G.R. No.

179901 April 14, 2008

BANCO DE ORO-EPCI, INC.,* petitioner, vs.JAPRL

DEVELOPMENT CORPORATION, RAPID FORMING
CORPORATION and JOSE U. AROLLADO, respondents.

DECISION

CORONA, J.:

This petition for review on certiorari1 seeks to set aside the

decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 95659
and its resolution3 denying reconsideration.

After evaluating the financial statements of respondent JAPRL

Development Corporation (JAPRL) for fiscal years 1998, 1999 and
2000,4 petitioner Banco de Oro-EPCI, Inc. extended credit facilities
to it amounting to P230,000,0005 on March 28, 2003. Respondents
Rapid Forming Corporation (RFC) and Jose U. Arollado acted as
JAPRL's sureties.

Despite its seemingly strong financial position, JAPRL defaulted in

the payment of four trust receipts soon after the approval of its
loan.6 Petitioner later learned from MRM Management, JAPRL's
financial adviser, that JAPRL had altered and falsified its financial
statements. It allegedly bloated its sales revenues to post a big
income from operations for the concerned fiscal years to project
itself as a viable investment.7 The information alarmed petitioner.
Citing relevant provisions of the Trust Receipt Agreement,8 it
demanded immediate payment of JAPRL's outstanding obligations
amounting to P194,493,388.98.9

SP Proc. No. Q-03-064

On August 30, 2003, JAPRL (and its subsidiary, RFC) filed a

petition for rehabilitation in the Regional Trial Court (RTC) of
Quezon City, Branch 90 (Quezon City RTC).10 It disclosed that it
had been experiencing a decline in sales for the three preceding
years and a staggering loss in 2002.11

Because the petition was sufficient in form and substance, a stay

order12 was issued on September 28, 2003.13 However, the
proposed rehabilitation plan for JAPRL and RFC was eventually
rejected by the Quezon City RTC in an order dated May 9, 2005.14
Civil Case No. 03-991

Because JAPRL ignored its demand for payment, petitioner filed a

complaint for sum of money with an application for the issuance of
a writ of preliminary attachment against respondents in the RTC of
Makati City, Branch 145 (Makati RTC) on August 21, 2003.15
Petitioner essentially asserted that JAPRL was guilty of fraud
because it (JAPRL) altered and falsified its financial statements.16

The Makati RTC subsequently denied the application (for the

issuance of a writ of preliminary attachment) for lack of merit as
petitioner was unable to substantiate its allegations. Nevertheless,
it ordered the service of summons on respondents.17 Pursuant to
the said order, summonses were issued against respondents and
were served upon them.

Respondents moved to dismiss the complaint due to an allegedly

invalid service of summons.18 Because the officer's return stated
that an "administrative assistant" had received the summons,19
JAPRL and RFC argued that Section 11, Rule 14 of the Rules of
Court20 contained an exclusive list of persons on whom summons
against a corporation must be served.21 An "administrative
assistant" was not one of them. Arollado, on the other hand, cited
Section 6, Rule 14 thereof22 which mandated personal service of
summons on an individual defendant.23

The Makati RTC, in its October 10, 2005 order,24 noted that
because corporate officers are often busy, summonses to
corporations are usually received only by administrative assistants
or secretaries of corporate officers in the regular course of
business. Hence, it denied the motion for lack of merit.

Respondents moved for reconsideration25 but withdrew it before

the Makati RTC could resolve the matter.26

RTC SEC Case No. 68-2008-C

On February 20, 2006, JAPRL (and its subsidiary, RFC) filed a

petition for rehabilitation in the RTC of Calamba, Laguna, Branch
34 (Calamba RTC). Finding JAPRL's petition sufficient in form and
in substance, the Calamba RTC issued a stay order27 on March 13,
2006.

In view of the said order, respondents hastily moved to suspend

the proceedings in Civil Case No. 03-991 pending in the Makati
RTC.28

On July 7, 2006, the Makati RTC granted the motion with regard to
JAPRL and RFC but ordered Arollado to file an answer. It ruled
that, because he was jointly and solidarily liable with JAPRL and
RFC, the proceedings against him should continue.29 Respondents
moved for reconsideration30 but it was denied.31

On August 11, 2006, respondents filed a petition for certiorari32 in

the CA alleging that the Makati RTC committed grave abuse of
discretion in issuing the October 10, 2005 and July 7, 2006
orders.33 They asserted that the court did not acquire jurisdiction
over their persons due to defective service of summons. Thus, the
Makati RTC could not hear the complaint for sum of money.34

In its June 7, 2007 decision, the CA held that because the

summonses were served on a mere administrative assistant, the
Makati RTC never acquired jurisdiction over respondents. Thus, it
granted the petition.35

Petitioner moved for reconsideration but it was denied.36 Hence,

this petition.

Petitioner asserts that respondents maliciously evaded the service

of summonses to prevent the Makati RTC from acquiring
jurisdiction over their persons. Furthermore, they employed bad
faith to delay proceedings by cunningly exploiting procedural
technicalities to avoid the payment of their obligations.37

We grant the petition.

Respondents, in their petition for certiorari in the CA, questioned

the jurisdiction of the Makati RTC over their persons (i.e., whether
or not the service of summons was validly made). Therefore, it was
only the October 10, 2005 order of the said trial court which they in
effect assailed.38 However, because they withdrew their motion for
reconsideration of the said order, it became final. Moreover, the
petition was filed 10 months and 1 day after the assailed order was
issued by the Makati RTC,39 way past the 60 days allowed by the
Rules of Court. For these reasons, the said petition should have
been dismissed outright by the CA.

More importantly, when respondents moved for the suspension of

proceedings in Civil Case No. 03-991 before the Makati RTC (on
the basis of the March 13, 2006 order of the Calamba RTC), they
waived whatever defect there was in the service of summons and
were deemed to have submitted themselves voluntarily to the
jurisdiction of the Makati RTC.40

We withhold judgment for the moment on the July 7, 2006 order of

the Makati RTC suspending the proceedings in Civil Case No. 03-
991 insofar as JAPRL and RFC are concerned. Under the Interim
Rules of Procedure on Corporate Rehabilitation, a stay order
defers all actions or claims against the corporation seeking
rehabilitation41 from the date of its issuance until the dismissal of
the petition or termination of the rehabilitation proceedings.42

The Makati RTC may proceed to hear Civil Case No. 03-991 only
against Arollado if there is no ground to go after JAPRL and RFC
(as will later be discussed). A creditor can demand payment from
the surety solidarily liable with the corporation seeking
rehabilitation.43

Respondents abused procedural technicalities (albeit

unsuccessfully) for the sole purpose of preventing, or at least
delaying, the collection of their legitimate obligations. Their
reprehensible scheme impeded the speedy dispensation of justice.
More importantly, however, considering the amount involved,
respondents utterly disregarded the significance of a stable and
efficient banking system to the national economy.44

Banks are entities engaged in the lending of funds obtained

through deposits45 from the public.46 They borrow the public's
excess money (i.e., deposits) and lend out the same.47 Banks
therefore redistribute wealth in the economy by channeling idle
savings to profitable investments.

Banks operate (and earn income) by extending credit facilities

financed primarily by deposits from the public.48 They plough back
the bulk of said deposits into the economy in the form of loans.49
Since banks deal with the public's money, their viability depends
largely on their ability to return those deposits on demand. For this
reason, banking is undeniably imbued with public interest.
Consequently, much importance is given to sound lending
practices and good corporate governance.50

Protecting the integrity of the banking system has become, by

large, the responsibility of banks. The role of the public, particularly
individual borrowers, has not been emphasized. Nevertheless, we
are not unaware of the rampant and unscrupulous practice of
obtaining loans without intending to pay the same.

In this case, petitioner alleged that JAPRL fraudulently altered and

falsified its financial statements in order to obtain its credit
facilities. Considering the amount of petitioner's exposure in
JAPRL, justice and fairness dictate that the Makati RTC hear
whether or not respondents indeed committed fraud in securing
the credit accomodation.

A finding of fraud will change the whole picture. In this event,

petitioner can use the finding of fraud to move for the dismissal of
the rehabilitation case in the Calamba RTC.

The protective remedy of rehabilitation was never intended to be a

refuge of a debtor guilty of fraud.

Meanwhile, the Makati RTC should proceed to hear Civil Case No.
03-991 against the three respondents guided by Section 40 of the
General Banking Law which states:

Section 40. Requirement for Grant of Loans or Other Credit

Accommodations. Before granting a loan or other credit
accommodation, a bank must ascertain that the debtor is capable
of fulfilling his commitments to the bank.

Towards this end, a bank may demand from its credit applicants a
statement of their assets and liabilities and of their income and
expenditures and such information as may be prescribed by law or
by rules and regulations of the Monetary Board to enable the bank
to properly evaluate the credit application which includes the
corresponding financial statements submitted for taxation
purposes to the Bureau of Internal Revenue. Should such
statements prove to be false or incorrect in any material
detail, the bank may terminate any loan or credit
accommodation granted on the basis of said statements and
shall have the right to demand immediate repayment or
liquidation of the obligation.

In formulating the rules and regulations under this Section, the

Monetary Board shall recognize the peculiar characteristics of
microfinancing, such as cash flow-based lending to the basic
sectors that are not covered by traditional collateral. (emphasis
supplied)

Under this provision, banks have the right to annul any credit
accommodation or loan, and demand the immediate payment
thereof, from borrowers proven to be guilty of fraud. Petitioner
would then be entitled to the immediate payment of
P194,493,388.98 and other appropriate damages.51

Finally, considering that respondents failed to pay the four trust

receipts, the Makati City Prosecutor should investigate whether or
not there is probable cause to indict respondents for violation of
Section 13 of the Trust Receipts Law.52

ACCORDINGLY, the petition is hereby GRANTED. The June 7,

2007 decision and August 31, 2007 resolution of the Court of
Appeals in CA-G.R. SP No. 95659 are REVERSED and SET
ASIDE.

The Regional Trial Court of Makati City, Branch 145 is ordered to

proceed expeditiously with the trial of Civil Case No. 03-991 with
regard to respondent Jose U. Arollado, and the other respondents
if warranted.

SO ORDERED.
G.R. No. 150283 April 16, 2008

RYUICHI YAMAMOTO, petitioner, vs.NISHINO LEATHER

INDUSTRIES, INC. and IKUO NISHINO, respondents.

DECISION

CARPIO MORALES, J.:

In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese

national, organized under Philippine laws Wako Enterprises
Manila, Incorporated (WAKO), a corporation engaged principally in
leather tanning, now known as Nishino Leather Industries, Inc.
(NLII), one of herein respondents.

In 1987, Yamamoto and the other respondent, Ikuo Nishino

(Nishino), also a Japanese national, forged a Memorandum of
Agreement under which they agreed to enter into a joint venture
wherein Nishino would acquire such number of shares of stock
equivalent to 70% of the authorized capital stock of WAKO.

