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CORPORATION LAW
NATIONALITY OF CORPORATIONS
GRANDFATHER RULE
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and McARTHUR MINING, INC., vs. REDMONT
CONCOLIDATED MINES CORP.
G.R. No. 195580, January 28, 2015, J. Velasco, Jr.
A corporation that complies with the 60-40 Filipino to foreign equity
requirement can be considered a Filipino corporation if there is no doubt as to who
has the beneficial ownership and control of the corporation. In this case, a
further investigation as to the nationality of the personalities with the beneficial
ownership and control of the corporate shareholders in both the investing and
investee corporations is necessary. Doubt refers to various indicia that the
beneficial ownership and control of the corporation do not in fact reside in
Filipino shareholders but in foreign stakeholders. Even if at first glance the
petitioners comply with the 60-40 Filipino to foreign equity ratio, doubt exists in the
present case that gives rise to a reasonable suspicion that the Filipino shareholders
do not actually have the requisite number of control and beneficial ownership in
petitioners Narra, Tesoro, and McArthur. Hence, the Court is correct in using the
Grandfather Rule in determining the nationality of the petitioners.
Facts:
Petitioner Narra Nickel and Mining Development Corp. (Narra) filed this
Motion for Reconsideration of the Supreme Court's April 21, 2014 Decision wherein
it affirmed the appellate court's ruling that petitioners, being foreign corporations,
are not entitled to Mineral Production Sharing Agreements (MPSAs ). In reaching the
assailed decision, the Court upheld with approval the appellate court's finding that
there was doubt as to petitioners' nationality since a 100% Canadian-owned firm,
MBMI Resources, Inc. (MBMI), effectively owns 60% of the common stocks of the
petitioners by owning equity interest of petitioners' other majority corporate
shareholders.
To petitioners, the Courts application of the Grandfather Rule to determine
their nationality is erroneous and allegedly without basis in the Constitution, the
Foreign Investments Act of 1991 (FIA), the Philippine Mining Act of 1995, and the
Rules issued by the Securities and Exchange Commission (SEC). These laws and
rules supposedly espouse the application of the Control Test in verifying the
Philippine nationality of corporate entities for purposes of determining compliance
with Sec. 2, Art. XII of the Constitution that only corporations or associations at
least sixty per centum of whose capital is owned by such [Filipino] citizens may
enjoy certain rights and privileges, like the exploration and development of natural
resources
Issue:

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Whether the Court erred in using the Grandfather rule and not the control
test in determining the nationality of the petitioners.
Ruling:
No. As defined by Dean Cesar Villanueva, the Grandfather Rule is the
method by which the percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities, provided for under the
Constitution and other nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate
shareholder. Thus, to arrive at the actual Filipino ownership and control in a
corporation, both the direct and indirect shareholdings in the corporation are
determined. In other words, if there are layers of intervening corporations investing
in a mining joint venture, we must delve into the citizenship of the individual
stockholders of each corporation.
Admittedly, an ongoing quandary obtains as to the role of the Grandfather
Rule in determining compliance with the minimum Filipino equity requirement vis-vis the Control Test. This confusion springs from the erroneous assumption that the
use of one method forecloses the use of the other. The Control Test and the
Grandfather Rule are not, as it were, incompatible ownership-determinant methods
that can only be applied alternative to each other. Rather, these methods can, if
appropriate, be used cumulatively in the determination of the ownership and control
of corporations engaged in fully or partly nationalized activities, as the mining
operation.
The Grandfather Rule, standing alone, should not be used to determine the
Filipino ownership and control in a corporation, as it could result in an otherwise
foreign corporation rendered qualified to perform nationalized or partly nationalized
activities. Hence, it is only when the Control Test is first complied with that the
Grandfather Rule may be applied. Put in another manner, if the subject
corporations Filipino equity falls below the threshold 60%, the corporation is
immediately considered foreign-owned, in which case, the need to resort to the
Grandfather Rule disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to
foreign equity requirement can be considered a Filipino corporation if there is no
doubt as to who has the beneficial ownership and control of the corporation. In
that instance, there is no need for a dissection or further inquiry on the ownership of
the corporate shareholders in both the investing and investee corporation or the
application of the Grandfather Rule. As a corollary rule, even if the 60-40 Filipino to
foreign equity ratio is apparently met by the subject or investee corporation, a
resort to the Grandfather Rule is necessary if doubt exists as to the locus of the
beneficial ownership and control.
In this case, a further investigation as to the nationality of the personalities
with the beneficial ownership and control of the corporate shareholders in both the
investing and investee corporations is necessary.
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As explained in the April 21, 2012 Decision, the doubt that demands the
application of the Grandfather Rule in addition to or in tandem with the Control Test
is not confined to, or more bluntly, does not refer to the fact that the apparent
Filipino ownership of the corporations equity falls below the 60% threshold. Rather,
doubt refers to various indicia that the beneficial ownership and control of the
corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.
Even if at first glance the petitioners comply with the 60-40 Filipino to foreign equity
ratio, doubt exists in the present case that gives rise to a reasonable suspicion that
the Filipino shareholders do not actually have the requisite number of control and
beneficial ownership in petitioners Narra, Tesoro, and McArthur. Hence, a further
investigation and dissection of the extent of the ownership of the corporate
shareholders through the Grandfather Rule is justified.
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and MCARTHUR MINING, INC. vs. REDMONT
CONSOLIDATED MINES CORP.
G.R. No. 195580, April 21, 2014, J. Velasco Jr.
The Grandfather Rule is a method to determine the nationality of the
corporation by making reference to the nationality of the stockholders of the
investor corporation. Based on a SEC Rule and DOJ Opinion, the Grandfather Rule
or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign
equity ownership is in doubt (i.e., in cases where the joint venture corporation with
Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%]
invests in other joint venture corporation which is either 60-40% Filipino-alien or the
59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity
ownership is not in doubt, the Grandfather Rule will not apply.
Facts:
Redmont Consolidated Mines Corp. (Redmont), a domestic corporation
organized and existing under Philippine laws, took interest in mining and exploring
certain areas of the province of Palawan. After inquiring with the Department of
Environment and Natural Resources (DENR), it learned that the areas where it
wanted to undertake exploration and mining activities where already covered by
Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra,
Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining,
Inc. (SMMI), filed an application for an MPSA. Subsequently, SMMI was issued MPSAAMA-IVB-153 covering an area of over 1,782 hectares and EPA-IVB-44 which
includes an area of 3,720 hectares. The MPSA and EP were then transferred to
Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to
petitioner McArthur. Petitioner Narra acquired its MPSA from Alpha Resources and
Development Corporation and Patricia Louise Mining & Development Corporation
(PLMDC) which previously filed an application for an MPSA. Through the said
application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in
barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently,
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another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as
MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao
and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently
conveyed, transferred and assigned its rights and interest over the said MPSA
application to Tesoro.
On 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR
three (3) separate petitions for the denial of petitioners applications for MPSA. In
the petitions, Redmont alleged that at least 60% of the capital stock of McArthur,
Tesoro and Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100%
Canadian corporation. Redmont reasoned that since MBMI is a considerable
stockholder of petitioners, it was the driving force behind petitioners filing of the
MPSAs over the areas covered by applications since it knows that it can only
participate in mining activities through corporations which are deemed Filipino
citizens. Redmont argued that given that petitioners capital stocks were mostly
owned by MBMI, they were likewise disqualified from engaging in mining activities
through MPSAs, which are reserved only for Filipino citizens.
Issue:
Whether or not petitioner corporations Narra, Tesoro and McArthur are foreign
corporations based on the "Grandfather Rule".
Ruling:
Yes.
Grandfather Rule is a method to determine the nationality of the corporation
by making reference to the nationality of the stockholders of the investor
corporation. Based on a SEC Rule and DOJ Opinion, the Grandfather Rule or the
second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity
ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino
and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests
in other joint venture corporation which is either 60-40% Filipino-alien or the 59%
less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is
not in doubt, the Grandfather Rule will not apply.
After a scrutiny of the evidence extant on record, the Court finds that this
case calls for the application of the grandfather rule since doubt prevails and
persists in the corporate ownership of petitioners. Also doubt is present in the 60-40
Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their
common investor, the 100% Canadian corporationMBMI, funded them. Obviously,
the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Courts mind. To
determine, therefore, the actual participation, direct or indirect, of MBMI, the
grandfather rule must be used.
McArthur Mining, Inc.

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To establish the actual ownership, interest or participation of MBMI in each of
petitioners corporate structure, they have to be "grandfathered." As previously
discussed, McArthur acquired its MPSA application from MMC, which acquired its
application from SMMI. McArthur has a capital stock of ten million pesos (PhP
10,000,000) divided into 10,000 common shares at one thousand pesos (PhP 1,000)
per share, subscribed to by the following:
Name

Nationalit
y

Number of
Shares

Amount
Subscribed

Amount Paid

Madridejos Mining
Corporation

Filipino

5,997

PhP 5,997,000.00

PhP 825,000.00

MBMI Resources,
Inc.

Canadian

3,998

PhP 3,998,000.0

PhP 1,878,174.60

Lauro L. Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B. Esguerra

Filipino

PhP 1,000.00

PhP 1,000.00

Manuel A. Agcaoili

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP 10,000,000.00

PhP 2,708,174.60

Interestingly, looking at the corporate structure of MMC, we take note that it


has a similar structure and composition as McArthur. In fact, it would seem that
MBMI is also a major investor and "controls" MBMI and also, similar nominal
shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar
(Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation
In the case of Madridejos Mining Corporation, noticeably, Olympic Mines &
Development Corporation (Olympic) as one of its stockholders did not pay any
amount with respect to the number of shares they subscribed to in the corporation,
which is quite absurd since Olympic is the major stockholder in MMC. MBMIs 2006
Annual Report sheds light on why Olympic failed to pay any amount with respect to
the number of shares it subscribed to. MBMI states that Olympic entered into joint
venture agreements with several Philippine companies, wherein MBMI holds directly
and indirectly a 60% effective equity interest in the Olympic Properties. Thus, as
demonstrated in this first corporation, McArthur, when it is "grandfathered,"
company layering was utilized by MBMI to gain control over McArthur. It is apparent
that MBMI has more than 60% or more equity interest in McArthur, making the latter
a foreign corporation.
Tesoro Mining and Development, Inc.
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of
ten million pesos (PhP 10,000,000) divided into ten thousand (10,000) common
shares at PhP 1,000 per share. Except for the name "Sara Marie Mining, Inc.,"
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Tesoros corporate structure shows exactly the same figures as the corporate
structure of petitioner McArthur, down to the last centavo. All the other
shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell.
The figures under "Nationality," "Number of Shares," "Amount Subscribed," and
"Amount Paid" are exactly the same.
Sara Marie Mining, Inc.
After subsequently studying SMMIs corporate structure, it is not farfetched
for us to spot the glaring similarity between SMMI and MMCs corporate structure.
Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti
Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures
under the headings "Nationality," "Number of Shares," "Amount Subscribed," and
"Amount Paid" are exactly the same except for the amount paid by MBMI which now
reflects the amount of two million seven hundred ninety four thousand pesos (PhP
2,794,000). Oddly, the total value of the amount paid is two million eight hundred
nine thousand nine hundred pesos (PhP 2,809,900). Accordingly, after
"grandfathering" petitioner Tesoro and factoring in Olympics participation in SMMIs
corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or
more equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino
corporation and, thus, disqualifies it to participate in the exploitation, utilization and
development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and assignee
of PLMDCs MPSA application, whose corporate structures arrangement is similar to
that of the first two petitioners discussed. The capital stock of Narra is ten million
pesos (PhP 10,000,000), which is divided into ten thousand common shares
(10,000) at one thousand pesos (PhP 1,000) per share. Again, MBMI, along with
other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this
corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDCs
corporate structure:
Name
Palawan
Alpha
South
Development Corporation

Nationali Number
ty
Shares
Resources Filipino

of Amount
Subscribed

Amount Paid

6,596

PhP
6,596,000.00

PhP 0

MBMI Resources,
Inc.

Canadian

3,396

PhP
3,396,000.00

PhP
2,796,000.00

Higinio C. Mendoza, Jr.

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B. Esguerra

Filipino

PhP 1,000.00

PhP 1,000.00

Henry E. Fernandez

Filipino

PhP 1,000.00

PhP 1,000.00

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Lauro L. Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Manuel A. Agcaoili

Filipino

PhP 1,000.00

PhP 1,000.00

Bayani H. Agabin

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP
2,708,174.60

Yet again, the same stockholders in petitioners corporate structures are


present. Similarly, the amount of money paid by the 2nd tier majority stock holder,
in this case, Palawan Alpha South Resources and Development Corp. (PASRDC), is
zero.
Concluding from the above-stated facts, it is quite safe to say that petitioners
McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. Such conclusion is derived
from grandfathering petitioners corporate owners, namely: MMI, SMMI and PLMDC.
Going further and adding to the picture, MBMIs Summary of Significant Accounting
Policies statement regarding the "joint venture" agreements that it entered into
with the "Olympic" and "Alpha" groupsinvolves SMMI, Tesoro, PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations boils down to MBMI,
Olympic or corporations under the "Alpha" group wherein MBMI has joint venture
agreements with, practically exercising majority control over the corporations
mentioned. In effect, whether looking at the capital structure or the underlying
relationships between and among the corporations, petitioners are NOT Filipino
nationals and must be considered foreign since 60% or more of their capital stocks
or equity interests are owned by MBMI.

DOCTRINE
OF

CORPORATE JURIDICAL PERSONALITY


CORPORATE JURIDICAL PERSONALITY

PHILIPPINE NATIONAL BANK vs. MERELO B. AZNAR et al.


G.R. No. 171805, May 30, 2014, J. Leonardo-De Castro
Stockholders cannot claim ownership over corporate properties by virtue of
the Minutes of a Stockholders meeting which merely evidence a loan agreement
between the stockholders and the corporation. As such, there interest over the
properties are merely inchoate.
Facts:

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In 1958, RISCO ceased operation due to business reverses. Due to Merelo B.
Aznar, Matias B. Aznar III, Jose L. Aznar, Rosario T. Barcenilla, Jose B. Enad and
Ricardo Gabuyas (Aznar et al)desire to rehabilitate RISCO, they contributed a total
amount of P212,720.00 which was used in the purchase of the three (3) parcels of
land located in various areas in the Cebu Province.
After the purchase of the above lots, titles were issued in the name of RISCO.
The amount contributed by plaintiffs constituted as liens and encumbrances on the
aforementioned properties as annotated in the titles of said lots. Such annotation
was made pursuant to the Minutes of the Special Meeting of the Board of Directors
of RISCO stating that;
And that the respective contributions above-mentioned shall
constitute as their lien or interest on the property described above, if
and when said property are titled in the name of RURAL INSURANCE &
SURETY CO., INC., subject to registration as their adverse claim in
pursuance of the Provisions of Land Registration Act, (Act No. 496, as
amended) until such time their respective contributions are refunded
to them completely.
Thereafter, various subsequent annotations were made on the same titles in
favor of PNB. As a result, a Certificate of Sale was issued in favor of PNB, being the
lone and highest bidder of the three (3) parcels of land and was also issued Transfer
Certificate of Title over the said parcels of land.
This prompted Aznar et. al to file a complaint seeking the quieting of their
supposed title to the subject properties. They alleged that the subsequent
annotations on the titles are subject to the prior annotation of their liens and
encumbrances. On the other hand, asserts that plaintiffs, as mere stockholders of
RISCO do not have any legal or equitable right over the properties of the
corporation. PNB posited that even if plaintiffs monetary lien had not expired, their
only recourse was to require the reimbursement or refund of their contribution.
Aznar, et al., filed a Manifestation and Motion for Judgment on the Pleadings.
Thus, the trial court rendered the November 18, 1998 Decision, which ruled against
PNB. It further declared that the Minutes of the Special Meeting of the Board of
Directors of RISCO annotated on the titles to subject properties as an express trust
whereby RISCO was a mere trustee and the above-mentioned stockholders as
beneficiaries being the true and lawful owners of Lots 3597, 7380 and 1323.
On appeal, the CA set aside the ruling of the trial court and ruled that there
was no trust created. The lien is merely an evidence of the loan. Thus, it directed
PNB to pay Aznar, et al., the amount of their contributions plus legal interest from
the time of acquisition of the property until finality of judgment.
Issue:

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Whether or not Aznar et al as stockholders has the legal or equitable rights
over the subject properties
Ruling:
No. Aznar et al do not have any legal or equitable rights over the properties.
Indeed, we find that Aznar, et al., have no right to ask for the quieting of title
of the properties at issue because they have no legal and/or equitable rights over
the properties that are derived from the previous registered owner which is RISCO.
As a consequence thereof, a corporation has a personality separate and
distinct from those of its stockholders and other corporations to which it may be
connected. Thus, we had previously ruled in Magsaysay-Labrador v. Court of
Appeals that the interest of the stockholders over the properties of the corporation
is merely inchoate and therefore does not entitle them to intervene in litigation
involving corporate property.
Here, the interest, if it exists at all, of petitioners-movants is indirect,
contingent, remote, conjectural, consequential and collateral. At the very least, their
interest is purely inchoate, or in sheer expectancy of a right in the management of
the corporation and to share in the profits thereof and in the properties and assets
thereof on dissolution, after payment of the corporate debts and obligations.
In the case at bar, there is no allegation, much less any proof, that the
corporate existence of RISCO has ceased and the corporate property has been
liquidated and distributed to the stockholders. The records only indicate that, as per
Securities and Exchange Commission (SEC) Certification dated June 18, 1997, the
SEC merely suspended RISCOs Certificate of Registration beginning on September
5, 1988 due to its non-submission of SEC required reports and its failure to operate
for a continuous period of at least five years.
Verily, Aznar, et al., who are stockholders of RISCO, cannot claim ownership
over the properties at issue in this case on the strength of the Minutes which, at
most, is merely evidence of a loan agreement between them and the company.
There is no indication or even a suggestion that the ownership of said properties
were transferred to them which would require no less that the said properties be
registered under their names. For this reason, the complaint should be dismissed
since Aznar, et al., have no cause to seek a quieting of title over the subject
properties.
At most, what Aznar, et al., had was merely a right to be repaid the amount
loaned to RISCO. Unfortunately, the right to seek repayment or reimbursement of
their contributions used to purchase the subject properties is already barred by
prescription.

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COMMISSIONER OF CUSTOMS vs. OILINK INTERNATIONAL CORPORATION
G.R. No. 161759, July 2, 2014, J. Bersamin
URC and Oilink had the same Board of Directors and Oilink was 100% owned
by URC. The Court held that the doctrine of piercing the corporate veil has no
application here because the Commissioner of Customs did not establish that Oilink
had been set up to avoid the payment of taxes or duties, or for purposes that would
defeat public convenience, justify wrong, protect fraud, defend crime, confuse
legitimate legal or judicial issues, perpetrate deception or otherwise circumvent the
law.
Facts:
In the course of its business undertakings, particularly in the period from
1991 to 1994, Union Refinery Corporation (URC) imported oil products into the
country. URC and Oilink had interlocking directors when Oilink started its business.
They had the same Board of Directors and Oilink was 100% owned by URC.
The District Collector of the Port of Manila, formally demanded that URC pay
the taxes and duties on its oil imports that had arrived between January 6, 1991 and
November 7, 1995 at the Port of Lucanin in Mariveles, Bataan.
On July 2, 1999, Commissioner Tan made a final demand for the total liability
of P138,060,200.49 upon URC and Oilink. Co requested from Commissioner Tan a
complete finding of the facts and law in support ofthe assessment made in the
latters July 2, 1999 final demand. Oilink formally protested the assessment on the
ground that it was not the party liable for the assessed deficiency taxes.
On July 12, 1999, after receiving the letter from Co, Commissioner Tan
communicated in writing the detailed computation of the tax liability, stressing that
the Bureau of Customs (BoC) would not issue any clearance to Oilink unless the
amount of P138,060,200.49 demanded as Oilinks tax liability be first paid, and a
performance bond be posted by URC/Oilink to secure the payment of any
adjustments that would result from the BIRs review of the liabilities for VAT, excise
tax, special duties, penalties, etc.
Thus, on July 30, 1999, Oilink appealed to the CTA, seeking the nullification of
the assessment for having been issued without authority and with grave abuse of
discretion tantamount to lack of jurisdiction because the Government was thereby
shifting the imposition from URC to Oilink.
The CTA rendered its decision declaring as null and void the assessment of the
Commissioner of Customs. The CA ruled in favor of Oilink.
Issue:
Whether or not the Commissioner of Customs could pierce the veil of
corporate fiction
Ruling:

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No. A corporation, upon coming into existence, is invested by law with a
personality separate and distinct from those of the persons composing it as well as
from any other legal entity to which it may be related. For this reason, a stockholder
is generally not made to answer for the acts or liabilities of the corporation, and
viceversa. The separate and distinct personality of the corporation is, however, a
mere fiction established by law for convenience and to promote the ends of justice.
It may not be used or invoked for ends that subvert the policy and purpose behind
its establishment, or intended by law to which the corporation owes its being. This is
true particularly when the fiction is used to defeat public convenience, to justify
wrong, to protect fraud, to defend crime, to confuse legitimate legal or judicial
issues, to perpetrate deception or otherwise to circumvent the law. This is likewise
true where the corporate entity is being used as an alter ego, adjunct, or business
conduit for the sole benefit of the stockholders or of another corporate entity. In
such instances, the veil of corporate entity will be pierced or disregarded with
reference to the particular transaction involved.
In Philippine National Bank v. Ritratto Group, Inc., the Court has outlined the
following circumstances thatare useful in the determination of whether a subsidiary
is a mere instrumentality of the parent-corporation, viz:
1. Control, not mere majority or complete control, but complete domination,
not only of finances butof policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetrate the violation of a statutory or other positive legal duty, or
dishonest and, unjust act incontravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.
In applying the "instrumentality" or "alter ego" doctrine, the courts are
concerned with reality, not form, and with how the corporation operated and the
individual defendant's relationship to the operation. Consequently, the absence of
any one of the foregoing elements disauthorizes the piercing of the corporate veil.
Indeed, the doctrine of piercing the corporate veil has no application here
because the Commissioner of Customs did not establish that Oilink had been set up
to avoid the payment of taxes or duties, or for purposes that would defeat public
convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or
judicial issues, perpetrate deception or otherwise circumvent the law. It is also
noteworthy that from the outset the Commissioner of Customs sought to collect the
deficiency taxes and duties from URC, and that it was only on July 2, 1999 when the
Commissioner of Customs sent the demand letter to both URC and Oilink. That was
revealing, because the failure of the Commissioner of Customs to pursue the
remedies against Oilink from the outset manifested that its belated pursuit of Oilink
was only an afterthought.

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GIRLY G. ICO vs. SYSTEMS TECHNOLOGY INSTITUTE, INC., MONICO V.
JACOB and PETER K. FERNANDEZ
G.R. No. 185100, July 9, 2014, J. Del Castillo
A corporation, as a juridical entity, may act only through its directors, officers
and employees. Obligations incurred as a result of the directors and officers acts
as corporate agents, are not their personal liability but the direct responsibility of
the corporation they represent. As a rule, they are only solidarily liable with the
corporation for the illegal termination of services of employees if they acted with
malice or bad faith.
To hold a director or officer personally liable for corporate obligations, two
requisites must concur: (1) it must be alleged in the complaint that the director or
officer assented to patently unlawful acts of the corporation or that the officer was
guilty of gross negligence or bad faith; and (2) there must be proof that the officer
acted in bad faith.
Facts:
Systems Technology Institute, Inc. (STI) is an educational institution duly
incorporated, organized, and existing under Philippine laws. Monico V. Jacob (Jacob)
and Peter K. Fernandez (Fernandez) are STI officers, the former being the President
and Chief Executive Officer (CEO) and the latter Senior Vice-President. STI offers
pre-school, elementary, secondary and tertiary education, as well as post-graduate
courses either through franchisees or STI wholly-owned schools.
Girly G. Ico (Ico), a masteral degree holder with doctorate units earned, was
hired as Faculty Member by STI College Makati (Inc.), which operates STI CollegeMakati (STI-Makati). STI College Makati (Inc.) is a wholly-owned subsidiary of STI. Ico
was subsequent promoted as Dean of STI College- Paraaque and, thereafter, as
Chief Operating Officer (COO) of STI-Makati.
However, after the merger between STI and STI College Makati (Inc.), Ico
received a memorandum cancelling her COO assignment at STI-Makati, citing
managements decision to undertake an "organizational restructuring" in line with
the merger of STI and STI-Makati. Further ordering Ico to report to turn over her
work to one Victoria Luz (Luz), who shall function as STI-Makatis School
Administrator. According to STI, the "organizational re-structuring" was undertaken
"in order to streamline operations. In the process, the positions of Chief Executive
Officer and Chief Operating Officer of STI Makati were abolished."
Furthermore, the STIs Corporate Auditor/Audit Advisory Group conducted an
audit of STI-Makati covering the whole period of Icos stint as COO/School
Administrator therein. In a report (Audit Report) later submitted to Fernandez, the
auditors claim to have discovered several irregularities. In another memorandum, it
was recommended that an investigation committee be formed to investigate Ico for
grave abuse of authority, falsification, gross dishonesty, maligning and causing
intrigues, and other charges. Fernandez recommended that Ico be placed under
preventive suspension pending investigation. Hence, pursuant to said
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recommendation, Ico was placed under preventive suspension and banning her
entry to any of STIs premises.
Labor Arbiter (LA) found Ico to have been illegally constructively and in bad
faith dismissed by respondents in her legally acquired status as regular employee
thus, ordering respondents SYSTEMS TECHNOLOGY INSTITUTE, INC. and/or MONICO
V. JACOB, PETER K. FERNANDEZ in solido to reinstate her to her former position and
pay Icos full back wages plus damages. On appeal, NLRC reversed the ruling of the
LA. On petition for certiorari by Ico before the CA, CA affirmed the ruling of the
NLRC, hence, this petition.
Issue:
Whether Jacob, as officer of STI, may be held solidarily liable with STI.
Ruling:
Nonetheless, the Court fails to discern any bad faith or negligence on the part
of respondent Jacob. The principal character that figures prominently in this case is
Fernandez; he alone relentlessly caused petitioners hardships and suffering. He
alone is guilty of persecuting petitioner. Indeed, some of his actions were without
sanction of STI itself, and were committed outside of the authority given to him by
the school; they bordered on the personal, rather than official. His superior, Jacob,
may have been, for the most part, clueless of what Fernandez was doing to
petitioner. After all, Fernandez was the Head of the Academic Services Group of the
EMD, and petitioner directly reported to him at the time; his position enabled him to
pursue a course of action with petitioner that Jacob was largely unaware of.
A corporation, as a juridical entity, may act only through its directors, officers
and employees. Obligations incurred as a result of the directors and officers acts
as corporate agents, are not their personal liability but the direct responsibility of
the corporation they represent. As a rule, they are only solidarily liable with the
corporation for the illegal termination of services of employees if they acted with
malice or bad faith.
To hold a director or officer personally liable for corporate obligations, two
requisites must concur: (1) it must be alleged in the complaint that the director or
officer assented to patently unlawful acts of the corporation or that the officer was
guilty of gross negligence or bad faith; and (2) there must be proof that the officer
acted in bad faith.
Hence, Jacob is absolved from any liability.
PALM AVENUE HOLDING CO.,INC., and PALM AVENUE REALTY AND
DEVELOPMENT CORPORATION vs. SANDIGANBAYAN 5TH Division, REPUBLIC
OF THE PHILIPPINES, represented by the PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT (PCGG)
G.R. No. 173082, August 6, 2014, J. Peralta

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The writ of sequestration issued against the assets of the corporation is not
valid because the suit in the civil case was against the shareholder in the
corporation and is not a suit against the latter. Thus, the failure to implead these
corporations as defendants and merely annexing a list of such corporations to the
complaints is a violation of their right to due process for it would be, in effect,
disregarding their distinct and separate personality without a hearing.
Furthermore, the sequestration order issued against the corporation is
deemed automatically lifted due to the failure of the Republic to commence the
proper judicial action or to implead them therein within the period under the
Constitution.
Facts:
Through a writ of sequestration dated October 27, 1986, the Presidential
Commission on Good Government (PCGG) sequestered all the assets, properties,
records, and documents of the Palm Companies.The PCGG had relied on a letter
from the Palm Companies Attorney-in-Fact, Jose S. Sandejas, specifically identifying
Benjamin Kokoy Romualdez, a known crony of former President Ferdinand E.
Marcos, as the beneficial owner of the Benguet Corporation shares in the Palm
Companies name.
The Republic, represented by the PCGG, filed a complaint with the
Sandiganbayan docketed as Civil Case No. 0035 but did not initially implead the
Palm Companies as defendants. However, the Sandiganbayan issued a Resolution
dated June 16, 1989 where it ordered said companies to be impleaded. Pursuant to
said order, the Republic filed an amended complaint dated January 17, 1997 and
named therein the Palm Companies as defendants. The graft court admitted the
amended complaint on October 15, 2001.
Thereafter, the companies filed a Motion for Bill of Particulars to direct the
Republic to submit a bill of particulars regarding matters in the amended complaint
which were not alleged with certainty or particularity.
Hence, the Republic submitted its bill of particulars. Subsequently, the Palm
Companies filed a motion to dismiss the Republics complaint. They argued that the
bill of particulars did not satisfactorily comply with the requested details.
Furthermore, the Palm Companies filed another motion to order the PCGG to
release all the companies shares of stock and funds in its custody on the ground
that since they were not impleaded as parties-defendants in Civil Case No. 0035
within the period prescribed by the Constitution.
The Sandiganbayan then issued its October 21, 2010 Resolution, granting the
companies foregoing motion.
Issue:
Whether the Sandiganbayan committed grave abuse of discretion amounting
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to excess off jurisdiction in granting the Palm Companies motion to release all
shares of stock and funds in the custody of the PCGG
Ruling:
No.
Under Sec. 26, Article XVIII of the 1987 Constitution, it mandates the Republic
to file the corresponding judicial action or proceedings within a six-month period
(from its ratification on February 2, 1987) in order to maintain sequestration, noncompliance with which would result in the automatic lifting of the sequestration
order. Hence, there is a necessity on the part of the Republic to actually implead
corporations as defendants in the complaint, out of recognition for their distinct and
separate personalities, failure to do so would necessarily be denying such entities
their right to due process.
Here, the writ of sequestration issued against the assets of the Palm
Companies is not valid because the suit in Civil Case No. 0035 against Benjamin
Romualdez as shareholder in the Palm Companies is not a suit against the latter.
Thus, the failure to implead these corporations as defendants and merely annexing
a list of such corporations to the complaints is a violation of their right to due
process for it would be, in effect, disregarding their distinct and separate personality
without a hearing.
In the case at bar, the Palm Companies were merely mentioned as Item Nos.
47 and 48, Annex A of the Complaint, as among the corporations where defendant
Romualdez owns shares of stocks. Furthermore, while the writ of sequestration was
issued on October 27, 1986, the Palm Companies were impleaded in the case only
in 1997, or already a decade from the ratification of the Constitution in 1987, way
beyond the prescribed period.
The sequestration order issued against the Palm Companies is therefore
deemed automatically lifted due to the failure of the Republic to commence the
proper judicial action or to implead them therein within the period under the
Constitution. However, the lifting of the writ of sequestration will not necessarily be
fatal to the main case since the same does not ipso facto mean that the
sequestered properties are, in fact, not illgotten. The effect of the lifting of the
sequestration will merely be the termination of the governments role as
conservator.
OLONGAPO CITY vs. SUBIC WATER AND SEWERAGE CO., INC.
G.R. No. 171626, August 6, 2014, J. Brion
OCWD and Subic Water are two separate and different entities. Subic Water
clearly demonstrated that it was a separate corporate entity from OCWD. OCWD is
just a ten percent (10%) shareholder of Subic Water. As a mere shareholder,
OCWDs juridical personality cannot be equated nor confused with that of Subic
Water. It is basic in corporation law that a corporation is a juridical entity vested
with a legal personality separate and distinct from those acting for and in its behalf
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and, in general, from the people comprising it. Under this corporate reality, Subic
Water cannot be held liable for OCWDs corporate obligations in the same manner
that OCWD cannot be held liable for the obligations incurred by Subic Water as a
separate entity. The corporate veil should not and cannot be pierced unless it is
clearly established that the separate and distinct personality of the corporation was
used to justify a wrong, protect fraud, or perpetrate a deception.
Facts:
The Olongapo City filed a complaint for sum of money and damages against
Olongapo City Water District (OCWD). It alleged that OCWD failed to pay its
electricity bills to Olongapo City and remit its payment under the contract to pay,
pursuant to OCWDs acquisition of Olongapo Citys water system.
In the interim, OCWD entered into a Joint Venture Agreement (JVA) with Subic
Bay Metropolitan Authority (SBMA), Biwater International Limited (Biwater), and
D.M. Consunji, Inc. (DMCI). Pursuant to this agreement, Subic Water a new
corporate entity was incorporated, with the following equity participation from its
shareholders: SBMA 19.99% or 20%; OCWD 9.99% or 10%; Biwater 29.99% or 30%;
and DMCI 39.99% or 40%.
Subic Water was granted the franchise to operate and to carry on the
business of providing water and sewerage services in the Subic Bay Free Port Zone,
as well as in Olongapo City. Hence, Subic Water took over OCWDs water operations
in Olongapo City. To finally settle their money claims against each other, Olongapo
City and OCWD entered into a compromise agreement.
The compromise agreement also contained a provision regarding the parties
request that Subic Water, Philippines, which took over the operations of the
defendant Olongapo City Water District be made the co-maker for OCWDs
obligations. Mr. Noli Aldip, then chairman of Subic Water, acted as its representative
and signed the agreement on behalf of Subic Water.
To enforce the compromise agreement, Olongapo City filed a motion for the
issuance of a writ of execution with the RTC. It granted the motion, but did not issue
the corresponding writ of execution. Almost four years later, the Olongapo City,
prayed again for the issuance of a writ of execution against OCWD.
OCWDs former counsel, filed a manifestation alleging that OCWD had
already been dissolved and that Subic Water is now the former OCWD. Because of
this assertion, Subic Water also filed a manifestation informing the RTC that as
borne out by the articles of incorporation and general information sheet of Subic
Water defendant OCWD is not Subic Water. The manifestation also indicated that
OCWD was only a ten percent (10%) shareholder of Subic Water; and that its 10%
share was already in the process of being transferred to Olongapo City pursuant to a
Deed of Assignment .

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The RTC granted the motion for execution and directed its issuance against
OCWD and/or Subic Water. The CA granted Subic Waters petition for certiorari and
reversed the trial courts rulings.
Issue:
Whether or not Subic Water can be made liable under the writ of execution
issued by RTC in favor of Olongapo City
Ruling:
No, the writ of execution issued by the RTC, in favor of Olongapo City, is null
and void. OCWD and Subic Water are two separate and different entities.
Olongapo City practically suggests that since Subic Water took over OCWDs
water operations in Olongapo City, it also acquired OCWDs juridical personality,
making the two entities one and the same.
This is an interpretation that we cannot make or adopt under the facts and
the evidence of this case. Subic Water clearly demonstrated that it was a separate
corporate entity from OCWD. OCWD is just a ten percent (10%) shareholder of Subic
Water. As a mere shareholder, OCWDs juridical personality cannot be equated nor
confused with that of Subic Water. It is basic in corporation law that a corporation is
a juridical entity vested with a legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it.
Under this corporate reality, Subic Water cannot be held liable for OCWDs
corporate obligations in the same manner that OCWD cannot be held liable for the
obligations incurred by Subic Water as a separate entity. The corporate veil should
not and cannot be pierced unless it is clearly established that the separate and
distinct personality of the corporation was used to justify a wrong, protect fraud, or
perpetrate a deception.
In Concept Builders, Inc. v. NLRC, the Court enumerated the possible
probative factors of identity which could justify the application of the doctrine of
piercing the corporate veil. These are:
(1)
(2)
(3)
(4)

Stock ownership by one or common ownership of both corporations;


Identity of directors and officers;
The manner of keeping corporate books and records; and
Methods of conducting the business.

The burden of proving the presence of any of these probative factors lies with
the one alleging it. Unfortunately, Olongapo City simply claimed that Subic Water
took over OCWD's water operations in Olongapo City. Apart from this allegation,
Olongapo City failed to demonstrate any link to justify the construction that Subic
Water and OCWD are one and the same. Under this evidentiary situation, our duty is
to respect the separate and distinct personalities of these two juridical entities.

