
The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60%
fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only
made an example of an instance where "doubt" as to the ownership of the corporation exists. It
would be ludicrous to limit the application of the said word only to the instances where the
stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a
corporation. The corporations interested in circumventing our laws would clearly strive to have
"60% Filipino Ownership" at face value. It would be senseless for these applying corporations to
state in their respective articles of incorporation that they have less than 60% Filipino
stockholders since the applications will be denied instantly. Thus, various corporate schemes
and layerings are utilized to circumvent the application of the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine,
therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the McArthur Mining, Inc.
Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control
Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 To establish the actual ownership, interest or participation of MBMI in each of petitioners’
SEC Rules which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the corporate structure, they have to be "grandfathered."
capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.’
Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its
more) Filipino stockholdings of the Investing Corporation since a corporation which is at least application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000)
60% Filipino-owned is considered as Filipino. divided into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed
to by the following:44
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in
said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino Name Nationality Number of Amount Amount Paid
ownership in the corporation or partnership is less than 60%, only the number of shares Shares Subscribed
corresponding to such percentage shall be counted as of Philippine nationality." Under the Strict
Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the
Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of
Corporation
Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
Investing Corporation and added to the shares directly owned in the Investee Corporation x x x. Inc.

xxxx
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the
second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders Esguerra
with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation
which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60- Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply.
(emphasis supplied)
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt
is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro,
 39

  Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60 Olympic failed to pay any amount with respect to the number of shares it subscribed to. It states
(emphasis supplied) that Olympic entered into joint venture agreements with several Philippine companies, wherein it
holds directly and indirectly a 60% effective equity interest in the Olympic Properties. 46 Quoting
Interestingly, looking at the corporate structure of MMC, we take note that it has a similar the said Annual report:
structure and composition as McArthur. In fact, it would seem that MBMI is also a major investor
On September 9, 2004, the Company and Olympic Mines & Development Corporation
and "controls"45 MBMI and also, similar nominal shareholders were present, i.e. Fernando B.
("Olympic") entered into a series of agreements including a Property Purchase and Development
Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth
Agreement (the Transaction Documents) with respect to three nickel laterite properties in
Cawkell (Cawkell):
Palawan, Philippines (the "Olympic Properties"). The Transaction Documents effectively
Madridejos Mining Corporation establish a joint venture between the Company and Olympic for purposes of developing the
Olympic Properties. The Company holds directly and indirectly an initial 60% interest in the joint
venture. Under certain circumstances and upon achieving certain milestones, the Company may
Name Nationality Number of Amount Amount Paid
earn up to a 100% interest, subject to a 2.5% net revenue royalty.47 (emphasis supplied)
Shares Subscribed
Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0 layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more
than 60% or more equity interest in McArthur, making the latter a foreign corporation.
Development
Tesoro Mining and Development, Inc.
Corp.
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos
MBMI Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00 (PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share,
Resources, as demonstrated below:

Inc. [[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?

file=/jurisprudence/2014/april2014/195580.pdf]]

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Name Nationality Number of Amount Amount Paid

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00 Shares Subscribed

Esguerra
Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 Mining, Inc.

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60
Hernando
Resources, Inc.

Michael T. American 1 PhP 1,000.00 PhP 1,000.00

Mason Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00 Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra
  Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied) Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with Agcaoili
respect to the number of shares they subscribed to in the corporation, which is quite absurd
since Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why
 40

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00 Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00   Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)
  Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the
(emphasis supplied)
glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of identical
stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando,
Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures
Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount
as the corporate structure of petitioner McArthur, down to the last centavo. All the other
Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI
shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures
which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP
under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly
2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand
the same. Delving deeper, we scrutinize SMMI’s corporate structure:
nine hundred pesos (PhP 2,809,900).
Sara Marie Mining, Inc.
Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html? SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more
file=/jurisprudence/2014/april2014/195580.pdf]] equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus,
disqualifies it to participate in the exploitation, utilization and development of our natural
resources.
Name Nationality Number of Amount Amount Paid
Narra Nickel Mining and Development Corporation
Shares Subscribed
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA
application, whose corporate structure’s arrangement is similar to that of the first two petitioners
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0
discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into
Development ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as
follows:
Corp.
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2014/april2014/195580.pdf]]
MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

Inc. Name Nationality Number of Amount Amount Paid

Shares Subscribed
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Mining &
Esguerra
Development

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 Corp.

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00 MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Hernando Resources, Inc.

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00 Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00
 41

Mendoza, Jr. Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00 Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00 Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00 Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Bocalan
  Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00 (emphasis
supplied)
Robert L. American 1 PhP 1,000.00 PhP 1,000.00
Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the
McCurdy amount of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South
Resources and Development Corp. (PASRDC), is zero.

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00 Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains
the reason behind the intricate corporate layering that MBMI immersed itself in:
  Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00 JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in
(emphasis supplied) the acquisition, exploration and development of mineral properties in the Philippines is described
as follows:
Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is
present in this corporate structure. (a) Olympic Group

Patricia Louise Mining & Development Corporation The Philippine companies holding the Olympic Property, and the ownership and interests
therein, are as follows:
Using the grandfather method, we further look and examine PLMDC’s corporate structure:
Olympic- Philippines (the "Olympic Group")
Name Nationality Number of Amount Amount Paid
Shares Subscribed Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Palawan Alpha South Resources Filipino 6,596 PhP PhP 0
Development Corporation 6,596,000.00 Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an
effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders’
agreement, the Company exercises joint control over the companies in the Olympic Group.
MBMI Resources, Canadian 3,396 PhP PhP
3,396,000.00 2,796,000.00 (b) Alpha Group
Inc.
The Philippine companies holding the Alpha Property, and the ownership interests therein, are
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00 as follows:

Alpha- Philippines (the "Alpha Group")

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company
exercises joint control over the companies in the Alpha Group.48 (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro
and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of
their equity interests. Such conclusion is derived from grandfathering petitioners’ corporate
owners, namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s
Summary of Significant Accounting Policies statement– –regarding the "joint venture"
agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro,
PLMDC and Narra. Noticeably, the ownership of the "layered" corporations boils down to MBMI,
Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements
with, practically exercising majority control over the corporations mentioned. In effect, whether
looking at the capital structure or the underlying relationships between and among the
corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60%
or more of their capital stocks or equity interests are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by
co-partner or agent" rule and "admission by privies" under the Rules of Court in the instant case,
by pointing out that statements made by MBMI should not be admitted in this case since it is not
a party to the case and that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the
party within the scope of his authority and during the existence of the partnership or agency,
may be given in evidence against such party after the partnership or agency is shown by
evidence other than such act or declaration itself. The same rule applies to the act or declaration
of a joint owner, joint debtor, or other person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the act,
declaration, or omission of the latter, while holding the title, in relation to the property, is
evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the
partnership relation must be shown, and that proof of the fact must be made by evidence other
than the admission itself."49 Thus, petitioners assert that the CA erred in finding that a
partnership relationship exists between them and MBMI because, in fact, no such partnership
exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They
challenged the conclusion of the CA which pertains to the close characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before this particular
partnership can be formed, it should have been formally reduced into writing since the capital
involved is more than three thousand pesos (PhP 3,000). Being that there is no evidence of
42
written agreement to form a partnership between petitioners and MBMI, no partnership was
created.
We disagree.
A partnership is defined as two or more persons who bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profits among
themselves.50 On the other hand, joint ventures have been deemed to be "akin" to partnerships
since it is difficult to distinguish between joint ventures and partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of their association are so similar
and closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities are
to be tested by rules which are closely analogous to and substantially the same, if not exactly
the same, as those which govern partnership. In fact, it has been said that the trend in the law
has been to blur the distinctions between a partnership and a joint venture, very little law being
found applicable to one that does not apply to the other.51
Though some claim that partnerships and joint ventures are totally different animals, there are
very few rules that differentiate one from the other; thus, joint ventures are deemed "akin" or
similar to a partnership. In fact, in joint venture agreements, rules and legal incidents governing
partnerships are applied.52
Accordingly, culled from the incidents and records of this case, it can be assumed that the
relationships entered between and among petitioners and MBMI are no simple "joint venture
agreements." As a rule, corporations are prohibited from entering into partnership agreements;
consequently, corporations enter into joint venture agreements with other corporations or
partnerships for certain transactions in order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI
was executed to circumvent the legal prohibition against corporations entering into partnerships,
then the relationship created should be deemed as "partnerships," and the laws on partnership
should be applied. Thus, a joint venture agreement between and among corporations may be
seen as similar to partnerships since the elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are considered to be
partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that
"by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators’ jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case.
The POA has jurisdiction to settle disputes over rights to mining areas which definitely involve
the petitions filed by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by
filing its petition against petitioners, is asserting the right of Filipinos over mining areas in the
Philippines against alleged foreign-owned mining corporations. Such claim constitutes a
"dispute" found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by the parties for the decision, the panel
shall have exclusive and original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53
The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or
opposition to an application for mineral agreement. The POA therefore has the jurisdiction to
resolve any adverse claim, protest, or opposition to a pending application for a mineral
agreement filed with the concerned Regional Office of the MGB. This is clear from Secs. 38 and
41 of the DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio announcements,
the authorized officer(s) of the concerned office(s) shall issue a certification(s) that the
publication/posting/radio announcement have been complied with. Any adverse claim, protest,
opposition shall be filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned Regional Office or through any
concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these
implementing rules and regulations. Upon final resolution of any adverse claim, protest or
opposition, the Panel of Arbitrators shall likewise issue a certification to that effect within five (5)
working days from the date of finality of resolution thereof. Where there is no adverse claim,
protest or opposition, the Panel of Arbitrators shall likewise issue a Certification to that effect
within five working days therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements under this Section are fully
complied with and any adverse claim/protest/opposition is finally resolved by the Panel of
Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the Panel of
Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall initially
evaluate the Mineral Agreement applications in areas outside Mineral reservations. He/She shall
thereafter endorse his/her findings to the Bureau for further evaluation by the Director within
fifteen (15) working days from receipt of forwarded documents. Thereafter, the Director shall
endorse the same to the secretary for consideration/approval within fifteen working days from
receipt of such endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15)
working days from receipt of the Certification issued by the Panel of Arbitrators as provided for in
Section 38 hereof, the same shall be evaluated and endorsed by the Director to the Secretary
for consideration/approval within fifteen days from receipt of such endorsement. (emphasis
supplied)
It has been made clear from the aforecited provisions that the "disputes involving rights to
mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of mining rights.
43
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said
sections may also be filed directly with the Panel of Arbitrators within the concerned periods for
filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the proposed
contract area is located once a week for two (2) consecutive weeks in a language generally
understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45)
days, the concerned offices shall issue a certification that publication/posting has been made
and that no adverse claim, protest or opposition of whatever nature has been filed. On the other
hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-five
(45) days from the last date of publication/posting, with the Regional Offices concerned, or
through the Department’s Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of Arbitrators. However previously published valid and
subsisting mining claims are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and
resolved by the Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the "disputes involving rights to
mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said
sections may also be filed directly with the Panel of Arbitrators within the concerned periods for
filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the proposed
contract area is located once a week for two (2) consecutive weeks in a language generally
understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45)
days, the concerned offices shall issue a certification that publication/posting has been made

and that no adverse claim, protest or opposition of whatever nature has been filed. On the other
hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-five
(45) days from the last date of publication/posting, with the Regional offices concerned, or
through the Department’s Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional
Office for resolution of the Panel of Arbitrators. However, previously published valid and
subsisting mining claims are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and
resolved by the Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to resolve any adverse claim,
opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to
adverse claims, conflicts and oppositions relating to applications for the grant of mineral rights.
POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and
oppositions and it has no authority to approve or reject said applications. Such power is vested
in the DENR Secretary upon recommendation of the MGB Director. Clearly, POA’s jurisdiction
over "disputes involving rights to mining areas" has nothing to do with the cancellation of existing
mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve
disputes over MPSA applications subject of Redmont’s petitions. However, said jurisdiction does
not include either the approval or rejection of the MPSA applications, which is vested only upon
the Secretary of the DENR. Thus, the finding of the POA, with respect to the rejection of
petitioners’ MPSA applications being that they are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the
POA, that has jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at the time of the
commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original
jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.—
x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the
panel shall have exclusive and original jurisdiction to hear and decide the following:
(c) Disputes involving rights to mining areas
44
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all disputes involving
rights to mining areas. One such dispute is an MPSA application to which an adverse claim,
protest or opposition is filed by another interested applicant.1âwphi1 In the case at bar, the
dispute arose or originated from MPSA applications where petitioners are asserting their rights
to mining areas subject of their respective MPSA applications. Since respondent filed 3 separate
petitions for the denial of said applications, then a controversy has developed between the
parties and it is POA’s jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the
DENR Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus POA
has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary
jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:
The doctrine of primary jurisdiction holds that if a case is such that its determination requires the
expertise, specialized training and knowledge of an administrative body, relief must first be
obtained in an administrative proceeding before resort to the courts is had even if the matter
may well be within their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system via a resort to
the CA and to this Court as a last recourse.
Selling of MBMI’s shares to DMCI
As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want
us to declare the instant petition moot and academic due to the transfer and conveyance of all
the shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing
under Philippine laws and is at least 60% Philippine-owned. 56 Petitioners reasoned that they now
cannot be considered as foreign-owned; the transfer of their shares supposedly cured the
"defect" of their previous nationality. They claimed that their current FTAA contract with the State
should stand since "even wholly-owned foreign corporations can enter into an FTAA with the
State."57 Petitioners stress that there should no longer be any issue left as regards their
qualification to enter into FTAA contracts since they are qualified to engage in mining activities in
the Philippines. Thus, whether the "grandfather rule" or the "control test" is used, the
nationalities of petitioners cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and
said fact should be disregarded. The manifestation can no longer be considered by us since it is
being tackled in G.R. No. 202877 pending before this Court.1âwphi1 Thus, the question of
whether petitioners, allegedly a Philippine-owned corporation due to the sale of MBMI's
shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-issue in this
case.
In ending, the "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution,
entitled to undertake the exploration, development and utilization of the natural resources of the
Philippines. When in the mind of the Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may
apply the "grandfather rule."
 45

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of in relation to all other pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209,
Appeals Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby and authorizing Revenue Examiner Rodolfo de Leon, one of herein respondents, to make and
AFFIRMED. file the application for search warrant which was attached to the letter.

SO ORDERED. In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness,
respondent Arturo Logronio, went to the Court of First Instance of Rizal. They brought with them
EN BANC the following papers: respondent Vera’s aforesaid letter-request; an application for search
warrant already filled up but still unsigned by respondent De Leon; an affidavit of respondent
[G.R. No. L-32409. February 27, 1971.] Logronio subscribed before respondent De Leon; a deposition in printed form of respondent
Logronio already accomplished and signed by him but not yet subscribed; and a search warrant
BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. JUDGE already accomplished but still unsigned by respondent Judge.
VIVENCIO M. RUIZ, MISAEL P. VERA, in his capacity as Commissioner of Internal
Revenue, ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ, MIMIR At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed
DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE, JOHN DOE, and JOHN his Deputy Clerk of Court to take the depositions of respondents De Leon and Logronio. After
DOE, Respondents. the session had adjourned, respondent Judge was informed that the depositions had already
been taken. The stenographer, upon request of respondent Judge, read to him her stenographic
San Juan, Africa, Gonzales & San Agustin, for Petitioners. notes; and thereafter, respondent Judge asked respondent Logronio to take the oath and
warned him that if his deposition was found to be false and without legal basis, he could be
Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista, charged for perjury. Respondent Judge signed respondent de Leon’s application for search
Solicitor Pedro A. Ramirez and Special Attorney Jaime M. Maza for Respondents. warrant and respondent Logronio’s deposition, Search Warrant No. 2-M-70 was then sign by
respondent Judge and accordingly issued.

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

VILLAMOR, J.:
This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of
preliminary mandatory and prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., a
corporation duly organized and existing under the laws of the Philippines, and its President,
Frederick E. Seggerman, pray this Court to declare null and void Search Warrant No. 2-M-70
issued by respondent Judge on February 25, 1970; to order respondents to desist from
enforcing the same and/or keeping the documents, papers and effects seized by virtue thereof,
as well as from enforcing the tax assessments on petitioner corporation alleged by petitioners to
have been made on the basis of the said documents, papers and effects, and to order the return
of the latter to petitioners. We gave due course to the petition but did not issue the writ of
preliminary injunction prayed for therein.
The pertinent facts of this case, as gathered from record, are as follows:chanrob1es virtual 1aw
library
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a
letter addressed to respondent Judge Vivencio M. Ruiz requesting the issuance of a search
warrant against petitioners for violation of Section 46(a) of the National Internal Revenue Code,
On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying that
the search warrant be quashed, dissolved or recalled, that preliminary prohibitory and
mandatory writs of injunction be issued, that the search warrant be declared null and void, and
that the respondents be ordered to pay petitioners, jointly and severally, damages and attorney’s
fees. On March 18, 1970, the respondents, thru the Solicitor General, filed an answer to the
petition. After hearing, the court, presided over by respondent Judge, issued on July 29, 1970,
an order dismissing the petition for dissolution of the search warrant. In the meantime, or on
April 16, 1970, the Bureau of Internal Revenue made tax assessments on petitioner corporation
in the total sum of P2,594,729.97, partly, if not entirely, based on the documents thus seized.
Petitioners came to this Court.
The petition should be granted for the following reasons:chanrob1es virtual 1aw library
1. Respondent Judge failed to personally examine the complainant and his witness.
The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Court
are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their persons, houses, papers and effects against
unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon
probable cause, to be determined by the judge after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing the place to be
searched, and the persons or things to be seized." (Art. III, Sec. 1, Constitution.)
 46

"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are
"SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue but upon incorporating in our constitution something of a fundamental character. Now, before a judge
probable cause in connection with one specific offense to be determined by the judge or justice could issue a search warrant, he must be under the obligation to examine personally under oath
of the peace after examination under oath or affirmation of the complainant and the witnesses the complainant and if he has any witness, the witnesses that he may produce . . ."cralaw
he may produce, and particularly describing the place to be searched and the persons or things virtua1aw library
to be seized.
The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and
"No search warrant shall issue for more than one specific offense. candid, for it requires the judge, before issuing a search warrant, to "personally examine on oath
or affirmation the complainant and any witnesses he may produce . . ."cralaw virtua1aw library
"SEC. 4. Examination of the applicant. — The judge or justice of the peace must, before issuing
the warrant, personally examine on oath or affirmation the complainant and any witnesses he Personal examination by the judge of the complainant and his witnesses is necessary to enable
may produce and take their depositions in writing, and attach them to the record, in addition to him to determine the existence or non-existence of a probable cause, pursuant to Art. III, Sec. 1,
any affidavits presented to him." (Rule 126, Revised Rules of Court.) par. 3, of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court, both of which
prohibit the issuance of warrants except "upon probable cause." The determination of whether or
The examination of the complainant and the witnesses he may produce, required by Art. III, Sec. not a probable cause exists calls for the exercise of judgment after a judicial appraisal of facts
1, par. 3, of the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, and should not be allowed to be delegated in the absence of any rule to the contrary.
should be conducted by the judge himself and not by others. The phrase "which shall be
determined by the judge after examination under oath or affirmation of the complainant and the In the case at bar, no personal examination at all was conducted by respondent Judge of the
witnesses he may produce," appearing in the said constitutional provision, was introduced by complainant (respondent De Leon) and his witness (respondent Logronio). While it is true that
Delegate Francisco as an amendment to the draft submitted by the Sub-Committee of Seven. the complainant’s application for search warrant and the witness’ printed-form deposition were
The following discussion in the Constitutional Convention (Laurel, Proceedings of the Philippine subscribed and sworn to before respondent Judge, the latter did not ask either of the two any
Constitutional Convention, Vol. III, pp. 755-757) is enlightening:jgc:chanrobles.com.ph question the answer to which could possibly be the basis for determining whether or not there
was probable cause against herein petitioners. Indeed, the participants seem to have attached
"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano. so little significance to the matter that notes of the proceedings before respondent Judge were
not even taken. At this juncture it may be well to recall the salient facts. The transcript of
En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the hearing of
justicia mediante el registro inmediato y la incautacion del cuerpo del delito, no cree Su Señoria this case in the court below shows that per instruction of respondent Judge, Mr. Eleodoro V.
que causaria cierta demora el procedimiento apuntado en su enmienda en tal forma que podria Gonzales, Special Deputy Clerk of Court, took the depositions of the complainant and his
frustrar los fines de la justicia o si Su Señoria encuentra un remedio para esto casos con el fin witness, and that stenographic notes thereof were taken by Mrs. Gaspar. At that time
de compaginar los fines de la justicia con los derechos del individuo en su persona, bienes respondent Judge was at the sala hearing a case. After respondent Judge was through with the
etcetera, etcetera. hearing, Deputy Clerk Gonzales, stenographer Gaspar, complainant De Leon and witness
Logronio went to respondent Judge’s chamber and informed the Judge that they had finished
"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Señoria pregunta por la the depositions. Respondent Judge then requested the stenographer to read to him her
siguiente razon: el que solicita un mandamiento de registro tiene que hacerlo por escrito y ese stenographic notes. Special Deputy Clerk Gonzales testified as follows:jgc:chanrobles.com.ph
escrito no aparecer en la Mesa del Juez sin que alguien vaya el juez a presentar ese escrito o
peticion de sucuestro. Esa persona que presenta el registro puede ser el mismo denunciante o "A And after finishing reading the stenographic notes, the Honorable Judge requested or
alguna persona que solicita dicho mandamiento de registro. Ahora toda la enmienda en esos instructed them, requested Mr. Logronio to raise his hand and warned him if his deposition will
casos consiste en que haya peticion de registro y el juez no se atendra solamente a sea be found to be false and without legal basis, he can be charged criminally for perjury. The
peticion sino que el juez examiner a ese denunciante y si tiene testigos tambin examiner a los Honorable Court told Mr. Logronio whether he affirms the facts contained in his deposition and
testigos. the affidavit executed before Mr. Rodolfo de Leon.

"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese denunciante por escrito "Q And thereafter?
siempre requeriria algun tiempo?.
"A And thereafter, he signed the deposition of Mr. Logronio.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo lo
posible las vejaciones injustas con la expedicion arbitraria de los mandamientos de registro. "Q Who is this he?
Creo que entre dos males debemos escoger. el menor.
"A The Honorable Judge.
x       x       x
"Q The deposition or the affidavit?
 47

"A The affidavit, Your Honor."cralaw virtua1aw library Code. The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax
returns), which are interrelated. The second is the violation of Sec. 53 (withholding of income
Thereafter, respondent Judge signed the search warrant. taxes at source). The third is the violation of Sec. 208 (unlawful pursuit of business or
occupation); and the fourth is the violation of Sec. 209 (failure to make a return of receipts,
The participation of respondent Judge in the proceedings which led to the issuance of Search sales, business or gross value of output actually removed or to pay the tax due thereon). Even in
Warrant No. 2-M-70 was thus limited to listening to the stenographer’s readings of her notes, to their classification the six above-mentioned provisions are embraced in two different titles: Secs.
a few words of warning against the commission of perjury, and to administering the oath to the 46(a), 53, 72 and 73 are under Title II (Income Tax); while Secs. 208 and 209 are under Title V
complainant and his witness. This cannot be consider a personal examination. If there was an (Privilege Tax on Business and Occupation).
examination at all of the complainant and his witness, it was the one conducted by the Deputy
Clerk of Court. But, as stated, the Constitution and the rules require a personal examination by Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA
the judge. It was precisely on account of the intention of the delegates to the Constitutional 383), is not applicable, because there the search warrants were issued for "violation of Central
Convention to make it a duty of the issuing judge to personally examine the complainant and his Bank Laws, Internal Revenue (Code) and Revised Penal Code;" whereas, here Search Warrant
witnesses that the question of how much time would be consumed by the judge in examining No 2-M-70 was issued for violation of only one code, i.e., the National Internal Revenue Code.
them came up before the Convention, as can be seen from the record of the proceedings quoted The distinction more apparent than real, because it was precisely on account of the Stonehill
above. The reading of the stenographic notes to respondent Judge did not constitute sufficient incident, which occurred sometime before the present Rules of Court took effect on January 1,
compliance with the constitutional mandate and the rule; for by that manner respondent Judge 1964, that this Court amended the former rule by inserting therein the phrase "in connection with
did not have the opportunity to observe the demeanor of the complainant and his witness, and to one specific offense," and adding the sentence "No search warrant shall issue for more than one
propound initial and follow-up questions which the judicial mind, on account of its training, was in specific offense," in what is now Sec. 3, Rule 126. Thus we said in
the best position to conceive. These were important in arriving at a sound inference on the all- Stonehill:jgc:chanrobles.com.ph
important question of whether or not there was probable cause.
"Such is the seriousness of the irregularities committed in connection with the disputed search
2. The search warrant was issued for more than one specific offense. warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of
Court that ‘a search warrant shall not issue but upon probable cause in connection with one
Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National Internal specific offense.’ Not satisfied with this qualification, the Court added thereto a paragraph,
Revenue Code in relation to all other pertinent provisions thereof particularly Secs. 53, 72, 73, directing that ‘no search warrant shall issue for more than one specific offense.’"
208 and 209." The question is: Was the said search warrant issued "in connection with one
specific offense," as required by Sec. 3, Rule 126? 3. The search warrant does not particularly describe the things to be seized.

To arrive at the correct answer it is essential to examine closely the provisions of the Tax Code The documents, papers and effects sought to be seized are described in Search Warrant No. 2-
referred to above. Thus we find the following:chanrob1es virtual 1aw library M-70 in this manner:jgc:chanrobles.com.ph

Sec. 46(a) requires the filing of income tax returns by corporations. "Unregistered and private books of accounts (ledgers, journals, columnars, receipts and
disbursements books, customers ledgers); receipts for payments received; certificates of stocks
Sec. 53 requires the withholding of income taxes at source. and securities; contracts, promissory notes and deeds of sale; telex and coded messages;
business communications, accounting and business records; checks and check stubs; records
Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false and of bank deposits and withdrawals; and records of foreign remittances, covering the years 1966
fraudulent returns. to 1970."cralaw virtua1aw library

Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply the The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec.
information required under the Tax Code. 3, Rule 126 of the Revised Rules of Court, that the warrant should particularly describe the
things to be seized.
Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures
any article subject to a specific tax, without having paid the privilege tax therefore, or who aids or In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion,
abets in the conduct of illicit distilling, rectifying, compounding, or illicit manufacture of any article said:jgc:chanrobles.com.ph
subject to specific tax . . .," and provides that in the case of a corporation, partnership, or
association, the official and/or employee who caused the violation shall be responsible. "The grave violation of the Constitution made in the application for the contested search
warrants was compounded by the description therein made of the effects to be searched for and
Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of seized, to wit:chanrob1es virtual 1aw library
output removed, or to pay the tax due thereon.
‘Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers,
The search warrant in question was issued for at least four distinct offenses under the Tax portfolios, credit journals, typewriters, and other documents and/or paper showing all business

transactions including disbursement receipts, balance sheets and related profit and loss
statements.’
"Thus, the warrants authorized the search for and seizure of records pertaining to all business
transactions of petitioners herein, regardless of whether the transactions were legal or illegal.
The warrants sanctioned the seizure of all records of the petitioners and the aforementioned
corporations, whatever their nature, thus openly contravening the explicit command of our Bill of
Rights — that the things to be seized be particularly described — as well as tending to defeat its
major objective: the elimination of general warrants."cralaw virtua1aw library
While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the
said warrant nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the
elimination of general warrants, for the language used therein is so all-embracing as to include
all conceivable records of petitioner corporation, which, if seized, could possibly render its
business inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to
explain the purpose of the requirement that the warrant should particularly describe the place to
be searched and the things to be seized, to wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that a
search warrant should particularly describe the place to be searched and the things to be
seized. The evident purpose and intent of this requirement is to limit the things to be seized to
those, and only those, particularly described in the search warrant — to leave the officers of the
law with no discretion regarding what articles they shall seize, to the end that ‘unreasonable
searches and seizures’ may not be made, — that abuses may not be committed. That this is the
correct interpretation of this constitutional provision is borne out by American authorities."cralaw
virtua1aw library
The purpose as thus explained could, surely and effectively, be defeated under the search
warrant issued in this case.
A search warrant may be said to particularly describe the things to be seized when the
description therein is as specific as the circumstances will ordinarily allow (People v. Rubio; 57
Phil. 384); or when the description expresses a conclusion of fact — not of law — by which the
warrant officer may be guided in making the search and seizure (idem., dissent of Abad
Santos, J.,); or when the things described are limited to those which bear direct relation to the
offense for which the warrant is being issued (Sec. 2, Rule 126, Revised Rules of Court). The
herein search warrant does not conform to any of the foregoing tests. If the articles desired to be
seized have any direct relation to an offense committed, the applicant must necessarily have
some evidence, other than those articles, to prove the said offense; and the articles subject of
search and seizure should come in handy merely to strengthen such evidence. In this event, the
description contained in the herein disputed warrant should have mentioned, at least, the dates,
amounts, persons, and other pertinent data regarding the receipts of payments, certificates of
stocks and securities, contracts, promissory notes, deeds of sale, messages and
communications, checks, bank deposits and withdrawals, records of foreign remittances, among
others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed to file a motion for
reconsideration of respondent Judge’s order of July 29, 1970. The contention is without merit. In
the first place, when the questions raised before this Court are the same as those which were
48
squarely raised in and passed upon by the court below, the filing of a motion for reconsideration
in said court before certiorari can be instituted in this Court is no longer a prerequisite. (Pajo,
etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the rule requiring the filing of a
motion for reconsideration before an application for a writ of certiorari can be entertained was
never intended to be applied without considering the circumstances. (Matutina v. Buslon, Et Al.,
109 Phil., 140.) In the case at bar time is of the essence in view of the tax assessments sought
to be enforced by respondent officers of the Bureau of Internal Revenue against petitioner
corporation, On account of which immediate and more direct action becomes necessary.
(Matute v. Court of Appeals, Et Al., 26 SCRA 768.) Lastly, the rule does not apply where, as in
this case, the deprivation of petitioners’ fundamental right to due process taints the proceeding
against them in the court below not only with irregularity but also with nullity. (Matute v. Court of
Appeals, Et Al., supra.)
It is next contended by respondents that a corporation is not entitled to protection against
unreasonable search and seizures. Again, we find no merit in the contention.
"Although, for the reasons above stated, we are of the opinion that an officer of a corporation
which is charged with a violation of a statute of the state of its creation, or of an act of Congress
passed in the exercise of its constitutional powers, cannot refuse to produce the books and
papers of such corporation, we do not wish to be understood as holding that a corporation is not
entitled to immunity, under the 4th Amendment, against unreasonable searches and seizures. A
corporation is, after all, but an association of individuals under an assumed name and with a
distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities
appropriate to such body. Its property cannot be taken without compensation. It can only be
proceeded against by due process of law, and is protected, under the 14th Amendment, against
unlawful discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different rule
applied to a corporation, the ground that it was not privileged from producing its books and
papers. But the rights of a corporation against unlawful search and seizure are to be protected
even if the same result might have been achieved in a lawful way." (Silverthorne Lumber
Company, Et. Al. v. United States of America, 251 U.S. 385, 64 L. ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a
corporation to object against unreasonable searches and seizures, thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have no cause of action to assail the
legality of the contested warrants and of the seizures made in pursuance thereof, for the simple
reason that said corporations have their respective personalities, separate and distinct from the
personality of herein petitioners, regardless of the amount of shares of stock or the interest of
each of them in said corporations, whatever, the offices they hold therein may be. Indeed, it is
well settled that the legality of a seizure can be contested only by the party whose rights have
been impaired thereby, and that the objection to an unlawful search and seizure is purely
personal and cannot be availed of by third parties. Consequently, petitioners herein may not
validly object to the use in evidence against them of the documents, papers and things seized
from the offices and premises of the corporations adverted to above, since the right to object to
the admission of said papers in evidence belongs exclusively to the corporations, to whom the
seized effects belong, and may not be invoked by the corporate officers in proceedings against
them in their individual capacity . . ."cralaw virtua1aw library
In the Stonehill case only the officers of the various corporations in whose offices documents,

papers and effects were searched and seized were the petitioners. In the case at bar, the
corporation to whom the seized documents belong, and whose rights have thereby been
impaired, is itself a petitioner. On that score, petitioner corporation here stands on a different
footing from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion were, if not entirely — as claimed by
petitioners — at least partly — as in effect admitted by respondents — based on the documents
seized by virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the assessments were
made some one and one-half months after the search and seizure on February 25, 1970, is a
strong indication that the documents thus seized served as basis for the assessments. Those
assessments should therefore not be enforced.
PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70
issued by respondent Judge is declared null and void; respondents are permanently enjoined
from enforcing the said search warrant; the documents, papers and effects seized thereunder
are ordered to be returned to petitioners; and respondent officials the Bureau of Internal
Revenue and their representatives are permanently enjoined from enforcing the assessments
mentioned in Annex "G" of the present petition, as well as other assessments based on the
documents, papers and effects seized under the search warrant herein nullified, and from using
the same against petitioners in any criminal or other proceeding. No pronouncement as to costs.
EN BANC
G.R. No. L-19550             June 19, 1967
HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL
BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in
his capacity as Acting Director, National Bureau of Investigation; SPECIAL
PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and MANUEL VILLAREAL, JR. and
ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN, Municipal Court of Manila;
JUDGE ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES CALUAG,
Court of First Instance of Rizal-Quezon City Branch, and JUDGE DAMIAN JIMENEZ,
Municipal Court of Quezon City, respondents.
Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer and Juan T. David for
petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P. de Castro,
Assistant Solicitor General Frine C. Zaballero, Solicitor Camilo D. Quiason and Solicitor C.
Padua for respondents.
CONCEPCION, C.J.:
Upon application of the officers of the government named on the margin1 — hereinafter referred
to as Respondents-Prosecutors — several judges2 — hereinafter referred to as Respondents-
Judges — issued, on different dates,3 a total of 42 search warrants against petitioners
herein4 and/or the corporations of which they were officers,5 directed to the any peace officer, to
search the persons above-named and/or the premises of their offices, warehouses and/or
residences, and to seize and take possession of the following personal property to wit:
Books of accounts, financial records, vouchers, correspondence, receipts, ledgers, journals,
portfolios, credit journals, typewriters, and other documents and/or papers showing all business
49
transactions including disbursements receipts, balance sheets and profit and loss statements
and Bobbins (cigarette wrappers).
as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or
"used or intended to be used as the means of committing the offense," which is described in the
applications adverted to above as "violation of Central Bank Laws, Tariff and Customs Laws,
Internal Revenue (Code) and the Revised Penal Code."
Alleging that the aforementioned search warrants are null and void, as contravening the
Constitution and the Rules of Court — because, inter alia: (1) they do not describe with
particularity the documents, books and things to be seized; (2) cash money, not mentioned in
the warrants, were actually seized; (3) the warrants were issued to fish evidence against the
aforementioned petitioners in deportation cases filed against them; (4) the searches and
seizures were made in an illegal manner; and (5) the documents, papers and cash money
seized were not delivered to the courts that issued the warrants, to be disposed of in accordance
with law — on March 20, 1962, said petitioners filed with the Supreme Court this original action
for certiorari, prohibition, mandamus and injunction, and prayed that, pending final disposition of
the present case, a writ of preliminary injunction be issued restraining Respondents-
Prosecutors, their agents and /or representatives from using the effects seized as
aforementioned or any copies thereof, in the deportation cases already adverted to, and that, in
due course, thereafter, decision be rendered quashing the contested search warrants and
declaring the same null and void, and commanding the respondents, their agents or
representatives to return to petitioners herein, in accordance with Section 3, Rule 67, of the
Rules of Court, the documents, papers, things and cash moneys seized or confiscated under the
search warrants in question.
In their answer, respondents-prosecutors alleged, 6 (1) that the contested search warrants are
valid and have been issued in accordance with law; (2) that the defects of said warrants, if any,
were cured by petitioners' consent; and (3) that, in any event, the effects seized are admissible
in evidence against herein petitioners, regardless of the alleged illegality of the aforementioned
searches and seizures.
On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the petition.
However, by resolution dated June 29, 1962, the writ was partially lifted or dissolved, insofar as
the papers, documents and things seized from the offices of the corporations above mentioned
are concerned; but, the injunction was maintained as regards the papers, documents and things
found and seized in the residences of petitioners herein.7
Thus, the documents, papers, and things seized under the alleged authority of the warrants in
question may be split into two (2) major groups, namely: (a) those found and seized in the
offices of the aforementioned corporations, and (b) those found and seized in the residences of
petitioners herein.
As regards the first group, we hold that petitioners herein have no cause of action to assail the
legality of the contested warrants and of the seizures made in pursuance thereof, for the simple
reason that said corporations have their respective personalities, separate and distinct from the
personality of herein petitioners, regardless of the amount of shares of stock or of the interest of
each of them in said corporations, and whatever the offices they hold therein may be.8 Indeed, it
is well settled that the legality of a seizure can be contested only by the party whose rights have
been impaired thereby,9 and that the objection to an unlawful search and seizure is purely
personal and cannot be availed of by third parties. 10 Consequently, petitioners herein may not
validly object to the use in evidence against them of the documents, papers and things seized
from the offices and premises of the corporations adverted to above, since the right to object to

the admission of said papers in evidence belongs exclusively to the corporations, to whom the
seized effects belong, and may not be invoked by the corporate officers in proceedings against
them in their individual capacity. 11 Indeed, it has been held:
. . . that the Government's action in gaining possession of papers belonging to
the corporation did not relate to nor did it affect the personal defendants. If these papers were
unlawfully seized and thereby the constitutional rights of or any one were invaded, they were the
rights of the corporation and not the rights of the other defendants. Next, it is clear that a
question of the lawfulness of a seizure can be raised only by one whose rights have been
invaded. Certainly, such a seizure, if unlawful, could not affect the constitutional rights of
defendants whose property had not been seized or the privacy of whose homes had not been
disturbed; nor could they claim for themselves the benefits of the Fourth Amendment, when its
violation, if any, was with reference to the rights of another. Remus vs. United
States (C.C.A.)291 F. 501, 511. It follows, therefore, that the question of the admissibility of the
evidence based on an alleged unlawful search and seizure does not extend to the personal
defendants but embraces only the corporation whose property was taken. . . . (A Guckenheimer
& Bros. Co. vs. United States, [1925] 3 F. 2d. 786, 789, Emphasis supplied.)
With respect to the documents, papers and things seized in the residences of petitioners herein,
the aforementioned resolution of June 29, 1962, lifted the writ of preliminary injunction previously
issued by this Court, 12 thereby, in effect, restraining herein Respondents-Prosecutors from using
them in evidence against petitioners herein.
In connection with said documents, papers and things, two (2) important questions need be
settled, namely: (1) whether the search warrants in question, and the searches and seizures
made under the authority thereof, are valid or not, and (2) if the answer to the preceding
question is in the negative, whether said documents, papers and things may be used in
evidence against petitioners herein.1äwphï1.ñët
Petitioners maintain that the aforementioned search warrants are in the nature of general
warrants and that accordingly, the seizures effected upon the authority there of are null and void.
In this connection, the Constitution 13 provides:
The right of the people to be secure in their persons, houses, papers, and effects against
unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon
probable cause, to be determined by the judge after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing the place to be
searched, and the persons or things to be seized.
Two points must be stressed in connection with this constitutional mandate, namely: (1) that no
warrant shall issue but upon probable cause, to be determined by the judge in the manner set
forth in said provision; and (2) that the warrant shall particularly describe the things to be seized.
None of these requirements has been complied with in the contested warrants. Indeed, the
same were issued upon applications stating that the natural and juridical person therein named
had committed a "violation of Central Ban Laws, Tariff and Customs Laws, Internal Revenue
(Code) and Revised Penal Code." In other words, no specific offense had been alleged in said
applications. The averments thereof with respect to the offense committed were abstract. As a
consequence, it was impossible for the judges who issued the warrants to have found the
existence of probable cause, for the same presupposes the introduction of competent proof that
the party against whom it is sought has performed particular acts, or
committed specific omissions, violating a given provision of our criminal laws. As a matter of
fact, the applications involved in this case do not allege any specific acts performed by herein
50
petitioners. It would be the legal heresy, of the highest order, to convict anybody of a "violation of
Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal
Code," — as alleged in the aforementioned applications — without reference to any determinate
provision of said laws or
To uphold the validity of the warrants in question would be to wipe out completely one of the
most fundamental rights guaranteed in our Constitution, for it would place the sanctity of the
domicile and the privacy of communication and correspondence at the mercy of the whims
caprice or passion of peace officers. This is precisely the evil sought to be remedied by the
constitutional provision above quoted — to outlaw the so-called general warrants. It is not
difficult to imagine what would happen, in times of keen political strife, when the party in power
feels that the minority is likely to wrest it, even though by legal means.
Such is the seriousness of the irregularities committed in connection with the disputed search
warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of
Court 14 by providing in its counterpart, under the Revised Rules of Court 15 that "a search
warrant shall not issue but upon probable cause in connection with one specific offense." Not
satisfied with this qualification, the Court added thereto a paragraph, directing that "no search
warrant shall issue for more than one specific offense."
The grave violation of the Constitution made in the application for the contested search warrants
was compounded by the description therein made of the effects to be searched for and seized,
to wit:
Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers,
portfolios, credit journals, typewriters, and other documents and/or papers showing all business
transactions including disbursement receipts, balance sheets and related profit and loss
statements.
Thus, the warrants authorized the search for and seizure of records pertaining to all business
transactions of petitioners herein, regardless of whether the transactions were legal or illegal.
The warrants sanctioned the seizure of all records of the petitioners and the aforementioned
corporations, whatever their nature, thus openly contravening the explicit command of our Bill of
Rights — that the things to be seized be particularly described — as well as tending to defeat its
major objective: the elimination of general warrants.
Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors maintain that,
even if the searches and seizures under consideration were unconstitutional, the documents,
papers and things thus seized are admissible in evidence against petitioners herein. Upon
mature deliberation, however, we are unanimously of the opinion that the position taken in the
Moncado case must be abandoned. Said position was in line with the American common law
rule, that the criminal should not be allowed to go free merely "because the constable has
blundered," 16 upon the theory that the constitutional prohibition against unreasonable searches
and seizures is protected by means other than the exclusion of evidence unlawfully
obtained, 17 such as the common-law action for damages against the searching officer, against
the party who procured the issuance of the search warrant and against those assisting in the
execution of an illegal search, their criminal punishment, resistance, without liability to an
unlawful seizure, and such other legal remedies as may be provided by other laws.
However, most common law jurisdictions have already given up this approach and eventually
adopted the exclusionary rule, realizing that this is the only practical means of enforcing the
constitutional injunction against unreasonable searches and seizures. In the language of Judge
Learned Hand:

As we understand it, the reason for the exclusion of evidence competent as such, which has
been unlawfully acquired, is that exclusion is the only practical way of enforcing the
constitutional privilege. In earlier times the action of trespass against the offending official may
have been protection enough; but that is true no longer. Only in case the prosecution which itself
controls the seizing officials, knows that it cannot profit by their wrong will that wrong be
repressed.18
In fact, over thirty (30) years before, the Federal Supreme Court had already declared:
If letters and private documents can thus be seized and held and used in evidence against a
citizen accused of an offense, the protection of the 4th Amendment, declaring his rights to be
secure against such searches and seizures, is of no value, and, so far as those thus placed are
concerned, might as well be stricken from the Constitution. The efforts of the courts and their
officials to bring the guilty to punishment, praiseworthy as they are, are not to be aided by the
sacrifice of those great principles established by years of endeavor and suffering which have
resulted in their embodiment in the fundamental law of the land.19
This view was, not only reiterated, but, also, broadened in subsequent decisions on the same
Federal Court. 20 After reviewing previous decisions thereon, said Court held, in Mapp vs.
Ohio (supra.):
. . . Today we once again examine the Wolf's constitutional documentation of the right of privacy
free from unreasonable state intrusion, and after its dozen years on our books, are led by it to
close the only courtroom door remaining open to evidence secured by official lawlessness in
flagrant abuse of that basic right, reserved to all persons as a specific guarantee against that
very same unlawful conduct. We hold that all evidence obtained by searches and seizures in
violation of the Constitution is, by that same authority, inadmissible in a State.
Since the Fourth Amendment's right of privacy has been declared enforceable against the
States through the Due Process Clause of the Fourteenth, it is enforceable against them by the
same sanction of exclusion as it used against the Federal Government. Were it otherwise, then
just as without the Weeks rule the assurance against unreasonable federal searches and
seizures would be "a form of words," valueless and underserving of mention in a perpetual
charter of inestimable human liberties, so too, without that rule the freedom from state invasions
of privacy would be so ephemeral and so neatly severed from its conceptual nexus with the
freedom from all brutish means of coercing evidence as not to permit this Court's high regard as
a freedom "implicit in the concept of ordered liberty." At the time that the Court held in Wolf that
the amendment was applicable to the States through the Due Process Clause, the cases of this
Court as we have seen, had steadfastly held that as to federal officers the Fourth Amendment
included the exclusion of the evidence seized in violation of its provisions. Even Wolf "stoutly
adhered" to that proposition. The right to when conceded operatively enforceable against the
States, was not susceptible of destruction by avulsion of the sanction upon which its protection
and enjoyment had always been deemed dependent under the Boyd, Weeks and Silverthorne
Cases. Therefore, in extending the substantive protections of due process to all constitutionally
unreasonable searches — state or federal — it was logically and constitutionally necessarily that
the exclusion doctrine — an essential part of the right to privacy — be also insisted upon as an
essential ingredient of the right newly recognized by the Wolf Case. In short, the admission of
the new constitutional Right by Wolf could not tolerate denial of its most important constitutional
privilege, namely, the exclusion of the evidence which an accused had been forced to give by
reason of the unlawful seizure. To hold otherwise is to grant the right but in reality to withhold its
privilege and enjoyment. Only last year the Court itself recognized that the purpose of the
51
exclusionary rule to "is to deter — to compel respect for the constitutional guaranty in the only
effectively available way — by removing the incentive to disregard it" . . . .
The ignoble shortcut to conviction left open to the State tends to destroy the entire system of
constitutional restraints on which the liberties of the people rest. Having once recognized that
the right to privacy embodied in the Fourth Amendment is enforceable against the States, and
that the right to be secure against rude invasions of privacy by state officers is, therefore
constitutional in origin, we can no longer permit that right to remain an empty promise. Because
it is enforceable in the same manner and to like effect as other basic rights secured by its Due
Process Clause, we can no longer permit it to be revocable at the whim of any police officer
who, in the name of law enforcement itself, chooses to suspend its enjoyment. Our decision,
founded on reason and truth, gives to the individual no more than that which the Constitution
guarantees him to the police officer no less than that to which honest law enforcement is
entitled, and, to the courts, that judicial integrity so necessary in the true administration of
justice. (emphasis ours.)
Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit of the
constitutional injunction against unreasonable searches and seizures. To be sure, if the
applicant for a search warrant has competent evidence to establish probable cause of the
commission of a given crime by the party against whom the warrant is intended, then there is no
reason why the applicant should not comply with the requirements of the fundamental law. Upon
the other hand, if he has no such competent evidence, then it is not possible for the Judge to
find that there is probable cause, and, hence, no justification for the issuance of the warrant. The
only possible explanation (not justification) for its issuance is the necessity of fishing evidence of
the commission of a crime. But, then, this fishing expedition is indicative of the absence of
evidence to establish a probable cause.
Moreover, the theory that the criminal prosecution of those who secure an illegal search warrant
and/or make unreasonable searches or seizures would suffice to protect the constitutional
guarantee under consideration, overlooks the fact that violations thereof are, in general,
committed By agents of the party in power, for, certainly, those belonging to the minority could
not possibly abuse a power they do not have. Regardless of the handicap under which the
minority usually — but, understandably — finds itself in prosecuting agents of the majority, one
must not lose sight of the fact that the psychological and moral effect of the possibility 21 of
securing their conviction, is watered down by the pardoning power of the party for whose benefit
the illegality had been committed.
In their Motion for Reconsideration and Amendment of the Resolution of this Court dated June
29, 1962, petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House No.
2008, Dewey Boulevard, House No. 1436, Colorado Street, and Room No. 304 of the Army-
Navy Club, should be included among the premises considered in said Resolution as residences
of herein petitioners, Harry S. Stonehill, Robert P. Brook, John J. Brooks and Karl Beck,
respectively, and that, furthermore, the records, papers and other effects seized in the offices of
the corporations above referred to include personal belongings of said petitioners and other
effects under their exclusive possession and control, for the exclusion of which they have a
standing under the latest rulings of the federal courts of federal courts of the United States. 22
We note, however, that petitioners' theory, regarding their alleged possession of and control
over the aforementioned records, papers and effects, and the alleged "personal" nature thereof,
has Been Advanced, not in their petition or amended petition herein, but in the Motion for
Reconsideration and Amendment of the Resolution of June 29, 1962. In other words, said theory
would appear to be readjustment of that followed in said petitions, to suit the approach intimated

in the Resolution sought to be reconsidered and amended. Then, too, some of the affidavits or
copies of alleged affidavits attached to said motion for reconsideration, or submitted in support
thereof, contain either inconsistent allegations, or allegations inconsistent with the theory now
advanced by petitioners herein.
Upon the other hand, we are not satisfied that the allegations of said petitions said motion for
reconsideration, and the contents of the aforementioned affidavits and other papers submitted in
support of said motion, have sufficiently established the facts or conditions contemplated in the
cases relied upon by the petitioners; to warrant application of the views therein expressed,
should we agree thereto. At any rate, we do not deem it necessary to express our opinion
thereon, it being best to leave the matter open for determination in appropriate cases in the
future.
We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby,
abandoned; that the warrants for the search of three (3) residences of herein petitioners, as
specified in the Resolution of June 29, 1962, are null and void; that the searches and seizures
therein made are illegal; that the writ of preliminary injunction heretofore issued, in connection
with the documents, papers and other effects thus seized in said residences of herein petitioners
is hereby made permanent; that the writs prayed for are granted, insofar as the documents,
papers and other effects so seized in the aforementioned residences are concerned; that the
aforementioned motion for Reconsideration and Amendment should be, as it is hereby, denied;
and that the petition herein is dismissed and the writs prayed for denied, as regards the
documents, papers and other effects seized in the twenty-nine (29) places, offices and other
premises enumerated in the same Resolution, without special pronouncement as to costs.
It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.
CASTRO, J., concurring and dissenting:
From my analysis of the opinion written by Chief Justice Roberto Concepcion and from the
import of the deliberations of the Court on this case, I gather the following distinct conclusions:
1. All the search warrants served by the National Bureau of Investigation in this case are general
warrants and are therefore proscribed by, and in violation of, paragraph 3 of section 1 of Article
III (Bill of Rights) of the Constitution;
2. All the searches and seizures conducted under the authority of the said search warrants were
consequently illegal;
3. The non-exclusionary rule enunciated in Moncado vs. People, 80 Phil. 1, should be, and is
declared, abandoned;
4. The search warrants served at the three residences of the petitioners are expressly declared
null and void the searches and seizures therein made are expressly declared illegal; and the writ
of preliminary injunction heretofore issued against the use of the documents, papers and effect
seized in the said residences is made permanent; and
5. Reasoning that the petitioners have not in their pleadings satisfactorily demonstrated that they
have legal standing to move for the suppression of the documents, papers and effects seized in
the places other than the three residences adverted to above, the opinion written by the Chief
Justice refrains from expressly declaring as null and void the such warrants served at such
52
other places and as illegal the searches and seizures made therein, and leaves "the matter open
for determination in appropriate cases in the future."
It is precisely the position taken by the Chief Justice summarized in the immediately preceding
paragraph (numbered 5) with which I am not in accord.
I do not share his reluctance or unwillingness to expressly declare, at this time, the nullity of the
search warrants served at places other than the three residences, and the illegibility of the
searches and seizures conducted under the authority thereof. In my view even the exacerbating
passions and prejudices inordinately generated by the environmental political and moral
developments of this case should not deter this Court from forthrightly laying down the law not
only for this case but as well for future cases and future generations. All the search warrants,
without exception, in this case are admittedly general, blanket and roving warrants and are
therefore admittedly and indisputably outlawed by the Constitution; and the searches and
seizures made were therefore unlawful. That the petitioners, let us assume in gratia argumente,
have no legal standing to ask for the suppression of the papers, things and effects seized from
places other than their residences, to my mind, cannot in any manner affect, alter or otherwise
modify the intrinsic nullity of the search warrants and the intrinsic illegality of the searches and
seizures made thereunder. Whether or not the petitioners possess legal standing the said
warrants are void and remain void, and the searches and seizures were illegal and remain
illegal. No inference can be drawn from the words of the Constitution that "legal standing" or the
lack of it is a determinant of the nullity or validity of a search warrant or of the lawfulness or
illegality of a search or seizure.
On the question of legal standing, I am of the conviction that, upon the pleadings submitted to
this Court the petitioners have the requisite legal standing to move for the suppression and
return of the documents, papers and effects that were seized from places other than their family
residences.
Our constitutional provision on searches and seizures was derived almost verbatim from the
Fourth Amendment to the United States Constitution. In the many years of judicial construction
and interpretation of the said constitutional provision, our courts have invariably regarded as
doctrinal the pronouncement made on the Fourth Amendment by federal courts, especially the
Federal Supreme Court and the Federal Circuit Courts of Appeals.
The U.S. doctrines and pertinent cases on standing to move for the suppression or return of
documents, papers and effects which are the fruits of an unlawful search and seizure, may be
summarized as follows; (a) ownership of documents, papers and effects gives "standing;" (b)
ownership and/or control or possession — actual or constructive — of premises searched gives
"standing"; and (c) the "aggrieved person" doctrine where the search warrant and the sworn
application for search warrant are "primarily" directed solely and exclusively against the
"aggrieved person," gives "standing."
An examination of the search warrants in this case will readily show that, excepting three, all
were directed against the petitioners personally. In some of them, the petitioners were named
personally, followed by the designation, "the President and/or General Manager" of the particular
corporation. The three warrants excepted named three corporate defendants. But the
"office/house/warehouse/premises" mentioned in the said three warrants were also the same
"office/house/warehouse/premises" declared to be owned by or under the control of the
petitioners in all the other search warrants directed against the petitioners and/or "the President
and/or General Manager" of the particular corporation. (see pages 5-24 of Petitioners' Reply of
April 2, 1962). The searches and seizures were to be made, and were actually made, in the
"office/house/warehouse/premises" owned by or under the control of the petitioners.

Ownership of matters seized gives "standing."
Ownership of the properties seized alone entitles the petitioners to bring a motion to return and
suppress, and gives them standing as persons aggrieved by an unlawful search and seizure
regardless of their location at the time of seizure. Jones vs. United States, 362 U.S. 257, 261
(1960) (narcotics stored in the apartment of a friend of the defendant); Henzel vs. United States,
296 F. 2d. 650, 652-53 (5th Cir. 1961), (personal and corporate papers of corporation of which
the defendant was president), United States vs. Jeffers, 342 U.S. 48 (1951) (narcotics seized in
an apartment not belonging to the defendant); Pielow vs. United States, 8 F. 2d 492, 493 (9th
Cir. 1925) (books seized from the defendant's sister but belonging to the defendant); Cf. Villano
vs. United States, 310 F. 2d 680, 683 (10th Cir. 1962) (papers seized in desk neither owned by
nor in exclusive possession of the defendant).
In a very recent case (decided by the U.S. Supreme Court on December 12, 1966), it was held
that under the constitutional provision against unlawful searches and seizures, a person places
himself or his property within a constitutionally protected area, be it his home or his office, his
hotel room or his automobile:
Where the argument falls is in its misapprehension of the fundamental nature and scope of
Fourth Amendment protection. What the Fourth Amendment protects is the security a man relies
upon when he places himself or his property within a constitutionally protected area, be it his
home or his office, his hotel room or his automobile. There he is protected from unwarranted
governmental intrusion. And when he puts some thing in his filing cabinet, in his desk drawer, or
in his pocket, he has the right to know it will be secure from an unreasonable search or an
unreasonable seizure. So it was that the Fourth Amendment could not tolerate the warrantless
search of the hotel room in Jeffers, the purloining of the petitioner's private papers in Gouled, or
the surreptitious electronic surveilance in Silverman. Countless other cases which have come to
this Court over the years have involved a myriad of differing factual contexts in which the
protections of the Fourth Amendment have been appropriately invoked. No doubt, the future will
bring countless others. By nothing we say here do we either foresee or foreclose factual
situations to which the Fourth Amendment may be applicable. (Hoffa vs. U.S., 87 S. Ct. 408
(December 12, 1966). See also U.S. vs. Jeffers, 342 U.S. 48, 72 S. Ct. 93 (November 13, 1951).
(Emphasis supplied).
Control of premises searched gives "standing."
Independent of ownership or other personal interest in the records and documents seized, the
petitioners have standing to move for return and suppression by virtue of their proprietary or
leasehold interest in many of the premises searched. These proprietary and leasehold interests
have been sufficiently set forth in their motion for reconsideration and need not be recounted
here, except to emphasize that the petitioners paid rent, directly or indirectly, for practically all
the premises searched (Room 91, 84 Carmen Apts; Room 304, Army & Navy Club; Premises
2008, Dewey Boulevard; 1436 Colorado Street); maintained personal offices within the
corporate offices (IBMC, USTC); had made improvements or furnished such offices; or had paid
for the filing cabinets in which the papers were stored (Room 204, Army & Navy Club); and
individually, or through their respective spouses, owned the controlling stock of the corporations
involved. The petitioners' proprietary interest in most, if not all, of the premises searched
therefore independently gives them standing to move for the return and suppression of the
books, papers and affects seized therefrom.
In Jones vs. United States, supra, the U.S. Supreme Court delineated the nature and extent of
the interest in the searched premises necessary to maintain a motion to suppress. After
53
reviewing what it considered to be the unduly technical standard of the then prevailing circuit
court decisions, the Supreme Court said (362 U.S. 266):
We do not lightly depart from this course of decisions by the lower courts. We are persuaded,
however, that it is unnecessarily and ill-advised to import into the law surrounding the
constitutional right to be free from unreasonable searches and seizures subtle distinctions,
developed and refined by the common law in evolving the body of private property law which,
more than almost any other branch of law, has been shaped by distinctions whose validity is
largely historical. Even in the area from which they derive, due consideration has led to the
discarding of those distinctions in the homeland of the common law. See Occupiers' Liability Act,
1957, 5 and 6 Eliz. 2, c. 31, carrying out Law Reform Committee, Third Report, Cmd. 9305.
Distinctions such as those between "lessee", "licensee," "invitee," "guest," often only of
gossamer strength, ought not be determinative in fashioning procedures ultimately referable to
constitutional safeguards. See also Chapman vs. United States, 354 U.S. 610, 616-17 (1961).
It has never been held that a person with requisite interest in the premises searched must own
the property seized in order to have standing in a motion to return and suppress. In Alioto vs.
United States, 216 F. Supp. 48 (1963), a Bookkeeper for several corporations from whose
apartment the corporate records were seized successfully moved for their return. In United
States vs. Antonelli, Fireworks Co., 53 F. Supp. 870, 873 (W D. N. Y. 1943), the corporation's
president successfully moved for the return and suppression is to him of both personal and
corporate documents seized from his home during the course of an illegal search:
The lawful possession by Antonelli of documents and property, "either his own or the
corporation's was entitled to protection against unreasonable search and seizure. Under the
circumstances in the case at bar, the search and seizure were unreasonable and unlawful. The
motion for the return of seized article and the suppression of the evidence so obtained should be
granted. (Emphasis supplied).
Time was when only a person who had property in interest in either the place searched or the
articles seize had the necessary standing to invoke the protection of the exclusionary rule. But
in MacDonald vs. Unite States, 335 U.S. 461 (1948), Justice Robert Jackson joined by Justice
Felix Frankfurter, advanced the view that "even a guest may expect the shelter of the rooftree he
is under against criminal intrusion." This view finally became the official view of the U.S.
Supreme Court and was articulated in United States vs. Jeffers, 432 U.S 48 (1951). Nine years
later, in 1960, in Jones vs. Unite States, 362 U.S. 257, 267, the U.S. Supreme Court went a step
further. Jones was a mere guest in the apartment unlawfully searched but the Court nonetheless
declared that the exclusionary rule protected him as well. The concept of "person aggrieved by
an unlawful search and seizure" was enlarged to include "anyone legitimately on premise where
the search occurs."
Shortly after the U.S. Supreme Court's Jones decision the U.S. Court of Appeals for the Fifth
Circuit held that the defendant organizer, sole stockholder and president of a corporation had
standing in a mail fraud prosecution against him to demand the return and suppression of
corporate property. Henzel vs. United States, 296 F 2d 650, 652 (5th Cir. 1961), supra. The
court conclude that the defendant had standing on two independent grounds: First — he had a
sufficient interest in the property seized, and second — he had an adequate interest in the
premises searched (just like in the case at bar). A postal inspector had unlawfully searched the
corporation' premises and had seized most of the corporation's book and records. Looking
to Jones, the court observed:
Jones clearly tells us, therefore, what is not required qualify one as a "person aggrieved by an
unlawful search and seizure." It tells us that appellant should not have been precluded from

objecting to the Postal Inspector's search and seizure of the corporation's books and records
merely because the appellant did not show ownership or possession of the books and records or
a substantial possessory interest in the invade premises . . . (Henzel vs. United States, 296 F.
2d at 651). .
Henzel was soon followed by Villano vs. United States, 310 F. 2d 680, 683, (10th Cir. 1962).
In Villano, police officers seized two notebooks from a desk in the defendant's place of
employment; the defendant did not claim ownership of either; he asserted that several
employees (including himself) used the notebooks. The Court held that the employee had a
protected interest and that there also was an invasion of privacy.
Both Henzel and Villano considered also the fact that the search and seizure were "directed at"
the moving defendant. Henzel vs. United States, 296 F. 2d at 682; Villano vs. United States, 310
F. 2d at 683.
In a case in which an attorney closed his law office, placed his files in storage and went to
Puerto Rico, the Court of Appeals for the Eighth Circuit recognized his standing to move to
quash as unreasonable search and seizure under the Fourth Amendment of the U.S.
Constitution a grand jury subpoena duces tecum directed to the custodian of his files. The
Government contended that the petitioner had no standing because the books and papers were
physically in the possession of the custodian, and because the subpoena was directed against
the custodian. The court rejected the contention, holding that
Schwimmer legally had such possession, control and unrelinquished personal rights in the
books and papers as not to enable the question of unreasonable search and seizure to be
escaped through the mere procedural device of compelling a third-party naked possessor to
produce and deliver them. Schwimmer vs. United States, 232 F. 2d 855, 861 (8th Cir. 1956).
Aggrieved person doctrine where the search warrant s primarily directed against said person
gives "standing."
The latest United States decision squarely in point is United States vs. Birrell, 242 F. Supp. 191
(1965, U.S.D.C. S.D.N.Y.). The defendant had stored with an attorney certain files and papers,
which attorney, by the name of Dunn, was not, at the time of the seizing of the records, Birrell's
attorney. * Dunn, in turn, had stored most of the records at his home in the country and on a
farm which, according to Dunn's affidavit, was under his (Dunn's) "control and management."
The papers turned out to be private, personal and business papers together with corporate
books and records of certain unnamed corporations in which Birrell did not even claim
ownership. (All of these type records were seized in the case at bar). Nevertheless, the search
in Birrell was held invalid by the court which held that even though Birrell did not own the
premises where the records were stored, he had "standing" to move for the return of all the
papers and properties seized. The court, relying on Jones vs. U.S., supra; U.S. vs. Antonelli
Fireworks Co., 53 F. Supp. 870, Aff'd 155 F. 2d 631: Henzel vs. U.S., supra; and Schwimmer
vs. U.S., supra, pointed out that
It is overwhelmingly established that the searches here in question were directed solely and
exclusively against Birrell. The only person suggested in the papers as having violated the law
was Birrell. The first search warrant described the records as having been used "in committing a
violation of Title 18, United States Code, Section 1341, by the use of the mails by one Lowell M.
Birrell, . . ." The second search warrant was captioned: "United States of America vs. Lowell M.
Birrell. (p. 198)
Possession (actual or constructive), no less than ownership, gives standing to move to
suppress. Such was the rule even before Jones. (p. 199)
54
If, as thus indicated Birrell had at least constructive possession of the records stored with Dunn,
it matters not whether he had any interest in the premises searched. See also Jeffers v. United
States, 88 U.S. Appl. D.C. 58, 187 F. 2d 498 (1950), affirmed 432 U.S. 48, 72 S. Ct. 93, 96 L.
Ed. 459 (1951).
The ruling in the Birrell case was reaffirmed on motion for reargument; the United States did not
appeal from this decision. The factual situation in Birrell is strikingly similar to the case of the
present petitioners; as in Birrell, many personal and corporate papers were seized from
premises not petitioners' family residences; as in Birrell, the searches were "PRIMARILY
DIRECTED SOLETY AND EXCLUSIVELY" against the petitioners. Still both types of documents
were suppressed in Birrell because of the illegal search. In the case at bar, the petitioners
connection with the premises raided is much closer than in Birrell.
Thus, the petitioners have full standing to move for the quashing of all the warrants regardless
whether these were directed against residences in the narrow sense of the word, as long as the
documents were personal papers of the petitioners or (to the extent that they were corporate
papers) were held by them in a personal capacity or under their personal control.
Prescinding a from the foregoing, this Court, at all events, should order the return to the
petitioners all personal and private papers and effects seized, no matter where these were
seized, whether from their residences or corporate offices or any other place or places.
The uncontradicted sworn statements of the petitioners in their, various pleadings submitted to
this Court indisputably show that amongst the things seized from the corporate offices and other
places were personal and private papers and effects belonging to the petitioners.
If there should be any categorization of the documents, papers and things which where the
objects of the unlawful searches and seizures, I submit that the grouping should be:
(a) personal or private papers of the petitioners were they were unlawfully seized, be it their
family residences offices, warehouses and/or premises owned and/or possessed (actually or
constructively) by them as shown in all the search and in the sworn applications filed in securing
the void search warrants and (b) purely corporate papers belonging to corporations. Under such
categorization or grouping, the determination of which unlawfully seized papers, documents and
things are personal/private of the petitioners or purely corporate papers will have to be left to the
lower courts which issued the void search warrants in ultimately effecting the suppression and/or
return of the said documents.
And as unequivocally indicated by the authorities above cited, the petitioners likewise have clear
legal standing to move for the suppression of purely corporate papers as "President and/or
General Manager" of the corporations involved as specifically mentioned in the void search
warrants.
Finally, I must articulate my persuasion that although the cases cited in my disquisition were
criminal prosecutions, the great clauses of the constitutional proscription on illegal searches and
seizures do not withhold the mantle of their protection from cases not criminal in origin or nature.
EN BANC
G.R. No. 75885 May 27, 1987
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,
vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA,
COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ,

COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE
B. SIACUNCO, et al., respondents.
Apostol, Bernas, Gumaru, Ona and Associates for petitioner.
Vicente G. Sison for intervenor A.T. Abesamis.
NARVASA, J.:
Challenged in this special civil action of certiorari and prohibition by a private corporation known
as the Bataan Shipyard and Engineering Co., Inc. are: (1) Executive Orders Numbered 1 and 2,
promulgated by President Corazon C. Aquino on February 28, 1986 and March 12, 1986,
respectively, and (2) the sequestration, takeover, and other orders issued, and acts done, in
accordance with said executive orders by the Presidential Commission on Good Government
and/or its Commissioners and agents, affecting said corporation.
1. The Sequestration, Takeover, and Other Orders Complained of
a. The Basic Sequestration Order
The sequestration order which, in the view of the petitioner corporation, initiated all its misery
was issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It was addressed to
three of the agents of the Commission, hereafter simply referred to as PCGG. It reads as
follows:
RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential Commission on Good Government, by
authority of the President of the Philippines, you are hereby directed to sequester the following
companies.
1. Bataan Shipyard and Engineering Co., Inc. (Engineering Island Shipyard and Mariveles
Shipyard)
2. Baseco Quarry
3. Philippine Jai-Alai Corporation
4. Fidelity Management Co., Inc.
5. Romson Realty, Inc.
6. Trident Management Co.
7. New Trident Management
8. Bay Transport
9. And all affiliate companies of Alfredo "Bejo" Romualdez
You are hereby ordered:
55
1. To implement this sequestration order with a minimum disruption of these companies'
business activities.
2. To ensure the continuity of these companies as going concerns, the care and maintenance of
these assets until such time that the Office of the President through the Commission on Good
Government should decide otherwise.
3. To report to the Commission on Good Government periodically.
Further, you are authorized to request for Military/Security Support from the Military/Police
authorities, and such other acts essential to the achievement of this sequestration order. 1
b. Order for Production of Documents
On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the PCGG,
addressed a letter dated April 18, 1986 to the President and other officers of petitioner firm,
reiterating an earlier request for the production of certain documents, to wit:
1. Stock Transfer Book
2. Legal documents, such as:
2.1. Articles of Incorporation
2.2. By-Laws
2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986
2.4. Minutes of the Regular and Special Meetings of the Board of Directors from 1973 to 1986
2.5. Minutes of the Executive Committee Meetings from 1973 to 1986
2.6. Existing contracts with suppliers/contractors/others.
3. Yearly list of stockholders with their corresponding share/stockholdings from 1973 to 1986
duly certified by the Corporate Secretary.
4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others from 1973 to
December 31, 1985.
5. Monthly Financial Statements for the current year up to March 31, 1986.
6. Consolidated Cash Position Reports from January to April 15, 1986.
7. Inventory listings of assets up dated up to March 31, 1986.
8. Updated schedule of Accounts Receivable and Accounts Payable.
9. Complete list of depository banks for all funds with the authorized signatories for withdrawals
thereof.
10. Schedule of company investments and placements. 2
The letter closed with the warning that if the documents were not submitted within five days, the
officers would be cited for "contempt in pursuance with Presidential Executive Order Nos. 1 and
2."

c. Orders Re Engineer Island
(1) Termination of Contract for Security Services
A third order assailed by petitioner corporation, hereafter referred to simply as BASECO, is that
issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a member of the task force assigned to
carry out the basic sequestration order. He sent a letter to BASECO's Vice-President for
Finance, 3 terminating the contract for security services within the Engineer Island compound
between BASECO and "Anchor and FAIRWAYS" and "other civilian security agencies,"
CAPCOM military personnel having already been assigned to the area,
(2) Change of Mode of Payment of Entry Charges
On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck Owners
and Contractors," particularly a "Mr. Buddy Ondivilla National Marine Corporation," advising of
the amendment in part of their contracts with BASECO in the sense that the stipulated charges
for use of the BASECO road network were made payable "upon entry and not anymore subject
to monthly billing as was originally agreed upon." 4
d. Aborted Contract for Improvement of Wharf at Engineer Island
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of
BASECO with Deltamarine Integrated Port Services, Inc., in virtue of which the latter undertook
to introduce improvements costing approximately P210,000.00 on the BASECO wharf at
Engineer Island, allegedly then in poor condition, avowedly to "optimize its utilization and in
return maximize the revenue which would flow into the government coffers," in consideration of
Deltamarine's being granted "priority in using the improved portion of the wharf ahead of
anybody" and exemption "from the payment of any charges for the use of wharf including the
area where it may install its bagging equipments" "until the improvement remains in a condition
suitable for port operations." 5 It seems however that this contract was never consummated.
Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO Management Team," advised Deltamarine
by letter dated July 30, 1986 that "the new management is not in a position to honor the said
contract" and thus "whatever improvements * * (may be introduced) shall be deemed
unauthorized * * and shall be at * * (Deltamarine's) own risk." 6
e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent, Mayor
Melba O. Buenaventura, "to plan and implement progress towards maximizing the continuous
operation of the BASECO Sesiman Rock Quarry * * by conventional methods;" but afterwards,
Commissioner Bautista, in representation of the PCGG, authorized another party, A.T.
Abesamis, to operate the quarry, located at Mariveles, Bataan, an agreement to this effect
having been executed by them on September 17, 1986. 7
f. Order to Dispose of Scrap, etc.
By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor
Buenaventura was also "authorized to clean and beautify the Company's compound," and in this
connection, to dispose of or sell "metal scraps" and other materials, equipment and machineries
no longer usable, subject to specified guidelines and safeguards including audit and
verification. 8
g. The TAKEOVER Order
56
By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeover by
the PCGG of BASECO, "the Philippine Dockyard Corporation and all their affiliated
companies." 9 Diaz invoked the provisions of Section 3 (c) of Executive Order No. 1,
empowering the Commission —
* * To provisionally takeover in the public interest or to prevent its disposal or dissipation,
business enterprises and properties taken over by the government of the Marcos Administration
or by entities or persons close to former President Marcos, until the transactions leading to such
acquisition by the latter can be disposed of by the appropriate authorities.
A management team was designated to implement the order, headed by Capt. Siacunco, and
was given the following powers:
1. Conducts all aspects of operation of the subject companies;
2. Installs key officers, hires and terminates personnel as necessary;
3. Enters into contracts related to management and operation of the companies;
4. Ensures that the assets of the companies are not dissipated and used effectively and
efficiently; revenues are duly accounted for; and disburses funds only as may be necessary;
5. Does actions including among others, seeking of military support as may be necessary, that
will ensure compliance to this order;
6. Holds itself fully accountable to the Presidential Commission on Good Government on all
aspects related to this take-over order.
h. Termination of Services of BASECO Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M.
Valdez, Gilberto Pasimanero, and Benito R. Cuesta I, advising of the termination of their
services by the PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and agents which, to
repeat, petitioner BASECO would have this Court nullify. More particularly, BASECO prays that
this Court-
1) declare unconstitutional and void Executive Orders Numbered 1 and 2;
2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently issued
and acts done on the basis thereof, inclusive of the takeover order of July 14, 1986 and the
termination of the services of the BASECO executives. 11
a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders
While BASECO concedes that "sequestration without resorting to judicial action, might be made
within the context of Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom
Constitution was promulgated, under the principle that the law promulgated by the ruler under a
revolutionary regime is the law of the land, it ceased to be acceptable when the same ruler
opted to promulgate the Freedom Constitution on March 25, 1986 wherein under Section I of the
same, Article IV (Bill of Rights) of the 1973 Constitution was adopted providing, among others,

that "No person shall be deprived of life, liberty and property without due process of law."
(Const., Art. I V, Sec. 1)." 12
It declares that its objection to the constitutionality of the Executive Orders "as well as the
Sequestration Order * * and Takeover Order * * issued purportedly under the authority of said
Executive Orders, rests on four fundamental considerations: First, no notice and hearing was
accorded * * (it) before its properties and business were taken over; Second, the PCGG is not a
court, but a purely investigative agency and therefore not competent to act as prosecutor and
judge in the same cause; Third, there is nothing in the issuances which envisions any
proceeding, process or remedy by which petitioner may expeditiously challenge the validity of
the takeover after the same has been effected; and Fourthly, being directed against specified
persons, and in disregard of the constitutional presumption of innocence and general rules and
procedures, they constitute a Bill of Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986, which it has apparently
already complied with, was issued without court authority and infringed its constitutional right
against self-incrimination, and unreasonable search and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and Management
BASECO further contends that the PCGG had unduly interfered with its right of dominion and
management of its business affairs by —
1) terminating its contract for security services with Fairways & Anchor, without the consent and
against the will of the contracting parties; and amending the mode of payment of entry fees
stipulated in its Lease Contract with National Stevedoring & Lighterage Corporation, these acts
being in violation of the non-impairment clause of the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with
Deltamarine Integrated Port Services, Inc., giving the latter free use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry
at Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and
other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated
companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S.
Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R.
Cuesta I; 19
7) planning to elect its own Board of Directors; 20
8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's
premises at Mariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have
been buried therein. 22
57
3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders
Many misconceptions and much doubt about the matter of sequestration, takeover and freeze
orders have been engendered by misapprehension, or incomplete comprehension if not indeed
downright ignorance of the law governing these remedies. It is needful that these
misconceptions and doubts be dispelled so that uninformed and useless debates about them
may be avoided, and arguments tainted b sophistry or intellectual dishonesty be quickly exposed
and discarded. Towards this end, this opinion will essay an exposition of the law on the matter.
In the process many of the objections raised by BASECO will be dealt with.
4. The Governing Law
a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit command of the
Provisional Constitution, ordained by Proclamation No. 3, 23 that the President-in the exercise of
legislative power which she was authorized to continue to wield "(until a legislature is elected
and convened under a new Constitution" — "shall give priority to measures to achieve the
mandate of the people," among others to (r)ecover ill-gotten properties amassed by the leaders
and supporters of the previous regime and protect the interest of the people through orders of
sequestration or freezing of assets or accounts."  24
b. Executive Order No. 1
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates
that "vast resources of the government have been amassed by former President Ferdinand E.
Marcos, his immediate family, relatives, and close associates both here and abroad." 25 Upon
these premises, the Presidential Commission on Good Government was created, 26 "charged
with the task of assisting the President in regard to (certain specified) matters," among which
was precisely-
* * The recovery of all in-gotten wealth accumulated by former President Ferdinand E. Marcos,
his immediate family, relatives, subordinates and close associates, whether located in the
Philippines or abroad, including the takeover or sequestration of all business enterprises and
entities owned or controlled by them, during his administration, directly or through nominees, by
taking undue advantage of their public office and/or using their powers, authority, influence,
connections or relationship. 27
In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of
its mission, the PCGG was granted "power and authority" to do the following particular acts, to
wit:
1. To sequester or place or cause to be placed under its control or possession any building or
office wherein any ill-gotten wealth or properties may be found, and any records pertaining
thereto, in order to prevent their destruction, concealment or disappearance which would
frustrate or hamper the investigation or otherwise prevent the Commission from accomplishing
its task.
2. To provisionally take over in the public interest or to prevent the disposal or dissipation,
business enterprises and properties taken over by the government of the Marcos Administration
or by entities or persons close to former President Marcos, until the transactions leading to such
acquisition by the latter can be disposed of by the appropriate authorities.

3. To enjoin or restrain any actual or threatened commission of acts by any person or entity that
may render moot and academic, or frustrate or otherwise make ineffectual the efforts of the
Commission to carry out its task under this order. 28
So that it might ascertain the facts germane to its objectives, it was granted power to conduct
investigations; require submission of evidence by subpoenae ad testificandum and duces
tecum; administer oaths; punish for contempt. 29 It was given power also to promulgate such
rules and regulations as may be necessary to carry out the purposes of * * (its creation). 30
c. Executive Order No. 2
Executive Order No. 2 gives additional and more specific data and directions respecting "the
recovery of ill-gotten properties amassed by the leaders and supporters of the previous regime."
It declares that:
1) * * the Government of the Philippines is in possession of evidence showing that there are
assets and properties purportedly pertaining to former Ferdinand E. Marcos, and/or his wife Mrs.
Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies,
agents or nominees which had been or were acquired by them directly or indirectly, through or
as a result of the improper or illegal use of funds or properties owned by the government of the
Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of their office, authority, influence, connections or relationship,
resulting in their unjust enrichment and causing grave damage and prejudice to the Filipino
people and the Republic of the Philippines:" and
2) * * said assets and properties are in the form of bank accounts, deposits, trust accounts,
shares of stocks, buildings, shopping centers, condominiums, mansions, residences, estates,
and other kinds of real and personal properties in the Philippines and in various countries of the
world." 31
Upon these premises, the President-
1) froze "all assets and properties in the Philippines in which former President Marcos and/or his
wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates,
dummies, agents, or nominees have any interest or participation;
2) prohibited former President Ferdinand Marcos and/or his wife * *, their close relatives,
subordinates, business associates, duties, agents, or nominees from transferring, conveying,
encumbering, concealing or dissipating said assets or properties in the Philippines and abroad,
pending the outcome of appropriate proceedings in the Philippines to determine whether any
such assets or properties were acquired by them through or as a result of improper or illegal use
of or the conversion of funds belonging to the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue
advantage of their official position, authority, relationship, connection or influence to unjustly
enrich themselves at the expense and to the grave damage and prejudice of the Filipino people
and the Republic of the Philippines;
3) prohibited "any person from transferring, conveying, encumbering or otherwise depleting or
concealing such assets and properties or from assisting or taking part in their transfer,
encumbrance, concealment or dissipation under pain of such penalties as are prescribed by
law;" and
58
4) required "all persons in the Philippines holding such assets or properties, whether located in
the Philippines or abroad, in their names as nominees, agents or trustees, to make full
disclosure of the same to the Commission on Good Government within thirty (30) days from
publication of * (the) Executive Order, * *. 32
d. Executive Order No. 14
A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is
empowered, "with the assistance of the Office of the Solicitor General and other government
agencies, * * to file and prosecute all cases investigated by it * * as may be warranted by its
findings." 34 All such cases, whether civil or criminal, are to be filed "with
the Sandiganbayan which shall have exclusive and original jurisdiction thereof." 35 Executive
Order No. 14 also pertinently provides that civil suits for restitution, reparation of damages, or
indemnification for consequential damages, forfeiture proceedings provided for under Republic
Act No. 1379, or any other civil actions under the Civil Code or other existing laws, in connection
with * * (said Executive Orders Numbered 1 and 2) may be filed separately from and proceed
independently of any criminal proceedings and may be proved by a preponderance of evidence;"
and that, moreover, the "technical rules of procedure and evidence shall not be strictly applied
to* * (said)civil cases." 36
5. Contemplated Situations
The situations envisaged and sought to be governed are self-evident, these being:
1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the previous
regime"; 37
a) more particularly, that ill-gotten wealth (was) accumulated by former President Ferdinand E.
Marcos, his immediate family, relatives, subordinates and close associates, * * located in the
Philippines or abroad, * * (and) business enterprises and entities (came to be) owned or
controlled by them, during * * (the Marcos) administration, directly or through nominees, by
taking undue advantage of their public office and/or using their powers, authority, influence,
Connections or relationship; 38
b) otherwise stated, that "there are assets and properties purportedly pertaining to former
President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close
relatives, subordinates, business associates, dummies, agents or nominees which had been or
were acquired by them directly or indirectly, through or as a result of the improper or illegal use
of funds or properties owned by the Government of the Philippines or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of
their office, authority, influence, connections or relationship, resulting in their unjust enrichment
and causing grave damage and prejudice to the Filipino people and the Republic of the
Philippines"; 39
c) that "said assets and properties are in the form of bank accounts. deposits, trust. accounts,
shares of stocks, buildings, shopping centers, condominiums, mansions, residences, estates,
and other kinds of real and personal properties in the Philippines and in various countries of the
world;" 40 and
2) that certain "business enterprises and properties (were) taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos. 41
6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's plan "to
recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the above described
factual premises of the Executive Orders and Proclamation No. 3 to be true, to be demonstrable
by competent evidence, the recovery from Marcos, his family and his dominions of the assets
and properties involved, is not only a right but a duty on the part of Government.
But however plain and valid that right and duty may be, still a balance must be sought with the
equally compelling necessity that a proper respect be accorded and adequate protection
assured, the fundamental rights of private property and free enterprise which are deemed pillars
of a free society such as ours, and to which all members of that society may without exception
lay claim.
* * Democracy, as a way of life enshrined in the Constitution, embraces as its necessary
components freedom of conscience, freedom of expression, and freedom in the pursuit of
happiness. Along with these freedoms are included economic freedom and freedom of
enterprise within reasonable bounds and under proper control. * * Evincing much concern for the
protection of property, the Constitution distinctly recognizes the preferred position which real
estate has occupied in law for ages. Property is bound up with every aspect of social life in a
democracy as democracy is conceived in the Constitution. The Constitution realizes the
indispensable role which property, owned in reasonable quantities and used legitimately, plays
in the stimulation to economic effort and the formation and growth of a solid social middle class
that is said to be the bulwark of democracy and the backbone of every progressive and happy
country. 42
a. Need of Evidentiary Substantiation in Proper Suit
Consequently, the factual premises of the Executive Orders cannot simply be assumed. They
will have to be duly established by adequate proof in each case, in a proper judicial proceeding,
so that the recovery of the ill-gotten wealth may be validly and properly adjudged and
consummated; although there are some who maintain that the fact-that an immense fortune, and
"vast resources of the government have been amassed by former President Ferdinand E.
Marcos, his immediate family, relatives, and close associates both here and abroad," and they
have resorted to all sorts of clever schemes and manipulations to disguise and hide their illicit
acquisitions-is within the realm of judicial notice, being of so extensive notoriety as to dispense
with proof thereof, Be this as it may, the requirement of evidentiary substantiation has been
expressly acknowledged, and the procedure to be followed explicitly laid down, in Executive
Order No. 14.
b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits
Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten
wealth" as the evidence at hand may reveal, there is an obvious and imperative need for
preliminary, provisional measures to prevent the concealment, disappearance, destruction,
dissipation, or loss of the assets and properties subject of the suits, or to restrain or foil acts that
may render moot and academic, or effectively hamper, delay, or negate efforts to recover the
same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed three (3) provisional remedies. These are: (1)
sequestration; (2) freeze orders; and (3) provisional takeover.
59
Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-
gotten wealth." The remedy of "provisional takeover" is peculiar to cases where "business
enterprises and properties (were) taken over by the government of the Marcos Administration or
by entities or persons close to former President Marcos." 43
a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-
gotten" means to place or cause to be placed under its possession or control said property, or
any building or office wherein any such property and any records pertaining thereto may be
found, including "business enterprises and entities,"-for the purpose of preventing the
destruction, concealment or dissipation of, and otherwise conserving and preserving, the same-
until it can be determined, through appropriate judicial proceedings, whether the property was in
truth will- gotten," i.e., acquired through or as a result of improper or illegal use of or the
conversion of funds belonging to the Government or any of its branches, instrumentalities,
enterprises, banks or financial institutions, or by taking undue advantage of official position,
authority relationship, connection or influence, resulting in unjust enrichment of the ostensible
owner and grave damage and prejudice to the State. 44 And this, too, is the sense in which the
term is commonly understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property alleged to
constitute "ill-gotten wealth" "from transferring, conveying, encumbering or otherwise depleting
or concealing such property, or from assisting or taking part in its transfer, encumbrance,
concealment, or dissipation." 46 In other words, it commands the possessor to hold the property
and conserve it subject to the orders and disposition of the authority decreeing such freezing. In
this sense, it is akin to a garnishment by which the possessor or ostensible owner of property is
enjoined not to deliver, transfer, or otherwise dispose of any effects or credits in his possession
or control, and thus becomes in a sense an involuntary depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges the apparent
distinction between "ill gotten" "business enterprises and entities" (going concerns, businesses
in actual operation), generally, as to which the remedy of sequestration applies, it being
necessarily inferred that the remedy entails no interference, or the least possible interference
with the actual management and operations thereof; and "business enterprises which
were taken over by the government government of the Marcos Administration or by entities or
persons close to him," in particular, as to which a "provisional takeover" is authorized, "in the
public interest or to prevent disposal or dissipation of the enterprises." 48 Such a "provisional
takeover" imports something more than sequestration or freezing, more than the placing of the
business under physical possession and control, albeit without or with the least possible
interference with the management and carrying on of the business itself. In a "provisional
takeover," what is taken into custody is not only the physical assets of the business enterprise or
entity, but the business operation as well. It is in fine the assumption of control not only over
things, but over operations or on- going activities. But, to repeat, such a "provisional takeover" is
allowed only as regards "business enterprises * * taken over by the government of the Marcos
Administration or by entities or persons close to former President Marcos."
d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional, contingent character of
the remedies just described. Indeed the law plainly qualifies the remedy of take-over by the
adjective, "provisional." These remedies may be resorted to only for a particular exigency: to
prevent in the public interest the disappearance or dissipation of property or business, and
conserve it pending adjudgment in appropriate proceedings of the primary issue of whether or
not the acquisition of title or other right thereto by the apparent owner was attended by some
vitiating anomaly. None of the remedies is meant to deprive the owner or possessor of his title or
any right to the property sequestered, frozen or taken over and vest it in the sequestering
agency, the Government or other person. This can be done only for the causes and by the
processes laid down by law.
That this is the sense in which the power to sequester, freeze or provisionally take over is to be
understood and exercised, the language of the executive orders in question leaves no doubt.
Executive Order No. 1 declares that the sequestration of property the acquisition of which is
suspect shall last "until the transactions leading to such acquisition * * can be disposed of by the
appropriate authorities."  49 Executive Order No. 2 declares that the assets or properties therein
mentioned shall remain frozen "pending the outcome of appropriate proceedings in the
Philippines to determine whether any such assets or properties were acquired" by illegal
means. Executive Order No. 14 makes clear that judicial proceedings are essential for the
resolution of the basic issue of whether or not particular assets are "ill-gotten," and resultant
recovery thereof by the Government is warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command
There is thus no cause for the apprehension voiced by BASECO 50 that sequestration, freezing
or provisional takeover is designed to be an end in itself, that it is the device through which
persons may be deprived of their property branded as "ill-gotten," that it is intended to bring
about a permanent, rather than a passing, transitional state of affairs. That this is not so is quite
explicitly declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of
these provisional remedies. Section 26 of its Transitory Provisions, 51 lays down the relevant rule
in plain terms, apart from extending ratification or confirmation (although not really necessary) to
the institution by presidential fiat of the remedy of sequestration and freeze orders:
SEC. 26. The authority to issue sequestration or freeze orders under Proclamation No. 3 dated
March 25, 1986 in relation to the recovery of ill-gotten wealth shag remain operative for not more
than eighteen months after the ratification of this Constitution. However, in the national interest,
as certified by the President, the Congress may extend said period.
A sequestration or freeze order shall be issued only upon showing of a prima facie case. The
order and the list of the sequestered or frozen properties shall forthwith be registered with the
proper court. For orders issued before the ratification of this Constitution, the corresponding
judicial action or proceeding shall be filed within six months from its ratification. For those issued
after such ratification, the judicial action or proceeding shall be commenced within six
months from the issuance thereof.
The sequestration or freeze order is deemed automatically lifted if no judicial action or
proceeding is commenced as herein provided. 52
f. Kinship to Attachment Receivership
60
As thus described, sequestration, freezing and provisional takeover are akin to the provisional
remedy of preliminary attachment, or receivership. 53 By attachment, a sheriff seizes property of
a defendant in a civil suit so that it may stand as security for the satisfaction of any judgment that
may be obtained, and not disposed of, or dissipated, or lost intentionally or otherwise, pending
the action. 54 By receivership, property, real or personal, which is subject of litigation, is placed in
the possession and control of a receiver appointed by the Court, who shall conserve it pending
final determination of the title or right of possession over it. 55 All these remedies —
sequestration, freezing, provisional, takeover, attachment and receivership — are provisional,
temporary, designed for-particular exigencies, attended by no character of permanency or
finality, and always subject to the control of the issuing court or agency.
g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court
is of no moment. The Solicitor General draws attention to the writ of distraint and levy which
since 1936 the Commissioner of Internal Revenue has been by law authorized to issue against
property of a delinquent taxpayer. 56 BASECO itself declares that it has not manifested "a rigid
insistence on sequestration as a purely judicial remedy * * (as it feels) that the law should not be
ossified to a point that makes it insensitive to change." What it insists on, what it pronounces to
be its "unyielding position, is that any change in procedure, or the institution of a new one,
should conform to due process and the other prescriptions of the Bill of Rights of the
Constitution." 57 It is, to be sure, a proposition on which there can be no disagreement.
h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and receivership, as well as delivery of personal
property in replevin suits, sequestration and provisional takeover writs may issue ex
parte. 58 And as in preliminary attachment, receivership, and delivery of personality, no objection
of any significance may be raised to the ex parte issuance of an order of sequestration, freezing
or takeover, given its fundamental character of temporariness or conditionality; and taking
account specially of the constitutionally expressed "mandate of the people to recover ill-gotten
properties amassed by the leaders and supporters of the previous regime and protect the
interest of the people;" 59 as well as the obvious need to avoid alerting suspected possessors of
"ill-gotten wealth" and thereby cause that disappearance or loss of property precisely sought to
be prevented, and the fact, just as self-evident, that "any transfer, disposition, concealment or
disappearance of said assets and properties would frustrate, obstruct or hamper the efforts of
the Government" at the just recovery thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case of attachment and receivership, there exist a
prima facie factual foundation, at least, for the sequestration, freeze or takeover order, and
adequate and fair opportunity to contest it and endeavor to cause its negation or nullification. 61
Both are assured under the executive orders in question and the rules and regulations
promulgated by the PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and
due process." 62 Executive Order No. 2 declares that with respect to claims on allegedly "ill-
gotten" assets and properties, "it is the position of the new democratic government that
President Marcos * * (and other parties affected) be afforded fair opportunity to contest these

claims before appropriate Philippine authorities." 63 Section 7 of the Commission's Rules and
Regulations provides that sequestration or freeze (and takeover) orders issue upon the authority
of at least two commissioners, based on the affirmation or complaint of an interested
party, or motu proprio when the Commission has reasonable grounds to believe that the
issuance thereof is warranted. 64 A similar requirement is now found in Section 26, Art. XVIII of
the 1987 Constitution, which requires that a "sequestration or freeze order shall be issued only
upon showing of a prima facie case." 65
b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a
party may seek to set aside a writ of sequestration or freeze order, viz:
SECTION 5. Who may contend.-The person against whom a writ of sequestration or freeze or
hold order is directed may request the lifting thereof in writing, either personally or through
counsel within five (5) days from receipt of the writ or order, or in the case of a hold order, from
date of knowledge thereof.
SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio for good
cause shown, the Commission may lift the writ or order unconditionally or subject to such
conditions as it may deem necessary, taking into consideration the evidence and the
circumstance of the case. The resolution of the commission may be appealed by the party
concerned to the Office of the President of the Philippines within fifteen (15) days from receipt
thereof.
Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not
expressly imposed by some rule or regulation as a condition to warrant the sequestration or
freezing of property contemplated in the executive orders in question, it would nevertheless be
exigible in this jurisdiction in which the Rule of Law prevails and official acts which are devoid of
rational basis in fact or law, or are whimsical and capricious, are condemned and struck down. 66
9. Constitutional Sanction of Remedies
If any doubt should still persist in the face of the foregoing considerations as to the validity and
propriety of sequestration, freeze and takeover orders, it should be dispelled by the fact that
these particular remedies and the authority of the PCGG to issue them have received
constitutional approbation and sanction. As already mentioned, the Provisional or "Freedom"
Constitution recognizes the power and duty of the President to enact "measures to achieve the
mandate of the people to * * * (recover ill- gotten properties amassed by the leaders and
supporters of the previous regime and protect the interest of the people through orders of
sequestration or freezing of assets or accounts." And as also already adverted to, Section 26,
Article XVIII of the 1987 Constitution 67 treats of, and ratifies the "authority to issue sequestration
or freeze orders under Proclamation No. 3 dated March 25, 1986."
The institution of these provisional remedies is also premised upon the State's inherent police
power, regarded, as t lie power of promoting the public welfare by restraining and regulating the
use of liberty and property," 68 and as "the most essential, insistent and illimitable of powers * * in
the promotion of general welfare and the public interest," 69 and said to be co-extensive with self-
protection and * * not inaptly termed (also) the'law of overruling necessity." "70
10. PCGG not a "Judge"; General Functions
61
It should also by now be reasonably evident from what has thus far been said that the PCGG is
not, and was never intended to act as, a judge. Its general function is to conduct investigations
in order to collect evidence establishing instances of "ill-gotten wealth;" issue sequestration, and
such orders as may be warranted by the evidence thus collected and as may be necessary to
preserve and conserve the assets of which it takes custody and control and prevent their
disappearance, loss or dissipation; and eventually file and prosecute in the proper court of
competent jurisdiction all cases investigated by it as may be warranted by its findings. It does
not try and decide, or hear and determine, or adjudicate with any character of finality or
compulsion, cases involving the essential issue of whether or not property should be forfeited
and transferred to the State because "ill-gotten" within the meaning of the Constitution and the
executive orders. This function is reserved to the designated court, in this case, the
Sandiganbayan. 71 There can therefore be no serious regard accorded to the accusation, leveled
by BASECO, 72 that the PCGG plays the perfidious role of prosecutor and judge at the same
time.
11. Facts Preclude Grant of Relief to Petitioner
Upon these premises and reasoned conclusions, and upon the facts disclosed by the record,
hereafter to be discussed, the petition cannot succeed. The writs of certiorari and prohibition
prayed for will not be issued.
The facts show that the corporation known as BASECO was owned or controlled by President
Marcos "during his administration, through nominees, by taking undue advantage of his public
office and/or using his powers, authority, or influence, " and that it was by and through the same
means, that BASECO had taken over the business and/or assets of the National Shipyard and
Engineering Co., Inc., and other government-owned or controlled entities.
12. Organization and Stock Distribution of BASECO
BASECO describes itself in its petition as "a shiprepair and shipbuilding company * *
incorporated as a domestic private corporation * * (on Aug. 30, 1972) by a consortium of Filipino
shipowners and shipping executives. Its main office is at Engineer Island, Port Area, Manila,
where its Engineer Island Shipyard is housed, and its main shipyard is located at Mariveles
Bataan." 73 Its Articles of Incorporation disclose that its authorized capital stock is
P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with a value of
P12,000,000.00 have been subscribed, and on said subscription, the aggregate sum of
P3,035,000.00 has been paid by the incorporators. 74 The same articles Identify the
incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3)
Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7)
Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11)
Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15)
Rodolfo Torres.
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders,
namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio
Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of this year, 1986, there were twenty
(20) stockholders listed in BASECO's Stock and Transfer Book. 75 Their names and the number
of shares respectively held by them are as follows:
1. Jose A. Rojas 1,248 shares

2. Severino G. de la Cruz
3. Emilio T. Yap
4. Jose Fernandez
5. Jose Francisco
6. Manuel S. Mendoza
7. Anthony P. Lee
8. Hilario M. Ruiz
9. Constante L. Fariñas
10. Fidelity Management, Inc.
11. Trident Management
12. United Phil. Lines
13. Renato M. Tanseco
14. Fidel Ventura
15. Metro Bay Drydock
16. Manuel Jacela
17. Jonathan G. Lu
18. Jose J. Tanchanco
19. Dioscoro Papa
20. Edward T. Marcelo
TOTAL
62
13 Acquisition of NASSCO by BASECO
1,248 shares
Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel
2,508 shares Corporation, or NASSCO, a government-owned or controlled corporation, the latter's shipyard at
Mariveles, Bataan, known as the Bataan National Shipyard (BNS), and — except for NASSCO's
Engineer Island Shops and certain equipment of the BNS, consigned for future negotiation — all
1,248 shares its structures, buildings, shops, quarters, houses, plants, equipment and facilities, in stock or in
transit. This it did in virtue of a "Contract of Purchase and Sale with Chattel Mortgage" executed
128 shares on February 13, 1973. The price was P52,000,000.00. As partial payment thereof, BASECO
delivered to NASSCO a cash bond of P11,400,000.00, convertible into cash within twenty-four
(24) hours from completion of the inventory undertaken pursuant to the contract. The balance of
96 shares P41,600,000.00, with interest at seven percent (7%) per annum, compounded semi-annually,
was stipulated to be paid in equal semi-annual installments over a term of nine (9) years,
payment to commence after a grace period of two (2) years from date of turnover of the shipyard
1,248 shares
to BASECO. 76
32 shares 14. Subsequent Reduction of Price; Intervention of Marcos
Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to
8 shares P24,311,550.00, about eight (8) months later. A document to this effect was executed on
October 9, 1973, entitled "Memorandum Agreement," and was signed for NASSCO by Arturo
Pacificador, as Presiding Officer of the Board of Directors, and David R. Ines, as General
65,882 shares Manager. 77 This agreement bore, at the top right corner of the first page, the word
"APPROVED" in the handwriting of President Marcos, followed by his usual full signature. The
7,412 shares document recited that a down payment of P5,862,310.00 had been made by BASECO, and the
balance of P19,449,240.00 was payable in equal semi-annual installments over nine (9) years
after a grace period of two (2) years, with interest at 7% per annum.
1,240 shares
15. Acquisition of 300 Hectares from Export Processing Zone Authority
8 shares On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles from
the Export Processing Zone Authority for the price of P10,047,940.00 of which, as set out in the
document of sale, P2,000.000.00 was paid upon its execution, and the balance stipulated to be
8 shares
payable in installments. 78
136,370 shares 16. Acquisition of Other Assets of NASSCO; Intervention of Marcos
Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with the
1 share intervention of President Marcos, acquired ownership of the rest of the assets of NASSCO which
had not been included in the first two (2) purchase documents. This was accomplished by a
deed entitled "Contract of Purchase and Sale," 79 which, like the Memorandum of Agreement
1 share
dated October 9, 1973 supra also bore at the upper right-hand corner of its first page, the
handwritten notation of President Marcos reading, "APPROVED, July 29, 1973," and underneath
1 share it, his usual full signature. Transferred to BASECO were NASSCO's "ownership and all its titles,
rights and interests over all equipment and facilities including structures, buildings, shops,
quarters, houses, plants and expendable or semi-expendable assets, located at the Engineer
128 shares Island, known as the Engineer Island Shops, including all the equipment of the Bataan National
Shipyards (BNS) which were excluded from the sale of NBS to BASECO but retained by
4 shares BASECO and all other selected equipment and machineries of NASSCO at J. Panganiban
Smelting Plant." In the same deed, NASSCO committed itself to cooperate with BASECO for the
acquisition from the National Government or other appropriate Government entity of Engineer
218,819 shares. Island. Consideration for the sale was set at P5,000,000.00; a down payment of P1,000,000.00
appears to have been made, and the balance was stipulated to be paid at 7% interest per

annum in equal semi annual installments over a term of nine (9) years, to commence after a
grace period of two (2) years. Mr. Arturo Pacificador again signed for NASSCO, together with
the general manager, Mr. David R. Ines.
17. Loans Obtained
It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the
last available Japanese war damage fund of $19,000,000.00," to pay for "Japanese made heavy
equipment (brand new)." 80 On September 3, 1975, it got another loan also from the NDC in the
amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another loan, this time from
the GSIS, in the sum of P12,400,000.00. 81 The claim has been made that not a single centavo
has been paid on these loans. 82
18. Reports to President Marcos
In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO.
The first was contained in a letter dated September 5, 1977 of Hilario M. Ruiz, BASECO
president. 83 The second was embodied in a confidential memorandum dated September 16,
1977 of Capt. A.T. Romualdez. 84 They further disclose the fine hand of Marcos in the affairs of
BASECO, and that of a Romualdez, a relative by affinity.
a. BASECO President's Report
In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had
been "no orders or demands for ship construction" for some time and expressed the fear that if
that state of affairs persisted, BASECO would not be able to pay its debts to the Government,
which at the time stood at the not inconsiderable amount of P165,854,000.00. 85 He suggested
that, to "save the situation," there be a "spin-off (of their) shipbuilding activities which shall be
handled exclusively by an entirely new corporation to be created;" and towards this end, he
informed Marcos that BASECO was —
* * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding loan to
BASECO amounting to P341.165M and assuming and converting a portion of BASECO's
shipbuilding loans from REPACOM amounting to P52.2M or a total of P83.365M as NDC's
equity contribution in the new corporation. LUSTEVECO will participate by absorbing and
converting a portion of the REPACOM loan of Bay Shipyard and Drydock, Inc., amounting to
P32.538M.86
b. Romualdez' Report
Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened
with the following caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission
FROM: Capt. A.T. Romualdez.
Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan obligations
due chiefly to the fact that "orders to build ships as expected * * did not materialize."
63
He advised that five stockholders had "waived and/or assigned their holdings inblank," these
being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5)
Anthony P. Lee. Pointing out that "Mr. Magiliw Torres * * is already dead and Mr. Jose A. Rojas
had a major heart attack," he made the following quite revealing, and it may be added, quite
cynical and indurate recommendation, to wit:
* * (that) their replacements (be effected) so we can register their names in the stock book prior
to the implementation of your instructions to pass a board resolution to legalize the transfers
under SEC regulations;
2. By getting their replacements, the families cannot question us later on; and
3. We will owe no further favors from them. 87
He also transmitted to Marcos, together with the report, the following documents: 88
1. Stock certificates indorsed and assigned in blank with assignments and waivers;  89
2. The articles of incorporation, the amended articles, and the by-laws of BASECO;
3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in "Engineer
Island", Port Area, Manila;
4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering "Engineer Island";
5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure and equipment
at Mariveles, Bataan;
6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and equipment at
Engineer Island, Port Area Manila;
7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of land at
Mariveles, Bataan;
8. List of BASECO's fixed assets;
9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of P30,000,000.00;
10. BASECO-REPACOM Agreement dated May 27, 1975;
11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the housing facilities
for BASECO's rank-and-file employees. 90
Capt. Romualdez also recommended that BASECO's loans be restructured "until such period
when BASECO will have enough orders for ships in order for the company to meet loan
obligations," and that —
An LOI may be issued to government agencies using floating equipment, that a linkage scheme
be applied to a certain percent of BASECO's net profit as part of BASECO's amortization
payments to make it justifiable for you, Sir. 91
It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of
BASECO, yet he has presented a report on BASECO to President Marcos, and his report
demonstrates intimate familiarity with the firm's affairs and problems.