Eventually, Nishino and his brother1 Yoshinobu Nishino

(Yoshinobu) acquired more than 70% of the authorized capital
stock of WAKO, reducing Yamamoto’s investment therein to, by
his claim, 10%,2 less than 10% according to Nishino.3

The corporate name of WAKO was later changed to, as reflected

earlier, its current name NLII.

Negotiations subsequently ensued in light of a planned takeover of

NLII by Nishino who would buy-out the shares of stock of
Yamamoto. In the course of the negotiations, Yoshinobu and
Nishino’s counsel Atty. Emmanuel G. Doce (Atty. Doce) advised
Yamamoto by letter dated October 30, 1991, the pertinent portions
of which follow:

Hereunder is a simple memorandum of the subject matters

discussed with me by Mr. Yoshinobu Nishino yesterday, October
29th, based on the letter of Mr. Ikuo Nishino from Japan, and which
I am now transmitting to you.4

xxxx

12. Machinery and Equipment:

The following machinery/equipment have been contributed by you
to the company:

Splitting machine - 1 unit

Samming machine - 1 unit

Forklift - 1 unit

Drums - 4 units

Toggling machine - 2 units

Regarding the above machines, you may take them out with you
(for your own use and sale) if you want, provided, the value of
such machines is deducted from your and Wako’s capital
contributions, which will be paid to you.

Kindly let me know of your comments on all the above,

soonest.

x x x x5 (Emphasis and underscoring supplied)

On the basis of such letter, Yamamoto attempted to recover the

machineries and equipment which were, by Yamamoto’s
admission, part of his investment in the corporation,6 but he was
frustrated by respondents, drawing Yamamoto to file on January
15, 1992 before the Regional Trial Court (RTC) of Makati a
complaint7 against them for replevin.

Branch 45 of the Makati RTC issued a writ of replevin after

Yamamoto filed a bond. 8

In their Answer with Counterclaim,9 respondents claimed that the

machineries and equipment subject of replevin form part of
Yamamoto’s capital contributions in consideration of his equity in
NLII and should thus be treated as corporate property; and that the
above-said letter of Atty. Doce to Yamamoto was merely a
proposal, "conditioned on [Yamamoto’s] sell-out to . . . Nishino of
his entire equity,"10 which proposal was yet to be authorized by the
stockholders and Board of Directors of NLII.

By way of Counterclaim, respondents, alleging that they suffered

damage due to the seizure via the implementation of the writ of
replevin over the machineries and equipment, prayed for the
award to them of moral and exemplary damages, attorney’s fees
and litigation expenses, and costs of suit.

The trial court, by Decision of June 9, 1995, decided the case in

favor of Yamamoto,11 disposing thus:

WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff

as the rightful owner and possessor of the machineries in question,
and making the writ of seizure permanent; (2) ordering defendants
to pay plaintiff attorney’s fees and expenses of litigation in the
amount of Fifty Thousand Pesos (P50,000.00), Philippine
Currency; (3) dismissing defendants’ counterclaims for lack of
merit; and (4) ordering defendants to pay the costs of suit.

SO ORDERED.12 (Underscoring supplied)

On appeal,13 the Court of Appeals held in favor of herein

respondents and accordingly reversed the RTC decision and
dismissed the complaint.14 In so holding, the appellate court found
that the machineries and equipment claimed by Yamamoto are
corporate property of NLII and may not thus be retrieved without
the authority of the NLII Board of Directors;15 and that petitioner’s
argument that Nishino and Yamamoto cannot hide behind the
shield of corporate fiction does not lie,16 nor does petitioner’s
invocation of the doctrine of promissory estoppel.17 At the same
time, the Court of Appeals found no ground to support
respondents’ Counterclaim.18

The Court of Appeals having denied19 his Motion for

Reconsideration,20 Yamamoto filed the present petition,21 faulting
the Court of Appeals

A.

x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION

SHOULD NOT BE PIERCED IN THE CASE AT BAR.

B.

x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY

ESTOPPEL DOES NOT APPLY TO THE CASE AT BAR.

C.

x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE

FOR ATTORNEY’S FEES.22

The resolution of the petition hinges, in the main, on whether the

advice in the letter of Atty. Doce that Yamamoto may retrieve the
machineries and equipment, which admittedly were part of his
investment, bound the corporation. The Court holds in the
negative.

Indeed, without a Board Resolution authorizing respondent Nishino

to act for and in behalf of the corporation, he cannot bind the latter.
Under the Corporation Law, unless otherwise provided, corporate
powers are exercised by the Board of Directors.23

Urging this Court to pierce the veil of corporate fiction, Yamamoto

argues, viz:

During the negotiations, the issue as to the ownership of the

Machiner[ies] never came up. Neither did the issue on the proper
procedure to be taken to execute the complete take-over of the
Company come up since Ikuo, Yoshinobu, and Yamamoto were
the owners thereof, the presence of other stockholders being only
for the purpose of complying with the minimum requirements of the
law.

What course of action the Company decides to do or not to do

depends not on the "other members of the Board of Directors". It
depends on what Ikuo and Yoshinobu decide. The Company
is but a mere instrumentality of Ikuo [and] Yoshinobu.24

xxxx

x x x The Company hardly holds board meetings. It has an inactive

board, the directors are directors in name only and are there to do
the bidding of the Nish[i]nos, nothing more. Its minutes are paper
minutes. x x x 25

xxxx

The fact that the parties started at a 70-30 ratio and Yamamoto’s
percentage declined to 10% does not mean the 20% went to
others. x x x The 20% went to no one else but Ikuo himself. x x x
Yoshinobu is the younger brother of Ikuo and has no say at
all in the business. Only Ikuo makes the decisions. There
were, therefore, no other members of the Board who have not
given their approval.26 (Emphasis and underscoring supplied)

While the veil of separate corporate personality may be pierced

when the corporation is merely an adjunct, a business conduit, or
alter ego of a person,27 the mere ownership by a single stockholder
of even all or nearly all of the capital stocks of a corporation is not
by itself a sufficient ground to disregard the separate corporate
personality.28

The elements determinative of the applicability of the doctrine of

piercing the veil of corporate fiction follow:

"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
the 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."29 (Italics in the original; emphasis
and underscoring supplied)

In relation to the second element, to disregard the separate

juridical personality of a corporation, the wrongdoing or unjust act
in contravention of a plaintiff’s legal rights must be clearly and
convincingly established; it cannot be presumed.30 Without a
demonstration that any of the evils sought to be prevented by the
doctrine is present, it does not apply.31

In the case at bar, there is no showing that Nishino used the

separate personality of NLII to unjustly act or do wrong to
Yamamoto in contravention of his legal rights.

Yamamoto argues, in another vein, that promissory estoppel lies

against respondents, thus:

Under the doctrine of promissory estoppel, x x x estoppel may

arise from the making of a promise, even though without
consideration, if it was intended that the promise should be relied
upon and in fact it was relied upon, and if a refusal to enforce it
would be virtually to sanction the perpetration of fraud or would
result in other injustice.

x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company.

For this purpose negotiations were had between the parties.
Having expressly given Yamamoto, through the Letter and through
a subsequent meeting at the Manila Peninsula where Ikuo himself
confirmed that Yamamoto may take out the Machinery from the
Company anytime, respondents should not be allowed to turn
around and do the exact opposite of what they have represented
they will do.

In paragraph twelve (12) of the Letter, Yamamoto was expressly

advised that he could take out the Machinery if he wanted to so,
provided that the value of said machines would be deducted from
his capital contribution x x x.

xxxx

Respondents cannot now argue that they did not intend for
Yamamoto to rely upon the Letter. That was the purpose of the
Letter to begin with. Petitioner[s] in fact, relied upon said Letter and
such reliance was further strengthened during their meeting at the
Manila Peninsula.

To sanction respondents’ attempt to evade their obligation would

be to sanction the perpetration of fraud and injustice against
petitioner.32 (Underscoring supplied)

It bears noting, however, that the aforementioned paragraph 12 of

the letter is followed by a request for Yamamoto to give his
"comments on all the above, soonest."33

What was thus proffered to Yamamoto was not a promise, but a

mere offer, subject to his acceptance. Without acceptance, a mere
offer produces no obligation.34

Thus, under Article 1181 of the Civil Code, "[i]n conditional

obligations, the acquisition of rights, as well as the extinguishment
or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition." In the
case at bar, there is no showing of compliance with the condition
for allowing Yamamoto to take the machineries and equipment,
namely, his agreement to the deduction of their value from his
capital contribution due him in the buy-out of his interests in NLII.
Yamamoto’s allegation that he agreed to the condition35 remained
just that, no proof thereof having been presented.

The machineries and equipment, which comprised Yamamoto’s

investment in NLII,36 thus remained part of the capital property of
the corporation.37

It is settled that the property of a corporation is not the property of

its stockholders or members.38 Under the trust fund doctrine, the
capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors
which are preferred over the stockholders in the distribution of
corporate assets.39 The distribution of corporate assets and
property cannot be made to depend on the whims and caprices of
the stockholders, officers, or directors of the corporation unless the
indispensable conditions and procedures for the protection of
corporate creditors are followed.40

WHEREFORE, the petition is DENIED.

Costs against petitioner.

SO ORDERED.
G.R. No. 172302 February 4, 2008

PRYCE CORPORATION, petitioner, vs.THE COURT OF

APPEALS and CHINA BANKING CORPORATION, respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is a petition for review on certiorari seeking to

reverse the Decision1 of the Court of Appeals (Seventh Division)
dated July 28, 2005 in CA-G.R. SP No. 88479.

Pryce Corporation, petitioner, was incorporated under Philippine

laws on September 7, 1989. Its primary purpose was to develop
real estate in Mindanao. It engaged in the development of
memorial parks, operated a major hotel in Cagayan de Oro City,
and produced industrial gases.

The 1997 Asian financial crisis, however, badly affected

petitioner’s operations, resulting in heavy losses. It could not meet
its obligations as they became due. It incurred losses of P943.09
million in 2001, P479.05 million in 2002, and P125.86 million in
2003.

Thus, on July 12, 2004, petitioner filed with the Regional Trial
Court (RTC), Branch 138, Makati City, acting as Commercial
Court, a petition for rehabilitation,2 docketed as Special
Proceedings No. M-5901. Petitioner prayed for the appointment of
a Rehabilitation Receiver from among the nominees named
therein and the staying of the enforcement of all claims, monetary
or otherwise against it. Petitioner also prayed that after due
hearing, its proposed Rehabilitation Plan be approved. The salient
features of the proposed Rehabilitation Plan3 are:
[1] the bank creditors will be paid through dacion en pago of assets
already mortgaged to them, to the extent sufficient to pay off the
outstanding obligations. The excess assets, if any, will be freed
from liens and encumbrances and released to the petitioner.

[2] in case the value of the mortgaged assets for dacion is less
than the amount of the obligation to be paid, the deficiency shall be
settled by way of dacion of memorial park lots owned by the
petitioner.

