C. NATIONALITY OF CORPORATION
Self-dealing on the part of DBP which was acting both as a
G.R. No. L-64013 November 28, 1983
UNION GLASS & CONTAINER CORPORATION and CARLOS
PALANCA, JR., in his capacity as President of Union Glass &
Container Corporation, petitioners,
vs.
THE SECURITIES AND EXCHANGE COMMISSION and CAROLINA
HOFILEA, respondents.
ESCOLIN, This petition for certiorari and prohibition seeks to annul
and set aside the Order of the Securities and Exchange Commission,
dated September 25, 1981, upholding its jurisdiction in SEC Case No.
2035, entitled "Carolina Hofilea, Complainant, versus Development
Bank of the Philippines, et al., Respondents."
Private respondent Carolina Hofilea, complainant in SEC Case No.
2035, is a stockholder of Pioneer Glass Manufacturing Corporation,
Pioneer Glass for short, a domestic corporation engaged in the
operation of silica mines and the manufacture of glass and glassware.
Since 1967, Pioneer Glass had obtained various loan
accommodations from the Development Bank of the Philippines
[DBP], and also from other local and foreign sources which DBP
guaranteed.
As security for said loan accommodations, Pioneer Glass mortgaged
and/or assigned its assets, real and personal, to the DBP, in addition
to the mortgages executed by some of its corporate officers over their
personal assets. The proceeds of said financial exposure of the DBP
were used in the construction of a glass plant in Rosario, Cavite, and
the operation of seven silica mining claims owned by the corporation.
It appears that through the conversion into equity of the accumulated
unpaid interests on the various loans amounting to P5.4 million as of
January 1975, and subsequently increased by another P2.2 million in
1976, the DBP was able to gain control of the outstanding shares of
common stocks of Pioneer Glass, and to get two, later three, regular
seats in the corporation's board of directors.
Sometime in March, 1978, when Pioneer Glass suffered serious
liquidity problems such that it could no longer meet its financial
obligations with DBP, it entered into a dacion en pago agreement with
the latter, whereby all its assets mortgaged to DBP were ceded to the
latter in full satisfaction of the corporation's obligations in the total
amount of P59,000,000.00. Part of the assets transferred to the DBP
was the glass plant in Rosario, Cavite, which DBP leased and
subsequently sold to herein petitioner Union Glass and Container
Corporation, hereinafter referred to as Union Glass.
On April 1, 1981, Carolina Hofilea filed a complaint before the
respondent Securities and Exchange Commission against the DBP,
Union Glass and Pioneer Glass, docketed as SEC Case No. 2035. Of
the five causes of action pleaded therein, only the first cause of action
concerned petitioner Union Glass as transferee and possessor of the
glass plant. Said first cause of action was based on the alleged
illegality of the aforesaid dacion en pago resulting from: [1] the
supposed unilateral and unsupported undervaluation of the assets of
Pioneer Glass covered by the agreement; [2] the self-dealing indulged
in by DBP, having acted both as stockholder/director and secured
creditor of Pioneer Glass; and [3] the wrongful inclusion by DBP in its
statement of account of P26M as due from Pioneer Glass when the
same had already been converted into equity.
Thus, with respect to said first cause of action, respondent Hofilea
prayed that the SEC issue an order:
1. Holding that the so called dacion en pago conveying all the assets
of Pioneer Glass and the Hofilea personal properties to Union Glass
be declared null and void on the ground that the said conveyance was
tainted with.t.hqw
A.
controlling stockholder/director and as secured creditor of the Pioneer
Glass, all to its advantage and to that of Union Glass, and to the gross
prejudice of the Pioneer Glass,
B. That the dacion en pago is void because there was gross
undervaluation of the assets included in the so-called dacion en pago
by more than 100% to the prejudice of Pioneer Glass and to the undue
advantage of DBP and Union Glass;
C. That the DBP unduly favored Union Glass over another buyer, San
Miguel Corporation, notwithstanding the clearly advantageous terms
offered by the latter to the prejudice of Pioneer Glass, its other
creditors and so-called 'Minority stockholders.'
2. Holding that the assets of the Pioneer Glass taken over by DBP and
part of which was delivered to Union Glass particularly the glass plant
to be returned accordingly.
3. That the DBP be ordered to accept and recognize the appraisal
conducted by the Asian Appraisal Inc. in 1975 and again in t978 of the
asset of Pioneer Glass. 1
In her common prayer, Hofilea asked that DBP be sentenced to pay
Pioneer Glass actual, consequential, moral and exemplary damages,
for its alleged illegal acts and gross bad faith; and for DBP and Union
Glass to pay her a reasonable amount as attorney's fees. 2
On April 21, 1981, Pioneer Glass filed its answer. On May 8, 1981,
petitioners moved for dismissal of the case on the ground that the SEC
had no jurisdiction over the subject matter or nature of the suit.
Respondent Hofilea filed her opposition to said motion, to which
herein petitioners filed a rejoinder.
On July 23, 1981, SEC Hearing Officer Eugenio E. Reyes, to whom
the case was assigned, granted the motion to dismiss for lack of
jurisdiction. However, on September 25, 1981, upon motion for
reconsideration filed by respondent Hofilea, Hearing Officer Reyes
reversed his original order by upholding the SEC's jurisdiction over the
subject matter and over the persons of petitioners. Unable to secure a
reconsideration of the Order as well as to have the same reviewed by
the Commission En Banc, petitioners filed the instant petition for
certiorari and prohibition to set aside the order of September 25, 1981,
and to prevent respondent SEC from taking cognizance of SEC Case
No. 2035.
The issue raised in the petition may be propounded thus: Is it the
regular court or the SEC that has jurisdiction over the case?
In upholding the SEC's jurisdiction over the case Hearing Officer
Reyes rationalized his conclusion thus:t.hqw
As correctly pointed out by the complainant, the present action is in
the form of a derivative suit instituted by a stockholder for the benefit
of the corporation, respondent Pioneer Glass and Manufacturing
Corporation, principally against another stockholder, respondent
Development Bank of the Philippines, for alleged illegal acts and gross
bad faith which resulted in the dacion en pago arrangement now being
questioned by complainant. These alleged illegal acts and gross bad
faith came about precisely by virtue of respondent Development Bank
of the Philippine's status as a stockholder of co-respondent Pioneer
Glass Manufacturing Corporation although its status as such
stockholder, was gained as a result of its being a creditor of the latter.
The derivative nature of this instant action can also be gleaned from
the common prayer of the complainant which seeks for an order
directing respondent Development Bank of the Philippines to pay co-
respondent Pioneer Glass Manufacturing Corporation damages for the
alleged illegal acts and gross bad faith as above-mentioned.
As far as respondent Union Glass and Container Corporation is
concerned, its inclusion as a party-respondent by virtue of its being an
indispensable party to the present action, it being in possession of the
assets subject of the dacion en pago and, therefore, situated in such
a way that it will be affected by any judgment thereon, 3
In the ordinary course of things, petitioner Union Glass, as transferee
and possessor of the glass plant covered by the dacion en
pago agreement, should be joined as party-defendant under the
general rule which requires the joinder of every party who has an
interest in or lien on the property subject matter of the dispute. 4 Such
joinder of parties avoids multiplicity of suits as well as ensures the
convenient, speedy and orderly administration of justice.
But since petitioner Union Glass has no intra-corporate relation with
either the complainant or the DBP, its joinder as party-defendant in
SEC Case No. 2035 brings the cause of action asserted against it
outside the jurisdiction of the respondent SEC.
The jurisdiction of the SEC is delineated by Section 5 of PD No. 902-
A as follows:t.hqw As heretofore pointed out, petitioner Union Glass is involved only in
Sec. 5. In addition to the regulatory and adjudicative function of the
Securities and Exchange Commission over corporations, partnerships
and other forms of associations registered with it as expressly granted
under existing laws and devices, it shall have original and exclusive
jurisdiction to hear and decide cases involving:
a] Devices and schemes employed by or any acts, of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the interest
of the public and/or the stockholders, partners, members of
associations or organizations registered with the Commission
b] 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, partnership, or association of
which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the
state insofar as it concerns their individual franchise or right to exist as
such entity;
c] Controversies in the election or appointments of directors, trustees,
officers or managers of such corporations, partnerships or
associations.
This grant of jurisdiction must be viewed in the light of the nature and
function of the SEC under the law. Section 3 of PD No. 902-A confers
upon the latter "absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are grantees of
primary franchise and/or license or permit issued by the government
to operate in the Philippines ... " The principal function of the SEC is
the supervision and control over corporations, partnerships and
associations with the end in view that investment in these entities may
be encouraged and protected, and their activities pursued for the
promotion of economic development. 5
It is in aid of this office that the adjudicative power of the SEC must be
exercised. Thus the law explicitly specified and delimited its jurisdiction
to matters intrinsically connected with the regulation of corporations,
partnerships and associations and those dealing with the internal
affairs of such corporations, partnerships or associations.
Otherwise stated, in order that the SEC can take cognizance of a case,
the controversy must pertain to any of the following relationships: [a]
between the corporation, partnership or association and the public; [b]
between the corporation, partnership or association and its
stockholders, partners, members, or officers; [c] between the
corporation, partnership or association and the state in so far as its
franchise, permit or license to operate is concerned; and [d] among the
stockholders, partners or associates themselves.
The fact that the controversy at bar involves the rights of petitioner
Union Glass who has no intra-corporate relation either with
complainant or the DBP, places the suit beyond the jurisdiction of the
respondent SEC. The case should be tried and decided by the court
of general jurisdiction, the Regional Trial Court. This view is in accord
with the rudimentary principle that administrative agencies, like the
SEC, are tribunals of limited jurisdiction 6 and, as such, could wield
only such powers as are specifically granted to them by their enabling
statutes. 7 As We held in Sunset View Condominium Corp. vs.
Campos, Jr.: 8
Inasmuch as the private respondents are not shareholders of the
petitioner condominium corporation, the instant cases for collection
cannot be a 'controversy arising out of intra-corporate or partnership
relations between and among stockholders, members or associates;
between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively,' which controversies are under the original and exclusive
jurisdiction of the Securities & Exchange Commission, pursuant to
Section 5 [b] of P.D. No. 902-A. ...
the first cause of action of Hofileas complaint in SEC Case No, 2035.
While the Rules of Court, which applies suppletorily to proceedings
before the SEC, allows the joinder of causes of action in one
complaint, such procedure however is subject to the rules regarding
jurisdiction, venue and joinder of parties. 9 Since petitioner has no
intra-corporate relationship with the complainant, it cannot be joined
as party-defendant in said case as to do so would violate the rule or
jurisdiction. Hofileas complaint against petitioner for cancellation of
the sale of the glass plant should therefore be brought separately
before the regular court But such action, if instituted, shall be
suspended to await the final outcome of SEC Case No. 2035, for the
issue of the validity of the dacion en pago posed in the last mentioned
case is a prejudicial question, the resolution of which is a logical
antecedent of the issue involved in the action against petitioner Union
Glass. Thus, Hofileas complaint against the latter can only prosper if
final judgment is rendered in SEC Case No. 2035, annulling the dacion
en pago executed in favor of the DBP.
WHEREFORE, the instant petition is hereby granted, and the
questioned Orders of respondent SEC, dated September 25, 1981,
March 25, 1982 and May 28, 1982, are hereby set aside. Respondent
Commission is ordered to drop petitioner Union Glass from SEC Case
No. 2035, without prejudice to the filing of a separate suit before the
regular court of justice. No pronouncement as to costs.
SO ORDERED.1wph1.t
Concepcion, Jr., Guerrero, Abad Santos, De Castro, Melencio-
Herrera, Plana, Relova and Gutierrez, Jr., JJ., concur.
G.R. No. L-63558 May 19, 1987
SPOUSES JOSE ABEJO AND AURORA ABEJO, TELEC.
TRONIC SYSTEMS, INC., petitioners,
vs.
HON. RAFAEL DE LA CRUZ, JUDGE OF THE REGIONAL TRIAL
COURT (NATIONAL CAPITAL JUDICIAL REGION, BRANCH
CLX-PASIG), SPOUSES AGAPITO BRAGA AND VIRGINIA
BRAGA, VIRGILIO BRAGA AND NORBERTO
BRAGA, respondents.
No. L-68450-51 May 19, 1987
POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA,
VIRGILIO T. BRAGA, NORBERTO BRAGA, and VIRGINIA
BRAGA, petitioners,
vs.
THE HONORABLE SECURITIES AND EXCHANGE
COMMISSION, TELECTRONIC SYSTEMS, INC., JOSE ABEJO,
JOSE LUIS SANTIAGO, SIMEON A. MIRAVITE, SR., ANDRES
T. VELARDE AND L. QUIDATO BANDOLINO, respondents.

