21 - US v. Milwaukee Refrigerator Transit Co.

(1905) (dummy corporation) Doctrines: General Rule: A corporation will be looked upon as a legal entity, until sufficient reason to the contrary appears. Exception: when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, defend crime, the law will regard the corporation as an association of persons; and, where one corporation was organized and is owned by the officers and stockholders of another, making their interests identical, they may be treated as identical when the interests of justice require it. Facts: The Elkins Act was enacted to prohibit railroads from giving and receiving of unlawful rebates. After the enactment of the said Act, officers of a brewing company, who were also its controlling stockholders, organized a transit company named Milwaukee Refrigerator Transit, et al and became its officers and the owners of all of its stock. On behalf of the brewing company, the officers contracted with the transit company to make all the shipments for the brewing company. The transit company contracted for shipments with interstate carriers, where they would only pay it from 1/10 to 1/8 of the published rate, for the transportation, supposedly as a commission for obtaining the business, but was known really a rebate for the benefit of the brewing company. Thus, the US filed a suit against the brewing company to enjoin them from receiving rebates from carriers. Issues: 1. W/N the piercing of the veil is in order (whether a corporation organized and owned by the officers and stockholders of another is in fact an independent corporation or was organized merely as a dummy to enable the other through it to solicit and obtain illegal rebates from carriers) Held/Ratio: 1. Yes, the piercing is in order. As a general rule, a corporation will be looked upon as a legal entity, until sufficient reason to the contrary appears. An exception to this is when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, defend crime, the law will regard the corporation as an association of persons; and, where one corporation was organized and is owned by the officers and stockholders of another, making their interests identical, they may be treated as identical when the interests of justice require it. The bill shows the creation, by the controlling interests of the brewing company, of a dummy corporation, and with dummy directors, with intent to evade the law making the transit company as a mere alter ego of the brewing corporation, both being substantially identical in interest and control, and the brewing company the ultimate beneficiary. Applying the rule here laid down to the circumstances shown to surround the brewing company and transit company, it clearly appears that the shipper practically controls the transit company, and this shows a sufficient identity of interest among the shareholders of both in these repayments to make them rebates, if paid and received with unlawful intent. It is the argument of Milwaukee that the procurement of the shipments through the contract is the mere soliciting of them for the carriers, for which they are lawfully authorized to pay a part of the rate, in order to get the business; and the transit company, owing a large number of refrigerator cars, and wishing to keep them employed, simply gives the freight to those competing shippers who will make the best terms, the business being of great volume, and the sums paid for the freights large. But this theory of innocence is exploded by the fact that the transit company is a mere separate name for the brewing company, being in fact the same collection of persons and interests. TRADERS ROYAL BANK v. CA mere 90% ownership / no fraud Filriters was the registered owner of CB Certificates of Indebtedness (CBCI). Banaria, VP of Treasury of Filriters assigned the CBCI, w/o Board authorization, (fictitiously) to Philfinance, w/c then assigned it to Traders. The CB refused to register the same as the transfer was not made in compliance w/ the CB Rules & Regulations the assignment was not made by the registered owner or his representative. Traders now claims that the veil of corporate fiction must be pierced as Philfinance owns 90% of Filriters, and payment to Philfinance is tantamount to payment to Filriters. Piercing the veil is an equitable remedy available only in case the corporate fiction is used to protect fraud, justify wrong, defend crime, or if a corporation is a mere alter ego of another rd person. Its primary intent is the protection of 3 persons. The mere fact that Philfinance owns 90% of Filriters is not itself sufficient to warrant piercing in the absence of the above circumstances. In this case, Traders was not defrauded. On its face, the certificates were in the

