G. R. No.

164317 February 6, 2006

ALFREDO CHING, Petitioner,

vs.
THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-VILLAVERT, JUDGE
EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch 52; RIZAL COMMERCIAL
BANKING CORP. and THE PEOPLE OF THE PHILIPPINES, Respondents.

DECISION

CALLEJO, SR., J.:

Before the Court is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-
G.R. SP No. 57169 dismissing the petition for certiorari, prohibition and mandamus filed by petitioner
Alfredo Ching, and its Resolution2 dated June 28, 2004 denying the motion for reconsideration thereof.

Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime in September
to October 1980, PBMI, through petitioner, applied with the Rizal Commercial Banking Corporation
(respondent bank) for the issuance of commercial letters of credit to finance its importation of assorted
goods.3

Respondent bank approved the application, and irrevocable letters of credit were issued in favor of
petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner signed 13 trust receipts 4 as
surety, acknowledging delivery of the following goods:

T/R Date Granted Maturity Date Principal Description of Goods

Nos.

1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK" Brand

Synthetic Graphite
Electrode

1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 bundles)

Calorized Lance Pipes

1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired

Refractory Tundish Bricks

1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for

CCM

1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds

2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory

Nozzle Bricks

1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite

Electrode [with] tapered
pitch filed nipples

1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles

calorized lance pipes [)]
 1895 12-17-80 03-17-81 P67,652.04 Spare parts for
Spectrophotometer

1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds

2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds

2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for

rolling mills

2100 02-10-81 05-12-81 P210,748.00 Spare parts for

Lacolaboratory
Equipment5

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to sell but
not by way of conditional sale, pledge or otherwise; and in case such goods were sold, to turn over the
proceeds thereof as soon as received, to apply against the relative acceptances and payment of other
indebtedness to respondent bank. In case the goods remained unsold within the specified period, the goods
were to be returned to respondent bank without any need of demand. Thus, said "goods, manufactured
products or proceeds thereof, whether in the form of money or bills, receivables, or accounts separate and
capable of identification" were respondent bank’s property.

When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to return their
value amounting to ₱6,940,280.66 despite demands. Thus, the bank filed a criminal complaint for
estafa6 against petitioner in the Office of the City Prosecutor of Manila.

After the requisite preliminary investigation, the City Prosecutor found probable cause estafa under Article
315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree (P.D.) No. 115, otherwise
known as the Trust Receipts Law. Thirteen (13) Informations were filed against the petitioner before the
Regional Trial Court (RTC) of Manila. The cases were docketed as Criminal Cases No. 86-42169 to 86-
42181, raffled to Branch 31 of said court.

Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The appeal was
dismissed in a Resolution7 dated March 17, 1987, and petitioner moved for its reconsideration. On
December 23, 1987, the Minister of Justice granted the motion, thus reversing the previous resolution
finding probable cause against petitioner.8 The City Prosecutor was ordered to move for the withdrawal of
the Informations.

This time, respondent bank filed a motion for reconsideration, which, however, was denied on February 24,
1988.9The RTC, for its part, granted the Motion to Quash the Informations filed by petitioner on the ground
that the material allegations therein did not amount to estafa.10

In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoñez, 11 holding that the
penal provision of P.D. No. 115 encompasses any act violative of an obligation covered by the trust receipt;
it is not limited to transactions involving goods which are to be sold (retailed), reshipped, stored or
processed as a component of a product ultimately sold. The Court also ruled that "the non-payment of the
amount covered by a trust receipt is an act violative of the obligation of the entrustee to pay." 12

On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against petitioner before
the Office of the City Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there was no
probable cause to charge petitioner with violating P.D. No. 115, as petitioner’s liability was only civil, not
criminal, having signed the trust receipts as surety. 13 Respondent bank appealed the resolution to the
Department of Justice (DOJ) via petition for review, alleging that the City Prosecutor erred in ruling:

1. That there is no evidence to show that respondent participated in the misappropriation of the
goods subject of the trust receipts;

2. That the respondent is a mere surety of the trust receipts; and

3. That the liability of the respondent is only civil in nature.14

On July 13, 1999, the Secretary of Justice issued Resolution No. 250 15 granting the petition and reversing
the assailed resolution of the City Prosecutor. According to the Justice Secretary, the petitioner, as Senior
Vice-President of PBMI, executed the 13 trust receipts and as such, was the one responsible for the offense.
Thus, the execution of said receipts is enough to indict the petitioner as the official responsible for violation
of P.D. No. 115. The Justice Secretary also declared that petitioner could not contend that P.D. No. 115
covers only goods ultimately destined for sale, as this issue had already been settled in Allied Banking
Corporation v. Ordoñez,16 where the Court ruled that P.D. No. 115 is "not limited to transactions in goods
which are to be sold (retailed), reshipped, stored or processed as a component of a product ultimately sold
but covers failure to turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold
or not otherwise disposed of in accordance with the terms of the trust receipts."

The Justice Secretary further stated that the respondent bound himself under the terms of the trust receipts
not only as a corporate official of PBMI but also as its surety; hence, he could be proceeded against in two
(2) ways: first, as surety as determined by the Supreme Court in its decision in Rizal Commercial Banking
Corporation v. Court of Appeals;17 and second, as the corporate official responsible for the offense under
P.D. No. 115, via criminal prosecution. Moreover, P.D. No. 115 explicitly allows the prosecution of corporate
officers "without prejudice to the civil liabilities arising from the criminal offense." Thus, according to the
Justice Secretary, following Rizal Commercial Banking Corporation, the civil liability imposed is clearly
separate and distinct from the criminal liability of the accused under P.D. No. 115.

Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13 Informations
against petitioner for violation of P.D. No. 115 before the RTC of Manila. The cases were docketed as
Criminal Cases No. 99-178596 to 99-178608 and consolidated for trial before Branch 52 of said court.
Petitioner filed a motion for reconsideration, which the Secretary of Justice denied in a Resolution18 dated
January 17, 2000.

Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the resolutions
of the Secretary of Justice on the following grounds:

1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE ACTING
OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS PROSECUTION
DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO PROVE HIS
PARTICIPATION IN THE ALLEGED TRANSACTIONS.

2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE ABUSE OF

DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED
PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME INCURRED IN THE
TERMINATION OF THE PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE
DISMISSAL OF THE INSTANT CASE.

3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR

ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF JURISDICTION
 WHEN THEY CONTINUED THE PROSECUTION OF THE PETITIONER DESPITE LACK OF
SUFFICIENT BASIS.19

In his petition, petitioner incorporated a certification stating that "as far as this Petition is concerned, no
action or proceeding in the Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal
or agency. It is finally certified that if the affiant should learn that a similar action or proceeding has been
filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any
other tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5) days from such
notice."20

In its Comment on the petition, the Office of the Solicitor General alleged that -

A.

THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER

ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND THAT
THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF P.D. [No.] 115 IN
RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL CODE.

B.

THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE DELAY HAS

MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE,
JUSTIFYING ITS DISMISSAL.

C.

THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND MANDAMUS
IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF THE DEPARTMENT
OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE DISMISSED.21

On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on procedural
grounds. On the procedural issue, it ruled that (a) the certification of non-forum shopping executed by
petitioner and incorporated in the petition was defective for failure to comply with the first two of the three-
fold undertakings prescribed in Rule 7, Section 5 of the Revised Rules of Civil Procedure; and (b) the
petition for certiorari, prohibition and mandamus was not the proper remedy of the petitioner.

On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of Justice were
correctly issued for the following reasons: (a) petitioner, being the Senior Vice-President of PBMI and the
signatory to the trust receipts, is criminally liable for violation of P.D. No. 115; (b) the issue raised by the
petitioner, on whether he violated P.D. No. 115 by his actuations, had already been resolved and laid to
rest in Allied Bank Corporation v. Ordoñez;22 and (c) petitioner was estopped from raising the

City Prosecutor’s delay in the final disposition of the preliminary investigation because he failed to do so in
the DOJ.

Thus, petitioner filed the instant petition, alleging that:

THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE GROUND
THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED THEREIN WAS
DEFECTIVE.
 II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS COMMITTED BY
THE SECRETARY OF JUSTICE IN COMING OUT WITH THE ASSAILED RESOLUTIONS.23

The Court will delve into and resolve the issues seriatim.

The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He claims that the
rules of procedure should be used to promote, not frustrate, substantial justice. He insists that the Rules of
Court should be construed liberally especially when, as in this case, his substantial rights are adversely
affected; hence, the deficiency in his certification of non-forum shopping should not result in the dismissal
of his petition.

The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably, the
certificate of non-forum shopping incorporated in the petition before the CA is defective because it failed to
disclose essential facts about pending actions concerning similar issues and parties. It asserts that
petitioner’s failure to comply with the Rules of Court is fatal to his petition. The OSG cited Section 2, Rule
42, as well as the ruling of this Court in Melo v. Court of Appeals.24

We agree with the ruling of the CA that the certification of non-forum shopping petitioner incorporated in his
petition before the appellate court is defective. The certification reads:

It is further certified that as far as this Petition is concerned, no action or proceeding in the Supreme Court,
the Court of Appeals or different divisions thereof, or any tribunal or agency.

It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or is
pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal
or agency, it hereby undertakes to notify this Honorable Court within five (5) days from such notice. 25

Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should be
accompanied by a sworn certification of non-forum shopping, as provided in the third paragraph of Section
3, Rule 46 of said Rules. The latter provision reads in part:

SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. — The petition shall
contain the full names and actual addresses of all the petitioners and respondents, a concise statement of
the matters involved, the factual background of the case and the grounds relied upon for the relief prayed
for.

xxx

The petitioner shall also submit together with the petition a sworn certification that he has not theretofore
commenced any other action involving the same issues in the Supreme Court, the Court of Appeals or
different divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he
must state the status of the same; and if he should thereafter learn that a similar action or proceeding has
been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or
any other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other tribunal or
agency thereof within five (5) days therefrom. xxx

Compliance with the certification against forum shopping is separate from and independent of the
avoidance of forum shopping itself. The requirement is mandatory. The failure of the petitioner to comply
with the foregoing requirement shall be sufficient ground for the dismissal of the petition without prejudice,
unless otherwise provided.26
Indubitably, the first paragraph of petitioner’s certification is incomplete and unintelligible. Petitioner failed
to certify that he "had not heretofore commenced any other action involving the same issues in the Supreme
Court, the Court of Appeals or the different divisions thereof or any other tribunal or agency" as required by
paragraph 4, Section 3, Rule 46 of the Revised Rules of Court.

We agree with petitioner’s contention that the certification is designed to promote and facilitate the orderly
administration of justice, and therefore, should not be interpreted with absolute literalness. In his works on
the Revised Rules of Civil Procedure, former Supreme Court Justice Florenz Regalado states that, with
respect to the contents of the certification which the pleader may prepare, the rule of substantial compliance
may be availed of.27However, there must be a special circumstance or compelling reason which makes the
strict application of the requirement clearly unjustified. The instant petition has not alleged any such
extraneous circumstance. Moreover, as worded, the certification cannot even be regarded as substantial
compliance with the procedural requirement. Thus, the CA was not informed whether, aside from the
petition before it, petitioner had commenced any other action involving the same issues in other tribunals.

On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary of Justice
committed grave abuse of discretion in finding probable cause against the petitioner for violation of estafa
under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to P.D. No. 115. Thus, the appellate
court ratiocinated:

Be that as it may, even on the merits, the arguments advanced in support of the petition are not persuasive
enough to justify the desired conclusion that respondent Secretary of Justice gravely abused its discretion
in coming out with his assailed Resolutions. Petitioner posits that, except for his being the Senior Vice-
President of the PBMI, there is no iota of evidence that he was a participes crimines in violating the trust
receipts sued upon; and that his liability, if at all, is purely civil because he signed the said trust receipts
merely as a xxx surety and not as the entrustee. These assertions are, however, too dull that they cannot
even just dent the findings of the respondent Secretary, viz:

"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:

‘xxx If the violation or offense is committed by a corporation, partnership, association or other judicial
entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or
other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising
from the criminal offense.’

"There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the thirteen
(13) trust receipts. As such, the law points to him as the official responsible for the offense. Since a
corporation cannot be proceeded against criminally because it cannot commit crime in which personal
violence or malicious intent is required, criminal action is limited to the corporate agents guilty of an act
amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil.
401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent of said receipts is enough
to indict him as the official responsible for violation of PD 115.

"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which are ultimately
destined for sale and not goods, like those imported by PBM, for use in manufacture. This issue has already
been settled in the Allied Banking Corporation case, supra, where he was also a party, when the Supreme
Court ruled that PD 115 is ‘not limited to transactions in goods which are to be sold (retailed), reshipped,
stored or processed as a component or a product ultimately sold’ but ‘covers failure to turn over the
proceeds of the sale of entrusted goods, or to return said goods if unsold or disposed of in accordance with
the terms of the trust receipts.’

"In regard to the other assigned errors, we note that the respondent bound himself under the terms of the
trust receipts not only as a corporate official of PBM but also as its surety. It is evident that these are two
(2) capacities which do not exclude the other. Logically, he can be proceeded against in two (2) ways: first,
as surety as determined by the Supreme Court in its decision in RCBC vs. Court of Appeals, 178 SCRA
739; and, secondly, as the corporate official responsible for the offense under PD 115, the present case is
an appropriate remedy under our penal law.

"Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without prejudice to the civil
liabilities arising from the criminal offense’ thus, the civil liability imposed on respondent in RCBC vs. Court
of Appeals case is clearly separate and distinct from his criminal liability under PD 115.’"28

Petitioner asserts that the appellate court’s ruling is erroneous because (a) the transaction between PBMI
and respondent bank is not a trust receipt transaction; (b) he entered into the transaction and was sued in
his capacity as PBMI Senior Vice-President; (c) he never received the goods as an entrustee for PBMI,
hence, could not have committed any dishonesty or abused the confidence of respondent bank; and (d)
PBMI acquired the goods and used the same in operating its machineries and equipment and not for resale.

The OSG, for its part, submits a contrary view, to wit:

34. Petitioner further claims that he is not a person responsible for the offense allegedly because "[b]eing
charged as the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner cannot be held
criminally liable as the transactions sued upon were clearly entered into in his capacity as an officer of the
corporation" and that [h]e never received the goods as an entrustee for PBM as he never had or took
possession of the goods nor did he commit dishonesty nor "abuse of confidence in transacting with RCBC."
Such argument is bereft of merit.

35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not exculpate him from
any liability. Petitioner’s responsibility as the corporate official of PBM who received the goods in trust is
premised on Section 13 of P.D. No. 115, which provides:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or
as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials
or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal
offense. (Emphasis supplied)

36. Petitioner having participated in the negotiations for the trust receipts and having received the goods
for PBM, it was inevitable that the petitioner is the proper corporate officer to be proceeded against by virtue
of the PBM’s violation of P.D. No. 115.29

The ruling of the CA is correct.

In Mendoza-Arce v. Office of the Ombudsman (Visayas), 30 this Court held that the acts of a quasi-judicial
officer may be assailed by the aggrieved party via a petition for certiorari and enjoined (a) when necessary
to afford adequate protection to the constitutional rights of the accused; (b) when necessary for the orderly
administration of justice; (c) when the acts of the officer are without or in excess of authority; (d) where the
charges are manifestly false and motivated by the lust for vengeance; and (e) when there is clearly no prima
facie case against the accused.31 The Court also declared that, if the officer conducting a preliminary
investigation (in that case, the Office of the Ombudsman) acts without or in excess of his authority and
resolves to file an Information despite the absence of probable cause, such act may be nullified by a writ of
certiorari.32
Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the Information shall be
prepared by the Investigating Prosecutor against the respondent only if he or she finds probable cause to
hold such respondent for trial. The Investigating Prosecutor acts without or in excess of his authority under
the Rule if the Information is filed against the respondent despite absence of evidence showing probable
cause therefor.34 If the Secretary of Justice reverses the Resolution of the Investigating Prosecutor who
found no probable cause to hold the respondent for trial, and orders such prosecutor to file the Information
despite the absence of probable cause, the Secretary of Justice acts contrary to law, without authority
and/or in excess of authority. Such resolution may likewise be nullified in a petition for certiorari under Rule
65 of the Revised Rules of Civil Procedure.35

A preliminary investigation, designed to secure the respondent against hasty, malicious and oppressive
prosecution, is an inquiry to determine whether (a) a crime has been committed; and (b) whether there is
probable cause to believe that the accused is guilty thereof. It is a means of discovering the person or
persons who may be reasonably charged with a crime. Probable cause need not be based on clear and
convincing evidence of guilt, as the investigating officer acts upon probable cause of reasonable belief.
Probable cause implies probability of guilt and requires more than bare suspicion but less than evidence
which would justify a conviction. A finding of probable cause needs only to rest on evidence showing that
more likely than not, a crime has been committed by the suspect.36

However, while probable cause should be determined in a summary manner, there is a need to examine
the evidence with care to prevent material damage to a potential accused’s constitutional right to liberty and
the guarantees of freedom and fair play37 and to protect the State from the burden of unnecessary expenses
in prosecuting alleged offenses and holding trials arising from false, fraudulent or groundless charges.38

In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion
in issuing the assailed resolutions. Indeed, he acted in accord with law and the evidence.

Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this
Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another
person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or
security interests over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed document
called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes substantially equivalent to any of the following:

1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture
or process the goods with the purpose of ultimate sale; Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale,
the entruster shall retain its title over the goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship
or otherwise deal with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a
principal; or c) to effect the consummation of some transactions involving delivery to a depository
or register; or d) to effect their presentation, collection or renewal.

The sale of goods, documents or instruments by a person in the business of selling goods, documents or
instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights
in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or
other interest as security for the payment of the purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage of this Decree.

An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt
transaction, and any successor in interest of such person for the purpose of payment specified in the trust
receipt agreement.39 The entrustee is obliged to: (1) hold the goods, documents or instruments in trust for
the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust
receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the
extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their
total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof
whether in money or whatever form, separate and capable of identification as property of the entruster; (5)
return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and
(6) observe all other terms and conditions of the trust receipt not contrary to the provisions of the decree.40

The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as
appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale,
and to the enforcement of all other rights conferred on him in the trust receipt; provided, such are not
contrary to the provisions of the document.41

In the case at bar, the transaction between petitioner and respondent bank falls under the trust receipt
transactions envisaged in P.D. No. 115. Respondent bank imported the goods and entrusted the same to
PBMI under the trust receipts signed by petitioner, as entrustee, with the bank as entruster. The agreement
was as follows:

And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as its property
with liberty to sell the same within ____days from the date of the execution of this Trust Receipt and for the
Bank’s account, but without authority to make any other disposition whatsoever of the said goods or any
part thereof (or the proceeds) either by way of conditional sale, pledge or otherwise.

I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage or other
casualties as directed by the BANK, the sum insured to be payable in case of loss to the BANK, with the
understanding that the BANK is, not to be chargeable with the storage premium or insurance or any other
expenses incurred on said goods.

In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the BANK, to
apply against the relative acceptances (as described above) and for the payment of any other indebtedness
of mine/ours to the BANK. In case of non-sale within the period specified herein, I/we agree to return the
goods under this Trust Receipt to the BANK without any need of demand.

I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the form of
money or bills, receivables, or accounts separate and capable of identification as property of the BANK.42

It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of public
policy, the failure of person to turn over the proceeds of the sale of the goods covered by a trust receipt or
to return said goods, if not sold, is a public nuisance to be abated by the imposition of penal sanctions. 43

The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving goods
procured as a component of a product ultimately sold has been resolved in the affirmative in Allied Banking
Corporation v. Ordoñez.44 The law applies to goods used by the entrustee in the operation of its machineries
and equipment. The non-payment of the amount covered by the trust receipts or the non-return of the goods
covered by the receipts, if not sold or otherwise not disposed of, violate the entrustee’s obligation to pay
the amount or to return the goods to the entruster.
In Colinares v. Court of Appeals,45 the Court declared that there are two possible situations in a trust receipt
transaction. The first is covered by the provision which refers to money received under the obligation
involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by
the provision which refers to merchandise received under the obligation to return it (devolvera) to the
owner.46 Thus, failure of the entrustee to turn over the proceeds of the sale of the goods covered by the
trust receipts to the entruster or to return said goods if they were not disposed of in accordance with the
terms of the trust receipt is a crime under P.D. No. 115, without need of proving intent to defraud. The law
punishes dishonesty and abuse of confidence in the handling of money or goods to the prejudice of the
entruster, regardless of whether the latter is the owner or not. A mere failure to deliver the proceeds of the
sale of the goods, if not sold, constitutes a criminal offense that causes prejudice, not only to another, but
more to the public interest.47

The Court rules that although petitioner signed the trust receipts merely as Senior Vice-President of PBMI
and had no physical possession of the goods, he cannot avoid prosecution for violation of P.D. No. 115.

The penalty clause of the law, Section 13 of P.D. No. 115 reads:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or
as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code.1âwphi1 If
the violation or offense is committed by a corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials
or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal
offense.

The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b),
Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It may be committed by a
corporation or other juridical entity or by natural persons. However, the penalty for the crime is imprisonment
for the periods provided in said Article 315, which reads:

ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of the means mentioned
hereinbelow shall be punished by:

1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum
period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if
such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its
maximum period, adding one year for each additional 10,000 pesos; but the total penalty which
may be imposed shall not exceed twenty years. In such cases, and in connection with the accessory
penalties which may be imposed and for the purpose of the other provisions of this Code, the
penalty shall be termed prision mayor or reclusion temporal, as the case may be;

2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the
fraud is over 6,000 pesos but does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum
period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200 pesos,
provided that in the four cases mentioned, the fraud be committed by any of the following means; xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or
other officers or persons responsible for the offense, without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or other officials or employees responsible for the offense.
The rationale is that such officers or employees are vested with the authority and responsibility to devise
means necessary to ensure compliance with the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in the violations of the law. 48

If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other
officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because
of the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence,
cannot be penalized for a crime punishable by imprisonment.49 However, a corporation may be charged
and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined. 50

A crime is the doing of that which the penal code forbids to be done, or omitting to do what it commands. A
necessary part of the definition of every crime is the designation of the author of the crime upon whom the
penalty is to be inflicted. When a criminal statute designates an act of a corporation or a crime and
prescribes punishment therefor, it creates a criminal offense which, otherwise, would not exist and such
can be committed only by the corporation. But when a penal statute does not expressly apply to
corporations, it does not create an offense for which a corporation may be punished. On the other hand, if
the State, by statute, defines a crime that may be committed by a corporation but prescribes the penalty
therefor to be suffered by the officers, directors, or employees of such corporation or other persons
responsible for the offense, only such individuals will suffer such penalty. 51Corporate officers or employees,
through whose act, default or omission the corporation commits a crime, are themselves individually guilty
of the crime.52

The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to those
corporate agents who themselves commit the crime and to those, who, by virtue of their managerial
positions or other similar relation to the corporation, could be deemed responsible for its commission, if by
virtue of their relationship to the corporation, they had the power to prevent the act. 53 Moreover, all parties
active in promoting a crime, whether agents or not, are principals.54 Whether such officers or employees
are benefited by their delictual acts is not a touchstone of their criminal liability. Benefit is not an operative
fact.

In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of the
separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate officer
cannot protect himself behind a corporation where he is the actual, present and efficient actor. 55

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the petitioner.

SO ORDERED.
 [G.R. No. 141994. January 17, 2005]

FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND EDUCATIONAL
CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F.
AGO, respondents.

DECISION
CARPIO, J.:

The Case

This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January 2000 Resolution of the
Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification the 14
December 1992 Decision[3] of the Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236.
The Court of Appeals held Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre
and Carmelo Rima liable for libel and ordered them to solidarily pay Ago Medical and Educational Center-
Bicol Christian College of Medicine moral damages, attorneys fees and costs of suit.

The Antecedents

Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima) and Hermogenes Jun
Alegre (Alegre).[5] Expos is aired every morning over DZRC-AM which is owned by Filipinas Broadcasting
Network, Inc. (FBNI). Expos is heard over Legazpi City, the Albay municipalities and other Bicol areas. [6]
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged complaints
from students, teachers and parents against Ago Medical and Educational Center-Bicol Christian College
of Medicine (AMEC) and its administrators. Claiming that the broadcasts were defamatory, AMEC and
Angelita Ago (Ago), as Dean of AMECs College of Medicine, filed a complaint for damages [7] against FBNI,
Rima and Alegre on 27 February 1990. Quoted are portions of the allegedly libelous broadcasts:

JUN ALEGRE:

Let us begin with the less burdensome: if you have children taking medical course at AMEC-BCCM, advise
them to pass all subjects because if they fail in any subject they will repeat their year level, taking up all
subjects including those they have passed already. Several students had approached me stating that they had
consulted with the DECS which told them that there is no such regulation. If [there] is no such regulation why is
AMEC doing the same?

xxx

Second: Earlier AMEC students in Physical Therapy had complained that the course is not recognized by
DECS. xxx

Third: Students are required to take and pay for the subject even if the subject does not have an instructor -
such greed for money on the part of AMECs administration. Take the subject Anatomy: students would pay for
the subject upon enrolment because it is offered by the school. However there would be no instructor for such
subject. Students would be informed that course would be moved to a later date because the school is still searching
for the appropriate instructor.

xxx
It is a public knowledge that the Ago Medical and Educational Center has survived and has been surviving for the
past few years since its inception because of funds support from foreign foundations. If you will take a look at the
AMEC premises youll find out that the names of the buildings there are foreign soundings. There is a McDonald
Hall. Why not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the support of
foreign foundations for AMEC is substantial, isnt it? With the report which is the basis of the expose in DZRC
today, it would be very easy for detractors and enemies of the Ago family to stop the flow of support of foreign
foundations who assist the medical school on the basis of the latters purpose. But if the purpose of the institution
(AMEC) is to deceive students at cross purpose with its reason for being it is possible for these foreign foundations
to lift or suspend their donations temporarily.[8]

xxx

On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and the AMEC-
Institute of Mass Communication in their effort to minimize expenses in terms of salary are absorbing or
continues to accept rejects. For example how many teachers in AMEC are former teachers of Aquinas University
but were removed because of immorality? Does it mean that the present administration of AMEC have the total
definite moral foundation from catholic administrator of Aquinas University. I will prove to you my friends,
that AMEC is a dumping ground, garbage, not merely of moral and physical misfits. Probably they only qualify
in terms of intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family name implies. She is too
old to work, being an old woman. Is the AMEC administration exploiting the very [e]nterprising or compromising
and undemanding Lola? Could it be that AMEC is just patiently making use of Dean Justita Lola were if she is very
old. As in atmospheric situation zero visibility the plane cannot land, meaning she is very old, low pay follows. By
the way, Dean Justita Lola is also the chairman of the committee on scholarship in AMEC. She had retired from
Bicol University a long time ago but AMEC has patiently made use of her.

xxx

MEL RIMA:

xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit people. What does
this mean? Immoral and physically misfits as teachers.

May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no longer fit to teach.
You are too old. As an aviation, your case is zero visibility. Dont insist.

xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship committee at that. The
reason is practical cost saving in salaries, because an old person is not fastidious, so long as she has money to buy
the ingredient of beetle juice. The elderly can get by thats why she (Lola) was taken in as Dean.

xxx

xxx On our end our task is to attend to the interests of students. It is likely that the students would be influenced by
evil. When they become members of society outside of campus will be liabilities rather than assets. What do
you expect from a doctor who while studying at AMEC is so much burdened with unreasonable imposition? What
do you expect from a student who aside from peculiar problems because not all students are rich in their struggle to
improve their social status are even more burdened with false regulations. xxx [9] (Emphasis supplied)

The complaint further alleged that AMEC is a reputable learning institution. With the supposed exposs,
FBNI, Rima and Alegre transmitted malicious imputations, and as such, destroyed plaintiffs (AMEC and
Ago) reputation. AMEC and Ago included FBNI as defendant for allegedly failing to exercise due diligence
in the selection and supervision of its employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an Answer[10] alleging that
the broadcasts against AMEC were fair and true. FBNI, Rima and Alegre claimed that they were plainly
impelled by a sense of public duty to report the goings-on in AMEC, [which is] an institution imbued with
public interest.
Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo Cea,
collaborating counsel of Atty. Lozares, filed a Motion to Dismiss[11] on FBNIs behalf. The trial court denied
the motion to dismiss. Consequently, FBNI filed a separate Answer claiming that it exercised due diligence
in the selection and supervision of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the
broadcaster should (1) file an application; (2) be interviewed; and (3) undergo an apprenticeship and
training program after passing the interview. FBNI likewise claimed that it always reminds its broadcasters
to observe truth, fairness and objectivity in their broadcasts and to refrain from using libelous and indecent
language. Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa
Pilipinas (KBP) accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision [12] finding FBNI and Alegre liable for libel
except Rima. The trial court held that the broadcasts are libelous per se. The trial court rejected the
broadcasters claim that their utterances were the result of straight reporting because it had no factual basis.
The broadcasters did not even verify their reports before airing them to show good faith. In holding FBNI
liable for libel, the trial court found that FBNI failed to exercise diligence in the selection and supervision of
its employees.
In absolving Rima from the charge, the trial court ruled that Rimas only participation was when he
agreed with Alegres expos. The trial court found Rimas statement within the bounds of freedom of speech,
expression, and of the press. The dispositive portion of the decision reads:

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of damages caused
by the controversial utterances, which are not found by this court to be really very serious and damaging, and
there being no showing that indeed the enrollment of plaintiff school dropped, defendants Hermogenes Jun
Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC), are hereby jointly and severally
ordered to pay plaintiff Ago Medical and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM)
the amount of P300,000.00 moral damages, plus P30,000.00 reimbursement of attorneys fees, and to pay the costs of
suit.

SO ORDERED. [13] (Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other,
appealed the decision to the Court of Appeals. The Court of Appeals affirmed the trial courts judgment with
modification. The appellate court made Rima solidarily liable with FBNI and Alegre. The appellate court
denied Agos claim for damages and attorneys fees because the broadcasts were directed against AMEC,
and not against her. The dispositive portion of the Court of Appeals decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification that broadcaster
Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.

SO ORDERED.[14]

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in its 26
January 2000 Resolution.
Hence, FBNI filed this petition.[15]

The Ruling of the Court of Appeals

The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are libelous per
se and that FBNI, Rima and Alegre failed to overcome the legal presumption of malice. The Court of
Appeals found Rima and Alegres claim that they were actuated by their moral and social duty to inform the
public of the students gripes as insufficient to justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the Court of Appeals ruled
that the broadcasts were made with reckless disregard as to whether they were true or false. The appellate
court pointed out that FBNI, Rima and Alegre failed to present in court any of the students who allegedly
complained against AMEC. Rima and Alegre merely gave a single name when asked to identify the
students. According to the Court of Appeals, these circumstances cast doubt on the veracity of the
broadcasters claim that they were impelled by their moral and social duty to inform the public about the
students gripes.
The Court of Appeals found Rima also liable for libel since he remarked that (1) AMEC-BCCM is a
dumping ground for morally and physically misfit teachers; (2) AMEC obtained the services of Dean Justita
Lola to minimize expenses on its employees salaries; and (3) AMEC burdened the students with
unreasonable imposition and false regulations.[16]
The Court of Appeals held that FBNI failed to exercise due diligence in the selection and supervision
of its employees for allowing Rima and Alegre to make the radio broadcasts without the proper KBP
accreditation. The Court of Appeals denied Agos claim for damages and attorneys fees because the
libelous remarks were directed against AMEC, and not against her. The Court of Appeals adjudged FBNI,
Rima and Alegre solidarily liable to pay AMEC moral damages, attorneys fees and costs of suit.

Issues

FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF
MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.

The Courts Ruling

We deny the petition.

This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and Alegre
against AMEC.[17] While AMEC did not point out clearly the legal basis for its complaint, a reading of the
complaint reveals that AMECs cause of action is based on Articles 30 and 33 of the Civil Code. Article
30[18] authorizes a separate civil action to recover civil liability arising from a criminal offense. On the other
hand, Article 33[19] particularly provides that the injured party may bring a separate civil action for damages
in cases of defamation, fraud, and physical injuries. AMEC also invokes Article 19[20] of the Civil Code to
justify its claim for damages. AMEC cites Articles 2176 [21] and 2180[22] of the Civil Code to hold FBNI
solidarily liable with Rima and Alegre.