TEEHANKEE, C.J.:
These two cases, jointly heard, are jointly herein decided. They
involve the question of who, between the Regional Trial Court and
the Securities and Exchange Commission (SEC), has original and
exclusive jurisdiction over the dispute between the principal
stockholders of the corporation Pocket Bell Philippines,
Inc. (Pocket Bell), a "tone and voice paging corporation," namely,
the spouses Jose Abejo and Aurora Abejo (hereinafter referred to
as the Abejos) and the purchaser, Telectronic Systems, Inc.
(hereinafter referred to as Telectronics) of their 133,000 minority
shareholdings (for P5 million) and of 63,000 shares registered in
the name of Virginia Braga and covered by five stock certificates
endorsed in blank by her (for P1,674,450.00), and the spouses
Agapito Braga and Virginia Braga (hereinafter referred to as the
Bragas), erstwhile majority stockholders. With the said purchases,
Telectronics would become the majority stockholder, holding 56%
of the outstanding stock and voting power of the corporation Pocket
Bell.
With the said purchases in 1982, Telectronics requested the
corporate secretary of the corporation, Norberto Braga, to register
and transfer to its name, and those of its nominees the total
196,000 Pocket Bell shares in the corporation's transfer book,
cancel the surrendered certificates of stock and issue the
corresponding new certificates of stock in its name and those of its
nominees.
Norberto Braga, the corporate secretary and son of the Bragas,
refused to register the aforesaid transfer of shares in t e corporate
oo s, asserting that the Bragas claim preemptive rights over the
133,000 Abejo shares and that Virginia Braga never transferred her
63,000 shares to Telectronics but had lost the five stock certificates
representing those shares.
This triggered off the series of intertwined actions between the
protagonists, all centered on the question of jurisdiction over the
dispute, which were to culminate in the filing of the two cases at
bar.
The Bragas assert that the regular civil court has original and
exclusive jurisdiction as against the Securities and Exchange
Commission, while the Abejos claim the contrary. A summary of
the actions resorted to by the parties follows:
A. ABEJOS ACTIONS IN SEC
1. The Abejos and Telectronics and the latter's nominees, as new
majority shareholders, filed SEC Cases Nos. 02379 and 02395
against the Bragas on December 17, 1982 and February 14, 1983,
respectively.
2. In SEC Case No. 02379, they prayed for mandamus from the
SEC ordering Norberto Braga, as corporate secretary of Pocket
Bell to register in their names the transfer and sale of the aforesaid
196,000 Pocket Bell shares (of the Abejos 1 and Virginia Braga 2, cancel the
surrendered certificates as duly endorsed and to issue new certificates in their names.
3. In SEC Case No.02395, they prayed for injunction and a
temporary restraining order that the SEC enjoin the Bragas from
disbursing or disposing funds and assets of Pocket Bell and from
performing such other acts pertaining to the functions of corporate
officers.
4. Pocket Bell's corporate secretary, Norberto Braga, filed a Motion
to Dismiss the mandamus case (SEC Case No. 02379) contending
that the SEC has no jurisdiction over the nature of the action since
it does not involve an intracorporate controversy between
stockholders, the principal petitioners therein, Telectronics, not
being a stockholder of record of Pocket Bell.
5. On January 8, 1983, SEC Hearing Officer Joaquin Garaygay
denied the motion. On January 14, 1983, the corporate secretary
filed a Motion for Reconsideration. On March 21, 1983, SEC
Hearing Officer Joaquin Garaygay issued an order granting Braga's
motion for reconsideration and dismissed SEC Case No. 02379.
6. On February 11, 1983, the Bragas filed their Motion to Dismiss
the injunction case, SEC Case No. 02395. On April 8, 1985, the
SEC Director, Eugenio Reyes, acting upon the Abejos'ex-parte
motion, created a three-man committee composed of Atty.
Emmanuel Sison as Chairman and Attys. Alfredo Oca and Joaquin
Garaygay as members, to hear and decide the two SEC cases
(Nos. 02379 and 02395).
7. On April 13, 1983, the SEC three-man committee issued an
order reconsidering the aforesaid order of March 21, 1983 of the
SEC Hearing Officer Garaygay (dismissing the mandamus petition
SEC Case No. 02379) and directing corporate secretary Norberto
Braga to file his answer to the petitioner therein.
B. BRAGAS' ACTION IN SEC
8. On December 12, 1983, the Bragas filed a petition for certiorari,
prohibition and mandamus with the SEC en banc, SEC Case No.
EB #049, seeking the dismissal of SEC Cases Nos.' 02379 and
02395 for lack of jurisdiction of the Comn-iission and the setting
aside of the various orders issued by the SEC three-man
committee in the course of the proceedings in the two SEC cases.
9. On May 15, 1984, the SEC en banc issued an order dismissing
the Bragas' petition in SEC Case No. EB#049 for lack of merit and
at the same time ordering the SEC Hearing Committee to continue
with the hearings of the Abejos and Telectronics SEC Cases Nos.
02379 and 02395, ruhng that the "issue is not the ownership of
shares but rather the nonperformance by the Corporate Secretary
of the ministerial duty of recording transfers of shares of stock of
the corporation of which he is secretary."
10. On May 15, 1984 the Bragas filed a motion for reconsideration
but the SEC en banc denied the same on August 9, 1984.
C. BRAGAS' ACTION IN CFI (NOWRTC)
11. On November 25, 1982, following the corporate secretary's
refusal to register the transfer of the shares in question, the Bragas
filed a complaint against the Abejos and Telectronics in the Court
of First Instance of Pasig, Branch 21 (now the Regional Trial Court,
Branch 160) docketed as Civil Case No. 48746 for: (a) rescission
and annulment of the sale of the shares of stock in Pocket Bell
made by the Abejos in favor of Telectronics on the ground that it
violated the Bragas' alleged pre-emptive right over the Abej os'
shareholdings and an alleged perfected contract with the Abejos to
sell the same shares in their (Bragas) favor, (Ist cause of
action); plus damages for bad faith; and (b) declaration ofnullity of
any transfer, assignment or endorsement of Virginia Bragas' stock
certificates for 63,000 shares in Pocket Ben to Telectronics for want
of consent and consideration, alleging that said stock certificates,
which were intended as security for a loan application and were
thus endorsed by her in blank, had been lost (2nd cause of action).
12. On January 4, 1983, the Abejos filed a Motion to Dismiss the
complaint on the ground that it is the SEC that is vested under PD
902-A with original and exclusive jurisdiction to hear and decide
cases involving, among others, controversies "between and among
stockholders" and that the Bragas' suit is such a controversy as the
issues involved therein are the stockholders' alleged pre-emptive
rights, the validity of the transfer and endorsement of certificates of
stock, the election of corporate officers and the management and
control of the corporation's operations. The dismissal motion was
granted by Presiding Judge G. Pineda on January 14, 1983.
13. On January 24, 1983, the Bragas filed a motion for
reconsideration. The Abejos opposed. Meanwhile, respondent
Judge Rafael de la Cruz was appointed presiding judge of the court
(renamed Regional Trial Court) in place of Judge G. Pineda.
14. On February 14, 1983, respondent Judge de la Cruz issued an
order rescinding the January 14, 1983 order and reviving the
temporary restraining order previously issued on December 23,
1982 restraining Telectronics' agents or representatives from
enforcing their resolution constituting themselves as the new set of
officers of Pocket Bell and from assuming control of the corporation
and discharging their functions.
15. On March 2, 1983, the Abejos filed a motion for reconsideration,
which motion was duly opposed by the Bragas. On March 11, 1983,
respondent Judge denied the motion for reconsideration.
D. ABEJOS' PETITION AT BAR
16. On March 26, 1983, the Abejos, alleging that the acts of
respondent Judge in refusing to dismiss the complaint despite clear
lack of jurisdiction over the action and in refusing to reconsider his
erroneous position were performed without jurisdiction and with
grave abuse of discretion, filed their herein Petition for certiorari
and Prohibition with Preliminary Injunction. They prayed that the
challenged orders of respondent Judge dated February 14, 1983
and March 11, 1983 be set aside for lack of jurisdiction and that he
be ordered to permanently desist from further proceedings in Civil
Case No. 48746. Respondent judge desisted from further
proceedings in the case, dispensing with the need of issuing any
restraining order.
E. BRAGAS' PETITION AT BAR
17. On August 29, 1984, the Bragas, alleging in turn that the SEC
has no jurisdiction over SEC Cases Nos. 02379 and 02395 and
that it acted arbitrarily, whimsically and capriciously in dismissing
their petition (in SEC Case No. EB #049) for dismissal of the said
cases, filed their herein Petition for certiorari and Prohibition with
Preliminary Injunction or TRO. The petitioner seeks the reversal
and/or setting aside of the SEC Order dated May 15, 1984
dismissing their petition in said SEC Case No. EB #049 and
sustaining its jurisdiction over SEC Cases Nos. 02379 and 02395,
filed by the Abejos. On September 24, 1984, this Court issued a
temporary restraining order to maintain the status quo and
restrained the SEC and/or any of its officers or hearing committees
from further proceeding with the hearings in SEC Cases Nos.
02379 and 02395 and from enforcing any and all orders and/or
resolutions issued in connection with the said cases.
The cases, having been given due course, were jointly heard by
the Court on March 27, 1985 and the parties thereafter filed on April
16, 1985 their respective memoranda in amplification of oral
argument on the points of law that were crystalled during the
hearing,
The Court rules that the SEC has original and exclusive jurisdiction
over the dispute between the principal stockholders of the
corporation Pocket Bell, namely, the Abejos and
Telectronics, the purchasers of the 56% majority stock (supra, at
page 2) on the one hand, and the Bragas, erstwhile majority
stockholders, on the other, and that the SEC, through its en banc
Resolution of May 15, 1984 co"ectly ruled in dismissing the Bragas'
Petition questioning its jurisdiction, that "the issue is not the
ownership of shares but rather the nonperformance by the
Corporate Secretary of the ministerial duty of recording transfers of
shares of stock of the Corporation of which he is secretary."
1. The SEC ruling upholding its primary and exclusive jurisdiction
over the dispute is correctly premised on, and fully supported by,
the applicable provisions of P.D. No. 902-A which reorganized the
SEC with additional powers "in line with the government's policy of
encouraging investments, both domestic and foreign, and more
active publicParticipation in the affairs of private corporations and
enterprises through which desirable activities may be pursued for
the promotion of economic development; and, to promote a wider
and more meaningful equitable distribution of wealth," and
accordingly provided that:
SEC. 3. The Commission shall have absolute
jurisdiction, supervision and control ouer all
corporations, partnerships or associations, who
are the grantees of primary franchise and/or a
license or permit issued by the government to
operate in the Philippines; ...
SEC. 5. In addition to the regulatory and
adjudicative functions of the Securities and
Exchange Commission over corporations,
partnerships and other forms of associations
registered with it as expressly granted under
existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide
cases involving:
a) Devices or schemes employed by or any acts, of the board of
directors, business associations, its officers or partners, amounting
to fruud and misrepresentation which may be detrimental to the
interest of the public andlor of the stockholder, partners, members
of associations or organizations registered with the Commission.
b) Controversies arising out of intracorporate or partnership
relations, between and among stockholders, members, or
associates; between any andlor all of them and the
corporation, partnership or association of which they are
stockholders, members or assmiates, respectively; and between
such corporation, partnership or assmiation and the state insofar
as it concems their individual franchise or right to exist as such
entity;
c) Controversies in the election or appointments of
directors, trustees, officers or managers of such corporations,
partnerships or associations. 3
Section 6 further grants the SEC "in order to effectively exercise
such jurisdiction," the power, inter alia, "to issue preliminary or
permanent injunctions, whether prohibitory or mandatory, in all
cases in which it has jurisdiction, and in which cases the pertinent
provisions of the Rules of Court shall apply."
2. Basically and indubitably, the dispute at bar, as held by the SEC,
is an intracorporate dispute that has arisen between and among
the principal stockholders of the corporation Pocket Bell due to the
refusal of the corporate secretary, backed up by his parents as
erstwhile majority shareholders, to perform his "ministerial duty" to
record the transfers of the corporation's controlling (56%) shares of
stock, covered by duly endorsed certificates of stock, in favor of
Telectronics as the purchaser thereof. mandamus in the SEC to
compel the corporate secretary to register the transfers and issue
new certificates in favor of Telectronics and its nominees was
properly resorted to under Rule XXI, Section 1 of the SEC's New
Rules of Procedure, 4 which provides for the filing of such petitions
with the SEC. Section 3 of said Rules further authorizes the SEC
to "issue orders expediting the proceedings ... and also [to] grant a
preliminary injunction for the preservation of the rights of the parties
pending such proceedings, "
The claims of the Bragas, which they assert in their complaint in
the Regional Trial Court, praying for rescission and annulment of
the sale made by the Abejos in favor of Telectronics on the ground
that they had an alleged perfected preemptive right over the
Abejos' shares as well as for annulment of sale to Telectronics of
Virginia Braga's shares covered by street certificates duly endorsed
by her in blank, may in no way deprive the SEC of its primary and
exclusive jurisdiction to grant or not the writ of mandamus ordering
the registration of the shares so transferred. The Bragas'
contention that the question of ordering the recording of the
transfers ultimately hinges on the question of ownership or right
thereto over the shares notwithstanding, the jurisdiction over the
dispute is clearly vested in the SEC.
3. The very complaint of the Bragas for annulment of the sales and
transfers as filed by them in the regular court questions the validity
of the transfer and endorsement of the certificates of stock,
claiming alleged pre-emptive rights in the case of the Abejos'
shares and alleged loss of thio certificates and lack of consent and
consideration in the case of Virginia Braga's shares. Such dispute
c learly involve's controversies "between and among stockholders,
" as to the Abej os' right to sell and dispose of their shares to
Telectronics, the validity of the latter's acquisition of Virginia
Braga's shares, who between the Bragas and the Abejos'
transferee should be recognized as the controlling shareholders of
the corporation, with the right to elect the corporate officers and the
management and control of its operations. Such a dispute and case
clearly fag within the original and exclusive jurisdiction of the SEC
to decide, under Section 5 of P.D. 902-A, above-quoted. The
restraining order issued by the Regional Trial Court restraining
Telectronics agents and representatives from enforcing their
resolution constituting themselves as the new set of officers of
Pocket Bell and from assuming control of the corporation and
discharging their functions patently encroached upon the SEC's
exclusive jurisdiction over such specialized corporate controversies
calling for its special competence. As stressed by the Solicitor
General on behalf of the SEC, the Court has held that "Nowhere
does the law [PD 902-A] empower any Court of First Instance [now
Regional Trial Court] to interfere with the orders of the
Commission," 5 and consequently "any ruling by the trial court on
the issue of ownership of the shares of stock is not binding on the
Commission 6 for want of jurisdiction.
4. The dispute therefore clearly falls within the general
classification of cases within the SEC's original and exclusive
jurisdiction to hear and decide, under the aforequoted governing
section 5 of the law. Insofar as the Bragas and their corporate
secretary's refusal on behalf of the corporation Pocket Bell to
record the transfer of the 56% majority shares to Telectronics may
be deemed a device or scheme amounting to fraud and
misrepresentation emplolyed by them to keep themselves in
control of the corporation to the detriment of Telectronics (as buyer
and substantial investor in the corporate stock) and the Abejos (as
substantial stockholders-sellers), the case falls under paragraph
(a). The dispute is likewise an intra-corporate controversy between
and among the majority and minority stockholders as to the transfer
and disposition of the controlling shares of the corporation, failing
under paragraph (b). As stressed by the Court in DMRC
Enterprises v. Este del Sol Mountain Reserve, Inc, 7 Considering
the announced policy of PD 902-A, the expanded jurisdiction of the
respondent Securities and Exchange Commission under said
decree extends exclusively to matters arising from contracts
involving investments in private corporations, partnerships and
associations." The dispute also concerns the fundamental issue
ofwhether the Bragas or Telectronics have the right to elect the
corporate directors and officers and manage its business and
operations, which falls under paragraph (c).
5. Most of the cases that have come to this Court involve those
under paragraph (b), i.e. whether the controversy is an intra-
corporate one, arising "between and among stockholders" or
"between any or allof them and the corporation." The parties have
focused their arguments on this question. The Bragas' contention
in his field must likewise fail. In Philex Mining Corp. v. Reyes, 8 the
Court spelled out that"'an intra-corporate controversy is one which
arises between a stockholder and the corporation. There is no
distinction, qualification, nor any exemption whatsoever. The
provision is broad and covers all kinds of controversies between
stockholders and corporations. The issue of whether or not a
corporation is bound to replace a stockholder's lost certificate of
stock is a matter purely between a stockholder and the corporation.
It is a typical intra-corporate dispute. The quqsjion of damage's
raised is merely incidental to that main issue. The Court rejected
the stockholders' theory of excluding his complaint (for replacement
of a lost stock [dividend] certificate which he claimed to have never
received) from the classification of intra-corporate controversies as
one that "does not square with the intent of the law, which is to
segregate from the general jurisdiction of regular Courts
controversies involving corporations and their stockholders and to
bring them to the SEC for exclusive resolution, in much the same
way that labor disputes are now brought to the Ministry-of Labor
and Employment (MOLE) and the National Labor Relations
Commission (NLRC), and not to the Courts."
(a) The Bragas contend that Telectronics, as
buyertransferee of the 56% majority shares is
not a registered stockholder, because they,
through their son the corporate secretary,
appear to have refused to perform "the
ministerial duty of recording transfers of shares
of stock of the corporation of which he is the
secretary," and that the dispute is therefore, not
an intracorporate one. This contention begs the
question which must properly be resolved by
the SEC, but which they would prevent by their
own act, through their son, of blocking the due
recording of the transfer and cannot be
sanctioned. It can be seen from their very
complaint in the regular courts that they with
their two sons constituting the plaintiffs are all
stockholders while the defendants are the
Abejos who are also stockholders whose sale of
the shares to Telectronics they would annul.
(b) There can be no question that the dispute
between the Abejos and the Bragas as to the
sale and transfer of the former's shares to
Telectronics for P5 million is an intracorporate
one under section 5 (b), prescinding from the
applicability of section 5 (a) and (c), (supra, par.
4) lt is the SEC which must resolve the Bragas'
claim in their own complaint in the court case
filed by them of an alleged pre-emptive right to
buy the Abejos' shares by virtue of "on-going
negotiations," which they may submit as their
defense to the mandamus petition to register
the sale of the shares to Telectronics. But
asserting such preemptive rights and asking
that the same be enforced is a far cry from the
Bragas' claim that "the case relates to questions
of ownership" over the shares in question. 9 (Not
to mention, as pointed out by the Abejos, that
the corporation is not a close corporation, and
no restriction over the free transferability of the
shares appears in the Articles of Incorporation,
as well as in the by-laws 10 and the certificates of stock
themselves, as required by law for the enforcement of such
restriction. See Go Soc & Sons, etc. v. IAC, G.R. No. 72342,
Resolution of February 19, 1987.)
 (c) The dispute between the Bragas and
Telectronics as to the sale and transfer for
P1,674,450.00 of Virginia Braga's 63.000
shares covered by Street certificates duly
endorsed in blank by her is within the special
competence and jurisdiction of the SEC, dealing
as it does with the free transferability of
corporate shares, particularly street
certificates," as guaranteed by the Corporation
Code and its proclaimed policy of encouraging
foreign and domestic investments in Philippine
private corpora. tions and more active public
participation therein for the Promotion of
economic development. Here again, Virginia
Braga's claim of loss of her street
certificates 11 or theft thereof (denounced by Telectronics as
11 perjurious" 12 ) must be pleaded by her as a defense against
Telectronics'petition for mandamus and recognition now as the
controlling stockholder of the corporation in the light of the joint
affidavit of Geneml Cerefino S. Carreon of the National
Telecommunications Commission and private respondent Jose
Luis Santiago of Telectronics narrating the facts and circumstances
of how the former sold and delivered to Telectronics on behalf of
his compadres, the Bragas, Virginia Braga's street certificates for
63,000 shares equivalent to 18% of the corporation's outstanding
stock and received the cash price thereof. 13 But as to the sale and
transfer of the Abejos' shares, the Bragas cannot oust the SEC of
its original and exclusive jurisdiction to hear and decide the case,
by blocking through the corporate secretary, their son, the due
recording of the transfer and sale of the shares in question and
claiming that Telectronics is not a stockholder of the corporation
which is the very issue that the SEC is called upon to resolve. As
the SEC maintains, "There is no requirement that a stockholder of
a corporation must be a registered one in order that,the Securities
and Exchange Commission may take cognizance of a suit seeking
to enforce his rights as such stockholder." 14 This is because the
SEC by express mandate has "absolute jurisdiction, supervision
and control over all corporations" and is called upon to enforce the
provisions of the Corporation Code, among which is the stock
purchaser's right to secure the corresponding certificate in his
name under the provisions of Section 63 of the Code. Needless to
say, any problem encountered in securing the certificates of stock
representing the investment made by the buyer must be
expeditiously dealt with through administrative mandamus
proceedings with the SEC, rather than through the usual tedious
regular court procedure. Furthermore, as stated in the SEC order
of April 13, 1983, notice given to the corporation of the sale of the
shares and presentation of the certificates for transfer is ,equivalent
to registration: "Whether the refusal of the (corporation) to effect
the same is ivalid or not is still subject to the outcome of the hearing
on the merits of the case. 15
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative
commissions and boards the power to resolve specialized disputes in the field of labor (as in
corporations, public transportation and public utilities) ruled that Congress in requiring the
Industrial Court's intervention in the resolution of labor-management controversies likely to
cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so
expressly state in the law. The Court held that under the "sense-making and expeditious
doctrine of primary jurisdiction ... the courts cannot or will n6t determine a controversy
involving a question which is within the jurisdiction of an administrative tribunal, where the
question demands the exercise of sound administrative discretion requiring the special
knowledge, experience, and seruices of the administratiue tribunal to determine technical and
intricate matters of fact, and a uniformity of ruling is essential to comply uith the purposes of
the regulatory statute administered " 16
In this era of clogged court dockets, the need for specialized administrative boards or
commissions with the special knowledge, experience and capability to hear and determine
promptly disputes on technical matters or essentially factual matters, subject to judicial review
in case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the
Court noted that "between the power lodged in an administrative body and a court, the
unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been
committed to the view that unless the law speaks clearly and unequivocably, the choice should
fall on [an administrative agency.]' " 17 The Court in the earlier case of Ebon vs. De
Guzman 18 noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC
their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D.
amendment splitting their jurisdiction with the regular courts, "evidently ... had second
thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award
damages in labor cases because that setup would mean duplicity of suits, splitting the cause
of action and possible conflicting findings and conclusions by two tribunals on one and the
same claim."
7. Thus, the Corporation Code (B.P. No. 178) enacted on May 1,
1980 specifically vests the SEC with the Rule-making power in the
discharge of its task of implementing the provisions of the Code
and particularly charges it with the duty of preventing fraud and
abuses on the part of controlling stockholders, directors and
officers, as follows:
SEC. 143. Rule-making power of the Securities
and Exchange Commission. The Securities
and Exchange Commission shall have the
power and authority to implement the provisions
of this Code, and to promulgate rules and
regulations reasonably necessary to enable it to
perform its duties hereunder, particularly in the
prevention of fraud and abuses on the part of
the controlling stockholders, members,
directors, trustees or officers. (Emphasis
supplied)
The dispute between the contending parties for control of
thecorporation manifestly fans within the primary and exclusive
jurisdiction of the SEC in whom the law has reserved such
jurisdiction as an administrative agency of special competence to
deal promptly and expeditiously therewith.
As the Court stressed in Union Glass & Container Corp. v.
SEC, 19 "This grant of jurisdiction [in Section 51 must be viewed in the light of the nature
and functions of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter
'absolute jurisdiction, supervision, and control over all corporations, partnerships or
associations, who are grantees of primary franchise and/or license or permit issued by the
government to operate in the Philippines ... The principal function of the SEC is the supervision
and control over corporations, partnerships and associations with the end in view that
investment in these entities may be encouraged and protected, and their activities pursued for
the promotion of economic development.
"It is in aid of this office that the adjudicative power of the SEC must
be exercised. Thus the law explicitly specified and delin-dted its
jurisdiction to matters intrinsically connected with the regulation of
corporations, partnerships and associations and those dealing with
the internal affairs of such corporations, partnerships or
associations.
"Otherwise stated, in order that the SEC can take cognizance of a
case, the controversy must pertain to any of the following
relationships: [al between the corporation, partnership or
association and the public; [b] between the corporation, partnership
or association and its stockholders, partners, members, or officers;
[c] between the corporation, partnership or association and the
state in so far as its franchise, permit or license to operate is
concerned; and Id] among the stockholders, partners or associates
themselves." 20
Parenthetically, the cited case of Union Glass illustrates by way of
contrast what disputes do not fall within the special jurisdiction of
the SEC. In this case, the SEC had properly assumed jurisdiction
over the dissenting stockholders' com. Plaint against the
corporation Pioneer Glass questioning its dacion en pago of its
glass plant and all its assets in favor of the DBP which was clearly
an intra-corporate controversy dealing with its internal affairs. But
the Court held that the SEC had no jurisdiction over petitioner
Union Glass Corp., imPle,aded as third party purchaser of the plant
from DBP in the action to annul the dacion en pago. The Court held
that such action for recovery of the glass plant could be brought by
the dissenting stockholder to the regular courts only if and when
the SE C rendered final judgment annulling the dacion en pago and
furthermore subject to Union Glass' defenses as a third party buyer
in good faith. Similarly, in the DMRC case, therein
petitioner's,tomplaint for collection of the amounts due to it as
payment of rentals for the lease of its heavy equipment in the form
mainly of cash and part in shares of stock of the debtor-defendant
corporation was held to be not covered by the SEC's exclusive
jurisdiction over intracorporate disputes, since "to pass upon a
money claim under a lease contract would be beyond the
competence Of the Securities and Exchange Commission and to
separate the claim for money from the claim for shares of stock
would be splitting a single cause of action resulting in a multiplicity
of suitS." 21 Such an action for collection of a debt does not involve
enforcement Of rights and obligations under the Corporation Code
nor the in. temal or intracorporate affairs of the debtor corporation.
But in aR disputes affecting and dealing With the interests of the
corporation and its stockholders, following the trend and clear
legislative intent of entmsting all disputes of a specialized nature to
administrative agencies possessing. the requisite competence,
special knowledge, experience and services and facilities to
expeditiously resolve them and determine the essential facts
including technical and intricate matters, as in labor and public
utilities rates disputes, the SEC has been given "the original and
exclusive jurisdiction to hear anddecide" them (under section 5 of
P.D. 902-A) "in addition to [its] regulatory and adjudicative
functions" (under Section 3, vesting in it "absolute jurisdiction,
supervision and control over all corporations" and the Rule-making
power granted it in Section 143 of the Corporation Code, supra). As
stressed by the Court in the Philex case, supra, "(T)here is no
distinction, qualification, nor any exemption whatsoever. The
provision is broad and covers all kinds of controversies between
stockholders and corporations."
It only remains now to deal with the Order dated April 15, 1983
(Annex H, Petition) 22 of the SEC's three-member Hearing
Conunittee granting Telectronics' motion for creation of a
receivership or management committee with the ample powers
therein enumerated for the preservation pendente lite of the
corporation's assets and in discharge of its "power and duty to
preserve the rights of the parties, the stockholders, the public
availing of the corporation's services and the rights of creditors," as
well as "for reasons of equity and justice ... (and) to prevent
possible paralization of corporate business." The said Order has
not been implemented notwithstanding its having been upheld per
the SEC en banc's Order of May 15, 1984 (Annex "V", Petition)
dismissing for lack of merit the petition for certiorari, prohibition and
mandamus with prayer for restraining order or injunction filed by
the Bragas seeking the disbandment of the Hearing Committee and
the setting aside of its Orders, and its Resolution of August 9, 1984,
denying reconsideration (Annex "X", Petition), due to the Bragas'
filing of the petition at bar.
Prescinding from the great concern of damage and prejudice
expressed by Telectronics due to the Bragas having remained in
control of the corporation and having allegedly committed acts of
gross mismanagement and misapplication of funds, the Court finds
that under the facts and circumstances of record, it is but fair and
just that the SEC's order creating a receivership committee be
implemented forthwith, in accordance with its terms, as follows:
The three-man receivership committee shall be
composed of a representative from the
commission, in the person of the Director,
Examiners and Appraisers Department or his
designated representative, and a representative
from the petitioners and a representative of the
respondent.
The petitioners and respondent are therefore
directed to sub. mit to the Commission the name
of their designated representative within three
(3) days from receipt of this order. The
Conunission shall appoint the other
representatives if either or both parties fafl to
comply with the requirement within the stated
time.
ACCORDINGLY, judgment is hereby rendered:
(a) Granting the petition in G.R. No. 63558,
annulling the challenged Orders of respondent
Judge clated February 14, 1983 and March i 1,
1983 (Annexes "L" and "P" of the Abejos'
petition) and prohibiting respondent Judge from
further proceeding in Civil Case No. 48746 filed
in his Court other than to dismiss the same for
lack or jurisdiction over the subject-matter;
(b) Dismissing the petition in G.R. Nos. 68450-
51 and lifting the temporary restraining order
issued on September 24, 1984, effective
immediately upon promulgation hereof,
(c) Directing the SEC through its Hearing
Committee to proceed immediately with hearing
and resolving the pending mandamus petition
for recording in the corporate books the transfer
to Telectronics and its nominees of the majority
(56%) shares of stock of the corporation Pocket
Bell pertaining to the Abejos and Virginia Braga
and all related issues, taking into consideration,
without need of resubmittal to it, the pleadings,
annexes and exhibits filed by the contending
parties in the cases at bar; and
(d) Likewise directing the SEC through its
Hearing Committee to proceed immediately
with the implementation of its receivership or
management committee Order of April 15, 1983
in SEC Case No. 2379 and for the purpose, the
contending parties are ordered to submit to said
Hearing Committee the name of their
designated representatives in the
receivership/management committee within
three (3) days from receipt of this decision, on
pain of forfeiture of such right in case of failure
to comply herewith, as provided in the said
Order; and ordering theBragas to perform only
caretaker acts in the corporation pending the
organization of such receivership/management
committee and assumption of its functions.
This decision shall be immediately executory upon its
promulgation.
SO ORDERED.
G.R. No. 87135 May 22, 1992
ALMA MAGALAD, petitioner,
vs.
PREMIERE FINANCING CORP., respondent.
PARAS, J.:
This is an appeal originally filed with the Court of Appeals but
certified to this court for disposition since it involves purely
questions of law from the decision of the Regional Trial Court
(RTC), Branch LXXXV, Quezon City, dated May 22, 1984, in Civil
Case No. Q-40392, ordering the defendant-appellant Premiere
Financing Corporation (Premiere for short) to pay to the plaintiff-
appellee Alma Magalad (Magalad for short) the sum of:
(a) P50,000.00, the principal obligation, plus interest at the legal
rate from September 12, 1983, until the full amount is paid; (b)
P10,000.00, both for moral and exemplary damages; (c)
P5,000.00, for and as attorney's fees and (d) the costs of suit.
The antecedent facts of the case are as follows:
Premiere is a financing company engaged in soliciting and
accepting money market placements or deposits (Original Record,
p. 29).
On September 12, 1983 with expired permit to issue commercial
papers (Ibid., p. 8) and with intention not to pay or defraud its
creditors, Premiere induced and misled Magalad into making a
money market placement of P50,000.00 at 22% interest per
annum for which it issued a receipt (Ibid., Exh. "B", p. 8). Aside from
the receipt, Premier likewise issued two (2) post-dated checks in
the total sum of P51,079.00 (Ibid., Exh. "C", p. 9) and assigned to
Magalad its receivable from a certain David Saman for the same
amount (Ibid., Exh. "C", p. 10).
When the said checks were presented for payment on their due
dates, the drawee bank dishonored the checks for lack of sufficient
funds to cover the amount (Ibid., Exhs. "D-1", "E-1", pp. 11-12).
Despite demands by Magalad for the replacement of said checks
with cash, Premiere, for no valid reason, failed and refused to honor
such demands and due to fraudulent acts of Premiere, Magalad
suffered sleepless nights, mental anguish, fright, serious anxiety,
considering the fact that the money she invested is blood money
and is the only source of support for her family (Ibid., p. 4).
Magalad in order to seek redress and retrieve her blood money,
availed of the service of counsel for which she agreed to pay twenty
percent (20%) of the amount due as and for attorney's fees (Ibid.)
On January 10, 1984, Magalad filed a complaint for damages with
prayer for writ of preliminary attachment with the RTC, Branch
LXXXV, Quezon City, docketed as Civil Case No. Q-40392 against
herein Premiere (Ibid., p. 3-6).
Premiere having failed to file an answer and acting on Magalad's
motion, the lower court declared Premiere in default by virtue of an
order dated April 5, 1984 allowing Magalad to present evidence ex-
parte (Ibid., pp. 21; 22)
On May 22, 1984 the lower court rendered a default judgment
against Premiere, the dispositive portion of which reads:
From the foregoing evidence, the court finds that plaintiff has fully
established her claim that defendant had indeed acted fraudulently
in incurring the obligation and considering that no evidence has
been adduced by the defendant to contradict the same, judgment
is hereby rendered ordering the defendant to pay plaintiff as
follows:
(a) P50,000.00, the principal obligation, plus interest at the legal
rate from September 12, 1983 until the full amount is paid;
(b) P10,000.00 both for moral and exemplary damages;
(c) P5,000.00 for and as attorney's fees; and
(d) the costs of suit.
SO ORDERED. (Ibid., p. 30)
Premiere filed a motion for reconsideration of the foregoing
decision, based principally on a question of law alleging that the
Securities and Exchange Commission (SEC) has exclusive and
original jurisdiction over a corporation under a state of suspension
of payments (Ibid., pp. 32-41).
Magalad filed an opposition to the motion for reconsideration on
January 8, 1985 alleging among others that the regular court has
jurisdiction over the case to the exclusion of the SEC. (Ibid., pp. 51-
53).
On May 28, 1986 the lower court issued an order denying the
motion for reconsideration (Ibid., p. 61).
On June 11, 1986 Premiere filed his notice of appeal which led to
the issuance of the order of the lower court dated July 29, 1986
elevating the case to the Court of Appeals (CA) (Ibid., pp. 62-63).
The Court of Appeals in its resolution dated September 8, 1987
dismissed the case for failure of Premiere to file its brief despite the
ninety-day extension granted to it, which expired on June 10, 1987
(Rollo, p. 16).
An omnibus motion for reconsideration and admission of late filing
of Premiere's brief was filed on September 22, 1987 (Rollo, pp. 17-
19; 32).
On September 30, 1987 the Court of Appeals issued a resolution
which reconsidered its previous resolution dated September 5,
1987 and admitted the Premiere's brief (Rollo, p. 26).
On January 31, 1989 the Court of Appeals issued a resolution
certifying the instant case to this Court on the ground that the case
involves a question of law, the dispositive part of which stating:
ACCORDINGLY, pursuant to Rule 50, Sec. 3, in relation to the
Judiciary Act of 1948, Sec. 17, par. 4(3) (4), the Appeal in this case
is hereby certified to the Supreme Court on the ground that the only
issue raised concerns the jurisdiction of the trial court and only a
question of law. (Rollo, p. 33)
Hence, this appeal.
The pivotal issue in this case is whether or not the court a quo had
jurisdiction to try the instant case.
At the very core of this appeal assailing the aforesaid
pronouncement of the lower court, and around which revolve the
arguments of the parties, is the applicability of Presidential Decree
No. 902-A (Reorganization of the SEC with Additional Powers), as
amended by Presidential Decrees Nos. 1653, 1758 and 1799.
Magalad submits that the legal suit which she has brought against
Premiere is an ordinary action for damages with the preliminary
attachment cognizable solely by the RTC. Premiere, on the other
hand, espouses the original and exclusive jurisdiction of the
Securities and Exchange Commission.
Presidential Decree No. 902-A, Section 3, provides:
Sec. 3. The Commission shall have absolute jurisdiction,
supervision and control over all corporations, partnerships or
associations, who are the grantees of primary franchises and/or a
license or permit issued by the government to operate in the
Philippines; and in the exercise of its authority, it shall have the
power to enlist the aid and support of and to deputize any and all
enforcement agencies of the government, civil or military as well as
any private institution, corporation, firm, association or person. (As
amended by Presidential Decree No. 1758).
Sec. 3 of Pres. Decree No. 902-A should also be read in
conjunction with Sec. 5 of the same law, providing:
Sec. 5. In addition to the regulatory and adjudicative functions of
the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as
expressly granted under the existing laws and decrees, it shall
have original and exclusive jurisdiction to hear and decide cases
involving:
a) Devises or schemes employed by or any acts of the Board of
Directors, business associates, its officers or partners, amounting
to fraud and misrepresentation which may be detrimental to the
public and/or to the stockholders, partners, members of
associations or organizations registered with the Commission.
(Emphasis supplied)
Considering that Magalad's complaint sufficiently alleges acts
amounting to fraud and misrepresentation committed by Premiere,
the SEC must be held to retain its original and exclusive jurisdiction
over the case, despite the fact that the suit involves collection of
sums of money paid to said corporation, the recovery of which
would ordinarily fall within the jurisdiction of regular courts. The
fraud committed is detrimental to the interest of the public and,
therefore, encompasses a category of relationship within the SEC
jurisdiction.
Otherwise stated, in order that the SEC can take cognizance of a
case, the controversy must pertain to any of the following
relationships: (a) between the corporation, partnership or
association and the public; (b) between the corporation,
partnership or association and its stockholders, partners, members
or officers; (c) between the corporation, partnership or association
and the state so far as its franchise, permit or license to operate is
concerned; and (d) among the stockholders, partners or associates
themselves (Union Glass & Container Corp. v. SEC, 126 SCRA 31;
38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987).
In this case, the recitals of the complaint sufficiently allege that
devices or schemes amounting to fraud and misrepresentation
detrimental to the interest of the public have been resorted to by
Premiere Corporation. It can not but be conceded, therefore, that
the SEC may exercise its adjudicative powers pursuant to Sec. 5(a)
of Pres. Decree No. 902-A (Supra).
The fact that Premiere's authority to engage in financing already
expired will not have the effect of divesting the SEC of its original
and exclusive jurisdiction. The expanded jurisdiction of the SEC
was conceived primarily to protect the interest of the investing
public. That Magalad's money placements were in the nature of
investments in Premiere can not be gainsaid. Magalad had
reasonably expected to receive returns from moneys she had paid
to Premiere. Unfortunately, however, she was the victim of alleged
fraud and misrepresentation.
Reliance by Magalad on the cases of DMRC v. Este del Sol, (132
SCRA 293) and Union Glass & Container Corp. v. SEC (126 SCRA
31), where the jurisdiction of the ordinary Courts was upheld, is
misplaced for, as explicitly stated in those cases, nowhere in the
complaints therein is found any averment of fraud or
misrepresentation committed by the respective corporations
involved. The causes of action, therefore, were nothing more than
simple money claims.
Further bolstering the jurisdiction of the SEC in this case is the fact
that said agency had already appointed a Rehabilitation Receiver
for Premiere and has directed all proceedings or claims against it
be suspended. This, pursuant to Sec. 6(c) of Pres. Decree No. 902-
A providing that "upon appointment of a . . . rehabilitation receiver
. . . all actions for claims against corporations . . . under receivership
pending before any court, tribunal, board or body shall be
suspended accordingly."
By so doing, SEC has exercised its original and exclusive
jurisdiction to hear and decide cases involving:
a) Petitions of corporations, partnerships or associations to be
declared in the state of suspension of payments in cases where the
corporation, partnership or association possesses sufficient
property to cover all its debts but foresees the impossibility of
meeting them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to
cover its liabilities but is under the management of a Rehabilitation
Receiver or Management of a Rehabilitation Receiver or
Management Committee created pursuant to this Decree. (Section
5(d) of Pres. Decree No. 902-A as added by Pres. Decree 1758).
In fine, the adjudicative powers of the SEC being clearly defined by
law, its jurisdiction over this case has to be upheld.
PREMISES CONSIDERED, the instant appeal is GRANTED, and
the order of the Presiding Judge of the Regional Trial Court,
Quezon City, Branch LXXXV dated May 22, 1984, in Civil Case No.
Q-40392 is REVERSED and SET ASIDE, without prejudice to the
filing by Alma Magalad of the appropriate complaint against
Premiere Financing Corporation with the Securities and Exchange
Commission.
SO ORDERED.
G.R. No. L-12719 May 31, 1962
THE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court of Tax Appeals,
reversing the decision of the Collector of Internal Revenue,
assessing against and demanding from the "Club Filipino, Inc. de
Cebu", the sum of P12,068.84 as fixed and percentage taxes,
surcharge and compromise penalty, allegedly due from it as a
keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de
Cebu," (Club, for short), is a civic corporation organized under the
laws of the Philippines with an original authorized capital stock of
P22,000.00, which was subsequently increased to P200,000.00,
among others, to it "proporcionar, operar, y mantener un campo de
golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling
alleys), mesas de billar y pool, y toda clase de juegos no prohibidos
por leyes generales y ordenanzas generales; y desarollar y cultivar
deportes de toda clase y denominacion cualquiera para el recreo y
entrenamiento saludable de sus miembros y accionistas" (sec. 2,
Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in
the articles or by-laws is there a provision relative to dividends and
their distribution, although it is covenanted that upon its dissolution,
the Club's remaining assets, after paying debts, shall be donated
to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del
Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf
course (on a lot leased from the government), and a bar-restaurant
where it sells wines and liquors, soft drinks, meals and short orders
to its members and their guests. The bar-restaurant was a
necessary incident to the operation of the club and its golf-course.
The club is operated mainly with funds derived from membership
fees and dues. Whatever profits it had, were used to defray its
overhead expenses and to improve its golf-course. In 1951. as a
result of a capital surplus, arising from the re-valuation of its real
properties, the value or price of which increased, the Club declared
stock dividends; but no actual cash dividends were distributed to
the stockholders. In 1952, a BIR agent discovered that the Club
has never paid percentage tax on the gross receipts of its bar and
restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a
letter dated December 22, 1852, the Collector of Internal Revenue
assessed against and demanded from the Club, the following
sums:
 As percentage tax on its gross receipts
during the tax years 1946 to 1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years 1946 to 1952 70.00
Compromise penalty 500.00
The Club wrote the Collector, requesting for the cancellation of the
assessment. The request having been denied, the Club filed the
instant petition for review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of the sum
of 12,068.84, as fixed and percentage taxes and surcharges
prescribed in sections 182, 183 and 191 of the Tax Code, under
which the assessment was made, in connection with the operation
of its bar and restaurant, during the periods mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as
compromise penalty.
Section 182, of the Tax Code states, "Unless otherwise provided,
every person engaging in a business on which the percentage tax
is imposed shall pay in full a fixed annual tax of ten pesos for each
calendar year or fraction thereof in which such person shall engage
in said business." Section 183 provides in general that "the
percentage taxes on business shall be payable at the end of each
calendar quarter in the amount lawfully due on the business
transacted during each quarter; etc." And section 191, same Tax
Code, provides "Percentage tax . . . Keepers of restaurants,
refreshment parlors and other eating places shall pay a tax
three per centum, and keepers of bar and cafes where wines or
liquors are served five per centum of their gross receipts . . .". It has
been held that the liability for fixed and percentage taxes, as
provided by these sections, does not ipso facto attach by mere
reason of the operation of a bar and restaurant. For the liability to
attach, the operator thereof must be engaged in the business as a
barkeeper and restaurateur. The plain and ordinary meaning
of business is restricted to activities or affairs where profit is the
purpose or livelihood is the motive, and the term business when
used without qualification, should be construed in its plain and
ordinary meaning, restricted to activities for profit or livelihood (The
Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks
Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959,
giving full definitions of the word "business"; Coll. of Int. Rev. v.
Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178,
Aug. 21, 1959, the facts of which are similar to the ones at bar;
Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and
cultivate sports of all class and denomination, for the healthful
recreation and entertainment of its stockholders and members; that
upon its dissolution, its remaining assets, after paying debts, shall
be donated to a charitable Philippine Institution in Cebu; that it is
operated mainly with funds derived from membership fees and
dues; that the Club's bar and restaurant catered only to its
members and their guests; that there was in fact no cash dividend
distribution to its stockholders and that whatever was derived on
retail from its bar and restaurant was used to defray its overall
overhead expenses and to improve its golf-course (cost-plus-
expenses-basis), it stands to reason that the Club is not engaged
in the business of an operator of bar and restaurant (same
authorities, cited above).
It is conceded that the Club derived profit from the operation of its
bar and restaurant, but such fact does not necessarily convert it
into a profit-making enterprise. The bar and restaurant are
necessary adjuncts of the Club to foster its purposes and the profits
derived therefrom are necessarily incidental to the primary object
of developing and cultivating sports for the healthful recreation and
entertainment of the stockholders and members. That a Club
makes some profit, does not make it a profit-making Club. As has
been remarked a club should always strive, whenever possible, to
have surplus (Jesus Sacred Heart College v. Collector of Int. Rev.,
G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco
Educational Corp., G.R. No. L-9276, Oct. 23, 1956).1wph1.t
It is claimed that unlike the two cases just cited (supra), which are
non-stock, the appellee Club is a stock corporation. This is
unmeritorious. The facts that the capital stock of the respondent
Club is divided into shares, does not detract from the finding of the
trial court that it is not engaged in the business of operator of bar
and restaurant. What is determinative of whether or not the Club is
engaged in such business is its object or purpose, as stated in its
articles and by-laws. It is a familiar rule that the actual purpose is
not controlled by the corporate form or by the commercial aspect
of the business prosecuted, but may be shown by extrinsic
evidence, including the by-laws and the method of operation. From
the extrinsic evidence adduced, the Tax Court concluded that the
Club is not engaged in the business as a barkeeper and
restaurateur.
Moreover, for a stock corporation to exist, two requisites must be
complied with, to wit: (1) a capital stock divided into shares and (2)
an authority to distribute to the holders of such shares, dividends
or allotments of the surplus profits on the basis of the shares held
(sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of
incorporation or by-laws could be found an authority for the
distribution of its dividends or surplus profits. Strictly speaking, it
cannot, therefore, be considered a stock corporation, within the
contemplation of the corporation law.
A tax is a burden, and, as such, it should not be deemed imposed
upon fraternal, civic, non-profit, nonstock organizations, unless the
intent to the contrary is manifest and patent" (Collector v. BPOE
Elks Club, et al., supra), which is not the case in the present appeal.
Having arrived at the conclusion that respondent Club is not
engaged in the business as an operator of a bar and restaurant,
and therefore, not liable for fixed and percentage taxes, it follows
that it is not liable for any penalty, much less of a compromise
penalty.
WHEREFORE, the decision appealed from is affirmed without
costs.
Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Barrera and Dizon, JJ., concur.
Bengzon, C.J., is on leave.
G.R. No. 91889 August 27, 1993
MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY
AND NEPOMUCENO REDOVAN, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, EDGARDO D.
PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V.
VELOSO AND CASTRENSE C. VELOSO, respondents.
Virgilio E. Dulay for petitioners.
Torres, Tobias, Azura & Jocson for private respondents.
NOCON, J.:
This is a petition for review on certiorari to annul and set aside the
decision 1 of the Court of Appeals affirming the decision2 of the
Regional Trial Court of Pasay, Branch 114 Civil Cases Nos. 8198-
P, and 2880-P, the dispositive portion of which reads, as follows:
Wherefore, in view of all the foregoing considerations, in this Court
hereby renders judgment, as follows:
In Civil Case No. 2880-P, the petition filed by Manuel R. Dulay
Enterprises, Inc. and Virgilio E. Dulay for annulment or declaration
of nullity of the decision of the Metropolitan Trial Court, Branch 46,
Pasay City, in its Civil Case No. 38-81 entitled "Edgardo D.
Pabalan, et al., vs. Spouses Florentino Manalastas, et al.," is
dismissed for lack of merits;
In Civil Case No. 8278-P, the complaint filed by Manuel R. Dulay
Enterprises, Inc. for cancellation of title of Manuel A. Torres, Jr.
(TCT No. 24799 of the Register of Deeds of Pasay City) and
reconveyance, is dismissed for lack or merit, and,
In Civil Case No. 8198-P, defendants Manuel R. Dulay Enterprises,
Inc. and Virgilio E. Dulay are ordered to surrender and deliver
possession of the parcel of land, together with all the improvements
thereon, described in Transfer Certificate of Title No. 24799 of the
Register of Deeds of Pasay City, in favor of therein plaintiffs Manuel
A. Torres, Jr. as owner and Edgardo D. Pabalan as real estate
administrator of said Manuel A. Torres, Jr.; to account for and
return to said plaintiffs the rentals from dwelling unit No. 8-A of the
apartment building (Dulay Apartment) from June 1980 up to the
present, to indemnify plaintiffs, jointly and severally, expenses of
litigation in the amount of P4,000.00 and attorney's fees in the sum
of P6,000.00, for all the three (3) cases. Co-defendant
Nepomuceno Redovan is ordered to pay the current and
subsequent rentals on the premises leased by him to plaintiffs.
The counterclaim of defendants Virgilio E. Dulay and Manuel R.
Dulay Enterprises, Inc. and N. Redovan, dismissed for lack of merit.
With costs against the three (3) aforenamed defendants. 3
The facts as found by the trial court are as follows:
Petitioner Manuel R. Dulay Enterprises, Inc, a domestic corporation
with the following as members of its Board of Directors: Manuel R.
Dulay with 19,960 shares and designated as president, treasurer
and general manager, Atty. Virgilio E. Dulay with 10 shares and
designated as vice-president; Linda E. Dulay with 10 shares; Celia
Dulay-Mendoza with 10 shares; and Atty. Plaridel C. Jose with 10
shares and designated as secretary, owned a property covered by
TCT No. 17880 4 and known as Dulay Apartment consisting of
sixteen (16) apartment units on a six hundred eighty-nine (689)
square meters lot, more or less, located at Seventh Street (now
Buendia Extension) and F.B. Harrison Street, Pasay City.
Petitioner corporation through its president, Manuel Dulay,
obtained various loans for the construction of its hotel project,
Dulay Continental Hotel (now Frederick Hotel). It even had to
borrow money from petitioner Virgilio Dulay to be able to continue
the hotel project. As a result of said loan, petitioner Virgilio Dulay
occupied one of the unit apartments of the subject property since
property since 1973 while at the same time managing the Dulay
Apartment at his shareholdings in the corporation was
subsequently increased by his father. 5
On December 23, 1976, Manuel Dulay by virtue of Board
Resolution
No 186 of petitioner corporation sold the subject property to private
respondents spouses Maria Theresa and Castrense Veloso in the
amount of P300,000.00 as evidenced by the Deed of Absolute
Sale.7 Thereafter, TCT No. 17880 was cancelled and TCT No.
23225 was issued to private respondent Maria Theresa
Veloso. 8 Subsequently, Manuel Dulay and private respondents
spouses Veloso executed a Memorandum to the Deed of Absolute
Sale of December 23, 1976 9 dated December 9, 1977 giving
Manuel Dulay within (2) years or until December 9, 1979 to
repurchase the subject property for P200,000.00 which was,
however, not annotated either in TCT No. 17880 or TCT No. 23225.
On December 24, 1976, private respondent Maria Veloso, without
the knowledge of Manuel Dulay, mortgaged the subject property to
private respondent Manuel A. Torres for a loan of P250,000.00
which was duly annotated as Entry No. 68139 in TCT No. 23225. 10
Upon the failure of private respondent Maria Veloso to pay private
respondent Torres, the subject property was sold on April 5, 1978
to private respondent Torres as the highest bidder in an
extrajudicial foreclosure sale as evidenced by the Certificate of
Sheriff's Sale 11 issued on April 20, 1978.
On July 20, 1978, private respondent Maria Veloso executed a
Deed of Absolute Assignment of the Right to Redeem 12 in favor of
Manuel Dulay assigning her right to repurchase the subject
property from private respondent Torres as a result of the extra sale
held on April 25, 1978.
As neither private respondent Maria Veloso nor her assignee
Manuel Dulay was able to redeem the subject property within the
one year statutory period for redemption, private respondent Torres
filed an Affidavit of Consolidation of Ownership 13 with the Registry
of Deeds of Pasay City and TCT No. 24799 14 was subsequently
issued to private respondent Manuel Torres on April 23, 1979.
On October 1, 1979, private respondent Torres filed a petition for
the issuance of a writ of possession against private respondents
spouses Veloso and Manuel Dulay in LRC Case No. 1742-P.
However, when petitioner Virgilio Dulay was never authorized by
the petitioner corporation to sell or mortgage the subject property,
the trial court ordered private respondent Torres to implead
petitioner corporation as an indispensable party but the latter
moved for the dismissal of his petition which was granted in an
Order dated April 8, 1980.
On June 20, 1980, private respondent Torres and Edgardo
Pabalan, real estate administrator of Torres, filed an action against
petitioner corporation, Virgilio Dulay and Nepomuceno Redovan, a
tenant of Dulay Apartment Unit No. 8-A for the recovery of
possession, sum of money and damages with preliminary
injunction in Civil Case, No. 8198-P with the then Court of First
Instance of Rizal.
On July 21, 1980, petitioner corporation filed an action against
private respondents spouses Veloso and Torres for the
cancellation of the Certificate of Sheriff's Sale and TCT No. 24799
in Civil Case No. 8278-P with the then Court of First Instance of
Rizal.
On January 29, 1981, private respondents Pabalan and Torres filed
an action against spouses Florentino and Elvira Manalastas, a
tenant of Dulay Apartment Unit No. 7-B, with petitioner corporation
as intervenor for ejectment in Civil Case No. 38-81 with the
Metropolitan Trial Court of Pasay City which rendered a decision
on April 25, 1985, dispositive portion of which reads, as follows:
Wherefore, judgment is hereby rendered in favor of the plaintiff
(herein private respondents) and against the defendants:
1. Ordering the defendants and all persons claiming possession
under them to vacate the premises.
2. Ordering the defendants to pay the rents in the sum of P500.000
a month from May, 1979 until they shall have vacated the premises
with interest at the legal rate;
3. Ordering the defendants to pay attorney's fees in the sum of
P2,000.00 and P1,000.00 as other expenses of litigation and for
them to pay the costs of the suit.15
Thereafter or on May 17, 1985, petitioner corporation and Virgilio
Dulay filed an action against the presiding judge of the Metropolitan
Trial Court of Pasay City, private respondents Pabalan and Torres
for the annulment of said decision with the Regional Trial Court of
Pasay in Civil Case No. 2880-P.
Thereafter, the three (3) cases were jointly tried and the trial court
rendered a decision in favor of private respondents.
Not satisfied with said decision, petitioners appealed to the Court
of Appeals which rendered a decision on October 23, 1989, the
dispositive portion of which reads, as follows:
PREMISES CONSIDERED, the decision being appealed should be
as it is hereby AFFIRMED in full. 16
On November 8, 1989, petitioners filed a Motion for
Reconsideration which was denied on January 26, 1990.
Hence, this petition.
During the pendency of this petition, private respondent Torres died
on April 3, 1991 as shown in his death certificate 17 and named
Torres-Pabalan Realty & Development Corporation as his heir in
his holographic will 18dated October 31, 1986.
Petitioners contend that the respondent court had acted with grave
abuse of discretion when it applied the doctrine of piercing the veil
of corporate entity in the instant case considering that the sale of
the subject property between private respondents spouses Veloso
and Manuel Dulay has no binding effect on petitioner corporation
as Board Resolution No. 18 which authorized the sale of the subject
property was resolved without the approval of all the members of
the board of directors and said Board Resolution was prepared by
a person not designated by the corporation to be its secretary.
We do not agree.
Section 101 of the Corporation Code of the Philippines provides:
Sec. 101. When board meeting is unnecessary or improperly held.
Unless the by-laws provide otherwise, any action by the directors
of a close corporation without a meeting shall nevertheless be
deemed valid if:
1. Before or after such action is taken, written consent thereto is
signed by all the directors, or
2. All the stockholders have actual or implied knowledge of the
action and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the
express or implied acquiese of all the stockholders, or
4. All the directors have express or implied knowledge of the action
in question and none of them makes prompt objection thereto in
writing.
If a directors' meeting is held without call or notice, an action taken
therein within the corporate powers is deemed ratified by a director
who failed to attend, unless he promptly files his written objection
with the secretary of the corporation after having knowledge
thereof.
In the instant case, petitioner corporation is classified as a close
corporation and consequently a board resolution authorizing the
sale or mortgage of the subject property is not necessary to bind
the corporation for the action of its president. At any rate, corporate
action taken at a board meeting without proper call or notice in a
close corporation is deemed ratified by the absent director unless
the latter promptly files his written objection with the secretary of
the corporation after having knowledge of the meeting which, in his
case, petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an entity which
has a personality distinct and separate from its individual
stockholders or members, 19 the veil of corporate fiction may be
pierced when it is used to defeat public convenience justify wrong,
protect fraud or defend crime. 20 The privilege of being treated as
an entity distinct and separate from its stockholder or members is
therefore confined to its legitimate uses and is subject to certain
limitations to prevent the commission of fraud or other illegal or
unfair act. When the corporation is used merely as an alter ego or
business conduit of a person, the law will regard the corporation as
the act of that person. 21 The Supreme Court had repeatedly
disregarded the separate personality of the corporation where the
corporate entity was used to annul a valid contract executed by one
of its members.
Petitioners' claim that the sale of the subject property by its
president, Manuel Dulay, to private respondents spouses Veloso is
null and void as the alleged Board Resolution No. 18 was passed
without the knowledge and consent of the other members of the
board of directors cannot be sustained. As correctly pointed out by
the respondent Court of Appeals:
Appellant Virgilio E. Dulay's protestations of complete innocence to
the effect that he never participated nor was even aware of any
meeting or resolution authorizing the mortgage or sale of the
subject premises (see par. 8, affidavit of Virgilio E. Dulay, dated
May 31, 1984, p. 14, Exh. "21") is difficult to believe. On the
contrary, he is very much privy to the transactions involved. To
begin with, he is a incorporator and one of the board of directors
designated at the time of the organization of Manuel R. Dulay
Enterprise, Inc. In ordinary parlance, the said entity is loosely
referred to as a "family corporation". The nomenclature, if
imprecise, however, fairly reflects the cohesiveness of a group and
the parochial instincts of the individual members of such an
aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical:
four-fifths of its incorporators being close relatives namely, three
(3) children and their father whose name identifies their corporation
(Articles of Incorporation of Manuel R. Dulay Enterprises, Inc. Exh.
"31-A"). 22
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975
executed an affidavit 23 that he was a signatory witness to the
execution of the post-dated Deed of Absolute Sale of the subject
property in favor of private respondent Torres indicates that he was
aware of the transaction executed between his father and private
respondents and had, therefore, adequate knowledge about the
sale of the subject property to private respondents.
Consequently, petitioner corporation is liable for the act of Manuel
Dulay and the sale of the subject property to private respondents
by Manuel Dulay is valid and binding. As stated by the trial court:
. . . the sale between Manuel R. Dulay Enterprises, Inc. and the
spouses Maria Theresa V. Veloso and Castrense C. Veloso, was
a corporate act of the former and not a personal transaction of
Manuel R. Dulay. This is so because Manuel R. Dulay was not only
president and treasurer but also the general manager of the
corporation. The corporation was a closed family corporation and
the only non-relative in the board of directors was Atty. Plaridel C.
Jose who appeared on paper as the secretary. There is no denying
the fact, however, that Maria Socorro R. Dulay at times acted as
secretary. . . ., the Court can not lose sight of the fact that the
Manuel R. Dulay Enterprises, Inc. is a closed family corporation
where the incorporators and directors belong to one single family.
It cannot be concealed that Manuel R. Dulay as president,
treasurer and general manager almost had absolute control over
the business and affairs of the corporation. 24
Moreover, the appellate courts will not disturb the findings of the
trial judge unless he has plainly overlooked certain facts of
substance and value that, if considered, might affect the result of
the case, 25 which is not present in the instant case.
Petitioners' contention that private respondent Torres never
acquired ownership over the subject property since the latter was
never in actual possession of the subject property nor was the
property ever delivered to him is also without merit.
Paragraph 1, Article 1498 of the New Civil Code provides:
When the sale is made through a public instrument, the execution
thereof shall be equivalent to the delivery of the thing which is the
object of the contract, if from the deed the contrary do not appear
or cannot clearly be inferred.
Under the aforementioned article, the mere execution of the deed
of sale in a public document is equivalent to the delivery of the
property. Likewise, this Court had held that:
It is settled that the buyer in a foreclosure sale becomes the
absolute owner of the property purchased if it is not redeemed
during the period of one year after the registration of the sale. As
such, he is entitled to the possession of the said property and can
demand it at any time following the consolidation of ownership in
his name and the issuance to him of a new transfer certificate of
title. The buyer can in fact demand possession of the land even
during the redemption period except that he has to post a bond in
accordance with Section 7 of Act No. 3133 as amended. No such
bond is required after the redemption period if the property is not
redeemed. Possession of the land then becomes an absolute right
of the purchaser as confirmed owner. 26
Therefore, prior physical delivery or possession is not legally
required since the execution of the Deed of Sale in deemed
equivalent to delivery.
Finally, we hold that the respondent appellate court did not err in
denying petitioner's motion for reconsideration despite the fact that
private respondents failed to submit their comment to said motion
as required by the respondent appellate court from resolving
petitioners' motion for reconsideration without the comment of the
private respondent which was required merely to aid the court in
the disposition of the motion. The courts are as much interested as
the parties in the early disposition of cases before them. To require
otherwise would unnecessarily clog the courts' dockets.
WHEREFORE, the petition is DENIED and the decision appealed
from is hereby AFFIRMED.
SO ORDERED.
EN BANC
[G.R. Nos. 84132-33 : December 10, 1990.]
192 SCRA 257
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC.,
Petitioners, vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO
SHERIFF and GODOFREDO QUILING, in his capacity as Deputy
Sheriff of Calamba, Laguna, Respondents.
DECISION
CRUZ, J.:
This case involves the constitutionality of a presidential decree which,
like all other issuances of President Marcos during his regime, was at
that time regarded as sacrosanct. It is only now, in a freer atmosphere,
that his acts are being tested by the touchstone of the fundamental law
that even then was supposed to limit presidential action.
: rd
The particular enactment in question is Pres. Decree No. 1717, which
ordered the rehabilitation of the Agrix Group of Companies to be
administered mainly by the National Development Company. The law
outlined the procedure for filing claims against the Agrix companies
and created a Claims Committee to process these claims. Especially
relevant to this case, and noted at the outset, is Sec. 4(1) thereof
providing that "all mortgages and other liens presently attaching to any
of the assets of the dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of
private respondent Philippine Veterans Bank a real estate mortgage
dated July 7, 1978, over three (3) parcels of land situated in Los
Baos, Laguna. During the existence of the mortgage, AGRIX went
bankrupt. It was for the expressed purpose of salvaging this and the
other Agrix companies that the aforementioned decree was issued by
President Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX
Claims Committee for the payment of its loan credit. In the meantime,
the New Agrix, Inc. and the National Development Company,
petitioners herein, invoking Sec. 4 (1) of the decree, filed a petition with
the Regional Trial Court of Calamba, Laguna, for the cancellation of
the mortgage lien in favor of the private respondent. For its part, the
private respondent took steps to extrajudicially foreclose the
mortgage, prompting the petitioners to file a second case with the
same court to stop the foreclosure. The two cases were consolidated.
After the submission by the parties of their respective pleadings, the
trial court rendered the impugned decision. Judge Francisco Ma.
Guerrero annulled not only the challenged provision, viz., Sec. 4 (1),
but the entire Pres. Decree No. 1717 on the grounds that: (1) the
presidential exercise of legislative power was a violation of the
principle of separation of powers; (2) the law impaired the obligation of
contracts; and (3) the decree violated the equal protection clause. The
motion for reconsideration of this decision having been denied, the
present petition was filed.: rd
The petition was originally assigned to the Third Division of this Court
but because of the constitutional questions involved it was transferred
to the Court en banc. On August 30, 1988, the Court granted the
petitioner's prayer for a temporary restraining order and instructed the
respondents to cease and desist from conducting a public auction sale
of the lands in question. After the Solicitor General and the private
respondent had filed their comments and the petitioners their reply, the
Court gave due course to the petition and ordered the parties to file
simultaneous memoranda. Upon compliance by the parties, the case
was deemed submitted.
The petitioners contend that the private respondent is now estopped
from contesting the validity of the decree. In support of this contention,
it cites the recent case of Mendoza v. Agrix Marketing, Inc., 1 where
the constitutionality of Pres. Decree No. 1717 was also raised but not
resolved. The Court, after noting that the petitioners had already filed
their claims with the AGRIX Claims Committee created by the decree,
had simply dismissed the petition on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent
also invoked the provisions of Pres. Decree No. 1717 by filing a claim
with the AGRIX Claims Committee. Failing to get results, it sought to
foreclose the real estate mortgage executed by AGRIX in its favor,
which had been extinguished by the decree. It was only when the
petitioners challenged the foreclosure on the basis of Sec. 4 (1) of the
decree, that the private respondent attacked the validity of the
provision. At that stage, however, consistent with Mendoza, the private
respondent was already estopped from questioning the
constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the
AGRIX Claims Committee pursuant to this decree. It must be noted,
however, that this was done in 1980, when President Marcos was the
absolute ruler of this country and his decrees were the absolute law.
Any judicial challenge to them would have been futile, not to say
foolhardy. The private respondent, no less than the rest of the nation,
was aware of that reality and knew it had no choice under the
circumstances but to conform. : nad
It is true that there were a few venturesome souls who dared to
question the dictator's decisions before the courts of justice then. The
record will show, however, that not a single act or issuance of
President Marcos was ever declared unconstitutional, not even by the
highest court, as long as he was in power. To rule now that the private
respondent is estopped for having abided with the decree instead of
boldly assailing it is to close our eyes to a cynical fact of life during that
repressive time.
This case must be distinguished from Mendoza, where the petitioners,
after filing their claims with the AGRIX Claims Committee, received in
settlement thereof shares of stock valued at P40,000.00 without
protest or reservation. The herein private respondent has not been
paid a single centavo on its claim, which was kept pending for more
than seven years for alleged lack of supporting papers. Significantly,
the validity of that claim was not questioned by the petitioner when it
sought to restrain the extrajudicial foreclosure of the mortgage by the
private respondent. The petitioner limited itself to the argument that
the private respondent was estopped from questioning the decree
because of its earlier compliance with its provisions.
Independently of these observations, there is the consideration that an
affront to the Constitution cannot be allowed to continue existing
simply because of procedural inhibitions that exalt form over
substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted
above, extinguishing all mortgages and other liens attaching to the
assets of AGRIX. It also notes, with equal concern, the restriction in
Subsection (ii) thereof that all "unsecured obligations shall not bear
interest" and in Subsection (iii) that "all accrued interests, penalties or
charges as of date hereof pertaining to the obligations, whether
secured or unsecured, shall not be recognized."
These provisions must be read with the Bill of Rights, where it is clearly
provided in Section 1 that "no person shall be deprived of life, liberty
or property without due course of law nor shall any person be denied
the equal protection of the law" and in Section 10 that "no law impairing
the obligation of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like
all rights, are subject to regulation under the police power for the
promotion of the common welfare. The contention is that this inherent
power of the state may be exercised at any time for this purpose so
long as the taking of the property right, even if based on contract, is
done with due process of law.
This argument is an over-simplification of the problem before us. The
police power is not a panacea for all constitutional maladies. Neither
does its mere invocation conjure an instant and automatic justification
for every act of the government depriving a person of his life, liberty or
property.
A legislative act based on the police power requires the concurrence
of a lawful subject and a lawful method. In more familiar words, a) the
interests of the public generally, as distinguished from those of a
particular class, should justify the interference of the state; and b) the
means employed are reasonably necessary for the accomplishment of
the purpose and not unduly oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that
the interests of the public are not sufficiently involved to warrant the
interference of the government with the private contracts of AGRIX.
The decree speaks vaguely of the "public, particularly the small
investors," who would be prejudiced if the corporation were not to be
assisted. However, the record does not state how many there are of
such investors, and who they are, and why they are being preferred to
the private respondent and other creditors of AGRIX with vested
property rights.:-cralaw
The public interest supposedly involved is not identified or explained.
It has not been shown that by the creation of the New Agrix, Inc. and
the extinction of the property rights of the creditors of AGRIX, the
interests of the public as a whole, as distinguished from those of a
particular class, would be promoted or protected. The indispensable
link to the welfare of the greater number has not been established. On
the contrary, it would appear that the decree was issued only to favor
a special group of investors who, for reasons not given, have been
preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds
that the means employed to rehabilitate AGRIX fall far short of the
requirement that they shall not be unduly oppressive. The
oppressiveness is patent on the face of the decree. The right to
property in all mortgages, liens, interests, penalties and charges owing
to the creditors of AGRIX is arbitrarily destroyed. No consideration is
paid for the extinction of the mortgage rights. The accrued interests
and other charges are simply rejected by the decree. The right to
property is dissolved by legislative fiat without regard to the private
interest violated and, worse, in favor of another private interest.
A mortgage lien is a property right derived from contract and so comes
under the protection of the Bill of Rights. So do interests on loans, as
well as penalties and charges, which are also vested rights once they
accrue. Private property cannot simply be taken by law from one
person and given to another without compensation and any known
public purpose. This is plain arbitrariness and is not permitted under
the Constitution.
And not only is there arbitrary taking, there is discrimination as well. In
extinguishing the mortgage and other liens, the decree lumps the
secured creditors with the unsecured creditors and places them on the
same level in the prosecution of their respective claims. In this respect,
all of them are considered unsecured creditors. The only concession
given to the secured creditors is that their loans are allowed to earn
interest from the date of the decree, but that still does not justify the
cancellation of the interests earned before that date. Such interests,
