Case Digest

G.R. No. 172885 October 9, 2009

MANUEL LUIS S. SANCHEZ, Petitioner,

vs.
REPUBLIC OF THE PHILIPPINES, Represented by the Department of Education,
Culture and Sports, Respondent.

Facts:
- A government-owned Human Settlements Development Corporation (HSDC)
built with public funds and on government land the St. Martin Technical Institute
Complex at Barangay Ugong, Pasig City. This later on became known as the
University of Life Complex.

- On August 26, 1980 the government gave the management and operation of the
Complex to ULFI but HSDC was to continue to construct facilities and acquire
equipment for it. Although ULFI was to get all the incomes of the Complex, ULFI
had to pay HSDC an annual fee of 14 percent of HSDC’s investments in it.

- The complaint alleged that Henri Kahn (ULFI President) and petitioner Sanchez,
as key ULFI (University of Life Foundation, Inc. (ULFI), a private non-stock, non-
profit corporation devoted to non-formal education) officers, were remiss in
safekeeping ULFIs corporate incomes and in accounting for them.

- They neither placed the incomes derived from the Complex in ULFIs deposit
account nor submitted the required financial statements detailing their
transactions. The underlying theory of the case is that Kahn and Sanchez operated
ULFI as if it were their own property, handled the collections and spent the money
as if it were their personal belonging.

- The DECS asked the RTC to order Kahn and Sanchez personally to pay it the
P22,559,215.14 in rents due from ULFI with legal interest, exemplary damages of
P1,000,000.00, attorneys fees of P500,000.00, and costs.

- In his answer, petitioner Sanchez alleged that, being a mere officer of ULFI, he
cannot be made personally liable for its adjudged corporate liability. He took
exception to the complaint, characterizing it as an attempt to pierce the corporate
veil that cloaked ULFI.
 - Both Kahn and petitioner Sanchez appealed to the Court of Appeals. The latter
court gave due course to Sanchez’s appeal but denied that of Kahn since it was
filed out of time. On February 21, 2006 the Court of Appeals rendered judgment,
wholly affirming the trial court’s decision, hence, this petition.

Issue:
- Whether or not petitioner Sanchez, a director and chief executive officer of ULFI,
can be held liable in damages under Section 31 of the Corporation Code for
gross neglect or bad faith in directing the corporation’s affairs

Ruling:
- Yes. Petitioner Sanchez claims that there is no ground for the courts below to
pierce the veil of corporate identity and hold him and Kahn, who were mere
corporate officers, personally liable for ULFIs obligations to the DECS. But this is
not a case of piercing the veil of corporate fiction. The DECS brought its action
against Sanchez and Kahn under Section 31 of the Corporation Code, which
should not be confused with actions intended to pierce the corporate fiction.

- Section 31 of the Corporation Code makes directors/officers of corporations jointly

and severally liable even to third parties for their gross negligence or bad faith in
directing the affairs of their corporations. Thus:

o Sec. 31. Liability of directors, trustees or officers. - Directors or

trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence
or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons

- The DECS does not have to invoke the doctrine of piercing the veil of corporate
fiction. Section 31 above expressly lays down petitioner Sanchez and Kahns
 liability for damages arising from their gross negligence1 or bad faith2 in
directing corporate affairs. The doctrine mentioned, on the other hand, is an
equitable remedy resorted to only when the corporate fiction is used, among
others, to defeat public convenience, justify wrong, protect fraud or defend a crime.

- Section 31 also lays down the "doctrine of corporate opportunity"3 and holds
personally liable corporate directors found guilty of gross negligence or bad faith
in directing the affairs of the corporation, which results in damage or injury to the
corporation, its stockholders or members, and other persons.

- Moreover, in a piercing case, the test is complete control or domination, not only
of finances, but of policy and business practice in respect of the transaction

1
Gross negligence is the want of even slight care, acting or omitting to act in a situation where
there is duty to act, not inadvertently but willfully and intentionally, with a conscious indifference
to consequences insofar as other persons may be affected. It evinces a thoughtless disregard of
consequences without exerting any effort to avoid them; the want or absence of or failure to
exercise slight care or diligence, or the entire absence of care.
2
Bad faith implies breach of faith and willful failure to respond to plain and well understood
obligation. It does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it means breach of a known
duty through some motive or interest or ill will. It partakes of the nature of fraud.