[3] pricing of the assets for dacion shall be based on the average
of two valuation appraisals from independent third-party appraisers
accredited with the Bangko Sentral ng Pilipinas (BSP) to be
chosen by the creditors and acceptable to the petitioner, except for
memorial park lots which shall be valued at P16,000 per lot.

[4] all penalties shall be waived by the creditors.

[5] interest on the loans shall be accrued only up to June 30, 2003.

[6] titles of properties and sales documents held by the bank as

additional security but without actual mortgage on the properties
will also be released to the petitioner after the dacion.

[7] memorial park mother titles mortgaged to a creditor bank shall

be priced based on the value of individual memorial lots
comprising those titles, the mother titles shall be released to the
petitioner.

[8] for purpose of the dacion, the foreign currency loan from China
Banking Corporation, the only US Dollar-denominated obligation,
will be converted to peso based on the average exchange rate for
the year 2003 (P54.2033 to US$1.00), being the mean of 12
monthly averages, as quoted on the statistics web page of the
Bangko Sentral ng Pilipinas.

[9] the bank creditors will avail of the tax exemption and benefits
offered under the Special Purpose Vehicle (SPV) Law or R.A. No.
9182 to minimize the dacion-related costs for all parties
concerned. Any concerned bank or financial institution which does
not avail of said tax exemption through its own fault will shoulder
the applicable taxes and related fees for the dacion transaction.

[10] trade creditors will be paid through dacion of memorial park

lots.

[11] any other debt not covered by mortgaged (sic) of assets or not
falling under the aforementioned categories shall be paid through
dacion of memorial park lots.

On July 13, 2004, the RTC issued a "Stay Order"4 directing that: all
claims against petitioner be deferred; the initial hearing of the
petition for rehabilitation be set on September 1, 2004; and all
creditors and interested parties should file their respective
comments/oppositions to the petition. In the same Order, the RTC
then appointed Gener T. Mendoza as Rehabilitation Receiver.

The petition was opposed by petitioner’s bank-creditors. The Bank

of the Philippine Islands claimed that the petition and the proposed
Rehabilitation Plan are coercive and violative of the contract. The
Land Bank of the Philippines contended, among others, that the
petition is unacceptable because of the unrealistic valuation of the
properties subject of the dacion en pago.

The China Banking Corporation, respondent herein, alleged in its

opposition that petitioner is solvent and that it filed the petition to
force its creditors to accept dacion payments. In effect, petitioner
passed on to the creditors the burden of marketing and financing
unwanted memorial lots, while exempting it (petitioner) from paying
interests and penalties.

On September 13, 2004, the RTC issued an Order,5 the dispositive

portion of which reads:

WHEREFORE, the Petition is given due course. Let the

Rehabilitation Plan, Annex J, Petition, be referred to Mr. Gener
Mendoza, Rehabilitation Receiver, for evaluation and
recommendation to be submitted not later than December 15,
2004.

SO ORDERED.

On December 6, 2004, the Rehabilitation Receiver, in compliance

with the above Order, submitted an Amended Rehabilitation Plan,
recommending the following:

1. Payment of all bank loans and long-term commercial papers

(LTCP) through dacion en pago of PC’s real estate assets;
2. Payment of all non-bank, trade and other payables amounting to
at least P500,000 each through a dacion of memorial park lots;
and

3. Payment in cash over a three-year period, without interest, of all

non-bank, trade and other payables amounting to less than
P500,000 each. There are 290 of these creditors but their
aggregate exposure to PC is only P7.64 million.

The Rehabilitation Receiver further proposed the following

amendments with respect to the dacion payments to petitioner’s
bank creditors:

1. The asset base from which the creditors may choose to be paid
has been broadened. Each creditor will no longer be limited to
assets already mortgaged to it and may elect to be paid from the
many other assets of the company, including even those
mortgaged to other creditors. Any secured creditor, however, shall
have priority to acquire the assets mortgaged to it.

2. A third appraiser has been added to the two proposed by PC to

undertake valuation of assets earmarked for dacion. With three
appraisers, more representative values are likely to be obtained.

3. Valuation of the memorial lots has been configured to dovetail

with values approved in the corporate rehabilitation of Pryce
Gases, Inc. (PGI), a subsidiary of PC. Thus, any memorial lot
ceded to secured creditors shall be valued at P13,125 per lot, and
P17,500/lot for unsecured creditors.

On January 17, 2005, the RTC issued an Order approving the

Amended Rehabilitation Plan and finding petitioner eligible to be
placed in a state of corporate rehabilitation; and directing that its
assets shall be held and disposed of and its liabilities paid and
liquidated in the manner specified in the said Order.

Consequently, on February 23, 2005, respondent filed with the

Court of Appeals a petition for review, docketed as CA-G.R. SP
No. 88479. Respondent alleged that in approving the Amended
Rehabilitation Plan, the RTC impaired the obligations of contracts,
voided contractual stipulation and contravened the "avowed policy
of the State" to maintain a competitive financial system.

On July 28, 2005, the Court of Appeals rendered its Decision

granting respondent’s petition and reversing the assailed Orders of
the RTC, thus:

WHEREFORE, premises considered, petition is hereby

GRANTED. The assailed July 13, 2004, September 13, 2004 and
January 17, 2005 Orders of the Regional Trial Court of Makati City,
Branch 138, are hereby REVERSED and SET ASIDE.

SO ORDERED.

Petitioner herein seasonably filed a motion for reconsideration but

it was denied by the appellate court in its Resolution dated April
12, 2006.

Hence, the instant recourse raising the sole issue of whether the
Court of Appeals erred in denying the petition for rehabilitation of
petitioner Pryce Corporation.

Section 6 of the Interim Rules of Procedure on Corporate

Rehabilitation6 provides:

SEC. 6. Stay Order.— If the court finds the petition to be sufficient

in form and substance, it shall, not later than five (5) days from the
filing of the petition, issue an Order (a) appointing a Rehabilitation
Receiver and fixing his bond; (b) staying enforcement of all claims,
whether for money or otherwise and whether such enforcement is
by court action or otherwise, against the debtor, its guarantors and
sureties not solidarily liable with the debtor; (c) prohibiting the
debtor from selling, encumbering, transferring, or disposing in any
manner any of its properties except in the ordinary course of
business; (d) prohibiting the debtor from making any payment of its
liabilities outstanding as of the date of filing of the petition; (e)
prohibiting the debtor’s suppliers of goods or services from
withholding supply of goods and services in the ordinary course of
business for as long as the debtor makes payments for the
services and goods supplied after the issuance of the stay order;
(f) directing the payment in full of all administrative expenses
incurred after the issuance of the stay order; (g) fixing the initial
hearing on the petition not earlier than forty five (45) days but
not later than sixty (60) days from the filing thereof; (h)
directing the petitioner to publish the Order in a newspaper of
general circulation in the Philippines once a week for two (2)
consecutive weeks; (i) directing all creditors and all interested
parties (including the Securities and Exchange Commission) to file
and serve on the debtor a verified comment on or opposition
to the petition, with supporting affidavits and documents, not
later than ten (10) days before the date of the initial hearing and
putting them on notice that their failure to do so will bar them from
participating in the proceedings; and (j) directing the creditors
and interested parties to secure from the court copies of the
petition and its annexes within such time as to enable
themselves to file their comment on or opposition to the petition
and to prepare for the initial hearing of the petition.

Section 6 provides that the petition must be "sufficient in form and

substance." In Rizal Commercial Banking Corporation v.
Intermediate Appellate Court,7 this Court held that under Section
6(c) of P.D. No. 902-A,8 receivers may be appointed whenever:
(1) necessary in order to preserve the rights of the parties-
litigants; and/or (2) protect the interest of the investing public and
creditors. The situations contemplated in these instances are
serious in nature. There must exist a clear and imminent
danger of losing the corporate assets if a receiver is not
appointed. Absent such danger, such as where there are
sufficient assets to sustain the rehabilitation plan and both
investors and creditors are amply protected, the need for
appointing a receiver does not exist. Simply put, the purpose of
the law in directing the appointment of receivers is to protect
the interests of the corporate investors and creditors.

We agree with the Court of Appeals that the petition for

rehabilitation does not allege that there is a clear and imminent
danger that petitioner will lose its corporate assets if a receiver is
not appointed. In other words, the "serious situation test" laid
down by Rizal Commercial Banking Corporation has not been
met or at least substantially complied with. Significantly, the Stay
Order dated July 13, 2004 issued by the RTC does not state any
serious situation affecting petitioner’s corporate assets. We
observe that in appointing Mr. Gener T. Mendoza as Rehabilitation
Receiver, the only basis of the lower court was its finding that
"the petition is sufficient in form and substance." However, it
did not specify any reason or ground to sustain such finding.
Clearly, the petition failed to comply with the "serious situation
test."

As aptly held by the Court of Appeals:

There are serious requirements before rehabilitation can be
ordered. That is why this stay order is issued only after a
management committee or receiver is appointed. Before a
management committee or receiver is appointed, the law expressly
states the serious requirements that must first exist: (1) an
imminent danger (National Development Company and New Agrix,
Inc. v. Philippine Veterans Bank, G.R. Nos. 84132-33, December
10, 1990, 192 SCRA 257) of dissipation, loss, wastage or
destruction of assets or of paralization of business operations of
the liquid corporation which may be prejudicial to the interest of
minority stockholders, parties-litigants or to the general public, or
(2) there is a necessity to preserve the rights and interests of the
parties-litigants, of the investing public and of creditors.

In the case at bench, when the commercial court appointed a

rehabilitation receiver, the very next day after the filing of the
Petition for Rehabilitation, it is highly doubtful and well-nigh
impossible, that, without any hearing yet held, the commercial
court could have already gathered enough evidence before it
to determine whether there was any imminent danger of
dissipation of assets or of paralization of business operations
to warrant the appointment of a rehabilitation receiver.9

In determining whether petitioner’s financial situation is serious

and whether there is a clear and imminent danger that it will lose
its corporate assets, the RTC, acting as commercial court, should
conduct a hearing wherein both parties can present their
respective evidence. Hence, a remand of the records of this case
to the RTC is imperative.

WHEREFORE, we DENY the petition. The assailed Decision of

the Court of Appeals in CA-G.R. SP No. 88479 is AFFIRMED with
the modification discussed above. Let the records of this case be
REMANDED to the RTC, Branch 138, Makati City, sitting as
Commercial Court, for further proceedings with dispatch to
determine the merits of the petition for rehabilitation. No costs.

SO ORDERED.
G.R. No. 172812 February 12, 2008

AMELIA R. ENRIQUEZ and REMO SIA, petitioners, vs.BANK OF

THE PHILIPPINE ISLANDS and LUIS A. PUENTEVELLA, AVP,
respondents.

DECISION

TINGA, J.:

In this petition for review on certiorari, petitioners Amelia R.