I.
Whether the broadcasts are libelous
 A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary, or
any act or omission, condition, status, or circumstance tending to cause the dishonor, discredit, or contempt
of a natural or juridical person, or to blacken the memory of one who is dead.[24]
There is no question that the broadcasts were made public and imputed to AMEC defects or
circumstances tending to cause it dishonor, discredit and contempt. Rima and Alegres remarks such as
greed for money on the part of AMECs administrators; AMEC is a dumping ground, garbage of xxx moral
and physical misfits; and AMEC students who graduate will be liabilities rather than assets of the society
are libelous per se. Taken as a whole, the broadcasts suggest that AMEC is a money-making institution
where physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and Alegre
were plainly impelled by their civic duty to air the students gripes. FBNI alleges that there is no evidence
that ill will or spite motivated Rima and Alegre in making the broadcasts. FBNI further points out that Rima
and Alegre exerted efforts to obtain AMECs side and gave Ago the opportunity to defend AMEC and its
administrators. FBNI concludes that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.[25] Rima and Alegre failed to show adequately
their good intention and justifiable motive in airing the supposed gripes of the students. As hosts of a
documentary or public affairs program, Rima and Alegre should have presented the public issues free
from inaccurate and misleading information.[26] Hearing the students alleged complaints a month before the
expos,[27] they had sufficient time to verify their sources and information. However, Rima and Alegre hardly
made a thorough investigation of the students alleged gripes. Neither did they inquire about nor confirm the
purported irregularities in AMEC from the Department of Education, Culture and Sports. Alegre testified
that he merely went to AMEC to verify his report from an alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the students because they were many and not because
there is proof that what they are saying is true.[28] This plainly shows Rima and Alegres reckless disregard
of whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not the result of straight reporting. Significantly, some
courts in the United States apply the privilege of neutral reportage in libel cases involving matters of public
interest or public figures. Under this privilege, a republisher who accurately and disinterestedly reports
certain defamatory statements made against public figures is shielded from liability, regardless of the
republishers subjective awareness of the truth or falsity of the accusation.[29] Rima and Alegre cannot invoke
the privilege of neutral reportage because unfounded comments abound in the broadcasts. Moreover, there
is no existing controversy involving AMEC when the broadcasts were made. The privilege of neutral
reportage applies where the defamed person is a public figure who is involved in an existing controversy,
and a party to that controversy makes the defamatory statement.[30]
However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v. Court
of Appeals,[31] FBNI contends that the broadcasts fall within the coverage of qualifiedly privileged
communications for being commentaries on matters of public interest. Such being the case, AMEC should
prove malice in fact or actual malice. Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the doctrine of fair comment,
thus:

[F]air commentaries on matters of public interest are privileged and constitute a valid defense in an action for libel
or slander. The doctrine of fair comment means that while in general every discreditable imputation publicly made is
deemed false, because every man is presumed innocent until his guilt is judicially proved, and every false imputation
is deemed malicious, nevertheless, when the discreditable imputation is directed against a public person in his public
capacity, it is not necessarily actionable. In order that such discreditable imputation to a public official may be
actionable, it must either be a false allegation of fact or a comment based on a false supposition. If the
comment is an expression of opinion, based on established facts, then it is immaterial that the opinion happens to
be mistaken, as long as it might reasonably be inferred from the facts. [32](Emphasis supplied)
 True, AMEC is a private learning institution whose business of educating students is genuinely imbued
with public interest. The welfare of the youth in general and AMECs students in particular is a matter which
the public has the right to know. Thus, similar to the newspaper articles in Borjal, the subject broadcasts
dealt with matters of public interest. However, unlike in Borjal, the questioned broadcasts are not based
on established facts. The record supports the following findings of the trial court:

xxx Although defendants claim that they were motivated by consistent reports of students and parents against
plaintiff, yet, defendants have not presented in court, nor even gave name of a single student who made the
complaint to them, much less present written complaint or petition to that effect. To accept this defense of
defendants is too dangerous because it could easily give license to the media to malign people and establishments
based on flimsy excuses that there were reports to them although they could not satisfactorily establish it. Such
laxity would encourage careless and irresponsible broadcasting which is inimical to public interests.

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates of their duties, did
not verify and analyze the truth of the reports before they aired it, in order to prove that they are in good faith.

Alegre contended that plaintiff school had no permit and is not accredited to offer Physical Therapy courses. Yet,
plaintiff produced a certificate coming from DECS that as of Sept. 22, 1987 or more than 2 years before the
controversial broadcast, accreditation to offer Physical Therapy course had already been given the plaintiff, which
certificate is signed by no less than the Secretary of Education and Culture herself, Lourdes R. Quisumbing (Exh. C-
rebuttal). Defendants could have easily known this were they careful enough to verify. And yet, defendants were
very categorical and sounded too positive when they made the erroneous report that plaintiff had no permit to offer
Physical Therapy courses which they were offering.

The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald Foundation prove
not to be true also. The truth is there is no Mcdonald Foundation existing. Although a big building of plaintiff school
was given the name Mcdonald building, that was only in order to honor the first missionary in Bicol of plaintiffs
religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants over the air, not a single centavo appears
to be received by plaintiff school from the aforementioned McDonald Foundation which does not exist.

Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when medical students
fail in one subject, they are made to repeat all the other subject[s], even those they have already passed, nor their
claim that the school charges laboratory fees even if there are no laboratories in the school. No evidence was
presented to prove the bases for these claims, at least in order to give semblance of good faith.

As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers, defendant[s] singled out
Dean Justita Lola who is said to be so old, with zero visibility already. Dean Lola testified in court last Jan. 21,
1991, and was found to be 75 years old. xxx Even older people prove to be effective teachers like Supreme Court
Justices who are still very much in demand as law professors in their late years. Counsel for defendants is past 75
but is found by this court to be still very sharp and effective. So is plaintiffs counsel.

Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but is still alert and
docile.

The contention that plaintiffs graduates become liabilities rather than assets of our society is a mere conclusion.
Being from the place himself, this court is aware that majority of the medical graduates of plaintiffs pass the board
examination easily and become prosperous and responsible professionals. [33]

Had the comments been an expression of opinion based on established facts, it is immaterial that the
opinion happens to be mistaken, as long as it might reasonably be inferred from the facts. [34] However, the
comments of Rima and Alegre were not backed up by facts. Therefore, the broadcasts are not privileged
and remain libelous per se.
 The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga Brodkaster sa Pilipinas,
Ink. (Radio Code). Item I(B) of the Radio Code provides:

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x

4. Public affairs program shall present public issues free from personal bias, prejudice and inaccurate
and misleading information. x x x Furthermore, the station shall strive to present balanced
discussion of issues. x x x.

xxx

7. The station shall be responsible at all times in the supervision of public affairs, public issues and
commentary programs so that they conform to the provisions and standards of this code.

8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect public
interest, general welfare and good order in the presentation of public affairs and public
issues.[36] (Emphasis supplied)

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the code of
ethical conduct governing practitioners in the radio broadcast industry. The Radio Code is a voluntary code
of conduct imposed by the radio broadcast industry on its own members. The Radio Code is a public
warranty by the radio broadcast industry that radio broadcast practitioners are subject to a code by which
their conduct are measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live up to the code of
conduct of their profession, just like other professionals. A professional code of conduct provides the
standards for determining whether a person has acted justly, honestly and with good faith in the exercise
of his rights and performance of his duties as required by Article 19 [37] of the Civil Code. A professional
code of conduct also provides the standards for determining whether a person who willfully causes loss or
injury to another has acted in a manner contrary to morals or good customs under Article 21 [38] of the Civil
Code.
II.
Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a corporation. [39]
A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or
moral shock.[40] The Court of Appeals cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of
moral damages. However, the Courts statement in Mambulao that a corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral damages is an obiter
dictum.[42]
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 [43] of the Civil Code.
This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other
form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly complain for libel or any other form of
defamation and claim for moral damages.[44]
Moreover, where the broadcast is libelous per se, the law implies damages.[45] In such a case,
evidence of an honest mistake or the want of character or reputation of the party libeled goes only in
mitigation of damages.[46] Neither in such a case is the plaintiff required to introduce evidence of actual
damages as a condition precedent to the recovery of some damages. [47] In this case, the broadcasts are
libelous per se. Thus, AMEC is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The record shows that even
though the broadcasts were libelous per se, AMEC has not suffered any substantial or material damage to
its reputation. Therefore, we reduce the award of moral damages from P300,000 to P150,000.

III.
Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of
attorneys fees. FBNI adds that the instant case does not fall under the enumeration in Article 2208 [48] of the
Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its claim for
attorneys fees. AMEC did not adduce evidence to warrant the award of attorneys fees. Moreover, both the
trial and appellate courts failed to explicitly state in their respective decisions the rationale for the award of
attorneys fees.[49] In Inter-Asia Investment Industries, Inc. v. Court of Appeals,[50] we held that:

[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule, and
counsels fees are not to be awarded every time a party wins a suit. The power of the court to award attorneys fees
under Article 2208 of the Civil Code demands factual, legal and equitable justification, without which the
award is a conclusion without a premise, its basis being improperly left to speculation and conjecture. In all
events, the court must explicitly state in the text of the decision, and not only in the decretal portion thereof, the
legal reason for the award of attorneys fees.[51] (Emphasis supplied)

While it mentioned about the award of attorneys fees by stating that it lies within the discretion of the
court and depends upon the circumstances of each case, the Court of Appeals failed to point out any
circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and
attorneys fees because it exercised due diligence in the selection and supervision of its employees,
particularly Rima and Alegre. FBNI maintains that its broadcasters, including Rima and Alegre, undergo a
very regimented process before they are allowed to go on air. Those who apply for broadcaster are
subjected to interviews, examinations and an apprenticeship program.
FBNI further argues that Alegres age and lack of training are irrelevant to his competence as a
broadcaster. FBNI points out that the minor deficiencies in the KBP accreditation of Rima and Alegre do
not in any way prove that FBNI did not exercise the diligence of a good father of a family in selecting and
supervising them. Rimas accreditation lapsed due to his non-payment of the KBP annual fees while Alegres
accreditation card was delayed allegedly for reasons attributable to the KBP Manila Office. FBNI claims
that membership in the KBP is merely voluntary and not required by any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the tort
which they commit.[52] Joint tort feasors are all the persons who command, instigate, promote, encourage,
advise, countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done,
if done for their benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on Articles 2176
and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for damages
arising from the libelous broadcasts. As stated by the Court of Appeals, recovery for defamatory statements
published by radio or television may be had from the owner of the station, a licensee, the operator of the
station, or a person who procures, or participates in, the making of the defamatory statements. [54] An
employer and employee are solidarily liable for a defamatory statement by the employee within the course
and scope of his or her employment, at least when the employer authorizes or ratifies the defamation. [55] In
this case, Rima and Alegre were clearly performing their official duties as hosts of FBNIs radio program
Expos when they aired the broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond
the scope of their work at that time. There was likewise no showing that FBNI did not authorize and ratify
the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection and supervision of its employees, particularly Rima and Alegre. FBNI merely showed that
it exercised diligence in the selection of its broadcasters without introducing any evidence to prove that it
observed the same diligence in the supervision of Rima and Alegre. FBNI did not show how it exercised
diligence in supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters to observe
truth, fairness and objectivity and to refrain from using libelous and indecent language is not enough to
prove due diligence in the supervision of its broadcasters. Adequate training of the broadcasters on the
industrys code of conduct, sufficient information on libel laws, and continuous evaluation of the
broadcasters performance are but a few of the many ways of showing diligence in the supervision of
broadcasters.
FBNI claims that it has taken all the precaution in the selection of Rima and Alegre as broadcasters,
bearing in mind their qualifications. However, no clear and convincing evidence shows that Rima and Alegre
underwent FBNIs regimented process of application. Furthermore, FBNI admits that Rima and Alegre had
deficiencies in their KBP accreditation,[56] which is one of FBNIs requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary, indicates the broadcasters strong commitment to
observe the broadcast industrys rules and regulations. Clearly, these circumstances show FBNIs lack of
diligence in selecting and supervising Rima and Alegre. Hence, FBNI is solidarily liable to pay damages
together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and
Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the MODIFICATION
that the award of moral damages is reduced from P300,000 to P150,000 and the award of attorneys fees
is deleted. Costs against petitioner.
SO ORDERED.
 [G.R. No. 100812. June 25, 1999]

FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF

APPEALS and SPOUSES GREGORIO and LIBRADA
MANUEL, respondents.

DECISION
QUISUMBING, J.:

This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the
decision[1] of the Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered by
Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural antecedents of this
petition are as follows:
On January 23, 1985, petitioner filed a complaint[2] against private respondents to recover
three thousand four hundred twelve and six centavos (P3,412.06), representing the balance of the
jeep body purchased by the Manuels from petitioner; an additional sum of twenty thousand four
hundred fifty-four and eighty centavos (P20,454.80) representing the unpaid balance on the cost
of repair of the vehicle; and six thousand pesos (P6,000.00) for cost of suit and attorneys fees.[3] To
the original balance on the price of jeep body were added the costs of repair.[4] In their answer,
private respondents interposed a counterclaim for unpaid legal services by Gregorio Manuel in the
amount of fifty thousand pesos (P50,000) which was not paid by the incorporators, directors and
officers of the petitioner. The trial court decided the case on June 26, 1985, in favor of petitioner
in regard to the petitioners claim for money, but also allowed the counter-claim of private
respondents. Both parties appealed. On April 15, 1991, the Court of Appeals sustained the trial
courts decision.[5] Hence, the present petition.
For our review in particular is the propriety of the permissive counterclaim which private
respondents filed together with their answer to petitioners complaint for a sum of money. Private
respondent Gregorio Manuel alleged as an affirmative defense that, while he was petitioners
Assistant Legal Officer, he represented members of the Francisco family in the intestate estate
proceedings of the late Benita Trinidad. However, even after the termination of the proceedings,
his services were not paid. Said family members, he said, were also incorporators, directors and
officers of petitioner. Hence to counter petitioners collection suit, he filed a permissive
counterclaim for the unpaid attorneys fees.[6]
For failure of petitioner to answer the counterclaim, the trial court declared petitioner in
default on this score, and evidence ex-parte was presented on the counterclaim. The trial court
ruled in favor of private respondents and found that Gregorio Manuel indeed rendered legal
services to the Francisco family in Special Proceedings Number 7803- In the Matter of Intestate
Estate of Benita Trinidad. Said court also found that his legal services were not compensated
despite repeated demands, and thus ordered petitioner to pay him the amount of fifty thousand
(P50,000.00) pesos.[7]
 Dissatisfied with the trial courts order, petitioner elevated the matter to the Court of Appeals,
posing the following issues:
I.

WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS

NULL AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE
PERSON OF THE DEFENDANT.
II.

WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN

THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE
TO THE CLAIM OF DEFENDANT-APPELLEES.
III.

WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-

APPELLANT TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM.[8]

Petitioner contended that the trial court did not acquire jurisdiction over it because no
summons was validly served on it together with the copy of the answer containing the permissive
counterclaim. Further, petitioner questions the propriety of its being made party to the case because
it was not the real party in interest but the individual members of the Francisco family concerned
with the intestate case.
In its assailed decision now before us for review, respondent Court of Appeals held that a
counterclaim must be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of
Court; and nowhere does it state in the Rules that a party still needed to be summoned anew if a
counterclaim was set up against him. Failure to serve summons, said respondent court, did not
effectively negate trial courts jurisdiction over petitioner in the matter of the counterclaim. It
likewise pointed out that there was no reason for petitioner to be excused from answering the
counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the copy
of the answer with counterclaim two (2) days prior to his withdrawal as counsel for
petitioner. Moreover when petitioners new counsel, Jose N. Aquino, entered his appearance, three
(3) days still remained within the period to file an answer to the counterclaim. Having failed to
answer, petitioner was correctly considered in default by the trial court.[9] Even assuming that the
trial court acquired no jurisdiction over petitioner, respondent court also said, but having filed a
motion for reconsideration seeking relief from the said order of default, petitioner
was estopped from further questioning the trial courts jurisdiction.[10]
On the question of its liability for attorneys fees owing to private respondent Gregorio Manuel,
petitioner argued that being a corporation, it should not be held liable therefor because these fees
were owed by the incorporators, directors and officers of the corporation in their personal capacity
as heirs of Benita Trinidad. Petitioner stressed that the personality of the corporation, vis--vis the
individual persons who hired the services of private respondent, is separate and distinct,[11] hence,
the liability of said individuals did not become an obligation chargeable against petitioner.
 Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:

However, this distinct and separate personality is merely a fiction created by law for
convenience and to promote justice. Accordingly, this separate personality of the
corporation may be disregarded, or the veil of corporate fiction pierced, in cases
where it is used as a cloak or cover for found (sic) illegality, or to work an injustice, or
where necessary to achieve equity or when necessary for the protection of
creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347) Corporations are
composed of natural persons and the legal fiction of a separate corporate personality is
not a shield for the commission of injustice and inequity. (Chemplex Philippines, Inc.
vs. Pamatian, 57 SCRA 408)

In the instant case, evidence shows that the plaintiff-appellant Francisco Motors
Corporation is composed of the heirs of the late Benita Trinidad as directors and
incorporators for whom defendant Gregorio Manuel rendered legal services in the
intestate estate case of their deceased mother.Considering the aforestated principles
and circumstances established in this case, equity and justice demands plaintiff-
appellants veil of corporate identity should be pierced and the defendant be
compensated for legal services rendered to the heirs, who are directors of the plaintiff-
appellant corporation.[12]

Now before us, petitioner assigns the following errors:

I.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF

PIERCING THE VEIL OF CORPORATE ENTITY.
II.