3 3
29 Schildberg Rock Products Co. v. Brooks, 140 NW 2d 132, 137. Chief Justice Garfield
quotes the doctrine as follows:

(5) The doctrine "corporate opportunity" is not new to the law and is but one
phase of the cardinal rule of undivided loyalty on the part of the fiduciaries. 3
Flecther Cyc. Corporations, Perm. Ed., 1965 Revised Volume, section 861.1,
page 227; 19 Am. Jur. 2d. corporations, section 1311, page 717. Our own
consideration of the quoted terms as such is mainly in Ontjes v. MacNider, supra,
232 Iowa 562, 579, 5 N.W., 2d 860, 869, which quotes at length with approval
from Guth v. Loft, Inc., 23 Del. Ch. 255, 270, 5 A 2d 503, 511, a leading case in
this area of the law. The quotation cites several precedents for this: "*** if there is
presented to a corporate officer or director a business opportunity which the
corporation is financially able to undertake, is from its nature, in the line of the
corporation's business and is of practical advantage to it, is one in which the
corporation has an interest or a reasonable expectancy, and by embracing the
opportunity, the self-interest of the officer or director will be brought into seize the
opportunity for himself. And, if, in such circumstances, the interests of the
corporation are betrayed, the corporation may elect to claim all of the benefits of
the transaction for itself. and the law will impress a trust in favor of the
corporation upon the property. interests and profits so acquired.
 attacked. This is not the case here. Section 31, under which this case was brought,
makes a corporate director who may or may not even be a stockholder or member
accountable for his management of the affairs of the corporation.

- WHEREFORE, the Court DENIES the petition and AFFIRMS the February 21,
2006 Decision of the Court of Appeals in CA-G.R. CV 83648 and its Resolution of
May 29, 2006.

G.R. No. 189158

January 11, 2017

JAMES IENT and MAHARLIKA SCHULZE, Petitioners,

vs.
TULLETT PREBON (PHILIPPINES), INC., Respondent.

Facts:
- Lent (Petitioner) is the Chief Financial Officer of Tradition Asia Pacific Pte. Ltd.
(Tradition Asia) in Singapore. Schulze (Petitioner) does Application Support for
Tradition Financial Services Ltd. in London (Tradition London).
- In August 2008, in line with Tradition Group's motive of expansion and
diversification in Asia, petitioners Lent and Schulze were tasked to establish a
Philippine subsidiary of Tradition Asia to be known as Tradition Financial Services
Philippines, Inc. (Tradition Philippines).
- Tradition Philippines was registered with the Securities and Exchange
Commission (SEC) on September 19, 2008 with petitioners lent and Schulze,
among others, named as incorporators and directors in its AOI.
- The Tradition Group and Tullett Prebon are competitors in the inter-dealer broking
business. On October 2008, Tullett, through one of its directors, Gordon Buchan,
filed a Complaint-Affidavit with the City Prosecution Office of Makati City against
the officers/employees of the Tradition Group for violation of the Corporation Code.
- The former President and Managing Director of Tullett, Jaime Villalon and
Mercedes Chuidian, who was formerly a member of Tullett's Board of Directors,
are impleaded as respondents.

- According to Tullett, respondents Villalon and Chuidian violated Sections 31 and

34 of the Corporation Code which made them criminally liable under Section 144
of the Code.
- As for petitioners lent and Schulze, Tullett asserted that they conspired with
Villalon and Chuidian in the latter's acts of disloyalty against the company.4

- Villalon and Chuidian were charged with using their former positions in Tullett to
sabotage said company by orchestrating the mass resignation of its entire
brokering staff in order for them to join Tradition Philippines. Villalon and Chuidan
allegedly acquired business opportunity through telling the brokers of complainant
to convince their clients to transfer their business to Tradition, the profits of
complainant which rightly belonging to it will be transferred to a competitor
company to be headed by respondents.

- The city prosecutor dismissed the criminal complained however, on respondent’s

appleal to the Department of Justice, the dismissal was reversed in finding the
arguments of the respondent proper. The CA affirmed the decision of the DOJ
Secretary.

