G.R. No. 172302 February 18, 2014 7.
8, 2014 7. Dollar-denominated loans will be converted to Philippine Pesos on the date of the issuance
PRYCE CORPORATION, Petitioner,
vs.
CHINA BANKING CORPORATION, Respondent.
RESOLUTION
LEONEN, J.:
This case resolves conflicting decisions between two divisions. Only one may serve as res
judicata or a bar for the other to proceed. This case also settles the doctrine as to whether a
hearing is needed prior to the issuance of a stay order in corporate rehabilitation
proceedings.
The present case originated from a petition for corporate rehabilitation filed by petitioner
Pryce Corporation on July 9, 2004 with the Regional Trial Court of Makati, Branch 138. 1
The rehabilitation court found the petition sufficient in form and substance and issued a stay
order on July 13, 2004 appointing Gener T. Mendoza as rehabilitation receiver. 2
On September 13, 2004, the rehabilitation court gave due course to the petition and directed
the rehabilitation receiver to evaluate and give recommendations on petitioner Pryce
Corporation’s proposed rehabilitation plan attached to its petition. 3
The rehabilitation receiver did not approve this plan and submitted instead an amended
rehabilitation plan, which the rehabilitation court approved by order dated January 17,
2005.4 In its disposition, the court found petitioner Pryce Corporation "eligible to be placed in
a state of corporate rehabilitation."5 The disposition likewise identified the assets to be held
and disposed of by petitioner Pryce Corporation and the manner by which its liabilities shall
be paid and liquidated.6
On February 23, 2005, respondent China Banking Corporation elevated the case to the Court
of Appeals. Its petition questioned the January 17, 2005 order that included the following
terms:
1. The indebtedness to China Banking Corporation and Bank of the Philippine Islands as well
as the long term commercial papers will be paid through a dacion en pago of developed real
estate assets of the petitioner.
xxxx
4. All accrued penalties are waived[.]
5. Interests shall accrue only up to July 13, 2004, the date of issuance of the stay order[.]
6. No interest will accrue during the pendency of petitioner’s corporate rehabilitation[.]
of this Order using the reference rate of the Philippine Dealing System as of this date. 7
Respondent China Banking Corporation contended that the rehabilitation plan’s approval
impaired the obligations of contracts. It argued that neither the provisions of Presidential
Decree No. 902-A nor the Interim Rules of Procedure on Corporate Rehabilitation (Interim
Rules) empowered commercial courts "to render without force and effect valid contractual
stipulations."8 Moreover, the plan’s approval authorizing dacion en pago of petitioner Pryce
Corporation’s properties without respondent China Banking Corporation’s consent not only
violated "mutuality of contract and due process, but [was] also antithetical to the avowed
policies of the state to maintain a competitive financial system."9
The Bank of the Philippine Islands (BPI), another creditor of petitioner Pryce Corporation,
filed a separate petition with the Court of Appeals assailing the same order by the
rehabilitation court. BPI called the attention of the court "to the non-impairment clause and
the mutuality of contracts purportedly ran roughshod by the [approved rehabilitation
plan]."10
On July 28, 2005, the Court of Appeals Seventh (7th) Division 11 granted respondent China
Banking Corporation's petition, and reversed and set aside the rehabilitation court’s: (1) July
13, 2004 stay order that also appointed Gener T. Mendoza as rehabilitation receiver; (2)
September 13, 2004 order giving due course to the petition and directing the rehabilitation
receiver to evaluate and give recommendations on petitioner Pryce Corporation’s proposed
rehabilitation plan; and (3) January 17, 2005 order finding petitioner Pryce Corporation
eligible to be placed in a state of corporate rehabilitation, identifying assets to be disposed of,
and determining the manner of liquidation to pay the liabilities. 12
With respect to BPI’s separate appeal, the Court of Appeals First (1st) Division 13 granted its
petition initially and set aside the January 17, 2005 order of the rehabilitation court in its
decision dated May 3, 2006. 14 On reconsideration, the court issued a resolution dated May
23, 2007 setting aside its original decision and dismissing the petition. 15 BPI elevated the case
to this court, docketed as G.R. No. 180316. By resolution dated January 30, 2008, the First
(1st) Division of this court denied the petition.16 By resolution dated April 28, 2008, this
court denied reconsideration with finality.17
Meanwhile, petitioner Pryce Corporation also appealed to this court assailing the July 28,
2005 decision of the Court of Appeals Seventh (7th) Division granting respondent China
Banking Corporation’s petition as well as the resolution denying its motion for
reconsideration.
In the decision dated February 4, 2008, 18 the First (1st) Division of this court denied its
petition with the dispositive portion as follows:
WHEREFORE, we DENY the petition. The assailed Decision of the Court of Appeals in CA-G.R.
SP No. 88479 is AFFIRMED with the modification discussed above. Let the records of this case
1
be REMANDED to the RTC, Branch 138, Makati City, sitting as Commercial Court, for further
proceedings with dispatch to determine the merits of the petition for rehabilitation. No
costs.19
Petitioner Pryce Corporation filed an omnibus motion for (1) reconsideration or (2) partial
reconsideration and (3) referral to the court En Banc dated February 29, 2008. Respondent
China Banking Corporation also filed a motion for reconsideration on even date, praying that
the February 4, 2008 decision be set aside and reconsidered only insofar as it ordered the
remand of the case for further proceedings "to determine whether petitioner's financial
condition is serious and whether there is clear and imminent danger that it will lose its
corporate assets."20
By resolution dated June 16, 2008, this court denied with finality the separate motions for
reconsideration filed by the parties.
On September 10, 2008, petitioner Pryce Corporation filed a second motion for
reconsideration praying that the Court of Appeals’ decision dated February 4, 2008 be set
aside.
The First Division of this court referred this case to the En Banc en consulta by resolution
dated June 22, 2009.21The court En Banc, in its resolution dated April 13, 2010, resolved to
accept this case.22
On July 30, 2013, petitioner Pryce Corporation and respondent China Banking Corporation,
through their respective counsel, filed a joint manifestation and motion to suspend
proceedings. The parties requested this court to defer its ruling on petitioner Pryce
Corporation’s second motion for reconsideration "so as to enable the parties to work out a
mutually acceptable arrangement."23
By resolution dated August 6, 2013, this court granted the motion but only for two (2)
months. The registry receipts showed that counsel for respondent China Banking Corporation
and counsel for petitioner Pryce Corporation received their copies of this resolution on
September 5, 2013.24
More than two months had lapsed since September 5, 2013, but no agreement was filed by
the parties. Thus, we proceed to rule on petitioner Pryce Corporation’s second motion for
reconsideration.
This motion raises two grounds.
First, petitioner Pryce Corporation argues that the issue on the validity of the rehabilitation
court orders is now res judicata. Petitioner Pryce Corporation submits that the ruling in BPI v.
Pryce Corporation docketed as G.R. No. 180316 contradicts the present case, and it has
rendered the issue on the validity and regularity of the rehabilitation court orders as res
judicata.25
Second, petitioner Pryce Corporation contends that Rule 4, Section 6 of the Interim Rules of
Procedure on Corporate Rehabilitation 26 does not require the rehabilitation court to hold a
hearing before issuing a stay order. Considering that the Interim Rules was promulgated later
than Rizal Commercial Banking Corp. v. IAC 27 that enunciated the "serious situations"
test,28 petitioner Pryce Corporation argues that the test has effectively been abandoned by
the "sufficiency in form and substance test" under the Interim Rules. 29
The present second motion for reconsideration involves the following issues:
I. WHETHER THE ISSUE ON THE VALIDITY OF THE REHABILITATION ORDER DATED JANUARY 17,
2005 IS NOW RES JUDICATA IN LIGHT OF BPI V. PRYCE CORPORATION DOCKETED AS G.R. NO.
180316;
II. WHETHER THE REHABILITATION COURT IS REQUIRED TO HOLD A HEARING TO COMPLY
WITH THE "SERIOUS SITUATIONS" TEST LAID DOWN IN THE CASE OF RIZAL COMMERCIAL
BANKING CORP. V. IAC BEFORE ISSUING A STAY ORDER.
We proceed to discuss the first issue.
BPI v. Pryce Corporation docketed as G.R. No. 180316 rendered the issue on the validity of
the rehabilitation court’s January 17, 2005 order approving the amended rehabilitation plan
as res judicata.
In BPI v. Pryce Corporation, the Court of Appeals set aside initially the January 17, 2005 order
of the rehabilitation court.30 On reconsideration, the court set aside its original decision and
dismissed the petition.31 On appeal, this court denied the petition filed by BPI with finality. An
entry of judgment was made for BPI v. Pryce Corporation on June 2, 2008. 32 In effect, this
court upheld the January 17, 2005 order of the rehabilitation court.
According to the doctrine of res judicata, "a final judgment or decree on the merits by a court
of competent jurisdiction is conclusive of the rights of the parties or their privies in all later
suits on all points and matters determined in the former suit." 33
The elements for res judicata to apply are as follows: (a) the former judgment was final; (b)
the court that rendered it had jurisdiction over the subject matter and the parties; (c) the
judgment was based on the merits; and (d) between the first and the second actions, there
was an identity of parties, subject matters, and causes of action.34
Res judicata embraces two concepts: (1) bar by prior judgment 35 and (2) conclusiveness of
judgment.36
Bar by prior judgment exists "when, as between the first case where the judgment was
rendered and the second case that is sought to be barred, there is identity of parties, subject
matter, and causes of action."37
2
On the other hand, the concept of conclusiveness of judgment finds application "when a fact
or question has been squarely put in issue, judicially passed upon, and adjudged in a former
suit by a court of competent jurisdiction." 38This principle only needs identity of parties and
issues to apply.39
The elements of res judicata through bar by prior judgment are present in this case.
On the element of identity of parties, res judicata does not require absolute identity of
parties as substantial identity is enough. 40 Substantial identity of parties exists "when there is
a community of interest between a party in the first case and a party in the second case, even
if the latter was not impleaded in the first case." 41 Parties that represent the same interests in
two petitions are, thus, considered substantial identity of parties for purposes of res
judicata.42Definitely, one test to determine substantial identity of interest would be to see
whether the success or failure of one party materially affects the other.
In the present case, respondent China Banking Corporation and BPI are creditors of petitioner
Pryce Corporation and are both questioning the rehabilitation court’s approval of the
amended rehabilitation plan. Thus, there is substantial identity of parties since they are
litigating for the same matter and in the same capacity as creditors of petitioner Pryce
Corporation.
There is no question that both cases deal with the subject matter of petitioner Pryce
Corporation’s rehabilitation. The element of identity of causes of action also exists.
In separate appeals, respondent China Banking Corporation and BPI questioned the same
January 17, 2005 order of the rehabilitation court before the Court of Appeals.
Since the January 17, 2005 order approving the amended rehabilitation plan was affirmed
and made final in G.R. No. 180316, this plan binds all creditors, including respondent China
Banking Corporation.
In any case, the Interim Rules or the rules in effect at the time the petition for corporate
rehabilitation was filed in 2004 adopts the cram-down principle which "consists of two things:
(i) approval despite opposition and (ii) binding effect of the approved plan x x x." 43
First, the Interim Rules allows the rehabilitation court 44 to "approve a rehabilitation plan even
over the opposition of creditors holding a majority of the total liabilities of the debtor if, in its
judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is
manifestly unreasonable."45
Second, it also provides that upon approval by the court, the rehabilitation plan and its
provisions "shall be binding upon the debtor and all persons who may be affected by it,
including the creditors, whether or not such persons have participated in the proceedings or
opposed the plan or whether or not their claims have been scheduled." 46
Thus, the January 17, 2005 order approving the amended rehabilitation plan, now final and
executory resulting from the resolution of BPI v. Pryce Corporation docketed as G.R. No.
180316, binds all creditors including respondent China Banking Corporation.
This judgment in BPI v. Pryce Corporation covers necessarily the rehabilitation court’s
September 13, 2004 order giving due course to the petition. The general rule precluding
relitigation of issues extends to questions implied necessarily in the final judgment, viz:
The general rule precluding the relitigation of material facts or questions which were in issue
and adjudicated in former action are commonly applied to all matters essentially connected
with the subject matter of the litigation. Thus, it extends to questions necessarily implied in
the final judgment, although no specific finding may have been made in reference thereto
and although such matters were directly referred to in the pleadings and were not actually or
formally presented. x x x.47
The dispositive portion of the Court of Appeals’ decision in BPI v. Pryce Corporation, reversed
on reconsideration, only mentioned the January 17, 2005 order of the rehabilitation court
approving the amended rehabilitation plan. Nevertheless, the affirmation of its validity
necessarily included the September 13, 2004 order as this earlier order gave due course to
the petition and directed the rehabilitation receiver to evaluate and give recommendations
on the rehabilitation plan proposed by petitioner. 48
In res judicata, the primacy given to the first case is related to the principle of immutability of
final judgments essential to an effective and efficient administration of justice, viz:
x x x [W]ell-settled is the principle that a decision that has acquired finality becomes
immutable and unalterable and may no longer be modified in any respect even if the
modification is meant to correct erroneous conclusions of fact or law and whether it will be
made by the court that rendered it or by the highest court of the land.
The reason for this is that litigation must end and terminate sometime and somewhere, and it
is essential to an effective and efficient administration of justice that, once a judgment has
become final, the winning party be not deprived of the fruits of the verdict. Courts must
guard against any scheme calculated to bring about that result and must frown upon any
attempt to prolong the controversies.
The only exceptions to the general rule are the correction of clerical errors, the so-called nunc
pro tunc entries which cause no prejudice to any party, void judgments, and whenever
circumstances transpire after the finality of the decision rendering its execution unjust and
inequitable.49 (Emphasis provided)
Generally, the later case is the one abated applying the maxim qui prior est tempore, potior
est jure (he who is before in time is the better in right; priority in time gives preference in
law).50 However, there are limitations to this rule as discussed in Victronics Computers, Inc. v.
Regional Trial Court, Branch 63, Makati:51
3
In our jurisdiction, the law itself does not specifically require that the pending action which
would hold in abatement the other must be a pending prior action. Thus, in Teodoro vs.
Mirasol, this Court observed:
It is to be noted that the Rules do not require as a ground for dismissal of a complaint that
there is a prior pending action. They provide that there is a pending action, not a pending
prior action. The fact that the unlawful detainer suit was of a later date is no bar to the
dismissal of the present action. We find, therefore, no error in the ruling of the court a quo
that plaintiff's action should be dismissed on the ground of the pendency of another more
appropriate action between the same parties and for the same cause.
In Roa-Magsaysay vs. Magsaysay, wherein it was the first case which was abated, this Court
ruled:
In any event, since We are not really dealing with jurisdiction but mainly with venue,
considering both courts concerned do have jurisdiction over the causes of action of the
parties herein against each other, the better rule in the event of conflict between two courts
of concurrent jurisdiction as in the present case, is to allow the litigation to be tried and
decided by the court which, under the circumstances obtaining in the controversy, would, in
the mind of this Court, be in a better position to serve the interests of justice, considering the
nature of the controversy, the comparative accessibility of the court to the parties, having in
view their peculiar positions and capabilities, and other similar factors. Without in any
manner casting doubt as to the capacity of the Court of First Instance of Zambales to
adjudicate properly cases involving domestic relations, it is easy to see that the Juvenile and
Domestic Relations Court of Quezon City which was created in order to give specialized
attention to family problems, armed as it is with adequate and corresponding facilities not
available to ordinary courts of first instance, would be able to attend to the matters here in
dispute with a little more degree of expertise and experience, resulting in better service to
the interests of justice. A reading of the causes of action alleged by the contending spouses
and a consideration of their nature, cannot but convince Us that, since anyway, there is an
available Domestic Court that can legally take cognizance of such family issues, it is better
that said Domestic Court be the one chosen to settle the same as the facts and the law may
warrant.
We made the same pronouncement in Ramos vs. Peralta:
Finally, the rule on litis pendentia does not require that the later case should yield to the
earlier case. What is required merely is that there be another pending action, not a prior
pending action. Considering the broader scope of inquiry involved in Civil Case No. 4102 and
the location of the property involved, no error was committed by the lower court in deferring
to the Bataan court's jurisdiction.
An analysis of these cases unravels the ratio for the rejection of the priority-in-time rule and
establishes the criteria to determine which action should be upheld and which is to be
abated. In Teodoro, this Court used the criterion of the more appropriate action. We ruled
therein that the unlawful detainer case, which was filed later, was the more appropriate
action because the earlier case — for specific performance or declaratory relief — filed by the
lessee (Teodoro) in the Court of First Instance (CFI) to seek the extension of the lease for
another two (2) years or the fixing of a longer term for it, was "prompted by a desire on
plaintiff's part to anticipate the action for unlawful detainer, the probability of which was
apparent from the letter of the defendant to the plaintiff advising the latter that the contract
of lease expired on October 1, 1954." The real issue between the parties therein was whether
or not the lessee should be allowed to continue occupying the leased premises under a
contract the terms of which were also the subject matter of the unlawful detainer case.
Consonant with the doctrine laid down in Pue vs. Gonzales and Lim Si vs. Lim, the right of the
lessee to occupy the land leased against the lessor should be decided under Rule 70 of the
Rules of Court; the fact that the unlawful detainer case was filed later then of no moment.
Thus, the latter was the more appropriate action.
xxxx
In Roa-Magsaysay[,] the criterion used was the consideration of the interest of justice. In
applying this standard, what was asked was which court would be "in a better position to
serve the interests of justice," taking into account (a) the nature of the controversy, (b) the
comparative accessibility of the court to the parties and (c) other similar factors. While such a
test was enunciated therein, this Court relied on its constitutional authority to change venue
to avoid a miscarriage of justice.
It is interesting to note that in common law, as earlier adverted to, and pursuant to the
Teodoro vs. Mirasol case, the bona fides or good faith of the parties is a crucial element. In
the former, the second case shall not be abated if not brought to harass or vex; in the latter,
the first case shall be abated if it is merely an anticipatory action or, more appropriately, an
anticipatory defense against an expected suit — a clever move to steal the march from the
aggrieved party.52 (Emphasis provided and citations omitted)
None of these situations are present in the facts of this instant suit. In any case, it is the
better part of wisdom in protecting the creditors if the corporation is rehabilitated.
We now proceed to the second issue on whether the rehabilitation court is required to hold a
hearing to comply with the "serious situations" test laid down in Rizal Commercial Banking
Corp. v. IAC before issuing a stay order.
The rehabilitation court complied with the Interim Rules in its order dated July 13, 2004 on
the issuance of a stay order and appointment of Gener T. Mendoza as rehabilitation
receiver.53
The 1999 Rizal Commercial Banking Corp. v. IAC54 case provides for the "serious situations"
test in that the suspension of claims is counted only upon the appointment of a rehabilitation
4
receiver,55 and certain situations serious in nature must be shown to exist before one is
appointed, viz:
Furthermore, as relevantly pointed out in the dissenting opinion, a petition for rehabilitation
does not always result in the appointment of a receiver or the creation of a management
committee. The SEC has to initially determine whether such appointment is appropriate and
necessary under the circumstances. Under Paragraph (d), Section 6 of Presidential Decree No.
902-A, certain situations must be shown to exist before a management committee may be
created or appointed, such as:
1. when there is imminent danger of dissipation, loss, wastage or destruction of assets or
other properties; or
2. when there is paralization of business operations of such corporations or entities which
may be prejudicial to the interest of minority stockholders, parties-litigants or to the general
public.
On the other hand, receivers may be appointed whenever:
1. necessary in order to preserve the rights of the parties-litigants; and/or
2. protect the interest of the investing public and creditors. (Section 6 [c], P.D. 902-A.)
These situations are rather serious in nature, requiring the appointment of a management
committee or a receiver to preserve the existing assets and property of the corporation in
order to protect the interests of its investors and creditors. Thus, in such situations,
suspension of actions for claims against a corporation as provided in Paragraph (c) of Section
6, of Presidential Decree No. 902-A is necessary, and here we borrow the words of the late
Justice Medialdea, "so as not to render the SEC management Committee irrelevant and
inutile and to give it unhampered ‘rescue efforts’ over the distressed firm" (Rollo, p. 265)."
Otherwise, when such circumstances are not obtaining or when the SEC finds no such
imminent danger of losing the corporate assets, a management committee or rehabilitation
receiver need not be appointed and suspension of actions for claims may not be ordered by
the SEC. When the SEC does not deem it necessary to appoint a receiver or to create a
management committee, it may be assumed, that there are sufficient assets to sustain the
rehabilitation plan, and that the creditors and investors are amply protected. 56
However, this case had been promulgated prior to the effectivity of the Interim Rules that
took effect on December 15, 2000.
Section 6 of the Interim Rules states explicitly that "[i]f the court finds the petition to be
sufficient in form and substance, it shall, not later than five (5) days from the filing of the
petition, issue an Order (a) appointing a Rehabilitation Receiver and fixing his bond; (b)
staying enforcement of all claims x x x."57
Compliant with the rules, the July 13, 2004 stay order was issued not later than five (5) days
from the filing of the petition on July 9, 2004 after the rehabilitation court found the petition
sufficient in form and substance.
We agree that when a petition filed by a debtor "alleges all the material facts and includes all
the documents required by Rule 4-2 [of the Interim Rules]," 58 it is sufficient in form and
substance.
Nowhere in the Interim Rules does it require a comprehensive discussion in the stay order on
the court’s findings of sufficiency in form and substance.
The stay order and appointment of a rehabilitation receiver dated July 13, 2004 is an
"extraordinary, preliminary, ex parte remed[y]." 59 The effectivity period of a stay order is only
"from the date of its issuance until dismissal of the petition or termination of the
rehabilitation proceedings."60 It is not a final disposition of the case. It is an interlocutory
order defined as one that "does not finally dispose of the case, and does not end the Court’s
task of adjudicating the parties’ contentions and determining their rights and liabilities as
regards each other, but obviously indicates that other things remain to be done by the
Court."61
Thus, it is not covered by the requirement under the Constitution that a decision must
include a discussion of the facts and laws on which it is based. 62
Neither does the Interim Rules require a hearing before the issuance of a stay order. What it
requires is an initial hearing before it can give due course to 63 or dismiss64 a petition.
Nevertheless, while the Interim Rules does not require the holding of a hearing before the
issuance of a stay order, neither does it prohibit the holding of one. Thus, the trial court has
ample discretion to call a hearing when it is not confident that the allegations in the petition
are sufficient in form and substance, for so long as this hearing is held within the five (5)-day
period from the filing of the petition — the period within which a stay order may issue as
provided in the Interim Rules.
One of the important objectives of the Interim Rules is "to promote a speedy disposition of
corporate rehabilitation cases[,] x x x apparent from the strict time frames, the non-
adversarial nature of the proceedings, and the prohibition of certain kinds of pleadings." 65 It is
in light of this objective that a court with basis to issue a stay order must do so not later than
five (5) days from the date the petition was filed.66
Moreover, according to the November 17, 2000 memorandum submitted by the Supreme
Court Committee on the Interim Rules of Procedure on Corporate Rehabilitation:
The Proposed Rules remove the concept of the Interim Receiver and replace it with a
rehabilitation receiver. This is to justify the immediate issuance of the stay order because
5
under Presidential Decree No. 902-A, as amended, the suspension of actions takes effect only
upon appointment of the rehabilitation receiver. 67 (Emphasis provided)
Even without this court going into the procedural issues, addressing the substantive merits of
the case will yield the same result.
Respondent China Banking Corporation mainly argues the violation of the constitutional
proscription against impairment of contractual obligations 68 in that neither the provisions of
Pres. Dec. No. 902-A as amended nor the Interim Rules empower commercial courts "to
render without force and effect valid contractual stipulations." 69
The non-impairment clause first appeared in the United States Constitution as a safeguard
against the issuance of worthless paper money that disturbed economic stability after the
American Revolution.70 This constitutional provision was designed to promote commercial
stability.71 At its core is "a prohibition of state interference with debtor-creditor
relationships."72
This clause first became operative in the Philippines through the Philippine Bill of 1902, the
fifth paragraph of Section 5 which states "[t]hat no law impairing the obligation of contracts
shall be enacted." It was consistently adopted in subsequent Philippine fundamental laws,
namely, the Jones Law of 1916,73 the 1935 Constitution, 74 the 1973 Constitution,75 and the
present Constitution.76
Nevertheless, this court has brushed aside invocations of the non-impairment clause to give
way to a valid exercise of police power77 and afford protection to labor.78
In Pacific Wide Realty and Development Corporation v. Puerto Azul Land, Inc. 79 which similarly
involved corporate rehabilitation, this court found no merit in Pacific Wide’s invocation of the
non-impairment clause, explaining as follows:
We also find no merit in PWRDC’s contention that there is a violation of the impairment
clause. Section 10, Article III of the Constitution mandates that no law impairing the
obligations of contract shall be passed. This case does not involve a law or an executive
issuance declaring the modification of the contract among debtor PALI, its creditors and its
accommodation mortgagors. Thus, the non-impairment clause may not be invoked.
Furthermore, as held in Oposa v. Factoran, Jr. even assuming that the same may be invoked,
the non-impairment clause must yield to the police power of the State. Property rights and
contractual rights are not absolute. The constitutional guaranty of non-impairment of
obligations is limited by the exercise of the police power of the State for the common good of
the general public.
Successful rehabilitation of a distressed corporation will benefit its debtors, creditors,
employees, and the economy in general. The court may approve a rehabilitation plan even
over the opposition of creditors holding a majority of the total liabilities of the debtor if, in its
judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is
manifestly unreasonable. The rehabilitation plan, once approved, is binding upon the debtor
and all persons who may be affected by it, including the creditors, whether or not such
persons have participated in the proceedings or have opposed the plan or whether or not
their claims have been scheduled.80
Corporate rehabilitation is one of many statutorily provided remedies for businesses that
experience a downturn. Rather than leave the various creditors unprotected, legislation now
provides for an orderly procedure of equitably and fairly addressing their concerns. Corporate
rehabilitation allows a court-supervised process to rejuvenate a corporation. Its twin,
insolvency, provides for a system of liquidation and a procedure of equitably settling various
debts owed by an individual or a business. It provides a corporation’s owners a sound chance
to re-engage the market, hopefully with more vigor and enlightened services, having learned
from a painful experience.
Necessarily, a business in the red and about to incur tremendous losses may not be able to
pay all its creditors. Rather than leave it to the strongest or most resourceful amongst all of
them, the state steps in to equitably distribute the corporation’s limited resources.
The cram-down principle adopted by the Interim Rules does, in effect, dilute contracts. When
it permits the approval of a rehabilitation plan even over the opposition of creditors, 81 or
when it imposes a binding effect of the approved plan on all parties including those who did
not participate in the proceedings, 82 the burden of loss is shifted to the creditors to allow the
corporation to rehabilitate itself from insolvency.
Rather than let struggling corporations slip and vanish, the better option is to allow
commercial courts to come in and apply the process for corporate rehabilitation.
This option is preferred so as to avoid what Garrett Hardin called the Tragedy of Commons.
Here, Hardin submits that "coercive government regulation is necessary to prevent the
degradation of common-pool resources [since] individual resource appropriators receive the
full benefit of their use and bear only a share of their cost." 83 By analogy to the game theory,
this is the prisoner’s dilemma: "Since no individual has the right to control or exclude others,
each appropriator has a very high discount rate [with] little incentive to efficiently manage
the resource in order to guarantee future use." 84 Thus, the cure is an exogenous policy to
equitably distribute scarce resources. This will incentivize future creditors to continue
lending, resulting in something productive rather than resulting in nothing.
In fact, these corporations exist within a market. The General Theory of Second Best holds
that "correction for one market imperfection will not necessarily be efficiency-enhancing
unless [there is also] simultaneous [correction] for all other market imperfections." 85 The
correction of one market imperfection may adversely affect market efficiency elsewhere, for
instance, "a contract rule that corrects for an imperfection in the market for consensual
agreements may [at the same time] induce welfare losses elsewhere." 86 This theory is one
6
justification for the passing of corporate rehabilitation laws allowing the suspension of
payments so that corporations can get back on their feet.

As in all markets, the environment is never guaranteed. There are always

risks.1avvphi1 Contracts are indeed sacred as the law between the parties. However, these
contracts exist within a society where nothing is risk-free, and the government is constantly
being called to attend to the realities of the times.

Corporate rehabilitation is preferred for addressing social costs.1âwphi1 Allowing the

corporation room to get back on its feet will retain if not increase employment opportunities
for the market as a whole. Indirectly, the services offered by the corporation will also benefit
the market as "[t]he fundamental impulse that sets and keeps the capitalist engine in motion
comes from [the constant entry of] new consumers’ goods, the new methods of production
or transportation, the new markets, [and] the new forms of industrial organization that
capitalist enterprise creates."87

As a final note, this is not the first time this court was made to review two separate petitions
appealed from two conflicting decisions, rendered by two divisions of the Court of Appeals,
and originating from the same case. In Serrano v. Ambassador Hotel, Inc., 88 we ordered the
Court of Appeals to adopt immediately a more efficient system in its Internal Rules to avoid
situations as this.

In this instance, it is fortunate that this court had the opportunity to correct the situation and
prevent conflicting judgments from reaching impending finality with the referral to the En
Banc.

We reiterate the need for our courts to be "constantly vigilant in extending their judicial gaze
to cases related to the matters submitted for their resolution" 89 as to "ensure against judicial
confusion and [any] seeming conflict in the judiciary’s decisions." 90

WHEREFORE, petitioner Pryce Corporation's motion is GRANTED. This court's February 4,

2008 decision is RECONSIDERED and SET ASIDE.

SO ORDERED.

7
G.R. No.197530 July 9, 2014
ABOITIZ EQUITY VENTURES, INC., Petitioner,
vs.
VICTOR S. CHIONGBIAN, BENJAMIN D. GOTHONG, and CARLOS A. GOTHONG LINES, INC.
(CAGLI),Respondents.
DECISION
LEONEN, J.:
This is a petition for review on certiorari with an application for the issuance of a temporary
restraining order and/or writ of preliminary injunction under Rule 45 of the Rules of Court.
This petition prays that the assailed orders dated May 5, 2011 1 and June 24, 20112 of the
Regional Trial Court, Cebu City, Branch 10 in Civil Case No. CEB-37004 be nullified and set
aside and that judgment be rendered dismissing with prejudice the complaint 3 dated July 20,
2010 filed by respondents Carlos A. Gothong Lines, Inc. ("CAGLI") and Benjamin D. Gothong.
On January 8, 1996, Aboitiz Shipping Corporation ("ASC"), principally owned by the Aboitiz
family, CAGLI, principally owned by the Gothong family, and William Lines, Inc.("WLI"),
principally owned by the Chiongbian family, entered into anagreement (the
"Agreement"),4 whereby ASC and CAGLI would transfer their shipping assets to WLI in
exchange for WLI’s shares of stock. 5 WLI, in turn, would run their merged shipping businesses
and, henceforth, be known as WG&A, Inc. ("WG&A"). 6
Sec. 11.06 of the Agreement required all disputes arising out of or in connection with the
Agreement tobe settled by arbitration:
11.06 Arbitration
All disputes arising out of or in connection with this Agreement including any issue as to this
Agreement’s validity or enforceability, which cannot be settled amicably among the parties,
shall be finally settled by arbitration in accordance with the Arbitration Law (Republic Act No.
876) by an arbitration tribunal composed of four (4) arbitrators. Each of the parties shall
appoint one (1) arbitrator, the three (3) to appoint the fourth arbitrator who shall act as
Chairman. Any award by the arbitration tribunal shall be final and binding upon the parties
and shall be enforced by judgment of the Courts of Cebu or Metro Manila. 7
Among the attachments to the Agreement was Annex SL-V. 8 This was a letter dated January
8,1996, from WLI, through its President (herein respondent) Victor S. Chiongbian addressed
to CAGLI, through its Chief Executive Officer Bob D. Gothong and Executive Vice President for
Engineering (herein respondent) Benjamin D. Gothong. On its second page, Annex SL-V bore
the signatures ofBob D. Gothong and respondent Benjamin D. Gothong by way of a conforme
on behalf of CAGLI.
Annex SL-V confirmed WLI’s commitment to acquire certain inventories of CAGLI. These
inventories would havea total aggregate value of, at most, ₱400 million, "as determinedafter
a special examination of the [i]nventories." 9Annex SL-V also specificallystated that such
acquisition was "pursuant to the Agreement."10
The entirety of Annex SL-V’s substantive portion reads:
We refer to the Agreement dated January 8, 1996 (the "Agreement") among William Lines,
Inc. ("Company C"), Aboitiz Shipping Corporation ("Company A") and Carlos A. Gothong Lines,
Inc. ("Company B") regarding the transfer of various assets of Company A and Company B to
Company C in exchangefor shares of capital stock of Company C. Terms defined in the
Agreement are used herein as therein defined.
This will confirm our commitment to acquire certain spare parts and materials inventory (the
"Inventories") of Company B pursuant to the Agreement.
The total aggregate value of the Inventories to be acquired shall not exceed ₱400 Million as
determined after a special examination of the Inventories as performed by SGV & Co. to be
completed on or before the Closing Date under the agreed procedures determined by the
parties.
Subject to documentation acceptable to both parties, the Inventories to be acquired shall be
determined not later than thirty (30) days after the Closing Date and the payments shall be
made in equal quarterly instalments over a period of two years with the first payment due on
March 31, 1996.11
Pursuant to Annex SL-V, inventories were transferred from CAGLI to WLI. These inventories
were assessed to have a value of 514 million, which was later adjusted to 558.89 million. 12 Of
the total amount of 558.89 million, "CAGLIwas paid the amount of 400 Million." 13 In addition
to the payment of 400 million,petitioner Aboitiz Equity Ventures ("AEV") noted that WG&A
shares with a book value of 38.5 million were transferred to CAGLI. 14
As there was still a balance, in2001, CAGLI sent WG&A (the renamed WLI) demand letters
"for the return of or the payment for the excess [i]nventories." 15 AEV alleged that to satisfy
CAGLI’s demand, WLI/WG&A returned inventories amounting to 120.04 million. 16 As proof of
this, AEV attached copies of delivery receipts signed by CAGLI’s representatives as Annex "K"
of the present petition.17
Sometime in 2002, the Chiongbian and Gothong families decided to leave the WG&A
enterprise and sell their interest in WG&A to the Aboitiz family. As such, a share purchase
agreement18 ("SPA") was entered into by petitioner AEV and the respective shareholders
groups of the Chiongbians and Gothongs. In the SPA, AEV agreedto purchase the Chiongbian
group's 40.61% share and the Gothong group's 20.66% share in WG&A’s issued and
outstanding stock.19
8
Section 6.5 of the SPA provided for arbitration as the mode of settling any dispute arising
from the SPA. It reads:
6.5 Arbitration. Should there be any dispute arising between the parties relating to this
Agreement including the interpretation or performance hereof which cannot beresolved by
agreement of the parties within fifteen (15) days after written notice by a party to another,
such matter shall then be finally settled by arbitration in Cebu City in accordance with the
Philippine Arbitration Law. Substantive aspects of the dispute shall be settled by applying the
laws of the Philippines. The decision of the arbitrators shall be final and binding upon the
parties hereto and the expense of arbitration (including without limitation the award of
attorney’s fees to the prevailing party) shall be paid as the arbitrators shall determine. 20
Section 6.8 of the SPA further provided that the Agreement (of January 8, 1996) shall be
deemed terminated except its Annex SL-V. It reads:
6.8 Termination of Shareholders Agreement. The Buyer and the Sellers hereby agree that on
Closing, the Agreement among Aboitiz Shipping Corporation, Carlos A. Gothong Lines, Inc.
and William Lines, Inc. dated January 8, 1996, as the same has been amended from time to
time (the "Shareholders’ Agreement") shall all be considered terminated, except with respect
to such rights and obligations that the parties to the Shareholders’ Agreement have under a
letter dated January 8, 1996 (otherwise known as "SL-V") from William Lines, Inc. to Carlos A.
Gothong Lines, Inc. regarding certain spare parts and materials inventory, which rights and
obligations shall survive through the date prescribed by the applicable statute of limitations. 21
As part of the SPA, the parties entered into an Escrow Agreement 22 whereby ING Bank N.V.-
Manila Branch was to take custody of the shares subject of the SPA. 23 Section 14.7 of the
Escrow Agreement provided that all disputes arising from it shall be settled through
arbitration:
14.7 All disputes, controversies or differences which may arise by and among the parties
hereto out of, or in relation to, or in connection with this Agreement, orfor the breach thereof
shall be finally settled by arbitration in Cebu City in accordance with the Philippine Arbitration
Law. The award rendered by the arbitrator(s) shall be final and binding upon the parties
concerned. However, notwithstanding the foregoing provision, the parties reserve the right to
seek redress before the regular court and avail of any provisional remedies in the event of any
misconduct, negligence, fraud or tortuous acts which arise from any extra-contractual
conduct that affects the ability ofa party to comply with his obligations and responsibilities
under this Agreement.24
As a result of the SPA, AEV became a stockholder of WG&A. Subsequently, WG&A was
renamed Aboitiz Transport Shipping Corporation ("ATSC"). 25
Petitioner AEV alleged that in2008, CAGLI resumed making demands despite having already
received 120.04 million worth of excess inventories. 26 CAGLI initially made its demand to ATSC
(the renamed WLI/WG&A) through a letter27 dated February 14, 2008. As alleged by AEV,
however, CAGLI subsequently resorted to a "shotgun approach" 28 and directed its subsequent
demand letters to AEV29 as well as to FCLC30 (a company related to respondent Chiongbian).
AEV responded to CAGLI’s demands through several letters. 31 In these letters, AEV rebuffed
CAGLI's demands noting that: (1) CAGLI already received the excess inventories;(2) it was not
a party to CAGLI's claim as it had a personality distinct from WLI/WG&A/ATSC; and (3) CAGLI's
claim was already barred by prescription.
In a reply-letter32 dated May 5, 2008, CAGLI claimed that it was unaware of the delivery to it
of the excess inventories and asked for copies of the corresponding delivery receipts. 33 CAGLI
threatened that unless it received proof of payment or return ofexcess inventories having
been made on or before March 31, 1996, it would pursue arbitration. 34
In letters written for AEV (the first dated October 16, 2008 by Aboitiz and Company, Inc.’s
Associate General Counsel Maria Cristina G. Gabutina 35 and the second dated October 27,
2008 by SyCip Salazar Hernandez and Gatmaitan36), it was noted that the excess inventories
were delivered to GT Ferry Warehouse. 37 Attached to these letters were a listing and/or
samples38 of the corresponding delivery receipts. In these letters it was also noted that the
amount of excess inventories delivered (120.04 million) was actually in excess of the value of
the supposedly unreturned inventories (119.89 million). 39 Thus, it was pointed out that it was
CAGLI which was liable to return the difference between 120.04 million and 119.89
million.40 Its claims not having been satisfied, CAGLI filed on November 6, 2008 the first of
two applications for arbitration ("first complaint") 41 against respondent Chiongbian, ATSC,
ASC, and petitioner AEV, before the Cebu City Regional Trial Court, Branch 20. The first
complaint was docketed as Civil Case No. CEB-34951.
In response, AEV filed a motion to dismiss 42 dated February 5, 2009. AEV argued that CAGLI
failed to state a cause of action as there was no agreement to arbitrate between CAGLI and
AEV.43 Specifically, AEV pointed out that: (1) AEV was never a party to the January 8, 1996
Agreement or to its Annex SL-V;44 (2) while AEV is a party to the SPA and Escrow Agreement,
CAGLI's claim had no connection to either agreement; (3) the unsigned and unexecuted SPA
attached to the complaint cannot be a source of any right to arbitrate; 45 and (4) CAGLI did not
say how WLI/WG&A/ATSC's obligation to return the excess inventories can be charged to AEV.
On December 4, 2009, the Cebu City Regional Trial Court, Branch 20 issued an
order46 dismissing the first complaint with respect to AEV. It sustained AEV’s assertion that
there was no agreement binding AEV and CAGLI to arbitrate CAGLI’s claim. 47 Whether by
motion for reconsideration, appeal or other means, CAGLI did not contest this dismissal.
On February 26, 2010, the Cebu CityRegional Trial Court, Branch 20 issued an order 48 directing
the parties remaining in the first complaint (after the discharge of AEV) to proceed with
arbitration.
9
The February 26, 2010 order notwithstanding, CAGLI filed a notice of dismissal 49 dated July 8,
2010, withdrawing the first complaint. In an order 50 dated August 13, 2010, the Cebu City
Regional Trial Court, Branch 20 allowed this withdrawal.
ATSC (the renamed WLI/WG&A) filed a motion for reconsideration 51 dated September 20,
2010 to the allowance of CAGLI's notice of dismissal. This motion was denied in an
order52 dated April 15, 2011.
On September 1, 2010, while the first complaint was still pending (n.b., it was only on April
15, 2011 that the Cebu City Regional Trial Court, Branch 20 denied ATSC’s motion for
reconsideration assailing the allowance of CAGLI’s notice of disallowance), CAGLI, now joined
by respondent Benjamin D. Gothong, filed a second application for arbitration ("second
complaint")53 before the Cebu City Regional Trial Court, Branch 10. The second complaint was
docketed as Civil Case No. CEB-37004 and was also in view of the return of the same excess
inventories subject of the first complaint.
On October 28, 2010, AEV filed a motion to dismiss 54 the second complaint on the following
grounds:55 (1) forum shopping; (2) failure to state a cause of action; (3) res judicata; and (4)
litis pendentia.
In the first of the two (2) assailed orders dated May 5, 2011, 56 the Cebu City Regional Trial
Court, Branch 10 denied AEV's motion to dismiss.
On the matter of litis pendentia, the Regional Trial Court, Branch 10 noted that the first
complaint was dismissed with respect to AEV on December 4, 2009, while the second
complaint was filed on September 1, 2010. As such, the first complaint was no longer pending
at the time of the filing of the second complaint. 57 On the matter of res judicata, the trial
court noted that the dismissal without prejudice of the first complaint "[left] the parties free
to litigate the matter in a subsequent action, as though the dismiss[ed] action had not been
commenced."58 It added that since litis pendentia and res judicata did not exist, CAGLI could
not be charged with forum shopping. 59 On the matter of an agreement to arbitrate, the
Regional Trial Court, Branch 10 pointed to the SPA as "clearly express[ing] the intention of the
parties to bring to arbitration process all disputes, if amicable settlement fails." 60 It further
dismissed AEV’s claim that it was not a party to the SPA, as "already touching on the merits of
the case"61 and therefore beyond its duty "to determine if they should proceed to arbitration
or not."62
In the second assailed order 63 dated June 24, 2011, the Cebu City Regional Trial Court, Branch
10 deniedAEV's motion for reconsideration.
Aggrieved, AEV filed the present petition. 64 AEV asserts that the second complaint is barred
by res judicata and litis pendentia and that CAGLI engaged in blatant forum shopping. 65 It
insists that it is not bound by an agreement to arbitrate with CAGLI and that, even assuming
that it may be required to arbitrate, it is being ordered to do so under terms that are
"manifestly contrary to the . . . agreements on which CAGLI based its demand for
arbitration."66
For resolution are the following issues:
I. Whether the complaint in Civil Case No. CEB-37004 constitutes forum shopping and/or is
barred by res judicata and/or litis pendentia
II. Whether petitioner, Aboitiz Equity Ventures, Inc., is bound by an agreement to arbitrate
with Carlos A. Gothong Lines, Inc., with respect to the latter’s claims for unreturned
inventories delivered to William Lines, Inc./WG&A, Inc./Aboitiz Transport System Corporation
AEV availed of the wrong
remedy in seeking relief from
this court
Before addressing the specific mattersraised by the present petition, we emphasize that AEV
is in error inseeking relief from this court via a petition for review on certiorari under Rule45
of the Rules of Court. As such, we are well in a position to dismiss the present petition
outright. Nevertheless, as the actions of the Cebu City Regional Trial Court, Branch 10 are
tainted with grave abuse of discretion amounting to lack or excess of jurisdiction, this court
treats the present Rule 45 petition as a Rule 65 petition and gives it due course.
A petition for review on certiorari under Rule 45 is a mode of appeal. This is eminently clear
from the very title and from the first section of Rule 45 (as amended by A.M. No. 07-7-12-SC):
Rule 45
APPEAL BY CERTIORARITO THE SUPREME COURT
SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal by certiorarifrom
a judgment, final order or resolution of the Court of Appeals, the Sandiganbayan, the Court of
Tax Appeals, the Regional Trial Court or other courts, whenever authorized by law, may file
with the Supreme Court a verified petition for review on certiorari. The petition may include
an application for a writ of preliminary injunction or other provisional remedies and shall
raise only questions of law, which must be distinctly set forth. The petitioner may seek the
same provisional remedies by verified motion filed inthe same action or proceeding at any
time during its pendency. (Emphasis supplied)
Further, it is elementary that anappeal may only be taken from a judgment or final order that
completely disposes of the case.67 As such, no appeal may be taken from an interlocutory
order68 (i.e., "one which refers to something between the commencement and end of the suit
which decides some point or matter but it is not the final decision of the whole
controversy"69). As explained in Sime Darby Employees Association v. NLRC, 70 "[a]n
interlocutory order is not appealable until after the rendition of the judgment on the merits
for a contrary rule would delay the administration of justice and unduly burden the courts." 71
10
An order denying a motion to dismiss is interlocutory in character. Hence, it may not be the
subject of an appeal. The interlocutory nature of an order denying a motion to dismiss and
the remedies for assailing such an order were discussed in Douglas Lu Ym v. Nabua: 72
An order denying a motion to dismiss is an interlocutory order which neither terminates nor
finally disposes of a case, as it leaves something to be done by the court before the case is
finally decided on the merits. As such, the general rule is that the denial of a motion to
dismiss cannot be questioned in a special civil action for certiorariwhich is a remedy designed
to correct errors ofjurisdiction and not errors of judgment. Neither can a denial of a motion
todismiss be the subject of an appeal unless and until a final judgment or order is rendered.In
order to justify the grant of the extraordinary remedy of certiorari, the denial of the motion
to dismiss must have been tainted with grave abuse of discretion amounting to lack or excess
of jurisdiction.73 (Emphasis supplied)
Thus, where a motion to dismiss is denied, the proper recourse is for the movant to file an
answer.74 Nevertheless, where the order denying the motion to dismiss is tainted with grave
abuse of discretion amounting to lack or excess of jurisdiction, the movant may assail such
order via a Rule 65 (i.e., certiorari, prohibition, and/or mandamus) petition. This is expressly
recognized in the third paragraph of Rule 41, Section 1 of the Rules of Court. 75 Following the
enumeration in the second paragraph of Rule 41, Section 1 of the instances when an appeal
may not be taken, the third paragraph specifies that "[in] any of the foregoing circumstances,
the aggrieved party may file an appropriate special civil action as provided in Rule 65." 76
Per these rules, AEV is in error for having filed what it itself calls a "Petition for Review on
Certiorari [Appeal by Certiorari under Rule 45 of the Rules of Court]." 77 Since AEV availed of
the improper remedy, this court is well in a position to dismiss the present petition.
Nevertheless, there have been instances when a petition for review on certiorari under Rule
45 was treated by this court as a petition for certiorari under Rule 65. As explained in China
Banking Corporation v. Asian Construction and Development Corporation: 78
[I]n many instances, the Court has treated a petition for review on certiorariunder Rule 45 as
a petition for certiorari under Rule 65 of the Rules of Court, such as in cases where the
subject of the recourse was one of jurisdiction, or the act complained of was perpetrated by a
court with grave abuse of discretion amounting to lack or excess of jurisdiction. 79
In this case, the May 5, 2011 and June 24, 2011 orders of the Cebu City Regional Trial Court,
Branch 10 in Civil Case No. CEB-37004 are assailed for having denied AEV’s motion todismiss
despite: first, the second complaint having been filed in a manner constituting forum
shopping; second, the prior judgment on the merits made in Civil Case No. CEB-34951,
thereby violating the principle ofres judicata; and third, the (then) pendency of Civil Case No.
CEB-34951 with respect to the parties that, unlike AEV, were not discharged from the case,
thereby violating the principle of litis pendentia. The same orders are assailed for having
allowed CAGLI’s application for arbitration to continue despite supposedly clear and
unmistakable evidence that AEV is not bound by an agreement to arbitrate with CAGLI.
As such, the Cebu City, Regional Trial Court, Branch 10’s orders are assailed for having been
made with grave abuse of discretion amounting to lack or excess of jurisdiction in that the
Cebu City Regional Trial Court, Branch 10 chose to continue taking cognizance of the second
complaint, despite there being compelling reasons for its dismissal and the Cebu City,
Regional Trial Court Branch 20’s desistance. Conformably, we treat the present petition as a
petition for certiorari under Rule 65 of the Rules of Court and give it due course.
The complaint in Civil Case
No. CEB-37004 constitutes
forum shopping and is barred
by res judicata
The concept of and rationale against forum shopping were explained by this court in Top Rate
Construction & General Services, Inc. v. Paxton Development Corporation: 80
FORUM SHOPPING is committed by a party who institutes two or more suits in different
courts, either simultaneously or successively, in order to ask the courts to rule on the same or
related causes or to grant the same or substantially the same reliefs, on the supposition that
one or the other court would make a favorabledisposition or increase a party's chances of
obtaining a favorable decision or action. It is an act of malpractice for it trifles with the courts,
abuses their processes, degrades the administration of justice and adds to the already
congested court dockets. What is critical is the vexation brought upon the courts and the
litigants by a party who asks different courts to rule on the same or related causes and grant
the same or substantially the same reliefs and in the process creates the possibility of
conflicting decisions being rendered by the different fora upon the same issues, regardless of
whether the court in which one of the suits was brought has no jurisdiction over the action. 81
Equally settled is the test for determining forum shopping. As this court explained in Yap v.
Chua:82
To determine whether a party violated the rule against forum shopping, the most important
factor toask is whether the elements of litis pendentiaare present, or whether a final
judgment in one case will amount to res judicatain another; otherwise stated, the test for
determining forum shopping is whether in the two (or more) cases pending, there is identity
of parties, rights or causes of action, and reliefs sought. 83
Litis pendentia "refers to that situation wherein another action is pending between the same
parties for the same cause ofaction, such that the second action becomes unnecessary and
vexatious."84 It requires the concurrence of three (3) requisites: "(1)the identity of parties, or
at least such as representing the same interests in both actions; (2) the identity of rights
asserted and relief prayed for,the relief being founded on the same facts; and (3) the identity
11
of the two cases such that judgment in one, regardless of which party issuccessful, would
amount tores judicatain the other."85
In turn, prior judgment or res judicata bars a subsequent case when the following requisites
concur: "(1) the former judgment is final; (2) it is rendered by a court having jurisdiction over
the subject matter and the parties; (3) it is a judgment or an order on the merits; (4) there is
— between the first and the second actions — identityof parties, of subject matter, and of
causes of action."86
Applying the cited concepts and requisites, we find that the complaint in Civil Case No. CEB-
37004 is barred byres judicata and constitutes forum shopping.
First, between the first and second complaints, there is identity of parties. The first complaint
was brought by CAGLI as the sole plaintiff against Victor S. Chiongbian, ATSC, and AEV as
defendants. In the second complaint, CAGLI was joined by Benjamin D. Gothong as
(co-)plaintiff. As to the defendants, ATSC was deleted while Chiongbian and AEV were
retained.
While it is true that the parties to the first and second complaints are not absolutely identical,
this court has clarified that, for purposes of forum shopping, "[a]bsolute identity of parties is
not required [and that it] is enough that there is substantial identity of parties." 87
Even as the second complaint alleges that Benjamin D. Gothong "is . . . suing in his personal
capacity,"88 Gothong failed to show any personal interest in the reliefs sought by the second
complaint. Ultimately, what is at stake in the second complaint is the extent to which CAGLI
may compel AEV and Chiongbian to arbitrate in order that CAGLI may then recover the value
of its alleged unreturned inventories. This claim for recovery is pursuant to the agreement
evinced in Annex SL-V. Annex SL-V was entered into by CAGLI and not by Benjamin D.
Gothong. While it is true that Benjamin D. Gothong, along with Bob D. Gothong, signed
Annex SL-V, he did so only in a representative, and not in a personal, capacity. As such,
Benjamin D. Gothong cannot claim any right that personally accrues to him on account of
Annex SL-V. From this, it follows that Benjamin D. Gothong is not a real party in interest —
"one who stands to be benefitted or injured by the judgment in the suit or the party entitled
to the avails of the suit"89 — and that his inclusion in the second complaint is an unnecessary
superfluity.
Second, there is identity in subject matter and cause of action. There is identity in subject
matter as both complaints are applications for the same relief. There is identity in cause
ofaction as both complaints are grounded on the right to be paid for or to receive the value of
excess inventories (and the supposed corresponding breach thereof) as spelled out in Annex
SL-V.
The first and second complaints are both applications for arbitration and are founded on the
same instrument — Annex SL-V. Moreover, the intended arbitrations in both complaintscater
to the sameultimate purpose, i.e., that CAGLI may recover the value of its supposedly
unreturned inventories earlier delivered to WLI/WG&A/ATSC.
In both complaints, the supposedpropriety of compelling the defendants to submit
themselves to arbitration are anchored on the same bases: (1) Section 6.8 of the SPA, which
provides that the January 8, 1996 Agreement shall be deemed terminatedbut that the rights
and obligations arising from Annex SL-V shall continue to subsist; 90 (2) Section 6.5 of the SPA,
which requires arbitration as the mode for settling disputes relating to the SPA; 91 and, (3)
defendants’ refusal to submit themselves to arbitration vis-a-vis Republic Act No. 876, which
provides that "[a] party aggrieved by the failure, neglect or refusal of another to perform
under an agreement in writing providing for arbitration may petition the court for an order
directing that such arbitration proceed in the manner provided for in such agreement." 92
Both complaints also rely on the same factual averments: 93
1. that ASC, CAGLI, and WLI entered into an agreement on January 8, 1996;
2. that under Annex SL-V of the Agreement, WLI/WG&A "committed to acquire certain
[inventories], the total aggregate value of which shall not exceed ₱400 Million"; 94
3. that after examination, it was ascertained that the value of the transferred inventories
exceeded ₱400 million;
4. that pursuant to Annex SL-V, WG&A paid CAGLI ₱400 million but that the former failed to
return or pay for spare parts representing a value in excess of ₱400 million;
5. "[t]hat on August 31, 2001, [CAGLI] wrote the WG&A through its AVP Materials
Management, Ms. Concepcion M. Magat, asking for the return of the excess spare parts"; 95
6. that on September 5, 2001, WG&A’s Ms. Magat replied that the matter is beyond her
authority level and that she must elevate it to higher management;
7. that several communications demanding the return of the excess spare parts were sent to
WG&Abut these did not elicit any response; and
8. "[t]hat the issue of excess spare parts, was taken over by events, when on July 31,
2002,"96 the Chiongbians and Gothongs entered into an Escrow Agreement with AEV.
Third, the order dated December 4, 2009 of the Cebu City Regional Trial Court, Branch 20,
which dismissed the first complaint with respect to AEV, attained finality when CAGLI did not
file a motion for reconsideration, appealed, or, in any other manner, questioned the order.
Fourth, the parties did not dispute that the December 4, 2009 order was issued by a court
having jurisdiction over the subject matter and the parties. Specifically as to jurisdiction over
the parties,jurisdiction was acquired over CAGLI as plaintiff when it filed the first complaint
and sought relief from the Cebu City Regional Trial Court, Branch 20; jurisdiction over
12
defendants AEV, ATSC, and Victor S.Chiongbian was acquired with the service of summons
upon them. Fifth, the dismissal of the first complaint with respect to AEV was a judgment on
the merits. As explained in Cabreza, Jr. v. Cabreza: 97
A judgment may be considered as one rendered on the merits "when it determines the rights
and liabilities of the parties based on the disclosed facts, irrespective of formal, technical or
dilatoryobjections"; or when the judgment is rendered "aftera determination of which party
is right, as distinguished from a judgment rendered upon some preliminary or formal or
merely technical point."98
Further, as this court clarified in Mendiola v. Court of Appeals, 99 "[i]t is not necessary . . . that
there [be] a trial"100 in order that a judgment be considered as one on the merits.
Prior to issuing the December 4, 2009 order dismissing the first complaint with respect to
AEV, the Cebu City Regional Trial Court, Branch 20 allowed the parties the full opportunity to
establish the facts and to ventilate their arguments relevant to the complaint. Specifically, the
Cebu City Regional Trial Court, Branch 20 admitted: 1) AEV’s motion to dismiss; 101 2) CAGLI’s
opposition to the motion to dismiss;102 3) AEV’s reply and opposition; 103 4) CAGLI’s
rejoinder;104 and 5) AEV’s surrejoinder. 105
Following these, the Cebu City Regional Trial Court, Branch 20 arrived at the following
findings and made a definitive determination that CAGLI had no right to compel AEV to
subject itself to arbitration with respect to CAGLI’s claims under Annex SL-V:
After going over carefully the contentions and arguments of both parties, the court has found
that no contract or document exists binding CAGLI and AEV to arbitrate the former’s claim.
The WLI Letter upon which the claim is based confirms only the commitment of William
Lines, Inc. (WLI) to purchase certain material inventories from CAGLI. It does not involve AEV.
The court has searched in vain for any agreement or document showing that said
commitment was passed on to and assumed by AEV. Such agreement or document, if one
exists, being an actionable document, should have been attached to the complaint. While the
Agreement of January 8, 1996 and the Share Purchase Agreement provide for arbitration of
disputes, they refer to disputes arising from or in connection with the Agreements
themselves. No reference is made, as included therein, to the aforesaid commitment of WLI
or to any claim that CAGLI may pursue based thereon or relative thereto. Section 6.8 of the
Share Purchase Agreement, cited by plaintiff CAGLI, does not incorporate therein, expressly
or impliedly, the WLI commitment above-mentioned. It only declares that the rights and
obligations of the parties under the WLI Letter shall survive even after the termination of the
Shareholder’s Agreement. It does not speak of arbitration. Finally, the complaint does not
allege the existence of a contract obliging CAGLI and AEV to arbitrate CAGLI’s claim under the
WLI Letter. Consequently, there is no legal or factual basis for the present complaint for
application for arbitration. 106 (Emphasis supplied)
In the assailed order dated May 5, 2011, the Cebu City Regional Trial Court, Branch 10 made
much of the Cebu City Regional Trial Court, Branch 20’s pronouncement in the latter’s
December 4, 2009 order that "the [first] complaint fails to state a cause of action." 107 Based
on this, the Cebu City Regional Trial Court, Branch 10 concluded that the dismissal of the first
complaint was one made without prejudice, thereby "leav[ing] the parties free to litigate the
matter ina subsequent action, as though the dismissal [sic] action had not been
commenced."108
The Cebu City Regional Trial Court, Branch 10 is in serious error. In holding that the second
complaint was not barred by res judicata, the Cebu City Regional Trial Court, Branch 10
ignored established jurisprudence.
Referring to the earlier cases of Manalo v. Court of Appeals 109 and Mendiola v. Court of
Appeals,110 this court emphasized in Luzon Development Bank v. Conquilla 111 that dismissal for
failure to state a cause of action may very well be considered a judgment on the merits and,
thereby, operate as res judicata on a subsequent case:
[E]ven a dismissal on the ground of "failure to state a cause of action" may operate as res
judicata on a subsequent case involving the same parties, subject matter, and causes of
action, provided that the order of dismissalactually ruled on the issues raised.What appears
to be essential to a judgment on the merits is that it be a reasoned decision, which clearly
states the facts and the law on which it is based. 112 (Emphasis supplied)
To reiterate, the Cebu City Regional Trial Court, Branch 20 made a definitive determination
that CAGLI had no right to compel AEV to subject itself to arbitrationvis-a-vis CAGLI’s claims
under Annex SL-V. This determination was arrived at after due consideration of the facts
established and the arguments advancedby the parties. Accordingly, the Cebu City Regional
Trial Court, Branch 20’s December 4, 2009 order constituted a judgment on the merits and
operated as res judicata on the second complaint.
In sum, the requisites for res judicata have been satisfied and the second complaint should,
thus, have been dismissed. From this, it follows that CAGLI committed an act of forum
shopping in filing the second complaint. CAGLI instituted two suits in two regional trial court
branches, albeit successively and not simultaneously. It asked both branches to rule on the
exact same cause and to grant the exact same relief. CAGLI did so after it had obtained an
unfavorable decision (at least with respect to AEV) from the Cebu City Regional Trial Court,
Branch 20. These circumstances afford the reasonable inference that the second complaint
was filed in the hopes of a more favorable ruling.
Notwithstanding our pronouncements sustaining AEV’s allegations that CAGLI engaged in
forum shopping and that the second complaint was barred by res judicata, we find that at the
time of the filing of the second complaint, AEV had already been discharged from the
proceedings relating to the first complaint. Thus, asbetween AEV and CAGLI, the first
13
complaint was no longer pending at the time of the filing of the second complaint.
Accordingly, the second complaint could not have been barred by litis pendentia.
There is no agreement
binding AEV to arbitrate
with CAGLI on the latter’s
claims arising from Annex SL-V
For arbitration to be proper, it is imperative thatit be grounded on an agreement between the
parties. This was adequately explained in Ormoc Sugarcane Planters’ Association,Inc. v. Court
of Appeals:113
Section 2 of R.A. No. 876 (the Arbitration Law) pertinently provides:
Sec. 2. Persons and matterssubject to arbitration. – Two or more persons or parties may
submit to the arbitration of one or more arbitrators any controversy existing between them
at the time of the submission and which may be the subject of an action, or the parties to any
contract may in such contract agree to settle by arbitration a controversy thereafter arising
between them. Such submission or contract shall be valid, enforceable and irrevocable, save
upon such grounds as exist at law for the revocation of any contract. . . . (Emphasis ours)
The foregoing provision speaks of two modes of arbitration: (a) an agreement to submit to
arbitration somefuture dispute, usually stipulated upon in a civil contract between the
parties, and known as an agreement to submit to arbitration, and (b) an agreement
submitting an existing matter of difference to arbitrators, termed the submission agreement.
Article XX of the milling contract is an agreement to submit to arbitrationbecause it was made
in anticipation of a dispute that might arise between the parties after the contract’s
execution.
Except where a compulsory arbitration is provided by statute, the first step toward the
settlement of a difference by arbitration is the entry by the parties into a valid agreement to
arbitrate.An agreement to arbitrate is a contract, the relation ofthe parties is contractual, and
the rights and liabilities of the parties are controlled by the law of contracts. In an agreement
for arbitration, the ordinary elements of a valid contract must appear, including an agreement
toarbitrate some specific thing, and an agreement to abide by the award, either in express
language or by implication.114 (Emphasis supplied)
In this petition, not one of the parties — AEV, CAGLI, Victor S. Chiongbian, and Benjamin D.
Gothong — has alleged and/or shown that the controversy is properly the subject of
"compulsory arbitration [as] provided by statute." 115 Thus, the propriety of compelling AEV to
submit itself to arbitration must necessarilybe founded on contract.
Four (4) distinct contracts have been cited in the present petition:
1. The January 8, 1996 Agreement in which ASC, CAGLI, and WLI merged their shipping
enterprises, with WLI (subsequently renamed WG&A) as the surviving entity. Section 11.06 of
this Agreement provided for arbitration as the mechanism for settling all disputes arising out
of or in connection with the Agreement.
2. Annex SL-V of the Agreement between CAGLI and WLI (and excluded ASC and any other
Aboitiz-controlled entity), and which confirmed WLI’s commitment to acquire certain
inventories, worth not more than 400 million, of CAGLI. Annex SL-V stated that the
acquisition was "pursuant to the Agreement."116 It did not contain an arbitration clause.
3. The September 23, 2003 Share Purchase Agreement or SPA in which AEV agreed to
purchasethe Chiongbian and Gothong groups' shares in WG&A’s issued and outstanding
stock. Section 6.5 of the SPA provided for arbitration as the mode of settling any dispute
arising from the SPA. Section 6.8 of the SPA further provided that the Agreement of January
8, 1996 shall be deemed terminatedexcept its Annex SL-V.
4. The Escrow Agreement whereby ING Bank N.V.-Manila Branch was to take custody of the
shares subject of the SPA. Section 14.7 of the Escrow Agreement provided that all disputes
arising from it shall be settled via arbitration.
The obligation for WLI to acquire certain inventories of CAGLI and which is the subject of the
present petition was contained in Annex SL-V. It is therefore this agreement which deserves
foremost consideration. As to this particular agreement, these points must be underscored:
first, that it has no arbitration clause; second, Annex SL-V is only between WLI and CAGLI.
On the first point, it is clear, pursuant to this court’s pronouncements in Ormoc Sugarcane
Planters’ Association, that neither WLI nor CAGLI can compel arbitration under Annex SL-V.
Plainly, there is no agreement to arbitrate.
It is of no moment that Annex SL-Vstates that it was made "pursuant to the Agreement" or
that Section 11.06 of the January 8, 1996 Agreement provides for arbitration as the mode of
settling disputes arising out of or in connection with the Agreement.
For one, to say that Annex SL-V was made"pursuant to the Agreement" is merely to
acknowledge: (1) the factual context in which Annex SL-V was executed and (2) that it was
that context that facilitated the agreement embodied in it. Absentany other clear or
unequivocal pronouncement integrating Annex SL-V into the January 8, 1996 Agreement, it
would be too much of a conjecture to jump to the conclusion that Annex SL-V is governed by
the exact same stipulations which govern the January 8, 1996 Agreement.
Likewise, a reading of the Agreement’s arbitration clause will reveal that it does not
contemplate disputes arising from Annex SL-V.
Section 11.06 of the January 8, 1996 Agreement requires the formation of an arbitration
tribunal composed of four (4) arbitrators. Each of the parties — WLI, CAGLI, and ASC — shall
14
appoint one (1) arbitrator, and the fourth arbitrator, who shall actas chairman, shall be
appointed by the three (3) arbitrators appointed by the parties. From the manner by which
the arbitration tribunal is to be constituted, the necessary implication is that the arbitration
clause is applicable tothree-party disputes — as will arise from the tripartite January 8, 1996
Agreement — and not to two-party disputesas will arise from the two-party Annex SL-V.
From the second point — that Annex SL-V is only between WLI and CAGLI — it necessarily
follows that none but WLI/WG&A/ATSC and CAGLI are bound by the terms of Annex SL-V. It is
elementary that contracts are characterized by relativity or privity, that is, that "[c]ontracts
take effect only between the parties, their assigns and heirs."117 As such, one who is not a
party to a contract may not seek relief for such contract’s breach. Likewise, one who is not a
party to a contract may not be held liable for breach of any its terms.
While the principle of privity or relativity of contracts acknowledges that contractual
obligations are transmissible to a party’s assigns and heirs, AEV is not WLI’s successor-in-
interest. In the period relevant to this petition, the transferee of the inventories transferred
by CAGLI pursuant to Annex SL-V assumed three (3) names: (1) WLI, the original name of the
entity that survived the merger under the January 8, 1996 Agreement; (2) WG&A, the name
taken by WLI in the wake of the Agreement; and (3) ATSC, the name taken by WLI/WG&A
inthe wake of the SPA. As such, it is now ATSC that is liable under Annex SL-V.
Pursuant to the January 8, 1996 Agreement, the Aboitiz group (via ASC) and the Gothong
group (viaCAGLI) became stockholders of WLI/WG&A, along with the Chiongbiangroup
(which initially controlled WLI). This continued until, pursuant to the SPA, the Gothong group
and the Chiongbian group transferred their shares to AEV. With the SPA, AEV became a
stockholder of WLI/WG&A, which was subsequently renamed ATSC. Nonetheless, AEV’s
status asATSC’s stockholder does not subject it to ATSC’s obligations
It is basic that a corporation has a personality separate and distinct from that of its individual
stockholders. Thus, a stockholder does not automatically assume the liabilities of the
corporation of which he is a stockholder. As explained in Philippine National Bankv. Hydro
Resources Contractors Corporation: 118
A corporation is an artificial entitycreated by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or
incident to its existence. It has a personality separate and distinct from that of its
stockholders and from that of other corporations to which it may be connected. As a
consequence of its status as a distinct legal entityand as a result of a conscious policy decision
to promote capital formation, a corporation incurs its own liabilities and is legally responsible
for payment of its obligations. In other words, by virtue of the separate juridical personality
ofa corporation, the corporate debt or credit is not the debt or credit of the stockholder. This
protection from liability for shareholders is the principle of limited liability. 119
In fact, even the ownership by a single stockholder of all or nearly all the capital stock of a
corporation is not, in and of itself, a ground for disregarding a corporation’s separate
personality. As explained in Secosa v. Heirs of Francisco: 120
It is a settled precept in this jurisdiction that a corporation is invested by law with a
personality separate from thatof its stockholders or members. It has a personality separate
and distinct from those of the persons composing it as well as from that of any other entity to
which it may be related. Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not in itself sufficient ground for
disregarding the separate corporate personality.A corporation’s authority to act and its
liability for its actions are separate and apart from the individuals who own it.
The so-called veil of corporation fiction treats as separate and distinct the affairs of a
corporation and its officers and stockholders. As a general rule, a corporation will be looked
upon as a legal entity, unless and until sufficient reason to the contrary appears. When the
notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as an association of persons. Also, the
corporate entity may be disregarded in the interest of justice in such cases asfraud that may
work inequities among members of the corporation internally, involving no rights of the
public or third persons. In both instances, there must have been fraud and proof of it. For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be
clearly and convincingly established. It cannot be presumed. 121 (Emphasis supplied)
AEV’s status as ATSC’s stockholder is, in and of itself, insufficient to make AEV liable for ATSC’s
obligations. Moreover, the SPA does not contain any stipulation which makes AEV assume
ATSC’s obligations. It is true that Section 6.8 of the SPA stipulates that the rights and
obligations arising from Annex SL-V are not terminated. But all that Section 6.8 does is
recognize that the obligations under Annex SL-V subsist despite the termination of the
January 8, 1996 Agreement. At no point does the text of Section 6.8 support the position that
AEV steps into the shoes of the obligor under Annex SL-V and assumes its obligations.
Neither does Section 6.5 of the SPAsuffice to compel AEV to submit itself to arbitration. While
it is true that Section 6.5 mandates arbitration as the mode for settling disputes between the
parties to the SPA, Section 6.5 does not indiscriminatelycover any and all disputes which may
arise between the parties to the SPA. Rather, Section 6.5 is limited to "dispute[s] arising
between the parties relating tothis Agreement [i.e., the SPA]." 122 To belabor the point, the
obligation which is subject of the present dispute pertains to Annex SL-V, not to the SPA. That
the SPA, in Section 6.8, recognizes the subsistence of Annex SL-Vis merely a factual
recognition. It does not create new obligations and does not alter or modify the obligations
spelled out in Annex SL-V.
AEV was drawn into the present controversy on account of its having entered into the SPA.
This SPA made AEV a stockholder of WLI/WG&A/ATSC. Even then, AEV retained a personality
15
separate and distinct from WLI/WG&A/ATSC. The SPA did not render AEV personally liable for
the obligations of the corporation whose stocks it held.

The obligation animating CAGLI’s desire to arbitrate is rooted in Annex SL-V. Annex SL-V is a
contractentirely different from the SPA. It created distinct obligations for distinctparties. AEV
was never a party to Annex SL-V. Rather than pertaining to AEV, Annex SL-V pertained to a
different entity: WLI (renamed WG&A then renamed ATSC). AEV is, thus, not bound by Annex
SL-V.

On one hand, Annex SL-V does not stipulate that disputes arising from it are to be settled via
arbitration.On the other hand, the SPA requires arbitration as the mode for settling disputes
relating to it and recognizes the subsistence of the obligations under Annex SL-V. But as a
separate contract, the mere mention of Annex SL-V in the SPA does not suffice to place Annex
SL-V under the ambit of the SPA or to render it subject to the SPA’s terms, such as the
requirement to arbitrate.

WHEREFORE, the petition is GRANTED. The assailed orders dated May 5, 2011 and June
24,2011 of the Regional Trial Court, Cebu City, Branch 10 in Civil Case No. CEB-37004 are
declared VOID. The Regional Trial Court, Cebu City, Branch 10 is ordered to DISMISSCivil Case
No. CEB-37004.

SO ORDERED.