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS

JURISDICTION OVER PETITIONER WITH RESPECT TO THE
COUNTERCLAIM.[13]

Petitioner submits that respondent court should not have resorted to piercing the veil of
corporate fiction because the transaction concerned only respondent Gregorio Manuel and the heirs
of the late Benita Trinidad. According to petitioner, there was no cause of action by said respondent
against petitioner; personal concerns of the heirs should be distinguished from those involving
corporate affairs. Petitioner further contends that the present case does not fall among the instances
wherein the courts may look beyond the distinct personality of a corporation. According to
petitioner, the services for which respondent Gregorio Manuel seeks to collect fees from petitioner
are personal in nature. Hence, it avers the heirs should have been sued in their personal capacity,
and not involve the corporation.[14]
 With regard to the permissive counterclaim, petitioner also insists that there was no proper
service of the answer containing the permissive counterclaim. It claims that the counterclaim is a
separate case which can only be properly served upon the opposing party through
summons. Further petitioner states that by nature, a permissive counterclaim is one which does not
arise out of nor is necessarily connected with the subject of the opposing partys claim. Petitioner
avers that since there was no service of summons upon it with regard to the counterclaim, then the
court did not acquire jurisdiction over petitioner. Since a counterclaim is considered an action
independent from the answer, according to petitioner, then in effect there should be two
simultaneous actions between the same parties: each party is at the same time both plaintiff and
defendant with respect to the other,[15] requiring in each case separate summonses.
In their Comment, private respondents focus on the two questions raised by petitioner. They
defend the propriety of piercing the veil of corporate fiction, but deny the necessity of serving
separate summonses on petitioner in regard to their permissive counterclaim contained in the
answer.
Private respondents maintain both trial and appellate courts found that respondent Gregorio
Manuel was employed as assistant legal officer of petitioner corporation, and that his services were
solicited by the incorporators, directors and members to handle and represent them in Special
Proceedings No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They assert that
the members of petitioner corporation took advantage of their positions by not compensating
respondent Gregorio Manuel after the termination of the estate proceedings despite his repeated
demands for payment of his services. They cite findings of the appellate court that support piercing
the veil of corporate identity in this particular case.They assert that the corporate veil may be
disregarded when it is used to defeat public convenience, justify wrong, protect fraud, and defend
crime. It may also be pierced, according to them, where the corporate entity is being used as an
alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another
corporate entity. In these instances, they aver, the corporation should be treated merely as an
association of individual persons.[16]
Private respondents dispute petitioners claim that its right to due process was violated when
respondents counterclaim was granted due course, although no summons was served upon it. They
claim that no provision in the Rules of Court requires service of summons upon a defendant in a
counterclaim. Private respondents argue that when the petitioner filed its complaint before the trial
court it voluntarily submitted itself to the jurisdiction of the court. As a consequence, the issuance
of summons on it was no longer necessary. Private respondents say they served a copy of their
answer with affirmative defenses and counterclaim on petitioners former counsel, Nicanor G.
Alvarez. While petitioner would have the Court believe that respondents served said copy upon
Alvarez after he had withdrawn his appearance as counsel for the petitioner, private respondents
assert that this contention is utterly baseless. Records disclose that the answer was received two
(2) days before the former counsel for petitioner withdrew his appearance, according to private
respondents. They maintain that the present petition is but a form of dilatory appeal, to set off
petitioners obligations to the respondents by running up more interest it could recover from
them. Private respondents therefore claim damages against petitioner.[17]
To resolve the issues in this case, we must first determine the propriety of piercing the veil of
corporate fiction.
 Basic in corporation law is the principle that a corporation has a separate personality distinct
from its stockholders and from other corporations to which it may be connected.[18] However, under
the doctrine of piercing the veil of corporate entity, the corporations separate juridical personality
may be disregarded, for example, when the corporate identity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime. Also, where the corporation is a 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, then its distinct personality may be ignored.[19]In these circumstances, the courts will
treat the corporation as a mere aggrupation of persons and the liability will directly attach to
them. The legal fiction of a separate corporate personality in those cited instances, for reasons of
public policy and in the interest of justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this case, the doctrine of piercing
the corporate veil has no relevant application here.Respondent court erred in permitting the trial
courts resort to this doctrine. The rationale behind piercing a corporations identity in a given case
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. However, in the case at bar, instead of holding certain
individuals or persons responsible for an alleged corporate act, the situation has been reversed. It
is the petitioner as a corporation which is being ordered to answer for the personal liability of
certain individual directors, officers and incorporators concerned. Hence, it appears to us that the
doctrine has been turned upside down because of its erroneous invocation. Note that according to
private respondent Gregorio Manuel his services were solicited as counsel for members of the
Francisco family to represent them in the intestate proceedings over Benita Trinidads estate. These
estate proceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family members
but also from petitioner corporation on the claims that its management had requested his services
and he acceded thereto as an employee of petitioner from whom it could be deduced he was also
receiving a salary. His move to recover unpaid legal fees through a counterclaim against Francisco
Motors Corporation, to offset the unpaid balance of the purchase and repair of a jeep body could
only result from an obvious misapprehension that petitioners corporate assets could be used to
answer for the liabilities of its individual directors, officers, and incorporators. Such result if
permitted could easily prejudice the corporation, its own creditors, and even other stockholders;
hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said
incorporators, directors and officers of the corporation had incurred, it was incurred in their
personal capacity. When directors and officers of a corporation are unable to compensate a party
for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or
promoting injustice, and be thereby held liable therefor by piercing its corporate veil. While there
are no hard and fast rules on disregarding separate corporate identity, we must always be mindful
of its function and purpose. A court should be careful in assessing the milieu where the doctrine
of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may
result from its erroneous application.
The personality of the corporation and those of its incorporators, directors and officers in their
personal capacities ought to be kept separate in this case. The claim for legal fees against the
concerned individual incorporators, officers and directors could not be properly directed against
the corporation without violating basic principles governing corporations. Moreover, every action
including a counterclaim must be prosecuted or defended in the name of the real party in
interest.[20] It is plainly an error to lay the claim for legal fees of private respondent Gregorio
Manuel at the door of petitioner (FMC) rather than individual members of the Francisco family.
However, with regard to the procedural issue raised by petitioners allegation, that it needed to
be summoned anew in order for the court to acquire jurisdiction over it, we agree with respondent
courts view to the contrary. Section 4, Rule 11 of the Rules of Court provides that a counterclaim
or cross-claim must be answered within ten (10) days from service. Nothing in the Rules of Court
says that summons should first be served on the defendant before an answer to counterclaim must
be made. The purpose of a summons is to enable the court to acquire jurisdiction over the person
of the defendant. Although a counterclaim is treated as an entirely distinct and independent action,
the defendant in the counterclaim, being the plaintiff in the original complaint, has already
submitted to the jurisdiction of the court. Following Rule 9, Section 3 of the 1997 Rules of Civil
Procedure,[21] if a defendant (herein petitioner) fails to answer the counterclaim, then upon motion
of plaintiff, the defendant may be declared in default. This is what happened to petitioner in this
case, and this Court finds no procedural error in the disposition of the appellate court on this
particular issue. Moreover, as noted by the respondent court, when petitioner filed its motion
seeking to set aside the order of default, in effect it submitted itself to the jurisdiction of the
court. As well said by respondent court:

Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show

that upon its request, plaintiff-appellant was granted time to file a motion for
reconsideration of the disputed decision. Plaintiff-appellant did file its motion for
reconsideration to set aside the order of default and the judgment rendered on the
counterclaim.

Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the

counterclaim, as it vigorously insists, plaintiff-appellant is considered to have
submitted to the courts jurisdiction when it filed the motion for reconsideration
seeking relief from the court. (Soriano vs. Palacio, 12 SCRA 447). A party is estopped
from assailing the jurisdiction of a court after voluntarily submitting himself to its
jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar against any
claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37).[22]

WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby
REVERSED insofar only as it held Francisco Motors Corporation liable for the legal obligation
owing to private respondent Gregorio Manuel; but this decision is without prejudice to his filing
the proper suit against the concerned members of the Francisco family in their personal
capacity. No pronouncement as to costs.
SO ORDERED.
G.R. No. 105395 December 10, 1993

BANK OF AMERICA, NT & SA, petitioners,

vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO,
JOHN DOE AND JANE DOE, respondents.

Agcaoili & Associates for petitioner.

Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private respondents.

VITUG, J.:

A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to court
as adversaries in seeking a definition of their respective rights or liabilities thereunder.

On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail an
Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch,
for the account of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover
the sale of plastic ropes and "agricultural files," with the petitioner as advising bank and private
respondent Inter-Resin Industrial Corporation as beneficiary.

On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing and
transmitting, along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty.
Emiliano Tanay to Bank of America to have the letter of credit confirmed. The bank did not.
Reynaldo Dueñas, bank employee in charge of letters of credit, however, explained to Atty. Tanay
that there was no need for confirmation because the letter of credit would not have been transmitted
if it were not genuine.

Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the letter
of credit by submitting to Bank of America invoices, covering the shipment of 24,000 bales of
polyethylene rope to General Chemicals valued at US$1,320,600.00, the corresponding packing list,
export declaration and bill of lading. Finally, after being satisfied that Inter-Resin's documents
conformed with the conditions expressed in the letter of credit, Bank of America issued in favor of
Inter-Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft (for)
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary stamps, postage
and mail issuance." 1 The check was picked up by Inter-Resin's Executive Vice-President Barcelina
Tio. On 10 April 1981, Bank of America wrote Bank of Ayudhya advising the latter of the availment
under the letter of credit and sought the corresponding reimbursement therefor.

Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the
second availment under the same letter of credit consisting of a packing list, bill of lading, invoices,
export declaration and bills in set, evidencing the second shipment of goods. Immediately upon
receipt of a telex from the Bank of Ayudhya declaring the letter of credit fraudulent, 2 Bank of
America stopped the processing of Inter-Resin's documents and sent a telex to its branch office in
Bangkok, Thailand, requesting assistance in determining the authenticity of the letter of credit. 3 Bank
of America kept Inter-Resin informed of the developments. Sensing a fraud, Bank of America sought
the assistance of the National Bureau of Investigation (NBI). With the help of the staff of the
Philippine Embassy at Bangkok, as well as the police and customs personnel of Thailand, the NBI
agents, who were sent to Thailand, discovered that the vans exported by Inter-Resin did not contain
ropes but plastic strips, wrappers, rags and waste materials. Here at home, the NBI also investigated
Inter-Resin's President Francisco Trajano and Executive Vice President Barcelina Tio, who,
thereafter, were criminally charged for estafa through falsification of commercial documents. The
case, however, was eventually dismissed by the Rizal Provincial Fiscal who found no prima
facieevidence to warrant prosecution.

Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of the
draft for US$1,320,600.00 on the partial availment of the now disowned letter of credit. On the other
hand, Inter-Resin claimed that not only was it entitled to retain P10,219,093.20 on its first shipment
but also to the balance US$1,461,400.00 covering the second shipment.

On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the merchandise to Thailand;
(b) the telex declaring the letter of credit fraudulent was unverified and self-serving, hence, hearsay,
but even assuming that the letter of credit was fake, "the fault should be borne by the BA which was
careless and negligent" 5 for failing to utilize its modern means of communication to verify with Bank
of Ayudhya in Thailand the authenticity of the letter of credit before sending the same to Inter-Resin;
(c) the loading of plastic products into the vans were under strict supervision, inspection and
verification of government officers who have in their favor the presumption of regularity in the
performance of official functions; and (d) Bank of America failed to prove the participation of Inter-
Resin or its employees in the alleged fraud as, in fact, the complaint for estafa through falsification of
documents was dismissed by the Provincial Fiscal of Rizal.6

On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by petitioner
Bank of America.

The following issues are raised by Bank of America: (a) whether it has warranted the genuineness
and authenticity of the letter of credit and, corollarily, whether it has acted merely as an advising
bank or as a confirming bank; (b) whether Inter-Resin has actually shipped the ropes specified by
the letter of credit; and (c) following the dishonor of the letter of credit by Bank of Ayudhya, whether
Bank of America may recover against Inter-Resin under the draft executed in its partial availment of
the letter of credit.8

In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the issue of
being only an advising bank; (b) the findings of the trial court that the ropes have actually been
shipped is binding on the Court; and, (c) Bank of America cannot recover from Inter-Resin because
the drawer of the letter of credit is the Bank of Ayudhya and not Inter-Resin.

If only to understand how the parties, in the first place, got themselves into the mess, it may be well
to start by recalling how, in its modern use, a letter of credit is employed in trade transactions.

A letter of credit is a financial device developed by merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods
before paying. 9 To break the impasse, the buyer may be required to contract a bank to issue a letter
of credit in favor of the seller so that, by virtue of the latter of credit, the issuing bank can authorize
the seller to draw drafts and engage to pay them upon their presentment simultaneously with the
tender of documents required by the letter of credit. 10 The buyer and the seller agree on what
documents are to be presented for payment, but ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in the process secures the
required shipping documents or documents of title. To get paid, the seller executes a draft and
presents it together with the required documents to the issuing bank. The issuing bank redeems the
draft and pays cash to the seller if it finds that the documents submitted by the seller conform with
what the letter of credit requires. The bank then obtains possession of the documents upon paying
the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires
the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he
delivers the documents of title over the goods, while the buyer acquires said documents and control
over the goods only after reimbursing the bank.

What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller of the draft and the required shipping documents
are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of
any breach of the main sales contract. By this so-called "independence principle," the bank
determines compliance with the letter of credit only by examining the shipping documents presented;
it is precluded from determining whether the main contract is actually accomplished or not. 11

There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit and
obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank
issuing the letter of credit, 13 which undertakes to pay the seller upon receipt of the draft and proper
document of titles and to surrender the documents to the buyer upon reimbursement; and, (c)
the seller, 14 who in compliance with the contract of sale ships the goods to the buyer and delivers the
documents of title and draft to the issuing bank to recover payment.

The number of the parties, not infrequently and almost invariably in international trade practice, may
be increased. Thus, the services of an advising (notifying) bank 15 may be utilized to convey to the
seller the existence of the credit; or, of a confirming bank 16 which will lend credence to the letter of
credit issued by a lesser known issuing bank; or, of a paying bank, 17 which undertakes to encash the
drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim
payment, the buyer may approach another bank, termed the negotiating bank, 18 to have the draft
discounted.

Being a product of international commerce, the impact of this commercial instrument transcends
national boundaries, and it is thus not uncommon to find a dearth of national law that can adequately
provide for its governance. This country is no exception. Our own Code of Commerce basically
introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then why great
reliance has been placed on commercial usage and practice, which, in any case, can be justified by
the universal acceptance of the autonomy of contract rules. The rules were later developed into what
is now known as the Uniform Customs and Practice for Documentary Credits ("U.C.P.") issued by
the International Chamber of Commerce. It is by no means a complete text by itself, for, to be sure,
there are other principles, which, although part of lex mercatoria, are not dealt with the U.C.P.

In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent of their
pertinency, the application in our jurisdiction of this international commercial credit regulatory set of
rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the observances of the U.C.P. is
justified by Article 2 of the Code of Commerce which expresses that, in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be governed by usages and
customs generally observed. We have further observed that there being no specific provisions which
govern the legal complexities arising from transactions involving letters of credit not only between or
among banks themselves but also between banks and the seller or the buyer, as the case may be,
the applicability of the U.C.P. is undeniable.
The first issue raised with the petitioner, i.e., that it has in this instance merely been advising bank, is
outrightly rejected by Inter-Resin and is thus sought to be discarded for having been raised only on
appeal. We cannot agree. The crucial point of dispute in this case is whether under the "letter of
credit," Bank of America has incurred any liability to the "beneficiary" thereof, an issue that largely is
dependent on the bank's participation in that transaction; as a mere advising or notifying bank, it
would not be liable, but as a confirming bank, had this been the case, it could be considered as
having incurred that liability. 22

In Insular Life Assurance Co. Ltd. Employees Association — Natu vs. Insular Life Assurance Co.,
Ltd., 23 the Court said: Where the issues already raised also rest on other issues not specifically
presented, as long as the latter issues bear relevance and close relation to the former and as long
as they arise from the matters on record, the court has the authority to include them in its discussion
of the controversy and to pass upon them just as well. In brief, in those cases where questions not
particularly raised by the parties surface as necessary for the complete adjudication of the rights and
obligations of the parties, the interests of justice dictate that the court should consider and resolve
them. The rule that only issues or theories raised in the initial proceedings may be taken up by a
party thereto on appeal should only refer to independent, not concomitant matters, to support or
oppose the cause of action or defense. The evil that is sought to be avoided, i.e., surprise to the
adverse party, is in reality not existent on matters that are properly litigated in the lower court and
appear on record.

It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an
advising, not confirming, bank, and this much is clearly evident, among other things, by the
provisions of the letter of credit itself, the petitioner bank's letter of advice, its request for payment of
advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has
asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the
proceeds thereof, did not obviously make it a confirming bank. The fact, too, that the draft required
by the letter of credit is to be drawn under the account of General Chemicals (buyer) only means the
same had to be presented to Bank of Ayudhya (issuing bank) for payment. It may be significant to
recall that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay the
draft.

