1

Republic of the Philippines

petition for review filed by an employer after the Court of Appeals decided in favor of respondent union, which

Supreme Court
is the employees recognized collective bargaining representative.

Manila
EN BANC
BANK OF THE PHILIPPINE ISLANDS,

G.R. No. 164301

At the outset, we should call to mind the spirit and the letter of the Labor Code provisions on union

Petitioner,
Present:

- versus -

BPI EMPLOYEES UNION-DAVAO

FEDERATION OF UNIONS
IN BPI UNIBANK,

CHAPTER-

CORONA, C.J.,
CARPIO,
CARPIO MORALES,
VELASCO, JR.,*
NACHURA,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ, and
MENDOZA, JJ.

security clauses, specifically Article 248 (e), which states, x x x Nothing in this Code or in any other

law shall stop the parties from requiring membership in a recognized collective bargaining agent as a

condition for employment, except those employees who are already members of another union at the time

of the signing of the collective bargaining agreement. [1] This case which involves the application of a

collective bargaining agreement with a union shop clause should be resolved principally from the standpoint of
Respondent.

Promulgated:

August 10, 2010

x----------------------- -------------------------x
DECISION
LEONARDO-DE CASTRO, J.:

the clear provisions of our labor laws, and the express terms of the CBA in question, and not by inference from

the general consequence of the merger of corporations under the Corporation Code, which obviously does not

deal with and, therefore, is silent on the terms and conditions of employment in corporations or juridical

entities.
May a corporation invoke its merger with another corporation as a valid ground to exempt its absorbed

employees from the coverage of a union shop clause contained in its existing Collective Bargaining
This issue must be resolved NOW, instead of postponing it to a future time when the CBA is
Agreement (CBA) with its own certified labor union? That is the question we shall endeavor to answer in this
renegotiated as suggested by the Honorable Justice Arturo D. Brion because the same issue may still be

resurrected in the renegotiation if the absorbed employees insist on their privileged status of being exempt

Montejo, in CA-G.R. SP No. 70445, entitled BPI Employees Union-Davao Chapter-Federation of Unions in

from any union shop clause or any variant thereof.

BPI Unibank v. Bank of the Philippine Islands, et al.

The antecedent facts are as follows:

We find it significant to note that it is only the employer, Bank of the Philippine Islands (BPI), that

brought the case up to this Court via the instant petition for review; while the employees actually involved in

the case did not pursue the same relief, but had instead chosen in effect to acquiesce to the decision of the

On March 23, 2000, the Bangko Sentral ng Pilipinas approved the Articles of Merger executed on
January 20, 2000 by and between BPI, herein petitioner, and FEBTC. [5] This Article and Plan of Merger was
approved by the Securities and Exchange Commission on April 7, 2000. [6]

Court of Appeals which effectively required them to comply with the union shop clause under the existing CBA

at the time of the merger of BPI with Far East Bank and Trust Company (FEBTC), which decision had

Pursuant to the Article and Plan of Merger, all the assets and liabilities of FEBTC were transferred to
and absorbed by BPI as the surviving corporation. FEBTC employees, including those in its different

already become final and executory as to the aforesaid employees. By not appealing the decision of the
branches across the country, were hired by petitioner as its own employees, with their status and tenure
Court of Appeals, the aforesaid employees are bound by the said Court of Appeals decision to join BPIs duly

recognized and salaries and benefits maintained.

certified labor union. In view of the apparent acquiescence of the affected FEBTC employees in the Court of
Respondent BPI Employees Union-Davao Chapter - Federation of Unions in BPI Unibank (hereinafter
Appeals decision, BPI should not have pursued this petition for review. However, even assuming that BPI
the Union, for brevity) is the exclusive bargaining agent of BPIs rank and file employees in Davao City. The
may do so, the same still cannot prosper.

former FEBTC rank-and-file employees in Davao City did not belong to any labor union at the time of the
merger. Prior to the effectivity of the merger, or on March 31, 2000, respondent Union invited said FEBTC
employees to a meeting regarding the Union Shop Clause(Article II, Section 2) of the existing CBA between

What is before us now is a petition for review under Rule 45 of the Rules of Court of the

petitioner BPI and respondent Union. [7]

Decision[2] dated September 30, 2003 of the Court of Appeals, as reiterated in its Resolution [3] of June 9, 2004,
The parties both advert to certain provisions of the existing CBA, which are quoted below:
reversing and setting aside the Decision [4] dated November 23, 2001 of Voluntary Arbitrator Rosalina Letrondo-

Committee. However, the issue remained unresolved at this level and so it was subsequently submitted for
voluntary arbitration by the parties. [11]
ARTICLE I
Section 1. Recognition and Bargaining Unit The BANK recognizes the UNION as the
sole and exclusive collective bargaining representative of all the regular rank and file
employees of the Bank offices in Davao City.
Voluntary Arbitrator Rosalina Letrondo-Montejo, in a Decision [12] dated November 23, 2001, ruled in

Section 2. Exclusions
Section 3. Additional Exclusions

favor of petitioner BPIs interpretation that the former FEBTC employees were not covered by the Union

Section 4. Copy of Contract

Security Clause of the CBA between the Union and the Bank on the ground that the said employees were not
ARTICLE II

Section 1. Maintenance of Membership All employees within the bargaining unit who
are members of the Union on the date of the effectivity of this Agreement as well as
employees within the bargaining unit who subsequently join or become members of the
Union during the lifetime of this Agreement shall as a condition of their continued
employment with the Bank, maintain their membership in the Union in good standing.
Section 2. Union Shop - New employees falling within the bargaining unit as defined
in Article I of this Agreement, who may hereafter be regularly employed by the Bank
shall, within thirty (30) days after they become regular employees, join the Union as a
condition of their continued employment. It is understood that membership in good
standing in the Union is a condition of their continued employment with the Bank.
[8]
(Emphases supplied.)

new employees who were hired and subsequently regularized, but were absorbed employees by operation of
law because the former employees of FEBTC can be considered assets and liabilities of the absorbed
corporation. The Voluntary Arbitrator concluded that the former FEBTC employees could not be compelled
to join the Union, as it was their constitutional right to join or not to join any organization.

Respondent Union filed a Motion for Reconsideration, but the Voluntary Arbitrator denied the same
in an Order dated March 25, 2002.[13]

After the meeting called by the Union, some of the former FEBTC employees joined the Union,
while others refused. Later, however, some of those who initially joined retracted their membership. [9]
Dissatisfied, respondent then appealed the Voluntary Arbitrators decision to the Court of
Appeals. In the herein assailed Decision dated September 30, 2003, the Court of Appeals reversed and set
Respondent Union then sent notices to the former FEBTC employees who refused to join, as well as
aside the Decision of the Voluntary Arbitrator. [14] Likewise, the Court of Appeals denied herein petitioners
those who retracted their membership, and called them to a hearing regarding the matter. When these former
Motion for Reconsideration in a Resolution dated June 9, 2004.
FEBTC employees refused to attend the hearing, the president of the Union requested BPI to implement the
Union Shop Clause of the CBA and to terminate their employment pursuant thereto. [10]
The Court of Appeals pertinently ruled in its Decision:

After two months of management inaction on the request, respondent Union informed petitioner BPI
of its decision to refer the issue of the implementation of the Union Shop Clause of the CBA to the Grievance

A union-shop clause has been defined as a form of union security provision

wherein non-members may be hired, but to retain employment must become union
members after a certain period.
There is no question as to the existence of the union-shop clause in the
CBA between the petitioner-union and the company. The controversy lies in its
application to the absorbed employees.

This Court agrees with the voluntary arbitrator that the ABSORBED
employees are distinct and different from NEW employees BUT only in so far as their
employment service is concerned. The distinction ends there. In the case at bar, the
absorbed employees length of service from its former employer is tacked with their
employment with BPI. Otherwise stated, the absorbed employees service is
continuous and there is no gap in their service record.
This Court is persuaded that the similarities of new and absorbed
employees far outweighs the distinction between them. The similarities lies on the
following, to wit: (a) they have a new employer; (b) new working conditions; (c) new
terms of employment and; (d) new company policy to follow. As such, they should be
considered as new employees for purposes of applying the provisions of the CBA
regarding the union-shop clause.
To rule otherwise would definitely result to a very awkward and unfair
situation wherein the absorbed employees shall be in a different if not, better situation
than the existing BPI employees. The existing BPI employees by virtue of the unionshop clause are required to pay the monthly union dues, remain as members in good
standing of the union otherwise, they shall be terminated from the company, and other
union-related obligations. On the other hand, the absorbed employees shall enjoy
the fruits of labor of the petitioner-union and its members for nothing in
exchange. Certainly, this would disturb industrial peace in the company which is the
paramount reason for the existence of the CBA and the union.
The voluntary arbitrators interpretation of the provisions of the CBA
concerning the coverage of the union-shop clause is at war with the spirit and the
rationale why the Labor Code itself allows the existence of such provision.
The Supreme Court in the case of Manila Mandarin Employees Union vs.
NLRC (G.R. No. 76989, September 29, 1987) rule, to quote:
This Court has held that a valid form of union
security, and such a provision in a collective bargaining
agreement is not a restriction of the right of freedom of
association guaranteed by the Constitution.
A closed-shop agreement is an agreement whereby
an employer binds himself to hire only members of the
contracting union who must continue to remain members in
good standing to keep their jobs. It is THE MOST PRIZED
ACHIEVEMENT OF UNIONISM. IT ADDS MEMBERSHIP
AND COMPULSORY DUES. By holding out to loyal members
a promise of employment in the closed-shop, it wields group
solidarity. (Emphasis supplied)

I
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT
THE FORMER FEBTC EMPLOYEES SHOULD BE CONSIDERED NEW
EMPLOYEES OF BPI FOR PURPOSES OF APPLYING THE UNION SHOP CLAUSE
OF THE CBA

II
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN FINDING
THAT THE VOLUNTARY ARBITRATORS INTERPRETATION OF THE COVERAGE
OF THE UNION SHOP CLAUSE IS AT WAR WITH THE SPIRIT AND THE
RATIONALE WHY THE LABOR CODE ITSELF ALLOWS THE EXISTENCE OF SUCH
PROVISION[16]

In essence, the sole issue in this case is whether or not the former FEBTC employees that were
absorbed by petitioner upon the merger between FEBTC and BPI should be covered by the Union Shop
Clause found in the existing CBA between petitioner and respondent Union.

Petitioner is of the position that the former FEBTC employees are not new employees of BPI for
purposes of applying the Union Shop Clause of the CBA, on this note, petitioner points to Section 2, Article II
of the CBA, which provides:

New employees falling within the bargaining unit as defined in Article I

of this Agreement, who may hereafter be regularly employed by the Bank shall,
within thirty (30) days after they become regular employees, join the Union as a
condition of their continued employment. It is understood that membership in
good standing in the Union is a condition of their continued employment with the
Bank.[17] (Emphases supplied.)

Hence, the voluntary arbitrator erred in construing the CBA literally at the
expense of industrial peace in the company.
With the foregoing ruling from this Court, necessarily, the alternative prayer
of the petitioner to require the individual respondents to become members or if they
refuse, for this Court to direct respondent BPI to dismiss them, follows. [15]

Petitioner argues that the term new employees in the Union Shop Clause of the CBA is qualified
by the phrases who may hereafter be regularly employed and after they become regular employees which
led petitioner to conclude that the new employees referred to in, and contemplated by, the Union Shop

Hence, petitioners present recourse, raising the following issues:

Clause of the CBA were only those employees who were new to BPI, on account of having been hired
initially on a temporary or probationary status for possible regular employment at some future date. BPI

argues that the FEBTC employees absorbed by BPI cannot be considered as new employees of BPI for

certain agreed departments of the enterprise unless he or she is, becomes, and, for the duration of the

purposes of applying the Union Shop Clause of the CBA. [18]

agreement, remains a member in good standing of a union entirely comprised of or of which the employees in
interest are a part.[19]

According to petitioner, the contrary interpretation made by the Court of Appeals of this particular
CBA provision ignores, or even defies, what petitioner assumes as its clear meaning and scope which

In the case of Liberty Flour Mills Employees v. Liberty Flour Mills, Inc.,[20] we ruled that:

allegedly contradicts the Courts strict and restrictive enforcement of union security agreements.

We do not agree.

Section 2, Article II of the CBA is silent as to how one becomes a regular employee of the BPI for
the first time. There is nothing in the said provision which requires that a new regular employee first

It is the policy of the State to promote unionism to enable the workers

to negotiate with management on the same level and with more persuasiveness
than if they were to individually and independently bargain for the improvement
of their respective conditions. To this end, the Constitution guarantees to them the
rights to self-organization, collective bargaining and negotiations and peaceful
concerted actions including the right to strike in accordance with law. There is no
question that these purposes could be thwarted if every worker were to choose to go
his own separate way instead of joining his co-employees in planning collective action
and presenting a united front when they sit down to bargain with their employers. It is
for this reason that the law has sanctioned stipulations for the union shop and the
closed shop as a means of encouraging the workers to join and support the labor union
of their own choice as their representative in the negotiation of their demands and the
protection of their interest vis--vis the employer. (Emphasis ours.)

undergo a temporary or probationary status before being deemed as such under the union shop
clause of the CBA.

In other words, the purpose of a union shop or other union security arrangement is to guarantee
the continued existence of the union through enforced membership for the benefit of the workers.

Union security is a generic term which is applied to and comprehends closed shop, union shop,
maintenance of membership or any other form of agreement which imposes upon employees the obligation

All employees in the bargaining unit covered by a Union Shop Clause in their CBA with management

to acquire or retain union membership as a condition affecting employment. There is union shop when all new

are subject to its terms. However, under law and jurisprudence, the following kinds of employees are

regular employees are required to join the union within a certain period for their continued employment. There

exempted from its coverage, namely, employees who at the time the union shop agreement takes effect are

is maintenance of membership shop when employees, who are union members as of the effective date of the

bona fide members of a religious organization which prohibits its members from joining labor unions on

agreement, or who thereafter become members, must maintain union membership as a condition for

religious grounds;[21] employees already in the service and already members of a union other than the

continued employment until they are promoted or transferred out of the bargaining unit or the agreement is

majority at the time the union shop agreement took effect;[22] confidential employees who are excluded

terminated. A closed-shop, on the other hand, may be defined as an enterprise in which, by agreement

from the rank and file bargaining unit; [23] and employees excluded from the union shop by express terms

between the employer and his employees or their representatives, no person may be employed in any or

of the agreement.

a distinction as to how a regular employee attains such a status. Moreover, there is nothing in the Corporation
When certain employees are obliged to join a particular union as a requisite for continued
employment, as in the case of Union Security Clauses, this condition is a valid restriction of the freedom or

Law and the merger agreement mandating the automatic employment as regular employees by the surviving
corporation in the merger.

right not to join any labor organization because it is in favor of unionism. This Court, on occasion, has even
held that a union security clause in a CBA is not a restriction of the right of freedom of association guaranteed
by the Constitution.[24]

It is apparent that petitioner hinges its argument that the former FEBTC employees were absorbed
by BPI merely as a legal consequence of a merger based on the characterization by the Voluntary Arbiter of
these absorbed employees as included in the assets and liabilities of the dissolved corporation - assets

Moreover, a closed shop agreement is an agreement whereby an employer binds himself to hire only

because they help the Bank in its operation and liabilities because redundant employees may be terminated

members of the contracting union who must continue to remain members in good standing to keep their

and company benefits will be paid to them, thus reducing the Banks financial status. Based on this

jobs. It is the most prized achievement of unionism. It adds membership and compulsory dues. By

ratiocination, she ruled that the same are not new employees of BPI as contemplated by the CBA at issue,

holding out to loyal members a promise of employment in the closed shop, it wields group solidarity.[25]

noting that the Certificate of Filing of the Articles of Merger and Plan of Merger between FEBTC and BPI
stated that x x x the entire assets and liabilities of FAR EASTERN BANK & TRUST COMPANY will be

Indeed, the situation of the former FEBTC employees in this case clearly does not fall within the first

transferred to and absorbed by the BANK OF THE PHILIPPINE ISLANDS x x x (underlining supplied). [26] In

three exceptions to the application of the Union Shop Clause discussed earlier. No allegation or evidence of

sum, the Voluntary Arbiter upheld the reasoning of petitioner that the FEBTC employees became BPI

religious exemption or prior membership in another union or engagement as a confidential employee was

employees by operation of law because they are included in the term assets and liabilities.

presented by both parties. The sole category therefore in which petitioner may prove its claim is the fourth
recognized exception or whether the former FEBTC employees are excluded by the express terms of the

Absorbed FEBTC Employees are Neither Assets

nor Liabilities

existing CBA between petitioner and respondent.