16
G.R. No. 172843 September 24, 2014
ALFREDO L. VILLAMOR, JR., Petitioner,
vs.
JOHN S. UMALE, in substitution of HERNANDO F. BALMORES, Respondent.
x-----------------------x
G.R. No. 172881
ODIVAL E. REYES, HANS M. PALMA and DOROTEO M. PANGILINAN, Petitioners,
vs.
HERNANDO F. BALMORES, Respondent.
DECISION
LEONEN, J.:
Before us is a petition for review on certiorari 1 under Rule 45 of the Rules of Court, assailing
the decision2 of the Court of Appeals dated March 2, 2006 and its resolution 3 dated May 29,
2006, denying petitioners’ motions for reconsideration. The Court of Appeals placed Pasig
Printing Corporation (PPC) under receivership and appointed an interim management
committee for the corporation.4
MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part
of the area owned by Mid-Pasig Development Corporation (Mid-Pasig). 5
On March 1, 2004, PPC obtained an option to lease portions of MidPasig’s property, including
the Rockland area.6
On November 11, 2004, PPC’s board of directors issued a resolution 7 waiving all its rights,
interests, and participation in the option to lease contract in favor of the law firm of Atty.
Alfredo Villamor, Jr. (Villamor), petitioner in G.R. No. 172843. PPC received no consideration
for this waiver in favor of Villamor’s law firm.8
On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of
agreement (MOA) with MC Home Depot. 9 Under the MOA, MC Home Depot would continue
to occupy the area as PPC’s sublessee for four (4) years, renewable for another four (4) years,
at a monthly rental of ₱4,500,000.00 plus goodwill of ₱18,000,000.00. 10
In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks
representing rentalpayments for one year and the goodwill money. The checks were given to
Villamor who did not turn these or the equivalent amount over to PPC, upon encashment. 11
Hernando Balmores, respondent inG.R. No. 172843 and G.R. No. 172881 and a stockholder
and director of PPC,12wrote a letter addressed to PPC’s directors, petitioners inG.R. No.
172881, on April 4, 2005. 13 He informed them that Villamor should bemade to deliver to PPC
and account for MC Home Depot’s checks or their equivalent value. 14
Due to the alleged inaction of the directors, respondent Balmores filed with the Regional Trial
Court an intra-corporate controversy complaint under Rule 1, Section 1(a)(1) of the Interim
Rules for Intra-Corporate Controversies15 (Interim Rules) against petitioners for their alleged
devices or schemes amounting to fraud or misrepresentation "detrimental to the interest of
the corporation and its stockholders."16
Respondent Balmores alleged in his complaint that because of petitioners’ actions, PPC’s
assets were ". . . not only in imminent danger, but have actually been dissipated,lost, wasted
and destroyed."17
Respondent Balmores prayed that a receiver be appointed from his list of nominees. 18 He also
prayed for petitioners’ prohibition from "selling, encumbering, transferring or disposing in
any manner any of [PPC’s] properties, including the MC Home [Depot] checks and/or their
proceeds."19 He prayed for the accounting and remittance to PPC of the MC Home Depot
checks or their proceeds and for the annulment of the board’s resolution waiving PPC’s rights
in favor of Villamor’s law firm.20
Ruling of the Regional Trial Court
In its resolution21 dated June 15, 2005, the Regional Trial Court denied respondent Balmores’
prayer for the appointment of a receiver or the creation of a management committee.The
dispositive portion reads:
WHEREFORE, premises considered the appointment of a Receiver and the creation of a
Management Committee applied for by plaintiff Hernando F. Balmores are, as they are
hereby, DENIED.22 (Emphasis in the original)
According to the trial court, PPC’s entitlement to the checks was doubtful. The resolution
issued by PPC’s board of directors, waiving its rights to the option to lease contract infavor of
Villamor’s law firm, must be accorded prima facie validity. 23
The trial court also noted that there was a pending case filed by one Leonardo Umale against
Villamor, involving the same checks. Umale was also claiming ownership of the checks. 24 This,
according to the trial court, weakened respondent Balmores’ claim that the checks were
properties of PPC.25
The trial court also found that there was "no clear and positive showing of dissipation, loss,
wastage, or destruction of [PPC’s] assets . . . [that was] prejudicial to the interestof the
minority stockholders, partieslitigants or the general public." 26 The board’s failure to recover
the disputed amounts was not an indication of mismanagement resulting in the dissipation of
assets.27
17
The trial court noted that PPC was earning substantial rental income from its other sub-
lessees.28
The trial court added that the failure to implead PPCwas fatal. PPC should have been
impleaded as an indispensable party, without which, there would be no final determination
of the action.29
Ruling of the Court of Appeals
Respondent Balmores filed with the Court of Appeals a petition for certiorari under Rule 65 of
the Rules of Court.30He assailed the decision of the trial court, which denied his "application
for the appointment of a [r]eceiver and the creation ofa [m]anagement [c]ommittee." 31
In the decision promulgated on March 2, 2006, the Court of Appeals gave due course to
respondent Balmores’ petition. It reversed the trial court’s decision, and issued a new order
placing PPC under receivership and creating an interim management committee. 32 The
dispositive portion reads:
WHEREFORE, premises considered, the instant petition is hereby GRANTED and GIVEN DUE
COURSE and the June 15, 2005 Order/Resolution of the commercial court, the Regional Trial
Court of Pasig City, Branch 167, in S.E.C. Case No. 05-62, is hereby REVERSED and SET ASIDE
and a NEW ORDER is ISSUED that, during the pendency of the derivative suit, untiljudgment
on the merits is rendered by the commercial court, in order toprevent dissipation, loss,
wastage or destruction of the assets, in order to prevent paralization of business operations
which may be prejudicial to the interest of stockholders, parties-litigants or the general
public, and in order to prevent violations of the corporation laws: (1) Pasig Printing
Corporation (PPC) is hereby placed under receivership pursuant to the Rules Governing Intra-
Corporate Controversies under R.A. No. 8799;(2) an Interim Management Committee is
hereby created for Pasig Printing Corporation (PPC) composed of Andres Narvasa, Jr., Atty.
Francis Gustilo and Ms Rosemarie Salvio-Leonida; (3) the interim management committee is
hereby directed to forthwith, during the pendency of the derivative suit until judgment on
the merits is rendered by the commercial court, to: (a) take over the business of Pasig
Printing Corporation (PPC), (b) take custody and control of all assets and properties owned
and possessed by Pasig Printing Corporation (PPC), (c) take the place of the management and
the board of directors of Pasig Printing Corporation (PPC), (d) preserve Pasig Printing
Corporation’s assets and properties, (e) stop and prevent any disposal, in any manner, of any
of the properties of Pasig Printing Corporation (PPC) including the MC Home Depot checks
and/or their proceeds; and (3) [sic] restore the status quo ante prevailing by directing
respondents their associates and agents to account and return to the Interim Management
Committee for Pasig Printing Corporation (PPC) all the money proceeds of the 20 MC Home
Depot checks taken by them and to account and surrender to the Interim Management
Committee all subsequent MC Home Depot checks or proceeds. 33(Citation omitted)
The Court of Appeals characterizedthe assailed order/resolution of the trial court as an
interlocutory order that is not appealable. 34 In reversing the trial court order/resolution, the
Court of Appeals considered the danger of dissipation, wastage, and loss of PPC’s assets if the
review of the trial court’s judgment would be delayed. 35
The Court of Appeals ruled that the case filed by respondent Balmores with the trial court
"[was] a derivative suit because there were allegations of fraud or ultra vires acts . . . by
[PPC’s directors]."36
According to the Court of Appeals,the trial court abandoned its duty to the stockholders in a
derivative suit when it refused to appoint a receiver or create a management committee, all
during the pendency of the proceedings. The assailed order ofthe trial court removed from
the stockholders their right, in an intra-corporate controversy, to be allowed the remedy of
appointment of a receiverduring the pendency of a derivative suit, leaving the corporation
under the control of an outsider and its assets prone to dissipation. 37 The Court of Appeals
also ruled that this amounts to "despotic, capricious, or whimsicalexercise of judicial
power"38 on the part of the trial court.
In justifying its decision to place PPCunder receivership and to create a management
committee, the Court of Appeals stated that the board’s waiver of PPC’s rights in favor
ofVillamor’s law firm without any consideration and its inaction on Villamor’s failure to turn
over the proceeds of rental payments to PPC warrant the creation of a management
committee.39 The circumstances resulted in the imminent danger of loss, waste, or dissipation
of PPC’s assets.40
Petitioners filed separatemotions for reconsideration. Both motions were denied by the Court
of Appeals on May 29, 2006. The dispositive portion of the Court of Appeals’ resolution
reads:
WHEREFORE, for lack of merit, respondents’ March 10, 2006 and March 20, 2006 Motions for
Reconsideration are hereby DENIED.41
Petitioners filed separatepetitions for review under Rule 45, raising the following threshold
issues:
I. Whether the Court of Appeals correctly characterized respondent Balmores’ action as a
derivative suit
II. Whether the Court of Appeals properly placed PPC under receivership and created a
receiver or management committee
PPC’s directors argued that the Court of Appeals erred in characterizing respondent
Balmores’ suit as a derivative suit because of his failure to implead PPC as party in the case.
Hence, the appellate court did not acquire jurisdiction over the corporation, and the
appointment of a receiver or management committee is not valid. 42
18
The directors further argued that the requirements for the appointment of a receiver or
management committee under Rule 9 43 of the Interim Rules were not satisfied. The directors
pointed out that respondent Balmores failed to prove that the assets of the corporation were
in imminent danger of being dissipated.44
According to the directors, assuming that a receiver or management committee may be
appointed in the case, it is the Regional Trial Court only and not the Court of Appeals that
must appoint them.45
Meanwhile, Villamor argued that PPC’s entitlement to the checks or their proceeds was still in
dispute. In a separate civil case against Villamor, a certain Leonardo Umale was claiming
ownership of the checks.46
Villamor also argued that the Court of Appeals’ order to place PPC under receivership and to
appoint a management committee does not endanger PPC’s assets because the MC Home
Depot checks were not the only assets of PPC. 47 Therefore, it would not affect the operation
of PPC or result in its paralysation. 48
In his comment, respondent Balmores argued that Villamor’s and the directors’ petitions raise
questions of facts, which cannot be allowed in a petition for review under Rule 45. 49
On the appointment of a receiver or management committee, respondent Balmores stated
that the ". . . very practice of waiving assets and income for no consideration can in factlead,
not only to the paralyzation of business, but to the complete loss or cessation of business of
PPC[.] It is
precisely because of this fraudulent practice that a receiver/management committee must be
appointed to protect the assets of PPC from further fraudulent acts, devices and schemes." 50
The petitions have merit.
I mere nominal party.61
Petition for review on
certiorari under Rule 45 was proper
First, we rule on the issue of whether petitioners properly filed a petition for review on
certiorari under Rule 45.
Respondent Balmores argued that the petition raises questions of fact.
Under Rule 45, only questionsof law may be raised. 51 There is a question of law "when there
is doubt or controversy as to what the law is on a certain [set] of facts." 52 The test is "whether
the appellate court can determine the issue raised without reviewing or evaluating the
evidence."53 Meanwhile, there is a question of fact when there is "doubt . . . as to the truth or
falsehood of facts."54 The question must involve the examination of probative value of the
evidence presented.
In this case, petitioners raise issues on the correctness of the Court of Appeals’ conclusions.
Specifically, petitioners ask (1) whether respondent Balmores’ failure to implead PPC in his
action with the trial court was fatal; (2) whether the Court of Appeals correctly characterized
respondent Balmores’ action as a derivative suit; (3) whether the Court of Appeals’
appointment of a management committee was proper; and (4) whether the Court of Appeals
may exercise the power to appoint a management committee.
These are questions of law that may be determined without looking into the evidence
presented. The question of whether the conclusion drawn by the Court of Appeals from a set
of facts is correct is a question of law, cognizable by this court. 55
Petitioners, therefore, properly filed a petition for review under Rule 45.
II
Respondent Balmores’ action
in the trial court is not a derivative suit
A derivative suit is an action filed by stockholders to enforce a corporate action. 56 It is an
exception to the general rule that the corporation’s power to sue 57 is exercised only by the
board of directors or trustees.58
Individual stockholders may be allowed to sue on behalf of the corporation whenever the
directors or officers of the corporation refuse to sue to vindicate the rights of the corporation
or are the ones to be sued and are in control of the corporation. 59 It is allowed when the
"directors [or officers] are guilty of breach of . . . trust, [and] not of mere error of judgment." 60
In derivative suits, the real party in interest is the corporation, and the suing stockholder is a
Thus, this court noted:
The Court has recognized that a stockholder’s right to institute a derivative suit is not based
on any express provision of the Corporation Code, or even the Securities Regulation Code, but
is impliedly recognized when the said laws make corporate directors or officers liable for
damages suffered by the corporation and its stockholders for violation of their fiduciary
duties. In effect, the suit isan action for specific performance of an obligation, owed by the
corporation to the stockholders, to assist its rights of action when the corporation has been
put in default by the wrongful refusal of the directors or management to adopt suitable
measures for its protection.62
Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim
Rules) provides the five (5) requisites 63 for filing derivative suits:
19
SECTION 1. Derivative action. – A stockholder or member may bring an action in the name of
a corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
toexhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not included in the enumeration, is implied
in the first paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the
stockholder or member must be "in the name of [the] corporation or association. . . ." This
requirement has already been settled in jurisprudence.
Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., 64 this court said that
"[a]mong the basic requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must allege in his complaint
before the proper forum that he is suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who wish to join [him]." 65 This
principle on derivative suits has been repeated in, among other cases, Tam Wing Tak v. Hon.
Makasiar and De Guia66 and in Chua v. Court of Appeals, 67 which was cited in Hi-Yield Realty,
Incorporated v. Court of
Appeals.68
Moreover, it is important that the corporation be made a party to the case. 69
This court explained in Asset Privatization Trust v. Court of Appeals 70 why it is a condition sine
qua nonthat the corporation be impleaded as party in derivative suits. Thus:
Not only is the corporation an indispensible party, but it is also the present rule that it must
be served with process. The reason given is that the judgment must be made binding upon
the corporation inorder 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 party because it is its cause of action that is being
litigated and because judgment must be a res judicata against it. 71
In the same case, this court enumerated the reasons for disallowing a direct individual suit.
The reasons given for not allowing direct individual suit are:
(1) . . . "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." Inother words, to allow shareholders to sue separately
would conflict with the separate corporate entity principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held
in the case of Evangelista v. 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 dissolution of the corporation and the
liquidation of its debts and liabilities, something which cannot be legally donein view of
Section 16 of the Corporation Law. . .";
(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) 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.72
While it is true that the basis for allowing stockholders to file derivative suits on behalf of
corporations is based on equity, the above legal requisites for its filing must necessarily be
complied with for its institution.73
Respondent Balmores’ action in the trial court failed to satisfy all the requisites of a derivative
suit.
Respondent Balmores failed to exhaust all available remedies to obtain the reliefs he prayed
for. Though he tried to communicate with PPC’s directors about the checks in Villamor’s
possession before he filed an action with the trial court, respondent Balmores was not able to
show that this comprised all the remedies available under the articles of incorporation,
bylaws, laws, or rules governing PPC.
An allegation that appraisal rights were not available for the acts complained of is another
requisite for filing derivative suits under Rule 8, Section 1(3) of the Interim Rules.
Section 81 of the Corporation Code provides the instances of appraisal right:
SEC. 81. Instances of appraisal right.— Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholders or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
20
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this Code; and
3. In case of merger or consolidation.
Section 82 of the Corporation Codeprovides that the stockholder may exercise the right if he
or she voted against the proposed corporate action and if he made a written demand for
payment on the corporation within thirty (30) days after the date of voting.
Respondent Balmores complained aboutthe alleged inaction of PPC’s directors in his letter
informing themthat Villamor should be made to deliver to PPC and accountfor MC Home
Depot’s checks or their equivalent value. He alleged that these are devices or schemes
amounting to fraud or misrepresentation detrimental to the corporation’s and the
stockholders’ interests. He also alleged that the directors’ inaction placed PPC’s assets in
imminent and/or actual dissipation, loss, wastage, and destruction.
Granting that (a) respondent Balmores’ attempt to communicate with the other PPC directors
already comprised all the available remedies that he could have exhausted and (b) the
corporation was under full control of petitioners that exhaustion of remedies became
impossible or futile,74 respondent Balmores failed toallege that appraisal rights were not
available for the acts complained of here.
Neither did respondent Balmores implead PPC as party in the case nor did he allege that he
was filing on behalf of the corporation.
The non-derivative character of respondent Balmores’ action may also be gleaned from his
allegations in the trial court complaint. In the complaint, he described the nature ofhis action
as an action under Rule 1, Section 1(a)(1) of the Interim Rules, and not an action under Rule
1, Section 1(a)(4) of the Interim Rules, which refers to derivative suits. Thus, respondent
Balmores said:
1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-
corporate Controversies, involving devices or schemes employed by, or acts of, the
defendants as board of directors, business associates and officers of Pasig Printing
Corporation (PPC), amounting to fraud or misrepresentation, which are detrimental to the
interest of the plaintiff as stockholder of PPC.75 (Emphasis supplied)
Rule 1, Section 1(a)(1) of the Interim Rules refers to acts of the board, associates, and officers,
amounting to fraud or misrepresentation, which may be detrimental to the interest of the
stockholders. This is different from a derivative suit.
While devices and schemes of the board of directors, business associates, or officers
amounting to fraud under Rule 1, Section 1(a)(1) of the Interim Rules are causes of a
derivative suit, it is not always the case that derivative suits are limited to such causes or that
they are necessarily derivative suits. Hence, they are separately enumerated in Rule 1,
Section 1(a) of the Interim Rules:
SECTION 1. (a) Cases covered. – These Rules shall govern the procedure to be observed in civil
cases involving the following:
(1) Devices or schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, or members of
any corporation, partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or association relations, between
and among stockholders, members, or associates; and between, any or all of them and the
corporation, partnership, or association of which they are stockholders, members, or
associates, respectively;
(3) Controversies in the election orappointment of directors, trustees, officers, or managers
ofcorporations, partnerships, or associations;
(4) Derivative suits;and
(5) Inspection of corporate books. (Emphasis supplied)
Stockholder/s’ suits based on fraudulent or wrongful acts of directors, associates, or officers
may also beindividual suits or class suits.
Individual suits are filed when the cause of action belongs to the individual stockholder
personally, and notto the stockholders as a group or to the corporation, e.g., denial of right to
inspection and denial of dividends to a stockholder. 76 If the cause of action belongs to a group
of stockholders, such as when the rights violated belong to preferred stockholders, a class or
representative suit may be filed to protect the stockholders in the group. 77
In this case, respondent Balmores filed an individual suit. His intent was very clear from his
manner of describing the nature of his action:
1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-
corporate Controversies, involving devices or schemes employed by, or acts of, the
defendants as board of directors, business associates and officers of Pasig Printing
Corporation (PPC),amounting to fraud or misrepresentation, which are detrimental to the
interest of the plaintiff as stockholder of PPC.78
(Emphasis supplied)
His intent was also explicit from his prayer:
WHEREFORE, plaintiff respectfully prays that the Honorable Court –
21
....
2. After notice and due proceedings –
Declare that the acts of defendant Directorsin allowing defendant VILLAMOR to retain
custody of the MC Home checks and encash them upon maturity, as well as their refusal or
failure to take any action against defendant VILLAMOR to make him account and deliver the
MC Home checks and/or their proceeds to Pasig Printing Corporation are devices, schemes or
acts amounting to fraud that are detrimental to plaintiff’s interest as a stockholder of
PPC;79 (Emphasis supplied)
Respondent Balmores did not bring the action for the benefit of the corporation. Instead,
hewas alleging that the acts of PPC’s directors, specifically the waiver of rights in favor of
Villamor’s law firm and their failure to take back the MC Home Depot checks from Villamor,
were detrimental to his individual interest as a stockholder. In filing an action, therefore, his
intention was to vindicate his individual interest and not PPC’s or a group of stockholders’.
The essence of a derivative suit is thatit must be filed on behalf of the corporation. This is
because the cause of action belongs, primarily, to the corporation. The stockholder who sues
on behalf of a corporation is merely a nominal party.
Respondent Balmores’ intent to file an individual suit removes it from the coverage of
derivative suits.
III
Respondent Balmores has no cause of action that would
entitle him to the reliefs sought
Corporations have a personality that is separate and distinct from their stockholders and
directors. A wrong tothe corporation does not necessarily create an individual cause of
action. "A cause of action is the act or omission by which a party violates the right of
another."80 A cause of action must pertain to complainant if he or she is to be entitled to the
reliefs sought. Thus, in Cua v. Tan,81 this court emphasized:
. . . where the acts complainedof constitute a wrong to the corporation itself, the cause of
action belongs to the corporation and not to the individual stockholder or member. Although
in most every case of wrong to the corporation, each stockholder is necessarily affected
because the value of his interest therein would beimpaired, this fact of itself is not sufficient
to give him an individual cause of action since the corporation is a person distinct and
separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would
the theory of separate entity be violated, but there would be multiplicity of suits as well as a
violation of the priority rights of creditors. Furthermore, there is the difficulty of determining
the amount of damages that should be paid to each individual stockholder. 82
In this case, respondent Balmores did not allege any cause of action that is personal to him.
His allegations are limited to the facts that PPC’s directors waived their rights to rental
income in favor of Villamor’s law firm without consideration and that they failed to take
action when Villamor refused to turn over the amounts to PPC. These are wrongsthat pertain
to PPC. Therefore, the cause of action belongs to PPC — not to respondent Balmores or any
stockholders as individuals.
For this reason, respondent Balmoresis not entitled to the reliefs sought in the complaint.
Only the corporation, or arguably the stockholders as a group, is entitled to these reliefs,
which should have been sought in a proper derivative suit filed on behalf of the corporation.
PPC will not be bound by a decision granting the application for the appointment of a receiver
or management committee. Since it was not impleaded in the complaint, the courtsdid not
acquire jurisdiction over it. On this matter, it is an indispensable party, without which, no final
determination can be had.
Hence, it is not only respondent Balmores’ failure to implead PPC that is fatal to his action, as
petitioners point out. It is the fact that he alleged no cause of action that pertains personally
to him that disqualifies him from the reliefs he sought in his complaint.
On this basis alone, the Court of Appeals erred in giving due course to respondent Balmores’
petition for certiorari, reversing the trial court’s decision, and issuing a new order placing PPC
under receivership and creating an interim management committee.
IV
Appointment of a management committee was not proper
Assuming that respondent Balmores has an individual cause of action, the Court of Appeals
still erred in placing PPC under receivership and in creating and appointing a management
committee.
A corporation may be placed under receivership, or management committees may be created
to preserveproperties involved in a suit and to protect the rights of the parties under the
control and supervision of the court. 83Management committees and receivers are appointed
when the corporation is in imminent danger of "(1) [d]issipation, loss, wastage or destruction
of assets or other properties; and (2) [p]aralysation of its business operations that may be
prejudicial to the interest of the minority stockholders, parties-litigants, or the general
public."84
Applicants for the appointment of a receiver or management committee need to establish
the confluence of these two requisites.1âwphi1 This is because appointed receivers and
management committees will immediately take over the management of the corporation and
will have the management powers specified in law. 85 This may have a negative effect on the
operations and affairs of the corporation with third parties, 86 as persons who are more
22
familiar with its operations are necessarily dislodged from their positions in favor of question was an interlocutory one. This means that jurisdiction over the main case was still
appointees who are strangers to the corporation’s operations and affairs. lodged with the trial court.

Thus, in Sy Chim v. Sy Siy Ho & Sons, Inc.,87 this court said:
. . . the creation and appointment of a management committee and a receiver is an extra
ordinary and drastic remedy to be exercised with care and caution; and only when the
requirements under the Interim Rules are shown. It is a drastic course for the benefit of the
minority stockholders, the parties-litigants or the general public are allowed only under
pressing circumstances and, when there is inadequacy, ineffectual or exhaustion of legal or
other remedies . . . The powerof the court to continue a business of a corporation . . . must be
exercised with the greatest care and caution. There should be a full consideration ofall the
attendant facts, including the interest of all the parties concerned. 88
The court making the appointment controls and supervises the appointed receiver or
management committee.1âwphi1Thus, the Court of Appeals’ appointment of a management
committee would result in an absurd scenario wherein while the main case is still pending
before the trial court, the receiver or management committee reports to the Court of
Appeals.
WHEREFORE, the petitions are GRANTED. The decision of the Court of Appeals dated March
2, 2006 and its resolution dated May 29, 2006 are SET ASIDE.
SO ORDERED.

PPC waived its rights, without any consideration in favor of Villamor. The checks were already MARVIC M.V. F. LEONEN
in Villamor’s possession. Some of the checks may have already been encashed. This court Associate Justice
takes judicial notice that the goodwill money of ₱18,000,000.00 and the rental payments of
₱4,500,000.00 every month are not meager amounts only to be waived without any
consideration. It is, therefore, enough to constitute loss or dissipation of assets under the
Interim Rules.

Respondent Balmores, however, failed to show that there was an imminent danger of
paralysis of PPC’s business operations. Apparently, PPC was earning substantial amounts from
its other sub-lessees. Respondent Balmores did not prove otherwise. He, therefore, failed to
show at least one of the requisites for appointment of a receiver or management committee.

The Court of Appeals had no

jurisdiction to appoint the receiver or management

committee

The Court of Appeals has no power to appoint a receiver or management committee. The
Regional Trial Court has original and exclusive jurisdiction 89 to hear and decide intra-corporate
controversies,90 including incidents of such controversies. 91 These incidents include
applications for the appointment of receivers or management committees.

"The receiver and members of the management committee . . . are considered officers of the
court and shall be under its control and supervision." 92 They are required to report tothe
court on the status of the corporation within sixty (60) days from their appointment and
every three (3) months after.93

When respondent Balmores filed his petition for certiorari with the Court of Appeals, there
was still a pending action in the trial court. No less than the Court of Appeals stated that it
allowed respondent Balmores’ petition under Rule 65 because the order or resolution in
23
G.R. 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.
DECISION
LEONEN, J.:
Corporate representatives may be compelled to submit to arbitration proceedings pursuant
to a contract entered into by the corporation they represent if there are allegations of bad
faith or malice in their acts representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October
5, 2006 resolution. The Court of Appeals affirmed the trial court's decision holding that
petitioners, as director, should submit themselves as parties tothe arbitration proceedings
between BF Corporation and Shangri-La Properties, Inc. (Shangri-La).
In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-Laand the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco,
Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos. 1
BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it
entered into agreements with Shangri-La wherein it undertook to construct for Shangri-La a
mall and a multilevel parking structure along EDSA. 2
Shangri-La had been consistent in paying BF Corporation in accordance with its progress
billing statements.3However, by October 1991, Shangri-La started defaulting in payment.4
BF Corporation alleged that Shangri-La induced BF Corporation to continue with the
construction of the buildings using its own funds and credit despite Shangri-La’s
default.5 According to BF Corporation, ShangriLa misrepresented that it had funds to pay for
its obligations with BF Corporation, and the delay in payment was simply a matter of delayed
processing of BF Corporation’s progress billing statements. 6
BF Corporation eventually completed the construction of the buildings. 7 Shangri-La allegedly
took possession of the buildings while still owing BF Corporation an outstanding balance. 8
BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance
owed to it.9 It also alleged that the Shangri-La’s directors were in bad faith in directing
Shangri-La’s affairs. Therefore, they should be held jointly and severally liable with Shangri-La
for its obligations as well as for the damages that BF Corporation incurred as a result of
Shangri-La’s default.10
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and
Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF Corporation’s
failure to submit its dispute to arbitration, in accordance with the arbitration clauseprovided
in its contract, quoted in the motion as follows: 11
35. Arbitration
(1) Provided always that in case any dispute or difference shall arise between the Owner or
the Project Manager on his behalf and the Contractor, either during the progress or after the
completion or abandonment of the Works as to the construction of this Contract or as to any
matter or thing of whatsoever nature arising there under or inconnection therewith
(including any matter or thing left by this Contract to the discretion of the Project Manager or
the withholding by the Project Manager of any certificate to which the Contractor may claim
to be entitled or the measurement and valuation mentioned in clause 30(5)(a) of these
Conditions or the rights and liabilities of the parties under clauses 25, 26, 32 or 33 of these
Conditions), the owner and the Contractor hereby agree to exert all efforts to settle their
differences or dispute amicably. Failing these efforts then such dispute or difference shall be
referred to arbitration in accordance with the rules and procedures of the Philippine
Arbitration Law.
xxx xxx xxx
(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the
Arbitrators shall be a condition precedent to any right of legal action that either party may
have against the other. . . .12 (Underscoring in the original)
On August 19, 1993, BF Corporation opposed the motion to suspend proceedings. 13
In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend
proceedings.14
On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with
compulsory counter claim against BF Corporation and crossclaim against Shangri-La. 15 They
alleged that they had resigned as members of Shangri-La’s board of directors as of July 15,
1991.16
After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of
its November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G.
Licauco III, and Benjamin Ramos filed a petition for certiorari with the Court of Appeals. 17
On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the
submission of the dispute to arbitration. 18
Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on
certiorari with this court. 19On March 27, 1998, this court affirmed the Court of Appeals’
decision, directing that the dispute be submitted for arbitration. 20
24
Another issue arose after BF Corporation had initiated arbitration proceedings. BF
Corporation and Shangri-La failed to agree as to the law that should govern the arbitration
proceedings.21 On October 27, 1998, the trial court issued the order directing the parties to
conduct the proceedings in accordance with Republic Act No. 876. 22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification,
both seeking to clarify the term, "parties," and whether Shangri-La’s directors should be
included in the arbitration proceedings and served with separate demands for arbitration. 23
Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that
they be excluded from the arbitration proceedings for being non-parties to Shangri-La’s and
BF Corporation’s agreement.24
On July 28, 2003, the trial court issued the order directing service of demands for arbitration
upon all defendants in BF Corporation’s complaint. 25 According to the trial court, Shangri-La’s
directors were interested parties who "must also be served with a demand for arbitration to
give them the opportunity to ventilate their side of the controversy, safeguard their interest
and fend off their respective positions." 26 Petitioners’ motion for reconsideration ofthis order
was denied by the trial court on January 19, 2005.27
Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of
discretion in the issuance of orders compelling them to submit to arbitration proceedings
despite being third parties to the contract between Shangri-La and BF Corporation. 28
In its May 11, 2006 decision, 29 the Court of Appeals dismissed petitioners’ petition for
certiorari. The Court of Appeals ruled that ShangriLa’s directors were necessary parties in the
arbitration proceedings.30 According to the Court of Appeals:
[They were] deemed not third-parties tothe contract as they [were] sued for their acts in
representation of the party to the contract pursuant to Art. 31 of the Corporation Code, and
that as directors of the defendant corporation, [they], in accordance with Art. 1217 of the
Civil Code, stand to be benefited or injured by the result of the arbitration proceedings,
hence, being necessary parties, they must be joined in order to have complete adjudication
of the controversy. Consequently, if [they were] excluded as parties in the arbitration
proceedings and an arbitral award is rendered, holding [Shangri-La] and its board of directors
jointly and solidarily liable to private respondent BF Corporation, a problem will arise, i.e.,
whether petitioners will be bound bysuch arbitral award, and this will prevent complete
determination of the issues and resolution of the controversy. 31
The Court of Appeals further ruled that "excluding petitioners in the arbitration
proceedings . . . would be contrary to the policy against multiplicity of suits." 32
The dispositive portion of the Court of Appeals’ decision reads:
WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and January
19, 2005 of public respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400, are
AFFIRMED.33
The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006
resolution.34
On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of
Appeals decision and the October 5, 2006 Court of Appeals resolution. 35
The issue in this case is whether petitioners should be made parties to the arbitration
proceedings, pursuant to the arbitration clause provided in the contract between BF
Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate acts or
obligations.36 The corporation is a separate being, and nothing justifies BF Corporation’s
allegation that they are solidarily liable with Shangri-La. 37Neither did they bind themselves
personally nor did they undertake to shoulder Shangri-La’s obligations should it fail in its
obligations.38 BF Corporation also failed to establish fraud or bad faith on their part. 39
Petitioners also argue that they are third parties to the contract between BF Corporation and
Shangri-La.40Provisions including arbitration stipulations should bind only the parties. 41 Based
on our arbitration laws, parties who are strangers to an agreement cannot be compelled to
arbitrate.42
Petitioners point out thatour arbitration laws were enacted to promote the autonomy of
parties in resolving their disputes.43 Compelling them to submit to arbitration is against this
purpose and may be tantamount to stipulating for the parties.44
Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III,
Alfredo C.Ramos and Benjamin C. Ramos.45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that
Shangri-La’sdirectors, being non-parties to the contract, should not be made personally liable
for Shangri-La’s acts.46 Since the contract was executed only by BF Corporation and Shangri-
La, only they should be affected by the contract’s stipulation. 47 BF Corporation also failed to
specifically allege the unlawful acts of the directors that should make them solidarily liable
with Shangri-La for its obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties
should undergo arbitration "clearly contemplated the inclusion of the directors of the
corporation[.]"49 BF Corporation also argued that while petitioners were not parties to the
agreement, they were still impleaded under Section 31 of the Corporation Code. 50Section 31
makes directors solidarily liable for fraud, gross negligence, and bad faith. 51 Petitioners are
25
not really third parties to the agreement because they are being sued as Shangri-La’s
representatives, under Section 31 of the Corporation Code.52
BF Corporation further argued that because petitioners were impleaded for their solidary
liability, they are necessary parties to the arbitration proceedings. 53 The full resolution of all
disputes in the arbitration proceedings should also be done in the interest of justice. 54
In the manifestation dated September 6, 2007, petitioners informed the court that the
Arbitral Tribunal had already promulgated its decision on July 31, 2007. 55 The Arbitral Tribunal
denied BF Corporation’s claims against them. 56Petitioners stated that "[they] were included
by the Arbitral Tribunal in the proceedings conducted . . . notwithstanding [their] continuing
objection thereto. . . ."57 They also stated that "[their] unwilling participation in the
arbitration case was done ex abundante ad cautela, as manifested therein on several
occasions."58 Petitioners informed the court that they already manifested with the trial court
that "any action taken on [the Arbitral Tribunal’s decision] should be without prejudice to the
resolution of [this] case."59
Upon the court’s order, petitioners and Shangri-La filed their respective memoranda.
Petitioners and Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated
their arguments that they should not be held liable for Shangri-La’s default and made parties
to the arbitration proceedings because only BF Corporation and Shangri-La were parties to
the contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary
liability under Section 31 of the Corporation Code. Shangri-La added that their exclusion from
the arbitration proceedings will result in multiplicity of suits, which "is not favored in this
jurisdiction."60 It pointed out that the case had already been mooted by the termination of
the arbitration proceedings, which petitioners actively participated in. 61 Moreover, BF
Corporation assailed only the correctness of the Arbitral Tribunal’s award and not the part
absolving Shangri-La’s directors from liability.62
BF Corporation filed a counter-manifestation with motion to dismiss 63 in lieu of the required
memorandum.
In its counter-manifestation, BF Corporation pointed out that since "petitioners’
counterclaims were already dismissed with finality, and the claims against them were likewise
dismissed with finality, they no longer have any interest orpersonality in the arbitration case.
Thus, there is no longer any need to resolve the present Petition, which mainly questions the
inclusion of petitioners in the arbitration proceedings." 64 The court’s decision in this case will
no longer have any effect on the issue of petitioners’ inclusion in the arbitration
proceedings.65
The petition must fail.
The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on
BF Corporation, have rendered this case moot and academic.
The mootness of the case, however, had not precluded us from resolving issues so that
principles may be established for the guidance of the bench, bar, and the public. In De la
Camara v. Hon. Enage,66 this court disregarded the fact that petitioner in that case already
escaped from prison and ruled on the issue of excessive bails:
While under the circumstances a ruling on the merits of the petition for certiorari is
notwarranted, still, as set forth at the opening of this opinion, the fact that this case is moot
and academic should not preclude this Tribunal from setting forth in language clear and
unmistakable, the obligation of fidelity on the part of lower court judges to the unequivocal
command of the Constitution that excessive bail shall not be required. 67
This principle was repeated in subsequent cases when this court deemed it proper to clarify
important matters for guidance.68
Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in
accordance with Shangri-Laand BF Corporation’s agreement, in order to determine if the
distinction between Shangri-La’s personality and their personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid
litigation and settle disputes amicably and more expeditiously by themselves and through
their choice of arbitrators.
The policy in favor of arbitration has been affirmed in our Civil Code, 69 which was approved as
early as 1949. It was later institutionalized by the approval of Republic Act No. 876, 70 which
expressly authorized, made valid, enforceable, and irrevocable parties’ decision to submit
their controversies, including incidental issues, to arbitration. This court recognized this policy
in Eastboard Navigation, Ltd. v. Ysmael and Company, Inc.:71
As a corollary to the question regarding the existence of an arbitration agreement, defendant
raises the issue that, even if it be granted that it agreed to submit its dispute with plaintiff to
arbitration, said agreement is void and without effect for it amounts to removing said dispute
from the jurisdiction of the courts in which the parties are domiciled or where the dispute
occurred. It is true that there are authorities which hold that "a clause in a contract providing
that all matters in dispute between the parties shall be referred to arbitrators and to them
alone, is contrary to public policy and cannot oust the courts of jurisdiction" (Manila Electric
Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are authorities which
favor "the more intelligent view that arbitration, as an inexpensive, speedy and amicable
method of settling disputes, and as a means of avoiding litigation, should receive every
encouragement from the courts which may be extended without contravening sound public
policy or settled law" (3 Am. Jur., p. 835). Congress has officially adopted the modern view
when it reproduced in the new Civil Code the provisions of the old Code on Arbitration. And
26
only recently it approved Republic Act No. 876 expressly authorizing arbitration of future
disputes.72 (Emphasis supplied)
In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses
are liberally construed to favor arbitration. Thus, in LM Power Engineering Corporation v.
Capitol Industrial Construction Groups, Inc.,73 this court said:
Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along
with mediation, conciliation and negotiation — is encouraged by the Supreme Court. Aside
from unclogging judicial dockets, arbitration also hastens the resolution of disputes,
especially of the commercial kind. It is thus regarded as the "wave of the future" in
international civil and commercial disputes. Brushing aside a contractual agreement calling
for arbitration between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution
methods, courts should liberally construe arbitration clauses. Provided such clause is
susceptible of an interpretation that covers the asserted dispute, an order to arbitrate should
be granted. Any doubt should be resolved in favor of arbitration. 74(Emphasis supplied)
A more clear-cut statement of the state policy to encourage arbitration and to favor
interpretations that would render effective an arbitration clause was later expressed in
Republic Act No. 9285:75
SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote
party autonomy in the resolution of disputes or the freedom of the party to make their own
arrangements to resolve their disputes. Towards this end, the State shall encourage and
actively promote the use of Alternative Dispute Resolution (ADR) as an important means to
achieve speedy and impartial justice and declog court dockets. As such, the State shall
provide means for the use of ADR as an efficient tool and an alternative procedure for the
resolution of appropriate cases. Likewise, the State shall enlist active private sector
participation in the settlement of disputes through ADR. This Act shall be without prejudice to
the adoption by the Supreme Court of any ADR system, such as mediation, conciliation,
arbitration, or any combination thereof as a means of achieving speedy and efficient means
of resolving cases pending before all courts in the Philippines which shall be governed by such
rules as the Supreme Court may approve from time to time.
....
SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to
the policy of the law in favor of arbitration.Where action is commenced by or against multiple
parties, one or more of whomare parties who are bound by the arbitration agreement
although the civil action may continue as to those who are not bound by such arbitration
agreement. (Emphasis supplied)
Thus, if there is an interpretation that would render effective an arbitration clause for
purposes ofavoiding litigation and expediting resolution of the dispute, that interpretation
shall be adopted. Petitioners’ main argument arises from the separate personality given to
juridical persons vis-à-vis their directors, officers, stockholders, and agents. Since they did not
sign the arbitration agreement in any capacity, they cannot be forced to submit to the
jurisdiction of the Arbitration Tribunal in accordance with the arbitration agreement.
Moreover, they had already resigned as directors of Shangri-Laat the time of the alleged
default.
Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate
and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law. 76 This means that while it is not a
person, naturally, the law gives it a distinct personality and treats it as such. A corporation, in
the legal sense, is an individual with a personality that is distinct and separate from other
persons including its stockholders, officers, directors, representatives, 77 and other juridical
entities. The law vests in corporations rights,powers, and attributes as if they were natural
persons with physical existence and capabilities to act on their own. 78 For instance, they have
the power to sue and enter into transactions or contracts. Section 36 of the Corporation Code
enumerates some of a corporation’s powers, thus:
Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code
has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate ofincorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
27
9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers asmay be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation. (13a)
Because a corporation’s existence is only by fiction of law, it can only exercise its rights and
powers through itsdirectors, officers, or agents, who are all natural persons. A corporation
cannot sue or enter into contracts without them.
A consequence of a corporation’s separate personality is that consent by a corporation
through its representatives is not consent of the representative, personally. Its obligations,
incurred through official acts of its representatives, are its own. A stockholder, director, or
representative does not become a party to a contract just because a corporation executed a
contract through that stockholder, director or representative.
Hence, a corporation’s representatives are generally not bound by the terms of the contract
executed by the corporation. They are not personally liable for obligations and liabilities
incurred on or in behalf of the corporation.
Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their
disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation79 that an arbitration clause shall not apply to persons who were neither parties
to the contract nor assignees of previous parties, thus:
A submission to arbitration is a contract. As such, the Agreement, containing the stipulation
on arbitration, binds the parties thereto, as well as their assigns and heirs. But only
they.80 (Citations omitted)
81
Similarly, in Del Monte Corporation-USA v. Court of Appeals, this court ruled:
The provision to submit to arbitration any dispute arising therefrom and the relationship of
the parties is part of that contract and is itself a contract. As a rule, contracts are respected as
the law between the contracting parties and produce effect as between them, their assigns
and heirs. Clearly, only parties to the Agreement . . . are bound by the Agreement and its
arbitration clause as they are the only signatories thereto. 82 (Citation omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co.,
Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc., et al. 84
As a general rule, therefore, a corporation’s representative who did not personally bind
himself or herself to an arbitration agreement cannot be forced to participate in arbitration
proceedings made pursuant to an agreement entered into by the corporation. He or she is
generally not considered a party to that agreement.
However, there are instances when the distinction between personalities of directors,
officers,and representatives, and of the corporation, are disregarded. We call this piercing the
veil of corporate fiction.
Piercing the corporate veil is warranted when "[the separate personality of a corporation] 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." 85 It is also
warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter ego
or business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation." 86
When corporate veil is pierced, the corporation and persons who are normally treated as
distinct from the corporation are treated as one person, such that when the corporation is
adjudged liable, these persons, too, become liable as if they were the corporation.
Among the persons who may be treatedas the corporation itself under certain circumstances
are its directors and officers. Section 31 of the Corporation Code provides the instances when
directors, trustees, or officers may become liable for corporate acts:
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.
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
inhim 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. (n)
Based on the above provision, a director, trustee, or officer of a corporation may be made
solidarily liable with it for all damages suffered by the corporation, its stockholders or
members, and other persons in any of the following cases:
a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful
corporate act;
28
b) The director or trustee was guilty of gross negligence or bad faith in directing corporate
affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict with his or her
duties as director or trustee.
Solidary liability with the corporation will also attach in the following instances:
a) "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";87
b) "When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the corporation"; 88 and
c) "When a director, trustee or officer is made, by specific provision of law, personally liable
for his corporate action."89
When there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these persons and
the corporation should be treated as one. Without a trial, courts and tribunals have no basis
for determining whether the veil of corporate fiction should be pierced. Courts or tribunals
do not have such prior knowledge. Thus, the courts or tribunals must first determine whether
circumstances exist towarrant the courts or tribunals to disregard the distinction between the
corporation and the persons representing it. The determination of these circumstances must
be made by one tribunal or court in a proceeding participated in by all parties involved,
including current representatives of the corporation, and those persons whose personalities
are impliedly the sameas the corporation. This is because when the court or tribunal finds
that circumstances exist warranting the piercing of the corporate veil, the corporate
representatives are treated as the corporation itself and should be held liable for corporate
acts. The corporation’s distinct personality is disregarded, and the corporation is seen as a
mere aggregation of persons undertaking a business under the collective name of the
corporation.
Hence, when the directors, as in this case, are impleaded in a case against a corporation,
alleging malice orbad faith on their part in directing the affairs of the corporation,
complainants are effectively alleging that the directors and the corporation are not acting as
separate entities. They are alleging that the acts or omissions by the corporation that violated
their rights are also the directors’ acts or omissions. 90 They are alleging that contracts
executed by the corporation are contracts executed by the directors. Complainants effectively
pray that the corporate veilbe pierced because the cause of action between the corporation
and the directors is the same.
In that case, complainants have no choice but to institute only one proceeding against the
parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single cause of action is
prohibited. Institution of more than one suit for the same cause of action constitutes splitting
the cause of action, which is a ground for the dismissal ofthe others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. — A party may not institute more than one
suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on
the basis of the same cause of action, the filing of one or a judgment upon the merits in any
one is available as a ground for the dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may later be found to be
indistinct that we rule that petitioners may be compelled to submit to arbitration.
However, in ruling that petitioners may be compelled to submit to the arbitration
proceedings, we are not overturning Heirs of Augusto Salas wherein this court affirmed the
basic arbitration principle that only parties to an arbitration agreement may be compelled to
submit to arbitration. In that case, this court recognizedthat persons other than the main
party may be compelled to submit to arbitration, e.g., assignees and heirs. Assignees and
heirs may be considered parties to an arbitration agreement entered into by their assignor
because the assignor’s rights and obligations are transferred to them upon assignment. In
other words, the assignor’s rights and obligations become their own rights and obligations. In
the same way, the corporation’s obligations are treated as the representative’s obligations
when the corporate veil is pierced. Moreover, in Heirs of Augusto Salas, this court affirmed its
policy against multiplicity of suits and unnecessary delay. This court said that "to split the
proceeding into arbitration for some parties and trial for other parties would "result in
multiplicity of suits, duplicitous procedure and unnecessary delay." 91 This court also intimated
that the interest of justice would be best observed if it adjudicated rights in a single
proceeding.92 While the facts of that case prompted this court to direct the trial court to
proceed to determine the issues of thatcase, it did not prohibit courts from allowing the case
to proceed to arbitration, when circumstances warrant.
Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and
the incidental issue of whether piercing of the corporate veil is warranted, should be
determined in a single proceeding. Such finding would determine if the corporation is merely
an aggregation of persons whose liabilities must be treated as one with the corporation.
However, when the courts disregard the corporation’s distinct and separate personality from
its directors or officers, the courts do not say that the corporation, in all instances and for all
purposes, is the same as its directors, stockholders, officers, and agents. It does not result in
an absolute confusion of personalities of the corporation and the persons composing or
representing it. Courts merely discount the distinction and treat them as one, in relation to a
specific act, in order to extend the terms of the contract and the liabilities for all damages to
erring corporate officials who participated in the corporation’s illegal acts. This is done so that
the legal fiction cannot be used to perpetrate illegalities and injustices.
29
Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the
corporate veil, parties who are normally treated as distinct individuals should be made to
participate in the arbitration proceedings in order to determine ifsuch distinction should
indeed be disregarded and, if so, to determine the extent of their liabilities.

In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to
prove the existence of circumstances that render petitioners and the other directors solidarily
liable. It ruled that petitioners and Shangri-La’s other directors were not liable for the
contractual obligations of Shangri-La to BF Corporation. The Arbitral Tribunal’s decision was
made with the participation of petitioners, albeit with their continuing objection. In view of
our discussion above, we rule that petitioners are bound by such decision.

WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and
resolution of October 5, 2006 are AFFIRMED.

SO ORDERED.

30
G.R. No. 173548
ONOFRE ANDRES, SUBSTITUTED BY HIS HEIRS, NAMELY: FERDINAND, ROSALINA, ERIBERTO,
FROILAN, MA. CLEOFE, NELSON, GERMAN, GLORIA, ALEXANDER, MAY, ABRAHAM, and
AFRICA, All Surnamed ANDRES, Petitioners
vs.
PHILIPPINE NATIONAL BANK, Respondents
DECISION
LEONEN, J.:
A bank that accepts a mortgage based upon a title which appears valid on its face and after
exercising the requisite care, prudence, and diligence appropriate to the public interest
character of its business can be deemed a mortgagee in good !aith. The subsequent
consolidation of title in its name after a valid foreclosure shall be respected notwithstanding
later proof showing that the title was based upon a void transaction.
This case involves a 4,634-square-meter parcel of land in Nueva Ecija mortgaged to
respondent Philippine National Bank (PNB). PNB later foreclosed the property and
consolidated title in its name.1 Petitioner Onofre Andres, the uncle of mortgagors Reynaldo
Andres and his wife, Janette de Leon, filed a complaint for cancellation of title and
reconveyance of the property alleging that title in mortgagor's name was based on a falsified
document denominated as "Self-Adjudication of Sole Heir."
The trial court ruled in favor of Onofre Andres by voiding all derivative titles from TCT No. NT-
7267. The Court of Appeals modified this decision by declaring as valid and existing TCT No.
N-24660 in PNB’s name. Onofre Andres filed the instant petition 2 assailing the Court of
Appeals’ decision and resolution.
The Spouses Victor and Filomena Andres acquired during their marriage a 4,634-square-
meter parcel of land in Sto. Domingo, Nueva Ecija, covered by TCT No. NT-7267. 3
They had nine children.4 Among them were Onofre Andres and Roman Andres who is the
father of Reynaldo Andres.5 Victor passed away on June 15, 1955, while his wife, Filomena,
died on April 23, 1973.6
After Victor’s death, or on July 1, 1965, 7 his widow, Filomena, and six of their children —
Onofre, Roman, Juana, Guillermo, Felisa,8 and Maxima — agreed in an extrajudicial partition
with sale to adjudicate one half of the land covered by TCT No. NT-7267 to each of them pro
indiviso.9 This document also provides that for 1,000.00, they all sold, transferred, and
conveyed to Roman Andres their respective rights and participation to the one-half portion of
the property.10 This was annotated on the title.11
Consequently, TCT No. NT-7267 was cancelled, and a new title was issued on August 20, 1965
in the name of Roman Andres and his wife, Lydia Echaus-Andres, under TCT No. NT-
57731.12 PNB alleged that on October 22, 1968, the Spouses Roman and Lydia Andres
mortgaged the property to PNB for 3,000.00. 13 According to PNB, no objection was made,
even after the mortgage had been cancelled on July 20, 1972. 14
PNB also alleged that on October 14, 1992, the Nueva Ecija Regional Trial Court 15 cancelled
the guardianship issued in favor of the Security Bank and Trust Company and transferred
ownership of the properties of the deceased, Spouses Roman and Lydia Andres, to their only
living heir, Reynaldo Andres. 16
TCT No. NT-57731 was consequently cancelled, and title was transferred to the Spouses
Reynaldo Andres and Janette de Leon, under TCT No. (NT-239548) NT-7725 on December 27,
1994.17
On September 4, 1995, the Spouses Reynaldo Andres and Janette de Leon used this title and
mortgaged the property to PNB for a 1.2 million loan. 18 This was without the consent of
Onofre Andres.19
Onofre Andres, claiming ownership over the property, filed on November 13, 1996 a
complaint for cancellation of title, reconveyance of property and damages, with prayer for
the issuance of a preliminary injunction against his nephew Reynaldo Andres and Reynaldo’s
wife, Janette de Leon, PNB, Lydia Echaus-Andres, and the Register of Deeds of Nueva Ecija. 20
The complaint alleged that on November 8, 1994, Onofre Andres’ nephew Reynaldo Andres
was in collusion with his mother, Lydia EchausAndres, in executing a falsified document
denominated as "SelfAdjudication of Sole Heir." This stated that Reynaldo Andres was the
sole heir of his father, Roman Andres, who died on October 12, 1968, and his mother who
died on December 15, 1969. 21 However, his mother was then still alive and his father, Roman
Andres, died only on May 29, 1990.22
PNB denied the material allegations in the complaint. It argued that it conducted an
investigation on the property. 23The title presented to PNB by Reynaldo Andres and his wife
was clear and free from adverse claims.24
For their part, the Spouses Reynaldo Andres and Janette de Leon claimed that from the time
title was issued in the name of Reynaldo Andres’ parents, until title transferred to them on
December 27, 1994, his father, Roman Andres, had exercised acts of ownership over the
property until they succeeded in its possession. 25 Onofre Andres’ possession was merely
"tolerated [because] of their close relationship." 26 The Spouses Reynaldo Andres and Janette
de Leon also raised prescription and estoppel. 27
In his reply, Onofre Andres countered that the extrajudicial partition with sale executed on
July 1, 1965 was fictitious, thus, void. 28 Onofre Andres argued that (1) this was not published
in a newspaper of general circulation; (2) it was executed only to accommodate the request
of Roman Andres and his wife who wanted to mortgage the property; (3) three of the
legitimate heirs of the late Victor and Filomena Andres, who were then still living, namely,
31
Sixto, Ofelia, and Araceli, did not participate in its execution; and (4) there was no
consideration for the alleged sale.29
Even assuming that the document was valid, only a one-half undivided portion of the land
was sold since the other half was the conjugal share of Filomena Andres who was then still
living.30 The residential building did not exist yet at the time of the questioned partition so
this could not have been sold to Roman Andres. 31
Onofre Andres also denied that his continuous possession of the property was by mere
tolerance.32
This case was filed as early as November 13, 1996, but the entire Nueva Ecija Regional Trial
Court was razed by fire.33 The records of this case were among those destroyed that needed
reconstitution.34
The parties submitted documents and pleadings forming part of the reconstituted records,
and the case was set for the retaking of testimonies and presentation of
evidence.35 Unfortunately, Onofre Andres' testimony could not be retaken since he was
already bedridden at that time.36
It appears that PNB was considered to have waived further presentation of evidence when its
counsel failed to appear at the hearing despite notice. 37 The trial court denied PNB’s motion
for reconsideration to be allowed to present evidence. 38
Onofre Andres died on March 20, 2001 when the case was in the presentation of evidence
stage. He was substituted by his surviving heirs. 39 The Regional Trial Court 40 rendered its
decision41 on November 7, 2003 in favor of Onofre Andres:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Declaring null and void all derivative titles from TCT No. NT-7267 specifically TCT No. NT-
57731, TCT No. NT-239548 and TCT No. NT-24660, and ordering the concerned Register of
Deeds to reinstate said TCT NT-7267 in the names of its original owners, Victor Andres and
Filomena Ramos.
2. Ordering defendant spouses Reynaldo Andres and Janette de Leon, jointly and severally, to
pay plaintiff or his substitutes the sum of 100,000.00 by way of moral damages.
3. Ordering defendant spouses Reynaldo Andres and Janette de Leon, jointly and severally, to
pay plaintiff or his substitutes the sum of 50,000.00 by way of exemplary damages;
4. Ordering defendant spouses Reynaldo Andres and Janette de Leon, jointly and severally, to
pay plaintiff or his substitutes attorney's fees in the sum of 30,000.00, and to pay the costs of
suit.
SO ORDERED.42
The Court of Appeals43 rendered its decision 44 on December 13, 2005, modifying the trial
court’s decision in that TCT No. N-24660 in the name of PNB was declared valid and existing.
The rest of the decision stands. 45 It also denied reconsideration 46 on July 5, 2006, prompting
Onofre Andres to file the instant petition. 47
Petitioner heirs of Onofre Andres argue that (1) there is no legal basis to uphold the validity
of PNB's title as it was derived from a void title; 48 (2) Cabuhat v. Court of Appeals49 on
innocent mortgagees for value is not applicable; 50 (3) PNB is "not a mortgagee in good
faith";51 (4) there was no valid mortgage, thus, no valid foreclosure and auction sale; 52 and (5)
"trial courts are in [a] better position to determine questions involving [the] credibility of
witnesses."53
Petitioner heirs pray that the assailed Court of Appeals’ decision and resolution be set aside,
and the trial court’s November 7, 2003 decision be reinstated. 54
In its comment, PNB countered that "a defective title may be a source of a completely legal
and valid title in the hands of an innocent purchaser for value." 55 Cruz v. Bancom Finance
Corporation56 cited by petitioner heirs is off-tangent and inapplicable. 57 On the other
hand, Cabuhat v. Court of Appeals on innocent mortgagees in good faith involved similar facts
and the same legal issue.58
PNB adds that the issue of whether it is a mortgagee in good faith involves a factual issue not
within this court’s power of review. 59 The issue on the validity of the foreclosure proceedings
and sale was not raised in the complaint, thus, cannot be raised for the first time on appeal. 60
Lastly, PNB contends that the factual findings of the Court of Appeals are deemed final and
conclusive by this court.61
Petitioner heirs filed a reply reiterating their arguments and submitting certified true copies
of the property’s tax declarations to support their contentions. 62
Thus, the issues before this court for resolution are:
I. Whether a valid title can be derived from a void title; and
II. Whether PNB is an innocent mortgagee for value and in good faith, thus, its right on the
property is protected even if the mortgagor obtained title through fraud.
A petition for review on certiorari shall raise only questions of law.63 The core of the issues
presented requires a determination of whether PNB was in good faith and exercised due
diligence in accepting the property mortgaged by Spouses Reynaldo Andres and Janette de
Leon. These are questions of fact64 that fall outside the ambit of this court’s power of review.
This court is not a trier of facts that routinely re-examines evidence presented. Factual
findings by the Court of Appeals are, thus, generally considered binding and conclusive upon
this court.65
32
The rule against entertaining factual questions admits of exceptions, 66 but none are present in
this case. This court finds no reason to overturn the findings of the Court of Appeals.
Petitioner heirs submit that the trial court "did not rule categorically on the issue of good
faith interposed by the respondent bank[; however], it ruled that since the mortgage was
without object and cause, it was parenthetically void such that the defense of and
protestation of good faith is thus rendered of no consequence." 67 In support of their
contention that PNB’s title was derived from a void title, petitioner heirs cited at length the
trial court decision:
A close examination of the said deed of partition will show that not all the children of the
spouses Victor Andres and Filomena Ramos were parties nor signatories thereto. Specifically,
only six of the nine children of said spouses executed the supposed extra-judicial partition
which, in effect, preterited three others, namely: Sixto, Ofelia and Araceli.
The extra-judicial partition is thus vitiated by what appeared to have been a deliberate
omission therein of the said three children. The obvious explanation to that is what is claimed
by the plaintiff: that the deed was simulated to afford financial accommodation to their
brother Roman.
More significantly, the deed very clearly provided that only one half of the subject property
was covered by partition since the other half was recognized as the conjugal share of Victor
Andres’ spouses [sic], Filomena Ramos.
Even assuming the validity of the partition as executed, only onehalf of the subject property
should have been transferred, by virtue thereof, to Roman Andres.
Insofar, therefore, as the Extra-Judicial Partition with Sale was made the basis for the transfer
of TCT No. NT-7267 to TCT No. NT57731, the same may not be characterized other than as
absolutely simulated or fictitious contract or document. As such, the transfer effected through
it was void ab initioand, in legal contemplation, never existed.
By the same token, any subsequent transfer from the void TCT No. NT-57731, could not have
had any valid and binding effect so as to constitute the transferee thereof as the legal owner
of the property embraced and described therein.
Interestingly, even the manner defendant Andres effected the transfer of TCT No. NT-57731 to
himself was legally flawed.
To be sure, the issuance of TCT No. NT-239548 in the name of defendant Reynaldo Andres
was by way of a document styled as Self Adjudication of Sole Heir (Exh. "D") executed by
defendant Reynaldo Andres himself. In this document, he declared that Roman Andres died
on October 12, 1968, and his mother died Lydia Echaus, on December 15, 1969; that they
died with the subject property as their only property, that he is the only child and heir of the
decedents and for that reason he declared the estate to be his inheritance and adjudicated
the same unto himself extra-judicially pursuant to Section 1, Rule 74 of the Rules of Court.
It appears, however, that at the time the Self-Adjudication of Sole Heir was executed by
defendant Reynaldo Andres, it is not true that his mother, Lydia Echaus, was already dead. In
fact, up to the present she [is] still alive. Not only that, defendant Reynaldo Andres is not
really the sole child of spouses Roman Andres and Lydia Echaus because they have other
children, namely: Cynthia and Vienna who are both in the United States of
America.68 (Emphasis supplied)
On the other hand, the Court of Appeals ascertained good faith on the part of PNB.
Preliminarily, the Court of Appeals mentioned that it is "in quandary as to whether or not the
appellant PNB indeed was able to present evidence for and on its own behalf [but a] close
scrutiny of the records of this case would disclose that Gerardo Pestaño was presented as a
witness for the defendant-PNB and his testimony was adopted by the defendants-spouses." 69
It then found that PNB followed the standard practice of banks before approving a loan by
sending representatives to inspect the property offered as collateral. 70 PNB even investigated
on "where and from whom the title . . . originated." 71
According to the Court of Appeals, evidence disclosed that Spouses Reynaldo Andres and
Janette de Leon submitted TCT No. (NT-239548) N7725 as proof of their ownership. PNB’s
property appraiser, Gerardo Pestaño, conducted an investigation and verified the status of the
property with the Register of Deeds and Assessor's Office.72
On August 8, 1995, Gerardo Pestaño went to the property and personally met with the
borrowers, Spouses Reynaldo Andres and Janette de Leon, who told him they were living in
the property. He appraised the residential building then being constructed. Upon Gerardo
Pestaño’s request, Reynaldo Andres submitted the property’s tax declaration. 73
Gerardo Pestaño also went to the Municipal Trial Court to check on any pending cases,
particularly on estafa, filed against Spouses Reynaldo Andres and Janette de Leon. Upon
verification from the Register of Deeds, he learned that all previous annotations on the titles
have been cancelled.74
The Court of Appeals found that there was nothing on the face of the titles that would excite
any suspicion of an irregular issuance. 75 Reynaldo Andres’ parents had even previously
mortgaged the property to a bank in 1965, and the property was accepted. 76
We affirm the decision of the Court of Appeals.
The Court of Appeals quoted Cabuhat v. Court of Appeals in holding that "when a mortgagee
relies upon what appears on the face of a Torrens title and loans money in all good faith on
the basis of the title in the name of the mortgagor, only thereafter to learn that the latter’s
title was defective, being thus an innocent mortgagee for value, his or her right or lien upon
33
the land mortgaged must be respected and protected, even if the mortgagor obtained her
title thereto through fraud."77
Petitioner heirs argued the inapplicability of Cabuhat to the instant case. They explained
how Cabuhat involved a private individual mortgagee while respondent was a universal bank.
They added that unlike in Cabuhat, good faith was not duly proven by PNB.78
Petitioner heirs then cited Cruz v. Bancom Finance Corporation for its holding that "[the bank]
should not have simply relied on the face of the Certificate of Title to the property, as its
ancillary function of investing funds required a greater degree of diligence. . . ." 79
The Civil Code is clear that only the absolute owner of a property can mortgage such
property.80 The law also provides that absolutely simulated or fictitious contracts are void and
inexistent.81 Consequently, these fictitious contracts convey no rights.
The trial court has declared as void all titles that originated from the contracts it found to be
void, such as the extrajudicial partition with sale in favor of Roman Andres, and the "Self-
Adjudication of Sole Heir" in favor of Reynaldo Andres. This was affirmed by the Court of
Appeals.
The issue now is whether a valid title in favor of PNB can be derived from these void titles.
This court reiterated the good faith doctrine that applies to innocent mortgagees for value in
the 2012 case of Philippine Banking Corporation v. Dy:82
While it is settled that a simulated deed of sale is null and void and therefore, does not
convey any right that could ripen into a valid title, it has been equally ruled that, for reasons
of public policy, the subsequent nullification of title to a property is not a ground to annul the
contractual right which may have been derived by a purchaser, mortgagee or other transferee
who acted in good faith.83 (Emphasis supplied, citations omitted)
The doctrine protecting mortgagees and innocent purchasers in good faith emanates from
the social interest embedded in the legal concept granting indefeasibility of titles. The burden
of discovery of invalid transactions relating to the property covered by a title appearing
regular on its face is shifted from the third party relying on the title to the co-owners or the
predecessors of the title holder. Between the third party and the coowners, it will be the
latter that will be more intimately knowledgeable about the status of the property and its
history. The costs of discovery of the basis of invalidity, thus, are better borne by them
because it would naturally be lower. A reverse presumption will only increase costs for the
economy, delay transactions, and, thus, achieve a less optimal welfare level for the entire
society.84
The general rule allows every person dealing with registered land to rely on the face of the
title when determining its absolute owner. 85 Thus, cases like Cabuhat have held that "a
mortgagee has a right to rely in good faith on the certificate of title of the mortgagor of the
property given as security and in the absence of any sign that might arouse suspicion, has no
obligation to undertake further investigation." 86 The protection of innocent mortgagees for
value finds support in the Land Registration Act:
Then in Penullar v. PNB, this Court resolved a similar issue ruling that Section 38 of the Land
Registration Act places an innocent mortgagee for value under the mantle of protection
accorded to innocent purchasers for value.
Furthermore, Section 39 of Act No. 496 provides that every person receiving a certificate of
title in pursuance of a decree of registration, and every subsequent purchaser (or mortgagee)
of registered land who takes a certificate of title for value in good faith, shall hold the same
free of all encumbrance except those noted on said certificate. . . 87 (Citations omitted)
Section 38 of Act No. 496 in what is now Section 32 of Presidential Decree No. 1529 reads:
SEC. 32. Review of decree of registration; Innocent purchaser for value. — The decree of
registration shall not be reopened or revised by reason of absence, minority, or other
disability of any person adversely affected thereby, nor by any proceeding in any court for
reversing judgments, subject, however, to the right of any person, including the government
and the branches thereof, deprived of land or of any estate or interest therein by such
adjudication or confirmation of title obtained by actual fraud, to file in the proper Court of
First Instance a petition for reopening and review of the decree of registration not later than
one year from and after the date of the entry of such decree of registration, but in no case
shall such petition be entertained by the court where an innocent purchaser for value has
acquired the land or an interest therein, whose rights may be prejudiced. Whenever the
phrase "innocent purchaser for value" or an equivalent phrase occurs in this Decree, it shall
be deemed to include an innocent lessee, mortgagee, or other encumbrancer for value.
Upon the expiration of said period of one year, the decree of registration and the certificate
of title issued shall become incontrovertible. Any person aggrieved by such decree of
registration in any case may pursue his remedy by action for damages against the applicant or
any other persons responsible for the fraud.
However, the banking industry belongs to a different category than private individuals. Banks
are considered businesses impressed with public interest, requiring "high standards of
integrity and performance."88 Consequently, banks must exercise greater care, prudence, and
due diligence in their property dealings. The standard operating practice for banks when
acting on a loan application is "to conduct an ocular inspection of the property offered for
mortgage and to verify the genuineness of the title to determine the real owner(s) thereof." 89
Unlike in Cruz v. Bancom Finance Corporation cited by petitioners,90 PNB complied with this
standard operating practice.
The petition even attached certified true copies of the transcript of bank appraiser Gerardo
Pestaño’s testimony, offered "to prove that defendant spouses Reynaldo and Jannette [sic]
34
Andres mortgaged the property subject matter of the litigation covered by Transfer Certificate
of Title No. NT-239548 to secure their loan to PNB approved in 1995 and at that time the
defendant Andres [spouses] were the owner[s] of the mortgaged property; that there was no
claim filed by the plaintiff Onofre Andres. . . ."91
Petitioner heirs disagree with the Court of Appeals’ findings of due diligence by PNB. They
submit that Gerardo Pestaño failed to conduct a thorough investigation; otherwise, he would
have discovered that Reynaldo Andres did not own the residential building then being
constructed on the property.92 Petitioner heirs add that the approval of a collateral in 1965
does not mean the same property is good collateral 30 years later. 93 Lastly, PNB was negligent
when it failed to take into account the two-year period under
Rule 74, Section 4 of the Rules of Court. 94
These arguments fail to convince.
First, it is undisputed that PNB sent its appraiser and credit investigator Gerardo Pestaño to
conduct an ocular inspection of the property. 95 He also went to the relevant government
offices to verify the ownership status of the property. 96 There was an on-going construction of
a residential building during his inspection, so he appraised this building as well, in case the
land proved insufficient to cover the applied loan. 97 These acts complied with the standard
operating practice expected of banks when dealing with real property.
Second, the two-year period under Rule 74, Section 4 of the Rules of Court had lapsed and
petitioner heirs did not allege if any heir or creditor of Roman Andres and his wife had
invoked their right under this provision. Rule 74, Section 4 of the Rules of Court provides:
SEC 4. Liability of distributees and estate. – If it shall appear at any time within two (2) years
after the settlement and distribution of an estate in accordance with the provisions of either
of the first two sections of this rule, that an heir or other person has been unduly deprived
of his lawful participation in the estate, such heir or such other person may compel the
settlement of the estate in the courts in the manner hereinafter provided for the purpose of
satisfying such lawful participation. And if within the same time of two (2) years, it shall
appear that there are debts outstanding against the estate which have not been paid, or that
an heir or other person has been unduly deprived of his lawful participation payable in
money, the court having jurisdiction of the estate may, by order for that purpose, after
hearing, settle the amount of such debts or lawful participation and order how much and in
what manner each distributee shall contribute in the payment thereof, and may issue
execution, if circumstances require, against the bond provided in the preceding section or
against the real estate belonging to the deceased, or both. Such bond and such real estate
shall remain charged with a liability to creditors, heirs, or other persons for the full period of
two (2) years after such distribution, notwithstanding any transfers of real estate that may
have been made. (Emphasis supplied)
This provision was no longer annotated on the title at the time the title was submitted to PNB
as collateral for the loan:
Q: You mentioned that you did went [sic] to the Register of Deeds and in the Register of
Deeds you found the document concerning an order in Civil Case involving the property, do
you remember having said that?
A: Yes, sir.
Q: What was that Civil Case all about?
A: I go to the Register of Deeds to verify the previous title because there is a Sec. 4 Rule 74 of
the title and I found out at the back of the title that there is an order in favor of Reynaldo
Andres commissioned by virtue of an order of RTC 3rd Judicial Region, Branch 37, Sto.
Domingo, Nueva Ecija issued by Hon. Senen Saguyod issued by Security Bank and Trust
Company and the transfer of ownership of the properties of the deceased spouses Roman
Andres and Lydia Echauz to Reynaldo Andres and the date is October 14, 1992, sir.
Atty. Lasam:
Q: Having read that at the Register of Deeds of Nueva Ecija you proceeded to Branch 37,
Baloc, Sto. Domingo, Nueva Ecija to verify whether there are still pending cases regarding the
lot?
A: A[t] the time they submit the title there is no annotation at the back of the title and the
title is clean, sir.
Q: You mean to say that when they applied for a loan that annotation which you read earlier
was not present?
A: There is no more annotation, sir. 98 (Emphasis supplied)
In any event, Rule 74, Section 4 does not apply to Onofre Andres who never alleged being an
excluded heir or unpaid creditor of his brother Roman Andres and Roman’s wife.
Petitioner heirs also insist that Gerardo Pestaño did not interview or inquire from residents in
the surrounding area regarding the ownership of the residential building then being
constructed on the land.99 They submit that this amounts to lack of due diligence by PNB
considering Reynaldo Andres’ admission that Onofre Andres possessed the property, but by
mere tolerance.100
On the contrary, Gerardo Pestaño testified that he interviewed the laborers working on the
residential building in the property, and he asked the Spouses Reynaldo Andres and Janette
de Leon to obtain the tax declaration from the Assessor’s Office:
ATTY LASAM: Mr. witness, the time you conducted the credit investigation who was in
possession of the property?
35
A. I was asked by Reynaldo Andres to see the property and we went to the place and there is
on going construction of a building and it was 50% finish. I told them to go to the Municipal
Assessor’s Office for Tax Declaration.
Q. So it is cle[unreadable] that Reynaldo and Jannette was in possession of the subject
property?
A. Yes, sir.
Q. And at the time you conducted the credit investigation was there any claim of that
property. . regarding this claim of Onofre Andres?
A. I went to the Municipal Hall of Sto. Domingo and I don’t have any knowledge of that.
....
Q. When you investigated you solely relied to the title being offered?
A. No, sir. I went to the Assessor’s Office of Sto. Domingo, to see the tax payments and to the
Register of Deeds.
Q. You did talk to the laborers working in the building?
A. Yes, sir.
Q. Mr. witness, you mentioned that you required Reynaldo Andres to submit the tax
declaration of the building?
A. Yes, sir.
Q. Did he submit to you the tax declaration?
A. Yes.101 (Emphasis supplied)
Gerardo Pestaño did not have a copy of the tax declaration of the residential building at the
time of his testimony, but he testified that the Spouses Reynaldo Andres and Janette de Leon
presented Tax Declaration No. 449459, and he inspected this document. 102 He does not
appear to have been questioned on the contents of Tax Declaration No. 449459.
Nevertheless, even Onofre Andres’ possession appears doubtful since Gerardo Pestaño
testified that the residential building was still under construction during his inspection on
August 8, 1995:103
Q: Did you actually inspect the 4,634 square meters of the property?
A: Yes, sir.
Q: At the time of your inspection of the property, who was actually living in the property?
A: At the time of my inspection on August 8, 1995 the house is under construction? sir.
Q: There were no occupants?
A: The spouses borrower Reynaldo Andres and his wife, sir.
Atty. Lasam:
Q: You mean to say that while the building is under construction they were at the same time
living there?
A: They were not living there but they were in possession of the property, sir.
Q: You only presumed that they are the once [sic] in possession of the property?
A: Because they accompanied me there, sir. 104 (Emphasis supplied)
In their reply, petitioner heirs attached tax declarations over the land and the residential
building, asking this court to allow the submission of such documentary evidence in the
interest of substantial justice.105 Again, this court is not a trier of facts. A petition for review
on certiorari "shall raise only questions of law."106 This court cannot accept and consider
documentary evidence only raised and submitted now on review.
In any event, the tax declarations attached to the reply fail to convince.1âwphi1 Reynaldo
Andres attached two tax declarations to show that he owned the residential building standing
on the property, thus, Gerardo Pestaño did not conduct an exhaustive investigation. 107
The first tax declaration in Reynaldo Andres’ name was for year 1994. The spaces allotted for
the boundaries of the land where the house stands read "erected on the lot of Roman
Andres," but the name Roman Andres was written on top of a white out erasure, and such
correction was not countersigned. 108 Reynaldo Andres did not explain such erasure in his
reply. A person presenting an altered document must account for the alteration; otherwise,
this affects its admissibility.109
The second tax declaration was for year 2006, long after Gerardo Pestafio inspected the
property in 1995.110
In sum, this court reiterates the rule that banks, as businesses impressed with public interest,
must exercise greater care, prudence, and due diligence in all their property dealings. This
court upholds the Court of Appeals' findings that PNB complied with the standard operating
practice of banks, which met the requisite level of diligence, when it sent Gerardo Pestano to
conduct an ocular inspection of the property and verify the status of its ownership and title.
Consequently, PNB is a mortgagee in good faith. The title resulting from the foreclosure sale,
therefore, is to be protected. The bank is an innocent purchaser for value.
WHEREFORE, the petition is DENIED. The assailed Court of
36
Appeals decision and resolution are AFFIRMED.

SO ORDERED.

37
G.R. No.190486 November 26, 2014
STANLEY FINE FURNITURE, ELENAAND CARLOS WANG, Petitioners,
vs.
VICTOR T. GALLANO AND ENRIQUITO SIAREZ, Respondents.
DECISION
LEONEN, J.:
To terminate the employment of workers simply because they asserted their legal rights by
filing a complaint is illegal. It violates their right to security of tenure an'd should not be
tolerated.
In this petition for review 1 on certiorari filed by Elena Briones, 2 we are asked to reverse the
decision3 of the Court of Appeals in CA-G.R. SP No. 101145. The Court of Appeals found grave
abuse of discretion on the part of the National Labor Relations Commission, and reinstated
the decision of the Labor Arbiter dated August 2, 2006 finding that respondents Victor
Gallano and Enriquito Siarez were illegally dismissed. 4
Stanley Fine Furniture (Stanley Fine), through its owners Elena and Carlos Wang, hired
respondents Victor T. Gallano and Enriquito Siarez in 1995 as painters/carpenters. Victor and
Enriquito each received 215.00 basic salary per day.5
On May 26, 2005, Victor and Enriquito filed a labor complaint 6 for underpayment/non-
payment of salaries, wages, Emergency Cost of Living Allowance (ECOLA), and 13th month
pay. They indicated in the complaint form that they were "still working" 7 for Stanley Fine.
Victor and Enriquito filed an amended complaint 8 on May 31, 2005, for actual illegal
dismissal, underpayment/non-payment of overtime pay, holiday pay, premium for holiday
pay, service incentive leave pay, 13th month pay, ECOLA, and Social Security System (SSS)
benefit. In the amended complaint, Victor and Enriqui to claimed that they were dismissed on
May 26, 2005.9 Victor and Enriquito were allegedly scolded for filing a complaint for money
claims. Later on, they were not allowed to work. 10
On the other hand, petitioner Elena Briones claimed that Victor and Enriquito were "required
to explain their absences for the month of May 2005, but they refused." 11
In the decision12 dated August 2, 2006, the Labor Arbiter found that Victor and Enriqui to
were illegally dismissed. The Labor Arbiter noted the following contradictory statements
inStanley Fine’s position paper, thus:
Also, Stanley Fine was forced todeclare them dismissed due to their failure to report back to
work for a considerable length of time and also, due to the filing of an unmeritorious labor
case against it by the two complainants. . . .
....
The main claim of the complainants is their allegation that they were dismissed. They were
NOT DISMISSED.13(Emphasis in the original)
The Labor Arbiter resolved these contradictory statements in the following manner:
In fact, the admission that complainants were dismissed due to the filing of a case against
them by complainants is a blatant transgression of the Labor Code that no retaliatory
measure shall be levelled against an employee by reason of an action commenced against an
employer. This is virtually a confession of judgment and a death [k]nell to the cause of
respondents. It actually lends credence tothe fact that complainants were dismissed upon
respondents’ knowledge of the complaint before the NLRC as attested by the fact that four
days after the filing of the complaint, the same was amended to include illegal dismissal. 14
The Labor Arbiter also awarded moral and exemplary damages to respondents, reasoning
that: Finding malice, and ill-will in the dismissal of complainants, which exhibits arrogance
and defiance of labor laws on the part of respondents, moral and exemplary damages for
₱50,000 and ₱30,000 respectively for each of the complainants are hereby granted.
WHEREFORE, premises considered, respondents are hereby declared guilty of illegal
dismissal. As a consequence, they are ORDERED to reinstate complainant to their former
position and pay jointly and severally complainants’ full backwages from date of dismissal
until actual reinstatement[.]15
On appeal, the National Labor Relations Commission reversed 16 the Labor Arbiter’s decision,
ruling that the Labor Arbiter erred in considering the statement, "due to the filing ofan
unmeritorious labor case," as an admission against interest. 17 The National Labor Relations
Commission held that:
Contrary to the findings of the Labor Arbiter below . . . respondents-appellants’ allegations in
paragraph 5 of their position paper is not an admission that they dismissed complainants-
appellees moreso [sic], in retaliation for complainants-appellees’ filing a complaint against
them. Had the Labor Arbiter been more circumspect analyzing the facts brought before him
by the herein parties pleadings, he could have easily discerned that complainants-appellees
were merely required to explain their unauthorized absences they committed for the month
of May 2005 alone. Complainants-appellees did notdeny knowledge of the memoranda
issued to them on May 23, 25 and 27, 2005 for complainant-appellee Siarez and June 1, 2005
memo for Gallano. That they simply refused receipt of them cannot extricate themselves
from its legal effects as the last of which clearly show that itwas sent to them thru the mails.
....
38
The same holds true with the findings of the Labor Arbiter below that respondents-
appellants’ evidence, Annexes "7" to "74" "cannot be admissible in evidence" for being mere
xerox copies and "are easily subjected to interpolation and tampering."
Suffice it to state that these pieces of evidence were adduced during the arbitral proceedings
below, where complainants-appellees were afforded the opportunity to controvert and deny
its truthfulness and veracity that complainants-appellees never objected thereto or deny its
authenticity, certainly did not render said documents tampered or interpolated.
WHEREFORE, in view of the foregoing, the decision appealed from is hereby REVERSEDand
SET ASIDE.Respondents-appellants are however ordered to reinstate complainants-appellees
to their former position without loss of seniority rights and benefits appurtenant thereto,
without backwages.
18
SO ORDERED.
19
Victor and Enriquito filed a motion for reconsideration, which the National Labor Relations
Commission denied in the resolution 20 dated August 15, 2007.
Thus, Victor and Enriquito filed a petition for certiorari before the Court of Appeals.
Generally, petitions for certiorari are limited to the determination and correction of grave
abuse of discretion amounting to lack or excess of jurisdiction. However,the Court of Appeals
reviewed the findings of facts and of law of the labor tribunals, considering that the Labor
Arbiter and the National Labor Relations Commission had different findings. 21
The Court of Appeals found that Stanley Fine failed to show any valid cause for Victor and
Enriquito’s termination and to comply with the twonotice rule. 22 Also, the Court of Appeals
noted that Stanley Fine’s statements — that it was "forced to declare them dismissed" 23 due
to their absences and "due to the filing of an unmeritorious labor case against it by the two
complainants"24 — were admissions against interest and binding upon Stanley Fine. Thus: An
admission against interest is the best evidence which affords the greatest certainty of the
facts in dispute since no man would declare anything against himself unless such declaration
is true. Thus, an admission against interest binds the person who makes the same, and absent
any showing that this was made thru palpable mistake, no amount of rationalization can
offset it.25
The Court of Appeals also held that the immediate amendment of Victor and Enriquito’s
complaint negated their alleged abandonment. 26
With regard to the National Labor Relations Commission’s deletion of the monetary award,
the Court of Appeals ruled that:
Notably, private respondents’ claim of payment is again belied by their own admission in their
position paper that they failed to pay petitioners their ECOLA and to ask for exemption from
payment of said benefits to their employees. In any event, private respondents’ allegation of
payment of money claims is not supported by substantial evidence. The Labor Arbiter found
that the documents presented by private respondents were mere photocopies, with no
appropriate signatures of petitioners and could be easily subjected to interpolation and
tampering.27
The Court of Appeals, thus, granted the petition, set aside the resolutions of the National
Labor Relations Commission, and reinstated the decision of the Labor Arbiter. 28 The
dispositive portion of its decision reads:
WHEREFORE, the assailed Resolutions dated June 18, 2007 and August 15, 2007 of public
respondent NLRC are set aside and the Labor Arbiter’s Decision dated August 2, 2006 is
reinstated.
SO ORDERED.29
Stanley Fine filed a motion for reconsideration, 30 which the Court of Appeals denied in the
resolution31 dated November 27, 2009.
On December 21, 2009, Stanley Fine, Elena, and Carlos Wang filed a motion for extension of
time to file petition for review on certiorari. 32
On January 21, 2010, Elena Briones filed a petition for review. 33 Elena alleged that she is the
"registered owner/proprietress of the business operation doing business under the name and
style ‘Stanley Fine Furniture.’" 34She argued that the Court of Appeals erred in ruling that
Victor and Enriquito were illegally dismissed considering that she issued several memoranda
to them, but they refused to accept the memoranda and explain their absences. 35 As to the
statement, "due to the filing of an unmeritorious labor case," 36 it was error on the part of her
former counsel which should not bind her. 37 Further, the monetary claims should not have
been awarded because these were based on the allegations in the complaint form, 38 whereas
Elena presented documentary evidence to show that Victor and Enriquito’s money claims had
been paid. They never rebutted her documentary evidence. 39 As to the award of moral and
exemplary damages and attorney’s fees, Victor and Enriquito did not present any evidence to
support their claim, thus, it was error for the Court of Appeals to have reinstated the Labor
Arbiter’s decision.40
In compliance with this court’s resolution 41 dated February 17, 2010, Victor and Enriquito
filed their comment42 and argued that the petition should be denied because Elena "is neither
the respondent, party in interest or representatives as parties." 43 With regard to Victor’s two
absences and Enriquito’s five absences, these should not be interpreted as refusal to go back
to work tantamount to abandonment. 44 Considering that Elena’s arguments had been passed
upon by the labor tribunals and the Court of Appeals, this petition should be denied. 45
Elena filed her reply46 and posited that she has legal standing to file the petition for review
because she isthe owner/proprietress of Stanley Fine. 47 In addition, she argued that Victor
and Enriquito knew that she, Elena, is the real party-in-interest because during the pendency
39
of the labor case, she filed an ex-parte manifestation, attaching her Department of Trade and
Industry certificate of registration of business name,48 showing that the registration is under
her maiden name, Elena Y. Briones. As per the Department of Trade and Industry’s
certification,49 Stanley Fine is a sole proprietorship owned by "Elena Briones Yam-Wang."
Thus, this court is asked to resolve procedural and substantive issues in this petition as
follows:>
1. Whether Elena Briones has standing to file this petition for review on certiorari;
2. Whether the Court of Appeals erred in ruling that Victor Gallano and Enriquito Siarez were
illegally dismissed;
3. Whether the Court of Appeals erred when it agreed with the Labor Arbiter that the
statement, "filing of an unmeritorious labor case," is an admission against interest and
binding against Stanley Fine Furniture; and
4. Whether the Court of Appeals erred in awarding the monetary claims and damages to
Victor Gallano and Enriquito Siarez, considering that they did not produce evidence to
support their claims.
I.
Petitioner Elena Briones has standing to file this case
On this issue, petitioners claimed that Elena Briones is not the real party-in-interest; hence,
the decision of the Court of Appeals is final and executory since the petition for review was
not properly filed.50
In her reply, Elena argued that she is the sole proprietor of Stanley Fine, a fact known to
respondents.51 As the sole proprietor, she has standing to file this petition. 52
Respondents cannot deny Elena Briones’ standing to file this petition considering that in their
amended complaint filed before the Labor Arbiter, they wrote "Stanley Fine Furniture, Elina
[sic] Briones Wang as ownerand Carlos Wang" as their employers. 53
Also, respondents did not refute Elena’s allegation that Stanley Fine is a sole proprietorship.
In Excellent Quality Apparel, Inc. v. Win Multi-Rich Builders, Inc., 54 this court stated that:
A sole proprietorship does not possess a juridical personality separate and distinct from the
personality of the owner of the enterprise. The law merely recognizes the existence of a sole
proprietorship as a form of business organization conducted for profit by a single individual
and requires its proprietor or owner to secure licenses and permits, register its business
name, and pay taxes to the national government. The law does not vest a separate legal
personality on the sole proprietorship or empower it to file or defend an action in
court.55 (Emphasis supplied) Thus, Stanley Fine, being a sole proprietorship, does not have a
personality separate and distinct from its owner, Elena Briones. Elena, being the proprietress
of Stanley Fine, can be considered as a real party-in-interest and has standing to file this
petition for review.
II.
Review of procedural parameters
In her petition for review, Elena raised the following issues: (a) whether "the filing of an
Establishment Termination Report" 56 is an act of dismissal; (b) whether counsel’s allegation
that an employee was dismissed due to the filing of an "unmeritorious" case against the
employer is binding;57 (c) whether a Labor Arbiter can award monetary claims based on the
allegations in the complaint form; 58 and (d) whether the award of moral and exemplary
damages and attorney’s fees is proper even without supporting evidence. 59
In a Rule 45 petition for review of a Court of Appeals decision rendered under Rule 65, this
court is guided by the following rules:
[I]n a Rule 45 review (of the CA decision rendered under Rule 65), the question of law that
confronts the Court is the legal correctness of the CA decision – i.e., whether the CA correctly
determined the presence or absence of grave abuse of discretion in the NLRC decision before
it, and not on the basis of whether the NLRC decision on the merits of the case was correct. . .
. Specifically, in reviewing a CA labor ruling under Rule 45 of the Rules of Court, the Court’s
review is limited to:
(1) Ascertaining the correctness of the CA’s decision in finding the presence or absence of a
grave abuse of discretion. This is done by examining, on the basis of the parties’
presentations, whether the CA correctly determined that at the NLRC level, all the adduced
pieces of evidence were considered; no evidence which should not have been considered was
considered; and the evidence presented supports the NLRC findings; and
(2) Deciding any other jurisdictional error that attended the CA’s interpretation or application
of the law.60(Citation omitted)
Thus, the proper issue in this case is whether the Court of Appeals correctly determined the
presence of grave abuse of discretion on the part of the National Labor Relations
Commission. III.
There was no just cause in the dismissal of respondents
The Court of Appeals found grave abuse of discretion on the part of the National Labor
Relations Commission when it reversed the Labor Arbiter’s decision. The Court of Appeals
held that respondents were illegally dismissed because no valid causefor dismissal was
shown. Also, there was no compliance withthe two-notice requirement. 61
Elena admitted that no notices of dismissal were issued to respondents. However,
memoranda were given to respondents, requiring them to explain their absences. She
40
claimed that the notices to explain disprove respondents’ allegation that there was intent to
dismiss them.62
Grounds for termination of employment are provided under the Labor Code. 63 Just causes for
termination ofan employee are provided under
Article 282 of the Labor Code: ARTICLE 282. Termination by employer.- An employer may
terminate an employment for any of the following causes:
(a) Serious misconduct or willful disobedience by the employee of the lawful orders of his
employer or representative in connection with his work;
(b) Gross and habitual neglect by the employee of his duties;
(c) Fraud or willful breach by the employee of the trust reposed in him by his employer or
duly authorized representative;
(d) Commission of a crime or offense by the employee against the person of his employer or
any immediate member of his family or his duly authorized representatives; and
(e) Other causes analogous to the foregoing.
Although abandonment of work is not included in the enumeration, this court has held that
"abandonment is a form of neglect of duty." 64 To prove abandonment, two elements must
concur:
1. Failure to report for work orabsence without valid or justifiable reason; and
2. A clear intention to sever the employer-employee relationship. 65
In Hodieng Concrete Products v. Emilia,66 this court held that:
Absence must be accompanied by overt acts unerringly pointing to the fact that the
employee simply does not want to work anymore. And the burden of proof to show that
there was unjustified refusal to go back to work rests on the employer. 67
The Court of Appeals ruled that the alleged abandonment of work is negated by the
immediate filing of the complaint for illegal dismissal on May 31, 2005. 68 The Court of Appeals
further stated that:
Long standing is the rule that the filing of the complaint for illegal dismissal negates the
allegation of abandonment. Human experience dictates that no employee in his right mind
would go through the trouble of filing a case unless the employer had indeed terminated the
services of the employee.69
In this case, Elena failed to pinpoint the overt acts of respondents that show they had
abandoned their work. There was a mere allegation that she was "forced to declare them
dismissed dueto their failure to report back to work for a considerable length of time"but no
evidence to prove the intent to abandon work. 70 It is the burden of the employer to prove
that the employee was not dismissed or, if dismissed, that such dismissal was not
illegal.71 Unfortunately for Elena, she failed to do so.
IV.
Generally, errors of counsel bind the client
Elena’s position paper states the following:
5. Also, Stanley Fine was forced to declare them dismissed due to their failure to report back
to work for a considerable length of time and also, due to the filing of an unmeritorious labor
case against itby the two complainants. . . . (Emphasis supplied)
....
8. The main claim of the complainants is their allegation that they were dismissed. They were
NOT DISMISSED. Management was [sic] has only instructed them to submit a written
explanation for their absence before they would be allowed back to work. . . . 72 (Underscoring
in the original)
Elena argued that the use of the word "unmeritorious" should not be taken against her
because it is commonly used in pleadings. Also, the use of the word "unmeritorious" came
from her previous counsel.73 In an effort to persuade this court, Elena further argued in her
reply that the statement "unmeritorious case" was a mistake committed by her former
counsel which should not bind her, considering its grave consequence. 74
On the other hand, respondents alleged in their position paper 75 that they were requesting
from their employer an increase in pay to comply with the minimum wage law. 76 However,
they were reprimanded and were told "not to work anymore." 77
Respondents filed a reply78 to Elena’s position paper and argued that:
6. The words "Nag complain pa kayo sa Labor ha, tanggal na kayo" were clear, unequivocal
and categorical. These circumstances were sufficient to create the impression in the mind of
complainants – and correctly so – that their services were being terminated. The acts of
respondents were indicative of their intention to dismiss complainants from their
employment.79
On this issue, the National Labor Relations Commission held that the phrase, "filing of an
unmeritorious labor complaint,"80 if read together with the other allegations in Elena’s
position paper, would show that respondents were not dismissed but simply required to
explain their absences.81
On the other hand, the Court of Appeals agreed with the Labor Arbiter that Elena’s statement
is an admission against interest and binding upon her. The Court of Appeals explained that:
41
An admission against interest is the best evidence which affords the greatest certainty of the
facts in dispute since no man would declare anything against himself unless such declaration
is true. Thus, an admission against interest binds the person who makes the same, and absent
any showing that this was made thru palpable mistake, no amount of rationalization can
offset it.82
The general rule is that errors of counsel bind the client. The reason behind this rule was
discussed in Building Care Corporation v. Macaraeg: 83
It is however, an oft-repeated ruling that the negligence and mistakes of counsel bind the
client.1âwphi1 A departure from this rule would bring about never-ending suits, so long as
lawyers could allege their own fault or negligence to support the client’scase and obtain
remedies and reliefs already lost by operation of law. The only exception would be, where the
lawyer’s gross negligence would result in the grave injustice of depriving his client of the due
process of law.84 (Citations omitted)
There is not an iota of proof that the lawyer committed gross negligence in this case. That
counsel did not reflect his client’s true intentions is a bare allegation. It is not a mere
afterthought meant to escape liability for such illegal act. Elena’s counsel reflected the true
reason for dismissing respondents. Both position papers state that Elena dismissed
respondents because of the filing of a labor complaint. Thus, the Court of Appeals did not err
in affirming the Labor Arbiter’s ruling that the statement, "unmeritorious labor complaint," is
an admission against interest.
V.
Non-compliance with procedural
due process supports the finding of
illegal dismissal
Assuming that the statement, "filing of an unmeritorious labor case," is not an admission
against interest, still, the Court of Appeals did not err in reinstating the Labor
Arbiter’sdecision. Elena admitted85 that no notices of dismissal were issued.
Elena pointed out that there is no evidence showing that at the time she sent the
memoranda, she already knew of the complaint for money claims filed by respondents. 86 The
allegation that she told respondents "Nag complain pa kayo sa Labor ha, sige tanggal na
kayo"87 is hearsay and inadmissible.88
In cases of termination of employment, Article 277(b) of the Labor Code provides that:
ARTICLE 277. Miscellaneous provisions. –
....
(b) Subject to the constitutional right of workers to security of tenure and their right to be
protected against dismissal except for a just and authorized cause and without prejudice to
the requirement of notice under Article 283 of this Code, the employer shall furnish the
worker whose employment is sought to be terminated a written notice containing a
statement of the causes for termination and shall afford the latter ample opportunity to be
heard and to defend himself with the assistance of his representative if he so desires in
accordance with company rules and regulations promulgated pursuant to guidelines set by
the Department of Labor and Employment. Any decision taken by the employer shall be
without prejudice to the right of the worker to contest the validity or legality of his dismissal
by filing a complaint with the regional branch of the National Labor Relations Commission.
The burden of proving that the termination was for a valid or authorized cause shall rest on
the employer[.]
Book VI, Rule I, Section 2(d) of the Omnibus Rules Implementing the Labor Code further
provides:
Section 2. Security of tenure. . . .
....
(d) In all cases of termination of employment, the following standards of due process shall be
substantially observed:
For termination of employment based on just causes as defined in Article 282 of the Code:
(i) A written notice served on the employee specifying the ground or grounds for termination,
and giving said employee reasonable opportunity within which to explain his side.
(ii) A hearing or conference during which the employee concerned, with the assistance of
counsel if heso desires is given opportunity to respond to the charge, present his evidence, or
rebut the evidence presented against him.
(iii) A written notice of termination served on the employee, indicating that upon due
consideration of all the circumstances, grounds have been established to justify his
termination. King of Kings Transport, Inc. v. Mamac 89 extensively discussed the two-notice
requirement and the procedure that must be observed in cases of termination, thus:
(1) The first written noticeto be served on the employees should contain the specific causes
or grounds for termination against them, and a directive that the employees are given the
opportunity to submit their written explanation within a reasonable period. "Reasonable
opportunity" under the Omnibus Rules means every kind of assistance that management
must accord to the employees to enable them to prepare adequately for their defense. This
should be construed as a period of at least five (5) calendar days from receipt of the notice to
give the employees an opportunity to study the accusation against them, consult a union
official or lawyer, gather data and evidence, and decide on the defenses they will raise against
the complaint. Moreover, in order to enable the employees to intelligently prepare their
explanation and defenses, the notice should contain a detailed narration of the facts and
42
circumstances that will serve as basis for the charge against the employees. A general
description of the charge will not suffice. Lastly, the notice should specifically mention which
company rules, if any, are violated and/or which among the grounds under Art. 282 is being
charged against the employees.
(2) After serving the first notice, the employers should schedule and conduct a hearing or
conference wherein the employees will be given the opportunity to: (1) explain and clarify
their defenses to the charge against them; (2) present evidence insupport of their defenses;
and (3) rebut the evidence presented against them by the management. During the hearing
or conference, the employees are given the chance to defend themselves personally, with the
assistance of a representative or counsel of their choice. Moreover, this conference or
hearing could be used by the parties as an opportunity to cometo an amicable settlement.
(3) After determining that termination of employment is justified, the employers shall serve
the employees a written notice of termination indicating that: (1) all circumstances involving
the charge against the employees have been considered; and (2) grounds have been
established to justify the severance of their employment. 90 (Emphasis in the original, citation
omitted)
Elena presented photocopies of the memoranda to prove that notices to explain were sent to
respondents. These photocopies were not considered by the Labor Arbiter, on the ground
that they had no probative value. Elena argued that even if the annexes were mere
photocopies, they formed part of the position paper, which is a verified pleading under
oath.91 Elena also cited Lee v. Regional Trial Court of Quezon City, Branch 85 92 where this court
allegedly ruled that photocopies of documents attached to a verified motion, which have not
been controverted, are admissible.93
In Lee v. Regional Trial Court of Quezon City, Branch 85, this court stated the following:
Before we discuss the substance of private respondent’s motion, we note that attached to it
weremere photocopies of the supporting documents and not "certified true copies of
documents or papers involved therein" as required by the Rules of Court. However, given that
the motion was verified and petitioners, who were given a chance to oppose or comment on
it, made no objection thereto, we brush aside the defect in form and proceed to discuss the
merits of the motion.94 (Citation omitted)
A review of the decision in Lee v. Regional Trial Court of Quezon City, Branch 85 shows that
the case involved an omnibus motion to cite Jose C. Lee and the other parties in indirect
contempt, and to impose disciplinary sanctions or disbar Jose C. Lee’s counsel. 95 The
statement cited by Elena is not the controlling doctrine in that case. In addition, it appears
that this court brushed aside "the defect in form" in the exercise of its discretion and, thus, it
should not be taken as the controllingdoctrine. Hence, no error can be attributed to the Court
of Appeals when it agreed with the Labor Arbiter’s ruling that the photocopies of the
memoranda have no probative value since they are mere photocopies. 96
Even if this court considers Annexes 1 to 5,97 these pieces of evidence would not save Elena’s
cause. Annexes 1 to 3 are the memoranda issued to Enriquito with a notation that he refused
to sign. Annex 2 is dated May 25, 2005, but the date when Enriquito allegedly refused to sign
is not indicated.98 Annex 3 is dated May 23, 2005, but again, the memorandum does not show
when it was served upon Enriquito and the date he refused to sign. 99 It is quite possible that
these memoranda were antedated.
Annex 4 is dated June 1, 2005 and was sent to Enriquito Siarez via registered mail. 100 Annex 5
is the memorandum issued to Victor Gallano and is likewise dated June 1,
2005.101 Respondents were allegedly dismissed on May 26, 2005; 102 hence, Annex 1 dated
May 27, 2005,103 Annex 4 dated June 1, 2005, and Annex 5 also dated June 1, 2005, were
issued as a mere afterthought.
VI.
The Court of Appeals did not err in
awarding money claims and damages
With regard to the award of money claims, 104 Elena likewise argues that the Labor Arbiter
erred in notadmitting Annexes 7 to 74, citing Lee v. Regional Trial Court of Quezon City,
Branch 85. On this matter, the Court of Appeals quoted the Labor Arbiter’s decision, stating
that:
With respect to Annexes 7 to 74 to prove compliance of labor standards, the same cannot be
admissible in evidence because they are mere Xerox copies which are easily subjected to
interpolation and tampering.
Besides, Annex 69 which purports to be payment of 13th month pay for 2004 of complainant
Gallano but no amount is indicated. Again, Annex 71 states 13th month pay for ₱4,500.00 for
complainant Gallano yet there is no signature of Gallano acknowledging receipt thereof. If
one document is tainted with fraud, all other Xerox documents are fraudulent. 105
In their comment, respondents argued that Elena’s claim of payment is refuted by her own
admission that she did not pay respondents’ ECOLA and she even asked for exemption from
paying them.106
The Court of Appeals found that, indeed, Elena admitted that respondents were not paid
their ECOLA and that she asked for exemption from doing so.107 In addition, Elena’s allegations
of payment of the other monetary claims, such as 13th month pay, holiday pay, and premium
for holiday pay, were not supported by substantial evidence.108
A review of the records reveals that even if the Court of Appeals considered the vouchers
marked as Annexes 7 to 74 and submitted by Elena, these would only disprove her claim of
payment.
43
Annexes 7 to 74109 are vouchers showing payment of holiday pay, 13th month pay, and service
incentive leave pay to respondents. However, not all vouchers were signed by them. Further,
in some of the vouchers, the amount given to respondents was not written. Hence, these
vouchers do not prove Elena's claim of payment.