No less important is that Bank of America's letter of 11 March 1981 has expressly stated that "[t]he
enclosure is solely an advise of credit opened by the abovementioned correspondent and conveys
no engagement by us." 24This written reservation by Bank of America in limiting its obligation only to
being an advising bank is in consonance with the provisions of U.C.P.

As an advising or notifying bank, Bank of America did not incur any obligation more than just
notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of
credit. 25 The bare statement of the bank employees, aforementioned, in responding to the inquiry
made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of credit certainly
did not have the effect of novating the letter of credit and Bank of America's letter of advise, 26 nor
can it justify the conclusion that the bank must now assume total liability on the letter of credit.
Indeed, Inter-Resin itself cannot claim to have been all that free from fault. As the seller, the
issuance of the letter of credit should have obviously been a great concern to it. 27 It would have, in
fact, been strange if it did not, prior to the letter of credit, enter into a contract, or negotiated at the
every least, with General Chemicals. 28 In the ordinary course of business, the perfection of contract
precedes the issuance of a letter of credit.

Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising
bank. The view that Bank of America should have first checked the authenticity of the letter of credit
with bank of Ayudhya, by using advanced mode of business communications, before dispatching the
same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P. states that: "Banks
assume no liability or responsibility for the consequences arising out of the delay and/or loss in
transit of any messages, letters or documents, or for delay, mutilation or other errors arising in the
transmission of any telecommunication . . ." As advising bank, Bank of America is bound only to
check the "apparent authenticity" of the letter of credit, which it did. 29 Clarifying its meaning,
Webster's Ninth New Collegiate Dictionary 30 explains that the word "APPARENT suggests
appearance to unaided senses that is not or may not be borne out by more rigorous examination or
greater knowledge."

May Bank of America then recover what it has paid under the letter of credit when the corresponding
draft for partial availment thereunder and the required documents were later negotiated with it by
Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a
discounting arrangement. This time, Bank of America has acted independently as a negotiating
bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of
Ayudhya to recover payment. (Inter-Resin, of course, could have chosen other banks with which to
negotiate the draft and the documents.) As a negotiating bank, Bank of America has a right to
recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of
the draft, continues to assume a contingent liability thereon. 31

While bank of America has indeed failed to allege material facts in its complaint that might have
likewise warranted the application of the Negotiable Instruments Law and possible then allowed it to
even go after the indorsers of the draft, this failure, 32/ nonetheless, does not preclude petitioner
bank's right (as negotiating bank) of recovery from Inter-Resin itself. Inter-Resin admits having
received P10,219,093.20 from bank of America on the letter of credit and in having executed the
corresponding draft. The payment to Inter-Resin has given, as aforesaid, Bank of America the right
of reimbursement from the issuing bank, Bank of Ayudhya which, in turn, would then seek
indemnification from the buyer (the General Chemicals of Thailand). Since Bank of Ayudhya
disowned the letter of credit, however, Bank of America may now turn to Inter-Resin for restitution.

Between the seller and the negotiating bank there is the usual relationship existing
between a drawer and purchaser of drafts. Unless drafts drawn in pursuance of the
credit are indicated to be without recourse therefore, the negotiating bank has the
ordinary right of recourse against the seller in the event of dishonor by the issuing
bank . . . The fact that the correspondent and the negotiating bank may be one and
the same does not affect its rights and obligations in either capacity, although a
special agreement is always a possibility . . . 33

The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its
products, is really of no consequence. In the operation of a letter of credit, the involved banks deal
only with documents and not on goods described in those documents. 34

The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya did
issue the letter of credit and whether or not the main contract of sale that has given rise to the letter
of credit has been breached, are not relevant to this controversy. They are matters, instead, that can
only be of concern to the herein parties in an appropriate recourse against those, who, unfortunately,
are not impleaded in these proceedings.

In fine, we hold that —

First, given the factual findings of the courts below, we conclude that petitioner Bank of America has
acted merely as a notifying bank and did not assume the responsibility of a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial
availment as beneficiary of the letter of credit which has been disowned by the alleged issuer bank.

No judgment of civil liability against the other defendants, Francisco Trajano and other unidentified
parties, can be made, in this instance, there being no sufficient evidence to warrant any such finding.

WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial
Corporation is ordered to refund to petitioner Bank of America NT & SA the amount of
P10,219,093.20 with legal interest from the filing of the complaint until fully paid.

No costs.

SO ORDERED.
G.R. No. 142616 July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner,

vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE,respondents.

KAPUNAN, J.:

In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to
annul and set aside the Court of Appeals' decision in C.A. CV G.R. S.P. No. 55374 dated March 27,
2000, affirming the Order issuing a writ of preliminary injunction of the Regional Trial Court of Makati,
Branch 147 dated June 30, 1999, and its Order dated October 4, 1999, which denied petitioner's
motion to dismiss.

The antecedents of this case are as follows:

Petitioner Philippine National Bank is a domestic corporation organized and existing under Philippine
law. Meanwhile, respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General
Merchandise are domestic corporations, likewise, organized and existing under Philippine law.

On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB,
organized and doing business in Hong Kong, extended a letter of credit in favor of the respondents
in the amount of US$300,000.00 secured by real estate mortgages constituted over four (4) parcels
of land in Makati City. This credit facility was later increased successively to US$1,140,000.00 in
September 1996; to US$1,290,000.00 in November 1996; to US$1,425,000.00 in February 1997;
and decreased to US$1,421,316.18 in April 1998. Respondents made repayments of the loan
incurred by remitting those amounts to their loan account with PNB-IFL in Hong Kong.

However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70. Pursuant to
the terms of the real estate mortgages, PNB-IFL, through its attorney-in-fact PNB, notified the
respondents of the foreclosure of all the real estate mortgages and that the properties subject
thereof were to be sold at a public auction on May 27, 1999 at the Makati City Hall.

On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ
of preliminary injunction and/or temporary restraining order before the Regional Trial Court of Makati.
The Executive Judge of the Regional Trial Court of Makati issued a 72-hour temporary restraining
order. On May 28, 1999, the case was raffled to Branch 147 of the Regional Trial Court of Makati.
The trial judge then set a hearing on June 8, 1999. At the hearing of the application for preliminary
injunction, petitioner was given a period of seven days to file its written opposition to the application.
On June 15, 1999, petitioner filed an opposition to the application for a writ of preliminary injunction
to which the respondents filed a reply. On June 25, 1999, petitioner filed a motion to dismiss on the
grounds of failure to state a cause of action and the absence of any privity between the petitioner
and respondents. On June 30, 1999, the trial court judge issued an Order for the issuance of a writ
of preliminary injunction, which writ was correspondingly issued on July 14, 1999. On October 4,
1999, the motion to dismiss was denied by the trial court judge for lack of merit.

Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the writ of
preliminary injunction before the Court of Appeals. In the impugned decision,1 the appellate court
dismissed the petition. Petitioner thus seeks recourse to this Court and raises the following errors:

1.
 THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A
QUO, CONSIDERING THAT BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE
OF ACTION EXISTS AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN
INTEREST BEING A MERE ATTORNEY-IN-FACT AUTHORIZED TO ENFORCE AN
ANCILLARY CONTRACT.

2.

THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO

ISSUE IN EXCESS OR LACK OF JURISDICTION A WRIT OF PRELIMINARY INJUNCTION
OVER AND BEYOND WHAT WAS PRAYED FOR IN THE COMPLAINT A QUO
CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101 SCRA 827.2

Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the trial
court's Orders dated June 30, 1999 and October 4, 1999 be set aside and the dismissal of the
complaint in the instant case.3

In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-IFL are
two separate entities, petitioner is still the party-in-interest in the application for preliminary injunction
because it is tasked to commit acts of foreclosing respondents' properties.4 Respondents maintain
that the entire credit facility is void as it contains stipulations in violation of the principle of mutuality
of contracts.5 In addition, respondents justified the act of the court a quo in applying the doctrine of
"Piercing the Veil of Corporate Identity" by stating that petitioner is merely an alter ego or a business
conduit of PNB-IFL.6

The petition is impressed with merit.

Respondents, in their complaint, anchor their prayer for injunction on alleged invalid provisions of the
contract:

GROUNDS

THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE

DISCRETION OF THE DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF
MUTUALITY OF CONTRACTS.

II

THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF

INTEREST AGREED UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT,
THERE WAS NO STIPULATION THAT THE RATE OF INTEREST SHALL BE REDUCED IN
THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF INTEREST IS REDUCED BY
LAW OR BY THE MONETARY BOARD.7

Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from the
foreclosure and eventual sale of the property in order to protect their rights to said property by
reason of void credit facilities as bases for the real estate mortgage over the said property.8
The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their
complaint, respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL with full
power and authority to, inter alia, foreclose on the properties mortgaged to secure their loan
obligations with PNB-IFL. In other words, herein petitioner is an agent with limited authority and
specific duties under a special power of attorney incorporated in the real estate mortgage. It is not
privy to the loan contracts entered into by respondents and PNB-IFL.

The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's principal
and the party to the loan contracts, and the respondents. Yet, despite the recognition that petitioner
is a mere agent, the respondents in their complaint prayed that the petitioner PNB be ordered to re-
compute the rescheduling of the interest to be paid by them in accordance with the terms and
conditions in the documents evidencing the credit facilities, and crediting the amount previously paid
to PNB by herein respondents.9

Clearly, petitioner not being a part to the contract has no power to re-compute the interest rates set
forth in the contract. Respondents, therefore, do not have any cause of action against petitioner.

The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly
owned subsidiary of defendant Philippine National Bank, the suit against the defendant PNB is a suit
against PNB-IFL.10 In justifying its ruling, the trial court, citing the case of Koppel Phil. Inc. vs.
Yatco,11 reasoned that the corporate entity may be disregarded 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.12

We disagree.

The general rule is that as a legal entity, a corporation has a personality distinct and separate from
its individual stockholders or members, and is not affected by the personal rights, obligations and
transactions of the latter.13 The mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform
legitimate functions, a subsidiary's separate existence may be respected, and the liability of the
parent corporation as well as the subsidiary will be confined to those arising in their respective
business. The courts may in the exercise of judicial discretion step in to prevent the abuses of
separate entity privilege and pierce the veil of corporate entity.

We find, however, that the ruling in Koppel finds no application in the case at bar. In said case, this
Court disregarded the separate existence of the parent and the subsidiary on the ground that the
latter was formed merely for the purpose of evading the payment of higher taxes. In the case at bar,
respondents fail to show any cogent reason why the separate entities of the PNB and PNB-IFL
should be disregarded.

While there exists no definite test of general application in determining when a subsidiary may be
treated as a mere instrumentality of the parent corporation, some factors have been identified that
will justify the application of the treatment of the doctrine of the piercing of the corporate veil. The
case of Garrett vs. Southern Railway Co.14 is enlightening. The case involved a suit against the
Southern Railway Company. Plaintiff was employed by Lenoir Car Works and alleged that he
sustained injuries while working for Lenoir. He, however, filed a suit against Southern Railway
Company on the ground that Southern had acquired the entire capital stock of Lenoir Car Works,
hence, the latter corporation was but a mere instrumentality of the former. The Tennessee Supreme
Court stated that as a general rule the stock ownership alone by one corporation of the stock of
another does not thereby render the dominant corporation liable for the torts of the subsidiary unless
the separate corporate existence of the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. Said Court
then outlined the circumstances which may be useful in the determination of whether the subsidiary
is but a mere instrumentality of the parent-corporation:

The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to

catalogue the infinite variations of fact that can arise but there are certain common
circumstances which are important and which, if present in the proper combination, are
controlling.

These are as follows:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.

(e) The subsidiary has grossly inadequate capital.

(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.

(g) The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation.

(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary
is described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation.

(k) The formal legal requirements of the subsidiary are not observed.

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most
of the capital stock of Lenoir by Southern, and possibly subscription to the capital stock of
Lenoir. . . The complaint must be dismissed.

Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is an
equitable doctrine developed to address situations where the separate corporate personality of a
corporation is abused or used for wrongful purposes. 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.15

In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the applicability of the
doctrine of piercing the veil of corporate fiction, to wit:

1. Control, not mere majority or complete 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 defendant's relationship to the
operation.17

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing
of the indicative factors that the former corporation is a mere instrumentality of the latter are present.
Neither is there a demonstration that any of the evils sought to be prevented by the doctrine of
piercing the corporate veil exists. Inescapably, therefore, the doctrine of piercing the corporate veil
based on the alter ego or instrumentality doctrine finds no application in the case at bar.

In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal
relationship involved in this case since the petitioner was not sued because it is the parent company
of PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in
initiating the foreclosure proceedings. A suit against an agent cannot without compelling reasons be
considered a suit against the principal. Under the Rules of Court, every action must be prosecuted or
defended in the name of the real party-in-interest, unless otherwise authorized by law or these
Rules.18 In mandatory terms, the Rules require that "parties-in-interest without whom no final
determination can be had, an action shall be joined either as plaintiffs or defendants."19 In the case
at bar, the injunction suit is directed only against the agent, not the principal.

Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional
remedy but adjunct to the main suit.20 A writ of preliminary injunction is an ancillary or preventive
remedy that may only be resorted to by a litigant to protect or preserve his rights or interests and for
no other purpose during the pendency of the principal action. The dismissal of the principal action
thus results in the denial of the prayer for the issuance of the writ. Further, there is no showing that
respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the 1997 Rules of Civil
Procedure provides:

SECTION 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may

be granted when it is established:
 (a) That the applicant is entitled to the relief demanded, and the whole or part of such relief
consists in restraining the commission or continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either for a limited period or perpetually,

(b) That the commission, continuance or non-performance of the acts or acts complained of
during the litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is
procuring or suffering to be done, some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and tending to render the
judgment ineffectual.

Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid
injurious consequences which cannot be remedied under any standard
compensation.21 Respondents do not deny their indebtedness. Their properties are by their own
choice encumbered by real estate mortgages. Upon the non-payment of the loans, which were
secured by the mortgages sought to be foreclosed, the mortgaged properties are properly subject to
a foreclosure sale. Moreover, respondents questioned the alleged void stipulations in the contract
only when petitioner initiated the foreclosure proceedings. Clearly, respondents have failed to prove
that they have a right protected and that the acts against which the writ is to be directed are violative
of said right.22 The Court is not unmindful of the findings of both the trial court and the appellate court
that there may be serious grounds to nullify the provisions of the loan agreement. However, as
earlier discussed, respondents committed the mistake of filing the case against the wrong party,
thus, they must suffer the consequences of their error.

All told, respondents do not have a cause of action against the petitioner as the latter is not privy to
the contract the provisions of which respondents seek to declare void. Accordingly, the case before
the Regional Trial Court must be dismissed and the preliminary injunction issued in connection
therewith, must be lifted.

IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision of the
Court of Appeals is hereby REVERSED. The Orders dated June 30, 1999 and October 4, 1999 of
the Regional Trial Court of Makati, Branch 147 in Civil Case No. 99-1037 are hereby ANNULLED
and SET ASIDE and the complaint in said case DISMISSED.

SO ORDERED.
 [G.R. No. 141617. August 14, 2001]

ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT

CORPORATION, petitioners, vs. RITA C. MEJIA, as Executrix of
Testate Estate of ANDREA CORDOVA VDA. DE
GUTIERREZ, respondent.