In legal parlance, however, human beings are never embraced in the term assets and
To reiterate, petitioner insists that the term new employees, as the same is used in the Union Shop
Clause of the CBA at issue, refers only to employees hired by BPI as non-regular employees who later
qualify for regular employment and become regular employees, and not those who, as a legal consequence
of a merger, are allegedly automatically deemed regular employees of BPI. However, the CBA does not make

liabilities. Moreover, BPIs absorption of former FEBTC employees was neither by operation of law nor by
legal consequence of contract. There was no government regulation or law that compelled the merger of the
two banks or the absorption of the employees of the dissolved corporation by the surviving corporation. Had
there been such law or regulation, the absorption of employees of the non-surviving entities of the merger
would have been mandatory on the surviving corporation. [27] In the present case, the merger was voluntarily

entered into by both banks presumably for some mutually acceptable consideration. In fact, the Corporation

absorbed employees should not be subject to the terms and conditions of employment obtaining in

Code does not also mandate the absorption of the employees of the non-surviving corporation by the

the surviving corporation.

surviving corporation in the case of a merger. Section 80 of the Corporation Code provides:

SEC. 80. Effects of merger or consolidation. The merger or consolidation, as

provided in the preceding sections shall have the following effects:
1. The constituent corporations shall become a single corporation which, in
case of merger, shall be the surviving corporation designated in the plan of merger;
and, in case of consolidation, shall be the consolidated corporation designated in the
plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except
that of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities and powers and shall be subject to all the duties and liabilities of
a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter
possess all the rights, privileges, immunities and franchises of each of the constituent
corporations; and all property, real or personal, and all receivables due on whatever
account, including subscriptions to shares and other choses in action, and all and
every other interest of, or belonging to, or due to each constituent corporation, shall be
taken and deemed to be transferred to and vested in such surviving or consolidated
corporation without further act or deed; and
5. The surviving or the consolidated corporation shall be responsible and liable
for all the liabilities and obligations of each of the constituent corporations in the same
manner as if such surviving or consolidated corporation had itself incurred such
liabilities or obligations; and any claim, action or proceeding pending by or against any
of such constituent corporations may be prosecuted by or against the surviving or
consolidated corporation, as the case may be. Neither the rights of creditors nor any
lien upon the property of any of such constituent corporations shall be impaired by
such merger or consolidated.

The rule is that unless expressly assumed, labor contracts such as employment
contracts and collective bargaining agreements are not enforceable against a
transferee of an enterprise, labor contracts being in personam, thus binding only
between the parties. A labor contract merely creates an action in personam and does
not create any real right which should be respected by third parties. This conclusion
draws its force from the right of an employer to select his employees and to decide
when to engage them as protected under our Constitution, and the same can only be
restricted by law through the exercise of the police power. [28]

Furthermore, this Court believes that it is contrary to public policy to declare the former FEBTC
employees as forming part of the assets or liabilities of FEBTC that were transferred and absorbed by BPI in
the Articles of Merger. Assets and liabilities, in this instance, should be deemed to refer only to property rights
and obligations of FEBTC and do not include the employment contracts of its personnel. A corporation cannot
unilaterally transfer its employees to another employer like chattel. Certainly, if BPI as an employer had the
right to choose who to retain among FEBTCs employees, FEBTC employees had the concomitant right to
choose not to be absorbed by BPI. Even though FEBTC employees had no choice or control over the merger
of their employer with BPI, they had a choice whether or not they would allow themselves to be absorbed by
BPI. Certainly nothing prevented the FEBTCs employees from resigning or retiring and seeking employment
elsewhere instead of going along with the proposed absorption.

Significantly, too, the Articles of Merger and Plan of Merger dated April 7, 2000 did not contain any
specific stipulation with respect to the employment contracts of existing personnel of the non-surviving entity

Employment is a personal consensual contract and absorption by BPI of a former FEBTC

which is FEBTC. Unlike the Voluntary Arbitrator, this Court cannot uphold the reasoning that the general

employee without the consent of the employee is in violation of an individuals freedom to contract. It would

stipulation regarding transfer of FEBTC assets and liabilities to BPI as set forth in the Articles of Merger

have been a different matter if there was an express provision in the articles of merger that as a condition for

necessarily includes the transfer of all FEBTC employees into the employ of BPI and neither BPI nor the

the merger, BPI was being required to assume all the employment contracts of all existing FEBTC employees

FEBTC employees allegedly could do anything about it. Even if it is so, it does not follow that the

with the conformity of the employees. In the absence of such a provision in the articles of merger, then BPI

clearly had the business management decision as to whether or not employ FEBTCs employees. FEBTC
employees likewise retained the prerogative to allow themselves to be absorbed or not; otherwise, that would
be tantamount to involuntary servitude.

There appears to be no dispute that with respect to FEBTC employees that BPI chose not to
employ or FEBTC employees who chose to retire or be separated from employment instead of being
absorbed, BPIs assumed liability to these employees pursuant to the merger is FEBTCs liability to them in
terms of separation pay,[29] retirement pay[30] or other benefits that may be due them depending on the
circumstances.

employment on other roads, and the action was for specific performance of this
agreement against a demurring group of the original employees of the railroad which
was operating the consolidated shops. The relief sought was denied, the court saying
that, absent some specific contract provision otherwise, seniority rights were ordinarily
limited to the employment in which they were earned, and concluding that the contract
for which specific performance was sought was not such a completed and binding
agreement as would support such equitable relief, since the railroad, whose
concurrence in the arrangements made was essential to their effectuation, was not a
party to the agreement.
Where the provisions of a labor contract provided that in the event that a
trucker absorbed the business of another private contractor or common carrier, or was
a party to amerger of lines, the seniority of the employees absorbed or affected
thereby should be determined by mutual agreement between the trucker and the
unions involved, it was held inMoore v International Brotherhood of Teamsters, etc.
(1962, Ky) 356 SW2d 241, that the trucker was not required to absorb the affected
employees as well as the business, the court saying that they could find no such
meaning in the above clause, stating that it dealt only with seniority, and not with initial
employment. Unless and until the absorbing company agreed to take the employees
of the company whose business was being absorbed, no seniority problem was
created, said the court, hence the provision of the contract could have no
application. Furthermore, said the court, it did not require that the absorbing company
take these employees, but only that if it did take them the question of seniority between
the old and new employees would be worked out by agreement or else be submitted
to the grievance procedure.[31] (Emphasis ours.)

Legal Consequences of Mergers

Indeed, from the tenor of local and foreign authorities, in voluntary mergers, absorption of the
Although not binding on this Court, American jurisprudence on the consequences of
voluntary mergers on the right to employment and seniority rights is persuasive and illuminating. We quote
the following pertinent discussion from the American Law Reports:

Several cases have involved the situation where as a result of mergers,

consolidations, or shutdowns, one group of employees, who had accumulated seniority
at one plant or for one employer, finds that their jobs have been discontinued except to
the extent that they are offered employment at the place or by the employer where the
work is to be carried on in the future. Such cases have involved the question whether
such transferring employees should be entitled to carry with them their accumulated
seniority or whether they are to be compelled to start over at the bottom of the seniority
list in the "new" job. It has been recognized in some cases that the accumulated
seniority does not survive and cannot be transferred to the "new" job.
In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597 , the shop work of
three formerly separate railroad corporations, which had previously operated separate
facilities, was consolidated in the shops of one of the roads. Displaced employees of
the other two roads were given preference for the new jobs created in the shops of the
railroad which took over the work. A controversy arose between the employees as to
whether the displaced employees were entitled to carry with them to the new jobs the
seniority rights they had accumulated with their prior employers, that is, whether the
rosters of the three corporations, for seniority purposes, should be "dovetailed" or
whether the transferring employees should go to the bottom of the roster of their new
employer. Labor representatives of the various systems involved attempted to work
out an agreement which, in effect, preserved the seniority status obtained in the prior

dissolved corporations employees or the recognition of the absorbed employees service with their previous
employer may be demanded from the surviving corporation if required by provision of law or contract. The
dissent of Justice Arturo D. Brion tries to make a distinction as to the terms and conditions of employment of
the absorbed employees in the case of a corporate merger or consolidation which will, in effect, take away
from corporate management the prerogative to make purely business decisions on the hiring of employees or
will give it an excuse not to apply the CBA in force to the prejudice of its own employees and their recognized
collective bargaining agent. In this regard, we disagree with Justice Brion.

Justice Brion takes the position that because the surviving corporation continues the personality of the
dissolved corporation and acquires all the latters rights and obligations, it is duty-bound to absorb the
dissolved corporations employees, even in the absence of a stipulation in the plan of merger. He proposes

that this interpretation would provide the necessary protection to labor as it spares workers from being left in
merger in terms of seniority and other conditions of their employment due to the merger. Thus, we are not
legal limbo.
convinced that in the absence of a stipulation in the merger plan the surviving corporation was compelled, or
However, there are instances where an employer can validly discontinue or terminate the employment

may be judicially compelled, to absorb all employees under the same terms and conditions obtaining in the

of an employee without violating his right to security of tenure. Among others, in case of redundancy, for
dissolved corporation as the surviving corporation should also take into consideration the state of its business
example, superfluous employees may be terminated and such termination would be authorized under Article
283 of the Labor Code.[32]

and its obligations to its own employees, and to their certified collective bargaining agent or labor union.

Moreover, assuming for the sake of argument that there is an obligation to hire or absorb all employees

Even assuming we accept Justice Brions theory that in a merger situation the surviving corporation

of the non-surviving corporation, there is still no basis to conclude that the terms and conditions of

should be compelled to absorb the dissolved corporations employees as a legal consequence of the merger

employment under a valid collective bargaining agreement in force in the surviving corporation should not be

and as a social justice consideration, it bears to emphasize his dissent also recognizes that the employee may

made to apply to the absorbed employees.

choose to end his employment at any time by voluntarily resigning. For the employee to be absorbed by
BPI, it requires the employees implied or express consent. It is because of this human element in

The Corporation Code and the Subject Merger

Agreement are Silent on Efficacy, Terms and
Conditions of Employment Contracts

employment contracts and the personal, consensual nature thereof that we cannot agree that, in a merger
situation, employment contracts are automatically transferable from one entity to another in the same manner

The lack of a provision in the plan of merger regarding the transfer of employment contracts to the

that a contract pertaining to purely proprietary rights such as a promissory note or a deed of sale of property
is perfectly and automatically transferable to the surviving corporation.

surviving corporation could have very well been deliberate on the part of the parties to the merger, in order to

grant the surviving corporation the freedom to choose who among the dissolved corporations employees to

retain, in accordance with the surviving corporations business needs. If terminations, for instance due to

redundancy or labor-saving devices or to prevent losses, are done in good faith, they would be valid. The

surviving corporation too is duty-bound to protect the rights of its own employees who may be affected by the

That BPI is the same entity as FEBTC after the merger is but a legal fiction intended as a tool to

adjudicate rights and obligations between and among the merged corporations and the persons that deal with

them. Although in a merger it is as if there is no change in the personality of the employer, there is in reality a

change in the situation of the employee. Once an FEBTC employee is absorbed, there are presumably

10

same terms and conditions as stated in the latters employment contracts with FEBTC. This further
changes in his condition of employment even if his previous tenure and salary rate is recognized by BPI. It is
strengthens the view that BPI and the former FEBTC employees voluntarily contracted with each other for
reasonable to assume that BPI would have different rules and regulations and company practices than FEBTC

and it is incumbent upon the former FEBTC employees to obey these new rules and adapt to their new

their employment in the surviving corporation.

Proper Appreciation of the

Employees Under the CBA

Term

New

environment. Not the least of the changes in employment condition that the absorbed FEBTC employees

must face is the fact that prior to the merger they were employees of an unorganized establishment and after

In any event, it is of no moment that the former FEBTC employees retained the regular status that
they possessed while working for their former employer upon their absorption by petitioner. This fact would

the merger they became employees of a unionized company that had an existing collective bargaining

agreement with the certified union. This presupposes that the union who is party to the collective bargaining

not remove them from the scope of the phrase new employees as contemplated in the Union Shop Clause of
the CBA, contrary to petitioners insistence that the term new employees only refers to those who are initially
hired as non-regular employees for possible regular employment.

agreement is the certified union that has, in the appropriate certification election, been shown to represent a

majority of the members of the bargaining unit.

The Union Shop Clause in the CBA simply states that new employees who during the effectivity
of the CBA may be regularly employed by the Bank must join the union within thirty (30) days from their

Likewise, with respect to FEBTC employees that BPI chose to employ and who also chose to be
absorbed, then due to BPIs blanket assumption of liabilities and obligations under the articles of merger, BPI
was bound to respect the years of service of these FEBTC employees and to pay the same, or commensurate
salaries and other benefits that these employees previously enjoyed with FEBTC.

regularization. There is nothing in the said clause that limits its application to only new employees who
possess non-regular status, meaning probationary status, at the start of their employment. Petitioner
likewise failed to point to any provision in the CBA expressly excluding from the Union Shop Clause new
employees who are absorbed as regular employees from the beginning of their employment. What is
indubitable from the Union Shop Clause is that upon the effectivity of the CBA, petitioners new regular

As the Union likewise pointed out in its pleadings, there were benefits under the CBA that the former
FEBTC employees did not enjoy with their previous employer. As BPI employees, they will enjoy all

employees (regardless of the manner by which they became employees of BPI ) are required to join the
Union as a condition of their continued employment.

these CBA benefits upon their absorption. Thus, although in a sense BPI is continuing FEBTCs employment
of these absorbed employees, BPIs employment of these absorbed employees was not under exactly the

The dissenting opinion of Justice Brion dovetails with Justice Carpios view only in their restrictive
interpretation of who are new employees under the CBA. To our dissenting colleagues, the phrase new

11

employees (who are covered by the union shop clause) should only include new employees who were hired
as probationary during the life of the CBA and were later granted regular status. They propose that the former
FEBTC employees who were deemed regular employees from the beginning of their employment with BPI

the articles of merger which, in turn, must have been duly approved by a majority of the
respective stockholders of the constituent corporations. The same provision further
states that the merger shall be effective only upon the issuance by the SEC of a
certificate of merger. The effectivity date of the merger is crucial for determining
when the merged or absorbed corporation ceases to exist; and when its rights,
privileges, properties as well as liabilities pass on to the surviving
corporation. (Emphasis ours.)

should be treated as a special class of employees and be excluded from the union shop clause.
In other words, even though BPI steps into the shoes of FEBTC as the surviving corporation, BPI
does so at a particular point in time, i.e., the effectivity of the merger upon the SECs issuance of a certificate
Justice Brion himself points out that there is no clear, categorical definition of new employee in the

CBA. In other words, the term new employee as used in the union shop clause is used broadly without any

of merger. In fact, the articles of merger themselves provided that both BPI and FEBTC will continue their
respective business operations until the SEC issues the certificate of merger and in the event SEC does not
issue such a certificate, they agree to hold each other blameless for the non-consummation of the merger.

qualification or distinction. However, the Court should not uphold an interpretation of the term new employee

based on the general and extraneous provisions of the Corporation Code on merger that would defeat, rather

Considering the foregoing principle, BPI could have only become the employer of the FEBTC
employees it absorbed after the approval by the SEC of the merger. If the SEC did not approve the merger,

than fulfill, the purpose of the union shop clause. To reiterate, the provision of the Article 248(e) of the
BPI would not be in the position to absorb the employees of FEBTC at all. Indeed, there is evidence on record
Labor Code in point mandates that nothing in the said Code or any other law should stop the parties

from requiring membership in a recognized collective bargaining agent as a condition of employment.

that BPI made the assignments of its absorbed employees in BPI effective April 10, 2000, or after the SECs
approval of the merger.[34] In other words, BPI became the employer of the absorbed employees only at some
point after the effectivity of the merger, notwithstanding the fact that the absorbed employees years of

Significantly, petitioner BPI never stretches its arguments so far as to state that the absorbed

service with FEBTC were voluntarily recognized by BPI.

employees should be deemed old employees who are not covered by the Union Shop Clause. This is not
Even assuming for the sake of argument that we consider the absorbed FEBTC employees as old

surprising.

employees of BPI who are not members of any union (i.e., it is their date of hiring by FEBTC and not the

By law and jurisprudence, a merger only becomes effective upon approval by the Securities and
Exchange Commission (SEC) of the articles of merger. InAssociated Bank v. Court of Appeals,[33] we held:

date of their absorption that is considered), this does not necessarily exclude them from the union security
clause in the CBA. The CBA subject of this case was effective from April 1, 1996 until March 31, 2001. Based
on the allegations of the former FEBTC employees themselves, there were former FEBTC employees who

The procedure to be followed is prescribed under the Corporation Code. Section 79 of

said Code requires the approval by the Securities and Exchange Commission (SEC) of

were hired by FEBTC after April 1, 1996 and if their date of hiring by FEBTC is considered as their date of

12

hiring by BPI, they would undeniably be considered new employees of BPI within the contemplation of the

who was absorbed from another bank as a regular employee pursuant to a merger, for purposes of applying

Union Shop Clause of the said CBA. Otherwise, it would lead to the absurd situation that we would

the Union Shop Clause. Both employees were hired/employed only after the CBA was signed. At the time

discriminate not only between new BPI employees (hired during the life of the CBA) and former FEBTC

they are being required to join the Union, they are both already regular rank and file employees of BPI. They

employees (absorbed during the life of the CBA) but also among the former FEBTC employees

belong to the same bargaining unit being represented by the Union. They both enjoy benefits that the Union

themselves. In other words, we would be treating employees who are exactly similarly situated ( i.e., the group

was able to secure for them under the CBA. When they both entered the employ of BPI, the CBA and the

of absorbed FEBTC employees) differently. This hardly satisfies the demands of equality and justice.

