MCCONNEL VS.

CA 1 SCRA 722 (1961)

The issue before us in the correctness of the decision of the Court of Appeals that, under the
circumstances of record, there was justification for disregarding the corporate entity of the Park
Rite Co., Inc., and holding its controlling stockholders personally responsible for a judgment
against the corporation.

FACTS:

The Court of Appeals found that the Park Rite Co., Inc., a Philippine corporation, was originally
organized on or about April 15, 1947, with a capital stock of 1,500 shares at P1.00 a share. The
corporation leased from Rafael Perez Rosales y Samanillo a vacant lot on Juan Luna street
(Manila) which it used for parking motor vehicles for a consideration.

It turned out that in operating its parking business, the corporation occupied and used not only
the Samanillo lot it had leased but also an adjacent lot belonging to the respondents-appellees
Padilla, without the owners' knowledge and consent.

When the latter discovered the truth around October of 1947, they demanded payment for the
use and occupation of the lot.

The corporation (then controlled by petitioners Cirilo Parades and Ursula Tolentino, who had
purchased and held 1,496 of its 1,500 shares) disclaimed liability, blaming the original
incorporators, McConnel, Rodriguez and Cochrane.

Whereupon, the lot owners filed against it a complaint for forcible entry in the Municipal Court of
Manila on 7 October 1947 (Civil Case No. 4031).

RTC- Judgment was rendered in due course on 13 November 1947, ordering the Park Rite Co.,
Inc. to pay P7,410.00 plus legal interest as damages from April 15, 1947 until return of the lot.
Restitution not having been made until 31 January 1948, the entire judgment amounted to
P11,732.50. Upon execution, the corporation was found without any assets other than P550.00
deposited in Court. After their application to the judgment credit, there remained a balance of
P11,182.50 outstanding and unsatisfied.

Now the judgment creditors then filed suit in the Court of First Instance of Manila against the
corporation and its past and present stockholders, to recover from them, jointly and severally, the
unsatisfied balance of the judgment, plus legal interest and costs.

RTC- The Court of First Instance denied recovery;

CA- Court of Appeals (CA-G.R. No. 8434-R) reversed, finding that the corporation was a mere
alter ego or business conduit of the principal stockholders that controlled it for their own benefit,
and adjudged them responsible for the amounts demanded by the lot owners,

Defendant-appellee RICARDO RODRIGUEZ is hereby ordered to pay to the plaintiffs-appellants

Dominga de los Reyes and Sabino Padilla the sum of P1,742.64 with legal interest thereon from
the time of the filing of the complaint and until it is fully paid. In addition thereto the defendants-
appellees Cirilo Paredes, Ursula Tolentino and Ricardo Rodriguez shall pay the costs
proportionately in both instances.

ISSUE”
whether the individual stockholders maybe held liable for obligations contracted by the
corporation.
this Court has already answered the question in the affirmative wherever circumstances have
shown that the corporate entity is being used as an alter ego or business conduit for the sole
benefit of the stockholders, or else to defeat public convenience, justify wrong, protect fraud, or
defend crime (Koppel [Phil.] Inc. vs. Yatco, 77 Phil. 496; Arnold vs. Willits and Patterson, 44 Phil.
364).
The Court of Appeals has made express findings to the following effect:

There is no question that a wrong has been committed by the so-called Park Rite Co., Inc., upon
the plaintiffs when it occupied the lot of the latter without its prior knowledge and consent and
without paying the reasonable rentals for the occupation of said lot. There is also no doubt in our
mind that the corporation was a mere alter ego or business conduit of the defendants Cirilo
Paredes and Ursula Tolentino, and before them — the defendants M. McConnel, W. P. Cochrane,
and Ricardo Rodriguez. The evidence clearly shows that these persons completely dominated
and controlled the corporation and that the functions of the corporation were solely for their
benefits.

When it was originally organized on or about April 15, 1947, the original incorporators were M.
McConnel, W. P. Cochrane, Ricardo Rodriguez, Benedicto M. Dario and Aurea Ordrecio with a
capital stock of P1,500.00 divided into 1,500 shares at P1.00 a share. McConnel and Cochrane
each owned 500 shares, Ricardo Rodriguez 408 shares, and Dario and Ordrecio 1 share each. It
is obvious that the shares of the last two named persons were merely qualifying shares.

Then or about August 22, 1947 the defendants Cirilo Paredes and Ursula Tolentino purchased
1,496 shares of the said corporation and the remaining four shares were acquired by Bienvenido
J. Claudio, Quintin C. Paredes, Segundo Tarictican, and Paulino Marquez at one share each. It
is obvious that the last four shares bought by these four persons were merely qualifying shares
and that to all intents and purposes the spouses Cirilo Paredes and Ursula Tolentino composed
the so-called Park Rite Co., Inc. That the corporation was a mere extension of their personality is
shown by the fact that the office of Cirilo Paredes and that of Park Rite Co., Inc. were located in
the same building, in the same floor and in the same room — at 507 Wilson Building. This is
further shown by the fact that the funds of the corporation were kept by Cirilo Paredes in his own
name (p. 14, November 8, 1950, T.S.N.) The corporation itself had no visible assets, as correctly
found by the trial court, except perhaps the toll house, the wire fence around the lot and the signs
thereon. It was for this reason that the judgment against it could not be fully satisfied. (Emphasis
supplied).