Enriquez (Enriquez) and Remo L. Sia (Sia) assail the Decision1 of
the Court of Appeals dated 30 November 2005 affirming in toto the
Decision2 of the Fourth Division of the National Labor Relations
Commission (NLRC), Cebu City which dismissed their complaint
for illegal dismissal and money claims. The NLRC had earlier
reversed and set aside the decision of Executive Labor Arbiter
Danilo C. Acosta finding that petitioners were illegally dismissed by
respondent Bank of the Philippine Islands (BPI).

The antecedents, as culled from the records, are as follows:

Enriquez and Sia were the branch manager and assistant branch
manager, respectively, of the BPI-Bacolod Singcang Branch.
Enriquez was first employed by respondent bank in 1971 and had
been an employee thereof for 32 years at the time of her
termination,3 whereas Sia had been in respondent bank’s employ
since 1974, or for a total of 29 years at the time of his dismissal. 4
Respondent Luis A. Puentevella (Puentevella) is one of
respondent’s principal officers and was impleaded in his personal
capacity.

Petitioners maintain that on 27 December 2002, their branch

experienced a heavy volume of transactions owing to the fact that
it was the last banking day of the year. When banking hours came
to a close, teller Geraldine Descartin (Descartin) purportedly
discovered that she had a cash shortage of P36,000.00 and
informed Sia about it. Sia, in turn, informed Enriquez of the
problem and was directed to review the day’s transactions to trace
its cause.5

Descartin claimed that the discrepancy was due to an innocent

oversight and recalled that the unaccounted shortage was due to
the failure of her mother-in-law, Remedios Descartin (Remedios),
to sign the withdrawal slip when the latter withdrew P36,000.00
earlier that day. With that explanation, Enriquez directed Descartin
and her co-teller Evelyn Fregil (Fregil) to submit their written
memorandum of the incident. Descartin was permitted to leave the
bank to look for Remedios so that the latter could sign the
withdrawal slip. At around 7:00 p.m., she returned to the bank with
the signed withdrawal slip and debited the amount from the client’s
account. Thus, petitioners aver, the transaction was regularized
before the end of the day.6

It is the position of petitioners that as there was neither shortage

nor loss to the bank because the initial discrepancy was accounted
for and that it was due to a mere oversight, they put the matter to
rest. In the meantime, Sia began to wind up his affairs as 27
December 2002 was his last working day with the bank before
going on terminal leave prior to his optional retirement.

Respondents, however, have a different version of what transpired

on 27 December 2002. According to them, teller Descartin’s
shortage of P36,000.00, which she confided to her co-teller Fregil,
was incurred because she had temporarily borrowed the money
that week to pay her financial obligations but intended to return the
same on the first week of January. Teller Fregil reported the matter
to Sia and Enriquez, both of whom suggested that teller Descartin
fill the shortage with a loan from her family. Teller Descartin replied
that her family did not have the money, she instead borrowed the
amount from her in-laws. Thus, at 5:21 p.m., teller Descartin
posted the unsigned withdrawal slip for the amount of P36,000.00
against the joint account of her parents-in-law. As the amount
exceeded the floor limit for tellers which would require the approval
of a superior officer, either Enriquez or Sia approved the
transaction at 5:22 p.m. as reflected on the account records. Teller
Descartin thereafter left the bank to secure the signature of her
mother-in-law Remedios and returned at past 7:00 p.m. with the
signed withdrawal slip.7

On 28 December 2002, teller Fregil was allegedly informed that

teller Descartin was going to prepare a "white lie" report, to be
signed by both of them, stating that teller Descartin had
inadvertently misplaced the withdrawal slip of her mother-in-law
and that the transaction was regularized within the same day. On 2
January 2003, teller Fregil signed the report. However, in February
2003, teller Fregil bumped into a colleague assigned to the BPI-
Bacolod Main Branch and confided to the latter her uneasiness
about the 27 December 2002 incident. The matter was reported
and ultimately brought to the attention of respondent Puentevella.8

Thus, sometime in February 2003, respondent Puentevella

initiated further investigation on the incident. Later, on 3 March
2003, teller Fregil retracted her original statement and instead
executed another letter claiming that there was a cover-up of the
shortage on the day in question. Respondents assert that the
investigation conducted by the Auditing Division of BPI bolstered
teller Fregil’s claims of irregularity as the audit report disclosed that
petitioners failed to make the necessary report on the shortage
and instead assisted in covering-up teller Descartin’s wrongdoing.

On 25 April 2003, petitioners were instructed to report to the BPI

head office for polygraph testing. While they expressed their
willingness to be interviewed, petitioners objected to the polygraph
test. On 27 June 2003, petitioners received show-cause memos
directing them to explain in writing why they should not be
sanctioned for conflict of interest and breach of trust. Petitioners
submitted their respective replies in which they denied the charges
against them. On 14 July 2003, a committee of respondent bank
conducted a hearing of the case and as part of the investigation,
separately interviewed petitioners and tellers Descartin and Fregil.
On 3 September 2003, petitioners were dismissed from
employment on grounds of breach of trust and confidence and
dishonesty.

Hence, on 4 September 2003, petitioners filed their respective

Complaints9 for illegal dismissal against respondents and prayed
for reinstatement or, in lieu thereof, payment of separation pay.
Additionally, they sought backwages, retirement pay, attorney’s
fees and moral and exemplary damages in the amount of
P10,000,000.00.

After the submission by the parties of their position papers, Labor

Arbiter Acosta rendered a Decision10 on 29 March 2004 finding that
petitioners had been illegally dismissed. The dispositive portion of
the decision states:

WHEREFORE, premises considered, judgment is hereby rendered

as follows:

1. DECLARING that complainants were illegally dismissed by

respondents;

2. ORDERING respondents to reinstate complainants to their

former position without loss of seniority rights and to pay them their
corresponding full back wages inclusive of allowances and other
benefits as computed, in the sum of Pesos: ONE MILLION ONE
HUNDRED SEVENTY-THREE THOUSAND, FOUR HUNDRED
THIRTY-FOUR AND 50/100 ONLY (P1,173,434.50);

3. ORDERING respondents to jointly and severally pay

complainants moral and exemplary damages in the amount of
P3,000,000.00 each or a total of P6,000,000.00;

4. ORDERING respondents to jointly and severally pay attorney’s

fees in the amount of P717,343.45 which is equivalent to 10% of
the total judgment award, thereby making a total of SEVEN
MILLION EIGHT HUNDRED NINETY THOUSAND, SEVEN
HUNDRED SEVENTY-SEVEN AND 95/100 ONLY
(P7,890,777.95), the same to be deposited with the Cashier of this
Office within ten (10) calendar days from receipt of this Decision;

5. ORDERING respondents to jointly and severally pay

complainants in case they reach the compulsory retirement age of
60 years old pending final resolution of this case, their Retirement
pay equivalent to two (2) months latest salary for every year of
service and their Separation pay equivalent to one (1) month
salary for every year of service computed from the time they were
hired up to their retirement period.11

Aggrieved, respondents appealed to the NLRC. Finding that the

records substantiated the conclusion that petitioners tried to cover
up teller Descartin’s infraction instead of taking the appropriate
action thereon, the NLRC ruled that respondents had just cause to
terminate their employment. Hence, the NLRC reversed and set
aside the challenged decision and although it dismissed the
complaint, it ordered respondents to give petitioners financial
assistance equivalent to one-half month’s pay for every year of
service.12

Petitioners thereafter elevated the case to the Court of Appeals.

The appellate court, agreeing with the NLRC, denied petitioners’
appeal and affirmed in toto the latter’s assailed decision.

Before us, petitioners raise the following assignment of errors:

THE COURT OF APPEALS ERRED IN NOT DECLARING THAT

RESPONDENTS’ APPEAL TO THE NLRC WAS DEFECTIVE
FOR FAILING TO COMPLY WITH RULE VI, SECTION 4 OF THE
NLRC RULES OF PROCEDURE.

THE APPEALED DECISION AND RESOLUTION OF THE COURT

OF APPEALS ARE MANIFESTLY ERRONEOUS AND
RENDERED IN DISREGARD OF THE EVIDENCE IN RECORD
AND EXISTING JURISPRUDENCE.

THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN

CONCLUDING THAT PETITIONERS WERE VALIDLY
TERMINATED FROM EMPLOYMENT.

THE COURT OF APPEALS ERRED IN AFFIRMING THE NLRC’S

DECISION AND RESOLUTION THAT ARE IRREGULAR AND
ANOMALOUS.13

The petition should be denied.

Petitioners maintain that the Memorandum of Appeal14 filed by

respondents before the NLRC should have been dismissed due to
a defect in its verification. In particular, petitioners assert that the
document was signed by Puentevella alone, who did not show any
board resolution authorizing him to represent the corporation on
appeal, in violation of Rule VI, Section 4 of the NLRC Rules of
Procedure which provides:

Section 4. REQUISITES FOR PERFECTION OF APPEAL. A) The

appeal shall be filed within the reglementary period as provided in
Section 1 of this Rules, shall be verified by appellant himself in
accordance with Section 4, Rule 7 of the Rules of Court x x x.
For their part, respondents argue that the board of directors of a
corporation, in vesting authority to another person or body, does
not necessarily have to be express and in writing at all times. They
cited the following excerpt from the case of People’s Aircargo and
Warehousing Co., Inc. v. Court of Appeals15 to support their
contention:

The general rule is that, in the absence of authority from the board
of directors, no person, not even its officers, can validly bind a
corporation. A corporation is a juridical person, separate and
distinct from its stockholders and members, "having xxx powers,
attributes and properties expressly authorized by law or incident to
its existence."

Being a juridical entity, a corporation may act through its board of

directors, which exercises almost all corporate powers, lays down
all corporate business policies and is responsible for the efficiency
of management, as provided in Section 23 of the Corporation
Code of the Philippines:

xxx

Under this provision, the power and the responsibility to decide

whether the corporation should enter into a contract that will bind
the corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law. However, just
as a natural person may authorize another to do certain acts for
and on his behalf, the board of directors may validly delegate
some of its functions and powers to officers, committees or agents.
The authority of such individuals to bind the corporation is
generally derived from law, corporate bylaws or authorization from
the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business, viz.:

"A corporate officer or agent may represent and bind the

corporation in transactions with third persons to the extent that
[the] authority to do so has been conferred upon him, and this
includes powers which have been intentionally conferred, and also
such powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused persons dealing with the
officer or agent to believe that it has conferred."

x x x Apparent authority is derived not merely from practice. Its

existence may be ascertained through (1) the general manner in
which the corporation holds out an officer or agent as having the
power to act or, in other words, the apparent authority to act in
general, with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive
knowledge thereof, whether within or beyond the scope of his
ordinary powers. x x x16

Therefore, according to respondents, there was acquiescence on

the part of BPI which amounted to a valid authority as it never
showed any indication that it had not given its authority to
respondent Puentevella to act on its behalf in the filing of the
appeal with the NLRC.