Union Shop Clause therein were already in effect and neither of them had the opportunity to express their
preference for unionism or not. We see no cogent reason why the Union Shop Clause should not be applied

Petitioner limited itself to the argument that its absorbed employees do not fall within the term new

equally to these two types of new employees, for they are undeniably similarly situated.

employees contemplated under the Union Shop Clause with the apparent objective of excluding all, and not
just some, of the former FEBTC employees from the application of the Union Shop Clause.

The effect or consequence of BPIs so-called absorption of former FEBTC employees should be
limited to what they actually agreed to, i.e. recognition of the FEBTC employees years of service, salary rate

However, in law or even under the express terms of the CBA, there is no special class of employees

and other benefits with their previous employer. The effect should not be stretched so far as to exempt former

called absorbed employees. In order for the Court to apply or not apply the Union Shop Clause, we can only

FEBTC employees from the existing CBA terms, company policies and rules which apply to employees

classify the former FEBTC employees as either old or new. If they are not old employees, they are

similarly situated. If the Union Shop Clause is valid as to other new regular BPI employees, there is no reason

necessarily new employees. If they are new employees, the Union Shop Clause did not distinguish between

why the same clause would be a violation of the absorbed employees freedom of association.

new employees who are non-regular at their hiring but who subsequently become regular and new employees
who are absorbed as regular and permanent from the beginning of their employment. The Union Shop

Non-Application of Union Shop Clause Contrary

to the Policy of the Labor Code and Inimical to
Industrial Peace

Clause did not so distinguish, and so neither must we.

It is but fair that similarly situated employees who enjoy the same privileges of a CBA should be
No Substantial Distinction Under the CBA
Between Regular Employees Hired After
Probationary Status and Regular Employees
Hired After the Merger

likewise subject to the same obligations the CBA imposes upon them. A contrary interpretation of the Union
Shop Clause will be inimical to industrial peace and workers solidarity. This unfavorable situation will not be
sufficiently addressed by asking the former FEBTC employees to simply pay agency fees to the Union in lieu

Verily, we agree with the Court of Appeals that there are no substantial differences between a
of union membership, as the dissent of Justice Carpio suggests. The fact remains that other new regular
newly hired non-regular employee who was regularized weeks or months after his hiring and a new employee

13

employees, to whom the absorbed employees should be compared, do not have the option to simply pay the
agency fees and they must join the Union or face termination.

Indeed, a union security clause in a CBA should be interpreted to give meaning and effect to its
purpose, which is to afford protection to the certified bargaining agent and ensure that the employer is dealing
with a union that represents the interests of the legally mandated percentage of the members of the bargaining

Petitioners restrictive reading of the Union Shop Clause could also inadvertently open an avenue,

unit.

which an employer could readily use, in order to dilute the membership base of the certified union in the
collective bargaining unit (CBU). By entering into a voluntary merger with a non-unionized company that

The union shop clause offers protection to the certified bargaining agent by ensuring that future

employs more workers, an employer could get rid of its existing union by the simple expedient of arguing that

regular employees who (a) enter the employ of the company during the life of the CBA; (b) are deemed part of

the absorbed employees are not new employees, as are commonly understood to be covered by a CBAs

the collective bargaining unit; and (c) whose number will affect the number of members of the collective

union security clause. This could then lead to a new majority within the CBU that could potentially threaten the

bargaining unit will be compelled to join the union. Such compulsion has legal effect, precisely because the

majority status of the existing union and, ultimately, spell its demise as the CBUs bargaining

employer by voluntarily entering in to a union shop clause in a CBA with the certified bargaining agent takes

representative. Such a dreaded but not entirely far-fetched scenario is no different from the ingenious and

on the responsibility of dismissing the new regular employee who does not join the union.

creative union-busting schemes that corporations have fomented throughout the years, which this Court has
foiled time and again in order to preserve and protect the valued place of labor in this jurisdiction consistent
with the Constitutions mandate of insuring social justice.

Without the union shop clause or with the restrictive interpretation thereof as proposed in the dissenting
opinions, the company can jeopardize the majority status of the certified union by excluding from union
membership all new regular employees whom the Company will absorb in future mergers and all new regular

There is nothing in the Labor Code and other applicable laws or the CBA provision at issue that

employees whom the Company hires as regular from the beginning of their employment without undergoing a

requires that a new employee has to be of probationary or non-regular status at the beginning of the

probationary period. In this manner, the Company can increase the number of members of the collective

employment relationship. An employer may confer upon a new employee the status of regular employment

bargaining unit and if this increase is not accompanied by a corresponding increase in union membership, the

even at the onset of his engagement. Moreover, no law prohibits an employer from voluntarily recognizing the

certified union may lose its majority status and render it vulnerable to attack by another union who wishes to

length of service of a new employee with a previous employer in relation to computation of benefits or seniority

represent the same bargaining unit. [35]

but it should not unduly be interpreted to exclude them from the coverage of the CBA which is a binding
contractual obligation of the employer and employees.

Or worse, a certified union whose membership falls below twenty percent (20%) of the total members of
the collective bargaining unit may lose its status as a legitimate labor organization altogether, even in a

14

situation where there is no competing union. [36] In such a case, an interested party may file for the cancellation
inclusion of such employees in a future CBA is next to nil more so, if BPIs narrow interpretation of the union
of the unions certificate of registration with the Bureau of Labor Relations. [37]
shop clause is sustained by this Court.
Plainly, the restrictive interpretation of the union shop clause would place the certified unions very
existence at the mercy and control of the employer. Relevantly, only BPI, the employer appears to be

Right of an Employee not to Join a Union is not

Absolute and Must Give Way to the Collective
Good of All Members of the Bargaining Unit

interested in pursuing this case. The former FEBTC employees have not joined BPI in this appeal.
The dissenting opinions place a premium on the fact that even if the former FEBTC employees are
For the foregoing reasons, Justice Carpios proposal to simply require the former FEBTC to pay agency

not old employees, they nonetheless were employed as regular and permanent employees without a gap in

fees is wholly inadequate to compensate the certified union for the loss of additional membership supposedly

their service. However, an employees permanent and regular employment status in itself does not

guaranteed by compliance with the union shop clause. This is apart from the fact that treating these

necessarily exempt him from the coverage of a union shop clause.

absorbed employees as a special class of new employees does not encourage worker solidarity in the
company since another class of new employees (i.e. those whose were hired as probationary and later

In the past this Court has upheld even the more stringent type of union security clause, i.e., the closed

regularized during the life of the CBA) would not have the option of substituting union membership with

shop provision, and held that it can be made applicable to old employees who are already regular and

payment of agency fees.

permanent but have chosen not to join a union. In the early case of Juat v. Court of Industrial Relations,[38] the
Court held that an old employee who had no union may be compelled to join the union even if the collective
bargaining agreement (CBA) imposing the closed shop provision was only entered into seven years after of

Justice Brion, on the other hand, appears to recognize the inherent unfairness of perpetually excluding
the hiring of the said employee. To quote from that decision:
the absorbed employees from the ambit of the union shop clause. He proposes that this matter be left to

negotiation by the parties in the next CBA. To our mind, however, this proposal does not sufficiently address

the issue. With BPI already taking the position that employees absorbed pursuant to its voluntary mergers

A closed-shop agreement has been considered as one form of union security

whereby only union members can be hired and workers must remain union members
as a condition of continued employment. The requirement for employees or workers to
become members of a union as a condition for employment redounds to the benefit
and advantage of said employees because by holding out to loyal members a
promise of employment in the closed-shop the union wields group solidarity. In fact,
it is said that "the closed-shop contract is the most prized achievement of unionism."
xxxx

with other banks are exempt from the union shop clause, the chances of the said bank ever agreeing to the

This Court had categorically held in the case of Freeman Shirt Manufacturing
Co., Inc., et al. vs. Court of Industrial Relations, et al., G.R. No. L-16561, Jan. 28,
1961, that the closed-shop proviso of a collective bargaining agreement entered into
between an employer and a duly authorized labor union is applicable not only to the
employees or laborers that are employed after the collective bargaining

15

agreement had been entered into but also to old employees who are not
members of any labor union at the time the said collective bargaining agreement
was entered into. In other words, if an employee or laborer is already a member of a
labor union different from the union that entered into a collective bargaining agreement
with the employer providing for a closed-shop, said employee or worker cannot be
obliged to become a member of that union which had entered into a collective
bargaining agreement with the employer as a condition for his continued employment.
(Emphasis and underscoring supplied.)

not unlimited, is a fundamental personal right and liberty, and has a preferred position in the hierarchy of
values.[42]

However, Victoriano is consistent with Juat since they both affirm that the right to refrain from joining a
Although the present case does not involve a closed shop provision that included even old employees,

union is not absolute. The relevant portion ofVictoriano is quoted below:

the Juat example is but one of the cases that laid down the doctrine that the right not to join a union is not
absolute. Theoretically, there is nothing in law or jurisprudence to prevent an employer and a union from
stipulating that existing employees (who already attained regular and permanent status but who are not
members of any union) are to be included in the coverage of a union security clause. Even Article 248(e) of
the Labor Code only expressly exempts old employees who already have a union from inclusion in a union
security clause.[39]

Contrary to the assertion in the dissent of Justice Carpio, Juat has not been overturned by Victoriano

The right to refrain from joining labor organizations recognized by

Section 3 of the Industrial Peace Act is, however, limited. The legal protection
granted to such right to refrain from joining is withdrawn by operation of law, where
a labor union and an employer have agreed on a closed shop, by virtue of which
the employer may employ only member of the collective bargaining union, and
the employees must continue to be members of the union for the duration of the
contract in order to keep their jobs. Thus Section 4 (a) (4) of the Industrial Peace
Act, before its amendment by Republic Act No. 3350, provides that although it would
be an unfair labor practice for an employer "to discriminate in regard to hire or
tenure of employment or any term or condition of employment to encourage or
discourage membership in any labor organization" the employer is, however, not
precluded "from making an agreement with a labor organization to require as a
condition of employment membership therein, if such labor organization is the
representative of the employees." By virtue, therefore, of a closed shop agreement,
before the enactment of Republic Act No. 3350, if any person, regardless of his
religious beliefs, wishes to be employed or to keep his employment, he must become a
member of the collective bargaining union. Hence, the right of said employee not to
join the labor union is curtailed and withdrawn.[43] (Emphases supplied.)

v. Elizalde Rope Workers Union[40] nor by Reyes v. Trajano.[41] The factual milieus of these three cases are
vastly different.

If Juat exemplified an exception to the rule that a person has the right not to join a
union, Victoriano merely created an exception to the exception on the ground of religious freedom.

In Victoriano, the issue that confronted the Court was whether or not employees who were members of
the Iglesia ni Kristo (INK) sect could be compelled to join the union under a closed shop provision, despite the

Reyes, on the other hand, did not involve the interpretation of any union security clause. In that case,

fact that their religious beliefs prohibited them from joining a union. In that case, the Court was asked to

there was no certified bargaining agent yet since the controversy arose during a certification

balance the constitutional right to religious freedom against a host of other constitutional provisions including

election. In Reyes, the Court highlighted the idea that the freedom of association included the right not to

the freedom of association, the non-establishment clause, the non-impairment of contracts clause, the equal

associate or join a union in resolving the issue whether or not the votes of members of the INK sect who were

protection clause, and the social justice provision. In the end, the Court held that religious freedom, although

part of the bargaining unit could be excluded in the results of a certification election, simply because they were
not members of the two contesting unions and were expected to have voted for NO UNION in view of their
religious affiliation. The Court upheld the inclusion of the votes of the INK members since in the previous case

16

of Victoriano we held that INK members may not be compelled to join a union on the ground of religious

It is unsurprising that significant provisions on labor protection of the 1987 Constitution are found in

freedom and even without Victoriano every employee has the right to vote no union in a certification election

Article XIII on Social Justice. The constitutional guarantee given the right to form unions [51] and the State

as part of his freedom of association. However, Reyes is not authority for Justice Carpios proposition that an

policy to promote unionism[52] have social justice considerations. In Peoples Industrial and Commercial

employee who is not a member of any union may claim an exemption from an existing union security clause

Employees and Workers Organization v. Peoples Industrial and Commercial Corporation,[53] we recognized

because he already has regular and permanent status but simply prefers not to join a union.

that [l]abor, being the weaker in economic power and resources than capital, deserve protection that is
actually substantial and material.

The other cases cited in Justice Carpios dissent on this point are likewise inapplicable. Basa v.
Federacion Obrera de la Industria Tabaquera y Otros Trabajadores de Filipinas,[44] Anucension v. National

The rationale for upholding the validity of union shop clauses in a CBA, even if they impinge upon

Labor Union,[45] and Gonzales v. Central Azucarera de Tarlac Labor Union [46] all involved members of the

the individual employees right or freedom of association, is not to protect the union for the unions sake. Laws

INK. In line with Victoriano, these cases upheld the INK members claimed exemption from the union security

and jurisprudence promote unionism and afford certain protections to the certified bargaining agent in a

clause on religious grounds. In the present case, the former FEBTC employees never claimed any religious

unionized company because a strong and effective union presumably benefits all employees in the

grounds for their exemption from the Union Shop Clause. As for Philips Industrial Development, Inc. v.

bargaining unit since such a union would be in a better position to demand improved benefits and conditions

National Labor Relations Corporation[47] and Knitjoy Manufacturing, Inc. v. Ferrer-Calleja,[48] the employees

of work from the employer. This is the rationale behind the State policy to promote unionism declared in the

who were exempted from joining the respondent union or who were excluded from participating in the

Constitution, which was elucidated in the above-cited case of Liberty Flour Mills Employees v. Liberty Flour

certification election were found to be not members of the bargaining unit represented by respondent

Mills, Inc.[54]

unionand were free to form/join their own union. In the case at bar, it is undisputed that the former FEBTC
employees

were

part

of

the

bargaining

unit

that

the

Union

represented. Thus,

the

rulings
In the case at bar, since the former FEBTC employees are deemed covered by the Union Shop Clause,

in Philips and Knitjoy have no relevance to the issues at hand.

they are required to join the certified bargaining agent, which supposedly has gathered the support of the
Time and again, this Court has ruled that the individual employees right not to join a union may be

majority of workers within the bargaining unit in the appropriate certification proceeding. Their joining the

validly restricted by a union security clause in a CBA [49]and such union security clause is not a violation of the
certified union would, in fact, be in the best interests of the former FEBTC employees for it unites their
employees constitutional right to freedom of association. [50]
interests with the majority of employees in the bargaining unit. It encourages employee solidarity and affords

17

sufficient protection to the majority status of the union during the life of the CBA which are the precisely the

as to curtail an employees eligibility to apply for retirement if qualified under the law, the existing retirement

objectives of union security clauses, such as the Union Shop Clause involved herein. We are indeed not

plan, or the CBA as the case may be.

being called to balance the interests of individual employees as against the State policy of promoting
In sum, this Court finds it reasonable and just to conclude that the Union Shop Clause of the CBA
unionism, since the employees, who were parties in the court below, no longer contested the adverse Court of
covers the former FEBTC employees who were hired/employed by BPI during the effectivity of the CBA in a
Appeals decision. Nonetheless, settled jurisprudence has already swung the balance in favor of unionism, in

recognition that ultimately the individual employee will be benefited by that policy. In the hierarchy of

manner which petitioner describes as absorption. A contrary appreciation of the facts of this case would,
undoubtedly, lead to an inequitable and very volatile labor situation which this Court has consistently ruled
against.

constitutional values, this Court has repeatedly held that the right to abstain from joining a labor organization is

subordinate to the policy of encouraging unionism as an instrument of social justice.

In the case of former FEBTC employees who initially joined the union but later withdrew their
membership, there is even greater reason for the union to request their dismissal from the employer since the
CBA also contained a Maintenance of Membership Clause.

Also in the dissenting opinion of Justice Carpio, he maintains that one of the dire consequences to the

A final point in relation to procedural due process, the Court is not unmindful that the former
FEBTC employees refusal to join the union and BPIs refusal to enforce the Union Shop Clause in this

former FEBTC employees who refuse to join the union is the forfeiture of their retirement benefits. This is
instance may have been based on the honest belief that the former FEBTC employees were not covered by
clearly not the case precisely because BPI expressly recognized under the merger the length of service of the

said clause. In the interest of fairness, we believe the former FEBTC employees should be given a fresh thirty
(30) days from notice of finality of this decision to join the union before the union demands BPI to terminate

absorbed employees with FEBTC. Should some refuse to become members of the union, they may still opt to
their employment under the Union Shop Clause, assuming said clause has been carried over in the present
retire if they are qualified under the law, the applicable retirement plan, or the CBA, based on their combined

length of service with FEBTC and BPI. Certainly, there is nothing in the union shop clause that should be read

CBA and there has been no material change in the situation of the parties.

18

WHEREFORE, the petition is hereby DENIED, and the Decision dated September 30, 2003 of the
Court of Appeals is AFFIRMED, subject to the thirty (30) day notice requirement imposed herein. Former
FEBTC employees who opt not to become union members but who qualify for retirement shall receive their
retirement benefits in accordance with law, the applicable retirement plan, or the CBA, as the case may be.
BPI EMPLOYEES UNION-DAVAO CHAPTER-FEDERATION OF
UNIONS IN BPI UNIBANK,
Respondent.
x--------------------------------------------------x

SO ORDERED.
Republic of the Philippines
Supreme Court
Manila
EN BANC
BANK OF THE PHILIPPINE ISLANDS,
Petitioner,

G.R. No. 164301

Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,*
DEL CASTILLO,**
ABAD,
VILLARAMA, JR.,
PEREZ,**
MENDOZA,
SERENO,
REYES,*** and
PERLAS-BERNABE, JJ.

RESOLUTION

LEONARDO-DE CASTRO, J.:

Promulgated:

- versus -

October 19, 2011

In

the present

incident,

petitioner

Bank

of

the

Philippine

Islands

(BPI)

moves

for

reconsideration[1] of our Decision dated August 10, 2010, holding that former employees of the Far East Bank
and Trust Company (FEBTC) absorbed by BPI pursuant to the two banks merger in 2000 were covered by

19

the Union Shop Clause in the then existing collective bargaining agreement (CBA) [2] of BPI with respondent

Court of Appeals which ruled that the Voluntary Arbitrators interpretation of the Union Shop Clause was at war

BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank (the Union).

with the spirit and rationale why the Labor Code allows the existence of such provision. On review with this
Court, we upheld the appellate courts ruling and disposed of the case as follows:

To recall, the Union Shop Clause involved in this long standing controversy provided, thus:

ARTICLE II

WHEREFORE, the petition is hereby DENIED, and the Decision dated

September 30, 2003 of the Court of Appeals is AFFIRMED, subject to the thirty (30)
day notice requirement imposed herein. Former FEBTC employees who opt not to
become union members but who qualify for retirement shall receive their retirement
benefits in accordance with law, the applicable retirement plan, or the CBA, as the case
may be.[4]

xxxx

Section 2. Union Shop - New employees falling within the bargaining unit
as defined in Article I of this Agreement, who may hereafter be regularly employed
by the Bank shall, within thirty (30) days after they become regular employees,
join the Union as a condition of their continued employment. It is understood that
membership in good standing in the Union is a condition of their continued employment
with the Bank.[3] (Emphases supplied.)

Notwithstanding our affirmation of the applicability of the Union Shop Clause to former FEBTC
employees, for reasons already extensively discussed in the August 10, 2010 Decision, even now BPI
continues to protest the inclusion of said employees in the Union Shop Clause.

The bone of contention between the parties was whether or not the absorbed FEBTC employees

In seeking the reversal of our August 10, 2010 Decision, petitioner insists that the parties to the CBA

fell within the definition of new employees under the Union Shop Clause, such that they may be required to

clearly intended to limit the application of the Union Shop Clause only to new employees who were hired as

join respondent union and if they fail to do so, the Union may request BPI to terminate their employment, as

non-regular employees but later attained regular status at some point after hiring. FEBTC employees cannot

the Union in fact did in the present case. Needless to state, BPI refused to accede to the Unions

be considered new employees as BPI merely stepped into the shoes of FEBTC as an employer purely as a

request. Although BPI won the initial battle at the Voluntary Arbitrator level, BPIs position was rejected by the

consequence of the merger.[5]

20

and the consensual nature of employment contracts as valid bases for the conclusion that former FEBTC
employees should be deemed new employees. [10] The Union argues that the creation of employment relations
Petitioner likewise relies heavily on the dissenting opinions of our respected colleagues, Associate
between former FEBTC employees and BPI (i.e., BPIs selection and engagement of former FEBTC
Justices Antonio T. Carpio and Arturo D. Brion. From both dissenting opinions, petitioner derives its contention
employees, its payment of their wages, power of dismissal and of control over the employees conduct)
that the situation of absorbed employees can be likened to old employees of BPI, insofar as their full tenure
occurred after the merger, or to be more precise, after the Securities and Exchange Commissions (SEC)
with FEBTC was recognized by BPI and their salaries were maintained and safeguarded from diminution but
approval of the merger.[11] The Union likewise points out that BPI failed to offer any counterargument to the
such absorbed employees cannot and should not be treated in exactly the same way as old BPI employees
Courts reasoning that:
for there are substantial differences between them. [6] Although petitioner admits that there are similarities
between absorbed and new employees, they insist there are marked differences between them as well. Thus,
adopting Justice Brions stance, petitioner contends that the absorbed FEBTC employees should be
considered a sui generis group of employees whose classification will not be duplicated until BPI has another
merger where it would be the surviving corporation. [7] Apparently borrowing from Justice Carpio, petitioner

The rationale for upholding the validity of union shop clauses in a CBA,
even if they impinge upon the individual employee's right or freedom of association, is
not to protect the union for the union's sake. Laws and jurisprudence promote unionism
and afford certain protections to the certified bargaining agent in a unionized company
because a strong and effective union presumably benefits all employees in the
bargaining unit since such a union would be in a better position to demand improved
benefits and conditions of work from the employer. x x x.

propounds that the Union Shop Clause should be strictly construed since it purportedly curtails the right of the
absorbed employees to abstain from joining labor organizations. [8]

x x x Nonetheless, settled jurisprudence has already swung the balance in

favor of unionism, in recognition that ultimately the individual employee will be
benefited by that policy. In the hierarchy of constitutional values, this Court has
repeatedly held that the right to abstain from joining a labor organization is subordinate
to the policy of encouraging unionism as an instrument of social justice. [12]

Pursuant to our directive, the Union filed its Comment [9] on the Motion for Reconsideration. In
opposition to petitioners arguments, the Union, in turn, adverts to our discussion in the August 10, 2010
Decision regarding the voluntary nature of the merger between BPI and FEBTC, the lack of an express
stipulation in the Articles of Merger regarding the transfer of employment contracts to the surviving corporation,

While most of the arguments offered by BPI have already been thoroughly addressed in the August 10,
2010 Decision, we find that a qualification of our ruling is in order only with respect to the interpretation of the
provisions of the Articles of Merger and its implications on the former FEBTC employees security of tenure.

21

By upholding the automatic assumption of the non-surviving corporations existing employment

Taking a second look on this point, we have come to agree with Justice Brions view that it is more in
contracts by the surviving corporation in a merger, the Court strengthens judicial protection of the right to
keeping with the dictates of social justice and the State policy of according full protection to labor to deem
security of tenure of employees affected by a merger and avoids confusion regarding the status of their
employment contracts as automatically assumed by the surviving corporation in a merger, even in the absence
various benefits which were among the chief objections of our dissenting colleagues. However, nothing in this
of an express stipulation in the articles of merger or the merger plan. In his dissenting opinion, Justice Brion
Resolution shall impair the right of an employer to terminate the employment of the absorbed employees for a
reasoned that:
lawful or authorized cause or the right of such an employee to resign, retire or otherwise sever his
employment, whether before or after the merger, subject to existing contractual obligations. In this manner,
To my mind, due consideration of Section 80 of the Corporation Code, the
constitutionally declared policies on work, labor and employment, and the specific
FEBTC-BPI situation i.e., a merger with complete "body and soul" transfer of all that
FEBTC embodied and possessed and where both participating banks were willing
(albeit by deed, not by their written agreement) to provide for the affected human
resources by recognizing continuity of employment should point this Court to a
declaration that in a complete merger situation where there is total takeover by one
corporation over another and there is silence in the merger agreement on what the fate
of the human resource complement shall be, the latter should not be left in legal limbo
and should be properly provided for, by compelling the surviving entity to absorb these
employees. This is what Section 80 of the Corporation Code commands, as the
surviving corporation has the legal obligation to assume all the obligations and
liabilities of the merged constituent corporation.

Justice Brions theory of automatic assumption may be reconciled with the majoritys concerns with the
successor employers prerogative to choose its employees and the prohibition against involuntary servitude.

Notwithstanding this concession, we find no reason to reverse our previous pronouncement that the
absorbed FEBTC employees are covered by the Union Shop Clause.

Not to be forgotten is that the affected employees managed, operated and

worked on the transferred assets and properties as their means of livelihood; they
constituted a basic component of their corporation during its existence. In a merger and
consolidation situation, they cannot be treated without consideration of the applicable
constitutional declarations and directives, or, worse, be simply disregarded. If they are
so treated, it is up to this Court to read and interpret the law so that they are treated in
accordance with the legal requirements of mergers and consolidation, read in light of
the social justice, economic and social provisions of our Constitution. Hence, there is a
need for the surviving corporation to take responsibility for the affected employees and
to absorb them into its workforce where no appropriate provision for the merged
corporation's human resources component is made in the Merger Plan. [13]

Even in our August 10, 2010 Decision, we already observed that the legal fiction in the law on mergers
(that the surviving corporation continues the corporate existence of the non-surviving corporation) is mainly a
tool to adjudicate the rights and obligations between and among the merged corporations and the persons that

22

deal with them.[14] Such a legal fiction cannot be unduly extended to an interpretation of a Union Shop Clause

the non-consummation of the merger.[16] We likewise previously noted that BPI made its assignments of the

so as to defeat its purpose under labor law. Hence, we stated in the Decision that:

former FEBTC employees effective on April 10, 2000, or after the SEC approved the merger. [17] In other
words, the obligation of BPI to pay the salaries and benefits of the former FEBTC employees and its right of

In any event, it is of no moment that the former FEBTC employees retained the
regular status that they possessed while working for their former employer upon their
absorption by petitioner. This fact would not remove them from the scope of the phrase
"new employees" as contemplated in the Union Shop Clause of the CBA, contrary to
petitioner's insistence that the term "new employees" only refers to those who are
initially hired as non-regular employees for possible regular employment.

discipline and control over them only arose with the effectivity of the merger. Concomitantly, the obligation of
former FEBTC employees to render service to BPI and their right to receive benefits from the latter also arose
upon the effectivity of the merger. What is material is that all of these legal consequences of the merger took
place during the life of an existing and valid CBA between BPI and the Union wherein they have mutually

The Union Shop Clause in the CBA simply states that "new employees"
who during the effectivity of the CBA "may be regularly employed" by the Bank must
join the union within thirty (30) days from their regularization. There is nothing in the
said clause that limits its application to only new employees who possess non-regular
status, meaning probationary status, at the start of their employment. Petitioner
likewise failed to point to any provision in the CBA expressly excluding from the Union
Shop Clause new employees who are "absorbed" as regular employees from the
beginning of their employment. What is indubitable from the Union Shop Clause is that
upon the effectivity of the CBA, petitioner's new regular employees (regardless of the
manner by which they became employees of BPI) are required to join the Union as a
condition of their continued employment. [15]

consented to include a Union Shop Clause.

From the plain, ordinary meaning of the terms of the Union Shop Clause, it covers employees who
(a) enter the employ of BPI during the term of the CBA; (b) are part of the bargaining unit (defined in the CBA
as comprised of BPIs rank and file employees); and (c) become regular employees without distinguishing as
to the manner they acquire their regular status. Consequently, the number of such employees may adversely

Although by virtue of the merger BPI steps into the shoes of FEBTC as a successor employer as if the
affect the majority status of the Union and even its existence itself, as already amply explained in the Decision.
former had been the employer of the latters employees from the beginning it must be emphasized that, in
reality, the legal consequences of the merger only occur at a specific date, i.e., upon its effectivity which is the
date of approval of the merger by the SEC. Thus, we observed in the Decision that BPI and FEBTC stipulated
in the Articles of Merger that they will both continue their respective business operations until the SEC issues
the certificate of merger and in the event no such certificate is issued, they shall hold each other blameless for

Indeed, there are differences between (a) new employees who are hired as probationary or temporary
but later regularized, and (b) new employees who, by virtue of a merger, are absorbed from another company
as regular and permanent from the beginning of their employment with the surviving corporation. It bears

23

reiterating here that these differences are too insubstantial to warrant the exclusion of the absorbed
employees from the application of the Union Shop Clause. In the Decision, we noted that:
We now come to the question: Does our affirmance of our ruling that former FEBTC employees
absorbed by BPI are covered by the Union Shop Clause violate their right to security of tenure which we
Verily, we agree with the Court of Appeals that there are no substantial
differences between a newly hired non-regular employee who was regularized weeks
or months after his hiring and a new employee who was absorbed from another bank
as a regular employee pursuant to a merger, for purposes of applying the Union Shop
Clause. Both employees were hired/employed only after the CBA was signed. At the
time they are being required to join the Union, they are both already regular rank and
file employees of BPI. They belong to the same bargaining unit being represented by
the Union. They both enjoy benefits that the Union was able to secure for them under
the CBA. When they both entered the employ of BPI, the CBA and the Union Shop
Clause therein were already in effect and neither of them had the opportunity to
express their preference for unionism or not. We see no cogent reason why the Union
Shop Clause should not be applied equally to these two types of new employees, for
they are undeniably similarly situated.[18]

Again, it is worthwhile to highlight that a contrary interpretation of the Union Shop Clause would

expressly upheld in this Resolution? We answer in the negative.

In Rance v. National Labor Relations Commission,[20] we held that:

It is the policy of the state to assure the right of workers to "security of

tenure" (Article XIII, Sec. 3 of the New Constitution, Section 9, Article II of the 1973
Constitution). The guarantee is an act of social justice. When a person has no property,
his job may possibly be his only possession or means of livelihood. Therefore, he
should be protected against any arbitrary deprivation of his job. Article 280 of the Labor
Code has construed security of tenure as meaning that "the employer shall not
terminate the services of an employee except for a just cause or when
authorized by" the Code. x x x (Emphasis supplied.)

dilute its efficacy and put the certified union that is supposedly being protected thereby at the mercy of
management. For if the former FEBTC employees had no say in the merger of its former employer with
another bank, as petitioner BPI repeatedly decries on their behalf, the Union likewise could not prevent BPI
We have also previously held that the fundamental guarantee of security of tenure and due
from proceeding with the merger which undisputedly affected the number of employees in the bargaining unit
process dictates that no worker shall be dismissed except for a just and authorized cause provided by law and
that the Union represents and may negatively impact on the Unions majority status. In this instance, we
after due process is observed. [21] Even as we now recognize the right to continuous, unbroken employment of
should be guided by the principle that courts must place a practical and realistic construction upon a CBA,
workers who are absorbed into a new company pursuant to a merger, it is but logical that their employment
giving due consideration to the context in which it is negotiated and purpose which it is intended to serve. [19]
may be terminated for any causes provided for under the law or in jurisprudence without violating their right to

24

security of tenure. As Justice Carpio discussed in his dissenting opinion, it is well-settled that termination of
employment by virtue of a union security clause embodied in a CBA is recognized in our jurisdiction. [22] In Del

right to due process, self-organization and security of tenure.

The enforcement of union security clauses is authorized by
law provided such enforcement is not characterized by
arbitrariness, and always with due process. Even on the
assumption that the federation had valid grounds to expel the
union officers, due process requires that these union officers be
accorded a separate hearing by respondent company.

Monte Philippines, Inc. v. Saldivar,[23] we explained the rationale for this policy in this wise:

Article 279 of the Labor Code ordains that "in cases of regular employment,
the employer shall not terminate the services of an employee except for a just cause or
when authorized by [Title I, Book Six of the Labor Code]." Admittedly, the
enforcement of a closed-shop or union security provision in the CBA as a
ground for termination finds no extension within any of the provisions under
Title I, Book Six of the Labor Code. Yet jurisprudence has consistently
recognized, thus: "It is State policy to promote unionism to enable workers to
negotiate with management on an even playing field and with more persuasiveness
than if they were to individually and separately bargain with the employer. For this
reason, the law has allowed stipulations for 'union shop' and 'closed shop' as means of
encouraging workers to join and support the union of their choice in the protection of
their rights and interests vis-a-vis the employer."[24] (Emphasis supplied.)

The twin requirements of notice and hearing constitute the essential

elements of procedural due process. The law requires the employer to furnish the
employee sought to be dismissed with two written notices before termination of
employment can be legally effected: (1) a written notice apprising the employee of the
particular acts or omissions for which his dismissal is sought in order to afford him an
opportunity to be heard and to defend himself with the assistance of counsel, if he
desires, and (2) a subsequent notice informing the employee of the employer's
decision to dismiss him. This procedure is mandatory and its absence taints the
dismissal with illegality.

Irrefragably, GMC cannot dispense with the requirements of notice and

hearing before dismissing Casio, et al. even when said dismissal is pursuant to
the closed shop provision in the CBA. The rights of an employee to be informed of
the charges against him and to reasonable opportunity to present his side in a
controversy with either the company or his own union are not wiped away by a union
security clause or a union shop clause in a collective bargaining agreement. x x
x[26] (Emphases supplied.)

Although it is accepted that non-compliance with a union security clause is a valid ground for an
employees dismissal, jurisprudence dictates that such a dismissal must still be done in accordance with due
In light of the foregoing, we find it appropriate to state that, apart from the fresh thirty (30)-day
process. This much we decreed in General Milling Corporation v. Casio,[25] to wit:
period from notice of finality of the Decision given to the affected FEBTC employees to join the Union before
the latter can request petitioner to terminate the formers employment, petitioner must still accord said
The Court reiterated in Malayang Samahan ng mga Manggagawa sa M.
Greenfield v. Ramos that:

employees the twin requirements of notice and hearing on the possibility that they may have other
justifications for not joining the Union. Similar to our August 10, 2010 Decision, we reiterate that our ruling

While respondent company may validly dismiss the

employees expelled by the union for disloyalty under the union
security clause of the collective bargaining agreement upon the
recommendation by the union, this dismissal should not be
done hastily and summarily thereby eroding the employees'

presupposes there has been no material change in the situation of the parties in the interim.

25

SECOND DIVISION

WHEREFORE, the Motion for Reconsideration is DENIED. The Decision dated August 10, 2010

GLOBAL BUSINESS HOLDINGS, INC. (formerly Global Business Bank,

Inc.),
Petitioner,

is AFFIRMED, subject to the qualifications that:

Present:
VELASCO, JR., J.,*
NACHURA,**
Acting Chairperson,
LEONARDO-DE CASTRO,***
BRION,**** and
MENDOZA, JJ.

- versus -

SURECOMP SOFTWARE, B.V.,

Promulgated:

Respondent.

(a) Petitioner is deemed to have assumed the employment contracts of the Far East Bank and

G.R. No. 173463

October 13, 2010

Trust Company (FEBTC) employees upon effectivity of the merger without break in the continuity of their
employment, even without express stipulation in the Articles of Merger; and

x----------------------------------------------------------------------------------x
(b) Aside from the thirty (30) days, counted from notice of finality of the August 10, 2010 Decision,
given to former FEBTC employees to join the respondent, said employees shall be accorded full procedural

DECISION
NACHURA, J.:

due process before their employment may be terminated.

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
Decision[1] dated May 5, 2006 and the Resolution [2]dated July 10, 2006 of the Court of Appeals (CA) in CA-

SO ORDERED.

G.R. SP No. 75524.

Republic of the Philippines

Supreme Court
Manila

The facts of the case are as follows:

26

On March 29, 1999, respondent Surecomp Software, B.V. (Surecomp), a foreign corporation duly

product and the services provided, Global failed to pay and comply with its obligations under the agreement.

organized and existing under the laws of the Netherlands, entered into a software license agreement with

Thus, Surecomp demanded payment of actual damages amounting to US$319,955.00 and an additional

Asian Bank Corporation (ABC), a domestic corporation, for the use of its IMEX Software System (System) in

amount of US$227,610.00 for Globals unilateral pretermination of the agreement, exemplary damages,

the banks computer system for a period of twenty (20) years. [3]

attorneys fees and costs of suit.[6]

In July 2000, ABC merged with petitioner Global Business Holdings, Inc. (Global), [4] with Global as the

Instead of filing an answer, Global filed a motion to dismiss based on two grounds: (1) that Surecomp

surviving corporation. When Global took over the operations of ABC, it found the System unworkable for its

had no capacity to sue because it was doing business in the Philippines without a license; and (2) that the

operations, and informed Surecomp of its decision to discontinue with the agreement and to stop further

claim on which the action was founded was unenforceable under the Intellectual Property Code of

payments thereon. Consequently, for failure of Global to pay its obligations under the agreement despite

the Philippines.[7]

demands, Surecomp filed a complaint for breach of contract with damages before the Regional Trial Court
(RTC) of Makati. The case was docketed as Civil Case No. 01-1278. [5]

On the first ground, Global argued that the contract entered into was not an isolated transaction since
the contract was for a period of 20 years. Furthermore, Global stressed that it could not be held accountable

In its complaint, Surecomp alleged that it is a foreign corporation not doing business in

for any breach as the agreement was entered into between Surecomp and ABC. It had not, in any manner,

the Philippines and is suing on an isolated transaction. Pursuant to the agreement, it installed the System in

taken part in the negotiation and execution of the agreement but merely took over the operations of ABC as a

ABCs computers for a consideration of US$298,000.00 as license fee. ABC also undertook to pay Surecomp

result of the merger. On the second ground, Global averred that the agreement, being a technology transfer

professional services, which included on-site support and development of interfaces, and annual maintenance

arrangement, failed to comply with Sections 87 and 88 of the Intellectual Property Code of the Philippines.[8]

fees for five (5) subsequent anniversaries, and committed to purchase one (1) or two (2) Remote Access
solutions at discounted prices. In a separate transaction, ABC requested Surecomp to purchase on its behalf a
software called MF Cobol Runtime with a promise to reimburse its cost. Notwithstanding the delivery of the

In the interim, Global filed a motion for leave to serve written interrogatories to Surecomp in preparation
for the hearing on the motion to dismiss, attaching thereto its written interrogatories.

27

After an exchange of pleadings on the motions filed by Global, on June 18, 2002, the RTC issued an
Order,[9] the pertinent portions of which read:
After a thorough and careful deliberation of the respective arguments advanced
by the parties in support of their positions in these two (2) incidents, and since it cannot
be denied that there is indeed a contract entered into between the plaintiff [Surecomp]
and the defendant [Global], the latter as a successor in interest of the merging
corporation Asian Bank, defendant [Global] is estopped from denying plaintiffs
[Surecomps] capacity to sue it for alleged breach of that contract with damages. Its
argument that it was not the one who actually contracted with the plaintiff [Surecomp]
as it was the merging Asian Bank which did, is of no moment as it does not relieve
defendant Global Bank of its contractual obligation under the Agreement on account of
its undertaking under it:

On November 27, 2002, the RTC issued an Order,[12] the fallo of which reads:
WHEREFORE, the Order of this Court dated 18 June 2002 is modified.
Defendants [Globals] Motion to Dismiss dated 17 October 2001 is denied on the two
grounds therein alleged. Defendant [Global] is given five (5) days from receipt of this
Order within which to file its Answer.
The resolution of defendants [Globals] Motion to Serve Written Interrogatories
is held in abeyance pending the filing of the Answer.
SO ORDERED.[13]

In partially modifying the first assailed Order, the RTC ratiocinated, viz.:
x x x shall be responsible for all the liabilities and obligations of
ASIANBANK in the same manner as if the Merged Bank had
itself incurred such liabilities or obligations, and any pending
claim, action or proceeding brought by or against ASIANBANK
may be prosecuted by or against the Merged Bank. The right of
creditors or liens upon the property of ASIANBANK shall not be
impaired by the merger; provided that the Merged Bank shall
have the right to exercise all defenses, rights, privileges, setoffs and counter-claims of every kind and nature which
ASIANBANK may have, or with the Merged Bank may invoke
under existing laws.
It appearing however that the second ground relied upon by the defendant
[Global], i.e., that the cause of action of the plaintiff is anchored on an unenforceable
contract under the provision of the Intellectual Property Code, will require a hearing
before the motion to dismiss can be resolved and considering the established
jurisprudence in this jurisdiction, that availment of mode of discovery by any of the
parties to a litigation, shall be liberally construed to the end that the truth of the
controversy on hand, shall be ascertained at a less expense with the concomitant
facility and expeditiousness, the motion to serve written interrogatories upon the
plaintiff [Surecomp] filed by the defendant [Global] is GRANTED insofar as the alleged
unenforceability of the subject contract is concerned. Accordingly, the latter is directed
to serve the written interrogatories upon the plaintiff [Surecomp], which is required to
act on it in accordance with the pertinent rule on the matter.
Necessarily, the resolution of the motion to dismiss is held in abeyance until
after a hearing on it is property conducted, relative to the second ground
aforementioned.

This court sees no reason to further belabor the issue on plaintiffs capacity to
sue since there is a prima facie showing that defendant entered into a contract with
defendant and having done so, willingly, it cannot now be made to raise the issue of
capacity to sue [Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824]. That defendant
was not aware of plaintiffs lack of capacity to sue or that defendant did not benefit from
the transaction are arguments that are hardly supported by the evidence already
presented for the resolution of the Motion to Dismiss.
As to the issue of unenforceability of the subject contract under the Intellectual
Property Code, this court finds justification in modifying the earlier Order allowing the
further presentation of evidence. It appearing that the subject contract between the
parties is an executed, rather than an executory, contract the statute of frauds therefore
finds no application here.
xxxx
As to defendants Motion to Serve Written Interrogatories, this court finds that
resort to such a discovery mechanism while laudable is premature as defendant has
yet to file its Answer. As the case now stands, the issues are not yet joined and the
disputed facts are not clear.[14]

Undaunted, Global filed a petition for certiorari with prayer for the issuance of a temporary restraining

SO ORDERED.[10]
order and/or writ of preliminary injunction under Rule 65 of the Rules of Court before the CA, contending that

Surecomp moved for partial reconsideration, praying for an outright denial of the motion to dismiss,
while Global filed a motion for reconsideration. [11]

the RTC abused its discretion and acted in excess of its jurisdiction. [15]

28

On May 5, 2006, the CA rendered a Decision,[16] the dispositive portion of which reads:

WHEREFORE, premises considered, the instant petition is DENIED. The

assailed

Orders

dated

June

18,

2002

and

November

27,

2002

An order denying a motion to dismiss is an interlocutory order which neither terminates nor finally

of

the Regional Trial Court ofMakati City, Branch 146, in Civil Case No. 01-1278 are

disposes of a case as it leaves something to be done by the court before the case is finally decided on the
merits. As such, the general rule is that the denial of a motion to dismiss cannot be questioned in a special civil

hereby AFFIRMED.

action for certiorari which is a remedy designed to correct errors of jurisdiction and not errors of judgment. [20]
SO ORDERED.

[17]

To justify the grant of the extraordinary remedy of certiorari, the denial of the motion to dismiss must

A motion for reconsideration was filed by Global. On July 10, 2006, the CA issued a
Resolution[18] denying the motion for reconsideration for lack of merit.

have been tainted with grave abuse of discretion. By "grave abuse of discretion" is meant such capricious and
whimsical exercise of judgment that is equivalent to lack of jurisdiction. The abuse of discretion must be grave
as where the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility,

Hence, this petition.

and must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform
the duty enjoined by or to act all in contemplation of law.[21]

Global presents the following issues for resolution: (1) whether a special civil action for certiorari is the
proper remedy for a denial of a motion to dismiss; and (2) whether Global is estopped from questioning
Surecomps capacity to sue.[19]

In the instant case, Global did not properly substantiate its claim of arbitrariness on the part of the trial
court judge that issued the assailed orders denying the motion to dismiss. In a petition for certiorari, absent
such showing of arbitrariness, capriciousness, or ill motive in the disposition of the trial judge in the case, we

The petition is bereft of merit.

are constrained to uphold the courts ruling, especially because its decision was upheld by the CA.

29

II

A foreign corporation doing business in the Philippines without license may sue in Philippine courts a
Filipino citizen or a Philippine entity that had contracted with and benefited from it. [25] A party is estopped from

The determination of a corporations capacity is a factual question that requires the elicitation of a

challenging the personality of a corporation after having acknowledged the same by entering into a contract

preponderant set of facts.[22] As a rule, unlicensed foreign non-resident corporations doing business in

with it.[26] The principle is applied to prevent a person contracting with a foreign corporation from later taking

the Philippines cannot file suits in the Philippines.[23] This is mandated under Section 133 of the Corporation

advantage of its noncompliance with the statutes, chiefly in cases where such person has received the

Code, which reads:

benefits of the contract.

Sec. 133. Doing business without a license. - No foreign corporation

transacting business in the Philippines without a license, or its successors or assigns,
shall be permitted to maintain or intervene in any action, suit or proceeding in any court
or administrative agency of the Philippines, but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.

[27]

Due to Globals merger with ABC and because it is the surviving corporation, it is as if it was the one
which entered into contract with Surecomp. In the merger of two existing corporations, one of the corporations
survives and continues the business, while the other is dissolved, and all its rights, properties, and liabilities

A corporation has a legal status only within the state or territory in which it was organized. For this
are acquired by the surviving corporation. [28] This is particularly true in this case. Based on the findings of fact
reason, a corporation organized in another country has no personality to file suits in the Philippines. In order to
of the RTC, as affirmed by the CA, under the terms of the merger or consolidation, Global assumed all the
subject a foreign corporation doing business in the country to the jurisdiction of our courts, it must acquire a
liabilities and obligations of ABC as if it had incurred such liabilities or obligations itself. In the same way,
license from the Securities and Exchange Commission and appoint an agent for service of process. Without
Global also has the right to exercise all defenses, rights, privileges, and counter-claims of every kind and
such license, it cannot institute a suit in the Philippines.

[24]

nature which ABC may have or invoke under the law. These findings of fact were never contested by Global in
any of its pleadings filed before this Court.
The exception to this rule is the doctrine of estoppel. Global is estopped from challenging Surecomps
capacity to sue.

30

Promulgated:
WHEREFORE, in view of the foregoing, the Decision dated May 5, 2006 and the Resolution dated
October 11, 2010

July 10, 2006 of the Court of Appeals in CA-G.R. SP No. 75524 are hereby AFFIRMED. Costs against
petitioner.

SO ORDERED.
Republic of the Philippines
Supreme Court
Manila

SECOND DIVISION
MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by its
Liquidator, THE PHILIPPINE DEPOSIT INSURANCE CORPORATION,
Petitioner,

- versus -

G.R. No. 178618

Present:

x------------------------------------------------------------------------------------x

CARPIO, J.,
DECISION
NACHURA,

EDWARD WILLKOM; GILDA GO; REMEDIOS UY; MALAYO BANTUAS, in his

capacity as the Deputy Sheriff of Regional Trial Court, Branch 3, Iligan City;
and the REGISTER OF DEEDS of Cagayan de Oro City,
Respondent.

