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LBC Express, Inc. vs.

Court of Appeals,

G.R. No. 108670, 236 SCRA 602 , September 21, 1994 In this Petition for Review on Certiorari, petitioner LBC questions the decision 1 of respondent Court of Appeals affirming the judgment of the Regional Trial Court of Dipolog City, , awarding moral and exemplary damages, reimbursement of P32,000.00, and costs of suit; but deleting the amount of attorney's fees. Private respondent Adolfo Carloto, incumbent President-Manager of private respondent Rural Bank of Labason, alleged that on November 12, 1984, he was in Cebu City transacting business with the Central Bank Regional Office. He was instructed to proceed to Manila on or before November 21, 1984 to follow-up the Rural Bank's plan of payment of rediscounting obligations with Central Bank's main office in Manila. 2 He then purchased a round trip plane ticket to Manila. He also phoned his sister Elsie Carloto-Concha to send him ONE THOUSAND PESOS (P1,000.00) for his pocket money in going to Manila and some rediscounting papers thru petitioner's LBC Office at Dipolog City. 3 On November 16, 1984, Mrs. Concha thru her clerk, Adelina Antigo consigned thru LBC Dipolog Branch the pertinent documents and the sum of ONE THOUSAND PESOS (P1,000.00) to respondent Carloto at No. 2 Greyhound Subdivision, Kinasangan, Pardo, Cebu City. This was evidenced by LBC Air Cargo, Inc., Cashpack Delivery Receipt No. 34805. On November 17, 1984, the documents arrived without the cashpack. Respondent Carloto made personal follow-ups on that same day, and also on November 19 and 20, 1984 at LBC's office in Cebu but petitioner failed to deliver to him the cashpack. Consequently, respondent Carloto said he was compelled to go to Dipolog City on November 24, 1984 to claim the money at LBC's office. His effort was once more in vain. On November 27, 1984, he went back to Cebu City at LBC's office. He was, however, advised that the money has been returned to LBC's office in Dipolog City upon shipper's request. Again, he demanded for the ONE THOUSAND PESOS (P1,000.00) and refund of FORTY-NINE PESOS (P49.00) LBC revenue charges. He received the money only on December 15, 1984 less the revenue charges. Respondent Carloto claimed that because of the delay in the transmittal of the cashpack, he failed to submit the rediscounting documents to Central Bank on time. As a consequence, his rural bank was made to pay the Central Bank THIRTY-TWO THOUSAND PESOS (P32,000.00) as penalty interest. 4 He allegedly suffered embarrassment and humiliation. Petitioner LBC, on the other hand, alleged that the cashpack was forwarded via PAL to LBC Cebu City branch on November 22, 1984. 5 On the same day, it was delivered at respondent Carloto's residence at No. 2 Greyhound Subdivision, Kinasangan, Pardo, Cebu City. However, he was not around to receive it. The delivery man served instead a claim notice to insure he would personally receive the money. This was annotated on Cashpack Delivery Receipt No. 342805. Notwithstanding the said notice, respondent Carloto did not claim the cashpack at LBC Cebu. On November 23, 1984, it was returned to the shipper, Elsie Carloto-Concha at Dipolog City. Claiming that petitioner LBC wantonly and recklessly disregarded its obligation, respondent Carloto instituted an action for Damages Arising from Non-performance of Obligation docketed as Civil Case No. 3679 before the Regional Trial Court of Dipolog City on January 4, 1985. On June 25, 1988, an amended complaint was filed where respondent rural bank joined as one of the plaintiffs and prayed for the reimbursement of THIRTY-TWO THOUSAND PESOS (P32,000.00). After hearing, the trial court rendered its decision, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered: 1. Ordering the defendant LBC Air Cargo, Inc. to pay unto plaintiff Adolfo M. Carloto and Rural Bank of Labason, Inc., moral damages in the amount of P10,000.00; exemplary damages in the amount of P5,000.00; attorney's fees in the amount of P3,000.00 and litigation expenses of P1,000.00; 2. Sentencing defendant LBC Air Cargo, Inc., to reimburse plaintiff Rural Bank of Labason, Inc. the sum of P32,000.00 which the latter paid as penalty interest to the Central Bank of the Philippines as penalty interest for failure to rediscount its due bills on time arising from the defendant's failure to deliver the cashpack, with legal interest computed from the date of filing of this case; and 3. Ordering defendant to pay the costs of these proceedings. SO ORDERED. 6 On appeal, respondent court modified the judgment by deleting the award of attorney's fees. Petitioner's Motion for Reconsideration was denied in a Resolution dated January 11, 1993. Hence, this petition raising the following questions, to wit: 1. Whether or not respondent Rural Bank of Labason Inc., being an artificial person should be awarded moral damages. 2. Whether or not the award of THIRTY-TWO THOUSAND PESOS (P32,000.00) was made with grave abuse of discretion. 3. Whether or not the respondent Court of Appeals gravely abused its discretion in affirming the trial court's decision ordering petitioner LBC to pay moral and exemplary damages despite performance of its obligation. We find merit in the petition. The respondent court erred in awarding moral damages to the Rural Bank of Labason, Inc., an artificial person. Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. 7 A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. 8 Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life 9 all of which cannot be suffered by respondent bank as an artificial person. We can neither sustain the award of moral damages in favor of the private respondents. The right to recover moral damages is based on equity. Moral damages are recoverable only if the case falls under Article 2219 of the Civil Code in relation to Article 21. 10 Part of conventional wisdom is that he who comes to court to demand equity, must come with clean hands. In the case at bench, respondent Carloto is not without fault. He was fully aware that his rural bank's obligation would mature on November 21, 1984 and his bank has set aside cash for these bills payable. 11 He was all set to go to Manila to settle this obligation. He has received the documents necessary for the approval of their rediscounting application with the Central Bank. He has also received the plane ticket to go to Manila. Nevertheless, he did not immediately proceed to Manila but instead tarried for days allegedly claiming his ONE THOUSAND PESOS (P1,000.00) pocket money. Due to his delayed trip, he failed to submit the rediscounting papers to the Central Bank on time and his bank was penalized THIRTY-TWO THOUSAND PESOS (P32,000.00) for failure to pay its obligation on its due date. The undue importance given by respondent Carloto to his ONE THOUSAND PESOS (P1,000.00) pocket money is inexplicable for it was not indispensable for him to follow up his bank's rediscounting application with Central Bank. According to said respondent, he needed the money to "invite people for a snack or dinner." 12 The attitude of said respondent speaks ill of his ways of business dealings and cannot be countenanced by this Court. Verily, it will be revolting to our sense of ethics to use it as basis for awarding damages in favor of private respondent Carloto and the Rural Bank of Labason, Inc. We also hold that respondents failed to show that petitioner LBC's late delivery of the cashpack was motivated by personal malice or bad faith, whether intentional or thru gross negligence. In fact, it was proved during the trial that the cashpack was consigned on November 16, 1984, a Friday. It was sent to Cebu on November 19, 1984, the next business day. Considering this circumstance, petitioner cannot be charged with gross neglect of duty. Bad faith under the law can not be presumed; it must be established by clearer and convincing evidence. 13 Again, the unbroken jurisprudence is that in breach of contract cases where the defendant is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of the branch of the obligation which the parties had foreseen or could reasonable have foreseen. The damages, however, will not include liability for moral damages. 14

Prescinding from these premises, the award of exemplary damages made by the respondent court would have no legal leg to support itself. Under Article 2232 of the Civil Code, in a contractual or quasi-contractual relationship, exemplary damages may be awarded only if the defendant had acted in "a wanton, fraudulent, reckless, oppressive, or malevolent manner." The established facts of not so warrant the characterization of the action of petitioner LBC. IN VIEW WHEREOF, the Decision of the respondent court dated September 30, 1992 is REVERSED and SET ASIDE; and the Complaint in Civil Case No. 3679 is ordered DISMISSED. No costs. SO ORDERED.

ACME SHOE, RUBBER & PLASTIC CORPORATION vs. COURT OF APPEALS


260 SCRA 714 Business Organization Corporation Law Rule on Moral Damages When It Comes to Corporations In June 1978, Acme Shoe, Rubber & Plastic Corporation executed a chattel mortgage in favor of Producers Bank of the Philippines in consideration of a loan in the amount of P3 million. The loan was paid. Thereafter, Producers Bank extended another P2.7 million loan to Acme. The same was paid. In 1984, Producers Bank extended a P1 million loan to Acme. This time, Acme was unable to pay and eventually, Producers Bank foreclosed the property subject of the chattel mortgage executed in June 1978. Acme opposed the foreclosure as it alleged that the 1984 loan was no longer covered by the chattel mortgage of 1978. Acme is also asking for moral damages (worth P3 million) for the groundless foreclosure done by Producers Bank. ISSUE: Whether or not Acme Shoe is entitled to moral damages. HELD: No. It is true that the chattel mortgage executed in 1978 for the initial P3 million loan only covers the initial loan and not the 1984 P1 million loan. However, Acme Shoes is not entitled to moral damages. Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and grieves of life all of which cannot be suffered by Acme Shoes as an artificial person.