- Undeniably, respondents Villalon and Chuidian occupied positions of high

responsibility and great trust as they were members of the board of directors and
corporate officers of complainant. As such, they are required to administer the
corporate affairs of complainant for the welfare and benefit of the stockholders and
to exercise the best care, skill and judgment in the management of the corporate
business and act solely for the interest of the corporation, instead respondents
Villalon and Chuidian acted with dishonesty and in fraud.

Issue:
- Can respondents be held personally liable under Sections 31, 34, and 144 of the
Corporation Code?

Ruling:
- It is evident from the case at bar that there is probable cause to indict respondents
Villalon and Chuidian for violating Section 31 of the Corporation Code because
there is prima facie evidence to show that the said respondents acted in bad faith
in directing the affairs of complainant. When respondents Villalon and Chuidian
told the brokers of complainant to convince their clients to transfer their business
to Tradition, they also violated Section 34 of the Corporation Code because they
acquired a business opportunity adverse to that of complainant.
 - The provision of Violations of the Corporate Code5 is also applicable in the case
at bar as the penal provision provided therein is made applicable to all violations
of the Corporation Code, not otherwise specifically penalized.

- Petitioners' rigid interpretation of clear-cut instances of liability serves only to

undermine the values of loyalty, honesty and fairness in managing the affairs
of the corporation, which the law vested on their position. As aptly pointed out by
the private respondent, the issue is not the right of the employee brokers to seek
greener pastures or better employment opportunities but the breach of fiduciary
duty6 owed by its directors and officers.

- According to SC, a close reading of Section 144 shows that it is not purely a penal
provision because it provides that when the violator is a corporation, an
administrative penalty is imposed in form of dissolution, which is not a criminal
sanction.

- SC held that they can only impose civil liability since there is no legislative intent
to criminalize in Sections 31 and 34 of the Corporation Code. In common law, the
remedies available in the event of a breach of director’s fiduciary duties to the
corporation are civil remedies. If a director/trustee is found to have breached his
duty of loyalty, an injunction may be issued or damages may be awarded. A
corporate officer guilty of fraud or mismanagement may be held liable for lost
profits. There is nothing in the deliberations to indicate that drafters of the
Corporation Code intended to deviate from common law practice and enforce
fiduciary obligations of directors and corporate officers through penal sanction
aside from civil liability.

5
Section 144 of the Corporation Code

6
Fiduciary Duties - A director, holding as he does a position of trust, is a fiduciary of the
corporation. As such, in case of conflict of his interest with those of the corporation, he cannot
sacrifice the latter without incurring liability for his disloyal act. The fiduciary duty has many
ramifications, and the possible conflict-of-interest situations are almost limitless, each
possibility posing different problems. There will be cases where a breach of trust is clear.
Thus, where a director converts for his own use funds or property belonging to the corporation,
or accepts material benefits for exercising his powers in favor of someone seeking to do
business with the corporation, no court will allow him to keep the profit he derives from his
wrongdoing. In many other cases, however, the line of demarcation between the fiduciary
relationship and a director's personal right is not easy to define. The Code has attempted at
least to lay down general rules of conduct and although these serve as guidelines for
directors to follow, the determination as to whether in a given case the duty of loyalty
has been violated has ultimately to be decided by the court on the case's own merits.
G.R. No. 178158 December 4, 2009

STRATEGIC ALLIANCE DEVELOPMENT CORPORATION, Petitioner,

vs.
RADSTOCK SECURITIES LIMITED and PHILIPPINE NATIONAL CONSTRUCTION
CORPORATION,Respondents.
ASIAVEST MERCHANT BANKERS BERHAD, Intervenor.

G.R. No. 180428

LUIS SISON, Petitioner,

vs.
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION and RADSTOCK
SECURITIES LIMITED,Respondents.

Facts:

- PNCC was incorporated in 1966 with the name Construction Development

Corporation of the Philippines (CDCP). Sometime between 1978 and 1981, Basay
Mining Corporation (Basay Mining), an affiliate of CDCP, obtained loans from
Marubeni Corporation of Japan (Marubeni) amounting to 5,460,000,000 yen and
US$5 million.
- A CDCP official issued letters of guarantee for the loans, committing CDCP to pay
solidarily for the full amount of the 5,460,000,000 yen loan and to the extent of ₱20
million for the US$5 million loan. However, there was no CDCP Board Resolution
authorizing the issuance of the letters of guarantee.

