Commercial Law

19/02/19 Lecture

GREGORIO ARANETA, INC. vs. TUASON

G.R. No. L-2886; August 22, 1952

FACTS:

Paz Tuason de Paterno, who is the registered owner of an approximately 40,703 square meter
land, obtained from Jose Vidal several loans totallingP90,098 and constituted a first mortgage
on the aforesaid property to secure the debt. In January and April, 1943, she obtained additional
loans of P30,000 andP20,000 upon the same security. On each of the last-mentioned occasions the
previous contract of mortgage was renewed and the amounts received were consolidated. In the
first novated contract the time of payment was fixed at two years and in the second and last at four
years. In 1943 Paz Tuason decided to sell the entire property for the net amount of P400,000 to
Gregorio Araneta, who at that time Jose Araneta was said to be the president of the same.
Allegedly, Jose Araneta also acted as agent of Paz Tuason for the sale of the latter’s land. Thus, the
result of the negotiations was the execution on October 19, 1943, of a contract called "Promesa de
Compra y Venta". This contract also stated that Paz Tuason would sell to Gregorio Araneta, Inc. for
the said amount of P400,000 the entire estate except for the mortgage to Jose Vidal. Paz Tuason
had offered to Vidal the check for P143,150 in full settlement of her mortgage obligation, but the
mortgagee had refused to receive that check or to cancel the mortgage. A case was filed against
Vidal but the action never came on for trial and the record and the checks were destroyed during
the war operations in January or February, 1945; and neither was the case reconstituted afterward.
After liberation, an instant action was begun by Gregorio Araneta, Inc.to compel Paz Tuason to
deliver to the plaintiff a clear title to the lots described free from all liens and encumbrances, and
a deed of cancellation of the mortgage to Vidal. Vidal came into the case in virtue of a summon
issued by order of the court, and filed a cross-claim against Paz Tuazon to foreclose his mortgage.
The lower court's judgment was that deed of sale between Araneta and Tuason was invalid., unless
Vidal's mortgage was cancelled.

ISSUE:

Whether or not Jose Araneta acted as agent of Paz Tuason de Paterno.

HELD:

No. Jose Araneta did not act as agent of Paz Tuason. Even if Paz Tuason have known that Jose
Araneta is the same as Gregorio Araneta Inc., she would still go with sale of her property as Jose
Araneta did not by way of being an agent performed such act of being an agent for the sale was
between the corporation and not that of with Jose. Otherwise, greed would have set in in the heart
of Jose, would Jose have been the agent as well as the purchaser of the property of Paz than to
respect their trusted and respected relationship as principal and agent. Moreover, Jose Araneta
was not given any authority to make a binding contract. He was not given the confidence to
administer, and act in behalf of Paz so there was no betrayal of thrust as Jose acted only as a middle-
man tasked only to look for a buyer and not to administer any sale between any prospective buyers.
Adding to this, Jose was not to make the terms of payment. Therefore, Jose Araneta was left with
no power or discretion whatsoever, which he could abuse to his advantage and to the owner's
prejudice. He is not entrusted as an agent for the agent’s incapacity to buy principal’s property
rests in the fact that the agent and principal form one juridical person.

PALAY, INC. vs. CLAVE

G.R. No. L-56076

FACTS:

ON March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor
of private respondent, Nazario Dumpit, a Contract to sell a parcel of Land in Antipolo, Rizal owned
by said corporation. The sale price was P23, 300.00 with 9% interest per annum, payable with a
down payment of P4, 660.00 and monthly installments of P246.42 until fully paid.
Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment
of any monthly installment after the lapse of 90 days from the expiration of the grace period of one
month, without need of notice and with forfeiture of all installments paid. Respondent Dumpit paid
the down payment and several installments amounting to P13, 722.50. The last payment was made
on December 5, 1967 for installments up to September 1967.

On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to
update all his overdue accounts with interest, and seeking its written consent to the assignment of
his rights to a certain Lourdes Dizon. In response, petitioners informed respondent that his Contract
to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had
already been resold.

A complaint was filed by the respondent with the NHA for conveyance with an alternative prayer
for refund. The NHA, in its resolution, ordered Palay, Inc. and Alberto Onstott in his capacity as
President of the corporation, jointly and severally, to refund immediately to respondent the
amount paid with 12% interest from the filing of complaint. Respondent Presidential Executive
Assistant Clave affirmed the NHA resolution.

ISSUE:

1. Whether the doctrine of piercing the veil of corporate fiction has application to the case.
2. Whether petitioner On Stott can be held solidarity liable with petitioner Corporation for the
refund of the installment payments made by respondent Dump it.

RULING:

The doctrine of piercing the veil of corporate fiction has no application to the case. Consequently,
petitioner Onstott cannot be held solidarity liable with petitioner Corporation for the refund of the
installment payments made by respondent Dumpit.

A corporation is invested by law with a personality separate and distinct from those of the persons
composing it. As a general rule, a corporation may not be made to answer for acts or liabilities of
its stockholders or those of the legal entities to which it may be connected and vice versa.

However, the veil of corporate fiction may be pierced when: it is used as a shield to further an end
subversive of justice; or for purposes that could not have been intended by the law that created it;
or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetrate
fraud or con fuse legitimate issues; or to circumvent the law or perpetuate deception; or as an alter
ego, adjunct or business conduit for the sole benefit of the stockholders. In this case however,
there are no badges of fraud on the part of the petitioners. They had literally relied, although
mistakenly, on paragraph 6 of the contract with respondent when they rescinded the contract to
sell extra judicially.

Although Onstott appears to be the controlling stockholder, there being no fraud, he cannot be
made personally liable.

Pabalan and Lagdameo v. NLRC

G.R. No. 89879

FACTS:

84 workers of the Philippine Inter-Fashion (PIF) filed a complaint against the latter for illegal
transfer simultaneous with illegal dismissal in violation of the Labor Code. PIF was notified about
the complaint and summons but hearings were continually re-set for failure of its officers
(petitioners herein) to appear. Complainant workers thus moved to implead petitioners as officers
of PIF in the complaint for their illegal transfer to a new firm. The Labor Arbiter ruled in favor of
workers holding petitioners-officers jointly and severally liable with PIF to pay them their benefits.
Petitioners’ appeal was dismissed.

ISSUE:

Whether or not petitioners as officers may be held jointly and severally liable with the corporation
for its liability.
RULING:

No. The settled rule is that the corporation is vested by law with a personality separate and distinct
from the persons composing it, including its officers as well as from that of any other legal entity
to which it may be related. Thus, a company manager acting in good faith within the scope of his
authority in terminating the services of certain employees cannot be held personally liable for
damages. However, the legal fiction that a corporation has a personality separate and distinct from
stockholders and members may be disregarded when the notion of legal entity is used as a means
to perpetrate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, and or (to) confuse legitimate issues the veil which protects the
corporation will be lifted.

In this particular case complainants did not allege or show that petitioners, as officers of the
corporation deliberately and maliciously designed to evade the financial obligation of the
corporation to its employees, or used the transfer of the employees as a means to perpetrate an
illegal act or as a vehicle for the evasion of existing obligations, the circumvention of statutes, or to
confuse the legitimate issues.

Not one of the above circumstances has been shown to be present. Hence petitioners cannot be
held jointly and severally liable with the PIF corporation under the questioned decision and
resolution of the public respondent.

Del Rosario vs NLRC

187 SCRA 777 / GR No. 85416 July 24, 1990

FACTS:

In POEA case no. 85-06-0394, the Philippine Overseas Employment Administration (POEA)
promulgated a decision on February 4,1986 dismissing the complaint for money claims for lack of
merit. The decision was appealed to the NLRC, which on April 30, 1987 reversed the POEA decision
and ordered Philsa Construction and Trading Co.Ind and Ariel Enterprises (the foreign employer) to
jointly and severally pay private respondent the peso equivalent of $16,039,000 salary differentials
and $2,420.03 as vacation leave benefits. A writ of execution was issued by the POEA but it was
returned unsatisfied incapable of satisfying the judgement. Private respondent moved for the
issuance of an alias writ against the officers of Philsa. This motion was opposed by the officers led
by petitioners, the president and general manager of the corporation. However, POEA issued a
resolution ordering the sheriff to execute against the properties of the petitioner and if insufficient,
against the cash and/or surety bond of bonding company concerned for the full satisfaction of the
judgement awarded.

ISSUE:

Whether or not the POEA resolution is proper.

HELD:

No. Under the law, a corporation is bestowed juridical personality, separate and distinct from its
stockholders. But when the juridical personality of the corporation is used to defeat public
convenience, justify wrong, protect or defend crime, the corporation shall be considered as a mere
association of persons and its responsible officers and/or stockholders shall be individually liable.
For the same reasons, a corporation shall be liable for obligations of a stockholder or a corporation
and its successor-in-interest shall be considered as one and the liability of the former shall attach
to the latter.

But for the separate juridical personality of a corporation to be disregarded, the wrong doing must
be clearly and convincingly established. It cannot be presumed.

Thus, at the time Philsa allowed its license to lapse in 1985 and even at the time it was delivered in
1986, there was yet no judgement in favor of private respondent. An intent to evade payment of
his claims cannot therefore be implied from the expiration of Phila’s license and its delisting.

Neither will the organization of Philsa International Placement and Services Corp. and its
registration with the POEA as a private employment agency imply fraud since it was organized and
registered in 1981, several years before private respondent filed his complaint with the POEA in
1985. The creation of the second anticipation of private respondent’s money claims and the
consequent adverse judgement against Philsa.

Likewise, substantially identity of the incorporators of the two corporations does not necessarily
imply fraud.

Villa Rey Transit vs. Ferrer

GR L-23893, 29 October 1968

FACTS:

[preceding case] Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under
the business name of Villa Rey Transit, pursuant to certificates of public convenience granted him
by the Public Service Commission (PSC) in Cases 44213 and 104651, which authorized him to
operate a total of 32 units on various routes or lines from Pangasinan to Manila, and vice-versa. On
8 January 1959, he sold the two certificates of public convenience to the Pangasinan Transportation
Company, Inc. (Pantranco), for P350,000.00 with the condition, among others, that the seller
(Villarama) "shall not for a period of 10 years from the date of this sale, apply for any TPU service
identical or competing with the buyer."

Barely 3 months thereafter, or on 6 March 1959: a corporation called Villa Rey Transit, Inc. (the
Corporation) was organized with a capital stock of P500,000.00 divided into 5,000 shares of the par
value of P100.00 each; P200,000.00 was the subscribed stock; Natividad R. Villarama (wife of Jose
M. Villarama) was one of the incorporators, and she subscribed for P1,000.00; the balance of
P199,000.00 was subscribed by the brother and sister-in-law of Jose M. Villarama; of the subscribed
capital stock, P105,000.00 was paid to the treasurer of the corporation, who was Natividad R.
Villarama. In less than a month after its registration with the Securities and Exchange Commission
(10 March 1959), the Corporation, on 7 April 1959, bought 5 certificates of public convenience, 49
buses, tools and equipment from one Valentin Fernando, for the sum of P249,000.00, of which
P100,000.00 was paid upon the signing of the contract; P50,000.00 was payable upon the final
approval of the sale by the PSC; P49,500.00 one year after the final approval of the sale; and the
balance of P50,000.00 "shall be paid by the BUYER to the different suppliers of the SELLER."

The very same day that the contract of sale was executed, the parties thereto immediately applied
with the PSC for its approval, with a prayer for the issuance of a provisional authority in favor of
the vendee Corporation to operate the service therein involved. On 19 May 1959, the PSC granted
the provisional permit prayed for, upon the condition that "it may be modified or revoked by the
Commission at any time, shall be subject to whatever action that may be taken on the basic
application and shall be valid only during the pendency of said application." Before the PSC could
take final action on said application for approval of sale, however, the Sheriff of Manila, on 7 July
1959, levied on 2 of the five certificates of public convenience involved therein, namely, those
issued under PSC cases 59494 and 63780, pursuant to a writ of execution issued by the Court of
First Instance of Pangasinan in Civil Case 13798, in favor of Eusebio E. Ferrer against Valentin
Fernando. The Sheriff made and entered the levy in the records of the PSC. On 16 July 1959, a
public sale was conducted by the Sheriff of the said two certificates of public convenience. Ferrer
was the highest bidder, and a certificate of sale was issued in his name. Thereafter, Ferrer sold the
two certificates of public convenience to Pantranco, and jointly submitted for approval their
corresponding contract of sale to the PSC. Pantranco therein prayed that it be authorized
provisionally to operate the service involved in the said two certificates.

The applications for approval of sale, filed before the PSC, by Fernando and the Corporation, Case
124057, and that of Ferrer and Pantranco, Case 126278, were scheduled for a joint hearing. In the
meantime, to wit, on 22 July 1959, the PSC issued an order disposing that during the pendency of
the cases and before a final resolution on the aforesaid applications, the Pantranco shall be the
one to operate provisionally the service under the two certificates embraced in the contract
between Ferrer and Pantranco. The Corporation took issue with this particular ruling of the PSC
and elevated the matter to the Supreme Court, which decreed, after deliberation, that until the
issue on the ownership of the disputed certificates shall have been finally settled by the proper
court, the Corporation should be the one to operate the lines provisionally.

[present case] On 4 November 1959, the Corporation filed in the Court of First Instance of Manila,
a complaint for the annulment of the sheriff's sale of the aforesaid two certificates of public
convenience (PSC Cases 59494 and 63780) in favor of Ferrer, and the subsequent sale thereof by
the latter to Pantranco, against Ferrer, Pantranco and the PSC. The Corporation prayed therein that
all the orders of the PSC relative to the parties' dispute over the said certificates be annulled. The
CFI of Manila declared the sheriff's sale of two certificates of public convenience in favor of Ferrer
and the subsequent sale thereof by the latter to Pantranco null and void; declared the Corporation
to be the lawful owner of the said certificates of public convenience; and ordered Ferrer and
Pantranco, jointly and severally, to pay the Corporation, the sum of P5,000.00 as and for attorney's
fees. The case against the PSC was dismissed. All parties appealed.

ISSUE:

Whether the stipulation, "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE,
APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH THE BUYER" in the contract
between Villarama and Pantranco, binds the Corporation (the Villa Rey Transit, Inc.).

HELD:

Villarama supplied the organization expenses and the assets of the Corporation, such as trucks and
equipment; there was no actual payment by the original subscribers of the amounts of P95,000.00
and P100,000.00 as appearing in the books; Villarama made use of the money of the Corporation
and deposited them to his private accounts; and the Corporation paid his personal accounts.
Villarama himself admitted that he mingled the corporate funds with his own money. These
circumstances are strong persuasive evidence showing that Villarama has been too much involved
in the affairs of the Corporation to altogether negative the claim that he was only a part-time
general manager. They show beyond doubt that the Corporation is his alter ego. The interference
of Villarama in the complex affairs of the corporation, and particularly its finances, are much too
inconsistent with the ends and purposes of the Corporation law, which, precisely, seeks to separate
personal responsibilities from corporate undertakings. It is the very essence of incorporation that
the acts and conduct of the corporation be carried out in its own corporate name because it has
its own personality. The doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected in all cases which are
within reason and the law. When the fiction is urged as a means of perpetrating a fraud or an illegal
act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the
veil with which the law covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation of individuals.
Hence, the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive clause
in the contract entered into by the latter and Pantranco is also enforceable and binding against the
said Corporation. For the rule is that a seller or promisor may not make use of a corporate entity
as a means of evading the obligation of his covenant. Where the Corporation is substantially the
alter ego of the covenantor to the restrictive agreement, it can be enjoined from competing with
the covenantee.