MAMBULAO LUMBER COMPANY, vs. PHILIPPINE NATIONAL BANK and ANACLETOHERALDO


On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 (approved for a loan of P100,000 only) with the Naga Branch of defendant PNB. To secure payment, the plaintiff mortgaged aparcel of land, together with the buildings and improvements existing thereon, situated in the poblacion of Jose Panganiban (formerly Mambulao), province of Camarines Norte. The PNB released from the approvedloan the sum of P27,500, and another release of P15,500.The plaintiff failed to pay the amortization on the amounts released to and received by it. It was found that the plaintiff had already stopped operation about the end of 1957 or early part of 1958.The unpaid obligation of the plaintiff as of September 22, 1961, amounted to P57,646.59, excludingattorney's fees. A foreclosure sale of the parcel of land, together with the buildings and improvementsthereon was, held on November 21, 1961, and the said property was sold to the PNB for the sum of P56,908.00, subject to the right of the plaintiff to redeem the same within a period of one year.The plaintiff sent a letter reiterating its request that the foreclosure sale of the mortgaged chattels bediscontinued on the grounds that the mortgaged indebtedness had been fully paid and that it could not belegally effected at a place other than the City of Manila.The trial court sentenced the Mambulao Lumber Company to pay to the defendant PNB the sum of P3,582.52 with interest thereon at the rate of 6% per annum. The plaintiff on appeal advanced that its totalindebtedness to the PNB as of November 21, 1961, was only P56,485.87 and not P58,213.51 as concludedby the court a quo; hence, the proceeds of the foreclosure sale of its real property alone in the amount of P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB thereafter was more thansufficient to liquidate its obligation, thereby rendering the subsequent foreclosure sale of its chattelsunlawful;That for the acts of the PNB in proceeding with the sale of the chattels, in utter disregard of plaintiff'svigorous opposition thereto, and in taking possession thereof after the sale thru force, intimidation,coercion, and by detaining its "man-in-charge" of said properties, the PNB is liable to plaintiff fordamages and attorney's fees. ISSUE: Whether or not PNB may be held liable to plaintiff Corporation for damages and attorneys fees. HELD: Herein appellant's claim for moral damages, seems to have no legal or factual basis. Obviously, anartificial person like herein appellant corporation cannot experience physical sufferings, mentalanguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which arebasis of moral damages . A corporation may have a good reputation which, if besmirched, may also be aground for the award of moral damages. The same cannot be considered under the facts of this case,however, not only because it is admitted that herein appellant had already ceased in its business operationat the time of the foreclosure sale of the chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels could have upon its reputation or business standing would undoubtedlybe the same whether the sale was conducted at Jose Panganiban, Camarines Norte, or in Manila which is theplace agreed upon by the parties in the mortgage contract.

SIMEX INTERNATIONAL, INC. vs. CA


[G.R. No. 88013 March 19, 1990] Facts: Simex International is a private corporation engaged in the exportation of food products. It buys these products from various local suppliers and then sells them abroad, particularly in the United States, Canada and the Middle East. Most of its exports are purchased by the petitioner on credit. Simex is a depositor of TRB and maintained a checking account in its Cubao branch. Simex maintained an account in the amount of P100,000.00, thus increasing its balance as of that date to P190,380.74. Subsequently, the petitioner issued several (8) checks against its deposit but was surprised to learn later that they had been dishonored for insufficient funds. As a consequence, actions on the pending orders of SIMEX with the other suppliers (California Manufacturing Comp., Malabon Longlife Trading Corp., etc.) whose checks were dishonored was deferred. And thus made these companies send demand letters to SIMEX threatening prosecution if the checks were not made good.

SIMEX complained to TRB and found out that the sum of P100,000.00 deposited had not been credited. The error was rectified on June 17, 1981, and the dishonored checks were paid after they were re-deposited. SIMEX sent demand letter for reparation against TRB, which was not met, thus a complaint was filed in CFI Rizal by SIMEX. The court denied the moral & exemplary damages but upheld and ordered TRB to pay for nominal damages in the amount of P20,000.00 plus attys fees & costs, which was then affirmed by the CA. The CA found with the trial court that the private respondent was guilty of negligence but agreed that the petitioner was nevertheless not entitled to moral damages. It said: The essential ingredient of moral damages is proof of bad faith (De Aparicio vs. Parogurga, 150 SCRA 280). Indeed, there was the omission by the defendant-appellee bank to credit appellant's deposit of P100,000.00 on May 25, 1981. But the bank rectified its records. It credited the said amount in favor of plaintiff-appellant in less than a month. The dishonored checks were eventually paid. These circumstances negate any imputation or insinuation of malicious, fraudulent, wanton and gross bad faith and negligence on the part of the defendant-appellant. It is this ruling that is faulted in the petition now before us. Issue: Whether or not TRB is guilty of negligence which warrants SIMEX reparation for damages. Held: YES. Award SIMEX with moral damages (P20,000) and exemplary damages (P50,000). The initial carelessness of the respondent bank, aggravated by the lack of promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical attitude toward the complaining depositor constituted the gross negligence, if not wanton bad faith, that the respondent court said had not been established by the petitioner. There was also prejudice suffered by SIMEX in the fact that the petitioner's credit line was canceled and its orders were not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its reputation was tarnished. Its standing was reduced in the business community. All this was due to the fault of the respondent bank which was undeniably remiss in its duty to the petitioner. We shall recognize that the petitioner did suffer injury because of the private respondent's negligence that caused the dishonor of the checks issued by it. The immediate consequence was that its prestige was impaired because of the bouncing checks and confidence in it as a reliable debtor was diminished. In the case at bar, it is obvious that the respondent bank was remiss in that duty and violated that relationship. What is especially deplorable is that, having been informed of its error in not crediting the deposit in question to the petitioner, the respondent bank did not immediately correct it but did so only one week later or twenty-three days after the deposit was made. It bears repeating that the record does not contain any satisfactory explanation of why the error was made in the first place and why it was not corrected immediately after its discovery. Such ineptness comes under the concept of the wanton manner contemplated in the Civil Code that calls for the imposition of exemplary damages.

PALAY INC. vs. CLAVE

G.R. No. L-56076 September 21, 1983 Facts: On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott sold a parcel of land owned by the corporation to the private respondent, Nazario Dumpit, by virtue of a Contract to Sell. The sale price was P23,300.00 with 9% interest per annum, payable with a down payment of P4,660.00 and monthly instalments of P246.42 until fully paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly instalment after the lapse of 90 days from the expiration of the grace period of one month, without need of notice and with forfeiture of all instalments paid. 2. Respondent Dumpit paid the down payment and several instalments amounting to P13,722.50 with the last payment was made on December 5, 1967 for instalments up to September 1967. Almost six (6) years later, private respondent wrote petitioner offering to update all his overdue accounts and sought consent to the assignment of his rights to a certain Lourdes Dizon. Petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold. 3. Respondent filed a letter complaint with the National Housing Authority (NHA) questioning the validity of the rescission. The NHA held that the rescission is void in the absence of either judicial or notarial demand. Palay, Inc. and Onstott in his capacity as President of the corporation, jointly and severally, was ordered to refund Dumpit the amount paid plus 12% interest from the filing of the complaint. Petitioners' MR was denied by the NHA. Respondent Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the present petition. 1. Issue: W/N demand is necessary to rescind a contract Ruling: As held in previous jurisprudence, the judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission. A written notice is indispensable to inform the defaulter of the rescission. Hence, the resolution by petitioners of the contract was ineffective and inoperative against private respondent for lack of notice of resolution (as held in the U.P. vs. Angeles case). The act of a party in treating a contract as cancelled should be made known to the other. Later, RA 6551 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Instalment Payments, emphasized the indispensability of notice of cancellation to the buyer when it specifically provided: Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer. (Emphasis supplied). Moreover, there was no waiver on the part of the private respondent of his right to be notified under paragraph 6 of the contract since it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate. Finally, it is a matter of public policy to protect buyers of real estate on instalment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on instalment payments. As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should be replaced by another acceptable lot but since the property had already been sold to a third person and there is no evidence on record that other lots are still available, private respondent is entitled to the refund of instalments paid plus interest at the legal rate of 12% computed from the date of the institution of the action. It would be most inequitable if petitioners were to be allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another. Onstott not personally liable Onstott was made liable because he was then the President of the corporation and the controlling stockholder but there was no sufficient proof that he used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just because he "appears

to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality. Finally, there are no badges of fraud on the petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6 (supra) of the contract when it rescinded the contract to sell extrajudicially and had sold it to a third person. Petitioner Palay, Inc. is liable to refund to respondent Dumpit the amount of P13,722.50, with interest at twelve (12%) p.a. from November 8, 1974, the date of the filing of the Complaint.