The facts thus found can not be varied by us, and conclusively show that the corporation is a
mere instrumentality of the individual stockholder's, hence the latter must individually answer for
the corporate obligations. While the mere ownership of all or nearly all of the capital stock of a
corporation is a mere business conduit of the stockholder, that conclusion is amply justified where
it is shown, as in the case before us, that the operations of the corporation were so merged with
those of the stockholders as to be practically indistinguishable from them.

To hold the latter liable for the corporation's obligations is not to ignore the corporation's separate
entity, but merely to apply the established principle that such entity can not be invoked or used
for purposes that could not have been intended by the law that created that separate personality.

The petitioners-appellants insist that the Court could have no jurisdiction over an action to enforce
a judgment within five (5) years from its rendition, since the Rules of Court provide for enforcement
by mere motion during those five years. The error of this stand is apparent, because the second
action, originally begun in the Court of First Instance, was not an action to enforce the judgment
of the Municipal Court, but an action to have non-parties to the judgment held responsible for its
payment.

DONNINA C. HALLEY v. PRINTWELL, GR No. 157549, 2011-05-30

Facts:
The petitioner was an incorporator and original director of Business Media Philippines, Inc.
(BMPI), which, at its incorporation on November 12, 1987,[3] had an authorized capital stock of
P3,000,000.00 divided into 300,000 shares each with a par value of
P10.00,of which 75,000 were initially subscribed
Printwell engaged in commercial and industrial printing.
BMPI commissioned Printwell for the printing of the magazine Philippines, Inc. (together with
wrappers and subscription cards) that BMPI published and sold.
For that purpose, Printwell extended 30-day credit... accommodations to BMPI.
In the period from October 11, 1988 until July 12, 1989, BMPI placed with Printwell several orders
on credit, evidenced by invoices and delivery receipts totaling P316,342.76.
BMPI paid only P25,000.00, Printwell sued BMPI on January 26, 1990 for the collection... of the
unpaid balance of P291,342.76 in the RTC.
Printwell amended the complaint in order to implead as defendants all the original stockholders
and incorporators to recover on their unpaid subscriptions... defendants filed a consolidated
answer,[6]averring that they all had paid their subscriptions in full... that BMPI had a separate
personality from those of its stockholders
To prove payment of their subscriptions, the defendant stockholders submitted in evidence BMPI
official receipt
RTC rendered a decision in favor of Printwell, rejecting the allegation of payment in full of the
subscriptions in view of an irregularity in the issuance of the ORs and observing that the
defendants had used BMPI's corporate personality to evade payment... and create injustice
Assuming arguendo that the individual defendants have paid their unpaid subscriptions, still, it is
very apparent that individual defendants merely used the corporate fiction as a cloak or cover to
create an injustice; hence, the alleged separate personality of defendant... corporation should be
disregarded
Applying the trust fund doctrine, the RTC declared the defendant stockholders liable to Printwell
pro rata
CA affirmed the RTC, holding that the defendants' resort to the corporate personality would create
an injustice because Printwell would thereby be at a loss against whom it would assert the right
to collect
Issues:
the propriety of disregarding the separate personalities of BMPI and its stockholders by piercing
the thin veil that separated them
Ruling:
Although a corporation has a personality separate and distinct from those of its stockholders,
directors, or officers,[26]such separate and distinct personality is merely a fiction created by law
for the sake of convenience and to promote the ends of... justice.
The corporate personality may be disregarded, and the individuals composing the corporation will
be treated as individuals, if the corporate entity is being used as a cloak or cover for fraud or
illegality; as a justification for a wrong; as an... alter ego, an adjunct, or a business conduit for the
sole benefit of the stockholders.
As a general rule, a corporation is looked upon as a legal entity, unless and until sufficient reason
to the contrary appears.
The prevailing rule is that a stockholder is personally liable for the financial obligations of... the
corporation to the extent of his unpaid subscription.
In view of the petitioner's unpaid subscription being worth P262,500.00, she was liable up to that
amount.
Principles:
Stockholders of a corporation are liable for the debts of the corporation up to the extent of their
unpaid subscriptions. They cannot invoke the veil of corporate identity as a shield from liability,
because the veil may be lifted to avoid defrauding... corporate creditors.