LEONARDO-DE CASTRO,*

NACHURA, J.:

PERALTA, and
MENDOZA, JJ.

This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Mindanao Savings
and Loan Association, Inc. (MSLAI), represented by its liquidator, Philippine Deposit Insurance Corporation
(PDIC), against respondents Edward R. Willkom (Willkom); Gilda Go (Go); Remedios Uy (Uy); Malayo

31

Bantuas (sheriff Bantuas), in his capacity as sheriff of the Regional Trial Court (RTC), Branch 3 of Iligan City;
and the Register of Deeds of Cagayan de Oro City. MSLAI seeks the reversal and setting aside of the Court of

Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and approved Board Resolution
No. 86-002, assigning its assets in favor of DSLAI which in turn assumed the formers liabilities. [8]

Appeals[1] (CA) Decision[2] dated March 21, 2007 and Resolution [3] dated June 1, 2007 in CA-G.R. CV No.
58337.
The business of MSLAI, however, failed. Hence, the Monetary Board of the Central Bank of
the Philippines ordered its closure and placed it under receivership per Monetary Board Resolution No. 922
The controversy stemmed from the following facts:

dated August 31, 1990. The Monetary Board found that MSLAIs financial condition was one of insolvency, and
for it to continue in business would involve probable loss to its depositors and creditors. On May 24, 1991, the
Monetary Board ordered the liquidation of MSLAI, with PDIC as its liquidator. [9]

The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan
Association, Inc. (DSLAI) are entities duly registered with the Securities and Exchange Commission (SEC)
under Registry Nos. 34869 and 32388, respectively, primarily engaged in the business of granting loans and
receiving deposits from the general public, and treated as banks. [4]

It appears that prior to the closure of MSLAI, Uy filed with the RTC, Branch 3 of Iligan City, an action for
collection of sum of money against FISLAI, docketed as Civil Case No. 111-697. On October 19, 1989, the
RTC issued a summary decision in favor of Uy, directing defendants therein (which included FISLAI) to pay
the former the sum of P136,801.70, plus interest until full payment, 25% as attorneys fees, and the costs of

Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving corporation.
[5]

The articles of merger were not registered with the SEC due to incomplete documentation. [6] On August 12,

1985, DSLAI changed its corporate name to MSLAI by way of an amendment to Article 1 of its Articles of
Incorporation, but the amendment was approved by the SEC only on April 3, 1987. [7]

suit. The decision was modified by the CA by further ordering the third-party defendant therein to reimburse
the payments that would be made by the defendants. The decision became final and executory on February
21, 1992. A writ of execution was thereafter issued.[10]

32

On April 28, 1993, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in Cagayan

In answer, respondents averred that MSLAI had no cause of action against them or the right to recover

de Oro City, and the notice of sale was subsequently published. During the public auction on May 17, 1993,

the subject properties because MSLAI is a separate and distinct entity from FISLAI. They further contended

Willkom was the highest bidder. A certificate of sale was issued and eventually registered with the Register of

that the unofficial merger between FISLAI and DSLAI (now MSLAI) did not take effect considering that the

Deeds of Cagayan de Oro City. Upon the expiration of the redemption period, sheriff Bantuas issued the

merging companies did not comply with the formalities and procedure for merger or consolidation as

sheriffs definite deed of sale. New certificates of title covering the subject properties were issued in favor of

prescribed by the Corporation Code of the Philippines. Finally, they claimed that FISLAI is still a SEC

Willkom. On September 20, 1994, Willkom sold one of the subject parcels of land to Go. [11]

registered corporation and could not have been absorbed by petitioner.[14]

On June 14, 1995, MSLAI, represented by PDIC, filed before the RTC, Branch 41 of Cagayan de Oro

On March 13, 1997, the RTC issued a resolution dismissing the case for lack of jurisdiction. The RTC

City, a complaint for Annulment of Sheriffs Sale, Cancellation of Title and Reconveyance of Properties against

declared that it could not annul the decision in Civil Case No. 111-697, having been rendered by a court of

respondents.[12] MSLAI alleged that the sale on execution of the subject properties was conducted without

coordinate jurisdiction.[15]

notice to it and PDIC; that PDIC only came to know about the sale for the first time in February 1995 while
discharging its mandate of liquidating MSLAIs assets; that the execution of the RTC decision in Civil Case No.
111-697 was illegal and contrary to law and jurisprudence, not only because PDIC was not notified of the
execution sale, but also because the assets of an institution placed under receivership or liquidation such as

On appeal, MSLAI failed to obtain a favorable decision when the CA affirmed the RTC resolution. The
dispositive portion of the assailed CA Decision reads:

MSLAI should be deemed in custodia legis and should be exempt from any order of garnishment, levy,
attachment, or execution.[13]

WHEREFORE, premises considered, the instant appeal is DENIED. The

decision assailed is AFFIRMED.

We REFER Sheriff Malayo B. Bantuas violation of the Supreme Court

Administrative Circular No. 12 to the Office of the Court Administrator for appropriate
action. The Division Clerk of Court is hereby DIRECTED to furnish the Office of the
Court Administrator a copy of this decision.

33

SO ORDERED.[16]
THE HONORABLE COURT OF APPEALS, CAGAYAN DE ORO COMMITTED GRAVE
AND REVERSIBLE ERROR WHEN:

(1)
The appellate court sustained the dismissal of petitioners complaint not because it had no jurisdiction
over the case, as held by the RTC, but on a different ground. Citing Associated Bank v. CA,[17] the CA ruled
that there was no merger between FISLAI and MSLAI (formerly DSLAI) for their failure to follow the procedure

IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now MSLAI) AS THE
SURVIVING ENTITY IN THE MERGER BETWEEN DSLAI AND FISLAI AS A
DEFENSE IN AN ACTION OTHER THAN IN A QUO WARRANTO PROCEEDING
UPON THE INSTITUTION OF THE SOLICITOR GENERAL AS MANDATED UNDER
SECTION 20 OF BATAS PAMBANSA BLG. 68.

laid down by the Corporation Code for a valid merger or consolidation. The CA then concluded that the two
corporations retained their separate personalities; consequently, the claim against FISLAI is warranted, and

(2)

the subsequent sale of the levied properties at public auction is valid. The CA went on to say that even if there
had been a de facto merger between FISLAI and MSLAI (formerly DSLAI), Willkom, having relied on the clean

IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI AND DSLAI WITH

DSLAI AS THE SURVIVING CORPORATION.

certificates of title, was an innocent purchaser for value, whose right is superior to that of
(3)
MSLAI. Furthermore, the alleged assignment of assets and liabilities executed by FISLAI in favor of MSLAI
was not binding on third parties because it was not registered. Finally, the CA said that the validity of the
auction sale could not be invalidated by the fact that the sheriff had no authority to conduct the execution sale.

IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE NOT IN

CUSTODIA LEGIS AND THEREFORE, EXEMPT FROM GARNISHMENT, LEVY,
ATTACHMENT OR EXECUTION.[19]

[18]

To resolve this petition, we must address two basic questions: (1) Was the merger between FISLAI and
Petitioners motion for reconsideration was denied in a Resolution dated June 1, 2007. Hence, the
instant petition anchored on the following grounds:

DSLAI (now MSLAI) valid and effective; and (2) Was there novation of the obligation by substituting the person
of the debtor?

34

incorporation of the surviving corporation, or in case of consolidation, all the statements

required in the articles of incorporation of a corporation.

(2) Submission of plan to stockholders or members of each corporation for

approval. A meeting must be called and at least two (2) weeks notice must be sent
to allstockholders or members, personally or by registered mail. A summary of the plan
must be attached to the notice. Vote of two-thirds of the members or of stockholders
representing two-thirds of the outstanding capital stock will be needed. Appraisal rights,
when proper, must be respected.

We answer both questions in the negative.

Ordinarily, in the merger of two or more existing corporations, one of the corporations survives and
(3) Execution of the formal agreement, referred to as the articles of merger
o[r] consolidation, by the corporate officers of each constituent corporation. These take
the place of the articles of incorporation of the consolidated corporation, or amend the
articles of incorporation of the surviving corporation.

continues the combined business, while the rest are dissolved and all their rights, properties, and liabilities are
acquired by the surviving corporation. [20] Although there is a dissolution of the absorbed or merged
corporations, there is no winding up of their affairs or liquidation of their assets because the surviving

(4) Submission of said articles of merger or consolidation to the SEC for

approval.

corporation automatically acquires all their rights, privileges, and powers, as well as their liabilities. [21]

(5) If necessary, the SEC shall set a hearing, notifying all corporations
concerned at least two weeks before.

The merger, however, does not become effective upon the mere agreement of the constituent

(6) Issuance of certificate of merger or consolidation.[28]

corporations.[22] 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. [23]

Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the SEC,
subject to its prior determination that the merger is not inconsistent with the Corporation Code or existing laws.
The steps necessary to accomplish a merger or consolidation, as provided for in Sections 76,
[24]

77,[25] 78,[26] and 79[27] of the Corporation Code, are:

(1) The board of each corporation draws up a plan of merger or

consolidation. Such plan must include any amendment, if necessary, to the articles of

[29]

Where a party to the merger is a special corporation governed by its own charter, the Code particularly

mandates that a favorable recommendation of the appropriate government agency should first be obtained. [30]

35

In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not registered
with the SEC due to incomplete documentation. Consequently, the SEC did not issue the required certificate of
There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as
merger. Even if it is true that the Monetary Board of the Central Bank of the Philippines recognized such
respondents, the two corporations shall not be considered as one but two separate corporations. A corporation
merger, the fact remains that no certificate was issued by the SEC. Such merger is still incomplete without
is an artificial being created by operation of law. It possesses the right of succession and such powers,
the certification.
attributes, and properties expressly authorized by law or incident to its existence. [35] It has a personality
separate and distinct from the persons composing it, as well as from any other legal entity to which it may be
related.[36] Being separate entities, the property of one cannot be considered the property of the other.
The issuance of the certificate of merger is crucial because not only does it bear out SECs
approval but it also marks the moment when the consequences of a merger take place. By operation of law,
upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights and properties, as
Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as its
well as liabilities, shall be taken and deemed transferred to and vested in the surviving corporation.

[31]

assets and cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the Deed of Assignment
wherein FISLAI assigned its assets and properties to DSLAI, and the latter assumed all the liabilities of the
former. As provided in Article 1625 of the Civil Code, an assignment of credit, right or action shall produce no
The same rule applies to consolidation which becomes effective not upon mere agreement of the
effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the
members but only upon issuance of the certificate of consolidation by the SEC. [32] When the SEC, upon
Registry of Property in case the assignment involves real property. The certificates of title of the subject
processing and examining the articles of consolidation, is satisfied that the consolidation of the corporations is
properties were clean and contained no annotation of the fact of assignment. Respondents cannot, therefore,
not inconsistent with the provisions of the Corporation Code and existing laws, it issues a certificate of
be faulted for enforcing their claim against FISLAI on the properties registered under its name. Accordingly,
consolidation which makes the reorganization official. [33] The new consolidated corporation comes into
MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the execution sale over the
existence and the constituent corporations are dissolved and cease to exist. [34]

36

properties of FISLAI. With more reason can it not cause the cancellation of the title to the subject properties of
Willkom and Go.

In this case, there was no showing that Uy, the creditor, gave her consent to the agreement that
DSLAI (now MSLAI) would assume the liabilities of FISLAI. Such agreement cannot prejudice Uy. Thus, the
assets that FISLAI transferred to DSLAI remained subject to execution to satisfy the judgment claim of Uy
against FISLAI. The subsequent sale of the properties by Uy to Willkom, and of one of the properties by

Petitioner cannot also anchor its right to annul the execution sale on the principle of novation. While it is

Willkom to Go, cannot, therefore, be questioned by MSLAI.

true that DSLAI (now MSLAI) assumed all the liabilities of FISLAI, such assumption did not result in novation
as would release the latter from liability, thereby exempting its properties from execution. Novation is the
extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which

The consent of the creditor to a novation by change of debtor is as indispensable as the creditors

extinguishes or modifies the first, either by changing the object or principal conditions, by substituting another

consent in conventional subrogation in order that a novation shall legally take place. [39] Since novation implies

in place of the debtor, or by subrogating a third person in the rights of the creditor. [37]

a waiver of the right which the creditor had before the novation, such waiver must be express. [40]

It is a rule that novation by substitution of debtor must always be made with the consent of the
creditor.[38] Article 1293 of the Civil Code is explicit, thus:

Art. 1293. Novation which consists in substituting a new debtor in the place
of the original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives him
the rights mentioned in Articles 1236 and 1237.

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated
March 21, 2007 and Resolution dated June 1, 2007 in CA-G.R. CV No. 58337 are AFFIRMED.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 190144

August 1, 2012

37

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
CARLITO LEE, Respondent.
DECISION
PERLAS-BERNABE, J.:
In this Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court, petitioner Bank of the Philippine
Islands (BPI) seeks to reverse and set aside the February 11, 2009 Decision 2 and October 29, 2009
Resolution3of the Court of Appeals (CA) in CA-G.R. No. 87911 which annulled the March 1, 2004 3 and
September 16, 20044Orders of the Regional Trial Court (RTC) of Makati City, Branch 61 and instead, entered
a new one directing the RTC to issue a writ of execution and/or enforce garnishment against the bank deposit
of Trendline Resources & Commodities Exponent, Inc. (Trendline) and Leonarda Buelva (Buelva) with the
defunct Citytrust Banking Corporation (Citytrust), now merged with BPI.
The Facts
On April 26, 1988, respondent Carlito Lee (Lee) filed a complaint for sum of money with damages and
application for the issuance of a writ of attachment against Trendline and Buelva (collectively called
"defendants") before the RTC, docketed as Civil Case No. 88-702, seeking to recover his total investment in
the amount of P5.8 million. Lee alleged that he was enticed to invest his money with Trendline upon Buelvas
misrepresentation that she was its duly licensed investment consultant or commodity saleswoman. His
investments, however, were lost without any explanation from the defendants.
On May 4, 1988, the RTC issued a writ of preliminary attachment whereby the Check-O-Matic Savings
Accounts of Trendline with Citytrust Banking Corporation, Ayala Branch, in the total amount of P700,962.10
were garnished. Subsequently, the RTC rendered a decision on August 8, 1989 finding defendants jointly and
severally liable to Lee for the full amount of his investment plus legal interest, attorneys fees and costs of suit.
The defendants appealed the RTC decision to the CA, docketed as CA-G.R. CV No. 23166.
Meanwhile, on April 13, 1994, Citytrust filed before the RTC an Urgent Motion and Manifestation 5 seeking a
ruling on defendants' request to release the amount of P591,748.99 out of the garnished amount for the
purpose of paying Trendlines tax obligations. Having been denied for lack of jurisdiction, Trendline filed a
similar motion6with the CA which the latter denied for failure to prove that defendants had no other assets to
answer for its tax obligations.
On October 4, 1996, Citytrust and BPI merged, with the latter as the surviving corporation. The Articles of
Merger provide, among others, that "all liabilities and obligations of Citytrust shall be transferred to and
become the liabilities and obligations of BPI in the same manner as if the BPI had itself incurred such liabilities
or obligations."7
On December 22, 1998, the CA denied the appeal in CA-G.R. CV No. 23166 and affirmed in toto the decision
of the RTC, which had become final and executory on January 24, 1999.