- Eventually, Basay Mining changed its name to CDCP Mining Corporation (CDCP
Mining). CDCP Mining secured the Marubeni loans when CDCP and CDCP Mining
were still privately owned and managed.

- Subsequently in 1983, CDCP changed its corporate name to PNCC to reflect the
extent of the Government's equity investment in the company, which arose when
government financial institutions converted their loans to PNCC into equity
following PNCC’s inability to pay the loans. Various government financial
institutions held a total of seventy-seven point forty-eight percent (77.48%) of
PNCC’s voting equity, most of which were later transferred to the Asset
Privatization Trust (APT) series of 1987 and 1988, respectively.
 - Meanwhile, the Marubeni loans to CDCP Mining remained unpaid. On 20 October
2000, during the short-lived Estrada Administration, the PNCC Board of Directors
passed Board Resolution No. BD-092-2000 admitting PNCC’s liability to Marubeni
for ₱10,743,103,388 as of 30 September 1999. Previously, for two decades the
PNCC Board consistently refused to admit any liability for the Marubeni loans.

- In January 2001, barely three months after the PNCC Board first admitted liability
for the Marubeni loans, Marubeni assigned its entire credit to Radstock for US$2
million or less than ₱100 million. In short, Radstock paid Marubeni less than 10%
of the ₱10.743 billion admitted amount. Radstock immediately sent a notice and
demand letter to PNCC.

- On 15 January 2001, Radstock filed an action for collection and damages against
PNCC before the RTC of Mandaluyong City. In its order of 23 January 2001, the
trial court issued a writ of preliminary attachment against PNCC. The trial court
ordered PNCC’s bank accounts garnished and several of its real properties
attached. PNCC also filed a motion to dismiss the case but the trial court denied
it. PNCC filed motions for reconsideration, which the trial court also denied. PNCC
filed a petition for certiorari before the Court of Appeals, docketed as CA-G.R. SP
No. 66654, assailing the denial of the motion to dismiss. On 30 August 2002, the
Court of Appeals denied PNCC’s petition. PNCC filed a motion for reconsideration,
which the Court of Appeals also denied in its 22 January 2003 Resolution. PNCC
filed a petition for review before this Court, docketed as G.R. No. 156887.

Issue:

- Did the PNCC Board Act in Bad Faith and with Gross Negligence?

Ruling:
- In this jurisdiction, the members of the board of directors have a three-fold
duty: duty of obedience, duty of diligence, and duty of loyalty.7 Accordingly, the
members of the board of directors shall

(1) direct the affairs of the corporation only in accordance with the purposes
for which it was organized8;

7
Villanueva, Philippine Corporate Law, 2001, p. 318. Section 31 of the Corporation Code.

8
Villanueva, Philippine Corporate Law, 2001, pp. 321-322. Section 25 of the Corporation Code
pertinently provides: The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and by the by-laws of the corporation.
 (2) shall not willfully and knowingly vote for or assent to patently unlawful
acts of the corporation or act in bad faith or with gross negligence in
directing the affairs of the corporation; and
(3) shall not acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees.

- The acts of PNCC surely goes against ordinary human nature, and amounts to
gross negligence and utter bad faith, even bordering on fraud, on the part of the
PNCC Board in directing the affairs of the corporation. Owing loyalty to PNCC and
its stockholders, the PNCC Board should have exercised utmost care and
diligence in admitting a gargantuan debt of ₱10.743 billion that would certainly
force PNCC into insolvency, a debt that previous PNCC Boards in the last two
decades consistently refused to admit.

- When a director, trustee or officer attempts to acquire or acquires, in

violation of his duty, any interest adverse to the corporation in respect of
any matter which has been reposed in him in confidence, as to which equity
imposes a disability upon him to deal in his own behalf, he shall be liable as a
trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.