whether due to the secured or the unsecured creditors, are all
extinguished by the decree. Even assuming such cancellation to be
valid, we still cannot see why all kinds of creditors, regardless of
security, are treated alike.
Under the equal protection clause, all persons or things similarly
situated must be treated alike, both in the privileges conferred and the
obligations imposed. Conversely, all persons or things differently
situated should be treated differently. In the case at bar, persons
differently situated are similarly treated, in disregard of the principle
that there should be equality only among equals. - nad
One may also well wonder why AGRIX was singled out for government
help, among other corporations where the stockholders or investors
were also swindled. It is not clear why other companies entitled to
similar concern were not similarly treated. And surely, the stockholders
of the private respondent, whose mortgage lien had been cancelled
and legitimate claims to accrued interests rejected, were no less
deserving of protection, which they did not get. The decree operated,
to use the words of a celebrated case, 3 "with an evil eye and an
uneven hand."
On top of all this, New Agrix, Inc. was created by special decree
notwithstanding the provision of Article XIV, Section 4 of the 1973
Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law,
provide for the formation, organization, or regulation of private
corporations, unless such corporations are owned or controlled by the
Government or any subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the
government. The National Development Corporation was merely
required to extend a loan of not more than P10,000,000.00 to New
Agrix, Inc. Pending payment thereof, NDC would undertake the
management of the corporation, but with the obligation of making
periodic reports to the Agrix board of directors. After payment of the
loan, the said board can then appoint its own management. The stocks
of the new corporation are to be issued to the old investors and
stockholders of AGRIX upon proof of their claims against the abolished
corporation. They shall then be the owners of the new corporation.
New Agrix, Inc. is entirely private and so should have been organized
under the Corporation Law in accordance with the above-cited
constitutional provision.
The Court also feels that the decree impairs the obligation of the
contract between AGRIX and the private respondent without
justification. While it is true that the police power is superior to the
impairment clause, the principle will apply only where the contract is
so related to the public welfare that it will be considered congenitally
susceptible to change by the legislature in the interest of the greater
number. 5 Most present-day contracts are of that nature. But as
already observed, the contracts of loan and mortgage executed by
AGRIX are purely private transactions and have not been shown to be
affected with public interest. There was therefore no warrant to amend
their provisions and deprive the private respondent of its vested
property rights.
It is worth noting that only recently in the case of the Development
Bank of the Philippines v. NLRC, 6 we sustained the preference in
payment of a mortgage creditor as against the argument that the
claims of laborers should take precedence over all other claims,
including those of the government. In arriving at this ruling, the Court
recognized the mortgage lien as a property right protected by the due
process and contract clauses notwithstanding the argument that the
amendment in Section 110 of the Labor Code was a proper exercise
of the police power.: nad
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise
of the police power, not being in conformity with the traditional
requirements of a lawful subject and a lawful method. The extinction
of the mortgage and other liens and of the interest and other charges
pertaining to the legitimate creditors of AGRIX constitutes taking
without due process of law, and this is compounded by the reduction
of the secured creditors to the category of unsecured creditors in
violation of the equal protection clause. Moreover, the new
corporation, being neither owned nor controlled by the Government,
should have been created only by general and not special law. And
insofar as the decree also interferes with purely private agreements
without any demonstrated connection with the public interest, there is
likewise an impairment of the obligation of the contract.
With the above pronouncements, we feel there is no more need to rule
on the authority of President Marcos to promulgate Pres. Decree No.
1717 under Amendment No. 6 of the 1973 Constitution. Even if he had
such authority, the decree must fall just the same because of its
violation of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is
declared UNCONSTITUTIONAL. The temporary restraining order
dated August 30, 1988, is LIFTED. Costs against the petitioners. - nad
SO ORDERED.
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY &
HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M.
MAGLANA and JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY
CORPORATION, BORDER MACHINERY and HEAVY
EQUIPMENT CO., INC,, FRANCISCO and MODESTO
CERVANTES and CONSTANCIO MAGLANA, respondents.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the decision
of the Court of Appeals in CA-G.R. CV No. 66195 which modified
the decision of the then Court of First Instance of Manila in Civil
Case No. 66135. The plaintiffs complaint (petitioner in G.R. No.
84197) against all defendants (respondents in G.R. No. 84197)
was dismissed but in all other respects the trial court's decision was
affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S.
Lim requiring Lim to pay plaintiff the amount of P311,056.02, with
interest at the rate of 12% per annum compounded monthly; plus
15% of the amount awarded to plaintiff as attorney's fees from July
2,1966, until full payment is made; plus P70,000.00 moral and
exemplary damages.
It is found in the records that the cross party plaintiffs incurred
additional miscellaneous expenses aside from
Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S.
Lim is further required to pay cross party plaintiff, Bormaheco, the
Cervanteses one-half and Maglana the other half, the amount of
Pl84,878.74 with interest from the filing of the cross-complaints
until the amount is fully paid; plus moral and exemplary damages
in the amount of P184,878.84 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and
exemplary damages in the amount of P50,000.00 for each of the
two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and
the Cervanteses, and another P20,000.00 to Constancio B.
Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff
Pioneer against defendants Bormaheco, the Cervanteses and
Constancio B. Maglana, is dismissed. Instead, plaintiff is required
to indemnify the defendants Bormaheco and the Cervanteses the
amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the
time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana
the amount of P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this
action was filed in good faith. The fact that the properties of the
Bormaheco and the Cervanteses were attached and that they were
required to file a counterbond in order to dissolve the attachment,
is not an act of bad faith. When a man tries to protect his rights, he
should not be saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its
discretion.
No damage is decided against Malayan Insurance Company, Inc.,
the third-party defendant, for it only secured the attachment prayed
for by the plaintiff Pioneer. If an insurance company would be liable
for damages in performing an act which is clearly within its power
and which is the reason for its being, then nobody would engage in
the insurance business. No further claim or counter-claim for or
against anybody is declared by this Court. (Rollo - G.R. No. 24197,
pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged
in the airline business as owner-operator of Southern Air Lines
(SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA)
and Lim entered into and executed a sales contract (Exhibit A) for
the sale and purchase of two (2) DC-3A Type aircrafts and one (1)
set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with
Registry No. PIC-718, arrived in Manila on June 7,1965 while the
other aircraft, arrived in Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation
(Pioneer, petitioner in G.R. No. 84197) as surety executed and
issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in
behalf of its principal, Lim, for the balance price of the aircrafts and
spare parts.
It appears that Border Machinery and Heavy Equipment Company,
Inc. (Bormaheco), Francisco and Modesto Cervantes
(Cervanteses) and Constancio Maglana (respondents in both
petitions) contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be
their contributions to a new corporation proposed by Lim to expand
his airline business. They executed two (2) separate indemnity
agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed
by Maglana and the other jointly signed by Lim for SAL, Bormaheco
and the Cervanteses. The indemnity agreements stipulated that the
indemnitors principally agree and bind themselves jointly and
severally to indemnify and hold and save harmless Pioneer from
and against any/all damages, losses, costs, damages, taxes,
penalties, charges and expenses of whatever kind and nature
which Pioneer may incur in consequence of having become surety
upon the bond/note and to pay, reimburse and make good to
Pioneer, its successors and assigns, all sums and amounts of
money which it or its representatives should or may pay or cause
to be paid or become liable to pay on them of whatever kind and
nature.
On June 10, 1965, Lim doing business under the name and style
of SAL executed in favor of Pioneer as deed of chattel mortgage
as security for the latter's suretyship in favor of the former. It was
stipulated therein that Lim transfer and convey to the surety the two
aircrafts. The deed (Exhibit D) was duly registered with the Office
of the Register of Deeds of the City of Manila and with the Civil
Aeronautics Administration pursuant to the Chattel Mortgage Law
and the Civil Aeronautics Law (Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting
JDA to request payments from the surety. Pioneer paid a total sum
of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the
said chattel mortgage before the Sheriff of Davao City. The
Cervanteses and Maglana, however, filed a third party claim
alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure
with an application for a writ of preliminary attachment against Lim
and respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed
cross-claims against Lim alleging that they were not privies to the
contracts signed by Lim and, by way of counterclaim, sought for
damages for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the purchase of the
aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable
to pay Pioneer but dismissed Pioneer's complaint against all other
defendants.
As stated earlier, the appellate court modified the trial court's
decision in that the plaintiffs complaint against all the defendants
was dismissed. In all other respects the trial court's decision was
affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED
WHEN IT DISMISSED THE APPEAL OF PETITIONER ON THE
SOLE GROUND THAT PETITIONER HAD ALREADY
COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS
BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN
THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate
court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff
Pioneer had reinsured its risk of liability under the surety bond in
favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged
obligation to Pioneer amounts to P295,000.00, hence, plaintiffs
instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real
party in interest to institute the instant action as it does not stand to
be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to
recover the amount from defendants, hence, it instituted the action
is utterly devoid of merit. Plaintiff did not even present any evidence
that it is the attorney-in-fact of the reinsurance company,
authorized to institute an action for and in behalf of the latter. To
qualify a person to be a real party in interest in whose name an
action must be prosecuted, he must appear to be the present real
owner of the right sought to be enforced (Moran, Vol. I, Comments
on the Rules of Court, 1979 ed., p. 155). It has been held that the
real party in interest is the party who would be benefited or injured
by the judgment or the party entitled to the avails of the suit
(Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real
party in interest is meant a present substantial interest as
distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27;
Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414;
Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P.
2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be
considered as the real party in interest as it has already been paid
by the reinsurer the sum of P295,000.00 the bulk of defendants'
alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by
plaintiff Pioneer from its reinsurer, the former was able to foreclose
extra-judicially one of the subject airplanes and its spare engine,
realizing the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00, to the
proceeds of the reinsurance amounting to P295,000.00, it is patent
that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants
the amount in excess of P298,666.28 would be tantamount to
unjust enrichment as it has already been paid by the reinsurance
company of the amount plaintiff has paid to JDA as surety of
defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled
is the rule that no person should unjustly enrich himself at the
expense of another (Article 22, New Civil Code). (Rollo-84197, pp.
24-25).
The petitioner contends that-(1) it is at a loss where respondent
court based its finding that petitioner was paid by its reinsurer in the
aforesaid amount, as this matter has never been raised by any of
the parties herein both in their answers in the court below and in
their respective briefs with respondent court; (Rollo, p. 11) (2) even
assuming hypothetically that it was paid by its reinsurer, still none
of the respondents had any interest in the matter since the
reinsurance is strictly between the petitioner and the re-insurer
pursuant to section 91 of the Insurance Code; (3) pursuant to the
indemnity agreements, the petitioner is entitled to recover from
respondents Bormaheco and Maglana; and (4) the principle of
unjust enrichment is not applicable considering that whatever
amount he would recover from the co-indemnitor will be paid to the
reinsurer.
The records belie the petitioner's contention that the issue on the
reinsurance money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that
two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect
to so much of its obligations to JDA as has been paid with
reinsurance money?
2. If the answer to the preceding question is in the negative, has
Pioneer still any claim against defendants, considering the amount
it has realized from the sale of the mortgaged properties? (Record
on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the
surety bond it had executed in favor of JDA, collected the proceeds
of such reinsurance in the sum of P295,000, and paid with the said
amount the bulk of its alleged liability to JDA under the said surety
bond, it is plain that on this score it no longer has any right to collect
to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance
(sic), that is suing defendants for the amount paid to it by the
reinsurers, notwithstanding that the cause of action pertains to the
latter, Pioneer says: The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.. . . .
Pioneer Insurance & Surety Corporation is representing the
reinsurers to recover the amount.' In other words, insofar as the
amount paid to it by the reinsurers Pioneer is suing defendants as
their attorney-in-fact.
But in the first place, there is not the slightest indication in the
complaint that Pioneer is suing as attorney-in- fact of the reinsurers
for any amount. Lastly, and most important of all, Pioneer has no
right to institute and maintain in its own name an action for the
benefit of the reinsurers. It is well-settled that an action brought by
an attorney-in-fact in his own name instead of that of the principal
will not prosper, and this is so even where the name of the principal
is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every
action must be prosecuted in the name of the real party in interest.'
This provision is mandatory. The real party in interest is the party
who would be benefitted or injured by the judgment or is the party
entitled to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not
a real party in interest, that there is no law permitting an action to
be brought by an attorney-in-fact. Arroyo v. Granada and Gentero,
18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep.
12; Filipinos Industrial Corporation v. San Diego G.R. No. L-
22347,1968, 23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since
Pioneer has collected P295,000.00 from the reinsurers, the
uninsured portion of what it paid to JDA is the difference between
the two amounts, or P3,666.28. This is the amount for which
Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount realized
from the sale of the mortgaged chattels are P35,000.00 for one of
the airplanes and P2,050.00 for a spare engine, or a total of
P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore,
Pioneer has no more claim against defendants. (Record on Appeal,
pp. 360-363).
The payment to the petitioner made by the reinsurers was not
disputed in the appellate court. Considering this admitted payment,
the only issue that cropped up was the effect of payment made by
the reinsurers to the petitioner. Therefore, the petitioner's argument
that the respondents had no interest in the reinsurance contract as
this is strictly between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of the
Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the same
rights by subrogation as are acquired in similar cases where the
original insurer pays a loss (Universal Ins. Co. v. Old Time
Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in
general applicable to actions or contracts of reinsurance.
(Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126
GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to
wit:
Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air
Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we
subsequently applied in Manila Mahogany Manufacturing
Corporation v. Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that the
insurer is deemed subrogated to the rights of the insured against
the wrongdoer and if the amount paid by the insurer does not fully
cover the loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal provision, the
real party in interest with regard to the portion of the indemnity paid
is the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and
not as an attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in
dismissing the petitioner's complaint as against the respondents for
the reason that the petitioner was not the real party in interest in
the complaint and, therefore, has no cause of action against the
respondents.
Nevertheless, the petitioner argues that the appeal as regards the
counter indemnitors should not have been dismissed on the
premise that the evidence on record shows that it is entitled to
recover from the counter indemnitors. It does not, however, cite any
grounds except its allegation that respondent "Maglanas defense
and evidence are certainly incredible" (p. 12, Rollo) to back up its
contention.
On the other hand, we find the trial court's findings on the matter
replete with evidence to substantiate its finding that the counter-
indemnitors are not liable to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement
ceased to be valid and effective after the execution of the chattel
mortgage.
Testimonies of defendants Francisco Cervantes and Modesto
Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare
parts involved, agreed to issue the bond provided that the same
would be mortgaged to it, but this was not possible because the
planes were still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to the
Philippines, they would be mortgaged to Pioneer Insurance to
cover the bond, and this indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the original
complaint:
The various conflicting claims over the mortgaged properties have
impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there
is no other security for the claim sought to be enforced by this
action, which necessarily means that the indemnity agreement had
ceased to have any force and effect at the time this action was
instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the
chattel mortgage on the planes and spare parts, no longer has any
further action against the defendants as indemnitors to recover any
unpaid balance of the price. The indemnity agreement was ipso
jure extinguished upon the foreclosure of the chattel mortgage.
These defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make payments to
the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's election of
the remedy of foreclosure precludes any further action to recover
any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were
as provided in Article 1484 of the New Civil Code, known as the
Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant suit.
Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid balance and any agreement to the
contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp.
No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from
through the contention that Pioneer is not the vendor but JDA. The
reason is that Pioneer is actually exercising the rights of JDA as
vendor, having subrogated it in such rights. Nor may the application
of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee but
indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change
of their maturity dates discharged these defendants from any
liability as alleged indemnitors. The change of the maturity dates of
the obligations of Lim, or SAL extinguish the original obligations
thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three
months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due
and payable on the 26th day x x x of each succeeding three months
and the last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum
executed by SAL or Lim and JDA, modifying the maturity dates of
the obligations, as follows:
The principal hereof shall be paid in eight equal successive three
month interval installments the first of which shall be due and
payable 4 September 1965, the remainder of which ... shall be due
and payable on the 4th day ... of each succeeding months and the
last of which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory
notes bearing maturity dates different from that fixed in the
aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of the
last installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity
dates, effected twice, were done without the knowledge, much less,
would have it believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel would have it believed that
these defendants and defendant Maglana knew of and consented
to the modification of the obligations. But if that were so, there
would have been the corresponding documents in the form of a
written notice to as well as written conformity of these defendants,
and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured
by the indemnity agreement which was thereby also extinguished.
Applicable by analogy are the rulings of the Supreme Court in the
case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and
the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension time
referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when
Pioneer paid the same. Consequently, Pioneer has no more cause
of action to recover from these defendants, as supposed
indemnitors, what it has paid to JDA. By virtue of an express
stipulation in the surety bond, the failure of JDA to present its claim
to Pioneer within ten days from default of Lim or SAL on every
installment, released Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from
these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after
the obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's
fees from Pioneer and its surety by reason of the filing of the instant
case against them and the attachment and garnishment of their
properties. The instant action is clearly unfounded insofar as
plaintiff drags these defendants and defendant Maglana.' (Record
on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not
meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors
whose agreement was to do business through the corporate
vehicle but who failed to incorporate the entity in which they had
chosen to invest? How are the losses to be treated in situations
where their contributions to the intended 'corporation' were
invested not through the corporate form? This Petition presents
these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a
result of the failure of respondents Bormaheco, Spouses
Cervantes, Constancio Maglana and petitioner Lim to incorporate,
a de facto partnership among them was created, and that as a
consequence of such relationship all must share in the losses
and/or gains of the venture in proportion to their contribution. The
petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended
corporation, to wit:
However, defendant Lim should be held liable to pay his co-
defendants' cross-claims in the total amount of P184,878.74 as
correctly found by the trial court, with interest from the filing of the
cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received the
amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject
airplanes and spare parts (Exhibit 58). In addition, the cross-party
plaintiffs incurred additional expenses, hence, the total sum of P
184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating
thereto and not by the rules governing partners (Cannon v. Brush
Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily
held that persons who attempt, but fail, to form a corporation and
who carry on business under the corporate name occupy the
position of partners inter se (Lynch v. Perryman, 119 P. 229, 29
Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate
themselves together under articles to purchase property to carry on
a business, and their organization is so defective as to come short
of creating a corporation within the statute, they become in legal
effect partners inter se, and their rights as members of the company
to the property acquired by the company will be recognized (Smith
v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple
v. Parker, 29 Mich. 369). So, where certain persons associated
themselves as a corporation for the development of land for
irrigation purposes, and each conveyed land to the corporation,
and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was
ever issued in the corporation, it was treated as a trustee for the
associates in an action between them for an accounting, and its
capital stock was treated as partnership assets, sold, and the
proceeds distributed among them in proportion to the value of the
property contributed by each (Shorb v. Beaudry, 56 Cal.
446). However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no
partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6
S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be
implied only when necessary to do justice between the parties;
thus, one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership
relation between certain stockholders and other stockholders, who
were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen,
44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p.
464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared
non-suited for his failure to appear during the pretrial despite
notification. In his answer, the petitioner denied having received
any amount from respondents Bormaheco, the Cervanteses and
Maglana. The trial court and the appellate court, however, found
through Exhibit 58, that the petitioner received the amount of
P151,000.00 representing the participation of Bormaheco and Atty.
Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave
P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to
form a corporation with the respondents despite his
representations to them. This gives credence to the cross-claims
of the respondents to the effect that they were induced and lured
by the petitioner to make contributions to a proposed corporation
which was never formed because the petitioner reneged on their
agreement. Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco
Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the
required permits for the operation thereof. Maglana sometime in
May 1965, gave Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in
an undertaking sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their agreement and
proceeded to acquire the planes on his own account. Since then
up to the filing of this answer, Lim has refused, failed and still
refuses to set up the corporation or return the money of Maglana.
(Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their
answer, counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the
answering defendants to purchase two airplanes and spare parts
from Japan which the latter considered as their lawful contribution
and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant
Lim. Down payments were advanced by defendants Bormaheco
and the Cervanteses and Constancio Maglana (Exh. E- 1).
Contrary to the agreement among the defendants, defendant Lim
in connivance with the plaintiff, signed and executed the alleged
chattel mortgage and surety bond agreement in his personal
capacity as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery and
misrepresentation of the other, Jacob Lim, when the herein plaintiff
chattel mortgage (sic) allegedly executed by defendant Lim,
thereby forcing them to file an adverse claim in the form of third
party claim. Notwithstanding repeated oral demands made by
defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories
and or return the amount advanced by the former amounting to an
aggregate sum of P 178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply with
them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of
the case, necessarily, no de facto partnership was created among
the parties which would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation. The record
shows that the petitioner was acting on his own and not in behalf
of his other would-be incorporators in transacting the sale of the
airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The
questioned decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
D. CORPORATE JURIDICAL PERSONALITY
G.R. No. 124293. September 24, 2003]
JG SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF APPEALS,
COMMITTEE ON PRIVATIZATION, its Chairman and Members; ASSET
PRIVATIZATION TRUST and PHILYARDS HOLDINGS, INC., respondents.
RESOLUTION
PUNO, J.:
The core issue posed by the Motions for Reconsideration is whether a
shipyard is a public utility whose capitalization must be sixty percent (60%)
owned by Filipinos. Our resolution of this issue will determine the fate of the
shipbuilding and ship repair industry. It can either spell the industrys demise
or breathe new life to the struggling but potentially healthy partner in the
countrys bid for economic growth. It can either kill an initiative yet in its infancy,
or harness creativity in the productive disposition of government assets.
The facts are undisputed and can be summarized briefly as follows:
On January 27, 1977, the National Investment and Development Corporation
(NIDC), a government corporation, entered into a Joint Venture Agreement
(JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for
the construction, operation and management of the Subic National Shipyard,
Inc. (SNS) which subsequently became the Philippine Shipyard and
Engineering Corporation (PHILSECO). Under the JVA, the NIDC and
KAWASAKI will contribute P330 million for the capitalization of PHILSECO in
the proportion of 60%-40% respectively.[1] One of its salient features is the
grant to the parties of the right of first refusal should either of them decide to
sell, assign or transfer its interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its interest in
SNS [PHILSECO] to any third party without giving the other under the same
terms the right of first refusal. This provision shall not apply if the transferee is
a corporation owned or controlled by the GOVERNMENT or by a KAWASAKI
affiliate.[2]
On November 25, 1986, NIDC transferred all its rights, title and interest in
PHILSECO to the Philippine National Bank (PNB). Such interests were
subsequently transferred to the National Government pursuant to
Administrative Order No. 14. On December 8, 1986, President Corazon C.
Aquino issued Proclamation No. 50 establishing the Committee on
Privatization (COP) and the Asset Privatization Trust (APT) to take title to, and
possession of, conserve, manage and dispose of non-performing assets of the
National Government. Thereafter, on February 27, 1987, a trust agreement
was entered into between the National Government and the APT wherein the
latter was named the trustee of the National Governments share in
PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to
settle its huge obligations to PNB, the National Governments shareholdings in
PHILSECO increased to 97.41% thereby reducing KAWASAKIs
shareholdings to 2.59%.[3]
In the interest of the national economy and the government, the COP and the
APT deemed it best to sell the National Governments share in PHILSECO to
private entities. After a series of negotiations between the APT and
KAWASAKI, they agreed that the latters right of first refusal under the JVA be
exchanged for the right to top by five percent (5%) the highest bid for the said
shares. They further agreed that KAWASAKI would be entitled to name a
company in which it was a stockholder, which could exercise the right to top.
On September 7, 1990, KAWASAKI informed APT that Philyards Holdings,
Inc. (PHI) would exercise its right to top.[4]
At the pre-bidding conference held on September 18, 1993, interested bidders
were given copies of the JVA between NIDC and KAWASAKI, and of the Asset
Specific Bidding Rules (ASBR) drafted for the National Governments 87.6%
equity share in PHILSECO.[5] The provisions of the ASBR were explained to
the interested bidders who were notified that the bidding would be held on
December 2, 1993. A portion of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through public
bidding is the National Governments equity in PHILSECO consisting of
896,869,942 shares of stock (representing 87.67% of PHILSECOs
outstanding capital stock), which will be sold as a whole block in accordance
with the rules herein enumerated.
...
2.0 The highest bid, as well as the buyer, shall be subject to the final approval
of both the APT Board of Trustees and the Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis. The
Indicative price set for the National Governments 87.67% equity in PHILSECO
is PESOS: ONE BILLION THREE HUNDRED MILLION (P1,300,000,000.00).
...
6.0 The highest qualified bid will be submitted to the APT Board of Trustees at
its regular meeting following the bidding, for the purpose of determining
whether or not it should be endorsed by the APT Board of Trustees to the
COP, and the latter approves the same. The APT shall advise Kawasaki
Heavy Industries, Inc. and/or its nominee, Philyards Holdings, Inc., that the
highest bid is acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or Philyards Holdings, Inc. shall then have a period of thirty
(30) calendar days from the date of receipt of such advice from APT within
which to exercise their Option to Top the Highest Bid by offering a bid
equivalent to the highest bid plus five (5%) percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc.
exercise their Option to Top the Highest Bid, they shall so notify the APT about
such exercise of their option and deposit with APT the amount equivalent to
ten percent (10%) of the highest bid plus five percent (5%) thereof within the
thirty (30)-day period mentioned in paragraph 6.0 above. APT will then serve
notice upon Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc.
declaring them as the preferred bidder and they shall have a period of ninety
(90) days from the receipt of the APTs notice within which to pay the balance
of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. fail
to exercise their Option to Top the Highest Bid within the thirty (30)-day period,
APT will declare the highest bidder as the winning bidder.
...
12.0 The bidder shall be solely responsible for examining with appropriate care
these rules, the official bid forms, including any addenda or amendments
thereto issued during the bidding period. The bidder shall likewise be
responsible for informing itself with respect to any and all conditions
concerning the PHILSECO Shares which may, in any manner, affect the
bidders proposal. Failure on the part of the bidder to so examine and inform
itself shall be its sole risk and no relief for error or omission will be given by
APT or COP. . ..[6]
At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc.
submitted a bid of Two Billion and Thirty Million Pesos (P2,030,000,000.00)
with an acknowledgement of KAWASAKI/Philyards right to top, viz:
4. I/We understand that the Committee on Privatization (COP) has up to thirty
(30) days to act on APTs recommendation based on the result of this bidding.
Should the COP approve the highest bid, APT shall advise Kawasaki Heavy
Industries, Inc. and/or its nominee, Philyards Holdings, Inc. that the highest
bid is acceptable to the National Government. Kawasaki Heavy Industries, Inc.
and/or Philyards Holdings, Inc. shall then have a period of thirty (30) calendar
days from the date of receipt of such advice from APT within which to exercise
their Option to Top the Highest Bid by offering a bid equivalent to the highest
bid plus five (5%) percent thereof.[7]
As petitioner was declared the highest bidder, the COP approved the sale on
December 3, 1993 subject to the right of Kawasaki Heavy Industries,
Inc./Philyards Holdings, Inc. to top JGSMIs bid by 5% as specified in the
bidding rules.[8]
On December 29, 1993, petitioner informed APT that it was protesting the offer
of PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI consortium
composed of Kawasaki, Philyards, Mitsui, Keppel, SM Group, ICTSI and
Insular Life violated the ASBR because the last four (4) companies were the
losing bidders thereby circumventing the law and prejudicing the weak winning
bidder; (b) only KAWASAKI could exercise the right to top; (c) giving the same
option to top to PHI constituted unwarranted benefit to a third party; (d) no right
of first refusal can be exercised in a public bidding or auction sale; and (e) the
JG Summit consortium was not estopped from questioning the proceedings.[9]
On February 2, 1994, petitioner was notified that PHI had fully paid the balance
of the purchase price of the subject bidding. On February 7, 1994, the APT
notified petitioner that PHI had exercised its option to top the highest bid and
that the COP had approved the same on January 6, 1994. On February 24,
1994, the APT and PHI executed a Stock Purchase
Agreement.[10] Consequently, petitioner filed with this Court a Petition for
Mandamus under G.R. No. 114057. On May 11, 1994, said petition was
referred to the Court of Appeals. On July 18, 1995, the Court of Appeals denied
the same for lack of merit. It ruled that the petition for mandamus was not the
proper remedy to question the constitutionality or legality of the right of first
refusal and the right to top that was exercised by KAWASAKI/PHI, and that
the matter must be brought by the proper party in the proper forum at the
proper time and threshed out in a full blown trial. The Court of Appeals further
ruled that the right of first refusal and the right to top are prima facie legal and
that the petitioner, by participating in the public bidding, with full knowledge of
the right to top granted to KASAWASAKI/Philyards is . . .estopped from
questioning the validity of the award given to Philyards after the latter
exercised the right to top and had paid in full the purchase price of the subject
shares, pursuant to the ASBR. Petitioner filed a Motion for Reconsideration of
said Decision which was denied on March 15, 1996. Petitioner thus filed a
Petition for Certiorari with this Court alleging grave abuse of discretion on the
part of the appellate court.[11]
On November 20, 2000, this Court rendered the now assailed Decision ruling
among others that the Court of Appeals erred when it dismissed the petition
on the sole ground of the impropriety of the special civil action
of mandamus because the petition was also one of certiorari.[12] It further ruled
that a shipyard like PHILSECO is a public utility whose capitalization must be
sixty percent (60%) Filipino-owned.[13] Consequently, the right to top granted
to KAWASAKI under the Asset Specific Bidding Rules (ASBR) drafted for the
sale of the 87.67% equity of the National Government in PHILSECO is illegal-
--not only because it violates the rules on competitive bidding--- but more so,
because it allows foreign corporations to own more than 40% equity in the
shipyard.[14] It also held that although the petitioner had the opportunity to
examine the ASBR before it participated in the bidding, it cannot be estopped
from questioning the unconstitutional, illegal and inequitable provisions
thereof.[15] Thus, this Court voided the transfer of the national governments
87.67% share in PHILSECO to Philyard Holdings, Inc., and upheld the right of
JG Summit, as the highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is GRANTED. The
assailed Decision and Resolution of the Court of Appeals are REVERSED and
SET ASIDE. Petitioner is ordered to pay to APT its bid price of Two Billion
Thirty Million Pesos (P2,030,000,000.00 ), less its bid deposit plus interests
upon the finality of this Decision. In turn, APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid deposit and
interests from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates of stocks
representing 87.6% of PHILSECOs total capitalization;
(d) return to private respondent PHGI the amount of Two Billion One Hundred
Thirty-One Million Five Hundred Thousand Pesos (P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to PHI.
SO ORDERED.[16]
In separate Motions for Reconsideration,[17] respondents submit three basic
issues for our resolution: (1) Whether PHILSECO is a public utility; (2) Whether
under the 1977 JVA, KAWASAKI can exercise its right of first refusal only up
to 40% of the total capitalization of PHILSECO; and (3) Whether the right to
top granted to KAWASAKI violates the principles of competitive bidding.
I.
Whether PHILSECO is a Public Utility.
After carefully reviewing the applicable laws and jurisprudence, we hold that
PHILSECO is not a public utility for the following reasons:
First. By nature, a shipyard is not a public utility.
A public utility is a business or service engaged in regularly supplying the
public with some commodity or service of public consequence such as
electricity, gas, water, transportation, telephone or telegraph service.[18] To
constitute a public utility, the facility must be necessary for the maintenance of
life and occupation of the residents. However, the fact that a business offers
services or goods that promote public good and serve the interest of the public
does not automatically make it a public utility. Public use is not synonymous
with public interest. As its name indicates, the term public utility implies public
use and service to the public. The principal determinative
characteristic of a public utility is that of service to, or readiness to serve, an
indefinite public or portion of the public as such which has a legal right to
demand and receive its services or commodities. Stated otherwise, the owner
or person in control of a public utility must have devoted it to such use that the
public generally or that part of the public which has been served and has
accepted the service, has the right to demand that use or service so long as it
is continued, with reasonable efficiency and under proper charges. [19] Unlike a
private enterprise which independently determines whom it will serve, a public
utility holds out generally and may not refuse legitimate demand for
service.[20] Thus, in Iloilo Ice and Cold Storage Co. vs. Public Utility
Board,[21] this Court defined public use, viz:
Public use means the same as use by the public. The essential feature of the
public use is that it is not confined to privileged individuals, but is open to the
indefinite public. It is this indefinite or unrestricted quality that gives it its public
character. In determining whether a use is public, we must look not only to the
character of the business to be done, but also to the proposed mode of doing
it. If the use is merely optional with the owners, or the public benefit is merely
incidental, it is not a public use, authorizing the exercise of jurisdiction of the
public utility commission. There must be, in general, a right which the law
compels the owner to give to the general public. It is not enough that the
general prosperity of the public is promoted. Public use is not synonymous
with public interest. The true criterion by which to judge the character of
the use is whether the public may enjoy it by right or only by
permission.[22] (emphasis supplied)
Applying the criterion laid down in Iloilo to the case at bar, it is crystal clear
that a shipyard cannot be considered a public utility.
A shipyard is a place or enclosure where ships are built or repaired. [23] Its
nature dictates that it serves but a limited clientele whom it may choose to
serve at its discretion. While it offers its facilities to whoever may wish to avail
of its services, a shipyard is not legally obliged to render its services
indiscriminately to the public. It has no legal obligation to render the
services sought by each and every client. The fact that it publicly offers its
services does not give the public a legal right to demand that such services be
rendered.
There can be no disagreement that the shipbuilding and ship repair industry is
imbued with public interest as it involves the maintenance of the
seaworthiness of vessels dedicated to the transportation of either persons or
goods. Nevertheless, the fact that a business is affected with public interest
does not imply that it is under a duty to serve the public. While the business
may be regulated for public good, the regulation cannot justify the
classification of a purely private enterprise as a public utility. The legislature
cannot, by its mere declaration, make something a public utility which is not in
fact such; and a private business operated under private contracts with
selected customers and not devoted to public use cannot, by legislative
fiat or by order of a public service commission, be declared a public
utility, since that would be taking private property for public use without just
compensation, which cannot be done consistently with the due process
clause.[24]
It is worthy to note that automobile and aircraft manufacturers, which are of
similar nature to shipyards, are not considered public utilities despite the fact
that their operations greatly impact on land and air transportation. The reason
is simple. Unlike commodities or services traditionally regarded as public
utilities such as electricity, gas, water, transportation, telephone or telegraph
service, automobile and aircraft manufacturing---and for that matter ship
building and ship repair--- serve the public only incidentally.
Second. There is no law declaring a shipyard as a public utility.
History provides us hindsight and hindsight ought to give us a better view of
the intent of any law. The succession of laws affecting the status of shipyards
ought not to obliterate, but rather, give us full picture of the intent of the
legislature. The totality of the circumstances, including the contemporaneous
interpretation accorded by the administrative bodies tasked with the
enforcement of the law all lead to a singular conclusion: that shipyards are not
public utilities.
Since the enactment of Act No. 2307 which created the Public Utility
Commission (PUC) until its repeal by Commonwealth Act No. 146,
establishing the Public Service Commission (PSC), a shipyard, by legislative
declaration, has been considered a public utility.[25] A Certificate of Public
Convenience (CPC) from the PSC to the effect that the operation of the said
service and the authorization to do business will promote the public interests
in a proper and suitable manner is required before any person or corporation
may operate a shipyard.[26] In addition, such persons or corporations should
abide by the citizenship requirement provided in Article XIII, section 8 of the
1935 Constitution,[27] viz:
Sec. 8. No franchise, certificate, or any other form or authorization for the
operation of a public utility shall be granted except to citizens of the Philippines
or to corporations or other entities organized under the laws of the
Philippines, sixty per centum of the capital of which is owned by citizens
of the Philippines, nor shall such franchise, certificate or authorization be
exclusive in character or for a longer period than fifty years. No franchise or
right shall be granted to any individual, firm or corporation, except under the
condition that it shall be subject to amendment, alteration, or repeal by the
National Assembly when the public interest so requires. (emphasis supplied)
To accelerate the development of shipbuilding and ship repair industry, former
President Ferdinand E. Marcos issued P.D. No. 666 granting the following
incentives:
SECTION 1. Shipbuilding and ship repair yards duly registered with the
Maritime Industry Authority shall be entitled to the following incentive benefits:
(a) Exemption from import duties and taxes.- The importation of machinery,
equipment and materials for shipbuilding, ship repair and/or alteration,
including indirect import, as well as replacement and spare parts for the repair
and overhaul of vessels such as steel plates, electrical machinery and
electronic parts, shall be exempt from the payment of customs duty and
compensating tax: Provided, however, That the Maritime Industry Authority
certifies that the item or items imported are not produced locally in sufficient
quantity and acceptable quality at reasonable prices, and that the importation
is directly and actually needed and will be used exclusively for the
construction, repair, alteration, or overhaul of merchant vessels, and other
watercrafts; Provided, further, That if the above machinery, equipment,
materials and spare parts are sold to non-tax exempt persons or entities, the
corresponding duties and taxes shall be paid by the original
importer; Provided, finally, That local dealers and/or agents who sell
machinery, equipment, materials and accessories to shipyards for shipbuilding
and ship repair are entitled to tax credits, subject to approval by the total tariff
duties and compensating tax paid for said machinery, equipment, materials
and accessories.
(b) Accelerated depreciation.- Industrial plant and equipment may, at the
option of the shipbuilder and ship repairer, be depreciated for any number of
years between five years and expected economic life.
(c) Exemption from contractors percentage tax.- The gross receipts derived by
shipbuilders and ship repairers from shipbuilding and ship repairing activities
shall be exempt from the Contractors Tax provided in Section 91 of the
National Internal Revenue Code during the first ten years from registration with
the Maritime Industry Authority, provided that such registration is effected not
later than the year 1990; Provided, That any and all amounts which would
otherwise have been paid as contractors tax shall be set aside as a separate
fund, to be known as Shipyard Development Fund, by the contractor for the
purpose of expansion, modernization and/or improvement of the contractors
own shipbuilding or ship repairing facilities; Provided, That, for this purpose,
the contractor shall submit an annual statement of its receipts to the Maritime
Industry Authority; and Provided, further, That any disbursement from such
fund for any of the purposes hereinabove stated shall be subject to approval
by the Maritime Industry Authority.
In addition, P.D. No. 666 removed the shipbuilding and ship repair industry
from the list of public utilities, thereby freeing the industry from the 60%
citizenship requirement under the Constitution and from the need to obtain
Certificate of Public Convenience pursuant to section 15 of C.A No.
146. Section 1 (d) of P.D. 666 reads:
(d) Registration required but not as a Public Utility.- The business of
constructing and repairing vessels or parts thereof shall not be
considered a public utility and no Certificate of Public Convenience shall
be required therefor. However, no shipyard, graving dock, marine railway or
marine repair shop and no person or enterprise shall engage in construction
and/or repair of any vessel, or any phase or part thereof, without a valid
Certificate of Registration and license for this purpose from the Maritime
Industry Authority, except those owned or operated by the Armed Forces of
the Philippines or by foreign governments pursuant to a treaty or agreement.
(emphasis supplied)
Any law, decree, executive order, or rules and regulations inconsistent with
P.D. No. 666 were repealed or modified accordingly.[28] Consequently,
sections 13 (b) and 15 of C.A. No. 146 were repealed in so far as the former
law included shipyards in the list of public utilities and required the certificate
of public convenience for their operation. Simply stated, the repeal was due to
irreconcilable inconsistency, and by definition, this kind of repeal falls under
the category of an implied repeal.[29]
On April 28, 1983, Batas Pambansa Blg. 391, also known as the Investment
Incentive Policy Act of 1983, was enacted. It laid down the general policy of
the government to encourage private domestic and foreign investments in the
various sectors of the economy, to wit:
Sec. 2. Declaration of Investment Policy.- It is the policy of the State to
encourage private domestic and foreign investments in industry, agriculture,
mining and other sectors of the economy which shall: provide significant
employment opportunities relative to the amount of the capital being invested;
increase productivity of the land, minerals, forestry, aquatic and other
resources of the country, and improve utilization of the products thereof;
improve technical skills of the people employed in the enterprise; provide a
foundation for the future development of the economy; accelerate
development of less developed regions of the country; and result in increased
volume and value of exports for the economy.
It is the policy of the State to extend to projects which will significantly
contribute to the attainment of these objectives, fiscal incentives without
which said projects may not be established in the locales, number and/or pace
required for optimum national economic development. Fiscal incentive
systems shall be devised to compensate for market imperfections,
reward performance of making contributions to economic development,
cost-efficient and be simple to administer.
The fiscal incentives shall be extended to stimulate establishment and assist
initial operations of the enterprise, and shall terminate after a period of not
more than 10 years from registration or start-up of operation unless a special
period is otherwise stated.
The foregoing declaration shall apply to all investment incentive
schemes and in particular will supersede article 2 of Presidential Decree No.
1789. (emphases supplied)
With the new investment incentive regime, Batas Pambansa Blg. 391 repealed
the following laws, viz:
Sec. 20. The following provisions are hereby repealed:
1) Section 53, P.D. 463 (Mineral Resources Development Decree);
2.) Section 1, P.D. 666 (Shipbuilding and Ship Repair Industry);
3) Section 6, P.D. 1101 (Radioactive Minerals);
4) LOI 508 extending P.D. 791 and P.D. 924 (Sugar); and
5) The following articles of Presidential Decree 1789: 2, 18, 19, 22, 28, 30, 39,
49 (d), 62, and 77. Articles 45, 46 and 48 are hereby amended only with
respect to domestic and export producers.
All other laws, decrees, executive orders, administrative orders, rules and
regulations or parts thereof which are inconsistent with the provisions of this
Act are hereby repealed, amended or modified accordingly.
All other incentive systems which are not in any way affected by the provisions
of this Act may be restructured by the President so as to render them cost-
efficient and to make them conform with the other policy guidelines in the
declaration of policy provided in Section 2 of this Act. (emphasis supplied)
From the language of the afore-quoted provision, the whole of P.D. No. 666,
section 1 was expressly and categorically repealed. As a consequence, the
provisions of C.A. No. 146, which were impliedly repealed by P.D. No. 666,
section 1 were revived.[30] In other words, with the enactment of Batas
Pambansa Blg. 391, a shipyard reverted back to its status as a public utility
and as such, requires a CPC for its operation.
The crux of the present controversy is the effect of the express repeal of Batas
Pambansa Blg. 391 by Executive Order No. 226 issued by former President
Corazon C. Aquino under her emergency powers.
We rule that the express repeal of Batas Pambansa Blg. 391 by E.O. No. 226
did not revive Section 1 of P.D. No. 666. But more importantly, it also put a
period to the existence of sections 13 (b) and 15 of C.A. No. 146. It bears
emphasis that sections 13 (b) and 15 of C.A. No. 146, as originally written,
owed their continued existence to Batas Pambansa Blg. 391. Had the latter
not repealed P.D. No. 666, the former should have been modified accordingly
and shipyards effectively removed from the list of public utilities. Ergo, with the
express repeal of Batas Pambansa Blg. 391 by E.O. No. 226, the revival of
sections 13 (b) and 15 of C.A. No. 146 had no more leg to stand on. A law that
has been expressly repealed ceases to exist and becomes inoperative from
the moment the repealing law becomes effective.[31] Hence, there is simply no
basis in the conclusion that shipyards remain to be a public utility. A repealed
statute cannot be the basis for classifying shipyards as public utilities.
In view of the foregoing, there can be no other conclusion than to hold that a
shipyard is not a pubic utility. A shipyard has been considered a public utility
merely by legislative declaration. Absent this declaration, there is no more
reason why it should continuously be regarded as such. The fact that the
legislature did not clearly and unambiguously express its intention to include
shipyards in the list of public utilities indicates that that it did not intend to do
so. Thus, a shipyard reverts back to its status as non-public utility prior to the
enactment of the Public Service Law.
This interpretation is in accord with the uniform interpretation placed upon it
by the Board of Investments (BOI), which was entrusted by the legislature with
the preparation of annual Investment Priorities Plan (IPPs). The BOI has
consistently classified shipyards as part of the manufacturing sector and not
of the public utilities sector. The enactment of Batas Pambansa Blg. 391 did
not alter the treatment of the BOI on shipyards. It has been, as at present,
classified as part of the manufacturing and not of the public utilities sector.[32]
Furthermore, of the 441 Ship Building and Ship Repair (SBSR) entities
registered with the MARINA,[33] none appears to have an existing franchise. If
we continue to hold that a shipyard is a pubic utility, it is a necessary
consequence that all these entities should have obtained a franchise as was
the rule prior to the enactment of P.D. No. 666. But MARINA remains without
authority, pursuant to P.D. No. 474[34] to issue franchises for the operation of
shipyards. Surely,
the legislature did not intend to create a vacuum by continuously treating a
shipyard as a public utility without giving MARINA the power to issue a
Certificate of Public Convenience (CPC) or a Certificate of Public Convenience
and Necessity (CPCN) as required by section 15 of C.A. No. 146.
II.
Whether under the 1977 Joint Venture Agreement,
KAWASAKI can purchase only a maximum of 40%
of PHILSECOs total capitalization.
A careful reading of the 1977 Joint Venture Agreement reveals that there is
nothing that prevents KAWASAKI from acquiring more than 40% of
PHILSECOs total capitalization. Section 1 of the 1977 JVA states:
1.3 The authorized capital stock of Philseco shall be P330 million. The parties
shall thereafter increase their subscription in Philseco as may be necessary
and as called by the Board of Directors, maintaining a proportion of 60%-40%
for NIDC and KAWASAKI respectively, up to a total subscribed and paid-up
capital stock of P312 million.
1.4 Neither party shall sell, transfer or assign all or any part of its interest in
SNS [renamed PHILSECO] to any third party without giving the other under
the same terms the right of first refusal. This provision shall not apply if the
transferee is a corporation owned and controlled by the GOVERMENT [of the
Philippines] or by a Kawasaki affiliate.
1.5 The By-Laws of SNS [PHILSECO] shall grant the parties preemptive rights
to unissued shares of SNS [PHILSECO].[35]
Under section 1.3, the parties agreed to the amount of P330 million as the total
capitalization of their joint venture. There was no mention of the amount of
their initial subscription. What is clear is that they are to infuse the needed
capital from time to time until the total subscribed and paid-up capital
reaches P312 million. The phrase maintaining a proportion of 60%-40% refers
to their respective share of the burden each time the Board of Directors
decides to increase the subscription to reach the target paid-up capital of P312
million. It does not bind the parties to maintain the sharing scheme all
throughout the existence of their partnership.
The parties likewise agreed to arm themselves with protective mechanisms to
preserve their respective interests in the partnership in the event that (a) one
party decides to sell its shares to third parties; and (b) new Philseco shares
are issued. Anent the first situation, the non-selling party is given the right of
first refusal under section 1.4 to have a preferential right to buy or to refuse
the selling partys shares. The right of first refusal is meant to protect the
original or remaining joint venturer(s) or shareholder(s) from the entry of third
persons who are not acceptable to it as co-venturer(s) or co-shareholder(s).
The joint venture between the Philippine Government and KAWASAKI is in
the nature of a partnership[36] which, unlike an ordinary corporation, is based
on delectus personae.[37] No one can become a member of the partnership
association without the consent of all the other associates. The right of first
refusal thus ensures that the parties are given control over who may become
a new partner in substitution of or in addition to the original partners. Should
the selling partner decide to dispose all its shares, the non-selling partner may
acquire all these shares and terminate the partnership. No person or
corporation can be compelled to remain or to continue the partnership. Of
course, this presupposes that there are no other restrictions in the maximum
allowable share that the non-selling partner may acquire such as the
constitutional restriction on foreign ownership in public utility. The theory that
KAWASAKI can acquire, as a maximum, only 40% of PHILSECOs shares is
correct only if a shipyard is a public utility. In such instance, the non-selling
partner who is an alien can acquire only a maximum of 40% of the total
capitalization of a public utility despite the grant of first refusal. The partners
cannot, by mere agreement, avoid the constitutional proscription. But as afore-
discussed, PHILSECO is not a public utility and no other restriction is present
that would limit the right of KAWASAKI to purchase the Governments share to
40% of Philsecos total capitalization.
Furthermore, the phrase under the same terms in section 1.4 cannot be given
an interpretation that would limit the right of KAWASAKI to purchase
PHILSECO shares only to the extent of its original proportionate contribution
of 40% to the total capitalization of the PHILSECO. Taken together with the
whole of section 1.4, the phrase under the same terms means that a
partner to the joint venture that decides to sell its shares to a third party
shall make a similar offer to the non-selling partner. The selling partner
cannot make a different or a more onerous offer to the non-selling partner.
The exercise of first refusal presupposes that the non-selling partner is aware
of the terms of the conditions attendant to the sale for it to have a guided
choice. While the right of first refusal protects the non-selling partner from the
entry of third persons, it cannot also deprive the other partner the right to sell
its shares to third persons if, under the same offer, it does not buy the shares.
Apart from the right of first refusal, the parties also have preemptive
rights under section 1.5 in the unissued shares of Philseco. Unlike the former,
this situation does not contemplate transfer of a partners shares to third parties
but the issuance of new Philseco shares. The grant of preemptive rights
preserves the proportionate shares of the original partners so as not to dilute
their respective interests with the issuance of the new shares. Unlike the right
of first refusal, a preemptive right gives a partner a preferential right over the
newly issued shares only to the extent that it retains its original proportionate
share in the joint venture.
The case at bar does not concern the issuance of new shares but the transfer
of a partners share in the joint venture. Verily, the operative protective
mechanism is the right of first refusal which does not impose any limitation in
the maximum shares that the non-selling partner may acquire.
III.
Whether the right to top granted to KAWASAKI
in exchange for its right of first refusal violates
the principles of competitive bidding.
We also hold that the right to top granted to KAWASAKI and exercised by
private respondent did not violate the rules of competitive bidding.
The word bidding in its comprehensive sense means making an offer or an
invitation to prospective contractors whereby the government manifests its
intention to make proposals for the purpose of supplies, materials and
equipment for official business or public use, or for public works or
repair.[38] The three principles of public bidding are: (1) the offer to the public;
(2) an opportunity for competition; and (3) a basis for comparison of bids.[39] As
long as these three principles are complied with, the public bidding can be
considered valid and legal. It is not necessary that the highest bid be
automatically accepted. The bidding rules may specify other conditions or the
bidding process be subjected to certain reservation or qualification such as
when the owner reserves to himself openly at the time of the sale the right to
bid upon the property, or openly announces a price below which the property
will not be sold. Hence, where the seller reserves the right to refuse to accept
any bid made, a binding sale is not consummated between the seller and the
bidder until the seller accepts the bid. Furthermore, where a right is reserved
in the seller to reject any and all bids received, the owner may exercise the
right even after the auctioneer has accepted a bid, and this applies to the
auction of public as well as private property. [40] Thus:
It is a settled rule that where the invitation to bid contains a reservation for the
Government to reject any or all bids, the lowest or the highest bidder, as the
case may be, is not entitled to an award as a matter of right for it does not
become a ministerial duty of the Government to make such an award. Thus, it
has been held that where the right to reject is so reserved, the lowest bid or
any bid for that matter may be rejected on a mere technicality, that all bids
may be rejected, even if arbitrarily and unwisely, or under a mistake, and that
in the exercise of a sound discretion, the award may be made to another than
the lowest bidder. And so, where the Government as advertiser, availing itself
of that right, makes its choice in rejecting any or all bids, the losing bidder has
no cause to complain nor right to dispute that choice, unless an unfairness or
injustice is shown. Accordingly, he has no ground of action to compel the
Government to award the contract in his favor, nor compel it to accept his
bid.[41]
In the instant case, the sale of the Government shares in PHILSECO was
publicly known. All interested bidders were welcomed. The basis for
comparing the bids were laid down. All bids were accepted sealed and were
opened and read in the presence of the COAs official representative and
before all interested bidders. The only question that remains is whether or not
the existence of KAWASAKIs right to top destroys the essence of competitive
bidding so as to say that the bidders did not have an opportunity for
competition. We hold that it does not.
The essence of competition in public bidding is that the bidders are placed on
equal footing. This means that all qualified bidders have an equal chance of
winning the auction through their bids. In the case at bar, all of the bidders
were exposed to the same risk and were subjected to the same condition, i.e.,
the existence of KAWASAKIs right to top. Under the ASBR, the Government
expressly reserved the right to reject any or all bids, and manifested its
intention not to accept the highest bid should KAWASAKI decide to exercise
its right to top under the ABSR. This reservation or qualification was made
known to the bidders in a pre-bidding conference held on September 28, 1993.
They all expressly accepted this condition in writing without any qualification.
Furthermore, when the Committee on Privatization notified petitioner of the
approval of the sale of the National Government shares of stock in PHILSECO,
it specifically stated that such approval was subject to the right of KAWASAKI
Heavy Industries, Inc./Philyards Holdings, Inc. to top JGSMIs bid by 5% as
specified in the bidding rules. Clearly, the approval of the sale was a
conditional one. Since Philyards eventually exercised its right to top petitioners
bid by 5%, the sale was not consummated. Parenthetically, it cannot be
argued that the existence of the right to top set for naught the entire public
bidding. Had Philyards Holdings, Inc. failed or refused to exercise its right to
top, the sale between the petitioner and the National Government would have
been consummated. In like manner, the existence of the right to top cannot be
likened to a second bidding, which is countenanced, except when there is
failure to bid as when there is only one bidder or none at all. A prohibited
second bidding presupposes that based on the terms and conditions of the
sale, there is already a highest bidder with the right to demand that the seller
accept its bid. In the instant case, the highest bidder was well aware that the
acceptance of its bid was conditioned upon the non-exercise of the right to top.
To be sure, respondents did not circumvent the requirements for bidding by
granting KAWASAKI, a non-bidder, the right to top the highest bidder. The fact
that KAWASAKIs nominee to exercise the right to top has among its
stockholders some losing bidders cannot also be deemed unfair.
It must be emphasized that none of the parties questions the existence of
KAWASAKIs right of first refusal, which is concededly the basis for the grant
of the right to top. Under KAWASAKIs right of first refusal, the National
Government is under the obligation to give preferential right to KAWASAKI in
the event it decides to sell its shares in PHILSECO. It has to offer to
KAWASAKI the shares and give it the option to buy or refuse under the same
terms for which it is willing to sell the said shares to third parties. KAWASAKI
is not a mere non-bidder. It is a partner in the joint venture; the incidents of
which are governed by the law on contracts and on partnership.
It is true that properties of the National Government, as a rule, may be sold
only after a public bidding is held. Public bidding is the accepted method in
arriving at a fair and reasonable price and ensures that overpricing, favoritism
and other anomalous practices are eliminated or minimized.[42] But the
requirement for public bidding does not negate the exercise of the right of first
refusal. In fact, public bidding is an essential first step in the exercise of the
right of first refusal because it is only after the public bidding that the terms
upon which the Government may be said to be willing to sell its shares to third
parties may be known. It is only after the public bidding that the Government
will have a basis with which to offer KAWASAKI the option to buy or forego the
shares.
Assuming that the parties did not swap KAWASAKIs right of first refusal with
the right to top, KAWASAKI would have been able to buy the National
Governments shares in PHILSECO under the same terms as offered by the
highest bidder. Stated otherwise, by exercising its right of first refusal,
KAWASAKI could have bought the shares for only P2.03 billion and not the
higher amount of P2.1315 billion. There is, thus, no basis in the submission
that the right to top unfairly favored KAWASAKI. In fact, with the right to top,
KAWASAKI stands to pay higher than it should had it settled with its right of
first refusal. The obvious beneficiary of the scheme is the National
Government.
If at all, the obvious consideration for the exchange of the right of first refusal
with the right to top is that KAWASAKI can name a nominee, which it is a
shareholder, to exercise the right to top. This is a valid contractual stipulation;
the right to top is an assignable right and both parties are aware of the full legal
consequences of its exercise. As aforesaid, all bidders were aware of the
existence of the right to top, and its possible effects on the result of the public
bidding was fully disclosed to them. The petitioner, thus, cannot feign
ignorance nor can it be allowed to repudiate its acts and question the
proceedings it had fully adhered to.[43]
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM
Group, Insular Life Assurance, Mitsui and ICTSI), has joined Philyards in the
latters effort to raise P2.131 billion necessary in exercising the right to top is
not contrary to law, public policy or public morals. There is nothing in the ASBR
that bars the losing bidders from joining either the winning bidder (should the
right to top is not exercised) or KAWASAKI/PHI (should it exercise its right to
top as it did), to raise the purchase price. The petitioner did not allege, nor was
it shown by competent evidence, that the participation of the losing bidders in
the public bidding was done with fraudulent intent. Absent any proof of fraud,
the formation by Philyards of a consortium is legitimate in a free enterprise
system. The appellate court is thus correct in holding the petitioner estopped
from questioning the validity of the transfer of the National Governments
shares in PHILSECO to respondent.
Finally, no factual basis exists to support the view that the drafting of the ASBR
was illegal because no prior approval was given by the COA for it, specifically
the provision on the right to top the highest bidder and that the public auction
on December 2, 1993 was not witnessed by a COA representative. No
evidence was proffered to prove these allegations and the Court cannot make
legal conclusions out of mere allegations. Regularity in the performance of
official duties is presumed[44] and in the absence of competent evidence to
rebut this presumption, this Court is duty bound to uphold this presumption.
IN VIEW OF THE FOREGOING, the Motion for Reconsideration is hereby
GRANTED. The impugned Decision and Resolution of the Court of Appeals
are AFFIRMED.
SO ORDERED.
G.R. No. 111008 November 7, 1994
TRAMAT MERCANTILE, INC. AND DAVID ONG, petitioners,
vs.
HON. COURT OF APPEALS AND MELCHOR DE LA
CUESTA, respondents.
VITUG, J.:
This petition for review on certiorari challenges the 04th March 1993 decision
of the Court of Appeals and its resolution of 01 July 1993 denying the motion
for reconsideration.
On 09 April 1984, Melchor de la Cuesta, doing business under the name and
style of "Farmers Machineries," sold to Tramat Mercantile, Inc. ("Tramat"), one
(1) unit HINOMOTO TRACTOR Model MB 1100D powered by a 13 H.P. diesel
engine. In payment, David Ong, Tramat's president and manager, issued a
check for P33,500.00 (apparently replacing an earlier postdated check for
P33,080.00). Tramat, in turn, sold the tractor, together with an attached lawn
mower fabricated by it, to the Metropolitan Waterworks and Sewerage System
("NAWASA") for P67,000.00. David Ong caused a "stop payment" of the check
when NAWASA refused to pay the tractor and lawn mower after discovering
that, aside from some stated defects of the attached lawn mower, the engine
(sold by de la Cuesta) was a reconditioned unit.
On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00,
as well as attorney's fees of P10,000.00, and the costs of suit. Ong, in his
answer, averred, among other things, that de la Cuesta had no cause of action;
that the questioned transaction was between plaintiff and Tramat Mercantile,
Inc., and not with Ong in his personal capacity; and that the payment of the
check was stopped because the subject tractor had been priced as a brand
new, not as a reconditioned unit.
On 02 November 1989, after the reception of evidence, the trial court rendered
a decision, the dispositive portions of which read:
WHEREFORE, in view of the foregoing consideration, judgment is hereby
rendered:
1. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of
P33,500.00 with legal interest thereon at the rate of 12% per annum from July
7, 1984 until fully paid; and
2. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of
P10,000.00 as attorney's fees, and the costs of this suit.
SO ORDERED. 1
An appeal was timely interposed by the defendants. On 04 March 1993, the
Court of Appeals affirmed in toto the decision of the trial court. Defendant-
appellants' motion for reconsideration was denied.
Hence, the instant petition.
We could find no reason to reverse the factual findings of both the trial court
and the appellate court, particularly in holding that the contract between de la
Cuesta and TRAMAT was one of absolute, not conditional, sale of the tractor
and that de la Cuesta did not violate any warranty on the sale of the tractor to
TRAMAT. The appellate court, in its decision, adequately explained:
If the perfection of the sale was dependent upon acceptance by the MWSS of
the subject tractor why did the appellants issue a check in payment of the item
to the appellee? And long after MWSS had complained about the defective
tractor engine, and after the appellee had failed to remedy the defect, why did
the appellants still draw and deliver a replacement check to the appellee for
the increased amount of P33,500.00?
These payments argue against the claim now made by the defendants that
the sale was conditional.
According to the appellee, the additional amount covered the cost of replacing
the oil gasket of the tractor engine when it was repaired in Soledad Cac's
gasoline station in Quezon City. The appellants, on the other hand, claims the
amount represented the freight charges for transporting the tractor from
Cauayan, Isabela to Metro Manila.
The appellants should have explained why they failed to include the freight
charges in the first check. The tractor was transported from Isabela to Metro
Manila as early as April 1984, and the first check was drawn at about the same
time. The freight charges cannot be said to have been incurred when the
tractor engine was delivered back to the supplier for repairs. The appellants
admitted that the engine was not brought back to Isabela. The repairs were
done at Soledad Cac's gasoline station in Quezon City.
Anent the first assigned error, We sustain the trial court's finding that at the
time of the purchase, the appellants did not reveal to the appellee the true
purpose for which the tractor would be used. Granting that the appellants
informed the appellee that they would be reselling the unit to the MWSS, an
entity admittedly not engaged in farming, and that they ordered the tractor
without the power tiller, an indispensable accessory if the tractor would be
used in farming, these in themselves would not constitute the required implied
notice to the appellee as seller.
xxx xxx xxx
In regard to the second assigned error, We do not agree that the appellee
should have been held liable for the tractor's alleged hidden defects. . . .
It has to be noted in this regard that, to satisfy the requirements of the MWSS,
the appellants borrowed a lawn mower from the MWSS so they could fabricate
one such mower. The appellants' witness stated that the kind of mid-mounted
lawn mower was being manufactured by their competitor, Alpha Machinery,
which had by then stopped supplying the same (tsn,
Nov. 29, 1988, pp. 73-74). There is no showing that the appellants had had
any previous experience in the fabrication of this lawn mower. In fact, as
aforesaid, they had to borrow one from the MWSS which they could copy. But
although they made a copy with the same specifications and design, there was
no assurance that the copy would function as well as with the model.
xxx xxx xxx
Although the trial court discussed it in a different light, We view the matter in
the same way the trial court did that the lawn mower as fabricated by the
appellants was the root of the parties' problems.
Having had no previous experience in the manufacture of lawn mowers of the
same type as that in litigation, and in a possibly patent-infringing effort to
undercut their competition, the appellants gathered enough daring to do the
fabrication themselves. But the product might have proved too much for the
subject tractor to power, and the tractor's engine was strained beyond its limits,
causing it to overheat and damage its gaskets.
No wonder, then, it was a gasket Soledad Cac had to replace, at a cost
chargeable to the appellants. No wonder, furthermore, the appellants' witness
declared that even after the replacement of that one gasket, the engine still
leaked oil after being torture-tested. The integrity of the other engine gaskets
might have been impaired, too. Such was the burden placed on the engine.
The engine malfunctioned not necessarily because the engine, as alleged by
the appellants, had been a reconditioned, and not a brand new, one. It
malfunctioned because it was made to do what it simply could not.2
Secretary-Treasurer of a supposed corporation; the fact that twenty-five
certificates were signed by its president for no justifiable reason; the fact that
its principal stockholder had made enormous profits and, therefore, had a
motive to hide them to evade the payment of taxes; the fact that the other
subscribers had no incomes of sufficient magnitude to justify their big
subscriptions; the fact that the treasurer in the name of the alleged corporation
but were kept by the principal stockholder herself; the fact that the
stockholders or the directors never appeared to have ever met to discuss the
business of the corporation; the fact that she advanced big sums of money to
the corporation without any previous arrangement or accounting; and the fact
that the books of accounts were kept as if they belonged to her alone are
circumstantial evidence which are not only convincing but conclusive that she
is the sole and exclusive owner of all the shares of stock of the corporation
and that the other partners are her dummies.
DECISION