On December 16, 2002, Lee filed a Motion for Execution and/or Enforcement of Garnishment 9 before the RTC
seeking to enforce against BPI the garnishment of Trendlines deposit in the amount of P700,962.10 and other
deposits it may have had with Citytrust. The RTC denied the motion for dearth of evidence showing that BPI
took over the subject accounts from Citytrust and the fact that BPI was not a party to the case. Lees motion
for reconsideration was likewise denied. 10
Lee elevated the matter to the CA on a petition for certiorari. In its February 11, 2009 Decision, the CA
annulled the questioned orders, finding grave abuse of discretion on the part of the RTC in denying Lees
motion to enforce the garnishment against Trendlines attached bank deposits with Citytrust, which have been
transferred to BPI by virtue of their merger. It found BPI liable to deliver to the RTC the garnished bank deposit
of Trendline in the amount of P700,962.10, which Citytrust withheld pursuant to the RTC's previously-issued
writ of attachment.
The CA refused to give credence to BPIs defense that it can no longer locate Trendlines bank records with
the defunct Citytrust, as its existence was supported by evidence and by the latter's admission. Neither did it
consider BPI a stranger to the case, holding it to have become a party in-interest upon the approval by the
Securities and Exchange Commission (SEC) of the parties Articles of Merger. BPIs Motion for
Reconsideration11 was denied in the CA's October 29, 2009 Resolution.
The Issues
In this petition, BPI ascribes the following errors to the CA:
A.
THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING CA-G.R. SP No. 87911,
THE PETITION FOR CERTIORARI UNDER RULE 65 OF THE REVISED RULES OF COURT,
FILED BY RESPONDENT CARLITO LEE BEING AN IMPROPER REMEDY.
B.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER BPI BECAME
PARTY-IN-INTEREST IN THE CASE FILED BY RESPONDENT CARLITO LEE UPON THE
APPROVAL BY THE SECURITIES AND EXCHANGE COMMISSION OF ITS MERGER WITH
CITYTRUST BANKING CORPORATION.
C.
THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT THE MOTION FOR
EXECUTION AND/OR ENFORCEMENT OF GARNISHMENT IS NOT THE APPROPRIATE
REMEDY IN THE EVENT THERE IS A THIRD PARTY INVOLVED DURING THE EXECUTION
PROCESS OF A FINAL AND EXECUTORY JUDGMENT.
D.

Hence, Lee filed a Motion for Execution8 before the RTC on July 29, 1999, which was granted. Upon issuance
of the corresponding writ, he sought the release of the garnished deposits of Trendline. When the writ was
implemented, however, BPI Manager Samuel Mendoza, Jr. denied having possession, control and custody of
any deposits or properties belonging to defendants, prompting Lee to seek the production of their records of
accounts with BPI. However, on the manifestation of BPI that it cannot locate the defendants' bank records
with Citytrust, the RTC denied the motion on September 6, 2002.

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER BPI SHOULD
BE HELD ACCOUNTABLE FOR THE AMOUNT OF PHP700,962.10. 12
The Ruling of the Court

38

Section 1, Rule 41 of the Revised Rules of Court provides:

SECTION 1. Subject of appeal. - x x x
No appeal may be taken from:
xxx
(b) An interlocutory order;
xxx
In any of the foregoing circumstances, the aggrieved party may file an appropriate special civil
action as provided in Rule 65.13
A punctilious examination of the records will reveal that Lee had previously sought the execution of the final
and executory decision of the RTC dated August 8, 1989 which was granted and had resulted in the issuance
of the corresponding writ of execution. However, having garnished the deposits of Trendline with Citytrust in
the amount of P 700,962.10 by virtue of a writ of preliminary attachment, Lee filed anew a Motion for
Execution and/or Enforcement of Garnishment before the RTC on December 16, 2002. While the RTC denied
the motion in its March 1, 2004 Order, the denial was clearly with respect only to the enforcement of the
garnishment, to wit:
Acting on the Motion for Execution and/or Enforcement of Garnishment filed by plaintiff Carlito Lee, and there
being no evidence shown that the accounts subject of the motion were taken over by the Bank of the
Philippine Islands from Citytrust Bank and considering further that Bank of Philippine Islands is not a party to
this case, the instant Motion is DENIED for lack of merit.
SO ORDERED.14
Consequently, the foregoing Order merely involved the implementation of a writ of execution, hence,
interlocutory in nature. An interlocutory order is one that does not finally dispose of the case, and does not end
the court's task of adjudicating the parties contentions and determining their rights and liabilities as regards
each other, but obviously indicates that other things remain to be done. 15
Conformably with the provisions of Section 1, Rule 41 of the Revised Rules of Court above-quoted, the
remedy from such interlocutory order is certiorari under Rule 65. Thus, contrary to the contention of BPI, the
CA did not err in assuming jurisdiction over the petition for certiorari.
BPI likewise insists that the CA erred in considering it a party to the case by virtue of its merger with Citytrust,
the garnishee of defendants' deposits.
The Court is not convinced.
Section 5, Rule 65 of the Revised Rules of Court requires that persons interested in sustaining the
proceedings in court must be impleaded as private respondents. Upon the merger of Citytrust and BPI, with
the latter as the surviving corporation, and with all the liabilities and obligations of Citytrust transferred to BPI
as if it had incurred the same, BPI undoubtedly became a party interested in sustaining the proceedings, as it
stands to be prejudiced by the outcome of the case.

It is a settled rule that upon service of the writ of garnishment, the garnishee becomes a "virtual party" or
"forced intervenor" to the case and the trial court thereby acquires jurisdiction to bind the garnishee to comply
with its orders and processes. In Perla Compania de Seguros, Inc. v. Ramolete, 16 the Court ruled:
In order that the trial court may validly acquire jurisdiction to bind the person of the garnishee, it is not
necessary that summons be served upon him. The garnishee need not be impleaded as a party to the case.
All that is necessary for the trial court lawfully to bind the person of the garnishee or any person who has in his
possession credits belonging to the judgment debtor is service upon him of the writ of garnishment.
The Rules of Court themselves do not require that the garnishee be served with summons or impleaded in the
case in order to make him liable.
xxxx
Through the service of the writ of garnishment, the garnishee becomes a "virtual party" to, or a "forced
intervenor" in, the case and the trial court thereby acquires jurisdiction to bind him to compliance with all
orders and processes of the trial court with a view to the complete satisfaction of the judgment of the court. 17
Citytrust, therefore, upon service of the notice of garnishment and its acknowledgment that it was in
possession of defendants' deposit accounts in its letter-reply dated June 28, 1988, became a "virtual party" to
or a "forced intervenor" in the civil case. As such, it became bound by the orders and processes issued by the
trial court despite not having been properly impleaded therein. Consequently, by virtue of its merger with BPI
on October 4, 1996, BPI, as the surviving corporation, effectively became the garnishee, thus the "virtual
party" to the civil case.
Corollarily, it should be emphasized that a merger of two corporations produces, among others, the following
effects:
1. The constituent corporations shall become a single corporation which, in case of merger, shall be the
surviving corporation designated in the plan of merger; and in case of consolidation, shall be the consolidated
corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporation shall cease, except that of the surviving or the
consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers
and shall be subject to all the duties and liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal,
and all receivables due on whatever account, including subscriptions to shares and other choses in action,
and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed
transferred to and vested in such surviving or consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations
of each of the constituent corporations in the same manner as if such surviving or consolidated corporation
had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or
against any of such constituent corporations may be prosecuted by or against the surviving or consolidated
corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not
be impaired by such merger or consolidation.18 (Underscoring supplied)

39

In sum, although Citytrust was dissolved, no winding up of its affairs or liquidation of its assets, privileges,
powers and liabilities took place. As the surviving corporation, BPI simply continued the combined businesses
of the two banks and absorbed all the rights, privileges, assets, liabilities and obligations of Citytrust, including
the latters obligation over the garnished deposits of the defendants.
Adopting another tack, BPI claims that Lee should have instead availed himself of the remedy provided under
Section 43, Rule 39 of the Revised Rules of Court because he is a third party to the case who denies
possession of the property.

Evidently, the loss of bank records of a garnished deposit is not a ground for the dissolution of garnishment.
Consequently, the obligation to satisfy the writ stands.
Moreover, BPI cannot avoid the obligation attached to the writ of garnishment by claiming that the fund was
not transferred to it, in light of the Articles of Merger which provides that "all liabilities and obligations of
Citytrust shall be transferred to and become the liabilities and obligations of BPI in the same manner as if the
BPI had itself incurred such liabilities or obligations, and in order that the rights and interest of creditors of
Citytrust or liens upon the property of Citytrust shall not be impaired by merger." 30

The argument is specious.

Indubitably, BPI IS liable to deliver the fund subject of the writ of garnishment.

Section 43, Rule 39 of the Revised Rules of Court states:

With regard to the amount of the garnished fund, the Court concurs with the finding of the CA that the total
amount of garnished deposit of Trendline as of January 27, 1994 is P700,962.10, 31 extant in its motion for
partial lifting of the writ of preliminary attachment32 and which amount, as correctly observed by the CA,
remains undisputed33 throughout the proceedings relative to this case.

SECTION 43. Proceedings when indebtedness denied or another person claims the property. If it
appears that a person or corporation, alleged to have property of the judgment obligor or to be
indebted to him, claims an interest in the property adverse to him or denies the debt, the court may
authorize, by an order made to that effect, the judgment oblige to institute an action against such
person or corporation for the recovery of such interest or debt, forbid a transfer or other disposition
of such interest or debt within one hundred twenty (120) days from notice of the order, and may
punish disobedience of such order as for contempt. Such order may be modified or vacated at any
time by the court which issued it, or by the court in which the action is brought, upon such terms as
may be just. (Underscoring supplied).

WHEREFORE, the instant petition is DENIED and the assailed February 11, 2009 Decision and October 29,
2009 Resolution of the Court of Appeals are AFFIRMED.
SO ORDERED.
Republic of the Philippines
Supreme Court
Manila

The institution of a separate action against a garnishee contemplates a situation where the garnishee (third
person) "claims an interest in the property adverse to him (judgment debtor) or denies the debt." 19 Neither of
these situations exists in this case. The garnishee does not claim any interest in the deposit accounts of the
defendants, nor does it deny the existence of the deposit accounts. In fact, Citytrust admitted in its letter dated
June 28, 1988 that it is in possession of the deposit accounts.
Considering the foregoing disquisitions, BPI's liability for the garnished deposits of defendants has been
clearly established.
Garnishment has been defined as a specie of attachment for reaching credits belonging to the judgment
debtor and owing to him from a stranger to the litigation. 20 A writ of attachment is substantially a writ of
execution except that it emanates at the beginning, instead of at the termination, of a suit. It places the
attached properties in custodia legis, obtaining pendente lite a lien until the judgment of the proper tribunal on
the plaintiffs claim is established, when the lien becomes effective as of the date of the levy. 21
By virtue of the writ of garnishment, the deposits of the defendants with Citytrust were placed in custodia legis
of the court. From that time onwards, their deposits were under the sole control of the RTC and Citytrust holds
them subject to its orders until such time that the attachment or garnishment is discharged, or the judgment in
favor of Lee is satisfied or the credit or deposit is delivered to the proper officer of the court. 22 Thus, Citytrust,
and thereafter BPI, which automatically assumed the formers liabilities and obligations upon the approval of
their Articles of Merger, is obliged to keep the deposit intact and to deliver the same to the proper officer upon
order of the court.
However, the RTC is not permitted to dissolve or discharge a preliminary attachment or garnishment except on
grounds specifically provided23 in the Revised Rules of Court, namely,24 (a) the debtor has posted a counterbond or has made the requisite cash deposit; 25 (b) the attachment was improperly or irregularly issued 26 as
where there is no ground for attachment, or the affidavit and/or bond filed therefor are defective or insufficient;
(c) the attachment is excessive, but the discharge shall be limited to the excess; 27 (d) the property attachment
is exempt from preliminary attachment;28 or (e) the judgment is rendered against the attaching creditor.29

THIRD DIVISION
PHILIP TURNER and ELNORA
TURNER,
Petitioners,

-versus -

LORENZO SHIPPING
CORPORATION,
Respondent.

G.R. No. 157479

Present:
CARPIO MORALES, Chairperson,
BRION,
BERSAMIN,
VILLARAMA, JR., and
ARANAL-SERENO, JJ.
Promulgated:
November 24, 2010

x-----------------------------------------------------------------------------------------x
DECISION
BERSAMIN, J.:

40

This case concerns the right of dissenting stockholders to demand payment of the value of their
shareholdings.

amendment and demanded payment of their shares at the rate ofP2.276/share based on the book value of the
shares, or a total of P2,298,760.00.

In the stockholders suit to recover the value of their shareholdings from the corporation, the

The respondent found the fair value of the shares demanded by the petitioners unacceptable. It insisted

Regional Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered the corporation,

that the market value on the date before the action to remove the pre-emptive right was taken should be the

herein respondent, to pay. Execution was partially carried out against the respondent. On the respondents

value, or P0.41/share (or a total of P414,100.00), considering that its shares were listed in the Philippine Stock

petition forcertiorari, however, the Court of Appeals (CA) corrected the RTC and dismissed the petitioners suit

Exchange, and that the payment could be made only if the respondent had unrestricted retained earnings in its

on the ground that their cause of action for collection had not yet accrued due to the lack of unrestricted

books to cover the value of the shares, which was not the case.

retained earnings in the books of the respondent.

The disagreement on the valuation of the shares led the parties to constitute an appraisal committee
Thus, the petitioners are now before the Court to challenge the CAs decision promulgated

pursuant to Section 82 of the Corporation Code, each of them nominating a representative, who together then

on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon,

nominated the third member who would be chairman of the appraisal committee. Thus, the appraisal

in his capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et al.[1]

committee came to be made up of Reynaldo Yatco, the petitioners nominee; Atty. Antonio Acyatan, the
respondents nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third member/chairman.

Antecedents

On October 27, 2000, the appraisal committee reported its valuation of P2.54/share, for an
The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged
aggregate value of P2,565,400.00 for the petitioners.[2]
primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of
incorporation to remove the stockholders pre-emptive rights to newly issued shares of stock. Feeling that the
corporate move would be prejudicial to their interest as stockholders, the petitioners voted against the

41

9) xxx there is no genuine issue to material fact and therefore, the

plaintiffs are entitled, as a matter of right, to a summary judgment.
xxx [6]

Subsequently, the petitioners demanded payment based on the valuation of the appraisal
committee, plus 2%/month penalty from the date of their original demand for payment, as well as the
reimbursement of the amounts advanced as professional fees to the appraisers. [3]

The respondent opposed the motion for partial summary judgment, stating that the determination
of the unrestricted retained earnings should be made at the end of the fiscal year of the

In its letter to the petitioners dated January 2, 2001, [4] the respondent refused the petitioners demand,

respondent, and that the petitioners did not have a cause of action against the respondent.

explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal
rights could be paid only when the corporation had unrestricted retained earnings to cover the fair value of

During the pendency of the motion for partial summary judgment, however, the Presiding Judge

the shares, but that it had no retained earnings at the time of the petitioners demand, as borne out by its

of Branch 133 transmitted the records to the Clerk of Court for re-raffling to any of the RTCs

Financial Statements for Fiscal Year 1999 showing a deficit ofP72,973,114.00 as of December 31, 1999.

special commercial courts in Makati City due to the case being an intra-corporate dispute.
Hence, Civil Case No. 01-086 was re-raffled to Branch 142.

Upon the respondents refusal to pay, the petitioners sued the respondent for collection and damages in
the RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No. 01-086, was initially
assigned to Branch 132.[5]

Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01086 was ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio Tipon,
[7]

On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:

7) xxx the defendant has an accumulated unrestricted retained

earnings of ELEVEN MILLION NINE HUNDRED SEVENTY FIVE
THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of the
Quarter Ending March 31, 2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by the
Appraisal Committee is final, that the same cannot be disputed xxx

pursuant to the Interim Rules of Procedure on Intra-Corporate Controversies (Interim Rules) requiring intra-

corporate cases to be brought in the RTC exercising jurisdiction over the place where the principal office of the
corporation was found.

42

After the conference in Civil Case No. 01-086 set on October 23, 2002, which the petitioners

Rules. Thus, also on November 22, 2002, Judge Tipon denied the motion for reconsideration and granted the

counsel did not attend, Judge Tipon issued an order, [8]granting the petitioners motion for partial

petitioners motion for immediate execution.[10]

summary judgment, stating:

As to the motion for partial summary judgment, there is no question that the 3man committee mandated to appraise the shareholdings of plaintiff submitted its
recommendation on October 27, 2000 fixing the fair value of the shares of stocks of the
plaintiff at P2.54 per share. Under Section 82 of the Corporation Code:
The findings of the majority of the appraisers shall be final, and
the award shall be paid by the corporation within thirty (30) days after
the award is made.