As to the award of money claims, including moral and exemplary damages, Elena argued that
respondents did not present evidence to prove their entitlement to damages. 110

Considering the circumstances surrounding respondents' dismissal, the Court of Appeals did
not err in upholding the Labor Arbiter's award of moral and exemplary damages. Indeed,
there was malice when, as a retaliatory measure, petitioners dismissed respondents because
they filed a labor complaint. Further, Elena violated respondents' rights to substantive and
procedural due process when she failed to issue notices to explain and notices of
termination.

Gone are the days when workers were reduced to mendicant despondency by their
employers.1âwphi1 Within our legal order, workers have legal rights and procedures to claim
these rights. The only way for employers to avoid legal action from their workers is to give
them what they may be due in law and.as human beings. Businesses thrive through the
acumen of their owners and entrepreneurs. But, none of them will exist without the outcome
of the sacrifices and toil of their workers. Our economy thrives through this partnership
based upon mutual respect. At the very least, these are the values which are congealed in our
present laws.

Apparently, in this case, the owners forgot that labor is not merely a factor of production. It is
a human product no matter how modest it may seem to them.

WHEREFORE, premises considered, the Court of Appeals' decision dated July 28, 2009, and its
resolution dated November 27, 2009, reinstating the Labor Arbiter's decision dated August 2,
2006, are hereby AFFIRMED.

SO ORDERED.

44
G.R. No.178407
METROPOLITAN BANK AND TRUST COMPANY, Petitioner,
vs.
S.F. NAGUIAT ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
This case calls for the determination of whether the approval and consent of the insolvency
court is required under Act No. 1956, otherwise known as the Insolvency Law, before a
secured creditor like petitioner Metropolitan Bank and Trust Company can proceed with the
extrajudicial foreclosure of the mortgaged property.
This is a Petition for Review1 under Rule 45, seeking to reverse and
set aside the November 15, 2006 Decision 2 and June 14, 2007 Resolution3 of the Court of
Appeals (Sixth Division) in CA-G.R. SP No. 94968. The questioned Decision and Resolution
dismissed Metropolitan Bank and Trust Company’s Petition for Certiorari and Mandamus 4 and
denied its subsequent Motion for Reconsideration and Clarification. 5
Sometime in April 1997, Spouses Rommel Naguiat and Celestina Naguiat and S.F. Naguiat
Enterprises, Inc. (S.F. Naguiat) executed a real estate mortgage 6 in favor of Metropolitan Bank
and Trust Company (Metrobank) to secure certain credit accommodations obtained from the
latter amounting to 17 million. The mortgage was constituted over the following properties:
(1)TCT No. 586767 – a parcel of land in the Barrio of Pulung Bulu, Angeles, Pampanga, with an
area of 489 square meters; and
(2)TCT No. 310523 – a parcel of land in Marikina, Rizal, with an area of 1,200.10 square
meters.8
On March 3, 2005, S.F. Naguiat represented by Celestina T. Naguiat, Eugene T. Naguiat, and
Anna N. Africa obtained a loan 9 from Metrobank in the amount of 1,575,000.00. The loan was
likewise secured by the 1997 real estate mortgage by virtue of the Agreement on Existing
Mortgage(s)10 executed between the parties on March 15, 2004.
On July 7, 2005, S.F. Naguiat filed a Petition for Voluntary Insolvency with Application for the
Appointment of a Receiver11 pursuant to Act No. 1956, as amended, 12 before the Regional
Trial Court of Angeles City and which was raffled to Branch 56. 13 Among the assets declared in
the Petition was the property covered by TCT No. 58676 (one of the properties mortgaged to
Metrobank).14
Presiding Judge Irin Zenaida S. Buan (Judge Buan) issued the Order 15 dated July 12, 2005,
declaring S.F. Naguiat insolvent; directing the Deputy Sheriff to take possession of all the
properties of S.F. Naguiat until the appointment of a receiver/assignee; and forbidding
payment of any debts due, delivery of properties, and transfer of any of its properties.
Pending the appointment of a receiver, Judge Buan directed the creditors, including
Metrobank, to file their respective Comments on the Petition. 16 In lieu of a Comment,
Metrobank filed a Manifestation and Motion 17informing the court of Metrobank’s decision to
withdraw from the insolvency proceedings because it intended to extrajudicially foreclose the
mortgaged property to satisfy its claim against S.F. Naguiat. 18
Subsequently, S.F. Naguiat defaulted in paying its loan. 19 On November 8, 2005, Metrobank
instituted an extrajudicial foreclosure proceeding against the mortgaged property covered by
TCT No. 5867620 and sold the property at a public auction held on December 9, 2005 to
Phoenix Global Energy, Inc., the highest bidder. 21Afterwards, Sheriff Claude B. Balasbas
prepared the Certificate of Sale22 and submitted it for approval to Clerk of Court Vicente S.
Fernandez, Jr. and Executive Judge Bernardita Gabitan-Erum (Executive Judge Gabitan-Erum).
However, Executive Judge Gabitan-Erum issued the Order 23 dated December 15, 2005
denying her approval of the Certificate of Sale in view of the July 12, 2005 Order issued by the
insolvency court. Metrobank’s subsequent Motion for Reconsideration was also denied in the
Order24 dated April 24, 2006.
Aggrieved by both Orders of Executive Judge Gabitan-Erum, Metrobank filed a Petition 25 for
certiorari and mandamus before the Court of Appeals on June 22, 2006. S.F. Naguiat filed its
Manifestation26 stating that it was not interposing any objection to the Petition and requested
that the issues raised in the Petition be resolved without objection and argument on its
part.27
On November 15, 2006, the Court of Appeals rendered its Decision dismissing the Petition on
the basis of Metrobank’s failure to "obtain the permission of the insolvency court to
extrajudicially foreclose the mortgaged property." 28 The Court of Appeals declared that "a
suspension of the foreclosure proceedings is in order, until an assignee [or receiver,] is
elected or appointed [by the insolvency court] so as to afford the insolvent debtor proper
representation in the foreclosure [proceedings]." 29
Metrobank filed a Motion for Reconsideration and Clarification, which was denied by the
Court of Appeals in its Resolution dated June 14, 2007. 30 The Court of Appeals held that leave
of court must be obtained from the insolvency court whether the foreclosure suit was
instituted judicially or extrajudicially so as to afford the insolvent estate’s proper
representation (through the assignee) in such action 31 and "to avoid the dissipation of the
insolvent debtor’s assets in possession of the insolvency court without the latter’s
knowledge."32
Hence, the present Petition for Review was filed. Petitioner contends that the Court of
Appeals decided questions of substance in a way not in accord with law and with the
applicable decisions of this court:
45
A.
By ruling that there must be a motion for leave of court to be filed and granted by the
insolvency court, before the petitioner, as a secured creditor of an insolvent, can
extrajudicially foreclose the mortgaged property, which is tantamount to a judicial legislation.
B.
By ruling that the Honorable Executive Judge Bernardita Gabitan- Erum did not abuse her
discretion in refusing to perform her ministerial duty of approving the subject certificate of
sale, despite the fact that the petitioner and the designated sheriff complied with all the
requirements mandated by Act No. 3135, as amended, circulars, administrative matters and
memorandums issued by the Honorable Supreme Court.
C.
By ruling that the action of the Honorable Executive Judge Bernardita Gabitan-Erum is proper
in denying the approval of the Certificate of Sale on the grounds that the issuance of the
Order dated 12 July 2005 declaring respondent insolvent and the pendency of the insolvency
proceeding forbid the petitioner, as a secured creditor, to foreclose the subject mortgaged
property.33 (Emphasis supplied)
34
On October 20, 2007, S.F. Naguiat filed a Manifestation stating that it interposed no
objection to the Petition and submitted the issues raised therein without any argument.
On November 28, 2007, the court resolved "to give due course to the petition [and] to decide
the case according to the pleadings already filed[.]"35
The issues for resolution are:
First, whether the Court of Appeals erred in ruling that prior leave of the insolvency court is
necessary before a secured creditor, like petitioner Metropolitan Bank and Trust Company,
can extrajudicially foreclose the mortgaged property.
Second, whether the Court of Appeals erred in ruling that Executive Judge Gabitan-Erum did
not abuse her discretion in refusing to approve the Certificate of Sale.
Petitioner argues that nowhere in Act No. 1956 does it require that a secured creditor must
first obtain leave or permission from the insolvency court before said creditor can foreclose
on the mortgaged property.36 It adds that this procedural requirement applies only to civil
suits, and not when the secured creditor opts to exercise the right to foreclose extrajudicially
the mortgaged property under Act No. 3135, as amended, because extrajudicial foreclosure is
not a civil suit.37 Thus, the Court of Appeals allegedly imposed a new condition that was
tantamount to unauthorized judicial legislation when it required petitioner to file a Motion
for Leave of the insolvency court. 38 Said condition, petitioner argues, defeated and rendered
inutile its right or prerogative under Act No. 1956 to independently initiate extrajudicial
foreclosure of the mortgaged property. 39
Nonetheless, petitioner contends that the filing of its Manifestation before the insolvency
court served as sufficient notice of its intention and, in effect, asked the court’s permission to
foreclose the mortgaged property. 40
Petitioner further contends that "the powers and responsibilities of an Executive Judge in
extrajudicial foreclosure proceedings, in line with Administrative Order No. 6, is merely to
supervise the conduct of the extra- judicial foreclosure of the property" 41 and to oversee that
the procedural requirements are faithfully complied with; 42 and when "the Clerk of Court and
Sheriff concerned complied with their designated duties and responsibilities under the
[administrative] directives and under Act No. 3135, as amended, and the corresponding filing
and legal fees were duly paid, it becomes a ministerial duty on the part of the executive judge
to approve the certificate of sale."43 Thus, Executive Judge Gabitan-Erum allegedly exceeded
her authority by "exercising judicial discretion in issuing her Orders dated December 15, 2006
and April 24, 2006 . . . despite the fact that Sheriff Balasbas complied with all the notices
requirements under Act No. 3135, [as] amended, . . . and the petitioner and the highest
bidder paid all the requisite filing and legal fees[.]" 44
Furthermore, citing Chartered Bank v. C.A. Imperial and National Bank, 45 petitioner submits
that the order of insolvency affected only unsecured creditors and not secured creditors, like
petitioner, which did not surrender its right over the mortgaged property. 46 Hence, it
contends that the Court of Appeals seriously erred in holding as proper Executive Judge
Gabitan-Erum’s disapproval of the Certificate of Sale on account of the Order of insolvency
issued by the insolvency court.47
Finally, petitioner points out that contrary to the Court of Appeals’ ruling, "there is nothing
more to suspend because the extrajudicial foreclosure of the mortgaged property was
already a fait accompli as the public auction sale was conducted on December 9, 2005 and all
the requisite legal fees were paid and a Certificate of Sale was already prepared." 48 "The only
remaining thing to do [was] for the . . . Executive Judge to sign the Certificate of Sale, which
she . . . refused to do."49
The Petition has no merit.
I
A look at the historical background of the laws governing insolvency in this country will be
helpful in resolving the questions presented before us.
The first insolvency law, Act No. 1956, was enacted on May 20, 1909. It was derived from the
Insolvency Act of California (1895), with a few provisions taken from the United States
Bankruptcy Act of 1898.50 Act No.1956 was entitled "An Act Providing for the Suspension of
Payments, the Relief of Insolvent Debtors, the Protection of Creditors, and the Punishment of
46
Fraudulent Debtors." The remedies under the law were through a suspension of
payment51 (for a debtor who was solvent but illiquid) or a discharge from debts and liabilities
through the voluntary 52or involuntary 53 insolvency proceedings (for a debtor who was
insolvent).
The objective of suspension of payments is the deferment of the payment of debts until such
time as the debtor, which possesses sufficient property to cover all its debts, is able to
convert such assets into cash or otherwise acquires the cash necessary to pay its debts. On
the other hand, the objective in insolvency proceedings is "to effect an equitable distribution
of the bankrupt’s properties among his creditors and to benefit the debtor by
discharging54him from his liabilities and enabling him to start afresh with the property set
apart for him as exempt." 55
Act No. 1956 was meant to be a complete law on insolvency, 56 and debts were to be
liquidated in accordance with the order of priority set forth under Chapter VI, Sections 48 to
50 on "Classification and Preference of Creditors"; and Sections 29 and 59 with respect to
mortgage or pledge of real or personal property, or lien thereon. Jurisdiction over suspension
of payments and insolvency was vested in the Courts of First Instance (now the Regional Trial
Courts).57
The Civil Code58 (effective August 30, 1950) established a system of concurrence and
preference of credits, which finds particular application in insolvency
proceedings.59 Philippine Savings Bank v. Hon. Lantin60 explains this scheme:
Concurrence of credits occurs when the same specific property of the debtor or all of his
property is subjected to the claims of several creditors. The concurrence of credits raises no
questions of consequence where the value of the property or the value of all assets of the
debtor is sufficient to pay in full all the creditors. However, it becomes material when said
assets are insufficient for then some creditors of necessity will not be paid or some creditors
will not obtain the full satisfaction of their claims. In this situation, the question of preference
will then arise, that is to say who of the creditors will be paid ahead of the others. (Caguioa,
Comments and Cases on Civil Law, 1970 ed., Vol. VI, p. 472.) 61
The credits are classified into three general categories, namely, "(a) special preferred credits
listed in Articles 224162and 2242,63 (b) ordinary preferred credits listed in Article 2244[,] 64 and
(c) common credits under Article 2245."65
The special preferred credits enumerated in Articles 2241 (with respect to movable property)
and 2242 (with respect to immovable property) are considered as mortgages or pledges of
real or personal property, or liens within the purview of Act No. 1956. 66 These credits, which
enjoy preference with respect to a specific movable or immovable property, exclude all others
to the extent of the value of the property. 67 If there are two or more liens on the same
specific property, the lienholders divide the value of the property involved pro rata, after the
taxes on the same property are fully paid.68
"Credits which are specially preferred because they constitute liens (tax or non-tax) in turn,
take precedence over ordinary preferred credits so far as concerns the property to which the
liens have attached. The specially preferred credits must be discharged first out of the
proceeds of the property to which they relate, before ordinary preferred creditors may lay
claim to any part of such proceeds."69
"In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate
property which follow such property. What Article 2244 creates are simply rights in favor of
certain creditors to have the cash and other assets of the insolvent applied in a certain
sequence or order of priority."70
(5)Credits and advancements made to the debtor for support of himself or herself, and family,
during the last year preceding the insolvency;
(6)Support during the insolvency proceedings, and for three months thereafter;
(7)Fines and civil indemnification arising from a criminal offense;
(8)Legal expenses, and expenses incurred in the administration of the insolvent’s estate for
the common interest of the creditors, when properly authorized and approved by the court;
(9)Taxes and assessments due the national government, other than those mentioned in
articles 2241, No. 1, and 2242, No. 1;
(10)Taxes and assessments due any province, other than those referred to in articles 2241,
No. 1, and 2242, No. 1;
(11)Taxes and assessments due any city or municipality, other than those indicated in articles
2241, No. 1, and 2242, No. 1;
(12)Damages for death or personal injuries caused by a quasi-delict;
(13)Gifts due to public and private institutions of charity or beneficence;
(14)Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final
judgment, if they have been the subject of litigation.
These credits shall have preference among themselves in the order of priority of the dates of
the instruments and of the judgments, respectively.
It was held that concurrence and preference of credits can only be ascertained in the context
of a general liquidation proceeding that is in rem, such as an insolvency proceeding, where
properties of the debtor are inventoried and liquidated and the claims of all the creditors may
be bindingly adjudicated.71 The application of this order of priorities established under the
Civil Code in insolvency proceedings assures that priority of claims are respected and credits
belonging to the same class are equitably treated.
47
Conformably, it is the policy of Act No. 1956 to place all the assets and liabilities of the
insolvent debtor completely within the jurisdiction and control of the insolvency court
without the intervention of any other court in the insolvent debtor’s concerns or in the
administration of the estate.72 It was considered to be of prime importance that the
insolvency proceedings follow their course as speedily as possible in order that a discharge, if
the insolvent debtor is entitled to it, should be decreed without unreasonable delay.
"Proceedings of [this] nature cannot proceed properly or with due dispatch unless they are
controlled absolutely by the court having charge thereof." 73
In 1981, Presidential Decree No. 1758 amended Presidential Decree No. 902-A, the Securities
and Exchange Commission charter. Under its terms, 74 jurisdiction regarding corporations that
sought suspension of payments process was taken away from the regular courts and given to
the Securities and Exchange Commission. 75 In addition, an alternative to suspension of
payments — rehabilitation — was introduced. It enables a corporation whose assets are not
sufficient to cover its liabilities to apply to the Securities and Exchange Commission for the
appointment of a rehabilitation receiver and/or management committee 76 and then to
develop a rehabilitation plan with a view to rejuvenating a financially distressed corporation.
However, the procedure to avail of the remedy was not spelled out until 20 years later when
the Securities and Exchange Commission finally adopted the Rules of Procedure on Corporate
Recovery on January 4, 2000.
Shortly thereafter, with the passage of Republic Act No. 8799 or The Securities Regulation
Code on July 19, 2000, jurisdiction over corporation rehabilitation cases was reverted to the
Regional Trial Courts designated as commercial courts or rehabilitation courts. 77 This legal
development was implemented by the Interim Rules of Procedure on Corporate
Rehabilitation (made effective in December 2000), which was later replaced by A.M. 00-8- 10-
SC or the Rules of Procedure on Corporate Rehabilitation of 2008.
Act No. 1956 continued to remain in force and effect until its express repeal on July 18, 2010
when Republic Act No. 10142,78 otherwise known as the Financial Rehabilitation and
Insolvency Act of 2010, took effect. Republic Act No. 10142 now provides for court
proceedings in the rehabilitation or liquidation of debtors, both juridical and natural persons,
in a "timely, fair, transparent, effective and efficient" 79 manner. The purpose of insolvency
proceedings is "to encourage debtors . . . and their creditors to collectively and realistically
resolve and adjust competing claims and property rights" 80 while "maintain[ing] certainty and
predictability in commercial affairs, preserv[ing] and maximiz[ing] the value of the assets of
these debtors, recogniz[ing] creditor rights and respect[ing] priority of claims, and ensur[ing]
equitable treatment of creditors who are similarly situated." 81 It has also been provided that
whenever rehabilitation is no longer feasible, "it is in the interest of the State to facilitate a
speedy and orderly liquidation of [the] debtors’ assets and the settlement of their
obligations."82
Unlike Act No. 1956, Republic Act No. 10142 provides a broad definition of the term,
"insolvent":
SEC. 4. Definition of Terms. - As used in this Act, the term:
....
(p) Insolvent shall refer to the financial condition of a debtor that is generally unable to pay
its or his liabilities as they fall due in the ordinary course of business or has liabilities that are
greater than its or his assets.
Republic Act No. 10142 also expressly categorizes different forms of debt relief available to a
corporate debtor in financial distress. These are out-of-court restructuring agreements; 83 pre-
negotiated rehabilitation; 84 court-supervised rehabilitation;85 and liquidation (voluntary and
involuntary).86 An insolvent individual debtor can avail of suspension of payments, 87 or
liquidation.88
During liquidation proceedings, a secured creditor may waive its security or lien, prove its
claim, and share in the distribution of the assets of the debtor, in which case it will be
admitted as an unsecured creditor; or maintain its rights under the security or lien, 89 in which
case:
1.[T]he value of the property may be fixed in a manner agreed upon by the creditor and the
liquidator. When the value of the property is less than the claim . . . the [creditor] will be
admitted . . . as a creditor for the balance. If its value exceeds the claim . . . the liquidator may
convey the property to the creditor and waive the debtor’s right of redemption upon
receiving the excess from the creditor;
2.[T]he liquidator may sell the property and satisfy the secured creditor’s entire claim from
the proceeds of the sale; or
3.[T]he secured creditor may enforce the lien or foreclose on the property pursuant to
applicable laws.90
A secured creditor, however, is subject to the temporary stay of foreclosure proceedings for a
period of 180 days,91upon the issuance by the court of the Liquidation Order. 92
Republic Act No. 10142 was to govern all petitions filed after it had taken effect, and all
further proceedings in pending insolvency, suspension of payments, and rehabilitation cases,
except when its application "would not be feasible or would work injustice, in which event
the procedures set forth in prior laws and regulations shall apply." 93
The relevant proceedings in this case took place prior to Republic Act No. 10142; hence, the
issue will be resolved according to the provisions of Act No. 1956.
II
Act No. 1956 impliedly requires a secured creditor to ask the permission of the insolvent
court before said creditor can foreclose the mortgaged property.
48
When read together, the following provisions of Act No. 1956 reveal the necessity for leave of
the insolvency court:
(A)Under Section 14, "[a]n insolvent debtor, owing debts exceeding in amount the sum of one
thousand pesos, may apply to be discharged from his debts and liabilities by petition to the
Court of First Instance of the province or city in which he has resided for six months next
preceding the filing of such petition. In his petition, he shall set forth his place of residence,
the period of his residence therein immediately prior to filing said petition, his inability to pay
all his debts in full, his willingness to surrender all his property, estate, and effects not exempt
from execution for the benefit of his creditors, and an application to be adjudged an
insolvent. He shall annex to his petition a schedule and inventory in the form hereinafter
provided. The filing of such petition shall be an act of insolvency."
(B)Under Section 16, "[the] inventory must contain, besides the creditors, an accurate
description of all the real and personal property, estate, and effects of the [insolvent],
including his homestead, if any, together with a statement of the value of each item of said
property, estate, and effects and its location, and a statement of the incumbrances thereon.
All property exempt by law from execution shall be set out in said inventory with a statement
of its valuation, location, and the incumbrances thereon, if any. The inventory shall contain an
outline of the facts giving rises [sic], or which might give rise, to a right of action in favor of
the insolvent debtor."
(C)Under Section 18, upon receipt of the petition, the court shall issue an order declaring the
petitioner insolvent, and directing the sheriff to take possession of, and safely keep, until the
appointment of a receiver or assignee, all the debtor’s real and personal property, except
those exempt by law from execution. The order also forbids the transfer of any property by
the debtor.
(D)Under Section 32, once an assignee is elected and qualified, the clerk of court shall assign
and convey to the assignee all the real and personal property of the debtor, not exempt from
execution, and such assignment shall relate back to the commencement of the insolvency
proceedings, and by operation of law, shall vest the title to all such property in the assignee.
With the declaration of insolvency of the debtor, insolvency courts "obtain full and complete
jurisdiction over all property of the insolvent and of all claims by and against [it.]" 94 It follows
that the insolvency court has exclusive jurisdiction to deal with the property of the
insolvent.95 Consequently, after the mortgagor-debtor has been declared insolvent and the
insolvency court has acquired control of his estate, a mortgagee may not, without the
permission of the insolvency court, institute proceedings to enforce its lien. In so doing, it
would interfere with the insolvency court’s possession and orderly administration of the
insolvent’s properties.96
It is true that under Section 59 of Act No. 1956, the creditor is given the option to participate
in the insolvency proceedings by proving the balance of his debt, after deducting the value of
the mortgaged property as agreed upon with the receiver or determined by the court or by a
sale of the property as directed by the court; or proving his whole debt, after releasing his
claim to the receiver/sheriff before the election of an assignee, or to the assignee. However,
Section 59 of Act No. 1956 proceeds to state that when "the property is not sold or released,
and delivered up, or its value fixed, the creditor [is] not allowed to prove any part of his
debt," but the assignee shall deliver to the creditor the mortgaged property. Hence, explicitly
under Section 59 and as a necessary consequence flowing from the exclusive jurisdiction of
the insolvency court over the estate of the insolvent, the mortgaged property must first be
formally delivered by the court or the assignee (if one has already been elected) before a
mortgagee-creditor can initiate proceedings for foreclosure. 97
Here, the foreclosure and sale of the mortgaged property of the debtor, without leave of
court, contravene the provisions of Act No. 1956 and violate the Order dated July 12, 2005 of
the insolvency court which declared S.F. Naguiat insolvent and forbidden from making any
transfer of any of its properties to any person.
Petitioner would insist that "respondent was given the opportunity to be represented in the
public auction sale conducted on December 9, 2005" 98 because it received a copy of the
Notice of the Sheriff’s Sale on November 11, 2005; 99 and the Notice of Auction Sale was
published in a newspaper of general circulation. 100 However, respondent allegedly opted not
to participate by not attending the public auction sale.101
Such was to be expected because when the foreclosure proceeding was initiated, respondent
was already declared insolvent. Indeed, upon the adjudication of insolvency, the insolvent
ceased to exist and was in effect judicially declared dead as of the filing of the insolvency
petition and by the nature of things had no further interest in the property covered by the
mortgage.102 Under Section 32 of Act No. 1956, title to the insolvent’s estate relates back to
the filing of the insolvency petition upon the election of the assignee who shall thereafter act
on behalf of all the creditors. Under Section 36, the assignee has the power to redeem all
valid mortgages or sell property subject to mortgage. Thus, the extrajudicial foreclosure of
the mortgaged property initiated by petitioner without leave of insolvency court would
effectively exclude the assignee’s right to participate in the public auction sale of the property
and to redeem the foreclosed property 103 to the prejudice of all the other creditors of the
insolvent.
Petitioner filed its Manifestation and Motion before the insolvency court on September 7,
2005,104 praying that it would no longer file the Comment required as it opted to exercise its
right to extrajudicially foreclose the property mortgaged and that it "be allowed to
temporarily withdraw its active participation in the . . . proceeding pending the outcome of
the extra- judicial foreclosure proceeding of the mortgaged property." 105
Petitioner should have waited for the insolvency court to act on its Manifestation and Motion
before foreclosing the mortgaged property and its lien (assuming valid) would not be
impaired or its claim in any way jeopardized by any reasonable delay. There are mechanisms
49
within Act No. 1956 such as Section 59 that ensure that the interests of the secured creditor
are adequately protected. Parenthetically, mortgage liens are retained in insolvency
proceedings. What is merely suspended until court approval is obtained is the creditor’s
enforcement of such preference.
On the other hand, to give the secured creditor a free hand in foreclosing its collateral upon
the initiation of insolvency proceedings may frustrate the basic objectives of Act No. 1956 of
maximizing the value of the estate of the insolvent or obtaining the highest return possible
from its sale for the benefit of all the creditors (both secured and unsecured).
III
Executive Judge Gabitan-Erum did not unlawfully neglect to perform her duty when she
refused to approve and sign the Certificate of Sale, as would warrant the issuance of a writ of
mandamus against her.
An executive judge has the administrative duty in extrajudicial foreclosure proceedings to
ensure that all the conditions of Act No. 3135 have been complied with before approving the
sale at public auction of any mortgaged property. 106
"Certain requisites must be established before a creditor can proceed to an extrajudicial
foreclosure, namely: first, there must have been the failure to pay the loan obtained from the
mortgagee-creditor; second, the loan obligation must be secured by a real estate mortgage;
and third, the mortgagee-creditor has the right to foreclose the real estate mortgage either
judicially or extrajudicially."107
Furthermore, Act No. 3135 outlines the notice and publication requirements and the
procedure for the extrajudicial foreclosure which constitute a condition sine qua non for its
validity. Specifically, Sections 2, 3, and 4 of the law prescribe the formalities of the
extrajudicial foreclosure proceeding:
SEC. 2. Said sale cannot be made legally outside of the province in which the property sold is
situated; and in case the place within said province in which the sale is to be made is the
subject of stipulation, such sale shall be made in said place or in the municipal building of the
municipality in which the property or part thereof is situated.
SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at
least three public places of the municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall also be published once a
week for at least three consecutive weeks in a newspaper of general circulation in the
municipality or city.
SEC. 4. The sale shall be made at public auction, between the hours of nine in the morning
and four in the afternoon; and shall be under the direction of the sheriff of the province, the
justice or auxiliary justice of the peace of the municipality in which such sale has to be made,
or a notary public of said municipality, who shall be entitled to collect a fee of five pesos for
each day of actual work performed, in addition to his expenses.1âwphi1
"Mandamus will not issue to enforce a right which is in substantial dispute or to which a
substantial doubt exists."108
There was a valid reason for Executive Judge Gabitan-Erum to doubt the propriety of the
foreclosure sale. Her verification with the records of the Clerk of Court showed that a Petition
for Insolvency had been filed and had already been acted upon by the insolvency court prior
to the application for extrajudicial foreclosure of the mortgaged properties. Among the
inventoried unpaid debts and properties attached to the Petition for Insolvency was the loan
secured by the real estate mortgage subject of the application for extrajudicial foreclosure
sale.109 With the pendency of the insolvency case, substantial doubt exists to justify the
refusal by Executive Judge Gabitan-Erum to approve the Certificate of Sale as the extrajudicial
foreclosure sale without leave of the insolvency court may contravene the policy and purpose
of Act No. 1956.110
Act No. 3135 is silent with respect to mortgaged properties that are in custodia legis, such as
the property in this case, which was placed under the control and supervision of the
insolvency court. This court has declared that "[a] court which has control of such property,
exercises exclusive jurisdiction over the same, retains all incidents relative to the conduct of
such property. No court, except one having supervisory control or superior jurisdiction in the
premises, has a right to interfere with and change that possession." 111 The extrajudicial
foreclosure and sale of the mortgaged property of the debtor would clearly constitute an
interference with the insolvency court's possession of the property.
Furthermore, Executive Judge Gabitan-Erum noticed that the President of the highest bidder
in the public auction sale may be related to the owners of S.F. Naguiat Enterprises, Inc. The
President of the highest bidder, Phoenix Global Energy, Inc., was a certain Eugene T.
Naguiat.112 "Among the incorporators of S.F. Naguiat Enterprises, Inc. [the insolvent
corporation] [were] Sergio F. Naguiat, Maningning T. Naguiat, Antolin M. Tiglao, Nero F.
Naguiat and Antolin T. Naguiat. Later[,] its capital was increased and the listed subscribers
[were] Celestina T. Naguiat, Rommel T. Naguiat, Antolin T. Naguiat, Sergio T. Naguiat, Jr.,
Alexander T. Naguiat, Coumelo T. Naguiat, Fely Ann Breggs and Teresita Celine Quemer." 113
Under the foregoing circumstances, the refusal of Executive Judge Gabitan-Erum to approve
the Certificate of Sale was in accord with her duty to act with prudence, caution, and
attention in the performance of her functions.
WHEREFORE, the Petition is DENIED, and the Court of Appeals' Decision dated November 15,
2006 and Resolution dated June 14, 2007 are AFFIRMED.
SO ORDERED.
50
G.R. No. 198436
PIONEER INSURANCE SURETY CORPORATION, Petitioner,
vs.
MORNING STAR TRAVEL & TOURS, INC., ESTELITA CO WONG, BENNY H. WONG, ARSENIO
CHUA, SONNY CHUA, AND WONG YAN TAK, Respondents.
DECISION
LEONEN, J.:
As a general rule, a corporation has a separate and distinct personality from those who
represent it.1 Its officers are solidarily liable only when exceptional circumstances exist, such
as cases enumerated in Section 31 of the Corporation Code. 2The liability of the officers must
be proven by evidence sufficient to overcome the burden of proof borne by the plaintiff.
3
This case originated from a Complaint for Collection of Sum of Money and Damages filed by
Pioneer Insurance & Surety Corporation (Pioneer) against Morning Star Travel & Tours, Inc.
(Morning Star) for the amounts Pioneer paid the International Air Transport Association
under its credit insurance policy. The amounts of P100,479,171.59 and US$457,834.14
represent Morning Star’s overdue remittances to the International Air Transport Association. 4
Pioneer filed this Petition for Review 5 assailing the Court of Appeals’ February 28, 2011
Decision6 "only insofar as it absolved the individual respondents of their joint and solidary
liability to petitioner[,]"7 and August 31, 2011 Resolution8 denying reconsideration.
Morning Star is a travel and tours agency with Benny Wong, Estelita Wong, Arsenio Chua,
Sonny Chua, and Wong Yan Tak as shareholders and members of the board of directors. 9
International Air Transport Association is a Canadian corporation licensed to do business in
the Philippines "to promote safe, regular and economical air transport for all people, among
others."10
International Air Transport Association appointed Morning Star as an accredited travel
agent.11 Morning Star "avail[ed] of the privilege of getting on credit . . . air transport tickets
from various airline companies [to be sold] to passengers at prices fixed by the airline
companies[.]"12
Morning Star and International Air Transport Association entered a Passenger Sales Agency
Agreement such that Morning Star must report all air transport ticket sales to International
Air Transport Association and account all payments received through the centralized system
called Billing and Settlement Plan. 13 Morning Star only holds in trust all monies collected as
these belong to the airline companies. 14
International Air Transport Association obtained a Credit Insurance Policy from Pioneer to
assure itself of payments by accredited travel agents for ticket sales and monies due to the
airline companies under the Billing and Settlement Plan. 15 The policy was for the period from
November 1, 2001 to December 31, 2002, renewed for the period from January 1, 2003 to
December 31, 2003.16
The policy was made known to the accredited travel agents. Morning Star, through its
President, Benny Wong, was among those that declared itself liable to indemnify Pioneer for
any and all claims under the policy. He executed a registration form under the Credit
Insurance Program for BSP-Philippines Agents.17
Morning Star had an accrued billing of P49,051,641.80 and US$325,865.35 for the period
from December 16, 2002 to December 31, 2002. It failed to remit these amounts through the
Billing and Settlement Plan, prompting the International Air Transport Association to send a
letter dated January 17, 2003 advising on the overdue remittance. 18
International Air Transport Association again declared Morning Star in default by a letter
dated January 20, 2003 for its overdue account covering the period from January 1, 2003 to
January 20, 2003.19
Pursuant to the credit insurance policies, International Air Transport Association demanded
from Pioneer the sums of P109,728,051.00 and US$457,834.14 representing Morning Star’s
overdue account as of April 30, 2003. Pioneer investigated, ascertained, and validated the
claims, then paid International Air Transport Association the amounts of P100,479,171.59 and
US$457,834.14.20
Consequently, Pioneer demanded these amounts from Morning Star through a letter dated
September 23, 2003.21International Air Transport Association executed in Pioneer’s favor a
Release of Claim and Subrogation Receipt on December 23, 2003. 22
On November 10, 2005, Pioneer filed a Complaint for Collection of Sum of Money and
Damages against Morning Star and its shareholders and directors. 23
Morning Star, Benny Wong, and Estelita Wong were served with summons and a copy of the
Complaint on November 22, 2005, while Arsenio Chua, Sonny Chua, and Wong Yan Tak were
unserved.24
The trial court granted Pioneer’s Motion to Declare Respondents in Default for failure to file
an Answer within the period.25 Pioneer presented its evidence ex-parte. 26
Meanwhile, Pioneer filed an Ex-Parte Motion for Issuance of Alias Summons since Morning
Star was previously served through substituted service. The trial court granted the Motion,
and alias summons was served on February 5, 2007. Upon motion, Morning Star was
declared in default for failure to file an Answer within the period. 27
On June 28, 2007, Morning Star filed a Motion for Leave of Court to File Attached Answer
explaining that it only received a copy of the Complaint on February 5, 2007. 28 Its counsel also
51
alleged that he was retained only on June 22, 2007. 29 The trial court denied the Motion on
July 23, 2007, and also denied reconsideration. 30
The Regional Trial Court in its Decision 31 dated November 9, 2007 ruled in favor of Pioneer
and ordered respondents to jointly and severally pay Pioneer:
WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of the plaintiff as
against the defendants ordering the latter to jointly and severally pay the following amount:
1. One Hundred Million Four Hundred Seventy Nine Thousand One Hundred Seventy One
Pesos and Fifty Nine (Php100,479,171.59) and Four Hundred Fifty Seven Thousand Eight
Hundred Thirty Four Dollars and 14/100 (US$457,834.14), with interest at 12% per annum
from September 23, 2003 until the sum is fully paid;
2. Php100,000.00 as attorney’s fees;
3. Php100,000.00 as exemplary damages;
4. Php200,000.00 as litigation expenses[;]
5. costs of suit.
SO ORDERED.32
The Court of Appeals, in its Decision dated February 28, 2011, affirmed the trial court with
modification in that only Morning Star was liable to pay petitioner:
WHEREFORE, premises considered, the instant Appeal is DENIED. Accordingly, the assailed 9
November 2007 Decision of the Regional Trial Court of Makati City, Branch 143 in Civil Case
No. 05-993 is AFFIRMED with MODIFICATION. Insofar as the trial court ordered Defendants-
Appellants Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny Chua and Wong Yan Tak to
jointly and severally pay the amounts awarded to Plaintiff-Appellee, the same is deleted. Only
Morning Star is held personally liable for the payment thereof. Further, exemplary damages
and attorney’s fees are likewise deleted for lack of basis.
SO ORDERED.33
The Court of Appeals denied Pioneer’s Motion for Partial Reconsideration. 34 Thus, Pioneer
filed this Petition.
Pioneer submits that its Petition falls under the exceptions to the general rule that petitions
for review may raise only questions of law. 35 Pioneer raises conflicting findings and
conclusions by the lower courts regarding solidary liability, and misapprehension of facts by
the Court of Appeals.36
Pioneer argues that "the individual respondents were, at the very least, grossly negligent in
running the affairs of respondent Morning Star by knowingly allowing it to amass huge debts
to [International Air Transport Association] despite its financial distress, thus, giving sufficient
ground for the court to pierce the corporate veil and hold said individual respondents
personally liable."37 It cites Section 31 of the Corporation Code on the liability of directors
"guilty of gross negligence or bad faith in directing the affairs of the corporation[.]" 38
Pioneer also cites jurisprudence 39 on the requisites for the doctrine of piercing the corporate
veil to apply.40 It submits that all requisites are present, thus, the individual respondents
should be held solidarily liable with Morning Star. 41 It cites at length the testimony of its
witness Atty. Vincenzo Nonato M. Taggueg (Atty. Taggueg) 42 that based on Morning Star’s
General Information Sheet and financial statements, Morning Star "has been accumulating
losses as early as 1998 continuing to 1999 and 2000 resulting to a deficit of
Php26,168,1768.00 [sic] as of December 31, 2000[.]" 43
Pioneer contends that the abnormally large indebtedness to International Air Transport
Association was incurred in fraud and bad faith, with Morning Star having no intention to pay
its debt.44 It cites Oria v. McMicking45 on the badges of fraud.46 Pioneer then enumerates "the
unmistakable badges of fraud and deceit committed by individual respondents" 47 such as the
fact that Morning Star had no assets,48 but the two corporations also "controlled and
managed by the individual respondents were doing relatively well [at] the time . . . Morning
Star was incurring huge losses[.]" 49 Moreover, a new travel agency called Morning Star Tour
Planners, Inc. now operates at the Morning Star’s former principal place of business in Pedro
Gil, Manila, with the children of individual respondents as its stockholders, directors, and
officers.50
Respondents counter with the general rule clothing corporations with personality separate
and distinct from their officers and stockholders. 51 They submit that "[m]ere sweeping
allegations that officers acted in bad faith because it incurred obligations it cannot pay will
not hold any water."52 Respondents argue that Pioneer failed to prove bad faith, relying only
on Atty. Taggueg’s testimony, but "Mr. Taggueg admitted that his knowledge about the
defendant Morning Star was merely based on his assumptions and his examination of the
[Securities and Exchange Commission] documents." 53
The issues for resolution are:
First, whether this case involves an exception to the general rule that petitions for review are
limited to questions of law; and
Second, whether the doctrine of piercing the corporate veil applies to hold the individual
respondents solidarily liable with respondent Morning Star Travel and Tours, Inc. to pay the
award in favor of petitioner Pioneer Insurance & Surety Corporation.
I
52
Only questions of law may be raised in a petition for review. 54 Factual findings of the Court of
Appeals are generally "final and conclusive, and cannot be reviewed on appeal by [this court],
provided they are borne out by the record or based on substantial evidence." 55
Issues such as whether the separate and distinct personality of a corporation was used for
fraudulent ends, or whether the evidence warrants a piercing of the corporate veil, involve
questions of fact.56
Jurisprudence established exceptions from the general rule against a factual review by this
court. These exceptions include cases when the judgment appears to be based on a "patent
misappreciation of facts."57
Petitioner invokes this exception in alleging that "the conflicting findings and conclusions
between the Court of Appeals and the trial court insofar as the solidary liability of
respondents to pay petitioner and the misapprehensions of facts by the Court of Appeals
constrains petitioner to raise both questions of fact and law in the Petition." 58
In ruling against the solidary liability of the individual respondents with respondent Morning
Star, the Court of Appeals discussed that "the trial court merely stated in the dispositive
portion thereof that Defendants- Appellants are ordered to pay Plaintiff-Appellee jointly and
severally the judgment award without discussing in the body of the decision the reason for
such conclusion."59
The Court of Appeals then enumerated the exceptional circumstances warranting solidary
liabilities by corporate agents based on jurisprudence, and found none to be present in this
case.60
We affirm the Court of Appeals.
II
The law vests corporations with a separate and distinct personality from those that represent
these corporations.61
The corporate legal structure draws its "economic superiority" 62 from key features such as a
separate corporate personality. Unlike other business associations such as partnerships, the
corporate framework encourages investment by allowing even small capital contributors to
be part of a big business endeavor made possible by the aggregation of their capital
funds.63 The consequent limited liability feature, since corporate assets will answer for
corporate debts, also proves attractive for investors. However, this legal structure should not
be abused.
A separate corporate personality shields corporate officers acting in good faith and within
their scope of authority from personal liability except for situations enumerated by law and
jurisprudence,64 thus:
Personal liability of a corporate director, trustee or officer along (although not necessarily)
with the corporation may so validly attach, as a rule, only when —
‘1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
‘2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
‘3. He agrees to hold himself personally and solidarily liable with the corporation; or
‘4. He is made, by a specific provision of law, to personally answer for his corporate action.’ 65
The first exception comes from Section 31 of the Corporation Code:
SECTION 31. Liability of Directors, Trustees or Officers. —
Directors or trustees who wilfully 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. (Emphasis supplied)
Petitioner imputes gross negligence and bad faith on the part of the individual respondents
for incurring the huge indebtedness to International Air Transport Association. 66
Bad faith "imports a dishonest purpose or some moral obliquity and conscious doing of a
wrong, not simply bad judgment or negligence." 67 "[I]t means breach of a known duty
through some motive or interest or ill will; it partakes of the nature of fraud." 68
The trial court gave weight to its finding that respondent Morning Star still availed itself of
loans and/or obligations with International Air Transport Association despite its financial
standing of operating at a loss:
Based on the plaintiff’s examination of the financial statements submitted by the defendant
Morning Star with the Securities and Exchange Commission (SEC) for the years 2000 and 2001
with comparative figures for the years ending 1998, 1999 and 2000, herein defendant
corporation has been accumulating losses as early as 1998 continuing to 1999 and 2000
resulting to a deficit of Php26, 168,176.80 as of December 31, 2000. It was also shown that
for the prior years of 1998 and 1999, defendant Morning Star incurred a deficit of
Php3,910,763.00 as of December 31, 1998 and Php2,841,626.00 as of December 31, 1999
and in the Balance Sheet, it indicated therein the defendants’ total assets of
Php150,579,421.00 while the total liabilities amounted to Php160,222,966.00, thereby
making the defendant Morning Star insolvent. Despite the fact that defendant Morning Star
53
was already incurring losses as early as 1998 up to the year 2000, the latter still
contracted loans and/or obligations with IATA sometime in 2002 and which indebtedness
ballooned to the huge amount of Php109,728,051.00 andUS$496,403.21 as of April 30,
2003, which obviously it could not pay considering its financial standing.
Further investigation by the plaintiff shows that it could not find any assets or properties in
the name of defendant Morning Star because even the land and the building where it held
office was registered in the name of "Morning Star Management Ventures Corporation", as
evidenced by the certified true copies of the transfer certificates of title (TCT) nos. 192243
and 192244 in the name of Morning Star Management Ventures Corporation and unlike the
defendant Morning Star, which has practically the same officers and members of the Board,
has only an asset of Php125,392,960.00 and liabilities of Php4,306,702[.]00 and an income
deficit of Php26,922,598.00 as of December 31, 2001. Similarly, the Pic [‘]N Pac Mart, Inc.,
which has the same set of officers, said corporation has shown a total assets of
Php5,423,201.30 and liabilities/stockholders equity of Php5,423,201.30 but with a retained
earnings of Php194,412[.]74 as of December 31, 1999. Plaintiff contends that in such a case,
defendant Morning Star has used the separate and distinct corporate personality accorded
to it under the Corporation Code to commit said fraudulent transaction of incurring
corporate debts and allow the herein individual defendants to escape personal liability and
placing the assets beyond the reach of the creditors.69 (Emphasis supplied, citations omitted)
On the other hand, the Court of Appeals ruled that the general rule on separate corporate
personality and against personal liability by corporate officers applies since petitioner failed
to prove bad faith amounting to fraud by the corporate officers:
The mere fact that Morning Star has been incurring huge losses and that it has no assets at
the time it contracted large financial obligations to IATA, cannot be considered that its
officers, Defendants-Appellants Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny Chua
and Wong Yan Tak, acted in bad faith or such circumstance would amount to fraud,
warranting personal and solidary liability of its corporate officers. The same is also true with
the fact that Morning Star Management Ventures Corporation and Pic ‘N Pac Mart, Inc.,
corporations having the same set of officers as Morning Star, were doing relatively well during
the time that the former incurred huge losses. Thus, only Morning Star should be held
personally liable to Plaintiff- Appellee, and not its corporate officers. 70
Piercing the corporate veil in order to hold corporate officers personally liable for the
corporation’s debts requires that "the bad faith or wrongdoing of the director must be
established clearly and convincingly [as] [b]ad faith is never presumed."71
III
Oria v. McMicking72 enumerates several badges of fraud. Petitioner argues the existence of
the fourth to sixth badges:73
1. The fact that the consideration of the conveyance is fictitious or is inadequate.
2. A transfer made by a debtor after suit has been begun and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent
or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present other
of the above circumstances.
7. The failure of the vendee to take exclusive possession of all the property. 74 (Emphasis
supplied)
Petitioner listed the following circumstances as constituting badges of fraud by the individual
respondents:
Attention is drawn to the following badges of fraud by individual respondents to use the
corporate fiction of respondent Morning Star as a veil or cloak to insulate themselves from
any liability to pay its indebtedness to [sic], to wit:
a. As members of the Board of Directors and at the same time, officers of respondent
Morning Star, individual respondents Estelita Co Wong (President and Member of the Board),
Benny H. Wong (Chairman of the Board), Arsenio Chua (Member of the Board), Sonny Chua
(Secretary and Member of the Board) and Wong Yan Tak (Treasurer and Member of the
Board) undoubtedly exercised complete control and direction of the financial management
and business operations of respondent Morning Star;
b. Similarly, the individual respondents are likewise in direct control of the management of
two other corporations, Morning Star Management Ventures Corp. and Pic ‘N Pac Mart[,]
Inc., being the shareholders, members of the Board and officers of the said corporations, as
evidenced by the General Information Sheets (GIS) of the said corporations filed with the
Securities and Exchange Commission (Exhibits "O" to "O-4" and "P" to "P-3" of petitioner’s
Formal Offer of Evidence dated August 15, 2007);
c. Respondent Morning Star has no assets or property in its name that may be levied upon for
attachment and execution to secure and to satisfy any judgment debt, as in fact the land and
building where its offices can be found and situated at J. Bocobo Street cor. Pedro Gil Street,
Ermita Manila is not even registered in its name but in the name of another corporation
"Morning Star Management Ventures Corporation" which is similarly owned and controlled
by the individual respondents (Exhibits "S" to "S-2" and "T" to "T-2" of petitioner’s Formal
Offer of Evidence dated August 15, 2007);
d. As early as 1998, respondent Morning Star had already been incurring huge losses which
clearly show the inability to pay its obligations to IATA but the individual respondents
54
contracted its huge financial obligations from IATA knowing fully well that respondent
Morning Star will be unable to pay such obligations;
e. Strangely, on the other hand, Pic ‘N Pac Mart, Inc. and Morning Star Management Ventures
Corp., the other two (2) corporations similarly controlled and managed by the individual
respondents, were doing relatively well during the time that respondent Morning Star was
incurring huge losses (Exhibits "U" to "U-7" and "V" to "V-9" of petitioner’s Formal Offer of
Evidence dated August 15, 2007);
f. Individual respondents allowed the indebtedness of respondent Morning Star to balloon to
a staggering amount of Php100,479,171.59 and US$457,834.14[.] 75 (Citations omitted)
This court finds that petitioner was not able to clearly and convincingly establish bad faith by
the individual respondents, nor substantiate the alleged badges of fraud.1avvphi1
IV
First, petitioner failed to substantiate the fourth badge of fraud on "[e]vidence of large
indebtedness or complete insolvency."76
In 1993, International Air Transport Association appointed respondent Morning Star as an
accredited travel agent with the privilege of getting air tickets on credit, and they entered a
Passenger Sales Agency Agreement.77 None of the parties made allegations on the financial
status or business standing of respondent Morning Star during the first five years from its
accreditation in 1993.
Petitioner relies on Atty. Taggueg’s testimony regarding respondent Morning Star’s financial
statements with the Securities and Exchange Commission.
Atty. Taggueg testified on the comparative figures for the years ended 1998, 1999, and 2000
and how the company was "accumulating losses as early as 1998 continuing to 1999 and
2000 resulting to a deficit of Php26,168,1768.00 [sic] as of December 31, 2000 . . . deficit of
Php3,910,763.00 as of December 31, 1998 and another deficit of Php2,841,626.00 as of
December 31, 1999[.]"78 He testified that as of December 31, 2000, respondent Morning Star
had total assets of Php150,579,421.00 and total liabilities of Php160,222,966.00. 79
Atty. Taggueg then testified that despite this insolvency, "Morning Star Travel still contracted
loans and/or obligations from the IATA sometime in December 2002 which indebtedness with
IATA ballooned to the huge amount of Php109,728,051.00 and US$496,403.21 as of April 30,
2003[.]"80
Petitioner did not present Securities and Exchange Commission documents on respondent
Morning Star’s total assets as of December 2002.1a\^/phi1 It did not present respondent
Morning Star’s financial statements for December 2002, the year it incurred obligations from
International Air Transport Association.81
The financial statements for years 1998 to 1999 and 1999 to 2000 testified on by Atty.
Taggueg are not representative of the financial status of respondent Morning Star’s business.
Year 2000 reflected total assets of P150,579,421.00 and total liabilities of
P160,222,966.00.82 On the other hand, year 1999 showed total assets of P134,361,353.00 and
total liabilities of P120,678,345.00.83 Businesses may earn profits in some years and operate
at a loss in others as a result of changing economic conditions. These two financial
statements do not show that respondent Morning Star was operating at a loss in 2002.
Deficits in the years 1998 to 2000 do not necessarily mean deficits in 2002. It is unclear if
these figures included previous obligations to International Air Transport Association, or
whether some or all of such obligations were paid in subsequent years as an indication of
respondent Morning Star’s credit history.
In any event, it is in the nature of businesses to take risks when making business judgments,
and this includes taking loans and incurring liabilities.
Atty. Taggueg’s association with respondent Morning Star, or this case, is also unclear.
Respondents submit in their memorandum that "[i]n his testimony[,] Mr. Taggueg admitted
that his knowledge about . . . Morning Star was merely based on his assumptions and his
examination of the [Securities and Exchange Commission] documents." 84
Petitioner’s reliance on Atty. Taggueg’s testimony on respondentMorning Star’s financial
statements for previous years fails to clearly and convincingly establish bad faith by the
individual respondents.
V
Second, petitioner failed to substantiate the fifth badge of fraud on the "transfer of all or
nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed
financially."85
Mere allegations that Morning Star Management Ventures Corporation and Pic ‘N Pac Mart,
Inc. "were doing relatively well during the time that respondent Morning Star was incurring
huge losses"86 do not establish bad faith or fraud by the individual respondents. Such
allegations alone do not prove that the individual respondents were transferring respondent
Morning Star’s properties in fraud of its creditors.
Neither does the allegation that Morning Star Management Ventures Corporation has title
over the land and building where the offices can be found establish bad faith or fraud.
Petitioner did not show that this title was originally in respondent Morning Star’s name and
was later transferred to respondent Morning Star.
This court has held that the "existence of interlocking directors, corporate officers and
shareholders is not enough justification to pierce the veil of corporate fiction in the absence
of fraud or other public policy considerations." 87
55
VI
Third, petitioner also failed to substantiate the sixth badge of fraud that "the transfer is made
between father and son, when there are present other of the above circumstances." 88
Petitioner submits that:
It would be the height of injustice to allow individual respondents to get away with their gross
negligence to the prejudice of petitioner, especially since there is now another travel agency
in the name of Morning Star Tour Planners, Inc. operating at the respondent Morning Star’s
former principal place of business at 1600 J. Bocobo St. corner Pedro Gil Malate, Manila. . . .
....
does this suspicion support petitioner’s position that the individual respondents were in bad
faith or gross negligence in directing the affairs of respondent Morning Star.
Finally, pursuant to this court's pronouncement in Nacar v. Gallery Frames,92 the interest rate
should be 6% per annum on the amount owing to petitioner representing respondent
Morning Star's unpaid air transport tickets availed on credit.
WHEREFORE, the Petition is DENIED. The Court of Appeals Decision is AFFIRMED with
MODIFICATION in that legal interest is 6% per annum from September 23, 2003 until fully
paid.
SO ORDERED.

Curiously, among the stockholders, directors and officers of Morning Star Tour Planners, Inc.,
are the following: Belinda Wong, Billy Wong, Barbara C. Wong and Benny C. Wong, Jr., who all
have the same address as individual respondents Estelita Co Wong and Benny H. Wong.

Given, these vital pieces of information, it is at once indubitable that respondents have
established another travel agency in the name of their children in order to escape their
solidary liability to petitioner! 89 (Citation omitted)

This court has held that "compliance with the recognized modes of acquisition of jurisdiction
cannot be dispensed with even in piercing the veil of corporate fiction[.]" 90 Morning Star Tour
Planners, Inc. is not a party in this case. It would offend due process rights if what petitioner
ultimately seeks in its allegation is to hold Morning Star Tour Planners, Inc. responsible for
respondent Morning Star’s liability.

In any event, petitioner failed to plead and prove the circumstances that would pass the
following control test for the operation of the alter ego doctrine:

(1) Control, not mere majority or complete stock control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no separate mind, will or existence
of its own;

(2) Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must [have] proximately caused the injury or
unjust loss complained of.91

The records do not show that the individual respondents controlled Morning Star Tour
Planners, Inc. and that such control was used to commit fraud against petitioner. Neither

56
[ G.R. No. 215568, August 03, 2015 ] tickets held by the passengers on board Bus No. 8286 who had transferred from Bus No. 1820
in San Fernando, Pampanga. (Bus No. 1820 broke down.) In the course of his inspection, he
RICHARD N. RIVERA, PETITIONER, VS. GENESIS TRANSPORT SERVICE, INC. AND RIZA A. noticed that Ticket No. 723374 VA had a written corrected amount of P394.00. However, the
MOISES, RESPONDENTS. amount marked by perforations made on the ticket, which was the amount originally
indicated by the bus conductor, was only P198.00. Upon inquiring with the passenger holding
DECISION the ticket, Villaseran found out that the passenger paid P500.00 to Rivera, who gave her
LEONEN, J.: change in the amount of P106.00. [11]

This resolves a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Subsequently, Villaseran conducted verification works with the Ticket Section of Genesis'
Procedure praying that the July 8, 2014 Decision [1] and the November 20, 2014 Resolution [2] of Cubao Main Office. Per his inquiries, the duplicate ticket surrendered by Rivera to Genesis
the Court of Appeals Fifth Division in CA-G.R. SP No. 130801 be reversed and set aside, and indicated only the unconnected amount of P198.00. It was also found that Rivera remitted
that new judgment be entered finding petitioner Richard N. Rivera to have been illegally only P198.00.[12]
dismissed and awarding to him his monetary claims.
On July 20, 2010, Genesis served on Rivera a written notice [13] informing him that a hearing of
The assailed July 8, 2014 Decision of the Court of Appeals dismissed the Petition for Certiorari his case was set on July 23, 2010. Despite his explanations, Rivera's services were terminated
under Rule 65 of the 1997 Rules of Civil Procedure filed by Richard N. Rivera (Rivera) and through a written notice dated July 30, 2010. [14] Contending that this termination was
affirmed the February 28, 2013[3] and April 30, 2013[4] Resolutions of the National Labor arbitrary and not based on just causes for terminating employment, he filed the
Relations Commission Second Division. These Resolutions sustained the ruling of Labor Complaint[15] for illegal dismissal, which is subject of this Petition. [16]
Arbiter Gaudencio P. Demaisip, Jr. who, in his June 26, 2012 Decision, [5] dismissed Rivera's
Complaint[6] for illegal dismissal. For their defense, Genesis and Riza A. Moises claimed that Rivera's misdeclaration of the
amount in the bus ticket receipts and failure to remit the correct amount clearly violated
The assailed November 20, 2014 Resolution of the Court of Appeals denied Rivera's Motion Genesis' policies and amounted to serious misconduct, fraud, and willful breach of trust;
for Reconsideration. thereby justifying his dismissal. [17]

Rivera was employed by respondent Genesis Transport Service, Inc. (Genesis) beginning June In a Decision[18] dated June 26, 2012, Labor Arbiter Gaudencio P. Demaisip gave credence to
2002 as a bus conductor, assigned to the Cubao-Baler, Aurora route. As part of the requisites respondents' appreciation of the gravity of Rivera's acts of misdeclaring the amount of bus
for his employment, he was required to post a cash bond of P6,000.00. Respondent Riza A. ticket receipts and failing to remit the correct amount. Thus, he dismissed Rivera's Complaint.
Moises is Genesis' President and General Manager. [7]
In a Resolution[19] dated February 28, 2013, the National Labor Relations Commission Second
In his Position Paper before the Labor Arbiter, Rivera acknowledged that he was dismissed by Division affirmed the Decision of Labor Arbiter Demaisip. In a Resolution [20] dated April 30,
Genesis on account of a discrepancy in the amount he declared on bus ticket receipts. He 2013, the National Labor Relations Commission denied Rivera's Motion for Reconsideration.
alleged that on June 10, 2010, he received a Memorandum [8] giving him twenty-four (24)
hours to explain why he should not be sanctioned for reporting and remitting the amount of Thereafter, Rivera filed a Rule 65 Petition before the Court of Appeals. In the assailed July 8,
P198.00 instead of the admittedly correct amount of P394.00 worth of bus ticket receipts. He 2014 Decision,[21] the Court of Appeals Fifth Division sustained the rulings of Labor Arbiter
responded that it was an honest mistake, which he was unable to correct "because the bus Demaisip and the National Labor Relations Commission. In the assailed November 20, 2014
encountered mechanical problems."[9] Resolution,[22] the Court of Appeals denied Rivera's Motion for Reconsideration.

The discrepancy between the reported and remitted amount as against the correct amount Hence, this Petition was filed.
was detailed in the "Irregularity Report" prepared by Genesis' Inspector, Arnel Villaseran
(Villaseran).[10] For resolution is the issue of whether petitioner Richard N. Rivera's employment was
terminated for just cause by respondent Genesis Transport, Inc.
According to Villaseran, on May 25, 2010, he conducted a "man to man" inspection on the

57
As Riza A. Moises, Genesis' President and General Manager, has been impleaded, this court This case is quintessentially paradigmatic of the need for the law to be applied in order to
must also rule on her personal liability, should the termination of petitioner's employment be ensure social justice. The resolution of this case should be guided by the constitutional
found invalid. command for courts to take a preferential view in favor of labor in ambitious cases.

This case revolves around an alleged discrepancy between the amounts indicated on a single
ticket. For the paltry sum of P196.00 that petitioner failed to remit in his sole documented
I instance of apparent misconduct, petitioner's employment was terminated. He was deprived
of his means of subsistence.

Our laws on labor, foremost of which is the Labor Code, are pieces of social legislation. They
have been adopted pursuant to the constitutional recognition of "labor as a primary social
economic force"[23] and to the constitutional mandates for the state to "protect the rights of II
workers and promote their welfare" [24] and for Congress to "give highest priority to the
enactment of measures that protect and enhance the right of all the people to human
dignity, [and] reduce social, economic, and political inequalities." [25] Misconduct and breach of trust are just causes for terminating employment only when
attended by such gravity as would leave the employer no other viable recourse but to cut off
They are means for effecting social justice, i.e., the "humanization of laws and the an employee's livelihood.
equalization of social and economic forces by the State so that justice in the rational and
objectively secular conception may at least be approximated." [26] The Labor Code recognizes serious misconduct, willful breach of trust or loss of confidence,
and other analogous causes as just causes for termination of employment:
Article XIII, Section 3 of the 1987 Constitution guarantees the right of workers to security of
tenure. "One's employment, profession, trade or calling is a 'property right,'" [27] of which a
Article 282. Termination by employer. An employer may terminate an employment for any of
worker may be deprived only upon compliance with due process requirements:
the following just causes:

It is the policy of the state to assure the right of workers to "security of tenure" (Article XIII, Serious misconduct or willful disobedience by the employee of the lawful orders of his
Sec. 3 of the New Constitution, Section 9, Article II of the 1973 Constitution). The guarantee is (a)
employer or representative in connection with his work;
an act of social justice. When a person has no property, his job may possibly be his only
possession or means of livelihood. Therefore, he should be protected against any arbitrary
deprivation of his job. Article 280 of the Labor Code has construed security of tenure as
(b) Gross and habitual neglect by the employee of his duties;
meaning that "the employer shall not terminate the services of an employee except for a just
cause or when authorized by" the code. Dismissal is not justified for being arbitrary where
the workers were denied due process and a clear denial of due process, or constitutional right
must be safeguarded against at all times.[28] (Citations omitted) Fraud or willful breach by the employee of the trust reposed in him by his employer or
(c)
duly authorized representative;
Conformably, liberal construction of Labor Code provisions in favor of workers is stipulated by
Article 4 of the Labor Code:
Commission of a crime or offense by the employee against the person of his employer or
(d)
any immediate member of his family or his duly authorized representative; and
Art. 4. Construction in favor of labor. All doubts in the implementation and interpretation of
the provisions of this Code, including its implementing rules and regulations, shall be resolved
in favor of labor.
(e) Other causes analogous to the foregoing.

58
Serious misconduct as a just cause for termination was discussed in Yabut v. Manila Electric employee's breach of trust. In China City Restaurant Corporation v. National Labor Relations
Co.:[29] Commission,[34] this court emphasized the need for caution:

Misconduct is defined as the "transgression of some established and definite rule of action, a For loss of trust and confidence to be a valid ground for the dismissal of employees, it must
forbidden act, a dereliction of duty, willful in character, and implies wrongful intent and not be substantial and not arbitrary, whimsical, capricious or concocted.
mere error in judgment." For serious misconduct to justify dismissal, the following requisites
must be present: (a) it must be serious; (b) it must relate to the performance of the Irregularities or malpractices should not be allowed to escape the scrutiny of this Court.
employee's duties; and (c) it must show that the employee has become unfit to continue Solicitude for the protection of the rights of the working class [is] of prime importance.
working for the employer.[30] (Emphasis supplied, citation omitted) Although this is not [al license to disregard the rights of management, still the Court must be
wary of the ploys of management to get rid of employees it considers as undesirable.
Thus, it is not enough for an employee to be found to have engaged in improper or wrongful [35]
(Emphasis supplied)
conduct. To justify termination of employment, misconduct must be so severe as to make it
evident that no other penalty but the termination of the employee's livelihood is viable. III

In Philippine Plaza Holdings v. Episcope,[31] we discussed the requisites for valid dismissal on
account of willful breach of trust: The social justice suppositions underlying labor laws require that the statutory grounds
justifying termination of employment should not be read to justify the view that bus
conductors should, in all cases, be free from any kind of error. Not every improper act should
Among the just causes for termination is the employer's loss of trust and confidence in its be taken to justify the termination of employment.
employee. Article 296 (c) (formerly Article 282 [c]) of the Labor Code provides that an
employer may terminate the services of an employee for fraud or willful breach of the trust Concededly, bus conductors handle money. To this extent, their work may be analogous to
reposed in him. But in order for the said cause to be properly invoked, certain requirements that of tellers, cashiers, and other similarly situated rank-and-file employees who occupy
must be complied with[,] namely[:] (1) the employee concerned must be holding a position of positions of trust and confidence. However, even granting that the first requisite for
trust and confidence and (2) there must be an act that would justify the loss of trust and termination of employment on account of willful breach of trust has been satisfied, we find it
confidence.[32] improper to sustain the validity of the termination of petitioner's employment.

Relating to the first requisite, Philippine Plaza Holdings clarified that two (2) classes of
employees are considered to hold positions of trust:
It is noteworthy to mention that there are two classes of positions of trust: on the one hand,
there are managerial employees whose primary duty consists of the management of the
establishment in which they are employed or of a department or a subdivision thereof, and to
other officers or members of the managerial staff; on the other hand, there are fiduciary
rank-and-file employees, such as cashiers, auditors, property custodians, or those who, in the
normal exercise of their functions, regularly handle significant amounts of money or property.
These employees, though rank-and-file, are routinely charged with the care and custody of
the employer's money or property, and are thus classified as occupying positions of trust and
confidence.[33] (Emphasis supplied)
The position an employee holds is not the sole criterion. More important than this formalistic
requirement is that loss of trust and confidence must be justified. As with misconduct as basis
for terminating employment, breach of trust demands that a degree of severity attend the
We take judicial notice of bus conductors' everyday work. Bus conductors receive, exchange,
and keep money paid by passengers by way of transportation fare. They keep track of
payments and make computations down to the last centavo, literally on their feet while a bus
is in transit.
Regardless of whether a bus is driving through awkward spaces—through steep inclines,
rugged roads, or sharp turns—or of whether a bus is packed with standing passengers, the
lonesome task of keeping track of the passengers' payments falls upon a bus conductor.
Thus, while they do handle money, their circumstances are not at all the same as those of
regular cashiers. They have to think quickly, literally on their feet. Regular cashiers, on the
other hand, have the time and comfort to deliberately and carefully examine the transactions
of their employer.
However, handling passengers' fare payments is not their sole function. Bus conductors assist
drivers as they maneuver buses through tight spaces while they are in transit, depart, or park.
59
They often act as dispatchers in bus stops and other such places, assist passengers as they Rule 45. It erred when it held that the National Labor Relations did not commit grave abuse of
embark and alight, and sometimes even help passengers load and unload goods and cargo. discretion when the latter did not engage in the requisite scrutiny to review the inference and
They manage the available space in a bus and ensure that no space is wasted as the bus its bases.
accommodates more passengers. Along with drivers, bus conductors commit to memory the
destination of each passenger so that they can anticipate their stops.

There are several ways to manifest the severity that suffices to qualify petitioner's alleged IV
misconduct or breach of trust as so grave that terminating his employment is warranted. It
may be through the nature of the act itself: spanning an entire spectrum between, on one
As his employment was illegally and unjustly terminated, petitioner is entitled to full
end, an overlooked error, made entirely in good faith; and, on another end, outright larceny.
backwages and benefits from the time of his termination until the finality of this Decision. He
It may be through the sheer amount mishandled. It may be through frequency of acts. It may
is likewise entitled to separation pay in the amount of one (1) month's salary for every year of
be through other attendant circumstances, such as attempts to destroy or conceal records
service until the finality of this Decision, with a fraction of a year of at least six (6) months
and other evidence, or evidence of a motive to undermine the business of an employer.
being counted as one (1) whole year.
We fail to appreciate any of these in this case.
As he was compelled to litigate in order to seek relief for the illegal and unjust termination of
his employment, petitioner is likewise entitled to attorney's fees in the amount of 10% of the
To reiterate, what is involved is a paltry amount of P196.00. All that has been proven is the
total monetary award.[36]
existence of a discrepancy. No proof has been adduced of ill-motive or even
of gross negligence. From all indications, petitioner stood charged with a lone, isolated
"Moral damages are awarded in termination cases where the employee's dismissal was
instance of apparent wrongdoing.
attended by bad faith, malice or fraud, or where it constitutes an act oppressive to labor, or
where it was done in a manner contrary to morals, good customs or public policy." [37] Also, to
The records are bereft of evidence showing a pattern of discrepancies chargeable against
provide an "example or correction for the public good," [38] exemplary damages may be
petitioner. Seen in the context of his many years of service to his employer and in the
awarded.
absence of clear proof showing otherwise, the presumption should be that he has performed
his functions faithfully and regularly. It can be assumed that he has issued the correct tickets
However, we find no need to award these damages in favor of petitioner. While the
and given accurate amounts of change to the hundreds or even thousands of passengers that
termination of his employment was invalid, we nevertheless do not find respondent Genesis
he encountered throughout his tenure. It is more reasonable to assume that—except for a
to have acted with such a degree of malice as to act out of a design to oppress petitioner. It
single error costing a loss of only P196.00—the company would have earned the correct
remains that a discrepancy and shortage chargeable to petitioner was uncovered, although
expected margins per passenger, per trip, and per bus that it allowed to travel.
this discrepancy and shortage does not justify a penalty as grave as termination of
employment.
Absent any other supporting evidence, the error in a single ticket issued by petitioner can
hardly be used to justify the inference that he has committed serious misconduct or has acted
in a manner that runs afoul of his employer's trust. More so, petitioner cannot be taken to
have engaged in a series of acts evincing a pattern or a design to defraud his employer.
V
Terminating his employment on these unfounded reasons is manifestly unjust.

To infer from a single error that petitioner committed serious misconduct or besmirched his Respondent Riza A. Moises may not be held personally liable for the illegal termination of
employer's trust is grave abuse of discretion. It is an inference that is arbitrary and capricious. petitioner's employment.
It is contrary to the high regard for labor and social justice enshrined in our Constitution and
our labor laws. As we explained in Saudi Arabian Airlines v. Rebesencio:[39]

The Court of Appeals committed an error of law correctible by a petition for review under

60
A corporation has a personality separate and distinct from those of the persons composing it.
Thus, as a rule, corporate directors and officers are not liable for the illegal termination of a
corporation's employees. It is only when they acted in bad faith or with malice that they
become solidarity liable with the corporation.

In Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever Electrical,

this court clarified that "[b]ad faith does not 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."[40]

Petitioner has not produced proof to show that respondent Riza A. Moises acted in bad faith
or with malice as regards the termination of his employment. Thus, she did not incur any
personal liability.