It was, nevertheless, an error to hold David Ong jointly and severally liable with
TRAMAT to de la Cuesta under the questioned transaction. Ong had there so
acted, not in his personal capacity, but as an officer of a corporation, TRAMAT,
with a distinct and separate personality. As such, it should only be the LABRADOR, J.:
corporation, not the person acting for and on its behalf, that properly could be
made liable thereon.3

Personal liability of a corporate director, trustee or officer along (although not

This action was brought by plaintiffs as stockholders of the Marvel Building
necessarily) with the corporation may so validly attach, as a rule, only when
Corporation to enjoin the defendant Collector of Internal Revenue from selling

at public auction various properties described in the complaint, including three

1. He assents (a) to a patently unlawful act of the corporation, or parcels of land, with the buildings situated thereon, known as the Aguinaldo
(b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict of Building, the Wise Building, and the Dewey Boulevard-Padre Faura Mansion,
interest, resulting in damages to the corporation, its stockholders or other all registered in the name of said corporation. Said properties were seized and
persons;4 distrained by defendant to collect war profits taxes assessed against plaintiff
Maria B. Castro (Exhibit B). Plaintiffs allege that the said three properties
2. He consents to the issuance of watered stocks or who, having knowledge (lands and buildings) belong to the Marvel Building corporation and not to
thereof, does not forthwith file with the corporate secretary his written objection Maria B. Castro, while the defendant claims that Maria B. Castro is the true
thereto;5 and sole owner of all the subscribed stock of the Marvel Building Corporation,
including those appearing to have been subscribed and paid for by the other
3. He agrees to hold himself personally and solidarily liable with the members, and consequently said Maria B. Castro is also the true and
corporation;6 or exclusive owner of the properties seized. The trial court held that the evidence,
which is mostly circumstantial, fails to show to its satisfaction that Maria B.
4. He is made, by a specific provision of law, to personally answer for his
Castro is the true owner of all the stock certificates of the corporation, because
corporate action.7
the evidence is susceptible of two interpretations and an interpretation may
In the case at bench, there is no indication that petitioner David Ong could be not be made which would deprive one of property without due process of law.
held personally accountable under any of the abovementioned cases.
It appears that on September 15, 1950, the Secretary of Finance, upon
WHEREFORE, the petition is given DUE COURSE and the decision of the trial consideration of the report of a special committee assigned to study the war
court, affirmed by the appellate court, is MODIFIED insofar as it holds profits tax case of Mrs. Maria B. Castro, recommended the collection of
petitioner David Ong jointly and severally liable with Tramat Mercantile, Inc., P3,593,950.78 as war profits taxes for the latter, and on September 22, 1953
which portion of the questioned judgment is SET ASIDE. In all other respects, the President instructed the Collector that steps be taken to collect the same
the decision appealed from is AFFIRMED. No costs. (Exhibits 114, 114-A to 114-D). Pursuant thereto various properties, including
the three above mentioned, were seized by the Collector of Internal Revenue
SO ORDERED.
on October 31, 1950. On November 13, 1950, the original complaint in this
case was filed. After trial, the Court of First Instance of Manila rendered
judgment ordering the release of the properties mentioned, and enjoined the
EN BANC Collector of Internal Revenue from selling the same. The Collector of Internal
Revenue has appealed to this Court against the judgment.
[G.R. No. L-5081. February 24, 1954.]
The following facts are not disputed, or are satisfactorily proved by the
MARVEL BUILDING CORPORATION, ET AL., Plaintiffs-Appellees, v. evidence:chanrob1es virtual 1aw library
SATURNINO DAVID, in his capacity as Collector, Bureau of Internal
Revenue, Defendant-Appellant. The Articles of Incorporation of the Marvel Building Corporation is dated
February 12, 1947 and according to it the capital stock is P2,000,000, of which
Assistant Solicitor General Francisco Carreon for Appellant. P1,025,000 was (at the time of incorporation) subscribed and paid by the
following incorporators:chanrob1es virtual 1aw library
Antonio Quirino and Rosendo J. Tansinsin for Appellees.
Maria B. Castro -------- 250 shares ------P250,000.00

Amado A. Yatco ------- 100" ------ 100,000.00

SYLLABUS
Santiago Tan ----------- 100" ------ 100,000.00

Jose T. Lopez ---------- 90" ------ 90,000.00

CORPORATIONS; CIRCUMSTANTIAL EVIDENCE SHOWING ONE-MAN Benita Lamagna --------- 90" ------ 90,000.00
CORPORATION. the existence of endorsed certificates discovered by
internal revenue agents between 1948 and 1949 in the possession of the C.S. Gonzales ----------- 80" ------ 80,000.00
Maria Cristobal --------- 70" ------ 70,000.00 The main issue involved in these proceedings is: Is Maria B. Castro the owner
of all the shares of stock of the Marvel Building Corporation and the other
Segundo Esguerra, Sr. -- 75" ------ 75,000.00 stockholders mere dummies of hers?

Ramon Sangalang -------- 70" ------ 70,000.00 The most important evidence presented by the Collector of Internal Revenue
to prove his claim that Maria B. Castro is the sole and exclusive owner of the
Maximo Cristobal ------- 55" ------ 55,000.00 shares of stock of the Marvel Building Corporation is the supposed
endorsement in blank of the shares of stock issued in the name of the other
Antonio Cristobal ------ 45" ------ 45,000.00 incorporators, and the possession thereof by Maria B. Castro. The existence
of said endorsed certificates was testified to by witnesses Felipe Aquino,
____________ internal revenue examiner, Antonio Mariano, examiner, and Crispin Llamado,
Under-Secretary of Finance, who declared as follows: Towards the end of the
P1,025,000.00. year of 1948 and about the beginning of the year 1949, while Aquino and
Mariano were examining the books and papers of the Marvel Building
Maria B. Castro was elected President and maximo Cristobal, Secretary- Corporation at its place of business, which books and papers were furnished
Treasurer (Exhibit A). by its Secretary, Maximo Cristobal, they came across an envelope containing
eleven stock certificates, bound together by an Acco fastener, which
The Wise Building was purchased on September 4, 1946, the purchase being (certificates) corresponded in number and in amount on their face to the
made in the name of Dolores Trinidad, wife of Amado A. Yatco (Exhibit V), and subscriptions of the stockholders that all the certificates, except that in the
the Aguinaldo Building, on January 17, 1947, in the name of Segundo name of Maria B. Castro, were endorsed in blank by the subscribers; that as
Esguerra, Sr. (Exhibit M). Both building were purchased for P1,800,00, but as two revenue agents could not agree what to do with the certificates, Aquino
the corporation had only P1,025,000, the balance of the purchase price was brought them to Under-Secretary of Finance Llamado, who thereupon
obtained as loans from the Insular Life Assurance Co., Ltd. and the Philippine suggested that photostatic copies thereof be taken; that this was done, and
Guaranty Co., Inc. (Exhibit C). the photostatic copies placed by him in his office safe; that Aquino returned
the certificates that same day after the photostatic copies had been taken; that
Of the incorporators of the Marvel Building Corporation, Maximo Cristobal and the photostatic copies taken are Exhibits 4, 5, 6, 7, 8, 9, 10, 11, 12, and 13;
Antonio Cristobal are half-brothers of Maria B. Castro, Manila Cristobal is a and in that July, 1950, copy-cat copies of the above photostats were taken,
half-sister, and Segundo Esguerra, Sr. a brother-in-law, husband of Maria and said copy-cat copies are Exhibits 40-49.
Cristobal, Maria B. Castros half-sister. Maximo B. Cristobal did not file any
income tax returns before the year 1946, except for the years 1939 and 1940, Julio Llamado, bookkeeper of the Marvel Building Corporation from 1947 to
but in these years he was exempted from the tax. He has not filed any war May, 1948, also testified that he was the one who had prepared the original
profits tax return (Exhibit 54). Antonio Cristobal, Segundo Esguerra, Sr. and certificates, putting therein the number of shares in words in handprint; that
Jose T. Lopez did not file any income tax returns for the years prior to 1946, the originals were given to him by Maria B. Castro for comparison with the
and neither did they file any war profits tax returns (Exhibit 52). Maria Cristobal articles of incorporation; that they were not yet signed by the President and by
filed income tax returns for the years 1929 to 1942, but they were exempt from the Secretary-Treasurer when he had the certificates; and that after the
the tax (Exhibit 53). Benita A. Lamagna did not file any income tax returns prior checking he returned all of them to Mrs. Castro. He recognized the photostats,
to 1945, except for 1942 which was exempt. Since did not file any war profits Exhibits 4 to 13 as photostats of the said originals. He also declared that he
tax (Exhibit 55). Ramon M. Sangalang did not file income tax returns up to also prepared a set of stock certificates, similar to the certificates which were
1945 except for the years 1936, 1937, 1938, 1939 and 1940. He has not filed copied in the photostats, filling the blanks for the name of the stockholder, the
any war profits tax return (Exhibit 56). Santiago Tan did not file any income tax number of shares, and the date of issue, and that the certificates he had
returns prior to 1945, except for the years 1938, 1939, 1940 and 1942, but all prepared are Exhibits H, H-1 to H-7 and J (Exhibits 30-38). This set of
of these were exempt. He did not file any war profits tax return (Exhibit 57). certificates was made him first and the set of which photostats were taken, a
Amado A. Yatco did not file income tax returns prior to 1945, except for the few days later.
years 1937, 1938, 1939, 1941 and 1942, but these were exempt. He did not
file any war profits tax return (Exhibit 58). The plaintiffs offered a half-hearted denial of the existence of the endorsed
blank certificates, Maximo Cristobal, secretary of the corporation, saying that
Antonio Cristobals income in 1946 is P15,630, and in 1947, P4,550 (Exhibits no investigation was ever made by Aquino and Mariano in which said
59-60); Maximo B. Cristobals income in 1946 is P19,759.10, in 1947, certificates were discovered by the latter. The, however, vigorously attack the
P9,773.47 (Exhibits 61-62); Segundo Esguerras income in 1946 is P5,500, in credibility of the witnesses for the defendant, imputing to the Llamados, enmity
1947, P7,754.32 (Exhibits 63-64); Jose T. Lopezs income in 1946 is P20,785, against Maria B. Castro, and to Aquino and Mariano, a very doubtful conduct
in 1947, P14,302.77 (Exhibits 69- 70); Benita A. Lamagnas income in 1945 is in not divulging the existence of the certificates either to Lobrin, Chief Income
P1,559, in 1946, P6,463.36, in 1947, P6,189.79 and her husbands income in Tax Examiner, or to the Collector of Internal Revenue, both their immediate
1947 is P10,825.53 (Exhibits 65-68); Ramon M. Sangalangs income in 1945 chiefs. Reliance is also placed on a certificate, Exhibit W, wherein Aquino and
is P5,500, in 1946, P18,300.00 (Exhibits 71-72); Santiago Tans income in others, declare that the certificates (Exhibits not endorsed when the same
1945 is P456, in 1947 is P9,167.95, and in 1947, P7,620.11 (Exhibits 73-75); were examined. In connection with this certificate, Exhibit W, we note that it
and Amado Yatcos income in 1945 is P12,600 in 1946, P23,960, and in 1947, states that the certificates examined were Exhibits 30 to 38, the existence or
P11,160 (Exhibits 76-78). character of which are not disputed. But the statement contains nothing to the
effect that the above certificates were the only ones in existence, according to
In October, 1945 Maria B. Castro, Nicasio Yatco, Maxima Cristobal de their knowledge. Again the certificate was issued for an examination on
Esguerra, Maria Cristobal Lopez and Maximo Cristobal organized the Maria September 1949, not by Aquino and Mariano at the end of 1948 or the
B. Castro, Inc. with a capital stock of P100,00, of which Maria B. Castro beginning of 1949. The certificate, therefore, neither denies the existence of
subscribed for P99,600 and all the others for P100 each. This was increased the endorsed certificates, nor that Aquino and Mariano had made an
in 1950 to P500,000 and Maria B. Castro subscribed P76,000 and the others examination of the papers of the corporation at the end of the year 1948. It
P1,000 each (Exhibit 126). can not, therefore, discredit the testimonies of the defendants witnesses.