19. Marcos' Response to Reports
President Marcos lost no time in acting on his subordinates' recommendations, particularly as
regards the "spin-off" and the "linkage scheme" relative to "BASECO's amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo
Velasco of the Philippine National Oil Company and Chairman Constante Fariñas of the National
Development Company, directing them "to participate in the formation of a new corporation
resulting from the spin-off of the shipbuilding component of BASECO along the following
guidelines:
a. Equity participation of government shall be through LUSTEVECO and NDC in the amount of
P115,903,000 consisting of the following obligations of BASECO which are hereby authorized to
be converted to equity of the said new corporation, to wit:
1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)
2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of non- voting shares.
For immediate compliance. 92
Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days
after receiving their president's memorandum, Messrs. Hilario M. Ruiz, Constante L. Fariñas and
Geronimo Z. Velasco, in representation of their respective corporations, executed a PRE-
INCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they undertook to form a
shipbuilding corporation to be known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring
to realization their president's instructions. It would seem that the new corporation ultimately
formed was actually named "Philippine Dockyard Corporation (PDC)." 94
b. Letter of Instructions No. 670
Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On
February 14, 1978, he issued Letter of Instructions No. 670 addressed to the Reparations
Commission REPACOM the Philippine National Oil Company (PNOC), the Luzon Stevedoring
Company (LUSTEVECO), and the National Development Company (NDC). What is commanded
therein is summarized by the Solicitor General, with pithy and not inaccurate observations as to
the effects thereof (in italics), as follows:
* * 1) the shipbuilding equipment procured by BASECO through reparations be transferred to
NDC subject to reimbursement by NDC to BASECO (of) the amount of s allegedly representing
the handling and incidental expenses incurred by BASECO in the installation of said
equipment (so instead of NDC getting paid on its loan to BASECO, it was made to pay BASECO
instead the amount of P18.285M); 2) the shipbuilding equipment procured from reparations
through EPZA, now in the possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.)
be transferred to LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus)
transferred be invested by LUSTEVECO, acting through PNOC and NDC, as the government's
equity participation in a shipbuilding corporation to be established in partnership with the private
sector.
xxx xxx xxx
64
And so, through a simple letter of instruction and memorandum, BASECO's loan obligation to
NDC and REPACOM * * in the total amount of P83.365M and BSD's REPACOM loan of
P32.438M were wiped out and converted into non-voting preferred shares. 95
20. Evidence of Marcos'
Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the
control by President Marcos of BASECO has been sufficiently shown.
Other evidence submitted to the Court by the Solicitor General proves that President Marcos not
only exercised control over BASECO, but also that he actually owns well nigh one hundred
percent of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819
shares of stock outstanding, ostensibly owned by twenty (20) stockholders. 96 Four of these
twenty are juridical persons: (1) Metro Bay Drydock, recorded as holding 136,370 shares;
(2) Fidelity Management, Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4)
United Phil. Lines, 1,240 shares. The first three corporations, among themselves, own an
aggregate of 209,664 shares of BASECO stock, or 95.82% of the outstanding stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that
found in Malacanang shortly after the sudden flight of President Marcos, were certificates
corresponding to more than ninety-five percent (95%) of all the outstanding shares of stock of
BASECO, endorsed in blank, together with deeds of assignment of practically all the outstanding
shares of stock of the three (3) corporations above mentioned (which hold 95.82% of all
BASECO stock), signed by the owners thereof although not notarized. 97
More specifically, found in Malacanang (and now in the custody of the PCGG) were:
1) the deeds of assignment of all 600 outstanding shares of Fidelity Management Inc. — which
supposedly owns as aforesaid 65,882 shares of BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of Metro Bay
Drydock Corporation — which allegedly owns 136,370 shares of BASECO stock;
3) the deeds of assignment of 800 outstanding shares of Trident Management Co., Inc. — which
allegedly owns 7,412 shares of BASECO stock, assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares of
BASECO stock; that is, all but 5 % — all endorsed in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the
BASECO stockholders were still in possession of their respective stock certificates and had
"never endorsed * * them in blank or to anyone else," 100 that denial is exposed by his own prior
and subsequent recorded statements as a mere gesture of defiance rather than a verifiable
factual declaration.
By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10
days "to SUBMIT, as undertaken by him, * * the certificates of stock issued to the stockholders
of * * BASECO as of April 23, 1986, as listed in Annex 'P' of the petition.'  101 Counsel thereafter
moved for extension; and in his motion dated October 2, 1986, he declared inter alia that "said
certificates of stock are in the possession of third parties, among whom being the respondents

themselves * * and petitioner is still endeavoring to secure copies thereof from them." 102 On
the same day he filed another motion praying that he be allowed "to secure copies of the
Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other Certificates, of
Stock of petitioner's stockholders in possession of respondents." 103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued
that counsel's aforestated motion to secure copies of the stock certificates "confirms the fact that
stockholders of petitioner corporation are not in possession of * * (their) certificates of stock,"
and the reason, according to him, was "that 95% of said shares * * have been endorsed in blank
and found in Malacañang after the former President and his family fled the country." To this
manifestation BASECO's counsel replied on November 5, 1986, as already mentioned,
Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105
In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among
other things "to require * * the petitioner * * to deposit upon proper receipt with Clerk of Court
Juanito Ranjo the originals of the stock certificates alleged to be in its possession or accessible
to it, mentioned and described in Annex 'P' of its petition, (and other pleadings) * * within ten (10)
days from notice." 106 In a motion filed on December 5, 1986, 107 BASECO's counsel made the
statement, quite surprising in the premises, that "it will negotiate with the owners (of the
BASECO stock in question) to allow petitioner to borrow from them, if available, the certificates
referred to" but that "it needs a more sufficient time therefor" (sic). BASECO's counsel however
eventually had to confess inability to produce the originals of the stock certificates, putting up the
feeble excuse that while he had "requested the stockholders to allow * * (him) to borrow said
certificates, * * some of * * (them) claimed that they had delivered the certificates to third parties
by way of pledge and/or to secure performance of obligations, while others allegedly have
entrusted them to third parties in view of last national emergency." 108 He has conveniently
omitted, nor has he offered to give the details of the transactions adverted to by him, or to
explain why he had not impressed on the supposed stockholders the primordial importance of
convincing this Court of their present custody of the originals of the stock, or if he had done so,
why the stockholders are unwilling to agree to some sort of arrangement so that the originals of
their certificates might at the very least be exhibited to the Court. Under the circumstances, the
Court can only conclude that he could not get the originals from the stockholders for the simple
reason that, as the Solicitor General maintains, said stockholders in truth no longer have them in
their possession, these having already been assigned in blank to then President Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders
In the light of the affirmative showing by the Government that, prima facie at least, the
stockholders and directors of BASECO as of April, 1986 109 were mere "dummies," nominees
or alter egos of President Marcos; at any rate, that they are no longer owners of any shares of
stock in the corporation, the conclusion cannot be avoided that said stockholders and directors
have no basis and no standing whatever to cause the filing and prosecution of the instant
proceeding; and to grant relief to BASECO, as prayed for in the petition, would in effect be to
restore the assets, properties and business sequestered and taken over by the PCGG to
persons who are "dummies," nominees or alter egos of the former president.
From the standpoint of the PCGG, the facts herein stated at some length do indeed show that
the private corporation known as BASECO was "owned or controlled by former President
Ferdinand E. Marcos * * during his administration, * * through nominees, by taking advantage of
* * (his) public office and/or using * * (his) powers, authority, influence * *," and that NASSCO
and other property of the government had been taken over by BASECO; and the situation
justified the sequestration as well as the provisional takeover of the corporation in the public
65
interest, in accordance with the terms of Executive Orders No. 1 and 2, pending the filing of the
requisite actions with the Sandiganbayan to cause divestment of title thereto from Marcos, and
its adjudication in favor of the Republic pursuant to Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts is correct;
accordingly, it sustains the acts of sequestration and takeover by the PCGG as being in accord
with the law, and, in view of what has thus far been set out in this opinion, pronounces to be
without merit the theory that said acts, and the executive orders pursuant to which they were
done, are fatally defective in not according to the parties affected prior notice and hearing, or an
adequate remedy to impugn, set aside or otherwise obtain relief therefrom, or that the PCGG
had acted as prosecutor and judge at the same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in question are a bill of
attainder. 110 "A bill of attainder is a legislative act which inflicts punishment without judicial
trial." 111 "Its essence is the substitution of a legislative for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably construed as a
determination or declaration of guilt. On the contrary, the executive orders, inclusive of
Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or
acquisition of "ill-gotten wealth" is to be handed down by a judicial tribunal, in this case,
the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In the second place, no
punishment is inflicted by the executive orders, as the merest glance at their provisions will
immediately make apparent. In no sense, therefore, may the executive orders be regarded as a
bill of attainder.
23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures
BASECO also contends that its right against self incrimination and unreasonable searches and
seizures had been transgressed by the Order of April 18, 1986 which required it "to produce
corporate records from 1973 to 1986 under pain of contempt of the Commission if it fails to do
so." The order was issued upon the authority of Section 3 (e) of Executive Order No. 1, treating
of the PCGG's power to "issue subpoenas requiring * * the production of such books, papers,
contracts, records, statements of accounts and other documents as may be material to the
investigation conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing
with its power to "require all persons in the Philippines holding * * (alleged "ill-gotten") assets or
properties, whether located in the Philippines or abroad, in their names as nominees, agents or
trustees, to make full disclosure of the same * *." The contention lacks merit.
It is elementary that the right against self-incrimination has no application to juridical persons.
While an individual may lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation, vested with special privileges and
franchises, may refuse to show its hand when charged with an abuse ofsuchprivileges * * 113
Relevant jurisprudence is also cited by the Solicitor General. 114
* * corporations are not entitled to all of the constitutional protections which private individuals
have. * * They are not at all within the privilege against self-incrimination, although this court
more than once has said that the privilege runs very closely with the 4th Amendment's Search
and Seizure provisions. It is also settled that an officer of the company cannot refuse to produce

its records in its possession upon the plea that they will either incriminate him or may incriminate
it." (Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).
* * The corporation is a creature of the state. It is presumed to be incorporated for the benefit of
the public. It received certain special privileges and franchises, and holds them subject to the
laws of the state and the limitations of its charter. Its powers are limited by law. It can make no
contract not authorized by its charter. Its rights to act as a corporation are only preserved to it so
long as it obeys the laws of its creation. There is a reserve right in the legislature to investigate
its contracts and find out whether it has exceeded its powers. It would be a strange anomaly to
hold that a state, having chartered a corporation to make use of certain franchises, could not, in
the exercise of sovereignty, inquire how these franchises had been employed, and whether they
had been abused, and demand the production of the corporate books and papers for that
purpose. The defense amounts to this, that an officer of the corporation which is charged with a
criminal violation of the statute may plead the criminality of such corporation as a refusal to
produce its books. To state this proposition is to answer it. While an individual may lawfully
refuse to answer incriminating questions unless protected by an immunity statute, it does not
follow that a corporation, vested with special privileges and franchises may refuse to show its
hand when charged with an abuse of such privileges. (Wilson v. United States, 55 Law Ed., 771,
780 [emphasis, the Solicitor General's])
At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures
protection to individuals required to produce evidence before the PCGG against any possible
violation of his right against self-incrimination. It gives them immunity from prosecution on the
basis of testimony or information he is compelled to present. As amended, said Section 4 now
provides that —
xxx xxx xxx
The witness may not refuse to comply with the order on the basis of his privilege against self-
incrimination; but no testimony or other information compelled under the order (or any
information directly or indirectly derived from such testimony, or other information) may be used
against the witness in any criminal case, except a prosecution for perjury, giving a false
statement, or otherwise failing to comply with the order.
The constitutional safeguard against unreasonable searches and seizures finds no application to
the case at bar either. There has been no search undertaken by any agent or representative of
the PCGG, and of course no seizure on the occasion thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and extent of the
powers that may be wielded by the PCGG with regard to the properties or businesses placed
under sequestration or provisionally taken over. Obviously, it is not a question to which an
answer can be easily given, much less one which will suffice for every conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of
dominion over property sequestered, frozen or provisionally taken over. AS already earlier
stressed with no little insistence, the act of sequestration; freezing or provisional takeover of
property does not import or bring about a divestment of title over said property; does not make
the PCGG the owner thereof. In relation to the property sequestered, frozen or provisionally
taken over, the PCGG is a conservator, not an owner. Therefore, it can not perform acts of strict
66
ownership; and this is specially true in the situations contemplated by the sequestration rules
where, unlike cases of receivership, for example, no court exercises effective supervision or can
upon due application and hearing, grant authority for the performance of acts of dominion.
Equally evident is that the resort to the provisional remedies in question should entail the least
possible interference with business operations or activities so that, in the event that the
accusation of the business enterprise being "ill gotten" be not proven, it may be returned to its
rightful owner as far as possible in the same condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the property or business
sequestered or provisionally taken over, much like a court-appointed receiver, 115 such as to
bring and defend actions in its own name; receive rents; collect debts due; pay outstanding
debts; and generally do such other acts and things as may be necessary to fulfill its mission as
conservator and administrator. In this context, it may in addition enjoin or restrain any actual or
threatened commission of acts by any person or entity that may render moot and academic, or
frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect
contempt in accordance with the Rules of Court; and seek and secure the assistance of any
office, agency or instrumentality of the government. 116 In the case of sequestered businesses
generally (i.e., going concerns, businesses in current operation), as in the case of sequestered
objects, its essential role, as already discussed, is that of conservator, caretaker, "watchdog" or
overseer. It is not that of manager, or innovator, much less an owner.
c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to him;
Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to have been "taken
over by the government of the Marcos Administration or by entities or persons close to former
President Marcos," 117 the PCGG is given power and authority, as already adverted to, to
"provisionally take (it) over in the public interest or to prevent * * (its) disposal or dissipation;" and
since the term is obviously employed in reference to going concerns, or business enterprises in
operation, something more than mere physical custody is connoted; the PCGG may in this case
exercise some measure of control in the operation, running, or management of the business
itself. But even in this special situation, the intrusion into management should be restricted to the
minimum degree necessary to accomplish the legislative will, which is "to prevent the disposal or
dissipation" of the business enterprise. There should be no hasty, indiscriminate, unreasoned
replacement or substitution of management officials or change of policies, particularly in respect
of viable establishments. In fact, such a replacement or substitution should be avoided if at all
possible, and undertaken only when justified by demonstrably tenable grounds and in line with
the stated objectives of the PCGG. And it goes without saying that where replacement of
management officers may be called for, the greatest prudence, circumspection, care and
attention - should accompany that undertaking to the end that truly competent, experienced and
honest managers may be recruited. There should be no role to be played in this area by rank
amateurs, no matter how wen meaning. The road to hell, it has been said, is paved with good
intentions. The business is not to be experimented or played around with, not run into the
ground, not driven to bankruptcy, not fleeced, not ruined. Sight should never be lost sight of the
ultimate objective of the whole exercise, which is to turn over the business to the Republic, once
judicially established to be "ill-gotten." Reason dictates that it is only under these conditions and
circumstances that the supervision, administration and control of business enterprises
provisionally taken over may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
 67

So, too, it is within the parameters of these conditions and circumstances that the PCGG may WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14,
properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the 1986 is lifted.
President of the Philippines through a Memorandum dated June 26, 1986. That Memorandum
authorizes the PCGG, "pending the outcome of proceedings to determine the ownership of * * FIRST DIVISION
(sequestered) shares of stock," "to vote such shares of stock as it may have sequestered in
corporations at all stockholders' meetings called for the election of directors, declaration of G.R. No. 126297             January 31, 2007
dividends, amendment of the Articles of Incorporation, etc." The Memorandum should be
PROFESSIONAL SERVICES, INC., Petitioner,
construed in such a manner as to be consistent with, and not contradictory of the Executive
vs.
Orders earlier promulgated on the same matter. There should be no exercise of the right to vote
NATIVIDAD and ENRIQUE AGANA, Respondents.
simply because the right exists, or because the stocks sequestered constitute the controlling or
a substantial part of the corporate voting power. The stock is not to be voted to replace directors, x-----------------------x
or revise the articles or by-laws, or otherwise bring about substantial changes in policy, program
or practice of the corporation except for demonstrably weighty and defensible grounds, and G.R. No. 126467            January 31, 2007
always in the context of the stated purposes of sequestration or provisional takeover, i.e., to
prevent the dispersion or undue disposal of the corporate assets. Directors are not to be voted NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA, JR.,
out simply because the power to do so exists. Substitution of directors is not to be done without EMMA AGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE
reason or rhyme, should indeed be shunned if at an possible, and undertaken only when AGANA, Petitioners,
essential to prevent disappearance or wastage of corporate property, and always under such vs.
circumstances as assure that the replacements are truly possessed of competence, experience JUAN FUENTES, Respondent.
and probity.
x- - - - - - - - - - - - - - - - - - - -- - - - x
In the case at bar, there was adequate justification to vote the incumbent directors out of office
and elect others in their stead because the evidence showed prima facie that the former were G.R. No. 127590            January 31, 2007
just tools of President Marcos and were no longer owners of any stock in the firm, if they ever
MIGUEL AMPIL, Petitioner,
were at all. This is why, in its Resolution of October 28, 1986; 118 this Court declared that —
vs.
Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' NATIVIDAD AGANA and ENRIQUE AGANA, Respondents.
calling and holding of a stockholders' meeting for the election of directors as authorized by the
DECISION
Memorandum of the President * * (to the PCGG) dated June 26, 1986, particularly, where as in
this case, the government can, through its designated directors, properly exercise control and SANDOVAL-GUTIERREZ, J.:
management over what appear to be properties and assets owned and belonging to the
government itself and over which the persons who appear in this case on behalf of BASECO Hospitals, having undertaken one of mankind’s most important and delicate endeavors, must
have failed to show any right or even any shareholding in said corporation. assume the grave responsibility of pursuing it with appropriate care. The care and service
dispensed through this high trust, however technical, complex and esoteric its character may be,
It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board must meet standards of responsibility commensurate with the undertaking to preserve and
in the management of the company's affairs should henceforth be guided and governed by the protect the health, and indeed, the very lives of those placed in the hospital’s keeping.1
norms herein laid down. They should never for a moment allow themselves to forget that they
are conservators, not owners of the business; they are fiduciaries, trustees, of whom the highest Assailed in these three consolidated petitions for review on certiorari is the Court of Appeals’
degree of diligence and rectitude is, in the premises, required. Decision2 dated September 6, 1996 in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198
affirming with modification the Decision3 dated March 17, 1993 of the Regional Trial Court
25. No Sufficient Showing of Other Irregularities (RTC), Branch 96, Quezon City in Civil Case No. Q-43322 and nullifying its Order dated
September 21, 1993.
As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the
execution of certain contracts, inclusive of the termination of the employment of some of its The facts, as culled from the records, are:
executives, 119 this Court cannot, in the present state of the evidence on record, pass upon
them. It is not necessary to do so. The issues arising therefrom may and will be left for initial On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital (Medical
determination in the appropriate action. But the Court will state that absent any showing of any City Hospital) because of difficulty of bowel movement and bloody anal discharge. After a series
important cause therefor, it will not normally substitute its judgment for that of the PCGG in these of medical examinations, Dr. Miguel Ampil, petitioner in G.R. No. 127590, diagnosed her to be
individual transactions. It is clear however, that as things now stand, the petitioner cannot be suffering from "cancer of the sigmoid."
said to have established the correctness of its submission that the acts of the PCGG in question
were done without or in excess of its powers, or with grave abuse of discretion. On April 11, 1984, Dr. Ampil, assisted by the medical staff 4 of the Medical City Hospital,
performed an anterior resection surgery on Natividad. He found that the malignancy in her

sigmoid area had spread on her left ovary, necessitating the removal of certain portions of it.
Thus, Dr. Ampil obtained the consent of Natividad’s husband, Enrique Agana, to permit Dr. Juan
Fuentes, respondent in G.R. No. 126467, to perform hysterectomy on her.
After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the operation
and closed the incision.
However, the operation appeared to be flawed. In the corresponding Record of Operation dated
April 11, 1984, the attending nurses entered these remarks:
"sponge count lacking 2
"announced to surgeon searched (sic) done but to no avail continue for closure."
On April 24, 1984, Natividad was released from the hospital. Her hospital and medical bills,
including the doctors’ fees, amounted to P60,000.00.
After a couple of days, Natividad complained of excruciating pain in her anal region. She
consulted both Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the natural
consequence of the surgery. Dr. Ampil then recommended that she consult an oncologist to
examine the cancerous nodes which were not removed during the operation.
On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek
further treatment. After four months of consultations and laboratory examinations, Natividad was
told she was free of cancer. Hence, she was advised to return to the Philippines.
On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two weeks
thereafter, her daughter found a piece of gauze protruding from her vagina. Upon being
informed about it, Dr. Ampil proceeded to her house where he managed to extract by hand a
piece of gauze measuring 1.5 inches in width. He then assured her that the pains would soon
vanish.
Dr. Ampil’s assurance did not come true. Instead, the pains intensified, prompting Natividad to
seek treatment at the Polymedic General Hospital. While confined there, Dr. Ramon Gutierrez
detected the presence of another foreign object in her vagina -- a foul-smelling gauze measuring
1.5 inches in width which badly infected her vaginal vault. A recto-vaginal fistula had formed in
her reproductive organs which forced stool to excrete through the vagina. Another surgical
operation was needed to remedy the damage. Thus, in October 1984, Natividad underwent
another surgery.
On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96, Quezon City
a complaint for damages against the Professional Services, Inc. (PSI), owner of the Medical City
Hospital, Dr. Ampil, and Dr. Fuentes, docketed as Civil Case No. Q-43322. They alleged that the
latter are liable for negligence for leaving two pieces of gauze inside Natividad’s body and
malpractice for concealing their acts of negligence.
Meanwhile, Enrique Agana also filed with the Professional Regulation Commission (PRC) an
administrative complaint for gross negligence and malpractice against Dr. Ampil and Dr.
Fuentes, docketed as Administrative Case No. 1690. The PRC Board of Medicine heard the
case only with respect to Dr. Fuentes because it failed to acquire jurisdiction over Dr. Ampil who
was then in the United States.
On February 16, 1986, pending the outcome of the above cases, Natividad died and was duly
substituted by her above-named children (the Aganas).
68
On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI, Dr. Ampil
and Dr. Fuentes liable for negligence and malpractice, the decretal part of which reads:
WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the defendants
PROFESSIONAL SERVICES, INC., DR. MIGUEL AMPIL and DR. JUAN FUENTES to pay to
the plaintiffs, jointly and severally, except in respect of the award for exemplary damages and
the interest thereon which are the liabilities of defendants Dr. Ampil and Dr. Fuentes only, as
follows:
1. As actual damages, the following amounts:
a. The equivalent in Philippine Currency of the total of US$19,900.00 at the rate of P21.60-
US$1.00, as reimbursement of actual expenses incurred in the United States of America;
b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician daughter;
c. The total sum of P45,802.50, representing the cost of hospitalization at Polymedic Hospital,
medical fees, and cost of the saline solution;
2. As moral damages, the sum of P2,000,000.00;
3. As exemplary damages, the sum of P300,000.00;
4. As attorney’s fees, the sum of P250,000.00;
5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of filing of the
complaint until full payment; and
6. Costs of suit.
SO ORDERED.
Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals,
docketed as CA-G.R. CV No. 42062.
Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial execution of its
Decision, which was granted in an Order dated May 11, 1993. Thereafter, the sheriff levied upon
certain properties of Dr. Ampil and sold them for P451,275.00 and delivered the amount to the
Aganas.
Following their receipt of the money, the Aganas entered into an agreement with PSI and Dr.
Fuentes to indefinitely suspend any further execution of the RTC Decision. However, not long
thereafter, the Aganas again filed a motion for an alias writ of execution against the properties of
PSI and Dr. Fuentes. On September 21, 1993, the RTC granted the motion and issued the
corresponding writ, prompting Dr. Fuentes to file with the Court of Appeals a petition for
certiorari and prohibition, with prayer for preliminary injunction, docketed as CA-G.R. SP No.
32198. During its pendency, the Court of Appeals issued a Resolution 5 dated October 29, 1993
granting Dr. Fuentes’ prayer for injunctive relief.
On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV No. 42062.
Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision 6 in
Administrative Case No. 1690 dismissing the case against Dr. Fuentes. The Board held that the

prosecution failed to show that Dr. Fuentes was the one who left the two pieces of gauze inside
Natividad’s body; and that he concealed such fact from Natividad.
On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing of CA-G.R.
CV No. 42062 and CA-G.R. SP No. 32198, thus:
WHEREFORE, except for the modification that the case against defendant-appellant Dr. Juan
Fuentes is hereby DISMISSED, and with the pronouncement that defendant-appellant Dr.
Miguel Ampil is liable to reimburse defendant-appellant Professional Services, Inc., whatever
amount the latter will pay or had paid to the plaintiffs-appellees, the decision appealed from is
hereby AFFIRMED and the instant appeal DISMISSED.
Concomitant with the above, the petition for certiorari and prohibition filed by herein defendant-
appellant Dr. Juan Fuentes in CA-G.R. SP No. 32198 is hereby GRANTED and the challenged
order of the respondent judge dated September 21, 1993, as well as the alias writ of execution
issued pursuant thereto are hereby NULLIFIED and SET ASIDE. The bond posted by the
petitioner in connection with the writ of preliminary injunction issued by this Court on November
29, 1993 is hereby cancelled.
Costs against defendants-appellants Dr. Miguel Ampil and Professional Services, Inc.
SO ORDERED.
Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution 7 dated
December 19, 1996.
Hence, the instant consolidated petitions.
In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in holding that: (1)
it is estopped from raising the defense that Dr. Ampil is not its employee; (2) it is solidarily liable
with Dr. Ampil; and (3) it is not entitled to its counterclaim against the Aganas. PSI contends that
Dr. Ampil is not its employee, but a mere consultant or independent contractor. As such, he
alone should answer for his negligence.
In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding that Dr.
Fuentes is not guilty of negligence or medical malpractice, invoking the doctrine of res ipsa
loquitur. They contend that the pieces of gauze are prima facie proofs that the operating
surgeons have been negligent.
Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in finding him
liable for negligence and malpractice sans evidence that he left the two pieces of gauze in
Natividad’s vagina. He pointed to other probable causes, such as: (1) it was Dr. Fuentes who
used gauzes in performing the hysterectomy; (2) the attending nurses’ failure to properly count
the gauzes used during surgery; and (3) the medical intervention of the American doctors who
examined Natividad in the United States of America.
For our resolution are these three vital issues: first, whether the Court of Appeals erred in
holding Dr. Ampil liable for negligence and malpractice; second, whether the Court of Appeals
erred in absolving Dr. Fuentes of any liability; and third, whether PSI may be held solidarily liable
for the negligence of Dr. Ampil.
I - G.R. No. 127590
Whether the Court of Appeals Erred in Holding Dr. Ampil
69
Liable for Negligence and Malpractice.
Dr. Ampil, in an attempt to absolve himself, gears the Court’s attention to other possible causes
of Natividad’s detriment. He argues that the Court should not discount either of the following
possibilities: first, Dr. Fuentes left the gauzes in Natividad’s body after performing hysterectomy;
second, the attending nurses erred in counting the gauzes; and third, the American doctors were
the ones who placed the gauzes in Natividad’s body.
Dr. Ampil’s arguments are purely conjectural and without basis. Records show that he did not
present any evidence to prove that the American doctors were the ones who put or left the
gauzes in Natividad’s body. Neither did he submit evidence to rebut the correctness of the
record of operation, particularly the number of gauzes used. As to the alleged negligence of Dr.
Fuentes, we are mindful that Dr. Ampil examined his (Dr. Fuentes’) work and found it in order.
The glaring truth is that all the major circumstances, taken together, as specified by the Court of
Appeals, directly point to Dr. Ampil as the negligent party, thus:
First, it is not disputed that the surgeons used gauzes as sponges to control the bleeding of the
patient during the surgical operation.
Second, immediately after the operation, the nurses who assisted in the surgery noted in their
report that the ‘sponge count (was) lacking 2’; that such anomaly was ‘announced to surgeon’
and that a ‘search was done but to no avail’ prompting Dr. Ampil to ‘continue for closure’ x x x.
Third, after the operation, two (2) gauzes were extracted from the same spot of the body of Mrs.
Agana where the surgery was performed.
An operation requiring the placing of sponges in the incision is not complete until the sponges
are properly removed, and it is settled that the leaving of sponges or other foreign substances in
the wound after the incision has been closed is at least prima facie negligence by the operating
surgeon.8 To put it simply, such act is considered so inconsistent with due care as to raise an
inference of negligence. There are even legions of authorities to the effect that such act is
negligence per se.9
Of course, the Court is not blind to the reality that there are times when danger to a patient’s life
precludes a surgeon from further searching missing sponges or foreign objects left in the body.
But this does not leave him free from any obligation. Even if it has been shown that a surgeon
was required by the urgent necessities of the case to leave a sponge in his patient’s abdomen,
because of the dangers attendant upon delay, still, it is his legal duty to so inform his patient
within a reasonable time thereafter by advising her of what he had been compelled to do. This is
in order that she might seek relief from the effects of the foreign object left in her body as her
condition might permit. The ruling in Smith v. Zeagler 10 is explicit, thus:
The removal of all sponges used is part of a surgical operation, and when a physician or
surgeon fails to remove a sponge he has placed in his patient’s body that should be removed as
part of the operation, he thereby leaves his operation uncompleted and creates a new condition
which imposes upon him the legal duty of calling the new condition to his patient’s attention, and
endeavoring with the means he has at hand to minimize and avoid untoward results likely to
ensue therefrom.
Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze. Worse, he even
misled her that the pain she was experiencing was the ordinary consequence of her operation.
Had he been more candid, Natividad could have taken the immediate and appropriate medical

remedy to remove the gauzes from her body. To our mind, what was initially an act of
negligence by Dr. Ampil has ripened into a deliberate wrongful act of deceiving his patient.
This is a clear case of medical malpractice or more appropriately, medical negligence. To
successfully pursue this kind of case, a patient must only prove that a health care provider either
failed to do something which a reasonably prudent health care provider would have done, or that
he did something that a reasonably prudent provider would not have done; and that failure or
action caused injury to the patient. 11 Simply put, the elements are duty, breach, injury and
proximate causation. Dr, Ampil, as the lead surgeon, had the duty to remove all foreign objects,
such as gauzes, from Natividad’s body before closure of the incision. When he failed to do so, it
was his duty to inform Natividad about it. Dr. Ampil breached both duties. Such breach caused
injury to Natividad, necessitating her further examination by American doctors and another
surgery. That Dr. Ampil’s negligence is the proximate cause12 of Natividad’s injury could be
traced from his act of closing the incision despite the information given by the attending nurses
that two pieces of gauze were still missing. That they were later on extracted from Natividad’s
vagina established the causal link between Dr. Ampil’s negligence and the injury. And what
further aggravated such injury was his deliberate concealment of the missing gauzes from the
knowledge of Natividad and her family.
II - G.R. No. 126467
Whether the Court of Appeals Erred in Absolving
Dr. Fuentes of any Liability
The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes on the
ground that it is contrary to the doctrine of res ipsa loquitur. According to them, the fact that the
two pieces of gauze were left inside Natividad’s body is a prima facie evidence of Dr. Fuentes’
negligence.
We are not convinced.
Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that the fact of the
occurrence of an injury, taken with the surrounding circumstances, may permit an inference or
raise a presumption of negligence, or make out a plaintiff’s prima facie case, and present a
question of fact for defendant to meet with an explanation.13 Stated differently, where the thing
which caused the injury, without the fault of the injured, is under the exclusive control of the
defendant and the injury is such that it should not have occurred if he, having such control used
proper care, it affords reasonable evidence, in the absence of explanation that the injury arose
from the defendant’s want of care, and the burden of proof is shifted to him to establish that he
has observed due care and diligence.14
From the foregoing statements of the rule, the requisites for the applicability of the doctrine of
res ipsa loquitur are: (1) the occurrence of an injury; (2) the thing which caused the injury was
under the control and management of the defendant; (3) the occurrence was such that in the
ordinary course of things, would not have happened if those who had control or management
used proper care; and (4) the absence of explanation by the defendant. Of the foregoing
requisites, the most instrumental is the "control and management of the thing which caused the
injury."15
We find the element of "control and management of the thing which caused the injury" to be
wanting. Hence, the doctrine of res ipsa loquitur will not lie.
70
It was duly established that Dr. Ampil was the lead surgeon during the operation of Natividad.
He requested the assistance of Dr. Fuentes only to perform hysterectomy when he (Dr. Ampil)
found that the malignancy in her sigmoid area had spread to her left ovary. Dr. Fuentes
performed the surgery and thereafter reported and showed his work to Dr. Ampil. The latter
examined it and finding everything to be in order, allowed Dr. Fuentes to leave the operating
room. Dr. Ampil then resumed operating on Natividad. He was about to finish the procedure
when the attending nurses informed him that two pieces of gauze were missing. A "diligent
search" was conducted, but the misplaced gauzes were not found. Dr. Ampil then directed that
the incision be closed. During this entire period, Dr. Fuentes was no longer in the operating
room and had, in fact, left the hospital.
Under the "Captain of the Ship" rule, the operating surgeon is the person in complete charge of
the surgery room and all personnel connected with the operation. Their duty is to obey his
orders.16 As stated before, Dr. Ampil was the lead surgeon. In other words, he was the "Captain
of the Ship." That he discharged such role is evident from his following conduct: (1) calling Dr.
Fuentes to perform a hysterectomy; (2) examining the work of Dr. Fuentes and finding it in order;
(3) granting Dr. Fuentes’ permission to leave; and (4) ordering the closure of the incision. To our
mind, it was this act of ordering the closure of the incision notwithstanding that two pieces of
gauze remained unaccounted for, that caused injury to Natividad’s body. Clearly, the control and
management of the thing which caused the injury was in the hands of Dr. Ampil, not Dr.
Fuentes.
In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does not per se
create or constitute an independent or separate ground of liability, being a mere evidentiary
rule.17 In other words, mere invocation and application of the doctrine does not dispense with the
requirement of proof of negligence. Here, the negligence was proven to have been committed by
Dr. Ampil and not by Dr. Fuentes.
III - G.R. No. 126297
Whether PSI Is Liable for the Negligence of Dr. Ampil
The third issue necessitates a glimpse at the historical development of hospitals and the
resulting theories concerning their liability for the negligence of physicians.
Until the mid-nineteenth century, hospitals were generally charitable institutions, providing
medical services to the lowest classes of society, without regard for a patient’s ability to
pay.18 Those who could afford medical treatment were usually treated at home by their
doctors.19 However, the days of house calls and philanthropic health care are over. The modern
health care industry continues to distance itself from its charitable past and has experienced a
significant conversion from a not-for-profit health care to for-profit hospital businesses.
Consequently, significant changes in health law have accompanied the business-related
changes in the hospital industry. One important legal change is an increase in hospital liability
for medical malpractice. Many courts now allow claims for hospital vicarious liability under the
theories of respondeat superior, apparent authority, ostensible authority, or agency by
estoppel. 20
In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the Civil
Code, which reads:
Art. 2176. Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-

existing contractual relation between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter.
A derivative of this provision is Article 2180, the rule governing vicarious liability under the
doctrine of respondeat superior, thus:
ART. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or
omissions, but also for those of persons for whom one is responsible.
x x x x x x
The owners and managers of an establishment or enterprise are likewise responsible for
damages caused by their employees in the service of the branches in which the latter are
employed or on the occasion of their functions.
Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks even though the former are not engaged in any
business or industry.
x x x x x x
The responsibility treated of in this article shall cease when the persons herein mentioned prove
that they observed all the diligence of a good father of a family to prevent damage.
A prominent civilist commented that professionals engaged by an employer, such as physicians,
dentists, and pharmacists, are not "employees" under this article because the manner in which
they perform their work is not within the control of the latter (employer). In other words,
professionals are considered personally liable for the fault or negligence they commit in the
discharge of their duties, and their employer cannot be held liable for such fault or negligence. In
the context of the present case, "a hospital cannot be held liable for the fault or negligence of a
physician or surgeon in the treatment or operation of patients."21
The foregoing view is grounded on the traditional notion that the professional status and the very
nature of the physician’s calling preclude him from being classed as an agent or employee of a
hospital, whenever he acts in a professional capacity. 22 It has been said that medical practice
strictly involves highly developed and specialized knowledge, 23 such that physicians are
generally free to exercise their own skill and judgment in rendering medical services sans
interference.24 Hence, when a doctor practices medicine in a hospital setting, the hospital and its
employees are deemed to subserve him in his ministrations to the patient and his actions are of
his own responsibility.25
The case of Schloendorff v. Society of New York Hospital26 was then considered an authority for
this view. The "Schloendorff doctrine" regards a physician, even if employed by a hospital, as an
independent contractor because of the skill he exercises and the lack of control exerted over his
work. Under this doctrine, hospitals are exempt from the application of the respondeat superior
principle for fault or negligence committed by physicians in the discharge of their profession.
However, the efficacy of the foregoing doctrine has weakened with the significant developments
in medical care. Courts came to realize that modern hospitals are increasingly taking active role
in supplying and regulating medical care to patients. No longer were a hospital’s functions
limited to furnishing room, food, facilities for treatment and operation, and attendants for its
patients. Thus, in Bing v. Thunig,27 the New York Court of Appeals deviated from the
Schloendorff doctrine, noting that modern hospitals actually do far more than provide facilities for
treatment. Rather, they regularly employ, on a salaried basis, a large staff of physicians, interns,
71
nurses, administrative and manual workers. They charge patients for medical care and
treatment, even collecting for such services through legal action, if necessary. The court then
concluded that there is no reason to exempt hospitals from the universal rule of respondeat
superior.
In our shores, the nature of the relationship between the hospital and the physicians is rendered
inconsequential in view of our categorical pronouncement in Ramos v. Court of Appeals 28 that
for purposes of apportioning responsibility in medical negligence cases, an employer-employee
relationship in effect exists between hospitals and their attending and visiting physicians. This
Court held:
"We now discuss the responsibility of the hospital in this particular incident. The unique practice
(among private hospitals) of filling up specialist staff with attending and visiting "consultants,"
who are allegedly not hospital employees, presents problems in apportioning responsibility for
negligence in medical malpractice cases. However, the difficulty is more apparent than real.
In the first place, hospitals exercise significant control in the hiring and firing of consultants and
in the conduct of their work within the hospital premises. Doctors who apply for ‘consultant’ slots,
visiting or attending, are required to submit proof of completion of residency, their educational
qualifications, generally, evidence of accreditation by the appropriate board (diplomate),
evidence of fellowship in most cases, and references. These requirements are carefully
scrutinized by members of the hospital administration or by a review committee set up by the
hospital who either accept or reject the application. x x x.
After a physician is accepted, either as a visiting or attending consultant, he is normally required
to attend clinico-pathological conferences, conduct bedside rounds for clerks, interns and
residents, moderate grand rounds and patient audits and perform other tasks and
responsibilities, for the privilege of being able to maintain a clinic in the hospital, and/or for the
privilege of admitting patients into the hospital. In addition to these, the physician’s performance
as a specialist is generally evaluated by a peer review committee on the basis of mortality and
morbidity statistics, and feedback from patients, nurses, interns and residents. A consultant
remiss in his duties, or a consultant who regularly falls short of the minimum standards
acceptable to the hospital or its peer review committee, is normally politely terminated.
In other words, private hospitals, hire, fire and exercise real control over their attending and
visiting ‘consultant’ staff. While ‘consultants’ are not, technically employees, x x x, the control
exercised, the hiring, and the right to terminate consultants all fulfill the important hallmarks of an
employer-employee relationship, with the exception of the payment of wages. In assessing
whether such a relationship in fact exists, the control test is determining. Accordingly, on the
basis of the foregoing, we rule that for the purpose of allocating responsibility in medical
negligence cases, an employer-employee relationship in effect exists between hospitals and
their attending and visiting physicians. "
But the Ramos pronouncement is not our only basis in sustaining PSI’s liability. Its liability is also
anchored upon the agency principle of apparent authority or agency by estoppel and the
doctrine of corporate negligence which have gained acceptance in the determination of a
hospital’s liability for negligent acts of health professionals. The present case serves as a perfect
platform to test the applicability of these doctrines, thus, enriching our jurisprudence.
Apparent authority, or what is sometimes referred to as the "holding
out" theory, or doctrine of ostensible agency or agency by estoppel,29 has its origin from the law
of agency. It imposes liability, not as the result of the reality of a contractual relationship, but

rather because of the actions of a principal or an employer in somehow misleading the public
into believing that the relationship or the authority exists. 30 The concept is essentially one of
estoppel and has been explained in this manner:
"The principal is bound by the acts of his agent with the apparent authority which he knowingly
permits the agent to assume, or which he holds the agent out to the public as possessing. The
question in every case is whether the principal has by his voluntary act placed the agent in such
a situation that a person of ordinary prudence, conversant with business usages and the nature
of the particular business, is justified in presuming that such agent has authority to perform the
particular act in question.31
The applicability of apparent authority in the field of hospital liability was upheld long time ago in
Irving v. Doctor Hospital of Lake Worth, Inc.32 There, it was explicitly stated that "there does not
appear to be any rational basis for excluding the concept of apparent authority from the field of
hospital liability." Thus, in cases where it can be shown that a hospital, by its actions, has held
out a particular physician as its agent and/or employee and that a patient has accepted
treatment from that physician in the reasonable belief that it is being rendered in behalf of the
hospital, then the hospital will be liable for the physician’s negligence.
Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article 1869 of
the Civil Code reads:
ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or
lack of action, or his failure to repudiate the agency, knowing that another person is acting on his
behalf without authority.
In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and
specializations of the physicians associated or accredited by it, including those of Dr. Ampil and
Dr. Fuentes. We concur with the Court of Appeals’ conclusion that it "is now estopped from
passing all the blame to the physicians whose names it proudly paraded in the public directory
leading the public to believe that it vouched for their skill and competence." Indeed, PSI’s act is
tantamount to holding out to the public that Medical City Hospital, through its accredited
physicians, offers quality health care services. By accrediting Dr. Ampil and Dr. Fuentes and
publicly advertising their qualifications, the hospital created the impression that they were its
agents, authorized to perform medical or surgical services for its patients. As expected, these
patients, Natividad being one of them, accepted the services on the reasonable belief that such
were being rendered by the hospital or its employees, agents, or servants. The trial court
correctly pointed out:
x x x regardless of the education and status in life of the patient, he ought not be burdened with
the defense of absence of employer-employee relationship between the hospital and the
independent physician whose name and competence are certainly certified to the general public
by the hospital’s act of listing him and his specialty in its lobby directory, as in the case herein.
The high costs of today’s medical and health care should at least exact on the hospital greater, if
not broader, legal responsibility for the conduct of treatment and surgery within its facility by its
accredited physician or surgeon, regardless of whether he is independent or employed."33
The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like PSI, are
capable of acting only through other individuals, such as physicians. If these accredited
physicians do their job well, the hospital succeeds in its mission of offering quality medical
services and thus profits financially. Logically, where negligence mars the quality of its services,
the hospital should not be allowed to escape liability for the acts of its ostensible agents.
72
We now proceed to the doctrine of corporate negligence or corporate responsibility.
One allegation in the complaint in Civil Case No. Q-43332 for negligence and malpractice is that
PSI as owner, operator and manager of Medical City Hospital, "did not perform the necessary
supervision nor exercise diligent efforts in the supervision of Drs. Ampil and Fuentes and its
nursing staff, resident doctors, and medical interns who assisted Drs. Ampil and Fuentes in the
performance of their duties as surgeons."34 Premised on the doctrine of corporate negligence,
the trial court held that PSI is directly liable for such breach of duty.
We agree with the trial court.
Recent years have seen the doctrine of corporate negligence as the judicial answer to the
problem of allocating hospital’s liability for the negligent acts of health practitioners, absent facts
to support the application of respondeat superior or apparent authority. Its formulation proceeds
from the judiciary’s acknowledgment that in these modern times, the duty of providing quality
medical service is no longer the sole prerogative and responsibility of the physician. The modern
hospitals have changed structure. Hospitals now tend to organize a highly professional medical
staff whose competence and performance need to be monitored by the hospitals commensurate
with their inherent responsibility to provide quality medical care.35
The doctrine has its genesis in Darling v. Charleston Community Hospital.36 There, the Supreme
Court of Illinois held that "the jury could have found a hospital negligent, inter alia, in failing to
have a sufficient number of trained nurses attending the patient; failing to require a consultation
with or examination by members of the hospital staff; and failing to review the treatment
rendered to the patient." On the basis of Darling, other jurisdictions held that a hospital’s
corporate negligence extends to permitting a physician known to be incompetent to practice at
the hospital.37 With the passage of time, more duties were expected from hospitals, among
them: (1) the use of reasonable care in the maintenance of safe and adequate facilities and
equipment; (2) the selection and retention of competent physicians; (3) the overseeing or
supervision of all persons who practice medicine within its walls; and (4) the formulation,
adoption and enforcement of adequate rules and policies that ensure quality care for its
patients.38 Thus, in Tucson Medical Center, Inc. v. Misevich,39 it was held that a hospital,
following the doctrine of corporate responsibility, has the duty to see that it meets the standards
of responsibilities for the care of patients. Such duty includes the proper supervision of the
members of its medical staff. And in Bost v. Riley, 40 the court concluded that a patient who
enters a hospital does so with the reasonable expectation that it will attempt to cure him. The
hospital accordingly has the duty to make a reasonable effort to monitor and oversee the
treatment prescribed and administered by the physicians practicing in its premises.
In the present case, it was duly established that PSI operates the Medical City Hospital for the
purpose and under the concept of providing comprehensive medical services to the public.
Accordingly, it has the duty to exercise reasonable care to protect from harm all patients
admitted into its facility for medical treatment. Unfortunately, PSI failed to perform such duty.
The findings of the trial court are convincing, thus:
x x x PSI’s liability is traceable to its failure to conduct an investigation of the matter reported in
the nota bene of the count nurse. Such failure established PSI’s part in the dark conspiracy of
silence and concealment about the gauzes. Ethical considerations, if not also legal, dictated the
holding of an immediate inquiry into the events, if not for the benefit of the patient to whom the
duty is primarily owed, then in the interest of arriving at the truth. The Court cannot accept that
the medical and the healing professions, through their members like defendant surgeons, and
their institutions like PSI’s hospital facility, can callously turn their backs on and disregard even a

mere probability of mistake or negligence by refusing or failing to investigate a report of such
seriousness as the one in Natividad’s case.
It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the assistance of
the Medical City Hospital’s staff, composed of resident doctors, nurses, and interns. As such, it
is reasonable to conclude that PSI, as the operator of the hospital, has actual or constructive
knowledge of the procedures carried out, particularly the report of the attending nurses that the
two pieces of gauze were missing. In Fridena v. Evans, 41 it was held that a corporation is bound
by the knowledge acquired by or notice given to its agents or officers within the scope of their
authority and in reference to a matter to which their authority extends. This means that the
knowledge of any of the staff of Medical City Hospital constitutes knowledge of PSI. Now, the
failure of PSI, despite the attending nurses’ report, to investigate and inform Natividad regarding
the missing gauzes amounts to callous negligence. Not only did PSI breach its duties to oversee
or supervise all persons who practice medicine within its walls, it also failed to take an active
step in fixing the negligence committed. This renders PSI, not only vicariously liable for the
negligence of Dr. Ampil under Article 2180 of the Civil Code, but also directly liable for its own
negligence under Article 2176. In Fridena, the Supreme Court of Arizona held:
x x x In recent years, however, the duty of care owed to the patient by the hospital has
expanded. The emerging trend is to hold the hospital responsible where the hospital has failed
to monitor and review medical services being provided within its walls. See Kahn Hospital
Malpractice Prevention, 27 De Paul . Rev. 23 (1977).
Among the cases indicative of the ‘emerging trend’ is Purcell v. Zimbelman, 18 Ariz. App. 75,500
P. 2d 335 (1972). In Purcell, the hospital argued that it could not be held liable for the
malpractice of a medical practitioner because he was an independent contractor within the
hospital. The Court of Appeals pointed out that the hospital had created a professional staff
whose competence and performance was to be monitored and reviewed by the governing body
of the hospital, and the court held that a hospital would be negligent where it had knowledge or
reason to believe that a doctor using the facilities was employing a method of treatment or care
which fell below the recognized standard of care.
Subsequent to the Purcell decision, the Arizona Court of Appeals held that a hospital has certain
inherent responsibilities regarding the quality of medical care furnished to patients within its
walls and it must meet the standards of responsibility commensurate with this undertaking.
Beeck v. Tucson General Hospital, 18 Ariz. App. 165, 500 P. 2d 1153 (1972). This court has
confirmed the rulings of the Court of Appeals that a hospital has the duty of supervising the
competence of the doctors on its staff. x x x.
x x x x x x
In the amended complaint, the plaintiffs did plead that the operation was performed at the
hospital with its knowledge, aid, and assistance, and that the negligence of the defendants was
the proximate cause of the patient’s injuries. We find that such general allegations of negligence,
along with the evidence produced at the trial of this case, are sufficient to support the hospital’s
liability based on the theory of negligent supervision."
Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for damages, let it be
emphasized that PSI, apart from a general denial of its responsibility, failed to adduce evidence
showing that it exercised the diligence of a good father of a family in the accreditation and
supervision of the latter. In neglecting to offer such proof, PSI failed to discharge its burden
under the last paragraph of Article 2180 cited earlier, and, therefore, must be adjudged solidarily
liable with Dr. Ampil. Moreover, as we have discussed, PSI is also directly liable to the Aganas.
73
One final word. Once a physician undertakes the treatment and care of a patient, the law
imposes on him certain obligations. In order to escape liability, he must possess that reasonable
degree of learning, skill and experience required by his profession. At the same time, he must
apply reasonable care and diligence in the exercise of his skill and the application of his
knowledge, and exert his best judgment.
WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of the Court of
Appeals in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198.
Costs against petitioners PSI and Dr. Miguel Ampil.
SO ORDERED.
FIRST DIVISION
G.R. No. 150920 November 25, 2005
CHILD LEARNING CENTER, INC. and SPOUSES EDGARDO L. LIMON and SYLVIA S.
LIMON, Petitioners,
vs.
TIMOTHY TAGARIO, assisted by his parents BASILIO TAGORIO and HERMINIA
TAGORIO, Respondents.
DECISION
AZCUNA, J.:
This petition started with a tort case filed with the Regional Trial Court of Makati by Timothy
Tagorio and his parents, Basilio R. Tagorio and Herminia Tagorio, docketed as Civil Case No.
91-1389. The complaint1 alleged that during the school year 1990-1991, Timothy was a Grade IV
student at Marymount School, an academic institution operated and maintained by Child
Learning Center, Inc. (CLC). In the afternoon of March 5, 1991, between 1 and 2 p.m., Timothy
entered the boy’s comfort room at the third floor of the Marymount building to answer the call of
nature. He, however, found himself locked inside and unable to get out. Timothy started to panic
and so he banged and kicked the door and yelled several times for help. When no help arrived
he decided to open the window to call for help. In the process of opening the window, Timothy
went right through and fell down three stories. Timothy was hospitalized and given medical
treatment for serious multiple physical injuries.
An action under Article 2176 of the Civil Code was filed by respondents against the CLC, the
members of its Board of Directors, namely Spouses Edgardo and Sylvia Limon, Alfonso Cruz,
Carmelo Narciso and Luningning Salvador, and the Administrative Officer of Marymount School,
Ricardo Pilao. In its defense,2 CLC maintained that there was nothing defective about the locking
mechanism of the door and that the fall of Timothy was not due to its fault or negligence. CLC
further maintained that it had exercised the due care and diligence of a good father of a family to
ensure the safety, well-being and convenience of its students.
After trial, the court a quo found in favor of respondents and ordered petitioners CLC and
Spouses Limon to pay respondents, jointly and severally, ₱200,253.12 as actual and
compensatory damages, ₱200,000 as moral damages, ₱50,000 as exemplary damages,
₱100,000 as attorney’s fees and the costs of the suit. The trial court disregarded the corporate
fiction of CLC and held the Spouses Limon personally liable because they were the ones who
actually managed the affairs of the CLC.

Petitioners CLC and the Spouses Limon appealed the decision to the Court of Appeals.
On September 28, 2001, the Court of Appeals3 affirmed the decision in toto. Petitioners elevated
the case to this Court under Rule 45 of the Rules of Court, after their motion for reconsideration
was denied by Resolution of November 23, 2001.4
Petitioners question several factual findings of the trial court, which were affirmed by the Court of
Appeals, namely:5
1. That respondent was allegedly trapped inside the boy’s comfort room located at the third floor
of the school building on March 5, 1991;
2. That respondent allegedly banged and kicked the door of said comfort room several times to
attract attention and that he allegedly yelled thereat for help which never came;
3. That respondent was allegedly forced to open the window of said comfort room to seek help;
4. That the lock set installed at the boy’s comfort room located in the third floor of the school
building on March 5, 1991 was allegedly defective and that the same lock set was involved in
previous incidents of alleged malfunctioning;
5. That petitioner Child Learning Center, Inc. allegedly failed to install iron grills in the window of
the boy’s comfort room at the third floor of the school building;
6. That petitioner Child Learning Center, Inc. allegedly failed to exercise the due care of a good
father of a family in the selection and supervision of its employees;
7. That the proximate cause of respondent’s accident was allegedly not due to his own
contributory negligence;
8. That there was an alleged basis to apply the legal principle of "piercing the veil of corporate
entity" in resolving the issue of alleged liability of petitioners Edgardo L. Limon and Sylvia S.
Limon;
9. That there was alleged basis for petitioners to pay respondent actual, moral and exemplary
damages, plus attorney’s fees;
10. That there was an alleged basis in not awarding petitioners’ prayer for moral and exemplary
damages, including attorney’s fees.
Generally, factual findings of the trial court, affirmed by the Court of Appeals, are final and
conclusive and may not be reviewed on appeal. The established exceptions are: (1) when the
inference made is manifestly mistaken, absurd or impossible; (2) when there is grave abuse of
discretion; (3) when the findings are grounded entirely on speculations, surmises or conjectures;
(4) when the judgment of the Court of Appeals is based on misapprehension of facts; (5) when
the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went
beyond the issues of the case and the same is contrary to the admissions of both appellant and
appellee; (7) when the findings of fact are conclusions without citation of specific evidence on
which they are based; (8) when the Court of Appeals manifestly overlooked certain relevant
facts not disputed by the parties and which, if properly considered, would justify a different
conclusion; and (9) when the findings of fact of the Court of Appeals are premised on the
absence of evidence and are contradicted by the evidence on record.6
74
On the basis of the records of this case, this Court finds no justification to reverse the factual
findings and consider this case as an exception to the general rule.
In every tort case filed under Article 2176 of the Civil Code, plaintiff has to prove by a
preponderance of evidence: (1) the damages suffered by the plaintiff; (2) the fault or negligence
of the defendant or some other person for whose act he must respond; and (3) the connection of
cause and effect between the fault or negligence and the damages incurred.7
Fault, in general, signifies a voluntary act or omission which causes damage to the right of
another giving rise to an obligation on the part of the actor to repair such damage. Negligence is
the failure to observe for the protection of the interest of another person that degree of care,
precaution and vigilance which the circumstances justly demand. Fault requires the execution of
a positive act which causes damage to another while negligence consists of the omission to do
acts which result in damage to another.8
In this tort case, respondents contend that CLC failed to provide precautionary measures to
avoid harm and injury to its students in two instances: (1) failure to fix a defective door knob
despite having been notified of the problem; and (2) failure to install safety grills on the window
where Timothy fell from.
The trial court found that the lock was defective on March 5, 1991:9
The door knob was defective. After the incident of March 5, 1991, said door knob was taken off
the door of the toilet where Timothy was in. The architect who testified during the trial declared
that although there were standard specifications for door knobs for comfort room[s], and he
designed them according to that requirement, he did not investigate whether the door knob
specified in his plans during the construction [was] actually put in place. This is so because he
did not verify whether the door knob he specified w[as] actually put in place at the particular
comfort room where Timothy was barred from getting outside. (TSN, pp. 19-20, December 8,
1994).
The Court of Appeals held that there was no reason to disturb the factual assessment:10
After having perused the records, We fail to see any indication of whim or arbitrariness on the
part of the trial magistrate in his assessment of the facts of the case. That said, We deem it not
to be within Our business to recast the factual conclusions reached by the court below.
Petitioners would make much of the point that no direct evidence was presented to prove that
the door knob was indeed defective on the date in question.
The fact, however, that Timothy fell out through the window shows that the door could not be
opened from the inside. That sufficiently points to the fact that something was wrong with the
door, if not the door knob, under the principle of res ipsa loquitor. The doctrine of res ipsa
loquitor applies where (1) the accident was of such character as to warrant an inference that it
would not have happened except for the defendant’s negligence; (2) the accident must have
been caused by an agency or instrumentality within the exclusive management or control of the
person charged with the negligence complained of; and (3) the accident must not have been due
to any voluntary action or contribution on the part of the person injured. 11 Petitioners are clearly
answerable for failure to see to it that the doors of their school toilets are at all times in working
condition. The fact that a student had to go through the window, instead of the door, shows that
something was wrong with the door.

As to the absence of grills on the window, petitioners contend that there was no such
requirement under the Building Code. Nevertheless, the fact is that such window, as petitioners
themselves point out, was approximately 1.5 meters from the floor, so that it was within reach of
a student who finds the regular exit, the door, not functioning. Petitioners, with the due diligence
of a good father of the family, should have anticipated that a student, locked in the toilet by a
non-working door, would attempt to use the window to call for help or even to get out.
Considering all the circumstances, therefore, there is sufficient basis to sustain a finding of
liability on petitioners’ part.
Petitioners’ argument that CLC exercised the due diligence of a good father of a family in the
selection and supervision of its employees is not decisive. Due diligence in the selection and
supervision of employees is applicable where the employer is being held responsible for the acts
or omissions of others under Article 2180 of the Civil Code.12 In this case, CLC’s liability is under
Article 2176 of the Civil Code, premised on the fact of its own negligence in not ensuring that all
its doors are properly maintained.
Our pronouncement that Timothy climbed out of the window because he could not get out using
the door, negates petitioners’ other contention that the proximate cause of the accident was
Timothy’s own negligence. The injuries he sustained from the fall were the product of a natural
and continuous sequence, unbroken by any intervening cause, that originated from CLC’s own
negligence.
We, however, agree with petitioners that there was no basis to pierce CLC’s separate corporate
personality. To disregard the corporate existence, the plaintiff must prove: (1) Control by the
individual owners, not mere majority or complete stock ownership, resulting in complete
domination not only of finances but of policy and business practice in respect to a transaction so
that the corporate entity as to this transaction had at the time no separate mind, will or existence
of its own; (2) such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest and unjust act
in contravention of the plaintiff’s legal right; and (3) the control and breach of duty must
proximately cause the injury or unjust loss complained of. The absence of these elements
prevents piercing the corporate veil.13 The evidence on record fails to show that these elements
are present, especially given the fact that plaintiffs’ complaint had pleaded that CLC is a
corporation duly organized and existing under the laws of the Philippines.
On 9th and 10th points raised concerning the award of damages, the resolution would rest on
factual determinations by the trial court, affirmed by the Court of Appeals, and no legal issue
warrants our intervention.
WHEREFORE, the petition is partly granted and the Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 50961 dated September 28, 2001 and November 23, 2001,
respectively, are MODIFIED in that petitioners Spouses Edgardo and Sylvia Limon are absolved
from personal liability. The Decision and Resolution are AFFIRMED in all other respects. No
pronouncement as to costs.
SECOND DIVISION
G.R. No. 170891               November 24, 2009
MANUEL C. ESPIRITU, JR., AUDIE LLONA, FREIDA F. ESPIRITU, CARLO F. ESPIRITU,
RAFAEL F. ESPIRITU, ROLANDO M. MIRABUNA, HERMILYN A. MIRABUNA, KIM ROLAND
A. MIRABUNA, KAYE ANN A. MIRABUNA, KEN RYAN A. MIRABUNA, JUANITO P. DE
CASTRO, GERONIMA A. ALMONITE and MANUEL C. DEE, who are the officers and
75
directors of BICOL GAS REFILLING PLANT CORPORATION, Petitioners,
vs.
PETRON CORPORATION and CARMEN J. DOLOIRAS, doing business under the name
"KRISTINA PATRICIA ENTERPRISES," Respondents.
DECISION
ABAD, J.:
This case is about the offense or offenses that arise from the reloading of the liquefied
petroleum gas cylinder container of one brand with the liquefied petroleum gas of another brand.
The Facts and the Case
Respondent Petron Corporation (Petron) sold and distributed liquefied petroleum gas (LPG) in
cylinder tanks that carried its trademark "Gasul." 1 Respondent Carmen J. Doloiras owned and
operated Kristina Patricia Enterprises (KPE), the exclusive distributor of Gasul LPGs in the
whole of Sorsogon.2 Jose Nelson Doloiras (Jose) served as KPE’s manager.
Bicol Gas Refilling Plant Corporation (Bicol Gas) was also in the business of selling and
distributing LPGs in Sorsogon but theirs carried the trademark "Bicol Savers Gas." Petitioner
Audie Llona managed Bicol Gas.
In the course of trade and competition, any given distributor of LPGs at times acquired
possession of LPG cylinder tanks belonging to other distributors operating in the same area.
They called these "captured cylinders." According to Jose, KPE’s manager, in April 2001 Bicol
Gas agreed with KPE for the swapping of "captured cylinders" since one distributor could not
refill captured cylinders with its own brand of LPG. At one time, in the course of implementing
this arrangement, KPE’s Jose visited the Bicol Gas refilling plant. While there, he noticed several
Gasul tanks in Bicol Gas’ possession. He requested a swap but Audie Llona of Bicol Gas replied
that he first needed to ask the permission of the Bicol Gas owners. That permission was given
and they had a swap involving around 30 Gasul tanks held by Bicol Gas in exchange for
assorted tanks held by KPE.
KPE’s Jose noticed, however, that Bicol Gas still had a number of Gasul tanks in its yard. He
offered to make a swap for these but Llona declined, saying the Bicol Gas owners wanted to
send those tanks to Batangas. Later Bicol Gas told Jose that it had no more Gasul tanks left in
its possession. Jose observed on almost a daily basis, however, that Bicol Gas’ trucks which
plied the streets of the province carried a load of Gasul tanks. He noted that KPE’s volume of
sales dropped significantly from June to July 2001.
On August 4, 2001 KPE’s Jose saw a particular Bicol Gas truck on the Maharlika Highway.
While the truck carried mostly Bicol Savers LPG tanks, it had on it one unsealed 50-kg Gasul
tank and one 50-kg Shellane tank. Jose followed the truck and when it stopped at a store, he
asked the driver, Jun Leorena, and the Bicol Gas sales representative, Jerome Misal, about the
Gasul tank in their truck. They said it was empty but, when Jose turned open its valve, he noted
that it was not. Misal and Leorena then admitted that the Gasul and Shellane tanks on their truck
belonged to a customer who had them filled up by Bicol Gas. Misal then mentioned that his
manager was a certain Rolly Mirabena.
Because of the above incident, KPE filed a complaint3 for violations of Republic Act (R.A.) 623
(illegally filling up registered cylinder tanks), as amended, and Sections 155 (infringement of
trade marks) and 169.1 (unfair competition) of the Intellectual Property Code (R.A. 8293). The

complaint charged the following: Jerome Misal, Jun Leorena, Rolly Mirabena, Audie Llona, and
several John and Jane Does, described as the directors, officers, and stockholders of Bicol Gas.
These directors, officers, and stockholders were eventually identified during the preliminary
investigation.
Subsequently, the provincial prosecutor ruled that there was probable cause only for violation of
R.A. 623 (unlawfully filling up registered tanks) and that only the four Bicol Gas employees,
Mirabena, Misal, Leorena, and petitioner Llona, could be charged. The charge against the other
petitioners who were the stockholders and directors of the company was dismissed.
Dissatisfied, Petron and KPE filed a petition for review with the Office of the Regional State
Prosecutor, Region V, which initially denied the petition but partially granted it on motion for
reconsideration. The Office of the Regional State Prosecutor ordered the filing of additional
informations against the four employees of Bicol Gas for unfair competition. It ruled, however,
that no case for trademark infringement was present. The Secretary of Justice denied the appeal
of Petron and KPE and their motion for reconsideration.
Undaunted, Petron and KPE filed a special civil action for certiorari with the Court of
Appeals4 but the Bicol Gas employees and stockholders concerned opposed it, assailing the
inadequacy in its certificate of non-forum shopping, given that only Atty. Joel Angelo C. Cruz
signed it on behalf of Petron. In its Decision5 dated October 17, 2005, the Court of Appeals
ruled, however, that Atty. Cruz’s certification constituted sufficient compliance. As to the
substantive aspect of the case, the Court of Appeals reversed the Secretary of Justice’s ruling. It
held that unfair competition does not necessarily absorb trademark infringement. Consequently,
the court ordered the filing of additional charges of trademark infringement against the
concerned Bicol Gas employees as well.
Since the Bicol Gas employees presumably acted under the direct order and control of its
owners, the Court of Appeals also ordered the inclusion of the stockholders of Bicol Gas in the
various charges, bringing to 16 the number of persons to be charged, now including petitioners
Manuel C. Espiritu, Jr., Freida F. Espiritu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando M.
Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna, Kaye Ann A. Mirabuna, Ken Ryan A.
Mirabuna, Juanito P. de Castro, Geronima A. Almonite, and Manuel C. Dee (together with Audie
Llona), collectively, petitioners Espiritu, et al. The court denied the motion for reconsideration of
these employees and stockholders in its Resolution dated January 6, 2006, hence, the present
petition for review6 before this Court.
The Issues Presented
The petition presents the following issues:
1. Whether or not the certificate of non-forum shopping that accompanied the petition filed with
the Court of Appeals, signed only by Atty. Cruz on behalf of Petron, complied with what the rules
require;
2. Whether or not the facts of the case warranted the filing of charges against the Bicol Gas
people for:
a) Filling up the LPG tanks registered to another manufacturer without the latter’s consent in
violation of R.A. 623, as amended;
b) Trademark infringement consisting in Bicol Gas’ use of a trademark that is confusingly similar
to Petron’s registered "Gasul" trademark in violation of section 155 also of R.A. 8293; and
76
c) Unfair competition consisting in passing off Bicol Gas-produced LPGs for Petron-produced
Gasul LPG in violation of Section 168.3 of R.A. 8293.
The Court’s Rulings
First. Petitioners Espiritu, et al. point out that the certificate of non-forum shopping that
respondents KPE and Petron attached to the petition they filed with the Court of Appeals was
inadequate, having been signed only by Petron, through Atty. Cruz.
But, while procedural requirements such as that of submittal of a certificate of non-forum
shopping cannot be totally disregarded, they may be deemed substantially complied with under
justifiable circumstances.7 One of these circumstances is where the petitioners filed a collective
action in which they share a common interest in its subject matter or raise a common cause of
action. In such a case, the certification by one of the petitioners may be deemed sufficient.8
Here, KPE and Petron shared a common cause of action against petitioners Espiritu, et al.,
namely, the violation of their proprietary rights with respect to the use of Gasul tanks and
trademark. Furthermore, Atty. Cruz said in his certification that he was executing it "for and on
behalf of the Corporation, and co-petitioner Carmen J. Doloiras."9 Thus, the object of the
requirement – to ensure that a party takes no recourse to multiple forums – was substantially
achieved. Besides, the failure of KPE to sign the certificate of non-forum shopping does not
render the petition defective with respect to Petron which signed it through Atty. Cruz.10 The
Court of Appeals, therefore, acted correctly in giving due course to the petition before it.
Second. The Court of Appeals held that under the facts of the case, there is probable cause that
petitioners Espiritu, et al. committed all three crimes: (a) illegally filling up an LPG tank registered
to Petron without the latter’s consent in violation of R.A. 623, as amended; (b) trademark
infringement which consists in Bicol Gas’ use of a trademark that is confusingly similar to
Petron’s registered "Gasul" trademark in violation of Section 155 of R.A. 8293; and (c) unfair
competition which consists in petitioners Espiritu, et al. passing off Bicol Gas-produced LPGs for
Petron-produced Gasul LPG in violation of Section 168.3 of R.A. 8293.
Here, the complaint adduced at the preliminary investigation shows that the one 50-kg Petron
Gasul LPG tank found on the Bicol Gas’ truck "belonged to [a Bicol Gas] customer who had the
same filled up by BICOL GAS."11 In other words, the customer had that one Gasul LPG tank
brought to Bicol Gas for refilling and the latter obliged.
R.A. 623, as amended,12 punishes any person who, without the written consent of the
manufacturer or seller of gases contained in duly registered steel cylinders or tanks, fills the
steel cylinder or tank, for the purpose of sale, disposal or trafficking, other than the purpose for
which the manufacturer or seller registered the same. This was what happened in this case,
assuming the allegations of KPE’s manager to be true. Bicol Gas employees filled up with their
firm’s gas the tank registered to Petron and bearing its mark without the latter’s written authority.
Consequently, they may be prosecuted for that offense.
But, as for the crime of trademark infringement, Section 155 of R.A. 8293 (in relation to Section
17013 ) provides that it is committed by any person who shall, without the consent of the owner of
the registered mark:
1. Use in commerce any reproduction, counterfeit, copy or colorable imitation of a registered
mark or the same container or a dominant feature thereof in connection with the sale, offering for
sale, distribution, advertising of any goods or services including other preparatory steps

necessary to carry out the sale of any goods or services on or in connection with which such use
is likely to cause confusion, or to cause mistake, or to deceive; or
2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature
thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs,
prints, packages, wrappers, receptacles or advertisements intended to be used in commerce
upon or in connection with the sale, offering for sale, distribution, or advertising of goods or
services on or in connection with which such use is likely to cause confusion, or to cause
mistake, or to deceive.
KPE and Petron have to show that the alleged infringer, the responsible officers and staff of
Bicol Gas, used Petron’s Gasul trademark or a confusingly similar trademark on Bicol Gas tanks
with intent to deceive the public and defraud its competitor as to what it is selling. 14 Examples of
this would be the acts of an underground shoe manufacturer in Malabon producing "Nike"
branded rubber shoes or the acts of a local shirt company with no connection to La Coste,
producing and selling shirts that bear the stitched logos of an open-jawed alligator.
Here, however, the allegations in the complaint do not show that Bicol Gas painted on its own
tanks Petron’s Gasul trademark or a confusingly similar version of the same to deceive its
customers and cheat Petron. Indeed, in this case, the one tank bearing the mark of Petron
Gasul found in a truck full of Bicol Gas tanks was a genuine Petron Gasul tank, more of a
captured cylinder belonging to competition. No proof has been shown that Bicol Gas has gone
into the business of distributing imitation Petron Gasul LPGs.
As to the charge of unfair competition, Section 168.3 (a) of R.A. 8293 (also in relation to Section
170) describes the acts constituting the offense as follows:
168.3. In particular, and without in any way limiting the scope of protection against unfair
competition, the following shall be deemed guilty of unfair competition:
(a) Any person, who is selling his goods and gives them the general appearance of goods of
another manufacturer or dealer, either as to the goods themselves or in the wrapping of the
packages in which they are contained, or the devices or words thereon, or in any other feature of
their appearance, which would be likely to influence purchasers to believe that the goods offered
are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who
otherwise clothes the goods with such appearance as shall deceive the public and defraud
another of his legitimate trade, or any subsequent vendor of such goods or any agent of any
vendor engaged in selling such goods with a like purpose;
Essentially, what the law punishes is the act of giving one’s goods the general appearance of
the goods of another, which would likely mislead the buyer into believing that such goods belong
to the latter. Examples of this would be the act of manufacturing or selling shirts bearing the logo
of an alligator, similar in design to the open-jawed alligator in La Coste shirts, except that the jaw
of the alligator in the former is closed, or the act of a producer or seller of tea bags with red tags
showing the shadow of a black dog when his competitor is producing or selling popular tea bags
with red tags showing the shadow of a black cat.
Here, there is no showing that Bicol Gas has been giving its LPG tanks the general appearance
of the tanks of Petron’s Gasul. As already stated, the truckfull of Bicol Gas tanks that the KPE
manager arrested on a road in Sorsogon just happened to have mixed up with them one
authentic Gasul tank that belonged to Petron.
77
The only point left is the question of the liability of the stockholders and members of the board of
directors of Bicol Gas with respect to the charge of unlawfully filling up a steel cylinder or tank
that belonged to Petron. The Court of Appeals ruled that they should be charged along with the
Bicol Gas employees who were pointed to as directly involved in overt acts constituting the
offense.1avvphi1
Bicol Gas is a corporation. As such, it is an entity separate and distinct from the persons of its
officers, directors, and stockholders. It has been held, however, that corporate officers or
employees, through whose act, default or omission the corporation commits a crime, may
themselves be individually held answerable for the crime.15
Jose claimed in his affidavit that, when he negotiated the swapping of captured cylinders with
Bicol Gas, its manager, petitioner Audie Llona, claimed that he would be consulting with the
owners of Bicol Gas about it. Subsequently, Bicol Gas declined the offer to swap cylinders for
the reason that the owners wanted to send their captured cylinders to Batangas. The Court of
Appeals seized on this as evidence that the employees of Bicol Gas acted under the direct
orders of its owners and that "the owners of Bicol Gas have full control of the operations of the
business."16
The "owners" of a corporate organization are its stockholders and they are to be distinguished
from its directors and officers. The petitioners here, with the exception of Audie Llona, are being
charged in their capacities as stockholders of Bicol Gas. But the Court of Appeals forgets that in
a corporation, the management of its business is generally vested in its board of directors, not its
stockholders.17 Stockholders are basically investors in a corporation. They do not have a hand in
running the day-to-day business operations of the corporation unless they are at the same time
directors or officers of the corporation. Before a stockholder may be held criminally liable for acts
committed by the corporation, therefore, it must be shown that he had knowledge of the criminal
act committed in the name of the corporation and that he took part in the same or gave his
consent to its commission, whether by action or inaction.
The finding of the Court of Appeals that the employees "could not have committed the crimes
without the consent, [abetment], permission, or participation of the owners of Bicol Gas"18 is a
sweeping speculation especially since, as demonstrated above, what was involved was just one
Petron Gasul tank found in a truck filled with Bicol Gas tanks. Although the KPE manager heard
petitioner Llona say that he was going to consult the owners of Bicol Gas regarding the offer to
swap additional captured cylinders, no indication was given as to which Bicol Gas stockholders
Llona consulted. It would be unfair to charge all the stockholders involved, some of whom were
proved to be minors.19 No evidence was presented establishing the names of the stockholders
who were charged with running the operations of Bicol Gas. The complaint even failed to allege
who among the stockholders sat in the board of directors of the company or served as its
officers.
The Court of Appeals of course specifically mentioned petitioner stockholder Manuel C. Espiritu,
Jr. as the registered owner of the truck that the KPE manager brought to the police for
investigation because that truck carried a tank of Petron Gasul. But the act that R.A. 623
punishes is the unlawful filling up of registered tanks of another. It does not punish the act of
transporting such tanks. And the complaint did not allege that the truck owner connived with
those responsible for filling up that Gasul tank with Bicol Gas LPG.
WHEREFORE, the Court REVERSES and SETS ASIDE the Decision of the Court of Appeals in
CA-G.R. SP 87711 dated October 17, 2005 as well as its Resolution dated January 6, 2006, the
Resolutions of the Secretary of Justice dated March 11, 2004 and August 31, 2004, and the
Order of the Office of the Regional State Prosecutor, Region V, dated February 19, 2003. The

Court REINSTATES the Resolution of the Office of the Provincial Prosecutor of Sorsogon in I.S.
2001-9231 (inadvertently referred in the Resolution itself as I.S. 2001-9234), dated February 26,
2002. The names of petitioners Manuel C. Espiritu, Jr., Freida F. Espititu, Carlo F. Espiritu,
Rafael F. Espiritu, Rolando M. Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna, Kaye
Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. De Castro, Geronima A. Almonite and
Manuel C. Dee are ORDERED excluded from the charge.
SO ORDERED.
SECOND DIVISION
G.R. No. 173807               April 16, 2009
JAIME U. GOSIACO, Petitioner,
vs.
LETICIA CHING and EDWIN CASTA, Respondents.
DECISION
TINGA, J.:
The right to recover due and demandable pecuniary obligations incurred by juridical persons
such as corporations cannot be impaired by procedural rules. Our rules of procedure governing
the litigation of criminal actions for violation of Batas Pambansa Blg. 22 (B.P. 22) have given the
appearance of impairing such substantive rights, and we take the opportunity herein to assert
the necessary clarifications.
Before us is a Rule 45 petition 1 which seeks the reversal of the Decision2 of the Court of Appeals
in CA-GR No. 29488. The Court of Appeals' decision affirmed the decision 3 of the Regional Trial
Court of Pasig, Branch 68 in Criminal Case No. 120482. The RTC's decision reversed the
decision4 of the Metropolitan Trial Court of San Juan, Branch 58 in Criminal Case No. 70445
which involved a charge of violation of B.P. Blg. 22 against respondents Leticia Ching (Ching)
and Edwin Casta (Casta).
On 16 February 2000, petitioner Jaime Gosiaco (petitioner) invested ₱8,000,000.00 with ASB
Holdings, Inc. (ASB) by way of loan. The money was loaned to ASB for a period of 48 days with
interest at 10.5% which is equivalent to ₱112,000.00. In exchange, ASB through its Business
Development Operation Group manager Ching, issued DBS checks no. 0009980577 and
0009980578 for ₱8,000,000.00 and ₱112,000.00 respectively. The checks, both signed by
Ching, were drawn against DBS Bank Makati Head Office branch. ASB, through a letter dated
31 March 2000, acknowledged that it owed petitioner the abovementioned amounts.5
Upon maturity of the ASB checks, petitioner went to the DBS Bank San Juan Branch to deposit
the two (2) checks. However, upon presentment, the checks were dishonored and payments
were refused because of a stop payment order and for insufficiency of funds. Petitioner informed
respondents, through letters dated 6 and 10 April 2000, 6 about the dishonor of the checks and
demanded replacement checks or the return of the money placement but to no avail. Thus,
petitioner filed a criminal complaint for violation of B.P. Blg. 22 before the Metropolitan Trial
Court of San Juan against the private respondents.
Ching was arraigned and tried while Casta remained at large. Ching denied liability and claimed
that she was a mere employee of ASB. She asserted that she did not have knowledge as to how
much money ASB had in the banks. Such responsibility, she claimed belonged to another
department.
78
On 15 December 2000, petitioner moved7 that ASB and its president, Luke Roxas, be impleaded
as party defendants. Petitioner, then, paid the corresponding docket fees. However, the MTC
denied the motion as the case had already been submitted for final decision.8
On 8 February 2001, the MTC acquitted Ching of criminal liability but it did not absolve her from
civil liability. The MTC ruled that Ching, as a corporate officer of ASB, was civilly liable since she
was a signatory to the checks.9
Both petitioner and Ching appealed the ruling to the RTC. Petitioner appealed to the RTC on the
ground that the MTC failed to hold ASB and Roxas either jointly or severally liable with Ching.
On the other hand, Ching moved for a reconsideration which was subsequently denied.
Thereafter, she filed her notice of appeal on the ground that she should not be held civilly liable
for the bouncing checks because they were contractual obligations of ASB.
On 12 July 2005, the RTC rendered its decision sustaining Ching's appeal. The RTC affirmed
the MTC’s ruling which denied the motion to implead ASB and Roxas for lack of jurisdiction over
their persons. The RTC also exonerated Ching from civil liability and ruled that the subject
obligation fell squarely on ASB. Thus, Ching should not be held civilly liable.10
Petitioner filed a petition for review with the Court of Appeals on the grounds that the RTC erred
in absolving Ching from civil liability; in upholding the refusal of the MTC to implead ASB and
Roxas; and in refusing to pierce the corporate veil of ASB and hold Roxas liable.
On 19 July 2006, the Court of Appeals affirmed the decision of the RTC and stated that the
amount petitioner sought to recover was a loan made to ASB and not to Ching. Roxas’
testimony further bolstered the fact that the checks issued by Ching were for and in behalf of
ASB. The Court of Appeals ruled that ASB cannot be impleaded in a B.P. Blg. 22 case since it is
not a natural person and in the case of Roxas, he was not the subject of a preliminary
investigation. Lastly, the Court of Appeals ruled that there was no need to pierce the corporate
veil of ASB since none of the requisites were present.11
Hence this petition.
Petitioner raised the following issues: (1) is a corporate officer who signed a bouncing check
civilly liable under B.P. Blg. 22; (2) can a corporation be impleaded in a B.P. Blg. 22 case; and
(3) is there a basis to pierce the corporate veil of ASB?
B.P. Blg. 22 is popularly known as the Bouncing Checks Law. Section 1 of B.P. Blg. 22 provides:
xxx xxx xxx
Where the check is drawn by a corporation, company or entity, the person or persons, who
actually signed the check in behalf of such drawer shall be liable under this Act.
B.P. Blg. 22 was enacted to address the rampant issuance of bouncing checks as payment for
pre-existing obligations. The circulation of bouncing checks adversely affected confidence in
trade and commerce. The State criminalized such practice because it was deemed injurious to
public interests12 and was found to be pernicious and inimical to public welfare. 13 B.P. Blg. 22
punishes the act of making and issuing bouncing checks. It is the act itself of issuing the checks
which is considered malum prohibitum. The law is an offense against public order and not an
offense against property.14 It penalizes the issuance of a check without regard to its purpose. It
covers all types of checks.15 Even checks that were issued as a form of deposit or guarantee
were held to be within the ambit of B.P. Blg. 22.161avvphi1.zw+

When a corporate officer issues a worthless check in the corporate name he may be held
personally liable for violating a penal statute. 17 The statute imposes criminal penalties on anyone
who with intent to defraud another of money or property, draws or issues a check on any bank
with knowledge that he has no sufficient funds in such bank to meet the check on
presentment.18 Moreover, the personal liability of the corporate officer is predicated on the
principle that he cannot shield himself from liability from his own acts on the ground that it was a
corporate act and not his personal act.19 As we held in Llamado v. Court of Appeals:20
Petitioner's argument that he should not be held personally liable for the amount of the check
because it was a check of the Pan Asia Finance Corporation and he signed the same in his
capacity as Treasurer of the corporation, is also untenable. The third paragraph of Section 1 of
BP Blg. 22 states: "Where the check is drawn by a corporation, company or entity, the person or
persons who actually signed the check in behalf of such drawer shall be liable under this Act."
The general rule is that a corporate officer who issues a bouncing corporate check can only be
held civilly liable when he is convicted. In the recent case of Bautista v. Auto Plus Traders
Inc.,21 the Court ruled decisively that the civil liability of a corporate officer in a B.P. Blg. 22 case
is extinguished with the criminal liability. We are not inclined through this case to revisit so recent
a precedent, and the rule of stare decisis precludes us to discharge Ching of any civil liability
arising from the B.P. Blg. 22 case against her, on account of her acquittal in the criminal charge.
We recognize though the bind entwining the petitioner. The records clearly show that it is ASB is
civilly obligated to petitioner. In the various stages of this case, petitioner has been proceeding
from the
premise that he is unable to pursue a separate civil action against ASB itself for the recovery of
the amounts due from the subject checks. From this premise, petitioner sought to implead ASB
as a defendant to the B.P. Blg. 22 case, even if such case is criminal in nature.22
What supplied the notion to the petitioner that he was unable to pursue a separate civil action
against ASB? He cites the Revised Rules on Criminal Procedure, particularly the provisions
involving B.P. Blg. 22 cases, which state that:
Rule 111, Section 1—Institution of criminal and civil action.
xxx
(b) The criminal action for violation of Batas Pambansa Blg. 22 shall be deemed to include the
corresponding civil action. No reservation to file such civil action separately shall be allowed.
Upon filing of the aforesaid joint criminal and civil actions, the offended party shall pay in full the
filing fees based on the amount of the check involved, which shall be considered as the actual
damages claimed. Where the complainant or information also seeks to recover liquidated, moral,
nominal, temperate or exemplary damages, the offended party shall pay the filing fees based on
the amounts alleged therein. If the amounts are not so alleged but any of these damages are
subsequently awarded by the court, the filing fees based on the amount awarded shall constitute
a first lien on the judgment.
Where the civil action has been filed separately and trial thereof has not yet commenced, it may
be consolidated with the criminal action upon application with the court trying the latter case. If
the application is granted, the trial of both actions shall proceed in accordance with section 2 of
this Rule governing consolidation of the civil and criminal actions.23
79
We are unable to agree with petitioner that he is entitled to implead ASB in the B.P. Blg. 22
case, or any other corporation for that matter, even if the Rules require the joint trial of both the
criminal and civil liability. A basic maxim in statutory construction is that the interpretation of
penal laws is strictly construed against the State and liberally construed against the accused.
Nowhere in B.P. Blg. 22 is it provided that a juridical person may be impleaded as an accused or
defendant in the prosecution for violations of that law, even in the litigation of the civil aspect
thereof.
Nonetheless, the substantive right of a creditor to recover due and demandable obligations
against a debtor-corporation cannot be denied or diminished by a rule of procedure. Technically,
nothing in Section 1(b) of Rule 11 prohibits the reservation of a separate civil action against the
juridical person on whose behalf the check was issued. What the rules prohibit is the reservation
of a separate civil
action against the natural person charged with violating B.P. Blg. 22, including such corporate
officer who had signed the bounced check.
In theory the B.P. Blg. 22 criminal liability of the person who issued the bouncing check in behalf
of a corporation stands independent of the civil liability of the corporation itself, such civil liability
arising from the Civil Code. B.P. Blg. 22 itself fused this criminal liability of the signer of the
check in behalf of the corporation with the corresponding civil liability of the corporation itself by
allowing the complainant to recover such civil liability not from the corporation, but from the
person who signed the check in its behalf. Prior to the amendments to our rules on criminal
procedure, it though clearly was permissible to pursue the criminal liability against the signatory,
while going after the corporation itself for the civil liability.
However, with the insistence under the amended rules that the civil and criminal liability
attaching to the bounced check be pursued jointly, the previous option to directly pursue the civil
liability against the person who incurred the civil obligation–the corporation itself–is no longer
that clear. In theory, the implied institution of the civil case into the criminal case for B.P. Blg. 22
should not affect the civil liability of the corporation for the same check, since such implied
institution concerns the civil liability of the signatory, and not of the corporation.
Let us pursue this point further. B.P. Blg. 22 imposes a distinct civil liability on the signatory of
the check which is distinct from the civil liability of the corporation for the amount represented
from the check. The civil liability attaching to the signatory arises from the wrongful act of signing
the check despite the insufficiency of funds in the account, while the civil liability attaching to the
corporation is itself the very obligation covered by the check or the consideration for its
execution. Yet these civil liabilities are mistaken to be indistinct. The confusion is traceable to
the singularity of the amount of each.
If we conclude, as we should, that under the current Rules of Criminal Procedure, the civil action
that is impliedly instituted in the B.P. Blg. 22 action is only the civil liability of the signatory, and
not that of the corporation itself, the distinctness of the cause of action against the signatory and
that against the corporation is rendered beyond dispute. It follows that the actions involving
these liabilities should be adjudged according to their respective standards and merits. In the
B.P. Blg. 22 case, what the trial court should determine whether or not the signatory had signed
the check with knowledge of the insufficiency of funds or credit in the bank account, while in the
civil case the trial court should ascertain whether or not the obligation itself
is valid and demandable. The litigation of both questions could, in theory, proceed independently
and simultaneously without being ultimately conclusive on one or the other.
 80

It might be argued that under the current rules, if the signatory were made liable for the amount ALFREDO CHING, Petitioner,
of the check by reason of the B.P. Blg. 22 case, such signatory would have the option of vs.
recovering the same amount from the corporation. Yet that prospect does not ultimately satisfy THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-
the ends of justice. If the signatory does not have sufficient assets to answer for the amount of VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch 52;
the check–a distinct possibility considering the occasional large-scale transactions engaged in RIZAL COMMERCIAL BANKING CORP. and THE PEOPLE OF THE
by corporations – the corporation would not be subsidiarily liable to the complainant, even if it in PHILIPPINES, Respondents.
truth the controversy, of which the criminal case is just a part, is traceable to the original
obligation of the corporation. While the Revised Penal Code imposes subsidiary civil liability to DECISION
corporations for criminal acts engaged in by their employees in the discharge of their duties, said
subsidiary liability applies only to felonies, 24 and not to crimes penalized by special laws such as CALLEJO, SR., J.:
B.P. Blg. 22. And nothing in B.P. Blg. 22 imposes such subsidiary liability to the corporation in
Before the Court is a petition for review on certiorari of the Decision 1 of the Court of Appeals
whose name the check is actually issued. Clearly then, should the check signatory be unable to
(CA) in CA-G.R. SP No. 57169 dismissing the petition for certiorari, prohibition and mandamus
pay the obligation incurred by the corporation, the complainant would be bereft of remedy unless
filed by petitioner Alfredo Ching, and its Resolution2 dated June 28, 2004 denying the motion for
the right of action to collect on the liability of the corporation is recognized and given flesh.
reconsideration thereof.
There are two prevailing concerns should civil recovery against the corporation be pursued even
Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime in
as the B.P. Blg. 22 case against the signatory remains extant. First, the possibility that the
September to October 1980, PBMI, through petitioner, applied with the Rizal Commercial
plaintiff might be awarded the amount of the check in both the B.P. Blg. 22 case and in the civil
Banking Corporation (respondent bank) for the issuance of commercial letters of credit to
action against the corporation. For obvious reasons, that should not be permitted. Considering
finance its importation of assorted goods.3
that petitioner herein has no chance to recover the amount of the check through the B.P. Blg. 22
case, we need not contend with that possibility through this case. Nonetheless, as a matter of Respondent bank approved the application, and irrevocable letters of credit were issued in favor
prudence, it is best we refer the matter to the Committee on Rules for the formulation of proper of petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner signed 13
guidelines to prevent that possibility. trust receipts4 as surety, acknowledging delivery of the following goods:
The other concern is over the payment of filing fees in both the B.P. Blg. 22 case and the civil
action against the corporation. Generally, we see no evil or cause for distress if the plaintiff were T/R Date Maturity Principal Description of Goods
made to pay filing fees based on the amount of the check in both the B.P. Blg. 22 case and the Nos. Granted Date
civil action. After all, the plaintiff therein made the deliberate option to file two separate cases,
even if the recovery of the amounts of the check against the corporation could evidently be 1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK"
pursued through the civil action alone. Brand Synthetic Graphite
Electrode
Nonetheless, in petitioner’s particular case, considering the previous legal confusion on whether
he is authorized to file the civil case against ASB, he should, as a matter of equity, be exempted
from paying the filing fees based on the amount of the checks should he pursue the civil action 1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 bundles)
against ASB. In a similar vein and for a similar reason, we likewise find that petitioner should not Calorized Lance Pipes
be barred by prescription should he file the civil action as the period should not run from the date
the checks were issued but from the date this decision attains finality. The courts should not be 1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired
bound strictly by the statute of limitations or the doctrine of laches when to do so, manifest Refractory Tundish Bricks
wrong or injustice would result.25

WHEREFORE, the petition is DENIED, without prejudice to the right of petitioner Jaime U. 1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for
Gosiaco to pursue an independent civil action against ASB Holdings Inc. for the amount of the CCM
subject checks, in accordance with the terms of this decision. No pronouncements as to costs.

Let a copy of this Decision be REFERRED to the Committee on Revision of the Rules for the 1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds
formulation of the formal rules of procedure to govern the civil action for the recovery of the
amount covered by the check against the juridical person which issued it. 2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory
Nozzle Bricks
SO ORDERED.

FIRST DIVISION 1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite

Electrode [with] tapered
G. R. No. 164317             February 6, 2006
 81

In the meantime, the Court rendered judgment in Allied Banking Corporation v.

pitch filed nipples
Ordoñez,11 holding that the penal provision of P.D. No. 115 encompasses any act violative of an
obligation covered by the trust receipt; it is not limited to transactions involving goods which are
1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles to be sold (retailed), reshipped, stored or processed as a component of a product ultimately
calorized lance pipes [)] sold. The Court also ruled that "the non-payment of the amount covered by a trust receipt is an
act violative of the obligation of the entrustee to pay."12
1895 12-17-80 03-17-81 P67,652.04 Spare parts for On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against
Spectrophotometer petitioner before the Office of the City Prosecutor of Manila. The case was docketed as I.S. No.
95B-07614.
1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there
was no probable cause to charge petitioner with violating P.D. No. 115, as petitioner’s liability
2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds was only civil, not criminal, having signed the trust receipts as surety.13 Respondent bank
appealed the resolution to the Department of Justice (DOJ) via petition for review, alleging that
2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for the City Prosecutor erred in ruling:
rolling mills
1. That there is no evidence to show that respondent participated in the misappropriation of the
goods subject of the trust receipts;
2100 02-10-81 05-12-81 P210,748.00 Spare parts for
Lacolaboratory 2. That the respondent is a mere surety of the trust receipts; and
Equipment5
3. That the liability of the respondent is only civil in nature.14

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to
sell but not by way of conditional sale, pledge or otherwise; and in case such goods were sold,
to turn over the proceeds thereof as soon as received, to apply against the relative acceptances
and payment of other indebtedness to respondent bank. In case the goods remained unsold
within the specified period, the goods were to be returned to respondent bank without any need
of demand. Thus, said "goods, manufactured products or proceeds thereof, whether in the form
of money or bills, receivables, or accounts separate and capable of identification" were
respondent bank’s property.
When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to
return their value amounting to ₱6,940,280.66 despite demands. Thus, the bank filed a criminal
complaint for estafa6 against petitioner in the Office of the City Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found probable cause estafa
under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree
(P.D.) No. 115, otherwise known as the Trust Receipts Law. Thirteen (13) Informations were
filed against the petitioner before the Regional Trial Court (RTC) of Manila. The cases were
docketed as Criminal Cases No. 86-42169 to 86-42181, raffled to Branch 31 of said court.
Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The
appeal was dismissed in a Resolution7 dated March 17, 1987, and petitioner moved for its
reconsideration. On December 23, 1987, the Minister of Justice granted the motion, thus
reversing the previous resolution finding probable cause against petitioner. 8 The City Prosecutor
was ordered to move for the withdrawal of the Informations.
This time, respondent bank filed a motion for reconsideration, which, however, was denied on
February 24, 1988.9 The RTC, for its part, granted the Motion to Quash the Informations filed by
petitioner on the ground that the material allegations therein did not amount to estafa.10
On July 13, 1999, the Secretary of Justice issued Resolution No. 250 15 granting the petition and
reversing the assailed resolution of the City Prosecutor. According to the Justice Secretary, the
petitioner, as Senior Vice-President of PBMI, executed the 13 trust receipts and as such, was
the one responsible for the offense. Thus, the execution of said receipts is enough to indict the
petitioner as the official responsible for violation of P.D. No. 115. The Justice Secretary also
declared that petitioner could not contend that P.D. No. 115 covers only goods ultimately
destined for sale, as this issue had already been settled in Allied Banking Corporation v.
Ordoñez,16 where the Court ruled that P.D. No. 115 is "not limited to transactions in goods which
are to be sold (retailed), reshipped, stored or processed as a component of a product ultimately
sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to return said
goods if unsold or not otherwise disposed of in accordance with the terms of the trust receipts."
The Justice Secretary further stated that the respondent bound himself under the terms of the
trust receipts not only as a corporate official of PBMI but also as its surety; hence, he could be
proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its
decision in Rizal Commercial Banking Corporation v. Court of Appeals; 17 and second, as the
corporate official responsible for the offense under P.D. No. 115, via criminal prosecution.
Moreover, P.D. No. 115 explicitly allows the prosecution of corporate officers "without prejudice
to the civil liabilities arising from the criminal offense." Thus, according to the Justice Secretary,
following Rizal Commercial Banking Corporation, the civil liability imposed is clearly separate
and distinct from the criminal liability of the accused under P.D. No. 115.
Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13
Informations against petitioner for violation of P.D. No. 115 before the RTC of Manila. The cases
were docketed as Criminal Cases No. 99-178596 to 99-178608 and consolidated for trial before
Branch 52 of said court. Petitioner filed a motion for reconsideration, which the Secretary of
Justice denied in a Resolution18 dated January 17, 2000.

Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the
resolutions of the Secretary of Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE ACTING
OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS PROSECUTION
DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO PROVE HIS
PARTICIPATION IN THE ALLEGED TRANSACTIONS.
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE ABUSE
OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED
PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME INCURRED IN THE
TERMINATION OF THE PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE
DISMISSAL OF THE INSTANT CASE.
3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR
ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF
JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF THE PETITIONER
DESPITE LACK OF SUFFICIENT BASIS.19
In his petition, petitioner incorporated a certification stating that "as far as this Petition is
concerned, no action or proceeding in the Supreme Court, the Court of Appeals or different
divisions thereof, or any tribunal or agency. It is finally certified that if the affiant should learn that
a similar action or proceeding has been filed or is pending before the Supreme Court, the Court
of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby undertakes to
notify this Honorable Court within five (5) days from such notice."20
In its Comment on the petition, the Office of the Solicitor General alleged that -
A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER
ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND
THAT THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF P.D. [No.]
115 IN RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL CODE.
B.
THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE DELAY HAS
MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE,
JUSTIFYING ITS DISMISSAL.
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND MANDAMUS
IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF THE DEPARTMENT
OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE DISMISSED.21
On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on
procedural grounds. On the procedural issue, it ruled that (a) the certification of non-forum
shopping executed by petitioner and incorporated in the petition was defective for failure to
comply with the first two of the three-fold undertakings prescribed in Rule 7, Section 5 of the
Revised Rules of Civil Procedure; and (b) the petition for certiorari, prohibition and mandamus
was not the proper remedy of the petitioner.
82
On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of
Justice were correctly issued for the following reasons: (a) petitioner, being the Senior Vice-
President of PBMI and the signatory to the trust receipts, is criminally liable for violation of P.D.
No. 115; (b) the issue raised by the petitioner, on whether he violated P.D. No. 115 by his
actuations, had already been resolved and laid to rest in Allied Bank Corporation v.
Ordoñez;22 and (c) petitioner was estopped from raising the
City Prosecutor’s delay in the final disposition of the preliminary investigation because he failed
to do so in the DOJ.
Thus, petitioner filed the instant petition, alleging that:
I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE GROUND
THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED THEREIN WAS
DEFECTIVE.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS COMMITTED BY
THE SECRETARY OF JUSTICE IN COMING OUT WITH THE ASSAILED RESOLUTIONS.23
The Court will delve into and resolve the issues seriatim.
The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He claims
that the rules of procedure should be used to promote, not frustrate, substantial justice. He
insists that the Rules of Court should be construed liberally especially when, as in this case, his
substantial rights are adversely affected; hence, the deficiency in his certification of non-forum
shopping should not result in the dismissal of his petition.
The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably,
the certificate of non-forum shopping incorporated in the petition before the CA is defective
because it failed to disclose essential facts about pending actions concerning similar issues and
parties. It asserts that petitioner’s failure to comply with the Rules of Court is fatal to his petition.
The OSG cited Section 2, Rule 42, as well as the ruling of this Court in Melo v. Court of
Appeals.24
We agree with the ruling of the CA that the certification of non-forum shopping petitioner
incorporated in his petition before the appellate court is defective. The certification reads:
It is further certified that as far as this Petition is concerned, no action or proceeding in the
Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency.
It is finally certified that if the affiant should learn that a similar action or proceeding has been
filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof,
of any other tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5)
days from such notice.25
Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should
be accompanied by a sworn certification of non-forum shopping, as provided in the third
paragraph of Section 3, Rule 46 of said Rules. The latter provision reads in part:

SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. — The
petition shall contain the full names and actual addresses of all the petitioners and respondents,
a concise statement of the matters involved, the factual background of the case and the grounds
relied upon for the relief prayed for.
xxx
The petitioner shall also submit together with the petition a sworn certification that he has not
theretofore commenced any other action involving the same issues in the Supreme Court, the
Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is such
other action or proceeding, he must state the status of the same; and if he should thereafter
learn that a similar action or proceeding has been filed or is pending before the Supreme Court,
the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he
undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within
five (5) days therefrom. xxx
Compliance with the certification against forum shopping is separate from and independent of
the avoidance of forum shopping itself. The requirement is mandatory. The failure of the
petitioner to comply with the foregoing requirement shall be sufficient ground for the dismissal of
the petition without prejudice, unless otherwise provided.26
Indubitably, the first paragraph of petitioner’s certification is incomplete and unintelligible.
Petitioner failed to certify that he "had not heretofore commenced any other action involving the
same issues in the Supreme Court, the Court of Appeals or the different divisions thereof or any
other tribunal or agency" as required by paragraph 4, Section 3, Rule 46 of the Revised Rules of
Court.
We agree with petitioner’s contention that the certification is designed to promote and facilitate
the orderly administration of justice, and therefore, should not be interpreted with absolute
literalness. In his works on the Revised Rules of Civil Procedure, former Supreme Court Justice
Florenz Regalado states that, with respect to the contents of the certification which the pleader
may prepare, the rule of substantial compliance may be availed of.27 However, there must be a
special circumstance or compelling reason which makes the strict application of the requirement
clearly unjustified. The instant petition has not alleged any such extraneous circumstance.
Moreover, as worded, the certification cannot even be regarded as substantial compliance with
the procedural requirement. Thus, the CA was not informed whether, aside from the petition
before it, petitioner had commenced any other action involving the same issues in other
tribunals.
On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary
of Justice committed grave abuse of discretion in finding probable cause against the petitioner
for violation of estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to
P.D. No. 115. Thus, the appellate court ratiocinated:
Be that as it may, even on the merits, the arguments advanced in support of the petition are not
persuasive enough to justify the desired conclusion that respondent Secretary of Justice gravely
abused its discretion in coming out with his assailed Resolutions. Petitioner posits that, except
for his being the Senior Vice-President of the PBMI, there is no iota of evidence that he was a
participes crimines in violating the trust receipts sued upon; and that his liability, if at all, is purely
civil because he signed the said trust receipts merely as a xxx surety and not as the entrustee.
These assertions are, however, too dull that they cannot even just dent the findings of the
respondent Secretary, viz:
83
"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:
‘xxx If the violation or offense is committed by a corporation, partnership, association or other
judicial entities, the penalty provided for in this Decree shall be imposed upon the directors,
officers, employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.’
"There is no dispute that it was the respondent, who as senior vice-president of PBM, executed
the thirteen (13) trust receipts. As such, the law points to him as the official responsible for the
offense. Since a corporation cannot be proceeded against criminally because it cannot commit
crime in which personal violence or malicious intent is required, criminal action is limited to the
corporate agents guilty of an act amounting to a crime and never against the corporation itself
(West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus,
the execution by respondent of said receipts is enough to indict him as the official responsible
for violation of PD 115.
"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which
are ultimately destined for sale and not goods, like those imported by PBM, for use in
manufacture. This issue has already been settled in the Allied Banking Corporation case, supra,
where he was also a party, when the Supreme Court ruled that PD 115 is ‘not limited to
transactions in goods which are to be sold (retailed), reshipped, stored or processed as a
component or a product ultimately sold’ but ‘covers failure to turn over the proceeds of the sale
of entrusted goods, or to return said goods if unsold or disposed of in accordance with the terms
of the trust receipts.’
"In regard to the other assigned errors, we note that the respondent bound himself under the
terms of the trust receipts not only as a corporate official of PBM but also as its surety. It is
evident that these are two (2) capacities which do not exclude the other. Logically, he can be
proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its
decision in RCBC vs. Court of Appeals, 178 SCRA 739; and, secondly, as the corporate official
responsible for the offense under PD 115, the present case is an appropriate remedy under our
penal law.
"Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without prejudice to the
civil liabilities arising from the criminal offense’ thus, the civil liability imposed on respondent in
RCBC vs. Court of Appeals case is clearly separate and distinct from his criminal liability under
PD 115.’"28
Petitioner asserts that the appellate court’s ruling is erroneous because (a) the transaction
between PBMI and respondent bank is not a trust receipt transaction; (b) he entered into the
transaction and was sued in his capacity as PBMI Senior Vice-President; (c) he never received
the goods as an entrustee for PBMI, hence, could not have committed any dishonesty or abused
the confidence of respondent bank; and (d) PBMI acquired the goods and used the same in
operating its machineries and equipment and not for resale.
The OSG, for its part, submits a contrary view, to wit:
34. Petitioner further claims that he is not a person responsible for the offense allegedly because
"[b]eing charged as the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner
cannot be held criminally liable as the transactions sued upon were clearly entered into in his
capacity as an officer of the corporation" and that [h]e never received the goods as an entrustee
for PBM as he never had or took possession of the goods nor did he commit dishonesty nor
"abuse of confidence in transacting with RCBC." Such argument is bereft of merit.

35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not
exculpate him from any liability. Petitioner’s responsibility as the corporate official of PBM who
received the goods in trust is premised on Section 13 of P.D. No. 115, which provides:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of
the goods, documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable under the provisions of Article Three hundred
and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as
amended, otherwise known as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the penalty provided for in
this Decree shall be imposed upon the directors, officers, employees or other officials or persons
therein responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust receipts and having received
the goods for PBM, it was inevitable that the petitioner is the proper corporate officer to be
proceeded against by virtue of the PBM’s violation of P.D. No. 115.29
The ruling of the CA is correct.
In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts of a
quasi-judicial officer may be assailed by the aggrieved party via a petition for certiorari and
enjoined (a) when necessary to afford adequate protection to the constitutional rights of the
accused; (b) when necessary for the orderly administration of justice; (c) when the acts of the
officer are without or in excess of authority; (d) where the charges are manifestly false and
motivated by the lust for vengeance; and (e) when there is clearly no prima facie case against
the accused.31 The Court also declared that, if the officer conducting a preliminary investigation
(in that case, the Office of the Ombudsman) acts without or in excess of his authority and
resolves to file an Information despite the absence of probable cause, such act may be nullified
by a writ of certiorari.32
Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the Information
shall be prepared by the Investigating Prosecutor against the respondent only if he or she finds
probable cause to hold such respondent for trial. The Investigating Prosecutor acts without or in
excess of his authority under the Rule if the Information is filed against the respondent despite
absence of evidence showing probable cause therefor.34 If the Secretary of Justice reverses the
Resolution of the Investigating Prosecutor who found no probable cause to hold the respondent
for trial, and orders such prosecutor to file the Information despite the absence of probable
cause, the Secretary of Justice acts contrary to law, without authority and/or in excess of
authority. Such resolution may likewise be nullified in a petition for certiorari under Rule 65 of the
Revised Rules of Civil Procedure.35
A preliminary investigation, designed to secure the respondent against hasty, malicious and
oppressive prosecution, is an inquiry to determine whether (a) a crime has been committed; and
(b) whether there is probable cause to believe that the accused is guilty thereof. It is a means of
discovering the person or persons who may be reasonably charged with a crime. Probable
cause need not be based on clear and convincing evidence of guilt, as the investigating officer
acts upon probable cause of reasonable belief. Probable cause implies probability of guilt and
requires more than bare suspicion but less than evidence which would justify a conviction. A
finding of probable cause needs only to rest on evidence showing that more likely than not, a
crime has been committed by the suspect.36
84
However, while probable cause should be determined in a summary manner, there is a need to
examine the evidence with care to prevent material damage to a potential accused’s
constitutional right to liberty and the guarantees of freedom and fair play 37 and to protect the
State from the burden of unnecessary expenses in prosecuting alleged offenses and holding
trials arising from false, fraudulent or groundless charges.38
In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of
discretion in issuing the assailed resolutions. Indeed, he acted in accord with law and the
evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this Decree
as the entruster, and another person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security interests over certain specified goods,
documents or instruments, releases the same to the possession of the entrustee upon the
latter’s execution and delivery to the entruster of a signed document called a "trust receipt"
wherein the entrustee binds himself to hold the designated goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes substantially equivalent to any of
the following:
1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale; Provided, That, in the case
of goods delivered under trust receipt for the purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the goods whether in its original or processed
form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to
load, unload, ship or otherwise deal with them in a manner preliminary or necessary to their
sale; or
2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to
a principal; or c) to effect the consummation of some transactions involving delivery to a
depository or register; or d) to effect their presentation, collection or renewal.
The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the
buyer, general property rights in such goods, documents or instruments, or who sells the same
to the buyer on credit, retaining title or other interest as security for the payment of the purchase
price, does not constitute a trust receipt transaction and is outside the purview and coverage of
this Decree.
An entrustee is one having or taking possession of goods, documents or instruments under a
trust receipt transaction, and any successor in interest of such person for the purpose of
payment specified in the trust receipt agreement. 39 The entrustee is obliged to: (1) hold the
goods, documents or instruments in trust for the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust
for the entruster and turn over the same to the entruster to the extent of the amount owing to the
entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss
from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in

money or whatever form, separate and capable of identification as property of the entruster; (5)
return the goods, documents or instruments in the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the
provisions of the decree.40
The entruster shall be entitled to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the extent of the amount owing to
the entruster or as appears in the trust receipt, or to the return of the goods, documents or
instruments in case of non-sale, and to the enforcement of all other rights conferred on him in
the trust receipt; provided, such are not contrary to the provisions of the document.41
In the case at bar, the transaction between petitioner and respondent bank falls under the trust
receipt transactions envisaged in P.D. No. 115. Respondent bank imported the goods and
entrusted the same to PBMI under the trust receipts signed by petitioner, as entrustee, with the
bank as entruster. The agreement was as follows:
And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as
its property with liberty to sell the same within ____days from the date of the execution of this
Trust Receipt and for the Bank’s account, but without authority to make any other disposition
whatsoever of the said goods or any part thereof (or the proceeds) either by way of conditional
sale, pledge or otherwise.
I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage
or other casualties as directed by the BANK, the sum insured to be payable in case of loss to the
BANK, with the understanding that the BANK is, not to be chargeable with the storage premium
or insurance or any other expenses incurred on said goods.
In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the
BANK, to apply against the relative acceptances (as described above) and for the payment of
any other indebtedness of mine/ours to the BANK. In case of non-sale within the period
specified herein, I/we agree to return the goods under this Trust Receipt to the BANK without
any need of demand.
I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the
form of money or bills, receivables, or accounts separate and capable of identification as
property of the BANK.42
It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of
public policy, the failure of person to turn over the proceeds of the sale of the goods covered by
a trust receipt or to return said goods, if not sold, is a public nuisance to be abated by the
imposition of penal sanctions.43
The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions
involving goods procured as a component of a product ultimately sold has been resolved in the
affirmative in Allied Banking Corporation v. Ordoñez. 44 The law applies to goods used by the
entrustee in the operation of its machineries and equipment. The non-payment of the amount
covered by the trust receipts or the non-return of the goods covered by the receipts, if not sold or
otherwise not disposed of, violate the entrustee’s obligation to pay the amount or to return the
goods to the entruster.
In Colinares v. Court of Appeals, 45 the Court declared that there are two possible situations in a
trust receipt transaction. The first is covered by the provision which refers to money received
under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise
85
sold. The second is covered by the provision which refers to merchandise received under the
obligation to return it (devolvera) to the owner.46 Thus, failure of the entrustee to turn over the
proceeds of the sale of the goods covered by the trust receipts to the entruster or to return said
goods if they were not disposed of in accordance with the terms of the trust receipt is a crime
under P.D. No. 115, without need of proving intent to defraud. The law punishes dishonesty and
abuse of confidence in the handling of money or goods to the prejudice of the entruster,
regardless of whether the latter is the owner or not. A mere failure to deliver the proceeds of the
sale of the goods, if not sold, constitutes a criminal offense that causes prejudice, not only to
another, but more to the public interest.47
The Court rules that although petitioner signed the trust receipts merely as Senior Vice-
President of PBMI and had no physical possession of the goods, he cannot avoid prosecution
for violation of P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of
the goods, documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable under the provisions of Article Three hundred
and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as
amended, otherwise known as the Revised Penal Code.1âwphi1 If the violation or offense is
committed by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under
paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It
may be committed by a corporation or other juridical entity or by natural persons. However, the
penalty for the crime is imprisonment for the periods provided in said Article 315, which reads:
ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum
period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if
such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in
its maximum period, adding one year for each additional 10,000 pesos; but the total penalty
which may be imposed shall not exceed twenty years. In such cases, and in connection with the
accessory penalties which may be imposed and for the purpose of the other provisions of this
Code, the penalty shall be termed prision mayor or reclusion temporal, as the case may be;
2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the
fraud is over 6,000 pesos but does not exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum
period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and
4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200
pesos, provided that in the four cases mentioned, the fraud be committed by any of the following
means; xxx

Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the civil
liabilities of such corporation and/or board of directors, officers, or other officials or employees
responsible for the offense. The rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure compliance with the law and, if
they fail to do so, are held criminally accountable; thus, they have a responsible share in the
violations of the law.48
If the crime is committed by a corporation or other juridical entity, the directors, officers,
employees or other officers thereof responsible for the offense shall be charged and penalized
for the crime, precisely because of the nature of the crime and the penalty therefor. A
corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment.49 However, a corporation may be charged and prosecuted for a
crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment
as penalty, a corporation may be prosecuted and, if found guilty, may be fined.50
A crime is the doing of that which the penal code forbids to be done, or omitting to do what it
commands. A necessary part of the definition of every crime is the designation of the author of
the crime upon whom the penalty is to be inflicted. When a criminal statute designates an act of
a corporation or a crime and prescribes punishment therefor, it creates a criminal offense which,
otherwise, would not exist and such can be committed only by the corporation. But when a penal
statute does not expressly apply to corporations, it does not create an offense for which a
corporation may be punished. On the other hand, if the State, by statute, defines a crime that
may be committed by a corporation but prescribes the penalty therefor to be suffered by the
officers, directors, or employees of such corporation or other persons responsible for the
offense, only such individuals will suffer such penalty. 51 Corporate officers or employees, through
whose act, default or omission the corporation commits a crime, are themselves individually
guilty of the crime.52
The principle applies whether or not the crime requires the consciousness of wrongdoing. It
applies to those corporate agents who themselves commit the crime and to those, who, by virtue
of their managerial positions or other similar relation to the corporation, could be deemed
responsible for its commission, if by virtue of their relationship to the corporation, they had the
power to prevent the act.53 Moreover, all parties active in promoting a crime, whether agents or
not, are principals.54 Whether such officers or employees are benefited by their delictual acts is
not a touchstone of their criminal liability. Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the
cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a
corporate officer cannot protect himself behind a corporation where he is the actual, present and
efficient actor.55
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the
petitioner.
SO ORDERED.
FIRST DIVISION
August 9, 2017
G.R. No. 211845
86
PEN DEVELOPMENT CORPORATION and LAS BRISAS RESORT
CORPORATION, Petitioners,
vs.
MARTINEZ LEYBA, INC.,, Respondent
DECISION
DEL CASTILLO, J.:
Assailed in this Petition for Review on Certiorari1 are the July 17, 2013 Decision 2 of the Court of
Appeals (CA) in CA-G.R. CV No. 97478 which affirmed with modification the January 20, 2009
Decision3 of the Regional Trial Court of Antipolo City, Branch 71 (RTC) in Civil Case No. 97-
4386, and the CA's March 28, 2014 Resolution 4 denying herein petitioners' Motion for
Reconsideration.
Factual Antecedents
As found by the CA, the facts are as follows:
Plaintiff-Appellee Martinez Leyba, Inc. (hereafter Martinez) is a corporation organized and
existing under Philippine laws and the registered owner of three (3) contiguous parcels of land
situated in Antipolo, Rizal, surveyed and identified as Lot Nos. 29, 30 and 31, Block 3, (LRC)
Pcs-7305 and registered under Transfer Certificate of Title Nos. 250212, 25044 and 250243,
respectively, with the Register of Deeds of Rizal.
Defendants-Appellants Pen Development Corporation and Las Brisas Resorts Corporation are
also domestic corporations duly organized and existing under Philippine laws. Appellants,
facreafter, merged into one corporate entity under the name Las Brisas Resmis Corporation
(hereafter Las Brisas). Las Brisas is the registered owner of a parcel of land under TCT No.
153101 which is situated adjacent to the lMds owned by Martinez. Las Brisas occupied the said
land in 1967 and fenced the same.
In l 968, Martinez noticed that the construction of Las Brisas' fence seemed to encroach on its
land. Upon verification by surveyors, Martinez was informed that the fence of Las Brisas
overlaps its property. On 11 March 1968, Martinez sent a Letter informing Las Brisas that the
fence it constructed encroaches [sic] on Martinez's land and requested Las Brisas to refrain from
further intruding on the same. Las Brisa5 did not respond to Martinez's letter and continued
developing its land.
Martinez sent two (2) more Letters dated 31 March 1970 and 3 November 1970 to Las Brisas
informing the latter of the encroachment of its structures and improvements over Martinez's titled
land.
On 31 July 1971, Las Brisas, through a certain Paul Naidas, sent a letter to Martinez, claiming
that it 'can not [sic] trace the origin of these titles' (pertaining to Martinez's land).
Martinez sent two (2) Letters to Las Bdsas reiterating its ownership over the land that Las Brisas'
improvements h.ave encroached upon. Despite the notices, Las Brisas continued developing its
property.
Martinez sought the services of a licensed geodetic engineer to survey the boundaries of its
land. The verification survey plan Vs.,Q4,Q0034, which was approved by the Regional Technical
Director for Lands of the Department of Environment and Natural Resources (DENR), revealed
that the building and improvements constructed by Las Brisas occupied portions of Martinez's

lands: 567 square meters of Lot No. 29, Block 3, (LRC) Pcs. 7305; a portion of 1,389 square
meters of Lot No. 30, Block 3, (LRC) Pcs.
On 24 November 1994, Martinez sent a letter to Las Brisas demanding the latter to cease and
desist from unlawfully holding portions of Martinez's land occupied by Las Brisas structures and
improvements. Despite the said demand, no action was taken by Las Brisa.
On 24 March 1997, Martinez filed a Complaint for Quieting of Title, Cancellation of Title and
Recovery of Ownership with Damages against Las Brisas before the Regional Trial Court of
Antipolo City, docketed as Civil Case No. 97-4386. The case was raffled to, and heard by,
Branch 71 thereof x x x.
In its Answer, Las Brisas denied that it encroached on Martinez's land and that it constructed the
Las Brisas Resort Complex within the land covered by TCT No. 153101.6
its Complaint,7 Martinez added that Transfer Certificate of Title (TCT) Nos. 250242, 250244 and
250243 (or the Martinez titles - totaling 9,796 square meters )8 emanated from Decree No. 1921
issued by the General Land Registration Office pursuant to Land Registration Case No. 3296,
which was transcribed as Original Certificate of Title (OCT) No. 756 by the Register of Deeds of
Rizal on August 14, 1915; that Las Brisas "constructed a riprapping on the northern portion of
Lot No. 29, a building straddling Lots 30 and 31, and are now constructing a new building on Lot
No. 31,"9 which acts constitute an encroachment on lands covered by the Martinez titles; that
Las Brisas' s title, TCT 153101 10 (TCT 153101), was originally registered on September 14,
1973, under OCT 9311 pursuant to Decree No. N-147380, LRC Case No. N-7993, Rec. No. N-
43097; that the encroachment is confirmed per verification survey conducted by a geodetic
engineer and approved by the Regional Technical Director for Lands of the Department of
Environment and Natural Resources (DENR); and that TCT 153101 thus casts a cloud on the
Martinez titles, which must be removed in order to quiet title to the latter.
Las Brisas countered in its Answer 11 that it bought the land covered by TCT 153101 (consisting
of 3,606 square meters) on May 18, 1967 from Republic Bank; that it took possession thereof in
good faith that very same year; and that it is actually Martinez that was encroaching upon its
land.
Ruling of the Regional Trial Court
After trial, the RTC issued its Decision dated January 20, 2009, containing the following
pronouncement:
To clarify matters, the plaintiff12 engaged the services of Ricardo S. Cruz, a licensed Geodetic
Engineer, to plot and verify the plans and technical descriptions to determine the relative
geographic positions of the land covered by the titles of plaintiff and defendant. 13 This verification
survey was approved by the Regional Technical Director of Lands on May 23, 1996, under plan
VS-04- 000394. (Exh. T-1, T-2, T-3, T-4, T-5). 'Ibis plan revealed that Psu-234002, in relation to
T.C.T. No. 153101 of the defendant overlapped thus:
a. A portion of 567 square meters of Lot No. 29, Block 3, (LRC) Pcs- 7305, covered by plaintiff's
T.C.T. No. 250242. This is the portion where the defendant built a riprapping.
b. A portion of 1,389 square meters of Lot No. 30, Block 3, (LRC) Pcs- 7305, covered by
plaintiff's T.C.T. No. 250243. This is the portion where the defendant had constructed an old
building.
87
c. A portion of 1,498 square meters of Lot No. 31, Block 3, (LRC) Pcs- 7305, covered by
plaintiff's T.C.T. No. 250244. This is the portion where the defendant constructed a new multi-
story edifice.
xxxx
The issues sought to be resolved x x x can be read in the respective memorandum [sic]
submitted by the parties.
For the plaintiff, the statement of issues are as follows:
1. Whether x x x the Certificate of Title of the defendant overlapped and thus created a cloud on
plaintiff T.C.T. Nos. 250242, 250243, 250244, covering lots nos. 29, 30, and 31, block 3 (LRC)
PCS-7305, which should be removed under Article 476 of the Civil Code of the Philippines;
2. Whether x x x defendant's T.C.T. No. 153101 should be cancelled insofar as it overlapped
Lots 29, 30 and 31, Block 3, (LRC) PCS- 7305;
3. Whether x x x the defendant is a builder in bad faith and is liable for the consequence of his
acts;
4. Whether x x x the plaintiff is entitled to collect actual or compensatory and moral damages in
the amount of ₱5,000,000.00, exemplary damage in the amount of ₱1,000,000.00, nominal
damage in the amount of ₱l,000,000.00, and attorney's fees in the amount of ₱300,000.00,
exclusive of appearance fee of ₱3,000.00 per hearing or unferome [sic] attended.
For defendants, the issues presented are:
1. Whether x x x defendant's title over the property is valid and effective;
2. Whether x x x defendant is an innocent purchaser for value;
3. Whether x x x defendant is entitled to reimbursement for expenses in developing the property.
For its evidence in chief, plaintiff presented Nestor Quesada (direct, June 7, 2001; cross July 26,
2001) rested its case on October 4, 2001. Its Formal Offer of Evidence as filed with the Couit on
November l 5, 2001 wherein Court Order dated January 15, 2002, Exhibits A to U. inclusive of
their submarkings were admitted over the objections of defendant.
The defendant presented Eu:fracia Naidas (direct/cross on July 11, 2004), then rested its case
on May 11, 2005, the Formal Offer of Evidence was filed in Court on June 10, 2005 wherein the
Court Order dared June 27, 2005, Exhibits 1 to 7 inclusive of submarkings were all admitted
over plaintiff's objections.
xxxx
Considering that the defendant has raised the defense of the validity of T.C.T. No. N-21871 of
the Registry of Deeds, Marikina (Exhibit 1), and subsequently cancelled by T.C.T. No. 153101
as transferred to the Pen Development Corp. (Exh. 2) and introduced substantial improvements
thereon which from the facts established and evidence presented during the hearings of the
case it cannot be denied that said title over the property in question is genuine and valid.
Moreover, the defendant obtained the property as innocent purchasers for value, having no
knowledge of any irregularity, defect, or duplication in the title.