WHEREFORE, the Petition for Review on Certiorari is PARTIALLY GRANTED. The assailed
Decision dated July 8, 2014 and the assailed Resolution dated November 20, 2014 of the
Court of Appeals Fifth Division in CA-G.R. SP No. 130801, which dismissed the Petition for
Certiorari filed by petitioner Richard N. Rivera and affirmed the February 28, 2013 and April
30, 2013 Resolutions of the National Labor Relations Commission Second Division, as well as
the June 26, 2012 Decision of Labor Arbiter Gaudencio P. Demaisip, Jr., are REVERSED and SET
ASIDE. Accordingly, respondent Genesis Transport Service, Inc. is ordered to pay petitioner:

Full backwages and other benefits computed from July 30, 2010, when petitioner's
(1)
employment was illegally terminated, until the finality of this Decision;

Separation pay computed from June 2002, when petitioner commenced employment,
until the finality of this Decision, at the rate of one (1) month's salary for every year of
(2)
service, with a fraction of a year of at least six (6) months being counted as one (1) whole
year; and

(3) Attorney's fees equivalent to ten percent (10%) of the total award.

The case is REMANDED to the Labor Arbiter to make a detailed computation of the amounts
due to petitioner, which respondents should pay without delay.

The case is DISMISSED with respect to respondent Riza A. Moises.

SO ORDERED.
61
[ G.R. No. 181683, October 07, 2015 ] Homer Yape (Captain Yape), a Harbor Pilot from the General Santos City pilotage district. [11] As
underscored by Lorenzo Shipping, the MV Lorcon Luzon was under Captain Yape's pilotage as
LORENZO SHIPPING CORPORATION, PETITIONER, VS. NATIONAL POWER CORPORATION, it was mandatory to yield navigational control to the Harbor Pilot while docking. [12]
RESPONDENT.
Testifying before the Board of Marine Inquiry, Captain Villarias recalled that while the MV
[G.R. No. 184568] Lorcon Luzon was under Captain Yape's pilotage, he nevertheless "always" [13] remained at the
side of Captain Yape. He likewise affirmed that he heard and knew of Captain Yape's orders,
NATIONAL POWER CORPORATION, PETITIONER, VS. LORENZO SHIPPING CORPORATION, "because I have to repeat his order." [14]
RESPONDENT.
As the MV Lorcon Luzon was docking, Captain Yape ordered the vessel to proceed "slow
DECISION ahead," making it move at the speed of about one (1) knot. As it moved closer to dock,
LEONEN, J.: Captain Yape gave the order "dead slow ahead," making the vessel move even slower. He
then ordered the engine stopped. [15]
These consolidated Petitions for Review on Certiorari [1] are offshoots of the Court of Appeals'
disposition of CA-G.R. CV No. 76295. The Petition docketed as G.R. No. 181683 was filed by As the MV Lorcon Luzon moved "precariously close" [16] to the wharf, Captain Yape ordered the
Lorenzo Shipping Corporation (Lorenzo Shipping) while the Petition docketed as G.R. No. vessel to move backward, i.e., go "slow astern," and subsequently "full astern." Despite his
184568 was filed by National Power Corporation. orders, the engine failed to timely respond. Thus, Captain Yape ordered the dropping of the
anchor. Despite this, the MV Lorcon Luzon rammed into Power Barge 104. [17]
In its September 14, 2007 Decision, [2] the Court of Appeals reversed and set aside the
February 18, 2002 Decision of the Regional Trial Court and entered another judgment Following this incident, Nelson Homena, Plant Manager of Power Barge 104, filed a Marine
ordering Lorenzo Shipping to pay National Power Corporation the amount of P876,286.00 as Protest before the Board of Marine Inquiry. Captain Villarias also filed his own Marine
actual damages and P50,000.00 as attorney's fees and expenses of litigation. [3] Protest. For his part, Captain Yape filed a Marine Accident Report. The Board of Marine
Inquiry conducted joint hearings on the Marine Protests and Captain Yape's report. [18]
In its February 12, 2008 Amended Decision, [4] the Court of Appeals amended its September
14, 2007 Decision to award National Power Corporation the amount of P300,000.00 as To forestall the prescription of its cause of action for damages, National Power Corporation
temperate damages in lieu of the original award of P876,286.00 as actual damages. filed before the Quezon City Regional Trial Court a Complaint for Damages against Lorenzo
Shipping.[19] In this Complaint, National Power Corporation recalled the damage resulting
In its September 17, 2008 Resolution, [5] the Court of Appeals denied National Power from the ramming, as follows:
Corporation's Motion for Reconsideration.
4. Due to the force and impact of the ramming, the three (3) nylon ropes of 4 inches [sic]
The February 18, 2002 Decision [6] of the Regional Trial Court dismissed National Power diameter each securing the barge at the Makar Wharf-Philippines [sic] Ports Authority Pier
Corporation's Complaint for damages against Lorenzo Shipping. [7] was instantaneously ripped off and the take [-] off tower of the barge swayed causing flash
over on the 69 KV line tripping the line and isolated General Santos City from the Mindanao
Lorenzo Shipping is the owner and operator of the commercial vessel MV Lorcon Luzon. Grid. Consequently, the General Santos Power Plant, Power Barge 102, interconnected with
[8]
National Power Corporation is the owner of Power Barge 104, "a non-propelled power Power Barge 104, all tripped off causing total blackout in General Santos City and its
plant barge."[9] underlying areas;

On March 20, 1993, Power Barge 104 was berthed and stationed at the Makar Wharf in
General Santos City when the MV Lorcon Luzon "hit and rammed Power Barge 104." [10]
At the time of the incident, Captain Mariano Villarias (Captain Villarias) served as the Master
of the MV Lorcon Luzon. However, the MV Lorcon Luzon was then being piloted by Captain
5. Immediate investigation revealed that the ramming resulted to severe damage to Ballast
Tank No. 1 and metal deformation with approximate area of two (2) sq. meters. The crack, 25
mm. [b]y 460 mm. [ojccurred two (2) meters above the crater line and another one, 75 mm.
by 310 mm. on the water line caused a leak of waste oil into the sea . . .;

62
6. In addition to the physical damage caused to the Power Barge 104, plaintiff suffered Lorenzo Shipping failed to show that it exercised due diligence in the selection and
generation losses as a result of the tripping off of the line and the failure of Power Barge 104 supervision of Captain Villarias. [33]
to generate electricity immediately after the accident[.] [20]
Lorenzo Shipping filed a Motion for Reconsideration.
Lorenzo Shipping filed a Motion to Dismiss grounded on the Regional Trial Court's alleged lack
of jurisdiction over the subject matter and National Power Corporation's failure to exhaust The Court of Appeals then issued the Amended Decision dated February 12, 2008. [34] Noting
administrative remedies. Lorenzo Shipping underscored that the dispute was supposedly that the amount of actual damages was not proven by National Power Corporation, it
within the jurisdiction of the Board of Marine Inquiry/Philippine Coast Guard. [21] The Regional awarded National Power Corporation the amount of P300,000.00 as temperate damages in
Trial Court denied Lorenzo Shipping's Motion to Dismiss. [22] lieu of actual damages. The awards for attorney's fees and litigation expenses were sustained.

On November 7, 1997, Lorenzo Shipping filed its Answer. It emphasized that at the time of National Power Corporation then filed a Motion for Reconsideration, which the Court of
the incident, the MV Lorcon Luzon was commandeered by an official Harbor Pilot to whom it Appeals denied in its Resolution dated September 17, 2008. [35]
was "mandatory . . . to yield operational control"; [23] thus, any liability should be attributed to
the Harbor Pilot and not to the company. It added that "Makar Wharf is a berthing place only On March 31, 2008, Lorenzo Shipping filed the Petition for Review on Certiorari [36] docketed
for self-propelled vessel [sic]."[24] As Power Barge 104 was not a self-propelled vessel, it "had as G.R. No. 181683. It reiterated its position that no liability could be attributed to it as the
no right to lash itself on the Maka[r] Wharf. . . . [and] it assumed the risk of such ramming MV Lorcon Luzon was under compulsory pilotage and that National Power Corporation
because [of] its improper presence[.]" [25] Lastly, Lorenzo Shipping pointed out that National assumed risk when it berthed a non-propelled vessel in the Makar Wharf. [37] It added that
Power Corporation's action was barred by laches as four (4) years had lapsed before it filed its even assuming that it was at fault, the award of P3 00,000.00 as temperate damages was still
Complaint.[26] improper. It claimed that, from the text of Article 2224 of the Civil Code, [38] temperate
damages can be awarded only in cases where pecuniary loss may have been incurred, but
The Regional Trial Court issued the Decision [27] dated February 18, 2002 absolving Lorenzo whose exact amount, through the nature of the injury suffered, e.g., injury to commercial
Shipping of liability. It concluded that National Power Corporation failed to establish Lorenzo credit or business goodwill, cannot be ascertained. It argued that National Power Corporation
Shipping's negligence. It underscored that while the ramming was found to have been the was well in a position to adduce proof of the exact amount of damage it incurred, but failed
result of the engine's stoppage, no malfunctioning was recorded before and after the to do so.[39]
incident. The Regional Trial Court further stated that Lorenzo Shipping was sued in its capacity
as the employer of Captain Villarias and that any liability it incurred would have been only On November 24, 2008, National Power Corporation filed its Comment [40] to Lorenzo
subsidiary. Nevertheless, as Lorenzo Shipping supposedly exercised due diligence in its Shipping's Petition. It maintained that it was Lorenzo Shipping that must be held liable and
selection and supervision of Captain Villarias, no liability could be attributed to it. [28] that it was able to show by "competent testimonial and documentary evidence" [41] that it
must be compensated for actual damages in the amount of P876,826.00. On April 7, 2009,
National Power Corporation appealed before the Court of Appeals. Lorenzo Shipping filed its Reply.[42]

The Court of Appeals rendered the Decision [29] dated September 14, 2007 reversing and In the meantime, on November 18, 2008, National Power Corporation filed its own Petition
setting aside the February 18, 2002 Decision of the Regional Trial Court and entering another for Review on Certiorari[43] docketed as G.R. No. 184568, arguing how it had supposedly
judgment ordering Lorenzo Shipping to pay National Power Corporation the amount of proven by competent evidence that it was entitled to actual damages in the amount of
P876,286.00 as actual damages and P50,000.00 as attorney's fees and expenses of litigation. F876,826.00. Lorenzo Shipping filed its Comment [44] on February 2, 2009. National Power
[30]
Corporation filed its Reply [45] on June 22, 2009.

The Court of Appeals reasoned that while the MV Lorcon Luzon was under compulsory In the Resolution[46] dated February 9, 2009, this court consolidated the Petitions docketed as
pilotage, Captain Villarias, the vessel's Master, remained to be its overall commander. It G.R. Nos. 181683 and 184568.
added that he was remiss in his duties as he did nothing in the crucial moments when Captain
Yape's orders to go astern appeared to not have been heeded. [31] It cited Article 2180 of the For resolution are the following issues:
Civil Code[32] in that an employer's liability is primary and not subsidiary. It further noted that

63
First, whether Lorenzo Shipping Corporation is liable for the damage sustained by Power corporate enterprise) has to do with the operation and preservation of the vessel during its
Barge 104 when the MV Lorcon Luzon rammed into it, considering that at the time of the voyage and the protection of the passengers (if any) and crew and cargo. In his role as general
ramming, the MV Lorcon Luzon was under mandatory pilotage by Captain Yape; and agent of the shipowner, the captain has authority to sign bills of lading, carry goods aboard
and deal with the freight earned, agree upon rates and decide whether to take cargo. The
Second, assuming that liability is to be attributed to Lorenzo Shipping, what damages, if any, ship captain, as agent of the shipowner, has legal authority to enter into contracts with
may be awarded to National Power Corporation. respect to the vessel and the trading of the vessel, subject to applicable limitations
established by statute, contract or instructions and regulations of the shipowner. To the
captain is committed the governance, care and management of the vessel. Clearly, the
captain is vested with both management and fiduciary functions. [50] (Emphasis supplied,
I citations omitted)

This notwithstanding, there are recognized instances when control of a vessel is yielded to a
It is not disputed that the MV Lorcon Luzon, a vessel owned and operated by Lorenzo pilot. Section 8 of Philippine Ports Authority (PPA) Administrative Order No. 03-85, otherwise
Shipping, rammed into Power Barge 104 while attempting to dock at the Makar Wharf. known as the Rules and Regulations Governing Pilotage Services, the Conduct of Pilots and
Likewise, it is not disputed that when it rammed into Power Barge No. 104, the MV Lorcon Pilotage Fees in Philippine Ports, [51] enumerates instances when vessels are subjected to
Luzon was being piloted by Captain Yape. What is in dispute is whether Captain Yape's compulsory pilotage:
pilotage suffices to absolve Lorenzo Shipping of liability.

A Master's designation as the commander of a vessel is long-settled. This court's citation Sec. 8. Compulsory Pilotage Service — For entering a harbor and anchoring thereat, or
in Yu Con v. Ipil[47] of General Review of Legislation and Jurisprudence explains that "Master" passing through rivers or straits within a pilotage district, as well as docking and undocking at
and "Captain" are synonymous terms: any pier/wharf, or shifting from one berth or another, every vessel engaged in coastwise and
foreign trade shall be under compulsory pilotage.

"The name of captain or master is given, according to the kind of vessel, to the person in However, in the Ports of Manila and Cebu, and in such other ports as may be allowed by this
charge of it. Authority, Ship Captains may pilot their vessels engaged in coastwise trade provided they
meet / comply with the following minimum qualifications / requirements:
"The first denomination is applied to those who govern vessels that navigate the high seas or
ships of large dimensions and importance, although they be engaged in the coastwise trade.
a) Must be properly licensed as a Harbor Pilot by the Philippine Coast Guard for Manila, Cebu
"Masters are those who command smaller ships engaged exclusively in the coastwise trade. and other authorized ports;

"For the purposes of maritime commerce, the words 'captain' and Q 'master' have the same b) Must have been a Master of an interisland vessel for at least three (3) years prior to his
meaning; both being the chiefs or commanders of ships. [48] application with the PPA;

Likewise, in Inter-Orient Maritime Enterprises, Inc. v. National Labor Relations Commission:[49] c) Must be certified by a government physician as physically and mentally fit.

Vessels maneuvered by a Special Harbor Pilot shall be exempt from the payment of all
A master or captain, for purposes of maritime commerce, is one who has command of a pilotage fees.[52]
vessel. A captain commonly performs three (3) distinct roles: (1) he is a general agent of the
The second paragraph of Section 8 identifies an instance when control of a vessel need not be
shipowner; (2) he is also commander and technical director of the vessel; and (3) he is a
yielded to a pilot. Section 9 further enumerates exceptions to compulsory pilotage:
representative of the country under whose flag he navigates. Of these roles, by far the most
important is the role performed by the captain as commander of the vessel; for such role
(which, to our mind, is analogous to that of "Chief Executive Officer" [CEO] of a present-day

64
Sec. 9. Exemptions - In the following cases, pilotage service is not compulsory: same provision, however, emphasizes that "overall command" of the vessel remains in the
Master of the vessel:

Vessels engaged in coastwise trade undocking at all ports, except at the ports of Manila,
a)
Cebu, Iloilo, Tacloban, Davao, Zamboanga, Pulupandan, Masinloc, and San Fernando, Sec. 11. Control of Vessels and Liability for Damage. — On compulsory pilotage grounds, the
Harbor Pilot providing the service to a vessel shall be responsible for the damage caused to a
vessel or to life and property at ports due to his negligence or fault. He can be absolved from
b) Government vessels, liability if the accident is caused by force majeure or natural calamities provided he has
exercised prudence and extra diligence to prevent or minimize the damage.

The Master shall retain overall command of the vessel even on pilotage grounds whereby he
c) Vessels of foreign governments entitled to courtesy,
can countermand or overrule the order or command of the Harbor Pilot on board. In such
event, any damage caused to a vessel or to life and property at ports by reason of the fault or
negligence of the Master shall be the responsibility and liability of the registered owner of
Vessels that are authorized by BOT to engage in daily ferry service plying between two the vessel concerned without prejudice to recourse against said Master.
d)
places within a port or between two ports,
Such liability of the owner or Master of the vessel or its pilots shall be determined by
competent authority in appropriate proceedings in the light of the facts and circumstances of
e) Phil. Flag vessels engaged in coastwise trade that depart from an anchorage, each particular case.[55]

Accordingly, it is settled that Harbor Pilots are liable only to the extent that they can perform
their function through the officers and crew of the piloted vessel. [56] Where there is failure by
Vessels calling at private ports whose owners have formally waived the requirements of
f) the officers and crew to adhere to their orders, Harbor Pilots cannot be held liable. [57]In Far
compulsory pilotage.[53]
Eastern Shipping Co. V. Court of Appeals,[58] this court explained the intertwined
Section 32(f) of PPA Administrative Order No. 03-85 specifies the foremost responsibility of a responsibilities of pilots and masters:
Harbor Pilot, that is, the direction of the vessel being piloted. In addition, Section 32 (f) spells
out the duration within which the Harbor Pilot is to fulfill this responsibility. It likewise
provides that the Master's failure to carry out the Harbor Pilot's orders is a ground for [W]here a compulsory pilot is in charge of a ship, the master being required to permit him to
absolving the Harbor Pilot of liability: navigate it, if the master observes that the pilot is incompetent or physically incapable, then
it is the duty of the master to refuse to permit the pilot to act. But if no such reasons are
present, then the master is justified in relying upon the pilot, but not blindly. Under the
Sec. 32. Duties and Responsibilities of the Pilots or Pilots' Association. — The duties and circumstances of this case, if a situation arose where the master, exercising that reasonable
responsibilities of the Harbor Pilot shall be as follows: vigilance which the master of a ship should exercise, observed, or should have observed, that
the pilot was so navigating the vessel that she was going, or was likely to go, into danger, and
.... there was in the exercise of reasonable care and vigilance an opportunity for the master to
intervene so as to save the ship from danger, the master should have acted accordingly. The
master of a vessel must exercise a degree of vigilance commensurate with the circumstances.
A pilot shall be held responsible for the direction of a vessel from the time he assumes [59]
(Citations omitted)
his work as a pilot thereof until he leaves it anchored or berthed safely; Provided,
f)
however, that his responsibility shall cease at the moment the Master neglects or refuses Thus, contrary to Lorenzo Shipping's assertion, the MV Lorcon Luzon's having been piloted by
to carry out his order. [54] Captain Yape at the time of the ramming does not automatically absolve Lorenzo Shipping of
liability. Clearing it of liability requires a demonstration of how the Master, Captain Villarias,
Consistent with the yielding of control to a pilot, Section 11 of PPA Administrative Order No.
conducted himself in those moments when it became apparent that the MV Lorcon Luzon's
03-85 makes the Harbor Pilot liable for damage caused by his or her negligence or fault. The
engine had stopped and Captain Yape's orders to go "slow astern" and "full astern" were not
65
being heeded.

Capt.
Yes, because I have to repeat his order.
Villarias:
II

Atty.
As noted by the Court of Appeals, Captain Villarias was remiss in his duties. In his testimony Now, when there was no response[,] who is supposed to respond to the order of the
Tepel
before the Board of Marine Inquiry, Captain Villarias admitted that about six (6) minutes had harbor pilot?
(sic):
passed before he even realized that there was an engine failure, let alone acted on this fact:

Significantly, Captain Mariano Villarias before the Board of Marine Inquiry testified as follows: Capt.
It was the engine department.
Vilalrias:

"Atty. Now, during the time of that accident, Mr. Witness, how did you know that the
Tapel: cause of the ramming on Power Barge No. 104 was due to engine failure?
Atty
Who in the engine department is supposed to respond to the order of the harbor
Tapel
pilot?
(sic):
Capt There was no response upon the order or the harbor pilot from slow to full eastern
Villarias: [sic] engine.

Capt.
The second engineer and the chief engineer. The engineer on duty.
Villarias:
Do you want to tell this Honorable Board that before the ramming incident there
Atty.
was an order from the harbor pilot for slow eastern [sic] engine and there was no
Tepal:
response?
And because there was no response from the engine department[,] you concluded
Atty.
that there was an engine failure which caused the ramming of Napocor Power
Tepal:
Barge?
Capt
Yes, there was an order.
Villarias:

Capt. Almost six (6) minutes there is no response before I know that there was an engine
Villarias: failure."[60]
Atty.
Where were you at that time, Mr. Witness?
Tepal: In the Reply it filed in G.R. No. 181683, Lorenzo Shipping attempts to douse the significance
of Captain Villarias' inaction for six (6) minutes as follows:

Capt.
I am always [at] the side of the harbor pilot. The Court of Appeals held that Capt. Villarias was remiss in his duties because he just stood
Villarias:
besides [sic] the harbour pilot waiting for a response from the engine department. He could
have called the attention of Capt. Yape on his miscalculations in the docking maneuvers of the
vessel.
Atty.
Have you heard the harbor pilot issuing the orders?
Tepal: But the Court of Appeals assumed that the unfolding circumstances on the water that

66
approached the wharf were in slow motion and permitted the vessel's captain to have time to testimony, the crew was already listening to both his and Captain Yape's voices. He admitted
examine the situation and deliberate on it, make a judgment that the pilot had given a wrong that he repeated Captain Yape's orders. The crew was, thus, properly disposed to heed
command, wrest from him control of the vessel, and enable the crew down in its belly, at the instructions coming from him. If at all, his failure to timely act despite the crew's presumptive
time tuned to the voice of the pilot, to realize that the latter's authority had been superseded readiness to heed his command only highlights his negligence.
and that the command had reverted to the captain. As it were, no evidence was presented to
show that the captain and the crew had all the time they needed to arrest the momentum of
the vessel to which the pilot had directed it. [61]
III
We disagree.

In the first place, six (6) minutes cannot be characterized as so quick and fleeting that it Equally futile is Lorenzo Shipping's claim that National Power Corporation must bear its own
deprived Captain Villarias and his crew of "the time they needed to arrest the momentum of losses as it assumed the risk of injury when it moored a non-propelled or stationary barge in
the vessel."[62] By way of reference, an entire song of average length (or longer) could have the Makar Wharf.
played in Captain Villarias' head within those six (6) minutes. The vessel had been performing
the tedious task of berthing and had been moving so fast that it was about to collide with the It is pointless to even consider this. Apart from Lorenzo Shipping's own self-serving
docks in the wharf. Given these circumstances, it was only reasonable for Captain Villarias, assertions, there is no basis for holding that Power Barge 104's presence in the Makar Wharf
precisely because he was the vessel's Master, to remain vigilant, to support and supplement was improper and tantamount to an assumption of risk. Lorenzo Shipping could have very
Captain Yape's orders, and to take evasive and counter measures should Captain Yape's easily adduced proof attesting to Makar Wharf's supposedly being exclusive to self-propelled
attempts to safely berth prove to be ineffectual. The Court of Appeals' observation is well- vessels. It did not. Nowhere in any of its submissions to this court did Lorenzo Shipping annex
taken: "Even just a minute without any response from the concerned department could have a copy of the appropriate regulation, if any, that restricts the use of Makar Wharf to self-
alarmed him."[63] propelled vessels or absolutely prohibits National Power Corporation from using it as a
berthing place for a power barge.
Lorenzo Shipping counters the observations of the Court of Appeals by attempting to paint a
picture of absurdity. It describes the confluence of events as needing to have been in "slow If at all, the MV Lorcon Luzon's ramming of a stationary object is even more damaging to
motion" if the crew were to timely and properly react. It conjures images of Captain Villarias Lorenzo Shipping's cause. As explained in Far Eastern Shipping:[65]
"wrest[ing] from [Captain Yape] control of the vessel" [64] and the crew thrown into a confused
frenzy as they had to listen to Captain Villarias' voice.
We start our discussion of the successive issues bearing in mind the evidentiary rule in
This manner of arguing fails to impress. To reiterate, six (6) minutes were more than enough American jurisprudence that there is a presumption of fault against a moving vessel that
time for Captain Villarias to have done something to remedy the situation. It is not for us to strikes a stationary object such as a dock or navigational aid. In admiralty, this presumption
hypothesize on whether the measures he took would have been effectual. It remains that for does more than merely require the ship to go forward and produce some evidence on the
six minutes, he did nothing. As Master of the MV Lorcon Luzon, he should have been on his presumptive matter. The moving vessel must show that it was without fault or that the
toes, keen and ready to make decisions in a split second, especially in an evidently precarious collision was occasioned by the fault of the stationary object or was the result of inevitable
situation. His failure to timely act is too glaring to ignore. accident. It has been held that such vessel must exhaust every reasonable possibility which
the circumstances admit and show that in each, they did all that reasonable care required. In
Moreover, both Captain Villarias and Captain Yape must be presumed to have been the absence of sufficient proof in rebuttal, the presumption of fault attaches to a moving
disciplined officers who knew fully well how to conduct themselves in such a situation. There vessel which collides with a fixed object and makes a prima facie case of fault against the
is no basis for contemplating a scenario where the Pilot and the Master are battling for vessel. Logic and experience support this presumption:
control of the MV Lorcon Luzon.

So, too, the crew must be presumed to have been trained to follow the Master's commands. The common sense behind the rule makes the burden a heavy one. Such accidents simply do
It is ridiculous to think that merely hearing Captain Villarias' voice in lieu of Captain Yape's not occur in the ordinary course of things unless the vessel has been mismanaged in some
would throw the crew into paralyzed confusion. Besides, from Captain Villarias' quoted way. It is not sufficient for the respondent to produce witnesses who testify that as soon as

67
the danger became apparent everything possible was done to avoid an accident. The b. The "Total Incidental Cost for Drydock and Repair" prepared by the Philippine
question remains, How then did the collision occur? The answer must be either that, in spite Shipyard and Engineering Corporation ("PHILSECO") dated 14 October 1993 was
of the testimony of the witnesses, what was done was too little or too late or, if not, then the presented which clearly enumerated and itemized the actual damages [sic]
vessel was at fault for being in a position in which an unavoidable collision would occur. sustained by Power Barge 104 and repaired by PHILSECO.
[66]
(Emphasis supplied, citations omitted)

IV c. NPC Disbursement Voucher No. 093-121304 in the amount of P6,775,839.02

We sustain the Court of Appeals' award to National Power Corporation of P300,000.00 as
temperate damages.
Article 2199 of the Civil Code spells out the basic requirement that compensation by way of
actual damages is awarded only to the extent that pecuniary loss is proven:
Article 2199. Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved. Such
compensation is referred to as actual or compensatory damages.
The standard for proving pecuniary loss was explained in PNOC Shipping and Transport Corp.
v. Court of Appeals,[67] as follows:
A party is entitled to adequate compensation only for such pecuniary loss actually suffered
and duly proved. Indeed, basic is the rule that to recover actual damages, the amount of loss
must not only be capable of proof but must actually be proven with a reasonable degree of
certainty, premised upon competent proof or best evidence obtainable of the actual amount
thereof. The claimant is duty-bound to point out specific facts that afford a basis for
measuring whatever compensatory damages are borne. A court cannot merely rely on
speculations, conjectures, or guesswork as to the fact and amount of damages as well as
hearsay or uncorroborated testimony whose truth is suspect. [68] (Citations omitted)
National Power Corporation bewails the Court of Appeals' observation that the basis of its
claims was "not properly receipted." [69] It counters that it was able to show by "competent
testimonial and documentary evidence"[70] that it must be compensated for actual damages in
the amount of P876,826.00. It recalls these pieces of evidence:
covering a period up to 14 January 1994 as proof of payment made by [National
Power Corporation] to PHILSECO for drydocking repairs of Power Barge 104. [71]
However, Lorenzo Shipping pointed out fatal flaws in these pieces of evidence. These flaws
led the Court of Appeals to reconsider its earlier award of actual damages to National Power
Corporation.
Regarding the "Total Incidental Cost for Drydock and Repair," which was National Power
Corporation's Exhibit "F" before the Regional Trial Court, Lorenzo Shipping underscored that
when the Regional Trial Court ruled on National Power Corporation's Formal Offer of
Evidence, it denied the admission of Exhibit "F" for not having been identified nor
authenticated. It emphasized that no witness came forward to attest to its authenticity and
due execution, let alone allowed himself or herself to be cross-examined on these points. [72]
Regarding Nelson Homena's testimony, Lorenzo Shipping emphasized that all he indicated
was how he and a certain Mr. Neri estimated the cost of damage to be at about
P1,000,000.00.[73]
Regarding Disbursement Voucher No. 093-121304, Lorenzo Shipping pointed out that while
this attests to expenses paid to PHILSECO, it was silent on the exact cost paid for the repair of
Power Barge 104.[74]
Nowhere in any of its submissions to this court—whether in its Comment in G.R. No. 181683
or in its Petition and/or Reply in G.R. No. 184568—did National Power Corporation rebut the
flaws noted by Lorenzo Shipping. Instead, it merely insisted on how actual damages are
awarded on the basis of the "best obtainable evidence," [75] and how it has supposedly
presented "competent testimonial and documentary evidence" [76] to prove its claims.
National Power Corporation's posturing fails to impress.

It is basic that any material presented as evidence will not be considered unless duly admitted
a. Testimony of Mr. Nelson Homena, manager of Power Barge 104 [who] testified on by the court before which it is presented. Just as basic is that a private document offered as
the damages [sic] sustained by said barge as a result of the ramming incident authentic evidence shall not be admitted unless its due execution and authenticity are
caused by the negligence of M/V Lorcon Luzon. established in the manner specified by Rule 132, Section 30 of the Revised Rules on Evidence:

68
Section 20. Proof of private document. - Before any private document offered as authentic is As National Power Corporation cannot rely on the "Total Incidental Cost for Drydock and
received in evidence, its due execution and authenticity must be proved either: Repair," it is left to rely on the testimony of Nelson Hpmena and on NPC Disbursement
Voucher No. 093-121304.
(a) By anyone who saw the document executed or written; or
However, as pointed out by Lorenzo Shipping, these pieces of evidence fall short of the
(b) By evidence of the genuineness of the signature or handwriting of the maker. standard required for proving pecuniary loss, which shall be the basis for awarding actual
damages. As regards Nelson Homena's testimony, all he did was give an estimate of
Any other private document need only be identified as that which it is claimed to be. P1,000,000.00. Certainly, a mere estimate does not suffice as proof of actual pecuniary loss.
As regards NPC Disbursement Voucher No. 093-121304, all it attests to is a release of funds in
A bill of expenses, such as National Power Corporation's Exhibit "F", is considered a private favor of PHILSECO in the total amount of P6,775,839.02, covering no specific transaction but
document as it does not fall under what the Revised Rules on Evidence defines to be public a period extending from January 14, 1994.
documents.[77] Accordingly, for it to have been admitted by the Regional Trial Court as
authentic, Rule 132, Section 30 of the Revised Rules on Evidence must have been complied
with. National Power Corporation failed in this respect. Thus, in the words of the Regional
Trial Court, it: V

3. Denies the admission of Exhibit "F" and its submarkings for not having been properly Clearly, National Power Corporation failed to establish the precise amount of pecuniary loss it
identified.[78] suffered. Nevertheless, it remains that Power Barge 104 sustained damage—which may be
reckoned financially—as a result of the MV Lorcon Luzon's ramming into it. National Power
It is of no consequence that the substance or contents of Exhibit "F" are such that they Corporation suffered pecuniary loss, albeit its precise extent or amount had not been
specify an amount. It is of no consequence that it is purportedly of such evidentiary weight established. Accordingly, we sustain the Court of Appeals' conclusion that National Power
that it could definitely establish National Power Corporation's claims. Corporation is entitled to temperate damages.

Admissibility of evidence and weight accorded to evidence are two distinct affairs. Rule 128, Articles 2224 and 2225 of the Civil Code govern temperate damages:
Section 3 of the Revised Rules on Evidence governs admissibility and provides that
"[e]vidence is admissible when it is relevant to the issue and is not excluded by the law of
these rules." When evidence has "such a relation to the fact in issue as to induce belief in its Article 2224. Temperate or moderate damages, which are more than nominal but less than
existence or non-existence,"[79] it is said to be relevant. When evidence is not excluded by law compensatory damages, may be recovered when the court finds that some pecuniary loss has
or by the Rules, it is said to be competent. been suffered but its amount can not, from the nature of the case, be provided with
certainty.
The weight accorded to evidence is properly considered only after evidence has been
admitted. To this end, courts evaluate evidence in accordance with the rules stipulated by Article 2225. Temperate damages must be reasonable under the circumstances.
Rule 133 of the Revised Rules on Evidence, [80] consistent with basic precepts of rationality and
guided by judicially established standards. It is improper to even speak of evidentiary weight Banking on Article 2224's text, which references "the nature of the case," Lorenzo Shipping
when the piece of evidence in question has not even been admitted. asserts that temperate damages can be awarded only in cases where pecuniary loss may have
been incurred, but whose exact amount, through the nature of the injury suffered, e.g., injury
Exhibit "F" was ruled to have been inadmissible for failing to comply with Rule 132, Section 20 to commercial credit or business goodwill, cannot be ascertained. It argues that because the
thus, it failed the standard of competency. Consistent with this, reliance on National Power circumstances of this case are such that National Power Corporation could have pleaded and
Corporation's Exhibit "F" and its contents, so as to establish the extent of National Power proved a specific—i.e., ascertained—amount of pecuniary loss but failed to do so, temperate
Corporation's pecuniary loss, is misplaced. Not having been admitted, Exhibit "F" does not damages should not be awarded.
form part of the body of evidence worthy of judicial consideration.
Lorenzo Shipping is proposing an erroneous, narrow, and unduly restrictive construction of
Article 2224.
69
This case is not the first instance that this court was confronted with the ostensibly limiting
language of Article 2224. In Republic of the Philippines v. Tuvera,[81] this court already
debunked the notion that temperate damages are appropriate only in those cases in which
pecuniary loss cannot, "by its nature," be ascertained:

Temperate or moderate damages avail when "the court finds that some pecuniary loss has
been suffered but its amount can not from the nature of the case, be proved with
certainty." The textual language might betray an intent that temperate damages do not avail
when the case, by its nature, is susceptible to proof of pecuniary loss; and certainly the
Republic could have proved pecuniary loss herein. Still, jurisprudence applying Article 2224 is
clear that temperate damages may be awarded even in instances where pecuniary loss could
theoretically have been proved with certainty.

In a host of criminal cases, the Court has awarded temperate damages to the heirs of the
victim in cases where the amount of actual damages was not proven due to the inadequacy
of the evidence presented by the prosecution. These cases include People v. Oliano, People v.
Suplito, People v. De la Tongga, People v. Briones, and People v. Plazo. In Viron Transportation
Co., Inc. v. Delos Santos, a civil action for damages involving a vehicular collision, temperate
damages were awarded for the resulting damage sustained by a cargo truck, after the plaintiff
had failed to submit competent proof of actual damages. [82] (Citations omitted)

In resolving this case, we have had to sift through the parties' competing claims as to who
exactly is liable and to what extent. Reduced to its fundamentals, however, this case remains
to be about damage sustained by property owned by National Power Corporation when the
MV Lorcon Luzon rammed into it. This damage is susceptible to financial reckoning.
Unfortunately for National Power Corporation, it failed to establish the precise amount of its
pecuniary loss. This vice of precision notwithstanding, it would be improper to completely
turn a blind eye to the loss suffered by National Power Corporation and to deny it, as Lorenzo
Shipping suggests, of any form of recompense. Under these circumstances, we sustain the
Court of Appeals' award of temperate damages.

WHEREFORE, the consolidated Petitions are DENIED. The Amended Decision dated February
12, 2008 and Resolution dated September 17, 2008 of the Court of Appeals in CA-G.R. CV No.
76295 are AFFIRMED.

All monetary awards for damages shall earn interest at the legal rate of 6% per annum from
the date of the finality of this judgment until fully paid.

SO ORDERED.

70
G.R. No. 194964-65
UNIVERSITY OF MINDANAO, INC., Petitioner,
vs.
BANGKO SENTRAL NG PILIPINAS, ET AL., Respondents.
DECISION
LEONEN, J.:
Acts of an officer that are not authorized by the board of directors/trustees do not bind the
corporation unless the corporation ratifies the acts or holds the officer out as a person with
authority to transact on its behalf.
This is a Petition for Review on Certiorari 1 of the Court of Appeals' December 17, 2009
Decision2 and December 20, 2010 Resolution. 3 The Court of Appeals reversed the Cagayan De
Oro City trial court’s and the Iligan City trial court’s Decisions to nullify mortgage contracts
involving University of Mindanao’s properties. 4
University of Mindanao is an educational institution. For the year 1982, its Board of Trustees
was chaired by Guillermo B. Torres. His wife, Dolores P. Torres, sat as University of Mindanao’s
Assistant Treasurer. 5
Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and operated two (2)
thrift banks: (1) First Iligan Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings
and Loan Association, Inc. (DSLAI). Guillermo B. Torres chaired both thrift banks. He acted as
FISLAI’s President, while his wife, Dolores P. Torres, acted as DSLAI’s President and FISLAI’s
Treasurer.6
Upon Guillermo B. Torres’ request, Bangko Sentral ng Pilipinas issued a P1.9 million standby
emergency credit to FISLAI. The release of standby emergency credit was evidenced by three
(3) promissory notes dated February 8, 1982, April 7, 1982, and May 4, 1982 in the amounts
of P500,000.00, P600,000.00, and P800,000.00, respectively. All these promissory notes were
signed by Guillermo B. Torres, and were co-signed by either his wife, Dolores P. Torres, or
FISLAI’s Special Assistant to the President, Edmundo G. Ramos, Jr. 7
On May 25, 1982, University of Mindanao’s Vice President for Finance, Saturnino Petalcorin,
executed a deed of real estate mortgage over University of Mindanao’s property in Cagayan
de Oro City (covered by Transfer Certificate of Title No. T-14345) in favor of Bangko Sentral ng
Pilipinas.8 "The mortgage served as security for FISLAI’s P1.9 Million loan[.]" 9 It was allegedly
executed on University of Mindanao’s behalf.10
As proof of his authority to execute a real estate mortgage for University of Mindanao,
Saturnino Petalcorin showed a Secretary’s Certificate signed on April 13, 1982 by University of
Mindanao’s Corporate Secretary, Aurora de Leon. 11 The Secretary’s Certificate stated:
That at the regular meeting of the Board of Trustees of the aforesaid corporation [University
of Mindanao] duly convened on March 30, 1982, at which a quorum was present, the
following resolution was unanimously adopted:
"Resolved that the University of Mindanao, Inc. be and is hereby authorized, to mortgage real
estate properties with the Central Bank of the Philippines to serve as security for the credit
facility of First Iligan Savings and Loan Association, hereby authorizing the President and/or
Vice-president for Finance, Saturnino R. Petalcorin of the University of Mindanao, Inc. to sign,
execute and deliver the covering mortgage document or any other documents which may be
proper[l]y required."12
The Secretary’s Certificate was supported by an excerpt from the minutes of the January 19,
1982 alleged meeting of University of Mindanao’s Board of Trustees. The excerpt was
certified by Aurora de Leon on March 13, 1982 to be a true copy of University of Mindanao’s
records on file.13 The excerpt reads:
3 – Other Matters:
(a) Cagayan de Oro and Iligan properties: Resolution No. 82-1-8
Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-President for Finance, to
represent the University of Mindanao to transact, transfer, convey, lease, mortgage, or
otherwise hypothecate any or all of the following properties situated at Cagayan de Oro and
Iligan City and authorizing further Mr. Petalcorin to sign any or all documents relative thereto:
1. A parcel of land situated at Cagayan de Oro City, covered and technically described in
TRANSFER CERTIFICATE OF TITLE No. T-14345 of the Registry of Deeds of Cagayan de Oro City;
2. A parcel of land situated at Iligan City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15696 (a.t.) of the Registry of Deeds of Iligan City; and
3. A parcel of land situated at Iligan City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15697 (a.f.) of the Registry of Deeds of Iligan City. 14
The mortgage deed executed by Saturnino Petalcorin in favor of Bangko Sentral ng Pilipinas
was annotated on the certificate of title of the Cagayan de Oro City property (Transfer
Certificate of Title No. 14345) on June 25, 1982. Aurora de Leon’s certification was also
annotated on the Cagayan de Oro City property’s certificate of title (Transfer Certificate of
Title No. 14345).15
On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an additional loan of
P620,700.00. Guillermo B. Torres and Edmundo Ramos executed a promissory note on
October 21, 1982 to cover that amount. 16
On November 5, 1982, Saturnino Petalcorin executed another deed of real estate mortgage,
allegedly on behalf of University of Mindanao, over its two properties in Iligan
71
City.1âwphi1 This mortgage served as additional security for FISLAI’s loans. The two Iligan City
properties were covered by Transfer Certificates of Title Nos. T-15696 and T-15697. 17
On January 17, 1983, Bangko Sentral ng Pilipinas’ mortgage lien over the Iligan City properties
and Aurora de Leon’s certification were annotated on Transfer Certificates of Title Nos. T-
15696 and T-15697.18 On January 18, 1983, Bangko Sentral ng Pilipinas’ mortgage lien over
the Iligan City properties was also annotated on the tax declarations covering the Iligan City
properties.19
Bangko Sentral ng Pilipinas also granted emergency advances to DSLAI on May 27, 1983 and
on August 20, 1984 in the amounts of P1,633,900.00 and P6,489,000.00, respectively. 20
On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines entered into a
Memorandum of Agreement intended to rehabilitate the thrift banks, which had been
suffering from their depositors’ heavy withdrawals. Among the terms of the agreement was
the merger of FISLAI and DSLAI, with DSLAI as the surviving corporation. DSLAI later became
known as Mindanao Savings and Loan Association, Inc. (MSLAI).21
Guillermo B. Torres died on March 2, 1989. 22
MSLAI failed to recover from its losses and was liquidated on May 24, 1991. 23
On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to University of Mindanao,
informing it that the bank would foreclose its properties if MSLAI’s total outstanding
obligation of P12,534,907.73 remained unpaid. 24
In its reply to Bangko Sentral ng Pilipinas’ June 18, 1999 letter, University of Mindanao,
through its Vice President for Accounting, Gloria E. Detoya, denied that University of
Mindanao’s properties were mortgaged. It also denied having received any loan proceeds
from Bangko Sentral ng Pilipinas.25
On July 16, 1999, University of Mindanao filed two Complaints for nullification and
cancellation of mortgage. One Complaint was filed before the Regional Trial Court of Cagayan
de Oro City, and the other Complaint was filed before the Regional Trial Court of Iligan City. 26
University of Mindanao alleged in its Complaints that it did not obtain any loan from Bangko
Sentral ng Pilipinas. It also did not receive any loan proceeds from the bank. 27
University of Mindanao also alleged that Aurora de Leon’s certification was anomalous. It
never authorized Saturnino Petalcorin to execute real estate mortgage contracts involving its
properties to secure FISLAI’s debts. It never ratified the execution of the mortgage contracts.
Moreover, as an educational institution, it cannot mortgage its properties to secure another
person’s debts.28
On November 23, 2001, the Regional Trial Court of Cagayan de Oro City rendered a Decision
in favor of University of Mindanao,29 thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff and
against defendants:
1. DECLARING the real estate mortgage Saturnino R. Petalcorin executed in favor of BANGKO
SENTRAL NG PILIPINAS involving Lot 421-A located in Cagayan de Oro City with an area of 482
square meters covered by TCT No. T-14345 as annuled [sic];
2. ORDERING the Register of Deeds of Cagayan de Oro City to cancel Entry No. 9951 and Entry
No. 9952 annotated at the back of said TCT No. T-14345, Registry of Deeds of Cagayan de Oro
City;
Prayer for attorney’s fee [sic] is hereby denied there being no proof that in demanding
payment of the emergency loan, defendant BANGKO SENTRAL NG PILIPINAS was motivated
by evident bad faith,
SO ORDERED.30 (Citation omitted)
The Regional Trial Court of Cagayan de Oro City found that there was no board resolution
giving Saturnino Petalcorin authority to execute mortgage contracts on behalf of University of
Mindanao. The Cagayan de Oro City trial court gave weight to Aurora de Leon’s testimony
that University of Mindanao’s Board of Trustees did not issue a board resolution that would
support the Secretary’s Certificate she issued. She testified that she signed the Secretary’s
Certificate only upon Guillermo B. Torres’ orders. 31
Saturnino Petalcorin testified that he had no authority to execute a mortgage contract on
University of Mindanao’s behalf. He merely executed the contract because of Guillermo B.
Torres’ request.32
Bangko Sentral ng Pilipinas’ witness Daciano Pagui, Jr. also admitted that there was no board
resolution giving Saturnino Petalcorin authority to execute mortgage contracts on behalf of
University of Mindanao.33
The Regional Trial Court of Cagayan de Oro City ruled that Saturnino Petalcorin was not
authorized to execute mortgage contracts for University of Mindanao. Hence, the mortgage
of University of Mindanao’s Cagayan de Oro City property was unenforceable. Saturnino
Petalcorin’s unauthorized acts should be annulled.34
Similarly, the Regional Trial Court of Iligan City rendered a Decision on December 7, 2001 in
favor of University of Mindanao.35 The dispositive portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendants, as follows:
1. Nullifying and canceling [sic] the subject Deed of Real Estate Mortgage dated November 5,
1982 for being unenforceable or void contract;
72
2. Ordering the Office of the Register of Deeds of Iligan City to cancel the entries on TCT No.
T-15696 and TCT No. T-15697 with respect to the aforesaid Deed of Real Estate Mortgage
dated November 5, 1982 and all other entries related thereto;
3. Ordering the defendant Bangko Sentral ng Pilipinas to return the owner’s duplicate copies
of TCT No. T-15696 and TCT No. 15697 to the plaintiff;
4. Nullifying the subject [f]oreclosure [p]roceedings and the [a]uction [s]ale conducted by
defendant Atty. Gerardo Paguio, Jr. on October 8, 1999 including all the acts subsequent
thereto and ordering the Register of Deeds of Iligan City not to register any Certificate of Sale
pursuant to the said auction sale nor make any transfer of the corresponding titles, and if
already registered and transferred, to cancel all the said entries in TCT No. T-15696 and TCT
No. T-15697 and/or cancel the corresponding new TCTs in the name of defendant Bangko
Sentral ng Pilipinas;
5. Making the Preliminary Injunction per Order of this Court dated October 13, 2000
permanent.
No pronouncement as to costs.36 (Citation omitted)
The Iligan City trial court found that the Secretary’s Certificate issued by Aurora de Leon was
fictitious37 and irregular for being unnumbered. 38 It also did not specify the identity,
description, or location of the mortgaged properties. 39
The Iligan City trial court gave credence to Aurora de Leon’s testimony that the University of
Mindanao’s Board of Trustees did not take up the documents in its meetings. Saturnino
Petalcorin corroborated her testimony.40
The Iligan City trial court ruled that the lack of a board resolution authorizing Saturnino
Petalcorin to execute documents of mortgage on behalf of University of Mindanao made the
real estate mortgage contract unenforceable under Article 1403 41 of the Civil Code.42 The
mortgage contract and the subsequent acts of foreclosure and auction sale were void
because the mortgage contract was executed without University of Mindanao’s authority. 43
The Iligan City trial court also ruled that the annotations on the titles of University of
Mindanao’s properties do not operate as notice to the University because annotations only
bind third parties and not owners. 44 Further, Bangko Sentral ng Pilipinas’ right to foreclose the
University of Mindanao’s properties had already prescribed. 45
Bangko Sentral ng Pilipinas separately appealed the Decisions of both the Cagayan de Oro
City and the Iligan City trial courts. 46
After consolidating both cases, the Court of Appeals issued a Decision on December 17, 2009
in favor of Bangko Sentral ng Pilipinas, thus:
FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial Court
of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7
December 2001 of the Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790
are REVERSED and SET ASIDE. The Complaints in both cases before the trial courts
are DISMISSED. The Writ of Preliminary Injunction issued by the Regional Trial Court of Iligan
City, Branch 1 in Civil Case No. 4790 is LIFTED and SET ASIDE.
SO ORDERED.47
The Court of Appeals ruled that "[a]lthough BSP failed to prove that the UM Board of Trustees
actually passed a Board Resolution authorizing Petalcorin to mortgage the subject real
properties,"48 Aurora de Leon’s Secretary’s Certificate "clothed Petalcorin with apparent and
ostensible authority to execute the mortgage deed on its behalf[.]" 49Bangko Sentral ng
Pilipinas merely relied in good faith on the Secretary’s Certificate. 50 University of Mindanao is
estopped from denying Saturnino Petalcorin’s authority. 51
Moreover, the Secretary’s Certificate was notarized. This meant that it enjoyed the
presumption of regularity as to the truth of its statements and authenticity of the
signatures.52 Thus, "BSP cannot be faulted for relying on the [Secretary’s Certificate.]" 53
The Court of Appeals also ruled that since University of Mindanao’s officers, Guillermo B.
Torres and his wife, Dolores P. Torres, signed the promissory notes, University of Mindanao
was presumed to have knowledge of the transaction. 54 Knowledge of an officer in relation to
matters within the scope of his or her authority is notice to the corporation. 55
The annotations on University of Mindanao’s certificates of title also operate as constructive
notice to it that its properties were mortgaged. 56 Its failure to disown the mortgages for more
than a decade was implied ratification. 57
The Court of Appeals also ruled that Bangko Sentral ng Pilipinas’ action for foreclosure had
not yet prescribed because the due date extensions that Bangko Sentral ng Pilipinas granted
to FISLAI extended the due date of payment to five (5) years from February 8, 1985. 58 The
bank’s demand letter to Dolores P. Torres on June 18, 1999 also interrupted the prescriptive
period.59
University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion for
Reconsideration60 and Motion for Partial Reconsideration respectively of the Court of
Appeals’ Decision. On December 20, 2010, the Court of Appeals issued a Resolution, thus:
Acting on the foregoing incidents, the Court RESOLVES to:
1. GRANT the appellant’s twin motions for extension of time to file comment/opposition
and NOTE the Comment on the appellee’s Motion for Reconsideration it subsequently filed
on June 23, 2010;
73
2. GRANT the appellee’s three (3) motions for extension of time to file comment/opposition
and NOTE the Comment on the appellant’s Motion for Partial Reconsideration it filed on July
26, 2010;
3. NOTE the appellant’s "Motion for Leave to File Attached Reply Dated August 11, 2010" filed
on August 13, 2010 and DENY the attached "Reply to Comment Dated July 26, 2010";
4. DENY the appellee’s Motion for Reconsideration as it does not offer any arguments
sufficiently meritorious to warrant modification or reversal of the Court’s 17 December 2009
Decision. The Court finds that there is no compelling reason to reconsider its ruling; and
5. GRANT the appellant’s Motion for Partial Reconsideration, as the Court finds it
meritorious, considering that it ruled in its Decision that "BSP can still foreclose on the UM’s
real property in Cagayan de Oro City covered by TCT No. T-14345." It then follows that the
injunctive writ issued by the RTC of Cagayan de Oro City, Branch 24 must be lifted. The Court’s
17 December 2009 Decision is accordingly MODIFIED and AMENDED to read as follows:
"FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial
Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7
December 2001 of the Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790
are REVERSED and SET ASIDE. The Complaints in both cases before the trial courts
are DISMISSED. The Writs of Preliminary Injunction issued by the Regional Trial Court of Iligan
City, Branch 1 in Civil Case No. 4790 and in the Regional Trial Court of Cagayan de Oro City,
Branch 24 in Civil Case No. 99-414 are LIFTED and SET ASIDE."
SO ORDERED.61 (Citation omitted)
Hence, University of Mindanao filed this Petition for Review.
The issues for resolution are:
First, whether respondent Bangko Sentral ng Pilipinas’ action to foreclose the mortgaged
properties had already prescribed; and
Second, whether petitioner University of Mindanao is bound by the real estate mortgage
contracts executed by Saturnino Petalcorin.
We grant the Petition.
I In other words, as a general rule, a person defaults and prescriptive period for action runs
Petitioner argues that respondent’s action to foreclose its mortgaged properties had already
prescribed.
Petitioner is mistaken.
Prescription is the mode of acquiring or losing rights through the lapse of time. 62 Its purpose
is "to protect the diligent and vigilant, not those who sleep on their rights." 63
The prescriptive period for actions on mortgages is ten (10) years from the day they may be
brought.64 Actions on mortgages may be brought not upon the execution of the mortgage
contract but upon default in payment of the obligation secured by the mortgage. 65
A debtor is considered in default when he or she fails to pay the obligation on due date and,
subject to exceptions, after demands for payment were made by the creditor. Article 1169 of
the Civil Code provides:
ART. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered was
a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
Article 1193 of the Civil Code provides that an obligation is demandable only upon due date.
It provides:
ART. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of the day
certain.
A day certain is understood to be that which must necessarily come, although it may not be
known when.
If the uncertainty consists in whether the day will come or not, the obligation is conditional,
and it shall be regulated by the rules of the preceding Section.
when (1) the obligation becomes due and demandable; and (2) demand for payment has
been made.
The prescriptive period neither runs from the date of the execution of a contract nor does the
prescriptive period necessarily run on the date when the loan becomes due and
74
demandable.66 Prescriptive period runs from the date of demand, 67 subject to certain
exceptions.
In other words, ten (10) years may lapse from the date of the execution of contract, without
barring a cause of action on the mortgage when there is a gap between the period of
execution of the contract and the due date or between the due date and the demand date in
cases when demand is necessary.68
The mortgage contracts in this case were executed by Saturnino Petalcorin in 1982. The
maturity dates of FISLAI’s loans were repeatedly extended until the loans became due and
demandable only in 1990.69 Respondent informed petitioner of its decision to foreclose its
properties and demanded payment in 1999.
The running of the prescriptive period of respondent’s action on the mortgages did not start
when it executed the mortgage contracts with Saturnino Petalcorin in 1982.
The prescriptive period for filing an action may run either (1) from 1990 when the loan
became due, if the obligation was covered by the exceptions under Article 1169 of the Civil
Code; (2) or from 1999 when respondent demanded payment, if the obligation was not
covered by the exceptions under Article 1169 of the Civil Code.
In either case, respondent’s Complaint with cause of action based on the mortgage contract
was filed well within the prescriptive period.
Given the termination of all traces of FISLAI’s existence,70 demand may have been rendered
unnecessary under Article 1169(3)71 of the Civil Code. Granting that this is the case,
respondent would have had ten (10) years from due date in 1990 or until 2000 to institute an
action on the mortgage contract.
However, under Article 115572 of the Civil Code, prescription of actions may be interrupted by
(1) the filing of a court action; (2) a written extrajudicial demand; and (3) the written
acknowledgment of the debt by the debtor.
Therefore, the running of the prescriptive period was interrupted when respondent sent its
demand letter to petitioner on June 18, 1999. This eventually led to petitioner’s filing of its
annulment of mortgage complaints before the Regional Trial Courts of Iligan City and Cagayan
De Oro City on July 16, 1999.
Assuming that demand was necessary, respondent’s action was within the ten (10)-year
prescriptive period. Respondent demanded payment of the loans in 1999 and filed an action
in the same year.
II
Petitioner argues that the execution of the mortgage contract was ultra vires. As an
educational institution, it may not secure the loans of third persons. 73 Securing loans of third
persons is not among the purposes for which petitioner was established. 74
Petitioner is correct.
Corporations are artificial entities granted legal personalities upon their creation by their
incorporators in accordance with law. Unlike natural persons, they have no inherent powers.
Third persons dealing with corporations cannot assume that corporations have powers. It is
up to those persons dealing with corporations to determine their competence as expressly
defined by the law and their articles of incorporation. 75
A corporation may exercise its powers only within those definitions. Corporate acts that are
outside those express definitions under the law or articles of incorporation or those
"committed outside the object for which a corporation is created" 76 are ultra vires.
The only exception to this rule is when acts are necessary and incidental to carry out a
corporation’s purposes, and to the exercise of powers conferred by the Corporation Code and
under a corporation’s articles of incorporation. 77This exception is specifically included in the
general powers of a corporation under Section 36 of the Corporation Code:
SEC. 36. Corporate powers and capacity.—Every corporation incorporated under this Code
has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
75
9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation. (Emphasis supplied)
Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc. 78 stated the test to determine if a
corporate act is in accordance with its purposes:
It is a question, therefore, in each case, of the logical relation of the act to the corporate
purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise
prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to
the promotion of those ends, in a substantial, and not in a remote and fanciful, sense, it may
fairly be considered within charter powers. The test to be applied is whether the act in
question is in direct and immediate furtherance of the corporation’s business, fairly incident
to the express powers and reasonably necessary to their exercise. If so, the corporation has
the power to do it; otherwise, not.79 (Emphasis supplied)
As an educational institution, petitioner serves:
a. To establish, conduct and operate a college or colleges, and/or university;
b. To acquire properties, real and/or personal, in connection with the establishment and
operation of such college or colleges;
c. To do and perform the various and sundry acts and things permitted by the laws of the
Philippines unto corporations like classes and kinds;
d. To engage in agricultural, industrial, and/or commercial pursuits in line with educational
program of the corporation and to acquire all properties, real and personal[,] necessary for
the purposes[;]
e. To establish, operate, and/or acquire broadcasting and television stations also in line with
the educational program of the corporation and for such other purposes as the Board of
Trustees may determine from time to time;
f. To undertake housing projects of faculty members and employees, and to acquire real
estates for this purpose;
g. To establish, conduct and operate and/or invest in educational foundations; [As amended
on December 15, 1965][;]
h. To establish, conduct and operate housing and dental schools, medical facilities and other
related undertakings;
i. To invest in other corporations. [As amended on December 9, 1998]. [Amended Articles of
Incorporation of the University of Mindanao, Inc. – the Petitioner]. 80
Petitioner does not have the power to mortgage its properties in order to secure loans of
other persons. As an educational institution, it is limited to developing human capital through
formal instruction. It is not a corporation engaged in the business of securing loans of others.
Hiring professors, instructors, and personnel; acquiring equipment and real estate;
establishing housing facilities for personnel and students; hiring a concessionaire; and other
activities that can be directly connected to the operations and conduct of the education
business may constitute the necessary and incidental acts of an educational institution.
Securing FISLAI’s loans by mortgaging petitioner’s properties does not appear to have even
the remotest connection to the operations of petitioner as an educational institution.
Securing loans is not an adjunct of the educational institution’s conduct of business. 81 It does
not appear that securing third-party loans was necessary to maintain petitioner’s business of
providing instruction to individuals.
This court upheld the validity of corporate acts when those acts were shown to be clearly
within the corporation’s powers or were connected to the corporation’s purposes.
In Pirovano, et al. v. De la Rama Steamship Co.,82 this court declared valid the donation given
to the children of a deceased person who contributed to the growth of the corporation. 83 This
court found that this donation was within the broad scope of powers and purposes of the
corporation to "aid in any other manner any person . . . in which any interest is held by this
corporation or in the affairs or prosperity of which this corporation has a lawful interest." 84
In Twin Towers Condominium Corporation v. Court of Appeals, et al.,85 this court declared valid
a rule by Twin Towers Condominium denying delinquent members the right to use
condominium facilities.86 This court ruled that the condominium’s power to promulgate rules
on the use of facilities and to enforce provisions of the Master Deed was clear in the
Condominium Act, Master Deed, and By-laws of the condominium. 87 Moreover, the
promulgation of such rule was "reasonably necessary" to attain the purposes of the
condominium project.88
This court has, in effect, created a presumption that corporate acts are valid if, on their face,
the acts were within the corporation’s powers or purposes. This presumption was explained
as early as in 1915 in Coleman v. Hotel De France 89 where this court ruled that contracts
entered into by corporations in the exercise of their incidental powers are not ultra vires. 90
76
Coleman involved a hotel’s cancellation of an employment contract it executed with a
gymnast. One of the hotel’s contentions was the supposed ultra vires nature of the contract.
It was executed outside its express and implied powers under the articles of incorporation. 91
In ruling in favor of the contract’s validity, this court considered the incidental powers of the
hotel to include the execution of employment contracts with entertainers for the purpose of
providing its guests entertainment and increasing patronage. 92
This court ruled that a contract executed by a corporation shall be presumed valid if on its
face its execution was not beyond the powers of the corporation to do. 93 Thus:
When a contract is not on its face necessarily beyond the scope of the power of the
corporation by which it was made, it will, in the absence of proof to the contrary, be
presumed to be valid. Corporations are presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to
prevail where it would defeat the ends of justice or work a legal wrong. 94
However, this should not be interpreted to mean that such presumption applies to all cases,
even when the act in question is on its face beyond the corporation’s power to do or when
the evidence contradicts the presumption.
Presumptions are "inference[s] as to the existence of a fact not actually known, arising from
its usual connection with another which is known, or a conjecture based on past experience
as to what course human affairs ordinarily take." 95 Presumptions embody values and revealed
behavioral expectations under a given set of circumstances.
Presumptions may be conclusive96 or disputable.97
Conclusive presumptions are presumptions that may not be overturned by evidence,
however strong the evidence is.98 They are made conclusive not because there is an
established uniformity in behavior whenever identified circumstances arise. They are
conclusive because they are declared as such under the law or the rules. Rule 131, Section 2
of the Rules of Court identifies two (2) conclusive presumptions:
SEC. 2. Conclusive presumptions.— The following are instances of conclusive presumptions:
(a) Whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act or omission, be permitted to
falsify it;
(b) The tenant is not permitted to deny the title of his landlord at the time of the
commencement of the relation of landlord and tenant between them.
On the other hand, disputable presumptions are presumptions that may be overcome by
contrary evidence.99 They are disputable in recognition of the variability of human behavior.
Presumptions are not always true. They may be wrong under certain circumstances, and
courts are expected to apply them, keeping in mind the nuances of every experience that
may render the expectations wrong.
Thus, the application of disputable presumptions on a given circumstance must be based on
the existence of certain facts on which they are meant to operate. "[P]resumptions are not
allegations, nor do they supply their absence[.]" 100Presumptions are conclusions. They do not
apply when there are no facts or allegations to support them.
If the facts exist to set in motion the operation of a disputable presumption, courts may
accept the presumption. However, contrary evidence may be presented to rebut the
presumption.
Courts cannot disregard contrary evidence offered to rebut disputable presumptions.
Disputable presumptions apply only in the absence of contrary evidence or explanations. This
court explained in Philippine Agila Satellite Inc. v. Usec. Trinidad-Lichauco:101
We do not doubt the existence of the presumptions of "good faith" or "regular performance
of official duty," yet these presumptions are disputable and may be contradicted and
overcome by other evidence. Many civil actions are oriented towards overcoming any number
of these presumptions, and a cause of action can certainly be geared towards such effect. The
very purpose of trial is to allow a party to present evidence to overcome the disputable
presumptions involved. Otherwise, if trial is deemed irrelevant or unnecessary, owing to the
perceived indisputability of the presumptions, the judicial exercise would be relegated to a
mere ascertainment of what presumptions apply in a given case, nothing more. Consequently,
the entire Rules of Court is rendered as excess verbiage, save perhaps for the provisions
laying down the legal presumptions.
If this reasoning of the Court of Appeals were ever adopted as a jurisprudential rule, no
public officer could ever be sued for acts executed beyond their official functions or authority,
or for tortious conduct or behavior, since such acts would "enjoy the presumption of good
faith and in the regular performance of official duty." Indeed, few civil actions of any nature
would ever reach the trial stage, if a case can be adjudicated by a mere determination from
the complaint or answer as to which legal presumptions are applicable. For example, the
presumption that a person is innocent of a wrong is a disputable presumption on the same
level as that of the regular performance of official duty. A civil complaint for damages
necessarily alleges that the defendant committed a wrongful act or omission that would serve
as basis for the award of damages. With the rationale of the Court of Appeals, such complaint
can be dismissed upon a motion to dismiss solely on the ground that the presumption is that
a person is innocent of a wrong. 102 (Emphasis supplied, citations omitted)
In this case, the presumption that the execution of mortgage contracts was within
petitioner’s corporate powers does not apply. Securing third-party loans is not connected to
petitioner’s purposes as an educational institution.
77
III
Respondent argues that petitioner’s act of mortgaging its properties to guarantee FISLAI’s
loans was consistent with petitioner’s business interests, since petitioner was presumably a
FISLAI shareholder whose officers and shareholders interlock with FISLAI. Respondent points
out that petitioner and its key officers held substantial shares in MSLAI when DSLAI and FISLAI
merged. Therefore, it was safe to assume that when the mortgages were executed in 1982,
petitioner held substantial shares in FISLAI.103
Parties dealing with corporations cannot simply assume that their transaction is within the
corporate powers. The acts of a corporation are still limited by its powers and purposes as
provided in the law and its articles of incorporation.
Acquiring shares in another corporation is not a means to create new powers for the
acquiring corporation. Being a shareholder of another corporation does not automatically
change the nature and purpose of a corporation’s business. Appropriate amendments must
be made either to the law or the articles of incorporation before a corporation can validly
exercise powers outside those provided in law or the articles of incorporation. In other words,
without an amendment, what is ultra vires before a corporation acquires shares in other
corporations is still ultra vires after such acquisition.
Thus, regardless of the number of shares that petitioner had with FISLAI, DSLAI, or MSLAI,
securing loans of third persons is still beyond petitioner’s power to do. It is still inconsistent
with its purposes under the law104 and its articles of incorporation.105
In attempting to show petitioner’s interest in securing FISLAI’s loans by adverting to their
interlocking directors and shareholders, respondent disregards petitioner’s separate
personality from its officers, shareholders, and other juridical persons.
The separate personality of corporations means that they are "vest[ed] [with] rights, powers,
and attributes [of their own] as if they were natural persons[.]" 106 Their assets and liabilities
are their own and not their officers’, shareholders’, or another corporation’s. In the same vein,
the assets and liabilities of their officers and shareholders are not the corporations’.
Obligations incurred by corporations are not obligations of their officers and shareholders.
Obligations of officers and shareholders are not obligations of corporations. 107 In other words,
corporate interests are separate from the personal interests of the natural persons that
comprise corporations.
Corporations are given separate personalities to allow natural persons to balance the risks of
business as they accumulate capital. They are, however, given limited competence as a means
to protect the public from fraudulent acts that may be committed using the separate juridical
personality given to corporations.
Petitioner’s key officers, as shareholders of FISLAI, may have an interest in ensuring the
viability of FISLAI by obtaining a loan from respondent and securing it by whatever means.
However, having interlocking officers and stockholders with FISLAI does not mean that
petitioner, as an educational institution, is or must necessarily be interested in the affairs of
FISLAI.
Since petitioner is an entity distinct and separate not only from its own officers and
shareholders but also from FISLAI, its interests as an educational institution may not be
consistent with FISLAI’s.
Petitioner and FISLAI have different constituencies. Petitioner’s constituents comprise
persons who have committed to developing skills and acquiring knowledge in their chosen
fields by availing the formal instruction provided by petitioner. On the other hand, FISLAI is a
thrift bank, which constituencies comprise investors.
While petitioner and FISLAI exist ultimately to benefit their stockholders, their constituencies
affect the means by which they can maintain their existence. Their interests are congruent
with sustaining their constituents’ needs because their existence depends on that. Petitioner
can exist only if it continues to provide for the kind and quality of instruction that is needed
by its constituents. Its operations and existence are placed at risk when resources are used on
activities that are not geared toward the attainment of its purpose. Petitioner has no business
in securing FISLAI, DSLAI, or MSLAI’s loans. This activity is not compatible with its business of
providing quality instruction to its constituents.
Indeed, there are instances when we disregard the separate corporate personalities of the
corporation and its stockholders, directors, or officers. This is called piercing of the corporate
veil.
Corporate veil is pierced when the separate personality of the corporation is being used to
perpetrate fraud, illegalities, and injustices.108 In Lanuza, Jr. v. BF Corporation:109
Piercing the corporate veil is warranted when "[the separate personality of a corporation] 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." It is also
warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter ego
or business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation." 110
These instances have not been shown in this case. There is no evidence pointing to the
possibility that petitioner used its separate personality to defraud third persons or commit
illegal acts. Neither is there evidence to show that petitioner was merely a farce of a
corporation. What has been shown instead was that petitioner, too, had been victimized by
fraudulent and unauthorized acts of its own officers and directors.
In this case, instead of guarding against fraud, we perpetuate fraud if we accept respondent’s
contentions.
78
IV
Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage its properties on
its behalf. There was no board resolution to that effect. Thus, the mortgages executed by
Saturnino Petalcorin were unenforceable. 111
The mortgage contracts executed in favor of respondent do not bind petitioner. They were
executed without authority from petitioner.
Petitioner must exercise its powers and conduct its business through its Board of Trustees.
Section 23 of the Corporation Code 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.
Being a juridical person, petitioner cannot conduct its business, make decisions, or act in any
manner without action from its Board of Trustees. The Board of Trustees must act as a body
in order to exercise corporate powers. Individual trustees are not clothed with corporate
powers just by being a trustee. Hence, the individual trustee cannot bind the corporation by
himself or herself.
The corporation may, however, delegate through a board resolution its corporate powers or
functions to a representative, subject to limitations under the law and the corporation’s
articles of incorporation. 112
The relationship between a corporation and its representatives is governed by the general
principles of agency.113Article 1317 of the Civil Code provides that there must be authority
from the principal before anyone can act in his or her name:
ART. 1317. No one may contract in the name of another without being authorized by the
latter, or unless he has by law a right to represent him.
Hence, without delegation by the board of directors or trustees, acts of a person—including
those of the corporation’s directors, trustees, shareholders, or officers—executed on behalf
of the corporation are generally not binding on the corporation. 114
Contracts entered into in another’s name without authority or valid legal representation are
generally unenforceable. The Civil Code provides:
ART. 1317. . . .
A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it
is revoked by the other contracting party.
....
ART. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers[.]
The unenforceable status of contracts entered into by an unauthorized person on behalf of
another is based on the basic principle that contracts must be consented to by both
parties.115 There is no contract without meeting of the minds as to the subject matter and
cause of the obligations created under the contract. 116
Consent of a person cannot be presumed from representations of another, especially if
obligations will be incurred as a result. Thus, authority is required to make actions made on
his or her behalf binding on a person. Contracts entered into by persons without authority
from the corporation shall generally be considered ultra vires and unenforceable 117 against
the corporation.
Two trial courts118 found that the Secretary’s Certificate and the board resolution were either
non-existent or fictitious. The trial courts based their findings on the testimony of the
Corporate Secretary, Aurora de Leon herself. She signed the Secretary’s Certificate and the
excerpt of the minutes of the alleged board meeting purporting to authorize Saturnino
Petalcorin to mortgage petitioner’s properties. There was no board meeting to that effect.
Guillermo B. Torres ordered the issuance of the Secretary’s Certificate. Aurora de Leon’s
testimony was corroborated by Saturnino Petalcorin.
Even the Court of Appeals, which reversed the trial courts’ decisions, recognized that "BSP
failed to prove that the UM Board of Trustees actually passed a Board Resolution authorizing
Petalcorin to mortgage the subject real properties[.]"119
Well-entrenched is the rule that this court, not being a trier of facts, is bound by the findings
of fact of the trial courts and the Court of Appeals when such findings are supported by
evidence on record. 120 Hence, not having the proper board resolution to authorize Saturnino
Petalcorin to execute the mortgage contracts for petitioner, the contracts he executed are
unenforceable against petitioner. They cannot bind petitioner.
However, personal liabilities may be incurred by directors who assented to such unauthorized
act121 and by the person who contracted in excess of the limits of his or her authority without
the corporation’s knowledge.122
V
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Unauthorized acts that are merely beyond the powers of the corporation under its articles of
incorporation are not void ab initio.
In Pirovano, et al., this court explained that corporate acts may be ultra vires but not
void.123 Corporate acts may be capable of ratification: 124
[A] distinction should be made between corporate acts or contracts which are illegal and
those which are merely ultra vires. The former contemplates the doing of an act which is
contrary to law, morals, or public order, or contravene some rules of public policy or public
duty, and are, like similar transactions between individuals, void. They cannot serve as basis
of a court action, nor acquire validity by performance, ratification, or estoppel. Mere ultra
vires acts, on the other hand, or those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders. 125
Thus, even though a person did not give another person authority to act on his or her behalf,
the action may be enforced against him or her if it is shown that he or she ratified it or
allowed the other person to act as if he or she had full authority to do so. The Civil Code
provides:
ART. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly.
ART. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable
with the agent if the former allowed the latter to act as though he had full powers . (Emphasis
supplied)
Ratification is a voluntary and deliberate confirmation or adoption of a previous unauthorized
act.126 It converts the unauthorized act of an agent into an act of the principal. 127 It cures the
lack of consent at the time of the execution of the contract entered into by the
representative, making the contract valid and enforceable. 128 It is, in essence, consent
belatedly given through express or implied acts that are deemed a confirmation or waiver of
the right to impugn the unauthorized act. 129 Ratification has the effect of placing the principal
in a position as if he or she signed the original contract. In Board of Liquidators v. Heirs of M.
Kalaw, et al.:130
Authorities, great in number, are one in the idea that "ratification by a corporation of an
unauthorized act or contract by its officers or others relates back to the time of the act or
contract ratified, and is equivalent to original authority;" and that "[t]he corporation and the
other party to the transaction are in precisely the same position as if the act or contract had
been authorized at the time." The language of one case is expressive: "The adoption or
ratification of a contract by a corporation is nothing more nor less than the making of an
original contract. The theory of corporate ratification is predicated on the right of a
corporation to contract, and any ratification or adoption is equivalent to a grant of prior
authority."131 (Citations omitted)
Implied ratification may take the form of silence, acquiescence, acts consistent with approval
of the act, or acceptance or retention of benefits. 132 However, silence, acquiescence,
retention of benefits, and acts that may be interpreted as approval of the act do not by
themselves constitute implied ratification. For an act to constitute an implied ratification,
there must be no acceptable explanation for the act other than that there is an intention to
adopt the act as his or her own. 133 "[It] cannot be inferred from acts that a principal has a
right to do independently of the unauthorized act of the agent." 134
No act by petitioner can be interpreted as anything close to ratification. It was not shown that
it issued a resolution ratifying the execution of the mortgage contracts. It was not shown that
it received proceeds of the loans secured by the mortgage contracts. There was also no
showing that it received any consideration for the execution of the mortgage contracts. It
even appears that petitioner was unaware of the mortgage contracts until respondent
notified it of its desire to foreclose the mortgaged properties.
Ratification must be knowingly and voluntarily done. 135 Petitioner’s lack of knowledge about
the mortgage executed in its name precludes an interpretation that there was any ratification
on its part.
Respondent further argues that petitioner is presumed to have knowledge of its transactions
with respondent because its officers, the Spouses Guillermo and Dolores Torres, participated
in obtaining the loan.136
Indeed, a corporation, being a person created by mere fiction of law, can act only through
natural persons such as its directors, officers, agents, and representatives. Hence, the general
rule is that knowledge of an officer is considered knowledge of the corporation.
However, even though the Spouses Guillermo and Dolores Torres were officers of both the
thrift banks and petitioner, their knowledge of the mortgage contracts cannot be considered
as knowledge of the corporation.
The rule that knowledge of an officer is considered knowledge of the corporation applies only
when the officer is acting within the authority given to him or her by the corporation.
In Francisco v. Government Service Insurance System:137
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course
of his employment, and in relation to matters within the scope of his authority, is notice to
the corporation, whether he communicates such knowledge or not. 138
The public should be able to rely on and be protected from the representations of a corporate
representative acting within the scope of his or her authority. This is why an authorized
80
officer’s knowledge is considered knowledge of corporation. However, just as the public
should be able to rely on and be protected from corporate representations, corporations
should also be able to expect that they will not be bound by unauthorized actions made on
their account.
Thus, knowledge should be actually communicated to the corporation through its authorized
representatives. A corporation cannot be expected to act or not act on a knowledge that had
not been communicated to it through an authorized representative. There can be no implied
ratification without actual communication. Knowledge of the existence of contract must be
brought to the corporation’s representative who has authority to ratify it. Further, "the
circumstances must be shown from which such knowledge may be presumed." 139
The Spouses Guillermo and Dolores Torres’ knowledge cannot be interpreted as knowledge of
petitioner. Their knowledge was not obtained as petitioner’s representatives. It was not
shown that they were acting for and within the authority given by petitioner when they
acquired knowledge of the loan transactions and the mortgages. The knowledge was
obtained in the interest of and as representatives of the thrift banks.
VI
Respondent argues that Saturnino Petalcorin was clothed with the authority to transact on
behalf of petitioner, based on the board resolution dated March 30, 1982 and Aurora de
Leon’s notarized Secretary’s Certificate.140 According to respondent, petitioner is bound by the
mortgage contracts executed by Saturnino Petalcorin. 141
This court has recognized presumed or apparent authority or capacity to bind corporate
representatives in instances when the corporation, through its silence or other acts of
recognition, allowed others to believe that persons, through their usual exercise of corporate
powers, were conferred with authority to deal on the corporation’s behalf. 142
The doctrine of apparent authority does not go into the question of the corporation’s
competence or power to do a particular act. It involves the question of whether the officer
has the power or is clothed with the appearance of having the power to act for the
corporation. A finding that there is apparent authority is not the same as a finding that the
corporate act in question is within the corporation’s limited powers.
The rule on apparent authority is based on the principle of estoppel. The Civil Code provides:
ART. 1431. Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon.
....
ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence
or lack of action, or his failure to repudiate the agency, knowing that another person is acting
on his behalf without authority.
Agency may be oral, unless the law requires a specific form.
A corporation is estopped by its silence and acts of recognition because we recognize that
there is information asymmetry between third persons who have little to no information as to
what happens during corporate meetings, and the corporate officers, directors, and
representatives who are insiders to corporate affairs.143
In People’s Aircargo and Warehousing Co. Inc. v. Court of Appeals,144 this court held that the
contract entered into by the corporation’s officer without a board resolution was binding
upon the corporation because it previously allowed the officer to contract on its behalf
despite the lack of board resolution. 145
In Francisco, this court ruled that Francisco’s proposal for redemption of property was
accepted by and binding upon the Government Service Insurance System. This court did not
appreciate the Government Service Insurance System’s defense that since it was the Board
Secretary and not the General Manager who sent Francisco the acceptance telegram, it could
not be made binding upon the Government Service Insurance System. It did not authorize the
Board Secretary to sign for the General Manager. This court appreciated the Government
Service Insurance System’s failure to disown the telegram sent by the Board Secretary and its
silence while it accepted all payments made by Francisco for the redemption of property. 146
There can be no apparent authority and the corporation cannot be estopped from denying
the binding affect of an act when there is no evidence pointing to similar acts and other
circumstances that can be interpreted as the corporation holding out a representative as
having authority to contract on its behalf. In Advance Paper Corporation v. Arma Traders
Corporation,147 this court had the occasion to say:
The doctrine of apparent authority does not apply if the principal did not commit any acts or
conduct which a third party knew and relied upon in good faith as a result of the exercise of
reasonable prudence. Moreover, the agent’s acts or conduct must have produced a change of
position to the third party’s detriment. 148 (Citation omitted)
Saturnino Petalcorin’s authority to transact on behalf of petitioner cannot be presumed
based on a Secretary’s Certificate and excerpt from the minutes of the alleged board meeting
that were found to have been simulated. These documents cannot be considered as the
corporate acts that held out Saturnino Petalcorin as petitioner’s authorized representative for
mortgage transactions. They were not supported by an actual board meeting. 149
VII
Respondent argues that it may rely on the Secretary’s Certificate issued by Aurora de Leon
because it was notarized.
The Secretary’s Certificate was void whether or not it was notarized.
81
Notarization creates a presumption of regularity and authenticity on the document. This
presumption may be rebutted by "strong, complete and conclusive proof" 150 to the contrary.
While notarial acknowledgment "attaches full faith and credit to the document
concerned[,]"151 it does not give the document its validity or binding effect. When there is
evidence showing that the document is invalid, the presumption of regularity or authenticity
is not applicable.
In Basilio v. Court of Appeals,152 this court was convinced that the purported signatory on a
deed of sale was not as represented, despite testimony from the notary public that the
signatory appeared before him and signed the instrument. 153 Apart from finding that there
was forgery,154 this court noted:
The notary public, Atty. Ruben Silvestre, testified that he was the one who notarized the
document and that Dionisio Z. Basilio appeared personally before him and signed the
instrument himself. However, he admitted that he did not know Dionisio Z. Basilio personally
to ascertain if the person who signed the document was actually Dionisio Z. Basilio himself, or
another person who stood in his place. He could not even recall whether the document had
been executed in his office or not.
Thus, considering the testimonies of various witnesses and a comparison of the signature in
question with admittedly genuine signatures, the Court is convinced that Dionisio Z. Basilio
did not execute the questioned deed of sale. Although the questioned deed of sale was a
public document having in its favor the presumption of regularity, such presumption was
adequately refuted by competent witnesses showing its forgery and the Court’s own visual
analysis of the document.155 (Emphasis supplied, citations omitted)
156
In Suntay v. Court of Appeals, this court held that a notarized deed of sale was void because
it was a mere sham.157 It was not intended to have any effect between the parties. 158 This
court said:
[I]t is not the intention nor the function of the notary public to validate and make binding an
instrument never, in the first place, intended to have any binding legal effect upon the parties
thereto.159
Since the notarized Secretary’s Certificate was found to have been issued without a
supporting board resolution, it produced no effect. It is not binding upon petitioner. It should
not have been relied on by respondent especially given its status as a bank.
VIII
The banking institution is "impressed with public interest" 160 such that the public’s faith is "of
paramount importance."161 Thus, banks are required to exercise the highest degree of
diligence in their transactions. 162 In China Banking Corporation v. Lagon,163 this court found
that the bank was not a mortgagee in good faith for its failure to question the due execution
of a Special Power of Attorney that was presented to it in relation to a mortgage
contract.164 This court said:
Though petitioner is not expected to conduct an exhaustive investigation on the history of the
mortgagor’s title, it cannot be excused from the duty of exercising the due diligence required
of a banking institution. Banks are expected to exercise more care and prudence than private
individuals in their dealings, even those that involve registered lands, for their business is
affected with public interest.165 (Citations omitted)
For its failure to exercise the degree of diligence required of banks, respondent cannot claim
good faith in the execution of the mortgage contracts with Saturnino Petalcorin.
Respondent’s witness, Daciano Paguio, Jr., testified that there was no board resolution
authorizing Saturnino Petalcorin to act on behalf of petitioner. 166 Respondent did not inquire
further as to Saturnino Petalcorin’s authority.
Banks cannot rely on assumptions. This will be contrary to the high standard of diligence
required of them.
VI
According to respondent, the annotations of respondent’s mortgage interests on the
certificates of titles of petitioner’s properties operated as constructive notice to petitioner of
the existence of such interests. 167 Hence, petitioners are now estopped from claiming that
they did not know about the mortgage.
Annotations of adverse claims on certificates of title to properties operate as constructive
notice only to third parties—not to the court or the registered owner.1âwphi1 In Sajonas v.
Court of Appeals:168
[A]nnotation of an adverse claim is a measure designed to protect the interest of a person
over a piece of real property where the registration of such interest or right is not otherwise
provided for by the Land Registration Act or Act 496 (now [Presidential Decree No.] 1529 or
the Property Registration Decree), and serves a warning to third parties dealing with said
property that someone is claiming an interest on the same or a better right than that of the
registered owner thereof.169 (Emphasis supplied)
Annotations are merely claims of interest or claims of the legal nature and incidents of
relationship between the person whose name appears on the document and the person who
caused the annotation. It does not say anything about the validity of the claim or convert a
defective claim or document into a valid one. 170 These claims may be proved or disproved
during trial.
Thus, annotations are not conclusive upon courts or upon owners who may not have reason
to doubt the security of their claim as their properties' title holders.
82
WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision dated December 17,
2009 is REVERSED and SET ASIDE. The Regional Trial Courts' Decisions of November 23, 2001
and December 7, 2001 are REINSTATED.