DECISION
GONZAGA-REYES, J.:

In this petition for review by certiorari, petitioners pray for the setting aside of the Decision
of the Court of Appeals promulgated on 13 April 1999 and its 15 December 1999 Resolution in
CA-G.R. CV No. 19281.
As culled from the decisions of the lower courts and the pleadings of the parties, the factual
background of this case is as set out herein:
Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a parcel of land in
Camarin, Caloocan City known as Lot 861 of the Tala Estate. The land had an aggregate area of
twenty-five (25) hectares and was covered by Transfer Certificate of Title (TCT) No. 5779 of the
Registry of Deeds of Caloocan City. The property was later subdivided into five lots with an area
of five hectares each and pursuant thereto, TCT No. 5779 was cancelled and five new transfer
certificates of title were issued in the name of Gutierrez, namely TCT No. 7123 covering Lot 861-
A, TCT No. 7124 covering Lot 861-B, TCT No. 7125 covering Lot 861-C, TCT No. 7126 covering
Lot 861-D and TCT No. 7127 covering Lot 861-E.
On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation (Cardale)
executed a Deed of Sale with Mortgage relating to the lots covered by TCT Nos. 7124, 7125, 7126
and 7127, for the consideration of P800,000.00. Upon the execution of the deed, Cardale paid
Gutierrez P171,000.00. It was agreed that the balance of P629,000.00 would be paid in several
installments within five years from the date of the deed, at an interest of nine percent per annum
based on the successive unpaid principal balances. Thereafter, the titles of Gutierrez were
cancelled and in lieu thereof TCT Nos. 7531 to 7534 were issued in favor of Cardale.
To secure payment of the balance of the purchase price, Cardale constituted a mortgage on
three of the four parcels of land covered by TCT Nos. 7531, 7532 and 7533, encompassing fifteen
hectares of land.[1] The encumbrance was annotated upon the certificates of title and the owners
duplicate certificates. The owners duplicates were retained by Gutierrez.
On 26 August 1968, owing to Cardales failure to settle its mortgage obligation, Gutierrez filed
a complaint for rescission of the contract with the Quezon City Regional Trial Court (RTC), which
was docketed as Civil Case No. Q-12366.[2] On 20 October 1969, during the pendency of the
rescission case, Gutierrez died and was substituted by her executrix, respondent Rita C. Mejia
(Mejia). In 1971, plaintiffs presentation of evidence was terminated. However, Cardale, which was
represented by petitioner Adalia B. Francisco (Francisco) in her capacity as Vice-President and
Treasurer of Cardale, lost interest in proceeding with the presentation of its evidence and the case
lapsed into inactive status for a period of about fourteen years.
In the meantime, the mortgaged parcels of land covered by TCT Nos. 7532 and 7533 became
delinquent in the payment of real estate taxes in the amount of P102,300.00, while the other
mortgaged property covered by TCT No. 7531 became delinquent in the amount of P89,231.37,
which culminated in their levy and auction sale on 1 and 12 September 1983, in satisfaction of the
tax arrears. The highest bidder for the three parcels of land was petitioner Merryland Development
Corporation (Merryland), whose President and majority stockholder is Francisco. A memorandum
based upon the certificate of sale was then made upon the original copies of TCT Nos. 7531 to
7533.
On 13 August 1984, before the expiration of the one year redemption period, Mejia filed a
Motion for Decision with the trial court. The hearing of said motion was deferred, however, due
to a Motion for Postponement filed by Cardale through Francisco, who signed the motion in her
capacity as officer-in-charge, claiming that Cardale needed time to hire new counsel. However,
Francisco did not mention the tax delinquencies and sale in favor of Merryland. Subsequently, the
redemption period expired and Merryland, acting through Francisco, filed petitions for
consolidation of title,[3] which culminated in the issuance of certain orders[4] decreeing the
cancellation of Cardales TCT Nos. 7531 to 7533 and the issuance of new transfer certificates of
title free from any encumbrance or third-party claim whatsoever in favor of Merryland. Pursuant
to such orders, the Register of Deeds of Caloocan City issued new transfer certificates of title in
the name of Merryland which did not bear a memorandum of the mortgage liens in favor of
Gutierrez.
Thereafter, sometime in June 1985, Francisco filed in Civil Case No. Q-12366 an undated
Manifestation to the effect that the properties subject of the mortgage and covered by TCT Nos.
7531 to 7533 had been levied upon by the local government of Caloocan City and sold at a tax
delinquency sale. Francisco further claimed that the delinquency sale had rendered the issues in
Civil Case No. Q-12366 moot and academic. Agreeing with Francisco, the trial court dismissed
the case, explaining that since the properties mortgaged to Cardale had been transferred to
Merryland which was not a party to the case for rescission, it would be more appropriate for the
parties to resolve their controversy in another action.
On 14 January 1987, Mejia, in her capacity as executrix of the Estate of Gutierrez, filed with
the RTC of Quezon City a complaint for damages with prayer for preliminary attachment against
Francisco, Merryland and the Register of Deeds of Caloocan City. The case was docketed as Civil
Case No. Q-49766. On 15 April 1988, the trial court rendered a decision[5] in favor of the
defendants, dismissing the complaint for damages filed by Mejia.It was held that plaintiff Mejia,
as executrix of Gutierrezs estate, failed to establish by clear and convincing evidence her
allegations that Francisco controlled Cardale and Merryland and that she had employed fraud by
intentionally causing Cardale to default in its payment of real property taxes on the mortgaged
properties so that Merryland could purchase the same by means of a tax delinquency
sale. Moreover, according to the trial court, the failure to recover the property subject of the Deed
of Sale with Mortgage was due to Mejias failure to actively pursue the action for rescission (Civil
Case No. 12366), allowing the case to drag on for eighteen years. Thus, it ruled that -
xxx xxx xxx
The act of not paying or failing to pay taxes due the government by the defendant
Adalia B. Francisco, as treasurer of Cardale Financing and Realty Corporation do not,
per se, constitute perpetration of fraud or an illegal act. It do [sic] not also constitute
an act of evasion of an existing obligation (to plaintiff) if there is no clear showing
that such an act of non-payment of taxes was deliberately made despite its (Cardales)
solvency and capability to pay. There is no evidence showing that Cardale Financing
and Realty Corporation was financially capable of paying said taxes at the time.

There are times when the corporate fiction will be disregarded: (1) where all
the members or stockholders commit illegal act; (2) where the corporation is used as
dummy to commit fraud or wrong; (3) where the corporation is an agency for a parent
corporation; and (4) where the stock of a corporation is owned by one person. (I,
Fletcher, 58, 59, 61 and 63). None of the foregoing reasons can be applied to the
incidents in this case: (1) there appears no illegal act committed by the stockholders of
defendant Merryland Development Corporation and Cardale Financing and Realty
Corporation; (2) the incidents proven by evidence of the plaintiff as well as that of the
defendants do not show that either or both corporations were used as dummies by
defendant Adalia B. Francisco to commit fraud or wrong. To be used as [a] dummy,
there has to be a showing that the dummy corporation is controlled by the person
using it. The evidence of plaintiff failed to prove that defendant Adalia B. Francisco
has controlling interest in either or both corporations. On the other hand, the evidence
of defendants clearly show that defendant Francisco has no control over either of the
two corporations; (3) none of the two corporations appears to be an agency for a
parent (the other) corporation; and (4) the stock of either of the two corporation [sic]
is not owned by one person (defendant Adalia B. Francisco). Except for defendant
Adalia B. Francisco, the incorporators and stockholders of one corporation are
different from the other.

xxx xxx xxx

The said case (Civil Case No. 12366) remained pending for almost 18 years before the
then Court of First Instance, now the Regional Trial Court.Even if the trial of the said
case became protracted on account of the retirement and/or promotion of the presiding
judge, as well as the transfer of the case from one sala to another, and as claimed by
the plaintiff that the defendant lost interest, (which allegation is unusual, so to speak),
the court believe [sic] that it would not have taken that long to dispose [of] said case
had plaintiff not slept on her rights, and her duty and obligation to see to it that the
case is always set for hearing so that it may be adjudicated [at] the earliest possible
time. This duty pertains to both parties, but plaintiff should have been more assertive,
as it was her obligation, similar to the obligation of plaintiff relative to the service of
summons in other cases. The fact that Cardale Financing and Realty Corporation did
not perform its obligation as provided in the said Deed of Sale with Mortgage (Exhibit
A) is very clear.Likewise, the fact that Andrea Cordova, the contracting party,
represented by the plaintiff in this case did not also perform her duties and/or
obligation provided in the said contract is also clear. This could have been the reason
why the plaintiff in said case (Exhibit E) slept on her rights and allowed the same to
remain pending for almost 18 years. However, and irrespective of any other reason
behind the same, the court believes that plaintiff, indeed, is the one to blame for the
failure of the testate estate of the late Andrea Cordova Vda. de Gutierrez to recover
the money or property due it on the basis of Exhibit A.

xxx xxx xxx

xxx Had the plaintiff not slept on her rights and had it not been for her failure to
perform her commensurate duty to pursue vigorously her case against Cardale
Financing and Realty Corporation in said Civil Case No. 12366, she could have easily
known said non-payment of realty taxes on the said properties by said Cardale
Financing and Realty Corporation, or, at least the auction sales that followed, and
from which she could have redeemed said properties within the one year period
provided by law, or, have availed of remedies at the time to protect the interest of the
testate estate of the late Andrea Cordova Vda. de Gutierrez.

xxx xxx xxx

The dispositive portion of the trial courts decision states -

WHEREFORE, in view of all the foregoing consideration, the court hereby renders
judgment in favor of the defendants Register of Deeds of Caloocan City, Merryland
Development Corporation and Adalia B. Francisco, and against plaintiff Rita C.
Mejia, as Executrix of the Testate Estate of Andrea Cordova Vda. De Gutierrez, and
hereby orders:

1. That this case for damages be dismissed, at the same time, plaintiffs motion for
reconsideration dated September 23, 1987 is denied;

2. Plaintiff pay the defendants Merryland Development Corporation and the

Register of Deeds the sum of P20,000.00, and another sum of P20,000.00 to the
defendant Adalia B. Francisco, as and for attorneys fees and litigation expenses,
and pay the costs of the proceedings.

SO ORDERED.

The Court of Appeals,[6] in its decision[7] promulgated on 13 April 1999, reversed the trial court,
holding that the corporate veil of Cardale and Merryland must be pierced in order to hold Francisco
and Merryland solidarily liable since these two corporations were used as dummies by Francisco,
who employed fraud in allowing Cardale to default on the realty taxes for the properties mortgaged
to Gutierrez so that Merryland could acquire the same free from all liens and encumbrances in the
tax delinquency sale and, as a consequence thereof, frustrating Gutierrezs rights as a mortgagee
over the subject properties. Thus, the Court of Appeals premised its findings of fraud on the
following circumstances
xxx xxx xxx

xxx Appellee Francisco knew that Cardale of which she was vice-president and
treasurer had an outstanding obligation to Gutierrez for the unpaid balance of the real
properties covered by TCT Nos. 7531 to 7533, which Cardale purchased from
Gutierrez which account, as of December 1988, already amounted to P4,414,271.43
(Exh. K, pp. 39-44, record); she also knew that Gutierrez had a mortgage lien on the
said properties to secure payment of the aforesaid obligation; she likewise knew that
the said mortgaged properties were under litigation in Civil Case No. Q-12366 which
was an action filed by Gutierrez against Cardale for rescission of the sale and/or
recovery of said properties (Exh. E). Despite such knowledge, appellee Francisco did
not inform Gutierrezs Estate or the Executrix (herein appellant) as well as the trial
court that the mortgaged properties had incurred tax delinquencies, and that Final
Notices dated July 9, 1982 had been sent by the City Treasurer of Caloocan
demanding payment of such tax arrears within ten (10) days from receipt thereof
(Exhs. J & J-1, pp. 37-38, record). Both notices which were addressed to

Cardale Financing & Realty Corporation c/o Merryland Development

Corporation

and sent to appellee Franciscos address at 83 Katipunan Road, White Plains, Quezon
City, gave warning that if the taxes were not paid within the aforesaid period, the
properties would be sold at public auction to satisfy the tax delinquencies.

To reiterate, notwithstanding receipt of the aforesaid notices, appellee Francisco did

not inform the Estate of Gutierrez or her executrix about the tax delinquencies and of
the impending auction sale of the said properties. Even a modicum of good faith and
fair play should have encouraged appellee Francisco to at least advise Gutierrezs
Estate through her executrix (herein appellant) and the trial court which was hearing
the complaint for rescission and recovery of said properties of such fact, so that the
Estate of Gutierrez, which had a real interest on the properties as mortgagee and as
plaintiff in the rescission and recovery suit, could at least take steps to forestall the
auction sale and thereby preserve the properties and protect its interests thereon. And
not only did appellee Francisco allow the auction sale to take place, but she used her
other corporation (Merryland) in participating in the auction sale and in acquiring the
very properties which her first corporation (Cardale) had mortgaged to
Gutierrez. Again, appellee Francisco did not thereafter inform the Estate of Gutierrez
or its executrix (herein appellant) about the auction sale, thus precluding the Estate
from exercising its right of redemption. And it was only after the expiration of the
redemption period that appellee Francisco filed a Manifestation in Civil Case No. Q-
12366 (Exh. I, p. 36, record), in which she disclosed for the first time to the trial court
and appellant that the properties subject of the case and on which Gutierrez or her
Estate had a mortgage lien, had been sold in a tax delinquency sale. And in order to
further conceal her deceptive maneuver, appellee Francisco did not divulge in her
aforesaid Manifestation that it was her other corporation (Merryland) that acquired the
properties in the auction sale.

We are not impressed by appellees submission that no evidence was adduced to prove
that Cardale had the capacity to pay the tax arrears and therefore she or Cardale may
not be faulted for the tax delinquency sale of the properties in question. Appellee
Franciscos bad faith or deception did not necessarily lie in Cardales or her failure to
settle the tax deliquencies in question, but in not disclosing to Gutierrezs estate or its
executrix (herein appellant) which had a mortgage lien on said properties the tax
delinquencies and the impending auction sale of the encumbered properties.

Appellee Franciscos deception is further shown by her concealment of the tax

delinquency sale of the properties from the estate or its executrix, thus preventing the
latter from availing of the right of redemption of said properties. That appellee
Francisco divulged the auction sale of the properties only after such redemption
period had lapsed clearly betrays her intention to keep Gutierrezs Estate or its
Executrix from availing of such right. And as the evidence would further show,
appellee Francisco had a hand in securing for Merryland consolidation of its
ownership of the properties and in seeing to it that Merrylands torrens certificates for
the properties were free from liens and encumbrances. All these appellee Francisco
did even as she was fully aware that Gutierrez or her estate had a valid and subsisting
mortgage lien on the said properties.

It is likewise worthy of note that early on appellee Francisco had testified in the action
for rescission of sale and recovery of possession and ownership of the properties
which Gutierrez filed against Cardale (Civil Case No. Q-12366) in her capacity as
defendant Cardales vice-president and treasurer.But then, for no plausible reason
whatsoever, she lost interest in continuing with the presentation of evidence for
defendant Cardale. And then, when appellant Mejia as executrix of Gutierrezs Estate
filed on August 13, 1984 a Motion for Decision in the aforesaid case, appellee
Francisco moved to defer consideration of appellants Motion on the pretext that
defendant Cardale needed time to employ another counsel. Significantly, in her
aforesaid Motion for Postponement dated August 16, 1984 which appellee Francisco
personally signed as Officer-in-Charge of Cardale, she also did not disclose the fact
that the properties subject matter of the case had long been sold at a tax delinquency
sale and acquired by her other corporation Merryland.

And as if what she had already accomplished were not enough fraudulence, appellee
Francisco, acting in behalf of Merryland, caused the issuance of new transfer
certificates of title in the name of Merryland, which did not anymore bear the
mortgage lien in favor of Gutierrez. In the meantime, to further avoid payment of
the mortgage indebtedness owing to Gutierrezs estate, Cardale corporation was
dissolved. Finally, to put the properties beyond the reach of the mortgagee, Gutierrezs
estate, Merryland caused the subdivision of such properties, which were subsequently
sold on installment basis.

In its petition for certiorari, petitioners argue that there is no law requiring the mortgagor to
inform the mortgagee of the tax delinquencies, if any, of the mortgaged properties. Moreover,
petitioners claim that Cardales failure to pay the realty taxes, per se, does not constitute fraud since
it was not proven that Cardale was capable of paying the taxes. Petitioners also contend that if
Mejia, as executrix of Gutierrezs estate, was not remiss in her duty to pursue Civil Case No. 12366,
she could have easily learned of the non-payment of realty taxes on the subject properties and of
the auction sale that followed and thus, have redeemed the properties or availed of some other
remedy to conserve the estate of Gutierrez. In addition, Mejia could have annotated a notice of lis
pendens on the titles of the mortgaged properties, but she failed to do so. It is the stand of
petitioners that respondent has not adduced any proof that Francisco controlled both Cardale and
Merryland and that she used these two corporations to perpetuate a fraud upon Gutierrez or her
estate. Petitioners maintain that the evidence shows that, apart form the meager share of petitioner
Francisco, the stockholdings of both corporations comprise other shareholders, and the
stockholders of either of them, aside from petitioner Francisco, are composed of different persons.
As to Civil Case No. 12366, petitioners insist that the decision of the trial court in that case
constitutes res judicata to the instant case.[8]
It is dicta in corporation law that a corporation is a juridical person with a separate and distinct
personality from that of the stockholders or members who compose it.[9] However, when the legal
fiction of the separate corporate personality is abused, such as when the same is used for fraudulent
or wrongful ends, the courts have not hesitated to pierce the corporate veil. One of the earliest
formulations of this doctrine of piercing the corporate veil was made in the American case
of United States v. Milwaukee Refrigerator Transit Co.[10] -

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.

Since then a good number of cases have firmly implanted this doctrine in Philippine
jurisprudence.[11] One such case is Umali v. Court of Appeals[12] wherein the Court declared that
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.