Defendant further argued that there is no proof to plaintiff's claim that it had sent notices and
claims to defendant. Assuming that notices were sent to defendant as early as 1968, it took
plaintiff almost thirty (30) years to file the action to quiet its title. Therefore, by the principle of
laches it should suffer the consequence of its failure to do so within a reasonable period of time.
xxx
Defendant, having introduced substantial improvements on the property, if on the ground or
assumption that the case will be decided in favor of the plaintiff, that defendant should be, by
law, entitled to be reimbursed for the expenses incurred in purchasing and developing the
property, the construction cost of the building alone estimated to be Fifty-Five Million Pesos
(₱55,000,000.00) x x x.
Defendant also cited Articles 544, 546, 548 of the New Civil Code of the Philippines in further
support of its defense.
It is incumbent upon the plaintiff to adduce evidence in support of his complaint x x x. Likewise,
the trial shall be limited to the issues stated in the pretrial order.
As earlier stated, the Court shall rule on whether x x x plaintiff has discharged its obligation to do
so in compliance with the Rules of Court. Having closely examined, evaluated and passed upon
the evidence presented by both the plaintiff and defendant the Court is convinced that the
plaintiff has successfully discharged said obligation and is inclined to grant the reliefs prayed for.
Clearly this is a valid complaint for quieting of title specifically defined under Article 476 of the
Civil Code and as cited in the cases of Vda. De Angeles v. CA, G.R. No. 95748, November 21,
1996; Tan vs. Valdehuesa, 66 SCRA 61 (1975).
As claimed by the plaintiff, defendant's T.C.T. No. 153101 is an instrument, record or claim
which constitutes or casts a cloud upon its T.C.T. Nos. 250242, 250243, and 250244. Sufficient
and competent evidence has been introduced by the plaintiff that upon plotting verification of the
technical description of both parcels of land conducted by Geodetic Engineer Ricardo Cruz, duly
approved by the Regional Technical Director of Lands of the DENR that Psu-234002, covered
by defendant's T.C.T. No. 153101 overlapped a portion of 567 square meters of Lot No. 29 x x x,
a portion of 1,389 square meter of Lot No. 30 x x x covered by plaintiff's T.C.T. Nos. 250242,
250243and 250244, respectively. Surprisingly, defendant has not disputed nor has it adduced
evidence to disprove these findings.
It was likewise established that plaintiffs T.C.T. No[s]. 250242, 250243 and 250244 emanated
from O.C.T. No. 756, which was originally registered on August 14, 1915, whereas, from
defendant's own evidence, its T.C.T. No. 153101 was derived from O.C.T. No. 9311, which was
originally registered on September 14, 1973, pursuant to Decree No. D-147380, in LRC Case
No. N- 7993, Rec. No. 43097.
Plaintiffs mother title was registered 58 years ahead of defendant's mother title. Thus, while
defendant's T.C.T. No. 153101 and its mother title are apparently valid and effective in the sense
that they were issued in consequence of a land registration proceeding, they are in truth and in
fact invalid, ineffective, voidable, and unforceable [sic] insofar as it overlaps plaintiffs prior and
subsisting titles.
xxxx
In the cases of Chan vs. CA, 298 SCRA 713, de Villa vs. Trinidad, 20 SCRA 1167, Gotian vs.
Gaffud, 27 SCRA 706, again the Supreme Court held:
88
'When two certificates of title are issued to different persons covering the same land, in whole or
in part, the earlier in date must prevail and in cases of successive registrations where more than
one certificate of title is issued over the same land, the person holding a prior certificate is
entitled to the land as against a person who relies on a subsequent certificate. '
xxxx
Article 526 of the Civil Code defines a possession in good faith as 'one who is not aware that
there exists in his title or mode of acquisition any flaw which invalidates it, and a possession in
bad faith as one who possesses in any case contrary to the foregoing.
xxxx
In the case of Ortiz vs. Fuentebella, 27 Phil. 537, the Supreme Court held.
'Thus, where defendant received a letter from the daughter of the plaintiff, advising defendant to
desist from planting coconut on a land in possession of defendant, and which letter the
defendant answered by saying she did not intend to plant coconuts on the land belonging to
plaintiff, it was held that the possession [in] bad faith began from the receipt of such letter.'
A close similarity exists in Fuentebella above cited with the facts obtaining in this case. The
pieces evidence [sic] show that while defendant was in good faith when it bought the land from
the Republic Bank as a foreclosed property, the plaintiff in a letter dated as early as March 11,
1968 x x x had advised the defendant that the land it was trying to fence is within plaintiff’s
property and that the defendant should refrain from occupying and building improvements
thereon and from doing any act in derogation of plaintiff's property rights. Six other letters
followed suit x x x. The records show that defendant received these letters but chose to ignore
them and the only communication in writing from the defendant thru Paul Naidas was a letter
dated July 31, 1971, stating that he (Naidas) was all the more confused about plaintiff's claim to
the land. The defendant cannot dispute the letters sent because it sent a response dated July
31, 1970. It is very clear that while defendant may have been [in] good faith when it purchased
the land from Republic Bank on December 6, 1977, such good faith ceased upon being informed
in writing about plaintiff's title or claim over the same land, and, worse, it acted with evident bad
faith when it proceed [sic] to build the structures on the land despite such notice.
Consequently, the rule on the matter can be found in Articles 449, 450 of the Civil Code of the
Philippines which provide:
'Article 449. - He who builds, plants, or sows in bad faith on the land of another, loses what is
built, planted or sown without right to indemnity. "
Article 450. - The owner of the land on which anything has been built, planted or sown in bad
faith may demand the demolition of the work, or that the planting or sowing be removed, in order
to replace things in their former condition at the expense of the person who built, planted or
sowed, or he may compel the builder or planter to pay the price of the land, and the sower the
proper rent.'
In the case of Tan Queto vs. CA, 122 SCRA 206, the Supreme Court held:
'A builder in bad faith loses the building he builds on another's property without right of refund, 'x
xx
xxxx

As to defendant's claim that they had obtained title to the property as innocent purchasers for
value, lack of knowledge of any irregularity, effect or duplication of title, they could have
discovered the overlapping had they only bothered to engage a licensed geodetic engineer to
check the accuracy of their plan Psu-234002. To that extent, defendant has failed to exercise
the diligence to be entitled to the status as an innocent purchaser for value. It was clearly
established that defendant's certificate of title emanated from a mother title that partially
overlapped the plaintiff's prior and subsisting title. Hence, defendant's certificate of title is void
abinittio [sic] insofar as the overlapped areas are concerned.
Defendant's claim of lack of notice on the claim of the plaintiff on the overlapped properties is
belied by the evidence presented by plaintiff which consisted by [sic] a letter dated as early as
March 11, 1968 (Exh. N, N-1, N-2) advising defendant that the land it was trying to fence of [sic]
is within plaintiff's property, and at the same time asking the defendant to refrain from occupying
and building improvements thereon and from doing any act in derogation of plaintiff's property
rights. Five (5) succeeding let1ers addressed to defendant
followed suit and the evidence clearly show that the san1e were received by defendant and no
less than Paul Naidas wrote a reply letter to plaintiff's counsel, Alfonso Roldan on July 31, 1971
which conclusively affi1m the fact that defendant is well aware of plaintiffs claim to the portion of
the land encroached. Thus, the defendant's claim that it is a builder in good faith finds no factual
nor legal basis. On the contrary, the defendant's continued construction and introduction of
improvements on the questioned portion of plaintiff's property clearly negates good faith.
The claim for damages prayed for by plaintiff as a result of defendant's obstinate refusal to
recognize [the] plaintiff's title to the land insofar as the encroachments were made and to turn
over the possession thereof entitles the plaintiff to the award of moral, exemplary damages and
attorney's fees. However, since no sufficient evidence was presented that the plaintiff suffered
actual damages, the Court cannot award any pursuant to [Article] 2199 of the New Civil Code of
the Philippines.
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against 1he defendant
as follows:
1. Quieting its T.C.T. Nos. 250242, 240243 and 250[2]44, and removing the clouds thereon
created by the issuance of T.C.T. No. 153101 insofar as the said titles are overlapped by the
T.C.T. No. : 153101;
2. Ordering the cancellation or annulment of portions of T.C.T. No. 153101 insofar as it overlaps
plaintiff's T.C.T. No. 250242, to Lot 29, Block 3, (LRC) Pcs-7305; plaintiff's T.C.T. No. 250243 to
Lot 30, Block 3 (LRC) Pcs- 7305; and plaintiff's [TCT] No. 250244 to Lot 31, Block 3, (LRC) Pcs-
7305;
3. Ordering the defendant to vac1.ite and turn over the possession of said portions in favor of
the plaintiff: and to remove the building or structures it has constructed thereon at its own
expense without right to indemnity [therefor]; to allow the plaintiff to appropriate what the
defendant has built or to compel the defendant to pay for the value of the land encroached upon;
4. Ordering the defendant to pay moral damages to the plaintiff in thy amount of ₱ 1,000,000.00;
exemplary damages in the amount of ₱1,000,000.00 and attorney's fees in 1he amount of
₱100,000.00.
5. Ordering the defendant to pay for the cost of suit.
89
SO ORDERED.14
Petitioners filed a joint Motion for Reconsideration. 15 However, in an August 7, 2009 Order, 16 the
RTC held its ground.
Ruling of the Court of Appeals
Petitioners interposed an appeal before the CA, docketed as CA-G.R. CV No. 97478. They
argued that the trial court erred in- giving probative value to respondent's documentary evidence
despite its hearsay character; that the trial court erred in declaring them builders in bad faith;
that the respondent is guilty of laches; and that the lower court erred in awarding damages to
respondent.
On July 17, 2013, the CA rendered the assailed Decision declaring as follows:
The appeal fails.
Good faith is an intangible and abstract quality with no technical meaning or statutory definition,
and it encompasses, among other things, an honest belief, the absence of malice and the
absence of design to defraud or to seek an unconscionable advantage. An individual's personal
good faith is a concept of his own mind and, therefore, may not conclusively be determined by
his protestations alone. It implies honesty of intention, and freedom from knowledge of
circumstances which ought to put the holder upon inquiry. The essence of good faith lies in an
honest belief in the validity of one's right, ignorance of a superior claim, and absence of intention
to overreach another.
Article 528 of the New Civil Code provide that possession acquired in good faith does not lose
1his character, except in a case and from the moment facts exist which show 1hat the
possessor is not unaware that he possesses the thing improperly or wrongfully. Possession in
good faith ceases from the moment defects in the title are made known to the possessors, by
extraneous evidence or by suit for recovery of the property by the true owner. Whatever may be
the cause or the fact from which it can be deduced that the possessor has knowledge of the
defect of his title or mode of acquisition, it must be considered sufficient to show bad faith.
In the instant case, as early as 1968, Martinez sent several letters to Las Brisas informing the
latter of Martinez's Ownership over the land covered by TCT Nos. 250242, 250243 and 250244
and that the buildings and improvements Las Brisas made have encroached on the said
property. In the Letter dated 11 March 1968, Martinez informed Las Brisas that the latter's fence
had overlapped into the former's land and requested that Las Brisas refrain from entering
Martinez's property. However, Las Brisas did not heed Martinez's demand and continued
developing its property. Martinez sent six (6) more letters to Las Brisas reiterating that the
latter's structures and improvements encroached on Martinez land. Records show that Las
Brisas received these notices and in fact, made a reply to one of Martint1z's letters. Clearly, Las
Brisas was informed on several occasions about Martinez's title x x x over its land and, despite
such notices, Las Brisas chose to ignore Martinez's demand and continued constructing other
buildings and improvements that intruded into Martinez's property. Hence, Las Brisas cannot
claim that it had no knowledge of the defects of its title and, consequently, cannot be considered
in good faith.
Neither did Las Brisas bother to have its property surveyed in order to discover, for its own
benefit, the actual boundaries of its land (TCT No. 153101). It is doctrinal in land registration law
that possession of titled property adverse to the registered owner is necessarily tainted with bad
faith. Thus, proceeding with the construction works on the overlapped portions of TCT Nos.

250242, 250243 and 250244 despite knowledge of Martinez's ownership thereof puts Las Brisas
in bad faith.
Las Brisas further argues that Martinez is guilty of laches as it failed to assert its right over the
encroached portions of TCT Nos. 250242, 250243 and 250244 within reasonable time.
We disagree.
xxxx
Furthermore, Martinez is the registered owner of TCT Nos. 250242, 250243 and 250244 (and,
as such, its right to demand to recover the portions thereof encroached by Las Brisas is never
barred by laches. In the case of Arroyo vs. Bocage Inland Dev't Corp., the Supreme Court held:
'As registered owners of the lots in question, the private respondents have a right to eject any
person illegally occupying their property. This right is in1prescriptible. Even if it be supposed that
they were aware of the petitioners' occupation of the property, and regardless of the length of
that possession, the lawful owners have right to demand the return of their property at any time
as long as the possession was unauthorized or merely tolerated, if at all. This right is never
barred by laches.'
Las Brisas argues that the court a quo erred in admitting Martinez's Relocation Survey of tot
Nos. 28, 29 and 30 and the Verification Plan Vs-04-00394 as they constitute hearsay evidence
and as such are inadmissible.
We are not persuaded.
It bears noting that this issue of hearsay evidence was raised for the first time on appeal. It is a
fundamental rule that no question will be entertained on appeal unless it has been raised below
Stated differently, issues of fact and arguments not adequately brought to the attention of the
lower courts will not be considered by the reviewing courts as they cannot be raised for the first
time on appeal. An issue, which was neither averred in the complaint nor raised during the trial
in the lower courts, cannot be raised for the first time on appeal because it would be offensive to
the basic rule of fair play and justice, and would be violative of the constitutional right to due
process of the other party. In fact, the determination of issues at the pre-trial bars consideration
of other issues or questions on appeal,
In this case, Las Brisas failed to raise this argument during pre-trial and in the trial proper. Las
Brisas even failed to [raise] its objection during Martinez's fom1al offer of evidence. Clearly, Las
Brisas waived its right to object on [sic] the admissibility of Martinez's evidence. Thus, We
cannot bend backwards to examine this issue raised by Las Brisas at this late stage of the
proceedings as it would violate Martinez's right to due process and should thus be disregarded.
Anent the award of moral damages of Php1,000,000.00 and exemplary damages of
Php1,000,000.00, We find the same without factual or legal basis.
A juridical person is generally not entitled to moral damages because, unlike a natural person, it
cannot experience physical suffering, or such sentiment as wounded feelings, serious anxiety,
mental anguish or moral shock. While the courts may allow the grant of moral damages to
corporations in exceptional situations, it is not automatically granted because there must still be
proof of the existence of the factual basis of the damage and its causal relation to the
defendant's acts. Moral damages, though incapable of pecuniary estimation, are in the category
of an award designed to compensate the claimant for actual injury suffered and not to impose a
penalty 0n the wrongdoer. In this case, We find no evidence that Martinez suffered besmirched
90
reputation on account of the Las Brisas encroachment on Martinez's land. Hence, the award of
moral damages should be deleted.
Neither is Martinez entitled to exemplary damages. Exemplary damages may only be awarded if
it has been shown that wrongful act was accompanied by bad faith or done in a wanton,
fraudulent and reckless or malevolent manner. Exemplary damages are allowed only in addition
to moral damages such that no exemplary damage can be awarded unless the claimant first
establishes his clear right to moral damages. As the moral damages are improper in the instant
case, so is the award of exemplary damages.
Nevertheless, an award of nominal damages of Php100,000.00 is warranted since Las Brisas
violated the property rights of Martinez. The New Civil Code provides:
Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff; which has been
violated or invaded by the defendan4 may be vindicated or recognized, and not for the purpose
of indemnifying the plaintiff for any loss suffered by him.
Art. 2222. The court may award nominal damages in every obligation arising from any source
enumerated in Article 1157, or in every case where any property right has been invaded.
The award of damages is also in accordance with Article 451 of the New Civil Code which states
that the landowner is entitled to damages from the builder in bad faith.
WHEREFORE, the Decision dated 20 January 2009 of the Regional Trial Court of Antipolo City,
Branch 71, in Civil Case No. 97-4386 is AFFIRMED with MODIHCATION, as follows:
1.) deleting the award of moral damages and exemplary damages to Martinez Leyba, Inc.; and
2.) ordering Las Brisas Resort Corporation to pay Martinez Leyba, Inc., Php 100,000.00, as
nominal damages.
SO ORDERED.17 (Citations omitted)
Petitioners sought to reconsider, but were rebuffed. Hence, the present Petition.
Issues
In a June 15, 2015 Resolution,18 this Court resolved to give due course to the Petition, which
contains the following assignment of errors:
A. THE HONORALBE COURT OF APPEALS SERIOUSLY ERRED IN RULING THAT
PETITIONER IS A POSSESSOR/BUILDER IN BAD FAITH.
B. THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN FAILING TO RULE
THAT THE RESPONDENT INCURRED LACHES IN ENFORCING ITS PUTATIVE RIGHTS.
C. THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN RULING THAT THE
ISSUE ON HEARSAY CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL.19
Petitioners' Arguments
In praying that the assailed CA and trial court dispositions be set aside and that Civil Case No.
97-4386 be dismissed instead, petitioners argue in their Petition and Reply20 that they are not
builders in bad faith; that in constructing the improvements subject of the instant case, they
merely relied on the validity and indefeasibility of their title, TCT 153101; that until their title is

nullified and invalidated, the same subsists; that as builders in good faith, they are entitled either
to a) a refund and reimbursement of the necessary expenses, and full retention of the land until
they are paid by respondent, or b) removal of the improvements without damage to respondent's
property; that contrary to the CA's pronouncement, respondent may be held accountable for
laches in filing a case only after the lapse of thirty years; and that the Survey Plan of Lots 29, 30
and 31 and the Verification Survey Plan Vs-04-000394 are inadmissible in evidence for being
hearsay, as they were not authenticated in court.
Respondent's Arguments
Respondent, on the other hand, counters in its Comment21 that the CA is correct in declaring that
petitioners are possessors and builders in bad faith; that while petitioners may have been
innocent purchasers for value, they were not possessors and builders in good faith because
despite having been regularly informed in writing that they encroached on respondent's land and
are building illegal structures thereon, they continued with their illegal occupation and
construction; that under the Civil Code, petitioners are not entitled to retention or reimbursement
for being bi1ilders in bad faith; that the principle of laches does not apply against owners of land
registered under the Torrens system of land registration; and that petitioners cannot be allowed
to argue for the first time on appeal that the pieces of documentary evidence it presented before
the trial court are hearsay.
Our Ruling
The Court denies the Petition.
Under the Manual on Land Survey Procedures of the Philippines, on Verification Surveys,
particularly, it is provided, thus:
Section 146. The Regional Technical Director for Lands may issue order to conduct a
verification survey whenever any approved survey is reported to be erroneous, or when titled
lands are reported to overlap or where occupancy is reported to encroach another property. xxx
xxxx
Section 149. All survey work undertaken for verification purposes shall be subject of verification
and approval in the DENR~LMS Regional Office concerned and shall be designated as
Verification Surveys (Vs). x x x
Pursuant to these provisions, respondent caused its property to be surveyed, and on May 23,
1996, the Regional Technical Director of Lands approved the verification survey under
Verification Survey Plan Vs-04-000394.22 This Verification Survey Plan revealed that petitioners
encroached on respondent's land to the following extent:
a. A portion of 567 square meters of Lot No. 29, Block 3, (LRC) Pcs-7305, covered by
respondent's TCT-250242. This is the portion where the petitioners built a riprapping.
b. A p01tion of 1,389 square meters of Lot No. 30, Block 3, (LRC) Pcs-7305, covered by
respondent's TCT 250243. This is the portion where the petitioners had constructed an old
building.
c. A portion of 1,498 square meters of Lot No. 31, Block 3, (LRC) Pcs7305, covered by
respondent's TCT 250244. This is the portion where the petitioners constructed & new multi-
story edifice.
91
On this basis, respondent filed Civil Case No. 97·"4386. Respondent's main evidence is the said
Verification Survey Plan V s-04-000394, which is a public document. As a public document, it is
admissible in evidence even without further proof of its due execution and genuineness, 23 and
had in its favor the presumption of regularity. To contradict the same, there must be evidence
that is clear, convincing and more than merely preponderant, otherwise the document should be
upheld,24 The certification and approval by the Regional Technical Director of Lands signifies the
technical correctness of the survey plotted in the said plan."25
On the other hand, petitioners' evidence consists mainly of the claim that their TCT 153101 is a
valid title and that they purchased the land covered by it in good faith and for value. They did not
present evidence to contradict respondent's Verification Survey Plan VS-Q4-000394; in other
words, no evidence was presented to disprove respondent's claim of overlapping. Their
evidence only goes so far as proving that they acquired the land covered by TCT 153101 in
good faith. However, while it may be true that they acquired TCT 153101 in good faith and for
value, this does not prove that they did not encroach upon respondent's lands.
In effect, respondent's Verification Survey Plan Vs-04-000394 remains unrefuted. Petitioners'
sole objection to this piece of evidence that it was not authenticated during trial is of no
significance considering that the said documentary evidence is a public document.
Although "[i]n overlapping of titles disputes, it has always been the practice for the [trial] court to
appoint a surveyor from the government land agencies [such as] the Land Registration Authority
or the DENR to act as commissioner," 26 this is not mandatory procedure; the trial court may rely
on the parties' respective evidence to resolve the case.27 In this case, respondent presented the
results of a verification survey conducted on its lands. On the other hand, petitioners did not
present proof like the results of a survey conducted upon their initiative to contradict
respondent's evidence; nor did they move for the appointment by the trial court of government or
private surveyors to act as commissioners. Their sole defense is that they acquired their land in
good faith and for value; but this does not squarely address respondent's claim of overlapping.
For the RTC and CA, respondent's undisputed evidence proved its claim of overlapping. This
Court agrees. As a public document containing the certification and approval by the Regional
Technical Director of Lands, Verification Survey Plan Vs-Q4-000394 can be relied upon as proof
of the encroachment over respondent's lands. More so when petitioners could not present
contradictory proof.
On the issue of being a builder in had faith, there is no question that petitioners should be held
liable to respondent for their obstinate refusal to abide by the latter's repeated demands to cease
and desist from continuing their construction upon the encroached area. Petitioners' sole
defense is that they purchased their property in good faith and for value; but this does not
squarely address the issue of encroachment or overlapping. To repeat, while petitioners may
have been innocent purchasers for value with respect to their land, this does not prove that they
are equally innocent of the claim of encroachment upon respondent's lands. The evidence
suggests otherwise: despite being apprised of the encroachment, petitioners turned a blind eye
and deaf ear and continued to construct on the disputed area. They did not bother to conduct
their own survey to put the issue to rest, and to avoid the possibility of being adjudged as
builders in bad faith upon land that did not belong to them.
Under the Civil Code,
Art. 449. He who builds, plants or sows in bad faith on the land of another, loses what is built,
planted or sown without right to indemnity.

Art. 450. Tue owner of the land on which anything has been built, planted or sown in bad faith
may demand the demolition of the work, or that the planting or sowing be removed, in order to
replace things in their former condition at the expense of the person who built, planted or sowed;
or he may compel the builder or planter to pay the price of the land, and the sower the proper
rent.
Art. 451. In the cases of the two preceding articles, the landowner is entitled to damages from
the builder planter or sower.
Moreover, it has been declared that
The right of the owner of the land to recover damages from a builder in bad faith is clearly
provided for in Article 451 of the Civil Code. Although said Article 451 does not elaborate on the
basis for damages, the Court perceives that it should reasonably correspond with the value of
the properties lost or destroyed as a result of the occupation in bad faith, as well as the fruits
(natural, industrial or civil) from those properties that the owner of the land reasonably expected
to obtain. x x x28
For their part, petitioners are not entitled to reimbursement for necessary expenses. Indeed,
under Article 452 of the Civil Code, 29 the builder, planter or sower in bad faith is entitled to
reimbursement for the necessary expenses of preservation of the land. However, in this case,
respondent's lands were not preserved: petitioners' construction and use thereof in fact caused
dan1age, which must be undone or simply endured by respondent by force of law and
circumstance. Respondent did not in any way benefit from petitioners' occupation of its lands.
Finally, on the question of laches, the CA correctly held that as owners of the subject property,
respondent has the imprescriptible right to recover possession thereof from any person illegally
occupying its lands. Even if petitioners have been occupying these lands for a significant period
of time, respondent as the registered and lawful owner has the right to demand the return
thereof at any time.
Jurisprudence consistently holds that ‘prescription and laches cannot apply to registered land
covered by the Torrens system' because 'under the Property Registration Decree, no title to
registered land in derogation to that of the registered owner shall be acquired by prescription or
adverse possession.’30
Under Section 47 of the Property Registration Decree, or Presidential Decree No. 1529, "(n)o
title to registered land in derogation of the title of the registered owner shall be acquired by
prescription or adverse possession."
WHEREFORE, the Petition is DENIED. The July 17, 2013 Decision and March 28i 2014
Resolution of the Court of Appeals in CA-G.R. CV No. 97478 are AFFIRMEDin toto.
SO ORDERED.
FIRST DIVISION
G.R. No. 141994             January 17, 2005
FILIPINAS BROADCASTING NETWORK, INC., petitioner,
vs.
AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF
MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO, respondents.
92
DECISION
CARPIO, J.:
The Case
This petition for review1 assails the 4 January 1999 Decision2 and 26 January 2000 Resolution of
the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification
the 14 December 1992 Decision3 of the Regional Trial Court of Legazpi City, Branch 10, in Civil
Case No. 8236. The Court of Appeals held Filipinas Broadcasting Network, Inc. and its
broadcasters Hermogenes Alegre and Carmelo Rima liable for libel and ordered them to
solidarily pay Ago Medical and Educational Center-Bicol Christian College of Medicine moral
damages, attorney’s fees and costs of suit.
The Antecedents
"Exposé" is a radio documentary4 program hosted by Carmelo ‘Mel’ Rima ("Rima") and
Hermogenes ‘Jun’ Alegre ("Alegre"). 5 Exposé is aired every morning over DZRC-AM which is
owned by Filipinas Broadcasting Network, Inc. ("FBNI"). "Exposé" is heard over Legazpi City,
the Albay municipalities and other Bicol areas.6
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged
complaints from students, teachers and parents against Ago Medical and Educational Center-
Bicol Christian College of Medicine ("AMEC") and its administrators. Claiming that the
broadcasts were defamatory, AMEC and Angelita Ago ("Ago"), as Dean of AMEC’s College of
Medicine, filed a complaint for damages7 against FBNI, Rima and Alegre on 27 February 1990.
Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical course at AMEC-
BCCM, advise them to pass all subjects because if they fail in any subject they will repeat
their year level, taking up all subjects including those they have passed already. Several
students had approached me stating that they had consulted with the DECS which told them
that there is no such regulation. If [there] is no such regulation why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had complained that the course is not
recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the subject does not
have an instructor - such greed for money on the part of AMEC’s administration. Take the
subject Anatomy: students would pay for the subject upon enrolment because it is offered by the
school. However there would be no instructor for such subject. Students would be informed that
course would be moved to a later date because the school is still searching for the appropriate
instructor.
xxx
It is a public knowledge that the Ago Medical and Educational Center has survived and has been
surviving for the past few years since its inception because of funds support from foreign
foundations. If you will take a look at the AMEC premises you’ll find out that the names of the
buildings there are foreign soundings. There is a McDonald Hall. Why not Jose Rizal or

Bonifacio Hall? That is a very concrete and undeniable evidence that the support of foreign
foundations for AMEC is substantial, isn’t it? With the report which is the basis of the expose in
DZRC today, it would be very easy for detractors and enemies of the Ago family to stop the flow
of support of foreign foundations who assist the medical school on the basis of the latter’s
purpose. But if the purpose of the institution (AMEC) is to deceive students at cross purpose
with its reason for being it is possible for these foreign foundations to lift or suspend their
donations temporarily.8
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and
the AMEC-Institute of Mass Communication in their effort to minimize expenses in terms
of salary are absorbing or continues to accept "rejects". For example how many teachers in
AMEC are former teachers of Aquinas University but were removed because of immorality?
Does it mean that the present administration of AMEC have the total definite moral foundation
from catholic administrator of Aquinas University. I will prove to you my friends, that AMEC is a
dumping ground, garbage, not merely of moral and physical misfits. Probably they only
qualify in terms of intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family
name implies. She is too old to work, being an old woman. Is the AMEC administration exploiting
the very [e]nterprising or compromising and undemanding Lola? Could it be that AMEC is just
patiently making use of Dean Justita Lola were if she is very old. As in atmospheric situation –
zero visibility – the plane cannot land, meaning she is very old, low pay follows. By the way,
Dean Justita Lola is also the chairman of the committee on scholarship in AMEC. She had
retired from Bicol University a long time ago but AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit
people. What does this mean? Immoral and physically misfits as teachers.
May I say I’m sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no
longer fit to teach. You are too old. As an aviation, your case is zero visibility. Don’t insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship
committee at that. The reason is practical cost saving in salaries, because an old person is not
fastidious, so long as she has money to buy the ingredient of beetle juice. The elderly can get by
– that’s why she (Lola) was taken in as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that the students
would be influenced by evil. When they become members of society outside of campus will
be liabilities rather than assets. What do you expect from a doctor who while studying at
AMEC is so much burdened with unreasonable imposition? What do you expect from a student
who aside from peculiar problems – because not all students are rich – in their struggle to
improve their social status are even more burdened with false regulations. xxx9 (Emphasis
supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the supposed
exposés, FBNI, Rima and Alegre "transmitted malicious imputations, and as such, destroyed
plaintiffs’ (AMEC and Ago) reputation." AMEC and Ago included FBNI as defendant for allegedly
93
failing to exercise due diligence in the selection and supervision of its employees, particularly
Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
Answer10 alleging that the broadcasts against AMEC were fair and true. FBNI, Rima and Alegre
claimed that they were plainly impelled by a sense of public duty to report the "goings-on in
AMEC, [which is] an institution imbued with public interest."
Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo
Cea, collaborating counsel of Atty. Lozares, filed a Motion to Dismiss 11 on FBNI’s behalf. The
trial court denied the motion to dismiss. Consequently, FBNI filed a separate Answer claiming
that it exercised due diligence in the selection and supervision of Rima and Alegre. FBNI
claimed that before hiring a broadcaster, the broadcaster should (1) file an application; (2) be
interviewed; and (3) undergo an apprenticeship and training program after passing the interview.
FBNI likewise claimed that it always reminds its broadcasters to "observe truth, fairness and
objectivity in their broadcasts and to refrain from using libelous and indecent language."
Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa
Pilipinas ("KBP") accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision 12 finding FBNI and Alegre liable for
libel except Rima. The trial court held that the broadcasts are libelous per se. The trial court
rejected the broadcasters’ claim that their utterances were the result of straight reporting
because it had no factual basis. The broadcasters did not even verify their reports before airing
them to show good faith. In holding FBNI liable for libel, the trial court found that FBNI failed to
exercise diligence in the selection and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rima’s only participation was when
he agreed with Alegre’s exposé. The trial court found Rima’s statement within the "bounds of
freedom of speech, expression, and of the press." The dispositive portion of the decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree
of damages caused by the controversial utterances, which are not found by this court to
be really very serious and damaging, and there being no showing that indeed the
enrollment of plaintiff school dropped, defendants Hermogenes "Jun" Alegre, Jr. and
Filipinas Broadcasting Network (owner of the radio station DZRC), are hereby jointly and
severally ordered to pay plaintiff Ago Medical and Educational Center-Bicol Christian College of
Medicine (AMEC-BCCM) the amount of ₱300,000.00 moral damages, plus ₱30,000.00
reimbursement of attorney’s fees, and to pay the costs of suit.
SO ORDERED. 13 (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other,
appealed the decision to the Court of Appeals. The Court of Appeals affirmed the trial court’s
judgment with modification. The appellate court made Rima solidarily liable with FBNI and
Alegre. The appellate court denied Ago’s claim for damages and attorney’s fees because the
broadcasts were directed against AMEC, and not against her. The dispositive portion of the
Court of Appeals’ decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification
that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes
Alegre.
SO ORDERED.14

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in
its 26 January 2000 Resolution.
Hence, FBNI filed this petition.15
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial court’s ruling that the questioned broadcasts are
libelous per se and that FBNI, Rima and Alegre failed to overcome the legal presumption of
malice. The Court of Appeals found Rima and Alegre’s claim that they were actuated by their
moral and social duty to inform the public of the students’ gripes as insufficient to justify the
utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMEC’s administrators, the Court of Appeals
ruled that the broadcasts were made "with reckless disregard as to whether they were true or
false." The appellate court pointed out that FBNI, Rima and Alegre failed to present in court any
of the students who allegedly complained against AMEC. Rima and Alegre merely gave a single
name when asked to identify the students. According to the Court of Appeals, these
circumstances cast doubt on the veracity of the broadcasters’ claim that they were "impelled by
their moral and social duty to inform the public about the students’ gripes."
The Court of Appeals found Rima also liable for libel since he remarked that "(1) AMEC-BCCM
is a dumping ground for morally and physically misfit teachers; (2) AMEC obtained the services
of Dean Justita Lola to minimize expenses on its employees’ salaries; and (3) AMEC burdened
the students with unreasonable imposition and false regulations."16
The Court of Appeals held that FBNI failed to exercise due diligence in the selection and
supervision of its employees for allowing Rima and Alegre to make the radio broadcasts without
the proper KBP accreditation. The Court of Appeals denied Ago’s claim for damages and
attorney’s fees because the libelous remarks were directed against AMEC, and not against her.
The Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable to pay AMEC moral
damages, attorney’s fees and costs of suit.1awphi1.nét
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEY’S FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF
MORAL DAMAGES, ATTORNEY’S FEES AND COSTS OF SUIT.
The Court’s Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and
Alegre against AMEC.17 While AMEC did not point out clearly the legal basis for its complaint, a
reading of the complaint reveals that AMEC’s cause of action is based on Articles 30 and 33 of
the Civil Code. Article 3018 authorizes a separate civil action to recover civil liability arising from a
94
criminal offense. On the other hand, Article 33 19 particularly provides that the injured party may
bring a separate civil action for damages in cases of defamation, fraud, and physical injuries.
AMEC also invokes Article 1920 of the Civil Code to justify its claim for damages. AMEC cites
Articles 217621 and 218022 of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel23 is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary,
or any act or omission, condition, status, or circumstance tending to cause the dishonor,
discredit, or contempt of a natural or juridical person, or to blacken the memory of one who is
dead.24
There is no question that the broadcasts were made public and imputed to AMEC defects or
circumstances tending to cause it dishonor, discredit and contempt. Rima and Alegre’s remarks
such as "greed for money on the part of AMEC’s administrators"; "AMEC is a dumping ground,
garbage of xxx moral and physical misfits"; and AMEC students who graduate "will be liabilities
rather than assets" of the society are libelous per se. Taken as a whole, the broadcasts suggest
that AMEC is a money-making institution where physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and
Alegre were plainly impelled by their civic duty to air the students’ gripes. FBNI alleges that there
is no evidence that ill will or spite motivated Rima and Alegre in making the broadcasts. FBNI
further points out that Rima and Alegre exerted efforts to obtain AMEC’s side and gave Ago the
opportunity to defend AMEC and its administrators. FBNI concludes that since there is no
malice, there is no libel.
FBNI’s contentions are untenable.
Every defamatory imputation is presumed malicious.25 Rima and Alegre failed to show
adequately their good intention and justifiable motive in airing the supposed gripes of the
students. As hosts of a documentary or public affairs program, Rima and Alegre should have
presented the public issues "free from inaccurate and misleading information."26 Hearing the
students’ alleged complaints a month before the exposé,27 they had sufficient time to verify their
sources and information. However, Rima and Alegre hardly made a thorough investigation of the
students’ alleged gripes. Neither did they inquire about nor confirm the purported irregularities in
AMEC from the Department of Education, Culture and Sports. Alegre testified that he merely
went to AMEC to verify his report from an alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the students "because they were many and not
because there is proof that what they are saying is true." 28 This plainly shows Rima and Alegre’s
reckless disregard of whether their report was true or not.
Contrary to FBNI’s claim, the broadcasts were not "the result of straight reporting." Significantly,
some courts in the United States apply the privilege of "neutral reportage" in libel cases involving
matters of public interest or public figures. Under this privilege, a republisher who accurately and
disinterestedly reports certain defamatory statements made against public figures is shielded
from liability, regardless of the republisher’s subjective awareness of the truth or falsity of the
accusation.29 Rima and Alegre cannot invoke the privilege of neutral reportage because
unfounded comments abound in the broadcasts. Moreover, there is no existing controversy
involving AMEC when the broadcasts were made. The privilege of neutral reportage applies
where the defamed person is a public figure who is involved in an existing controversy, and a
party to that controversy makes the defamatory statement.30

However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v.
Court of Appeals,31 FBNI contends that the broadcasts "fall within the coverage of qualifiedly
privileged communications" for being commentaries on matters of public interest. Such being the
case, AMEC should prove malice in fact or actual malice. Since AMEC allegedly failed to prove
actual malice, there is no libel.
FBNI’s reliance on Borjal is misplaced. In Borjal, the Court elucidated on the "doctrine of fair
comment," thus:
[F]air commentaries on matters of public interest are privileged and constitute a valid defense in
an action for libel or slander. The doctrine of fair comment means that while in general every
discreditable imputation publicly made is deemed false, because every man is presumed
innocent until his guilt is judicially proved, and every false imputation is deemed malicious,
nevertheless, when the discreditable imputation is directed against a public person in his public
capacity, it is not necessarily actionable. In order that such discreditable imputation to a
public official may be actionable, it must either be a false allegation of fact or a comment
based on a false supposition. If the comment is an expression of opinion, based on
established facts, then it is immaterial that the opinion happens to be mistaken, as long as it
might reasonably be inferred from the facts.32 (Emphasis supplied)
True, AMEC is a private learning institution whose business of educating students is "genuinely
imbued with public interest." The welfare of the youth in general and AMEC’s students in
particular is a matter which the public has the right to know. Thus, similar to the newspaper
articles in Borjal, the subject broadcasts dealt with matters of public interest. However, unlike
in Borjal, the questioned broadcasts are not based on established facts. The record supports
the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of students and
parents against plaintiff, yet, defendants have not presented in court, nor even gave name of a
single student who made the complaint to them, much less present written complaint or petition
to that effect. To accept this defense of defendants is too dangerous because it could easily give
license to the media to malign people and establishments based on flimsy excuses that there
were reports to them although they could not satisfactorily establish it. Such laxity would
encourage careless and irresponsible broadcasting which is inimical to public interests.
Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates
of their duties, did not verify and analyze the truth of the reports before they aired it, in order to
prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer Physical
Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22,
1987 or more than 2 years before the controversial broadcast, accreditation to offer Physical
Therapy course had already been given the plaintiff, which certificate is signed by no less than
the Secretary of Education and Culture herself, Lourdes R. Quisumbing (Exh. C-rebuttal).
Defendants could have easily known this were they careful enough to verify. And yet,
defendants were very categorical and sounded too positive when they made the erroneous
report that plaintiff had no permit to offer Physical Therapy courses which they were offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald
Foundation prove not to be true also. The truth is there is no Mcdonald Foundation existing.
Although a big building of plaintiff school was given the name Mcdonald building, that was only
in order to honor the first missionary in Bicol of plaintiffs’ religion, as explained by Dr. Lita Ago.
95
Contrary to the claim of defendants over the air, not a single centavo appears to be received by
plaintiff school from the aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when
medical students fail in one subject, they are made to repeat all the other subject[s], even those
they have already passed, nor their claim that the school charges laboratory fees even if there
are no laboratories in the school. No evidence was presented to prove the bases for these
claims, at least in order to give semblance of good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers,
defendant[s] singled out Dean Justita Lola who is said to be so old, with zero visibility already.
Dean Lola testified in court last Jan. 21, 1991, and was found to be 75 years old. xxx Even older
people prove to be effective teachers like Supreme Court Justices who are still very much in
demand as law professors in their late years. Counsel for defendants is past 75 but is found by
this court to be still very sharp and effective.l^vvphi1.net So is plaintiffs’ counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but is
still alert and docile.
The contention that plaintiffs’ graduates become liabilities rather than assets of our society is a
mere conclusion. Being from the place himself, this court is aware that majority of the medical
graduates of plaintiffs pass the board examination easily and become prosperous and
responsible professionals.33
Had the comments been an expression of opinion based on established facts, it is immaterial
that the opinion happens to be mistaken, as long as it might reasonably be inferred from the
facts.34 However, the comments of Rima and Alegre were not backed up by facts. Therefore, the
broadcasts are not privileged and remain libelous per se.
The broadcasts also violate the Radio Code 35 of the Kapisanan ng mga Brodkaster sa Pilipinas,
Ink. ("Radio Code"). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal bias, prejudice
and inaccurate and misleading information. x x x Furthermore, the station shall strive to
present balanced discussion of issues. x x x.
xxx
7. The station shall be responsible at all times in the supervision of public affairs, public issues
and commentary programs so that they conform to the provisions and standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect
public interest, general welfare and good order in the presentation of public affairs and public
issues.36 (Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the
code of ethical conduct governing practitioners in the radio broadcast industry. The Radio Code
is a voluntary code of conduct imposed by the radio broadcast industry on its own members.
The Radio Code is a public warranty by the radio broadcast industry that radio broadcast

practitioners are subject to a code by which their conduct are measured for lapses, liability and
sanctions.
The public has a right to expect and demand that radio broadcast practitioners live up to the
code of conduct of their profession, just like other professionals. A professional code of conduct
provides the standards for determining whether a person has acted justly, honestly and with
good faith in the exercise of his rights and performance of his duties as required by Article
1937 of the Civil Code. A professional code of conduct also provides the standards for
determining whether a person who willfully causes loss or injury to another has acted in a
manner contrary to morals or good customs under Article 2138 of the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a corporation.39
A juridical person is generally not entitled to moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock.40 The Court of Appeals cites Mambulao Lumber Co. v. PNB, et
al.41 to justify the award of moral damages. However, the Court’s statement in Mambulao that "a
corporation may have a good reputation which, if besmirched, may also be a ground for the
award of moral damages" is an obiter dictum.42
Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article 2219 43 of the Civil
Code. This provision expressly authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a
natural or juridical person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral damages.44
Moreover, where the broadcast is libelous per se, the law implies damages.45 In such a case,
evidence of an honest mistake or the want of character or reputation of the party libeled goes
only in mitigation of damages. 46 Neither in such a case is the plaintiff required to introduce
evidence of actual damages as a condition precedent to the recovery of some damages. 47 In this
case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.
However, we find the award of ₱300,000 moral damages unreasonable. The record shows that
even though the broadcasts were libelous per se, AMEC has not suffered any substantial or
material damage to its reputation. Therefore, we reduce the award of moral damages from
₱300,000 to ₱150,000.
III.
Whether the award of attorney’s fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the
award of attorney’s fees. FBNI adds that the instant case does not fall under the enumeration in
Article 220848 of the Civil Code.
The award of attorney’s fees is not proper because AMEC failed to justify satisfactorily its claim
for attorney’s fees. AMEC did not adduce evidence to warrant the award of attorney’s fees.
Moreover, both the trial and appellate courts failed to explicitly state in their respective decisions
the rationale for the award of attorney’s fees.49 In Inter-Asia Investment Industries, Inc. v.
Court of Appeals ,50 we held that:
96
[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather
than the rule, and counsel’s fees are not to be awarded every time a party wins a suit. The
power of the court to award attorney’s fees under Article 2208 of the Civil Code demands
factual, legal and equitable justification, without which the award is a conclusion without
a premise, its basis being improperly left to speculation and conjecture. In all events, the
court must explicitly state in the text of the decision, and not only in the decretal portion thereof,
the legal reason for the award of attorney’s fees.51 (Emphasis supplied)
While it mentioned about the award of attorney’s fees by stating that it "lies within the discretion
of the court and depends upon the circumstances of each case," the Court of Appeals failed to
point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre for moral damages, attorney’s fees and
costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages
and attorney’s fees because it exercised due diligence in the selection and supervision of its
employees, particularly Rima and Alegre. FBNI maintains that its broadcasters, including Rima
and Alegre, undergo a "very regimented process" before they are allowed to go on air. "Those
who apply for broadcaster are subjected to interviews, examinations and an apprenticeship
program."
FBNI further argues that Alegre’s age and lack of training are irrelevant to his competence as a
broadcaster. FBNI points out that the "minor deficiencies in the KBP accreditation of Rima and
Alegre do not in any way prove that FBNI did not exercise the diligence of a good father of a
family in selecting and supervising them." Rima’s accreditation lapsed due to his non-payment of
the KBP annual fees while Alegre’s accreditation card was delayed allegedly for reasons
attributable to the KBP Manila Office. FBNI claims that membership in the KBP is merely
voluntary and not required by any law or government regulation.
FBNI’s arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the
tort which they commit.52 Joint tort feasors are all the persons who command, instigate, promote,
encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who
approve of it after it is done, if done for their benefit. 53 Thus, AMEC correctly anchored its cause
of action against FBNI on Articles 2176 and 2180 of the Civil Code.1a\^/phi1.net
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for
damages arising from the libelous broadcasts. As stated by the Court of Appeals, "recovery for
defamatory statements published by radio or television may be had from the owner of the
station, a licensee, the operator of the station, or a person who procures, or participates in,
the making of the defamatory statements."54 An employer and employee are solidarily liable for a
defamatory statement by the employee within the course and scope of his or her employment, at
least when the employer authorizes or ratifies the defamation.55 In this case, Rima and Alegre
were clearly performing their official duties as hosts of FBNI’s radio program Exposé when they
aired the broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond the
scope of their work at that time. There was likewise no showing that FBNI did not authorize and
ratify the defamatory broadcasts.

Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection and supervision of its employees, particularly Rima and Alegre. FBNI merely
showed that it exercised diligence in the selection of its broadcasters without introducing any
evidence to prove that it observed the same diligence in the supervision of Rima and Alegre.
FBNI did not show how it exercised diligence in supervising its broadcasters. FBNI’s alleged
constant reminder to its broadcasters to "observe truth, fairness and objectivity and to refrain
from using libelous and indecent language" is not enough to prove due diligence in the
supervision of its broadcasters. Adequate training of the broadcasters on the industry’s code of
conduct, sufficient information on libel laws, and continuous evaluation of the broadcasters’
performance are but a few of the many ways of showing diligence in the supervision of
broadcasters.
FBNI claims that it "has taken all the precaution in the selection of Rima and Alegre as
broadcasters, bearing in mind their qualifications." However, no clear and convincing evidence
shows that Rima and Alegre underwent FBNI’s "regimented process" of application.
Furthermore, FBNI admits that Rima and Alegre had deficiencies in their KBP
accreditation,56 which is one of FBNI’s requirements before it hires a broadcaster. Significantly,
membership in the KBP, while voluntary, indicates the broadcaster’s strong commitment to
observe the broadcast industry’s rules and regulations. Clearly, these circumstances show
FBNI’s lack of diligence in selecting and supervising Rima and Alegre. Hence, FBNI is solidarily
liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and
Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the
MODIFICATION that the award of moral damages is reduced from ₱300,000 to ₱150,000 and
the award of attorney’s fees is deleted. Costs against petitioner.
SO ORDERED.
THIRD DIVISION
G.R. No. 131723             December 13, 2007
MANILA ELECTRIC COMPANY, petitioner,
vs.
T.E.A.M. ELECTRONICS CORPORATION, TECHNOLOGY ELECTRONICS ASSEMBLY and
MANAGEMENT PACIFIC CORPORATION; and ULTRA ELECTRONICS INSTRUMENTS,
INC., respondents.
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking the reversal
of the Decision1 of the Court of Appeals (CA) dated June 18, 1997 and its Resolution 2 dated
December 3, 1997 in CA-G.R. CV No. 40282 denying the appeal filed by petitioner Manila
Electric Company.
The facts of the case, as culled from the records, are as follows:
Respondent T.E.A.M. Electronics Corporation (TEC) was formerly known as NS Electronics
(Philippines), Inc. before 1982 and National Semi-Conductors (Phils.) before 1988. TEC is
wholly owned by respondent Technology Electronics Assembly and Management Pacific
97
Corporation (TPC). On the other hand, petitioner Manila Electric Company (Meralco) is a utility
company supplying electricity in the Metro Manila area.
Petitioner and NS Electronics (Philippines), Inc., the predecessor-in-interest of respondent TEC,
were parties to two separate contracts denominated as Agreements for the Sale of Electric
Energy under the following account numbers: 09341-1322-163 and 09341-1812-13.4 Under the
aforesaid agreements, petitioner undertook to supply TEC's building known as Dyna Craft
International Manila (DCIM) located at Electronics Avenue, Food Terminal Complex, Taguig,
Metro Manila, with electric power. Another contract was entered into for the supply of electric
power to TEC's NS Building under Account No. 19389-0900-10.
In September 1986, TEC, under its former name National Semi-Conductors (Phils.) entered into
a Contract of Lease5 with respondent Ultra Electronics Industries, Inc. (Ultra) for the use of the
former's DCIM building for a period of five years or until September 1991. Ultra was, however,
ejected from the premises on February 12, 1988 by virtue of a court order, for repeated violation
of the terms and conditions of the lease contract.
On September 28, 1987, a team of petitioner's inspectors conducted a surprise inspection of the
electric meters installed at the DCIM building, witnessed by Ultra's6 representative, Mr. Willie
Abangan. The two meters covered by account numbers 09341-1322-16 and 09341-1812-13,
were found to be allegedly tampered with and did not register the actual power consumption in
the building. The results of the inspection were reflected in the Service Inspection
Reports7 prepared by the team.
In a letter dated November 25, 1987, petitioner informed TEC of the results of the inspection and
demanded from the latter the payment of P7,040,401.01 representing its unregistered
consumption from February 10, 1986 until September 28, 1987, as a result of the alleged
tampering of the meters.8 TEC received the letters on January 7, 1988. Since Ultra was in
possession of the subject building during the covered period, TEC's Managing Director, Mr.
Bobby Tan, referred the demand letter to Ultra9 which, in turn, informed TEC that its Executive
Vice-President had met with petitioner's representative. Ultra further intimated that assuming
that there was tampering of the meters, petitioner's assessment was excessive. 10 For failure of
TEC to pay the differential billing, petitioner disconnected the electricity supply to the DCIM
building on April 29, 1988.
TEC demanded from petitioner the reconnection of electrical service, claiming that it had nothing
to do with the alleged tampering but the latter refused to heed the demand. Hence, TEC filed a
complaint on May 27, 1988 before the Energy Regulatory Board (ERB) praying that electric
power be restored to the DCIM building. 11 The ERB immediately ordered the reconnection of the
service but petitioner complied with it only on October 12, 1988 after TEC paid P1,000,000.00,
under protest. The complaint before the ERB was later withdrawn as the parties deemed it best
to have the issues threshed out in the regular courts. Prior to the reconnection, or on June 7,
1988, petitioner conducted a scheduled inspection of the questioned meters and found them to
have been tampered anew.12
Meanwhile, on April 25, 1988, petitioner conducted another inspection, this time, in TEC's NS
Building. The inspection allegedly revealed that the electric meters were not registering the
correct power consumption. Petitioner, thus, sent a letter dated June 18, 1988 demanding
payment of P280,813.72 representing the differential billing.13 TEC denied petitioner's
allegations and claim in a letter dated June 29, 1988. 14 Petitioner, thus, sent TEC another letter
demanding payment of the aforesaid amount, with a warning that the electric service would be
disconnected in case of continued refusal to pay the differential billing.15 To avert the impending
disconnection of electrical service, TEC paid the above amount, under protest.16

On January 13, 1989, TEC and TPC filed a complaint for damages against petitioner and
Ultra17 before the Regional Trial Court (RTC) of Pasig. The case was raffled to Branch 162 and
was docketed as Civil Case No. 56851.18 Upon the filing of the parties' answer to the complaint,
pre-trial was scheduled.
At the pre-trial, the parties agreed to limit the issues, as follows:
1. Whether or not the defendant Meralco is liable for the plaintiffs' disconnection of electric
service at DCIM Building.
2. Whether or not the plaintiff is liable for (sic) the defendant for the differential billings in the
amount of P7,040,401.01.
3. Whether or not the plaintiff is liable to defendant for exemplary damages.19
For failure of the parties to reach an amicable settlement, trial on the merits ensued. On June
17, 1992, the trial court rendered a Decision in favor of respondents TEC and TPC, and against
respondent Ultra and petitioner. The pertinent portion of the decision reads:
WHEREFORE, judgment is hereby rendered in this case in favor of the plaintiffs and against the
defendants as follows:
(1) Ordering both defendants Meralco and ULTRA Electronics Instruments, Inc. to jointly and
severally reimburse plaintiff TEC actual damages in the amount of ONE MILLION PESOS with
legal rate of interest from the date of the filing of this case on January 19, 1989 until the said
amount shall have been fully paid;
(2) Ordering defendant Meralco to pay to plaintiff TEC the amount of P280,813.72 as actual
damages with legal rate of interest also from January 19, 1989;
(3) Ordering defendant Meralco to pay to plaintiff TPC the amount of P150,000.00 as actual
damages with interest at legal rate from January 19, 1989;
(4) Condemning defendant Meralco to pay both plaintiffs moral damages in the amount
pf P500,000.00;
(5) Condemning defendant Meralco to pay both plaintiffs corrective and/or exemplary damages
in the amount of P200,000.00;
(6) Ordering defendant Meralco to pay attorney's fees in the amount of P200,000.00
Costs against defendant Meralco.
20
SO ORDERED.
The trial court found the evidence of petitioner insufficient to prove that TEC was guilty of
tampering the meter installations. The deformed condition of the meter seal and the existence of
an opening in the wire duct leading to the transformer vault did not, in themselves, prove the
alleged tampering, especially since access to the transformer was given only to petitioner's
employees.21 The sudden drop in TEC's (or Ultra's) electric consumption did not, per se, show
meter tampering. The delay in the sending of notice of the results of the inspection was likewise
viewed by the court as evidence of inefficiency and arbitrariness on the part of petitioner. More
importantly, petitioner's act of disconnecting the DCIM building's electric supply constituted bad
faith and thus makes it liable for damages. 22 The court further denied petitioner's claim of
98
differential billing primarily on the ground of equitable negligence.23 Considering that TEC and
TPC paid P1,000,000.00 to avert the disconnection of electric power; and because Ultra
manifested to settle the claims of petitioner, the court imposed solidary liability on both Ultra and
petitioner for the payment of the P1,000,000.00.
Ultra and petitioner appealed to the CA which affirmed the RTC decision, with a modification of
the amount of actual damages and interest thereon. The dispositive portion of the CA decision
dated June 18, 1997, states:
WHEREFORE, this Court renders judgment affirming in toto the Decision rendered by the trial
court with the slight modification that the interest at legal rate shall be computed from January
13, 1989 and that Meralco shall pay plaintiff T.E.A.M. Electronics Corporation and Technology
Electronics Assembly and Management Pacific Corporation the sum of P150,000.00 per month
for five (5) months for actual damages incurred when it was compelled to lease a generator set
with interest at the legal rate from the above-stated date.
SO ORDERED.24
The appellate court agreed with the RTC's conclusion. In addition, it considered petitioner
negligent for failing to discover the alleged defects in the electric meters; in belatedly notifying
TEC and TPC of the results of the inspection; and in disconnecting the electric power without
prior notice.
Petitioner now comes before this Court in this petition for review on certiorari contending that:
The Court of Appeals committed grievous errors and decided matters of substance contrary to
law and the rulings of this Honorable Court:
1. In finding that the issue in the case is whether there was deliberate tampering of the metering
installations at the building owned by TEC.
2. In not finding that the issue is: whether or not, based on the tampered meters, whether or not
petitioner is entitled to differential billing, and if so, how much.
3. In declaring that petitioner ME RALCO had the burden of proof to show by clear and
convincing evidence that with respect to the tampered meters that TEC and/or TPC authored
their tampering.
4. In finding that petitioner Meralco should not have held TEC and/or TPC responsible for the
acts of Ultra.
5. In finding that TEC should not be held liable for the tampering of this electric meter in its DCIM
Building.
6. In finding that there was no notice of disconnection.
7. In finding that petitioner MERALCO was negligent in informing TEC of the alleged tampering.
8. In making the finding that it is difficult to believe that when petitioner MERALCO inspected on
June 7, 1988 the meter installations, they were found to be tampered.
9. In declaring that petitioner MERALCO estopped from claiming any tampering of the meters.

10. In finding that "the method employed by MERALCO to as certain (sic) the 'correct' amount of
electricity consumed is questionable";
11. In declaring that MERALCO all throughout its dealings with TEC took on an "attitude" which
is oppressive, wanton and reckless.
12. In declaring that MERALCO acted arbitrarily in inspecting TEC's DCIM building and the NS
building.
13. In declaring that respondents TEC and TPC are entitled to the damages which it awarded.
14. In not declaring that petitioner is entitled to the differential bill.
15. In not declaring that respondents are liable to petitioner for exemplary damages, attorney's
fee and expenses for litigation.25
The petition must fail.
The issues for resolution can be summarized as follows: 1) whether or not TEC tampered with
the electric meters installed at its DCIM and NS buildings; 2) If so, whether or not it is liable for
the differential billing as computed by petitioner; and 3) whether or not petitioner was justified in
disconnecting the electric power supply in TEC's DCIM building.
Petitioner insists that the tampering of the electric meters installed at the DCIM and NS buildings
owned by respondent TEC has been established by overwhelming evidence, as specifically
shown by the shorting devices found during the inspection. Thus, says petitioner, tampering of
the meter is no longer an issue.
It is obvious that petitioner wants this Court to revisit the factual findings of the lower courts.
Well-established is the doctrine that under Rule 45 of the Rules of Court, only questions of law,
not of fact, may be raised before the Court. We would like to stress that this Court is not a trier of
facts and may not re-examine and weigh anew the respective evidence of the parties. Factual
findings of the trial court, especially those affirmed by the Court of Appeals, are binding on this
Court.26
Looking at the record, we note that petitioner claims to have discovered three incidences of
meter-tampering; twice in the DCIM building on September 28, 1987 and June 7, 1988; and
once in the NS building on April 24, 1988.
The first instance was supposedly discovered on September 28, 1987. The inspector allegedly
found the presence of a short circuiting device and saw that the meter seal was deformed. In
addition, petitioner, through the Supervising Engineer of its Special Billing Analysis
Department,27 claimed that there was a sudden and unexplainable drop in TEC's electrical
consumption starting February 10, 1986. On the basis of the foregoing, petitioner concluded that
the electric meters were tampered with.
However, contrary to petitioner's claim that there was a drastic and unexplainable drop in TEC's
electric consumption during the affected period, the Pattern of TEC's Electrical
Consumption28 shows that the sudden drop is not peculiar to the said period. Noteworthy is the
observation of the RTC in this wise:
In fact, in Account No. 09341-1812-13 (heretofore referred as Account/Meter No. 2), as
evidenced by Exhibits "35" and "35-A," there was likewise a sudden drop of electrical
consumption from the year 1984 which recorded an average 141,300 kwh/month to 1985 which
99
recorded an average kwh/month at 87,600 or a difference-drop of 53,700 kwh/month; from
1985's 87,600 recorded consumption, the same dropped to 18,600 kwh/month or a difference-
drop of 69,000 kwh/month. Surely, a drop of 53,700 could be equally categorized as a sudden
drop amounting to 69,000 which, incidentally, the Meralco claimed as "unexplainable. x x x.29
The witnesses for petitioner who testified on the alleged tampering of the electric meters,
declared that tampering is committed by consumers to prevent the meter from registering the
correct amount of electric consumption, and result in a reduced monthly electric bill, while
continuing to enjoy the same power supply. Only the registration of actual electric energy
consumption, not the supply of electricity, is affected when a meter is tampered with. 30 The
witnesses claimed that after the inspection, the tampered electric meters were corrected, so that
they would register the correct consumption of TEC. Logically, then, after the correction of the
allegedly tampered meters, the customer's registered consumption would go up.
In this case, the period claimed to have been affected by the tampered electric meters is from
February 1986 until September 1987. Based on petitioner's Billing Record 31 (for the DCIM
building), TEC's monthly electric consumption on Account No. 9341-1322-16 was between 4,500
and 27,000 kwh.32 Account No. 9341-1812-13 showed a monthly consumption between 9,600
and 34,200 kwh.33 It is interesting to note that, after correction of the allegedly tampered meters,
TEC's monthly electric consumption from October 1987 to February 1988 (the last month that
Ultra occupied the DCIM building) was between 8,700 and 24,300 kwh in its first account, and
16,200 to 46,800 kwh on the second account.
Even more revealing is the fact that TEC's meters registered 9,300 kwh and 19,200 kwh
consumption on the first and second accounts, respectively, a month prior to the inspection. On
the first month after the meters were corrected, TEC's electric consumption registered at 9,300
kwh and 22,200 kwh on the respective accounts. These figures clearly show that there was no
palpably drastic difference between the consumption before and after the inspection, casting a
cloud of doubt over petitioner's claim of meter-tampering. Indeed, Ultra's explanation that the
corporation was losing; thus, it had lesser consumption of electric power appear to be the more
plausible reason for the drop in electric consumption.
Petitioner likewise claimed that when the subject meters were again inspected on June 7, 1988,
they were found to have been tampered anew. The Court notes that prior to the inspection, TEC
was informed about it; and months before the inspection, there was an unsettled controversy
between TEC and petitioner, brought about by the disconnection of electric power and the non-
payment of differential billing. We are more disposed to accept the trial court's conclusion that it
is hard to believe that a customer previously apprehended for tampered meters and
assessed P7 million would further jeopardize itself in the eyes of petitioner. 34 If it is true that
there was evidence of tampering found on September 28, 1987 and again on June 7, 1988, the
better view would be that the defective meters were not actually corrected after the first
inspection. If so, then Manila Electric Company v. Macro Textile Mills Corporation35 would apply,
where we said that we cannot sanction a situation wherein the defects in the electric meter are
allowed to continue indefinitely until suddenly, the public utilities demand payment for the
unrecorded electricity utilized when they could have remedied the situation immediately.
Petitioner's failure to do so may encourage neglect of public utilities to the detriment of the
consuming public. Corollarily, it must be underscored that petitioner has the imperative duty to
make a reasonable and proper inspection of its apparatus and equipment to ensure that they do
not malfunction, and the due diligence to discover and repair defects therein. Failure to perform
such duties constitutes negligence. 36 By reason of said negligence, public utilities run the risk of
forfeiting amounts originally due from their customers.37

As to the alleged tampering of the electric meter in TEC's NS building, suffice it to state that the
allegation was not proven, considering that the meters therein were enclosed in a metal cabinet
the metal seal of which was unbroken, with petitioner having sole access to the said meters.38
In view of the negative finding on the alleged tampering of electric meters on TEC's DCIM and
NS buildings, petitioner's claim of differential billing was correctly denied by the trial and
appellate courts. With greater reason, therefore, could petitioner not exercise the right of
immediate disconnection.
The law in force at the time material to this controversy was Presidential Decree (P.D.) No.
40139 issued on March 1, 1974. 40 The decree penalized unauthorized installation of water,
electrical or telephone connections and such acts as the use of tampered electrical meters. It
was issued in answer to the urgent need to put an end to illegal activities that prejudice the
economic well-being of both the companies concerned and the consuming public. 41 P.D. 401
granted the electric companies the right to conduct inspections of electric meters and the
criminal prosecution42 of erring consumers who were found to have tampered with their electric
meters. It did not expressly provide for more expedient remedies such as the charging of
differential billing and immediate disconnection against erring consumers. Thus, electric
companies found a creative way of availing themselves of such remedies by inserting into their
service contracts (or agreements for the sale of electric energy) a provision for differential billing
with the option of disconnection upon non-payment by the erring consumer. The Court has
recognized the validity of such stipulations.43 However, recourse to differential billing with
disconnection was subject to the prior requirement of a 48-hour written notice of disconnection.44
Petitioner, in the instant case, resorted to the remedy of disconnection without prior notice. While
it is true that petitioner sent a demand letter to TEC for the payment of differential billing, it did
not include any notice that the electric supply would be disconnected. In fine, petitioner abused
the remedies granted to it under P.D. 401 and Revised General Order No. 1 by outrightly
depriving TEC of electrical services without first notifying it of the impending disconnection.
Accordingly, the CA did not err in affirming the RTC decision.
As to the damages awarded by the CA, we deem it proper to modify the same. Actual damages
are compensation for an injury that will put the injured party in the position where it was before
the injury. They pertain to such injuries or losses that are actually sustained and susceptible of
measurement. Except as provided by law or by stipulation, a party is entitled to adequate
compensation only for such pecuniary loss as is duly proven. Basic is the rule that to recover
actual damages, not only must the amount of loss be capable of proof; it must also be actually
proven with a reasonable degree of certainty, premised upon competent proof or the best
evidence obtainable.45
Respondent TEC sufficiently established, and petitioner in fact admitted, that the former
paid P1,000,000.00 and P280,813.72 under protest, the amounts representing a portion of the
latter's claim of differential billing. With the finding that no tampering was committed and, thus,
no differential billing due, the aforesaid amounts should be returned by petitioner, with interest,
as ordered by the Court of Appeals and pursuant to the guidelines set forth by the Court.46
However, despite the appellate court's conclusion that no tampering was committed, it held Ultra
solidarily liable with petitioner for P1,000,000.00, only because the former, as occupant of the
building, promised to settle the claims of the latter. This ruling is erroneous. Ultra's promise was
conditioned upon the finding of defect or tampering of the meters. It did not acknowledge any
culpability and liability, and absent any tampered meter, it is absurd to make the lawful occupant
liable. It was petitioner who received the P1 million; thus, it alone should be held liable for the
return of the amount.
100
TEC also sufficiently established its claim for the reimbursement of the amount paid as rentals
for the generator set it was constrained to rent by reason of the illegal disconnection of electrical
service. The official receipts and purchase orders submitted by TEC as evidence sufficiently
show that such rentals were indeed made. However, the amount of P150,000.00 per month for
five months, awarded by the CA, is excessive. Instead, a total sum of P150,000.00, as found by
the RTC, is proper.
As to the payment of exemplary damages and attorney's fees, we find no cogent reason to
disturb the same. Exemplary damages are imposed by way of example or correction for the
public good in addition to moral, temperate, liquidated, or compensatory damages.47 In this case,
to serve as an example – that before a disconnection of electrical supply can be effected by a
public utility, the requisites of law must be complied with – we affirm the award of P200,000.00
as exemplary damages. With the award of exemplary damages, the award of attorney's fees is
likewise proper, pursuant to Article 2208 48 of the Civil Code. It is obvious that TEC needed the
services of a lawyer to argue its cause through three levels of the judicial hierarchy. Thus, the
award of P200,000.00 is in order.49
We, however, deem it proper to delete the award of moral damages. TEC's claim was premised
allegedly on the damage to its goodwill and reputation. 50 As a rule, a corporation is not entitled to
moral damages because, not being a natural person, it cannot experience physical suffering or
sentiments like wounded feelings, serious anxiety, mental anguish and moral shock. The only
exception to this rule is when the corporation has a reputation that is debased, resulting in its
humiliation in the business realm.51 But in such a case, it is imperative for the claimant to present
proof to justify the award. It is essential to prove the existence of the factual basis of the damage
and its causal relation to petitioner's acts. 52 In the present case, the records are bereft of any
evidence that the name or reputation of TEC/TPC has been debased as a result of petitioner's
acts. Besides, the trial court simply awarded moral damages in the dispositive portion of its
decision without stating the basis thereof.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
40282 dated June 18, 1997 and its Resolution dated December 3, 1997 are AFFIRMED with the
following MODIFICATIONS: (1) the award of P150,000.00 per month for five months as
reimbursement for the rentals of the generator set is REDUCED to P150,000.00; and (2) the
award of P500,000.00 as moral damages is hereby DELETED.
SO ORDERED.
SECOND DIVISION
G.R. No. 172428             November 28, 2008
HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C. SOLANTE, and
DORIS C. MAGLASANG, as Heirs of Deceased SPOUSES RAYMUNDO I. CRYSTAL and
DESAMPARADOS C. CRYSTAL, petitioners,
vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
TINGA, J.:

Before us is a Petition for Review1 of the Decision2 and Resolution3 of the Court of Appeals
dated 24 October 2005 and 31 March 2006, respectively, in CA G.R. CV No. 72886, which
affirmed the 8 June 2001 decision of the Regional Trial Court, Branch 5, of Cebu City.4
The facts, as culled from the records, follow.
On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained a P300,000.00
loan in behalf of the Cebu Contractors Consortium Co. (CCCC) from the Bank of the Philippine
Islands-Butuan branch (BPI-Butuan). The loan was secured by a chattel mortgage on heavy
equipment and machinery of CCCC. On the same date, the spouses executed in favor of BPI-
Butuan a Continuing Suretyship5 where they bound themselves as surety of CCCC in the
aggregate principal sum of not exceeding P300,000.00. Thereafter, or on 29 March 1979,
Raymundo Crystal executed a promissory note 6 for the amount of P300,000.00, also in favor of
BPI-Butuan.
Sometime in August 1979, CCCC renewed a previous loan, this time from BPI, Cebu City
branch (BPI-Cebu City). The renewal was evidenced by a promissory note 7 dated 13 August
1979, signed by the spouses in their personal capacities and as managing partners of CCCC.
The promissory note states that the spouses are jointly and severally liable with CCCC. It
appears that before the original loan could be granted, BPI-Cebu City required CCCC to put up
a security.
However, CCCC had no real property to offer as security for the loan; hence, the spouses
executed a real estate mortgage8 over their own real property on 22 September 1977.9 On 3
October 1977, they executed another real estate mortgage over the same lot in favor of BPI-
Cebu City, to secure an additional loan of P20,000.00 of CCCC.10
CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they became due.
CCCC, as well as the spouses, failed to pay their obligations despite demands. Thus, BPI
resorted to the foreclosure of the chattel mortgage and the real estate mortgage. The
foreclosure sale on the chattel mortgage was initially stalled with the issuance of a restraining
order against BPI.11 However, following BPI’s compliance with the necessary requisites of
extrajudicial foreclosure, the foreclosure sale on the chattel mortgage was consummated on 28
February 1988, with the proceeds amounting to P240,000.00 applied to the loan from BPI-
Butuan which had then reached P707,393.90.12 Meanwhile, on 7 July 1981, Insular Bank of Asia
and America (IBAA), through its Vice-President for Legal and Corporate Affairs, offered to buy
the lot subject of the two (2) real
estate mortgages and to pay directly the spouses’ indebtedness in exchange for the release of
the mortgages. BPI rejected IBAA’s offer to pay.13
BPI filed a complaint for sum of money against CCCC and the spouses before the Regional Trial
Court of Butuan City (RTC Butuan), seeking to recover the deficiency of the loan of CCCC and
the spouses with BPI-Butuan. The trial court ruled in favor of BPI. Pursuant to the decision, BPI
instituted extrajudicial foreclosure of the spouses’ mortgaged property.14
On 10 April 1985, the spouses filed an action for Injunction With Damages, With A Prayer For A
Restraining Order and/ or Writ of Preliminary Injunction.15 The spouses claimed that the
foreclosure of the real estate mortgages is illegal because BPI should have exhausted CCCC’s
properties first, stressing that they are mere guarantors of the renewed loans. They also prayed
that they be awarded moral and exemplary damages, attorney’s fees, litigation expenses and
cost of suit. Subsequently, the spouses filed an amended complaint, 16 additionally alleging that
CCCC had opened and maintained a foreign currency savings account (FCSA-197) with bpi,
101
Makati branch (BPI-Makati), and that said FCSA was used as security for a P450,000.00 loan
also extended by BPI-Makati. The P450,000.00 loan was allegedly paid, and thereafter the
spouses demanded the return of the FCSA passbook. BPI rejected the demand; thus, the
spouses were unable to withdraw from the said account to pay for their other obligations to BPI.
The trial court dismissed the spouses’ complaint and ordered them to pay moral and exemplary
damages and attorney’s fees to BPI. 17 It ruled that since the spouses agreed to bind themselves
jointly and severally, they are solidarily liable for the loans; hence, BPI can validly foreclose the
two real estate mortgages. Moreover, being guarantors-mortgagors, the spouses are not entitled
to the benefit of exhaustion. Anent the FCSA, the trial court found that CCCC originally had
FCDU SA No. 197 with BPI, Dewey Boulevard branch, which was transferred to BPI-Makati as
FCDU SA 76/0035, at the request of Desamparados Crystal. FCDU SA 76/0035 was thus
closed, but Desamparados Crystal failed to surrender the passbook because it was lost. The
transferred FCSA in BPI-Makati was the one used as security for CCCC’s P450,000.00 loan
from BPI-Makati. CCCC was no longer allowed to withdraw from FCDU SA No. 197 because it
was already closed.
The spouses appealed the decision of the trial court to the Court of Appeals, but their appeal
was dismissed.18 The spouses moved for the reconsideration of the decision, but the Court of
Appeals also denied their motion for reconsideration.19 Hence, the present petition.
Before the Court, petitioners who are the heirs of the spouses argue that the failure of the
spouses to pay the BPI-Cebu City loan of P120,000.00 was due to BPI’s illegal refusal to accept
payment for the loan unless the P300,000.00 loan from BPI-Butuan would also be paid.
Consequently, in view of BPI’s unjust refusal to accept payment of the BPI-Cebu City loan, the
loan obligation of the spouses was extinguished, petitioners contend.
The contention has no merit. Petitioners rely on IBAA’s offer to purchase the mortgaged lot from
them and to directly pay BPI out of the proceeds thereof to settle the loan. 20 BPI’s refusal to
agree to such payment scheme cannot extinguish the spouses’ loan obligation. In the first place,
IBAA is not privy to the loan agreement or the promissory note between the spouses and BPI.
Contracts, after all, take effect only between the parties, their successors in interest, heirs
and assigns.21 Besides, under Art. 1236 of the Civil Code, the creditor is not bound to accept
payment or performance by a third person who has no interest in the fulfillment of the obligation,
unless there is a stipulation to the contrary. We see no stipulation in the promissory note which
states that a third person may fulfill the spouses’ obligation. Thus, it is clear that the spouses
alone bear responsibility for the same.
In any event, the promissory note is the controlling repository of the obligation of the spouses.
Under the promissory note, the spouses defined the parameters of their obligation as follows:
On or before June 29, 1980 on demand, for value received, I/we promise to pay, jointly and
severally, to the BANK OF THE PHILIPPINE ISLANDS, at its office in the city of Cebu
Philippines, the sum of ONE HUNDRED TWENTY THOUSAND PESOS (P120,0000.00),
Philippine Currency, subject to periodic installments on the principal as follows: P30,000.00
quarterly amortization starting September 28, 1979. x x x 22
A solidary obligation is one in which each of the debtors is liable for the entire obligation, and
each of the creditors is entitled to demand the satisfaction of the whole obligation from any or all
of the debtors. 23 A liability is solidary "only when the obligation expressly so states, when the
law so provides or when the nature of the

obligation so requires."24 Thus, when the obligor undertakes to be "jointly and severally" liable, it
means that the obligation is solidary,25 such as in this case. By stating "I/we promise to pay,
jointly and severally, to the BANK OF THE PHILIPPINE ISLANDS," the spouses agreed to be
sought out and be demanded payment from, by BPI. BPI did demand payment from them, but
they failed to comply with their obligation, prompting BPI’s valid resort to the foreclosure of the
chattel mortgage and the real estate mortgages.
More importantly, the promissory note, wherein the spouses undertook to be solidarily liable for
the principal loan, partakes the nature of a suretyship and therefore is an additional security for
the loan. Thus we held in one case that if solidary liability was instituted to "guarantee" a
principal obligation, the law deems the contract to be one of suretyship. 26 And while a contract of
a surety is in essence secondary only to a valid principal obligation, the surety’s liability to the
creditor or promisee of the principal is said to be direct, primary, and absolute; in other words,
the surety is directly and equally bound with the principal. The surety therefore becomes liable
for the debt or duty of another even if he possesses no direct or personal interest over the
obligations nor does he receive any benefit therefrom.27
Petitioners contend that the Court of Appeals erred in not granting their counterclaims,
considering that they suffered moral damages in view of the unjust refusal of BPI to accept the
payment scheme proposed by IBAA and the allegedly unjust and illegal foreclosure of the real
estate mortgages on their property. 28 Conversely, they argue that the Court of Appeals erred in
awarding moral damages to BPI, which is a corporation, as well as exemplary damages,
attorney’s fees and expenses of litigation.29
We do not agree. Moral damages are meant to compensate the claimant for any physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injuries unjustly caused. 30 Such damages, to be
recoverable, must be the proximate result of a wrongful act or omission the factual basis for
which is satisfactorily established by the aggrieved party. 31 There being no wrongful or unjust act
on the part of BPI in demanding payment from them and in seeking the foreclosure of the chattel
and real estate mortgages, there is no lawful basis for award of damages in favor of the
spouses.
Neither is BPI entitled to moral damages. A juridical person is generally not entitled to moral
damages because, unlike a natural person, it cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. 32 The Court of
Appeals found BPI as "being famous and having gained its familiarity and respect not only in the
Philippines but also in the whole world because of its good will and good reputation must protect
and defend the same against any unwarranted suit such as the case at bench." 33 In holding that
BPI is entitled to moral damages, the Court of Appeals relied on the case of People v.
Manero,34 wherein the Court ruled that "[i]t is only when a juridical person has a good reputation
that is debased, resulting in social humiliation, that moral damages may be awarded."35
We do not agree with the Court of Appeals. A statement similar to that made by the Court
in Manero can be found in the case of Mambulao Lumber Co. v. PNB, et al.,36 thus:
x x x Obviously, an artificial person like herein appellant corporation cannot experience physical
sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are basis of moral damages. A corporation may have good reputation
which, if besmirched may also be a ground for the award of moral damages . x x x
(Emphasis supplied)
102
Nevertheless, in the more recent cases of ABS-CBN Corp. v. Court of Appeals, et
al.,37 and Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational Center-Bicol
Christian College of Medicine (AMEC-BCCM),38 the Court held that the statements in Manero
and Mambulao were mere obiter dicta, implying that the award of moral damages to
corporations is not a hard and fast rule. Indeed, while the Court may allow the grant of moral
damages to corporations, it is not automatically granted; there must still be proof of the
existence of the factual basis of the damage and its causal relation to the defendant’s acts. This
is so because moral damages, though incapable of pecuniary estimation, are in the category of
an award designed to compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer.39
The spouses’ complaint against BPI proved to be unfounded, but it does not automatically entitle
BPI to moral damages. Although the institution of a clearly unfounded civil suit can at times be a
legal
justification for an award of attorney's fees, such filing, however, has almost invariably been held
not to be a ground for an award of moral damages. The rationale for the rule is that the law
could not have meant to impose a penalty on the right to litigate. Otherwise, moral damages
must every time be awarded in favor of the prevailing defendant against an unsuccessful
plaintiff.40 BPI may have been inconvenienced by the suit, but we do not see how it could have
possibly suffered besmirched reputation on account of the single suit alone. Hence, the award of
moral damages should be deleted.
The awards of exemplary damages and attorney’s fees, however, are proper. Exemplary
damages, on the other hand, are imposed by way of example or correction for the public good,
when the party to a contract acts in a wanton, fraudulent, oppressive or malevolent manner,
while attorney’s fees are allowed when exemplary damages are awarded and when the party to
a suit is compelled to incur expenses to protect his interest.41 The spouses instituted their
complaint against BPI notwithstanding the fact that they were the ones who failed to pay their
obligations. Consequently, BPI was forced to litigate and defend its interest. For these reasons,
BPI is entitled to the awards of exemplary damages and attorney’s fees.
WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of Appeals
dated 24 October 2005 and 31 March 2006, respectively, are hereby AFFIRMED, with the
MODIFICATION that the award of moral damages to Bank of the Philippine Islands is
DELETED.
Costs against the petitioners.
SO ORDERED.
FIRST DIVISION
G.R. No. 171182               August 23, 2012
UNIVERSITY OF THE PHILIPPINES, JOSE V. ABUEVA, RAUL P. DE GUZMAN, RUBEN P.
ASPIRAS, EMMANUEL P. BELLO, WILFREDO P. DAVID, CASIANO S. ABRIGO, and
JOSEFINA R. LICUANAN, Petitioners,
vs.
HON. AGUSTIN S. DIZON, his capacity as Presiding Judge of the Regional Trial Court of
Quezon City, Branch 80, STERN BUILDERS, INC., and SERVILLANO DELA
CRUZ, Respondents.

DECISION
BERSAMIN, J.:
Trial judges should not immediately issue writs of execution or garnishment against the
Government or any of its subdivisions, agencies and instrumentalities to enforce money
judgments.1 They should bear in mind that the primary jurisdiction to examine, audit and settle all
claims of any sort due from the Government or any of its subdivisions, agencies and
instrumentalities pertains to the Commission on Audit (COA) pursuant to Presidential Decree
No. 1445 (Government Auditing Code of the Philippines).
The Case
On appeal by the University of the Philippines and its then incumbent officials (collectively, the
UP) is the decision promulgated on September 16, 2005, 2 whereby the Court of Appeals (CA)
upheld the order of the Regional Trial Court (RTC), Branch 80, in Quezon City that directed the
garnishment of public funds amounting to ₱ 16,370,191.74 belonging to the UP to satisfy the writ
of execution issued to enforce the already final and executory judgment against the UP.
Antecedents
On August 30, 1990, the UP, through its then President Jose V. Abueva, entered into a General
Construction Agreement with respondent Stern Builders Corporation (Stern Builders),
represented by its President and General Manager Servillano dela Cruz, for the construction of
the extension building and the renovation of the College of Arts and Sciences Building in the
campus of the University of the Philippines in Los Baños (UPLB).3
In the course of the implementation of the contract, Stern Builders submitted three progress
billings corresponding to the work accomplished, but the UP paid only two of the billings. The
third billing worth ₱ 273,729.47 was not paid due to its disallowance by the Commission on Audit
(COA). Despite the lifting of the disallowance, the UP failed to pay the billing, prompting Stern
Builders and dela Cruz to sue the UP and its co-respondent officials to collect the unpaid billing
and to recover various damages. The suit, entitled Stern Builders Corporation and Servillano R.
Dela Cruz v. University of the Philippines Systems, Jose V. Abueva, Raul P. de Guzman, Ruben
P. Aspiras, Emmanuel P. Bello, Wilfredo P. David, Casiano S. Abrigo, and Josefina R.
Licuanan, was docketed as Civil Case No. Q-93-14971 of the Regional Trial Court in Quezon
City (RTC).4
After trial, on November 28, 2001, the RTC rendered its decision in favor of the plaintiffs,5 viz:
Wherefore, in the light of the foregoing, judgment is hereby rendered in favor of the plaintiff and
against the defendants ordering the latter to pay plaintiff, jointly and severally, the following, to
wit:
1. ₱ 503,462.74 amount of the third billing, additional accomplished work and retention money
2. ₱ 5,716,729.00 in actual damages
3. ₱ 10,000,000.00 in moral damages
4. ₱ 150,000.00 and ₱ 1,500.00 per appearance as attorney’s fees; and
5. Costs of suit.
103
SO ORDERED.
Following the RTC’s denial of its motion for reconsideration on May 7, 2002, 6 the UP filed a
notice of appeal on June 3, 2002. 7 Stern Builders and dela Cruz opposed the notice of appeal on
the ground of its filing being belated, and moved for the execution of the decision. The UP
countered that the notice of appeal was filed within the reglementary period because the UP’s
Office of Legal Affairs (OLS) in Diliman, Quezon City received the order of denial only on May
31, 2002. On September 26, 2002, the RTC denied due course to the notice of appeal for having
been filed out of time and granted the private respondents’ motion for execution.8
The RTC issued the writ of execution on October 4, 2002, 9 and the sheriff of the RTC served the
writ of execution and notice of demand upon the UP, through its counsel, on October 9,
2002.10 The UP filed an urgent motion to reconsider the order dated September 26, 2002, to
quash the writ of execution dated October 4, 2002, and to restrain the proceedings.11 However,
the RTC denied the urgent motion on April 1, 2003.12
On June 24, 2003, the UP assailed the denial of due course to its appeal through a petition
for certiorari in the Court of Appeals (CA), docketed as CA-G.R. No. 77395.13
On February 24, 2004, the CA dismissed the petition for certiorari upon finding that the UP’s
notice of appeal had been filed late,14 stating:
Records clearly show that petitioners received a copy of the Decision dated November 28, 2001
and January 7, 2002, thus, they had until January 22, 2002 within which to file their appeal. On
January 16, 2002 or after the lapse of nine (9) days, petitioners through their counsel Atty.
Nolasco filed a Motion for Reconsideration of the aforesaid decision, hence, pursuant to the
rules, petitioners still had six (6) remaining days to file their appeal. As admitted by the
petitioners in their petition (Rollo, p. 25), Atty. Nolasco received a copy of the Order denying
their motion for reconsideration on May 17, 2002, thus, petitioners still has until May 23, 2002
(the remaining six (6) days) within which to file their appeal. Obviously, petitioners were not able
to file their Notice of Appeal on May 23, 2002 as it was only filed on June 3, 2002.
In view of the said circumstances, We are of the belief and so holds that the Notice of Appeal
filed by the petitioners was really filed out of time, the same having been filed seventeen (17)
days late of the reglementary period. By reason of which, the decision dated November 28, 2001
had already become final and executory. "Settled is the rule that the perfection of an appeal in
the manner and within the period permitted by law is not only mandatory but jurisdictional, and
failure to perfect that appeal renders the challenged judgment final and executory. This is not an
empty procedural rule but is grounded on fundamental considerations of public policy and sound
practice." (Ram’s Studio and Photographic Equipment, Inc. vs. Court of Appeals, 346 SCRA
691, 696). Indeed, Atty. Nolasco received the order of denial of the Motion for Reconsideration
on May 17, 2002 but filed a Notice of Appeal only on June 3, 3003. As such, the decision of the
lower court ipso facto became final when no appeal was perfected after the lapse of the
reglementary period. This procedural caveat cannot be trifled with, not even by the High Court.15
The UP sought a reconsideration, but the CA denied the UP’s motion for reconsideration on
April 19, 2004.16
On May 11, 2004, the UP appealed to the Court by petition for review on certiorari (G.R. No.
163501).
On June 23, 2004, the Court denied the petition for review. 17 The UP moved for the
reconsideration of the denial of its petition for review on August 29, 2004, 18 but the Court denied

the motion on October 6, 2004.19 The denial became final and executory on November 12,
2004.20
In the meanwhile that the UP was exhausting the available remedies to overturn the denial of
due course to the appeal and the issuance of the writ of execution, Stern Builders and dela Cruz
filed in the RTC their motions for execution despite their previous motion having already been
granted and despite the writ of execution having already issued. On June 11, 2003, the RTC
granted another motion for execution filed on May 9, 2003 (although the RTC had already
issued the writ of execution on October 4, 2002).21
On June 23, 2003 and July 25, 2003, respectively, the sheriff served notices of garnishment on
the UP’s depository banks, namely: Land Bank of the Philippines (Buendia Branch) and the
Development Bank of the Philippines (DBP), Commonwealth Branch.22 The UP assailed the
garnishment through an urgent motion to quash the notices of garnishment; 23 and a motion to
quash the writ of execution dated May 9, 2003.24
On their part, Stern Builders and dela Cruz filed their ex parte motion for issuance of a release
order.25
On October 14, 2003, the RTC denied the UP’s urgent motion to quash, and granted Stern
Builders and dela Cruz’s ex parte motion for issuance of a release order.26
The UP moved for the reconsideration of the order of October 14, 2003, but the RTC denied the
motion on November 7, 2003.27
On January 12, 2004, Stern Builders and dela Cruz again sought the release of the garnished
funds.28 Despite the UP’s opposition,29 the RTC granted the motion to release the garnished
funds on March 16, 2004. 30 On April 20, 2004, however, the RTC held in abeyance the
enforcement of the writs of execution issued on October 4, 2002 and June 3, 2003 and all the
ensuing notices of garnishment, citing Section 4, Rule 52, Rules of Court, which provided that
the pendency of a timely motion for reconsideration stayed the execution of the judgment.31
On December 21, 2004, the RTC, through respondent Judge Agustin S. Dizon, authorized the
release of the garnished funds of the UP,32 to wit:
WHEREFORE, premises considered, there being no more legal impediment for the release of
the garnished amount in satisfaction of the judgment award in the instant case, let the amount
garnished be immediately released by the Development Bank of the Philippines, Commonwealth
Branch, Quezon City in favor of the plaintiff.
SO ORDERED.
The UP was served on January 3, 2005 with the order of December 21, 2004 directing DBP to
release the garnished funds.33
On January 6, 2005, Stern Builders and dela Cruz moved to cite DBP in direct contempt of court
for its non-compliance with the order of release.34
Thereupon, on January 10, 2005, the UP brought a petition for certiorari in the CA to challenge
the jurisdiction of the RTC in issuing the order of December 21, 2004 (CA-G.R. CV No.
88125).35 Aside from raising the denial of due process, the UP averred that the RTC committed
grave abuse of discretion amounting to lack or excess of jurisdiction in ruling that there was no
longer any legal impediment to the release of the garnished funds. The UP argued that
government funds and properties could not be seized by virtue of writs of execution or
104
garnishment, as held in Department of Agriculture v. National Labor Relations
Commission,36 and citing Section 84 of Presidential Decree No. 1445 to the effect that "revenue
funds shall not be paid out of any public treasury or depository except in pursuance of an
appropriation law or other specific statutory authority;" and that the order of garnishment clashed
with the ruling in University of the Philippines Board of Regents v. Ligot-Telan 37 to the effect that
the funds belonging to the UP were public funds.
On January 19, 2005, the CA issued a temporary restraining order (TRO) upon application by
the UP.38
On March 22, 2005, Stern Builders and dela Cruz filed in the RTC their amended motion for
sheriff’s assistance to implement the release order dated December 21, 2004, stating that the
60-day period of the TRO of the CA had already lapsed. 39 The UP opposed the amended motion
and countered that the implementation of the release order be suspended.40
On May 3, 2005, the RTC granted the amended motion for sheriff’s assistance and directed the
sheriff to proceed to the DBP to receive the check in satisfaction of the judgment.41
The UP sought the reconsideration of the order of May 3, 2005.42
On May 16, 2005, DBP filed a motion to consign the check representing the judgment award
and to dismiss the motion to cite its officials in contempt of court.43
On May 23, 2005, the UP presented a motion to withhold the release of the payment of the
judgment award.44
On July 8, 2005, the RTC resolved all the pending matters, 45 noting that the DBP had already
delivered to the sheriff Manager’s Check No. 811941 for ₱ 16,370,191.74 representing the
garnished funds payable to the order of Stern Builders and dela Cruz as its compliance with the
RTC’s order dated December 21, 2004.46 However, the RTC directed in the same order that
Stern Builders and dela Cruz should not encash the check or withdraw its amount pending the
final resolution of the UP’s petition for certiorari, to wit:47
To enable the money represented in the check in question (No. 00008119411) to earn interest
during the pendency of the defendant University of the Philippines application for a writ of
injunction with the Court of Appeals the same may now be deposited by the plaintiff at the
garnishee Bank (Development Bank of the Philippines), the disposition of the amount
represented therein being subject to the final outcome of the case of the University of the
Philippines et al., vs. Hon. Agustin S. Dizon et al., (CA G.R. 88125) before the Court of Appeals.
Let it be stated herein that the plaintiff is not authorized to encash and withdraw the amount
represented in the check in question and enjoy the same in the fashion of an owner during the
pendency of the case between the parties before the Court of Appeals which may or may not be
resolved in plaintiff’s favor.
With the end in view of seeing to it that the check in question is deposited by the plaintiff at the
Development Bank of the Philippines (garnishee bank), Branch Sheriff Herlan Velasco is
directed to accompany and/or escort the plaintiff in making the deposit of the check in question.
SO ORDERED.
On September 16, 2005, the CA promulgated its assailed decision dismissing the UP’s petition
for certiorari, ruling that the UP had been given ample opportunity to contest the motion to direct
the DBP to deposit the check in the name of Stern Builders and dela Cruz; and that the

garnished funds could be the proper subject of garnishment because they had been already
earmarked for the project, with the UP holding the funds only in a fiduciary capacity,48 viz:
Petitioners next argue that the UP funds may not be seized for execution or garnishment to
satisfy the judgment award. Citing Department of Agriculture vs. NLRC, University of the
Philippines Board of Regents vs. Hon. Ligot-Telan, petitioners contend that UP deposits at Land
Bank and the Development Bank of the Philippines, being government funds, may not be
released absent an appropriations bill from Congress.
The argument is specious. UP entered into a contract with private respondents for the expansion
and renovation of the Arts and Sciences Building of its campus in Los Baños, Laguna.
Decidedly, there was already an appropriations earmarked for the said project. The said funds
are retained by UP, in a fiduciary capacity, pending completion of the construction project.
We agree with the trial Court [sic] observation on this score:
"4. Executive Order No. 109 (Directing all National Government Agencies to Revert Certain
Accounts Payable to the Cumulative Result of Operations of the National Government and for
Other Purposes) Section 9. Reversion of Accounts Payable, provides that, all 1995 and prior
years documented accounts payable and all undocumented accounts regardless of the year
they were incurred shall be reverted to the Cumulative Result of Operations of the National
Government (CROU). This shall apply to accounts payable of all funds, except fiduciary funds,
as long as the purpose for which the funds were created have not been accomplished and
accounts payable under foreign assisted projects for the duration of the said project. In this
regard, the Department of Budget and Management issued Joint-Circular No. 99-6 4.0 (4.3)
Procedural Guidelines which provides that all accounts payable that reverted to the CROU may
be considered for payment upon determination thru administrative process, of the existence,
validity and legality of the claim. Thus, the allegation of the defendants that considering no
appropriation for the payment of any amount awarded to plaintiffs appellee the funds of
defendant-appellants may not be seized pursuant to a writ of execution issued by the regular
court is misplaced. Surely when the defendants and the plaintiff entered into the General
Construction of Agreement there is an amount already allocated by the latter for the said project
which is no longer subject of future appropriation."49
After the CA denied their motion for reconsideration on December 23, 2005, the petitioners
appealed by petition for review.
Matters Arising During the Pendency of the Petition
On January 30, 2006, Judge Dizon of the RTC (Branch 80) denied Stern Builders and dela
Cruz’s motion to withdraw the deposit, in consideration of the UP’s intention to appeal to the
CA,50 stating:
Since it appears that the defendants are intending to file a petition for review of the Court of
Appeals resolution in CA-G.R. No. 88125 within the reglementary period of fifteen (15) days
from receipt of resolution, the Court agrees with the defendants stand that the granting of
plaintiffs’ subject motion is premature.
Let it be stated that what the Court meant by its Order dated July 8, 2005 which states in part
that the "disposition of the amount represented therein being subject to the final outcome of the
case of the University of the Philippines, et. al., vs. Hon. Agustin S. Dizon et al., (CA G.R. No.
88125 before the Court of Appeals) is that the judgment or resolution of said court has to be final
105
and executory, for if the same will still be elevated to the Supreme Court, it will not attain finality
yet until the highest court has rendered its own final judgment or resolution.51
However, on January 22, 2007, the UP filed an Urgent Application for A Temporary Restraining
Order and/or A Writ of Preliminary Injunction, 52 averring that on January 3, 2007, Judge Maria
Theresa dela Torre-Yadao (who had meanwhile replaced Judge Dizon upon the latter’s
appointment to the CA) had issued another order allowing Stern Builders and dela Cruz to
withdraw the deposit,53 to wit:
It bears stressing that defendants’ liability for the payment of the judgment obligation has
become indubitable due to the final and executory nature of the Decision dated November 28,
2001. Insofar as the payment of the [sic] judgment obligation is concerned, the Court believes
that there is nothing more the defendant can do to escape liability. It is observed that there is
nothing more the defendant can do to escape liability. It is observed that defendant U.P. System
had already exhausted all its legal remedies to overturn, set aside or modify the decision (dated
November 28, 2001( rendered against it. The way the Court sees it, defendant U.P. System’s
petition before the Supreme Court concerns only with the manner by which said judgment award
should be satisfied. It has nothing to do with the legality or propriety thereof, although it prays for
the deletion of [sic] reduction of the award of moral damages.
It must be emphasized that this Court’s finding, i.e., that there was sufficient appropriation
earmarked for the project, was upheld by the Court of Appeals in its decision dated September
16, 2005. Being a finding of fact, the Supreme Court will, ordinarily, not disturb the same was
said Court is not a trier of fact. Such being the case, defendants’ arguments that there was no
sufficient appropriation for the payment of the judgment obligation must fail.
While it is true that the former Presiding Judge of this Court in its Order dated January 30, 2006
had stated that:
Let it be stated that what the Court meant by its Order dated July 8, 2005 which states in part
that the "disposition of the amount represented therein being subject to the final outcome of the
case of the University of the Philippines, et. al., vs. Hon. Agustin S. Dizon et al., (CA G.R. No.
88125 before the Court of Appeals) is that the judgment or resolution of said court has to be final
and executory, for if the same will still be elevated to the Supreme Court, it will not attain finality
yet until the highest court has rendered its own final judgment or resolution.
it should be noted that neither the Court of Appeals nor the Supreme Court issued a preliminary
injunction enjoining the release or withdrawal of the garnished amount. In fact, in its present
petition for review before the Supreme Court, U.P. System has not prayed for the issuance of a
writ of preliminary injunction. Thus, the Court doubts whether such writ is forthcoming.
The Court honestly believes that if defendants’ petition assailing the Order of this Court dated
December 31, 2004 granting the motion for the release of the garnished amount was
meritorious, the Court of Appeals would have issued a writ of injunction enjoining the same.
Instead, said appellate court not only refused to issue a wit of preliminary injunction prayed for
by U.P. System but denied the petition, as well.54
The UP contended that Judge Yadao thereby effectively reversed the January 30, 2006 order of
Judge Dizon disallowing the withdrawal of the garnished amount until after the decision in the
case would have become final and executory.
Although the Court issued a TRO on January 24, 2007 to enjoin Judge Yadao and all persons
acting pursuant to her authority from enforcing her order of January 3, 2007, 55 it appears that on

January 16, 2007, or prior to the issuance of the TRO, she had already directed the DBP to
forthwith release the garnished amount to Stern Builders and dela Cruz; 56 and that DBP had
forthwith complied with the order on January 17, 2007 upon the sheriff’s service of the order of
Judge Yadao.57
These intervening developments impelled the UP to file in this Court a supplemental petition on
January 26, 2007,58 alleging that the RTC (Judge Yadao) gravely erred in ordering the immediate
release of the garnished amount despite the pendency of the petition for review in this Court.
The UP filed a second supplemental petition59 after the RTC (Judge Yadao) denied the UP’s
motion for the redeposit of the withdrawn amount on April 10, 2007,60 to wit:
This resolves defendant U.P. System’s Urgent Motion to Redeposit Judgment Award praying
that plaintiffs be directed to redeposit the judgment award to DBP pursuant to the Temporary
Restraining Order issued by the Supreme Court. Plaintiffs opposed the motion and countered
that the Temporary Restraining Order issued by the Supreme Court has become moot and
academic considering that the act sought to be restrained by it has already been performed.
They also alleged that the redeposit of the judgment award was no longer feasible as they have
already spent the same.
It bears stressing, if only to set the record straight, that this Court did not – in its Order dated
January 3, 2007 (the implementation of which was restrained by the Supreme Court in its
Resolution dated January 24, 2002) – direct that that garnished amount "be deposited with the
garnishee bank (Development Bank of the Philippines)". In the first place, there was no need to
order DBP to make such deposit, as the garnished amount was already deposited in the account
of plaintiffs with the DBP as early as May 13, 2005. What the Court granted in its Order dated
January 3, 2007 was plaintiff’s motion to allow the release of said deposit. It must be recalled
that the Court found plaintiff’s motion meritorious and, at that time, there was no restraining
order or preliminary injunction from either the Court of Appeals or the Supreme Court which
could have enjoined the release of plaintiffs’ deposit. The Court also took into account the
following factors:
a) the Decision in this case had long been final and executory after it was rendered on
November 28, 2001;
b) the propriety of the dismissal of U.P. System’s appeal was upheld by the Supreme Court;
c) a writ of execution had been issued;
d) defendant U.P. System’s deposit with DBP was garnished pursuant to a lawful writ of
execution issued by the Court; and
e) the garnished amount had already been turned over to the plaintiffs and deposited in their
account with DBP.
The garnished amount, as discussed in the Order dated January 16, 2007, was already owned
by the plaintiffs, having been delivered to them by the Deputy Sheriff of this Court pursuant to
par. (c), Section 9, Rule 39 of the 1997 Rules of Civil Procedure. Moreover, the judgment
obligation has already been fully satisfied as per Report of the Deputy Sheriff.
Anent the Temporary Restraining Order issued by the Supreme Court, the same has become
functus oficio, having been issued after the garnished amount had been released to the
plaintiffs. The judgment debt was released to the plaintiffs on January 17, 2007, while the
Temporary Restraining Order issued by the Supreme Court was received by this Court on
106
February 2, 2007. At the time of the issuance of the Restraining Order, the act sought to be
restrained had already been done, thereby rendering the said Order ineffectual.
After a careful and thorough study of the arguments advanced by the parties, the Court is of the
considered opinion that there is no legal basis to grant defendant U.P. System’s motion to
redeposit the judgment amount. Granting said motion is not only contrary to law, but it will also
render this Court’s final executory judgment nugatory. Litigation must end and terminate
sometime and somewhere, and it is essential to an effective administration of justice that once a
judgment has become final the issue or cause involved therein should be laid to rest. This
doctrine of finality of judgment is grounded on fundamental considerations of public policy and
sound practice. In fact, nothing is more settled in law than that once a judgment attains finality it
thereby becomes immutable and unalterable. It may no longer be modified in any respect, even
if the modification is meant to correct what is perceived to be an erroneous conclusion of fact or
law, and regardless of whether the modification is attempted to be made by the court rendering it
or by the highest court of the land.
WHEREFORE, premises considered, finding defendant U.P. System’s Urgent Motion to
Redeposit Judgment Award devoid of merit, the same is hereby DENIED.
SO ORDERED.
Issues
The UP now submits that:
I
THE COURT OF APPEALS COMMITTED GRAVE ERROR IN DISMISSING THE PETITION,
ALLOWING IN EFFECT THE GARNISHMENT OF UP FUNDS, WHEN IT RULED THAT
FUNDS HAVE ALREADY BEEN EARMARKED FOR THE CONSTRUCTION PROJECT; AND
THUS, THERE IS NO NEED FOR FURTHER APPROPRIATIONS.
II
THE COURT OF APPEALS COMMITTED GRAVE ERROR IN ALLOWING GARNISHMENT OF
A STATE UNIVERSITY’S FUNDS IN VIOLATION OF ARTICLE XIV, SECTION 5(5) OF THE
CONSTITUTION.
III
IN THE ALTERNATIVE, THE UNIVERSITY INVOKES EQUITY AND THE REVIEW POWERS
OF THIS HONORABLE COURT TO MODIFY, IF NOT TOTALLY DELETE THE AWARD OF ₱
10 MILLION AS MORAL DAMAGES TO RESPONDENTS.
IV
THE RTC-BRANCH 80 COMMITTED GRAVE ERROR IN ORDERING THE IMMEDIATE
RELEASE OF THE JUDGMENT AWARD IN ITS ORDER DATED 3 JANUARY 2007 ON THE
GROUND OF EQUITY AND JUDICIAL COURTESY.
V
THE RTC-BRANCH 80 COMMITTED GRAVE ERROR IN ORDERING THE IMMEDIATE
RELEASE OF THE JUDGMENT AWARD IN ITS ORDER DATED 16 JANUARY 2007 ON THE

GROUND THAT PETITIONER UNIVERSITY STILL HAS A PENDING MOTION FOR
RECONSIDERATION OF THE ORDER DATED 3 JANUARY 2007.
VI
THE RTC-BRANCH 80 COMMITTED GRAVE ERROR IN NOT ORDERING THE REDEPOSIT
OF THE GARNISHED AMOUNT TO THE DBP IN VIOLATION OF THE CLEAR LANGUAGE OF
THE SUPREME COURT RESOLUTION DATED 24 JANUARY 2007.
The UP argues that the amount earmarked for the construction project had been purposely set
aside only for the aborted project and did not include incidental matters like the awards of actual
damages, moral damages and attorney’s fees. In support of its argument, the UP cited Article
12.2 of the General Construction Agreement, which stipulated that no deductions would be
allowed for the payment of claims, damages, losses and expenses, including attorney’s fees, in
case of any litigation arising out of the performance of the work. The UP insists that the CA
decision was inconsistent with the rulings in Commissioner of Public Highways v. San
Diego61 and Department of Agriculture v. NLRC62 to the effect that government funds and
properties could not be seized under writs of execution or garnishment to satisfy judgment
awards.
Furthermore, the UP contends that the CA contravened Section 5, Article XIV of the Constitution
by allowing the garnishment of UP funds, because the garnishment resulted in a substantial
reduction of the UP’s limited budget allocated for the remuneration, job satisfaction and
fulfillment of the best available teachers; that Judge Yadao should have exhibited judicial
courtesy towards the Court due to the pendency of the UP’s petition for review; and that she
should have also desisted from declaring that the TRO issued by this Court had become functus
officio.
Lastly, the UP states that the awards of actual damages of ₱ 5,716,729.00 and moral damages
of ₱ 10 million should be reduced, if not entirely deleted, due to its being unconscionable,
inequitable and detrimental to public service.
In contrast, Stern Builders and dela Cruz aver that the petition for review was fatally defective for
its failure to mention the other cases upon the same issues pending between the parties (i.e.,
CA-G.R. No. 77395 and G.R No. 163501); that the UP was evidently resorting to forum
shopping, and to delaying the satisfaction of the final judgment by the filing of its petition for
review; that the ruling in Commissioner of Public Works v. San Diego had no application
because there was an appropriation for the project; that the UP retained the funds allotted for
the project only in a fiduciary capacity; that the contract price had been meanwhile adjusted to ₱
22,338,553.25, an amount already more than sufficient to cover the judgment award; that the
UP’s prayer to reduce or delete the award of damages had no factual basis, because they had
been gravely wronged, had been deprived of their source of income, and had suffered untold
miseries, discomfort, humiliation and sleepless years; that dela Cruz had even been constrained
to sell his house, his equipment and the implements of his trade, and together with his family
had been forced to live miserably because of the wrongful actuations of the UP; and that the
RTC correctly declared the Court’s TRO to be already functus officio by reason of the withdrawal
of the garnished amount from the DBP.
The decisive issues to be considered and passed upon are, therefore:
(a) whether the funds of the UP were the proper subject of garnishment in order to satisfy the
judgment award; and (b) whether the UP’s prayer for the deletion of the awards of actual
damages of ₱ 5,716,729.00, moral damages of ₱ 10,000,000.00 and attorney’s fees of ₱
107
150,000.00 plus ₱ 1,500.00 per appearance could be granted despite the finality of the judgment
of the RTC.
Ruling
The petition for review is meritorious.
I.
UP’s funds, being government funds,
are not subject to garnishment
The UP was founded on June 18, 1908 through Act 1870 to provide advanced instruction in
literature, philosophy, the sciences, and arts, and to give professional and technical training to
deserving students.63 Despite its establishment as a body corporate,64 the UP remains to be a
"chartered institution"65 performing a legitimate government function. It is an institution of higher
learning, not a corporation established for profit and declaring any dividends. 66 In enacting
Republic Act No. 9500 (The University of the Philippines Charter of 2008), Congress has
declared the UP as the national university 67 "dedicated to the search for truth and knowledge as
well as the development of future leaders."68
Irrefragably, the UP is a government instrumentality,69 performing the State’s constitutional
mandate of promoting quality and accessible education. 70 As a government instrumentality, the
UP administers special funds sourced from the fees and income enumerated under Act No.
1870 and Section 1 of Executive Order No. 714, 71 and from the yearly appropriations, to achieve
the purposes laid down by Section 2 of Act 1870, as expanded in Republic Act No. 9500. 72 All
the funds going into the possession of the UP, including any interest accruing from the deposit of
such funds in any banking institution, constitute a "special trust fund," the disbursement of which
should always be aligned with the UP’s mission and purpose,73 and should always be subject to
auditing by the COA.74
Presidential Decree No. 1445 defines a "trust fund" as a fund that officially comes in the
possession of an agency of the government or of a public officer as trustee, agent or
administrator, or that is received for the fulfillment of some obligation. 75 A trust fund may be
utilized only for the "specific purpose for which the trust was created or the funds received."76
The funds of the UP are government funds that are public in character. They include the income
accruing from the use of real property ceded to the UP that may be spent only for the attainment
of its institutional objectives.77 Hence, the funds subject of this action could not be validly made
the subject of the RTC’s writ of execution or garnishment. The adverse judgment rendered
against the UP in a suit to which it had impliedly consented was not immediately enforceable by
execution against the UP,78 because suability of the State did not necessarily mean its liability.79
A marked distinction exists between suability of the State and its liability. As the Court succinctly
stated in Municipality of San Fernando, La Union v. Firme:80
A distinction should first be made between suability and liability. "Suability depends on the
consent of the state to be sued, liability on the applicable law and the established facts. The
circumstance that a state is suable does not necessarily mean that it is liable; on the other hand,
it can never be held liable if it does not first consent to be sued. Liability is not conceded by the
mere fact that the state has allowed itself to be sued. When the state does waive its sovereign
immunity, it is only giving the plaintiff the chance to prove, if it can, that the defendant is liable.