- The SC grants the petition in G.R. No. 180428. We DECLARE (1) PNCC Board
Resolution Nos. BD-092-2000 and BD-099-2000 admitting liability for the
Marubeni loans VOID AB INITIO for causing undue injury to the Government and
giving unwarranted benefits to a private party, constituting a corrupt practice and
unlawful act under Section 3(e) of the Anti-Graft and Corrupt Practices Act, and (2)
the Compromise Agreement between the Philippine National Construction
Corporation and Radstock Securities Limited INEXISTENT AND VOID AB INITIO
for being contrary to Section 29(1), Article VI and Sections 3 and 7, Article XII of
the Constitution; Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the
Administrative Code of 1987; Sections 4(2), 79, 84(1), and 85 of the Government
Auditing Code; and Articles 2241, 2242, 2243 and 2244 of the Civil Code.

G. R. No. 173333

August 13, 2008

LUCIA MAGALING, PARALUMAN R. MAGALING et.al
vs.
PETER ONG
Facts:
- Defendants Sps. Reynaldo Magaling and Lucila Magaling are the controlling
stockholders/owners of Thermo (sic) Loans and Credit Corp. and had used the
corporation as mere alter ego or adjunct to evade the payment of valid obligation.

- On or about December 1994, defendant Reynaldo Magaling, (sic) approached

plaintiff in his store at Lipa City and induced him to lend him money and/or his
company Thermo (sic) Loans and Credit Corp. with undertaking to pay interest at
the rate of two and a half (2 %) percent per month. Defendant gave assurance that
he and his company Thermo (sic) Loans and Credit Corp. will be able to pay the
loan. Without the assurance plaintiff would not have lent the money.

- Based on the assurance and representation of Reynaldo Magaling, Peter Ong

extended loan to defendants. As of September 1997, the principal loan extended
to defendants stands atP350,000.00. The interest thereon computed at 2 % per
month is P8,750.00 per month.

- Despite demands, defendants Sps. Reynaldo and Lucila Magaling and/or Thermo
(sic) Loans and Credit Corp. unjustifiably and illegally failed, refused and neglected
and still fail, refuse and neglect to pay to the prejudice and damage of plaintiff. As
of June 30, 1998, defendant’s obligation stands at P389,043.96 inclusive of
interest;

- It was alleged further that Reynaldo Magaling, as President of Termo Loans,

together with the corporation’s treasurer, a certain Mrs. L. Rosita, signed a
Promissory Not in favor of Ong for the amount of P300,000.00 plus a monthly
interest of 2.5%.

- Because of the failure of Termo Loans to pay its outstanding obligation despite
demand, Ong filed the above-mentioned complaint praying that Spouses Magaling
and Termo Loans be ordered to pay, jointly and severally, the principal amount of
P389,000.00, plus interest, attorneys fees and costs of suit. In addition to the
preceding entreaty, Ong asked for the issuance of the writ of preliminary
attachment pursuant to Section 1(d), Rule 57 of the Rules of Court, as amended.

- On 7 October 1998, acting on Ongs prayer for the issuance of a writ of preliminary
attachment grounded on the allegation that Spouses Magaling were guilty of fraud
in contracting the obligation subject of the complaint for sum of money; and finding
the same to be impressed with merit, the RTC issued an Order directing the
 issuance of the writ prayed for upon the filing of a bond in the amount of
P390,000.00.

Issue:

- Whether or not Reynaldo Magaling should be held personally responsible for the
debts of Termo Loans.

Ruling:

- Yes. In the present case, there is nothing substantial on record to show that
Reynaldo Magaling, as President of Termo Loans, has, indeed, acted in bad faith
in inviting Ong to invest in Termo Loans and/or in obtaining a loan from Ong for
said corporation in order to warrant his personal liability. From all indications, the
proceeds of the investment and/or loan were indeed utilized by Termo Loans.
Likewise, bad faith does not arise just because a corporation fails to pay its
obligations, because the inability to pay one’s obligation is not synonymous with
fraudulent intent not to honor the obligations.

- The foregoing discussion notwithstanding, the SC still cannot totally absolve

Reynaldo Magaling from any liability considering his gross negligence in directing
the affairs of Termo Loans; thus, he must be made personally liable for the debt of
Termo Loans to Ong.

- In order to pierce the veil of corporate fiction, for reasons of negligence by the
director, trustee or officer in the conduct of the transactions of the corporation, such
negligence must be gross. Gross negligence is one that is characterized by the
want of even slight care, acting or omitting to act in a situation where there is a
duty to act, not inadvertently but willfully and intentionally with a conscious
indifference to consequences insofar as other persons may be affected; and must
be established by clear and convincing evidence. Parenthetically, gross or willful
negligence could amount to bad faith.