Jardine Davies Inc. vs. CA and Far East Mills Supply Corporation
Corporation entitled to Moral Damages (reputation besmirched) Facts: In 1992 Purefoods decided to install 2 generators in its food processing plant in San Roque, Marikina. A bidding for the supply and installation was held among the bidders was Far East Mills Supply Corporation (FEMSCO). Thereafter, in a letter addressed to FEMSCO president, Purefoods confirmed the award of the contract. Immediately FEMSCO submitted the requirements such as a performance bond and all risk insurance policy as well as purchasing the necessary materials. However, in another letter, Purefoods unilaterally cancelled the award citing significant factors which were uncovered and brought to their attention which dictate the cancellation and wa rrant a total review and re-bid of the project. FEMSCO protested the cancellation but before the matter could be resolve, Purefoods awarded the project with Jardine Nell, a division of Jardine Davies. FEMSCO sued both Purefoods and Jardine. The RTC granted Jardines demurrer to evidence but found in favor of FEMSCO against Purefoods and order indemnification. FEMSCO appealed the granting of the demurrer filed by Jardine and Purefoods appealed the decision of the court. The CA affirmed the decision of the RTC but ordered Jardine to pay FEMSCO damages for inducing Purefoods to violate the contract as such, Jardine must pay moral damages. In addition, Purefoods was also directed to pay FEMSCO moral damages and exemplary damages Both Purefoods and Jardine filed motions for reconsideration which were denied. Issue: Whether or not moral damages may be granted to a corporation? Held: The Court has awarded in the past moral damages to a corporation whose reputation has been besmirched. (Asset Privatization Trust v. CA, 300 SCRA 379) In this case, respondent FEMSCO has sufficiently shown that its reputation was tarnished after it immediately ordered equipment from its suppliers on account of the urgency of the project, only to be canceled later. The Court thus, sustained respondent appellate courts award of moral damages. However, as there is no showing whatsoever that Jardine induced Purefoods, the decision of the CA is modified. The order to Jardine Davies to pay FEMSCO moral damages is reversed and set aside.

Filipinas Broadcasting vs. Ago Medical Center


GRN 141994 January 17, 2005 FACTS: Rima & Alegre were host of FBNI radio program Expose. Respondent Ago was the owner of the Medical & Educational center, subject of the radio program Expose. AMEC claimed that the broadcasts were defamatory and owner Ago and school AMEC claimed for damages. T he complaint further alleged that AMEC is a reputable learning institution. With the supposed expose, FBNI, Rima and Alegre transmitted malicious imputations and as such, destroyed plaintiffs reputation. FBNI was included as defendant for allegedly failing to exercise due diligence in the selection and supervision of its employees. The trial court found Rimas statements to be within the bounds of freedom of speech and ruled that the broadcast was libelous. It ordered the defendants Alegre and FBNI to pay AMEC 300k for moral damage s. ISSUE: Whether or not AMEC is entitled to moral damages. RULING: A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. Nevertheless, AMECs claim, or moral damages fall under item 7 of Art 2219 of the NCC. This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Art 2219 (7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or any other form of defamation and claim for moral damages. Moreover, where the broadcast is libelous per se, the law implied damages. In such a case, evidence of an honest mistake or the want of character or reputation of the party libeled goes only in mitigation of damages. In this case, the broadcasts are libelous per se. thus, AMEC is entitled to moral damages. However, we find the award P500,000 moral damages unreasonable. The record shows that even though the broadcasts were libelous, per se, AMEC has not suffered any substantial or material damage to its reputation. Therefore, we reduce the award of moral damages to P150k. JOIN TORT FEASORS are all the persons who command, instigate, promote, encourage, advice countenance, cooperate in, aid or abet the commission of a tort, as who approve of it after it is done, for its benefit.

PCGG vs. SANDIGANBAYAN


Facts: In its continuing search for ill-gotten wealth, herein petitioner Presidential Commission on Good Government (PCGG) filed in the Sandiganbayan a case (Civil Case No. 0009) for reconveyance, reversion, accounting, restitution and damages against Manuel H. Nieto, Jose L. Africa, Roberto S. Benedicto, Potenciano Ilusorio, Juan Ponce Enrile and Ferdinand Marcos, Jr. alleging, in substance, that said defendants acted as dummies of the late strongman and devised schemes and strategems to monopolize the telecommunications industry. Annexed to the complaint is a listing of the assets of defendants Nieto and Africa, among which are their shares of stock in private respondent Aerocom Investors and Managers, Inc. (Aerocom).

Almost a year later, the PCGG sought to sequester Aerocom under a writ of sequestration dated June 15, 1988, which was served on and received under protest by Aerocoms president on August 3, 1988. Seven days after receipt of the sequestration order, Aerocom on August 10, 1988 filed a complaint against the PCGG (docketed as Civil Case No. 0044), urging the Sandiganbayan to nullify the same on the ground that it was served on Aerocom beyond the eighteen-month period from the ratification of the 1987 Constitution as provided for in Section 26, Article XVIII. In its amended answer, the PCGG specifically alleged that Aerocom has no cause of action against it since the issuance of the writ of sequestration on June 15, 1988 was well-within the 18-month constitutional deadline counted from February 2, 1987, the date when the people, in a plebiscite, overwhelmingly ratified the 1987 Constitution. The Sandiganbayan in its Resolution acted favorably on Aerocoms Manifestation and Motion and thus ordered the PCGG to release the dividends pertaining to Aerocom except the dividends on the sequestered shares of stock registered in the names of Manuel Nieto and Jose Africa in POTC, ETPI and Aerocom. Held: The PCGG cannot justify its failure, as found by the Sandiganbayan, to file the corresponding judicial action against Aerocom within the six (6)-month period as provided for under the same constitutional provision in focus (Section 26, Article XVIII, second paragraph) by the fact that Aerocom was mentioned in the complaint of the PCGG in Civil Case No. 0009 (the Nieto, Africa, et al. case) and in Annex A thereof notwithstanding that Aerocom was not impleaded as party-defendant, and on the argument that the filing of Civil Case No. 0009 against the Nieto, Africa, et al. group is enough compliance with the judicial action requirement. The case of Republic v. Sandiganbayan, 240 SCRA 376, January 23, 1995, relied upon by the PCGG, has no rightful application, inasmuch as this Courts pronouncements therein, in answer to this crucial question: DOES INCLUSION IN THE COMPLAINTS FILED BY THE PCGG BEFORE THE SANDIGANBAYAN OF SPECIFIC ALLEGATIONS OF CORPORATIONS BEING `DUMMIES OR UNDER THE CONTROL OF ONE OR ANOTHER OF THE DEFENDANTS NAMED THEREIN AND USED AS INSTRUMENTS FOR ACQUISITION, OR AS BEING DEPOSITARIES OR PRODUCTS, OF ILL-GOTTEN WEALTH; OR THE ANNEXING TO SAID COMPLAINTS OF A LIST OF SAID FIRMS, BUT WITHOUT ACTUALLY IMPLEADING THEM AS DEFENDANTS, SATISFY THE CONSTITUTIONAL REQUIREMENT THAT IN ORDER TO MAINTAIN A SEIZURE EFFECTED IN ACCORDANCE WITH EXECUTIVE ORDER NO. 1, s. 1986, THE CORRESPONDING `JUDICIAL ACTION OR PROCEEDING SHOULD BE FILED WITHIN THE SIX-MONTH PERIOD PRESCRIBED IN SECTION 26, ARTICLE XVIII, OF THE (1987) CONSTITUTION?, presuppose a valid and existing sequestration of the unimpleaded corporation/s concerned. Thus 1) Section 26, Article XVIII of the Constitution does not, by its terms or any fair interpretation thereof, require that corporations or business enterprises alleged to be repositories of `ill-gotten wealth, as the term is used in said provision, be actually and formally impleaded in the actions for the recovery thereof, in order to maintain in effect existing sequestrations thereof; 2) complaints for the recovery of ill-gotten wealth which merely identify and/or allege said corporations or enterprises to be the instruments, repositories or the fruits of ill-gotten wealth, without more, come within the meaning of the phrase `corresponding judicial action or proceeding contemplated by the constitutional provision referred to; the more so, that normally, said corporations, as distinguished from their stockholders or members, are not generally suable for the latters illegal or criminal actuations in the acquisition of the assets invested by them in the former; 3) even assuming the impleading of said corporations to be necessary and proper so that judgment may comprehensively and effectively be rendered in the actions, amendment of the complaints to implead them as defendants may, under existing rules of procedure, be done at any time during the pendency of the actions thereby initiated, and even during the pendency of an appeal to the Supreme Court - a procedure that, in any case, is not inconsistent with or proscribed by the constitutional time limits to the filing of the corresponding complaints `for i.e., with regard or in relation to, in respect of, or in connection with, or concerning - orders of sequestration, freezing, or provisional takeover. xxx xxx xxx There is no existing sequestration to talk about in this case, as the writ issued against Aerocom, to repeat, is invalid for reasons hereinbefore stated. Ergo, the suit in Civil Case No. 0009 against Mr. Nieto and Mr. Africa as shareholders in Aerocom is not and cannot ipso facto be a suit against the unimpleaded Aerocom itself without violating the fundamental principle that a corporation has a legal personality distinct and separate from its stockholders. Such is the ruling laid down in PCGG v. Interco, to quote:

x x x failure to implead these corporations as defendants and merely annexing a list of such corporations to the complaints is a violation of their right to due process for it would in effect be disregarding their distinct and separate personality without a hearing. In cases where stocks of a corporation were allegedly the fruits of ill-gotten wealth, it should be remembered that in most of these cases the stocks involved constitute a substantial if not controlling interest in the corporations. The basic tenets of fair play demand that these corporations be impleaded as defendants since a judgment in favor of the government will undoubtedly substantially and decisively affect the corporations as distinct entities. The judgment could strip them of everything without being previously heard as they are not parties to the action in which the judgment is rendered. x x x. Holding that the `corresponding judicial action or proceeding contemplated by the Constitution is any action concerning or involving the corporation under sequestration is oversimplifying the solution, the result of which is antagonistic to the principles of justice and fair play. x x x the actions contemplated by the Constitution should be those which include the corporation not as a mere annex to the complaint but as defendant. This is the minimum requirement of the due process guarantee. Short of being impleaded, the corporation has no standing in the judicial action. It cannot adequately defend itself. It may not even be heard. On the x x x opinion that alternatively the corporations can be impleaded as defendants by amendment of the complaint, Section 26, Article XVIII of the Constitution would appear to preclude this procedure, for allowing amendment of the complaint to implead theretofore unimpleaded corporations would in effect allow complaints against the corporation to be filed beyond the periods fixed by said Section 26. xxx xxx xxx

While government efforts to recover illegally amassed wealth should have support from all its branches, eagerness and zeal should not be allowed to run berserk, overriding in the process the very principles that it is sworn to uphold. In our legal system, the ends do not always justify the means. Wrongs are never corrected by committing other wrongs, and as above-discussed the recovery of ill-gotten wealth does not and should never justify unreasonable intrusions into constitutionally forbidden grounds. x x x. The PCGG issued the aforequoted Certification and Resolution 94-066 apparently on the basis of a Memorandum prepared by Atty. Ismael B. Sanchez, former legal counsel of the PCGG, advising the latter not to interpose any objection to the release of the POTC cash dividends. The Sandiganbayan found the PCGG to be in estoppel from denying the non-sequestered status of Aerocom and from refusing the release of cash dividends in favor of the latter. The PCGG takes exception to this finding on the claim that the State should not be held vulnerable to estoppel for the acts of past officials. The PCGGs contention is not persuasive under the attendant circumstances. While we agree with the statement that the State is immune from estoppel, this concept, as clarified by this Court thru Mr. Justice Melo in Republic v. Sandiganbayan, et al. is understood to refer to acts and mistakes of its officials especially those which are irregular. Here, other than its bare assertion that Atty. Sanchezs Opinion is illegal and prejudicial, the PCGG has not presented convincing evidence to prove irregularity or negligence on the part of Atty. Sanchez in rendering his Opinion favorable to Aerocom. In fact, no less than PCGG Chairman Magtanggol Gunigundo and the rest of the Commissioners clearly heeded the recommendation of Atty. Sanchez by affixing their signatures on Resolution No. 94-066 allowing the release of the cash dividends declared in 1993 accruing to Aerocoms shares of stock in POTC. Elementary notions of consistency and fair play call upon the PCGG to honor the release of the cash dividends presently requested by Aerocom, after a similar commitment has been collectively confirmed by its commissioners in black and white. A ruling to the contrary, in the erudite language of Justice Escareal of the Sandiganbayan as adopted in Republic v. Sandiganbayan, 226 SCRA 314, is not only illogical and irrational, but inequitable and pernicious as well, for it may open the door for capricious adventurism on the part of the policy-makers of the land, and disregard for the majesty of the law, which could ultimately bring about the citizenrys loss of faith and confidence in the sincerity of the government in its dealings with the governed.

GOOD EARTH EMPORIUM vs. CA


Facts: A Lease Contract, dated October 16, 1981, was entered into by and between ROCES-REYES REALTY, INC., as lessor, and GOOD EARTH EMPORIUM, INC., as lessee, for a term of three years beginning November 1, 1981 and ending October 31, 1984 at a monthly rental of P65,000.00 (Rollo, p. 32; Annex "C" of Petition). The building which was the subject of the contract of lease is a five-storey building located at the corner of Rizal Avenue and Bustos Street in Sta. Cruz, Manila. From March 1983, up to the time the complaint was filed, the lessee had defaulted in the payment of rentals, as a consequence of which, private respondent ROCES-REYES REALTY, INC., (hereinafter designated as ROCES for brevity) filed on October 14, 1984, an ejectment case (Unlawful Detainer) against herein petitioners, GOOD EARTH EMPORIUM, INC. and LIM KA PING, hereinafter designated as GEE. After the latter had tendered their responsive pleading, the lower court (MTC, Manila) on motion of Roces rendered judgment on the pleadings dated April 17, 1984, ordering defendants (herein petitioners) and all persons claiming title under him to vacate the premises and surrender the same to the plaintiffs (herein respondents).

On May 16, 1984, Roces filed a motion for execution which was opposed by GEE on May 28, 1984 simultaneous with the latter's filing of a Notice of Appeal. The court resolved to grant the motion for being meritorious. On June 14, 1984, a writ of execution was issued. Upon an exparte Motion of ROCES, the trial court issued an Alias Writ of Execution dated February 25, 1985 which was implemented on February 27, 1985. GEE thru counsel filed a motion to quash the writ of execution and notice of levy and an urgent Ex-parte Supplemental Motion for the issuance of a restraining order, on March 7, and 20, 1985, respectively. On March 21, 1985, the lower court issued a restraining order to the sheriff to hold the execution of the judgment pending hearing on the motion to quash the writ of execution. After hearing and disposing some other incidents, the MeTC denied the motion to quash for lack of merit. GEE appealed and by coincidence, was raffled to the same Court, RTC Branch IX. Roces moved to dismiss the appeal but the Court denied the motion. On certiorari, the Court of Appeals dismissed Roces' petition and remanded the case to the RTC. Meantime, Branch IX became vacant and the case was re-raffled to Branch XLIV. On April 6, 1987, the Regional Trial Court of Manila, finding that the amount of P1 million evidenced by Exhibit "I" and another P1 million evidenced by the pacto de retro sale instrument (Exhibit "2") were in full satisfaction of the judgment obligation, reversed the decision of the MTC. On further appeal, the Court of Appeals reversed the decision of the RTC and reinstated the Resolution of the MeTC of Manila. Issue: Whether or not there was full satisfaction of the judgment debt in favor of respondent corporation which would justify the quashing of the Writ of Execution. Held: A careful study of the common exhibits (Exhibits 1/A and 2/B) shows that nowhere in any of said exhibits was there any writing alluding to or referring to any settlement between the parties of petitioners' judgment obligation. Moreover, there is no indication in the receipt, Exhibit "1", that it was in payment, full or partial, of the judgment obligation. Likewise, there is no indication in the pacto de retro sale which was drawn in favor of Jesus Marcos Roces and Marcos V. Roces and not the respondent corporation, that the obligation embodied therein had something to do with petitioners' judgment obligation with respondent corporation. Finding that the common exhibit, Exhibit 1/A had been signed by persons other than judgment creditors (Roces-Reyes Realty, Inc.) coupled with the fact that said exhibit was not even alleged by GEE and Lim Ka Ping in their original motion to quash the alias writ of execution but produced only during the hearing which production resulted in petitioners having to claim belatedly that there was an "overpayment" of about half a million pesos and remarking on the utter absence of any writing in Exhibits "1/A" and "2/B" to indicate payment of the judgment debt, respondent Appellate Court correctly concluded that there was in fact no payment of the judgment debt. In the case at bar, the supposed payments were not made to Roces-Reyes Realty, Inc. or to its successor in interest nor is there positive evidence that the payment was made to a person authorized to receive it. No such proof was submitted but merely inferred by the RTC from Marcos Roces having signed the Lease Contract as President which was witnessed by Jesus Marcos Roces. The latter, however, was no longer President or even an officer of Roces-Reyes Realty, Inc. at the time he received the money (Exhibit "1") and signed the sale with pacto de

retro (Exhibit "2"). He, in fact, denied being in possession of authority to receive payment for the respondent corporation nor does the receipt show that he signed in the same capacity as he did in the Lease Contract at a time when he was President for respondent corporation. On the other hand, Jesus Marcos Roces testified that the amount of P1 million evidenced by the receipt (Exhibit "1") is the payment for a loan extended by him and Marcos Roces in favor of Lim Ka Ping. The assertion is home by the receipt itself whereby they acknowledged payment of the loan in their names and in no other capacity. A corporation has a personality distinct and separate from its individual stockholders or members. Being an officer or stockholder of a corporation does not make one's property also of the corporation, and vice-versa, for they are separate entities. Shareowners are in no legal sense the owners of corporate property (or credits) which is owned by the corporation as a distinct legal person. As a consequence of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder, nor is the stockholder's debt or credit that of the corporation. The absence of a note to evidence the loan is explained by Jesus Marcos Roces who testified that the IOU was subsequently delivered to private respondents (Rollo, pp. 97-98). Contrary to the Regional Trial Court's premise that it was incumbent upon respondent corporation to prove that the amount was delivered to the Roces brothers in the payment of the loan in the latter's favor, the delivery of the amount to and the receipt thereof by the Roces brothers in their names raises the presumption that the said amount was due to them. There is a disputable presumption that money paid by one to the other was due to the latter. It is for GEE and Lim Ka Ping to prove otherwise. In other words, it is for the latter to prove that the payments made were for the satisfaction of their judgment debt and not vice versa. The fact that at the time payment was made to the two Roces brothers, GEE was also indebted to respondent corporation for a larger amount, is not supportive of the Regional Trial Court's conclusions that the payment was in favor of the latter, especially in the case at bar where the amount was not receipted for by respondent corporation and there is absolutely no indication in the receipt from which it can be reasonably inferred, that said payment was in satisfaction of the judgment debt. Likewise, no such inference can be made from the execution of the pacto de retro sale which was not made in favor of respondent corporation but in favor of the two Roces brothers in their individual capacities without any reference to the judgment obligation in favor of respondent corporation.