After assiduously weighing the arguments of the parties, we find

that a liberal construction of the rules is in order. To serve the
interest of justice, compelling reason obtains to address
respondents’ arguments and brush aside technicality. The Court
frowns upon the practice of dismissing cases purely on procedural
grounds.17 Instructive is our pronouncement in the case of Bank of
the Philippine Islands v. Court of Appeals,18 thus:

Verification is simply intended to secure an assurance that the

allegations in the pleading are true and correct and not the product
of the imagination or a matter of speculation, and that the pleading
is filed in good faith. x x x We see no circumvention of these
objectives by the vice president’s signing the verification and
certification without express authorization from any existing
board resolution.

As explained in BPI’s Motion for Reconsideration, he was actually

authorized to sign the verification and the certification, as shown
by the written confirmation attached to the Motion. Furthermore, he
is presumed to know the requirements for validly signing those
documents. (Emphasis supplied)19

While it is true that rules of procedure are intended to promote

rather than frustrate the ends of justice, and the swift unclogging of
court dockets is a laudable objective, it nevertheless must not be
met at the expense of substantial justice.20 This Court has time and
again reiterated the doctrine that the rules of procedure are mere
tools aimed at facilitating the attainment of justice, rather than its
frustration. A strict and rigid application of the rules must always be
eschewed when it would subvert the primary objective of the rules,
that is, to enhance fair trials and expedite justice. Technicalities
should never be used to defeat the substantive rights of the other
party. Every party-litigant must be afforded the amplest opportunity
for the proper and just determination of his cause, free from the
constraints of technicalities.21 Considering that there was
substantial compliance, a liberal interpretation of procedural rules
in this labor case is more in keeping with the constitutional
mandate to secure social justice.22

Having disposed of the procedural matter raised by petitioners, we

now address the merits of the petition. There is no denying that
loss of trust and confidence is a valid ground for termination of
employment.23 Hence, the basic requisite for dismissal on the
ground of loss of confidence is that the employee concerned holds
a position of trust and confidence24 or is routinely charged with the
care and custody of the employer’s money or property.25 Moreover,
the breach must be related to the performance of the employee’s
function.26 Also, it must be shown that the employee is a
managerial employee, since the term "trust and confidence" is
restricted to said class of employees.27 In reviewing this petition,
we have fully taken into account the foregoing considerations.

Petitioners challenge the reliance of the assailed decisions on the

letters and affidavits executed by Teller Fregil, which retracted her
original statement dated 28 December 2002 consistent with
petitioners’ version of the facts. While retractions are generally
looked upon with disfavor by the courts, there may exist instances,
as in the case at bar, when a retraction may be accepted. Before
doing so, it is necessary to examine the circumstances
surrounding it and the possible motives for reversing the previous
declaration.

We find sufficient basis in evidence to accord full probative value

to Teller Fregil’s retraction letter which she later affirmed through
subsequent affidavits. The independent audit conducted by the
auditing division of BPI notably supports her claim that the
wrongdoing was concealed by petitioners from respondent bank.
Moreover, a review of the teller’s transaction summary28 of teller
Descartin reinforces the conclusion that the shortage in her pico
box was due to a "temporary borrowing," the cover-up of which
was sanctioned by petitioners.

It is likewise asserted by petitioners that under BPI’s bank policy,

failure to report a shortage is not a ground to terminate
employment. The argument is short-sighted.

BPI’s policy on tellers’ shortages is unambiguous. It requires that

all shortages be declared properly and booked accordingly on the
same day they are incurred.29 Furthermore, the same must be
reported by the branch head to the designated bank officers and
departments not later than the second banking day from the date
of booking.30

The pertinent provisions of BPI’s Personnel Policies and Benefits

Manual, in Chapter IV, Section 20 (B) thereof, provides:

2.1 Breach of Trust and Confidence; Dishonesty

xxx

2.1.2 Misappropriation, malversation or withholding of funds.

1st offense – dismissal

xxx

2.2 Violation of Operating Procedures

2.2.1 Willful non-observance of standard operating procedures in

the handling of any transaction or work assignment for purposes of
personal gain, profit, or advantage of another person.

1st offense – dismissal

xxx

3.5 Any employee who knowingly aids, abets, or conceals or

otherwise deliberately permits the commission of any irregular or
fraudulent act directed against the Unibank will be considered
equally guilty as the principal perpetuators of the fraud or
irregularity, and will be dealt with accordingly.

3.5.1 Management will not tolerate violations of banking and/or

established procedures by an employee where there is a conflict-
of-interest situation and where the irregular transaction or omission
is intended to benefit the officer concerned or a related interest, at
the Unibank’s expense or risk. x x x31

Taken together with the attending circumstances of the case, the

failure of petitioners to report the cash shortage of teller Descartin,
even if done in good faith, nonetheless resulted in their abetting
the dishonesty committed by the latter. Under the personnel
policies of respondent bank, this act of petitioners justifies their
dismissal even on the first offense. Even assuming the version of
petitioners as the truth, the fact remains that they willfully decided
against reporting the shortage that occurred. As a result, in either
situation, petitioners’ acts have caused respondents to have a
legitimate reason to lose the trust reposed in them as senior
managerial employees. Their participation in the cover-up of the
misconduct of teller Descartin makes them unworthy of the trust
and confidence demanded by their positions.

It is well-settled that the power to dismiss an employee is a

recognized prerogative that is inherent in the employer’s right to
freely manage and regulate his business. An employer cannot be
expected to retain an employee whose lack of morals, respect and
loyalty to his employer or regard for his employer’s rules and
appreciation of the dignity and responsibility of his office has so
plainly and completely been bared.32 Thus, to compel respondent
bank to keep petitioners in its employ after the latter have betrayed
the confidence given to them would be unjust to respondent bank.
The expectation of trust is more so magnified in the instant case in
light of the nature of respondent bank’s business. The banking
industry is imbued with public interest and is mandated by law to
serve its clients with extraordinary care and diligence. To be able
to fulfill this duty, it in turn must rely on the honesty and loyalty of
its employees.33

As a final challenge to the decision of the appellate court,

petitioners maintain that irregularity and anomaly attended the
disposition of respondents’ appeal before the NLRC. In particular,
petitioners bewail the alleged "breakneck speed" at which the
appeal was resolved by Commissioner Oscar Uy who, they claim,
took an unusual interest in the case. Petitioners’ counsel even filed
a complaint against Commissioner Uy before the Ombudsman.

We must sustain the appellate court in treating such suppositions

as mere allegations pending the result of the formal investigation
by the Ombudsman. Absent a definitive finding on the accusations
of irregularity, we cannot in this case consider petitioners’
arguments on the matter. It is a separate matter in itself which has
to be addressed first by the Ombudsman in the case pending
before it. At all events, the assailed decision at bar is basically
sound, aligned with law and jurisprudence, and supported by the
evidence on record.

Besides, the province of the instant Rule 45 petition for review is to

correct errors of law committed by the Court of Appeals. After a
judicious and meticulous review of the records of the case, we are
convinced that the Court of Appeals did not err in finding that
petitioners were validly terminated from employment.

Clearly, as a measure of self-preservation against acts patently

inimical to its interests, respondent bank had every right to dismiss
petitioners for breach of trust, loss of confidence and dishonesty.
Indeed, in cases of this nature, the fact that petitioners had been
employees of BPI for a long time, if it is to be considered at all,
should be taken against them. Their manifest condonation and
even concealment of an offense prejudicial to their employer’s
interest committed by a subordinate under their supervision reflect
a regrettable lack of loyalty which they should have reinforced,
instead of betrayed.34 So Sosito v. Aguinaldo Development
Corporation35 prescribes:

While the Constitution is committed to the policy of social justice

and the protection of the working class, it should not be supposed
that every labor dispute will be automatically decided in favor of
labor. Management also has its own rights which, as such, are
entitled to respect and enforcement in the interest of simple fair
play. Out of its concern for those with less privileges

in life, this Court has inclined more often than not toward the
worker and upheld his cause in his conflicts with the employer.
Such favoritism, however, has not blinded us to the rule that justice
is in every case for the deserving, to be dispensed in the light of
the established facts and the applicable law and doctrine.36

WHEREFORE, finding no reversible error, the instant petition is

DENIED.

SO ORDERED.
G.R. No. 164182 February 26, 2008

POWER HOMES UNLIMITED CORPORATION, petitioner, vs.

SECURITIES AND EXCHANGE COMMISSION AND NOEL
MANERO, respondents.

DECISION

PUNO, C.J.:

This petition for review seeks the reversal and setting aside of the
July 31, 2003 Decision1 of the Court of Appeals that affirmed the
January 26, 2001 Cease and Desist Order (CDO)2 of public
respondent Securities and Exchange Commission (SEC) enjoining
petitioner Power Homes Unlimited Corporation’s (petitioner)
officers, directors, agents, representatives and any and all persons
claiming and acting under their authority, from further engaging in
the sale, offer for sale or distribution of securities; and its June 18,
2004 Resolution3 which denied petitioner’s motion for
reconsideration.

The facts: Petitioner is a domestic corporation duly registered with

public respondent SEC on October 13, 2000 under SEC Reg. No.
A200016113. Its primary purpose is:

To engage in the transaction of promoting, acquiring, managing,

leasing, obtaining options on, development, and improvement of
real estate properties for subdivision and allied purposes, and in
the purchase, sale and/or exchange of said subdivision and
properties through network marketing.4
On October 27, 2000, respondent Noel Manero requested public
respondent SEC to investigate petitioner’s business. He claimed
that he attended a seminar conducted by petitioner where the
latter claimed to sell properties that were inexistent and without
any broker’s license.

On November 21, 2000, one Romulo E. Munsayac, Jr. inquired

from public respondent SEC whether petitioner’s business involves
"legitimate network marketing."

On the bases of the letters of respondent Manero and Munsayac,

public respondent SEC held a conference on December 13, 2000
that was attended by petitioner’s incorporators John Lim, Paul
Nicolas and Leonito Nicolas. The attendees were requested to
submit copies of petitioner’s marketing scheme and list of its
members with addresses.

The following day or on December 14, 2000, petitioner submitted

to public respondent SEC copies of its marketing course module
and letters of accreditation/authority or confirmation from Crown
Asia, Fil-Estate Network and Pioneer 29 Realty Corporation.

On January 26, 2001, public respondent SEC visited the business

premises of petitioner wherein it gathered documents such as
certificates of accreditation to several real estate companies, list of
members with web sites, sample of member mail box, webpages
of two (2) members, and lists of Business Center Owners who are
qualified to acquire real estate properties and materials on
computer tutorials.