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Furthermore, an officers actions can only bind the corporation if he had been
authorized to do so. An examination of the compromise agreement reveals that it
was not accompanied by any document showing a grant of authority to Mr. Noli
Aldip to sign on behalf of Subic Water.
Subic Water is a corporation. A corporation, as a juridical entity, primarily acts
through its board of directors, which exercises its corporate powers. In this capacity,
the general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation.
A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that the authority to do so has been
conferred upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the particular business,
are incidental to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to the particular officer or
agent, and such apparent powers as the corporation has caused persons dealing
with the officer or agent to believe that it has conferred.
Mr. Noli Aldip signed the compromise agreement purely in his own capacity.
Moreover, the compromise agreement did not expressly provide that Subic Water
consented to become OCWDs co-maker. As worded, the compromise agreement
merely provided that both parties also request Subic Water, Philippines, which took
over the operations of Olongapo City Water District be made as co-maker for the
obligations above-cited. This request was never forwarded to Subic Waters board of
directors. Even if due notification had been made (which does not appear in the
records), Subic Waters board does not appear to have given any approval to such
request. No document such as the minutes of Subic Waters board of directors
meeting or a secretarys certificate, purporting to be an authorization to Mr. Aldip to
conform to the compromise agreement, was ever presented. In effect, Mr. Aldips
act of signing the compromise agreement was outside of his authority to undertake.
Since Mr. Aldip was never authorized and there was no showing that Subic
Waters articles of incorporation or by-laws granted him such authority, then the
compromise agreement he signed cannot bind Subic Water. Subic Water cannot
likewise be made a surety or even a guarantor for OCWDs obligations. OCWDs
debts under the compromise agreement are its own corporate obligations to
Olongapo City.
The SC confirmed that the writ of execution issued by RTC Olongapo, in favor
of Olongapo City, is null and void. Accordingly, Subic Water cannot be made liable
under the writ.

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GERARDO LANUZA, JR. AND ANTONIO 0. OLBES vs. BF CORPORATION,


SHANGRI- LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO,
MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS
G.R. No. 174938, October 01, 2014, J. Leonen
BF Corporation filed a collection complaint with the Regional Trial Court
against Shangri-La and the members of its board of directors. A corporations
representatives are generally not bound by the terms of the contract executed by
the corporation. They are not personally liable for obligations and liabilities incurred
on or in behalf of the corporation.
Facts:
In 1993, BF Corporation filed a collection complaint with the Regional Trial
Court against Shangri-La and the members of its board of directors.
BF Corporation alleged that Shangri-La induced BF Corporation to continue
with the construction of the buildings using its own funds and credit despite
Shangri-Las default. According to BF Corporation, Shangri- La misrepresented that
it had funds to pay for its obligations with BF Corporation, and the delay in payment
was simply a matter of delayed processing of BF Corporations progress billing
statements. BF Corporation eventually completed the construction of the
buildings. Shangri-La allegedly took possession of the buildings while still owing BF
Corporation an outstanding balance.
On August 3, 1993, Shangri-La, and its BOD filed a motion to suspend the
proceedings in view of BF Corporations failure to submit its dispute to arbitration, in
accordance with the arbitration clause provided in its contract.
Petitioners main argument arises from the separate personality given to
juridical persons vis--vis their directors, officers, stockholders, and agents. Since
they did not sign the arbitration agreement in any capacity, they cannot be forced
to submit to the jurisdiction of the Arbitration Tribunal in accordance with the
arbitration agreement. Moreover, they had already resigned as directors of ShangriLa at the time of the alleged default.
The Arbitral Tribunal rendered a decision, finding that BF Corporation failed to
prove the existence of circumstances that render petitioners and the other directors
solidarily liable. It ruled that petitioners and Shangri-Las other directors were not
liable for the contractual obligations of Shangri-La to BF Corporation.
Issue:
Whether or not Shangri-Las directors were liable for the contractual
obligations of Shangri-La to BF Corporation
Ruling:
No.

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Indeed, as petitioners point out, their personalities as directors of Shangri-La


are separate and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law. This means that
while it is not a person, naturally, the law gives it a distinct personality and treats it
as such. A corporation, in the legal sense, is an individual with a personality that is
distinct and separate from other persons including its stockholders, officers,
directors, representatives, and other juridical entities.
The law vests in corporations rights, powers, and attributes as if they were natural
persons with physical existence and capabilities to act on their own. For instance,
they have the power to sue and enter into transactions or contracts. A consequence
of a corporations separate personality is that consent by a corporation through its
representatives is not consent of the representative, personally. Its obligations,
incurred through official acts of its representatives, are its own. A stockholder,
director, or representative does not become a party to a contract just because a
corporation executed a contract through that stockholder, director or
representative. Hence, a corporations representatives are generally not bound by
the terms of the contract executed by the corporation. They are not personally
liable for obligations and liabilities incurred on or in behalf of the corporation.
This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation that an arbitration clause shall not apply to persons who were neither
parties to the contract nor assignees of previous parties, thus: A submission to
arbitration is a contract. As such, the Agreement, containing the stipulation on
arbitration, binds the parties thereto, as well as their assigns and heirs. But only
they.
As a general rule, therefore, a corporations representative who did not
personally bind himself or herself to an arbitration agreement cannot be forced to
participate in arbitration proceedings made pursuant to an agreement entered into
by the corporation. He or she is generally not considered a party to that agreement.
However, there are instances when the distinction between personalities of
directors, officers, and representatives, and of the corporation, are disregarded. The
Court calls this piercing the veil of corporate fiction. When there are allegations of
bad faith or malice against corporate directors or representatives, it becomes the
duty of courts or tribunals to determine if these persons and the corporation should
be treated as one. Without a trial, courts and tribunals have no basis for
determining whether the veil of corporate fiction should be pierced. Courts or
tribunals do not have such prior knowledge. Thus, the courts or tribunals must first
determine whether circumstances exist to warrant the courts or tribunals to
disregard the distinction between the corporation and the persons representing it.
Hence, when the directors, as in this case, are impleaded in a case against a
corporation, alleging malice or bad faith on their part in directing the affairs of the
corporation, complainants are effectively alleging that the directors and the
corporation are not acting as separate entities.
In that case, complainants have no choice but to institute only one
proceeding against the parties. Under the Rules of Court, filing of multiple suits for a

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single cause of action is prohibited. Institution of more than one suit for the same
cause of action constitutes splitting the cause of action, which is a ground for the
dismissal of the others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. A party may not institute
more than one suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action; effect of. If two or more suits
are instituted on the basis of the same cause of action, the filing of one or a
judgment upon the merits in any one is available as a ground for the dismissal of
the others. (4a)
It is because the personalities of petitioners and the corporation may later be
found to be indistinct that we rule that petitioners may be compelled to submit to
arbitration.
FVR SKILLS AND SERVICES EXPONENTS, INC. (SKILLEX), FULGENCIO V.
RANA and MONINA R. BURGOS vs. JOVERT SEV A, JOSUEL V. V
ALENCERINA, JANET ALCAZAR, ANGELITO AMPARO, BENJAMIN ANAEN, JR.,
JOHN HILBERT BARBA, BONIFACIO BATANG, JR., VALERIANO BINGCO,JR.,
RONALD CASTRO, MARLON CONSORTE, ROLANDO CORNELIO, EDITO
CULDORA, RUEL DUNCIL, MERVIN FLORES, LORD GALISIM, SOTERO GARCIA,
JR., REY GONZALES, DANTE ISIP, RYAN ISMEN, JOEL JUNIO, CARLITO LATOJA,
ZALDY MARRA, MICHAEL PANTANO, GLENN PILOTON, NORELDO QUIRANTE,
ROEL RANCE, RENANTE ROSARIO and LEONARDA TANAEL
G.R. No. 200857, October 22, 2014, J. Arturo D. Brion
A corporation is a juridical entity with legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people comprising
it. The general rule is that, obligations incurred by the corporation, acting through
its directors, officers and employees, are its sole liabilities.
A director or officer shall only be personally liable for the obligations of the
corporation, if the following conditions concur: (1) the complainant alleged in the
complaint that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2)
the complainant clearly and convincingly proved such unlawful acts, negligence or
bad faith.
In the present case, the respondents failed to show the existence of the first
requisite. They did not specifically allege in their complaint that Rana and Burgos
willfully and knowingly assented to the petitioner's patently unlawful act of forcing
the respondents to sign the dubious employment contracts in exchange for their
salaries. The respondents also failed to prove that Rana and Burgos had been guilty
of gross negligence or bad faith in directing the affairs of the corporation.
Facts:
The twenty-eight (28) respondents in this case were employees of petitioner
FVR Skills and Services Exponents, Inc. (petitioner), an independent contractor

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engaged in the business of providing janitorial and other manpower services to its
clients.
Skillex entered into a Contract of Janitorial Service (service contract) with
Robinsons Land Corporation (Robinsons). Both agreed that the petitioner shall
supply janitorial, manpower and sanitation services to Robinsons Place Ermita Mall
for a period of one year. Halfway through the service contract, the Skillex asked the
respondents to execute individual contracts which stipulated that their respective
employments shall end at the last day of the year.
The Skillex and Robinsons no longer extended their contract of janitorial
services. Consequently, the Skillex dismissed the respondents as they were project
employees whose duration of employment was dependent on the petitioner's
service contract with Robinsons.
Respondents filed a complaint for illegal dismissal with the NLRC. They
argued that they were not project employees; they were regular employees who
may only be dismissed for just or authorized causes. The LA ruled in the Skillex's
favor but was reversed by NLRC considering that the respondents had been under
the petitioner's employ for more than a year already and was affirmed by CA.
Issue:
Whether or not Rana and Burgos should be held solidarily liable with the
corporation for respondents' monetary claims having personalities separate and
distinct from the corporation.
Ruling:
No, Rana and Burgos, as the petitioner's president and general manager,
should not be held solidarily liable with the corporation for its monetary liabilities
with the respondents.
A corporation is a juridical entity with legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people comprising
it. The general rule is that, obligations incurred by the corporation, acting through
its directors, officers and employees, are its sole liabilities.
A director or officer shall only be personally liable for the obligations of the
corporation, if the following conditions concur: (1) the complainant alleged in the
complaint that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2)
the complainant clearly and convincingly proved such unlawful acts, negligence or
bad faith.
In the present case, the respondents failed to show the existence of the first
requisite. They did not specifically allege in their complaint that Rana and Burgos
willfully and knowingly assented to the petitioner's patently unlawful act of forcing
the respondents to sign the dubious employment contracts in exchange for their

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salaries. The respondents also failed to prove that Rana and Burgos had been guilty
of gross negligence or bad faith in directing the affairs of the corporation.
To hold an officer personally liable for the debts of the corporation, and thus
pierce the veil of corporate fiction, it is necessary to clearly and convincingly
establish the bad faith or wrongdoing of such officer, since bad faith is never
presumed. Because the respondents were not able to clearly show the definite
participation of Burgos and Rana in their illegal dismissal, the Court upholds the
general rule that corporate officers are not personally liable for the money claims of
the discharged employees, unless they acted with evident malice and bad faith in
terminating their employment.
DOCTRINE OF PIERCING THE CORPORATE VEIL
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS vs. DAN T. LIM,
doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES
G.R. No. 206806, June 25, 2014, J. Leonen
The corporate existence may be disregarded where the entity is formed or
used for non-legitimate purposes, such as to evade a just and due obligation, or to
justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions, in which case, the fiction will
be disregarded and the individuals composing it and the two corporations will be
treated as identical. In the case at bar, when petitioner Arco Pulp and Papers
obligation to Lim became due and demandable, she not only issued an unfunded
check but also contracted with a third party in an effort to shift petitioner Arco Pulp
and Papers liability. She unjustifiably refused to honor petitioner corporations
obligations to respondent. These acts clearly amount to bad faith. In this instance,
the corporate veil may be pierced, and petitioner Santos may be held solidarily
liable with petitioner Arco Pulp and Paper.
Facts:
Dan T. Lim works in the business of supplying scrap papers, cartons, and
other raw materials, under the name Quality Paper and Plastic Products,
Enterprises, to factories engaged in the paper mill business. Lim delivered scrap
papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. through its Chief
Executive Officer and President, Candida A. Santos. The parties allegedly agreed
that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw materials
or deliver to him their finished products of equivalent value.
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and
Paper issued a post-dated check as partial payment, with the assurance that the
check would not bounce. When he deposited the check, it was dishonored for being
drawn against a closed account. On the same day, Arco Pulp and Paper and a
certain Eric Sy executed a memorandum of agreement where Arco Pulp and Paper
bound themselves to deliver their finished products to Megapack Container
Corporation, owned by Eric Sy, for his account. According to the memorandum, the

Page 23 of 128

raw materials would be supplied by Dan T. Lim, through his company, Quality Paper
and Plastic Products.
Despite repeated demands by Lim, Arco Pulp and Paper did not pay. Lim filed
a complaint for collection of sum of money with prayer for attachment with the RTC.
The trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed
the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished Arco Pulp and
Papers obligation to. Lim. The CA reversed said decision.
Issue:
Whether or not Candida A. Santos was solidarily liable with Arco Pulp and
Paper Co., Inc.
Ruling:
Yes.
In Heirs of Fe Tan Uy v. International Exchange Bank, the Court has ruled:
Basic is the rule in corporation law that a corporation is a juridical entity
which is vested with a legal personality separate and distinct from those acting for
and in its behalf and, in general, from the people comprising it. Following this
principle, obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A director, officer or employee of a
corporation is generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues.
Before a director or officer of a corporation can be held personally liable for
corporate obligations, however, the following requisites must concur: (1) the
complainant must allege in the complaint that the director or officer assented to
patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and (2) the complainant must clearly and convincingly
prove such unlawful acts, negligence or bad faith.
As a general rule, directors, officers, or employees of a corporation cannot be
held personally liable for obligations incurred by the corporation. However, this veil
of corporate fiction may be pierced if complainant is able to prove, as in this case,
that (1) the officer is guilty of negligence or bad faith, and (2) such negligence or
bad faith was clearly and convincingly proven.
Here, Santos entered into a contract with respondent in her capacity as the
President and Chief Executive Officer of Arco Pulp and Paper. She also issued the
check in partial payment of petitioner corporations obligations to respondent on
behalf of petitioner Arco Pulp and Paper. This is clear on the face of the check
bearing the account name, "Arco Pulp & Paper, Co., Inc." Any obligation arising from

Page 24 of 128

these acts would not, ordinarily, be Santos personal undertaking for which she
would be solidarily liable with petitioner Arco Pulp and Paper.
The Court found, however, that the corporate veil must be pierced. In Livesey
v. Binswanger Philippines:
Piercing the veil of corporate fiction is an equitable doctrine developed
to address situations where the separate corporate personality of a
corporation is abused or used for wrongful purposes. Under the
doctrine, the corporate existence may be disregarded where the entity
is formed or used for non-legitimate purposes, such as to evade a just
and due obligation, or to justify a wrong, to shield or perpetrate fraud
or to carry out similar or inequitable considerations, other unjustifiable
aims or intentions, in which case, the fiction will be disregarded and
the individuals composing it and the two corporations will be treated as
identical.
We agree with the Court of Appeals. Petitioner Santos cannot be
allowed to hide behind the corporate veil. When petitioner Arco Pulp
and Papers obligation to respondent became due and demandable,
she not only issued an unfunded check but also contracted with a third
party in an effort to shift petitioner Arco Pulp and Papers liability. She
unjustifiably refused to honor petitioner corporations obligations to
respondent. These acts clearly amount to bad faith. In this instance,
the corporate veil may be pierced, and petitioner Santos may be held
solidarily liable with petitioner Arco Pulp and Paper.
WPM INTERNATIONAL TRADING , INC. and WARLITO P. MANLAPAZ vs. FE
CORAZON LABAYEN
G.R. No. 182770, September 17, 2014, J. Brion
When an officer owns almost all of the stocks of a corporation, it does not
ipso facto warrant the application of the principle of piercing the corporate veil
unless it is proven that the officer has complete dominion over the corporation.
Facts:
WPM International Trading, Inc. (WPM) is engaged in the restaurant business,
with Warlito P. Manlapaz as its president. WPM entered into a management
agreement with the Labayen, by virtue of which the Labayen was authorized to
operate, manage and rehabilitate Quickbite, a restaurant owned and operated by
WPM. As part of her tasks, the respondent looked for a contractor who would
renovate the two existing Quickbite outlets. She engaged the services of CLN
Engineering Services to renovate one of the outlets at the cost of P432,876.02.
However, out of the P432,876.02 renovation cost, only the amount of P320,000.00
was paid to CLN, leaving a balance of P112,876.02.
CLN filed a complaint for sum of money and damages before the RTC against
the respondent and Manlapaz. CLN later amended the complaint to exclude
Manlapaz as defendant. Labayen was declared in default for her failure to file a

Page 25 of 128

responsive pleading. The RTC found the respondent liable to pay CLN actual
damages in the amount of P112,876.02 with 12% interest per annum and 20% of
the amount recoverable as attorneys fees.
As a result, Labayen instituted a complaint for damages against WPM and
Manlapaz. She alleged that she should be entitled to reimbursement. Labayen also
contended that her participation in the management agreement was limited only to
introducing Manlapaz to CLNs general manager and that it was actually Manlapaz
and the general manager who agreed on the terms and conditions of the
agreement. Manlapaz, on the other hand, claimed Labayen had entered into the
renovation agreement with CLN in her own personal capacity and that since she had
exceeded her authority as agent of WPM, the renovation agreement should only
bind her. Further, WPM has a separate and distinct personality, Manlapaz cannot be
made liable for the Labayens claim.
RTC held that Labayen was entitled to indemnity from Manlapaz. The RTC
found that based on the records, there is a clear indication that WPM is a mere
instrumentality or business conduit of Manlapaz and as such, WPM and Manlapaz
are considered one and the same. The RTC also found that Manlapaz had complete
control over WPM considering that he is its chairman, president and treasurer at the
same time. The RTC thus concluded that Manlapaz is liable in his personal capacity
to reimburse the respondent the amount she paid to CLN in connection with the
renovation agreement. CA affirmed the decision of the RTC applying the principle of
piercing the veil of corporate fiction.
Issue:
Whether or not CA correctly applied the principle of piercing the veil of
corporate fiction
Ruling:
No, the CA erred in applying the doctrine.
The doctrine of piercing the corporate veil applies only in three (3) basic
instances, namely: a) when the separate and distinct corporate personality defeats
public convenience, as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation; b) in fraud cases, or when the corporate entity is
used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego
cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and
controlled and its affairs so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
Piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements, namely:
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to

Page 26 of 128

this transaction had at the time no separate mind, will or existence of


its own;
(2) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of. The absence of any of
these elements prevents piercing the corporate veil.
In the present case, the attendant circumstances do not establish that WPM is
a mere alter ego of Manlapaz. Aside from the fact that Manlapaz was the principal
stockholder of WPM, records do not show that WPM was organized and controlled,
and its affairs conducted in a manner that made it merely an instrumentality,
agency, conduit or adjunct of Manlapaz. As held in Martinez v. Court of Appeals, the
mere ownership by a single stockholder of even all or nearly all of the capital stocks
of a corporation is not by itself a sufficient ground to disregard the separate
corporate personality. To disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly established.
In this connection, the Court stresses that the control necessary to invoke the
instrumentality or alter ego rule is not majority or even complete stock control but
such domination of finances, policies and practices that the controlled corporation
has, so to speak, no separate mind, will or existence of its own, and is but a conduit
for its principal. The control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made.
Here, Labayen failed to prove that Manlapaz, acting as president, had
absolute control over WPM. Even granting that he exercised a certain degree of
control over the finances, policies and practices of WPM, in view of his position as
president, chairman and treasurer of the corporation, such control does not
necessarily warrant piercing the veil of corporate fiction since there was not a single
proof that WPM was formed to defraud CLN or the respondent, or that Manlapaz was
guilty of bad faith or fraud.
On the contrary, the evidence establishes that CLN and Labayen knew and
acted on the knowledge that they were dealing with WPM for the renovation of the
latters restaurant, and not with Manlapaz. That WPM later reneged on its monetary
obligation to CLN, resulting to the filing of a civil case for sum of money against the
respondent, does not automatically indicate fraud, in the absence of any proof to
support it.
HACIENDA CATAYWA/MANUEL VILLANUEVA, et al. vs. ROSARIO LOREZO
G.R. No. 179640, March 18, 2015, J. Peralta
This Court agrees with the petitioners that there is no need to pierce the
corporate veil. Respondent failed to substantiate her claim that Mancy and Sons

Page 27 of 128

Enterprises, Inc. and Manuel and Jose Marie Villanueva are one and the same. She
based her claim on the SSS form wherein Manuel Villanueva appeared as employer.
However, this does not prove, in any way, that the corporation is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, or when it is
made as a shield to confuse the legitimate issues, warranting that its separate and
distinct personality be set aside.
Facts:
Rosario Lorezo received, upon inquiry, a letter from the Social Security
System, informing her that she cannot avail of their retirement benefits since per
their record she has only paid 16 months. Such is 104 months short of the
minimum requirement of 120 months payment to be entitled to the benefit.
Aggrieved, Lorezo then filed her Amended Petition before the SSC, alleging
that she was employed as laborer in Hda. Cataywa managed by Jose Marie
Villanueva in 1970 but was reported to the SSS only in 1978. She alleged that SSS
contributions were deducted from her wages from 1970 to 1995, but not all were
remitted to the SSS which, subsequently, caused the rejection of her claim. She also
impleaded Talisay Farms, Inc. by virtue of its Investment Agreement with Mancy and
Sons Enterprises. She also prayed that the veil of corporate fiction be pierced since
she alleged that Mancy and Sons Enterprises and Manuel and Jose Marie Villanueva
are
one
and
the
same.
Petitioners Manuel and Jose Villanueva refuted in their answer, the
allegation that not all contributions of respondent were remitted. Petitioners alleged
that all farm workers of Hda. Cataywa were reported and their contributions were
duly paid and remitted to SSS. It was the late Domingo Lizares, Jr. who managed
and administered the hacienda. While, Talisay Farms, Inc. filed a motion to dismiss
on the ground of lack of cause of action in the absence of an allegation that there
was an employer-employee relationship between Talisay Farms and respondent.
The SSC found that Lorezo was a regular employee subject to compulsory
coverage of Hda. Cataywa/Manuel Villanueva/ Mancy and Sons Enterprises, Inc.
within the period of 1970 to February 25, 1990. The SSC denied petitioners' Motion
for Reconsideration. The petitioners, then, elevated the case before the CA where
the case was dismissed outright because the signatory to the Verification failed to
attach his authority to sign for and in behalf of the other Petitioners and the
certified true copies of pleadings and documents relevant and pertinent to the
petition are incomplete.
Issues:
Whether or not the corporate veil should be pierced
Ruling:

No. It was held in Rivera v. United Laboratories, Inc. that

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While a corporation may exist for any lawful purpose, the law will regard it as
an association of persons or, in case of two corporations, merge them into one,
when its corporate legal entity is used as a cloak for fraud or illegality. This is the
doctrine of piercing the veil of corporate fiction. The doctrine applies only when
such corporate fiction is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, or when it is made as a shield to confuse the legitimate
issues, or where a corporation is the mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. To disregard the separate juridical personality of a corporation,
the wrongdoing must be established clearly and convincingly. It cannot be
presumed.
This Court has cautioned against the inordinate application of this doctrine,
reiterating the basic rule that "the corporate veil may be pierced only if it becomes
a shield for fraud, illegality or inequity committed against a third person.
The Court has expressed the language of piercing doctrine when applied to
alter ego cases, as follows: Where the stock of a corporation is owned by one
person whereby the corporation functions only for the benefit of such individual
owner, the corporation and the individual should be deemed the same.
This Court agrees with the petitioners that there is no need to pierce the
corporate veil. Respondent failed to substantiate her claim that Mancy and Sons
Enterprises, Inc. and Manuel and Jose Marie Villanueva are one and the same. She
based her claim on the SSS form wherein Manuel Villanueva appeared as employer.
However, this does not prove, in any way, that the corporation is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, or when it is made
as a shield to confuse the legitimate issues, warranting that its separate and distinct
personality be set aside. Also, it was not alleged nor proven that Mancy and Sons
Enterprises, Inc. functions only for the benefit of Manuel Villanueva, thus, one
cannot be an alter ego of the other.
BY-LAWS

INCORPORATION AND ORGANZATION

FOREST HILLS GOLF AND COUNTRY CLUB, INC. vs. GARDPRO, INC.
G.R. No. 164686, October 22, 2014, J. Bersamin
The relevant provisions of the articles of incorporation and the by-laws of
Forest Hills governed the relations of the parties as far as the issues between them
were concerned. Indeed, the articles of incorporation of Forest Hills defined its
charter as a corporation and the contractual relationships between Forest Hills and
the State, between its stockholders and the State, and between Forest Hills and its
stockholder; hence, there could be no gainsaying that the contents of the articles of
incorporation were binding not only on Forest Hills but also on its shareholders. On
the other hand, the by-laws were the self-imposed rules resulting from the
agreement between Forest Hills and its members to conduct the corporate business
in a particular way. In that sense, the by-laws were the private statutes by which
Forest Hills was regulated, and would function. The charter and the by-laws were
thus the fundamental documents governing the conduct of Forest Hills corporate
Page 29 of 128

affairs; they established norms of procedure for exercising rights, and reflected the
purposes and intentions of the incorporators. Until repealed, the by-laws were a
continuing rule for the government of Forest Hills and its officers, the proper
function being to regulate the transaction of the incidental business of Forest Hills.
The by-laws constituted a binding contract as between Forest Hills and its members,
and as between the members themselves. Every stockholder governed by the bylaws was entitled to access them. The by-laws were self-imposed private laws
binding on all members, directors and officers of Forest Hills. The prevailing rule is
that the provisions of the articles of incorporation and the by-laws must be strictly
complied with and applied to the letter.
Facts:
Petitioner Forest Hills Golf and Country Club, Inc. (interchangeably Forest Hills
or Club), a non-profit stock corporation, was established to promote social,
recreational and athletic activities among its members. It was an exclusive and
private club organized for the sole benefit of its members. Fil-Estate Properties, Inc.,
a party to a Project Agreement to develop the Forest Hills Residential Estates and
the Forest Hills Golf and Country Club, undertook to market the golf club shares of
Forest Hills for a fee. In July 1995, Fil-Estate Properties, Inc. (FEPI) assigned its rights
and obligations under the Project Agreement to Fil- Estate Golf and Development,
Inc. (FEGDI).
In 1995, FEPI and FEGDI engaged Fil-Estate Marketing Associates Inc., (FEMAI)
to market and offer for sale the shares of stocks of Forest Hills. Leandro de Mesa,
the President of FEMAI, oriented the sales staff on the information that would
usually be inquired about by prospective buyers. He made it clear that membership
in the Club was a privilege, such that purchasers of shares of stock would not
automatically become members of the Club, but must apply for and comply with all
the requirements in order to qualify them for membership, subject to the approval
of the Board of Directors.
Gardpro, Inc. (Gardpro) bought class C common shares of stock, which were
special corporate shares that entitled the registered owner to designate two
nominees or representatives for membership in the Club. Subsequently, Ramon
Albert, the General Manager of the Club, notified the shareholders that it was
already accepting applications for membership. In that regard, Gardpro designated
Fernando R. Martin and Rolando N. Reyes to be its corporate nominees; hence, the
two applied for membership in the Club. Forest Hills charged them membership fees
of P50, 000.00 each, prompting Martin to immediately call up Albert and complain
about being thus charged despite having been assured that no such fees would be
collected from them. With Albert assuring that the fees were temporary, both
nominees of Gardpro paid the fees. At that time, the P45, 000.00 membership fees
of corporate members were increased to P75,000.00 per nominee by virtue of the
resolution of the Board of Directors. Any nominee who paid the fees within a
specified period was entitled to a discount of P25, 000.00. Both nominees of
Gardpro were then admitted as members upon approval of their applications by the
Board of Directors. Later, Gardpro decided to change its designated nominees, and
Forest Hills charged Gardpro new membership fees of P75, 000.00 per nominee.
When Gardpro refused to pay, the replacement did not take place.

Page 30 of 128

Later, Gardpro filed a complaint in the SEC. SEC Hearing Officer rendered
decision in favor of Gardpro which were later affirmed by both the SEC En Bank and
the CA.
Issue:
Whether or not the replacement nominees of Gardpro are required to pay
membership fees.
Ruling:
No. Forest Hills was not authorized under its articles of incorporation and bylaws to collect new membership fees for the replacement nominees of Gardpro.
There is no question that Gardpro held class C common stocks that entitled
it to two memberships in the Club. Its nominees could be admitted as regular
members upon approval of the Board of Directors but only one nominee for each
class C share as designated in the resolution could vote as such. A regular
member was then entitled to use all the facilities and privileges of the Club. In that
regard, Gardpro could only designate as its nominees/representatives its officers
whose functions and office were defined by its own by-laws.
The membership in the Club was a privilege, it being clear that the mere
purchase of a share in the Club did not immediately qualify a juridical entity for
membership. Admission for membership was still upon the favorable action of the
Board of Directors of the Club. Under Section 2.2.7 of its by-laws, the application
form was accomplished by the chairman of the board, president or chief executive
officer of the applicant juridical entity. The designated nominees also accomplished
their respective application forms, duly proposed and seconded, and the nominees
were evaluated as to their qualifications. The nominees automatically became
ineligible for membership once they ceased to be officers of the corporate member
under its by-laws upon certification of such loss of tenure by a responsible officer of
the corporate member.
Corporations buy shares in clubs in order to invest for earnings. Their
purchases may also be to reward their corporate executives by having them enjoy
the facilities and perks concomitant to the club memberships. When Gardpro
purchased and registered its ownership of the class C common shares, it did not
only invest for earnings because it also became entitled to nominate two of its
officers in the Club as set forth in its seventh purpose of the articles of incorporation
and Section 2.2.2 of the by-laws.
Golf clubs usually sell shares to individuals and juridical entities in order to
raise capital for the construction of their recreational facilities. In that regard, golf
clubs accept juridical entities to become regular members, and allow such entities
to designate corporate nominees because only natural persons can enjoy the sports
facilities. In the context of this arrangement, Gardpros two nominees held playing
rights. But the articles of incorporation of Forest Hills and Section 2.2.2 of its by-laws
recognized the right of the corporate member to replace the nominees, subject to
the payment of the transfer fee in such amount as the Board of Directors

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determined for every change. The replacement could take place for any of the
following reasons, namely: (a) if the nominee should cease to be an officer of the
corporate member; or (b) if the corporate member should request the replacement.
In case of a replacement, the playing rights would also be transferred to the new
nominees.
The relevant provisions of the articles of incorporation and the by-laws of
Forest Hills governed the relations of the parties as far as the issues between them
were concerned. Indeed, the articles of incorporation of Forest Hills defined its
charter as a corporation and the contractual relationships between Forest Hills and
the State, between its stockholders and the State, and between Forest Hills and its
stockholder; hence, there could be no gainsaying that the contents of the articles of
incorporation were binding not only on Forest Hills but also on its shareholders. On
the other hand, the by-laws were the self-imposed rules resulting from the
agreement between Forest Hills and its members to conduct the corporate business
in a particular way. In that sense, the by-laws were the private statutes by which
Forest Hills was regulated, and would function. The charter and the by-laws were
thus the fundamental documents governing the conduct of Forest Hills corporate
affairs; they established norms of procedure for exercising rights, and reflected the
purposes and intentions of the incorporators. Until repealed, the by-laws were a
continuing rule for the government of Forest Hills and its officers, the proper
function being to regulate the transaction of the incidental business of Forest Hills.
The by-laws constituted a binding contract as between Forest Hills and its members,
and as between the members themselves. Every stockholder governed by the bylaws was entitled to access them. The by-laws were self-imposed private laws
binding on all members, directors and officers of Forest Hills. The prevailing rule is
that the provisions of the articles of incorporation and the by-laws must be strictly
complied with and applied to the letter.
Anent the second issue, the Court disagrees with the contention of Forest
Hills that the CA encroached upon its prerogative to determine its own rules and
procedures and to decide all issues on the construction of its articles of
incorporation and by-laws. On the contrary, the CA acted entirely within its legal
competence to decide the issues between the parties. The complaint of Gardpro
stated a cause of action, and thus contained the operative acts that gave rise to its
remedial right against Forest Hills. The cause of action required not only the
interpretation of contracts and the application of corporate laws but also the
application of the civil law itself, particularly its tenets on unjust enrichment and
those regulating property rights arising from ownership. If Forest Hills were allowed
to charge nominees membership fees, and then to still charge their replacement
nominees every time a corporate member changed its nominees, Gardpro would be
unduly deprived of its full enjoyment and control of its property even as the former
would be unjustly enriched.
MEETINGS

BOARD OF DIRECTORS AND TRUSTEES


LOPEZ
REALTY, INC. AND ASUNCION LOPEZ-GONZALES vs. SPOUSES REYNALDO
TANJANGCO AND MARIA LUISA ARGUELLES-TANJANGCO
G.R. No. 154291, November 12, 2014, J. Reyes

Page 32 of 128

The petitioner assails the validity of sale of shares of stocks to the


respondents claiming that there was no compliance with the requirement of prior
notice to the Board of Directors when the Board Resolution authorizing the sale to
the respondent spouses were promulgated. The Supreme Court ruled that the
general rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general
law. However, the actions taken in such a meeting by the directors or trustees may
be ratified expressly or impliedly.
Facts:
The petitioner Lopez Realty, Inc. issued a Board Resolution authorizing Arturo,
a member of the Board of Directors of the corporation, to negotiate with the
Tanjanco spouses for the sale of the shares of LRI (Lopez Realty Corporation).
Because of this, Arturo and the spouses executed a Deed of Sale for the shares for a
consideration of Php3.6M. However, Asuncion, another Board of Director of the said
corporation, submitted a letter requesting the Board to defer any transaction with
Tanjanco as she was not apprised and given notice of the said transaction. Despite
this, the execution of the Deed of Absolute Sale between Arturo and spouses
Tanjanco proceeded. Asuncion then filed a complaint for the Annulment of the Deed
of Sale with a prayer for a writ of preliminary injuction in the Regional Trial Court.
Asuncion alleges that she was neither notified nor apprised of the on-going sale of
the shares of LRI.
The Regional Trial Court granted the prayer of Asuncion and declared the
subject deed null and void for failure to comply with the strict procedural
requirements. The RTC ruled that for a Board Resolution authorizing the sale of
share to be valid, it is necessary that notice must be sent to the Board of Directors
at least one day prior to the said board meeting. However, on appeal, the Court of
Appeals reversed and set aside the decision of the RTC. Hence, the current petition.
Issue:
Whether or not the sale of the shares of stock of LRI to respondent spouses
Tanjanco are valid pursuant to the Board Resolution promulgated by LRI despite lack
of notice to Asuncion, one of its Board of Directors.
Ruling:
The sale of the shares of stock of LRI to the respondent spouses Tanjanco is
deemed valid because the Board Resolution from which it is derived is also valid
despite the lack of the required prior notice to its Board of Directors. The Supreme
Court reinstated the decision of the RTC and affirmed the decision of the Court of
Appeals.
Section 53 of the Corporation Code provides for the following:

Page 33 of 128

SEC. 53. Regular and special meetings of directors or trustees. Regular


meetings of the board of directors or trustees of every corporation shall be
held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any
time upon call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or
outside of the Philippines, unless the by-laws provide otherwise. Notice of
regular or special meetings stating the date, time and place of the meeting
must be sent to every director or trustee at least one (1) day prior to the
scheduled meeting, unless otherwise provided by the by-laws. A director or
trustee may waive this requirement, either expressly or impliedly.
The general rule is that a corporation, through its board of directors, should
act in the manner and within the formalities, if any, prescribed by its charter or by
the general law. Thus, directors must act as a body in a meeting called pursuant to
the law or the corporation's bylaws, otherwise, any action taken therein may be
questioned by any objecting director or shareholder.
However, the actions taken in such a meeting by the directors or trustees
may be ratified expressly or impliedly. "Ratification means that the principal
voluntarily adopts, confirms and gives sanction to some unauthorized act of its
agent on its behalf. It is this voluntary choice, knowingly made, which amounts to a
ratification of what was theretofore unauthorized and becomes the authorized act of
the party so making the ratification. The substance of the doctrine is confirmation
after conduct, amounting to a substitute for a prior authority. Ratification can be
made either expressly or impliedly. Implied ratification may take various forms
like silence or acquiescence, acts showing approval or adoption of the act, or
acceptance and retention of benefits flowing therefrom."
In the present case, the ratification was expressed through the July 30, 1982
Board Resolution. Asuncion claims that the July 30, 1982 Board Resolution did not
ratify the Board Resolution dated August 17, 1981 for lack of the required number of
votes because Juanito is not entitled to vote while Leo voted "no" to the ratification
of the sale even if the minutes stated otherwise.
RIGHT TO
INSPECT

STOCKHOLDERS AND MEMBERS

ADERITO Z. YUJUICO AND BONIFACIO C. SUMBILLA vs. CEZAR T. QUIAMBAO


AND ERIC C. PILAPIL
G.R. No. 180416, June 02, 2014, J. Perez
A criminal action based on the violation of a stockholder's right to examine or
inspect the corporate records and the stock and transfer hook of a corporation
under the second and fourth paragraphs of Section 74 of the Corporation Code can
only he maintained against corporate officers or any other persons acting on behalf
of such corporation. The complaint and the evidence Quiambao and Sumbilla
submitted during preliminary investigation do not establish that Quiambao and

Page 34 of 128

Pilapil were acting on behalf of STRADEC. Violations of Section 74 contemplates a


situation wherein a corporation, acting thru one of its officers or agents, denies the
right of any of its stockholders to inspect the records, minutes and the stock and
transfer book of such corporation. Thus, the dismissal is valid.
Facts:
Strategic Alliance Development Corporation is a domestic corporation
operating as a business development and investment company. On 1 March 2004,
during the annual stockholder's meeting of STRADEC, Aderito Z. Yujuico was elected
as president and chairman of the company. Yujuico replaced Cezar T. Quiambao,
who had been the president and chairman of STRADEC since 1994. STRADEC
appointed petitioner Bonifacio C. Sumbilla as treasurer and one Joselito John G.
Blando as corporate secretary. Blando replaced respondent Eric C. Pilapil, the
previous corporate secretary of STRADEC. On 12 August 2005, Yujuico and Sumbilla
filed a criminal complaint against Quiambao and Pilapil and one Giovanni T.
Casanova before the Office of the City Prosecutor of Pasig City. The complaint
accuses Quiambao, Pilapil and Casanova of violating Section 74 in relation to
Section 144 of the Corporation Code.
That during the stockholders' meeting, Yujuico--as newly elected president
and chairman of STRADEC--demanded Quiambao for the turnover of the corporate
records of the company, particularly the accounting files, ledgers, journals and other
records of the corporation's business. Quiambao refused. After the stockholders'
meeting, Quiambao and Casanova caused the removal of the corporate records of
STRADEC from the company's offices in Pasig City. Upon his appointment as
corporate secretary, Blando likewise demanded Pilapil for the turnover of the stock
and transfer book of STRADEC. Pilapil refused. On 25 June 2004, Pilapil proposed to
Blando to have the stock and transfer book deposited in a safety deposit box with
Equitable Pel Bank. Blando acceded to the proposal and the stock and transfer book
was deposited in a safety deposit box with the bank identified. It was agreed that
the safety deposit box may only be opened in the presence of both Quiambao and
Blando. Quiambao and Pilapil withdrew the stock and transfer book from the safety
deposit box and brought it to the offices of the Stradcom Corporation in Quezon City.
Quiambao thereafter asked Blando to proceed to the STRADCOM offices. Upon
arriving thereat, Quiambao pressured Blando to make certain entries in the stock
and transfer books. After making such entries, Blando again demanded that he be
given possession of the stock and transfer book. Quiambao refused.
Blando received an order issued by the RTC of Pasig City, which directed him
to cancel the entries he made in the stock and transfer book. Blando wrote letters to
Quiambao and Pilapil once again demanding for the turnover of the stock and
transfer book. Pilapil replied where he appeared to agree to Blando's demand.
However, Quiambao still refused to turnover the stock and transfer book to Blando.
Blando was once again constrained to agree to a proposal by Pilapil to have the
stock and transfer book deposited with the RTC of Pasig City. The said court,
however, refused to accept such deposit on the ground that it had no place for
safekeeping.