Also, in Republic v. Villasor,81 where the issuance of an alias writ of execution directed against
the funds of the Armed Forces of the Philippines to satisfy a final and executory judgment was
nullified, the Court said:
xxx The universal rule that where the State gives its consent to be sued by private parties either
by general or special law, it may limit claimant’s action "only up to the completion of proceedings
anterior to the stage of execution" and that the power of the Courts ends when the judgment is
rendered, since government funds and properties may not be seized under writs of execution or
garnishment to satisfy such judgments, is based on obvious considerations of public policy.
Disbursements of public funds must be covered by the corresponding appropriation as required
by law. The functions and public services rendered by the State cannot be allowed to be
paralyzed or disrupted by the diversion of public funds from their legitimate and specific objects,
as appropriated by law.
The UP correctly submits here that the garnishment of its funds to satisfy the judgment awards
of actual and moral damages (including attorney’s fees) was not validly made if there was no
special appropriation by Congress to cover the liability. It was, therefore, legally unwarranted for
the CA to agree with the RTC’s holding in the order issued on April 1, 2003 that no appropriation
by Congress to allocate and set aside the payment of the judgment awards was necessary
because "there (were) already an appropriations (sic) earmarked for the said project."82 The CA
and the RTC thereby unjustifiably ignored the legal restriction imposed on the trust funds of the
Government and its agencies and instrumentalities to be used exclusively to fulfill the purposes
for which the trusts were created or for which the funds were received except upon express
authorization by Congress or by the head of a government agency in control of the funds, and
subject to pertinent budgetary laws, rules and regulations.83
Indeed, an appropriation by Congress was required before the judgment that rendered the UP
liable for moral and actual damages (including attorney’s fees) would be satisfied considering
that such monetary liabilities were not covered by the "appropriations earmarked for the said
project." The Constitution strictly mandated that "(n)o money shall be paid out of the Treasury
except in pursuance of an appropriation made by law."84
II
COA must adjudicate private respondents’ claim
before execution should proceed
The execution of the monetary judgment against the UP was within the primary jurisdiction of the
COA. This was expressly provided in Section 26 of Presidential Decree No. 1445, to wit:
Section 26. General jurisdiction. - The authority and powers of the Commission shall extend to
and comprehend all matters relating to auditing procedures, systems and controls, the keeping
of the general accounts of the Government, the preservation of vouchers pertaining thereto for a
period of ten years, the examination and inspection of the books, records, and papers relating to
those accounts; and the audit and settlement of the accounts of all persons respecting funds or
property received or held by them in an accountable capacity, as well as the examination, audit,
and settlement of all debts and claims of any sort due from or owing to the Government or any of
its subdivisions, agencies and instrumentalities. The said jurisdiction extends to all government-
owned or controlled corporations, including their subsidiaries, and other self-governing boards,
commissions, or agencies of the Government, and as herein prescribed, including non
governmental entities subsidized by the government, those funded by donations through the
government, those required to pay levies or government share, and those for which the
government has put up a counterpart fund or those partly funded by the government.
108
It was of no moment that a final and executory decision already validated the claim against the
UP. The settlement of the monetary claim was still subject to the primary jurisdiction of the COA
despite the final decision of the RTC having already validated the claim.85 As such, Stern
Builders and dela Cruz as the claimants had no alternative except to first seek the approval of
the COA of their monetary claim.
On its part, the RTC should have exercised utmost caution, prudence and judiciousness in
dealing with the motions for execution against the UP and the garnishment of the UP’s funds.
The RTC had no authority to direct the immediate withdrawal of any portion of the garnished
funds from the depository banks of the UP. By eschewing utmost caution, prudence and
judiciousness in dealing with the execution and garnishment, and by authorizing the withdrawal
of the garnished funds of the UP, the RTC acted beyond its jurisdiction, and all its orders and
issuances thereon were void and of no legal effect, specifically: (a) the order Judge Yadao
issued on January 3, 2007 allowing Stern Builders and dela Cruz to withdraw the deposited
garnished amount; (b) the order Judge Yadao issued on January 16, 2007 directing DBP to
forthwith release the garnish amount to Stern Builders and dela Cruz; (c) the sheriff’s report of
January 17, 2007 manifesting the full satisfaction of the writ of execution; and (d) the order of
April 10, 2007 deying the UP’s motion for the redeposit of the withdrawn amount. Hence, such
orders and issuances should be struck down without exception.
Nothing extenuated Judge Yadao’s successive violations of Presidential Decree No. 1445. She
was aware of Presidential Decree No. 1445, considering that the Court circulated to all judges its
Administrative Circular No. 10-2000,86 issued on October 25, 2000, enjoining them "to observe
utmost caution, prudence and judiciousness in the issuance of writs of execution to satisfy
money judgments against government agencies and local government units" precisely in order
to prevent the circumvention of Presidential Decree No. 1445, as well as of the rules and
procedures of the COA, to wit:
In order to prevent possible circumvention of the rules and procedures of the
Commission on Audit, judges are hereby enjoined to observe utmost caution, prudence
and judiciousness in the issuance of writs of execution to satisfy money judgments
against government agencies and local government units.
Judges should bear in mind that in Commissioner of Public Highways v. San Diego (31 SCRA
617, 625 1970), this Court explicitly stated:
"The universal rule that where the State gives its consent to be sued by private parties either by
general or special law, it may limit claimant’s action ‘only up to the completion of proceedings
anterior to the stage of execution’ and that the power of the Court ends when the judgment is
rendered, since government funds and properties may not be seized under writs of execution or
garnishment to satisfy such judgments, is based on obvious considerations of public policy.
Disbursements of public funds must be covered by the corresponding appropriation as required
by law. The functions and public services rendered by the State cannot be allowed to be
paralyzed or disrupted by the diversion of public funds from their legitimate and specific objects,
as appropriated by law.
Moreover, it is settled jurisprudence that upon determination of State liability, the
prosecution, enforcement or satisfaction thereof must still be pursued in accordance with
the rules and procedures laid down in P.D. No. 1445, otherwise known as the Government
Auditing Code of the Philippines (Department of Agriculture v. NLRC, 227 SCRA 693, 701-
02 1993 citing Republic vs. Villasor, 54 SCRA 84 1973). All money claims against the
Government must first be filed with the Commission on Audit which must act upon it
within sixty days. Rejection of the claim will authorize the claimant to elevate the matter

to the Supreme Court on certiorari and in effect, sue the State thereby (P.D. 1445,
Sections 49-50).
However, notwithstanding the rule that government properties are not subject to levy and
execution unless otherwise provided for by statute (Republic v. Palacio, 23 SCRA 899 1968;
Commissioner of Public Highways v. San Diego, supra) or municipal ordinance (Municipality of
Makati v. Court of Appeals, 190 SCRA 206 1990), the Court has, in various instances,
distinguished between government funds and properties for public use and those not held for
public use. Thus, in Viuda de Tan Toco v. Municipal Council of Iloilo (49 Phil 52 1926, the Court
ruled that "where property of a municipal or other public corporation is sought to be subjected to
execution to satisfy judgments recovered against such corporation, the question as to whether
such property is leviable or not is to be determined by the usage and purposes for which it is
held." The following can be culled from Viuda de Tan Toco v. Municipal Council of Iloilo:
1. Properties held for public uses – and generally everything held for governmental
purposes – are not subject to levy and sale under execution against such corporation.
The same rule applies to funds in the hands of a public officer and taxes due to a
municipal corporation.
2. Where a municipal corporation owns in its proprietary capacity, as distinguished from its
public or government capacity, property not used or used for a public purpose but for quasi-
private purposes, it is the general rule that such property may be seized and sold under
execution against the corporation.
3. Property held for public purposes is not subject to execution merely because it is temporarily
used for private purposes. If the public use is wholly abandoned, such property becomes subject
to execution.
This Administrative Circular shall take effect immediately and the Court Administrator shall see
to it that it is faithfully implemented.
Although Judge Yadao pointed out that neither the CA nor the Court had issued as of then any
writ of preliminary injunction to enjoin the release or withdrawal of the garnished amount, she did
not need any writ of injunction from a superior court to compel her obedience to the law. The
Court is disturbed that an experienced judge like her should look at public laws like Presidential
Decree No. 1445 dismissively instead of loyally following and unquestioningly implementing
them. That she did so turned her court into an oppressive bastion of mindless tyranny instead of
having it as a true haven for the seekers of justice like the UP.
III
Period of appeal did not start without effective
service of decision upon counsel of record;
Fresh-period rule announced in
Neypes v. Court of Appeals
can be given retroactive application
The UP next pleads that the Court gives due course to its petition for review in the name of
equity in order to reverse or modify the adverse judgment against it despite its finality. At stake
in the UP’s plea for equity was the return of the amount of ₱ 16,370,191.74 illegally garnished
from its trust funds. Obstructing the plea is the finality of the judgment based on the supposed
tardiness of UP’s appeal, which the RTC declared on September 26, 2002. The CA upheld the
declaration of finality on February 24, 2004, and the Court itself denied the UP’s petition for
109
review on that issue on May 11, 2004 (G.R. No. 163501). The denial became final on November
12, 2004.
It is true that a decision that has attained finality becomes immutable and unalterable, and
cannot be modified in any respect,87 even if the modification is meant to correct erroneous
conclusions of fact and law, and whether the modification is made by the court that rendered it
or by this Court as the highest court of the land. 88 Public policy dictates that once a judgment
becomes final, executory and unappealable, the prevailing party should not be deprived of the
fruits of victory by some subterfuge devised by the losing party. Unjustified delay in the
enforcement of such judgment sets at naught the role and purpose of the courts to resolve
justiciable controversies with finality.89 Indeed, all litigations must at some time end, even at the
risk of occasional errors.
But the doctrine of immutability of a final judgment has not been absolute, and has admitted
several exceptions, among them: (a) the correction of clerical errors; (b) the so-called nunc pro
tunc entries that cause no prejudice to any party; (c) void judgments; and (d) whenever
circumstances transpire after the finality of the decision that render its execution unjust and
inequitable.90 Moreover, in Heirs of Maura So v. Obliosca, 91 we stated that despite the absence of
the preceding circumstances, the Court is not precluded from brushing aside procedural norms if
only to serve the higher interests of justice and equity. Also, in Gumaru v. Quirino State
College,92 the Court nullified the proceedings and the writ of execution issued by the RTC for the
reason that respondent state college had not been represented in the litigation by the Office of
the Solicitor General.
We rule that the UP’s plea for equity warrants the Court’s exercise of the exceptional power to
disregard the declaration of finality of the judgment of the RTC for being in clear violation of the
UP’s right to due process.
Both the CA and the RTC found the filing on June 3, 2002 by the UP of the notice of appeal to
be tardy. They based their finding on the fact that only six days remained of the UP’s
reglementary 15-day period within which to file the notice of appeal because the UP had filed a
motion for reconsideration on January 16, 2002 vis-à-vis the RTC’s decision the UP received on
January 7, 2002; and that because the denial of the motion for reconsideration had been served
upon Atty. Felimon D. Nolasco of the UPLB Legal Office on May 17, 2002, the UP had only until
May 23, 2002 within which to file the notice of appeal.
The UP counters that the service of the denial of the motion for reconsideration upon Atty.
Nolasco was defective considering that its counsel of record was not Atty. Nolasco of the UPLB
Legal Office but the OLS in Diliman, Quezon City; and that the period of appeal should be
reckoned from May 31, 2002, the date when the OLS received the order. The UP submits that
the filing of the notice of appeal on June 3, 2002 was well within the reglementary period to
appeal.
We agree with the submission of the UP.
Firstly, the service of the denial of the motion for reconsideration upon Atty. Nolasco of the
UPLB Legal Office was invalid and ineffectual because he was admittedly not the counsel of
record of the UP. The rule is that it is on the counsel and not the client that the service should be
made.93
That counsel was the OLS in Diliman, Quezon City, which was served with the denial only on
May 31, 2002. As such, the running of the remaining period of six days resumed only on June 1,

2002,94 rendering the filing of the UP’s notice of appeal on June 3, 2002 timely and well within
the remaining days of the UP’s period to appeal.
Verily, the service of the denial of the motion for reconsideration could only be validly made
upon the OLS in Diliman, and no other. The fact that Atty. Nolasco was in the employ of the UP
at the UPLB Legal Office did not render the service upon him effective. It is settled that where a
party has appeared by counsel, service must be made upon such counsel. 95 Service on the party
or the party’s employee is not effective because such notice is not notice in law.96 This is clear
enough from Section 2, second paragraph, of Rule 13, Rules of Court, which explicitly states
that: "If any party has appeared by counsel, service upon him shall be made upon his counsel or
one of them, unless service upon the party himself is ordered by the court. Where one counsel
appears for several parties, he shall only be entitled to one copy of any paper served upon him
by the opposite side." As such, the period to appeal resumed only on June 1, 2002, the date
following the service on May 31, 2002 upon the OLS in Diliman of the copy of the decision of the
RTC, not from the date when the UP was notified.97
Accordingly, the declaration of finality of the judgment of the RTC, being devoid of factual and
legal bases, is set aside.
Secondly, even assuming that the service upon Atty. Nolasco was valid and effective, such that
the remaining period for the UP to take a timely appeal would end by May 23, 2002, it would still
not be correct to find that the judgment of the RTC became final and immutable thereafter due to
the notice of appeal being filed too late on June 3, 2002.
In so declaring the judgment of the RTC as final against the UP, the CA and the RTC applied the
rule contained in the second paragraph of Section 3, Rule 41 of the Rules of Court to the effect
that the filing of a motion for reconsideration interrupted the running of the period for filing the
appeal; and that the period resumed upon notice of the denial of the motion for reconsideration.
For that reason, the CA and the RTC might not be taken to task for strictly adhering to the rule
then prevailing.
However, equity calls for the retroactive application in the UP’s favor of the fresh-period rule that
the Court first announced in mid-September of 2005 through its ruling in Neypes v. Court of
Appeals,98 viz:
To standardize the appeal periods provided in the Rules and to afford litigants fair opportunity to
appeal their cases, the Court deems it practical to allow a fresh period of 15 days within which to
file the notice of appeal in the Regional Trial Court, counted from receipt of the order dismissing
a motion for a new trial or motion for reconsideration.
The retroactive application of the fresh-period rule, a procedural law that aims "to regiment or
make the appeal period uniform, to be counted from receipt of the order denying the motion for
new trial, motion for reconsideration (whether full or partial) or any final order or resolution," 99 is
impervious to any serious challenge. This is because there are no vested rights in rules of
procedure.100 A law or regulation is procedural when it prescribes rules and forms of procedure in
order that courts may be able to administer justice.101 It does not come within the legal
conception of a retroactive law, or is not subject of the general rule prohibiting the retroactive
operation of statues, but is given retroactive effect in actions pending and undetermined at the
time of its passage without violating any right of a person who may feel that he is adversely
affected.
We have further said that a procedural rule that is amended for the benefit of litigants in
furtherance of the administration of justice shall be retroactively applied to likewise favor actions
110
then pending, as equity delights in equality.102 We may even relax stringent procedural rules in
order to serve substantial justice and in the exercise of this Court’s equity jurisdiction. 103 Equity
jurisdiction aims to do complete justice in cases where a court of law is unable to adapt its
judgments to the special circumstances of a case because of the inflexibility of its statutory or
legal jurisdiction.104
It is cogent to add in this regard that to deny the benefit of the fresh-period rule to the UP would
amount to injustice and absurdity – injustice, because the judgment in question was issued on
November 28, 2001 as compared to the judgment in Neypes that was rendered in 1998;
absurdity, because parties receiving notices of judgment and final orders issued in the year 1998
would enjoy the benefit of the fresh-period rule but the later rulings of the lower courts like that
herein would not.105
Consequently, even if the reckoning started from May 17, 2002, when Atty. Nolasco received the
denial, the UP’s filing on June 3, 2002 of the notice of appeal was not tardy within the context of
the fresh-period rule. For the UP, the fresh period of 15-days counted from service of the denial
of the motion for reconsideration would end on June 1, 2002, which was a Saturday. Hence, the
UP had until the next working day, or June 3, 2002, a Monday, within which to appeal,
conformably with Section 1 of Rule 22, Rules of Court, which holds that: "If the last day of the
period, as thus computed, falls on a Saturday, a Sunday, or a legal holiday in the place where
the court sits, the time shall not run until the next working day."
IV
Awards of monetary damages,
being devoid of factual and legal bases,
did not attain finality and should be deleted
Section 14 of Article VIII of the Constitution prescribes that express findings of fact and of law
should be made in the decision rendered by any court, to wit:
Section 14. No decision shall be rendered by any court without expressing therein clearly and
distinctly the facts and the law on which it is based.
No petition for review or motion for reconsideration of a decision of the court shall be refused
due course or denied without stating the legal basis therefor.
Implementing the constitutional provision in civil actions is Section 1 of Rule 36, Rules of Court,
viz:
Section 1. Rendition of judgments and final orders. — A judgment or final order determining the
merits of the case shall be in writing personally and directly prepared by the judge, stating
clearly and distinctly the facts and the law on which it is based, signed by him, and filed with the
clerk of the court. (1a)
The Constitution and the Rules of Court apparently delineate two main essential parts of a
judgment, namely: the body and the decretal portion. Although the latter is the controlling
part,106 the importance of the former is not to be lightly regarded because it is there where the
court clearly and distinctly states its findings of fact and of law on which the decision is based.
To state it differently, one without the other is ineffectual and useless. The omission of either
inevitably results in a judgment that violates the letter and the spirit of the Constitution and the
Rules of Court.

The term findings of fact that must be found in the body of the decision refers to statements of
fact, not to conclusions of law.107 Unlike in pleadings where ultimate facts alone need to be
stated, the Constitution and the Rules of Court require not only that a decision should state the
ultimate facts but also that it should specify the supporting evidentiary facts, for they are what
are called the findings of fact.
The importance of the findings of fact and of law cannot be overstated. The reason and purpose
of the Constitution and the Rules of Court in that regard are obviously to inform the parties why
they win or lose, and what their rights and obligations are. Only thereby is the demand of due
process met as to the parties. As Justice Isagani A. Cruz explained in Nicos Industrial
Corporation v. Court of Appeals:108
It is a requirement of due process that the parties to a litigation be informed of how it was
decided, with an explanation of the factual and legal reasons that led to the conclusions of the
court. The court cannot simply say that judgment is rendered in favor of X and against Y and just
leave it at that without any justification whatsoever for its action. The losing party is entitled to
know why he lost, so he may appeal to a higher court, if permitted, should he believe that the
decision should be reversed. A decision that does not clearly and distinctly state the facts and
the law on which it is based leaves the parties in the dark as to how it was reached and is
especially prejudicial to the losing party, who is unable to pinpoint the possible errors of the court
for review by a higher tribunal.
Here, the decision of the RTC justified the grant of actual and moral damages, and attorney’s
fees in the following terse manner, viz:
xxx The Court is not unmindful that due to defendants’ unjustified refusal to pay their outstanding
obligation to plaintiff, the same suffered losses and incurred expenses as he was forced to re-
mortgage his house and lot located in Quezon City to Metrobank (Exh. "CC") and BPI Bank just
to pay its monetary obligations in the form of interest and penalties incurred in the course of the
construction of the subject project.109
The statement that "due to defendants’ unjustified refusal to pay their outstanding obligation to
plaintiff, the same suffered losses and incurred expenses as he was forced to re-mortgage his
house and lot located in Quezon City to Metrobank (Exh. "CC") and BPI Bank just to pay its
monetary obligations in the form of interest and penalties incurred in the course of the
construction of the subject project" was only a conclusion of fact and law that did not comply with
the constitutional and statutory prescription. The statement specified no detailed expenses or
losses constituting the ₱ 5,716,729.00 actual damages sustained by Stern Builders in relation to
the construction project or to other pecuniary hardships. The omission of such expenses or
losses directly indicated that Stern Builders did not prove them at all, which then contravened
Article 2199, Civil Code, the statutory basis for the award of actual damages, which entitled a
person to an adequate compensation only for such pecuniary loss suffered by him as he has
duly proved. As such, the actual damages allowed by the RTC, being bereft of factual support,
were speculative and whimsical. Without the clear and distinct findings of fact and law, the
award amounted only to an ipse dixit on the part of the RTC,110 and did not attain finality.
There was also no clear and distinct statement of the factual and legal support for the award of
moral damages in the substantial amount of ₱ 10,000,000.00. The award was thus also
speculative and whimsical. Like the actual damages, the moral damages constituted another
judicial ipse dixit, the inevitable consequence of which was to render the award of moral
damages incapable of attaining finality. In addition, the grant of moral damages in that manner
contravened the law that permitted the recovery of moral damages as the means to assuage
"physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded
111
feelings, moral shock, social humiliation, and similar injury."111 The contravention of the law was
manifest considering that Stern Builders, as an artificial person, was incapable of experiencing
pain and moral sufferings.112 Assuming that in granting the substantial amount of ₱
10,000,000.00 as moral damages, the RTC might have had in mind that dela Cruz had himself
suffered mental anguish and anxiety. If that was the case, then the RTC obviously disregarded
his separate and distinct personality from that of Stern Builders. 113 Moreover, his moral and
emotional sufferings as the President of Stern Builders were not the sufferings of Stern Builders.
Lastly, the RTC violated the basic principle that moral damages were not intended to enrich the
plaintiff at the expense of the defendant, but to restore the plaintiff to his status quo ante as
much as possible. Taken together, therefore, all these considerations exposed the substantial
amount of ₱ 10,000,000.00 allowed as moral damages not only to be factually baseless and
legally indefensible, but also to be unconscionable, inequitable and unreasonable.
Like the actual and moral damages, the ₱ 150,000.00, plus ₱ 1,500.00 per appearance, granted
as attorney’s fees were factually unwarranted and devoid of legal basis. The general rule is that
a successful litigant cannot recover attorney’s fees as part of the damages to be assessed
against the losing party because of the policy that no premium should be placed on the right to
litigate.114 Prior to the effectivity of the present Civil Code, indeed, such fees could be recovered
only when there was a stipulation to that effect. It was only under the present Civil Code that the
right to collect attorney’s fees in the cases mentioned in Article 2208115 of the Civil Code came to
be recognized.116 Nonetheless, with attorney’s fees being allowed in the concept of actual
damages,117 their amounts must be factually and legally justified in the body of the decision and
not stated for the first time in the decretal portion. 118 Stating the amounts only in the dispositive
portion of the judgment is not enough; 119 a rendition of the factual and legal justifications for them
must also be laid out in the body of the decision.120
That the attorney’s fees granted to the private respondents did not satisfy the foregoing
requirement suffices for the Court to undo them. 121 The grant was ineffectual for being contrary to
law and public policy, it being clear that the express findings of fact and law were intended to
bring the case within the exception and thereby justify the award of the attorney’s fees. Devoid
of such express findings, the award was a conclusion without a premise, its basis being
improperly left to speculation and conjecture.122
Nonetheless, the absence of findings of fact and of any statement of the law and jurisprudence
on which the awards of actual and moral damages, as well as of attorney’s fees, were based
was a fatal flaw that invalidated the decision of the RTC only as to such awards. As the Court
declared in Velarde v. Social Justice Society,123 the failure to comply with the constitutional
requirement for a clear and distinct statement of the supporting facts and law "is a grave abuse
of discretion amounting to lack or excess of jurisdiction" and that "(d)ecisions or orders issued in
careless disregard of the constitutional mandate are a patent nullity and must be struck down as
void."124 The other item granted by the RTC (i.e., ₱ 503,462.74) shall stand, subject to the action
of the COA as stated herein.
WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES and SETS
ASIDE the decision of the Court of Appeals under review; ANNULS the orders for the
garnishment of the funds of the University of the Philippines and for the release of the garnished
amount to Stern Builders Corporation and Servillano dela Cruz; and DELETES from the decision
of the Regional Trial Court dated November 28, 2001 for being void only the awards of actual
damages of ₱ 5,716,729.00, moral damages of ₱ 10,000,000.00, and attorney's fees of ₱
150,000.00, plus ₱ 1,500.00 per appearance, in favor of Stern Builders Corporation and
Servillano dela Cruz.

The Court ORDERS Stem Builders Corporation and Servillano dela Cruz to redeposit the
amount of ₱ 16,370,191.74 within 10 days from receipt of this decision.
Costs of suit to be paid by the private respondents.
SO ORDERED.
SECOND DIVISION
G.R. No. 128066 June 19, 2000
JARDINE DAVIES INC., Petitioner, v. COURT OF APPEALS and FAR EAST MILLS SUPPLY
CORPORATION, Respondents.
G.R. No. 128069 June 19, 2000
PURE FOODS CORPORATION, Petitioner, v. COURT OF APPEALS and FAR EAST MILLS
SUPPLY CORPORATION, Respondents.
 
BELLOSILLO, J.:
This is rather a simple case for specific performance with damages which could have been
resolved through mediation and conciliation during its infancy stage had the parties been
earnest in expediting the disposal of this case. They opted however to resort to full court
proceedings and denied themselves the benefits of alternative dispute resolution, thus making
the process more arduous and long-drawn.
The controversy started in 1992 at the height of the power crisis which the country was then
experiencing. To remedy and curtail further losses due to the series of power failures, petitioner
PURE FOODS CORPORATION (hereafter PUREFOODS) decided to install two (2) 1500 KW
generators in its food processing plant in San Roque, Marikina City.
Sometime in November 1992 a bidding for the supply and installation of the generators was
held. Several suppliers and dealers were invited to attend a pre-bidding conference to discuss
the conditions, propose scheme and specifications that would best suit the needs of
PUREFOODS. Out of the eight (8) prospective bidders who attended the pre-bidding
conference, only three (3) bidders, namely, respondent FAR EAST MILLS SUPPLY
CORPORATION (hereafter FEMSCO), MONARK and ADVANCE POWER submitted bid
proposals and gave bid bonds equivalent to 5% of their respective bids, as required.
Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President Alfonso Po,
PUREFOODS confirmed the award of the contract to FEMSCO -
Gentlemen:
This will confirm that Pure Foods Corporation has awarded to your firm the project: Supply and
Installation of two (2) units of 1500 KW/unit Generator Sets at the Processed Meats Plant, Bo.
San Roque, Marikina, based on your proposal number PC 28-92 dated November 20, 1992,
subject to the following basic terms and conditions:
112
1. Lump sum contract of P6,137,293.00 (VAT included), for the supply of materials and labor for
the local portion and the labor for the imported materials, payable by progress billing twice a
month, with ten percent (10%) retention. The retained amount shall be released thirty (30) days
after acceptance of the completed project and upon posting of Guarantee Bond in an amount
equivalent to twenty percent (20%) of the contract price. The Guarantee Bond shall be valid for
one (1) year from completion and acceptance of project. The contract price includes future
increase/s in costs of materials and labor;
2. The projects shall be undertaken pursuant to the attached specifications. It is understood that
any item required to complete the project, and those not included in the list of items shall be
deemed included and covered and shall be performed;
3. All materials shall be brand new;
4. The project shall commence immediately and must be completed within twenty (20) working
days after the delivery of Generator Set to Marikina Plant, penalty equivalent to 1/10 of 1% of
the purchase price for every day of delay;
5. The Contractor shall put up Performance Bond equivalent to thirty (30%) of the contract price,
and shall procure All Risk Insurance equivalent to the contract price upon commencement of the
project. The All Risk Insurance Policy shall be endorsed in favor of and shall be delivered to
Pure Foods Corporation;
6. Warranty of one (1) year against defective material and/or workmanship.
Once finalized, we shall ask you to sign the formal contract embodying the foregoing terms and
conditions.
Immediately, FEMSCO submitted the required performance bond in the amount of
P1,841,187.90 and contractor's all-risk insurance policy in the amount of P6,137,293.00 which
PUREFOODS through its Vice President Benedicto G. Tope acknowledged in a letter dated 18
December 1992. FEMSCO also made arrangements with its principal and started the
PUREFOODS project by purchasing the necessary materials. PUREFOODS on the other hand
returned FEMSCO's Bidder's Bond in the amount of P1,000,000.00, as requested.
Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior Vice
President Teodoro L. Dimayuga unilaterally canceled the award as "significant factors were
uncovered and brought to (their) attention which dictate (the) cancellation and warrant a total
review and re-bid of (the) project." Consequently, FEMSCO protested the cancellation of the
award and sought a meeting with PUREFOODS. However, on 26 March 1993, before the matter
could be resolved, PUREFOODS already awarded the project and entered into a contract with
JARDINE NELL, a division of Jardine Davies, Inc. (hereafter JARDINE), which incidentally was
not one of the bidders.
FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to JARDINE to
cease and desist from delivering and installing the two (2) generators at PUREFOODS. Its
demand letters unheeded, FEMSCO sued both PUREFOODS and JARDINE: PUREFOODS for
reneging on its contract, and JARDINE for its unwarranted interference and inducement. Trial
ensued. After FEMSCO presented its evidence, JARDINE filed a Demurrer to Evidence.
On 27 June 1994 the Regional Trial Court of Pasig, Br. 68, 1 granted JARDINE's Demurrer to
Evidence. The trial court concluded that "[w]hile it may seem to the plaintiff that by the actions of
the two defendants there is something underhanded going on, this is all a matter of perception,

and unsupported by hard evidence, mere suspicions and suppositions would not stand up very
well in a court of law." 2 Meanwhile trial proceeded as regards the case against PUREFOODS.
On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to indemnify
FEMSCO the sum of P2,300,000.00 representing the value of engineering services it rendered;
(b) to pay FEMSCO the sum of US$14,000.00 or its peso equivalent, and P900,000.00
representing contractor's mark-up on installation work, considering that it would be impossible to
compel PUREFOODS to honor, perform and fulfill its contractual obligations in view of
PUREFOOD's contract with JARDINE and noting that construction had already started thereon;
(c) to pay attorney's fees in an amount equivalent to 20% of the total amount due; and, (d) to pay
the costs. The trial court dismissed the counterclaim filed by PUREFOODS for lack of factual
and legal basis.
Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO appealed the 27
June 1994 Resolution of the trial court which granted the Demurrer to Evidence filed by
JARDINE resulting in the dismissal of the complaint against it, while PUREFOODS appealed the
28 July 1994 Decision of the same court which ordered it to pay FEMSCO.
On 14 August 1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of the trial
court. 3 It also reversed the 27 June 1994 Resolution of the lower court and ordered JARDINE to
pay FEMSCO damages for inducing PUREFOODS to violate the latter's contract with FEMSCO.
As such, JARDINE was ordered to pay FEMSCO P2,000,000.00 for moral damages. In addition,
PUREFOODS was also directed to pay FEMSCO P2,000,000.00 as moral damages and
P1,000,000.00 as exemplary damages as well as 20% of the total amount due as attorney's
fees.
On 31 January 1997 the Court of Appeals denied for lack of merit the separate motions for
reconsideration filed by PUREFOODS and JARDINE. Hence, these two (2) petitions for review
filed by PUREFOODS and JARDINE which were subsequently consolidated.
PUREFOODS maintains that the conclusions of both the trial court and the appellate court are
premised on a misapprehension of facts. It argues that its 12 December 1992 letter to FEMSCO
was not an acceptance of the latter's bid proposal and award of the project but more of a
qualified acceptance constituting a counter-offer which required FEMSCO's express conforme.
Since PUREFOODS never received FEMSCO's conforme, PUREFOODS was very well within
reason to revoke its qualified acceptance or counter-offer. Hence, no contract was perfected
between PUREFOODS and FEMSCO. PUREFOODS also contends that it was never in bad
faith when it dealt with FEMSCO. Hence moral and exemplary damages should not have been
awarded.
Corollarily, JARDINE asserts that the records are bereft of any showing that it had prior
knowledge of the supposed contract between PUREFOODS and FEMSCO, and that it induced
PUREFOODS to violate the latter's alleged contract with FEMSCO. Moreover, JARDINE
reasons that FEMSCO, an artificial person, is not entitled to moral damages. But
granting arguendo that the award of moral damages is proper, P2,000,000.00 is extremely
excessive.
In the main, these consolidated cases present two (2) issues: first, whether there existed a
perfected contract between PUREFOODS and FEMSCO; and second, granting there existed a
perfected contract, whether there is any showing that JARDINE induced or connived with
PUREFOODS to violate the latter's contract with FEMSCO.
113
A contract is defined as "a juridical convention manifested in legal form, by virtue of which one or
more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a
prestation to give, to do, or not to do." 4 There can be no contract unless the following requisites
concur: (a) consent of the contracting parties; (b) object certain which is the subject matter of the
contract; and, (c) cause of the obligation which is established. 5 A contract binds both contracting
parties and has the force of law between them.
Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made
by the offeror. From that moment, the parties are bound not only to the fulfillment of what has
been expressly stipulated but also to all the consequences which, according to their nature, may
be in keeping with good faith, usage and law. 6 To produce a contract, the acceptance must not
qualify the terms of the offer. However, the acceptance may be express or implied. 7 For a
contract to arise, the acceptance must be made known to the offeror. Accordingly, the
acceptance can be withdrawn or revoked before it is made known to the offeror.
In the instant case, there is no issue as regards the subject matter of the contract and the cause
of the obligation. The controversy lies in the consent - whether there was an acceptance of the
offer, and if so, if it was communicated, thereby perfecting the contract.
To resolve the dispute, there is a need to determine what constituted the offer and the
acceptance. Since petitioner PUREFOODS started the process of entering into the contract by
conducting a bidding, Art. 1326 of the Civil Code, which provides that "[a]dvertisements for
bidders are simply invitations to make proposals," applies. Accordingly, the Terms and
Conditions of the Bidding disseminated by petitioner PUREFOODS constitutes the
"advertisement" to bid on the project. The bid proposals or quotations submitted by the
prospective suppliers including respondent FEMSCO, are the offers. And, the reply of petitioner
PUREFOODS, the acceptance or rejection of the respective offers.
Quite obviously, the 12 December 1992 letter of petitioner. PUREFOODS to FEMSCO
constituted acceptance of respondent FEMSCO's offer as contemplated by law. The tenor of the
letter, i.e., "This will confirm that Pure Foods has awarded to your firm (FEMSCO) the project,"
could not be more categorical. While the same letter enumerated certain "basic terms and
conditions," these conditions were imposed on the performance of the obligation rather than on
the perfection of the contract. Thus, the first "condition" was merely a reiteration of the contract
price and billing scheme based on the Terms and Conditions of Bidding and the bid or previous
offer of respondent FEMSCO. The second and third "conditions" were nothing more than
general statements that all items and materials including those excluded in the list but necessary
to complete the project shall be deemed included and should be brand new. The fourth
"condition" concerned the completion of the work to be done, i.e., within twenty (20) days from
the delivery of the generator set, the purchase of which was part of the contract. The fifth
"condition" had to do with the putting up of a performance bond and an all-risk insurance, both of
which should be given upon commencement of the project. The sixth "condition" related to the
standard warranty of one (1) year. In fine, the enumerated "basic terms and conditions" were
prescriptions on how the obligation was to be performed and implemented. They were far from
being conditions imposed on the perfection of the contract.
In Babasa v. Court of Appeals  8 we distinguished between a condition imposed on the perfection
of a contract and a condition imposed merely on the performance of an obligation. While failure
to comply with the first condition results in the failure of a contract, failure to comply with the
second merely gives the other party options and/or remedies to protect his interests.
We thus agree with the conclusion of respondent appellate court which affirmed the trial court -

As can be inferred from the actual phrase used in the first portion of the letter, the decision to
award the contract has already been made. The letter only serves as a confirmation of such
decision. Hence, to the Court's mind, there is already an acceptance made of the offer received
by Purefoods. Notwithstanding the terms and conditions enumerated therein, the offer has been
accepted and/or amplified the details of the terms and conditions contained in the Terms and
Conditions of Bidding given out by Purefoods to prospective bidders. 9
But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS
constituted a "conditional counter-offer," respondent FEMCO's submission of the performance
bond and contractor's all-risk insurance was an implied acceptance, if not a clear indication of its
acquiescence to, the "conditional counter-offer," which expressly stated that the performance
bond and the contractor's all-risk insurance should be given upon the commencement of the
contract. Corollarily, the acknowledgment thereof by petitioner PUREFOODS, not to mention its
return of FEMSCO's bidder's bond, was a concrete manifestation of its knowledge that
respondent FEMSCO indeed consented to the "conditional counter-offer." After all, as earlier
adverted to, an acceptance may either be express or implied, 10 and this can be inferred from the
contemporaneous and subsequent acts of the contracting parties.
Accordingly, for all intents and purposes, the contract at that point has been perfected, and
respondent FEMSCO's conforme would only be a mere surplusage. The discussion of the price
of the project two (2) months after the 12 December 1992 letter can be deemed as nothing more
than a pressure being exerted by petitioner PUREFOODS on respondent FEMSCO to lower the
price even after the contract had been perfected. Indeed from the facts, it can easily be
surmised that petitioner PUREFOODS was haggling for a lower price even after agreeing to the
earlier quotation, and was threatening to unilaterally cancel the contract, which it eventually did.
Petitioner PUREFOODS also makes an issue out of the absence of a purchase order (PO).
Suffice it to say that purchase orders or POs do not make or break a contract. Thus, even the
tenor of the subsequent letter of petitioner PUREFOODS, i.e., "Pure Foods Corporation is
hereby canceling the award to your company of the project," presupposes that the contract has
been perfected. For, there can be no cancellation if the contract was not perfected in the first
place.
Petitioner PUREFOODS also argues that it was never in bad faith. On the contrary, it believed in
good faith that no such contract was perfected. We are not convinced. We subscribe to the
factual findings and conclusions of the trial court which were affirmed by the appellate court -
Hence, by the unilateral cancellation of the contract, the defendant (petitioner PURE FOODS)
has acted with bad faith and this was further aggravated by the subsequent inking of a contract
between defendant Purefoods and erstwhile co-defendant Jardine. It is very evident that
Purefoods thought that by the expedient means of merely writing a letter would automatically
cancel or nullify the existing contract entered into by both parties after a process of bidding. This,
to the Court's mind, is a flagrant violation of the express provisions of the law and is contrary to
fair and just dealings to which every man is due. 11
This Court has awarded in the past moral damages to a corporation whose reputation has been
besmirched. 12 In the instant case, respondent FEMSCO has sufficiently shown that its
reputation was tarnished after it immediately ordered equipment from its suppliers on account of
the urgency of the project, only to be canceled later. We thus sustain respondent appellate
court's award of moral damages. We however reduce the award from P2,000,000.00 to
P1,000,000.00, as moral damages are never intended to enrich the recipient. Likewise, the
award of exemplary damages by way of example for the public good is excessive and should be
reduced to P100,000.00.
114
Petitioner JARDINE maintains on the other hand that respondent appellate court erred in
ordering it to pay moral damages to respondent FEMSCO as it supposedly induced
PUREFOODS to violate the contract with FEMSCO. We agree. While it may seem that
petitioners PUREFOODS and JARDINE connived to deceive respondent FEMSCO, we find no
specific evidence on record to support such perception. Likewise, there is no showing
whatsoever that petitioner JARDINE induced petitioner PUREFOODS. The similarity in the
design submitted to petitioner PUREFOODS by both petitioner JARDINE and respondent
FEMSCO, and the tender of a lower quotation by petitioner JARDINE are insufficient to show
that petitioner JARDINE indeed induced petitioner PUREFOODS to violate its contract with
respondent FEMSCO.
WHEREFORE, judgment is hereby rendered as follows:
(a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court of Appeals
reversing the 27 June 1994 resolution of the trial court and ordering petitioner JARDINE
DAVIES, INC., to pay private respondent FAR EAST MILLS SUPPLY CORPORATION
P2,000,000.00 as moral damages is REVERSED and SET ASIDE for insufficiency of evidence;
and
(b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of Appeals
ordering petitioner PUREFOODS CORPORATION to pay private respondent FAR EAST MILLS
SUPPLY CORPORATION the sum of P2,300,000.00 representing the value of engineering
services it rendered, US$14,000.00 or its peso equivalent, and P900,000.00 representing the
contractor's mark-up on installation work, as well as attorney's fees equivalent to twenty percent
(20%) of the total amount due, is AFFIRMED. In addition, petitioner PURE FOODS
CORPORATION is ordered to pay private respondent FAR EAST MILLS SUPPLY
CORPORATION moral damages in the amount of P1,000,000.00 and exemplary damages in
the amount of P1,000,000.00. Costs against petitioner.
SO ORDERED.
FIRST DIVISION
G.R. No. 117097 March 21, 1997
SAMAHAN NG OPTOMETRISTS SA PILIPINAS, ILOCOS SUR-ABRA CHAPTER, EDUARDO
MA. GUIRNALDA, DANTE G. PACQUING and OCTAVIO A. DE
PERALTA, Petitioners, v. ACEBEDO INTERNATIONAL CORPORATION and the HON.
COURT OF APPEALS, Respondents.
HERMOSISIMA, JR., J.:
Before us is a petition seeking the review and ultimately the reversal of the decision 1 of the
Court of Appeals 2 which rejected what petitioners vehemently claim to be a prohibition, under
Republic Act (R.A.) No. 1998, popularly known as the old Optometry Law, against the
employment by corporations, usually optical shops and eyeware stores, of optometrists, such
practice, according to petitioners, being an indirect violation of the rule against corporations
exercising professions reserved only to natural persons. Petitioners understandably did not
welcome the herein assailed decision because they have, earlier, obtained a decision  3 favorable
to them from the Regional Trial Court of Candon, Ilocos Sur, Branch 23, presided over by Judge
Gabino Balbin, Jr. The said judge had, in the main, ruled that the operations of private
respondent Acebedo International Corporation involves the practice of optometry which is
precluded by R.A. No. 1998.

The undisputed facts of the case, as found by the respondent Court of Appeals and quoted by
petitioners, are as follows:
On February 22, 1991, . . . [private respondent] filed an application with the Office of the Mayor
of Candon, Ilocos Sur, for the issuance of a permit for the opening and operation of a branch of
the Acebedo Optical in that municipality.
The application was opposed by the . . . [petitioner] Samahan ng Optometrists sa Pilipinas
(SOP) which contended that . . . [private respondent] is a juridical entity not qualified to practice
optometry.
On March 6, 1991, . . . [private respondent] filed its answer, arguing it is not the corporation, but
the optometrists employed by it, who would be practicing optometry.
On April 17, 1991, the Mayor of Candon created a committee, composed of public respondents
Eduardo Ma. Guirnalda, Dante G. Pacquing and Octavio de Peralta, to pass on [private
respondent's] application.
On September 26, 1991 the committee rendered a decision denying [private respondent's]
application for a mayor's permit to operate a branch in Candon and ordering . . . [private
respondent] to close its establishment within fifteen (15) days from receipt of the decision.
Acebedo moved for a reconsideration but its motion was denied on November 14, 1991. . . .
[Private respondent] was ordered to close its establishment within ten (10) days from receipt of
the order.
On December 9, 1991, . . . [private respondent] filed with the Court of Appeals a petition
for certiorari (CA G.R SP No. 26782), questioning the decision of respondent committee. Its
petition, however, was referred to the court a quo, which on December 16, 1992, dismissed
Acebedo's petition. Hence, . . . [the] appeal [to the respondent Court of Appeals]. 4
The singular issue, admittedly extensively debated and intensely contested not only by the
members of the optometry profession and the players in the business of selling optical ware,
supplies, substances and instruments but also by the members of the Senate during the
deliberations respecting R. A. 8050, otherwise known as Revised New Optometry Law, is this:
May corporations, engaged in the business of selling optical wares, supplies, substances and
instruments which, as an incident to and in the ordinary course of the business hire optometrists,
be said to be practicing the profession of optometry which, by legal mandate, may only be
engaged in by natural persons possessed of specific legal qualifications?
The trial court resolved this issue in the affirmative. In so finding, it explained, thus:
The denial of the application of Acebedo rested on the grounds that it is operating an optical
shop and it is practicing optometry where its charter does not grant to it authority to practice the
former. Acebedo submits that the findings of the Commission have no basis both in law and in
fact. It argues that the hiring of optometrists by the petitioner is merely incidental to its main
business which is the sale of optical products. Acebedo contends further that its employees
have a personality separate and distinct from that of Acebedo which is a juridical entity, and it
cannot therefore be considered as engaged in optometry.
The Court disagrees.
Quoted for the enlightenment of both parties is a portion of the contested Decision, to wit:
The visit revealed the following:
115
1. The establishment was manned by three personnel: Dr. Salvador Pagarigan, optometrist;
Miss Lilibeth Begonia, receptionist; and a Laboratory technician, who refused to give his name;
2. There were several shelves containing eyeglasses;
3. There were benches where, according to Miss Begonia, would-be clients can sit while waiting
for their turn to be examined;
4. An examination room complete with an optical chair and optical charts; and,
5. An optical laboratory.
The Court is very much aware of the existence of several shops owned by Acebedo. They are
operating up to the present. But the Court has to rely in this case on the findings of the
Commission created by the Mayor of Candon in the absence of proof that the same was arrived
at hastily and without regard for the rights of the parties. In fact, the contested Decision was
issued only after an ocular inspection was conducted and the parties have submitted their
respective memorandum.
The findings of the Commission reveal that the operation of Acebedo's local shop involves the
practice of optometry. If indeed Acebedo is engaged in the sale of optical products, the absence
of sales clerks more than demonstrate its real business. In the contested Decision, the floor plan
of the shop was even commented on as that of an optical shop. As noted by the members of the
Commission, there was also a banner in front of the shop prominently display advertising free
consultations (libreng consulta sa mata). These facts, taken together, denote that Acebedo was
operating in Candon an optical shop contrary to law.
While it is also true that a corporation has a personality separate and distinct from that of its
personnel, the veil of corporate fiction cannot be used for the purpose of some illegal activity.
The veil of corporate fiction can be pierced, as in this case, and the acts of the personnel of the
corporation will be considered as those of the corporation. Acebedo then is engaged in the
practice of optometry. 5
Disagreeing with the foregoing decision of the trial court, private respondent appealed therefrom
and asked the respondent Court of Appeals to reverse the same on the ground that the court a
quo erred in concluding that private respondent was engaged in the practice of optometry by
operating an optical shop.
Respondent appellate court found that private respondent's contentions merited the reversal of
the court a quo's decision. The respondent court, speaking through Court of Appeals Presiding
Justice, now Supreme Court Associate Justice Vicente V. Mendoza, ratiocinated in this wise:
First. . . . [Private respondent] maintains that it is not practicing optometry nor is it operating an
optical clinic. The contention has merit. The amended Articles of Incorporation of . . . [private
respondent] in part states:
PRIMARY PURPOSES
1. To own, maintain, conduct, operate and carry on the business of dispensing opticians and
optical establishments, and in the course of the business, to buy, sell, ship, store and otherwise
use, deal in, acquire and dispose of every kind of optical, ophthalmic and scientific instrument,
glass, lens, optical solutions or equipment necessary or convenient to the operation and conduct
of the general business of dispensing opticians.

SECONDARY PURPOSES
xxx xxx xxx
3. To do all and everything necessary, suitable or proper for the accomplishment of any of the
purposes, the attainment of any of the objects, or in the exercise of any of the powers herein set
forth, either alone or in conjunction with other corporations, firms or individuals and either as
principal or agents and to do every other act or acts, thing or things, incidental or appurtenant to
or growing out of or connected with the abovementioned objects, purposes or powers.
Clearly, the corporation is not an optical clinic. Nor is it - but rather the optometrists employed by
it who are - engaged in the practice of optometry. Petitioner-appellant simply dispenses optical
and ophthalmic instruments and supplies.
Indeed, the Optometry Law (Rep. Act No. 1998), which . . . [petitioners] cite, does not prohibit
corporations, like . . . [private respondent] from employing licensed optometrists.
What it prohibits is the practice of the profession without license by those engaged in it. This is
clear from sec. 2 of the law which provides:
No person shall practice or attempt to practice optometry as defined in this Act, without holding a
valid certificate of registration as optometrist issued to him by the Board of Examiners in
Optometry herein created and in accordance with the provisions hereof: Provided, that valid
certificates of registration as optometrists shall be issued to optometrists of good moral
character now registered in accordance with the provisions of chapter thirty-three of the Revised
Administrative Code, who shall, by application within a period of one year from the effectivity of
this Act, be exempt from the provisions of sections eleven, twelve and twenty-three of this Act. . .
. legally exercisable only by natural persons and professional partnerships. We have carefully
The prohibition is thus addressed to natural persons who are required to have "a valid certificate
of registration as optometrist" and who must be of "good moral character". The prohibition can
have no application to . . . [private respondent] which is not itself engaged in the practice of
optometry. As the Professional Regulation Commission said, "Acebedo Optical, Acebedo Optical
Clinic, Acebedo Optical Co., Inc. and Acebedo International, Inc. are not natural persons who
can take the Optometrist licensure examinations. They are not, and cannot be registered as
Optometrist under RA 1998 [The Optometry Law]. 6
Petitioners filed a Motion for Reconsideration of the aforegoing decision. It was, however, denied
by respondent appellate court. Hence, this petition anchored on the following sole ground:
ISSUE
WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT
PRIVATE RESPONDENT ACEBEDO INTERNATIONAL CORPORATION DOES NOT VIOLATE
THE OPTOMETRY LAW (RA NO. 1998) WHEN IT EMPLOYS OPTOMETRISTS TO ENGAGE
IN THE PRACTICE OF OPTOMETRY UNDER ITS NAME AND FOR ITS BEHALF
The herein petitioner most respectfully submits that the private respondent Acebedo
International Corporation flagrantly violates R.A. No. 1998 and the Corporation Code of the
Philippines when it employs optometrists to engage in the practice of optometry under its name
and for its behalf. 7
We hold that the petition lacks merit.
116
Private respondent does not deny that it employs optometrists whose role in the operations of its
optical shops is to administer the proper eye examination in order to determine the correct type
and grade of lenses to prescribe to persons purchasing the same from private respondent's
optical shops. Petitioners vehemently insist that in so employing said optometrists, private
respondent is in effect itself practicing optometry. Such practice, petitioners conclude, is in
violation of RA. No. 1998, which, it must be noted at this juncture, has been repealed and
superseded by R.A. 8050.
Petitioners' contentions are, however, untenable. The fact that private respondent hires
optometrists who practice their profession in the course of their employment in private
respondent's optical shops, does not translate into a practice of optometry by private respondent
itself. Private respondent is a corporation created and organized for the purpose of conducting
the business of selling optical lenses or eyeglasses, among others. The clientele of private
respondent understably, would largely be composed of persons with defective vision and thus
need the proper lenses to correct the same and enable them to gain normal vision. The
determination of the proper lenses to sell to private respondent's clientele entails the
employment of optometrists who have been precisely trained for that purpose. Private
respondent's business is not the determination itself of the proper lenses needed by persons
with defective vision. Private respondent's business, rather, is the buying and importing of
eyeglasses and lenses and other similar or allied instruments from suppliers thereof and selling
the same to consumers.
For petitioners' argument to hold water, there need be clear showing that R.A. No. 1998
prohibits a corporation from hiring optometrists, for only then would it be undeniably evident that
the intention of the legislature is to preclude the formation of the so-called optometry
corporations because such is tantamount to the practice of the profession of optometry which is
reviewed R.A. No. 1998 however, and we find nothing therein that supports petitioner's insistent
claims. 8
It is significant to note that even under R.A. No. 8050, known as the Revised Optometry
Law, 9 we find no prohibition against the hiring by corporations of optometrists. The pertinent
provisions of R.A. No. 8050 regarding the practice of optometry, are reproduced below for ready
reference:
THE PRACTICE OF OPTOMETRY
Sec. 4. Acts Constituting the practice of Optometry. Any of the following acts constitute the
practice of optometry:
a) The examination of the human eye through the employment of subjective and objective
procedures, including the use of specific topical diagnostic pharmaceutical agents or drugs and
instruments, tools, equipment, implements, visual aids, apparatuses, machines, ocular exercises
and related devices, for the purpose of determining the condition and acuity of human vision to
correct and improve the same in accordance with subsections (b), (c) and (d) hereof; vision to
correct and improve the same in accordance with subsections (b), (c) and (d) hereof;
b) The prescription and dispensing of ophthalmic lenses, prisms, contact lenses and their
accessories and solutions, frames and their accessories, and supplies for the purpose of
correcting and treating defects, deficiencies and abnormalities of vision.

c) The conduct of ocular exercises and vision training, the provision of orthoptics and other
devices and procedures to aid and correct abnormalities of human vision, and the installation of
prosthetic devices;
d) The counseling of patients with regard to vision and eye care and hygiene;
e) The establishment of offices, clinics, and similar places where optometric services are offered;
and
f) The collection of professional fees for the performance of any of the acts mentioned in
paragraphs (a), (b), (c) and (d) of this section.
Sec. 5. Prohibition Against the Unauthorized Practice of Optometry. - No person shall practice
optometry as defined in Section 3 of this Act nor perform any of the acts, constituting the
practice of optometry as setforth in Section 4 hereof, without having been first admitted to the
practice of this profession under the provisions of this Act and its implementing rules and
regulations: Provided, That this prohibition shall not apply to regularly licensed and duly
registered physicians who have received post-graduate training in the diagnosis and treatment
of eye diseases: Provided, however, That the examination of the human eye by duly registered
physicians in connection with the physical examination of patients shall not be considered as
practice of optometry: Provided, further, That public health workers trained and involved in the
government's blindness prevention program may conduct only visual acuity test and visual
screening.
Sec. 6. Disclosure of Authority to Practice. - An optometrist shall be required to indicate his
professional license number and the date of its expiration in the documents he issues or signs in
connection with the practice of his profession. He shall also display his certificate of registration
in a conspicuous area of his clinic or office.
All told, there is no law that prohibits the hiring by corporations of optometrists or considers the
hiring by corporations of optometrists as a practice by the corporation itself of the profession of
optometry.
WHEREFORE, the instant petition is hereby DISMISSED.
Costs against the petitioners.
SO ORDERED.
SECOND DIVISION
G.R. No. 148384            April 17, 2002
DOCTORS ROSA P. ALFAFARA, VIVIAN DYHONGPO, MARIA TORRES, EMMA YBAÑEZ,
ELSA CABARDO, REBECCA SANTIAGO, PRISCILLA NARVASA, SUSIE CHAN, CLARO
CINCO, FELIPE CINCO, CARMEN MODESTO, FELISA LIMKIMSO, ARLENE DORIO,
ROSALINDA BONO, and SUSAN YU, in their own behalf and in behalf of all the other 80
optometrists-members of the SAMAHAN NG OPTOMETRISTS SA PILIPINAS-CEBU
CHAPTER, petitioners,
vs.
ACEBEDO OPTICAL, CO., INC., respondent.
MENDOZA, J.:
117
This is a petition for review on certiorari of the decision, 1 dated January 20, 2000, of the Court of
Appeals, setting aside the decision,2 dated September 3, 1993, of the Regional Trial Court,
Branch 9, Cebu City, which enjoined respondent Acebedo Optical Co., Inc., its agents,
representatives, and/or employees from practicing optometry, as defined in §1(a) of Republic
Act No. 1998, in the province and cities of Cebu, and the resolution, dated May 10, 2001, of the
appeals court denying petitioners’ motion for reconsideration.
Petitioners are optometrists. They brought, in their own behalf and in behalf of 80 other
optometrists, who are members of the Samahan ng Optometrists sa Pilipinas-Cebu Chapter, an
injunctive suit in the Regional Trial Court, Branch 9, Cebu City to enjoin respondent Acebedo
Optical Co., Inc. and its agents, representatives, and/or employees from practicing optometry in
the province of Cebu. In their complaint, they alleged that respondent opened several optical
shops in Cebu and announced to the public, through leaflets, newspapers, and other forms of
advertisement, the availability of "ready-to-wear" eyeglasses for sale at P60.00 each and free
services by optometrists in such outlets. They claimed that, through the licensed optometrists
under its employ, respondent had been engaging in the practice of optometry by examining the
human eye, analyzing the ocular functions, prescribing ophthalmic lenses, prisms, and contact
lenses; and conducting ocular exercises, visual trainings, orthoptics, prosthetics, and other
preventive or corrective measures for the aid, correction, or relief of the human eye. They
contended that such acts of respondent were done in violation of the Optometry Law (R.A. No.
1998)3 and the Code of Ethics for Optometrists, promulgated by the Board of Examiners in
Optometry on July 11, 1983. They sought payment to them of attorney’s fees, litigation
expenses, and the costs of the suit.4
The trial court at first dismissed the suit but, on motion of petitioners, reinstated the action and
granted their prayer for a writ of preliminary injunction and/or restraining order. Petitioners
argued that the case involved a pure question of law, i.e., whether or not respondent’s hiring of
optometrists was violative of the applicable laws, and that, as such, the case was an exception
to the rule requiring exhaustion of administrative remedies as a condition for the filing of an
injunctive suit. They further alleged that the Board of Optometry held itself to be without
jurisdiction over the president of respondent Acebedo Company as he was not duly registered
with the Professional Regulation Commission.
In its answer, respondent averred that the advertisements referred to by petitioner were part of
its promotion to make known to the public the opening of its new branches in Cebu; that
incidental to its business of selling optical products, it hired duly licensed optometrists who
conducted eye examination, prescribed ophthalmic lenses, and rendered other services; that it
exercised neither control nor supervision over the optometrists under its employ; and that the
hired optometrists exercised neither control nor supervision in the sale of optical products and
accessories by respondent. By way of special and affirmative defense, respondent stated that
the optometrists should be impleaded as party-defendants because they were indispensable
parties; that the trial court had no jurisdiction over the case; that the filing of the complaint was
barred by res judicata as similar suits had been previously dismissed by the Court of First
instance of Lucena City and the Securities and Exchange Commission; and that the petitioners
were guilty of forum-shopping. Respondent sought the recovery of ₱100,000.00 as moral
damages, ₱500,000.00 as exemplary damages, and ₱100,000.00 as attorney’s fees.5
During the pre-trial conference, the parties entered into the following stipulation of facts: that the
petitioners were duly licensed optometrists; that the petitioners were all members of the
Samahan ng Optometrists ng Pilipinas (SOP)-Cebu Chapter; that SOP-Cebu Chapter was a
chapter of SOP Incorporated, a national organization; that the SOP-Cebu Chapter had a
program called "Sight Saving Month"; that the "Sight Saving Month" program was also a

program of the SOP nationwide; that petitioners’ SOP "Sight Saving Month" program provided
free consultations; that respondent was a corporation with several outlets in Cebu; that
respondent was selling optical products and "ready-to-wear" eyeglasses of limited grades; that
during the opening of its new branches in Cebu, the respondent advertised its products through
leaflets, newspapers, and other similar means, such as streamers and loudspeakers on board a
vehicle; that respondent hired optometrists who conducted eye examinations, prescribed
ophthalmic lenses, and rendered other optometry services; and that while the hired optometrists
received their salary from respondent, they are not precluded from seeking other sources of
income.6
The evidence for the petitioners showed that respondent advertised its "ready-to-wear"
eyeglasses in newspapers, posters pasted on the walls, and announcements made in roving
jeeps. A witness testified that he purchased a pair of eyeglasses for P66.00 (P60.00 plus P6.00
for VAT) without any prior eye examination by an optometrist. A week later, he had vision
difficulty and consulted an optometrist who advised him to buy a pair of eyeglasses with the
correct grade. Petitioners thus sought to prove that the selling of "ready-to-wear" eyeglasses by
respondent was detrimental to the public.
On the other hand, respondent maintained that before the customers purchased the "ready-to-
wear" eyeglasses on display, they either have a prior prescription from an optometrist or had to
be examined first by the branch optometrist. Customers thus had the option either to buy the
"ready-to-wear" eyeglasses on display or to order a new pair of eyeglasses.
After hearing, judgment was rendered in favor of petitioners. The trial court found that the hiring
of licensed optometrists by the respondent was unlawful because it resulted in the practice of
the optometry profession by respondent, a juridical person. It ruled that respondent could not
raise the issue of res judicata as there was no decision on the merits of the case rendered by
any court of competent jurisdiction and, consequently, petitioners could not be guilty of forum-
shopping. As to petitioners’ failure to implead the optometrists in the employ of respondent, the
trial court explained that since the issue involved the propriety of respondent’s hiring of
optometrists to perform optometry services, the optometrists did not have to be impleaded as
defendants. As to whether respondent’s selling of "ready-to-wear" eyeglasses to customers
without prior eye examination violated the applicable laws and was detrimental to the public, the
trial court ruled that petitioners failed to substantiate such claim.
Respondent appealed to the Court of Appeals contending that the trial court erred in holding that
respondent was illegally engaged in the practice of Optometry; that being indispensable parties,
the licensed optometrists employed by respondent should have been impleaded as defendants;
and that the trial court erred in not holding that petitioners, by filing several harassment suits
before various fora, were guilty of forum-shopping.
The Court of Appeals reversed the decision of the trial court and dismissed the complaint of
petitioners. Citing the case of Samahan ng Optometrists sa Pilipinas, Ilocos Sur-Abra Chapter v.
Acebedo International Corporation,7 the appeals court ruled that respondent’s hiring of licensed
optometrists did not constitute practice of optometry nor violate any law. As to the second issue
raised, the Court of Appeals stated that since the complaint was lodged solely against
respondent for its hiring of optometrists, whatever decision the trial court would render would
solely affect respondent since what was sought to be restrained was the employment of licensed
optometrists; hence, the optometrists were not indispensable parties. Anent the issue of forum-
shopping, the appeals court found no cogent reason to reverse the findings of the trial court that
the administrative case before the Professional Regulation Commission was not decided on the
118
merits while the letters of petitioners sent to government officials did not constitute judicial
proceedings.
Petitioners filed a motion for reconsideration but their motion was denied. Hence, this petition
alleging that the Court of Appeals erred in holding that respondent Acebedo was not engaged in
the practice of optometry.
The petition has no merit.
First. Petitioners contend that the ruling in Samahan ng Optometrists sa Pilipinas, Ilocos Sur-
Abra Chapter v. Acebedo International Corporation8 is no longer controlling because of the later
case of Apacionado v. Professional Regulation Commission.9 In Apacionado, petitioners Ma.
Cristina Apacionado and Zenaida Robil, who were employed by Acebedo as optometrists, were
suspended from the practice of optometry for two (2) years by the Board of Optometry for
violation of R.A. No. 1998 and Art. III, §6 of the Code of Ethics for Optometrists for having
participated in the promotional advertisement of Acebedo, entitled "Libreng Konsulta sa Mata:
Reading Glasses P60.00," held from July 5-14, 1989 in Tuguegarao, Cagayan. In affirming the
suspension of the optometrists, the Professional Regulation Commission found that by rendering
professional services to Acebedo’s clientele (free eye consultations and refractions), petitioners
were guilty of unprofessional conduct. Consequently, their professional licenses as optometrists
were suspended for two (2) years. This was because the services of the two optometrists were
the ones being offered to the public for free. The decision of the Professional Regulation
Commission was affirmed by the Court of Appeals and later by this Court. As our resolution,
dated July 12, 1999,10 stated in pertinent parts:
Thus, the instant petition which must likewise fail.
The Court finds the decision of the Court of Appeals to be in accordance with the law. The Rules
and Regulation[s] of the Board of Examiners for [O]ptometry are quite explicit, and Rule 56
provides:
Rule 56. Acts Constituting Unprofessional Conduct.- It shall be considered unprofessional for
any registered optometrist:
(1) To make optometric examinations outside of his regular clinic, unless he shall have received
an unsolicited written request by the person or persons to be examined;
(2) To advertise a price or prices [of] spectacle frames, mountings, or ophthalmic lenses and
other ophthalmic devices used in the practice of Optometry and to be associated with, or remain
in the employ of, any person who does such advertising;
.…
(4) To advertise "free examination," "examination included," "discounts," "installments,"
"wholesale and retail," or similar words and phrases which would tend to remove the spirit of
professionalism;
….
(11) To use Mobile Units for conducting refraction in any area within ten (10) kilometers of a
Municipality.
Likewise, Section 6 of the Code of Ethics for optometrists states:

SEC. 6. The following are deemed, among others, to be unethical and are deemed to constitute
unprofessional conduct:
….
c. Performing optometric examination outside of the regular office, unless he shall have received
unsolicited request to make such an examination.
….
u. To use Mobile Units for conducting refraction in any area within ten (10) kilometers of a
Municipality.
These provisions petitioners, through Acebedo, were found to have violated.
Petitioners cannot deny that it was their skills as optometrists as well as their licenses which
Acebedo used in order to enable itself to render optometric services to its clientele. Under such
arrangement, petitioners acted as tools of Acebedo so that the latter can offer the whole
package of services to its clientele.
Corollarily, Republic Act No. 1998 pertinently provides:
SEC. 20. Revocation or suspension of certificate. - The Board may, after giving proper notice
and hearing to the party concerned, revoke or suspend a certificate of registration for the causes
mentioned in the next preceding section, or for unprofessional conduct….
Having knowingly allowed themselves to be used as tools in furtherance of [the] unauthorized
practice of optometry, petitioners are clearly liable for unethical and unprofessional practice of
their profession. The Court, thus finds no error committed by the Court of Appeals.
WHEREFORE, petition is denied due course.
Petitioners cite the Tennessee Supreme Court statement in Lens Crafter, Inc.
Sunquist,11 stating that:
The logical result would be that corporations and business partnerships might practice law,
medicine, dentistry or any other profession by the simple expedient of employing licensed
agents. And, if this were permitted, professional standards would be practically destroyed and
professions requiring special training would be commercialized, to the public detriment….The
ethics of any profession is based upon personal or individual responsibility.
The contention has no merit. An "optometrist" is a person who has been certified by the Board of
Optometry and registered with the Professional Regulation Commission as qualified to practice
optometry in the Philippines. 12 Thus, only natural persons can engage in the practice of
optometry and not corporations. Respondent, which is not a natural person, cannot take the
licensure examinations for optometrist and, therefore, it cannot be registered as an optometrist
under R.A. No. 1998. It is noteworthy that, in Apacionado, the Court did not find Acebedo to be
engaged in the practice of optometry. The optometrists in that case were found guilty of
unprofessional conduct and their licenses were suspended for two (2) years for having
participated, in their capacities as optometrists, in the implementation of the promotional
advertisement of Acebedo. In contrast, in the case at bar, respondent is merely engaged in the
business of selling optical products, not in the practice of optometry, whether directly or
indirectly, through its hired optometrists.
119
In Samahan ng Optometrists sa Pilipinas, Ilocos Sur-Abra Chapter v. Acebedo International
Corporation,13 petitioners opposed respondent Acebedo’s application for a municipal permit to
operate a branch in Candon, Ilocos Sur. They brought suit to enjoin respondent Acebedo from
employing optometrists as this allegedly constituted an indirect violation of R.A. No. 1998, which
prohibits corporations from exercising professions reserved only to natural persons. The
committee created by the Mayor of Candon to pass on Acebedo’s application denied the same
and ordered the closure of Acebedo optical shops. Acebedo appealed but its appeal was
dismissed by the trial court on the ground that it was practicing optometry. On appeal, the Court
of Appeals held that Acebedo was not operating as an optical clinic nor engaged in the practice
of optometry, although it employed licensed optometrists. Acebedo simply dispensed optical and
ophthalmic instruments and supplies. It was pointed out that R.A. No. 1998 does not prohibit
corporations from employing licensed optometrists. What it prohibits is the practice of optometry
by individuals who do not have a license to practice. The prohibition is addressed to natural
persons who are required to have "a valid certificate of registration as optometrist" and who must
be of "good moral character." This Court affirmed the ruling of the appeals court and explained
that even under R.A. No. 8050 (Revised Optometry Law) there is no prohibition against the
hiring by corporations of optometrists. The fact that Acebedo hired optometrists who practiced
their profession in the course of their employment in Acebedo’s optical shops did not mean that
it was itself engaged in the practice of optometry.
We see no reason to deviate from the ruling that a duly licensed optometrist is not prohibited
from being employed by respondent and that respondent cannot be said to be exercising the
optometry profession by reason of such employment.
Second. Petitioners argue that an optometrist, who is employed by a corporation, such as
Acebedo, is not acting on his own capacity but as an employee or agent of the corporation. They
contend that, as a mere employee or agent, such optometrist cannot be held personally liable for
his acts done in the course of his employment as an optometrist under the following provisions
of the Civil Code. Thus,
Art. 1897. The agent who acts as such is not personally liable to the party with whom he
v.
contracts, unless he expressly binds himself or exceeds the limits of his authority without giving
such party sufficient notice of his powers.
Art. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly.
This contention likewise has no merit. While the optometrists are employees of respondent, their
practice of optometry is separate and distinct from the business of respondent of selling optical
products. They are personally liable for acts done in the course of their practice in the same way
that if respondent is sued in court in connection with its business of selling optical products, the
optometrists need not be impleaded as party defendants. In that regard, the Board of Optometry
and the Professional Regulation Commission regulate their practice and have exclusive original
jurisdiction over them.
In the later case of Acebedo Optical Company, Inc. v. Court of Appeals,14 petitioner Acebedo
was granted by the City Mayor of Iligan a business permit subject to certain conditions, to wit:
1. Since it is a corporation, Acebedo cannot put up an optical clinic but only a commercial store;

2. Acebedo cannot examine and/or prescribe reading and similar optical glasses for patients,
because these are functions of optical clinics;
3. Acebedo cannot sell reading and similar eyeglasses without a prescription having first been
made by an independent optometrist (not its employee) or independent optical clinic. Acebedo
can only sell directly to the public, without need of a prescription, Ray-Ban and similar
eyeglasses;
4. Acebedo cannot advertise optical lenses and eyeglasses, but can advertise Ray-Ban and
similar glasses and frames;
5. Acebedo is allowed to grind lenses but only upon the prescription of an independent
optometrist.
The Samahang Optometrist sa Pilipinas-Iligan Chapter sought the cancellation and/or revocation
of Acebedo’s permit on the ground that it had violated the conditions for its business permit.
After due investigation, Acebedo was found guilty of violating the conditions of its permit and, as
a consequence, its permit was cancelled. Acebedo was advised that its permit would not be
renewed. Acebedo filed a petition for certiorari, prohibition, and mandamus in the Regional Trial
Court, but its petition was dismissed for non-exhaustion of administrative remedies. Acebedo
then filed a petition for certiorari, prohibition, and mandamus with the Court of Appeals. At first,
its petition was dismissed. On appeal, however, the decision of the Court of Appeals was
reversed. This Court held that a business permit is issued primarily to regulate the conduct of a
business and, therefore, the City Mayor cannot, through the issuance of such permit, regulate
the practice of a profession, like optometry. This Court held Acebedo to be entitled to a permit to
do business as an optical shop because, although it had duly licensed optometrists in its
employ, it did not apply for a license to engage in the practice of optometry as a corporate body
or entity.
WHEREFORE, the petition is DENIED for lack of showing that the Court of Appeals committed a
reversible error.
SO ORDERED.
SECOND DIVISION
G.R. No. 185280               January 18, 2012
TIMOTEO H. SARONA, Petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, ROYALE SECURITY AGENCY (FORMERLY
SCEPTRE SECURITY AGENCY) and CESAR S. TAN, Respondents.
DECISION
REYES, J.:
This is a petition for review under Rule 45 of the Rules of Court from the May 29, 2008
Decision1 of the Twentieth Division of the Court of Appeals (CA) in CA-G.R. SP No. 02127
entitled "Timoteo H. Sarona v. National Labor Relations Commission, Royale Security Agency
(formerly Sceptre Security Agency) and Cesar S. Tan" (Assailed Decision), which affirmed the
National Labor Relations Commission’s (NLRC) November 30, 2005 Decision and January 31,
2006 Resolution, finding the petitioner illegally dismissed but limiting the amount of his
backwages to three (3) monthly salaries. The CA likewise affirmed the NLRC’s finding that the
120
petitioner’s separation pay should be computed only on the basis of his length of service with
respondent Royale Security Agency (Royale). The CA held that absent any showing that Royale
is a mere alter ego of Sceptre Security Agency (Sceptre), Royale cannot be compelled to
recognize the petitioner’s tenure with Sceptre. The dispositive portion of the CA’s Assailed
Decision states:
WHEREFORE, in view of the foregoing, the instant petition is PARTLY GRANTED, though
piercing of the corporate veil is hereby denied for lack of merit. Accordingly, the assailed
Decision and Resolution of the NLRC respectively dated November 30, 2005 and January 31,
2006 are hereby AFFIRMED as to the monetary awards.
SO ORDERED. 2
Factual Antecedents
On June 20, 2003, the petitioner, who was hired by Sceptre as a security guard sometime in
April 1976, was asked by Karen Therese Tan (Karen), Sceptre’s Operation Manager, to submit a
resignation letter as the same was supposedly required for applying for a position at Royale. The
petitioner was also asked to fill up Royale’s employment application form, which was handed to
him by Royale’s General Manager, respondent Cesar Antonio Tan II (Cesar).3
After several weeks of being in floating status, Royale’s Security Officer, Martin Gono (Martin),
assigned the petitioner at Highlight Metal Craft, Inc. (Highlight Metal) from July 29, 2003 to
August 8, 2003. Thereafter, the petitioner was transferred and assigned to Wide Wide World
Express, Inc. (WWWE, Inc.). During his assignment at Highlight Metal, the petitioner used the
patches and agency cloths of Sceptre and it was only
when he was posted at WWWE, Inc. that he started using those of Royale.4
On September 17, 2003, the petitioner was informed that his assignment at WWWE, Inc. had
been withdrawn because Royale had allegedly been replaced by another security agency. The
petitioner, however, shortly discovered thereafter that Royale was never replaced as WWWE,
Inc.’s security agency. When he placed a call at WWWE, Inc., he learned that his fellow security
guard was not relieved from his post.5
On September 21, 2003, the petitioner was once again assigned at Highlight Metal, albeit for a
short period from September 22, 2003 to September 30, 2003. Subsequently, when the
petitioner reported at Royale’s office on October 1, 2003, Martin informed him that he would no
longer be given any assignment per the instructions of Aida Sabalones-Tan (Aida), general
manager of Sceptre. This prompted him to file a complaint for illegal dismissal on October 4,
2003.6
In his May 11, 2005 Decision, Labor Arbiter Jose Gutierrez (LA Gutierrez) ruled in the
petitioner’s favor and found him illegally dismissed. For being unsubstantiated, LA Gutierrez
denied credence to the respondents’ claim that the termination of the petitioner’s employment
relationship with Royale was on his accord following his alleged employment in another
company. That the petitioner was no longer interested in being an employee of Royale cannot
be presumed from his request for a certificate of employment, a claim which, to begin with, he
vehemently denies. Allegation of the petitioner’s abandonment is negated by his filing of a
complaint for illegal dismissal three (3) days after he was informed that he would no longer be
given any assignments. LA Gutierrez ruled:
In short, respondent wanted to impress before us that complainant abandoned his employment.
We are not however, convinced.
 121

There is abandonment when there is a clear proof showing that one has no more interest to no proof that Roso T. Sabalones, organized his single proprietorship business into a corporation,
return to work. In this instant case, the record has no proof to such effect. In a long line of Royale Security Agency. On the contrary, the name of Roso T. Sabalones does not appear in
decisions, the Supreme Court ruled: the Articles of Incorporation. The names therein as incorporators are:

"Abandonment of position is a matter of intention expressed in clearly certain and Bruno M. Kuizon - [₱]150,000.00
unequivocal acts, however, an interim employment does not mean abandonment."
(Jardine Davis, Inc. vs. NLRC, 225 SCRA 757).
Wilfredo K. Tan - 100,000.00
"In abandonment, there must be a concurrence of the intention to abandon and some
overt acts from which an employee may be declared as having no more interest to work." Karen Therese S. Tan - 100,000.00
(C. Alcontin & Sons, Inc. vs. NLRC, 229 SCRA 109).

"It is clear, deliberate and unjustified refusal to severe employment and not mere absence
that is required to constitute abandonment." x x x" (De Ysasi III vs. NLRC, 231 SCRA 173).
Aside from lack of proof showing that complainant has abandoned his employment, the record
would show that immediate action was taken in order to protest his dismissal from employment.
He filed a complaint [for] illegal dismissal on October 4, 2004 or three (3) days after he was
dismissed. This act, as declared by the Supreme Court is inconsistent with abandonment, as
held in the case of Pampanga Sugar Development Co., Inc. vs. NLRC, 272 SCRA 737 where
the Supreme Court ruled:
"The immediate filing of a complaint for [i]llegal [d]ismissal by an employee is
inconsistent with abandonment."7
The respondents were ordered to pay the petitioner backwages, which LA Gutierrez computed
from the day he was dismissed, or on October 1, 2003, up to the promulgation of his Decision on
May 11, 2005. In lieu of reinstatement, the respondents were ordered to pay the petitioner
separation pay equivalent to his one (1) month salary in consideration of his tenure with Royale,
which lasted for only one (1) month and three (3) days. In this regard, LA Gutierrez refused to
pierce Royale’s corporate veil for purposes of factoring the petitioner’s length of service with
Sceptre in the computation of his separation pay. LA Gutierrez ruled that Royale’s corporate
personality, which is separate and distinct from that of Sceptre, a sole proprietorship owned by
the late Roso Sabalones (Roso) and later, Aida, cannot be pierced absent clear and convincing
evidence that Sceptre and Royale share the same stockholders and incorporators and that
Sceptre has complete control and dominion over the finances and business affairs of Royale.
Specifically:
To support its prayer of piercing the veil of corporate entity of respondent Royale, complainant
avers that respondent Royal (sic) was using the very same office of SCEPTRE in C. Padilla St.,
Cebu City. In addition, all officers and staff of SCEPTRE are now the same officers and staff of
ROYALE, that all [the] properties of SCEPTRE are now being owned by ROYALE and that
ROYALE is now occupying the property of SCEPTRE. We are not however, persuaded.
Cesar Antonio S. Tan - 100,000.00
Gabeth Maria K. Tan - 50,000.00
Complainant claims that two (2) of the incorporators are the granddaughters of Roso T.
Sabalones. This fact even give (sic) us further reason to conclude that respondent Royal (sic)
Security Agency is not an alter ego or conduit of SCEPTRE. It is obvious that respondent Royal
(sic) Security Agency is not owned by the owner of "SCEPTRE".
It may be true that the place where respondent Royale hold (sic) office is the same office
formerly used by "SCEPTRE." Likewise, it may be true that the same officers and staff now
employed by respondent Royale Security Agency were the same officers and staff employed by
"SCEPTRE." We find, however, that these facts are not sufficient to justify to require respondent
Royale to answer for the liability of Sceptre, which was owned solely by the late Roso T.
Sabalones. As we have stated above, the remedy is to address the claim on the estate of Roso
T. Sabalones.8
The respondents appealed LA Gutierrez’s May 11, 2005 Decision to the NLRC, claiming that the
finding of illegal dismissal was attended with grave abuse of discretion. This appeal was,
however, dismissed by the NLRC in its November 30, 2005 Decision,9 the dispositive portion of
which states:
WHEREFORE, premises considered, the Decision of the Labor Arbiter declaring the illegal
dismissal of complainant is hereby AFFIRMED.
However[,] We modify the monetary award by limiting the grant of backwages to only three (3)
months in view of complainant’s very limited service which lasted only for one month and three
days.
1. Backwages - [₱]15,600.00

It should be pointed out at this juncture that SCEPTRE, is a single proprietorship. Being so, it 2. Separation Pay - 5,200.00
has no distinct and separate personality. It is owned by the late Roso T. Sabalones. After the
death of the owner, the property is supposed to be divided by the heirs and any claim against 3. 13th Month Pay - 583.34
the sole proprietorship is a claim against Roso T. Sabalones. After his death, the claims should
be instituted against the estate of Roso T. Sabalones. In short, the estate of the late Roso T.
[₱]21,383.34 Attorney's Fees - 2,138.33
Sabalones should have been impleaded as respondent of this case.

Complainant wanted to impress upon us that Sceptre was organized into another entity now Total [₱]23,521.67
called Royale Security Agency. There is however, no proof to this assertion. Likewise, there is

The appeal of respondent Royal (sic) Security Agency is hereby DISMISSED for lack of merit.
SO ORDERED.10
The NLRC partially affirmed LA Gutierrez’s May 11, 2005 Decision. It concurred with the latter’s
finding that the petitioner was illegally dismissed and the manner by which his separation pay
was computed, but modified the monetary award in the petitioner’s favor by reducing the amount
of his backwages from ₱95,600.00 to ₱15,600.00. The NLRC determined the petitioner’s
backwages as limited to three (3) months of his last monthly salary, considering that his
employment with Royale was only for a period for one (1) month and three (3) days, thus:11
On the other hand, while complainant is entitled to backwages, We are aware that his stint with
respondent Royal (sic) lasted only for one (1) month and three (3) days such that it is Our
considered view that his backwages should be limited to only three (3) months.
Backwages:
[₱]5,200.00 x 3 months = [₱]15,600.0012
The petitioner, on the other hand, did not appeal LA Gutierrez’s May 11, 2005 Decision but
opted to raise the validity of LA Gutierrez’s adverse findings with respect to piercing Royale’s
corporate personality and computation of his separation pay in his Reply to the respondents’
Memorandum of Appeal. As the filing of an appeal is the prescribed remedy and no aspect of
the decision can be overturned by a mere reply, the NLRC dismissed the petitioner’s efforts to
reverse LA Gutierrez’s disposition of these issues. Effectively, the petitioner had already waived
his right to question LA Gutierrez’s Decision when he failed to file an appeal within the
reglementary period. The NLRC held:
On the other hand, in complainant’s Reply to Respondent’s Appeal Memorandum he prayed that
the doctrine of piercing the veil of corporate fiction of respondent be applied so that his services
with Sceptre since 1976 [will not] be deleted. If complainant assails this particular finding in the
Labor Arbiter’s Decision, complainant should have filed an appeal and not seek a relief by
merely filing a Reply to Respondent’s Appeal Memorandum.13
Consequently, the petitioner elevated the NLRC’s November 30, 2005 Decision to the CA by
way of a Petition for Certiorari under Rule 65 of the Rules of Court. On the other hand, the
respondents filed no appeal from the NLRC’s finding that the petitioner was illegally dismissed.
The CA, in consideration of substantial justice and the jurisprudential dictum that an appealed
case is thrown open for the appellate court’s review, disagreed with the NLRC and proceeded to
review the evidence on record to determine if Royale is Sceptre’s alter ego that would warrant
the piercing of its corporate veil.14 According to the CA, errors not assigned on appeal may be
reviewed as technicalities should not serve as bar to the full adjudication of cases. Thus:
In Cuyco v. Cuyco, which We find application in the instant case, the Supreme Court held:
"In their Reply, petitioners alleged that their petition only raised the sole issue of interest on the
interest due, thus, by not filing their own petition for review, respondents waived their privilege to
bring matters for the Court’s review that [does] not deal with the sole issue raised.
Procedurally, the appellate court in deciding the case shall consider only the assigned errors,
however, it is equally settled that the Court is clothed with ample authority to review matters not
assigned as errors in an appeal, if it finds that their consideration is necessary to arrive at a just
disposition of the case."
122
Therefore, for full adjudication of the case, We have to primarily resolve the issue of whether the
doctrine of piercing the corporate veil be justly applied in order to determine petitioner’s length of
service with private respondents.15 (citations omitted)
Nonetheless, the CA ruled against the petitioner and found the evidence he submitted to support
his allegation that Royale and Sceptre are one and the same juridical entity to be wanting. The
CA refused to pierce Royale’s corporate mask as one of the "probative factors that would justify
the application of the doctrine of piercing the corporate veil is stock ownership by one or
common ownership of both corporations" and the petitioner failed to present clear and
convincing proof that Royale and Sceptre are commonly owned or controlled. The relevant
portions of the CA’s Decision state:
In the instant case, We find no evidence to show that Royale Security Agency, Inc. (hereinafter
"Royale"), a corporation duly registered with the Securities and Exchange Commission (SEC)
and Sceptre Security Agency (hereinafter "Sceptre"), a single proprietorship, are one and the
same entity.
Petitioner, who has been with Sceptre since 1976 and, as ruled by both the Labor Arbiter and
the NLRC, was illegally dismissed by Royale on October 1, 2003, alleged that in order to
circumvent labor laws, especially to avoid payment of money claims and the consideration on
the length of service of its employees, Royale was established as an alter ego or business
conduit of Sceptre. To prove his claim, petitioner declared that Royale is conducting business in
the same office of Sceptre, the latter being owned by the late retired Gen. Roso Sabalones, and
was managed by the latter’s daughter, Dr. Aida Sabalones-Tan; that two of Royale’s
incorporators are grandchildren [of] the late Gen. Roso Sabalones; that all the properties of
Sceptre are now owned by Royale, and that the officers and staff of both business
establishments are the same; that the heirs of Gen. Sabalones should have applied for
dissolution of Sceptre before the SEC before forming a new corporation.
On the other hand, private respondents declared that Royale was incorporated only on March
10, 2003 as evidenced by the Certificate of Incorporation issued by the SEC on the same date;
that Royale’s incorporators are Bruino M. Kuizon, Wilfredo Gracia K. Tan, Karen Therese S.
Tan, Cesar Antonio S. Tan II and [Gabeth] Maria K. Tan.
Settled is the tenet that allegations in the complaint must be duly proven by competent evidence
and the burden of proof is on the party making the allegation. Further, Section 1 of Rule 131 of
the Revised Rules of Court provides:
"SECTION 1. Burden of proof. – Burden of proof is the duty of a party to present evidence on
the facts in issue necessary to establish his claim or defense by the amount of evidence
required by law."
We believe that petitioner did not discharge the required burden of proof to establish his
allegations. As We see it, petitioner’s claim that Royale is an alter ego or business conduit of
Sceptre is without basis because aside from the fact that there is no common ownership of both
Royale and Sceptre, no evidence on record would prove that Sceptre, much less the late retired
Gen. Roso Sabalones or his heirs, has control or complete domination of Royale’s finances and
business transactions. Absence of this first element, coupled by petitioner’s failure to present
clear and convincing evidence to substantiate his allegations, would prevent piercing of the
corporate veil. Allegations must be proven by sufficient evidence. Simply stated, he who alleges
a fact has the burden of proving it; mere allegation is not evidence.16 (citations omitted)

By way of this Petition, the petitioner would like this Court to revisit the computation of his
backwages, claiming that the same should be computed from the time he was illegally dismissed
until the finality of this decision.17 The petitioner would likewise have this Court review and
examine anew the factual allegations and the supporting evidence to determine if the CA erred
in its refusal to pierce Royale’s corporate mask and rule that it is but a mere continuation or
successor of Sceptre. According to the petitioner, the erroneous computation of his separation
pay was due to the CA’s failure, as well as the NLRC and LA Gutierrez, to consider evidence
conclusively demonstrating that Royale and Sceptre are one and the same juridical entity. The
petitioner claims that since Royale is no more than Sceptre’s alter ego, it should recognize and
credit his length of service with Sceptre.18
The petitioner claimed that Royale and Sceptre are not separate legal persons for purposes of
computing the amount of his separation pay and other benefits under the Labor Code. The
piercing of Royale’s corporate personality is justified by several indicators that Royale was
incorporated for the sole purpose of defeating his right to security of tenure and circumvent
payment of his benefits to which he is entitled under the law: (i) Royale was holding office in the
same property used by Sceptre as its principal place of business; 19 (ii) Sceptre and Royal have
the same officers and employees; 20 (iii) on October 14, 1994, Roso, the sole proprietor of
Sceptre, sold to Aida, and her husband, Wilfredo Gracia K. Tan (Wilfredo),21 the property used
by Sceptre as its principal place of business; 22 (iv) Wilfredo is one of the incorporators of
Royale;23 (v) on May 3, 1999, Roso ceded the license to operate Sceptre issued by the
Philippine National Police to Aida;24 (vi) on July 28, 1999, the business name "Sceptre Security &
Detective Agency" was registered with the Department of Trade and Industry (DTI) under the
name of Aida;25 (vii) Aida exercised control over the affairs of Sceptre and Royale, as she was, in
fact, the one who dismissed the petitioner from employment; 26 (viii) Karen, the daughter of Aida,
was Sceptre’s Operation Manager and is one of the incorporators of Royale; 27 and (ix) Cesar
Tan II, the son of Aida was one of Sceptre’s officers and is one of the incorporators of Royale.28
In their Comment, the respondents claim that the petitioner is barred from questioning the
manner by which his backwages and separation pay were computed. Earlier, the petitioner
moved for the execution of the NLRC’s November 30, 2005 Decision 29 and the respondents paid
him the full amount of the monetary award thereunder shortly after the writ of execution was
issued.30 The respondents likewise maintain that Royale’s separate and distinct corporate
personality should be respected considering that the evidence presented by the petitioner fell
short of establishing that Royale is a mere alter ego of Sceptre.
The petitioner does not deny that he has received the full amount of backwages and separation
pay as provided under the NLRC’s November 30, 2005 Decision. 31 However, he claims that this
does not preclude this Court from modifying a decision that is tainted with grave abuse of
discretion or issued without jurisdiction.32
ISSUES
Considering the conflicting submissions of the parties, a judicious determination of their
respective rights and obligations requires this Court to resolve the following substantive issues:
a. Whether Royale’s corporate fiction should be pierced for the purpose of compelling it to
recognize the petitioner’s length of service with Sceptre and for holding it liable for the benefits
that have accrued to him arising from his employment with Sceptre; and
b. Whether the petitioner’s backwages should be limited to his salary for three (3) months.
OUR RULING
123
Because his receipt of the proceeds of the award under the NLRC’s November 30, 2005
Decision is qualified and without prejudice to the CA’s resolution of his petition
for certiorari, the petitioner is not barred from exercising his right to elevate the decision
of the CA to this Court.
Before this Court proceeds to decide this Petition on its merits, it is imperative to resolve the
respondents’ contention that the full satisfaction of the award under the NLRC’s November 30,
2005 Decision bars the petitioner from questioning the validity thereof. The respondents submit
that they had paid the petitioner the amount of ₱21,521.67 as directed by the NLRC and this
constitutes a waiver of his right to file an appeal to this Court.
The respondents fail to convince.
The petitioner’s receipt of the monetary award adjudicated by the NLRC is not absolute,
unconditional and unqualified. The petitioner’s May 3, 2007 Motion for Release contains a
reservation, stating in his prayer that: "it is respectfully prayed that the respondents and/or Great
Domestic Insurance Co. be ordered to RELEASE/GIVE the amount of ₱23,521.67 in favor of the
complainant TIMOTEO H. SARONA without prejudice to the outcome of the petition with the
CA."33
In Leonis Navigation Co., Inc., et al. v. Villamater, et al.,34 this Court ruled that the prevailing
party’s receipt of the full amount of the judgment award pursuant to a writ of execution issued by
the labor arbiter does not close or terminate the case if such receipt is qualified as without
prejudice to the outcome of the petition for certiorari pending with the CA.1avvphi1
Simply put, the execution of the final and executory decision or resolution of the NLRC shall
proceed despite the pendency of a petition for certiorari, unless it is restrained by the proper
court. In the present case, petitioners already paid Villamater’s widow, Sonia, the amount of
₱3,649,800.00, representing the total and permanent disability award plus attorney’s fees,
pursuant to the Writ of Execution issued by the Labor Arbiter. Thereafter, an Order was issued
declaring the case as "closed and terminated". However, although there was no motion for
reconsideration of this last Order, Sonia was, nonetheless, estopped from claiming that the
controversy had already reached its end with the issuance of the Order closing and terminating
the case. This is because the Acknowledgment Receipt she signed when she received
petitioners’ payment was without prejudice to the final outcome of the petition
for certiorari pending before the CA.35
The finality of the NLRC’s decision does not preclude the filing of a petition for certiorari under
Rule 65 of the Rules of Court. That the NLRC issues an entry of judgment after the lapse of ten
(10) days from the parties’ receipt of its decision36 will only give rise to the prevailing party’s right
to move for the execution thereof but will not prevent the CA from taking cognizance of a petition
for certiorari on jurisdictional and due process considerations.37 In turn, the decision rendered by
the CA on a petition for certiorari may be appealed to this Court by way of a petition for review
on certiorari under Rule 45 of the Rules of Court. Under Section 5, Article VIII of the
Constitution, this Court has the power to "review, revise, reverse, modify, or affirm on appeal
or certiorari as the law or the Rules of Court may provide, final judgments and orders of lower
courts in x x x all cases in which only an error or question of law is involved." Consistent with this
constitutional mandate, Rule 45 of the Rules of Court provides the remedy of an appeal
by certiorari from decisions, final orders or resolutions of the CA in any case, i.e., regardless of
the nature of the action or proceedings involved, which would be but a continuation of the
appellate process over the original case.38 Since an appeal to this Court is not an original and
independent action but a continuation of the proceedings before the CA, the filing of a petition

for review under Rule 45 cannot be barred by the finality of the NLRC’s decision in the same
way that a petition for certiorari under Rule 65 with the CA cannot.
Furthermore, if the NLRC’s decision or resolution was reversed and set aside for being issued
with grave abuse of discretion by way of a petition for certiorari to the CA or to this Court by way
of an appeal from the decision of the CA, it is considered void ab initio and, thus, had never
become final and executory.39
A Rule 45 Petition should be confined to questions of law. Nevertheless, this Court has
the power to resolve a question of fact, such as whether a corporation is a mere alter ego
of another entity or whether the corporate fiction was invoked for fraudulent or
malevolent ends, if the findings in assailed decision is not supported by the evidence on
record or based on a misapprehension of facts.
The question of whether one corporation is merely an alter ego of another is purely one of fact.
So is the question of whether a corporation is a paper company, a sham or subterfuge or
whether the petitioner adduced the requisite quantum of evidence warranting the piercing of the
veil of the respondent’s corporate personality.40
As a general rule, this Court is not a trier of facts and a petition for review on certiorari under
Rule 45 of the Rules of Court must exclusively raise questions of law. Moreover, if factual
findings of the NLRC and the LA have been affirmed by the CA, this Court accords them the
respect and finality they deserve. It is well-settled and oft-repeated that findings of fact of
administrative agencies and quasi-judicial bodies, which have acquired expertise because their
jurisdiction is confined to specific matters, are generally accorded not only respect, but finality
when affirmed by the CA. 41
Nevertheless, this Court will not hesitate to deviate from what are clearly procedural guidelines
and disturb and strike down the findings of the CA and those of the labor tribunals if there is a
showing that they are unsupported by the evidence on record or there was a patent
misappreciation of facts. Indeed, that the impugned decision of the CA is consistent with the
findings of the labor tribunals does not per se conclusively demonstrate the correctness thereof.
By way of exception to the general rule, this Court will scrutinize the facts if only to rectify the
prejudice and injustice resulting from an incorrect assessment of the evidence presented.
A resolution of an issue that has supposedly become final and executory as the petitioner
only raised it in his reply to the respondents’ appeal may be revisited by the appellate
court if such is necessary for a just disposition of the case.
As above-stated, the NLRC refused to disturb LA Gutierrez’s denial of the petitioner’s plea to
pierce Royale’s corporate veil as the petitioner did not appeal any portion of LA Gutierrez’s May
11, 2005 Decision.
In this respect, the NLRC cannot be accused of grave abuse of discretion. Under Section 4(c),
Rule VI of the NLRC Rules,42 the NLRC shall limit itself to reviewing and deciding only the issues
that were elevated on appeal. The NLRC, while not totally bound by technical rules of
procedure, is not licensed to disregard and violate the implementing rules it implemented. 43
Nonetheless, technicalities should not be allowed to stand in the way of equitably and
completely resolving the rights and obligations of the parties. Technical rules are not binding in
labor cases and are not to be applied strictly if the result would be detrimental to the working
man.44 This Court may choose not to encumber itself with technicalities and limitations
consequent to procedural rules if such will only serve as a hindrance to its duty to decide cases
124
judiciously and in a manner that would put an end with finality to all existing conflicts between
the parties.
Royale is a continuation or successor of Sceptre.
A corporation is an artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or incident
to its existence. It has a personality separate and distinct from the persons composing it, as well
as from any other legal entity to which it may be related. This is basic.45
Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled
only when it becomes a shield for fraud, illegality or inequity committed against third persons.46
Hence, any application of the doctrine of piercing the corporate veil should be done with caution.
A court should be mindful of the milieu where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an injustice that was never unintended may
result from an erroneous application.47
Whether the separate personality of the corporation should be pierced hinges on obtaining facts
appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or
when necessary in the interest of justice. After all, the concept of corporate entity was not meant
to promote unfair objectives.48
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of
an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.49
In this regard, this Court finds cogent reason to reverse the CA’s findings. Evidence abound
showing that Royale is a mere continuation or successor of Sceptre and fraudulent objectives
are behind Royale’s incorporation and the petitioner’s subsequent employment therein. These
are plainly suggested by events that the respondents do not dispute and which the CA, the
NLRC and LA Gutierrez accept as fully substantiated but misappreciated as insufficient to
warrant the use of the equitable weapon of piercing.
As correctly pointed out by the petitioner, it was Aida who exercised control and supervision over
the affairs of both Sceptre and Royale. Contrary to the submissions of the respondents that
Roso had been the only one in sole control of Sceptre’s finances and business affairs, Aida took
over as early as 1999 when Roso assigned his license to operate Sceptre on May 3, 1999. 50 As
further proof of Aida’s acquisition of the rights as Sceptre’s sole proprietor, she caused the
registration of the business name "Sceptre Security & Detective Agency" under her name with
the DTI a few months after Roso abdicated his rights to Sceptre in her favor. 51 As far as Royale
is concerned, the respondents do not deny that she has a hand in its management and
operation and possesses control and supervision of its employees, including the petitioner. As
the petitioner correctly pointed out, that Aida was the one who decided to stop giving any

assignments to the petitioner and summarily dismiss him is an eloquent testament of the power
she wields insofar as Royale’s affairs are concerned. The presence of actual common control
coupled with the misuse of the corporate form to perpetrate oppressive or manipulative conduct
or evade performance of legal obligations is patent; Royale cannot hide behind its corporate
fiction.
Aida’s control over Sceptre and Royale does not, by itself, call for a disregard of the corporate
fiction. There must be a showing that a fraudulent intent or illegal purpose is behind the exercise
of such control to warrant the piercing of the corporate veil. 52 However, the manner by which the
petitioner was made to resign from Sceptre and how he became an employee of Royale suggest
the perverted use of the legal fiction of the separate corporate personality.lavvphil It is
undisputed that the petitioner tendered his resignation and that he applied at Royale at the
instance of Karen and Cesar and on the impression they created that these were necessary for
his continued employment. They orchestrated the petitioner’s resignation from Sceptre and
subsequent employment at Royale, taking advantage of their ascendancy over the petitioner
and the latter’s lack of knowledge of his rights and the consequences of his actions.
Furthermore, that the petitioner was made to resign from Sceptre and apply with Royale only to
be unceremoniously terminated shortly thereafter leads to the ineluctable conclusion that there
was intent to violate the petitioner’s rights as an employee, particularly his right to security of
tenure. The respondents’ scheme reeks of bad faith and fraud and compassionate justice
dictates that Royale and Sceptre be merged as a single entity, compelling Royale to credit and
recognize the petitioner’s length of service with Sceptre. The respondents cannot use the legal
fiction of a separate corporate personality for ends subversive of the policy and purpose behind
its creation53 or which could not have been intended by law to which it owed its being.54
For the piercing doctrine to apply, it is of no consequence if Sceptre is a sole proprietorship. As
ruled in Prince Transport, Inc., et al. v. Garcia, et al.,55 it is the act of hiding behind the separate
and distinct personalities of juridical entities to perpetuate fraud, commit illegal acts, evade one’s
obligations that the equitable piercing doctrine was formulated to address and prevent:
A settled formulation of the doctrine of piercing the corporate veil is that when two business
enterprises are owned, conducted and controlled by the same parties, both law and equity will,
when necessary to protect the rights of third parties, disregard the legal fiction that these two
entities are distinct and treat them as identical or as one and the same. In the present case, it
may be true that Lubas is a single proprietorship and not a corporation. However, petitioners’
attempt to isolate themselves from and hide behind the supposed separate and distinct
personality of Lubas so as to evade their liabilities is precisely what the classical doctrine of
piercing the veil of corporate entity seeks to prevent and remedy.56
Also, Sceptre and Royale have the same principal place of business. As early as October 14,
1994, Aida and Wilfredo became the owners of the property used by Sceptre as its principal
place of business by virtue of a Deed of Absolute Sale they executed with Roso. 57 Royale,
shortly after its incorporation, started to hold office in the same property. These, the respondents
failed to dispute.
The respondents do not likewise deny that Royale and Sceptre share the same officers and
employees. Karen assumed the dual role of Sceptre’s Operation Manager and incorporator of
Royale. With respect to the petitioner, even if he has already resigned from Sceptre and has
been employed by Royale, he was still using the patches and agency cloths of Sceptre during
his assignment at Highlight Metal.
Royale also claimed a right to the cash bond which the petitioner posted when he was still with
Sceptre. If Sceptre and Royale are indeed separate entities, Sceptre should have released the
125
petitioner’s cash bond when he resigned and Royale would have required the petitioner to post a
new cash bond in its favor.
Taking the foregoing in conjunction with Aida’s control over Sceptre’s and Royale’s business
affairs, it is patent that Royale was a mere subterfuge for Aida. Since a sole proprietorship does
not have a separate and distinct personality from that of the owner of the enterprise, the latter is
personally liable. This is what she sought to avoid but cannot prosper.
Effectively, the petitioner cannot be deemed to have changed employers as Royale and Sceptre
are one and the same. His separation pay should, thus, be computed from the date he was hired
by Sceptre in April 1976 until the finality of this decision. Based on this Court’s ruling
in Masagana Concrete Products, et al. v. NLRC, et al.,58 the intervening period between the day
an employee was illegally dismissed and the day the decision finding him illegally dismissed
becomes final and executory shall be considered in the computation of his separation pay as a
period of "imputed" or "putative" service:
Separation pay, equivalent to one month's salary for every year of service, is awarded as an
alternative to reinstatement when the latter is no longer an option. Separation pay is computed
from the commencement of employment up to the time of termination, including the imputed
service for which the employee is entitled to backwages, with the salary rate prevailing at the
end of the period of putative service being the basis for computation.59
It is well-settled, even axiomatic, that if reinstatement is not possible, the period covered
in the computation of backwages is from the time the employee was unlawfully
terminated until the finality of the decision finding illegal dismissal.
With respect to the petitioner’s backwages, this Court cannot subscribe to the view that it should
be limited to an amount equivalent to three (3) months of his salary. Backwages is a remedy
affording the employee a way to recover what he has lost by reason of the unlawful
dismissal.60 In awarding backwages, the primordial consideration is the income that should have
accrued to the employee from the time that he was dismissed up to his reinstatement61 and the
length of service prior to his dismissal is definitely inconsequential.
As early as 1996, this Court, in Bustamante, et al. v. NLRC, et al.,62 clarified in no uncertain
terms that if reinstatement is no longer possible, backwages should be computed from the time
the employee was terminated until the finality of the decision, finding the dismissal unlawful.
Therefore, in accordance with R.A. No. 6715, petitioners are entitled on their full backwages,
inclusive of allowances and other benefits or their monetary equivalent, from the time their actual
compensation was withheld on them up to the time of their actual reinstatement.
As to reinstatement of petitioners, this Court has already ruled that reinstatement is no longer
feasible, because the company would be adjustly prejudiced by the continued employment of
petitioners who at present are overage, a separation pay equal to one-month salary granted to
them in the Labor Arbiter's decision was in order and, therefore, affirmed on the Court's decision
of 15 March 1996. Furthermore, since reinstatement on this case is no longer feasible, the
amount of backwages shall be computed from the time of their illegal termination on 25
June 1990 up to the time of finality of this decision.63 (emphasis supplied)
A further clarification was made in Javellana, Jr. v. Belen:64
Article 279 of the Labor Code, as amended by Section 34 of Republic Act 6715 instructs:

Art. 279. Security of Tenure. - In cases of regular employment, the employer shall not terminate
the services of an employee except for a just cause or when authorized by this Title. An
employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of
seniority rights and other privileges and to his full backwages, inclusive of allowances, and to his
other benefits or their monetary equivalent computed from the time his compensation was
withheld from him up to the time of his actual reinstatement.
Clearly, the law intends the award of backwages and similar benefits to accumulate past the
date of the Labor Arbiter's decision until the dismissed employee is actually reinstated. But if, as
in this case, reinstatement is no longer possible, this Court has consistently ruled that
backwages shall be computed from the time of illegal dismissal until the date the decision
becomes final.65 (citation omitted)
In case separation pay is awarded and reinstatement is no longer feasible, backwages shall be
computed from the time of illegal dismissal up to the finality of the decision should separation
pay not be paid in the meantime. It is the employee’s actual receipt of the full amount of his
separation pay that will effectively terminate the employment of an illegally dismissed
employee.66 Otherwise, the employer-employee relationship subsists and the illegally dismissed
employee is entitled to backwages, taking into account the increases and other benefits,
including the 13th month pay, that were received by his co-employees who are not
dismissed.67 It is the obligation of the employer to pay an illegally dismissed employee or worker
the whole amount of the salaries or wages, plus all other benefits and
bonuses and general increases, to which he would have been normally entitled had he not been
dismissed and had not stopped working.68
In fine, this Court holds Royale liable to pay the petitioner backwages to be computed from his
dismissal on October 1, 2003 until the finality of this decision. Nonetheless, the amount received
by the petitioner from the respondents in satisfaction of the November 30, 2005 Decision shall
be deducted accordingly.
Finally, moral damages and exemplary damages at ₱25,000.00 each as indemnity for the
petitioner’s dismissal, which was tainted by bad faith and fraud, are in order. Moral damages
may be recovered where the dismissal of the employee was tainted by bad faith or fraud, or
where it constituted an act oppressive to labor, and done in a manner contrary to morals, good
customs or public policy while exemplary damages are recoverable only if the dismissal was
done in a wanton, oppressive, or malevolent manner.69
WHEREFORE, premises considered, the Petition is hereby GRANTED. We REVERSE and SET
ASIDE the CA’s May 29, 2008 Decision in C.A.-G.R. SP No. 02127 and order the respondents
to pay the petitioner the following minus the amount of (₱23,521.67) paid to the petitioner in
satisfaction of the NLRC’s November 30, 2005 Decision in NLRC Case No. V-000355-05:
a) full backwages and other benefits computed from October 1, 2003 (the date Royale illegally
dismissed the petitioner) until the finality of this decision;
b) separation pay computed from April 1976 until the finality of this decision at the rate of one
month pay per year of service;
c) ten percent (10%) attorney’s fees based on the total amount of the awards under (a) and (b)
above;
d) moral damages of Twenty-Five Thousand Pesos (₱25,000.00); and
126
e) exemplary damages of Twenty-Five Thousand Pesos (₱25,000.00).
This case is REMANDED to the labor arbiter for computation of the separation pay, backwages,
and other monetary awards due the petitioner.
SO ORDERED.
SECOND DIVISION
G.R. No. 147993             July 21, 2006
ENRIQUEZ SECURITY SERVICES, INC., petitioner,
vs.
VICTOR A. CABOTAJE, respondent.
DECISION
CORONA, J.:
Sometime in January 1979, respondent Victor A. Cabotaje was employed as a security guard by
Enriquez Security and Investigation Agency (ESIA). On November 13, 1985, petitioner Enriquez
Security Services, Inc. (ESSI) was incorporated. Respondent continued to work as security
guard in petitioner’s agency.
On reaching the age of 60 in July 1997,1 respondent applied for retirement.
Petitioner acknowledged that respondent was entitled to retirement benefits but opposed his
claim that the computation of such benefits must be reckoned from January 1979 when he
started working for ESIA. It claimed that the benefits must be computed only from November 13,
1985 when ESSI was incorporated.
Respondent consequently filed a complaint in the National Labor Relations Commission (NLRC)
seeking the payment of retirement benefits under Republic Act No. (RA) 7641, otherwise known
as the Retirement Pay Law.2
On January 15, 1999, labor arbiter Eduardo Carpio decided in respondent’s favor:
Complainant is entitled to retirement pay. This entitlement was not denied by respondents. xxx
The computation of this benefits shall cover the entire period of his employment from January
1979 up to July 16, 1997 based on his latest monthly salary of P5,383.15 per the payroll sheet
submitted by respondents. While respondents claim that respondent corporation was merely
registered with the DOTC on November 13, 1985, they did not deny however that complainant
was an employee of the then Enriquez Security and Investigation Agency, and that
complainant’s services with the said security agency up to the present respondent corporation
was uninterrupted. The obligation of the new company involves not only to absorb the workers of
the dissolved company, but also to include the length of service earned by the absorbed
employee with their former employer as well. To rule otherwise would be manifestly less than
fair, certainly less than just and equitable.
xxx       xxx       xxx
WHEREFORE, judgment is hereby rendered ordering respondents to pay complainant the grand
total amount of P228,581.00 representing his retirement benefits and other money claims.