FELICIANO vs. COMMISSION ON AUDIT


Facts: A Special Audit Team from Commission on Audit (COA) Regional Office No. VIII audited the accounts of the Leyte Metropolitan Water District (LMWD). Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting payment of auditing fees. As General Manager of LMWD, Engr. Ranulfo C. Feliciano sent a reply dated 12 October 1999 informing COAs Regional Director that the wat er district could not pay the auditing fees. Feliciano cited as basis for his action Sections 6 and 20 of PD 198, as well as Section 18 of RA 6758. The Regional Director referred Felicianos reply to the COA Chairman on 18 October 1999. On 19 October 1999, Feliciano wrote COA through the Regional Director asking for refund of all auditing fees LMWD previously paid to COA. On 16 March 2000, Feliciano received COA Chairman Celso D. Gangans Resolution dated 3 January 2000 denying Felicianos request for COA to cease all audit services, and to sto p charging auditing fees, to LMWD. The COA also denied Felicianos request for COA to ref und all auditing fees previously paid by LMWD. Feliciano filed a motion for reconsideration on 31 March 2000, which COA denied on 30 January 2001. On 13 March 2001, Felicaino filed the petition for certiorari. Issue: Whether a Local Water District (LWD) is a government-owned or controlled corporation. Held: The Constitution recognizes two classes of corporations. The first refers to private corporations created under a general law. The second refers to government-owned or controlled corporations created by special charters. The Constitution emphatically prohibits the creation of private corporations except by a general law applicable to all citizens. The purpose of this constitutional provision is to ban private corporations created by special charters, which historically gave certain individuals, families or groups special privileges denied to other citizens. In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated differently, only corporations created under a general law can qualify as private corporations. Under existing laws, that general law is the Corporation Code, except that the Cooperative Code governs the incorporation of cooperatives. The Constitution authorizes Congress to create government-owned or controlled corporations through special charters. Since private corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled. Obviously, LWDs are not private corporations because they are not created under the Corporation Code. LWDs are not registered with the Securities and Exchange Commission. Section 14 of the Corporation Code states that [A]ll corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation x x x. LWDs have no articles of incorporation, no incorporators and no stockholders or members. There are no stockholders or members to elect the board directors of LWDs as in the case of all corporations registered with the Securities and Exchange Commission. The local mayor or the provincial governor appoints the directors of LWDs for a fixed term of office. LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only government-owned or controlled corporations may have special charters, LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs are private corporations with a special charter is to admit that their existence is constitutionally infirm. Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs derive their legal existence and power from PD 198.

MAGSAYSAY-LABRADOR vs. COURT OF APPEALS

G.R. No. 58168. December 19, 1989.Fernan, C.J. FACTS: Private respondent Adelaida Rodriguez Magsaysay filed an action against Subic Land Corporation (SUBIC), among others, to annul the deed of assignment and deed of mortgage executed in favor of the latter by her late husband. Private respondent alleged that the subject land of the two deeds was acquired through conjugal funds. Since her consent to the disposition of the same was not obtained, she claimed that the acts of assignment and mortgage were done to defraud the conjugal partnership. She further contended that the same were done without consideration and hence null and void. Petitioners, sisters of the deceased husband of the private respondent, filed a motion for intervention on the ground that their brother conveyed to them one-half of his shareholdings in SUBIC, or about 41%. The trial court denied the motion for intervention ruling that

petitioners have no legal interest because SUBIC has a personality separate and distinct from its stockholders. The CA confirmed the denial on appeal. Hence, this petition. ISSUE: Whether petitioners, as stockholders of SUBIC, have a legal interest in the action for annulment of the deed of assignment and deed of mortgage in favor of the corporation. HELD: NO. The Court noted that the interest which entitles person to intervene in a suitbetween other parties must be in the matter in litigation and of such direct and immediate character that the intervenor will either gain or lose by the direct legal operation and effect of the judgment. In the instant petition, it was said that the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person.

Sulo ng Bayan vs. Araneta


[GR L-31061, 17 August 1976] Facts: On 26 April 1966, Sulo ng Bayan, Inc. filed an accion de revindicacion with the Court of First Instance of Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against Gregorio Araneta Inc. (GAI), Paradise Farms Inc., National Waterworks & Sewerage Authority (NAWASA), Hacienda Caretas Inc., and the Register of Deeds of Bulacan to recover the ownership and possession of a large tract of land in San Jose del Monte, Bulacan, containing an area of 27,982,250 sq. ms., more or less, registered under the Torrens System in the name of GAI, et. al.'s predecessors-in-interest (who are members of the corporation). On 2 September 1966, GAI filed a motion to dismiss the amended complaint on the grounds that (1) the complaint states no cause of action; and (2) the cause of action, if any, is barred by prescription and laches. Paradise Farms, Inc. and Hacienda Caretas, Inc. filed motions to dismiss based on the same grounds. NAWASA did not file any motion to dismiss. However, it pleaded in its answer as special and affirmative defenses lack of cause of action by Sulo ng Bayan Inc. and the barring of such action by prescription and laches. On 24 January 1967, the trial court issued an Order dismissing the (amended) complaint. On 14 February 1967, Sulo ng Bayan filed a motion to reconsider the Order of dismissal, arguing among others that the complaint states a sufficient cause of action because the subject matter of the controversy in one of common interest to the members of the corporation who are so numerous that the present complaint should be treated as a class suit. The motion was denied by the trial court in its Order dated 22 February 1967. Sulo ng Bayan appealed to the Court of Appeals. On 3 September 1969, the Court of Appeals, upon finding that no question of fact was involved in the appeal but only questions of law and jurisdiction, certified the case to the Supreme Court for resolution of the legal issues involved in the controversy. Issue: 1. Whether the corporation (non-stock) may institute an action in behalf of its individual members for the recovery of certain parcels of land allegedly owned by said members, among others. 2. Held: 1. It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members. The property of the corporation is its property and not that of the stockholders, as owners, although they have equities in it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. Conversely, a corporation ordinarily has no interest in the individual property of its stockholders unless transferred to the corporation, "even in the case of a one-man corporation." The mere fact that one is president of a corporation does not render the property which he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate similarities. Similarly, stockholders in a corporation engaged in buying and dealing in real estate whose certificates of stock entitled the holder thereof to an allotment in the distribution of the land of the corporation upon surrender of their stock certificates were considered not to have such legal or equitable title or interest in the land, as would support a suit for title, especially against parties other than the corporation. It must be noted, however, that the juridical personality of the corporation, as separate and distinct from the persons composing it, is but a legal fiction introduced for the purpose of convenience and to subserve the ends of justice. This separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work -an injustice, or where necessary to achieve equity. It has not been claimed that the members have assigned or transferred whatever rights they may have on the land in question to the corporation. Absent any showing of interest, therefore, a corporation, has no personality to bring an action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to said stockholders or members in their personal capacities. 2. In order that a class suit may prosper, the following requisites must be present: (1) that the subject matter of the controversy is one of common or general interest to many persons; and (2) that the parties are so numerous that it is impracticable to bring them all before the court. Here, there is only one party plaintiff, and the corporation does not even have an interest in the subject matter of the controversy, and cannot, therefore, represent its members or stockholders who claim to own in their individual capacities ownership of the said property. Moreover, a class suit does not lie in actions for the recovery of property where several persons claim partnership of their respective portions of the property, as each one could alleged and prove his respective right in a different way for each portion of the land, so that they cannot all be held to have identical title through acquisition/prescription. Whether the complaint filed by the corporation in behalf of its members may be treated as a class suit