With specific regard to corporate officers, the general rule is that the officer cannot be held
personally liable with the corporation, whether civilly or otherwise, for the consequences of his
acts, if he acted for and in behalf of the corporation, within the scope of his authority and in good
faith. In such cases, the officers acts are properly attributed to the corporation.[13] However, if it is
proven that the officer has used the corporate fiction to defraud a third party,[14] or that he has acted
negligently, maliciously or in bad faith,[15] then the corporate veil shall be lifted and he shall be held
personally liable for the particular corporate obligation involved.
The Court, after an assiduous study of this case, is convinced that the totality of the
circumstances appertaining conduce to the inevitable conclusion that petitioner Francisco acted in
bad faith. The events leading up to the loss by the Gutierrez estate of its mortgage security attest
to this. It has been established that Cardale failed to comply with its obligation to pay the balance
of the purchase price for the four parcels of land it bought from Gutierrez covered by TCT Nos.
7531 to 7534, which obligation was secured by a mortgage upon the lands covered by TCT Nos.
7531, 7532 and 7533. This prompted Gutierrez to file an action for rescission of the Deed of Sale
with Mortgage (Civil Case No. Q-12366), but the case dragged on for about fourteen years when
Cardale, as represented by Francisco, who was Vice-President and Treasurer of the same,[16] lost
interest in completing its presentation of evidence.
Even before 1984 when Mejia, in her capacity as executrix of Gutierrezs estate, filed a Motion
for Decision with the trial court, there is no question that Francisco knew that the properties subject
of the mortgage had become tax delinquent. In fact, as treasurer of Cardale, Francisco herself was
the officer charged with the responsibility of paying the realty taxes on the corporations properties.
This was admitted by the trial court in its decision.[17] In addition, notices dated 9 July 1982 from
the City Treasurer of Caloocan demanding payment of the tax arrears on the subject properties and
giving warning that if the realty taxes were not paid within the given period then such properties
would be sold at public auction to satisfy the tax delinquencies were sent directly to Franciscos
address in White Plains, Quezon City.[18] Thus, as early as 1982, Francisco could have informed the
Gutierrez estate or the trial court in Civil Case No. Q-12366 of the tax arrears and of the notice
from the City Treasurer so that the estate could have taken the necessary steps to prevent the
auction sale and to protect its interests in the mortgaged properties, but she did no such
thing. Finally, in 1983, the properties were levied upon and sold at public auction wherein
Merryland - a corporation where Francisco is a stockholder[19] and concurrently acts as President
and director[20] - was the highest bidder.
When Mejia filed the Motion for Decision in Civil Case No. Q-12366,[21] the period for
redeeming the properties subject of the tax sale had not yet expired.[22] Under the Realty Property
Tax Code,[23] pursuant to which the tax levy and sale were prosecuted,[24] both the delinquent
taxpayer and in his absence, any person holding a lien or claim over the property shall have the
right to redeem the property within one year from the date of registration of the sale. [25] However,
if these persons fail to redeem the property within the time provided, then the purchaser acquires
the property free from any encumbrance or third party claim whatsoever.[26] Cardale made no
attempts to redeem the mortgaged property during this time. Moreover, instead of informing Mejia
or the trial court in Q-12366 about the tax sale, the records show that Francisco filed a Motion for
Postponement[27] in behalf of Cardale - even signing the motion in her capacity as officer-in-charge
- which worked to defer the hearing of Mejias Motion for Decision. No mention was made by
Francisco of the tax sale in the motion for postponement. Only after the redemption period had
expired did Francisco decide to reveal what had transpired by filing a Manifestation stating that
the properties subject of the mortgage in favor of Gutierrez had been sold at a tax delinquency
sale; however, Francisco failed to mention that it was Merryland that acquired the properties since
she was probably afraid that if she did so the court would see behind her fraudulent scheme. In this
regard, it is also significant to note that it was Francisco herself who filed the petitions for
consolidation of title and who helped secure for Merryland titles over the subject properties free
from any encumbrance or third-party claim whatsoever.
It is exceedingly apparent to the Court that the totality of Francisos actions clearly betray an
intention to conceal the tax delinquencies, levy and public auction of the subject properties from
the estate of Gutierrez and the trial court in Civil Case No. Q-12366 until after the expiration of
the redemption period when the remotest possibility for the recovery of the properties would be
extinguished.[28] Consequently, Francisco had effectively deprived the estate of Gutierrez of its
rights as mortgagee over the three parcels of land which were sold to Cardale. If Francisco was
acting in good faith, then she should have disclosed the status of the mortgaged properties to the
trial court in Civil Case No. Q-12366 - especially after Mejia had filed a Motion for Decision, in
response to which she filed a motion for postponement wherein she could easily have mentioned
the tax sale - since this action directly affected such properties which were the subject of both the
sale and mortgage.
That Merryland acquired the property at the public auction only serves to shed more light
upon Franciscos fraudulent purposes. Based on the findings of the Court of Appeals, Francisco is
the controlling stockholder and President of Merryland.[29] Thus, aside from the instrumental role
she played as an officer of Cardale, in evading that corporations legitimate obligations to Gutierrez,
it appears that Franciscos actions were also oriented towards securing advantages for another
corporation in which she had a substantial interest. We cannot agree, however, with the Court of
Appeals decision to hold Merryland solidarily liable with Francisco. The only act imputable to
Merryland in relation to the mortgaged properties is that it purchased the same and this by itself is
not a fraudulent or wrongful act. No evidence has been adduced to establish that Merryland was a
mere alter ego or business conduit of Francisco. Time and again it has been reiterated that mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality.[30] Neither has it been alleged or proven that Merryland is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct
of Cardale.[31] Even assuming that the businesses of Cardale and Merryland are interrelated, this
alone is not justification for disregarding their separate personalities, absent any showing that
Merryland was purposely used as a shield to defraud creditors and third persons of their
rights.[32] Thus, Merrylands separate juridical personality must be upheld.
Based on a statement of account submitted by Mejia, the Court of Appeals awarded
P4,314,271.43 in favor of the estate of Gutierrez which represents the unpaid balance of the
purchase price in the amount of P629,000.00 with an interest rate of nine percent (9%) per annum,
in accordance with the agreement of the parties under the Deed of Sale with Mortgage,[33] as of
December 1988.[34] Therefore, in addition to the amount awarded by the appellate court, Francisco
should pay the estate of Gutierrez interest on the unpaid balance of the purchase price (in the
amount of P629,000.00) at the rate of nine percent (9%) per annum computed from January, 1989
until fully satisfied.
Finally, contrary to petitioners assertions, we agree with the Court of Appeals that the decision
of the trial court in Civil Case No. Q-12366 does not constitute res judicata insofar as the present
case is concerned because the decision in the first case was not a judgment on the merits. Rather,
it was merely based upon the premise that since Cardale had been dissolved and the property
acquired by another corporation, the action for rescission would not prosper. As a matter of fact,
it was even expressly stated by the trial court that the parties should ventilate their issues in another
action.
WHEREFORE, the 13 April 1999 Decision of the Court of Appeals is hereby accordingly
MODIFIED so as to hold ADALIA FRANCISCO solely liable to the estate of Gutierrez for the
amount of P4,314,271.43 and for interest on the unpaid balance of the purchase price (in the
amount of P629,000.00) at the rate of nine percent (9%) per annum computed from January, 1989
until fully satisfied. MERRYLAND is hereby absolved from all liability.
SO ORDERED.
 [G.R. No. 142435. April 30, 2003]

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners, vs.

PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC
EX-OFFICIO SHERIFF OF QUEZON CITY and the Heirs of
EUGENIO D. TRINIDAD, respondents.

DECISION
QUISUMBING, J.:

This petition for review on certiorari seeks the reversal of the

Decision dated October 21, 1999 of the Court of Appeals in CA-G.R. CV No.
[1]

41536 which dismissed herein petitioners appeal from the Decision dated [2]

February 10, 1993 of the Regional Trial Court (RTC) of Quezon City, Branch
84, in Civil Case No. Q-89-4152. The trial court had dismissed petitioners
complaint for annulment of real estate mortgage and the extra-judicial
foreclosure thereof. Likewise brought for our review is the Resolution dated
[3]

February 23, 2000 of the Court of Appeals which denied petitioners motion for
reconsideration.
The facts, as culled from records, are as follows:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned
Belas Export Trading (BET), a single proprietorship with principal office at No.
814 Aurora Boulevard, Cubao, Quezon City. BET was engaged in the
manufacture of garments for domestic and foreign consumption. The Lipats
also owned the Mystical Fashions in the United States, which sells goods
imported from the Philippines through BET. Mrs. Lipat designated her daughter,
Teresita B. Lipat, to manage BET in the Philippines while she was managing
Mystical Fashions in the United States.
In order to facilitate the convenient operation of BET, Estelita Lipat executed
on December 14, 1978, a special power of attorney appointing Teresita Lipat
as her attorney-in-fact to obtain loans and other credit accommodations from
respondent Pacific Banking Corporation (Pacific Bank). She likewise authorized
Teresita to execute mortgage contracts on properties owned or co-owned by
her as security for the obligations to be extended by Pacific Bank including any
extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of attorney,
was able to secure for and in behalf of her mother, Mrs. Lipat and BET, a loan
from Pacific Bank amounting to P583,854.00 to buy fabrics to be manufactured
by BET and exported to Mystical Fashions in the United States. As security
therefor, the Lipat spouses, as represented by Teresita, executed a Real Estate
Mortgage over their property located at No. 814 Aurora Blvd., Cubao, Quezon
City. Said property was likewise made to secure other additional or new loans,
discounting lines, overdrafts and credit accommodations, of whatever amount,
which the Mortgagor and/or Debtor may subsequently obtain from the
Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor
of the whole or part of said original, additional or new loans, discounting lines,
overdrafts and other credit accommodations, including interest and expenses
or other obligations of the Mortgagor and/or Debtor owing to the Mortgagee,
whether directly, or indirectly, principal or secondary, as appears in the
accounts, books and records of the Mortgagee. [4]

On September 5, 1979, BET was incorporated into a family corporation

named Belas Export Corporation (BEC) in order to facilitate the management
of the business. BEC was engaged in the business of manufacturing and
exportation of all kinds of garments of whatever kind and description and [5]

utilized the same machineries and equipment previously used by BET. Its
incorporators and directors included the Lipat spouses who owned a combined
300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20
shares, and other close relatives and friends of the Lipats. Estelita Lipat was
[6]

named president of BEC, while Teresita became the vice-president and general
manager.
Eventually, the loan was later restructured in the name of BEC and
subsequent loans were obtained by BEC with the corresponding promissory
notes duly executed by Teresita on behalf of the corporation. A letter of credit
was also opened by Pacific Bank in favor of A. O. Knitting Manufacturing Co.,
Inc., upon the request of BEC after BEC executed the corresponding trust
receipt therefor. Export bills were also executed in favor of Pacific Bank for
additional finances. These transactions were all secured by the real estate
mortgage over the Lipats property.
The promissory notes, export bills, and trust receipt eventually became due
and demandable. Unfortunately, BEC defaulted in its payments. After receipt of
Pacific Banks demand letters, Estelita Lipat went to the office of the banks
liquidator and asked for additional time to enable her to personally settle BECs
obligations. The bank acceded to her request but Estelita failed to fulfill her
promise.
Consequently, the real estate mortgage was foreclosed and after
compliance with the requirements of the law the mortgaged property was sold
at public auction. On January 31, 1989, a certificate of sale was issued to
respondent Eugenio D. Trinidad as the highest bidder.
On November 28, 1989, the spouses Lipat filed before the Quezon City RTC
a complaint for annulment of the real estate mortgage, extrajudicial foreclosure
and the certificate of sale issued over the property against Pacific Bank and
Eugenio D. Trinidad. The complaint, which was docketed as Civil Case No. Q-
89-4152, alleged, among others, that the promissory notes, trust receipt, and
export bills were all ultra vires acts of Teresita as they were executed without
the requisite board resolution of the Board of Directors of BEC. The Lipats also
averred that assuming said acts were valid and binding on BEC, the same were
the corporations sole obligation, it having a personality distinct and separate
from spouses Lipat. It was likewise pointed out that Teresitas authority to
secure a loan from Pacific Bank was specifically limited to Mrs. Lipats sole use
and benefit and that the real estate mortgage was executed to secure the Lipats
and BETs P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged in common
that petitioners Lipat cannot evade payments of the value of the promissory
notes, trust receipt, and export bills with their property because they and the
BEC are one and the same, the latter being a family corporation. Respondent
Trinidad further claimed that he was a buyer in good faith and for value and that
petitioners are estopped from denying BECs existence after holding themselves
out as a corporation.
After trial on the merits, the RTC dismissed the complaint, thus:

WHEREFORE, this Court holds that in view of the facts contained in the record, the
complaint filed in this case must be, as is hereby, dismissed.Plaintiffs however has
five (5) months and seventeen (17) days reckoned from the finality of this decision
within which to exercise their right of redemption. The writ of injunction issued is
automatically dissolved if no redemption is effected within that period.

The counterclaims and cross-claim are likewise dismissed for lack of legal and factual
basis.

No costs.

IT IS SO ORDERED. [7]

The trial court ruled that there was convincing and conclusive evidence
proving that BEC was a family corporation of the Lipats. As such, it was a mere
extension of petitioners personality and business and a mere alter ego or
business conduit of the Lipats established for their own benefit. Hence, to allow
petitioners to invoke the theory of separate corporate personality would
sanction its use as a shield to further an end subversive of justice. Thus, the
[8]

trial court pierced the veil of corporate fiction and held that Belas Export
Corporation and petitioners (Lipats) are one and the same. Pacific Bank had
transacted business with both BET and BEC on the supposition that both are
one and the same. Hence, the Lipats were estopped from disclaiming any
obligations on the theory of separate personality of corporations, which is
contrary to principles of reason and good faith.
The Lipats timely appealed the RTC decision to the Court of Appeals in CA-
G.R. CV No. 41536. Said appeal, however, was dismissed by the appellate
court for lack of merit. The Court of Appeals found that there was ample
evidence on record to support the application of the doctrine of piercing the veil
of corporate fiction. In affirming the findings of the RTC, the appellate court
noted that Mrs. Lipat had full control over the activities of the corporation and
used the same to further her business interests. In fact, she had benefited from
[9]

the loans obtained by the corporation to finance her business. It also found
unnecessary a board resolution authorizing Teresita Lipat to secure loans from
Pacific Bank on behalf of BEC because the corporations by-laws allowed such
conduct even without a board resolution. Finally, the Court of Appeals ruled that
the mortgage property was not only liable for the original loan of P583,854.00
but likewise for the value of the promissory notes, trust receipt, and export bills
as the mortgage contract equally applies to additional or new loans, discounting
lines, overdrafts, and credit accommodations which petitioners subsequently
obtained from Pacific Bank.
The Lipats then moved for reconsideration, but this was denied by the
appellate court in its Resolution of February 23, 2000. [10]

Hence, this petition, with petitioners submitting that the court a quo erred
1) .IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION APPLIES IN THIS CASE.
2) .IN HOLDING THAT PETITIONERS PROPERTY CAN BE HELD LIABLE UNDER
THE REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF P583,854.00
BUT ALSO FOR THE FULL VALUE OF PROMISSORY NOTES, TRUST RECEIPTS
AND EXPORT BILLS OF BELAS EXPORT CORPORATION.
3) .IN HOLDING THAT THE IMPOSITION OF 15% ATTORNEYS FEES IN THE EXTRA-
JUDICIAL FORECLOSURE IS BEYOND THIS COURTS JURISDICTION FOR IT IS
BEING RAISED FOR THE FIRST TIME IN THIS APPEAL.
4) .IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE DISPUTED
PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND TRUST
 RECEIPTS DESPITE THE EVIDENT FACT THAT THEY WERE NOT SIGNED BY
HIM AND THEREFORE ARE NOT VALID OR ARE NOT BINDING TO HIM.
5) .IN DENYING PETITIONERS MOTION FOR RECONSIDERATION AND IN
HOLDING THAT SAID MOTION FOR RECONSIDERATION IS AN UNAUTHORIZED
MOTION, A MERE SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF
ANY CONSEQUENCE TO APPELLANTS.[11]
In sum, the following are the relevant issues for our resolution:
1. Whether or not the doctrine of piercing the veil of corporate fiction is
applicable in this case;
2. Whether or not petitioners' property under the real estate mortgage is
liable not only for the amount of P583,854.00 but also for the value of the
promissory notes, trust receipt, and export bills subsequently incurred by BEC;
and
3. Whether or not petitioners are liable to pay the 15% attorneys fees
stipulated in the deed of real estate mortgage.
On the first issue, petitioners contend that both the appellate and trial courts
erred in holding them liable for the obligations incurred by BEC through the
application of the doctrine of piercing the veil of corporate fiction absent any
clear showing of fraud on their part.
Respondents counter that there is clear and convincing evidence to show
fraud on part of petitioners given the findings of the trial court, as affirmed by
the Court of Appeals, that BEC was organized as a business conduit for the
benefit of petitioners.
Petitioners contentions fail to persuade this Court. A careful reading of the
judgment of the RTC and the resolution of the appellate court show that in
finding petitioners mortgaged property liable for the obligations of BEC, both
courts below relied upon the alter egodoctrine or instrumentality rule, rather
than fraud in piercing the veil of corporate fiction. When the corporation is the
mere alter ego or business conduit of a person, the separate personality of the
corporation may be disregarded. This is commonly referred to as the
[12]

instrumentality rule or the alter ego doctrine, which the courts have applied in
disregarding the separate juridical personality of corporations. As held in one
case,