SO ORDERED.

83
GR. No. 174909
Stockholder Number of Shares
MARCELINO M. FLORETE, JR., MARIA ELENA F. MUYCO and RAUL A. MUYCO, Petitioners,
vs.
Marcelino Florete, Sr. (Marcelino, Sr.) 250 shares
ROGELIO M. FLORETE, IMELDA C. FLORETE, DIAMEL CORPORATION, ROGELIO C. FLORETE
JR., and MARGARET RUTH C. FLORETE, Respondents.
Salome Florete (Salome) 100 shares
x-----------------------x

G.R. No. 177275 Ricardo Berlin (Berlin) 50 shares

ROGELIO M. FLORETE SR., Petitioner,

vs. Pacifico Sudario (Sudario) 50 shares
MARCELINO M. FLORETE, JR., MARIA ELENA F. MUYCO AND RAUL A. MUYCO, Respondents.

DECISION Atty. Santiago Divinagracia (Divinagracia), now deceased9 50 shares10

LEONEN, J.:
A stockholder may suffer from a wrong done to or involving a corporation, but this does not
vest in the aggrieved stockholder a sweeping license to sue in his or her own capacity. The
determination of the stockholder’s appropriate remedy—whether it is an individual suit, a
class suit, or a derivative suit—hinges on the object of the wrong done. When the object of
the wrong done is the corporation itself or "the whole body of its stock and property without
any severance or distribution among individual holders," 1 it is a derivative suit, not an
individual suit or class/representative suit, that a stockholder must resort to.
This resolves consolidated cases involving a Complaint for Declaration of Nullity of Issuances,
Transfers and Sale of Shares in People’s Broadcasting Service, Inc. and All Posterior
Subscriptions and Increases thereto with Damages. 2The Complaint did not implead as parties
the concerned corporation, some of the transferees, transferors and other parties involved in
the assailed transactions. The Petition 3 docketed as G.R. No. 174909 assails the Court of
Appeals Decision affirming the dismissal of the Complaint and sustaining the award of
₱25,000,000.00 as moral damages and ₱5,000,000.00 as exemplary damages in favor of
Rogelio Florete, Sr. The Petition 4 docketed as G.R. No. 177275 assails the Court of Appeals
Decision that disallowed the immediate execution of the same award of damages.
On November 17, 1967, Berlin and Sudario resigned from their positions as General Manager
and Station Supervisor, respectively.11 Berlin and Sudario each transferred 20 shares to Raul
Muyco and Estrella Mirasol.12
Salome died on November 22, 1980. 13 Marcelino, Sr. suffered a stroke on July 12, 1982, which
left him paralyzed and bedridden until his death on October 3, 1990. 14 After Marcelino, Sr.’s
stroke, their son, Rogelio, Sr. started managing the affairs of People’s Broadcasting. 15
In October 1993, People’s Broadcasting sought the services of the accounting and auditing
firm Sycip Gorres Velayo and Co. in order to determine the ownership of equity in the
corporation.16 On November 2, 1994, Sycip Gorres Velayo and Co. submitted a report detailing
the movements of the corporation’s shares from November 23, 1967 to December 8,
1989.17 The relevant portion of this report reads:
B. PEOPLE’S BROADCASTING SERVICE, INC. (PBS)
The movements in the capital stock accounts (by beneficial stockholders) are as follows:
1âwphi1

Spouses Marcelino Florete, Sr. and Salome Florete (now both deceased) had four (4) children: Transfer of
Additional Transfer Transfer of
Marcelino Florete, Jr. (Marcelino, Jr.), Maria Elena Muyco (Ma. Elena), Rogelio Florete,Beneficial
Sr. Shareholdings Shares of
Subscription of Shares Shares of Shareholdin
(Rogelio, Sr.), and Teresita Menchavez (Teresita), now deceased. 5 Nov. 27, 1967 Stock Increase (F)
Stockholder Sept. 1, 1982 of Stock Stock June Oct. 31, 199
(A) March 1,
People’s Broadcasting Service, Inc. (People’s Broadcasting) is a private corporation authorized (B) (D) 5, 1987 (E)
1983 (C)
to operate, own, maintain, install, and construct radio and television stations in the
Philippines.6 In its incorporation on March 8, 1966, 7 it had an authorized capital stock of
₱250,000.00 divided into 2,500 shares at ₱100.00 par value per share. 8Twenty-five percent Marcelino M. 560 - 750 (680) - 62,344.19 62,974.19
(25%) of the corporation’s authorized capital stock were then subscribed to as follows:
84
 Inc. (CBS), DYMF and DXMF in Cebu and Davao, respectively. In consideration thereof,
ete, Sr.
[People’s Broadcasting Service, Inc.] shall issue 1,250 shares of stock in favor of [Consolidated
Broadcasting System, Inc.]. In pursuance thereof, on September 1, 1982, the Corporation
ome M. 30 (30) - - - issued the remaining 1,240 shares of unissued capital stock to [Consolidated Broadcasting
ete System, Inc.]. To complete the consideration of 1,250 shares, it was explained that [Salome]
transferred her 10 shares to [Consolidated Broadcasting System, Inc.] and distributed her
remaining 20 shares to her children, at 5 shares each.
elio M. 20 5 1110 370 (5) 149,624.75 151,124.75
ete (C) On March 1, 1983, all the 610 shares of [Newsounds Broadcasting Network, Inc.] were
transferred to [Rogelio, Sr.]. We were not able to determine the person who endorsed the
certificate in [sic] behalf [of] [Newsounds Broadcasting Network, Inc.] as the certificate was
Elena F. 20 5 - - (25) 2,493.68 2,493.68
not found on file. On the same day, the entire investment of [Consolidated Broadcasting
yco
System, Inc.] were transferred to [Marcelino, Sr.] and [Rogelio, Sr.] at the proportion of 750
shares and 500 shares, respectively. The cancelled certificates of [Consolidated Broadcasting
esita F. - 5 - 20 (25) 2,493.69 2,493.69 System, Inc.] were endorsed by [Rogelio, Sr.] in [sic] its behalf.
nchavez
(D) On February 28 and August 1, 1983, [Marcelino, Sr.] transferred 680 shares from his block
to the following:
rcelino M. - 5 - 20 (20) 2,493.44 2,493.44
ete, Jr.
Transferee No. of Shares Date of Transfer

tiago C. 20 - - 270 75 29,925.25 30,290.25

nagracia

Rogelio M. Florete [Sr.] 370 February 28, 1983

wsound 610 - (610)
adcasting18
Santiago C. Divinagracia 270 August 1, 1983
solidated - 1,250 (1,250)
adcasting Marcelino M. Florete, Jr. 20 August 1, 1983

al 1,260 1,250 249,375.00 251,875.00

Teresita F. Menchavez 20 August 1, 1983

(A) The People’s Broadcasting Service, Inc. was incorporated in 1965 with an authorized Total 680
capital stock of P250,000 divided into 2,500 shares at P100 par value. As of November 23,
1967, the total subscribed shares of stock was [sic] 1,260. The 610 shares issued in the name
(E) On June 3, 1987, the Corporation effected the transfer of 75 shares to [Divinagracia] by
of [Newsounds Broadcasting Network, Inc.] was [sic] authorized by the Board of Directors in
virtue of the deeds of sale executed by the transferors concerned in his favor.
payment for the obligation of the Corporation to [Newsounds Broadcasting Network, Inc.].
(F) On December 8, 1989, the [Securities and Exchange Commission] approved the
....
application of the Corporation to increase the authorized capital stock to ₱100,000,000.00
(B) On August 5, 1982, the Board of Directors passed Resolution No. 4 which authorized Atty. divided into 1,000,000 shares at ₱100 par value. Of the increase, 249,375 shares were
Divinagracia to negotiate the purchase of two stations of Consolidated Broadcasting System,
85
subscribed for ₱24,937,500 and ₱6,234,375 thereof was paid-up. The subscribers to the
7. Rogelio Florete, Jr. 100.00
increase were as indicated in the foregoing.

There were no other transactions affecting the interest of the beneficial stockholders up to
8. Margaret Ruth Florete 100.00
October 31, 1993 except transfers to and from designated nominees[.] 19

Even as it tracked the movements of shares, Sycip Gorres Velayo and Co. declined to give a 9. Raul Muyco 10.00
categorical statement on equity ownership as People’s Broadcasting’s corporate records were
incomplete.20 The report contained the following disclaimer on the findings regarding the
corporation’s capital structure: 10. Manuel Villa, Jr. 10.00

Because the procedures included certain assumptions as represented by the corporate

11. Gregorio Rubias 1.00
secretaries mentioned in Attachment I and we have not verified the documents supporting
some of the transactions, we do not express an opinion on the capital stock accounts of the
respective companies [including People’s Broadcasting] as at October 31, 1993. 21 (Emphasis 12. Cyril Regaldao 1.00
supplied)

On February 1, 1997, the Board of Directors of People’s Broadcasting approved Sycip Gorres 13. Jose Mari Treñas 1.00
Velayo and Co.’s report.22

In the meantime, Rogelio, Sr. transferred a portion of his shareholdings to the members of his 14. Enrico Jacomille 1.00
immediate family, namely: Imelda Florete, Rogelio Florete, Jr., and Margaret Ruth Florete, as
well as to Diamel Corporation, a corporation owned by Rogelio, Sr.’s family. 23 15. Joseph Vincent Go 1.00
As of April 27, 2002, the stockholders of record of People’s Broadcasting were the following: 24
16. Jerry Treñas 1.00
Stockholder No. of Shares
17. Efrain Treñas 10.00
1. Diamel Corporation 30,000.00
On June 23, 2003, Marcelino, Jr., Ma. Elena, and Raul Muyco (Marcelino, Jr. Group) filed
before the Regional Trial Court a Complaint25 for Declaration of Nullity of Issuances, Transfers
2. Rogelio Florete [Sr.] 153,881.53
and Sale of Shares in People’s Broadcasting Service, Inc. and All Posterior Subscriptions and
Increases thereto with Damages 26 against Diamel Corporation, Rogelio, Sr., Imelda Florete,
3. Marcelino Florete, Jr. 18,240.99 Margaret Florete, and Rogelio Florete, Jr. (Rogelio, Sr. Group).

On July 25, 2003, the Rogelio, Sr. Group filed their Answer with compulsory counterclaim. 27
4. Ma. Elena Muyco 18,227.23
On August 2, 2005, the Regional Trial Court issued a Decision (which it called a "Placitum")
dismissing the Marcelino, Jr. Group’s Complaint. It ruled that the Marcelino, Jr. Group did not
5. Santiago Divinagracia 30,289.25 have a cause of action against the Rogelio, Sr. Group and that the former is estopped from
questioning the assailed movement of shares of People’s Broadcasting. It also ruled that
6. Imelda Florete 1,000.00 indispensible parties were not joined in their Complaint.

According to the trial court, the indispensable parties would include:

86
[Marcelino, Sr.] and/or his estate and/or his heirs, [Salome] and/or her estate and/or her
heirs, [Divinagracia] and/or his estate and/or his successors-in-interest, [Teresita] and/or her
estate and/or her own successors-in-interest, the other [People’s Broadcasting Service, Inc.]
stockholders who may be actually beneficial owners and not purely nominees, all the so
called nominal stockholders. . . [and] the various [People’s Broadcasting Service, Inc.]
Corporate Secretaries[.]"28
The Regional Trial Court granted Rogelio, Sr.’s compulsory counterclaim for moral and
exemplary damages amounting to ₱25,000,000.00 and ₱5,000,000.00, respectively, reasoning
that Rogelio, Sr. suffered from the besmirching of his personal and commercial reputation. 29
The dispositive portion of the Regional Trial Court Decision reads:
WHEREFORE, premises duly considered, the instant "Complaint" of the plaintiffs is hereby
DISMISSED for lack of merit.
The "Counterclaim" of defendant Rogelio Florete Sr. is hereby given DUE COURSE but only
insofar as the claims for moral and exemplary damages are concerned. Consequently, the
plaintiffs herein are hereby ordered to pay, jointly and severally, defendant Rogelio Florete Sr.,
the following sums, to wit:
1. TWENTY FIVE MILLION PESOS (P25,000,000.00) as and for MORAL DAMAGES; and,
2. FIVE MILLION PESOS (P5,000,000.00) as and for EXEMPLARY DAMAGES.
The "Counterclaim(s)" of the other defendants and the prayer for the recovery of attorney’s
fees and litigation expenses of defendant Rogelio Florete, Sr. are hereby DISMISSED likewise
for lack of merit.
SO ORDERED.30
On August 15, 2005, Rogelio, Sr. filed a Motion for the immediate execution of the award of
moral and exemplary damages pursuant to Rule I, Section 4 31 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies. 32
On September 8, 2005, the Marcelino, Jr. Group filed before the Court of Appeals a Petition
for Review33 with a prayer for the issuance of a temporary restraining order and/or writ of
preliminary injunction to deter the immediate execution of the trial court Decision awarding
damages to Rogelio, Sr. 34 The Court of Appeals issued a temporary restraining order and,
subsequently, a writ of preliminary injunction. 35
In its Decision36 dated March 29, 2006, the Court of Appeals denied the Marcelino, Jr. Group’s
Petition and affirmed the trial court Decision. 37 It also lifted the temporary restraining order
and writ of preliminary injunction. 38
The Court of Appeals ruled that the Marcelino, Jr. Group did not have a cause of action
against those whom they have impleaded as defendants. It also noted that the principal
obligors in or perpetrators of the assailed transactions were persons other than those in the
Rogelio, Sr. Group who have not been impleaded as parties. Thus, the Court of Appeals
emphasized that the following parties were indispensable to the case: People’s Broadcasting;
Marcelino, Sr.; Consolidated Broadcasting System, Inc.; Salome; Divinagracia; Teresita; and
"other stockholders of [People’s Broadcasting] to whom the shares were transferred or the
nominees of the stockholders." 39
The Court of Appeals further emphasized that the estates of Marcelino, Sr. and Salome had
long been settled, with those in the Marcelino, Jr. Group participating (in their capacity as
heirs). As the Marcelino, Jr. Group failed to act to protect their supposed interests in shares
originally accruing to Marcelino, Sr. and Salome, the group is estopped from questioning the
distribution of Marcelino, Sr.’s and Salome’s assets. 40 Furthering the conclusion that the
Marcelino, Jr. Group was bound by estoppel, the Court of Appeals noted that the Marcelino,
Jr. Group was well aware of the matters stated in the report furnished by Sycip Gorres Velayo
and Co. but failed to act on any supposed error in the report. Instead, the Marcelino, Jr.
Group waited ten (10) years before filing their Complaint. In the interim, they even
participated in the affairs of People’s Broadcasting, voting their shares and electing members
of the Board of Directors.41
On April 26, 2006, the Marcelino, Jr. Group filed a Motion for Reconsideration dated April 24,
2006.42
Pending resolution of the Marcelino, Jr. Group’s Motion for Reconsideration, Rogelio, Sr. filed
before the Regional Trial Court a Motion to resolve his earlier motion for the immediate
execution of the awards of moral and exemplary damages, which was filed on August 15,
2005.43 The Regional Trial Court granted the Motion in its Order dated May 18, 2006. 44 On
May 23, 2006, a Writ of Execution was issued to enforce the award of moral and exemplary
damages.45
The Marcelino, Jr. Group filed a Petition for Certiorari 46 before the Court of Appeals
questioning the Regional Trial Court Order to immediately execute its Decision. 47 On June 13,
2006, the Court of Appeals issued a temporary restraining order and, subsequently, a writ of
preliminary injunction.48 The Court of Appeals reversed the trial court Order of immediate
execution in the Decision promulgated on November 28, 2006. 49 It also annulled the writ of
execution issued pursuant to the Order of immediate execution. Rogelio, Sr. filed a Motion for
Reconsideration,50 but it was denied on February 23, 2007.51
On September 15, 2006, the Court of Appeals denied the Marcelino, Jr. Group’s Motion for
Reconsideration dated April 24, 2006.52
Hence, on November 17, 2006, the Marcelino, Jr. Group filed the Petition 53 docketed as G.R.
No. 174909.
87
Since the Court of Appeals Decision disallowed the immediate execution of the Regional Trial
Court Decision, Rogelio, Sr. filed on May 7, 2007 the Petition 54 docketed as G.R. No. 177275.
On March 16, 2009, this court ordered the consolidation of the Petitions docketed as G.R. No.
174909 and G.R. No. 177275.
For resolution are the following issues:
First, whether it was proper for the Regional Trial Court to dismiss the Complaint filed by the
Marcelino, Jr. Group;
Second, assuming that it was error for the Regional Trial Court to dismiss the Complaint and
that the case may be decided on the merits, whether the transfers of shares assailed by the
Marcelino, Jr. Group should be nullified; and
Lastly, whether the Regional Trial Court’s award of moral and exemplary damages in favor of
Rogelio, Sr. may be executed at this juncture of the proceedings.
The Marcelino, Jr. Group insists that they have sufficiently established causes of action
accruing to them and against the Rogelio, Sr. Group. 55 They add that they have impleaded all
indispensable parties.56 Thus, they claim that it was an error for the Regional Trial Court to
dismiss their Complaint. They assert that a resolution of the case on the merits must ensue.
The Marcelino, Jr. Group seeks to nullify the following transactions on the shares of stock of
People’s Broadcasting, as noted in the report of Sycip Gorres Velayo and Co.:
(a) Issuance of 1,240 shares to Consolidated Broadcasting System, Inc. on September 1, 1982,
(b) Transfer of 10 shares from Salome to Consolidated Broadcasting System, Inc. on
September 1, 1982,
(c) Issuance of 610 shares to Newsounds Broadcasting Network, Inc. on November 17, 1967,
(d) Transfer of 610 shares from Newsounds Broadcasting Network, Inc. to Rogelio, Sr. on
March 1, 1983,
(e) Transfer of 750 shares from Consolidated Broadcasting System, Inc. to Marcelino, Sr. on
March 1, 1983,
(f) Transfer of 500 shares from Consolidated Broadcasting System, Inc. to Rogelio, Sr.,
(g) Transfer of 680 shares from Marcelino, Sr. to the following: 370 shares to Rogelio, Sr., 270
shares to Divinagracia, 20 shares to Marcelino, Jr., and 20 shares to Teresita, and
(h) Increase in the authorized capital stock to ₱100,000,000.00 divided into 1,000,000 shares
with a par value of ₱100.00 per share on December 8, 1989, and the resulting subscriptions. 57
For the issuance of 1,250 shares to Consolidated Broadcasting System, Inc., the Marcelino, Jr.
Group argues that Board Resolution No. 4 dated August 5, 1982, the basis for the issuance of
the 1,250 shares in favor of Consolidated Broadcasting System, Inc., was a forgery: it was
simulated, unauthorized, and issued without a quorum as required under Section 25 of the
Corporation Code.58 They add that Salome, who allegedly transferred her 10 shares to
complete the 1,250 share transfer, was already dead at the time of the alleged transfer on
September 1, 1982.59 The Marcelino, Jr. Group claims that no member of the Board attended
the meeting referred to in Board Resolution No. 4. 60 They further allege that the signature of
Marcelino, Sr. in Board Resolution No. 4 is a forgery. 61 They argue that Marcelino, Sr. could not
have attended the meeting on August 5, 1982 because from July 12, 1982 to August 26,
1982,62 he was confined in Gov. B. Lopez Memorial Hospital for quadriparesis and motor
aphasia.63 They also supplied the trial court with specimen signatures of Marcelino, Sr. to
prove that the signature appearing on Board Resolution No. 4 was forged. 64
The Marcelino, Jr. Group alleges that from the time Marcelino, Sr. suffered a stroke on July 12,
1982 until his death on October 3, 1990, he was no longer capable of giving consent because
of his quadriparesis and motor aphasia. 65As they emphasized, "[q]uadriparesis means
weakness of the upper and lower extremities with spasticity and tremors. Motor aphasia
means that the patient could not communicate, unable to talk, nor responds [sic] to question
or simple commands." 66 Thus, they conclude that all of the issuances of shares in favor of
Marcelino, Sr. and all of the transfers of shares to and from Marcelino, Sr. from July 12, 1982
are void for lack of consent.
With respect to the issuance of 610 shares to Newsounds Broadcasting Network, Inc. and the
subsequent transfer of 610 shares to Rogelio, Sr., the Marcelino, Jr. Group argues that there is
no deed of conveyance to support the transfer and that the stock certificates representing
the 610 shares are missing. They conclude that because of the absence of the stock
certificates, there is no valid delivery and endorsement as required by Section 63 of the
Corporation Code.67 Hence, the transfer is invalid.
Regarding the increase in the authorized capital stock of People’s Broadcasting, the
Marcelino, Jr. Group argues that the increase was procured by fraud because it was made "by
the new Board of Directors who were elected by stockholders who were transferees of the
illegal, fraudulent and anomalous transfers, and therefore have no power and authority to
procure such increase."68 They also pray that the subscriptions to the increase be nullified. 69
After a declaration that the issuances and transfers are void, the Marcelino, Jr. Group prays
that the capital structure of People’s Broadcasting System be corrected to reflect the
following:70
Beneficial Stockholder No. of Shares %
88

Marcelino Florete, Sr. 660 81.48
Salome Florete 100 12.35
Santiago Divinagracia 50 6.17
Total 810 100.00
The Marcelino, Jr. Group further claims that the award of moral and exemplary damages is
erroneous. 71 They add that the amounts of ₱25,000,000.00 as moral damages and
₱5,000,000.00 as exemplary damages are excessive.72
The Rogelio, Sr. Group seeks the denial of the Petition filed by the Marcelino, Jr. Group,
claiming that it raises factual questions that may not be taken cognizance of in a petition for
review on certiorari under Rule 45.73
They further argue that the Marcelino, Jr. Group has no cause of action against them. 74 They
insist that indispensable parties have not been impleaded 75 and that the Marcelino Jr. Group’s
claims should have been raised during the settlement of the estates of deceased Spouses
Marcelino, Sr. and Salome Florete. 76 They also argue that the Marcelino, Jr. Group is already
estopped from questioning Sycip Gorres Velayo and Co.’s report because they allowed 10
years to lapse before questioning the truthfulness of the report. They add that the Marcelino,
Jr. Group’s members have been voting their shares since 1963 without making any
reservation.77
In G.R. No. 177275, Rogelio, Sr. argues that the Court of Appeals erred in disallowing the
immediate execution of the Regional Trial Court Decision. He argues that the Petition filed by
the Marcelino, Jr. Group before the Court of Appeals should not have been accepted because
Rule 65 petitions require that there no longer be any appeal nor any plain, speedy, and
adequate remedy in the ordinary course of law. 78 He alleges that when the Petition was filed
by the Marcelino, Jr. Group, there was still a pending appeal before the Court of Appeals to
resolve the main case.79Rogelio, Sr. adds that the filing of a new petition despite the pendency
of the main case is a violation of the rule against forum shopping. 80
I permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in
The sufficiency of the Marcelino, Jr. Group’s plea for relief, through their Complaint for
Declaration of Nullity of Issuances, Transfers and Sale of Shares in People’s Broadcasting
Service, Inc. and All Posterior Subscriptions and Increases thereto with Damages,81 hinges on
a characterization of the suit or action they initiated. This characterization requires a
determination of the cause of action through which the Marcelino, Jr. Group came to court
for relief. It will, thus, clarify the parties who must be included in their action and the
procedural and substantive requirements they must satisfy if their action is to prosper.
A stockholder suing on account of wrongful or fraudulent corporate actions (undertaken
through directors, associates, officers, or other persons) may sue in any of three (3)
capacities: as an individual; as part of a group or specific class of stockholders; or as a
representative of the corporation.
Villamor v. Umale82 distinguished individual suits from class or representative suits:
Individual suits are filed when the cause of action belongs to the individual stockholder
personally, and not to the stockholders as a group or to the corporation, e.g., denial of right
to inspection and denial of dividends to a stockholder. If the cause of action belongs to a
group of stockholders, such as when the rights violated belong to preferred stockholders, a
class or representative suit may be filed to protect the stockholders in the group. 83
Villamor further explained that a derivative suit "is an action filed by stockholders to enforce
a corporate action."84 A derivative suit, therefore, concerns "a wrong to the corporation
itself."85 The real party in interest is the corporation, not the stockholders filing the suit. The
stockholders are technically nominal parties but are nonetheless the active persons who
pursue the action for and on behalf of the corporation.
Remedies through derivative suits are not expressly provided for in our statutes—more
specifically, in the Corporation Code and the Securities Regulation Code—but they are
"impliedly recognized when the said laws make corporate directors or officers liable for
damages suffered by the corporation and its stockholders for violation of their fiduciary
duties."86 They are intended to afford reliefs to stockholders in instances where those
responsible for running the affairs of a corporation would not otherwise act:
However, in cases of mismanagement where the wrongful acts are committed by the
directors or trustees themselves, a stockholder or member may find that he has no redress
because the former are vested by law with the right to decide whether or not the corporation
should sue, and they will never be willing to sue themselves. The corporation would thus be
helpless to seek remedy. Because of the frequent occurrence of such a situation, the common
law gradually recognized the right of a stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has been proven to be an effective remedy
of the minority against the abuses of management. Thus, an individual stockholder is
order to protect or vindicate corporate rights, whenever 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 the nominal party, with the corporation as the party in
interest.87
The distinction between individual and class/representative suits on one hand and derivative
suits on the other is crucial. These are not discretionary alternatives. The fact that
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stockholders suffer from a wrong done to or involving a corporation does not vest in them a
sweeping license to sue in their own capacity. The recognition of derivative suits as a vehicle
for redress distinct from individual and representative suits is an acknowledgment that
certain wrongs may be addressed only through acts brought for the corporation:
Although in most every case of wrong to the corporation, each stockholder is necessarily
affected because the value of his interest therein would be impaired, this fact of itself is not
sufficient to give him an individual cause of action since the corporation is a person distinct
and separate from him, and can and should itself sue the wrongdoer. 88
In Asset Privatization Trust v. Court of Appeals,89 the reasons for disallowing a direct individual
suit were further explained:
The reasons given for not allowing direct individual suit are:
(1) . . . "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;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held
in the case of Evangelista v. 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 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. . .";
(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) 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.90
The avenues for relief are, thus, mutually exclusive. The determination of the appropriate
remedy hinges on the object of the wrong done. When the object is a specific stockholder or a
definite class of stockholders, an individual suit or class/representative suit must be resorted
to. When the object of the wrong done is the corporation itself or "the whole body of its
stock and property without any severance or distribution among individual holders," 91 it is a
derivative suit that a stockholder must resort to. In Cua, Jr. v. Tan:92
Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one
hand, and individual and class suits, on the other, are mutually exclusive, viz.:
As the Supreme Court has explained: "A shareholder's derivative suit seeks to recover for the
benefit of the corporation and its whole body of shareholders when injury is caused to the
corporation that may not otherwise be redressed because of failure of the corporation to
act. Thus, ‘the action is derivative, i.e., in the corporate right, if the gravamen of the
complaint is injury to the corporation, or to the whole body of its stock and property without
any severance or distribution among individual holders, or it seeks to recover assets for the
corporation or to prevent the dissipation of its assets.’" In contrast, "a direct action [is one]
filed by the shareholder individually (or on behalf of a class of shareholders to which he or
she belongs) for injury to his or her interest as a shareholder. . . . [T]he two actions are
mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders
(direct action) or the corporation (derivative action)."
Thus, in Nelson v. Anderson, the minority shareholder alleged that the other shareholder of
the corporation negligently managed the business, resulting in its total failure. The appellate
court concluded that the plaintiff could not maintain the suit as a direct action: " Because the
gravamen of the complaint is injury to the whole body of its stockholders, it was for the
corporation to institute and maintain a remedial action. A derivative action would have been
appropriate if its responsible officials had refused or failed to act." The court went on to note
that the damages shown at trial were the loss of corporate profits. Since "[s]hareholders own
neither the property nor the earnings of the corporation," any damages that the plaintiff
alleged that resulted from such loss of corporate profits "were incidental to the injury to the
corporation."93 (Emphasis supplied, citations omitted)
Villamor recalls the requisites for filing derivative suits:
Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim
Rules) provides the five (5) requisites for filing derivative suits:
SECTION 1. Derivative action.—A stockholder or member may bring an action in the name of
a corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not included in the enumeration, is implied
in the first paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the
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stockholder or member must be "in the name of [the] corporation or association. . . ." This
requirement has already been settled in jurisprudence.
Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., this court said that
"[a]mong the basic requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must allege in his complaint
before the proper forum that he is suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who wish to join [him]." . . .
Moreover, it is important that the corporation be made a party to the case. 94 (Citations
omitted)
II
The greater number of cases that sustained stockholders’ recourse to derivative suits involved
corporate acts amounting to mismanagement by either the corporation’s directors or officers
in relations to third persons. Several cases serve as examples.
Hi-Yield Realty v. Court of Appeals95 affirmed the Regional Trial Court’s and Court of Appeals’
characterization of a Petition for Annulment of Real Estate Mortgage and Foreclosure Sale 96 as
a derivative suit. The Petition was initiated by private respondent Roberto H. Torres, a
stockholder, on behalf of the corporation Honorio Torres & Sons, Inc. Petitioner Hi-Yield
Realty, Inc. was among the defendants to the Petition, along with the related parties,
Leonora, Ma. Theresa, Glenn, and Stephanie, all surnamed Torres, as well as the Registers of
Deeds of Marikina and of Quezon City. Against Hi-Yield Realty, Inc.’s claims, this court
sustained the respondent’s position that the Petition was "primarily a derivative suit to
redress the alleged unauthorized acts of its corporate officers and major stockholders in
connection with the lands."97
Cua, Jr. considered two corporate acts to be valid objects of a derivative suit. The first was a
resolution of the Board of Directors of the corporation Philippine Racing Club, Inc. to acquire
up to 100% of the common shares of another corporation, JTH Davies Holdings, Inc., as well
as to appoint Santiago Cua, Jr. "to act as attorney-in-fact and proxy who could vote all the
shares of [Philippine Racing Club, Inc.] in [JTH Davies Holdings, Inc.], as well as nominate,
appoint, and vote into office directors and/or officers during regular and special stockholders
meetings of [JTH Davies Holdings, Inc.]." 98 The second was another resolution of Philippine
Racing Club, Inc.’s Board of Directors "approving the property-for-shares exchange between
P[hilippine] R[acing] C[lub], I[nc]. and [JTH Davies Holdings, Inc.]." 99
In Cua, Jr., the derivative suit grounded on the first was dismissed by this court for being
moot and academic.100 The suit grounded on the second was similarly dismissed for failure to
comply with one of the requisites for instituting a derivative suit. The plaintiffs "made no
mention at all of appraisal rights, which could or could not have been available to them[,]"
thereby violating Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate
Controversies.101
As with Hi-Yield Realty and Cua, Go v. Distinction Properties Development and Construction,
Inc.102 concerned a corporate action taken in relation to a third person.
Petitioners Philip L. Go, Pacifico Q. Lim and Andrew Q. Lim filed before the Housing and Land
Use Regulatory Board a Complaint, which they claimed was one for specific performance
intended to compel the developer of Phoenix Heights Condominium, Distinction Properties
Development and Construction, Inc. (Distinction Properties), to fulfill its contractual
obligations. The Complaint was filed in the wake of an agreement entered into by Distinction
Properties with the condominium corporation Phoenix Heights Condominium Corporation
(PHCC). PHCC "approved a settlement offer from [Distinction Properties] for the set-off of the
latter’s association dues arrears with the assignment [from Distinction Properties] of title over
[two saleable commercial units/spaces originally held by Distinction Properties] and their
conversion into common areas."103
This court clarified that the true purpose of the petitioners’ action was not to compel
Distinction Properties to fulfill its contractual obligations. Instead, "petitioners [we]re actually
seeking to nullify and invalidate the duly constituted acts of PHCC - the April 29, 2005
Agreement entered into by PHCC with DPDCI and its Board Resolution which authorized the
acceptance of the proposed offsetting/settlement of DPDCI’s indebtedness and approval of
the conversion of certain units from saleable to common areas." This court thereby
concluded that "the cause of action rightfully pertains to PHCC [and that] [p]etitioners cannot
exercise the same except through a derivative suit."104
The prevalence of derivative suits arising from corporate actions taken in relation to third
persons is to be expected. After all, it is easier to perceive the wrong done to a corporation
when third persons unduly gain an advantage. However, this does not mean that derivative
suits cannot arise with respect to conflicts among a corporation’s directors, officers, and
stockholders.
Ching and Wellington v. Subic Bay Golf and Country Club 105 sustained the Regional Trial
Court’s and Court of Appeals’ characterization of the Complaint filed by stockholders against
officers of the corporation as a derivative suit. Nestor Ching and Andrew Wellington filed a
Complaint in their own names and in their right as individual stockholders assailing an
amendment introduced into Subic Bay Golf and Country Club’s articles of incorporation,
which supposedly "takes away the right of the shareholders to participate in the pro-rata
distribution of the assets of the corporation after its dissolution." 106 They anchored their
action on Section 5(a) of Presidential Decree No. 902-A. 107 They claimed that this statutory
provision "allows any stockholder to file a complaint against the Board of Directors for
employing devices or schemes amounting to fraud and misrepresentation which is
detrimental to the interest of the public and/or the stockholders." 108
This court did not sustain Nestor Ching’s and Andrew Wellington’s claim of a right to sue in
their own capacity. Concluding that the petitioners’ action was a derivative suit, this court
explained:
91
The reliefs sought in the Complaint, namely that of enjoining defendants from acting as
officers and Board of Directors of the corporation, the appointment of a receiver, and the
prayer for damages in the amount of the decrease in the value of the shares of stock, clearly
show that the Complaint was filed to curb the alleged mismanagement of [Subic Bay Gold
and Country Club]. The causes of action pleaded by petitioners do not accrue to a single
shareholder or a class of shareholders but to the corporation itself.109 (Emphasis supplied)
We are mindful that in 1979, in Gamboa v. Victoriano,110 this court characterized an action to
nullify the sale of 823 unissued shares on the ground of violating the plaintiffs’ pre-emptive
rights and in violation of the voting requirement for the Board of Directors as not a derivative
suit. This court characterized the action as one in which "the plaintiffs are alleging and
vindicating their own individual interests or prejudice, and not that of the corporation." 111
This pronouncement cannot be considered as a binding precedent for holding actions of the
sort filed by the plaintiffs therein to not be derivative suit. This point in Gamboa was mere
obiter dictum. The main issue in Gamboa was the validity of the trial court’s denial of the
Motion to Dismiss filed by four of the seven defendants after the plaintiffs entered into a
compromise agreement with the three other defendants. The resolution of this issue was
contingent on the determination of whether the compromise amounted to the plaintiff’s
waiver and estoppel for having conceded the validity of the sale. Besides, this court itself
acknowledged that the statement it made characterizing the action brought by the plaintiffs
was premature. Immediately after saying that "the plaintiffs are alleging and vindicating their
own individual interests or prejudice, and not that of the corporation[,]" 112 this court stated:
"At any rate, it is yet too early in the proceedings since the issues have not been joined." 113
III
In this case, the Marcelino, Jr. Group anchored their Complaint on violations of and liabilities
arising from the Corporation Code, specifically: Section 23 114 (on corporate decision-making
being vested in the board of directors), Section 25 115 (quorum requirement for the transaction
of corporate business), Sections 39116 and 102117 (both on stockholders’ pre-emptive rights),
Section 62118 (stipulating the consideration for which stocks must be issued), Section
63119 (stipulating that no transfer of shares "shall be valid, except as between the parties, until
the transfer is recorded in the books of the corporation"), and Section 65 120 (on liabilities of
directors and officers "to the corporation and its creditors" for the issuance of watered stocks)
in relation to provisions in People’s Broadcasting’s Articles of Incorporation and By-Laws as
regards conditions for issuances of and subscription to shares. The Marcelino, Jr. Group
ultimately prays that People’s Broadcasting’s entire capital structure be reconfigured to
reflect a status quo ante.121
As with Ching and Wellington, the actions being assailed by the Marcelino, Jr. Group pertain
to parties that are not extraneous to People’s Broadcasting. They assail and seek to nullify
acts taken by various iterations of People’s Broadcasting’s Board of Directors. All these acts
and incidents concern the capital structure of People’s Broadcasting. These acts reconfigured,
through redistribution and enlargement, the structure of People’s Broadcasting’s equity
ownership. These acts also admitted into People’s Broadcasting new equity holders such as
Consolidated Broadcasting System, Inc. and Newsounds Broadcasting Network, Inc.
As Ching and Wellington exemplifies, the action should be a proper derivative suit even if the
assailed acts do not pertain to a corporation’s transactions with third persons. Cua,
Jr. established that the pivotal consideration is whether the wrong done as well as the cause
of action arising from it accrues to the corporation itself or to the whole body of its
stockholders. Ching and Wellington states that if "[t]he causes of action pleaded . . . do not
accrue to a single shareholder or a class of shareholders but to the corporation itself," 122 the
action should be deemed a derivative suit. Also, in Go, an action "seeking to nullify and
invalidate the duly constituted acts [of a corporation]" entails a cause of action that "rightfully
pertains to [the corporation itself and which stockholders] cannot exercise . . . except through
a derivative suit."123
These are the same conditions in this case. What the Marcelino, Jr. Group asks is the
complete reversal of a number of corporate acts undertaken by People’ Broadcasting’s
different boards of directors. These boards supposedly engaged in outright fraud or, at the
very least, acted in such a manner that amounts to wanton mismanagement of People’s
Broadcasting’s affairs. The ultimate effect of the remedy they seek is the reconfiguration of
People’s Broadcasting’s capital structure.
The remedies that the Marcelino, Jr. Group seeks are for People’s Broadcasting itself to avail.
Ordinarily, these reliefs may be unavailing because objecting stockholders such as those in
the Marcelino, Jr. Group do not hold the controlling interest in People’s Broadcasting. This is
precisely the situation that the rule permitting derivative suits contemplates: minority
shareholders having no other recourse "whenever the directors or officers of the corporation
refuse to sue to vindicate the rights of the corporation or are the ones to be sued and are in
control of the corporation."124
The Marcelino, Jr. Group points to violations of specific provisions of the Corporation Code
that supposedly attest to how their rights as stockholders have been besmirched. However,
this is not enough to sustain a claim that the Marcelino, Jr. Group initiated a valid individual
or class suit. To reiterate, whether stockholders suffer from a wrong done to or involving a
corporation does not readily vest in them a sweeping license to sue in their own capacity.
The specific provisions adverted to by the Marcelino, Jr. Group signify alleged wrongdoing
committed against the corporation itself and not uniquely to those stockholders who now
comprise the Marcelino, Jr. Group. A violation of Sections 23 and 25 of the Corporation Code
—on how decision-making is vested in the board of directors and on the board’s quorum
requirement—implies that a decision was wrongly made for the entire corporation, not just
with respect to a handful of stockholders. Section 65 specifically mentions that a director’s or
officer’s liability for the issuance of watered stocks in violation of Section 62 is solidary "to
the corporation and its creditors," not to any specific stockholder. Transfers of shares made in
92
violation of the registration requirement in Section 63 are invalid and, thus, enable the
corporation to impugn the transfer. Notably, those in the Marcelino, Jr. Group have not shown
any specific interest in, or unique entitlement or right to, the shares supposedly transferred in
violation of Section 63.
Also, the damage inflicted upon People’s Broadcasting’s individual stockholders, if any, was
indiscriminate. It was not unique to those in the Marcelino, Jr. Group. It pertained to "the
whole body of [People’s Broadcasting’s] stock." 125 Accordingly, it was upon People’s
Broadcasting itself that the causes of action now claimed by the Marcelino Jr. Group accrued.
While stockholders in the Marcelino, Jr. Group were permitted to seek relief, they should have
done so not in their unique capacity as individuals or as a group of stockholders but in place
of the corporation itself through a derivative suit. As they, instead, sought relief in their
individual capacity, they did so bereft of a cause of action. Likewise, they did so without even
the slightest averment that the requisites for the filing of a derivative suit, as spelled out in
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies, have
been satisfied. Since the Complaint lacked a cause of action and failed to comply with the
requirements of the Marcelino, Jr. Group’s vehicle for relief, it was only proper for the
Complaint to have been dismissed.
IV
Erroneously pursuing a derivative suit as a class suit not only meant that the Marcelino, Jr.
Group lacked a cause of action; it also meant that they failed to implead an indispensable
party.
In derivative suits, the corporation concerned must be impleaded as a party. As explained
in Asset Privatization Trust:
Not only is the corporation an indispensible party, but it is also the present rule that it must
be served with process. The reason given is that the judgment 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 party because it is its cause of action that is being
litigated and because judgment must be a res ajudicata [sic] against it. 126
We have already discussed Go where this court concluded that an action brought by three
individual stockholders was, in truth, a derivative suit. There, this court further explained that
a case cannot prosper when the proper party is not impleaded:
As it is clear that the acts being assailed are those of PHHC, this case cannot prosper for
failure to implead the proper party, PHCC.
An indispensable party is defined as one who has such an interest in the controversy or
subject matter that a final adjudication cannot be made, in his absence, without injuring or
affecting that interest. In the recent case of Nagkakaisang Lakas ng Manggagawa sa Keihin
(NLMK-OLALIA-KMU) v. Keihin Philippines Corporation, the Court had the occasion to state
that:
Under Section 7, Rule 3 of the Rules of Court, "parties in interest without whom no final
determination can be had of an action shall be joined as plaintiffs or defendants." If there is a
failure to implead an indispensable party, any judgment rendered would have no
effectiveness. It is "precisely ‘when an indispensable party is not before the court (that) an
action should be dismissed.’ The absence of an indispensable party renders all subsequent
actions of the court null and void for want of authority to act, not only as to the absent
parties but even to those present." The purpose of the rules on joinder of indispensable
parties is a complete determination of all issues not only between the parties themselves, but
also as regards other persons who may be affected by the judgment. A decision valid on its
face cannot attain real finality where there is want of indispensable parties.
Similarly, in the case of Plasabas v. Court of Appeals, the Court held that a final decree would
necessarily affect the rights of indispensable parties so that the Court could not proceed
without their presence. In support thereof, the Court in Plasabas cited the following
authorities, thus:
The general rule with reference to the making of parties in a civil action requires the joinder
of all indispensable parties under any and all conditions, their presence being a sine qua non
of the exercise of judicial power. For this reason, our Supreme Court has held that when it
appears of record that there are other persons interested in the subject matter of the
litigation, who are not made parties to the action, it is the duty of the court to suspend the
trial until such parties are made either plaintiffs or defendants. x x x Where the petition failed
to join as party defendant the person interested in sustaining the proceeding in the court, the
same should be dismissed. x x x When an indispensable party is not before the court, the
action should be dismissed.
Parties in interest without whom no final determination can be had of an action shall be
joined either as plaintiffs or defendants. The burden of procuring the presence of all
indispensable parties is on the plaintiff. The evident purpose of the rule is to prevent the
multiplicity of suits by requiring the person arresting a right against the defendant to include
with him, either as co-plaintiffs or as co-defendants, all persons standing in the same
position, so that the whole matter in dispute may be determined once and for all in one
litigation.
From all indications, PHCC is an indispensable party and should have been impleaded, either
as a plaintiff or as a defendant, in the complaint filed before the HLURB as it would be directly
and adversely affected by any determination therein. To belabor the point, the causes of
action, or the acts complained of, were the acts of PHCC as a corporate body[.] 127 (Citations
omitted)
V
93
There are two consequences of a finding on appeal that indispensable parties have not been
joined. First, all subsequent actions of the lower courts are null and void for lack of
jurisdiction.128 Second, the case should be remanded to the trial court for the inclusion of
indispensable parties. It is only upon the plaintiff’s refusal to comply with an order to join
indispensable parties that the case may be dismissed.129
All subsequent actions of lower courts are void as to both the absent and present
parties.130 To reiterate, the inclusion of an indispensable party is a jurisdictional requirement:
While the failure to implead an indispensable party is not per se a ground for the dismissal of
an action, considering that said party may still be added by order of the court, on motion of
the party or on its own initiative at any stage of the action and/or such times as are just, it
remains essential — as it is jurisdictional — that any indispensable party be impleaded in the
proceedings before the court renders judgment. This is because the absence of such
indispensable party renders all subsequent actions of the court null and void for want of
authority to act, not only as to the absent parties but even as to those present. 131 (Emphasis
supplied, citation omitted)
In Metropolitan Bank and Trust Co. v. Alejo 132 and Arcelona v. Court of Appeals,133 this court
clarified that the courts must first acquire jurisdiction over the person of an indispensable
party. Any decision rendered by a court without first obtaining the required jurisdiction over
indispensable parties is null and void for want of jurisdiction: "the presence of indispensable
parties is necessary to vest the court with jurisdiction, which is ‘the authority to hear and
determine a cause, the right to act in a case.’" 134
In Divinagracia v. Parilla,135 Macawadib v. Philippine National Police Directorate for Personnel
and Records Management,136 People v. Go,137 and Valdez-Tallorin v. Heirs of Tarona,138 among
others, this court annulled judgments rendered by lower courts in the absence of
indispensible parties.
The second consequence is unavailing in this case. While "[n]either misjoinder nor non-
joinder of parties is ground for dismissal of an action" 139 and is, thus, not fatal to the
Marcelino, Jr. Group’s action, we have shown that they lack a cause of action. This warrants
the dismissal of their Complaint.
The first consequence, however, is crucial. It determines the validity of the Regional Trial
Court’s award of damages to Rogelio, Sr.
Since the Regional Trial Court did not have jurisdiction, the decision awarding damages in
favor of Rogelio, Sr. is void.1âwphi1
Apart from this, there is no basis in jurisprudence for awarding moral and exemplary
damages in cases where individual suits that were erroneously filed were dismissed. In the
analogous cases that we previously discussed—Hi-Yield Realty, Cua, Jr., Go, and Ching and
Wellington—the dismissal alone of the erroneously filed complaints sufficed. This court never
saw the need to award moral and exemplary damages. This is in keeping with the Civil Code
provisions that stipulate when the award of such damages is proper. We find no reason to
conclude that the Marcelino, Jr. Group acted in so malevolent, oppressive, or reckless a
manner that moral and exemplary damages must be awarded in such huge amounts as the
Regional Trial Court did.
From the conclusion that the Decision awarding damages is void and unwarranted, it
necessarily follows that the Order of the Regional Trial Court to immediately execute its
Decision is likewise null and void. In Arcelona, the Decision sought to be annulled was already
being executed. However, this court found that the assailed Decision was promulgated
without indispensable parties being impleaded. Hence, the Decision was ruled to have been
made without jurisdiction. This court nullified the judgment and declared:
A void judgment for want of jurisdiction is no judgment at all. It cannot be the source of any
right nor the creator of any obligation. All acts performed pursuant to it and all claims
emanating from it have no legal effect. Hence, it can never become final and any writ of
execution based on it is void: x x x it may be said to be a lawless thing which can be treated
as an outlaw and slain at sight, or ignored wherever and whenever it exhibits its
head.140(Emphasis supplied)
Accordingly, the subsequent Order of the Decision’s immediate execution is also void for lack
of jurisdiction. Contrary to Rogelio Sr.’s claim in its Petition, execution cannot ensue. For this
reason, the Petition docketed as G.R. No. 177275 must be denied.
WHEREFORE, the Petition docketed as G.R. No. 174909 is PARTLY GRANTED and the Petition
docketed as G.R. No. 177275 is DENIED.
The Complaint filed by Marcelino M. Florete, Jr., Maria Elena F. Muyco, and Raul A. Muyco for
Declaration of Nullity of Issuances, Transfers and Sale of Shares in People's Broadcasting
Service, Inc. and All Posterior Subscriptions and Increases thereto with Damages is dismissed
as the complainants have no cause of action. The award of P25,000,000.00 as moral damages
and PS,000,000.00 as exemplary damages in favor of Rogelio Florete, Sr. is deleted. The
Regional Trial Court Order dated May 18, 2006 ordering the immediate execution of its
Decision dated August 2, 2005 is set aside.
SO ORDERED.
94
 G.R. No. 177382
VIVA SHIPPING LINES, (1) Metropolitan Bank & Trust Company
INC., Petitioner,
vs.
(2) Keppel Philippines Marine, Inc.
KEPPEL PHILIPPINES MINING, INC., METROPOLITAN BANK & TRUST COMPANY, PILIPINAS
SHELL PETROLEUM CORPORATION, CITY OF BATANGAS, CITY OF LUCENA, PROVINCE OF
QUEZON, ALEJANDRO OLIT, NIDA MONTILLA, PIO HERNANDEZ, EUGENIO BACULO, and (3) Province of Quezon, Lucena City, and Province of Batangas,
HARLAN BACALTOS,Respondents. Batangas City
DECISION
LEONEN, J.:
Rule 43 of the Rules of Court prescribes the procedure to assail the final orders and decisions
in corporate rehabilitation cases filed under the Interim Rules of Procedure on Corporate
Rehabilitation. 1 Liberality in the application of the rules is not an end in itself. It must be
pleaded with factual basis and must be allowed for equitable ends. There must be no
indication that the violation of the rule is due to negligence or design. Liberality is an extreme
exception, justifiable only when equity exists.
On October 4, 2005, Viva Shipping Lines, Inc. (Viva Shipping Lines) filed a Petition for
Corporate Rehabilitation before the Regional Trial Court of Lucena City. 2 The Regional Trial
Court initially denied the Petition for failure to comply with the requirements in Rule 4,
Sections 2 and 3 of the Interim Rules of Procedure on Corporate Rehabilitation. 3 On October
17, 2005, Viva Shipping Lines filed an Amended Petition. 4
In the Amended Petition, Viva Shipping Lines claimed to own and operate 19 maritime
vessels5 and Ocean Palace Mall, a shopping mall in downtown Lucena City. 6 Viva Shipping
Lines also declared its total properties’ assessed value at about ₱45,172,790.00. 7 However,
these allegations were contrary to the attached documents in the Amended Petition.
One of the attachments, the Property Inventory List, showed that Viva Shipping Lines owned
only two (2) maritime vessels: M/V Viva Peñafrancia V and M/V Marian Queen. 8 The list also
stated that the fair market value of all of Viva Shipping Lines’ assets amounted to
₱447,860,000.00,9 ₱400 million more than what was alleged in its Amended Petition. Some of
the properties listed in the Property Inventory List were already marked as "encumbered" by
its creditors;10 hence, only ₱147,630,000.00 of real property and its vessels were marked as
"free assets."11
Viva Shipping Lines also declared the following debts:
Amount
me of Creditor Nature of Debts
Obligation
Loan secured by Real Estate
Mortgage ₱176,428,745.50
Charges for Repair of Vessels 9,000,000.00+
Realty Taxes and Assessments 35,000,000.00+
TOTAL12 ₱220,428,745.50+
According to Viva Shipping Lines, the devaluation of the Philippine peso, increased
competition, and mismanagement of its businesses made it difficult to pay its debts as they
became due.13 It also stated that "almost all [its] vessels were rendered unserviceable either
because of age and deterioration that [it] can no longer compete with modern made vessels
owned by other operators."14
In its Company Rehabilitation Plan, Viva Shipping Lines enumerated possible sources of
funding such as the sale of old vessels and commercial lots of its sister company, Sto.
Domingo Shipping Lines.15 It also proposed the conversion of the Ocean Palace Mall into a
hotel, the acquisition of two (2) new vessels for shipping operations, and the "re-
operation"16 of an oil mill in Buenavista, Quezon. 17
Viva Shipping Lines nominated two individuals to be appointed as rehabilitation receiver:
Armando F. Ragudo, a businessman from Tayabas, Quezon, and Atty. Calixto Ferdinand B.
Dauz III, a lawyer from Lucena City. 18 A day after filing the Amended Petition, Viva Shipping
Lines submitted the name of a third nominee, Former Judge Jose F. Mendoza (Judge
Mendoza).19
On October 19, 2005, the Regional Trial Court found that Viva Shipping Lines’ Amended
Petition to be "sufficient in form and substance," and issued a stay order. 20 It stayed the
enforcement of all monetary and judicial claims against Viva Shipping Lines, and prohibited
Viva Shipping Lines from selling, encumbering, transferring, or disposing of any of its
properties except in the ordinary course of business. 21 The Regional Trial Court also appointed
Judge Mendoza as rehabilitation receiver.
Before the initial hearing scheduled on December 5, 2005, the City of Batangas, Keppel
Philippines Marine, Inc., and Metropolitan Bank and Trust Company (Metrobank) filed their
respective comments and oppositions to Viva Shipping Lines’ Amended Petition. 22
During
of the initial hearing, Pilipinas Shell Petroleum Corporation (Pilipinas Shell) moved for
additional time to write its opposition to Viva Shipping Lines’ Amended Petition. 23 Pilipinas
Shell later filed its Comment/Opposition with Formal Notice of Claim. 24
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 Luzviminda C. Cueto, a former employee of Viva Shipping Lines, also filed a Manifestation and The Regional Trial Court also noted the following as Viva Shipping Lines’ free assets: 39
Registration of Monetary Claim stating that Viva Shipping Lines owes her ₱232,000.00 as
separation and 13th month pay.25 The Securities and Exchange Commission filed a Comment Nature of Property Assessed Value Market Value
informing the Regional Trial Court that Viva Shipping Lines violated certain laws and rules of
the Commission.26 1. Agricultural/Industrial Lot in San Narciso, Quezon covered by TCT No. T-155423 ₱ 16,493,050.00 ₱ 40,000,000.0
On March 24, 2006, Judge Mendoza withdrew his acceptance of appointment as
rehabilitation receiver.27 As replacement, Viva Shipping Lines nominated Atty. Antonio 2. Agricultural Lot located at San Andres, Quezon covered by TCT No. T-215549 1,235,010.00 47,630,000.00
Acyatan, while Metrobank nominated Atty. Rosario S. Bernaldo. 28 Keppel Philippines Marine,
Inc.1âwphi1 adopted Metrobank’s nomination.29 3. MV Viva Peñafrancia 5 30,000,000.00

On April 4, 2006, Metrobank filed a Motion for Production or Inspection of relevant 40

documents relating to Viva Shipping Lines’ business operations such as board resolutions,4.taxMV Marian Queen
30
returns, accounting ledgers, bank accounts, and contracts. Viva Shipping Lines filed its
opposition. However, the Regional Trial Court granted Metrobank’s Motion. 31 Viva Shipping
Lines failed to comply with the Order to produce the documents, 32 as well as with the
Regional Trial Court Order to submit a memorandum. 33
On September 27, 2006, Viva Shipping Lines’ former employees Alejandro Olit, Nida Montilla,
34
Pio Hernandez, Eugenio Baculo, and Harlan Bacaltos (Alejandro Olit, et al.) filed their
comment on the Amended Petition, informing the Regional Trial Court of their pending
complaint against Viva Shipping Lines before the National Labor Relations Commission. 35
In the Order dated October 30, 2006,36 the Regional Trial Court lifted the stay order and
dismissed Viva Shipping Lines’ Amended Petition for failure to show the company’s viability
and the feasibility of rehabilitation. The Regional Trial Court summarized Viva Shipping Lines’
creditors and debts:37
30,000,000.00
TOTAL ₱ 147,630,000
The Regional Trial Court found that Viva Shipping Lines’ assets all appeared to be non-
performing. Further, it noted that Viva Shipping Lines failed to show any evidence of consent
to sell real properties belonging to its sister company. 41
Aggrieved, Viva Shipping Lines filed a Petition for Review under Rule 43 of the Rules of Court
before the Court of Appeals.42 It only impleaded Hon. Adolfo V. Encomienda, the Presiding
Judge of the trial court that rendered the assailed decision. It did not implead any of its
creditors, but served copies of the Petition on counsels for Metrobank, Keppel Philippines
Marine, Inc., Pilipinas Shell, City of Batangas, Province of Quezon, and City of Lucena. 43 Viva
Shipping Lines neither impleaded nor served a copy of the Petition on its former employees
or their counsels.

me of Creditor
atangas City
eppel Philippines Marine, Inc.
Metropolitan Bank & Trust Company
lipinas Shell Petroleum Corp.
uzviminda C. Cueto
Nature of Debts38 Amount of Obligation The Court of Appeals dismissed Viva Shipping Lines’ Petition for Review in the Resolution
dated January 5, 2007.44It found that Viva Shipping Lines failed to comply with procedural
requirements under Rule 43. 45 The Court of Appeals ruled that due to the failure of Viva
Real Estate Taxes ₱264,006.52
Shipping Lines to implead its creditors as respondents, "there are no respondents who may
be required to file a comment on the petition, pursuant to Section 8 of Rule 43." 46
Charges for Repair of Vessels 20,054,977.84
Viva Shipping Lines moved for reconsideration. 47 It argued that its procedural misstep was
Loan secured by Real Estate Mortgage 191,963,465.79 cured when it served copies of the Petition on the Regional Trial Court and on its former
employees.48 In the Resolution dated March 30, 2007, the Court of Appeals denied Viva
Shipping Lines’ Motion for Reconsideration. 49
Supply Agreement 20,546,797.74
Viva Shipping Lines filed before this court a Petition for Review on Certiorari assailing the
Labor 232,000.00 January 5, 2007 and March 30, 2007 Court of Appeals Resolutions. 50 It prayed that the case
be remanded to the Court of Appeals for adjudication on the merits. 51
TOTAL ₱233,061,247.89 Without necessarily giving due course to the Petition, this court required respondents to
comment.52 Keppel Philippines Marine, Inc.,53 Pilipinas Shell,54 Metrobank,55 former
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employees Alejandro Olit et al., 56 the City of Batangas,57 the City Treasurer of Lucena, 58 and
the Provincial Treasurer of Quezon59 filed their respective Comments.
On September 17, 2008,60 December 10, 2008,61 and July 20, 2009,62 this court required Viva
Shipping Lines to file replies to respondents’ comments. Viva Shipping Lines’ counsel,
Abesamis Law Office, withdrew its representation, which was accepted by this court. 63 Viva
Shipping Lines was unable to file its consolidated reply; hence, this court resolved that Viva
Shipping Lines’ right to file a consolidated reply was deemed waived. 64
On September 1, 2011, Atty. Vicente M. Joyas (Atty. Joyas) entered his appearance as Viva
Shipping Lines’ new counsel. 65 Atty. Joyas moved for several extensions of time to comply
with this court’s order to file a consolidated reply. This court allowed Atty. Joyas’ Motions,
and Viva Shipping Lines’ consolidated reply was noted in our Resolution dated December 7,
2011.66 This court then ordered the parties to submit their respective memoranda. 67
Viva Shipping Lines, Inc.68 and respondents Pilipinas Shell,69 Keppel Philippines Marine,
Inc.,70 and Metrobank71submitted their respective memoranda. This court dispensed with the
filing of the other respondents’ memoranda. 72
We resolve the following issues:
First, whether the Court of Appeals erred in dismissing petitioner Viva Shipping Lines’ Petition
for Review on procedural grounds; and
Second, whether petitioner was denied substantial justice when the Court of Appeals did not
give due course to its petition.
Petitioner argues that the Court of Appeals should have given due course to its Petition and
excused its non-compliance with procedural rules.73 For petitioner, the Interim Rules of
Procedure on Corporate Rehabilitation mandates a liberal construction of procedural rules,
which must prevail over the strict application of Rule 43 of the Rules of Court. 74
According to petitioner, this court disfavors dismissals based on pure technicalities and
adopts a policy stating that rules on appeal are "not iron-clad and must yield to loftier
demands of substantial [j]ustice and equity."75 For petitioner, the immediate dismissal of its
Petition for Review is contrary to the purpose of corporate rehabilitation to rescue and
rehabilitate financially distressed companies. 76
Respondents, on the other hand, argue that the dismissal of petitioner’s Petition for Review
was proper for its failure to implead any of its creditors. Petitioner’s procedural misstep
resulted in the denial of the creditors’ right to due process as they could not file a comment
on the Petition.77 Respondent Pilipinas Shell points out that petitioner did not even try to
explain why it failed to implead its creditors in its Petition. 78
Respondents cite Rule 43, Section 7, which states that non-compliance with any of the
requirements of proof of service of the Petition, and the required contents, shall be sufficient
ground for the dismissal of the Petition. 79Compliance with Rule 43 is required under the
Interim Rules of Procedure on Corporate Rehabilitation because it is the prescribed mode of
appealing trial court decisions and final orders in corporate rehabilitation cases. 80 According
to respondent Metrobank, contrary to the views of petitioner, the policy of liberality in
construction of the Interim Rules of Procedure on Corporate Rehabilitation are limited to
proceedings in the Regional Trial Court, and not with respect to procedural rules in elevating
appeals relating to corporate rehabilitation. 81
Respondents note that because petitioner repeatedly defied procedural rules, it therefore
was no longer entitled to the relaxation of these rules. 82 Respondent Pilipinas Shell also points
out the defects in the verification, certification of non-forum shopping, and attachments of
petitioner in its Petition before this court.83
Respondent City of Batangas emphasizes that the Rules of Court are promulgated to facilitate
the adjudication of cases. It argues that petitioner should not be afforded equitable
considerations as it acted in bad faith by concealing material information during the
rehabilitation proceedings.84
Respondents further argue that even if the Court of Appeals gave due course to the Petition,
it would still have dismissed the case on the merits. Respondents cite petitioner’s failure to
provide material facts with sufficient particularity in its Amended Petition for Corporate
Rehabilitation. 85 Petitioner also failed to disclose some of its creditors, as well as the several
pending cases relating to its financial liabilities. 86 It failed to describe with specificity the
cause of its inability to pay its debts. 87 It also failed to clarify which vessels were still under its
ownership, and which vessels had maritime liens. 88 Petitioner merely estimated its liabilities
against its creditors.89 Respondents also allege that petitioner nominated rehabilitators who
are professionally connected with its counsel despite the existence of conflict of interest. 90
Respondents point out that petitioner’s admission that almost all its vessels are rendered
unserviceable suggests that rehabilitation is no longer viable. 91 Former employees also
mention that despite petitioner’s desire to rehabilitate, after the Regional Trial Court’s final
order, petitioner began disposing of some of its assets. 92Respondents also cannot rely on the
plan to sell some of petitioner’s sister company’s properties. They also express doubts
regarding petitioner’s plan of converting its mall to a hotel/restaurant because it had no such
experience. Respondents thus characterize Viva Shipping Lines’ rehabilitation plan as
"unrealistic, untested, and improbable."93
We deny the Petition.
I
Corporate rehabilitation is a remedy for corporations, partnerships, and associations "who
[foresee] the impossibility of meeting [their] debts when they respectively fall due." 94 A
corporation under rehabilitation continues with its corporate life and activities to achieve
solvency,95 or a position where the corporation is able to pay its obligations as they fall due in
97
the ordinary course of business. Solvency is a state where the businesses’ liabilities are less
than its assets.96
Corporate rehabilitation is a type of proceeding available to a business that is insolvent. In
general, insolvency proceedings provide for predictability that commercial obligations will be
met despite business downturns. Stability in the economy results when there is assurance to
the investing public that obligations will be reasonably paid. It is considered state policy
to encourage debtors, both juridical and natural persons, and their creditors to collectively
and realistically resolve and adjust competing claims and property rights[.] . . .
[R]ehabilitation or liquidation shall be made with a view to ensure or maintain certainty and
predictability in commercial affairs, preserve and maximize the value of the assets of these
debtors, recognize creditor rights and respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in
the interest of the State to facilitate a speedy and orderly liquidation of these debtors’ assets
and the settlement of their obligations. 97 (Emphasis supplied)
The rationale in corporate rehabilitation is to resuscitate businesses in financial distress
because "assets . . . are often more valuable when so maintained than they would be when
liquidated."98 Rehabilitation assumes that assets are still serviceable to meet the purposes of
the business. The corporation receives assistance from the court and a disinterested
rehabilitation receiver to balance the interest to recover and continue ordinary business, all
the while attending to the interest of its creditors to be paid equitably. These interests are
also referred to as the rehabilitative and the equitable purposes of corporate rehabilitation. 99
The nature of corporate rehabilitation was thoroughly discussed in Pryce Corporation v. China
Banking Corporation:100
Corporate rehabilitation is one of many statutorily provided remedies for businesses that
experience a downturn. Rather than leave the various creditors unprotected, legislation now
provides for an orderly procedure of equitably and fairly addressing their concerns. Corporate
rehabilitation allows a court-supervised process to rejuvenate a corporation. . . . It provides a
corporation’s owners a sound chance to re-engage the market, hopefully with more vigor and
enlightened services, having learned from a painful experience.
Necessarily, a business in the red and about to incur tremendous losses may not be able to
pay all its creditors. Rather than leave it to the strongest or most resourceful amongst all of
them, the state steps in to equitably distribute the corporation’s limited resources.
....
Rather than let struggling corporations slip and vanish, the better option is to allow
commercial courts to come in and apply the process for corporate rehabilitation. 101
Philippine Bank of Communications v. Basic Polyprinters and Packaging
Corporation102 reiterates that courts "must endeavor to balance the interests of all the parties
that had a stake in the success of rehabilitating the debtors." 103These parties include the
corporation seeking rehabilitation, its creditors, and the public in general. 104
The public’s interest lies in the court’s ability to effectively ensure that the obligations of the
debtor, who has experienced severe economic difficulties, are fairly and equitably served. The
alternative might be a chaotic rush by all creditors to file separate cases with the possibility of
different trial courts issuing various writs competing for the same assets. Rehabilitation is a
means to temper the effect of a business downturn experienced for whatever reason. In the
process, it gives entrepreneurs a second chance. Not only is it a humane and equitable relief,
it encourages efficiency and maximizes welfare in the economy.
Clearly then, there are instances when corporate rehabilitation can no longer be achieved.
When rehabilitation will not result in a better present value recovery for the creditors, 105 the
more appropriate remedy is liquidation. 106
It does not make sense to hold, suspend, or continue to devalue outstanding credits of a
business that has no chance of recovery. In such cases, the optimum economic welfare will be
achieved if the corporation is allowed to wind up its affairs in an orderly manner. Liquidation
allows the corporation to wind up its affairs and equitably distribute its assets among its
creditors. 107
Liquidation is diametrically opposed to rehabilitation. Both cannot be undertaken at the same
time.108 In rehabilitation, corporations have to maintain their assets to continue business
operations. In liquidation, on the other hand, corporations preserve their assets in order to
sell them. Without these assets, business operations are effectively discontinued. The
proceeds of the sale are distributed equitably among creditors, and surplus is divided or
losses are re-allocated.109
Proceedings in case of insolvency are not limited to rehabilitation. Our laws have evolved to
provide for different procedures where a debtor can undergo judicially supervised
reorganization or liquidation of its assets. 110
Corporate rehabilitation traces its roots to Act No. 1956, otherwise known as the Insolvency
Law of 1909. Under the Insolvency Law, a debtor in possession of sufficient properties to
cover all its debts but foresees the impossibility of meeting them when they fall due may file
a petition before the court to be declared in a state of suspension of payments. 111 This allows
time for the debtor to organize its affairs in order to achieve a state where it can comply with
its obligations.
The relief was also provided in the amendatory provisions of Presidential Decree No. 902-A.
Section 5 of Presidential Decree No. 902-A states that the Securities and Exchange
Commission has jurisdiction to decide:
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d) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association possesses
sufficient property to cover all its debts but foresees the impossibility of meeting them when
they respectively fall due or in cases where the corporation, partnership or association has no
sufficient assets to cover its liabilities, but is under the management of a Rehabilitation
Receiver or Management Committee created pursuant to this Decree. 112 (Emphasis supplied).
In 2000, the jurisdiction of the Securities and Exchange Commission over these cases was
transferred to the Regional Trial Court, 113 by operation of Section 5.2 of the Securities
Regulation Code.114 In the same year, this court approved the Interim Rules of Procedure on
Corporate Rehabilitation. The Interim Rules of Procedure on Corporate Rehabilitation
provides a summary and non-adversarial proceeding to expedite the resolution of cases for
the benefit of the corporation in need of rehabilitation, its creditors, and the public in
general.115
Currently, the prevailing law and procedure for corporate rehabilitation is the Financial
Rehabilitation and Insolvency Act of 2010 (FRIA). 116 FRIA provides procedures for the different
types of rehabilitation and liquidation proceedings. The Financial Rehabilitation Rules of
Procedure was issued by this court on August 27, 2013. 117
However, since the Regional Trial Court acted on petitioner’s Amended Petition before FRIA
was enacted, Presidential Decree No. 902-A and the Interim Rules of Procedure on Corporate
Rehabilitation were applied to this case.118
II
The controversy in this case arose from petitioner’s failure to comply with appellate
procedural rules in corporate rehabilitation cases. Petitioner now pleads this court to apply
the policy of liberality in constructing the rules of procedure. 119
We observe that during the corporate rehabilitation proceedings, the Regional Trial Court
already exercised the liberality contemplated by the Interim Rules of Procedure on Corporate
Rehabilitation. The Regional Trial Court initially dismissed Viva Shipping Lines’ Petition but
allowed the filing of an amended petition. Later on, the same court issued a stay order when
there were sufficient grounds to believe that the Amended Petition complied with Rule 4,
Section 2 of the Interim Rules of Procedure on Corporate Rehabilitation. Petitioner was not
penalized for its non-compliance with the court’s order to produce relevant documents or for
its non-submission of a memorandum. 120
Even with these accommodations, the trial court still found basis to dismiss the plea for
rehabilitation.
Any final order or decision of the Regional Trial Court may be subject of an appeal. 121 In Re:
Mode of Appeal in Cases Formerly Cognizable by the Securities and Exchange
Commission,122 this court clarified that all decisions and final orders falling under the Interim
Rules of Procedure on Corporate Rehabilitation shall be appealable to the Court of Appeals
through a petition for review under Rule 43 of the Rules of Court. 123
New Frontier Sugar Corporation v. Regional Trial Court, Branch 39, Iloilo City 124 clarifies that
an appeal from a final order or decision in corporate rehabilitation proceedings may be
dismissed for being filed under the wrong mode of appeal. 125
New Frontier Sugar doctrinally requires compliance with the procedural rules for appealing
corporate rehabilitation decisions. It is true that Rule 1, Section 6 of the Rules of Court
provides that the "[r]ules shall be liberally construed in order to promote their objective of
securing a just, speedy and inexpensive disposition of every action and proceeding."
However, this provision does not negate the entire Rules of Court by providing a license to
disregard all the other provisions. Resort to liberal construction must be rational and well-
grounded, and its factual bases must be so clear such that they outweigh the intent or
purpose of an apparent reading of the rules.
Rule 43 prescribes the mode of appeal for corporate rehabilitation cases:
Sec. 5. How appeal taken. – Appeal shall be taken by filing a verified petition for review in
seven (7) legible copies with the Court of Appeals, with proof of service of a copy thereof on
the adverse party and on the court or agency a quo. The original copy of the petition
intended for the Court of Appeals shall be indicated as such by the petitioner.
....
Sec. 6. Contents of the petition. – The petition for review shall (a) state the full names of the
parties to the case, without impleading the court or agencies either as petitioners or
respondents; (b) contain a concise statement of the facts and issues involved and the grounds
relied upon for the review; (c) be accompanied by a clearly legible duplicate original or a
certified true copy of the award, judgment, final order or resolution appealed from, together
with certified true copies of such material portions of the record referred to therein and
other supporting papers; and (d) contain a sworn certification against forum shopping as
provided in the last paragraph of section 2, Rule 42. The petition shall state the specific
material dates showing that it was filed within the period fixed herein. (Emphasis supplied)
Petitioner did not comply with some of these requirements. First, it did not implead its
creditors as respondents. Instead, petitioner only impleaded the Presiding Judge of the
Regional Trial Court, contrary to Section 6(a) of Rule 43. Second, it did not serve a copy of the
Petition on some of its creditors, specifically, its former employees. Finally, it did not serve a
copy of the Petition on the Regional Trial Court.
Petitioner justified its failure to furnish its former employees with copies of the Petition by
stating that the former employees were late in filing their opposition before the trial
court.126 It also stated that its failure to furnish the Regional Trial Court with a copy of the
Petition was unintentional.127
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The Court of Appeals correctly dismissed petitioner’s Rule 43 Petition as a consequence of
non-compliance with procedural rules. Rule 43, Section 7 of the Rules of Court states:
Sec. 7. Effect of failure to comply with requirements. – The failure of the petitioner to comply
with any of the foregoing requirements regarding the payment of the docket and other lawful
fees, the deposit of costs, proof of service of the petition, and the contents of and the
documents which should accompany the petition shall be sufficient ground for the dismissal
thereof.
Petitioner admitted its failure to comply with the rules. It begs the indulgence of the court to
give due course to its Petition based on their belated compliance with some of these
procedural rules and the policy on the liberal construction of procedural rules.
There are two kinds of "liberality" with respect to the construction of provisions of law. The
first requires ambiguity in the text of the provision and usually pertains to a situation where
there can be two or more viable meanings given the factual context presented by a case.
Liberality here means a presumption or predilection to interpret the text in favor of the cause
of the party requesting for "liberality."
Then there is the "liberality" that actually means a request for the suspension of the
operation of a provision of law, whether substantive or procedural. This liberality requires
equity. There may be some rights that are not recognized in law, and if courts refuse to
recognize these rights, an unfair situation may arise. 128 Specifically, the case may be a
situation that was not contemplated on or was not possible at the time the legal norm was
drafted or promulgated.
It is in the second sense that petitioner pleads this court.
III
129
Our courts are not only courts of law, but are also courts of equity. Equity is justice outside
legal provisions, and must be exercised in the absence of law, not against it.130 In Reyes v.
Lim:131 Equity jurisdiction aims to do complete justice in cases where a court of law is unable
to adapt its judgments to the special circumstances of a case because of the inflexibility of its
statutory or legal jurisdiction. Equity is the principle by which substantial justice may be
attained in cases where the prescribed or customary forms of ordinary law are
inadequate.132 (Citation omitted)
Liberality lies within the bounded discretion of a court to allow an equitable result when the
proven circumstances require it. Liberality acknowledges a lacuna in the text of a provision of
law. This may be because those who promulgated the rule may not have foreseen the unique
circumstances of a case at bar. Human foresight as laws and rules are prepared is powerful,
but not perfect.
Liberality is not an end in itself. Otherwise, it becomes a backdoor disguising the arbitrariness
or despotism of judges and justices. In North Bulacan Corp. v. PBCom, 133 the Regional Trial
Court ignored several procedural rules violated by the petitioning corporation and allowed
rehabilitation in the guise of liberality. This court found that the Regional Trial Court grossly
abused its authority when it allowed rehabilitation despite the corporation’s blatant non-
compliance with the rules.
The factual antecedents of a plea for the exercise of liberality must be clear. There must also
be a showing that the factual basis for a plea for liberality is not one that is due to the
negligence or design of the party requesting the suspension of the rules. Likewise, the basis
for claiming an equitable result—for all the parties—must be clearly and sufficiently pleaded
and argued. Courts exercise liberality in line with their equity jurisdiction; hence, it may only
be exercised if it will result in fairness and justice.
IV
The first rule breached by petitioner is the failure to implead all the indispensable parties.
Petitioner did not even interpose reasons why it should be excused from compliance with the
rule to "state the full names of the parties to the case, without impleading the court . . . as . . .
respondents." Petitioner did exactly the opposite. It failed to state the full names of its
creditors as respondents. Instead, it impleaded the Presiding Judge of the originating court.
The Rules of Court requires petitioner to implead respondents as a matter of due process.
Under the Constitution, "[n]o person shall be deprived of life, liberty or property without due
process of the law."134 An appeal to a corporate rehabilitation case may deprive creditor-
stakeholders of property. Due process dictates that these creditors be impleaded to give
them an opportunity to protect the property owed to them.
Creditors are indispensable parties to a rehabilitation case, even if a rehabilitation case is
non-adversarial. In Boston Equity Resources, Inc. v. Court of Appeals:135
An indispensable party is one who has such an interest in the controversy or subject matter of
a case that a final adjudication cannot be made in his or her absence, without injuring or
affecting that interest. He or she is a party who has not only an interest in the subject matter
of the controversy, but "an interest of such nature that a final decree cannot be made
without affecting [that] interest or leaving the controversy in such a condition that its final
determination may be wholly inconsistent with equity and good conscience. It has also been
considered that an indispensable party is a person in whose absence there cannot be a
determination between the parties already before the court which is effective, complete or
equitable." Further, an indispensable party is one who must be included in an action before it
may properly proceed.136
A corporate rehabilitation case cannot be decided without the creditors’ participation. The
court’s role is to balance the interests of the corporation, the creditors, and the general
public. Impleading creditors as respondents on appeal will give them the opportunity to
100
present their legal arguments before the appellate court. The courts will not be able to
balance these interests if the creditors are not parties to a case. Ruling on petitioner’s appeal
in the absence of its creditors will not result in judgment that is effective, complete, and
equitable.
This court cannot exercise its equity jurisdiction and allow petitioner to circumvent the
requirement to implead its creditors as respondents. Tolerance of such failure will not only be
unfair to the creditors, it is contrary to the goals of corporate rehabilitation, and will
invalidate the cardinal principle of due process of law.
The failure of petitioner to implead its creditors as respondents cannot be cured by serving
copies of the Petition on its creditors. Since the creditors were not impleaded as respondents,
the copy of the Petition only serves to inform them that a petition has been filed before the
appellate court. Their participation was still significantly truncated. Petitioner’s failure to
implead them deprived them of a fair hearing. The appellate court only serves court orders
and processes on parties formally named and identified by the petitioner. Since the creditors
were not named as respondents, they could not receive court orders prompting them to file
remedies to protect their property rights.
The next procedural rule that petitioner pleaded to suspend is the rule requiring it to furnish
all parties with copies of the Rule 43 Petition. Petitioner admitted its failure to furnish its
former employees with copies of the Petition because they belatedly filed their claims before
the Regional Trial Court.
This argument is specious at best; at worst, it foists a fraud on this court. The former
employees were unable to raise their claims on time because petitioner did not declare them
as creditors. The Amended Petition did not contain any information regarding pending
litigation between petitioner and its former employees. The only way the former employees
could become aware of the corporate rehabilitation proceedings was either through the
required publication or through news informally circulated among their colleagues. Clearly, it
was petitioner who caused the belated filing of its former employees’ claims when it failed to
notify its employees of the corporate rehabilitation proceedings. Petitioner’s failure was
conveniently and disreputably hidden from this court.
Former employee Luzviminda C. Cueto filed her Manifestation and Registration of Monetary
Claim as early as November 25, 2005. Alejandro Olit, et al., the other employees, filed their
Comment on September 27, 2006. By the time petitioner filed its Petition for Review dated
November 21, 2006 before the Court of Appeals, it was well aware that these individuals had
expressed their interest in the corporate rehabilitation proceedings. Petitioner and its counsel
had no excuse to exclude these former employees as respondents on appeal.
Petitioner’s belated compliance with the requirement to serve the Petition for Review on its
former employees did not cure the procedural lapse. There were two sets of employees with
claims against petitioner: Luzviminda C. Cueto and Alejandro Olit, et al. When the Court of
Appeals dismissed petitioner’s appeal, petitioner only served a copy on Alejandro Olit, et al.
Petitioner still did not serve a copy on Luzviminda C. Cueto.
We do not see how it will be in the interest of justice to allow a petition that fails to inform
some of its creditors that the final order of the corporate rehabilitation proceeding was
appealed. By not declaring its former employees as creditors in the Amended Petition for
Corporate Rehabilitation and by not notifying the same employees that an appeal had been
filed, petitioner consistently denied the due process rights of these employees.
This court cannot be a party to the inequitable way that petitioner’s employees were treated.
Petitioner also pleaded to be excused from the requirement under Rule 6, Section 5 of the
Rules of Court to serve a copy of the Petition on the originating court. According to petitioner,
the annexes for the Petition for Review filed before the Court of Appeals arrived from Lucena
City on the last day of filing the petition. Petitioner’s representative from Lucena City and
petitioner’s counsel rushed to compile and reproduce all the documents, and in such rush,
failed to send a copy to the Regional Trial Court. When petitioner realized that it failed to
furnish the originating court with a copy of the Petition, a copy was immediately sent by
registered mail.137
Again, petitioner’s excuse is unacceptable. Petitioner had 15 days to file a Rule 43 petition,
which should include the proof of service to the originating court. Rushing the compilation of
the pleading with the annexes has nothing to do with being able to comply with the
requirement to submit a proof of service of the copy of the petition for review to the
originating court. If at all, it further reflects the unprofessional way that petitioner and its
counsel treated our rules.
As this court has consistently ruled, "[t]he right to appeal is not a natural right[,] nor a part of
due process; it is merely a statutory privilege, and may be exercised only in the manner and in
accordance with the provisions of the law."138
In line with this, liberality in corporate rehabilitation procedure only generally refers to the
trial court, not to the proceedings before the appellate court. The Interim Rules of Procedure
on Corporate Rehabilitation covers petitions for rehabilitation filed before the Regional Trial
Court. Thus, Rule 2, Section 2 of the Interim Rules of Procedure on Corporate Rehabilitation,
which refers to liberal construction, is limited to the Regional Trial Court. The liberality was
given "to assist the parties in obtaining a just, expeditious, and inexpensive disposition of the
case."139
In Spouses Ortiz v. Court of Appeals, 140 the petitioners made a procedural mistake with the
attachments of the petition before the Court of Appeals. The petitioners subsequently
provided the correct attachments; however, this court still upheld the Court of Appeals’
dismissal:
101
The party who seeks to avail [itself] of [an appeal] must comply with the requirements of the
rules. Failing to do so, the right to appeal is lost. Rules of procedure are required to be
followed, except only when for the most persuasive of reasons, they may be relaxed to relieve
a litigant of an injustice not commensurate with the degree of his thoughtlessness in not
complying with the procedure prescribed.141
Petitioner’s excuses do not trigger the application of the policy of liberality in construing
procedural rules. For the courts to exercise liberality, petitioner must show that it is suffering
from an injustice not commensurate to the thoughtlessness of its procedural mistakes. Not
only did petitioner exercise injustice towards its creditors, its Rule 43 Petition for Review did
not show that the Regional Trial Court erred in dismissing its Amended Petition for Corporate
Rehabilitation.
V
Petitioner’s main argument for the continuation of corporate rehabilitation proceedings is
that the Regional Trial Court should have allowed petitioner to clarify its Amended Petition
with respect to details regarding its assets and its liabilities to its creditors instead of
dismissing the Petition outright.142
The Regional Trial Court correctly dismissed the Amended Petition for Corporate
Rehabilitation. The dismissal of the Amended Petition did not emanate from petitioner’s
failure to provide complete details on its assets and liabilities but on the trial court’s finding
that rehabilitation is no longer viable for petitioner. Under the Interim Rules of Procedure on
Corporate Rehabilitation, a "petition shall be dismissed if no rehabilitation plan is approved
by the court upon the lapse of one hundred eighty (180) days from the date of the initial
hearing."143 The proceedings are also deemed terminated upon the trial court’s disapproval of
a rehabilitation plan, "or a determination that the rehabilitation plan may no longer be
implemented in accordance with its terms, conditions, restrictions, or assumptions." 144
Bank of the Philippine Islands v. Sarabia Manor Hotel Corp. 145 provides the test to help trial
courts evaluate the economic feasibility of a rehabilitation plan:
In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a
thorough examination and analysis of the distressed corporation’s financial data must be
conducted. If the results of such examination and analysis show that there is a real
opportunity to rehabilitate the corporation in view of the assumptions made and financial
goals stated in the proposed rehabilitation plan, then it may be said that a rehabilitation is
feasible. In this accord, the rehabilitation court should not hesitate to allow the corporation
to operate as an on-going concern, albeit under the terms and conditions stated in the
approved rehabilitation plan. On the other hand, if the results of the financial examination
and analysis clearly indicate that there lies no reasonable probability that the distressed
corporation could be revived and that liquidation would, in fact, better subserve the interests
of its stakeholders, then it may be said that a rehabilitation would not be feasible. In such
case, the rehabilitation court may convert the proceedings into one for
liquidation.146 (Emphasis supplied)
Professor Stephanie V. Gomez of the University of the Philippines College of Law suggests
specific characteristics of an economically feasible rehabilitation plan:
a. The debtor has assets that can generate more cash if used in its daily operations than if
sold.
b. Liquidity issues can be addressed by a practicable business plan that will generate enough
cash to sustain daily operations.
c. The debtor has a definite source of financing for the proper and full implementation of a
Rehabilitation Plan that is anchored on realistic assumptions and goals. 147 (Emhasis supplied)
These requirements put emphasis on liquidity: the cash flow that the distressed corporation
will obtain from rehabilitating its assets and operations. A corporation’s assets may be more
than its current liabilities, but some assets may be in the form of land or capital equipment,
such as machinery or vessels. Rehabilitation sees to it that these assets generate more value
if used efficiently rather than if liquidated.
On the other hand, this court enumerated the characteristics of a rehabilitation plan that is
infeasible:
(a) the absence of a sound and workable business plan;
(b) baseless and unexplained assumptions, targets and goals;
(c) speculative capital infusion or complete lack thereof for the execution of the business
plan;
(d) cash flow cannot sustain daily operations; and
(e) negative net worth and the assets are near full depreciation or fully depreciated. 148
In addition to the tests of economic feasibility, Professor Stephanie V. Gomez also suggests
that the Financial and Rehabilitation and Insolvency Act of 2010 emphasizes on rehabilitation
that provides for better present value recovery for its creditors.149
Present value recovery acknowledges that, in order to pave way for rehabilitation, the
creditor will not be paid by the debtor when the credit falls due. The court may order a
suspension of payments to set a rehabilitation plan in motion; in the meantime, the creditor
remains unpaid. By the time the creditor is paid, the financial and economic conditions will
have been changed. Money paid in the past has a different value in the future. 150 It is unfair if
the creditor merely receives the face value of the debt. Present value of the credit takes into
account the interest that the amount of money would have earned if the creditor were paid
on time.151
102
Trial courts must ensure that the projected cash flow from a business’ rehabilitation plan The Regional Trial Court rendered a decision in accordance with facts and law. Thus, we deny
allows for the closest present value recovery for its creditors. If the projected cash flow is the plea for liberalization of procedural rules. To grant the plea would cause more economic
realistic and allows the corporation to meet all its obligations, then courts should favor hardship and injustice to all those concerned.
rehabilitation over liquidation. However, if the projected cash flow is unrealistic, then courts
should consider converting the proceedings into that for liquidation to protect the creditors. WHEREFORE, the Petition is DENIED. The Court of Appeals Resolutions dated January 7, 2007
and March 30, 2007 in CA-G.R. SP No. 96974 are AFFIRMED.
The Regional Trial Court correctly dismissed petitioner’s rehabilitation plan. It found that
petitioner’s assets are non-performing.152 Petitioner admitted this in its Amended Petition SO ORDERED.
when it stated that its vessels were no longer serviceable. 153 In Wonder Book Corporation v.
Philippine Bank of Communications, 154 a rehabilitation plan is infeasible if the assets are
nearly fully or fully depreciated. This reduces the probability that rehabilitation may restore
and reinstate petitioner to its former position of successful operation and solvency.