It does not appear that the stockholders or the board of directors of the Marvel As to the supposed enmity of the Llamados towards the plaintiff Maria B.
Building Corporation have ever held a business meeting, for no books thereof Castro, we note that, supposing that there really was such enmity, it does not
or minutes of meeting were ever mentioned by the officers thereof or appear that it was of such magnitude or force as could have induced the
presented by them at the trial. The by-laws of the corporation, if any had ever Llamados to lie or fabricate evidence against her. It seems that the Llamados
been approved, has not been presented. Neither does it appear that any report and Maria B. Castro were close friends way back in 1947 and up to 1949; but
of the affairs of the corporation has been made, either of its transactions or that at the time of the trial the friendship had been marred by
accounts. misunderstandings. We believe that in 1948 and 1949 the Llamados were
trusted friends of Maria B. Castro, and this explains why they had knowledge
From the book of accounts of the corporation, advances to the Marvel Building of her secret transactions. The younger Llamado even made advances for the
Corporation of P125,000 were made by Maria B. Castro in 1947, P102,916.05 hand of Maria B. Castros daughter, and this at the time when as a bookkeeper
in 1948, and P160,910.96 in 1949 (Exhibit 118). he was entrusted with checking up the certificates of stock. When the older
Llamado kept secret the existence of the endorsed certificates, the friendship
between the two families was yet intact; hence, the existence of the endorsed
certificates must have been kept to himself by the older Llamado. All the above
circumstances reinforce our belief that the Llamados had personal knowledge
of the facts they testified to, and the existence of this knowledge in turn renders
improbable plaintiffs claim that their testimonies were biased.
Attempt was also made by the plaintiffs to show by expert evidence that the
endorsement could have been super-imposed, i.e., that the signatures made
on other papers and these were pasted and thereafter the documents
photographed. Judicial experience is to the effect that expert witnesses can
always be obtained for both sides of an issue, most likely because expert
witnesses are no longer impermeable to the influence of fees (II Wigmore,
Sec. 563 (2), p. 646). and if parties are capable of paying fees, expert opinion
should be received with caution. In the case at bar, the opinion on the
supposed superimposition was merely a possibility, and we note various
circumstances which prove that the signatures were not superimposed and
corroborate defendants claim that they were genuine. In the first place, the
printed endorsement contains a very heavy line at the bottom for the signature
of the endorsee. This line in almost all of the endorsements is as clear as the
printed letters above it, and at the points where the letters of the signature
extend down and traverse it (the line), there is no indication that the line is
covered by a superimposed paper. Again in these places both the signatures
and the lines are clear and distinct where the cross one another. Had there
been superimpositions the above features could not have been possible. In
the second place, Maria B. Castro admitted having singed 25 stock
certificates, but only eleven were issued (t.s.n., p. 662). No explanation is
given by her why she had to sign as many as 25 forms when there were only
eleven subscribers and eleven forms to be filled. This circumstances
corroborate the young Llamados declaration that two sets of certificates had
been prepared. The nineteen issued must be Exhibits H, H-1 to H-7 and J, or
Nos. 30 to 38, and the stock certificates endorsed whose photostatic copies
are Exhibits 4 to 13. It is to be remembered also, that it is a common practice
among unscrupulous merchants to carry two sets of books, one set for
themselves and another to be shown to tax collectors. This practice could not
have been unknown to Maria B. Castro, who apparently had been able to
evade the payment of her war profits taxes. These circumstances, coupled
with the testimony of Julio Llamado that two sets of certificates were given to
him for checking, show to an impartial mind the existence of the set of
certificates endorsed in blank, thus confirming the testimonies of the
defendants witnesses, Aquino, Mariano and Crispin Llamado, and thus
discrediting the obviously partial testimony of the expert presented by
plaintiffs. The genuineness of the signatures on the endorsement is not
disputed. How could the defendant had secured these genuine signatures?
Plaintiffs offer no explanation for this, although they do not question them. It
follows that the genuine signatures must have been made on the stock
certificates themselves.
Next in importance among the evidence submitted by the defendant collector
to prove his contention that Maria B. Castro is the sole owner of the shares of
stock of the Marvel Building Corporation, is the fact that the other stockholders
did not have incomes in such amounts, during the time of the organization of
the corporation in 1947, or immediately thereto, as to enable them to pay in
full for their supposed subscriptions. This fact is proved by their income tax
returns, or the absence thereof. Let us take Amado A. Yatco as an example.
Before 1945 his returns were exempt from the tax, in 1945 he had P12,600
and in 1946, P23,000. He has four children. How could he have paid P100,000
in 1945 and 1946? Santiago Tan who also contributed P100,000 had no
appreciable income before 1946, and in this year an income of only P9,167.95.
Jose T. Lopez also did not file any income tax returns before 1940 and in 1946
he had an income of only P20,785, whereas he is supposed to have
subscribed P90,000 worth of stock early in 1947. Benita Lamagna had no
returns either up to 1945, except in 1942, which was exempt, and in 1945 she
had an income of P1,550 and in 1946, P6,463.36. In the same situation are all
the others, and besides, brothers and sisters and brother-in- law of Maria B.
Castro. On the other hand, Maria B. Castro had been found to have made
enormous gains or profits in her business such that the taxes thereon were
assessed at around P3,000,000. There was, therefore, a prima facie case
made out by the defendant collector that Maria B. Castro had furnished all the
money that the Marvel Building Corporation had.
In order to meet the above evidence only three of the plaintiffs testified,
namely, Maximo Cristobal, the corporations secretary, who made the general
assertion on the witness stand that the other stockholders paid for their shares
in full, Maria B. Castro, who stated that payments of the subscriptions were
made to her, and C. S. Gonzales, who admitted that Maria B. Castro paid for
his subscription. After a careful study of the above testimonies, however, we
find them subject to various objections. Maximo Cristobal declared that he
issued provincial receipts for the subscriptions supposedly paid to him in 1946;
but none of the supposed receipts was presented. If the subscriptions were
really received by him, big as the amounts were, he would have been able to
tell specifically, by dates and in fixed amounts, when and how the payments
were made. The general assertion of alleged payments, without the concrete
days and amounts of payments, are, according to our experience, positive
indications of untruthfulness, for when a witness testified to a fact that actually
occurs, the act is concretely stated and no generalization is made.
With respect to Maria B. Castros testimony, we find it to be as untruthful as
that of Cristobal. She declared that payments of the subscriptions took place
between July and December, 1946, and that said payments were first
deposited by her in the National City Bank of New York. A study of her account
in said bank (Exhibit 82), however, fails to show the alleged deposit of the
subscriptions during the year 1946 (See Exhibits 83-112). This fact completely
belies her assertion. As to the testimony of C. S. Gonzales that Maria B. Castro
advanced his subscription, there is nothing in the evidence to corroborate it,
and the circumstances show otherwise. If he had really been a stockholder
and Maria B. Castro advanced his subscription, the agreement between him
and Castro should have been put in writing, the amount advanced being quite
considerable (P80,000), and it appearing further that Gonzales is no close
relative or confidant of Castro.
Lastly, it is significant that the plaintiffs, the supposed subscribers, who should
have come to court to assert that they actually paid for their subscriptions, and
are not mere dummies, did not do so. They could not have afforded such a
costly indifference, valued at from P70,000 to P100,000 each, if they were not
actual dummies. This failure on their part to take the witness stand to deny or
refute the charge that they were mere dummies is to us of utmost significance.
What could have been easier to disprove the charge that they were dummies,
than for them to come to court and show their receipts and testify on the
payments they have made on their subscriptions? This they, however, refused
to do. They had it in their power to rebut the charges, but they chose to keep
silent. The non-production of evidence that would naturally have been
produced by an honest and therefore fearless claimant permits the inference
that its tenor is unfavorable to the partys cause (II Wigmore, Sec. 285, p. 162).
A partys silence to adverse testimony is equivalent to an admission of its truth
(Ibid, Sec. 289, p. 175).
Our consideration of the evidence submitted on both sides, leads us to a
conclusion exactly opposite that arrived at by the trial court. In general the
evidence offered by the plaintiffs is testimonial and direct evidence, easy of
fabrication; that offered by defendant, documentary and circumstantial, not
only difficult of fabrication but in most cases found in the possession of
plaintiffs. There is very little room for choice as between the two. The
circumstantial evidence is not only convincing; it is conclusive. The existence
of endorsed certificates, discovered by the internal revenue agents between
1943 and 1949 in the possession of the Secretary-Treasurer, the fact that
twenty-five certificates were signed by the president of the corporation, for no
justifiable reason, the fact that two sets of certificates were issued, the
undisputed fact that Maria B. Castro had made enormous profits and,
therefore, had a motive to hide them to evade the payment of taxes, the fact
that the other subscribers had no incomes of sufficient magnitude to justify
their big subscriptions, the fact that the subscriptions were not receipted for
and deposited by the treasurer in the name of the corporation but were kept
by Maria B. Castro herself, the fact that the stockholders or the directors never
appeared to have ever met to discuss the business of the corporation, the fact
that Maria B. Castro advanced big sums of money to the corporation without
any previous arrangement or accounting, and the fact that the books of
accounts were kept as if they belonged to Maria B. Castro alone these facts
are of patent and potent significance. What are their necessary implications?
Maria B. Castro would not have asked them to endorse their stock certificates,
or be keeping these in her possession, if they were really the owners. They
never would have consented that Maria B. Castro keep the funds without
receipts or accounting, nor that she manages the business without their
knowledge or concurrence, were they owners of the stocks in their own rights.
Each and every one of the facts all set forth above, in the same manner, is
inconsistent with the claim that the stockholders, other than Maria B. Castro,
owned their shares in their own right. On the other hand, each and every one
of them, and all of them, can point to no other conclusion than that Maria B.
Castro was the sole and exclusive owner of the shares and that they were only
her dummies.
In our opinion, the facts and circumstances duly set forth above, all of which
have been proved to our satisfaction, prove conclusively and beyond
reasonable doubt (section 89, Rule 123 of the Rules of Court and section 42
of the Provisional law for the application of the Penal Code) that Maria B.
Castro is the sole and exclusive owner of all the shares of stock of the Marvel
Building Corporation and that the other partners are her dummies.
Wherefore, the judgment appealed from should be, as it hereby is, reversed
and the action filed by plaintiffs-appellees, dismissed, with costs against
plaintiffs-appellees. So ordered.
G.R. No. L-20886 April 27, 1967
NATIONAL MARKETING CORPORATION (NAMARCO), plaintiff-appellant,
vs.
ASSOCIATED FINANCE COMPANY, INC., and FRANCISCO
SYCIP, defendants.
FRANCISCO SYCIP, defendant-appellee.
Tomas P. Matic, Jr,. for plaintiff and appellant.
Francisco Sycip in his behalf as defendant and appellee.
DIZON, J.:
Appeal by the National Marketing Corporation hereinafter referred to as
NAMARCO, from the decision of the Court of First Instance of Manila in Civil
Case No. 45770 ordering the Associated Finance Company, Inc.
hereinafter referred to as the ASSOCIATED to pay the NAMARCO the sum
of P403,514.28, with legal interest thereon from the date of filing of the action
until fully paid, P80,702.26 as liquidated damages, P5,000.00 as attorney's
fees, plus costs, but dismissing the complaint insofar as defendant Francisco
Sycip was concerned, as well as the latter's counterclaim. The appeal is only
from that portion of the decision dismissing the case as against Francisco
Sycip.
On March 25, 1958, ASSOCIATED, a domestic corporation, through its
President, appellee Francisco Sycip, entered into an agreement to exchange
sugar with NAMARCO, represented by its then General Manager, Benjamin
Estrella, whereby the former would deliver to the latter 22,516 bags (each
weighing 100 pounds) of "Victorias" and/or "National" refined sugar in
exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil" raw
sugar belonging to NAMARCO, both agreeing to pay liquidated damages
equivalent to 20% of the contractual value of the sugar should either party fail
to comply with the terms and conditions stipulated (Exhibit A). Pursuant
thereto, on May 19,1958, NAMARCO delivered to ASSOCIATED 7,732.71
bars of "Busilak" and 17,285.08 piculs of "Pasumil" domestic raw sugar. As
ASSOCIATED failed to deliver to NAMARCO the 22,516 bags of "Victoria"
and/or "National" refined sugar agreed upon, the latter, on January 12, 1959,
demanded in writing from the ASSOCIATED either (a) immediate delivery
thereof before January 20, or (b) payment of its equivalent cash value
amounting to P372,639.80.
On January 19, 1959, ASSOCIATED, through Sycip, offered to pay
NAMARCO the value of 22,516 bags of refined sugar at the rate of P15.30 per
bag, but the latter rejected the offer. Instead, on January 21 of the same year
it demanded payment of the 7,732.71 bags of "Busilak" raw sugar at P15.30
per bag, amounting to P118,310.40. and of the 17,285.08 piculs of "Pasumil"
raw sugar at P16.50 per picul, amounting, to P285.203.82, or a total price of
P403,514.28 for both kinds of sugar, based on the sugar quotations (Exh. H)
as of March 20, 1958 the date when the exchange agreement was entered
into.
As ASSOCIATED refused to deliver the raw sugar or pay for the refined sugar
delivered to it, inspite of repeated demands therefore, NAMARCO instituted
the present action in the lower court to recover the sum of P403,514.28 in
payment of the raw sugar received by defendants from it; P80,702.86 as
liquidated damages; P10,000.00 as attorney's fees, expenses of litigation and
exemplary damages, with legal interest thereon from the filing of the complaint
until fully paid.
In their amended answer defendants, by way of affirmative defenses, alleged
that the correct value of the sugar delivered by NAMARCO to them was
P259,451.09 or P13.30 per bag of 100 lbs. weight (quedan basis) and not
P403,514.38 as claimed by NAMARCO. As counterclaim they prayed for the
award of P500,000.00 as moral damages, P100,000.00 as exemplary
damages and P10,000.00 as attorney's fees.
After due trial court rendered the appealed judgment. The appeal was taken
to the Court of Appeals, but on January 15, 1963 the latter certified the case
to us for final adjudication pursuant to sections 17 and 31 of the Judiciary Act
of 1948, as amended, the amount involved being more than P200,000.00,
exclusive of interests and cost.
The only issue to be resolved is whether, upon the facts found by the trial
court, which, in our opinion, are fully supported by the evidence
Francisco Sycip may be held liable, jointly and severally with his co-defendant,
for the sums of money adjudged in favor of NAMARCO.
The evidence of record shows that, of the capital stock of ASSOCIATED, Sycip
owned P60,000.00 worth of shares, while his wife the second biggest
stockholder owned P20,000.00 worth of shares; that the par value of the
subscribed capital stock of ASSOCIATED was only P105,000.00; that
negotiations that lead to the execution of the exchange agreement in question
were conducted exclusively by Sycip on behalf of ASSOCIATED; that, as a
matter of fact, in the course of his testimony, Sycip referred to himself as the
one who contracted or transacted the business in his personal capacity, and
asserted that the exchange agreement was his personal contract; that it was
Sycip who made personal representations and gave assurances that
ASSOCIATED was in actual possession of the 22,516 bags of "Victorias"
and/or "National" refined sugar which the latter had agreed to deliver to
NAMARCO, and that the same was ready for delivery; that, as a matter of fact,
ASSOCIATED was at that time already insolvent; that when NAMARCO made
demands upon ASSOCIATED to deliver the 22,516 bags of refined sugar it
was under obligation to deliver to the former, ASSOCIATED and Sycip, instead
of making delivery of the sugar, offered to pay its value at the rate of P15.30
per bag a clear indication that they did not have the sugar contracted
for.1wph1.t
The foregoing facts, fully established by the evidence, can lead to no other
conclusion than that Sycip was guilty of fraud because through false
representations he succeeded in inducing NAMARCO to enter into the
aforesaid exchange agreement, with full knowledge, on his part, on the fact
that ASSOCIATED whom he represented and over whose business and
affairs he had absolute control, was in no position to comply with the obligation
it had assumed. Consequently, he can not now seek refuge behind the general
principle that a corporation has a personality distinct and separate from that of
its stockholders and that the latter are not personally liable for the corporate
obligations. To the contrary, upon the proven facts, We feel perfectly justified
in "piercing the veil of corporate fiction" and in holding Sycip personally liable,
jointly and severally with his co-defendant, for the sums of money adjudged in
favor of appellant. It is settled law in this and other jurisdictions that when the
corporation is the mere alter ego of a person, the corporate fiction may be
disregarded; the same being true when the corporation is controlled, and its
affairs are so conducted as to make it merely an instrumentality, agency or
conduit of another (Koppel Phils., etc. vs. Yatco, etc., 43 O.G. No. 11. Nov.
1947; Yutivo Sons, etc. vs. Court of Tax Appeals, etc., G.R. No. L-13203,
promulgated on January 28, 1961).
Wherefore, the decision appealed from is modified by sentencing defendant-
appellee Francisco Sycip to pay, jointly and severally with the Associated
Finance Company, Inc., the sum of money which the trial court sentenced the
latter to pay to the National Marketing Corporation, as follows: the sum of
FOUR HUNDRED THREE THOUSAND FIVE HUNDRED FOURTEEN
PESOS, and TWENTY-EIGHT CENTAVOS P403,514.28), with interest at the
legal rate from the date of the filing of the action until fully paid plus an
additional amount of EIGHTY THOUSAND SEVEN HUNDRED TWO PESOS
and EIGHTY-SIX CENTAVOS (P80,702.86) as liquidated damages and
P5,000.00 as attorney's fees and further to pay the costs. With costs.
G.R. No. 96490 February 3, 1992
INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO, petitioner,
vs.
VOLUNTARY ARBITRATOR TEODORICO P. CALICA and INDOPHIL
TEXTILE MILLS, INC., respondents.
Romeo C. Lagman for petitioner.
Borreta, Gutierrez & Leogardo for respondent Indophil Textile Mills, Inc.
MEDIALDEA, J.:
This is a petition for certiorari seeking the nullification of the award issued by
the respondent Voluntary Arbitrator Teodorico P. Calica dated December 8,
1990 finding that Section 1 (c), Article I of the Collective Bargaining Agreement
between Indophil Textile Mills, Inc. and Indophil Textile Mill Workers Union-
PTGWO does not extend to the employees of Indophil Acrylic Manufacturing
Corporation as an extension or expansion of Indophil Textile Mills,
Incorporated.
The antecedent facts are as follows:
Petitioner Indophil Textile Mill Workers Union-PTGWO is a legitimate labor
organization duly registered with the Department of Labor and Employment
and the exclusive bargaining agent of all the rank-and-file employees of
Indophil Textile Mills, Incorporated. Respondent Teodorico P. Calica is
impleaded in his official capacity as the Voluntary Arbitrator of the National
Conciliation and Mediation Board of the Department of Labor and
Employment, while private respondent Indophil Textile Mills, Inc. is a
corporation engaged in the manufacture, sale and export of yarns of various
counts and kinds and of materials of kindred character and has its plants at
Barrio Lambakin. Marilao, Bulacan.
In April, 1987, petitioner Indophil Textile Mill Workers Union-PTGWO and
private respondent Indophil Textile Mills, Inc. executed a collective bargaining
agreement effective from April 1, 1987 to March 31, 1990.
On November 3, 1967 Indophil Acrylic Manufacturing Corporation was formed
and registered with the Securities and Exchange Commission. Subsequently,
Acrylic applied for registration with the Board of Investments for incentives
under the 1987 Omnibus Investments Code. The application was approved on
a preferred non-pioneer status.
In 1988, Acrylic became operational and hired workers according to its own
criteria and standards. Sometime in July, 1989, the workers of Acrylic
unionized and a duly certified collective bargaining agreement was executed.
In 1990 or a year after the workers of Acrylic have been unionized and a CBA
executed, the petitioner union claimed that the plant facilities built and set up
by Acrylic should be considered as an extension or expansion of the facilities
of private respondent Company pursuant to Section 1(c), Article I of the CBA,
to wit,.
c) This Agreement shall apply to the Company's plant facilities and
installations and to any extension and expansion thereat. (Rollo, p.4)
In other words, it is the petitioner's contention that Acrylic is part of the Indophil
bargaining unit.
The petitioner's contention was opposed by private respondent which submits
that it is a juridical entity separate and distinct from Acrylic.
The existing impasse led the petitioner and private respondent to enter into a
submission agreement on September 6, 1990. The parties jointly requested
the public respondent to act as voluntary arbitrator in the resolution of the
pending labor dispute pertaining to the proper interpretation of the CBA
provision.
After the parties submitted their respective position papers and replies, the
public respondent Voluntary Arbitrator rendered its award on December 8,
1990, the dispositive portion of which provides as follows:
PREMISES CONSIDERED, it would be a strained interpretation and
application of the questioned CBA provision if we would extend to the
employees of Acrylic the coverage clause of Indophil Textile Mills CBA.
Wherefore, an award is made to the effect that the proper interpretation and
application of Sec. l, (c), Art. I, of the 1987 CBA do (sic) not extend to the
employees of Acrylic as an extension or expansion of Indophil Textile Mills,
Inc. (Rollo, p.21)
Hence, this petition raising four (4) issues, to wit:
1. WHETHER OR NOT THE RESPONDENT ARBITRATOR ERRED IN
INTERPRETING SECTION 1(c), ART I OF THE CBA BETWEEN
PETITIONER UNION AND RESPONDENT COMPANY.
2. WHETHER OR NOT INDOPHIL ACRYLIC IS A SEPARATE AND
DISTINCT ENTITY FROM RESPONDENT COMPANY FOR PURPOSES OF
UNION REPRESENTATION.
3. WHETHER OR NOT THE RESPONDENT ARBITRATOR GRAVELY
ABUSED HIS DISCRETION AMOUNTING TO LACK OR IN EXCESS OF HIS
JURISDICTION.
4. WHETHER OR NOT THE RESPONDENT ARBITRATOR VIOLATED
PETITIONER UNION'S CARDINAL PRIMARY RIGHT TO DUE PROCESS.
(Rollo, pp. 6-7)
The central issue submitted for arbitration is whether or not the operations in
Indophil Acrylic Corporation are an extension or expansion of private
respondent Company. Corollary to the aforementioned issue is the question
of whether or not the rank-and-file employees working at Indophil Acrylic
should be recognized as part of, and/or within the scope of the bargaining unit.
Petitioner maintains that public respondent Arbitrator gravely erred in
interpreting Section l(c), Article I of the CBA in its literal meaning without taking
cognizance of the facts adduced that the creation of the aforesaid Indophil
Acrylic is but a devise of respondent Company to evade the application of the
CBA between petitioner Union and respondent Company.
Petitioner stresses that the articles of incorporation of the two corporations
establish that the two entities are engaged in the same kind of business, which
is the manufacture and sale of yarns of various counts and kinds and of other
materials of kindred character or nature.
Contrary to petitioner's assertion, the public respondent through the Solicitor
General argues that the Indophil Acrylic Manufacturing Corporation is not an
alter ego or an adjunct or business conduit of private respondent because it
has a separate legitimate business purpose. In addition, the Solicitor General
alleges that the primary purpose of private respondent is to engage in the
business of manufacturing yarns of various counts and kinds and textiles. On
the other hand, the primary purpose of Indophil Acrylic is to manufacture, buy,
sell at wholesale basis, barter, import, export and otherwise deal in yarns of
various counts and kinds. Hence, unlike private respondent, Indophil Acrylic
cannot manufacture textiles while private respondent cannot buy or import
yarns.
Furthermore, petitioner emphasizes that the two corporations have practically
the same incorporators, directors and officers. In fact, of the total stock
subscription of Indophil Acrylic, P1,749,970.00 which represents seventy
percent (70%) of the total subscription of P2,500,000.00 was subscribed to by
respondent Company.
On this point, private respondent cited the case of Diatagon Labor Federation
v. Ople, G.R. No. L-44493-94, December 3, 1980, 10l SCRA 534, which ruled
that two corporations cannot be treated as a single bargaining unit even if their
businesses are related. It submits that the fact that there are as many
bargaining units as there are companies in a conglomeration of companies is
a positive proof that a corporation is endowed with a legal personality distinctly
its own, independent and separate from other corporations (see Rollo, pp.
160-161).
Petitioner notes that the foregoing evidence sufficiently establish that Acrylic
is but an extension or expansion of private respondent, to wit:
(a) the two corporations have their physical plants, offices and facilities
situated in the same compound, at Barrio Lambakin, Marilao, Bulacan;
(b) many of private respondent's own machineries, such as dyeing machines,
reeling, boiler, Kamitsus among others, were transferred to and are now
installed and being used in the Acrylic plant;
(c) the services of a number of units, departments or sections of private
respondent are provided to Acrylic; and
(d) the employees of private respondent are the same persons manning and
servicing the units of Acrylic. (see Rollo, pp. 12-13)
Private respondent insists that the existence of a bonafide business
relationship between Acrylic and private respondent is not a proof of being a
single corporate entity because the services which are supposedly provided
by it to Acrylic are auxiliary services or activities which are not really essential
in the actual production of Acrylic. It also pointed out that the essential services
are discharged exclusively by Acrylic personnel under the control and
supervision of Acrylic managers and supervisors.
In sum, petitioner insists that the public respondent committed grave abuse of
discretion amounting to lack or in excess of jurisdiction in erroneously
interpreting the CBA provision and in failing to disregard the corporate entity
of Acrylic.
We find the petition devoid of merit.
Time and again, We stress that the decisions of voluntary arbitrators are to be
given the highest respect and a certain measure of finality, but this is not a
hard and fast rule, it does not preclude judicial review thereof where want of
jurisdiction, grave abuse of discretion, violation of due process, denial of
substantial justice, or erroneous interpretation of the law were brought to our
attention. (see Ocampo, et al. v. National Labor Relations Commission, G.R.
No. 81677, 25 July 1990, First Division Minute Resolution citing Oceanic Bic
Division (FFW) v. Romero, G.R. No. L-43890, July 16, 1984, 130 SCRA 392)
It should be emphasized that in rendering the subject arbitral award, the
voluntary arbitrator Teodorico Calica, a professor of the U.P. Asian Labor
Education Center, now the Institute for Industrial Relations, found that the
existing law and jurisprudence on the matter, supported the private
respondent's contentions. Contrary to petitioner's assertion, public respondent
cited facts and the law upon which he based the award. Hence, public
respondent did not abuse his discretion.
Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exist, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be
disregarded. In such cases, the corporation will be considered as a mere
association of persons. The members or stockholders of the corporation will
be considered as the corporation, that is liability will attach directly to the
officers and stockholders. The doctrine applies when the 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. (Umali et al. v. Court of Appeals, G.R. No. 89561, September 13,
1990, 189 SCRA 529, 542)
In the case at bar, petitioner seeks to pierce the veil of corporate entity of
Acrylic, alleging that the creation of the corporation is a devise to evade the
application of the CBA between petitioner Union and private respondent
Company. While we do not discount the possibility of the similarities of the
businesses of private respondent and Acrylic, neither are we inclined to apply
the doctrine invoked by petitioner in granting the relief sought. The fact that
the businesses of private respondent and Acrylic are related, that some of the
employees of the private respondent are the same persons manning and
providing for auxilliary services to the units of Acrylic, and that the physical
plants, offices and facilities are situated in the same compound, it is our
considered opinion that these facts are not sufficient to justify the piercing of
the corporate veil of Acrylic.
In the same case of Umali, et al. v. Court of Appeals (supra), We already
emphasized that "the legal corporate entity is disregarded only if it is sought
to hold the officers and stockholders directly liable for a corporate debt or
obligation." In the instant case, petitioner does not seek to impose a claim
against the members of the Acrylic.
Furthermore, We already ruled in the case of Diatagon Labor Federation Local
110 of the ULGWP v. Ople (supra) that it is grave abuse of discretion to treat
two companies as a single bargaining unit when these companies are
indubitably distinct entities with separate juridical personalities.
Hence, the Acrylic not being an extension or expansion of private respondent,
the rank-and-file employees working at Acrylic should not be recognized as
part of, and/or within the scope of the petitioner, as the bargaining
representative of private respondent.
All premises considered, the Court is convinced that the public respondent
Voluntary Arbitrator did not commit grave abuse of discretion in its
interpretation of Section l(c), Article I of the CBA that the Acrylic is not an
extension or expansion of private respondent.
ACCORDINGLY, the petition is DENIED and the award of the respondent
Voluntary Arbitrator are hereby AFFIRMED.
SO ORDERED.
CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR
RELATIONS COMMISSION, (First Division); and Norberto Marabe,
Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos,
Pedro Aboigar, Norberto Comendador, Rogello Salut, Emilio Garcia, Jr.,
Mariano Rio, Paulina Basea, Aifredo Albera, Paquito Salut, Domingo
Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino
Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents.
DECISION
HERMOSISIMA, JR., J.:
The corporate mask may be lifted and the corporate veil may be pierced when
a corporation is just but the alter ego of a person or of another corporation.
Where badges of fraud exist; where public convenience is defeated; where a
wrong is sought to be justified thereby, the corporate fiction or the notion of
legal entity should come to naught. The law in these instances will regard the
corporation as a mere association of persons and, in case of two corporations,
merge them into one.
Thus, where a sister corporation is used as a shield to evade a corporations
subsidiary liability for damages, the corporation may not be heard to say that
it has a personality separate and distinct from the other corporation. The
piercing of the corporate veil comes into play.
This special civil action ostensibly raises the question of whether the National
Labor Relations Commission committed grave abuse of discretion when it
issued a break-open order to the sheriff to be enforced against personal
property found in the premises of petitioners sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office
at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the
construction business. Private respondents were employed by said company
as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written
notices of termination of employment by petitioner, effective on November 30,
1981. It was stated in the individual notices that their contracts of employment
had expired and the project in which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the
termination of private respondents employment, the project in which they were
hired had not yet been finished and completed. Petitioner had to engage the
services of sub-contractors whose workers performed the functions of private
respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair
labor practice and non-payment of their legal holiday pay, overtime pay and
thirteenth-month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment1 ordering
petitioner to reinstate private respondents and to pay them back wages
equivalent to one year or three hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC)
dismissed the motion for reconsideration filed by petitioner on the ground that
the said decision had already become final and executory.2
On October 16, 1986, the NLRC Research and Information Department made
the finding that private respondents backwages amounted to P199,800.00.3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the
sheriff to execute the Decision, dated December 19, 1984. The writ was
partially satisfied through garnishment of sums from petitioners debtor, the
Metropolitan Waterworks and Sewerage Authority, in the amount of
P81,385.34. Said amount was turned over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor
Arbiter directing the sheriff to collect from herein petitioner the sum of
P117,414.76, representing the balance of the judgment award, and to
reinstate private respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the
alias writ of execution on petitioner through the security guard on duty but the
service was refused on the ground that petitioner no longer occupied the
premises.
On September 26, 1986, upon motion of private respondents, the Labor
Arbiter issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated
in his progress report, dated November 2, 1989:
1. All the employees inside petitioners premises at 355 Maysan Road,
Valenzuela, Metro Manila, claimed that they were employees of Hydro Pipes
Philippines, Inc. (HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the
properties he had levied upon.4
The said special sheriff recommended that a break-open order be issued to
enable him to enter petitioners premises so that he could proceed with the
public auction sale of the aforesaid personal properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim Antonio W. Lim Chairman
with the Labor Arbiter alleging that the properties sought to be levied upon by
the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice- Elisa C. Lim Member
President.
Dennis S. Cuyegkeng Member
On November 23, 1989, private respondents filed a Motion for Issuance of a
Virgilio O. Casino Member
Break-Open Order, alleging that HPPI and petitioner corporation were owned
by the same incorporator! stockholders. They also alleged that petitioner Teodulo R. Dino Member
temporarily suspended its business operations in order to evade its legal
obligations to them and that private respondents were willing to post an 3. Corporate Officers
indemnity bond to answer for any damages which petitioner and HPPI may
Antonio W. Lim President
suffer because of the issuance of the break-open order.
Dennis S. Cuyegkeng Assistant to the President
In support of their claim against HPPI, private respondents presented duly
certified copies of the General Informations Sheet, dated May 15, 1987, Elisa O. Lim Treasurer
submitted by petitioner to the Securities and Exchange Commission (SEC)
and the General Information Sheet, dated May 15, 1987, submitted by HPPI Virgilio O. Casino Corporate Secretary
to the Securities and Exchange Commission.
4. Principal Office
The General Information Sheet submitted by the petitioner1 revealed the
following: 355 Maysan Road, Valenzuela, Metro Manila.6

1. Breakdown of Subscribed Capital On February 1, 1990, HPPI filed an Opposition to private respondents motion
for issuance of a break-open order, contending that HPPI is a corporation
Name of Stockholder Amount Subscribed which is separate and distinct from petitioner. HPPI also alleged that the two
corporations are engaged in two different kinds of businesses, i.e., HPPI is a
HPPI P6,999,500.00 manufacturing firm while petitioner was then engaged in construction.
Antonio W. Lim 2,900,000.00 On March 2, 1990, the Labor Arbiter issued an Order which denied private
respondents motion for break-open order.
Dennis S. Cuyegkeng 300.00
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC
Elisa C. Lim 100,000.00
set aside the order of the Labor Arbiter, issued a break-open order and
Teodulo R. Dino 100.00 directed private respondents to file a bond. Thereafter, it directed the sheriff to
proceed with the auction sale of the properties already levied upon. It
Virgilio O. Casino 100.00 dismissed the third-party claim for lack of merit.
2. Board of Directors Petitioner moved for reconsideration but the motion was denied by the NLRC
in a Resolution, dated December 3, 1992.
Antonio W. Lim Chairman
Hence, the resort to the present petition.
Dennis S. Cuyegkeng Member
Petitioner alleges that the NLRC committed grave abuse of discretion when it
Elisa C. Lim Member
ordered the execution of its decision despite a third-party claim on the levied
Teodulo R. Dino Member property. Petitioner further contends, that the doctrine of piercing the corporate
veil should not have been applied, in this case, in the absence of any showing
Virgilio O. Casino Member that it created HPPI in order to evade its liability to private respondents. It also
contends that HPPI is engaged in the manufacture and sale of steel, concrete
3. Corporate Officers and iron pipes, a business which is distinct and separate from petitioners
construction business. Hence, it is of no consequence that petitioner and HPPI
Antonio W. Lim President
shared the same premises, the same President and the same set of officers
Dennis S. Cuyegkeng Assistant to the President and subscribers.7

Elisa 0. Lim Treasurer We find petitioners contention to be unmeritorious.

Virgilio O. Casino Corporate Secretary It is a fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to
4. Principal Office which it may be connected.8 But, this separate and distinct personality of a
corporation is merely a fiction created by law for convenience and to promote
355 Maysan Road
justice.9 So, when the notion of separate juridical personality is used to defeat
Valenzuela, Metro Manila.5 public convenience, justify wrong, protect fraud or defend crime, or is used as
a device to defeat the labor laws,10 this separate personality of the corporation
On the other hand, the General Information Sheet of HPPI revealed the may be disregarded or the veil of corporate fiction pierced.11 This is true
following: likewise when the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation.12
1. Breakdown of Subscribed Capital
The conditions under which the juridical entity may be disregarded vary
Name of Stockholder Amount Subscribed according to the peculiar facts and circumstances of each case. No hard and
fast rule can be accurately laid down, but certainly, there are some probative
Antonio W. Lim P400,000.00
factors of identity that will justify the application of the doctrine of piercing the
Elisa C. Lim 57,700.00 corporate veil, to wit:

AWL Trading 455,000.00 1. Stock ownership by one or common ownership of both corporations.

Dennis S. Cuyegkeng 40,100.00 2. Identity of directors and officers.

Teodulo R. Dino 100.00 3. The manner of keeping corporate books and records.