On the same day, after finding petitioner to be engaged in the sale

or offer for sale or distribution of investment contracts, which are
considered securities under Sec. 3.1 (b) of Republic Act (R.A.) No.
8799 (The Securities Regulation Code),5 but failed to register them
in violation of Sec. 8.1 of the same Act,6 public respondent SEC
issued a CDO that reads:

WHEREFORE, pursuant to the authority vested in the

Commission, POWER HOMES UNLIMITED, CORP., its officers,
directors, agents, representatives and any and all persons claiming
and acting under their authority, are hereby ordered to immediately
CEASE AND DESIST from further engaging in the sale, offer or
distribution of the securities upon the receipt of this order.
In accordance with the provisions of Section 64.3 of Republic Act
No. 8799, otherwise known as the Securities Regulation Code, the
parties subject of this Cease and Desist Order may file a request
for the lifting thereof within five (5) days from receipt.7

On February 5, 2001, petitioner moved for the lifting of the CDO,

which public respondent SEC denied for lack of merit on February
22, 2001.

Aggrieved, petitioner went to the Court of Appeals imputing grave

abuse of discretion amounting to lack or excess of jurisdiction on
public respondent SEC for issuing the order. It also applied for a
temporary restraining order, which the appellate court granted.

On May 23, 2001, the Court of Appeals consolidated petitioner’s

case with CA-G.R. [SP] No. 62890 entitled Prosperity.Com,
Incorporated v. Securities and Exchange Commission
(Compliance and Enforcement Department), Cristina T. De La
Cruz, et al.

On June 19, 2001, petitioner filed in the Court of Appeals a Motion

for the Issuance of a Writ of Preliminary Injunction. On July 6,
2001, the motion was heard. On July 12, 2001, public respondent
SEC filed its opposition. On July 13, 2001, the appellate court
granted petitioner’s motion, thus:

Considering that the Temporary Restraining Order will expire

tomorrow or on July 14, 2001, and it appearing that this Court
cannot resolve the petition immediately because of the issues
involved which require a further study on the matter, and
considering further that with the continuous implementation of the
CDO by the SEC would eventually result to the sudden demise of
the petitioner’s business to their prejudice and an irreparable
damage that may possibly arise, we hereby resolve to grant the
preliminary injunction.

WHEREFORE, let a writ of preliminary injunction be issued in

favor of petitioner, after posting a bond in the amount of
P500,000.00 to answer whatever damages the respondents may
suffer should petitioner be adjudged not entitled to the injunctive
relief herein granted.8

On August 8, 2001, public respondent SEC moved for

reconsideration, which was not resolved by the Court of Appeals.
On July 31, 2003, the Court of Appeals issued its Consolidated
Decision. The disposition pertinent to petitioner reads:9

WHEREFORE, x x x x the petition for certiorari and prohibition filed

by the other petitioner Powerhomes Unlimited Corporation is
hereby DENIED for lack of merit and the questioned Cease and
Desist Order issued by public respondent against it is accordingly
AFFIRMED IN TOTO.

On June 18, 2004, the Court of Appeals denied petitioner’s motion

for reconsideration;10 hence, this petition for review.

The issues for determination are: (1) whether public respondent

SEC followed due process in the issuance of the assailed CDO;
and (2) whether petitioner’s business constitutes an investment
contract which should be registered with public respondent SEC
before its sale or offer for sale or distribution to the public.

On the first issue, Sec. 64 of R.A. No. 8799 provides:

Sec. 64. Cease and Desist Order. – 64.1. The Commission, after
proper investigation or verification, motu proprio or upon verified
complaint by any aggrieved party, may issue a cease and desist
order without the necessity of a prior hearing if in its judgment the
act or practice, unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury
or prejudice to the investing public.

We hold that petitioner was not denied due process. The records
reveal that public respondent SEC properly examined petitioner’s
business operations when it (1) called into conference three of
petitioner’s incorporators, (2) requested information from the
incorporators regarding the nature of petitioner’s business
operations, (3) asked them to submit documents pertinent thereto,
and (4) visited petitioner’s business premises and gathered
information thereat. All these were done before the CDO was
issued by the public respondent SEC. Trite to state, a formal trial
or hearing is not necessary to comply with the requirements of due
process. Its essence is simply the opportunity to explain one’s
position. Public respondent SEC abundantly allowed petitioner to
prove its side.

The second issue is whether the business of petitioner involves an

investment contract that is considered security11 and thus, must be
registered prior to sale or offer for sale or distribution to the public
pursuant to Section 8.1 of R.A. No. 8799, viz:

Section 8. Requirement of Registration of Securities. – 8.1.

Securities shall not be sold or offered for sale or distribution within
the Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on
the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each
prospective purchaser.

Public respondent SEC found the petitioner "as a marketing

company that promotes and facilitates sales of real properties and
other related products of real estate developers through effective
leverage marketing." It also described the conduct of petitioner’s
business as follows:

The scheme of the [petitioner] corporation requires an investor to

become a Business Center Owner (BCO) who must fill-up and sign
its application form. The Terms and Conditions printed at the back
of the application form indicate that the BCO shall mean an
independent representative of Power Homes, who is enrolled in
the company’s referral program and who will ultimately purchase
real property from any accredited real estate developers and as
such he is entitled to a referral bonus/commission. Paragraph 5 of
the same indicates that there exists no employer/employee
relationship between the BCO and the Power Homes Unlimited,
Corp.

The BCO is required to pay US$234 as his enrollment fee. His

enrollment entitles him to recruit two investors who should pay
US$234 each and out of which amount he shall receive US$92. In
case the two referrals/enrollees would recruit a minimum of four (4)
persons each recruiting two (2) persons who become his/her own
down lines, the BCO will receive a total amount of US$147.20 after
deducting the amount of US$36.80 as property fund from the gross
amount of US$184. After recruiting 128 persons in a period of
eight (8) months for each Left and Right business groups or a total
of 256 enrollees whether directly referred by the BCO or through
his down lines, the BCO who receives a total amount of
US$11,412.80 after deducting the amount of US$363.20 as
property fund from the gross amount of US$11,776, has now an
accumulated amount of US$2,700 constituting as his Property
Fund placed in a Property Fund account with the Chinabank. This
accumulated amount of US$2,700 is used as partial/full down
payment for the real property chosen by the BCO from any of
[petitioner’s] accredited real estate developers.12

An investment contract is defined in the Amended Implementing

Rules and Regulations of R.A. No. 8799 as a "contract, transaction
or scheme (collectively ‘contract’) whereby a person invests his
money in a common enterprise and is led to expect profits
primarily from the efforts of others."13

It behooves us to trace the history of the concept of an investment

contract under R.A. No. 8799. Our definition of an investment
contract traces its roots from the 1946 United States (US) case of
SEC v. W.J. Howey Co.14 In this case, the US Supreme Court was
confronted with the issue of whether the Howey transaction
constituted an "investment contract" under the Securities Act’s
definition of "security."15 The US Supreme Court, recognizing that
the term "investment contract" was not defined by the Act or
illumined by any legislative report,16 held that "Congress was using
a term whose meaning had been crystallized"17 under the state’s
"blue sky" laws18 in existence prior to the adoption of the Securities
Act.19 Thus, it ruled that the use of the catch-all term "investment
contract" indicated a congressional intent to cover a wide range of
investment transactions.20 It established a test to determine
whether a transaction falls within the scope of an "investment
contract."21 Known as the Howey Test, it requires a transaction,
contract, or scheme whereby a person (1) makes an investment of
money, (2) in a common enterprise, (3) with the expectation of
profits, (4) to be derived solely from the efforts of others.22
Although the proponents must establish all four elements, the US
Supreme Court stressed that the Howey Test "embodies a flexible
rather than a static principle, one that is capable of adaptation to
meet the countless and variable schemes devised by those who
seek the use of the money of others on the promise of profits."23
Needless to state, any investment contract covered by the Howey
Test must be registered under the Securities Act, regardless of
whether its issuer was engaged in fraudulent practices.

After Howey came the 1973 US case of SEC v. Glenn W. Turner

Enterprises, Inc. et al.24 In this case, the 9th Circuit of the US Court
of Appeals ruled that the element that profits must come "solely"
from the efforts of others should not be given a strict interpretation.
It held that a literal reading of the requirement "solely" would lead
to unrealistic results. It reasoned out that its flexible reading is in
accord with the statutory policy of affording broad protection to the
public. Our R.A. No. 8799 appears to follow this flexible concept
for it defines an investment contract as a contract, transaction or
scheme (collectively "contract") whereby a person invests his
money in a common enterprise and is led to expect profits not
solely but primarily from the efforts of others. Thus, to be a
security subject to regulation by the SEC, an investment contract
in our jurisdiction must be proved to be: (1) an investment of
money, (2) in a common enterprise, (3) with expectation of profits,
(4) primarily from efforts of others.

Prescinding from these premises, we affirm the ruling of the public

respondent SEC and the Court of Appeals that the petitioner was
engaged in the sale or distribution of an investment contract.
Interestingly, the facts of SEC v. Turner25 are similar to the case at
bar. In Turner, the SEC brought a suit to enjoin the violation of
federal securities laws by a company offering to sell to the public
contracts characterized as self-improvement courses. On appeal
from a grant of preliminary injunction, the US Court of Appeals of
the 9th Circuit held that self-improvement contracts which primarily
offered the buyer the opportunity of earning commissions on the
sale of contracts to others were "investment contracts" and thus
were "securities" within the meaning of the federal securities laws.
This is regardless of the fact that buyers, in addition to investing
money needed to purchase the contract, were obliged to contribute
their own efforts in finding prospects and bringing them to sales
meetings. The appellate court held:

It is apparent from the record that what is sold is not of the usual
"business motivation" type of courses. Rather, the purchaser is
really buying the possibility of deriving money from the sale
of the plans by Dare to individuals whom the purchaser has
brought to Dare. The promotional aspects of the plan, such as
seminars, films, and records, are aimed at interesting others in the
Plans. Their value for any other purpose is, to put it mildly,
minimal.

Once an individual has purchased a Plan, he turns his efforts

toward bringing others into the organization, for which he will
receive a part of what they pay. His task is to bring prospective
purchasers to "Adventure Meetings."
The business scheme of petitioner in the case at bar is essentially
similar. An investor enrolls in petitioner’s program by paying
US$234. This entitles him to recruit two (2) investors who pay
US$234 each and out of which amount he receives US$92. A
minimum recruitment of four (4) investors by these two (2) recruits,
who then recruit at least two (2) each, entitles the principal investor
to US$184 and the pyramid goes on.

We reject petitioner’s claim that the payment of US$234 is for the

seminars on leverage marketing and not for any product. Clearly,
the trainings or seminars are merely designed to enhance
petitioner’s business of teaching its investors the know-how of its
multi-level marketing business. An investor enrolls under the
scheme of petitioner to be entitled to recruit other investors and to
receive commissions from the investments of those directly
recruited by him. Under the scheme, the accumulated amount
received by the investor comes primarily from the efforts of his
recruits.

We therefore rule that the business operation or the scheme of

petitioner constitutes an investment contract that is a security
under R.A. No. 8799. Thus, it must be registered with public
respondent SEC before its sale or offer for sale or distribution to
the public. As petitioner failed to register the same, its offering to
the public was rightfully enjoined by public respondent SEC. The
CDO was proper even without a finding of fraud. As an investment
contract that is security under R.A. No. 8799, it must be registered
with public respondent SEC, otherwise the SEC cannot protect the
investing public from fraudulent securities. The strict regulation of
securities is founded on the premise that the capital markets
depend on the investing public’s level of confidence in the system.

IN VIEW WHEREOF, the petition is DENIED. The July 31, 2003

Decision of the Court of Appeals, affirming the January 26, 2001
Cease and Desist Order issued by public respondent Securities
and Exchange Commission against petitioner Power Homes
Unlimited Corporation, and its June 18, 2004 Resolution denying
petitioner’s Motion for Reconsideration are AFFIRMED. No costs.

SO ORDERED.
G.R. No. 170585 October 6, 2008

DAVID C. LAO and JOSE C. LAO, petitioners, vs.DIONISIO C.

LAO, respondents.

DECISION

REYES, R.T., J.:

IS the mere inclusion as shareholder in the General Information

Sheet of a corporation sufficient proof that one is a shareholder in
such corporation?

This is the main question for resolution in this petition for review on
certiorari of the Amended Decision1 of the Court of Appeals (CA)
affirming the Decision2 of the Regional Trial Court (RTC), Branch
11, Cebu City in CEB-25916-SRC.

The Facts

On October 15, 1998, petitioners David and Jose Lao filed a

petition with the Securities and Exchange Commission (SEC)
against respondent Dionisio Lao, president of Pacific Foundry
Shop Corporation (PFSC). Petitioners prayed for a declaration as
stockholders and directors of PFSC, issuance of certificates of
shares in their name and to be allowed to examine the corporate
books of PFSC.3

Petitioners claimed that they are stockholders of PFSC based on

the General Information Sheet filed with the SEC, in which they are
named as stockholders and directors of the corporation. Petitioner
David Lao alleged that he acquired 446 shares in PFSC from his
father, Lao Pong Bao, which shares were previously purchased
from a certain Hipolito Lao. Petitioner Jose Lao, on the other hand,
alleged that he acquired 333 shares from respondent Dionisio Lao
himself.4

Respondent denied petitioners' claim. He alleged that the inclusion

of their names in the corporation's General Information Sheet was
inadvertently made. He also claimed that petitioners did not
acquire any shares in PFSC by any of the modes recognized by
law, namely subscription, purchase, or transfer. Since they were
neither stockholders nor directors of PFSC, petitioners had no right
to be issued certificates or stocks or to inspect its corporate
books.5

On June 19, 2000, Republic Act 8799, otherwise known as the

Securities Regulation Code, was enacted, transferring jurisdiction
over all intra-corporate disputes from the SEC to the RTC.
Pursuant to the law, the petition with the SEC was transferred to
the RTC in Cebu City and docketed as Civil Case No. CEB-25916-
SRC. The case was consolidated with another intra-corporate
dispute, Civil Case No. CEB-25910-SRC, filed by the Heirs of Uy
Lam Tiong against respondent Dionisio Lao.6

During pre-trial, the parties agreed to submit the case for

resolution based on the evidence on record.7

RTC Disposition

On December 19, 2001, the RTC rendered a Joint Decision8 with

the following pertinent disposition, thus:

WHEREFORE, in view of the foregoing premises, judgment is

hereby rendered by the Court in these cases:

(a) Denying the petition of David C. Lao and Jose C. Lao to be

recognized as stockholders and directors of Pacific Foundry Shop
Corporation, to be issued certificates of stock of said corporation
and to be allowed to exercise rights of stockholders of the same
corporation.9

In denying the petition, the RTC ratiocinated:

x x x Thus, the petitioners David C. Lao and Jose C Lao do not

appear to have become registered stockholders of Pacific Foundry
Shop corporation, as they do not appear to have acquired shares
of stock of the corporation either as subscribers or by purchase
from a holder of outstanding shares or by purchase from the
corporation of additionally issued shares.

xxxx

Secondly, the claim or contention of the petitioners David C. Lao

and Jose C. Lao is wanting in merit because they have no stock
certificates in their names. A stock certificate, as we very well
know, is the evidence of ownership of corporate stock. If ever the
said petitioners acquired shares of stock of the corporation, there
is a need for their acquisition of said shares to be registered in the
Stock and Transfer Book of the corporation. Registration is
necessary to entitle a person to exercise the rights of a stockholder
and to hold office as director or other offices (12 Fletcher 343).
That is why it is explicitly provided in Section 63 of the Corporation
Code of the Philippines that no transfer of shares of stock shall be
valid until the transfer is recorded in the books of the corporation.
An unregistered transfer is not valid as against the corporation
(Uson vs. Diosomito, 61 Phil. 535). A transfer must be registered,
or at least notice thereof given to the corporation for the purpose of
registration, before the transferee can acquire any right as against
the corporation other than the right to have the transfer registered
(12 Fletcher 339). An unrecorded transferee can not enjoy the
status of a stockholder, he can not vote nor he voted for (Price &
Sulu Development Corp. vs. Martin, 58 Phil. 707). Until the transfer
is registered, the transferee is not a stockholder but an outsider
(Rivera vs. Florendo, G.R. No. L-57586, October 8, 1986). So, a
person who has acquired or purchased shares of stock of a
corporation, and who desires to be recognized as stockholder for
the purpose of voting and exercising other rights of a stockholder,
must secure such a standing by having the acquisition or transfer
recorded in the corporate books (Price & Sulu development Corp.
vs. Martin, supra). Unfortunately, in the cases at bench, the
petitioners David C. Lao and Jose C. Lao did not secure such a
standing. Consequently, their petition to be recognized as
stockholders of Pacific Foundry Shop Corporation must fail.10

Petitioners appealed to the CA.

CA Disposition

On May 27, 2005, the CA rendered a Decision11 modifying that of

the RTC, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered

modifying the Joint Decision dated December 19, 2001 of the trial
court in so far as it relates to Civil Case No. CEB-25916-SRC by:

(a) Declaring that petitioners have owned since 1987 shares of

stock in Pacific Foundry Shop Corporation, numbering 446 for
petitioner-appellant David C. Lao and 333 for petitioner-appellant
Jose C. Lao;

(b) Ordering respondent-appellee through the corporate secretary

to issue to petitioners-appellants the certificates of stock for the
aforementioned number of shares;

(c) Ordering respondent-appellee, as President of Pacific Foundry

Shop Corporation, to allow petitioners-appellants to exercise their
rights as stock holders;

(d) Ordering respondent-appellee to call a stockholders meeting

every fourth Saturday of January in accordance with the By-Laws
of Pacific Foundry shop Corporation.12

The CA decision was penned by Justice Arsenio Magpale and

concurred in by Justices Sesinando Villon and Enrico Lanzanas.

In modifying the RTC decision, the appellate court gave credence

to the General Information Sheet submitted by petitioners that
names them as stockholders of PFSC, thus:

The General Information Sheet of PFSC for the years 1987-1998

state that petitioners-appellants David C. Lao and Jose C. Lao own
446 and 333 shares, respectively, in PFSC. It is also indicated
therein that David C. Lao occupied various key positions in PFSC
from 1987-1998 and Jose C. Lao served as Director in PFSC from
1990-1998. The Sworn Statements of Uy Lam Tiong, former
corporate secretary of the PFSC, also state that petitioners-
appellants David C. Lao and Jose C. Lao, per corporate records of
PFSC, own shares of stock numbering 446 and 333, respectively.
The minutes of the Annual Stockholders Meeting of PFSC on
January 28, 1988 at 3:00 o'clock p.m. shows that among those
present were petitioners-appellants David C. Lao and Jose C. Lao.
During the said meeting, petitioner-appellant David C. Lao was
nominated and elected Director of PFSC. Withal, the Minutes of
the Meeting of the Board of Directors of PFSC at its Office at
Hipodromo, Cebu City, on January 28, 1988 at 4:00 p.m. disclose
that petitioner-appellant David C. Lao was elected vice-president
of PFSC. Both minutes were signed by the officers of PFSC
including respondent-appellee.13

Respondent filed a motion for reconsideration14 of the CA decision.

On July 11, 2005, respondent moved to inhibit15 the ponente of the

CA decision, Justice Magpale, from resolving his pending motion
for reconsideration.

On July 22, 2005, Justice Magpale issued a Resolution16

voluntarily inhibiting himself from further participating in the
resolution of the pending motion for reconsideration. Justice
Magpale stated:

Although the undersigned ponente does not agree with the

imputations of respondent-appellee and that the same are not any
of those grounds mentioned in Rule 137 of the Revised Rules of
Court, nonetheless the ponente voluntarily inhibits himself from
further handling this case in order to free the entire court of the
slightest suspicion of bias and prejudice against the respondent-
appellee.17

Amended Decision

On August 31, 2005, the CA rendered an Amended Decision 18

affirming that of the RTC, with a fallo reading:

IN VIEW OF THE FOREGOING, the May 27, 2005 Decision of this

Court is hereby SET ASIDE and the Decision of the Regional Trial
Court, Branch 11, Cebu City with respect to Civil Case No. 25916-
SRC is hereby AFIRMED in toto.19

The Amended Decision was penned by Justice Enrico Lanzanas

and concurred in by Justices Sesinando Villon and Vicente Yap.
The CA stated:

Petitioners-appellants maintain that they acquired their shares of

stocks through transfer - the third mode mentioned by the trial
court. David C. Lao claims that he acquired his 446 shares through
his father, Lao Pong Bao, when the latter purchased said shares
from Hipolito Lao. On the other hand, Jose C. Lao asserts that he
acquired his 333 shares through Dionisio C. Lao himself from the
original 1,333 shares of stocks of the latter.

Petitioner-appellants asseverations are unavailing. To substantiate

their statements, they merely relied on the General Information
Sheets submitted to the Securities and Exchange Commission for
the year 1987 to 1998, as well as on the Minutes of the
Stockholders Meeting and Board of Directors Meeting held on
January 28, 1988. They did not adduce evidence that would
indubitably show that there was indeed a valid transfer of stocks,
i.e. endorsement and delivery, from the transferors, Hipolito Lao
and Dionisio Lao, to them as transferees.

xxxx

To our mind, David C. Lao utterly failed to confute the argument

posited by respondent-appellee or demonstrate compliance with
any of the statutory requirements as to warrant a favorable ruling
on his part. No proof was ever shown that there was endorsement
and delivery to him of the stock certificates representing the 446
shares of Hipolito Lao. Neither was the transfer registered in
PFSC's Stock and Transfer Book. Conversely, Dionisio C. Lao was
able to show conformity with the aforementioned requirements.
Accordingly, it is but logical to conclude that the certificate of stock
covering 446 shares of Hipolito Lao was in fact endorsed and
delivered to Dionisio C. Lao and as such is reflected in PFSC's
Stock and Transfer Book x x x.