Petitioner’s rehabilitation plan should have shown that petitioner has enough serviceable
assets to be able to continue its business. Yet, the plan showed that the source of funding
would be to sell petitioner’s old vessels. Disposing of the assets constituting petitioner’s main
business cannot result in rehabilitation. A business primarily engaged as a shipping line
cannot operate without its ships. On the other hand, the plan to purchase new vessels
sacrifices the corporation’s cash flow. This is contrary to the goal of corporate rehabilitation,
which is to allow present value recovery for creditors. The plan to buy new vessels after
selling the two vessels it currently owns is neither sound nor workable as a business plan.

The other part of the rehabilitation plan entails selling properties of petitioner’s sister
company.1âwphi1 As pointed out by the Regional Trial Court, this plan requires conformity
from the sister company. Even if the two companies have the same directorship and
ownership, they are still two separate juridical entities. In BPI Family Savings Bank v. St.
Michael Medical Center,155 this court refused to include in the financial and liquidity
assessment the financial statements of another corporation that the petitioning-corporation
plans to merge with.

As pointed out by respondents, petitioner’s rehabilitation plan is almost impossible to

implement. Even an ordinary individual with no business acumen can discern the
groundlessness of petitioner’s rehabilitation plan. Petitioner should have presented a more
realistic and practicable rehabilitation plan within the time periods allotted after initiatory
hearing, or otherwise, should have opted for liquidation.

Finally, petitioner argues that after Judge Mendoza’s withdrawal as rehabilitation receiver, the
Regional Trial Court should have appointed a new rehabilitation receiver to evaluate the
rehabilitation plan. We rule otherwise. It is not solely the responsibility of the rehabilitation
receiver to determine the validity of the rehabilitation plan. The Interim Rules of Procedure
on Corporate Rehabilitation allows the trial court to disapprove a rehabilitation plan 156 and
terminate proceedings or, should the instances warrant, to allow modifications to a
rehabilitation plan.157

103
SECOND DIVISION
[ G.R. No. 190187, September 28, 2016 ]
THE PHILIPPINE GEOTHERMAL, INC. EMPLOYEES UNION, PETITIONER, VS. UNOCAL
PHILIPPINES, INC. (NOW KNOWN AS CHEVRON GEOTHERMAL PHILIPPINES HOLDINGS,
INC.), RESPONDENT.
DECISION
LEONEN, J.:
The merger of a corporation with another does not operate to dismiss the employees of the
corporation absorbed by the surviving corporation. This is in keeping with the nature and
effects of a merger as provided under law and the constitutional policy protecting the rights
of labor. The employment of the absorbed employees subsists. Necessarily, these absorbed
employees are not entitled to separation pay on account of such merger in the absence of
any other ground for its award.
This resolves a Petition for Review on Certiorari [1] filed by Philippine Geothermal, Inc.
Employees Union (Union) assailing the Decision[2] dated July 23, 2009 and the
Resolution[3] dated November 9, 2009 of the Court of Appeals Eighth Division in Unocal
Philippines, Inc. (now known as Chevron Geothermal Philippines Holdings, inc.) v. The
Philippine Geothermal, Inc. Employees Union. The assailed Decision granted Unocal
Philippines, Inc.'s (Unocal Philippines) appeal and reversed the Secretary of Labor's award of
separation benefits to the Union. The award was granted on the premise that the merger of
Unocal Philippines' parent corporation with another corporation impliedly terminated the
employment of the Union's members. The assailed Resolution denied the Union's Motion for
Reconsideration.
Philippine Geothermal, Inc. Employees Union is a legitimate labor union that stands as the
bargaining agent of the rank-and-file employees of Unocal Philippines. [4]
Unocal Philippines, formerly known as Philippine Geothermal, Inc., is a foreign corporation
incorporated under the laws of the State of California, United States of America, licensed to
do business in the Philippines for the "exploration and development of geothermal resources
as alternative sources of energy." [5] It is a wholly owned subsidiary of Union Oil Company of
California (Unocal California), [6]which, in turn, is a wholly owned subsidiary of Union Oil
Corporation (Unocal Corporation).[7] Unocal Philippines operates two (2) geothermal steam
fields in Tiwi, Albay and Makiling, Banahaw, Laguna, owned by the National Power
Corporation.[8]
On April 4, 2005, Unocal Corporation executed an Agreement and Plan of Merger (Merger
Agreement) with Chevron Texaco Corporation (Chevron) and Blue Merger Sub, Inc. (Blue
Merger).[9] Blue Merger is a wholly owned subsidiary of Chevron. [10] Under the Merger
Agreement, Unocal Corporation merged with Blue Merger, and Blue Merger became the
surviving corporation.[11] Chevron then became the parent corporation of the merged
corporations:[12] After the merger, Blue Merger, as the surviving corporation, changed its
name to Unocal Corporation. [13]
On January 31, 2006, Unocal Philippines executed a Collective Bargaining Agreement with the
Union.[14]
However, on October 20, 2006, the Union wrote Unocal Philippines asking for the separation
benefits provided for under the Collective Bargaining Agreement. According to the Union, the
Merger Agreement of Unocal Corporation, Blue Merger, and Chevron resulted in the closure
and cessation of operations of Unocal Philippines and the implied dismissal of its employees.
[15]
Unocal Philippines refused the Union's request and asserted that the employee-members
were not terminated and that the merger did not result in its closure or the cessation of its
operations.[16]
As Unocal Philippines and the Union were unable to agree, they decided to submit the matter
to the Department of Labor and Employment's Administrative Intervention for Dispute
Avoidance Program.[17] However, they were unable to arrive at "a mutually acceptable
agreement."[18]
On November 24, 2006, the Union claimed that Unocal Philippines was guilty of unfair labor
practice and filed a Notice of Strike.[19]Later, the Union withdrew its Notice of Strike.[20]
On February 5, 2007, the parties agreed to submit their dispute for voluntary arbitration
before the Department of Labor and Employment, with the Secretary of Labor and
Employment as Voluntary Arbitrator. [21] The case, entitled In Re: Labor Dispute at Philippines,
Inc./Chevron, was docketed as OS-VA-2007-04. [22]
After the parties submitted their respective position papers, the Secretary of Labor rendered
the Decision[23] on January 15, 2008 ruling that the Union's members were impliedly
terminated from employment as a result of the Merger Agreement. The Secretary of Labor
found that the merger resulted in new contracts and a new employer for the Union's
members. The new contracts allegedly required the employees' consent; otherwise, there
was no employment contract to speak of. [24] Thus, the Secretary of Labor awarded the Union
separation pay under the Collective Bargaining Agreement. [25] The dispositive portion of the
Decision reads:
104
WHEREFORE, this Office rules that Unocal and Chevron merged into one corporate entity and WHEREFORE, premises considered, the Decision dated 15 January 2008, of the Department
the employees were impliedly terminated from employment. Accordingly, they are entitled to of Labor and Employment (DOLE) in OS-VA-2007-04 is hereby REVERSED and SET ASIDE.
the separation benefits provided under ARTICLE XII, SECTION 2and ANNEX "B" of the
collective bargaining [agreement] between UNOCAL PHILIPPINES, INC. and the PHILIPPINE SO ORDERED.[40] (Emphasis in the original)
GEOTHERMAL, INC. EMPLOYEES UNION.
On November 9, 2009, the Court of Appeals denied the Union's Motion for Reconsideration.
[41]
Pursuant to Section 7, Rule XIX of Department Order No. 40-03, series of 2003, this Decision
shall be final and executory after ten (10) calendar days from receipt hereof and it shall not
be subject of a motion for reconsideration. Hence, this Petition[42] was filed.

SO ORDERED.[26] (Emphasis in the original) Petitioner Philippine Geothermal, Inc. Employees Union claims that respondent Unocal
Philippines, Inc. changed its theory of the case when, in the proceedings before the Secretary
Unocal Philippines filed before the Court of Appeals a Petition for Review [27] questioning the of Labor, it claimed that it entered into a merger and not a sale, but later, in its appeal before
Secretary of Labor's Decision. Unocal Philippines claimed that the Union was not entitled to the Court of Appeals, argued that it was not a party to the merger. [43] Petitioner asserts that
separation benefits given that Unocal Philippines was not a party to the merger, [28]that it the Court of Appeals erred in allowing respondent to change its theory of the case on appeal
never closed nor ceased its business, and that it did not terminate its employees after the and in deciding the case on the basis of this changed theory. [44]
merger.[29] It asserted that its operations continued in the same manner, and with the same
manpower complement.[30] Likewise, the employees kept their tenure intact and experienced Petitioner further claims that the Court of Appeals erred in reversing the Decision of the
no changes in their salaries and benefits. [31] Secretary of Labor, who properly ruled that petitioner's members are entitled to separation
pay.[45] It claims that the merger resulted in (a) "the severance of the juridical tie that existed
In the Decision[32] dated July 23, 2009, the Court of Appeals granted the appeal of Unocal between the employees and its original employer, Unocal Corporation," [46] and (b) the implied
Philippines and reversed the Decision of the Secretary of Labor. [33] It held that Unocal termination of the employment of the Union's members, who had the right to waive their
Philippines has a separate and distinct juridical personality from its parent company, Unocal continued employment with the absorbing corporation. [47] Petitioner insists that the the
Corporation, which was the party that entered into the Merger Agreement. [34] The Court of "cessation of operations" contemplated in the Collective Bargaining Agreement and the
Appeals ruled that Unocal Philippines remained undissolved and its employees were Memorandum of Agreement must be liberally interpreted to include mergers, [48] and that
unaffected by the merger.[35] It found that this was evidenced by the Union's assumption of its doubts must be resolved in favor of labor. [49]
role as the duly recognized bargaining representative of all rank-and-file employees a few
months after the merger. [36] In the Resolution[50] dated January 27, 2010, this Court directed respondent to comment on
the Petition.
Moreover, the Court of Appeals found that although Unocal Corporation became a part of
Chevron, Unocal Philippines still remained as a wholly owned subsidiary of Unocal California Respondent filed its Comment[51] on March 26, 2010. It argues that it did not change its
after the merger.[37] It ruled that in any case, the Collective Bargaining Agreement only theory on appeal. It insists that it has been consistent in arguing before the Secretary of Labor
provided for the payment of separation pay if a reduction in workforce results from and the Court of Appeals that it was never a party to the merger between Unocal Corporation
redundancy, retrenchment or installation of labor-saving devices, or closure and cessation of and Blue Merger as it has always stated that it was Unocal Corporation who entered into the
operations, all of which did not occur in this case. [38] Merger Agreement.[52]Respondent argues that even assuming that it did change its theory on
appeal, it may do so as an exception to the rule since "a party may change [its] legal theory
The Court of Appeals also pointed out that the Union's members merely wanted to when its factual bases would not require the presentation of further evidence by the adverse
discontinue their employment with Unocal Philippines, but there was nothing in the Labor party in order to meet the issue raised in the new theory." [53] It posits that the alleged new
Code nor in the parties' Collective Bargaining Agreement that would sanction the payment of theory would still be based on the evidence presented before the Secretary of Labor, hence,
separation pay to those who no longer wanted to work for Unocal Philippines as a result of petitioner was.not placed at a disadvantage. [54]
the merger.[39] The dispositive portion of the Decision reads:
Respondent further argues that in any case, petitioner's members still did not lose their
employment as to warrant the award of separation pay. [55] The Memorandum of Agreement,
105
the Collective Bargaining Agreement, and the contemporaenous acts of the parties show that In Philippine Deposit Insurance Corp. v. Citibank:[62]
respondent shall pay separation pay only in case the employees actually lose their jobs due to
redundancy, retrenchment or installation of labor-saving devices, or closure and cessation of
operation.[56] As these circumstances did not occur, respondent cannot grant petitioner's The Court begins by examining the manner by which a foreign corporation can establish its
members separation pay. presence in the Philippines. It may choose to incorporate its own subsidiary as a domestic
corporation, in which case such subsidiary would have its own separate and independent
Petitioner filed its Reply[57] on July 6, 2010. It insists that respondent never claimed before the legal personality to conduct business in the country. In the alternative, it may create a branch
Secretary of Labor that it was not covered by the merger. [58] It maintains that respondent only in the Philippines, which would not be a legally independent unit, and simply obtain a license
insisted on this argument when it obtained the unfavorable decision from the Secretary of to do business in the Philippines.[63] (Emphasis supplied, citations omitted)
Labor.[59] Moreover, the Secretary of Labor was correct in ruling that, indeed, there was a
Respondent likewise made the following assertions in its Position Paper in the proceedings
cessation of operations of respondent when it merged with Chevron. [60]
before the Secretary of Labor:
We resolve the following issues:
Based on the facts of this case, the Honorable Secretary of Labor would certainly appreciate
First, whether respondent changed the theory of its case on appeal; that the business transaction entered into by respondent employer was in law and in fact, a
merger. Hence, there is no basis to the union's claim.
Second, whether the Merger Agreement executed by Unocal Corporation, Blue Merger, and
Chevron resulted in the termination of the employment of petitioner's members; and . . . .

Lastly, whether petitioner's members are entitled to separation benefits. . . . In the present case, it is clear that the surviving corporation, i.e. Unocal Philippines
Inc. has continued the business and operations of the absorbed corporation in an unchanged
As regards the first issue, we rule that respondent did, indeed, change the theory of its case manner, and using the same employees with their tenure intact and under the same terms
on appeal. and conditions of employment.[64] (Emphasis supplied)

In its Petition before the Court of Appeals, respondent asserted that it was not a party to the These statements reveal that not only did respondent fail to assert that it was not a party to
merger as it was a subsidiary of Unocal California and, thus, had a separate and distinct the Merger Agreement, but it also referred to itself as the party who entered into the
personality from Unocal Corporation. transaction and became the surviving corporation in the merger. Thus, the claim that
respondent is not a party to the merger is a new allegation raised for the first time on appeal
However, the following statement can be found in respondent's Position Paper in the before the Court of Appeals.
proceedings before the Secretary of Labor:
Raising a factual question for the first time on appeal is not allowed. In Tan v. Commission on
Elections:[65]
3. . . . Following the merger, Blue Merger Sub Inc. which as above stated is a wholly owned
subsidiary of Chevron Corporation changed its name to Unocal Corporation retaining Unocal
Philippines, Inc. as its Philippine Branch to continue to operate the aforenamed geothermal The aforementioned issue is now raised only for the first time on appeal before this Court.
plants as, in fact[.][61] (Emphasis supplied) Settled is the rule that issues not raised in the proceedings below (COMELEC en banc) cannot
be raised for the first time on appeal. Fairness and due process dictate that evidence and
Respondent alleges that it is a branch of Unocal Coiporation. Claiming that it is a branch is issues not presented below cannot be taken up for the first time on appeal.
inconsistent with its allegation (on appeal) that it is a subsidiary of another corporation. A
branch and a subsidiary differ in its corporate existence: a branch is not a legally independent Thus, in Matugas v. Commission on Elections, we reiterated this rule, saying:
unit, while a subsidiary has a separate and distinct personality from its parent corporation.

106
The rule in appellate procedure is that a factual question may not be raised for the first time
on appeal, and documents forming no part of the proofs before the appellate court will not Petitioner was denied the opportunity to present evidence to disprove respondent's new
be considered in disposing of the issues of" an action. This is true whether the decision claim. Therefore, the Court of Appeals erred in taking into consideration this argument.
elevated for review originated from a regular court or an administrative agency or quasi-
judicial body, and whether it was rendered in a civil case, a special proceeding, or a criminal As to the remaining issues, we rule in favor of respondent and dismiss the Petition.
case. Piecemeal presentation of evidence is simply not in accord with orderly justice.
Both the Secretary of Labor and the Court of Appeals found that what was entered into by
Moreover, in Vda. De Gualberto v. Go, we also held: Unocal Corporation, Blue Merger, and Chevron is a merger. The primary issue is what the
effects of this merger on respondent's employees are.

In Labor Congress of the Philippines v. NLRC, we have made it clear that "to allow fresh issues We find that, whether or not respondent is a party to the Merger Agreement, there is no
on appeal is violative of the rudiments of fair play, justice and due process." Likewise, implied dismissal of its employees as a consequence of the merger.
in Orosa v. Court of Appeals, the Court disallowed it because "it would be offensive to the
basic rule of fair play, justice and due process if it considered [the] issue[s] raised for the first A merger is a consolidation of two or more corporations, which results in one or more
time on appeal." We cannot take an opposite stance in the present case. [66] (Citations corporations being absorbed into one surviving corporation. [69] The separate existence of the
omitted) absorbed corporation ceases, and the surviving corporation "retains its identity and takes
over the rights, privileges, franchises, properties, claims, liabilities and obligations of the
Respondent did state that Unocal Corporation was the party to the Merger Agreement with
absorbed corporation(s)."[70]
Blue Merger and Chevron. Nonetheless, it did not use this allegation to argue that it had a
separate and distinct personality from Unocal Corporation and is, thus, not a party to the
If respondent is a subsidiary of Unocal California, which, in turn, is a subsidiary of Unocal
Merger Agreement. Respondent only raised this argument in its appeal before the Court of
Corporation, then the merger of Unocal Corporation with Blue Merger and Chevron does not
Appeals.
affect respondent or any of its employees. Respondent has a separate and distinct personality
from its parent corporation.
Respondent's contention that it falls within the exception to the rule likewise does not lie.
Respondent cites Quasha Ancheta Pena and Nolasco Law Office v. LCN Construction Corp.
[67]
Nonetheless, if respondent is indeed a party to the merger, the merger still does not result in
and claims that it falls within the exception since it did not present any additional evidence
the dismissal of its employees.
on the matter:
The effects of a merger are provided under Section 80 of the Corporation Code:
In the interest of justice and within the sound discretion of the appellate court, a party may
change his legal theory on appeal, only when the factual bases thereof would not require
SEC. 80. Effects of merger or consolidation. — The merger or consolidation, as provided in the
presentation of any further evidence by the adverse party in order to enable it to properly
preceding sections shall have the following effects:
meet the issue raised in the new theory. [68]

However, this paragraph states that it is the adverse party that should no longer be required
to present additional evidence to contest the new claim, and not the party presenting the 1. The constituent corporations shall become a single corporation which, in case of merger,
new theory on appeal. Thus, it does not matter that respondent no longer presented shall be the surviving corporation designated in the plan of merger; and, in case of
additional evidence to support its new claim. The petitioner, as the adverse party, should not consolidation, shall be the consolidated corporation designated in the plan of consolidation;
have to present further evidence on the matter before the new issue may be considered.
However, the issue of whether respondent is a party to the Merger Agreement may be 2. The separate existence of the constituent corporations shall cease, except that of the
proven otherwise by petitioner, through the presentation of evidence that respondent is surviving or the consolidated corporation;
merely a branch and not a subsidiary of Unocal Corporation. Thus, respondent's new
allegation does not fall under the exception to the rule. 3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a corporation
107
organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all
the rights, privileges, immunities and franchises of each of the constituent corporations; and
all property, real or personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be taken and deemed to be
transferred to and vested in such surviving or consolidated corporation without further act or
deed; and
5. The surviving or the consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner as if
such surviving or consolidated corporation had itself incurred such liabilities or obligations;
and any claim, action or proceeding pending by or against any of such constituent
corporations may be prosecuted by or against the surviving or consolidated corporation, as
the case may be. Neither the rights of creditors nor any lien upon the property of any of such
constituent corporations shall be impaired by such merger or consolidation. (Emphasis
supplied)
Although this provision does not explicitly state the merger's effect on the employees of the
absorbed corporation, Bank of the Philippine Islands v. BPI Employees Union-Davao Chapter-
Federation of Unions in BPI Unibank [71] has ruled that the surviving corporation automatically
assumes the employment contracts of the absorbed corporation, such that the absorbed
corporation's employees become part of the manpower complement of the surviving
corporation, thus:
Taking a second look on this point, we have come to agree with Justice Brion's view that it is
more in keeping with the dictates of social justice and the State policy of according full
protection to labor to deem employment contracts as automatically assumed by the surviving
corporation in a merger, even in the absence of an express stipulation in the articles of merger
or the merger plan. In his dissenting opinion, Justice Brion reasoned that:
To my mind, due consideration of Section 80 of the Corporation Code, the constitutionally
declared policies on work, labor and employment, and the specific FEBTC-BPI situation — i.e.,
a merger with complete "body and soul" transfer of all that FEBTC embodied and possessed
and where both participating banks were willing (albeit by deed, not by their written
agreement) to provide for the affected human resources by recognizing continuity of
employment — should point this Court to a declaration that in a complete merger situation
where there is total takeover by one corporation over another and there is silence in the
merger agreement on what the fate of the human resource complement shall be, the latter
should not be left in legal limbo and should be properly provided for, by compelling the
surviving entity to absorb these employees. This is what Section 80 of the Corporation Code
commands, as the surviving corporation has the legal obligation to assume all the obligations
and liabilities of the merged constituent corporation.
Not to be forgotten is that the affected employees managed, operated and worked on the
transferred assets and properties as their means of livelihood; they constituted a basic
component of their corporation during its existence. In a merger and consolidation situation,
they cannot be treated without consideration of the applicable constitutional declarations
and directives, or, worse, be simply disregarded. If they are so treated, it is up to this Court to
read and interpret the law so that they are treated in accordance with the legal requirements
of mergers and consolidation, read in light of the social justice, economic and social
provisions of our Constitution. Hence, there is a need for the surviving corporation to take
responsibility for the affected employees and to absorb them into its workforce where no
appropriate provision for the merged corporation's human resources component is made in
the Merger Plan.[72] (Emphasis supplied, citations omitted)
The rationale for this ruling is anchored on the nature and effects of a merger as provided
under Section 80 of the Corporation Code, as well as the policies on work and labor
enshrined in the Constitution.[73]
To reiterate, Section 80 of the Corporation Code provides that the surviving corporation shall
possess all the rights, privileges, properties, and receivables due of the absorbed corporation.
Moreover, all interests of, belonging to, or due to the absorbed corporation "shall be taken
and deemed to be transferred to and vested in such surviving or consolidated corporation
without further act or deed."[74] The surviving corporation likewise acquires all the liabilities
and obligations of the absorbed corporation as if it had itself incurred these liabilities or
obligations.[75]
This acquisition of all assets, interests, and liabilities of the absorbed corporation necessarily
includes the rights and obligations of the absorbed corporation under its employment
contracts. Consequently, the surviving corporation becomes bound by the employment
contracts entered into by the absorbed corporation. These employment contracts are not
terminated. They subsist unless their termination is allowed by law.
This interpretation is consistent with the consitutional provisions and policies on work and
labor, which provides:
ARTICLE II
. . . .
State Policies
108
 An employment contract or contract of service essentially has value because it embodies
. . . . work — the means of adding value to basic raw materials and the processes for producing
goods, materials and services that become the lifeblood of corporations and, ultimately, of
SECTION 18. The State affirms labor as a primary social economic force. It shall protect the the nation. Viewed from this perspective, the employment contract or contract of service is
rights of workers and promote their welfare. not an ordinary agreement that can be viewed in strictly contractual sense. It embodies work
and production and carries with it a very significant element of public interest; thus, the
. . . . Constitution, no less, accords full recognition and protection to workers and their
contribution to production.

. . . .
ARTICLE XIII
These constitutional statements and directives, aside from telling us to consider work, labor
. . . . and employment beyond purely contractual terms, also provide us directions on how our
considerations should be made, i.e., with an eye on the interests they represent — the
Labor individual, the corporate, and more importantly, the national. [77]

Associate Justice Brion likewise discussed the nature of a merger agreement vis-a-vis the
SECTION 3. The State shall afford full protection to labor, local and overseas, organized and employment contracts:
unorganized, and promote full employment and equality of employment opportunities for all.

It shall guarantee the rights of all workers to self-organization, collective bargaining and This recognition is not to objectify the workers as assets and liabilities, but to recognize —
negotiations, and peaceful concerted activities, including the right to strike in accordance using the spirit of the law and constitutional standards — their necessary involvement and
with law. They shall be entitled to security of tenure, humane conditions of work, and a living need to be provided for in a merger situation. Neither does this step, directly impacting on
wage. They shall also participate in policy and decision-making processes affecting their rights the employees' individual employment contracts, detract from the in personam character of
and benefits as may be provided by law. these contracts. For in a merger situation, no change of employer is involved; the change is in
the internal personality of the employer rather than through the introduction of a new
The State shall promote the principle of shared responsibility between workers and employer which would have novated the contract. This conclusion proceeds from the nature
employers and the preferential use of voluntary modes in settling disputes, including of a merger as a corporate development regulated by law and the merger's implementation
conciliation, and shall enforce their mutual compliance therewith to foster industrial peace. through the parties' merger agreement.

The State shall regulate the relations between workers and employers, recognizing the right
of labor to its just share in the fruits of production and the right of enterprises to reasonable
returns on investments, and to expansion and growth.
These constitutional provisions ensure that workers' rights are protected as they are imbued
with public interest. They likewise prevent an interpretation of any law, rule, or agreement,
which may violate worker's rights acquired during their employment.
Associate Justice Arturo D. Brion's Dissenting Opinion in Bank of the Philippine Islands v. BPI
Employees Union-Davao Chapter-Federation of Unions in BPI Unibank [76] was similarly
premised on the constitutional protection afforded to labor and the public interest carried by
employment contracts:
. . . .
In the BPI-FEBTC situation, these employment contracts are part of the obligations that the
merging parties have to account and make provisions for under the Constitution and the
Corporation Code; in the absence of any clear agreement, these employment contracts
subsist, subject to the right of the employees to reject them as they cannot be compelled to
render service but can only be made to answer in damages if the rejection constitutes a
breach. In other words, in mergers and consolidations, these contracts should be held to be
continuing, unless rejected by the employees themselves or declared by the merging parties
to be subject to the authorized causes for termination of employment under Sections 282 and
283 of the Labor Code. In this sense, the merging parties' control and business decision on
how employees shall be affected, in the same manner that the affected employees' decision

109
on whether to abide by the merger or to opt out, remain unsullied. [78] (Emphasis in the
original)
Senior Associate Justice Antonio T. Carpio's Dissenting Opinion [79] likewise discusses the
constitutional and legal right to security of tenure as basis for ruling that the employment
contracts of the absorbed corporation subsist in case of a merger:
Upon merger, BPI, as the surviving entity, absorbs FEBTC and continues the combined
business of the two banks. BPI assumes the legal personality of FEBTC, and automatically
acquires FEBTC s rights, privileges and powers, as well as its liabilities and obligations.
. . . .
Among the obligations and liabilities of FEBTC is to continue the employment of FEBTC
employees. These employees have already acquired certain employment status, tenure,
salary and benefits. They are regular employees of FEBTC. Since after the merger, BPI has
continued the business of FEBTC, FEBTC's obligation to these employees is assumed by BPI,
and BPI becomes duty-bound to continue the employment of these FEBTC employees.
party to the merger, its employment contracts are deemed to subsist and continue by "the
combined operation of the Corporation Code and the Labor Code under the backdrop of the
labor and social justice provisions of the Constitution." [83]
Petitioner insists that this is contrary to its freedom to contract, considering its members did
not enter into employment contracts with the surviving corporation. However, petitioner is
not precluded from leaving the surviving corporation. Although the absorbed employees are
retained as employees of the merged corporation, the employer retains the right to
terminate their employment for a just or authorized cause. Likewise, the employees are not
precluded from severing their employment through resignation or retirement. The freedom
to contract and the prohibition against involuntary servitude is still, thus, preserved in this
sense.[84] This is the manner by which the consent of the employees is considered by the law.
Hence, assuming respondent is a party to the merger, the merger still does not operate to
effect a termination of the employment of respondent's employees. Should they be unhappy
with the surviving corporation, the employees may retire or resign from employment.
Given these considerations, we rule that petitioner is not entitled to the separation benefits it
claims from respondent.

Under Article 279 of the Labor Code, regular employees acquire security of tenure, and
Separation benefits are not granted to petitioner by law in case of voluntary resignation, [85] or
hence, may not be terminated by the employer except upon legal grounds. . . . Without any
by any contract it entered into with respondent.
of these legal grounds, the employer cannot validly terminate the employment of regular
employees; otherwise, the employees' right to security of tenure would be violated.
The Collective Bargaining Agreement [86] between petitioner and respondent provides:

The merger of two corporations does not authorize the surviving corporation to terminate
the employees of the absorbed corporation in the absence of just or authorized causes as Article XII
provided in Articles 282 and 283 of the Labor Code. . . . Once an employee becomes
permanent, he is protected by the security of tenure clause in the Constitution, and he can be RESPONSIBILITIES OF THE PARTIES AND INDUSTRIAL PEACE
terminated only for just or authorized causes as provided by law. [80]

These theories were dissents to the Decision in Bank of the Philippine Islands. However, in the . . . .
Resolution resolving the Motion for Reconsideration in that case, this Court found it
necessary to interpret Section 80 of the Corporation Code and the constitutional provisions Section 2. ADDITIONAL RESPONSIBILITIES
on labor as to strengthen the "judicial protection of the right to security of tenure of
employees affected by a merger and [avoid] confusion regarding the status of various- . . . .
benefits."[81] Thus, this Court ruled that the surviving corporation automatically assumes the
employment contracts of the absorbed corporation. The absorbed corporation's employees In the event of closure, cessation of operations, retrenchment, redundancy or installation of
are not impliedly dismissed, but become part of the manpower complement of the surviving labor saving devices, the COMPANY will pay just and fair compensation for those who will be
corporation.[82] separated from the COMPANY. The separation benefit is covered under a MEMORANDUM OF
AGREEMENT as agreed upon by both parties and shall serve as a part of this agreement
The merger of Unocal Corporation with Blue Merger and Chevron does not result in an (Annex B).[87]
implied termination of the employment of petitioner's members. Assuming respondent is a

110
Likewise, the Memorandum of Agreement [88] dated November 1, 2005 betweeen petitioner obligation to keep in its payroll more employees than are necessary for the operation of its
and respondent states: business.[90](Citations omitted)

Retrenchment, on the other hand, is the reduction of personnel to save on costs on salaries
WITHESSETH: That and wages due to a considerable decline in the volume of business. [91]

Cessation and closure of business contemplates the stopping of business operations of the
WHEREAS, the COMPANY and the UNION recognize the possibility that UNOCAL PHILIPPINES, employer whether on the employer's prerogative or on account of severe business losses. [92]
INC. may undergo at its discretion reduction in workforce as a result of redundancy,
retrenchment or installation of labor saving devices, or closure and cessation of operations. None of these instances are present here. The terms do not provide that a merger is one of
the instances where petitioner may claim separation benefits for its members. Neither can
WHEREAS, the COMPANY and the UNION agree that should any of the above-cited conditions these circumstances be interpreted as to contemplate a merger with another corporation. In
occur that may directly affect the tenure of existing employees, the rights of the employees any case, if title parties intended that petitioner ought to be granted separation pay in case of
should be respected and that the COMPANY will pay just and fair compensation for those a merger, it should have been explicitly provided for in the contract. Absent this express
who will be separated from the COMPANY; intention, petitioner cannot claim separation pay.

In view of the foregoing and in consideration of industrial peace and this covenant, the On the contention that petitioner must be awarded the separation pay in the interest of
parties hereby agree as follows: social justice, this Court has held that this award is granted only under the following
exceptional cases: (1) the dismissal of the employee was not for serious misconduct; and (2)
. . . . it did not reflect on the moral character of the employee. [93]

2. The COMPANY will provide the following separation benefits for all regular and In this case, there is no dismissal of the employees on account of the merger. Petitioner does
probationary employees in the event that they lose their jobs as a result of the conditions not deny that respondent actually continued its normal course of operations after the merger,
cited above; and that its members, as employees, resumed their work with their tenure, salaries, wages,
and other benefits intact. Petitioner was even able to execute with respondent, after the
merger, the Collective Bargaining Agreement from which it anchors its claims.
a. Separation Pay: 2.5 months multiplied by the current monthly base pay plus
monthly equivalent of the 13th month and 14thmonth pay multiplied by the number
Given these circumstances, petitioner is not entitled to separation pay. Although the policy of
of years service.[89]
the state is to rule in favor of labor in light of the social justice provisions under the
Merger is not one of the circumstances where the employees may claim separation pay. The Constitution, this Court cannot unduly trample upon the rights of management, which are
only instances where separation pay may be awarded to petitioner are: (a) reduction in likewise entitled to respect in the interest of fair play.
workforce as a result of redundancy; (b) retrenchment or installation of labor-saving devices;
or (c) closure and cessation of operations. WHEREFORE, the Decision dated July 23, 2009 and the Resolution dated November 9, 2009
of the Court of Appeals in CA-G.R. SP No. 102184 are AFFIRMED. The Petition for Review
Redundancy has been defined by this Court as follows: is DENIED considering that no reversible error was committed by the Court of Appeals.

SO ORDERED.
[W]e believe that redundancy, for purposes of our Labor Code, exists where the services of an
employee are in excess of what is reasonably demanded by the actual requirements of the
enterprise. Succinctly put, a position is redundant where it is superfluous, and superfluity of a
position or positions may be the outcome of a number of factors, such as overhiring of
workers, decreased volume of business, or dropping of a particular product line or service
activity previously manufactured or undertaken by the enterprise. The employer has no legal
111
[ G.R. No. 172948, October 05, 2016 ] stockholders, however, the same may be restricted. The right to inspect should be limited to
the ordinary records as identified and classified by PASAR. Thus, pending the determination
PHILIPPINE ASSOCIATED SMELTING AND REFINING CORPORATION, PETITIONER, VS. of which records are confidential or inexistent, the petitioners should be enjoined from
PABLITO O. LIM, MANUEL A. AGCAOILI, AND CONSUELO M. PADILLA, RESPONDENTS. inspecting the books. The dispositive portion of said Order states:

DECISION

LEONEN, J.:
An action for injunction filed by a corporation generally does not lie to prevent the
enforcement by a stockholder of his or her right to inspection. [1]
Philippine Associated Smelting and Refining Corporation filed a Petition for Review on
Certiorari[2] to assail the Court of Appeals Decision [3] dated January 243 2006 and
Resolution[4] dated May 18, 2006, The Court of Appeals lifted and cancelled the writ of
preliminary injunction issued by the Regional Trial Court, [5] which enjoined respondents
Pablito O. Lim (Lim), Manuel A. Agcaoili (Agcaoili), and Consuelo M. Padilla (Padilla), or their
representatives, from gaining access to the records of Philippine Associated Smelting and
Refining Corporation.: The records were then classified as either confidential or inexistent
until further orders from the court. [6]
"WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito
Lim, Manuel A. Agcaoili and Consuelo N. Padilla or their representatives from gaining access
to records of Philippine Associated Smelting and Refining Corporation which are presently
classified as either confidential or inexistent, until further orders from this Court.
Petitioner is required to execute a bond in the amount of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) in favor of herein respondents to answer for all damages which the latter may
sustain by reason of the injunction should this Court, finally decide that petitioner is not
entitled thereto.
SO ORDERED."

As summarized by the Court of Appeals, the facts are as follows:

On May 26, 2004, petitioners filed a Motion for Dissolution of the Writ of Preliminary
Injunction on the ground that the petition is insufficient. Petitioners claim that the
enforcement of the right to inspect book should be on the stockholders and not on PASAR.
Philippine Associated Smelting and Refining Corporation (hereafter PASAR) is a corporation Petitioners further claim that no irreparable injury is caused to PASAR which justifies the
duly organized and existing under the laws of the Philippines and is engaged in copper issuance of the writ of preliminary injunction.
smelting and refining.
On January 10, 2005, the RTC issued the assailed Order, denying the Motion to Dismiss filed
On the other hand, Pablito Lim, Manuel Agcaoili and Consuelo Padilla (collectively referred to by petitioners on the ground that it is a prohibited pleading under Section 8, Rule 1 of the
as petitioners) were former senior officers and presently shareholders of PASAR holding 500 Interim Rules on Intra-Corporate Controversies under the Securities Regulation Code (RA
shares each. 8799). The Motion for Dissolution of the Writ of Preliminary Injunction was likewise denied
on the ground that the writ does not completely result in unjust denial of petitioners' right to
An Amended Petition for Injunction and Damages with prayer for Preliminary Injunction inspect the books of the corporation. The RTC further stated that if no preliminary injunction
and/or Temporary Restraining Order, dated February 4, 2004 was filed by PASAR seeking to is issued, petitioners may, before final judgment, do the act which PASAR is seeking the Court
restrain petitioners from demanding inspection of its confidential and inexistent records. to restrain which will make ineffectual the final judgment that it may afterward render.
[7]
(Emphasis in the original)
On February 23, 2004, petitioners moved for the dismissal of the petition on the following
grounds: 1) the petition states no cause of action; 2) the petition should be dismissed on
account of litis pendentia; 3) the petition is a nuisance or harassment suit; and 4) the petition Aggrieved, Lim, Agcaoili, and Padilla filed before the Court of Appeals a Petition for
should be dismissed on account of improper venue. Certiorari[8] questioning the propriety of the writ of preliminary injunction. The Court of
Appeals held that there was no basis to issue an injunctive writ, thus:
On April 14, 2004, the RTC issued an Order granting PASAR's prayer for a writ of preliminary
injunction. The RTC held that the right to inspect book should not be denied to the
112

We agree. The act of PASAR in filing a petition for injunction with prayer for writ of
preliminary injunction is uncalled for. The petition is a pre-emptive action unjustly intended
to impede and restrain the stockholders' rights. If a stockholder demands the inspection of
corporate books, the corporation could refuse to heed to such demand. When the
corporation, through its officers, denies the stockholders of such right, the latter could then
go to court and enforce their rights. It is then that the corporation could set up its defenses
and the reasons for the denial of such right. Thus, the proper remedy available for the
enforcement of the right of inspection is undoubtedly the writ of mandamus to be filed by
the stockholders and not a petition for injunction filed by the corporation.
The Order of the RTC shows that indeed there is no basis for the issuance not only of the
temporary but also of the permanent injunctive writ. The Order dated April 14, 2004 states:
"In the present case, PASAR failed to present sufficient evidence to show that respondents'
(petitioners') demand to inspect the corporate records was not made in good faith nor for a
lawful purpose. . . . PASAR is reminded that it is its burden to prove that respondents' action
in seeking examination of the corporate records was moved by unlawful or ill-motivated
designs which could appropriately call for a judicial protection against the exercise of such
right[.]"[9]
Hence, Philippine Associated Smelting and Refining Corporation filed this Petition praying that
this Court render judgment:
(a) reversing and setting aside the Decision dated 24 January 2006 and Resolution dated 18
May 2006 rendered by the Court of Appeals;
(b) reinstating the writ of preliminary injunction granted by the RTC in its Order dated 14 April
2004, and consequently ordering respondents to desist from further harassing, vexing, or
annoying petitioner with threats of filing criminal complaints against its President, Bruce
Anderson, and other appropriate parties, as embodied in the letters dated 25 and 27
February 2006 and 31 March 2006;
(c) reinstating the main action for injunction and ordering the RTC to continue hearing SEC
Case No. 04-33;
(d) meanwhile, it is respectfully prayed that a temporary restraining order or status quo order
be issued by this Honorable Court to urgently restrain respondents from further committing
acts which are bases for the application of the writ of preliminary injunction. [10]
In the Resolution[11] dated July 19, 2006, this Court denied petitioner's prayer for the issuance
of a temporary restraining order and required respondents Lim, Agcaoili, and Padilla to
comment on the Petition.
Respondents filed their Comment[12] on October 16, 2006 through counsel Cayetano
Sebastian Ata Dado & Cruz. On October 20, 2006, they filed a second Comment [13] through
counsel Siguion Reyna Montecillo & Ongsiako. Petitioner filed a Motion for Leave to Admit
Attached Reply,[14] together with its Reply,[15] on December 12, 2006.
In the Resolution[16] dated January 24, 2007, this Court noted respondents' separate
Comments and petitioner's Reply. The parties were also directed to submit their respective
memoranda within 30 days from notice. [17] Respondents filed their Memorandum [18] on March
26, 2007, and petitioner filed its Memorandum [19] on April 2, 2007.
Petitioner argues that the right of a stockholder to inspect corporate books and records is
limited in that any demand must be made in good faith or for a legitimate purpose.
[20]
Respondents, however, have no legitimate purpose in this case. [21] If respondents gain
access to petitioner's confidential records, petitioner's trade secrets and other confidential
information will be used by its former officers to give undue commercial advantage to third
parties.[22] Petitioner insists that to hold that objections to the right of inspection can only be
raised in an action for mandamus brought by the stockholder, would leave a corporation
helpless and without an adequate legal remedy. [23] To leave the corporation helpless negates
the doctrine that where there is a right, there is a remedy for its violation. [24]
Petitioner argues that it has the right to protect itself against all forms of embarrassment or
harassment against its officers, including the filing of criminal cases against them.
[25]
Moreover, respondents' request for inspection of confidential corporate records and
documents violates and breaches petitioner's right to peaceful and continuous possession of
its confidential records and documents. [26]
Petitioner further argues that respondents' Motion for Dissolution before the Court of
Appeals did not comply with Rule 58, Section 6 of the Rules of Court. Therefore, the Motion
should not have been granted.[27] Likewise, respondents' Motion to Dismiss is a prohibited
pleading under Rule 1, Section 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies[28] and should not have been granted. [29] In any case, the Court of Appeals
should have remanded the case to the trial court for further disposition. [30]
113
We are asked to resolve whether injunction properly lies to prevent respondents from (b) reinstating the writ of preliminary injunction granted by the RTC in its Order dated 14 April
invoking their right to inspect. 2004, and consequently ordering respondents to desist from further harassing, vexing, or
annoying petitioner with threats of filing criminal complaints against its President, Bruce
We deny the Petition. Anderson, and other appropriate parties, as embodied in the letters dated 25 and 27
February 2006 and 31 March 2006;

.....
I
(d) meanwhile, it is respectfully prayed that a temporary restraining order or status quo order
be issued by this Honorable Court to urgently restrain respondents from further committing
The Petition asks this Court to enjoin acts beyond what was enjoined by the Regional Trial
acts which are bases for the application of the writ of preliminary injunction. [33]
Court in its April 14, 2004 Order. [31] The Regional Trial Court Order did not specify the
particular acts it enjoined respondents from doing:

The question as to what records should be deemed confidential and inexistent, however,
cannot be passed upon at this time, since neither were admissions made nor sufficient
evidence presented to categorically determine which corporate records are to be considered
confidential and inexistent. In the meantime, then, and in order to prevent grave and
irreparable injury on the part of PASAR should otherwise be allowed [sic], respondents' right
to inspect is limited to the ordinary records as identified and classified by PASAR. Subsequent
hearings shall be set to determine which among the corporate records demanded to be
inspected by the respondents are indeed confidential or inexistent, and to further determine
whether or not the issuance of a writ of final injunction is in order.
WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito Lim,
Manuel A. Agcaoili and Consuelo N. Padilla or their representatives from gaining access to
records of Philippine Associated Smelting & Refining Corporation which are presently
classified as either confidential or inexistent, until further orders from this Court. [32] (Emphasis
supplied)
What precisely is contemplated by the phrase "gaming access to records" is not clear.
Taking advantage of this ambiguity, petitioner prays that the injunction be reinstated and that
this Court enjoin respondents from "harassing, vexing, or annoying petitioner with threats of
filing criminal complaints" and from "further committing acts which are bases for the
application of the writ of preliminary injunction":
Petitioner claims that respondents are materially and substantially invading its right to
protect itself by demanding to inspect petitioner's purportedly confidential records.
Respondents wrote petitioner and demanded to inspect its corporate books and records.
[34]
They reiterated this demand in a subsequent letter. [35]
On at least two (2) occasions, respondents went to petitioner's office to again demand that
they be allowed to inspect.[36] On one of these occasions, respondents brought members of
the press, caused work disruption, and harassed petitioner's representatives who met with
them.[37] When asked the purpose of the inspection of certain records not ordinarily
inspected by stockholders, respondents answered they wished to ensure that petitioner's
business transactions were "above board" and "entered into for the best interest of the
company."[38]
During negotiations on the terms of confidentiality agreements to be executed before
respondents are allowed to inspect certain confidential records, respondents wrote petitioner
stating that they would proceed to inspect the corporate books and records. They warned
petitioner that should petitioner fail to allow inspection, they would initiate legal proceedings
against it.[39] They refused to accept the final terms and conditions of the confidentiality
agreement and wrote another letter, reiterating their demand to inspect confidential records.
[40]
After petitioner filed before the Regional Trial Court of Pasig City a Petition for Declaratory
Relief[41] seeking a declaration of the rights and duties of the parties in relation to the
inspection of the records, respondent Lim filed a criminal Complaint [42] against some of
petitioner's officers for infringing on their right to inspect petitioner's corporate books and
records.[43] As a result, a criminal case was filed against Javier Herrero, petitioner's Former
President, and Jocelyn Sanchez-Salazar, its Former Corporate Secretary. [44] Respondents
caused news reports to be published on the arrest warrants issued in relation to these
Informations.[45]
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Respondents wrote another letter dated January 30, 2004 demanding again that they be (b) That the commission, continuance or non- performance of the act or acts complained of
allowed to inspect, among others, the confidential records. [46] On March 31, 2006, during the litigation would probably work injustice to the applicant; or
respondents wrote another letter threatening to file criminal charges if they were not allowed
to inspect the confidential records. They stated that they wanted to ensure that petitioner (c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is
complied with environmental laws in the operations of its plant in Leyte. [47] procuring or suffering to be done some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and tending to render the
On April 7, 2006, petitioner advised respondents that it would furnish them with records kept judgment ineffectual.
by the Department of Environment and Natural Resources. These records supposedly showed
that all environmental laws were complied with.[48] On June 28, 2006 and July 4, 2006,
respondents Lim and Padilla wrote to demand that they be allowed to inspect the audited In Duvaz Corp. v. Export and Industry Bank:[53]
financial statements for 2004 and 2005; the interim statements for the end of May 2006; and
more detailed records on finance, production, marketing, and purchasing. [49]

Anent the first issue, the requisites for preliminary injunctive relief are: (a) the invasion of the
In September 2006, after a stockholders' meeting, respondents again demanded access to
right sought to be protected is material and substantial; (b) the right of the plaintiff is clear
certain information and documents. [50] In a letter dated September 8, 2006, respondents
and unmistakable; and (c) there is an urgent and paramount necessity for the writ to prevent
again asked about balance sheet accounts, advances to suppliers, trade and other
serious damage. As such, a writ of preliminary injunction may be issued only upon clear
receivables, inventory, investments, current assets, trade and other payables, related party
showing of an actual existing right to be protected during the pendency of the principal
transactions, cost of goods manufactured and sold, selling and administrative expenses, other
action. The twin requirements of a valid injunction are the existence of a right and its actual
operating expenses, metal hedging, and staff costs, among others. [51]
or threatened violation. Thus, to be entitled to an injunctive writ, the right to be protected
and the violation against that right must be shown.
For an action for injunction to prosper, the applicant must show the existence of a right, as
well as the actual or threatened violation of this right. [52]
In Almeida v. Court of Appeals, the Court stressed how important it is for the applicant for an
injunctive writ to establish his right thereto by competent evidence:
Specifically, for a writ of preliminary injunction to be issued, Rule 58 of the Rules of Court
provides:

Thus, the petitioner, as plaintiff, was burdened to adduce testimonial and/or documentary
evidence to establish her right to the injunctive writs. It must be stressed that injunction is
RULE 58
not designed to protect contingent or future rights, and, as such, the possibility of irreparable
PRELIMINARY INJUNCTION
damage without proof of actual existing right is no ground for an injunction. A clear and
positive right especially calling for judicial protection must be established. Injunction is not a
.... remedy to protect or enforce contingent, abstract, or future rights; it will not issue to protect
a right not in esse and which may never arise, or to restrain an action which did not give rise
SEC. 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may be to a cause of action. There must be an existence of an actual right. Hence, where the plaintiffs
granted when it is established: right or title is doubtful or disputed, injunction is not proper.

. . . .

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief An injunctive remedy may only be resorted to when there is a pressing necessity to avoid
consists in restraining the commission or continuance of the act or acts complained of, or in injurious consequences which cannot be remedied under any standard compensation. The
requiring the performance of an act or acts either for a limited period or perpetually; possibility of irreparable damage without proof of an. actual existing right would not justify

115
injunctive relief in his favor. member entered or left the meeting must be noted in the minutes; and on a similar demand,
the yeas and nays must be taken on any motion or proposition, and a record thereof carefully
. . . . made. The protest of any director, trustee, stockholder or member on any action or proposed
action must be recorded in full on his demand.
In the absence of a clear legal right, the issuance of the injunctive writ constitutes grave
abuse of discretion. As the Court had the occasion to state in Olalia v. Hizon . . . : The records of all business transactions of the corporation and the minutes of any meetings
shall be open to the inspection of any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand, in writing, for a copy
of excerpts from said records or minutes, at his expense.
It has been consistently held that there is no power the exercise of which is more delicate,
which requires greater caution, deliberation and sound discretion, or more dangerous in a Any officer or agent of the corporation who shall refuse to allow any director, trustee,
doubtful case, than the issuance of an injunction. It is the strong arm of equity that should stockholder or member of the corporation to examine and copy excerpts from its records or
never be extended unless to cases of great injury, where courts of law cannot afford an minutes, in accordance with the provisions of this Code, shall be liable to such director,
adequate or commensurate remedy in damages. trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if such refusal is
Every court should remember that an injunction is a limitation upon the freedom of action of pursuant to a resolution or order of the Board of Directors or Trustees, the liability under this
the defendant and should not be granted lightly or precipitately. It should be granted only section for such action shall be imposed upon the directors or trustees who voted for such
when the court is fully satisfied that the law permits it and the emergency demands it. refusal: and Provided, further, That it shall be a defense to any action under this section that
[54]
(Emphasis supplied, citations omitted) the person demanding to examine and copy excerpts from the corporation's records and
minutes has improperly used any information secured through any prior examination of the
records or minutes of such corporation or of any other corporation, or was not acting in good
faith or for a legitimate purpose in making his demand. (Emphasis supplied)
Thus, an injunction must fail where there is no clear showing of both an actual right to be
protected and its threatened violation, which calls for the issuance of an injunction.

The Corporation Code provides that a stockholder has the right to inspect the records of all The right to inspect under Section 74 of the Corporation Code is subject to certain limitations.
business transactions of the corporation and the minutes of any meeting at reasonable hours However, these limitations are expressly provided as defenses in actions filed under Section
on business days. The stockholder may demand in writing for a copy of excerpts from these 74. Thus, this Court has held that a corporation's objections to the right to inspect must be
records or minutes, at his or her expense: raised as a defense:

Title VIII
Corporate Books and Records
SECTION 74. Books to be Kept; Stock Transfer Agent. — Every corporation shall, at its principal
office, keep and carefully preserve a record of all business transactions, and minutes of all
meetings of stockholders or members, or of the board of directors or trustees, in which shall
be set forth in detail the time and place of holding the meeting, how authorized, the notice
given, whether the meeting was regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting. Upon the demand of any
director, trustee, stockholder or member, the time when any director, trustee, stockholder or
2) the person demanding to examine and copy excerpts from the corporation's records and
minutes has not improperly used any information secured through any previous examination
of the records of such corporation; and 3) the demand is made in good faith or for a
legitimate purpose. The latter two limitations, however, must be set up as a defense by the
corporation if it is to merit judicial cognizance. As such, and in the absence of evidence, the
PCGG cannot unilaterally deny a stockholder from exercising his statutory right of inspection
based on an unsupported and naked assertion that private respondent's motive is improper
or merely for curiosity or on the ground that the stockholder is not in friendly terms with the
corporation's officers.[55]
116

Gokongwei, Jr. v. Securities and Exchange Commission [56] stresses that "impropriety of
purpose . . . must be set up the [sic] corporation defensively":
The stockholder's right of inspection of the corporation's books and records is based upon
their ownership of the assets and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a quasi-ownership. This right is predicated
upon the necessity of self-protection. It is generally held by majority of the courts that where
the right is granted by statute to the stockholder, it is given to him as such and must be
exercised by him with respect to his interest as a stockholder and for some purpose germane
thereto or in the interest of the corporation. In other words, the inspection has to be
germane to the petitioner's interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation. In Grey v. Insular Lumber, this
Court held that "the right to examine the books of the corporation must be exercised in good
faith, for specific and honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes." The weight of judicial opinion appears to be, that on application for
mandamus to enforce the right, it is proper for the court to inquire into and consider the
stockholder's good faith and his purpose and motives hi seeking inspection. Thus, it was held
that "the right given by statute is not absolute and may be refused when the information is
not sought in good faith or is used to the detriment of the corporation." But the "impropriety
of purpose such as will defeat enforcement must be set up the corporation defensively if the
Court is to take cognizance of it as a qualification. In other words, the specific provisions
take from the stockholder the burden of showing propriety of purpose and place upon the
corporation the burden of showing impropriety of purpose or motive." It appears to be the
"general rule that stockholders are entitled to full information as to the management of the
corporation and the manner of expenditure of its funds, and to inspection to obtain such
information, especially where it appears that the company is being mismanaged or that it is
being managed for the personal benefit of officers or directors or certain of the stockholders
to the exclusion of others."[57] (Emphasis supplied, citations omitted)
Terelay Investment and Development Corp. v. Yulo [58] has held that although the corporation
may deny a stockholder's request to inspect corporate records, the corporation must show
that the purpose of the shareholder is improper by way of defense:
The right of the shareholder to inspect the books and records of the petitioner should not be
made subject to the condition of a showing of any particular dispute or of proving any
mismanagement or other occasion rendering an examination proper, but if the right is to be
denied, the burden of proof is upon the corporation to show that the purpose of the
shareholder is improper, by way of defense. According to a recognized commentator:
By early English decisions it was formerly held that there must be something more than bare
suspicion of mismanagement or fraud. There must be some particular controversy or
question in which the party applying was interested, and inspection would be granted only so
far as necessary for that particular occasion. By the general rule in the United States,
however, shareholders have a right to inspect the books and papers of the corporation
without first showing any particular dispute or proving any mismanagement or other
occasion rendering an examination proper. The privilege, however, is not absolute and the
corporation may show in defense that the applicant is acting from wrongful motives.
In Guthrie v. Harkness, there was involved the right of a shareholder hi a national bank to
inspect its books for the purpose of ascertaining whether the business affairs of the bank' had
been conducted according to law, and whether, as suspected, the bank was guilty of
irregularities. The court said: "The decisive weight of American authority recognizes the right
of the shareholder, for proper purposes and under reasonable regulations as to place and
time, to inspect the books of the corporation of which he is a member. . . . In issuing the writ
of mandamus the court will exercise a sound discretion and grant the right under proper
safeguards to protect the interest of all concerned. The writ should not be granted for
speculative purposes or to gratify idle curiosity or to aid a blackmailer, but it may not be
denied to the stockholder who seeks the information for legitimate purposes."
Among the purposes held to justify a demand for inspection are the following: (1) To
ascertain the financial condition of the company or the propriety of dividends; (2) the value
of the shares of stock for sale or investment; (3) whether there has been mismanagement; (4)
in anticipation of shareholders' meetings to obtain a mailing list of shareholders to solicit
proxies or influence voting; (5) to obtain information in aid of litigation with the corporation
or its officers as to corporate transactions. Among the improper purposes which may justify
denial of the right of inspection are: (1) Obtaining of information as to business secrets or to
aid a competitor; (2) to secure business "prospects" or investment or advertising lists; (3) to
find technical defects in corporate transactions in order to bring "strike suits" for purposes of
blackmail or extortion.
In general, however, officers and directors have no legal authority to close the office doors
against shareholders for whom they are only agents, and withhold from them the right to
inspect the books which furnishes the most effective method of gaining information which
the law has provided, on mere doubt or suspicion as to the motives of the shareholder. While
117
there is some conflict of authority, when an inspection by a shareholder is contested, the
burden is usually held to be upon the corporation to establish a probability that the applicant
is attempting to gain inspection for a purpose not connected with his interests as a
shareholder, or that his purpose is otherwise improper. The burden is not upon the petitioner
to show the propriety of his examination or that the refusal by the officers or directors was
wrongful, except under statutory provisions. [59] (Citations omitted)
Among the actions that may be filed is an action for specific performance, damages, petition
for mandamus, or for violation of Section 74, in relation to Section 144 of the Corporation
Code, which provides:
SECTION 144. Violations of the Code. — Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of not
less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00)
pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years,
or both, in the discretion of the court. If the violation is committed by a corporation, the
same may, after notice and hearing, be dissolved in appropriate proceedings before the
Securities and Exchange Commission: Provided, That such dissolution shall not preclude the
institution of appropriate action against the director, trustee or officer of the corporation
responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in this Code.
In this case, petitioner invokes its right to raise the limitations provided under Section 74 of
the Corporation Code. However, petitioner provides scant legal basis to claim this right
because it does not raise the limitations as a matter of defense. As properly appreciated by
the Court of Appeals:
We agree. The act of PASAR in filing a petition for injunction with prayer for writ of
preliminary injunction is uncalled for. The petition is a pre-emptive action unjustly intended
to impede and restrain the stockholders' rights. If a stockholder demands the inspection of
corporate books, the corporation could refuse to heed to such demand. When the
corporation, through its officers, denies the stockholders of such right, the latter could then
go to court and enforce their rights. It is then that the corporation could set up its defenses
and the reasons for the denial of such right. Thus, the proper remedy available for the
enforcement of the right of inspection is undoubtedly the writ of mandamus to be filed by
the stockholders and not a petition for injunction filed by the corporation. [60]
Petitioner insists that the Court of Appeals erred in relying on Section 74 of the Corporation
Code. It claims that jurisprudence allows the corporation to prevent a stockholder from
inspecting records containing confidential information. [61] Petitioner cites W.G Philpotts v.
Philippine Manufacturing Company:[62]
In order that the rule above stated may not be taken in too sweeping a sense, we deem it
advisable to say that there are some things which a corporation may undoubtedly keep
secret, notwithstanding the right of inspection given by law to the stockholder; as, for
instance, where a corporation engaged in the business of manufacture, has acquired a
formula or process, not generally known, which has proved of utility to it in the manufacture
of its products. It is not our intention to declare that the authorities of the corporation, and
more particularly the Board of Directors, might not adopt measures for the protection of such
process from publicity.[63]
However, W.G Philpotts cannot support petitioner's contention since it involved a petition for
mandamus where the stockholder prayed to be allowed to exercise its right to inspect, and
the respondent's objections were raised as a defense. Nothing in W.G. Philpotts grants a
corporation a cause of action to enjoin the exercise of the right of inspection by a stockholder.
The clear provision in Section 74 of the Corporation Code is sufficient authority to conclude
that an action for injunction and, consequently, a writ of preliminary injunction filed by a
corporation is generally unavailable to prevent stockholders from exercising their right to
inspection. Specifically, stockholders cannot be prevented from gaining access to the (a)
records of all business transactions of the corporation; and (b) minutes of any meeting of
stockholders or the board of directors, including their various committees and
subcommittees.
The grant of legal personality to a corporation is conditioned on its compliance with certain
obligations. Among these are its fiduciary responsibilities to its stockholders. Providing
stockholders with access to information is a fundamental basis for their intelligent
participation in the governance of the corporation as a business organization that they
partially own. The law is agnostic with respect to the amount of shares required. Generally,
each individual stockholder should be given reasonable access so that he or she can assess or
share his or her assessment of the management of the corporation with other stockholders.
The separate legal personality of a corporation is not so absolutely separate that it divorces
itself from its responsibility to its constituent owners.
118
The law takes into consideration the potential disparity in the financial legal resources under Rule 65 of the Rules of Court based on the grave abuse of discretion on the part of the
between the corporation and an ordinary stockholder. The phraseology of the text of the law Regional Trial Court in issuing the writ of preliminary injunction.
provides that access to the information mentioned in Section 74 of the Corporation Code is
mandatory. The presumption is that the corporation should provide access. If it has basis for Petitioner invokes Rule 58, Section 6 of the Rules of Court, which provides:
denial, then the corporation shoulders the risks of being sued and of successfully raising the
proper defenses. The corporation cannot immediately deploy its resources—part of which is
owned by the requesting stockholder—to put the owner on the defensive.
SEC. 6. Grounds for Objection to, or for Motion of Dissolution of, Injunction or Restraining
Specifically, corporations may raise their objections to the right of inspection through Order. — The application for injunction or restraining order may be denied, upon a showing
affirmative defense in an ordinary civil action for specific performance or damages, or of its insufficiency. The injunction or restraining order may also be denied, or, if granted, may
through a comment (if one is required) in a petition for mandamus. [64] The corporation or be dissolved, on other grounds upon affidavits of the party or person enjoined, which may be
defendant or respondent still carries the burden of proving (a) that the stockholder has opposed by the applicant also by affidavits. It may further be denied, or, if granted, may be
improperly used information before; (b) lack of good faith; or (c) lack of legitimate purpose. [65] dissolved, if it appears after hearing that although the applicant is entitled to the injunction
or restraining order, the issuance or continuance thereof, as the case may be, would cause
Good faith and a legitimate purpose are presumed. It is the duty of the corporation to allege irreparable damage to the party or person enjoined while the applicant can be fully
and prove with sufficient evidence the facts that give rise to a claim of bad faith as to the compensated for such damages as he may suffer, and the former files a bond in an amount
existence of an illegitimate purpose. fixed by the court conditioned that he will pay all damages which the applicant may suffer by
the denial or the dissolution of the injunction or restraining order. If it appears that the extent
The confidentiality of business transactions is not a magical incantation that will defeat the of the preliminary injunction or restraining order granted is too great, it may be modified.
request of a stockholder to inspect the records. Although it is true that the business is
entitled to the protection of its trade secrets and other intellectual property rights, facts must
be pleaded to convince the court that a specific stockholder's request for inspection, under Petitioner assails respondents' failure to submit any affidavit or counter-bond pertaining to
certain conditions, would violate the corporation's own legal right. irreparable damage and compensation of damages that may be suffered if the injunction is
dissolved.[66]
Furthermore, the discomfort caused to the management of a corporation when a request for
inspection is claimed is part of the regular matters that a business wanting to ensure good However, the injunction was lifted and cancelled via a petition for certiorari under Rule 65 of
governance must endure. The range between discomfort and vexation is a broad one, which the Rules of Court, [67] not based on a motion for dissolution of the injunction. Thus, the Court
may tend to be located in the personalities of those involved. of Appeals evaluated the basis for the injunction granted by the Regional Trial Court rather
than whether the injunction would cause irreparable damage to respondents.
Certainly, by themselves, these are not sufficient factual basis to conclude bad faith on the
part of the requesting stockholder. Courts must be convinced that the scope or manner of the WHEREFORE, the Petition is DENIED.
request and the conditions under which it was made are so frivolous that the huge cost to the
business will, in equity, be unfair to the other stockholders. There is no iota of evidence that SO ORDERED.
this happened here.