Virgilio O. Casino 100.00 4. Methods of conducting the business.13

2. Board of Directors
The SEC en banc explained the instrumentality rule which the courts have
applied in disregarding the separate juridical personality of corporations as
follows:
Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the instrumentality may be
disregarded. The control necessary to invoke the rule is not majority or even
complete stock control but such domination of finances, policies and practices
that the controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. It must be kept in
mind that the control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.
The absence of any one of these elements prevents piercing the corporate
veil. in applying the instrumentality or alter ego doctrine, the courts are
concerned with reality and not form, with how the corporation operated and
the individual defendants relationship to that operation. 14
Thus, the question of whether a corporation is a mere alter ego, a mere sheet
or paper corporation, a sham or a subterfuge is purely one of fact.15
In this case, the NLRC noted that, while petitioner claimed that it ceased its
business operations on April 29, 1986, it filed an Information Sheet with the
Securities and Exchange Commission on May 15, 1987, stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand,
HPPI, the third-party claimant, submitted on the same day, a similar
information sheet stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casino as the
corporate secretary of both corporations. It would also not be amiss to note
that both corporations had the same president, the same board of directors,
the same corporate officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent
(herein petitioner) and the third-party claimant shared the same address
and/or premises. Under this circumstances, (sic) it cannot be said that the
property levied upon by the sheriff were not of respondents.16
Clearly, petitioner ceased its business operations in order to evade the
payment to private respondents of backwages and to bar their reinstatement
to their former positions. HPPI is obviously a business conduit of petitioner
corporation and its emergence was skillfully orchestrated to avoid the financial
liability that already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial
Relations17 where we had the occasion to rule:
Respondent courts findings that indeed the Claparols Steel and Nail Plant,
which ceased operation of June 30, 1957, was SUCCEEDED by the Claparols
Steel Corporation effective the next day, July 1, 1957, up to December 7, 1962,
when the latter finally ceased to operate, were not disputed by petitioner. it is
very clear that the latter corporation was a continuation and successor of the
first entity x x x. Both predecessors and successor were owned and controlled
by petitioner Eduardo Claparols and there was no break in the succession and
continuity of the same business. This avoiding-the-liability scheme is very
patent, considering that 90% of the subscribed shares of stock of the Claparols
Steel Corporation (the second corporation) was owned by respondent x x x
Claparols himself, and all the assets of the dissolved Claparols Steel and Nail
Plant were turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced
as it was deliberately and maliciously designed to evade its financial obligation
to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the
property subject of the execution, private respondents had no other recourse
but to apply for a break-open order after the third-party claim of HPPI was
dismissed for lack of merit by the NLRC. This is in consonance with Section 3,
Rule VII of the NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the
Sheriff or his representative entry to the place where the property subject of
execution is located or kept, the judgment creditor may apply to the
Commission or Labor Arbiter concerned for a break-open order.
Furthermore, our perusal of the records shows that the twin requirements of
due notice and hearing were complied with. Petitioner and the third-party
claimant were given the opportunity to submit evidence in support of their
claim.
Hence, the NLRC did not commit any grave abuse of discretion when it
affirmed the break-open order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of
quasi-judicial agencies supported by substantial evidence are binding on this
Court and are entitled to great respect, in the absence of showing of grave
abuse of a discretion.18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the
NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED.
SO ORDERED.
Padilla (Chairman), Bellosillo, Vitug, and Kapunan, JJ., concur.
G.R. No. L-23893 October 29, 1968
VILLA REY TRANSIT, INC., plaintiff-appellant,
vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and
PUBLIC SERVICE COMMISSION,defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO.,
INC., defendants-appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,
vs.
JOSE M. VILLARAMA, third-party defendant-appellee.
ANGELES, J.:
This is a tri-party appeal from the decision of the Court of First Instance of
Manila, Civil Case No. 41845, declaring null and void the sheriff's sale
of two certificates of public convenience in favor of defendant Eusebio E.
Ferrer and the subsequent sale thereof by the latter to defendant Pangasinan
Transportation Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the
lawful owner of the said certificates of public convenience; and ordering the
private defendants, jointly and severally, to pay to the plaintiff, the sum of
P5,000.00 as and for attorney's fees. The case against the PSC was
dismissed.
The rather ramified circumstances of the instant case can best be understood
by a chronological narration of the essential facts, to wit:
Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under
the business name of Villa Rey Transit, pursuant to certificates of public
convenience granted him by the Public Service Commission (PSC, for short)
in Cases Nos. 44213 and 104651, which authorized him to operate a total of
thirty-two (32) units on various routes or lines from Pangasinan to Manila, and
vice-versa. On January 8, 1959, he sold the aforementioned two certificates
of public convenience to the Pangasinan Transportation Company, Inc.
(otherwise known as Pantranco), for P350,000.00 with the condition, among
others, that the seller (Villarama) "shall not for a period of 10 years from the
date of this sale, apply for any TPU service identical or competing with the
buyer."
Barely three months thereafter, or on March 6, 1959: a corporation called Villa
Rey Transit, Inc. (which shall be referred to hereafter as the Corporation) was
organized with a capital stock of P500,000.00 divided into 5,000 shares of the
par value of P100.00 each; P200,000.00 was the subscribed stock; Natividad
R. Villarama (wife of Jose M. Villarama) was one of the incorporators, and she
subscribed for P1,000.00; the balance of P199,000.00 was subscribed by the
brother and sister-in-law of Jose M. Villarama; of the subscribed capital stock,
P105,000.00 was paid to the treasurer of the corporation, who was Natividad
R. Villarama.
In less than a month after its registration with the Securities and Exchange
Commission (March 10, 1959), the Corporation, on April 7, 1959,
bought five certificates of public convenience, forty-nine buses, tools and
equipment from one Valentin Fernando, for the sum of P249,000.00, of which
P100,000.00 was paid upon the signing of the contract; P50,000.00 was
payable upon the final approval of the sale by the PSC; P49,500.00 one year
after the final approval of the sale; and the balance of P50,000.00 "shall be
paid by the BUYER to the different suppliers of the SELLER."
The very same day that the aforementioned contract of sale was executed,
the parties thereto immediately applied with the PSC for its approval, with a
prayer for the issuance of a provisional authority in favor of the vendee
Corporation to operate the service therein involved.1 On May 19, 1959, the
PSC granted the provisional permit prayed for, upon the condition that "it may
be modified or revoked by the Commission at any time, shall be subject to
whatever action that may be taken on the basic application and shall be valid
only during the pendency of said application." Before the PSC could take final
action on said application for approval of sale, however, the Sheriff of Manila,
on July 7, 1959, levied on two of the five certificates of public
convenience involved therein, namely, those issued under PSC cases Nos.
59494 and 63780, pursuant to a writ of execution issued by the Court of First
Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio Ferrer,
plaintiff, judgment creditor, against Valentin Fernando, defendant, judgment
debtor. The Sheriff made and entered the levy in the records of the PSC. On
July 16, 1959, a public sale was conducted by the Sheriff of the
said two certificates of public convenience. Ferrer was the highest bidder, and
a certificate of sale was issued in his name.
Thereafter, Ferrer sold the two certificates of public convenience to Pantranco,
and jointly submitted for approval their corresponding contract of sale to the
PSC.2 Pantranco therein prayed that it be authorized provisionally to operate
the service involved in the said two certificates.
The applications for approval of sale, filed before the PSC, by Fernando and
the Corporation, Case No. 124057, and that of Ferrer and Pantranco, Case
No. 126278, were scheduled for a joint hearing. In the meantime, to wit, on
July 22, 1959, the PSC issued an order disposing that during the pendency of
the cases and before a final resolution on the aforesaid applications, the
Pantranco shall be the one to operate provisionally the service under
the twocertificates embraced in the contract between Ferrer and Pantranco.
The Corporation took issue with this particular ruling of the PSC and elevated
the matter to the Supreme Court,3 which decreed, after deliberation, that until
the issue on the ownership of the disputed certificates shall have been finally
settled by the proper court, the Corporation should be the one to operate the
lines provisionally.
On November 4, 1959, the Corporation filed in the Court of First Instance of
Manila, a complaint for the annulment of the sheriff's sale of the
aforesaid two certificates of public convenience (PSC Cases Nos. 59494 and
63780) in favor of the defendant Ferrer, and the subsequent sale thereof by
the latter to Pantranco, against Ferrer, Pantranco and the PSC. The plaintiff
Corporation prayed therein that all the orders of the PSC relative to the parties'
dispute over the said certificates be annulled.
In separate answers, the defendants Ferrer and Pantranco averred that the
plaintiff Corporation had no valid title to the certificates in question because
the contract pursuant to which it acquired them from Fernando was subject to
a suspensive condition the approval of the PSC which has not yet been
fulfilled, and, therefore, the Sheriff's levy and the consequent sale at public
auction of the certificates referred to, as well as the sale of the same by Ferrer
to Pantranco, were valid and regular, and vested unto Pantranco, a superior
right thereto.
Pantranco, on its part, filed a third-party complaint against Jose M. Villarama,
alleging that Villarama and the Corporation, are one and the same; that
Villarama and/or the Corporation was disqualified from operating the two
certificates in question by virtue of the aforementioned agreement between
said Villarama and Pantranco, which stipulated that Villarama "shall not for a
period of 10 years from the date of this sale, apply for any TPU service
identical or competing with the buyer."
Upon the joinder of the issues in both the complaint and third-party complaint,
the case was tried, and thereafter decision was rendered in the terms, as
above stated.
As stated at the beginning, all the parties involved have appealed from the
decision. They submitted a joint record on appeal.
Pantranco disputes the correctness of the decision insofar as it holds that Villa
Rey Transit, Inc. (Corporation) is a distinct and separate entity from Jose M.
Villarama; that the restriction clause in the contract of January 8, 1959
between Pantranco and Villarama is null and void; that the Sheriff's sale of
July 16, 1959, is likewise null and void; and the failure to award damages in
its favor and against Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's
sale is null and void; and the sale of the two certificates in question by Valentin
Fernando to the Corporation, is valid. He also assails the award of P5,000.00
as attorney's fees in favor of the Corporation, and the failure to award moral
damages to him as prayed for in his counterclaim.
The Corporation, on the other hand, prays for a review of that portion of the
decision awarding only P5,000.00 as attorney's fees, and insisting that it is
entitled to an award of P100,000.00 by way of exemplary damages.
After a careful study of the facts obtaining in the case, the vital issues to be
resolved are: (1) Does the stipulation between Villarama and Pantranco, as
contained in the deed of sale, that the former "SHALL NOT FOR A PERIOD
OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU
SERVICE IDENTICAL OR COMPETING WITH THE BUYER," apply to new
lines only or does it include existing lines?; (2) Assuming that said stipulation
covers all kinds of lines, is such stipulation valid and enforceable?; (3) In the
affirmative, that said stipulation is valid, did it bind the Corporation?
For convenience, We propose to discuss the foregoing issues by starting with
the last proposition.
The evidence has disclosed that Villarama, albeit was not an incorporator or
stockholder of the Corporation, alleging that he did not become such, because
he did not have sufficient funds to invest, his wife, however, was an
incorporator with the least subscribed number of shares, and was elected
treasurer of the Corporation. The finances of the Corporation which, under all
concepts in the law, are supposed to be under the control and administration
of the treasurer keeping them as trust fund for the Corporation, were,
nonetheless, manipulated and disbursed as if they were the private funds of
Villarama, in such a way and extent that Villarama appeared to be the actual
owner-treasurer of the business without regard to the rights of the
stockholders. The following testimony of Villarama,4together with the other
evidence on record, attests to that effect:
Q. Doctor, I want to go back again to the incorporation of the Villa Rey
Transit, Inc. You heard the testimony presented here by the bank regarding
the initial opening deposit of ONE HUNDRED FIVE THOUSAND PESOS, of
which amount Eighty-Five Thousand Pesos was a check drawn by yourself
personally. In the direct examination you told the Court that the reason you
drew a check for Eighty-Five Thousand Pesos was because you and your wife,
or your wife, had spent the money of the stockholders given to her for
incorporation. Will you please tell the Honorable Court if you knew at the time
your wife was spending the money to pay debts, you personally knew she was
spending the money of the incorporators?
A. You know my money and my wife's money are one. We never talk about
those things.
Q. Doctor, your answer then is that since your money and your wife's
money are one money and you did not know when your wife was paying debts
with the incorporator's money?
A. Because sometimes she uses my money, and sometimes the money
given to her she gives to me and I deposit the money.
Q. Actually, aside from your wife, you were also the custodian of some of
the incorporators here, in the beginning?
A. Not necessarily, they give to my wife and when my wife hands to me I
did not know it belonged to the incorporators.
Q. It supposes then your wife gives you some of the money received by
her in her capacity as treasurer of the corporation?
A. Maybe.
Q. What did you do with the money, deposit in a regular account?
A. Deposit in my account.
Q. Of all the money given to your wife, she did not receive any check?
A. I do not remember.
Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos without
even asking what is this?
xxx xxx xxx
JUDGE: Reform the question.
Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two
Thousand Pesos, did your wife give you Fifty-two Thousand Pesos?
A. I have testified before that sometimes my wife gives me money and I
do not know exactly for what.
The evidence further shows that the initial cash capitalization of the
corporation of P105,000.00 was mostly financed by Villarama. Of the
P105,000.00 deposited in the First National City Bank of New York,
representing the initial paid-up capital of the Corporation, P85,000.00 was
covered by Villarama's personal check. The deposit slip for the said amount
of P105,000.00 was admitted in evidence as Exh. 23, which shows on its face
that P20,000.00 was paid in cash and P85,000.00 thereof was covered by
Check No. F-50271 of the First National City Bank of New York. The
testimonies of Alfonso Sancho5 and Joaquin Amansec,6 both employees of
said bank, have proved that the drawer of the check was Jose Villarama
himself.
Another witness, Celso Rivera, accountant of the Corporation, testified that
while in the books of the corporation there appears an entry that the treasurer
received P95,000.00 as second installment of the paid-in subscriptions, and,
subsequently, also P100,000.00 as the first installment of the offer for second
subscriptions worth P200,000.00 from the original subscribers, yet Villarama
directed him (Rivera) to make vouchers liquidating the sums.7 Thus, it was
made to appear that the P95,000.00 was delivered to Villarama in payment for
equipment purchased from him, and the P100,000.00 was loaned as
advances to the stockholders. The said accountant, however, testified that he
was not aware of any amount of money that had actually passed hands among
the parties involved,8 and actually the only money of the corporation was the
P105,000.00 covered by the deposit slip Exh. 23, of which as mentioned
above, P85,000.00 was paid by Villarama's personal check.
Further, the evidence shows that when the Corporation was in its initial months
of operation, Villarama purchased and paid with his personal checks Ford
trucks for the Corporation. Exhibits 20 and 21 disclose that the said purchases
were paid by Philippine Bank of Commerce Checks Nos. 992618-B and
993621-B, respectively. These checks have been sufficiently established by
Fausto Abad, Assistant Accountant of Manila Trading & Supply Co., from
which the trucks were purchased9 and Aristedes Solano, an employee of the
Philippine Bank of Commerce,10as having been drawn by Villarama.
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries
and vouchers showing that Villarama had co-mingled his personal funds and
transactions with those made in the name of the Corporation, are very
illuminating evidence. Villarama has assailed the admissibility of these
exhibits, contending that no evidentiary value whatsoever should be given to
them since "they were merely photostatic copies of the originals, the best
evidence being the originals themselves." According to him, at the time
Pantranco offered the said exhibits, it was the most likely possessor of the
originals thereof because they were stolen from the files of the Corporation
and only Pantranco was able to produce the alleged photostat copies thereof.
Section 5 of Rule 130 of the Rules of Court provides for the requisites for the
admissibility of secondary evidence when the original is in the custody of the
adverse party, thus: (1) opponent's possession of the original; (2) reasonable
notice to opponent to produce the original; (3) satisfactory proof of its
existence; and (4) failure or refusal of opponent to produce the original in
court.11 Villarama has practically admitted the second and fourth
requisites.12As to the third, he admitted their previous existence in the files of
the Corporation and also that he had seen some of them.13 Regarding the first
element, Villarama's theory is that since even at the time of the issuance of
the subpoena duces tecum, the originals were already missing, therefore, the
Corporation was no longer in possession of the same. However, it is not
necessary for a party seeking to introduce secondary evidence to show that
the original is in the actual possession of his adversary. It is enough that the
circumstances are such as to indicate that the writing is in his possession or
under his control. Neither is it required that the party entitled to the custody of
the instrument should, on being notified to produce it, admit having it in his
possession.14 Hence, secondary evidence is admissible where he denies
having it in his possession. The party calling for such evidence may introduce
a copy thereof as in the case of loss. For, among the exceptions to the best
evidence rule is "when the original has been lost, destroyed, or cannot be
produced in court."15 The originals of the vouchers in question must be
deemed to have been lost, as even the Corporation admits such loss. Viewed
upon this light, there can be no doubt as to the admissibility in evidence of
Exhibits 6 to 19 and 22.
Taking account of the foregoing evidence, together with Celso Rivera's
testimony,16 it would appear that: Villarama supplied the organization
expenses and the assets of the Corporation, such as trucks and
equipment;17 there was no actual payment by the original subscribers of the
amounts of P95,000.00 and P100,000.00 as appearing in the
books;18 Villarama made use of the money of the Corporation and deposited
them to his private accounts;19 and the Corporation paid his personal
accounts.20
Villarama himself admitted that he mingled the corporate funds with his own
money.21 He also admitted that gasoline purchases of the Corporation were
made in his name22 because "he had existing account with Stanvac which was
properly secured and he wanted the Corporation to benefit from the rebates
that he received."23
The foregoing circumstances are strong persuasive evidence showing that
Villarama has been too much involved in the affairs of the Corporation to
altogether negative the claim that he was only a part-time general manager.
They show beyond doubt that the Corporation is his alter ego.
It is significant that not a single one of the acts enumerated above as proof of
Villarama's oneness with the Corporation has been denied by him. On the
contrary, he has admitted them with offered excuses.
Villarama has admitted, for instance, having paid P85,000.00 of the initial
capital of the Corporation with the lame excuse that "his wife had requested
him to reimburse the amount entrusted to her by the incorporators and which
she had used to pay the obligations of Dr. Villarama (her husband) incurred
while he was still the owner of Villa Rey Transit, a single proprietorship." But
with his admission that he had received P350,000.00 from Pantranco for the
sale of the two certificates and one unit,24 it becomes difficult to accept
Villarama's explanation that he and his wife, after consultation,25 spent the
money of their relatives (the stockholders) when they were supposed to have
their own money. Even if Pantranco paid the P350,000.00 in check to him, as
claimed, it could have been easy for Villarama to have deposited said check
in his account and issued his own check to pay his obligations. And there is
no evidence adduced that the said amount of P350,000.00 was all spent or
was insufficient to settle his prior obligations in his business, and in the light of
the stipulation in the deed of sale between Villarama and Pantranco that
P50,000.00 of the selling price was earmarked for the payments of accounts
due to his creditors, the excuse appears unbelievable.
On his having paid for purchases by the Corporation of trucks from the Manila
Trading & Supply Co. with his personal checks, his reason was that he was
only sharing with the Corporation his credit with some companies. And his
main reason for mingling his funds with that of the Corporation and for the
latter's paying his private bills is that it would be more convenient that he kept
the money to be used in paying the registration fees on time, and since he had
loaned money to the Corporation, this would be set off by the latter's paying
his bills. Villarama admitted, however, that the corporate funds in his
possession were not only for registration fees but for other important
obligations which were not specified.26
Indeed, while Villarama was not the Treasurer of the Corporation but was,
allegedly, only a part-time manager,27 he admitted not only having held the
corporate money but that he advanced and lent funds for the Corporation, and
yet there was no Board Resolution allowing it.28
Villarama's explanation on the matter of his involvement with the corporate
affairs of the Corporation only renders more credible Pantranco's claim that
his control over the corporation, especially in the management and disposition
of its funds, was so extensive and intimate that it is impossible to segregate
and identify which money belonged to whom. The interference of Villarama in
the complex affairs of the corporation, and particularly its finances, are much
too inconsistent with the ends and purposes of the Corporation law, which,
precisely, seeks to separate personal responsibilities from corporate
undertakings. It is the very essence of incorporation that the acts and conduct
of the corporation be carried out in its own corporate name because it has its
own personality.
The doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected in all
cases which are within reason and the law.29 When the fiction is urged as a
means of perpetrating a fraud or an illegal act or as a vehicle for the evasion
of an existing obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or
crime,30 the veil with which the law covers and isolates the corporation from
the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.
Upon the foregoing considerations, We are of the opinion, and so hold, that
the preponderance of evidence have shown that the Villa Rey Transit, Inc. is
an alter ego of Jose M. Villarama, and that the restrictive clause in the contract
entered into by the latter and Pantranco is also enforceable and binding
against the said Corporation. For the rule is that a seller or promisor may not
make use of a corporate entity as a means of evading the obligation of his
covenant.31 Where the Corporation is substantially the alter ego of the
covenantor to the restrictive agreement, it can be enjoined from competing
with the covenantee.32
The Corporation contends that even on the supposition that Villa Rey Transit,
Inc. and Villarama are one and the same, the restrictive clause in the contract
between Villarama and Pantranco does not include the purchase of existing
lines but it only applies to application for the new lines. The clause in dispute
reads thus:
(4) The SELLER shall not, for a period of ten (10) years from the date of this
sale apply for any TPU service identical or competing with the BUYER.
(Emphasis supplied)
As We read the disputed clause, it is evident from the context thereof that the
intention of the parties was to eliminate the seller as a competitor of the buyer
for ten years along the lines of operation covered by the certificates of public
convenience subject of their transaction. The word "apply" as broadly used
has for frame of reference, a service by the seller on lines or routes that would
compete with the buyer along the routes acquired by the latter. In this
jurisdiction, prior authorization is needed before anyone can operate a TPU
service,33whether the service consists in a new line or an old one acquired
from a previous operator. The clear intention of the parties was to prevent the
seller from conducting any competitive line for 10 years since, anyway, he has
bound himself not to apply for authorization to operate along such lines for the
duration of such period.34
If the prohibition is to be applied only to the acquisition of new certificates of
public convenience thru an application with the Public Service Commission,
this would, in effect, allow the seller just the same to compete with the buyer
as long as his authority to operate is only acquired thru transfer or sale from a
previous operator, thus defeating the intention of the parties. For what would
prevent the seller, under the circumstances, from having a representative or
dummy apply in the latter's name and then later on transferring the same by
sale to the seller? Since stipulations in a contract is the law between the
contracting parties,
Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good
faith. (Art. 19, New Civil Code.)
We are not impressed of Villarama's contention that the re-wording of the two
previous drafts of the contract of sale between Villarama and Pantranco is
significant in that as it now appears, the parties intended to effect the least
restriction. We are persuaded, after an examination of the supposed drafts,
that the scope of the final stipulation, while not as long and prolix as those in
the drafts, is just as broad and comprehensive. At most, it can be said that the
re-wording was done merely for brevity and simplicity.
The evident intention behind the restriction was to eliminate the sellers as a
competitor, and this must be, considering such factors as the good will 35 that
the seller had already gained from the riding public and his adeptness and
proficiency in the trade. On this matter, Corbin, an authority on Contracts has
this to say.36
When one buys the business of another as a going concern, he usually wishes
to keep it going; he wishes to get the location, the building, the stock in trade,
and the customers. He wishes to step into the seller's shoes and to enjoy the
same business relations with other men. He is willing to pay much more if he
can get the "good will" of the business, meaning by this the good will of the
customers, that they may continue to tread the old footpath to his door and
maintain with him the business relations enjoyed by the seller.
... In order to be well assured of this, he obtains and pays for the seller's
promise not to reopen business in competition with the business sold.
As to whether or not such a stipulation in restraint of trade is valid, our
jurisprudence on the matter37says:
The law concerning contracts which tend to restrain business or trade has
gone through a long series of changes from time to time with the changing
condition of trade and commerce. With trifling exceptions, said changes have
been a continuous development of a general rule. The early cases show
plainly a disposition to avoid and annul all contract which prohibited or
restrained any one from using a lawful trade "at any time or at any place," as
being against the benefit of the state. Later, however, the rule became well
established that if the restraint was limited to "a certain time" and within "a
certain place," such contracts were valid and not "against the benefit of the
state." Later cases, and we think the rule is now well established, have held
that a contract in restraint of trade is valid providing there is a limitation upon
either time or place. A contract, however, which restrains a man from entering
into business or trade without either a limitation as to time or place, will be held
invalid.
The public welfare of course must always be considered and if it be not
involved and the restraint upon one party is not greater than protection to the
other requires, contracts like the one we are discussing will be sustained. The
general tendency, we believe, of modern authority, is to make the test whether
the restraint is reasonably necessary for the protection of the contracting
parties. If the contract is reasonably necessary to protect the interest of the
parties, it will be upheld. (Emphasis supplied.)
Analyzing the characteristics of the questioned stipulation, We find that
although it is in the nature of an agreement suppressing competition, it is,
however, merely ancillary or incidental to the main agreement which is that of
sale. The suppression or restraint is only partial or limited: first, in scope, it
refers only to application for TPU by the seller in competition with the lines sold
to the buyer; second, in duration, it is only for ten (10) years; and third, with
respect to situs or territory, the restraint is only along the lines covered by the
certificates sold. In view of these limitations, coupled with the consideration of
P350,000.00 for just two certificates of public convenience, and considering,
furthermore, that the disputed stipulation is only incidental to a main
agreement, the same is reasonable and it is not harmful nor obnoxious to
public service.38 It does not appear that the ultimate result of the clause or
stipulation would be to leave solely to Pantranco the right to operate along the
lines in question, thereby establishing monopoly or predominance
approximating thereto. We believe the main purpose of the restraint was to
protect for a limited time the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There can be no danger of
price controls or deterioration of the service because of the close supervision
of the Public Service Commission.39 This Court had stated long ago,40that
"when one devotes his property to a use in which the public has an interest,
he virtually grants to the public an interest in that use and submits it to such
public use under reasonable rules and regulations to be fixed by the Public
Utility Commission."
Regarding that aspect of the clause that it is merely ancillary or incidental to a
lawful agreement, the underlying reason sustaining its validity is well explained
in 36 Am. Jur. 537-539, to wit:
... Numerous authorities hold that a covenant which is incidental to the sale
and transfer of a trade or business, and which purports to bind the seller not
to engage in the same business in competition with the purchaser, is lawful
and enforceable. While such covenants are designed to prevent competition
on the part of the seller, it is ordinarily neither their purpose nor effect to stifle
competition generally in the locality, nor to prevent it at all in a way or to an
extent injurious to the public. The business in the hands of the purchaser is
carried on just as it was in the hands of the seller; the former merely takes the
place of the latter; the commodities of the trade are as open to the public as
they were before; the same competition exists as existed before; there is the
same employment furnished to others after as before; the profits of the
business go as they did before to swell the sum of public wealth; the public
has the same opportunities of purchasing, if it is a mercantile business; and
production is not lessened if it is a manufacturing plant.
The reliance by the lower court on tile case of Red Line Transportation Co. v.
Bachrach41 and finding that the stipulation is illegal and void seems misplaced.
In the said Red Line case, the agreement therein sought to be enforced was
virtually a division of territory between two operators, each company imposing
upon itself an obligation not to operate in any territory covered by the routes
of the other. Restraints of this type, among common carriers have always been
covered by the general rule invalidating agreements in restraint of trade. 42
Neither are the other cases relied upon by the plaintiff-appellee applicable to
the instant case. In Pampanga Bus Co., Inc. v. Enriquez,43the undertaking of
the applicant therein not to apply for the lifting of restrictions imposed on his
certificates of public convenience was not an ancillary or incidental agreement.
The restraint was the principal objective. On the other hand, in Red Line
Transportation Co., Inc. v. Gonzaga,44 the restraint there in question not to ask
for extension of the line, or trips, or increase of equipment was not an
agreement between the parties but a condition imposed in the certificate of
public convenience itself.
Upon the foregoing considerations, Our conclusion is that the stipulation
prohibiting Villarama for a period of 10 years to "apply" for TPU service along
the lines covered by the certificates of public convenience sold by him to
Pantranco is valid and reasonable. Having arrived at this conclusion, and
considering that the preponderance of the evidence have shown that Villa Rey
Transit, Inc. is itself the alter ego of Villarama, We hold, as prayed for in
Pantranco's third party complaint, that the said Corporation should, until the
expiration of the 1-year period abovementioned, be enjoined from operating
the line subject of the prohibition.
To avoid any misunderstanding, it is here to be emphasized that the 10-year
prohibition upon Villarama is not against his application for, or purchase of,
certificates of public convenience, but merely the operation of TPU along the
lines covered by the certificates sold by him to Pantranco. Consequently, the
sale between Fernando and the Corporation is valid, such that the rightful
ownership of the disputed certificates still belongs to the plaintiff being the prior
purchaser in good faith and for value thereof. In view of the ancient rule
of caveat emptor prevailing in this jurisdiction, what was acquired by Ferrer in
the sheriff's sale was only the right which Fernando, judgment debtor, had in
the certificates of public convenience on the day of the sale.45
Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of
Public Service was notified that "by virtue of an Order of Execution issued by
the Court of First Instance of Pangasinan, the rights, interests, or participation
which the defendant, VALENTIN A. FERNANDO in the above entitled case
may have in the following realty/personalty is attached or levied upon, to wit:
The rights, interests and participation on the Certificates of Public
Convenience issued to Valentin A. Fernando, in Cases Nos. 59494, etc. ...
Lines Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy
only shows that Ferrer, the vendee at auction of said certificates, merely
stepped into the shoes of the judgment debtor. Of the same principle is the
provision of Article 1544 of the Civil Code, that "If the same thing should have
been sold to different vendees, the ownership shall be transferred to the
person who may have first taken possession thereof in good faith, if it should
be movable property."
There is no merit in Pantranco and Ferrer's theory that the sale of the
certificates of public convenience in question, between the Corporation and
Fernando, was not consummated, it being only a conditional sale subject to
the suspensive condition of its approval by the Public Service Commission.
While section 20(g) of the Public Service Act provides that "subject to
established limitation and exceptions and saving provisions to the contrary, it
shall be unlawful for any public service or for the owner, lessee or operator
thereof, without the approval and authorization of the Commission previously
had ... to sell, alienate, mortgage, encumber or lease its property, franchise,
certificates, privileges, or rights or any part thereof, ...," the same section also
provides:
... Provided, however, That nothing herein contained shall be construed to
prevent the transaction from being negotiated or completed before its approval
or to prevent the sale, alienation, or lease by any public service of any of its
property in the ordinary course of its business.
It is clear, therefore, that the requisite approval of the PSC is not a condition
precedent for the validity and consummation of the sale.
Anent the question of damages allegedly suffered by the parties, each of the
appellants has its or his own version to allege.
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants
(Pantranco and Ferrer) in acquiring the certificates of public convenience in
question, despite constructive and actual knowledge on their part of a prior
sale executed by Fernando in favor of the said corporation, which necessitated
the latter to file the action to annul the sheriff's sale to Ferrer and the
subsequent transfer to Pantranco, it is entitled to collect actual and
compensatory damages, and attorney's fees in the amount of P25,000.00. The
evidence on record, however, does not clearly show that said defendants
acted in bad faith in their acquisition of the certificates in question. They
believed that because the bill of sale has yet to be approved by the Public
Service Commission, the transaction was not a consummated sale, and,
therefore, the title to or ownership of the certificates was still with the seller.
The award by the lower court of attorney's fees of P5,000.00 in favor of Villa
Rey Transit, Inc. is, therefore, without basis and should be set aside.
Eusebio Ferrer's charge that by reason of the filing of the action to annul the
sheriff's sale, he had suffered and should be awarded moral, exemplary
damages and attorney's fees, cannot be entertained, in view of the conclusion
herein reached that the sale by Fernando to the Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with the allegation
that when it purchased ViIlarama's business for P350,000.00, it intended to
build up the traffic along the lines covered by the certificates but it was rot
afforded an opportunity to do so since barely three months had elapsed when
the contract was violated by Villarama operating along the same lines in the
name of Villa Rey Transit, Inc. It is further claimed by Pantranco that the
underhanded manner in which Villarama violated the contract is pertinent in
establishing punitive or moral damages. Its contention as to the proper
measure of damages is that it should be the purchase price of P350,000.00
that it paid to Villarama. While We are fully in accord with Pantranco's claim of
entitlement to damages it suffered as a result of Villarama's breach of his
contract with it, the record does not sufficiently supply the necessary
evidentiary materials upon which to base the award and there is need for
further proceedings in the lower court to ascertain the proper amount.
PREMISES CONSIDERED, the judgment appealed from is hereby modified
as follows:
1. The sale of the two certificates of public convenience in question by Valentin
Fernando to Villa Rey Transit, Inc. is declared preferred over that made by the
Sheriff at public auction of the aforesaid certificate of public convenience in
favor of Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party complaint filed by
Pangasinan Transportation Co. against Jose M. Villarama, holding that Villa
Rey Transit, Inc. is an entity distinct and separate from the personality of Jose
M. Villarama, and insofar as it awards the sum of P5,000.00 as attorney's fees
in favor of Villa Rey Transit, Inc.;
3. The case is remanded to the trial court for the reception of evidence in
consonance with the above findings as regards the amount of damages
suffered by Pantranco; and
4. On equitable considerations, without costs. So ordered.
[G.R. No. 160039. June 29, 2004]
RAYMUNDO ODANI SECOSA, EL BUENASENSO SY and DASSAD
WAREHOUSING and PORT SERVICES,
INCORPORATED, petitioners, vs. HEIRS OF ERWIN SUAREZ
FRANCISCO, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review under Rule 45 of the Rules of Court seeking the
reversal of the decision[1] of the Court of Appeals dated February 27, 2003 in
CA-G.R. CV No. 61868, which affirmed in toto the June 19, 1998 decision[2] of
Branch 20 of the Regional Trial Court of Manila in Civil Case No. 96-79554.
The facts are as follows:
On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen
year old third year physical therapy student of the Manila Central University,
was riding a motorcycle along Radial 10 Avenue, near the Veteran Shipyard
Gate in the City of Manila. At the same time, petitioner, Raymundo Odani
Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the
same road. The truck was owned by petitioner, Dassad Warehousing and Port
Services, Inc.
Traveling behind the motorcycle driven by Francisco was a sand and gravel
truck, which in turn was being tailed by the Isuzu truck driven by Secosa. The
three vehicles were traversing the southbound lane at a fairly high
speed. When Secosa overtook the sand and gravel truck, he bumped the
motorcycle causing Francisco to fall. The rear wheels of the Isuzu truck then
ran over Francisco, which resulted in his instantaneous death. Fearing for his
life, petitioner Secosa left his truck and fled the scene of the collision.[3]
Respondents, the parents of Erwin Francisco, thus filed an action for damages
against Raymond Odani Secosa, Dassad Warehousing and Port Services,
Inc. and Dassads president, El Buenasucenso Sy. The complaint was
docketed as Civil Case No. 96-79554 of the RTC of Manila, Branch 20.
On June 19, 1998, after a full-blown trial, the court a quo rendered a decision
in favor of herein respondents, the dispositive portion of which states:
WHEREFORE, premised on the foregoing, judgment is hereby rendered in
favor of the plaintiffs ordering the defendants to pay plaintiffs jointly and
severally:
1. The sum of P55,000.00 as actual and compensatory damages;
2. The sum of P20,000.00 for the repair of the motorcycle;
3. The sum of P100,000.00 for the loss of earning capacity;
4. The sum of P500,000.00 as moral damages;
5. The sum of P50,000.00 as exemplary damages;
6. The sum of P50,000.00 as attorneys fees plus cost of suit.
SO ORDERED.
Petitioners appealed the decision to the Court of Appeals, which affirmed the
appealed decision in toto.[4]
Hence the present petition, based on the following arguments:
I.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE
DECISION OF THE TRIAL COURT THAT PETITIONER DASSAD DID NOT
EXERCISE THE DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE
SELECTION AND SUPERVISION OF ITS EMPLOYEES WHICH IS NOT IN
ACCORDANCE WITH ARTICLE 2180 OF THE NEW CIVIL CODE AND
RELATED JURISPRUDENCE ON THE MATTER.
II.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE
DECISION OF THE TRIAL COURT IN HOLDING PETITIONER EL
BUENASENSO SY SOLIDARILY LIABLE WITH PETITIONERS DASSAD
AND SECOSA IN VIOLATION OF THE CORPORATION LAW AND
RELATED JURISPRUDENCE ON THE MATTER.
III.
THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT
OF APPEALS AWARDING P500,000.00 AS MORAL DAMAGES IS
MANIFESTLY ABSURD, MISTAKEN AND UNJUST.[5]
The petition is partly impressed with merit.
On the issue of whether petitioner Dassad Warehousing and Port Services,
Inc. exercised the diligence of a good father of a family in the selection and
supervision of its employees, we find the assailed decision to be in full accord
with pertinent provisions of law and established jurisprudence.
Article 2176 of the Civil Code provides:
Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence,
if there is no pre-existing contractual relation between the parties, is called a
quasi-delict and is governed by the provisions of this Chapter.
On the other hand, Article 2180, in pertinent part, states:
The obligation imposed by article 2176 is demandable not only for ones own
acts or omissions, but also for those of persons for whom one is responsible x
x x.
Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even though
the former are not engaged in any business or industry x x x.
The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a
family to prevent damage.
Based on the foregoing provisions, when an injury is caused by the negligence
of an employee, there instantly arises a presumption that there was negligence
on the part of the employer either in the selection of his employee or in the
supervision over him after such selection. The presumption, however, may be
rebutted by a clear showing on the part of the employer that it exercised the
care and diligence of a good father of a family in the selection and supervision
of his employee. Hence, to evade solidary liability for quasi-delict committed
by an employee, the employer must adduce sufficient proof that it exercised
such degree of care.[6]
How does an employer prove that he indeed exercised the diligence of a good
father of a family in the selection and supervision of his employee? The case
of Metro Manila Transit Corporation v. Court of Appeals[7] is instructive:
In fine, the party, whether plaintiff or defendant, who asserts the affirmative of
the issue has the burden of presenting at the trial such amount of evidence
required by law to obtain a favorable judgment[8] . . . In making proof in its or
his case, it is paramount that the best and most complete evidence is formally
entered.[9]
Coming now to the case at bar, while there is no rule which requires that
testimonial evidence, to hold sway, must be corroborated by documentary
evidence, inasmuch as the witnesses testimonies dwelt on mere generalities,
we cannot consider the same as sufficiently persuasive proof that there was
observance of due diligence in the selection and supervision of employees.
Petitioners attempt to prove its deligentissimi patris familias in the selection
and supervision of employees through oral evidence must fail as it was unable
to buttress the same with any other evidence, object or documentary, which
might obviate the apparent biased nature of the testimony.[10]
Our view that the evidence for petitioner MMTC falls short of the required
evidentiary quantum as would convincingly and undoubtedly prove its
observance of the diligence of a good father of a family has its precursor in the
underlying rationale pronounced in the earlier case of Central Taxicab Corp.
vs. Ex-Meralco Employees Transportation Co., et al.,[11] set amidst an almost
identical factual setting, where we held that:
The failure of the defendant company to produce in court any record or other
documentary proof tending to establish that it had exercised all the diligence
of a good father of a family in the selection and supervision of its drivers and
buses, notwithstanding the calls therefor by both the trial court and the
opposing counsel, argues strongly against its pretensions.
We are fully aware that there is no hard-and-fast rule on the quantum of
evidence needed to prove due observance of all the diligence of a good father
of a family as would constitute a valid defense to the legal presumption of
negligence on the part of an employer or master whose employee has by his
negligence, caused damage to another. x x x (R)educing the testimony of
Albert to its proper proportion, we do not have enough trustworthy evidence
left to go by. We are of the considered opinion, therefore, that the believable
evidence on the degree of care and diligence that has been exercised in the
selection and supervision of Roberto Leon y Salazar, is not legally sufficient to
overcome the presumption of negligence against the defendant company.
The above-quoted ruling was reiterated in a recent case again involving the
Metro Manila Transit Corporation,[12] thus:
In the selection of prospective employees, employers are required to examine
them as to their qualifications, experience, and service records.[13] On the
other hand, with respect to the supervision of employees, employers should
formulate standard operating procedures, monitor their implementation, and
impose disciplinary measures for breaches thereof. To establish these factors
in a trial involving the issue of vicarious liability, employers must submit
concrete proof, including documentary evidence.
In this case, MMTC sought to prove that it exercised the diligence of a good
father of a family with respect to the selection of employees by presenting
mainly testimonial evidence on its hiring procedure. According to MMTC,
applicants are required to submit professional driving licenses, certifications of
work experience, and clearances from the National Bureau of Investigation; to
undergo tests of their driving skills, concentration, reflexes, and vision; and, to
complete training programs on traffic rules, vehicle maintenance, and standard
operating procedures during emergency cases.
xxxxxxxxx
Although testimonies were offered that in the case of Pedro Musa all these
precautions were followed, the records of his interview, of the results of his
examinations, and of his service were not presented. . . [T]here is no record
that Musa attended such training programs and passed the said examinations
before he was employed. No proof was presented that Musa did not have any
record of traffic violations. Nor were records of daily inspections, allegedly
conducted by supervisors, ever presented. . . The failure of MMTC to present
such documentary proof puts in doubt the credibility of its witnesses.
Jurisprudentially, therefore, the employer must not merely present testimonial
evidence to prove that he observed the diligence of a good father of a family
in the selection and supervision of his employee, but he must also support
such testimonial evidence with concrete or documentary evidence. The reason
for this is to obviate the biased nature of the employers testimony or that of his
witnesses.[14]
Applying the foregoing doctrines to the present case, we hold that petitioner
Dassad Warehousing and Port Services, Inc. failed to conclusively prove that
it had exercised the requisite diligence of a good father of a family in the
selection and supervision of its employees.
Edilberto Duerme, the lone witness presented by Dassad Warehousing and
Port Services, Inc. to support its position that it had exercised the diligence of
a good father of a family in the selection and supervision of its employees,
testified that he was the one who recommended petitioner Raymundo Secosa
as a driver to Dassad Warehousing and Port Services, Inc.; that it was his duty
to scrutinize the capabilities of drivers; and that he believed petitioner to be
physically and mentally fit for he had undergone rigid training and attended the
PPA safety seminar.[15]
Petitioner Dassad Warehousing and Port Services, Inc. failed to support the
testimony of its lone witness with documentary evidence which would have
strengthened its claim of due diligence in the selection and supervision of its
employees. Such an omission is fatal to its position, on account of which,
Dassad can be rightfully held solidarily liable with its co-petitioner Raymundo
Secosa for the damages suffered by the heirs of Erwin Francisco.
However, we find that petitioner El Buenasenso Sy cannot be held solidarily
liable with his co-petitioners. While it may be true that Sy is the president of
petitioner Dassad Warehousing and Port Services, Inc., such fact is not by
itself sufficient to hold him solidarily liable for the liabilities adjudged against
his co-petitioners.
It is a settled precept in this jurisdiction that a corporation is invested by law
with a personality separate from that of its stockholders or members.[16] It has
a personality separate and distinct from those of the persons composing it as
well as from that of any other entity to which it may be related. Mere ownership
by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not in itself sufficient ground for disregarding
the separate corporate personality.[17] A corporations authority to act and its
liability for its actions are separate and apart from the individuals who own it.[18]
The so-called veil of corporation fiction treats as separate and distinct the
affairs of a corporation and its officers and stockholders. As a general rule, a
corporation will be looked upon as a legal entity, unless and until sufficient
reason to the contrary appears. When the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association of persons.[19] Also, the
corporate entity may be disregarded in the interest of justice in such cases as
fraud that may work inequities among members of the corporation internally,
involving no rights of the public or third persons. In both instances, there must
have been fraud and proof of it. For the separate juridical personality of a
corporation to be disregarded, the wrongdoing must be clearly and
convincingly established.[20] It cannot be presumed.[21]
The records of this case are bereft of any evidence tending to show the
presence of any grounds enumerated above that will justify the piercing of the
veil of corporate fiction such as to hold the president of Dassad Warehousing
and Port Services, Inc. solidarily liable with it.
The Isuzu cargo truck which ran over Erwin Francisco was registered in the
name of Dassad Warehousing and Port Services, Inc., and not in the name of
El Buenasenso Sy.Raymundo Secosa is an employee of Dassad
Warehousing and Port Services, Inc. and not of El Buenasenso Sy. All these
things, when taken collectively, point toward El Buenasenso Sys exclusion
from liability for damages arising from the death of Erwin Francisco.
Having both found Raymundo Secosa and Dassad Warehousing and Port
Services, Inc. liable for negligence for the death of Erwin Francisco on June
27, 1996, we now consider the question of moral damages which his parents,
herein respondents, are entitled to recover. Petitioners assail the award of
moral damages of P500,000.00 for being manifestly absurd, mistaken and
unjust. We are not persuaded.
Under Article 2206, the spouse, legitimate and illegitimate descendants and
ascendants of the deceased may demand moral damages for mental anguish
for the death of the deceased. The reason for the grant of moral damages has
been explained in this wise:
. . . the award of moral damages is aimed at a restoration, within the limits
possible, of the spiritual status quo ante; and therefore, it must be
proportionate to the suffering inflicted. The intensity of the pain experienced
by the relatives of the victim is proportionate to the intensity of affection for him
and bears no relation whatsoever with the wealth or means of the offender.[22]
In the instant case, the spouses Francisco presented evidence of the searing
pain that they felt when the premature loss of their son was relayed to them.
That pain was highly evident in the testimony of the father who was forever
deprived of a son, a son whose untimely death came at that point when the
latter was nearing the culmination of every parents wish to educate their
children. The death of Francis has indeed left a void in the lives of the
respondents. Antonio Francisco testified on the effect of the death of his son,
Francis, in this manner:
Q: (Atty. Balanag): What did you do when you learned that your son was killed
on June 27, 1996?
A: (ANTONIO FRANCISCO): I boxed the door and pushed the image of St.
Nio telling why this happened to us.
Q: Mr. Witness, how did you feel when you learned of the untimely death of
your son, Erwin Suares (sic)?
A: Masakit po ang mawalan ng anak. Its really hard for me, the thought that
my son is dead.
xxxxxxxxx
Q: How did your family react to the death of Erwin Suarez Francisco?
A: All of my family and relatives were felt (sic) sorrow because they knew that
my son is (sic) good.
Q: We know that it is impossible to put money terms(s) [on] the life of [a]
human, but since you are now in court and if you were to ask this court how
much would you and your family compensate? (sic)
A: Even if they pay me millions, they cannot remove the anguish of my son
(sic).[23]
Moral damages are emphatically not intended to enrich a plaintiff at the
expense of the defendant. They are awarded to allow the former to obtain
means, diversion or amusements that will serve to alleviate the moral suffering
he has undergone due to the defendants culpable action and must, perforce,
be proportional to the suffering inflicted.[24] We have previously held as proper
an award of P500,000.00 as moral damages to the heirs of a deceased family
member who died in a vehicular accident. In our 2002 decision in Metro Manila
Transit Corporation v. Court of Appeals, et al.,[25] we affirmed the award of
moral damages of P500,000.00 to the heirs of the victim, a mother, who died
from injuries she sustained when a bus driven by an employee of the petitioner
hit her. In the case at bar, we likewise affirm the portion of the assailed
decision awarding the moral damages.
Since the petitioners did not question the other damages adjudged against
them by the court a quo, we affirm the award of these damages to the
respondents.
WHEREFORE, the petition is DENIED. The assailed decision is AFFIRMED
with the MODIFICATION that petitioner El Buenasenso Sy
is ABSOLVED from any liability adjudged against his co-petitioners in this
case.
Costs against petitioners.
SO ORDERED.
G.R. Nos. 111810-11 June 16, 1995
JAMES YU and WILSON YOUNG, petitioners,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, LABOR ARBITER
DANIEL C. CUETO, TANDUAY DISTILLERY INC., FERNANDO DURAN,
EDUARDO PALIWAN, ROQUE ESTOCE AND RODRIGO
SANTOS, respondents.
MELO, J.:
Before us is a petition for certiorari assailing the decision of public respondent
National Labor Relations Commission (NLRC) promulgated on August 25,
1993 in the cases of Fernando Duran, et al. vs. Tanduay Distillery,
Inc., docketed as NLRC NCR Case No. 00-04-01737-88, and Rodrigo Santos
vs. Tanduay Distillery, Inc., docketed as NLRC NCR Case No. 00-06-02546-
88.
The relevant antecedent facts as gathered from the record are as follows:
Private respondents-employees Fernando Duran, Eduardo Paliwan, Roque
Estoce, and Rodrigo Santos were employees of respondent corporation
Tanduay Distillery, Inc, (TDI).
On March 29, 1988, 22 employees of TDI, including private respondents
employees, received a memorandum from TDI terminating their services. for
reasons of retrenchment, effective 30 days from receipt thereof or not later
than the close of business hours on April 28, 1988.
On April 26, 1988, all 22 employees of TDI filed an application for the issuance
of a temporary restraining order against their retrenchment. The labor arbiter
issued the restraining order the following day. However, due to the 20-day
lifetime of the temporary restraining order, and because of the on-going
negotiations for the sale of TDI the retrenchment pushed through.
Parenthetically, it should be mentioned that although all 22 employees were
retrenched, the instant petition involves only the 4 individual respondents
herein, namely, Fernando Duran, Eduardo Paliwan, Roque Estoce, and
Rodrigo Santos.
On June 14, 1988, the First Pacific Metro Corporation moved that it be dropped
as a party to the case on the ground that its projected purchase of the assets
of TDI was not consummated. The participation of First Pacific was later in
effect held to be irrelevant (decision dated May 24, 1989; Annex G, pp. 50-
58, Rollo). On June 1, 1988, or after respondents-employees had ceased as
such employees, a new buyer of TDI's assets, Twin Ace Holdings, Inc. took
over the business. Twin Ace assumed the business name Tanduay Distillers.
On August 8, 1988, the employees filed a motion to implead herein petitioners
James Yu and Wilson Young, doing business under the name and style of
Tanduay Distillers, as party respondents in said cases. Petitioners filed an
opposition thereto, asserting that they are representatives of Tanduay
Distillers an entity distinct and separate from TDI, the previous owner, and that
there is no employer-employee relationship between Tanduay Distillers and
private respondents. Respondents-employees filed a reply to the opposition
stating that petitioner James Yu as officer-in-charge of Tanduay Distillers had
informed the president of TDI labor union of Tanduay Distillers' decision to hire
everybody with a clean slate on a probation basis.
On November 16, 1988, private respondents filed a motion for leave to file an
amended complaint impleading petitioners as respondents. Petitioners filed an
opposition thereto reiterating the grounds they relied upon in their opposition
to private respondents' motion to implead. A reply was filed by private
respondents, and a rejoinder was then filed by petitioners. In turn, private
respondents filed a sub-rejoinder.
Subsequently, an amended complaint was filed by private respondents
against TDI and petitioners Yu and Young "doing business under the name
and style of Tanduay Distillers".
In her decision dated May 24, 1989, Labor Arbiter Daisy Cauton-Barcelona
held:
In treating the motion to implead a motion to admit amended complaint with
leave, the same [is] hereby given due course and all pleadings filed by
respondents James Yu and Wilson Young are hereby treated as their
responsive pleadings in the light of speedy disposition of justice and the basic
rule that administrative fora, such as this office, are not governed by technical
rules of proceedings.
(p. 52, Rollo).
In the same decision, it was disposed:
WHEREFORE, judgment is hereby rendered and declaring that the
retrenchment is illegal thereby ordering respondent Tanduay Distillery, Inc., to
reinstate the complainants to their former position with backwages up to the
time of change of ownership, if one has taken place.
That in the event of change in management it (Tanduay Distillery, Inc.,) is
hereby ordered to pay the complainants their respective separation benefits
computed at the rate of one (1) month for every year of service. This is without
prejudice to the letter of Mr. James Yu as officer-in-charge of Tanduay
Distillers dated June 17, 1988 to the President of the Tanduay Distillery, Inc.,
Labor Union.
(pp. 57-58, Rollo.)
Only TDI appealed said decision to the National Labor Relations Commission,
but on June 18, 1991, said commission promulgated an affirmance decision
(p. 102, Rollo). TDI filed a motion for reconsideration, but the same was denied
on August 15, 1991.
Thereupon, private respondents-employees on September 16, 1991 filed a
motion for execution (Annex Q, pp. 103-106, Rollo) praying that NLRC through
the labor arbiter, "[i]ssue the necessary writ for the execution of the entire
decision dated May 24, 1989, including the actual reinstatement of the
complainants to their former position without loss of seniority and benefits
against Tanduay Distillery, Inc., and/or Tanduay Distillers, James Yu and
Wilson Young."
On September 24, 1993, petitioners filed an opposition (Annex R, pp. 108-
110, Rollo) to the motion for execution on the ground that "the Motion for
Execution is without any basis in so far as it prays for the issuance of a writ of
execution against respondent Tanduay Distillers, which is an entity separate
and distinct from respondent Tanduay Distillery, Inc., and respondents James
Yu and Wilson Young." Respondents-employees filed their reply thereto
(Annex S, pp. 111-115, Rollo), and in turn petitioners filed their rejoinder
(Annex T, pp. 116-118, Rollo), to which private respondents filed their sur-
rejoinder (Annex U, pp. 119-122, Rollo). On December 18, 1991, respondent
TDI filed its comment on the motion for execution (Annex V, pp. 124-
129, Rollo), while petitioners on January 10, 1992, filed a joint comment
(Annex W, pp. 130-132, Rollo) to private respondents' sur-rejoinder as well to
the comment filed by respondent TDI.
Subsequently, TDI filed a manifestation dated April 24, 1992 (Annex X, pp.
133-135, Rollo), stating
2. At the hearing held on March 23, 1992, individual complainants, assisted by
their counsel, Atty. Noel Cruz, agreed to be paid the total amount of
P86,049.83, in full satisfaction of the Company's liability as stated in the
dispositive portion of Labor Arbiter Barcelona's decision promulgated on May
24, 1989 and affirmed by the Second Division of the NLRC on June 18, 1991,
which reads as follows:
WHEREFORE, judgment is hereby rendered declaring that the retrenchment
is illegal thereby ordering respondent Tanduay Distillery, Inc. to reinstate the
complainants to their former position with backwages up to the time of the
change of ownership, if one has taken place.
That in the event of change in management it (Tanduay Distillery, Inc.( is
hereby ordered to pay the complainants their respective separation benefits
computed at the rate of one (1) month of every year of service. This is without
prejudice to the letter of Mr. James Yu as officer-in-charge of Tanduay
Distillers dated June 17, 1988 to the President of the Tanduay Distillery, Inc.,
Labor Union.
No Costs.
SO ORDERED.
1. In accordance with the aforequoted decision,
complainants shall be paid the amounts appearing
opposite their respective names:
Rodrigo F. Santos P20,282.03
Roque Estoce 20,092.50
Eduardo Daliwan 19,973.40
Fernando A. Duran 25,702.00
Total P86,049.83
=========
4. The foregoing amounts shall be satisfied out of the cash bond deposited by
the Company with the Cashier of the NLRC. The excess amounting to
P7,076.44 must revert to the Company.
(pp. 134-135, Rollo.)
On November 17, 1992, respondent NLRC, through Labor Arbiter Daniel C.
Cueto, issued an order (Annex Z, pp. 139-145, Rollo), resolving the motion for
execution as follows:
Based on the foregoing considerations, this Branch finds the Motion for Writ
of Execution filed by the complainants meritorious and in order. Accordingly,
let a Writ of Execution be issued against Tanduay Distiller, Inc., Wilson Young
and James Yu to immediately reinstate complainants Fernando Duran,
Rodrigo Santos, Roque Estoce and Eduardo Daliwan to their respective
positions.
(p 145, Rollo.)
Consequently, a writ of execution was issued by Labor Arbiter Cueto on
December 16, 1992.
To stop the implementation of the writ of execution, petitioners filed a petition
for certiorari (Annex AA, pp. 146-158, Rollo before respondent NLRC, praying
that
1. Immediately upon filing of the instant case, a temporary restraining order he
issued, to wit.
a) Enjoining and restraining the respondents from implementing the Order
dated November 17, 1992;
b.) Commanding the public respondent to desist from acting on the Order,
c.) Commanding the respondents to desist from committing any other act
judicial to the petitioners/appellants.
2. After the appropriate proceedings, a writ of preliminary injunction be issued
so enjoining the respondents;
3. After hearing on the merits, the Order dated November 17, 1992 be set
aside and an injunction be issued permanently enjoining the respondents from
committing the aforesaid acts and to comply strictly with terms of the Decision
and the NLRC;
4. Ordering the respondents, jointly and severally, to pay petitioner's fees in
the amount of P100,000.00 and to pay the cost of suit.
On August 25, 1993, respondent NLRC promulgated its decision, the
dispositive portion of which reads:
In view of the foregoing premises, the petition/appeal with prayer for
preliminary injunction is hereby dismissed for lack of merit.
The petitioners respondents are hereby directed to re re-employ/re-hire
respondents-complainants immediately upon receipt of this decision.
(p. 36, Rollo.)
Thus, the present petition where petitioners pray that
1. Immediately upon filing of the instant case, a temporary restraining order be
issued, to wit:
a) Restraining and prohibiting the respondents form implementing the ORDER
dated November 17, 1992 and the NLRC Certiorari Decision.
b) Commanding the respondents to desist from committing any other act
prejudicial to the petitioners.
2. After the appropriate proceedings, a writ of preliminary injunction be issued
so enjoining the respondents;
3. After appropriate proceedings, the ORDER dated November 17, 1992 and
the NLRC CertiorariDecision be set aside and a injunction be issued
permanently enjoining the respondents from committing the aforesaid acts and
to comply strictly with the terms of the Arbiter Decision and the NLRC Decision;
4. Ordering the respondents, jointly and severally, to pay petitioners' attorney's
fees in the amount of P100,000.00 and to pay the costs of suit.
(pp. 26-27, Rollo.)
The issue posed by the present petition is whether respondent NLRC
committed grave abuse of discretion in holding petitioners Yu and Young liable
under the decision dated May 24, 1989 which decreed that:
WHEREFORE, judgment is hereby rendered declaring that the retrenchment
is illegal thereby ordering respondent Tanduay Distillery Inc., to reinstate the
complainants to their former position with backwages up to the time of the
change ownership, if one has taken place.
That in the event of change in management it (Tanduay Distillery, Inc.) is
hereby ordered to pay the complainants their respective separation benefits
corrupted at the rate of one (1) month for every year of service. This is without
prejudice to the letter of Mr. James Yu as officer-in-charge of Tanduay
Distillers dated June 17, 1988 to the President of the Tanduay Distillery, Inc.,
Labor Union.
(pp. 57-58, Rollo.)
We hold that petitioners, for a number of reasons which we shall discuss
below, may not be held answerable and liable under the final judgment of
Labor Arbiter Cauton-Barcelona.
1. Admittedly, the decision dated May 24, 1989 is now final and executory, as
only respondent TDI appealed said decision and its appeal was later
dismissed by respondent NLRC. It is fundamental that a final and executory
decision cannot be amended or corrected (First Integrated Bonding and
Insurance Company, Inc, vs. Hernando, 199 SCRA 796 [1991]) except for
clerical errors or mistakes (Maramba vs. Lozano, 20 SCRA 474 [1967]); Reyes
vs. Court of Appeals, 189 SCRA 46 [1990]). A definitive judgment is no longer
subject to change, revision, amendment, or reversal (Miranda vs. Court of
Appeals, 71 SCRA 295 [1976], and the court loses jurisdiction over it, except
to order its execution (PY Eng Chong vs. Herrera, 70 SCRA 130 (1976]).
An examination of the aforequoted dispositive portion of the decision shows
that the same does not in any manner obligate Tanduay Distillers, or even
petitioners Yu and Young for that matter, to reinstate respondents. Only TDI
was held liable to reinstate respondents up to the time of change of ownership,
and for separation benefits.
However, Labor Arbiter Cueto went beyond what was disposed by the decision
and issued an order dated November 17, 1992 (Annex Z, Petition, pp. 139-
145, Rollo) which required
. . . Tanduay Distillers, Inc., Wilson Young and James Yu to immediately
reinstate complainants Fernando Duran, Rodrigo Santos, Roque Estoce and
Eduardo Daliwan to heir respective positions.
(p. 145, Rollo.)
Subsequently, a writ of execution was issued on December 16, 1992 pursuant
to the order of November 17, 1992.
The order of execution dated November 17, 1992 in effect amended the
decision dated May 24, 1989 for the former orders petitioners and Tanduay
Distillers to reinstate private respondents employees whereas the decision
dated May 24, 1989, as we have discussed above, does not so decree, This
cannot be done. It is beyond the power and competence of Labor Arbiter Cueto
to amend a final decision, The writ of execution must not go beyond the scope
of the judgment.
As Chief Justice Moran opined: "The writ of execution must conform to the
judgment which is to be executed as it may not vary the terms of the judgment
it seeks to enforce. Nor may it go beyond the terms of the judgment, sought to
be executed. Where the execution is not in harmony with the judgment which
gives it life and exceeds it, it has pro tanto no validity. To maintain otherwise
would be to ignore the constitutional provision against depriving a person of
his property without due process of law" (Moran, Comments on the Rules of
Court, Vol. I 1952 Ed., p. 809; cited in Villoria vs. Piccio, supra).
(Gamboa's Incorporated vs. Court of
Appeals, 72 SCRA 131, 137-138 [1976])
The order of execution and the writ of execution ordering petitioners and
Tanduay Distillers to reinstate private respondents employees are, therefore,
null and void.
2. Neither may be said that petitioners and Tanduay Distillers are one and the
same as TDI, as seems to be the impression of respondents when they
impleaded petitioners as party respondents in their compliant for unfair labor
practice, illegal lay off, and separation benefits.
Such a stance is not supported by the facts. The name of the company for
whom the petitioners are working is Twin Ace Holdings Corporation, As stated
by the Solicitor General, Twin Ace is part of the Allied Bank Group although it
conducts the rum business under the name of Tanduay Distillers. The use of
a similar sounding or almost identical name is an obvious device to capitalize
on the goodwill which Tanduay Rum has built over the years. Twin Ace or
Tanduay Distillers, on one hand, and Tanduay Distillery Inc. (TDI), on the
other, are distinct and separate corporations. There is nothing to suggest that
the owners of TDI, have any common relationship as to identify it with Allied
Bank Group which runs Tanduay Distillers. The dissertation of the Court in
Diatagon Labor Federation Local 110 of the ULGWP vs. Ople, et al. (101
SCRA 534 [1980]) is worthy of restatement, thusly:
We hold that the director of labor Relations acted with grave abuse of
discretion in treating the two companies as a single bargaining unit. The ruling
is arbitrary and untenable because the two companies are indubitably distinct
entities with separate juridical personalities.
The fact that their businesses are related and that the 236 employees of
Georgia Pacific International Corporation were originally employees of Lianga
Bay Logging Co., Inc, is not a justification for disregarding their separate
personalities. Hence, the 236 employees, who are now attached to Georgia
Pacific International should not be allowed to vote in the certification election
at the Lianga Bay Logging Co., Inc. They should vote at a separate certification
election to determine the collective bargaining representative of the
employees of Georgia Pacific International Corporation.
(at pp. 540-541.)
It is basic that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it as well as from that of any
other legal entity to which it may be related (Palay, Inc. et al. vs. Clave, et al.,
124 SCRA 641 [1983]).
The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin
Ace was only a subsequent interested buyer. At the time when termination
notices were sent to its employees, TDI was negotiating with the First Pacific
Metro Corporation for the sale of its assets. Only after First Pacific gave up its
efforts to acquire the assets did Twin Ace or Tanduay Distillers come into the
picture. Respondents-employees have not presented any proof as to
communality of ownership and management to support their contention that
the two companies are one firm or closely related. The doctrine of piercing the
veil of corporate entity applies when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime or where a
corporation is the mere alter ego or business conduit of a person (Indophil
Textile Mill Workers Union vs. Calica, 205 SCRA 697, 703 (1992]). To
disregard the separate juridical personality of a corporation, the wrong-doing
must be clearly and convincingly established. It cannot be presumed (Del
Rosario vs. NLRC, 187 SCRA 777, 7809 [1990]).
The complaint for unfair labor practice, illegal lay off, and separation benefits
was filed against TDI. Only later when the manufacture and sale of Tanduay
products was taken over by Twin Ace or Tanduay Distillers were James Yu
and Wilson Young impleaded.
The corporation itself Twin Ace or Tanduay Distillers was never made a
party to the case.
Another factor to consider is that TDI as a corporation or its shares of stock
were not purchased by Twin Ace. The buyer limited itself to purchasing most
of the assets, equipment, and machinery of TDI. Thus, Twin Ace or Tanduay
Distillers did not take over the corporate personality of DTI although they
manufacture the same product at the same plant with the same equipment
and machinery. Obviously, the trade name "Tanduay" went with the sale
because the new firm does business as Tanduay Distillers and its main
product of rum is sold as Tanduay Rum. There is no showing, however, that
TDI itself was absorbed by Twin Ace or that it ceased to exist as a separate
corporation, In point of fact TDI is now herein a party respondent represented
by its own counsel.
Significantly, TDI in the petition at hand has taken the side of its former
employees and argues against Tanduay Distillers. In its memorandum filed on
January 9, 1995, TDI argues that it was not alone its liability which arbiter
recognized "but also of James Yu and Wilson Young representatives of Twin
Ace and/or the Allied Bank Group doing business under the name "TANDUAY
DISTILLERS," to whom the business and assets of TDI were sold." If TDI and
Tanduay, Distillers are one and the same group or one is a continuation of the
other, the two would not be fighting each other in this case. TDI would not
argue strongly "that the petition for certiorari filed by James Yu and Wilson
Young be dismissed for lack of merit." It is obvious that the second corporation,
Twin Ace or Tanduay Distillers, is an entity separate and distinct, from the first
corporation, TDI. The circumstances of this case are different from the earlier
decisions of the Court in labor cases where the veil of corporate fiction was
pierced.
In La Campana Coffee Factory. Inc. vs. Kaisahan ng Mangagawa sa La
Campana (KKM), (93 Phil, 160 [1953]), La Campana Coffee Factory, Inc. and
La Campana Gaugau Packing were substantially owned by the same person.
They had one office, one management, and a single payroll for both
businesses. The laborers of the gaugau factory and the coffee factory were
also interchangeable, the workers in one factory worked also in the other
factory.
In Claparols vs. Court of Industrial Relations (65 SCRA 613 (1975]), the
Claparols Steel and Nail Plant, which was ordered to pay its workers
backwages, ceased operations on June 30, 1956 and was succeeded on the
very next day, July 1, 1957, by the Claparols Steel Corporation. Both
corporations were substantially owned and controlled by the same person and
there was no break or cessation in operations. Moreover, all the assets of the
steel and nail plant were transferred to the new corporation.
In fine, the fiction of separate and distinct corporate entities cannot, in the
instant case, be disregarded and brushed aside, there being not the least
indication that the second corporation is a dummy or serves as a client of the
first corporate entity.
In the case at bench, since TDI and Twin Ace or Tanduay Distillers are two
separate and distinct entities, the order for Tanduay Distillers (and petitioners)
to reinstate respondents-employees is obviously without legal and factual
basis.
3. Nor could the order and writ to reinstate be anchored on the vague and
seemingly uncalled for alternative disposition in the Barcelona decision that
. . . This is without prejudice to the letter of Mr. James Yu as officer-in-charge
of Tanduay Distillers dated June 16, 1988 to the President of the Tanduay
Distillery, Inc. labor Union.
The June 11, 1988 letter referred to was addressed to Benjamin C. Agaloos,
president of the Tanduay Distillery Labor Union by James Yu in his capacity
as officer-in-charge of Tanduay Distillers.
It pertinently reads:
Please be informed that our company stands firm on its decision to hire
everybody with a clean slate effective June 1, 1988 on a probationary basis
while those currently casual or contractual employees shall retain the same
employment status. In the same manner that the new company stood firm on
its decision to grant a 10% across-the-board increase to all employees, which
in fact has been received by employees concerned.
(p. 88, Rollo.)
We do not find in the decision of Labor Arbiter Cauton Barcelona or in the letter
of James Yu what the respondents are trying to read into it. Labor Arbiter
Cauton-Barcelona found the retrenchment effected by TDI illegal and ordered
TDI to reinstate the complainants and that if there is a change of management,
then separation benefits would be paid. There is, however, no order in the
decision directing Twin Ace or Tanduay Distillers to hire or reinstate herein
four individual respondents.
The letter of James Yu does not mention any reinstatement. It assures the
president of the labor union that Tanduay Distillers stood firm on its decision
to hire employees with a clean slate on a probationary basis. The fact that the
employees of the former employer (TDI) would be hired on a probationary
basis shows that there was no employer-employee relationship between
individual respondents and Twin Ace. Any one who joins the buyer corporation
comes in as an outsider who is newly hired and who starts on a probationary
basis until he proves he deserves to be on a permanent status. His application
can be rejected in the exercise of the hiring authority's discretion.
There is thus no legal basis for Labor Arbiter Cueto or the NLRC to compel
Twin Ace or Tanduay Distillers, or petitioners to "reinstate" the four individual
respondents. The letter of James Yu to the union president was a unilateral
and gratuitous offer with no consideration. It refers to people who still have to
be hired. New hires had to be investigated or evaluated if they have "clean
slates." Twin Ace or Tanduay Distillers and petitioners are being compelled by
public respondents to reinstate workers who were never their employees.
There is no showing that the sale of assets by TDI to Tanduay Distillers
included a condition that employees of the former would be absorbed by the
latter.
Employees of TDI had been terminated in their employment as of April 28,
1988. Petitioners state that Twin Ace bought the assets of TDI after the
employment of the individual respondents had been terminated. True, Labor
Arbiter Cauton-Barcelona declared the retrenchment program of TDI as illegal.
This decision, however, did not convert the individual respondents into
employees of the firm which purchased the assets of the former employer. It
merely held TDI liable for the consequences of the illegal retrenchment.
Labor Arbiter Cueto and the NLRC, therefore, committed grave abuse of
discretion when they read into the decision of Labor Arbiter Cauton- Barcelona
something which did not appear therein. And even assuming that Labor Arbiter
Cauton-Barcelona formally included an order for the petitioners to hire the
individual respondents, there would be no factual or legal basis for such an
order. An employer-employee relation is created by contract, and can not be
forced upon either party simply upon order of a labor arbiter. The hiring of
employees is one of the recognized prerogatives of management.
4. Another factor which militates against the claim for reinstatement of the
individual respondents is their having received separation pay as part of a
compromise agreement in the course of their litigation with TDI. Rodrigo F.
Santos received P20,282.03; Roque Estoce, P20,092.50; Eduardo Daliwan,
P19,973.40; and Fernando A. Duran, P25,702.00. These amounts correspond
to their entitlement to separation benefits. Having received separation pay
from a former employer, how can they compel, as a matter of right, another
company to hire them on a supposed "reinstatement" basis? The orders
executing the earlier decision of Labor Arbiter Cauton-Barcelona and directing
petitioners to immediately reinstate the four individual respondents to their
former positions are, thus, characterized by grave abuse of discretion. There
are no "former positions" to which individual respondents may be reinstated
because they never hired by Twin Ace/Tanduay Distillers and had never
worked for it.
WHEREFORE, the petition is hereby GRANTED, The questioned Order of the
Labor Arbiter Daniel C. Cueto dated November 17, 1992 and the decision of
the National Labor Relations Commission upholding said order are set aside
as null and void. No special pronouncement is made as to costs.
SO ORDERED.
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN
PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES,
INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate Court
which sustained the private respondent's contention that the deed of exchange
whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to
Delpher Trades Corporation in exchange for 2,500 shares of stock was
actually a deed of sale which violated a right of first refusal under a lease
contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of
27,169 square meters of real estate Identified as Lot. No. 1095, Malinta Estate,
in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro
Manila) which is covered by Transfer Certificate of Title No. T-4240 of the
Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components
International Inc. the same property and providing that during the existence or
after the term of this lease the lessor should he decide to sell the property
leased shall first offer the same to the lessee and the letter has the priority to
buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc.
assigned its rights and obligations under the contract of lease in favor of Hydro
Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin
Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were annotated at
he back of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin
and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the
former conveyed to the latter the leased property (TCT No.T-4240) together
with another parcel of land also located in Malinta Estate, Valenzuela, Metro
Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with
a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes
Philippines, Inc., filed an amended complaint for reconveyance of Lot. No.
1095 in its favor under conditions similar to those whereby Delpher Trades
Corporation acquired the property from Pelagia Pacheco and Delphin
Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff.
The dispositive portion of the decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid
existence of the plaintiffs preferential right to acquire the subject property (right
of first refusal) and ordering the defendants and all persons deriving rights
therefrom to convey the said property to plaintiff who may offer to acquire the
same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose
area is 27,169 square meters only. Without pronouncement as to attorney's
fees and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p.
134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate
Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to
review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set
aside the resolution denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire
from petitioners a parcel of industrial land consisting of 27,169 square meters
or 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll
expressway) for only P14/sq. meter, or a total of P380,366, although the
prevailing value thereof is approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there
is no "sale" or transfer of actual ownership interests by petitioners to third
parties; and
3. Assuming arguendo that there has been a transfer of actual ownership
interests, private respondent will acquire the land not under "similar
conditions" by which it was transferred to petitioner Delpher Trades
Corporation, as provided in the same contractual provision invoked by private
respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange"
of the properties executed by the Pachecos on the one hand and the Delpher
Trades Corporation on the other was meant to be a contract of sale which, in
effect, prejudiced the private respondent's right of first refusal over the leased
property included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia
Pacheco testified that Delpher Trades Corporation is a family corporation; that
the corporation was organized by the children of the two spouses (spouses
Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and
Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes
Philippines in order to perpetuate their control over the property through the
corporation and to avoid taxes; that in order to accomplish this end, two pieces
of real estate, including Lot No. 1095 which had been leased to Hydro Pipes
Philippines, were transferred to the corporation; that the leased property was
transferred to the corporation by virtue of a deed of exchange of property; that
in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued
no par value shares of stock which are equivalent to a 55% majority in the
corporation because the other owners only owned 2,000 shares; and that at
the time of incorporation, he knew all about the contract of lease of Lot. No.
1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration,
they refer to this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no
transfer of ownership of the subject parcel of land since the Pachecos
remained in control of the property. Thus, the petitioners allege: "Considering
that the beneficial ownership and control of petitioner corporation remained in
the hands of the original co-owners, there was no transfer of actual ownership
interests over the land when the same was transferred to petitioner corporation
in exchange for the latter's shares of stock. The transfer of ownership, if
anything, was merely in form but not in substance. In reality, petitioner
corporation is a mere alter ego or conduit of the Pacheco co-owners; hence
the corporation and the co-owners should be deemed to be the same, there
being in substance and in effect an Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They
argue that there was no sale and that they exchanged the land for shares of
stocks in their own corporation. "Hence, such transfer is not within the letter,
or even spirit of the contract. There is a sale when ownership is transferred for
a price certain in money or its equivalent (Art. 1468, Civil Code) while there is
a barter or exchange when one thing is given in consideration of another thing
(Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades
Corporation is a corporate entity separate and distinct from the Pachecos.
Thus, it contends that it cannot be said that Delpher Trades Corporation is the
Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having
treated Delpher Trades Corporation as such a separate and distinct corporate
entity, is not a party who may allege that this separate corporate existence
should be disregarded. It maintains that there was actual transfer of ownership
interests over the leased property when the same was transferred to Delpher
Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by
subscription or by purchasing stock directly from the corporation or from
individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing
Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their
properties, the Pachecos acquired 2,500 original unissued no par value shares
of stocks of the Delpher Trades Corporation. Consequently, the Pachecos
became stockholders of the corporation by subscription "The essence of the
stock subscription is an agreement to take and pay for original unissued
shares of a corporation, formed or to be formed." (Rohrlich 243, cited in
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos
took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate
interest in the capital stock measured by value, but only an aliquot part of the
whole number of such shares of the issuing corporation. The holder of no-par
shares may see from the certificate itself that he is only an aliquot sharer in
the assets of the corporation. But this character of proportionate interest is not
hidden beneath a false appearance of a given sum in money, as in the case
of par value shares. The capital stock of a corporation issuing only no-par
value shares is not set forth by a stated amount of money, but instead is
expressed to be divided into a stated number of shares, such as, 1,000 shares.
This indicates that a shareholder of 100 such shares is an aliquot sharer in the
assets of the corporation, no matter what value they may have, to the extent
of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention
of persons interested in the financial condition of a corporation is focused upon
the value of assets and the amount of its debts. (Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980
Edition, p. 107).
Moreover, there was no attempt to state the true or current market value of the
real estate. Land valued at P300.00 a square meter was turned over to the
family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock,
the Pachecos have control of the corporation. Their equity capital is 55% as
against 45% of the other stockholders, who also belong to the same family
group.
In effect, the Delpher Trades Corporation is a business conduit of the
Pachecos. What they really did was to invest their properties and change the
nature of their ownership from unincorporated to incorporated form by
organizing Delpher Trades Corporation to take control of their properties and
at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the
spouses Hernandez and Pacheco in connection with their execution of a deed
of exchange on the properties for no par value shares of the defendant
corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed
of exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the
spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits, and other
inherent benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of
taxation in entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free
exchange of property, they were able to execute the deed of exchange free
from income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-
sub-par. (2) Exceptions regarding the provision which I quote: "No gain or loss
shall also be recognized if a person exchanges his property for stock in a
corporation of which as a result of such exchange said person alone or
together with others not exceeding four persons gains control of said
corporation."
Q Did you explain to the spouses this benefit at the time you executed the
deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par
value share in the defendant corporation was for the purpose of flexibility. Can
you explain flexibility in connection with the ownership of the property in
question?
A There is flexibility in using no par value shares as the value is determined
by the board of directors in increasing capitalization. The board can fix the
value of the shares equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by
the corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to the
property indefinitely for a period of at least 50 years. On the other hand, if the
property is held by the spouse the property will be tied up in succession
proceedings and the consequential payments of estate and inheritance taxes
when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular
person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does
not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate
planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer
to decrease the amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be doubted." (Liddell &
Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v.
Helvering, 293 U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher
Trades Corporation cannot be considered a contract of sale. There was no
transfer of actual ownership interests by the Pachecos to a third party. The
Pacheco family merely changed their ownership from one form to another. The
ownership remained in the same hands. Hence, the private respondent has
no basis for its claim of a light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned
decision and resolution of the then Intermediate Appellate Court are
REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-
V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.
JARDINE DAVIES, INC., G.R. No. 151438 Petitioner,
Present: PUNO, J., Chairman, AUSTRIA-MARTINEZ,
versus CALLEJO, SR., TINGA, and CHICO-NAZARIO, JJ. JRB REALTY,
INC., Respondent. Promulgated:
July 15, 2005
3. Ordering defendants to jointly and severally pay plaintiffs P150,000.00
attorneys fees and other costs of litigation, as well as exemplary damages in
an amount not less than or equal to Prayer 2 above; and
4. Granting plaintiff such other and further relief as shall be just and equitable
in the premises.[7]

CALLEJO, SR., J.:
Before us is a petition for review of the Decision[1] of the Court of Appeals (CA)
in CA-G.R. CV No. 54201 affirming in toto that of the Regional Trial Court
(RTC) in Civil Case No. 90-237 for specific performance; and the Resolution
dated January 11, 2002 denying the motion for reconsideration thereof.
The facts are as follows:
Of the four defendants, only the petitioner filed its Answer. The court did not
acquire jurisdiction over Aircon because the latter ceased operations, as its
corporate life ended on December 31, 1986.[8] Upon motion, defendants
Fedders Air Conditioning USA and Maxim were declared in default.[9]
On May 17, 1996, the RTC rendered its Decision, the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered ordering defendants Jardine
Davies, Inc., Fedders Air Conditioning USA, Inc. and Maxim Industrial and
Merchandising Corporation, jointly and severally:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named 1. To deliver, install and place into operation the two (2) brand new
Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo Village, units of Fedders unitary packaged airconditioning units each of 10 tons
Makati City. An air conditioning system was needed for the Blanco Law Firm capacity with rotary compressors to deliver 30,000 kcal or 120,000 BTUH to
housed at the second floor of the building. On March 13, 1980, the the second floor of the Blanco Center building, or to pay plaintiff the current
respondents Executive Vice-President, Jose R. Blanco, accepted the contract price for two such units;
quotation of Mr. A.G. Morrison, President of Aircon and Refrigeration
2. To reimburse plaintiff the amount of P556,551.55 as and for the
Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal
unsaved electricity bills from October 21, 1981 up to April 30, 1995; and
(Code: 10-TR) air conditioning equipment with a net total selling price
another amount of P185,951.67 as and for repair costs;
of P99,586.00.[2] Thereafter, two (2) brand new packaged air conditioners of
10 tons capacity each to deliver 30,000 kcal or 120,000 BTUH[3] were installed
by Aircon. When the units with rotary compressors were installed, they could
not deliver the desired cooling temperature. Despite several adjustments and 3. To pay plaintiff P50,000.00 as and for attorneys fees; and
corrective measures, the respondent conceded that Fedders Air Conditioning
USAs technology for rotary compressors for big capacity conditioners like
those installed at the Blanco Center had not yet been perfected. The parties
4. Cost of suit.[10]
thereby agreed to replace the units with reciprocating/semi-hermetic
compressors instead. In a Letter dated March 26, 1981,[4] Aircon stated that it
would be replacing the units currently installed with new ones using rotary
compressors, at the earliest possible time. Regrettably, however, it could not The petitioner filed its notice of appeal with the CA, alleging that the trial court
specify a date when delivery could be effected. erred in holding it liable because it was not a party to the contract between
JRB Realty, Inc. and Aircon, and that it had a personality separate and distinct
TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the from that of Aircon.
maintenance of the units, inclusive of parts and services. In October 1987, the
respondent learned, through newspaper ads,[5] that Maxim Industrial and On March 23, 2000, the CA affirmed the trial courts ruling in toto; hence, this
Merchandising Corporation (Maxim, for short) was the new and exclusive petition.
licensee of Fedders Air Conditioning USA in the Philippines for the
manufacture, distribution, sale, installation and maintenance of Fedders air
conditioners. The respondent requested that Maxim honor the obligation of The petitioner raises the following assignment of errors:
Aircon, but the latter refused. Considering that the ten-year period of
prescription was fast approaching, to expire on March 13, 1990, the I.
respondent then instituted, on January 29, 1990, an action for specific
performance with damages against Aircon & Refrigeration Industries, Inc., THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR
Fedders Air Conditioning USA, Inc., Maxim Industrial & Merchandising THE ALLEGED CONTRACTUAL BREACH OF AIRCON SOLELY BECAUSE
Corporation and petitioner Jardine Davies, Inc.[6] The latter was impleaded as THE LATTER WAS FORMERLY JARDINES SUBSIDIARY.
defendant, considering that Aircon was a subsidiary of the petitioner. The
respondent prayed that judgment be rendered, as follows:
II.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS

1. Ordering the defendants to jointly and severally at their account and
JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT
expense deliver, install and place in operation two
DECLARING AIRCONS OBLIGATION TO DELIVER THE TWO (2)
brand new units of each 10-tons capacity Fedders unitary packaged air
AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY
conditioners with Fedders USAs technology perfected rotary compressors to
COMPLIED WITH IN GOOD FAITH.
always deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco
Center building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;
III.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS

2. Ordering defendants to jointly and severally reimburse plaintiff not only the
sums of P415,118.95 for unsaved electricity from 21st October 1981 to
7th January 1990 and P99,287.77 for repair costs of the two service units from
7th March 1987 to 11th January 1990, with legal interest thereon from the filing
of this Complaint until fully reimbursed, but also like unsaved electricity costs
and like repair costs therefrom until Prayer No. 1 above shall have been
complied with;
JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT
DECLARING JRBS CAUSES OF ACTION AS HAVING BEEN BARRED BY
LACHES.
IV.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS
JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN
FINDING JRB ENTITLED TO RECOVER ALLEGED UNSAVED
ELECTRICITY EXPENSES.