Rufina Lim vs CA, Auto Truck, TBA Corporation, Sspeed Distributing Inc., Active Distributors, Alliance Marketing Corporation, Action Company, Inc. (January 24, 2000)
Tests to Pierce the Veil of Corporate Fiction Facts: Rufina Lim is the surviving spouse of Pastor Lim whose estate is the subject of probate proceedings. The private respondents are corporations formed, organized and existing under Philippine Laws and which own real properties. Pastor Lim died June 1994, Rufina Lim

filed for the administration of the estate. The properties which were owned by the corporations were included in the inventory of the estate. They filed for the exclusion of the properties from said estate and the cancellation of the annotation of lis pendens in the TCTs of said properties. The RTC granted the motions. However Rufina Lim filed an amended petition which averred that such corporations were owned by Pastor Lim, that such were dummies of Pastor Lim, that those listed as incorporators are there only for the purpose of registration with the SEC, and that the real properties, although registered in the name of the corporations, were actually acquired by Pastor Lim during his marriage with Rufina Lim. The RTC acting on such motion set aside its order and ordered the Register of Deeds to reinstate the lis pendens. The respondent filed for certiorari with the CA which granted its prayer. Rufina Lim disputes such decision and urges that not only are the properties of the corporations part of the estate but also the corporations themselves. She cites that Pastor Lim during his lifetime organized and wholly owned the 5 corporations. Issue: Whether or not a corporation in its universality be the proper subject of and be included in the inventory of the estate of a deceased person? Held: The real properties included in the inventory of the estate of the late Pastor Lim are in the possession of and are registered in the name of private respondent corporations, which under the law possess a personality separate and distinct from their stockholders and in the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of private respondents should stand. It is settled that a corporation is clothed with personality separate and distinct from that of persons composing it. It may not generally be held liable for that of the persons composing it. It may not be held liable for the personal indebtedness of its stockholders or those of the entities connected with it. A corporation by legal fiction and convenience is an entity shielded by a protective mantle and imbued by law with a character alien to the persons comprising it. But when the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation fromwill be lifted to allow for its consideration merely as an aggregation of individuals. First Philippine International Bank vs CA (252 SCRA 259) The test in determining the applicability of piercing the veil of corporation fiction is as follows: 1) Control, not mere majority or complete stock control but complete domination not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as of this transaction had at the time no separate mind, will or existence of its own. 2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right. 3) The control and breach of duty must proximately cause the injury. The absence of these elements prevent the piercing. Petitioner failed to adduce evidence that would justify such piercing. Mere ownership by a single stockholder or by a corporation of all or nearly all of the capital stock is not sufficient reason for disregarding the fiction of separate corporate personalities.

Adelio C. Cruz vs Quiterio L. Dalisay

Administrative Matter in the Supreme Court. Malfeasance in office, corrupt practices and serious irregularities. Doctrine: A corporation has a personality distinct and separate from its individual stockholders or members.Facts:

1.
In a sworn complaint dated July 23, 1984, Adelio Cruz (complainant) charged Quiterio Dalisay (respondent),Senior Deputy Sheriff of Manila, with malfeasance in office, corrupt practices and serious irregularities allegedly committed as follows: a. Respondent attached and/or levied the money belonging to complainant Cruz when he was not himself the judgment debtor in the final judgment of an NLRC case sought to be enforced but rather the company known as Qualitrans Limousine Service, Inc..b . R e s p o n d e n t a l s o c a u s e d t h e s e r v i c e o f t h e a l i a s w r i t o f e x e c u t i o n u p o n c o m p l a i n a n t w h o i s a resident of Pasay City, despite knowledge that his territorial jurisdiction covers Manila only anddoes not extend to Pasay City. 2. In his Comment, respondent explained that when he garnished complainants cash deposit at the Philtrustbank he was merely performing a ministerial duty. And that while it is true that said writ was addressed to Qualitrans Limousine Service, Inc., it is also a fact that complainant had executed an affidavit before the Pasay City assistant fiscal stating that he is the owner/ president of Qualitrans. Because of that declaration, the counsel for the plaintiff in the labor case advised him to serve notice of garnishment on the Philtrustbank.3.On November 12, 1984 this case was referred to the executive judge of the RTC of Manila for investigation, report and recommendation. However, prior to the termination of the proceedings, complainant executed an affidavit of desistance stating that he is no longer interested in prosecuting the case and that there was justa misunderstanding between complainant and respondent.4.On May 29, 1986, acting on respondents motion the executive judge issued an order recommending the dismissal of the case. Issue: WON the complaint should be dismissed based on complainants motion of desistance. Held: NO Reason: 1.It has been held that desistance of complainant does not preclude the taking of disciplinary action againstrespondent.2.Respondents actuation in enforcing a judgment against complainant who is not a judgment debtor in the case calls for disciplinary action. What is incumbent upon respondent is to ensure that only the portion of adecision ordained or decreed in the dispositive part should be the subject of the execution. 3. The tenor of the NLRC judgment and the implementing writ is clear enough. It directed Qualitrans Limousine Service, inc., to reinstate the discharged employees and pay them full back wages. Respondent, however, c h o o s e t o p i e r c e t h e v e i l o f c o r p o r a t e e n t i t y u s u r p i n g a p o w e r b e l o n g i n g t o t h e c o u r t a n d a s s u m e d improvidently that since the complainant is the owner/president of Qualitrans Limousine Service, Inc., they are one and the same. It is a well settled doctrine both in law and equity that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members. 4. The mere fact that one is president of the corporation does not render the property he owns or possesses the property of the corporation, since that president, as an individual, and the corporations are separate entities. D e c i s i o n : A C C O R D I N G L Y , w e f i n d R e s p o n d e n t D e p u t y S h e r i f f Q u i t e r i o l . D a l i s a y N E G L I G E N T i n t h e enforc ement of the writ of execution in NLRC Case No. 8-12389-91, and a fine equivalent to 3 months salary is hereby imposed with a stern

warning that the commission of the same or similar offense in the future will merit a heavier penalty. Let a copy of the Resolution be filed in the personal record of the respondent.

LUXURIA HOMES, INC VS CA

302 SCRA 315 Business Organization Corporation Law Piercing the Veil of Corporate Fiction Aida Posadas was the owner of a 1.6 hectare land in Sucat, Muntinlupa. In 1989, she entered into an agreement with Jaime Bravo for the latter to draft a development and architectural design for the said property. The contract price was P450,000.00. Posadas gave a down payment of P25,000.00. Later, Posadas assigned her property to Luxuria Homes, Inc. One of the witnesses to the deed of assignment and articles of incorporation was Jaime Bravo. In 1992, Bravo finished the architectural design so he proposed that he and his company manage the development of the property. But Posadas turned down the proposal and thereafter the business relationship between the two went sour. Bravo then demanded Posadas to pay them the balance of their agreement as regards the architectural design (P425k). Bravo also demanded payment for some other expenses and fees he incurred i.e., negotiating and relocating the informal settlers then occupying the land of Posadas. Posadas refused to make payment. Bravo then filed a complaint for specific performance against Posadas but he included Luxuria Homes as a co-defendant as he alleged that Luxuria Homes was a mere conduit of Posadas; that the said corporation was created in order to defraud Bravo and avoid the payment of debt. ISSUE: Whether or not Luxuria Homes should be impleaded. HELD: No. It was Posadas who entered into a contract with Bravo in her personal capacity. Bravo was not able to prove that Luxuria Homes was a mere conduit of Posadas. Posadas owns just 33% of Luxuria Homes. Further, when Luxuria Homes was created, Bravo was there as a witness. So how can he claim that the creation of said corporation was to defraud him. The eventual transfer of Posadas prop erty to Luxuria was with the full knowledge of Bravo. The agreement between Posadas and Bravo was entered into even before Luxuria existed hence Luxuria was never a party thereto. Whatever liability Posadas incurred arising from said agreement must be borne by her solely and not in solidum with Luxuria. To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed.