Subsequently, on November 28, 2002, the RTC issued a writ of execution.[11]

Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge

The only restriction imposed by the Corporation Code is

That no payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained earning in its books to
cover such payment.
The evidence submitted by plaintiffs shows that in its quarterly financial
statement it submitted to the Securities and Exchange Commission, the defendant has
retained earnings of P11,975,490 as of March 21, 2002. This is not disputed by the
defendant. Its only argument against paying is that there must be unrestricted retained
earning at the time the demand for payment is made.
This certainly is a very narrow concept of the appraisal right of a stockholder.
The law does not say that the unrestricted retained earnings must exist at the time of
the demand. Even if there are no retained earnings at the time the demand is made if
there are retained earnings later, the fair value of such stocks must be paid. The only
restriction is that there must be sufficient funds to cover the creditors after the
dissenting stockholder is paid. No such allegations have been made by the defendant.
[9]

On November 12, 2002, the respondent filed a motion for reconsideration.

the two aforecited orders of Judge Tipon, claiming that:

A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY
JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT THE TIME THE
COMPLAINT WAS FILED, LSC HAD NO RETAINED EARNINGS, AND THUS WAS
COMPLYING WITH THE LAW, AND NOT VIOLATING ANY RIGHTS OF THE
SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF THEIR
LSC SHARES. ANY RETAINED EARNINGS MADE A YEAR AFTER
THE COMPLAINT WAS FILED ARE IRRELEVANT TO THE SPOUSES TURNERS
RIGHT TO RECOVER UNDER THE COMPLAINT, BECAUSE THE WELL-SETTLED
RULE, REPEATEDLY BROUGHT TO JUDGE TIPONS ATTENTION, IS IF NO RIGHT
EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED THE SUIT CANNOT BE
MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE ACCRUED
THEREAFTER.
B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY
ABUSED HIS DISCRETION, WHEN HE GRANTED AND ISSUED THE QUESTIONED
WRIT OF EXECUTION DIRECTING THE EXECUTION OF HIS PARTIAL SUMMARY
JUDGMENT IN FAVOR OF THE SPOUSES TURNER, BECAUSE THAT JUDGMENT
IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF RULE 39 OF THE RULES OF
COURT AND THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE
SUPREME COURTS CATEGORICAL HOLDING IN PROVINCE OF PANGASINAN
VS. COURT OF APPEALS.

On the scheduled hearing of the motion for reconsideration on November 22, 2002, the petitioners
filed a motion for immediate execution and a motion to strike out motion for reconsideration. In the latter

Upon the respondents application, the CA issued a temporary restraining order (TRO), enjoining

motion, they pointed out that the motion for reconsideration was prohibited by Section 8 of the Interim

the petitioners, and their agents and representatives from enforcing the writ of execution. By then, however,
the writ of execution had been partially enforced.

43

The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the execution.
Thereupon, the sheriff resumed the enforcement of the writ of execution.

The CA promulgated its assailed decision on March 4, 2003,[12] pertinently holding:

However, it is clear from the foregoing that the Turners appraisal right is
subject to the legal condition that no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted retained earnings in its books to
cover such payment. Thus, the Supreme Court held that:
The requirement of unrestricted retained earnings to cover
the shares is based on the trust fund doctrine which means that the
capital stock, property and other assets of a corporation are regarded
as equity in trust for the payment of corporate creditors. The reason
is that creditors of a corporation are preferred over the stockholders
in the distribution of corporate assets. There can be no distribution of
assets among the stockholders without first paying corporate
creditors. Hence, any disposition of corporate funds to the prejudice
of creditors is null and void. Creditors of a corporation have the right
to assume that so long as there are outstanding debts and liabilities,
the board of directors will not use the assets of the corporation to
purchase its own stock.
In the instant case, it was established that there were no unrestricted retained
earnings when the Turners filed their Complaint. In a letter dated 20 August 2000,
petitioner informed the Turners that payment of their shares could only be made if it
had unrestricted earnings in its books to cover the same. Petitioner reiterated this in a
letter dated 2 January 2001 which further informed the Turners that its Financial
Statement for fiscal year 1999 shows that its retained earnings ending December 31,
1999 was at a deficit in the amount of P72,973,114.00, a matter which has not been
disputed by private respondents. Hence, in accordance with the second paragraph of
sec. 82, BP 68 supra, the Turners right to payment had not yet accrued when they filed
their Complaint on January 22, 2001, albeit their appraisal right already existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the
Supreme Court declared that:
Now, before an action can properly be commenced all the
essential elements of the cause of action must be in existence, that is,
the cause of action must be complete.All valid conditions precedent to
the institution of the particular action, whether prescribed by statute,
fixed by agreement of the parties or implied by law must be performed or
complied with before commencing the action, unless the conduct of the
adverse party has been such as to prevent or waive performance or
excuse non-performance of the condition.
It bears restating that a right of action is the right to presently
enforce a cause of action, while a cause of action consists of the

operative facts which give rise to such right of action. The right of action
does not arise until the performance of all conditions precedent to the
action and may be taken away by the running of the statute of
limitations, through estoppel, or by other circumstances which do not
affect the cause of action. Performance or fulfillment of all conditions
precedent upon which a right of action depends must be sufficiently
alleged, considering that the burden of proof to show that a party has a
right of action is upon the person initiating the suit.
The Turners right of action arose only when petitioner had already retained
earnings in the amount of P11,975,490.00 on March 21, 2002; such right of action was
inexistent on January 22, 2001 when they filed the Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the
Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided
by law, an action commenced before the cause of action has accrued is
prematurely brought and should be dismissed. The fact that the cause
of action accrues after the action is commenced and while it is pending
is of no moment. It is a rule of law to which there is, perhaps, no
exception, either at law or in equity, that to recover at all there must be
some cause of action at the commencement of the suit. There are
reasons of public policy why there should be no needless haste in
bringing up litigation, and why people who are in no default and against
whom there is as yet no cause of action should not be summoned
before the public tribunals to answer complaints which are groundless.
An action prematurely brought is a groundless suit. Unless the plaintiff
has a valid and subsisting cause of action at the time his action
is commenced, the defect cannot be cured or remedied by the
acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-accrued
cause of action is not permissible.

The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao
vs. Court of Appeals.
The Turners apprehension that their claim for payment may prescribe if they
wait for the petitioner to have unrestricted retained earnings is misplaced. It is the legal
possibility of bringing the action that determines the starting point for the computation
of the period of prescription. Stated otherwise, the prescriptive period is to be reckoned
from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its jurisdiction when it
entertained the herein Complaint and issued the assailed Orders. Excess of
jurisdiction is the state of being beyond or outside the limits of jurisdiction, and as
distinguished from the entire absence of jurisdiction, means that the act although within
the general power of the judge, is not authorized and therefore void, with respect to the
particular case, because the conditions which authorize the exercise of his general
power in that particular case are wanting, and hence, the judicial power is not in fact
lawfully invoked.
We find no necessity to discuss the second ground raised in this petition.
WHEREFORE, upon the premises, the petition is GRANTED. The assailed
Orders and the corresponding Writs of Garnishment are NULLIFIED. Civil Case No.
02-104692 is hereby ordered DISMISSED without prejudice to refiling by the private

44

respondents of the action for enforcement of their right to payment as withdrawing

stockholders.

A.
Stockholders Right of Appraisal, In General

SO ORDERED.
A stockholder who dissents from certain corporate actions has the right to demand payment of the
The petitioners now come to the Court for a review on certiorari of the CAs decision, submitting
that:

fair value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81
of the Corporation Code, to wit:

I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT
GRANTED THE PETITION FOR CERTIORARI WHEN THE REGIONAL TRIAL
COURT OF MANILA DID NOT ACT BEYOND ITS JURISDICTION AMOUNTING TO
LACK OF JURISDICTION IN GRANTING THE MOTION FOR PARTIAL SUMMARY
JUDGMENT AND IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF
JUDGMENT;
II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT
ORDERED THE DISMISSAL OF THE CASE, WHEN THE PETITION FOR
CERTIORARI MERELY SOUGHT THE ANNULMENT OF THE ORDER GRANTING
THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND OF THE ORDER
GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF THE JUDGMENT;
III.
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF
SUBSTANCE NOT THEREFORE DETERMINED BY THIS HONORABLE COURT
AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH LAW OR WITH
JURISPRUDENCE.

Section 81. Instances of appraisal right. - Any stockholder of a corporation

shall have the right to dissent and demand payment of the fair value of his shares in
the following instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets as provided in
the Code; and
3. In case of merger or consolidation. (n)

Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter
or articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless

Ruling
objectionable corporate action is taken. [13] It serves the purpose of enabling the dissenting stockholder to have

The petition fails.

The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the
petitioners complaint in Civil Case No. 01-086, and in rendering the summary judgment and issuing writ of
execution.

his interests purchased and to retire from the corporation. [14]

Under the common law, there were originally conflicting views on whether a corporation had the power
to acquire or purchase its own stocks. In England, it was held invalid for a corporation to purchase its issued
stocks because such purchase was an indirect method of reducing capital (which was statutorily restricted),
aside from being inconsistent with the privilege of limited liability to creditors. [15] Only a few American

45

value of his shares. The failure to make the demand within the period is deemed
a waiver of the appraisal right.[19]
jurisdictions adopted by decision or statute the strict English rule forbidding a corporation from purchasing its

2.

If the withdrawing stockholder and the corporation cannot agree on the fair value
of the shares within a period of 60 days from the date the stockholders approved
the corporate action, the fair value shall be determined and appraised by three
disinterested persons, one of whom shall be named by the stockholder, another
by the corporation, and the third by the two thus chosen. The findings and award
of the majority of the appraisers shall be final, and the corporation shall pay their
award within 30 days after the award is made. Upon payment by the corporation
of the agreed or awarded price, the stockholder shall forthwith transfer his or her
shares to the corporation.[20]

3.

All rights accruing to the withdrawing stockholders shares, including voting and
dividend rights, shall be suspended from the time of demand for the payment of
the fair value of the shares until either the abandonment of the corporate action
involved or the purchase of the shares by the corporation, except the right of
such stockholder to receive payment of the fair value of the shares. [21]

4.

Within 10 days after demanding payment for his or her shares, a dissenting
stockholder shall submit to the corporation the certificates of stock representing
his shares for notation thereon that such shares are dissenting shares. A failure
to do so shall, at the option of the corporation, terminate his rights under this Title
X of the Corporation Code. If shares represented by the certificates bearing such
notation are transferred, and the certificates are consequently canceled, the
rights of the transferor as a dissenting stockholder under this Title shall cease
and the transferee shall have all the rights of a regular stockholder; and all
dividend distributions that would have accrued on such shares shall be paid to
the transferee.[22]

5.

If the proposed corporate action is implemented or effected, the corporation shall

pay to such stockholder, upon the surrender of the certificates of stock
representing his shares, the fair value thereof as of the day prior to the date on
which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.[23]

own shares. In some American states where the English rule used to be adopted, statutes granting authority to
purchase out of surplus funds were enacted, while in others, shares might be purchased even out of capital
provided the rights of creditors were not prejudiced. [16] The reason underlying the limitation of share purchases
sprang from the necessity of imposing safeguards against the depletion by a corporation of its assets and
against the impairment of its capital needed for the protection of creditors. [17]

Now, however, a corporation can purchase its own shares, provided payment is made out of surplus
profits and the acquisition is for a legitimate corporate purpose. [18] In the Philippines, this new rule is embodied
in Section 41 of the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate purpose or
purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired:
1.

To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of

unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold
during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code. (n)

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation has
no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides that if the

The Corporation Code defines how the right of appraisal is exercised, as well as the implications of
the right of appraisal, as follows:

1.

The appraisal right is exercised by any stockholder who has voted against the
proposed corporate action by making a written demand on the corporation within
30 days after the date on which the vote was taken for the payment of the fair

dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and
dividend rights shall immediately be restored.

46

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment

legal duty of the defendant to respect such right; and (c) an act or omission by such defendant in violation of

of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and

the right of the plaintiff with a resulting injury or damage to the plaintiff for which the latter may maintain an

other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are

action for the recovery of relief from the defendant. [28]Although the first two elements may exist, a cause of

preferred in the distribution of corporate assets. [24] The creditors of a corporation have the right to assume that

action arises only upon the occurrence of the last element, giving the plaintiff the right to maintain an action in

the board of directors will not use the assets of the corporation to purchase its own stock for as long as the

court for recovery of damages or other appropriate relief. [29]

corporation has outstanding debts and liabilities. [25] There can be no distribution of assets among the
stockholders without first paying corporate debts. Thus, any disposition of corporate funds and assets to the
prejudice of creditors is null and void. [26]

Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based on a
cause of action. Accordingly, Civil Case No. 01-086 was dismissible from the beginning for being without any
cause of action.

B.
Petitioners cause of action was premature

The RTC concluded that the respondents obligation to pay had accrued by its having the unrestricted
That the respondent had indisputably no unrestricted retained earnings in its books at the time the

retained earnings after the making of the demand by the petitioners. It based its conclusion on the fact that

petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondents legal

the Corporation Code did not provide that the unrestricted retained earnings must already exist at the time of

obligation to pay the value of the petitioners shares did not yet arise. Thus, the CA did not err in holding that

the demand.

the petitioners had no cause of action, and in ruling that the RTC did not validly render the partial summary
judgment.

The RTCs construal of the Corporation Code was unsustainable, because it did not take into
account the petitioners lack of a cause of action against the respondent. In order to give rise to any obligation

A cause of action is the act or omission by which a party violates a right of another. [27] The essential
elements of a cause of action are: (a) the existence of a legal right in favor of the plaintiff; ( b) a correlative

to pay on the part of the respondent, the petitioners should first make a valid demand that the respondent

47

refused to pay despite having unrestricted retained earnings. Otherwise, the respondent could not be said to

must exist at the commencement of an action, which is commenced by the filing of the original

be guilty of any actionable omission that could sustain their action to collect.

complaint in court. [34]

Neither did the subsequent existence of unrestricted retained earnings after the filing of the complaint

The petitioners claim that the respondents petition for certiorari sought only the annulment of the

cure the lack of cause of action in Civil Case No. 01-086. The petitioners right of action could only spring from

assailed orders of the RTC (i.e., granting the motion for partial summary judgment and the motion for

an existing cause of action. Thus, a complaint whose cause of action has not yet accrued cannot be cured by

immediate execution); hence, the CA had no right to direct the dismissal of Civil Case No. 01-086.

an amended or supplemental pleading alleging the existence or accrual of a cause of action during the
pendency of the action.[30] For, only when there is an invasion of primary rights, not before, does the adjective

The claim of the petitioners cannot stand.

or remedial law become operative. [31] Verily, a premature invocation of the courts intervention renders the
complaint without a cause of action and dismissible on such ground. [32] In short, Civil Case No. 01-086, being
a groundless suit, should be dismissed.

Although the respondents petition for certiorari targeted only the RTCs orders granting the motion for
partial summary judgment and the motion for immediate execution, the CAs directive for the dismissal of Civil
Case No. 01-086 was not an abuse of discretion, least of all grave, because such dismissal was the only

Even the fact that the respondent already had unrestricted retained earnings more than sufficient

proper thing to be done under the circumstances. According to Surigao Mine Exploration Co., Inc. v. Harris:[35]

to cover the petitioners claims on June 26, 2002 (when they filed their motion for partial summary
judgment) did not rectify the absence of the cause of action at the time of the commencement
of Civil Case No. 01-086. The motion for partial summary judgment, being a mere application for
relief other than by a pleading, [33] was not the same as the complaint in Civil Case No. 01-086.
Thereby, the petitioners did not meet the requirement of the Rules of Court that a cause of action

Subject to certain qualification, and except as otherwise provided by law, an

action commenced before the cause of action has accrued is prematurely
brought and should be dismissed. The fact that the cause of action accrues after the
action is commenced and while the case is pending is of no moment. It is a rule of law
to which there is, perhaps no exception, either in law or in equity, that to recover at all
there must be some cause of action at the commencement of the suit. There are
reasons of public policy why there should be no needless haste in bringing up litigation,
and why people who are in no default and against whom there is as yet no cause of
action should not be summoned before the public tribunals to answer complaints which
are groundless. An action prematurely brought is a groundless suit. Unless the
plaintiff has a valid and subsisting cause of action at the time his action is
commenced, the defect cannot be cured or remedied by the acquisition or
accrual of one while the action is pending, and a supplemental complaint or an
amendment setting up such after-accrued cause of action is not permissible.

48

Lastly, the petitioners argue that the respondents recourse of a special action for certiorari was the
wrong remedy, in view of the fact that the granting of themotion for partial summary judgment constituted only
an error of law correctible by appeal, not of jurisdiction.

The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it
exceeded its jurisdiction by taking cognizance of the complaint that was not based on an existing cause of
action.

WHEREFORE, the petition for review on certiorari is denied for lack of merit.

We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo
Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the
Regional Trial Court of Manila, et al.

Costs of suit to be paid by the petitioners.

SO ORDERED.