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Since Quiambao and Pilapil still refused to turnover the stock and transfer
book, Blando again acceded to have the book deposited in a safety deposit box, this
time, with the Export and Industry Bank. Yujuico and Sumbilla theorize that the
refusal by the Quiambao, Pilapil and Casanova to turnover STRADEC's corporate
records and stock and transfer book violates their right, as stockholders, directors
and officers of the corporation, to inspect such records and book under Section 74
of the Corporation Code and may be held criminally liable pursuant to Section 144
of the Corporation Code.
The MeTC partially granted the Urgent Omnibus Motion. The MeTC ordered
the issuance of a warrant of arrest against Quiambao and Pilapil. The RTC issued a
TRO enjoining the MeTC from conducting further proceedings in Criminal Case No.
89724.
The RTC granted Quiambao and Pilapils certiorari petition and directing the
dismissal of Criminal Case No. 89724. According to the RTC, the MeTC committed
grave abuse of discretion in issuing a warrant of arrest against Quiambao and
Pilapil. The RTC opined that refusing to allow inspection of the stock and transfer
book, as opposed to refusing examination of other corporate records, is not
punishable as an offense under the Corporation Code. The petitioners moved for
reconsideration, but the RTC remained steadfast. Hence, this petition by Yujuico and
Sumbilla.
Issue:
Whether or not the RTCs refusal to allow inspection of the stock and transfer
book of a corporation is not a punishable offense under the Corporation Code, such
a refusal still amounts to a violation of Section 74 of the Corporation Code, for which
Section 144 of the same code prescribes a penalty.cra1aw
Ruling:
No, there is no violation of the Corporation, thus, dismissal of the complaint is
warranted.
The act of refusing to allow inspection of the stock and transfer book of a
corporation, when done in violation of Section 74(4) of the Corporation Code, is
punishable as an offense under Section 144 of the same code. In justifying this
conclusion, the RTC seemingly relied on the fact that, under Section 74 of the
Corporation Code, the application of Section 144 is expressly mentioned only in
relation to the act of "refusing to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from the
corporation's records or minutes" that excludes its stock and transfer book, the
same does not mean that the latter section no longer applies to any other possible
violations of the former section. It must be emphasized that Section 144 already
purports to penalize "violations" of "any provision" of the Corporation Code "not
otherwise specifically penalized therein." Hence, we find inconsequential the fact
that that Section 74 expressly mentions the application of Section 144 only to a
specific act, but not with respect to the other possible violations of the former
section.

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A criminal action based on the violation of a stockholder's right to examine or


inspect the corporate records and the stock and transfer hook of a corporation
under the second and fourth paragraphs of Section 74 of the Corporation Code can
only he maintained against corporate officers or any other persons acting on behalf
of such corporation. The submissions of the Yujuico and Sumbilla during the
preliminary investigation clearly suggest that Quiambao and Pilapil are neither in
relation to STRADEC. Thus, we sustain the dismissal of Criminal Case No. 89724.
Criminal Case No. 89724 accuses Quiambao and Pilapil of denying Yujuico
and Sumbilla's right to examine or inspect the corporate records and the stock and
transfer book of STRADEC. It is thus a criminal action that is based on the violation
of the second and fourth paragraphs of Section 74 of the Corporation Code. A
perusal of the second and fourth paragraphs of Section 74, as well as the first
paragraph
of
the
same
section,
reveal
that
they
are
provisions
that obligates a corporation: they prescribe what books or records a corporation is
required to keep; where the corporation shall keep them; and what are the other
obligations of the corporation to its stockholders or members in relation to such
books and records. Hence, by parity of reasoning, the second and fourth
paragraphs of Section 74, including the first paragraph of the same section, can
only be violated by a corporation.
It is clear then that a criminal action based on the violation of the second or
fourth paragraphs of Section 74 can only be maintained against corporate officers
or such other persons that are acting on behalf of the corporation. Violations of
Section 74 contemplates a situation wherein a corporation, acting thru one of its
officers or agents, denies the right of any of its stockholders to inspect the records,
minutes and the stock and transfer book of such corporation.
The problem with the Yujuico and Sumbilla's complaint and the evidence that
they submitted during preliminary investigation is that they do not establish that
Quiambao and Pilapil were acting on behalf of STRADEC. Quiambao and Sumbilla
are not actually invoking their right to inspect the records and the stock and
transfer book of STRADEC under the second and fourth paragraphs of Section
74. What they seek to enforce is the proprietary right of STRADEC to be in
possession of such records and book. Such right, though certainly legally
enforceable by other means, cannot be enforced by a criminal prosecution based on
a violation of the second and fourth paragraphs of Section 74.
DERIVATIVE SUIT
NESTOR CHING and ANDREW WELLINGTON vs. SUBIC BAY GOLF AND
COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH
alias JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD R. SUAREZ
G.R. No. 174353, September 10, 2014, J. LEONARDO-DE CASTRO
A derivative suit cannot prosper without first complying with the legal
requisites for its institution. Thus, a complaint which contained no allegation
whatsoever of any effort to avail of intra-corporate remedies allows the court to
dismiss it, even motu proprio. Indeed, even if petitioners thought it was futile to

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exhaust intra-corporate remedies, they should have stated the same in the
Complaint and specified the reasons for such opinion. The requirement of this
allegation in the Complaint is not a useless formality which may be disregarded at
will.
Facts:
On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a
Complaint with the RTC of Olongapo City on behalf of the members of Subic Bay
Golf and Country Club, Inc. (SBGCCI) against the said country club and its Board of
Directors and officers under the provisions of Presidential Decree No. 902-A in
relation to Section 5.2 of the Securities Regulation Code. The complaint alleged that
the defendant corporation sold shares to plaintiffs at US$22,000.00 per share,
presenting to them the Articles of Incorporation. However, on June 27, 1996, an
amendment to the Articles of Incorporation was approved by the Securities and
Exchange Commission (SEC).
Petitioners claimed in the Complaint that SBGCCI did not disclose to them the
above amendment which allegedly makes the shares non-proprietary, as it takes
away the right of the shareholders to participate in the pro-rata distribution of the
assets of the corporation after its dissolution. According to petitioners, this is in
fraud of the stockholders who only discovered the amendment when they filed a
case for injunction to restrain the corporation from suspending their rights to use all
the facilities of the club. Furthermore, petitioners alleged that the Board of Directors
and officers of the corporation did not call any stockholders meeting from the time
of the incorporation, in violation of Section 50 of the Corporation Code and the ByLaws of the corporation. Neither did the defendant directors and officers furnish the
stockholders with the financial statements of the corporation nor the financial report
of the operation of the corporation in violation of Section 75 of the Corporation
Code. Petitioners also claim SBGCCI presented to the SEC an amendment to the ByLaws of the corporation suspending the voting rights of the shareholders except for
the five founders shares. Said amendment was allegedly passed without any
stockholders meeting or notices to the stockholders in violation of Section 48 of the
Corporation Code.
The Complaint furthermore enumerated several instances of fraud in the
management of the SBGCCI allegedly committed by the Board of Directors and
officers of the corporation.
The RTC issued an Order dismissing the Complaint. The RTC held that the
action is a derivative suit. Petitioners Ching and Wellington elevated the case to the
Court of Appeals which rendered the assailed Decision affirming that of the RTC.
Hence, petitioners resort to the present Petition for Review, wherein they
argue that the Complaint they filed with the RTC was not a derivative suit.
Issue:
Whether or not the Complaint is indeed a derivative suit.

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Ruling:
The nature of an action, as well as which court or body has jurisdiction over
it, is determined based on the allegations contained in the complaint of the plaintiff,
irrespective of whether or not the plaintiff is entitled to recover upon all or some of
the claims asserted therein.
While there were allegations in the Complaint of fraud in their subscription
agreements, such as the misrepresentation of the Articles of Incorporation,
petitioners do not pray for the rescission of their subscription or seek to avail of
their appraisal rights. Instead, they ask that defendants be enjoined from managing
the corporation and to pay damages for their mismanagement. Petitioners only
possible cause of action as minority stockholders against the actions of the Board of
Directors is the common law right to file a derivative suit. The legal standing of
minority stockholders to bring derivative suits is not a statutory right, there being
no provision in the Corporation Code or related statutes authorizing the same, but is
instead a product of jurisprudence based on equity. However, a derivative suit
cannot prosper without first complying with the legal requisites for its institution.
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra Corporate
Controversies imposes the following requirements for derivative suits:
(1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity
in the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership
to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
The RTC dismissed the Complaint for failure to comply with the second and
fourth requisites above.
Upon a careful examination of the Complaint, this Court finds that the same
should not have been dismissed on the ground that it is a nuisance or harassment
suit. Although the shareholdings of petitioners are indeed only two out of the 409
alleged outstanding shares or 0.24%, the Court has held that it is enough that a
member or a minority of stockholders file a derivative suit for and in behalf of a
corporation.
With regard, however, to the second requisite, we find that petitioners failed
to state with particularity in the Complaint that they had exerted all reasonable
efforts to exhaust all remedies available under the articles of incorporation, by-laws,
and laws or rules governing the corporation to obtain the relief they desire. The
Complaint contained no allegation whatsoever of any effort to avail of intracorporate remedies. Indeed, even if petitioners thought it was futile to exhaust
intra-corporate remedies, they should have stated the same in the Complaint and
specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the
Complaint, even motu proprio, in accordance with the Interim Rules. The

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requirement of this allegation in the Complaint is not a useless formality which may
be disregarded at will.

ALFREDO L. VILLAMOR, JR. vs. JOHN S. UMALE, IN SUBSTITUTION OF


HERNANDO F. BALMORES
G.R. No. 172843, September 24, 2014, J. Leonen
Derivative Suit: The Court has recognized that a stockholder's right to
institute a derivative suit is not based on any express provision of the Corporation
Code, or even the Securities Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties. In effect, the
suit is an action for specific performance of an obligation, owed by the corporation
to the stockholders, to assist its rights of action when the corporation has been put
in default by the wrongful refusal of the directors or management to adopt suitable
measures for its protection.
Management committees: Management committees and receivers are
appointed when the corporation is in imminent danger of (1) dissipation, loss,
wastage or destruction of assets or other properties; and (2) paralysation of its
business operations that may be prejudicial to' the interest of the minority
stockholders, parties-litigants, or the general public." Applicants for the
appointment of a receiver or management committee need to establish the
confluence of these two requisites. This is because appointed receivers and
management committees will immediately take over the management of the
corporation and will have the management powers specified in law.
Jurisdiction to appoint receiver: The Court of Appeals has no power to appoint
a receiver or management committee. The Regional Trial Court has original and
exclusive jurisdiction to hear and decide intra-corporate controversies, including
incidents of such controversies. These incidents include applications for the
appointment of receivers or management committees.
Facts:
MC Home Depot occupied a prime property (Rockland area) in Pasig. The
property was part of the area owned by Mid-Pasig Development Corporation. Pasig
Printing Corporation (PPC) obtained an option to lease portions of Mid-Pasig's
property, including the Rockland area. PPC's board of directors issued a resolution
waiving all its rights, interests, and participation in the option to lease contract in
favor of the law firm of Atty. Villamor. PPC, represented by Villamor, entered into a
memorandum of agreement with MC Home Depot. Under the MOA, MC Home Depot
would continue to occupy the area as PPC's sub-lessee for 4 years, renewable for
another 4 years, at a monthly rental of P4,500,000.00 plus goodwill of
P18,000,000.00.
In compliance with the terms of the MOA, MC Home Depot issued 20 postdated checks representing rental payments for one year and the goodwill money.

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The checks were given to Villamor who did not turn these or the equivalent amount
over to PPC, upon encashment. Hernando Balmores, stockholder and director of
PPC, wrote a letter addressed to PPJC's directors informing them that Villamor
should be made to deliver to PPC and account for MC Home Depot's checks or their
equivalent value. Due to the alleged inaction of the directors, respondent Balmores
filed with the RTC an intra-corporate controversy complaint against petitioners for
their alleged devices or schemes amounting to fraud or misrepresentation.
Respondent Balmores alleged that because of petitioners' actions, PPC's assets
were ". . . not only in imminent danger, but have actually been dissipated, lost,
wasted and destroyed." Respondent Balmores prayed that a receiver be appointed
from his list of nominees. He also prayed for petitioners' prohibition from "selling,
encumbering, transferring or disposing in any manner any of PPC's properties,
including the MC Home Depot checks and/or their proceeds." He prayed for the
accounting and remittance to PPC of the MC Home Depot checks or their proceeds
and for the annulment of the board's resolution "waiving PPC's rights in favor of
Villamor's law firm.
The RTC denied respondent Balmores' prayer for the appointment of a
receiver or the creation of a management committee. According to it, PPC's
entitlement to the checks was doubtful. The resolution issued by PPC's board of
directors; waiving its rights to the option to lease contract in favor of Villamor's law
firm, must be accorded prima facie validity. Balmores filed with CA a petition for
certiorari which was given due course. It reversed the trial court's decision, and
issued a new order placing PPC under receivership and creating an interim
management committee. The CA considered the danger of dissipation, wastage,
and loss of PPC's assets if the review of the trial court's judgment would be delayed.
It stated that the board's waiver of PPC's rights in favor of Villamor's law firm
without any consideration and its inaction on Villamor's failure to turn over the
proceeds of rental payments to PPC warrant the creation of a management
committee. Also, the CA ruled that the case filed by respondent Balmores with the
trial court "was a derivative suit because there were allegations of fraud or ultra
vires acts ... by PPC's directors.
Issues:
1. Whether the Court of Appeals correctly characterized respondent Balmores'
action as a derivative suit
2. Whether the Court of Appeals properly placed PPC under receivership and
created a receiver or management committee
Ruling:
1. No.
The requisites of a derivative suit are as follows:
a. He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the
action was filed;
b. He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available

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under the articles of incorporation, by-laws, laws or rules governing


the corporation or partnership to obtain the relief he desires;
c. No appraisal rights are available for the act or acts complained of;
and
d. The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith
dismiss the case.
Balmores' action in the trial court failed to satisfy all the requisites of a
derivative suit. Balmores failed to exhaust all available remedies to obtain the
reliefs he prayed for. Though he tried to communicate with PPC's directors about the
checks in Villamor's possession before he filed an action with the trial court,
Balmores was not able to show that this comprised -all the remedies available under
the articles of incorporation, bylaws, laws, or rules governing PPC. Neither did
respondent Balmores implead PPC as party in the case nor did he allege that he was
filing on behalf of the corporation. The non-derivative character of Balmores' action
may also be gleaned from his allegations in the trial court complaint. In the
complaint, he described the nature of his action as an action under Rule 1, Section
l(a)(l) of the Interim Rules, and not an action under Rule 1, Section l(a)(4) of the
Interim Rules, which refers to derivative suits. Respondent Balmores filed an
individual suit. His intent was very clear from his manner of describing the nature of
his action as being based on Rule 1, Sec. 1(a)(1) of the Interim Rules, involving
devices or schemes employed by, or acts of, the petitioners as board of directors,
business associates and officers of PPC, amounting to fraud or misrepresentation,
which are detrimental to the interest of the plaintiff as stockholder of PPC.
Balmores did not bring the action for the benefit of the corporation. Instead,
he was alleging that the acts of PPCs directors, specifically the waiver of rights in
favor of Villamors law firm and their failure to take back the MC Home Depot checks
from Villamor, were detrimental to his individual interest as a stockholder. In filing
an action, therefore, his intention was to vindicate his individual interest and not
PPCs or a group of stockholders.
2. No.
The CA still erred in placing PPC under receivership and in creating and
appointing a management committee. A corporation may be placed under
receivership, or management committees may be created to preserve properties
involved in a suit and to protect the rights of the parties under the control and
supervision of the court. Management committees and receivers are appointed
when the corporation is in imminent danger of (1) dissipation, loss, wastage or
destruction of assets or other properties; and (2) paralysation of its business
operations that may be prejudicial to' the interest of the minority stockholders,
parties-litigants, or the general public." PPC waived its rights, without any
consideration in favor of Villamor. The checks were already in Villamor's
possession. Some of the checks may have already been encashed. It is,
therefore, enough to constitute loss or dissipation of assets under the Interim
Rules. Balmores, however, failed to show that there was an imminent danger of
paralysis of PPC's business operations. Apparently, PPC was- earning substantial

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amounts from its other sub-lessees. Balmores did not prove otherwise. He,
therefore, failed to show at least one of the requisites for appointment of a
receiver or management committee.
INTRA-CORPORATE DISPUTE
ROBERTO L. ABAD, MANUEL D. ANDAL, BENITO V. ARANETA, PHILIP G.
BRODETT, ENRIQUE L. LOCSIN and ROBERTO V. SAN JOSE vs. PHILIPPINE
COMMUNICATIONS
SATELLITE CORPORATION
G.R. No. 200620, March 18, 2015, J. Villarama, Jr.
. Upon the enactment of Republic Act No. 8799, the jurisdiction of the SEC
over intra-corporate controversies and the other cases enumerated in Section 5 of
P.D. No. 902-A was transferred to the Regional Trial Court. The jurisdiction of the
Sandiganbayan has been held not to extend even to a case involving a sequestered
company notwithstanding that the majority of the members of the board of
directors were PCGG nominees.
Facts:
Respondent PHILCOMSA, along with Philippine Overseas Telecommunications
Corporation (POTC) were among those private companies sequestered by the PCGG
after the EDSA People Power Revolution in 1986. PHILCOMSAT owns 81% of the
outstanding capital stock of Philcomsat Holdings Corporation (PHC). The majority
shareholders of PHILCOMSAT are also the seven families who have owned and
controlled POTC.
During the administration of President Gloria Macapagal-Arroyo, Enrique L.
Locsin and Manuel D. Andal, along with Julio Jalandoni, were appointed nomineedirectors representing the Republic of the Philippines. These PCGG nominees have
aligned with the Nieto family (Nieto-PCGG) against the group of Africa and Ilusorio
(Africa-Bildner), in the ensuing battle for control over the respective boards of POTC,
PHILCOMSAT and PHC.
On August 31, 2004, the following were elected during the annual
stockholders meeting of PHC conducted by the Nieto-PCGG group wherein Locsin
was elected Chairman. Said election at PHC was the offshoot of separate elections
conducted by the two factions in POTC and PHILCOMSAT, the Africa-Bildner group
and the Nieto-PCGG group. In the July 28, 2004 stockholders meetings of POTC and
PHILCOMSAT, Victor Africa was among those in the Africa-Bildner group who were
elected as Directors. He was designated as the POTC proxy to the PHILCOMSAT
stockholders meeting. While Locsin, Andal and Nieto, Jr. were also elected as
Directors, they did not accept their election as POTC and PHILCOMSAT Directors.
Instead, the Nieto-PCGG group held the stockholders meeting for PHILCOMSAT on
August 9, 2004 at the Manila Golf Club. Immediately after the stockholders
meeting, an organizational meeting was held, and Nieto, Jr. and Locsin were
respectively elected as Chairman and President of PHILCOMSAT. At the same
meeting, they issued a proxy in favor of Nieto, Jr. and/or Locsin authorizing them to

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represent PHILCOMSAT and vote the PHILCOMSAT shares in the stockholders


meeting of PHC scheduled on August 31, 2004.
Thereafter, the two factions took various legal steps including the filing of
suits and countersuits to gain legitimacy for their respective election as directors
and officers of POTC and PHILCOMSAT. The Africa group had sought the invalidation
of the proxy issued in favor of Nieto, Jr. and/or Locsin and consequent nullification of
the elections held during the annual stockholders meeting of PHC on August 31,
2004. Africa in his capacity as President and CEO of PHILCOMSAT, and as
stockholder in his own right, wrote the board and management of PHC that
PHILCOMSAT will exercise its right of inspection over the books, records, papers, etc.
pertinent to the business transactions of PHC. In his letter, Nieto, Jr. said that
Africas request will be referred to the PHC Board of Directors or Executive
Committee in view of the several pending cases involving the Africa and Nieto-PCGG
groups on one hand, and the PHC and its board of directors on the other. He further
advised Africa to inform them in writing of his reasons and purposes for such
inspection. In reply, Africa reiterated his request for inspection asserting that the
PHILCOMSAT board of directors was elected on September 22, 2005. On the day of
the scheduled inspection, PHILCOMSAT sent its representatives. However, Brodett
disallowed the conduct of the inspection which prompted PHILCOMSAT through its
counsel to make a written query whether the refusal of Brodett to permit the
conduct of PHCs inspection of corporate books and financial documents was with
the knowledge and authority of PHCs board of directors. But no reply or
communication was received by Africa from the PHC.
PHILCOMSAT filed in the RTC a Complaint for Inspection of Books against the
incumbent PHC directors and/or officers, to enforce its right under Sections 74 and
75 of the Corporation Code of the Philippines. The RTC dismissed the complaint for
lack of jurisdiction. PHILCOMSAT appealed to the CA thru a petition for review
arguing that it is the RTC and not Sandiganbayan which has jurisdiction over the
case involving a stockholders right to inspect corporate books and records. The CA
granted the petition.
Issue:
Whether it is the Sandiganbayan or RTC which has jurisdiction over a
stockholders suit to enforce its right of inspection under Section 74 of the
Corporation Code
Ruling:
It is the RTC and not the Sandiganbayan which has jurisdiction over cases
which do not involve a sequestration-related incident but an intra-corporate
controversy.
Originally, Section 5 of P.D. No. 902-A vested the original and exclusive
jurisdiction over cases involving the following in the SEC: Controversies arising out
of intra-corporate or partnership relations, between and among stockholders,
members or associates; between any or all of them and the corporation. Upon the
enactment of Republic Act No. 8799, effective on August 8, 2000, the jurisdiction of

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the SEC over intra-corporate controversies and the other cases enumerated in
Section 5 of P.D. No. 902-A was transferred to the Regional Trial Court.
The jurisdiction of the Sandiganbayan has been held not to extend even to a
case involving a sequestered company notwithstanding that the majority of the
members of the board of directors were PCGG nominees. The Court marked this
distinction clearly in Holiday Inn (Phils.), Inc. v. Sandiganbayan:
The original and exclusive jurisdiction given to the Sandiganbayan over
PCGG cases pertains to (a) cases filed by the PCGG, pursuant to the
exercise of its powers under Executive Order Nos. 1, 2 and 14, as
amended by the Office of the President, and Article XVIII, Section 26 of
the Constitution, i.e., where the principal cause of action is the
recovery of ill-gotten wealth, as well as all incidents arising from,
incidental to, or related to such cases and (b) cases filed by those who
wish to question or challenge the commissions acts or orders in such
cases.
The complaint concerns PHILCOMSATs demand to exercise its right of
inspection as stockholder of PHC but which petitioners refused on the ground of the
ongoing power struggle within POTC and PHILCOMSAT that supposedly prevents
PHC from recognizing PHILCOMSATs representative (Africa) as possessing such right
or authority from the legitimate directors and officers. Clearly, the controversy is
intra-corporate in nature as they arose out of intra-corporate relations between
and among stockholders, and between stockholders and the corporation.
DISSOLUTION AND LIQUIDATION
LIQUIDATION
ALABANG DEVELOPMENT CORPORATION vs. ALABANG HILLS VILLAGE
ASSOCIATION AND RAFAEL TINIO
G.R. No. 187456, June 02, 2014, J. Peralta
ADC filed its complaint not only after its corporate existence was terminated
but also beyond the three-year period allowed by Section 122 of the Corporation
Code. To allow ADC to initiate the subject complaint and pursue it until final
judgment, on the ground that such complaint was filed for the sole purpose of
liquidating its assets, would be to circumvent the provisions of Section 122 of the
Corporation Code. Thus, it is clear that at the time of the filing of the subject
complaint petitioner lacks the capacity to sue as a corporation.
Facts:
The case traces its roots to the Complaint for Injunction and Damages filed
with the RTC of Muntinlupa City on Alabang Development Corporation against
Alabang Hills Village Association, Inc. and Rafael Tinio Tinio, President of AHVAI. The
Complaint alleged that Alabang is the developer of Alabang Hills Village and still
owns certain parcels of land therein that are yet to be sold, as well as those

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considered open spaces that have not yet been donated to the local government of
Muntinlupa City or the Homeowner's Association. In September 2006, ADC learned
that AHVAI started the construction of a multi-purpose hall and a swimming pool on
one of the parcels of land still owned by ADC without the latter's consent and
approval, and that despite demand, AHVAI failed to desist from constructing the
said improvements. ADC thus prayed that an injunction be issued enjoining
defendants from constructing the multi-purpose hall and the swimming pool at the
Alabang Hills Village.
In its Answer With Compulsory Counterclaim, AHVAI denied ADC's
asseverations and claimed that the latter has no legal capacity to sue since its
existence as a registered corporate entity was revoked by the SEC on May 26, 2003;
that ADC has no cause of action because by law it is no longer the absolute owner
but is merely holding the property in question in trust for the benefit of AHVAI as
beneficial owner thereof; and that the subject lot is part of the open space required
by law to be provided in the subdivision. As counterclaim, it prayed that an order be
issued divesting ADC of the title of the property and declaring AHVAI as owner
thereof; and that ADC be made liable for moral and exemplary damages as well as
attorney's fees. On January 4, 2007, the RTC of Muntinlupa City, rendered judgment
dismissing ADCs complaint. ADC filed a Notice of Appeal of the RTC decision. The
RTC approved ADC's notice of appeal but dismissed respondent AHVAIs
counterclaim on the ground that it is dependent on ADC's complaint. Respondent
AHVAI then filed an appeal with the CA. The CA dismissed both appeals of ADC and
AHVAI, and affirmed the decision of the RTC. Thus, the instant petition.
Issue:
1. Whether or not the Court of Appeals erred in relying on the case of
Columbia Pictures, Inc. V. Court of appeals in resolving ADC's lack of
capacity
2. Whether or not the Court of Appeals erred in finding lack of capacity of the
ADC in filing the case contrary to the earlier rulings of this honorable court
Ruling:
1. No, the CA did not err.
The Court does not agree that the CA erred in relying on the case of Columbia
Pictures, Inc. v. Court of Appeals. The CA cited the case for the purpose of restating
and distinguishing the jurisprudential definition of the terms lack of capacity to
sue and lack of personality to sue; and of applying these definitions to the
present case. Unlike in the instant case, the corporations involved in the Columbia
case were foreign corporations is of no moment. The definition of the term lack of
capacity to sue enunciated in the said case still applies to the case at bar. Indeed,
as held by this Court and as correctly cited by the CA in the case of Columbia: lack
of legal capacity to sue means that the plaintiff is not in the exercise of his civil
rights, or does not have the necessary qualification to appear in the case, or does
not have the character or representation he claims; lack of capacity to sue' refers
to a plaintiff's general disability to sue, such as on account of minority, insanity,

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incompetence, lack of juridical personality or any other general disqualifications of a


party. In the instant case, petitioner lacks capacity to sue because it no longer
possesses juridical personality by reason of its dissolution and lapse of the threeyear grace period provided under Section 122 of the Corporation Code.
2. As provided by Section 122 of the Corporation Code.
It is to be noted that the time during which the corporation, through its own
officers, may conduct the liquidation of its assets and sue and be sued as a
corporation is limited to three years from the time the period of dissolution
commences; but there is no time limit within which the trustees must complete a
liquidation placed in their hands. It is provided only that the conveyance to the
trustees must be made within the three-year period. It may be found impossible to
complete the work of liquidation within the three-year period or to reduce disputed
claims to judgment. The authorities are to the effect that suits by or against a
corporation abate when it ceased to be an entity capable of suing or being sued but
trustees to whom the corporate assets have been conveyed pursuant to the
authority of Sec. 78 may sue and be sued as such in all matters connected with the
liquidation.
Still in the absence of a board of directors or trustees, those having any
pecuniary interest in the assets, including not only the shareholders but likewise the
creditors of the corporation, acting for and in its behalf, might make proper
representations with the SEC which has primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final settlement of the corporate concerns.
In the instant case, there is no dispute that petitioner's corporate registration was
revoked on May 26, 2003. Based on law, it had three years, or until May 26, 2006,
to prosecute or defend any suit by or against it. The subject complaint, however,
was filed only on October 19, 2006, more than three years after such revocation. It
is not disputed that the subject complaint was filed by ADC and not by its directors
or trustees.
In the present case, petitioner filed its complaint not only after its corporate
existence was terminated but also beyond the three-year period allowed by Section
122 of the Corporation Code. Thus, it is clear that at the time of the filing of the
subject complaint petitioner lacks the capacity to sue as a corporation. To allow
petitioner to initiate the subject complaint and pursue it until final judgment, on the
ground that such complaint was filed for the sole purpose of liquidating its assets,
would be to circumvent the provisions of Section 122 of the Corporation Code.
CORPORATE REHABILITATION
PUERTO AZUL LAND, INC. vs. PACIFIC WIDE REALTY DEVELOPMENT
CORPORATION
G.R. No. 184000, September 17, 2014, J. Perlas- Bernabe
PALI filed petition for rehabilitation due to impossibility of meeting its debts
and obligations. The issue is whether or not such dismissal of petition by the CA is
valid. The court ruled that The validity of PALIs rehabilitation was already raised as

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an issue by PWRDC and resolved with finality by the Court in its November 25, 2009
Decision in G.R. No. 180893 (consolidated with G.R. No. 178768). The Court
sustained therein the CAs affirmation of PALIs Revised Rehabilitation Plan,
including those terms which its creditors had found objectionable, namely, the 50%
"haircut" reduction of the principal obligations and the condonation of accrued
interests and penalty charges
Facts:
PALI is a domestic corporation engaged in the business of developing the
Puerto Azul Complex located in Ternate, Cavite into a "satellite city," described as a
"self-sufficient and integrated tourist destination community with residential areas,
resort/tourism, and retail commercial centers with recreation areas like golf courses,
jungle trails, and white sand lagoons." To finance the full operation of its business,
PALI obtained loans in the total principal amount of 640,225,324.00 from several
creditors, among which were East Asia Capital, Export and Industry Bank (EIB),
Philippine National Bank, and Equitable PCI Bank (EPCIB), secured by real estate
owned by PALI and by accommodation mortgagors under a Mortgage Trust
Indenture.
Foreseeing the impossibility of meeting its debts and obligations to its
creditors as they fall due, PALI, on September 14, 2004, filed a Petition for
Suspension of Payments and Rehabilitation before the RTC. On September 17, 2004,
the RTC, finding PALIs petition to be sufficient in form and substance, issued a Stay
Order pursuant to Section 6, Rule 4 of the Interim Rules on Corporate
Rehabilitation (Interim Rules). RTC approved PALIs Revised Rehabilitation Plan. CA
granted PWRDCs petition for review and reversed the December 13, 2005 RTC
Decision, thereby dismissing PALIs petition for rehabilitation. It held that the causes
of PALIs inability to pay its debts were not alleged in the petition with sufficient
particularity as to have allowed the RTC to properly evaluate whether or not to issue
a Stay Order and eventually approve its rehabilitation.
Issue:
Whether or not the CA erred in reversing the RTC Decision, thereby
dismissing PALIs Revised Rehabilitation Plan
Ruling:
Yes. CA erred in dismissing PALIS Rehabilitation Plan
The validity of PALIs rehabilitation was already raised as an issue by PWRDC
and resolved with finality by the Court in its November 25, 2009 Decision in G.R. No.
180893 (consolidated with G.R. No. 178768). The Court sustained therein the CAs
affirmation of PALIs Revised Rehabilitation Plan, including those terms which its
creditors had found objectionable, namely, the 50% "haircut" reduction of the
principal obligations and the condonation of accrued interests and penalty charges.