Concept Builders Inc. vs. NLRC


[GR 108734, 29 May 1996] Facts: Concept Builders, Inc., (CBI) a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business while Norberto Marabe; Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben Robalos were employed by said company as laborers, carpenters and riggers. On November 1981, Marabe, et. al. were served individual written notices of termination of employment by CBI, effective on 30 November 1981. It was stated in the individual notices that their contracts of employment had expired and the project in which they were hired had been completed. The National Labor Relations Commission (NLRC) found it to be, the fact, however, that at the time of the termination of Marabe, et.al.'s employment, the project in which they were hired had not yet been finished and completed. CBI had to engage the services of sub-contractors whose workers performed the functions of Marabe, et. al. Aggrieved, Marabe, et. al. filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against CBI. On 19 December 1984, the Labor Arbiter rendered judgment ordering CBI to reinstate Marabe et. al. and to pay them back wages equivalent to 1 year or 300 working days. On 27 November 1985, the NLRC dismissed the motion for reconsideration filed by CBI on the ground that the said decision had already become final and executory. On 16 October 1986, the NLRC Research and Information Department made the finding that Marabe, et. al.'s back wages amounted to P199,800.00. On 29 October 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the Decision, dated 19 December 1984. The writ was partially satisfied through garnishment of sums from CBI's debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of P81,385.34. Said amount was turned over to the cashier of the NLRC. On 1 February 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect from CBI the sum of P117,414.76, representing the balance of the judgment award, and to reinstate Marabe, et. al. to their former positions. On 13 July 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on petitioner through the security guard on duty but the service was refused on the ground that CBI no longer occupied the premises. On 26 September 1986, upon motion of Marabe, et. al., the Labor Arbiter issued a second alias writ of execution. The said writ had not been enforced by the special sheriff because, as stated in his progress report dated 2 November 1989, that all the employees inside CBI's premises claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by CBI; that levy was made upon personal properties he found in the premises; and that security guards with high-powered guns prevented him from removing the properties he had levied upon. The said special sheriff recommended that a "break-open order" be issued to enable him to enter CBI's premises so that he could proceed with the public auction sale of the aforesaid personal properties on 7 November 1989. On 6 November 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the properties sought to be levied upon by the sheriff were owned by HPPI, of which he is the Vice-President. On 23 November 1989, Marabe, et. al. filed a "Motion for Issuance of a Break-Open Order," alleging that HPPI and CBI were owned by the same incorporator/stockholders. They also alleged that petitioner temporarily suspended its business operations in order to evade its legal obligations to them and that Marabe, et. al. were willing to post an indemnity bond to answer for any damages which CBI and HPPI may suffer because of the issuance of the break-open order. On 2 March 1990, the Labor Arbiter issued an Order which denied Marabe, et. al.'s motion for break-open order. Marabe, et. al. then appealed to the NLRC. On 23 April 1992, the NLRC set aside the order of the Labor Arbiter, issued a break-open order and directed Marabe, et. al. to file a bond. Thereafter, it directed the sheriff to proceed with the auction sale of the properties already levied upon. It dismissed the third-party claim for lack of merit. CBI moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated 3 December 1992. Hence, the petition. Issue: Whether the NLRC was correct in issuing the break-open order to levy the HPPI properties located at CBI amd/or HPPIs premises at 355 Maysan Road, Valenzuela, Metro Manila. Held: It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an

alter ego of another corporation. The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit: (1) Stock ownership by one or common ownership of both corporations; (2) Identity of directors and officers; (3) The manner of keeping corporate books and records; and (4) Methods of conducting the business. The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding the separate juridical personality of corporations as "Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the "instrumentality" may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of instances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made." The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiff's legal rights; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to that operation. Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one of fact. Here, while CBI claimed that it ceased its business operations on 29 April 1986, it filed an Information Sheet with the Securities and Exchange Commission on 15 May 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. Further, both information sheets were filed by the same Virgilio O. Casio as the corporate secretary of both corporations. Both corporations had the same president, the same board of directors, the same corporate officers, and substantially the same subscribers. From the foregoing, it appears that, among other things, the CBI and the HPPI shared the same address and/or premises. Under these circumstances, it cannot be said that the property levied upon by the sheriff were not of CBI's. Clearly, CBI ceased its business operations in order to evade the payment to Marabe, et. al. of back wages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of CBI and its emergence was skillfully orchestrated to avoid the financial liability that already attached to CBI.

Villa Rey Transit vs. Ferrer


Facts: Jose M. Villarama was an operator of a bus transportation, under the business name of Villa Rey Transit, pursuant to certificates of public convenience granted him by the Public Service Commission which authorized him to operate a total of thirty-two (32) units on various routes or lines from Pangasinan to Manila, and vice-versa. On January 8, 1959, he sold the aforementioned two certificates of public convenience to the Pangasinan Transportation Company, Inc. for P 350,000.00 with the condition, among others, that the seller "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer." Barely three months thereafter, or on March 6, 1959, a corporation called Villa Rey Transit, Inc. was organized. Natividad R. Villarama (wife of Jose M. Villarama) was one of the incorporators and treasurer as well. In less than a month after its registration with the Securities and Exchange Commission the Corporation, on April 7, 1959, bought five certificates of public convenience, forty-nine buses, tools and equipment from one Valentin Fernando. The very same day that the aforementioned contract of sale was executed, the parties thereto immediately applied with the PSC for its approval, with a prayer for the issuance of a provisional authority in favor of the vendee Corporation to operate the service therein involved. On May 19, 1959, the PSC granted the provisional permit prayed for, upon the condition that "it may be modified or revoked by the Commission at any time, shall be subject to whatever action that may be taken on the basic application and shall be valid only during the pendency of said application." Before the PSC could take final action on said application for approval of sale, however, the Sheriff of Manila, levied on two of the five certificates of public convenience involved therein, pursuant to a writ of execution issued by the Court of First Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant, judgment debtor. A public sale was conducted by the Sheriff of the said two certificates of public convenience and Ferrer was the highest bidder, and a certificate of sale was issued in his name. Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly submitted for approval their corresponding contract of sale to the PSC.

Issue: 1. 2. 3. Held: 1.

Does the stipulation between Villarama and Pantranco, as contained in the deed of sale, that the former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH THE BUYER," apply to new lines only or does it include existing lines? Assuming that said stipulation covers all kinds of lines, is such stipulation valid and enforceable?; In the affirmative, that said stipulation is valid, did it bind the Corporation?

2.

The clear intention of the parties was to prevent the seller from conducting any competitive line for 10 years since, anyway, he has bound himself not to apply for authorization to operate along such lines for the duration of such period. If the prohibition is to be applied only to the acquisition of new certificates of public convenience thru an application with the Public Service Commission, this would, in effect, allow the seller just the same to compete with the buyer as long as his authority to operate is only acquired thru transfer or sale from a previous operator, thus defeating the intention of the parties. The 10-year restrictive clause in the contract between Villarama and Pantranco, while in the nature of an agreement suppressing competition, it is, however, merely ancillary or incidental to the main agreement which is that of sale. The suppression or restraint is only partial or limited: first, in scope, it refers only to application for TPU by the seller in competition with the lines sold to the buyer; second, in duration, it is only for ten (10) years; and third, with respect to situs or territory, the restraint is only along the lines covered by the certificates sold.

3.

The preponderance of evidence have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter and Pantranco is also enforceable and binding against the said Corporation.

FRANCISCO MOTORS CORPORATION VS COURT OF APPEALS


FACTS: In 1985, Francisco Motors Corporation (FMC) sued Atty. Gregorio Manuel to recover from a him a sum of money in the amount of P23,000.00+. Said amount was allegedly owed to them by Manuel for the purchase of a jeep body plus repairs thereto. Manuel filed a counterclaim in the amount of P50,000.00. In his counterclaim, Manuel alleged that he was the Assistant Legal Officer for FMC; that the Francisco Family, owners of FMC, engaged his services for the intestate estate proceedings of one Benita Trinidad; that he was not paid for his legal services; that he is filing the counterclaim against FMC because said corporation was merely a conduit of the Francisco Family. The trial court as well as the Court of Appeals granted Manuels counterclaim on the ground that the legal fees were owed by the incorporators of FMC (an application of the doctrine of piercing the veil of corporation fiction in a reversed manner). ISSUE: Whether or not the doctrine of piercing the veil of corporate fiction was properly used by the Court of Appeals. HELD: No. In the first place, the doctrine is to be used in disregarding corporate fiction and making the incorporators liable in appropriate circumstances. In the case at bar, the doctrine is applied upside down where the corporation is held liable for the personal obligations of the incorporators such was uncalled for and erroneous. It must be noted that that Atty. Manuels legal services were secured by the Francisco Family to represent them in the intestate proceedings over Benita Trinidads estate. The indebtedness was incurred by the Fra ncisco Family in their separate and personal capacity. These estate proceedings did not involve any business of FMC. The proper remedy is for Manuel to sue the concerned members of the Francisco Family in their individual capacity.

PNB, NASUDECO vs. Andrada Electric and Engineering Company


(2002) Doctrine: Basic is the rule that a corporation has a legal personality distinct and separate from the persons and entities owning it. The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting public auction by the Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMILs contractual debts to respondent. Facts: 1. PASUMIL (Pampanga Sugar Mills) engaged the services of Andrada Electric for electrical rewinding, repair, the construction of a power house building, installation of turbines, transformers, among others. Most of the services were partially paid by PASUMIL, leaving several unpaid accounts. On August 1975, PNB, a semi-government corporation, acquired the assets of PASUMILassets that were earlier foreclosed by the DBP. On September 1975, PNB organized NASUDECO (National Sugar Development Corporation), under LOI No. 311 to take ownership and possession of the assets and ultimately, to nationalize and consolidate its interest in other PNB controlled sugar mills. NASUDECO is a semi-government corporation and the sugar arm of the PNB. Andrada Electric alleges that PNB and NASUDECO should be liable for PASUMILs unpaid obligation amounting to 500K php, damages, and attorneys fees, having owned and possessed the assets of PASUMIL.

2. 3.

4.

Issue: Whether PNB and NASUDECO may be held liable for PASUMILs liability to Andrada Electric and Engineering Company. Held: NO. Basic is the rule that a corporation has a legal personality distinct and separate from the persons and entities owning it. The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting public auction by the Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMIL's contractual debts to Andrada Electric & Engineering Company (AEEC). Piercing the veil of corporate fiction may be allowed only if the following elements concur: (1) control not mere stock control, but complete domination not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff's legal right; and (3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of. The absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First, other than the fact that PNB and NASUDECO acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of corporate personalities. Second, there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entityor person. Third, AEEC was not defrauded or injured when PNB and NASUDECO acquired the assets of PASUMIL. Hence, although the assets of NASUDECO can be easily traced to PASUMIL, the transfer of the latter's assets to PNB and NASUDECO was not fraudulently entered into in order to escape liability for its debt to AEEC. There was NO merger or consolidation with respect to PASUMIL and PNB.

Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB to merge or consolidate (allegedly). On the other hand, petitioners contend that their takeover of the operations of PASUMIL did not involve any corporate merger or consolidation, because the latter had never lost its separate identity as a corporation. A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. The merger, however, does not become effective upon the mere agreement of the constituent corporations. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them. For a valid merger or consolidation, the approval by the SEC of the articles of merger or consolidation is required. These articles must likewise be duly approved by a majority of the respective stockholders of the constituent corporations. In the case at bar, there is no merger or consolidation with respect to PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation Code was not followed. In fact, PASUMILs corporate existence, as correctly found by the CA, had not been legally extinguished or terminated. Further, prior to PNBs acquisition of the foreclosed assets, PASUMIL had previously made partial payments to respondent for the formers obligation in the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another P14,000. Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent. LOI No. 11 explicitly provides that PNB shall study and submit recommendations on the claims of PASUMILs creditors. Clearly, the corporate separateness between PASUMIL and PNB remains, despite respondents insistence to the contrary.

Lipat vs. Pacific Banking Corporation


[GR 142435, 30 April 2003] Facts: The spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's Export Trading" (BET), a single proprietorship with principal office at No. 814 Aurora Boulevard, Cubao, Quezon City. BET was engaged in the manufacture of garments for domestic and foreign consumption. The Lipats also owned the "Mystical Fashions" in the United States, which sells goods imported from the Philippines through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to manage BET in the Philippines while she was managing "Mystical Fashions" in the United States. In order to facilitate the convenient operation of BET, Estelita Lipat executed on 14 December 1978, a special power of attorney appointing Teresita Lipat as her attorney-in-fact to obtain loans and other credit accommodations from Pacific Banking Corporation (Pacific Bank). She likewise authorized Teresita to execute mortgage contracts on properties owned or co-owned by her as security for the obligations to be extended by Pacific Bank including any extension or renewal thereof. Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to "Mystical Fashions" in the United States. As security therefor, the Lipat spouses, as represented by Teresita, executed a Real Estate Mortgage over their property located at No. 814 Aurora Blvd., Cubao, Quezon City. Said property was likewise made to secure other additional or new loans, etc. On 5 September 1979, BET was incorporated into a family corporation named Bela's Export Corporation (BEC) in order to facilitate the management of the business. BEC was engaged in the business of manufacturing and exportation of all kinds of garments of whatever kind and description and utilized the same machineries and equipment previously used by BET. Its incorporators and directors included the Lipat spouses who owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other close relatives and friends of the Lipats. Estelita Lipat was named president of BEC, while Teresita became the vice-president and general manager. Eventually, the loan was later restructured in the name of BEC and subsequent loans were obtained by BEC with the corresponding promissory notes duly executed by Teresita on behalf of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O. Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the corresponding trust receipt therefor. Export bills were also executed in favor of Pacific Bank for additional finances. These transactions were all secured by the real estate mortgage over the Lipats' property. The promissory notes, export bills, and trust receipt eventually became due and demandable. Unfortunately, BEC defaulted in its payments. After receipt of Pacific Bank's demand letters, Estelita Lipat went to the office of the bank's liquidator and asked for additional time to enable her to personally settle BEC's obligations. The bank acceded to her request but Estelita failed to fulfill her promise. Consequently, the real estate mortgage was foreclosed and after compliance with the requirements of the law the mortgaged property was sold at public auction. On 31 January 1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest bidder. On 28 November 1989, the spouses Lipat filed before the Quezon City RTC a complaint for annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale issued over the property against Pacific Bank and Eugenio D. Trinidad. The complaint alleged, among others, that the promissory notes, trust receipt, and export bills were all ultra vires acts of Teresita as they were executed without the requisite board resolution of the Board of Directors of BEC. The Lipats also averred that assuming said acts were valid and binding on BEC, the same were the corporation's sole obligation, it having a personality distinct and separate from spouses Lipat. It was likewise pointed out that Teresita's authority to secure a loan from Pacific Bank was specifically limited to Mrs. Lipat's sole use and benefit and that the real estate mortgage was executed to secure the Lipats' and BET's P583,854.00 loan only. In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners Lipat cannot evade payments of the value of the promissory notes, trust receipt, and export bills with their property because they and the BEC are one and the same, the latter being a family corporation. Trinidad further claimed that he was a buyer in good faith and for value and that the Lipat spouses are estopped from denying BEC's existence after holding themselves out as a corporation. After trial on the merits, the RTC dismissed the complaint. The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV 41536. Said appeal, however, was dismissed by the appellate court for lack of merit. The Lipats then moved for reconsideration, but this was denied by the appellate court in its Resolution of 23 February 2000. The Lipat spouses filed the petition for review on certiorari. Issue: Whether BEC and BET are separate business entities, and thus the Lipt spouses can isolate themselves behind the corporate personality of BEC. Held: When the corporation is the mere alter ego or business conduit of a person, the separate personality of the corporation may be disregarded. This is commonly referred to as the "instrumentality rule" or the alter ego doctrine, which the courts have applied in

disregarding the separate juridical personality of corporations. As held in one case, where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the 'instrumentality' may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. The evidence on record shows BET and BEC are not separate business entities. (1) Estelita and Alfredo Lipat are the owners and majority shareholders of BET and BEC, respectively; (2) both firms were managed by their daughter, Teresita; 19 (3) both firms were engaged in the garment business, supplying products to "Mystical Fashion," a U.S. firm established by Estelita Lipat; (4) both firms held office in the same building owned by the Lipats; (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the business operations of the BEC were so merged with those of Mrs. Lipat such that they were practically indistinguishable; (7) the corporate funds were held by Estelita Lipat and the corporation itself had no visible assets; (8) the board of directors of BEC was composed of the Burgos and Lipat family members; (9) Estelita had full control over the activities of and decided business matters of the corporation; and that (10) Estelita Lipat had benefited from the loans secured from Pacific Bank to finance her business abroad and from the export bills secured by BEC for the account of "Mystical Fashion." It could not have been coincidental that BET and BEC are so intertwined with each other in terms of ownership, business purpose, and management. Apparently, BET and BEC are one and the same and the latter is a conduit of and merely succeeded the former. The spouses' attempt to isolate themselves from and hide behind the corporate personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. BEC is a mere continuation and successor of BET, and the Lipat spouses cannot evade their obligations in the mortgage contract secured under the name of BEC on the pretext that it was signed for the benefit and under the name of BET.

Lim vs. Philippine Fishing Gear Industries


[GR 136448, 3 November 1999] Facts: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated 7 February 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (PFGI). They claimed that they were engaged in a business venture with Lim Tong Lim, who however was not a signatory to the agreement. The total price of the nets amounted to P532,045. 400 pieces of floats worth P68,000 were also sold to the Corporation. The buyers, however, failed to pay for the fishing nets and the floats; hence, PFGI filed a collection suit against Chua, Yao and Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a Certification from the Securities and Exchange Commission. On 20 September 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila. Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a reasonable time within which to pay. He also turned over to PFGI some of the nets which were in his possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present evidence on his behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. The trial court maintained the Writ, and upon motion of PFGI, ordered the sale of the fishing nets at a public auction. PFGI won the bidding and deposited with the said court the sales proceeds of P900,000. On 18 November 1992, the trial court rendered its Decision, ruling that PFGI was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay PFGI. The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the three in Civil Case 1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages. Lim appealed to the Court of Appeals (CA) which, affirmed the RTC. Lim filed the Petition for Review on Certiorari. Lim argues, among others, that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and not to him. Issue: Whether Lim should be held jointly liable with Chua and Yao. Held: Chua, Yao and Lim had decided to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was Lim Tong Lims brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term "common fund" under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership. The partnership extended not only to the purchase of the boat, but also to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could not have proceeded. The sale of the boats, as well as the division among the three of the balance remaining after the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an asset of the partnership. It is not uncommon to register the properties acquired from a loan in the name of the person the lender trusts, who in this case is Lim Tong Lim himself. After all, he is the brother of the creditor, Jesus Lim. It is unreasonable indeed, it is absurd for petitioner to sell his property to pay a debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners. As to Lim's argument that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and not to him; Section 21 of the Corporation Code of the Philippines provides that "All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation." Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its corporate existence. "The reason behind this doctrine is obvious an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent." The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first instance, an unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack of personality to be sued to evade its

responsibility for a contract it entered into and by virtue of which it received advantages and benefits. On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of. There is no dispute that PFGI is entitled to be paid for the nets it sold. The only question here is whether Lim should be held jointly liable with Chua and Yao. Lim contests such liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Although technically it is true that Lim did not directly act on behalf of the corporation; however, having reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel.