G.R. No.
L-23145 November 29, 1968 requirements of its by-laws before new stock certificates could be
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D.
TAYAG, ancillary administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary
administrator, the County Trust Company of New York, United
States of America, of the estate of the deceased Idonah Slade
Perkins, who died in New York City on March 27, 1960, to surrender
to the ancillary administrator in the Philippines the stock certificates
owned by her in a Philippine corporation, Benguet Consolidated,
Inc., to satisfy the legitimate claims of local creditors, the lower
court, then presided by the Honorable Arsenio Santos, now retired,
issued on May 18, 1964, an order of this tenor: "After considering
the motion of the ancillary administrator, dated February 11, 1964,
as well as the opposition filed by the Benguet Consolidated, Inc., the
Court hereby (1) considers as lost for all purposes in connection with
the administration and liquidation of the Philippine estate of Idonah
Slade Perkins the stock certificates covering the 33,002 shares of
stock standing in her name in the books of the Benguet
Consolidated, Inc., (2) orders said certificates cancelled, and (3)
directs said corporation to issue new certificates in lieu thereof, the
same to be delivered by said corporation to either the incumbent
ancillary administrator or to the Probate Division of this Court."1
From such an order, an appeal was taken to this Court not by the
domiciliary administrator, the County Trust Company of New York,
but by the Philippine corporation, the Benguet Consolidated, Inc.
The appeal cannot possibly prosper. The challenged order
represents a response and expresses a policy, to paraphrase
Frankfurter, arising out of a specific problem, addressed to the
attainment of specific ends by the use of specific remedies, with full
and ample support from legal doctrines of weight and significance.
The facts will explain why. As set forth in the brief of appellant
Benguet Consolidated, Inc., Idonah Slade Perkins, who died on
March 27, 1960 in New York City, left among others, two stock
certificates covering 33,002 shares of appellant, the certificates
being in the possession of the County Trust Company of New York,
which as noted, is the domiciliary administrator of the estate of the
deceased.2 Then came this portion of the appellant's brief: "On
August 12, 1960, Prospero Sanidad instituted ancillary
administration proceedings in the Court of First Instance of Manila;
Lazaro A. Marquez was appointed ancillary administrator, and on
January 22, 1963, he was substituted by the appellee Renato D.
Tayag. A dispute arose between the domiciary administrator in New
York and the ancillary administrator in the Philippines as to which of
them was entitled to the possession of the stock certificates in
question. On January 27, 1964, the Court of First Instance of Manila
ordered the domiciliary administrator, County Trust Company, to
"produce and deposit" them with the ancillary administrator or with
the Clerk of Court. The domiciliary administrator did not comply
with the order, and on February 11, 1964, the ancillary administrator
petitioned the court to "issue an order declaring the certificate or
certificates of stocks covering the 33,002 shares issued in the name
of Idonah Slade Perkins by Benguet Consolidated, Inc., be declared
[or] considered as lost."3
It is to be noted further that appellant Benguet Consolidated, Inc.
admits that "it is immaterial" as far as it is concerned as to "who is
entitled to the possession of the stock certificates in question;
appellant opposed the petition of the ancillary administrator
because the said stock certificates are in existence, they are today in
the possession of the domiciliary administrator, the County Trust
Company, in New York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock
certificates cannot be declared or considered as lost. Moreover, it
would allege that there was a failure to observe certain
issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks
merit. The challenged order constitutes an emphatic affirmation of
judicial authority sought to be emasculated by the wilful conduct of
the domiciliary administrator in refusing to accord obedience to a
court decree. How, then, can this order be stigmatized as illegal?
As is true of many problems confronting the judiciary, such a
response was called for by the realities of the situation. What cannot
be ignored is that conduct bordering on wilful defiance, if it had not
actually reached it, cannot without undue loss of judicial prestige, be
condoned or tolerated. For the law is not so lacking in flexibility and
resourcefulness as to preclude such a solution, the more so as
deeper reflection would make clear its being buttressed by
indisputable principles and supported by the strongest policy
considerations.
It can truly be said then that the result arrived at upheld and
vindicated the honor of the judiciary no less than that of the
country. Through this challenged order, there is thus dispelled the
atmosphere of contingent frustration brought about by the
persistence of the domiciliary administrator to hold on to the stock
certificates after it had, as admitted, voluntarily submitted itself to
the jurisdiction of the lower court by entering its appearance
through counsel on June 27, 1963, and filing a petition for relief
from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality
and effectiveness to what was decreed. For without it, what it had
been decided would be set at naught and nullified. Unless such a
blatant disregard by the domiciliary administrator, with residence
abroad, of what was previously ordained by a court order could be
thus remedied, it would have entailed, insofar as this matter was
concerned, not a partial but a well-nigh complete paralysis of judicial
authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power of
the appellee ancillary administrator to gain control and possession
of all assets of the decedent within the jurisdiction of the
Philippines. Nor could it. Such a power is inherent in his duty to
settle her estate and satisfy the claims of local creditors.5 As Justice
Tuason speaking for this Court made clear, it is a "general rule
universally recognized" that administration, whether principal or
ancillary, certainly "extends to the assets of a decedent found within
the state or country where it was granted," the corollary being "that
an administrator appointed in one state or country has no power
over property in another state or country."6
It is to be noted that the scope of the power of the ancillary
administrator was, in an earlier case, set forth by Justice Malcolm.
Thus: "It is often necessary to have more than one administration of
an estate. When a person dies intestate owning property in the
country of his domicile as well as in a foreign country, administration
is had in both countries. That which is granted in the jurisdiction of
decedent's last domicile is termed the principal administration,
while any other administration is termed the ancillary
administration. The reason for the latter is because a grant of
administration does not ex proprio vigore have any effect beyond
the limits of the country in which it is granted. Hence, an
administrator appointed in a foreign state has no authority in the
[Philippines]. The ancillary administration is proper, whenever a
person dies, leaving in a country other than that of his last domicile,
property to be administered in the nature of assets of the deceased
liable for his individual debts or to be distributed among his heirs."7
It would follow then that the authority of the probate court to
require that ancillary administrator's right to "the stock certificates
covering the 33,002 shares ... standing in her name in the books of
[appellant] Benguet Consolidated, Inc...." be respected is equally
beyond question. For appellant is a Philippine corporation owing full
allegiance and subject to the unrestricted jurisdiction of local courts.
Its shares of stock cannot therefore be considered in any wise as
immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal
Revenue8 finds application. "In the instant case, the actual situs of
the shares of stock is in the Philippines, the corporation being
domiciled [here]." To the force of the above undeniable proposition,
not even appellant is insensible. It does not dispute it. Nor could it
successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a
rather conclusive fashion for the legality of the challenged order,
how does appellant, Benguet Consolidated, Inc. propose to carry the
extremely heavy burden of persuasion of precisely demonstrating
the contrary? It would assign as the basic error allegedly committed
by the lower court its "considering as lost the stock certificates
covering 33,002 shares of Benguet belonging to the deceased
Idonah Slade Perkins, ..."9 More specifically, appellant would stress
that the "lower court could not "consider as lost" the stock
certificates in question when, as a matter of fact, his Honor the trial
Judge knew, and does know, and it is admitted by the appellee, that
the said stock certificates are in existence and are today in the
possession of the domiciliary administrator in New York."10
There may be an element of fiction in the above view of the lower
court. That certainly does not suffice to call for the reversal of the
appealed order. Since there is a refusal, persistently adhered to by
the domiciliary administrator in New York, to deliver the shares of
stocks of appellant corporation owned by the decedent to the
ancillary administrator in the Philippines, there was nothing
unreasonable or arbitrary in considering them as lost and requiring
the appellant to issue new certificates in lieu thereof. Thereby, the
task incumbent under the law on the ancillary administrator could
be discharged and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial
order being made to depend on the uncontrolled discretion of the
party or entity, in this case domiciled abroad, which thus far has
shown the utmost persistence in refusing to yield obedience.
Certainly, appellant would not be heard to contend in all seriousness
that a judicial decree could be treated as a mere scrap of paper, the
court issuing it being powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the
lower court did not correspond exactly with the facts. To be more
blunt, the quality of truth may be lacking in such a conclusion
arrived at. It is to be remembered however, again to borrow from
Frankfurter, "that fictions which the law may rely upon in the pursuit
of legitimate ends have played an important part in its
development."11
Speaking of the common law in its earlier period, Cardozo could
state fictions "were devices to advance the ends of justice, [even if]
clumsy and at times offensive."12 Some of them have persisted even
to the present, that eminent jurist, noting "the quasi contract, the
adopted child, the constructive trust, all of flourishing vitality, to
attest the empire of "as if" today."13 He likewise noted "a class of
fictions of another order, the fiction which is a working tool of
thought, but which at times hides itself from view till reflection and
analysis have brought it to the light."14
What cannot be disputed, therefore, is the at times indispensable
role that fictions as such played in the law. There should be then on
the part of the appellant a further refinement in the catholicity of its
condemnation of such judicial technique. If ever an occasion did call
for the employment of a legal fiction to put an end to the anomalous
situation of a valid judicial order being disregarded with apparent
impunity, this is it. What is thus most obvious is that this particular
alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the
above contention by its invoking one of the provisions of its by-laws
which would set forth the procedure to be followed in case of a lost,
stolen or destroyed stock certificate; it would stress that in the
event of a contest or the pendency of an action regarding ownership
of such certificate or certificates of stock allegedly lost, stolen or
destroyed, the issuance of a new certificate or certificates would
await the "final decision by [a] court regarding the ownership
[thereof]."15
Such reliance is misplaced. In the first place, there is no such
occasion to apply such by-law. It is admitted that the foreign
domiciliary administrator did not appeal from the order now in
question. Moreover, there is likewise the express admission of
appellant that as far as it is concerned, "it is immaterial ... who is
entitled to the possession of the stock certificates ..." Even if such
were not the case, it would be a legal absurdity to impart to such a
provision conclusiveness and finality. Assuming that a contrariety
exists between the above by-law and the command of a court
decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution
overrides a statute, to which, however, the judiciary must yield
deference, when appropriately invoked and deemed applicable. It
would be most highly unorthodox, however, if a corporate by-law
would be accorded such a high estate in the jural order that a court
must not only take note of it but yield to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be
saddled unless the appealed order be set aside for its inconsistency
with one of its by-laws does not impress us. Its obedience to a lawful
court order certainly constitutes a valid defense, assuming that such
apprehension of a possible court action against it could possibly
materialize. Thus far, nothing in the circumstances as they have
developed gives substance to such a fear. Gossamer possibilities of a
future prejudice to appellant do not suffice to nullify the lawful
exercise of judicial authority.
4. What is more the view adopted by appellant Benguet
Consolidated, Inc. is fraught with implications at war with the basic
postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an
artificial being created by operation of law...."16 It owes its life to the
state, its birth being purely dependent on its will. As Berle so aptly
stated: "Classically, a corporation was conceived as an artificial
person, owing its existence through creation by a sovereign
power."17As a matter of fact, the statutory language employed owes
much to Chief Justice Marshall, who in the Dartmouth College
decision defined a corporation precisely as "an artificial being,
invisible, intangible, and existing only in contemplation of law."18
The well-known authority Fletcher could summarize the matter
thus: "A corporation is not in fact and in reality a person, but the law
treats it as though it were a person by process of fiction, or by
regarding it as an artificial person distinct and separate from its
individual stockholders.... It owes its existence to law. It is an
artificial person created by law for certain specific purposes, the
extent of whose existence, powers and liberties is fixed by its
charter."19 Dean Pound's terse summary, a juristic person, resulting
from an association of human beings granted legal personality by
the state, puts the matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the basic
theme of which to quote from Friedmann, "is the reality of the
group as a social and legal entity, independent of state recognition
and concession."21 A corporation as known to Philippine
jurisprudence is a creature without any existence until it has
received the imprimatur of the state according to law. It is logically
inconceivable therefore that it will have rights and privileges of a
higher priority than that of its creator. More than that, it cannot
legitimately refuse to yield obedience to acts of its state organs,
certainly not excluding the judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following
American law still of persuasive authority in our jurisdiction, comes
more often within the ken of the judiciary than the other two
coordinate branches. It institutes the appropriate court action to
enforce its right. Correlatively, it is not immune from judicial control
in those instances, where a duty under the law as ascertained in an
appropriate legal proceeding is cast upon it.
To assert that it can choose which court order to follow and which to
disregard is to confer upon it not autonomy which may be conceded
but license which cannot be tolerated. It is to argue that it may,
when so minded, overrule the state, the source of its very existence;
it is to contend that what any of its governmental organs may
lawfully require could be ignored at will. So extravagant a claim
cannot possibly merit approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs,22 it
was shown that in a guardianship proceedings then pending in a
lower court, the United States Veterans Administration filed a
motion for the refund of a certain sum of money paid to the minor
under guardianship, alleging that the lower court had previously
granted its petition to consider the deceased father as not entitled
to guerilla benefits according to a determination arrived at by its
main office in the United States. The motion was denied. In seeking
a reconsideration of such order, the Administrator relied on an
American federal statute making his decisions "final and conclusive
on all questions of law or fact" precluding any other American
official to examine the matter anew, "except a judge or judges of the
United States court."23 Reconsideration was denied, and the
Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court.
Thus: "We are of the opinion that the appeal should be rejected. The
provisions of the U.S. Code, invoked by the appellant, make the
decisions of the U.S. Veterans' Administrator final and conclusive
when made on claims property submitted to him for resolution; but
they are not applicable to the present case, where the Administrator
is not acting as a judge but as a litigant. There is a great difference
between actions against the Administrator (which must be filed
strictly in accordance with the conditions that are imposed by the
Veterans' Act, including the exclusive review by United States
courts), and those actions where the Veterans' Administrator seeks
a remedy from our courts and submits to their jurisdiction by filing
actions therein. Our attention has not been called to any law or
treaty that would make the findings of the Veterans' Administrator,
in actions where he is a party, conclusive on our courts. That, in
effect, would deprive our tribunals of judicial discretion and render
them mere subordinate instrumentalities of the Veterans'
Administrator."
It is bad enough as the Viloria decision made patent for our judiciary
to accept as final and conclusive, determinations made by foreign
governmental agencies. It is infinitely worse if through the absence
of any coercive power by our courts over juridical persons within our
jurisdiction, the force and effectivity of their orders could be made
to depend on the whim or caprice of alien entities. It is difficult to
imagine of a situation more offensive to the dignity of the bench or
the honor of the country.
Yet that would be the effect, even if unintended, of the proposition
to which appellant Benguet Consolidated seems to be firmly
committed as shown by its failure to accept the validity of the order
complained of; it seeks its reversal. Certainly we must at all pains
see to it that it does not succeed. The deplorable consequences
attendant on appellant prevailing attest to the necessity of negative
response from us. That is what appellant will get.
That is all then that this case presents. It is obvious why the appeal
cannot succeed. It is always easy to conjure extreme and even
oppressive possibilities. That is not decisive. It does not settle the
issue. What carries weight and conviction is the result arrived at, the
just solution obtained, grounded in the soundest of legal doctrines
and distinguished by its correspondence with what a sense of
realism requires. For through the appealed order, the imperative
requirement of justice according to law is satisfied and national
dignity and honor maintained.
WHEREFORE, the appealed order of the Honorable Arsenio Santos,
the Judge of the Court of First Instance, dated May 18, 1964, is
affirmed. With costs against oppositor-appelant Benguet
Consolidated, Inc.
G.R. No. L-17295 July 30, 1962
ANG PUE & COMPANY, ET AL., plaintiffs-appellants,
vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendant-appellee.
Felicisimo E. Escaran for plaintiffs-appellants.
Office of the Solicitor General for defendant-appellee.
DIZON, J.:
Action for declaratory relief filed in the Court of First Instance of
Iloilo by Ang Pue & Company, Ang Pue and Tan Siong against the
Secretary of Commerce and Industry to secure judgment "declaring
that plaintiffs could extend for five years the term of the partnership
pursuant to the provisions of plaintiffs' Amendment to the Article of
Co-partnership."
The answer filed by the defendant alleged, in substance, that the
extension for another five years of the term of the plaintiffs'
partnership would be in violation of the provisions of Republic Act
No. 1180.
It appears that on May 1, 1953, Ang Pue and Tan Siong, both
Chinese citizens, organized the partnership Ang Pue & Company for
a term of five years from May 1, 1953, extendible by their mutual
consent. The purpose of the partnership was "to maintain the
business of general merchandising, buying and selling at wholesale
and retail, particularly of lumber, hardware and other construction
materials for commerce, either native or foreign." The
corresponding articles of partnership (Exhibit B) were registered in
the Office of the Securities & Exchange Commission on June 16,
1953.
On June 19, 1954 Republic Act No. 1180 was enacted to regulate the
retail business. It provided, among other things, that, after its
enactment, a partnership not wholly formed by Filipinos could
continue to engage in the retail business until the expiration of its
term.
On April 15, 1958 — prior to the expiration of the five-year term of
the partnership Ang Pue & Company, but after the enactment of the
Republic Act 1180, the partners already mentioned amended the
original articles of part ownership (Exhibit B) so as to extend the
term of life of the partnership to another five years. When the
amended articles were presented for registration in the Office of the
Securities & Exchange Commission on April 16, 1958, registration
was refused upon the ground that the extension was in violation of
the aforesaid Act.
From the decision of the lower court dismissing the action, with
costs, the plaintiffs interposed this appeal.
The question before us is too clear to require an extended
discussion. To organize a corporation or a partnership that could
claim a juridical personality of its own and transact business as such,
is not a matter of absolute right but a privilege which may be
enjoyed only under such terms as the State may deem necessary to
impose. That the State, through Congress, and in the manner
provided by law, had the right to enact Republic Act No. 1180 and to
provide therein that only Filipinos and concerns wholly owned by
Filipinos may engage in the retail business can not be seriously
disputed. That this provision was clearly intended to apply to
partnership already existing at the time of the enactment of the law
is clearly showing by its provision giving them the right to continue
engaging in their retail business until the expiration of their term or
life.
To argue that because the original articles of partnership provided
that the partners could extend the term of the partnership, the
provisions of Republic Act 1180 cannot be adversely affect
appellants herein, is to erroneously assume that the aforesaid
provision constitute a property right of which the partners can not
be deprived without due process or without their consent. The
agreement contain therein must be deemed subject to the law
existing at the time when the partners came to agree regarding the
extension. In the present case, as already stated, when the partners
amended the articles of partnership, the provisions of Republic Act
1180 were already in force, and there can be not the slightest doubt
that the right claimed by appellants to extend the original term of
their partnership to another five years would be in violation of the
clear intent and purpose of the law aforesaid.
WHEREFORE, the judgment appealed from is affirmed, with costs.
G.R. No. 125469 October 27, 1997
PHILIPPINE STOCK EXCHANGE, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION and PUERTO AZUL LAND, INC., respondents.
TORRES, JR., J.:
The Securities and Exchange Commission is the government agency,
under the direct general supervision of the Office of the
President, 1 with the immense task of enforcing the Revised
Securities Act, and all other duties assigned to it by pertinent laws.
Among its inumerable functions, and one of the most important, is
the supervision of all corporations, partnerships or associations, who
are grantees of primary franchise and/or a license or permit issued
by the government to operate in the Philippines. 2 Just how far this
regulatory authority extends, particularly, with regard to the
Petitioner Philippine Stock Exchange, Inc. is the issue in the case at
bar.
In this Petition for Review on Certiorari, petitioner assails the
resolution of the respondent Court of Appeals, dated June 27, 1996,
which affirmed the decision of the Securities and Exchange
Commission ordering the petitioner Philippine Stock Exchange, Inc.
to allow the private respondent Puerto Azul Land, Inc. to be listed in
its stock market, thus paving the way for the public offering of PALI's
shares.
The facts of the case are undisputed, and are hereby restated in
sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation,
had sought to offer its shares to the public in order to raise funds
allegedly to develop its properties and pay its loans with several
banking institutions. In January, 1995, PALI was issued a Permit to
Sell its shares to the public by the Securities and Exchange
Commission (SEC). To facilitate the trading of its shares among
investors, PALI sought to course the trading of its shares through the
Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with
the said stock exchange an application to list its shares, with
supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a
perusal of PALI's application, recommended to the PSE's Board of
Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application,
the Board of Governors of the PSE received a letter from the heirs of
Ferdinand E. Marcos, claiming that the late President Marcos was
the legal and beneficial owner of certain properties forming part of
the Puerto Azul Beach Hotel and Resort Complex which PALI claims
to be among its assets and that the Ternate Development
Corporation, which is among the stockholders of PALI, likewise
appears to have been held and continue to be held in trust by one
Rebecco Panlilio for then President Marcos and now, effectively for
his estate, and requested PALI's application to be deferred. PALI was
requested to comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto
Azul Beach Hotel and Resort Complex were not claimed by PALI as
its assets. On the contrary, the resort is actually owned by Fantasia
Filipina Resort, Inc. and the Puerto Azul Country Club, entities
distinct from PALI. Furthermore, the Ternate Development
Corporation owns only 1.20% of PALI. The Marcoses responded that
their claim is not confined to the facilities forming part of the Puerto
Azul Hotel and Resort Complex, thereby implying that they are also
asserting legal and beneficial ownership of other properties titled
under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol
Gunigundo of the Presidential Commission on Good Government
(PCGG) requesting for comments on the letters of the PALI and the
Marcoses. On March 4, 1996, the PSE was informed that the
Marcoses received a Temporary Restraining Order on the same date,
enjoining the Marcoses from, among others, "further impeding,
obstructing, delaying or interfering in any manner by or any means
with the consideration, processing and approval by the PSE of the
initial public offering of PALI." The TRO was issued by Judge Martin
S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No.
65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of
Governors of the PSE reached its decision to reject PALI's
application, citing the existence of serious claims, issues and
circumstances surrounding PALI's ownership over its assets that
adversely affect the suitability of listing PALI's shares in the stock
exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the
then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's
attention the action taken by the PSE in the application of PALI for
the listing of its shares with the PSE, and requesting that the SEC, in
the exercise of its supervisory and regulatory powers over stock
exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's
action on PALI's listing application and institute such measures as
are just and proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE,
attaching thereto the letter of PALI and directing the PSE to file its
comments thereto within five days from its receipt and for its
authorized representative to appear for an "inquiry" on the matter.
On April 22, 1996, the PSE submitted a letter to the SEC containing
its comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's
decision. The dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking
the Commissioner's authority and jurisdiction
under Section 3 of the Revised Securities Act, in
conjunction with Section 3, 6(j) and 6(m) of
Presidential Decree No. 902-A, the decision of
the Board of Governors of the Philippine Stock
Exchange denying the listing of shares of Puerto
Azul Land, Inc., is hereby set aside, and the PSE is
hereby ordered to immediately cause the listing
of the PALI shares in the Exchange, without
prejudice to its authority to require PALI to
disclose such other material information it
deems necessary for the protection of the
investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29,
1996, which was, however denied by the Commission in its May 9,
1996 Order which states:
WHEREFORE, premises considered, the
Commission finds no compelling reason to
reconsider its order dated April 24, 1996, and in
the light of recent developments on the adverse
claim against the PALI properties, PSE should
require PALI to submit full disclosure of material
 facts and information to protect the investing
public. In this regard, PALI is hereby ordered to
amend its registration statements filed with the
Commission to incorporate the full disclosure of
these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals
on May 17, 1996 a Petition for Review (with Application for Writ of
Preliminary Injunction and Temporary Restraining Order), assailing
the above mentioned orders of the SEC, submitting the following as
errors of the SEC:
I. SEC COMMITTED SERIOUS
ERROR AND GRAVE ABUSE
OF DISCRETION IN ISSUING
THE ASSAILED ORDERS
WITHOUT POWER,
JURISDICTION, OR
AUTHORITY; SEC HAS NO
POWER TO ORDER THE
LISTING AND SALE OF
SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED
AND TO REVIEW AND
SUBSTITUTE DECISIONS OF
PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED SERIOUS
ERROR AND GRAVE ABUSE
OF DISCRETION IN FINDING
THAT PSE ACTED IN AN
ARBITRARY AND ABUSIVE
MANNER IN DISAPPROVING
PALI'S LISTING APPLICATION;
III. THE ASSAILED ORDERS OF
SEC ARE ILLEGAL AND VOID
FOR ALLOWING FURTHER
DISPOSITION OF PROPERTIES
IN CUSTODIA LEGIS AND
WHICH FORM PART OF
NAVAL/MILITARY
RESERVATION; AND
IV. THE FULL DISCLOSURE OF
THE SEC WAS NOT PROPERLY
PROMULGATED AND ITS
IMPLEMENTATION AND
APPLICATION IN THIS CASE
VIOLATES THE DUE PROCESS
CLAUSE OF THE
CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review
and subsequently, a Comment and Motion to Dismiss. On June 10,
1996, PSE fled its Reply to Comment and Opposition to Motion to
Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution
dismissing the PSE's Petition for Review. Hence, this Petition by the
PSE.
The appellate court had ruled that the SEC had both jurisdiction and
authority to look into the decision of the petitioner PSE, pursuant to
Section 3 3 of the Revised Securities Act in relation to Section 6(j)
and 6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the Revised
Securities Act, and for the purpose of ensuring fair administration of
the exchange. Both as a corporation and as a stock exchange, the
petitioner is subject to public respondent's jurisdiction, regulation
and control. Accepting the argument that the public respondent has
the authority merely to supervise or regulate, would amount to
serious consequences, considering that the petitioner is a stock
exchange whose business is impressed with public interest. Abuse is
not remote if the public respondent is left without any system of
control. If the securities act vested the public respondent with
jurisdiction and control over all corporations; the power to authorize
the establishment of stock exchanges; the right to supervise and
regulate the same; and the power to alter and supplement rules of
the exchange in the listing or delisting of securities, then the law
certainly granted to the public respondent the plenary authority
over the petitioner; and the power of review necessarily comes
within its authority.
All in all, the court held that PALI complied with all the requirements
for public listing, affirming the SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an
arbitrary and abusive manner in disapproving
the application of PALI for listing of its shares in
the face of the following considerations:
1. PALI has clearly and admittedly complied with
the Listing Rules and full disclosure requirements
of the Exchange;
2. In applying its clear and reasonable standards
on the suitability for listing of shares, PSE has
failed to justify why it acted differently on the
application of PALI, as compared to the IPOs of
other companies similarly situated that were
allowed listing in the Exchange;
3. It appears that the claims and issues on the
title to PALI's properties were even less serious
than the claims against the assets of the other
companies in that, the assertions of the
Marcoses that they are owners of the disputed
properties were not substantiated enough to
overcome the strength of a title to properties
issued under the Torrens System as evidence of
ownership thereof;
4. No action has been filed in any court of
competent jurisdiction seeking to nullify PALI's
ownership over the disputed properties, neither
has the government instituted recovery
proceedings against these properties. Yet the
import of PSE's decision in denying PALI's
application is that it would be PALI, not the
Marcoses, that must go to court to prove the
legality of its ownership on these properties
before its shares can be listed.
In addition, the argument that the PALI properties belong to the
Military/Naval Reservation does not inspire belief. The point is, the
PALI properties are now titled. A property losses its public character
the moment it is covered by a title. As a matter of fact, the titles
have long been settled by a final judgment; and the final decree
having been registered, they can no longer be re-opened
considering that the one year period has already passed. Lastly, the
determination of what standard to apply in allowing PALI's
application for listing, whether the discretion method or the system
of public disclosure adhered to by the SEC, should be addressed to
the Securities Commission, it being the government agency that
exercises both supervisory and regulatory authority over all
corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed
the instant Petition for Review on Certiorari, taking exception to the
rulings of the SEC and the Court of Appeals. Respondent PALI filed its
Comment to the petition on October 17, 1996. On the same date,
the PCGG filed a Motion for Leave to file a Petition for Intervention.
This was followed up by the PCGG's Petition for Intervention on
October 21, 1996. A supplemental Comment was filed by PALI on
October 25, 1997. The Office of the Solicitor General, representing
the SEC and the Court of Appeals, likewise filed its Comment on
December 26, 1996. In answer to the PCGG's motion for leave to file
petition for intervention, PALI filed its Comment thereto on January
17, 1997, whereas the PSE filed its own Comment on January 20,
1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the
comments of respondent PALI (October 17, 1996) and the Solicitor
General (December 26, 1996). On May 16, 1997, PALI filed its
Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC
had authority to order the PSE to list the shares of PALI in the stock
exchange. Under presidential decree No. 902-A, the powers of the
SEC over stock exchanges are more limited as compared to its
authority over ordinary corporations. In connection with this, the
powers of the SEC over stock exchanges under the Revised Securities
Act are specifically enumerated, and these do not include the power
to reverse the decisions of the stock exchange. Authorities are in
abundance even in the United States, from which the country's
security policies are patterned, to the effect of giving the Securities
Commission less control over stock exchanges, which in turn are
given more lee-way in making the decision whether or not to allow
corporations to offer their stock to the public through the stock
exchange. This is in accord with the "business judgment rule"
whereby the SEC and the courts are barred from intruding into
business judgments of corporations, when the same are made in
good faith. the said rule precludes the reversal of the decision of the
PSE to deny PALI's listing application, absent a showing of bad faith
on the part of the PSE. Under the listing rules of the PSE, to which
PALI had previously agreed to comply, the PSE retains the discretion
to accept or reject applications for listing. Thus, even if an issuer has
complied with the PSE listing rules and requirements, PSE retains the
discretion to accept or reject the issuer's listing application if the PSE
determines that the listing shall not serve the interests of the
investing public.
Moreover, PSE argues that the SEC has no jurisdiction over
sequestered corporations, nor with corporations whose properties
are under sequestration. A reading of Republic of the Philippines
vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that
the properties of PALI, which were derived from the Ternate
Development Corporation (TDC) and the Monte del Sol
Development Corporation (MSDC). are under sequestration by the
PCGG, and subject of forfeiture proceedings in the Sandiganbayan.
This ruling of the Court is the "law of the case" between the Republic
and TDC and MSDC. It categorically declares that the assets of these
corporations were sequestered by the PCGG on March 10, 1986 and
April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that
PALI's ownership over its properties can no longer be questioned,
since certificates of title have been issued to PALI and more than
one year has since lapsed, is erroneous and ignores well settled
jurisprudence on land titles. That a certificate of title issued under
the Torrens System is a conclusive evidence of ownership is not an
absolute rule and admits certain exceptions. It is fundamental that
forest lands or military reservations are non-alienable. Thus, when a
title covers a forest reserve or a government reservation, such title is
void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance on
the alleged policy of "full disclosure" to uphold the listing of PALI's
shares with the PSE, in the absence of a clear mandate for the
effectivity of such policy. As it is, the case records reveal the truth
that PALI did not comply with the listing rules and disclosure
requirements. In fact, PALI's documents supporting its application
contained misrepresentations and misleading statements, and
concealed material information. The matter of sequestration of
PALI's properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALI's
application.
It is undeniable that the petitioner PSE is not an ordinary
corporation, in that although it is clothed with the markings of a
corporate entity, it functions as the primary channel through which
the vessels of capital trade ply. The PSE's relevance to the continued
operation and filtration of the securities transactions in the country
gives it a distinct color of importance such that government
intervention in its affairs becomes justified, if not necessarily.
Indeed, as the only operational stock exchange in the country today,
the PSE enjoys a monopoly of securities transactions, and as such, it
yields an immense influence upon the country's economy.
Due to this special nature of stock exchanges, the country's
lawmakers has seen it wise to give special treatment to the
administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of
jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the special
mandate to be vigilant in the supervision of the affairs of stock
exchanges so that the interests of the investing public may be fully
safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough
authority to uphold the SEC's challenged control authority over the
petitioner PSE even as it provides that "the Commission shall have
absolute jurisdiction, supervision, and control over all corporations,
partnerships or associations, who are the grantees of primary
franchises and/or a license or permit issued by the government to
operate in the Philippines. . ." The SEC's regulatory authority over
private corporations encompasses a wide margin of areas, touching
nearly all of a corporation's concerns. This authority springs from the
fact that a corporation owes its existence to the concession of its
corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore,
may be implied from or be considered as necessary or incidental to
the carrying out of the SEC's express power to insure fair dealing in
securities traded upon a stock exchange or to ensure the fair
administration of such exchange. 7 It is, likewise, observed that the
principal function of the SEC is the supervision and control over
corporations, partnerships and associations with the end in view
that investment in these entities may be encouraged and protected,
and their activities for the promotion of economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC
reversed the decision of the PSE to deny the application for listing in
the stock exchange of the private respondent PALI. The SEC's action
was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to
whether or not securities, including shares of stock of a corporation,
may be traded or not in the stock exchange. This is in line with the
SEC's mission to ensure proper compliance with the laws, such as
the Revised Securities Act and to regulate the sale and disposition of
securities in the country. 9 As the appellate court explains:
Paramount policy also supports the authority of
the public respondent to review petitioner's
denial of the listing. Being a stock exchange, the
petitioner performs a function that is vital to the
national economy, as the business is affected
with public interest. As a matter of fact, it has
often been said that the economy moves on the
basis of the rise and fall of stocks being traded.
By its economic power, the petitioner certainly
can dictate which and how many users are
allowed to sell securities thru the facilities of a
stock exchange, if allowed to interpret its own
rules liberally as it may please. Petitioner can
either allow or deny the entry to the market of
securities. To repeat, the monopoly, unless
accompanied by control, becomes subject to
abuse; hence, considering public interest, then it
should be subject to government regulation.
The role of the SEC in our national economy cannot be minimized.
The legislature, through the Revised Securities Act, Presidential
Decree No. 902-A, and other pertinent laws, has entrusted to it the
serious responsibility of enforcing all laws affecting corporations and
other forms of associations not otherwise vested in some other
government office. 10
This is not to say, however, that the PSE's management prerogatives
are under the absolute control of the SEC. The PSE is, alter all, a
corporation authorized by its corporate franchise to engage in its
proposed and duly approved business. One of the PSE's main
concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations,
including the right to sue and be sued, to hold property in its own
name, to enter (or not to enter) into contracts with third persons,
and to perform all other legal acts within its allocated express or
implied powers.
A corporation is but an association of individuals, allowed to transact
under an assumed corporate name, and with a distinct legal
personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such a
body. 11 As to its corporate and management decisions, therefore,
the state will generally not interfere with the same. Questions of
policy and of management are left to the honest decision of the
officers and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of the board
of directors. The board is the business manager of the corporation,
and so long as it acts in good faith, its orders are not reviewable by
the courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE,
and the resultant authority to reverse the PSE's decision in matters
of application for listing in the market, the SEC may exercise such
power only if the PSE's judgment is attended by bad faith. In Board
of Liquidators vs. Kalaw, 13 it was held that bad faith does not simply
connote bad judgment or negligence. It imports a dishonest purpose
or some moral obliquity and conscious doing of wrong. It means a
breach of a known duty through some motive or interest of ill will,
partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the
PSE considered important facts, which, in the general scheme, brings
to serious question the qualification of PALI to sell its shares to the
public through the stock exchange. During the time for receiving
objections to the application, the PSE heard from the representative
of the late President Ferdinand E. Marcos and his family who claim
the properties of the private respondent to be part of the Marcos
estate. In time, the PCGG confirmed this claim. In fact, an order of
sequestration has been issued covering the properties of PALI, and
suit for reconveyance to the state has been filed in the
Sandiganbayan Court. How the properties were effectively
transferred, despite the sequestration order, from the TDC and
MSDC to Rebecco Panlilio, and to the private respondent PALI, in
only a short span of time, are not yet explained to the Court, but it is
clear that such circumstances give rise to serious doubt as to the
integrity of PALI as a stock issuer. The petitioner was in the right
when it refused application of PALI, for a contrary ruling was not to
the best interest of the general public. The purpose of the Revised
Securities Act, after all, is to give adequate and effective protection
to the investing public against fraudulent representations, or false
promises, and the imposition of worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its
avowed protection to acts detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth
in securities" Act, was designed not only to
provide investors with adequate information
upon which to base their decisions to buy and
sell securities, but also to protect legitimate
business seeking to obtain capital through
honest presentation against competition from
crooked promoters and to prevent fraud in the
sale of securities. (Tenth Annual Report, U.S.
Securities & Exchange Commission, p. 14).
As has been pointed out, the effects of such an
act are chiefly (1) prevention of excesses and
fraudulent transactions, merely by requirement
of that their details be revealed; (2) placing the
market during the early stages of the offering of
a security a body of information, which
operating indirectly through investment services
and expert investors, will tend to produce a
more accurate appraisal of a security, . . . Thus,
the Commission may refuse to permit a
registration statement to become effective if it
appears on its face to be incomplete or
inaccurate in any material respect, and empower
the Commission to issue a stop order suspending
the effectiveness of any registration statement
which is found to include any untrue statement
of a material fact or to omit to state any material
fact required to be stated therein or necessary to
make the statements therein not misleading.
(Idem).
Also, as the primary market for securities, the PSE has established its
name and goodwill, and it has the right to protect such goodwill by
maintaining a reasonable standard of propriety in the entities who
choose to transact through its facilities. It was reasonable for the
PSE, therefore, to exercise its judgment in the manner it deems
appropriate for its business identity, as long as no rights are
trampled upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of
government absolutism is a thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute
and can no longer be assailed is of no moment. At this juncture,
there is the claim that the properties were owned by TDC and MSDC
and were transferred in violation of sequestration orders, to
Rebecco Panlilio and later on to PALI, besides the claim of the
Marcoses that such properties belong to the Marcos estate, and
were held only in trust by Rebecco Panlilio. It is also alleged by the
petitioner that these properties belong to naval and forest reserves,
and therefore beyond private dominion. If any of these claims is
established to be true, the certificates of title over the subject
properties now held by PALI map be disregarded, as it is an
established rule that a registration of a certificate of title does not
confer ownership over the properties described therein to the
person named as owner. The inscription in the registry, to be
effective, must be made in good faith. The defense of indefeasibility
of a Torrens Title does not extend to a transferee who takes the
certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted
correctly in refusing the application of PALI, the true ownership of
the properties of PALI need not be determined as an absolute fact.
What is material is that the uncertainty of the properties' ownership
and alienability exists, and this puts to question the qualification of
PALI's public offering. In sum, the Court finds that the SEC had acted
arbitrarily in arrogating unto itself the discretion of approving the
application for listing in the PSE of the private respondent PALI,
since this is a matter addressed to the sound discretion of the PSE, a
corporation entity, whose business judgments are respected in the
absence of bad faith.
The question as to what policy is, or should be relied upon in
approving the registration and sale of securities in the SEC is not for
the Court to determine, but is left to the sound discretion of the
Securities and Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in performing its other
functions under pertinent laws, the Revised Securities Act, under
Section 3 thereof, gives the SEC the power to promulgate such rules
and regulations as it may consider appropriate in the public interest
for the enforcement of the said laws. The second paragraph of
Section 4 of the said law, on the other hand, provides that no
security, unless exempt by law, shall be issued, endorsed, sold,
transferred or in any other manner conveyed to the public, unless
registered in accordance with the rules and regulations that shall be
promulgated in the public interest and for the protection of
investors by the Commission. Presidential Decree No. 902-A, on the
other hand, provides that the SEC, as regulatory agency, has
supervision and control over all corporations and over the securities
market as a whole, and as such, is given ample authority in
determining appropriate policies. Pursuant to this regulatory
authority, the SEC has manifested that it has adopted the policy of
"full material disclosure" where all companies, listed or applying for
listing, are required to divulge truthfully and accurately, all material
information about themselves and the securities they sell, for the
protection of the investing public, and under pain of administrative,
criminal and civil sanctions. In connection with this, a fact is deemed
material if it tends to induce or otherwise effect the sale or purchase
of its securities. 15 While the employment of this policy is recognized
and sanctioned by the laws, nonetheless, the Revised Securities Act
sets substantial and procedural standards which a proposed issuer
of securities must satisfy. 16 Pertinently, Section 9 of the Revised
Securities Act sets forth the possible Grounds for the Rejection of the
registration of a security:
— The Commission may reject a registration
statement and refuse to issue a permit to sell
the securities included in such registration
statement if it finds that —
(1) The registration statement is on its face
incomplete or inaccurate in any material respect
or includes any untrue statement of a material
fact or omits to state a material fact required to
be stated therein or necessary to make the
statements therein not misleading; or
(2) The issuer or registrant —
(i) is not solvent or not in
sound financial condition;
(ii) has violated or has not
complied with the provisions
of this Act, or the rules
promulgated pursuant
thereto, or any order of the
Commission;
(iii) has failed to comply with
any of the applicable
requirements and conditions
that the Commission may, in
the public interest and for
the protection of investors,
impose before the security
can be registered;
(iv) has been engaged or is
engaged or is about to
engage in fraudulent
transaction;
(v) is in any way dishonest or
is not of good repute; or
(vi) does not conduct its
business in accordance with
law or is engaged in a
business that is illegal or
contrary to government rules
and regulations.
(3) The enterprise or the business of the issuer is
not shown to be sound or to be based on sound
business principles;
(4) An officer, member of the board of directors,
or principal stockholder of the issuer is
disqualified to be such officer, director or
principal stockholder; or
(5) The issuer or registrant has not shown to the
satisfaction of the Commission that the sale of its
security would not work to the prejudice of the
public interest or as a fraud upon the purchasers
or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the
lawmakers to make the registration and issuance of securities
dependent, to a certain extent, on the merits of the securities
themselves, and of the issuer, to be determined by the Securities
and Exchange Commission. This measure was meant to protect the
interests of the investing public against fraudulent and worthless
securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The
absolute reliance on the full disclosure method in the registration of
securities is, therefore, untenable. As it is, the Court finds that the
private respondent PALI, on at least two points (nos. 1 and 5) has
failed to support the propriety of the issue of its shares with
unfailing clarity, thereby lending support to the conclusion that the
PSE acted correctly in refusing the listing of PALI in its stock
exchange. This does not discount the effectivity of whatever method
the SEC, in the exercise of its vested authority, chooses in setting the
standard for public offerings of corporations wishing to do so.
However, the SEC must recognize and implement the mandate of
the law, particularly the Revised Securities Act, the provisions of
which cannot be amended or supplanted by mere administrative
issuance.
In resume, the Court finds that the PSE has acted with justified
circumspection, discounting, therefore, any imputation of
arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is justified
by the law and by the circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court
hereby GRANTS the Petition for Review onCertiorari. The Decisions
of the Court of Appeals and the Securities and Exchange Commission
dated July 27, 1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED,
affirming the decision of the Philippine Stock Exchange to deny the
application for listing of the private respondent Puerto Azul Land,
Inc.
SO ORDERED.
G.R. No. L-67626 April 18, 1989
JOSE REMO, JR., petitioner,
vs.
THE HON. INTERMEDIATE APPELLATE COURT and E.B. MARCHA
TRANSPORT COMPANY, INC., represented by APIFANIO B.
MARCHA, respondents.
Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.
GANCAYCO, J.:
A corporation is an entity separate and distinct from its
stockholders. While not in fact and in reality a person, the law treats
a corporation as though it were a person by process of fiction or by
regarding it as an artificial person distinct and separate from its
individual stockholders. 1
However, the corporate fiction or the notion of legal entity may be
disregarded when it "is used to defeat public convenience, justify
wrong, protect fraud, or defend crime" in which instances "the law
will regard the corporation as an association of persons, or in case of
two corporations, will merge them into one." The corporate fiction
may also be disregarded when it is the "mere alter ego or business
conduit of a person." 2 There are many occasions when this Court
pierced the corporate veil because of its use to protect fraud and to
justify wrong. 3 The herein petition for review of a. resolution of the
Intermediate Appellate Court dated February 8, 1984 seeking the
reversal thereof and the reinstatement of its earlier decision dated
June 30, 1983 in AC-G.R. No. 68496-R 4 calls for the application of
the foregoing principles.
In the latter part of December, 1977 the board of directors of Akron
Customs Brokerage Corporation (hereinafter referred to as Akron),
composed of petitioner Jose Remo, Jr., Ernesto Bañares, Feliciano
Coprada, Jemina Coprada, and Dario Punzalan with Lucia Lacaste as
Secretary, adopted a resolution authorizing the purchase of thirteen
(13) trucks for use in its business to be paid out of a loan the
corporation may secure from any lending institution. 5
Feliciano Coprada, as President and Chairman of Akron, purchased
thirteen trucks from private respondent on January 25, 1978 for and
in consideration of P525,000.00 as evidenced by a deed of absolute
sale. 6 In a side agreement of the same date, the parties agreed on a
downpayment in the amount of P50,000.00 and that the balance of
P475,000.00 shall be paid within sixty (60) days from the date of the
execution of the agreement. The parties also agreed that until said
balance is fully paid, the down payment of P50,000.00 shall accrue
as rentals of the 13 trucks; and that if Akron fails to pay the balance
within the period of 60 days, then the balance shall constitute as a
chattel mortgage lien covering said cargo trucks and the parties may
allow an extension of 30 days and thereafter private respondent
may ask for a revocation of the contract and the reconveyance of all
said trucks. 7
The obligation is further secured by a promissory note executed by
Coprada in favor of Akron. It is stated in the promissory note that
the balance shall be paid from the proceeds of a loan obtained from
the Development Bank of the Philippines (DBP) within sixty (60)
days. 8 After the lapse of 90 days, private respondent tried to collect
from Coprada but the latter promised to pay only upon the release
of the DBP loan. Private respondent sent Coprada a letter of demand
dated May 10, 1978. 9 In his reply to the said letter, Coprada
reiterated that he was applying for a loan from the DBP from the
proceeds of which payment of the obligation shall be made. 10
Meanwhile, two of the trucks were sold under a pacto de retro sale
to a certain Mr. Bais of the Perpetual Loans and Savings Bank at
Baclaran. The sale was authorized by a board resolution made in a
meeting held on March 15, 1978. 11
Upon inquiry, private respondent found that no loan application was
ever filed by Akron with DBP. 12
In the meantime, Akron paid rentals of P500.00 a day pursuant to a
subsequent agreement, from April 27, 1978 (the end of the 90-day
period to pay the balance) to May 31, 1978. Thereafter, no more
rental payments were made.
On June 17, 1978, Coprada wrote private respondent begging for a
grace period of until the end of the month to pay the balance of the
purchase price; that he will update the rentals within the week; and
in case he fails, then he will return the 13 units should private
respondent elect to get back the same. 13 Private respondent,
through counsel, wrote Akron on August 1, 1978 demanding the
return of the 13 trucks and the payment of P25,000.00 back rentals
covering the period from June 1 to August 1, 1978. 14
Again, Coprada wrote private respondent on August 8, 1978 asking
for another grace period of up to August 31, 1978 to pay the
balance, stating as well that he is expecting the approval of his loan
application from a certain financing company, and that ten (10)
trucks have been returned to Bagbag, Novaliches. 15 On December
9, 1978, Coprada informed private respondent anew that he had
returned ten (10) trucks to Bagbag and that a resolution was passed
by the board of directors confirming the deed of assignment to
private respondent of P475,000 from the proceeds of a loan
obtained by Akron from the State Investment House, Inc. 16
In due time, private respondent filed a compliant for the recovery of
P525,000.00 or the return of the 13 trucks with damages against
Akron and its officers and directors, Feliciano Coprada, Dario D.
Punzalan, Jemina Coprada, Lucia Lacaste, Wilfredo Layug, Arcadio de
la Cruz, Francisco Clave, Vicente Martinez, Pacifico Dollario and
petitioner with the then Court of First Instance of Rizal. Only
petitioner answered the complaint denying any participation in the
transaction and alleging that Akron has a distinct corporate
personality. He was, however, declared in default for his failure to
attend the pre-trial.
In the meanwhile, petitioner sold all his shares in Akron to Coprada.
It also appears that Akron amended its articles of incorporation
thereby changing its name to Akron Transport International, Inc.
which assumed the liability of Akron to private respondent.
After an ex parte reception of the evidence of the private
respondent, a decision was rendered on October 28, 1980, the
dispositive part of which reads as follows:
Finding the evidence sufficient to prove the case of the plaintiff,
judgment is hereby rendered in favor of the plaintiff and against the
defendants, ordering them jointly and severally to pay;
a — the purchase price of the trucks in the
amount of P525,000.00 with ... legal rate (of
interest) from the filing of the complaint until
the full amount is paid;
b — rentals of Bagbag property at P1,000.00 a
month from August 1978 until the premises is
cleared of the said trucks;
c — attorneys fees of P10,000.00, and
d — costs of suit.
The P50,000.00 given as down payment shall pertain as rentals of
the trucks from June 1 to August 1, 1978 which is P25,000.00 (see
demand letter of Atty. Aniano Exhibit "T") and the remaining
P25,000.00 shall be from August 1, 1978 until the trucks are
removed totally from the place." 17
A motion for new trial filed by petitioner was denied so he appealed
to the then Intermediate Appellate Court (IAC) wherein in due
course a decision was rendered on June 30, 1 983 setting aside the
said decision as far as petitioner is concemed. However, upon a
motion for reconsideration filed by private respondent dent, the
IAC, in a resolution dated February 8,1984, set aside the decision
dated June 30, 1983. The appellate court entered another decision
affirming the appealed decision of the trial court, with costs against
petitioner.
Hence, this petition for review wherein petitioner raises the
following issues:
I. The Intermediate Appellate Court (IAC) erred
in disregarding the corporate fiction and in
holding the petitioner personally liable for the
obligation of the Corporation which decision is
patently contrary to law and the applicable
decision thereon.
II. The Intermediate Appellate Court (IAC)
committed grave error of law in its decision by
sanctioning the merger of the personality of the
corporation with that of the petitioner when the
latter was held liable for the corporate debts. 18
We reverse.
The environmental facts of this case show that there is no cogent
basis to pierce the corporate veil of Akron and hold petitioner
personally liable for its obligation to private respondent. While it is
true that in December, 1977 petitioner was still a member of the
board of directors of Akron and that he participated in the adoption
of a resolution authorizing the purchase of 13 trucks for the use in
the brokerage business of Akron to be paid out of a loan to be
secured from a lending institution, it does not appear that said
resolution was intended to defraud anyone and more particularly
private respondent. It was Coprada, President and Chairman of
Akron, who negotiated with said respondent for the purchase of 13
cargo trucks on January 25, 1978. It was Coprada who signed a
promissory note to guarantee the payment of the unpaid balance of
the purchase price out of the proceeds of a loan he supposedly
sought from the DBP. The word "WE' in the said promissory note
must refer to the corporation which Coprada represented in the
execution of the note and not its stockholders or directors.
Petitioner did not sign the said promissory note so he cannot be
personally bound thereby.
Thus, if there was any fraud or misrepresentation that was foisted
on private respondent in that there was a forthcoming loan from the
DBP when it fact there was none, it is Coprada who should account
for the same and not petitioner.
As to the sale through pacto de retro of the two units to a third
person by the corporation by virtue of a board resolution, petitioner
asserts that he never signed said resolution. Be that as it may, the
sale is not inherently fraudulent as the 13 units were sold through a
deed of absolute sale to Akron so that the corporation is free to
dispose of the same. Of course, it was stipulated that in case of
default in payment to private respondent of the balance of the
consideration, a chattel mortgage lien shag be constituted on the 13
units. Nevertheless, said mortgage is a prior lien as against the pacto
de retro sale of the 2 units.
As to the amendment of the articles of incorporation of Akron
thereby changing its name to Akron Transport International, Inc.,
petitioner alleges that the change of corporate name was in order to
include trucking and container yard operations in its customs
brokerage of which private respondent was duly informed in a
letter. 19Indeed, the new corporation confirmed and assumed the
obligation of the old corporation. There is no indication of an
attempt on the part of Akron to evade payment of its obligation to
private respondent.
There is the fact that petitioner sold his shares in Akron to Coprada
during the pendency of the case. Since petitioner has no personal
obligation to private respondent, it is his inherent right as a
stockholder to dispose of his shares of stock anytime he so desires.
Mention is also made of the alleged "dumping" of 10 units in the
premises of private respondent at Bagbag, Novaliches which to the
mind of the Court does not prove fraud and instead appears to be an
attempt on the part of Akron to attend to its obligations as regards
the said trucks. Again petitioner has no part in this.
If the private respondent is the victim of fraud in this transaction, it
has not been clearly shown that petitioner had any part or
participation in the perpetration of the same. Fraud must be
established by clear and convincing evidence. If at all, the principal
character on whom fault should be attributed is Feliciano Coprada,
the President of Akron, whom private respondent dealt with
personally all through out. Fortunately, private respondent obtained
a judgment against him from the trial court and the said judgment
has long been final and executory.
WHEREFORE, the petition is GRANTED. The questioned resolution of
the Intermediate Appellate Court dated February 8,1984 is hereby
set aside and its decision dated June 30,1983 setting aside the
decision of the trial court dated October 28, 1980 insofar as
petitioner is concemed is hereby reinstated and affirmed, without
costs.
SO ORDERED.
G.R. No. 129459 September 29, 1998
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,
vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE
GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND
DEVELOPMENT CORP., respondents.
PANGANIBAN, J.:
May corporate treasurer, by herself and without any authorization
from he board of directors, validly sell a parcel of land owned by the
corporation?. May the veil of corporate fiction be pierced on the
mere ground that almost all of the shares of stock of the corporation
are owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in
resolving the Petition for Review on Certioraribefore us, assailing the
March 18, 1997 Decision 1 of the Court of Appeals 2 in CA GR CV No.
46801 which, in turn, modified the July 18, 1994 Decision of the
Regional Trial Court of Makati, Metro Manila, Branch 63 3 in Civil
Case No. 89-3511. The RTC dismissed both the Complaint and the
Counterclaim filed by the parties. On the other hand, the Court of
Appeals ruled:
WHEREFORE, premises considered, the appealed
decision is AFFIRMED WITH MODIFICATION
ordering defendant-appellee Nenita Lee
Gruenberg to REFUND or return to plaintiff-
appellant the downpayment of P100,000.00
which she received from plaintiff-appellant.
There is no pronouncement as to costs. 4
The petition also challenges the June 10, 1997 CA Resolution
denying reconsideration. 5
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel
Fabricators, Inc.'s amended complaint alleged
that on 14 February 1989, plaintiff-appellant
entered into an agreement with defendant-
appellee Motorich Sales Corporation for the
transfer to it of a parcel of land identified as Lot
30, Block 1 of the Acropolis Greens Subdivision
located in the District of Murphy, Quezon City.
Metro Manila, containing an area of Four
Hundred Fourteen (414) square meters, covered
by TCT No. (362909) 2876: that as stipulated in
the Agreement of 14 February 1989, plaintiff-
appellant paid the downpayment in the sum of
One Hundred Thousand (P100,000.00) Pesos, the
balance to be paid on or before March 2, 1989;
that on March 1, 1989. Mr. Andres T. Co,
president of plaintiff-appellant corporation,
wrote a letter to defendant-appellee Motorich
Sales Corporation requesting for a computation
of the balance to be paid: that said letter was
coursed through defendant-appellee's broker.
Linda Aduca, who wrote the computation of the
balance: that on March 2, 1989, plaintiff-
appellant was ready with the amount
corresponding to the balance, covered by
Metrobank Cashier's Check No. 004223, payable
to defendant-appellee Motorich Sales
Corporation; that plaintiff-appellant and
defendant-appellee Motorich Sales Corporation
were supposed to meet in the office of plaintiff-
appellant but defendant-appellee's treasurer,
Nenita Lee Gruenberg, did not appear; that
defendant-appellee Motorich Sales Corporation
despite repeated demands and in utter disregard
of its commitments had refused to execute the
Transfer of Rights/Deed of Assignment which is
necessary to transfer the certificate of title; that
defendant ACL Development Corp. is impleaded
as a necessary party since Transfer Certificate of
Title No. (362909) 2876 is still in the name of
said defendant; while defendant JNM Realty &
Development Corp. is likewise impleaded as a
necessary party in view of the fact that it is the
transferor of right in favor of defendant-appellee
Motorich Sales Corporation: that on April 6,
1989, defendant ACL Development Corporation
and Motorich Sales Corporation entered into a
Deed of Absolute Sale whereby the former
transferred to the latter the subject property;
that by reason of said transfer, the Registry of
Deeds of Quezon City issued a new title in the
name of Motorich Sales Corporation,
represented by defendant-appellee Nenita Lee
Gruenberg and Reynaldo L. Gruenberg, under
Transfer Certificate of Title No. 3571; that as a
result of defendants-appellees Nenita Lee
Gruenberg and Motorich Sales Corporation's bad
faith in refusing to execute a formal Transfer of
Rights/Deed of Assignment, plaintiff-appellant
suffered moral and nominal damages which may
be assessed against defendants-appellees in the
sum of Five Hundred Thousand (500,000.00)
Pesos; that as a result of defendants-appellees
Nenita Lee Gruenberg and Motorich Sales
Corporation's unjustified and unwarranted
failure to execute the required Transfer of
Rights/Deed of Assignment or formal deed of
sale in favor of plaintiff-appellant, defendants-
appellees should be assessed exemplary
damages in the sum of One Hundred Thousand
(P100,000.00) Pesos; that by reason of
defendants-appellees' bad faith in refusing to
execute a Transfer of Rights/Deed of Assignment
in favor of plaintiff-appellant, the latter lost the
opportunity to construct a residential building in
the sum of One Hundred Thousand
(P100,000.00) Pesos; and that as a consequence
of defendants-appellees Nenita Lee Gruenberg
and Motorich Sales Corporation's bad faith in
refusing to execute a deed of sale in favor of
plaintiff-appellant, it has been constrained to
obtain the services of counsel at an agreed fee of
One Hundred Thousand (P100,000.00) Pesos
plus appearance fee for every appearance in
court hearings.
In its answer, defendants-appellees Motorich
Sales Corporation and Nenita Lee Gruenberg
interposed as affirmative defense that the
President and Chairman of Motorich did not sign
the agreement adverted to in par. 3 of the
amended complaint; that Mrs. Gruenberg's
signature on the agreement (ref: par. 3 of
Amended Complaint) is inadequate to bind
Motorich. The other signature, that of Mr.
Reynaldo Gruenberg, President and Chairman of
Motorich, is required: that plaintiff knew this
from the very beginning as it was presented a
copy of the Transfer of Rights (Annex B of
amended complaint) at the time the Agreement
(Annex B of amended complaint) was signed;
that plaintiff-appellant itself drafted the
Agreement and insisted that Mrs. Gruenberg
accept the P100,000.00 as earnest money; that
granting, without admitting, the enforceability of
the agreement, plaintiff-appellant nonetheless
failed to pay in legal tender within the stipulated
period (up to March 2, 1989); that it was the
understanding between Mrs. Gruenberg and
plaintiff-appellant that the Transfer of
Rights/Deed of Assignment will be signed only
upon receipt of cash payment; thus they agreed
that if the payment be in check, they will meet at
a bank designated by plaintiff-appellant where
they will encash the check and sign the Transfer
of Rights/Deed. However, plaintiff-appellant
informed Mrs. Gruenberg of the alleged
availability of the check, by phone, only after
banking hours.
On the basis of the evidence, the court a
quo rendered the judgment appealed from[,]
dismissing plaintiff-appellant's complaint, ruling
that:
The issue to be resolved is:
whether plaintiff had the
right to compel defendants
to execute a deed of
absolute sale in accordance
with the agreement of
February 14, 1989: and if so,
whether plaintiff is entitled
to damage.
As to the first question, there
is no evidence to show that
defendant Nenita Lee
Gruenberg was indeed
authorized by defendant
corporation. Motorich Sales,
to dispose of that property
covered by T.C.T. No.
(362909) 2876. Since the
property is clearly owned by
the corporation. Motorich
Sales, then its disposition
should be governed by the
requirement laid down in
Sec. 40. of the Corporation
Code of the Philippines, to
wit:
Sec. 40, Sale or other disposition of assets. Subject to the provisions
of existing laws on illegal combination and monopolies, a
corporation may by a majority vote of its board of directors . . . sell,
lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets including its goodwill . . .
when authorized by the vote of the stockholders representing at
least two third (2/3) of the outstanding capital stock . . .
No such vote was obtained by defendant Nenita Lee Gruenberg for
that proposed sale[;] neither was there evidence to show that the
supposed transaction was ratified by the corporation. Plaintiff
should have been on the look out under these circumstances. More
so, plaintiff himself [owns] several corporations (tsn dated August
16, 1993, p. 3) which makes him knowledgeable on corporation
matters.
Regarding the question of damages, the Court likewise, does not
find substantial evidence to hold defendant Nenita Lee Gruenberg
liable considering that she did not in anyway misrepresent herself to
be authorized by the corporation to sell the property to plaintiff (tsn
dated September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders judgment
DISMISSING the complaint at instance for lack of merit.
"Defendants" counterclaim is also DISMISSED for lack of basis.
(Decision, pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced
hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and
between:
MOTORICH SALES CORPORATION, a corporation duly organized and
existing under and by virtue of Philippine Laws, with principal office
address at 5510 South Super Hi-way cor. Balderama St., Pio del Pilar.
Makati, Metro Manila, represented herein by its Treasurer, NENITA
LEE GRUENBERG, hereinafter referred to as the TRANSFEROR;
— and —
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly 1. Appellant is entitled to
organized and existing under and by virtue of the laws of the compel the appellees to
Philippines, with principal office address at Sumulong Highway, execute a Deed of Absolute
Barrio Mambungan, Antipolo, Rizal, represented herein by its Sale in accordance with the
President, ANDRES T. CO, hereinafter referred to as the Agreement of February 14,
TRANSFEREE. 1989,

WITNESSETH, That: 2. Plaintiff is entitled to

WHEREAS, the TRANSFEROR is the owner of a parcel of land
identified as Lot 30 Block 1 of the ACROPOLIS GREENS SUBDIVISION
located at the District of Murphy, Quezon City, Metro Manila,
containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE
METERS, covered by a TRANSFER OF RIGHTS between JNM Realty &
Dev. Corp. as the Transferor and Motorich Sales Corp. as the
Transferee;
damages. 7
As stated earlier, the Court of Appeals debunked petitioner's
arguments and affirmed the Decision of the RTC with the
modification that Respondent Nenita Lee Gruenberg was ordered to
refund P100,000 to petitioner, the amount remitted as
"downpayment" or "earnest money." Hence, this petition before
us. 8

NOW, THEREFORE, for and in consideration of the foregoing The Issues

premises, the parties have agreed as follows:
Before this Court, petitioner raises the following issues:
1. That the purchase price shall be at FIVE THOUSAND TWO
HUNDRED PESOS (P5,200.00) per square meter; subject to the I. Whether or not the
following terms: doctrine of piercing the veil
of corporate fiction is
a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS applicable in the instant case
(P100,000.00), will be paid upon the execution of this agreement
and shall form part of the total purchase price; II. Whether or not the
appellate court may consider
b. Balance shall be payable on or before March 2, 1989; matters which the parties
failed to raise in the lower
2. That the monthly amortization for the month of February 1989 court
shall be for the account of the Transferor; and that the monthly
amortization starting March 21, 1989 shall be for the account of the III. Whether or not there is a
Transferee; valid and enforceable
contract between the
The transferor warrants that he [sic] is the lawful owner of the petitioner and the
above-described property and that there [are] no existing liens respondent corporation
and/or encumbrances of whatsoever nature;
IV. Whether or not the Court
In case of failure by the Transferee to pay the balance on the date of Appeals erred in holding
specified on 1, (b), the earnest money shall be forfeited in favor of that there is a valid
the Transferor. correction/substitution of
answer in the transcript of
stenographic note[s].
That upon full payment of the balance, the TRANSFEROR agrees to
execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in favor of
the TRANSFEREE. V. Whether or not
respondents are liable for
damages and attorney's
IN WITNESS WHEREOF, the parties have hereunto set their hands
fees 9
this 14th day of February, 1989 at Greenhills, San Juan, Metro
Manila, Philippines.
The Court synthesized the foregoing and will thus discuss
them seriatim as follows:
MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL
FABRICATORS
1. Was there a valid contract
of sale between petitioner
TRANSFEROR TRANSFEREE
and Motorich?

[SGD.] [SGD.]
2. May the doctrine of
piercing the veil of corporate
By. NENITA LEE GRUENBERG By: ANDRES T. CO fiction be applied to
Motorich?
Treasurer President
3. Is the alleged alteration of
Signed In the presence of: Gruenberg's testimony as
recorded in the transcript of
[SGD.] stenographic notes material
[SGD.] to the disposition of this
case?
————————————— ————————
——— 6 4. Are respondents liable for
damages and attorney's
fees?
In its recourse before the Court of Appeals, petitioner insisted:
The Court's Ruling
The petition is devoid of merit.
First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that
on February 14, 1989, it entered through its president, Andres Co,
into the disputed Agreement with Respondent Motorich Sales
Corporation, which was in turn allegedly represented by its
treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen
Gruenberg and Co affixed their signatures on the contract they both
consented to be bound by the terms thereof." Ergo, petitioner
contends that the contract is binding on the two corporations. We
do not agree.
True, Gruenberg and Co signed on February 14, 1989, the
Agreement, according to which a lot owned by Motorich Sales
Corporation was purportedly sold. Such contract, however, cannot
bind Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its
stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express
authorization from the corporation's board of directors. 10 Section
23 of BP 68, otherwise known as the Corporation Code of the
Philippines, provides;
Sec. 23. The Board of Directors or Trustees. —
Unless otherwise provided in this Code, the
corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trustees to be elected from among the holders
of stocks, or where there is no stock, from
among the members of the corporation, who
shall hold office for one (1) year and until their
successors are elected and qualified.
Indubitably, a corporation may act only through its board of
directors or, when authorized either by its bylaws or by its board
resolution, through its officers or agents in the normal course of
business. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the
articles of incorporation, bylaws, or relevant provisions of
law. 11 Thus, this Court has held that "a corporate officer or agent
may represent and bind the corporation in transactions with third
persons to the extent that the authority to do so has been conferred
upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the
particular business, are incidental to, or may be implied from, the
powers intentionally conferred, powers added by custom and usage,
as usually pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused persons dealing with
the officer or agent to believe that it has conferred." 12
Furthermore, the Court has also recognized the rule that "persons
dealing with an assumed agent, whether the assumed agency be a
general or special one bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted,
the burden of proof is upon them to establish it (Harry Keeler v.
Rodriguez, 4 Phil. 19)." 13 Unless duly authorized, a treasurer, whose
powers are limited, cannot bind the corporation in a sale of its
assets. 14
In the case at bar, Respondent Motorich categorically denies that it
ever authorized Nenita Gruenberg, its treasurer, to sell the subject
parcel of land. 15 Consequently, petitioner had the burden of proving
that Nenita Gruenberg was in fact authorized to represent and bind
Motorich in the transaction. Petitioner failed to discharge this
burden. Its offer of evidence before the trial court contained no
proof of such authority. 16 It has not shown any provision of said
respondent's articles of incorporation, bylaws or board resolution to
prove that Nenita Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free
petitioner from the responsibility of ascertaining the extent of her
authority to represent the corporation. Petitioner cannot assume
that she, by virtue of her position, was authorized to sell the
property of the corporation. Selling is obviously foreign to a
corporate treasurer's function, which generally has been described
as "to receive and keep the funds of the corporation, and to disburse
them in accordance with the authority given him by the board or the
properly authorized officers."17
Neither was such real estate sale shown to be a normal business
activity of Motorich. The primary purpose of Motorich is marketing,
distribution, export and import in relation to a general
merchandising business. 18 Unmistakably, its treasurer is not cloaked
with actual or apparent authority to buy or sell real property, an
activity which falls way beyond the scope of her general authority.
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
Art. 1874. When a sale of a piece of land or any
interest therein is through an agent, the
authority of the latter shall be in writing:
otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are
necessary in the following case:
xxx xxx xxx
(5) To enter any contract by which the
ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable
consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich has ratified
said contract of sale because of its "acceptance of benefits," as
evidenced by the receipt issued by Respondent
Gruenberg. 19 Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of
their authority are binding on the corporation. But when these
officers exceed their authority, their actions "cannot bind the
corporation, unless it has ratified such acts or is estopped from
disclaiming them." 20
In this case, there is a clear absence of proof that Motorich ever
authorized Nenita Gruenberg, or made it appear to any third person
that she had the authority, to sell its land or to receive the earnest
money. Neither was there any proof that Motorich ratified,
expressly or impliedly, the contract. Petitioner rests its argument on
the receipt which, however, does not prove the fact of ratification.
The document is a hand-written one, not a corporate receipt, and it
bears only Nenita Gruenberg's signature. Certainly, this document
alone does not prove that her acts were authorized or ratified by
Motorich.
Art. 1318 of the Civil Code lists the requisites of a valid and
perfected contract: "(1) consent of the contracting parties; (2) object
certain which is the subject matter of the contract; (3) cause of the
obligation which is established." As found by the trial court 21 and
affirmed by the Court of Appeals, 22 there is no evidence that
Gruenberg was authorized to enter into the contract of sale, or that
the said contract was ratified by Motorich. This factual finding of the
two courts is binding on this Court. 23 As the consent of the seller
was not obtained, no contract to bind the obligor was perfected.
Therefore, there can be no valid contract of sale between petitioner
and Motorich.
Because Motorich had never given a written authorization to
Respondent Gruenberg to sell its parcel of land, we hold that the
February 14, 1989 Agreement entered into by the latter with
petitioner is void under Article 1874 of the Civil Code. Being
inexistent and void from the beginning, said contract cannot be
ratified. 24
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich
should be pierced, because the latter is a close corporation. Since
"Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all
or almost all or 99.866% to be accurate, of the subscribed capital
stock" 25 of Motorich, petitioner argues that Gruenberg needed no
authorization from the board to enter into the subject contract. 26 It
adds that, being solely owned by the Spouses Gruenberg, the
company can treated as a close corporation which can be bound by
the acts of its principal stockholder who needs no specific authority.
The Court is not persuaded.
First, petitioner itself concedes having raised the issue
belatedly, 27 not having done so during the trial, but only when it
filed its sur-rejoinder before the Court of Appeals. 28 Thus, this Court
cannot entertain said issue at this late stage of the proceedings. It is
well-settled the points of law, theories and arguments not brought
to the attention of the trial court need not be, and ordinarily will not
be, considered by a reviewing court, as they cannot be raised for the
first time on appeal. 29Allowing petitioner to change horses in
midstream, as it were, is to run roughshod over the basic principles
of fair play, justice and due process.
Second, even if the above mentioned argument were to be
addressed at this time, the Court still finds no reason to uphold it.
True, one of the advantages of a corporate form of business
organization is the limitation of an investor's liability to the amount
of the investment. 30 This feature flows from the legal theory that a
corporate entity is separate and distinct from its stockholders.
However, the statutorily granted privilege of a corporate veil may be
used only for legitimate purposes. 31 On equitable considerations,
the veil can be disregarded when it is utilized as a shield to commit
fraud, illegality or inequity; defeat public convenience; confuse
legitimate issues; or serve as a mere alter ego or business conduit of
a person or an instrumentality, agency or adjunct of another
corporation. 32
Thus, the Court has consistently ruled that "[w]hen the fiction is
used as a means of perpetrating a fraud or an illegal act or as 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." 33
We stress that the corporate fiction should be set aside when it
becomes a shield against liability for fraud, illegality or inequity
committed on third persons. The question of piercing the veil of
corporate fiction is essentially, then, a matter of proof. In the
present case, however, the Court finds no reason to pierce the
corporate veil of Respondent Motorich. Petitioner utterly failed to
establish that said corporation was formed, or that it is operated, for
the purpose of shielding any alleged fraudulent or illegal activities of
its officers or stockholders; or that the said veil was used to conceal
fraud, illegality or inequity at the expense of third persons like
petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it
is not. Section 96 of the Corporation Code defines a close
corporation as follows:
Sec. 96. Definition and Applicability of Title. — A
close corporation, within the meaning of this
Code, is one whose articles of incorporation
provide that: (1) All of the corporation's issued
stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a
specified number of persons, not exceeding
twenty (20); (2) All of the issued stock of all
classes shall be subject to one or more specified
restrictions on transfer permitted by this Title;
and (3) The corporation shall not list in any stock
exchange or make any public offering of any of
its stock of any class. Notwithstanding the
foregoing, a corporation shall be deemed not a
close corporation when at least two-thirds (2/3)
of its voting stock or voting rights is owned or
controlled by another corporation which is not a
close corporation within the meaning of this
Code. . . . .
The articles of incorporation 34 of Motorich Sales Corporation does
not contain any provision stating that (1) the number of
stockholders shall not exceed 20, or (2) a preemption of shares is
restricted in favor of any stockholder or of the corporation, or (3)
listing its stocks in any stock exchange or making a public offering of
such stocks is prohibited. From its articles, it is clear that
Respondent Motorich is not a close corporation. 35 Motorich does
not become one either, just because Spouses Reynaldo and Nenita
Gruenberg owned 99.866% of its subscribed capital stock. The
"[m]ere ownership by a single stockholder or by another corporation
of all or capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personalities." 36 So,
too, a narrow distribution of ownership does not, by itself, make a
close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of
Appeals 37 wherein the Court ruled that ". . . petitioner corporation is
classified as a close corporation and, consequently, a board
resolution authorizing the sale or mortgage of the subject property
is not necessary to bind the corporation for the action of its
president." 38 But the factual milieu in Dulay is not on all fours with
the present case. In Dulay, the sale of real property was contracted
by the president of a close corporation with the knowledge and
acquiescence of its board of directors. 39 In the present case,
Motorich is not a close corporation, as previously discussed, and the
agreement was entered into by the corporate treasurer without the
knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where "an
action by a director, who singly is the controlling stockholder, may
be considered as a binding corporate act and a board action as
nothing more than a mere formality." 40 The present case, however,
is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg
own "almost 99.866%" of Respondent Motorich.41 Since Nenita is
not the sole controlling stockholder of Motorich, the
aforementioned exception does not apply. Grantingarguendo that
the corporate veil of Motorich is to be disregarded, the subject
parcel of land would then be treated as conjugal property of
Spouses Gruenberg, because the same was acquired during their
marriage. There being no indication that said spouses, who appear
to have been married before the effectivity of the Family Code, have
agreed to a different property regime, their property relations would
be governed by conjugal partnership of gains. 42 As a consequence,
Nenita Gruenberg could not have effected a sale of the subject lot
because "[t]here is no co-ownership between the spouses in the
properties of the conjugal partnership of gains. Hence, neither
spouse can alienate in favor of another his or interest in the
partnership or in any property belonging to it; neither spouse can
ask for a partition of the properties before the partnership has been
legally dissolved." 43
Assuming further, for the sake of argument, that the spouses'
property regime is the absolute community of property, the sale
would still be invalid. Under this regime, "alienation of community
property must have the written consent of the other spouse or he
authority of the court without which the disposition or encumbrance
is void." 44 Both requirements are manifestly absent in the instant
case.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the
transcript of stenographic notes (TSN):
 Q Did you ever represent to
Mr. Co that you were
authorized by the
corporation to sell the
property?
A Yes, sir. 45
Petitioner claims that the answer "Yes" was crossed out, and, in its
place was written a "No" with an initial scribbled above it. 46 This,
however, is insufficient to prove that Nenita Gruenberg was
authorized to represent Respondent Motorich in the sale of its
immovable property. Said excerpt be understood in the context of
her whole testimony. During her cross-examination. Respondent
Gruenberg testified:
Q So, you signed in your
capacity as the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all
along that you [were] not
authorized?
A Yes, sir.
Q You stated on direct
examination that you did not
represent that you were
authorized to sell the
property?
A Yes, sir.
Q But you also did not say
that you were not authorized
to sell the property, you did
not tell that to Mr. Co, is that
correct?
A That was not asked of me.
Q Yes, just answer it.
A I just told them that I was
the treasurer of the
corporation and it [was] also
the president who [was] also
authorized to sign on behalf
of the corporation.
Q You did not say that you
were not authorized nor did
you say that you were
authorized?
A Mr. Co was very interested
to purchase the property and
he offered to put up a
P100,000.00 earnest money
at that time. That was our
first meeting. 47
Clearly then, Nenita Gruenberg did not testify that Motorich had
authorized her to sell its property. On the other hand, her testimony
demonstrates that the president of Petitioner Corporation, in his
great desire to buy the property, threw caution to the wind by
offering and paying the earnest money without first verifying
Gruenberg's authority to sell the lot.
Fourth Issue:
Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's fees, alleging
that "[i]n an utter display of malice and bad faith, respondents
attempted and succeeded in impressing on the trial court and [the]
Court of Appeals that Gruenberg did not represent herself as
authorized by Respondent Motorich despite the receipt issued by
the former specifically indicating that she was signing on behalf of
Motorich Sales Corporation. Respondent Motorich likewise acted in
bad faith when it claimed it did not authorize Respondent
Gruenberg and that the contract [was] not binding, [insofar] as it
[was] concerned, despite receipt and enjoyment of the proceeds of
Gruenberg's act." 48Assuming that Respondent Motorich was not a
party to the alleged fraud, petitioner maintains that Respondent
Gruenberg should be held liable because she "acted fraudulently
and in bad faith [in] representing herself as duly authorized by
[R]espondent [C]orporation." 49
As already stated, we sustain the findings of both the trial and the
appellate courts that the foregoing allegations lack factual bases.
Hence, an award of damages or attorney's fees cannot be justified.
The amount paid as "earnest money" was not proven to have
redounded to the benefit of Respondent Motorich. Petitioner claims
that said amount was deposited to the account of Respondent
Motorich, because "it was deposited with the account of Aren
Commercial c/o Motorich Sales Corporation." 50 Respondent
Gruenberg, however, disputes the allegations of petitioner. She
testified as follows:
Q You voluntarily accepted
the P100,000.00, as a matter
of fact, that was encashed,
the check was encashed.
A Yes. sir, the check was paid
in my name and I deposit[ed]
it.
Q In your account?
A Yes, sir. 51
In any event, Gruenberg offered to return the amount to
petitioner ". . . since the sale did not push through." 52
Moreover, we note that Andres Co is not a neophyte in the world of
corporate business. He has been the president of Petitioner
Corporation for more than ten years and has also served as chief
executive of two other corporate entities. 53 Co cannot feign
ignorance of the scope of the authority of a corporate treasurer such
as Gruenberg. Neither can he be oblivious to his duty to ascertain
the scope of Gruenberg's authorization to enter into a contract to
sell a parcel of land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is unsubstantiated
and fails to persuade the Court. Indubitably, petitioner appears to be
the victim of its own officer's negligence in entering into a contract
with and paying an unauthorized officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita
Gruenberg should be ordered to return to petitioner the amount she
received as earnest money, as "no one shall enrich himself at the
expense of another." 54 a principle embodied in Article 2154 of Civil
Code. 55 Although there was no binding relation between them,
petitioner paid Gruenberg on the mistaken belief that she had the
authority to sell the property of Motorich. 56 Article 2155 of Civil
Code provides that "[p]ayment by reason of a mistake in the
contruction or application of a difficult question of law may come
within the scope of the preceding article."
WHEREFORE, the petition is hereby DENIED and the assailed
Decision is AFFIRMED.
SO ORDERED.
G.R. No. 67125 August 24 1990
PHILIPPINE VETERANS BANK EMPLOYEES UNION-NUBE, DOMINGO
C. LOPEZ, HERMAN B. PASILIAO FELIZARDO B. SARAPAT, LADY LYDIA
B. CORNISTA, ELIZABETH S. KARASIG, EDUARDO C. NIEVERA,
NORMAN T. BAYODA, REGINO V. TAGUIAM, ROMULO G. GARCIA,
MANUEL A. LAMAN, EDUARDO SJ. BELMONTE, HERNANI B.
LIWANAG, EDUARDO P. CRUZ, DANILO N. MENDOZA, ELSA J.
SILVERIO, REGINO V. TAGUIAM, JR., ALBERT G. MALAPIT, MANUEL B.
GARCIA, and the Bank Employees listed in Annex "A" of this
Petition, petitioners,
vs.
THE PHILIPPINE VETERANS BANK Now renamed PHILIPPINE
MILITARY AND VETERANS BANK, GENERAL FABIAN VER in his
capacity as Chairman of the Board of Directors of the Philippine
Veterans Bank, and of the Board of Trustees of the Armed Forces of
the Philippines Retirement and Separation Benefits System, and
RAFAEL ARNALDO in his capacity as President of the Philippine
Veterans Bank,respondents.
G.R. No. 82337 August 24,1990
SIMEON C. MEDALLA, GREGORIO VENTURANZA, JOSE P. JUANILLO,
RAMON P. MIRANDA, ENRIQUE H.R. ABILA, PEDRO ACIERTO,
SILVINO AGUDO, SANTIAGO FERNANDEZ, JUAN P. ROSETE, MAXIMO
G. AQUINO, GREGORIO C. DARROLES, ISMAEL T. ESPIRITU, ERNESTO
Y. GUEVARRA, MARIANO F. INFANTE, VENERANDO E. MANZO,
VICENTE G. VILLADOLID, GUILLERMO A. CRUZ, JORGE MARIANO,
PASCUAL SARMIENTO, RAMON P. MENDOZA, PEDRO GABRIEL,
ANTONIO A. LIM, MIGUEL T. MARCOS, TOMAS T. NUFABLE,
MARIANO ORTIZ, DOMINGO C. OCTAVO, MANUEL R. RAMOS,
LEONCIO MANALO, DAYAN S. MAMACO, CORNELIO D. CAUNAR,
MAURO DE LA CRUZ, FIDEL T. VIZMANOS, FELIPE L. VICENCIO,
DAMIAN S. VITO CRUZ, JUAN LOMBREDAS, MARINA BAUTISTA,
SEGUNDO M. ROSALES, CECLONDO CIEGO, CECILIO MIRANDA,
FERNANDO APOSTOL, ANICETO R. NARCA, CARLOS B. LASMARIAS,
RICARTE G. REYES, P.D. DELLOSON, LORETO BANTONIO ERNESTO D.
LLAGUNO, CONSTANCIO SEBASTIAN, ELEUTERIO R. VALENZUELA,
ISIDRO A. BATHAN, LEON G. NOLLIDO, in representation of the
remainder of the 510,000 veterans or their heirs, as defined in R.A.
3518, and the PHILIPPINE VETERANS BANK, petitioners,
vs.
CENTRAL BANK OF THE PHILIPPINES, LIQUIDATOR OF THE
PHILIPPINE VETERANS BANK, THE LIQUIDATION COURT (RTC,
BRANCH 39, MANILA), SECRETARY OF THE BUDGET and THE
NATIONAL TREASURER, respondents.
CRUZ, J.:
The Philippine Veterans Bank was created in 1963 with the hope
that it would ensure the economic future and perhaps even
prosperity of the hundreds of thousands of war veterans who were
to be its stockholders. For a while the vision grew, but in time it
dimmed and finally faded as the Bank found itself enmeshed in
financial difficulties that threatened its very survival. Now the dream
is in tatters. Efforts are at present being taken to piece together its
severed sinews but it is doubtful if the Bank will ever be whole
again.
I finance several programs and projects. And on June 11, 1990,
The trouble began when on April 10, 1983, the Bank was placed
under receivership by virtue of Resolution No. 334 of the Monetary
Board of the Central Bank. The reason was the precarious condition
of the Bank. A year later, on April 26, 1984, the Philippine Veterans
Bank Employees Union questioned the retrenchment and
reorganization program of the Bank and, on the ground of security
of tenure, prayed that the said program be prohibited. In its
petition, which was docketed as G.R. No. 67125, the Union also
asked for a temporary restraining order, which was issued on May 9,
1984. Subsequently, while the case was pending, the Monetary
Board ordered the liquidation of the Bank by Resolution No. 612
dated June 7, 1985, after finding that the Bank had incurred an
outstanding liability of P540,835,860.79. This order was opposed by
the Union in a supplemental petition for prohibition with
preliminary injunction filed on September 25, 1985. On November
26,1985, the Veterans Federation of the Philippines entered the
picture and filed with leave of court a petition in intervention which,
besides echoing the original petition in opposing the liquidation,
asserted the additional claim that it was in the process of
formulating plans for the rehabilitation and eventual expansion of
the Bank. This was followed by an ancillary petition for the
immediate payment of the wage or salary increase ordered by the
NLRC in its resolution dated September 17,1985. On March 26,1987,
a writ of preliminary injunction was issued by this Court reading as
follows:
NOW THEREFORE, effective immediately and until further orders
from this Court, you (Respondent Central Bank of the Philippines,
and PVB Liquidator), your agents, representatives, and/or any
person or persons acting upon your orders or in your place or stead,
are hereby ENJOINED from liquidating the Phil. Veterans Bank and
from taking or pursuing any act or transaction in pursuance of such
liquidation, including sales or other disposal of properties of
whatever kind, or disbursing PVB funds, except those incurred in the
course of ordinary administration of the affairs of the bank,
including payment of accrued and unpaid claims of PVB Employees
under the 1982-1985 CBA, all of which should be subject to the prior
approval of the respondent liquidation court.
On March 18,1988, an original petition for restitution and for
extraordinary and equitable writs was filed by Simeon Medalla et
al. in their own right and "on behalf of the remaining 510,000 World
War II veterans or their heirs." It sought inter alia a judicial
declaration that the petitioners were entitled to the ownership,
possession and control of the Bank and an order restraining the
Central Bank from disposing of the assets of the Bank or making any
disbursements therefrom except for ordinary administrative
expenses and for the payment of accrued wages and other benefits
of personnel as approved by the liquidator court. This petition was
docketed as G.R. No. 82337 and consolidated with G.R. No. 67125.
Earlier, on June 11, 1987, then Judge Abelardo M. Dayrit of the
Regional Trial Court of Manila had ordered the payment of the
claims of the employees amounting to P37,920,310.82. This was
followed on October 21, 1988, by another order issued by the same
court for the payment of retirement benefits to two former board
members of the Bank, namely, Agustin Marking and Jaime S. Mejia.
Upon the representations of the petitioners, however, we prevented
enforcement of this order with our temporary restraining order
dated January 12, 1989.
On December 15, 1988, the writ of preliminary injunction dated
March 26,1987, was amended "to exclude from its coverage the sale
or disposal by the Central Bank or the Bank Liquidator of the
acquired assets of the PVB." This was done in response to petitions
filed by several persons seeking to redeem or repurchase the
properties which had earlier been purchased by the Bank through
foreclosure sales. 1
On August 25, 1989, another ancillary petition was filed for the
immediate payment of backwages of the Bank personnel on the
regular payroll as of June 1985 equivalent to five months' gross
salary. On May 25, 1990, the City Government of Davao filed a
motion to lift the preliminary injunction dated March 26, 1987, with
respect to its deposit of P3,700,000, which it wanted to withdraw to
Dolores V. Molina filed her own motion to withdraw her deposit of
P1,l00,000.00.
II
The Court has purposely delayed resolution of these cases in the
hope that it would not be necessary to do so in view of the efforts
being taken by the Executive Department for the rehabilitation of
the Bank. The agency in charge of this matter is the Special
Presidential Committee on the Philippine Veterans Bank, which was
created by Adm. Order No. 29 dated July 10, 1987, and renewed by
Adm. Order No. 62 dated February 23, 1988 and by Adm. Order No.
90 dated September 2, 1988, to study the financial condition of the
Bank and determine the feasibility of its rehabilitation. However,
although we may assume that the Committee has been assiduously
pursuing its objectives and while there are optimistic statements
every now and then that the Bank will be reopening soon, that
prospect does not really seem to be in sight yet. We have therefore
decided to finally resolve these cases, applying a judicial solution
which, when all is said and done, will still be less acceptable than a
practical administrative settlement.
III
The basic issue in these petitions is whether the Central Bank has
the power to liquidate the Philippine Veterans Bank.
The petitioners dispute this authority. In G.R. No. 67125, they claim
that as the Bank was created by a special law, a contractual
relationship now exists between the Government and the
stockholders of the Bank that cannot be disturbed without violation
of the impairment clause. The acceptance of the benefits of that law
by the petitioners had conferred a vested right on them that cannot
now be withdrawn without their consent as this would constitute a
deprivation of their property without due process of law. Assuming
that such benefits could be validly revoked, this cannot be done by
the Central Bank only but by the legislature itself which conferred
the franchise on the Bank in the first place. Moreover, the Central
Bank cannot exercise any authority over the Bank because the latter
is itself also a government bank with the same status as the
Development Bank of the Philippines, the Land Bank of the
Philippines, and the Philippine National Bank. The Central Bank has
no control over these government lending institutions.
We sustain the position of the respondents that these arguments
are not well-taken.
The mere fact that the Bank was created by special law does not
confer upon it extraordinary privileges over and above those
granted similar charters like the Development Bank of the
Philippines and the Land Bank of the Philippines. As a lending
institution, it is part of the banking system and therefore covered by
the regulatory power exercised over such entities by the Central
Bank. Such authority is expressly provided for in the Central Bank
Act, as follows:
Sec. 25. Creation of the appropriate
departments. — In order to assure the
observance of this Act and of other pertinent
laws, and of the rules and regulations of the
Monetary Board, the Central Bank shall have
appropriate supervising and examining
departments which shall be charged with the
supervision and periodic or special examinations
of banking institutions operating in the
Philippines, including all Government credit
institutions, including their subsidiaries and
affiliates of non-bank financial intermediaries,
and subsidiaries and affiliates of non-bank
financial intermediaries performing quasi-
banking functions: . . . The supervising and/or
examining departments shall discharge their
responsibilities in accordance with the
instructions of the Monetary Board.
The department heads and the examiners of the
supervising and/or examining departments are
hereby authorized to administer oaths to any
director, officer, or employee of any institution
under their respective supervision or subject to
their examination and to compel the
presentation of all books, documents, papers or
records necessary in their judgment to ascertain
the facts relative to the true condition of any
institution as well as the books and records of
persons and entities relative to or in connection
with the operations, activities or transactions of
the institution under examination.
No restraining order or injunction shall be issued
by the court enjoining the Central Bank from
examining any institution subject to supervision
or examination by the Central Bank, unless there
is convincing proof that the action of the Central
Bank is plainly arbitrary and made in bad faith
and the petitioner or plaintiff files with the clerk
or judge of the court in which the action is
pending a bond executed, in favor of the Central
Bank, in an amount to be fixed by the court. The
restraining order or injunction shall be refused
or, if granted, shall be dissolved upon filing by
the Central Bank of a bond, which shall be in the
form of cash or Central Bank cashier's check, in
an amount twice the amount of the bond of the
petitioner or plaintiff conditioned that it will pay
the damages which the petitioner or plaintiff
may suffer by the refusal or the dissolution of
the injunction. The provisions of Rule 58 of the
New Rules of Court insofar as they are applicable
and not inconsistent with the provisions of this
Section shall govern the issuance and dissolution
of the restraining order or injunction
contemplated in this Section.
SEC. 25-A. — The department heads and the
examiners of the supervising and examining
departments, in the conduct of the periodic or
special examination of banking institutions may
be specifically authorized by the Monetary Board
to examine, inquire or look into all deposits of
whatever nature with banking institutions in the
Philippines including investments in debt
instruments issued by the Government of the
Philippines, its political subdivisions and its
instrumentalities, after being satisfied that there
is reasonable ground to believe that a bank fraud
or serious irregularity has been or is being
committed and that it is necessary to look into
the deposit to establish such fraud or
irregularity.
SEC. 28. Examination and fees. — It shall be the
duty of the head of the appropriate supervising
and examining department, personally or by
deputy, at least once in every twelve months,
and at such other times as either he or the
Monetary Board may deem expedient, to make
an examination of the books of every banking
institution within the purview of this Act and
make a report on the same to the Monetary
Board.
Every such institution shall afford to the head of
the appropriate supervising and examining
departments and to his authorized deputies full
opportunity to examine its books, cash and
available assets and general condition at any
time when requested so to do by the Central
Bank: Provided, however, That none of the
reports and other papers relative to such
examinations shall be open to inspection by the
public except insofar as such publicity is
incidental to the proceeding hereinafter
authorized or is necessary for the prosecution of
violations n connection with the business of such
institutions. . . .
SEC. 28-A. Appointment of conservator. —
Whenever, on the basis of a report submitted by
the appropriate supervising or examining
department, the Monetary Board finds that a
bank or a non-bank financial intermediary
performing quasi-banking functions is in a state
of continuing inability or unwillingness to
maintain a condition of liquidity deemed
adequate to protect the interest of depositors
and creditors, the Monetary Board may appoint
a conservator to take charge of the assets,
liabilities, and the management of that
institution, collect all monies and debts due said
institution and exercise all powers necessary to
preserve the assets of the institution, reorganize
the management thereof, and restore its
viability. He shall have the power to overrule or
revoke the actions of the previous management
and board of directors of the bank or non-bank
financial intermediary performing quasi-banking
functions, any provision of law to the contrary
notwithstanding, and such other powers as the
Monetary Board shall deem necessary.
As much as practicable, the conservator should
not be connected with the Central Bank but
should be competent and knowledgeable in
bank operations and management. . . . He shall
report and be responsible to the Monetary
Board until such time as the Monetary Board is
satisfied that the institution can continue to
operate on its own and the conservatorship is no
longer necessary. The conservatorship shall
likewise be terminated should the Monetary
Board, on the basis of the report of the
conservator or of its own findings, determine
that the continuance in business of the
institution would involve probable loss to its
depositors or creditors, in which case the
provision of Section 29 shall apply.
SEC. 29. Proceedings upon insolvency. —
Whenever, upon examination by the head of the
appropriate supervising or examining
department or his examiners or agents into the
condition of any bank or non-bank financial
intermediary performing quasi-banking
functions, it shall be disclosed that the condition
of the same is one of insolvency, or that its
continuance in business would involve probable
loss to its depositors or creditors, it shall be the
duty of the department head concerned
forthwith, in writing, to inform the Monetary
Board of the facts. The Board may, upon finding
the statements of the department head to be
true, forbid the institution to do business in the
Philippines and designate an official of the
Central Bank or a person of recognized
competence in banking or finance as receiver to
immediately take charge of its assets and
liabilities, as expeditiously as possible collect and
gather all the assets and administer the same for
the benefit of its creditors, and represent the
bank personally or through counsel as he may
retain in all actions or proceedings for or against
the institution, exercising all the powers
necessary for these purposes including, but not
limited to, bringing and foreclosing mortgages in
the name of the bank or non-bank financial
intermediary performing quasi-banking
functions.
The Monetary Board shall thereupon determine
within sixty days whether the institution may be
recognized or otherwise placed in such a
condition so that it may be permitted to resume
business with safety to its depositors and
creditors and the general public and shall
prescribe the conditions under which such
resumption of business shall take place as well
as the time for fulfillment of such conditions. In
such case, the expenses and fees in the
collection and administration of the assets of the
institution shall be determined by the Board and
shall be paid to the Central Bank out of the
assets of such institution.
If the Monetary Board shall determine and
confirm within the said period that the bank or
non-bank financial intermediary performing
quasi-banking functions is insolvent or cannot
resume business with safety to its depositors,
creditors and the general public, it shall, if the
public interest requires, order its liquidation,
indicate the manner of its liquidation and
approve a liquidation plan which may, when
warranted, involve disposition of any or all
assets in consideration for the assumption of
equivalent liabilities. The liquidator designated
as hereunder provided shall, by the Solicitor
General, file a petition in the regional trial court
reciting the proceedings which have been taken
and praying the assistance of the court in the
liquidation of such institution. The court shall
have jurisdiction in the same proceedings to
assist in the adjudication of the disputed claims
against the bank or non-bank financial
intermediary performing quasi-banking functions
and in the enforcement of individual liabilities of
the stockholders and do all that is necessary to
preserve the assets of such institution and to
implement the liquidation plan approved by the
Monetary Board. The Monetary Board shall
designate an official of the Central Bank or a
person of recognized competence in banking or
finance, as liquidator who shall take over and
continue the functions of the receiver previously
appointed by the Monetary Board under this
Section. The liquidator shall, with all convenient
speed, convert the assets of the banking
institution or non-bank financial intermediary
performing quasi-banking functions to money or
sell, assign or otherwise dispose of the same to
creditors and other parties for the purpose of
paying the debts of such institution and he may,
in the name of the bank or non-bank financial
intermediary performing quasi- banking
functions and with the assistance of counsel as
he may retain, institute such actions as may be
necessary in the appropriate court to collect and
recover accounts and assets of such institution
or defend any action filed against the
institution: Provided, however, That after having
reasonably established all claims against the
institution, the liquidator may, with the approval
of the court, effect partial payments of such
claims for assets of the institution in accordance
with their legal priority.
The assets of an institution under receivership or
liquidation shall be deemed in custodia legis in
the hands of the receiver or liquidator and shall,
from the moment of such receivership or
liquidation, be exempt from any order of
garnishment, levy, attachment, or execution.
The provisions of any law to the contrary
notwithstanding, the actions of the Monetary
Board under this Section, Section 28-A, and the
second paragraph of Section 34 of this Act shall
be final and executory, and can be set aside by a
court only if there is convincing proof, after
hearing, that the action is plainly arbitrary and
made in bad faith: Provided, That the same is
raised in an appropriate pleading filed by the
stockholders of record representing the majority
of the capital stock within ten (10) days from the
date the receiver takes charge of the assets and
liabilities of the bank or non-bank financial
intermediary performing quasi-banking functions
 or, in case of conservatorship or liquidation,
within ten (10) days from receipt of notice by the
said majority stockholders of said bank or non-
bank financial intermediary of the order of its
placement under conservatorship or liquidation.
No restraining order or injunction shall be issued
by any court enjoining the Central Bank from
implementing its actions under this Section and
the second paragraph of Section 34 of this Act in
the absence of any convincing proof that the
action of the Monetary Board is plainly arbitrary
and made in bad faith and the petitioner or
plaintiff files a bond, executed in favor of the
Central Bank, in an amount to be fixed by the
court. The restraining order or injunction shall be
refused or, if granted, shall be dissolved upon
filing by the Central Bank of a bond, which shall
be in the form of cash or Central Bank cashier's
check, in an amount twice the amount of the
bond of the petitioner or plaintiff conditioned
that it will pay the damages which the petitioner
or plaintiff may suffer by the refusal or the
dissolution of the injunction. The provisions of
Rule 58 of the New Rules of Court insofar as they
are applicable and not inconsistent with the
provisions of this Section shall govern the
issuance and dissolution of the restraining order
or injunction contemplated in this Section.
Insolvency, under this Act, shall be understood
to mean that the realizable assets of a bank or a
non-bank financial intermediary performing
quasi-banking functions as determined by the
Central Bank are insufficient to meet its
liabilities.
The appointment of a conservator under Section
28-A of this Act or the appointment of a receiver
or liquidator under this Section shall be vested
exclusively with the Monetary Board, the
provision of any law, general or special, to the
contrary notwithstanding.
It is stressed that in Section 25 of the said Act, the Department of
Supervision and Examination is charged with the supervision and
periodic examination of all banking institutions operating in the
Philippines, including all government credit institutions. Assuming
for the moment that the Bank is owned or controlled by the
government, it is nevertheless not exempt from but in fact expressly
placed under the jurisdiction of the Central Bank.
More to the point, R.A. No. 3518 itself, which created the Philippine
Veterans Bank, provides in its Section 14 that the Bank shall be
subject to the authority of the Department of Supervision and
Examination.
The said Section 14 reads as follows:
Sec. 14. Inspection by Department of Supervision
and Examination of the Central Bank. — The
Veterans Bank shall be subject to inspection by
the Department of Supervision and Examination
of the Central Bank in accordance with Republic
Act Numbered Two hundred sixty-five and
Republic Act Numbered Three hundred thirty-
seven.
The purpose of these provisions is to enable the Central Bank, as the
entity charged with the responsibility of maintaining the stability of
the banking and monetary systems of the country, to take the
necessary steps against any banking institution whose continued
operation may cause prejudice to its depositors and creditors, and
the general public as well.
Even if it be conceded that the charter of the Rank constitutes a
contract between the Government and the stockholders of the
Bank, it would not follow that the relationship cannot be altered
without violating the impairment clause. This is a too simplistic
conclusion that loses sight of the vulnerability of this "precious little
clause," as it is called, to the inherent powers of the State when the
public interest demands their exercise. The clause, according to
Corwin, "is lately of negligible importance, and might well be
stricken from the Constitution. For most practical purposes, in fact,
it has been." 2
The undeniable fact is that the notion of public interest has made
such considerable inroads into the constitutional guaranty that one
could validly say now that it has become the exception rather than
the rule. The impact of the modern society upon hitherto private
agreements has left the clause in a shambles, as it were, making
practically every contract susceptible to change on behalf of the
public. The modern understanding is that the contract is protected
by the guaranty only if it does not affect public interest, but there is
hardly any contract now that does not somehow or other affect
public interest as not to come under the powers of the State. Part of
that understanding therefore is that, conversely, the contract may
be altered validly if it involves the public interest, to which private
interests must "yield as a postulate of the existing social order."
In the landmark case of Norman v. Baltimore, 3 the U.S. Supreme
Court stressed that every contract involving the public interest
suffers a congenital infirmity, and that is its susceptibility to change
whenever required by the public interest. The police power can be
validly asserted to make that change to meet any one of the several
great public needs, such as, in that case, regulation of the value of
money. In upholding a legislative enactment providing for the
payment of existing debts dollar for dollar in the current legal
tender, as against contracts calling for such payment in gold coin of
specified weight and fineness the decision stressed:
Contracts, however express, cannot fetter the
constitutional authority of the Congress.
Contracts may create rights of property, but
when contracts deal with a subject matter which
lies within the control of the Congress, they have
a congenital infirmity. Parties cannot remove
their transactions from the reach of dominant
constitutional power by making contracts about
them.
The need in the case at bar is no less compelling, to wit, the
preservation of the integrity and stability of our banking system.
Unless adequate and determined efforts are taken by the
government against distressed and mismanaged banks, public faith
in the banking system is certain to deteriorate to the prejudice of
the national economy itself, not to mention the losses suffered by
the bank depositors, creditors, and stockholders, who all deserve
the protection of the government. The government cannot simply
cross its arms while the assets of a bank are being depleted through
mismanagement or irregularities. It is the duty of the Central Bank in
such an event to step in and salvage the remaining resources of the
bank so that they may not continue to be dissipated or plundered by
those entrusted with their management.
The petitioners' argument that by accepting the stocks granted to
them by the law, the same have become their inalienable and
irrevocable property is clearly untenable. These stockholdings do not
enjoy any special immunity over and above shares of stock in any
other corporation, which are always subject to the vicissitudes of
business. Their value may appreciate or decline or the stocks may
become worthless altogether. Like any other property, they do not
have a fixed but a fluctuating price. Certainly, the mere acceptance
of these shares of stock by the petitioners did not create any legal
assurance from the Government that their original value would be
preserved and that the owners could not be deprived of such
property under any circumstance no matter how justified.
Nor is the charter subject to revocation only by the legislature, as
the petitioners also erroneously contend. The mere circumstance
that the charter was granted directly by Congress does not signify
that only Congress can modify or abrogate it by another enactment.
In fact, the charter itself says that the Bank shall be subject to
regulation by the Central Bank which is empowered inter alia, by
express provision of law, to order its liquidation. Also, by its own
terms, the charter will automatically becomefunctus officio after
fifty years and the Bank itself will cease to exist unless its life is
extended by positive act of the legislature. It may also be noted
that quo warranto proceedings may be filed against the Bank by the
Solicitor General on behalf of the Republic of the Philippines
pursuant to the Rules of Court on any of the grounds enumerated in
Rule 66 thereof. All these can be done without the necessity of
direct legislative action and, no less importantly, without violation of
the legislative will.
There is also the practical difficulty of Congress itself decreeing
liquidation, presumably to be made after examination of the
financial condition of the Bank. In effect, the legislature, through its
corresponding appropriate committees, will be undertaking the
function purposely assigned by law to the Department of
Examination and Supervision of the Central Bank. This is an intricate
administrative function wisely entrusted by Congress to the said
body, from which the petitioners would now recall it for its direct
exercise by the lawmaking body. Such a procedure would bring us
back to square one, so to speak, and revoke the authority confided
by Congress to the Central Bank in recognition of its established
expertise in the regulation of banks.
Coming now to the ownership of the Bank, we find it is not a
government bank, as claimed by the petitioners. The fact is that
under Section 3(b) of its charter, while 51% of the capital stock of
the Bank was initially fully subscribed by the Republic of the
Philippines for and in behalf of the veterans, their widows, orphans
or compulsory heirs, the corresponding shares of stock were to be
turned over within 5 years from the organization by the Bank to the
said beneficiaries who would thereafter have the right to vote such
common shares. The balance of about 49% was to be divided into
preferred shares which would be opened for subscription by any
recognized veteran, widow, orphans or compulsory heirs of said
veteran at the rate of one preferred share per veteran, on the
condition that in case of failure of any particular veteran to
subscribe for any preferred share of stock so offered to him within
thirty (30) days from the date of receipt of notice, said share of stock
shall be available for subscription to other veterans in accordance
with such rules or regulations as may be promulgated by the Board
of Directors. Moreover, under Sec. 6(a), the affairs of the Bank are
managed by a board of directors composed of eleven members,
three of whom are ex officio members, with the other eight being
elected annually by the stockholders in the manner prescribed by
the Corporation Law. Significantly, Sec. 28 also provides as follows:
Sec. 28. Articles of incorporation. — This Act,
upon its approval, shall be deemed and accepted
to all legal intents and purposes as the statutory
articles of incorporation or Charter of the
Philippine Veterans' Bank; and that,
notwithstanding the provisions of any existing
law to the contrary, said Bank shall be deemed
registered and duly authorized to do business
and operate as a commercial bank as of the date
of approval of this Act.
This point is important because the Constitution provides in its
Article IX-B, Section 2(1) that "the Civil Service embraces all
branches, subdivisions, instrumentalities, and agencies of the
Government, including government-owned or controlled
corporations with original charters." As the Bank is not owned or
controlled by the Government although it does have an original
charter in the form of R.A. No. 3518, it clearly does not fall under the
Civil Service and should be regarded as an ordinary commercial
corporation. Section 28 of the said law so provides. The
consequence is that the relations of the Bank with its employees
should be governed by the labor laws, under which in fact they have
already been paid some of their claims.
Applying the Labor Code, the Court rules that the petitioners' claim
for back wages must be rejected. The reason is that the employees
making this claim have not been illegally dismissed but lawfully
separated as a result of the liquidation of the Bank on orders of
higher authority. This move was not the decision of the Bank; it was
forced upon it by the resolution of the Monetary Board of the
Central Bank. Back pay is awarded for work that could have been
performed by the employee except that he was prevented from
doing so because of his illegal dismissal by the employer. It is clearly
not due in the case at bar to the employees whose services were
terminated as a result of the forcible closure of the Bank.
As regards the claims of Marking and Mejia for the payment of their
retirement benefits, which we restrained temporarily on January 12,
1989, we find with the public respondents that such payment is in
order. We so hold, considering that although the said retirees are
members of the board of directors, they are nevertheless covered by
the Retirement Plan of the Bank per the following pertinent
provisions:
Article II, Section 1. — The following words and
phrases, as used herein shall have the meaning
indicated, unless a different meaning is plainly
required by the text:
...
c) "Employee" means any person who is
employed by the Bank on a regular and
permanent basis, including officers; and such
members of the Board of Director and other
hired workers not employed on a regular and
permanent basis but who, because of their
extended service, would qualify under the
retirement categories under Article IV hereof
and who for purposes of this Plan, shall be
deemed employees.
Article III, Section 1 — Eligibility at Effective Date
All employees as herein defined shall
automatically be eligible to participate in the
Plan, as of its effective date. (Emphasis supplied)
However, for purposes of the application of Article 110 of the Labor
Code, the said directors must be considered managerial employees,
or officers, and so not entitled to the preference of claims granted
thereunder to workers in general or the rank-and-file employees.
The claims of these workers must be accorded priority over all other
claims, including those of the said directors, and indeed even of the
Government itself." This provision, as amended by Republic Act No.
6715, reads as follows:
Article 110. Worker preference in case of
bankruptcy. In the event of bankruptcy or
liquidation of an employer's business, his
workers shall enjoy first preference as regards
their unpaid wages and other monetary claims,
any provision of law to the contrary
notwithstanding. Such unpaid wages and
monetary claims shall be paid in full before the
claims of the Government and other creditors
may be paid. (Amendments italicized).
Focusing now on G.R. No. 82337, the Court notes that the
petitioners therein are asking that the ownership and management
of the Bank be turned over to them in accordance with R.A. No.
3518. They point out that the deficit incurred by the Bank when its
liquidation was ordered by the Central Bank in 1985 is not imputable
to them and suggest they can do better in rehabilitating the Bank,
given the proper support from the Government. For this reason,
they ask the Court to order inter alia the Central Bank to grant them
the necessary loans and other facilities, the Secretary of the Budget
to certify as appropriated the amount needed to fully pay all
common and preferred shares of the Bank, and the National
Treasurer to release such amounts to the Bank.
We agree with the Solicitor General that there is a procedural flaw in
the petition, in that-
 The Rules of Court, the Judiciary Reorganization
Act of 1980 and the Interim Rules of Court quite
clearly delineate the jurisdiction of the Supreme
Court in civil cases as encompassing a review on
appeal only on questions of law as well as
original petitions in certain special civil actions
like certiorari, prohibition and mandamus.
The present petition does not come under any of
the above. Obviously, the petition is not an
appeal from the decision of any lower court or
quasi-judicial body, as in fact, the same is indeed
an original petition for restitution. Also, the
present petition is certainly not one for
certiorari, prohibition or mandamus because
there is no tribunal, board or officer that has
acted without or in excess of jurisdiction or with
grave abuse of discretion, or has neglected the
performance of an act which the law enjoins as a
duty, and from-whose acts or negligence the
petitioners were supposed to have been
aggrieved thereby. On the basis alone of
jurisdiction, the petition at bar should be
dismissed.
A reading of the instant petition would show,
however, that the same partakes of the nature
of mandamus because it seeks judgment
directing and commanding the Secretary of
Budget, the National Treasurer, the CB, the
Monetary Board and the PVB Liquidator to do
certain specific acts. Unfortunately, the facts
hereof do not present a case where such offices
and officials are, by law, mandated to do the
adverted acts, even less, that they have
neglected to perform them.
Moreover, from what has already been said of the power of the
Central Bank to regulate commercial banks, and to order their
liquidation whenever warranted, it would seem that the affairs of
the Bank are best entrusted to the liquidator court at this time
rather than managed directly by the petitioners. This is no reflection
on their competence and sincerity, not to mention their genuine
concern for the Bank, of which they are the intended beneficiaries
and owners. It is only that, considering the expertise of the Central
Bank oh this matter, and the familiarity of the liquidator court with
the ramifications of the problem at hand, we feel it is advisable that
they be allowed, as long as the administration has not yet adopted
its own plans, to devise the proper steps to relieve the Bank of its
present difficulties.
III
The Court reiterates its hope that the administrative authorities may
still find a way to rehabilitate the Bank even at this late hour. This is
still possible even with this decision, for all we are saying here is that
the Central Bank has the power to liquidate the Bank under existing
laws and that, in the present circumstances, its liquidation may be
undertaken under the control of the liquidator court in accordance
with the procedure prescribed by R.A. No. 265 and the guidelines
herein laid down. Such rehabilitation may still be ordered by the
President of the Philippines if she sees fit, without violation of the
import of this decision or of the pertinent laws here interpreted and
applied.
WHEREFORE, judgment is hereby rendered: (a) DISMISSING the
petitions in G.R. Nos. 67125 and 82337; and (b) LIFTING the writ of
preliminary injunction dated March 26, 1987, and the temporary
restraining order dated January 21, 1989. Costs against the
petitioners.
SO ORDERED.
G.R. No. 15574 September 17, 1919
SMITH, BELL & COMPANY (LTD.), petitioner,
vs.
JOAQUIN NATIVIDAD, Collector of Customs of the port of
Cebu, respondent.
Ross and Lawrence for petitioner.
Attorney-General Paredes for respondent.
MALCOLM, J.:
A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against
Joaquin Natividad, Collector of Customs of the port of Cebu,
Philippine Islands, to compel him to issue a certificate of Philippine
registry to the petitioner for its motor vessel Bato. The Attorney-
General, acting as counsel for respondent, demurs to the petition on
the general ground that it does not state facts sufficient to
constitute a cause of action. While the facts are thus admitted, and
while, moreover, the pertinent provisions of law are clear and
understandable, and interpretative American jurisprudence is found
in abundance, yet the issue submitted is not lightly to be resolved.
The question, flatly presented, is, whether Act. No. 2761 of the
Philippine Legislature is valid — or, more directly stated, whether
the Government of the Philippine Islands, through its Legislature,
can deny the registry of vessels in its coastwise trade to corporations
having alien stockholders.
FACTS.
Smith, Bell & Co., (Ltd.), is a corporation organized and existing
under the laws of the Philippine Islands. A majority of its
stockholders are British subjects. It is the owner of a motor vessel
known as the Bato built for it in the Philippine Islands in 1916, of
more than fifteen tons gross The Bato was brought to Cebu in the
present year for the purpose of transporting plaintiff's merchandise
between ports in the Islands. Application was made at Cebu, the
home port of the vessel, to the Collector of Customs for a certificate
of Philippine registry. The Collector refused to issue the certificate,
giving as his reason that all the stockholders of Smith, Bell & Co.,
Ltd., were not citizens either of the United States or of the Philippine
Islands. The instant action is the result.
LAW.
The Act of Congress of April 29, 1908, repealing the Shipping Act of
April 30, 1906 but reenacting a portion of section 3 of this Law, and
still in force, provides in its section 1:
That until Congress shall have authorized the registry as
vessels of the United States of vessels owned in the
Philippine Islands, the Government of the Philippine
Islands is hereby authorized to adopt, from time to time,
and enforce regulations governing the transportation of
merchandise and passengers between ports or places in
the Philippine Archipelago. (35 Stat. at L., 70; Section 3912,
U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)
The Act of Congress of August 29, 1916, commonly known as the
Jones Law, still in force, provides in section 3, (first paragraph, first
sentence), 6, 7, 8, 10, and 31, as follows.
SEC. 3. That no law shall be enacted in said Islands which
shall deprive any person of life, liberty, or property
without due process of law, or deny to any person therein
the equal protection of the laws. . . .
SEC. 6. That the laws now in force in the Philippines shall
continue in force and effect, except as altered, amended,
or modified herein, until altered, amended, or repealed by
the legislative authority herein provided or by Act of
Congress of the United States.
SEC. 7. That the legislative authority herein provided shall
have power, when not inconsistent with this Act, by due
enactment to amend, alter modify, or repeal any law, civil
 or criminal, continued in force by this Act as it may from
time to time see fit
This power shall specifically extend with the limitation
herein provided as to the tariff to all laws relating to
revenue provided as to the tariff to all laws relating to
revenue and taxation in effect in the Philippines.
SEC. 8. That general legislative power, except as otherwise
herein provided, is hereby granted to the Philippine
Legislature, authorized by this Act.
SEC. 10. That while this Act provides that the Philippine
government shall have the authority to enact a tariff law
the trade relations between the islands and the United
States shall continue to be governed exclusively by laws of
the Congress of the United States: Provided, That tariff
acts or acts amendatory to the tariff of the Philippine
Islands shall not become law until they shall receive the
approval of the President of the United States, nor shall
any act of the Philippine Legislature affecting immigration
or the currency or coinage laws of the Philippines become
a law until it has been approved by the President of the
United States: Provided further, That the President shall
approve or disapprove any act mentioned in the foregoing
proviso within six months from and after its enactment
and submission for his approval, and if not disapproved
within such time it shall become a law the same as if it had
been specifically approved.
SEC. 31. That all laws or parts of laws applicable to the
Philippines not in conflict with any of the provisions of this
Act are hereby continued in force and effect." (39 Stat at
L., 546.)
On February 23, 1918, the Philippine Legislature enacted Act No.
2761. The first section of this law amended section 1172 of the
Administrative Code to read as follows:
SEC. 1172. Certificate of Philippine register. — Upon
registration of a vessel of domestic ownership, and of
more than fifteen tons gross, a certificate of Philippine
register shall be issued for it. If the vessel is of domestic
ownership and of fifteen tons gross or less, the taking of
the certificate of Philippine register shall be optional with
the owner.
"Domestic ownership," as used in this section, means
ownership vested in some one or more of the following
classes of persons: (a) Citizens or native inhabitants of the
Philippine Islands; (b) citizens of the United States residing
in the Philippine Islands; (c) any corporation or company
composed wholly of citizens of the Philippine Islands or of
the United States or of both, created under the laws of the
United States, or of any State thereof, or of thereof, or the
managing agent or master of the vessel resides in the
Philippine Islands
Any vessel of more than fifteen gross tons which on
February eighth, nineteen hundred and eighteen, had a
certificate of Philippine register under existing law, shall
likewise be deemed a vessel of domestic ownership so
long as there shall not be any change in the ownership
thereof nor any transfer of stock of the companies or
corporations owning such vessel to person not included
under the last preceding paragraph.
Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202
of the Administrative Code to read as follows:
SEC. 1176. Investigation into character of vessel. — No
application for a certificate of Philippine register shall be
approved until the collector of customs is satisfied from an
inspection of the vessel that it is engaged or destined to be
engaged in legitimate trade and that it is of domestic
ownership as such ownership is defined in section eleven
hundred and seventy-two of this Code.
The collector of customs may at any time inspect a vessel
or examine its owner, master, crew, or passengers in order
to ascertain whether the vessel is engaged in legitimate
trade and is entitled to have or retain the certificate of
Philippine register.
SEC. 1202. Limiting number of foreign officers and
engineers on board vessels. — No Philippine vessel
operating in the coastwise trade or on the high seas shall
be permitted to have on board more than one master or
one mate and one engineer who are not citizens of the
United States or of the Philippine Islands, even if they hold
licenses under section one thousand one hundred and
ninety-nine hereof. No other person who is not a citizen of
the United States or of the Philippine Islands shall be an
officer or a member of the crew of such vessel. Any such
vessel which fails to comply with the terms of this section
shall be required to pay an additional tonnage tax of fifty
centavos per net ton per month during the continuance of
said failure.
ISSUES.
Predicated on these facts and provisions of law, the issues as above
stated recur, namely, whether Act No 2761 of the Philippine
Legislature is valid in whole or in part — whether the Government of
the Philippine Islands, through its Legislature, can deny the registry
of vessel in its coastwise trade to corporations having alien
stockholders .
OPINION.
1. Considered from a positive standpoint, there can exist no
measure of doubt as to the power of the Philippine Legislature to
enact Act No. 2761. The Act of Congress of April 29, 1908, with its
specific delegation of authority to the Government of the Philippine
Islands to regulate the transportation of merchandise and
passengers between ports or places therein, the liberal construction
given to the provisions of the Philippine Bill, the Act of Congress of
July 1, 1902, by the courts, and the grant by the Act of Congress of
August 29, 1916, of general legislative power to the Philippine
Legislature, are certainly superabundant authority for such a law.
While the Act of the local legislature may in a way be inconsistent
with the Act of Congress regulating the coasting trade of the
Continental United States, yet the general rule that only such laws of
the United States have force in the Philippines as are expressly
extended thereto, and the abnegation of power by Congress in favor
of the Philippine Islands would leave no starting point for convincing
argument. As a matter of fact, counsel for petitioner does not assail
legislative action from this direction (See U. S. vs. Bull [1910], 15
Phil., 7; Sinnot vs. Davenport [1859] 22 How., 227.)
2. It is from the negative, prohibitory standpoint that counsel argues
against the constitutionality of Act No. 2761. The first paragraph of
the Philippine Bill of Rights of the Philippine Bill, repeated again in
the first paragraph of the Philippine Bill of Rights as set forth in the
Jones Law, provides "That no law shall be enacted in said Islands
which shall deprive any person of life, liberty, or property without
due process of law, or deny to any person therein the equal
protection of the laws." Counsel says that Act No. 2761 denies to
Smith, Bell & Co., Ltd., the equal protection of the laws because it, in
effect, prohibits the corporation from owning vessels, and because
classification of corporations based on the citizenship of one or
more of their stockholders is capricious, and that Act No. 2761
deprives the corporation of its properly without due process of law
because by the passage of the law company was automatically
deprived of every beneficial attribute of ownership in the Bato and
left with the naked title to a boat it could not use .
The guaranties extended by the Congress of the United States to the
Philippine Islands have been used in the same sense as like
provisions found in the United States Constitution. While the "due
process of law and equal protection of the laws" clause of the
Philippine Bill of Rights is couched in slightly different words than
the corresponding clause of the Fourteenth Amendment to the
United States Constitution, the first should be interpreted and given
the same force and effect as the latter. (Kepner vs. U.S. [1904], 195
U. S., 100; Sierra vs. Mortiga [1907], 204 U. S.,.470; U. S. vs. Bull
[1910], 15 Phil., 7.) The meaning of the Fourteenth Amendment has
been announced in classic decisions of the United States Supreme
Court. Even at the expense of restating what is so well known, these
basic principles must again be set down in order to serve as the basis
of this decision.
The guaranties of the Fourteenth Amendment and so of the first
paragraph of the Philippine Bill of Rights, are universal in their
application to all person within the territorial jurisdiction, without
regard to any differences of race, color, or nationality. The word
"person" includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S., 356;
Truaxvs. Raich [1915], 239 U. S., 33.) Private corporations, likewise,
are "persons" within the scope of the guaranties in so far as their
property is concerned. (Santa Clara County vs. Southern Pac. R. R.
Co. [1886], 118.U. S., 394; Pembina Mining Co. vs. Pennsylvania
[1888],.125 U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford
[1896], 164 U. S., 578.) Classification with the end in view of
providing diversity of treatment may be made among corporations,
but must be based upon some reasonable ground and not be a mere
arbitrary selection (Gulf, Colorado & Santa Fe Railway Co. vs. Ellis
[1897],.165 U. S., 150.) Examples of laws held unconstitutional
because of unlawful discrimination against aliens could be cited.
Generally, these decisions relate to statutes which had attempted
arbitrarily to forbid aliens to engage in ordinary kinds of business to
earn their living. (Statevs. Montgomery [1900], 94 Maine, 192,
peddling — but see. Commonwealth vs. Hana [1907], 195 Mass.,
262; Templar vs. Board of Examiners of Barbers [1902], 131 Mich.,
254, barbers; Yick Wo vs. Hopkins [1886], 118 U. S.,.356,
discrimination against Chinese; Truax vs. Raich [1915], 239 U. S.,
33; In re Parrott [1880], 1 Fed , 481; Fraser vs. McConway & Torley
Co. [1897], 82 Fed , 257; Juniata Limestone Co. vs. Fagley [1898], 187
Penn., 193, all relating to the employment of aliens by private
corporations.)
A literal application of general principles to the facts before us
would, of course, cause the inevitable deduction that Act No. 2761 is
unconstitutional by reason of its denial to a corporation, some of
whole members are foreigners, of the equal protection of the laws.
Like all beneficient propositions, deeper research discloses provisos.
Examples of a denial of rights to aliens notwithstanding the
provisions of the Fourteenth Amendment could be cited.
(Tragesser vs. Gray [1890], 73 Md., 250, licenses to sell spirituous
liquors denied to persons not citizens of the United States;
Commonwealth vs. Hana [1907], 195 Mass , 262, excluding aliens
from the right to peddle; Patsone vs. Commonwealth of
Pennsylvania [1914], 232 U. S. , 138, prohibiting the killing of any
wild bird or animal by any unnaturalized foreign-born resident; Ex
parte Gilleti [1915], 70 Fla., 442, discriminating in favor of citizens
with reference to the taking for private use of the common property
in fish and oysters found in the public waters of the State;
Heim vs. McCall [1915], 239 U. S.,.175, and Crane vs. New York
[1915], 239 U. S., 195, limiting employment on public works by, or
for, the State or a municipality to citizens of the United States.)
One of the exceptions to the general rule, most persistent and far
reaching in influence is, that neither the Fourteenth Amendment to
the United States Constitution, broad and comprehensive as it is,
nor any other amendment, "was designed to interfere with the
power of the State, sometimes termed its `police power,' to
prescribe regulations to promote the health, peace, morals,
education, and good order of the people, and legislate so as to
increase the industries of the State, develop its resources and add to
its wealth and prosperity. From the very necessities of society,
legislation of a special character, having these objects in view, must
often be had in certain districts." (Barbier vs. Connolly [1884], 113
U.S., 27; New Orleans Gas Co. vs. Lousiana Light Co. [1885], 115 U.S.,
650.) This is the same police power which the United States
Supreme Court say "extends to so dealing with the conditions which
exist in the state as to bring out of them the greatest welfare in of its
people." (Bacon vs. Walker [1907], 204 U.S., 311.) For quite similar
reasons, none of the provision of the Philippine Organic Law could
could have had the effect of denying to the Government of the
Philippine Islands, acting through its Legislature, the right to exercise
that most essential, insistent, and illimitable of powers, the
sovereign police power, in the promotion of the general welfare and
the public interest. (U. S. vs. Toribio [1910], 15 Phil., 85; Churchill
and Tait vs. Rafferty [1915], 32 Phil., 580; Rubi vs. Provincial Board of
Mindoro [1919], 39 Phil., 660.) Another notable exception permits of
the regulation or distribution of the public domain or the common
property or resources of the people of the State, so that use may be
limited to its citizens. (Ex parte Gilleti [1915], 70 Fla., 442;
McCready vs. Virginia [1876], 94 U. S., 391;
Patsone vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.)
Still another exception permits of the limitation of employment in
the construction of public works by, or for, the State or a
municipality to citizens of the United States or of the State.
(Atkin vs. Kansas [1903],191 U. S., 207; Heim vs. McCall [1915], 239
U.S., 175; Crane vs. New York [1915], 239 U. S., 195.) Even as to
classification, it is admitted that a State may classify with reference
to the evil to be prevented; the question is a practical one,
dependent upon experience. (Patsone vs. Commonwealth of
Pennsylvania [1914], 232 U. S., 138.)
To justify that portion of Act no. 2761 which permits corporations or
companies to obtain a certificate of Philippine registry only on
condition that they be composed wholly of citizens of the Philippine
Islands or of the United States or both, as not infringing Philippine
Organic Law, it must be done under some one of the exceptions
here mentioned This must be done, moreover, having particularly in
mind what is so often of controlling effect in this jurisdiction — our
local experience and our peculiar local conditions.
To recall a few facts in geography, within the confines of Philippine
jurisdictional limits are found more than three thousand islands.
Literally, and absolutely, steamship lines are, for an Insular territory
thus situated, the arteries of commerce. If one be severed, the life-
blood of the nation is lost. If on the other hand these arteries are
protected, then the security of the country and the promotion of the
general welfare is sustained. Time and again, with such conditions
confronting it, has the executive branch of the Government of the
Philippine Islands, always later with the sanction of the judicial
branch, taken a firm stand with reference to the presence of
undesirable foreigners. The Government has thus assumed to act for
the all-sufficient and primitive reason of the benefit and protection
of its own citizens and of the self-preservation and integrity of its
dominion. (In re Patterson [1902], 1 Phil., 93; Forbes vs. Chuoco,
Tiaco and Crossfield [1910], 16 Phil., 534;.228 U.S., 549; In
re McCulloch Dick [1918], 38 Phil., 41.) Boats owned by foreigners,
particularly by such solid and reputable firms as the instant claimant,
might indeed traverse the waters of the Philippines for ages without
doing any particular harm. Again, some evilminded foreigner might
very easily take advantage of such lavish hospitality to chart
Philippine waters, to obtain valuable information for unfriendly
foreign powers, to stir up insurrection, or to prejudice Filipino or
American commerce. Moreover, under the Spanish portion of
Philippine law, the waters within the domestic jurisdiction are
deemed part of the national domain, open to public use. (Book II,
Tit. IV, Ch. I, Civil Code; Spanish Law of Waters of August 3, 1866,
arts 1, 2, 3.) Common carriers which in the Philippines as in the
United States and other countries are, as Lord Hale said, "affected
with a public interest," can only be permitted to use these public
waters as a privilege and under such conditions as to the
representatives of the people may seem wise. (See De
Villata vs. Stanley [1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S.,
138), a case herein before mentioned, Justice Holmes delivering the
opinion of the United States Supreme Court said:
This statute makes it unlawful for any unnaturalized
foreign-born resident to kill any wild bird or animal except
in defense of person or property, and `to that end' makes
it unlawful for such foreign-born person to own or be
possessed of a shotgun or rifle; with a penalty of $25 and a
forfeiture of the gun or guns. The plaintiff in error was
found guilty and was sentenced to pay the
abovementioned fine. The judgment was affirmed on
successive appeals. (231 Pa., 46; 79 Atl., 928.) He brings
the case to this court on the ground that the statute is
 contrary to the 14th Amendment and also is in
contravention of the treaty between the United States and
Italy, to which latter country the plaintiff in error belongs .
Under the 14th Amendment the objection is twofold;
unjustifiably depriving the alien of property, and
discrimination against such aliens as a class. But the
former really depends upon the latter, since it hardly can
be disputed that if the lawful object, the protection of wild
life (Geer vs. Connecticut, 161 U.S., 519; 40 L. ed., 793; 16
Sup. Ct. Rep., 600), warrants the discrimination, the,
means adopted for making it effective also might be
adopted. . . .
The discrimination undoubtedly presents a more difficult
question. But we start with reference to the evil to be
prevented, and that if the class discriminated against is or
reasonably might be considered to define those from
whom the evil mainly is to be feared, it properly may be
picked out. A lack of abstract symmetry does not matter.
The question is a practical one, dependent upon
experience. . . .
The question therefore narrows itself to whether this
court can say that the legislature of Pennsylvania was not
warranted in assuming as its premise for the law that
resident unnaturalized aliens were the peculiar source of
the evil that it desired to prevent. (Barrett vs. Indiana,. 229
U.S., 26, 29; 57 L. ed., 1050, 1052; 33 Sup. Ct. Rep., 692.)
Obviously the question, so stated, is one of local
experience, on which this court ought to be very slow to
declare that the state legislature was wrong in its facts
(Adams vs. Milwaukee, 228 U.S., 572, 583; 57 L. ed.,
971,.977; 33 Sup. Ct. Rep., 610.) If we might trust popular
speech in some states it was right; but it is enough that
this court has no such knowledge of local conditions as to
be able to say that it was manifestly wrong. . . .
Judgment affirmed.
We are inclined to the view that while Smith, Bell & Co. Ltd., a
corporation having alien stockholders, is entitled to the protection
afforded by the due-process of law and equal protection of the laws
clause of the Philippine Bill of Rights, nevertheless, Act No. 2761 of
the Philippine Legislature, in denying to corporations such as Smith,
Bell &. Co. Ltd., the right to register vessels in the Philippines
coastwise trade, does not belong to that vicious species of class
legislation which must always be condemned, but does fall within
authorized exceptions, notably, within the purview of the police
power, and so does not offend against the constitutional provision.
This opinion might well be brought to a close at this point. It occurs
to us, however, that the legislative history of the United States and
the Philippine Islands, and, probably, the legislative history of other
countries, if we were to take the time to search it out, might disclose
similar attempts at restriction on the right to enter the coastwise
trade, and might thus furnish valuable aid by which to ascertain and,
if possible, effectuate legislative intention.
3. The power to regulate commerce, expressly delegated
to the Congress by the Constitution, includes the power to
nationalize ships built and owned in the United States by
registries and enrollments, and the recording of the
muniments of title of American vessels. The Congress
"may encourage or it may entirely prohibit such
commerce, and it may regulate in any way it may see fit
between these two extremes." (U.S.vs. Craig [1886], 28
Fed., 795; Gibbons vs. Ogden [1824], 9 Wheat., 1; The
Passenger Cases [1849], 7 How., 283.)
Acting within the purview of such power, the first Congress of the
United States had not been long convened before it enacted on
September 1, 1789, "An Act for Registering and Clearing Vessels,
Regulating the Coasting Trade, and for other purposes." Section 1 of
this law provided that for any ship or vessel to obtain the benefits of
American registry, it must belong wholly to a citizen or citizens of
the United States "and no other." (1 Stat. at L., 55.) That Act was
shortly after repealed, but the same idea was carried into the Acts of
Congress of December 31, 1792 and February 18, 1793. (1 Stat. at L.,
287, 305.).Section 4 of the Act of 1792 provided that in order to
obtain the registry of any vessel, an oath shall be taken and
subscribed by the owner, or by one of the owners thereof, before
the officer authorized to make such registry, declaring, "that there is
no subject or citizen of any foreign prince or state, directly or
indirectly, by way of trust, confidence, or otherwise, interested in
such vessel, or in the profits or issues thereof." Section 32 of the Act
of 1793 even went so far as to say "that if any licensed ship or vessel
shall be transferred to any person who is not at the time of such
transfer a citizen of and resident within the United States, ... every
such vessel with her tackle, apparel, and furniture, and the cargo
found on board her, shall be forefeited." In case of alienation to a
foreigner, Chief Justice Marshall said that all the privileges of an
American bottom were ipso facto forfeited. (U.S. vs. Willings and
Francis [1807], 4 Cranch, 48.) Even as late as 1873, the Attorney-
General of the United States was of the opinion that under the
provisions of the Act of December 31, 1792, no vessel in which a
foreigner is directly or indirectly interested can lawfully be
registered as a vessel of the United. States. (14 Op. Atty.-Gen. [U.S.],
340.)
These laws continued in force without contest, although possibly the
Act of March 3, 1825, may have affected them, until amended by
the Act of May 28, 1896 (29 Stat. at L., 188) which extended the
privileges of registry from vessels wholly owned by a citizen or
citizens of the United States to corporations created under the laws
of any of the states thereof. The law, as amended, made possible
the deduction that a vessel belonging to a domestic corporation was
entitled to registry or enrollment even though some stock of the
company be owned by aliens. The right of ownership of stock in a
corporation was thereafter distinct from the right to hold the
property by the corporation (Humphreys vs. McKissock [1890], 140
U.S., 304; Queen vs. Arnaud [1846], 9 Q. B., 806; 29 Op. Atty.-Gen.
[U.S.],188.)
On American occupation of the Philippines, the new government
found a substantive law in operation in the Islands with a civil law
history which it wisely continued in force Article fifteen of the
Spanish Code of Commerce permitted any foreigner to engage in
Philippine trade if he had legal capacity to do so under the laws of
his nation. When the Philippine Commission came to enact the
Customs Administrative Act (No. 355) in 1902, it returned to the old
American policy of limiting the protection and flag of the United
States to vessels owned by citizens of the United States or by native
inhabitants of the Philippine Islands (Sec. 117.) Two years later, the
same body reverted to the existing Congressional law by permitting
certification to be issued to a citizen of the United States or to a
corporation or company created under the laws of the United States
or of any state thereof or of the Philippine Islands (Act No. 1235, sec.
3.) The two administration codes repeated the same provisions with
the necessary amplification of inclusion of citizens or native
inhabitants of the Philippine Islands (Adm. Code of 1916, sec. 1345;
Adm. Code of 1917, sec. 1172). And now Act No. 2761 has returned
to the restrictive idea of the original Customs Administrative Act
which in turn was merely a reflection of the statutory language of
the first American Congress.
Provisions such as those in Act No. 2761, which deny to foreigners
the right to a certificate of Philippine registry, are thus found not to
be as radical as a first reading would make them appear.
Without any subterfuge, the apparent purpose of the Philippine
Legislature is seen to be to enact an anti-alien shipping act. The
ultimate purpose of the Legislature is to encourage Philippine ship-
building. This, without doubt, has, likewise, been the intention of the
United States Congress in passing navigation or tariff laws on
different occasions. The object of such a law, the United States
Supreme Court once said, was to encourage American trade,
navigation, and ship-building by giving American ship-owners
exclusive privileges. (Old Dominion Steamship Co. vs. Virginia [1905],
198 U.S., 299; Kent's Commentaries, Vol. 3, p. 139.)
In the concurring opinion of Justice Johnson in Gibbons vs. Ogden
([1824], 9 Wheat., 1) is found the following:
Licensing acts, in fact, in legislation, are universally
restraining acts; as, for example, acts licensing gaming
houses, retailers of spirituous liquors, etc. The act, in this
instance, is distinctly of that character, and forms part of
an extensive system, the object of which is to encourage
American shipping, and place them on an equal footing
with the shipping of other nations. Almost every
commercial nation reserves to its own subjects a
monopoly of its coasting trade; and a countervailing
privilege in favor of American shipping is contemplated, in
the whole legislation of the United States on this subject.
It is not to give the vessel an American character, that the
license is granted; that effect has been correctly attributed
to the act of her enrollment. But it is to confer on her
American privileges, as contradistinguished from foreign;
and to preserve the. Government from fraud by
foreigners, in surreptitiously intruding themselves into the
American commercial marine, as well as frauds upon the
revenue in the trade coastwise, that this whole system is
projected.
The United States Congress in assuming its grave responsibility of
legislating wisely for a new country did so imbued with a spirit of
Americanism. Domestic navigation and trade, it decreed, could only
be carried on by citizens of the United States. If the representatives
of the American people acted in this patriotic manner to advance
the national policy, and if their action was accepted without protest
in the courts, who can say that they did not enact such beneficial
laws under the all-pervading police power, with the prime motive of
safeguarding the country and of promoting its prosperity? Quite
similarly, the Philippine Legislature made up entirely of Filipinos,
representing the mandate of the Filipino people and the guardian of
their rights, acting under practically autonomous powers, and
imbued with a strong sense of Philippinism, has desired for these
Islands safety from foreign interlopers, the use of the common
property exclusively by its citizens and the citizens of the United
States, and protection for the common good of the people. Who can
say, therefore, especially can a court, that with all the facts and
circumstances affecting the Filipino people before it, the Philippine
Legislature has erred in the enactment of Act No. 2761?
Surely, the members of the judiciary are not expected to live apart
from active life, in monastic seclusion amidst dusty tomes and
ancient records, but, as keen spectators of passing events and alive
to the dictates of the general — the national — welfare, can incline
the scales of their decisions in favor of that solution which will most
effectively promote the public policy. All the presumption is in favor
of the constitutionally of the law and without good and strong
reasons, courts should not attempt to nullify the action of the
Legislature. "In construing a statute enacted by the Philippine
Commission (Legislature), we deem it our duty not to give it a
construction which would be repugnant to an Act of Congress, if the
language of the statute is fairly susceptible of another construction
not in conflict with the higher law." (In re Guariña [1913], 24. Phil.,
36; U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is the true construction
which will best carry legislative intention into effect.
With full consciousness of the importance of the question, we
nevertheless are clearly of the opinion that the limitation of
domestic ownership for purposes of obtaining a certificate of
Philippine registry in the coastwise trade to citizens of the Philippine
Islands, and to citizens of the United States, does not violate the
provisions of paragraph 1 of section 3 of the Act of Congress of
August 29, 1916 No treaty right relied upon Act No. 2761 of the
Philippine Legislature is held valid and constitutional .
The petition for a writ of mandamus is denied, with costs against the
petitioner. So ordered.
G.R. No. L-19550 June 19, 1967
HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL
BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE;
JOSE LUKBAN, in his capacity as Acting Director, National Bureau of
Investigation; SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I.
PLANA and MANUEL VILLAREAL, JR. and ASST. FISCAL MANASES G.
REYES; JUDGE AMADO ROAN, Municipal Court of Manila; JUDGE
ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES
CALUAG, Court of First Instance of Rizal-Quezon City Branch, and
JUDGE DAMIAN JIMENEZ, Municipal Court of Quezon
City, respondents.
Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer
and Juan T. David for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Pacifico P. de Castro, Assistant Solicitor General Frine C.
Zaballero, Solicitor Camilo D. Quiason and Solicitor C. Padua for
respondents.
CONCEPCION, C.J.:
Upon application of the officers of the government named on the
margin1 — hereinafter referred to as Respondents-Prosecutors —
several judges2 — hereinafter referred to as Respondents-Judges —
issued, on different dates,3 a total of 42 search warrants against
petitioners herein4 and/or the corporations of which they were
officers,5 directed to the any peace officer, to search the persons
above-named and/or the premises of their offices, warehouses
and/or residences, and to seize and take possession of the following
personal property to wit:
Books of accounts, financial records, vouchers,
correspondence, receipts, ledgers, journals, portfolios,
credit journals, typewriters, and other documents and/or
papers showing all business transactions including
disbursements receipts, balance sheets and profit and loss
statements and Bobbins (cigarette wrappers).
as "the subject of the offense; stolen or embezzled and proceeds or
fruits of the offense," or "used or intended to be used as the means
of committing the offense," which is described in the applications
adverted to above as "violation of Central Bank Laws, Tariff and
Customs Laws, Internal Revenue (Code) and the Revised Penal
Code."
Alleging that the aforementioned search warrants are null and void,
as contravening the Constitution and the Rules of Court —
because, inter alia: (1) they do not describe with particularity the
documents, books and things to be seized; (2) cash money, not
mentioned in the warrants, were actually seized; (3) the warrants
were issued to fish evidence against the aforementioned petitioners
in deportation cases filed against them; (4) the searches and
seizures were made in an illegal manner; and (5) the documents,
papers and cash money seized were not delivered to the courts that
issued the warrants, to be disposed of in accordance with law — on
March 20, 1962, said petitioners filed with the Supreme Court this
original action for certiorari, prohibition, mandamus and injunction,
and prayed that, pending final disposition of the present case, a writ
of preliminary injunction be issued restraining Respondents-
Prosecutors, their agents and /or representatives from using the
effects seized as aforementioned or any copies thereof, in the
deportation cases already adverted to, and that, in due course,
thereafter, decision be rendered quashing the contested search
warrants and declaring the same null and void, and commanding the
respondents, their agents or representatives to return to petitioners
herein, in accordance with Section 3, Rule 67, of the Rules of Court,
the documents, papers, things and cash moneys seized or
confiscated under the search warrants in question.
In their answer, respondents-prosecutors alleged, 6 (1) that the
contested search warrants are valid and have been issued in
accordance with law; (2) that the defects of said warrants, if any,
were cured by petitioners' consent; and (3) that, in any event, the
effects seized are admissible in evidence against herein petitioners,
regardless of the alleged illegality of the aforementioned searches
and seizures.
On March 22, 1962, this Court issued the writ of preliminary
injunction prayed for in the petition. However, by resolution dated
June 29, 1962, the writ was partially lifted or dissolved, insofar as
the papers, documents and things seized from the offices of the
corporations above mentioned are concerned; but, the injunction
was maintained as regards the papers, documents and things found
and seized in the residences of petitioners herein.7
Thus, the documents, papers, and things seized under the alleged
authority of the warrants in question may be split into two (2) major
groups, namely: (a) those found and seized in the offices of the
aforementioned corporations, and (b) those found and seized in the
residences of petitioners herein.
As regards the first group, we hold that petitioners herein
have no cause of action to assail the legality of the contested
warrants and of the seizures made in pursuance thereof, for the
simple reason that said corporations have their respective
personalities, separate and distinct from the personality of herein
petitioners, regardless of the amount of shares of stock or of the
interest of each of them in said corporations, and whatever the
offices they hold therein may be.8 Indeed, it is well settled that the
legality of a seizure can be contested only by the party whose rights
have been impaired thereby,9 and that the objection to an unlawful
search and seizure is purely personal and cannot be availed of by
third parties. 10 Consequently, petitioners herein may not validly
object to the use in evidence against them of the documents, papers
and things seized from the offices and premises of the corporations
adverted to above, since the right to object to the admission of said
papers in evidence belongsexclusively to the corporations, to whom
the seized effects belong, and may not be invoked by the corporate
officers in proceedings against them in their individual
capacity. 11 Indeed, it has been held:
. . . that the Government's action in gaining possession of
papers belonging to the corporation did not relate to nor
did it affect the personal defendants. If these papers were
unlawfully seized and thereby the constitutional rights of
or any one were invaded, they were the rights of
the corporation and not the rights of the other defendants.
Next, it is clear that a question of the lawfulness of a
seizure can be raised only by one whose rights have been
invaded. Certainly, such a seizure, if unlawful, could not
affect the constitutional rights of defendants whose
property had not been seized or the privacy of whose
homes had not been disturbed; nor could they claim for
themselves the benefits of the Fourth Amendment, when
its violation, if any, was with reference to the rights
of another. Remus vs. United States (C.C.A.)291 F. 501,
511. It follows, therefore, that the question of the
admissibility of the evidence based on an alleged unlawful
search and seizure does not extend to the personal
defendants but embraces only the corporation whose
property was taken. . . . (A Guckenheimer & Bros. Co. vs.
United States, [1925] 3 F. 2d. 786, 789, Emphasis
supplied.)
With respect to the documents, papers and things seized in the
residences of petitioners herein, the aforementioned resolution of
June 29, 1962, lifted the writ of preliminary injunction previously
issued by this Court,12 thereby, in effect, restraining herein
Respondents-Prosecutors from using them in evidence against
petitioners herein.
In connection with said documents, papers and things, two (2)
important questions need be settled, namely: (1) whether the
search warrants in question, and the searches and seizures made
under the authority thereof, are valid or not, and (2) if the answer to
the preceding question is in the negative, whether said documents,
papers and things may be used in evidence against petitioners
herein.1äwphï1.ñët
Petitioners maintain that the aforementioned search warrants are in
the nature of general warrants and that accordingly, the seizures
effected upon the authority there of are null and void. In this
connection, the Constitution13 provides:
The right of the people to be secure in their persons,
houses, papers, and effects against unreasonable searches
and seizures shall not be violated, and no warrants shall
issue but upon probable cause, to be determined by the
judge after examination under oath or affirmation of the
complainant and the witnesses he may produce, and
particularly describing the place to be searched, and the
persons or things to be seized.
Two points must be stressed in connection with this constitutional
mandate, namely: (1) that no warrant shall issue but upon
probable cause, to be determined by the judge in the manner set
forth in said provision; and (2) that the warrant
shall particularly describe the things to be seized.
None of these requirements has been complied with in the
contested warrants. Indeed, the same were issued upon applications
stating that the natural and juridical person therein named had
committed a "violation of Central Ban Laws, Tariff and Customs
Laws, Internal Revenue (Code) and Revised Penal Code." In other
words, nospecific offense had been alleged in said applications. The
averments thereof with respect to the offense committed
were abstract. As a consequence, it was impossible for the judges
who issued the warrants to have found the existence of probable
cause, for the same presupposes the introduction of competent
proof that the party against whom it is sought has
performed particular acts, or committed specific omissions, violating
a given provision of our criminal laws. As a matter of fact, the
applications involved in this case do not allege any specific acts
performed by herein petitioners. It would be the legal heresy, of the
highest order, to convict anybody of a "violation of Central Bank
Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised
Penal Code," — as alleged in the aforementioned applications —
without reference to any determinate provision of said laws or
To uphold the validity of the warrants in question would be to wipe
out completely one of the most fundamental rights guaranteed in
our Constitution, for it would place the sanctity of the domicile and
the privacy of communication and correspondence at the mercy of
the whims caprice or passion of peace officers. This is precisely the
evil sought to be remedied by the constitutional provision above
quoted — to outlaw the so-called general warrants. It is not difficult
to imagine what would happen, in times of keen political strife,
when the party in power feels that the minority is likely to wrest it,
even though by legal means.
Such is the seriousness of the irregularities committed in connection
with the disputed search warrants, that this Court deemed it fit to
amend Section 3 of Rule 122 of the former Rules of Court 14 by
providing in its counterpart, under the Revised Rules of Court 15 that
"a search warrant shall not issue but upon probable cause in
connection with one specific offense." Not satisfied with this
qualification, the Court added thereto a paragraph, directing that
"no search warrant shall issue for more than one specific offense."
The grave violation of the Constitution made in the application for
the contested search warrants was compounded by the description
therein made of the effects to be searched for and seized, to wit:
Books of accounts, financial records, vouchers, journals,
correspondence, receipts, ledgers, portfolios, credit
journals, typewriters, and other documents and/or papers
showing all business transactions including disbursement
receipts, balance sheets and related profit and loss
statements.
Thus, the warrants authorized the search for and seizure of records
pertaining to all business transactions of petitioners herein,
regardless of whether the transactions were legal or illegal. The
warrants sanctioned the seizure of all records of the petitioners and
the aforementioned corporations, whatever their nature, thus
openly contravening the explicit command of our Bill of Rights —
that the things to be seized be particularly described — as well as
tending to defeat its major objective: the elimination
of general warrants.
Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-
Prosecutors maintain that, even if the searches and seizures under
consideration were unconstitutional, the documents, papers and
things thus seized are admissible in evidence against petitioners
herein. Upon mature deliberation, however, we are unanimously of
the opinion that the position taken in the Moncado case must be
abandoned. Said position was in line with the American common law
rule, that the criminal should not be allowed to go free merely
"because the constable has blundered," 16 upon the theory that the
constitutional prohibition against unreasonable searches and
seizures is protected by means other than the exclusion of evidence
unlawfully obtained, 17 such as the common-law action for damages
against the searching officer, against the party who procured the
issuance of the search warrant and against those assisting in the
execution of an illegal search, their criminal punishment, resistance,
without liability to an unlawful seizure, and such other legal
remedies as may be provided by other laws.
However, most common law jurisdictions have already given up this
approach and eventually adopted the exclusionary rule, realizing
that this is the only practical means of enforcing the constitutional
injunction against unreasonable searches and seizures. In the
language of Judge Learned Hand:
As we understand it, the reason for the exclusion of
evidence competent as such, which has been unlawfully
acquired, is that exclusion is the only practical way of
enforcing the constitutional privilege. In earlier times the
action of trespass against the offending official may have
been protection enough; but that is true no longer. Only in
case the prosecution which itself controls the seizing
officials, knows that it cannot profit by their wrong will
that wrong be repressed.18
In fact, over thirty (30) years before, the Federal Supreme Court had
already declared:
If letters and private documents can thus be seized and
held and used in evidence against a citizen accused of an
offense, the protection of the 4th Amendment, declaring
his rights to be secure against such searches and seizures,
is of no value, and, so far as those thus placed are
concerned, might as well be stricken from the
Constitution. The efforts of the courts and their officials to
bring the guilty to punishment, praiseworthy as they are,
are not to be aided by the sacrifice of those great principles
established by years of endeavor and suffering which have
resulted in their embodiment in the fundamental law of
the land.19
This view was, not only reiterated, but, also, broadened in
subsequent decisions on the same Federal Court. 20After reviewing
previous decisions thereon, said Court held, in Mapp vs.
Ohio (supra.):
. . . Today we once again examine the Wolf's constitutional
documentation of the right of privacy free from
unreasonable state intrusion, and after its dozen years on
our books, are led by it to close the only courtroom door
remaining open to evidence secured by official lawlessness
in flagrant abuse of that basic right, reserved to all persons
as a specific guarantee against that very same unlawful
conduct. We hold that all evidence obtained by searches
and seizures in violation of the Constitution is, by that
same authority, inadmissible in a State.
Since the Fourth Amendment's right of privacy has been
declared enforceable against the States through the Due
Process Clause of the Fourteenth, it is enforceable against
them by the same sanction of exclusion as it used against
the Federal Government. Were it otherwise, then just as
without the Weeks rule the assurance against
unreasonable federal searches and seizures would be "a
form of words," valueless and underserving of mention in
a perpetual charter of inestimable human liberties, so
too, without that rule the freedom from state invasions of
privacy would be so ephemeral and so neatly severed from
its conceptual nexus with the freedom from all brutish
means of coercing evidence as not to permit this Court's
high regard as a freedom "implicit in the concept of
ordered liberty." At the time that the Court held in Wolf
that the amendment was applicable to the States through
the Due Process Clause, the cases of this Court as we have
seen, had steadfastly held that as to federal officers the
Fourth Amendment included the exclusion of the evidence
seized in violation of its provisions. Even Wolf "stoutly
adhered" to that proposition. The right to when conceded
operatively enforceable against the States, was not
susceptible of destruction by avulsion of the sanction upon
which its protection and enjoyment had always been
deemed dependent under the Boyd, Weeks and
Silverthorne Cases. Therefore, in extending the substantive
protections of due process to all constitutionally
unreasonable searches — state or federal — it was
logically and constitutionally necessarily that the exclusion
doctrine — an essential part of the right to privacy — be
also insisted upon as an essential ingredient of the right
newly recognized by the Wolf Case. In short, the admission
of the new constitutional Right by Wolf could not tolerate
denial of its most important constitutional privilege,
namely, the exclusion of the evidence which an accused
had been forced to give by reason of the unlawful seizure.
To hold otherwise is to grant the right but in reality to
withhold its privilege and enjoyment. Only last year the
Court itself recognized that the purpose of the exclusionary
rule to "is to deter — to compel respect for the
constitutional guaranty in the only effectively available
way — by removing the incentive to disregard it" . . . .
The ignoble shortcut to conviction left open to the State
tends to destroy the entire system of constitutional
restraints on which the liberties of the people rest. Having
once recognized that the right to privacy embodied in the
Fourth Amendment is enforceable against the States, and
that the right to be secure against rude invasions of
privacy by state officers is, therefore constitutional in
origin, we can no longer permit that right to remain an
empty promise. Because it is enforceable in the same
manner and to like effect as other basic rights secured by
its Due Process Clause, we can no longer permit it to be
revocable at the whim of any police officer who, in the
name of law enforcement itself, chooses to suspend its
enjoyment. Our decision, founded on reason and truth,
gives to the individual no more than that which the
Constitution guarantees him to the police officer no less
than that to which honest law enforcement is entitled, and,
to the courts, that judicial integrity so necessary in the true
administration of justice. (emphasis ours.)
Indeed, the non-exclusionary rule is contrary, not only to the letter,
but also, to the spirit of the constitutional injunction against
unreasonable searches and seizures. To be sure, if the applicant for
a search warrant has competent evidence to establish probable
cause of the commission of a given crime by the party against whom
the warrant is intended, then there is no reason why the applicant
should not comply with the requirements of the fundamental law.
Upon the other hand, if he has no such competent evidence, then it
is not possible for the Judge to find that there is probable cause,
and, hence, no justification for the issuance of the warrant. The only
possible explanation (not justification) for its issuance is the
necessity of fishing evidence of the commission of a crime. But,
then, this fishing expedition is indicative of the absence of evidence
to establish a probable cause.
Moreover, the theory that the criminal prosecution of those who
secure an illegal search warrant and/or make unreasonable searches
or seizures would suffice to protect the constitutional guarantee
under consideration, overlooks the fact that violations thereof are,
in general, committed By agents of the party in power, for, certainly,
those belonging to the minority could not possibly abuse a power
they do not have. Regardless of the handicap under which the
minority usually — but, understandably — finds itself in prosecuting
agents of the majority, one must not lose sight of the fact that the
psychological and moral effect of the possibility 21 of securing their
conviction, is watered down by the pardoning power of the party for
whose benefit the illegality had been committed.
In their Motion for Reconsideration and Amendment of the
Resolution of this Court dated June 29, 1962, petitioners allege that
Rooms Nos. 81 and 91 of Carmen Apartments, House No. 2008,
Dewey Boulevard, House No. 1436, Colorado Street, and Room No.
304 of the Army-Navy Club, should be included among the premises
considered in said Resolution as residences of herein petitioners,
Harry S. Stonehill, Robert P. Brook, John J. Brooks and Karl Beck,
respectively, and that, furthermore, the records, papers and other
effects seized in the offices of the corporations above referred to
include personal belongings of said petitioners and other effects
under their exclusive possession and control, for the exclusion of
which they have a standing under the latest rulings of the federal
courts of federal courts of the United States. 22
We note, however, that petitioners' theory, regarding their alleged
possession of and control over the aforementioned records, papers
and effects, and the alleged "personal" nature thereof, has Been
Advanced, notin their petition or amended petition herein, but in
the Motion for Reconsideration and Amendment of the Resolution
of June 29, 1962. In other words, said theory would appear to be
readjustment of that followed in said petitions, to suit the approach
intimated in the Resolution sought to be reconsidered and
amended. Then, too, some of the affidavits or copies of alleged
affidavits attached to said motion for reconsideration, or submitted
in support thereof, contain either inconsistent allegations, or
allegations inconsistent with the theory now advanced by
petitioners herein.
Upon the other hand, we are not satisfied that the allegations of
said petitions said motion for reconsideration, and the contents of
the aforementioned affidavits and other papers submitted in
support of said motion, have sufficiently established the facts or
conditions contemplated in the cases relied upon by the petitioners;
to warrant application of the views therein expressed, should we
agree thereto. At any rate, we do not deem it necessary to express
our opinion thereon, it being best to leave the matter open for
determination in appropriate cases in the future.
We hold, therefore, that the doctrine adopted in the Moncado case
must be, as it is hereby, abandoned; that the warrants for the search
of three (3) residences of herein petitioners, as specified in the
Resolution of June 29, 1962, are null and void; that the searches and
seizures therein made are illegal; that the writ of preliminary
injunction heretofore issued, in connection with the documents,
papers and other effects thus seized in said residences of herein
petitioners is hereby made permanent; that the writs prayed for are
granted, insofar as the documents, papers and other effects so
seized in the aforementioned residences are concerned; that the
aforementioned motion for Reconsideration and Amendment
should be, as it is hereby, denied; and that the petition herein is
dismissed and the writs prayed for denied, as regards the
documents, papers and other effects seized in the twenty-nine (29)
places, offices and other premises enumerated in the same
Resolution, without special pronouncement as to costs.
It is so ordered.
EN BANC
[G.R. No. L-32409. February 27, 1971.]
BACHE & CO. (PHIL.), INC. and FREDERICK E.
SEGGERMAN, Petitioners, v. HON. JUDGE VIVENCIO M. RUIZ, MISAEL
P. VERA, in his capacity as Commissioner of Internal Revenue,
ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ,
MIMIR DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE, JOHN
DOE, and JOHN DOE, Respondents.
San Juan, Africa, Gonzales & San Agustin, for Petitioners.
Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin
V . Bautista, Solicitor Pedro A. Ramirez and Special Attorney Jaime
M. Maza for Respondents.
DECISION
VILLAMOR, J.:
This is an original action of certiorari, prohibition and mandamus,
with prayer for a writ of preliminary mandatory and prohibitory
injunction. In their petition Bache & Co. (Phil.), Inc., a corporation
duly organized and existing under the laws of the Philippines, and its
President, Frederick E. Seggerman, pray this Court to declare null
and void Search Warrant No. 2-M-70 issued by respondent Judge on
February 25, 1970; to order respondents to desist from enforcing
the same and/or keeping the documents, papers and effects seized
by virtue thereof, as well as from enforcing the tax assessments on
petitioner corporation alleged by petitioners to have been made on
the basis of the said documents, papers and effects, and to order the
return of the latter to petitioners. We gave due course to the
petition but did not issue the writ of preliminary injunction prayed
for therein.
The pertinent facts of this case, as gathered from record, are as
follows:chanrob1es virtual 1aw library
On February 24, 1970, respondent Misael P. Vera, Commissioner of
Internal Revenue, wrote a letter addressed to respondent Judge
Vivencio M. Ruiz requesting the issuance of a search warrant against
petitioners for violation of Section 46(a) of the National Internal
Revenue Code, in relation to all other pertinent provisions thereof,
particularly Sections 53, 72, 73, 208 and 209, and authorizing
Revenue Examiner Rodolfo de Leon, one of herein respondents, to
make and file the application for search warrant which was attached
to the letter.
In the afternoon of the following day, February 25, 1970, respondent
De Leon and his witness, respondent Arturo Logronio, went to the
Court of First Instance of Rizal. They brought with them the
following papers: respondent Vera’s aforesaid letter-request; an
application for search warrant already filled up but still unsigned by
respondent De Leon; an affidavit of respondent Logronio subscribed
before respondent De Leon; a deposition in printed form of
respondent Logronio already accomplished and signed by him but
not yet subscribed; and a search warrant already accomplished but
still unsigned by respondent Judge.
At that time respondent Judge was hearing a certain case; so, by
means of a note, he instructed his Deputy Clerk of Court to take the
depositions of respondents De Leon and Logronio. After the session
had adjourned, respondent Judge was informed that the depositions
had already been taken. The stenographer, upon request of
respondent Judge, read to him her stenographic notes; and
thereafter, respondent Judge asked respondent Logronio to take the
oath and warned him that if his deposition was found to be false and
without legal basis, he could be charged for perjury. Respondent
Judge signed respondent de Leon’s application for search warrant
and respondent Logronio’s deposition, Search Warrant No. 2-M-70
was then sign by respondent Judge and accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday, the
BIR agents served the search warrant petitioners at the offices of
petitioner corporation on Ayala Avenue, Makati, Rizal. Petitioners’
lawyers protested the search on the ground that no formal
complaint or transcript of testimony was attached to the warrant.
The agents nevertheless proceeded with their search which yielded
six boxes of documents.
On March 3, 1970, petitioners filed a petition with the Court of First
Instance of Rizal praying that the search warrant be quashed,
dissolved or recalled, that preliminary prohibitory and mandatory
writs of injunction be issued, that the search warrant be declared
null and void, and that the respondents be ordered to pay
petitioners, jointly and severally, damages and attorney’s fees. On
March 18, 1970, the respondents, thru the Solicitor General, filed an
answer to the petition. After hearing, the court, presided over by
respondent Judge, issued on July 29, 1970, an order dismissing the
petition for dissolution of the search warrant. In the meantime, or
on April 16, 1970, the Bureau of Internal Revenue made tax
assessments on petitioner corporation in the total sum of
P2,594,729.97, partly, if not entirely, based on the documents thus
seized. Petitioners came to this Court.
The petition should be granted for the following reasons:chanrob1es
virtual 1aw library
1. Respondent Judge failed to personally examine the complainant
and his witness.
The pertinent provisions of the Constitution of the Philippines and of
the Revised Rules of Court are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their persons, houses,
papers and effects against unreasonable searches and seizures shall
not be violated, and no warrants shall issue but upon probable
cause, to be determined by the judge after examination under oath
or affirmation of the complainant and the witnesses he may
produce, and particularly describing the place to be searched, and
the persons or things to be seized." (Art. III, Sec. 1, Constitution.)
"SEC. 3. Requisites for issuing search warrant. — A search warrant
shall not issue but upon probable cause in connection with one
specific offense to be determined by the judge or justice of the
peace after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly
describing the place to be searched and the persons or things to be
seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4. Examination of the applicant. — The judge or justice of the
peace must, before issuing the warrant, personally examine on oath
or affirmation the complainant and any witnesses he may produce
and take their depositions in writing, and attach them to the record,
in addition to any affidavits presented to him." (Rule 126, Revised
Rules of Court.)
The examination of the complainant and the witnesses he may
produce, required by Art. III, Sec. 1, par. 3, of the Constitution, and
by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should be
conducted by the judge himself and not by others. The phrase
"which shall be determined by the judge after examination under
oath or affirmation of the complainant and the witnesses he may
produce," appearing in the said constitutional provision, was
introduced by Delegate Francisco as an amendment to the draft
submitted by the Sub-Committee of Seven. The following discussion
in the Constitutional Convention (Laurel, Proceedings of the
Philippine Constitutional Convention, Vol. III, pp. 755-757) is
enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al
grano.
En los casos de una necesidad de actuar inmediatamente para que
no se frusten los fines de la justicia mediante el registro inmediato y
la incautacion del cuerpo del delito, no cree Su Señoria que causaria
cierta demora el procedimiento apuntado en su enmienda en tal
forma que podria frustrar los fines de la justicia o si Su Señoria
encuentra un remedio para esto casos con el fin de compaginar los
fines de la justicia con los derechos del individuo en su persona,
bienes etcetera, etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que
Su Señoria pregunta por la siguiente razon: el que solicita un
mandamiento de registro tiene que hacerlo por escrito y ese escrito
no aparecer en la Mesa del Juez sin que alguien vaya el juez a
presentar ese escrito o peticion de sucuestro. Esa persona que
presenta el registro puede ser el mismo denunciante o alguna
persona que solicita dicho mandamiento de registro. Ahora toda la
enmienda en esos casos consiste en que haya peticion de registro y
el juez no se atendra solamente a sea peticion sino que el juez
examiner a ese denunciante y si tiene testigos tambin examiner a los
testigos.
"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese
denunciante por escrito siempre requeriria algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro
lado minimizamos en todo lo posible las vejaciones injustas con la
expedicion arbitraria de los mandamientos de registro. Creo que
entre dos males debemos escoger. el menor.
x x x
"MR. LAUREL. . . . The reason why we are in favor of this amendment
is because we are incorporating in our constitution something of a
fundamental character. Now, before a judge could issue a search
warrant, he must be under the obligation to examine personally
under oath the complainant and if he has any witness, the witnesses
that he may produce . . ."cralaw virtua1aw library
The implementing rule in the Revised Rules of Court, Sec. 4, Rule
126, is more emphatic and candid, for it requires the judge, before
issuing a search warrant, to "personally examine on oath or
affirmation the complainant and any witnesses he may produce . .
."cralaw virtua1aw library
Personal examination by the judge of the complainant and his
witnesses is necessary to enable him to determine the existence or
non-existence of a probable cause, pursuant to Art. III, Sec. 1, par. 3,
of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of
Court, both of which prohibit the issuance of warrants except "upon
probable cause." The determination of whether or not a probable
cause exists calls for the exercise of judgment after a judicial
appraisal of facts and should not be allowed to be delegated in the
absence of any rule to the contrary.
In the case at bar, no personal examination at all was conducted by
respondent Judge of the complainant (respondent De Leon) and his
witness (respondent Logronio). While it is true that the
complainant’s application for search warrant and the witness’
printed-form deposition were subscribed and sworn to before
respondent Judge, the latter did not ask either of the two any
question the answer to which could possibly be the basis for
determining whether or not there was probable cause against
herein petitioners. Indeed, the participants seem to have attached
so little significance to the matter that notes of the proceedings
before respondent Judge were not even taken. At this juncture it
may be well to recall the salient facts. The transcript of stenographic
notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at
the hearing of this case in the court below shows that per
instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special
Deputy Clerk of Court, took the depositions of the complainant and
his witness, and that stenographic notes thereof were taken by Mrs.
Gaspar. At that time respondent Judge was at the sala hearing a
case. After respondent Judge was through with the hearing, Deputy
Clerk Gonzales, stenographer Gaspar, complainant De Leon and
witness Logronio went to respondent Judge’s chamber and informed
the Judge that they had finished the depositions. Respondent Judge
then requested the stenographer to read to him her stenographic
notes. Special Deputy Clerk Gonzales testified as
follows:jgc:chanrobles.com.ph
"A And after finishing reading the stenographic notes, the Honorable
Judge requested or instructed them, requested Mr. Logronio to raise
his hand and warned him if his deposition will be found to be false
and without legal basis, he can be charged criminally for perjury. The
Honorable Court told Mr. Logronio whether he affirms the facts
contained in his deposition and the affidavit executed before Mr.
Rodolfo de Leon.
"Q And thereafter?
"A And thereafter, he signed the deposition of Mr. Logronio.
"Q Who is this he?
"A The Honorable Judge.
"Q The deposition or the affidavit?
"A The affidavit, Your Honor."cralaw virtua1aw library
Thereafter, respondent Judge signed the search warrant.
The participation of respondent Judge in the proceedings which led
to the issuance of Search Warrant No. 2-M-70 was thus limited to
listening to the stenographer’s readings of her notes, to a few words
of warning against the commission of perjury, and to administering
the oath to the complainant and his witness. This cannot be consider
a personal examination. If there was an examination at all of the
complainant and his witness, it was the one conducted by the
Deputy Clerk of Court. But, as stated, the Constitution and the rules
require a personal examination by the judge. It was precisely on
account of the intention of the delegates to the Constitutional
Convention to make it a duty of the issuing judge to personally
examine the complainant and his witnesses that the question of how
much time would be consumed by the judge in examining them
came up before the Convention, as can be seen from the record of
the proceedings quoted above. The reading of the stenographic
notes to respondent Judge did not constitute sufficient compliance
with the constitutional mandate and the rule; for by that manner
respondent Judge did not have the opportunity to observe the
demeanor of the complainant and his witness, and to propound
initial and follow-up questions which the judicial mind, on account of
its training, was in the best position to conceive. These were
important in arriving at a sound inference on the all-important
question of whether or not there was probable cause.
2. The search warrant was issued for more than one specific offense.
Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a)
of the National Internal Revenue Code in relation to all other
pertinent provisions thereof particularly Secs. 53, 72, 73, 208 and
209." The question is: Was the said search warrant issued "in
connection with one specific offense," as required by Sec. 3, Rule
126?
To arrive at the correct answer it is essential to examine closely the
provisions of the Tax Code referred to above. Thus we find the
following:chanrob1es virtual 1aw library
Sec. 46(a) requires the filing of income tax returns by corporations.
Sec. 53 requires the withholding of income taxes at source.
Sec. 72 imposes surcharges for failure to render income tax returns
and for rendering false and fraudulent returns.
Sec. 73 provides the penalty for failure to pay the income tax, to
make a return or to supply the information required under the Tax
Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks,
compounds, or manufactures any article subject to a specific tax,
without having paid the privilege tax therefore, or who aids or abets
in the conduct of illicit distilling, rectifying, compounding, or illicit
manufacture of any article subject to specific tax . . .," and provides
that in the case of a corporation, partnership, or association, the
official and/or employee who caused the violation shall be
responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales,
business, or gross value of output removed, or to pay the tax due
thereon.
The search warrant in question was issued for at least four distinct
offenses under the Tax Code. The first is the violation of Sec. 46(a),
Sec. 72 and Sec. 73 (the filing of income tax returns), which are
interrelated. The second is the violation of Sec. 53 (withholding of
income taxes at source). The third is the violation of Sec. 208
(unlawful pursuit of business or occupation); and the fourth is the
violation of Sec. 209 (failure to make a return of receipts, sales,
business or gross value of output actually removed or to pay the tax
due thereon). Even in their classification the six above-mentioned
provisions are embraced in two different titles: Secs. 46(a), 53, 72
and 73 are under Title II (Income Tax); while Secs. 208 and 209 are
under Title V (Privilege Tax on Business and Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550,
June 19, 1967 (20 SCRA 383), is not applicable, because there the
search warrants were issued for "violation of Central Bank Laws,
Internal Revenue (Code) and Revised Penal Code;" whereas, here
Search Warrant No 2-M-70 was issued for violation of only one code,
i.e., the National Internal Revenue Code. The distinction more
apparent than real, because it was precisely on account of the
Stonehill incident, which occurred sometime before the present
Rules of Court took effect on January 1, 1964, that this Court
amended the former rule by inserting therein the phrase "in
connection with one specific offense," and adding the sentence "No
search warrant shall issue for more than one specific offense," in
what is now Sec. 3, Rule 126. Thus we said in
Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in
connection with the disputed search warrants, that this Court
deemed it fit to amend Section 3 of Rule 122 of the former Rules of
Court that ‘a search warrant shall not issue but upon probable cause
in connection with one specific offense.’ Not satisfied with this
qualification, the Court added thereto a paragraph, directing that
‘no search warrant shall issue for more than one specific offense.’"
3. The search warrant does not particularly describe the things to be
seized.
The documents, papers and effects sought to be seized are
described in Search Warrant No. 2-M-70 in this
manner:jgc:chanrobles.com.ph
"Unregistered and private books of accounts (ledgers, journals,
columnars, receipts and disbursements books, customers ledgers);
receipts for payments received; certificates of stocks and securities;
contracts, promissory notes and deeds of sale; telex and coded
messages; business communications, accounting and business
records; checks and check stubs; records of bank deposits and
withdrawals; and records of foreign remittances, covering the years
1966 to 1970."cralaw virtua1aw library
The description does not meet the requirement in Art III, Sec. 1, of
the Constitution, and of Sec. 3, Rule 126 of the Revised Rules of
Court, that the warrant should particularly describe the things to be
seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto
Concepcion, said:jgc:chanrobles.com.ph
"The grave violation of the Constitution made in the application for
the contested search warrants was compounded by the description
therein made of the effects to be searched for and seized, to
wit:chanrob1es virtual 1aw library
‘Books of accounts, financial records, vouchers, journals,
correspondence, receipts, ledgers, portfolios, credit journals,
typewriters, and other documents and/or paper showing all
business transactions including disbursement receipts, balance
sheets and related profit and loss statements.’
"Thus, the warrants authorized the search for and seizure of records
pertaining to all business transactions of petitioners herein,
regardless of whether the transactions were legal or illegal. The
warrants sanctioned the seizure of all records of the petitioners and
the aforementioned corporations, whatever their nature, thus
openly contravening the explicit command of our Bill of Rights —
that the things to be seized be particularly described — as well as
tending to defeat its major objective: the elimination of general
warrants."cralaw virtua1aw library
While the term "all business transactions" does not appear in Search
Warrant No. 2-M-70, the said warrant nevertheless tends to defeat
the major objective of the Bill of Rights, i.e., the elimination of
general warrants, for the language used therein is so all-embracing
as to include all conceivable records of petitioner corporation,
which, if seized, could possibly render its business inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this
Court had occasion to explain the purpose of the requirement that
the warrant should particularly describe the place to be searched
and the things to be seized, to wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97)
specifically require that a search warrant should particularly
describe the place to be searched and the things to be seized. The
evident purpose and intent of this requirement is to limit the things
to be seized to those, and only those, particularly described in the
search warrant — to leave the officers of the law with no discretion
regarding what articles they shall seize, to the end that
‘unreasonable searches and seizures’ may not be made, — that
abuses may not be committed. That this is the correct interpretation
of this constitutional provision is borne out by American
authorities."cralaw virtua1aw library
The purpose as thus explained could, surely and effectively, be
defeated under the search warrant issued in this case.
A search warrant may be said to particularly describe the things to
be seized when the description therein is as specific as the
circumstances will ordinarily allow (People v. Rubio; 57 Phil. 384); or
when the description expresses a conclusion of fact — not of law —
by which the warrant officer may be guided in making the search
and seizure (idem., dissent of Abad Santos, J.,); or when the things
described are limited to those which bear direct relation to the
offense for which the warrant is being issued (Sec. 2, Rule 126,
Revised Rules of Court). The herein search warrant does not
conform to any of the foregoing tests. If the articles desired to be
seized have any direct relation to an offense committed, the
applicant must necessarily have some evidence, other than those
articles, to prove the said offense; and the articles subject of search
and seizure should come in handy merely to strengthen such
evidence. In this event, the description contained in the herein
disputed warrant should have mentioned, at least, the dates,
amounts, persons, and other pertinent data regarding the receipts
of payments, certificates of stocks and securities, contracts,
promissory notes, deeds of sale, messages and communications,
checks, bank deposits and withdrawals, records of foreign
remittances, among others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners
failed to file a motion for reconsideration of respondent Judge’s
order of July 29, 1970. The contention is without merit. In the first
place, when the questions raised before this Court are the same as
those which were squarely raised in and passed upon by the court
below, the filing of a motion for reconsideration in said court
before certiorari can be instituted in this Court is no longer a
prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the
second place, the rule requiring the filing of a motion for
reconsideration before an application for a writ of certiorari can be
entertained was never intended to be applied without considering
the circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In the
case at bar time is of the essence in view of the tax assessments
sought to be enforced by respondent officers of the Bureau of
Internal Revenue against petitioner corporation, On account of
which immediate and more direct action becomes necessary.
(Matute v. Court of Appeals, Et Al., 26 SCRA 768.) Lastly, the rule
does not apply where, as in this case, the deprivation of petitioners’
fundamental right to due process taints the proceeding against them
in the court below not only with irregularity but also with nullity.
(Matute v. Court of Appeals, Et Al., supra.)
It is next contended by respondents that a corporation is not
entitled to protection against unreasonable search and seizures.
Again, we find no merit in the contention.
"Although, for the reasons above stated, we are of the opinion that
an officer of a corporation which is charged with a violation of a
statute of the state of its creation, or of an act of Congress passed in
the exercise of its constitutional powers, cannot refuse to produce
the books and papers of such corporation, we do not wish to be
understood as holding that a corporation is not entitled to
immunity, under the 4th Amendment, against unreasonable
searches and seizures. A corporation is, after all, but an association
of individuals under an assumed name and with a distinct legal
entity. In organizing itself as a collective body it waives no
constitutional immunities appropriate to such body. Its property
cannot be taken without compensation. It can only be proceeded
against by due process of law, and is protected, under the 14th
Amendment, against unlawful discrimination . . ." (Hale v. Henkel,
201 U.S. 43, 50 L. ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was
thought that a different rule applied to a corporation, the ground
that it was not privileged from producing its books and papers. But
the rights of a corporation against unlawful search and seizure are to
be protected even if the same result might have been achieved in a
lawful way." (Silverthorne Lumber Company, Et. Al. v. United States
of America, 251 U.S. 385, 64 L. ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly
recognized the right of a corporation to object against unreasonable
searches and seizures, thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have no
cause of action to assail the legality of the contested warrants and of
the seizures made in pursuance thereof, for the simple reason that
said corporations have their respective personalities, separate and
distinct from the personality of herein petitioners, regardless of the
amount of shares of stock or the interest of each of them in said
corporations, whatever, the offices they hold therein may be.
Indeed, it is well settled that the legality of a seizure can be
contested only by the party whose rights have been impaired
thereby, and that the objection to an unlawful search and seizure is
purely personal and cannot be availed of by third parties.
Consequently, petitioners herein may not validly object to the use in
evidence against them of the documents, papers and things seized
from the offices and premises of the corporations adverted to
above, since the right to object to the admission of said papers in
evidence belongs exclusively to the corporations, to whom the
seized effects belong, and may not be invoked by the corporate
officers in proceedings against them in their individual capacity . .
."cralaw virtua1aw library
In the Stonehill case only the officers of the various corporations in
whose offices documents, papers and effects were searched and
seized were the petitioners. In the case at bar, the corporation to
whom the seized documents belong, and whose rights have thereby
been impaired, is itself a petitioner. On that score, petitioner
corporation here stands on a different footing from the corporations
in Stonehill.
The tax assessments referred to earlier in this opinion were, if not
entirely — as claimed by petitioners — at least partly — as in effect
admitted by respondents — based on the documents seized by
virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the
assessments were made some one and one-half months after the
search and seizure on February 25, 1970, is a strong indication that
the documents thus seized served as basis for the assessments.
Those assessments should therefore not be enforced.
PREMISES CONSIDERED, the petition is granted. Accordingly, Search
Warrant No. 2-M-70 issued by respondent Judge is declared null and
void; respondents are permanently enjoined from enforcing the said
search warrant; the documents, papers and effects seized
thereunder are ordered to be returned to petitioners; and
respondent officials the Bureau of Internal Revenue and their
representatives are permanently enjoined from enforcing the
assessments mentioned in Annex "G" of the present petition, as well
as other assessments based on the documents, papers and effects
seized under the search warrant herein nullified, and from using the
same against petitioners in any criminal or other proceeding. No
pronouncement as to costs.
Bataan Shipyard vs PCGG
Facts:
Challenged in this special civil action of certiorari and prohibition by
a private corporation known as the Bataan Shipyard and Engineering
Co., Inc. are: (1) Executive Orders Numbered 1 and 2, promulgated
by President Corazon C. Aquino on February 28, 1986 and March 12,
1986, respectively, and (2) the sequestration, takeover, and other
orders issued, and acts done, in accordance with said executive
orders by the Presidential Commission on Good Government and/or
its Commissioners and agents, affecting said corporation.
The PCGG was tasked to sequester the BASECO thru Executive
Orders 1 and 2 of President Cory Aquino.
The PCGG was able to take over the BASECO and terminate its
executive employees and requested to have the following
documents of the said company. Such as (Stock transfer book, Legal
documents, Minutes of the meetings, Financial statements, and the
likes)
Petitioner contends that he cannot produce the said documents due
to it is an infringement of its right against self incrimination.
ISSUE:
WON documents ask in by PCGG would vitiate their right against self
incrimination.
RULING:
BASECO also contends that its right against self incrimination and
unreasonable searches and seizures had been transgressed by the
Order of April 18, 1986 which required it "to produce corporate
records from 1973 to 1986 under pain of contempt of the
Commission if it fails to do so." The order was issued upon the
authority of Section 3 (e) of Executive Order No. 1, treating of the
PCGG's power to "issue subpoenas requiring * * the production of
such books, papers, contracts, records, statements of accounts and
other documents as may be material to the investigation conducted
by the Commission, " and paragraph (3), Executive Order No. 2
dealing with its power to "require all persons in the Philippines
holding * * (alleged "ill-gotten") assets or properties, whether
located in the Philippines or abroad, in their names as nominees,
agents or trustees, to make full disclosure of the same * *." The
contention lacks merit.
it is elementary that the right against self-incrimination has no
application to juridical persons.
While an individual may lawfully refuse to answer incriminating
questions unless protected by an immunity statute, it does not
follow that a corporation, vested with special privileges and
franchises, may refuse to show its hand when charged with an abuse
ofsuchprivileges
At any rate, Executive Order No. 14-A, amending Section 4 of
Executive Order No. 14 assures protection to individuals required to
produce evidence before the PCGG against any possible violation of
his right against self-incrimination. It gives them immunity from
prosecution on the basis of testimony or information he is
compelled to present. As amended, said Section 4 now provides that
—
xxx xxx xxx
The witness may not refuse to comply with the order on the basis of
his privilege against self-incrimination; but no testimony or other
information compelled under the order (or any information directly
or indirectly derived from such testimony, or other information) may
be used against the witness in any criminal case, except a
prosecution for perjury, giving a false statement, or otherwise failing
to comply with the order.
Relevant jurisprudence is also cited by the Solicitor General. 114
* * corporations are not entitled to all of the constitutional
protections which private individuals have. * * They are not at all
within the privilege against self-incrimination, although this court
more than once has said that the privilege runs very closely with the
4th Amendment's Search and Seizure provisions.It is also settled
that an officer of the company cannot refuse to produce its records
in its possession upon the plea that they will either incriminate him
or may incriminate it." (Oklahoma Press Publishing Co. v. Walling,
327 U.S. 186; emphasis, the Solicitor General's).
* * The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It received certain special
privileges and franchises, and holds them subject to the laws of the
state and the limitations of its charter. Its powers are limited by law.
It can make no contract not authorized by its charter. Its rights to act
as a corporation are only preserved to it so long as it obeys the laws
of its creation. There is a reserve right in the legislature to
investigate its contracts and find out whether it has exceeded its
powers. It would be a strange anomaly to hold that a state, having
chartered a corporation to make use of certain franchises, could not,
in the exercise of sovereignty, inquire how these franchises had
been employed, and whether they had been abused, and demand
the production of the corporate books and papers for that purpose.
The defense amounts to this, that an officer of the corporation
which is charged with a criminal violation of the statute may plead
the criminality of such corporation as a refusal to produce its books.
To state this proposition is to answer it. While an individual may
lawfully refuse to answer incriminating questions unless protected by
an immunity statute, it does not follow that a corporation, vested
with special privileges and franchises may refuse to show its hand
when charged with an abuse of such privileges.
The constitutional safeguard against unreasonable searches and
seizures finds no application to the case at bar either. There has
been no search undertaken by any agent or representative of the
PCGG, and of course no seizure on the occasion thereof.
G.R. No. L-26001 October 29, 1968
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND
INDUSTRIAL BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank — hereinafter referred to as the PNB
— seeks the review by certiorari of a decision of the Court of
Appeals, which affirmed that of the Court of First Instance of Manila,
dismissing plaintiff's complaint against the Philippine Commercial
and Industrial Bank — hereinafter referred to as the PCIB — for the
recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and the
decision of the Court of Appeals show that, on about January 15,
1962, one Augusto Lim deposited in his current account with the
PCIB branch at Padre Faura, Manila, GSIS Check No. 645915- B, in
the sum of P57,415.00, drawn against the PNB; that, following an
established banking practice in the Philippines, the check was, on
the same date, forwarded, for clearing, through the Central Bank, to
the PNB, which did not return said check the next day, or at any
other time, but retained it and paid its amount to the PCIB, as well
as debited it against the account of the GSIS in the PNB; that,
subsequently, or on January 31, 1962, upon demand from the GSIS,
said sum of P57,415.00 was re-credited to the latter's account, for
the reason that the signatures of its officers on the check were
forged; and that, thereupon, or on February 2, 1962, the PNB
demanded from the PCIB the refund of said sum, which the PCIB
refused to do. Hence, the present action against the PCIB, which was
dismissed by the Court of First Instance of Manila, whose decision
was, in turn, affirmed by the Court of Appeals.
It is not disputed that the signatures of the General Manager and
the Auditor of the GSIS on the check, as drawer thereof, are forged;
that the person named in the check as its payee was one Mariano D.
Pulido, who purportedly indorsed it to one Manuel Go; that the
check purports to have been indorsed by Manuel Go to Augusto Lim,
who, in turn, deposited it with the PCIB, on January 15, 1962; that,
thereupon, the PCIB stamped the following on the back of the check:
"All prior indorsements and/or Lack of Endorsement Guaranteed,
Philippine Commercial and Industrial Bank," Padre Faura Branch,
Manila; that, on the same date, the PCIB sent the check to the PNB,
for clearance, through the Central Bank; and that, over two (2)
months before, or on November 13, 1961, the GSIS had notified the
PNB, which acknowledged receipt of the notice, that said check had
been lost, and, accordingly, requested that its payment be stopped.
In its brief, the PNB maintains that the lower court erred: (1) in not
finding the PCIB guilty of negligence; (2) in not finding that the
indorsements at the back of the check are forged; (3) in not finding
the PCIB liable to the PNB by virtue of the former's warranty on the
back of the check; (4) in not holding that "clearing" is not
"acceptance", in contemplation of the Negotiable Instruments law;
(5) in not finding that, since the check had not been accepted by the
PNB, the latter is entitled to reimbursement therefor; and (6) in
denying the PNB's right to recover from the PCIB.
The first assignment of error will be discussed later, together with
the last,with which it is interrelated.
As regards the second assignment of error, the PNB argues that,
since the signatures of the drawer are forged, so must the signatures
of the supposed indorsers be; but this conclusion does not
necessarily follow from said premise. Besides, there is absolutely no
evidence, and the PNB has not even tried to prove that the
aforementioned indorsements are spurious. Again, the PNB
refunded the amount of the check to the GSIS, on account of the
forgery in the signatures, not of the indorsers or supposed indorsers,
but of the officers of the GSISas drawer of the instrument. In other
words, the question whether or not the indorsements have been
falsified is immaterial to the PNB's liability as a drawee, or to its right
to recover from the PCIB,1 for, as against the drawee, the
indorsement of an intermediate bank does not guarantee the
signature of the drawer,2 since the forgery of the indorsement
is not the cause of the loss.3
With respect to the warranty on the back of the check, to which the
third assignment of error refers, it should be noted that the PCIB
thereby guaranteed "all prior indorsements," not the authenticity of
the signatures of the officers of the GSIS who signed on its behalf,
because the GSIS is not an indorser of the check, but its drawer.4Said
warranty is irrelevant, therefore, to the PNB's alleged right to
recover from the PCIB. It could have been availed of by a subsequent
indorsee5 or a holder in due course6 subsequent to the PCIB, but,
the PNB is neither.7 Indeed, upon payment by the PNB, as drawee,
the check ceased to be a negotiable instrument, and became a mere
voucher or proof of payment.8
Referring to the fourth and fifth assignments of error, we must bear
in mind that, in general, "acceptance", in the sense in which this
term is used in the Negotiable Instruments Law9 is not required for
checks, for the same are payable on demand.10 Indeed,
"acceptance" and "payment" are, within the purview of said Law,
essentially different things, for the former is "a promise to perform
an act," whereas the latter is the "actual performance" thereof.11 In
the words of the Law,12 "the acceptance of a bill is the signification
by the drawee of his assent to the order of the drawer," which, in
the case of checks, is the payment, on demand, of a given sum of
money. Upon the other hand, actual payment of the amount of a
check implies not only an assent to said order of the drawer and a
recognition of the drawer's obligation to pay the aforementioned
sum, but, also, a compliance with such obligation.
Let us now consider the first and the last assignments of error. The
PNB maintains that the lower court erred in not finding that the PCIB
had been guilty of negligence in not discovering that the check was
forged. Assuming that there had been such negligence on the part of
the PCIB, it is undeniable, however, that the PNB has, also, been
negligent, with the particularity that the PNB had been guilty of
a greater degree of negligence, because it had a previous and formal
notice from the GSIS that the check had been lost, with the request
that payment thereof be stopped. Just as important, if not more
important and decisive, is the fact that the PNB's negligence was the
main or proximate cause for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash the
check upon its presentation by Augusto Lim; that the latter had
merely deposited it in his current account with the PCIB; that, on the
same day, the PCIB sent it, through the Central Bank, to the PNB, for
clearing; that the PNB did not return the check to the PCIB the next
day or at any other time; that said failure to return the check to the
PCIB implied, under the current banking practice, that the PNB
considered the check good and would honor it; that, in fact, the PNB
honored the check and paid its amount to the PCIB; and that only
then did the PCIB allow Augusto Lim to draw said amount from his
aforementioned current account.
Thus, by not returning the check to the PCIB, by thereby indicating
that the PNB had found nothing wrong with the check and would
honor the same, and by actually paying its amount to the PCIB, the
PNB induced the latter, not only to believe that the check was
genuine and good in every respect, but, also, to pay its amount to
Augusto Lim. In other words, the PNB was the primary or proximate
cause of the loss, and, hence, may not recover from the PCIB.13
It is a well-settled maxim of law and equity that when one of two (2)
innocent persons must suffer by the wrongful act of a third person,
the loss must be borne by the one whose negligence was the
proximate cause of the loss or who put it into the power of the third
person to perpetrate the wrong.14
Then, again, it has, likewise, been held that, where the collecting
(PCIB) and the drawee (PNB) banks are equally at fault, the court will
leave the parties where it finds them.15
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he
will pay it according to the tenor of his acceptance; and
admits:
(a) The existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to
indorse.
The prevailing view is that the same rule applies in the case of a
drawee who pays a bill without having previously accepted it.16
WHEREFORE, the decision appealed from is hereby affirmed, with
costs against the Philippine National Bank. It is so ordered.
G.R. No. L-40324 October 5, 1988
JOSE O. SIA, petitioner,
vs.
COURT OF APPEALS and THE PEOPLE OF THE
PHILIPPINES, respondents.
Faustino B. Tobia and Robert H. Tobia for petitioner.
The Solicitor General for respondents.
PADILLA, J.:
The facts in this ease are not disputed. As stated by the Court of
Appeals in its assailed decision, * dated 29 November 1974,
rendered in CA-G.R. No. 12602-CR, they are as follows:
... on October 31, 1963 Jose O. Sia (appellant
herein), President and General Manager of the
Metal Manufacturing of the Philippines, Inc. for
and in its behalf, applied for and was granted a
Letter of Credit (Exhibit "A") with the Continental
Bank, Manila to cover the importation of One
Hundred (100) pieces of Safe-Deposit Locks No.
4440, complete with keys, amounting Pl,979.06.
A marginal deposit was made with the Bank and
the Letter of Credit was confirmed with its
foreign correspondent. Thereafter, appellant, for
and in behalf of the Metal Manufacturing of the
Philippines, Inc., executed a trust receipt (Exhibit
"C") in favor of the Continental Bank, the terms
and conditions of which read, in part, 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 for its account
but without any authority to
make any other disposition
whatsoever of the said goods
or any part thereof (or the
proceeds thereof) either by
way of conditional sale,
pledge or otherwise.
In case of sale I/We further
agree to hand the proceeds
as soon as received to the
Bank to apply against the
relative accept instance (as
described above) and for the
payment of any other
indebtedness of mine/ours
to Continental Bank.
I/We agree to keep said
goods insured to their full
value against fire and 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
charged with the storage,
premium of insurance or any
other expenses incurred on
said goods.
I/We also 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.
xxx xxx xxx
The Bank may at any time
cancel this trust and take
possession of said goods or
the proceeds of the same as
may then have been sold
wherever the said goods or
proceeds may then be found,
and in the event of any
suspensions, or failure, or
assignment for the benefit of
creditor on my/our part or
non-fulfillment of any
obligation, or of the non-
payment at maturity of any
acceptance specified hereon
or under any credit issued by
the Bank on my/our account,
or of any indebtedness on
my/our part, all of my/our
obligations, acceptances,
indebtedness, and liabilities
whatsoever shall thereupon
(with or without notice)
mature and become due and
payable. ...
When the said trust receipt became due and
demandable, the Metal Manufacturing of the
Philippines, Inc. failed to pay or deliver the
merchandise to the Bank despite the latter's
demands (Exh. "D"). ... 1
Consequently, before the Court of First Instance of Manila, Branch
XI, an information for estafa was filed against petitioner for violation
of the trust receipt agreement executed by him in his capacity as
President and General Manager of Metal Manufacturing of the
Philippines, Inc. in favor of Continental Bank (docketed as Criminal
Case No. 77092).
Upon petitioner's plea of not guilty, trial proceeded. The trial court
entered a verdict of guilty beyond reasonable doubt for the offense
of estafa defined and penalized in paragraph 1(b), Article 315 of the
Revised Penal Code, and sentenced the accused (petitioner) to an
indeterminate penalty of from One (1) Month and One (1) Day of
arresto mayor, as minimum, to One (1) Year of prison correccional,
as maximum, to indemnify the offended party in the sum of
P1,979.06 and to pay the costs.
Elevating the trial court's decision to the Court of Appeals (docketed
therein as CA G.R. No. 16026-CR), the conviction of the accused, as
aforestated, was affirmed with the modification to the effect that
the accused is to indemnify the offended party in the sum of
P1,278.65 only (after deducting the marginal deposit). A motion for
reconsideration followed, but was denied for lack of merit. Hence,
this petition for review on certiorari.
From the assignment of errors submitted by the petitioner, the
following issues are raised:
1) whether petitioner Sia, as President and General Manager of
Metal Manufacturing of the Phil., Inc. having acted for and on its
behalf in executing the Trust Receipt Agreement in favor of the
Continental Bank may be held liable for the crime charged; and
2) the real nature of a trust receipt agreement or transaction.
This case presents issues similar to those resolved by the Court en
banc in Sia vs. People. 2 The decision in the cited case calls for a
reversal of the respondent appellate court's herein appealed
judgment thereby resulting in the acquittal of the petitioner.
There is no further point is discussing the issues raised by petitioner,
as met by the respondents, because the Court's decision in the
earlier Sia case has preempted the subject (although there are
pronouncements in said decision which may be open to question so
much so that the decision was not reached by a unanimous court).
It should be pointed out, however, that if the acts herein involved
occurred after 29 January 1975, petitioner would be criminally liable
for estafa under paragraph l(b), Article 315 of the Revised Penal
Code, pursuant to the following provisions of PD 115—
Sec. 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 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. 3
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby
GRANTED. The decision of the Court of Appeals is SET ASIDE.
Defendant is ACQUITTED without prejudice to the institution of a
civil action against the Metal Manufacturing of the Phil., Inc. for
collection of the sum due plus damages if any. No costs.
SO ORDERED.
G.R. No. L-19190 November 29, 1922
THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
VENANCIO CONCEPCION, defendant-appellant.
Recaredo Ma. Calvo for appellant.
Attorney-General Villa-Real for appellee.
MALCOLM, J.:
By telegrams and a letter of confirmation to the manager of the
Aparri branch of the Philippine National Bank, Venancio Concepcion,
President of the Philippine National Bank, between April 10, 1919,
and May 7, 1919, authorized an extension of credit in favor of "Puno
y Concepcion, S. en C." in the amount of P300,000. This special
authorization was essential in view of the memorandum order of
President Concepcion dated May 17, 1918, limiting the discretional
power of the local manager at Aparri, Cagayan, to grant loans and
discount negotiable documents to P5,000, which, in certain cases,
could be increased to P10,000. Pursuant to this authorization, credit
aggregating P300,000, was granted the firm of "Puno y Concepcion,
S. en C.," the only security required consisting of six demand notes.
The notes, together with the interest, were taken up and paid by
July 17, 1919.
"Puno y Concepcion, S. en C." was a copartnership capitalized at
P100,000. Anacleto Concepcion contributed P5,000; Clara Vda. de
Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente Puno,
P20,000; and Rosario San Agustin, "casada con Gral. Venancio
Concepcion," P50,000. Member Miguel S. Concepcion was the
administrator of the company.
On the facts recounted, Venancio Concepcion, as President of the
Philippine National Bank and as member of the board of directors of
this bank, was charged in the Court of First Instance of Cagayan with
a violation of section 35 of Act No. 2747. He was found guilty by the
Honorable Enrique V. Filamor, Judge of First Instance, and was
sentenced to imprisonment for one year and six months, to pay a
fine of P3,000, with subsidiary imprisonment in case of insolvency,
and the costs.
Section 35 of Act No. 2747, effective on February 20, 1918, just
mentioned, to which reference must hereafter repeatedly be made,
reads as follows: "The National Bank shall not, directly or indirectly,
grant loans to any of the members of the board of directors of the
bank nor to agents of the branch banks." Section 49 of the same Act
provides: "Any person who shall violate any of the provisions of this
Act shall be punished by a fine not to exceed ten thousand pesos, or
by imprisonment not to exceed five years, or by both such fine and
imprisonment." These two sections were in effect in 1919 when the
alleged unlawful acts took place, but were repealed by Act No. 2938,
approved on January 30, 1921.
Counsel for the defense assign ten errors as having been committed
by the trial court. These errors they have argued adroitly and
exhaustively in their printed brief, and again in oral argument.
Attorney-General Villa-Real, in an exceptionally accurate and
comprehensive brief, answers the proposition of appellant one by
one.
The question presented are reduced to their simplest elements in
the opinion which follows:
I. Was the granting of a credit of P300,000 to the copartnership
"Puno y Concepcion, S. en C." by Venancio Concepcion, President of
the Philippine National Bank, a "loan" within the meaning of section
35 of Act No. 2747?
Counsel argue that the documents of record do not prove that
authority to make a loan was given, but only show the concession of
a credit. In this statement of fact, counsel is correct, for the exhibits
in question speak of a "credito" (credit) and not of a " prestamo"
(loan).
The "credit" of an individual means his ability to borrow money by
virtue of the confidence or trust reposed by a lender that he will pay
what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490;
Bouvier's Law Dictionary.) A "loan" means the delivery by one party
and the receipt by the other party of a given sum of money, upon an
agreement, express or implied, to repay the sum loaned, with or
without interest. (Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The
concession of a "credit" necessarily involves the granting of "loans"
up to the limit of the amount fixed in the "credit,"
II. Was the granting of a credit of P300,000 to the copartnership
"Puno y Concepcion, S. en C.," by Venancio Concepcion, President of
the Philippine National Bank, a "loan" or a "discount"?
Counsel argue that while section 35 of Act No. 2747 prohibits the
granting of a "loan," it does not prohibit what is commonly known as
a "discount."
In a letter dated August 7, 1916, H. Parker Willis, then President of
the National Bank, inquired of the Insular Auditor whether section
37 of Act No. 2612 was intended to apply to discounts as well as to
loans. The ruling of the Acting Insular Auditor, dated August 11,
1916, was to the effect that said section referred to loans alone, and
placed no restriction upon discount transactions. It becomes
material, therefore, to discover the distinction between a "loan" and
a "discount," and to ascertain if the instant transaction comes under
the first or the latter denomination.
Discounts are favored by bankers because of their liquid nature,
growing, as they do, out of an actual, live, transaction. But in its last
analysis, to discount a paper is only a mode of loaning money, with,
however, these distinctions: (1) In a discount, interest is deducted in
advance, while in a loan, interest is taken at the expiration of a
credit; (2) a discount is always on double-name paper; a loan is
generally on single-name paper.
Conceding, without deciding, that, as ruled by the Insular Auditor,
the law covers loans and not discounts, yet the conclusion is
inevitable that the demand notes signed by the firm "Puno y
Concepcion, S. en C." were not discount paper but were mere
evidences of indebtedness, because (1) interest was not deducted
from the face of the notes, but was paid when the notes fell due;
and (2) they were single-name and not double-name paper.
The facts of the instant case having relation to this phase of the
argument are not essentially different from the facts in the
Binalbagan Estate case. Just as there it was declared that the
operations constituted a loan and not a discount, so should we here
lay down the same ruling.
III. Was the granting of a credit of P300,000 to the copartnership,
"Puno y Concepcion, S. en C." by Venancio Concepcion, President of
the Philippine National Bank, an "indirect loan" within the meaning
of section 35 of Act No. 2747?
Counsel argue that a loan to the partnership "Puno y Concepcion, S.
en C." was not an "indirect loan." In this connection, it should be
recalled that the wife of the defendant held one-half of the capital
of this partnership.
In the interpretation and construction of statutes, the primary rule is
to ascertain and give effect to the intention of the Legislature. In this
instance, the purpose of the Legislature is plainly to erect a wall of
safety against temptation for a director of the bank. The prohibition
against indirect loans is a recognition of the familiar maxim that no
man may serve two masters — that where personal interest clashes
with fidelity to duty the latter almost always suffers. If, therefore, it
is shown that the husband is financially interested in the success or
failure of his wife's business venture, a loan to partnership of which
the wife of a director is a member, falls within the prohibition.
Various provisions of the Civil serve to establish the familiar
relationship called a conjugal partnership. (Articles 1315, 1393,
1401, 1407, 1408, and 1412 can be specially noted.) A loan,
therefore, to a partnership of which the wife of a director of a bank
is a member, is an indirect loan to such director.
That it was the intention of the Legislature to prohibit exactly such
an occurrence is shown by the acknowledged fact that in this
instance the defendant was tempted to mingle his personal and
family affairs with his official duties, and to permit the loan
P300,000 to a partnership of no established reputation and without
asking for collateral security.
In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558;
3 Am. Rep., 211), the Supreme Court of Maryland said:
What then was the purpose of the law when it declared
that no director or officer should borrow of the bank, and
"if any director," etc., "shall be convicted," etc., "of directly
or indirectly violating this section he shall be punished by
fine and imprisonment?" We say to protect the
stockholders, depositors and creditors of the bank, against
the temptation to which the directors and officers might
be exposed, and the power which as such they must
necessarily possess in the control and management of the
bank, and the legislature unwilling to rely upon the implied
understanding that in assuming this relation they would
not acquire any interest hostile or adverse to the most
exact and faithful discharge of duty, declared in express
terms that they should not borrow, etc., of the bank.
In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon
in the Binalbagan Estate decision, it was said:
We are of opinion the statute forbade the loan to his
copartnership firm as well as to himself directly. The loan
was made indirectly to him through his firm.
IV. Could Venancio Concepcion, President of the Philippine National
Bank, be convicted of a violation of section 35 of Act No. 2747 in
relation with section 49 of the same Act, when these portions of Act
No. 2747 were repealed by Act No. 2938, prior to the finding of the
information and the rendition of the judgment?
As noted along toward the beginning of this opinion, section 49 of
Act No. 2747, in relation to section 35 of the same Act, provides a
punishment for any person who shall violate any of the provisions of
the Act. It is contended, however, by the appellant, that the repeal
of these sections of Act No. 2747 by Act No. 2938 has served to take
away the basis for criminal prosecution.
This same question has been previously submitted and has received
an answer adverse to such contention in the cases of United Stated
vs. Cuna ([1908], 12 Phil., 241); People vs. Concepcion ([1922], 43
Phil., 653); and Ong Chang Wing and Kwong Fok vs. United States
([1910], 218 U. S., 272; 40 Phil., 1046). In other words, it has been
the holding, and it must again be the holding, that where an Act of
the Legislature which penalizes an offense, such repeals a former
Act which penalized the same offense, such repeal does not have
the effect of thereafter depriving the courts of jurisdiction to try,
convict, and sentenced offenders charged with violations of the old
law.
V. Was the granting of a credit of P300,000 to the copartnership
"Puno y Concepcion, S. en C." by Venancio Concepcion, President of
the Philippine National Bank, in violation of section 35 of Act No.
2747, penalized by this law?
Counsel argue that since the prohibition contained in section 35 of
Act No. 2747 is on the bank, and since section 49 of said Act
provides a punishment not on the bank when it violates any
provisions of the law, but on a personviolating any provisions of the
same, and imposing imprisonment as a part of the penalty, the
prohibition contained in said section 35 is without penal
sanction.lawph!l.net
The answer is that when the corporation itself is forbidden to do an
act, the prohibition extends to the board of directors, and to each
director separately and individually. (People vs. Concepcion, supra.)
VI. Does the alleged good faith of Venancio Concepcion, President of
the Philippine National Bank, in extending the credit of P300,000 to
the copartnership "Puno y Concepcion, S. en C." constitute a legal
defense?
Counsel argue that if defendant committed the acts of which he was
convicted, it was because he was misled by rulings coming from the
Insular Auditor. It is furthermore stated that since the loans made to
the copartnership "Puno y Concepcion, S. en C." have been paid, no
loss has been suffered by the Philippine National Bank.
Neither argument, even if conceded to be true, is conclusive. Under
the statute which the defendant has violated, criminal intent is not
necessarily material. The doing of the inhibited act, inhibited on
account of public policy and public interest, constitutes the crime.
And, in this instance, as previously demonstrated, the acts of the
President of the Philippine National Bank do not fall within the
purview of the rulings of the Insular Auditor, even conceding that
such rulings have controlling effect.
Morse, in his work, Banks and Banking, section 125, says:
It is fraud for directors to secure by means of their trust,
and advantage not common to the other stockholders. The
law will not allow private profit from a trust, and will not
listen to any proof of honest intent.
JUDGMENT
On a review of the evidence of record, with reference to the
decision of the trial court, and the errors assigned by the appellant,
and with reference to previous decisions of this court on the same
subject, we are irresistibly led to the conclusion that no reversible
error was committed in the trial of this case, and that the defendant
has been proved guilty beyond a reasonable doubt of the crime
charged in the information. The penalty imposed by the trial judge
falls within the limits of the punitive provisions of the law.
Judgment is affirmed, with the costs of this instance against the
appellant. So ordered.
ASSET PRIVATIZATION VS CA (300 SCRA 579)
Asset Privatization Trust vs Court of Appeals
300 SCRA 579 [GR No. 121171 December 29, 1998]
Facts: The development, exploration and utilization of the mineral
deposits in the Surigao Mineral Reservation have been authorized by
the Republic Act No. 1528, as amended by Republic Act No. 2077
and Republic Act No. 4167, by virtue of which laws, a memorandum
of agreement was drawn on July 3, 1968, whereby the Republic of
the Philippines thru the Surigao Mineral Reservation Board, granted
MMIC the exclusive right to explore, develop and exploit nickel,
cobalt, and other minerals in the Surigao Mineral Reservation. MMIC
is a domestic corporation engaged in mining with respondent Jesus
S. Cabarrus Sr. as president and among its original stockholders. The
Philippine government undertook to support the financing of MMIC
by purchase of MMIC debenture bonds and extension of guarantees.
Further, from the DBP and/or the government financing institutions
to subscribe in MMIC and issue guarantee/s of foreign loans or
deferred payment arrangements secured from the US Eximbank,
Asian Development Bank (ADB), Kobe steel of amount not
exceeding US$100 million. On July 13, 1981, MMIC, PNB, and DBP
executed a mortgage trust agreement whereby MMIC as mortgagor,
agreed to constitute a mortgage in favor of PNB and DBP as
mortgages, over all MMIC assets; subject of real estate and chattel
mortgage executed by the mortgagor, and additional assets
described and identified, including assets of whatever kind, nature
or description, which the mortgagor may acquire whether in
substitution of, in replenishment or in addition thereto. Due to the
unsettled obligations, a financial restructuring plan (FRP) was
suggested, however not finalized. The obligations matured and the
mortgage was foreclosed. The foreclosed assets were sold to PNB as
the lone bidder and were assigned to the newly formed
corporations namely Nonoc Mining Corporation, Maricalum Mining
and Industrial Corporation and Island Cement Corporation. In 1986,
these assets were transferred to the asset privatization trust. On
February 28, 1985, Jesus S. Cabarrus Sr. together with the other
stockholders of MMIC, filed a derivative suit against DBP and PNB
before the RTC of Makati branch 62, for annulment of foreclosures,
specific performance and damages. The suit docketed as civil case
no. 9900, prayed that the court: 1.) Annul the foreclosures, restore
the foreclosed assets to MMIC, and require the banks to account for
their use and operation in the interim; 2.) Direct the banks to honor
and perform their commitments under the alleged FRP; 3.) Pay
moral and exemplary damages, attorney’s fees, litigation expenses
and costs. A compromise and arbitration agreement was entered by
the parties to which committee awarded damages in favor of
Cabarrus.
Issue: Whether or not the award granted to Cabarrus was proper.
Held: No. Civil case no. 9900 filed before the RTC being a derivative
suit, MMIC should have been impleaded as a party. It was not joined
as a part plaintiff or party defendant at any stage before of the
proceedings as it is, the award for damages to MMIC, which was not
party before the arbitration committee is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the
real party in interest while the stockholder filing suit for the
corporation’s behalf is only a nominal party. The corporation should
be included s a party in the suit.
An individual stockholder is permitted to institute a derivative suit
on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued or hold the
control of the corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the real part in
interest.
It is a condition sine qua non that the corporation be impleaded as a
party because – not only is the corporation an indispensable party,
but it is also the present rule that it must be served with process.
The reason given is that the judgement must be made binding upon
the corporation in order that the corporation may get the benefit of
the suit and may not bring a subsequent suit against the same
defendants for the same cause of action. In other words the
corporation must be joined as a party because it is its cause of action
that is being litigated and because judgement must be a res judicata
against it.
The reasons given for not allowing direct individual suit are:
1. That the prior rights of the creditors may be prejudiced.
Thus, our Supreme Court held in the case of Evangelista vs
Santos that the “Stockholders may not directly claim those
damages for themselves for that would result in the
appropriation by, and the distribution among them of part
of the corporate assets before the
2. The universally recognized doctrine that a stockholder in a
corporation has no title legal or equitable to the corporate
property; that both of these are in the corporation itself for
the benefit of the stockholders. In other words, to allow
shareholders to sue separately would conflict with the
separate corporate entity principle.
3. dissolution of the corporation and the liquidation of its
debts and liabilities, something which cannot be legally
done in view of section 16 of the corporation law.
4. The filing of such suits would conflict with the duty of the
management to sue for the protection of all concerned;
5. It would produce wasteful multiplicity of suits; and
6. It would involve confusion in ascertaining the effect of
partial recovery by an individual on the damages
recoverable by the corporation for the same act.
G.R. Nos. 86883-85 January 29, 1993
PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
NORBERTO MANERO, JR., EDILBERTO MANERO, ELPIDIO MANERO,
SEVERINO LINES, RUDY LINES, EFREN PLEÑAGO, ROGER BEDAÑO,
RODRIGO ESPIA, ARSENIO VILLAMOR, JR., JOHN DOE and PETER
DOE, accused.
SEVERINO LINES, RUDY LINES, EFREN PLEÑAGO and ROGER
BENDAÑO, accused-appellants.
The Solicitor General for plaintiff-appellee.
Romeo P. Jorge for accused-appellants.
BELLOSILLO, J.:
This was gruesome murder in a main thoroughfare an hour before
sundown. A hapless foreign religious minister was riddled with
bullets, his head shattered into bits and pieces amidst the revelling
of his executioners as they danced and laughed around their quarry,
chanting the tune "Mutya Ka Baleleng", a popular regional folk song,
kicking and scoffing at his prostrate, miserable, spiritless figure that
was gasping its last. Seemingly unsatiated with the ignominy of their
manslaughter, their leader picked up pieces of the splattered brain
and mockingly displayed them before horrified spectators. Some
accounts swear that acts of cannibalism ensued, although they were
not sufficiently demonstrated. However, for their outrageous feat,
the gangleader already earned the monicker "cannibal priest-killer"
But, what is indubitable is that Fr. Tulio Favali 1 was senselessly killed
for no apparent reason than that he was one of the Italian Catholic
missionaries laboring in heir vineyard in the hinterlands of
Mindanao. 2
In the aftermath of the murder, police authorities launched a
massive manhunt which resulted in the capture of the perpetrators
except Arsenio Villamor, Jr., and two unidentified persons who
eluded arrest and still remain at large.
Informations for Murder, 3 Attempted Murder 4 and Arson 5 were
accordingly filed against those responsible for the frenzied orgy of
violence that fateful day of 11 April 1985. As these cases arose from
the same occasion, they were all consolidated in Branch 17 of the
Regional Trial Court of Kidapawan, Cotabato. 6
After trial, the court a quo held —
WHEREFORE . . . the Court finds the accused
Norberto Manero, Jr. alias Commander Bucay,
Edilberto Manero alias Edil, Elpidio Manero,
Severino Lines, Rudy Lines, Rodrigo Espia alias
Rudy, Efren Pleñago and Roger Bedaño GUILTY
beyond reasonable doubt of the offense of
Murder, and with the aggravating circumstances
of superior strength and treachery, hereby
sentences each of them to a penalty of
imprisonment of reclusion perpetua; to pay the
Pontifical Institute of Foreign Mission (PIME)
Brothers, the congregation to which Father Tulio
Favali belonged, a civil indemnity of P12,000.00;
attorney's fees in the sum of P50,000.00 for each
 of the eight (8) accused or a total sum of
P400,000.00; court appearance fee of
P10,000.00 for every day the case was set for
trial; moral damages in the sum of P100,000.00;
and to pay proportionately the costs.
Further, the Court finds the accused Norberto
Manero, Jr. alias Commander Bucay GUILTY
beyond reasonable doubt of the offense of
Arson and with the application of the
Indeterminate Sentence Law, hereby sentences
him to an indeterminate penalty of
imprisonment of not less than four (4) years,
nine (9) months, one (1) day of prision
correccional, as minimum, to six (6) years
of prision correccional, as maximum, and to
indemnify the Pontifical Institute of Foreign
Mission (PIME) Brothers, the congregation to
which Father Tulio Favali belonged, the sum of
P19,000.00 representing the value of the
motorcycle and to pay the costs.
Finally, the Court finds the accused Norberto
Manero, Jr., alias Commander Bucay, Edilberto
Manero alias Edil, Elpidio Manero, Severino
Lines, Rudy Lines, Rodrigo Espia alias Rudy, Efren
Pleñago and Roger Bedaño GUILTY beyond
reasonable doubt of the offense of Attempted
Murder and with the application of the
Indeterminate Sentence Law, hereby sentences
each of them to an indeterminate penalty of
imprisonment of not less than two (2) years, four
(4) months and one (1) day of prision
correccional, and minimum, to eight (8) years
and twenty (20) days of prision mayor, as
maximum, and to pay the complainant Rufino
Robles the sum of P20,000.00 as attorney's fees
and P2,000.00 as court appearance fee for every
day of trial and to pay proportionately the costs.
The foregoing penalties shall be served by the
said accused successively in the order of their
respective severity in accordance with the
provisions of Article 70 of the Revised Penal
Code, as amended. 7
From this judgment of conviction only accused Severino Lines, Rudy
Lines, Efren Pleñago and Roger Bedaño appealed with respect to the
cases for Murder and Attempted Murder. The Manero brothers as
well as Rodrigo Espia did not appeal; neither did Norberto Manero,
Jr., in the Arson case. Consequently, the decision as against them
already became final.
Culled from the records, the facts are: On 11 April 1985, around
10:00 o'clock in the morning, the Manero brothers Norberto Jr.,
Edilberto and Elpidio, along with Rodrigo Espia, Severino Lines, Rudy
Lines, Efren Pleñago and Roger Bedaño, were inside the eatery of
one Reynaldo Diocades at Km. 125, La Esperanza, Tulunan,
Cotabato. They were conferring with Arsenio Villamor, Jr., private
secretary to the Municipal Mayor of Tulunan, Cotabato, and his two
(2) unidentified bodyguards. Plans to liquidate a number of
suspected communist sympathizers were discussed. Arsenio
Villamor, Jr. scribbled on a cigarette wrapper the following "NPA v.
NPA, starring Fr. Peter, Domingo Gomez, Bantil, Fred Gapate, Rene
alias Tabagac and Villaning." "Fr. Peter" is Fr. Peter Geremias, an
Italian priest suspected of having links with the communist
movement; "Bantil" is Rufino Robles, a Catholic lay leader who is the
complaining witness in the Attempted Murder; Domingo Gomez is
another lay leader, while the others are simply "messengers". On
the same occasion, the conspirators agreed to Edilberto Manero's
proposal that should they fail to kill Fr. Peter Geremias, another
Italian priest would be killed in his stead. 8
At about 1:00 o'clock that afternoon, Elpidio Manero with two (2)
unidentified companions nailed a placard on a street-post beside the
eatery of Deocades. The placard bore the same inscriptions as those
found on the cigarette wrapper except for the additional phrase
"versus Bucay, Edil and Palo." Some two (2) hours later, Elpidio also
posted a wooden placard bearing the same message on a street
cross-sign close to the eatery. 9
Later, at 4:00 o'clock, the Manero brothers, together with Espia and
the four (4) appellants, all with assorted firearms, proceeded to the
house of "Bantil", their first intended victim, which was also in the
vicinity of Deocades'carinderia. They were met by "Bantil" who
confronted them why his name was included in the placards.
Edilberto brushed aside the query; instead, he asked "Bantil" if he
had any qualms about it, and without any provocation, Edilberto
drew his revolver and fired at the forehead of "Bantil". "Bantil" was
able to parry the gun, albeit his right finger and the lower portion of
his right ear were hit. Then they grappled for its possession until
"Bantil" was extricated by his wife from the fray. But, as he was
running away, he was again fired upon by Edilberto. Only his
trousers were hit. "Bantil" however managed to seek refuge in the
house of a certain Domingo Gomez. 10Norberto, Jr., ordered his men
to surround the house and not to allow any one to get out so that
"Bantil" would die of hemorrhage. Then Edilberto went back to the
restaurant of Deocades and pistol-whipped him on the face and
accused him of being a communist coddler, while appellants and
their cohorts relished the unfolding drama. 11
Moments later, while Deocades was feeding his swine, Edilberto
strewed him with a burst of gunfire from his M-14 Armalite.
Deocades cowered in fear as he knelt with both hands clenched at
the back of his head. This again drew boisterous laughter and
ridicule from the dreaded desperados.
At 5:00 o'clock, Fr. Tulio Favali arrived at Km. 125 on board his
motorcycle. He entered the house of Gomez. While inside, Norberto,
Jr., and his co-accused Pleñago towed the motorcycle outside to the
center of the highway. Norberto, Jr., opened the gasoline tank,
spilled some fuel, lit a fire and burned the motorcycle. As the vehicle
was ablaze, the felons raved and rejoiced. 12
Upon seeing his motorcycle on fire, Fr. Favali accosted Norberto, Jr.
But the latter simply stepped backwards and executed a thumbs-
down signal. At this point, Edilberto asked the priest: "Ano ang gusto
mo, padre (What is it you want, Father)? Gusto mo, Father, bukon
ko ang ulo mo (Do you want me, Father, to break your head)?"
Thereafter, in a flash, Edilberto fired at the head of the priest. As Fr.
Favali dropped to the ground, his hands clasped against his chest,
Norberto, Jr., taunted Edilberto if that was the only way he knew to
kill a priest. Slighted over the remark, Edilberto jumped over the
prostrate body three (3) times, kicked it twice, and fired anew. The
burst of gunfire virtually shattered the head of Fr. Favali, causing his
brain to scatter on the road. As Norberto, Jr., flaunted the brain to
the terrified onlookers, his brothers danced and sang "Mutya Ka
Baleleng" to the delight of their comrades-in-arms who now took
guarded positions to isolate the victim from possible assistance. 13
In seeking exculpation from criminal liability, appellants Severino
Lines, Rudy Lines, Efren Pleñago and Roger Bedaño contend that the
trial court erred in disregarding their respective defenses of alibi
which, if properly appreciated, would tend to establish that there
was no prior agreement to kill; that the intended victim was Fr.
Peter Geremias, not Fr. Tulio Favali; that there was only one (1)
gunman, Edilberto; and, that there was absolutely no showing that
appellants cooperated in the shooting of the victim despite their
proximity at the time to Edilberto.
But the evidence on record does not agree with the arguments of
accused-appellants.
On their defense of alibi, accused brothers Severino and Rudy Lines
claim that they were harvesting palay the whole day of 11 April 1985
some one kilometer away from the crime scene. Accused Roger
Bedaño alleges that he was on an errand for the church to buy
lumber and nipa in M'lang, Cotabato, that morning of 11 April 1985,
taking along his wife and sick child for medical treatment and arrived
in La Esperanza, Tulunan, past noontime.
Interestingly, all appellants similarly contend that it was only after
they heard gunshots that they rushed to the house of Norberto
Manero, Sr., Barangay Captain of La Esperanza, where they were
joined by their fellow CHDF members and co-accused, and that it
was only then that they proceeded together to where the crime
took place at Km. 125.
It is axiomatic that the accused interposing the defense of alibi must
not only be at some other place but that it must also be physically
impossible for him to be at the scene of the crime at the time of its
commission. 14
Considering the failure of appellants to prove the required physical
impossibility of being present at the crime scene, as can be readily
deduced from the proximity between the places where accused-
appellants were allegedly situated at the time of the commission of
the offenses and the locus criminis, 15 the defense of alibi is
definitely feeble. 16 After all, it has been the consistent ruling of this
Court that no physical impossibility exists in instances where it
would take the accused only fifteen to twenty minutes by jeep or
tricycle, or some one-and-a-half hours by foot, to traverse the
distance between the place where he allegedly was at the time of
commission of the offense and the scene of the crime. 17 Recently,
we ruled that there can be no physical impossibility even if the
distance between two places is merely two (2) hours by bus. 18 More
important, it is well-settled that the defense of alibi cannot prevail
over
the positive identification of the authors of the crime by the
prosecution witnesses. 19
In the case before Us, two (2) eyewitnesses, Reynaldo Deocades and
Manuel Bantolo, testified that they were both inside the eatery at
about 10:00 o'clock in the morning of 11 April 1985 when the
Manero brothers, together with appellants, first discussed their plan
to kill some communist sympathizers. The witnesses also testified
that they still saw the appellants in the company of the Manero
brothers at 4:00 o'clock in the afternoon when Rufino Robles was
shot. Further, at 5:00 o'clock that same afternoon, appellants were
very much at the scene of the crime, along with the Manero
brothers, when Fr. Favali was brutally murdered. 20 Indeed, in the
face of such positive declarations that appellants were at the locus
criminis from 10:00 o'clock in the morning up to about 5:00 o'clock
in the afternoon, the alibi of appellants that they were somewhere
else, which is negative in nature, cannot prevail. 21 The presence of
appellants in the eatery at Km. 125 having been positively
established, all doubts that they were not privy to the plot to
liquidate alleged communist sympathizers are therefore removed.
There was direct proof to link them to the conspiracy.
There is conspiracy when two or more persons come to an
agreement to commit a crime and decide to commit it.22 It is not
essential that all the accused commit together each and every act
constitutive of the offense. 23 It is enough that an accused
participates in an act or deed where there is singularity of purpose,
and unity in its execution is present. 24
The findings of the court a quo unmistakably show that there was
indeed a community of design as evidenced by the concerted acts of
all the accused. Thus —
The other six accused, 25 all armed with high
powered firearms, were positively identified
with Norberto Manero, Jr. and Edilberto Manero
in the carinderia of Reynaldo Deocades in La
Esperanza, Tulunan, Cotabato at 10:00 o'clock in
the morning of 11 April 1985 morning . . . they
were outside of the carinderia by the window
near the table where Edilberto Manero,
Norberto Manero, Jr., Jun Villamor, Elpidio
Manero and unidentified members of the
airborne from Cotabato were grouped together.
Later that morning, they all went to the
cockhouse nearby to finish their plan and drink
tuba. They were seen again with Edilberto
Manero and Norberto Manero, Jr., at 4:00
o'clock in the afternoon of that day near the
house of Rufino Robles (Bantil) when Edilberto
Manero shot Robles. They surrounded the house
of Domingo Gomez where Robles fled and hid,
but later left when Edilberto Manero told them
to leave as Robles would die of hemorrhage.
They followed Fr. Favali to Domingo Gomez'
house, witnessed and enjoyed the burning of the
motorcycle of Fr. Favali and later stood guard
with their firearms ready on the road when
Edilberto Manero shot to death Fr. Favali.
Finally, they joined Norberto Manero, Jr. and
Edilberto Manero in their enjoyment and
merriment on the death of the priest.26
From the foregoing narration of the trial court, it is clear that
appellants were not merely innocent bystanders but were in fact
vital cogs in perpetrating the savage murder of Fr. Favali and the
attempted murder of Rufino Robles by the Manero brothers and
their militiamen. For sure, appellants all assumed a fighting stance to
discourage if not prevent any attempt to provide assistance to the
fallen priest. They surrounded the house of Domingo Gomez to stop
Robles and the other occupants from leaving so that the wounded
Robles may die of hemorrhage. 27Undoubtedly, these were overt
acts to ensure success of the commission of the crimes and in
furtherance of the aims of the conspiracy. The appellants acted in
concert in the murder of Fr. Favali and in the attempted murder of
Rufino Robles. While accused-appellants may not have delivered the
fatal shots themselves, their collective action showed a common
intent to commit the criminal acts.
While it may be true that Fr. Favali was not originally the intended
victim, as it was Fr. Peter Geremias whom the group targetted for
the kill, nevertheless, Fr. Favali was deemed a good substitute in the
murder as he was an Italian priest. On this, the conspirators
expressly agreed. As witness Manuel Bantolo explained 28 —
Q Aside from those persons
listed in that paper to be
killed, were there other
persons who were to be
liquidated?
A There were some others.
Q Who were they?
A They said that if they could
not kill those persons listed
in that paper then they will
(sic) kill anyone so long as he
is (sic) an Italian and if they
could not kill the persons
they like to kill they will (sic)
make Reynaldo Deocades as
their sample.
That appellants and their co-accused reached a common
understanding to kill another Italian priest in the event that Fr. Peter
Geremias could not be spotted was elucidated by Bantolo thus 29 —
Q Who suggested that Fr.
Peter be the first to be
killed?
A All of them in the group.
Q What was the reaction of
Norberto Manero with
respect to the plan to kill Fr.
Peter?
A He laughed and even said,
"amo ina" meaning "yes, we
will kill him ahead."
 xxx xxx xxx
Q What about Severino
Lines? What was his
reaction?
A He also laughed and so
conformed and agreed to it.
Q Rudy Lines.
A He also said "yes".
Q What do you mean "yes"?
A He also agreed and he was
happy and said "yes" we will
kill him.
xxx xxx xxx
Q What about Efren
Pleñago?
A He also agreed and even
commented laughing "go
ahead".
Q Roger Bedaño, what was
his reaction to that
suggestion that should they
fail to kill Fr. Peter, they will
(sic) kill anybody provided he
is an Italian and if not, they
will (sic) make Reynaldo
Deocades an example?
A He also agreed laughing.
Conspiracy or action in concert to achieve a criminal design being
sufficiently shown, the act of one is the act of all the other
conspirators, and
the precise extent or modality of participation of each of them
becomes secondary. 30
The award of moral damages in the amount of P100,000.00 to the
congregation, the Pontifical Institute of Foreign Mission (PIME)
Brothers, is not proper. There is nothing on record which indicates
that the deceased effectively severed his civil relations with his
family, or that he disinherited any member thereof, when he joined
his religious congregation. As a matter of fact, Fr. Peter Geremias of
the same congregation, who was then a parish priest of Kidapawan,
testified that "the religious family belongs to the natural family of
origin." 31 Besides, as We already held, 32 a juridical person is not
entitled to moral damages because, not being a natural person, it
cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock. It is only
when a juridical person has a good reputation that is debased,
resulting in social humiliation, that moral damages may be awarded.
Neither can We award moral damages to the heirs of the deceased
who may otherwise be lawfully entitled thereto pursuant to par. (3),
Art. 2206, of the Civil Code, 33 for the reason that the heirs never
presented any evidence showing that they suffered mental anguish;
much less did they take the witness stand. It has been held 34 that
moral damages and their causal relation to the defendant's acts
should be satisfactorily proved by the claimant. It is elementary that
in order that moral damages may be awarded there must be proof
of moral suffering. 35 However, considering that the brutal slaying of
Fr. Tulio Favali was attended with abuse of superior strength, cruelty
and ignominy by deliberately and inhumanly augmenting the pain
and anguish of the victim, outraging or scoffing at his person or
corpse, exemplary damages may be awarded to the lawful
heirs, 36 even though not proved nor expressly pleaded in the
complaint, 37 and the amount of P100,000.00 is considered
reasonable.
With respect to the civil indemnity of P12,000.00 for the death of Fr.
Tulio Favali, the amount is increased to P50,000.00 in accordance
with existing jurisprudence, which should be paid to the lawful heirs,
not the PIME as the trial court ruled.
WHEREFORE, the judgment appealed from being in accord with law
and the evidence is AFFIRMED with the modification that the civil
indemnity which is increased from P12,000.00 to P50,000.00 is
awarded to the lawful heirs of the deceased plus exemplary
damages of P100,000.00; however, the award of moral damages is
deleted.
Costs against accused-appellants.
SO ORDERED.
G.R. No. 128690 January 21, 1999
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP,
VIVA PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN
Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse and set
aside the decision 1 of 31 October 1996 and the resolution 2 of 10
March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The
former affirmed with modification the decision 3 of 28 April 1993 of
the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case
No. Q-92-12309. The latter denied the motion to reconsider the
decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of
Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film
Exhibition Agreement (Exh. "A") whereby Viva
gave ABS-CBN an exclusive right to exhibit some
Viva films. Sometime in December 1991, in
accordance with paragraph 2.4 [sic] of said
agreement stating that —.
1.4 ABS-CBN shall have the right of first refusal
to the next twenty-four (24) Viva films for TV
telecast under such terms as may be agreed
upon by the parties hereto, provided, however,
that such right shall be exercised by ABS-CBN
from the actual offer in writing.
Viva, through defendant Del Rosario, offered
ABS-CBN, through its vice-president Charo
Santos-Concio, a list of three(3) film packages
(36 title) from which ABS-CBN may exercise its
right of first refusal under the afore-said
agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-
B"-Viva). ABS-CBN, however through Mrs.
Concio, "can tick off only ten (10) titles" (from
the list) "we can purchase" (Exh. "3" - Viva) and
therefore did not accept said list (TSN, June 8,
1992, pp. 9-10). The titles ticked off by Mrs.
Concio are not the subject of the case at bar
except the film ''Maging Sino Ka Man."
For further enlightenment, this rejection letter
dated January 06, 1992 (Exh "3" - Viva) is hereby
quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am
writing to you as I would like to express my
difficulty in recommending the purchase of the
three film packages you are offering ABS-CBN.
From among the three packages I can only tick
off 10 titles we can purchase. Please see
attached. I hope you will understand my
position. Most of the action pictures in the list
do not have big action stars in the cast. They are
not for primetime. In line with this I wish to
mention that I have not scheduled for telecast
several action pictures in out very first contract
because of the cheap production value of these
movies as well as the lack of big action stars. As a
film producer, I am sure you understand what I
am trying to say as Viva produces only big action
pictures.
In fact, I would like to request two (2) additional
runs for these movies as I can only schedule
them in our non-primetime slots. We have to
cover the amount that was paid for these movies
because as you very well know that non-
primetime advertising rates are very low. These
are the unaired titles in the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us
before and have been rejected because of the
ruling of MTRCB to have them aired at 9:00 p.m.
due to their very adult themes.
As for the 10 titles I have choosen [sic] from the
3 packages please consider including all the
other Viva movies produced last year. I have
quite an attractive offer to make.
Thanking you and with my warmest regards.
On February 27, 1992, defendant Del Rosario
approached ABS-CBN's Ms. Concio, with a list
consisting of 52 original movie titles (i.e. not yet
aired on television) including the 14 titles subject
of the present case, as well as 104 re-runs
(previously aired on television) from which ABS-
CBN may choose another 52 titles, as a total of
156 titles, proposing to sell to ABS-CBN airing
rights over this package of 52 originals and 52 re-
runs for P60,000,000.00 of which
P30,000,000.00 will be in cash and
P30,000,000.00 worth of television spots (Exh.
"4" to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-
CBN general manager, Eugenio Lopez III, met at
the Tamarind Grill Restaurant in Quezon City to
discuss the package proposal of Viva. What
transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he
and Mr. Del Rosario allegedly agreed that ABS-
CRN was granted exclusive film rights to
fourteen (14) films for a total consideration of
P36 million; that he allegedly put this agreement
as to the price and number of films in a "napkin''
and signed it and gave it to Mr. Del Rosario (Exh.
D; TSN, pp. 24-26, 77-78, June 8, 1992). On the
other hand, Del Rosario denied having made any
agreement with Lopez regarding the 14 Viva
films; denied the existence of a napkin in which
Lopez wrote something; and insisted that what
he and Lopez discussed at the lunch meeting was
Viva's film package offer of 104 films (52
originals and 52 re-runs) for a total price of P60
million. Mr. Lopez promising [sic]to make a
counter proposal which came in the form of a
proposal contract Annex "C" of the complaint
(Exh. "1"·- Viva; Exh. "C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano
Gozon of RBS Senior vice-president for Finance
discussed the terms and conditions of Viva's
offer to sell the 104 films, after the rejection of
the same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario
received through his secretary, a handwritten
note from Ms. Concio, (Exh. "5" - Viva), which
reads: "Here's the draft of the contract. I hope
you find everything (in order," to which was
S
attached a draft exhibition agreement (Exh. "C''-
ABS-CBN; Exh. "9" - iViva, p. 3) a counter-
proposal covering 53g films, 52 of which came
from the list sent byndefendant Del Rosario and
one film was added eby Ms. Concio, for a
consideration of P35d million. Exhibit "C" provides
)
that ABS-CBN is granted films right to 53 films
 and contains a right of first refusal to "1992 Viva
Films." The said counter proposal was however
rejected by Viva's Board of Directors [in the]
evening of the same day, April 7, 1992, as Viva
would not sell anything less than the package of
104 films for P60 million pesos (Exh. "9" - Viva),
and such rejection was relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN
and following several negotiations and meetings
defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million,
signed a letter of agreement dated April 24,
1992. granting RBS the exclusive right to air 104
Viva-produced and/or acquired films (Exh. "7-A"
- RBS; Exh. "4" - RBS) including the fourteen (14)
films subject of the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for
specific performance with a prayer for a writ of preliminary
injunction and/or temporary restraining order against private
respondents Republic Broadcasting Corporation 5 (hereafter RBS ),
Viva Production (hereafter VIVA), and Vicente Del Rosario. The
complaint was docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining
order 6 enjoining private respondents from proceeding with the
airing, broadcasting, and televising of the fourteen VIVA films
subject of the controversy, starting with the film Maging Sino Ka
Man, which was scheduled to be shown on private respondents RBS'
channel 7 at seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction
upon ABS-CBN's posting of P35 million bond. ABS-CBN moved for
the reduction of the bond, 8 while private respondents moved for
reconsideration of the order and offered to put up a
counterbound. 9
In the meantime, private respondents filed separate answers with
counterclaim. 10 RBS also set up a cross-claim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving the writ of
preliminary injunction upon the posting by RBS of a P30 million
counterbond to answer for whatever damages ABS-CBN might suffer
by virtue of such dissolution. However, it reduced petitioner's
injunction bond to P15 million as a condition precedent for the
reinstatement of the writ of preliminary injunction should private
respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of
the court, agreed to explore the possibility of an amicable
settlement. In the meantime, RBS prayed for and was granted
reasonable time within which to put up a P30 million counterbond in
the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS
posted on 1 October 1992 a counterbond, which the RTC approved
in its Order of 15 October 1992. 13
On 19 October 1992, ABS-CBN filed a motion for
reconsideration 14 of the 3 August and 15 October 1992 Orders,
which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN filed
with the Court of Appeals a petition 17challenging the RTC's Orders
of 3 August and 15 October 1992 and praying for the issuance of a
writ of preliminary injunction to enjoin the RTC from enforcing said
orders. The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary
restraining order 18 to enjoin the airing, broadcasting, and televising
of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
decision 19 dismissing the petition in CA -G.R. No. 29300 for being
premature. ABS-CBN challenged the dismissal in a petition for
review filed with this Court on 19 January 1993, which was docketed
as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in
Civil Case No. Q-192-1209. Thereafter, on 28 April 1993, it rendered
a decision 20 in favor of RBS and VIVA and against ABS-CBN disposing
as follows:
WHEREFORE, under cool reflection and
prescinding from the foregoing, judgments is
rendered in favor of defendants and against the
plaintiff.
(1) The complaint is hereby
dismissed;
(2) Plaintiff ABS-CBN is
ordered to pay defendant
RBS the following:
a) P107,727.00, the amount of premium paid by RBS to the surety
which issued defendant RBS's bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for "Maging
Sino Ka Man" in various newspapers;
c) Attorney's fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For defendant VIVA,
plaintiff ABS-CBN is ordered
to pay P212,000.00 by way of
reasonable attorney's fees.
(4) The cross-claim of
defendant RBS against
defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price
and terms of the offer. The alleged agreement between Lopez III and
Del Rosario was subject to the approval of the VIVA Board of
Directors, and said agreement was disapproved during the meeting
of the Board on 7 April 1992. Hence, there was no basis for ABS-
CBN's demand that VIVA signed the 1992 Film Exhibition Agreement.
Furthermore, the right of first refusal under the 1990 Film Exhibition
Agreement had previously been exercised per Ms. Concio's letter to
Del Rosario ticking off ten titles acceptable to them, which would
have made the 1992 agreement an entirely new contract.
On 21 June 1993, this Court denied 21 ABS-CBN's petition for review
in G.R. No. 108363, as no reversible error was committed by the
Court of Appeals in its challenged decision and the case had
"become moot and academic in view of the dismissal of the main
action by the court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of
Appeals claiming that there was a perfected contract between ABS-
CBN and VIVA granting ABS-CBN the exclusive right to exhibit the
subject films. Private respondents VIVA and Del Rosario also
appealed seeking moral and exemplary damages and additional
attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with
the RTC that the contract between ABS-CBN and VIVA had not been
perfected, absent the approval by the VIVA Board of Directors of
whatever Del Rosario, it's agent, might have agreed with Lopez III.
The appellate court did not even believe ABS-CBN's evidence that
Lopez III actually wrote down such an agreement on a "napkin," as
the same was never produced in court. It likewise rejected ABS-
CBN's insistence on its right of first refusal and ratiocinated as
follows:
As regards the matter of right of first refusal, it
may be true that a Film Exhibition Agreement
was entered into between Appellant ABS-CBN
and appellant VIVA under Exhibit "A" in 1990,
and that parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the
right of first refusal to the
next twenty-four (24) VIVA
films for TV telecast under
such terms as may be agreed
upon by the parties hereto,
provided, however, that such
right shall be exercised by
ABS-CBN within a period of
fifteen (15) days from the
actual offer in writing
(Records, p. 14).
[H]owever, it is very clear that said right of first
refusal in favor of ABS-CBN shall still be subject
to such terms as may be agreed upon by the
parties thereto, and that the said right shall be
exercised by ABS-CBN within fifteen (15) days
from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on
the right of first refusal did not fix the price of
the film right to the twenty-four (24) films, nor
did it specify the terms thereof. The same are
still left to be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection
Exhibit 3 (Records, p. 89) stated that it can only
tick off ten (10) films, and the draft contract
Exhibit "C" accepted only fourteen (14) films,
while parag. 1.4 of Exhibit "A'' speaks of the next
twenty-four (24) films.
The offer of V1VA was sometime in December
1991 (Exhibits 2, 2-A. 2-B; Records, pp. 86-88;
Decision, p. 11, Records, p. 1150), when the first
list of VIVA films was sent by Mr. Del Rosario to
ABS-CBN. The Vice President of ABS-CBN, Ms.
Charo Santos-Concio, sent a letter dated January
6, 1992 (Exhibit 3, Records, p. 89) where ABS-
CBN exercised its right of refusal by rejecting the
offer of VIVA.. As aptly observed by the trial
court, with the said letter of Mrs. Concio of
January 6, 1992, ABS-CBN had lost its right of
first refusal. And even if We reckon the fifteen
(15) day period from February 27, 1992 (Exhibit
4 to 4-C) when another list was sent to ABS-CBN
after the letter of Mrs. Concio, still the fifteen
(15) day period within which ABS-CBN shall
exercise its right of first refusal has already
expired. 22
Accordingly, respondent court sustained the award of actual
damages consisting in the cost of print advertisements and the
premium payments for the counterbond, there being adequate
proof of the pecuniary loss which RBS had suffered as a result of the
filing of the complaint by ABS-CBN. As to the award of moral
damages, the Court of Appeals found reasonable basis therefor,
holding that RBS's reputation was debased by the filing of the
complaint in Civil Case No. Q-92-12309 and by the non-showing of
the film "Maging Sino Ka Man." Respondent court also held that
exemplary damages were correctly imposed by way of example or
correction for the public good in view of the filing of the complaint
despite petitioner's knowledge that the contract with VIVA had not
been perfected, It also upheld the award of attorney's fees,
reasoning that with ABS-CBN's act of instituting Civil Case No, Q-92-
1209, RBS was "unnecessarily forced to litigate." The appellate
court, however, reduced the awards of moral damages to P2 million,
exemplary damages to P2 million, and attorney's fees to P500,
000.00.
On the other hand, respondent Court of Appeals denied VIVA and
Del Rosario's appeal because it was "RBS and not VIVA which was
actually prejudiced when the complaint was filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed
the petition in this case, contending that the Court of Appeals
gravely erred in
I
. . . RULING THAT THERE WAS NO PERFECTED
CONTRACT BETWEEN PETITIONER AND PRIVATE
RESPONDENT VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED BY
PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY
DAMAGES IN FAVOR OF PRIVATE RESPONDENT
RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY
DAMAGES IN FAVOR OF PRIVATE RESPONDENT
RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR
OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first
refusal over twenty-four titles under the 1990 Film Exhibition
Agreement, as it had chosen only ten titles from the first list. It
insists that we give credence to Lopez's testimony that he and Del
Rosario met at the Tamarind Grill Restaurant, discussed the terms
and conditions of the second list (the 1992 Film Exhibition
Agreement) and upon agreement thereon, wrote the same on a
paper napkin. It also asserts that the contract has already been
effective, as the elements thereof, namely, consent, object, and
consideration were established. It then concludes that the Court of
Appeals' pronouncements were not supported by law and
jurisprudence, as per our decision of 1 December 1995 in Limketkai
Sons Milling, Inc. v. Court of Appeals, 23 which cited Toyota Shaw,
Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of
Appeals, 25 andVillonco Realty Company v. Bormaheco. Inc. 26
Anent the actual damages awarded to RBS, ABS-CBN disavows
liability therefor. RBS spent for the premium on the counterbond of
its own volition in order to negate the injunction issued by the trial
court after the parties had ventilated their respective positions
during the hearings for the purpose. The filing of the counterbond
was an option available to RBS, but it can hardly be argued that ABS-
CBN compelled RBS to incur such expense. Besides, RBS had another
available option, i.e., move for the dissolution or the injunction; or if
it was determined to put up a counterbond, it could have presented
a cash bond. Furthermore under Article 2203 of the Civil Code, the
party suffering loss or injury is also required to exercise the diligence
of a good father of a family to minimize the damages resulting from
the act or omission. As regards the cost of print advertisements, RBS
had not convincingly established that this was a loss attributable to
the non showing "Maging Sino Ka Man"; on the contrary, it was
brought out during trial that with or without the case or the
injunction, RBS would have spent such an amount to generate
interest in the film.
ABS-CBN further contends that there was no clear basis for the
awards of moral and exemplary damages. The controversy involving
ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not
arise from any contractual dealings or from specific acts committed
by ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the
complaint, An award of moral and exemplary damages is not
warranted where the record is bereft of any proof that a party acted
maliciously or in bad faith in filing an action. 27 In any case, free
resort to courts for redress of wrongs is a matter of public policy.
The law recognizes the right of every one to sue for that which he
honestly believes to be his right without fear of standing trial for
damages where by lack of sufficient evidence, legal technicalities, or
a different interpretation of the laws on the matter, the case would
lose ground. 28 One who makes use of his own legal right does no
injury. 29 If damage results front the filing of the complaint, it
is damnum absque injuria. 30 Besides, moral damages are generally
not awarded in favor of a juridical person, unless it enjoys a good
reputation that was debased by the offending party resulting in
social humiliation. 31
As regards the award of attorney's fees, ABS-CBN maintains that the
same had no factual, legal, or equitable justification. In sustaining
the trial court's award, the Court of Appeals acted in clear disregard
of the doctrines laid down in Buan v. Camaganacan 32 that the text
of the decision should state the reason why attorney's fees are being
awarded; otherwise, the award should be disallowed. Besides, no
bad faith has been imputed on, much less proved as having been
committed by, ABS-CBN. It has been held that "where no sufficient
showing of bad faith would be reflected in a party' s persistence in a
case other than an erroneous conviction of the righteousness of his
cause, attorney's fees shall not be recovered as cost." 33
On the other hand, RBS asserts that there was no perfected contract
between ABS-CBN and VIVA absent any meeting of minds between
them regarding the object and consideration of the alleged contract.
It affirms that the ABS-CBN's claim of a right of first refusal was
correctly rejected by the trial court. RBS insist the premium it had
paid for the counterbond constituted a pecuniary loss upon which it
may recover. It was obliged to put up the counterbound due to the
injunction procured by ABS-CBN. Since the trial court found that
ABS-CBN had no cause of action or valid claim against RBS and,
therefore not entitled to the writ of injunction, RBS could recover
from ABS-CBN the premium paid on the counterbond. Contrary to
the claim of ABS-CBN, the cash bond would prove to be more
expensive, as the loss would be equivalent to the cost of money RBS
would forego in case the P30 million came from its funds or was
borrowed from banks.
RBS likewise asserts that it was entitled to the cost of
advertisements for the cancelled showing of the film "Maging Sino
Ka Man" because the print advertisements were put out to
announce the showing on a particular day and hour on Channel
7, i.e., in its entirety at one time, not a series to be shown on a
periodic basis. Hence, the print advertisement were good and
relevant for the particular date showing, and since the film could not
be shown on that particular date and hour because of the
injunction, the expenses for the advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN
filed the case and secured injunctions purely for the purpose of
harassing and prejudicing RBS. Pursuant then to Article 19 and 21 of
the Civil Code, ABS-CBN must be held liable for such
damages. Citing Tolentino, 34 damages may be awarded in cases of
abuse of rights even if the act done is not illicit and there is abuse of
rights were plaintiff institutes and action purely for the purpose of
harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and
exemplary damages, private respondents RBScited People
v. Manero, 35 where it was stated that such entity may recover moral
and exemplary damages if it has a good reputation that is debased
resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has
been debased by ABS-CBN's acts in this case.
When RBS was not able to fulfill its commitment
to the viewing public to show the film "Maging
Sino Ka Man" on the scheduled dates and times
(and on two occasions that RBS advertised), it
suffered serious embarrassment and social
humiliation. When the showing was canceled,
late viewers called up RBS' offices and subjected
RBS to verbal abuse ("Announce kayo nang
announce, hindi ninyo naman ilalabas,"
"nanloloko yata kayo") (Exh. 3-RBS, par. 3). This
alone was not something RBS brought upon
itself. it was exactly what ABS-CBN had planned
to happen.
The amount of moral and exemplary damages
cannot be said to be excessive. Two reasons
justify the amount of the award.
The first is that the humiliation suffered by RBS is
national extent. RBS operations as a
broadcasting company is [sic] nationwide. Its
clientele, like that of ABS-CBN, consists of those
who own and watch television. It is not an
exaggeration to state, and it is a matter of
judicial notice that almost every other person in
the country watches television. The humiliation
suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of
the film "Maging Sino Ka Man" on May 28 and
November 3, 1992 but did not see it owing to
the cancellation. Added to this are the
advertisers who had placed commercial spots for
the telecast and to whom RBS had a
commitment in consideration of the placement
to show the film in the dates and times specified.
The second is that it is a competitor that caused
RBS to suffer the humiliation. The humiliation
and injury are far greater in degree when caused
by an entity whose ultimate business objective is
to lure customers (viewers in this case) away
from the competition. 36
For their part, VIVA and Vicente del Rosario contend that the
findings of fact of the trial court and the Court of Appeals do not
support ABS-CBN's claim that there was a perfected contract. Such
factual findings can no longer be disturbed in this petition for review
under Rule 45, as only questions of law can be raised, not questions
of fact. On the issue of damages and attorneys fees, they adopted
the arguments of RBS.
The key issues for our consideration are (1) whether there was a
perfected contract between VIVA and ABS-CBN, and (2) whether RBS
is entitled to damages and attorney's fees. It may be noted that the
award of attorney's fees of P212,000 in favor of VIVA is not assigned
as another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a
meeting of minds between two persons whereby one binds himself
to give something or to render some service to another 37 for a
consideration. there is no contract unless the following requisites
concur: (1) consent of the contracting parties; (2) object certain
which is the subject of the contract; and (3) cause of the obligation,
which is established. 38 A contract undergoes three stages:
(a) preparation, conception, or generation,
which is the period of negotiation and
bargaining, ending at the moment of agreement
of the parties;
 (b) perfection or birth of the contract, which is
the moment when the parties come to agree on
the terms of the contract; and
(c) consummation or death, which is the
fulfillment or performance of the terms agreed
upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere
meeting of the minds, Once there is concurrence between the offer
and the acceptance upon the subject matter, consideration, and
terms of payment a contract is produced. The offer must be certain.
To convert the offer into a contract, the acceptance must be
absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional, and without variance of any sort
from the proposal. A qualified acceptance, or one that involves a
new proposal, constitutes a counter-offer and is a rejection of the
original offer. Consequently, when something is desired which is not
exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or variation
from the terms of the offer annuls the offer. 40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the
Tamarind Grill on 2 April 1992 to discuss the package of films, said
package of 104 VIVA films was VIVA's offer to ABS-CBN to enter into
a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms.
Concio, a counter-proposal in the form of a draft contract proposing
exhibition of 53 films for a consideration of P35 million. This
counter-proposal could be nothing less than the counter-offer of Mr.
Lopez during his conference with Del Rosario at Tamarind Grill
Restaurant. Clearly, there was no acceptance of VIVA's offer, for it
was met by a counter-offer which substantially varied the terms of
the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is
misplaced. In these cases, it was held that an acceptance may
contain a request for certain changes in the terms of the offer and
yet be a binding acceptance as long as "it is clear that the meaning
of the acceptance is positively and unequivocally to accept the offer,
whether such request is granted or not." This ruling was, however,
reversed in the resolution of 29 March 1996, 43 which ruled that the
acceptance of all offer must be unqualified and absolute, i.e., it
"must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged
changes in the revised counter-offer were not material but merely
clarificatory of what had previously been agreed upon. It cited the
statement in Stuart v.Franklin Life Insurance Co. 44 that "a vendor's
change in a phrase of the offer to purchase, which change does not
essentially change the terms of the offer, does not amount to a
rejection of the offer and the tender of a counter-offer." 45However,
when any of the elements of the contract is modified upon
acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of
VIVA's offer. Hence, they underwent a period of bargaining. ABS-
CBN then formalized its counter-proposals or counter-offer in a draft
contract, VIVA through its Board of Directors, rejected such counter-
offer, Even if it be conceded arguendo that Del Rosario had accepted
the counter-offer, the acceptance did not bind VIVA, as there was no
proof whatsoever that Del Rosario had the specific authority to do
so.
Under Corporation Code, 46 unless otherwise provided by said Code,
corporate powers, such as the power; to enter into contracts; are
exercised by the Board of Directors. However, the Board may
delegate such powers to either an executive committee or officials
or contracted managers. The delegation, except for the executive
committee, must be for specific purposes, 47 Delegation to officers
makes the latter agents of the corporation; accordingly, the general
rules of agency as to the bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the
corporation to exercise a power of the Board, the latter must
specially authorize them to do so. That Del Rosario did not have the
authority to accept ABS-CBN's counter-offer was best evidenced by
his submission of the draft contract to VIVA's Board of Directors for
the latter's approval. In any event, there was between Del Rosario
and Lopez III no meeting of minds. The following findings of the trial
court are instructive:
A number of considerations militate against ABS-
CBN's claim that a contract was perfected at that
lunch meeting on April 02, 1992 at the Tamarind
Grill.
FIRST, Mr. Lopez claimed that what was agreed
upon at the Tamarind Grill referred to the price
and the number of films, which he wrote on a
napkin. However, Exhibit "C" contains numerous
provisions which, were not discussed at the
Tamarind Grill, if Lopez testimony was to be
believed nor could they have been physically
written on a napkin. There was even doubt as to
whether it was a paper napkin or a cloth napkin.
In short what were written in Exhibit "C'' were
not discussed, and therefore could not have
been agreed upon, by the parties. How then
could this court compel the parties to sign
Exhibit "C" when the provisions thereof were not
previously agreed upon?
SECOND, Mr. Lopez claimed that what was
agreed upon as the subject matter of the
contract was 14 films. The complaint in fact
prays for delivery of 14 films. But Exhibit "C"
mentions 53 films as its subject matter. Which is
which If Exhibits "C" reflected the true intent of
the parties, then ABS-CBN's claim for 14 films in
its complaint is false or if what it alleged in the
complaint is true, then Exhibit "C" did not reflect
what was agreed upon by the parties. This
underscores the fact that there was no meeting
of the minds as to the subject matter of the
contracts, so as to preclude perfection thereof.
For settled is the rule that there can be no
contract where there is no object which is its
subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of
his affidavit testimony (Exh. "D") states:
We were able to reach an
agreement. VIVA gave us the
exclusive license to show
these fourteen (14) films,
and we agreed to pay Viva
the amount of
P16,050,000.00 as well as
grant Viva commercial slots
worth P19,950,000.00. We
had already earmarked this
P16, 050,000.00.
which gives a total consideration of P36 million
(P19,950,000.00 plus P16,050,000.00. equals
P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this
napkin?
A. The total price, the
breakdown the known Viva
movies, the 7 blockbuster
movies and the other 7 Viva
movies because the price
was broken down
accordingly. The none [sic]
Viva and the seven other
 Viva movies and the sharing
between the cash portion
and the concerned spot
portion in the total amount
of P35 million pesos.
Now, which is which? P36 million or P35 million?
This weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN
stated that she transmitted Exhibit "C" to Mr.
Del Rosario with a handwritten note, describing
said Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn
pp. 23-24 June 08, 1992). The said draft has a
well defined meaning.
Since Exhibit "C" is only a draft, or a tentative,
provisional or preparatory writing prepared for
discussion, the terms and conditions thereof
could not have been previously agreed upon by
ABS-CBN and Viva Exhibit "C'' could not
therefore legally bind Viva, not having agreed
thereto. In fact, Ms. Concio admitted that the
terms and conditions embodied in Exhibit "C"
were prepared by ABS-CBN's lawyers and there
was no discussion on said terms and conditions. .
..
As the parties had not yet discussed the
proposed terms and conditions in Exhibit "C,"
and there was no evidence whatsoever that Viva
agreed to the terms and conditions thereof, said
document cannot be a binding contract. The fact
that Viva refused to sign Exhibit "C" reveals only
two [sic] well that it did not agree on its terms
and conditions, and this court has no authority
to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he
and Mr. Del Rosario agreed upon at the
Tamarind Grill was only provisional, in the sense
that it was subject to approval by the Board of
Directors of Viva. He testified:
Q. Now, Mr. Witness, and
after that Tamarind meeting
... the second meeting
wherein you claimed that
you have the meeting of the
minds between you and Mr.
Vic del Rosario, what
happened?
A. Vic Del Rosario was
supposed to call us up and
tell us specifically the result
of the discussion with the
Board of Directors.
Q. And you are referring to
the so-called agreement
which you wrote in [sic] a
piece of paper?
A. Yes, sir.
Q. So, he was going to
forward that to the board of
Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43,
June 8, 1992)
Q. Did Mr. Del Rosario tell
you that he will submit it to
his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8,
1992).
The above testimony of Mr. Lopez shows beyond
doubt that he knew Mr. Del Rosario had no
authority to bind Viva to a contract with ABS-
CBN until and unless its Board of Directors
approved it. The complaint, in fact, alleges that
Mr. Del Rosario "is the Executive Producer of
defendant Viva" which "is a corporation." (par. 2,
complaint). As a mere agent of Viva, Del Rosario
could not bind Viva unless what he did is ratified
by its Board of Directors. (Vicente vs. Geraldez,
52 SCRA 210; Arnold vs. Willets and Paterson, 44
Phil. 634). As a mere agent, recognized as such
by plaintiff, Del Rosario could not be held liable
jointly and severally with Viva and his inclusion
as party defendant has no legal basis. (Salonga
vs. Warner Barner [sic] , COLTA , 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations
in the complaint are clear admissions that what
was supposed to have been agreed upon at the
Tamarind Grill between Mr. Lopez and Del
Rosario was not a binding agreement. It is as it
should be because corporate power to enter into
a contract is lodged in the Board of Directors.
(Sec. 23, Corporation Code). Without such board
approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen
into a valid contract binding upon Viva (Yao Ka
Sin Trading vs. Court of Appeals, 209 SCRA 763).
The evidence adduced shows that the Board of
Directors of Viva rejected Exhibit "C" and insisted
that the film package for 140 films be
maintained (Exh. "7-1" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of
first refusal over twenty-four films under the 1990 Film Exhibition
Agreement and that the meeting between Lopez and Del Rosario
was a continuation of said previous contract is untenable. As
observed by the trial court, ABS-CBN right of first refusal had already
been exercised when Ms. Concio wrote to VIVA ticking off ten films,
Thus:
[T]he subsequent negotiation with ABS-CBN two
(2) months after this letter was sent, was for an
entirely different package. Ms. Concio herself
admitted on cross-examination to having used or
exercised the right of first refusal. She stated
that the list was not acceptable and was indeed
not accepted by ABS-CBN, (TSN, June 8, 1992,
pp. 8-10). Even Mr. Lopez himself admitted that
the right of the first refusal may have been
already exercised by Ms. Concio (as she had).
(TSN, June 8, 1992, pp. 71-75). Del Rosario
himself knew and understand [sic] that ABS-CBN
has lost its rights of the first refusal when his list
of 36 titles were rejected (Tsn, June 9, 1992, pp.
10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall
first take up actual damages. Chapter 2, Title XVIII, Book IV of the
Civil Code is the specific law on actual or compensatory damages.
Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss
suffered by him as he has duly proved. 51 The indemnification shall
comprehend not only the value of the loss suffered, but also that of
the profits that the obligee failed to obtain. 52 In contracts and quasi-
contracts the damages which may be awarded are dependent on
whether the obligor acted with good faith or otherwise, It case of
good faith, the damages recoverable are those which are the natural
and probable consequences of the breach of the obligation and
which the parties have foreseen or could have reasonably foreseen
at the time of the constitution of the obligation. If the obligor acted
with fraud, bad faith, malice, or wanton attitude, he shall be
responsible for all damages which may be reasonably attributed to
the non-performance of the obligation. 53 In crimes and quasi-
delicts, the defendant shall be liable for all damages which are the
natural and probable consequences of the act or omission
complained of, whether or not such damages has been foreseen or
could have reasonably been foreseen by the defendant. 54
Actual damages may likewise be recovered for loss or impairment of
earning capacity in cases of temporary or permanent personal
injury, or for injury to the plaintiff's business standing or commercial
credit. 55
The claim of RBS for actual damages did not arise from contract,
quasi-contract, delict, or quasi-delict. It arose from the fact of filing
of the complaint despite ABS-CBN's alleged knowledge of lack of
cause of action. Thus paragraph 12 of RBS's Answer with
Counterclaim and Cross-claim under the heading COUNTERCLAIM
specifically alleges:
12. ABS-CBN filed the complaint knowing fully
well that it has no cause of action RBS. As a
result thereof, RBS suffered actual damages in
the amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be
comprehended under the above law on actual damages. RBS could
only probably take refuge under Articles 19, 20, and 21 of the Civil
Code, which read as follows:
Art. 19. Every person must, in the exercise of his
rights and in the performance of his duties, act
with justice, give everyone his due, and observe
honesty and good faith.
Art. 20. Every person who, contrary to law,
wilfully or negligently causes damage to another,
shall indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or
injury to another in a manner that is contrary to
morals, good customs or public policy shall
compensate the latter for the damage.
It may further be observed that in cases where a writ of preliminary
injunction is issued, the damages which the defendant may suffer by
reason of the writ are recoverable from the injunctive bond. 57 In
this case, ABS-CBN had not yet filed the required bond; as a matter
of fact, it asked for reduction of the bond and even went to the
Court of Appeals to challenge the order on the matter, Clearly then,
it was not necessary for RBS to file a counterbond. Hence, ABS-CBN
cannot be held responsible for the premium RBS paid for the
counterbond.
Neither could ABS-CBN be liable for the print advertisements for
"Maging Sino Ka Man" for lack of sufficient legal basis. The RTC
issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed
sufficient ground for the issuance thereof. Notably, the RTC did not
dissolve the injunction on the ground of lack of legal and factual
basis, but because of the plea of RBS that it be allowed to put up a
counterbond.
As regards attorney's fees, the law is clear that in the absence of
stipulation, attorney's fees may be recovered as actual or
compensatory damages under any of the circumstances provided for
in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part
of damages because of the policy that no premium should be placed
on the right to litigate. 59 They are not to be awarded every time a
party wins a suit. The power of the court to award attorney's fees
under Article 2208 demands factual, legal, and equitable
justification. 60 Even when claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorney's
fees may not be awarded where no sufficient showing of bad faith
could be reflected in a party's persistence in a case other than
erroneous conviction of the righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book
IV of the Civil Code. Article 2217 thereof defines what are included
in moral damages, while Article 2219 enumerates the cases where
they may be recovered, Article 2220 provides that moral damages
may be recovered in breaches of contract where the defendant
acted fraudulently or in bad faith. RBS's claim for moral damages
could possibly fall only under item (10) of Article 2219, thereof
which reads:
(10) Acts and actions referred to in Articles 21,
26, 27, 28, 29, 30, 32, 34, and 35.
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered. and not to
impose a penalty on the wrongdoer. 62 The award is not meant to
enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or amusements
that will serve to obviate then moral suffering he has undergone. It
is aimed at the restoration, within the limits of the possible, of the
spiritual status quo ante, and should be proportionate to the
suffering inflicted. 63 Trial courts must then guard against the award
of exorbitant damages; they should exercise balanced restrained
and measured objectivity to avoid suspicion that it was due to
passion, prejudice, or corruption on the part of the trial court. 64
The award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having existence
only in legal contemplation, it has no feelings, no emotions, no
senses, It cannot, therefore, experience physical suffering and
mental anguish, which call be experienced only by one having a
nervous system. 65 The statement in People
v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation
may recover moral damages if it "has a good reputation that is
debased, resulting in social humiliation" is an obiter dictum. On this
score alone the award for damages must be set aside, since RBS is a
corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title
XVIII, Book IV of the Civil Code. These are imposed by way of
example or correction for the public good, in addition to moral,
temperate, liquidated or compensatory damages. 68 They are
recoverable in criminal cases as part of the civil liability when the
crime was committed with one or more aggravating
circumstances; 69 in quasi-contracts, if the defendant acted with
gross negligence;70 and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner. 71
It may be reiterated that the claim of RBS against ABS-CBN is not
based on contract, quasi-contract, delict, or quasi-delict, Hence, the
claims for moral and exemplary damages can only be based on
Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1)
the existence of a legal right or duty, (2) which is exercised in bad
faith, and (3) for the sole intent of prejudicing or injuring another.
Article 20 speaks of the general sanction for all other provisions of
law which do not especially provide for their own sanction; while
Article 21 deals with acts contra bonus mores, and has the following
elements; (1) there is an act which is legal, (2) but which is contrary
to morals, good custom, public order, or public policy, and (3) and it
is done with intent to injure. 72
Verily then, malice or bad faith is at the core of Articles 19, 20, and
21. Malice or bad faith implies a conscious and intentional design to
do a wrongful act for a dishonest purpose or moral obliquity. 73 Such
must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice or
bad faith. It was honestly convinced of the merits of its cause after it
had undergone serious negotiations culminating in its formal
submission of a draft contract. Settled is the rule that the adverse
result of an action does not per se make the action wrongful and
subject the actor to damages, for the law could not have meant to
impose a penalty on the right to litigate. If damages result from a
person's exercise of a right, it is damnum absque injuria. 75
WHEREFORE, the instant petition is GRANTED. The challenged
decision of the Court of Appeals in CA-G.R. CV No, 44125 is hereby
REVERSED except as to unappealed award of attorney's fees in favor
of VIVA Productions, Inc.1âwphi1.nêt
No pronouncement as to costs.
SO ORDERED.
G.R. No. L-6776 May 21, 1955
THE REGISTER OF DEEDS OF RIZAL, petitioner-appellee,
vs.
UNG SIU SI TEMPLE, respondent-appellant.
Alejo F. Candido for appellant.
Office of the Solicitor General Querube C. Makalintal and Solicitor
Felix V. Makasiar for appellee.
REYES, J.B.L., J.:
The Register of Deeds for the province of Rizal refused to accept for
record a deed of donation executed in due form on January 22,
1953, by Jesus Dy, a Filipino citizen, conveying a parcel of residential
land, in Caloocan, Rizal, known as lot No. 2, block 48-D, PSD-4212,
G.L.R.O. Record No. 11267, in favor of the unregistered religious
organization "Ung Siu Si Temple", operating through three trustees
all of Chinese nationality. The donation was duly accepted by Yu
Juan, of Chinese nationality, founder and deaconess of the Temple,
acting in representation and in behalf of the latter and its trustees.
The refusal of the Registrar was elevated en Consultato the IVth
Branch of the Court of First Instance of Manila. On March 14, 1953,
the Court upheld the action of the Rizal Register of Deeds, saying:
The question raised by the Register of Deeds in the above
transcribed consulta is whether a deed of donation of a
parcel of land executed in favor of a religious organization
whose founder, trustees and administrator are Chinese
citizens should be registered or not.
It appearing from the record of the Consulta that UNG SIU
SI TEMPLE is a religious organization whose deaconess,
founder, trustees and administrator are all Chinese
citizens, this Court is of the opinion and so hold that in
view of the provisions of the sections 1 and 5 of Article XIII
of the Constitution of the Philippines limiting the
acquisition of land in the Philippines to its citizens, or to
corporations or associations at least sixty per centum of
the capital stock of which is owned by such citizens
adopted after the enactment of said Act No. 271, and the
decision of the Supreme Court in the case of Krivenko vs.
the Register of Deeds of Manila, the deed of donation in
question should not be admitted for admitted for
registration. (Printed Rec. App. pp 17-18).
Not satisfied with the ruling of the Court of First Instance, counsel
for the donee Uy Siu Si Temple has appealed to this Court, claiming:
(1) that the acquisition of the land in question, for religious
purposes, is authorized and permitted by Act No. 271 of the old
Philippine Commission, providing as follows:
SECTION 1. It shall be lawful for all religious associations,
of whatever sort or denomination, whether incorporated
in the Philippine Islands or in the name of other country,
or not incorporated at all, to hold land in the Philippine
Islands upon which to build churches, parsonages, or
educational or charitable institutions.
SEC. 2. Such religious institutions, if not incorporated, shall
hold the land in the name of three Trustees for the use of
such associations; . . .. (Printed Rec. App. p. 5.)
and (2) that the refusal of the Register of Deeds violates the
freedom of religion clause of our Constitution [Art. III, Sec. 1(7)].
We are of the opinion that the Court below has correctly held that in
view of the absolute terms of section 5, Title XIII, of the Constitution,
the provisions of Act No. 271 of the old Philippine Commission must
be deemed repealed since the Constitution was enacted, in so far as
incompatible therewith. In providing that, —
Save in cases of hereditary succession, no private
agricultural land shall be transferred or assigned except to
individuals, corporations or associations qualified to
acquire or hold lands of the public domain in the
Philippines,
the Constitution makes no exception in favor of religious
associations. Neither is there any such saving found in sections 1 and
2 of Article XIII, restricting the acquisition of public agricultural lands
and other natural resources to "corporations or associations at least
sixty per centum of the capital of which is owned by such citizens"
(of the Philippines).
The fact that the appellant religious organization has no capital stock
does not suffice to escape the Constitutional inhibition, since it is
admitted that its members are of foreign nationality. The purpose of
the sixty per centum requirement is obviously to ensure that
corporations or associations allowed to acquire agricultural land or
to exploit natural resources shall be controlled by Filipinos; and the
spirit of the Constitution demands that in the absence of capital
stock, the controlling membership should be composed of Filipino
citizens.
To permit religious associations controlled by non-Filipinos to
acquire agricultural lands would be to drive the opening wedge to
revive alien religious land holdings in this country. We can not ignore
the historical fact that complaints against land holdings of that kind
were among the factors that sparked the revolution of 1896.
As to the complaint that the disqualification under article XIII is
violative of the freedom of religion guaranteed by Article III of the
Constitution, we are by no means convinced (nor has it been shown)
that land tenure is indispensable to the free exercise and enjoyment
of religious profession or worship; or that one may not worship the
Deity according to the dictates of his own conscience unless upon
land held in fee simple.
The resolution appealed from is affirmed, with costs against
appellant.
G.R. No. L-6055 June 12, 1953
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
WILLIAM H. QUASHA, defendant-appellant.
Jose P. Laurel for appellant and William H. Quasha in his own behalf.
Office of the Solicitor General Juan R. Liwag and Assistant Solicitor
General Francisco Carreon for appellee.
REYES, J.:
William H. Quasha, a member of the Philippine bar, was charged in
the Court of First Instance of Manila with the crime of falsification of
a public and commercial document in that, having been entrusted
with the preparation and registration of the article of incorporation
of the Pacific Airways Corporation, a domestic corporation organized
for the purpose of engaging in business as a common carrier, he
caused it to appear in said article of incorporation that one Arsenio
Baylon, a Filipino citizen, had subscribed to and was the owner of
60.005 per cent of the subscribed capital stock of the corporation
when in reality, as the accused well knew, such was not the case, the
truth being that the owner of the portion of the capital stock
subscribed to by Baylon and the money paid thereon were American
citizen whose name did not appear in the article of incorporation,
and that the purpose for making this false statement was to
circumvent the constitutional mandate that no corporation shall be
authorize to operate as a public utility in the Philippines unless 60
per cent of its capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term of imprisonment
and a fine, the accused has appealed to this Court.
The essential facts are not in dispute. On November 4,1946, the
Pacific Airways Corporation registered its articles of incorporation
with the Securities and Exchanged Commission. The article were
prepared and the registration was effected by the accused, who was
in fact the organizer of the corporation. The article stated that the
primary purpose of the corporation was to carry on the business of a
common carrier by air, land or water; that its capital stock was
P1,000,000, represented by 9,000 preferred and 100,000 common
shares, each preferred share being of the par value of p100 and
entitled to 1/3 vote and each common share, of the par value of P1
and entitled to one vote; that the amount capital stock actually
subscribed was P200,000, and the names of the subscribers were
Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James
O'Bannon, Denzel J. Cavin, and William H. Quasha, the first being a
Filipino and the other five all Americans; that Baylon's subscription
was for 1,145 preferred shares, of the total value of P114,500, and
for 6,500 common shares, of the total par value of P6,500, while the
aggregate subscriptions of the American subscribers were for 200
preferred shares, of the total par value of P20,000, and 59,000
common shares, of the total par value of P59,000; and that Baylon
and the American subscribers had already paid 25 per cent of their
respective subscriptions. Ostensibly the owner of, or subscriber to,
60.005 per cent of the subscribed capital stock of the corporation,
Baylon nevertheless did not have the controlling vote because of the
difference in voting power between the preferred shares and the
common shares. Still, with the capital structure as it was, the article
of incorporation were accepted for registration and a certificate of
incorporation was issued by the Securities and Exchange
Commission.
There is no question that Baylon actually subscribed to 60.005 per
cent of the subscribed capital stock of the corporation. But it is
admitted that the money paid on his subscription did not belong to
him but to the Americans subscribers to the corporate stock. In
explanation, the accused testified, without contradiction, that in the
process of organization Baylon was made a trustee for the American
incorporators, and that the reason for making Baylon such trustee
was as follows:
Q. According to this article of incorporation Arsenio Baylon
subscribed to 1,135 preferred shares with a total value of
P1,135. Do you know how that came to be?
A. Yes.
The people who were desirous of forming the corporation, whose
names are listed on page 7 of this certified copy came to my house,
Messrs. Shannahan, Onstott, O'Bannon, Caven, Perry and
Anastasakas one evening. There was considerable difficulty to get
them all together at one time because they were pilots. They had
difficulty in deciding what their respective share holdings would be.
Onstott had invested a certain amount of money in airplane surplus
property and they had obtained a considerable amount of money on
those planes and as I recall they were desirous of getting a
corporation formed right away. And they wanted to have their
respective shares holdings resolved at a latter date. They stated that
they could get together that they feel that they had no time to settle
their respective share holdings. We discussed the matter and finally
it was decided that the best way to handle the things was not to put
the shares in the name of anyone of the interested parties and to
have someone act as trustee for their respective shares holdings. So
we looked around for a trustee. And he said "There are a lot of
people whom I trust." He said, "Is there someone around whom we
could get right away?" I said, "There is Arsenio. He was my boy
during the liberation and he cared for me when i was sick and i said i
consider him my friend." I said. They all knew Arsenio. He is a very
kind man and that was what was done. That is how it came about.
Defendant is accused under article 172 paragraph 1, in connection
with article 171, paragraph 4, of the Revised Penal Code, which read:
ART. 171. Falsification by public officer, employee, or
notary or ecclesiastic minister. — The penalty ofprision
mayor and a fine not to exceed 5,000 pesos shall be
imposed upon any public officer, employee, or notary
who, taking advantage of his official position, shall falsify a
document by committing any of the following acts:
xxx xxx xxx
4. Making untruthful statements in a narration of facts.
ART. 172. Falsification by private individuals and use of
falsified documents. — The penalty of prision
correccional in its medium and maximum period and a fine
of not more than 5,000 pesos shall be imposed upon:
xxx xxx xxx
1. Any private individual who shall commit any of the
falsifications enumerated in the next preceding article in
any public or official document or letter of exchange or
any other kind of commercial document.
Commenting on the above provision, Justice Albert, in his well-
known work on the Revised Penal Code ( new edition, pp. 407-408),
observes, on the authority of U.S. vs. Reyes, (1 Phil., 341), that the
perversion of truth in the narration of facts must be made with the
wrongful intent of injuring a third person; and on the authority
of U.S. vs. Lopez (15 Phil., 515), the same author further maintains
that even if such wrongful intent is proven, still the untruthful
statement will not constitute the crime of falsification if there is no
legal obligation on the part of the narrator to disclose the truth.
Wrongful intent to injure a third person and obligation on the part
of the narrator to disclose the truth are thus essential to a
conviction for a crime of falsification under the above article of the
Revised Penal Code.
Now, as we see it, the falsification imputed in the accused in the
present case consists in not disclosing in the articles of incorporation
that Baylon was a mere trustee ( or dummy as the prosecution
chooses to call him) of his American co-incorporators, thus giving
the impression that Baylon was the owner of the shares subscribed
to by him which, as above stated, amount to 60.005 per cent of the
sub-scribed capital stock. This, in the opinion of the trial court, is a
malicious perversion of the truth made with the wrongful intent
circumventing section 8, Article XIV of the Constitution, which
provides that " no franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporation or other
entities organized under the law of the Philippines, sixty per
centum of the capital of which is owned by citizens of the Philippines
. . . ." Plausible though it may appear at first glance, this opinion
loses validity once it is noted that it is predicated on the erroneous
assumption that the constitutional provision just quoted was meant
to prohibit the mere formation of a public utility corporation
without 60 per cent of its capital being owned by the Filipinos, a
mistaken belief which has induced the lower court to that the
accused was under obligation to disclose the whole truth about the
nationality of the subscribed capital stock of the corporation by Constitution in so far as American citizens are concerned, the said
revealing that Baylon was a mere trustee or dummy of his American act has ceased to be an offense within the meaning of the law, so
co-incorporators, and that in not making such disclosure defendant's that defendant can no longer be held criminally liable therefor.
intention was to circumvent the Constitution to the detriment of the
public interests. Contrary to the lower court's assumption, the In view of the foregoing, the judgment appealed from is reversed
Constitution does not prohibit the mere formation of a public utility and the defendant William H. Quasha acquitted, with costs de oficio.
corporation without the required formation of Filipino capital. What
it does prohibit is the granting of a franchise or other form of
authorization for the operation of a public utility to a corporation
already in existence but without the requisite proportion of Filipino
capital. This is obvious from the context, for the constitutional G.R. No. L-19891 July 31, 1964
provision in question qualifies the terms " franchise", "certificate",
or "any other form of authorization" with the phrase "for the J.R.S. BUSINESS CORPORATION, J.R. DA SILVA and A.J.
operation of a public utility," thereby making it clear that the BELTRAN, petitioners,
franchise meant is not the "primary franchise" that invest a body of vs.
men with corporate existence but the "secondary franchise" or the IMPERIAL INSURANCE, INC., MACARIO M. OFILADA, Sheriff of Manila
privilege to operate as a public utility after the corporation has and
already come into being. HON. AGUSTIN MONTESA, Judge of the Court of First Instance of
Manila, respondents.
If the Constitution does not prohibit the mere formation of a public
utility corporation with the alien capital, then how can the accused Felipe N. Aurea for petitioners.
be charged with having wrongfully intended to circumvent that Tañada, Teehankee and Carreon for respondent Imperial Insurance,
fundamental law by not revealing in the articles of incorporation Inc.
that Baylon was a mere trustee of his American co-incorporation
and that for that reason the subscribed capital stock of the
PAREDES, J.:
corporation was wholly American? For the mere formation of the
corporation such revelation was not essential, and the Corporation
Law does not require it. Defendant was, therefore, under no Petitioner J. R. Da Silva, is the President of the J.R.S. Business
obligation to make it. In the absence of such obligation and of the Corporation, an establishment duly franchised by the Congress of
allege wrongful intent, defendant cannot be legally convicted of the the Philippines, to conduct a messenger and delivery express
crime with which he is charged. service. On July 12, 1961, the respondent Imperial Insurance, Inc.,
presented with the CFI of Manila a complaint (Civ. Case No. 47520),
for sum of money against the petitioner corporation. After the
It is urged, however, that the formation of the corporation with 60
defendants therein have submitted their Answer, the parties
per cent of its subscribed capital stock appearing in the name of
entered into a Compromise Agreement, assisted by their respective
Baylon was an indispensable preparatory step to the subversion of
counsels, the pertinent portions of which recite:
the constitutional prohibition and the laws implementing the policy
expressed therein. This view is not correct. For a corporation to be
entitled to operate a public utility it is not necessary that it be 1) WHEREAS, the DEFENDANTS admit and confess their
organized with 60 per cent of its capital owned by Filipinos from the joint and solidary indebtedness to the PLAINTIFF in the full
start. A corporation formed with capital that is entirely alien may sum of PESOS SIXTY ONE THOUSAND ONE HUNDRED
subsequently change the nationality of its capital through transfer of SEVENTY-TWO & 32/100 (P61,172.32), Philippine
shares to Filipino citizens. conversely, a corporation originally Currency, itemized as follows:
formed with Filipino capital may subsequently change the national
status of said capital through transfer of shares to foreigners. What
a) Principal P50,000.00
need is there then for a corporation that intends to operate a public
utility to have, at the time of its formation, 60 per cent of its capital b) Interest at 12% per annum 5,706.14
owned by Filipinos alone? That condition may anytime be attained
thru the necessary transfer of stocks. The moment for determining c) Liquidated damages at 7% per
whether a corporation is entitled to operate as a public utility is 3,330.58
annum
when it applies for a franchise, certificate, or any other form of
authorization for that purpose. And that can be done after the d) Costs of suit 135.60
corporation has already come into being and not while it is still being
formed. And at that moment, the corporation must show that it has e) Attorney's fees 2,000.00
complied not only with the requirement of the Constitution as to the
nationality of its capital, but also with the requirements of the Civil
2) WHEREAS, the DEFENDANTS bind themselves, jointly
Aviation Law if it is a common carrier by air, the Revised
and severally, and hereby promise to pay their
Administrative Code if it is a common carrier by water, and the
aforementioned obligation to the PLAINTIFF at its business
Public Service Law if it is a common carrier by land or other kind of
address at 301-305 Banquero St., (Ground Floor), Regina
public service.
Building, Escolta, Manila, within sixty (60) days from March
16, 1962 or on or before May 14, 1962;
Equally untenable is the suggestion that defendant should at least
be held guilty of an "impossible crime" under article 59 of the
3) WHEREAS, in the event the DEFENDANTS FAIL to pay in
Revised Penal Code. It not being possible to suppose that defendant
full the total amount of PESOS SIXTY ONE THOUSAND ONE
had intended to commit a crime for the simple reason that the
HUNDRED SEVENTY TWO & 32/100 (P61,172.32),
alleged constitutional prohibition which he is charged for having
Philippine Currency, for any reason whatsoever, on May
tried to circumvent does not exist, conviction under that article is
14, 1962, the PLAINTIFF shall be entitled, as a matter of
out of the question.
right, to move for the execution of the decision to be
rendered in the above-entitled case by this Honorable
The foregoing consideration can not but lead to the conclusion that Court based on this COMPROMISE AGREEMENT.
the defendant can not be held guilty of the crime charged. The
majority of the court, however, are also of the opinion that, even
On March 17, 1962, the lower court rendered judgment embodying
supposing that the act imputed to the defendant constituted
the contents of the said compromise agreement, the dispositive
falsification at the time it was perpetrated, still with the approval of
portion of which reads —
the Party Amendment to the Constitution in March, 1947, which
placed Americans on the same footing as Filipino citizens with
respect to the right to operate public utilities in the Philippines, thus WHEREFORE, the Court hereby approves the above-
doing away with the prohibition in section 8, Article XIV of the quoted compromise agreement and renders judgment in
 accordance therewith, enjoining the parties to comply
faithfully and strictly with the terms and conditions
thereof, without special pronouncement as to costs.
Wherefore, the parties respectfully pray that the foregoing
stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered
by this stipulation of facts. 1äwphï1.ñët
On May 15, 1962, one day after the date fixed in the compromise
agreement, within which the judgment debt would be paid, but was
not, respondent Imperial Insurance Inc., filed a "Motion for the
Insurance of a Writ of Execution". On May 23, 1962, a Writ of
Execution was issued by respondent Sheriff of Manila and on May
26, 1962, Notices of Sale were sent out for the auction of the
personal properties of the petitioner J.R.S. Business Corporation. On
June 2, 1962, a Notice of Sale of the "whole capital stocks of the
defendants JRS Business Corporation, the business name, right of
operation, the whole assets, furnitures and equipments, the total
liabilities, and Net Worth, books of accounts, etc., etc." of the
petitioner corporation was, handed down. On June 9, the petitioner,
thru counsel, presented an "Urgent Petition for Postponement of
Auction Sale and for Release of Levy on the Business Name and Right
to Operate of Defendant JRS Business Corporation", stating that
petitioners were busy negotiating for a loan with which to pay the
judgment debt; that the judgment was for money only and,
therefore, plaintiff (respondent Insurance Company) was not
authorized to take over and appropriate for its own use, the
business name of the defendants; that the right to operate under
the franchise, was not transferable and could not be considered a
personal or immovable, property, subject to levy and sale. On June
10, 1962, a Supplemental Motion for Release of Execution, was filed
by counsel of petitioner JRS Business Corporation, claiming that the
capital stocks thereof, could not be levied upon and sold under
execution. Under date of June 20, 1962, petitioner's counsel
presented a pleading captioned "Very Urgent Motion for
Postponement of Public Auction Sale and for Ruling on Motion for
Release of Levy on the Business Name, Right to Operate and Capital
Stocks of JRS Business Corporation". The auction sale was set for
June 21, 1962. In said motion, petitioners alleged that the loan they
had applied for, was to be secured within the next ten (10) days, and
they would be able to discharge the judgment debt. Respondents
opposed the said motion and on June 21, 1962, the lower court
denied the motion for postponement of the auction sale.
In the sale which was conducted in the premises of the JRS Business
Corporation at 1341 Perez St., Paco, Manila, all the properties of
said corporation contained in the Notices of Sale dated May 26,
1962, and June 2, 1962 (the latter notice being for the whole capital
stocks of the defendant, JRS Business Corporation, the business
name, right of operation, the whole assets, furnitures and
equipments, the total liabilities and Net Worth, books of accounts,
etc., etc.), were bought by respondent Imperial Insurance, Inc., for
P10,000.00, which was the highest bid offered. Immediately after
the sale, respondent Insurance Company took possession of the
proper ties and started running the affairs and operating the
business of the JRS Business Corporation. Hence, the present appeal.
It would seem that the matters which need determination are (1)
whether the respondent Judge acted without or in excess of his
jurisdiction or with grave abuse of discretion in promulgating the
Order of June 21, 1962, denying the motion for postponement of
the scheduled sale at public auction, of the properties of petitioner;
and (2) whether the business name or trade name, franchise (right
to operate) and capital stocks of the petitioner are properties or
property rights which could be the subject of levy, execution and
sale.
The respondent Court's act of postponing the scheduled sale was
within the discretion of respondent Judge, the exercise of which,
one way or the other, did not constitute grave abuse of discretion
and/or excess of jurisdiction. There was a decision rendered and the
corresponding writ of execution was issued. Respondent Judge had
jurisdiction over the matter and erroneous conclusions of law or
fact, if any, committed in the exercise of such jurisdiction are merely
errors of judgment, not correctible by certiorari (Villa Rey Transit v.
Bello, et al., L-18957, April 23, 1963, and cases cited therein.)
The corporation law, on forced sale of franchises, provides —
Any franchise granted to a corporation to collect tolls or to
occupy, enjoy, or use public property or any portion of the
public domain or any right of way over public property or
the public domain, and any rights and privileges acquired
under such franchise may be levied upon and sold under
execution, together with the property necessary for the
enjoyment, the exercise of the powers, and the receipt of
the proceeds of such franchise or right of way, in the same
manner and with like effect as any other property to
satisfy any judgment against the corporation: Provided,
That the sale of the franchise or right of way and the
property necessary for the enjoyment, the exercise of the
powers, and the receipt of the proceeds of said franchise
or right of way is especially decreed and ordered in the
judgment: And provided, further, That the sale shall not
become effective until confirmed by the court after due
notice. (Sec. 56, Corporation Law.)
In the case of Gulf Refining Co. v. Cleveland Trust Co., 108 So., 158, it
was held —
The first question then for decision is the meaning of the
word "franchise" in the statute.
"A franchise is a special privilege conferred by
governmental authority, and which does not
belong to citizens of the country generally as a
matter of common right. ... Its meaning depends
more or less upon the connection in which the
word is employed and the property and
corporation to which it is applied. It may have
different significations.
"For practical purposes, franchises, so far as
relating to corporations, are divisible into (1)
corporate or general franchises; and (2) special
or secondary franchises. The former is the
franchise to exist as a corporation, while the
latter are certain rights and privileges conferred
upon existing corporations, such as the right to
use the streets of a municipality to lay pipes or
tracks, erect poles or string wires." 2 Fletcher's
Cyclopedia Corp. See. 1148; 14 C.J. p. 160;
Adams v. Yazon & M. V. R. Co., 24 So. 200, 317,
28 So. 956, 77 Miss. 253, 60 L.R.A. 33 et seq.
The primary franchise of a corporation that is, the right to
exist as such, is vested "in the individuals who compose the
corporation and not in the corporation itself" (14 C.J. pp.
160, 161; Adams v. Railroad, supra; 2 Fletcher's Cyclopedia
Corp. Secs. 1153, 1158; 3 Thompson on Corporations 2d
Ed.] Secs. 2863, 2864),and cannot be conveyed in the
absence of a legislative authority so to do (14A CJ. 543,
577; 1 Fletcher's Cyc. Corp. Sec. 1224; Memphis & L.R.R.
Co. v. Berry 5 S. Ct. 299, 112 U.S. 609, 28 L.E.d. 837;
Vicksburg Waterworks Co. v. Vicksburg, 26 S. Ct. 660, 202
U.S. 453, 50 L.E.d. 1102, 6 Ann. Cas. 253; Arthur v.
Commercial & Railroad Bank, 9 Smedes & M. 394, 48 Am.
Dec. 719), but the specify or secondary franchises of a
corporation are vested in the corporation and may
ordinarily be conveyed or mortgaged under a general
power granted to a corporation to dispose of its
property (Adams v. Railroad, supra; 14A C.J. 542, 557; 3
Thompson on Corp. [2nd Ed.] Sec. 2909), except such
special or secondary franchises as are charged with a
public use (2 Fletcher's Cyc. Corp. see. 1225; 14A C.J. 544;
3 Thompson on Corp. [2d Ed.] sec. 2908; Arthur v.
Commercial & R.R. Bank, supra; McAllister v. Plant, 54
Miss. 106).
The right to operate a messenger and express delivery service, by
virtue of a legislative enactment, is admittedly a secondary franchise
(R.A. No. 3260, entitled "An Act granting the JRS Business
Corporation a franchise to conduct a messenger and express
service)" and, as such, under our corporation law, is subject to levy
and sale on execution together and including all the property
necessary for the enjoyment thereof. The law, however, indicates
the procedure under which the same (secondary franchise and the
properties necessary for its enjoyment) may be sold under
execution. Said franchise can be sold under execution, when such
sale is especially decreed and ordered in the judgment and it
becomes effective only when the sale is confirmed by the Court
after due notice (Sec. 56, Corp. Law). The compromise agreement
and the judgment based thereon, do not contain any special decree
or order making the franchise answerable for the judgment debt.
The same thing may be stated with respect to petitioner's trade
name or business name and its capital stock. Incidentally, the trade
name or business name corresponds to the initials of the President
of the petitioner corporation and there can be no serious dispute
regarding the fact that a trade name or business name and capital
stock are necessarily included in the enjoyment of the franchise. Like
that of a franchise, the law mandates, that property necessary for
the enjoyment of said franchise, can only be sold to satisfy a
judgment debt if the decision especially so provides. As We have
stated heretofore, no such directive appears in the decision.
Moreover, a trade name or business name cannot be sold separately
from the franchise, and the capital stock of the petitioner
corporation or any other corporation, for the matter, represents the
interest and is the property of stockholders in the corporation, who
can only be deprived thereof in the manner provided by law
(Therbee v. Baker, 35 N.E. Eq. [8 Stew.] 501, 505; In re Wells' Estate,
144 N.W. 174, 177, Wis. 294, cited in 6 Words and Phrases, 109).
It, therefore, results that the inclusion of the franchise, the trade
name and/or business name and the capital stock of the petitioner
corporation, in the sale of the properties of the JRS Business
Corporation, has no justification. The sale of the properties of
petitioner corporation is set aside, in so far as it authorizes the levy
and sale of its franchise, trade name and capital stocks. Without
pronouncement as to costs.
G.R. No. 114222 April 6, 1995
FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G.
BIAZON, petitioners,
vs.
HON. JESUS B. GARCIA, JR., in his capacity as the Secretary of the
Department of Transportation and Communications, and EDSA LRT
CORPORATION, LTD., respondents.
QUIASON, J.:
This is a petition under Rule 65 of the Revised Rules of Court to
prohibit respondents from further implementing and enforcing the
"Revised and Restated Agreement to Build, Lease and Transfer a
Light Rail Transit System for EDSA" dated April 22, 1992, and the
"Supplemental Agreement to the 22 April 1992 Revised and
Restated Agreement To Build, Lease and Transfer a Light Rail Transit
System for EDSA" dated May 6, 1993.
Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G.
Biazon are members of the Philippine Senate and are suing in their
capacities as Senators and as taxpayers. Respondent Jesus B. Garcia,
Jr. is the incumbent Secretary of the Department of Transportation
and Communications (DOTC), while private respondent EDSA LRT
Corporation, Ltd. is a private corporation organized under the laws
of Hongkong.
I Subsequently, Secretary Orbos was appointed Executive Secretary to
In 1989, DOTC planned to construct a light railway transit line along
EDSA, a major thoroughfare in Metropolitan Manila, which shall
traverse the cities of Pasay, Quezon, Mandaluyong and Makati. The
plan, referred to as EDSA Light Rail Transit III (EDSA LRT III), was
intended to provide a mass transit system along EDSA and alleviate
the congestion and growing transportation problem in the
metropolis.
On March 3, 1990, a letter of intent was sent by the Eli Levin
Enterprises, Inc., represented by Elijahu Levin to DOTC Secretary
Oscar Orbos, proposing to construct the EDSA LRT III on a Build-
Operate-Transfer (BOT) basis.
On March 15, 1990, Secretary Orbos invited Levin to send a
technical team to discuss the project with DOTC.
On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing
the Financing, Construction, Operation and Maintenance of
Infrastructure Projects by the Private Sector, and For Other
Purposes," was signed by President Corazon C. Aquino. Referred to
as the Build-Operate-Transfer (BOT) Law, it took effect on October 9,
1990.
Republic Act No. 6957 provides for two schemes for the financing,
construction and operation of government projects through private
initiative and investment: Build-Operate-Transfer (BOT) or Build-
Transfer (BT).
In accordance with the provisions of R.A. No. 6957 and to set the
EDSA LRT III project underway, DOTC, on January 22, 1991 and
March 14, 1991, issued Department Orders Nos. 91-494 and 91-496,
respectively creating the Prequalification Bids and Awards
Committee (PBAC) and the Technical Committee.
After its constitution, the PBAC issued guidelines for the
prequalification of contractors for the financing and implementation
of the project The notice, advertising the prequalification of bidders,
was published in three newspapers of general circulation once a
week for three consecutive weeks starting February 21, 1991.
The deadline set for submission of prequalification documents was
March 21, 1991, later extended to April 1, 1991. Five groups
responded to the invitation namely, ABB Trazione of Italy, Hopewell
Holdings Ltd. of Hongkong, Mansteel International of Mandaue,
Cebu, Mitsui & Co., Ltd. of Japan, and EDSA LRT Consortium,
composed of ten foreign and domestic corporations: namely, Kaiser
Engineers International, Inc., ACER Consultants (Far East) Ltd. and
Freeman Fox, Tradeinvest/CKD Tatra of the Czech and Slovak Federal
Republics, TCGI Engineering All Asia Capital and Leasing Corporation,
The Salim Group of Jakarta, E. L. Enterprises, Inc., A.M. Oreta & Co.
Capitol Industrial Construction Group, Inc, and F. F. Cruz & co., Inc.
On the last day for submission of prequalification documents, the
prequalification criteria proposed by the Technical Committee were
adopted by the PBAC. The criteria totalling 100 percent, are as
follows: (a) Legal aspects — 10 percent; (b)
Management/Organizational capability — 30 percent; and (c)
Financial capability — 30 percent; and (d) Technical capability — 30
percent (Rollo, p. 122).
On April 3, 1991, the Committee, charged under the BOT Law with
the formulation of the Implementation Rules and Regulations
thereof, approved the same.
After evaluating the prequalification, bids, the PBAC issued a
Resolution on May 9, 1991 declaring that of the five applicants, only
the EDSA LRT Consortium "met the requirements of garnering at
least 21 points per criteria [sic], except for Legal Aspects, and
obtaining an over-all passing mark of at least 82 points" (Rollo, p.
146). The Legal Aspects referred to provided that the BOT/BT
contractor-applicant meet the requirements specified in the
Constitution and other pertinent laws (Rollo, p. 114).
the President of the Philippines and was replaced by Secretary Pete
Nicomedes Prado. The latter sent to President Aquino two letters
dated May 31, 1991 and June 14, 1991, respectively recommending
the award of the EDSA LRT III project to the sole complying bidder,
the EDSA LRT Consortium, and requesting for authority to negotiate
with the said firm for the contract pursuant to paragraph 14(b) of
the Implementing Rules and Regulations of the BOT Law (Rollo, pp.
298-302).
In July 1991, Executive Secretary Orbos, acting on instructions of the
President, issued a directive to the DOTC to proceed with the
negotiations. On July 16, 1991, the EDSA LRT Consortium submitted
its bid proposal to DOTC.
Finding this proposal to be in compliance with the bid requirements,
DOTC and respondent EDSA LRT Corporation, Ltd., in substitution of
the EDSA LRT Consortium, entered into an "Agreement to Build,
Lease and Transfer a Light Rail Transit System for EDSA" under the
terms of the BOT Law (Rollo, pp. 147-177).
Secretary Prado, thereafter, requested presidential approval of the
contract.
In a letter dated March 13, 1992, Executive Secretary Franklin Drilon,
who replaced Executive Secretary Orbos, informed Secretary Prado
that the President could not grant the requested approval for the
following reasons: (1) that DOTC failed to conduct actual public
bidding in compliance with Section 5 of the BOT Law; (2) that the
law authorized public bidding as the only mode to award BOT
projects, and the prequalification proceedings was not the public
bidding contemplated under the law; (3) that Item 14 of the
Implementing Rules and Regulations of the BOT Law which
authorized negotiated award of contract in addition to public
bidding was of doubtful legality; and (4) that congressional approval
of the list of priority projects under the BOT or BT Scheme provided
in the law had not yet been granted at the time the contract was
awarded (Rollo, pp. 178-179).
In view of the comments of Executive Secretary Drilon, the DOTC
and private respondents re-negotiated the agreement. On April 22,
1992, the parties entered into a "Revised and Restated Agreement
to Build, Lease and Transfer a Light Rail Transit System for EDSA"
(Rollo, pp. 47-78) inasmuch as "the parties [are] cognizant of the fact
the DOTC has full authority to sign the Agreement without need of
approval by the President pursuant to the provisions of Executive
Order No. 380 and that certain events [had] supervened since
November 7, 1991 which necessitate[d] the revision of the
Agreement" (Rollo, p. 51). On May 6, 1992, DOTC, represented by
Secretary Jesus Garcia vice Secretary Prado, and private respondent
entered into a "Supplemental Agreement to the 22 April 1992
Revised and Restated Agreement to Build, Lease and Transfer a Light
Rail Transit System for EDSA" so as to "clarify their respective rights
and responsibilities" and to submit [the] Supplemental Agreement
to the President, of the Philippines for his approval" (Rollo, pp. 79-
80).
Secretary Garcia submitted the two Agreements to President Fidel V.
Ramos for his consideration and approval. In a Memorandum to
Secretary Garcia on May 6, 1993, approved the said Agreements,
(Rollo, p. 194).
According to the agreements, the EDSA LRT III will use light rail
vehicles from the Czech and Slovak Federal Republics and will have a
maximum carrying capacity of 450,000 passengers a day, or 150
million a year to be achieved-through 54 such vehicles operating
simultaneously. The EDSA LRT III will run at grade, or street level, on
the mid-section of EDSA for a distance of 17.8 kilometers from F.B.
Harrison, Pasay City to North Avenue, Quezon City. The system will
have its own power facility (Revised and Restated Agreement, Sec.
2.3 (ii); Rollo p. 55). It will also have thirteen (13) passenger stations
and one depot in 16-hectare government property at North Avenue
(Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).
Private respondents shall undertake and finance the entire project
required for a complete operational light rail transit system (Revised
and Restated Agreement, Sec. 4.1; Rollo, p. 58). Target completion
date is 1,080 days or approximately three years from the
implementation date of the contract inclusive of mobilization, site
works, initial and final testing of the system (Supplemental
Agreement, Sec. 5; Rollo, p. 83). Upon full or partial completion and
viability thereof, private respondent shall deliver the use and
possession of the completed portion to DOTC which shall operate
the same (Supplemental Agreement, Sec. 5; Revised and Restated
Agreement, Sec. 5.1; Rollo, pp. 61-62, 84). DOTC shall pay private
respondent rentals on a monthly basis through an Irrevocable Letter
of Credit. The rentals shall be determined by an independent and
internationally accredited inspection firm to be appointed by the
parties (Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As agreed
upon, private respondent's capital shall be recovered from the
rentals to be paid by the DOTC which, in turn, shall come from the
earnings of the EDSA LRT III (Revised and Restated Agreement, Sec.
1, p. 5; Rollo, p. 54). After 25 years and DOTC shall have completed
payment of the rentals, ownership of the project shall be transferred
to the latter for a consideration of only U.S. $1.00 (Revised and
Restated Agreement, Sec. 11.1; Rollo, p. 67).
On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections
of Republic Act No. 6957, Entitled "An Act Authorizing the Financing,
Construction, Operation and Maintenance of Infrastructure Projects
by the Private Sector, and for Other Purposes" was signed into law
by the President. The law was published in two newspapers of
general circulation on May 12, 1994, and took effect 15 days
thereafter or on May 28, 1994. The law expressly recognizes BLT
scheme and allows direct negotiation of BLT contracts.
II
In their petition, petitioners argued that:
(1) THE AGREEMENT OF APRIL 22, 1992, AS
AMENDED BY THE SUPPLEMENTAL AGREEMENT
OF MAY 6, 1993, INSOFAR AS IT GRANTS EDSA
LRT CORPORATION, LTD., A FOREIGN
CORPORATION, THE OWNERSHIP OF EDSA LRT
III, A PUBLIC UTILITY, VIOLATES THE
CONSTITUTION AND, HENCE, IS
UNCONSTITUTIONAL;
(2) THE BUILD-LEASE-TRANSFER SCHEME
PROVIDED IN THE AGREEMENTS IS NOT DEFINED
NOR RECOGNIZED IN R.A. NO. 6957 OR ITS
IMPLEMENTING RULES AND REGULATIONS AND,
HENCE, IS ILLEGAL;
(3) THE AWARD OF THE CONTRACT ON A
NEGOTIATED BASIS VIOLATES R; A. NO. 6957
AND, HENCE, IS UNLAWFUL;
(4) THE AWARD OF THE CONTRACT IN FAVOR OF
RESPONDENT EDSA LRT CORPORATION, LTD.
VIOLATES THE REQUIREMENTS PROVIDED IN THE
IMPLEMENTING RULES AND REGULATIONS OF
THE BOT LAW AND, HENCE, IS ILLEGAL;
(5) THE AGREEMENTS VIOLATE EXECUTIVE
ORDER NO 380 FOR THEIR FAILURE TO BEAR
PRESIDENTIAL APPROVAL AND, HENCE, ARE
ILLEGAL AND INEFFECTIVE; AND
(6) THE AGREEMENTS ARE GROSSLY
DISADVANTAGEOUS TO THE GOVERNMENT
(Rollo, pp. 15-16).
Secretary Garcia and private respondent filed their comments
separately and claimed that:
(1) Petitioners are not the real parties-in-interest and have no legal
standing to institute the present petition;
(2) The writ of prohibition is not the proper remedy and the petition
requires ascertainment of facts;
(3) The scheme adopted in the Agreements is actually a build-
transfer scheme allowed by the BOT Law;
(4) The nationality requirement for public utilities mandated by the
Constitution does not apply to private respondent;
(5) The Agreements executed by and between respondents have
been approved by President Ramos and are not disadvantageous to
the government;
(6) The award of the contract to private respondent through
negotiation and not public bidding is allowed by the BOT Law; and
(7) Granting that the BOT Law requires public bidding, this has been
amended by R.A No. 7718 passed by the Legislature On May 12,
1994, which provides for direct negotiation as a mode of award of
infrastructure projects.
III
Respondents claimed that petitioners had no legal standing to
initiate the instant action. Petitioners, however, countered that the
action was filed by them in their capacity as Senators and as
taxpayers.
The prevailing doctrines in taxpayer's suits are to allow taxpayers to
question contracts entered into by the national government or
government-owned or controlled corporations allegedly in
contravention of the law (Kilosbayan, Inc. v. Guingona, 232 SCRA 110
[1994]) and to disallow the same when only municipal contracts are
involved (Bugnay Construction and Development Corporation v.
Laron, 176 SCRA. 240 [1989]).
For as long as the ruling in Kilosbayan on locus standi is not
reversed, we have no choice but to follow it and uphold the legal
standing of petitioners as taxpayers to institute the present action.
IV
In the main, petitioners asserted that the Revised and Restated
Agreement of April 22, 1992 and the Supplemental Agreement of
May 6, 1993 are unconstitutional and invalid for the following
reasons:
(1) the EDSA LRT III is a public utility, and the
ownership and operation thereof is limited by
the Constitution to Filipino citizens and domestic
corporations, not foreign corporations like
private respondent;
(2) the Build-Lease-Transfer (BLT) scheme
provided in the agreements is not the BOT or BT
Scheme under the law;
(3) the contract to construct the EDSA LRT III was
awarded to private respondent not through
public bidding which is the only mode of
awarding infrastructure projects under the BOT
law; and
(4) the agreements are grossly disadvantageous
to the government.
1. Private respondent EDSA LRT Corporation, Ltd. to whom the
contract to construct the EDSA LRT III was awarded by public
respondent, is admittedly a foreign corporation "duly incorporated
and existing under the laws of Hongkong" (Rollo, pp. 50, 79). There
is also no dispute that once the EDSA LRT III is constructed, private
respondent, as lessor, will turn it over to DOTC, as lessee, for the
latter to operate the system and pay rentals for said use.
The question posed by petitioners is:
Can respondent EDSA LRT Corporation, Ltd., a
foreign corporation own EDSA LRT III; a public
utility? (Rollo, p. 17).
The phrasing of the question is erroneous; it is loaded. What private
respondent owns are the rail tracks, rolling stocks like the coaches,
rail stations, terminals and the power plant, not a public utility.
While a franchise is needed to operate these facilities to serve the
public, they do not by themselves constitute a public utility. What
constitutes a public utility is not their ownership but their use to
serve the public (Iloilo Ice & Cold Storage Co. v. Public Service Board,
44 Phil. 551, 557 558 [1923]).
The Constitution, in no uncertain terms, requires a franchise for the
operation of a public utility. However, it does not require a franchise
before one can own the facilities needed to operate a public utility
so long as it does not operate them to serve the public.
Section 11 of Article XII of the Constitution provides:
No franchise, certificate or any other form of
authorization for the operation of a public
utility shall be granted except to citizens of the
Philippines or to corporations or associations
organized under the laws of the Philippines at
least sixty per centum of whose capital is owned
by such citizens, nor shall such franchise,
certificate or authorization be exclusive
character or for a longer period than fifty years .
. . (Emphasis supplied).
In law, there is a clear distinction between the "operation" of a
public utility and the ownership of the facilities and equipment used
to serve the public.
Ownership is defined as a relation in law by virtue of which a thing
pertaining to one person is completely subjected to his will in
everything not prohibited by law or the concurrence with the rights
of another (Tolentino, II Commentaries and Jurisprudence on the
Civil Code of the Philippines 45 [1992]).
The exercise of the rights encompassed in ownership is limited by
law so that a property cannot be operated and used to serve the
public as a public utility unless the operator has a franchise. The
operation of a rail system as a public utility includes the
transportation of passengers from one point to another point, their
loading and unloading at designated places and the movement of
the trains at pre-scheduled times (cf. Arizona Eastern R.R. Co. v. J.A..
Matthews, 20 Ariz 282, 180 P.159, 7 A.L.R. 1149 [1919] ;United
States Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d. 722, 193 P. 2d
868, 2 A.L.R. 2d 1065 [1948]).
The right to operate a public utility may exist independently and
separately from the ownership of the facilities thereof. One can own
said facilities without operating them as a public utility, or
conversely, one may operate a public utility without owning the
facilities used to serve the public. The devotion of property to serve
the public may be done by the owner or by the person in control
thereof who may not necessarily be the owner thereof.
This dichotomy between the operation of a public utility and the
ownership of the facilities used to serve the public can be very well
appreciated when we consider the transportation industry.
Enfranchised airline and shipping companies may lease their aircraft
and vessels instead of owning them themselves.
While private respondent is the owner of the facilities necessary to
operate the EDSA. LRT III, it admits that it is not enfranchised to
operate a public utility (Revised and Restated Agreement, Sec.
3.2; Rollo, p. 57). In view of this incapacity, private respondent and
DOTC agreed that on completion date, private respondent will
immediately deliver possession of the LRT system by way of lease for
25 years, during which period DOTC shall operate the same as a
common carrier and private respondent shall provide technical
maintenance and repair services to DOTC (Revised and Restated
Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62). Technical
maintenance consists of providing (1) repair and maintenance
facilities for the depot and rail lines, services for routine clearing and
security; and (2) producing and distributing maintenance manuals
and drawings for the entire system (Revised and Restated
Agreement, Annex F).
Private respondent shall also train DOTC personnel for
familiarization with the operation, use, maintenance and repair of
the rolling stock, power plant, substations, electrical, signaling,
communications and all other equipment as supplied in the
agreement (Revised and Restated Agreement, Sec. 10; Rollo, pp. 66-
67). Training consists of theoretical and live training of DOTC
operational personnel which includes actual driving of light rail
vehicles under simulated operating conditions, control of
operations, dealing with emergencies, collection, counting and
securing cash from the fare collection system (Revised and Restated
Agreement, Annex E, Secs. 2-3). Personnel of DOTC will work under
the direction and control of private respondent only during training
(Revised and Restated Agreement, Annex E, Sec. 3.1). The training
objectives, however, shall be such that upon completion of the EDSA
LRT III and upon opening of normal revenue operation, DOTC shall
have in their employ personnel capable of undertaking training of all
new and replacement personnel (Revised and Restated Agreement,
Annex E Sec. 5.1). In other words, by the end of the three-year
construction period and upon commencement of normal revenue
operation, DOTC shall be able to operate the EDSA LRT III on its own
and train all new personnel by itself.
Fees for private respondent' s services shall be included in the rent,
which likewise includes the project cost, cost of replacement of
plant equipment and spare parts, investment and financing cost,
plus a reasonable rate of return thereon (Revised and Restated
Agreement, Sec. 1; Rollo, p. 54).
Since DOTC shall operate the EDSA LRT III, it shall assume all the
obligations and liabilities of a common carrier. For this purpose,
DOTC shall indemnify and hold harmless private respondent from
any losses, damages, injuries or death which may be claimed in the
operation or implementation of the system, except losses, damages,
injury or death due to defects in the EDSA LRT III on account of the
defective condition of equipment or facilities or the defective
maintenance of such equipment facilities (Revised and Restated
Agreement, Secs. 12.1 and 12.2; Rollo, p. 68).
In sum, private respondent will not run the light rail vehicles and
collect fees from the riding public. It will have no dealings with the
public and the public will have no right to demand any services from
it.
It is well to point out that the role of private respondent as lessor
during the lease period must be distinguished from the role of the
Philippine Gaming Management Corporation (PGMC) in the case
of Kilosbayan Inc. v. Guingona, 232 SCRA 110 (1994). Therein, the
Contract of Lease between PGMC and the Philippine Charity
Sweepstakes Office (PCSO) was actually a collaboration or joint
venture agreement prescribed under the charter of the PCSO. In the
Contract of Lease; PGMC, the lessor obligated itself to build, at its
own expense, all the facilities necessary to operate and maintain a
nationwide on-line lottery system from whom PCSO was to lease the
facilities and operate the same. Upon due examination of the
contract, the Court found that PGMC's participation was not
confined to the construction and setting up of the on-line lottery
system. It spilled over to the actual operation thereof, becoming
indispensable to the pursuit, conduct, administration and control of
the highly technical and sophisticated lottery system. In effect, the
PCSO leased out its franchise to PGMC which actually operated and
managed the same.
Indeed, a mere owner and lessor of the facilities used by a public
utility is not a public utility (Providence and W.R. Co. v. United
States, 46 F. 2d 149, 152 [1930]; Chippewa Power Co. v. Railroad
Commission of Wisconsin, 205 N.W. 900, 903, 188 Wis. 246 [1925];
Ellis v. Interstate Commerce Commission, Ill 35 S. Ct. 645, 646, 237
U.S. 434, 59 L. Ed. 1036 [1914]). Neither are owners of tank,
refrigerator, wine, poultry and beer cars who supply cars under
contract to railroad companies considered as public utilities (Crystal
Car Line v. State Tax Commission, 174 p. 2d 984, 987 [1946]).
Even the mere formation of a public utility corporation does not ipso
facto characterize the corporation as one operating a public utility.
The moment for determining the requisite Filipino nationality is
when the entity applies for a franchise, certificate or any other form
of authorization for that purpose (People v. Quasha, 93 Phil. 333
[1953]).
2. Petitioners further assert that the BLT scheme under the
Agreements in question is not recognized in the BOT Law and its
Implementing Rules and Regulations.
Section 2 of the BOT Law defines the BOT and BT schemes as
follows:
(a) Build-operate-and-transfer scheme — A
contractual arrangement whereby the
contractor undertakes the construction including
financing, of a given infrastructure facility, and
the operation and maintenance thereof. The
contractor operates the facility over a fixed term
during which it is allowed to charge facility users
appropriate tolls, fees, rentals and charges
sufficient to enable the contractor to recover its
operating and maintenance expenses and its
investment in the project plus a reasonable rate
of return thereon. The contractor transfers the
facility to the government agency or local
government unit concerned at the end of the
fixed term which shall not exceed fifty (50) years.
For the construction stage, the contractor may
obtain financing from foreign and/or domestic
sources and/or engage the services of a foreign
and/or Filipino constructor [sic]: Provided, That
the ownership structure of the contractor of an
infrastructure facility whose operation requires a
public utility franchise must be in accordance
with the Constitution: Provided, however, That in
the case of corporate investors in the build-
operate-and-transfer corporation, the citizenship
of each stockholder in the corporate investors
shall be the basis for the computation of Filipino
equity in the said corporation: Provided, further,
That, in the case of foreign constructors [sic],
Filipino labor shall be employed or hired in the
different phases of the construction where
Filipino skills are available: Provided,
furthermore, that the financing of a foreign or
foreign-controlled contractor from Philippine
government financing institutions shall not
exceed twenty percent (20%) of the total cost of
the infrastructure facility or project: Provided,
finally, That financing from foreign sources shall
not require a guarantee by the Government or
by government-owned or controlled
corporations. The build-operate-and-transfer
scheme shall include a supply-and-operate
situation which is a contractual agreement
whereby the supplier of equipment and
machinery for a given infrastructure facility, if
the interest of the Government so requires,
operates the facility providing in the process
technology transfer and training to Filipino
nationals.
(b) Build-and-transfer scheme — "A contractual
arrangement whereby the contractor undertakes
the construction including financing, of a given
infrastructure facility, and its turnover after
completion to the government agency or local
government unit concerned which shall pay the
contractor its total investment expended on the
project, plus a reasonable rate of return thereon.
This arrangement may be employed in the
construction of any infrastructure project
including critical facilities which for security or
strategic reasons, must be operated directly by
the government (Emphasis supplied).
The BOT scheme is expressly defined as one where the contractor
undertakes the construction and financing in infrastructure facility,
and operates and maintains the same. The contractor operates the
facility for a fixed period during which it may recover its expenses
and investment in the project plus a reasonable rate of return
thereon. After the expiration of the agreed term, the contractor
transfers the ownership and operation of the project to the
government.
In the BT scheme, the contractor undertakes the construction and
financing of the facility, but after completion, the ownership and
operation thereof are turned over to the government. The
government, in turn, shall pay the contractor its total investment on
the project in addition to a reasonable rate of return. If payment is
to be effected through amortization payments by the government
infrastructure agency or local government unit concerned, this shall
be made in accordance with a scheme proposed in the bid and
incorporated in the contract (R.A. No. 6957, Sec. 6).
Emphasis must be made that under the BOT scheme, the owner of
the infrastructure facility must comply with the citizenship
requirement of the Constitution on the operation of a public utility.
No such a requirement is imposed in the BT scheme.
There is no mention in the BOT Law that the BOT and BT schemes
bar any other arrangement for the payment by the government of
the project cost. The law must not be read in such a way as to rule
out or unduly restrict any variation within the context of the two
schemes. Indeed, no statute can be enacted to anticipate and
provide all the fine points and details for the multifarious and
complex situations that may be encountered in enforcing the law
(Director of Forestry v. Munoz, 23 SCRA 1183 [1968]; People v.
Exconde, 101 Phil. 1125 [1957]; United States v. Tupasi Molina, 29
Phil. 119 [1914]).
The BLT scheme in the challenged agreements is but a variation of
the BT scheme under the law.
As a matter of fact, the burden on the government in raising funds
to pay for the project is made lighter by allowing it to amortize
payments out of the income from the operation of the LRT System.
In form and substance, the challenged agreements provide that
rentals are to be paid on a monthly basis according to a schedule of
rates through and under the terms of a confirmed Irrevocable
Revolving Letter of Credit (Supplemental Agreement, Sec. 6; Rollo, p.
85). At the end of 25 years and when full payment shall have been
made to and received by private respondent, it shall transfer to
DOTC, free from any lien or encumbrances, all its title to, rights and
interest in, the project for only U.S. $1.00 (Revised and Restated
Agreement, Sec. 11.1; Supplemental Agreement, Sec; 7; Rollo, pp.
67, .87).
A lease is a contract where one of the parties binds himself to give
to another the enjoyment or use of a thing for a certain price and for
a period which may be definite or indefinite but not longer than 99
years (Civil Code of the Philippines, Art. 1643). There is no transfer of
ownership at the end of the lease period. But if the parties stipulate
that title to the leased premises shall be transferred to the lessee at
the end of the lease period upon the payment of an agreed sum, the
lease becomes a lease-purchase agreement.
Furthermore, it is of no significance that the rents shall be paid in
United States currency, not Philippine pesos. The EDSA LRT III
Project is a high priority project certified by Congress and the
National Economic and Development Authority as falling under the
Investment Priorities Plan of Government (Rollo, pp. 310-311). It is,
therefore, outside the application of the Uniform Currency Act (R.A.
No. 529), which reads as follows:
Sec. 1. — Every provision contained in, or made
with respect to, any domestic obligation to wit,
any obligation contracted in the Philippines
which provisions purports to give the obligee the
right to require payment in gold or in a particular
kind of coin or currency other than Philippine
currency or in an amount of money of the
Philippines measured thereby, be as it is hereby
declared against public policy, and null, void, and
of no effect, and no such provision shall be
contained in, or made with respect to, any
obligation hereafter incurred. The above
prohibition shall not apply to (a) . . .; (b)
transactions affecting high-priority economic
projects for agricultural, industrial and power
development as may be determined by
the National Economic Council which are
financed by or through foreign funds; . . . .
3. The fact that the contract for the construction of the EDSA LRT III
was awarded through negotiation and before congressional
approval on January 22 and 23, 1992 of the List of National Projects
to be undertaken by the private sector pursuant to the BOT Law
(Rollo, pp. 309-312) does not suffice to invalidate the award.
Subsequent congressional approval of the list including "rail-based
projects packaged with commercial development opportunities"
(Rollo, p. 310) under which the EDSA LRT III projects falls, amounts
to a ratification of the prior award of the EDSA LRT III contract under
the BOT Law.
Petitioners insist that the prequalifications process which led to the
negotiated award of the contract appears to have been rigged from
the very beginning to do away with the usual open international
public bidding where qualified internationally known applicants
could fairly participate.
The records show that only one applicant passed the
prequalification process. Since only one was left, to conduct a public
bidding in accordance with Section 5 of the BOT Law for that lone
participant will be an absurb and pointless exercise (cf. Deloso v.
Sandiganbayan, 217 SCRA 49, 61 [1993]).
Contrary to the comments of the Executive Secretary Drilon, Section
5 of the BOT Law in relation to Presidential Decree No. 1594 allows
the negotiated award of government infrastructure projects.
Presidential Decree No. 1594, "Prescribing Policies, Guidelines, Rules
and Regulations for Government Infrastructure Contracts," allows
the negotiated award of government projects in exceptional cases.
Sections 4 of the said law reads as follows:
Bidding. — Construction projects shall generally
be undertaken by contract after competitive
public bidding. Projects may be undertaken by
administration or force account or by negotiated
contract only in exceptional cases where time is
of the essence, or where there is lack of qualified
bidders or contractors, or where there is
conclusive evidence that greater economy and
efficiency would be achieved through this
arrangement, and in accordance with provision
of laws and acts on the matter, subject to the
approval of the Minister of Public Works and
Transportation and Communications, the
Minister of Public Highways, or the Minister of
Energy, as the case may be, if the project cost is
less than P1 Million, and the President of the
Philippines, upon recommendation of the
Minister, if the project cost is P1 Million or more
(Emphasis supplied).
xxx xxx xxx
Indeed, where there is a lack of qualified bidders or contractors, the
award of government infrastructure contracts may he made by
negotiation. Presidential Decree No. 1594 is the general law on
government infrastructure contracts while the BOT Law governs
particular arrangements or schemes aimed at encouraging private
sector participation in government infrastructure projects. The two
laws are not inconsistent with each other but are inpari materia and
should be read together accordingly.
In the instant case, if the prequalification process was actually
tainted by foul play, one wonders why none of the competing firms
ever brought the matter before the PBAC, or intervened in this case
before us (cf. Malayan Integrated Industries Corp. v. Court of
Appeals, 213 SCRA 640 [1992]; Bureau Veritas v. Office of the
President, 205 SCRA 705 [1992]).
The challenged agreements have been approved by President
Ramos himself. Although then Executive Secretary Drilon may have
disapproved the "Agreement to Build, Lease and Transfer a Light Rail
Transit System for EDSA," there is nothing in our laws that prohibits
parties to a contract from renegotiating and modifying in good faith
the terms and conditions thereof so as to meet legal, statutory and
constitutional requirements. Under the circumstances, to require
the parties to go back to step one of the prequalification process
would just be an idle ceremony. Useless bureaucratic "red tape"
should be eschewed because it discourages private sector
participation, the "main engine" for national growth and
development (R.A. No. 6957, Sec. 1), and renders the BOT Law
nugatory.
Republic Act No. 7718 recognizes and defines a BLT scheme in
Section 2 thereof as:
(e) Build-lease-and-transfer — A contractual
arrangement whereby a project proponent is
authorized to finance and construct an
infrastructure or development facility and upon
its completion turns it over to the government
agency or local government unit concerned on a
lease arrangement for a fixed period after which
ownership of the facility is automatically
transferred to the government unit concerned.
Section 5-A of the law, which expressly allows direct negotiation of
contracts, provides:
Direct Negotiation of Contracts. — Direct
negotiation shall be resorted to when there is
only one complying bidder left as defined
hereunder.
(a) If, after advertisement, only one contractor
applies for prequalification and it meets the
prequalification requirements, after which it is
required to submit a bid proposal which is
subsequently found by the agency/local
government unit (LGU) to be complying.
(b) If, after advertisement, more than one
contractor applied for prequalification but only
one meets the prequalification requirements,
after which it submits bid/proposal which is
found by the agency/local government unit
(LGU) to be complying.
(c) If, after prequalification of more than one
contractor only one submits a bid which is found
by the agency/LGU to be complying.
(d) If, after prequalification, more than one
contractor submit bids but only one is found by
the agency/LGU to be complying. Provided, That,
any of the disqualified prospective bidder [sic]
may appeal the decision of the implementing
agency, agency/LGUs prequalification bids and
awards committee within fifteen (15) working
days to the head of the agency, in case of
national projects or to the Department of the
Interior and Local Government, in case of local
projects from the date the disqualification was
made known to the disqualified bidder:
Provided, furthermore, That the implementing
agency/LGUs concerned should act on the
appeal within forty-five (45) working days from
receipt thereof.
Petitioners' claim that the BLT scheme and direct negotiation of
contracts are not contemplated by the BOT Law has now been
rendered moot and academic by R.A. No. 7718. Section 3 of this law
authorizes all government infrastructure agencies, government-
owned and controlled corporations and local government units to
enter into contract with any duly prequalified proponent for the
financing, construction, operation and maintenance of any
financially viable infrastructure or development facility through a
BOT, BT, BLT, BOO (Build-own-and-operate), CAO (Contract-add-
operate), DOT (Develop-operate-and-transfer), ROT (Rehabilitate-
operate-and-transfer), and ROO (Rehabilitate-own-operate) (R.A.
No. 7718, Sec. 2 [b-j]).
From the law itself, once and applicant has prequalified, it can enter
into any of the schemes enumerated in Section 2 thereof, including
a BLT arrangement, enumerated and defined therein (Sec. 3).
Republic Act No. 7718 is a curative statute. It is intended to provide
financial incentives and "a climate of minimum government
regulations and procedures and specific government undertakings in
support of the private sector" (Sec. 1). A curative statute makes valid
that which before enactment of the statute was invalid. Thus,
whatever doubts and alleged procedural lapses private respondent
and DOTC may have engendered and committed in entering into the
questioned contracts, these have now been cured by R.A. No. 7718
(cf. Development Bank of the Philippines v. Court of Appeals, 96
SCRA 342 [1980]; Santos V. Duata, 14 SCRA 1041 [1965]; Adong V.
Cheong Seng Gee, 43 Phil. 43 [1922].
4. Lastly, petitioners claim that the agreements are grossly
disadvantageous to the government because the rental rates are
excessive and private respondent's development rights over the 13
stations and the depot will rob DOTC of the best terms during the
most productive years of the project.
It must be noted that as part of the EDSA LRT III project, private
respondent has been granted, for a period of 25 years, exclusive
rights over the depot and the air space above the stations for
development into commercial premises for lease, sublease, transfer,
or advertising (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).
For and in consideration of these development rights, private
respondent shall pay DOTC in Philippine currency guaranteed
revenues generated therefrom in the amounts set forth in the
Supplemental Agreement (Sec. 11;Rollo, p. 93). In the event that
DOTC shall be unable to collect the guaranteed revenues, DOTC shall
be allowed to deduct any shortfalls from the monthly rent due
private respondent for the construction of the EDSA LRT III
(Supplemental Agreement, Sec. 11; Rollo, pp. 93-94). All rights,
titles, interests and income over all contracts on the commercial
spaces shall revert to DOTC upon expiration of the 25-year period.
(Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).
The terms of the agreements were arrived at after a painstaking
study by DOTC. The determination by the proper administrative
agencies and officials who have acquired expertise, specialized skills
and knowledge in the performance of their functions should be
accorded respect absent any showing of grave abuse of discretion
(Felipe Ysmael, Jr. & Co. v. Deputy Executive Secretary, 190 SCRA
673 [1990]; Board of Medical Education v. Alfonso, 176 SCRA 304
[1989]).
Government officials are presumed to perform their functions with
regularity and strong evidence is necessary to rebut this
presumption. Petitioners have not presented evidence on the
reasonable rentals to be paid by the parties to each other. The
matter of valuation is an esoteric field which is better left to the
experts and which this Court is not eager to undertake.
That the grantee of a government contract will profit therefrom and
to that extent the government is deprived of the profits if it engages
in the business itself, is not worthy of being raised as an issue. In all
cases where a party enters into a contract with the government, he
does so, not out of charity and not to lose money, but to gain
pecuniarily.
5. Definitely, the agreements in question have been entered into by
DOTC in the exercise of its governmental function. DOTC is the
primary policy, planning, programming, regulating and
administrative entity of the Executive branch of government in the
promotion, development and regulation of dependable and
coordinated networks of transportation and communications
systems as well as in the fast, safe, efficient and reliable postal,
transportation and communications services (Administrative Code of
1987, Book IV, Title XV, Sec. 2). It is the Executive department, DOTC
in particular that has the power, authority and technical expertise
determine whether or not a specific transportation or
communication project is necessary, viable and beneficial to the
people. The discretion to award a contract is vested in the
government agencies entrusted with that function (Bureau Veritas v.
Office of the President, 205 SCRA 705 [1992]).
WHEREFORE, the petition is DISMISSED.
SO ORDERED
G.R. No. L-2294 May 25, 1951
FILIPINAS COMPAÑIA DE SEGUROS, petitioner,
vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern
Huenefeld, & Co., Inc., after payment of corresponding premium,
obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy
No. 29333 in the sum of P1000,000, covering merchandise
contained in a building located at No. 711 Roman Street, Binondo
Manila. On February 27, 1942, or during the Japanese military
occupation, the building and insured merchandise were burned. In
due time the respondent submitted to the petitioner its claim under
the policy. The salvage goods were sold at public auction and, after
deducting their value, the total loss suffered by the respondent was
fixed at P92,650. The petitioner refused to pay the claim on the
ground that the policy in favor of the respondent had ceased to be
in force on the date the United States declared war against
Germany, the respondent Corporation (though organized under and
by virtue of the laws of the Philippines) being controlled by the
German subjects and the petitioner being a company under
American jurisdiction when said policy was issued on October 1,
1941. The petitioner, however, in pursuance of the order of the
Director of Bureau of Financing, Philippine Executive Commission,
dated April 9, 1943, paid to the respondent the sum of P92,650 on
April 19, 1943.
The present action was filed on August 6, 1946, in the Court of First
Instance of Manila for the purpose of recovering from the
respondent the sum of P92,650 above mentioned. The theory of the
petitioner is that the insured merchandise were burned up after the
policy issued in 1941 in favor of the respondent corporation has
ceased to be effective because of the outbreak of the war between
the United States and Germany on December 10, 1941, and that the
payment made by the petitioner to the respondent corporation
during the Japanese military occupation was under pressure. After
trial, the Court of First Instance of Manila dismissed the action
without pronouncement as to costs. Upon appeal to the Court of
Appeals, the judgment of the Court of First Instance of Manila was
affirmed, with costs. The case is now before us on appeal
by certiorari from the decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that
the respondent corporation became an enemy when the United
States declared war against Germany, relying on English and
American cases which held that a corporation is a citizen of the
country or state by and under the laws of which it was created or
organized. It rejected the theory that nationality of private
corporation is determine by the character or citizenship of its
controlling stockholders.
There is no question that majority of the stockholders of the
respondent corporation were German subjects. This being so, we
have to rule that said respondent became an enemy corporation
upon the outbreak of the war between the United States and
Germany. The English and American cases relied upon by the Court
of Appeals have lost their force in view of the latest decision of the
Supreme Court of the United States in Clark vs. Uebersee Finanz
Korporation, decided on December 8, 1947, 92 Law. Ed. Advance
Opinions, No. 4, pp. 148-153, in which the controls test has been
adopted. In "Enemy Corporation" by Martin Domke, a paper
presented to the Second International Conference of the Legal
Profession held at the Hague (Netherlands) in August. 1948 the
following enlightening passages appear:
Since World War I, the determination of enemy nationality
of corporations has been discussion in many countries,
belligerent and neutral. A corporation was subject to
enemy legislation when it was controlled by enemies,
namely managed under the influence of individuals or
corporations, themselves considered as enemies. It was
the English courts which first the Daimler case applied this
new concept of "piercing the corporate veil," which was
adopted by the peace of Treaties of 1919 and the Mixed
Arbitral established after the First World War.
The United States of America did not adopt the control
test during the First World War. Courts refused to
recognized the concept whereby American-registered
corporations could be considered as enemies and thus
subject to domestic legislation and administrative
measures regarding enemy property.
World War II revived the problem again. It was known that
German and other enemy interests were cloaked by
domestic corporation structure. It was not only by legal
ownership of shares that a material influence could be
exercised on the management of the corporation but also
by long term loans and other factual situations. For that
reason, legislation on enemy property enacted in various
countries during World War II adopted by statutory
provisions to the control test and determined, to various
degrees, the incidents of control. Court decisions were
rendered on the basis of such newly enacted statutory
provisions in determining enemy character of domestic
corporation.
The United States did not, in the amendments of the
Trading with the Enemy Act during the last war, include as
did other legislations the applications of the control test
and again, as in World War I, courts refused to apply this
concept whereby the enemy character of an American or
neutral-registered corporation is determined by the
enemy nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing
regulations, and other administrative practice in the
treatment of foreign-owned property in the United States
allowed to large degree the determination of enemy
interest in domestic corporations and thus the application
of the control test. Court decisions sanctioned such
administrative practice enacted under the First War
Powers Act of 1941, and more recently, on December 8,
1947, the Supreme Court of the United States definitely
approved of the control theory. In Clark vs. Uebersee
Finanz Korporation, A. G., dealing with a Swiss corporation
allegedly controlled by German interest, the Court: "The
property of all foreign interest was placed within the reach
of the vesting power (of the Alien Property Custodian) not
to appropriate friendly or neutral assets but to reach
enemy interest which masqueraded under those innocent
fronts. . . . The power of seizure and vesting was extended
to all property of any foreign country or national so that
no innocent appearing device could become a Trojan
horse."
It becomes unnecessary, therefore, to dwell at length on the
authorities cited in support of the appealed decision. However, we
may add that, in Haw Pia vs. China Banking Corporation,* 45 Off
Gaz., (Supp. 9) 299, we already held that China Banking Corporation
came within the meaning of the word "enemy" as used in the
Trading with the Enemy Acts of civilized countries not only because
it was incorporated under the laws of an enemy country but because
it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section
8, provides that "anyone except a public enemy may be insured." It
stands to reason that an insurance policy ceases to be allowable as
soon as an insured becomes a public enemy.
Effect of war, generally. — All intercourse between citizens
of belligerent powers which is inconsistent with a state of
war is prohibited by the law of nations. Such prohibition
includes all negotiations, commerce, or trading with the
enemy; all acts which will increase, or tend to increase, its
income or resources; all acts of voluntary submission to it;
or receiving its protection; also all acts concerning the
transmission of money or goods; and all contracts relating
thereto are thereby nullified. It further prohibits insurance
upon trade with or by the enemy, upon the life or lives of
aliens engaged in service with the enemy; this for the
reason that the subjects of one country cannot be
permitted to lend their assistance to protect by insurance
the commerce or property of belligerent, alien subjects, or
to do anything detrimental too their country's interest.
The purpose of war is to cripple the power and exhaust
the resources of the enemy, and it is inconsistent that one
country should destroy its enemy's property and repay in
insurance the value of what has been so destroyed, or that
it should in such manner increase the resources of the
enemy, or render it aid, and the commencement of war
determines, for like reasons, all trading intercourse with
the enemy, which prior thereto may have been lawful. All
individuals therefore, who compose the belligerent
powers, exist, as to each other, in a state of utter
exclusion, and are public enemies. (6 Couch, Cyc. of Ins.
Law, pp. 5352-5353.)
In the case of an ordinary fire policy, which grants
insurance only from year, or for some other specified term
it is plain that when the parties become alien enemies, the
contractual tie is broken and the contractual rights of the
parties, so far as not vested. lost. (Vance, the Law on
Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on December
10, 1941, the insurance policy issued in its favor on October 1, 1941,
by the petitioner (a Philippine corporation) had ceased to be valid
and enforcible, and since the insured goods were burned after
December 10, 1941, and during the war, the respondent was not
entitled to any indemnity under said policy from the petitioner.
However, elementary rules of justice (in the absence of specific
provision in the Insurance Law) require that the premium paid by
the respondent for the period covered by its policy from December
11, 1941, should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main
issue hinges on the question of whether the policy in question
became null and void upon the declaration of war between the
United States and Germany on December 10, 1941, and its judgment
in favor of the respondent corporation was predicated on its
conclusion that the policy did not cease to be in force. The Court of
Appeals necessarily assumed that, even if the payment by the
petitioner to the respondent was involuntary, its action is not
tenable in view of the ruling on the validity of the policy. As a matter
of fact, the Court of Appeals held that "any intimidation resorted to
by the appellee was not unjust but the exercise of its lawful right to
claim for and received the payment of the insurance policy," and
that the ruling of the Bureau of Financing to the effect that "the
appellee was entitled to payment from the appellant was, well
founded." Factually, there can be no doubt that the Director of the
Bureau of Financing, in ordering the petitioner to pay the claim of
the respondent, merely obeyed the instruction of the Japanese
Military Administration, as may be seen from the following: "In view
of the findings and conclusion of this office contained in its decision
on Administrative Case dated February 9, 1943 copy of which was
sent to your office and the concurrence therein of the Financial
Department of the Japanese Military Administration, and following
the instruction of said authority, you are hereby ordered to pay the
claim of Messrs. Christern, Huenefeld & Co., Inc. The payment of
said claim, however, should be made by means of crossed check."
(Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the
respondent under the circumstances on this case. However, the
petitioner will be entitled to recover only the equivalent, in actual
Philippines currency of P92,650 paid on April 19, 1943, in
accordance with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the
respondent corporation is ordered to pay to the petitioner the sum
of P77,208.33, Philippine currency, less the amount of the premium,
in Philippine currency, that should be returned by the petitioner for
the unexpired term of the policy in question, beginning December
11, 1941. Without costs. So ordered.
G.R. No. L-3869 January 31, 1952
S. DAVIS WINSHIP, plaintiff-appellant,
vs.
PHILIPPINE TRUST COMPANY, defendant-appellee.
Francisco R. Capistrano for appellant.
Lao and Feria for appellee.
PARAS, J.:
Prior to December, 1941, the Eastern Isles Import corporation
organized under and existing by virtue of the laws of the Philippines,
all of the capital stock of which was and has been owned by
American citizens, except one share with a par value of P100 in the
name of Antonia Sevilla and one share with a par value of P100 in
the name of Edmund A. Schwesinger, had a current account deposit
with the Philippine Trust Company, and as of December 29, 1941,
the balance in favor of said depositor was P51,410.91. Prior to
December, 1941, the Eastern Isles, Inc., a corporation organized
under and existing by virtue of the laws of the Philippines, all of the
capital stock of which was and has been owned by American
citizens, except one share with a par value of P100 in the name of F.
Capistrano, had a current account deposit with the Philippine Trust
Company, and as of December 29, 1941, the balance in favor of said
depositor was P34,827.74. The Eastern Isles, Incorporated made a
withdrawal of P204.37 which was debited to said account on June
10, 1942.
On October 4, 1943, the Japanese Military Administration in the
Philippines issued an order requiring all deposit accounts of the
hostile people (including corporations) to be transferred to the Bank
of Taiwan, as the depository of the Japanese Military Administration,
which order the Philippine Trust Company was specifically directed
to comply with. On September 29, 1944, in compliance with said
order, the Philippine Trust Company transferred and paid the credit
balances of the current account deposits of the Eastern Isles Import
Corporation and of the Eastern Isles, Inc. to the Bank of Taiwan.
The pre-war current deposit accounts of the Eastern Isles Import
Corporation and of the Eastern Isles, Inc. were subsequently
transferred to S. Davis Winship who, on August 12, 1947, presented
to the Philippine Trust Company checks Nos. A-79212 and H-579401
covering the aforesaid deposits. The Philippine Trust Company,
however, refused to pay said checks, whereupon, on September 6,
1947, S. Davis Winship instituted the present action against the
Philippine Trust Company in the Court of First Instance of Manila, to
recover upon the first cause of action the sum of P51,410.91 and
under the second cause of action the sum of P34,827.74.
In its answer, the defendant Philippine trust Company invoked the
order of the Japanese Military Administration by virtue of which it
transferred the current deposit accounts in question to the Bank of
Taiwan as the depository of the Bureau of Enemy Property Custody
of the Japanese Military Administration. After trial, the Court of First
Instance of Manila rendered a decision upholding the contention of
the defendant and accordingly dismissing the complaint. From this
decision plaintiff appealed. In the case of Everett Steamship
Corporation vs. Bank of the Philippine Islands, 84 Phil., 202; 47 O.G.,
No. 1 p. 165, we made the following pronouncement: This Court
having ruled in the Haw Pia case that the collection by the Bank of
Taiwan of the China Banking Corporation's credit from the latter's
debtor, by order of the Japanese Military Administration, was not a
confiscation but a mere sequestration of enemy's private personal
property, and therefore the payment by the plaintiff to the Bank of
Taiwan was valid and released his obligation to the defendant bank,
it follows that the Bank of Taiwan of plaintiff's deposit, and by order
of the Japanese Military Administration, was valid and released the
defendant's obligation to the plaintiff.'
In view of this pronouncement, we have to affirm the appealed
judgment. As it has been stipulated by the parties that the
defendant transferred the deposits in question to the Bank of
Taiwan in compliance with the order of the Japanese Military
Administration, the defendant was released from any obligation to
the depositors or their transferee. Appellant's contention that there
is no positive showing that the transfer was made by the Philippine
Trust Company in compliance with the order of the Japanese
Military Administration, and its logical effect is to make such act
binding on said company. At any rate, the defendant corporation has
not impugned its validity.
In the case of Filipinas Compañia de Seguros vs. Christern Henefeld
and Co., Inc., Phil., 54, we held that the nationality of a private
corporation is determined by the character or citizenship of its
controlling stockholders; and this pronouncement is of course
decisive as to the hostile character of the Eastern Isles, Inc., as far as
the Japanese Military Administration was concerned, it being
conceded that the controlling stockholders of said corporations
were American citizens.
Wherefore, the appealed judgment is affirmed, with costs against
the appellant. So ordered.
G.R. No. L-554 April 9, 1948
HAW PIA, plaintiff-appellant,
vs.
THE CHINA BANKING CORPORATION, defendant-appellee.
Fidel J. Silva for appellant.
Ross, Selph, Carrascoso and Janda for appellee.
DeWitt, Perkins, and Ponce Enrile; Gibbs, Gibbs, Chuidian and
Quasha; Ramon Diokno and Jose W. Diokno; Claro M. Recto and
Allan A. O'Gorman, as amici curiae.
FERIA, J.:
Plaintiff-appellant instituted this action in the Court of First Instance
of Manila against the defendant-appellee, China Banking
Corporation, to compel the latter to execute a deed of cancellation
of the mortgage on the property described in the complaint, and to
deliver to the said plaintiff the Transfer Certificate of Title No. 47634
of the Register of Deeds of Manila, with the mortgage annotated
therein already cancelled, as well as to pay the plaintiff the sum of
P1,000.00 for damages as attorney's fees and to pay the costs of the
suit. The cause of action is that the plaintiff's indebtedness to the
China Banking Corporation in the sum of P5,103.35 by way of
overdraft in current account payable on demand together with its
interests, has been completely paid, on different occasions, from
October 7, 1942, to August 29, 1944, to the defendant Bank China
Banking Corporation through the defendant Bank of Taiwan, Ltd.,
that was appointed by the Japanese Military authorities as liquidator
of the China Banking Corporation.
Upon having been served with summons the defendant-appellee
China Banking Corporation made a demand from the plaintiff-
appellant for the payment of the sum of P5,103.35 with interests
representing the debt of the said appellant, and in the answer it set
up a counter claim against the plaintiff-appellant demanding the
payment, within 90 days from the latter to the former by way of
overdraft together with its interests at the rate of 9 additional sum
of P1,500 as attorney's fees and the costs of the suits.
After the hearing of the case, the trial court rendered a decision
holding that, as there was no evidence presented to show that the
defendant China Banking Corporation had authorized the Bank of
Taiwan, Ltd., to accept the payment of the plaintiff's debt to the said
defendant, and said Bank of Taiwan, as an agency of the Japanese
invading army, was not authorized under the international law to
liquidate the business of the China Banking Corporation, the
payment has not extinguished the indebtedness of the plaintiff to
the said defendant under article 1162 of the Civil Code. The court
absolved the defendant China Banking Corporation from the
complaint of the plaintiff, and sentenced the latter to pay the former
the sum of P5,103.35 with interests within the period of 90 days
from and after the above mentioned Executive Order No. 32 had
been repealed or set aside, and ordered that, if the plaintiff failed to
pay it within the said period, the property mortgaged shall be sold at
public auction and the proceeds of the sale applied to the payment
of said obligations. The plaintiff appealed from the decision to this
Court.
The appellant's assignments of error may be reduced to two, to wit:
First, whether or not the Japanese Military Administration had
authority to order the liquidation or winding up of the business of
defendant-appellee China Banking Corporation, and to appoint the
Bank of Taiwan liquidator authorized as such to accept the payment
by the plaintiff-appellant to said defendant-appellee; and second,
whether or not such payment by the plaintiff-appellant has
extinguished her obligation to said defendant-appellee.
(1) As to the first question, we are Japanese military opinion, and
therefore hold, that the Japanese military authorities had power,
under the international law, to order the liquidation of the China
Banking Corporation and to appoint and authorize the Bank of
Taiwan as liquidator to accept the payment in question, because
such liquidation is not confiscation of the properties of the bank
appellee, but a mere sequestration of its assets which required the
liquidation or winding up of the business of said bank. All the
arguments to the contrary in support of the decision appealed from
the predicated upon the erroneous assumption that the liquidation
or winding up of the affairs of the China Banking Corporation, in
order to determine its liabilities and net assets to be sequestrated or
controlled, was an act of confiscation or appropriation of private
property contrary to Article 46, section III of the Hague Regulations
of 1907.
The provisions of the Hague Regulations, section III, on Military
Authority over Hostile Territory, which is a part of the Hague
Convention respecting the laws and customs of war on land, are
intended to serve as general rule of conduct for the belligerents in
their relations with each other and with the inhabitants, but as it
had not been found possible then to concert regulations covering all
the circumstances which occur in practice, and on the other hand it
could not have been intended by the High Contracting Parties that
the unforeseen cases should, in the absence of a written
undertaking, be left to the arbitrary judgment of military
commanders, it was agreed that "Until a complete code of the laws
of war has been issued, the High Contracting Parties deem it
expedient to declare that in cases not included in the Regulations
adopted by them, the inhabitants and the belligerents remain under
the protection and the rule of the principles of international law, as
they result for the usages established among civilized peoples, from
the laws of humanity, and the dictates of public conscience."
Before the Hague Convention, it was the usage or practice to allow
or permit the confiscation or appropriation by the belligerent
occupant not only of public but also of private property of the
enemy in a territory occupied by the belligerent hostile army; and as
such usage or practice was allowed, a fortiori, any other act short of
confiscation was necessarily permitted. Section III of the Hague
Regulations only prohibits the confiscation of private property,
article 53 provides that cash funds, and property liable to requisition
and all other movable property belonging to the State susceptible of
military use or operation, may be confiscated or taken possession of
as a booty and utilized for the benefit of the invader's government
(II Oppenheim, 8th ed. section 137; 320 & 321, War Department;
Basic Field Manual, Rules of Land Warfare FM 27-10). The
belligerents in their effort to control enemy property within their
jurisdiction or in territories occupied by their armed forces in order
to avoid their use in aid of the enemy and to increase their own
resources, after the Hague Convention and specially during the first
World War, had to resort to such measures of prevention which do
not amount to a straight confiscation, as freezing, blocking, placing
under custody and sequestrating the enemy private property. Such
acts are recognized as not repugnant to the Hague Regulations by
well-known writers on International Law, and are authorized in the
Army and Navy Manual of Military Government and Civil Affairs not
only of the United States, but also in tries, as well as in the Trading
with the Enemy Acts of said countries.
Hyde in his International Law chiefly as interpreted and applied by
the United States, Vol. 3, 6th ed., p. 1727, has the following to say:
In examining the efforts of a belligerent to control in
various ways property within its domain that has such a
connection with nationals of the enemy that it may be
fairly regarded as enemy property, it is important to
inquire whether the attempt is made to appropriate
property without compensation, divesting him not only of
title, but also of any right or interest in what is taken,
without prospect of reimbursement, or whether those
efforts constitute an assumption of control which,
regardless of any transfer of title, is not designated to
produce such a deprivation. The character of the
belligerent acts in the two situations is not identical. To
refer to both as confiscatory is not productive of clearness
of thought, unless a loose and broad signification be
attached to the term "confiscation." The point to be noted
is that a belligerent may in fact deprive an alien enemy
owner of property by process that are into essentially
confiscatory, even though the taking and retention may
cause him severe loss and hardship. Recourse to such non-
confiscatory retentions or deprivations has marked the
conduct of belligerents since the beginning of the World
War in 1914. They may perhaps be appropriately referred
to as sequestrations. The propriety of what they have
involved is, therefore, hardly discernible by reference to
objections directed against confiscatory action as such,
and must be tested by other means or standards.
A belligerent may fairly endeavor to prevent enemy
property of any kind within its territory (or elsewhere
within its reach) from being so employed as to afford
direct military aid to its foe. Measures of prevention may,
in a particular case, assume a confiscatory aspect. In such
a situation the question may arise whether those aspect.
In such a situation the question may arise whether those
measures are, nevertheless, excusable. It is believed that
they may be, and that they are not invariably unlawful
despite the absence of efforts to compensate the owners.
And in the footnote of the same page, said author adds:
This analysis differs sharply from that of those who would
regard almost all uncompensated deprivations of property
as essentially confiscatory, and as, therefore,
internationally illegal because of the further assumption or
conclusion that confiscatory action must inevitably be so
regarded. Belligerent States have not, however, generally
acted on such a theory. They have in fact proceeded,
especially since 1914, to exercise varying degrees of
control over vast amounts of enemy private property by
strictly non-confiscatory processes from which they have
felt no sense of legal obligation to abstain. In so doing they
have been creative of relatively fresh practices which logic
has ordained and war-terminating treaties have
sanctioned. Thus it happens that proper estimation of the
place of confiscation of enemy private property in the law
of nations has become of less importance than formerly,
because both of the reluctance of States — and notably of
the United States to have recourse to it, and of their
preference for no-confiscatory measures exemplified in
sequestrations as a desirable and sufficient means of
utilizing such property.
And Oppenheim in his International Law, Vol. 2, 6th ed., by
Lauterpacht, says:
But the desire to eliminate the financial and commercial
influence of the enemy, and other motives, presently led
in most States to exceptional war measures against the
businesses and property of enemies, which though not
confiscation, implicated great loss and injury. Sometimes
these measures stopped short of divesting the enemy
ownership of the property; but in other cases the
businesses or property were liquidated, and were
represented at the close of hostilities by nothing else than
the proceeds of their realization, often enough out of all
proportion to their value. In the Trading with the Enemy
Act, 1939, provisions was made for the appointment of
custodians of enemy property in order to prevent the
payment of money to enemies and preserve enemy
property in contemplation of arrangements to be made at
the conclusion of peace.
The readjustment of rights of private property on land was
provided for by the Treaties of Peace. The general
principles underlying their complicated arrangements
were that the validity of all completed war measures was
reciprocally confirmed; but that while uncompleted
liquidations on the territories of the Central Powers were
to be discontinued, and the subjects of the victorious
Powers were to receive compensation for the loss or
damage inflicted on their property by the emergency war
measures, the property of subjects of the vanquished
Powers on the territories of the Allied and Associated
Powers might be retained and liquidated, and the owner
was to look for compensation to his own State. The
proceeds of the realization of such property were not to
be handed over to him, or to his State, but were to be
credited to his State as payment on account of the sums
payable by it under the treaties.
In paragraph 143 (p. 313) of the same work, Oppenheim states that
"Private personal property which does not consist of war materials
or means of transport serviceable for military operations may not be
as a rule seized". It is obvious that the word "seized" used therein
signifies "confiscated" in view of the above quoted paragraph, and
therefore when Oppenheim says, in footnote to said passage, "Nor
may the occupant liquidate the business of enemy subject in
occupied territories," he means "confiscate" by the word "liquidate".
Ernest K. Feildchenfeld in his "The International Economic Law of
Belligerent Occupation (1942)" supports the foregoing conclusion of
Hyde, when he says that "According to Article 46 of the Hague
Regulations, private property must be respected and cannot be
confiscated. This rule affords protection against the loss of property,
through outright confiscation, but not against losses under lawful
requisition, contribution, seizure, fines, taxes, and expropriation"
(Par. 208, p. 51). And later on the adds: "A complete nationalization
of a corporation for the benefit of the occupant could not be
anything but a permanent measure involving final effects beyond
the duration of the occupation. There is no military need for it
because the same practical results can be achieved by
temporary sequestration," (par. 385, p. 107).
Martin Domke in his Trading with the Enemy in World War II, pp. 4
and 5, speaking of Warfare on Economic and military fronts, says
that "Freezing Control is but one phase of the present war effort; it
is but one weapon on the total war which is now being waged on
both economic and military fronts. Coupled with Freezing Control as
a part of this nation's program of economic warfare are to be found
export control, the promulgation of a Black List, censorship, seizure
of enemy-owned property, and financial and lend-lease aid to allied
and friendly nations. As to Japan, no official information is available
as yet on steps taken by the Japanese Government. As a
Commentary of April 11, 1942, points out, the Japanese Trading with
the Enemy legislation enacted during the last war against Germany
might throw some light on the views adopted by Japan in this
matter."
The sequestration or liquidation of enemy banks in occupied
territories is authorized expressly by the United States Army and
Navy Manual of Military Government and Civil Affairs F.M. 2710
OPNAV 50-E-3, which, mandatory and controlling upon the theatre
commanders of the U. S. forces in said territories, provides in its
paragraph 12 the following:
Functions of Civil Affairs Officers. — In the occupation of
such territories for a considerable period of time, the civil
affairs officers will in most cases be concerned with the
following and other activities:
1. MONEY AND BANKING. — Closing, if necessary and
guarding of banks, bank funds, safe deposit boxes,
securities and records; providing interim banking and
credit needs; liquidation; reorganization, and reopening of
banks at appropriate times; regulations and supervisions
of credit cooperatives and other financial agencies and
organizations; execution of policies on currency fixed by
higher authority, such as the designation of types of
currency to be used and rates of exchange supervision of
the issue and use of all types of money and credit;
declaration of debt moratoria; prevention of financial
transactions with enemy occupied territory.
The civil affairs officers are concerned, that is, entrusted with the
performance of the functions enumerated above, when so directed
by the chief commander of the occupant military forces.
Not only the United States Army and Navy Manual of Military
Government and Civil Affairs but similar manuals of other countries
authorize the liquidation or impounding of the assets of enemy
banks or the freezing, blocking and impounding of enemy properties
in the occupied hostile territories without violating article 46 or
other articles of the Hague Regulations. They do not amount to an
outright confiscation of private property, and were put into effect by
the Allied Army in the occupied hostile territories in Europe during
World War II.
The Combined Chiefs of Staff, in their Directive of May 31, 1943, on
Military Government in Sicily, Italy, addressed to the Supreme Allied
Commander, Mediterranean Theater, ordered: — "(h) An Allied
Military Financial Agency under the control of the Military
Government shall be established with such sub-agencies as
considered necessary," "(i) Military authorities on occupying an area
shall immediately take the following steps: '(1) All financial
institutions and banks shall be closed and put under the custody of
the military forces'," (2) a general moratorium shall be
declared. (j) ... all papers of value, foreign securities, gold and
foreign currencies shall be impounded with receipts granted to
recognized owners. (k) "The Allied Military Financial Agency or any
appointed agency by the MG will take into immediate custody all
foreign securities and currencies, holding of gold, national funds and
holding of Fascist organizations for deposit." (Appendix on American
Military Government, its Organization and Policies, by Hajo Holborn,
1947, pp. 116, 117.)
The Combined Directive of April 28, 1944, for Military government in
Germany Prior to Defeat or Surrender, provided that the Allied
Forces "Upon entering the area of Germany will take the following
steps and put into effect only such further financial measures as
they deem necessary from a strictly military standpoint. (b) "Banks
should be placed under such control as deemed necessary by them
in order that adequate facilities or military needs may be provided
and to insure that instructions and regulations issued by the military
authorities will be fully complied with." (c) "Pending determination
of future disposition, all gold, foreign currencies, foreign securities,
accounts in financial institutions, credits, valuable papers, and all
similar assets held by or on behalf of the following, will be
impounded or blocked and will be used or otherwise dealt with only
as permitted under licenses or other instructions which you may
issue: (1) German national state, provincial and local governments
and agencies and instrumentalities thereof." (4) "Nazi party
organizations including the party formations, affiliates and
supervised associations, and the officials, leading members and
supporters thereof; and (5) Persons under detention or other types
of custody by Allied Military authorities and other persons whose
activities are hostile to the interest of military government"
(Holborn, supra, p. 141)
In the Allied Directive of June 27, 1945, to the Commander in Chief
of the United States forces of occupation regarding the military
government of Austria, the Commanding General of the United
States forces of occupation in Austria, serving as United States
members of the Allied Council of the Allied Commission for Austria,
was authorized, subject to agreed policies of the Allied Council to
close banks, insurance companies, and other financial institutions
for a period long enough to introduce satisfactory control to
ascertain their cash position and to issue instructions for the
determination of accounts and assets to be blocked under
paragraph 55 which authorized him to impound or block all gold,
silver, currencies, securities accounts in financial institutions, credits,
valuable papers, and all other assets falling within the following
categories; a. Property owned or controlled, directly or indirectly, in
whole or in part, by any of the following: (1) the governments,
nationals or residents of the German Reich, Italy, Bulgaria, Rumania,
Hungary, Finland and Japan, including those of territories occupied
by them; (3) the Nazi Party, its formations, affiliated associations
and supervised organizations, its officials, leading members and
supporters; (4) all organizations, clubs and other associations
prohibited or dissolved by military government; (5) absentee
owners, including United nations and neutral governments; (7)
persons subject to arrest under the provisions of paragraph 7, and
all other persons specified by military government by inclusion in
lists or otherwise, (Holborn, supra, p. 192).
On the other hand, the provisions of the Trading with the Enemy
Acts enacted by the United States and almost all the principal
nations since the first World War, including England, Germany,
France and other European countries, as well as Japan, confirms that
the assets of enemy corporations, specially banks incorporated
under the laws of the country at war with the occupant and doing
business in the occupied territory, may be legally sequestered, and
the business thereof wound up or liquidated. Such sequestration or
seizure of the properties is not an act for the confiscation of enemy
property, but for the conservation of it, subject to further
disposition by treaty between the belligerents at the end of the war.
Section 12 of the Trading with the Enemy Act of the United States
provides that "after the end of the war any claim of enemy or ally of
an enemy to any money or other property received and held by the
Alien Custodian or deposited in the United States Treasury, shall be
settled as Congress shall direct."
The purpose of such sequestration is well expounded in the Annual
Report of the Office of the Alien Custodian for a period from March
11, 1943 to June 30, 1943. "In the absence of effective measures of
control, enemy-owned property can be used to further the interest
of the enemy and to impede our own war effort. All enemy-
controlled assets can be used to finance propaganda, epionage, and
sabotage in this country or in countries friendly to our cause. They
can be used to acquire stocks of strategic materials and supplies ...
use to the enemy, they will be diverted from our own war effort.
The national safety requires the prohibition of all unlicensed
communication, direct or indirect, with enemy and enemy-owned
territories. To the extent that this prohibition is effective, the
residents of such territory are prevented from exercising the rights
and responsibilities of ownership over property located in the
United States. Meanwhile, decisions affecting the utilization of such
property must be made and carried out. Houses must be maintained
and rents collected; payments of principal and interest on
mortgages must be made for the account of foreign debtors and
foreign creditors; stranded stocks of material and equipment must
be sold; patents must be licensed, business enterprises must be
operated and liquidated, and foreign interest must be represented in
court actions. The number of decisions to be made in connection
with property is in fact multiplied by a state of war, which requires
that productive resources be shifted from one use to another so as
to conform with the requirements of a war economy."
The defendant-appellee, China Banking Corporation, comes within
the meaning of the word "enemy" as used in the Trading with
Enemy Act of civilized countries, because not only it was controlled
by Japan's enemies, but it was, besides, incorporated under the laws
of a country with which Japan was at war.
Section 2 (1) of the Trading with the Enemy Act of Great Britain
provides that the expression "enemy" means: "any body of persons
(whether corporate or incorporate) carrying on business in any
place, if and so long as the body is controlled by a person who,
under this section, is an "enemy". The control test has also been
expressly adopted in the French Trading with the Enemy Act. The
Italian Act regards as enemies "legal persons when enemy subject
have any prevalent interest whatever in them." The Decree of the
Dutch Government-in-exile of June 7, 1940, also adopted the control
test by including in the term enemy subjects "legal persons in which
interest of an enemy state or enemy subjects are predominantly
involved." (Domke Trading with the Enemy Act, pp. 127-130.)
In the United States, the Trading with the Enemy Act has not
adopted the control theory. But section 2-a of the said Act says that
the word enemy shall be deemed to mean any "corporation
incorporated within such territory of any nation with which the
United States is at war." And the same definition is given to the
word "enemy" by the Trading with the Enemy Act of the above-
named countries. The British Act in Section 2 (1) defines as enemy
"any body of persons constituted or incorporated in or under the
laws of a state at war with his Majesty," it being immaterial that
they are under the control of allied or neutral stockholders. Similarly
the French Act regards as enemies, corporations incorporated in
conformity with the laws of an enemy state. The decree of the Dutch
Government-in-exile on June 7, 1940, considers as enemies legal
persons "organized or existing according to or governed by the law
of an enemy state." The German Act of January 15, 1940, I section 3
(1) 3, deems enemies all corporations, "the original personality of
which is based on the laws of an enemy state." The Italian Act of
1938, section 5, regards corporation as enemies if they are of enemy
nationality under the law of the enemy state. So too the Japanese
Act, Chapter 1, No. 25, deems enemies "all corporations belonging
to enemy countries." (See Martin Domke, Trading with the Enemy
Act in World War II, pp. 120-122.)
Section 3-A of the Trading with the Enemy Act of the United
Kingdom of September 5, 1939, as amended up to April 1, 1943,
provides that "Where and business is being carried in the United
Kingdom by, on behalf of, or under the jurisdiction of, persons all or
any of whom are enemies or enemy subjects or appear to the Board
of Trade to be associated with enemies, the Board of Trade may, if
they think it expedient so to do, make ...;" (b) and order (hereinafter
in this section referred to as a winding up orders) requiring the
business to be wound up;" and section 14 (c) of the same Act (that
obviously makes it applicable to enemy territories occupied by the
United Kingdoms armed forces) provides that "His Majesty may by
order in council direct that the provisions of this Act other than this
section shall extend, with such exceptions, adaptations and
modifications, if any, as may be prescribed by or under the order ...
(to the extent of His Majesty's jurisdiction therein) to any of the
country or territory being a foreign country or territory, in which for
the time being His Majesty has jurisdiction." (The Trading with the
Enemy Act in World War II, p. 481, by Martin Domke.)
Section 5 (b) of the Trading with the Enemy Act of the United States
provides that "during the time of war or during any period in which
national emergencies declared by the President, the President may
under any agency that he may designate or otherwise under such
rule and regulation as he may prescribe," and "any property or
interest of any foreign country or national thereof shall vest, when,
as, and upon the terms, directed by the President, in such agency or
person as may be designated from time to time by the President,
and upon such terms and conditions as the President may prescribe,
such interest or property shall be held, used, administered,
liquidated, etc." and section 6 (e) of the same Act provides that "any
payment, ... of money or property made to the alien property
custodian hereunder shall be a full acquittance and discharge for all
purposes of the obligation of the person making the same to the
extent of same. .. and shall, in any case of payment to the alien,
property custodian of any debt or obligation owed to an enemy or
ally of enemy, deliver up any notes, bonds, or other evidences of
indebtedness or obligation, ... with like effect as if he or they,
respectively, were duly appointed by the enemy or ally of enemy,
creditor, or obligee."
It is evident that the Trading with the Enemy Act of the United
States, like that of the United Kingdom or Great Britain above
quoted, and those of other countries, may be applied and enforced
in a hostile territory occupied by the United States armed forces,
because section 2 of said Act provides "That the words 'United
States', as used herein, shall be deemed to mean all land and water,
continental or insular, in any way within the jurisdiction of the
United States or occupied by the military or naval forces thereof."
After the liberation of the Philippines during World War II,
properties belonging to Japanese Nationals located in this country
were taken possession of by the Alien Property Custodian appointed
by the President of the United States under the Trading with the
Enemy Act, because, although the Philippines was not a territory or
within the jurisdiction or national domain of the United States, it
was then occupied by the military and naval forces thereof.
Of course it is obvious that the obligations assumed by the United
States, in applying the Trading with the Enemy Act of the United
States to properties within her national domain, is different and
distinct from those arising from the application thereof to enemy
properties located within the hostile territory occupied by her
armed forces. In the first case, Congress is untramelled and free to
authorize the seizure, use, or appropriation of such properties
without and compensation to the owners, for although section 2 of
the Trading with the Enemy Act provides that "at the end of the war
any claim of an enemy or of an ally of enemy to any money or other
property received and held by the alien property custodian or
deposited in the United States Treasury shall be settled by
Congress," the owners of the properties seized within the national
domain of the United States are not entitled to demand its release
or compensation for its seizure, but what could ultimately come
back to them, might be secured, not as a matter of right, but as
matter of either grace to the vanquished or exacted by the victor,
for the case is to be governed by the domestic laws of the United
States, and not by the Hague Regulations or International Law
(U.S.vs. Chemical Foundation Inc., 272 U.S. 1; United States vs. S.S.
White Dental Manufacturing Company, 274 U.S., 402). While in the
latter case, when the properties are sequestered in a hostile
occupied territory by the armed forces of the United States,
Congress can not legally refuse to credit the compensation for them
to the States of the owners as payment on the account of the sums
payable by said States under treaties, and the owners have to look
for compensation to their States, otherwise, they would violate
article 46 of the Hague Regulations or their pledge of good faith
implied in the act of sequestering or taking control of such
properties.
It is to be presumed that Japan, in sequestering and liquidating the
China Banking Corporation, must have acted in accordance, either
with her own Manual of the Army and Navy and Civil Affairs, or with
her Trading with the Enemy Act, and even if not, it being permitted
to the Allied Nations, specially the United states and England, to
sequestrate, impound, and block enemy properties found within
their own domain or in enemy territories occupied during the war by
their armed forces, and it not being contrary to the Hague
regulations or international law, Japan had also the right to do the
same in the Philippines by virtue of the international law principle
that "what is permitted to one belligerent is also allowed to the
other."
Taking into consideration the acts of the Japanese Military
Administration in treating the private properties of the so-called
enemy banks, it appears evident that Japan did not intend to
confiscate or appropriate the assets of said banks or the debts due
them from their debtors, and thus violate article 46 or any other
article of the Hague Regulations. It is true that as to private personal
properties of the enemy, freezing, blocking, or impounding thereof
is sufficient for the purpose of preventing their being used in aid of
the enemy; but with regard to the funds of commercial banks like
the so-called enemy banks, it was impossible or impracticable to
attain the purpose for which the freezing, blocking or impounding
are intended, without liquidating the said banks and collecting the
loans given by then to the hundreds if not thousands or persons
scattered over the Islands. Without doing so, their assets or money
loaned to so many persons can not properly be impounded or
blocked, in order to prevent their being used in aid to the enemy
through the intervention of their very debtors, and successfully
wage economic as well as military war.
That the liquidation or winding up of the business of the China
Banking Corporation and other enemy banks did not constitute a
confiscation or appropriation of their properties or of the debts due
them from their debtors, but a mere sequestration of their assets
during the duration of the war for the purposes already stated, is
evidenced conclusively by the following uncontroverted facts set
forth in the briefs of both parties and amici curiae:
(1) Out of the sum of about P34,000,000 collected from the debtors
by the liquidator Bank of Taiwan, the latter paid out to the
depositors or creditors of the same bank about P9,000,000; and its
common sense that this last amount should not have been
disbursed or taken out of the said amount of about P34,000,000 had
it been the intention of the Japanese Military Administration to
confiscate this amount collected by the Bank of Taiwan.
(2) The members of Chinese Associations were permitted to
withdraw from their deposits with the China Banking Corporation a
considerable amount of money which was paid out of the sum
collected from the debtors of said bank, in order that they may pay
the contribution legally exacted from them by the military occupant
in accordance with article 51 of the Hague Regulations. And this
showed the intention of the belligerent occupant not to confiscate
the bank's assets and to act, at least in this respect, in accordance
with said Regulations; because otherwise the Japanese Military
Administration could have properly required the Chinese to pay the
contribution out of their own funds, without diminishing or reducing
the amounts collected by the Bank of Taiwan from the debtors of
the China Bank.
(3) The collection of the aforementioned debts from the bank's
debtors, as well as the payment of withdrawal by the depositors,
were regularly entered into the books of said Banks, so that after
liberation they could easily determine the respective amounts and
the persons who had made the payments, which enabled all said
banks to re-open and continue their business; and the regular
keeping of said books would have been unnecessary or useless,
were it the intention of the military occupant to close definitely the
enemy banks and appropriate all their resources.
(4) There was absolutely no reason for confiscating the funds of the
banks collected from their debtors, because by sequestrating or
impounding their assets or funds after the latter had been collected
from their debtors, the principal purpose of preventing the possible
use of the funds of the banks in aid of Japan's enemy was
completely accomplished. Absolutely no other benefit could be
derived by Japan from confiscating or appropriating the payments
made in Japanese war military notes to the enemy banks by their
debtors, because the Japanese Government could have them at will
without cost, except that of the ink, paper and labor necessary for
printing and issuing them.
(5) The annual Report, 31st December, 1945, of the Chartered Bank
of India, Australia, and China (pp. 11-12), which had a branch in
Manila liquidated by Japanese Military authorities as one of enemy
banks, clearly shows that the liquidation of said branch was a mere
sequestration, impounding or control of its assets, and not a
confiscation or appropriation thereof during the occupation by the
Japanese. It says that during the enemy occupation the cash balance
of our Branches were seized, their assets realized and repayment of
varying amounts, but up to 100 per cent in one Branch at least,
made to depositors. Said report reads, in its pertinent part, as
follows:
I informed you, when commenting upon the Balance Sheet
figures for the year ending 31st December, 1942, that we
had reason to believe that accounts of some of our
occupied Branches had been partly or wholly liquidated,
and that the liquidation of such accounts would ultimately
bring about shrinkage in both Assets and Liabilities in the
Balance Sheet figures. The information now in our
possession and the various changes in the Balance Sheet
figures to which I have referred to above, confirm the
correctness of this statement, for during the enemy
occupation the cash balances of our Branches were
seized, their assets realized where possible,
and repayment of varying amounts, but up to 100 per cent
in one Branch at least, made to depositors. Even so, the
business of the offices of the Bank which remained under
our own control throughout the war was steadily
increased and has offset to a great extent decreases
brought about by the partial liquidation of Branches which
were in Japanese control. (Emphasis supplied.)
It is obvious that the fact that Japanese Military authorities failed to
pay the enemy banks the balance of the money collected by the
Bank of Taiwan from the debtors of the said banks, did not and
could not change the sequestration or impounding by them of the
bank's assets during the war, into an outright confiscation or
appropriation thereof. Aside from the fact that it was physically
impossible for the Japanese Military authorities to do so because
they were forcibly driven out of the Philippines or annihilated by the
forces of liberation, following the readjustment of rights of private
property on land seized by the enemy provided by the Treaty of
Versailles and other peace treaties entered into at the close of the
first World War, the general principles underlying such
arrangements are that the owners of properties seized,
sequestrated or impounded who are nationals of the victorious
belligerent are entitled to receive compensation for the loss or
damage inflicted on their property by the emergency war measures
taken by the enemy, through their respective States or Governments
who may officially intervene and demand the payment of he claim
on behalf of their nationals (VI Hackworth Digest of International
Law, pages 232, 233; 11 Oppenheim, sixth edition, page 263).
Naturally, as the Japanese war notes were issued as legal tender for
payment of all kinds at par with the Philippine peso, by the Japanese
Imperial Government, which in its proclamations of January 3, 1942,
and February 1, 1942, "takes full responsibility for their usage having
the correct amount to back them up" (See said Proclamations and
their official explanation, O.T. IMA, Vol, 1, pp. 39, 40), Japan is
bound to indemnify the aggrieved banks for the loss or damage on
their property, in terms of Philippine pesos or U.S. dollars at the rate
of one dollar for two pesos.
(2) The second question is, we may say, corollary of the first. It
having been shown above that the Japanese Military Forces had
power to sequestrate and impound the assets or funds of the China
Banking Corporation, and for that purpose to liquidate it by
collecting the debts due to said bank from its debtors, and paying its
creditors, and therefore to appoint the Bank of Taiwan as liquidator
with the consequent authority to make the collection, it follows
evidently that the payments by the debtors to the Bank of Taiwan of
their debts to the China Banking Corporation have extinguished their
obligation to the latter. Said payments were made to a person, the
Bank of Taiwan, authorized to receive them in the name of the bank
creditor under article 1162, of the Civil Code. Because it is evident
the words "a person authorized to receive it," as used therein,
means not only a person authorized by the same creditor, but also a
person authorized by law to do so, such as guardian, executor or
administrator of estate of a deceased, and assignee or liquidator of a
partnership or corporation, as well as any other who may be
authorized to do so by law (Manresa, Civil Code, 4th ed. p. 254.)
The fact that the money with which that debts have been paid were
Japanese war notes doe not affect the validity of the payments. The
provision of article 1170 of our Civil Code to the effect that
"payment of debts of money must be made in the species stipulated
and if it not to deliver such specie in silver or gold coins which is
legal tender," in not applicable to the present case, because the
contract between the parties was to pay Philippine pesos and not
some specifically defined species of money. The Philippine peso and
half-pesos including the Philippine Treasury Certificate was and is
legal tender in the Philippines under section 612 of the
Administrative Code, as amended by Act No. 4199. As well stated by coins, British Military Notes (BMA), to supplement the local lire
the Supreme Court of the United States in Knox vs. Lee and Parker currency then in use (Hajo Holborn, American Military Government,
(Legal Tender Cases, 12 Wall., 457-681, 20 Law. ed., 287). "The 1947, pp. 115-116). The Combined directive for Military Government
expectation of the creditor and the anticipation of the debtor may in Germany, prior to defeat or surrender, of April 28, 1944, directed
have been that the contract would be discharged by the payment of the United States, British and other Allied Forces to use Allied
coined metals, but neither the expectation of one party to the military mark and Reichsmark currency in circulation in Germany as
contract, respecting its fruits, nor the anticipation of the other, legal tender and the Allied Military Marks will be interchangeable
constitutes its obligation. There is a well-recognized distinction with the Reichsmark currency at the rate of Allied Mark for
between the expectation of the parties to a contract and the duty Reichsmark; and that in the event adequate supplies of them were
imposed by it. Aspdin vs. Austin, 5 Ad. & Bl. (N.S.) 671; Dunn vs. not available, the United States forces will use Yellow seal dollars
Sayles, Ibid. 685; Coffin vs. Landis, 46 Pa. 426. Were it not so, the and the British forces will use British Military Authority (BMN) notes.
expectation of results would be always equivalent to a binding (Holborn, op. cit. supra, p. 140.) And the American Directive on the
engagement that they should follow. But the obligation of contract Military Government of Austria of June 27, 1945, ordered that the
to pay money is to pay that which the law shall recognize as money United States forces and other Allied forces within Austria will use
when the payment is made. If there is anything settled by decision it only Allied Military Schillings for pay of troops and other military
is this, and we do not understand it to be controverted." (Knox vs. requirements, declaring it legal tender in Austria interchangeably
Exchange Bank of Virginia, 12 Wall., 457; 20 U.S. Supreme Court with Reichsmarks at a rate of one Allied military schilling for one
Reports, 20 L. ed., 287, 311.) In said case it was held that the legal Reichsmarks. (Holborn, op. cit. supra, p. 192.)
tender for payment of debts contracted before and after their
passage were not inappropriate for carrying into execution the In the above cited case of Thorington vs. Smith, the Supreme Court
legitimate purpose of the Government. And this Court, in Rogers vs. of the United States said:
Smith Bell (10 Phil., 319), held that "A debt of 12,000 pesos created
in 1876 can now (1908) be paid by 12,000 of the Philippine pesos
. . . While the war lasted, however, they had a certain
authorized by the Act of Congress of March 2, 1903, although at the
contingent value, and were used as money in nearly all
time the loan was made which created the debt, the creditor
business transactions of many millions of people. They
delivered to the debtor 12,000 pesos in gold coin."
must be regarded, therefore, as a currency, imposed on
the community by irresistible force.
The power of the military governments established in occupied
enemy territory to issue military currency in the exercise of their
It seems to follows as a necessary consequence from this
governmental power has never been seriously questioned. Such
actual supremacy of the insurgent government, as a
power is based, not only on the occupant's general power to
belligerent, within the territory where it circulated, and
maintain law and order recognized in article 43 of the Hague
from the necessity of civil obedience on the part of all who
Regulations (Feilchenfeld of Belligerent Occupation, paragraph 6),
remained in it, that this currency must be considered in
but on military necessity as shown by the history of the use of
courts of law in the same light as it has been issued by a
money or currency in wars.
foreign government, temporarily occupying a part of the
territory of the United States."
As early as the year 1122, during the siege of Tyre, Doge Micheli paid
his troops in leather money which he promised to redeem when he
According to Feilchenfeld in his book "The International Economic
returned to Venice (Del Mar, Money and Civilization, 26), and when
Law of Belligerent Occupation," the occupant in exercising his
Frederick II besieged Milan he also used leather money to pay his
powers in regard to money and currency, may adopt one of the
troops, as well as in payment of wages (id. 33). When the French
following methods according to circumstances: (1) When the
forces occupied the Ruhr in 1923, they finished the printing of some
coverage of the currency of the territory occupied has become
Reichsbank notes in process and issued them. (Nussbaum, Money in
inadequate as found in several Balkan countries during the War of
the Law, note 6, 158-59.) The British during the Boer War issued
1914-18, and "the local currency continues to be used, an occupant
receipts for requisitioned goods and made such receipts readily
may reorganize the national currency by appropriate methods, such
negotiable, an arrangement very similar to the issuance of currency
as the creation of new types and supplies of coverage" (paragraph
(Spaight, War Rights on Land, 396). During the American Revolution,
272). (2) The occupant may, and not infrequently, use his own
the Continental Congress issued currency even before the issuance
currency, in the occupied region. But this method may be found
of the Declaration of Independence, when the territory controlled
inconvenient if the coverage for their national currency had already
by Congress was held in military occupation against the then
become inadequate, and for that reason authorities are afraid of
legitimate government. (Dewey, Financial History of the United
exposing it to additional strain, and for that reason an occupant may
States, 37-38; Morrison and Commager, Growth of the American
not replace the local currency by his own currency for all currency
Republic, 207; Nussbaum, op. cit. supra note, 6, 172-173.) The
for all purposes, and enforce its use not only for his own payment
Confederacy issued its own currency in Confederate territory
but also for payments among inhabitants (paragraph 285). (3)
(Thorington vs. Smith, 8 Wall., 1) and also in northern areas
Where the regional currency has become inadequate and it is
occupied from time to time during the war. (Spaight, op. cit. supra,
deemed inadvisable by the occupant to expose his own currency to
note 19, 392.) The Japanese issued special occupation currency in
further strain, new types of money may be created by the occupant.
Korea and Manchuria during the Russo-Japanese War of 1905.
Such new currency may have anew name and may be issued by
(Takahashi, International Law Applied to Russo-Japanese War, 1908,
institution created for that purpose (paragraph 296). This last
260-61; Spaight, op. cit. note 19,397; Ariga, La Guerre Rossu-
method was the one adopted by Japan in this country, because the
Japanese, 1908, 450 et seq.) The British also issued currency notes
coverage of the Philippine Treasury Certificate of the territory
redeemable in Sterling in London at a fixed rate of exchange, in their
occupied had become inadequate, for most if not all of the said
occupation of Archangel during and after the first World War.
coverage had been taken to the United States and many millions of
(White, Currency of the Great War, 66; League of Nations, Currency
silver pesos were buried or thrown into the sea near Corregidor, and
After the War, 100.)
Japan did not want to use her national currency, and expose it to
additional strains.
During the World War II, the Germans had been using a variety of
occupation currencies as legal tenders on a large scale, the currency
But be that as it may, whatever might have been the intrinsic or
initially used in most occupied areas being the Reichskroditkassa
extrinsic worth of the Japanese war-notes which the Bank of Taiwan
mark, a paper currency printed in German and denominated in
has received as full satisfaction of the obligations of the appellee's
German monetary units, which circulated side by side with the local
debtors to it, is of no consequence in the present case. As we have
currency at decreased rate of exchange. And the Allies have
already stated, the Japanese war-notes were issued as legal tender
introduced notes as legal currency in Sicily, Germany, and Austria.
at par with the Philippine peso, and guaranteed by Japanese
The Combined Directive of the combined Chief of Staffs to the
Government "which takes full responsibility for their usage having
Supreme Allied Commander issued on June 24, 1943, directed that
the correct amount to back them up (Proclamation of January 3,
the task forces of the U.S. will use, besides regular U.S. coins, yellow
1942). Now that the outcome of the war has turned against Japan,
seal dollars, and the forces of Great Britain will use besides British
the enemy banks have the right to demand from Japan, through
their States or Governments, payments or compensation in
Philippine peso or U.S. dollars as the case may be, for the loss or
damage inflicted on the property by the emergency war measure
taken by the enemy. If Japan had won the war of were the victor,
the property or money of said banks sequestrated or impounded by
her might be retained by Japan and credited to the respective State
of which the owners of said banks were nationals, as a payment on
the account of the sums payable by them as indemnity under the
treaties, and the said owners were to look for compensation in
Philippine pesos or U.S. dollars to their respective States. (Treaty of
Versailles and other peace treaties entered at the close of the first
world war; VI Hackworth Digest of International Law, p. 232.) And if
they cannot et any or sufficient compensation either from the
enemy or from their States, because of their insolvency or
impossibility to pay, they have naturally to suffer, as everyone else,
the losses incident to all wars.
In view of all the foregoing, the judgement appealed from is
reversed, and the defendant-appellee is sentenced to execute the
deed of cancellation of mortgage of the property described in the
complaint, and to deliver to the plaintiff-appellant the Transfer
Certificate of Title No. 47634 of the Register of Deeds in Manila with
the annotation of mortgage therein already cancelled, without
pronouncement as to costs. So ordered.
G.R. No. L-14441 December 17, 1966
PEDRO R. PALTING, petitioner,
vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
BARRERA, J.:
This is a petition for review of the order of August 29, 1958, later
supplemented and amplified by another dated September 9, 1958,
of the Securities and Exchange Commission denying the opposition
to, and instead, granting the registration, and licensing the sale in
the Philippines, of 5,000,000 shares of the capital stock of the
respondent-appellee San Jose Petroleum, Inc. (hereafter referred to
as SAN JOSE PETROLEUM), a corporation organized and existing in
the Republic of Panama.
On September 7, 1956, SAN JOSE PETROLEUM filed with the
Philippine Securities and Exchange Commission a sworn registration
statement, for the registration and licensing for sale in the
Philippines Voting Trust Certificates representing 2,000,000 shares
of its capital stock of a par value of $0.35 a share, at P1.00 per share.
It was alleged that the entire proceeds of the sale of said securities
will be devoted or used exclusively to finance the operations of San
Jose Oil Company, Inc. (a domestic mining corporation hereafter to
be referred to as SAN JOSE OIL) which has 14 petroleum exploration
concessions covering an area of a little less than 1,000,000 hectares,
located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La
Union, Iloilo, Cotabato, Davao and Agusan. It was the express
condition of the sale that every purchaser of the securities shall not
receive a stock certificate, but a registered or bearer-voting-trust
certificate from the voting trustees named therein James L. Buckley
and Austin G.E. Taylor, the first residing in Connecticut, U.S.A., and
the second in New York City. While this application for registration
was pending consideration by the Securities and Exchange
Commission, SAN JOSE PETROLEUM filed an amended Statement on
June 20, 1958, for registration of the sale in the Philippines of its
shares of capital stock, which was increased from 2,000,000 to
5,000,000, at a reduced offering price of from P1.00 to P0.70 per
share. At this time the par value of the shares has also been reduced
from $.35 to $.01 per share.1
Pedro R. Palting and others, allegedly prospective investors in the
shares of SAN JOSE PETROLEUM, filed with the Securities and
Exchange Commission an opposition to registration and licensing of
the securities on the grounds that (1) the tie-up between the issuer,
SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE
OIL, a domestic corporation, violates the Constitution of the
Philippines, the Corporation Law and the Petroleum Act of 1949; (2)
the issuer has not been licensed to transact business in the
Philippines; (3) the sale of the shares of the issuer is fraudulent, and
works or tends to work a fraud upon Philippine purchasers; and (4)
the issuer as an enterprise, as well as its business, is based upon
unsound business principles. Answering the foregoing opposition of
Palting, et al., the registrant SAN JOSE PETROLEUM claimed that it
was a "business enterprise" enjoying parity rights under the
Ordinance appended to the Constitution, which parity right, with
respect to mineral resources in the Philippines, may be exercised,
pursuant to the Laurel-Langley Agreement, only through the
medium of a corporation organized under the laws of the
Philippines. Thus, registrant which is allegedly qualified to exercise
rights under the Parity Amendment, had to do so through the
medium of a domestic corporation, which is the SAN JOSE OIL. It
refused the contention that the Corporation Law was being violated,
by alleging that Section 13 thereof applies only to foreign
corporations doing business in the Philippines, and registrant was
not doing business here. The mere fact that it was a holding
company of SAN JOSE OIL and that registrant undertook the
financing of and giving technical assistance to said corporation did
not constitute transaction of business in the Philippines. Registrant
also denied that the offering for sale in the Philippines of its shares
of capital stock was fraudulent or would work or tend to work fraud
on the investors. On August 29, 1958, and on September 9, 1958 the
Securities and Exchange Commissioner issued the orders object of
the present appeal.
The issues raised by the parties in this appeal are as follows:
1. Whether or not petitioner Pedro R. Palting, as a
"prospective investor" in respondent's securities, has
personality to file the present petition for review of the
order of the Securities and Exchange Commission;
2. Whether or not the issue raised herein is already moot
and academic;
3. Whether or not the "tie-up" between the respondent
SAN JOSE PETROLEUM, a foreign corporation, and SAN
JOSE OIL COMPANY, INC., a domestic mining corporation,
is violative of the Constitution, the Laurel-Langley
Agreement, the Petroleum Act of 1949, and the
Corporation Law; and
4. Whether or not the sale of respondent's securities is
fraudulent, or would work or tend to work fraud to
purchasers of such securities in the Philippines.
1. In answer to the notice and order of the Securities and Exchange
Commissioner, published in 2 newspapers of general circulation in
the Philippines, for "any person who is opposed" to the petition for
registration and licensing of respondent's securities, to file his
opposition in 7 days, herein petitioner so filed an opposition. And,
the Commissioner, having denied his opposition and instead,
directed the registration of the securities to be offered for sale,
oppositor Palting instituted the present proceeding for review of
said order.
Respondent raises the question of the personality of petitioner to
bring this appeal, contending that as a mere "prospective investor",
he is not an "Aggrieved" or "interested" person who may properly
maintain the suit. Citing a 1931 ruling of Utah State Supreme
Court2 it is claimed that the phrase "party aggrieved" used in the
Securities Act3 and the Rules of Court4 as having the right to appeal
should refer only to issuers, dealers and salesmen of securities.
It is true that in the cited case, it was ruled that the phrase "person
aggrieved" is that party "aggrieved by the judgment or decree where
it operates on his rights of property or bears directly upon his
interest", that the word "aggrieved" refers to "a substantial
grievance, a denial of some personal property right or the imposition
upon a party of a burden or obligation." But a careful reading of the
case would show that the appeal therein was dismissed because the
court held that an order of registration was not final and therefore
not appealable. The foregoing pronouncement relied upon by herein
respondent was made in construing the provision regarding an order
of revocation which the court held was the one appealable. And
since the law provides that in revoking the registration of any
security, only the issuer and every registered dealer of the security
are notified, excluding any person or group of persons having no
such interest in the securities, said court concluded that the phrase
"interested person" refers only to issuers, dealers or salesmen of
securities.
We cannot consider the foregoing ruling by the Utah State Court as
controlling on the issue in this case. Our Securities Act in Section 7(c)
thereof, requires the publication and notice of the registration
statement. Pursuant thereto, the Securities and Exchange
Commissioner caused the publication of an order in part reading as
follows:
. . . Any person who is opposed with this petition must file
his written opposition with this Commission within said
period (2 weeks). . . .
In other words, as construed by the administrative office entrusted
with the enforcement of the Securities Act, any person (who may
not be "aggrieved" or "interested" within the legal acceptation of
the word) is allowed or permitted to file an opposition to the
registration of securities for sale in the Philippines. And this is in
consonance with the generally accepted principle that Blue Sky Laws
are enacted to protect investors and prospective purchasers and to
prevent fraud and preclude the sale of securities which are in fact
worthless or worth substantially less than the asking price. It is for
this purpose that herein petitioner duly filed his opposition giving
grounds therefor. Respondent SAN JOSE PETROLEUM was required
to reply to the opposition. Subsequently both the petition and the
opposition were set for hearing during which the petitioner was
allowed to actively participate and did so by cross-examining the
respondent's witnesses and filing his memorandum in support of his
opposition. He therefore to all intents and purposes became a party
to the proceedings. And under the New Rules of Court,5 such a party
can appeal from a final order, ruling or decision of the Securities and
Exchange Commission. This new Rule eliminating the word
"aggrieved" appearing in the old Rule, being procedural in
nature,6 and in view of the express provision of Rule 144 that the
new rules made effective on January 1, 1964 shall govern not only
cases brought after they took effect but all further proceedings in
cases then pending, except to the extent that in the opinion of the
Court their application would not be feasible or would work
injustice, in which event the former procedure shall apply, we hold
that the present appeal is properly within the appellate jurisdiction
of this Court.
The order allowing the registration and sale of respondent's
securities is clearly a final order that is appealable. The mere fact
that such authority may be later suspended or revoked, depending
on future developments, does not give it the character of an
interlocutory or provisional ruling. And the fact that seven days after
the publication of the order, the securities are deemed registered
(Sec. 7, Com. Act 83, as amended), points to the finality of the order.
Rights and obligations necessarily arise therefrom if not reviewed on
appeal.
Our position on this procedural matter — that the order is
appealable and the appeal taken here is proper — is strengthened
by the intervention of the Solicitor General, under Section 23 of Rule
3 of the Rules of Court, as the constitutional issues herein presented
affect the validity of Section 13 of the Corporation Law, which,
according to the respondent, conflicts with the Parity Ordinance and
the Laurel-Langley Agreement recognizing, it is claimed, its right to
exploit our petroleum resources notwithstanding said provisions of
the Corporation Law.
2. Respondent likewise contends that since the order of
Registration/Licensing dated September 9, 1958 took effect 30 days
from September 3, 1958, and since no stay order has been issued by
the Supreme Court, respondent's shares became registered and
licensed under the law as of October 3, 1958. Consequently, it is
asserted, the present appeal has become academic. Frankly we are
unable to follow respondent's argumentation. First it claims that the
order of August 29 and that of September 9, 1958 are not final
orders and therefor are not appealable. Then when these orders,
according to its theory became final and were implemented, it
argues that the orders can no longer be appealed as the question of
registration and licensing became moot and academic.
But the fact is that because of the authority to sell, the securities
are, in all probabilities, still being traded in the open market.
Consequently the issue is much alive as to whether respondent's
securities should continue to be the subject of sale. The purpose of
the inquiry on this matter is not fully served just because the
securities had passed out of the hands of the issuer and its dealers.
Obviously, so long as the securities are outstanding and are placed in
the channels of trade and commerce, members of the investing
public are entitled to have the question of the worth or legality of
the securities resolved one way or another.
But more fundamental than this consideration, we agree with the
late Senator Claro M. Recto, who appeared asamicus curiae in this
case, that while apparently the immediate issue in this appeal is the
right of respondent SAN JOSE PETROLEUM to dispose of and sell its
securities to the Filipino public, the real and ultimate controversy
here would actually call for the construction of the constitutional
provisions governing the disposition, utilization, exploitation and
development of our natural resources. And certainly this is neither
moot nor academic.
3. We now come to the meat of the controversy — the "tie-up"
between SAN JOSE OIL on the one hand, and the respondent SAN
JOSE PETROLEUM and its associates, on the other. The relationship
of these corporations involved or affected in this case is admitted
and established through the papers and documents which are parts
of the records: SAN JOSE OIL, is a domestic mining corporation, 90%
of the outstanding capital stock of which is owned by respondent
SAN JOSE PETROLEUM, a foreign (Panamanian) corporation, the
majority interest of which is owned by OIL INVESTMENTS, Inc.,
another foreign (Panamanian) company. This latter corporation in
turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and
PANCOASTAL PETROLEUM COMPANY, C.A., both organized and
existing under the laws of Venezuela. As of September 30, 1956,
there were 9,976 stockholders of PANCOASTAL PETROLEUM found
in 49 American states and U.S. territories, holding 3,476,988 shares
of stock; whereas, as of November 30, 1956, PANTEPEC OIL
COMPANY was said to have 3,077,916 shares held by 12,373
stockholders scattered in 49 American state. In the two lists of
stockholders, there is no indication of the citizenship of these
stockholders,7 or of the total number of authorized stocks of each
corporation, for the purpose of determining the corresponding
percentage of these listed stockholders in relation to the respective
capital stock of said corporation.
Petitioner, as well as the amicus curiae and the Solicitor
General8 contend that the relationship between herein respondent
SAN JOSE PETROLEUM and its subsidiary, SAN JOSE OIL, violates the
Petroleum Law of 1949, the Philippine Constitution, and Section 13
of the Corporation Law, which inhibits a mining corporation from
acquiring an interest in another mining corporation. It is
respondent's theory, on the other hand, that far from violating the
Constitution; such relationship between the two corporations is in
accordance with the Laurel-Langley Agreement which implemented
the Ordinance Appended to the Constitution, and that Section 13 of
the Corporation Law is not applicable because respondent is not
licensed to do business, as it is not doing business, in the Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1. All agricultural, timber, and mineral lands of the
public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, and other
natural resources of the Philippines belong to the State,
and their disposition, exploitation, development, or
utilization shall be limited to citizens of the Philippines, or
to corporations or associations at least sixty per centum of
the capital of which is owned by such citizens, subject to
any existing right, grant, lease or concession at the time of
the inauguration of this Government established under
this Constitution. . . . (Emphasis supplied)
In the 1946 Ordinance Appended to the Constitution, this right (to
utilize and exploit our natural resources) was extended to citizens of
the United States, thus:
Notwithstanding the provisions of section one, Article
Thirteen, and section eight, Article Fourteen, of the
foregoing Constitution, during the effectivity of the
Executive Agreement entered into by the President of the
Philippines with the President of the United States on the
fourth of July, nineteen hundred and forty-six, pursuant to
the provisions of Commonwealth Act Numbered Seven
hundred and thirty-three, but in no case to extend beyond
the third of July, nineteen hundred and seventy-four, the
disposition, exploitation, development, and utilization of
all agricultural, timber, and mineral lands of the public
domain, waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy, and other
natural resources of the Philippines, and the operation of
public utilities shall, if open to any person, be open to
citizens of the United States, and to all forms of business
enterprises owned or controlled, directly or indirectly, by
citizens of the United States in the same manner as to, and
under the same conditions imposed upon, citizens of the
Philippines or corporations or associations owned or
controlled by citizens of the Philippines (Emphasis
supplied.)
In the 1954 Revised Trade Agreement concluded between the
United States and the Philippines, also known as the Laurel-Langley
Agreement, embodied in Republic Act 1355, the following provisions
appear:
ARTICLE VI
1. The disposition, exploitation, development and
utilization of all agricultural, timber, and mineral lands of
the public domain, waters, minerals, coal, petroleum and
other mineral oils, all forces and sources of potential
energy, and other natural resources of either Party, and
the operation of public utilities, shall, if open to any
person, be open to citizens of the other Party and to all
forms of business enterprise owned or controlled, directly
or indirectly, by citizens of such other Party in the same
manner as to and under the same conditions imposed upon
citizens or corporations or associations owned or
controlled by citizens of the Party granting the right.
2. The rights provided for in Paragraph 1 may be exercised,
. . . in the case of citizens of the United States, with respect
to natural resources in the public domain in the
Philippines, only through the medium of a corporation
organized under the laws of the Philippines and at least
60% of the capital stock of which is owned or controlled by
citizens of the United States. . . .
3. The United States of America reserves the rights of the
several States of the United States to limit the extent to
which citizens or corporations or associations owned or
controlled by citizens of the Philippines may engage in the
activities specified in this Article. The Republic of the
Philippines reserves the power to deny any of the rights
specified in this Article to citizens of the United States who
are citizens of States, or to corporations or associations at
least 60% of whose capital stock or capital is owned or
controlled by citizens of States, which deny like rights to
citizens of the Philippines, or to corporations or
associations which are owned or controlled by citizens of
the Philippines. . . . (Emphasis supplied.)
Re-stated, the privilege to utilize, exploit, and develop the natural
resources of this country was granted, by Article XIII of the
Constitution, to Filipino citizens or to corporations or associations
60% of the capital of which is owned by such citizens. With the Parity
Amendment to the Constitution, the same right was extended to
citizens of the United States and business enterprises owned or
controlled directly or indirectly, by citizens of the United States.
There could be no serious doubt as to the meaning of the word
"citizens" used in the aforementioned provisions of the Constitution.
The right was granted to 2 types of persons: natural persons (Filipino
or American citizens) and juridical persons (corporations 60% of
which capital is owned by Filipinos and business enterprises owned
or controlled directly or indirectly, by citizens of the United States).
In American law, "citizen" has been defined as "one who, under the
constitution and laws of the United States, has a right to vote for
representatives in congress and other public officers, and who is
qualified to fill offices in the gift of the people. (1 Bouvier's Law
Dictionary, p. 490.) A citizen is —
One of the sovereign people. A constituent member of the
sovereignty, synonymous with the people." (Scott v.
Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)
A member of the civil state entitled to all its privileges.
(Cooley, Const. Lim. 77. See U.S. v. Cruikshank 92 U.S. 542,
23 L. Ed. 588; Minor v. Happersett 21 Wall. [U.S.] 162, 22 L.
Ed. 627.)
These concepts clarified, is herein respondent SAN JOSE
PETROLEUM an American business enterprise entitled to parity
rights in the Philippines? The answer must be in the negative, for the
following reasons:
Firstly — It is not owned or controlled directly by citizens of the
United States, because it is owned and controlled by a corporation,
the OIL INVESTMENTS, another foreign (Panamanian) corporation.
Secondly — Neither can it be said that it is indirectly owned and
controlled by American citizens through the OIL INVESTMENTS, for
this latter corporation is in turn owned and controlled, not by
citizens of the United States, but still by two foreign (Venezuelan)
corporations, the PANTEPEC OIL COMPANY and PANCOASTAL
PETROLEUM.
Thirdly — Although it is claimed that these two last corporations are
owned and controlled respectively by 12,373 and 9,979 stockholders
residing in the different American states, there is no showing in the
certification furnished by respondent that the stockholders of
PANCOASTAL or those of them holding the controlling stock, are
citizens of the United States.
Fourthly — Granting that these individual stockholders are American
citizens, it is yet necessary to establish that the different states of
which they are citizens, allow Filipino citizens or corporations or
associations owned or controlled by Filipino citizens, to engage in
the exploitation, etc. of the natural resources of these states (see
paragraph 3, Article VI of the Laurel-Langley Agreement, supra).
Respondent has presented no proof to this effect.
Fifthly — But even if the requirements mentioned in the two
immediately preceding paragraphs are satisfied, nevertheless to
hold that the set-up disclosed in this case, with a long chain of
intervening foreign corporations, comes within the purview of the
Parity Amendment regarding business enterprises indirectly owned
or controlled by citizens of the United States, is to unduly stretch
and strain the language and intent of the law. For, to what extent
must the word "indirectly" be carried? Must we trace the ownership
or control of these various corporationsad infinitum for the purpose
of determining whether the American ownership-control-
requirement is satisfied? Add to this the admitted fact that the
shares of stock of the PANTEPEC and PANCOASTAL which are
allegedly owned or controlled directly by citizens of the United
States, are traded in the stock exchange in New York, and you have a
situation where it becomes a practical impossibility to determine at
any given time, the citizenship of the controlling stock required by
the law. In the circumstances, we have to hold that the respondent
SAN JOSE PETROLEUM, as presently constituted, is not a business
enterprise that is authorized to exercise the parity privileges under
the Parity Ordinance, the Laurel-Langley Agreement and the
Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about 90% of
whose stock is owned by SAN JOSE PETROLEUM? This is a query
which we need not resolve in this case as SAN JOSE OIL is not a party
and it is not necessary to do so to dispose of the present
controversy. But it is a matter that probably the Solicitor General
would want to look into.
There is another issue which has been discussed extensively by the
parties. This is whether or not an American mining corporation may
lawfully "be in anywise interested in any other corporation
(domestic or foreign) organized for the purpose of engaging in
agriculture or in mining," in the Philippines or whether an American
citizen owning stock in more than one corporation organized for the
purpose of engaging in agriculture or in mining, may own more than
15% of the capital stock then outstanding and entitled to vote, of
each of such corporations, in view of the express prohibition
contained in Section 13 of the Philippine Corporation Law. The
petitioner in this case contends that the provisions of the
Corporation Law must be applied to American citizens and business
enterprise otherwise entitled to exercise the parity privileges,
because both the Laurel-Langley Agreement (Art. VI, par. 1) and the
Petroleum Act of 1948 (Art. 31), specifically provide that the
enjoyment by them of the same rights and obligations granted
under the provisions of both laws shall be "in the same manner as
to, and under the same conditions imposed upon, citizens of the
Philippines or corporations or associations owned or controlled by
citizens of the Philippines." The petitioner further contends that, as
the enjoyment of the privilege of exploiting mineral resources in the
Philippines by Filipino citizens or corporations owned or controlled
by citizens of the Philippines (which corporation must necessarily be
organized under the Corporation Law), is made subject to the
limitations provided in Section 13 of the Corporation Law, so
necessarily the exercise of the parity rights by citizens of the United
States or business enterprise owned or controlled, directly or
indirectly, by citizens of the United States, must equally be subject
to the same limitations contained in the aforesaid Section 13 of the
Corporation Law.
In view of the conclusions we have already arrived at, we deem it
not indispensable for us to pass upon this legal question, especially
taking into account the statement of the respondent (SAN JOSE
PETROLEUM) that it is essentially a holding company, and as found
by the Securities and Exchange Commissioner, its principal activity is
limited to the financing and giving technical assistance to SAN JOSE
OIL.
4. Respondent SAN JOSE PETROLEUM, whose shares of stock were
allowed registration for sale in the Philippines, was incorporated
under the laws of Panama in April, 1956 with an authorized capital
stock of $500,000.00, American currency, divided into 50,000,000
shares at par value of $0.01 per share. By virtue of a 3-party
Agreement of June 14, 1956, respondent was supposed to have
received from OIL INVESTMENTS 8,000,000 shares of the capital
stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note
for $250,000.00 due in 6 months, for which respondent issued in
favor of OIL INVESTMENTS 16,000,000 shares of its capital stock, at
$0.01 per share or with a value of $160,000.00, plus a note for
$230,297.97 maturing in 2 years at 6% per annum interest,9 and the
assumption of payment of the unpaid price of 7,500,000 (of the
8,000,000 shares of SAN JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was
increased from $500,000.00 to $17,500,000.00 by increasing the par
value of the same 50,000,000 shares, from $0.01 to $0.35. Without
any additional consideration, the 16,000,000 shares of $0.01
previously issued to OIL INVESTMENTS with a total value of
$160,000.00 were changed with 16,000,000 shares of the
recapitalized stock at $0.35 per share, or valued at $5,600,000.00.
And, to make it appear that cash was received for these re-issued
16,000,000 shares, the board of directors of respondent corporation
placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN
JOSE OIL (still having par value of $0.10 per share) which were
received from OIL INVESTMENTS as part-consideration for the
16,000,000 shares at $0.01 per share.
In the Balance Sheet of respondent, dated July 12, 1956, from the
$5,900,000.00, supposedly the value of the 8,000,000 shares of SAN
JOSE OIL, the sum of $5,100,000.00 was deducted, corresponding to
the alleged difference between the "value" of the said shares and
the subscription price thereof which is $800,000.00 (at $0.10 per
share). From this $800,000.00, the subscription price of the SAN
JOSE OIL shares, the amount of $319,702.03 was deducted, as
allegedly unpaid subscription price, thereby giving a difference of
$480,297.97, which was placed as the amount allegedly paid in on
the subscription price of the 8,000,000 SAN JOSE OIL shares. Then,
by adding thereto the note receivable from OIL INVESTMENTS, for
$250,000.00 (part-consideration for the 16,000,000 SAN JOSE
PETROLEUM shares), and the sum of $6,516.21, as deferred
expenses, SAN JOSE PETROLEUM appeared to have assets in the sum
of $736,814.18.
These figures are highly questionable. Take the item $5,900,000.00
the valuation placed on the 8,000,000 shares of SAN JOSE OIL. There
appears no basis for such valuation other than belief by the board of
directors of respondent that "should San Jose Oil Company be
granted the bulk of the concessions applied for upon reasonable
terms, that it would have a reasonable value of approximately
$10,000,000." 10 Then, of this amount, the subscription price of
$800,000.00 was deducted and called it "difference between the
(above) valuation and the subscription price for the 8,000,000
shares." Of this $800,000.00 subscription price, they deducted the
sum of $480,297.97 and the difference was placed as the unpaid
portion of the subscription price. In other words, it was made to
appear that they paid in $480,297.97 for the 8,000,000 shares of
SAN JOSE OIL. This amount ($480,297.97) was supposedly that
$250,000.00 paid by OIL INVESMENTS for 7,500,000 shares of SAN
JOSE OIL, embodied in the June 14 Agreement, and a sum of
$230,297.97 the amount expended or advanced by OIL
INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among
respondent's liabilities, for $230,297.97 appearing as note payable
to Oil Investments, maturing in two (2) years at six percent (6%) per
annum. 11 As far as it appears from the records, for the 16,000,000
shares at $0.35 per share issued to OIL INVESTMENTS, respondent
SAN JOSE PETROLEUM received from OIL INVESTMENTS only the
note for $250,000.00 plus the 8,000,000 shares of SAN JOSE OIL,
with par value of $0.10 per share or a total of $1,050,000.00 — the
only assets of the corporation. In other words, respondent actually
lost $4,550,000.00, which was received by OIL INVESTMENTS.
But this is not all. Some of the provisions of the Articles of
Incorporation of respondent SAN JOSE PETROLEUM are noteworthy;
viz:
(1) the directors of the Company need not be
shareholders;
(2) that in the meetings of the board of directors, any
director may be represented and may vote through a
proxy who also need not be a director or stockholder; and
(3) that no contract or transaction between the
corporation and any other association or partnership will
be affected, except in case of fraud, by the fact that any of
the directors or officers of the corporation is interested in,
or is a director or officer of, such other association or
partnership, and that no such contract or transaction of
the corporation with any other person or persons, firm,
association or partnership shall be affected by the fact that
any director or officer of the corporation is a party to or
has an interest in, such contract or transaction, or has in
anyway connected with such other person or persons,
firm, association or partnership; and finally, that all and
any of the persons who may become director or officer of
the corporation shall be relieved from all responsibility for
which they may otherwise be liable by reason of any
contract entered into with the corporation, whether it be
for his benefit or for the benefit of any other person, firm,
association or partnership in which he may be interested.
These provisions are in direct opposition to our corporation law and
corporate practices in this country. These provisions alone would
outlaw any corporation locally organized or doing business in this
jurisdiction. Consider the unique and unusual provision that no
contract or transaction between the company and any other
association or corporation shall be affected except in case of fraud,
by the fact that any of the directors or officers of the company may
be interested in or are directors or officers of such other association
or corporation; and that none of such contracts or transactions of
this company with any person or persons, firms, associations or
corporations shall be affected by the fact that any director or officer
of this company is a party to or has an interest in such contract or
transaction or has any connection with such person or persons,
firms associations or corporations; and that any and all persons who
may become directors or officers of this company are hereby
relieved of all responsibility which they would otherwise incur by
reason of any contract entered into which this company either for
their own benefit, or for the benefit of any person, firm, association
or corporation in which they may be interested.