name of Filriters; as a commercial bank it should have automatically put it on guard. The transfer also did not conform w/ the Rules & Regulations and the CBCI formed part of Filriters required legal reserves required w/c cannot be taken out of the said funds w/o violating the law. DD: There was negligence in this case; and piercing the corporate veil cannot be used as a means to extricate the negligent party from the consequences of its own fault or non-compliance with the rules. FRANCISCO MOTORS v. CA doctrine turned upside-down / jeep services vs. legal fees The Spouses Manuel purchased a jeep body and availed of repair services from Francisco Motors (FM). They refused to pay. FM filed a collection suit. Atty. Manuel (husband) interposed a counter-claim, alleging that the Francisco Family (incorporators of FM) availed of his legal services in an intestate proceeding, and have yet to pay him. Hence, there should be a set-off. Piercing has no application in this case. The rationale of the rule is to remove a barrier between the corporation and its incorporators to thwart their fraudulent schemes and use the corporate personality as a shield. But in this case, the reverse is sought. The separate juridical personality must be respected. The Francisco Family availed of Manuels legal services in their personal capacity and does not involve any business of the corporation. A court should be cautious in applying the piercing doctrine. The corporation, in this case, was not a real-party-in-interest w/ regard to Atty. Manuels cause of action. INDOPHIL WORKERS UNION v. CALICA unions / purpose of piercing Indophil Textile Mills was engaged in manufacture & sale of yarns. The Indophil Union was the exclusive bargaining unit of its rank-and-file employees. Then Indophil Acrylic was incorporated. The Union now claims that Acrylic is only an extension of Indophil, and that the employees of Acrylic should be recognized as w/in the scope of their collective bargaining agreement. They allege that it is only a devise to evade the application of the CBA, that they are engaged in the same business and having some common employees, located in the same compound, using common machineries, having common incorporators, and that 70 % of the total stock subscription of Acrylic pertained to Indophil. The foregoing facts are not sufficient to warrant piercing the corporate veil w/c is only employed when it is sought to hold the officers / stockholders liable for corporate obligations. In this case, no claim is interposed against the members of Acrylic. That being the case, their separate juridical personalities must be respected. DD: Here the Union made the fatal mistake of alleging fraud. Once fraud is alleged, a monetary claim against the corporation becomes indispensable as a requirement for piercing. The Union should have just alleged that one is the alter ego of another in which case, a monetary claim is not required. Compare this with the La Campaa Case. LA CAMPANA v. KKM gaugau & coffee factories / labor dispute / same entities Tan Tong owned the La Campana Gaugau Co. (GAUGAU). Later on, he and his family incorporated La Campana Coffee Factory (COFFEE). He entered into Collective Bargaining Agreement w/ Phil. Legion (labor) but later his employees formed their own union (KMM). They demanded higher wages and more privileges. Mediation was to no avail. Thus, they brought the matter to the Industrial Court. La Campana sought to dismiss on the ground that the case was filed against 2 separate companies (GAUGAU & COFFEE) and that GAUGAU had only 14 employees below the required minimum jurisdictional requirement for the Industrial Court. The SC disregarded the separate personalities of GAUGAU and COFFEE for several reasons. The Tan Tong Family owned both of them, shared the same office, management, and payroll. Their employees were interchangeable. Thus, the separate personality of GAUGAU cannot be interposed as a defense to subvert the ends of the law governing capital-labor relations. DD: This was a case of alter ego piercing (arguably also equity piercing). Unlike the case of Indophil, there was no invocation of fraud in this case. Hence no monetary claim against the corporation is needed. This ruling is reiterated by Shoemart v. NLRC. GOCHAN v. YOUNG derivative suit / conveyance of corporate property to alter ego Felix Gochan Sr. was a stockholder w/ the Felix Gochan & Sons Inc. His daughter Alice inherited his shares, w/c were, in turn inherited by her spouse (John Young) and then her children. During his life, Felix had requested that the shares be issued in the name of his children, but the Board continues to refuse alleging a right of first refusal embodied in the Articles of Incorporation. Now the heirs bring the matter