SO ORDERED.3
On appeal, the NLRC set aside the labor arbiter’s award of one-month salary for every year of
service for being excessive. It ruled that under RA 7641, respondent Cabotaje was entitled to
retirement pay equivalent only to one-half month salary for every year of service. Thus:
WHEREFORE, the assailed decision is hereby set aside and a new one entered ordering
respondents to pay complainant the amount of P76,710.60 representing his retirement benefits.
SO ORDERED.4
On March 15, 2000, the NLRC denied petitioner’s motion for reconsideration.5
On May 25, 2000, petitioner filed a special civil action for certiorari6 with the Court of Appeals.
On September 26, 2000, the appellate court affirmed the NLRC decision.7 It also denied the
motion for reconsideration on May 8, 2001.8
Hence, this petition for review on certiorari9 on the following issues:
1. [w]hether or not the Retirement [Pay] Law has retroactive effect.
2. [w]hether the whole 5 days service incentive leave or just a portion thereof equivalent to 1/12
should be included in the ½ month salary for purposes of computing the retirement pay.
3. [w]hether or not the length of service of a retired employee in a dissolved company (his former
employer) should be included in his length of service with his last employer for purposes of
computing the retirement pay.10
We find no merit in the petition.
First. Petitioner’s contention that RA 7641 cannot be applied retroactively has long been settled
in the Guidelines for Effective Implementation of RA 7641 issued on October 24, 1996 by the
Department of Labor and Employment. Paragraph B of the guidelines provides:
In reckoning the length of service, the period of employment with the same employer before the
effectivity date of the law on January 7, 1993 should be included.
Thus, in Rufina Patis Factory v. Lucas, Sr.,11 we held:
RA 7641 is undoubtedly a social legislation. The law has been enacted as a labor protection
measure and as a curative statute that – absent a retirement plan devised by, an agreement
with, or a voluntary grant from, an employer – can respond, in part at least, to the financial well-
being of workers during their twilight years soon following their life of labor. There should be little
doubt about the fact that the law can apply to labor contracts still existing at the time the
statute has taken effect, and that its benefits can be reckoned not only from the date of
the law’s enactment but retroactively to the time said employment contracts have
started. (emphasis ours)
Second. Petitioner’s insistence that only 1/12 of the service incentive leave (SIL) should be
included in the computation of the retirement benefit has no basis. Section 1, RA 7641 provides:
x x x Unless the parties provide for broader inclusions, the term one-half (1/2) month salary shall
mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of
not more than five (5) days of service incentive leave. x x x
127
Section 5.2, Rule II of the Implementing Rules of Book VI of the Labor Code further clarifies
what comprises the "1/2 month salary" due a retiring employee:
5.2 Components of One-half (1/2) Month Salary. – For the purpose of determining the minimum
retirement pay due an employee under this Rule, the term "one-half month salary" shall include
all the following:
(a) Fifteen (15) days salary of the employee based on his latest salary rate. x x x;
(b) The cash equivalent of not more than five (5) days of service incentive leave;
(c) One-twelfth of the 13th month pay due an employee;
(d) All other benefits that the employer and employee may agree upon that should be included in
the computation of the employee’s retirement pay.
The foregoing rules are clear that the whole 5 days of SIL are included in the computation of a
retiring employees’ pay.
Third. It is a well-entrenched doctrine that the Supreme Court does not pass upon questions of
fact in an appeal by certiorari under Rule 45. 12 It is not our function to assess and evaluate the
evidence all over again13 where the findings of the quasi-judicial agency and the appellate court
on the matter coincide.
The consistent rulings of the labor arbiter, the NLRC and the appellate court should be
respected and petitioner’s veil of corporate fiction should likewise be pierced. These are based
on the following uncontroverted facts: (1) respondent worked with ESIA and petitioner ESSI; (2)
his employment with both security agencies was continuous and uninterrupted; (3) both
agencies were owned by the Enriquez family and (4) petitioner ESSI maintained its office in the
same place where ESIA previously held office.14
The attempt to make the security agencies appear as two separate entities, when in reality they
were but one, was a devise to defeat the law and should not be permitted. Although respect for
corporate personality is the general rule, there are exceptions. In appropriate cases, the veil of
corporate fiction may be pierced as when it is used as a means to perpetrate a social injustice or
as a vehicle to evade obligations. Petitioner was thus correctly ordered to pay respondent’s
retirement under RA 7641, computed from January 1979 up to the time he applied for retirement
in July 1997.
WHEREFORE, the petition is hereby DENIED. Theassailed decision and resolution of the Court
of Appeals are AFFIRMED.
Costs against petitioner.
SO ORDERED.
SECOND DIVISION
G.R. No. 89561 September 13, 1990
BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO,
BERTILLA C. RADA, MARIETTA C. ABAÑEZ, LEOVINA C. JALBUENA and SANTIAGO M.
RIVERA, petitioners,
vs.

COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS
MANUFACTURING CO., INC., respondents.
Edmundo T. Zepeda for petitioners.
Martin M. De Guzman for respondent BORMAHECO, Inc.
Renato J. Robles for P.M. Parts Manufacturing Co., Inc.
REGALADO, J.:
This is a petition to review the decision of respondent Court of Appeals, dated August 3, 1989, in
CA-GR CV No. 15412, entitled "Buenaflor M. Castillo Umali, et al. vs. Philippine Machinery
Parts Manufacturing Co., Inc., et al.,"  1 the dispositive portion whereof provides:
WHEREFORE, viewed in the light of the entire record, the judgment appealed from must be, as
it is hereby REVERSED. In lieu thereof, a judgment is hereby rendered-
1) Dismissing the complaint, with cost against plaintiffs;
2) Ordering plaintiffs-appellees to vacate the subject properties; and
3) Ordering plaintiffs-appellees to pay upon defendants' counterclaims:
a) To defendant-appellant PM Parts: (i) damages consisting of the value of the fruits in the
subject parcels of land of which they were deprived in the sum of P26,000.00 and (ii) attorney's
fees of P15,000.00
b) To defendant-appellant Bormaheco: (i) expenses of litigation in the amount of P5,000.00 and
(ii) attorney's fees of P15,000.00.
SO ORDERED.
The original complaint for annulment of title filed in the court a quo by herein petitioners included
as party defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts),
Insurance Corporation of the Philippines (ICP), Bormaheco, Inc., (Bormaheco) and Santiago M.
Rivera (Rivera). A Second Amended Complaint was filed, this time impleading Santiago M.
Rivera as party plaintiff.
During the pre-trial conference, the parties entered into the following stipulation of facts:
As between all parties: Plaintiff Buenaflor M. Castillo is the judicial administratrix of the estate of
Felipe Castillo in Special Proceeding No. 4053, pending before Branch IX, CFI of Quezon (per
Exhibit A) which intestate proceedings was instituted by Mauricia Meer Vda. de Castillo, the
previous administratrix of the said proceedings prior to 1970 (per exhibits A-1 and A-2) which
case was filed in Court way back in 1964;
b) The four (4) parcels of land described in paragraph 3 of the Complaint were originally covered
by TCT No. T-42104 and Tax Dec. No. 14134 with assessed value of P3,100.00; TCT No. T
32227 and Tax Dec. No. 14132, with assessed value of P5,130,00; TCT No. T-31762 and Tax
Dec. No. 14135, with assessed value of P6,150.00; and TCT No. T-42103 with Tax Dec. No.
14133, with assessed value of P3,580.00 (per Exhibits A-2 and B, B-1 to B-3 C, C-1 -to C3
128
c) That the above-enumerated four (4) parcels of land were the subject of the Deed of Extra-
Judicial Partition executed by the heirs of Felipe Castillo (per Exhibit D) and by virtue thereof the
titles thereto has (sic) been cancelled and in lieu thereof, new titles in the name of Mauricia Meer
Vda. de Castillo and of her children, namely: Buenaflor, Bertilla, Victoria, Marietta and Leovina,
all surnamed Castillo has (sic) been issued, namely: TCT No. T-12113 (Exhibit E ); TCT No. T-
13113 (Exhibit F); TCT No. T-13116 (Exhibit G ) and TCT No. T13117 (Exhibit H )
d) That mentioned parcels of land were submitted as guaranty in the Agreement of Counter-
Guaranty with Chattel-Real Estate Mortgage executed on 24 October 1970 between Insurance
Corporation of the Philippines and Slobec Realty Corporation represented by Santiago Rivera
(Exhibit 1);
e) That based on the Certificate of Sale issued by the Sheriff of the Province of Quezon in favor
of Insurance Corporation of the Philippines it was able to transfer to itself the titles over the lots
in question, namely: TCT No. T-23705 (Exhibit M), TCT No. T 23706 (Exhibit N ), TCT No. T-
23707 (Exhibit 0) and TCT No. T 23708 (Exhibit P);
f) That on 10 April 1975, the Insurance Corporation of the Philippines sold to PM Parts the
immovables in question (per Exhibit 6 for PM Parts) and by reason thereof, succeeded in
transferring unto itself the titles over the lots in dispute, namely: per TCT No. T-24846 (Exhibit
Q ), per TCT No. T-24847 (Exhibit R ), TCT No. T-24848 (Exhibit), TCT No. T-24849 (Exhibit T );
g) On 26 August l976, Mauricia Meer Vda. de Castillo' genther letter to Modesto N. Cervantes
stating that she and her children refused to comply with his demands (Exhibit V-2);
h) That from at least the months of October, November and December 1970 and January 1971,
Modesto N. Cervantes was the Vice-President of Bormaheco, Inc. later President thereof, and
also he is one of the Board of Directors of PM Parts; on the other hand, Atty. Martin M. De
Guzman was the legal counsel of Bormaheco, Inc., later Executive Vice-President thereof, and
who also is the legal counsel of Insurance Corporation of the Philippines and PM Parts; that
Modesto N. Cervantes served later on as President of PM Parts, and that Atty. de Guzman was
retained by Insurance Corporation of the Philippines specifically for foreclosure purposes only;
i) Defendant Bormaheco, Inc. on November 25, 1970 sold to Slobec Realty and Development,
Inc., represented by Santiago Rivera, President, one (1) unit Caterpillar Tractor D-7 with Serial
No. 281114 evidenced by a contract marked Exhibit J and Exhibit I for Bormaheco, Inc.;
j) That the Surety Bond No. 14010 issued by co-defendant ICP was likewise secured by an
Agreement with Counter-Guaranty with Real Estate Mortgage executed by Slobec Realty &
Development, Inc., Mauricia Castillo Meer, Buenaflor Castillo, Bertilla Castillo, Victoria Castillo,
Marietta Castillo and Leovina Castillo, as mortgagors in favor of ICP which document was
executed and ratified before notary public Alberto R. Navoa of the City of Manila on October
24,1970;
k) That the property mortgaged consisted of four (4) parcels of land situated in Lucena City and
covered by TCT Nos. T-13114, T13115,
T-13116 and T-13117 of the Register of Deeds of Lucena City;
l) That the tractor sold by defendant Bormaheco, Inc. to Slobec Realty & Development, Inc. was
delivered to Bormaheco, Inc. on or about October 2,1973, by Mr. Menandro Umali for purposes
of repair;

m) That in August 1976, PM Parts notified Mrs. Mauricia Meer about its ownership and the
assignment of Mr. Petronilo Roque as caretaker of the subject property;
n) That plaintiff and other heirs are harvest fruits of the property (daranghita) which is worth no
less than Pl,000.00 per harvest.
As between plaintiffs and
defendant Bormaheco, Inc
o) That on 25 November 1970, at Makati, Rizal, Same Rivera, in representation of the Slobec
Realty & Development Corporation executed in favor of Bormaheco, Inc., represented by its
Vice-President Modesto N. Cervantes a Chattel Mortgage concerning one unit model CAT D7
Caterpillar Crawler Tractor as described therein as security for the payment in favor of the
mortgagee of the amount of P180,000.00 (per Exhibit K) that Id document was superseded by
another chattel mortgage dated January 23, 1971 (Exhibit 15);
p) On 18 December 1970, at Makati, Rizal, the Bormaheco, Inc., represented by its Vice-
President Modesto Cervantes and Slobec Realty Corporation represented by Santiago Rivera
executed the sales agreement concerning the sale of one (1) unit Model CAT D7 Caterpillar
Crawler Tractor as described therein for the amount of P230,000.00 (per Exhibit J) which
document was superseded by the Sales Agreement dated January 23,1971 (Exhibit 16);
q) Although it appears on the document entitled Chattel Mortgage (per Exhibit K) that it was
executed on 25 November 1970, and in the document entitled Sales Agreement (per Exhibit J)
that it was executed on 18 December 1970, it appears in the notarial register of the notary public
who notarized them that those two documents were executed on 11 December 1970. The
certified xerox copy of the notarial register of Notary Public Guillermo Aragones issued by the
Bureau of Records Management is hereto submitted as Exhibit BB That said chattel mortgage
was superseded by another document dated January 23, 1971;
r) That on 23 January 1971, Slobec Realty Development Corporation, represented by Santiago
Rivera, received from Bormaheco, Inc. one (1) tractor Caterpillar Model D-7 pursuant to Invoice
No. 33234 (Exhibits 9 and 9-A, Bormaheco, Inc.) and delivery receipt No. 10368 (per Exhibits 10
and 10-A for Bormaheco, Inc
s) That on 28 September 1973, Atty. Martin M. de Guzman, as counsel of Insurance Corporation
of the Philippines purchased at public auction for said corporation the four (4) parcels of land
subject of tills case (per Exhibit L), and which document was presented to the Register of Deeds
on 1 October 1973;
t) Although it appears that the realties in issue has (sic) been sold by Insurance Corporation of
the Philippines in favor of PM Parts on 1 0 April 1975, Modesto N. Cervantes, formerly Vice-
President and now President of Bormaheco, Inc., sent his letter dated 9 August 1976 to Mauricia
Meer Vda. de Castillo (Exhibit V), demanding that she and her children should vacate the
premises;
u) That the Caterpillar Crawler Tractor Model CAT D-7 which was received by Slobec Realty
Development Corporation was actually reconditioned and repainted. " 2
We cull the following antecedents from the decision of respondent Court of Appeals:
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo
family are the owners of a parcel of land located in Lucena City which was given as security for
a loan from the Development Bank of the Philippines. For their failure to pay the amortization,
129
foreclosure of the said property was about to be initiated. This problem was made known to
Santiago Rivera, who proposed to them the conversion into subdivision of the four (4) parcels of
land adjacent to the mortgaged property to raise the necessary fund. The Idea was accepted by
the Castillo family and to carry out the project, a Memorandum of Agreement (Exh. U p. 127,
Record) was executed by and between Slobec Realty and Development, Inc., represented by its
President Santiago Rivera and the Castillo family. In this agreement, Santiago Rivera obliged
himself to pay the Castillo family the sum of P70,000.00 immediately after the execution of the
agreement and to pay the additional amount of P400,000.00 after the property has been
converted into a subdivision. Rivera, armed with the agreement, Exhibit U , approached Mr.
Modesto Cervantes, President of defendant Bormaheco, and proposed to purchase from
Bormaheco two (2) tractors Model D-7 and D-8 Subsequently, a Sales Agreement was executed
on December 28,1970 (Exh. J, p. 22, Record).
On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development, Inc., represented
by its President, Santiago Rivera, executed a Sales Agreement over one unit of Caterpillar
Tractor D-7 with Serial No. 281114, as evidenced by the contract marked Exhibit '16'. As shown
by the contract, the price was P230,000.00 of which P50,000.00 was to constitute a down
payment, and the balance of P180,000.00 payable in eighteen monthly installments. On the
same date, Slobec, through Rivera, executed in favor of Bormaheco a Chattel Mortgage (Exh. K,
p. 29, Record) over the said equipment as security for the payment of the aforesaid balance of
P180,000.00. As further security of the aforementioned unpaid balance, Slobec obtained from
Insurance Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of the Phil.)
as surety and Slobec as principal, in favor of Bormaheco, as borne out by Exhibit '8' (p. 111,
Record). The aforesaid surety bond was in turn secured by an Agreement of Counter-Guaranty
with Real Estate Mortgage (Exhibit I, p. 24, Record) executed by Rivera as president of Slobec
and Mauricia Meer Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria
Castillo, Marietta Castillo and Leovina Castillo Jalbuena, as mortgagors and Insurance
Corporation of the Philippines (ICP) as mortgagee. In this agreement, ICP guaranteed the
obligation of Slobec with Bormaheco in the amount of P180,000.00. In giving the bond, ICP
required that the Castillos mortgage to them the properties in question, namely, four parcels of
land covered by TCTs in the name of the aforementioned mortgagors, namely TCT Nos. 13114,
13115, 13116 and 13117 all of the Register of Deeds for Lucena City.
On the occasion of the execution on January 23, 1971, of the Sales Agreement Exhibit '16',
Slobec, represented by Rivera received from Bormaheco the subject matter of the said Sales
Agreement, namely, the aforementioned tractor Caterpillar Model D-7 as evidenced by Invoice
No. 33234 (Exhs. 9 and 9-A, p. 112, Record) and Delivery Receipt No. 10368 (Exhs. 10 and 10-
A, p. 113). This tractor was known by Rivera to be a reconditioned and repainted one
[Stipulation of Facts, Pre-trial Order, par. (u)].
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement (Exh.
1), the properties of the Castillos were foreclosed by ICP As the highest bidder with a bid of
P285,212.00, a Certificate of Sale was issued by the Provincial Sheriff of Lucena City and
Transfer Certificates of Title over the subject parcels of land were issued by the Register of
Deeds of Lucena City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T-
23708 (Exhs. M to P, pp. 38-45). The mortgagors had one (1) year from the date of the
registration of the certificate of sale, that is, until October 1, 1974, to redeem the property, but
they failed to do so. Consequently, ICP consolidated its ownership over the subject parcels of
land through the requisite affidavit of consolidation of ownership dated October 29, 1974, as
shown in Exh. '22'(p. 138, Rec.). Pursuant thereto, a Deed of Sale of Real Estate covering the
subject properties was issued in favor of ICP (Exh. 23, p. 139, Rec.).

On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts
Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said conveyance, PM
Parts transferred unto itself the titles over the lots in dispute so that said parcels of land are now
covered by TCT Nos. T-24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49, Rec.).
Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated August
9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to
vacate the subject property, who (Mrs. Castillo) in turn sent her reply expressing her refusal to
comply with his demands.
On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor M.
Castillo Umali as the appointed administratrix of the properties in question filed an action for
annulment of title before the then Court of First Instance of Quezon and docketed thereat as
Civil Case No. 8085. Thereafter, they filed an Amended Complaint on January 10, 1980 (p. 444,
Record). On July 20, 1983, plaintiffs filed their Second Amended Complaint, impleading
Santiago M. Rivera as a party plaintiff (p. 706, Record). They contended that all the
aforementioned transactions starting with the Agreement of Counter-Guaranty with Real Estate
Mortgage (Exh. I), Certificate of Sale (Exh. L) and the Deeds of Authority to Sell, Sale and the
Affidavit of Consolidation of Ownership (Annexes F, G, H, I) as well as the Deed of Sale
(Annexes J, K, L and M) are void for being entered into in fraud and without the consent and
approval of the Court of First Instance of Quezon, (Branch IX) before whom the administration
proceedings has been pending. Plaintiffs pray that the four (4) parcels of land subject hereof be
declared as owned by the estate of the late Felipe Castillo and that all Transfer Certificates of
Title Nos. 13114,13115,13116,13117, 23705, 23706, 23707, 23708, 24846, 24847, 24848 and
24849 as well as those appearing as encumbrances at the back of the certificates of title
mentioned be declared as a nullity and defendants to pay damages and attorney's fees (pp.
71071 1, Record).
In their amended answer, the defendants controverted the complaint and alleged, by way of
affirmative and special defenses that the complaint did not state facts sufficient to state a cause
of action against defendants; that plaintiffs are not entitled to the reliefs demanded; that plaintiffs
are estopped or precluded from asserting the matters set forth in the Complaint; that plaintiffs
are guilty of laches in not asserting their alleged right in due time; that defendant PM Parts is an
innocent purchaser for value and relied on the face of the title before it bought the subject
property (p. 744, Record). 3
After trial, the court a quo rendered judgment, with the following decretal portion:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants,
declaring the following documents:
Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage dated October 24,1970
(Exhibit 1);
Sales Agreement dated December 28, 1970 (Exhibit J)
Chattel Mortgage dated November 25, 1970 (Exhibit K)
Sales Agreement dated January 23, 1971 (Exhibit 16);
Chattel Mortgage dated January 23, 1971 (Exhibit 17);
Certificate of Sale dated September 28, 1973 executed by the Provincial Sheriff of Quezon in
favor of Insurance Corporation of the Philippines (Exhibit L);
130
null and void for being fictitious, spurious and without consideration. Consequently, Transfer
Certificates of Title Nos. T 23705, T-23706, T23707 and T-23708 (Exhibits M, N, O and P)
issued in the name of Insurance Corporation of the Philippines, are likewise null and void.
The sale by Insurance Corporation of the- Philippines in favor of defendant Philippine Machinery
Parts Manufacturing Co., Inc., over Id four (4) parcels of land and Transfer Certificates of Title
Nos. T 24846, T-24847, T-24848 and T-24849 subsequently issued by virtue of said sale in the
name of Philippine Machinery Parts Manufacturing Co., Inc., are similarly declared null and void,
and the Register of Deeds of Lucena City is hereby directed to issue, in lieu thereof, transfer
certificates of title in the names of the plaintiffs, except Santiago Rivera.
Orders the defendants jointly and severally to pay the plaintiffs moral damages in the sum of
P10,000.00, exemplary damages in the amount of P5,000.00, and actual litigation expenses in
the sum of P6,500.00.
Defendants are likewise ordered to pay the plaintiffs, jointly and severally, the sum of
P10,000.00 for and as attomey's fees. With costs against the defendants.
SO ORDERED. 4
As earlier stated, respondent court reversed the aforequoted decision of the trial court and
rendered the judgment subject of this petition-
Petitioners contend that respondent Court of Appeals erred:
1. In holding and finding that the actions entered into between petitioner Rivera with Cervantes
are all fair and regular and therefore binding between the parties thereto;
2. In reversing the decision of the lower court, not only based on erroneous conclusions of facts,
erroneous presumptions not supported by the evidence on record but also, holding valid and
binding the supposed payment by ICP of its obligation to Bormaheco, despite the fact that the
surety bond issued it had already expired when it opted to foreclose extrajudically the mortgage
executed by the petitioners;
3. In aside the finding of the lower court that there was necessity to pierce the veil of corporate
existence; and
4. In reversing the decision of the lower court of affirming the same 5
I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as President of
Slobec Realty and Development Company (Slobec) and Mode Cervantes, as Vice-President of
Bormaheco, such as the Sales Agreement, 6 Chattel Mortgage 7 and the Agreement of Counter-
Guaranty with Chattel/Real Estate Mortgage, 8 are all fraudulent and simulated and should,
therefore, be declared nun and void. Such allegation is premised primarily on the fact that
contrary to the stipulations agreed upon in the Sales Agreement (Exhibit J), Rivera never made
any advance payment, in the alleged amount of P50,000.00, to Bormaheco; that the tractor was
received by Rivera only on January 23, 1971 and not in 1970 as stated in the Chattel Mortgage
(Exhibit K); and that when the Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage was executed on October 24, 1970, to secure the obligation of ICP under its surety
bond, the Sales Agreement and Chattel Mortgage had not as yet been executed, aside from the
fact that it was Bormaheco, and not Rivera, which paid the premium for the surety bond issued
by ICP

At the outset, it will be noted that petitioners submission under the first assigned error hinges
purely on questions of fact. Respondent Court of Appeals made several findings to the effect
that the questioned documents are valid and binding upon the parties, that there was no fraud
employed by private respondents in the execution thereof, and that, contrary to petitioners'
allegation, the evidence on record reveals that petitioners had every intention to be bound by
their undertakings in the various transactions had with private respondents. It is a general rule in
this jurisdiction that findings of fact of said appellate court are final and conclusive and, thus,
binding on this Court in the absence of sufficient and convincing proof, inter alia, that the former
acted with grave abuse of discretion. Under the circumstances, we find no compelling reason to
deviate from this long-standing jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration agreed upon in the Sales
Agreement, which clearly constitutes a breach of the contract, cannot be availed of by the guilty
party to justify and support an action for the declaration of nullity of the contract. Equity and fair
play dictates that one who commits a breach of his contract may not seek refuge under the
protective mantle of the law.
The evidence of record, on an overall calibration, does not convince us of the validity of
petitioners' contention that the contracts entered into by the parties are either absolutely
simulated or downright fraudulent.
There is absolute simulation, which renders the contract null and void, when the parties do not
intend to be bound at all by the same. 9 The basic characteristic of this type of simulation of
contract is the fact that the apparent contract is not really desired or intended to either produce
legal effects or in any way alter the juridical situation of the parties. The subsequent act of
Rivera in receiving and making use of the tractor subject matter of the Sales Agreement and
Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco,
concomitant with the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage, conduce to the conclusion that petitioners had every intention to be bound by these
contracts. The occurrence of these series of transactions between petitioners and private
respondents is a strong indication that the parties actually intended, or at least expected, to
exact fulfillment of their respective obligations from one another.
Neither will an allegation of fraud prosper in this case where petitioners failed to show that they
were induced to enter into a contract through the insidious words and machinations of private
respondents without which the former would not have executed such contract. To set aside a
document solemnly executed and voluntarily delivered, the proof of fraud must be clear and
convincing. 10 We are not persuaded that such quantum of proof exists in the case at bar.
The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP does
not per se affect the validity of the bond. Petitioners themselves admit in their present petition
that Rivera executed a Deed of Sale with Right of Repurchase of his car in favor of Bormaheco
and agreed that a part of the proceeds thereof shall be used to pay the premium for the
bond. 11 In effect, Bormaheco accepted the payment of the premium as an agent of ICP The
execution of the deed of sale with a right of repurchase in favor of Bormaheco under such
circumstances sufficiently establishes the fact that Rivera recognized Bormaheco as an agent of
ICP Such payment to the agent of ICP is, therefore, binding on Rivera. He is now estopped from
questioning the validity of the suretyship contract.
II. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist,
the legal fiction that a corporation is an entity with a juridical personality separate and distinct
from its members or stockholders may be disregarded. In such cases, the corporation will be
considered as a mere association of persons. The members or stockholders of the corporation
131
will be considered as the corporation, that is, liability will attach directly to the officers and
stockholders. 12 The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, 13 or when it is made as a shield to
confuse the legitimate issues 14 or where a corporation is the mere alter ego or business conduit
of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. 15
In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP
and PM Parts, alleging that these corporations employed fraud in causing the foreclosure and
subsequent sale of the real properties belonging to petitioners While we do not discount the
possibility of the existence of fraud in the foreclosure proceeding, neither are we inclined to
apply the doctrine invoked by petitioners in granting the relief sought. It is our considered opinion
that piercing the veil of corporate entity is not the proper remedy in order that the foreclosure
proceeding may be declared a nullity under the circumstances obtaining in the legal case at bar.
In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers
and stockholders directly liable for a corporate debt or obligation. In the instant case, petitioners
do not seek to impose a claim against the individual members of the three corporations involved;
on the contrary, it is these corporations which desire to enforce an alleged right against
petitioners. Assuming that petitioners were indeed defrauded by private respondents in the
foreclosure of the mortgaged properties, this fact alone is not, under the circumstances,
sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold the
officers and/or members of respondent corporations personally liable therefor. Petitioners are
merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained
without having to disregard the aforesaid corporate fiction attaching to respondent corporations.
Secondly, petitioners failed to establish by clear and convincing evidence that private
respondents were purposely formed and operated, and thereafter transacted with petitioners,
with the sole intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are interrelated is not
a justification for disregarding their separate personalities, 16 absent sufficient showing that the
corporate entity was purposely used as a shield to defraud creditors and third persons of their
rights.
III. The main issue for resolution is whether there was a valid foreclosure of the mortgaged
properties by ICP Petitioners argue that the foreclosure proceedings should be declared null and
void for two reasons, viz.: (1) no written notice was furnished by Bormaheco to ICP anent the
failure of Slobec in paying its obligation with the former, plus the fact that no receipt was
presented to show the amount allegedly paid by ICP to Bormaheco; and (b) at the time of the
foreclosure of the mortgage, the liability of ICP under the surety bond had already expired.
Respondent court, in finding for the validity of the foreclosure sale, declared:
Now to the question of whether or not the foreclosure by the ICP of the real estate mortgage
was in the exercise of a legal right, We agree with the appellants that the foreclosure
proceedings instituted by the ICP was in the exercise of a legal right. First, ICP has in its favor
the legal presumption that it had indemnified Bormaheco by reason of Slobec's default in the
payment of its obligation under the Sales Agreement, especially because Bormaheco consented
to ICPs foreclosure of the mortgage. This presumption is in consonance with pars. R and Q
Section 5, Rule 5, * New Rules of Court which provides that it is disputably presumed that
private transactions have been fair and regular. likewise, it is disputably presumed that the
ordinary course of business has been followed: Second, ICP had the right to proceed at once to

the foreclosure of the mortgage as mandated by the provisions of Art. 2071 Civil Code for these
further reasons: Slobec, the principal debtor, was admittedly insolvent; Slobec's obligation
becomes demandable by reason of the expiration of the period of payment; and its authorization
to foreclose the mortgage upon Slobec's default, which resulted in the accrual of ICPS liability to
Bormaheco. Third, the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. 1)
expressly grants to ICP the right to foreclose the real estate mortgage in the event of 'non-
payment or non-liquidation of the entire indebtedness or fraction thereof upon maturity as
stipulated in the contract'. This is a valid and binding stipulation in the absence of showing that it
is contrary to law, morals, good customs, public order or public policy. (Art. 1306, New Civil
Code). 17
1. Petitioners asseverate that there was no notice of default issued by Bormaheco to ICP which
would have entitled Bormaheco to demand payment from ICP under the suretyship contract.
Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein ICP and
Slobec undertook to guarantee the payment of the balance of P180,000.00 payable in eighteen
(18) monthly installments on one unit of Model CAT D-7 Caterpillar Crawler Tractor, pertinently
provides in part as follows:
1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under this BOND will
expire Twelve (I 2) months from date hereof. Furthermore, it is hereby agreed and understood
that the INSURANCE CORPORATION OF THE PHILIPPINES will not be liable for any claim not
presented in writing to the Corporation within THIRTY (30) DAYS from the expiration of this
BOND, and that the obligee hereby waives his right to bring claim or file any action against
Surety and after the termination of one (1) year from the time his cause of action accrues. 18
The surety bond was dated October 24, 1970. However, an annotation on the upper part thereof
states: "NOTE: EFFECTIVITY DATE OF THIS BOND SHALL BE ON JANUARY 22, 1971." 19
On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance of
P180,000.00 shall be payable in eighteen (18) monthly installments. 20 The Promissory Note
executed by Slobec on even date in favor of Bormaheco further provides that the obligation shall
be payable on or before February 23, 1971 up to July 23, 1972, and that non-payment of any of
the installments when due shall make the entire obligation immediately due and demandable. 21
It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the
obligation expressly assumed therein. We have repeatedly held that the extent of a surety's
liability is determined only by the clause of the contract of suretyship as well as the conditions
stated in the bond. It cannot be extended by implication beyond the terms the contract. 22
Fundamental likewise is the rule that, except where required by the provisions of the contract, a
demand or notice of default is not required to fix the surety's liability. 23 Hence, where the
contract of suretyship stipulates that notice of the principal's default be given to the surety,
generally the failure to comply with the condition will prevent recovery from the surety. There are
certain instances, however, when failure to comply with the condition will not extinguish the
surety's liability, such as a failure to give notice of slight defaults, which are waived by the
obligee; or on mere suspicion of possible default; or where, if a default exists, there is excuse or
provision in the suretyship contract exempting the surety for liability therefor, or where the surety
already has knowledge or is chargeable with knowledge of the default. 24
In the case at bar, the suretyship contract expressly provides that ICP shag not be liable for any
claim not filed in writing within thirty (30) days from the expiration of the bond. In its decision
dated May 25 1987, the court a quo categorically stated that '(n)o evidence was presented to
132
show that Bormaheco demanded payment from ICP nor was there any action taken by
Bormaheco on the bond posted by ICP to guarantee the payment of plaintiffs obligation. There is
nothing in the records of the proceedings to show that ICP indemnified Bormaheco for the failure
of the plaintiffs to pay their obligation. " 25 The failure, therefore, of Bormaheco to notify ICP in
writing about Slobec's supposed default released ICP from liability under its surety bond.
Consequently, ICP could not validly foreclose that real estate mortgage executed by petitioners
in its favor since it never incurred any liability under the surety bond. It cannot claim exemption
from the required written notice since its case does not fall under any of the exceptions
hereinbefore enumerated.
Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any
documentary evidence. Section 1, Rule 131 of the Rules of Court provides that the burden of
evidence lies with the party who asserts an affirmative allegation. Since ICP failed to duly prove
the fact of payment, the disputable presumption that private transactions have been fair and
regular, as erroneously relied upon by respondent Court of Appeals, finds no application to the
case at bar.
2. The liability of a surety is measured by the terms of his contract, and, while he is liable to the
full extent thereof, such liability is strictly limited to that assumed by its terms. 26 While ordinarily
the termination of a surety's liability is governed by the provisions of the contract of suretyship,
where the obligation of a surety is, under the terms of the bond, to terminate at a specified time,
his obligation cannot be enlarged by an unauthorized extension thereof. 27 This is an exception
to the general rule that the obligation of the surety continues for the same period as that of the
principal debtor. 28
It is possible that the period of suretyship may be shorter than that of the principal obligation, as
where the principal debtor is required to make payment by installments. 29 In the case at bar, the
surety bond issued by ICP was to expire on January 22, 1972, twelve (1 2) months from its
effectivity date, whereas Slobec's installment payment was to end on July 23, 1972. Therefore,
while ICP guaranteed the payment by Slobec of the balance of P180,000.00, such guaranty was
valid only for and within twelve (1 2) months from the date of effectivity of the surety bond, or
until January 22, 1972. Thereafter, from January 23, 1972 up to July 23, 1972, the liability of
Slobec became an unsecured obligation. The default of Slobec during this period cannot be a
valid basis for the exercise of the right to foreclose by ICP since its surety contract had already
been terminated. Besides, the liability of ICP was extinguished when Bormaheco failed to file a
written claim against it within thirty (30) days from the expiration of the surety bond.
Consequently, the foreclosure of the mortgage, after the expiration of the surety bond under
which ICP as surety has not incurred any liability, should be declared null and void.
3. Lastly, it has been held that where The guarantor holds property of the principal as collateral
surety for his personal indemnity, to which he may resort only after payment by himself, until he
has paid something as such guarantor neither he nor the creditor can resort to such
collaterals. 30
The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being
issued for and in consideration of the obligations assumed by the Mortgagee-Surety Company
under the terms and conditions of ICP Bond No. 14010 in behalf of Slobec Realty Development
Corporation and in favor of Bormaheco, Inc. 31 There is no doubt that said Agreement of
Counter-Guaranty is issued for the personal indemnity of ICP Considering that the fact of
payment by ICP has never been established, it follows, pursuant to the doctrine above adverted
to, that ICP cannot foreclose on the subject properties,

IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it acquired
a valid title over the subject properties. The submission is without merit and the conclusion is
specious
We have stated earlier that the doctrine of piercing the veil of corporate fiction is not applicable
in this case. However, its inapplicability has no bearing on the good faith or bad faith of private
respondent PM Parts. It must be noted that Modesto N. Cervantes served as Vice-President of
Bormaheco and, later, as President of PM Parts. On this fact alone, it cannot be said that PM
Parts had no knowledge of the aforesaid several transactions executed between Bormaheco
and petitioners. In addition, Atty. Martin de Guzman, who is the Executive Vice-President of
Bormaheco, was also the legal counsel of ICP and PM Parts. These facts were admitted without
qualification in the stipulation of facts submitted by the parties before the trial court. Hence, the
defense of good faith may not be resorted to by private respondent PM Parts which is charged
with knowledge of the true relations existing between Bormaheco, ICP and herein petitioners.
Accordingly, the transfer certificates of title issued in its name, as well as the certificate of sale,
must be declared null and void since they cannot be considered altogether free of the taint of
bad faith.
WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET
ASIDE, and judgment is hereby rendered declaring the following as null and void: (1) Certificate
of Sale, dated September 28,1973, executed by the Provincial Sheriff of Quezon in favor of the
Insurance Corporation of the Philippines; (2) Transfer Certificates of Title Nos. T-23705, T-
23706, T-23707 and T-23708 issued in the name of the Insurance Corporation of the
Philippines; (3) the sale by Insurance Corporation of the Philippines in favor of Philippine
Machinery Parts Manufacturing Co., Inc. of the four (4) parcels of land covered by the aforesaid
certificates of title; and (4) Transfer Certificates of Title Nos. T-24846, T-24847, T-24848 and
T24849 subsequently issued by virtue of said sale in the name of the latter corporation.
The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of Title
Nos. T-24846, T-24847, T24848 and T-24849 in the name of Philippine Machinery Parts
Manufacturing Co., Inc. and to issue in lieu thereof the corresponding transfer certificates of title
in the name of herein petitioners, except Santiago Rivera.
The foregoing dispositions are without prejudice to such other and proper legal remedies as may
be available to respondent Bormaheco, Inc. against herein petitioners.
SO ORDERED.
THIRD DIVISION
G.R. No. 140923. September 16, 2005
MANUEL M. MENDOZA and EDGARDO A. YOTOKO, Petitioners,
vs.
BANCO REAL DEVELOPMENT BANK (now LBC Development Bank), Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
1 2
Before us is a petition for review on certiorari , assailing the Decision  of the Court of Appeals
dated September 21, 1998 in CA-G.R. No. 41544, entitled "Banco Real Development Bank,
plaintiff, versus, Technica Video Inc., et. al., Manuel M. Mendoza, et. al., defendants" and
Resolution dated December 3, 1999.
133
The petition alleges inter alia that on August 7, 1985, the Board of Directors of Technical Video,
Inc. (TVI) passed a Resolution authorizing its President, Eduardo A. Yotoko, petitioner, or its
General Manager-Secretary-Treasurer, Manuel M. Mendoza, also a petitioner, to apply for and
secure a loan from the Pasay City Banco Real Development Bank (now LBC Development
Bank), herein respondent.
On September 11, 1985, respondent bank extended a loan of ₱500,000.00 to TVI. In his
capacity as General Manager, petitioner Mendoza executed a promissory note and chattel
mortgage over 195 units of Beta video machines and their equipment and accessories belonging
to TVI in favor of respondent bank.
On October 3, 1986, TVI and two other video firms, Fox Video and Galactica Video, organized a
new corporation named FGT Video Network Inc. (FGT). It was registered with the Securities and
Exchange Commission.3 Petitioner Mendoza was the concurrent President of FGT and
Operating General Manager of TVI. Thus, the office of TVI had to be transferred to the building
of FGT for easier monitoring of the distribution and marketing aspects of the business.
For TVI’s failure to pay its loan upon maturity, respondent bank, on January 26, 1987, filed with
the Office of the Clerk of Court of the Regional Trial Court (RTC), Pasay City, a petition for Extra
Judicial Foreclosure and Sale of Chattel Mortgage.
However, the Sheriff’s Report/Return 4 dated January 27, 1987 shows that TVI is no longer doing
business at its given address; that its General Manager, Mr. Manuel M. Mendoza, is presently
employed at FGT Video Network with offices at the Philcemcor Bldg., No. 4 Edsa cor.
Connecticut St., Greenhills, San Juan, Metro Manila; that when asked about the whereabouts of
the video machines, in the presence of the representative of respondent bank and its counsel,
Mr. Mendoza denied any knowledge of their whereabouts; and that action on respondent’s
petition is indefinitely postponed until further notice from the bank.
Respondent then wrote TVI demanding the surrender of the video machines. In his letter dated
February 19, 1987, petitioner Mendoza requested the bank to give him "additional time to enable
us to pay our total obligations" and proposed a repayment scheme to start not later than March
10, 1987.5 Still, no payment was received by the bank. TVI simply refused and ignored the
demand and kept silent as to the whereabouts of the video machines.
Meanwhile, in a case entitled "Republic of the Philippines, plaintiff vs. FGT Video Network Inc.,
Manuel Mendoza, Alfredo C. Ongyangco, Eric Apolonio, Susan Yang ang Eduardo A. Yotoko,
defendants," the RTC, Branch 167, Pasig City issued a search warrant. The agents of the
National Bureau of Investigation (NBI) confiscated at the offices of FGT 638 machines and
equipment including the 195 Beta machines mortgaged with respondent bank.
On May 29, 1987, upon motion of FGT and herein petitioners, the same court issued another
Order directing the NBI to release and return the said machines to them.
However, Columbia Pictures Inc., Orion Pictures Corp., Paramount Pictures Corp., Universal
City Studios Inc., The Walt Disney Company and Warner Bros. filed with this Court a petition
for certiorari6 assailing the Order of the lower court.
On June 18, 1987, this Court issued a temporary restraining order enjoining the RTC from
enforcing its assailed order. The machines and equipment were left in the custody of the NBI
until the petition for certiorari shall have been resolved with finality.

On July 13, 1990, respondent bank filed with the RTC, Branch 110, Pasig City,7 a complaint for
collection of a sum of money8 against TVI, FGT and petitioners. Only petitioners filed their joint
answer to the complaint.
In their joint answer, petitioners specifically denied the allegations in the complaint, raising the
defense that the loan is purely a corporate indebtedness of TVI.
On April 29, 1991, the trial court rendered a Decision, holding that:
"As by these considerations, the Court finds that TVI was the mere alter ego or business conduit
of Yotoko and Mendoza, and additionally considering 1) that Mendoza disclaimed knowledge of
the whereabouts of the TVI mortgaged property at the time plaintiff’s petition for extrajudicial
foreclosure was being effected, and 2) that Mendoza and Yotoko transferred the mortgaged
property to FGT without first securing plaintiff’s consent despite their awareness that under the
chattel mortgage, such consent was necessary, the doctrine of corporate entity must be pierced
and the two must be held personally liable for TVI’s obligation to plaintiff for said doctrine cannot
be used to defeat public convenience, justify wrong, protect fraud or avoid a legal obligation."
The dispositive portion of the trial court’s Decision reads:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendants TECHNICA VIDEO, INC., Mendoza and Yotoko, ordering them,
1) to pay plaintiff the sum of ₱500,000.00 plus interests, charges and penalties as agreed upon
in the promissory note of September 11, 1985, until the same is fully paid;
2) to pay plaintiff the sum equivalent to ten (10%) of the total unpaid obligation as and for
attorney’s fees, and
3) to pay the costs.
SO ORDERED."
Upon appeal by herein petitioners, the Court of Appeals rendered its Decision dated September
21, 1998, affirming in toto the Decision of the trial court. Petitioners’ motion for reconsideration
was denied in its Resolution dated December 3, 1999.
Hence, the instant petition.
The basic issue for our resolution is whether herein petitioners are personally liable for TVI’s
indebtedness of ₱500,000.00 with respondent bank.
Both the trial court and the Appellate Court found that the petitioners transferred the Beta video
machines from TVI to FGT without the consent of respondent bank. Also, upon inquiry of the
sheriff, petitioner Mendoza declined knowledge of the whereabouts of the mortgaged video
machines. Moreover, the fact that the NBI seized the video machines from FGT glaringly shows
that petitioners transferred the same from TVI. More importantly, a comparison of the list of
video machines in the Chattel Mortgage Contract and the list of video machines seized by the
NBI from FGT shows that they have the same serial numbers.
The courts below also found that TVI is petitioners’ mere alter ego or business conduit. They
control the affairs of TVI. Among its stockholders or directors, they were the only ones who
became incorporators of FGT. They transferred the assets of TVI to FGT.
134
The general rule is that obligations incurred by a corporation, acting through its directors, officers
or employees, are its sole liabilities. However, the veil with which the law covers and isolates the
corporation from its directors, officers or employees will be lifted when the corporation is used by
any of them as a cloak or cover for fraud or illegality or injustice. 9 Here, the fraud was committed
by petitioners to the prejudice of respondent bank. It bears emphasis that as reported by the
sheriff, TVI is no longer doing business at its given address and its whereabouts cannot be
established as yet.
Both the trial court and the Court of Appeals thus concluded that petitioners succeeded to hide
the chattels, preventing the sheriff to foreclose the mortgage. Obviously, they acted in bad faith
to defraud respondent bank.
In fine, we hold that the Appellate Court, in affirming the Decision of the trial court, correctly
ruled that petitioners, not TVI, are the ones personally liable to respondent bank for the payment
of the loan.
WHEREFORE, the petition is DENIED. Costs against petitioners.
SO ORDERED.
FIRST DIVISION
December 13, 2017
G.R. No. 191525
INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS (I/AME), Petitioner
vs.
LITTON AND COMPANY, INC., Respondent
DECISION
SERENO, CJ.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Court of Appeals (CA) Decision1 and Resolution2 in CA-G.R. SP No. 107727.
The CA affirmed the Judgment3 and Order4 of the Regional Trial Court (RTC) of Manila in
Special Civil Action No. 06-115547 reinstating the Order5 of the Metropolitan Trial Court (Me TC)
of Manila in favor of Litton and Company, Inc. (Litton).
THE FACTS
The facts, as culled from the records, are as follows:
Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings owned by Litton, owed the
latter rental arrears as well as his share of the payment of realty taxes.6
Consequently, Litton filed a complaint for unlawful detainer against Santos before the MeTC of
Manila. The MeTC ruled in Litton’s favor and ordered Santos to vacate A.I.D. Building and Litton
Apartments and to pay various sums of money representing unpaid arrears, realty taxes,
penalty, andattorney’s fees.7
It appears however that the judgment was not executed. Litton subsequently filed an action for
revival of judgment, which was granted by the RTC. 8 Santos then appealed the RTC decision to

the CA, which nevertheless affirmed the RTC.9 The said CA decision became final and
executory on 22 March 1994.10
On l 1 November 1996, the sheriff of the MeTC of Manila levied on a piece of real property
covered by Transfer Certificate of Title (TCT) No. 187565 and registered in the name of
International Academy of Management and Economics Incorporated (I/AME), in order to execute
the judgment against Santos.11 The annotations on TCT No. 187565 indicated that such
was "only up to the extent of the share of Emmanuel T. Santos."12
I/AME filed with Me TC a "Motion to Lift or Remove Annotations Inscribed in TCT No. 187565 of
the Register of Deeds of Makati City."13 I/AME claimed that it has a separate and distinct
personality from Santos; hence, its properties should not be made to answer for the latter's
liabilities. The motion was denied in an Order dated 29 October 2004.
Upon motion for reconsideration of I/AME, the Me TC reversed its earlier ruling and ordered the
cancellation of the annotations of levy as well as the writ of execution. Litton then elevated the
case to the RTC, which in turn reversed the Order granting I/AME’s motion for reconsideration
and reinstated the original Order dated 29 October 2004.
I/AME then filed a petition with the CA to contest the judgment of the RTC, which was eventually
denied by the appellate court.
THE CA RULING
The CA upheld the Judgment and Order of the RTC and held that no grave abuse of discretion
was committed when the trial court pierced the corporate veil of I/AME.14
It took note of how Santos had utilized I/ AME to insulate the Makati real property covered by
TCT No. 187565 from the execution of the judgment rendered against him, for the following
reasons:
First, the Deed of Absolute Sale dated 31 August 1979 indicated that Santos, being the
.President, was representing I/AME as the vendee.15 However, records show that it was only in
1985 that I/AME was organized as a juridical entity.16 Obviously, Santos could not have been
President of a non-existent corporation at that time.17
Second, the CA noted that the subject real property was transferred to I/AME during the
pendency of the appeal for the revival of the judgment in the ejectment case in the CA.18
Finally, the CA observed that the Register of Deeds of Makati City issued TCT No. 187565 only
on 17 November 1993, fourteen (14) years after the execution of the Deed of Absolute Sale and
more than eight (8) years after I/AME was incorporated.19
Thus, the CA concluded that Santos merely used I/ AME as a shield to protect his property from
the coverage of the writ of execution; therefore, piercing the veil of corporate fiction is proper.20
THE ISSUES
The issues boil down to the alleged denial of due process when the court pierced the corporate
veil of I/ AME and its property was made to answer for the liability of Santos.
OUR RULING
We deny the petition.
135
There was no violation of due
process against I/AME
Petitioner avers that its right to due process was violated when it was dragged into the case and
its real property made an object of a writ of execution in a judgment against Santos. It argues
that since it was not impleaded in the main case, the court a quo never acquired jurisdiction over
it. Indeed, compliance with the recognized modes of acquisition ofjurisdiction cannot be
dispensed with even in piercing the veil of corporation.21
In a petition for review on certiorari under Rule 45, only questions of law shall be entertained.
This Court considers the determination of the existence of any of the circumstances that would
warrant the piercing of the veil of corporate fiction as a question of fact which ordinarily cannot
be the subject of a petition for review on certiorari under Rule 45. We will only take cognizance
of factual issues if the findings of the lower court are not supported by the evidence on record or
are based on a misapprehension of facts. 22 Once the CA affirms the factual findings of the trial
court, such findings are deemed final and conclusive and thus, may not be reviewed on appeal,
unless the judgment of the CA depends on a misapprehension of facts, which if properly
considered, would justify a different conclusion.23 Such exception however, is not applicable in
this case.
The 29 October 2004 MeTC judgment, the RTC judgment, and the CA decision are one in
accord on the matters presented before this Court.
In general, corporations, whether stock or non-stock, are treated as separate and distinct legal
entities from the natural persons composing them. The privilege of being considered a distinct
and separate entity is confined to legitimate uses, and is subject to equitable limitations to
prevent its being exercised for fraudulent, unfair or illegal purposes.24 However, once equitable
limitations are breached using the coverture of the corporate veil, courts may step in to pierce
the same.
As we held in Lanuza, Jr. v. BF Corporation:25
Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used
as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate issues." It is also warranted in
alter ego cases "where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation."
When [the] corporate veil is pierced, the corporation and persons who are normally treated as
distinct from the corporation are treated as one person, such that when the corporation is
adjudged liable, these persons, too, become liable as if they were the corporation.
The piercing of the corporate veil is premised on the fact that the corporation concerned must
have been properly served with summons or properly subjected to the jurisdiction of the court a
quo. Corollary thereto, it cannot be subjected to a writ of execution meant for another in violation
of its right to due process.26
There exists, however, an exception to this rule: if it is shown "by clear and convincing proof that
the separate and distinct personality of the corporation was purposefully employed to evade a
legitimate and binding commitment and perpetuate a fraud or like wrongdoings. "27

The resistance of the Court to offend the right to due process of a corporation that is a nonparty
in a main case, may disintegrate not only when its director, officer, shareholder, trustee or
member is a party to the main case, but when it finds facts which show that piercing of the
corporate veil is merited.28
Thus, as the Court has already ruled, a party whose corporation is vulnerable to piercing of its
corporate veil cannot argue violation of due process.29
In this case, the Court confirms the lower courts' findings that Santos had an existing obligation
based on a court judgment that he owed monthly rentals and unpaid realty taxes under a lease
contract he entered into as lessee with the Littons as lessor. He was not able to comply with this
particular obligation, and in fact, refused to comply therewith.
This Court agrees with the CA that Santos used I/AME as a means to defeat judicial processes
and to evade his obligation to Litton. 30 Thus, even while I/AME was not imp leaded in the main
case and yet was so named in a writ of execution to satisfy a court judgment against Santos, it is
vulnerable to the piercing of its corporate veil. We will further expound on this matter.
Piercing the Corporate Veil may
Apply to Non-stock Corporations
Petitioner I/AME argues that the doctrine of piercing the corporate veil applies only to stock
corporations, and not to non-stock, nonprofit corporations such as I/AME since there are no
stockholders to hold liable in such a situation but instead only members. Hence, they do not
have investments or shares of stock or assets to answer for possible liabilities.
Thus, no one in a non-stock corporation can be held liable in case the corporate veil is
disregarded or pierced.31
The CA disagreed. It ruled that since the law does not make a distinction between a stock and
non-stock corporation, neither should there be a distinction in case the doctrine of piercing the
veil of corporate fiction has to be applied. While I/AME is an educational institution, the CA
further ruled, it still is a registered corporation conducting its affairs as such.32
This Court agrees with the CA.
In determining the propriety of applicability of piercing the veil of corporate fiction, this Court, in a
number of cases, did not put in issue whether a corporation is a stock or non-stock corporation.
In Sula ng Bayan, Inc. v. Gregorio Araneta, Inc. ,33 we considered but ultimately refused to
pierce the corporate veil of a non-stock non-profit corporation which sought to institute an action
for reconveyance of real property on behalf of its members. This Court held that the non-stock
corporation had no personality to institute a class suit on behalf of its members, considering that
the non-stock corporation was not an assignee or transferee of the real property in question, and
did not have an identity that was one and the same as its members.
In another case, this Court did not put in issue whether the corporation is a non-stock, non-profit,
non-governmental corporation in considering the application of the doctrine of piercing of
corporate veil. In Republic of the Philippines v. Institute for Social Concern,34 while we did not
allow the piercing of the corporate veil, this Court affirmed the finding of the CA that the
Chairman of the Institute for Social Concern cannot be held jointly and severally liable with the
aforesaid non-governmental organization (NGO) at the time the Memorandum of Agreement
was entered into with the Philippine Government. We found no fraud in that case committed by
the Chairman that would have justified the piercing of the corporate veil of the NG0.35
136
In the United States, from which we have adopted our law on corporations, non-profit
corporations are not immune from the doctrine of piercing the corporate veil.1âwphi1 Their
courts view piercing of the corporation asan equitable remedy, which justifies said courts to
scrutm1ze any organization however organized and in whatever manner it operates. Moreover,
control of ownership does not hinge on stock ownership.
As held in Barineau v. Barineau:36
[t]he mere fact that the corporation involved is a nonprofit corporation does not by itself preclude
a court from applying the equitable remedy of piercing the corporate veil. The equitable
character of the remedy permits a court to look to the substance of the organization, and its
decision is not controlled by the statutory framework under which the corporation was formed
and operated. While it may appear to be impossible for a person to exercise ownership control
over a non-stock, not-for-profit corporation, a person can be held personally liable under the
alter ego theory if the evidence shows that the person controlling the corporation did in fact
exercise control, even though there was no stock ownership.
In another U.S. case, Public Interest Bounty Hunters v. Board of Governors of Federal Reserve
System,37 the U.S. Court allowed the piercing of the corporate veil of the Foundation headed by
the plaintiff, in order to avoid inequitable results. Plaintiff was found to be the sole trustee, the
sole member of the board, and the sole financial contributor to the Foundation. In the end, the
Court found that the plaintiff used the Foundation to avoid paying attorneys’ fees.
The concept of equitable ownership, for stock or non-stock corporations, in piercing of the
corporate veil scenarios, may also be considered. An equitable owner is an individual who is a
non-shareholder defendant, who exercises sufficient control or considerable authority over the
corporation to the point of completely disregarding the corporate form and acting as though its
assets are his or her alone to manage and distribute.38
Given the foregoing, this Court sees no reason why a non-stock corporation such as I/AME, may
not be scrutinized for purposes of piercing the corporate veil or fiction.
Piercing the Corporate Veil may
Apply to Natural Persons
The petitioner also insists that the piercing of the corporate veil cannot be applied to a natural
person - in this case, Santos - simply because as a human being, he has no corporate veil
shrouding or covering his person.39
a) When the Corporation is the Alter Ego of a Natural Person
As cited in Sula ng Bayan, Inc. v. Araneta, Inc. ,40 "[t]he doctrine of alter ego is based upon
the misuse of a corporation by an individual for wrongful or inequitable purposes, and in such
case the court merely disregards the corporate entity and holds the individual responsible for
acts knowingly and intentionally done in the name of the corporation." This, Santos has done in
this case. Santos formed I/AME, using the non-stock corporation, to evade paying his judgment
creditor, Litton.
The piercing of the corporate veil may apply to corporations as well as natural persons involved
with corporations. This Court has held that the "corporate mask may be lifted and the corporate
veil may be pierced when a corporation is just but the alter ego of a person or of another
corporation."41

We have considered a deceased natural person as one and the same with his corporaticc to
protect the succession rights of his legal heirs to his estate. In Cease v. Court of Appeals, 42 the
predecessor-in-interest organized a close corporation which acquired properties during its
existence. When he died intestate, trouble ensued amongst his children on whether or not to
consider his company one and the same with his person. The Court agreed with the trial court
when it pierced the corporate veil of the decedent's corporation. It found that said corporation
was his business conduit and alter ego. Thus, the acquired properties were actually properties of
the decedent and as such, should be divided among the decedent's legitimate children in the
partition of his estate.43
In another instance, this Court allowed the piercing of the corporate veil against another natural
person, in Arcilla v. Court of Appeals. 44 The case stemmed from a complaint for sum of money
against Arcilla for his failure to pay his loan from the private respondent. Arcilla, in his defense,
alleged that the loan was in the name of his family corporation, CSAR Marine Resources, Inc.
He further argued that the CA erred in holding CSAR Marine Resources liable to the private
respondent since the latter was not impleaded as a party in the case. This Court allowed the
piercing of the corporate veil and held that Arcilla used "his capacity as President, x x x [as] a
sanctuary for a defense x x x to avoid complying with the liability adjudged against him x x x.
"45 We held that his liability remained attached even if he was impleaded as a party, and not the
corporation, to thecollection case and even if he ceased to be corporate president. 46 Indeed,
even if Arcilla had ceased to be corporate president, he remained personally liable for the
judgment debt to pay his personal loan, for we treated him and the corporation as one and the
same. CSAR Marine was deemed his alter ego.
We find similarities with Arcilla and the instant case. Like Arcilla, Santos: (1) was adjudged liable
to pay on a judgment against him; (2) he became President of a corporation; (3) he formed a
corporation to conceal assets which were supposed to pay for the judgment against his favor;
(4) the corporation which has Santos as its President, is being asked by the court to pay on the
judgment; and (5) he may not use as a defense that he is no longer President of I/AME
(although a visit to the website of the school shows he is the current President).47
This Court agrees with the CA that I/AME is the alter ego of Santos and Santos - the natural
person - is the alter ego of I/AME. Santos falsely represented himself as President of I/AME in
the Deed of Absolute Sale when he bought the Makati real property, at a time when I/ AME had
not yet existed. Uncontroverted facts in this case also reveal the findings of Me TC showing
Santos and I/ AME as being one and the same person:
(1) Santos is the conceptualizer and implementor of I/AME;
(2) Santos’ contribution is ₱1,200,000.00 (One Million Two Hundred Thousand Pesos) out of the
₱1,500,000.00 (One Million Five Hundred Thousand Pesos), making him the majority contributor
of I/AME; and,
(3) The building being occupied by I/AME is named after Santos using his known nickname (to
date it is called, the "Noli Santos Inte1national Tower").48
This Court deems I/AME and Santos as alter egos of each other based on the former’s own
admission in its pleadings before the trial court. In its Answer (to Amended Petition) with the
RTC entitled Litton and Company, Inc. v. Hon. Hernandez-Calledo, Civil Case No. 06-115547,
I/AME admitted the allegations found in paragraphs 2, 4 and 5 of the amended petition of Litton,
particularly paragraph number 4 which states:
137
4. Respondent, International Academy of Management and Economics Inc. (hereinafter
referred to as Respondent I/ AME), is a corporation organized and existing under Philippine laws
with address at 1061 Metropolitan Avenue, San Antonie Village, Makati City, where it may be
served with summons and other judicial processes. It is the corporate entity used by
Respondent Santos as his alter ego for the purpose of shielding his assets from the
reach of his creditors, one of which is herein Petitioner.49 (Emphases ours)
Hence, I/AME is the alter ego of the natural person, Santos, which the latter used to evade the
execution on the Makati property, thus frustrating the satisfaction of the judgment won by Litton.
b) Reverse Piercing of the Corporate Veil
This Court in Arcilla pierced the corporate veil of CSAR Marine Resources to satisfy a money
judgment against its erstwhile President, Arcilla.
We borrow from American parlance what is called reverse piercing or reverse corporate piercing
or piercing the corporate veil "in reverse."
As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership, 50 "in a traditional
veil-piercing action, a court disregards the existence of the corporate entity so a claimant can
reach the assets of a corporate insider. In a reverse piercing action, however, the plaintiff seeks
to reach the assets of a corporation to satisfy claims against a corporate insider."
"Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing) and
makes the corporation liable for the debt of the shareholders."51
It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider reverse
piercing occurs when a party with a claim against an individual or corporation attempts to be
repaid with assets of a corporation owned or substantially controlled by the defendant. 52 In
contrast, in insider reverse piercing, the controlling members will attempt to ignore the corporate
fiction in order to take advantage of a benefit available to the corporation, such as an interest in
a lawsuit or protection of personal assets.53
Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment creditor,
seeks the Court's intervention to pierce the corporate veil of I/AME in order to make its Makati
real property answer for a judgment against Santos, who formerly owned and still substantially
controls I/AME.
In the U.S. case Acree v. McMahan, 54 the American court held that "[ o ]utsider reverse veil-
piercing extends the traditional veil-piercing doctrine to permit a third-party creditor to pierce the
veil to satisfy the debts of an individual out of the corporation's assets."
The Court has pierced the corporate veil in a reverse manner in the instances when the scheme
was to avoid corporate assets to be included in the estate of a decedent as in the Cease case
and when the corporation was used to escape a judgment to pay a debt as in the Arcilla case.
In a 1962 Philippine case, this Court also employed what we now call reverse-piercing of the
corporate veil. In Palacio v. Fely Transportation Co., 55 we found that the president and general
manager of the private respondent company formed the corporation to evade his subsidiary civil
liability resulting from the conviction of his driver who ran over the child of the petitioner, causing
injuries and medical expenses. The Court agreed with the plaintiffs that the president and
general manager, and Fely Transportation, may be regarded as one and the same person.
Thus, even if the president and general manager was not a party to the case, we reversed the
lower court and declared both him and the private respondent company, jointly and severally

liable to the plaintiffs. Thus, this Court allowed the outsider-plaintiffs to pierce the corporate veil
of Fely Transportation to run after its corporate assets and pay the subsidiary civil liability of the
company's president and general manager.
This notwithstanding, the equitable remedy of reverse corporate piercing or reverse piercing was
not meant to encourage a creditor’s failure to undertake such remedies that could have
otherwise been available, to the detriment of other creditors.56
Reverse corporate piercing is an equitable remedy which if utilized cavalierly, may lead to
disastrous consequences for both stock and non-stock corporations. We are aware that ordinary
judgment collection procedures or other legal remedies are preferred over that which would risk
damage to third parties (for instance, innocent stockholders or voluntary creditors) with
unprotected interests in the assets of the beleaguered corporation.57
Thus, this Court would recommend the application of the current 1997 Rules on Civil Procedure
on Enforcement of Judgments. Under the current Rules of Court on Civil Procedure, when it
comes to satisfaction by levy, a judgment obligor is given the option to immediately choose
which property or part thereof may be levied upon to satisfy the judgment. If the judgmentobligor
does not exercise the option, personal properties, if any, shall be first levied and then on real
properties if the personal properties are deemed insufficient to answer for the judgment.58
In the instant case, it may be possible for this Court to recommend that Litton run after the other
properties of Santos that could satisfy the money judgment - first personal, then other real
properties other than that of the school. However, if we allow this, we frustrate the decades-old
yet valid MeTC judgment which levied on the real property now titled under the name of the
school. Moreover, this Court will unwittingly condone the action of Santos in hiding all these
years behind the corporate form to evade paying his obligation under the judgment in the court a
quo. This we cannot countenance without being a party to the injustice.
Thus, the reverse piercing of the corporate veil of I/AME to enforce the levy on execution of the
Makati real property where the school now stands is applied.
WHEREFORE, in view of the foregoing, the instant petition is DENIED. The CA Decision in CA-
G.R. SP No. 107727 dated 30 October 2009 and its Resolution on 12 March 2010 are
hereby AFFIRMED. The MeTC Order dated 29 October 2004 is hereby REINSTATED.
Accordingly, the MeTC of Manila, Branch 2, is hereby DIRECTED to execute with dispatch the
MeTC Order dated 29 October 2004 against Santos.
SO ORDERED.
Second Division
June 21, 2017
G.R. No. 224099
ROMMEL M. ZAMBRANO, ROMEO O. CALIPAY, JESUS L. CHIN, LYNDON B. APOSAGA,
BONIFACIO A. CASTANEDA, ROSEMARIE P. FALCUNIT, ROMEO A. FINALLA, LUISITO G.
GELLIDO, JOSE ALLI L. MABUHAY, VICENTE A. MORALES, RAUL L. REANZARES,
DIODITO I. TACUD, ERNAN D. TERCERO, LARRY V. MUTIA, ROMEO A. GURON,
DIOSDADO S. AZUSANO, BENEDICTO D. GIDAYAWAN, LOWIS M. LANDRITO, NARCISO
R. ASI, TEODULO BORAC, SANTOS J. CRUZADO, JR., ROLANDO DELA CRUZ,
RAYMUNDO, MILA Y. ABLAY, ERMITY F. GABUCAY, PABLITO M. LACANARIA,
138
MELCHOR PENAFLOR, ARSENIO B. PICART III, ROMEO M. SISON, JOSE VELASCO JR.,
ERWIN M. VICTORIA, PRISCO J. ABILO, WILFREDO D. ARANDIA, ALEXANDER Y.
HILADO, JAIME M. CORALES, GERALDINE C. MAUHAY, MAURO P. MARQUEZ,
JONATHAN T. BARQUIN, RICARDO M. CALDERON JR., RENA TO R. RAMIREZ, VIVIAN P.
VIRTUDES, DOMINGO P. COSTANTINO JR., RENATO A. MANAIG, RAFAEL D.
CARILLO, Petitioners
vs.
PHILIPPINE CARPET MANUFACTURING CORPORATION/ PACIFIC CARPET
MANUFACTURING CORPORATION, DAVIDE. T. LIM, and EVELYN LIM FORBES,
Respondents
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to reverse
and set aside the January 8, 2016 Decision 1 and April 11, 2016 Resolution2 of the Court of
Appeals (CA) in CA-G.R. SP No. 140663, which affirmed the February 27, 2015 Decision 3 and
March 31, 2015 Resolution4 of the National Labor Relations Commission (NLRC) in NLRC NCR
Case No. 01-00109-14; 01-00230-14; 01-00900-14; 01-01025-14; and 01-01133-14, for five (5)
consolidated complaints for illegal dismissal and unfair labor practice.
The Antecedents
The petitioners averred that they were employees of private respondent Philippine Carpet
Manufacturing Corporation (Phil Carpet). On January 3, 2011, they were notified of the
termination of their employment effective February 3, 2011 on the ground of cessation of
operation due to serious business losses. They were of the belief that their dismissal was
without just cause and in violation of due process because the closure of Phil Carpet was a
mere pretense to transfer its operations to its wholly owned and controlled corporation, Pacific
Carpet Manufacturing Corporation (PacificCarpet). They claimed that the job orders of some
regular clients of PhilCarpet were transferred to Pacific Carpet; and that from October to
November 2011, several machines were moved from the premises of Phil Carpet to Pacific
Carpet. They asserted that their dismissal constituted unfair labor practice as it involved the
mass dismissal of all union officers and members of the Philippine Carpet Manufacturing
Employees Association (PHILCEA).
In its defense, Phil Carpet countered that it permanently closed and totally ceased its operations
because there had been a steady decline in the demand for its products due to global recession,
stiffer competition, and the effects of a changing market. Based on the Audited Financial
Statements5 conducted by SGV & Co., it incurred losses of ₱4.1M in 2006; ₱12.8M in 2007;
₱53.28M in 2008; and ₱47.79M in 2009. As of the end of October 2010, unaudited losses
already amounted to ₱26.59M. Thus, in order to stem the bleeding, the company implemented
several cost-cutting measures, including voluntary redundancy and early retirement programs. In
2007, the car carpet division was closed. Moreover, from a high production capacity of about
6,000 square meters of carpet a month in 2002, its final production capacity steadily went down
to an average of 350 square meters per month for 2009 and 2010. Subsequently, the Board of
Directors decided to approve the recommendation of its management to cease manufacturing
operations. The termination of the petitioners' employment was effective as of the close of office
hours on February 3, 2011. Phil Carpet likewise faithfully complied with the requisites for closure
or cessation of business under the Labor Code. The petitioners and the Department of Labor
and Employment (DOLE) were served written notices one (1) month before the intended closure

of the company. The petitioners ·were also paid their separation pay and they voluntarily
executed their respective Release and Quitclaim6 before the DOLE officials.
The LA Ruling
In the September 29, 2014 Decision, 7 the Labor Arbiter (LA) dismissed the complaints for illegal
dismissal and unfair labor practice. It ruled that the termination of the petitioners' employment
was due to total cessation of manufacturing operations of Phil Carpet because it suffered
continuous serious business losses from 2007 to 2010. The LA added that the closure was truly
dictated by economic necessity as evidenced by its audited financial statements. It observed
that written notices of termination were served on the DOLE and on the petitioners at least one
(1) month before the intended date of closure. The LA further found that the petitioners
voluntarily accepted their separation pay and other benefits and eventually executed their
individual release and quitclaim in favor of the company. Finally, it declared that there was no
showing that the total closure of operations was motivated by any specific and clearly
determinable union activity of the employees. The dispositive portion reads:
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the complaint
of Domingo P. Constantino, Jr. on ground of prescription of cause of action and the consolidated
complaints of the rest of complainants for lack of merit.
8
SO ORDERED. 
Unconvinced, the petitioners elevated an appeal before the NLRC.
The NLRC Ruling
In its February 27, 2015 Decision, the NLRC affirmed the findings of the LA. It held that the
Audited Financial Statements show that Phil Carpet continuously incurred net losses starting
2007 leading to its closure in the year 2010. The NLRC added that Phil Carpet complied with the
procedural requirements of effecting the closure of business pursuant to the Labor
Code. Thefallo reads:
WHEREFORE, premises considered, complainants' appealfrom the Decision of the Labor
Arbiter Marita V. Padolina is hereby DISMISSED for lack of merit.
SO ORDERED. 9
Undeterred, the petitioners filed a motion for reconsideration thereof. In its resolution, dated
March 31, 2015, the NLRC denied the same.
Aggrieved, the petitioners filed a petition for certiorari with the CA.
The CA Ruling
In its assailed decision, dated January 8, 2016, the CA ruled that the total cessation of Phil
Carpet's manufacturing operations was not made in bad faith because the same was clearly due
to economic necessity. It determined that there was no convincing evidence to show that the
regular clients of Phil Carpet secretly transferred their job orders to Pacific Carpet; and that Phil
Carpet's machines were not transferred to Pacific Carpet but were actually sold to the latter after
the closure of business as shown by the several sales invoices and official receipts issued by
Phil Carpet. The CA adjudged that the dismissal of the petitioners who were union officers and
members of PHILCEA did not constitute unfair labor practice because Phil Carpet was able to
show that the closure was due to serious business losses.
139
The CA opined that the petitioners' claim that their termination was a mere pretense because
Phil Carpet continued operation through Pacific Carpet was unfounded because mere ownership
by a single stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate personality.
The CA disposed the petition in this wise:
WHEREFORE, premises considered, the instant petition for certiorari is hereby DISMISSED.
SO ORDERED. 10
The petitioners moved for reconsideration, but their motion was denied by the CA in its assailed
resolution, dated April 11, 2016.
Hence, this present petition.
ISSUES
WHETHER THE PETITIONERS WERE DISMISSED FROM EMPLOYMENT FOR A LAWFUL
CAUSE
WHETHER THE PETITIONERS' TERMINATION FROM EMPLOYMENT CONSTITUTES
UNFAIR LABOR PRACTICE
WHETHER PACIFIC CARPET MAY BE HELD LIABLE FOR PHIL CARPET'S OBLIGATIONS
WHETHER THE QUITCLAIMS SIGNED BY THE PETITIONERS ARE VALID AND BINDING
The petitioners argue that Phil Carpet did not totally cease its operations; that most of the job
orders of Phil Carpet were transferred to its wholly owned subsidiary, Pacific Carpet; and that
the signing of quitclaims did not bar them from pursuing their case because they were made to
believe that the closure was legal.
In its Comment, 11 dated August 26, 2016, Phil Carpet averred that the termination of the
petitioners' employment as a consequence of its total closure and cessation of operations was in
accordance with law and supported by substantial evidence; that the petitioners could only offer
bare and self-serving claims and sham evidence such as financial statements that did not
pertain to Phil Carpet; and that under the Labor Code, any compromise settlement voluntarily
agreed upon by the parties with the assistance of the regional office of the DOLE was final and
binding upon the parties.
In their Reply, 12 dated November 8, 2016, the petitioners alleged that the losses of Phil Carpet
were almost proportionate to the net income of its subsidiary, Pacific Carpet; and that the
alleged sale, which transpired between Phil Carpet and Pacific Carpet, was simulated.
The Court's Ruling
The petition is bereft of merit.
The petitioners were terminated fromemploymentfor an authorized cause
Under Article 298 (formerly Article 283) of the Labor Code, closure or cessation of operation of
the establishment is an authorized cause for terminating an employee, viz.:
Article 298. Closure of establishment and reduction ofpersonnel. -The employer may also
terminate the employment ofany employee due to the installation of labor-saving devices,

redundancy, retrenchment to prevent losses or the closing or cessation of operations 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. In case of termination
due to the installation of labor-saving devices or redundancy, the worker affected thereby shall
be entitled to a separation pay equivalent to at least one (1) month pay or to at least one (1)
month pay for every year of service, whichever is higher. In case of retrenchment to prevent
losses and in cases of closure or cessation of operations of establishment or undertaking not
due to serious business losses or financial reverses, the separation pay shall be equivalent to at
least one (1) month pay or 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 as one (1) whole year.
[Emphases supplied]
Closure of business is the reversal of fortune of the employer whereby there is a complete
cessation of business operations and/or an actual locking-up of the doors of establishment,
usually due to financial losses. Closure of business, as an authorized cause for termination of
employment, aims to prevent further financial drain upon an employer who cannot pay anymore
his employees since business has already stopped. In such a case, the employer is generally
required to give separation benefits to its employees, unless the closure is due to serious
business losses. 13
Further, in Industrial Timber Corporation v. Ababon, 14 the Court held:
A reading of the foregoing law shows that a partial or total closure or cessation of operations of
establishment or undertaking may either be due to serious business losses or financial reverses
or otherwise. Under the first kind, the employer must sufficiently and convincingly prove its
allegation of substantial losses, while under the second kind, the employer can lawfully close
shop anytime as long as cessation of or withdrawal from business operations was bona fide in
character and not impelled by a motive to defeat orcircumvent the tenurial rights of employees,
and as long as he pays his employees their termination pay in the amount corresponding to their
length of service. 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.
In sum, under Article 283 of the Labor Code, three requirements are necessary for a valid
cessation of business operations: (a) service of a written notice to the employees and to the
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. 15 [citations omitted]
In this case, the LA's findings that Phil Carpet suffered from serious business losses which
resulted in its closure were affirmed in toto by the NLRC, and subsequently by the CA. It is a rule
that absent any showing that the findings of fact of the labor tribunals and the appellate court are
not supported by evidence on record or the judgment is based on a misapprehension of facts,
the Court shall not examine anew the evidence submitted by the parties. 16 In Alfaro v. Court of
Appeals, 17 the Court explained the reasons therefor, to wit:
The Supreme Court is not a trier of facts, and this doctrine applies with greater force in labor
cases. Factual questions are for the labor tribunals to resolve. In this case, the factual issues
have already been determined by the labor arbiter and the National Labor Relations
140
Commission. Their findings were affirmed by the CA. Judicial review by this Court does not
extend to a reevaluation of the sufficiency of the evidence upon which the proper labor tribunal
has based its determination.
Indeed, factual findings of labor officials who are deemed to have acquired expertise in matters
within their respective jurisdictions are generally accorded not only respect, but even finality, and
are binding on the Supreme Court. Verily, their conclusions are accorded great weight upon
appeal, especially when supported by substantial evidence. Consequently, the Supreme Court is
not duty-bound to delve into the accuracy of their factual findings, in the absence of a clear
showing that the same were arbitrary and bereft of any rational basis. 18
Even after perusal of the records, the Court finds no reason to take exception from the foregoing
rule. Phil Carpet continuously incurred losses starting 2007, as shown by the Audited Financial
Statements 19 which were offered in evidence by the petitioners themselves. The petitioners, in
claiming that Phil Carpet continued to earn profit in 2011 and 2012, disregarded the reason for
such income, which was Phil Carpet's act of selling its remaining inventories. Notwithstanding
such income, Phil Carpet continued to incur total comprehensive losses in the amounts of
₱9,559,716 and ₱12,768,277 for the years 2011 and 2012, respectively. 20
Further, even if the petitioners refuse to consider these losses as serious enough to warrant Phil
Carpet's total and permanent closure, it was a business judgment on the part of the company's
owners and stockholders to cease operations, a judgment which the Court has no business
interfering with. The only limitation provided by law is that the closure must be "bonafide in
character and not impelled by a motive to defeat or circumvent thetenurial rights of
employees."21 Thus, when an employer complies with the foregoing conditions, the Court cannot
prohibit closure "just because the business is not suffering from any loss or because of the
desire to provide the workers continued employment."22
Finally, Phil Carpet notified DOLE23 and the petitioners24 of its decision to cease manufacturing
operations on January 3, 2011, or at least one (1) month prior to the intended date of closure on
February 3, 2011. The petitioners were also given separation pay equivalent to 100% of their
monthly basic salary for every year of service.
The dismissal of the petitioners did not amount to unfair labor practice
Article 259 (formerly Article 248) of the Labor Code enumerates the unfair labor practices of
employers, to wit:
Art. 259. Unfair Labor Practices of Employers. - It shall be unlawful for an employer to commit
any of the following unfair labor practices:
(a) To interfere with, restrain or coerce employees in the exercise of their right to self-
organization;
(b) To require a:s a condition of employment that a person or an employee shall not join a labor
organization or shall withdraw from one to which he belongs;
(c) To contract out services or functions being performed by union members when such will
interfere with, restrain or coerce employees in the exercise of their right to self-organization;
(d) To initiate, dominate, assist or otherwise interfere with the formation or administration of any
labor organization, including the giving of financial or other support to it or its organizers or
supporters;

(e) To discriminate in regard to wages, hours of work and other terms and conditions of
employment in order to encourage or discourage membership in any labor organization. Nothing
in this Code or in any other law shall stop the parties from requiring membership in a recognized
collective bargaining agent as a condition for employment, except those employees who are
already members of another union at the time of the signing of the collective bargaining
agreement. Employees of an appropriate bargaining unit who are not members of the
recognized collective bargaining agent may be assessed a reasonable fee equivalent to the
dues and other fees paid by members of the recognized collective bargaining agent, if such non-
union members accept the benefits under the collective bargaining agreement: Provided, That
the individual authorization required under Article 242, paragraph (o) of this Code shall not apply
to the non-members of the recognized collective bargaining agent;
(f) To dismiss, discharge or otherwise prejudice or discriminate against an employee for having
given or being about to give testimony under this Code;
(g) To violate the duty to bargain collectively as prescribed by this Code;
(h) To pay negotiation or attorney's fees to the union or its officers or agents as part of the
settlement of any issue in collective bargaining or any other dispute; or
(i) To violate a collective bargaining agreement.
The provisions of the preceding paragraph notwithstanding, only the officers and agents of
corporations, associations or partnerships who have actually participated in, authorized or
ratified unfair labor practices shall be held criminally liable.
Unfair labor practice refers to acts that violate the workers' right to organize. 25 There should be
no dispute that all the prohibited acts constituting unfair labor practice in essence relate to the
workers' right to self-organization. 26 Thus, an employer may only be held liable for unfair labor
practice if it can be shown that his acts affect in whatever manner the right of his employees to
self-organize. 27
The general principle is that one who makes an allegation has the burden of proving it. Although
there are exceptions to this general rule, in the case of unfair labor practice, the alleging party
has the burden of proving it. 28 In the case of Standard Chartered Bank Employees Union
(NUBE) v. Confesor,29 this Court elaborated:
In order to show that the employer committed ULP under the Labor Code, substantial
evidence is required to support the claim. Substantial evidence has been defined as such
relevantevidence as a reasonable mind might accept as adequate to support a
conclusion. 30 [Emphasis supplied]
Moreover, good faith is presumed and he who alleges bad faith has the duty to prove the
same. 31
The petitioners miserably failed to discharge the duty imposed upon them. They did not identify
the acts of Phil Carpet which, they claimed, constituted unfair labor practice. They did not even
point out the specific provisions which Phil Carpet violated. Thus, they would have the Court
pronounce that Phil Carpet committed unfair labor practice on the ground that they were
dismissed from employment simply because they were union officers and members. The
constitutional commitment to the policy of social justice, however, cannot be understood to mean
that every labor dispute shall automatically be decided in favor of labor.32
141
In this case, as far as the pieces of evidence offered by the petitioners are concerned, there is
no showing that the closure of the company was an attempt at union-busting. Hence, the charge
that Phil Carpet is guilty of unfair labor practice must fail for lack of merit.
Pacific Carpethasapersonalityseparateand distinct from Phil Carpet
The petitioners, in asking the Court to disregard the separate corporate personality of Pacific
Carpet and to make it liable for the obligations of Phil Carpet, rely heavily on the former being a
subsidiary of the latter.
A corporation is an artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or incident
to its existence. It has a personality separate and distinct from the persons composing it, as well
as from any other legal entity to which may be related. 33
Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled
only when it becomes a shield for fraud, illegality or inequity committed against third persons. 34
Hence, any application of the doctrine of piercing the corporate veil should be done with caution.
A court should be mindful of the milieu where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an injustice that was never unintended may
result from an erroneous application. 35
Further, the Court's ruling in Philippine National Bank v. HydroResources Contractors
Corporation  36 is enlightening, viz.:
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of
an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
xxxx
In this connection, case law lays down a three-pronged test to determine the application of
the alter ego theory, which is also known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of.

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be
completely under the control and domination of the parent. It examines the parent corporation's
relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the
parent corporation such that its separate existence as a distinct corporate entity will be ignored.
It seeks to establish whether the subsidiary corporation has no autonomy and the parent
corporation, though acting through the subsidiary in form and appearance, "is operating the
business directly for itself."
The second prong is the "fraud" test. This test requires that the parent corporation's conduct in
using the subsidiary corporation be unjust, fraudulent or wrongful.1âwphi1 It examines the
relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it
requires a showing of "an element of injustice or fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to show that the defendant's
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm
suffered. A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendant's exercise of control and improper use of the
corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements: control of the corporation by the stockholder or parent
corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage
caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of
these elements prevents piercing the corporate veil.37 [Citations omitted]
The Court finds that none of the tests has been satisfactorily met in this case.
Although ownership by one corporation of all or a great majority of stocks of another corporation
and their interlocking directorates may serve as indicia of control, by themselves and without
more, these circumstances are insufficient to establish an alter ego relationship or connection
between Phil Carpet on the one hand and Pacific Carpet on the other hand, that will justify the
puncturing of the latter's corporate cover.38
This Court has declared that "mere ownership by a single stockholder or by another corporation
of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality."39 It has likewise ruled that the "existence of
interlocking directors, corporate officers and shareholders is not enough justification to pierce
the veil of corporate fiction in the absence of fraud or other public policy considerations."40
It must be noted that Pacific Carpet was registered with the Securities and Exchange
Commission on January 29, 1999, 41 such that it could not be said that Pacific Carpet was set up
to evade Phil Carpet's liabilities. As to the transfer of Phil Carpet's machines to Pacific Carpet,
settled is the rule that "where one corporation sells or otherwise transfers all its assets to
another corporation for value, the latter is not, by that fact alone, liable for the debts and
liabilities of the transferor. "42
All told, the petitioners failed to present substantial evidence to prove their allegation that Pacific
Carpet is a mere alter ego of Phil Carpet.
142
The quitclaims were valid and binding upon the petitioners
Where the person making the waiver has done so voluntarily, with a full understanding thereof,
and the consideration for the quitclaim is credible and reasonable, the transaction must be
recognized as being a valid and binding undertaking. 43 Not all quitclaims are per se invalid or
against policy, except (1) where there is clear proof that the waiver was wangled from an
unsuspecting or gullible person, or (2) where the terms of settlement are unconscionable on
their face; in these cases, the law will step in to annul the questionable transactions. 44
In this case, the petitioners question the validity of the quitclaims they signed on the ground that
Phil Carpet's closure was a mere pretense. As the closure of Phil Carpet, however, was
supported by substantial evidence, the petitioners' reason for seeking the invalidation of the
quitclaims must necessarily fail. Further, as aptly observed by the CA, the contents of the
quitclaims, which were in Filipino, were clear and simple, such that it was unlikely that the
petitioners did not understand what they were signing. 45 Finally, the amount they received was
reasonable as the same complied with the requirements of the Labor Code.
WHEREFORE, the petition is DENIED. The January 8, 2016Decision and April 11, 2016
Resolution of the Court of Appeals in CA-G.R. SP No. 140663, are AFFIRMED intoto.
SO ORDERED.
THIRD DIVISION
JULY 23, 2018
G.R. No. 221813
MARICALUM MINING CORPORATION, Petitioner
vs.
ELY G. FLORENTINO, GLENN BUENVIAJE, RUDY J. GOMEZ, represented by his heir
THELMA GOMEZ, ALEJANDRO H. SITCHON, NENET ARITA, FERNANDO SIGUAN,
DENNIS ABELIDA, NOEL S. ACCOLADOR,WILFREDO TAGANILE, SR., MARTIR S.
AGSOY, SR., MELCHOR APUCA Y, DOMINGO LA VIDA, JESUS MOSQUEDA, RUELITO A.
VILLARMIA, SOFRONIO M. A YON, EFREN T. GENISE, ALQUIN A. FRANCO, PABLO L.
ALEMAN, PEPITO G. HEPRIANA, ELIAS S. TRESPECES, EDGAR SOBRINO, Respondents
x-----------------------x
G.R. No. 222723
ELY FLORENTINO, GLENN BUENVIAJE, RUDY J. GOMEZ, represented by his heir
THELMA GOMEZ, FERNANDO SIGUAN, DENNIS ABELIDA, NOEL S.
ACCOLADOR,WILFREDO TAGANILE, SR., MARTIR S. AGSOY, SR., MELCHOR APUCA Y,
DOMINGO LA VIDA, JESUS MOSQUEDA, RUELITO A. VILLARMIA, SOFRONIO M. A YON,
EFREN T. GENISE, ALQUIN A. FRANCO, PABLO L. ALEMAN, PEPITO G. HEPRIANA,
ELIAS S. TRESPECES, EDGAR SOBRINO, ALEJANDRO H. SITCHON, NENET ARITA,
WELILMO T. NERI, ERLINDA FERNANDEZ, and EDGARDO PENAFLORIDA, Petitioners
vs.
NATIONAL LABOR RELATIONS COMMISSION – 7th DIVISION, CEBU CITY, "G"
HOLDINGS, INC., and TEODORO G. BERNARDINO, ROLANDO DEGOJAS, MARICALUM
MINING CORPORATION. Respondents
DECISION
 143

GESMUNDO, J.:
A subsidiary company's separate corporate personality may be disregarded only when the
evidence shows that such separate personality was being used by its parent or holding
corporation to perpetrate a fraud or evade an existing obligation. Concomitantly, employees of a
corporation have no cause of action for labor-related claims against another unaffiliated
corporation, which does not exercise control over them.
The subjects of the instant consolidated cases are two (2) petitions for appeal by certiorari filed
by the following petitioners:
COOPERATIVE
1) Maricalum Mining Corporation (Maricalum Mining) m G.R. No. 221813; and
Upon the signing of the PSA and paying the stipulated down payment, G Holdings immediately
took physical possession of Maricalum Mining's Sipalay Mining Complex, as well as its facilities,
and took full control of the latter's management and operations.9
On January 26, 1999, the Sipalay General Hospital, Inc. (Sipalay Hospital) was duly
incorporated to provide medical services and facilities to the general public. 10
Afterwards, some of Maricalum Mining's employees retired and formed several manpower
cooperatives, 11 as follow:
DATE OF REGISTRATION

2) Ely Florentino, Glenn Buenviaje, Rudy J. Gomez, 1 Fernando Siguan, Dennis Abelida, Noel S. San Jose Multi-Purpose Cooperative (SJMPC) December 8, 1998
Acollador, Wilfredo C. Taganile, Sr., Martir S. Agsoy, Sr., Melchor B. Apucay, Domingo Lavida,
Jesus Mosqueda, Ruelito A. Villarmia, Sofronio M. Ayon, Efren T. Genise, Alquin A. Franco,
Pabio L. Aleman, Pepito G. Hepriana, Elias S. Trespeces, Edgar M. Sobrino, Alejandro H. Centennial Multi-Purpose Cooperative (CeMPC) April 5, 1999
Sitchon, Nenet Arita, Dr. Welilmo T. Neri, Erlinda L. Fernandez, and Edgardo S.
Pefiaflorida (complainants) in G.R. No. 222723. Sipalay Integrated Multi-Purpose April 5, 1999
2
Cooperative (SIMPC)
Both of these petitions are assailing the propriety of the October 29, 2014 Decision  of the Court
of Appeals (CA) in CA-G.R. SP No. 06835. The CA upheld the November 29, 2011
Decision3 and January 31, 2012 Resolution4 of the National Labor Relations Allied Services Multi-Purpose July 23, 1999
Commission (NLRC) in NLRC Case No. VAC-05-000412-11. In the present petitions, Cooperative (ASMPC)
complainants seek to reinstate the April 20, 2011 Decision 5 of the Labor Arbiter (LA) in
consolidated cases NLRC RAB VI CASE No. 09-10755-10, NLRC RAB VI CASE No. 12-10915- Cansibit Multi-Purpose Cooperative (CaMPC) September 16, 1999
10, NLRC RAB VI CASE No. 12-10916-10 and NLRC RAB VI CASE No. 12-10917-10, which
granted their joint complaints for monetary claims against G Holdings, Inc. (G Holdings); while
In 2000, each of the said cooperatives executed identical sets of Memorandum of
Maricalum Mining seeks to have the case remanded to the LA for proper computation of its total
Agreement 12 with Maricalum Mining wherein they undertook, among others, to provide the latter
monetary liability to the complainants.
with a steady supply of workers, machinery and equipment for a monthly fee.
The Antecedents
On June 1, 2001, Maricalum Mining's Vice President and Resident Manager Jesus H. Bermejo
The dispute traces its roots back to when the Philippine National Bank (PNB, a former wrote a Memorandum 13 to the cooperatives informing them that Maricalum Mining has decided
government-owned-and-controlled corporation) and the Development Bank of the to stop its mining and milling operations effective July 1, 2001 in order to avert continuing losses
Philippines (DBP) transferred its ownership of Maricalum Mining to the National Government for brought about by the low metal prices and high cost of production.
disposition or privatization because it had become a non-performing asset.6
In July 2001, the properties of Maricalum Mining, which had been mortgaged to secure the PNs,
On October 2, 1992, the National Government thru the Asset Privatization Trust (APT) executed were extrajudicially foreclosed and eventually sold to G Holdings as the highest bidder on
a Purchase and Sale Agreement (PSA) with G Holdings, a domestic corporation primarily December 3, 2001. 14
engaged in the business of owning and holding shares of stock of different companies. G
On September 23, 2010, some of Maricalum Mining's workers, including complainants, and
Holding bought 90% of Maricalum Mining's shares and financial claims in the form of company
some of Sipalay General Hospital's employees jointly filed a Complaint 15 with the LA against G
notes. In exchange, the PSA obliged G Holdings to pay APT the amount of ₱673,161,280.00,
Holdings, its president, and officer-in-charge, and the cooperatives and its officers for illegal
with a down payment of ₱98,704,000.00 and with the balance divided into four tranches payable
dismissal, underpayment and nonpayment of salaries, underpayment of overtime pay,
in installment over a period of ten years. 7 Concomitantly, G Holdings also assumed Maricalum
underpayment of premium pay for holiday, nonpayment of separation pay, underpayment of
Mining's liabilities in the form of company notes. The said financial liabilities were converted into
holiday pay, nonpayment of service incentive leave pay, nonpayment of vacation and sick leave,
three (3) Promissory Notes (PNs) totaling ₱550,000,000.00 (₱114,715,360.00, ₱186,550,560.00
nonpayment of 13th month pay, moral and exemplary damages, and attorneys fees.
and ₱248,734,080.00), which were secured by mortgages over some of Maricalum Mining's
properties.8 These PNs obliged Maricalum Mining to pay G Holdings the stipulated amount of On December 2, 2010, complainants and CeMPC Chairman Alejandro H. Sitchon surprisingly
₱550,000,000.00. filed his complaint for illegal dismissal and corresponding monetary claims with the LA against G
Holdings, its officer-in-charge and CeMPC. 16

Thereafter, the complaints were consolidated by the LA.

 144

During the hearings, complainants presented the affidavits of Alejandro H. Sitchon and Dennis The LA Ruling
Abelida which attested that, prior to the formation of the manpower cooperatives, their services
were terminated by Maricalum Mining as part of its retrenchment program. 17 They claimed that, In its decision dated April 28, 2011, the LA ruled in favor of complainants.1awp++i1 It held that G
in 1999, they were called by the top executives of Maricalum Mining and G Holdings and Holdings is guilty of labor-only contracting with the manpower cooperatives thereby making all of
informed that they will have to form a cooperative for the purpose of providing manpower them solidarily and directly liable to complainants. The LA reasoned that: G Holdings connived
services in view of the retrenchment program. Thus, they were "rehired" only after their with Marcalum Mining in orchestrating the formation of manpower cooperatives to circumvent
respective manpower cooperative services were formed. Moreover, they also submitted the complainants' labor standards rights; it is highly unlikely that complainants (except Sipalay
following documents: (a) Cash Vouchers 18 representing payments to the manpower Hospital's employees) would spontaneously form manpower cooperatives on their own and in
cooperatives; (b) a Payment Schedule 19 representing G Holdings' payment of social security unison without the guidance of G Holdings and Maricalum Mining; and complainants effectively
contributions in favor of some Sipalay Hospital employees (c) Termination Letters 20 written by became the employees of G Holdings because their work had changed from assisting in the
representatives of G Holdings, which were addressed to complainants including those employed mining operations to safeguarding the properties in the Sipalay Mining Complex, which had
by Sipalay Hospital; and (d) Caretaker Schedules 21 prepared by G Holdings to prove the already been acquired by G Holding. On the other hand, the LA denied the claims of
existence of employment relations. complainants Nenet Arita and Domingo Lavida for lack of factual basis. The fallo of the LA
decision reads:
After the hearings were concluded, complainants presented their Position Paper 22 claiming that:
they have not received any increase in wages since they were allegedly rehired; except for WHEREFORE, premises considered, judgment is hereby rendered DIRECTING respondent "G"
Sipalay Hospital's employees, they worked as an augmentation force to the security guards HOLDINGS, INC. to pay complainants as follows:
charged with securing Maricalum Mining's assets which were acquired by G Holdings;
Maricalum Mining's assets have been exposed to pilferage by some of its rank-and-file     Unpaid Salaries/ Wages 13th Month Pay
employees whose claims for collective bargaining benefits were undergoing litigation; the
Sipalay Hospital is purportedly "among the assets" of Maricalum Mining acquired by G Holdings; (1) Salvador Arceo ₱81,418.08 ₱6,784.84
the payrolls for their wages were supposedly prepared by G Holdings' accounting department;
since the second half of April 2007, they have not been paid their salary; and some of their
services were dismissed without any due process. (2) Sofronio Ayon 79,158.50 6,596.54

Based on these factual claims, complainants posited that: the manpower cooperatives were (3) Glenn Buenviaje 105,558.40 8,796.53
mere alter egos of G Holdings organized to subvert the "tenurial rights" of the complainants; G
Holdings implemented a retrenchment scheme to dismiss the caretakers it hired before the
(4) Ely Florentino 102,325.28 8,527.11
foreclosure of Maricalum Mining's assets; and G Holdings was their employer because it
allegedly had the power to hire, pay wages, control working methods and dismiss them.
(5) Rogelio Fulo 99,352.23 8,279.35
Correspondingly, G Holdings filed its Position Paper 23 maintaining that: it was Maricalum Mining
who entered into an agreement with the manpower corporations for the employment of (6) Efren Genise 161,149.18 13,429.10
complainants' services for auxiliary or seasonal mining activities; the manpower cooperatives
were the ones who paid the wages, deducted social security contributions, withheld taxes,
provided medical benefits and had control over the working means and methods of (7) Rudy Gomez 72,133.41 6,011.12
complainants; despite Maricalum Mining's decision to stop its mining and milling operations,
complainants still continued to render their services for the orderly winding down of the mines' (8) Jessie Magallanes 239,251.94 19,937.66
operations; Maricalum Mining should have been impleaded because it is supposed to be the
indispensable party in the present suit; (e) Marical um Mining, as well as the manpower (9) Freddie Masicampo 143,415.85 11,951.32
cooperatives, each have distinct legal personalities and that their individual corporate liabilities
cannot be imposed upon each other; and there was no employer-employee relationship between
G Holdings and complainants. (10) Edgardo Penaflorida 146,483.60 12,206.97

Likewise, the manpower cooperatives jointly filed their Position Paper 24 arguing that: (11) Noel Acollador 89,163.46 7,430.29
complainants had exhibited a favorable response when they were properly briefed of the nature
and benefits of working under a cooperative setup; complainants received their fair share of
benefits; complainants were entitled to cast their respective votes in deciding the affairs of their (12) Gorgonio Baladhay 220,956.10 18,413.01
respective cooperatives; complainants, as member of the cooperatives, are also co-owners of
the said cooperative and they cannot bargain for higher labor benefits with other co-owners; and (13) Jesus Mosqueda 48,303.22 4,025.27
the LA has no jurisdiction over the case because there is no employer-employee relationship
between a cooperative and its members. (14) Alquin Franco 180,281.25 15,023.44
 145

The parties filed their respective appeals to the NLRC.

On July 18, 2011, Marical um Mining filed its Appeal-in-Intervention 26 seeking to: (a) reverse
(15) Fabio Aleman 30,000.00 2,500.00 and set aside the Labor Arbiter's Decision; (b) declare Mari cal um Mining as the true and proper
party-in-interest; (c) remand the case back to the Labor Arbiter for proper computation of the
money claims of the complainants; and (d) give Maricalum Mining the opportunity to settle with
(16) Elias Trespeces 180,000.00 15,000.00 the complainants.

(17) Pepito Hedriana 18,000.00 1,500.00 The NLRC Ruling

In its decision dated November 29, 2011, the NLRC modified the LA ruling. It held that Dr.
(18) Dennis Abelida 149,941.00 12,945.08 Welilmo T. Neri, Erlinda L. Fernandez and Edgar M. Sobrino are not entitled to the monetary
awards because they were not able to establish the fact of their employment relationship with G
(19) Melchor Apucay 371,587.01 30,965.58 Holdings or Maricalum Mining because Sipalay Hospital has a separate and distinct corporate
personality. As to the remaining complainants, it found that no evidence was adduced to prove
(20) Martin Agsoy 128,945.08 10,745.42 that the salaries/wages and the 13th month pay had been paid.

However, the NLRC imposed the liability of paying the monetary awards imposed by the LA
(21) Ruelito Villarmia 224,486.95 18,707.25 against Maricalum Mining, instead of G Holdings, based on the following observations that: it
was Maricalum Mining-not G Holdings-who entered into service contracts by way of a
(22) Fernando Siguan 417,039.32 34,753.28 Memorandum of Agreement with each of the manpower cooperatives; complainants continued
rendering their services at the insistence of Maricalum Mining through their cooperatives;
Maricalum Mining never relinquished possession over the Sipalay Mining Complex; Maricalum
(23) Alejandro Sitchon 380,423.16 31,701.93 Mining continuously availed of the services of complainants through their respective manpower
cooperatives; in G Holdings, Inc. v. National Mines and Allied Workers Union Local 103
(24) Welilmo Neri 456,502.36 38,041.86 (NAMAWU), et al. 27 (NAMA WU Case), the Court already held that G Holdings and Maricalum
Mining have separate and distinct corporate personalities. The dispositive portion of the NLRC
(25) Erlinda Fernandez 125,553.88 10,462.82 ruling states:

WHEREFORE, premises considered, the Decision rendered by the Labor Arbiter on 20 April
(26) Edgardo Sobrino 112,521.40 9,376.78 2011 is hereby MODIFIED, to wit:

(27) Wildredo Taganile 52,386.82 4,365.57 1) the monetary award adjudged to complainants Jessie Magallanes, Rogelio E. Fulo, Salvador
J. Arceo, Freddie Masicampo, Welilmo Neri, Erlinda Fernandez and Edgar Sobrino are
CANCELLED;
(28) Bartholomew Jamboy 68,000.00 5,666.67
2) the award of ten percent (10%) attorney's fees is ADJUSTED commensurate to the award of
    ₱4,484,337.48 ₱373,694.79 unpaid salaries/wages and 13th month pay of the remaining complainants;

and the amount of ₱485,803.23 as attorney's fees, or the total amount of FIVE MILLION THREE
HUNDRED FORTY-THREE THOUSAND EIGHT HUNDRED THIRTY-FIVE and 50/100 PESOS
(₱5,343,835.50).
The other claims are DISMISSED for lack of merit.
Further, the complaints against respondents SIP ALA Y INTEGRATED MULTI-PURPOSE
COOPERATIVE, ALLIED SERVICES MULTI-COOPERATIVE, SAN JOSE MULTI-PURPOSE
COOPERATIVE, CANSIBIT MULTI-PURPOSE COOPERATIVE, and CENTENNIAL MULTI-
PURPOSE COOPERATIVE, being mere agents of respondent "G" HOLDINGS, INC., are
hereby DISMISSED.
SO ORDERED.25
3) the directive for respondent "G" Holdings, Inc. to pay complainants the monetary awards
adjudged by the Labor Arbiter is CANCELLED;
4) it is intervenor that is, accordingly, directed to pay the remaining complainants their respective
monetary awards.1âwphi1
In all other respects the Decision STANDS.
SO ORDERED.28
Complainants and Maricalum Mining filed their respective motions for reconsideration before the
NLRC. On January 31, 2012, it issued a resolution modifying its previous decision. The
dispositive portion of the NLRC resolution state:

WHEREFORE, premises considered, intervenor's Motion for Reconsideration is only
PARTIALLY GRANTED. The Decision promulgated by the Commission on 29 November 2011
modifying the Labor Arbiter's decision as stated therein, is further MODIFIED to the effect that
the monetary awards adjudged in favor of complainants Wilfredo Taganile and Bartholomew T.
Jamboy are CANCELLED.
SO ORDERED.29
Undaunted, the parties filed their respective petitions for certiorari before the CA.
The CA Ruling
In its decision dated October 29, 2014, the CA denied the petitions and affirmed the decision of
the NLRC. It ratiocinated that factual issues are not fit subjects for review via the extraordinary
remedy of certiorari. The CA emphasized that the NLRC's factual findings are conclusive and
binding on the appellate courts when they are supported by substantial evidence. Thus, it
maintained that it cannot review and re-evaluate the evidence all over again because there was
no showing that the NLRC's findings of facts were reached arbitrarily. The decretal portion of the
CA decision states:
WHEREFORE, premises considered, the instant petition for certiorari is DENIED, and the
assailed Decision dated 29 December 2011 and two Resolutions both dated 31 January 2012 of
the National Labor Relations Commission are hereby AFFIRMED in all respects.
Costs against petitioners.
SO ORDERED.30
Hence, these consolidated petitions essentially raising the following issues:
I proper because: (a) it did not acquire all of Maricalum Mining's assets; (b) it is primarily engaged
WHETHER THE COURT OF APPEALS ERRED IN REFUSING TO RE-EVALUATE THE
FACTS AND IN FINDING NO GRAVE ABUSE OF DISCRETION ON THE PART OF THE
NLRC;
II
WHETHER THE COURT OF APPEALS ERRED IN AFFIRMING THE NLRC'S FINDING OF
SUBSTANTIAL EVIDENCE IN GRANTING THE COMPLAINANTS' MONETARY AWARD AS
WELL AS ITS REFUSAL TO REMAND THE CASE BACK TO THE LABOR ARBITER FOR RE-
COMPUTATION OF SUCH AWARD;
III
WHETHER THE COURT OF APPEALS ERRED IN DISREGARDING THAT THE NLRC
ALLOWED MARICALUM MINING TO INTERVENE IN THE CASE ONLY ON APPEAL;
IV
WHETHER THE COURT OF APPEALS ERRED IN AFFIRMING THE NLRC'S RULING WHICH
ALLOWED THE PIERCING OF THE CORPORA TE VEIL AGAINST MARICALUM MINING BUT
NOT AGAINST SIPALAY HOSPITAL.
146
Complainants argue that the CA committed several reversible errors because: (a) it refused to
re-evaluate the facts of the case even if the factual findings of the NLRC and the LA were
conflicting; (b) it failed to consider that G Holdings had already acquired all of Maricalum
Mining's assets and that Teodoro G. Bernardino (Bernardino) was now the president and
controlling stockholder of both corporations; (c) it failed to take into account that Maricalum
Mining was allowed to intervene only on appeal even though it was not a real party-in-interest;
(d) it failed to appreciate the LA' s findings that Maricalum Mining could not have hired
complainants because G Holdings had already acquired in an auction sale all the assets in the
Sipalay Mining Complex; (e) it failed to consider that all resident managers of the Sipalay Mining
Complex were employed by G Holdings; (f) the foreclosure of the assets in the Sipalay Mining
Complex was intended to bring the said properties outside the reach of complainants; (g) the
Sipalay Hospital had been existing as a hospital for Maricalum Mining's employees long before
G Holdings arrived; (h) Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and
Wilfredo C. Taganile, Sr. were all hired by Maricalum Mining but were dismissed by G Holdings;
(i) Sipalay Hospital existed without a board of directors and its employees were receiving orders
from Maricalum Mining and, later on, replaced by G Holdings' officer-in-charge; and (j)
Maricalum Mining and G Holdings controlled the affairs of Sipalay Hospital.
Maricalum Mining contends that the CA committed grave abuse of discretion because the
monetary awards were improperly computed. It claims that complainants had stopped rendering
their services since September 23, 2010, hence, their monetary claims covering the second half
of April 2007 up to July 2007 have already prescribed as provided pursuant to Article 291 of the
Labor Code. Moreover, it also stressed that the NLRC should have remanded the case to the LA
for the determination of the manpower cooperatives' net surpluses and how these amounts were
distributed to their members to aid the proper determination of the total amount of the monetary
award. Finally, Maricalum Mining avers that the awards in favor of some of the complainants are
"improbable" and completely unfounded.
On the other hand, G Holdings argues that piercing the corporate veil of Maricalum Mining is not
in the business of owning and holding shares of stocks of different companies-not participating
in the operations of its subsidiaries; (c) Maricalum Mining, the actual employers of complainants,
had already manifested its willingness to settle the correct money claims; (d) Bernardino is not a
controlling stockholder of Maricalum Mining because the latter's corporate records show that
almost all of its shares of stock are owned by the APT; ( e) Joost Pekelharing-not Bernardino-is
G Holdings' president; (f) in the NAMA WU Case, it was already held that control over Maricalum
Mining was exercised by the APT and not G Holdings; (g) the NLRC did not commit any grave
abuse of discretion when it allowed Maricalum Mining to intervene after the LA's decision was
promulgated; (h) the cash vouchers, payment schedule, termination letters and caretaker
schedules presented by complainants do not prove the employment relationship with G Holdings
because the signatories thereto were either from Maricalum Mining or the manpower
cooperatives; (i) this Court's pronouncements in the NAMA WU Case and in Republic v. G
Holdings, Inc. 31 prove that Maricalum Mining never relinquished possession of the Sipalay
Mining Complex in favor of G Holdings; and (j) Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar
M. Sobrino and Wilfredo C. Taganile, Sr. were employees of the Sipalay Hospital, which is a
separate business entity, and were not members in any of the manpower cooperatives, which
entered into a labor-only arrangement with Maricalum Mining.
The Court's Ruling
It is basic that only pure questions of law should be raised in petitions for review
on certiorari under Rule 45 of the Rules of Court.32 It will not entertain questions of fact as the

factual findings of appellate courts are final, binding or conclusive on the parties and upon this
court when supported by substantial evidence.33 In labor cases, however, the Court has to
examine the CA' s Decision from the prism of whether the latter had correctly determined the
presence or absence of grave abuse of discretion in the NLRC's Decision.34
In this case, the principle that this Court is not a trier of facts applies with greater force in labor
cases. 35 Grave abuse must have attended the evaluation of the facts and evidence presented
by the parties.36 This Court is keenly aware that the CA undertook a Rule 65 review-not a review
on appeal-of the NLRC decision challenged before it. 37 It follows that this Court will not re-
examine conflicting evidence, reevaluate the credibility of witnesses, or substitute the findings of
fact of the NLRC, an administrative body that has expertise in its specialized field. 38 It may only
examine the facts only for the purpose of resolving allegations and determining the existence of
grave abuse of discretion. 39 Accordingly, with these procedural guidelines, the Court will now
proceed to determine whether or not the CA had committed any reversible error in affirming the
NLRC's Decision.
Propriety of the Monetary Awards
Ordinarily, when there is sufficient evidence before the Court to enable it to resolve fundamental
issues, it will dispense with the regular procedure of remanding the case to the lower court or
appropriate tribunal in order to avoid a further delay in the resolution of the case. 40 A remand is
only necessary when the proceedings below are grossly inadequate to settle factual
issues.41 This is in line with the Court's power to issue a process in order to enforce its own
decrees and thus avoid circuitous actions and vexatious litigation.42
In the case at bench, Maricalum Mining is seeking to have the case remanded because the LA
allegedly miscomputed the amount of the monetary awards. However, it failed to offer any
reasonable argument or explanation why the proceedings conducted before the NLRC or
LA were "grossly inadequate to settle factual issues," especially as regards the computation
of monetary awards. Its bare allegations - that the monetary awards were improperly computed
because prescribed claims have been granted, that the net surpluses of the manpower
cooperative were not properly distributed, and that the awards in favor of some of the
complainants were improbable - do not warrant the invocation of this Court's power to have the
case remanded back to the LA. Bare and unsubstantiated allegations do not constitute
substantial evidence and have no probative value.43
Besides, it is not imperative for the Court to remand the case to the LA for the determination of
the amounts of net surpluses that each of the manpower cooperatives had received from
Maricalum Mining. The records show that Maricalum Mining was guilty of entering into a labor-
only contracting arrangement with the manpower cooperatives, thus, all of them are solidarily
liable to the complainants by virtue of Article 106 44 of the Labor Code. In DOLE Philippines, Inc.
v. Esteva, et al. 45 it was ruled that a cooperative, despite having a personality separate from its
members, 46 is engaged in a labor-only contracting arrangement based on the following
indicators:
1) The cooperative had a measly paid-up capital of ₱6,600.00 and had only managed to
increase the same by continually engaging in labor-only contracting with its client;
2) The cooperative did not carry out an independent business from its client and its own office
and equipment were mainly used for administrative purposes;
3) The cooperative's members had to undergo instructions and pass the training provided by the
client's personnel before they could start working alongside regular employees;
147
4) The cooperative was not engaged to perform a specific and special job or service; and
5) The cooperative's members performed activities directly related and vital to the principal
business of its client.
Here, the virtually identical sets of memorandum of agreement with the manpower cooperatives
state among others that: (a) the services covered shall consist of operating loading, drilling and
various auxiliary equipments; and (b) the cooperative members shall abide by the norms and
standards of the Maricalum Mining. These services and guidelines are essential to the
operations of Maricalum Mining. Thus, since the cooperative members perform the work vital to
the operation of the Sipalay Mining Complex, the they were being contracted in a labor-only
arrangement. Moreover, the burden of proving the supposed status of the contractor rests on the
principal47 and Maricalum Mining, being the principal, also failed to present any evidence before
the NLRC that each of the manpower cooperatives had an independent viable business.
Propriety of Maricalum Mining's Intervention
Intervention is a remedy by which a third party, who is not originally imp leaded in a proceeding,
becomes a litigant for purposes of protecting his or her right or interest that may be affected by
the proceedings.48 The factors that should be reckoned in determining whether or not to allow
intervention are whether intervention will unduly delay or prejudice the adjudication of the rights
of the original parties and whether the intervenors rights may be fully protected in a separate
proceeding. 49 A motion to intervene may be entertained or allowed even if filed after judgment
was rendered by the trial court, especially in cases where the intervenors are indispensable
parties.50 Parties may be added by order of the court on motion of the party or on its own
initiative at any stage of the action and/or at such times as are just.51
In this case, it was never contested by complainants that it was Maricalum Mining-not G
Holdings-who executed several sets of memorandum of agreement with the manpower
cooperatives. The contractual connection between Maricalum Mining and the manpower
cooperatives is crucial to the determination of labor-related liabilities especially when it involves
a labor-only contracting arrangement. Accordingly, Maricalum Mining will eventually be held
solidarily liable with the manpower cooperatives. In other words, it stands to be injured by the
incontrovertible fact that it entered into a labor-only arrangement with the manpower
cooperatives. Thus, Maricalum Mining is an indispensable party and worthy of being allowed to
intervene in this case.52
In order to properly analyze G Holdings's role in the instant dispute, the Court must discuss its
peculiar relationship (or lack thereof) with Maricalum Mining and Sipalay Hospital.
G Holdings and Maricalum Mining
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: (a)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of
an existing obligation; (b) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or (c) alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. 53 This principle is basically
applied only to determine established liability. 54 However, piercing of the veil of corporate fiction
is frowned upon and must be done with caution. 55 This is because a corporation is invested by
law with a personality separate and distinct from those of the persons composing it as well as
from that of any other legal entity to which it may be related. 56

A parent57 or holding company58 is a corporation which owns or is organized to own a substantial
portion of another company's voting59 shares of stock enough to control 60 or influence the latter's
management, policies or affairs thru election of the latter's board of directors or otherwise.
However, the term "holding company" is customarily used interchangeably with the term
"investment company" which, in turn, is defined by Section 4 (a) of Republic Act (R.A.) No.
262961 as "any issuer (corporation) which is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing, reinvesting, or trading in securities."
In other words, a "holding company" is organized and is basically conducting its business by
investing substantially in the equity securities62 of another company for the purposes of
controlling their policies (as opposed to directly engaging in operating activities) and "holding"
them in a conglomerate or umbrella structure along with other subsidiaries. Significantly, the
holding company itself-being a separate entity-does not own the assets of and does not answer
for the liabilities of the subsidiary 63 or affiliate. 64 The management of the subsidiary or affiliate
still rests in the hands of its own board of directors and corporate officers. It is in keeping with
the basic rule a corporation is a juridical entity which is vested with a legal personality separate
and distinct from those acting for and in its behalf and, in general, from the people comprising
it.65 The corporate form was created to allow shareholders to invest without incurring personal
liability for the acts of the corporation. 66
While the veil of corporate fiction may be pierced under certain instances, mere ownership of a
subsidiary does not justify the imposition of liability on the parent company. 67 It must further
appear that to recognize a parent and a subsidiary as separate entities would aid in the
consummation of a wrong.68 Thus, a holding corporation has a separate corporate
existence and is to be treated as a separate entity; unless the facts show that such
separate corporate existence is a mere sham, or has been used as an instrument for
concealing the truth.69
In the case at bench, complainants mainly harp their cause on the alter ego theory. Under this
theory, piercing the veil of corporate fiction may be allowed only if the following elements concur:
1) Control-not mere stock control, but complete domination-not only of finances, but of policy
and business practice in respect to the transaction attacked, must have been such that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
2) Such control must have been used by the defendant to commit a fraud or a wrong, to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust
act in contravention of plaintiffs legal right; and
3) The said control and breach of duty must have proximately caused the injury or unjust loss
complained of.70
The elements of the alter ego theory were discussed in Philippine National Bank v. Hydro
Resources Contractors Corporation, 71 to wit:
The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary
be completely under the control and domination of the parent. It examines the parent
corporation's relationship with the subsidiary. It inquires whether a subsidiary corporation is so
organized and controlled and its affairs are so conducted as to make it a mere instrumentality or
agent of the parent corporation such that its separate existence as a distinct corporate entity will
be ignored. It seeks to establish whether the subsidiary corporation has no autonomy and the
148
parent corporation, though acting through the subsidiary in form and appearance, "is operating
the business directly for itself."
The second prong is the "fraud" test. This test requires that the parent corporation's conduct in
using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of
the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent
corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a
showing of "an element of injustice or fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to show that the defendant's
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm
suffered. A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendant's exercise of control and improper use of the
corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements: control of the corporation by the stockholder or parent
corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage
caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of
these elements prevents piercing the corporate veil. (emphases and underscoring supplied)
Again, all these three elements must concur before the corporate veil may be pierced under the
alter ego theory. Keeping in mind the parameters, guidelines and indicators for proper piercing
of the corporate veil, the Court now proceeds to determine whether Maricalum Mining's
corporate veil may be pierced in order to allow complainants to enforce their monetary awards
against G Holdings.
I. Control or Instrumentality Test
In Concept Builders, Inc. v. National Labor Relations Commission, et al., 72 the Court first laid
down the first set of probative factors of identity that will justify the application of the doctrine of
piercing the corporate veil, viz:
1) Stock ownership by one or common ownership of both corporations.
2) Identity of directors and officers.
3) The manner of keeping corporate books and records.
4) Methods of conducting the business.
Later, in Philippine National Bank v. Ritratto Group Inc., et al.,73 the Court expanded the
aforementioned probative factors and enumerated a combination of any of the following
common circumstances that may also render a subsidiary an instrumentality, to wit:
1) The parent corporation owns all or most of the capital stock of the subsidiary;
2) The parent and subsidiary corporations have common directors or officers;
3) The parent corporation finances the subsidiary;

4) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation;
5) The subsidiary has grossly inadequate capital;
6) The parent corporation pays the salaries and other expenses or losses of the subsidiary;
7) The subsidiary has substantially no business except with the parent corporation or no assets
except those conveyed to or by the parent corporation;
8) In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own;
9) The parent corporation uses the property of the subsidiary as its own;
10) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation; and
11) The formal legal requirements of the subsidiary are not observed.
In the instant case, there is no doubt that G Holdings-being the majority and controlling
stockholder-had been exercising significant control over Maricalum Mining. This is because this
Court had already upheld the validity and enforceability of the PSA between the APT and G
Holdings. It was stipulated in the PSA that APT shall transfer 90% of Mari cal um Mining's equity
securities to G Holdings and it establishes the presence of absolute control of a subsidiary's
corporate affairs. Moreover, the Court evinces its observation that Maricalum Mining's corporate
name appearing on the heading of the cash vouchers issued in payment of the services
rendered by the manpower cooperatives is being superimposed with G Holding's corporate
name. Due to this observation, it can be reasonably inferred that G Holdings is paying for Mari
cal um Mining's salary expenses. Hence, the presence of both circumstances of dominant equity
ownership and provision for salary expenses may adequately establish that Maricalum Mining is
an instrumentality of G Holdings.
However, mere presence of control and full ownership of a parent over a subsidiary is not
enough to pierce the veil of corporate fiction. It has been reiterated by this Court time and again
that mere ownership by a single stockholder or by another corporation of all or nearly all
of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality.74
II. Fraud Test
The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a
wrong, defeat public convenience, insulate bad faith or perpetuate injustice. 75 To aid in the
determination of the presence or absence of fraud, the following factors in the "Totality of
Circumstances Test"76 may be considered, viz:
1) Commingling of funds and other assets of the corporation with those of the individual
shareholders;
2) Diversion of the corporation's funds or assets to non-corporate uses (to the personal uses of
the corporation's shareholders);
149
3) Failure to maintain the corporate formalities necessary for the issuance of or subscription to
the corporation's stock, such as formal approval of the stock issue by the board of directors;
4) An individual shareholder representing to persons outside the corporation that he or she is
personally liable for the debts or other obligations of the corporation;
5) Failure to maintain corporate minutes or adequate corporate records;
6) Identical equitable ownership in two entities;
7) Identity of the directors and officers of two entities who are responsible for supervision and
management (a partnership or sole proprietorship and a corporation owned and managed by the
same parties);
8) Failure to adequately capitalize a corporation for the reasonable risks of the corporate
undertaking;
9) Absence of separately held corporate assets;
10) Use of a corporation as a mere shell or conduit to operate a single venture or some
particular aspect of the business of an individual or another corporation;
11) Sole ownership of all the stock by one individual or members of a single family;
12) Use of the same office or business location by the corporation and its individual
shareholder(s);
13) Employment of the same employees or attorney by the corporation and its shareholder(s);
14) Concealment or misrepresentation of the identity of the ownership, management or financial
interests in the corporation, and concealment of personal business activities of the shareholders
(sole shareholders do not reveal the association with a corporation, which makes loans to them
without adequate security);
15) Disregard of legal formalities and failure to maintain proper arm's length relationships among
related entities;
16) Use of a corporate entity as a conduit to procure labor, services or merchandise for another
person or entity;
17) Diversion of corporate assets from the corporation by or to a stockholder or other
person or entity to the detriment of creditors, or the manipulation of assets and liabilities
between entities to concentrate the assets in one and the liabilities in another;
18) Contracting by the corporation with another person with the intent to avoid the risk of
nonperformance by use of the corporate entity; or the use of a corporation as a
subterfuge for illegal transactions; and
19) The formation and use of the corporation to assume the existing liabilities of another person
or entity.
Aside from the aforementioned circumstances, it must be determined whether the transfer of
assets from Maricalum Mining to G Holdings is enough to invoke the equitable remedy of
piercing the corporate veil. The same issue was resolved in Y-1 Leisure Phils., Inc., et al. v.
Yu77 where this Court applied the "Nell Doctrine" 78 regarding the transfer of all the assets of

one corporation to another. It was discussed in that case that as a general rule that where one
corporation sells or otherwise transfers all of its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor, except:
1) Where the purchaser expressly or impliedly agrees to assume such debts;
2) Where the transaction amounts to a consolidation or merger of the corporations;
3) Where the purchasing corporation is merely a continuation of the selling corporation; and
4) Where the transaction is entered into fraudulently in order to escape liability for such
debts.
If any of the above-cited exceptions are present, then the transferee corporation shall assume
the liabilities of the transferor. 79
In this case, G Holdings cannot be held liable for the satisfaction of labor-related claims against
Maricalum Mining under the fraud test for the following reasons:
First, the transfer of some Maricalum Mining's assets in favor G Holdings was by virtue of the
PSA as part of an official measure to dispose of the government's non-performing assets-not to
evade its monetary obligations to the complainants. Even before complainants' monetary claims
supposedly existed in 2007, some of Maricalum Mining's assets had already been validly
extrajudicially foreclosed and eventually sold to G Holdings in 2001. Thus, G Holdings could not
have devised a scheme to avoid a non-existent obligation. No fraud could be attributed to G
Holdings because the transfer of assets was pursuant to a previously perfected valid contract.
Settled is the rule that where one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the
transferor. 80 In other words, control or ownership of substantially all of a subsidiary's assets is
not by itself an indication of a holding company's fraudulent intent to alienate these assets in
evading labor-related claims or liabilities. As discussed earlier, the PSA was not designed to
evade the monetary claims of the complainants. Although there was proof that G Holdings has
an office in Maricalum Mining's premises and that that some of their assets have been
commingled due to the PSA's unavoidable consequences, there was no fraudulent diversion of
corporate assets to another corporation for the sole purpose of evading complainants' claim.
Besides, it is evident that the alleged continuing depletion of Maricalum Mining's assets is due to
its disgruntled employees' own acts of pilferage, which was beyond the control of G Holdings.
More so, complainants also failed to present any clear and convincing evidence that G Holdings
was grossly negligent and failed to exercise the required degree of diligence in ensuring that
Maricalum Mining's assets would be protected from pilferage. 81 Hence, no fraud can be imputed
against G Holdings considering that there is no evidence in the records that establishes it
systematically tried to alienate Maricalum Mining's assets to escape the liabilities to
complainants.
Second, it was not proven that all of Maricalum Mining's assets were transferred to G Holdings
or were totally depleted. Complainants never offered any evidence to establish that Maricalum
Mining had absolutely no substantial assets to cover for their monetary claims. Their allegation
that their claims will be reduced to a mere "paper victory" has not confirmed with concrete proof.
At the very least, substantial evidence should be adduced that the subsidiary company's "net
realizable value"82 of "current assets" 83 and "fair value" 84 of "non-current assets" 85 are
collectively insufficient to cover the whole amount of its liability subject in the instant litigation.
150
Third, G Holdings purchased Mari cal um Mining's shares from the APT not for the purpose of
continuing the latter's existence and operations but for the purpose of investing in the mining
industry without having to directly engage in the management and operation of mining. As
discussed earlier, a holding company's primary business is merely to invest in the equity of
another corporation for the purpose of earning from the latter's endeavors. It generally does not
undertake to engage in the daily operating activities of its subsidiaries that, in turn, have their
own separate sets of directors and officers. Thus, there should be proof that a holding company
had indeed fraudulently used the separate corporate personality of its subsidiary to evade an
obligation before it can be held liable. Since G Holdings is a holding company, the corporate veil
of its subsidiaries may only be pierced based on fraud or gross negligence amounting to bad
faith.
Lastly, no clear and convincing evidence was presented by the complainants to conclusively
prove the presence of fraud on the part of G Holdings. Although the quantum of evidence
needed to establish a claim for illegal dismissal in labor cases is substantial evidence, 86 the
quantum need to establish the presence of fraud is clear and convincing evidence. 87 Thus, to
disregard the separate juridical personality of a corporation, the wrongdoing must be established
clearly and convincingly-it cannot be presumed.88
Here, the complainants did not satisfy the requisite quantum of evidence to prove fraud on the
part of G Holdings. They merely offered allegations and suppositions that, since Maricalum
Mining's assets appear to be continuously depleting and that the same corporation is a
subsidiary, G Holdings could have been guilty of fraud. As emphasized earlier, bare allegations
do not prove anything. There must be proof that fraud-not the inevitable effects of a previously
executed and valid contract such as the PSA-was the cause of the latter's total asset depletion.
To be clear, the presence of control per se is not enough to justify the piercing of the corporate
veil.
III. Harm or Casual Connection Test
In WPM International Trading, Inc., et al. v. Labayen, 89 the Court laid down the criteria for the
harm or casual connection test, to wit:
In this connection, we stress that the control necessary to invoke the instrumentality or alter
ego rule is not majority or even complete stock control but such domination of finances, policies
and practices that the controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. The control must be shown to have
been exercised at the time the acts complained of took place. Moreover, the control and breach
of duty must proximately cause the injury or unjust loss for which the complaint is made.
(emphases and underscoring supplied)
Proximate cause is defined as that cause, which, in natural and continuous sequence, unbroken
by any efficient intervening cause, produces the injury, and without which the result would not
have occurred.90 More comprehensively, the proximate legal cause is that "acting first and
producing the injury, either immediately or by setting other events in motion, all constituting a
natural and continuous chain of events, each having a close causal connection with its
immediate predecessor, the final event in the chain immediately effecting the injury as a natural
and probable result of the cause which first acted, under such circumstances that the person
responsible for the first event should, as an ordinary prudent and intelligent person, have
reasonable ground to expect at the moment of his act or default that an injury to some person
might probably result therefrom."91 Hence, for an act or event to be considered as proximate
legal cause, it should be shown that such act or event had indeed caused injury to another.

In the case at bench, complainants have not yet even suffered any monetary injury. They
have yet to enforce their claims against Maricalum Mining. It is apparent that complainants
are merely anxious that their monetary awards will not be satisfied because the assets of
Maricalum Mining were allegedly transferred surreptitiously to G Holdings. However, as
discussed earlier, since complainants failed to show that G Holdings's mere exercise of control
had a clear hand in the depletion of Maricalum Mining's assets, no proximate cause was
successfully established. The transfer of assets was pursuant to a valid and legal PSA between
G Holdings and APT.
Accordingly, complainants failed to satisfy the second and third tests to justify the application of
the alter ego theory. This inevitably shows that the CA committed no reversible error in
upholding the NLRC's Decision declaring Maricalum Mining as the proper party liable to pay the
monetary awards in favor of complainants.
G Holdings and Sipalay Hospital
Sipalay Hospital was incorporated by Romulo G. Zafra, Eleanore B. Gutierrez, Helen Grace B.
Fernandez, Evelyn B. Badajos and Helen Grace L. Arbolario. 92 However, there is absence of
indication that G Holdings subsequently acquired the controlling interests of Sipalay Hospital.
There is also no evidence that G Holdings entered into a contract with Sipalay Hospital to
provide medical services for its officers and employees. This lack of stockholding or contractual
connection signifies that Sipalay Hospital is not affiliated 93 with G Holdings. Thus, due to this
absence of affiliation, the Court must apply the tests used to determine the existence of an
employee-employer relationship; rather than piercing the corporate veil.
Under the four-fold test, the employer-employee relationship is determined if the following are
present: a) the selection and engagement of the employee; b) the payment of wages; c) the
power of dismissal; and d) the power to control the employee's conduct, or the so-called "control
test."94 Here, the "control test" is the most important and crucial among the four
tests. 95 However, in cases where there is no written agreement to base the relationship on and
where the various tasks performed by the worker bring complexity to the relationship with the
employer, the better approach would therefore be to adopt a two-tiered test involving: a) the
putative employer's power to control the employee with respect to the means and methods by
which the work is to be accomplished; and b) the underlying economic realities of the activity or
relationship.96
In applying the second tier, the determination of the relationship between employer and
employee depends upon the circumstances of the whole economic activity (economic reality or
multi-factor test), such as: a) the extent to which the services performed are an integral part of
the employer's business; b) the extent of the worker's investment in equipment and facilities; c)
the nature and degree of control exercised by the employer; d) the worker's opportunity for profit
and loss; e) the amount of initiative, skill, judgment or foresight required for the success of the
claimed independent enterprise; f) the permanency and duration of the relationship between the
worker and the employer; and g) the degree of dependency of the worker upon the employer for
his continued employment in that line of business. 97 Under all of these tests, the burden to prove
by substantial evidence all of the elements or factors is incumbent on the employee for he or she
is the one claiming the existence of an employment relationship.98
In light of the present circumstances, the Court must apply the four-fold test for lack of
relevant data in the case records relating to the underlying economic realities of the activity or
relationship of Sipalay Hospital's employees.
151
To prove the existence of their employment relationship with G Holdings, complainants Dr.
Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr.
presented the following documents:
1) Affidavit99 of Dr. Welilmo T. Neri attesting among others that he was the Medical Director of
Sipalay Hospital which is allegedly owned and operated by G Holdings/Maricalum Mining;
2) Several cash vouchers 100 issued by G Holdings!Maricalum Mining representing Dr. Welilmo
T. Neri's payment for services rendered to "various" personnel;
3) Schedules of social security premium payments101 in favor of Dr. Welilmo T. Neri, Edgar M.
Sobrino and Wilfredo C. Taganile, Sr. stamped paid by G Holdings;
4) Notice of termination 102 dated July 3, 2010 issued by Rolando G. Degojas (OIC of G-Holdings
Inc.) issued to Dr. Welilmo T. Neri and some of his companions who are not complainants in this
case;
5) Notice of termination103 addressed to Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar M.
Sobrino and some of their co-employees who are not complainants in this case with
a collatilla stating that the services of Dr. Welilmo T. Neri and nurse Erlinda L. Fernandez will be
engaged on per call basis; and
6) A "Statement of Unpaid Salaries of Employees of G Holdings, Inc. Assigned to the Sipalay
General Hospital" 104 prepared by Dr. Welilmo T. Neri which included his own along with
complainants Erlinda L. Fernandez, Wilfredo C. Taganile, [Sr.] and Edgar M. [Sobrino].
A perusal of the aforementioned documents fails to show that the services of complainants Dr.
Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. were
indeed selected and engaged by either Maricalum Mining or G Holdings. This gap in evidence
clearly shows that the first factor of the four-fold test, or the selection and engagement of
the employee, was not satisfied and not supported by substantial evidence.
However, the same cannot be said as to the second and third factors of the four-fold test (the
payment of wages and the power of dismissal). Since substantial evidence is defined as that
amount of relevant evidence which a reasonable mind might accept as adequate to justify a
conclusion, 105 the cash vouchers, social security payments and notices of termination are
reasonable enough to draw an inference that G Holdings and Maricalum Mining may have had a
hand in the complainants' payment of salaries and dismissal.
Notwithstanding the absence of the first factor and the presence of the second and third factors
of the four-fold test, the Court still deems it best to examine the fourth factor-the presence of
control-in order to determine the employment connection of complainants Dr. Welilmo T. Neri,
Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. with G Holdings.
Under the control test, an employer-employee relationship exists where the person for whom the
services are performed reserves the right to control not only the end achieved, but also the
manner and means to be used in reaching that end. 106 As applied in the healthcare industry, an
employment relationship exists between a physician and a hospital if the hospital controls both
the means and the details of the process by which the physician is to accomplish his task. 107 But
where a person who works for another performs his job more or less at his own pleasure, in the
manner he sees fit, not subject to definite hours or conditions of work, and is compensated
according to the result of his efforts and not the amount thereof, no employer-employee
relationship exists. 108

A corporation may only exercise its powers within the definitions provided by law and its articles
of incorporation. 109 Accordingly, in order to determine the presence or absence of an
employment relationship between G Holdings and the employees of Sipalay Hospital by using
the control test, the Court deems it essential to examine the salient portion of Sipalay Hospital's
Articles of Incorporation imparting its 'primary purpose,' 110 to wit:
To own, manage, lease or operate hospitals or clinics offering and providing medical services
and facilities to the general public, provided that purely professional, medical or surgical services
shall be performed by duly qualified physicians or surgeons who may or  may not be connected
with the corporation and who shall be freely and individually contracted by patients. (emphasis
supplied)
It is immediately apparent that Sipalay Hospital, even if its facilities are located inside the
Sipalay Mining Complex, does not limit its medical services only to the employees and officers of
Maricalum Mining and/or G Holdings. Its act of holding out services to the public reinforces the
fact of its independence from either Maricalum Mining or G Holdings because it is free to deal
with any client without any legal or contractual restriction. Moreover, G Holdings is a holding
company primarily engaged in investing substantially in the stocks of another company-not in
directing and managing the latter's daily business operations. Because of this corporate
attribute, the Court can reasonably draw an inference that G Holdings does not have a
considerable ability to control means and methods of work of Sipalay Hospital
employees. Markedly, the records are simply bereft of any evidence that G Holdings had, in
fact, used its ownership to control the daily operations of Sipalay Hospital as well as the working
methods of the latter's employees. There is no evidence showing any subsequent transfer of
shares from the original incorporators of Sipalay Hospital to G Holdings. Worse, it appears that
complainants Dr. Welilmo T. Neri, Erlinda L. Fernandez, Wilfredo C. Taganile, Sr. and Edgar M.
Sobrino are trying to derive their employment connection with G Holdings merely on an
assumed premise that the latter owns the controlling stocks of Maricalum Mining.
On this score, the CA committed no reversible error in allowing the NLRC to delete the monetary
awards of Dr. Welilmo T. Neri, Erlinda L. Fernandez, Wilfredo C. Taganile, Sr. and Edgar M.
Sobrino imposed by the Labor Arbiter against G Holdings.
Conclusion
A holding company may be held liable for the acts of its subsidiary only when it is adequately
proven that: a) there was control over the subsidiary; (b) such control was used to protect a
fraud (or gross negligence amounting to bad faith) or evade an obligation; and c) fraud was the
proximate cause of another's existing injury. Further, an employee is duly-burdened to prove the
crucial test or factor of control thru substantial evidence in order to establish the existence of an
employment relationship-especially as against an unaffiliated corporation alleged to be
exercising control.
In this case, complainants have not successfully proven that G Holdings fraudulently exercised
its control over Maricalum Mining to fraudulently evade any obligation. They also fell short of
proving that G Holdings had exercised operational control over the employees of Sipalay
Hospital. Due to these findings, the Court sees no reversible error on the part of the CA, which
found no grave abuse of discretion and affirmed in toto the factual findings and legal conclusions
of the NLRC.
WHEREFORE, the Court AFFIRMS in toto the October 29, 2014 Decision of the Court of
Appeals in CA-G.R. SP No. 06835.
152
No pronouncement as to costs.
SO ORDERED.
THIRD DIVISION
G.R. No. 155056-57               October 19, 2007
THE HEIRS OF THE LATE PANFILO V. PAJARILLO, Petitioners,
vs.
THE HON. COURT OF APPEALS, NATIONAL LABOR RELATIONS COMMISSION and
SAMAHAN NG MGA MANGGAGAWA NG PANFILO V. PAJARILLO, ALFREDO HOYOHOY,
HERMINIO CASTILLO, BERNARDO ROCO, RODOLFO TORRES, JULIAN JORVINA,
LOURDES ROCO, FLORITA YAPOC, MARLON ALDANA, PARALUMAN ULANG,
TOLENTINO SANHI, JOHNNY SORIANO, ANDRES CALAQUE, ROBERTO LAVAREZ,
FRANCISCO MORALES, SALVACION PERINA, ANTONIO ABALA, ROMEO SALONGA,
AUGUR M. MANIPOL, BIENVENIDA TEQUIL, MARIO ELEP, ALADINO LATIGO,
BERNARDINE BANSAL, PEDRO DE BAGUIO, RICARDO CALICA, LAURA CO, VICENTE
RECANA, ELENA TOLLEDO, ALFREDO PLAZA, SR., HERMINIO BALDONO, FELIPE
YAPOC, ARISTON NIPA, and ALFONSO C. BALDOMAR, Respondents.
DECISION
CHICO-NAZARIO, J.:
In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, 1 petitioners, heirs of
Panfilo V. Pajarillo, seek to set aside the Decision, 2 and Resolution,3 dated 12 March 2002 and
28 August 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 54330 and CA-G.R.
SP No. 54331, reversing the two Per Curiam Orders dated 28 October 1996 and 10 January
1997,4 of the National Labor Relations Commission (NLRC) in NLRC NCR Cases No. 08-03013-
87 and 01-00331-88.
Stripped of the non-essentials, the facts are as follows:
Panfilo V. Pajarillo (Panfilo) was the owner and operator of several buses plying certain routes in
Metro Manila. He used the name "PVP Liner" in his buses. Private respondents were employed
as drivers, conductors and conductresses by Panfilo.
During their employment with Panfilo, private respondents worked at least four times a week or
for an average of fifteen working days per month. They were required to observe a work
schedule starting from 4:00 in the morning up to 10:00 in the evening on a straight time basis.
Private respondent drivers were paid a daily commission of 10%, while private respondent
conductors and conductresses received a daily commission of 7%. In sum, each of the private
respondents earned an average daily commission of about ₱150.00 a day. They were not given
emergency cost of living allowance (ECOLA), 13th month pay, legal holiday pay and service
incentive leave pay.5
The following were deducted from the private respondents’ daily commissions: (a) costs of
washing the assigned buses; (b) terminal fees; (c) fees for sweeping the assigned buses; (d)
fees paid to the barangay tanod at bus terminals; and (e) rental fees for the use of stereo in the
assigned buses. Any employee who refused such deductions were either barred from working or
dismissed from work.6

Thereafter, private respondents and several co-employees formed a union called "SAMAHAN
NG MGA MANGGAGAWA NG PANFILO V. PAJARILLO" (respondent union). The Department
of Labor and Employment (DOLE) issued a Certificate of Registration in favor of the respondent
union.7
Upon learning of the formation of respondent union, Panfilo and his children ordered some of the
private respondents to sign a document affirming their trust and confidence in Panfilo and
denying any irregularities on his part. Other private respondents were directed to sign a blank
document which turned out to be a resignation letter. Private respondents refused to sign the
said documents, hence, they were barred from working or were dismissed without hearing and
notice. Panfilo and his children and relatives also formed a company union where they acted as
its directors and officers.8
On 25 August 1987, respondent union and several employees filed a Complaint for unfair labor
practice and illegal deduction before the Labor Arbiter with "Panfilo V. Pajarillo Liner" as party-
respondent. This was docketed as NLRC/NCR Case No. 00-08-03013-87.9 On 28 September
1987, the respondent union filed an Amended Complaint alleging this time not only unfair labor
practice and illegal deduction but also illegal dismissal.10
On 20 January 1988, respondent union and several employees filed another Complaint for
violation of labor standard laws claiming non-payment of (1) ECOLA, (2) 13th month pay, (3)
overtime pay, (4) legal holiday pay, (5) premium pay, and (6) service incentive leave. The party-
respondents in this complaint were "PVP LINER INC. and PANFILO V. PAJARILLO, as its
General Manager/Operator." This was docketed as NLRC Case No. 00-01-00331-88.11
Notifications and summons with respect to NLRC/NCR Case No. 00-08-03013-87 were
addressed and sent to "PANFILO V. PAJARILLO, President/Manager, Panfilo V. Pajarillo Liner,
Pasig Line St., Sta. Ana, Manila" on 31 August 1987. The Registry Return Receipt dated 4
September 1987 was addressed to Panfilo V. Pajarillo, and a signature therein appears on top
of the signature of the name of the addressee. 12 With regard to NLRC Case No. 00-01-00331-
88, notifications and summonses were addressed and sent to "THE PRESIDENT/MANAGER,
PVP Liner Inc. and Panfilo V. Pajarillo, 2175 Zamora Street, Sta. Ana, Manila" on 25 January
1988. The Registry Return Receipt dated 4 February 1988 was addressed to "PVP Liner Inc."
and was signed by a certain "Irene G. Pajarillo" as the addressee’s agent.13
Panfilo denied the charges in the complaints. He maintained that private respondents were not
dismissed from work on account of their union activities; that private respondents and several of
their co-employees either resigned or were separated from work, or simply abandoned their
employment long before the respondent union was organized and registered with the DOLE;
that the private respondents are not entitled to ECOLA and 13th month pay because they
received wages above the minimum provided by law; that the private respondents are not
entitled to overtime and legal holiday pay because these are already included in their daily
commissions; that the private respondents are not entitled to five days incentive leave pay
because they work only four days a week; that no deductions were made in the daily
commissions of the private respondents; that the private respondents voluntarily and directly
paid certain individuals for barangay protection and for the cleaning of the assigned buses; that
he had no participation in these activities/arrangements; that the private respondents were not
dismissed from work; and that the private respondents either abandoned their jobs or voluntarily
resigned from work.14
Upon motion of Panfilo, the complaints in NLRC/NCR Case No. 00-08-03013-87 and NLRC
Case No. 00-01-00331-88 were consolidated.15 On 29 January 1991, Panfilo died.16
153
After hearing and submission by both parties of their respective position papers and
memoranda, Labor Arbiter Manuel P. Asuncion (Arbiter Asuncion) rendered a Decision 17 dated
28 December 1992, dismissing the consolidated complaints for lack of merit. Thus:
IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS, the complaint should be as it is
hereby dismissed for lack of merit.
Respondent union appealed to the NLRC. On 18 June 1996, the NLRC reversed the decision of
Arbiter Asuncion and ordered the reinstatement of, and payment of backwages, ECOLA, 13th
month pay, legal holiday pay and service incentive leave pay to, private respondents. 18 The
dispositive portion of the NLRC decision reads:
Wherefore, the appealed decision is hereby set aside. Accordingly, judgment is hereby rendered
directing:
(1) The respondent, PVP Liner, Inc. to reinstate to their former positions, without loss of seniority
rights and other benefits, the following complainants: Alfredo [Hoyohoy], Bernardo Roco,
Rodolfo Torres, Julian Jorvina, Florita Yapoc, Marlon Aldana, Paraluman Ulang, Tolentino
Sanhi, Johnny Soriano, Andres Calaque, Roberto Lavarez, Francisco Morales, Salvacion
Perina, Antonio Abala, Alfonso Baldomar, Jr., Romeo Salonga, Augur Manipol, Bienvenida
Tequil, Mario Elep, Aladino Latigo, Bernardine Bansal, Pedro de Baguio, Ricardo Calica, Laura
Co, Vicente Recana, Elena Tolledo, Alfredo Plaza, Sr., Herminio Baldono, Felioe Yapoc, Ariston
Nipa and Herminia Castillo and to pay them their backwages corresponding to a period of three
(3) years without qualifications and deductions;
(2) The same respondent PVP Liner, Inc. to pay amounts to be computed in a hearing called for
said purpose by the Arbitration Branch of Origin, the aforesaid complainants their claims for
emergency cost of living allowance (ECOLA), 13th month pay, legal holiday pay and service
incentive leave benefits subject to the three-year prescriptive period provided under Article 291
of the Labor Code, as amended;
(3) The dismissal of the claims on alleged illegal deductions of the respondents for lack of
merits; and
(4) The dismissal of the case of Lourdes Roco due to prescription.
All other claims of the complainants and the respondents are likewise DISMISSED, for being
without merit.
The Arbitration Branch of Origin is hereby directed to enforce this decision.
Panfilo’s counsel filed a motion for reconsideration which was partially granted by the NLRC in
its Order dated 28 October 1996, to wit:
Dictated, however, by the imperatives of due process, we find it more judicious to just remand
this case for further hearing on key questions of:
1) whether or not PVP Liner Inc. was properly impleaded as party respondent in the
consolidated cases below;
2) whether or not summons was properly served on said corporation below; and
3) whether or not the subject cases can be considered as principally money claims which have
to be litigated in intestate/testate proceedings involving the estate of the late Panfilo V. Pajarillo.

WHEREFORE, our decision dated June 18, 1996 is hereby set aside. Let this case be
remanded to the NCR Arbitration Branch for further hearing on the questions above-
mentioned.19
Respondent union filed a motion for reconsideration of the above-stated Order, but this was
denied by the NLRC in its Order dated 10 January 1997.20 Thus, respondent union filed a
Petition for Certiorari under Rule 65 before this Court. Pursuant, however, to our ruling in St.
Martin Funeral Home v. National Labor Relations Commission,21 we remanded the petition to the
Court of Appeals for proper disposition.
On 12 March 2002, the Court of Appeals rendered a Decision granting the respondent union’s
petition and nullifying the Orders dated 28 October 1996 and 10 January 1997 of the NLRC. It
also reinstated the Decision dated 18 June 1986 of the NLRC.22 The appellate court decreed:
WHEREFORE, premises considered, the PETITION FOR CERTIORARI is hereby GRANTED.
Accordingly, the Order dated October 28 1996 and January 10, 1997 of the NLRC are hereby
NULLIFIED and its Decision dated 18 June 1986 be REINSTATED.
Panfilo’s counsel filed a motion for reconsideration of the said decision but this was denied by
the appellate court in its Resolution dated 28 August 2002.23
Herein petitioners, as heirs of Panfilo, filed the instant petition before this Court assigning the
following errors:
I.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN ARRIVING AT THE
CONCLUSION THAT PVP LINER INC. WAS PROPERLY MISPLEADED, WHICH IS A NON-
EXISTING CORPORATION.
II.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN NOT CONSIDERING THAT
THERE WAS NO PROPER AND EFFECTIVE SERVICE OF SUMMONS.
III.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN PIERCING THE VEIL OF
CORPORATE ENTITY OF PVP PAJARILLO LINER INC.
IV.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN REINSTATING THE
ORDER OF THE NLRC DATED JUNE 18, 1996, WHICH DECLARED THAT PRIVATE
RESPONDENTS WERE ILLEGALLY DISMISSED.24
Anent the first issue, petitioners alleged that the Decision dated 18 June 1996 of the NLRC,
ordered PVP Liner Inc. to reinstate private respondents and pay their backwages, ECOLA, 13th
month pay, legal holiday pay and service incentive leave pay; that there was no such entity as
PVP Liner Inc. organized and existing in the Philippines; that it was not possible for Arbiter
Asuncion and the NLRC to acquire jurisdiction over a non-existing company; that there can
never be a service of summons or notice to a non-existent entity; that the true employer of
private respondents was Panfilo as the sole proprietor/operator of passenger buses doing
business under the tradename, PVP Liner, and not PVP Liner Inc. which was non-existent; that
154
Panfilo never used PVP Liner Inc. as his tradename; that the present operator of PVP Liner
buses is P.V. PAJARILLO LINER, a corporation duly registered with the Securities and
Exchange Commission; that at the time the instant case was filed before Arbiter Asuncion in
1987, the latter did not have jurisdiction over P.V. PAJARILLO LINER because it was organized
and duly registered only on 22 January 1990; that P.V. PAJARILLO LINER has a separate and
distinct personality from Panfilo as the sole operator of PVP Liner buses; that, therefore, P.V.
PAJARILLO LINER cannot be made a party or impleaded in the present case; that the amended
complaint in NLRC/NCR Case No. 00-08-03013-87 impleaded as party-respondent "PANFILO
V. PAJARILLO LINER and PANFILO V. PAJARILLO, as operator and responsible officer"; that
PVP Liner Inc. was not impleaded in the instant case; and that no summons was ever served on
PVP Liner Inc. in NLRC/NCR Case No. 00-08-03013-87.25
The contentions are bereft of merit.
In the Complaint dated 20 January 1988, PVP Liner Inc. and Panfilo were impleaded as party-
respondents, thus:
That respondent PVP Liner, Inc., is a private business entity, engaged in transportation of
passengers, duly organized and existing pursuant to law and for this purpose maintains its
principal office at 2175, Zamora Street, Sta. Ana, Manila; while individual respondent [Panfilo] is
the General Manager/Operator and may be served with summons, notices and other processes
at the aforementioned principal office.26
Panfilo did not question in his position paper or in his motion for consolidation of the complaints
the foregoing allegations. Neither did he assail the inclusion of PVP Liner Inc. as party-
respondent in respondent union’s position paper dated 6 June 1988.
In Panfilo’s position paper as well as in the records of the proceedings before Arbiter Asuncion,
there is nothing that shows that Panfilo challenged the jurisdiction of Arbiter Asuncion over PVP
Liner Inc. When Arbiter Asuncion decided in favor of Panfilo, the latter said nothing about the
inclusion of PVP Liner Inc. as party respondent and the lack of jurisdiction of Arbiter Asuncion
over the same. It was only when the NLRC rendered a Decision adverse to Panfilo that the latter
alleged the non-existence of PVP Liner Inc. and the fact that Arbiter Asuncion and the NLRC
had no jurisdiction over it.
Petitioners are now precluded from questioning the inclusion of PVP Liner Inc. as party-
respondent as well as the jurisdiction of Arbiter Asuncion and the NLRC over them under the
principle of estoppel. It is settled that the active participation of a party against whom the action
was brought, coupled with his failure to object to the jurisdiction of the court or quasi-judicial
body where the action is pending, is tantamount to an invocation of that jurisdiction and a
willingness to abide by the resolution of the case and will bar said party from later on impugning
the court or body’s jurisdiction. 27 This Court has time and again frowned upon the undesirable
practice of a party submitting his case for decision and then accepting the judgment only if
favorable, and attacking it for lack of jurisdiction when adverse.28
It is apparent that Panfilo V. Pajarillo Liner and PVP Liner Inc. are one and the same entity
belonging to one and the same person, Panfilo. When PVP Liner Inc. and Panfilo V. Pajarillo
Liner were impleaded as party-respondents, it was Panfilo, through counsel, who answered the
complaints and filed the position papers, motions for reconsideration and appeals. It was also
Panfilo, through counsel, who participated in the hearings and proceedings. In fact, Abel
Pajarillo (Abel), son of Panfilo, testified before Arbiter Asuncion that he was the operations
manager of PVP Liner Inc.29 Further, both Panfilo and PVP Liner Inc. were charged jointly and
severally in the aforesaid complaints.

Apropos the second issue, petitioners alleged that the notices and summons were received by a
certain Irene G. Pajarillo (Irene) for and in behalf of the PVP Liner Inc.; that Irene was neither
and could not have been the President/Manager of PVP Liner Inc., the latter being non-existent;
and that Irene was not an officer of P.V. Pajarillo Liner.30
Sections 4 and 5 of Rule IV of the Revised Rules of Procedure of the NLRC provides the rule for
the service of summonses and notices in NLRC cases, viz:
Sec. 4. Service of notices and resolutions. – a) Notices or summons and copies of orders,
resolutions or decisions shall be served personally by the bailiff or the duly authorized public
officer or by registered mail on the parties to the case within five (5) days from receipt thereof by
the serving officer.
Sec. 5. Proof and completeness of service. – The return is prima facie proof of the facts
indicated therein. Service by registered mail is complete upon receipt by the addressee or his
agent.31
Records show that Irene received the summons for NLRC Case No. 00-01-00331-88 on 4
February 1988 in behalf of PVP Liner Inc. These summonses were addressed and sent to "THE
PRESIDENT/MANAGER, PVP Liner Inc. and Panfilo V. Pajarillo, 2175 Zamora Street, Sta. Ana,
Manila" on 25 January 1988. The Registry Return Receipt dated 4 February 1988 was
addressed to "PVP Liner Inc." and was signed by Irene as the addressee’s agent.32 Abel, one of
the heirs of Panfilo and the Operations Manager of PVP Liner Inc., testified during the hearing
before Arbiter Asuncion that Irene was one of the secretaries of PVP Liner Inc.33 Hence, there
was a valid service of summons.
Regarding the third issue, petitioners posited that P.V. Pajarillo Liner Inc. is an independent
corporation and cannot be considered as an adjunct or extension of Panfilo as the sole operator
of PVP Liner buses; and that at the time P.V. Pajarillo Liner Inc. was established, it had no
liability or obligation which it tried to shield or circumvent.34
It is a fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporations to which it may be connected.
However, this separate and distinct personality of a corporation is merely a fiction created by law
for convenience and to promote justice. Hence, when the notion of separate juridical personality
is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a
device to defeat labor laws, this separate personality of the corporation may be disregarded or
the veil of the corporate fiction pierced. This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation. The corporate mask may be
lifted and the corporate veil may be pierced when a corporation is but the alter ego of a person
or another corporation.35
It is apparent that Panfilo started his transportation business as the sole owner and operator of
passenger buses utilizing the name PVP Liner for his buses. After being charged by respondent
union of unfair labor practice, illegal deductions, illegal dismissal and violation of labor standard
laws, Panfilo transformed his transportation business into a family corporation, namely, P.V.
Pajarillo Liner Inc. He and petitioners were the incorporators, stockholders and officers therein.
P.V. Pajarillo Inc. and the sole proprietorship of Panfilo have the same business address. P.V.
Pajarillo Inc. also uses the name "PVP Liner" in its buses. Further, the license to operate or
franchise of the sole proprietorship was merely transferred to P.V. Pajarillo Liner Inc. The
testimony of Abel during the hearing before Arbiter Asuncion is revealing, thus:
Q: Mr. Pajarillo, when did you start assuming the functions of operations manager of PVP Liner?
155
A: Seven years from now, sometime in the year 1984 or 1985, sir.
Q: Do you have any written appointment as Operations Manager?
A: No, sir.
Q: I noticed that your surname is Pajarillo you are one way or another related to Mr. Panfilo V.
Pajarillo, is that correct?
Witness:
A: I am the son of Panfilo Pajarillo, sir.
Q: In so far as PVP Liner is concerned and being the operations manager, are you aware if it is
a single proprietor or a corporation?
A: At the start it was a single proprietorship, lately, it has become a family corporation.
Atty. Flores, Jr. (to witness)
Q: When you became the Operations Manager of PVP Liner, is it a single proprietor or a family
Corporation?
A: It was a single proprietorship.
Q: Mr. Witness, since PVP Liner is a transportation business it has a license to operate these
buses?
A: Yes, there is, sir.
Atty. Flores, Jr. (to witness)
Q: In whose name was it registered?
A: Before it was with my father Panfilo V. Pajarillo, sir.
Q: Do I understand that the licensing of this transportation company was transferred to another
person?
A: It was never transferred to another person, except now, that it has been transferred to a
corporation.36
It is clear from the foregoing that P.V. Pajarillo Liner Inc. was a mere continuation and successor
of the sole proprietorship of Panfilo. It is also quite obvious that Panfilo transformed his sole
proprietorship into a family corporation in a surreptitious attempt to evade the charges of
respondent union. Given these considerations, Panfilo and P.V. Pajarillo Liner Inc. should be
treated as one and the same person for purposes of liability.37
Finally, petitioners averred that no unfair labor practice was committed, and that private
respondents were not illegally dismissed from work.
In its Decision dated 18 June 1996, the NLRC made an exhaustive discussion of the allegations
and evidence of both parties as regards unfair labor practice and illegal dismissal. It concluded
that private respondents, officers and members of respondent union were dismissed by reason
of their union activities and that there was no compliance with substantial and procedural due

process in terminating their services. It also held that the private respondents who were not
members of the respondent union were also dismissed without just or valid cause, and that they
were denied due process. These factual findings and conclusions were supported by substantial
evidence comprised of affidavits, sworn statements, testimonies of witnesses during hearings
before Arbiter Asuncion, and other documentary evidence. These findings were sustained by the
Court of Appeals.
The rule is that findings of fact of quasi-judicial agencies like the NLRC are accorded by this
Court not only respect but even finality if they are supported by substantial evidence, or that
amount of relevant evidence which a reasonable mind might accept as adequate to justify a
conclusion.38 We find no compelling reason to deviate from such findings of the NLRC as
affirmed by the Court of Appeals.
Consequently, the private respondents are entitled to reinstatement, backwages and other
privileges and benefits under Article 279 of the Labor Code. Separation pay may be given in lieu
of reinstatement if the employee concerned occupies a position of trust and confidence. In the
case at bar, however, the private respondents, as former bus drivers, conductors and
conductresses of petitioners, do not hold the position of trust and confidence.39
Nonetheless, it appears from the records that some of the private respondents, namely, Augur
Manipol, Rodolfo Torres, Ricardo Calica, Paraluman Ulang, Edith Chua, Alfredo Hoyohoy,
Johnny Soriano, Bernardo Roco, Tolentino Sanhi, Salvacion Perina, Pedro L. de Baguio, Ariston
Nipa, Felipe Yapoc, Laura Co, Bienvenida Tequil, Roberto Lavarez, Francisco Morales and
Herminio Castillo, had executed a Quitclaim/Release discharging petitioners "from any and all
claims by way of unpaid wages, separation pay, overtime pay, differential pay, ECOLA, 13th
month pay, holiday pay, service incentive leave pay or otherwise."40
Generally, deeds of release, waivers, or quitclaims cannot bar employees from demanding
benefits to which they are legally entitled or from contesting the legality of their dismissal, since
quitclaims are looked upon with disfavor and are frowned upon as contrary to public policy.
Where, however, the person making the waiver has done so voluntarily, with a full
understanding thereof, and the consideration for the quitclaim is credible and reasonable, the
transaction must be recognized as being a valid and binding undertaking.41
There is no showing that the executions of these quitclaims were tainted with deceit or coercion.
On the contrary, each of the private respondents’ Sinumpaang Salaysay, which accompanied
the quitclaims, evinces voluntariness and full understanding of the execution and consequence
of the quitclaim. In their said Sinumpaang Salaysay, the private respondents stated that their
lawyer had extensively explained to them the computation and the actual amount of
consideration they would receive; that they were not forced or tricked by their lawyer in
accepting the same; and that they already received the amount of consideration.42
Further, the considerations received by the private respondents were credible and reasonable
because they were not grossly disproportionate to the computation by the NLRC of the amount
of backwages and other money claims.43
Given these circumstances, the quitclaims should be considered as binding on the private
respondents who executed them. It is settled that a legitimate waiver which represents a
voluntary and reasonable settlement of a worker’s claim should be respected as the law
between the parties.44 Accordingly, the private respondents who made such quitclaims are
already precluded from claiming reinstatement, backwages, ECOLA, 13 TH month pay, legal
holiday pay, service incentive leave pay, and other monetary claims.
156
With regard to the other private respondents who did not execute such quitclaims, they are
entitled to reinstatement, backwages, ECOLA, 13TH month pay, legal holiday pay and service
incentive leave pay in accordance with the computation of the NLRC.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution dated 12 March
2002 and 28 August 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 54330 and
CA-G.R. SP No. 54331, are hereby AFFIRMED with the following MODIFICATIONS: (1) Private
respondents Augur Manipol, Rodolfo M. Torres, Ricardo Calica, Paraluman Ulang, Edith Chua,
Alfredo Hoyohoy, Johnny Soriano, Bernardo Roco, Tolentino Sanhi, Salvacion Perina, Pedro L.
de Baguio, Ariston Nipa, Felipe Yapoc, Laura Co, Bienvenida Tequil, Roberto Lavarez,
Francisco Morales and Herminio Castillo are hereby precluded from claiming reinstatement,
backwages, ECOLA, 13TH month pay, legal holiday pay and service incentive leave pay by
reason of their respective quitclaims; (2) Petitioners are hereby ordered to reinstate private
respondents Julian Jorvina, Florita Yapoc, Marlon Aldana, Andres Calaque, Antonio Abala,
Alfonso Baldomar, Romeo Salonga, Mario Elep, Aladino Latigo, Bernardine Bansal, Vicente
Recana, Elena Tolledo and Alfredo Plaza, Sr., and to pay these respondents backwages from
the time of their dismissal up to the finality of this Decision. Petitioners are also ordered to pay
the foregoing private respondents ECOLA, 13TH month pay, legal holiday pay and service
incentive leave pay in accordance with the computation of the NLRC. Costs against petitioners.
SO ORDERED.
G.R. No. 116781 September 5, 1997
TOMAS LAO CONSTRUCTION, LVM CONSTRUCTION CORPORATION, THOMAS and
JAMES DEVELOPERS (PHIL.), INC., petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION, MARIO O. LABENDIA, SR., ROBERTO
LABENDIA, NARCISO ADAN, FLORENCIO GOMEZ, ERNESTO BAGATSOLON,
SALVADOR BABON, PATERNO BISNAR, CIRPRIANO BERNALES, ANGEL MABUHAY,
SR., LEO SURIGAO, and ROQUE MORILLO, respondents.
BELLOSILLO, J.:
From October to December 1990 private respondents individually filed complaints for illegal
dismissal against petitioners with the National Labor Relations Commission Regional Arbitration
Branch No. VIII (NLRC — RAB VIII), Tacloban City. Alleging that they were hired for various
periods as construction workers in different capacities they described their contractual terms as
follows: (a) Roberto Labendia, general construction foreman, from 1971 to 17 October 1990 at
P3,700/month; (b) Narciso Adan, tireman, from October 1981 to November 1990 at P75.00/day;
(c) Florencio Gomez, welder, from July 1983 to July 1990 at P260.00/day; (d) Ernesto
Bagatsolon leadman/checker, from June 1982 to October 1990 at P2,800/month; (e) Salvador
Babon, clerk/timekeeper/paymaster, from June 1982 to October 1990 at P3,200/month; (f)
Paterno Bisnar, road grader operator, from January 1979 to October 1990 at 105/day; (g)
Cipriano Bernales, instrument man, from February 1980 to November 1990 at P3,200/month; (h)
Angel Mabulay, Sr., dump truck driver, from August 1974 to October 1990 at P90/day; (I) Leo
Surigao, payloader operator, from March 1975 to January 1978 at P100/day; (J) Mario
Labendia, Sr. surveyor/foreman, from August 1971 to July 1990 at P2,900/month; and, (k)
Roque Morillo, company watchman, from August 1983 to October 1990 at P3,200/month.1

Within the periods of their respective employments, they alternately worked for petitioners
Tomas Lao Corporation (TLC), Thomas and James Developers (T&J) and LVM Construction
Corporation (LVM), altogether informally referred to as the "Lao Group of Companies," the three
(3) entities comprising a business conglomerate exclusively controlled and managed by
members of the Lao family.
TLC, T&J and LVM are engaged in the construction of public roads and bridges. Under joint
venture agreements they entered into among each other, they would undertake their projects
either simultaneously or successively so that, whenever necessary, they would lease tools and
equipment to one another. Each one would also allow the utilization of their employees by the
other two (2). With this arrangement, workers were transferred whenever necessary to on-going
projects of the same company or of the others, or were rehired after the completion of the
project or project phase to which they were assigned. Soon after, however, TLC ceased its
operations2 while T&J and LVM stayed on.
Sometime in 1989 Andres Lao, Managing Director of LVM and President of T&J, 3 issued a
memorandum4 requiring all workers and company personnel to sign employment contract forms
and clearances which were issued on 1 July 1989 but antedated 10 January 1989. These were
to be used allegedly for audit purposes pursuant to a joint venture agreement between LVM and
T&J. To ensure compliance with the directive, the company ordered the withholding of the salary
of any employee who refused to sign. Quite notably, the contracts expressly described the
construction workers as project employees whose employments were for a definite period, i.e.,
upon the expiration of the contract period or the completion of the project for which the workers
was hired.
Except for Florencio Gomez5 all private respondents refused to sign contending that this scheme
was designed by their employer to downgrade their status from regular employees to mere
project employees. Resultantly, their salaries were withheld. They were also required to explain
why their services should not be terminated for violating company rules and warned that failure
to satisfactorily explain would be construed as "disinterest" in continued employment with the
company. Since the workers stood firm in their refusal to comply with the directives their services
were terminated.
NLRC RAB VIII dismissed the complaints lodged before it, finding that private respondents were
project employees whose employments could be terminated upon completion of the projects or
project phase for which they were hired. It upheld petitioners' contention that the execution of
their employment contracts was to forestall the eventuality of being compelled to pay the
workers their salaries even if there was no more work to be done due to the completion of the
projects or project phases. The labor court however granted each employee a separation pay of
P6,435.00 computed at one-half (1/2) month salary for every year of service, uniformly rounded
at five (5) years.6
The decision of Labor Arbiter Gabino A. Velasquez, Jr., was reversed on appeal by the Fourth
Division of the National Labor Relations Commission (NLRC) of Cebu City which found that
private respondents were regular employees who were dismissed without just cause and denied
due process. The NLRC also overruled the fixing by the Labor Arbiter of the term of employment
of complainants uniformly at five (5) years since the periods of employment of the construction
workers as alleged in their complaints were never refuted by petitioners. In granting monetary
awards to complainants, NLRC disregarded the veil of corporate fiction and treated the three (3)
corporations as forming only one entity on the basis of the admission of petitioners that "the
three (3) operated as one (1), intermingling and commingling all its resources, including
manpower facility."7
157
Petitioners now lay their cause before us and assign the following errors: (a) NLRC erred in
classifying the employees as regular instead of project employees; (b) assuming that the
workers were regular employees, NLRC failed to consider that they were terminated for cause;
(c) assuming further that the employees were illegally dismissed, NLRC erred in awarding back
wages in excess of three (3) years; and, (d) assuming finally that the decision is correct, NLRC
erred when it pierced the veil of corporate personality of petitioner-corporations.
The main thrust of petitioners' expostulation is that respondents have no valid cause to complain
about their employment contracts since these documents merely formalized their status as
project employees. They cite Policy Instruction No. 20 of the Department of Labor which defines
project employees as those employed in connection with a particular construction project,
adding that the ruling in Sandoval Shipyards, Inc. v. NLRC8 applies squarely to the instant case
because there the Court declared that the employment of project employees is co-terminous
with the completion of the project regardless of the number of projects in which they have
worked. And as their employment is one for a definite period, they are not entitled to separation
pay nor is their employer required to obtain clearance from the Secretary of Labor in connection
with their termination. Petitioners thus argue that their dismissal from the service of private
respondents was legal since the projects for which they were hired had already been completed.
As additional ground, they claim that Mario Labendia and Roberto Labendia had absented
themselves without leave giving management no choice but to sever their employment.
We are not convinced. The principal test in determining whether particular employees are
"project employees" distinguished from "regular employees" is whether the "project employees"
are assigned to carry out "specific project or undertaking," the duration (and scope) of which are
specified at the time the employees are engaged for the project. "Project" in the realm of
business and industry refers to a particular job or undertaking that is within the regular or usual
business of employer, but which is distinct and separate and identifiable as such from the
undertakings of the company. Such job or undertaking begins and ends at determined or
determinable times.9
While it may be allowed that in the instant case the workers were initially hired for specific
projects or undertakings of the company and hence can be classified as project employees, the
repeated re-hiring and the continuing need for their services over a long span of time (the
shortest, at seven [7] years) have undeniably made them regular employees. Thus, we held that
where the employment of project employees is extended long after the supposed project has
been finished, the employees are removed from the scope of project employees and considered
regular employees.10
While length of time may not be a controlling test for project employment, it can be a strong
factor in determining whether the employee was hired for a specific undertaking or in fact tasked
to perform functions which are vital, necessary and indispensable to the usual business or trade
of the employer. In the case at bar, private respondents had already gone through the status of
project employees. But their employments became non-coterminous with specific projects when
they started to be continuously re-hired due to the demands of petitioners' business and were re-
engaged for many more projects without interruption. We note petitioners' own admission —
[t]hese construction projects have been prosecuted by either of the three petitioners, either
individually or in a joint venture with one another. Likewise, these construction projects have
been prosecuted by either of the three petitioners, either simultaneously, one construction
project overlapping another and/or one project commencing immediately after another project
has been completed or terminated. Perhaps because of their capacity to prosecute government
projects and their good record and performance, at least one of the three petitioners had an on-

going construction project and/or one of the three petitioners' construction project overlapped
that of another.11
The denial by petitioners of the existence of a work pool in the company because their projects
were not continuous is amply belied by petitioners themselves who admit that —
All the employees of either of the three petitioners were actually assigned to a particular project
to remain in said project until the completion or termination of that project. However, after the
completion of that particular project or when their services are no longer needed in the project or
particular phase of the project where they were assigned, they were transferred and rehired in
another on-going project.12
A work pool may exist although the workers in the pool do not receive salaries and are free to
seek other employment during temporary breaks in the business, provided that the worker shall
be available when called to report for a project. Although primarily applicable to regular seasonal
workers, this set-up can likewise be applied to project workers insofar as the effect of temporary
cessation of work is concerned. This is beneficial to both the employer and employee for it
prevents the unjust situation of "coddling labor at the expense of capital" and at the same time
enables the workers to attain the status of regular employees. Clearly, the continuous rehiring of
the same set of employees within the framework of the Lao Group of Companies is strongly
indicative that private respondents were an integral part of a work pool from which petitioners
drew its workers for its various projects.
In a final attempt to convince the Court that private respondents were indeed project employees,
petitioners point out that the workers were not regularly maintained in the payroll and were free
to offer their services to other companies when there were no on-going projects. This argument
however cannot defeat the workers' status of regularity. We apply by analogy the case
of Industrial-Commercial-Agricultural Workers Organization v. CIR13 which deals with regular
seasonal employees. There we held —
That during the temporary layoff the laborers are free to seek other employment is natural, since
the laborers are not being paid, yet must find means of support. A period during which the
Central is forced to suspend or cease operation for a time . . . should not mean starvation for
employees and their families (emphasis supplied).
Truly, the cessation of construction activities at the end of every project is a foreseeable
suspension of work. Of course, no compensation can be demanded from the employer because
the stoppage of operations at the end of a project and before the start of a new one is regular
and expected by both parties to the labor relations. Similar to the case of regular seasonal
employees, the employment relation is not severed by merely being suspended.14 The
employees are, strictly speaking, not separated from services but merely on leave of absence
without pay until they are reemployed.15 Thus we cannot affirm the argument that non-payment
of salary or non-inclusion in the payroll and the opportunity to seek other employment denote
project employment.
Contrary to petitioners' assertion, our ruling in Sandoval Shipyards is inapplicable considering
the special circumstances attendant to the present case. In Sandoval, the hiring of construction
workers, unlike in the instant case, was intermittent and not continuous for the "shipyard merely
accepts contracts for shipbuilding or for repair of vessels from third parties and, only on
occasions when it has work contract of this nature that it hires workers to do the job which,
needless to say, lasts only for less than a year or longer."16
158
Moreover, if private respondents were indeed employed as "project employees," petitioners
should have submitted a report of termination to the nearest public employment office every time
their employment was terminated due to completion of each construction project. 17 The records
show that they did not. Policy Instruction No. 20 is explicit that employers of project employees
are exempted from the clearance requirement but not from the submission of termination report.
We have consistently held that failure of the employer to file termination reports after every
project completion proves that the employees are not project employees. 18 Nowhere in the New
Labor Code is it provided that the reportorial requirement is dispensed with. The fact is that
Department Order No. 19 superseding Policy Instruction No. 20 expressly provides that the
report of termination is one of the indicators of project employment.19
We agree with the NLRC that the execution of the project employment contracts was
"farcical."20 Obviously, the contracts were a scheme of petitioners to prevent respondents' from
being considered as regular employees. It imposed time frames into an otherwise flexible
employment period of private respondents some of whom were employed as far back as 1969.
Clearly, here was an attempt to circumvent labor laws on tenurial security. Settled is the rule that
when periods have been imposed to preclude the acquisition of tenurial security by the
employee, they should be struck down as contrary to public morals, good customs or public
order.21 Worth noting is that petitioners had engaged in various joint venture agreements in the
past without having to draft project employment contracts. That they would require execution of
employment contracts and waivers at this point, ostensibly to be used for audit purposes, is a
suspect excuse, considering that petitioners enforced the directive by withholding the salary of
any employee who spurned the order.
We likewise reject petitioners' justification in re-hiring private respondents i.e., that it is much
cheaper and economical to re-hire or re-employ the same workers than to train a new set of
employees. It is precisely because of this cost-saving benefit to the employer that the law deems
it fair that the employees be given a regular status. We need not belabor this point.
The NLRC was correct in finding that the workers were illegally dismissed. The rule is that in
effecting a valid dismissal, the mandatory requirements of substantive and procedural due
process must be strictly complied with. These were wanting in the present case. Private
respondents were dismissed allegedly because of insubordination or blatant refusal to comply
with a lawful directive of their employer. But willful disobedience of the employer's lawful orders
as a just cause for the dismissal of the employees envisages the concurrence of at least two (2)
requisites: (a) the employee's assailed conduct must have been willful or intentional, the
willfulness being characterized by a wrongful and perverse attitude; and, (b) the order violated
must have been reasonable, lawful, made known to the employee and must pertain to the duties
which he has been engaged to discharge.22 The refusal of private respondents was willful but not
in the sense of plain and perverse insubordination. It was dictated by necessity and justifiable
reasons — for what appeared to be an innocent memorandum was actually a veiled attempt to
deny them their rightful status as regular employees. The workers therefore had no option but to
disobey the directive which they deemed unreasonable and unlawful because it would result in
their being downsized to mere project workers. This act of self-preservation should not merit
them the extreme penalty of dismissal.
The allegation of petitioners that private respondents are guilty of abandonment of duty is
without merit. The elements of abandonment are: (a) failure to report for work or absence
without valid or justifiable reason, and, (b) a clear intention to sever the employer-employee
relationship, with the second element as the more determinative factor manifested by some
overt acts.23 In this case, private respondents Roberto Labendia and Mario Labendia were
forced to leave their respective duties because their salaries were withheld. They could not

simply sit idly and allow their families to starve. They had to seek employment elsewhere, albeit
temporarily, in order to survive. On the other hand, it would be the height of injustice to validate
abandonment in this particular case as a ground for dismissal of respondents thereby making
petitioners benefit from a gross and unjust situation which they themselves created.24 Private
respondents did not intend to sever ties with petitioner and permanently abandon their jobs;
otherwise, they would not have filed this complaint for illegal dismissal.25
Petitioners submit that since private respondents were only project employees, they are not
entitled to security of tenure. This is incorrect. In Archbuild Masters and Construction,
Inc. v. NLRC26 we held —
. . . a project employee hired for a specific task also enjoys security of tenure. A termination of
his employment must be for a lawful cause and must be done in a manner which affords him the
proper notice and hearing . . . . To allow employers to exercise their prerogative to terminate a
project worker's employment based on gratuitous assertions of project completion would destroy
the constitutionally protected right of labor to security of tenure (emphasis supplied).
The burden of proving that an employee has been lawfully dismissed therefore lies with the
employer. In the case at bar, the assertions of petitioners were self-serving and insufficient to
substantiate their claim of proximate project completion. The services of the employees were
terminated not because of contract expiration but as sanction for their refusal to sign the project
employment forms and quitclaims.
Finding that the dismissal was without just cause, we find it unnecessary to dwell on the non-
observance of procedural due process. Suffice it to state that private respondents were not
priorly notified of their impending dismissal and that they were not provided ample opportunity to
defend themselves.
Petitioners charge as erroneous the grant to private respondents by NLRC of back wages in
excess of three (3) years or, in the alternative, to an award of separation pay if reinstatement is
no longer feasible.
We disagree. Since the illegal dismissal was made in 1990 or after the effectivity of the
amendatory provision of RA No. 6715 on 21 March 1989, private respondents' back wages
should be computed on the basis of Art. 279 of the Labor Code which states that "(a)n employee
who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority
rights and other privileges and to his full back wages, inclusive of allowances, and to his other
benefits or their monetary equivalent computed from the time his compensation was withheld
from him up to the time of his actual reinstatement."
Conformably with our ruling in Bustamante v. NLRC27 the illegally dismissed employees are
entitled to full back wages, undiminished by earnings derived elsewhere during the period of
their illegal dismissal. In the event that reinstatement is no longer feasible, back wages shall be
computed from the time of illegal termination until the time of the finality of the decision. 28 The
award shall be based on the documents submitted by private respondents, i.e. affidavits, SSS
and Medicare documents, since petitioners failed to adduce competent evidence to the contrary.
The separation pay shall be equivalent to "at least one (1) month salary or to one (1) month
salary for every year of service, whichever is higher, a fraction of at least six (6) months being
considered as one whole year."29
Finally, public respondent NLRC did not err in disregarding the veil of separate corporate
personality and holding petitioners jointly and severally liable for private respondents' back
wages and separation pay. The records disclose that the three (3) corporations were in fact
159
substantially owned and controlled by members of the Lao family composed of Lao Hian
Beng alias Tomas Lao, Chiu Siok Lian (wife of Tomas Lao), Andrew C. Lao, Lao Y. Heng,
Vicente Lao Chua, Lao E. Tin, Emmanuel Lao and Ismaelita Maluto. A majority of the
outstanding shares of stock in LVM and T&J is owned by the Lao family. T&J is 100% owned by
the Laos as reflected in its Articles of Incorporation. The Lao Group of Companies therefore is a
closed corporation where the incorporators and directors belong to a single family. Lao Hian
Beng is the same Tomas Lao who owns Tomas Lao Corporation and is the majority stockholder
of T&J. Andrew C. Lao is the Managing Director of LVM Construction, and President and
Managing Director of the Lao Group of Companies. Petitioners are engaged in the same line of
business under one management and use the same equipment including manpower services.
Where it appears that [three] business enterprises are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect the rights of third persons,
disregard the legal fiction that the [three] corporations are distinct entities, and treat them as
identical.30
Consonant with our earlier ruling,31 we hold that the liability of petitioners extends to the
responsible officers acting in the interest of the corporations. In view of the peculiar
circumstances of this case, we disregard the separate personalities of the three (3) corporations
and at the same time declare the members of the corporations jointly and severally liable with
the corporations for the monetary awards due to private respondents. It should always be borne
in mind that the fiction of law that a corporation as a juridical entity has a distinct and separate
personality was envisaged for convenience and to serve justice; therefore it should not be used
as a subterfuge to commit injustice and circumvent labor laws.
WHEREFORE, the petition is DENIED and the decision of the National Labor Relations
Commission dated 05 August 1994 is AFFIRMED. Petitioners are ordered to reinstate private
respondents to their former positions without loss of seniority rights and other privileges with full
back wages, inclusive of allowances, computed from the time compensation was withheld up to
the time of actual reinstatement. In the event that reinstatement is no longer feasible, petitioners
are directed to pay private respondents separation pay equivalent to one month salary for every
year of service, a fraction of at least six (6) months being considered one (1) year in the
computation thereof, and full back wages computed from the time compensation was withheld
until the finality of this decision. All other claims of the parties are DISMISSED for lack of merit.
Costs against petitioners.
SO ORDERED.
FIRST DIVISION
G.R. No. 108734 May 29, 1996
CONCEPT BUILDERS, INC., petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto Marabe;
Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar,
Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea,
Alfredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe
Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents.
 

HERMOSISIMA, JR., J.:p
The corporate mask may be lifted and the corporate veil may be pierced when a corporation is
just but the alter ego of a person or of another corporation. Where badges of fraud exist; where
public convenience is defeated; where a wrong is sought to be justified thereby, the corporate
fiction or the notion of legal entity should come to naught. The law in these instances will regard
the corporation as a mere association of persons and, in case of two corporations, merge them
into one.
Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary liability
for damages, the corporation may not be heard to say that it has a personality separate and
distinct from the other corporation. The piercing of the corporate veil comes into play.
This special civil action ostensibly raises the question of whether the National Labor Relations
Commission committed grave abuse of discretion when it issued a "break-open order" to the
sheriff to be enforced against personal property found in the premises of petitioner's sister
company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan
Road, Valenzuela, Metro Manila, is engaged in the construction business. Private respondents
were employed by said company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written notices of termination of
employment by petitioner, effective on November 30, 1981. It was stated in the individual notices
that their contracts of employment had expired and the project in which they were hired had
been completed.
Public respondent found it to be, the fact, however, that at the time of the termination of private
respondent's employment, the project in which they were hired had not yet been finished and
completed. Petitioner had to engage the services of sub-contractors whose workers performed
the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and
non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against
petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment1 ordering petitioner to reinstate
private respondents and to pay them back wages equivalent to one year or three hundred
working days.
On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion
for reconsideration filed by petitioner on the ground that the said decision had already become
final and executory.2
On October 16, 1986, the NLRC Research and Information Department made the finding that
private respondents' back wages amounted to P199,800.00.3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute
the Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of
sums from petitioner's debtor, the Metropolitan Waterworks and Sewerage Authority, in the
amount of P81,385.34. Said amount was turned over to the cashier of the NLRC.
160
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the
sheriff to collect from herein petitioner the sum of P117,414.76, representing the balance of the
judgment award, and to reinstate private respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of
execution on petitioner through the security guard on duty but the service was refused on the
ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second
alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in his progress
report, dated November 2, 1989:
1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro
Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by
respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the properties he had
levied upon.4
The said special sheriff recommended that a "break-open order" be issued to enable him to
enter petitioner's premises so that he could proceed with the public auction sale of the aforesaid
personal properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor
Arbiter alleging that the properties sought to be levied upon by the sheriff were owned by Hydro
(Phils.), Inc. (HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open
Order," alleging that HPPI and petitioner corporation were owned by the same
incorporator/stockholders. They also alleged that petitioner temporarily suspended its business
operations in order to evade its legal obligations to them and that private respondents were
willing to post an indemnity bond to answer for any damages which petitioner and HPPI may
suffer because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents presented duly certified copies of the
General Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities
Exchange Commission (SEC) and the General Information Sheet, dated May 25, 1987,
submitted by HPPI to the Securities and Exchange Commission.
The General Information Sheet submitted by the petitioner revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
HPPI P 6,999,500.00
Antonio W. Lim 2,900,000.00
Dennis S. Cuyegkeng 300.00
 161

Elisa C. Lim 100,000.00 Dennis S. Cuyegkeng Member

Teodulo R. Dino 100.00 Virgilio O. Casino Member

Virgilio O. Casino 100.00 Teodulo R. Dino Member

2. Board of Directors 3. Corporate Officers

Antonio W. Lim Chairman Antonio W. Lim President

Dennis S. Cuyegkeng Member Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Member Elisa C. Lim Treasurer

Teodulo R. Dino Member Virgilio O. Casino Corporate Secretary

Virgilio O. Casino Member 4. Principal Office

3. Corporate Officers 355 Maysan Road, Valenzuela, Metro Manila.6

Antonio W. Lim President On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance of a
break-open order, contending that HPPI is a corporation which is separate and distinct from
Dennis S. Cuyegkeng Assistant to the President petitioner. HPPI also alleged that the two corporations are engaged in two different kinds of
businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in construction.
Elisa O. Lim Treasurer
On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents' motion
Virgilio O. Casino Corporate Secretary for break-open order.
4. Principal Office Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the
order of the Labor Arbiter, issued a break-open order and directed private respondents to file a
355 Maysan Road
bond. Thereafter, it directed the sheriff to proceed with the auction sale of the properties already
Valenzuela, Metro Manila.5 levied upon. It dismissed the third-party claim for lack of merit.

On the other hand, the General Information Sheet of HPPI revealed the following: Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution,
dated December 3, 1992.
1. Breakdown of Subscribed Capital
Hence, the resort to the present petition.
Name of Stockholder Amount Subscribed
Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the
Antonio W. Lim P 400,000.00 execution of its decision despite a third-party claim on the levied property. Petitioner further
contends, that the doctrine of piercing the corporate veil should not have been applied, in this
Elisa C. Lim 57,700.00 case, in the absence of any showing that it created HPPI in order to evade its liability to private
respondents. It also contends that HPPI is engaged in the manufacture and sale of steel,
AWL Trading 455,000.00 concrete and iron pipes, a business which is distinct and separate from petitioner's construction
business. Hence, it is of no consequence that petitioner and HPPI shared the same premises,
Dennis S. Cuyegkeng 40,100.00
the same President and the same set of officers and subscribers.7
Teodulo R. Dino 100.00
We find petitioner's contention to be unmeritorious.
Virgilio O. Casino 100.00
It is a fundamental principle of corporation law that a corporation is an entity separate and
2. Board of Directors distinct from its stockholders and from other corporations to which it may be connected.8 But,
this separate and distinct personality of a corporation is merely a fiction created by law for
Antonio W. Lim Chairman convenience and to promote justice. 9 So, when the notion of separate juridical personality is
used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a
Elisa C. Lim Member device to defeat the labor laws,10 this separate personality of the corporation may be disregarded

or the veil of corporate fiction pierced. 11 This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation.12
The conditions under which the juridical entity may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard and fast rule can be accurately laid down, but
certainly, there are some probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.13
The SEC en banc explained the "instrumentality rule" which the courts have applied in
disregarding the separate juridical personality of corporations as follows:
Where one corporation is so organized and controlled and its affairs are conducted so that it is,
in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the
"instrumentality" may be disregarded. The control necessary to invoke the rule is not majority or
even complete stock control but such domination of instances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but
a conduit for its principal. It must be kept in mind that the control must be shown to have been
exercised at the time the acts complained of took place. Moreover, the control and breach of
duty must proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is
as follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty or dishonest and unjust act in
contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's relationship to that operation.14
Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper
corporation, a sham or a subterfuge is purely one of fact.15
In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations
on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on
May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila.
On the other hand, HPPI, the third-party claimant, submitted on the same day, a similar
162
information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro
Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casiño as the corporate secretary of
both corporations. It would also not be amiss to note that both corporations had
the same president, the same board of directors, the same corporate officers, and substantially
the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein petitioner) and
the third-party claimant shared the same address and/or premises. Under this circumstances,
(sic) it cannot be said that the property levied upon by the sheriff were not of respondents.16
Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of back wages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we
had the occasion to rule:
Respondent court's findings that indeed the Claparols Steel and Nail Plant, which ceased
operation of June 30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the
next day, July 1, 1957, up to December 7, 1962, when the latter finally ceased to operate, were
not disputed by petitioner. It is very clear that the latter corporation was a continuation and
successor of the first entity . . . . Both predecessors and successor were owned and controlled
by petitioner Eduardo Claparols and there was no break in the succession and continuity of the
same business. This "avoiding-the-liability" scheme is very patent, considering that 90% of the
subscribed shares of stock of the Claparols Steel Corporation (the second corporation) was
owned by respondent . . . Claparols himself, and all the assets of the dissolved Claparols Steel
and Nail plant were turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a corporate fiction
whose veil in the present case could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of
the execution, private respondents had no other recourse but to apply for a break-open order
after the third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is in
consonance with Section 3, Rule VII of the NLRC Manual of Execution of Judgment which
provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his
representative entry to the place where the property subject of execution is located or kept, the
judgment creditor may apply to the Commission or Labor Arbiter concerned for a break-open
order.
Furthermore, our perusal of the records shows that the twin requirements of due notice and
hearing were complied with. Petitioner and the third-party claimant were given the opportunity to
submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial
agencies supported by substantial evidence are binding on this Court and are entitled to great
respect, in the absence of showing of grave abuse of a discretion.18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April
23, 1992 and December 3, 1992, are AFFIRMED.
SO ORDERED.
SECOND DIVISION
G.R. No. 100812 June 25, 1999
FRANCISCO MOTORS CORPORATION, petitioner,
vs.
COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA MANUEL, respondents.
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the
decision 1 of the Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered by
Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural antecedents of this
petition are as follows:
On January 23, 1985, petitioner filed a complaint 2 against private respondents to recover three
thousand four hundred twelve and six centavos (P3,412.06), representing the balance of the
jeep body purchased by the Manuels from petitioner; an additional sum of twenty thousand four
hundred fifty-four and eighty centavos (P20,454.80) representing the unpaid balance on the cost
of repair of the vehicle; and six thousand pesos (P6,000.00) for cost of suit and attorney's
fees. 3 To the original balance on the price of jeep body were added the costs of repair. 4 In their
answer, private respondents interposed a counterclaim for unpaid legal services by Gregorio
Manuel in the amount of fifty thousand pesos (P50,000) which was not paid by the incorporators,
directors and officers of the petitioner. The trial court decided the case on June 26, 1985, in
favor of petitioner in regard to the petitioner's claim for money, but also allowed the counter-
claim of private respondents. Both parties appealed. On April 15, 1991, the Court of Appeals
sustained the trial court's decision. 5 Hence, the present petition.
For our review in particular is the propriety of the permissive counterclaim which private
respondents filed together with their answer to petitioner's complaint for a sum of money. Private
respondent Gregorio Manuel alleged as an affirmative defense that, while he was petitioner's
Assistant Legal Officer, he represented members of the Francisco family in the intestate estate
proceedings of the late Benita Trinidad. However, even after the termination of the proceedings,
his services were not paid. Said family members, he said, were also incorporators, directors and
officers of petitioner. Hence to petitioner's collection suit, he filed a counter permissive
counterclaim for the unpaid attorney's fees. 6
For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default
on this score, and evidence ex-parte was presented on the counterclaim. The trial court ruled in
favor of private respondents and found that Gregorio Manuel indeed rendered legal services to
the Francisco family in Special Proceedings Number 7803 — "In the Matter of Intestate Estate of
163
Benita Trinidad". Said court also found that his legal services were not compensated despite
repeated demands, and thus ordered petitioner to pay him the amount of fifty thousand
(P50,000.00) pesos. 7
Dissatisfied with the trial court's order, petitioner elevated the matter to the Court of Appeals,
posing the following issues:
I.
WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL AND
VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE PERSON OF THE DEFENDANT.
II.
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE ALLEGED
PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO THE CLAIM OF DEFENDANT-
APPELLEES.
III.
WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT TO
ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM. 8
Petitioner contended that the trial court did not acquire jurisdiction over it because no summons
was validly served on it together with the copy of the answer containing the permissive
counterclaim. Further, petitioner questions the propriety of its being made party to the case
because it was not the real party in interest but the individual members of the Francisco family
concerned with the intestate case.
In its assailed decision now before us for review, respondent Court of Appeals held that a
counterclaim must be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of
Court; and nowhere does it state in the Rules that a party still needed to be summoned anew if a
counterclaim was set up against him. Failure to serve summons, said respondent court, did not
effectively negate trial court's jurisdiction over petitioner in the matter of the counterclaim. It
likewise pointed out that there was no reason for petitioner to be excused from answering the
counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the
copy of the answer with counterclaim two (2) days prior to his withdrawal as counsel for
petitioner. Moreover when petitioner's new counsel, Jose N. Aquino, entered his appearance,
three (3) days still remained within the period to file an answer to the counterclaim. Having failed
to answer, petitioner was correctly considered in default by the trial
court. 9 Even assuming that the trial court acquired no jurisdiction over petitioner, respondent
court also said, but having filed a motion for reconsideration seeking relief from the said order of
default, petitioner was estopped from further questioning the trial court's jurisdiction. 10
On the question of its liability for attorney's fees owing to private respondent Gregorio Manuel,
petitioner argued that being a corporation, it should not be held liable therefor because these
fees were owed by the incorporators, directors and officers of the corporation in their personal
capacity as heirs of Benita Trinidad. Petitioner stressed that the personality of the
corporation, vis-a-vis the individual persons who hired the services of private respondent, is
separate and distinct, 11 hence, the liability of said individuals did not become an obligation
chargeable against petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:

However, this distinct and separate personality is merely a fiction created by law for
convenience and to promote justice. Accordingly, this separate personality of the corporation
may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak
or cover for found (sic) illegality, or to work an injustice, or where necessary to achieve equity or
when necessary for the protection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA
347) Corporations are composed of natural persons and the legal fiction of a separate corporate
personality is not a shield for the commission of injustice and inequity. (Chemplex Philippines,
Inc. vs. Pamatian, 57 SCRA 408).
In the instant case, evidence shows that the plaintiff-appellant Francisco Motors Corporation is
composed of the heirs of the late Benita Trinidad as directors and incorporators for whom
defendant Gregorio Manuel rendered legal services in the intestate estate case of their
deceased mother. Considering the aforestated principles and circumstances established in this
case, equity and justice demands plaintiff-appellant's veil of corporate identity should be pierced
and the defendant be compensated for legal services rendered to the heirs, who are directors of
the plaintiff-appellant corporation. 12
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE VEIL
OF CORPORATE ENTITY.
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION OVER
PETITIONER WITH RESPECT TO THE COUNTERCLAIM. 13
Petitioner submits that respondent court should not have resorted to piercing the veil of
corporate fiction because the transaction concerned only respondent Gregorio Manuel and the
heirs of the late Benita Trinidad. According to petitioner, there was no cause of action by said
respondent against petitioner; personal concerns of the heirs should be distinguished from those
involving corporate affairs. Petitioner further contends that the present case does not fall among
the instances wherein the courts may look beyond the distinct personality of a corporation.
According to petitioner, the services for which respondent Gregorio Manuel seeks to collect fees
from petitioner are personal in nature. Hence, it avers the heirs should have been sued in their
personal capacity, and not involve the corporation. 14
With regard to the permissive counterclaim, petitioner also insists that there was no proper
service of the answer containing the permissive counterclaim. It claims that the counterclaim is a
separate case which can only be properly served upon the opposing party through summons.
Further petitioner states that by nature, a permissive counterclaim is one which does not arise
out of nor is necessarily connected with the subject of the opposing party's claim. Petitioner
avers that since there was no service of summons upon it with regard to the counterclaim, then
the court did not acquire jurisdiction over petitioner. Since a counterclaim is considered an action
independent from the answer, according to petitioner, then in effect there should be two
simultaneous actions between the same parties: each party is at the same time both plaintiff and
defendant with respect to the other, 15 requiring in each case separate summonses.
In their Comment, private respondents focus on the two questions raised by petitioner. They
defend the propriety of piercing the veil of corporate fiction, but deny the necessity of serving
164
separate summonses on petitioner in regard to their permissive counterclaim contained in the
answer.
Private respondents maintain both trial and appellate courts found that respondent Gregorio
Manuel was employed as assistant legal officer of petitioner corporation, and that his services
were solicited by the incorporators, directors and members to handle and represent them in
Special Proceedings No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They
assert that the members of petitioner corporation took advantage of their positions by not
compensating respondent Gregorio Manuel after the termination of the estate proceedings
despite his repeated demands for payment of his services. They cite findings of the appellate
court that support piercing the veil of corporate identity in this particular case. They assert that
the corporate veil may be disregarded when it is used to defeat public convenience, justify
wrong, protect fraud, and defend crime. It may also be pierced, according to them, where the
corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of
the stockholders or of another corporate entity. In these instances, they aver, the corporation
should be treated merely as an association of individual persons. 16
Private respondents dispute petitioner's claim that its right to due process was violated when
respondents' counterclaim was granted due course, although no summons was served upon it.
They claim that no provision in the Rules of Court requires service of summons upon a
defendant in a counterclaim. Private respondents argue that when the petitioner filed its
complaint before the trial court it voluntarily submitted itself to the jurisdiction of the court. As a
consequence, the issuance of summons on it was no longer necessary. Private respondents say
they served a copy of their answer with affirmative defenses and counterclaim on petitioner's
former counsel, Nicanor G. Alvarez. While petitioner would have the Court believe that
respondents served said copy upon Alvarez after he had withdrawn his appearance as counsel
for the petitioner, private respondents assert that this contention is utterly baseless. Records
disclose that the answer was received two (2) days before the former counsel for petitioner
withdrew his appearance, according to private respondents. They maintain that the present
petition is but a form of dilatory appeal, to set off petitioner's obligations to the respondents by
running up more interest it could recover from them. Private respondents therefore claim
damages against petitioner. 17
To resolve the issues in this case, we must first determine the propriety of piercing the veil of
corporate fiction.
Basic in corporation law is the principle that a corporation has a separate personality distinct
from its stockholders and from other corporations to which it may be connected. 18 However,
under the doctrine of piercing the veil of corporate entity, the corporation's separate juridical
personality may be disregarded, for example, when the corporate identity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime. Also, where the corporation is
a mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation, then its distinct personality may be ignored. 19 In these
circumstances, the courts will treat the corporation as a mere aggrupation of persons and the
liability will directly attach to them. The legal fiction of a separate corporate personality in those
cited instances, for reasons of public policy and in the interest of justice, will be justifiably set
aside.
In our view, however, given the facts and circumstances of this case, the doctrine of piercing the
corporate veil has no relevant application here. Respondent court erred in permitting the trial
court's resort to this doctrine. The rationale behind piercing a corporation's identity in a given

case is to remove the barrier between the corporation from the persons comprising it to thwart
the fraudulent and illegal schemes of those who use the corporate personality as a shield for
undertaking certain proscribed activities. However, in the case at bar, instead of holding certain
individuals or persons responsible for an alleged corporate act, the situation has been reversed.
It is the petitioner as a corporation which is being ordered to answer for the personal liability of
certain individual directors, officers and incorporators concerned. Hence, it appears to us that
the doctrine has been turned upside down because of its erroneous invocation. Note that
according to private respondent Gregorio Manuel his services were solicited as counsel for
members of the Francisco family to represent them in the intestate proceedings over Benita
Trinidad's estate. These estate proceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family members but
also from petitioner corporation on the claims that its management had requested his services
and he acceded thereto as an employee of petitioner from whom it could be deduced he was
also receiving a salary. His move to recover unpaid legal fees through a counterclaim against
Francisco Motors Corporation, to offset the unpaid balance of the purchase and repair of a jeep
body could only result from an obvious misapprehension that petitioner's corporate assets could
be used to answer for the liabilities of its individual directors, officers, and incorporators. Such
result if permitted could easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said
incorporators, directors and officers of the corporation had incurred, it was incurred in their
personal capacity. When directors and officers of a corporation are unable to compensate a
party for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud
or promoting injustice, and be thereby held liable therefor by piercing its corporate veil. While
there are no hard and fast rules on disregarding separate corporate identity, we must always be
mindful of its function and purpose. A court should be careful in assessing the milieu where the
doctrine of piercing the corporate veil may be applied. Otherwise an injustice, although
unintended, may result from its erroneous application.
The personality of the corporation and those of its incorporators, directors and officers in their
personal capacities ought to be kept separate in this case. The claim for legal fees against the
concerned individual incorporators, officers and directors could not be properly directed against
the corporation without violating basic principles governing corporations. Moreover, every action
— including a counterclaim — must be prosecuted or defended in the name of the real party in
interest. 20 It is plainly an error to lay the claim for legal fees of private respondent Gregorio
Manuel at the door of petitioner (FMC) rather than individual members of the Francisco family.
However, with regard to the procedural issue raised by petitioner's allegation, that it needed to
be summoned anew in order for the court to acquire jurisdiction over it, we agree with
respondent court's view to the contrary. Section 4, Rule 11 of the Rules of Court provides that a
counterclaim or cross-claim must be answered within ten (10) days from service. Nothing in the
Rules of Court says that summons should first be served on the defendant before an answer to
counterclaim must be made. The purpose of a summons is to enable the court to acquire
jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely
distinct and independent action, the defendant in the counterclaim, being the plaintiff in the
original complaint, has already submitted to the jurisdiction of the court. Following Rule 9,
Section 3 of the 1997 Rules of Civil Procedure, 21 if a defendant (herein petitioner) fails to
answer the counterclaim, then upon motion of plaintiff, the defendant may be declared in default.
This is what happened to petitioner in this case, and this Court finds no procedural error in the
disposition of the appellate court on this particular issue. Moreover, as noted by the respondent
165
court, when petitioner filed its motion seeking to set aside the order of default, in effect it
submitted itself to the jurisdiction of the court. As well said by respondent court:
Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon
its request, plaintiff-appellant was granted time to file a motion for reconsideration of the
disputed decision. Plaintiff-appellant did file its motion for reconsideration to set aside the order
of default and the judgment rendered on the counterclaim.
Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the counterclaim, as it
vigorously insists, plaintiff-appellant is considered to have submitted to the court's jurisdiction
when it filed the motion for reconsideration seeking relief from the court. (Soriano vs. Palacio, 12
SCRA 447). A party is estopped from assailing the jurisdiction of a court after voluntarily
submitting himself to its jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar
against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37). 22
WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby
REVERSED insofar only as it held Francisco Motors Corporation liable for the legal obligation
owing to private respondent Gregorio Manuel; but this decision is without prejudice to his filing
the proper suit against the concerned members of the Francisco family in their personal
capacity. No pronouncement as to costs.1âwphi1.nêt
SO ORDERED.
SECOND DIVISION
G.R. No. 185122               August 16, 2010
WENSHA SPA CENTER, INC. and/or XU ZHI JIE, Petitioners,
vs.
LORETA T. YUNG, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by an employer
who was charged before the National Labor Relations Commission (NLRC) for dismissing an
employee upon the advice of a Feng Shui master. In this action, the petitioners assail the May
28, 2008 Decision1 and October 23, 2008 Resolution2 of the Court of Appeals (CA) in CA-G.R.
SP No. 98855 entitled Loreta T. Yung v. National Labor Relations Commission, Wensha Spa
Center, Inc. and/or Xu Zhi Jie.
THE FACTS:
Wensha Spa Center, Inc. (Wensha) in Quezon City is in the business of sauna bath and
massage services. Xu Zhi Jie a.k.a. Pobby Co (Xu) is its president, 3 respondent Loreta T. Yung
(Loreta) was its administrative manager at the time of her termination from employment.
In her position paper,4 Loreta stated that she used to be employed by Manmen Services Co.,
Ltd. (Manmen) where Xu was a client. Xu was apparently impressed by Loreta’s performance.
After he established Wensha, he convinced Loreta to transfer and work at Wensha. Loreta was
initially reluctant to accept Xu’s offer because her job at Manmen was stable and she had been
with Manmen for seven years. But Xu was persistent and offered her a higher pay. Enticed,

Loreta resigned from Manmen and transferred to Wensha. She started working on April 21,
2004 as Xu’s personal assistant and interpreter at a monthly salary of ₱12,000.00.
Loreta introduced positive changes to Wensha which resulted in increased business. This
pleased Xu so that on May 18, 2004, she was promoted to the position of Administrative
Manager.5
Loreta recounted that on August 10, 2004, she was asked to leave her office because Xu and a
Feng Shui master were exploring the premises. Later that day, Xu asked Loreta to go on leave
with pay for one month. She did so and returned on September 10, 2004. Upon her return, Xu
and his wife asked her to resign from Wensha because, according to the Feng Shui master, her
aura did not match that of Xu. Loreta refused but was informed that she could no longer
continue working at Wensha. That same afternoon, Loreta went to the NLRC and filed a case for
illegal dismissal against Xu and Wensha.
Wensha and Xu denied illegally terminating Loreta’s employment. They claimed that two months
after Loreta was hired, they received various complaints against her from the employees so that
on August 10, 2004, they advised her to take a leave of absence for one month while they
conducted an investigation on the matter. Based on the results of the investigation, they
terminated Loreta’s employment on August 31, 2004 for loss of trust and confidence.6
The Labor Arbiter (LA) Francisco Robles dismissed Loreta’s complaint for lack of merit. He
found it more probable that Loreta was dismissed from her employment due to Wensha’s loss of
trust and confidence in her. The LA’s decision7 partly reads:
However, this office has found it dubious and hard to believe the contentions made by the
complainant that she was dismissed by the respondents on the sole ground that she is a
"mismatch" in respondents' business as advised by an alleged Feng Shui Master. The
complainant herself alleged in her position paper that she has done several improvements in
respondents’ business such as uplifting the morale and efficiency of its employees and
increasing respondents’ clientele, and that respondent Co was very much pleased with the
improvements made by the complainant that she was offered twice a promotion but she
nevertheless declined. It would be against human experience and contrary to business acumen
to let go of someone, who was an asset and has done so much for the company merely on the
ground that she is a "mismatch" to the business. Absent any proof submitted by the complainant,
this office finds it more probable that the complainant was dismissed due to loss of trust and
confidence.8
This ruling was affirmed by the NLRC in its December 29, 2006 Resolution, 9 citing its
observation that Wensha was still considering the proper action to take on the day Loreta left
Wensha and filed her complaint. The NLRC added that this finding was bolstered by Wensha’s
September 10, 2004 letter to Loreta asking her to come back to personally clarify some matters,
but she declined because she had already filed a case.
Loreta moved for a reconsideration of the NLRC’s ruling but her motion was denied. Loreta then
went to the CA on a petition for certiorari. The CA reversed the ruling of the NLRC on the ground
that it gravely abused its discretion in appreciating the factual bases that led to Loreta’s
dismissal. The CA noted that there were irregularities and inconsistencies in Wensha’s position.
The CA stated the following:
We, thus, peruse the affidavits and documentary evidence of the Private Respondents and find
the following: First, on the affidavits of their witnesses, it must be noted that the same were mere
photocopies. It was held that [T]he purpose of the rule in requiring the production of the best
166
evidence is the prevention of fraud, because if a party is in possession of such evidence and
withholds it, and seeks to substitute inferior evidence in its place, the presumption naturally
arise[s] that the better evidence is withheld for fraudulent purposes which its production would
expose and defeat. Moreover, the affidavits were not executed under oath. The rule is that an
affiant must sign the document in the presence of and take his oath before a notary public as
evidence that the affidavit was properly made. Guided by these principles, the affidavits cannot
be assigned any weighty probative value and are mere scraps of paper the contents of which
are hearsay. Second, on the sales report and order slips, which allegedly prove that Yung had
been charging her food and drinks to Wensha, the said pieces of evidence do not, however,
bear Yung’s name thereon or even her signature. In fact, it does not state anyone’s name,
except that of Wensha. Hence, it would simply be capricious to pinpoint, or impute, on Yung as
the author in charging such expenses to Wensha on the basis of hearsay evidence. Third, while
the affidavit of Wensha’s Operations Manager, Princess delos Reyes (delos Reyes), may have
been duly executed under oath, she did not, however, specify the alleged infractions that Yung
committed. If at all, delos Reyes only made general statements on the alleged complaints
against Yung that were not even substantiated by any other piece of evidence. Finally, the daily
time records (DTRs) of Yung, which supposedly prove her habitual tardiness, were mere
photocopies that are not even signed by Wensha’s authorized representative, thus suspect, if
not violative of the best evidence rule and, therefore, incompetent evidence. x x x [Emphases
appear in the original]
x x x x.
Finally, after the Private Respondents filed their position paper, they alleged mistake on the part
of their former counsel in stating that Yung was dismissed on August 31, 2004. Thus, they
subsequently moved for the admission of their rejoinder. Notably, however, the said rejoinder
was dated October 4, 2004, earlier than the date when their position paper was filed, which was
on November 3, 2004. It is also puzzling that their position paper was dated November 25, 2004,
much later than its date of filing. The irregularities are simply too glaring to be ignored.
Nevertheless, the Private Respondents’ admission of Yung’s termination on August 31, 2004
cannot be retracted. They cannot use the mistake of their counsel as an excuse considering that
the position paper was verified by their Operations Manager, delos Reyes, who attested to the
truth of the contents therein.10 [Emphasis supplied]
Hence, the fallo of the CA decision reads:
WHEREFORE, the instant petition is GRANTED. Wensha Spa Center, Inc. and Xu Zhi Jie are
ORDERED to, jointly and severally, pay Loreta T. Yung her full backwages, other privileges, and
benefits, or their monetary equivalent, corresponding to the period of her dismissal from
September 1, 2004 up to the finality of this decision, and damages in the amounts of fifty
thousand pesos (Php50,000.00) as moral damages, twenty five thousand pesos (Php25,000.00)
as exemplary damages, and twenty thousand pesos (Php20,000.00) as attorney’s fees. No
costs.
SO ORDERED.11
Wensha and Xu now assail this ruling of the CA in this petition presenting the following:
V. GROUNDS FOR THE ALLOWANCE OF THE PETITION
5.1 The following are the reasons and arguments, which are purely questions of law and some
questions of facts, which justify the appeal by certiorari under Rule 45 of the 1997 Revised

Rules of Civil Procedure, as amended, to this Honorable SUPREME COURT of the assailed
Decision and Resolution, to wit:
5.1.1 The Honorable COURT OF APPEALS gravely erred in reversing that factual findings of the
Honorable Labor Arbiter and the Honorable NLRC (Third Division) notwithstanding recognized
and established rule in our jurisdiction that findings of facts of quasi-judicial agencies who have
gained expertise on their respective subject matters are given respect and finality;
5.1.2 The Honorable COURT OF APPEALS committed grave abuse of discretion and serious
errors when it ruled that findings of facts of the Honorable Labor Arbiter and the Honorable
NLRC are not supported by substantial evidence despite the fact that the records clearly show
that petitioner therein was not dismissed but is under investigation, and that she is guilty of
serious infractions that warranted her termination;
5.1.3 The Honorable COURT OF APPEALS grave[ly] erred when it ordered herein petitioner to
pay herein respondent her separation pay, in lieu of reinstatement, and full backwages, as well
as damages and attorney’s fees;
5.1.4 The Honorable COURT OF APPEALS committed grave abuse of discretion and serious
errors when it held that petitioner XU ZHI JIE to be solidarily liable with WENSHA, assuming that
respondent was illegally dismissed;
5.2 The same need to be corrected as they would work injustice to the herein petitioner, grave
and irreparable damage will be done to him, and would pose dangerous precedent.12
THE COURT’S RULING:
Loreta’s security of tenure is guaranteed by the Constitution and the Labor Code. The 1987
Philippine Constitution provides in Section 18, Article II that the State shall protect the rights of
workers and promote their welfare. Section 3, Article XIII also provides that all workers shall be
entitled to security of tenure. Along that line, Article 3 of the Labor Code mandates that the State
shall assure the rights of workers to security of tenure.
Under the security of tenure guarantee, a worker can only be terminated from his employment
for cause and after due process. For a valid termination by the employer: (1) the dismissal must
be for a valid cause as provided in Article 282, or for any of the authorized causes under Articles
283 and 284 of the Labor Code; and (2) the employee must be afforded an opportunity to be
heard and to defend himself. A just and valid cause for an employee’s dismissal must be
supported by substantial evidence, and before the employee can be dismissed, he must be
given notice and an adequate opportunity to be heard.13 In the process, the employer bears the
burden of proving that the dismissal of an employee was for a valid cause. Its failure to
discharge this burden renders the dismissal unjustified and, therefore, illegal.14
As a rule, the factual findings of the court below are conclusive on Us in a petition for review on
certiorari where We review only errors of law. This case, however, is an exception because the
CA’s factual findings are not congruent with those of the NLRC and the LA.
According to Wensha in its position paper,15 it dismissed Loreta on August 31, 2004 after
investigating the complaints against her. Wensha asserted that her dismissal was a valid
exercise of an employer’s right to terminate a managerial employee for loss of trust and
confidence. It claimed that she caused the resignation of an employee because of gossips
initiated by her. It was the reason she was asked to take a leave of absence with pay for one
month starting August 10, 2004.16
167
Wensha also alleged that Loreta was "sowing intrigues in the company" which was inimical to
Wensha. She was also accused of dishonesty, serious breach of trust reposed in her, tardiness,
and abuse of authority.17
In its Rejoinder, Wensha changed its position claiming that it did not terminate Loreta’s
employment on August 31, 2004. It even sent her a notice requesting her to report back to work.
She, however, declined because she had already filed her complaint.18
As correctly found by the CA, the cause of Loreta’s dismissal is questionable. Loss of trust and
confidence to be a valid ground for dismissal must have basis and must be founded on clearly
established facts.19
The Court finds the LA ruling that states, "[a]bsent any proof submitted by the complainant, this
office finds it more probable that the complainant was dismissed due to loss of trust and
confidence,"20 to be utterly erroneous as it is contrary to the applicable rules and pertinent
jurisprudence. The onus of proving a valid dismissal rests on the employer, not on the
employee.21 It is the employer who bears the burden of proving that its dismissal of the
employee is for a valid or authorized cause supported by substantial evidence. 22
According to the NLRC, "[p]erusal of the entire records show that complainant left the
respondents’ premises when she was confronted with the infractions imputed against
her."23 This information was taken from the affidavit 24 of Princess Delos Reyes (Delos
Reyes) which was dated March 21, 2005, not in Wensha’s earlier position paper or pleadings
submitted to the LA. The affidavits 25 of employees attached to Delos Reyes’ affidavit were all
dated November 19, 2004 indicating that they were not yet executed when the complaints
against Loreta were supposedly being investigated in August 2004.
It is also noteworthy that Wensha’s position paper related that because of the gossips
perpetrated by Loreta, a certain Oliva Gonzalo (Gonzalo) resigned from Wensha. Because of
the incident, Gonzalo, whose father was a policeman, "reportedly got angry with complainant
and of the management telling her friends at respondent company that she would retaliate thus
creating fear among those concerned."26 As a result, Loreta was advised to take a paid leave of
absence for one month while Wensha conducted an investigation.
According to Loreta, however, the reason for her termination was her aura did not match that of
Xu and the work environment at Wensha. Loreta narrated:
On August 10, 2004 however, complainant was called by respondent Xu and told her to wait at
the lounge area while the latter and a Feng Shui Master were doing some analysis of the office.
After several hours of waiting, respondent Xu then told complainant that according to the Feng
Shui master her Chinese Zodiac sign is a "mismatch" with that of the respondents; that
complainant should not enter the administrative office for a month while an altar was to be
placed on the left side where complainant has her table to allegedly correct the "mismatch" and
that it is necessary that offerings and prayers have to be made and said for about a month to
correct the alleged "jinx." Respondent Xu instructed complainant not to report to the office for a
month with assurance of continued and regular salary. She was ordered not to seek
employment elsewhere and was told to come back on the 10th of September 2004.27
Although she was a little confused, Loreta did as she was instructed and did not report for work
for a month. She returned to work on September 10, 2004. This is how Loreta recounted the
events of that day:

On September 10, 2004, in the morning, complainant reported to the office of respondents. As
usual, she punched-in her time card and signed in the logbook of the security guard. When she
entered the administrative office, some of its employees immediately contacted respondent Xu.
Respondent Xu then contacted complainant thru her mobile phone and told her to leave the
administrative office immediately and instead to wait for him in the dining area.
xxx
Complainant waited for respondent Xu in the dining area. After waiting for about two (2) hours,
respondent Xu was nowhere. Instead, it was Jiang Xue Qin a.k.a Annie Co, the Chinese wife of
respondent Xu, who arrived and after a short conversation between them, the former frankly told
complainant that she has to resign allegedly she is a mismatch to respondent Xu according to
the Feng Shui master and therefore she does not fit to work (sic) with the respondents.
Surprised and shocked, complainant demanded of Jiang Xue Qin to issue a letter of termination
if it were the reason therefor.
Instead of a termination letter issued, Jiang Xue Qin insisted for the complainant's resignation.
But when complainant stood her ground, Jian Xue Qin shouted invectives at her and told to
leave the office immediately.
Respondent Xu did not show up but talked to the complainant over the mobile phone and
convinced her likewise to resign from the company since there is no way to retain her because
her aura unbalanced the area of employment according to the Feng Shui, the Chinese spiritual
art of placement. Hearing this from no lees than respondent Xu, complainant left the office and
went straight to this Office and filed the present case on September 10, 2004. xxx28
Loreta also alleged that in the afternoon of that day, September 10, 2004, a notice was posted
on the Wensha bulletin board that reads:
TO ALL EMPLOYEES OF WENSHA SPA CENTER
WE WOULD LIKE TO INFORM YOU THAT MS. LORIE TSE YUNG, FORMER
ADMINISTRATIVE OFFICER OF WENSHA SPA CENTER IS NO LONGER CONNECTED TO
THIS COMPANY STARTING TODAY SEPTEMBER 10, 2004.
ANY TRANSACTION MADE BY HER IS NO LONGER A LIABILITY OF THE COMPANY.
(SGD.) THE MANAGEMENT [Italics were in red letters.]29
The Court finds Loreta’s complaint credible. There is consistency in her pleadings and evidence.
In contrast, Wensha’s pleadings and evidence, taken as a whole, suffer from inconsistency.
Moreover, the affidavits of the employees only pertain to petty matters that, to the Court’s mind,
are not sufficient to support Wensha’s alleged loss of trust and confidence. To be a valid cause
for termination of employment, the act or acts constituting breach of trust must have been done
intentionally, knowingly, and purposely; and they must be founded on clearly established facts.
The CA decision is supported by evidence and logically flows from a review of the records.
Loreta’s narration of the events surrounding her termination from employment was simple and
straightforward. Her claims are more credible than the affidavits which were clearly prepared as
an afterthought.
More importantly, the records are bereft of evidence that Loreta was duly informed of the
charges against her and that she was given the opportunity to respond to those charges prior to
her dismissal. If there were indeed charges against Loreta that Wensha had to investigate, then
168
it should have informed her of those charges and required her to explain her side. Wensha
should also have kept records of the investigation conducted while Loreta was on
leave.1avvphi1 The law requires that two notices be given to an employee prior to a valid
termination: the first notice is to inform the employee of the charges against her with a warning
that she may be terminated from her employment and giving her reasonable opportunity within
which to explain her side, and the second notice is the notice to the employee that upon due
consideration of all the circumstances, she is being terminated from her employment. 30 This is a
requirement of due process and clearly, Loreta did not receive any of those required notices.
We are in accord with the pronouncement of the CA that the reinstatement of Loreta to her
former position is no longer feasible in the light of the strained relations between the parties.
Reinstatement, under the circumstances, would no longer be practical as it would not be in the
interest of both parties. Under the law and jurisprudence, an illegally dismissed employee is
entitled to two reliefs - backwages and reinstatement, which are separate and distinct. If
reinstatement would only exacerbate the tension and further ruin the relations of the employer
and the employee, or if their relationship has been unduly strained due to irreconcilable
differences, particularly where the illegally dismissed employee held a managerial or key
position in the company, it would be prudent to order payment of separation pay instead of
reinstatement.31 In the case of Golden Ace Builders v. Talde,32 We wrote:
Under the doctrine of strained relations, the payment of separation pay has been considered an
acceptable alternative to reinstatement when the latter option is no longer desirable or viable.
On the one hand, such payment liberates the employee from what could be a highly oppressive
work environment. On the other, the payment releases the employer from the grossly
unpalatable obligation of maintaining in its employ a worker it could no longer trust.
In the case at bench, the CA, upon its own assessment, pronounced that the relations between
petitioners and the respondent have become strained because of her dismissal anchored on
dubious charges. The respondent has not contested the finding. As she is not insisting on being
reinstated, she should be paid separation pay equivalent to one (1) month salary for every year
of service.33 The CA, however, failed to decree such award in the dispositive
portion.ten.lihpwal This should be rectified.
Nevertheless, the Court finds merit in the argument of petitioner Xu that the CA erred in ruling
that he is solidarily liable with Wensha.
Elementary is the rule that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it and from that of any other legal entity to which it
may be related. "Mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality."34
In labor cases, corporate directors and officers may be held solidarily liable with the corporation
for the termination of employment only if done with malice or in bad faith. 35 Bad faith does not
connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and
conscious doing of wrong; it means breach of a known duty through some motive or interest or ill
will; it partakes of the nature of fraud.36
In the subject decision, the CA concluded that petitioner Xu and Wensha are jointly and
severally liable to Loreta.37 We have read the decision in its entirety but simply failed to come
across any finding of bad faith or malice on the part of Xu. There is, therefore, no justification for
such a ruling. To sustain such a finding, there should be an evidence on record that an officer or
director acted maliciously or in bad faith in terminating the services of an employee. 38 Moreover,

the finding or indication that the dismissal was effected with malice or bad faith should be stated
in the decision itself.39
WHEREFORE, the petition is PARTIALLY GRANTED. The decretal portion of the May 28, 2008
Decision of the Court of Appeals, in CA-G.R. SP No. 98855, is hereby MODIFIED to read as
follows:
WHEREFORE, the petition is GRANTED. Wensha Spa Center, Inc. is hereby ordered to pay
Loreta T. Yung her full backwages, other privileges, and benefits, or their monetary equivalent,
and separation pay reckoned from the date of her dismissal, September 1, 2004, up to the
finality of this decision, plus damages in the amounts of Fifty Thousand (₱50,000.00) Pesos, as
moral damages; Twenty Five Thousand (₱25,000.00) Pesos as exemplary damages; and
Twenty Thousand (₱20,000.00) Pesos, as attorney’s fees. No costs.
SO ORDERED.
[ G.R. No. 225544, December 04, 2017 ]
ROGEL N. ZARAGOZA, PETITIONER, V. KATHERINE L. TAN AND EMPERADOR
DISTILLERS, INC., RESPONDENT.
DECISION
PERALTA, J.:
Before us is a petition for review on certiorari seeking to annul and set aside the
Decision[1] dated January 27, 2016 and the Resolution [2] dated May 26, 2016 of the Court of
Appeals (CA) issued in CA-G.R. SP No. 135572.
The antecedent facts are as follows:
Petitioner Rogel N. Zaragoza was the Area Sales Manager of Consolidated Distillers of the Far
East Incorporated (Condis) in the Bicol Region. He was dismissed on December 3, 2007. On
February 18, 2008, he filed an illegal dismissal case with money claims against Condis, Winston
Co and Dominador D. Hidalgo. On March 3, 2009, the Labor Arbiter (LA) issued his
Decision[3] finding that petitioner was illegally dismissed, the dispositive portion of which reads:
WHEREFORE, finding merit on the causes of action set forth by complainant ROGEL N.
ZARAGOZA, judgment is hereby rendered declaring his termination or dismissal from
employment by respondents CONSOLIDATED DISTILLERS OF THE FAR EAST,
INC./DOMINADOR D. HIDALGO, as illegal, thus:
a. ordering respondents to reinstate complainant, which reinstatement is immediately executory,
to his former position without loss of seniority rights and other privileges, and under the same
terms and conditions prevailing prior to his dismissal, and by reason thereof, directing
respondents to submit a report of compliance within ten (10) days from receipt of this decision;
b. ordering respondents to pay complainant, jointly and severally, full backwages, computed
from the date of his unlawful dismissal up to the time of actual reinstatement, which as of the
date of this decision amount to Php362,692.25;
c. ordering respondents, jointly and severally, to pay the total amount of Php36,043.69,
representing complainant's monthly incentive; vacation/sick leave; 13th month pay; and
operational expenses; and
169
d. ordering respondents, jointly and severally, to pay complainant moral and exemplary
damages of Php 100,000.00; [and]
e. ordering respondents, jointly and severally, to pay complainant nominal damages of
Php50,000.00 (please see attached computation of monetary award forming an integral part of
this decision).
Other claims and charges are ordered DISMISSED finding no legal and tactual basis thereof.[4]
On May 11, 2009, Condis filed its Manifestation[5] by way of compliance with the LA alleging that
petitioner can no longer be reinstated as his former sales position no longer existed and there
was no equivalent position to which he could be reinstated pending appeal as the company was
no longer engaged in the manufacturing, selling and marketing of Emperador Brandy and other
liquor products; and that the Services Agreement which Condis entered with Emperador
Distillers, Inc. (EDI), the company that bought the former, to market, sell and make logistic
services was also terminated on June 1, 2008.
Condis and Hidalgo appealed the LA decision to the National Labor Relations Commission
(NLRC). On April 13, 2010, the NLRC affirmed[6] with modification the LA decision by deleting
the award of nominal damages and reducing to P50,000.00 the award of moral and exemplary
damages. Their motion for reconsideration was denied in a Resolution dated July 30, 2010.
They filed a petition for certiorari with the CA which issued its Decision[7] dated November 22,
2010, partly granting the petition. The CA affirmed with modification the NLRC Decision and
Resolution, and absolved Hidalgo of liability and deleted the award of moral and exemplary
damages. The CA denied the motion for reconsideration in a Resolution[8] dated March 7, 2011.
Condis filed a petition for review with the Court, which denied it in a Resolution [9] dated June 22,
2011. The motion for reconsideration was denied in a Resolution [10] dated January 18, 2012. The
Resolution became final and executory on March 30, 2012 and an entry of judgment was made.
Meanwhile, petitioner had already received a total amount of P454,986.98. [11] He then filed a
motion[12] for issuance of alias writ of execution with notice of appearance, arguing that he is
likewise entitled to accrued salaries by reason of the order of reinstatement, which as of
December 3, 2012 amounted to P2,294,897.47. He prayed that respondent Tan, as President of
Condis, should be held personally liable for the awards; and that respondent EDI should also be
held jointly and solidarily liable with Condis for the judgment award as the transfer of
manufacturing business of the latter to the former was done in bad faith in order to evade
payment/satisfaction of their liabilities in the labor case, applying the doctrine of piercing the veil
of corporate fiction.
On August 3, 2013, the LA issued a Resolution,[13] the decretal portion of which reads:
WHEREFORE, premises considered and as prayed for, let an alias writ of execution issue
against CONSOLIDATED DISTILLERS OF THE FAR EAST, INC.,/EMPERADOR DISTILLERS,
INC., doing business under the name and style of EDI International, jointly and severally, and in
the alternative, against Katherine L. Tan, in her capacity as President of Consolidated Distillers
of the Far East, Inc., for P2,135,256.45, representing backwages/reinstatement salaries,
inclusive of allowances, and to his other benefits or their monetary equivalent, covering the
period December 3, 2007 until August 3, 2013.[14]
In adjudging respondents Katherine Tan and EDI to be jointly and severally liable with Condis,
the LA found that the execution of the Asset Purchase Agreement and the termination of the
Services Agreement were purposely done by Condis and respondent EDI to defraud petitioner

as shown by the following: While the January 16, 2007 Asset Purchase Agreement was
executed earlier than petitioner's dismissal on December 3, 2007, Condis was still operational
for the period convenient to its purpose; the Asset Purchase Agreement and the letter
terminating the Services Agreement were signed by Co as the Managing Director of EDI, and
Co used to be Condis' Senior Vice-President prior to its alleged cessation of operation; both
companies were represented by one and the same lawyer when they filed their respective
Comment/Opposition; and Condis raised the issue of cessation of operation and separate
corporate personality only in the course of the execution of the decision in the illegal dismissal
case. Thus, the corporate fiction is pierceable by reason of fraud.
Respondents then filed with the NLRC a Petition for Annulment of the Resolution dated 3 August
2013 of the Executive Labor Arbiter Jess Orlando M. Quinones Ex Abundante Ad
Cautelam (with an Extremely Urgent Motion for the issuance of a Temporary Restraining Order
and/or Writ of Preliminary Injunction)
On January 17, 2014, the NLRC issued its Decision,[15] the decretal portion of which reads:
WHEREFORE, premises considered, the instant petition is GRANTED. The 03 August 2013
Resolution holding petitioners Emperador Distillers Inc. and Katherine Tan liable for the claims
of private respondent Rogel Zaragoza is declared null and void.[16]
In granting the petition, the NLRC found that respondents were never made parties in the illegal
dismissal case filed by petitioner; that they were merely dragged into the proceedings when
petitioner filed a motion for issuance of alias writ of execution with notice of appearance; that an
order of execution can only be issued against a party and not against one who did not have his
day in court. The LA did not acquire jurisdiction over the respondents, since they were neither
summoned nor voluntarily appeared before the LA, and not being impleaded in the case,
respondent EDI cannot be subject to the LA's process of piercing the veil of corporate fiction,
and respondent Tan cannot also be subject to the LA's process of determining bad faith which
would make an officer personally liable for the claims of a dismissed employee.
Petitioner's motion for reconsideration was denied in a Resolution[17] dated February 28, 2014.
Petitioner filed a petition for certiorari with the CA. The CA rendered its assailed Decision dated
January 27, 2016 which dismissed the petition and affirmed the NLRC decision. Petitioner's
motion for reconsideration was denied in a Resolution dated May 26, 2016.
Hence this petition for review where petitioner raises the issue of:
WHETHER OR NOT THE MONETARY AWARD IN FAVOR OF PETITIONER IN NLRC CASE
NO. SRAB V-07-00089-08 CAN STILL BE ENFORCED AGAINST RESPONDENT TAN IN HER
CAPACITY AS PRESIDENT OF CONDIS AND AGAINST RESPONDENT EDI, EVEN THOUGH
THEY WERE NOT IMPLEADED IN SAID LABOR CASE.[18]
We find no merit in this petition.
Under the final and executory decision in petitioner's illegal dismissal case, only Condis was
found liable for the judgment awarded to him. However, in petitioner's motion for the issuance of
alias writ of execution with notice of appearance, petitioner alleged that should Condis fail to pay
the judgment award, respondent Tan, as its President and as a stockholder of respondent EDI,
should be held personally liable for the awards; and that respondent EDI should also be held
jointly and severally liable with Condis. The LA granted the motion and issued the alias writ of
170
execution where respondents were ordered to solidarity pay the judgment award with Condis.
The NLRC, however, reversed the LA Order, which reversal was affirmed by the CA.
We agree with the CA.
The LA Resolution dated August 3, 2013, which directed the issuance of an alias writ of
execution against respondents had the effect of amending the final and executory decision
which made Condis the only one liable to petitioner. This cannot be done. The writ of execution
must conform to the judgment which is to be executed, [19] as it may not vary the terms of the
judgment it seeks to enforce. Nor may it go beyond the terms of the judgment which is sought to
be executed. Where the execution is not in harmony with the judgment which gives it life and
exceeds it, it has pro tanto no validity. To maintain otherwise would be to ignore the
constitutional provision against depriving a person of his property without due process of law.[20]
Moreover, it bears stressing that respondents were never mentioned in the illegal dismissal
proceedings, i.e., from the LA, the NLRC, the CA or up to this Court, since the party-
respondents therein were Condis, Co and Hidalgo. It is undisputed that respondents were
involved in the case only when petitioner filed a motion for issuance of alias writ of execution
which prayed for their inclusion, and which the LA granted; thus, they were unexpectedly
ordered to be jointly and severally liable with Condis to pay the judgment award. It is basic that
no man shall be affected by any proceeding to which he is a stranger, and strangers to a case
are not bound by judgment rendered by the court. [21] A decision of a court will not operate to
divest the rights of a person who has not and has never been a party to a litigation, either as
plaintiff or as defendant.[22] Execution of a judgment can only be issued against one who is a
party to the action, and not against one who, not being a party to the action, has not yet had his
day in court.[23] That execution may only be effected against the property of the judgment debtor,
who must necessarily be a party to the case.[24] Accordingly, the LA's Order against respondents
who were not parties to the case is a deprivation of property without due process of law.
More importantly, since respondents were never impleaded in the illegal dismissal case, they
were never served with summons nor did they voluntarily appear in the arbitration level; thus,
the LA never acquired jurisdiction over them as to order the piercing of the veil of corporate
fiction, and to make them jointly and severally liable with Condis for the judgment award to
petitioner. We find apropros the case of Pacific Rehouse Corporation v. Court of
Appeals[25] which was cited by the CA in its decision, thus:
The Court already ruled in Kukan International Corporation v. Reyes that compliance with the
recognized modes of acquisition of jurisdiction cannot be dispensed with even in piercing the veil
of corporate fiction, to wit:
The principle of piercing the veil of corporate fiction, and the resulting treatment of two related
corporations as one and the same juridical person with respect to a given transaction, is
basically applied only to determine established liability; it is not available to confer on the court a
jurisdiction it has not acquired, in the first place, over a party not impleaded in a case. Elsewise
put, a corporation not impleaded in a suit cannot be subject to the court's process of piercing the
veil of its corporate fiction. In that situation, the court has not acquired jurisdiction over the
corporation and, hence, any proceedings taken against that corporation and its property would
infringe on its right to due process. Aguedo Agbayani, a recognized authority on Commercial
Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x

This is so because the doctrine of piercing the veil of corporate fiction comes to play only during
the trial of the case after the court has already acquired jurisdiction over the corporation. Hence,
before this doctrine can be applied, based on the evidence presented, it is imperative that the
court must first have jurisdiction over the corporation. x x x" (Citations omitted)
From the preceding, it is therefore correct to say that the court must first and foremost acquire
jurisdiction over the parties; and only then would the parties be allowed to present evidence for
and/or against piercing the veil of corporate fiction. If the court has no jurisdiction over the
corporation, it follows that the court has no business in piercing its veil of corporate fiction
because such action offends the corporation's right to due process.
"Jurisdiction over the defendant is acquired either upon a valid service of summons or the
defendant's voluntary appearance in court. When the defendant does not voluntarily submit to
the court's jurisdiction or when there is no valid service of summons, 'any judgment of the court
which has no jurisdiction over the person of the defendant is null and void.'" "The defendant
must be properly apprised of a pending action against him and assured of the opportunity to
present his defenses to the suit. Proper service of summons is used to protect one's right to due
process."[26]
In any event, it is an elementary and fundamental principle of corporation law that a corporation
is an artificial being invested by law with a personality separate and distinct from its stockholders
and from other corporations to which it may be connected. [27] A corporation, as a juridical entity,
may act only through its directors, officers and employees. Obligations incurred as a result of the
acts of the directors and officers as the corporate agents are not their personal liability but the
direct responsibility of the corporation they represent. [28] While a corporation may exist for any
lawful purpose, the law will regard it as an association of persons, or in case of two corporations,
merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality.
[29]
 This is the doctrine of piercing the veil of corporate fiction which applies only when such
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend
crime,[30] or when it is made as a shield to confuse the legitimate issues, or where a corporation
is the mere alter ego or business conduit of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation. [31] To disregard the separate juridical personality of a
corporation, the wrongdoing must be established clearly and convincingly. It cannot be
presumed.[32]
Petitioner argues that respondent Tan, as President of Condis, can be held solidarily liable for
the judgment award despite not being impleaded as a party in the illegal dismissal case relying
on A.C. Ransom Labor Union-CCLU v. NLRC.[33] We are not impressed.
In A.C. Ransom, Ransom was found guilty of unfair labor practice; thus, it was ordered, together
with its officers and agents, to reinstate the 22 union members to their respective positions with
backwages, which decision became final and executory but the writ of execution could not be
implemented against Ransom because of the disposition posthaste of its leviable assets. We
found that Ransom put up another corporation, the Rosario Industrial Corporation (Rosario),
while the ULP case was pending with the Court of Industrial Relations and that both corporations
were closed corporations, owned and managed by the members of the Hernandez family; and
that Rosario was established to phase out Ransom if an unfavorable decision would be
rendered against the latter, hence, Ransom's operation was discontinued few months after the
LA ruled in the employees' favor. As Ransom had the intention of evading its just and due
obligations to the employees, We allowed the piercing of the veil of corporate fiction by making
the officers of Ransom personally liable for the debts of the latter. We said that since Ransom is
171
a corporation, an artificial person, it must have an officer who can be presumed to be the
employer, which as defined under Article 212(c) (now Article 212 [e]) of the Labor Code,
includes any person acting in the interest of an employer, directly or indirectly, but does not
include any labor organization or any of its officers or agents, except when acting as employer.
The factual milieu of A.C. Ransom case is different from the instant case. As the CA correctly
found, in A.C. Ransom, the officers and agents were already held liable in the final and
executory decision as they were named individual respondents in the case. Here, respondents
were included in this case only in petitioner's motion for issuance of alias writ of execution.
Moreover, in Carag v. NLRC,[34] where the employees therein sought to hold Carag, the
company's Chairman of the Board, personally liable for the separation pay owed by the
company to them on the basis of Article 212 (e) of the Labor Code, We made this clarification
and held:
Indeed, complainants seek to hold Carag personally liable for the debts of MAC based solely on
Article 212(e) of the Labor Code. This is the specific legal ground cited by complainants, and
used by Arbiter Ortiguerra, in holding Carag personally liable for the debts of MAC.
We have already ruled in McLeod v. NLRC and Spouses Santos v. NLRC that Article 212(e) of
the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the
corporation. The governing law on personal liability of directors for debts of the corporation is still
Section 31 of the Corporation Code. Thus, we explained in McLeod:
Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to
a patently unlawful act of the corporation, or when they are guilty of bad faith or gross
negligence in directing its affairs, or when there is a conflict of interest resulting in damages to
the corporation, its stockholders or other persons; (2) they consent to the issuance of watered
down stocks or when, having knowledge of such issuance, do not forthwith file with the
corporate secretary their written objection; (3) they agree to hold themselves personally and
solidarity liable with the corporation; or (4) they are made by specific provision of law personally
answerable for their corporate action.[35]
xxxx
Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime. In the absence of malice, bad faith, or a specific provision of law making a corporate
officer liable, such corporate officer cannot be made personally liable for corporate liabilities.
Neither Article 212[e] nor Article 273 (now 272) of the Labor Code expressly makes any
corporate officer personally liable for the debts of the corporation. As this Court ruled in H.L.
Carlos Construction, Inc. v. Marina Properties Corporation:
We concur with the CA that these two respondents are not liable. Section 31 of the Corporation
Code (Batas Pambansa Blg. 68) provides:
Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith ... shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders and other persons.
The personal liability of corporate officers validly attaches only when (a) they assent to a
patently unlawful act of the corporation; or (b) they are guilty of bad faith or gross negligence in

directing its affairs; or (c) they incur conflict of interest, resulting in damages to the corporation,
its stockholders or other persons.
Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court of Appeals to hold Carag
personally liable for the separation pay owed by MAC to complainants based alone on Article
212(e) of the Labor Code. Article 212(e) does not state that corporate officers are personally
liable for the unpaid salaries or separation pay of employees of the corporation. The liability of
corporate officers for corporate debts remains governed by Section 31 of the Corporation Code.
[36]
Thus, to hold a director or officer personally liable for corporate obligations, two requisites must
concur:[37] (1) complainant must allege in the complaint that the director or officer assented to
patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad
faith; and (2) complainant must clearly and convincingly prove such unlawful acts, negligence or
bad faith.
To stress, respondent Tan was not at all impleaded in the illegal dismissal case; thus, her
participation in petitioner's dismissal was never established in any of the proceedings therein.
Consequently, it was not shown at all that she assented to patently unlawful acts of the
corporation, or that she was guilty of gross negligence or bad faith. In fact, the LA Resolution
granting the alias writ of execution against the respondents did not make any finding as to why
respondent Tan was ordered to pay the judgment award in the alternative, with Condis and
respondent EDI, other than his reliance on our ruling in A.C. Ransom, which as we found is
misplaced.
Petitioner contends that he must be protected against the corporate maneuverings of Condis to
evade the full satisfaction of the award in the labor case by selling its manufacturing and sales
business to respondent EDI through the execution of the Asset Purchase Agreement; that there
was a valid justification to pierce the corporate veil of these two corporations as found by the LA.
We are not convinced.
In justifying the piercing of the veil of corporate fiction of respondent EDI and Condis, the LA
found that the execution of the Asset Purchase Agreement and the termination of the Service
Agreement between the two companies were purposely done to defraud petitioner; that the
Asset Purchase Agreement and the letter terminating the Services Agreement were signed by
Co as the Managing Director of respondent EDI, and that he used to be Condis' Senior Vice-
President prior to its alleged cessation of operation; and both companies were represented by
the same counsel; and that Condis raised the issue of cessation of operation and separate
corporate personality only in the course of the execution of the decision in the illegal dismissal
case. We find these reasons to be insufficient to justify the doctrine's application.
Notably, respondent EDI was incorporated in 2006. It entered into an Asset Purchase
Agreement with Condis on January 16, 2007 whereby all the latter's assets in the manufacturing
and selling of Emperador Brandy were sold to the former. On even date, they also executed a
Services Agreement where Condis' employees would provide assistance to respondent EDI until
the latter was already capable. These agreements were executed prior to petitioner's dismissal
on December 3, 2007 and the LA Decision dated March 3, 2009 finding him illegally dismissed.
Hence, it could not be alleged that respondent EDI was organized with the intention of evading
Condis' obligations to petitioner. Moreover, where one corporation sells or otherwise transfers all
its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts
and liabilities of the transferor. [38] In fact, the Asset Purchase Agreement provides for non-
assumption of liability, to wit:
172
Non assumption of liabilities
Except as otherwise agreed expressly in writing, Buyer does not and shall not assume or agree
to pay any of Seller's or, where applicable any shareholder's, partners' or members' liabilities or
obligations, of any nature or kind. Seller and, where applicable, any shareholder, partner,
member, shall each remain responsible for their respective debts and obligations.[39]
Also, the existence of interlocking directors, corporate officers and shareholders, which the LA
considered, without more, is not enough justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations. [40] Any piercing of the corporate veil has to
be done with caution.[41] The wrongdoing must be clearly and convincingly established. It cannot
just be presumed.[42]
It is significant to note that even if petitioner has sufficiently proven the factual bases for the
application of the said doctrine, it cannot still be validly applied against respondents since, as we
have discussed above, the LA never acquired jurisdiction over them.
WHEREFORE, the petition for review is DENIED. The Decision dated January 27, 2016 and the
Resolution dated May 26, 2016 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.
THIRD DIVISION
G.R. No. 191109               July 18, 2012
REPUBLIC OF THE PHILIPPINES, represented by the PHILIPPINE RECLAMATION
AUTHORITY (PRA), Petitioner,
vs.
CITY OF PARANAQUE, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, on
pure questions of law, assailing the January 8, 2010 Order 1 of the Regional Trial Court, Branch
195, Parafiaque City (RTC), which ruled that petitioner Philippine Reclamation Authority (PRA) is
a government-owned and controlled corporation (GOCC), a taxable entity, and, therefore, . not
exempt from payment of real property taxes. The pertinent portion of the said order reads:
In view of the finding of this court that petitioner is not exempt from payment of real property
taxes, respondent Parañaque City Treasurer Liberato M. Carabeo did not act xxx without or in
excess of jurisdiction, or with grave abuse of discretion amounting to lack or in excess of
jurisdiction in issuing the warrants of levy on the subject properties.
WHEREFORE, the instant petition is dismissed. The Motion for Leave to File and Admit
Attached Supplemental Petition is denied and the supplemental petition attached thereto is not
admitted.
The Public Estates Authority (PEA) is a government corporation created by virtue of Presidential
Decree (P.D.) No. 1084 (Creating the Public Estates Authority, Defining its Powers and
Functions, Providing Funds Therefor and For Other Purposes) which took effect on February 4,

1977 to provide a coordinated, economical and efficient reclamation of lands, and the
administration and operation of lands belonging to, managed and/or operated by, the
government with the object of maximizing their utilization and hastening their development
consistent with public interest.
On February 14, 1979, by virtue of Executive Order (E.O.) No. 525 issued by then President
Ferdinand Marcos, PEA was designated as the agency primarily responsible for integrating,
directing and coordinating all reclamation projects for and on behalf of the National Government.
On October 26, 2004, then President Gloria Macapagal-Arroyo issued E.O. No. 380
transforming PEA into PRA, which shall perform all the powers and functions of the PEA relating
to reclamation activities.
By virtue of its mandate, PRA reclaimed several portions of the foreshore and offshore areas of
Manila Bay, including those located in Parañaque City, and was issued Original Certificates of
Title (OCT Nos. 180, 202, 206, 207, 289, 557, and 559) and Transfer Certificates of Title (TCT
Nos. 104628, 7312, 7309, 7311, 9685, and 9686) over the reclaimed lands.
On February 19, 2003, then Parañaque City Treasurer Liberato M. Carabeo (Carabeo) issued
Warrants of Levy on PRA’s reclaimed properties (Central Business Park and Barangay San
Dionisio) located in Parañaque City based on the assessment for delinquent real property taxes
made by then Parañaque City Assessor Soledad Medina Cue for tax years 2001 and 2002.
On March 26, 2003, PRA filed a petition for prohibition with prayer for temporary restraining
order (TRO) and/or writ of preliminary injunction against Carabeo before the RTC.
On April 3, 2003, after due hearing, the RTC issued an order denying PRA’s petition for the
issuance of a temporary restraining order.
On April 4, 2003, PRA sent a letter to Carabeo requesting the latter not to proceed with the
public auction of the subject reclaimed properties on April 7, 2003. In response, Carabeo sent a
letter stating that the public auction could not be deferred because the RTC had already denied
PRA’s TRO application.
On April 25, 2003, the RTC denied PRA’s prayer for the issuance of a writ of preliminary
injunction for being moot and academic considering that the auction sale of the subject
properties on April 7, 2003 had already been consummated.
On August 3, 2009, after an exchange of several pleadings and the failure of both parties to
arrive at a compromise agreement, PRA filed a Motion for Leave to File and Admit Attached
Supplemental Petition which sought to declare as null and void the assessment for real property
taxes, the levy based on the said assessment, the public auction sale conducted on April 7,
2003, and the Certificates of Sale issued pursuant to the auction sale.
On January 8, 2010, the RTC rendered its decision dismissing PRA’s petition. In ruling that PRA
was not exempt from payment of real property taxes, the RTC reasoned out that it was a GOCC
under Section 3 of P.D. No. 1084. It was organized as a stock corporation because it had an
authorized capital stock divided into no par value shares. In fact, PRA admitted its corporate
personality and that said properties were registered in its name as shown by the certificates of
title. Therefore, as a GOCC, local tax exemption is withdrawn by virtue of Section 193 of
Republic Act (R.A.) No. 7160 Local Government Code (LGC) which was the prevailing law in
2001 and 2002 with respect to real property taxation. The RTC also ruled that the tax exemption
173
claimed by PRA under E.O. No. 654 had already been expressly repealed by R.A. No. 7160 and
that PRA failed to comply with the procedural requirements in Section 206 thereof.
Not in conformity, PRA filed this petition for certiorari assailing the January 8, 2010 RTC Order
based on the following GROUNDS
I
THE TRIAL COURT GRAVELY ERRED IN FINDING THAT PETITIONER IS LIABLE TO PAY
REAL PROPERTY TAX ON THE SUBJECT RECLAIMED LANDS CONSIDERING
THAT PETITIONER IS AN INCORPORATED INSTRUMENTALITY OF THE NATIONAL
GOVERNMENT AND IS, THEREFORE, EXEMPT FROM PAYMENT OF REAL PROPERTY
TAX UNDER SECTIONS 234(A) AND 133(O) OF REPUBLIC ACT 7160 OR THE LOCAL
GOVERNMENT CODE VIS-À-VIS MANILA INTERNATIONAL AIRPORT AUTHORITY V.
COURT OF APPEALS.
II
THE TRIAL COURT GRAVELY ERRED IN FAILING TO CONSIDER THAT RECLAIMED
LANDS ARE PART OF THE PUBLIC DOMAIN AND, HENCE, EXEMPT FROM REAL
PROPERTY TAX.
PRA asserts that it is not a GOCC under Section 2(13) of the Introductory Provisions of the
Administrative Code. Neither is it a GOCC under Section 16, Article XII of the 1987 Constitution
because it is not required to meet the test of economic viability. Instead, PRA is a government
instrumentality vested with corporate powers and performing an essential public service
pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. Although it
has a capital stock divided into shares, it is not authorized to distribute dividends and allotment
of surplus and profits to its stockholders. Therefore, it may not be classified as a stock
corporation because it lacks the second requisite of a stock corporation which is the distribution
of dividends and allotment of surplus and profits to the stockholders.
It insists that it may not be classified as a non-stock corporation because it has no members and
it is not organized for charitable, religious, educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry,
agriculture and like chambers as provided in Section 88 of the Corporation Code.
Moreover, PRA points out that it was not created to compete in the market place as there was
no competing reclamation company operated by the private sector. Also, while PRA is vested
with corporate powers under P.D. No. 1084, such circumstance does not make it a corporation
but merely an incorporated instrumentality and that the mere fact that an incorporated
instrumentality of the National Government holds title to real property does not make said
instrumentality a GOCC. Section 48, Chapter 12, Book I of the Administrative Code of 1987
recognizes a scenario where a piece of land owned by the Republic is titled in the name of a
department, agency or instrumentality.
Thus, PRA insists that, as an incorporated instrumentality of the National Government, it is
exempt from payment of real property tax except when the beneficial use of the real property is
granted to a taxable person. PRA claims that based on Section 133(o) of the LGC, local
governments cannot tax the national government which delegate to local governments the
power to tax.

It explains that reclaimed lands are part of the public domain, owned by the State, thus, exempt
from the payment of real estate taxes. Reclaimed lands retain their inherent potential as areas
for public use or public service. While the subject reclaimed lands are still in its hands, these
lands remain public lands and form part of the public domain. Hence, the assessment of real
property taxes made on said lands, as well as the levy thereon, and the public sale thereof on
April 7, 2003, including the issuance of the certificates of sale in favor of the respondent
Parañaque City, are invalid and of no force and effect.
On the other hand, the City of Parañaque (respondent) argues that PRA since its creation
consistently represented itself to be a GOCC. PRA’s very own charter (P.D. No. 1084) declared
it to be a GOCC and that it has entered into several thousands of contracts where it represented
itself to be a GOCC. In fact, PRA admitted in its original and amended petitions and pre-trial
brief filed with the RTC of Parañaque City that it was a GOCC.
Respondent further argues that PRA is a stock corporation with an authorized capital stock
divided into 3 million no par value shares, out of which 2 million shares have been subscribed
and fully paid up. Section 193 of the LGC of 1991 has withdrawn tax exemption privileges
granted to or presently enjoyed by all persons, whether natural or juridical, including GOCCs.
Hence, since PRA is a GOCC, it is not exempt from the payment of real property tax.
THE COURT’S RULING
The Court finds merit in the petition.
Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a GOCC
as follows:
SEC. 2. General Terms Defined. – x x x x
(13) Government-owned or controlled corporation refers to any agency organized as a stock or
non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to the extent of at least
fifty-one
(51) percent of its capital stock: x x x.
On the other hand, Section 2(10) of the Introductory Provisions of the Administrative Code
defines a government "instrumentality" as follows:
SEC. 2. General Terms Defined. –– x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if
not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. x x x
From the above definitions, it is clear that a GOCC must be "organized as a stock or non-stock
corporation" while an instrumentality is vested by law with corporate powers. Likewise, when the
law makes a government instrumentality operationally autonomous, the instrumentality remains
part of the National Government machinery although not integrated with the department
framework.
174
When the law vests in a government instrumentality corporate powers, the instrumentality does
not necessarily become a corporation. Unless the government instrumentality is organized as a
stock or non-stock corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers.
Many government instrumentalities are vested with corporate powers but they do not become
stock or non-stock corporations, which is a necessary condition before an agency or
instrumentality is deemed a GOCC. Examples are the Mactan International Airport Authority, the
Philippine Ports Authority, the University of the Philippines, and Bangko Sentral ng Pilipinas. All
these government instrumentalities exercise corporate powers but they are not organized as
stock or non-stock corporations as required by Section 2(13) of the Introductory Provisions of
the Administrative Code. These government instrumentalities are sometimes loosely called
government corporate entities. They are not, however, GOCCs in the strict sense as understood
under the Administrative Code, which is the governing law defining the legal relationship and
status of government entities.2
Correlatively, Section 3 of the Corporation Code defines a stock corporation as one whose
"capital stock is divided into shares and x x x authorized to distribute to the holders of such
shares dividends x x x." Section 87 thereof defines a non-stock corporation as "one where no
part of its income is distributable as dividends to its members, trustees or officers." Further,
Section 88 provides that non-stock corporations are "organized for charitable, religious,
educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service,
or similar purposes, like trade, industry, agriculture and like chambers."
Two requisites must concur before one may be classified as a stock corporation, namely: (1)
that it has capital stock divided into shares; and (2) that it is authorized to distribute dividends
and allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot
be properly classified as a stock corporation. As for non-stock corporations, they must have
members and must not distribute any part of their income to said members.3
In the case at bench, PRA is not a GOCC because it is neither a stock nor a non-stock
corporation. It cannot be considered as a stock corporation because although it has a capital
stock divided into no par value shares as provided in Section 7 4 of P.D. No. 1084, it is not
authorized to distribute dividends, surplus allotments or profits to stockholders. There is no
provision whatsoever in P.D. No. 1084 or in any of the subsequent executive issuances
pertaining to PRA, particularly, E.O. No. 525, 5 E.O. No. 6546 and EO No. 7987 that authorizes
PRA to distribute dividends, surplus allotments or profits to its stockholders.
PRA cannot be considered a non-stock corporation either because it does not have members. A
non-stock corporation must have members.8 Moreover, it was not organized for any of the
purposes mentioned in Section 88 of the Corporation Code. Specifically, it was created to
manage all government reclamation projects.
Furthermore, there is another reason why the PRA cannot be classified as a GOCC. Section 16,
Article XII of the 1987 Constitution provides as follows:
Section 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled corporations
may be created or established by special charters in the interest of the common good and
subject to the test of economic viability.
The fundamental provision above authorizes Congress to create GOCCs through special
charters on two conditions: 1) the GOCC must be established for the common good; and 2) the

GOCC must meet the test of economic viability. In this case, PRA may have passed the first
condition of common good but failed the second one - economic viability. Undoubtedly, the
purpose behind the creation of PRA was not for economic or commercial activities. Neither was
it created to compete in the market place considering that there were no other competing
reclamation companies being operated by the private sector. As mentioned earlier, PRA was
created essentially to perform a public service considering that it was primarily responsible for a
coordinated, economical and efficient reclamation, administration and operation of lands
belonging to the government with the object of maximizing their utilization and hastening their
development consistent with the public interest. Sections 2 and 4 of P.D. No. 1084 reads, as
follows:
Section 2. Declaration of policy. It is the declared policy of the State to provide for a coordinated,
economical and efficient reclamation of lands, and the administration and operation of lands
belonging to, managed and/or operated by the government, with the object of maximizing their
utilization and hastening their development consistent with the public interest.
Section 4. Purposes. The Authority is hereby created for the following purposes:
(a) To reclaim land, including foreshore and submerged areas, by dredging, filling or other
means, or to acquire reclaimed land;
(b) To develop, improve, acquire, administer, deal in, subdivide, dispose, lease and sell any and
all kinds of lands, buildings, estates and other forms of real property, owned, managed,
controlled and/or operated by the government.
(c) To provide for, operate or administer such services as may be necessary for the efficient,
economical and beneficial utilization of the above properties.
The twin requirement of common good and economic viability was lengthily discussed in the
case of Manila International Airport Authority v. Court of Appeals, 9 the pertinent portion of which
reads:
Third, the government-owned or controlled corporations created through special charters are
those that meet the two conditions prescribed in Section 16, Article XII of the Constitution.
The first condition is that the government-owned or controlled corporation must be established
for the common good. The second condition is that the government-owned or controlled
corporation must meet the test of economic viability. Section 16, Article XII of the 1987
Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned or controlled corporations may be
created or established by special charters in the interest of the common good and subject to the
test of economic viability.
The Constitution expressly authorizes the legislature to create "government-owned or controlled
corporations" through special charters only if these entities are required to meet the twin
conditions of common good and economic viability. In other words, Congress has no power to
create government-owned or controlled corporations with special charters unless they are made
to comply with the two conditions of common good and economic viability. The test of economic
viability applies only to government-owned or controlled corporations that perform economic or
commercial activities and need to compete in the market place. Being essentially economic
vehicles of the State for the common good — meaning for economic development purposes —
175
these government-owned or controlled corporations with special charters are usually organized
as stock corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and performing
governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every
modern State must provide its citizens. These instrumentalities need not be economically viable
since the government may even subsidize their entire operations. These instrumentalities are
not the "government-owned or controlled corporations" referred to in Section 16, Article XII of the
1987 Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or
public services. However, when the legislature creates through special charters corporations
that perform economic or commercial activities, such entities — known as "government-owned
or controlled corporations" — must meet the test of economic viability because they compete in
the market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of the
Philippines and similar government-owned or controlled corporations, which derive their
incometo meet operating expenses solely from commercial transactions in competition with the
private sector. The intent of the Constitution is to prevent the creation of government-owned or
controlled corporations that cannot survive on their own in the market place and thus merely
drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the test
of economic performance. We know what happened in the past. If a government corporation
loses, then it makes its claim upon the taxpayers' money through new equity infusions from the
government and what is always invoked is the common good. That is the reason why this year,
out of a budget of P115 billion for the entire government, about P28 billion of this will go into
equity infusions to support a few government financial institutions. And this is all taxpayers'
money which could have been relocated to agrarian reform, to social services like health and
education, to augment the salaries of grossly underpaid public employees. And yet this is all
going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common
good," this becomes a restraint on future enthusiasts for state capitalism to excuse themselves
from the responsibility of meeting the market test so that they become viable. And so, Madam
President, I reiterate, for the committee's consideration and I am glad that I am joined in this
proposal by Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY OR
THE ECONOMIC TEST," together with the common good.1âwphi1
Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the test of

economic viability." The addition includes the ideas that they must show capacity to function
efficiently in business and that they should not go into activities which the private sector can do
better. Moreover, economic viability is more than financial viability but also includes capability to
make profit and generate benefits not quantifiable in financial terms.
Clearly, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. The State is obligated to render
essential public services regardless of the economic viability of providing such service. The non-
economic viability of rendering such essential public service does not excuse the State from
withholding such essential services from the public.
However, government-owned or controlled corporations with special charters, organized
essentially for economic or commercial objectives, must meet the test of economic viability.
These are the government-owned or controlled corporations that are usually organized under
their special charters as stock corporations, like the Land Bank of the Philippines and the
Development Bank of the Philippines. These are the government-owned or controlled
corporations, along with government-owned or controlled corporations organized under the
Corporation Code, that fall under the definition of "government-owned or controlled corporations"
in Section 2(10) of the Administrative Code. [Emphases supplied]
This Court is convinced that PRA is not a GOCC either under Section 2(3) of the Introductory
Provisions of the Administrative Code or under Section 16, Article XII of the 1987 Constitution.
The facts, the evidence on record and jurisprudence on the issue support the position that PRA
was not organized either as a stock or a non-stock corporation. Neither was it created by
Congress to operate commercially and compete in the private market. Instead, PRA is a
government instrumentality vested with corporate powers and performing an essential public
service pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code.
Being an incorporated government instrumentality, it is exempt from payment of real property
tax.
Clearly, respondent has no valid or legal basis in taxing the subject reclaimed lands managed by
PRA. On the other hand, Section 234(a) of the LGC, in relation to its Section 133(o), exempts
PRA from paying realty taxes and protects it from the taxing powers of local government units.
Sections 234(a) and 133(o) of the LGC provide, as follows:
SEC. 234. Exemptions from Real Property Tax – The following are exempted from payment of
the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person.
xxxx
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. [Emphasis supplied]
176
It is clear from Section 234 that real property owned by the Republic of the Philippines (the
Republic) is exempt from real property tax unless the beneficial use thereof has been granted to
a taxable person. In this case, there is no proof that PRA granted the beneficial use of the
subject reclaimed lands to a taxable entity. There is no showing on record either that PRA
leased the subject reclaimed properties to a private taxable entity.
This exemption should be read in relation to Section 133(o) of the same Code, which prohibits
local governments from imposing "taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities x x x." The Administrative Code allows real
property owned by the Republic to be titled in the name of agencies or instrumentalities of the
national government. Such real properties remain owned by the Republic and continue to be
exempt from real estate tax.
Indeed, the Republic grants the beneficial use of its real property to an agency or instrumentality
of the national government. This happens when the title of the real property is transferred to an
agency or instrumentality even as the Republic remains the owner of the real property. Such
arrangement does not result in the loss of the tax exemption, unless "the beneficial use thereof
has been granted, for consideration or otherwise, to a taxable person."10
The rationale behind Section 133(o) has also been explained in the case of the Manila
International Airport Authority,11 to wit:
Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While
the 1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."
When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed
and there must be clear language in the law imposing the tax. Any doubt whether a person,
article or activity is taxable is resolved against taxation. This rule applies with greater force when
local governments seek to tax national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the national
government instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to
reduce the amount of money that has to be handled by government in the course of its
operations. For these reasons, provisions granting exemptions to government agencies may be
construed liberally, in favor of non tax-liability of such agencies.
There is, moreover, no point in national and local governments taxing each other, unless a
sound and compelling policy requires such transfer of public funds from one government pocket
to another.
There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities for the delivery of
essential public services for sound and compelling policy considerations. There must be express

language in the law empowering local governments to tax national government instrumentalities.
Any doubt whether such power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the
Code, local governments cannot tax national government instrumentalities. As this Court held in
Basco v. Philippine Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of
power on the part of the States to touch, in that way (taxation) at least, the instrumentalities of
the United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or
political subdivision can regulate a federal instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even to seriously burden it in the accomplishment of
them." (Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what
local authorities may perceive to be undesirable activities or enterprise using the power to tax as
"a tool for regulation." (U.S. v. Sanchez, 340 US 42)
The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity
which has the inherent power to wield it. [Emphases supplied]
The Court agrees with PRA that the subject reclaimed lands are still part of the public domain,
owned by the State and, therefore, exempt from payment of real estate taxes.
Section 2, Article XII of the 1987 Constitution reads in part, as follows:
Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral
oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of agricultural lands, all other
natural resources shall not be alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the State. The State may directly
undertake such activities, or it may enter into co-production, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at least 60 per centum of
whose capital is owned by such citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years, and under such terms and
conditions as may provided by law. In cases of water rights for irrigation, water supply, fisheries,
or industrial uses other than the development of waterpower, beneficial use may be the measure
and limit of the grant.
Similarly, Article 420 of the Civil Code enumerates properties belonging to the State:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
177
(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. [Emphases supplied]
Here, the subject lands are reclaimed lands, specifically portions of the foreshore and offshore
areas of Manila Bay. As such, these lands remain public lands and form part of the public
domain. In the case of Chavez v. Public Estates Authority and AMARI Coastal Development
Corporation,12 the Court held that foreshore and submerged areas irrefutably belonged to the
public domain and were inalienable unless reclaimed, classified as alienable lands open to
disposition and further declared no longer needed for public service. The fact that alienable
lands of the public domain were transferred to the PEA (now PRA) and issued land patents or
certificates of title in PEA’s name did not automatically make such lands private. This Court also
held therein that reclaimed lands retained their inherent potential as areas for public use or
public service.
As the central implementing agency tasked to undertake reclamation projects nationwide, with
authority to sell reclaimed lands, PEA took the place of DENR as the government agency
charged with leasing or selling reclaimed lands of the public domain. The reclaimed lands being
leased or sold by PEA are not private lands, in the same manner that DENR, when it disposes of
other alienable lands, does not dispose of private lands but alienable lands of the public domain.
Only when qualified private parties acquire these lands will the lands become private lands. In
the hands of the government agency tasked and authorized to dispose of alienable of
disposable lands of the public domain, these lands are still public, not private lands.
Furthermore, PEA's charter expressly states that PEA "shall hold lands of the public domain" as
well as "any and all kinds of lands." PEA can hold both lands of the public domain and private
lands. Thus, the mere fact that alienable lands of the public domain like the Freedom Islands are
transferred to PEA and issued land patents or certificates of title in PEA's name does not
automatically make such lands private.13
Likewise, it is worthy to mention Section 14, Chapter 4, Title I, Book III of the Administrative
Code of 1987, thus:
SEC 14. Power to Reserve Lands of the Public and Private Dominion of the Government.-
(1)The President shall have the power to reserve for settlement or public use, and for specific
public purposes, any of the lands of the public domain, the use of which is not otherwise directed
by law. The reserved land shall thereafter remain subject to the specific public purpose indicated
until otherwise provided by law or proclamation.
Reclaimed lands such as the subject lands in issue are reserved lands for public use. They are
properties of public dominion. The ownership of such lands remains with the State unless they
are withdrawn by law or presidential proclamation from public use.
Under Section 2, Article XII of the 1987 Constitution, the foreshore and submerged areas of
Manila Bay are part of the "lands of the public domain, waters x x x and other natural resources"
and consequently "owned by the State." As such, foreshore and submerged areas "shall not be
alienated," unless they are classified as "agricultural lands" of the public domain. The mere
reclamation of these areas by PEA does not convert these inalienable natural resources of the
State into alienable or disposable lands of the public domain. There must be a law or
presidential proclamation officially classifying these reclaimed lands as alienable or disposable
and open to disposition or concession. Moreover, these reclaimed lands cannot be classified as
alienable or disposable if the law has reserved them for some public or quasi-public use.

As the Court has repeatedly ruled, properties of public dominion are not subject to execution or
foreclosure sale.14 Thus, the assessment, levy and foreclosure made on the subject reclaimed
lands by respondent, as well as the issuances of certificates of title in favor of respondent, are
without basis.
WHEREFORE, the petition is GRANTED. The January 8, 2010 Order of the Regional Trial
Court, Branch 195, Parañaque City, is REVERSED and SET ASIDE. All reclaimed properties
owned by the Philippine Reclamation Authority are hereby declared EXEMPT from real estate
taxes. All real estate tax assessments, including the final notices of real estate tax
delinquencies, issued by the City of Parañaque on the subject reclaimed properties; the assailed
auction sale, dated April 7, 2003; and the Certificates of Sale subsequently issued by the
Parañaque City Treasurer in favor of the City of Parañaque, are all declared VOID.
SO ORDERED.
EN BANC
G.R. No. 177131               June 7, 2011
BOY SCOUTS OF THE PHILIPPINES, Petitioner,
vs.
COMMISSION ON AUDIT, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
The jurisdiction of the Commission on Audit (COA) over the Boy Scouts of the Philippines (BSP)
is the subject matter of this controversy that reached us via petition for prohibition 1 filed by the
BSP under Rule 65 of the 1997 Rules of Court. In this petition, the BSP seeks that the COA be
prohibited from implementing its June 18, 2002 Decision, 2 its February 21, 2007 Resolution,3 as
well as all other issuances arising therefrom, and that all of the foregoing be rendered null and
void. 4
Antecedent Facts and Background of the Case
This case arose when the COA issued Resolution No. 99-011 5 on August 19, 1999 ("the COA
Resolution"), with the subject "Defining the Commission’s policy with respect to the audit of the
Boy Scouts of the Philippines." In its whereas clauses, the COA Resolution stated that the BSP
was created as a public corporation under Commonwealth Act No. 111, as amended by
Presidential Decree No. 460 and Republic Act No. 7278; that in Boy Scouts of the Philippines v.
National Labor Relations Commission,6 the Supreme Court ruled that the BSP, as constituted
under its charter, was a "government-controlled corporation within the meaning of Article IX(B)
(2)(1) of the Constitution"; and that "the BSP is appropriately regarded as a government
instrumentality under the 1987 Administrative Code."7 The COA Resolution also cited its
constitutional mandate under Section 2(1), Article IX (D). Finally, the COA Resolution reads:
NOW THEREFORE, in consideration of the foregoing premises, the COMMISSION PROPER
HAS RESOLVED, AS IT DOES HEREBY RESOLVE, to conduct an annual financial audit of the
Boy Scouts of the Philippines in accordance with generally accepted auditing standards, and
express an opinion on whether the financial statements which include the Balance Sheet, the
Income Statement and the Statement of Cash Flows present fairly its financial position and
results of operations.
178
xxxx
BE IT RESOLVED FURTHERMORE, that for purposes of audit supervision, the Boy Scouts of
the Philippines shall be classified among the government corporations belonging to the
Educational, Social, Scientific, Civic and Research Sector under the Corporate Audit Office I, to
be audited, similar to the subsidiary corporations, by employing the team audit
approach.8 (Emphases supplied.)
The BSP sought reconsideration of the COA Resolution in a letter 9 dated November 26, 1999
signed by the BSP National President Jejomar C. Binay, who is now the Vice President of the
Republic, wherein he wrote:
It is the position of the BSP, with all due respect, that it is not subject to the Commission’s
jurisdiction on the following grounds:
1. We reckon that the ruling in the case of Boy Scouts of the Philippines vs. National Labor
Relations Commission, et al. (G.R. No. 80767) classifying the BSP as a government-controlled
corporation is anchored on the "substantial Government participation" in the National Executive
Board of the BSP. It is to be noted that the case was decided when the BSP Charter is defined
by Commonwealth Act No. 111 as amended by Presidential Decree 460.
However, may we humbly refer you to Republic Act No. 7278 which amended the BSP’s charter
after the cited case was decided. The most salient of all amendments in RA No. 7278 is the
alteration of the composition of the National Executive Board of the BSP.
The said RA virtually eliminated the "substantial government participation" in the National
Executive Board by removing: (i) the President of the Philippines and executive secretaries, with
the exception of the Secretary of Education, as members thereof; and (ii) the appointment and
confirmation power of the President of the Philippines, as Chief Scout, over the members of the
said Board.
The BSP believes that the cited case has been superseded by RA 7278. Thereby weakening the
case’s conclusion that the BSP is a government-controlled corporation (sic). The 1987
Administrative Code itself, of which the BSP vs. NLRC relied on for some terms, defines
government-owned and controlled corporations as agencies organized as stock or non-stock
corporations which the BSP, under its present charter, is not.
Also, the Government, like in other GOCCs, does not have funds invested in the BSP. What RA
7278 only provides is that the Government or any of its subdivisions, branches, offices, agencies
and instrumentalities can from time to time donate and contribute funds to the BSP.
xxxx
Also the BSP respectfully believes that the BSP is not "appropriately regarded as a government
instrumentality under the 1987 Administrative Code" as stated in the COA resolution. As defined
by Section 2(10) of the said code, instrumentality refers to "any agency of the National
Government, not integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter."
The BSP is not an entity administering special funds. It is not even included in the DECS
National Budget. x x x

It may be argued also that the BSP is not an "agency" of the Government. The 1987
Administrative Code, merely referred the BSP as an "attached agency" of the DECS as
distinguished from an actual line agency of departments that are included in the National
Budget. The BSP believes that an "attached agency" is different from an "agency." Agency, as
defined in Section 2(4) of the Administrative Code, is defined as any of the various units of the
Government including a department, bureau, office, instrumentality, government-owned or
controlled corporation or local government or distinct unit therein.
Under the above definition, the BSP is neither a unit of the Government; a department which
refers to an executive department as created by law (Section 2[7] of the Administrative Code);
nor a bureau which refers to any principal subdivision or unit of any department (Section 2[8],
Administrative Code).10
Subsequently, requests for reconsideration of the COA Resolution were also made separately
by Robert P. Valdellon, Regional Scout Director, Western Visayas Region, Iloilo City and
Eugenio F. Capreso, Council Scout Executive of Calbayog City.11
In a letter12 dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit Officer (CAO) I of
the COA, furnished the BSP with a copy of the Memorandum 13 dated June 20, 2000 of Atty.
Santos M. Alquizalas, the COA General Counsel. In said Memorandum, the COA General
Counsel opined that Republic Act No. 7278 did not supersede the Court’s ruling in Boy Scouts of
the Philippines v. National Labor Relations Commission, even though said law eliminated the
substantial government participation in the selection of members of the National Executive
Board of the BSP. The Memorandum further provides:
Analysis of the said case disclosed that the substantial government participation is only one (1)
of the three (3) grounds relied upon by the Court in the resolution of the case. Other
considerations include the character of the BSP’s purposes and functions which has a public
aspect and the statutory designation of the BSP as a "public corporation". These grounds have
not been deleted by R.A. No. 7278. On the contrary, these were strengthened as evidenced by
the amendment made relative to BSP’s purposes stated in Section 3 of R.A. No. 7278.
On the argument that BSP is not appropriately regarded as "a government instrumentality" and
"agency" of the government, such has already been answered and clarified. The Supreme Court
has elucidated this matter in the BSP case when it declared that BSP is regarded as, both a
"government-controlled corporation with an original charter" and as an "instrumentality" of the
Government. Likewise, it is not disputed that the Administrative Code of 1987 designated the
BSP as one of the attached agencies of DECS. Being an attached agency, however, it does not
change its nature as a government-controlled corporation with original charter and, necessarily,
subject to COA audit jurisdiction. Besides, Section 2(1), Article IX-D of the Constitution provides
that COA shall have the power, authority, and duty to examine, audit and settle all accounts
pertaining to the revenue and receipts of, and expenditures or uses of funds and property,
owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies
or instrumentalities, including government-owned or controlled corporations with original
charters.14
Based on the Memorandum of the COA General Counsel, Director Sunico wrote:
In view of the points clarified by said Memorandum upholding COA Resolution No. 99-011, we
have to comply with the provisions of the latter, among which is to conduct an annual financial
audit of the Boy Scouts of the Philippines.15
179
In a letter dated November 20, 2000 signed by Director Amorsonia B. Escarda, CAO I, the COA
informed the BSP that a preliminary survey of its organizational structure, operations and
accounting system/records shall be conducted on November 21 to 22, 2000.16
Upon the BSP’s request, the audit was deferred for thirty (30) days. The BSP then filed a
Petition for Review with Prayer for Preliminary Injunction and/or Temporary Restraining Order
before the COA. This was denied by the COA in its questioned Decision, which held that the
BSP is under its audit jurisdiction. The BSP moved for reconsideration but this was likewise
denied under its questioned Resolution.17
This led to the filing by the BSP of this petition for prohibition with preliminary injunction and
temporary restraining order against the COA.
The Issue
As stated earlier, the sole issue to be resolved in this case is whether the BSP falls under the
COA’s audit jurisdiction.
The Parties’ Respective Arguments
The BSP contends that Boy Scouts of the Philippines v. National Labor Relations Commission is
inapplicable for purposes of determining the audit jurisdiction of the COA as the issue therein
was the jurisdiction of the National Labor Relations Commission over a case for illegal dismissal
and unfair labor practice filed by certain BSP employees.18
While the BSP concedes that its functions do relate to those that the government might
otherwise completely assume on its own, it avers that this alone was not determinative of the
COA’s audit jurisdiction over it. The BSP further avers that the Court in Boy Scouts of the
Philippines v. National Labor Relations Commission "simply stated x x x that in respect of
functions, the BSP is akin to a public corporation" but this was not synonymous to holding that
the BSP is a government corporation or entity subject to audit by the COA. 19
The BSP contends that Republic Act No. 7278 introduced crucial amendments to its charter;
hence, the findings of the Court in Boy Scouts of the Philippines v. National Labor Relations
Commission are no longer valid as the government has ceased to play a controlling influence in
it. The BSP claims that the pronouncements of the Court therein must be taken only within the
context of that case; that the Court had categorically found that its assets were acquired from
the Boy Scouts of America and not from the Philippine government, and that its operations are
financed chiefly from membership dues of the Boy Scouts themselves as well as from property
rentals; and that "the BSP may correctly be characterized as non-governmental, and hence,
beyond the audit jurisdiction of the COA." It further claims that the designation by the Court of
the BSP as a government agency or instrumentality is mere obiter dictum.20
The BSP maintains that the provisions of Republic Act No. 7278 suggest that "governance of
BSP has come to be overwhelmingly a private affair or nature, with government participation
restricted to the seat of the Secretary of Education, Culture and Sports." 21 It cites Philippine
Airlines Inc. v. Commission on Audit22 wherein the Court declared that, "PAL, having ceased to
be a government-owned or controlled corporation is no longer under the audit jurisdiction of the
COA."23 Claiming that the amendments introduced by Republic Act No. 7278 constituted a
supervening event that changed the BSP’s corporate identity in the same way that the
government’s privatization program changed PAL’s, the BSP makes the case that the
government no longer has control over it; thus, the COA cannot use the Boy Scouts of the

Philippines v. National Labor Relations Commission as its basis for the exercise of its jurisdiction
and the issuance of COA Resolution No. 99-011.24 The BSP further claims as follows:
It is not far-fetched, in fact, to concede that BSP’s funds and assets are private in character.
Unlike ordinary public corporations, such as provinces, cities, and municipalities, or government-
owned and controlled corporations, such as Land Bank of the Philippines and the Development
Bank of the Philippines, the assets and funds of BSP are not derived from any government
grant. For its operations, BSP is not dependent in any way on any government appropriation; as
a matter of fact, it has not even been included in any appropriations for the government. To be
sure, COA has not alleged, in its Resolution No. 99-011 or in the Memorandum of its General
Counsel, that BSP received, receives or continues to receive assets and funds from any agency
of the government. The foregoing simply point to the private nature of the funds and assets of
petitioner BSP.
xxxx
As stated in petitioner’s third argument, BSP’s assets and funds were never acquired from the
government. Its operations are not in any way financed by the government, as BSP has never
been included in any appropriations act for the government. Neither has the government
invested funds with BSP. BSP, has not been, at any time, a user of government property or
funds; nor have properties of the government been held in trust by BSP. This is precisely the
reason why, until this time, the COA has not attempted to subject BSP to its audit jurisdiction. x x
x.25
To summarize its other arguments, the BSP contends that it is not a government-owned or
controlled corporation; neither is it an instrumentality, agency, or subdivision of the government.
In its Comment,26 the COA argues as follows:
1. The BSP is a public corporation created under Commonwealth Act No. 111 dated October 31,
1936, and whose functions relate to the fostering of public virtues of citizenship and patriotism
and the general improvement of the moral spirit and fiber of the youth. The manner of creation
and the purpose for which the BSP was created indubitably prove that it is a government
agency.
2. Being a government agency, the funds and property owned or held in trust by the BSP are
subject to the audit authority of respondent Commission on Audit pursuant to Section 2 (1),
Article IX-D of the 1987 Constitution.
3. Republic Act No. 7278 did not change the character of the BSP as a government-owned or
controlled corporation and government instrumentality.27
The COA maintains that the functions of the BSP that include, among others, the teaching to the
youth of patriotism, courage, self-reliance, and kindred virtues, are undeniably sovereign
functions enshrined under the Constitution and discussed by the Court in Boy Scouts of the
Philippines v. National Labor Relations Commission. The COA contends that any attempt to
classify the BSP as a private corporation would be incomprehensible since no less than the law
which created it had designated it as a public corporation and its statutory mandate embraces
performance of sovereign functions.28
The COA claims that the only reason why the BSP employees fell within the scope of the Civil
Service Commission even before the 1987 Constitution was the fact that it was a government-
owned or controlled corporation; that as an attached agency of the Department of Education,
180
Culture and Sports (DECS), the BSP is an agency of the government; and that the BSP is a
chartered institution under Section 1(12) of the Revised Administrative Code of 1987, embraced
under the term government instrumentality.29
The COA concludes that being a government agency, the funds and property owned or held by
the BSP are subject to the audit authority of the COA pursuant to Section 2(1), Article IX (D) of
the 1987 Constitution.
In support of its arguments, the COA cites The Veterans Federation of the Philippines (VFP) v.
Reyes,30 wherein the Court held that among the reasons why the VFP is a public corporation is
that its charter, Republic Act No. 2640, designates it as one. Furthermore, the COA quotes the
Court as saying in that case:
In several cases, we have dealt with the issue of whether certain specific activities can be
classified as sovereign functions. These cases, which deal with activities not immediately
apparent to be sovereign functions, upheld the public sovereign nature of operations needed
either to promote social justice or to stimulate patriotic sentiments and love of country.
xxxx
Petitioner claims that its funds are not public funds because no budgetary appropriations or
government funds have been released to the VFP directly or indirectly from the DBM, and
because VFP funds come from membership dues and lease rentals earned from administering
government lands reserved for the VFP.
The fact that no budgetary appropriations have been released to the VFP does not prove that it
is a private corporation. The DBM indeed did not see it fit to propose budgetary appropriations to
the VFP, having itself believed that the VFP is a private corporation. If the DBM, however, is
mistaken as to its conclusion regarding the nature of VFP's incorporation, its previous assertions
will not prevent future budgetary appropriations to the VFP. The erroneous application of the law
by public officers does not bar a subsequent correct application of the law.31 (Citations omitted.)
The COA points out that the government is not precluded by law from extending financial
support to the BSP and adding to its funds, and that "as a government instrumentality which
continues to perform a vital function imbued with public interest and reflective of the
government’s policy to stimulate patriotic sentiments and love of country, the BSP’s funds from
whatever source are public funds, and can be used solely for public purpose in pursuance of the
provisions of Republic Act No. [7278]."32
The COA claims that the fact that it has not yet audited the BSP’s funds may not bar the
subsequent exercise of its audit jurisdiction.
The BSP filed its Reply33 on August 29, 2007 maintaining that its statutory designation as a
"public corporation" and the public character of its purpose and functions are not determinative
of the COA’s audit jurisdiction; reiterating its stand that Boy Scouts of the Philippines v. National
Labor Relations Commission is not applicable anymore because the aspect of government
ownership and control has been removed by Republic Act No. 7278; and concluding that the
funds and property that it either owned or held in trust are not public funds and are not subject to
the COA’s audit jurisdiction.
Thereafter, considering the BSP’s claim that it is a private corporation, this Court, in a
Resolution34 dated July 20, 2010, required the parties to file, within a period of twenty (20) days

from receipt of said Resolution, their respective comments on the issue of whether
Commonwealth Act No. 111, as amended by Republic Act No. 7278, is constitutional.
In compliance with the Court’s resolution, the parties filed their respective Comments.
In its Comment35 dated October 22, 2010, the COA argues that the constitutionality of
Commonwealth Act No. 111, as amended, is not determinative of the resolution of the present
controversy on the COA’s audit jurisdiction over petitioner, and in fact, the controversy may be
resolved on other grounds; thus, the requisites before a judicial inquiry may be made, as set
forth in Commissioner of Internal Revenue v. Court of Tax Appeals, 36 have not been fully
met.37 Moreover, the COA maintains that behind every law lies the presumption of
constitutionality.38 The COA likewise argues that contrary to the BSP’s position, repeal of a law
by implication is not favored. 39 Lastly, the COA claims that there was no violation of Section 16,
Article XII of the 1987 Constitution with the creation or declaration of the BSP as a government
corporation. Citing Philippine Society for the Prevention of Cruelty to Animals v. Commission on
Audit,40 the COA further alleges:
The true criterion, therefore, to determine whether a corporation is public or private is found in
the totality of the relation of the corporation to the State. If the corporation is created by the State
as the latter’s own agency or instrumentality to help it in carrying out its governmental functions,
then that corporation is considered public; otherwise, it is private. x x x.41
For its part, in its Comment42 filed on December 3, 2010, the BSP submits that its charter,
Commonwealth Act No. 111, as amended by Republic Act No. 7278, is constitutional as it does
not violate Section 16, Article XII of the Constitution. The BSP alleges that "while [it] is not a
public corporation within the purview of COA’s audit jurisdiction, neither is it a private corporation
created by special law falling within the ambit of the constitutional prohibition x x x."43 The BSP
further alleges:
Petitioner’s purpose is embodied in Section 3 of C.A. No. 111, as amended by Section 1 of R.A.
No. 7278, thus:
xxxx
A reading of the foregoing provision shows that petitioner was created to advance the interest of
the youth, specifically of young boys, and to mold them into becoming good citizens. Ultimately,
the creation of petitioner redounds to the benefit, not only of those boys, but of the public good
or welfare. Hence, it can be said that petitioner’s purpose and functions are more of a public
rather than a private character. Petitioner caters to all boys who wish to join the organization
without any distinction. It does not limit its membership to a particular class of boys. Petitioner’s
members are trained in scoutcraft and taught patriotism, civic consciousness and responsibility,
courage, self-reliance, discipline and kindred virtues, and moral values, preparing them to
become model citizens and outstanding leaders of the country.44
The BSP reiterates its stand that the public character of its purpose and functions do not place it
within the ambit of the audit jurisdiction of the COA as it lacks the government ownership or
control that the Constitution requires before an entity may be subject of said jurisdiction.45 It
avers that it merely stated in its Reply that the withdrawal of government control is akin to
privatization, but it does not necessarily mean that petitioner is a private corporation.46 The BSP
claims that it has a unique characteristic which "neither classifies it as a purely public nor a
purely private corporation";47 that it is not a quasi-public corporation; and that it may belong to a
different class altogether.48
181
The BSP claims that assuming arguendo that it is a private corporation, its creation is not
contrary to the purpose of Section 16, Article XII of the Constitution; and that the evil sought to
be avoided by said provision is inexistent in the enactment of the BSP’s charter, 49 as, (i) it was
not created for any pecuniary purpose; (ii) those who will primarily benefit from its creation are
not its officers but its entire membership consisting of boys being trained in scoutcraft all over
the country; (iii) it caters to all boys who wish to join the organization without any distinction; and
(iv) it does not limit its membership to a particular class or group of boys. Thus, the enactment of
its charter confers no special privilege to particular individuals, families, or groups; nor does it
bring about the danger of granting undue favors to certain groups to the prejudice of others or of
the interest of the country, which are the evils sought to be prevented by the constitutional
provision involved.50
Finally, the BSP states that the presumption of constitutionality of a legislative enactment
prevails absent any clear showing of its repugnancy to the Constitution.51
The Ruling of the Court
After looking at the legislative history of its amended charter and carefully studying the
applicable laws and the arguments of both parties, we find that the BSP is a public corporation
and its funds are subject to the COA’s audit jurisdiction.
The BSP Charter (Commonwealth Act No. 111, approved on October 31, 1936), entitled "An Act
to Create a Public Corporation to be Known as the Boy Scouts of the Philippines, and to Define
its Powers and Purposes" created the BSP as a "public corporation" to serve the following public
interest or purpose:
Sec. 3. The purpose of this corporation shall be to promote through organization and
cooperation with other agencies, the ability of boys to do useful things for themselves and
others, to train them in scoutcraft, and to inculcate in them patriotism, civic consciousness and
responsibility, courage, self-reliance, discipline and kindred virtues, and moral values, using the
method which are in common use by boy scouts.
Presidential Decree No. 460, approved on May 17, 1974, amended Commonwealth Act No. 111
and provided substantial changes in the BSP organizational structure. Pertinent provisions are
quoted below:
Section II. Section 5 of the said Act is also amended to read as follows:
The governing body of the said corporation shall consist of a National Executive Board
composed of (a) the President of the Philippines or his representative; (b) the charter and life
members of the Boy Scouts of the Philippines; (c) the Chairman of the Board of Trustees of the
Philippine Scouting Foundation; (d) the Regional Chairman of the Scout Regions of the
Philippines; (e) the Secretary of Education and Culture, the Secretary of Social Welfare, the
Secretary of National Defense, the Secretary of Labor, the Secretary of Finance, the Secretary
of Youth and Sports, and the Secretary of Local Government and Community Development; (f)
an equal number of individuals from the private sector; (g) the National President of the Girl
Scouts of the Philippines; (h) one Scout of Senior age from each Scout Region to represent the
boy membership; and (i) three representatives of the cultural minorities. Except for the Regional
Chairman who shall be elected by the Regional Scout Councils during their annual meetings,
and the Scouts of their respective regions, all members of the National Executive Board shall be
either by appointment or cooption, subject to ratification and confirmation by the Chief Scout,
who shall be the Head of State. Vacancies in the Executive Board shall be filled by a majority
vote of the remaining members, subject to ratification and confirmation by the Chief Scout. The

by-laws may prescribe the number of members of the National Executive Board necessary to
constitute a quorum of the board, which number may be less than a majority of the whole
number of the board. The National Executive Board shall have power to make and to amend the
by-laws, and, by a two-thirds vote of the whole board at a meeting called for this purpose, may
authorize and cause to be executed mortgages and liens upon the property of the corporation.
Subsequently, on March 24, 1992, Republic Act No. 7278 further amended Commonwealth Act
No. 111 "by strengthening the volunteer and democratic character" of the BSP and reducing
government representation in its governing body, as follows:
Section 1. Sections 2 and 3 of Commonwealth Act. No. 111, as amended, is hereby amended to
read as follows:
"Sec. 2. The said corporation shall have the powers of perpetual succession, to sue and be
sued; to enter into contracts; to acquire, own, lease, convey and dispose of such real and
personal estate, land grants, rights and choses in action as shall be necessary for corporate
purposes, and to accept and receive funds, real and personal property by gift, devise, bequest
or other means, to conduct fund-raising activities; to adopt and use a seal, and the same to alter
and destroy; to have offices and conduct its business and affairs in Metropolitan Manila and in
the regions, provinces, cities, municipalities, and barangays of the Philippines, to make and
adopt by-laws, rules and regulations not inconsistent with this Act and the laws of the
Philippines, and generally to do all such acts and things, including the establishment of
regulations for the election of associates and successors, as may be necessary to carry into
effect the provisions of this Act and promote the purposes of said corporation: Provided, That
said corporation shall have no power to issue certificates of stock or to declare or pay dividends,
its objectives and purposes being solely of benevolent character and not for pecuniary profit of
its members.
"Sec. 3. The purpose of this corporation shall be to promote through organization and
cooperation with other agencies, the ability of boys to do useful things for themselves and
others, to train them in scoutcraft, and to inculcate in them patriotism, civic consciousness and
responsibility, courage, self-reliance, discipline and kindred virtues, and moral values, using the
method which are in common use by boy scouts."
Sec. 2. Section 4 of Commonwealth Act No. 111, as amended, is hereby repealed and in lieu
thereof, Section 4 shall read as follows:
"Sec. 4. The President of the Philippines shall be the Chief Scout of the Boy Scouts of the
Philippines."
Sec. 3. Sections 5, 6, 7 and 8 of Commonwealth Act No. 111, as amended, are hereby
amended to read as follows:
"Sec. 5. The governing body of the said corporation shall consist of a National Executive Board,
the members of which shall be Filipino citizens of good moral character. The Board shall be
composed of the following:
"(a) One (1) charter member of the Boy Scouts of the Philippines who shall be elected by the
members of the National Council at its meeting called for this purpose;
"(b) The regional chairmen of the scout regions who shall be elected by the representatives of all
the local scout councils of the region during its meeting called for this purpose: Provided, That a
candidate for regional chairman need not be the chairman of a local scout council;
182
"(c) The Secretary of Education, Culture and Sports;
"(d) The National President of the Girl Scouts of the Philippines;
"(e) One (1) senior scout, each from Luzon, Visayas and Mindanao areas, to be elected by the
senior scout delegates of the local scout councils to the scout youth forums in their respective
areas, in its meeting called for this purpose, to represent the boy scout membership;
"(f) Twelve (12) regular members to be elected by the members of the National Council in its
meeting called for this purpose;
"(g) At least ten (10) but not more than fifteen (15) additional members from the private sector
who shall be elected by the members of the National Executive Board referred to in the
immediately preceding paragraphs (a), (b), (c), (d), (e) and (f) at the organizational meeting of
the newly reconstituted National Executive Board which shall be held immediately after the
meeting of the National Council wherein the twelve (12) regular members and the one (1)
charter member were elected.
xxxx
"Sec. 8. Any donation or contribution which from time to time may be made to the Boy Scouts of
the Philippines by the Government or any of its subdivisions, branches, offices, agencies or
instrumentalities or by a foreign government or by private, entities and individuals shall be
expended by the National Executive Board in pursuance of this Act.
The BSP as a Public Corporation under Par. 2, Art. 2 of the Civil Code
There are three classes of juridical persons under Article 44 of the Civil Code and the BSP, as
presently constituted under Republic Act No. 7278, falls under the second classification. Article
44 reads:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or purpose created by
law; their personality begins as soon as they have been constituted according to law;
(3) Corporations, partnerships and associations for private interest or purpose to which the
law grants a juridical personality, separate and distinct from that of each shareholder, partner or
member. (Emphases supplied.)
The BSP, which is a corporation created for a public interest or purpose, is subject to the law
creating it under Article 45 of the Civil Code, which provides:
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed
by the laws creating or recognizing them.
Private corporations are regulated by laws of general application on the subject.
Partnerships and associations for private interest or purpose are governed by the provisions of
this Code concerning partnerships. (Emphasis and underscoring supplied.)
The purpose of the BSP as stated in its amended charter shows that it was created in order to
implement a State policy declared in Article II, Section 13 of the Constitution, which reads:

ARTICLE II - DECLARATION OF PRINCIPLES AND STATE POLICIES
Section 13. The State recognizes the vital role of the youth in nation-building and shall promote
and protect their physical, moral, spiritual, intellectual, and social well-being. It shall inculcate in
the youth patriotism and nationalism, and encourage their involvement in public and civic affairs.
Evidently, the BSP, which was created by a special law to serve a public purpose in pursuit of a
constitutional mandate, comes within the class of "public corporations" defined by paragraph 2,
Article 44 of the Civil Code and governed by the law which creates it, pursuant to Article 45 of
the same Code.
The BSP’s Classification Under the Administrative Code of 1987
The public, rather than private, character of the BSP is recognized by the fact that, along with
the Girl Scouts of the Philippines, it is classified as an attached agency of the DECS under
Executive Order No. 292, or the Administrative Code of 1987, which states:
TITLE VI – EDUCATION, CULTURE AND SPORTS
Chapter 8 – Attached Agencies
SEC. 20. Attached Agencies. – The following agencies are hereby attached to the Department:
xxxx
(12) Boy Scouts of the Philippines;
(13) Girl Scouts of the Philippines.
The administrative relationship of an attached agency to the department is defined in the
Administrative Code of 1987 as follows:
BOOK IV
THE EXECUTIVE BRANCH
Chapter 7 – ADMINISTRATIVE RELATIONSHIP
SEC. 38. Definition of Administrative Relationship. – Unless otherwise expressly stated in the
Code or in other laws defining the special relationships of particular agencies, administrative
relationships shall be categorized and defined as follows:
xxxx
(3) Attachment. – (a) This refers to the lateral relationship between the department or its
equivalent and the attached agency or corporation for purposes of policy and program
coordination. The coordination may be accomplished by having the department represented in
the governing board of the attached agency or corporation, either as chairman or as a member,
with or without voting rights, if this is permitted by the charter; having the attached corporation or
agency comply with a system of periodic reporting which shall reflect the progress of programs
and projects; and having the department or its equivalent provide general policies through its
representative in the board, which shall serve as the framework for the internal policies of the
attached corporation or agency. (Emphasis ours.)
As an attached agency, the BSP enjoys operational autonomy, as long as policy and program
coordination is achieved by having at least one representative of government in its governing
183
board, which in the case of the BSP is the DECS Secretary. In this sense, the BSP is not under
government control or "supervision and control." Still this characteristic does not make the
attached chartered agency a private corporation covered by the constitutional proscription in
question.
Art. XII, Sec. 16 of the Constitution refers to "private corporations" created by
government for proprietary or economic/business purposes
At the outset, it should be noted that the provision of Section 16 in issue is found in Article XII of
the Constitution, entitled "National Economy and Patrimony." Section 1 of Article XII is quoted as
follows:
SECTION 1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of goods and services
produced by the nation for the benefit of the people; and an expanding productivity as the key to
raising the quality of life for all, especially the underprivileged.
The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of human
and natural resources, and which are competitive in both domestic and foreign markets.
However, the State shall protect Filipino enterprises against unfair foreign competition and trade
practices.
In the pursuit of these goals, all sectors of the economy and all regions of the country shall be
given optimum opportunity to develop. Private enterprises, including corporations, cooperatives,
and similar collective organizations, shall be encouraged to broaden the base of their ownership.
The scope and coverage of Section 16, Article XII of the Constitution can be seen from the
aforementioned declaration of state policies and goals which pertains to national economy and
patrimony and the interests of the people in economic development.
Section 16, Article XII deals with "the formation, organization, or regulation of private
corporations,"52 which should be done through a general law enacted by Congress, provides for
an exception, that is: if the corporation is government owned or controlled; its creation is in the
interest of the common good; and it meets the test of economic viability. The rationale behind
Article XII, Section 16 of the 1987 Constitution was explained in Feliciano v. Commission on
Audit,53 in the following manner:
The Constitution emphatically prohibits the creation of private corporations except by a general
law applicable to all citizens. The purpose of this constitutional provision is to ban private
corporations created by special charters, which historically gave certain individuals, families or
groups special privileges denied to other citizens.54 (Emphasis added.)
It may be gleaned from the above discussion that Article XII, Section 16 bans the creation of
"private corporations" by special law. The said constitutional provision should not be construed
so as to prohibit the creation of public corporations or a corporate agency or instrumentality of
the government intended to serve a public interest or purpose, which should not be measured
on the basis of economic viability, but according to the public interest or purpose it serves as
envisioned by paragraph (2), of Article 44 of the Civil Code and the pertinent provisions of the
Administrative Code of 1987.
The BSP is a Public Corporation Not Subject to the Test of Government Ownership or Control
and Economic Viability

The BSP is a public corporation or a government agency or instrumentality with juridical
personality, which does not fall within the constitutional prohibition in Article XII, Section 16,
notwithstanding the amendments to its charter. Not all corporations, which are not government
owned or controlled, are ipso facto to be considered private corporations as there exists another
distinct class of corporations or chartered institutions which are otherwise known as "public
corporations." These corporations are treated by law as agencies or instrumentalities of the
government which are not subject to the tests of ownership or control and economic viability but
to different criteria relating to their public purposes/interests or constitutional policies and
objectives and their administrative relationship to the government or any of its Departments or
Offices.
Classification of Corporations Under Section 16, Article XII of the Constitution on National
Economy and Patrimony
The dissenting opinion of Associate Justice Antonio T. Carpio, citing a line of cases, insists that
the Constitution recognizes only two classes of corporations: private corporations under a
general law, and government-owned or controlled corporations created by special charters.
We strongly disagree. Section 16, Article XII should not be construed so as to prohibit Congress
from creating public corporations. In fact, Congress has enacted numerous laws creating public
corporations or government agencies or instrumentalities vested with corporate powers.
Moreover, Section 16, Article XII, which relates to National Economy and Patrimony, could not
have tied the hands of Congress in creating public corporations to serve any of the constitutional
policies or objectives.
In his dissent, Justice Carpio contends that this ponente introduces "a totally different species of
corporation, which is neither a private corporation nor a government owned or controlled
corporation" and, in so doing, is missing the fact that the BSP, "which was created as a non-
stock, non-profit corporation, can only be either a private corporation or a government owned or
controlled corporation."
Note that in Boy Scouts of the Philippines v. National Labor Relations Commission, the BSP,
under its former charter, was regarded as both a government owned or controlled corporation
with original charter and a "public corporation." The said case pertinently stated:
While the BSP may be seen to be a mixed type of entity, combining aspects of both public and
private entities, we believe that considering the character of its purposes and its functions, the
statutory designation of the BSP as "a public corporation" and the substantial participation of the
Government in the selection of members of the National Executive Board of the BSP, the BSP,
as presently constituted under its charter, is a government-controlled corporation within the
meaning of Article IX (B) (2) (1) of the Constitution.
We are fortified in this conclusion when we note that the Administrative Code of 1987 designates
the BSP as one of the attached agencies of the Department of Education, Culture and Sports
("DECS"). An "agency of the Government" is defined as referring to any of the various units of
the Government including a department, bureau, office, instrumentality, government-owned or
-controlled corporation, or local government or distinct unit therein. "Government instrumentality"
is in turn defined in the 1987 Administrative Code in the following manner:
Instrumentality - refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if
not all corporate powers, administering special funds, and enjoying operational autonomy
184
usually through a charter. This term includes regulatory agencies, chartered institutions and
government-owned or controlled corporations.
The same Code describes a "chartered institution" in the following terms:
Chartered institution - refers to any agency organized or operating under a special charter, and
vested by law with functions relating to specific constitutional policies or objectives. This term
includes the state universities and colleges, and the monetary authority of the State.
We believe that the BSP is appropriately regarded as "a government instrumentality" under the
1987 Administrative Code.
It thus appears that the BSP may be regarded as both a "government controlled corporation with
an original charter" and as an "instrumentality" of the Government within the meaning of Article
IX (B) (2) (1) of the Constitution. x x x.55 (Emphases supplied.)
The existence of public or government corporate or juridical entities or chartered institutions by
legislative fiat distinct from private corporations and government owned or controlled corporation
is best exemplified by the 1987 Administrative Code cited above, which we quote in part:
Sec. 2. General Terms Defined. – Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:
xxxx
(10) "Instrumentality" refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if
not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. This term includes regulatory agencies, chartered institutions and
government-owned or controlled corporations.
xxxx
(12) "Chartered institution" refers to any agency organized or operating under a special charter,
and vested by law with functions relating to specific constitutional policies or objectives. This
term includes the state universities and colleges and the monetary authority of the State.
(13) "Government-owned or controlled corporation" refers to any agency organized as a stock or
non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to the extent of at least
fifty-one (51) per cent of its capital stock: Provided, That government-owned or controlled
corporations may be further categorized by the Department of the Budget, the Civil Service
Commission, and the Commission on Audit for purposes of the exercise and discharge of their
respective powers, functions and responsibilities with respect to such corporations.
Assuming for the sake of argument that the BSP ceases to be owned or controlled by the
government because of reduction of the number of representatives of the government in the
BSP Board, it does not follow that it also ceases to be a government instrumentality as it still
retains all the characteristics of the latter as an attached agency of the DECS under the
Administrative Code. Vesting corporate powers to an attached agency or instrumentality of the
government is not constitutionally prohibited and is allowed by the above-mentioned provisions
of the Civil Code and the 1987 Administrative Code.

Economic Viability and Ownership and Control Tests Inapplicable to Public Corporations
As presently constituted, the BSP still remains an instrumentality of the national government. It
is a public corporation created by law for a public purpose, attached to the DECS pursuant to its
Charter and the Administrative Code of 1987. It is not a private corporation which is required to
be owned or controlled by the government and be economically viable to justify its existence
under a special law.
The dissent of Justice Carpio also submits that by recognizing "a new class of public
corporation(s)" created by special charter that will not be subject to the test of economic viability,
the constitutional provision will be circumvented.
However, a review of the Record of the 1986 Constitutional Convention reveals the intent of the
framers of the highest law of our land to distinguish between government corporations
performing governmental functions and corporations involved in business or proprietary
functions:
THE PRESIDENT. Commissioner Foz is recognized.
MR. FOZ. Madam President, I support the proposal to insert "ECONOMIC VIABILITY" as one of
the grounds for organizing government corporations. x x x.
MR. OPLE. Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the test
of economic performance. We know what happened in the past. If a government corporation
loses, then it makes its claim upon the taxpayers’ money through new equity infusions from the
government and what is always invoked is the common good. x x x
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common
good," this becomes a restraint on future enthusiasts for state capitalism to excuse themselves
from the responsibility of meeting the market test so that they become viable. x x x.
xxxx
THE PRESIDENT. Commissioner Quesada is recognized.
MS. QUESADA. Madam President, may we be clarified by the committee on what is meant by
economic viability?
THE PRESIDENT. Please proceed.
MR. MONSOD. Economic viability normally is determined by cost-benefit ratio that takes into
consideration all benefits, including economic external as well as internal benefits. These are
what they call externalities in economics, so that these are not strictly financial criteria. Economic
viability involves what we call economic returns or benefits of the country that are not
quantifiable in financial terms. x x x.
xxxx
MS. QUESADA. So, would this particular formulation now really limit the entry of government
corporations into activities engaged in by corporations?
185
MR. MONSOD. Yes, because it is also consistent with the economic philosophy that this
Commission approved – that there should be minimum government participation and
intervention in the economy.
MS. QUESDA. Sometimes this Commission would just refer to Congress to provide the
particular requirements when the government would get into corporations. But this time around,
we specifically mentioned economic viability. x x x.
MR. VILLEGAS. Commissioner Ople will restate the reason for his introducing that amendment.
MR. OPLE. I am obliged to repeat what I said earlier in moving for this particular amendment
jointly with Commissioner Foz. During the past three decades, there had been a proliferation of
government corporations, very few of which have succeeded, and many of which are now
earmarked by the Presidential Reorganization Commission for liquidation because they failed
the economic test. x x x.
xxxx
MS. QUESADA. But would not the Commissioner say that the reason why many of the
government-owned or controlled corporations failed to come up with the economic test is due to
the management of these corporations, and not the idea itself of government corporations? It is
a problem of efficiency and effectiveness of management of these corporations which could be
remedied, not by eliminating government corporations or the idea of getting into state-owned
corporations, but improving management which our technocrats should be able to do, given the
training and the experience.
MR. OPLE. That is part of the economic viability, Madam President.
MS. QUESADA. So, is the Commissioner saying then that the Filipinos will benefit more if these
government-controlled corporations were given to private hands, and that there will be more
goods and services that will be affordable and within the reach of the ordinary citizens?
MR. OPLE. Yes. There is nothing here, Madam President, that will prevent the formation of a
government corporation in accordance with a special charter given by Congress. However, we
are raising the standard a little bit so that, in the future, corporations established by the
government will meet the test of the common good but within that framework we should also
build a certain standard of economic viability.
xxxx
THE PRESIDENT. Commissioner Padilla is recognized.
MR. PADILLA. This is an inquiry to the committee. With regard to corporations created by a
special charter for government-owned or controlled corporations, will these be in the pioneer
fields or in places where the private enterprise does not or cannot enter? Or is this so general
that these government corporations can compete with private corporations organized under a
general law?
MR. MONSOD. Madam President, x x x. There are two types of government corporations –
those that are involved in performing governmental functions, like garbage disposal, Manila
waterworks, and so on; and those government corporations that are involved in business
functions. As we said earlier, there are two criteria that should be followed for corporations that
want to go into business. First is for government corporations to first prove that they can be
efficient in the areas of their proper functions. This is one of the problems now because they go

into all kinds of activities but are not even efficient in their proper functions. Secondly, they
should not go into activities that the private sector can do better.
MR. PADILLA. There is no question about corporations performing governmental functions or
functions that are impressed with public interest. But the question is with regard to matters that
are covered, perhaps not exhaustively, by private enterprise. It seems that under this provision
the only qualification is economic viability and common good, but shall government, through
government-controlled corporations, compete with private enterprise?
MR. MONSOD. No, Madam President. As we said, the government should not engage in
activities that private enterprise is engaged in and can do better. x x x.56 (Emphases supplied.)
Thus, the test of economic viability clearly does not apply to public corporations dealing with
governmental functions, to which category the BSP belongs. The discussion above conveys the
constitutional intent not to apply this constitutional ban on the creation of public corporations
where the economic viability test would be irrelevant. The said test would only apply if the
corporation is engaged in some economic activity or business function for the government.
It is undisputed that the BSP performs functions that are impressed with public interest. In fact,
during the consideration of the Senate Bill that eventually became Republic Act No. 7278, which
amended the BSP Charter, one of the bill’s sponsors, Senator Joey Lina, described the BSP as
follows:
Senator Lina. Yes, I can only think of two organizations involving the masses of our youth, Mr.
President, that should be given this kind of a privilege – the Boy Scouts of the Philippines and
the Girl Scouts of the Philippines. Outside of these two groups, I do not think there are other
groups similarly situated.
The Boy Scouts of the Philippines has a long history of providing value formation to our young,
and considering how huge the population of the young people is, at this point in time, and also
considering the importance of having an organization such as this that will inculcate moral
uprightness among the young people, and further considering that the development of these
young people at that tender age of seven to sixteen is vital in the development of the country
producing good citizens, I believe that we can make an exception of the Boy Scouting
movement of the Philippines from this general prohibition against providing tax exemption and
privileges.57
Furthermore, this Court cannot agree with the dissenting opinion which equates the changes
introduced by Republic Act No. 7278 to the BSP Charter as clear manifestation of the intent of
Congress "to return the BSP to the private sector." It was not the intent of Congress in enacting
Republic Act No. 7278 to give up all interests in this basic youth organization, which has been its
partner in forming responsible citizens for decades.
In fact, as may be seen in the deliberation of the House Bills that eventually resulted to Republic
Act No. 7278, Congress worked closely with the BSP to rejuvenate the organization, to bring it
back to its former glory reached under its original charter, Commonwealth Act No. 111, and to
correct the perceived ills introduced by the amendments to its Charter under Presidential Decree
No. 460. The BSP suffered from low morale and decrease in number because the Secretaries of
the different departments in government who were too busy to attend the meetings of the BSP’s
National Executive Board ("the Board") sent representatives who, as it turned out, changed from
meeting to meeting. Thus, the Scouting Councils established in the provinces and cities were
not in touch with what was happening on the national level, but they were left to implement what
was decided by the Board.58
186
A portion of the legislators’ discussion is quoted below to clearly show their intent:
HON. DEL MAR. x x x I need not mention to you the value and the tremendous good that the
Boy Scout Movement has done not only for the youth in particular but for the country in general.
And that is why, if we look around, our past and present national leaders, prominent men in the
various fields of endeavor, public servants in government offices, and civic leaders in the
communities all over the land, and not only in our country but all over the world many if not most
of them have at one time or another been beneficiaries of the Scouting Movement. And so, it is
along this line, Mr. Chairman, that we would like to have the early approval of this measure if
only to pay back what we owe much to the Scouting Movement. Now, going to the meat of the
matter, Mr. Chairman, if I may just – the Scouting Movement was enacted into law in October
31, 1936 under Commonwealth Act No. 111. x x x [W]e were acknowledged as the third biggest
scouting organization in the world x x x. And to our mind, Mr. Chairman, this erratic growth and
this decrease in membership [number] is because of the bad policy measures that were
enunciated with the enactment or promulgation by the President before of Presidential Decree
No. 460 which we feel is the culprit of the ills that is flagging the Boy Scout Movement today.
And so, this is specifically what we are attacking, Mr. Chairman, the disenfranchisement of the
National Council in the election of the national board. x x x. And so, this is what we would like to
be appraised of by the officers of the Boy [Scouts] of the Philippines whom we are also
confident, have the best interest of the Boy Scout Movement at heart and it is in this spirit, Mr.
Chairman, that we see no impediment towards working together, the Boy Scout of the
Philippines officers working together with the House of Representatives in coming out with a
measure that will put back the vigor and enthusiasm of the Boy Scout Movement. x x
x.59 (Emphasis ours.)
The following is another excerpt from the discussion on the House version of the bill, in the
Committee on Government Enterprises:
HON. AQUINO: x x x Well, obviously, the two bills as well as the previous laws that have created
the Boy Scouts of the Philippines did not provide for any direct government support by way of
appropriation from the national budget to support the activities of this organization. The point
here is, and at the same time they have been subjected to a governmental intervention, which to
their mind has been inimical to the objectives and to the institution per se, that is why they are
seeking legislative fiat to restore back the original mandate that they had under Commonwealth
Act 111. Such having been the experience in the hands of government, meaning, there has
been negative interference on their part and inasmuch as their mandate is coming from a
legislative fiat, then shouldn’t it be, this rhetorical question, shouldn’t it be better for this
organization to seek a mandate from, let’s say, the government the Corporation Code of the
Philippines and register with the SEC as non-profit non-stock corporation so that government
intervention could be very very minimal. Maybe that’s a rhetorical question, they may or they
may not answer, ano. I don’t know what would be the benefit of a charter or a mandate being
provided for by way of legislation versus a registration with the SEC under the Corporation Code
of the Philippines inasmuch as they don’t get anything from the government anyway insofar as
direct funding. In fact, the only thing that they got from government was intervention in their
affairs. Maybe we can solicit some commentary comments from the resource persons.
Incidentally, don’t take that as an objection, I’m not objecting. I’m all for the objectives of these
two bills. It just occurred to me that since you have had very bad experience in the hands of
government and you will always be open to such possible intervention even in the future as long
as you have a legislative mandate or your mandate or your charter coming from legislative
action.
xxxx

MR. ESCUDERO: Mr. Chairman, there may be a disadvantage if the Boy Scouts of the
Philippines will be required to register with the SEC. If we are registered with the SEC, there
could be a danger of proliferation of scout organization. Anybody can organize and then register
with the SEC. If there will be a proliferation of this, then the organization will lose control of the
entire organization. Another disadvantage, Mr. Chairman, anybody can file a complaint in the
SEC against the Boy Scouts of the Philippines and the SEC may suspend the operation or
freeze the assets of the organization and hamper the operation of the organization. I don’t know,
Mr. Chairman, how you look at it but there could be a danger for anybody filing a complaint
against the organization in the SEC and the SEC might suspend the registration permit of the
organization and we will not be able to operate.
HON. AQUINO: Well, that I think would be a problem that will not be exclusive to corporations
registered with the SEC because even if you are government corporation, court action may be
taken against you in other judicial bodies because the SEC is simply another quasi-judicial body.
But, I think, the first point would be very interesting, the first point that you raised. In effect, what
you are saying is that with the legislative mandate creating your charter, in effect, you have been
given some sort of a franchise with this movement.
MR. ESCUDERO: Yes.
HON. AQUINO: Exclusive franchise of that movement?
MR. ESCUDERO: Yes.
HON. AQUINO: Well, that’s very well taken so I will proceed with other issues, Mr. Chairman. x x
x.60 (Emphases added.)
Therefore, even though the amended BSP charter did away with most of the governmental
presence in the BSP Board, this was done to more strongly promote the BSP’s objectives, which
were not supported under Presidential Decree No. 460. The BSP objectives, as pointed out
earlier, are consistent with the public purpose of the promotion of the well-being of the youth, the
future leaders of the country. The amendments were not done with the view of changing the
character of the BSP into a privatized corporation. The BSP remains an agency attached to a
department of the government, the DECS, and it was not at all stripped of its public character.
The ownership and control test is likewise irrelevant for a public corporation like the BSP. To
reiterate, the relationship of the BSP, an attached agency, to the government, through the
DECS, is defined in the Revised Administrative Code of 1987. The BSP meets the minimum
statutory requirement of an attached government agency as the DECS Secretary sits at the BSP
Board ex officio, thus facilitating the policy and program coordination between the BSP and the
DECS.
Requisites for Declaration of Unconstitutionality Not Met in this Case
The dissenting opinion of Justice Carpio improperly raised the issue of unconstitutionality of
certain provisions of the BSP Charter. Even if the parties were asked to Comment on the validity
of the BSP charter by the Court, this alone does not comply with the requisites for judicial
review, which were clearly set forth in a recent case:
When questions of constitutional significance are raised, the Court can exercise its power of
judicial review only if the following requisites are present: (1) the existence of an actual and
appropriate case; (2) the existence of personal and substantial interest on the part of the party
187
raising the constitutional question; (3) recourse to judicial review is made at the earliest
opportunity; and (4) the constitutional question is the lis mota of the case.61 (Emphasis added.)
Thus, when it comes to the exercise of the power of judicial review, the constitutional issue
should be the very lis mota, or threshold issue, of the case, and that it should be raised by either
of the parties. These requirements would be ignored under the dissent’s rather overreaching
view of how this case should have been decided. True, it was the Court that asked the parties to
comment, but the Court cannot be the one to raise a constitutional issue. Thus, the Court
chooses to once more exhibit restraint in the exercise of its power to pass upon the validity of a
law.
Re: the COA’s Jurisdiction
Regarding the COA’s jurisdiction over the BSP, Section 8 of its amended charter allows the BSP
to receive contributions or donations from the government. Section 8 reads:
Section 8. Any donation or contribution which from time to time may be made to the Boy Scouts
of the Philippines by the Government or any of its subdivisions, branches, offices, agencies or
instrumentalities shall be expended by the Executive Board in pursuance of this Act.lawph!1
The sources of funds to maintain the BSP were identified before the House Committee on
Government Enterprises while the bill was being deliberated, and the pertinent portion of the
discussion is quoted below:
MR. ESCUDERO. Yes, Mr. Chairman. The question is the sources of funds of the organization.
First, Mr. Chairman, the Boy Scouts of the Philippines do not receive annual allotment from the
government. The organization has to raise its own funds through fund drives and fund
campaigns or fund raising activities. Aside from this, we have some revenue producing projects
in the organization that gives us funds to support the operation. x x x From time to time, Mr.
Chairman, when we have special activities we request for assistance or financial assistance
from government agencies, from private business and corporations, but this is only during
special activities that the Boy Scouts of the Philippines would conduct during the year.
Otherwise, we have to raise our own funds to support the organization.62
The nature of the funds of the BSP and the COA’s audit jurisdiction were likewise brought up in
said congressional deliberations, to wit:
HON. AQUINO: x x x Insofar as this organization being a government created organization, in
fact, a government corporation classified as such, are your funds or your finances subjected to
the COA audit?
MR. ESCUDERO: Mr. Chairman, we are not. Our funds is not subjected. We don’t fall under the
jurisdiction of the COA.
HON. AQUINO: All right, but before were you?
MR. ESCUDERO: No, Mr. Chairman.
MR. JESUS: May I? As historical backgrounder, Commonwealth Act 111 was written by then
Secretary Jorge Vargas and before and up to the middle of the Martial Law years, the BSP was
receiving a subsidy in the form of an annual… a one draw from the Sweepstakes. And, this was
the case also with the Girl Scouts at the Anti-TB, but then this was… and the Boy Scouts then
because of this funding partly from government was being subjected to audit in the contributions
being made in the part of the Sweepstakes. But this was removed later during the Martial Law

years with the creation of the Human Settlements Commission. So the situation right now is that
the Boy Scouts does not receive any funding from government, but then in the case of the local
councils and this legislative charter, so to speak, enables the local councils even the national
headquarters in view of the provisions in the existing law to receive donations from the
government or any of its instrumentalities, which would be difficult if the Boy Scouts is registered
as a private corporation with the Securities and Exchange Commission. Government bodies
would be estopped from making donations to the Boy Scouts, which at present is not the case
because there is the Boy Scouts charter, this Commonwealth Act 111 as amended by PD 463.
xxxx
HON. AMATONG: Mr. Chairman, in connection with that.
THE CHAIRMAN: Yeah, Gentleman from Zamboanga.
HON. AMATONG: There is no auditing being made because there’s no money put in the
organization, but how about donated funds to this organization? What are the remedies of the
donors of how will they know how their money are being spent?
MR. ESCUDERO: May I answer, Mr. Chairman?
THE CHAIRMAN: Yes, gentleman.
MR. ESCUDERO: The Boy Scouts of the Philippines has an external auditor and by the charter
we are required to submit a financial report at the end of each year to the National Executive
Board. So all the funds donated or otherwise is accounted for at the end of the year by our
external auditor. In this case the SGV.63
Historically, therefore, the BSP had been subjected to government audit in so far as public funds
had been infused thereto. However, this practice should not preclude the exercise of the audit
jurisdiction of COA, clearly set forth under the Constitution, which pertinently provides:
Section 2. (1) The Commission on Audit shall have the power, authority, and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses
of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations with original charters and their subsidiaries; and (d) such non-governmental entities
receiving subsidy or equity, directly or indirectly, from or through the Government, which are
required by law of the granting institution to submit to such audit as a condition of subsidy or
equity. x x x. 64
Since the BSP, under its amended charter, continues to be a public corporation or a government
instrumentality, we come to the inevitable conclusion that it is subject to the exercise by the COA
of its audit jurisdiction in the manner consistent with the provisions of the BSP Charter.
WHEREFORE, premises considered, the instant petition for prohibition is DISMISSED.
SO ORDERED.
EN BANC
188
G. R. No. 155027             February 28, 2006
THE VETERANS FEDERATION OF THE PHILIPPINES represented by Esmeraldo R.
Acorda, Petitioner,
vs.
Hon. ANGELO T. REYES in his capacity as Secretary of National Defense; and Hon.
EDGARDO E. BATENGA in his capacity as Undersecretary for Civil Relations and
Administration of the Department of National Defense, Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Certiorari with Prohibition under Rule 65 of the 1997 Rules of Civil
Procedure, with a prayer to declare as void Department Circular No. 04 of the Department of
National Defense (DND), dated 10 June 2002.
Petitioner in this case is the Veterans Federation of the Philippines (VFP), a corporate body
organized under Republic Act No. 2640, dated 18 June 1960, as amended, and duly registered
with the Securities and Exchange Commission. Respondent Angelo T. Reyes was the Secretary
of National Defense (DND Secretary) who issued the assailed Department Circular No. 04,
dated 10 June 2002. Respondent Edgardo E. Batenga was the DND Undersecretary for Civil
Relations and Administration who was tasked by the respondent DND Secretary to conduct an
extensive management audit of the records of petitioner.
The factual and procedural antecedents of this case are as follows:
Petitioner VFP was created under Rep. Act No. 2640,1 a statute approved on 18 June 1960.
On 15 April 2002, petitioner’s incumbent president received a letter dated 13 April 2002 which
reads:
Col. Emmanuel V. De Ocampo (Ret.)
President
Veterans Federation of the Philippines
Makati, Metro Manila
Dear Col. De Ocampo:
Please be informed that during the preparation of my briefing before the Cabinet and the
President last March 9, 2002, we came across some legal bases which tended to show that
there is an organizational and management relationship between Veterans Federation of the
Philippines and the Philippine Veterans Bank which for many years have been inadvertently
overlooked.
I refer to Republic Act 2640 creating the body corporate known as the VFP and Republic Act
3518 creating the Phil. Vets [sic] Bank.
1. RA 2640 dated 18 June 60 Section 1 ... "hereby created a body corporate, under the control
and supervision of the Secretary of National Defense."

2. RA 2640 Section 12 ... "On or before the last day of the month following the end of each fiscal
year, the Federation shall make and transmit to the President of the Philippines or to the
Secretary of National Defense, a report of its proceedings for the past year, including a full,
complete and itemized report of receipts and expenditures of whatever kind."
3. Republic Act 3518 dated 18 June 1963 (An Act Creating the Philippine Veterans Bank, and
for Other Purposes) provides in Section 6 that ... "the affairs and business of the Philippine
Veterans Bank shall be directed and its property managed, controlled and preserved, unless
otherwise provided in this Act, by a Board of Directors consisting of eleven (11) members to be
composed of three ex officio members to wit: the Philippine Veterans Administrator, the
President of the Veteran’s Federation of the Philippines and the Secretary of National Defense x
x x.
It is therefore in the context of clarification and rectification of what should have been done by
the DND (Department of National Defense) for and about the VFP and PVB that I am requesting
appropriate information and report about these two corporate bodies.
Therefore it may become necessary that a conference with your staffs in these two bodies be
set.
Thank you and anticipating your action on this request.
Very truly yours,
(SGD) ANGELO T. REYES
[DND] Secretary
On 10 June 2002, respondent DND Secretary issued the assailed DND Department Circular No.
04 entitled, "Further Implementing the Provisions of Sections 1 2 and 23 of Republic Act No.
2640," the full text of which appears as follows:
Department of National Defense
Department Circular No. 04
Subject: Further Implementing the Provisions of Sections 1 & 2 of
Republic Act No. 2640
Authority: Republic Act No. 2640
Executive Order No. 292 dated July 25, 1987
Section 1
These rules shall govern and apply to the management and operations of the Veterans
Federation of the Philippines (VFP) within the context provided by EO 292 s-1987.
Section 2 – DEFINITION OF TERMS – for the purpose of these rules, the terms, phrases or
words used herein shall, unless the context indicates otherwise, mean or be understood as
follows:
Supervision and Control – it shall include authority to act directly whenever a specific function is
entrusted by law or regulation to a subordinate; direct the performance of a duty; restrain the
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commission of acts; approve, reverse or modify acts and decisions of subordinate officials or
units; determine priorities in the execution of plans and programs; and prescribe standards,
guidelines, plans and programs.
Power of Control – power to alter, modify, nullify or set aside what a subordinate officer had
done in the performance of his duties and to substitute the judgment of the former to that of the
latter.
Supervision – means overseeing or the power of an officer to see to it that their subordinate
officers perform their duties; it does not allow the superior to annul the acts of the subordinate.
Administrative Process – embraces matter concerning the procedure in the disposition of both
routine and contested matters, and the matter in which determinations are made, enforced or
reviewed.
Government Agency – as defined under PD 1445, a government agency or agency of
government or "agency" refers to any department, bureau or office of the national government,
or any of its branches or instrumentalities, of any political subdivision, as well as any
government owned or controlled corporation, including its subsidiaries, or other self-governing
board or commission of the government.
Government Owned and Controlled Corporation (GOCC) – refer to any agency organized as a
stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the government directly or through its
instrumentalities wholly or, where applicable as in the case of stock corporations, to the extent of
at least 50% of its capital stock.
Fund – sum of money or other resources set aside for the purpose of carrying out specific
activities or attaining certain objectives in accordance with special regulations, restrictions or
limitations and constitutes an independent, fiscal and accounting entity.
Government Fund – includes public monies of every sort and other resources pertaining to any
agency of the government.
Veteran – any person who rendered military service in the land, sea or air forces of the
Philippines during the revolution against Spain, the Philippine American War, World War II,
including Filipino citizens who served in Allied Forces in the Philippine territory and foreign
nationals who served in Philippine forces; the Korean campaign, the Vietnam campaign, the
Anti-dissidence campaign, or other wars or military campaigns; or who rendered military service
in the Armed Forces of the Philippines and has been honorably discharged or separated after at
least six (6) years total cumulative active service or sooner separated due to the death or
disability arising from a wound or injury received or sickness or disease incurred in line of duty
while in the active service.
Section 3 – Relationship Between the DND and the VFP
3.1 Sec 1 of RA 3140 provides "... the following persons (heads of various veterans associations
and organizations in the Philippines) and their associates and successors are hereby created a
body corporate, under the control and supervision of the Secretary of National Defense, under
the name, style and title of "Veterans Federation of the Philippines ..."
The Secretary of National Defense shall be charged with the duty of supervising the veterans
and allied program under the jurisdiction of the Department. It shall also have the responsibility

of overseeing and ensuring the judicious and effective implementation of veterans assistance,
benefits, and utilization of VFP assets.
3.2 To effectively supervise and control the corporate affairs of the Federation and to safeguard
the interests and welfare of the veterans who are also wards of the State entrusted under the
protection of the DND, the Secretary may personally or through a designated representative,
require the submission of reports, documents and other papers regarding any or all of the
Federation’s business transactions particularly those relating to the VFP functions under Section
2 of RA 2640.
The Secretary or his representative may attend conferences of the supreme council of the VFP
and such other activities he may deem relevant.
3.3 The Secretary shall from time to time issue guidelines, directives and other orders governing
vital government activities including, but not limited to, the conduct of elections; the acquisition,
management and dispositions of properties, the accounting of funds, financial interests, stocks
and bonds, corporate investments, etc. and such other transactions which may affect the
interests of the veterans.
3.4 Financial transactions of the Federation shall follow the provisions of the government
auditing code (PD 1445) i.e. government funds shall be spent or used for public purposes; trust
funds shall be available and may be spent only for the specific purpose for which the trust was
created or the funds received; fiscal responsibility shall, to the greatest extent, be shared by all
those exercising authority over the financial affairs, transactions, and operations of the
federation; disbursements or dispositions of government funds or property shall invariably bear
the approval of the proper officials.
Section 4 – Records of the FEDERATION
As a corporate body and in accordance with appropriate laws, it shall keep and carefully
preserve records of all business transactions, minutes of meetings of stockholders/members of
the board of directors reflecting all details about such activity.
All such records and minutes shall be open to directors, trustees, stockholders, and other
members for inspection and copies of which may be requested.
As a body corporate, it shall submit the following: annual report; proceedings of council
meetings; report of operations together with financial statement of its assets and liabilities and
fund balance per year; statement of revenues and expenses per year; statement of cash flows
per year as certified by the accountant; and other documents/reports as may be necessary or
required by the SND.
Section 5 – Submission of Annual and Periodic Report
As mandated under appropriate laws, the following reports shall be submitted to the SND, to wit:
a. Annual Report to be submitted not later than every January 31 of the following year. Said
report shall consist of the following:
1. Financial Report of the Federation, signed by the Treasurer General and Auditor General;
2. Roster of Members of the Supreme Council;
3. Roster of Members of the Executive Board and National Officers; and
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4. Current listing of officers and management of VFP.
b. Report on the proceedings of each Supreme Council Meeting to be submitted not later than
one month after the meeting;
c. Report of the VFP President as may be required by SND or as may be found necessary by
the President of the Federation;
d. Resolutions passed by the Executive Board and the Supreme Council for confirmation to be
submitted not later than one month after the approval of the resolution;
e. After Operation/Activity Reports to be submitted not later than one month after such operation
or activity;
Section 6 – Penal Sanctions
As an attached agency to a regular department of the government, the VFP and all its
instrumentalities, officials and personnel shall be subject to the penal provisions of such laws,
rules and regulations applicable to the attached agencies of the government.
In a letter dated 6 August 2002 addressed to the President of petitioner, respondent DND
Secretary reiterated his instructions in his earlier letter of 13 April 2002.
Thereafter, petitioner’s President received a letter dated 23 August 2002 from respondent
Undersecretary, informing him that Department Order No. 129 dated 23 August 2002 directed
"the conduct of a Management Audit of the Veterans Federation of the Philippines." 4 The letter
went on to state that respondent DND Secretary "believes that the mandate given by said law
can be meaningfully exercised if this department can better appreciate the functions,
responsibilities and situation on the ground and this can be done by undertaking a thorough
study of the organization."5
Respondent Undersecretary also requested both for a briefing and for documents on personnel,
ongoing projects and petitioner’s financial condition. The letter ended by stating that, after the
briefing, the support staff of the Audit Committee would begin their work to meet the one-month
target within which to submit a report.
A letter dated 28 August 2003 informed petitioner’s President that the Management Audit Group
headed by the Undersecretary would be paying petitioner a visit on 30 August 2002 for an
update on VFP’s different affiliates and the financial statement of the Federation.
Subsequently, the Secretary General of the VFP sent an undated letter to respondent DND
Secretary, with notice to respondent Undersecretary for Civil Relations and Administration,
complaining about the alleged broadness of the scope of the management audit and requesting
the suspension thereof until such time that specific areas of the audit shall have been agreed
upon.
The request was, however, denied by the Undersecretary in a letter dated 4 September 2002 on
the ground that a specific timeframe had been set for the activity.
Petitioner thus filed this Petition for Certiorari with Prohibition under Rule 65 of the 1997 Rules of
Civil Procedure, praying for the following reliefs:
1. For this Court to issue a temporary restraining order and a writ of preliminary prohibitory and
mandatory injunction to enjoin respondent Secretary and all those acting under his discretion

and authority from: (a) implementing DND Department Circular No. 04; and (b) continuing with
the ongoing management audit of petitioner’s books of account;
2. After hearing the issues on notice –
a. Declare DND Department Circular No. 04 as null and void for being ultra vires;
b. Convert the writ of prohibition, preliminary prohibitory and mandatory injunction into a
permanent one.6
GIVING DUE COURSE TO THE PETITION
Petitioner asserts that, although cases which question the constitutionality or validity of
administrative issuances are ordinarily filed with the lower courts, the urgency and substantive
importance of the question on hand and the public interest attendant to the subject matter of the
petition justify its being filed with this Court directly as an original action.7
It is settled that the Regional Trial Court and the Court of Appeals also exercise original
jurisdiction over petitions for certiorari and prohibition. As we have held in numerous occasions,
however, such concurrence of original jurisdiction does not mean that the party seeking
extraordinary writs has the absolute freedom to file his petition in the court of his choice.8 Thus,
in Commissioner of Internal Revenue v. Leal,9 we held that:
Such concurrence of original jurisdiction among the Regional Trial Court, the Court of Appeals
and this Court, however, does not mean that the party seeking any of the extraordinary writs has
the absolute freedom to file his petition in the court of his choice. The hierarchy of courts in our
judicial system determines the appropriate forum for these petitions. Thus, petitions for the
issuance of the said writs against the first level (inferior) courts must be filed with the Regional
Trial Court and those against the latter, with the Court of Appeals. A direct invocation of this
Court’s original jurisdiction to issue these writs should be allowed only where there are special
and important reasons therefor, specifically and sufficiently set forth in the petition. This is the
established policy to prevent inordinate demands upon the Court’s time and attention, which are
better devoted to matters within its exclusive jurisdiction, and to prevent further over-crowding of
the Court’s docket. Thus, it was proper for petitioner to institute the special civil action for
certiorari with the Court of Appeals assailing the RTC order denying his motion to dismiss based
on lack of jurisdiction.
The petition itself, in this case, does not specifically and sufficiently set forth the special and
important reasons why the Court should give due course to this petition in the first instance,
hereby failing to fulfill the conditions set forth in Commissioner of Internal Revenue v.
Leal.10 While we reiterate the policies set forth in Leal and allied cases and continue to abhor the
propensity of a number of litigants to disregard the principle of hierarchy of courts in our judicial
system, we, however, resolve to take judicial notice of the fact that the persons who stand to
lose in a possible protracted litigation in this case are war veterans, many of whom have
precious little time left to enjoy the benefits that can be conferred by petitioner corporation. This
bickering for the power over petitioner corporation, an entity created to represent and defend the
interests of Filipino veterans, should be resolved as soon as possible in order for it to once and
for all direct its resources to its rightful beneficiaries all over the country. All these said, we
hereby resolve to give due course to this petition.
ISSUES
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Petitioner mainly alleges that the rules and guidelines laid down in the assailed Department
Circular No. 04 expanded the scope of "control and supervision" beyond what has been laid
down in Rep. Act No. 2640.11 Petitioner further submits the following issues to this Court:
1. Was the challenged department circular passed in the valid exercise of the respondent
Secretary’s "control and supervision"?
2. Could the challenged department circular validly lay standards classifying the VFP, an
essentially civilian organization, within the ambit of statutes only applying to government
entities?
3. Does the department circular, which grants respondent direct management control on the
VFP, unduly encroach on the prerogatives of VFP’s governing body?
At the heart of all these issues and all of petitioner’s prayers and assertions in this case is
petitioner’s claim that it is a private non-government corporation.
CENTRAL ISSUE:
IS THE VFP A PRIVATE CORPORATION?
Petitioner claims that it is not a public nor a governmental entity but a private organization, and
advances this claim to prove that the issuance of DND Department Circular No. 04 is an invalid
exercise of respondent Secretary’s control and supervision.12
This Court has defined the power of control as "the power of an officer to alter or modify or nullify
or set aside what a subordinate has done in the performance of his duties and to substitute the
judgment of the former to that of the latter." 13 The power of supervision, on the other hand,
means "overseeing, or the power or authority of an officer to see that subordinate officers
perform their duties. If the latter fail or neglect to fulfill them, the former may take such action or
step as prescribed by law to make them perform their duties." 14 These definitions are
synonymous with the definitions in the assailed Department Circular No. 04, while the other
provisions of the assailed department circular are mere consequences of control and
supervision as defined.
Thus, in order for petitioner’s premise to be able to support its conclusion, petitioners should be
deemed to imply either of the following: (1) that it is unconstitutional/impermissible for the law
(Rep. Act No. 2640) to grant control and/or supervision to the Secretary of National Defense
over a private organization, or (2) that the control and/or supervision that can be granted to the
Secretary of National Defense over a private organization is limited, and is not as strong as they
are defined above.
The following provision of the 1935 Constitution, the organic act controlling at the time of the
creation of the VFP in 1960, is relevant:
Section 7. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned and
controlled by the Government or any subdivision or instrumentality thereof.15
On the other hand, its counterparts in the 1973 and 1987 constitutions are the following:
Section 4. The National Assembly shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned or
controlled by the government or any subdivision or instrumentality thereof.16

Sec. 16. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned and controlled corporations may be
created or established by special charters in the interest of the common good and subject to the
test of economic viability.17
From the foregoing, it is crystal clear that our constitutions explicitly prohibit the regulation by
special laws of private corporations, with the exception of government-owned or controlled
corporations (GOCCs). Hence, it would be impermissible for the law to grant control of the VFP
to a public official if it were neither a public corporation, an unincorporated governmental entity,
nor a GOCC.18 Said constitutional provisions can even be read to prohibit the creation itself of
the VFP if it were neither of the three mentioned above, but we cannot go into that in this case
since there is no challenge to the creation of the VFP in the petition as to permit this Court from
considering its nullity.
Petitioner vigorously argues that the VFP is a private non-government organization, pressing on
the following contentions:
1. The VFP does not possess the elements which would qualify it as a public office, particularly
the possession/delegation of a portion of sovereign power of government to be exercised for the
benefit of the public;
2. VFP funds are not public funds because –
a) No budgetary appropriations or government funds have been released to the VFP directly or
indirectly from the Department of Budget and Management (DBM);
b) VFP funds come from membership dues;
c) The lease rentals raised from the use of government lands reserved for the VFP are private in
character and do not belong to the government. Said rentals are fruits of VFP’s labor and efforts
in managing and administering the lands for VFP purposes and objectives. A close analogy
would be any Filipino citizen settling on government land and who tills the land for his livelihood
and sustenance. The fruits of his labor belong to him and not to the owner of the land. Such
fruits are not public funds.
3. Although the juridical personality of the VFP emanates from a statutory charter, the VFP
retains its essential character as a private, civilian federation of veterans voluntarily formed by
the veterans themselves to attain a unity of effort, purpose and objectives, e.g. –
a. The members of the VFP are individual members and retirees from the public and military
service;
b. Membership in the VFP is voluntary, not compulsory;
c. The VFP is governed, not by the Civil Service Law, the Articles of War nor the GSIS Law, but
by the Labor Code and the SSS Law;
d. The VFP has its own Constitution and By-Laws and is governed by a Supreme Council who
are elected from and by the members themselves;
4. The Administrative Code of 1987 does not provide that the VFP is an attached agency, nor
does it provide that it is an entity under the control and supervision of the DND in the context of
the provisions of said code.
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5. The DBM declared that the VFP is a non-government organization and issued a certificate
that the VFP has not been a direct recipient of any funds released by the DBM.
These arguments of petitioner notwithstanding, we are constrained to rule that petitioner is in
fact a public corporation. Before responding to petitioner’s allegations one by one, here are the
more evident reasons why the VFP is a public corporation:
(1) Rep. Act No. 2640 is entitled "An Act to Create a Public Corporation to be Known as the
Veterans Federation of the Philippines, Defining its Powers, and for Other Purposes."
(2) Any action or decision of the Federation or of the Supreme Council shall be subject to the
approval of the Secretary of Defense.19
(3) The VFP is required to submit annual reports of its proceedings for the past year, including a
full, complete and itemized report of receipts and expenditures of whatever kind, to the President
of the Philippines or to the Secretary of National Defense.20
(4) Under Executive Order No. 37 dated 2 December 1992, the VFP was listed as among the
government-owned and controlled corporations that will not be privatized.
(5) In Ang Bagong Bayani – OFW Labor Party v. COMELEC,21 this Court held in a minute
resolution that the "VFP [Veterans Federation Party] is an adjunct of the government, as it is
merely an incarnation of the Veterans Federation of the Philippines.
And now to answer petitioner’s reasons for insisting that it is a private corporation:
1. Petitioner claims that the VFP does not possess the elements which would qualify it as a
public office, particularly the possession/delegation of a portion of sovereign power of
government to be exercised for the benefit of the public;
In Laurel v. Desierto,22 we adopted the definition of Mechem of a public office, that it is "the right,
authority and duty, created and conferred by law, by which, for a given period, either fixed by law
or enduring at the pleasure of the creating power, an individual is invested with some portion of
the sovereign functions of the government, to be exercised by him for the benefit of the public."
In the same case, we went on to adopt Mechem’s view that the delegation to the individual of
some of the sovereign functions of government is "[t]he most important characteristic" in
determining whether a position is a public office or not.23 Such portion of the sovereignty of the
country, either legislative, executive or judicial, must attach to the office for the time being, to be
exercised for the public benefit. Unless the powers conferred are of this nature, the individual is
not a public officer. The most important characteristic which distinguishes an office from an
employment or contract is that the creation and conferring of an office involves a delegation to
the individual of some of the sovereign functions of government, to be exercised by him for the
benefit of the public; – that some portion of the sovereignty of the country, either legislative,
executive or judicial, attaches, for the time being, to be exercised for the public benefit. Unless
the powers conferred are of this nature, the individual is not a public officer. 24 The issue,
therefore, is whether the VFA’s officers have been delegated some portion of the sovereignty of
the country, to be exercised for the public benefit.
In several cases, we have dealt with the issue of whether certain specific activities can be
classified as sovereign functions. These cases, which deal with activities not immediately
apparent to be sovereign functions, upheld the public sovereign nature of operations needed
either to promote social justice25 or to stimulate patriotic sentiments and love of country.26

As regards the promotion of social justice as a sovereign function, we held in Agricultural Credit
and Cooperative Financing Administration (ACCFA) v. Confederation of Unions in Government
Corporations and Offices (CUGCO),27 that the compelling urgency with which the Constitution
speaks of social justice does not leave any doubt that land reform is not an optional but a
compulsory function of sovereignty. The same reason was used in our declaration that
socialized housing is likewise a sovereign function. 28 Highly significant here is the observation of
former Chief Justice Querube Makalintal:
The growing complexities of modern society, however, have rendered this traditional
classification of the functions of government [into constituent and ministrant functions] quite
unrealistic, not to say obsolete. The areas which used to be left to private enterprise and
initiative and which the government was called upon to enter optionally, and only "because it
was better equipped to administer for the public welfare than is any private individual or group of
individuals," continue to lose their well-defined boundaries and to be absorbed within activities
that the government must undertake in its sovereign capacity if it is to meet the increasing social
challenges of the times. Here[,] as almost everywhere else[,] the tendency is undoubtedly
towards a greater socialization of economic forces. Here, of course, this development was
envisioned, indeed adopted as a national policy, by the Constitution itself in its declaration of
principle concerning the promotion of social justice.29 (Emphasis supplied.)
It was, on the other hand, the fact that the National Centennial Celebrations was calculated to
arouse and stimulate patriotic sentiments and love of country that it was considered as a
sovereign function in Laurel v. Desierto. 30 In Laurel, the Court then took its cue from a similar
case in the United States involving a Fourth of July fireworks display. The holding of the
Centennial Celebrations was held to be an executive function, as it was intended to enforce
Article XIV of the Constitution which provides for the conservation, promotion and popularization
of the nation’s historical and cultural heritage and resources, and artistic relations.
In the case at bar, the functions of petitioner corporation enshrined in Section 4 of Rep. Act No.
264031 should most certainly fall within the category of sovereign functions. The protection of the
interests of war veterans is not only meant to promote social justice, but is also intended to
reward patriotism. All of the functions in Section 4 concern the well-being of war veterans, our
countrymen who risked their lives and lost their limbs in fighting for and defending our nation. It
would be injustice of catastrophic proportions to say that it is beyond sovereignty’s power to
reward the people who defended her.
Like the holding of the National Centennial Celebrations, the functions of the VFP are executive
functions, designed to implement not just the provisions of Rep. Act No. 2640, but also, and
more importantly, the Constitutional mandate for the State to provide immediate and adequate
care, benefits and other forms of assistance to war veterans and veterans of military campaigns,
their surviving spouses and orphans.32
2. Petitioner claims that VFP funds are not public funds.
Petitioner claims that its funds are not public funds because no budgetary appropriations or
government funds have been released to the VFP directly or indirectly from the DBM, and
because VFP funds come from membership dues and lease rentals earned from administering
government lands reserved for the VFP.
The fact that no budgetary appropriations have been released to the VFP does not prove that it
is a private corporation. The DBM indeed did not see it fit to propose budgetary appropriations to
the VFP, having itself believed that the VFP is a private corporation. 33 If the DBM, however, is
mistaken as to its conclusion regarding the nature of VFP’s incorporation, its previous assertions
193
will not prevent future budgetary appropriations to the VFP. The erroneous application of the law
by public officers does not bar a subsequent correct application of the law.34
Nevertheless, funds in the hands of the VFP from whatever source are public funds, and can be
used only for public purposes. This is mandated by the following provisions of Rep. Act No.
2640:
(1) Section 2 provides that the VFP can only "invest its funds for the exclusive benefit of the
Veterans of the Philippines;"
(2) Section 2 likewise provides that "(a)ny action or decision of the Federation or of the Supreme
Council shall be subject to the approval of the Secretary of National Defense." Hence, all
activities of the VFP to which the Supreme Council can apply its funds are subject to the
approval of the Secretary of National Defense;
(3) Section 4 provides that "the Federation shall exist solely for the purposes of a benevolent
character, and not for the pecuniary benefit of its members;"1avvphil.net
(4) Section 6 provides that all funds of the VFP in excess of operating expenses are "reserved
for disbursement, as the Supreme Council may authorize, for the purposes stated in Section two
of this Act;"
(5) Section 10 provides that "(a)ny donation or contribution which from time to time may be
made to the Federation by the Government of the Philippines or any of its subdivisions,
branches, offices, agencies or instrumentalities shall be expended by the Supreme Council only
for the purposes mentioned in this Act."; and finally,
(6) Section 12 requires the submission of annual reports of VFP proceedings for the past year,
including a full, complete and itemized report of receipts and expenditures of whatever kind, to
the President of the Philippines or to the Secretary of National Defense.
It is important to note here that the membership dues collected from the individual members of
VFP’s affiliate organizations do not become public funds while they are still funds of the affiliate
organizations. A close reading of Section 135 of Rep. Act No. 2640 reveals that what has been
created as a body corporate is not the individual membership of the affiliate organizations, but
merely the aggregation of the heads of the affiliate organizations. Thus, only the money remitted
by the affiliate organizations to the VFP partake in the public nature of the VFP funds.
In Republic v. COCOFED,36 we held that the Coconut Levy Funds are public funds because,
inter alia, (1) they were meant to be for the benefit of the coconut industry, one of the major
industries supporting the national economy, and its farmers; and (2) the very laws governing
coconut levies recognize their public character. The same is true with regard to the VFP funds.
No less public is the use for the VFP funds, as such use is limited to the purposes of the VFP
which we have ruled to be sovereign functions. Likewise, the law governing VFP funds (Rep. Act
No. 2640) recognizes the public character of the funds as shown in the enumerated provisions
above.
We also observed in the same COCOFED case that "(e)ven if the money is allocated for a
special purpose and raised by special means, it is still public in character." 37 In the case at bar,
some of the funds were raised by even more special means, as the contributions from affiliate
organizations of the VFP can hardly be regarded as enforced contributions as to be considered
taxes. They are more in the nature of donations which have always been recognized as a
source of public funding. Affiliate organizations of the VFP cannot complain of their contributions

becoming public funds upon the receipt by the VFP, since they are presumed aware of the
provisions of Rep. Act No. 2640 which not only specifies the exclusive purposes for which VFP
funds can be used, but also provides for the regulation of such funds by the national government
through the Secretary of National Defense. There is nothing wrong, whether legally or morally,
from raising revenues through non-traditional methods. As remarked by Justice Florentino
Feliciano in his concurring opinion in Kilosbayan, Incorporated v. Guingona, Jr. 38 where he
explained that the funds raised by the On-line Lottery System were also public in nature, thus:
x x x [T]he more successful the government is in raising revenues by non-traditional methods
such as PAGCOR operations and privatization measures, the lesser will be the pressure upon
the traditional sources of public revenues, i.e., the pocket books of individual taxpayers and
importers.
Petitioner additionally harps on the inapplicability of the case of Laurel v. Desierto 39 which was
cited by Respondents. Petitioner claims that among the reasons National Centennial
Commission Chair Salvador Laurel was considered a public officer was the fact that his
compensation was derived from public funds. Having ruled that VFP funds from whatever source
are public funds, we can safely conclude that the Supreme Council’s compensation, taken as
they are from VFP funds under the term "operating expenses" in Section 6 of Rep. Act No. 2640,
are derived from public funds. The particular nomenclature of the compensation taken from VFP
funds is not even of relevance here. As we said in Laurel concerning compensation as an
element of public office:
Under particular circumstances, "compensation" has been held to include allowance for personal
expenses, commissions, expenses, fees, an honorarium, mileage or traveling expenses,
payments for services, restitution or a balancing of accounts, salary, and wages.40
3. Petitioner argues that it is a civilian federation where membership is voluntary.
Petitioner claims that the Secretary of National Defense "historically did not indulge in the direct
or ‘micromanagement’ of the VFP precisely because it is essentially a civilian organization where
membership is voluntary."41 This reliance of petitioner on what has "historically" been done is
erroneous, since laws are not repealed by disuse, custom, or practice to the
contrary.42 Furthermore, as earlier stated, the erroneous application of the law by public officers
does not bar a subsequent correct application of the law.43
Neither is the civilian nature of VFP relevant in this case. The Constitution does not contain any
prohibition, express or implied, against the grant of control and/or supervision to the Secretary of
National Defense over a civilian organization. The Office of the Secretary of National Defense is
itself a civilian office, its occupant being an alter ego of the civilian Commander-in-Chief. This
set-up is the manifestation of the constitutional principle that civilian authority is, at all times,
supreme over the military.44 There being no such constitutional prohibition, the creation of a
civilian public organization by Rep. Act No. 2640 is not rendered invalid by its being placed
under the control and supervision of the Secretary of National Defense.
Petitioner’s stand that the VFP is a private corporation because membership thereto is voluntary
is likewise erroneous. As stated above, the membership of the VFP is not the individual
membership of the affiliate organizations, but merely the aggregation of the heads of such
affiliate organizations. These heads forming the VFP then elect the Supreme Council and the
other officers,45 of this public corporation.
194
4. Petitioner claims that the Administrative Code of 1987 does not provide that the VFP is an
attached agency, and nor does it provide that it is an entity under the control and supervision of
the DND in the context of the provisions of said code.
The Administrative Code, by giving definitions of the various entities covered by it,
acknowledges that its enumeration is not exclusive. The Administrative Code could not be said
to have repealed nor enormously modified Rep. Act No. 2640 by implication, as such repeal or
enormous modification by implication is not favored in statutory construction.46
5. Petitioner offers as evidence the DBM opinion that the VFP is a non-government organization
in its certification that the VFP "has not been a direct recipient of any funds released by the
DBM."
Respondents claim that the supposed declaration of the DBM that petitioner is a non-
government organization is not persuasive, since DBM is not a quasi-judicial agency. They aver
that what we have said of the Bureau of Local Government Finance (BLGF) in Philippine Long
Distance Telephone Company (PLDT) v. City of Davao47 can be applied to DBM:
In any case, it is contended, the ruling of the Bureau of Local Government Finance (BLGF) that
petitioner’s exemption from local taxes has been restored is a contemporaneous construction of
Section 23 [of R.A. No. 7925 and, as such, is entitled to great weight.
The ruling of the BLGF has been considered in this case. But unlike the Court of Tax Appeals,
which is a special court created for the purpose of reviewing tax cases, the BLGF was created
merely to provide consultative services and technical assistance to local governments and the
general public on local taxation and other related matters. Thus, the rule that the "Court will not
set aside conclusions rendered by the CTA, which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise
of authority" cannot apply in the case of the BLGF.
On this score, though, we disagree with respondents and hold that the DBM’s appraisal is
considered persuasive. Respondents misread the PLDT case in asserting that only quasi-judicial
agencies’ determination can be considered persuasive. What the PLDT case points out is that,
for an administrative agency’s opinion to be persuasive, the administrative agency involved
(whether it has quasi-judicial powers or not) must be an expert in the field they are giving their
opinion on.
The DBM is indeed an expert on determining what the various government agencies and
corporations are. This determination is necessary for the DBM to fulfill its mandate:
Sec. 2. Mandate. - The Department shall be responsible for the formulation and implementation
of the National Budget with the goal of attaining our national socio-economic plans and
objectives.
The Department shall be responsible for the efficient and sound utilization of government funds
and revenues to effectively achieve our country's development objectives.48
The persuasiveness of the DBM opinion has, however, been overcome by all the previous
explanations we have laid so far. It has also been eclipsed by another similarly persuasive
opinion, that of the Department of National Defense embodied in Department Circular No. 04.
The DND is clearly more of an expert with respect to the determination of the entities under it,

and its Administrative Rules and Regulations are entitled to great respect and have in their favor
the presumption of legality.49
The DBM opinion furthermore suffers from its lack of explanation and justification in the
"certification of non-receipt" where said opinion was given. The DBM has not furnished, in said
certification or elsewhere, an explanation for its opinion that VFP is a non-government
organization.
THE FATE OF DEPARTMENT CIRCULAR NO. 04
Our ruling that petitioner is a public corporation is determinative of whether or not we should
grant petitioner’s prayer to declare Department Circular No. 04 void.
Petitioner assails Department Circular No. 04 on the ground that it expanded the scope of
control and supervision beyond what has been laid down in Rep. Act No. 2640. Petitioner
alleges that "(t)he equation of the meaning of `control’ and `supervision’ of the Administrative
Code of 1987 as the same `control and supervision’ under Rep. Act No. 2640, takes out the
context of the original legislative intent from the peculiar surrounding circumstances and
conditions that brought about the creation of the VFP."50 Petitioner claims that the VFP "was
intended as a self-governing autonomous body with a Supreme Council as governing authority,"
and that the assailed circular "pre-empts VFP’s original self-governance and autonomy (in)
representing veterans organizations, and substitutes government discretion and decisions to
that of the veterans’ own determination."51 Petitioner says that the circular’s provisions practically
render the Supreme Council inutile, despite its being the statutory governing body of the VFP.52
As previously mentioned, this Court has defined the power of control as "the power of an officer
to alter or modify or nullify or set aside what a subordinate has done in the performance of his
duties and to substitute the judgment of the former to that of the latter." 53 The power of
supervision, on the other hand, means "overseeing, or the power or authority of an officer to see
that subordinate officers perform their duties."54 Under the Administrative Code of 1987:55
Supervision and control shall include the authority to act directly whenever a specific function is
entrusted by law or regulation to a subordinate; direct the performance of duty; restrain the
commission of acts; review, approve, reverse or modify acts and decisions of subordinate
officials or units; determine priorities in the execution of plans and programs; and prescribe
standards, guidelines, plans and programs. x x x
The definition of the power of control and supervision under Section 2 of the assailed
Department Circular are synonymous with the foregoing definitions. Consequently, and
considering that petitioner is a public corporation, the provisions of the assailed Department
Circular No. 04 did not supplant nor modify the provisions of Republic Act No. 2640, thus not
violating the settled rule that "all such (administrative) issuances must not override, but must
remain consistent and in harmony with the law they seek to apply or implement. Administrative
rules and regulations are intended to carry out, neither to supplant nor to modify, the law."56
Section 3.2 of the assailed department circular, which authorizes the Secretary of National
Defense to "x x x personally or through a designated representative, require the submission of
reports, documents and other papers regarding any or all of the Federation’s business functions,
x x x."
as well as Section 3.3 which allows the Secretary of DND to
195
x x x [F]rom time to time issue guidelines, directives and other orders governing vital
government activities including, but not limited to, the conduct of elections, the acquisition,
management and dispositions of properties, the accounting of funds, financial interests, stocks
and bonds, corporate investments, etc. and such other transactions which may affect the
interests of the veterans.
are merely consequences of both the power of control and supervision granted by Rep. Act No.
2640. The power to alter or modify or nullify or set aside what a subordinate has done in the
performance of his duties, or to see to it that subordinate officers perform their duties in
accordance with law, necessarily requires the ability of the superior officer to monitor, as closely
as it desires, the acts of the subordinate.
The same is true with respect to Sections 4 and 5 of the assailed Department Circular No. 04,
which requires the preservation of the records of the Federation and the submission to the
Secretary of National Defense of annual and periodic reports.
Petitioner likewise claims that the assailed DND Department Circular No. 04 was never
published, and hence void.57 Respondents deny such non-publication.58
We have put forth both the rule and the exception on the publication of administrative rules and
regulations in the case of Tañada v. Tuvera:59
x x x Administrative rules and regulations must also be published if their purpose is to enforce or
implement existing law pursuant also to a valid delegation.
Interpretative regulations and those merely internal in nature, that is, regulating only the
personnel of the administrative agency and not the public, need not be published. Neither is
publication required of the so-called letters of instructions issued by administrative superiors
concerning the rules on guidelines to be followed by their subordinates in the performance of
their duties.
Even assuming that the assailed circular was not published, its validity is not affected by such
non-publication for the reason that its provisions fall under two of the exceptions enumerated in
Tañada.
Department Circular No. 04 is an internal regulation. As we have ruled, they are meant to
regulate a public corporation under the control of DND, and not the public in general. As likewise
discussed above, what has been created as a body corporate by Rep. Act No. 2640 is not the
individual membership of the affiliate organizations of the VFP, but merely the aggregation of the
heads of the affiliate organizations. Consequently, the individual members of the affiliate
organizations, who are not public officers, are beyond the regulation of the circular.
Sections 2, 3 and 6 of the assailed circular are additionally merely interpretative in nature. They
add nothing to the law. They do not affect the substantial rights of any person, whether party to
the case at bar or not. In Sections 2 and 3, control and supervision are defined, mentioning
actions that can be performed as consequences of such control and supervision, but without
specifying the particular actions that shall be rendered to control and supervise the VFP. Section
6, in the same vein, merely state what the drafters of the circular perceived to be consequences
of being an attached agency to a regular department of the government, enumerating sanctions
and remedies provided by law that may be availed of whenever desired.
Petitioner then objects to the implementation of Sec. 3.4 of the assailed Department Circular,
which provides that –

3.4 Financial transactions of the Federation shall follow the provisions of the government
auditing code (PD 1445) i.e. government funds shall be spent or used for public purposes; trust
funds shall be available and may be spent only for the specific purpose for which the trust was
created or the funds received; fiscal responsibility shall, to the greatest extent, be shared by all
those exercising authority over the financial affairs, transactions, and operations of the
federation; disbursements or dispositions of government funds or property shall invariably bear
the approval of the proper officials.
Since we have also previously determined that VFP funds are public funds, there is likewise no
reason to declare this provision invalid. Section 3.4 is correct in requiring the VFP funds to be
used for public purposes, but only insofar the term "public purposes" is construed to mean
"public purposes enumerated in Rep. Act No. 2640."
Having in their possession public funds, the officers of the VFP, especially its fiscal officers, must
indeed share in the fiscal responsibility to the greatest extent.
As to petitioner’s allegation that VFP was intended as a self-governing autonomous body with a
Supreme Council as governing authority, we find that the provisions of Rep. Act No. 2640
concerning the control and supervision of the Secretary of National Defense clearly withholds
from the VFP complete autonomy. To say, however, that such provisions render the VFP inutile
is an exaggeration. An office is not rendered inutile by the fact that it is placed under the control
of a higher office. These subordinate offices, such as the executive offices under the control of
the President, exercise discretion at the first instance. While their acts can be altered or even set
aside by the superior, these acts are effective and are deemed the acts of the superior until they
are modified. Surely, we cannot say that the offices of all the Department Secretaries are
worthless positions.
In sum, the assailed DND Department Circular No. 04 does not supplant nor modify and is, on
the contrary, perfectly in consonance with Rep. Act No. 2640. Petitioner VFP is a public
corporation. As such, it can be placed under the control and supervision of the Secretary of
National Defense, who consequently has the power to conduct an extensive management audit
of petitioner corporation.
WHEREFORE, the Petition is hereby DISMISSED for lack of merit. The validity of the
Department of National Defense Department Circular No. 04 is AFFIRMED.
SO ORDERED.
SECOND DIVISION
G.R. No. 134990             April 27, 2000
MANUEL M. LEYSON JR., petitioner,
vs.
OFFICE OF THE OMBUDSMAN, TIRSO ANTIPORDA, Chairman, UCPB and CIIF Oil Mills,
and OSCAR A. TORRALBA, President, CIIF Oil Mills, respondents.
BELLOSILLO, J.:
196
On 7 February 1996 International Towage and Transport Corporation (ITTC), a domestic
corporation engaged in the lighterage or shipping business, entered into a one (1)-year contract
with Legaspi Oil Company, Inc. (LEGASPI OIL), Granexport Manufacturing Corporation
(GRANEXPORT) and United Coconut Chemicals, Inc. (UNITED COCONUT), comprising the
Coconut Industry Investment Fund (CIIF) companies, for the transport of coconut oil in bulk
through MT Transasia. The majority shareholdings of these CIIF companies are owned by the
United Coconut Planters Bank (UCPB) as administrator of the CIIF. Under the terms of the
contract, either party could terminate the agreement provided a three (3)-month advance notice
was given to the other party. However, in August 1996, or prior to the expiration of the contract,
the CIIF companies with their new President, respondent Oscar A. Torralba, terminated the
contract without the requisite advance notice. The CIIF companies engaged the services of
another vessel, MT Marilag, operated by Southwest Maritime Corporation.
On 11 March 1997 petitioner Manuel M. Leyson Jr., Executive Vice President of ITTC, filed with
public respondent Office of the Ombudsman a grievance case against respondent Oscar A.
Torralba. The following is a summary of the irregularities and corrupt practices allegedly
committed by respondent Torralba: (a) breach of contract - unilateral cancellation of valid and
existing contract; (b) bad faith - falsification of documents and reports to stop the operation of
MT Transasia; (c) manipulation - influenced their insurance to disqualify MT Transasia; (d)
unreasonable denial of requirement imposed; (e) double standards and inconsistent in favor of
MT Marilag; (f) engaged and entered into a contract with Southwest Maritime Corp. which is not
the owner of MT Marilag, where liabilities were waived and whose paid-up capital is only
P250,000.00; and, (g) overpricing in the freight rate causing losses of millions of pesos to
Cocochem.1
On 2 January 1998 petitioner charged respondent Tirso Antiporda, Chairman of UCPB and CIIF
Oil Mills, and respondent Oscar A. Torralba with violation of The Anti-Graft and Corrupt
Practices Act also before the Ombudsman anchored on the aforementioned alleged irregularities
and corrupt practices.
On 30 January 1998 public respondent dismissed the complaint based on its finding that —
The case is a simple case of breach of contract with damages which should have been filed in
the regular court. This Office has no jurisdiction to determine the legality or validity of the
termination of the contract entered into by CIIF and ITTC. Besides the entities involved are
private corporations (over) which this Office has no jurisdiction.2
On 4 June 1998 reconsideration of the dismissal of the complaint was denied. The Ombudsman
was unswayed in his finding that the present controversy involved breach of contract as he also
took into account the circumstance that petitioner had already filed a collection case before the
Regional Trial Court of Manila-Br. 15, docketed as Civil Case No. 97-83354. Moreover, the
Ombudsman found that the filing of the motion for reconsideration on 31 March 1998 was
beyond the inextendible period of five (5) days from notice of the assailed resolution on 19
March 1998. 3
Petitioner now imputes grave abuse of discretion on public respondent in dismissing his
complaint. He submits that inasmuch as Philippine Coconut Producers
Federation, Inc. (COCOFED) v. PCGG4 and Republic v. Sandiganbayan5 have declared that the
coconut levy funds are public funds then, conformably with Quimpo v.
Tanodbayan,6 corporations formed and organized from those funds or whose controlling stocks
are from those funds should be regarded as government owned and/or controlled corporations.
As in the present case, since the funding or controlling interest of the companies being headed
by private respondents was given or owned by the CIIF as shown in the certification of their

Corporate Secretary,7 it follows that they are government owned and/or controlled corporations.
Corollarily, petitioner asserts that respondents Antiporda and Torralba are public officers subject
to the jurisdiction of the Ombudsman.
Petitioner alleges next that public respondent's conclusion that his complaint refers to a breach
of contract is whimsical, capricious and irresponsible amounting to a total disregard of its main
point, i. e., whether private respondents violated The Anti-Graft and Corrupt Practices Act when
they entered into a contract with Southwest Maritime Corporation which was grossly
disadvantageous to the government in general and to the CIIF in particular. Petitioner admits
that his motion for reconsideration was filed out of time. Nonetheless, he advances that public
respondent should have relaxed its rules in the paramount interest of justice; after all, the delay
was just a matter of days and he, a layman not aware of technicalities, personally filed the
complaint.
Private respondents counter that the CIIF companies were duly organized and are existing by
virtue of the Corporation Code. Their stockholders are private individuals and entities. In
addition, private respondents contend that they are not public officers as defined under The Anti-
Graft and Corrupt Practices Act but are private executives appointed by the Boards of Directors
of the CIIF companies. They asseverate that petitioner's motion for reconsideration was filed
through the expert assistance of a learned counsel. They then charge petitioner with forum
shopping since he had similarly filed a case for collection of a sum of money plus damages
before the trial court.
The Office of the Solicitor General maintains that the Ombudsman approved the
recommendation of the investigating officer to dismiss the complaint because he sincerely
believed there was no sufficient basis for the criminal indictment of private respondents.
We find no grave abuse of discretion committed by the Ombudsman. COCOFED
v. PCGG referred to in Republic v. Sandiganbayan reviewed the history of the coconut levy
funds. These funds actually have four (4) general classes: (a) the Coconut Investment Fund
created under R. A. No. 6260; 8 (b) the Coconut Consumers Stabilization Fund created under P.
D. No. 276;9 (c) the Coconut Industry Development Fund created under P. D. No. 582; 10 and, (d)
the Coconut Industry Stabilization Fund created under P. D. No. 1841. 11
The various laws relating to the coconut industry were codified in 1976. On 21 October of that
year, P. D. No. 961 12 was promulgated. On 11 June 1978 it was amended by P. D. No.
1468 13 by inserting a new provision authorizing the use of the balance of the Coconut Industry
Development Fund for the acquisition of "shares of stocks in corporations organized for the
purpose of engaging in the establishment and operation of industries . . . commercial activities
and other allied business undertakings relating to coconut and other palm oil
indust(ries)." 14 From this fund thus created, or the CIIF, shares of stock in what have come to be
known as the "CIIF companies" were purchased.
We then stated in COCOFED that the coconut levy funds were raised by the State's police and
taxing powers such that the utilization and proper management thereof were certainly the
concern of the Government. These funds have a public character and are clearly affected with
public interest.
Quimpo v. Tanodbayan involved the issue as to whether PETROPHIL was a government owned
or controlled corporation the employees of which fell within the jurisdictional purview of the
Tanodbayan for purposes of The Anti-Graft and Corrupt Practices Act. We upheld the
jurisdiction of the Tanodbayan on the ratiocination that —
197
While it may be that PETROPHIL was not originally "created" as a government-owned or
controlled corporation, after it was acquired by PNOC, which is a government-owned or
controlled corporation, PETROPHIL became a subsidiary of PNOC and thus shed-off its private
status. It is now funded and owned by the government as, in fact, it was acquired to perform
functions related to government programs and policies on oil, a vital commodity in the economic
life of the nation. It was acquired not temporarily but as a permanent adjunct to perform essential
government or government-related functions, as the marketing arm of the PNOC to assist the
latter in selling and distributing oil and petroleum products to assure and maintain an adequate
and stable domestic supply.
But these jurisprudential rules invoked by petitioner in support of his claim that the CIIF
companies are government owned and/or controlled corporations are incomplete without
resorting to the definition of "government owned or controlled corporation" contained in par. (13),
Sec. 2, Introductory Provisions of the Administrative Code of 1987, i. e., any agency organized
as a stock or non-stock corporation vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the
extent of at least fifty-one (51) percent of its capital stock. The definition mentions three (3)
requisites, namely, first, any agency organized as a stock or non-stock corporation; second,
vested with functions relating to public needs whether governmental or proprietary in nature;
and, third, owned by the Government directly or through its instrumentalities either wholly, or,
where applicable as in the case of stock corporations, to the extent of at least fifty-one (51)
percent of its capital stock.
In the present case, all three (3) corporations comprising the CIIF companies were organized as
stock corporations.1âwphi1 The UCPB-CIIF owns 44.10% of the shares of LEGASPI OIL,
91.24% of the shares of GRANEXPORT, and 92.85% of the shares of UNITED
COCONUT. 15 Obviously, the below 51% shares of stock in LEGASPI OIL removes this firm from
the definition of a government owned or controlled corporation. Our concern has thus been
limited to GRANEXPORT and UNITED COCONUT as we go back to the second requisite.
Unfortunately, it is in this regard that petitioner failed to substantiate his contentions. There is no
showing that GRANEXPORT and/or UNITED COCONUT was vested with functions relating to
public needs whether governmental or proprietary in nature unlike PETROPHIL in Quimpo. The
Court thus concludes that the CIIF companies are, as found by public respondent, private
corporations not within the scope of its jurisdiction.
With the foregoing conclusion, we find it unnecessary to resolve the other issues raised by
petitioner.
A brief note on private respondents' charge of forum shopping. Executive Secretary
v. Gordon 16 is instructive that forum shopping consists of filing multiple suits involving the same
parties for the same cause of action, either simultaneously or successively, for the purpose of
obtaining a favorable judgment. It is readily apparent that the present charge will not prosper
because the cause of action herein, i. e., violation of The Anti-Graft and Corrupt Practices Act, is
different from the cause of action in the case pending before the trial court which is collection of
a sum of money plus damages.
WHEREFORE, the petition is DISMISSED. The Resolution of public respondent Office of the
Ombudsman of 30 January 1998 which dismissed the complaint of petitioner Manuel M. Leyson
Jr., as well as its Order of 4 June 1998 denying his motion for reconsideration, is AFFIRMED.
Costs against petitioner.1âwphi1.nêt
SO ORDERED.

EN BANC
G. R. No. 175352               January 18, 2011
DANTE V. LIBAN, REYNALDO M. BERNARDO and SALVADOR M. VIARI, Petitioners,
vs.
RICHARD J. GORDON, Respondent.
PHILIPPINE NATIONAL RED CROSS, Intervenor.
RESOLUTION
LEONARDO-DE CASTRO, J.:
This resolves the Motion for Clarification and/or for Reconsideration1 filed on August 10, 2009 by
respondent Richard J. Gordon (respondent) of the Decision promulgated by this Court on July
15, 2009 (the Decision), the Motion for Partial Reconsideration 2 filed on August 27, 2009 by
movant-intervenor Philippine National Red Cross (PNRC), and the latter’s Manifestation and
Motion to Admit Attached Position Paper3 filed on December 23, 2009.
In the Decision,4 the Court held that respondent did not forfeit his seat in the Senate when he
accepted the chairmanship of the PNRC Board of Governors, as "the office of the PNRC
Chairman is not a government office or an office in a government-owned or controlled
corporation for purposes of the prohibition in Section 13, Article VI of the 1987
Constitution."5 The Decision, however, further declared void the PNRC Charter "insofar as it
creates the PNRC as a private corporation" and consequently ruled that "the PNRC should
incorporate under the Corporation Code and register with the Securities and Exchange
Commission if it wants to be a private corporation."6 The dispositive portion of the Decision
reads as follows:
WHEREFORE, we declare that the office of the Chairman of the Philippine National Red Cross
is not a government office or an office in a government-owned or controlled corporation for
purposes of the prohibition in Section 13, Article VI of the 1987 Constitution. We also declare
that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11, 12, and 13 of the Charter of the Philippine
National Red Cross, or Republic Act No. 95, as amended by Presidential Decree Nos. 1264 and
1643, are VOID because they create the PNRC as a private corporation or grant it corporate
powers.7
In his Motion for Clarification and/or for Reconsideration, respondent raises the following
grounds: (1) as the issue of constitutionality of Republic Act (R.A.) No. 95 was not raised by the
parties, the Court went beyond the case in deciding such issue; and (2) as the Court decided
that Petitioners did not have standing to file the instant Petition, the pronouncement of the Court
on the validity of R.A. No. 95 should be considered obiter.8
Respondent argues that the validity of R.A. No. 95 was a non-issue; therefore, it was
unnecessary for the Court to decide on that question. Respondent cites Laurel v.
Garcia,9 wherein the Court said that it "will not pass upon a constitutional question although
properly presented by the record if the case can be disposed of on some other ground" and
goes on to claim that since this Court, in the Decision, disposed of the petition on some other
ground, i.e., lack of standing of petitioners, there was no need for it to delve into the validity of
R.A. No. 95, and the rest of the judgment should be deemed obiter.
In its Motion for Partial Reconsideration, PNRC prays that the Court sustain the constitutionality
of its Charter on the following grounds:
198
A. THE ASSAILED DECISION DECLARING UNCONSTITUTIONAL REPUBLIC ACT NO. 95 AS
AMENDED DEPRIVED INTERVENOR PNRC OF ITS CONSTITUTIONAL RIGHT TO DUE
PROCESS.
1. INTERVENOR PNRC WAS NEVER A PARTY TO THE INSTANT CONTROVERSY.
2. THE CONSTITUTIONALITY OF REPUBLIC ACT NO. 95, AS AMENDED WAS NEVER AN
ISSUE IN THIS CASE.
B. THE CURRENT CHARTER OF PNRC IS PRESIDENTIAL DECREE NO. 1264 AND NOT
REPUBLIC ACT NO. 95. PRESIDENTIAL DECREE NO. 1264 WAS NOT A CREATION OF
CONGRESS.
C. PNRC’S STRUCTURE IS SUI GENERIS; IT IS A CLASS OF ITS OWN. WHILE IT IS
PERFORMING HUMANITARIAN FUNCTIONS AS AN AUXILIARY TO GOVERNMENT, IT IS A
NEUTRAL ENTITY SEPARATE AND INDEPENDENT OF GOVERNMENT CONTROL, YET IT
DOES NOT QUALIFY AS STRICTLY PRIVATE IN CHARACTER.
In his Comment and Manifestation10 filed on November 9, 2009, respondent manifests: (1) that
he agrees with the position taken by the PNRC in its Motion for Partial Reconsideration dated
August 27, 2009; and (2) as of the writing of said Comment and Manifestation, there was
pending before the Congress of the Philippines a proposed bill entitled "An Act Recognizing the
PNRC as an Independent, Autonomous, Non-Governmental Organization Auxiliary to the
Authorities of the Republic of the Philippines in the Humanitarian Field, to be Known as The
Philippine Red Cross."11
After a thorough study of the arguments and points raised by the respondent as well as those of
movant-intervenor in their respective motions, we have reconsidered our pronouncements in our
Decision dated July 15, 2009 with regard to the nature of the PNRC and the constitutionality of
some provisions of the PNRC Charter, R.A. No. 95, as amended.
As correctly pointed out in respondent’s Motion, the issue of constitutionality of R.A. No. 95 was
not raised by the parties, and was not among the issues defined in the body of the Decision;
thus, it was not the very lis mota of the case. We have reiterated the rule as to when the Court
will consider the issue of constitutionality in Alvarez v. PICOP Resources, Inc.,12 thus:
This Court will not touch the issue of unconstitutionality unless it is the very lis mota. It is a well-
established rule that a court should not pass upon a constitutional question and decide a law to
be unconstitutional or invalid, unless such question is raised by the parties and that when it is
raised, if the record also presents some other ground upon which the court may [rest] its
judgment, that course will be adopted and the constitutional question will be left for consideration
until such question will be unavoidable.13
Under the rule quoted above, therefore, this Court should not have declared void certain
sections of R.A. No. 95, as amended by Presidential Decree (P.D.) Nos. 1264 and 1643, the
PNRC Charter. Instead, the Court should have exercised judicial restraint on this matter,
especially since there was some other ground upon which the Court could have based its
judgment. Furthermore, the PNRC, the entity most adversely affected by this declaration of
unconstitutionality, which was not even originally a party to this case, was being compelled, as a
consequence of the Decision, to suddenly reorganize and incorporate under the Corporation
Code, after more than sixty (60) years of existence in this country.

Its existence as a chartered corporation remained unchallenged on ground of unconstitutionality
notwithstanding that R.A. No. 95 was enacted on March 22, 1947 during the effectivity of the
1935 Constitution, which provided for a proscription against the creation of private corporations
by special law, to wit:
SEC. 7. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations, unless such corporations are owned and controlled by the
Government or any subdivision or instrumentality thereof. (Art. XIV, 1935 Constitution.)
Similar provisions are found in Article XIV, Section 4 of the 1973 Constitution and Article XII,
Section 16 of the 1987 Constitution. The latter reads:
SECTION 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled corporations
may be created or established by special charters in the interest of the common good and
subject to the test of economic viability.
Since its enactment, the PNRC Charter was amended several times, particularly on June 11,
1953, August 16, 1971, December 15, 1977, and October 1, 1979, by virtue of R.A. No. 855,
R.A. No. 6373, P.D. No. 1264, and P.D. No. 1643, respectively. The passage of several laws
relating to the PNRC’s corporate existence notwithstanding the effectivity of the constitutional
proscription on the creation of private corporations by law, is a recognition that the PNRC is not
strictly in the nature of a private corporation contemplated by the aforesaid constitutional ban.
A closer look at the nature of the PNRC would show that there is none like it not just in terms of
structure, but also in terms of history, public service and official status accorded to it by the State
and the international community. There is merit in PNRC’s contention that its structure is sui
generis.
The PNRC succeeded the chapter of the American Red Cross which was in existence in the
Philippines since 1917. It was created by an Act of Congress after the Republic of the
Philippines became an independent nation on July 6, 1946 and proclaimed on February 14,
1947 its adherence to the Convention of Geneva of July 29, 1929 for the Amelioration of the
Condition of the Wounded and Sick of Armies in the Field (the "Geneva Red Cross
Convention"). By that action the Philippines indicated its desire to participate with the nations of
the world in mitigating the suffering caused by war and to establish in the Philippines a voluntary
organization for that purpose and like other volunteer organizations established in other
countries which have ratified the Geneva Conventions, to promote the health and welfare of the
people in peace and in war.14
The provisions of R.A. No. 95, as amended by R.A. Nos. 855 and 6373, and further amended by
P.D. Nos. 1264 and 1643, show the historical background and legal basis of the creation of the
PNRC by legislative fiat, as a voluntary organization impressed with public interest. Pertinently
R.A. No. 95, as amended by P.D. 1264, provides:
WHEREAS, during the meeting in Geneva, Switzerland, on 22 August 1894, the nations of the
world unanimously agreed to diminish within their power the evils inherent in war;
WHEREAS, more than one hundred forty nations of the world have ratified or adhered to the
Geneva Conventions of August 12, 1949 for the Amelioration of the Condition of the Wounded
and Sick of Armed Forces in the Field and at Sea, The Prisoners of War, and The Civilian
Population in Time of War referred to in this Charter as the Geneva Conventions;
199
WHEREAS, the Republic of the Philippines became an independent nation on July 4, 1946, and
proclaimed on February 14, 1947 its adherence to the Geneva Conventions of 1929, and by the
action, indicated its desire to participate with the nations of the world in mitigating the suffering
caused by war and to establish in the Philippines a voluntary organization for that purpose as
contemplated by the Geneva Conventions;
WHEREAS, there existed in the Philippines since 1917 a chapter of the American National Red
Cross which was terminated in view of the independence of the Philippines; and
WHEREAS, the volunteer organizations established in other countries which have ratified or
adhered to the Geneva Conventions assist in promoting the health and welfare of their people in
peace and in war, and through their mutual assistance and cooperation directly and through
their international organizations promote better understanding and sympathy among the people
of the world;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the
powers vested in me by the Constitution as Commander-in-Chief of all the Armed Forces of the
Philippines and pursuant to Proclamation No. 1081 dated September 21, 1972, and General
Order No. 1 dated September 22, 1972, do hereby decree and order that Republic Act No. 95,
Charter of the Philippine National Red Cross (PNRC) as amended by Republic Acts No. 855 and
6373, be further amended as follows:
Section 1. There is hereby created in the Republic of the Philippines a body corporate and
politic to be the voluntary organization officially designated to assist the Republic of the
Philippines in discharging the obligations set forth in the Geneva Conventions and to perform
such other duties as are inherent upon a national Red Cross Society. The national headquarters
of this Corporation shall be located in Metropolitan Manila. (Emphasis supplied.)
The significant public service rendered by the PNRC can be gleaned from Section 3 of its
Charter, which provides:
Section 3. That the purposes of this Corporation shall be as follows:
(a) To provide volunteer aid to the sick and wounded of armed forces in time of war, in
accordance with the spirit of and under the conditions prescribed by the Geneva Conventions to
which the Republic of the Philippines proclaimed its adherence;
(b) For the purposes mentioned in the preceding sub-section, to perform all duties devolving
upon the Corporation as a result of the adherence of the Republic of the Philippines to the said
Convention;
(c) To act in matters of voluntary relief and in accordance with the authorities of the armed
forces as a medium of communication between people of the Republic of the Philippines and
their Armed Forces, in time of peace and in time of war, and to act in such matters between
similar national societies of other governments and the Governments and people and the Armed
Forces of the Republic of the Philippines;
(d) To establish and maintain a system of national and international relief in time of peace and in
time of war and apply the same in meeting and emergency needs caused by typhoons, flood,
fires, earthquakes, and other natural disasters and to devise and carry on measures for
minimizing the suffering caused by such disasters;
(e) To devise and promote such other services in time of peace and in time of war as may be
found desirable in improving the health, safety and welfare of the Filipino people;

(f) To devise such means as to make every citizen and/or resident of the Philippines a member
of the Red Cross.
The PNRC is one of the National Red Cross and Red Crescent Societies, which, together with
the International Committee of the Red Cross (ICRC) and the IFRC and RCS, make up the
International Red Cross and Red Crescent Movement (the Movement). They constitute a
worldwide humanitarian movement, whose mission is:
[T]o prevent and alleviate human suffering wherever it may be found, to protect life and health
and ensure respect for the human being, in particular in times of armed conflict and other
emergencies, to work for the prevention of disease and for the promotion of health and social
welfare, to encourage voluntary service and a constant readiness to give help by the members
of the Movement, and a universal sense of solidarity towards all those in need of its protection
and assistance.15
The PNRC works closely with the ICRC and has been involved in humanitarian activities in the
Philippines since 1982. Among others, these activities in the country include:
1. Giving protection and assistance to civilians displaced or otherwise affected by armed clashes
between the government and armed opposition groups, primarily in Mindanao;
2. Working to minimize the effects of armed hostilities and violence on the population;
3. Visiting detainees; and
4. Promoting awareness of international humanitarian law in the public and private sectors.16
National Societies such as the PNRC act as auxiliaries to the public authorities of their own
countries in the humanitarian field and provide a range of services including disaster relief and
health and social programmes.
The International Federation of Red Cross (IFRC) and Red Crescent Societies (RCS) Position
Paper,17 submitted by the PNRC, is instructive with regard to the elements of the specific nature
of the National Societies such as the PNRC, to wit:
National Societies, such as the Philippine National Red Cross and its sister Red Cross and Red
Crescent Societies, have certain specificities deriving from the 1949 Geneva Convention and the
Statutes of the International Red Cross and Red Crescent Movement (the Movement). They are
also guided by the seven Fundamental Principles of the Red Cross and Red Crescent
Movement: Humanity, Impartiality, Neutrality, Independence, Voluntary Service, Unity and
Universality.
A National Society partakes of a sui generis character. It is a protected component of the Red
Cross movement under Articles 24 and 26 of the First Geneva Convention, especially in times of
armed conflict. These provisions require that the staff of a National Society shall be respected
and protected in all circumstances. Such protection is not ordinarily afforded by an international
treaty to ordinary private entities or even non-governmental organisations (NGOs). This sui
generis character is also emphasized by the Fourth Geneva Convention which holds that an
Occupying Power cannot require any change in the personnel or structure of a National
Society. National societies are therefore organizations that are directly regulated by
international humanitarian law, in contrast to other ordinary private entities, including
NGOs.
xxxx
200
In addition, National Societies are not only officially recognized by their public authorities as
voluntary aid societies, auxiliary to the public authorities in the humanitarian field, but also
benefit from recognition at the International level. This is considered to be an element
distinguishing National Societies from other organisations (mainly NGOs) and other forms of
humanitarian response.
x x x. No other organisation belongs to a world-wide Movement in which all Societies have equal
status and share equal responsibilities and duties in helping each other. This is considered to be
the essence of the Fundamental Principle of Universality.
Furthermore, the National Societies are considered to be auxiliaries to the public authorities in
the humanitarian field. x x x.
The auxiliary status of [a] Red Cross Society means that it is at one and the same time a
private institution and a public service organization because the very nature of its work
implies cooperation with the authorities, a link with the State. In carrying out their major
functions, Red Cross Societies give their humanitarian support to official bodies, in general
having larger resources than the Societies, working towards comparable ends in a given sector.
x x x No other organization has a duty to be its government’s humanitarian partner while
remaining independent.18 (Emphases ours.)
It is in recognition of this sui generis character of the PNRC that R.A. No. 95 has remained valid
and effective from the time of its enactment in March 22, 1947 under the 1935 Constitution and
during the effectivity of the 1973 Constitution and the 1987 Constitution.
The PNRC Charter and its amendatory laws have not been questioned or challenged on
constitutional grounds, not even in this case before the Court now.
In the Decision, the Court, citing Feliciano v. Commission on Audit, 19 explained that the purpose
of the constitutional provision prohibiting Congress from creating private corporations was to
prevent the granting of special privileges to certain individuals, families, or groups, which were
denied to other groups. Based on the above discussion, it can be seen that the PNRC Charter
does not come within the spirit of this constitutional provision, as it does not grant special
privileges to a particular individual, family, or group, but creates an entity that strives to serve the
common good.
Furthermore, a strict and mechanical interpretation of Article XII, Section 16 of the 1987
Constitution will hinder the State in adopting measures that will serve the public good or national
interest. It should be noted that a special law, R.A. No. 9520, the Philippine Cooperative Code of
2008, and not the general corporation code, vests corporate power and capacities upon
cooperatives which are private corporations, in order to implement the State’s avowed policy.
In the Decision of July 15, 2009, the Court recognized the public service rendered by the PNRC
as the government’s partner in the observance of its international commitments, to wit:
The PNRC is a non-profit, donor-funded, voluntary, humanitarian organization, whose mission is
to bring timely, effective, and compassionate humanitarian assistance for the most vulnerable
without consideration of nationality, race, religion, gender, social status, or political affiliation.
The PNRC provides six major services: Blood Services, Disaster Management, Safety Services,
Community Health and Nursing, Social Services and Voluntary Service.

The Republic of the Philippines, adhering to the Geneva Conventions, established the PNRC as
a voluntary organization for the purpose contemplated in the Geneva Convention of 27 July
1929. x x x.20 (Citations omitted.)
So must this Court recognize too the country’s adherence to the Geneva Convention and
respect the unique status of the PNRC in consonance with its treaty obligations. The
Geneva Convention has the force and effect of law. 21 Under the Constitution, the Philippines
adopts the generally accepted principles of international law as part of the law of the land. 22 This
constitutional provision must be reconciled and harmonized with Article XII, Section 16 of the
Constitution, instead of using the latter to negate the former.
By requiring the PNRC to organize under the Corporation Code just like any other private
corporation, the Decision of July 15, 2009 lost sight of the PNRC’s special status under
international humanitarian law and as an auxiliary of the State, designated to assist it in
discharging its obligations under the Geneva Conventions. Although the PNRC is called to be
independent under its Fundamental Principles, it interprets such independence as inclusive of its
duty to be the government’s humanitarian partner. To be recognized in the International
Committee, the PNRC must have an autonomous status, and carry out its humanitarian mission
in a neutral and impartial manner.
However, in accordance with the Fundamental Principle of Voluntary Service of National
Societies of the Movement, the PNRC must be distinguished from private and profit-making
entities. It is the main characteristic of National Societies that they "are not inspired by the desire
for financial gain but by individual commitment and devotion to a humanitarian purpose freely
chosen or accepted as part of the service that National Societies through its volunteers and/or
members render to the Community."23
The PNRC, as a National Society of the International Red Cross and Red Crescent Movement,
can neither "be classified as an instrumentality of the State, so as not to lose its character of
neutrality" as well as its independence, nor strictly as a private corporation since it is regulated
by international humanitarian law and is treated as an auxiliary of the State.24
Based on the above, the sui generis status of the PNRC is now sufficiently
established.1âwphi1 Although it is neither a subdivision, agency, or instrumentality of the
government, nor a government-owned or -controlled corporation or a subsidiary thereof, as
succinctly explained in the Decision of July 15, 2009, so much so that respondent, under the
Decision, was correctly allowed to hold his position as Chairman thereof concurrently while he
served as a Senator, such a conclusion does not ipso facto imply that the PNRC is a "private
corporation" within the contemplation of the provision of the Constitution, that must be organized
under the Corporation Code. As correctly mentioned by Justice Roberto A. Abad, the sui generis
character of PNRC requires us to approach controversies involving the PNRC on a case-to-case
basis.
In sum, the PNRC enjoys a special status as an important ally and auxiliary of the government in
the humanitarian field in accordance with its commitments under international law. This Court
cannot all of a sudden refuse to recognize its existence, especially since the issue of the
constitutionality of the PNRC Charter was never raised by the parties. It bears emphasizing that
the PNRC has responded to almost all national disasters since 1947, and is widely known to
provide a substantial portion of the country’s blood requirements. Its humanitarian work is
unparalleled. The Court should not shake its existence to the core in an untimely and drastic
manner that would not only have negative consequences to those who depend on it in times of
disaster and armed hostilities but also have adverse effects on the image of the Philippines in
201
the international community. The sections of the PNRC Charter that were declared void must
therefore stay.
WHEREFORE, premises considered, respondent Richard J. Gordon’s Motion for Clarification
and/or for Reconsideration and movant-intervenor PNRC’s Motion for Partial Reconsideration of
the Decision in G.R. No. 175352 dated July 15, 2009 are GRANTED. The constitutionality of
R.A. No. 95, as amended, the charter of the Philippine National Red Cross, was not raised by
the parties as an issue and should not have been passed upon by this Court. The structure of
the PNRC is sui generis¸ being neither strictly private nor public in nature. R.A. No. 95 remains
valid and constitutional in its entirety. The dispositive portion of the Decision should therefore be
MODIFIED by deleting the second sentence, to now read as follows:
WHEREFORE, we declare that the office of the Chairman of the Philippine National Red Cross
is not a government office or an office in a government-owned or controlled corporation for
purposes of the prohibition in Section 13, Article VI of the 1987 Constitution.
SO ORDERED.
EN BANC
G.R. No. 147402             January 14, 2004
ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte
Metropolitan Water District (LMWD), Tacloban City, petitioner,
vs.
COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C.
FLORES and EMMANUEL M. DALMAN, and Regional Director of COA Region
VIII, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari1 to annul the Commission on Audit’s ("COA") Resolution dated 3
January 2000 and the Decision dated 30 January 2001 denying the Motion for Reconsideration.
The COA denied petitioner Ranulfo C. Feliciano’s request for COA to cease all audit services,
and to stop charging auditing fees, to Leyte Metropolitan Water District ("LMWD"). The COA also
denied petitioner’s request for COA to refund all auditing fees previously paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD.
Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting payment of
auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12 October 1999
informing COA’s Regional Director that the water district could not pay the auditing fees.

Petitioner cited as basis for his action Sections 6 and 20 of Presidential Decree 198 ("PD 198") 2 ,
as well as Section 18 of Republic Act No. 6758 ("RA 6758"). The Regional Director referred
petitioner’s reply to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all
auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangan’s Resolution dated 3
January 2000 denying his requests. Petitioner filed a motion for reconsideration on 31 March
2000, which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions
of the Visayas Association of Water Districts (VAWD) and the Philippine Association of Water
Districts (PAWD) supporting the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COA’s audit jurisdiction over local water
districts in Davao City Water District v. Civil Service Commission and Commission on
Audit,3 as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught
petitioner’s contention that they are private corporations. It is clear therefrom that the power to
appoint the members who will comprise the members of the Board of Directors belong to the
local executives of the local subdivision unit where such districts are located. In contrast, the
members of the Board of Directors or the trustees of a private corporation are elected from
among members or stockholders thereof. It would not be amiss at this point to emphasize that a
private corporation is created for the private purpose, benefit, aim and end of its members or
stockholders. Necessarily, said members or stockholders should be given a free hand to choose
who will compose the governing body of their corporation. But this is not the case here and this
clearly indicates that petitioners are not private corporations.
The COA also denied petitioner’s request for COA to stop charging auditing fees as well as
petitioner’s request for COA to refund all auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess
of jurisdiction by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the
following issues for resolution:
1. Whether a Local Water District ("LWD") created under PD 198, as amended, is a government-
owned or controlled corporation subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COA’s certified public accountants
from auditing local water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and
controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
202
The Constitution and existing laws4 mandate COA to audit all government agencies, including
government-owned and controlled corporations ("GOCCs") with original charters. An LWD is a
GOCC with an original charter. Section 2(1), Article IX-D of the Constitution provides for COA’s
audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses
of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where
the internal control system of the audited agencies is inadequate, the Commission may adopt
such measures, including temporary or special pre-audit, as are necessary and appropriate to
correct the deficiencies. It shall keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers and other supporting papers
pertaining thereto. (Emphasis supplied)
The COA’s audit jurisdiction extends not only to government "agencies or instrumentalities," but
also to "government-owned and controlled corporations with original charters" as well as "other
government-owned or controlled corporations" without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine
backed by a long line of cases culminating in Davao City Water District v. Civil Service
Commission5 and just recently reiterated in De Jesus v. Commission on Audit.6 Petitioner
maintains that LWDs are not government-owned and controlled corporations with original
charters. Petitioner even argues that LWDs are private corporations. Petitioner asks the Court to
consider certain interpretations of the applicable laws, which would give a "new perspective to
the issue of the true character of water districts."7
Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration
("LWUA") and not the LWDs. Petitioner claims that LWDs are created "pursuant to" and not
created directly by PD 198. Thus, petitioner concludes that PD 198 is not an "original charter"
that would place LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article IX-
D of the Constitution. Petitioner elaborates that PD 198 does not create LWDs since it does not
expressly direct the creation of such entities, but only provides for their formation on an optional
or voluntary basis.8 Petitioner adds that the operative act that creates an LWD is the approval of
the Sanggunian Resolution as specified in PD 198.
Petitioner’s contention deserves scant consideration.
We begin by explaining the general framework under the fundamental law. The Constitution
recognizes two classes of corporations. The first refers to private corporations created under a
general law. The second refers to government-owned or controlled corporations created by
special charters. Section 16, Article XII of the Constitution provides:

Sec. 16. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned or controlled corporations may be
created or established by special charters in the interest of the common good and subject to the
test of economic viability.
The Constitution emphatically prohibits the creation of private corporations except by a general
law applicable to all citizens.9 The purpose of this constitutional provision is to ban private
corporations created by special charters, which historically gave certain individuals, families or
groups special privileges denied to other citizens.10
In short, Congress cannot enact a law creating a private corporation with a special charter. Such
legislation would be unconstitutional. Private corporations may exist only under a general law. If
the corporation is private, it must necessarily exist under a general law. Stated differently, only
corporations created under a general law can qualify as private corporations. Under existing
laws, that general law is the Corporation Code,11 except that the Cooperative Code governs the
incorporation of cooperatives.12
The Constitution authorizes Congress to create government-owned or controlled corporations
through special charters. Since private corporations cannot have special charters, it follows that
Congress can create corporations with special charters only if such corporations are
government-owned or controlled.
Obviously, LWDs are not private corporations because they are not created under the
Corporation Code. LWDs are not registered with the Securities and Exchange Commission.
Section 14 of the Corporation Code states that "[A]ll corporations organized under this code
shall file with the Securities and Exchange Commission articles of incorporation x x x." LWDs
have no articles of incorporation, no incorporators and no stockholders or members. There are
no stockholders or members to elect the board directors of LWDs as in the case of all
corporations registered with the Securities and Exchange Commission. The local mayor or the
provincial governor appoints the directors of LWDs for a fixed term of office. This Court has ruled
that LWDs are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the coverage of
the CSC are those corporations created pursuant to the Corporation Code. Significantly,
petitioners are not created under the said code, but on the contrary, they were created
pursuant to a special law and are governed primarily by its provision.13 (Emphasis
supplied)
LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the
Constitution only government-owned or controlled corporations may have special charters,
LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs are
private corporations with a special charter is to admit that their existence is constitutionally
infirm.
Unlike private corporations, which derive their legal existence and power from the Corporation
Code, LWDs derive their legal existence and power from PD 198. Sections 6 and 25 of PD
19814 provide:
Section 6. Formation of District. — This Act is the source of authorization and power to form
and maintain a district. For purposes of this Act, a district shall be considered as a quasi-
public corporation performing public service and supplying public wants. As such, a
district shall exercise the powers, rights and privileges given to private corporations
203
under existing laws, in addition to the powers granted in, and subject to such restrictions
imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city, municipality, or
province, or region thereof, served by said system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a city or municipality, such
boundary may include all lands within the city or municipality. A district may include one or more
municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities
managed, operated by or under the control of such city, municipality or province to such district
upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall include those
purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of term of office for
each.
(f) A statement that the district may only be dissolved on the grounds and under the conditions
set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of
this Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the
power to dissolve, alter or affect the district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a
single district, a similar resolution shall be adopted in each city, municipality and province.
xxx
Sec. 25. Authorization. — The district may exercise all the powers which are expressly
granted by this Title or which are necessarily implied from or incidental to the powers and
purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is
hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to
review by the Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on
LWDs corporate powers. Section 6 of PD 198 provides that LWDs "shall exercise the powers,
rights and privileges given to private corporations under existing laws." Without PD 198, LWDs
would have no corporate powers. Thus, PD 198 constitutes the special enabling charter of
LWDs. The ineluctable conclusion is that LWDs are government-owned and controlled
corporations with a special charter.
The phrase "government-owned and controlled corporations with original charters" means
GOCCs created under special laws and not under the general incorporation law. There is no
difference between the term "original charters" and "special charters." The Court clarified this
in National Service Corporation v. NLRC 15 by citing the deliberations in the Constitutional
Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.

Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now
read as follows: "including government-owned or controlled corporations WITH ORIGINAL
CHARTERS." The purpose of this amendment is to indicate that government corporations such
as the GSIS and SSS, which have original charters, fall within the ambit of the civil service.
However, corporations which are subsidiaries of these chartered agencies such as the
Philippine Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?
MR. FOZ. Just one question, Mr. Presiding Officer. By the term "original charters," what
exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of Congress, or by
special law.
MR. FOZ. And not under the general corporation law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
Again, in Davao City Water District v. Civil Service Commission,16 the Court reiterated the
meaning of the phrase "government-owned and controlled corporations with original charters" in
this wise:
By "government-owned or controlled corporation with original charter," We mean
government owned or controlled corporation created by a special law and not under the
Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819,
February 8, 1989, 170 SCRA 79, 82), We held:
"The Court, in National Service Corporation (NASECO) v. National Labor Relations
Commission, G.R. No. 69870, promulgated on 29 November 1988, quoting extensively
from the deliberations of the 1986 Constitutional Commission in respect of the intent and
meaning of the new phrase ‘with original charter,’ in effect held that government-owned
and controlled corporations with original charter refer to corporations chartered by
special law as distinguished from corporations organized under our general
incorporation statute — the Corporation Code. In NASECO, the company involved had been
organized under the general incorporation statute and was a subsidiary of the National
Investment Development Corporation (NIDC) which in turn was a subsidiary of the Philippine
National Bank, a bank chartered by a special statute. Thus, government-owned or controlled
corporations like NASECO are effectively, excluded from the scope of the Civil Service."
(Emphasis supplied)
Petitioner’s contention that the Sangguniang Bayan resolution creates the LWDs assumes that
the Sangguniang Bayan has the power to create corporations. This is a patently baseless
assumption. The Local Government Code 17 does not vest in the Sangguniang Bayan the power
to create corporations.18 What the Local Government Code empowers the Sangguniang Bayan
204
to do is to provide for the establishment of a waterworks system "subject to existing laws." Thus,
Section 447(5)(vii) of the Local Government Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. — (a) The sangguniang bayan,
as the legislative body of the municipality, shall enact ordinances, approve resolutions and
appropriate funds for the general welfare of the municipality and its inhabitants pursuant to
Section 16 of this Code and in the proper exercise of the corporate powers of the municipality as
provided for under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and repair
of an efficient waterworks system to supply water for the inhabitants; regulate the construction,
maintenance, repair and use of hydrants, pumps, cisterns and reservoirs; protect the purity and
quantity of the water supply of the municipality and, for this purpose, extend the coverage of
appropriate ordinances over all territory within the drainage area of said water supply and within
one hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or
watershed used in connection with the water service; and regulate the consumption, use or
wastage of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in accordance with the
provisions of PD 198. The Sangguniang Bayan has no power to create a corporate entity that
will operate its waterworks system. However, the Sangguniang Bayan may avail of existing
enabling laws, like PD 198, to form and incorporate a water district. Besides, even assuming for
the sake of argument that the Sangguniang Bayan has the power to create corporations, the
LWDs would remain government-owned or controlled corporations subject to COA’s audit
jurisdiction. The resolution of the Sangguniang Bayan would constitute an LWD’s special
charter, making the LWD a government-owned and controlled corporation with an original
charter. In any event, the Court has already ruled in Baguio Water District v. Trajano19 that the
Sangguniang Bayan resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for the final creation of a
district, this Court is of the opinion that said resolution cannot be considered as its charter, the
same being intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order that it
may have an original charter. In short, petitioner argues that one special law cannot serve as
enabling law for several GOCCs but only for one GOCC. Section 16, Article XII of the
Constitution mandates that "Congress shall not, except by general law,"20 provide for the
creation of private corporations. Thus, the Constitution prohibits one special law to create one
private corporation, requiring instead a "general law" to create private corporations. In contrast,
the same Section 16 states that "Government-owned or controlled corporations may be created
or established by special charters." Thus, the Constitution permits Congress to create a GOCC
with a special charter. There is, however, no prohibition on Congress to create several GOCCs
of the same class under one special enabling charter.
The rationale behind the prohibition on private corporations having special charters does not
apply to GOCCs. There is no danger of creating special privileges to certain individuals, families
or groups if there is one special law creating each GOCC. Certainly, such danger will not exist
whether one special law creates one GOCC, or one special enabling law creates several
GOCCs. Thus, Congress may create GOCCs either by special charters specific to each GOCC,

or by one special enabling charter applicable to a class of GOCCs, like PD 198 which applies
only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of PD
19821 declares that LWDs "shall be considered quasi-public" in nature. Petitioner’s rationale is
that only private corporations may be deemed "quasi-public" and not public corporations. Put
differently, petitioner rationalizes that a public corporation cannot be deemed "quasi-public"
because such corporation is already public. Petitioner concludes that the term "quasi-public" can
only apply to private corporations. Petitioner’s argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COA’s audit jurisdiction
depends on the government’s ownership or control of a corporation. The nature of the
corporation, whether it is private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over "government-owned and controlled
corporations with original charters," as well as "government-owned or controlled corporations"
without original charters. GOCCs with original charters are subject to COA pre-audit, while
GOCCs without original charters are subject to COA post-audit. GOCCs without original charters
refer to corporations created under the Corporation Code but are owned or controlled by the
government. The nature or purpose of the corporation is not material in determining COA’s audit
jurisdiction. Neither is the manner of creation of a corporation, whether under a general or
special law.
The determining factor of COA’s audit jurisdiction is government ownership or control of the
corporation. In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans
Bank,22 the Court even ruled that the criterion of ownership and control is more important than
the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that "the
Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the
Government, including government-owned or controlled corporations with original charters." As
the Bank is not owned or controlled by the Government although it does have an original
charter in the form of R.A. No. 3518, 23 it clearly does not fall under the Civil Service and
should be regarded as an ordinary commercial corporation. Section 28 of the said law so
provides. The consequence is that the relations of the Bank with its employees should be
governed by the labor laws, under which in fact they have already been paid some of their
claims. (Emphasis supplied)
Certainly, the government owns and controls LWDs. The government organizes LWDs in
accordance with a specific law, PD 198. There is no private party involved as co-owner in the
creation of an LWD. Just prior to the creation of LWDs, the national or local government owns
and controls all their assets. The government controls LWDs because under PD 198 the
municipal or city mayor, or the provincial governor, appoints all the board directors of an LWD
for a fixed term of six years.24 The board directors of LWDs are not co-owners of the LWDs.
LWDs have no private stockholders or members. The board directors and other personnel of
LWDs are government employees subject to civil service laws25 and anti-graft laws.26
While Section 8 of PD 198 states that "[N]o public official shall serve as director" of an LWD, it
only means that the appointees to the board of directors of LWDs shall come from the private
sector. Once such private sector representatives assume office as directors, they become public
officials governed by the civil service law and anti-graft laws. Otherwise, Section 8 of PD 198
would contravene Section 2(1), Article IX-B of the Constitution declaring that the civil service
includes "government-owned or controlled corporations with original charters."
205
If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then
they would fall under the term "agencies or instrumentalities" of the government and thus still
subject to COA’s audit jurisdiction. However, the stark and undeniable fact is that the
government owns LWDs. Section 45 27 of PD 198 recognizes government ownership of LWDs
when Section 45 states that the board of directors may dissolve an LWD only on the condition
that "another public entity has acquired the assets of the district and has assumed all
obligations and liabilities attached thereto." The implication is clear that an LWD is a public and
not a private entity.
Petitioner does not allege that some entity other than the government owns or controls LWDs.
Instead, petitioner advances the theory that the "Water District’s owner is the District
itself."28 Assuming for the sake of argument that an LWD is "self-owned," 29 as petitioner
describes an LWD, the government in any event controls all LWDs. First, government officials
appoint all LWD directors to a fixed term of office. Second, any per diem of LWD directors in
excess of P50 is subject to the approval of the Local Water Utilities Administration, and directors
can receive no other compensation for their services to the LWD.30 Third, the Local Water
Utilities Administration can require LWDs to merge or consolidate their facilities or
operations.31 This element of government control subjects LWDs to COA’s audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the
transfer of ownership of water facilities from local government units to their respective water
districts as mandated by PD 198. Petitioner is grasping at straws. Privatization involves the
transfer of government assets to a private entity. Petitioner concedes that the owner of the
assets transferred under Section 6 (c) of PD 198 is no other than the LWD itself. 32 The transfer of
assets mandated by PD 198 is a transfer of the water systems facilities "managed, operated by
or under the control of such city, municipality or province to such (water) district." 33 In short, the
transfer is from one government entity to another government entity. PD 198 is bereft of any
indication that the transfer is to privatize the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the government owns and controls
LWDs, Section 20 of PD 198 prevents COA from auditing LWDs. 34 Section 20 of PD 198
provides:
Sec. 20. System of Business Administration. — The Board shall, as soon as practicable,
prescribe and define by resolution a system of business administration and accounting for the
district, which shall be patterned upon and conform to the standards established by the
Administration. Auditing shall be performed by a certified public accountant not in the
government service. The Administration may, however, conduct annual audits of the fiscal
operations of the district to be performed by an auditor retained by the Administration. Expenses
incurred in connection therewith shall be borne equally by the water district concerned and the
Administration.35 (Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for
that matter, from auditing LWDs. Petitioner asserts that this is the import of the second sentence
of Section 20 of PD 198 when it states that "[A]uditing shall be performed by a certified public
accountant not in the government service."36
PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude
GOCCs like LWDs from COA’s audit jurisdiction. Section 3, Article IX-C of the Constitution
outlaws any scheme or devise to escape COA’s audit jurisdiction, thus:

Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any
guise whatever, or any investment of public funds, from the jurisdiction of the Commission on
Audit. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to
annul provisions of Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs
from COA audit. The following exchange in the deliberations of the Constitutional Commission
elucidates this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report
which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE
GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS
OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of the absence of a
legislature in the past to obtain presidential decrees exempting themselves from the
jurisdiction of the Commission on Audit, one notable example of which is the Philippine
National Oil Company which is really an empty shell. It is a holding corporation by itself, and
strictly on its own account. Its funds were not very impressive in quantity but underneath that
shell there were billions of pesos in a multiplicity of companies. The PNOC — the empty shell —
under a presidential decree was covered by the jurisdiction of the Commission on Audit, but the
billions of pesos invested in different corporations underneath it were exempted from the
coverage of the Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission on Audit has
determined that the coconut levy is a form of taxation; and that, therefore, these funds attributed
to the shares of 1,400,000 coconut farmers are, in effect, public funds. And that was, I think, the
basis of the PCGG in undertaking that last major sequestration of up to 94 percent of all the
shares in the United Coconut Planters Bank. The charter of the UCPB, through a presidential
decree, exempted it from the jurisdiction of the Commission on Audit, it being a private
organization.
So these are the fetuses of future abuse that we are slaying right here with this additional
section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING
ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR
ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION
ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on the proposed amendment of
Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will
accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
206
MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: "(c) government-owned or controlled
corporations and their subsidiaries"? So that if these government-owned and controlled
corporations and their subsidiaries are subjected to the audit of the COA, any law exempting
certain government corporations or subsidiaries will be already unconstitutional.
So I believe, Madam President, that the proposed amendment is unnecessary.
MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the
point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the
past, because the same provision was in the 1973 Constitution and yet somehow a law or a
decree was passed where certain institutions were exempted from audit. We are just reaffirming,
emphasizing, the role of the Commission on Audit so that this problem will never arise in the
future.37
There is an irreconcilable conflict between the second sentence of Section 20 of PD 198
prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IX-D of the
Constitution vesting in COA the power to audit all GOCCs. We rule that the second sentence of
Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article IX-D of the
Constitution.
On the Legality of COA’s
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services violate the
prohibition in Section 18 of RA 6758,38 which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. –
In order to preserve the independence and integrity of the Commission on Audit (COA), its
officials and employees are prohibited from receiving salaries, honoraria, bonuses, allowances
or other emoluments from any government entity, local government unit, government-owned or
controlled corporations, and government financial institutions, except those compensation
paid directly by COA out of its appropriations and contributions.
Government entities, including government-owned or controlled corporations including financial
institutions and local government units are hereby prohibited from assessing or billing other
government entities, including government-owned or controlled corporations including financial
institutions or local government units for services rendered by its officials and employees as part
of their regular functions for purposes of paying additional compensation to said officials and
employees. (Emphasis supplied)
Claiming that Section 18 is "absolute and leaves no doubt," 39 petitioner asks COA to discontinue
its practice of charging auditing fees to LWDs since such practice allegedly violates the law.
Petitioner’s claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from
any government entity except "compensation paid directly by COA out of its appropriations

and contributions." Thus, RA 6758 itself recognizes an exception to the statutory ban on COA
personnel receiving compensation from GOCCs. In Tejada v. Domingo,40 the Court declared:
There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen
further the policy x x x to preserve the independence and integrity of the COA, by explicitly
PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria, bonuses,
allowances or other emoluments from any government entity, local government unit, GOCCs
and government financial institutions, except such compensation paid directly by the COA
out of its appropriations and contributions, and (2) government entities, including GOCCs,
government financial institutions and local government units from assessing or billing other
government entities, GOCCs, government financial institutions or local government units for
services rendered by the latter’s officials and employees as part of their regular functions for
purposes of paying additional compensation to said officials and employees.
xxx
The first aspect of the strategy is directed to the COA itself, while the second aspect is
addressed directly against the GOCCs and government financial institutions. Under the first,
COA personnel assigned to auditing units of GOCCs or government financial institutions
can receive only such salaries, allowances or fringe benefits paid directly by the COA out
of its appropriations and contributions. The contributions referred to are the cost of audit
services earlier mentioned which cannot include the extra emoluments or benefits now
claimed by petitioners. The COA is further barred from assessing or billing GOCCs and
government financial institutions for services rendered by its personnel as part of their regular
audit functions for purposes of paying additional compensation to such personnel. x x x.
(Emphasis supplied)
In Tejada, the Court explained the meaning of the word "contributions" in Section 18 of RA
6758, which allows COA to charge GOCCs the cost of its audit services:
x x x the contributions from the GOCCs are limited to the cost of audit services which are based
on the actual cost of the audit function in the corporation concerned plus a reasonable rate to
cover overhead expenses. The actual audit cost shall include personnel services, maintenance
and other operating expenses, depreciation on capital and equipment and out-of-pocket
expenses. In respect to the allowances and fringe benefits granted by the GOCCs to the COA
personnel assigned to the former’s auditing units, the same shall be directly defrayed by COA
from its own appropriations x x x. 41
COA may charge GOCCs "actual audit cost" but GOCCs must pay the same directly to COA
and not to COA auditors. Petitioner has not alleged that COA charges LWDs auditing fees in
excess of COA’s "actual audit cost." Neither has petitioner alleged that the auditing fees are paid
by LWDs directly to individual COA auditors. Thus, petitioner’s contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the
Decision dated 30 January 2001 denying petitioner’s Motion for Reconsideration are
AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198 is declared
VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No costs.
SO ORDERED.
EN BANC
G.R. No. 184517               October 8, 2013
207
SME BANK INC., ABELARDO P. SAMSON, OLGA SAMSON and AURELIO VILLAFLOR,
JR., Petitioners,
vs.
PEREGRIN T. DE GUZMAN,EDUARDO M. AGUSTIN, JR., ELICERIO GASPAR, , RICARDO
GASPAR JR., EUFEMIA ROSETE, FIDEL ESPIRITU, SIMEONESPIRITU, JR., and
LIBERATO MANGOBA, Respondents.
x-----------------------x
G.R. No. 186641
SME BANK INC., ABELARDO P. SAMSON, OLGA SAMSON and AURELIO VILLAFLOR,
JR., Petitioners,
vs.
ELICERIO GASPAR, RICARDO GASPAR, JR., EUFEMIA ROSETE, FIDEL ESPIRITU,
SIMEONESPIRITU, JR., and LIBERATO MANGOBA, Respondents.
DECISION
SERENO, CJ.:
Security of tenure is a constitutionally guaranteed right. 1 Employees may not be terminated from
their regular employment except for just or authorized causes under the Labor Code 2 and other
pertinent laws. A mere change in the equity composition of a corporation is neither a just nor an
authorized cause that would legally permit the dismissal of the corporation’s employees en
masse.
Before this Court are consolidated Rule 45 Petitions for Review on Certiorari3 assailing the
Decision4 and Resolution5 of the Court of Appeals(CA) in CA-G.R. SP No. 97510 and its
Decision6 and Resolution7 in CA-G.R. SP No. 97942.
The facts of the case are as follows:
Respondent employees Elicerio Gaspar (Elicerio), Ricardo Gaspar, Jr.(Ricardo), Eufemia
Rosete (Eufemia), Fidel Espiritu (Fidel), Simeon Espiritu, Jr. (Simeon, Jr.), and Liberato
Mangoba (Liberato) were employees of Small and Medium Enterprise Bank, Incorporated (SME
Bank).Originally, the principal shareholders and corporate directors of the bank were Eduardo
M. Agustin, Jr. (Agustin) and Peregrin de Guzman, Jr. (De Guzman).
In June 2001, SME Bank experienced financial difficulties. To remedy the situation, the bank
officials proposed its sale to Abelardo Samson(Samson).8
Accordingly, negotiations ensued, and a formal offer was made to Samson. Through his
attorney-in-fact, Tomas S. Gomez IV, Samson then sent formal letters (Letter Agreements) to
Agustin and De Guzman, demanding the following as preconditions for the sale of SME Bank’s
shares of stock:
4. You shall guarantee the peaceful turn over of all assets as well as the peaceful transition of
management of the bank and shall terminate/retire the employees we mutually agree upon,
upon transfer of shares in favor of our group’s nominees;
xxxx

7. All retirement benefits, if any of the above officers/stockholders/board of directors are hereby
waived upon consummation [sic] of the above sale. The retirement benefits of the rank and file
employees including the managers shall be honored by the new management in accordance
with B.R. No. 10, S. 1997.9
Agustin and De Guzman accepted the terms and conditions proposed by Samson and signed
the conforme portion of the Letter Agreements.10
Simeon Espiritu (Espiritu), then the general manager of SME Bank, held a meeting with all the
employees of the head office and of the Talaveraand Muñoz branches of SME Bank and
persuaded them to tender their resignations, 11 with the promise that they would be rehired upon
reapplication. His directive was allegedly done at the behest of petitioner Olga Samson.12
Relying on this representation, Elicerio,13 Ricardo,14 Fidel,15 Simeon, Jr.,16 and
Liberato17 tendered their resignations dated 27 August 2001. As for Eufemia, the records show
that she first tendered a resignation letter dated27 August 2001, 18 and then a retirement letter
dated September 2001.19
Elicerio,20 Ricardo,21 Fidel,22 Simeon, Jr.,23 and Liberato24 submitted application letters on 11
September 2001. Both the resignation letters and copies of respondent employees’ application
letters were transmitted by Espiritu to Samson’s representative on 11 September 2001.25
On 11 September 2001, Agustin and De Guzman signified their conformity to the Letter
Agreements and sold 86.365% of the shares of stock of SME Bank to spouses Abelardo and
Olga Samson. Spouses Samson then became the principal shareholders of SME Bank, while
Aurelio Villaflor, Jr. was appointed bank president. As it turned out, respondent employees,
except for Simeon, Jr.,26 were not rehired. After a month in service, Simeon, Jr. again resigned
on October 2001.27
Respondent-employees demanded the payment of their respective separation pays, but their
requests were denied.1âwphi1
Aggrieved by the loss of their jobs, respondent employees filed a Complaint before the National
Labor Relations Commission (NLRC)– Regional Arbitration Branch No. III and sued SME Bank,
spouses Abelardo and Olga Samson and Aurelio Villaflor (the Samson Group) for unfair labor
practice; illegal dismissal; illegal deductions; underpayment; and nonpayment of allowances,
separation pay and 13th month pay. 28 Subsequently, they amended their Complaint to include
Agustin and De Guzman as respondents to the case.29
On 27 October 2004, the labor arbiter ruled that the buyer of an enterprise is not bound to
absorb its employees, unless there is an express stipulation to the contrary. However, he also
found that respondent employees were illegally dismissed, because they had involuntarily
executed their resignation letters after relying on representations that they would be given their
separation benefits and rehired by the new management. Accordingly, the labor arbiter decided
the case against Agustin and De Guzman, but dismissed the Complaint against the Samson
Group, as follows:
WHEREFORE, premises considered, judgment is hereby rendered ordering respondents
Eduardo Agustin, Jr. and Peregrin De Guzman to pay complainants’ separation pay in the total
amount of ₱339,403.00 detailed as follows:
Elicerio B. Gaspar = P 5,837.00
Ricardo B. Gaspar, Jr. = ₱11,674.00
208
Liberato B. Mangoba = ₱64,207.00
Fidel E. Espiritu = ₱29,185.00
Simeon B. Espiritu, Jr. = ₱26,000.00
Eufemia E. Rosete = ₱202,510.00
All other claims including the complaint against Abelardo Samson, Olga Samson and Aurelio
Villaflor are hereby DISMISSED for want of merit.
SO ORDERED.30
Dissatisfied with the Decision of the labor arbiter, respondent employees, Agustin and De
Guzman brought separate appeals to the NLRC. Respondent employees questioned the labor
arbiter’s failure to award backwages, while Agustin and De Guzman contended that they should
not be held liable for the payment of the employees’ claims.
The NLRC found that there was only a mere transfer of shares – and therefore, a mere change
of management – from Agustin and De Guzman to the Samson Group. As the change of
management was not a valid ground to terminate respondent bank employees, the NLRC ruled
that they had indeed been illegally dismissed. It further ruled that Agustin, De Guzman and the
Samson Group should be held jointly and severally liable for the employees’ separation pay and
backwages, as follows:
WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED.
Respondents are hereby Ordered to jointly and severally pay the complainants backwages from
11 September 2001 until the finality of this Decision, separation pay at one month pay for every
year of service, ₱10,000.00 and ₱5,000.00 moral and exemplary damages, and five (5%)
percent attorney’s fees.
Other dispositions are AFFIRMED
SO ORDERED.31
On 28 November 2006, the NLRC denied the Motions for Reconsideration filed by Agustin, De
Guzman and the Samson Group.32
Agustin and De Guzman filed a Rule 65 Petition for Certiorari with the CA, docketed as CA-G.R.
SP No. 97510. The Samson Group likewise filed a separate Rule 65 Petition for Certiorari with
the CA, docketed as CA-G.R. SP No. 97942. Motions to consolidate both cases were not acted
upon by the appellate court.
On 13 March 2008, the CA rendered a Decision in CA-G.R. SP No.97510 affirming that of the
NLRC. The fallo of the CA Decision reads:
WHEREFORE, in view of the foregoing, the petition is DENIED. Accordingly, the Decision dated
May 8, 2006, and Resolution dated November 28, 2006 of the National Labor Relations
Commission in NLRC NCR CA No. 043236-05 (NLRC RAB III-07-4542-02) are hereby
AFFIRMED.
SO ORDERED.33

Subsequently, CA-G.R. SP No. 97942 was disposed of by the appellate court in a Decision
dated 15 January 2008, which likewise affirmed that of the NLRC. The dispositive portion of the
CA Decision states:
WHEREFORE, premises considered, the instant Petition for Certiorari is denied, and the herein
assailed May 8, 2006 Decision and November 28, 2006 Resolution of the NLRC are hereby
AFFIRMED.
SO ORDERED.34
The appellate court denied the Motions for Reconsideration filed by the parties in Resolutions
dated 1 September 200835 and 19 February 2009.36
The Samson Group then filed two separate Rule 45 Petitions questioning the CA Decisions and
Resolutions in CA-G.R. SP No. 97510 and CA-G.R. SP No. 97942. On 17 June 2009, this Court
resolved to consolidate both Petitions.37
THE ISSUES
Succinctly, the parties are asking this Court to determine whether respondent employees were
illegally dismissed and, if so, which of the parties are liable for the claims of the employees and
the extent of the reliefs that may be awarded to these employees.
THE COURT’S RULING
The instant Petitions are partly meritorious.
I
Respondent employees were illegally dismissed.
As to Elicerio Gaspar, Ricardo Gaspar, Jr., Fidel Espiritu, Eufemia Rosete and Liberato
Mangoba
The Samson Group contends that Elicerio, Ricardo, Fidel, and Liberato voluntarily resigned from
their posts, while Eufemia retired from her position. As their resignations and retirements were
voluntary, they were not dismissed from their employment.38 In support of this argument, it
presented copies of their resignation and retirement letters, 39 which were couched in terms of
gratitude.
We disagree. While resignation letters containing words of gratitude may indicate that the
employees were not coerced into resignation,40 this fact alone is not conclusive proof that they
intelligently, freely and voluntarily resigned. To rule that resignation letters couched in terms of
gratitude are, by themselves, conclusive proof that the employees intended to relinquish their
posts would open the floodgates to possible abuse. In order to withstand the test of validity,
resignations must be made voluntarily and with the intention of relinquishing the office, coupled
with an act of relinquishment.41 Therefore, in order to determine whether the employees truly
intended to resign from their respective posts, we cannot merely rely on the tenor of the
resignation letters, but must take into consideration the totality of circumstances in each
particular case.
Here, the records show that Elicerio, Ricardo, Fidel, and Liberato only tendered resignation
letters because they were led to believe that, upon reapplication, they would be reemployed by
the new management.42 As it turned out, except for Simeon, Jr., they were not rehired by the
209
new management. Their reliance on the representation that they would be reemployed gives
credence to their argument that they merely submitted courtesy resignation letters because it
was demanded of them, and that they had no real intention of leaving their posts. We therefore
conclude that Elicerio, Ricardo, Fidel, and Liberato did not voluntarily resign from their work;
rather, they were terminated from their employment.
As to Eufemia, both the CA and the NLRC discussed her case together with the cases of the
rest of respondent-employees. However, a review of the records shows that, unlike her co-
employees, she did not resign; rather, she submitted a letter indicating that she was retiring from
her former position.43
The fact that Eufemia retired and did not resign, however, does not change our conclusion that
illegal dismissal took place.
Retirement, like resignation, should be an act completely voluntary on the part of the employee.
If the intent to retire is not clearly established or if the retirement is involuntary, it is to be treated
as a discharge.44
In this case, the facts show that Eufemia’s retirement was not of her own volition. The
circumstances could not be more telling. The facts show that Eufemia was likewise given the
option to resign or retire in order to fulfill the precondition in the Letter Agreements that the seller
should "terminate/retire the employees [mutually agreed upon] upon transfer of shares" to the
buyers.45 Thus, like her other co-employees, she first submitted a letter of resignation dated 27
August 2001.46 For one reason or another, instead of resigning, she chose to retire and
submitted a retirement letter to that effect. 47 It was this letter that was subsequently transmitted
to the representative of the Samson Group on 11 September 2001.48
In San Miguel Corporation v. NLRC,49 we have explained that involuntary retirement is
tantamount to dismissal, as employees can only choose the means and methods of terminating
their employment, but are powerless as to the status of their employment and have no choice
but to leave the company. This rule squarely applies to Eufemia’s case. Indeed, she could only
choose between resignation and retirement, but was made to understand that she had no choice
but to leave SME Bank. Thus, we conclude that, similar to her other co-employees, she was
illegally dismissed from employment.
The Samson Group further argues50 that, assuming the employees were dismissed, the
dismissal is legal because cessation of operations due to serious business losses is one of the
authorized causes of termination under Article 283 of the Labor Code.51
Again, we disagree.
The law permits an employer to dismiss its employees in the event of closure of the business
establishment.52 However, the employer is required to serve written notices on the worker and
the Department of Labor at least one month before the intended date of closure. 53 Moreover, the
dismissed employees are entitled to separation pay, except if the closure was due to serious
business losses or financial reverses.54 However, to be exempt from making such payment, the
employer must justify the closure by presenting convincing evidence that it actually suffered
serious financial reverses.55
In this case, the records do not support the contention of SME Bank that it intended to close the
business establishment. On the contrary, the intention of the parties to keep it in operation is
confirmed by the provisions of the Letter Agreements requiring Agustin and De Guzman to

guarantee the "peaceful transition of management of the bank" and to appoint "a manager of
[the Samson Group’s] choice x x x to oversee bank operations."
Even assuming that the parties intended to close the bank, the records do not show that the
employees and the Department of Labor were given written notices at least one month before
the dismissal took place. Moreover, aside from their bare assertions, the parties failed to
substantiate their claim that SME Bank was suffering from serious financial reverses.
In fine, the argument that the dismissal was due to an authorized cause holds no water.
Petitioner bank also argues that, there being a transfer of the business establishment, the
innocent transferees no longer have any obligation to continue employing respondent
employees,56 and that the most that they can do is to give preference to the qualified separated
employees; hence, the employees were validly dismissed.57
The argument is misleading and unmeritorious. Contrary to petitioner bank’s argument, there
was no transfer of the business establishment to speak of, but merely a change in the new
majority shareholders of the corporation.
There are two types of corporate acquisitions: asset sales and stock sales.58 In asset sales, the
corporate entity59 sells all or substantially all of its assets60 to another entity. In stock sales, the
individual or corporate shareholders61 sell a controlling block of stock62 to new or existing
shareholders.
In asset sales, the rule is that the seller in good faith is authorized to dismiss the affected
employees, but is liable for the payment of separation pay under the law. 63 The buyer in good
faith, on the other hand, is not obliged to absorb the employees affected by the sale, nor is it
liable for the payment of their claims.64 The most that it may do, for reasons of public policy and
social justice, is to give preference to the qualified separated personnel of the selling firm.65
In contrast with asset sales, in which the assets of the selling corporation are transferred to
another entity, the transaction in stock sales takes place at the shareholder level. Because the
corporation possesses a personality separate and distinct from that of its shareholders, a shift in
the composition of its shareholders will not affect its existence and continuity. Thus,
notwithstanding the stock sale, the corporation continues to be the employer of its people and
continues to be liable for the payment of their just claims. Furthermore, the corporation or its
new majority share holders are not entitled to lawfully dismiss corporate employees absent a just
or authorized cause.
In the case at bar, the Letter Agreements show that their main object is the acquisition by the
Samson Group of 86.365% of the shares of stock of SME Bank. 66 Hence, this case involves a
stock sale, whereby the transferee acquires the controlling shares of stock of the corporation.
Thus, following the rule in stock sales, respondent employees may not be dismissed except for
just or authorized causes under the Labor Code.
Petitioner bank argues that, following our ruling in Manlimos v. NLRC, 67 even in cases of stock
sales, the new owners are under no legal duty to absorb the seller’s employees, and that the
most that the new owners may do is to give preference to the qualified separated
employees.68 Thus, petitioner bank argues that the dismissal was lawful.
We are not persuaded.
Manlimos dealt with a stock sale in which a new owner or management group acquired
complete ownership of the corporation at the shareholder level. 69 The employees of the
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corporation were later "considered terminated, with their conformity" 70 by the new majority
shareholders. The employees then re-applied for their jobs and were rehired on a probationary
basis. After about six months, the new management dismissed two of the employees for having
abandoned their work, and it dismissed the rest for committing "acts prejudicial to the interest of
the new management."71 Thereafter, the employees sought reinstatement, arguing that their
dismissal was illegal, since they "remained regular employees of the corporation regardless of
the change of management."72
In disposing of the merits of the case, we upheld the validity of the second termination, ruling
that "the parties are free to renew the contract or not [upon the expiration of the period provided
for in their probationary contract of employment]."73 Citing our pronouncements in Central
Azucarera del Danao v. Court of Appeals,74 San Felipe Neri School of Mandaluyong, Inc. v.
NLRC,75 and MDII Supervisors & Confidential Employees Association v. Presidential Assistant
on Legal Affairs,76 we likewise upheld the validity of the employees’ first separation from
employment, pronouncing as follows:
A change of ownership in a business concern is not proscribed bylaw. In Central Azucarera del
Danao vs. Court of Appeals, this Court stated:
There can be no controversy for it is a principle well-recognized, that it is within the employer’s
legitimate sphere of management control of the business to adopt economic policies or make
some changes or adjustments in their organization or operations that would insure profit to itself
or protect the investment of its stockholders. As in the exercise of such management
prerogative, the employer may merge or consolidate its business with another, or sellor dispose
all or substantially all of its assets and properties which may bring about the dismissal or
termination of its employees in the process. Such dismissal or termination should not however
be interpreted in such a manner as to permit the employer to escape payment of termination
pay. For such a situation is not envisioned in the law. It strikes at the very concept of social
justice.
In a number of cases on this point, the rule has been laid down that the sale or disposition must
be motivated by good faith as an element of exemption from liability. Indeed, an innocent
transferee of a business establishment has no liability to the employees of the transfer or to
continue employer them. Nor is the transferee liable for past unfair labor practices of the
previous owner, except, when the liability therefor is assumed by the new employer under the
contract of sale, or when liability arises because of the new owner’s participation in thwarting or
defeating the rights of the employees.
Where such transfer of ownership is in good faith, the transferee is under no legal duty to absorb
the transferor’s employees as there is no law compelling such absorption. The most that the
transferee may do, for reasons of public policy and social justice, is to give preference to the
qualified separated employees in the filling of vacancies in the facilities of the purchaser.
Since the petitioners were effectively separated from work due to a bona fide change of
ownership and they were accordingly paid their separation pay, which they freely and voluntarily
accepted, the private respondent corporation was under no obligation to employ them; it may,
however, give them preference in the hiring. x x x. (Citations omitted)
We take this opportunity to revisit our ruling in Manlimos insofar as it applied a doctrine on asset
sales to a stock sale case. Central Azucarera del Danao, San Felipe Neri School of
Mandaluyong and MDII Supervisors &Confidential Employees Association all dealt with asset
sales, as they involved a sale of all or substantially all of the assets of the corporation. The
transactions in those cases were not made at the shareholder level, but at the corporate level.

Thus, applicable to those cases were the rules in asset sales: the employees may be separated
from their employment, but the seller is liable for the payment of separation pay; on the other
hand, the buyer in good faith is not required to retain the affected employees in its service, nor is
it liable for the payment of their claims.
The rule should be different in Manlimos, as this case involves a stock sale. It is error to even
discuss transfer of ownership of the business, as the business did not actually change hands.
The transfer only involved a change in the equity composition of the corporation. To reiterate,
the employees are not transferred to a new employer, but remain with the original corporate
employer, notwithstanding an equity shift in its majority shareholders. This being so, the
employment status of the employees should not have been affected by the stock sale. A change
in the equity composition of the corporate shareholders should not result in the automatic
termination of the employment of the corporation’s employees. Neither should it give the new
majority shareholders the right to legally dismiss the corporation’s employees, absent a just or
authorized cause.
The right to security of tenure guarantees the right of employees to continue in their employment
absent a just or authorized cause for termination. This guarantee proscribes a situation in which
the corporation procures the severance of the employment of its employees – who patently still
desire to work for the corporation – only because new majority stockholders and a new
management have come into the picture. This situation is a clear circumvention of the
employees’ constitutionally guaranteed right to security of tenure, an act that cannot be
countenanced by this Court.
It is thus erroneous on the part of the corporation to consider the employees as terminated from
their employment when the sole reason for so doing is a change of management by reason of
the stock sale. The conformity of the employees to the corporation’s act of considering them as
terminated and their subsequent acceptance of separation pay does not remove the taint of
illegal dismissal. Acceptance of separation pay does not bar the employees from subsequently
contesting the legality of their dismissal, nor does it estop them from challenging the legality of
their separation from the service.77
We therefore see it fit to expressly reverse our ruling in Manlimos insofar as it upheld that, in a
stock sale, the buyer in good faith has no obligation to retain the employees of the selling
corporation; and that the dismissal of the affected employees is lawful, even absent a just or
authorized cause.
As to Simeon Espiritu, Jr.
The CA and the NLRC discussed the case of Simeon, Jr. together with that of the rest of
respondent-employees. However, a review of the records shows that the conditions leading to
his dismissal from employment are different. We thus discuss his circumstance separately.
The Samson Group contends that Simeon, Jr., likewise voluntarily resigned from his
post.78 According to them, he had resigned from SME Bank before the share transfer took
place.79
Upon the change of ownership of the shares and the management of the company, Simeon, Jr.
submitted a letter of application to and was rehired by the new management. 80 However, the
Samson Group alleged that for purely personal reasons, he again resigned from his employment
on 15 October 2001.81
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Simeon, Jr., on the other hand, contends that while he was reappointed by the new
management after his letter of application was transmitted, he was not given a clear position, his
benefits were reduced, and he suffered a demotion in rank. 82 These allegations were not refuted
by the Samson Group.
We hold that Simeon, Jr. was likewise illegally dismissed from his employment.
Similar to our earlier discussion, we find that his first courtesy resignation letter was also
executed involuntarily. Thus, it cannot be the basis of a valid resignation; and thus, at that point,
he was illegally terminated from his employment. He was, however, rehired by SME Bank under
new management, although based on his allegations, he was not reinstated to his former
position or to a substantially equivalent one. 83 Rather, he even suffered a reduction in benefits
and a demotion in rank.84 These led to his submission of another resignation letter effective 15
October 2001.85
We rule that these circumstances show that Simeon, Jr. was constructively dismissed. In
Peñaflor v. Outdoor Clothing Manufacturing Corporation,86 we have defined constructive
dismissal as follows:
Constructive dismissal is an involuntary resignation by the employee due to the harsh, hostile,
and unfavorable conditions set by the employer and which arises when a clear discrimination,
insensibility, or disdain by an employer exists and has become unbearable to the employee.87
Constructive dismissal exists where there is cessation of work, because "continued employment
is rendered impossible, unreasonable or unlikely, as an offer involving a demotion in rank or a
diminution in pay" and other benefits.88
These circumstances are clearly availing in Simeon, Jr.’s case. He was made to resign, then
rehired under conditions that were substantially less than what he was enjoying before the illegal
termination occurred. Thus, for the second time, he involuntarily resigned from his employment.
Clearly, this case is illustrative of constructive dismissal, an act prohibited under our labor laws.
II
SME Bank, Eduardo M. Agustin, Jr. and Peregrin de Guzman, Jr. are liable for illegal dismissal.
Having ruled on the illegality of the dismissal, we now discuss the issue of liability and determine
who among the parties are liable for the claims of the illegally dismissed employees.
The settled rule is that an employer who terminates the employment of its employees without
lawful cause or due process of law is liable for illegal dismissal.89
None of the parties dispute that SME Bank was the employer of respondent employees. The fact
that there was a change in the composition of its shareholders did not affect the employer-
employee relationship between the employees and the corporation, because an equity transfer
affects neither the existence nor the liabilities of a corporation. Thus, SME Bank continued to be
the employer of respondent employees notwithstanding the equity change in the corporation.
This outcome is in line with the rule that a corporation has a personality separate and distinct
from that of its individual shareholders or members, such that a change in the composition of its
shareholders or members would not affect its corporate liabilities.
Therefore, we conclude that, as the employer of the illegally dismissed employees before and
after the equity transfer, petitioner SME Bank is liable for the satisfaction of their claims.

Turning now to the liability of Agustin, De Guzman and the Samson Group for illegal dismissal,
at the outset we point out that there is no privity of employment contracts between Agustin, De
Guzman and the Samson Group, on the one hand, and respondent employees on the other.
Rather, the employment contracts were between SME Bank and the employees. However, this
fact does not mean that Agustin, De Guzman and the Samson Group may not be held liable for
illegal dismissal as corporate directors or officers. In Bogo-Medellin Sugarcane Planters
Association, Inc. v. NLRC,90 we laid down the rule as regards the liability of corporate directors
and officers in illegal dismissal cases, as follows:
Unless they have exceeded their authority, corporate officers are, as a general rule, not
personally liable for their official acts, because a corporation, by legal fiction, has a personality
separate and distinct from its officers, stockholders and members. However, this fictional veil
may be pierced whenever the corporate personality is used as a means of perpetuating a fraud
or an illegal act, evading an existing obligation, or confusing a legitimate issue. In cases of illegal
dismissal, corporate directors and officers are solidarily liable with the corporation, where
terminations of employment are done with malice or in bad faith.91 (Citations omitted)
Thus, in order to determine the respective liabilities of Agustin, De Guzman and the Samson
Group under the afore-quoted rule, we must determine, first, whether they may be considered as
corporate directors or officers; and, second, whether the terminations were done maliciously or
in bad faith.
There is no question that both Agustin and De Guzman were corporate directors of SME Bank.
An analysis of the facts likewise reveals that the dismissal of the employees was done in bad
faith. Motivated by their desire to dispose of their shares of stock to Samson, they agreed to and
later implemented the precondition in the Letter Agreements as to the termination or retirement
of SME Bank’s employees. However, instead of going through the proper procedure, the bank
manager induced respondent employees to resign or retire from their respective employments,
while promising that they would be rehired by the new management. Fully relying on that
promise, they tendered courtesy resignations or retirements and eventually found themselves
jobless. Clearly, this sequence of events constituted a gross circumvention of our labor laws and
a violation of the employees’ constitutionally guaranteed right to security of tenure. We therefore
rule that, as Agustin and De Guzman are corporate directors who have acted in bad faith, they
may be held solidarily liable with SME Bank for the satisfaction of the employees’ lawful claims.
As to spouses Samson, we find that nowhere in the records does it appear that they were either
corporate directors or officers of SME Bank at the time the illegal termination occurred, except
that the Samson Group had already taken over as new management when Simeon, Jr. was
constructively dismissed. Not being corporate directors or officers, spouses Samson were not in
legal control of the bank and consequently had no power to dismiss its employees.
Respondent employees argue that the Samson Group had already taken over and conducted an
inventory before the execution of the share purchase agreement. 92 Agustin and De Guzman
likewise argued that it was at Olga Samson’s behest that the employees were required to resign
from their posts.93 Even if this statement were true, it cannot amount to a finding that spouses
Samson should be treated as corporate directors or officers of SME Bank. The records show
that it was Espiritu who asked the employees to tender their resignation and or retirement
letters, and that these letters were actually tendered to him.94 He then transmitted these letters to
the representative of the Samson Group.95 That the spouses Samson had to ask Espiritu to
require the employees to resign shows that they were not in control of the corporation, and that
the former shareholders – through Espiritu – were still in charge thereof. As the spouses
Samson were neither corporate officers nor directors at the time the illegal dismissal took place,
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we find that there is no legal basis in the present case to hold them in their personal capacities
solidarily liable with SME Bank for illegally dismissing respondent employees, without prejudice
to any liabilities that may have attached under other provisions of law.
Furthermore, even if spouses Samson were already in control of the corporation at the time that
Simeon, Jr. was constructively dismissed, we refuse to pierce the corporate veil and find them
liable in their individual steads. There is no showing that his constructive dismissal amounted to
more than a corporate act by SME Bank, or that spouses Samson acted maliciously or in bad
faith in bringing about his constructive dismissal.
Finally, as regards Aurelio Villaflor, while he may be considered as a corporate officer, being the
president of SME Bank, the records are bereft of any evidence that indicates his actual
participation in the termination of respondent employees. Not having participated at all in the
illegal act, he may not be held individually liable for the satisfaction of their claims.
III
Respondent employees are entitled to separation pay, full backwages, moral damages,
exemplary damages and attorney’s fees.
The rule is that illegally dismissed employees are entitled to (1) either reinstatement, if viable, or
separation pay if reinstatement is no longer viable; and (2) backwages.96
Courts may grant separation pay in lieu of reinstatement when the relations between the
employer and the employee have been so severely strained; when reinstatement is not in the
best interest of the parties; when it is no longer advisable or practical to order reinstatement; or
when the employee decides not to be reinstated.97 In this case, respondent employees expressly
pray for a grant of separation pay in lieu of reinstatement. Thus, following a finding of illegal
dismissal, we rule that they are entitled to the payment of separation pay equivalent to their one-
month salary for every year of service as an alternative to reinstatement.
Respondent employees are likewise entitled to full backwages notwithstanding the grant of
separation pay. In Santos v. NLRC, 98 we explained that an award of backwages restores the
income that was lost by reason of the unlawful dismissal, while separation pay "provides the
employee with 'the wherewithal during the period that he is looking for another
employment."99 Thus, separation pay is a proper substitute only for reinstatement; it is not an
adequate substitute for both reinstatement and backwages. 100 Hence, respondent employees
are entitled to the grant of full backwages in addition to separation pay.
As to moral damages, exemplary damages and attorney's fees, we uphold the appellate court's
grant thereof based on our finding that the forced resignations and retirement were fraudulently
done and attended by bad faith.
WHEREFORE, premises considered, the instant Petitions for Review are PARTIALLY
GRANTED.
The assailed Decision and Resolution of the Court of Appeals in CAG.R. SP No. 97510 dated
13 March 2008 and 1 September 2008,respectively, are hereby REVERSED and SET ASIDE
insofar as it held Abelardo P. Samson, Olga Samson and Aurelio Villaflor, Jr. solidarily liable for
illegal dismissal.
The assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 97942 dated
15 January 2008 and 19 February 2009,respectively, are likewise REVERSED and SETASIDE
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insofar as it held Abelardo P. Samson, Olga Samson and Aurelio Villaflor, Jr. solidarily liable for
illegal dismissal.

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

SO ORDERED.