Yutivo & Sons Hardware Co. V CTA, L-13203, Jan 28. 1961

FACTS: Yutivo bought a number of cars and trucks from General Motors Overseas Incorporated
(GM) to sell it to the public (buy and sell). GM paid sales tax prescribed in Sections 184, 185, and
186 of tax code based on its selling price to Yutivo. Said tax paid only once on original sale, so
Yutivo no longer paid sales tax on its sale to the public (people).
On June 13, 1946, the Southern Motor’s Inc (SM) was organized to sell cars, trucks and spare
parts. It was incorporated and the subscribers (owner shall we say) are sons of the founders of
Yutivo. The cars and trucks purchased by Yutivo from GM were sold to SM which, in turn, sold
them to the public. GM withdraw from the Phil in the middle of 1947, US manufacturer’s of GM
cars appointed Yutivo as importer for VisMin which continued its arrangement of selling
exclusively to SM. (Yutivo,as importer SM Public). Taking GM’s position as
importer, it’s now Yutivo who paid sales tax (similar as above), SM paid no sales tax.
Upon investigation, Collector of Internal Revenue (CIR) made an assessment and demanded
from Yutivo a certain amount (Php2,215,809.27 (taxes previously paid were not deducted)) as
deficiency sales tax plus surcharge. On the ground that the taxable sales were the retail sales by
SM and not the sales at whole sale made by Yutivo to SM, in as much as SM and Yutivo were
one and the same corporation, the former being the subsidiary of the latter.
Yutivo was alleged that the purpose in the organization of SM is to evade the payment of
taxes/defraud the government.
The fact of organization of SM holds below:
•Corporation of SM was organized in June 1946 , when it could not caused Yutivo any tax savings
and when it is more than a year before GM withdrew from the Phil (tax evasion device runs counter
to the fact that there was no tax to evade)
•Even though an observation from the news clippings said that as early as 1945 it was known that
GM would leave in the Phil, one cannot speculate that Yutivo anticipated the withdrawal thus
organize SM since newspaper clippings was published on 1947.
•The reported in above news clippings was a rumoured plan and Acting Manager refused to
confirm the rumor
The court is inclined to agree with the lower court that SM was actually owned/ controlled by
petitioner as to make it its mere subsidiary because of following reasons:
•SM is under the management and control of Yutivo by virtue of a management contract entered
into by the two parties
•Cash or funds of SM are place in the custody and control of Yutivo as evidenced by the latter
handling all cash assets and maintaining all cash transactions of the former
• Since SM is under Yutivo’s control, the former’s operations and existence became dependent
upon the latter
ISSUE: WON, Yutivo acted in bad faith in its organization of SM.
HELD: No. A taxpayer has the legal right to decrease the amount of tax or even avoid them by
means which the law permits. All legal means used by taxpayers to reduce taxes are all right. A
person may perform an act that he honestly believe to be sufficient to exempt him from taxes. He
does not incur fraud even if the act is there after found to be insufficient. There is no fraud, since
intention to minimize taxes in the context of fraud must be proved to exist by clear and convincing
evidence. Decision of CTA to ordering Yutivo to pay the amount stated above was modified.
Respondent is now ordered to pay 820,549.91, plus 25% surcharge for late payment.

ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT CORPORATION, petitioners,

vs. RITA C. MEJIA, as Executrix of Testate Estate of ANDREA CORDOVA VDA. DE
GUTERREZ, respondent. G.R. No. 141617, August 14, 2001
GONZAGA-REYES,J.:

FACTS: Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a parcel of
land in Camarin, Caloocan City. Gutierrez and Cardale Financing and Realty Corporation
(Cardale) executed a Deed of Sale with Mortgage relating to the lots for the consideration of
P800,000.00.
Owing to Cardale's failure to settle its mortgage obligation, Gutierrez filed a complaint for
rescission of the contract. 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 became delinquent in the payment of real estate
taxes which culminated in their levy and auction sale 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.
Thereafter, Francisco filed an undated Manifestation to the effect that the properties subject of
the mortgage had been levied upon and sold at a tax delinquency sale. Francisco further claimed
that the delinquency sale had rendered the issues in Civil Case moot and academic.
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 RTC held that plaintiff Mejia, as executrix of Gutierrez's 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.
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.
The RTC held that none of the foregoing reasons can be applied to the incidents in this case and
the stock of either of the two corporation is not owned by one person (defendant Francisco).
Except for defendant Adalia B. Francisco, the incorporators and stockholders of one corporation
are different from the other.
The Court of Appeals, 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.

ISSUE #1: Whether or not petitioner Francisco acted in bad faith in her dealings.

HELD: YES. 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.
Not only did 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.
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. 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. 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.
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 merealter 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.
It is exceedingly apparent to the Court that the totality of Francisco's 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. 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.
ISSUE #2: Whether or not Merryland may be held solidarily liable with Francisco.
HELD: NO. 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. 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. 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, Merryland's separate juridical
personality must be upheld.