to court by filing a derivative suit in behalf thereof alleging breach of trust and confidence, and usurpation of business opportunities in conflict w/ their fiduciary duties on the part of members of the Board, exhausting the corporate properties. They procured notices of lis pendens and ask for the delivery to the corporation of certain corporate properties conveyed to the Mactan & Lapu-Lapu Corporations w/c are mere alter egos of the directors of the corporation. This is an appropriate circumstance not only to file a derivative suit, but also to pierce the corporate veil, when the corporate medium is being used as a cloak to cover fraud of illegality, as a justification for wrong, alter ego, or mere business conduit for the benefit of the stockholders. The case is remanded to the trial court for further trial the notices of lis pendens are retained. DD: As a general rule, piercing is a remedy to protect third persons; but in this case it was used to settle an intra-corporate dispute. This case can be considered a case of equity piercing. PNB v. RITTRATO GROUP letter of credit / attorney-in-fact corporation / subsidiary The Rittrato Group procured a Letter of Credit from PNB International Finance (PNB-IFL) based in Hong Kong and a subsidiary of PNB. It was secured by real estate mortgages. The debts swelled to some $ 1.4 million. PNB-IFL, through its attorney-in-fact PNB sought to foreclose. Rittrato, averring that the credit facility is void, procured an Order of Injunction against PNB (not PNB-IFL), w/c was granted by the lower courts. It also seeks a re-computation of its debt. Rittrato also avers that PNB is a real-party-ininterest for being a mere alter ego of PNB-IFL. The trial court stated that since PNB-IFL is a subsidiary of PNB, then a suit against latter is a suit against PNB-IFL as well. Untenable! If used to perform legitimate functions, a subsidiarys separate existence must be respected. Rittrato failed to show any reason why the corporate veil must be pierced. The doctrine will apply only if the veil is used to shield fraud, justify wrong, defend crime, confuse legitimate issues, or where a corporation is a mere alter ego or business conduit of the other. Various factors mostly indicating total control may be considered which, if combined, may reasonably indicate that a corporation is but a conduit of another. No such circumstances exist in this case to warrant piercing. DD: Refer to Concept Builders v. NLRC for the test to determine the applicability of the piercing doctrine. The fact that a corporation is a subsidiary of another, by itself, does not suffice as a ground to pierce. UMALI v. CA tangled web / last resort / mere inter-relation insufficient The Castillo Family owned lands about to be foreclosed by DBP. Rivera proposed to them the development of their other 4 adjacent lots to raise the funds. They thus entered into an agreement w/ Slobec (Rivera was President) for the development of the 4 lots. Rivera then purchased tractors from Bormaheco, the balance of the price secured by Insurance Corp. (ICP). He then mortgaged the 4 lots to ICP to secure the surety in favor of Bormaheco. ICP then foreclosed on the 4 lots, consolidated ownership, and sold the same to PM Parts. Now, PM Parts wants the Castillos to vacate. Castillos allege that the foreclosure (and all the other transactions) by ICP was void. They invoke the piercing doctrine alleging that every transaction was fraudulent. Piercing the veil is not the proper remedy. It can only be employed if the stockholders/officers are sought to be held liable for corporate debts or where they have used the corporate medium to protect fraud, etc. There was in act no proof of fraud in this case. Further, piercing is a remedy of last resort, w/c need not be resorted to in this case in order to resolve the controversy. Considering that ICP made no payment based on the surety, it thus had no right to foreclose on the mortgage; thus the conveyance in favor of PM Parts cannot be sustained considering that it is not a purchaser in good faith considering that its president, Cervantes, is also VP of Bormaheco, and Atty. De Guzman was EVP of Bormaheco and legal counsel of ICP. They are chargeable w/ knowledge. But the mere fact that their businesses are inter-related is not justification for piercing the corporate veil. DD: Take note that fraud was alleged in this case. If fraud is alleged, there must be a monetary claim against the corporation; this is an indispensable requirement to fraud piercing.