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The rehabilitation plan is contested on the ground that the same is


unreasonable and results in the impairment of the obligations of contract. PWRDC
contests the following stipulations in PALIs rehabilitation plan: fifty percent (50%)
reduction of the principal obligation; condonation of the accrued and substantial
interests and penalty charges; repayment over a period of ten years, with minimal
interest of two percent (2%) for the first five years and five percent (5%) for the
next five years until fully paid, and only upon availability of cash flow for debt
service.
The Court found nothing onerous in the terms of PALIs rehabilitation plan.
The Interim Rules on Corporate Rehabilitation provides for means of execution of
the rehabilitation plan, which may include, among others, the conversion of the
debts or any portion thereof to equity, restructuring of the debts, dacion en pago, or
sale of assets or of the controlling interest.
The restructuring of the debts of PALI is part and parcel of its rehabilitation.
Moreover, per findings of fact of the RTC and as affirmed by the CA, the
restructuring of the debts of PALI would not be prejudicial to the interest of PWRDC
as a secured creditor.
There is nothing unreasonable or onerous about the 50% reduction of the
principal amount when, as found by the courta quo, a Special Purpose Vehicle (SPV)
acquired the credits of PALI from its creditors at deep discounts of as much as 85%.
Meaning, PALIs creditors accepted only 15% of their credits value. Stated
otherwise, if PALIs creditors are in a position to accept 15% of their credits value,
with more reason that they should be able to accept 50% thereof as full settlement
by their debtor. Since the issue on the validity, as well as regularity of the December
13, 2005 RTC Decision approving PALIs Revised Rehabilitation Plan had already
been resolved, the Court, in line with the res judicata principle, is constrained to
grant the present petition and, consequently, reverse the assailed CA decision.
ROBINSON'S BANK CORPORATION vs. HON. SAMUEL H. GAERLAN, et al.
G.R. No. 195289, September 24, 2014, J. Del Castillo
Under Rule 3, Section 5 of the Rules of Procedure on Corporate
Rehabilitation, the review of any order or decision of the rehabilitation court or on
appeal therefrom shall be in accordance with the Rules of Court, unless otherwise
provided. In the case at bar, TIDCORPs Petition for Review sought to nullify the pari
passu sharing scheme directed by the trial court and to grant preferential and
special treatment to TIDCORP over other WGC creditors, such as RBC. This being
the case, there is no visible objection to RBCs participation in said case, as it
stands to be injured or benefited by the outcome of TIDCORPs Petition for Review
being both a secured and unsecured creditor of WGC.
Facts:

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Nation Granary, Inc. (now World Granary Corporation, or WGC) filed a Petition
for Rehabilitation with Prayer for Suspension of Payments, Actions and
Proceedings before the RTC.
WGC is engaged in the business of mechanized bulk handling, transport and
storage, warehousing, drying, and milling of grains. It incurred loans amounting
to P2.66 billion from RBC and other banks and entities such as Trade and
Investment Development Corporation of the Philippines (TIDCORP). It appears that
RBC is both a secured and unsecured creditor, while TIDCORP is a secured creditor.
The RTC issued a Stay Order staying the enforcement of creditors claims and
prohibiting WGC from disposing its properties and paying its outstanding liabilities.
The RTC gave due course to the Petition for Rehabilitation. Accordingly, the receiver
submitted his Report with a proposal of a pari passu or equal sharing between
the secured and unsecured creditors of the proceeds from WGCs cash flow made
available for debt servicing.
In its Comment, TIDCORP among others took exception to the proposed pari
passu sharing, insisting that as a secured creditor, it should enjoy preference over
unsecured creditors, citing law and jurisprudence to the effect that the law on
preference of credits shall be observed in resolving claims against corporations
under rehabilitation. It likewise claimed that WGC violated its Indemnity
Agreement with TIDCORP which required that while the agreement subsisted,
WGC shall not incur new debts without TIDCORPs approval by obtaining additional
loans without the knowledge and consent of the latter.
RBC filed an Opposition to TIDCORPs Comment, arguing that giving
preference to TIDCORP would violate the Stay Order and impair the powers of the
receiver; and that any change in the contractual relations between TIDCORP and
WGC relative to their Indemnity Agreement comes as a necessary consequence of
rehabilitation, which TIDCORP may not be heard to complain.
The RTC approved WGCs rehabilitation plan. TIDCORP filed a Petition for
review before the CA praying that the order directing that all WGC obligations be
settled on a pari passu basis be reversed and set aside. RBC filed an Urgent Motion
for Intervention with attached Comment in Intervention, which is anchored on its
original claim and objection to TIDCORPs position.
In its Opposition, TIDCORP maintained that intervention is not allowed in
rehabilitation proceedings, citing Rule 3, Section 1 of the Interim Rules of Procedure
on Corporate Rehabilitation. It argued that a final determination of the appeal does
not depend on RBCs participation since rehabilitation proceedings are in remand
binding on all interested and affected parties even if they did not participate in the
proceedings.
Issues:
Page 50 of 128

1. Whether or not RBC should be allowed to participate in the petition for


review;
2. Whether or not a petition for review is the proper remedy for RBC
Ruling:
1. Yes. Under Rule 3, Section 5 of the Rules of Procedure on Corporate
Rehabilitation, the review of any order or decision of the rehabilitation court or on
appeal therefrom shall be in accordance with the Rules of Court, unless otherwise
provided. This being the case, there is no visible objection to RBCs participation in
CA-G.R. SP No. 104141 as it stands to be injured or benefited by the outcome of
TIDCORPs Petition for Review being both a secured and unsecured creditor of
WGC.
To recall, TIDCORPs Petition for Review in CA-G.R. SP No. 104141 sought to
1) nullify the pari passu sharing scheme directed by the trial court; 2) declare RBC
and the other creditor banks which granted additional loans to WGC after the latter
executed its Indemnity Agreement with TIDCORP guilty of violating TIDCORPs
rights; and 3) grant preferential and special treatment to TIDCORP over other WGC
creditors. These remedies would undoubtedly affect not merely the rights of RBC,
but of all the other WGC creditors as well, as their standing or status as creditors
would be somewhat downgraded, and the manner of recovery of their respective
credits will be altered if TIDCORPs prayer is granted. Thus, the nature of TIDCORPs
Petition in CA-G.R. SP No. 104141 is such that the other creditors like RBC must be
allowed to participate in the proceedings. They have an interest in the controversy
where a final decree would necessarily affect their rights.
To disallow the participation of RBC constitutes an evasion of the appellate
courts positive duty to observe due process, a gross and patent error that can be
considered as grave abuse of discretion. Likewise, when an adverse effect on the
substantial rights of a litigant results from the exercise of the courts discretion,
certiorari may issue. If not, this Court possesses the prerogative and initiative to
take corrective action when necessary to prevent a substantial wrong or to do
substantial justice.
2. No. While TIDCORP is correct in arguing that intervention is not the proper
mode for RBC coming to the CA since it is already a party to the rehabilitation
proceedings, this merely highlights the formers error in not allowing the latter to
participate in the proceedings in CA-G.R. SP No. 104141 just as it underscores the
appellate courts blunder in not ordering that RBC be allowed to comment or
participate in the case so that they may be given the opportunity to be heard on
TIDCORPs allegations and accusations. And while RBC chose the wrong mode for
interposing its comments and objections in CA-G.R. SP No. 104141, this does not
necessarily warrant the outright denial of its chosen remedy; the Court is not so

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rigid as to be precluded from adopting measures to insure that justice would be


administered fairly to all parties concerned. If TIDCORP must pursue its Petition for
Review, then RBC should be allowed to comment and participate in the proceedings.
There is no other solution to the impasse.
Finally, the CA committed another patent error in declaring that RBCs proper
remedy was not to move for intervention, but to file a Petition for Review of the trial
courts June 6, 2008 Order. It failed to perceive the obvious fact that there is nothing
about the trial courts order that RBC questioned; quite the contrary, it sought to
affirm the said order in toto and simply prayed for the dismissal of TIDCORPs
Petition for Review. There is thus no legal and logical basis for its conclusion that
RBC should have resorted to a Petition for Review just the same.

PHILIPPINE BANK OF COMMUNICATIONS vs. BASIC POLYPRINTERS AND


PACKAGING CORPORATION
G.R. No. 187581, October 20, 2014, J. Bersamin
A material financial commitment becomes significant in gauging the resolve,
determination, earnestness and good faith of the distressed corporation in financing
the proposed rehabilitation plan. This commitment may include the voluntary
undertakings of the stockholders or the would-be investors of the debtorcorporation indicating their readiness, willingness and ability to contribute funds or
property to guarantee the continued successful operation of the debtor corporation
during the period of rehabilitation.
In this case, the financial commitments
presented by Basic Polyprinters were insufficient for the purpose of rehabilitation.
Thus, its petition for corporate rehabilitation must necessarily fail.
Facts:
Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was a
domestic corporation engaged in the business of printing greeting cards, gift
wrappers, gift bags, calendars, posters, labels and other novelty items.
On February 27, 2004, Basic Polyprinters, along with the eight other
corporations belonging to the Limtong Group of Companies (namely: Cuisine
Connection, Inc., Fine Arts International, Gibson HP Corporation, Gibson Mega
Corporation, Harry U. Limtong Corporation, Main Pacific Features, Inc., T.O.L. Realty
& Development Corp., and Wonder Book Corporation), filed a joint petition for
suspension of payments with approval of the proposed rehabilitation in the RTC.
Included in its overall Rehabilitation Program was the full payment of its
outstanding loans in favor of Philippine Bank of Communications (PBCOM), RCBC,
Land Bank, EPCIBank and AUB via repayment over 15 years with moratorium of twoyears for the interest and five years for the principal at 5% interest per annum and
a dacion en pago of its affiliate property in favor of EPCIBank.
Finding the petition sufficient in form and substance, the RTC issued the stay
order dated August 31, 2006. It appointed Manuel N. Cacho III as the rehabilitation
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receiver, and required all creditors and interested parties, including the Securities
and Exchange Commission (SEC), to file their comments.
After the initial hearing and evaluation of the comments and opposition of the
creditors, including PBCOM, the RTC gave due course to the petition and referred it
to the rehabilitation receiver for evaluation and recommendation.
On October 18, 2007, the rehabilitation receiver submitted his report
recommending the approval of the rehabilitation plan. On December 19, 2007, the
rehabilitation receiver submitted his clarifications and corrections to his report and
recommendations.
On January 11, 2008, the RTC issued an order approving the rehabilitation
plan.
In the assailed decision promulgated on December 16, 2008, the CA affirmed
the questioned order of the RTC, agreeing with the finding of the rehabilitation
receiver that there were sufficient evidence, factors and actual opportunities in the
rehabilitation plan indicating that Basic Polyprinters could be successfully
rehabilitated in due time.
The PBCOM claims that the CA did not pass upon the issues presented in its
petition, that the rehabilitation plan did not contain the material financial
commitments required by Section 5, Rule 4 of the Interim Rules of Procedure for
Corporate Rehabilitation (Interim Rules); that, accordingly, the proposed repayment
scheme did not constitute a material financial commitment, and the proposed
dacion en pago was not proper because the property subject thereof had been
mortgaged in its favor;
Issue:
Whether or not Basic Polyprinters can be rehabilitated.
Ruling:
No. Basic Polyprinters cannot be rehabilitated.
A material financial commitment becomes significant in gauging the resolve,
determination, earnestness and good faith of the distressed corporation in financing
the proposed rehabilitation plan. This commitment may include the voluntary
undertakings of the stockholders or the would-be investors of the debtor-corporation
indicating their readiness, willingness and ability to contribute funds or property to
guarantee the continued successful operation of the debtor corporation during the
period of rehabilitation.
Basic Polyprinters presented financial commitments, as follows:
1. Additional P10 million working capital to be sourced from the insurance
claim;
2. Conversion of the directors and shareholders deposit for future
subscription to common stock;

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3. Conversion of substituted liabilities, if any, to additional paid-in capital to


increase the companys equity; and
4. All liabilities (cash advances made by the stockholders) of the company
from the officers and stockholders shall be treated as trade payables.
However, these financial commitments were insufficient for the purpose.
The commitment to add P10,000,000.00 working capital appeared to be
doubtful considering that the insurance claim from which said working capital would
be sourced had already been written-off by Basic Polyprinterss affiliate, Wonder
Book Corporation. A claim that has been written-off is considered a bad debt or a
worthless asset, and cannot be deemed a material financial commitment for
purposes of rehabilitation. At any rate, the proposed additional P10,000,000.00
working capital was insufficient to cover at least half of the shareholders deficit that
amounted to P23,316,044.00 as of June 30, 2006.
The Supreme Court also declared in Wonder Book Corporation v. Philippine
Bank of Communications (Wonder Book) that the conversion of all deposits for
future subscriptions to common stock and the treatment of all payables to officers
and stockholders as trade payables was hardly constituting material financial
commitments. Such conversion of cash advances to trade payables was, in fact, a
mere re-classification of the liability entry and had no effect on the shareholders
deficit. On the other hand, the Supreme Court cannot determine the effect of the
conversion of the directors and shareholders deposits for future subscription to
common stock and substituted liabilities on the shareholders deficit because their
amounts were not reflected in the financial statements contained in the rollo.
Basic Polyprinterss rehabilitation plan likewise failed to offer any proposal on
how it intended to address the low demands for their products and the effect of
direct competition from stores like SM, Gaisano, Robinsons, and other malls. Even
the P245 million insurance claim that was supposed to cover the destroyed
inventories worth P264 million appears to have been written-off with no probability
of being realized later on.
The Supreme Court observes, too, that Basic Polyprinterss proposal to enter
into the dacion en pago to create a source of fresh capital was not feasible
because the object thereof would not be its own property but one belonging to its
affiliate, TOL Realty and Development Corporation, a corporation also undergoing
rehabilitation. Moreover, the negotiations (for the return of books and magazines
from Basic Polyprinterss trade creditors) did not partake of a voluntary undertaking
because no actual financial commitments had been made thereon.
Worthy of note here is that Wonder Book Corporation was a sister company of
Basic Polyprinters, being one of the corporations that had filed the joint petition for
suspension of payments and rehabilitation in SEC. Both of them submitted identical
commitments in their respective rehabilitation plans. As a result, as the Court
observed in Wonder Book, the commitments by Basic Polyprinters could not be
considered as firm assurances that could convince creditors, future investors and
the general public of its financial and operational viability.

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Due to the rehabilitation plan being an indispensable requirement in


corporate rehabilitation proceedings, Basic Polyprinters was expected to exert a
conscious effort in formulating the same, for such plan would spell the future not
only for itself but also for its creditors and the public in general. The contents and
execution of the rehabilitation plan could not be taken lightly.
The Supreme Court is not oblivious to the plight of corporate debtors like
Basic Polyprinters that have inevitably fallen prey to economic recession and
unfortunate incidents in the course of their operations. However, the Supreme
Court must endeavor to balance the interests of all the parties that had a stake in
the success of rehabilitating the debtors. In doing so here, the Supreme Court
cannot now find the rehabilitation plan for Basic Polyprinters to be genuine and in
good faith, for it was, in fact, unilateral and detrimental to its creditors and the
public.
MARILYN VICTORIO-AQUINO vs. PACIFIC PLANS INC. and MAMARETO
A. MARCELO, JR.
G.R. No. 193108, December 10, 2014, J. Peralta
While the voice and participation of the creditors is crucial in the
determination of the viability of the rehabilitation plan, as they stand to benefit or
suffer in the implementation thereof, the interests of all stakeholders is the ultimate
and prime consideration.
Facts:
Respondent Pacific Plans, Inc. (now Abundance Providers and Entrepreneurs
Corporation or APEC) is engaged in the business of selling pre-need plans and
educational plans, including traditional open-ended educational plans. PEPTrads are
educational plans where respondent guarantees to pay the planholder, without
regard to the actual cost at the time of enrolment, the full amount of tuition and
other school fees of a designated beneficiary. Petitioner Marilyn is a holder of two
units of respondents PEPTrads.
On April 7, 2005, foreseeing the impossibility of meeting its obligations to the
availing plan holders as they fall due, respondent filed a Petition for Corporate
Rehabilitation with the Regional Trial Court (Rehabilitation Court), praying that it be
placed under rehabilitation and suspension of payments. The Rehabilitation Court
issued a Stay Order, directing the suspension of payments of the obligations of
respondent and ordering all creditors and interested parties to file their
comments/oppositions, respectively, to the Petition for Corporate Rehabilitation. The
same Order also appointed respondent Mamerto A. Marcelo as the rehabilitation
receiver and set the initial hearing of the case on May 25, 2005.
APEC submitted to the Rehabilitation Court its proposed rehabilitation plan.
Under the terms thereof, APEC proposed the implementation of a Swap, which will
essentially give the plan holder a means to exit from the PEPTrads at terms and
conditions relative to a termination value that is more advantageous than those
provided under the educational plan in case of voluntary termination. On February
16, 2006, the Rehabilitation Receiver submitted an Alternative Rehabilitation Plan

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for the approval of the Rehabilitation Court. Under the ARP, the benefits under the
PEPTrads shall be translated into fixed-value benefits as of December 31, 2004,
which will be termed as Base Year-end 2004 Entitlement. The creditors/oppositors
did not oppose/comment on the Rehabilitation Receivers ARP. Respondent
commenced with the implementation of its ARP in coordination with, and with
clearance from, the Rehabilitation Receiver. In the meantime, the value of the
Philippine Peso strengthened and appreciated. In view of this development, and
considering that the trust fund of respondent is mainly composed of NAPOCOR
bonds that are denominated in US Dollars, respondent submitted a manifestation
with the Rehabilitation Court on February 29, 2008, stating that the continued
appreciation of the Philippine Peso has grossly affected the value of the U.S. Dollardenominated NAPOCOR bonds, which stood as security for the payment of the Net
Translated Values of the PEPTrads.
Thereafter, the Rehabilitation Receiver filed a Manifestation with Motion to
Admit dated March 7, 2008, echoing the earlier tenor and substance of respondents
manifestation, and praying that the Modified Rehabilitation Plan be approved by the
Rehabilitation Court. Under the MRP, the ARP previously approved by the
Rehabilitation Court is modified. The Rehabilitation Court issued a Resolution dated
July 28, 2008 approving the MRP. Marilyn questioned the approval of the MRP before
the CA on September 26, 2008.Unfortunately for her, despite motion for
reconsideration, the CA denied the same on July 21, 2010.
Hence, this Petition for Review on Certiorari.
Issue:
Whether the MRP is ultra vires insofar as it reduces the original claim and
even the original amount that Marilyn was to receive under the ARP.
Ruling:
No, it is not.
The cram-down power of the Rehabilitation Court has long been established
and even codified under Section 23, Rule 4 of the Interim Rules. Such prerogative
was carried over in the Rehabilitation Rules, which maintains that the court may
approve a rehabilitation plan over the objection of the creditors if, in its judgment,
the rehabilitation of the debtors is feasible and the opposition of the creditors is
manifestly unreasonable. In Bank of the Philippine Islands v. Sarabia Manor Hotel
Corporation, where the Court elucidated the rationale behind Section 23, Rule 4 of
the Interim Rules, the Court said that a rehabilitation plan may be approved even
over the opposition of the creditors holding a majority of the corporations total
liabilities if there is a showing that rehabilitation is feasible and the opposition of the
creditors is manifestly unreasonable.
Also known as the cram-down clause, this provision, which is currently
incorporated in the FRIA, is necessary to curb the majority creditors natural
tendency to dictate their own terms and conditions to the rehabilitation, absent due
regard to the greater long-term benefit of all stakeholders. Otherwise stated, it

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forces the creditors to accept the terms and conditions of the rehabilitation plan,
preferring long-term viability over immediate but incomplete recovery.
Based on the aforequoted doctrine, petitioners outright censure of the
concept of the cram-down power of the rehabilitation court cannot be
countenanced. To adhere to the reasoning of petitioner would be a step backward
a futile attempt to address an outdated set of challenges. It is undeniable that there
is a need to move to a regime of modern restructuring, cram-down and court
supervision in the matter of corporation rehabilitation in order to address the
greater interest of the public. This is clearly manifested in Section 64 of Republic Act
No. 10142, otherwise known as Financial Rehabilitation and Insolvency Act of 2010.
BPI FAMILY SAVINGS BANKC, INC. vs. ST. MICHAEL MEDICAL CENTER, INC.
G.R. No. 205469, March 25, 2015, J. Perlas-Bernabe
It is well to emphasize that the remedy of rehabilitation should be denied to
corporations that do not qualify under the Rules. Neither should it be allowed to
corporations whose sole purpose is to delay the enforcement of any of the rights of
the creditors, which is rendered obvious by: (a) the absence of a sound and
workable business plan; (b) baseless and unexplained assumptions, targets, and
goals; and (c) speculative capital infusion or complete lack thereof for the execution
of the business plan. In this case, not only has the petitioning debtor failed to show
that it has formally began its operations which would warrant restoration, but also it
has failed to show compliance with the key requirements under the Rules, the
purpose of which are vital in determining the propriety of rehabilitation. Thus, for all
the reasons hereinabove explained, the Court is constrained to rule in favor of BPI
Family and hereby dismiss SMMCIs Rehabilitation Petition.
Facts:
Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole
proprietors of St. Michael Hospital. With a vision to upgrade St. Michael Hospital into
a modern, well-equipped and full service tertiary 11-storey hospital, Sps. Rodil
purchased two (2) parcels of land adjoining their existing property and, on May 22,
2003, incorporated SMMCI, with which entity they planned to eventually consolidate
St. Michael Hospitals operations. In order to finance the expansion of the premises
of the hospital, the Spouses Rodil obtained load from BPI Family Savings Bank. The
Spouses thereafter incurred problems with the first contractor, so the building was
not completed. SMMCI was only able to pay the interest on its BPI Family loan, or
the amount of 3,000,000.00 over a two-year period, from the income of St. Michael
Hospital.
On September 25, 2009, BPI Family demanded immediate payment of the
entire loan obligation and, soon after, filed a petition for extrajudicial foreclosure of
the real properties covered by the mortgage. The auction sale was scheduled on
December 11, 2009, which was postponed to February 15, 2010 with the conformity
of BPI Family.
On August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation
(Rehabilitation Petition) before the RTC, with prayer for the issuance of a Stay Order

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as it foresaw the impossibility of meeting its obligation to BPI Family, its purported
sole creditor. In its proposed Rehabilitation Plan,23 SMMCI merely sought for BPI
Family (a) to defer foreclosing on the mortgage and (b) to agree to a moratorium of
at least two (2) years during which SMMCI either through St. Michael Hospital or its
successor will retire all other obligations. After which, SMMCI can then start
servicing its loan obligation to the bank under a mutually acceptable restructuring
agreement. 24 SMMCI declared that it intends to conclude pending negotiations for
investments offered by a group of medical doctors whose capital infusion shall be
used (a) to complete the finishing requirements for the 3rd and 5th floors of the new
building; (b) to renovate the old 5storey building where St. Michael Hospital
operates; and (c) to pay, in whole or in part, the bank loan with the view of finally
integrating St. Michael Hospital with SMMCI. Finding the Rehabilitation Petition to be
sufficient in form and substance, the RTC issued a Stay Order. In an Order 34 dated
August 4, 2011, the RTC approved the Rehabilitation Plan
Aggrieved, BPI Family elevated the matter before the CA, mainly arguing that
the approval of the Rehabilitation Plan violated its rights as an unpaid
creditor/mortgagee and that the same was submitted without prior consultation
with creditors. In a Decision dated August 30, 2012, the CA affirmed the RTCs
approval of the Rehabilitation Plan. Hence, this petition.
Issue:
Whether or not the CA correctly affirmed SMMCIs Rehabilitation Plan as
approved by the RTC.
Ruling:
No. that SMMCIs Rehabilitation Plan, an indispensable requisite in corporate
rehabilitation proceedings, failed to comply with the fundamental requisites outlined
in Section 18, Rule 3 of the Rules, particularly, that of a material financial
commitment to support the rehabilitation and an accompanying liquidation analysis,
all of the petitioning debtor:
SEC. 18. Rehabilitation Plan. - The rehabilitation plan
shall include (a) the desired business targets or goals and the duration and
coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation
which shall include the manner of its implementation, giving due regard to the
interests of secured creditors such as, but not limited, to the nonimpairment of their
security liens or interests; (c) the material financial commitments to support the
rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which
may include debt to equity conversion, restructuring of the debts, dacion en pago or
sale exchange or any disposition of assets or of the interest of shareholders,
partners or members; (e) a liquidation analysis setting out for each creditor that the
present value of payments it would receive under the plan is more than that which
it would receive if the assets of the debtor were sold by a liquidator within a sixmonth period from the estimated date of filing of the petition; and (f) such other
relevant information to enable a reasonable investor to make an informed decision
on the feasibility of the rehabilitation plan.
It is well to emphasize that the remedy of rehabilitation should be denied to
corporations that do not qualify under the Rules. Neither should it be allowed to
corporations whose sole purpose is to delay the enforcement of any of the rights of

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the creditors, which is rendered obvious by: (a) the absence of a sound and
workable business plan; (b) baseless and unexplained assumptions, targets, and
goals; and (c) speculative capital infusion or complete lack thereof for the execution
of the business plan. Unfortunately, these negative indicators have all surfaced to
the fore, much to SMMCIs chagrin. While the Court recognizes the financial
predicaments of upstart corporations under the prevailing economic climate, it must
nonetheless remain forthright in limiting the remedy of rehabilitation only to
meritorious cases. As above-mentioned, the purpose of rehabilitation proceedings is
not only to enable the company to gain a new lease on life but also to allow
creditors to be paid their claims from its earnings, when so rehabilitated. Hence,
the remedy must be accorded only after a judicious regard of all stakeholders
interests; it is not a one-sided tool that may be graciously invoked to escape every
position of distress.
In this case, not only has the petitioning debtor failed to show that it has
formally began its operations which would warrant restoration, but also it has failed
to show compliance with the key requirements under the Rules, the purpose of
which are vital in determining the propriety of rehabilitation. Thus, for all the
reasons hereinabove explained, the Court is constrained to rule in favor of BPI
Family and hereby dismiss SMMCIs Rehabilitation Petition.

BANK OF

MERGER AND CONSOLIDATION

COMMERCE vs. RADIO PHILIPPINES NETWORK, INC., ET. AL.


G.R. No. 195615, April 21, 2014, J. Abad
Indubitably, it is clear that no merger took place between Bancommerce and
TRB as the requirements and procedures for a merger were absent. A merger does
not become effective upon the mere agreement of the constituent corporations. All
the requirements specified in the law must be complied with in order for merger to
take effect. Here, Bancommerce and TRB remained separate corporations with
distinct corporate personalities. What happened is that TRB sold and Bancommerce
purchased identified recorded assets of TRB in consideration of Bancommerces
assumption of identified recorded liabilities of TRB including booked contingent
accounts. There is no law that prohibits this kind of transaction especially when it is
done openly and with appropriate government approval.
Facts:
Traders Royal Bank (TRB) sold to petitioner Bank of Commerce
(Bancommerce) its banking business consisting of specified assets and liabilities
through a Purchase and Assumption (P & A) Agreement. Bangko Sentral ng
Pilipinas' (BSP's) approval of their P & A Agreement was however necessary. On
November 8, 2001 the BSP approved that agreement subject to the condition that
Bancommerce and TRB would set up an escrow fund of PSO million with another
bank to cover TRB liabilities for contingent claims that may subsequently be
adjudged against it, which liabilities were excluded from the purchase.

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Subsequently, P & A Agreement was approved by BSP. To comply with a BSP


mandate, TRB placed P50 million in escrow with Metropolitan Bank and Trust Co.
(Metrobank) to answer for those claims and liabilities that were excluded from the P
& A Agreement and remained with TRB.
Shortly after acting in G.R. 138510, Traders Royal Bank v. Radio Philippines
Network (RPN), Inc., this Court ordered TRB to pay respondents RPN,
Intercontinental Broadcasting Corporation, and Banahaw Broadcasting Corporation
(collectively, RPN, et al.) actual damages plus 12% legal interest and some
amounts. Based on this decision, RPN, et al.filed a motion for execution against TRB
before the Regional Trial Court (RTC). But rather than pursue a levy in execution of
the corresponding amounts on escrow with Metrobank, RPN, et al. filed a
Supplemental Motion for Execution where they described TRB as "now Bank of
Commerce" based on the assumption that TRB had been merged into
Bancommerce.
Subsequently, the RTC issued the assailed Order directing the release to the
Sheriff of Bancommerces "garnished monies and shares of stock or their monetary
equivalent" and for the sheriff to pay 25% of the amount "to the respondents
counsel representing his attorneys fees and appearance fees and litigation
expenses" and the balance to be paid to the respondents after deducting court
dues.
Issue:
Whether or not there was a merger or de facto merger between TRB and
Bancommerce thereby considering the latter as judgment debtor.
Ruling:
None.
Indubitably, it is clear that no merger took place between Bancommerce and
TRB as the requirements and procedures for a merger were absent. A merger does
not become effective upon the mere agreement of the constituent corporations. All
the requirements specified in the law must be complied with in order for merger to
take effect. Section 79 of the Corporation Code further provides that the merger
shall be effective only upon the issuance by the Securities and Exchange
Commission (SEC) of a certificate of merger. Here, Bancommerce and TRB remained
separate corporations with distinct corporate personalities. What happened is that
TRB sold and Bancommerce purchased identified recorded assets of TRB in
consideration of Bancommerces assumption of identified recorded liabilities of TRB
including booked contingent accounts. There is no law that prohibits this kind of
transaction especially when it is done openly and with appropriate government
approval.
In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that
under the Corporation Code, "a de facto merger can be pursued by one corporation
acquiring all or substantially all of the properties of another corporation in exchange

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of shares of stock of the acquiring corporation. The acquiring corporation would end
up with the business enterprise of the target corporation; whereas, the target
corporation would end up with basically its only remaining assets being the shares
of stock of the acquiring corporation."
No de facto merger took place in the present case simply because the TRB
owners did not get in exchange for the banks assets and liabilities an equivalent
value in Bancommerce shares of stock. Moreover, Bancommerce and TRB agreed
with BSP approval to exclude from the sale the TRBs contingent judicial liabilities,
including those owing to RPN, et al. The Bureau of Internal Revenue (BIR) treated
the transaction between the two banks purely as a sale of specified assets and
liabilities when it rendered its opinion on the tax consequences of the transaction
given that there is a difference in tax treatment between a sale and a merger or
consolidation. Furthermore, what was "consolidated" was the banking activities and
transactions of Bancommerce and TRB, not their corporate existence. The BSP did
not remotely suggest a merger of the two corporations.
To end, since there had been no merger, Bancommerce cannot be considered
as TRBs successor-in-interest and against which the Courts Decision of October 10,
2002 in G.R. 138510 may be enforced. Bancommerce did not hold the former TRBs
assets in trust for it as to subject them to garnishment for the satisfaction of the
latters liabilities to RPN, et al. Bancommerce bought and acquired those assets and
thus, became their absolute owner.
SECURITIES REGULATION CODE
PROXY
SOLICITATION
SECURITIES AND EXCHANGE COMMISSION, vs. THE HONORABLE COURT OF
APPEALS, OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING
TIA
ASTRA SECURITIES CORPORATION, vs. OMICO CORPORATION, EMILIO S.
TENG AND TOMMY KIN HING TIA,
G.R. No. 187702, October 22, 2014, CJ. SERENO,
The power of the SEC to investigate violations of its rules on proxy
solicitation is unquestioned when proxies are obtained to vote on matters unrelated
to the cases enumerated under Section 5 of Presidential Decree No. 902-A.
However, when proxies are solicited in relation to the election of corporate
directors, the resulting controversy, even if it ostensibly raised the violation of the
SEC rules on proxy solicitation, should be properly seen as an election controversy
within the original and exclusive jurisdiction of the trial courts by virtue of Section
5.2 of the SRC in relation to Section 5 (c) of Presidential Decree No. 902-A
Indeed, the validation of proxies in this case relates to the determination of
the existence of a quorum. Nonetheless, it is a quorum for the election of the
directors, and, as such, which requires the presence in person or by proxy of the
owners of the majority of the outstanding capital stock of Omico. Also, the fact that
there was no actual voting did not make the election any less so, especially since
Astra had never denied that an election of directors took place.
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Facts:
Omico Corporation (Omico) is a company whose shares of stock are listed and
traded in the Philippine Stock Exchange, Inc. Astra Securities Corporation (Astra) is
one of the stockholders of Omico owning about 18% of the latters outstanding
capital stock.
Omico scheduled its annual stockholders meeting. It set the deadline for
submission of proxies on and the validation of proxies. Astra objected to the
validation of the proxies issued in favor of Tommy Kin Hing Tia (Tia) as well as the
inclusion of the proxies issued in favor of Tia and/or Martin Buncio.
Astra maintained that the proxy issuers, who were brokers, did not obtain the
required express written authorization of their clients when they issued the proxies
in favor of Tia. In so doing, the issuers were allegedly in violation of SRC or Republic
Act No. 8799 Rules. Despite the objections of Astra, Omicos Board of Inspectors
declared that the proxies issued in favor of Tia were valid.
Astra filed a Complaint before the Securities and Exchange Commission (SEC)
praying for the invalidation of the proxies issued in favor of Tia. Astra also prayed
for the issuance of a cease and desist order (CDO) enjoining the holding of Omicos
annual stockholders meeting until the SEC had resolved the issues pertaining to the
validation of proxies which SEC granted.
The stockholders meeting proceeded as scheduled prompting Astra to
institute before the SEC a Complaint for indirect contempt against Omico for
disobedience of the CDO. On the other hand, Omico filed before the CA a Petition for
Certiorari and Prohibition imputing grave abuse of discretion on the part of the SEC
for issuing the CDO. CA declared the CDO null and void since the controversy was
an intra-corporate dispute. The SRC expressly transferred the jurisdiction over
actions involving intracorporate controversies from the SEC to the regional trial
courts.
Issue:
Whether or not the SEC has jurisdiction over controversies arising from the
validation of proxies for the election of the directors of a corporation.
Ruling:
No, SEC has no jurisdiction over controversies arising from the validation of
proxies for the election of the directors of a corporation
In GSIS v. CA, it was necessary for the Court to determine whether the action
to invalidate the proxies was intimately tied to an election controversy. Hence, the
Court pronounced: Under Section 5(c) of Presidential Decree No. 902-A, in relation
to the SRC, the jurisdiction of the regular trial courts with respect to election related
controversies is specifically confined to "controversies in the election or
appointment of directors, trustees, officers or managers of corporations,

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partnerships, or associations." Evidently, the jurisdiction of the regular courts over


so-called election contests or controversies under Section 5 (c) does not extend to
every potential subject that may be voted on by shareholders, but only to the
election of directors or trustees, in which stockholders are authorized to participate
under Section 24 of the Corporation Code.
This qualification allows for a useful distinction that gives due effect to the
statutory right of the SEC to regulate proxy solicitation, and the statutory
jurisdiction of regular courts over election contests or controversies. The power of
the SEC to investigate violations of its rules on proxy solicitation is unquestioned
when proxies are obtained to vote on matters unrelated to the cases enumerated
under Section 5 of Presidential Decree No. 902-A. However, when proxies are
solicited in relation to the election of corporate directors, the resulting controversy,
even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should
be properly seen as an election controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5 (c) of Presidential Decree No. 902-A.
The Court explained that the power of the SEC to regulate proxies remains in
place in instances when stockholders vote on matters other than the election of
directors. The test is whether the controversy relates to such election. All matters
affecting the manner and conduct of the election of directors are properly
cognizable by the regular courts. Otherwise, these matters may be brought before
the SEC for resolution based on the regulatory powers it exercises over
corporations, partnerships and associations.
Indeed, the validation of proxies in this case relates to the determination of
the existence of a quorum. Nonetheless, it is a quorum for the election of the
directors, and, as such, which requires the presence in person or by proxy of the
owners of the majority of the outstanding capital stock of Omico. Also, the fact that
there was no actual voting did not make the election any less so, especially since
Astra had never denied that an election of directors took place.
Court finds no merit either in the proposal of Astra regarding the "two (2)
viable, non-exclusive and successive legal remedies to question the validity of
proxies." It suggests that the power to pass upon the validity of proxies to
determine the existence of a quorum prior to the conduct of the stockholders
meeting should lie with the SEC; but, after the stockholders meeting, questions
regarding the use of invalid proxies in the election of directors should be cognizable
by the regular courts, since there was already an election to speak of. There is no
point in making distinctions between who has jurisdiction before and who has
jurisdiction after the election of directors, as all controversies related thereto SECURITIES AND EXCHANGE COMMISSION
whether before, during or after - shall be passed upon by regular courts as provided
by law. The Court closes with an observation.
PRIMANILA PLANS, INC., HEREIN REPRESENTED BY EDUARDO S. MADRID
vs. SECURITIES AND EXCHANGE COMMISSION

Page 63 of 128

G.R. No. 193791, August 6, 2014, J. Reyes


The authority of the SEC and the manner by which it can issue cease and
desist orders are provided in Section 64 of the SRC. The law is clear on the point
that a cease and desist order may be issued by the SEC motu proprio, it being
unnecessary that it results from a verified complaint from an aggrieved party. A
prior hearing is also not required whenever the Commission finds it appropriate to
issue a cease and desist order that aims to curtail fraud or grave or irreparable
injury to investors. It is beyond dispute that Primasa plans were not registered with
the SEC. Primanila was then barred from selling and offering for sale the said plan
product. A continued sale by the company would operate as fraud to its investors,
and would cause grave or irreparable injury or prejudice to the investing public,
grounds which could justify the issuance of a cease and desist order under Section
64 of the SRC.
Facts:
Primanilas website www.primanila.com was offering a pension plan product
called Primasa Plan. The website contains detailed instructions as to how interested
persons can apply for the said plan and where initial contributions and succeeding
installment payments can be made by applicants and planholders.
Primanila failed to renew its Dealers License for 2008. In view of the
expiration of the said license, the SECs Non Traditional Securities and Instruments
Department (NTD) enjoined Primanila from selling and/or offering for sale pre-need
plans to the public.
Primanila has not been issued a secondary license to act as dealer or general
agent for pre-need pension plans for 2008. Also, no registration statement has been
filed by Primanila for the approval of a pension plan product called Primasa Plan.
This is shown in the certification issued by NTD upon the request of SECs
Compliance and Enforcement Department (CED).
It was discovered by CED Primanilas Bank Account is still active when it
deposited on March 6, 2008 the sum of Php 50.00. Among the many planholders of
PRIMANILA are enlisted personnel of the PNP. The PNP remitted the total amount of
Php 2,072,149.38 to PRIMANILA representing the aforementioned premium
collections via salary deductions of the 410 enlisted personnel of PNP who are
planholders. But Primanila failed to deposit the required monthly contributions to
the trust fund in violation of Pre-need Rule 19.1. This is shown in the Trust Fund
Reports for the months of November and December 2007 prepared by ASIATRUST
BANK, the trustee of Primanila.
Primanila under-declared the total amount of its collections as shown in its
SEC Monthly Collection Reports which it submitted to NTD. Its reports show that it
only collected Php 302,081.00 from January to September 2007. However, the
remittance report of the PNP shows that Primanila received the amount of Php
1,688,965.22 from the PNP planholders alone for the said period. Therefore, it
under-declared its report by Php 1,386,884.22.7

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From these findings, the SEC declared that Primanila committed a flagrant
violation of Republic Act No. 8799, otherwise known as The Securities Regulation
Code (SRC), particularly Section 16 thereof. The SEC then issued the subject cease
and desist order "in order to prevent further violations and in order to protect the
interest of its plan holders and the public."
Feeling aggrieved, Primanila filed a Motion for Reconsideration/Lift Cease and
Desist Order, arguing that it was denied due process as the order was released
without any prior issuance by the SEC of a notice or formal charge that could have
allowed the company to defend itself. The cease and desist order issued on April 9,
2008 was then made permanent. The CA affirmed in toto the issuances of the SEC.
Issue:
Whether or not Primanila was accorded due process notwithstanding the
SECs immediate issuance of the cease and desist order on April 9, 2008
Ruling:
Yes, the authority of the SEC and the manner by which it can issue cease and
desist orders are provided in Section 64 of the SRC.
The law is clear on the point that a cease and desist order may be issued by
the SEC motu proprio, it being unnecessary that it results from a verified complaint
from an aggrieved party. A prior hearing is also not required whenever the
Commission finds it appropriate to issue a cease and desist order that aims to
curtail fraud or grave or irreparable injury to investors. There is good reason for this
provision, as any delay in the restraint of acts that yield such results can only
generate further injury to the public that the SEC is obliged to protect.
To equally protect individuals and corporations from baseless and improvident
issuances, the authority of the SEC under this rule is nonetheless with defined
limits. A cease and desist order may only be issued by the Commission after proper
investigation or verification, and upon showing that the acts sought to be restrained
could result in injury or fraud to the investing public. Without doubt, these requisites
were duly satisfied by the SEC prior to its issuance of the subject cease and desist
order.
Records indicate the prior conduct of a proper investigation on Primanilas
activities by the Commissions CED. Investigators of the CED personally conducted
an ocular inspection of Primanilas declared office, only to confirm reports that it
had closed even without the prior approval of the SEC. Members of CED also visited
the company website of Primanila, and discovered the companys offer for sale
thereon of the pension plan product called Primasa Plan, with instructions on how
interested applicants and planholders could pay their premium payments for the
plan. One of the payment options was through bank deposit to Primanilas given
Metrobank account which, following an actual deposit made by the CED was
confirmed to be active.

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As part of their investigation, the SEC also looked into records relevant to
Primanilas business. Records with the SECs Non-Traditional Securities and
Instruments Department (NTD) disclosed Primanilas failure to renew its dealers
license for 2008, orto apply for a secondary license as dealer or general agent for
pre-need pension plans for the same year. SEC records also confirmed Primanilas
failureto file a registration statement for Primasa Plan, to fully remit premium
collections from planholders, and to declare truthfully its premium collections from
January to September 2007.
The SEC was not mandated to allow Primanila to participate in the
investigation conducted by the Commission prior to the cease and desist orders
issuance. Given the circumstances, it was sufficient for the satisfaction of the
demands of due process that the company was amply apprised of the results of the
SEC investigation, and then given the reasonable opportunity to present its defense.
Primanila was able to do this via its motion to reconsider and lift the cease and
desist order. After the CED filed its comment on the motion, Primanila was further
given the chance to explain its side to the SEC through the filing of its reply. "Trite to
state, a formal trial or hearing isnot necessary to comply with the requirements of
due process. Its essence is simply the opportunity to explain ones position."
The validity of the SECs cease and desist order is further sustained for
having sufficient factual and legal bases.
The acts specifically restrained by the subject cease and desist order were
Primanilas sale, offer for sale and collection of payments specifically for its Primasa
plans. Notwithstanding the findings of both the SEC and the CA on Primanilas
activities, the company still argued in its petition that it neither sold nor collected
premiums for the Primasa product. Primanila argued that the offer for sale of
Primasa through the Primanila website was the result of mere inadvertence, after
the website developer whom it hired got hold of a copy of an old Primasa brochure
and then included its contents in the company website even without the knowledge
and prior approval of Primanila.
In the instant case, the substantial evidence is derived from the results of the
SEC investigation on Primanilas activities. Specifically on the product Primasa
plans, the SEC ascertained that there were detailed instructions on Primanilas
website as to how interested persons could apply for a plan, together with the
manner by which premium payments therefor could be effected. A money deposit
by CED to Primanilas Metrobank account indicated in the advertisement confirmed
that the bank account was active.
There could be no better conclusion from the foregoing circumstances that
Primanila was engaged in the sale or, at the very least, an offer for sale to the
public of the Primasa plans. The offer for Primasa was direct and its reach was even
expansive, especially as it utilized its website as a medium and visits to it were, as
could be expected, from prospective clients.
It is beyond dispute that Primasa plans were not registered with the SEC.
Primanila was then barred from selling and offering for sale the said plan product. A
continued sale by the company would operate as fraud to its investors, and would

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cause grave or irreparable injury or prejudice to the investing public, grounds which
could justify the issuance of a cease and desist order under Section 64 of the SRC.
Furthermore, even prior to the issuance of the subject cease and desist order,
Primanila was already enjoined by the SEC from selling and/or offering for sale preneed products to the public. The SEC Order dated April 9, 2008 declared that
Primanila failed to renew its dealers license for 2008, prompting the SECs NTD to
issue a letter dated January3, 2008 addressed to Primanilas Chairman and Chief
Executive Officer Eduardo S. Madrid, enjoining the company from selling and/or
offering for sale pre-need plans to the public. It also had not obtained a secondary
license to act as dealer or general agent for pre-need pension plans for 2008.
In view of the foregoing, Primanila clearly violated Section 16 of the SRC and
pertinent rules which barred the sale or offer for sale to the public of a pre-need
product except in accordance with SEC rules and regulations.
COSMOS BOTTLING CORPORATION vs. COMMISSION EN BANC of the
SECURITIES AND EXCHANGE COMMISSION (SEC) and JUSTINA F.
CALLANGAN, in her capacity as Director of the Corporation Finance
Department of the SEC
G.R. No. 199028, November 12, 2014, J. Perlas- Bernabe
As an administrative agency with both regulatory and adjudicatory functions,
the SEC was given the authority to delegate some of its functions to, inter alia, its
various operating departments, such as the SECCFD, the Enforcement and Investor
Protection Department, and the Company Registration and Monitoring Department.
In this case, the Court disagrees with the findings of both the SEC En Banc and the
CA that the Revocation Order emanated from the SEC En Banc. Rather, such Order
was merely issued by the SEC-CFD as one of the SECs operating departments. In
other words, the Revocation Order is properly deemed as a decision issued by the
SEC-CFD as one of the Operating Departments of the SEC, and accordingly, may be
appealed to the SEC En Banc, as what Cosmos properly did in this case. Perforce,
the SEC En Banc and the CA erred in deeming Cosmoss appeal as a motion for
reconsideration and ordering its dismissal on such ground.
Facts:
The instant case stemmed from Cosmoss failure to submit its 2005 Annual
Report to the SEC within the prescribed period. In connection therewith, it requested
an extension of time within which to file the same. In response, the SEC-Corporation
Finance Department (SEC-CFD), through respondent Director Callangan, sent
Cosmos a letter denying the latters request and directing it to submit its 2005
Annual Report. The same letter also ordered Cosmos to show cause why the
Cosmoss Registration of Securities/Permit to Sell Securities to the Public (Subject
Registration/Permit) should not be revoked for violating Section 17.1 (a) of Republic
Act No. 8799, otherwise known as "The Securities Regulation Code" (SRC).
Cosmos sent a reply-letter to the SEC-CFD, explaining that its failure to file its
2005 Annual Report was due to the non-completion by its external auditors of their
audit procedures. For this reason, Cosmos implored the SEC-CFD to reconsider its

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previous denial of Cosmoss request for additional time to file its 2005 Annual
Report. Thereafter, hearings for the suspension of the Subject Registration/Permit
commenced, with Cosmos advancing the same reasons for the non- submission of
its 2005 Annual Report. The SEC-CFD ordered the suspension of the Subject
Registration/Permit (suspension order) for a period of 60 days from receipt of the
same, or until Cosmos files its 2005 Annual Report, whichever is earlier. The SECCFD also stated that Cosmoss failure to submit its 2005 Annual Report within the
60-day period shall constrain the SEC to initiate proceedings for revocation of the
Subject Registration/Permit.
On October 31, 2007, Cosmos finally submitted its 2005 and 2006 Annual
Reports to the SEC. In connection therewith, Cosmos requested SEC-CFD that the
latter lift the suspension order and abandon the revocation proceedings against the
former.
The SEC-CFD referred the matter to the SEC En Banc for its
consideration. After the said meeting, the SEC En Banc issued Resolution No. 87,
series of (s.) 2008 wherein they resolved to: (a) deny Cosmoss request for the
lifting of the suspension order; and (b) revoke the Subject Registration/Permit. On
the basis thereof, the SEC-CFD issued a Revocation Order echoing the
pronouncements indicated in the aforesaid resolution. On appeal, this resolution
was later on affirmed by SEC En Banc and CA stating that the Revocation Order was
a mere articulation of the SEC En Bancs Resolution No. 87, s. 2008, and thus,
should be considered an issuance of the SEC En Banc itself. The SEC En Banc
deemed Cosmoss appeal as a motion for reconsideration, a prohibited pleading
under Section 3-6, Rule III of the 2006 SEC Rules of Procedure. Furthermore, CA held
that Cosmoss appeal, which was treated as a prohibited motion for reconsideration
under the 2006 SEC Rules of Procedure, did not toll the reglementary period for
filing an appeal before it. As such, the SEC En Bancs Ruling, as well as the
Revocation Order, had already lapsed into finality and could no longer be disturbed.
Issue:
Whether or not the CA correctly treated Cosmoss appeal before the SEC En
Banc as a motion for reconsideration, and consequently, affirmed its dismissal for
being a prohibited pleading under the 2006 SEC Rules of Procedure.
Ruling:
No.
As an administrative agency with both regulatory and adjudicatory functions,
the SEC was given the authority to delegate some of its functions to, inter alia, its
various operating departments, such as the SECCFD, the Enforcement and Investor
Protection Department, and the Company Registration and Monitoring Department,
pursuant to Section 4.6 of the SRC. Naturally, the aforesaid provision also gives the
SEC the power to review the acts performed by its operating departments in the
exercise of the formers delegated functions. This power of review is squarely
addressed by Section 11-1, Rule XI of the 2006 SEC Rules of Procedure.
In this case, the Court disagrees with the findings of both the SEC En Banc
and the CA that the Revocation Order emanated from the SEC En Banc. Rather, such
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Order was merely issued by the SEC-CFD as one of the SECs operating
departments, as evidenced by the following: (a) it was printed and issued on the
letterhead of the SEC-CFD, and not the SEC En Banc; (b) it was docketed as a case
under the SEC-CFD as an operating department of the SEC, since it bore the serial
number "SEC-CFD Order No. 027, [s.] 2008;" and (c) it was signed solely by Director
Callangan as director of the SEC-CFD, and not by the commissioners of the SEC En
Banc. Further, both the SEC En Banc and the CA erred in holding that the
Revocation Order merely reflected Resolution No. 87, s. 2008, and thus, should
already be considered as the ruling of the SEC En Banc in this case. As admitted by
respondents, the SEC-CFDs referral of the case to the SEC En Banc for its
consideration in its March 13, 2008 meeting, which eventually resulted in the
issuance of Resolution No. 87, s.2008, was merely an internal procedure inherent in
the exercise by the SEC of its administrative and regulatory functions.
In sum, the Revocation Order is properly deemed as a decision issued by the
SEC-CFD as one of the Operating Departments of the SEC, and accordingly, may be
appealed to the SEC En Banc, as what Cosmos properly did in this case. Perforce,
the SEC En Banc and the CA erred in deeming Cosmoss appeal as a motion for
reconsideration and ordering its dismissal on such ground. In view thereof, the Court
deems it prudent to reinstate and remand the case to the SEC En Banc for its
resolution on the merits.

SPECIAL COMMERCIAL LAWS


DOA ADELA EXPORT INTERNATIONAL, INC. vs. TRADE AND INVESTMENT
DEVELOPMENT CORPORATION and the BANK OF THE PHILIPPINE ISLANDS
G.R. No. 201931, February 11, 2015, J. Villarama, Jr.
Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits, provides for
exceptions when records of deposits may be disclosed. These are under any of the
following instances: (a) upon written permission of the depositor, (b) in cases of
impeachment, (c) upon order of a competent court in the case of bribery or
dereliction of duty of public officials or, (d) when the money deposited or invested is
the subject matter of the litigation, and (e) in cases of violation of the Anti-Money
Laundering Act, the Anti-Money Laundering Council may inquire into a bank account
upon order of any competent court. The Joint Motion to Approve Agreement was
executed by BPI and TIDCORP only. There was no written consent given by Doa
Adela or its representative that it is waiving the confidentiality of its bank
deposits.It is clear therefore that Doa Adela is not bound by the said provision
since it was without the express consent of Doa Adela who was not a party and
signatory to the said agreement.
Facts:
Doa Adela Export International, Inc. (Doa Adela) filed a Petition for
Voluntary Insolvency. The RTC, after finding the petition sufficient inform and

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substance, issued an order declaring Doa Adela as insolvent and staying all civil
proceedings against it.
Thereafter, Atty. Arlene Gonzales was appointed as receiver. Subsequently,
Atty. Gonzales filed a Motion for Parties to Enter Into Compromise Agreement
incorporating her proposed terms of compromise.
Creditors Trade and Investment Development Corporation (TIDCORP) and
Bank of the Philippine Islands (BPI) also filed a Joint Motion to Approve the
Compromise Agreement.
One of the stipulations of the agreement was the waiver of confidentiality in
which Doa Adela shall waive all rights to confidentiality provided under the
provisions of Republic Act No. 1405, as amended, otherwise known as the Law on
Secrecy of Bank Deposits, and Republic Act No. 8791, otherwise known as The
General Banking Law of 2000. Furthermore Doa Adela will grant TIDCORP and BPI
access to any deposit or other accounts maintained by them with any bank.
The RTC approved the Compromise Agreement filed by TIDCORP and BPI.
Doa Adela filed a motion for partial reconsideration and claimed that
TIDCORP and BPIs agreement imposes on it several obligations such as waiver of
confidentiality of its bank deposits but it is not a party and signatory to the said
agreement. Furthermore, there must be an express and written waiver from the
depositor concerned as required by law before any third person or entity is allowed
to examine bank deposits or bank records.
BPI counters that Doa Adela is estopped from questioning the BPI-TIDCORP
compromise agreement because Doa Adela and its counsel participated in all the
proceedings involving the subject compromise agreement and did not object when
the compromise agreement was considered by the RTC.
The RTC denied the motion and held that Doa Adelas silence and
acquiescence to the joint motion to approve compromise agreement while it was set
for hearing by creditors BPI and TIDCORP is tantamount to admission and
acquiescence.
Issue:
Whether the waiver of confidentiality provision in the Agreement between
TIDCORP and BPI is valid despite Doa Adela not being a party and signatory to the
same.
Ruling:
No.
Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits, provides for
exceptions when records of deposits may be disclosed. These are under any of the
following instances: (a) upon written permission of the depositor, (b) in cases of
impeachment, (c) upon order of a competent court in the case of bribery or
dereliction of duty of public officials or, (d) when the money deposited or invested is
the subject matter of the litigation, and (e) in cases of violation of the Anti-Money
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Laundering Act, the Anti-Money Laundering Council may inquire into a bank account
upon order of any competent court.
In this case, the Joint Motion to Approve Agreement was executed by BPI and
TIDCORP only. There was no written consent given by Doa Adela or its
representative, Epifanio Ramos, Jr., that Doa Adela is waiving the confidentiality of
its bank deposits. The provision on the waiver of the confidentiality of Doa Adelas
bank deposits was merely inserted in the agreement. It is clear therefore that Doa
Adela is not bound by the said provision since it was without the express consent of
Doa Adela who was not a party and signatory to the said agreement.
Neither can be Doa Adela deemed to have given its permission by failure to
interpose its objection during the proceedings. It is an elementary rule that the
existence of a waiver must be positively demonstrated since a waiver by implication
is not normally countenanced. The norm is that a waiver must not only be
voluntary, but must have been made knowingly, intelligently, and with sufficient
awareness of the relevant circumstances and likely consequences.
Furthermore, it is basic in law that a compromise agreement, as a contract, is
binding only upon the parties to the compromise, and not upon non-parties. This is
the doctrine of relativity of contracts. The sound reason for the exclusion of nonparties to an agreement is the absence of a vinculum or juridical tie which is the
efficient cause for the establishment of an obligation. Hence, a court judgment
made solely on the basis of a compromise agreement binds only the parties to the
compromise, and cannot bind a party litigant who did not take part in the
compromise agreement.
BPI FAMILY SAVINGS BANKC, INC. vs. ST. MICHAEL MEDICAL CENTER, INC.
G.R. No. 205469, March 25, 2015, J. Perlas-Bernabe
It is well to emphasize that the remedy of rehabilitation should be denied to
corporations that do not qualify under the Rules. Neither should it be allowed to
corporations whose sole purpose is to delay the enforcement of any of the rights of
the creditors, which is rendered obvious by: (a) the absence of a sound and
workable business plan; (b) baseless and unexplained assumptions, targets, and
goals; and (c) speculative capital infusion or complete lack thereof for the execution
of the business plan. In this case, not only has the petitioning debtor failed to show
that it has formally began its operations which would warrant restoration, but also it
has failed to show compliance with the key requirements under the Rules, the
purpose of which are vital in determining the propriety of rehabilitation. Thus, for all
the reasons hereinabove explained, the Court is constrained to rule in favor of BPI
Family and hereby dismiss SMMCIs Rehabilitation Petition.
Facts:
Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole
proprietors of St. Michael Hospital. With a vision to upgrade St. Michael Hospital into
a modern, well-equipped and full service tertiary 11-storey hospital, Sps. Rodil
purchased two (2) parcels of land adjoining their existing property and, on May 22,
2003, incorporated SMMCI, with which entity they planned to eventually consolidate
St. Michael Hospitals operations. In order to finance the expansion of the premises

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of the hospital, the Spouses Rodil obtained load from BPI Family Savings Bank. The
Spouses thereafter incurred problems with the first contractor, so the building was
not completed. SMMCI was only able to pay the interest on its BPI Family loan, or
the amount of 3,000,000.00 over a two-year period, from the income of St. Michael
Hospital.
On September 25, 2009, BPI Family demanded immediate payment of the
entire loan obligation and, soon after, filed a petition for extrajudicial foreclosure of
the real properties covered by the mortgage. The auction sale was scheduled on
December 11, 2009, which was postponed to February 15, 2010 with the conformity
of BPI Family.
On August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation18
(Rehabilitation Petition) before the RTC, with prayer for the issuance of a Stay Order
as it foresaw the impossibility of meeting its obligation to BPI Family, its purported
sole creditor. In its proposed Rehabilitation Plan,23 SMMCI merely sought for BPI
Family (a) to defer foreclosing on the mortgage and (b) to agree to a moratorium of
at least two (2) years during which SMMCI either through St. Michael Hospital or its
successor will retire all other obligations. After which, SMMCI can then start
servicing its loan obligation to the bank under a mutually acceptable restructuring
agreement. 24 SMMCI declared that it intends to conclude pending negotiations for
investments offered by a group of medical doctors whose capital infusion shall be
used (a) to complete the finishing requirements for the 3rd and 5th floors of the new
building; (b) to renovate the old 5storey building where St. Michael Hospital
operates; and (c) to pay, in whole or in part, the bank loan with the view of finally
integrating St. Michael Hospital with SMMCI. Finding the Rehabilitation Petition to be
sufficient in form and substance, the RTC issued a Stay Order. In an Order 34 dated
August 4, 2011, the RTC approved the Rehabilitation Plan
Aggrieved, BPI Family elevated the matter before the CA, mainly arguing that
the approval of the Rehabilitation Plan violated its rights as an unpaid
creditor/mortgagee and that the same was submitted without prior consultation
with creditors. In a Decision dated August 30, 2012, the CA affirmed the RTCs
approval of the Rehabilitation Plan. Hence, this petition.
Issue:
Whether or not the CA correctly affirmed SMMCIs Rehabilitation Plan as
approved by the RTC.
Ruling:
No. that SMMCIs Rehabilitation Plan, an indispensable requisite in corporate
rehabilitation proceedings, failed to comply with the fundamental requisites outlined
in Section 18, Rule 3 of the Rules, particularly, that of a material financial
commitment to support the rehabilitation and an accompanying liquidation analysis,
all of the petitioning debtor:
SEC. 18. Rehabilitation Plan. - The rehabilitation plan
shall include (a) the desired business targets or goals and the duration and
coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation
which shall include the manner of its implementation, giving due regard to the
interests of secured creditors such as, but not limited, to the nonimpairment of their
security liens or interests; (c) the material financial commitments to support the
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rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which
may include debt to equity conversion, restructuring of the debts, dacion en pago or
sale exchange or any disposition of assets or of the interest of shareholders,
partners or members; (e) a liquidation analysis setting out for each creditor that the
present value of payments it would receive under the plan is more than that which
it would receive if the assets of the debtor were sold by a liquidator within a sixmonth period from the estimated date of filing of the petition; and (f) such other
relevant information to enable a reasonable investor to make an informed decision
on the feasibility of the rehabilitation plan.
It is well to emphasize that the remedy of rehabilitation should be denied to
corporations that do not qualify under the Rules. Neither should it be allowed to
corporations whose sole purpose is to delay the enforcement of any of the rights of
the creditors, which is rendered obvious by: (a) the absence of a sound and
workable business plan; (b) baseless and unexplained assumptions, targets, and
goals; and (c) speculative capital infusion or complete lack thereof for the execution
of the business plan. Unfortunately, these negative indicators have all surfaced to
the fore, much to SMMCIs chagrin. While the Court recognizes the financial
predicaments of upstart corporations under the prevailing economic climate, it must
nonetheless remain forthright in limiting the remedy of rehabilitation only to
meritorious cases. As above-mentioned, the purpose of rehabilitation proceedings is
not only to enable the company to gain a new lease on life but also to allow
creditors to be paid their claims from its earnings, when so rehabilitated. Hence,
the remedy must be accorded only after a judicious regard of all stakeholders
interests; it is not a one-sided tool that may be graciously invoked to escape every
position of distress.
In this case, not only has the petitioning debtor failed to show that it has formally
began its operations which would warrant restoration, but also it has failed to show
compliance with the key requirements under the Rules, the purpose of which are
vital in determining the propriety of rehabilitation. Thus, for all the reasons
hereinabove explained, the Court is constrained to rule in favor of BPI Family and
hereby dismiss SMMCIs Rehabilitation Petition.
SPOUSES EDUARDO AND LYDIA SILOS vs. PHILIPPINE NATIONAL BANK
G.R. No. 181045, July 2, 2014, J. Del Castillo
Plainly, with the subject credit agreement, the element of consent or
agreement by the borrower is now completely lacking, which makes [PNBs]
unlawful act all the more reprehensible.
Accordingly, [Spouses Silos] are correct in arguing that estoppels should not
apply to them, for estoppels cannot be predicated on an illegal act. As between the
parties to a contract, validity cannot be given to it by estoppels if it is prohibited by
law or public policy. It appears that by its acts, PNB violated the Truth in Lending Act
or Republic Act No. 3765 which was enacted to protect citizens from a lack of
awareness of the true cost of credit to the use by using a full disclosure of such cost
with a view of preventing the uninformed use of credit to the detriment of the
national economy.
Facts:
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Spouses Silos were engaged in retail business since 1980s and for which they
secured several loans from PNB. Consequently, the following agreements were
executed, to wit:
1. Real Estate Mortgage to secure the credit line of PhP150,000.00;
2. Supplement to the Real Estate Mortgage to secure the credit line which
was first raised to PhP1.8 Million then to PhP2.5 Million;
3. Credit Agreement of July 1989 and Eight (8) Promissory Notes; and,
4. Amendment to Credit Agreement of August 1991 and Eighteen (18)
Promissory Notes.
The original Credit Agreement provided an interest of 19.5% per annum and
authorized PNB to modify the interest rate without need of notice to Spouses Silos
and depending on whatever policy the Bank may adopt. All of the agreements and
promissory notes contained stipulations respecting this unilateral modification of
interest rate.
PNB renewed the credit line from 1990 up to 1997 and Spouses Silos
religiously paid their accounts. In 1997, due to the Asian Financial Crisis, Spouses
Silos failed to make good on their outstanding promissory note for PhP2.5 Million,
which provided for a penalty clause equivalent to 24% per annum in case of default.
Thus, PNB prepared a Statement of Account showing aggregate accountabilities in
the amount of PhP3,620,541.60 against Spouses Silos. Failing to heed PNBs
demand, the mortgages were foreclosed and sold to the Bank at auction for the
amount of PhP4,324,172.96.
Spouses Silos commenced a complaint for annulment of foreclosure sale with
prayer for accounting of their credit with PNB. After hearing the opposing arguments
of the parties on the disputed stipulations, the trial court ruled in favor of PNB and
upheld the accounting of debts, foreclosure sale and agreements between the
parties among others. On appeal, the CA affirmed the judgment of the trial court but
with modifications respecting the applicable interest on the unpaid promissory note,
attorneys fees of 10% and reimbursement of the difference between the bid price
and the total amount due.
Issues:
1. Whether or not the provision conferring upon PNB the power to solely
determine and change the interest rate stated in the subject credit
agreement is contrary to law.
2. What is the appropriate interest that may be applied to the remaining
monetary obligation of Spouses Silos?
3. Whether or not the penalty charge in the still unpaid promissory note is
also covered by the security.
Ruling:
1. YES, the provision runs counter to Article 1308 of the Civil Code and the
Truth in Lending Act.

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In a long line of cases, the Court has struck down provisions in credit
documents issued by PNB to its borrowers, which allow it to increase or decrease
interest rate within the limits allowed by law at any time depending on whatever
policy it may adopt in the future. In the cases of PNB vs. CA circa 1991 and 1994,
the Court took the position that P.D. No. 1684 and C.B. Circular No. 905, respecting
the non-application of the usury law in loans and certain forbearances, no more
than allow contracting parties to stipulate freely regarding any subsequent
adjustment in the interest rate that shall accrue on a loan or forbearance of money,
goods or credits. In other words, the parties can agree to adjust, upward or
downward, the interest stipulated. Nevertheless, the Court pointed out that the
said law and circular did not authorize either party to unilaterally raise the interest
rate without the others consent. Thus, it was held that such clause introduced by
PNB ran afoul with the principle of mutuality of contracts ordained in Article 1308 of
the Civil Code.
In Spouses Almeda vs. CA, the Court also invalidated the very same
provisions in PNBs prepared Credit Agreement and mainly ratiocinated that
[e]scalation clauses are not basically wrong or legally objectionable so long as they
are not solely potestative but based on reasonable and valid grounds [and in this
case] not only are the increases of the interest rates on the basis of escalation
clause patently unreasonable and unconscionable, but also there are no valid and
reasonable standards upon which the increases are anchored.
In another PNB vs. CA case, circa 1996, the disquisition went in this wise:
while the Usury Law ceiling on interest rates was lifted by C.B. No. 905, nothing in
the said circular could possibly be read as granting PNB carte blanche authority to
raise interest rates to levels which would either enslave its borrowers or lead to a
hemorrhaging of their assets.
An equally relevant case, New Sampaguita Builders Construction, Inc. vs.
PNB, this Court pronounced that excessive interests, penalties and other charges
not revealed in the disclosure statements issued by banks, even it stipulated in the
promissory notes, cannot be given effect under the Truth in Lending Act.
Withal, in the light of these cases, the stipulations found in the Credit
Agreement, Amendment to the Credit Agreement and the promissory notes
prepared by PNB in the instant case must be once more invalidated. The lack of
consent by Spouses Silos has been made obvious by the fact that they signed the
promissory notes in blank for PNB to fill. The witness for PNB, Branch Manager Aspa,
admitted that interest rates were fixed solely by its Treasury Department in Manila,
which were then simply communicated to all PNB branches for imple-mentation. If
this were the case, then this would explain why Spouses Silos had to sign the
promissory notes in blank, since the imposable interest rates have yet to be
determined and fixed by PNB Treasury Department.
Further, in Aspas enumeration of factors that determine the interest rates, it
can be seen that considerations which affect PNBs borrowers are ignored. A
borrowers current financial state, his feedback or opinions, the nature and purpose
of his borrowings, the effect of foreign currency values or fluctuations on his

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business or borrowing, etc. these are not factors which influence the fixing of
interest rates to be imposed on him. Clearly, PNBs method of fixing interest rates
based on one-sided, indeterminate, and subjective criteria such as profitability, cost
of money, bank cost etc. is arbitrary for there is no fixed standard or margin above
or below these considerations.
To repeat what has been said in the cited cases, any modification in the
contract, such as interest rates must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of loan
agreements, the rate of interest is a principal condition, if not the most important
component. Thus, any modification thereof must be mutually agreed upon;
otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in
question no longer provide that the parties shall agree upon the interest rate to be
fixed; instead, they are worded in such a way that Spouses Silos shall agree to
whatever interest rate PNB fixes. Plainly, with the subject credit agreement, the
element of consent or agreement by Spouses Silos is now completely lacking, which
makes PNBs unlawful act all the more reprehensible.
Accordingly, Spouses Silos are correct in arguing that estoppels should not
apply to them, for estoppels cannot be predicated on an illegal act. As between the
parties to a contract, validity cannot be given to it by estoppels if it is prohibited by
law or public policy. It appears that by its acts, PNB violated the Truth in Lending Act
or Republic Act No. 3765 which was enacted to protect citizens from a lack of
awareness of the true cost of credit to the use by using a full disclosure of such cost
with a view of preventing the uninformed use of credit to the detriment of the
national economy.
However, the one-year period within which an action for violation of the Truth
in Lending Act may be filed evidently prescribed long ago, or sometime in 2001, one
year after Spouses Silos received the March 2000 demand letter which contained
the illegal charges.
The fact that Spouses Silos later received several statements of account
detailing its outstanding obligations does not cure PNBs breach. To repeat, the
belated discovery of the true cost of credit does not reverse the ill effects of an
already consummated business decision. Neither may the statements be considered
proposals sent to secure Spouses Silos conformity; they were sent after the
imposition and application of the interest rate, and not before.
2. The loan shall be subject to the original or stipulated rate of interest and
upon maturity, the amount due shall be subject to legal interest at the
rates of 12% and then 6% per annum.
Since the escalation clause is annulled, the principal amount of the loan is
subject to the original or stipulated rate of interest and upon maturity, the amount
due shall be subject to legal interest at the rate of 12% per annum. The interests
paid by Spouses Silos should be applied first to the payment of the stipulated or

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legal and unpaid interest, as the case may be and later, to the capital or principal.
PNB should then refund the excess amount of interest that it has illegally imposed
upon Spouses Silos; the amount to be refunded refers to that paid by Spouses Silos
when they had no obligation to do so. Thus, the parties original agreement
stipulated the payment of 19.5% interest; however, this rate was intended to apply
only to the first promissory note which expired in November 1989 and was paid by
Spouses Silos; it was not intended to apply to the whole duration of the loan.
Subsequent higher interest rates have been declared illegal; but because only the
rates are found to be improper, the obligation to pay interest subsists, the same to
be fixed at the legal rate of 12% per annum. However, the 12% interest shall apply
only until June 30, 2013. Starting July 01, 2013, the prevailing rate of interest shall
be 6% per annum pursuant to BSP Monetary Board Circular No. 799.
3. NO, the penalty charge must be excluded for not being expressly covered
by the credit agreement.
The unpaid promissory note provides that failure to pay it or any installment
thereon, when due, shall constitute default, and a penalty charge of 24% per
annum based on the defaulted principal amount shall be imposed. This penalty
charge can no longer be sustained based on the above disquisition. Having found
the credit agreements and promissory notes to be tainted, the mortgages must
likewise be accorded with the same treatment. After all, a mortgage and a note
secured by it are deemed parts of one transaction and are construed together.
Being so tainted and having attributes of a contract of adhesion as the principal
credit documents, the mortgages must be construed strictly and against the party
who drafted it. An examination of the mortgage agreements reveals that nowhere it
is stated that penalties are to be included in the secured amount. Construing the
silence strictly against PNB, the Court can only conclude that the parties did not
intend to include the penalty allowed under the subject note as part of the secured
amount.
PHILIPPINE AMANAH BANK (NOW AL-AMANAH ISLAMIC INVESTMENT BANK
OF THE PHILIPPINES, ALSO KNOWN AS ISLAMIC BANK) vs. EVANGELISTA
CONTRERAS
G.R. No. 173168, September 29, 2014, J. Brion
In the present case, however, nothing in the documents presented by
Calinico would arouse the suspicion of PAB to prompt a more extensive inquiry.
When the Ilogon spouses applied for a loan, they presented as collateral a parcel of
land evidenced by an OCT issued by the Office of the Register of Deeds and
registered in the name of Calinico. This document did not contain any inscription or
annotation indicating that Contreras was the owner or that he has any interest in
the subject land. In fact, he admitted that there was no encumbrance annotated on
Calinicos title at the time of the latters loan application. Any private arrangement
between Calinico and him regarding the proceeds of the loan was not the concern
of PAB, as it was not a privy to this agreement. If Calinico violated the terms of his
agreement with Contreras on the turn-over of the proceeds of the loan, then the
latter's proper recourse was to file the appropriate criminal action in court.
Facts:

Page 77 of 128

In July 1981, Respondent Contreras filed a complaint for annulment of real


estate mortgage, cancellation of original certificate of title, reconveyance, recovery
of possession and damages before the RTC against Spouses Calinico and Elnora
Ilogon and Petitioner Philippine Amanah Bank (PAB). Prior to the escalation of the
issue to a civil suit, Contreras approached Spouses Ilogon to ask for help in
obtaining a loan from PAB. Thereafter, Contreras and Calinico executed documents
to the effect that the property owned by the former is open for mortgage as security
for a loan and that Calinico was going to facilitate this transaction with PAB.
Eventually, a loan was due for release by PAB but Contreras forthwith
requested that the same should not be released to Calinico. To her dismay,
however, PAB released a total of PhP 100,000.00 to Calinico. Consequently, when he
failed to settle the loan, PAB was forced to extrajudicially foreclose the mortgage
and ultimately it consolidated its ownership over the same. Hence, Contreras had to
file the complaint before the RTC.
The trial court ruled in favor of PAB, pointing out that the bank had no
knowledge about the internal agreements between Contreras and Calinico.
Contreras moved for reconsideration but it was denied for having been filed out of
time and then later a petition for relief from judg-ment which was likewise denied.
The CA reversed this decision by the trial court. It found that there is sufficient
evidence showing that PAB knew of certain conflicting claims over the land and that
it ignored the Contreras representations that Calinocos title was defective.
Issue:
Whether or not PAB exercised extraordinary diligence in dealing with Calinico
over the subject property.
Ruling:
YES, PAB cannot be faulted in accepting the property as mortgage and
releasing the loan to Spouses Ilongon.
[The Court is aware] of the rule that banks are expected to exercise more
care and prudence than private individuals in their dealings, even those involving
registered lands, since their business is impressed with public interest. The rule that
persons dealing with registered lands can rely solely on the certificate of title does
not apply to banks. Simply put, the ascertainment of the status or condition of a
property offered to it as security for a loan must be a standard and indispensable
part of a banks operations.
In the present case, however, nothing in the documents presented by Calinico
would arouse the suspicion of [PAB] to prompt a more extensive inquiry. When the
Ilogon spouses applied for a loan, they presented as collateral a parcel of land
evidenced by [an OCT] issued by the Office of the Register of Deeds and
registered in the name of Calinico. This document did not contain any inscription or
annotation indicating that [Contreras] was the owner or that he has any interest in
the subject land. In fact, [he] admitted that there was no encumbrance annotated
on Calinicos title at the time of the latters loan application. Any private

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arrangement between Calinico and [him] regarding the proceeds of the loan was not
the concern of [PAB], as it was not a privy to this agreement. If Calinico violated the
terms of his agreement with [Contreras] on the turn-over of the proceeds of the
loan, then the latter's proper recourse was to file the appropriate criminal action in
court.
[Contreras] also failed to prove its allegation that the petitioner bank knew,
thru a letter sent by the formers lawyer, Atty. Crisanto Mutya, Jr., that the sale of
the subject land between him and Calinico was made only for loan purposes, and
that failure of Calinico to turn over the proceeds of the loan will invalidate the sale.
Even assuming, for the sake of argument, that the petitioner bank received a
copy of Atty. Mutyas letter, it was still well-within its discretion to grant or deny the
loan application after evaluating the documents submitted for loan applicant. As
earlier stated, [the certificate of title]issued in Calinicos favor was free from any
encumbrances. [PAB] is not anymore privy to whatever arrangements the owner
entered into regarding the proceeds of the loan.
Finally, [the Court points] out that [PAB] is a [GOCC]. While [the OCT] issued
in favor of Calinico by virtue of the deed of confirmation of sale contained a
prohibition against the alienation and encumbrance from the date of the patent,
the CA failed to mention that by the express wordings of the OCT itself, the
prohibition does not cover the alienation and encum-brance in favor of the
Government or any of its branches, units or institutions.
PHILIPPINE BANK OF COMMUNICATIONS vs. BASIC POLYPRINTERS AND
PACKAGING CORPORATION
G.R. No. 187581, October 20, 2014, J. Bersamin
A material financial commitment becomes significant in gauging the resolve,
determination, earnestness and good faith of the distressed corporation in financing
the proposed rehabilitation plan. This commitment may include the voluntary
undertakings of the stockholders or the would-be investors of the debtorcorporation indicating their readiness, willingness and ability to contribute funds or
property to guarantee the continued successful operation of the debtor corporation
during the period of rehabilitation.
In this case, the financial commitments
presented by Basic Polyprinters were insufficient for the purpose of rehabilitation.
Thus, its petition for corporate rehabilitation must necessarily fail.
Facts:
Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was a
domestic corporation engaged in the business of printing greeting cards, gift
wrappers, gift bags, calendars, posters, labels and other novelty items.
On February 27, 2004, Basic Polyprinters, along with the eight other
corporations belonging to the Limtong Group of Companies (namely: Cuisine
Connection, Inc., Fine Arts International, Gibson HP Corporation, Gibson Mega
Corporation, Harry U. Limtong Corporation, Main Pacific Features, Inc., T.O.L. Realty

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& Development Corp., and Wonder Book Corporation), filed a joint petition for
suspension of payments with approval of the proposed rehabilitation in the RTC.
Included in its overall Rehabilitation Program was the full payment of its
outstanding loans in favor of Philippine Bank of Communications (PBCOM), RCBC,
Land Bank, EPCIBank and AUB via repayment over 15 years with moratorium of twoyears for the interest and five years for the principal at 5% interest per annum and
a dacion en pago of its affiliate property in favor of EPCIBank.
Finding the petition sufficient in form and substance, the RTC issued the stay
order dated August 31, 2006. It appointed Manuel N. Cacho III as the rehabilitation
receiver, and required all creditors and interested parties, including the Securities
and Exchange Commission (SEC), to file their comments.
After the initial hearing and evaluation of the comments and opposition of the
creditors, including PBCOM, the RTC gave due course to the petition and referred it
to the rehabilitation receiver for evaluation and recommendation.
On October 18, 2007, the rehabilitation receiver submitted his report
recommending the approval of the rehabilitation plan. On December 19, 2007, the
rehabilitation receiver submitted his clarifications and corrections to his report and
recommendations.
On January 11, 2008, the RTC issued an order approving the rehabilitation
plan.
In the assailed decision promulgated on December 16, 2008, the CA affirmed
the questioned order of the RTC, agreeing with the finding of the rehabilitation
receiver that there were sufficient evidence, factors and actual opportunities in the
rehabilitation plan indicating that Basic Polyprinters could be successfully
rehabilitated in due time.
The PBCOM claims that the CA did not pass upon the issues presented in its
petition, that the rehabilitation plan did not contain the material financial
commitments required by Section 5, Rule 4 of the Interim Rules of Procedure for
Corporate Rehabilitation (Interim Rules); that, accordingly, the proposed repayment
scheme did not constitute a material financial commitment, and the proposed
dacion en pago was not proper because the property subject thereof had been
mortgaged in its favor;
Issue:
Whether or not Basic Polyprinters can be rehabilitated.
Ruling:
No. Basic Polyprinters cannot be rehabilitated.
A material financial commitment becomes significant in gauging the resolve,
determination, earnestness and good faith of the distressed corporation in financing

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the proposed rehabilitation plan. This commitment may include the voluntary
undertakings of the stockholders or the would-be investors of the debtor-corporation
indicating their readiness, willingness and ability to contribute funds or property to
guarantee the continued successful operation of the debtor corporation during the
period of rehabilitation.
Basic Polyprinters presented financial commitments, as follows:
5. Additional P10 million working capital to be sourced from the insurance
claim;
6. Conversion of the directors and shareholders deposit for future
subscription to common stock;
7. Conversion of substituted liabilities, if any, to additional paid-in capital to
increase the companys equity; and
8. All liabilities (cash advances made by the stockholders) of the company
from the officers and stockholders shall be treated as trade payables.
However, these financial commitments were insufficient for the purpose.
The commitment to add P10,000,000.00 working capital appeared to be
doubtful considering that the insurance claim from which said working capital would
be sourced had already been written-off by Basic Polyprinterss affiliate, Wonder
Book Corporation. A claim that has been written-off is considered a bad debt or a
worthless asset, and cannot be deemed a material financial commitment for
purposes of rehabilitation. At any rate, the proposed additional P10,000,000.00
working capital was insufficient to cover at least half of the shareholders deficit that
amounted to P23,316,044.00 as of June 30, 2006.
The Supreme Court also declared in Wonder Book Corporation v. Philippine
Bank of Communications (Wonder Book) that the conversion of all deposits for
future subscriptions to common stock and the treatment of all payables to officers
and stockholders as trade payables was hardly constituting material financial
commitments. Such conversion of cash advances to trade payables was, in fact, a
mere re-classification of the liability entry and had no effect on the shareholders
deficit. On the other hand, the Supreme Court cannot determine the effect of the
conversion of the directors and shareholders deposits for future subscription to
common stock and substituted liabilities on the shareholders deficit because their
amounts were not reflected in the financial statements contained in the rollo.
Basic Polyprinterss rehabilitation plan likewise failed to offer any proposal on
how it intended to address the low demands for their products and the effect of
direct competition from stores like SM, Gaisano, Robinsons, and other malls. Even
the P245 million insurance claim that was supposed to cover the destroyed
inventories worth P264 million appears to have been written-off with no probability
of being realized later on.
The Supreme Court observes, too, that Basic Polyprinterss proposal to enter
into the dacion en pago to create a source of fresh capital was not feasible
because the object thereof would not be its own property but one belonging to its
affiliate, TOL Realty and Development Corporation, a corporation also undergoing
rehabilitation. Moreover, the negotiations (for the return of books and magazines

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from Basic Polyprinterss trade creditors) did not partake of a voluntary undertaking
because no actual financial commitments had been made thereon.
Worthy of note here is that Wonder Book Corporation was a sister company of
Basic Polyprinters, being one of the corporations that had filed the joint petition for
suspension of payments and rehabilitation in SEC. Both of them submitted identical
commitments in their respective rehabilitation plans. As a result, as the Court
observed in Wonder Book, the commitments by Basic Polyprinters could not be
considered as firm assurances that could convince creditors, future investors and
the general public of its financial and operational viability.
Due to the rehabilitation plan being an indispensable requirement in
corporate rehabilitation proceedings, Basic Polyprinters was expected to exert a
conscious effort in formulating the same, for such plan would spell the future not
only for itself but also for its creditors and the public in general. The contents and
execution of the rehabilitation plan could not be taken lightly.
The Supreme Court is not oblivious to the plight of corporate debtors like
Basic Polyprinters that have inevitably fallen prey to economic recession and
unfortunate incidents in the course of their operations. However, the Supreme
Court must endeavor to balance the interests of all the parties that had a stake in
the success of rehabilitating the debtors. In doing so here, the Supreme Court
cannot now find the rehabilitation plan for Basic Polyprinters to be genuine and in
good faith, for it was, in fact, unilateral and detrimental to its creditors and the
public.
INTELLECTUAL PROPERTY LAW
GMA NETWORK, INC. vs. CENTRAL CATV, INC.
G.R. No. 176694, July 18, 2014, J. Brion
The mustcarry rule mandates that the local television (TV) broadcast signals
of an authorized TV broadcast station, such as the GMA Network, Inc., should be
carried in full by the cable antenna television (CATV) operator, without alteration or
deletion. In this case, the Central CATV, Inc. was found not to have violated the
must-carry rule when it solicited and showed advertisements in its cable television
(CATV) system. Such solicitation and showing of advertisements did not constitute
an infringement of the television and broadcast markets under Section 2 of E.O.
No. 205.
Facts:
Sometime in February 2000, GMA Network, Inc. (GMA), together with the
Kapisanan ng mga Brodkaster ng Pilipinas, Audiovisual Communicators,
Incorporated, Filipinas Broadcasting Network and Rajah Broadcasting Network, Inc.
(complainants), filed with the NTC a complaint against Central CATV, Inc. (Central
CATV) to stop it from soliciting and showing advertisements in its cable television
(CATV) system, pursuant to Section 2 of Executive Order (EO) No. 205. Under this
provision, a grantees authority to operate a CATV system shall not infringe on the

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television and broadcast markets. GMA alleged that the phrase television and
broadcast markets includes the commercial or advertising market.
In its answer, Central CATV admitted the airing of commercial advertisement
on its CATV network but alleged that Section 3 of EO No. 436 expressly allowed
CATV providers to carry advertisements and other similar paid segments provided
there is consent from their program providers.
After GMA presented and offered its evidence, Central CATV filed a motion to
dismiss by demurrer to evidence claiming that the evidence presented by the
complainants failed to show how Central CATVs acts of soliciting and/or showing
advertisements infringed upon the television and broadcast market.
The NTC granted Central CATVs demurrer to evidence and dismissed the
complaint. It ruled that since EO No. 205 does not define infringement, EO No.
436 merely clarified or filled in the details of the term to mean that the CATV
operators may show advertisements, provided that they secure the consent of their
program providers. In the present case, the documents attached to Central CATVs
demurrer to evidence showed that its program providers have given such consent.
The NTC added that since the insertion of advertisements under EO No. 436
would result in the alteration or deletion of the broadcast signals of the consenting
television broadcast station, its ruling necessarily results in the amendment of these
provisions. The second paragraph 9 of Section 3 of EO No. 436 is deemed to amend
the previous provisional authority issued to Central CATV, as well as Sections 6.2.1
and 6.4 of the NTCs Memorandum Circular (MC) 40888. Sections 6.2.1 and 6.4
require the CATV operators within the Grade A or B contours of a television
broadcast station to carry the latters television broadcast signals in full, without
alteration or deletion. This is known as the must-carryrule.
GMA went to the CA, which, in turn, upheld the NTC ruling. Hence, GMA filed a
petition for review on certiorari before the Supreme Court.
GMA alleges that the NTC gravely erred in failing to differentiate between EO
No. 205, which is a law, and EO No. 436 which is merely an executive issuance. An
executive issuance cannot make a qualification on the clear prohibition in the law,
EO No. 205.
On the other hand, Central CATV contends that EO No. 205 does not
expressly prohibit CATV operators from soliciting and showing advertisements. The
non-infringement limitation under Section 2 thereof, although couched in general
terms, should not be interpreted in such a way as to deprive CATV operators of
legitimate business opportunities. Also, EO No. 436, being an executive issuance
and a valid administrative legislation, has the force and effect of a law and cannot
be subject to collateral attack.
Issue:
Whether Central CATV, as a CATV operator, could show commercial
advertisements in its CATV networks.

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Ruling:
Yes. Central CATV could show commercial advertisements in its CATV
networks.
First, EO No. 205 is a law while EO No. 436 is an executive issuance. The NTC
and the CA proceeded from the wrong premise that both EO No. 205 and EO No.
436 are statutes.
EO No. 205 was issued by President Corazon Aquino. At the time of the
issuance of EO No. 205, President Aquino was still exercising legislative powers. EO
No. 436, on the other hand, is an executive order which was issued by President
Ramos in the exercise purely of his executive power. In short, it is not a law. In
considering EO No. 436 as a law, the NTC and the CA hastily concluded that it has
validly qualified Section 2 of EO No. 205 and has amended the provisions of MC 40888. Following this wrong premise, the NTC and the CA ruled that Central CATV has a
right to show advertisements under Section 3 of EO No. 436. While Central CATV
indeed has the right to solicit and show advertisements, the NTC and the CA
incorrectly interpreted and appreciated the relevant provisions of the law and rules.
The Court seeks to correct this error by ruling that MC 40888 alone sufficiently
resolves the issue on whether Central CATV could show advertisements in its CATV
networks. In other words, EO No. 436 is not material in resolving the substantive
issue before us.
Second, the CATV operators are not prohibited from showing advertisements
under EO No. 205 and its implementing rules and regulations, MC 40888.
MC 40888 has sufficiently filled in the details of Section 2 of EO No. 205,
specifically the contentious proviso that the authority to operate [CATV] shall not
infringe on the television and broadcast markets. It is clear from Section 6.1 of MC
040888 that the phrase television market connotes audience or viewers in
geographic areas and not the commercial or advertising market as what GMA
claims.
The kind of infringement prohibited by Section 2 of EO No. 205 was
particularly clarified under Sections 6.2, 6.2.1, 6.4(a)(1) and 6.4(b) of MC 040888,
which embody the mustcarry rule. This rule mandates that the local TV broadcast
signals of an authorized TV broadcast station, such as GMA, should be carried in full
by the CATV operator, without alteration or deletion.
MC 40888 mirrored the legislative intent of EO No. 205 and acknowledged the
importance of the CATV operations in the promotion of the general welfare. The
circular provides in its whereas clause that the CATV has the ability to offer
additional programming and to carry much improved broadcast signals in the
remote areas, thereby enriching the lives of the rest of the population through the
dissemination of social, economic and educational information, and cultural
programs. Unavoidably, however, the improved broadcast signals that CATV offers
may infringe or encroach upon the audience or viewer market of the freesignal TV.
This is so because the latters signal may not reach the remote areas or reach them

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with poor signal quality. To foreclose this possibility and protect the freeTV market
(audience market), the mustcarry rule was adopted to level the playing field. With
the mustcarry rule in place, the CATV networks are required to carry and show in full
the free-local TVs programs, including advertisements, without alteration or
deletion. This, in turn, benefits the public who would have a wide range of choices of
programs or broadcast to watch. This also benefits the freeTV signal as their
broadcasts are carried under the CATVs much-improved broadcast signals thus
expanding their viewers share.
The Court finds that the Sections 6.2, 6.2.1, 6.4(a)(1) and 6.4(b) of MC 4 0888,
which embody the mustcarry rule, are the governing rules in the present case.
Under these rules, the phrase television and broadcast markets means viewers or
audience market and not commercial advertisement market as claimed by GMA.
Therefore, Central CATVs act of showing advertisements does not constitute an
infringement of the television and broadcast markets under Section 2 of EO No.
205.
SHANG PROPERTIES REALTY CORPORATION (formerly THE SHANG GRAND
TOWER CORPORATION) and SHANG PROPERTIES, INC. (formerly EDSA
PROPERTIES HOLDINGS, INC.), vs. ST. FRANCIS DEVELOPMENT
CORPORATION
G.R. No. 190706, July 21, 2014, J. Perlas-Bernabe
Section 168 of Republic Act No. 8293, otherwise known as the Intellectual
Property Code of the Philippines (IP Code), provides for the rules and regulations
on unfair competition. Section 168.2 proceeds to the core of the provision,
describing forthwith who may be found guilty of and subject to an action of unfair
competition that is, any person who shall employ deception or any other means
contrary to good faith by which he shall pass off the goods manufactured by him or
in which he deals, or his business, or services for those of the one having
established such goodwill, or who shall commit any acts calculated to produce said
result x x x. In this case, the Court finds the element of fraud to be wanting hence,
there can be no unfair competition.
Facts:
St. Francis Development Corporation (SFDC) a domestic corporation
engaged in the real estate business and the developer of the St. Francis Square
Commercial Center, built sometime in 1992, located at Ortigas Center,
Mandaluyong City, Metro Manila (Ortigas Center) filed an intellectual property
violation case for unfair competition, false or fraudulent declaration, and damages
arising from Shang Properties use and filing of applications for the registration of
the marks THE ST. FRANCIS TOWERS and THE ST. FRANCIS SHANGRI-LA PLACE
against Shang Properties before the IPO Bureau of Legal Affairs (BLA).
In its complaints, SFDC alleged that it has used the mark ST. FRANCIS to
identify its numerous property development projects located at Ortigas Center.
SFDC added that as a result of its continuous use of the mark ST. FRANCIS in its
real estate business, it has gained substantial goodwill with the public that

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consumers and traders closely identify the said mark with its property development
projects.
Shang Properties contended that SFDC is barred from claiming ownership and
exclusive use of the mark ST. FRANCIS because the same is geographically
descriptive of the goods or services for which it is intended to be used. This is
because SFDCs as well as Shang Properties real estate development projects are
located along the streets bearing the name St. Francis, particularly, St. Francis
Avenue and St. Francis Street (now known as Bank Drive), both within the vicinity of
the Ortigas Center.
The BLA rendered a decision and found that Shang Properties committed acts
of unfair competition against SFDC by its use of the mark THE ST. FRANCIS
TOWERS but not with its use of the mark THE ST. FRANCIS SHANGRI-LA PLACE.
The BLA considered SFDC to have gained goodwill and reputation for its mark,
which therefore entitles it to protection against the use by other persons, at least, to
those doing business within the Ortigas Center.
Both parties appealed the BLA decision. The IPO Director-General reversed
the BLAs finding that Shang Properties committed unfair competition through their
use of the mark THE ST. FRANCIS TOWERS, thus dismissing such charge. He found
that SFDC could not be entitled to the exclusive use of the mark ST. FRANCIS,
even at least to the locality where it conducts its business, because it is a
geographically descriptive mark, considering that it was Shang Properties as well as
SFDCs intention to use the mark ST. FRANCIS in order to identify, or at least
associate, their real estate development projects/businesses with the place or
location where they are situated/conducted, particularly, St. Francis Avenue and St.
Francis Street (now known as Bank Drive), Ortigas Center.
SFDC elevated the case to the CA. The appellate court found Shang
Properties guilty of unfair competition not only with respect to their use of the mark
THE ST. FRANCIS TOWERS but also of the mark THE ST. FRANCIS SHANGRI-LA
PLACE. It ruled that SFDC which has exclusively and continuously used the mark
ST. FRANCIS for more than a decade, and, hence, gained substantial goodwill and
reputation thereby is very much entitled to be protected against the
indiscriminate
usage by other companies of the trademark/name it has so painstakingly tried to
establish and maintain.
Issue:
Whether or not Shang Properties companies are guilty of unfair competition
in using the marks THE ST. FRANCIS TOWERS and THE ST. FRANCIS SHANGRI-LA
PLACE.
Ruling:
No. Shang Properties are not guilty of unfair competition in using the marks
THE ST. FRANCIS TOWERS and THE ST. FRANCIS SHANGRI-LA PLACE.

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Section 168 of Republic Act No. 8293, otherwise known as the Intellectual
Property Code of the Philippines (IP Code), provides for the rules and regulations on
unfair competition. Section 168.2 proceeds to the core of the provision, describing
forthwith who may be found guilty of and subject to an action of unfair competition
that is, any person who shall employ deception or any other means contrary to
good faith by which he shall pass off the goods manufactured by him or in which he
deals, or his business, or services for those of the one having established such
goodwill, or who shall commit any acts calculated to produce said result x x x.
The true test of unfair competition has thus been whether the acts of the
defendant have the intent of deceiving or are calculated to deceive the ordinary
buyer making his purchases under the ordinary conditions of the particular trade to
which the controversy relates. It is therefore essential to prove the existence of
fraud, or the intent to deceive, actual or probable, determined through a judicious
scrutiny of the factual circumstances attendant to a particular case.
Here, the Court finds the element of fraud to be wanting hence, there can be
no unfair competition. What the CA appears to have disregarded or been mistaken
in its disquisition, however, is the geographically-descriptive nature of the mark ST.
FRANCIS which thus bars its exclusive appropriability, unless a secondary meaning
is acquired.
Under Section 123.2 of the IP Code, specific requirements have to be met in
order to conclude that a geographically-descriptive mark has acquired secondary
meaning, to wit: (a) the secondary meaning must have arisen as a result of
substantial commercial use of a mark in the Philippines (b) such use must result in
the distinctiveness of the mark insofar as the goods or the products are concerned
and (c) proof of substantially exclusive and continuous commercial use in the
Philippines for five (5) years before the date on which the claim of distinctiveness is
made. Unless secondary meaning has been established, a geographicallydescriptive mark, due to its general public domain classification, is perceptibly
disqualified from trademark registration.
The records are bereft of any showing that Shang Properties gave their
goods/services the general appearance that it was SFDC which was offering the
same to the public. Neither did Shang Properties employ any means to induce the
public towards a false belief that it was offering SFDCs goods/services. Nor did
Shang Properties make any false statement or commit acts tending to discredit the
goods/services offered by SFDC. Accordingly, the element of fraud which is the core
of unfair competition had not been established.
Besides, SFDC was not able to prove its compliance with the requirements
stated in Section 123.2 of the IP Code to be able to conclude that it acquired a
secondary meaning and, thereby, an exclusive right to the ST. FRANCIS
mark, which is, as the IPO Director-General correctly pointed out, geographicallydescriptive of the location in which its realty developments have been built. While it
is true that SFDC had been using the mark ST. FRANCIS since 1992, its use thereof
has been merely confined to its realty projects within the Ortigas Center. As its use
of the mark is clearly limited to a certain locality, it cannot be said that there was
substantial commercial use of the same recognized all throughout the country.

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Neither is there any showing of a mental recognition in buyers and potential


buyers minds that products connected with the mark ST. FRANCIS are associated
with the same source that is, the enterprise of SFDC. Thus, absent any showing
that there exists a clear goods/service-association between the realty projects
located in the aforesaid area and herein SFDC as the developer thereof, the latter
cannot be said to have acquired a secondary meaning as to its use of the ST.
FRANCIS mark.
ROBERTO CO vs. KENG HUAN JERRY YEUNG and EMMA YEUNG
G.R. No. 212705, September 10, 2014, J. Perlas-Bernabe
Unfair competition is defined as the passing off (or palming off) or attempting to
pass off upon the public of the goods or business of one person as the goods or
business of another with the end and probable effect of deceiving the public. This takes
place where the defendant gives his goods the general appearance of the goods of his
competitor with the intention of deceiving the public that the goods are those of his
competitor. Here, it has been established that Co conspired with the Laus in the
sale/distribution of counterfeit Greenstone products to the public, which were even
packaged in bottles identical to that of the original, thereby giving rise to the
presumption of fraudulent intent. In light of the foregoing definition, it is thus clear that
Co, together with the Laus, committed unfair competition, and should, consequently, be
held liable therefor. Although liable for unfair competition, the Court deems it apt to
clarify that Co was properly exculpated from the charge of trademark infringement
considering that the registration of the trademark "Greenstone" essential as it is in a
trademark infringement case was not proven to have existed during the time the acts
complained of were committed.

Facts:
At the core of the controversy is the product Greenstone Medicated Oil Item No.
16 (Greenstone) which is manufactured by Greenstone Pharmaceutical, a traditional
Chinese medicine manufacturing firm based in Hong Kong and owned by Keng Huan
Jerry Yeung (Yeung), and is exclusively imported and distributed in the Philippines by
Taka Trading owned by Yeungs wife, Emma Yeung (Emma).
On July 27, 2000, Sps. Yeung filed a civil complaint for trademark infringement
and unfair competition before the RTC against Ling Na Lau, her sister Pinky Lau (the
Laus), and Cof or allegedly conspiring in the sale of counterfeit Greenstone products to
the public. In the complaint, Sps. Yeung averred that on April 24, 2000, Emmas brother,
Jose Ruivivar III (Ruivivar), bought a bottle of Greenstone from Royal Chinese Drug Store
(Royal) in Binondo, Manila, owned by Ling Na Lau. However, when he used the product,
Ruivivar doubted its authenticity considering that it had a different smell, and the heat it
produced was not as strong as the original Greenstone he frequently used. Having been
informed by Ruivivar of the same, Yeung, together with his son, John Philip, went to
Royal on May 4, 2000 to investigate the matter, and, there, found seven (7) bottles of
counterfeit Greenstone on display for sale. He was then told by Pinky Lau (Pinky) the
stores proprietor thatthe items came from Co of Kiao An Chinese Drug Store.
According to Pinky, Co offered the products on April 28, 2000 as "Tienchi Fong Sap Oil
Greenstone" (Tienchi) which she eventually availed from him. Upon Yeungs prodding,
Pinky wrote a note stating these events.

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In defense, Co denied having supplied counterfeit items to Royal and maintained


that the stocks of Greenstone came only from Taka Trading. Meanwhile, the Laus denied
selling Greenstone and claimed that the seven (7) items of Tienchi were left by an
unidentified male person at the counter of their drug store and that when Yeung came
and threatened to report the matter to the authorities, the items were surrendered to
him. As to Pinkys note, it was claimed that she was merely forced by Yeung to sign the
same.
The RTC ruled in favor of Sps. Yeung . The CA affirmed the RTC Decision . The Laus
and Co respectively moved for reconsideration but were, however, denied. Hence, Co
filed the instant petition.

Issue:
Whether or not the CA correctly upheld Cos liability for unfair competition.

Ruling:
The petition is without merit.
Unfair competition is defined as the passing off (or palming off) or attempting to
pass off upon the public of the goods or business of one person as the goods or
business of another with the end and probable effect of deceiving the public. This takes
place where the defendant gives his goods the general appearance of the goods of his
competitor with the intention of deceiving the public that the goods are those of his
competitor.
Here, it has been established that Co conspired with the Laus in the
sale/distribution of counterfeit Greenstone products to the public, which were even
packaged in bottles identical to that of the original, thereby giving rise to the
presumption of fraudulent intent. In light of the foregoing definition, it is thus clear that
Co, together with the Laus, committed unfair competition, and should, consequently, be
held liable therefor.
Although liable for unfair competition, the Court deems it apt to clarify that Co
was properly exculpated from the charge of trademark infringement considering that
the registration of the trademark "Greenstone" essential as it is in a trademark
infringement case was not proven to have existed during the time the acts complained
of were committed, i.e., in May 2000. In this relation, the distinctions between suits for
trademark infringement and unfair competition prove useful: (a) the former is the
unauthorized use of a trademark, whereas the latter is the passing off of one's goods as
those of another; (b) fraudulent intent is unnecessary in the former, while it is essential
in the latter; and (c) in the former, prior registration of the trademark is a pre-requisite
to the action, while it is not necessary in the latter.

TAIWAN KOLIN CORPORATION, LTD. vs. KOLIN ELECTRONICS CO., INC.,


G.R. No. 209843, March 25, 2015, J. Velasco, Jr.
In trademark registration, while both competing marks refer to the word
KOLIN written in upper case letters and in bold font, but one is italicized and
colored black while the other is white in pantone red color background and there

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are differing features between the two, registration of the said mark could be
granted. It is hornbook doctrine that emphasis should be on the similarity of the
products involved and not on the arbitrary classification or general description of
their properties or characteristics. The mere fact that one person has adopted and
used a trademark on his goods would not, without more, prevent the adoption and
use of the same trademark by others on unrelated articles of a different kind.
Facts:
Taiwan Kolin filed with the IPO, then BPTTT, a trademark application, for the
use of
KOLIN on a combination of goods, including colored televisions,
refrigerators, window-type and split-type air conditioners, electric fans and water
dispensers with Taiwan Kolin electing Class 9 as the subject of its application. Kolin
Electronics opposed Taiwan Kolins application arguing that the mark Taiwan Kolin
seeks to register is identical, if not confusingly similar, with its registered KOLIN
mark covering products under Class 9 of the NCL.
BLA-IPO denied Taiwan Kolins application, citing Sec. 123(d) of the IP Code
that a mark cannot be registered if it is identical with a registered mark belonging to
a different proprietor in respect of the same or closely-related goods. Accordingly,
Kolin Electronics, as the registered owner of the mark KOLIN for goods falling
under Class 9 of the NCL, should then be protected against anyone who impinges on
its right, including Taiwan Kolin who seeks to register an identical mark to be used
on goods also belonging to Class 9 of the NCL.
Taiwan Kolin appealed the above Decision to the Office of the Director
General of the IPO which gave due course to the appeal ratiocinating that product
classification alone cannot serve as the decisive factor in the resolution of whether
or not the goods are related and that emphasis should be on the similarity of the
products involved and not on the arbitrary classification or general description of
their properties or characteristics.
Kolin Electronics elevated the case to the CA which found for Kolin Electronics
on the strength of the following premises: (a) the mark sought to be registered by
Taiwan Kolin is confusingly similar to the one already registered in favor of Kolin
Electronics; (b) there are no other designs, special shape or easily identifiable
earmarks that would differentiate the products of both competing companies; and
(c) the intertwined use of television sets with amplifier, booster and voltage
regulator bolstered the fact that televisions can be considered as within the normal
expansion of Kolin Electronics, and is thereby deemed covered by its trademark as
explicitly protected under Sec. 138 of the IP Code.
Issue:
Whether or not Taiwan Kolin is entitled to its trademark registration of
KOLIN over its specific goods of television sets and DVD players.
Ruling:
Yes, Taiwan Kolin is entitled.

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Whether or not the products covered by the trademark sought to be


registered by Taiwan Kolin, on the one hand, and those covered by the prior issued
certificate of registration in favor of Kolin Electronics, on the other, fall under the
same categories in the NCL is not the sole and decisive factor in determining a
possible violation of Kolin Electronics intellectual property right should Taiwan
Kolins application be granted. It is hornbook doctrine that emphasis should be on
the similarity of the products involved and not on the arbitrary classification or
general description of their properties or characteristics. The mere fact that one
person has adopted and used a trademark on his goods would not, without more,
prevent the adoption and use of the same trademark by others on unrelated articles
of a different kind.
It must be noted that the products covered by Taiwan Kolins application and
Kolin Electronics registration are unrelated.
A certificate of trademark registration confers upon the trademark owner the
exclusive right to sue those who have adopted a similar mark not only in connection
with the goods or services specified in the certificate, but also with those that are
related thereto.
In resolving one of the pivotal issues in this casewhether or not the
products of the parties involved are relatedthe doctrine in Mighty Corporation is
authoritative. There, the Court held that the goods should be tested against several
factors before arriving at a sound conclusion on the question of relatedness. Among
these are:
(a) the business (and its location) to which the goods belong;
(b) the class of product to which the goods belong;
(c) the products quality, quantity, or size, including the nature of the
package, wrapper or container;
(d) the nature and cost of the articles;
(e) the descriptive properties, physical attributes or essential characteristics
with reference to their form, composition, texture or quality;
(f) the purpose of the goods;
(g) whether the article is bought for immediate consumption, that is, day-today household items;
(h) the fields of manufacture;
(i) the conditions under which the article is usually purchased; and
(j) the channels of trade through which the goods flow, how they are
distributed, marketed, displayed and sold.
As mentioned, the classification of the products under the NCL is merely part
and parcel of the factors to be considered in ascertaining whether the goods are
related. It is not sufficient to state that the goods involved herein are electronic

Page 91 of 128

products under Class 9 in order to establish relatedness between the goods, for this
only accounts for one of many considerations enumerated in Mighty Corporation.
Clearly then, it was erroneous for Kolin Electronics to assume over the CA to
conclude that all electronic products are related and that the coverage of one
electronic product necessarily precludes the registration of a similar mark over
another. In this digital age wherein electronic products have not only diversified by
leaps and bounds, and are geared towards interoperability, it is difficult to assert
readily, as Kolin Electronics simplistically did, that all devices that require plugging
into sockets are necessarily related goods.
As a matter of fact, while both competing marks refer to the word KOLIN
written in upper case letters and in bold font, the Court at once notes the distinct
visual and aural differences between them: Kolin Electronics mark is italicized and
colored black while that of Taiwan Kolin is white in pantone red color background.
The differing features between the two, though they may appear minimal, are
sufficient to distinguish one brand from the other.
Finally, in line with the foregoing discussions, more credit should be given to
the ordinary purchaser. Cast in this particular controversy, the ordinary purchaser
is not the completely unwary consumer but is the ordinarily intelligent buyer
considering the type of product involved
All told, We are convinced that Taiwan Kolins trademark registration not only
covers unrelated good, but is also incapable of deceiving the ordinary intelligent
buyer. The ordinary purchaser must be thought of as having, and credited with, at
least a modicum of intelligence to be able to see the differences between the two
trademarks in question.
TRANSPORTATION LAW
VIGILANCE OVER GOODS
ASIAN TERMINALS, INC. vs. FIRST LEPANTO-TAISHO INSURANCE
CORPORATION
G.R. No. 185964, June 16, 2014, J. Reyes
The shipment received by the ATI from the vessel of COCSCO was found to
have sustained loss and damages. An arrastre operators duty is to take good care
of the goods and to turn them over to the party entitled to their possession. It must
prove that the losses were not due to its negligence or to that of its employees.
The Court held that ATI failed to discharge its burden of proof. ATI blamed COSCO
but when the damages were discovered, the goods were already in ATIs custody for
two weeks. Witnesses also testified that the shipment was left in an open area
exposed to the elements, thieves and vandals.
Facts:
About 3,000 bags of sodium tripolyphosphate contained in 100 plain jumbo
bags were loaded on M/V Da Feng owned by China Ocean Shipping Co. (COSCO) in

Page 92 of 128

favor of Grand Asian Sales, Inc. (GASI). It was insured by GASI with FIRST LEPANTO
for P7,959,550.50 under Marine Open Policy No. 0123.
The shipment arrived in Manila and was discharged into the custody of ATI,
which was engaged in arrastre business. It remained at ATIs storage area until
withdrawen by broker, Proven Customs Brokerage Corporation (PROVEN) for
delivery to GASI.
Upon receipt, GASI found that the goods incurred shortages of 8,600 kg. and
spillages of 3,315 kg. for a total of loss valued at P166,722.41. GASI sought
recompense from COSCO through its Philippine agent Smith Bell Shipping Lines, Inc.
(SMITH BELL), ATI, and PROVEN, but was denied. Thus, FIRST LEPANTO paid
P165,772.40 as insurance indemnity.
Then GASI executed a Release of Claim, discharging FIRST LEPANTO from any
and all liabilities pertaining to the damaged shipment and subrogating it to all the
rights of recovery and claims the former may have against any person or
corporation in relation to the damaged shipment.
FIRST LEPANTO demanded reimbursement from COSCO through SMITH BELL,
PROVEN, and ATI. When denied, it filed a Complaint for sum of money before the
MeTC.
ATI denied liability and claimed it exercised due diligence and care in
handling the goods. ATI alleged that upon arrival, it was discovered that one jumbo
bag sustained loss/damage while in custody of COSCO as evidenced by Turn Over
Survey of Bad Order Cargo No. 47890. During withdrawal of PROVEN, it was reexamined and the goods were found to be in the same condition as when it was
turned over to ATI such that one jumbo bag was damaged. ATI also averred that
even if it was liable, its contract for cargo handling service limits its liability to not
more than P5,000 per package.
PROVEN also denied liability and claimed that the damages were sustained
before they were withdrawn from ATIs custody under which the shipment was left in
an open area exposed to the elements, thieves and vandals. Despite receipt of
summons, COSCO and SMITH BELL failed to file an answer to the complaint.
MeTC dismissed the claim, absolving ATI and PROVEN of liability and finding
COSCO to be liable but ruling that it had no jurisdiction over it since it was a foreign
corporation and it was not established that SMITH BELL is its Philippine Agent. On
appeal, the RTC reversed this decision, by which it held ATI liable. ATI challenged the
RTCs decision before the Court of Appeals in which it argued that there was no valid
subrogation because FIRST LEPANTO failed to present a valid and existing Marine
Open Policy or insurance contract. The CA dismissed the appeal.
Issue:
1. Is ATI liable for the damages of the shipment?

Page 93 of 128

2. Whether or not the presentation of the insurance policy is indispensable in


proving right of FIRST LEPANTO to be subrogated
Ruling:
1. Yes, ATI failed to prove that it exercised due care and diligence while
shipment was under its custody, control and possession as arrastre operator.
Factual questions pertaining to ATIs liability has already been settled in the
uniform factual findings of the RTC and the CA. Such findings are binding and
conclusive upon the Supreme Court. Only questions of law are allowed in petitions
for review on certiorari under Rule 45 of the Rules of Court.
The relationship between the consignee and the arrastre operator is akin to
that existing between the consignee and/or the owner of the shipped goods and the
common carrier, or that between a depositor and a warehouseman. Hence, in the
performance of its obligations, an arrastre operator should observe the same
degree of diligence as that required of a common carrier and a warehouseman. An
arrastre operators duty is to take good care of the goods and to turn them over to
the party entitled to their possession.
Since the safekeeping of the goods is its responsibility, it must prove that the
losses were not due to its negligence or to that of its employees. ATI failed to
discharge its burden of proof. Instead, it insisted on shifting the blame to COSCO on
the basis of the Request for Bad Order Survey, purportedly showing that when ATI
received the shipment, one jumbo bag thereof was already in damaged condition.
The Court affirmed the finding of the RTC and CA that ATIs contention was
improbable and illogical. The date of the said document was too distant from the
date when the shipment was actually received by ATI from COSCO. In fact, what the
document established is that when the loss/damage was discovered, the shipment
has been in ATIs custody for at least two weeks. This circumstance, coupled with
the undisputed declaration of PROVENs witnesses that while the shipment was in
ATIs custody, it was left in an open area exposed to the elements, thieves and
vandals, all generate the conclusion that ATI failed to exercise due care and
diligence.
2. No, the non-presentation of the insurance contract is not fatal to FIRST
LEPANTOs cause of action.
ATI put in issue the submission of the insurance contract for the first time
before the CA. ATI also failed to allege the necessity of the insurance contract in its
answer to the complaint before the MeTC. Neither was the same considered during
pre-trial as one of the decisive matters in the case.
Since it was not agreed during the pre-trial proceedings that FIRST LEPANTO
will have to prove its subrogation rights by presenting a copy of the insurance
contract, ATI is barred from pleading the absence of such contract in its appeal. It is
imperative for the parties to disclose during pre-trial all issues they intend to raise
during the trial because they are bound by the delimitation of such issues. The

Page 94 of 128

determination of issues during the pre-trial conference bars the consideration of


other questions, whether during trial or on appeal.
However, the Court ruled that the non-presentation of the insurance contract
is not fatalto FIRST LEPANTOs right to collect reimbursement. Subrogation is the
substitution of one person in the place of another with reference to a lawful claim or
right, so that he who is substituted succeeds to the rights of the other in relation to
a debt or claim, including its remedies or securities.
As a general rule, the marine insurance policy needs to be presented in
evidence before the insurer may recover the insured value of the lost/damaged
cargo in the exercise of its subrogatory right. Presentation of the contract
constitutive of the insurance relationship between the consignee and insurer is
critical because it is the legal basis of the latters right to subrogation.
But the Court held that there are exceptions to this rule. The right of
subrogation accrues simply upon payment by the insurance company of the
insurance claim. Hence, presentation in evidence of the marine insurance policy is
not indispensable before the insurer may recover from the common carrier the
insured value of the lost cargo in the exercise of its subrogatory right. The
subrogation receipt, by itself, was held sufficient to establish not only the
relationship between the insurer and consignee, but also the amount paid to settle
the insurance claim.
It was held that the Certificate of Insurance and the Release of Claim
presented as evidence sufficiently established FIRST LEPANTOs right to collect
reimbursement as the subrogee of GASI.
LIABILITY FOR ACTS OF OTHERS
MARIANO C. MENDOZA AND ELVIRA LIM vs. SPOUSES LEONORA J. GOMEZ
AND GABRIEL V. GOMEZ
G.R. No. 160110, June 18, 2014, J. Perez

The operator of a bus company cannot renege on the obligation brought


about by collision of vehicles by claiming that she is not the true owner of the bus.
In case of collision of motor vehicles, the person whose name appears in the
certificate of registration shall be considered the employer of the person driving the
vehicle and shall be directly and primarily liable with the driver under the principle
of vicarious liability.

Page 95 of 128

Facts:

An Isuzu Elf truck (Isuzu truck) owned by Leonora J. Gomez (Leonora) and
driven by Antenojenes Perez (Perez), was hit by a Mayamy Transportation bus
(Mayamy bus) with registered under the name of Elvira Lim (Lim) and driven by
Mariano C. Mendoza (Mendoza). Mendoza was charged with reckless imprudence
resulting in damage to property and multiple physical injuries, however, he eluded
arrest, prompting the spouses Gomez to file a separate complaint for damages
against Mendoza and Lim, seeking actual damages, compensation for lost income,
moral damages, exemplary damages, attorneys fees and costs of the suit.

At the trial, it was found out that the Isuzu truck was on its right lane when
the Mayamy bus intruded the lane which caused the collision. As a result, the
helpers on board the truck sustained injuries necessitating medical treatment
amounting to P11,267.35, which amount was shouldered by spouses Gomez. The
spouses also contended that the collision deprived them the daily income of
P1,000.00 as they were engaged in buying plastic scraps and delivering them to
recycling plants, truck was vital in the furtherance of the business. Lastly, the
spouses claimed that the Isuzu truck sustained extensive damages on its cowl,
chassis, lights and steering wheel, amounting to P142,757.40.

Lim raised the issue of ownership of the bus in question that although the
registered owner was Lim, the actual owner of the bus was one SPO1 Cirilo
Enriquez, who had the bus attached with Mayamy Transportation Company under
the so-called "kabit system."

The RTC found Mendoza liable for direct personal negligence under Article
2176 of the Civil Code, and it also found Lim vicariously liable under Article 2180 of
the same Code. The RTC relied on the Certificate of Registration in concluding that
she is the registered owner of the bus in question. Although actually owned by
Enriquez, following the established principle in transportation law, Lim, as the
registered owner, is the one who can be held liable. Mendoza and Lim were ordered
to pay spouses Gomez 1) the costs of repair of the damaged vehicle in the amount
of P142,757.40; 2) the amount ofP1,000.00 per day from March 7, 1997 up to
November 1997 representing the unrealized income of the spouses Gomez when
the incident transpired up to the time the damaged Isuzu truck was repaired; 3)

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P100,000.00 as moral damages, plus a separate amount of P50,000.00 as


exemplary damages; 4) P50,000.00 as attorneys fees; and lastly 5) the costs of
suit. Aggrieved, Mendoza appealed to the CA which affirmed the decision of the RTC
with the exception of the award of unrealized income. Hence, the present petition.

Issues:

1. Whether or not Lim is liable as the employer despite the fact that the original
owner of the bus is Enriquez
2. Whether or not the award of moral and exemplary damages as well as
attorneys fees and costs of suit is proper

Ruling:

1. Yes, Lim shall be vicariously liable with Mendoza.

In Filcar Transport Services v. Espinas, we held that the registered owner is


deemed the employer of the negligent driver, and is thus vicariously liable under
Article 2176, in relation to Article 2180, of the Civil Code. Citing Equitable Leasing
Corporation v. Suyom, the Court ruled that in so far as third persons are concerned,
the registered owner of the motor vehicle is the employer of the negligent driver,
and the actual employer is considered merely as an agent of such owner. Thus,
whether there is an employer-employee relationship between the registered owner
and the driver is irrelevant in determining the liability of the registered owner who
the law holds primarily and directly responsible for any accident, injury or death
caused by the operation of the vehicle in the streets and highways.

As early as Erezo v. Jepte, the Court, speaking through Justice Alejo Labrador
summarized the justification for holding the registered owner directly liable, to wit:

Page 97 of 128

x x x The main aim of motor vehicle registration is to identify the


owner so that if any accident happens, or that any damage or injury is
caused by the vehicles on the public highways, responsibility therefore
can be fixed on a definite individual, the registered owner. Instances
are numerous where vehicle running on public highways caused
accidents or injuries to pedestrians or other vehicles without positive
identification of the owner or drivers, or with very scant means of
identification. It is to forestall these circumstances, so inconvenient or
prejudicial to the public, that the motor vehicle registration is primarily
ordained, in the interest of the determination of persons responsible
for damages or injuries caused on public highways. As such, there can
be no other conclusion but to hold Lim vicariously liable with Mendoza.

2. As to exemplary damages and costs of suit, yes but as to moral damages


and attorneys fees, no.

Moral Damages. Moral damages are awarded to enable the injured party to
obtain means, diversions or amusements that will serve to alleviate the moral
suffering he has undergone, by reason of the defendant's culpable action. In fine,
an award of moral damages calls for the presentation of 1) evidence of besmirched
reputation or physical, mental or psychological suffering sustained by the claimant;
2)a culpable act or omission factually established; 3) proof that the wrongful act or
omission of the defendant is the proximate cause of the damages sustained by the
claimant; and 4) the proof that the act is predicated on any of the instances
expressed or envisioned by Article 2219 and Article 2220 of the Civil Code.

A review of the complaint and the transcript of stenographic notes yields the
pronouncement that respondents neither alleged nor offered any evidence of
besmirched reputation or physical, mental or psychological suffering incurred by
them.

Spouses Gomez cannot rely on Article 2219 (2) of the Civil Code which allows
moral damages in quasi-delicts causing physical injuries because in physical
injuries, moral damages are recoverable only by the injured party, and in the case
at bar, herein respondents were not the ones who were actually injured. In B.F.
Metal (Corp.) v. Sps. Lomotan, et al., the Court, in a claim for damages based on

Page 98 of 128

quasi-delict causing physical injuries, similarly disallowed an award of moral


damages to the owners of the damaged vehicle, when neither of them figured in the
accident and sustained injuries.

Neither can respondents rely on Article 21 of the Civil Code as the RTC
erroneously did. Article 21 deals with acts contra bonus mores, and has the
following elements: (1) There is an act which is legal; (2) but which is contrary to
morals, good custom, public order, or public policy; (3) and it is done with intent to
injure. In the present case, it can hardly be said that Mendozas negligent driving
and violation of traffic laws are legal acts. Moreover, it was not proven that Mendoza
intended to injure Perez, et al. Thus, Article 21 finds no application to the case at
bar. All in all, we find that the RTC and the CA erred in granting moral damages to
respondents.

Exemplary Damages. Article 2229 of the Civil Code provides that exemplary
or corrective damages are imposed, by way of example or correction for the public
good, in addition to moral, temperate, liquidated or compensatory damages. Article
2231 of the same Code further states that in quasi-delicts, exemplary damages may
be granted if the defendant acted with gross negligence.
In motor vehicle accident cases, exemplary damages may be awarded where the
defendants misconduct is so flagrant as to transcend simple negligence and be
tantamount to positive or affirmative misconduct rather than passive or negative
misconduct. In characterizing the requisite positive misconduct which will support a
claim for punitive damages, the courts have used such descriptive terms as willful,
wanton, grossly negligent, reckless, or malicious, either alone or in combination.

Gross negligence is the absence of care or diligence as to amount to a


reckless disregard of the safety of persons or property. It evinces a thoughtless
disregard of consequences without exerting any effort to avoid them. In the case at
bar, having established respondents right to compensatory damages, exemplary
damages are also in order, given the fact that Mendoza was grossly negligent in
driving the Mayamy bus. His act of intruding or encroaching on the lane rightfully
occupied by the Isuzu truck shows his reckless disregard for safety.

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Attorneys Fees. Article 2208 of the Civil Code enumerates the instances
when attorneys fees may be recovered:

Art. 2208. In the absence of stipulation, attorneys fees and expenses


of litigation, other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendants act or omission has compelled the plaintiff
to litigate with third persons or to incur expenses to protect his
interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against
the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in
refusing to satisfy the plaintiffs valid and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers,
laborers and skilled workers;
(8) In actions for indemnity under workmens compensation and
employers liability laws;
(9) In a separate civil action to recover civil liability arising from a
crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable
that attorneys fees and expenses of litigation should be
recovered;
In all cases, the attorneys fees and expenses of litigation must be
reasonable.

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In Spouses Agustin v. CA, we held that, the award of attorneys fees being an
exception rather than the general rule, it is necessary for the court to make findings
of facts and law that would bring the case within the exception and justify the grant
of such award. Thus, the reason for the award of attorneys fees must be stated in
the text of the courts decision; otherwise, if it is stated only in the dispositive
portion of the decision, the same must be disallowed on appeal.

In the case at bar, the RTC Decision had nil discussion on the propriety of
attorneys fees, and it merely awarded such in the dispositive portion. Following
established jurisprudence, however, the CA should have disallowed on appeal said
award of attorneys fees as the RTC failed to substantiate said award.

Costs of suit. The Rules of Court provide that, generally, costs shall be
allowed to the prevailing party as a matter of course, thus:

Section 1. Costs ordinarily follow results of suit.- Unless otherwise


provided in these rules, costs shall be allowed to the prevailing party
as a matter of course, but the court shall have power, for special
reasons, to adjudge that either party shall pay the costs of an action,
or that the same be divided, as may be equitable. No costs shall be
allowed against the Republic of the Philippines, unless otherwise
provided by law.

In the present case, the award of costs of suit to respondents, as the


prevailing party, is in order.

STIPULATION FOR LIMITATION OF LIABILITY


PHILAM INSURANCE COMPANY, INC. (now CHARTIS PHILIPPINES
INSURANCE, INC.*) vs. HEUNG-A SHIPPING CORPORATION and WALLEM
PHILIPPINES SHIPPING, INC
G.R. No. 1877l
HEUNG-A SHIPPING CORPORATION and W ALLEM PHILIPPINES SHIPPING,
INC. vs. PHILAM INSURANCE COMPANY, INC. (now CHARTIS PHILIPPINES
INSURANCE, INC.),
G.R. No. 187812,
July 23, 2014, J. Reyes
Page 101 of 128

Common carriers, as a general rule, are presumed to have been at fault or


negligent if the goods they transported deteriorated or got lost or destroyed. That
is, unless they prove that they exercised extraordinary diligence in transporting the
goods. In order to avoid responsibility for any loss or damage, therefore, they have
the burden of proving that they observed such diligence. As the carrier of the
subject shipment, HEUNG-A was bound to exercise extraordinary diligence in
conveying the same and its slot charter agreement with DONGNAMA did not divest
it of such characterization nor relieve it of any accountability for the shipment.
However, the liability of HEUNG-A is limited to $500 per package or pallet because
in case of the shippers failure to declare the value of the goods in the bill of lading,
Section 4, paragraph 5 of the COGSA provides that neither the carrier nor the ship
shall in any event be or become liable for any loss or damage to or in connection
with the transportation of goods in an amount exceeding $500 per package
Facts:
On December 19, 2000, Novartis Consumer Health Philippines, Inc.
(NOVARTIS) imported from Jinsuk Trading Co. Ltd., (JINSUK) in South Korea, 19
pallets of 200 rolls of Ovaltine Power 18 G laminated plastic packaging material.
In order to ship the goods to the Philippines, JINSUK engaged the services of
Protop Shipping Corporation (PROTOP), a freight forwarder likewise based in South
Korea, to forward the goods to their consignee, NOVARTIS. PROTOP shipped the
cargo through Dongnama Shipping Co. Ltd. (DONGNAMA) which in turn loaded the
same on M/V Heung-A Bangkok V-019 owned and operated by Heung-A Shipping
Corporation, (HEUNG-A), a Korean corporation, pursuant to a slot charter
agreement whereby a space in the latters vessel was reserved for the exclusive
use of the former. Wallem Philippines Shipping, Inc. (WALLEM) is the ship agent of
HEUNG-A in the Philippines.
NOVARTIS insured the shipment with Philam Insurance Company, Inc.
(PHILAM, now Chartis Philippines Insurance, Inc.) under All Risk Marine Open
Insurance Policy No. MOP-0801011828 against all loss, damage, liability, or expense
before, during transit and even after the discharge of the shipment from the
carrying vessel until its complete delivery to the consignees premises.
The vessel arrived at the port of Manila, South Harbor, on December 27,
2000. The shipment reached NOVARTIS premises on January 5, 2001 and was
thereupon inspected by the companys Senior Laboratory Technician, Annie Rose
Caparoso (Caparoso). Upon initial inspection, Caparoso found the container van
locked with its load intact. After opening the same, she inspected its contents and
discovered that the boxes of the shipment were wet and damp. The boxes on one
side of the van were in disarray while others were opened or damaged due to the
dampness. Caparoso further observed that parts of the container van were
damaged and rusty. There were also water droplets on the walls and the floor was
wet. Since the damaged packaging materials might contaminate the product they
were meant to hold, Caparoso rejected the entire shipment.

Page 102 of 128

Aggrieved, NOVARTIS demanded indemnification for the lost/damaged


shipment from PROTOP but was denied. Insurance claims were, thus, filed with
PHILAM which paid the insured value of the shipment in the adjusted amount of One
Million Nine Hundred Four Thousand Six Hundred Thirteen Pesos and Twenty
Centavos (1,904,613.20). Claiming that after such payment, it was subrogated to
all the rights and claims of NOVARTIS against the parties liable for the lost/damaged
shipment, PHILAM filed on June 4, 2001, a complaint for damages against PROTOP.
On December 11, 2001, PHILAM filed a Motion to Admit Second Amended Complaint
this time designating PROTOP as the owner/operator of M/V Heung-A Bangkok V-019
and adding HEUNG-A as party defendant for being the registered owner of the
vessel. The motion was granted and the second amended complaint was admitted
by the trial court on December 14, 2001.
In a Decision dated February 26, 2007, the RTC rendered HEUNG-A, PROTOP
and WALLEM liable for the loss. PHILAM was declared to have been validly
subrogated in NOVARTIS stead and thus entitled to recover the insurance claims it
paid to the latter.
An appeal to the CA was interposed by PHILAM, WALLEM and HEUNG-A. The
CA ruled that proximate cause of the damage was the failure of HEUNG-A to inspect
and examine the actual condition of the sea van before loading it on the vessel.
However, the CA limited the liability of PROTOP, WALLEM and HEUNG-A to
US$8,500.00 pursuant to the liability limitation under the COGSA since the shipper
failed to declare the value of the subject cargo in the bill of lading and since they
could not be made answerable for the two (2) unaccounted pallets because the
shipment was on a shippers load, count and seal basis.
Issues:
1. Whether HEUNG-A should be liable for the loss sustained.
2. Whether HEUNG-As liability can be limited to US$500 per package
pursuant to the COGSA.
Ruling:
1. As the carrier of the subject shipment, HEUNG-A was bound to exercise
extraordinary diligence in conveying the same and its slot charter agreement with
DONGNAMA did not divest it of such characterization nor relieve it of any
accountability for the shipment.
[C]ommon carriers, as a general rule, are presumed to have been at fault or
negligent if the goods they transported deteriorated or got lost or destroyed. That
is, unless they prove that they exercised extraordinary diligence in transporting the
goods. In order to avoid responsibility for any loss or damage, therefore, they have
the burden of proving that they observed such diligence. Further, under Article
1742 of the Civil Code, even if the loss, destruction, or deterioration of the goods
should be caused by the faulty nature of the containers, the common carrier must
exercise due diligence to forestall or lessen the loss.

Page 103 of 128

Here, HEUNG-A failed to rebut this prima facie presumption when it failed to
give adequate explanation as to how the shipment inside the container van was
handled, stored and preserved to forestall or prevent any damage or loss while the
same was in its possession, custody and control.
2. Yes. Under Article 1753 of the Civil Code, the law of the country to which
the goods are to be transported shall govern the liability of the common carrier for
their loss, destruction or deterioration. Since the subject shipment was being
transported from South Korea to the Philippines, the Civil Code provisions shall
apply. In all matters not regulated by the Civil Code, the rights and obligations of
common carriers shall be governed by the Code of Commerce and by special laws
such as the COGSA. While the Civil Code contains provisions making the common
carrier liable for loss/damage to the goods transported, it failed to outline the
manner of determining the amount of such liability. Article 372 of the Code of
Commerce fills in this gap, thus:
Article 372. The value of the goods which
cases if loss or misplacement shall be determined
declared in the bill of lading, the shipper not being
that among the goods declared therein there were
and money.

the carrier must pay in


in accordance with that
allowed to present proof
articles of greater value

In case, however, of the shippers failure to declare the value of the goods in
the bill of lading, Section 4, paragraph 5 of the COGSA provides:
Neither the carrier nor the ship shall in any event be or become liable
for any loss or damage to or in connection with the transportation of goods in
an amount exceeding $500 per package lawful money of the United States,
or in case of goods not shipped in packages, per customary freight unit, or
the equivalent of that sum in other currency, unless the nature and value of
such goods have been declared by the shipper before shipment and inserted
in the bill of lading. This declaration, if embodied in the bill of lading shall be
prima facie evidence, but shall be conclusive on the carrier.
Hence, when there is a loss/damage to goods covered by contracts of
carriage from a foreign port to a Philippine port and in the absence a shippers
declaration of the value of the goods in the bill of lading, as in the present case, the
foregoing provisions of the COGSA shall apply. The CA, therefore, did not err in
ruling that HEUNG-A, WALLEM and PROTOPs liability is limited to $500 per package
or pallet.
DILIGENCE REQUIRED OF COMMON CARRIERS
NEDLLOYD LIJNEN B.V. ROTTERDAM AND THE EAST ASIATIC CO., LTD. vs.
GLOW LAKS ENTERPRISES, LTD.
G.R. No. 156330, November 19, 2014, J. Perez
There is no dispute that the custody of the goods was never turned over to
the consignee or his agents but was lost into the hands of unauthorized persons
who secured possession thereof on the strength of falsified documents. When the

Page 104 of 128

goods shipped are either lost or arrived in damaged condition, a presumption arises
against the carrier of its failure to observe that diligence, and there need not be an
express finding of negligence to hold it liable. To overcome the presumption of
negligence, the common carrier must establish by adequate proof that it exercised
extraordinary diligence over the goods. In the present case, Nedlloyd failed to prove
that they did exercise the degree of diligence required by law over the goods they
transported, it failed to adduce sufficient evidence they exercised extraordinary
care to prevent unauthorized withdrawal of the shipments.
Facts:
Nedlloyd Lijnen B.V. Rotterdam is a foreign corporation engaged in the
business of carrying goods by sea, whose vessels regularly call at the port of Manila.
It is doing business in the Philippines thru its local ship agent, co-petitioner East
Asiatic Co., Ltd. Glow Laks Enterprises, Ltd., is likewise a foreign corporation
organized and existing under the laws of Hong Kong. It is not licensed to do, and it
is not doing business in, the Philippines. On or about 14 September 1987, Glow
loaded on board M/S Scandutch at the Port of Manila a total 343 cartoons of
garments, complete and in good order for pre-carriage to the Port of Hong Kong.
The goods covered by Bills of Lading Nos. MHONX-2 and MHONX-34 arrived in good
condition in Hong Kong and were transferred to M/S Amethyst for final carriage to
Colon, Free Zone, Panama. Both vessels, M/S Scandutch and M/S Amethyst, are
owned by Nedlloyd represented in the Phlippines by its agent, East Asiatic. The
goods which were valued at US$53,640.00 was agreed to be released to the
consignee, Pierre Kasem, International, S.A., upon presentation of the original copies
of the covering bills of lading. Upon arrival of the vessel at the Port of Colon on 23
October 1987, Nedlloyd purportedly notified the consignee of the arrival of the
shipments, and its custody was turned over to the National Ports Authority in
accordance with the laws, customs regulations and practice of trade in Panama. By
an unfortunate turn of events, however, unauthorized persons managed to forge the
covering bills of lading and on the basis of the falsified documents, the ports
authority released the goods.
On 16 July 1988, Glow filed a formal claim with Nedlloyd for the recovery of
the amount of US$53,640.00 representing the invoice value of the shipment but to
no avail. Claiming that Nedlloyd are liable for the misdelivery of the goods, Glow
initiated Civil Case before the RTC of Manila, seeking for the recovery of the amount
of US$53,640.00, including the legal interest from the date of the first demand.
After the Pre-Trial Conference, trial on the merits ensued. The RTC rendered a
Decision ordering the dismissal of the complaint but granted Nedlloyd
counterclaims. The Court of Appeals reversed the findings of the RTC and held that
foreign laws were not proven in the manner provided by Section 24, Rule 132 of the
Revised Rules of Court, and therefore, it cannot be given full faith and credit.
Issue:
Whether or not Nedllyod are liable for the misdelivery of goods under
Philippine laws.
Ruling:

Page 105 of 128

Yes, Nedlloyd is laible.


Explicit is the rule under Article 1736 of the Civil Code that the extraordinary
responsibility of the common carrier begins from the time the goods are delivered to
the carrier. This responsibility remains in full force and effect even when they are
temporarily unloaded or stored in transit, unless the shipper or owner exercises the
right of stoppage in transitu, and terminates only after the lapse of a reasonable
time for the acceptance, of the goods by the consignee or such other person
entitled to receive them. It was further provided in the same statute that the carrier
may be relieved from the responsibility for loss or damage to the goods upon actual
or constructive delivery of the same by the carrier to the consignee or to the person
who has the right to receive them.
In this case, there is no dispute that the custody of the goods was never
turned over to the consignee or his agents but was lost into the hands of
unauthorized persons who secured possession thereof on the strength of falsified
documents. The loss or the misdelivery of the goods in the instant case gave rise to
the presumption that the common carrier is at fault or negligent. A common carrier
is presumed to have been negligent if it fails to prove that it exercised extraordinary
vigilance over the goods it transported. When the goods shipped are either lost or
arrived in damaged condition, a presumption arises against the carrier of its failure
to observe that diligence, and there need not be an express finding of negligence to
hold it liable. To overcome the presumption of negligence, the common carrier must
establish by adequate proof that it exercised extraordinary diligence over the goods.
It must do more than merely show that some other party could be responsible for
the damage.
In the present case, Nedlloyd failed to prove that they did exercise the degree
of diligence required by law over the goods they transported. Indeed, aside from
their persistent disavowal of liability by conveniently posing an excuse that their
extraordinary responsibility is terminated upon release of the goods to the
Panamanian Ports Authority, Nedlloyd failed to adduce sufficient evidence they
exercised extraordinary care to prevent unauthorized withdrawal of the shipments.
Nothing in the New Civil Code, however, suggests, even remotely, that the common
carriers responsibility over the goods ceased upon delivery thereof to the custom
authorities. The contract of carriage remains in full force and effect even after the
delivery of the goods to the port authorities; the only delivery that releases it from
their obligation to observe extraordinary care is the delivery to the consignee or his
agents. Even more telling of Nedlloyd continuing liability for the goods transported
to the fact that the original bills of lading up to this time, remains in the possession
of the notify party or consignee.
While surrender of the original bill of lading is not a condition precedent for
the common carrier to be discharged from its contractual obligation, there must be,
at the very least, an acknowledgement of the delivery by signing the delivery
receipt, if surrender of the original of the bill of lading is not possible. There was
neither surrender of the original copies of the bills of lading nor was there
acknowledgment of the delivery in the present case. This leads to the conclusion

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that the contract of carriage still subsists and Nedlloyd could be held liable for the
breach thereof.
Petitioners could have offered evidence before the trial court to show that they
exercised the highest degree of care and caution even after the goods was turned
over to the custom authorities, by promptly notifying the consignee of its arrival at
the Port of Cristobal in order to afford them ample opportunity to remove the
cargoes from the port of discharge. This court have scoured the records and found
that neither the consignee nor the notify party was informed by Nedlloyd of the
arrival of the goods, a crucial fact indicative of Nedlloyds failure to observe
extraordinary diligence in handling the goods entrusted to their custody for
transport.
LIABILITIES OF COMMON CARRIERS
LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR
INTERNATIONAL SHIPPING COMPANY, INCORPORATED vs. MALAYAN
INSURANCE COMPANY, INCORPORATED
G.R. No. 185565, November 26, 2014, J. Reyes
Under the Code of Commerce, if the goods are delivered but arrived at the
destination in damaged condition, the remedies to be pursued by the consignee
depend on the extent of damage on the goods. If the effect of damage on the
goods consisted merely of diminution in value, the carrier is bound to pay only the
difference between its price on that day and its depreciated value as provided
under Article 364. Malayan, as the insurer of PASAR, neither stated nor proved that
the goods are rendered useless or unfit for the purpose intended by PASAR due to
contamination with seawater. Hence, there is no basis for the goods rejection under
Article 365 of the Code of Commerce. Clearly, it is erroneous for Malayan to
reimburse PASAR as though the latter suffered from total loss of goods in the
absence of proof that PASAR sustained such kind of loss.
Facts:
Loadstar International Shipping (Loadstar Shipping) and PASAR entered into a
contract of affreightment of the latters copper concentrates. A shipment of cooper
concentrates were loaded in MV Bobcat, the vessel of Loadstar International
Shipping Co., Inc. (Loadstar International), with Philex as shipper and PASAR as
consignee. The cargo was insured by Malayan Insurance Company, Inc. (Malayan).
While out in the sea, the crew of the vessel found a crack on the vessel which
caused seawater to enter and wet the copper concentrates.
Immediately after the vessel arrived at port, PASAR and Philexs tested the
copper concentrates and found them to be contaminated. PASAR sent a formal
notice of claim to Loadstar Shipping, and surveyors recommended the value of the
claim at P 32,351,102.32. Malayan paid PASAR said amount.
Meanwhile, Malayan wrote Loadstar Shipping informing the latter of a
prospective buyer for the damaged copper concentrates and the opportunity to
nominate/refer other salvage buyers to PASAR. Malayan later wrote Loadstar
Shipping informing the latter of the acceptance of PASARs proposal to take the

Page 107 of 128

damaged copper concentrates at a residual value of US$90,000.00. Loadstar


Shipping wrote Malayan requesting for the reversal of its decision to accept PASARs
proposal and the conduct of a public bidding to allow Loadstar Shipping to match or
top PASARs bid by 10%.
PASAR then signed a subrogation receipt in favor of Malaya. To recover the
amount Malaya paid to PASAR, it demanded reimbursement from Loadstar Shipping,
which refused to comply, prompting Malaya to file a case of damages with the RTC,
against Loadstar Shipping, and later including Loadstar International. Malayan
alleged that due to the unseaworthiness of the vessel, PASAR suffered loss of the
cargo. Petitioners maintain, among others, that Malayans claim is excessive,
grossly overstated, unreasonable and unsubstantiated; that their liability, if any,
should not exceed the CIF value of the lost/damaged cargo as set forth in the bill of
lading, charter party or customary rules of trade; and that the arbitration clause in
the contract of affreightment should be followed.
The RTC dismissed the complaint, finding that although contaminated by
seawater, the copper concentrates can still be used. It gave credence to the
testimony of Francisco Esguerra, petitioners expert witness, that despite high
chlorine content, the copper concentrates remain intact and will not lose their
value. The gold and silver remain with the grains/concentrates even if soaked with
seawater and does not melt. The RTC observed that the purchase agreement
between PASAR and Philex contains a penalty clause and has no rejection clause.
Despite this agreement, the parties failed to sit down and assess the penalty.
The CA reversed and set aside the RTC, holding that petitioners must pay
Malayan the amount of P33,934,948.74 as actual damages, less $90,000.00-the
residual value of the copper concentrates it sold to PASAR in 2000.
Issue:
Did PASAR not suffer total loss of the copper concentrates as to warrant
rejection of the goods and reimbursement from Malayan?
Ruling:
The petition is granted.
The contract between PASAR and the petitioners is a contract of carriage of
goods and not a contract of sale. Therefore, the petitioners and PASAR are bound by
the laws on transportation of goods and their contract of affreightment. Since the
Contract of Affreightment between the petitioners and PASAR is silent as regards
the computation of damages, whereas the bill of lading presented before the trial
court is undecipherable, the New Civil Code and the Code of Commerce shall govern
the contract between the parties.
Malayan paid PASAR the amount of P32,351,102.32 covering the latters
claim of damage to the cargo. This represents damages for the total loss of that
portion of the cargo which were contaminated with seawater and not merely the
depreciation in its value. Strangely though, after claiming damages for the total loss

Page 108 of 128

of that portion, PASAR bought back the contaminated copper concentrates from
Malayan at the price of US$90,000.00. The fact of repurchase is enough to conclude
that the contamination of the copper concentrates cannot be considered as total
loss on the part of PASAR.
[Under the Code of Commerce], if the goods are delivered but arrived at the
destination in damaged condition, the remedies to be pursued by the consignee
depend on the extent of damage on the goods.
If the goods are rendered useless for sale, consumption or for the intended
purpose, the consignee may reject the goods and demand the payment of such
goods at their market price on that day pursuant to Article 365. In case the
damaged portion of the goods can be segregated from those delivered in good
condition, the consignee may reject those in damaged condition and accept merely
those which are in good condition. But if the consignee is able to prove that it is
impossible to use those goods which were delivered in good condition without the
others, then the entire shipment may be rejected. To reiterate, under Article 365,
the nature of damage must be such that the goods are rendered useless for sale,
consumption or intended purpose for the consignee to be able to validly reject
them.
If the effect of damage on the goods consisted merely of diminution in value,
the carrier is bound to pay only the difference between its price on that day and its
depreciated value as provided under Article 364.
Malayan, as the insurer of PASAR, neither stated nor proved that the goods
are rendered useless or unfit for the purpose intended by PASAR due to
contamination with seawater. Hence, there is no basis for the goods rejection under
Article 365 of the Code of Commerce. Clearly, it is erroneous for Malayan to
reimburse PASAR as though the latter suffered from total loss of goods in the
absence of proof that PASAR sustained such kind of loss. Otherwise, there will be no
difference in the indemnification of goods which were not delivered at all; or
delivered but rendered useless, compared against those which were delivered
albeit, there is diminution in value.
Malayan also failed to establish the legal basis of its decision to sell back the
rejected copper concentrates to PASAR. It cannot be ascertained how and when
Malayan deemed itself as the owner of the rejected copper concentrates to have
these validly disposed of. If the goods were rejected, it only means there was no
acceptance on the part of PASAR from the carrier. Furthermore, PASAR and Malayan
simply agreed on the purchase price of US$90,000.00 without any allegation or
proof that the said price was the depreciated value based on the appraisal of
experts as provided under Article 364 of the Code of Commerce.
BILL OF LADING
EASTERN SHIPPING LINES, INC. vs. BPI/MS INSURANCE CORP., &MITSUI
SUMITOMO INSURANCE CO., LTD.,
G.R. No. 182864, January 12, 2015, J. Perez

Page 109 of 128

Mere proof of delivery of the goods in good order to a common carrier and of
their arrival in bad order at their destination constitutes a prima facie case of fault
or negligence against the carrier. If no adequate explanation is given as to how the
deterioration, loss, or destruction of the goods happened, the transporter shall be
held responsible. In this case, the fault is attributable to ESLI.
Facts:
BPI/MS and Mitsui alleged that on 2 February 2004 at Yokohama, Japan,
Sumitomo Corporation shipped on board Eastern Shipping Lines vessel M/V
Eastern Venus 22 22 coils of various Steel Sheet weighing in good order and
condition for transportation to and delivery at the port of Manila in favor of
consignee Calamba Steel Center, Inc. The declared value of the shipment was
US$83,857.59. The shipment was insured with the BPI/MS and Mitsui against all
risks under Marine Policy No. 103-GG03448834. The complaint alleged that the
shipment arrived and upon withdrawal of the shipment by the Calamba Steels
representative, it was found out that part of the shipment was damaged and was in
bad order condition such that there was a Request for Bad Order Survey. It was
found out that the damage amounted to US$4,598.85 prompting Calamba Steel to
reject the damaged shipment for being unfit for the intended purpose. On 12 May
2004, Sumitomo Corporation again shipped on board ESLIs vessel M/V Eastern
Venus 25 50 coils in various Steel Sheet weighing 383,532 kilograms in good order
and condition for transportation to and delivery at the port of Manila, Philippines in
favor of the same consignee Calamba Steel. The shipment was insured with the
BPI/MS and Mitsui against all risks under Marine Policy No. 104-GG04457785. ESLIs
vessel with the second shipment arrived at the port of Manila partly damaged and in
bad order. The coils sustained further damage during the discharge from vessel to
shore until its turnover to ATIs custody for safekeeping. Upon withdrawal from ATI
and delivery to Calamba Steel, it was found out that the damage amounted to
US$12,961.63. As it did before, Calamba Steel rejected the damaged shipment for
being unfit for the intended purpose.
Calamba Steel attributed the damages on both shipments to ESLI as the
carrier and ATI as the arrastre operator in charge of the handling and discharge of
the coils and filed a claim against them. When ESLI and ATI refused to pay, Calamba
Steel filed an insurance claim for the total amount of the cargo against BPI/MS and
Mitsui as cargo insurers. As a result, BPI/MS and Mitsui became subrogated in place
of and with all the rights and defenses accorded by law in favor of Calamba Steel.
BPI/MS and Mitsui filed a Complaint before the RTC of Makati City against ESLI
and ATI to recover actual damages amounting to US$17,560.48 with legal interest,
attorneys fees and costs of suit. ATI, in its Answer, denied the allegations and
insisted that the coils in two shipments were already damaged upon receipt from
ESLIs vessels. It likewise insisted that it exercised due diligence in the handling of
the shipments and invoked that in case of adverse decision. On its part, ESLI denied
the allegations of the complainants and averred that the damage to both shipments
was incurred while the same were in the possession and custody of ATI and/or of the
consignee
or
its
representatives.

Page 110 of 128

BPI/MS and Mitsui, to substantiate their claims, submitted the Affidavits of (1)
Manuel, the Cargo Surveyor of Philippine Japan Marine Surveyors and Sworn
Measurers Corporation who personally examined and conducted the surveys on the
two shipments; (2) Richatto P. Almeda, the General Manager of Calamba Steel who
oversaw and examined the condition, quantity, and quality of the shipped steel
coils, and who thereafter filed formal notices and claims against ESLI and ATI; and
(3) Virgilio G. Tiangco, Jr., the Marine Claims Supervisor of BPI/MS who processed the
insurance claims of Calamba Steel. Along with the Affidavits were the Bills of Lading
covering the two shipments, Invoices, Notices of Loss of Calamba Steel, Subrogation
Form, Insurance Claims, Survey Reports, Turn Over Survey of Bad Order
Cargoes and Request for Bad Order Survey.
ESLI, in turn, submitted the Affidavits of Captain Hermelo M. Eduarte, who
monitored in coordination with ATI the discharge of the two shipments, and Rodrigo
Victoria who personally surveyed the subject cargoes on board the vessel as well as
the manner the ATI employees discharged the coils. Lastly, ATI submitted the
Affidavits of its Bad Order Inspector Ramon Garcia and Claims Officer Ramiro De
Vera.
RTC Makati City rendered a decision finding both the ESLI and ATI liable for
the damages sustained by the two shipments. On appeal, ESLI argued that the trial
court erred when it found BPI/MS has the capacity to sue and when it assumed
jurisdiction over the case. It also questioned the ruling on its liability since the
Survey Reports indicated that the cause of loss and damage was due to the rough
handling of ATIs stevedores during discharge from vessel to shore and during
loading operation onto the trucks. It invoked the limitation of liability of US$500.00
per package as provided in Commonwealth Act No. 65 or the Carriage of Goods by
Sea Act (COGSA). The CA denied the appeal of ESLI while granted that of ATI .
Issue:
Whether or not CA correctly ruled that ESLI is liable.
Ruling:
On the liability of ESLI
ESLI bases of its non-liability on the survey reports prepared by BPI/MS and
Mitsuis witness Manuel which found that the cause of damage was the rough
handling on the shipment by the stevedores of ATI during the discharging
operations. However, Manuel does not absolve ESLI of liability. The witness in fact
includes ESLI in the findings of negligence. As stated in the affidavit of Manuel:
During the aforesaid operations, the employees and forklift operators of
ESLI and ATI were very negligent in the handling of the subject cargoes.
ESLI cites the affidavit of its witness Rodrigo who stated that the cause of the
damage was the rough mishandling by ATIs stevedores. As Rodrigo admits, it was
also his duty to inspect and monitor the cargo on-board upon arrival of the vessel.
ESLI cannot invoke its non-liability solely on the manner the cargo was discharged
and unloaded. The actual condition of the cargoes upon arrival prior to discharge is
equally important and cannot be disregarded. Proof is needed that the cargo arrived

Page 111 of 128

at the port of Manila in good order condition and remained as such prior to its
handling by ATI.
Based on the bills of lading issued, it is undisputed that ESLI received the two
shipments of coils from shipper Sumitomo Corporation in good condition at the
ports of Yokohama and Kashima, Japan. However, upon arrival at the port of Manila,
some coils from the two shipments were partly dented and crumpled as evidenced
turn over survey of bad cargoes signed by ESLIs representatives, a certain Tabanao
and Rodrigo together with ATIs representative Garcia. According to the report, four
coils and one skid were partly dented and crumpled prior to turnover by ESLI to
ATIs possession while a total of eleven coils were partly dented and crumpled prior
to turnover.
Mere proof of delivery of the goods in good order to a common carrier and of
their arrival in bad order at their destination constitutes a prima facie case of fault
or negligence against the carrier. If no adequate explanation is given as to how the
deterioration, loss, or destruction of the goods happened, the transporter shall be
held responsible. From the foregoing, the fault is attributable to ESLI.
Limitation of Liability
ESLI assigns as error the appellate courts finding and reasoning that the
package limitation under the COGSA is inapplicable even if the bills of lading
covering the shipments only made reference to the corresponding invoices. ESLI
argues that the value of the cargoes was not incorporated in the bills of lading and
that there was no evidence that the shipper had presented to the carrier in writing
prior to the loading of the actual value of the cargo, and, that there was a no
payment of corresponding freight
The New Civil Code provides that a stipulation limiting a common carriers
liability to the value of the goods appearing in the bill of lading is binding, unless the
shipper or owner declares a greater value. In addition, a contract fixing the sum that
may be recovered by the owner or shipper for the loss, destruction, or deterioration
of the goods is valid, if it is reasonable and just under the circumstances, and has
been fairly and freely agreed upon. COGSA, on the other hand, provides under
Section 4, Subsection 5 that an amount recoverable in case of loss or damage shall
not exceed US$500.00 per package or per customary freight unless the nature
and value of such goods have been declared by the shipper before
shipment and inserted in the bill of lading. The Code takes precedence as the
primary law over the rights and obligations of common carriers with the Code of
Commerce and COGSA applying suppletorily.
ESLI contends that there must be an insertion of this declaration in the bill of
lading itself to fall outside the statutory limitation of liability.
The bills of lading represent the formal expression of the parties rights,
duties and obligations. It is the best evidence of the intention of the parties which is
to be deciphered from the language used in the contract, not from the
unilateral post facto assertions of one of the parties, or of third parties who are
strangers to the contract.

Page 112 of 128

As to the non-declaration of the value of the goods on the second bill of


lading, there is no error on the part of the appellate court when it ruled that there
was a compliance of the requirement provided by COGSA. The declaration
requirement does not require that all the details must be written down on the very
bill of lading itself. It must be emphasized that all the needed details are in the
invoice, which contains the itemized list of goods shipped to a buyer, stating
quantities, prices, shipping charges, and other details which may contain
numerous sheets. Compliance can be attained by incorporating the invoice, by way
of reference, to the bill of lading provided that the former containing the description
of the nature, value and/or payment of freight charges is as in this case duly
admitted as evidence. A review of the bill of ladings and invoice on the second
shipment indicates that the shipper declared the nature and value of the goods with
the corresponding payment of the freight on the bills of lading. Further, under the
caption description of packages and goods, it states that the description of the
goods to be transported as various steel sheet in coil with a gross weight of
383,532 kilograms (89.510 M3). On the other hand, the amount of the goods is
referred in the invoice, the due execution and genuineness of which has already
been admitted by ESLI, is US$186,906.35 as freight on board with payment of ocean
freight of US$32,736.06 and insurance premium of US$1,813.17. From the
foregoing, the Court ruled that the non- limitation of liability applies in the present
case.

NEGOTIABLE INSTRUMENTS LAW


HOLDER IN DUE COURSE
ALVIN PATRIMONIO vs. NAPOLEON GUTIERREZ AND OCTAVIO MARASIGAN III
G.R. No. 187769, June 4, 2014, J. Brion
Arguing that Gutierrez is not a holder in due course, Patrimonio filed the
instant petition praying that the ruling of the CA, ordering him to pay Gutierrez, be
reversed. Ruling in favor of the Patrimonio the SC ruled that Section 52(c) of the NIL
states that a holder in due course is one who takes the instrument "in good faith
and for value." Acquisition in good faith means taking without knowledge or notice
of equities of any sort which could be set up against a prior holder of the
instrument. It means that he does not have any knowledge of fact which would
render it dishonest for him to take a negotiable paper. The absence of the defense,
when the instrument was taken, is the essential element of good faith. In this case,
after having been found out that the blanks were not filled up in accordance with
the authority the Patrimonio gave, Gutierrez has no right to enforce payment
against Patrimonio, thus, the latter cannot be obliged to pay the face value of the
check.
Facts:

Page 113 of 128

Patrimonio and Gutierrez entered in a business venture under the name of


Slam Dunk Corporation, a corporation which produces mini-concerts and shows
related to basketball. In the course of their business, Patrimonio pre-signed several
checks to answer for the expenses of their business. Although signed, these checks
had no payees name, date or amount. The blank checks were entrusted to
Gutierrez with the specific instruction not to fill them out without previous
notification to and approval by Patrimonio. However, in the middle of 1993, without
Patrimonios knowledge and consent, Gutierrez went to Marasigan (Patrimonios
former teammate), to secure a loan in the amount of P200,000.00 alleging that
Patrimonio needed the money for the construction of his house. Marasigan agreed
to the request and gave him P 200, 000. Consequently, Guitierrez delivered to
Marasigan one of the pre-signed blank checks with the blank portions filled out with
the words "Cash" "Two Hundred Thousand Pesos Only", and the amount of
"P200,000.00". The portion of the check corresponding to the date was also filled
out with the words "May 23, 1994".
When Marasigan deposited the check, the same was dishonored for the
reason of Account Closed. Thereafter, Marasigan sought recovery from Gutierrez but
to no avail. He then sent several demand letters to Patrimonio asking for payment
but his demands likewise went unheeded. Consequently, he filed a criminal case for
violation of B.P. 22 against Patrimonio. Thereafter, Patrimonio filed before the RTC a
complaint for the declaration of nullity of the loan and recovery of damages against
herein Gutierrez and Marasigan. Patrmonio completely denied authorizing the loan
or the checks negotiation, and asserted that he was not privy to the parties loan
agreement.
The RTC ruled in favor of Marasigan. It declared Marasigan as a holder in due
course and dismissed Patrimonios complaint. It further ordered Patrimonio to pay
Marasigan the face value of the check with a right to claim reimbursement from
Gutierrez. On appeal, the CA affirmed the ruling of the RTC but agreed with
Patrimonio that Marasigan is not a holder in due course. However, since the loan is
grounded on an obligation arising from law, it held that it cannot be nullified and
that Patrimonio is still liable to pay Marasigan the sum of P 200, 000. Hence, this
petition.
Issues:
1. Whether Marasigan is a holder in due course.
2. Whether respondent Gutierrez has completely filled out the subject check strictly
under the authority given by Patrimonio.
Ruling:
1. No. Marasigan is Not a Holder in Due Course
The Negotiable Instruments Law (NIL) defines a holder in due course, thus:
Sec. 52 A holder in due course is a holder who has taken the instrument under
the following conditions:

Page 114 of 128

(a) That it is complete and regular upon its face;


(b) That he became the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.
Acquisition in good faith means taking without knowledge or notice of
equities of any sort which could be set up against a prior holder of the instrument. It
means that he does not have any knowledge of fact which would render it dishonest
for him to take a negotiable paper. The absence of the defense, when the
instrument was taken, is the essential element of good faith.
Since he (Marasigan) knew that the underlying obligation was not actually for
Patrimonio, the rule that a possessor of the instrument is prima facie a holder in due
course is inapplicable. As correctly noted by the CA, his inaction and failure to
verify, despite knowledge that Patrimonio was not a party to the loan, may be
construed as gross negligence amounting to bad faith.
2. No, the Check Was Not Completed Strictly Under The Authority Given by
Patrimonio.
The answer is supplied by the applicable statutory provision found in Section
14 of the Negotiable Instruments Law (NIL) which states:
Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any
material particular, the person in possession thereof has a prima facie
authority to complete it by filling up the blanks therein. And a signature on a
blank paper delivered by the person making the signature in order that the
paper may be converted into a negotiable instrument operates as a prima
facie authority to fill it up as such for any amount. In order, however, that any
such instrument when completed may be enforced against any person who
became a party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time. But if any
such instrument, after completion, is negotiated to a holder in due course, it is
valid and effectual for all purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the authority given and within a
reasonable time.
This provision applies to an incomplete but delivered instrument. Under this
rule, if the maker or drawer delivers a pre-signed blank paper to another person for
the purpose of converting it into a negotiable instrument, that person is deemed to
have prima facie authority to fill it up. It merely requires that the instrument be in
the possession of a person other than the drawer or maker and from such
possession, together with the fact that the instrument is wanting in a material
particular, the law presumes agency to fill up the blanks.

Page 115 of 128

In order however that one who is not a holder in due course can enforce the
instrument against a party prior to the instruments completion, two requisites must
exist: (1) that the blank must be filled strictly in accordance with the authority
given; and (2) it must be filled up within a reasonable time. If it was proven that the
instrument had not been filled up strictly in accordance with the authority given and
within a reasonable time, the maker can set this up as a personal defense and avoid
liability. However, if the holder is a holder in due course, there is a conclusive
presumption that authority to fill it up had been given and that the same was not in
excess of authority.
While under the law, Gutierrez had a prima facie authority to complete the
check, such prima facie authority does not extend to its use (i.e., subsequent
transfer or negotiation) once the check is completed. In other words, only the
authority to complete the check is presumed. Further, the law used the term "prima
facie" to underscore the fact that the authority which the law accords to a holder is
a presumption juris tantum only; hence, subject to subject to contrary proof. Thus,
evidence that there was no authority or that the authority granted has been
exceeded may be presented by the maker in order to avoid liability under the
instrument.
Notably, Gutierrez was only authorized to use the check for business
expenses; thus, he exceeded the authority when he used the check to pay the loan
he supposedly contracted for the construction of Patrimonio's house. This is a clear
violation of Patrimonio 's instruction to use the checks for the expenses of Slam
Dunk. It cannot therefore be validly concluded that the check was completed strictly
in accordance with the authority given by Patrimonio.
Considering that Marasigan is not a holder in due course, Patrimonio can
validly set up the personal defense that the blanks were not filled up in accordance
with the authority he gave. Consequently, Marasigan has no right to enforce
payment against Patrimonio and the latter cannot be obliged to pay the face value
of the check.
MATERIAL ALTERATION
CESAR V. AREZA and LOLITA B. AREZA vs. EXPRESS SAVINGS BANK, INC.
and MICHAEL POTENCIANO
G.R. No. 176697, September 10, 2014, J. PEREZ

When the drawee bank pays a materially altered check, it violates the terms
of the check, as well as its duty to charge its clients account only for bona fide
disbursements he had made. If the drawee did not pay according to the original
tenor of the instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the erroneous
payment it made from the drawers account which it was expected to treat with
utmost fidelity. The drawee, however, still has recourse to recover its loss. The
Page 116 of 128

collecting banks are ultimately liable for the amount of the materially altered check.
It cannot further pass the liability back to Cesar and Lolita absent any showing in
the negligence on the part of Cesar and Lolita which substantially contributed to the
loss from alteration.
Facts:
Cesar V. Areza and Lolita B. Areza maintained two bank deposits with Express
Savings Banks Bian branch (the Bank).

They were engaged in the business of "buy and sell" of brand new and
second-hand motor vehicles. On 2 May 2000, they received an order from a certain
Gerry Mambuay (Mambuay) for the purchase of a second-hand Mitsubishi Pajero and
a brand-new Honda CRV.

The buyer, Mambuay, paid Cesar and Lolita with nine (9) Philippine Veterans
Affairs Office (PVAO) checks payable to different payees and drawn against the
Philippine Veterans Bank (drawee), each valued at Two Hundred Thousand Pesos
(P200,000.00) for a total of One Million Eight Hundred Thousand Pesos
(P1,800,000.00).

About this occasion, Cesar and Lolita claimed that Michael Potenciano
(Potenciano), the branch manager of the Bank was present during the transaction
and immediately offered the services of the Bank for the processing and eventual
crediting of the said checks to Cesar and Lolita account. On the other hand,
Potenciano countered that he was prevailed upon to accept the checks by way of
accommodation of Cesar and Lolita who were valued clients of the Bank.

On 3 May 2000, Cesar and Lolita deposited the said checks in their savings
account with the Bank. The Bank, in turn, deposited the checks with its depositary
bank, Equitable-PCI Bank, in Bian, Laguna. Equitable-PCI Bank presented the
checks to the drawee, the Philippine Veterans Bank, which honored the checks.

Page 117 of 128

On 6 May 2000, Potenciano informed Cesar and Lolita that the checks they
deposited with the Bank were honored. He allegedly warned Cesar and Lolita that
the clearing of the checks pertained only to the availability of funds and did not
mean that the checks were not infirmed. Thus, the entire amount of P1,800,000.00
was credited to Cesar and Lolita savings account. Based on this information, Cesar
and Lolita released the two cars to the buyer.

Sometime in July 2000, the subject checks were returned by PVAO to the
drawee on the ground that the amount on the face of the checks was altered from
the original amount of P4,000.00 to P200,000.00. The drawee returned the checks
to Equitable-PCI Bank by way of Special Clearing Receipts. In August 2000, the Bank
was informed by Equitable-PCI Bank that the drawee dishonored the checks on the
ground of material alterations. Equitable-PCI Bank initially filed a protest with the
Philippine Clearing House. In February 2001, the latter ruled in favor of the drawee
Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account of
the Bank in the amount of P1,800,000.00.

The Bank insisted that they informed Cesar and Lolita of said development in
August 2000 by furnishing them copies of the documents given by its depositary
bank. On the other hand, Cesar and Lolita maintained that the Bank never informed
them of these developments.

On 9 March 2001, Cesar and Lolita issued a check in the amount


of P500,000.00. Said check was dishonored by the Bank for the reason "Deposit
Under Hold." According to Cesar and Lolita, the Bank unilaterally and unlawfully put
their account with the Bank on hold. On 22 March 2001, Cesar and Lolita counsel
sent a demand letter asking the Bank to honor their check. The Bank refused to
heed their request and instead, closed the Special Savings Account of the Cesar and
Lolita with a balance of P1,179,659.69 and transferred said amount to their savings
account. The Bank then withdrew the amount of P1,800,000.00 representing the
returned checks from Cesar and Lolita savings account.

Acting on the alleged arbitrary and groundless dishonoring of their checks


and the unlawful and unilateral withdrawal from their savings account, Cesar and
Lolita filed a Complaint for Sum of Money with Damages against the Bank and
Potenciano with the RTC of Calamba. The RTC ruled in favor of Cesar and Lolita.

Page 118 of 128

Express Savings Bank and Potenciano filed a motion for reconsideration while
Cesar and Lolita filed a motion for execution from the Decision of the RTC. On
appeal, the Court of Appeals affirmed the ruling of the trial court but deleted the
award of damages. Hence, Cesar and Lolita filed the present petition for review on
certiorari.

Issues:
1. Whether or not the Bank had the right to debit P1,800,000.00 from Cesar and
Lolita accounts.
2. What are the liabilities of the drawee, the intermediary banks, and the Cesar
and Lolita for the altered checks?
Ruling:
The Bank cannot debit the savings account of Cesar and Lolita.

When the drawee bank pays a materially altered check, it violates the terms
of the check, as well as its duty to charge its clients account only for bona fide
disbursements he had made. If the drawee did not pay according to the original
tenor of the instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the erroneous
payment it made from the drawers account which it was expected to treat with
utmost fidelity. The drawee, however, still has recourse to recover its loss. It may
pass the liability back to the collecting bank which is what the drawee bank exactly
did in this case. It debited the account of Equitable-PCI Bank for the altered amount
of the checks.

When Cesar and Lolita deposited the check with the Bank, they were
designating the latter as the collecting bank. This is in consonance with the rule that
a negotiable instrument, such as a check, whether a manager's check or ordinary
check, is not legal tender. As such, after receiving the deposit, under its own rules,
the Bank shall credit the amount in Cesar and Lolita account or infuse value
thereon only after the drawee bank shall have paid the amount of the check or the
check has been cleared for deposit.
As collecting banks, the Bank and Equitable-PCI Bank are both liable for the
amount of the materially altered checks. Since Equitable-PCI Bank is not a party to
Page 119 of 128

this case and the Bank allowed its account with Equitable PCI Bank to be debited, it
has the option to seek recourse against the latter in another forum.

As the rule now stands, the 24-hour rule is still in force, that is, any check
which should be refused by the drawee bank in accordance with long standing and
accepted banking practices shall be returned through the PCHC/local clearing office,
as the case may be, not later than the next regular clearing (24-hour). The
modification, however, is that items which have been the subject of material
alteration or bearing forged endorsement may be returned even beyond 24 hours so
long that the same is returned within the prescriptive period fixed by law. The
consensus among lawyers is that the prescriptive period is ten (10) years because a
check or the endorsement thereon is a written contract. Moreover, the item need
not be returned through the clearing house but by direct presentation to the
presenting bank. In short, the 24-hour clearing rule does not apply to altered
checks.

The Bank cannot debit the savings account of Cesar and Lolita. A
depositary/collecting bank may resist or defend against a claim for breach of
warranty if the drawer, the payee, or either the drawee bank or depositary bank
was negligent and such negligence substantially contributed to the loss from
alteration. In the instant case, no negligence can be attributed to Cesar and Lolita.

The drawee bank, Philippine Veterans Bank in this case, is only liable to the
extent of the check prior to alteration. Since Philippine Veterans Bank paid the
altered amount of the check, it may pass the liability back as it did, to Equitable-PCI
Bank, the collecting bank. The collecting banks, Equitable-PCI Bank and the Bank,
are ultimately liable for the amount of the materially altered check. It cannot further
pass the liability back to the Cesar and Lolita absent any showing in the negligence
on the part of the Cesar and Lolita which substantially contributed to the loss from
alteration.

CHECKS
METROPOLITAN BANK AND TRUST COMPANY vs. WILFRED N. CHIOK
BANK OF THE PHILIPPINE ISLANDS vs. WILFRED N. CHIOK

Page 120 of 128

GLOBAL BUSINESS BANK, INC. vs. WILFRED N. CHIOK


G.R. No. 172652, G.R. No. 175302, G.R. No. 175394, November 26, 2014, J.
LEONARDO-DE CASTRO
Clearing should not be confused with acceptance. Managers and cashiers
checks are still the subject of clearing to ensure that the same have not been
materially altered or otherwise completely counterfeited. However, managers and
cashiers checks are pre-accepted by the mere issuance thereof by the bank, which
is both its drawer and drawee. Thus, while managers and cashiers checks are still
subject to clearing, they cannot be countermanded for being drawn against a closed
account, for being drawn against insufficient funds, or for similar reasons such as a
condition not appearing on the face of the check. Long standing and accepted
banking practices do not countenance the countermanding of managers and
cashiers checks on the basis of a mere allegation of failure of the payee to comply
with its obligations towards the purchaser. On the contrary, the accepted banking
practice is that such checks are as good as cash. However, in view of the peculiar
circumstances of the case at bench, We are constrained to set aside the foregoing
concepts and principles in favor of the exercise of the right to rescind a contract
upon the failure of consideration thereof.
Facts:
Wilfred N. Chiok (Chiok) had been engaged in dollar trading for several years.
He usually buys dollars from Gonzalo B. Nuguid (Nuguid) at the exchange rate
prevailing on the date of the sale. Chiok pays Nuguid either in cash or managers
check, to be picked up by the latter or deposited in the latters bank account.
Nuguid delivers the dollars either on the same day or on a later date as may be
agreed upon between them, up to a week later. Chiok and Nuguid had been dealing
in this manner for about six to eight years, with their transactions running into
millions of pesos. For this purpose, Chiok maintained accounts with Metropolitan
Bank and Trust Company (Metrobank) and Global Business Bank, Inc. (Global Bank),
the latter being then referred to as the Asian Banking Corporation (Asian Bank).
Chiok likewise entered into a Bills Purchase Line Agreement (BPLA) with Asian Bank.
Under the BPLA, checks drawn in favor of, or negotiated to, Chiok may be
purchased by Asian Bank. Upon such purchase, Chiok receives a discounted cash
equivalent of the amount of the check earlier than the normal clearing period.
On July 5, 1995, pursuant to the BPLA, Asian Bank bills purchased Security
Bank & Trust Company (SBTC) Managers Check (MC) No. 037364 in the amount of
P25,500,000.00 issued in the name of Chiok, and credited the same amount to the
latters Savings Account No. 2-007-03-00201-3.
On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the
amount of P7,550,000.00 and MC No. 025939 in the amount of P10,905,350.00 to
Gonzalo Bernardo, who is the same person as Gonzalo B. Nuguid. The two Asian
Bank managers checks, with a total value of P18,455,350.00 were issued pursuant
to Chioks instruction and was debited from his account. Likewise upon Chioks
application, Metrobank issued Cashiers Check (CC) No. 003380 in the amount of
P7,613,000.00 in the name of Gonzalo Bernardo. The same was debited from
Chioks Savings Account No. 154-42504955.

Page 121 of 128

Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and
025939, and Metrobank CC No. 003380), with an aggregate value of
P26,068,350.00 in Nuguids account with Far East Bank & Trust Company (FEBTC),
the predecessor-in-interest of
Bank of the Philippine Islands (BPI). Nuguid was supposed to deliver
US$1,022,288.50, the dollar equivalent of the three checks as agreed upon, in the
afternoon of the same day. Nuguid, however, failed to do so, prompting Chiok to
request that payment on the three checks be stopped. Chiok was allegedly advised
to secure a court order within the 24-hour clearing period.
On the following day, July 6, 1995, Chiok filed a Complaint for damages with
application for ex parterestraining order and/or preliminary injunction with the
Regional Trial Court (RTC) of Quezon City against the spouses Gonzalo and Marinella
Nuguid, and the depositary banks, Asian Bank and Metrobank, represented by their
respective managers, Julius de la Fuente and Alice Rivera. The complaint was
docketed as Civil Case No. Q-95-24299 and was raffled to Branch 96. The complaint
was later amended to include the prayer of Chiok to be declared the legal owner of
the proceeds of the subject checks and to be allowed to withdraw the entire
proceeds thereof.
On the same day, July 6, 1995, the RTC issued a temporary restraining order
(TRO) directing the spouses Nuguid to refrain from presenting the said checks for
payment and the depositary banks from honoring the same until further orders from
the court.
Asian Bank refused to honor MC Nos. 025935 and 025939 in deference to the
TRO. Metrobank claimed that when it received the TRO on July 6, 1995, it refused to
honor CC No. 003380 and stopped payment thereon. However, in a letter also dated
July 6, 1995, Ms. Jocelyn T. Paz of FEBTC, Cubao-Araneta Branch informed Metrobank
that the TRO was issued a day after the check was presented for payment. Thus,
according to Paz, the transaction was already consummated and FEBTC had already
validly accepted the same. In another letter, FEBTC informed Metrobank that the
restraining order indicates the name of the payee of the check as GONZALO
NUGUID, but the check is in fact payable to GONZALO BERNARDO. We believe there
is a defect in the restraining order and as such should not bind your bank. Alice
Rivera of Metrobank replied to said letters, reiterating Metrobanks position to
comply with the TRO lest it be cited for contempt by the trial court. However, as
would later be alleged in Metrobanks Answer before the trial court, Metrobank
eventually acknowledged the check when it became clear that nothing more can be
done to retrieve the proceeds of the check. Metrobank furthermore claimed that
since it is the issuer of CC No. 003380, the check is its primary obligation and
should not be affected by any prior transaction between the purchaser (Chiok) and
the payee (Nuguid).
In the meantime, FEBTC, as the collecting bank, filed a complaint against
Asian Bank before the Philippine Clearing House Corporation (PCHC) Arbitration
Committee for the collection of the value of Asian Bank MC No. 025935 and 025939,
which FEBTC had allegedly allowed Nuguid to withdraw on July 5, 1995, the same
day the checks were deposited. The case was docketed as Arbicom Case No. 95-

Page 122 of 128

082. The PCHC Arbitration Committee later relayed, in a letter dated August 4,
1995, its refusal to assume jurisdiction over the case on the ground that any step it
may take might be misinterpreted as undermining the jurisdiction of the RTC over
the case or a violation of the July 6, 1995 TRO. On July 25, 1995, the RTC issued
an Order directing the issuance of a writ of preliminary prohibitory injunction. On
May 5, 2006, the Court of Appeals rendered the assailed Decision affirming the RTC
Decision with modifications.
Global Bank and BPI filed separate Motions for Reconsideration of the May 5,
2006 Court of Appeals Decision. On November 6, 2006, the Court of Appeals denied
the Motions for Reconsideration.
Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank (G.R.
No. 175394) filed with this Court separate Petitions for Review on Certiorari. In
Resolutions dated February 21, 2007 and March 12, 2007, this Court resolved to
consolidate the three petitions.
Issues:
1. Whether or not payment of managers and cashiers checks are subject to the
condition that the payee thereof should comply with his obligations to the
purchaser of the checks.
2. Whether or not the purchaser of managers and cashiers checks has the right
to have the checks cancelled by filing an action for rescission of its contract
with the payee.
3. Whether or not the peculiar circumstances of this case justify the deviation
from the general principles on causes and effects of managers and cashiers
checks.
Ruling:
1.
The legal effects of a managers check and a cashiers check are the same. A
managers check, like a cashiers check, is an order of the bank to pay, drawn upon
itself, committing in effect its total resources, integrity, and honor behind its
issuance. By its peculiar character and general use in commerce, a managers
check or a cashiers check is regarded substantially to be as good as the money it
represents.
The RTC effectively ruled that payment of managers and cashiers checks are
subject to the condition that the payee thereof complies with his obligations to the
purchaser of the checks.
The dedication of
such
checks pursuant to specific reciprocal undertakings between their purchasers and
payees authorizes rescission by the former to prevent substantial and material
damage to themselves, which authority includes stopping the payment of the
checks.

Page 123 of 128

Moreover, it seems to be fallacious to hold that the unconditional payment of


managers and cashiers checks is the rule. To begin with, both managers and
cashiers checks are still subject to regular clearing under the regulations of the
Bangko Sentral ng Pilipinas, a fact borne out by the BSP manual for banks and
intermediaries, which provides, among others, in its Section 1603.1, c.
It goes without saying that under the aforecited clearing rule, the
enumeration of causes to return checks is not exclusive but may include other
causes which are consistent with long standing and accepted banking practices. The
reason of plaintiffs can well constitute such a justifiable cause to enjoin payment.
The RTC made an error at this point. While indeed, it cannot be said that
managers and cashiers checks are pre-cleared, clearing should not be confused
with acceptance. Managers and cashiers checks are still the subject of clearing to
ensure that the same have not been materially altered or otherwise completely
counterfeited. However, managers and cashiers checks are pre-accepted by the
mere issuance thereof by the bank, which is both its drawer and drawee. Thus,
while managers and cashiers checks are still subject to clearing, they cannot be
countermanded for being drawn against a closed account, for being drawn against
insufficient funds, or for similar reasons such as a condition not appearing on the
face of the check. Long standing and accepted banking practices do not
countenance the countermanding of managers and cashiers checks on the basis of
a mere allegation of failure of the payee to comply with its obligations towards the
purchaser. On the contrary, the accepted banking practice is that such checks are
as good as cash.
2.
The right to rescind invoked by the Court of Appeals is provided by Article
1191 of the Civil Code.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with Articles 1385 and 1388 and the
Mortgage Law.
The cause of action supplied by the above article, however, is clearly
predicated upon the reciprocity of the obligations of the injured party and the guilty
party. Reciprocal obligations are those which arise from the same cause, and in
which each party is a debtor and a creditor of the other, such that the obligation of
one is dependent upon the obligation of the other. They are to be performed
simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other. When Nuguid failed to deliver the agreed
amount to Chiok, the latter had a cause of action against Nuguid to ask for the

Page 124 of 128

rescission of their contract. On the other hand, Chiok did not have a cause of action
against Metrobank and Global Bank that would allow him to rescind the contracts of
sale of the managers or cashiers checks, which would have resulted in the
crediting of the amounts thereof back to his accounts.
Otherwise stated, the right of rescission under Article 1191 of the Civil Code
can only be exercised in accordance with the principle of relativity of contracts
under Article 1131 of the same code.
3.
In view of the peculiar circumstances of this case, and in the interest of
substantial justice, the Court is constrained to rule in the affirmative.
The Court does not detract from well-settled concepts and principles in
commercial law regarding the nature, causes and effects of a managers check and
cashiers check. Such checks are primary obligations of the issuing bank and
accepted in advance by the mere issuance thereof. They are a banks order to pay
drawn upon itself, committing in effect its total resources, integrity, and honor. By
their peculiar character and general use in the commercial world, they are regarded
substantially as good as the money they represent. However, in view of the peculiar
circumstances of the case at bench, the Court is constrained to set aside the
foregoing concepts and principles in favor of the exercise of the right to rescind a
contract upon the failure of consideration thereof.
In deviating from general banking principles and disposing the case on the
basis of equity, the courtsa quo should have at least ensured that their dispositions
were indeed equitable. This Court observes that equity was not served in the
dispositions below wherein Nuguid, the very person found to have violated his
contract by not delivering his dollar obligation, was absolved from his liability,
leaving the banks who are not parties to the contract to suffer the losses of millions
of pesos.
Asian Bank, which is now Global Bank, obeyed the TRO and denied the
clearing of the managers checks. As such, Global Bank may not be held liable on
account of the knowledge of whatever else Chiok told them when he asked for the
procedure to secure a Stop Payment Order. On the other hand, there was no
mention that Metrobank was ever notified of the alleged failure of consideration.
Only Asian Bank was notified of such fact. Furthermore, the mere allegation of
breach on the part of the payee of his personal contract with the purchaser should
not be considered a sufficient cause to immediately nullify such checks, thereby
eroding their integrity and honor as being as good as cash.
INSURANCE LAW
PRESCRIPTION OF ACTION
H.H. HOLLERO CONSTRUCTION, INC. vs. GOVERNMENT SERVICE INSURANCE
SYSTEM and POOL OF MACHINERY INSURERS

Page 125 of 128

G.R. No. 152334, September 24, 2014, J. Perlas-Bernabe


The prescriptive period for the insureds action for indemnity should be
reckoned from the "final rejection" of the claim. "Final rejection" simply means
denial by the insurer of the claims of the insured and not the rejection or denial by
the insurer of the insureds motion or request for reconsideration. A perusal of the
letter dated April 26, 1990 shows that the GSIS denied Hollero Constructions
indemnity claims. The same conclusion obtains for the letter dated June 21, 1990
denying Hollero Constructions indemnity claim. Holler's causes of action for
indemnity respectively accrued from its receipt of the letters dated April 26, 1990
and June 21, 1990, or the date the GSIS rejected its claims in the first instance.
Consequently, given that it allowed more than twelve (12) months to lapse before
filing the necessary complaint before the RTC on September 27, 1991, its causes of
action had already prescribed.
Facts:
The GSIS and Hollero Construction entered into a Project Agreement whereby
the latter undertook the development of a GSIS housing project known as Modesta
Village Section B. Hollero obligated itself to insure the Project, including all the
improvements, upon the execution of the Agreement under a Contractors All Risks
(CAR) Insurance with the GSIS General Insurance Department for an amount equal
to its cost or sound value, which shall not be subject to any automatic annual
reduction.
Pursuant to its undertaking, Holler secured a CAR Policy for land development
and for the construction of twenty (20) housing units. In turn, the GSIS reinsured the
CAR Policy with Pool of Machinery Insurers. Under both policies, it was provided that:
(a) there must be prior notice of claim for loss, damage or liability within fourteen
(14) days from the occurrence of the loss or damage; (b) all benefits thereunder
shall be forfeited if no action is instituted within twelve(12) months after the
rejection of the claim for loss, damage or liability; and (c) if the sum insured is found
to be less than the amount required to be insured, the amount recoverable shall be
reduced to such proportion before taking into account the deductibles stated in the
schedule (average clause provision).
During the construction, three (3) typhoons hit the country, namely, Typhoon,
Typhoon Huaning, and Typhoon, which caused considerable damage to the
Project. Accordingly, Hollero Construction filed several claims for indemnity with the
GSIS. In a letter dated April 26, 1990, the GSIS rejected Hollero Constructions
indemnity claims for the damages wrought by Typhoons Biring and Huaning, finding
that no amount is recoverable pursuant to the average clause provision under the
policies. In a letter dated June 21, 1990, the GSIS similarly rejected Hollero
Constructions indemnity claim for damages wrought by Typhoon Saling on a "no

Page 126 of 128

loss" basis, it appearing from its records that the policies were not renewed before
the onset of the said typhoon.
Hollero filed a Complaint for Sum of Money and Damages before the RTC
which was opposed by the GSIS through a Motion to Dismiss on the ground that the
causes of action stated therein are barred by the twelve-month limitation provided
under the policies, i.e., the complaint was filed more than one (1) year from the
rejection of the indemnity claims. The RTC granted Hollero Constructions indemnity
claims. The CA set aside and reversed the RTC Judgment.
Issue:
Whether or not the CA committed reversible error in dismissing the complaint on
the ground of prescription.
Ruling:
No. Contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties themselves
have used. If such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary, and popular sense.
Section 10 of the General Conditions of the subject CAR Policies commonly read:
10. If a claim is in any respect fraudulent, or if any false declaration is made or used
in support thereof, or if any fraudulent means or devices are used by the Insured or
anyone acting on his behalf to obtain any benefit under this Policy, or if a claim is
made and rejected and no action or suit is commenced within twelve months after
such rejection or, in case of arbitration taking place as provided herein, within
twelve months after the Arbitrator or Arbitrators or Umpire have made their award,
all benefit under this Policy shall be forfeited.
In this relation, case law illumines that the prescriptive period for the
insureds action for indemnity should be reckoned from the "final rejection" of the
claim.
A perusal of the letter dated April 26, 1990 shows that the GSIS denied
Hollero Constructions indemnity claims wrought by Typhoons Biring and Huaning, it
appearing that no amount was recoverable under the policies. While the GSIS gave
Hollero Construction the opportunity to dispute its findings, neither of the parties
pursued any further action on the matter; this logically shows that they deemed the
said letter as a rejection of the claims. Lest it cause any confusion, the statement in
that letter pertaining to any queries Hollero Construction may have on the denial
should be construed, at best, as a form of notice to the former that it had the

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opportunity to seek reconsideration of the GSISs rejection. Surely, Hollero


Construction cannot construe the said letter to be a mere "tentative resolution." In
fact, despite its disavowals, Hollero Construction admitted in its pleadings that the
GSIS indeed denied its claim through the aforementioned letter, but tarried in
commencing the necessary action in court.
The same conclusion obtains for the letter dated June 21, 1990 denying
Hollero Construction s indemnity claim caused by Typhoon Saling on a "no loss"
basis due to the non-renewal of the policies therefor before the onset of the said
typhoon. The fact that Hollero Construction filed a letter of reconsideration
therefrom dated April 18, 1991, considering too the inaction of the GSIS on the
same similarly shows that the June 21, 1990 letter was also a final rejection of
Hollero Constructions indemnity claim.
As correctly observed by the CA, "final rejection" simply means denial by the
insurer of the claims of the insured and not the rejection or denial by the insurer of
the insureds motion or request for reconsideration. The rejection referred to should
be construed as the rejection in the first instance, as in the two instances abovediscussed.
Holler's causes of action for indemnity respectively accrued from its receipt of
the letters dated April 26, 1990 and June 21, 1990, or the date the GSIS rejected its
claims in the first instance. Consequently, given that it allowed more than twelve
(12) months to lapse before filing the necessary complaint before the RTC on
September 27, 1991, its causes of action had already prescribed.

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