II

The Court of Appeals did not commit an error of law in disregarding the procedure on
dissolution of injunctive writs. It lifted and cancelled the injunction via a petition for certiorari
119
G.R. No. 184317
METROPOLITAN BANK AND TRUST COMPANY, Petitioner,
vs.
LIBERTY CORRUGATED BOXES MANUFACTURING CORPORATION, Respondent.
DECISION
LEONEN, J.:
A corporation with debts that have already matured may still file a petition for rehabilitation
under the Interim Rules of Procedure on Corporation Rehabilitation.
This resolves a Petition for Review1 on certiorari assailing the Court of Appeals' June 13, 2008
Decision2 and August 20, 2008 Resolution. 3 The Court of Appeals affirmed the Regional Trial
Court's December 21, 2007 Order 4 approving Liberty Corrugated Boxes Manufacturing
Corp.'s rehabilitation plan.
Respondent Liberty Corrugated Boxes Manufacturing Corp. (Liberty) is a domestic corporation
that produces corrugated packaging boxes. 5 It obtained various credit accommodations and
loan facilities from petitioner Metropolitan Bank and Trust Company (Metrobank) amounting
to ₱19,940,000.00. To secure its loans, Liberty mortgaged to Metrobank 12 lots in Valenzuela
City. 6
Liberty defaulted on the loans. 7
On June 21, 2007, Liberty filed a Petition 8 for corporate rehabilitation before Branch 74 of the
Regional Trial Court of Malabon City. Liberty claimed that it could not meet its obligations to
Metrobank because of the Asian Financial Crisis, which resulted in a drastic decline in
demand for its goods, and the serious sickness of its Founder and President, Ki Kiao Koc. 9
Liberty's rehabilitation plan consisted of: (a) a debt moratorium; (b) renewal of marketing
efforts; (c) resumption of operations; and (d) entry into condominium development, a new
business.10
On June 27, 2007, the Regional Trial Court, finding the Petition sufficient in form and
substance, issued a Stay Order 11 and set an initial hearing for the Petition. On August 6, 2007,
Metro bank filed its Comment/Opposition. It argued that Liberty was not qualified for
corporate rehabilitation; that Liberty's Petition for rehabilitation and rehabilitation plan were
defective; and that rehabilitation was not feasible. It also claimed that Liberty filed the
Petition solely to avoid its obligations to the bank.
In its September 20, 2007 Order, 12 the Regional Trial Court gave due course to the Petition
and referred the rehabilitation plan to the Rehabilitation Receiver.
Rehabilitation Receiver Rafael Chris F. Teston recommended the approval of the plan,
provided that Liberty would initiate construction on the property in Valenzuela within 12
months from approval. 13
In its December 21, 2007 Order, 14 the Regional Trial Court approved the rehabilitation plan.
The trial court found that Liberty was capable of being rehabilitated and that the
rehabilitation plan was feasible and viable. 15
Metrobank appealed to the Court of Appeals. On June 13, 2008, the Court of Appeals issued
the Decision16 denying the Petition and affirming the Regional Trial Court's December 21,
2007 Order.
The Court of Appeals affirmed the Regional Trial Court's finding that debtor corporations
could still avail themselves of the remedy of rehabilitation under the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules) even if they were already in
default. 17 It held that even insolvent corporations could still file a petition for rehabilitation. 18
The Court of Appeals also found that the trial court correctly approved the rehabilitation plan
over Metrobank's Opposition upon the recommendation of the Rehabilitation Receiver, who
had carefully considered and addressed Metrobank's criticism on the plan's viability. 19
The Court of Appeals stressed that the purpose of rehabilitation proceedings is to enable the
distressed company to gain a new lease on life and to allow the creditors to be paid their
claims. It held that the approval of the Regional Trial Court was precisely "'to effect a feasible
and viable rehabilitation' of ailing corporations[,]" 20 as required by Presidential Decree No.
902-A.
Metrobank moved for reconsideration, but the Motion was denied21 on August 20, 2008.
Hence, this Petition was filed.
This Court required respondent Liberty Corrugated Boxes Manufacturing Corp. to file its
comment on the Petition within 10 days from notice.22 On March 23, 2009, respondent filed
its Comments to the Petition, 23 noted by this Court in its April 20, 2009
Resolution.24 Petitioner Metropolitan Bank and Trust Company filed its Reply 25 dated May 26,
2009, which this Court noted in its July 20, 2009 Resolution. 26 This Court also gave due course
to the Petition and required the parties to submit their respective memoranda within 30 days
from notice.
The parties filed their Memoranda on September 24, 2009 27 and November 3, 2009.28
Petitioner argues that respondent can no longer file a petition for corporate rehabilitation. It
claims that Rule 4, Section 1 of the Interim Rules restricts the kind of debtor who can file
petitions for corporate rehabilitation. 29 Petitioner insists that the phrase "who fore sees the
impossibility of meeting its debts when they respectively fall due" must be construed plainly
120
to mean that an element of foresight is required. 30 Because foresight is required, the debts of
the corporation should not have matured. 31
Petitioner also argues that the Regional Trial Court's approval of the rehabilitation plan is
contrary to Rule 4, Section 23 of the Interim Rules. 32 Under the provision, the court may
approve the rehabilitation plan over the opposition of the creditors only when two (2)
elements concur: (a) when the court finds that the rehabilitation of the debtor is feasible; and
(b) when the opposition of the creditors is "manifestly unreasonable." 33 Petitioner claims that
the Regional Trial Court did not declare the manifest unreasonableness of petitioner's
opposition.34
Petitioner likewise argues that respondent's Petition for rehabilitation and the attached
inventory of accounts receivable failed to disclose the maturity dates of the accounts. 35 This
failure renders the Petition defective under Rule 4, Section 2(d) of the Interim Rules. 36
Petitioner further claims that the rehabilitation plan lacked material financial commitments
required under Rule 4, Section 5 of the Interim Rules. 37 The rehabilitation plan did not claim
that new money would be invested in the corporation. 38
On the other hand, respondent insists on its qualification to seek rehabilitation. 39 It argues
that petitioner's reading of Rule 4, Section 1 of the Interim Rules is restrictive, merely
indicating the minimum conditions for a debtor to be able to file a petition for
rehabilitation. 40
In support of its claim that the remedy of corporate rehabilitation covers defaulting debtors,
respondent cites Rule 4, Sections 4 41 and 642 of the Interim Rules.43 Under Section 6, a stay
order, which may assume that cases have been filed to collect on matured debts, may be
granted.
Respondent argues that the Court of Appeals' finding that the rehabilitation plan is feasible is
well-grounded and in keeping with Rule 4, Section 23 of the Interim Rules. 44 The
Rehabilitation Receiver deemed the rehabilitation plan viable. 45 The Petition also listed the
receivables, clearly due for collection, in its annexes. 46
Respondent further contends that contrary to petitioner's arguments, the rehabilitation plan
contains material financial commitments.47 When the Interim Rules speak of "material
financial commitments to support the rehabilitation plan," 48 it does not mean that the
commitment must come from outside sources. The corporation's showing that the
rehabilitation plan can find sufficient funding should be sufficient. 49
The issues for resolution are:
First, whether respondent, as a debtor in default, is qualified to file a petition for
rehabilitation under Presidential Decree No. 902-A and Rule 4, Section 1 of the Interim Rules;
and
Second, whether respondent's Petition for rehabilitation is sufficient in form and substance
and respondent's rehabilitation plan, feasible.
I.A
A corporation that may seek corporate rehabilitation is characterized not by its debt but by its
capacity to pay this debt.
Rule 4, Section 1 of the Interim Rules provides:
RULE4
Debtor-Initiated Rehabilitation
SECTION 1. Who May Petition. - Any debtor who foresees the impossibility of meeting its
debts when they respectively fall due, or any creditor or creditors holding at least twenty-five
percent (25%) of the debtor's total liabilities, may petition the proper Regional Trial Court to
have the debtor placed under rehabilitation.
Petitioner insists that the words of the Interim Rules are clear and must be given their plain
and literal meaning. A better interpretation requires scrutiny of the purpose behind the
enactment of the Interim Rules and its provisions.
Philippine Bank of Communications v. Basic Polyprinters and Packaging
Corporation50reiterates the purpose of rehabilitation, which is to provide meritorious
corporations an opportunity for recovery:
Under the Interim Rules, rehabilitation is the process of restoring "the debtor to a position of
successful operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present value of payments
projected in the plan more if the corporation continues as a going concern that if it is
immediately liquidated." It contemplates a continuance of corporate life and activities in an
effort to restore and reinstate the corporation to its former position of successful operation
and solvency. 51 (Citations omitted)
As stated by the Court of Appeals in Philippine Bank of Communications, rehabilitation is in
line with the State's objective to promote a wider and more meaningful equitable distribution
of wealth. 52
In line with this objective, the Interim Rules provide for a liberal construction of its provisions:
RULE2
Definition of Terms and Construction
....
121
SECTION 2. Construction. - These Rules shall be liberally construed to carry out the objectives
of Sections 5(d), 6(c) and 6(d) of Presidential Decree No. 902-A, as amended, and to assist the
parties in obtaining a just, expeditious, and inexpensive determination of cases. Where
applicable, the Rules of Court shall apply suppletorily to proceedings under these Rules.
To adopt petitioner's interpretation would undermine the purpose of the Interim Rules. There
is no reason why corporations with debts that may have already matured should not be given
the opportunity to recover and pay their debtors in an orderly fashion. The opportunity to
rehabilitate the affairs of an economic entity, regardless of the status of its debts, redounds to
the benefit of its creditors, owners, and to the economy in general. Rehabilitation, rather
than collection of debts from a company already near bankruptcy, is a better use of judicial
rewards.
A.M. No. 08-8-1 O-SC53 further describes the remedy initiated by a petition for rehabilitation:
[A] petition for rehabilitation, the procedure for which is provided in the Interim Rules of
Procedure on Corporate Recovery, should be considered as a special proceeding. It is one that
seeks to establish the status of a party or a particular fact. As provided in section 1, Rule 4 of
the Interim Rules on Corporate Recovery, the status or fact sought to be established is
the inability of the corporate debtor to pay its debts when they fall due so that a
rehabilitation plan, containing the formula for the successful recovery of the corporation, may
be approved in the end. It does not seek a relief from an injury caused by another party.
(Emphasis supplied)
Thus, the condition that triggers rehabilitation proceedings is not the maturation of a
corporation's debts but the inability of the debtor to pay these.
I.B
Where the law does not distinguish, neither should this Court. 54 Because the definition under
the Interim Rules is encompassing, 55 there should be no distinction whether a claim has
matured or otherwise.
Petitioner's proposed interpretation contradicts provisions of the Interim Rules, which
contemplate situations where a debtor corporation may already be in default. As correctly
pointed out by respondent, a creditor may possibly petition for the debtor's rehabilitation for
default on debts already owed. 56
Rule 4, Section 1 of the Interim Rules does not specify what kind of debtor may seek
rehabilitation. The provision allows creditors holding 25% of the debtor corporation's total
liabilities to petition for the corporation's rehabilitation.
Further, Rule 4, Section 6 of the Interim Rules provides for a stay order "staying enforcement
of all claims, whether for money or otherwise and whether such enforcement is by court
action or otherwise."57 A stay order, however, only applies to the suspension of the
enforcement of claims. Hence, claims, if proper, can still be instituted in other proceedings.
There may already be pending claims against a debtor corporation for debts already matured.
In Spouses Sobrejuanite v. ASB Development, 58 the purpose of the stay order is to preserve
the rights of both the debtor corporation and its creditors:
The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an
advantage or preference over another and to protect and preserve the rights of party litigants
as well as the interest of the investing public or creditors. Such suspension is intended to give
enough breathing space for the management committee or rehabilitation receiver to make
the business viable again, without having to divert attention and resources to litigations in
various fora. 59 (Emphasis supplied, citations omitted)
The stay order prevents preference or advantage of creditors over others, including the
advantage that a creditor with matured money claims may have over one whose claims are
not in yet in default.
Rule 2, Section 1 of the Interim Rules defines the term "claim":
RULE 2
Definition of Terms and Construction
....
"Claim" shall include all claims or demands of whatever nature or character against a debtor
or its property, whether for money or otherwise.
The term "claim," which includes "all claims or demands of whatever nature or character," is
not limited to claims which have not yet defaulted.
This does not mean that those with secured claims against corporations undergoing
rehabilitation are deprived of the preference given them by law. Negros Navigation Co., Inc.
v. Court of Appeals60enumerated the guidelines in the treatment of claims against
corporations undergoing rehabilitation:
1. All claims against corporations, partnerships, or associations that are pending before any
court, tribunal, or board, without distinction as to whether or not a creditor is secured or
unsecured, shall be suspended effective upon the appointment of a management committee,
rehabilitation receiver, board, or body in accordance with the provisions of Presidential
Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of
such preference is equally suspended upon the appointment of a management committee,
rehabilitation receiver, board, or body. In the event that the assets of the corporation,
partnership, or association are finally liquidated, however, secured and preferred credits
122
under the applicable provisions of the Civil Code will definitely have preference over
unsecured ones.61
While the corporation is undergoing rehabilitation, all claims, regardless of nature, are
suspended from enforcement. However, once the corporation has successfully rehabilitated
or finally liquidated, the enforcement of these secured claims takes precedence.
In Negros Navigation Co., Tsuneishi Heavy Industries (Tsuneishi) filed a collection case against
Negros Navigation Co, Inc. (Negros Navigation) for repairman's lien, or the unpaid services for
the repair of its vessels. 62 The Regional Trial Court of Cebu issued a writ of preliminary
attachment against Negros Navigation's properties and held that Tsuneishi's repairman's lien
constituted a superior maritime lien. 63 Negros Navigation then filed before the Regional Trial
Court of Manila a petition for corporate rehabilitation with prayer for suspension of
payments, which the trial court, in issuing a stay order, granted. 64 On appeal, Tsuneishi argued
before this Court that its maritime liens were not covered by the stay order. 65
This Court held that the admiralty proceeding was appropriately suspended under Rule 4,
Section 6 of the Interim Rules, there being no exemptions or distinctions in the law on what
kinds of claims are covered by suspension:
The justification for the suspension of actions or claims, without distinction, pending
rehabilitation proceedings is to enable the management committee or rehabilitation receiver
to effectively exercise its/his powers free from any judicial or extra-judicial interference that
might unduly hinder or prevent the "rescue" of the debtor company. To allow such other
actions to continue would only add to the burden of the management committee or
rehabilitation receiver, whose time, effort and resources would be wasted in defending claims
against the corporation instead of being directed toward its restructuring and
rehabilitation. 66 (Citations omitted)
Likewise, in Abrera v. Hon. Barza,67College Assurance Plan Philippines, Inc. (CAP) sold pre-
need educational plans, which guaranteed the payment of tuition and other standard school
fees.68 CAP suffered financial difficulties and failed to meet its obligations under the
plans.69 The CAP planholders then filed an action for specific performance and/or annulment
of contract against CAP, its directors, and its officers. 70
CAP filed a petition for rehabilitation, which the trial court deemed sufficient in form and
substance. 71 The trial court also issued a stay order. 72
Questioning the stay order and the petition for rehabilitation, the CAP planholders argued
that CAP was a pre-need corporation and that a trust relationship existed between the
corporation and the planholders. 73 They argued that because they did not have a debtor-
creditor relationship with CAP, CAP could not apply for rehabilitation, and the stay order
could not apply to the action for specific performance. 74
This Court held that CAP, a pre-need corporation already in default of its obligations to the
planholders, could file for rehabilitation:
Under the Interim rules, "debtor" shall mean "any corporation, partnership, or
association, whether supervised or regulated by the Securities and Exchange Commission or
other government agencies, on whose behalf a petition for rehabilitation has been filed
under these Rules."
The Interim Rules does not distinguish whether a pre-need corporation like CAP cannot file a
petition for rehabilitation before the RTC. Courts are not authorized to distinguish where the
Interim Rules makes no distinction.
Moreover, under the Interim Rules, "claim" shall include "all claims or demands of whatever
nature or character against a debtor or its property, whether for money or otherwise."
"Creditor" shall mean "any holder of a claim."
Hence, the claim of petitioners for payment of tuition fees from CAP is included in the
definition of "claims" under the Interim Rules. 75 (Emphasis in the original, citations omitted)
In Express Investments III Private Ltd. and Export Development Canada v. Bayan
Telecommunications, Inc., 76 Bayan Telecommunications, Inc. (Bayantel) defaulted on its
obligations to its creditors and reached a total of ₱35.928 billion in unpaid principal and
interest.77 One of its bank creditors filed a petition for rehabilitation. 78 The trial court gave due
course to the petition.79
This Court allowed Bayantel to undergo rehabilitation proceedings despite Bayantel's status
as a debtor corporation already in default. 80
The definition of "claim" and the nature of stay orders contemplate situations where debtor
corporations already in default may be under rehabilitation. Rule 4, Section 1 does not limit
who may file a petition for rehabilitation.
I.C
The plain meaning doctrine cannot apply to Rule 4, Section 1 of the Interim Rules. In Social
Weather Stations, Inc. and Pulse Asia v. Commission on Elections: 81
First, verba legis or the so-called plain-meaning rule applies only when the law is completely
clear, such that there is absolutely no room for interpretation. Its application is premised on a
situation where the words of the legislature are clear that its intention, insofar as the facts of
a case demand from the point of view of a contemporary interpretative community, is neither
vague nor ambiguous. This is a matter of judicial appreciation. It cannot apply merely on a
party's contention of supposed clarity and lack of room for interpretation.
....
123
Second, statutory construction cannot lend itself to pedantic rigor that foments absurdity.
The dangers of inordinate insistence on literal interpretation are commonsensical and need
not be belabored. These dangers are by no means endemic to legal interpretation. Even in
everyday conversations, misplaced literal interpretations are fodder for humor. A fixation on
technical rules of grammar is no less innocuous. A pompously doctrinaire approach to text
can stifle, rather than facilitate, the legislative wisdom that unbridled textualism purports to
bolster.
Third, the assumption that there is, in all cases, a universal plain language is erroneous. In
reality, universality and uniformity of meaning is a rarity. A contrary belief wrongly assumes
that language is static. 82 (Citations omitted)
The context of the words of the statute should be considered to clarify inherent ambiguities.
Thus, in Chavez v. Judicial and Bar Council:83
Under the maxim noscitur a sociis, where a particular word or phrase is ambiguous in itself or
is equally susceptible of various meanings, its correct construction may be made clear and
specific by considering the company of words in which it is founded or which it is associated.
This is because a word or phrase in a statute is always used in association with other words or
phrases, and its meaning may, thus, be modified or restricted by the latter. The particular
words, clauses and phrases should not be studied as detached and isolated expressions, but
the whole and every part of the statute must be considered in fixing the meaning of any of its
parts and in order to produce a harmonious whole. A statute must be so construed as to
harmonize and give effect to all its provisions whenever possible. In short, every meaning to
be given to each word or phrase must be ascertained from the context of the body of the
statute since a word or phrase in a statute is always used in association with other words or
phrases and its meaning may be modified or restricted by the latter. 84 (Emphasis supplied,
citations omitted)
Where a literal meaning would lead to absurdity, 85 contradiction, or injustice,86 or otherwise
defeat the clear purpose of the lawmakers, 87 the spirit and reason of the statute may be
examined to determine the true intention of the provision. 88
In this case, the phrase "any debtor who foresees the impossibility of meeting its debts when
they respectively fall due" in Rule 4, Section 1 of the Interim Rules need not refer to a specific
period or point in time when the debts mature. It may refer to the debtor corporation's
general realization that it will not be able to fulfill its obligations-a realization that may come
before default.
Construing the phrase "when they respectively fall due" to mean that the debtor must
already be in default defeats the clear purpose of the lawmakers. It unjustly limits
rehabilitation to corporations with matured obligations.
II
This Court is not a trier of facts. 89 The factual findings of the lower courts are accorded great
weight and respect.90 This is especially so in corporate rehabilitation proceedings, to which
commercial courts are designated on account of their expertise and specialized knowledge. 91
The Court of Appeals affirmed the Regional Trial Court's findings that the Petition for
rehabilitation was sufficient and that the rehabilitation plan was reasonable. Petitioner seeks
to overturn these findings. It argues that the Petition was insufficient for its failure to include
maturity dates in the attached inventory; that the Regional Trial Court failed to determine
whether petitioner's opposition was manifestly unreasonable; and that the rehabilitation
plan was not feasible as it lacked materially significant financial commitments. 92
These are questions of fact. The resolution of these issues entails a review of the sufficiency
and weight of the evidence presented by the parties, including the inventory attached to the
Petition, as well as the other financial documents for the rehabilitation.
Pascual v. Burgos93reiterates that only questions of law should be raised in petitions
for certiorari under Rule 45:
The Rules of Court require that only questions of law should be raised in petitions filed under
Rule 45. This court is not a trier of facts. It will not entertain questions of fact as the factual
findings of the appellate courts are "final, binding[,] or conclusive on the parties and upon
this [c]ourt" when supported by substantial evidence. Factual findings of the appellate courts
will not be reviewed nor disturbed on appeal to this court.
However, these rules do admit exceptions. Over time, the exceptions to these rules have
expanded. At present, there are 10 recognized exceptions that were first listed in Medina v.
Mayor Asistio, Jr.:
(1) When the conclusion is a finding grounded entirely on speculation, surmises or
conjectures; (2) When the inference made is manifestly mistaken, absurd or impossible; (3)
Where there is a grave abuse of discretion; (4) When the judgment is based on a
misapprehension of facts; (5) When the findings of fact are conflicting; (6) When the Court of
Appeals, in making its findings, went beyond the issues of the case and the same is contrary
to the admissions of both appellant and appellee; (7) The findings of the Court of Appeals are
contrary to those of the trial court; (8) When the findings of fact are conclusions without
citation of specific evidence on which they are based; (9) When the facts set forth in the
petition as well as in the petitioner's main and reply briefs are not disputed by the
respondents; and (10) The finding of fact of the Court of Appeals is premised on the
supposed absence of evidence and is contradicted by the evidence on record.
These exceptions similarly apply in petitions for review filed before this court involving civil,
labor, tax, or criminal cases.
A question of fact requires this court to review the truthfulness or falsity of the allegations of
the parties. This review includes assessment of the "probative value of the evidence
124
presented." There is also a question of fact when the issue presented before this court is the
correctness of the lower courts' appreciation of the evidence presented by the
parties.94 (Citations omitted)
Absent any of the exceptions enumerated in Pascual, this Court will neither review nor
disturb the lower courts' findings of fact on appeal.
Petitioner contends that the Court of Appeals' findings are misapprehensions of the facts of
the case, and that these findings are conclusions without citations of their specific factual
bases. It claims that the Court of Appeals ignored respondent's failure to attach the maturity
dates95 and merely relied on respondent's self-serving assertions. 96 It also argues that the
Court of Appeals failed to refute petitioner's observations on the defects of respondent's
rehabilitation plan.97
Petitioner fails to convince. The Court of Appeals had legal and factual bases for approving
the Petition for rehabilitation.
The Interim Rules does not specify that courts must make a written declaration that a
creditor's opposition is manifestly unreasonable. The Regional Trial Court Orders gave
petitioner every opportunity to make its opposition and stance clear. In issuing the December
21, 2007 Order and approving the rehabilitation plan, the Regional Trial Court found the
opposition unreasonable.
Rule 4, Section 5 of the Interim Rules outlines the requisites of a rehabilitation plan:
RULE4
Debtor-Initiated Rehabilitation
....
SECTION 5. Rehabilitation Plan - The rehabilitation plan shall include (a) the desired business
targets or goals and the duration and coverage of the rehabilitation; (b) the terms and
conditions of such rehabilitation which shall include the manner of its implementation, giving
due regard to the interests of secured creditors; (c) the material financial commitments to
support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan,
which may include conversion of the debts or any portion thereof to equity, restructuring of
the debts, dacion en pago, or sale of assets or of the controlling interest; (e) a liquidation
analysis that estimates the proportion of the claims that the creditors and shareholders
would receive if the debtor's properties were liquidated; and (f) such other relevant
information to enable a reasonable investor to make an informed decision on the feasibility
of the rehabilitation plan.
The Regional Trial Court, as affirmed by the Court of Appeals, deemed the Petition for
rehabilitation sufficient. In its June 27, 2007 Order, it found that all the documents required
under Rule 4, Section 2 of the Interim Rules were attached to the Petition. 98
The Court of Appeals did not disregard the maturity dates. The Petition annexed a table of
accounts receivable showing obligations that had already matured.1âwphi1 Respondent
likewise admitted in the Petition99 that it could not comply with its obligations to petitioner.
Petitioner argues that the Regional Trial Court failed to rule on its Opposition and declare it
manifestly unreasonable. It claims that this failure renders respondent's Petition for
rehabilitation insufficient. This argument lacks credence.
Both the Court of Appeals and the Regional Trial Court found that the Rehabilitation Receiver
carefully considered the feasibility of the rehabilitation plan, and that no serious objection
and counter proposal were presented by petitioner. 100
Philippine Bank of Communications illustrates what may be deemed as insufficient financial
commitments:
The commitment to add ₱10,000,000.00 working capital appeared to be doubtful considering
that the insurance claim from which said working capital would be sourced had already been
written off by Basic Polyprinters's affiliate, Wonder Book Corporation. A claim that has been
written off is considered a bad debt or a worthless asset, and cannot be deemed a material
financial commitment for purposes of rehabilitation . . .
We also declared in Wonder Book Corporation v. Philippine Bank of Communications (Wonder
Book) that the conversion of all deposits for future subscriptions to common stock and the
treatment of all payables to officers and stockholders as trade payables was hardly
constituting material financial commitments. Such "conversion" of cash advances to trade
payables was, in fact, a mere re-classification of the liability entry and had no effect on the
shareholders' deficit. . . .
....
We observe, too, that Basic Polyprinters's proposal to enter into the dacion en pago to create
a source of ''fresh capital" was not feasible because the object thereof would not be its own
property but one belonging to its affiliate, TOL Realty and Development Corporation, a
corporation also undergoing rehabilitation. Moreover, the negotiations (for the return of
books and magazines from Basic Polyprinters's trade creditors) did not partake of a voluntary
undertaking because no actual financial commitments had been made thereon.
....
Due to the rehabilitation plan being an indispensable requirement in the corporate
rehabilitation proceedings, Basic Polyprinters was expected to exert a conscious effort in
formulating the same, for such plan would spell the future not only for itself but also for its
creditors and the public in general. The contents and execution of the rehabilitation plan
could not be taken lightly.101 (Emphasis supplied, citations omitted)
125
Petitioner's contention hinges on the sufficiency of respondent's material financial
commitments, which becomes significant in determining its resolve, earnestness, and good
faith. 102

Respondent intends to source its funds from internal operations. That the funds are internally
generated does not render the funds insufficient. This arrangement is still a material,
voluntary, and significant financial commitment, in line with respondent's rehabilitation plan.

Both the Court of Appeals and the Regional Trial Court found the Rehabilitation Receiver's
assurance that the cashflow from respondent's committed sources to be sufficient, thus:

From the foregoing, the undersigned deems the expected sources of cashflow to support the
proposed Rehabilitation Plan of the Petitioner as realistic. The funds requirement to
jumpstart the Rehabilitation Plan is minimal and easily obtained by the Petitioner's
management; while the income to be realized from the development of a condominium
project is also feasible. Finally, the present management of the Petitioner appears to be
capable of revitalizing and operating the Company and to generate the expected cashflow to
support its repayment program. 103

Based on his assessment, the Rehabilitation Receiver noted that the funds required to finance
the first year of the rehabilitation plan would be much less than that the amount stated in the
Petition. 104 Respondent put forth in detail its financial commitments.

Respondent, as a debtor corporation, may file for rehabilitation despite having defaulted on
its obligations to petitioner. As its Petition for rehabilitation was sufficient and its
rehabilitation plan was feasible, respondent's rehabilitation should proceed.

WHEREFORE, the Petition is DENIED. The June 13, 2008 Decision and August 20, 2008
Resolution of the Court of Appeals in CA-G.R. SP No. 102147 are AFFIRMED.

SO ORDERED.

126
G.R. No. 205045
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
SAN MIGUEL CORPORATION, Respondent,
x-----------------------x
G.R. No. 205723
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
SAN MIGUEL CORPORATION, Respondent.
DECISION
LEONEN, J.:
These consolidated cases consider whether "San Mig Light" is a new brand or a variant of one
of San Miguel Corporation's existing beer brands, and whether the Bureau of Internal
Revenue may issue notices of discrepancy that effectively changes "San Mig Light"'s
classification from new brand to variant. The issues involve an application of Section 143 of
the 1997 National Internal Revenue Code (Tax Code), as amended, on the definition of
a variant, which is subject to a higher excise tax rate than a new brand. This case also applies
the requirement in Rep. Act No. 9334 that reclassification of certain fermented liquor
products introduced between January 1, 1997 and December 31, 2003 can only be done by
an act of Congress.
The Petition1 docketed as G.R. No. 205045 assails the Court of Tax Appeals En Bane's
September 20, 2012 Decision 2 affirming the Third Division's grant of San Miguel Corporation's
refund claim in CTA Case No. 7708, and the December 11, 2012 Resolution 3 denying
reconsideration. The Commissioner of Internal Revenue prays for the reversal and setting
aside of the assailed Decision and Resolution, as well as the issuance of a new one denying
San Miguel Corporation's claim for tax refund or credit. 4
On the other hand, the Petition 5 docketed as G.R. No. 205723 and consolidated with G.R. No.
205045 assails the Court of Tax Appeals En Bane's October 24, 2012 Decision 6 dismissing the
Commissioner of Internal Revenue's appeal, and the February 4, 2013 Resolution 7 denying
reconsideration. The Commissioner of Internal Revenue prays for the reversal and setting
aside of the assailed Decision and Resolution, the issuance of a new one remanding the case
to the Court of Tax Appeals for the production of evidence in San Miguel Corporation's
possession, or, in the alternative, the dismissal of the Petitions in CTA Case Nos. 7052, 7053,
and 7405.8
On October 19, 1999, Virgilio S. De Guzman (De Guzman), San Miguel Corporation's Former
Assistant Vice President for Finance, wrote the Bureau of Internal Revenue Excise Tax Services
Assistant Commissioner Leonardo B. Albar (Assistant Commissioner Albar) to request the
registration of and authority to manufacture "San Mig Light," to be taxed at ₱12.15 per
liter.9 The letter dated October 27, 1999 granted this request. 10
On November 3, 1999, De Guzman advised Assistant Commissioner Albar that "San Mig
Light" would be sold at a suggested net retail price of ₱21.15 per liter or ₱6.98 per bottle, less
value-added tax and specific tax. "San Mig Light" would also be classified under "Medium
Priced Brand" to be taxed at ₱9.15 per liter. 11
On January 28, 2002, Alfredo R. Villacorte (Villacorte), San Miguel Corporation's Vice
President and Manager of the Group Tax Services, wrote the Bureau of Internal Revenue
Chief of the Large Taxpayers Assistance Division II (LTAD II) to request information on the tax
rate and classification of "San Mig Light" and another beer product named "Gold Eagle
King." 12
On February 7, 2002, LTAD II Acting Chief Conrado P. Item replied to Villacorte's letter. 13 He
confirmed that based on the submitted documents, San Miguel Corporation was allowed to
register, manufacture, and sell "San Mig Light" as a new brand, had been paying its excise tax
for a considerable length of time, and that the tax classification and rate of "San Mig Light" as
a new brand were in order. 14
However, on May 28, 2002, Edwin R. Abella (Assistant Commissioner Abella), Bureau of
Internal Revenue Large Taxpayers Service Assistant Commissioner, issued a Notice of
Discrepancy against San Miguel Corporation. The Notice stated that "San Mig Light" was a
variant of its existing beer products and must, therefore, be subjected to the higher excise tax
rate for variants. 15 Specifically, for the year 1999, "San Mig Light" should be taxed at the rate
of ₱19.91 per liter instead of ₱9.15 per liter; and for the year 2000, the 12% increase should
be based on the rate of Pl9.91 per liter under Section l 43(C)(2) of the Tax Code. 16 Hence, the
Notice demanded payments of deficiency excise tax in the amount of
₱824,750,204.97, exclusive of increments for years 1999 to April 2002. 17
The Finance Manager of San Miguel Corporation's Beer Division wrote a letter-reply dated
July 9, 2002 requesting the withdrawal of the Notice of Discrepancy. 18 San Miguel Corporation
stated, among other things, that "San Mig Light" was not a variant of any of its existing beer
brands because of "the distinctive shape, color scheme[,] and general appearance"; and the
"different alcohol content and innovative low calorie formulation." 19 It also emphasized that
the Escudo logo was not a beer brand logo but a corporate logo. 20
On October 14, 2002, Assistant Commissioner Abella wrote a letterrejoinder reiterating its
finding that "San Mig Light Pale Pilsen" was truly a variant of "San Miguel Pale Pilsen." 21 The
letter-rejoinder cited certain statements in San Miguel Corporation's publication, "Kaunlaran,"
and the corporation's Annual Report as support for its finding. 22
127
On November 20, 2002, Villacorte replied by requesting that "San Mig Light be reconfirmed
as a new brand . . . the deficiency assessment be set aside and the demand for payment be
withdrawn."23
Subsequently, three (3) conferences were held on the "San Mig Light" tax classification issue.
At the conference held on December 16, 2003, Commissioner Guillermo Parayno, Jr.
(Commissioner Parayno) informed San Miguel Corporation that five (5) members of the
Bureau of Internal Revenue Management Committee voted that "San Mig Light" was a variant
of "Pale Pilsen in can," while two (2) members voted that it was a variant of "Premium," a
high-priced beer product of San Miguel Corporation. 24
On January 6, 2004, Commissioner Parayno wrote San Miguel Corporation and validated the
findings that "San Mig Light" was a variant of "San Miguel Pale Pilsen in can," subject to the
same excise tax rate of the latter-that is, P13.61 per liter-and that an assessment for
deficiency excise tax against San Miguel Corporation was forthcoming. 25
On January 28, 2004, a Preliminary Assessment Notice (PAN) was issued against San Miguel
Corporation for deficiency excise tax in the amount of P852,039,418.15, inclusive of
increments, purportedly for the removals of "San Mig Pale Pilsen Light," from 1999 to January
7, 2004.26
On February 4, 2004, a Notice of Discrepancy was issued against San Miguel Corporation on
an alleged deficiency excise tax in the amount of ₱28,876,108.84, from January 8, 2004 to
January 29, 2004.27
Accordingly, on March 24, 2004, Bureau of Internal Revenue Deputy Commissioner Estelita C.
Aguirre (Deputy Commissioner Aguirre) issued a PAN against San Miguel Corporation for
₱29,967,465.37 representing deficiency excise tax, inclusive of increments, from January 8,
2004 to January 29, 2004.28
On April 12, 2004 and May 26, 2004, Deputy Commissioner Aguirre issued two (2) Formal
Letters of Demand29 to San Miguel Corporation with the accompanying Final Assessment
Notice (FAN) Nos. LTS TF 004-06-02 and LTS TF 129-05-04, respectively, directing San Miguel
Corporation to pay deficiency excise taxes in the amounts of:
(a) ₱876,098,898.83, inclusive of interest until April 30, 2004, for the period of November to
December 1999 at ₱12.52 per liter, and January 2000 to January 7, 2004 at ₱13.61 per
liter;30 and
(b) P30,763,133.68, inclusive of interest until June 30, 2004, for the period January 8, 2004 to
January 29, 2004.31
San Miguel filed a Protest/Request for Reconsideration against each FAN. 32
On August 17, 2004 and August 20, 2004, Former Large Taxpayers Service Officer-in-Charge
Deputy Commissioner Kim S. Jacinto-Henares informed San Miguel Corporation of the denial
of the Protest/Request for Reconsiderations against the two (2) FANs "for lack of legal and
factual basis."33
G.R. No. 205723
On September 1 7, 2004 and September 22, 2004, San Miguel Corporation filed before the
Court of Tax Appeals Petitions for Review, docketed as CTA Case Nos. 7052 and 7053, assailing
the denials of its Protest/Request for Reconsiderations of the deficiency excise tax
assessments.34
To prevent the issuance of additional excise tax assessments on San Mig Light products and
the disruption of its operations, San Miguel Corporation paid excise taxes at the rate of
₱13.61 beginning February 1, 2004.35
On December 28, 2005, San Miguel Corporation filed with the Bureau of Internal Revenue its
first refund claim. The claim sought the refund of ₱782,238,161.47 for erroneous excise taxes
collected on San Mig Light products from February 2, 2004 to November 30, 2005. 36
Due to inaction on its claim, on January 31, 2006, San Miguel Corporation filed before the
Court Tax Appeals a Petition for Review docketed as CTA Case No. 7405. 37 The Court of Tax
Appeals, upon motion, later consolidated CTA Case No. 7405 with CTA Case Nos. 7052 and
7053.38
The Court of Tax Appeals First Division, in its Decision 39 dated October 18, 2011, granted the
Petitions in CTA Case Nos. 7052 and 7053 and partially granted the Petition in CTA Case No.
7405.40 The Decision's dispositive portion reads:
WHEREFORE, in view of the foregoing considerations, the consolidated Petitions for Review in
CTA Case Nos. 7052 and 7053 are hereby GRANTED. The (1) [sic] letters dated August 17,
2004 and August 20, 2004 of respondents, denying petitioner's Protest/Request for
Reconsideration dated May 12, 2004 and July 7, 2004, respectively, and (2) Assessment
Notice Nos. LTS TF 004-06-02 and LTS TF 129-05-04 issued by respondent against petitioner
for the periods of November 1999 to January 7, 2004 and January 8, 2004 to January 29,
2004, are hereby CANCELLED and SET ASIDE.
Moreover, the Petition for Review in CTA Case No. 7405 is hereby PARTIALLY GRANTED.
Respondent CIR is hereby ORDERED to REFUND petitioner, or to ISSUE A TAX CREDIT
CERTIFICATE in its favor in, the amount of SEVEN HUNDRED EIGHTY ONE MILLION FIVE
HUNDRED FOURTEEN THOUSAND SEVEN HUNDRED SEVENTY TWO PESOS AND FIFTY SIX
CENTAVOUS [sic] (₱781,514,772.56), as determined below:
Claims for Over-Payment of Excise Taxes P782,238,161.47
per Petition
128
 2011) and SUPPLEMENTAL MOTION FOR PRODUCTION OF DOCUMENTS are
Less: Deductions from claims
hereby DENIED for lack of merit.

1. Excise taxes due on SML removals
per ODI which were not paid per
Returns Polo Plant
2. Excise taxes due per Excise Tax
Returns were Lesser than [the]
amounts per ODI Polo Plant
3. SML Removals per shipping
Memorandum were Greater than
OD Is
San Fernando Plant Bacolod Plant
P420,252.62 SO ORDERED.45 (Emphasis in the original)
The Court of Tax Appeals En Banc, in its Decision 46 dated October 24, 2012, dismissed the
Petition and affirmed the Division.47 It also denied reconsideration through the
Resolution48 dated February 4, 2013.
121,975.00
Hence, the Commissioner on Internal Revenue filed the Petition for Review
on Certiorari49 docketed as G.R. No. 205723.
G.R. No. 205045
On August 30, 2007, San Miguel Corporation filed its second refund claim with the Bureau of
Internal Revenue in the amount of ₱926,389,172.02. 50 Due to inaction on its claim, San
Miguel Corporation filed before the Court Tax Appeals a Petition for Review, docketed as CTA
Case No. 7708, on November 27, 2007.51
181,080.11
The Court of Tax Appeals Third Division, in its Decision dated January 7, 2011, partially
81.18 granted the Petition.52 It also denied reconsideration. 53 The Decision's dispositive portion
reads:

723,388.91 WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent
is hereby ORDERED TO REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor [of] petitioner
in the amount of ₱926,169,056.74, representing erroneously, or excessively and/or illegally
collected, and overpaid excise taxes on "San Mig Light" during the period from December 1,
Recomputed Excise Taxes for P781,5l4,772.56 2005 up to July 31, 2007.
Refund/Issuance of Tax Credit
SO ORDERED.54 (Emphasis in the original)
Certificate
On September 20, 2012, the Court of Tax Appeals En Banc 55 affirmed the Division and
41
SO ORDERED. (Emphasis in the original) thereafter also denied reconsideration. The Decision's dispositive portion reads:
The Commissioner filed a Motion for Reconsideration with Motion for Production of WHEREFORE, the present Petition for Review is hereby DENIED for lack of merit. The assailed
Documents praying that San Miguel Corporation be compelled to produce the following: (a) decision and resolution of the Third Division of this Court promulgated on January 7, 2011
"Kaunlaran" publication for the months of October 1999 and January 2000; (b) 1999 Annual and March 23, 2011, respectively, in CTA Case No. 7708 entitled "SAN MIGUEL CORPORATION
Report to stockholders; and (c) copies of the video footage of two (2) San Mig Light vs. COMMISSIONER OF INTERNAL REVENUE["], are hereby AFFIRMED.
commercials as seen in its website. 42 The Commissioner claimed "that the admission of said
documents would lead to a better illumination of the oucome of the case." 43 Accordingly, petitioner is ORDERED TO REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor
of respondent in the amount of ₱926,169,056.74, representing erroneously, excessively
The Court of Appeals First Division denied the Motions in its Resolution 44 dated February 6, and/or illegally collected and overpaid excise taxes on "San Mig Light" during the period
2012: December 1, 2005 to July 31, 2007.
WHEREFORE, premises considered, respondent's [CIR's] MOTION FOR RECONSIDERATION SO ORDERED.56 (Emphasis in the original)
WITH MOTION FOR PRODUCTION OF DOCUMENTS (Re: Decision promulgated 18 October

129
Hence, the Commissioner on Internal Revenue filed the Petition for Review
on Certiorari57 docketed as G.R. No. 205045. The two (2) cases were consolidated.
Respondent San Miguel Corporation filed its Comment 58 on the Petitions, to which petitioner
filed its Reply.59 The parties then filed their respective memoranda. 60
The issues for resolution are:
First, whether a motion for production of documents and objects may be availed of after the
court has rendered judgment;
Second, whether petitioner complied with all requisites of a motion for production of
documents and objects under Rule 27, such as a showing of good cause;
Third, whether "San Mig Light" is a new brand and not a variant of "San Miguel Pale Pilsen";
Fourth, whether the "classification freeze" in Rep. Act No. 9334 refers to the freezing of
classification of brands, and not to the freezing of net retail prices of brands;
Fifth, whether the deficiency excise tax assessments issued by the Bureau of Internal Revenue
against respondent dated April 12, 2004 and May 26, 2004 are valid; and
Lastly, whether respondent is entitled to a refund of excess payment of excise taxes on "San
Mig Light" in the amount of ₱781,514, 772.56 for the period from February 1, 2004 up to
November 30, 2005, and in the amount of ₱926,169,056.74 for the period from December 1,
2005 up to July 31, 2007.
I
Petitioner questions the denial of its Motion for Production of Documents and Objects. It
argues that this motion may be filed after pretrial or during the pendency of the action since
Rule 27, Section 1 of the Revised Rules of Civil Procedure does not explicitly provide that it
must be availed of before trial or pre-trial. 61 Petitioner contends that all requisites for filing
the motion were satisfied.62 Assuming the Motion was belatedly filed, it should have been
granted in the higher interest of justice. 63
Respondent counters that the Motions, which were filed only after the Court of Tax Appeals
Division rendered judgment, were belatedly filed since this mode of discovery must be
availed of before trial.64 Rule 27, Section 1 used the phrase, "in which an action is pending";
thus, this defines which court has authority to resolve the motion and does not define when
the motion must be made.65 Respondent contends that this remedy must be availed of before
trial in order to facilitate and expedite case preparations. 66 Respondent adds that petitioner
also failed to comply with the requisites for the motion. Specifically, the Motion did not
adequately describe the contents of the documents to be produced to show their materiality
and relevance to the case.67
Respondent further submits that the documents and objects are immaterial and irrelevant to
the issues. The documents petitioner sought to have respondent produce are referred to as
having to do with the taste, alcohol content, and calories of "San Mig Light," when the Tax
Code definition of variant has nothing to do with these matters. 68 Respondent submits that in
filing the Motions after judgment, petitioner was effectively seeking new trial, which it may
only avail itself of with "newly discovered" evidence. 69
Rule 27, Section 1 of the Revised Rules of Civil Procedure provides:
SECTION 1. Motion for production or inspection; order. - Upon motion of any party showing
good cause therefore, the court in which an action is pending may (a) order any party to
produce and permit the inspection and copying or photographing, by or on behalf of the
moving party, of any designated documents, papers, books, accounts, letters, photographs,
objects or tangible things, not privileged, which constitute or contain evidence material to
any matter involved in the action and which are in his possession, custody or control; or (b)
order any party to permit entry upon designated land or other property in his possession or
control for the purpose of inspecting, measuring, surveying, or photographing the property or
any designated relevant object or operation thereon. The order shall specify the time, place
and manner of making the inspection and taking copies and photographs, and may prescribe
such terms and conditions as are just. (Emphasis supplied)
Rule 18, Section 6 of the Rules of Court on Pre-Trial requires that the pre-trial briefs shall
include "[a] manifestation of their having availed or intention to avail themselves of discovery
procedures."
On July 13, 2004, this Court approved A.M. No. 03-1-09-SC, otherwise known as the Rule on
Guidelines to be Observed by Trial Court Judges and Clerks of Court in the Conduct of Pre-
Trial and Use of Deposition - Discovery Measures. Among other things, these rules direct trial
courts to require parties to submit, at least three (3) days before pretrial, pre-trial briefs
containing "[a] manifestation of the parties of their having availed or their intention to avail
themselves of discovery procedures or referral to commissioners." 70
Republic v. Sandiganbayan71 explained the purpose and policy behind modes of discovery:
The truth is that "evidentiary matters" may be inquired into and learned by the parties before
the trial. Indeed, it is the purpose and policy of the law that the parties - before the trial if
not indeed even before the pre-trial - should discover or inform themselves of all the facts
relevant to the action, not only those known to them individually, but also those known to
their adversaries; in other words, the desideratum is that civil trials should not be carried on
in the dark; and the Rules of Court make this ideal possible through the deposition-discovery
mechanism set forth in Rules 24 to 29. The experience in other jurisdictions has been that
ample discovery before trial, under proper regulation, accomplished one of the most
necessary ends of modern procedure: it not only eliminates unessential issues from trials
thereby shortening them considerably, but also requires parties to play the game with the
130
cards on the table so that the possibility of/air settlement before trial is measurably
increased ....
As just intimated, the deposition-discovery procedure was designed to remedy the conceded
inadequacy and cumbersomeness of the pre-trial functions of notice-giving, issue-
formulation and fact revelation theretofore performed primarily by the pleadings.
The various modes or instruments of discovery are meant to serve (1) as a device, along with
the pre-trial hearing under Rule 20, to narrow and clarify the basic issues between the
parties, and (2) as a device for ascertaining the facts relative to those issues. The evident
purpose is, to repeat, to enable the parties, consistent with recognized privileges, to obtain
the fullest possible knowledge of the issues and facts before civil trials and thus prevent
that said trials are carried on in the dark. 72 (Emphasis supplied, citations omitted)
Specifically, this Court discussed the importance of a motion for production of documents
under Rule 27 of the Rules of Court in expediting time-consuming trials:
This remedial measure is intended to assist in the administration of justice by facilitating and
expediting the preparation of cases for trial and guarding against undesirable surprise and
delay; and it is designed to simplify procedure and obtain admissions of facts and evidence,
thereby shortening costly and time-consuming trials. It is based on ancient principles of
equity. More specifically, the purpose of the statute is to enable a party-litigant to discover
material information which, by reason of an opponent's control, would otherwise be
unavailable for judicial scrutiny, and to provide a convenient and summary method of
obtaining material and competent documentary evidence in the custody or under the control
of an adversary. It is a further extension of the concept of pretrial. 73 (Emphasis supplied)
Consistent with litigation's quest for truth, parties should welcome every opportunity in
attaining this objective, such as acting in good faith to reveal material documents. 74
The scope of discovery must be liberally construed, as a general rule, to serve its purpose of
providing the parties with essential information to reach an amicable settlement or to
expedite trial. 75 "Courts, as arbiters and guardians of truth and justice, must not countenance
any technical ploy to the detriment of an expeditious settlement of the case or to a fair, full
and complete determination on its merits."76
Rule 27, Section 1 of the Rules of Court does not provide when the motion may be used.
Hence, the allowance of a motion for production of document rests on the sound discretion
of the court where the case is pending, with due regard to the rights of the parties and the
demands of equity and justice. 77
In Eagleridge Development Corporation v. Cameron Granville 3 Asset Management, Inc., 78 we
held that a motion for production of documents may be availed of even beyond the pre-trial
stage, upon showing of good cause as required under Rule 27. 79 We allowed the production
of documents because the petitioner was able to show "good cause" and relevance of the
documents sought to be produced, and the trial court had not yet rendered its judgment.
In this case, petitioner filed its Motion for Production of Documents after the Court of Tax
Appeals Division had rendered its judgment. According to the Court of Tax Appeals Division,
the documents sought to be produced were already discussed in the Commissioner's
Memorandum dated October 21, 2010 and were already considered by the tax court when it
rendered its Decision. 80 If petitioner believed that the evidence in the custody and control of
respondent "would provide a better illumination of the outcome of the case," it should have
sought their production at the earliest opportunity as it had been already aware of their
existence.81 Petitioner's laxity is inexcusable and is a fatal omission.
Under these circumstances, there was indeed no further need for the production of
documents and objects desired by petitioner. These pieces of evidence could have served no
useful purpose. On the contrary, the production of those documents after judgment defeats
the purpose of modes of discovery in expediting case preparation and shortening trials.
We find no reversible error on the part of the Court of Tax Appeals En Banc in affirming the
Division's denial of petitioner's Motion for Production of Documents.
II
These consolidated cases involve the Tax Code provision defining new brand as opposed to
variant of brand, as these two are treated differently for excise tax on fermented liquor.
Effective January 1, 1998, Republic Act No. 8424, otherwise known as the Tax Reform Act of
1997, reproduced as Section 143 the provisions of Section 140 of the old Tax Code, as
amended by Republic Act No. 8240, governing excise taxes on fermented liquor. Section 143
distinguishes a new brand from a variant of brand:
Sec. 143. Fermented Liquor. - There shall be levied, assessed and collected an excise tax on
beer, lager beer, ale, porter and other fermented liquors except tuba, basi, tapuy and similar
domestic fermented liquors in accordance with the following schedule:
(a) If the net retail price (excluding the excise tax and value-added tax) per liter of volume
capacity is less than Fourteen pesos and fifty centavos (₱14.50), the tax shall be Six pesos and
fifteen centavos (P6.15) per liter;
(b) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume
capacity is Fourteen pesos and fifty centavos (P14.50) up to Twenty-two pesos (P22.00), the
tax shall be Nine pesos and fifteen centavos (P9.15) per liter;
(c) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume
capacity is more than Twenty-two pesos (P22.00), the tax shall be Twelve pesos and fifteen
centavos (Pl2.15) per liter.
131
Variants of existing brands which are introduced in the domestic market after the ejfectivity
of Republic Act No. 8240 shall be taxed under the highest classification of any variant of
that brand.
Fermented liquor which are brewed and sold at micro-breweries or small establishments such
as pubs and restaurants shall be subject to the rate in paragraph (c) hereof. The excise tax
from any brand of fermented liquor within the next three (3) years from the effectivity of
Republic Act No. 8240 shall not be lower than the tax which was due from each brand on
October 1, 1996. The rates of excise tax on fermented liquor under paragraphs (a), (b) and (c)
hereof shall be increased by twelve percent (12%) on January 1, 2000. New brands shall he
classified according to their current net retail price.
For the above purpose, 'net retail price' shall mean the price at which the fermented liquor is
sold on retail in twenty (20) major supermarkets in Metro Manila (for brands of fermented
liquor marketed nationally), excluding the amount intended to cover the applicable excise tax
and the value-added tax. For brands which are marketed only outside Metro Manila, the 'net
retail price' shall mean the price at which the fermented liquor is sold in five (5) major
supermarkets in the region excluding the amount intended to cover the applicable excise tax
and the value-added tax.
The classification of each brand of fermented liquor based on its average net retail price as of
October 1, 1996, as set forth in Annex 'C,' shall remain in force until revised by Congress.
A 'variant of brand' shall refer to a brand on which a modifier is prefixed and/or suffixed to
the root name of the brand and/or a different brand which carries the same logo or design
of the existing brand.
Every brewer or importer of fermented liquor shall, within thirty (30) days from the effectivity
of R.A. No. 8240, and within the first five (5) days of every month thereafter, submit to the
Commissioner a sworn statement of the volume of sales for each particular brand of
fermented liquor sold at his establishment for the three-month period immediately
preceding.
Any brewer or importer who, in violation of this Section, knowingly misdeclares or
misrepresents in his or its sworn statement herein required any pertinent data or information
shall be penalized by a summary cancellation or withdrawal of his or its permit to engage in
business as brewer or importer of fermented liquor.
Any corporation, association or partnership liable for any of the acts or omissions in violation
of this Section shall be fined treble the amount of deficiency taxes, surcharges and interest
which may be assessed pursuant to this Section.
Any person liable for any of the acts or omissions prohibited under this Section shall be
criminally liable and penalized under Section 254 of this Code. Any person who willfully aids
or abets in the commission of any such act or omission shall be criminally liable in the same
manner as the principal.
If the offender is not a citizen of the Philippines, he shall be deported / immediately after
serving the sentence, without further proceedings for A deportation. (Emphasis supplied)
On January 1, 2005, Republic Act No. 933482 took effect, amending
Section 143 of the Tax Code to read:
Sec.143. Fermented Liquors. - There shall be levied, assessed and collected an excise tax on
beer, lager beer, ale, porter and other fermented liquors except tuba, basi, tapuy and similar
fermented liquors in accordance with the following schedule:
(a) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume
capacity is less than Fourteen pesos and fifty centavos (P14.50), the tax shall be Eight pesos
and twenty-seven centavos (P8.27) per liter;
(b) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume
capacity is Fourteen pesos and fifty centavos (P14.50) up to Twenty-two pesos (P22.00), the
tax shall be Twelve pesos and thirty centavos (P12.30) per liter;
(c) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume
capacity is more than Twenty-two pesos (P22.00), the tax shall be Sixteen pesos and thirty-
three centavos (₱16.33) per liter.
Variants of existing brands and variants of new brands which are introduced in the domestic
market after the effectivity of this Act shall be taxed under the proper classification thereof
based on their suggested net retail price: Provided, however, That such classification shall
not, in any case, be lower than the highest classification of any variant of that brand.
A 'variant of a brand' shall refer to a brand on which a modifier is prefvced and/or suffvced
to the root name of the brand.
Fermented liquors which are brewed and sold at micro-breweries or small establishments
such as pubs and restaurants shall be subject to the rate in paragraph (c) hereof.
New brands, as defined in the immediately following paragraph, shall initially be classified
according to their suggested net retail price.
'New brand' shall mean a brand registered after the date of effectivity of R.A. No. 8240.
'Suggested net retail price' shall mean the net retail price at which new brands, as defined
above, of locally manufactured or imported fermented liquor are intended by the
manufacturer or importer to be sold on retail in major supermarkets or retail outlets in Metro
Manila for those marketed nationwide, and in other regions, for those with regional markets.
At the end of three (3) months from the product launch, the Bureau of Internal Revenue shall
132
validate the suggested net retail price of the new brand against the net retail price as defined
herein and determine the correct tax bracket to which a particular new brand of fermented
liquor, as defined above, shall be classified. After the end of eighteen (18) months from such
validation, the Bureau of Internal Revenue shall revalidate the initially validated net retail
price against the net retail price as of the time of revalidation in order to finally determine the
correct tax bracket which a particular new brand of fermented liquors shall be
classified: Provided, however, That brands of fermented liquors introduced in the domestic
market between January 1, 1997 and December 31, 2003 shall remain in the classification
under which the Bureau of Internal Revenue has determined them to belong as of
December 31, 2003. Such classification of new brands and brands introduced between
January 1, 1997 and December 31, 2003 shall not be revised except by an act of Congress.
'Net retail price', as determined by the Bureau of Internal Revenue through a price survey to
be conducted by the Bureau of Internal Revenue itself, or the National Statistics Office when
deputized for the purpose by the Bureau of Internal Revenue, shall mean the price at which
the fermented liquor is sold on retail in at least twenty (20) major supermarkets in Metro
Manila (for brands of fermented liquor marketed nationally), excluding the amount intended
to cover the applicable excise tax and the value-added tax. For brands which are marketed
outside Metro Manila, the 'net retail price' shall mean the price at which the fermented
liquor is sold in at least five (5) major supermarkets in the region excluding the amount
intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of fermented liquor based on its average net retail price as
of October 1, 1996, as set forth in Annex 'C', including the classification of brands for the
same products which, although not set forth in said Annex 'C', were registered and were
being commercially produced and marketed on or after October 1, 1996, and which
continue to be commercially produced and marketed after the e/fectivity of this Act, shall
remain in force until revised by Congress.
The rates of tax imposed under this Section shall be increased by eight percent (8%) every
two years starting on January 1, 2007 until January 1, 2011.
Any downward reclassification of present categories, for tax purposes, of existing brands of
fermented liquor duly registered at the time of the effectivity of this Act which will reduce the
tax imposed herein, or the payment thereof, shall be prohibited.
Every brewer or importer of fermented liquor shall, within thirty (30) days from the effectivity
of this Act, and within the first five (5) days of every month thereafter, submit to the
Commissioner a sworn statement of the volume of sales for each particular brand of
fermented liquor sold at his establishment for the three-month period immediately
preceding.
Any brewer or importer who, in violation of this Section, knowingly misdeclares or
misrepresents in his or its sworn statement herein required any pertinent data or information
shall be penalized by a summary cancellation or withdrawal of his or its permit to engage in
business as brewer or importer of fermented liquor.
Any corporation, association or partnership liable for any of the acts or omissions in violation
of this Section shall be fined treble the amount of deficiency taxes, surcharges and interest
which may be assessed pursuant to this Section.
Any person liable for any of the acts or omissions prohibited under this Section shall be
criminally liable and penalized under Section 254 of this Code. Any person who willfully aids
or abets in the commission of any such act or omission shall be criminally liable in the same
manner as the principal.
If the offender is not a citizen of the Philippines, he shall be deported immediately after
serving the sentence, without further proceedings for deportation. (Emphasis supplied)
On December 19, 2012, Rep. Act No. 10351, otherwise known as the Sin Tax Law, 83 was
promulgated to further amend certain provisions on excise taxes on alcohol and tobacco
products. Among the amendments to Section 143 were:
(1) Increase in the excise tax rates and transition from three (3)- tiered to two (2)-tiered tax
rates starting January 1, 2014 until December 31, 2016; and to a single tax rate beginning
January 1, 201 7, irrespective of the price levels at which the products were sold in the
market;
(2) All fermented liquors existing in the market at the time of the effectivity of the Act shall be
classified according to the net retail prices and the tax rates provided, based on the latest
price survey of the fermented liquors conducted by the Bureau of Internal Revenue. However,
any downward reclassification is prohibited;
(3) Fermented liquors introduced in the domestic market after the effectivity of the Act shall
be initially tax-classified according to their suggested net retail prices until such time that
their correct tax bracket is finally determined under a specified period; and
(4) The proper tax classification of fermented liquors, whether registered before or after the
effectivity of the Act, shall be determined every two (2) years from the date of effectivity of
the Act.
Excise taxes are imposed on the production, sale, or consumption of specific goods.
Generally, excise taxes on domestic products are paid by the manufacturer or producer
before removal of those products from the place of production. 84 The excise tax based on
weight, volume capacity, or any other physical unit of measurement is referred to as "specific
tax." If based on selling price or other specified value, it is referred to as "ad valorem" tax. 85
The excise tax on beer is a specific tax based on volume, or on a per liter basis. Before its
amendment, Section 143 provided for three (3) layers of tax rates, depending on the net
retail price per liter. How a new beer product is taxed depends on its classification, i.e.
133
whether it is a variant of an existing brand or a new brand. Variants of a brand that were The May 28, 2002 Notice of Discrepancy was effectively nullified by the subsequent issuance
introduced in the market after January 1, 1997 are taxed under the highest tax classification of Revenue Memorandum Order No. 6-2003, which included "San Mig Light" as a new brand.
of any variant of the brand. On the other hand, new brands are initially classified and taxed
according to their suggested net retail price, until a survey is conducted by the Bureau of The Bureau of Internal Revenue issued Revenue Memorandum Order No. 6-2003 dated
Internal Revenue to determine their current net retail price in accordance with the specified March 11, 2003 with the subject, Prescribing the Guidelines and Procedures in the
procedure. Establishment of Current Net Retail Prices of New Brands of Cigarettes and Alcohol Products
Pursuant to Revenue Regulations No. 9-2003. Annex "A-3" is the Master List of Registered
III Brands of Locally Manufactured Alcohol Products as of February 28, 2003, and the list
includes "San Mig Light,"94 classified as "NB" or "new brand registered on or after January 1,
Petitioner argues that "San Mig Light," launched in November 1999, is not a new brand but 1997" : 95
merely a low-calorie variant of "San Miguel Pale Pilsen." 86 Thus, the application of the higher
excise tax rate for variant products is appropriate and respondent should not be entitled to a
INTENDED MARKET REMARKS
refund or issuance of a tax credit certificate. 87
BRAND NAME
Respondent counters that "San Mig Light" is a new brand; the classification of "San Mig Light" CLASS SPECIFICATION PACKAGE
Domestic Date of La
as a new and medium-priced brand may not be revised except by an act of Congress; and 88
Export Status
Sale Production
the Court of Tax Appeals did not err in granting its claim for refund or issuance of tax credit
certificate.
B. FERMENTED
The refund claim in CTA Case No. 7405, subject of the Petition docketed as G.R. No. 205723,
covers the period from February 2, 2004 to November 30, 2005, while the refund claim in CTA LIQUOR
Case No. 7708, subject of the Petition docketed as G.R. No. 205045, covers the period from
December 1, 2005 up to July 31, 2007.
I. SAN MIGUEL
We find for respondent. CORPORATION

Parenthetically, the Bureau of Internal Revenue's actions reflect its admission and
confirmation that "San Mig Light" is a new brand.

When respondent's October 19, 1999 letter requested the registration and authority to
"San Mig Light" NB 330ml flint bottle 24 bots x x Active96
manufacture "San Mig Light," to be taxed at ₱12.15 per liter, 89 the Bureau of Internal Revenue
granted the request.90
IV
The response dated February 7, 2002 of the LTAD II Acting Chief confirmed that respondent
Any reclassification of fermented liquor products should be by act of Congress. Section 143 of
was allowed to register, manufacture, and sell "San Mig Light" as a new brand. 91
the Tax Code, as amended by Rep. Act No. 9334, provides for this classification freeze referred
The Joint Stipulation of Facts, Documents and Issues in CTA Cases Nos. 7052 and 7053 dated to by the parties:
July 29, 2005,92 signed by both parties, includes paragraph 1.08, which reads:
Provided, however, That brands of fermented liquors introduced in the domestic market
1.08. From the time of its registration as a new brand in October 1999 and its production in between January 1, 1997 and December 31, 2003 shall remain in the classification under
November 1999, "San Mig Light" products have been withdrawn and sold, and taxes have which the Bureau of Internal Revenue has determined them to belong as of December 31,
been paid on such removals, on the basis of its registration and tax rate as a new brand. (CTA 2003. Such classification of new brands and brands introduced between January 1, 1997
No. 7052: Petition, par. 5.06; Answer, par. 2[e]; CTA No. 7053: Petition, par. 5.06; Answer, par. and December 31, 2003 shall not be revised except by an act of Congress.
93
2[e]). (Emphasis supplied)
....

134
The classification of each brand of fermented liquor based on its average net retail price as of
October 1, 1996, as set forth in Annex 'C', including the classification of brands for the same
products which, although not set forth in said Annex 'C', were registered and were being
commercially produced and marketed on or after October 1, 1996, and which continue to be
commercially produced and marketed after the effectivity of this Act, shall remain in force
until revised by Congress.97 (Emphasis supplied)
In her Dissenting Opinion, Court of Tax Appeals Associate Justice Cielito N. Mindaro-Grulla
discussed that British American Tobacco v. Camacho 98 explained the purpose and application
of the classification freeze. 99 Her Dissenting Opinion concludes that the classification freeze
does not apply when a brand is a variant erroneously determined as a new brand. 100
British American Tobacco involves Section 145 of the Tax Code governing excise taxes for
cigars and cigarettes.
This Court in British American Tobacco discussed that Rep. Act No. 9334 includes, among
other things, the legislative freeze on cigarette brands introduced between January 2, 1997
and December 31, 2003, in that these cigarette brands will remain in the classification
determined by the Bureau of Internal Revenue as of December 31, 2003 until revised by
Congress.101 In other words, after a cigarette brand is classified under the low-priced,
medium-priced, high-priced, or premium-priced tax bracket based on its
current net retail price, its classification is frozen unless Congress reclassifies it. 102
The petitioner in British American Tobacco questioned this legislative freeze under Section
145 for creating a "grossly discriminatory classification scheme between old and new
brands." 103 This Court ruled that the classification freeze provision does not violate the
constitutional provisions on equal protection. 104
This Court discussed the legislative intent behind the classification freeze, that is, to deter the
potential for abuse if the power to reclassify is delegated and much discretion is given to the
Department of Finance and Bureau of Internal Revenue:
To our mind, the classification freeze provision was in the main the result of Congress' earnest
efforts to improve the efficiency and effectivity of the tax administration over sin products
while trying to balance the same with other state interests. In particular, the questioned
provision addressed Congress' administrative concerns regarding delegating too much
authority to the DOF and BIR as this will open the tax system to potential areas of abuse and
corruption. Congress may have reasonably conceived that a tax system which would give the
least amount of discretion to the tax implementers would address the problems of tax
avoidance and tax evasion. 105
British American Tobacco discussed the legislative history of the classification freeze, but it
did not explicitly rule that the classification freeze only refers to retail price tax brackets.
In any event, petitioner's letters and Notices of Discrepancy, which effectively changed San
Mig Light's brand's classification from "new brand to variant of existing brand," necessarily
changes San Mig Light's tax bracket. Based on the legislative intent behind the classification
freeze provision, petitioner has no power to do this.
A reclassification of a fermented liquor brand introduced between January 1, 1997 and
December 31, 2003, such as "San Mig Light," must be by act of Congress. There was none in
this case.
V
Before Rep. Act No. 9334 was passed, the Tax Code under Republic Act No. 8240 defined a
"variant of a brand" as follows:
A variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to
the root name of the brand and/or a different brand which carries the same logo or design of
the existing brand. 106
This definition includes two (2) types of "variants." The first involves the use of a modifier
that is prefixed and/ or suffixed to a brand root name, and the second involves the use of the
same logo or design of an existing brand.
Rep. Act No. 9334 took effect on January 1, 2005 and deleted the second type of "variant"
from the definition:
A 'variant of a brand' shall refer to a brand on which a modifier is prefixed and/or suffixed to
the root name of the brand. 107
Revenue Regulations No. 3-2006, with the subject: "Prescribing the Implementing Guidelines
of the Revised Tax Rates on Alcohol and Tobacco Products Pursuant to the Provisions of
Republic Act No. 9334, and Clarifying Certain Provisions of Existing Revenue Regulations
Relative Thereto " reiterated the deletion of the second type of "variant":
SEC. 2. DEFINITION OF TERMS. - For purposes of these Regulations, the following words and
phrases shall have the meaning indicated below:
....
(d) VARIANT OF A BRAND - shall refer to a brand of alcohol or tobacco products on which a
modifier is pref1Xed and/or suff1Xed to the root name of the brand. (Emphasis supplied)
For this purpose, the term "root name" shall refer to a letter, word, number, symbol, or
character; or a combination of letters, words, numbers, symbols, and/or characters that may
or may not form a word; or shall consist of a word or group of words, which may or may not
describe the other word or words: Provided, That the root name has been originally
registered as such with the Bureau of Internal Revenue (BIR).
135
Examples of root name: "L & M", "b W ", "10'', "Pall Mall'', "Blue Ice'', "Red Horse'', etc.
ROOT NAME MODIFIER IS PREFIXED MODDIFIER IS SUFFIXED MODIFIED ROOT
The term "modifier" shall refer to a word, a number or a combination of words and/or NAME
numbers that specifically describe the root name to distinguish one variant from another
whether or not the use of such modifier is a common industry practice. The root name,
L&M Kings L& M L & M Lights M&L
although accompanied by a modifier at the time of the original brand registration, shall be
the basis in determining the tax classification of subsequent variants of such brands.
10 Perfect 10 10 Menthols Ten
Examples of modifiers: ...

For beer: "Light", "Dry", "Ice'', "Lager", Blue Ice Wild Blue Ice Blue Ice Supreme Blue Iced

"Hard", "Premium", etc.

Any variation in the color and/or design of the label (such as logo, font, picturegram, and the
like), manner and/or form of packaging or size of container of the brand originally registered
with the BIR shall not, by itself, be deemed an introduction of a new brand or a variant of a
brand: Provided, That all instances of such variation shall require a prior written permit from
the BIR.
In case such BIR-registered brand has more than one (1) tax classification as a result of the
shift in the manner of taxation from ad valorem tax to specific tax under R.A. No. 8240, the
highest tax classification shall be applied to such brand bearing a new label, package, or
volume content per package, subject to the provisions of the immediately preceding
paragraph.
ILLUSTRATION:
No. 1. -
....
In case a letter(s), number(s), symbols(s) or word(s) is/are deleted from or replaced by
another letter(s), number(s), symbol(s) or word(s) in the root name of a previously BIR-
registered brand, such that the introduction of the said brand bearing such change(s) shall
ride on the popularity of the said previously registered brand, the same shall be classified as a
variant of such previously registered brand: Provided, That where the introduction of such
brand by another manufacturer or importer will give rise to any legal action with respect to
infringement of patent or unfair competition, such brand shall be considered a variant of such
previously registered brand.
ILLUSTRATION:
No. 2. –
Red Horse Flying Red Horse Red Horse Premium Reddish Horse
Pall Mall Long Pall Mall Pall Mall Filter Pal Mall
Petitioner submits that the complete name of "San Mig Light" is "San Mig Light Pale Pilsen,"
and Section 143 of the Tax Code, in relation to its Annexes C-1 and C-2, show that the parent
brands of San Mig Light are RPT 108 in cans or San Miguel Beer Pale Pilsen in can 330 ml, Pale
Pilsen, and Super Dry. 109 It contends that the root name of the existing brand is "Pale Pilsen,"
and RPT had the highest tax classification at the time "San Mig Light" was introduced. 110 "San
Miguel Beer Pale Pilsen" and "San Mig Light" have almost identical labels, and only these two
labels bear the same "Pale Pilsen."111
Respondent counters that petitioner changed its theory of the case on appeal, and this
should not be allowed. 112 It argues that petitioner categorically invoked the second part of
the definition of variant in Section 143, and this part of the definition has been deleted by
Rep. Act No. 9334. 113 Moreover, petitioner made no categorical assertion on the first part of
the definition, but only a vague statement that "the root name of the existing brand is 'Pale
Pilsen."' 114 Respondent adds that petitioner "has not specified which type of 'San Mig Light',
in bottle or in can, is a variant of 'RPT' in can (San Miguel Beer Pale Pilsen)." 115
Petitioner, on the other hand, maintains that even during the trial stage, its theory has always
been that "San Mig Light" falls under both first and second parts of Section 143, before its
amendment by Rep. Act No. 9334. 116
A change of theory on appeal is generally disallowed in this jurisdiction for being unfair to the
adverse party. 117
Even then, the Court of Tax Appeals En Banc, in both assailed Decisions, quoted with approval
the First Division's finding that "San Mig Light" does not fall under both first and second parts
of the definition of variant:

136
The fact that "San Mig Light" is a "new brand" and not merely a variant of an existing brand is
bolstered by the fact that Annexes "C-1" and "C-2" of RA No. 8240, which enumerated the
fermented liquors registered with the BIR do not include the brand name "San Mig Light".
Instead, what were listed, as existing brands of petitioner, as of the effectivity of RA No. 8240,
were as follows: "Pale Pilsen 320 ml.", "Super Dry 355 ml." and "Premium Can 330 ml." Even
in Section 4 of RR No. 2- 97, which provides for the classification and manner of taxation of
existing brands, new brands and variants of existing brands, the list of existing brands of
fermented liquors of petitioner does not include the brand "San Mig Light", but merely "RPT
in cans 330 ml.", "Premium Bottles 355 ml.", "Premium Bottles 355 ml." and "Premium Bottle
Can 330 ml." for high priced brands; and "Super Dry 355 ml.", "Pale Pilsen 320 ml.", and
"Grande" for medium-priced brands. 118
Thus, it is clear that when the product "San Mig Light" was introduced in 1999, it was
considered as an entirely new product and a new brand of petitioner's fermented
liquor, there being no root name of "San Miguel" or "San Mig" in its existing brand names.
The existing registered and classified brand name of petitioner at that time was "Pale
Pilsen." Therefore, the word "Light" cannot he considered as a mere suff1:x to the word
"San Miguel," hut it is part and parcel of an entirely new brand name, "San Mig
Light." Evidently, as correctly pointed out by petitioner, "San Mig Light" is not merely a
variant of an existing brand, but an entirely new brand:
Anent the second type of "variant of brand," i.e., when a different brand carries the same
logo or design of an existing brand, records show that there are marked differences in the
designs of the existing brand "Pale Pilsen" and the new brand "San Mig Light":
a) as to "Pale Pilsen" and "San Mig Light" in bottles:
1. the size, shape and color of the respective bottles are different. Each brand has a distinct
design in its packaging. "Pale Pilsen" is in a steiny bottle, while "San Mig Light" is packed in a
tall and slim transparent bottle;
2. the design and color of the inscription on the bottles are different from each other. "Pale
Pilsen" has its label encrypted or embossed on the bottle itself, while "San Mig Light" has a
silver and blue label of distinctive design that is printed on paper pasted on the bottle; and
3. the color of the letters in the "Pale Pilsen" brand is white against the color of the bottle,
while that of the words "San Mig" is white against a blue background and the word "Light" is
blue against a silver background.
b) As to "Pale Pilsen" and "San Mig Light" in cans:
1. the words "Pale Pilsen" are in ordinary font printed horizontally in black on the can against
a diagonally striped light yellow gold background, while the words "San Mig" are in Gothic
font printed diagonally on the can against a blue background and the word "Light" in ordinary
font printed diagonally against a diagonally striped silver background; and
2. the general color scheme of "Pale Pilsen" is light yellow gold, while that of "San Mig Light"
is silver.
Though the "escudo" logo appears on both "Pale Pilsen" bottle and "San Mig Light" bottle
and can, the same cannot be considered as an indication that "San Mig Light" is merely a
variant of the brand "Pale Pilsen", since the said "escudo" insignia is the corporate logo of
petitioner. It merely identifies the products, as having been manufactured by petitioner, but
does not form part of its brand. In fact, it appears not only in petitioner's beer products, but
even in its non-beer products. 119
VI
A variant under the Tax Code has a technical meaning. It 1s determined by the brand (name)
or logo of the beer product.
To be sure, all beers are composed of four (4) raw materials: barley, hops, yeast, and
water. 120 Barley grain has always been used and associated with brewing beer, while hops act
as the bittering substance. 121 Yeast plays a role in alcoholic fermentation, with bottom-
fermenting yeasts resulting in light lager and top-fermenting ones producing the heavy and
rich ale. 122 With only four (4) ingredients combined and processed in varying quantities, all
beer are essentially related variants of these mixtures.
A manufacturer of beer may produce different versions of its products, distinguished by
features such as flavor, quality, or calorie content, to suit the tastes and needs of specific
segments of the domestic market. It can also leverage on the popularity of its existing brand
and sell a lower priced version to make it affordable for the low-income consumers. These
strategies are employed to gain a higher overall level of share or profit from the market.
In intellectual property law, a registered trademark owner has the right to prevent others
from the use of the same mark (brand) for identical goods or services. The use of an identical
or colorable imitation of a registered trademark by a person for the same goods or services or
closely related goods or services of another party constitutes infringement. It is a form of
unfair competition123 because there is an attempt to get a free on the reputation and selling
power of another manufacturer by passing of one's goods as identical or produced by the
same manufacturer as those carrying the other mark (brand). 124
The variant contemplated under the tax Code has a technical meaning. A variant is
determined by the brand (name) of the beer product, whether it was formed by prefixing or
suffixing a modifier to the root name of the alleged parent brand, or whether it carries the
same logo or design. The purpose behind the definition was to properly tax brands that were
presumed to be riding on the popularity of previously registered brands by being marketed
under an almost identical name with a prefix, suffix, or a variant. 125 It seeks to address price
differentials employed by a manufacturer on similar products differentiated only in brand or
design. Specifically, the provision was meant to obviate any tax avoidance by manufacturing
firms from the sale of lower priced variants of its existing beer brands, thus, falling in the
137
lower tax bracket with lower excise tax rates. To favor government, a variant of a brand is
taxed according to the highest rate of tax for that particular brand.
"San Mig Light" and "Pale Pilsen" do not share a root word. Neither is there an existing brand
in the list (Annexes C-1 and C-2 of the Tax Code) called "San Mig" to conclude that "Light" is a
suffix rendering "San Mig Light" as its "variant." 126 As discussed in the Court of Tax Appeals
Decision, "San Mig Light" should be considered as one brand name. 127
Respondent's statements describing San Mig Light as a low-calorie variant is not conclusive of
its classification as a variant for excise tax purposes. Burdens are not to be imposed nor
presumed to be imposed beyond the plain and express terms of the law. 128 "The general rule
of requiring adherence to the letter in construing statutes applies with peculiar strictness to
tax laws and the provisions of a taxing act are not to be extended by implication." 129
Furthermore, respondent's payment of the higher taxes starting January 30, 2004 after
deficiency assessments were made cannot be considered as an admission that its San Mig
Light is a variant. Section 130(A)(2) of the Tax Code requires payment of excise tax "before
removal of domestic products from place of production." 130 These payments were made in
protest as respondent subsequently filed refund claims.
VII
Petitioner argues that although the Bureau of Internal Revenue erroneously allowed San
Miguel Corporation to manufacture and sell "San Mig Light" in 1999 as a "new brand" with
the lower excise tax rate for "new brands," government is not estopped from correcting
previous errors by its agents. 131
Petitioner submits that the Notice of Discrepancy was to remedy the ‘misinterpretation" 132 of
"San Mig Light" as new brand. It submits that respondent's self-assessment of excise taxes as
a new brand was without approval:
San Mig Light was never registered with BIR as a new brand but always as a variant. Thus,
petitioner's payment of excise taxes on San Mig Light as a new brand is based on its own
classification of San Mig Light as a new brand without approval of the BIR. Under existing
procedures in the payment of excise taxes, taxpayers are required to pay their taxes based on
self-assessment system with the government relying heavily on the honesty of taxpayers.
Such being the case, any payments made, even those allegedly made as a condition for the
withdrawal of the product from the place of production, cannot be considered as a
confirmation by the BIR 133 of the correctness of such payment.
Section 143 of the Tax Code, as amended by Rep. Act No. 9334, provides for the Bureau of
Internal Revenue's role in validating and revalidating the suggested net retail price of a new
brand of fermented liquor for purposes of determining its tax bracket:
'Suggested net retail price' shall mean the net retail price at which new brands, as defined
above, of locally manufactured or imported fermented liquor are intended by the
manufacturer or importer to be sold on retail in major supermarkets or retail outlets in Metro
Manila for those marketed nationwide, and in other regions, for those with regional
markets.At the end of three (3) months from the product launch, the Bureau of
InternalRevenue shall validate the suggested net retail price of the new brandagainst the
net retail price as defined herein and determine the correcttax bracket to which a particular
new brand of fermented liquor, asdefined above, shall be classified. After the end of
eighteen (18) monthsfrom such validation, the Bureau of Internal Revenue shall
revalidatethe initially validated net retail price against the net retail price as of thetime of
revalidation in order to finally determine the correct tax bracketwhich a particular new
brand of fermented liquors shall be classified: Provided, however, That brands of fermented
liquors introduced in the domestic market between January 1, 1997 and December 31, 2003
shall remain in the classification under which the Bureau of Internal Revenue has determined
them to belong as of December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall not be revised except by
an act of Congress.
When respondent launched "San Mig Light" in 1999, it wrote the Bureau of Internal Revenue
on October 19, 1999 requesting registration and authority to manufacture "San Mig Light" to
be taxed as P12.15.
The Bureau of Internal Revenue granted this request in its October 27, 1999 letter. Contrary
to petitioner's contention, the registration granted was not merely for intellectual property
protection 134 but "for internal revenue purposes only":
Your request dated October 19, 1999, for the registration of San Miguel Corporation
commercial label for beer bearing the trade mark "San Mig Light" Pale Pilsen, for domestic
sale or export, 24 bottles in a case, each flint bottle with contents of 330 ml., is hereby
granted.
....
Please follow strictly the requirements of internal revenue laws, rules and regulations relative
to the marks to be placed on each case, cartons or box used as secondary containers. It is
understood that the said brand be brewed and bottled in the breweries at Polo, Valenzuela
(A-2-21).
You are hereby informed that the registration of commercial labels in this Office is for internal
revenue purposes only and does not give you protection against any person or entity whose
rights may be prejudiced by infringement or unfair competition resulting from your use of the
above indicated trademark. 135 (Emphasis supplied)
138
Because the Bureau of Internal Revenue granted respondent's request in its October 27, 1999
letter and confirmed this grant in its subsequent letters, respondent cannot be faulted for
relying on these actions by the Bureau of Internal Revenue.
While estoppel generally does not apply against government, especially when the case
involves the collection of taxes, an exception can be made when the application of the rule
will cause injustice against an innocent party. 136
Respondent had already acquired a vested right on the tax classification of its San Mig Light
as a new brand. To allow petitioner to change its position will result in deficiency assessments
in substantial amounts against respondent to the latter's prejudice.
The authority of the Bureau of Internal Revenue to overrule, correct, or reverse the mistakes
or errors of its agents is conceded. However, this authority must be exercised
reasonably,137 i.e., only when the action or ruling is patent y erroneous 138 or patent y contrary
to law.139 For the presumption lies in the regularity of performance of official duty, 140 and
reasonable care has been exercised by the revenue officer or agent in evaluating the facts
before him or her prior to rendering his or her decision or ruling-in this case, prior to the
approval of the registration of San Mig Light as a new brand for excise tax purposes. A
contrary view will create disorder and confusion in the operations of the Bureau of Internal
Revenue and open the administrative agency to inconsistencies in the administration and
enforcement of tax laws.
In Commissioner v. Algue:141
It is said that taxes are what we pay for civilized society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence, despite
the natural reluctance to surrender part of one's hard-earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the
government. The government for its part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement
in all democratic regimes that it be exercised reasonably and in accordance with the
prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will
then come to his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxf:ayer can demonstrate, as it has here, that the law has not
been observed. 142
VIII
The Tax Code includes remedies for erroneous collection and overpayment of taxes. Under
Sections 229 and 204(C) of the Tax Code, a taxpayer may seek recovery of erroneously paid
taxes within two (2) years from date of payment:
SEC. 229. Recovery of tax Erroneously or Illegally Collected. - No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed
to have been collected without authority, of any sum alleged to have been excessively or in
any manner wrongfully collected, until a claim for refund or credit has been duly filed with
the Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from
the date of payment of the tax or penalty regardless of any supervening case that may arise
after payment: Provided, however, That the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously paid.
....
SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.
-The Commissioner may –
....
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that have
been rendered unfit for use and refund their value upon proof of destruction. No credit or
refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment shall be considered
as a written claim for credit or refund.
A Tax Credit Certificate validly issued under the provisions of this Code may be applied against
any internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable.
Any request for conversion into refund of unutilized tax credits may be allowed, subject to the
provisions of Section 230 of this Code: Provided, That the original copy of the Tax Credit
Certificate showing a creditable balance is surrendered to the appropriate revenue officer for
verification and cancellation: Provided, further, That in no case shall a tax refund be given
resulting from availment of incentives granted pursuant to special laws for which no actual
payment was made.
The Commissioner shall submit to the Chairmen of the Committee on Ways and Means of
both the Senate and House of Representatives, every six (6) months, a report on the exercise
139
of his powers under this Section, stating therein the following facts and information, among
others: names and addresses of taxpayers whose cases have been the subject of abatement
or compromise; amount involved; amount compromised or abated; and reasons for the
exercise of power: Provided, That the said report shall be presented to the Oversight
Committee in Congress that shall be constituted to determine that said powers are
reasonably exercised and that the Government is not unduly deprived of revenues.

In G.R. No. 205045, the Court of Tax Appeals En Banc ruled that "San Mig Light" is a new
brand and not a variant of an existing brand. Accordingly, it ordered the refund of erroneously
collected excise taxes on"San Mig Light" products in the amount of ₱926,169,056.74 for the
period of December 1, 2005 to July 31, 2007. 143

In G.R. No. 205723, the Court of Tax Appeals En Banc found proper the refund of erroneously
collected excise taxes on "San Mig Light" products in the amount of '₱781,514,772.56 for the
period of February 2, 2004 to November 30, 2005. 144 It referred to, and agreed with, the
findings of the Court-commissioned Independent Certified Public Accountant Normita L.
Villaruz on reaching this amount. 145 The Court of Tax Appeals also found, from the records,
that respondent timely filed its administrative claim for refund on December 28, 2005, and its
judicial claim on January 31, 2006. 146

This Court accords the highest respect to the factual findings of the Court of Tax Appeals. We
recognize its developed expertise on the subject as it is the court dedicated solely to
considering tax issues, unless there is a showing of abuse in the exercise of authority. 147 We
find no reason to overturn the factual findings of the Court of Tax Appeals on the amounts
allowed for refund.

WHEREFORE, the Petitions are DENIED. The assailed Decisions and Resolutions of the Court
of Tax Appeals En Banc in CTA Case Nos. 7052, 7053, 7405, and 7708 are AFFIRMED.

SO ORDERED.