BOYER-ROXAS v. HEIRS OF EUGENIA ROXAS INC. Hidden Valley Resort Eugenia Roxas died and left several properties. Her heirs incorporated and used her estate properties to engage in a resort business: Hidden Valley. Edilberto, then GM, allowed his son Guillermo as well as Rebecca to use the resort staff-house and recreation hall respectively as residences. The Board tolerated this. Both Guillermo and Rebecca were stockholders. Several years later, the Board approved a resolution ordering them to vacate. They allege that as stockholders, they are co-owners of the property w/ a right to stay in the premises. They propose that the corporate veil be pierced considering the circumstances under w/c the corporation was formed. The corporation has a separate juridical personality. Shares of stock do not represent corporate property it only typifies the right to share in its proceeds. Therefore are they not entitled to the possession of any definite portion of its property. Piercing can only be done when the corporation is being used as a cloak to cover fraud or illegality, etc. It is not available for the purpose of justifying a theory of coownership for the purpose of utilizing corporate property. DD: Piercing is a remedy intended to protect third persons. 27 - Siain Enterprises Enterprises, Inc. v. Cupertino Realty Corp. (2009) Doctrine: Where clear evidence presented support the fact that a corporations affiliates have received large amounts which became the consideration for the company execution of a real estate mortgage over its properties, then the piercing doctrine shall be applied to support the fact that the real estate mortgage was valid and supported by proper consideration. Facts: In 1995, Siain Enterprises Enterprises, Inc. (Siain Enterprises) obtained a loan of P37M from Cupertino Realty Corporation (Cupertino) covered by a promissory note signed by both Siain Enterprisess and Cupertinos respective presidents, Cua Le Leng and Wilfredo Lua. To secure the loan, Siain Enterprises executed a real estate mortgage over two parcels of land, other equipment and machineries. The promissory note was subsequently amended to contain a 17% annual interest on the P37M loan. A few months after, Cua Le Leng executed another promissory note in favor of Cupertino for P160M and signed it as maker on behalf of Siain Enterprises and as co-maker, liable to Cupertino in her personal capacity. The real estate mortgage was also amended to reflect the increased amount of the loan from P37M to P197M A year after, Siain Enterprises through counsel, wrote Cupertino and demanded from the latter the release of the P160M loan. Siain Enterprises contends that despite repeated verbal demands, Cupertino failed to release P160M. On the other hand, Cupertino, also through counsel, denied that it had yet to release the P160M loan and maintained that Siain Enterprises had long obtained the proceeds of such loan and that Siain Enterprises was only trying to abscond from a just and valid obligation. Cupertino then instituted extrajudicial foreclosure proceedings over the properties subject of the amended real estate mortgage. This prompted Siain Enterprises to file a complaint with a prayer for a restraining order to enjoin from proceeding with the public auction. Siain Enterprises further contends that because it never received the P160M loan, the amended real estate mortgage is null and void because there was no consideration therefore. The lower courts ruled in favor of Cupertino and upheld the validity of the amended real estate mortgage. The lower court disregarded Siain Enterprisess bare denial and negative evidence and gave credence to Cupertinos evidence that the P160M loan was received by Siain Enterprises and its affiliate companies. In this regard, the court applied the doctrine of piercing the veil of corporate fiction to preclude Siain Enterprises from disavowing the receipt of the loan and paying its obligation under the amended real estate mortgage. Siain Enterprises contends that the court erroneously applied the doctrine of piercing the veil or corporate fiction. Issue: 1. W/N the doctrine of piercing the veil of corporate fiction was properly applied. Held/Ratio: 2. Yes. First and foremost, Siain Enterprises being the plaintiff, had the burden of proof and the duty to present a preponderance of evidence to establish its claim. Instead, its evidence consisted of only a barefaced denial of receipt of the P160M loan and a vaguely drawn theory. On the other hand, Cupertino presented overwhelming evidence that Siain Enterprises Inc., and its affiliate corporations (Yuyek and Siain Transport) had received the proceeds of the loan which was the consideration of the amended real estate mortgage. Moreover, it was established in the lower courts that Siain Enterprises and Yuyek had a common set of

incorporators, stockholders and board of directors, the same bookkeeper and accountant, the same office address and the same majority stockholder which is Cua Le Leng. Cua Le Leng had the unlimited liability to use Siain Transports funds to pay the obligations incurred by Siain Enterprises. Thus, it is clear that Siain Enterprises, Siain Transport and Yuyek are characterized by oneness of operations vested in Cua Le Leng alone. Consequently, these corporations were proven to be mere alteregos of Cua Le Leng. Where clear evidence presented support the fact that a corporations affiliates have received large amounts which became the consideration for the company execution of a real estate mortgage over its properties, then the piercing doctrine