V.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY
ATTORNEYS FEES.
VI.
THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO
JARDINE FOR DAMAGES.[11]
It is the well-settled rule that factual findings of the trial court, as affirmed by
the CA, are accorded high respect, even finality at times. However,
considering that the factual findings of the CA and the RTC were based on
speculation and conjectures, unsupported by substantial evidence, the Court
finds that the instant case falls under one of the excepted instances. There is,
thus, a need to correct the error.
The trial court ruled that Aircon was a subsidiary of the petitioner, and
concluded, thus:
Plaintiffs documentary evidence shows that at the time it contracted with
Aircon on March 13, 1980 (Exhibit D) and on the date the revised agreement
was reached on March 26, 1981, Aircon was a subsidiary of Jardine. The
phrase A subsidiary of Jardine Davies, Inc. was printed on Aircons letterhead
of its March 13, 1980 contract with plaintiff (Exhibit D-1), as well as the Aircons
letterhead of Jardines Director and Senior Vice-President A.G. Morrison and
Aircons President in his March 26, 1981 letter to plaintiff (Exhibit J-2)
confirming the revised agreement. Aircons newspaper ads of April 12 and 26,
1981 and a press release on August 30, 1982 (Exhibits E, F and L) also show
that defendant Jardine publicly represented Aircon to be its subsidiary.
Records from the Securities and Exchange Commission (SEC) also reveal
that as per Jardines December 31, 1986 and 1985 Financial Statements that
The company acts as general manager of its subsidiaries (Exhibit P). Jardines
Consolidated Balance Sheet as of December 31, 1979 filed with the SEC listed
Aircon as its subsidiary by owning 94.35% of Aircon (Exhibit P-1). Also,
Aircons reportorial General Information Sheet as of April 1980 and April 1981
filed with the SEC show that Jardine was 94.34% owner of Aircon (Exhibits Q
and R) and that out of seven members of the Board of Directors of Aircon, four
(4) are also of Jardine.
Defendant Jardines witness, Atty. Fe delos Santos-Quiaoit admitted that
defendant Aircon, renamed Aircon & Refrigeration Industries, Inc. is one of the
subsidiaries of Jardine Davies (TSN, September 22, 1995, p. 12). She also
testified that Jardine nominated, elected, and appointed the controlling
majority of the Board of Directors and the highest officers of Aircon (Ibid, pp.
10,13-14).
The foregoing circumstances provide justifiable basis for this Court to
disregard the fiction of corporate entity and treat defendant Aircon as part of
the instrumentality of co-defendant Jardine.[12]
The respondent court arrived at the same conclusion basing its ruling on the
following documents, to wit:
(a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1);
(b) Newspaper Advertisements (Exhs. E-1 and F-1);
(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty.
J.R. Blanco (Exh. J);
(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);
(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing
Aircon as one of its subsidiaries (Exh. P);
(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);
(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1).[13]
Applying the doctrine of piercing the veil of corporate fiction, both the
respondent and trial courts conveniently held the petitioner liable for the
alleged omissions of Aircon, considering that the latter was its instrumentality
or corporate alter ego. The petitioner is now before us, reiterating its defense
of separateness, and the fact that it is not a party to the contract.
We find merit in the petition.
It is an elementary and fundamental principle of corporation law that a
corporation is an artificial being invested by law with a personality separate
and distinct from its stockholders and from other corporations to which it may
be connected. While a corporation is allowed to exist solely for a lawful
purpose, the law will regard it as an association of persons or in case of two
corporations, merge them into one, when this corporate legal entity is used as
a cloak for fraud or illegality.[14] This is the doctrine of piercing the veil of
corporate
fiction which applies only when such corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime.[15] The rationale
behind piercing a corporations identity is to remove the barrier between the
corporation from the persons comprising it to thwart the fraudulent and illegal
schemes of those who use the corporate personality as a shield for
undertaking certain proscribed activities.[16]
While it is true that Aircon is a subsidiary of the petitioner, it does not
necessarily follow that Aircons corporate legal existence can just be
disregarded. In Velarde v. Lopez, Inc.,[17] the Court categorically held that a
subsidiary has an independent and separate juridical personality, distinct from
that of its parent company; hence, any claim or suit against the latter does not
bind the former, and vice versa. In applying the doctrine, the following
requisites must be established: (1) control, not merely majority or complete
stock control; (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 acts in contravention of plaintiffs legal rights;
and (3) the aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.[18]
The records bear out that Aircon is a subsidiary of the petitioner only because
the latter acquired Aircons majority of capital stock. It, however, does not
exercise complete control over Aircon; nowhere can it be gathered that the
petitioner manages the business affairs of Aircon. Indeed, no management
agreement exists between the petitioner and Aircon, and the latter is an
entirely different entity from the petitioner.[19]
Jardine Davies, Inc., incorporated as early as June 28, 1946,[20] is primarily a
financial and trading company. Its Articles of Incorporation states among many
others that the purposes for which the said corporation was formed, are as
follows:
(a) To carry on the business of merchants, commission merchants, brokers,
factors, manufacturers, and agents;
(b) Upon complying with the requirements of law applicable thereto, to act as
agents of companies and underwriters doing and engaging in any and all kinds
of insurance business.[21]
On the other hand, Aircon, incorporated on December 27, 1952,[22] is a
manufacturing firm. Its Articles of Incorporation states that its purpose is mainly
To carry on the business of manufacturers of commercial and household
appliances and accessories of any form, particularly to manufacture,
purchase, sell or deal in air conditioning and refrigeration products of every
class and description as well as accessories and parts thereof, or other
kindred articles; and to erect, or buy, lease, manage, or otherwise acquire
manufactories, warehouses, and depots for manufacturing, assemblage,
repair and storing, buying, selling, and dealing in the aforesaid appliances,
accessories and products. [23]
The existence of interlocking directors, corporate officers and shareholders,
which the respondent court considered, is not enough justification to pierce
the veil of corporate fiction, in the absence of fraud or other public policy
considerations.[24] But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction applies only
when such fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime.[25] To warrant resort to this extraordinary remedy, there
must be proof that the corporation is being used as a cloak or cover for fraud
or illegality, or to work injustice.[26] Any piercing of the corporate veil has to be
done with caution.[27] The wrongdoing must be clearly and convincingly
established. It cannot just be presumed.[28]
In the instant case, there is no evidence that Aircon was formed or utilized with
the intention of defrauding its creditors or evading its contracts and obligations.
There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a
manufacturing firm of air
conditioners, complied with its obligation of providing two air conditioning units
for the second floor of the Blanco Center in good faith, pursuant to its contract
with the respondent. Unfortunately, the performance of the air conditioning
units did not satisfy the respondent despite several adjustments and corrective
measures. In a Letter[29] dated October 22, 1980, the respondent even
conceded that Fedders Air Conditioning USA has not yet perhaps perfected
its technology of rotary compressors, and agreed to change the compressors
with the semi-hermetic type. Thus, Aircon substituted the units with
serviceable ones which delivered the cooling temperature needed for the law
office. After enjoying ten (10) years of its cooling power, respondent cannot
now complain about the performance of these units, nor can it demand a
replacement thereof.
Moreover, it was reversible error to award the respondent the amount
of P556,551.55 representing the alleged 30% unsaved electricity costs
and P185,951.67 as maintenance cost without showing any basis for such
award. To justify a grant of actual or compensatory damages, it is necessary
to prove with a reasonable degree of certainty, premised upon competent
proof and on the best evidence obtainable by the injured party, the actual
amount of loss.[30] The respondent merely based its cause of action on Aircons
alleged representation that Fedders air conditioners with rotary compressors
can save as much as 30% on electricity compared to other brands. Offered in
evidence were newspaper advertisements published on April 12 and 26, 1981.
The respondent then recorded its electricity consumption from October 21,
1981 up to April 3, 1995 and computed 30% thereof, which amounted
to P556,551.55. The Court rules that this amount is highly speculative and
merely hypothetical, and for which the petitioner can not be held accountable.
First. The respondent merely relied on the newspaper advertisements showing
the Fedders window-type air conditioners, which are far different from the big
capacity air conditioning units installed at Blanco Center.
Second. After such print advertisements, the respondent informed Aircon that
it was going to install an electric meter to register its electric consumption so
as to determine the electric costs not saved by the presently installed units
with semi-hermetic compressors. Contrary to the allegations of the respondent
that this was in pursuance to their Revised Agreement, no proof was adduced
that Aircon agreed to the respondents proposition. It was a unilateral act on
the part of the respondent, which Aircon did not oblige or commit itself to pay.
Third. Needless to state, the amounts computed are mere estimates
representing the respondents self-serving claim of unsaved electricity cost,
which is too speculative and conjectural to merit consideration. No other
proofs, reports or bases of comparison showing that Fedders Air Conditioning
USA could indeed cut down electricity cost by 30% were adduced.
Likewise, there is no basis for the award of P185,951.67 representing
maintenance cost. The respondent merely submitted a schedule[31] prepared
by the respondents accountant, listing the alleged repair costs from March
1987 up to June 1994. Such evidence is self-serving and can not also be given
probative weight, considering that there are no proofs of receipts,
vouchers, etc., which would substantiate the amounts paid for such services.
Absent any more convincing proof, the Court finds that the respondents claims
are without basis, and cannot, therefore, be awarded.
We sustain the petitioners separateness from that of Aircon in this case. It
bears stressing that the petitioner was never a party to the contract. Privity of
contracts take effect only between parties, their successors-in-interest, heirs
and assigns.[32] The petitioner, which has a order. Sample of said cable is hereto attached as Exhibit F. The bills of lading
separate and distinct legal personality from that of Aircon, cannot, therefore,
be held liable.
IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed
decision of the Court of Appeals, affirming the decision of the Regional Trial
Court is REVERSED and SET ASIDE. The complaint of the respondent
is DISMISSED. Costs against the respondent.
SO ORDERED.
G.R. No. L-47673 October 10, 1946
KOPPEL (PHILIPPINES), INC., plaintiff-appellant,
vs.
ALFREDO L. YATCO, Collector of Internal Revenue, defendant-appellee.
HILADO, J.:
This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court
of First Instance of Manila in civil case No. 51218 of said court dismissing said
corporations complaint for the recovery of the sum of P64,122.51 which it had
paid under protest to the Collector of Internal Revenue on October 30, 1936,
as merchant sales tax. The main facts of the case were stipulated in the court
below as follows:
AGREED STATEMENT OF FACTS
Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the
Solicitor General and undersigned Assistant Attorney of the Bureau of Justice
and, with leave of this Honorable Court, hereby respectfully stipulated and
agree to the following facts, to wit:
I. That plaintiff is a corporation duly organized and existing under and by virtue
of the laws of the Philippines, with principal office therein at the City of Manila,
the capital stock of which is divided into thousand (1,000) shares of P100 each.
The Koppel Industrial Car and Equipment company, a corporation organized
and existing under the laws of the State of Pennsylvania, United States of
America, and not licensed to do business in the Philippines, owned nine
hundred and ninety-five (995) shares out of the total capital stock of the plaintiff
from the year 1928 up to and including the year 1936, and the remaining five
(5) shares only were and are owned one each by officers of the plaintiff
corporation.
II. That plaintiff, at all times material to this case, was and now is duly licensed
to engage in business as a merchant and commercial broker in the Philippines;
and was and is the holder of the corresponding merchants and commercial
brokers privilege tax receipts.
III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer
in lieu of Mr. Alfredo L. Yatco.
IV. That during the period from January 1, 1929, up to and including
December 31, 1932, plaintiff transacted business in the Philippines in the
following manner, with the exception of the transactions which are described
in paragraphs V and VI of this stipulation:
When a local buyer was interested in the purchase of railway materials,
machinery, and supplies, it asked for price quotations from plaintiff. A typical
form of such request is attached hereto and made a part hereof as Exhibit
A. (Exhibit A represents typical transactions arising from written requests for
quotations, while Exhibits B to G, inclusive, are typical transactions arising
from verbal requests for quotation.) Plaintiff then cabled for the quotation
desired for Koppel Industrial Car and Equipment Company. A sample of the
pertinent cable is hereto attached and made a part hereof as Exhibit B. Koppel
Industrial Car and Equipment Company answered by cable quoting its cost
price, usually A. C. I. F. Manila cost price, which was later followed by a letter
of confirmation. A sample of the said cable quotation and of the letter of
confirmation are hereto attached and made a part hereof as Exhibits C and C-
1. Plaintiff, however, quoted by Koppel Industrial Car and Equipment
Company. Copy of the plaintiffs letter to purchaser is hereto attached and
made a part hereof as Exhibit D. On the basis of these quotations, orders were
placed by the local purchasers, copies of which orders are hereto attached as
Exhibits E and E-1.
A cable was then sent to Koppel Industrial Car and Equipment company giving
instructions to ship the merchandise to Manila forwarding the customers
were usually made to order and indorsed in blank with notation to the effect
that the buyer be notified of the shipment of the goods covered in the bills of
lading; commercial invoices were issued by Koppel Industrial Car and
Equipment Company in the names of the purchasers and certificates of
insurance were likewise issued in their names, or in the name of Koppel
Industrial Car and Equipment Company but indorsed in blank and attached to
drafts drawn by Koppel Industrial Car and Equipment Company on the
purchasers, which were forwarded through foreign banks to local banks.
Samples of the bills of lading are hereto attached as Exhibits F-1, I-1, I-2 and
I-3. Bills of ladings, Exhibits I-1, I-2 and I-3, may equally have been employed,
but said Exhibits I-1, I-2 and I-3 have no connection with the transaction
covered by Exhibits B to G, inclusive. The purchasers secured the shipping
papers by arrangement with the banks, and thereupon received and cleared
the shipments. If the merchandise were of European origin, and if there was
not sufficient time to forward the documents necessary for clearance, through
foreign banks to local banks, to the purchasers, the Koppel Industrial Car and
Equipment company did, in many cases, send the documents directly from
Europe to plaintiff with instructions to turn these documents over to the
purchasers. In many cases, where sales was effected on the basis of C. I. F.
Manila, duty paid, plaintiff advanced the sums required for the payment of the
duty, and these sums, so advanced, were in every case reimbursed to plaintiff
by Koppel Industrial Car and Equipment Company. The price were payable by
drafts agreed upon in each case and drawn by Koppel Industrial Car and
Equipment Company on respective purchasers through local banks, and
payments were made to the banks by the purchasers on presentation and
delivery to them of the above-mentioned shipping documents or copies
thereof. A sample of said drafts is hereto attached as Exhibit G. Plaintiff
received by way of compensation a percentage of the profits realized on the
above transactions as fixed in paragraph 6 of the plaintiffs contract with
Koppel Industrial Car and Equipment Company, which contract is hereto
attached as Exhibit H, and suffered its corresponding share in the losses
resulting from some of the transactions.
That the total gross sales from January 1, 1929, up to and including December
31, 1932, effected in the foregoing manner and under the above specified
conditions, amount to P 3,596,438.84.
V. That when a local sugar central was interested in the purchase of railway
materials, machinery and supplies, it secured quotations from, and placed the
corresponding orders with, the plaintiff in substantially the same manner as
outlined in paragraph IV of this stipulation, with the only difference that the
purchase orders which were agreed to by the central and the plaintiff are
similar to the sample hereto attached and made a part hereof as Exhibit I.
Typical samples of the bills of lading covering the herein transaction are hereto
attached and made a part hereto as Exhibits I-1, I-2 and I-3. The value of the
sales carried out in the manner mentioned in this paragraph is P 133,964.98.
VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila,
Philippines, placed an option with Koppel Industrial Car and Equipment
Company, through plaintiff, to purchase within three months a pair of Atlas-
Diesel Marine Engines. Koppel Industrial Car and Equipment Company
purchased said Diesel Engines in Stockholm, Sweden, for $16,508.32. The
suppliers drew a draft for the amount of $16,508.32 on the Koppel Industrial
Car and Equipment Company, which paid the amount covered by the draft.
Later, Miguel J. Ossorio definitely called the deal off, and as Koppel Industrial
Car and Equipment Company could not ship to or draw on said Mr. Miguel J.
Ossorio, it in turn drew another draft on plaintiff for the same amount at six
months sight, with the understanding that Koppel Industrial Car and
Equipment Company would reimburse plaintiff when said engines were
disposed of. Plaintiff honored the draft and debited the said sum of $16,508.32
to merchandise account. The engines were left stored at Stockholm, Sweden.
On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for $21,000 (P42,000) C. I.
F. Hongkong. The engines were shipped to Hongkong and a draft for $21,000
was drawn by Koppel Industrial Car and Equipment Company on Mr. Cesar
Barrios. After the draft was fully paid by Mr. Barrios, Koppel Industrial Car and
Equipment Company reimbursed plaintiff with cost price of $16,508.32 and
credited it with $1,152.95 as its share of the profit on the transaction. Exhibits
J and J-1 are herewith attached and made integral parts of this stipulation with
particular reference to paragraph VI hereof.
VII. That plaintiffs share in the profits realized out of these transactions
described in paragraphs IV, V and VI hereof totaling P 3,772,403.82, amounts
to P 132,201.30; and that plaintiff within the time provided by law returned the
aforesaid amount P 132,201.30 for the purpose of the commercial brokers 4
per cent tax and paid thereon the sum P 5,288.05 as such tax.
VIII. That defendant demanded of the plaintiff the sum of P 64,122.51 as the
merchants sales tax of 1% per cent on the amount of P 3,772,403.82,
representing the total gross value of the sales mentioned in paragraphs IV, V
and VI hereof, including the 25 percent surcharge for the late payment of the
said tax, which tax and surcharge were determined after the amount of P
5,288.05 mentioned in paragraph VI hereof was deducted.
IX. That plaintiff, on October 30, 1936, paid under protest said sum of P
64,122.51 in order to avoid further penalties, levy and distraint proceedings.
X. That defendant, on November 10, 1936, overruled plaintiffs protest, and
defendant has failed and refused and still fails and refuses, notwithstanding
demands by plaintiff, to return to the plaintiff said sum of P 64,122.51 or any
part thereof.
xxx xxx xxx
That the parties hereby reserve the right to present additional evidence in
support of their respective contentions.
Manila, Philippines, December 26, 1939
(Sgd.) ROMAN OZAETA
Solicitor General
(Sgd.) ANTONIO CAIZARES
Assistant Attorney
(Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila
Both parties adduced some oral evidence in clarification of or addition to their
agreed statement of facts. A preponderance of evidence has established,
besides the facts thus stipulated, the following:
(a) The shares of stock of plaintiff corporation were and are all owned by
Koppel Industries Car and Equipment Company of Pennsylvania, U.S.A.,
exceptive which were necessary to qualify the Board of Directors of said
plaintiff corporation;
(b) In the transactions involved herein the plaintiff corporation acted as the
representative of Koppel Industrial Car and Equipment Company only, and not
as the agent of both the latter company and the respective local purchasers
plaintiffs principal witness, A.H. Bishop, its resident Vice-President, in his
testimony invariably referred to Koppel Industrial Car and Equipment Co. as
our principal 9 t. s. n., pp. 10, 11, 12, 19, 75), except that at the bottom of
page 10 to the top of page 11, the witness stated that they had several
principal abroad but that our principal abroad was, for the years in question,
Koppel Industrial Car and Equipment Company, and on page 68, he testified
that what he actually said was . . . but our principal abroad and not our
principal abroad as to which it is very significant that neither this witness
nor any other gave the name of even a single other principal abroad of the
plaintiff corporation;
(c) The plaintiff corporation bore alone incidental expenses as, for instance,
cable expenses-not only those of its own cables but also those of its principal
(t.s.n., pp. 52, 53);
(d) the plaintiffs share in the profits realized from the transactions in which it
intervened was left virtually in the hands of Koppel Industrial Car and
Equipment Company (t.s.n., p. 51);
(e) Where drafts were not paid by the purchasers, the local banks were
instructed not to protest them but to refer them to plaintiff which was fully
empowered by Koppel Industrial Car and Equipment company to instruct the
banks with regards to disposition of the drafts and documents (t.s.n., p. 50;
Exhibit G);
(f) Where the goods were European origin, consular invoices, bill of lading,
and, in general, the documents necessary for clearance were sent directly to
plaintiff (t.s.n., p. 14);
(g) If the plaintiff had in stock the merchandise desired by local buyers, it
immediately filled the orders of such local buyers and made delivery in the
Philippines without the necessity of cabling its principal in America either for
price quotations or confirmation or rejection of that agreed upon between it
and the buyer (t.s.n., pp. 39-43);
(h) Whenever the deliveries made by Koppel Industrial Car and Equipment
Company were incomplete or insufficient to fill the local buyers orders, plaintiff
used to make good the deficiencies by deliveries from its own local stock, but
in such cases it charged its principal only the actual cost of the merchandise
thus delivered by it from its stock and in such transactions plaintiff did not
realize any profit (t.s.n., pp. 53-54);
(i) The contract of sale involved herein were all perfected in the Philippines.
Those described in paragraph IV of the agreed statement of facts went through
the following process: (1) When a local buyer was interested in the purchase
of railway materials, machinery, and supplies, it asked for price quotations
from plaintiff; (2) Plaintiff then cabled for the quotation desired from Koppel
Industrial Car and Equipment Company; (3) Plaintiff, however, quoted to the
purchaser a selling price above the figures quoted by Koppel Industrial Car
and Equipment Company; (4) On the basis of these quotations, orders were
placed by the local purchasers . . .
Those described in paragraph V of said agreed statement of facts were
transacted in substantially the same manner as outlined in paragraph IV.
As to the single transaction described in paragraph VI of the same agreed
statement of facts, discarding the Ossorio option which anyway was called off,
On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for $21,000(P 42,000) C.I.F.
Hongkong. (Emphasis supplied.).
(j) Exhibit H contains the following paragraph:
It is clearly understood that the intent of this contract is that the broker shall
perform only the functions of a broker as set forth above, and shall not take
possession of any of the materials or equipment applying to said orders or
perform any acts or duties outside the scope of a broker; and in no sense shall
this contract be construed as granting to the broker the power to represent the
principal as its agent or to make commitments on its behalf.
The Court of First Instance held for the defendant and dismissed plaintiffs
complaint with costs to it.
Upon this appeal, seven errors are assigned to said judgment as follows:
1. That the court a quo erred in not holding that appellant is a domestic
corporation distinct and separate from, and not a mere branch of Koppel
Industrial Car and Equipment Co.;
2. the court a quo erred in ignoring the ruling of the Secretary of Finance, dated
January 31, 1931, Exhibit M;
3. the court a quo erred in not holding that a character of a broker is
determined by the nature of the transaction and not by the basis or measure
of his compensation;
4. The court a quo erred in not holding that appellant acted as a commercial
broker in the transactions covered under paragraph VI of the agreed statement
of facts;
5. The court a quo erred in not holding that appellant acted as a commercial
broker in the transactions covered under paragraph v of the agreed statement
of facts;
6. The court a quo erred in not holding that appellant acted as a commercial
broker in the sole transaction covered under paragraph VI of the agreed
statement of facts;
7. the court a quo erred in dismissing appellants complaint.
The lower court found and held that Koppel (Philippines), Inc. is a mere dummy
or brach (hechura) of Koppel industrial Car and Equipment Company. The
lower court did not deny legal personality to Koppel (Philippines), Inc. for any
and all purposes, but in effect its conclusion was that, in the transactions
involved herein, the public interest and convenience would be defeated and
what would amount to a tax evasion perpetrated, unless resort is had to the
doctrine of disregard of the corporate fiction.
I.
In its first assignment of error appellant submits that the trial court erred in not
holding that it is a domestic corporation distinct and separate from and not a
mere branch of Koppel Industrial Car and Equipment Company. It contends
that its corporate existence as Philippine corporation can not be collaterally
attacked and that the Government is estopped from so doing.
As stated above, the lower court did not deny legal personality to appellant for
any and all purposes, but held in effect that in the transaction involved in this
case the public interest and convenience would be defeated and what would
amount to a tax evasion perpetrated, unless resort is had to the doctrine of
disregard of the corporate fiction. In other words, in looking through the
corporate form to the ultimate person or corporation behind that form, in the
particular transactions which were involved in the case submitted to its
determination and judgment, the court did so in order to prevent the
contravention of the local internal revenue laws, and the perpetration of what
would amount to a tax evasion, inasmuch as it considered and in our
opinion, correctly that appellant Koppel (Philippines), Inc. was a mere
branch or agency or dummy (hechura) of Koppel Industrial Car and
Equipment Co. The court did not hold that the corporate personality of Koppel
(Philippines), Inc., would also be disregarded in other cases or for other
purposes. It would have had no power to so hold. The courts action in this
regard must be confined to the transactions involved in the case at bar for the
purpose of adjudging the rights and liabilities of the parties in the case. They
have no jurisdiction to do more. (1 Flethcer, Cyclopedia of Corporation,
Permanent ed., p. 124, section 41.)
A leading and much cited case puts it as follows:
If any general rule can be laid down, in the present state of authority, it is that
a corporation will be looked upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears; but, when the notion of legal entity
is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons. (1
Fletcher Cyclopedia of Corporation [Permanent Edition], pp. 135, 136; United
States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255, per
Sanborn, J.)
In his second special defense appellee alleges that the plaintiff was and is in
fact a branch or subsidiary of Koppel Industrial Car and Equipment Co., a
Pennsylvania corporation not licensed to do business in the Philippines but
actually doing business here through the plaintiff; that the said foreign
corporation holds 995 of the 1,000 shares of the plaintiffs capital stock, the
remaining five shares being held by the officers of the plaintiff herein in order
to permit the incorporation thereof and to enable its aforesaid officers to act as
directors of the plaintiff corporation; and that plaintiff was organized as a
Philippine corporation for the purpose of evading the payment by its parent
foreign corporation of merchants sales tax on the transactions involved in this
case and others of similar nature.
By most courts the entity is normally regarded but is disregarded to prevent
injustice, or the distortion or hiding of the truth, or to let in a just defense. (1
Fletcher, Cyclopedia of Corporation, Permanent Edition, pp. 139,140;
emphasis supplied.)
Another rule is that, when the corporation is the mere alter ego, or business
conduit of a person, it may be disregarded. (1 Fletcher, Cyclopedia of
Corporation, Permanent Edition, p. 136.)
Manifestly, the principle is the same whether the person be natural or
artificial.
A very numerous and growing class of cases wherein the corporate entity is
disregarded is that (it 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). (1 Fletcher, Cyclopedia of Corporation, Permanent
ed., pp. 154, 155.)
While we recognize the legal principle that a corporation does not lose its entity
by the ownership of the bulk or even the whole of its stock, by another
corporation (Monongahela Co. vs. Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79
Am. St. Rep., 685) yet it is equally well settled and ignore corporate forms.
(Colonial Trust Co. vs. Montello Brick Works, 172 Fed., 310.)
Where it appears that two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to
protect the rights of third persons, disregard the legal fiction that two
corporations are distinct entities, and treat them as identical. (Abney vs.
Belmont Country Club Properties, Inc., 279 Pac., 829.)
. . . the legal fiction of distinct corporate existence will be disregarded in a case
where a corporation is so organized and controlled and its affairs are so
conducted, as to make it merely an instrumentality or adjunct of another
corporation. (Hanter vs. Baker Motor Vehicle Co., 190 Fed., 665.)
In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458,
464), the Supreme Court of the United States disregarded the artificial
personality of the subsidiary coal company in order to avoid that the parent
corporation, the Lehigh Valley R. Co., should be able, through the fiction of
that personality, to evade the prohibition of the Hepburn Act against the
transportation by railroad companies of the articles and commodities
described therein.
Chief Justice White, speaking for the court, said:
. . . Coming to discharge this duty it follows, in view of the express prohibitions
of the commodities clause, it must be held that while the right of a railroad
company as a stockholder to use its stock ownership for the purpose of a bona
fide separate administration of the affairs of a corporation in which it has a
stock interest may not be denied, the use of such stock ownership in
substance for the purpose of destroying the entity of a producing, etc.,
corporation, and commingling its affairs in administration with the affairs of the
railroad company, so as to make the two corporations virtually one, brings the
railroad company so voluntarily acting as to such producing, etc., corporation
within the prohibitions of the commodities clause. In other words, that by
operation and effect of the commodities clause there is duty cast upon a
railroad company proposing to carry in interstate commerce the product of a
producing, etc., corporation in which it has a stock interest, not to abuse such
power so as virtually to do by indirection that which the commodities clause
prohibits, a duty which plainly would be violated by the unnecessary
commingling of the affairs of the producing company with its own, so as to
cause them to be one and inseparable.
Corroborative authorities can be cited in support of the same proposition,
which we deem unnecessary to mention here.
From the facts herein above stated, as established by a preponderance of the
evidence , particularly those narrated in paragraph (a), (b), (c), (d), (e),(f), (h),
(i), and (j) after the agreed statement of facts, we find that, in so far as the
sales involved herein are concerned, Koppel (Philippines), Inc., and Koppel
Industrial Car and Equipment company are to all intents and purposes one
and the same; or, to use another mode of expression, that, as regards those
transactions, the former corporation is a mere branch, subsidiary or agency of
the latter. To our mind, this is conclusively borne out by the fact, among others,
that the amount of he so-called share in the profits of Koppel (Philippines),
Inc., was ultimately left to the sole, unbridled control of Koppel Industrial Car
and Equipment Company. If, in their relations with each other, Koppel
(Philippines), Inc., was considered and intended to function as a bona
fide separate corporation, we can not conceive how this arrangement could
have been adopted, for if there was any factor in its business as to which it
would in that case naturally have been opposed to being thus controlled, it
must have been precisely the amount of profit which it could endeavor and
hope to earn. No group of businessmen could be expected to organize a
mercantile corporation the ultimate end of which could only be profit if
the amount of that profit were to be subjected to such a unilateral control of
another corporation, unless indeed the former has previously been designed
by the incorporators to serve as a mere subsidiary, branch or agency of the
latter. Evidently, Koppel Industrial Car and Equipment Company made us of
its ownership of the overwhelming majority 99.5% of the capital stock of
the local corporation to control the operations of the latter to such an extent
that it had the final say even as to how much should be allotted to said local
entity in the so-called sharing in the profits. We can not overlook the fact that
in the practical working of corporate organizations of the class to which these
two entities belong, the holder or holders of the controlling part of the capital
stock of the corporation, particularly where the control is determined by the
virtual ownership of the totality of the shares, dominate not only the selection
of the Board of Directors but, more often than not, also the action of that Board.
Applying this to the instant case, we can not conceive how the Philippine
corporation could effectively go against the policies, decisions, and desires of
the American corporation with regards to the scheme which was devised
through the instrumentality of the contract Exhibit H, as well as all the other
details of the system which was adopted in order to avoid paying the 1 per
cent merchants sales tax. Neither can we conceive how the Philippine
corporation could avoid following the directions of the American corporation
held 99.5 per cent of the capital stock of the Philippine corporation. In the
present instance, we note that Koppel (Philippines), Inc., was represented in
the Philippines by its resident Vice-President. This fact necessarily leads to
the inference that the corporation had at least a Vice-President, and
presumably also a President, who were not resident in the Philippines but in
America, where the parent corporation is domiciled. If Koppel (Philippines),
Inc., had been intended to operate as a regular domestic corporation in the
Philippines, where it was formed, the record and the evidence do not disclose
any reason why all its officers should not reside and perform their functions in
the Philippines.
Other facts appearing from the evidence, and presently to be stated,
strengthen our conclusion, because they can only be explained if the local
entity is considered as a mere subsidiary, branch or agency of the parent
organization. Plaintiff charged the parent corporation no more than actual cost
without profit whatsoever for merchandise allegedly of its own to
complete deficiencies of shipments made by said parent corporation (t.s.n.,
pp. 53, 54) a fact which could not conceivably have been the case if plaintiff
had acted in such transactions as an entirely independent entity doing
business for profit, of course with the American concern. There has been
no attempt even to explain, if the latter situation really obtained, why these two
corporations should have thus departed from the ordinary course of
business. Plaintiff was charged by the American corporation with the cost
even of the latters cable quotations from ought that appears from the
evidence, this can only be comprehended by considering plaintiff as such a
subsidiary, branch or agency of the parent entity, in which case it would be
perfectly understandable that for convenient accounting purposes and the
easy determination of the profits or losses of the parent corporations
Philippines should be charged against the Philippine office and set off against
its receipts, thus separating the accounts of said branch from those which the
central organization might have in other countries. The reference to plaintiff by
local banks, under a standing instruction of the parent corporation, of unpaid
drafts drawn on Philippine customers by said parent corporation, whenever
said customers dishonored the drafts, and the fact that the American
corporation had previously advised said banks that plaintiff in those cases was
fully empowered to instruct (the banks) with regard to the disposition of the
drafts and documents (t.s.n., p. 50), in the absence of any other satisfactory
explanation naturally give rise to the inference that plaintiff was a subsidiary,
branch or agency of the American concern, rather than an independent
corporation acting as a broker. For, without such positive explanation, this
delegation of power is indicative of the relations between central and branch
offices of the same business enterprise, with the latter acting under
instructions already given by the former. Far from disclosing a real separation
between the two entities, particularly in regard to the transactions in question,
the evidence reveals such commingling and interlacing of their activities as to
render even incomprehensible certain accounting operations between them,
except upon the basis that the Philippine corporation was to all intents and
purposes a mere subsidiary, branch, or agency of the American parent
entity. Only upon this basis can it be comprehended why it seems not to
matter at all how much profit would be allocated to plaintiff, or even that no
profit at all be so allocated to it, at any given time or after any given period.
As already stated above, under the evidence the sales in the Philippines of the
railway materials, machinery and supplies imported here by Koppel Industrial
Car and Equipment Company could have been as conveniently and efficiently
transacted and handled if not more so had said corporation merely
established a branch or agency in the Philippines and obtained license to do
business locally; and if it had done so and said sales had been effected by
such branch or agency, there seems to be no dispute that the 1 per cent
merchants sales tax then in force would have been collectible. So far as we
can discover, there would be only one, but very important, difference between
the two schemes a difference in tax liability on the ground that the sales
were made through another and distinct corporation, as alleged broker, when
we have seen that this latter corporation is virtually owned by the former, or
that they practically one and the same, is to sanction a circumvention of our
tax laws, and permit a tax evasion of no mean proportions and the consequent
commission of a grave injustice to the Government. Not only this; it would
allow the taxpayer to do by indirection what the tax laws prohibited to be done
directly (non-payment of legitimate taxes), paraphrasing the United States
Supreme Court in United States vs. Lehigh Valley R. Co., supra.
The act of one corporation crediting or debiting the other for certain items,
expenses or even merchandise sold or disposed of, is perfectly compatible
with the idea of the domestic entity being or acting as a mere branch, agency
or subsidiary of the parent organization. Such operations were called for any
way by the exigencies or convenience of the entire business. Indeed,
accounting operation such as these are inevitable, and have to be effected in
the ordinary course of business enterprise extends its trade to another land
through a branch office, or through another scheme amounting to the same
thing.
If plaintiff were to act as broker in the Philippines for any other corporation,
entity or person, distinct from Koppel Industrial Car and Equipment company,
an entirely different question will arise, which, however, we are not called
upon, nor in a position, to decide.
As stated above, Exhibit H contains to the following paragraph:
It is clearly understood that the intent of this contract is that the broker shall
perform only the functions of a broker as set forth above, and shall not take
possession of any of the materials or equipment applying to said orders or
perform any acts or duties outside the scope of a broker; and in no sense shall
this contract be construed as granting to the broker the power to represent the
principal as its agent or to make commitments on its behalf.
The foregoing paragraph, construed in the light of other facts noted elsewhere
in this decision, betrays, we think a deliberate intent, through the medium of a
scheme devised with great care, to avoid the payment of precisely the 1 per
cent merchants sales tax in force in the Philippines before, at the time of, and
after, the making of the said contract Exhibit H. If this were to be allowed, the
payment of a tax, which directly could not have been avoided, could be
evaded by indirection, consideration being had of the aforementioned peculiar
relations between the said American and local corporations. Such evasion,
involving as it would, a violation of the former Internal Revenue Law, would
even fall within the penal sanction of section 2741 of the Revised
Administrative Code. Which only goes to show the illegality of the whole
scheme. We are not here concerned with the impossibility of collecting the
merchants sales tax, as a mere incidental consequence of transactions legal
in themselves and innocent in their purpose. We are dealing with a scheme
the primary, not to say the sole, object of which the evasion of the payment of
such tax. It is this aim of the scheme that makes it illegal.
We have said above that the contracts of sale involved herein were all
perfected in the Philippines. From the facts stipulated in paragraph IV of the
agreed statement of facts, it clearly appears that the Philippine purchasers had
to wait for Koppel Industrial Car and Equipment Company to communicate its
cost prices to Koppel (Philippines), Inc., were perfected in the Philippines. In
those cases where no such price quotations from the American corporation
were needed, of course, the sales effected in those cases described in
paragraph V of the agreed statement of facts were, as expressed therein,
transacted in substantially the same manner as outlined in paragraph VI.
Even the single transaction described in paragraph VI of the agreed statement
of facts was also perfected in the Philippines, because the contracting parties
were here and the consent of each was given here. While it is true that when
the contract was thus perfected in the Philippines the pair of Atlas-Diesel
Marine Engines were in Sweden and the agreement was to deliver them C.I.F.
Hongkong, the contract of sale being consensual perfected by mere
consent (Civil Code, article 1445; 10 Manresa, 4th ed., p. 11), the location
of the property and the place of delivery did not matter in the question of where
the agreement was perfected.
In said paragraph VI, we read the following, as indicating where the contract
was perfected, considering beforehand that one party, Koppel
(Philippines),Inc., which in contemplation of law, as to that transaction, was
the same Koppel Industrial Car Equipment Co., was in the Philippines:
. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for $21,000 (P 42,000)
C.I.F. Hongkong . . . (Emphasis supplied.)
Under the revenue law in force when the sales in question took place, the
merchants sales tax attached upon the happening of the respective sales of
the commodities, goods, wares, and merchandise involved, and we are
clearly of opinion that such sales took place upon the perfection of the
corresponding contracts. If such perfection took place in the Philippines, the
merchants sales tax then in force here attached to the transactions.
Even if we should consider that the Philippine buyers in the cases covered by
paragraph IV and V of the agreed statement of facts, contracted with Koppel
Industrial Car and Equipment company, we will arrive at the same final result.
It can not be denied in that case that said American corporation contracted
through Koppel (Philippines), Inc., which was in the Philippines. The real
transaction in each case of sale, in final effect, began with an offer of sale from
the seller, said American corporation, through its agent, the local corporation,
of the railway materials, machinery, and supplies at the prices quoted, and
perfected or completed by the acceptance of that offer by the local buyers
when the latter, accepting those prices, placed their orders. The offer could
not correctly be said to have been made by the local buyers when they asked
for price quotations, for they could not rationally be taken to have bound
themselves to buy before knowing the prices. And even if we should take into
consideration the fact that the american corporation contracted, at least partly,
through correspondence, according to article 54 of the Code of Commerce,
the respective contracts were completed from the time of the acceptance by
the local buyers, which happened in the Philippines.
Contracts executed through correspondence shall be completed from the time
an answer is madeaccepting the proposition or the conditions by which the
latter may be modified. (Code of Commerce, article 54; emphasis supplied.)
A contract is as a rule considered as entered into at the place where the place
it is performed. So where delivery is regarded as made at the place of
delivery. (13 C. J., 580-81, section 581.)
(In the consensual contract of sale delivery is not needed for its perfection.)
II.
Appellants second assignment of error can be summarily disposed of. It is
clear that the ruling of the Secretary of Finance, Exhibit M, was not binding
upon the trial court, much less upon this tribunal, since the duty and power of
interpreting the laws is primarily a function of the judiciary. (Ortua vs. Singson
Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be excused from abiding by
this legal principle, nor can it properly be heard to say that it relied on the
Secretarys ruling and that, therefore, the courts should not now apply an
interpretation at variance therewith. The rule of stare decisis is undoubtedly
entitled to more respect in the construction of statutes than the interpretations
given by officers of the administrative branches of the government, even those
entrusted with the administration of particular laws. But this court, in Philippine
Trust Company and Smith, Bell and Co. vs. Mitchell(59 Phil., 30, 36), said:
. . . The rule of stare decisis is entitled to respect. Stability in the law,
particularly in the business field, is desirable. But idolatrous reverence for
precedent, simply as precedent, no longer rules. More important than anything
else is that court should be right. . .
III.
In the view we take of the case, and after the disposition made above of the
first assignment of error, it becomes unnecessary to make any specific ruling
on the third, fourth, fifth, sixth, and seventh assignments of error, all of which
are necessarily disposed of adversely to appellants contention.
Wherefore, he judgment appealed from is affirmed, with costs of both
instances against appellant. So ordered.
Moran, C.J., Paras, Feria, Pablo, Bengzon, Briones, and Tuason, JJ., concur.
G.R. No. 182770 September 17, 2014
WPM INTERNATIONAL TRADING, INC. and WARLITO P.
MANLAPAZ, Petitioners,
vs.
FE CORAZON LABAYEN, Respondent.
DECISION
BRION, J.:
We review in this petition for review on certiorari1 the decision2 dated
September 28, 2007 and the resolution3 dated April 28, 2008 of the Court of
Appeals (CA) in CA-G.R. CV No. 68289 that affirmed with modification the
decision4 of the Regional Trial Court (RTC), Branch 77, Quezon City.
The Factual Background
The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems
Consultants, a management and consultant firm. The petitioner, WPM
International Trading, Inc. (WPM), is a domestic corporation engaged in the
restaurant business, while Warlito P. Manlapaz (Manlapaz) is its president.
Sometime in 1990, WPM entered into a management agreement with the
respondent, by virtue of which the respondent 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 in Divisoria, Manila and Lepanto
St., University Belt, Manila. Pursuant to the agreement, the respondent
engaged the services of CLN Engineering Services (CLN) to renovate
Quickbite-Divisoria at the cost of 432,876.02.
On June 13, 1990, Quickbite-Divisorias renovation was finally completed, and
its possession was delivered to the respondent. However, out of the
432,876.02 renovation cost, only the amount of 320,000.00 was paid to
CLN, leaving a balance of 112,876.02.
Complaint for Sum of Money (Civil Case No. Q-90-7013)
On October 19, 1990, CLN filed a complaint for sum of money and damages
before the RTC against the respondent and Manlapaz, which was docketed
as Civil Case No. Q-90-7013. CLN later amended the complaint to exclude
Manlapaz as defendant. The respondent was declared in default for her failure
to file a responsive pleading.
The RTC, in its January 28, 1991 decision, found the respondent liable to pay
CLN actual damages inthe amount of 112,876.02 with 12% interest per
annum from June 18,1990 (the date of first demand) and 20% of the amount
recoverable as attorneys fees.
Complaint for Damages (Civil Case No. Q-92-13446)
Thereafter, the respondent instituted a complaint for damages against the
petitioners, WPM and Manlapaz. The respondent alleged that in Civil Case
No. Q-90-7013, she was adjudged liable for a contract that she entered into
for and in behalf of the petitioners, to which she should be entitled to
reimbursement; that her participation in the management agreement was
limited only to introducing Manlapaz to Engineer Carmelo Neri (Neri), CLNs
general manager; that it was actually Manlapaz and Neri who agreed on the
terms and conditions of the agreement; that when the complaint for damages
was filed against her, she was abroad; and that she did not know of the case
until she returned to the Philippines and received a copy of the decision of the
RTC.
In her prayer, the respondent sought indemnification in the amount of
112,876.60 plus interest at 12%per annum from June 18, 1990 until fully
paid; and 20% of the award as attorneys fees. She likewise prayed that an
award of 100,000.00 as moral damages and 20,000.00 as attorneys fees
be paid to her.
In his defense, Manlapaz claims that it was his fellow incorporator/director
Edgar Alcansajewho was in-charge with the daily operations of the Quickbite
outlets; that when Alcansaje left WPM, the remaining directors were compelled
to hire the respondent as manager; that the respondent had entered intothe
renovation agreement with CLN in her own personal capacity; that when he
found the amount quoted by CLN too high, he instructed the respondent to
either renegotiate for a lower price or to look for another contractor; that since
the respondent had exceeded her authority as agent of WPM, the renovation
agreement should only bind her; and that since WPM has a separate and
distinct personality, Manlapaz cannot be made liable for the respondents
claim.
Manlapaz prayed for the dismissal of the complaint for lack of cause of action,
and by way of counterclaim, for the award of 350,000.00 as moral and
exemplary damages and 50,000.00 attorneys fees.
The RTC, through an order dated March 2, 1993 declared WPM in default for
its failure to file a responsive pleading.
The Decision of the RTC
In its decision, the RTC held that the respondent is 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 inconnection with the renovation agreement.
The petitioners appealed the RTC decision with the CA. There, they argued
that in view of the respondents act of entering into a renovation agreement
with CLN in excess of her authority as WPMs agent, she is not entitled to
indemnity for the amount she paid. Manlapaz also contended that by virtue
ofWPMs separate and distinct personality, he cannot be madesolidarily liable
with WPM.
The Ruling of the Court of Appeals
On September 28, 2007, the CA affirmed, with modification on the award of
attorneys fees, the decision of the RTC.The CA held that the petitioners are
barred from raising as a defense the respondents alleged lack of authority to
enter into the renovation agreement in view of their tacit ratification of the
contract.
The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and
the same based on the following: (1) Manlapaz is the principal stockholder of
WPM; (2) Manlapaz had complete control over WPM because he concurrently
held the positions of president, chairman of the board and treasurer, in
violation of the Corporation Code; (3) two of the four other stockholders of
WPM are employed by Manlapaz either directly or indirectly; (4) Manlapazs
residence is the registered principal office of WPM; and (5) the acronym
"WPM" was derived from Manlapazs initials. The CA applied the principle of
piercing the veil of corporate fiction and agreed with the RTC that Manlapaz
cannot evade his liability by simply invoking WPMs separate and distinct
personality.
After the CA's denial of their motion for reconsideration, the petitioners filed
the present petition for review on certiorari under Rule 45 of the Rules of Court.
The Petition
The petitioners submit that the CA gravely erred in sustaining the RTCs
application of the principle of piercing the veil of corporate fiction. They argue
that the legal fiction of corporate personality could only be discarded upon
clear and convincing proof that the corporation is being used as a shield to
avoid liability or to commit a fraud. Since the respondent failed to establish that
any of the circumstances that would warrant the piercing is present, Manlapaz
claims that he cannot be made solidarily liable with WPM to answerfor
damages allegedly incurred by the respondent.
The petitioners further argue that, assuming they may be held liable to
reimburse to the respondentthe amount she paid in Civil Case No. Q-90-7013,
such liability is only limited to the amount of 112,876.02, representing the
balance of the obligation to CLN, and should not include the twelve 12%
percent interest, damages and attorneys fees.
The Issues
The core issues are: (1) whether WPM is a mere instrumentality, alter-ego,
and business conduit of Manlapaz; and (2) whether Manlapaz is jointly and
severally liable with WPM to the respondent for reimbursement, damages and
interest.
Our Ruling
We find merit in the petition.
We note, at the outset, that the question of whether a corporation is a mere
instrumentality or alter-ego of another is purely one of fact.5 This is also true
with respect to the question of whether the totality of the evidence adduced by
the respondentwarrants the application of the piercing the veil of corporate
fiction doctrine.6
Generally, factual findings of the lower courts are accorded the highest degree
of respect, if not finality. When adopted and confirmed by the CA, these
findings are final and conclusive and may not be reviewed on appeal,7save in
some recognized exceptions8 among others, when the judgment is based on
misapprehension of facts.
We have reviewed the records and found that the application of the principle
of piercing the veil of corporate fiction is unwarranted in the present case.
On the Application ofthe Principle of Piercing the Veil of Corporate Fiction
The rule is settled that a corporation has a personality separate and distinct
from the persons acting for and in its behalf and, in general, from the people
comprising it.9 Following this principle, the obligations incurred by the
corporate officers, orother persons acting as corporate agents, are the direct
accountabilities ofthe corporation they represent, and not theirs. Thus, a
director, officer or employee of a corporation is generally not held personally
liable for obligations incurred by the corporation;10 it is only in exceptional
circumstances that solidary liability will attach to them.
Incidentally, 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 aninstrumentality, agency, conduit or adjunct of another
corporation.11
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 this transaction
had at the time no separate mind, will or existence of its own;
(2) Such control must have beenused 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 ofthese elements prevents piercing the corporate veil.12
In the present case, the attendantcircumstances 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 ofManlapaz. As held in Martinez v. Court of Appeals,13 the mere
ownership by a singlestockholder of even all or nearly all of the capital stocks
ofa 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.14
Likewise, the records of the case do not support the lower courts finding that
Manlapaz had control or domination over WPM or its finances. That Manlapaz
concurrentlyheld the positions of president, chairman and treasurer, or that the
Manlapazs residence is the registered principal office of WPM, are insufficient
considerations to prove that he had exercised absolutecontrol over WPM.
In this connection, we stress thatthe 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 tospeak, 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, the respondent failed to prove that Manlapaz, acting as president, had
absolute control over WPM.1wphi1 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 the respondent knew
and acted on the knowledgethat 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.
This Court also observed that the CA failed to demonstrate how the separate
and distinct personalityof WPM was used by Manlapaz to defeat the
respondents right for reimbursement. Neither was there any showing that
WPM attempted to avoid liability or had no property against which to proceed.
Since no harm could be said to have been proximately caused by Manlapaz
for which the latter could be held solidarily liable with WPM, and considering
that there was no proof that WPM had insufficient funds, there was no
sufficient justification for the RTC and the CA to have ruled that Manlapaz
should be held jointly and severally liable to the respondent for the amount she
paid to CLN. Hence, only WPM is liable to indemnify the respondent.
Finally, we emphasize that the piercing of the veil of corporate fiction is
frowned upon and thus, must be done with caution.15 It can only be done if it
has been clearly established that the separate and distinct personality of the
corporation is used to justify a wrong, protect fraud, or perpetrate a deception.
The court must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in
disregard of its rights; it cannot be presumed.
On the Award of Moral Damages
On the award of moral damages, we find the same in order in view of WPM's
unjustified refusal to pay a just debt. Under Article 2220 of the New Civil
Code,16 moral damages may be awarded in cases of a breach of contract
where the defendant acted fraudulently or in bad faith or was guilty of gross
negligence amounting to bad faith.
In the present case, when payment for the balance of the renovation cost was
demanded, WPM, instead of complying with its obligation, denied having
authorized the respondent to contract in its behalf and accordingly refused to
pay. Such cold refusal to pay a just debt amounts to a breach of contract in
bad faith, as contemplated by Article 2220. Hence, the CA's order to pay moral
damages was in order.
WHEREFORE, in light of the foregoing, the decision dated September 28,
2007 of the Court of Appeals in CA-G.R. CV No. 68289 is MODIFIED and.that
petitioner Warlito P. Manlapaz is ABSOLVED from any liability under the
renovation agreement.
SO ORDERED.
[ G.R. No. L-13119, September 22, 1959 ]
RICARDO TANTONGCO, PETITIONER, VS. KAISAHAN NG MGA
MANGGAGAWA SA LA CAMPANA (KKM) AND THE HONORABLE
COURT OF INDUSTRIAL RELATIONS, RESPONDENTS.
DECISION
MONTEMAYOR, J.:
This is a petition for certiorari and prohibition with prayer for issuance of a writ
of preliminary injunction to prohibit respondent Court of Industrial Relations
from proceeding with the hearing of the contempt proceedings for which
petitioner Ricardo Tantongco was cited to appear and present his evidence.
The contempt proceedings which petitioner seeks to stop are based on the
order of the Court of Industrial Relations, dated September 30, 1957, which
reads as follows:
"It appearing' that the Order of this Court, in the above-entitled case, dated
February 18, 1957 (folios 134-166), has become final and executory and the
respondents have failed to comply with the same, the said respondents,
namely, the La Campana Starch and Coffee Factory or its manager or the
person who has charge of the management, and the administrator of the
Estate of Ramon Tantongco are hereby ordered to comply with said Order,
within five days from receipt hereof, paritcularly the following, to wit:
"(a) To reinstate the persons named in the said Order of February 18, 1957;
"(b) To deposit the amount of P65.534.01 with this Court.
"With respect to possible back wages from August 28, 1957 as mentioned in
the petition for contempt of August 30, 1957, the same shall first be
determined. "Failure to comply with this Order shall be directly dealt with
accordingly."
It would appear that petitioner Ricardo Tantongco failed to comply with said
order and so, as already stated, he was cited to appear and to adduce
evidence on his behalf to show why he should not be punished for indirect
contempt.
The facts in this case may be briefly narrated thus: Sometime in June, 1951,
members of the Kaisahan ng mga Manggagawa sa La Campana, a labor union
to which were affiliated workers in the La Campana Starch Factory and La
Campana Coffee Factory, two separate entities but under one management,
presented demands for higher wages, and more privileges and benefits in
connection with their work. When the management failed and refused to grant
the demands, the Department of Labor intervened; but failing to settle the
controversy, it certified the dispute to the Court of Industrial Relations on July
17, 1951, where it was docketed as Case No. 584-V. On the theory that the
laborers presenting the demands were only the ones working in the coffee
factory, said company filed through the management a motion to dismiss
claiming that inasmuch as there were only 14 of them in said factory, the Court
of Industrial Relations had no jurisdiction to entertain and decide the case. The
motion was denied by the Court of Industrial Relations, which said:
"* * * There was only one management for the business of gawgaw and coffee
with whom the laborers are dealing regarding their work. Hence, the filing of
action against Hie La Campana Starch and Coffee Factory is proper and
justified."
The order of denial was appealed to this Tribunal through certiorari under G.
R. No. Lr-5677. In disposing of the case, we held:
"As to the first ground, petitioners obviously do not question the fact that the
number of employees of the La Campana Gaugau Packing involved in the
case is more than the jurisdictional number (31) required by law, but they
contend that the industrial court has no jurisdiction to try the case against La
Campana Coffee Factory, Inc. because the latter has allegedly only 14
laborers and only five of these are members of respondent Kaisahan. This,
contention loses force when it is noted that, as found by the industrial court
and this finding is conclusive upon us La Campana Gaugau Packing and La
Campana Coffee Factory Co. Inc., are operating-under one single
management, that is, one business though with two trade names'. True, the
coffee factory is a corporation, and, by legal fiction, an entity existing separate
and apart from the persona composing it, that is, Tan Tong and his family. But
it is settled this fiction of law, which has been introduced as a matter of
convenience and to subserve the ends of justice cannot be invoked to further
an end subversive of that purpose.
"* * * The attempt to make the two factories appear as two separate
businesses, when in reality they are but one is but a device to defeat the ends
of the law (the Act governing capital and labor relations) and should not be
permitted to prevail"( La Campana Coffee Factory, et al. vs. Kaisahan ng mga
Manggagawa, etc. et al., 93 Phil., 160; 49 Off. Gaz., [6] 2300.)
Upon the return of the case to the Court of Industrial Relations, the latter
proceeded with the hearing. In the meantime incidental cases involving the
same parties came up and were filed before the Court of Industrial Relations
in the following cases:
Case No. 584 V(l) petition for contempt against the La Campana Starch and
Coffee Factory for having employed 21 new laborers in violation of the order
of July 21, 1951, filed on July 25, 1951;
Case No. 584-V(2) petition of La Campana for authority to dismiss Loreto
Bernabe, filed on July 25, 1951;
Case No. 684-V(3) petition of Union to reinstate Bonifacio Calderon with
backpay, filed on August 3, 1951;
Case No. 584-V(5) petition of Union to reinstate Marcelo Estrada and Exequiel
Rapiz with back pay and to punish officials of the company for contempt, filed
on February 13, 1952; and
Case No. 584-V(6) petition of union for reinstement of Ibardolaza and seven
other member-laborers and to punish the officers of the company for contempt,
filed on July 15, 1953.
These five cases were heard jointly. In the meantime Ramon Tantongco
supposed to be the owner and manager of the La Campana Starch Factory
and the person in charge of the La Campana Coffee Factory died on May 16,
1956. On motion of the labor union, the Court of Industrial Relations ordered
the inclusion as party respondent of the administrator of the estate of Ramon
Tantongco who was Ricardo Tantongco.
Ricardo Tantongco, as administrator, under a special appearance filed a
motion to dismiss all the cases including the main case, that is to say, Cases
No. 584-(V) to 584-V(6), on the ground that said cases involved claims for
sums of money and consequently should be filed before the probate court
having jurisdiction over the estate, pursuant to the provisions of Rule 3,
Section 21, and Rule 88, Section 1 of the Rules of Court. On August 23, 1956,
the Court of Industrial Relations denied the motion to dismiss and proceeded
to hear the incidental cases against the La Campana entities.
On June 12,1956, a partial decision was rendered in the main case No. 584-
V, which partial decision was elevated to us and is still pending appeal. On
February 18, 1957, the Court of Industrial Relations issued an order in
incidental Cases No. 584-V(D, V(2), V(3), V(5) and V(6), directing the
"management of the respondent company and or the administrator of the
Estate of Ramon Tantongco", to reinstate the dismissed laborers mentioned
therein with back wages. This order of February 18, 1957, as well as tlie order
directing the inclusion of the administrator of the estate of Ramon Tantongco
as additional respondent in the incidental cases, and the order denying the
petition of the administrator to dismiss said incidental cases were appealed to
this tribunal through certiorari. The appeal, however, was summarily dismissed
by this Court in its resolution of June 12, 1957, as follows:
"This Court, deliberating upon the allegations of the petition filed in case L-
12355 (La Campana Starch Coffee Factory et al. vs. Kaisahan ng Mga
Manggagawa sa La Campana, KKM, et al.,) for review, on certiorari of the
decision of the Court of Industrial Relations referred to therein, and finding that
there is no merit in the petition, Resolves to Dismiss the same."
The CIR order of February 18, 1957, in the incidental cases Nos. 584-V to
V(6), having become final and executory, the laborers involved reported for
work on August 28, 1957, but they were not admitted by the management.
Consequently, the union filed a petition dated August 30, 1957, to hold
respondents in said cases for contempt. After hearing the CIR issued the order
of September 30, 1957, subject of this petition, ordering "the La Campana
Starch and Coffee Factory or its manager or the person who has charge of its
management and the administrator of the estate of Ramon Tantongco" to
"reinstate the persons named in the order of February 18, 1957" and "to
deposit the amount of P65,534.01." For refusal or failure to comply with said
order, petitioner Ricardo Tantongco was required to appear before the
attorney of the CIR in contempt proceedings.
Petitioner now seeks to prohibit the CIR from proceeding with the trial for
contempt and to enjoin respondent CIR from enforcing its order of September
30, 1957. Petitioner contends that upon the death of Ramon Tantongco, the
claims of the laborers should have been dismissed and that said claims should
have been filed with the probate court having jurisdiction over the
administration proceedings of the estate of Ramon Tantongco, pursuant to the
provisions of Rule 3, Section 21 of the Rules of Court and that the failure to
file said claims with the administrator forever barred said claims as provided
in Rule 87, Section 5 of the Rules of Court, especially after the assets of the
estate had been distributed among the heirs, and petitioner had ceased to be
the administrator of the estate. As already stated this same question was
raised by petitioner in G. R. No. L- 12355, entitled "La Campana Starch and
Coffee Factory and Ricardo Tantongco, etc. vs. Kaisahan ng mga
Manggagawa sa La Campana (KKM)," which, as already stated, was
summarily dismissed by this Court in a resolution dated June 12, 1957.
Consequently, said question may not again be raised in the present case.
Furthermore, it may be recalled that both in the main case and in the incidental
cases No. 584-V to 584-V(6), Ramon Tantongco was never a party. The party
there was the La Campana Starch and Coffee Factory by which name it was
sought to designate the two entities La Campana Starch Packing and the La
Campana Coffee Factory. Naturally, the claims contained in said cases were
not the claims contemplated by law to be submitted before the administrator.
In other words the death of Ramon Tantongco did not deprive the CIR of its
jurisdiction over the cases aforementioned. Moreover, the money claims of the
laborers were merely incidental to their demands for reinstatement for having
been unjustly dismissed, and for better working conditions.
Petitioner, however, contends that in G. R. No. L-5677, we "pierced the veil of
corporate existence", and held that the La Campana Starch and Coffee
Factory and its owner, Ramon Tantongco, were one; so that with the death of
Ramon, the La Campana entities ceased to exist, resulting in the loss of
jurisdiction of the CIR to enforce its order against said entities. The reason we
applied the so-called "piercing the veil of corporate existence" in G. R. No. L-
5677 was to avoid the technicality therein advanced in order to defeat the
jurisdiction of the CIR. We there found that although there were ostensibly,
two separate companies or entities, they were managed by the same person
or persons and the workers in both were used interchangeably so that in order
to determine whether or not the CIR had jurisdiction, the number of workers in
both entities, not in only one, was to be considered.
However, we still believe that although the family of Ramon Tantongco was
practically the owner of both the coffee factory and the starch factory,
nevertheless these entities are separate from the personality of Ramon. The
coffee factory is a stock corporation and the shares are owned not only by
Ramon but also by others, such as petitioner Ricardo who not only is a
stockholder and director and treasurer but also the manager of the same
Furthermore, petitioner is now estopped from claiming that the two entities in
question and Ramon are one. Thus in Annex 3-CIR (par. 1 thereof) which is a
complaint for injunction filed by La Campana Food Products, et al and La
Campana Starch Packing against the Consolidated Labor Organization of the
Philippines, in Civil Case No. P-2482 in the Court of First Instance of Rizal,
petitioner admitted the existence and operation of said entities; in Annex 4 CIR
where petitioner appeared as General Manager representing the two entities
in its agreement with the La Campana Workers Union to resolve the dispute
between the two entities and the laborers in cases Nos. 1072-V and 1371-
ULP, the existence of the two entities appears to have been admitted; and in
Annex 5-A-CIR, an answer to the complaint of La Campana Workers Union in
case No. 1471-ULP (Annex 5-CIR), petitioner admitted the allegation that said
two factories were in existence and doing business with petitioner as manager
of the same.
In relation to the order of the CIR requiring petitioner to appear in the contempt
proceedings instituted against liim, petitioner contends that after he ceased to
be the administrator of the estate of Ramon Tantongco, he may not now be
compelled to comply with the order of the court. In answer, it is enough to bear
in mind the jurisdiction and authority of the CIR as to compliance with and
violations of its orders under section 6, Commonwealth Act No. 143, which we
quote below:
"* * * The Court or any Judge thereof shall have furthermore, all the inherent
powers of a court of justice provided in paragraph 5 of Rule 124 of the
Supreme Court, as well as the power to punish direct and indirect contempt
as provided in Rule 64 of the same Court, under the same procedure and
penalties provided therein.
"Any violation of any order, award, or decision of the Court of Industrial
Relations shall, after such order, award or decision has become final,
conclusive, and executory, constitute contempt of court: * * *
"In case the employer (or landlord) committing any such violation or contempt
is an association or corporation, the manager or the person who has the
charge of the management of the business of the association or corporation
and the officers or directors thereof who have ordered or authorized the
violation of contempt shall be liable. *** "
In conclusion, we find and hold that the La Campana Starch and Food
Products Company which stands for the La Campana Starch and Coffee
Factory are entities distinct from the personality of Ramon Tantongco; that
after the death of Ramon these two entities continued to exist and to operate
under the management of petitioner and that consequently he is the proper
person and official to which the orders of the CIR are addressed and who is in
duty bound to comply with the same. We further find that the CIR acted within
its jurisdiction in issuing its order of September 30, 1957 and in requiring
petitioner to appear to give his evidence if any in relation with the contempt
proceedings instituted against him.
In view of the foregoing, the petition for certiorari is hereby denied and the writ
of preliminary injunction dissolved, with costs.
Paras, C. J., Bengzon, Padilla, Bautista Angela, Labrador, Concepcion,
Endencia, and Barrera, JJ., concur.