Piercing the Corporate Veil

GR No 174938 October 1, 2014

GERARDO LANUZA JR AND ANTONIO O. OLBES, PETITIONERS
VS.
BF CORPORATION, SHANGRI-LA PROPERTIES INC, ALFREDO C. RAMOS, RUFO
B. COLAYCO,MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS,
RESPONDENTS

Facts:
- BF Corporation entered into agreements with Shangri-La wherein it undertook to
construct for Shangri-La mall and a parking structure along EDSA. Shangri-La had
been consistent from the start in paying BF Corporation until it started defaulting
in payment Despite repeated demands by BF Corporation, Shangri-La still refused
to pay. BF Corporation then filed a complaint against Shangri-La and its board of
directors including Lanuza & Olbes who alleged that they already resigned as
board of directors.

- BF Corporation in its complaint alleged that the Board of Directors were in bad faith
and that they should be solidarily liable with Shangri-La for damages that BF
Corporation incurred.

- Shangrila filed a motion to oppose to suspend the proceedings which the RTC
denied but the CA granted which ordered the submission of the dispute to
arbitration proceedings in accordance with the arbitration clause in their contract.
Lanuza & Olbes then filed a comment praying that they should not be included in
the arbitration proceedings as they are not parties to the agreement between BF
Corporation and Shangrila. CA denied and ruled that they are parties to the said
proceedings.

Issue:
Whether or not Lanuza & Olbes should be made parties to the arbitration
proceedings in accordance with the arbitration clause?

Ruling:
- Yes. It is provided that a corporation’s representative who did not personally bind
himself or herself to an arbitration agreement cannot be forced to participate in
said proceedings entered by the corporation. He or she is not considered a party
to said agreement between the corporations. An exception to this rule are
instances when the distinction between personalities of the directors, officers and
representatives of the corporation are disregarded.

- This is called the Doctrine of piercing the corporate veil. Piercing the corporate
veil happens when the separate personality of a corporation is used as a
means to perpetuate fraud or an illegal act or as a vehicle for the evasion of
 an existing obligation, the circumvention of statues or to confuse legitimate
issues. When the corporate veil is pierced, the corporation and persons who are
treated as distinct from the corporation are treated as one person such that when
the corporation is found to be liable, these persons become liable as well as if they
were the corporation.

- In the case at bar, the Arbitral Tribunal rendered a decision finding that BF
Corporation failed to prove the existence of circumstances to render petitioners
and the other directors solidarily liable. It ruled that petitioners and the other
directors were not liable for contractual obligations of Shangri-La to BF
Corporation. Since the petitioner’s participated in the said arbitration proceedings,
the petitioner’s are bound by such decision.

G.R. No. 166282 February 13, 2013

HEIRS OF FE TAN UY (Represented by her heir, Mauling Uy Lim), Petitioners,
vs.
INTERNATIONAL EXCHANGE BANK, Respondent.

Facts:
- On several occasions, from June 23, 1997 to September 3, 1997, respondent
International Exchange Bank (iBank), granted loans to Hammer Garments
Corporation (Hammer), covered by promissory notes and deeds of assignment.
These were made pursuant to the Letter-Agreement,dated March 23, 1996,
between iBank and Hammer, represented by its President and General Manager,
Manuel Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P 25
Million-Peso Omnibus Line.

- The loans were secured by a P 9 Million-Peso Real Estate Mortgage executed on

July 1, 1997 by Goldkey Development Corporation (Goldkey) over several of its
properties and a P 25 Million-Peso Surety Agreement7 signed by Chua and his
wife, Fe Tan Uy (Uy), on April 15, 1996. As of October 28, 1997, Hammer had an
outstanding obligation of P25,420,177.62 to iBank.

- Hammer defaulted in the payment of its loans, prompting iBank to foreclose on

Goldkey’s third-party Real Estate Mortgage. For failure of Hammer to pay the
deficiency, iBank filed a Complaint for sum of money on December 16, 1997
against Hammer, Chua, Uy, and Goldkey before the Regional Trial Court, Makati
City (RTC).
 - In her separate answer, Uy claimed that she was not liable to iBank because she
never executed a surety agreement in favor of iBank. Goldkey, on the other hand,
also denies liability, averring that it acted only as a third-party mortgagor and that
it was a corporation separate and distinct from Hammer.