Where one corporation is so organized and controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the instrumentality may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. xxx [13]

We find that the evidence on record demolishes, rather than buttresses,

petitioners contention that BET and BEC are separate business entities. Note
that Estelita Lipat admitted that she and her husband, Alfredo, were the owners
of BET and were two of the incorporators and majority stockholders of
[14]

BEC. It is also undisputed that Estelita Lipat executed a special power of

[15]

attorney in favor of her daughter, Teresita, to obtain loans and credit lines from
Pacific Bank on her behalf. Incidentally, Teresita was designated as
[16]

executive-vice president and general manager of both BET and BEC,

respectively. We note further that: (1) Estelita and Alfredo Lipat are the owners
[17]

and majority shareholders of BET and BEC, respectively; (2) both firms were
[18]

managed by their daughter, Teresita; (3) both firms were engaged in the
[19]

garment business, supplying products to Mystical Fashion, a U.S. firm

established by Estelita Lipat; (4) both firms held office in the same building
owned by the Lipats; (5) BEC is a family corporation with the Lipats as its
[20]

majority stockholders; (6) the business operations of the BEC were so merged
with those of Mrs. Lipat such that they were practically indistinguishable; (7) the
corporate funds were held by Estelita Lipat and the corporation itself had no
visible assets; (8) the board of directors of BEC was composed of the Burgos
and Lipat family members; (9) Estelita had full control over the activities of and
[21]

decided business matters of the corporation; and that (10) Estelita Lipat had
[22]

benefited from the loans secured from Pacific Bank to finance her business
abroad and from the export bills secured by BEC for the account of Mystical
[23]

Fashion. It could not have been coincidental that BET and BEC are so
[24]

intertwined with each other in terms of ownership, business purpose, and

management. Apparently, BET and BEC are one and the same and the latter is
a conduit of and merely succeeded the former. Petitioners attempt to isolate
themselves from and hide behind the corporate personality of BEC so as to
evade their liabilities to Pacific Bank is precisely what the classical doctrine of
piercing the veil of corporate entity seeks to prevent and remedy. In our view,
BEC is a mere continuation and successor of BET, and petitioners cannot
evade their obligations in the mortgage contract secured under the name of
BEC on the pretext that it was signed for the benefit and under the name of
BET. We are thus constrained to rule that the Court of Appeals did not err when
it applied the instrumentality doctrine in piercing the corporate veil of BEC.
On the second issue, petitioners contend that their mortgaged property
should not be made liable for the subsequent credit lines and loans incurred by
BEC because, first, it was not covered by the mortgage contract of BET which
only covered the loan of P583,854.00 and which allegedly had already been
paid; and, second, it was secured by Teresita Lipat without any authorization or
board resolution of BEC.
We find petitioners contention untenable. As found by the Court of Appeals,
the mortgaged property is not limited to answer for the loan
of P583,854.00. Thus:

Finally, the extent to which the Lipats property can be held liable under the real estate
mortgage is not limited to P583,854.00. It can be held liable for the value of the
promissory notes, trust receipt and export bills as well. For the mortgage was executed
not only for the purpose of securing the Belas Export Tradings original loan of
P583,854.00, but also for other additional or new loans, discounting lines, overdrafts
and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor
may subsequently obtain from the mortgagee as well as any renewal or extension by
the Mortgagor and/or Debtor of the whole or part of said original, additional or new
loans, discounting lines, overdrafts and other credit accommodations, including
interest and expenses or other obligations of the Mortgagor and/or Debtor owing to
the Mortgagee, whether directly, or indirectly principal or secondary, as appears in the
accounts, books and records of the mortgagee. [25]

As a general rule, findings of fact of the Court of Appeals are final and
conclusive, and cannot be reviewed on appeal by the Supreme Court, provided
they are borne out by the record or based on substantial evidence. As noted [26]

earlier, BEC merely succeeded BET as petitioners alter ego; hence, petitioners
mortgaged property must be held liable for the subsequent loans and credit
lines of BEC.
Further, petitioners contention that the original loan had already been paid,
hence, the mortgaged property should not be made liable to the loans of BEC,
is unsupported by any substantial evidence other than Estelita Lipats self-
serving testimony. Two disputable presumptions under the rules on evidence
weigh against petitioners, namely: (a) that a person takes ordinary care of his
concerns; and (b) that things have happened according to the ordinary course
[27]

of nature and the ordinary habits of life. Here, if the original loan had indeed
[28]

been paid, then logically, petitioners would have asked from Pacific Bank for
the required documents evidencing receipt and payment of the loans and, as
owners of the mortgaged property, would have immediately asked for the
cancellation of the mortgage in the ordinary course of things. However, the
records are bereft of any evidence contradicting or overcoming said disputable
presumptions.
Petitioners contend further that the mortgaged property should not bind the
loans and credit lines obtained by BEC as they were secured without any proper
authorization or board resolution. They also blame the bank for its laxity and
complacency in not requiring a board resolution as a requisite for approving the
loans.
Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release a board resolution
since per admissions by both petitioner Estelita Lipat and Alice Burgos,
petitioners rebuttal witness, no business or stockholders meetings were
conducted nor were there election of officers held since its incorporation. In fact,
not a single board resolution was passed by the corporate board and it was
[29]

Estelita Lipat and/or Teresita Lipat who decided business matters. [30]

Secondly, the principle of estoppel precludes petitioners from denying the

validity of the transactions entered into by Teresita Lipat with Pacific Bank, who
in good faith, relied on the authority of the former as manager to act on behalf
of petitioner Estelita Lipat and both BET and BEC. While the power and
responsibility to decide whether the corporation should enter into a contract that
will bind the corporation is lodged in its board of directors, subject to the articles
of incorporation, by-laws, or relevant provisions of law, yet, just as a natural
person may authorize another to do certain acts for and on his behalf, the board
of directors may validly delegate some of its functions and powers to officers,
committees, or agents. The authority of such individuals to bind the corporation
is generally derived from law, corporate by-laws, or authorization from the
board, either expressly or impliedly by habit, custom, or acquiescence in the
general course of business. Apparent authority, is derived not merely from
[31]

practice. Its existence may be ascertained through (1) the general manner in
which the corporation holds out an officer or agent as having the power to act
or, in other words, the apparent authority to act in general, with which it clothes
him; or (2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope of his
ordinary powers. [32]

In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage
contract by virtue of a special power of attorney executed by Estelita
Lipat. Recall that Teresita Lipat acted as the manager of both BEC and BET
and had been deciding business matters in the absence of Estelita
Lipat. Further, the export bills secured by BEC were for the benefit of Mystical
Fashion owned by Estelita Lipat. Hence, Pacific Bank cannot be faulted for
[33]

relying on the same authority granted to Teresita Lipat by Estelita Lipat by virtue
of a special power of attorney. It is a familiar doctrine that if a corporation
knowingly permits one of its officers or any other agent to act within the scope
of an apparent authority, it holds him out to the public as possessing the power
to do those acts; thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agents
authority. [34]

We find no necessity to extensively deal with the liability of Alfredo Lipat for
the subsequent credit lines of BEC. Suffice it to state that Alfredo Lipat never
disputed the validity of the real estate mortgage of the original loan; hence, he
cannot now dispute the subsequent loans obtained using the same mortgage
contract since it is, by its very terms, a continuing mortgage contract.
On the third and final issue, petitioners assail the decision of the Court of
Appeals for not taking cognizance of the issue on attorneys fees on the ground
that it was raised for the first time on appeal. We find the conclusion of the Court
of Appeals to be in accord with settled jurisprudence. Basic is the rule that
matters not raised in the complaint cannot be raised for the first time on
appeal. A close perusal of the complaint yields no allegations disputing the
[35]

attorneys fees imposed under the real estate mortgage and petitioners cannot
now allege that they have impliedly disputed the same when they sought the
annulment of the contract.
In sum, we find no reversible error of law committed by the Court of Appeals
in rendering the decision and resolution herein assailed by petitioners.
WHEREFORE, the petition is DENIED. The Decision dated October 21,
1999 and the Resolution dated February 23, 2000 of the Court of Appeals in
CA-G.R. CV No. 41536 are AFFIRMED. Costs against petitioners.
SO ORDERED.
ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K.
SA BANSANG PILIPINAS, INC. petitioner, vs. IGLESIA NG DIOS
KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN, respondent.

DECISION
YNARES-SANTIAGO, J.:

This is a petition for review assailing the Decision dated October 7, 1997[1] and the Resolution
dated February 16, 1999[2] of the Court of Appeals in CA-G.R. SP No. 40933, which affirmed the
Decision of the Securities and Exchange and Commission (SEC) in SEC-AC No. 539.[3]
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of
God in Christ Jesus, the Pillar and Ground of Truth),[4]is a non-stock religious society or
corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and several other members
of respondent corporation disassociated themselves from the latter and succeeded in registering on
March 30, 1977 a new non-stock religious society or corporation, named Iglesia ng Dios Kay
Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel the Iglesia
ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name, which
petition was docketed as SEC Case No. 1774. On May 4, 1988, the SEC rendered judgment in
favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
Katotohanan to change its corporate name to another name that is not similar or identical to any
name already used by a corporation, partnership or association registered with the
Commission.[5] No appeal was taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the
registration on April 25, 1980 of petitioner corporation, AngMga Kaanib sa Iglesia ng Dios Kay
Kristo Hesus, H.S.K., sa Bansang Pilipinas. The acronym H.S.K. stands for Haligi at Saligan ng
Katotohanan.[6]
On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as SEC
Case No. 03-94-4704, praying that petitioner be compelled to change its corporate name and be
barred from using the same or similar name on the ground that the same causes confusion among
their members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to
dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared in default and
respondent was allowed to present its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner to change its
corporate name. The dispositive portion thereof reads:

PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner

(respondent herein).
Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang
Pilipinas (petitioner herein) is hereby MANDATED to change its corporate name to
another not deceptively similar or identical to the same already used by the
Petitioner, any corporation, association, and/or partnership presently registered with
the Commission.

Let a copy of this Decision be furnished the Records Division and the Corporate
and Legal Department [CLD] of this Commission for their records, reference and/or
for whatever requisite action, if any, to be undertaken at their end.

SO ORDERED.[7]

Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC No.
539. In a decision dated March 4, 1996, the SEC En Banc affirmed the above decision, upon a
finding that petitioner's corporate name was identical or confusingly or deceptively similar to that
of respondents corporate name.[8]
Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the Court
of Appeals rendered the assailed decision affirming the decision of the SEC En Banc. Petitioners
motion for reconsideration was denied by the Court of Appeals on February 16, 1992.
Hence, the instant petition for review, raising the following assignment of errors:
I

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT

PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO
PROCEDURAL DUE PROCESS, THE HONORABLE COURT OF APPEALS
DISREGARDED THE JURISPRUDENCE APPLICABLE TO THE CASE AT
BAR AND INSTEAD RELIED ON TOTALLY INAPPLICABLE
JURISPRUDENCE.
II

THE HONORABLE COURT OF APPEALS ERRED IN ITS INTEPRETATION

OF THE CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION,
THEREBY RESULTING IN ITS FAILURE TO FIND THAT THE
RESPONDENT'S RIGHT OF ACTION TO INSTITUTE THE SEC CASE HAS
SINCE PRESCRIBED PRIOR TO ITS INSTITUTION.
III

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND

PROPERLY APPLY THE EXCEPTIONS ESTABLISHED BY
 JURISPRUDENCE IN THE APPLICATION OF SECTION 18 OF THE
CORPORATION CODE TO THE INSTANT CASE.
IV

THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY

APPRECIATE THE SCOPE OF THE CONSTITUTIONAL GUARANTEE ON
RELIGIOUS FREEDOM, THEREBY FAILING TO APPLY THE SAME TO
PROTECT PETITIONERS RIGHTS.[9]

Invoking the case of Legarda v. Court of Appeals,[10] petitioner insists that the decision of the
Court of Appeals and the SEC should be set aside because the negligence of its former counsel of
record, Atty. Joaquin Garaygay, in failing to file an answer after its motion to dismiss was denied
by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of counsel binds the client.
This is based on the rule that any act performed by a lawyer within the scope of his general or
implied authority is regarded as an act of his client.[11] An exception to the foregoing is where the
reckless or gross negligence of the counsel deprives the client of due process of law.[12] Said
exception, however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in defending his clients cause
consisted in filing a motion for extension of time to file answer before the trial court. When his
client was declared in default, the counsel did nothing and allowed the judgment by default to
become final and executory. Upon the insistence of his client, the counsel filed a petition to annul
the judgment with the Court of Appeals, which denied the petition, and again the counsel allowed
the denial to become final and executory. This Court found the counsel grossly negligent and
consequently declared as null and void the decision adverse to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay filed before the SEC a
motion to dismiss on the ground of lack of cause of action. When his client was declared in default
for failure to file an answer, Atty. Garaygay moved for reconsideration and lifting of the order of
default.[13] After judgment by default was rendered against petitioner corporation, Atty. Garaygay
filed a motion for extension of time to appeal/motion for reconsideration, and thereafter a motion
to set aside the decision.[14]
Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to file an
answer that led to the rendition of a judgment by default against petitioner, his efforts were
palpably real, albeit bereft of zeal.[15]
Likewise, the issue of prescription, which petitioner raised for the first time on appeal to the
Court of Appeals, is untenable. Its failure to raise prescription before the SEC can only be
construed as a waiver of that defense.[16] At any rate, the SEC has the authority to de-register at all
times and under all circumstances corporate names which in its estimation are likely to spawn
confusion. It is the duty of the SEC to prevent confusion in the use of corporate names not only
for the protection of the corporations involved but more so for the protection of the public.[17]
Section 18 of the Corporation Code provides:
Corporate Name. --- No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already protected by
law or is patently deceptive, confusing or is contrary to existing laws. When a change
in the corporate name is approved, the Commission shall issue an amended certificate
of incorporation under the amended name.

Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:

(d) If the proposed name contains a word similar to a word already used as part of the
firm name or style of a registered company, the proposed name must contain two
other words different from the name of the company already registered;

Parties organizing a corporation must choose a name at their peril; and the use of a name
similar to one adopted by another corporation, whether a business or a nonprofit organization, if
misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may
be prevented by the corporation having a prior right, by a suit for injunction against the new
corporation to prevent the use of the name.[18]
Petitioner claims that it complied with the aforecited SEC guideline by adding not only two
but eight words to their registered name, to wit: Ang Mga Kaanib" and "Sa Bansang Pilipinas,
Inc., which, petitioner argues, effectively distinguished it from respondent corporation.
The additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc. in petitioners name
are, as correctly observed by the SEC, merely descriptive of and also referring to the members,
or kaanib, of respondent who are likewise residing in the Philippines. These words can hardly
serve as an effective differentiating medium necessary to avoid confusion or difficulty in
distinguishing petitioner from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym --- H.S.K.;[19] not to mention the fact that both
are espousing religious beliefs and operating in the same place. Parenthetically, it is well to
mention that the acronym H.S.K. used by petitioner stands for Haligi at Saligan ng
Katotohanan.[20]
Then, too, the records reveal that in holding out their corporate name to the public, petitioner
highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN
NG KATOTOHANAN, which is strikingly similar to respondent's corporate name, thus making it
even more evident that the additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc., are
merely descriptive of and pertaining to the members of respondent corporation.[21]
Significantly, the only difference between the corporate names of petitioner and respondent
are the words SALIGAN and SUHAY. These words are synonymous --- both mean ground,
foundation or support. Hence, this case is on all fours with Universal Mills Corporation v.
Universal Textile Mills, Inc.,[22] where the Court ruled that the corporate names Universal Mills
Corporation and Universal Textile Mills, Inc., are undisputably so similar that even under the test
of reasonable care and observation confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot
find justification under the generic word rule. We agree with the Court of Appeals conclusion that
a contrary ruling would encourage other corporations to adopt verbatim and register an existing
and protected corporate name, to the detriment of the public.
The fact that there are other non-stock religious societies or corporations using the names
Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church of
God in Christ & By the Holy Spirit, and other similar names, is of no consequence. It does not
authorize the use by petitioner of the essential and distinguishing feature of respondent's registered
and protected corporate name.[23]
We need not belabor the fourth issue raised by petitioner. Certainly, ordering petitioner to
change its corporate name is not a violation of its constitutionally guaranteed right to religious
freedom. In so doing, the SEC merely compelled petitioner to abide by one of the SEC guidelines
in the approval of partnership and corporate names, namely its undertaking to manifest its
willingness to change its corporate name in the event another person, firm, or entity has acquired
a prior right to the use of the said firm name or one deceptively or confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The
appealed decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.