The impact of these provisions upon the traditional judiciary

relationship between the directors and the stockholders of a
corporation is too obvious to escape notice by those who are called
upon to protect the interest of investors. The directors and officers
of the company can do anything, short of actual fraud, with the
affairs of the corporation even to benefit themselves directly or
other persons or entities in which they are interested, and with
immunity because of the advance condonation or relief from
responsibility by reason of such acts. This and the other provision
which authorizes the election of non-stockholders as directors,
completely disassociate the stockholders from the government and
management of the business in which they have invested.

To cap it all on April 17, 1957, admittedly to assure continuity of the

management and stability of SAN JOSE PETROLEUM, OIL
INVESTMENTS, as holder of the only subscribed stock of the former
corporation and acting "on behalf of all future holders of voting trust
certificates," entered into a voting trust agreement12 with James L.
Buckley and Austin E. Taylor, whereby said Trustees were given
authority to vote the shares represented by the outstanding trust
certificates (including those that may henceforth be issued) in the
following manner:

(a) At all elections of directors, the Trustees will designate

a suitable proxy or proxies to vote for the election of
directors designated by the Trustees in their own
discretion, having in mind the best interests of the holders
of the voting trust certificates, it being understood that any
and all of the Trustees shall be eligible for election as
directors;

(b) On any proposition for removal of a director, the

Trustees shall designate a suitable proxy or proxies to vote
for or against such proposition as the Trustees in their own
discretion may determine, having in mind the best interest
of the holders of the voting trust certificates;

(c) With respect to all other matters arising at any meeting

of stockholders, the Trustees will instruct such proxy or
proxies attending such meetings to vote the shares of
stock held by the Trustees in accordance with the written
instructions of each holder of voting trust certificates.
(Emphasis supplied.)

It was also therein provided that the said Agreement shall be binding
upon the parties thereto, their successors, and upon all holders of
voting trust certificates.

And these are the voting trust certificates that are offered to
investors as authorized by Security and Exchange Commissioner. It
can not be doubted that the sale of respondent's securities would,
to say the least, work or tend to work fraud to Philippine investors.

FOR ALL THE FOREGOING CONSIDERATIONS, the motion of

respondent to dismiss this appeal, is denied and the orders of the
Securities and Exchange Commissioner, allowing the registration of
Respondent's securities and licensing their sale in the Philippines are
hereby set aside. The case is remanded to the Securities and
Exchange Commission for appropriate action in consonance with
this decision. With costs. Let a copy of this decision be furnished the
Solicitor General for whatever action he may deem advisable to take
in the premises. So ordered.