- Meanwhile, iBank applied for the issuance of a writ of preliminary attachment which
was granted by the RTC in its December 17, 1997 Order. The Notice of Levy on
Attachment of Real Properties, dated July 15, 1998, covering the properties under
the name of Goldkey, was sent by the sheriff to the Registry of Deeds of Quezon
City.

Issue:
- Whether or not there is guilt by association in those cases where the veil of
corporate fiction may be pierced

Held:
- Uy is not liable; The piercing of the veil of corporate fiction is not justified. The heirs
of Uy argue that the latter could not be held liable for being merely an officer of
Hammer and Goldkey because it was not shown that she had committed any
actionable wrongor that she had participated in the transaction between Hammer
and iBank. They further claim that she had cut all ties with Hammer and her
husband long before the execution of the loan

- Basic is the rule in corporation law that a corporation is a juridical entity which is
vested with a legal personality separate and distinct from those acting for and in
its behalf and, in general, from the people comprising it. Following this principle,
obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. A director, officer or employee of a corporation
is generally not held personally liable for obligations incurred by the corporation.
Nevertheless, this legal fiction may be disregarded if it is used as a means to
perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate issues.This is
consistent with the provisions of the Corporation Code of the Philippines9, which
states:

- In this case, petitioners are correct to argue that it was not alleged, much less
proven, that Uy committed an act as an officer of Hammer that would permit the

9
Sec. 31. Liability of directors, trustees or officers
 piercing of the corporate veil. Indeed, there is no showing that Uy committed gross
negligence. And in the absence of any of the aforementioned requisites for making
a corporate officer, director or stockholder personally liable for the obligations of a
corporation, Uy, as a treasurer and stockholder of Hammer, cannot be made to
answer for the unpaid debts of the corporation.

- WHEREFORE, the petition are PARTLY GRANTED. The August 16, 2004
Decision and the December 2, 2004 Resolution of the Court of Appeals in CA-G.R.
CV No. 69817, are hereby MODIFIED. Fe Tan Uy is released from any liability
arising from the debts incurred by Hammer from iBank. Hammer Garments
Corporation, Manuel Chua Uy Po Tiong and Goldkey Development Corporation
are jointly and severally liable to pay International Exchange Bank the sum of
P13,420,177.62 representing the unpaid loan obligation of Hammer as of
December 12, 1997 plus interest. No costs.

Based on the foregoing a director of a corporation notably holds a position of trust,

and as such, he or she owes a duty of loyalty to the corporation. The fiduciary
responsibility of a director arises in favor of the corporation by reason of the fact that he
or she performs such powers and functions for the benefit of the corporate entity and as
such, he or she is responsible for any profit and losses that may accrue to it.

The Three-fold duties of directors/trustees/officers of a corporation are the following:

1. Duty of Obedience
2. Duty of Diligence
3. Duty of Loyalty10

Solidary liability will then attach to the directors, officers or employees of the corporation
in certain circumstances, such as:
1. When directors and trustees or, in appropriate cases, the officers of a
corporation: (a) vote for or assent to patently unlawful acts of the
corporation;11 (b) act in bad faith or with gross negligence in directing the
corporate affairs;12 and (c) are guilty of conflict of interest to the prejudice of
the corporation, its stockholders or members, and other persons;

11
Sec. 31, Corporation Code.

12
Sec. 65, Corporation Code.
 2. When a director or officer has consented to the issuance of watered stocks or
who, having knowledge thereof, did not forthwith file with the corporate
secretary his written objection thereto;13

3. When a director, trustee or officer has contractually agreed or stipulated to

hold himself personally and solidarily liable with the corporation; or

4. When a director, trustee or officer is made, by specific provision of law,

personally liable for his corporate action

Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur:

(1) the complainant must allege in the complaint that the director or officer assented
to patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and

(2) the complainant must clearly and convincingly prove such unlawful acts,
negligence or bad faith.14

13
Exemplified in Article 144, Corporation Code; See also Sec. 13, Presidential Decree 115
entitled, "The Trust Receipts Law."
14
Heirs of Fe Tan Uy vs. International Exchange Bank, G.R. No. 166282, February 13, 2013.