In fact, it is a rule that private transactions are presumed to have

been faire and regular and that the regular course of business is
presumed to have been followed. Thus, the transfer made by
Hipolito Lao of the 446 shares of stocks to Dionisio C. Lao is
deemed to have been valid and well-founded unless proven
otherwise. David C. Lao's mere allegation that Dionisio Lao
illegally appropriated upon himself the 446 shares failed to hurdle
such presumption. In this jurisdiction, neither fraud nor evil is
presumed and the record does not show either as to establish by
clear and sufficient evidence that may lead Us to believe such
allegation. The party alleging the same has the burden of proof to
present evidence necessary to establish his claim, unfortunately
however petitioners failed to do so. The General Information
Sheets and the Minutes of the Meetings adduced by petitioners-
appellants do not prove such allegation of fraud or deceit. In the
absence thereof, the presumption remains that private transactions
have been fair and regular.

As for the alleged shares of Jose C. Lao, We find his position

identically situated with David C. Lao. There is also no evidence on
record that would clearly establish how he acquired said shares of
PFSC. Jose C. Lao failed to show that there was endorsement and
delivery to him of the stock certificates or any documents showing
such transfer or assignment. In fact, the 333 shares being claimed
by him is still under the name of Dionisio C. Lao was reflected by
the Certificate of Stock as well as in PFSC's Stock and Transfer
Book. Corollary, Jose C. Lao could not be considered a
stockholder of PFSC in the absence of support reflecting his right
to the 333 shares other than the inclusion of his name in the
General Information Sheets from 1987 to 1998 and the Minutes of
the Stockholder's Meeting and Board of Director's Meeting.20

Petitioners moved for reconsideration but their motion was

denied.21 Hence, the present petition for review on certiorari under
Rule 45 of the 1997 Rules of Civil Procedure.

Issues

Petitioners raise five (5) issues for Our consideration, thus:

1. Whether or not the inhibition of Justice Arsenio J. Magpale is

proper when there is no "extrinsic evidence of bias, bad faith,
malice, or corrupt purpose" on the part of Justice Magpale, which
is required by this Honorable Court in its decision in Webb, et al. v.
People of the Philippines, 276 SCRA 243 [1997], as basis for
disqualification.

2. Whether or not the inhibition of Justice Magpale constitutes, in

effect, forum shopping, which is proscribed under Section 5, Rule
7 of the Rules of Court, as amended, and decisions of this
Honorable Court.

3. Whether or not determination of ownership of shares of stock in

a corporation shall be based on the Stock and Transfer Book
alone, or other evidence can be considered pursuant to the
decision of this Honorable Court in Tan v. Securities and
Exchange Commission, 206 SCRA 740.

4. Whether or not the admissions and representations of

respondent in the General Information Sheets submitted by him to
the Securities and Exchange Commission during the years 1987 to
1998 that (a) petitioners were stockholders of Pacific Foundry
Shop Corporation; that (b) petitioner David C. Lao and Jose C. Lao
owned 446 and 333 shares in the corporation, respectively; and
that (c) petitioners had been directors and officers of the
corporation, as well as the Sworn Statement of Uy Lam Tiong,
former Corporate Secretary, the Minutes of the Annual
Stockholders Meeting of PFSC on January 28, 1988, and the
Minutes of Meeting of the Board of Directors on January 28, 1988,
mentioned by Justice Magpale in his ponencia, are sufficient proof
of petitioners ownership of stocks in the corporation.

5. Whether or not respondent is stopped from questioning

petitioners' ownership of stocks in the corporation in view of his
admissions and representations in the General Information Sheets
he submitted to the Securities and Exchange Commission from
1987 to 1998 that petitioners were stockholders and officers of the
corporation.22

Essentially, only two (2) issues are raised in this petition. The first
concerns the voluntary inhibition of Justice Magpale, while the
second involves the substantive issue of whether or not petitioners
are indeed stockholders of PFSC.

Our Ruling

We deny the petition.

Voluntary inhibition is within the sound discretion of a judge.

Petitioners claim that the motion to inhibit Justice Magpale from

resolving the pending motion for reconsideration was improper and
unethical. They assert that the "bias and prejudice" grounds
alleged by private respondent were unsubstantiated and, worse,
constituted proscribed forum shopping. They argue that Justice
Magpale should have resolved the pending motion, instead of
voluntarily inhibiting himself from the case.

In cases of voluntary inhibition, the law leaves to the sound

discretion of the judge the decision to decide for himself the
question of whether or not he will inhibit himself from the case.
Section 1, Rule 137 of the Rules of Court provides:
Section 1. Disqualification of judges. - No judge or judicial officer
shall sit in any case in which he, or his wife or child, is pecuniarily
interested as heir, legatee, creditor, or otherwise, or in which he is
related to either party within the sixth degree of consanguinity or
affinity, or to counsel within the fourth degree, computed according
to the rules of the civil law, or in which he has been executor,
administrator, guardian, trustee, or counsel, or in which he has
presided in any inferior court when his ruling or decision is the
subject of review, without the written consent of all parties in
interest, signed by them and entered upon the record.

A judge may, in the exercise of his sound discretion, disqualify

himself from sitting in a case, for just or valid reasons other than
those mentioned above.

Here, Justice Magpale voluntarily inhibited himself "in order to free

the entire court [CA] of the slightest suspicion of bias and prejudice
x x x."23 We certainly cannot nullify the decision of Justice Magpale
recusing himself from the case because that is a matter left entirely
to his discretion. Nor can We fault him for doing so. No judge
should preside in a case in which he feels that he is not wholly
free, disinterested, impartial, and independent.

We agree with petitioners that it may seem unpalatable and even

revolting when a losing party seeks the disqualification of a judge
who had previously ruled against him in the hope that a new judge
might be more favorable to him. But We cannot take that basic
proposition too far. That Justice Magpale opted to voluntarily
recuse himself from the appealed case is already fait accompli. It
is, in popular idiom, water under the bridge.

Petitioners cannot bank on his voluntary inhibition to nullify the

Amended Decision later issued by the appellate court. It is highly
specious to assume that Justice Magpale would have ruled in
favor of petitioners on the pending motion for reconsideration if he
took a different course and opted to stay on with the case. It is also
illogical to presume that the Amended Decision would not have
been issued with or without the participation of Justice Magpale.
The Amended Decision is too far removed from the issue of
voluntary inhibition. It does not follow that petitioners would be
better off were it not for the voluntary inhibition.

Petitioners failed to prove that they are shareholders of PSFC.

Petitioners insist that they are shareholders of PFSC. They claim
purchasing shares in PFSC. Petitioner David Lao alleges that he
acquired 446 shares in the corporation from his father, Lao Pong
Bao, which shares were previously purchased from a certain
Hipolito Lao. Petitioner Jose Lao, on the other hand, alleges that
he acquired 333 shares from respondent Dionisio Lao.

Records, however, disclose that petitioners have no certificates of

shares in their name. A certificate of stock is the evidence of a
holder's interest and status in a corporation. It is a written
instrument signed by the proper officer of a corporation stating or
acknowledging that the person named in the document is the
owner of a designated number of shares of its stock.24 It is prima
facie evidence that the holder is a shareholder of a corporation.

Nor is there any written document that there was a sale of shares,
as claimed by petitioners. Petitioners did not present any deed of
assignment, or any similar instrument, between Lao Pong Bao and
Hipolito Lao; or between Lao Pong Bao and petitioner David Lao.
There is likewise no deed of assignment between petitioner Jose
Lao and private respondent Dionisio Lao.

Absent a written document, petitioners must prove, at the very

least, possession of the certificates of shares in the name of the
alleged seller. Again, they failed to prove possession. They failed
to prove the due delivery of the certificates of shares of the sellers
to them. Section 63 of the Corporation Code provides:

Sec. 63. Certificate of stock and transfer of shares. - The capital

stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with
the by-laws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is
recorded in the books of the corporation so as to show the names
of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares
transferred.
In contrast, respondent was able to prove that he is the owner of
the disputed shares. He had in his possession the certificates of
stocks of Hipolito Lao. The certificates of stocks were also properly
endorsed to him. More importantly, the transfer was duly
registered in the stock and transfer book of the corporation. Thus,
as between the parties, respondent has proven his right over the
disputed shares. As correctly ruled by the CA:

Au contraire, Dionisio C. Lao was able to show through competent

evidence that he is undeniably the owner of the disputed shares of
stocks being claimed by David C. Lao. He was able to validate that
he has the physical possession of the certificates covering the
shares of Hipolito Lao. Notably, it was Hipolito Lao who properly
endorsed said certificates to herein Dionisio Lao and that such
transfer was registered in PFSC's Stock and Transfer Book. These
circumstances are more in accord with the valid transfer
contemplated by Section 63 of the Corporation Code.25

The mere inclusion as shareholder of petitioners in the

General Information Sheet of PFSC is insufficient proof that
they are shareholders of the company.

Petitioners bank heavily on the General Information Sheet

submitted by PFSC to the SEC in which they were named as
shareholders of PFSC. They claim that respondent is now
estopped from contesting the General Information Sheet.

While it may be true that petitioners were named as shareholders

in the General Information Sheet submitted to the SEC, that
document alone does not conclusively prove that they are
shareholders of PFSC. The information in the document will still
have to be correlated with the corporate books of PFSC. As
between the General Information Sheet and the corporate books, it
is the latter that is controlling. As correctly ruled by the CA:

We agree with the trial court that mere inclusion in the General
Information Sheets as stockholders and officers does not make
one a stockholder of a corporation, for this may have come to pass
by mistake, expediency or negligence. As professed by
respondent-appellee, this was done merely to comply with the
reportorial requirements with the SEC. This maybe against the law
but "practice, no matter how long continued, cannot give rise to
any vested right."
If a transferee of shares of stock who failed to register such
transfer in the Stock and Transfer Book of the Corporation could
not exercise the rights granted unto him by law as stockholder,
with more reason that such rights be denied to a person who is not
a stockholder of a corporation. Petitioners-appellants never
secured such a standing as stockholders of PFSC and
consequently, their petition should be denied.26

It should be stressed that the burden of proof is on petitioners to

show that they are shareholders of PFSC. This is so because they
do not have any certificates of shares in their name. Moreover,
they do not appear in the corporate books as registered
shareholders. If they had certificates of shares, the burden would
have been with PFSC to prove that they are not shareholders of
the corporation.

As discussed, petitioners failed to hurdle their burden. There is no

written document evidencing their claimed purchase of shares. We
note that petitioners agreed to submit their case for decision based
merely on the documents on record. Hence, no testimonial
evidence was presented to prove the alleged purchase of shares.
Absent any documentary or testimonial evidence, the bare
assertion of petitioners that they are shareholders cannot prevail.

All told, We agree with the RTC and CA decision that petitioners
are not shareholders of PFSC.

WHEREFORE, the petition is DENIED and the appealed Amended

Decision AFFIRMED IN FULL.

SO ORDERED.