140
G.R. No. 188146
PILIPINAS SHELL PETROLEUM CORPORATION, Petitioner
vs.
ROYAL FERRY SERVICES, INC., Respondent
DECISION
LEONEN, J.:
The venue for a petition for voluntary insolvency proceeding under the Insolvency Law is the
Court of First Instance of the province or city where the insolvent debtor resides. A
corporation is considered a resident of the place where its principal office is located as stated
in its Articles of Incorporation. However, when it is uncontroverted that the insolvent
corporation abandoned the old principal office, the corporation is considered a resident of
the city where its actual principal office is currently found.
This resolves a Petition for Review on Certiorari1 assailing the Court of Appeals' January 30,
2009 Decision2 and May 26, 2009 Resolution 3 in CA-G.R. CV No. 88320, which reinstated the
Order4 that declared Royal Ferry Services Inc. insolvent made by the Regional Trial Court of
Manila, Branch 24 (Regional Trial Court).
Royal Ferry Services Inc. (Royal Ferry) is a corporation duly organized and existing under
Philippine law.5 According to its Articles of Incorporation, Royal Ferry's principal place of
business is located at 2521 A. Bonifacio Street, Bangkal, Makati City. 6 However, it currently
holds office at Room 203, BF Condominium Building, Andres Soriano comer Solano Streets,
Intramuros, Manila.7
On August 28, 2005, Royal Ferry filed a verified Petition for Voluntary Insolvency before the
Regional Trial Court of Manila.8 It alleged that in 2000, it suffered serious business losses that
led to heavy debts.9 Efforts to revive the company's finances failed, and almost all assets were
either foreclosed or sold to satisfy the liabilities incurred. 10 Royal Ferry ceased its operations
on February 28, 2002.11 In a special meeting on August 25, 2005, its Board of Directors
approved and authorized the filing of a petition for voluntary insolvency in court. 12
The Regional Trial Court declared Royal Ferry insolvent in its Order 13 dated December 19,
2005, the relevant portion of which reads:
Finding the petition sufficient in form and substance and pursuant to the provisions of Act
No. 1956, petitioner Royal Ferry Services, Inc., is hereby declared insolvent.
The Court hereby further directs and orders:
1. The Branch Sheriff to take possession of, and safely keep until the appointment, of an
Assignee all the deeds, vouchers, books of accounts, papers, notes, bills and securities of the
petitioner and all its real and personal properties, estates and effects not exempt from
execution;
2. All persons and entities owing money to petitioner are hereby forbidden to make payment
for its accounts or to deliver or transfer any property to petitioner except to the duly elected
Assignee;
3. All civil proceedings against petitioner are deemed stayed;
4. For purposes of electing an Assignee, a meeting of all creditors of the petitioner is hereby
set on February 24, 2006 at 8:30 a.m. before this Court, at Room 435, Fourth Floor, Manila
City Hall Building.
Let this Order be published in a newspaper of general circulation in the Philippines, once a
week for three (3) consecutive weeks, and copies thereof be furnished all creditors listed in
the schedule of creditors at the expense of petitioner.
SO ORDERED.14
On December 23, 2005, Pilipinas Shell Petroleum Corporation (Pilipinas Shell) filed before the
Regional Trial Court of Manila a Formal Notice of Claim 15 and a Motion to Dismiss. 16 In the
Notice of Claim, Pilipinas Shell asserted that Royal Ferry owed them the amount of
₱2,769,387.67.17 In its Motion to Dismiss, Pilipinas Shell alleged that the Petition was filed in
the wrong venue.18 It argued that the Insolvency Law provides that a petition for insolvency
should be filed before the court with territorial jurisdiction over the corporation's
residence.19 Since Royal Ferry's Articles of Incorporation stated that the corporation's
principal office is located at 2521 A. Bonifacio St., Bangkal, Makati City, the Petition should
have been filed before the Regional Trial Court of Makati and not before the Regional Trial
Court of Manila.20
On January 30, 2006, the Regional Trial Court of Manila issued the Order 21 denying Pilipinas
Shell's Motion to Dismiss for lack of merit. It found Royal Ferry to have sufficiently shown full
compliance with the requirements of the Insolvency Law on venue and that it had abandoned
its Makati office and moved to Manila. The Regional Trial Court also noted that when the
Branch Sherriff confiscated Royal Ferry's books and personal assets, the properties were
taken from a Manila address, at Room 203, BF Condominium Building, Andres Soriano comer
Streets, Intramuros, Manila.
Pilipinas Shell moved for reconsideration on February 24, 2006. 22
In the Order23 dated June 15, 2006, the Regional Trial Court reconsidered the denial of
Pilipinas Shell's Motion to Dismiss. It held that a corporation cannot change its place of
business without amending its Articles of Incorporation. 24 Without the amendment, Royal
Ferry's transfer did not produce any legal effect on its residence. 25 The Regional Trial Court
141
granted the dismissal of the Petition for Voluntary Insolvency. The dispositive portion of the
Order reads:
Accordingly, the Order of this court dated January 30, 2006 denying the claimant-movant's
motion to dismiss is hereby reconsidered. The Motion to Dismiss is granted. The Petition for
Voluntary Insolvency is hereby ordered DISMISSED.
SO ORDERED.26
Aggrieved, Royal Ferry filed a Notice of Appeal 27 on October 26, 2006. On November 7, 2006,
the Regional Trial Court forwarded the records of the case to the Court of Appeals. 28
In the Decision29 dated January 30, 2009, the Court of Appeals reinstated the insolvency
proceedings. The dispositive portion of the Decision reads:
WHEREFORE, premises considered, the instant appeal is GRANTED. Accordingly, the following
Orders of the Regional Trial Court of Manila (Branch 24) in Civil Case No. 05-113384 are SET
ASIDE: 1) Order dated 15 June 2006, which granted Pilipinas Shell's "Motion to Dismiss the
Petition for Voluntary Insolvency;" and 2) Order dated 16 October 2006, which denied Royal
Ferry's Motion for Reconsideration. On the other hand, the Orders of the trial court dated 5
September 2005 and 19 December 2005, granting an adjudication of insolvency in favor of
Royal Ferry are REINSTATED.
SO ORDERED.30 (Emphasis in the original)
The Court of Appeals held that the Motion to Dismiss failed to comply with Section 81 31 of the
Insolvency Law, which required the written consent of all creditors before a petition for
insolvency can be dismissed. It overturned the grant of the Motion to Dismiss since Pilipinas
Shell failed to secure the written consent of all the creditors of Royal Ferry.
On the alleged jurisdictional defects of Royal Ferry's Petition for Voluntary Insolvency, the
Court of Appeals found that "the [Manila Regional Trial Court] has jurisdiction over the
instant case, and therefore, has the authority to render a decision on it." 32 It likewise found
that Manila was the proper venue for the case because "the cities of Makati and Manila are
part of one region, or even a province, city or municipality, if Section 51 of the Corporation
Code of the Philippines is taken by analogy." 33 The Court of Appeals stated that Section 8234 of
the Insolvency Law dictates that an order granting an adjudication of insolvency is appealable
only to the Supreme Court.35
Pilipinas Shell moved for reconsideration, but the Motion was denied on May 26,
2009.36 Hence, this Petition was filed on July 20, 2009.
Petitioner contended that the Court of Appeals should not have taken cognizance of
respondent Royal Ferry's appeal because it "failed to comply with Section 13, paragraphs (a),
(c), (d), (e), (f), and (h), Rule 44 of the Rules of Court." 37 Petitioner claimed that the Court of
Appeals erred when it held that the "petition for voluntary insolvency [was filed] in the
proper venue since the cities of Makati and Manila are part of one region[.]" 38 According to
petitioner, there was no reason to consider Makati and Manila as part of one region or
province for the purpose of determining venue.39
Moreover, petitioner argued that since respondent's Articles of Incorporation stated that its
principal office was located at 2521 A. Bonifacio St., Bangkal, Makati City, 40 the Petition for
Voluntary Insolvency should have been filed in Makati, not in Manila. Petitioner cited Hyatt
Elevators and Escalators Corporation v. Goldstar Elevators Phils., Inc., 41 where this Court held
that a corporation's residence was the place where its principal office was located as stated in
its Articles of Incorporation. 42 Thus, the address in respondent's Articles of Incorporation
should control the venue.
Finally, petitioner claimed that Section 81 of the Insolvency Law is inapplicable to this case as
it contemplated a situation where the trial court had jurisdiction over the case. 43 Petitioner
reiterated that because the venue was improperly laid, the trial court could not issue a final
order declaring respondent insolvent.
In its Comment,44 respondent averred that jurisdiction over the subject was determined by
the allegations in the pleading. 45 Respondent argued that because it stated in its Petition that
it held office in Manila, the Regional Trial Court of Manila had jurisdiction over the case. 46 It
further asserted that the fiction of a corporation's residence must give way to fact.
On April 29, 2016, respondent moved to dismiss the case. 47 Respondent stated that it entered
into a Compromise Agreement 48 with petitioner, which resulted in the Court of Appeals'
judgment based on the compromise agreement. 49 It argued that the Judgment, promulgated
in a related case docketed as CA-G.R. CV No. 102522, 50 made the present Petition moot and
academic.51 In CA-G.R. CV No. 102522, the Court of Appeals deemed the stipulations of the
Compromise Agreement valid and not contrary to law, morals, good customs, public order, or
public policy.52 The dispositive portion of the Judgment reads:
WHEREFORE, the foregoing premises considered, the Compromise Agreement is
hereby APPROVED and judgment is hereby rendered in accordance therewith. The parties are
hereby enjoined to comply with and abide by the said terms and conditions thereof. By virtue
of such approval, this case is now deemed CLOSED and TERMINATED.
SO ORDERED.53 (Emphasis in the original)
On September 23, 2016, petitioner filed a Comment 54 to respondent's Motion to Dismiss. It
claimed that the Compromise Agreement was only between Pilipinas Shell, and Antonino R.
Gascon, Jr., and Jonathan D. Gascon (the Gascons ). 55 Respondent was not a party to the
agreement.56 Petitioner argued that it had agreed to waive any action against respondent's
officers, directors, employees, stockholders, and successors-in-interest, but that it did not
agree to waive its claim against respondent. 57
142
On October 25, 2016, respondent filed a Reply 58 stating that petitioner was held solidarily
liable with the Gascons in CA-G.R. CV No. 102522. Thus, when petitioner "released the
Gascons, two (2) of the solidary debtors, of all their obligations", 59 petitioner effectively
extinguished the entire obligation under Article 121560 of the Civil Code.
The issues for resolution are:
First, whether this Petition is moot and academic in light of the Compromise Agreement
dated August 4, 2015;
Second, whether the Court of Appeals erred in taking cognizance of Royal Ferry's appeal
despite its violation of Rule 44, Section 13 of the Rules of Court; and
Lastly, whether the Petition for Insolvency was properly filed.
I make the Gascons liable for respondent's liabilities. Before the Court of Appeals could rule on
Respondent argues that the Petition is moot and academic in light of the Compromise
Agreement. It alleges that petitioner has abandoned its claim against respondent and,
consequently, lost its status as respondent's creditor. Thus, petitioner has no more interest in
the case and can no longer question the insolvency proceeding. 61
For its part, petitioner contends that it has waived only its claims against "[respondent's]
Antonino R. Gascon, Jr. and Jonathan D. Gascon and its other officers, directors, employees,
stockholders, successors-in-interest and did not waive or abandon any of its claims against
[respondent]."62 (Emphasis in the original).
Petitioner has not abandoned its claim against respondent. Paragraphs 4 and 5 of the
Compromise Agreement provide:
4. The FIRST PARTY waives any further action of whatsoever nature, whether past, present or
contingent, in connection with the causes of action against the SECOND PARTY and THIRD
PARTY alleged in its complaint in Civil Case No. 05-773, entitled "Pilipinas Shell Petroleum
Corporation vs. Royal Ferry Services, Inc., Antonino R. Gascon, Jr. and Jonathan D.
Gascon," already partially resolved by the Regional Trial Court of Makati, Branch 141 in its
Partial Decision dated 20 May 2013 and Order dated 3 December 2013;
5. Should the Supreme Court of the Philippines rule in favor of the FIRST PARTY in "Pilipinas
Shell Petroleum Corporation vs. Royal Ferry Services, Inc." (G.R. No. 188146), or otherwise
reinstate the Orders dated 15 June 2006 and 16 October 2006 of the Regional Trial Court of
Manila, Branch 24, dismissing the Petition for Voluntary Insolvency filed by Royal Ferry
Services, Inc., the FIRST PARTY agrees not to hold the officers, directors, employees,
stockholders, successors-in-interest of Royal Ferry Services, Inc., the SECOND PARTY, the
THIRD PARTY, and the heirs and assigns of the foregoing personally liable for the obligations
of Royal Ferry Services, Inc. to the FIRST PARTY, and, instead, abandon completely all causes
of action against said officers, directors, employees, stockholders, successors-in-interest of
Royal Ferry Services, Inc., the SECOND PARTY, the THIRD PARTY, and their heirs and assigns. 63
The Compromise Agreement was between petitioner and the Gascons. Contrary to its claim,
respondent was not a party to the agreement. Nowhere in the Compromise Agreement did
petitioner agree to waive its claim against respondent.
In CA-GR. CV No. 102522, petitioner held the Gascons solidarily liable with respondent for the
same debt that petitioner was claiming in these proceedings. It is on this basis that
respondent now asserts that it is a solidary debtor with the Gascons and can, thus, acquire
the benefit stipulated in Article 121564 of the Civil Code.
Respondent did not present any other proof of this alleged solidary liability. In CA-GR. CV No.
102522, one of petitioner's contentions was whether the corporate veil should be pierced to
the matter, however, the Compromise Agreement had been executed and the case was
closed.
A case is moot and academic when it ceases to present a justiciable controversy because of
supervening events so that a declaration would be of no practical use or value. 65 As
respondent has failed to establish that petitioner has abandoned its claim against it,
petitioner continues to have an interest in the insolvency proceeding.
II
On the issue of the formal defects of respondent's appeal, we uphold the Court of Appeals
Decision to rule on the merits of the case.
Petitioner alleges that respondent's Appellant's Brief has failed to comply with Rule 44,
Section 13, paragraphs (a), (c), (d), (e), (f), and (h) of the Rules of Court:
(a) First, the Appellant's Brief is bereft of page references to the record in its "Statements of
Facts and of the Case" and its discussion supporting its assignment of errors, in violation of
Section 13 (c), (d) and (f) of Rule 44.
(b) Second, the Appellant's Brief failed to include a statement of the issues of fact or law to be
submitted to [the Court of Appeals] for judgment, in violation of Section 13(e), Rule 44.
(c) Third, the Appellant's Brief does not contain the page of the report on which the citation
of authorities is found, in violation of Section 13(f), Rule 44.
(d) Fourth, the table of cases is not alphabetically arranged, in violation of Section 13(a), Rule
44.
(e) Fifth, the Appellants Brief does not contain, as an appendix, a copy of the judgment or
final order appealed from, in violation of Section 13(h), Rule 44. 66
143
On the other hand, respondent argues that it has substantially complied with the
requirements under the law. 67 It claims that the absence of page references to the record in
its "Statements of Facts and of the Case" has not automatically resulted in the dismissal of
the appeal.68 Further, as the records of this case are not voluminous, the Court of Appeals
was not inconvenienced by the lapse.69
Respondent likewise claims that although the Appellant's Brief did not specifically contain the
phrase "statement of issues," the three errors in issue were identifiable through a reading of
the Brief.70 It claims that its failure to append a copy of the trial court Order has been mooted
because the Court of Appeals has issued the Resolution requiring them to submit copies of
the assailed Order. 71 Lastly, respondent argues that it only cited five (5) cases in the Brief.
Hence, a citation of authorities was unnecessary. 72
The Court of Appeals committed no reversible error in deciding to rule on the merits. The
term "may" in Rule 50, Section 1 73 of the Rules of Court means that the Court of Appeals has
discretion to dismiss an appeal based on the enumerated grounds. The Court of Appeals
exercised its discretion when it decided that the interest of justice would be better served by
overlooking the pleading's technical defects. Time and again, this Court has declared that
dismissal on purely technical grounds is frowned upon. 74 It is judicial policy to determine a
case based on the merits so that the parties have full opportunity to ventilate their cause and
defenses.75 The Court of Appeals did not err in taking cognizance of the appeal.
III
The Petition for Insolvency was properly filed before the Regional Trial Court of Manila.
The first insolvency law, Republic Act No. 1956, was entitled "An Act Providing for the
Suspension of Payments, the Relief of Insolvent Debtors, the Protection of Creditors, and the
Punishment of Fraudulent Debtors (Insolvency Law)". It was derived from the Insolvency Act
of California (1895), with few provisions taken from the United States Bankruptcy Act of
1898.76 With the enactment of Republic Act No. 10142, otherwise known as the Financial
Rehabilitation and Insolvency Act of 2010 (FRIA), the Insolvency Law was expressly repealed
on July 18, 2010. The FRIA is currently the special law that governs insolvency. However,
because the relevant proceedings in this case took place before the enactment of the FRIA,
the case needs to be resolved under the provisions of the Insolvency Law.
Insolvency proceedings are defined as the statutory procedures by which a debtor obtains
financial relief and undergoes judicially supervised reorganization or liquidation of its assets
for the benefit of its creditors. 77
Respondent argues that the Regional Trial Court of Manila obtained jurisdiction because in its
Petition for Voluntary Insolvency, respondent alleged that its principal office was then found
in Manila. On the other hand, petitioner argues that filing the petition before the Regional
Trial Court of Manila was a patent jurisdictional defect as the Regional Trial Court of Manila
did not have territorial jurisdiction over respondent's residence. 78
Petitioner confuses the concepts of jurisdiction and venue. In City of Lapu-Lapu v. Phil.
Economic Zone Authority:79
On the one hand, jurisdiction is "the power to hear and determine cases of the general class
to which the proceedings in question belong." Jurisdiction is a matter of substantive law.
Thus, an action may be filed only with the court or tribunal where the Constitution or a
statute says it can be brought. Objections to jurisdiction cannot be waived and may be
brought at any stage of the proceedings, even on appeal. When a case is filed with a court
which has no jurisdiction over the action, the court shall motu proprio dismiss the case.
On the other hand, venue is "the place of trial or geographical location in which an action or
proceeding should be brought." In civil cases, venue is a matter of procedural law. A party's
objections to venue must be brought at the earliest opportunity either in a motion to dismiss
or in the answer; otherwise the objection shall be deemed waived. When the venue of a civil
action is improperly laid, the court cannot motu proprio dismiss the case.80 (Citations omitted)
Wrong venue is merely a procedural infirmity, not a jurisdictional impediment. 81 Jurisdiction is
a matter of substantive law, while venue is a matter of procedural law. 82 Jurisdiction is
conferred by law, and the Insolvency Law vests jurisdiction in the Court of First Instance-now
the Regional Trial Court.
Jurisdiction is acquired based on the allegations in the complaint. 83 The relevant portion of
respondent's Petition for Voluntary Insolvency reads:
Petitioner was incorporated on 18 October 1996 with principal place of business in 2521 A.
Bonifacio Street, Bangkal, Makati City.1âwphi1 At present and during the past six months,
[Royal Ferry] has held office in Rm. 203 BF Condo Building, Andres Soriano cor. Solana St.,
Intramuros, Manila, within the jurisdiction of the Honorable Court, where its books of
accounts and most of its remaining assets are kept. 84
Section 14 of the Insolvency Law specifies that the proper venue for a petition for voluntary
insolvency is the Regional Trial Court of the province or city where the insolvent debtor has
resided in for six (6) months before the filing of the petition. 85 In this case, the issue of which
court is the proper venue for respondent's Petition for Voluntary Insolvency comes from the
confusion on an insolvent corporation's residence.
Petitioner contends that the residence of a corporation depends on what is stated in its
articles of incorporation, regardless of whether the corporation physically moved to a
different location. On the other hand, respondent posits that the fiction of a corporation's
residence must give way to uncontroverted facts.
In Young Auto Supply Co. v. Court of Appeals:86
A corporation has no residence in the same sense in which this term is applied to a natural
person. But for practical purposes, a corporation is in a metaphysical sense a resident of the
144
place where its principal office is located as stated in the articles of incorporation... The
Corporation Code precisely requires each corporation to specify in its articles of incorporation
the "place where the principal office of the corporation is to be located which must be within
the Philippines" ... The purpose of this requirement is to fix the residence of a corporation in
a definite place, instead of allowing it to be ambulatory. 87
Young Auto Supply dealt with the venue of a corporation's personal action by applying the
provisions of the Rules of Court. Nonetheless, the Rules of Court also provides for when its
provisions on venue do not apply. Rule 4, Section 4 provides:
RULE4
Venue of Actions
....
SECTION 4. When Rule not applicable. - This Rule shall not apply.
(a) In those cases where a specific rule or law provides otherwise; or
(b) Where the parties have validly agreed in writing before the filing of the action on the
exclusive venue thereof.
As there is a specific law that covers the rules on venue, the Rules of Court do not apply.
The old Insolvency Law provides that in determining the venue for insolvency proceedings,
the insolvent corporation should be considered a resident of the place where its actual place
of business is located six (6) months before the filing of the petition:
Sec. 14. Application. - An insolvent debtor, owing debts exceeding in amount the sum of one
thousand pesos, may apply to be discharged from his debts and liabilities by petition to the
Court of First Instance of province or city in which he has resided for six months next
preceding the filing of such petition. In his petition he shall set forth his place of residence,
the period of his residence therein immediately prior to filing said petition, his inability to pay
all his debts in full, his willingness to surrender all his property, estate, and effects not exempt
from execution for the benefit of his creditors, and an application to be adjudged an
insolvent. He shall annex to his petition a schedule and inventory in the form herein-after
provided. The filing of such petition shall be an act of insolvency. (Emphasis supplied) 88
The law places a premium on the place of residence before a petition is filed since venue is a
matter of procedure that looks at the convenience of litigants. 89 In insolvency proceedings,
this Court needs to control the property of the insolvent corporation. In Metropolitan Bank
and Trust Company v. S.F Naguiat Enterprises, Inc.:90
Conformably, it is the policy of Act No. 1956 to place all the assets and liabilities of the
insolvent debtor completely within the jurisdiction and control of the insolvency court
without the intervention of any other court in the insolvent debtor's concerns or in the
administration of the estate. It was considered to be of prime importance that the insolvency
proceedings follow their course as speedily as possible in order that a discharge, if the
insolvent debtor is entitled to it, should be decreed without unreasonable delay.
"Proceedings of [this] nature cannot proceed properly or with due dispatch unless they are
controlled absolutely by the court having charge thereof." 91 (Citations omitted)
To determine the venue of an insolvency proceeding, the residence of a corporation should
be the actual place where its principal office has been located for six (6) months before the
filing of the petition. If there is a conflict between the place stated in the articles of
incorporation and the physical location of the corporation's main office, the actual place of
business should control.
Requiring a corporation to go back to a place it has abandoned just to file a case is the very
definition of inconvenience. There is no reason why an insolvent corporation should be forced
to exert whatever meager resources it has to litigate in a city it has already left.
In any case, the creditors deal with the corporation's agents, officers, and employees in the
actual place of business. To compel a corporation to litigate in a city it has already abandoned
would create more confusion.
Moreover, the six (6)-month qualification of the law's requirement of residence shows intent
to find the most accurate location of the debtor's activities. If the address in a corporation's
articles of incorporation is proven to be no longer accurate, then legal fiction should give way
to fact.
Petitioner cites Hyatt Elevators and Escalators Corp. v. Goldstar Elevators Phils. Inc., 92 where
this Court ruled that a corporation's articles of incorporation is the controlling document that
determines the venue of a corporation's action. 93 Thus, abandoning the principal office does
not affect the venue of the corporation's personal action if the corporation's articles of
incorporation were not previously amended to reflect this change.
Two glaring differences between this case and Hyatt make the latter inapplicable.
First, Hyatt found inconclusive the allegation that the petitioner corporation relocated to a
different city.94 Here, the Regional Trial Court found that respondent had sufficiently shown
that it had been a resident of Manila for six (6) months before it filed its Petition for Voluntary
Insolvency.95 Second, and more importantly, Hyatt involves a complaint for unfair trade
practices and damages-a personal action governed by the Civil Code and the Rules of
Court.96 This case, however, involves insolvency, a special proceeding governed by a special
law that specifically qualifies the residence of the petitioner.
IV
We cannot sustain the ruling of the Court of Appeals that the "petition for voluntary
insolvency [was filed] in the proper venue since the cities of Makati and Manila are part of
145
one region[.]"97 This is untenable. Section 14 of Batas Pambansa Blg. 129 provides several
judges to preside over the different branches assigned to Manila and Makati. Thus, the two
venues are distinct:

(d) One hundred seventy-two Regional Trial Judges shall be commissioned for the National
Capital Judicial Region. There shall be:

Eighty-two branches (Branches I to LXXXII) for the city of Manila, with seats thereat;

Twenty-five branches (Branches LXXXIII to CVII) for Quezon City, with seats thereat;

Twelve branches (Branches CVIII to CXIX) for Pasay City, with seats thereat;

Twelve branches (Branches CXX to CXXXI) for Caloocan City, with seats thereat;

Thirty-nine branches (Branches CXXXII to CLXX) for the municipalities of Navotas, Malabon,
San Juan, Mandaluyong, Makati, Pasig, Pateros, Taguig, Marikina, Parafiaque, Las Piñas, and
Muntinlupa, Branches CXXXII to CL with seats at Makati,

Branches CLI to CLXVIII at Pasig, and Branches CLXIX and CLXX at Malabon; and

Two branches (Branches CLXXI and CLXXII) for the municipality of Valenzuela, with seats
thereat. (Emphasis supplied)

Despite being in the same region, Makati and Manila are treated as two distinct venues. To
deem them as interchangeable venues for being in the same region has no basis in law.

Respondent is a resident of Manila. The law should be read to lay the venue of the insolvency
proceeding in the actual location of the debtor's activities. If it is uncontroverted that
respondent's address in its Articles of Incorporation is no longer accurate, legal fiction should
give way to fact. Thus, the Petition was correctly filed before the Regional Trial Court of
Manila.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The assailed Decision dated
January 30, 2009 and the Resolution dated May 26, 2009 of the Court of Appeals in CA-G.R.
CV No. 88320 are AFFIRMED.

SO ORDERED.

146
G.R. No. 193068 DBP guaranteed Galleon's foreign loans. 11 In return, Galleon and its stockholders Sta. Ines,
Cuenca Investment, Universal Holdings, Cuenca, and Tinio, executed a Deed of
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner Undertaking12 on October 10, 1979 and obligated themselves to guarantee DBP's potential
vs. liabilities.13
STA. INES MELALE FOREST PRODUCTS CORPORATION, RODOLFO CUENCA, MANUEL TINIO,
CUENCA INVESTMENT CORPORATION and UNIVERSAL HOLDINGS CORPORATION, To secure DBP's guarantee, Galleon undertook to secure a first mortgage on its five new
Respondents vessels and two second-hand vessels.14 However, despite the loans extended to it,
"[Galleon's] financial condition did not improve." 15
x-----------------------x
Cuenca, as Galleon's president, wrote to the members of the Cabinet Standing Committee
G.R. No. 193099 "for the consideration of a policy decision to support a liner service." 16 Cuenca also wrote
NATIONAL DEVELOPMENT CORPORATION, Petitioner, then President Ferdinand Marcos and asked for assistance. 17
vs. On July 21, 1981, President Marcos issued Letter of Instructions No. 1155 18 addressed to the
STA. INES MELALE FOREST PRODUCTS CORPORATION, RODOLFO M. CUENCA, MANUEL I. NDC, DBP, and the Maritime Industry Authority. Letter of Instructions No. 1155 reads:
TINIO, CUENCA INVESTMENT CORPORATION and UNIVERSAL HOLDINGS
CORPORATION, Respondents. TO : Development Bank of the Philippines
National Development Company
DECISION Maritime Industry Authority
LEONEN, J.: DIRECTING A REHABILITATION PLAN FOR
A condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfilment and GALLEON SHIPPING CORPORATION
a debtor loses the right to make use of the period when a condition is violated, making the WHEREAS, Galleon Shipping Corporation is presently in a distressed state in view of the
obligation immediately demandable.1 unfavorable developments in the liner shipping business;
This resolves the consolidated Petitions for Review filed by the Development Bank of the WHEREAS, the exposure of the Philippine government financial institutions is substantial;
Philippines (DBP)2 and the National Development Corporation (NDC) 3 assailing the Court of
Appeals Decision4 dated March 24, 2010 and Court of Appeals Resolution 5 dated July 21, WHEREAS, it is a policy of government to provide a reliable liner service between the
2010, which affirmed with modifications the Decision 6 dated September 16, 2003 of Branch Philippines and its major trading partners;
137, Regional Trial Court of Makati City.7
WHEREAS, it is a policy to have a Philippine national flag liner service to compete with other
Sometime in 1977, National Galleon Shipping Corporation (Galleon), "formerly known as heavily subsidized national shipping companies of other countries;
Galleon Shipping Corporation, was organized to operate a liner service between the
Philippines and its ... trading partners." 8 Galleon's major stockholders were respondents Sta. NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, do hereby direct
Ines Melale Forest Products Corporation (Sta. Ines), Cuenca Investment Corporation (Cuenca the following:
Investment), Universal Holdings Corporation (Universal Holdings), Galleon's President Rodolfo 1. NDC shall acquire 100% of the shareholdings of Galleon Shipping Corporation from its
M. Cuenca (Cuenca), Manuel I. Tinio (Tinio), and the Philippine National Construction present owners for the amount of P46. 7 million which is the amount originally contributed
Corporation (PNCC).9 by the present shareholders, payable after five years with no interest cost.
Galleon experienced financial difficulties and had to take out several loans from different 2. NDC to immediately infuse P30 million into Galleon Shipping Corporation in lieu of its
sources such as foreign financial institutions, its shareholders (Sta. Ines, Cuenca Investment, previously approved subscription to Philippine National Lines. In addition, NDC is to provide
Universal Holdings, Cuenca, and Tinio), and other entities "with whom it had ongoing additional equity to Galleon as may be required.
commercial relationships."10

147
3. DBP to advance for a period of three years from date hereof both the principal and the
interest on Galleon's obligations falling due and to convert such advances into 12% preferred
shares in Galleon Shipping Corporation.
4. DBP and NDC to negotiate a restructuring of loans extended by foreign creditors of
Galleon.1avvphi1
5. MARINA to provide assistance to Galleon by mandating a rational liner shipping schedule
considering existing freight volume and to immediately negotiate a bilateral agreement with
the United States in accordance with UNCTAD resolutions.
These instructions are to take effect immediately.19
On August 10, 1981,20 pursuant to Letter of Instructions No. 1155, Galleon's stockholders,
represented by Cuenca, and NDC, through its then Chairman of the Board of Directors,
Roberto V. Ongpin (Ongpin) entered into a Memorandum of Agreement, 21 where NDC and
Galleon undertook to prepare and sign a share purchase agreement covering 100% of
Galleon's equity for ₱46,740,755.00.22 The purchase price was to be paid after five years from
the execution of the share purchase agreement. 23 The share purchase agreement also
provided for the release of Sta. Ines, Cuenca, Tinio and Construction Development
Corporation of the Philippines from the personal counter-guarantees they issued in DBP's
favor under the Deed of Undertaking. 24
The Memorandum of Agreement reads:
KNOW ALL MEN BY THESE PRESENTS:
This Memorandum of Agreement made and entered into this __ day of August, 1981, at
Makati, Metro Manila, Philippines, by and between the stockholders of Galleon Shipping
Corporation listed in Annex A hereof, represented herein by their duly authorized attorney-in-
fact, Mr. Rodolfo M. Cuenca (hereinafter called "Sellers") and National Development
Company, represented herein by its Chairman of the Board, Hon. Minister Roberto V. Ongpin
(hereinafter called "Buyer").
WITNESSETH: That-
WHEREAS, Sellers and Buyer desire to implement immediately Letter of Instructions No.
1155, dated July 21, 1981, which directs that Buyer acquire 100% of the shareholdings of
Galleon Shipping Corporation ("GSC") from Sellers who are the present owners.
WHEREAS, Sellers have consented to allow Buyer to assume actual control over the
management and operations of GSC prior to the execution of a formal share purchase
agreement and the transfer of all the shareholdings of Sellers to Buyer.
NOW, THEREFORE, the parties agree as follows:
1. Within seven (7) days after the signing hereof, Sellers shall take all steps necessary to cause
five (5) persons designated by Buyer to be elected directors of GSC, it being understood that
Sellers shall retain the remaining two (2) seats in the GSC board subject to the condition
hereafter stated in clause 7(b ).
2. The new board to be created pursuant to clause 1 above shall elect Antonio L. Carpio as
Chairman and Chief Executive Officer and Rodolfo M. Cuenca as President. All other officers
will be nominated and appointed by Buyer.
3. As soon as possible, but not more than 60 days after the signing hereof, the parties shall
endeavor to prepare and sign a share purchase agreement covering 100% of the
shareholdings of Sellers in GSC to be transferred to Buyer, i.e. 10,000,000 fully paid common
shares of the par value of ₱l.00 per share and subscription of an additional 100,000,000
common shares of the par value of ₱l.00 per share of which ₱36,740,755.00 has been paid,
but not yet issued.
4. Sellers hereby warrant that ₱46,740,755[.00] had been actually paid to Galleon Shipping
Corporation, which amount represents payment of Sellers for 46,740,755 common shares of
said Corporation. This warranty shall be verified by Buyer, the results of which will determine
the final purchase price to be paid to Sellers.
The purchase price directed by LOI 1155 to be paid to Sellers shall be paid after five (5) years
from date of the share purchase agreement with no interest cost to buyer.
5. As security for the payment of the aforementioned purchase price, Buyer shall issue to
each of the GSC stockholders listed in Annex A a negotiable promissory note in the amount
corresponding to the respective paid-up capital in GSC of each of such stockholders and with
maturity on the date of the fifth annual anniversary of the share purchase agreement.
6. Notwithstanding the provisions of clauses 4 and 5 above, upon the signing of the share
purchase agreement, it is understood that Sellers shall deliver to Buyer all the stock
certificates covering 10,000,000 common shares of GSC, and duly and validly endorsed for
transfer, free from any and all liens and encumbrances whatsoever. It is likewise understood
that Buyer shall at that time acquire all the subscription rights to 100,000,000 common
shares of which ₱36,740,755.00 has been paid by Sellers, and shall assume the obligation to
pay the unpaid portion of such subscription.
7. The stock purchase agreement to be prepared and signed by the parties within sixty (60)
days from date hereof shall contain, among other things:
(a) standard warranties of seller including, but not limited to, warranties pertaining to the
accuracy of financial and other statements of GSC; disclosure of liabilities; payment of all
taxes, duties, licenses and fees; non-encumbrance of corporate assets; valid contracts with
third parties, etc. including an indemnity clause covering any breach thereof.
148
(b) provisions that Buyer shall retain 2 representatives of Sellers in the board of GSC only for Acting as Galleon's guarantor, DBP paid off Galleon's debts to its foreign bank creditor and, on
as long as Sellers have not been paid, or have not negotiated or discounted any of the January 25, 1982, pursuant to the Deed of Undertaking, Galleon executed a mortgage
promissory notes referred to in clause 5 above. contract26 over seven of its vessels in favor of DBP.

(c) provisions whereby Construction Development Corporation of the Philippines, Sta. Ines NDC took over Galleon's operations "even prior to the signing of a share purchase
Melale Forest Products Corporation, Mr. Rodolfo M. Cuenca and Mr. Manuel I. Tinio shall be agreement."27 However, despite NDC's takeover, the share purchase agreement was never
released from counter-guarantees they have issued in favor of DBP and other financial formally executed.28
institutions in connection with GSC's various credit accommodations.
On February 10, 1982, or barely seven months from the issuance of Letter of Instructions No.
(d) provisions for arbitration as a means of settling disputes and differences of opinion 1155, President Marcos issued Letter of Instructions No. 1195,29 which reads:
regarding the stock purchase agreement.
TO : Development Bank of the Philippines
8. Sellers hereby make a special warranty that: National Development Company

(a) any and all liabilities and obligations as disclosed in the financial statements of Galleon RE : Galleon Shipping Corporation
Shipping Corporation are valid, regular, normal and incurred in the ordinary course of
business of Galleon Shipping Corporation, and Buyer will verify this warranty and conduct an WHEREAS, NDC has assumed management of Galleon's operations pursuant to LOI No. 1155;
audit of Galleon Shipping Corporation as of March 31 and July 31, 1981; liabilities that do not WHEREAS, the original terms under which Galleon acquired or leased the vessels were such
fall under the above definition are to be for the account of the Seller; and that Galleon would be unable to pay from its cash flows the resulting debt service burden;
(b) from July 31, 1981 to the date of the election of Buyers' representatives to the Board of WHEREAS, in such a situation the financial exposure of the Government will continue to
GSC, GSC has not and shall not enter into any contract and has not and shall not incur any increase and therefore the appropriate steps must be taken to limit and protect the
liability except what is normal and usual in the ordinary course of shipping business. Government's exposure;
9. Valid and duly authorized liabilities of GSC which are the subject of a meritorious lawsuit, NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, do hereby direct
or which have been arranged and guaranteed by Mr. Rodolfo M. Cuenca, may be considered the following:
by Buyer for priority in the repayment of accounts, provided that, upon review, the Buyer
shall determine these to be legitimate and were validly incurred in the ordinary course of 1) The DBP and the NDC shall take immediate steps, including foreclosure of Galleon vessels
GSC's principal business. and other assets, as may be deemed necessary to limit and protect the Government's
exposure;
IN WITNESS HEREOF, the parties have signed this Memorandum of Agreement this _ day of
August 1981, in Makati, Metro Manila. 2) NDC shall discharge such maritime liens as it may deem necessary to allow the foreclosed
vessels to engage in the international shipping business;
STOCKHOLDERS OF
GALLEON SHIPPING CORPORATION 3) Any provision of LOI No. 1155 inconsistent with this Letter of Instructions is hereby
rescinded.
By:
These instructions are to take effect immediately.30
(signed)
RODOLFO M. CUENCA On April 22, 1985, respondents Sta. Ines, Cuenca, Tinio, Cuenca Investment and Universal
NATIONAL DEVELOPMENT COMPANY Holdings filed a Complaint with Application for the Issuance of a Temporary Restraining Order
or Writ of Preliminary Injunction. 31 The Complaint was amended several times to imp lead
By: new parties and to include new claims/counterclaims.32
(signed) In their Complaint, Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings
ROBERTO V. ONGPIN25 alleged that NDC, "without paying a single centavo, took over the complete, total, and

149
absolute ownership, management, control, and operation of defendant [Galleon] and all its
assets, even prior to the formality of signing a share purchase agreement, which was held in
abeyance because the defendant NDC was verifying and confirming the amounts paid by
plaintiffs to Galleon, and certain liabilities of Galleon to plaintiffs[.]" 33
Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings also alleged that NDC
tried to delay "the formal signing of the share purchase agreement in order to interrupt the
running of the 5-year period to pay ... the purchase of the shares in the amount of
₱46,740,755[.00] and the execution of the negotiable promissory notes to secure
payment[.]"34
As for DBP, Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings claimed that
"DBP can no longer go after [them] for any deficiency judgment [since] NDC had been
subrogated [in their place] as borrower[s], hence the Deed of Undertaking between [Sta.
Ines, Cuenca Investment, Universal Holdings, Cuenca, and Tinio and DBP] had been
extinguished and novated[.]"35
Meanwhile, on December 8, 1986, Proclamation No. 50 created the Asset Privatization
Trust.36 The Asset Privatization Trust was tasked to "take title to and possession of, conserve,
provisionally manage and dispose of, assets which have been identified for privatization or
disposition and transferred to the TI-List for [that] purpose." 37
Under Administrative Order No. 14 issued by then President Corazon C. Aquino, certain assets
of DBP, which included Galleon's loan accounts, "were identified for transfer to the National
Government."38
On February 27, 1987, a Deed of Transfer was executed providing for the transfer of the
Galleon loan account from DBP to the National Government. 39 The Asset Privatization Trust
was "constituted as [the National Government's] trustee over the transferred accounts and
assets[.]"40
On September 16, 2003, the Regional Trial Court upheld the validity of Letter of Instructions
No. 1155 and the Memorandum of Agreement executed by NDC and Galleon's stockholders,
pursuant to Letter of Instructions No. 1155.41
The Regional Trial Court also held that Letter of Instructions No. 1195 did not supersede or
impliedly repeal Letter of Instructions No. 1155, and assuming that it did impliedly repeal
Letter of Instructions No. 1155, it would be void and unconstitutional for violating the non-
impairment clause.42
As regards NDC's argument that Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal
Holdings had no basis to compel it to pay Galleon's shares of stocks because no share
purchase agreement was executed, the Regional Trial Court held that the NDC was in
estoppel since it prevented the execution of the share purchase agreement and had admitted
to being Galleon's owner.43
The Regional Trial Court also ruled that Sta. Ines, Cuenca, Tinio, Cuenca Investment, and
Universal Holdings' liability to DBPunder the Deed of Undertaking had been extinguished due
to novation, with NDC replacing them and PNCC as debtors. 44 The dispositive of the Regional
Trial Court's Decision reads:
WHEREFORE, judgment is hereby rendered (1) ordering defendants National Development
Corporation and National Galleon Shipping Corporation, jointly and severally, to pay plaintiffs
Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca
Investment Corporation and Universal Holdings Corporation, the amounts of ₱15,150,000.00
and US$2.3 million, representing the amount of advances made by plaintiffs in behalf of
defendant Galleon, plus legal interest at the rate of 6% per annum from the date of filing of
this case on 22 April 1985 up to full payment;
(2) ordering defendants National Development Corporation and National Galleon Shipping
Corporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products
Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and
Universal Holdings Corporation, the amount of ₱46,740,755.00, representing the price of the
shares of stock of plaintiffs and defendant PNCC in defendant Galleon, plus legal interest at
the rate of 6% per annum from the date of filing of this case on 22 April 1985 up to full
payment;
(3) ordering defendants National Development Corporation and National Galleon Shipping
Corporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products
Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and
Universal Holdings Corporation, attorney's fees equivalent to 10% of the amount due; and
costs of suit; and
(4) ordering defendants National Development Corporation, Development Bank of the
Philippines and National Galleon Shipping Corporation, jointly and severally, to pay each
plaintiff and defendant Philippine National Construction Corporation, ₱10,000.00 as moral
damages; and ₱10,000.00 as exemplary damages.
SO ORDERED.45
On February 23, 2003, the Regional Trial Court issued an Order 46 partially reconsidering and
modifying the September 16, 2003 Decision by categorically declaring Sta. Ines, Cuenca, Tinio,
Cuenca Investment, and Universal Holdings free from liability under the mortgage contract
with DBP and the deficiency claim of DBP. 47 The Regional Trial Court also deleted the award of
US$2.3 million to Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings since
they failed to include the same in their fourth amended complaint. 48 The dispositive portion
of the Regional Trial Court Order, as amended, reads:
WHEREFORE, judgment is hereby rendered (1) ordering defendants National Development
Corporation and National Galleon Shipping Corporation, jointly and severally, to pay plaintiffs
Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca
150
Investment Corporation and Universal Holdings Corporation, the amount of ₱l5,150,000.00
representing the amount of advances made by plaintiffs in behalf of defendant NGSC, plus
legal interest at the rate of 6% per annum from the date of filing of this case on 22 April 1985
up to full payment;
(2) ordering defendants National Development Corporation and National Galleon Shipping
Corporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products
Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and
Universal Holdings Corporation, the amount of ₱46,740,755.00, representing the price of the
shares of stock of plaintiffs and defendant PNCC in defendant NGSC, plus legal interest at the
rate of 6% per annum from the date of filing of this case on 22 April 1985 up to full payment;
(3) ordering defendants National Development Corporation and National Galleon Shipping
Corporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products
Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and
Universal Holdings Corporation, attorney's fees equivalent to 10% of the amount due; and
costs of suit;
(4) ordering defendants National Development Corporation and National Galleon Shipping
Corporation, jointly and severally, to pay to each plaintiff and defendant Philippine National
Construction Corporation, ₱10,000.00 as moral damages; and ₱10,000.00 as exemplary
damages; and
(5) declaring plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca,
Manuel I. Tinio, Cuenca Investment Corporation and Universal Holdings Corporation and
defendant Philippine National Construction Corporation to be no longer liable to defendants
National Development Corporation, Development Bank of the Philippines and Asset
Privatization Trust under the deed of undertaking, pledge, mortgages, and other accessory
contracts between the parties; and consequently, permanently enjoining defendant DBP or
APT from filing a deficiency claim against plaintiffs and defendant PNCC.
SO ORDERED.49
On March 9, 2004 and March 16, 2004, DBP and NDC filed their respective notices of appeal
to the Court of Appeals.50
In its assailed Decision dated March 24, 2010, the Court of Appeals upheld the Regional Trial
Court's findings that the Memorandum of Agreement between NDC and Cuenca
(representing Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings) was a
perfected contract, which bound the parties, 51 thus:
Although the Supreme Court ruled in the Poliand case that LOI No. 1155 is a mere
administrative issuance and, as such, cannot be a valid source of obligation, the defendant-
appellant NDC cannot escape its liabilities to the plaintiffs-appellees considering that the
Memorandum of Agreement that it executed with the plaintiffs-appellees created certain
rights and obligations between the parties which may be enforced by the parties against each
other. The situation in the Poliand case is different because Poliand was not a party to the
Memorandum of Agreement.52
The Court of Appeals ruled that NDC is estopped from claiming that there was no agreement
between it and Cuenca since the agreement had already been partially executed after NDC
took over the control and management of Galleon.53
The Court of Appeals also rejected NDC's argument that it should not be held liable for the
payment of Galleon's shares. 54 The Court of Appeals held that NDC "voluntarily prevented the
execution of a share purchase agreement when it reneged on its various obligations under
the Memorandum of Agreement."55
The Court of Appeals likewise affirmed the Regional Trial Court's ruling that novation took
place when NDC agreed to be substituted in place of Sta. Ines, Cuenca, Tinio, Cuenca
Investment, and Universal Holdings in the counter-guarantees they issued in favor of DBP. 56
The Court of Appeals ruled that DBP was privy to the Memorandum of Agreement between
NDC and Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings, since Ongpin
was concurrently Governor of DBP and chairman of the NDC Board at the time the
Memorandum of Agreement was signed.57
The Court of Appeals further held that DBPwas no longer the real party-in-interest as the loan
accounts of Galleon were transferred to the Asset Privatization Trust. 58
The fallo of the Court of Appeals Decision reads:
WHEREFORE, in view of the foregoing premises, the assailed Decision, as well as,
assailed Order, appealed from is hereby AFFIRMED with MODIFICATIONS such that, as
modified, the dispositive portion thereof shall now read as follows:
"WHEREFORE, judgment is hereby rendered (1) ordering defendants National Development
Corporation and National Galleon Shipping Corporation jointly and severally, to pay plaintiffs
Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca
Investment Corporation and Universal Holdings Corporation, the amount of ₱15,150,000.00
representing the amount of advances made by plaintiffs in behalf of defendant NGSC, plus
interest at the rate of twelve percent (12%) per annum from the date of filing of this case on
22 April 1985 until instant Decision becomes final and executory, thereafter the said amount
shall earn an interest at the rate of twelve (12%) percent per annum from such finality until
its satisfaction;
(2) ordering the defendants National Development Corporation and National Galleon
Shipping [C]orporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products
Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and
Universal Holdings Corporation, the amount of ₱46,740,755.00, representing the price of the
151
shares of stock of plaintiffs and defendant PNCC in defendant NGSC, plus interest at the rate
of twelve percent (12%) per annum from the date of filing of this case on 22 April 1985 until
instant Decision becomes final and executory, thereafter the said amount shall earn an
interest at the rate of twelve percent (12%) per annum from such finality until its satisfaction;
(3) ordering the defendants National Development Corporation and National Galleon
Shipping Corporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest Products
Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and
Universal Holdings Corporation, attorney's fees equivalent to 10% of the amount due; and
costs of suit;
(4) ordering the defendants National Development Corporation and National Galleon
Shipping Corporation, jointly and severally, to pay to each plaintiffs and defendant Philippine
National Construction Corporation, ₱10,000.00 as moral damages; and ₱10,000.00 as
exemplary damages; and
(5) declaring plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca,
Manuel I. Tinio, Cuenca Investment Corporation and Universal Holdings Corporation and
defendant Philippine National Construction Corporation to be no longer liable to defendants
National Development Corporation, Development Bank of the Philippines and Asset
Privatization Trust under the deed of undertaking, pledge, mortgages, and other accessory
contracts between the parties; and consequently, permanently enjoining defendant DBP or
APT from filing a deficiency claim against plaintiffs and defendant PNCC.
SO ORDERED.59 (Emphasis and underscoring in the original)
On September 16, 2010, NDC appealed the Court of Appeals Decision to this Court. In its
Petition for Review,60 NDC maintains that the Memorandum of Agreement does not bind it,
since Ongpin was not equipped with authority from the NDC Board to sign the Memorandum
of Agreement on NDC's behalf. 61 NDC also denies that it took over the control and
management of Galleon or that it "prevented the execution of the [s]hare [p]urchase
[a]greement[.]"62
NDC asserts that even assuming that the Memorandum of Agreement was binding, what was
agreed upon was that the parties shall execute a share purchase agreement within a certain
period of time.63 The Memorandum of Agreement was only a preliminary agreement
between Cuenca and Ongpin for NDC's "intended purchase of Galleon's equity[,] pursuant to
[Letter of Instructions No.] 1155."64 The Memorandum of Agreement cannot "be considered
as the executing agreement or document for the purchase of the shares." 65
On September 13, 2010, DBP filed its Petition for Review 66 before this Court. DBP insisted that
novation did not take place because: (a) there was no second binding contract designed to
replace the Deed of Undertaking; (b) it did not give its consent to the substitution of debtors
under the Memorandum of Agreement; and (c) there was no agreement that unequivocally
declared novation by substitution of debtors. 67
The issues raised for the resolution of this Court are as follows:
a) Whether the Memorandum of Agreement obligates NDC to purchase Galleon's shares of
stocks and pay the advances made by respondents in Galleon's favor; 68
b) Whether the Memorandum of Agreement novated the Deed of Undertaking executed
between DBP and respondents;69 and
c) Whether the computation of legal interest should be at the rate of 6% per annum, instead
of the 12% per annum pegged by the Court of Appeals.70
I
When the "terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control." 71
Bautista v. Court of Appeals72 instructs that where the language of a contract is plain and
unambiguous, the contract must be taken at its face value, thus:
The rule is that where the language of a contract is plain and unambiguous, its meaning
should be determined without reference to extrinsic facts or aids. The intention of the parties
must be gathered from that language, and from that language alone. Stated differently,
where the language of a written contract is clear and unambiguous, the contract must be
taken to mean that which, on its face, it purports to mean, unless some good reason can be
assigned to show that the words used should be understood in a different sense. Courts
cannot make for the parties better or more equitable agreements than they themselves have
been satisfied to make, or rewrite contracts because they operate harshly or inequitably as to
one of the parties, or alter them for the benefit of one party and to the detriment of the
other, or by construction, relieve one of the parties from terms which he voluntarily
consented to, or impose on him those which he did not. 73
It is not disputed that NDC and respondents Sta. Ines, Cuenca, Tinio, Cuenca Investment, and
Universal Holdings executed a Memorandum of Agreement pursuant to the directives of
Letter of Instructions No. 1155.
Under the Memorandum of Agreement, NDC, as the Buyer, undertook to:
a) implement Letter of Instructions No. 1155 and acquire 100% of Galleon's shareholdings;
b) assume actual control over Galleon's management and operations prior to the execution of
a formal share purchase agreement and prior to the transfer to NDC of Galleon's
shareholdings;
c) designate five persons to sit in Galleon's Board of Directors;
d) pay Galleon's stockholders the share purchase price after five years from the date of the
share purchase agreement;
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e) issue each Galleon stockholder a negotiable promissory note with maturity on the date of
the fifth annual anniversary of the share purchase agreement;
f) verify Galleon's special warranty on its liabilities and obligations by conducting an audit;
and
g) consider for priority in the repayment of accounts, Galleon's valid and duly authorized
liabilities which are the subject of meritorious lawsuit or which have been arranged and
guaranteed by Cuenca. While respondents, Galleon's stockholders, as the Sellers, undertook
to:
a) implement Letter of Instructions No. 1155 by allowing NDC to purchase 100% of their
shareholdings;
b) consent for NDC to assume actual control over Galleon's management and operations prior
to the execution of a formal share purchase agreement and prior to the transfer to NDC of
Galleon's shareholdings;
c) elect NDC's designated five persons to Galleon's Board of Directors;
d) warrant that ₱46,740,755.00 had been actually paid to Galleon, representing payment of
46,740,755 common shares to Galleon;
e) deliver to NDC, upon signing of the share purchase agreement, 10,000,000 common shares
of Galleon, duly and validly endorsed for transfer, free from any and all liens and
encumbrances whatsoever; and
f) make special warranties under clause 8.
As parties to the Memorandum of Agreement, NDC and respondents jointly undertook to:
a) immediately implement Letter of Instructions No. 1155;
b) endeavor to prepare and sign a share purchase agreement covering 100% of Galleon's
shareholdings not more than 60 days after the signing of the Memorandum of Agreement;
and
c) incorporate the conditions listed down in clause 7 in the share purchase agreement.
The law is categorical that "various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken
jointly."74 Fernandez v. Court of Appeals 75further emphasizes that " [t]he important task in
contract interpretation is always the ascertainment of the intention of the contracting parties
and that task is of course to be discharged by looking to the words they used to project that
intention in their contract, all the words not just a particular word or two, and words in
context not words standing alone."76
The Court of Appeals found that the Memorandum of Agreement between NDC and Galleon
was a perfected contract for NDC to purchase 100% of Galleon's shareholdings. However, a
careful reading of the Memorandum of Agreement shows that what the parties agreed to
was the execution of a share purchase agreement to effect the transfer of 100% of Galleon's
shareholdings to NDC, as seen in clause 3:
3. As soon as possible, but not more than 60 days after the signing hereof, the parties shall
endeavor to prepare and sign a share purchase agreement covering 100% of the
shareholdings of Sellers in GSC to be transferred to Buyer, i.e. 10,000,000 fully paid common
shares of the par value of ₱1.00 per share and subscription of an additional 100,000,000
common shares of the par value of ₱1.00 per share of which ₱36,740,755.00 has been paid,
but not yet issued.
The second paragraph of clause 4 likewise makes the execution of a share purchase
agreement a condition before the purchase price can be paid to respondents, since the
payment of the purchase price becomes due only after five years from the date of execution
of the share purchase agreement:
4. Sellers hereby warrant that ₱46,740,755[.00] had been actually paid to Galleon Shipping
Corporation, which amount represents payment of Sellers for 46,740,755 common shares of
said Corporation. This warranty shall be verified by Buyer, the results of which will determine
the final purchase price to be paid to Sellers.
The purchase price directed by LOI 1155 to be paid to Sellers shall be paid after five (5) years
from date of the share purchase agreement with no interest cost to buyer. (Emphasis
supplied)
NDC asserts that the Memorandum of Agreement was only a preliminary agreement
between Galleon, represented by Cuenca, and NDC, represented by Ongpin, for the intended
purchase of Galleon's equity pursuant to Letter of Instructions No. 1155, 77 thus:
It merely prescribed the manner, terms and conditions of said purchase. In fact, the
[Memorandum of Agreement] provided for a time frame for the execution of the share
purchase agreement which is within sixty (60) days from the signing thereof. By no means can
it be considered as the executing agreement or document for the purchase of the shares. 78
NDC's assertion that the Memorandum of Agreement was merely a preliminary agreement
that was separate and distinct from the share purchase agreement, finds support in clause 7
of the Memorandum of Agreement, which lists down the terms and conditions to be included
in the share purchase agreement as follows:
7. The stock purchase agreement to be prepared and signed by the parties within sixty (60)
days from date hereof shall contain, among other things:
153
(a) standard warranties of seller including, but not limited to, warranties pertaining to the
accuracy of financial and other statements of GSC; disclosure of liabilities; payment of all
taxes, duties, licenses and fees; non-encumbrance of corporate assets; valid contracts with
third parties, etc. including an indemnity clause covering any breach thereof.
(b) provisions that Buyer shall retain 2 representatives of Sellers in the board of GSC only for
as long as Sellers have not been paid, or have not negotiated or discounted any of the
promissory notes referred to in clause 5 above.
(c) provisions whereby Construction Development Corporation of the Philippines, Sta. Ines
Melale Forest Products Corporation, Mr. Rodolfo M. Cuenca and Mr. Manuel I. Tinio shall be
released from counter-guarantees they have issued in favor of DBP and other financial
institutions in connection with GSC's various credit accommodations.
(d) provisions for arbitration as a means of settling disputes and differences of opinion
regarding the stock purchase agreement.
Under clause 7 of the Memorandum of Agreement, NDC and respondents agreed to include
in the still-to-be-executed share purchase agreement, provisions on: (a) standard warranties,
including warranties on the accuracy of Galleon's financials, disclosure of liabilities, etc; (b)
the retention of Galleon's representatives in Galleon's board of directors prior to the payment
of the share purchase price; (c) the release of respondents from the counter-guarantees they
made in favor of DBP and other financial institutions in connection with Galleon's various
credit accommodations; and (d) arbitration as a means of settling disputes and differences of
opinion regarding the stock purchase agreement.
Taking the provisions of the Memorandum of Agreement as a whole, it is clear that while
there was an intention to follow the directives of Letter of Instructions No. 1155, the transfer
of shares from respondents to NDC was to be effected only with the execution of the share
purchase agreement, the terms and conditions of which were laid out in the Memorandum of
Agreement.
NDC and the respondents undertook to prepare and sign a share purchase agreement over
100% of respondents' shares in Galleon not more than sixty days after the signing of the
Memorandum of Agreement:
3. As soon as possible, but not more than 60 days after the signing hereof, the parties shall
endeavor to prepare and sign a share purchase agreement covering 100% of the
shareholdings of Sellers in GSC to be transferred to Buyer, i.e. 10,000,000 fully paid common
shares of the par value of ₱1.00 per share and subscription of an additional 100,000,000
common shares of the par value of ₱1.00 per share of which ₱36,740,755.00 has been paid,
but not yet issued.
The execution of a share purchase agreement was a condition precedent to the transfer of
Galleon's shares to NDC. However, the Court of Appeals found that the NDC prevented its
execution by deliberately delaying its review of Galleon's financial accounts:
From the foregoing, it is evident that the period for the payment of the purchase price is
entirely dependent on the execution of a share purchase agreement by the parties. The
evidence on record, however, show that the defendant-appellant NDC itself voluntarily
prevented the execution of a share purchase agreement when it reneged on its various
obligations under the Memorandum of Agreement. The evidence on record show that the
share purchase agreement was not formally executed because then Minister Roberto Ongpin
claimed that the accounts of defendant Galleon had to be reviewed and cleared up before
the share purchase agreement is signed. While defendant Galleon made its financial records
available to defendant-appellant NDC for their review, the latter never made any serious
effort to review the financial accounts of the defendant Galleon, hence, effectively preventing
the execution of the share purchase agreement. Consequently, the condition for the running
of the period for the payment of the purchase price of the shares of stocks in defendant
Galleon by the defendant-appellant NDC, i.e., the execution of the Share Purchase
Agreement, was deemed fulfilled as it was the defendant-appellant NDC itself which
prevented it from happening. Under Article 1186 of the Civil Code, a "condition shall be
deemed fulfilled when the obligor voluntarily prevents its fulfilment." This applies in the
instant case.79 (Emphasis supplied)
The Regional Trial Court likewise found that respondent Cuenca, as Galleon's representative,
initiated moves for the preparation and execution of the share purchase agreement and
NDC's takeover of Galleon.80 Nonetheless, despite Cuenca's efforts, the share purchase
agreement was never formally executed:
Assuming that the share purchase agreement was a condition for the effectivity of the
Memorandum of Agreement (dated 10 August 1981 ), said condition is deemed fulfilled by
virtue of Art. 1186 of the Civil Code, which provides that "the condition shall be deemed
fulfilled when the obligor voluntarily prevents its fulfillment." Plaintiff Cuenca, as
representative of the former shareholders of defendant Galleon, in order to clear up the
accounts preparatory to the execution of the share purchase agreement, created a team to
prepare a statement of defendant Galleon's outstanding accounts which statement of
account was intended to be included as part of the annexes of the said share purchase
agreement. Another team with representatives from both parties, that is, the former
stockholders of defendant Galleon and defendant NDC, had to be created for a smoother
turnover. However, despite said efforts done by plaintiff Cuenca the share purchase
agreement was not formally executed.81 (Emphasis in the original)
NDC denies that it caused the delay in the execution of the share purchase agreement and
argues that it was Cuenca who caused the delay for insisting on the payment first of the
advances made in Galleon's favor before executing the share purchase agreement and
relinquishing control over Galleon.82
154
NDC's bare denials cannot succeed in light of the preponderance of evidence submitted by
respondents.
In his Affidavit83 dated June 17, 1999, Cuenca narrated the preparations the Galleon
stockholders undertook for the execution of the share purchase agreement with NDC:
168. Q: What happened to the share purchase agreement referred to in the Memorandum of
Agreement dated August 1981 (Exhibit "J")?
A: The share purchase agreement was never drawn up despite persistent attempts by myself
to see it prepared and executed. In fact, we continually negotiated with NDC and DBP
throughout 1982 and 1983 on the matter.
169. Q: Why was it never executed?
A: Minister Ongpin kept claiming that the accounts had to be cleared up before any formal
agreement could be signed.
170. Q: What steps, if any, did the parties take to clear up the accounts preparatory to the
signing of the share purchase agreement?
A: During the transition period, prior to the signing of the share purchase agreement, I
created a team to prepare a statement of Galleon's outstanding accounts which we intended
to include as part of the annexes of the share purchase agreement. Another team with
representatives from both parties, i.e., the former stockholders of Galleon and NDC, had to
be created for a smoother turn-over. In short, we did all that was possible and required of us
under the Memorandum of Agreement. We negotiated with NDC in good faith for years but
NDC kept stonewalling the execution of the share purchase agreement. 84 (Emphasis supplied)
On April 26, 1982, Antonio L. Carpio, NDC's General Manager, 85 sent Ongpin a
Memorandum,86 where Carpio acknowledged reviewing Galleon's outstanding accounts
submitted by Cuenca.87 This supports Cuenca's statement that they submitted a statement of
Galleon's outstanding accounts for NDC's review, as per Ongpin's request, a fact not denied
by NDC.
Upon receiving Galleon's outstanding accounts, NDC and Sta. Ines, Cuenca, Tinio, Cuenca
Investment and Universal Holdings should have initiated the execution of the share purchase
agreement. However, the share purchase agreement was never executed, through no fault of
Galleon's stockholders.
In clause 4 of the Memorandum of Agreement, NDC as the buyer was to verify the warranty
of the Galleon shareholders that ₱46,740,755.00 was paid for Ga1leon's 46,740,755 common
shares with par value of ₱1.00 per share. The results of the verification would have
determined the final purchase price to be paid to the Galleon shareholders. Nonetheless,
despite the verification still to be done, both parties agreed to execute the share purchase
agreement as soon as possible but not more than sixty days from the signing of the
Memorandum of Agreement.
We uphold the Court of Appeals' finding that the failure to execute the share purchase
agreement was brought about by NDC's delay in reviewing the financial accounts submitted
by Galleon's stockholders. The Memorandum of Agreement was executed on August 10,
1981, giving the parties no more than sixty days or up to October 9, 1981, to prepare and sign
the share purchase agreement. However, it was only on April 26, 1982, or more than eight
months after the Memorandum of Agreement was signed, did NDC's General Director submit
his recommendation on Galleon's outstanding account. Even then, there was no clear
intention to execute a share purchase agreement as compliance with the Memorandum of
Agreement. Article 1186 of the Civil Code is categorical that a "condition shall be deemed
fulfilled when the obligor voluntarily prevents its fulfilment." Considering NDC's delay, the
execution of the share purchase agreement should be considered fulfilled with NDC as the
new owner of 100% of Galleon's shares of stocks.
The due execution of the share purchase agreement is further bolstered by Article 1198(4) of
the Civil Code, which states that the debtor loses the right to make use of the period when a
condition is violated, making the obligation immediately demandable:
Article 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless he gives a
guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or securities which he has
promised;
(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of which the creditor agreed
to the period;
(5) When the debtor attempts to abscond. (Emphasis supplied)
Well-settled is the rule that findings of fact made by a trial court and the Court of Appeals are
accorded the highest degree of respect by this Court, and, absent a clear disregard of the
evidence before it that can otherwise affect the results of the case, those findings should not
be ignored.88
II
155
The Regional Trial Court found that the advances made by respondents in Galleon's behalf
covered legitimate expenses in the ordinary course of business, 89 making NDC liable under
clause 9 of the Memorandum of Agreement, which states:
9. Valid and duly authorized liabilities of GSC which are the subject of a meritorious lawsuit,
or which have been arranged and guaranteed by Mr. Rodolfo M. Cuenca, may be considered
by Buyer for priority in the repayment of accounts, provided that, upon review, the Buyer
shall determine these to be legitimate and were validly incurred in the ordinary course of
GSC's principal business.
NDC's liability for the advances made in Galleon's behalf was upheld by the Court of Appeals,
which held that the advances made were valid and authorized liabilities incurred by Galleon
in the course of its business, thus:
In the instant case, the advances being claimed by [respondents] are in the nature of
guarantee fees in consideration for the personal undertakings of the [respondents] to secure
the potential liabilities of defendant-appellant DBP in favor of defendant Galleon's foreign
creditors, advances to cover payments of interest, security and management fees arising out
of a mortgage contract, charter line payments, bare boat hire payments, fuel and ship
franchise payments, salaries and wages and advertising expenses[. ] 90
Ordinary and necessary business expenses are those that are "directly attributable to, the
development, management, operation and/or conduct of the trade, business or exercise of a
profession[.]"91
In Carpio's Memorandum to Ongpin dated April 26, 1982, he recommended that the
guarantee fees being claimed by Galleon's stockholders should not be paid. Carpio also
questioned the ₱1,400,000.00 interest being charged by Sta. Ines from the ₱6,650,000.00
cash advances it made in Galleon's behalf. Carpio likewise questioned the charge of
₱600,000.00 being claimed as Galleon's share for the Construction Development Corporation
of the Philippine's basketball team with the Philippine Basketball Association. 92
We see no reason to disturb the findings of fact made by the trial court and the Court of
Appeals considering that the same are duly supported by substantial evidence.
III
Novation is a mode of extinguishing an obligation by "[c]hanging [its] object or principal
conditions[,] [s]ubstituting the person of the debtor [or] [s]ubrogating a third person in the
rights of the creditor." 93 While novation, "which consists in substituting a new debtor in the
place of the original one may be made even without the knowledge or against the will of the
latter, [it must be with] the consent of the creditor." 94
Testate Estate of Mota v. Serra95 instructs that for novation to have legal effect, the creditor
must expressly consent to the substitution of the new debtor:
It should be noted that in order to give novation its legal effect, the law requires that the
creditor should consent to the substitution of a new debtor. This consent must be given
expressly for the reason that, since novation extinguishes the personality of the first debtor
who is to be substituted by new one, it implies on the part of the creditor a waiver of the
right that he had before the novation, which waiver must be express under the principle
that renuntiatio non prcesumitur, recognized by the law in declaring that a waiver of right
may not be performed unless the will to waive is indisputably shown by him who holds the
right.96 (Emphasis supplied)
The Court of Appeals erred when it ruled that DBP was privy to the Memorandum of
Agreement since Ongpin was concurrently Governor of DBP and chairman of NDC Board of
Directors at the time the Memorandum of Agreement was signed. 97
The general rule is that, "[i]n the absence of an authority from the board of directors, no
person, not even the officers of the corporation, can validly bind the corporation." 98 A
corporation is a juridical person, separate and distinct from its stockholders and members,
having "powers, attributes and properties expressly authorized by law or incident to its
existence."99
Section 23100 of the Corporation Code provides that "the corporate powers of all
corporations ... shall be exercised, all business conducted and all property of such
corporations [shall] be controlled and held by the board of directors[.]"
Peoples Aircargo and Warehousing Co. Inc. v. Court of Appeals 101 explains that under Section
23 of the Corporation Code, the power and responsibility to bind a corporation can be
delegated to its officers, committees, or agents. Such delegated authority is derived from law,
corporate bylaws, or authorization from the board:
Under this provision, the power and the responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in the board, subject to
the articles of incorporation, bylaws, or relevant provisions of law. However, just as a natural
person may authorize another to do certain acts for and on his behalf, the board of directors
may validly delegate some of its functions and powers to officers, committees or agents. The
authority of such individuals to bind the corporation is generally derived from law, corporate
bylaws or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business, viz.:
"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." 102 (Emphasis supplied)
156
Aside from Ongpin being the concurrent head of DBP and NDC at the time the Memorandum
of Agreement was executed, there was no proof presented that Ongpin was duly authorized
by the DBP to give consent to the substitution by NDC as a co-guarantor of Galleon's debts.
Ongpin is not DBP, therefore, it is wrong to assume that DBP impliedly gave its consent to the
substitution simply by virtue of the personality of its Governor.
Novation is never presumed. The animus novandi, whether partial or total, "must appear by
express agreement of the parties, or by their acts which are too clear and unequivocal to be
mistaken."103
There was no such animus novandi in the case at bar between DBP and respondents, thus,
respondents have not been discharged as Galleon's co-guarantors under the Deed of
Undertaking and they remain liable to DBP.
IV
On the issue of attorney's fees and moral and exemplary damages awarded to Sta. Ines,
Cuenca, Tinio, Cuenca Investment, and Universal Holdings, the Court of Appeals upheld the
findings of the Regional Trial Court for being just, reasonable, and supported by the evidence
on record.104
We see no reason to disturb the findings of the lower courts.
However, on the issue of compensatory interest as damages, where the Regional Trial Court
imposed an interest rate of six percent (6%) per annum on the advances made and the
payment due for the shares of stock, 105 the Court of Appeals modified the Regional Trial
Court's ruling insofar as the interest rate to be imposed was concemed. 106 The Court of
Appeals ruled that the advances made by Sta. Ines, Cuenca, Tinio, Cuenca Investment, and
Universal Holdings and the payment due them for the Galleon shares of stocks were loans or
forbearances of money that should earn interest of 12% from the date the case was
filed.107 Furthermore, the Court of Appeals held that these amounts should likewise earn an
additional 12% interest per annum from finality until its satisfaction.108
Estores v. Spouses Supangan 109 defined forbearance as an arrangement other than a loan
where a person agrees to the temporary use of his money, goods, or credits subject to the
fulfilment of certain conditions. 110
In this case, Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings advanced
money in Galleon's favor and agreed to turn over management and control of Galleon to NDC
even before receiving payment for their shares of stocks. They were deprived of the use of
their money in both cases for the periods pending fulfillment of the agreed conditions. When
those conditions were not met, they became entitled not only to the return of their advances
and payment of their shares of stocks, but also to the compensation for the use of their
money and property. The unwarranted withholding of the money, which rightfully pertains to
Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings, amounts to forbearance
of money.
Sunga-Chan v. Court of Appeals,111 citing Eastern Shipping Lines, Inc. v. Court of
Appeals,112 reiterated the rule on application of interest:
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and
the applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply
only to loans or forbearance of money, goods, or credits, as well as to judgments involving
such loan or forbearance of money, goods, or credit, while the 6% per annum under Art. 2209
of the Civil Code applies "when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of obligations in
general," with the application of both rates reckoned "from the time the complaint was filed
until the [adjudged] amount is fully paid." In either instance, the reckoning period for the
commencement of the running of the legal interest shall be subject to the condition "that the
courts are vested with discretion, depending on the equities of each case, on the award of
interest."
Otherwise formulated, the norm to be followed in the future on the rates and application
thereof is:
I. When an obligation, regardless of its source, is breached, the contravenor can be held liable
for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation breached consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
....
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. 113 (Emphasis supplied,
citations omitted)
On May 16, 2013, the Monetary Board of the Bangko Sentral ng Pilipinas issued Resolution
No. 796, which revised the interest rate to be imposed for the loan or forbearance of any
157
money, goods, or credits. This was implemented by Bangko Sentral ng Pilipinas Circular No.
799,114 Series of 2013, which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.l of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P. l of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Nacar v. Gallery Frames, et al. 115 then modified the guidelines laid down in Eastern Shipping
Lines to embody Bangko Sentral ng Pilipinas Circular No. 799, thus:
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably established at the time the demand
is made, the interest shall begin to run only from the date the judgment of the court is made
(at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 6% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July
1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of
interest fixed therein.116
Applying these guidelines, the Court of Appeals' ruling must be modified to reflect the ruling
in Nacar. The award of the advances made by Sta. Ines, Cuenca, Tinio, Cuenca Investment,
and Universal Holdings in Galleon's favor and payment for their shares of stocks in Galleon
shall earn an interest rate of l 2% per annum from the date of filing of this case on April 22,
1985117 until June 30, 2013. After June 30, 2013, these amounts shall earn interest at six
percent (6%) per annum until the Decision becomes final and executory. An interest of six
percent (6%) per annum shall be imposed on such amounts from the finality of the Decision
until its satisfaction.
Finally, DBP's claims for damages are denied since it failed to support its claims of malicious
prosecution and a deliberate act of Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal
Holdings to cause loss or injury to DBP.
WHEREFORE, the March 24, 2010 Decision and July 21, 2010 Resolution of the Court of
Appeals in CA-G.R. CV No. 85385 are AFFIRMED with the following MODIFICATIONS:
(1) Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca
Investment Corporation, Universal Holdings Corporation, and the Philippine National
Construction Corporation are declared LIABLE to the National Development Corporation, the
Development Bank of the Philippines, and the Asset Privatization Trust under the deed of
undertaking, pledge, mortgages, and other accessory contracts among the parties; and
(2) The award of the advances made by Sta. Ines Melale Forest Products Corporation, Rodolfo
M. Cuenca, Manuel L. Tinio, Cuenca Investment Corporation, and Universal Holdings
Corporation in Galleon's favour, as well as the award of the payment for their shares of stocks
in Galleon, shall earn an interest rate of 12% per annum from the date of the filing of this
case on April 22, 1985 until June 30, 2013, after which, they shall earn interest at the rate of
6% per annum until the Decision becomes final and executory.
These amounts shall earn interest at the rate of 6% per annum from the finality of this
Decision until its satisfaction.
SO ORDERED.
158
G.R. No. 197032
SECURITIES AND EXCHANGE COMMISSION, Petitioner
vs.
PRICE RICHARDSON CORPORATION, CONSUELO VELARDE-ALBERT, and GORDON RESNICK,
Respondents
DECISION
LEONEN, J.:
The determination of probable cause for purposes of filing an information is lodged with the
public prosecutor. It is not reviewable by courts unless it is attended by grave abuse of
discretion.
This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, praying that
the Court of Appeals Decision2 dated May 26, 2011 and the Department of Justice
Resolutions dated April 12, 20053 and July 5, 20064 be reversed and set aside.5 The Court of
Appeals affirmed the assailed Resolutions of the Department of Justice, which denied the
Petition for Review filed by the Securities and Exchange Commission (petitioner). 6 Petitioner
prays for the filing of an Information against Price Richardson Corporation, Consuelo Velarde-
Albert, and Gordon Resnick (respondents) for violating Sections 26.3 and 28 of the Securities
Regulation Code.7
Respondent Price Richardson Corporation (Price Richardson) is a Philippine corporation duly
incorporated under Philippine laws on December 7, 2000. 8 Its primary purpose is "[t]o
provide administrative services which includes but is not limited to furnishing all necessary
and incidental clerica], bookkeeping, mailing and billing services." 9
On October 17, 2001, its former employee, Michelle S. Avelino, (Avelino) executed a sworn
affidavit at the National Bureau of Investigation's Interpol Division, 10 alleging that Price
Richardson was "engaged in boiler room operations, wherein the company sells non[-]
existent stocks to investors using high pressure sales tactics." 11 Whenever this activity was
discovered, the company would close and emerge under a new company name. 12 Pertinent
portions of her sworn statement read:
Q03: State your reason why you are here at the NBI Interpol?
A: I am here to give a statement about the "boiler room" operation of PRICE RICHARDSON
CORPORATION.
Q04: What do you mean by "boiler room"?
A: A boiler room is a company which sells non-existent stocks to investors by using high
pressure sales tactics. They had no intention of paying the duped investors and when their
operation ha[s] been discovered this company would close and would spring up under a new
name. I know this for a fact because I used to work before with New Millennium Market
Research, Inc. which was shut down after the duped victims reported to authorities [its]
illegal activities. New Millennium Market Research, Inc. eventually became Price Richardson.
Boiler Room operation is an illegal activity considering that the company has no license from
the Securities and Exchange Commission to deal on securities or stocks.
Q05: Why do you know that Price Richardson is a "boiler room"?
A: I used to work there as a telemarketer from September 3, 2001 to October 15, 2001.
Q06: As telemarketer at Price Richardson what do you do?
A: Our supervisor would give "leads" for me to call. "Leads" are names of prospective
investors. Upon contracting a prospective investor, I would read a prepared "script" or
presentation of the company's profile and the services it offers. If the prospect is interested, I
will write all the information about this person and would forward the same to our supervisor
JOVY AGUDO. All our leads or prospects are foreigners.
Q07: As a telemarketer, how many calls do you make in a day and how many investors do you
qualify?
[A:] I average 100 calls a day and I can qualify an average of six (6) would[-]be investors daily.
....
Ql0: After you qualify a prospective investor, what happens next?
A: The company will send him a newsletter and then the salesman would contact him and
[use] high-pressure sales tactics to make a sale of non-existent stocks. The salesmen would
use the data and information gathered by the telemarketers and would make reference to the
calls or initial contact made by telemarketers. If the investor agreed, the salesman would give
him instructions on how to send the money to the company. Usually, the payment is made
through telegraphic transfers. After the payment has been received, a confirmation receipt
would then be sen[t] by the courier to the investor indicating therein the name of the
company where the alleged investment was made, the number of shares, the amount per
share, the tax and commissions paid. However, no hard copy of the stocks or certificates will
be issued for in truth and in fact there was no actual sale or transfer of stocks or certificates
for they are non-existent. In the event that the investor would then sell his certificates or
stocks, the salesman would try to convince the investor not to sell in order not to release the
money. Eventually, the company would disappear and would spring up under a new name.
Qll: Who are these salesmen?
A: The salesmen are all foreigners of various nationalities. They used also a prepared script to
induce the prospective client to invest.
159
....
Q13: Do you know if these salesmen are licensed stockbrokers duly authorized by the
Securities and Exchange Commission?
A: They are not licensed by the Securities and Exchange Commission. They are tourists here in
the country and they used aliases to hide their identities.13
Janet C. Rillo corroborated Avelino's claims. 14 She was a former employee of Capital
International Consultants, Inc. (Capital International), acorporation that allegedly merged
with Price Richardson.15 She claimed that their calls to prospective investors should be in
Price Richardson's name.16 Pertinent portions of her sworn statement read:
07. Q: You said that CAPITAL INTERNATIONAL CONSULTANTS CORP. has just merged with Price
Richardson Inc., can you elaborate on this?
A: Yes, just this September, we have been informed of the [merge]. In fact we have been
instructed to use the name of Price Richardson in our calls starting September 2001.
....
09. Q: Can you describe the process in, as you said - "qualify clients as possible investors"?
A: I make overseas calls to individuals listed in our Client Leads. The "Client Leads" contains a
list of the names of the top-level personnel of international companies, it includes their
address and telephone numbers. From these leads, we select clients to call and offer them a
free subscription of our "Financial News Letter".
....
11. Q: What does these "Financial News Letter" contain?
A: It contains the current status of the worldwide stock market.
12: Q: So what happens when a client agrees to subscribe in your news letter?
A: We then check from our list if the information we have regarding their address and
telephone numbers [is] correct. This is to check their mail preference - where they would like
us to send the news letter.
13. Q: What happens after that?
A: Those who agree to receive the subscription are considered as qualified clients. We then
fill out a "SALES LEAD" card, which reflects the information of the client. We then forward
these cards to the marketing department, consisting of the encoders and other
telemarketers. These people are the ones who send the newsletters and transaction receipts
to clients. Their office is located at the Price Richardson Office, 31st Floor Citibank Tower,
Paseo De Roxas, Makati. It is from these cards that our foreigner salesmen could get possible
investors. These possible investors would then be sold with non-existent stocks.
....
15. Q: So are you saying that CAPITAL INTERNATIONAL CONSULTANTS CORP and/or PRICE
RICHARDSON, Inc. is engaged in the illegal trading of stocks to clients?
A: Yes. When I applied for the job, I was briefed by ANNE BENWICK, the Operations Manager,
about the nature of their [b]usiness. She said that the company is engaged in trading stocks,
and my job as a Telemarketer would be to "qualify clients" who might become possible
investors. I am also aware of the nature of their business since I have been employed in a
similar company.17
Upon application of the National Bureau of Investigation Interpol Division 18 and the Securities
and Exchange Commission19 on November 15, 2001, Branch 143, Regional Trial Court, Makati
City issued three (3) search warrants against Capital International and Price Richardson for
violation of Section 2820 of the Securities Regulation Code. 21 The Regional Trial Court ordered
the seizure of Price Richardson's and Capital International's office equipment, documents,
and other items that were connected with the alleged violation. 22
On November 16, 2001, the search warrants were served and Price Richardson's office
equipment and documents were seized.23
On December 4, 2001, the Securities and Exchange Commission filed before the Department
of Justice its complaint against Price Richardson, Clara Arlene Baybay (Baybay), Armina A. La
Torre (La Torre), Manuel Luis Limpin (Limpin), Editha C. Rupido (Rupido ), Jose C. Taopo
(Taopo ), Consuelo Velarde-Albert (Velarde-Albert), and Gordon Resnick (Resnick) for violation
of Article 315(1)(b)24 of the Revised Penal Code and Sections 26.3 25 and 28 of the Securities
Regulation Code.26 Baybay, La Torre, Limpin, Rupido, and Taopo (the incorporators and
directors) were Price Richardson's incorporators and directors. 27 Velarde-Albert was its
Director for Operations and Resnick was its Associated Person. 28
The Securities and Exchange Commission alleged that Price Richardson was neither licensed
nor registered "to engage in the business of buying and selling securities within the
Philippines or act as salesman, or an associated person of any broker or dealer." 29 As shown
by the seized documents and equipment, Price Richardson engaged in seeking clients for the
buying and selling of securities, thereby violating Sections 26.3 and 28 of the Securities
Regulation Code.30
The Securities and Exchange Commission claimed that Velarde-Albert and Resnick should be
liable for acting as brokers or salesmen despite not being registered. 31 Meanwhile, the
incorporators and directors' liability was based on being responsible "for the corporate
management with the obligation to ensure that [Price Richardson] operate[d] within the
bounds of law."32
160
Price Richardson, Velarde-Albert, Resnick, and the incorporators and directors were also
charged with Estafa under Article 315(1)(b) of the Revised Penal Code. The Securities and
Exchange Commission averred that they obtained their investors' confidence by comporting
themselves as legitimate stock brokers. 33 Thus, when they failed to return the investments
they received, their act "constitute[d] misappropriation with abuse of confidence." 34
In defense, the incorporators and directors denied knowing or agreeing to the offenses
charged. They countered that they already transferred their respective shares to various
individuals in December 2000, as shown by their registered Deeds of Absolute Sale of Shares
of Stock.35 Velarde-Albert denied the Securities and Exchange Commission's allegations
against her while Resnick did not submit any evidence refuting the charges. 36
On March 13, 2002, State Prosecutor Aristotle M. Reyes (State Prosecutor Reyes) issued a
Resolution,37 dismissing the Securities and Exchange Commission's complaint "for lack of
probable cause."38 He found that:
[C]omplainant SEC failed to adduce evidence showing respondent Price's alleged
unauthorized trading. While it is true that based on the certification issued by the SEC,
respondent-corporation has no license to buy or sell securities, it does not, however, follow,
that said corporation had indeed engaged in such business. It is imperative for complainant to
prove the respondent-corporation's affirmative act of buying and selling securities to
constitute the offense charged. It cannot be established on the expedient reason that a
corporation is not license[d] or authorize[d] to trade securities. He who alleges a positive
statement has the burden of proving the same.
The various "confirmation of trade" receipts ... taken singly, does not prove violation of
Sections 26.3 and 28 of the Securities Regulation Code. Far from proving the offense charged,
those confirmation of trade could very well mean that indeed respondent Price was merely
"providing administrative services of furnishing all necessary and incidental clerical,
bookkeeping, mailing and billing services" pursuant to its primary purpose as embodied in its
articles of incorporation. There is no evidence that indeed anyone transacted business much
less purchased or sold securities with any of the respondents acting as broker or dealer in
securities. In other words, the burden of proving that respondents made various offers to sell
unregistered securities; that the offers were accepted; and, that agreements of sale were
reached and consummated, has not been dislodged by the complainant. Independent proof
of the various stages of a sale transaction is necessary to show violation of Sections 26.3 and
28 of the Securities Regulation Code.39
State Prosecutor Reyes absolved the incorporators and directors from any liability considering
that they already relinquished their positions as directors of Price Richardson when they
transferred their shares to third parties. 40 He also found Velarde-Albert and Resnick not liable
for lack of sufficient proof that they engaged in the trading of securities. 41
On the allegation of conspiracy, State Prosecutor Reyes held that because the facts failed "to
establish the alleged unauthorized trading, or the fraudulent investments that constitute the
crime charged, there can be no basis in determining collective criminal
responsibility."42 Finally, State Prosecutor Reyes ruled that there was no sufficient evidence to
show that Price Richardson, Velarde-Albert, Resnick, and the incorporators and directors
deceived investors that would constitute the crime of estafa withabuse of confidence. 43
In the meantime, individuals claiming to have agreed to purchase
securities from Price Richardson and have been defrauded surfaced and executed sworn
statements against it.44 They claimed that Price Richardson engaged in illegal trade of
securities.45 They filed complaints against Price Richardson before the Department of Justice
for violation of Article 315(1)(b) of the Revised Penal Code and Sections 26.3 and 28 of the
Securities Regulation Code.46
The Securities and Exchange Commission moved for reconsideration 47 of the March 13, 2002
Resolution, which was denied by State Prosecutor Reyes in a Resolution 48 dated May 31,
2002.
The Securities and Exchange Commission filed before the Department of Justice a Petition for
Review49 of State Prosecutor Reyes' March 13, 2002 and May 31, 2002 Resolutions. This was
denied in the April 12, 2005 Resolution 50 of Department of Justice Secretary Raul M. Gonzalez
(Secretary Gonzalez). The Securities and Exchange Commission filed a Motion for
Reconsideration51 of the April 12, 2005 Resolution but this was denied by Secretary Gonzalez
in his July 5, 2006 Resolution. 52
The Securities and Exchange Commission filed a Petition for Certiorari53 against Secretary
Gonzalez, Price Richardson, Velarde-Albert, and Resnick before the Court of Appeals for the
annulment of Secretary Gonzalez's April 12, 2005 and July 5, 2006 Resolutions. 54
On May 26, 2011, the Court of Appeals promulgated a Decision 55 affirming the assailed
Resolutions.56 The Court of Appeals held that there was no grave abuse of discretion on the
part of Secretary Gonzalez when he affirmed State Prosecutor Reyes' Resolutions, which
found no probable cause to file an information. 57
The Court of Appeals found that the affidavits executed by Price Richardson's employees
were merely surmises.58 They did not have personal knowledge of the security trading since
their jobs were limited to persuading people to get newsletter subscriptions. 59 Indeed, the
documents seized from Price Richardson's office showed a transaction between it and an
investor.60 However, "no clear and specific acts of buying or selling of securities were alleged
and substantiated by the SEC[.]"61
The alleged investors' affidavits were not sufficient to find probable cause because the
alleged transactions transpired over the phone and while these investors were not in the
161
Philippines.62 Moreover, since the traded stocks were not of domestic corporations or from
corporations doing business in the Philippines, Philippine penal laws could not be applied. 63
Lastly, there was no basis for the complaints against Velarde-Albert and Resnick because they
were neither board members nor stockholders of the corporation. The complaint did not
allege any particular act that can be interpreted as their direct participation in the purported
illegal stock trading.64
Hence, on July 26, 2011, the Securities and Exchange Commission filed a Petition for
Review65 before this Court against Price Richardson, Velarde-Albert, and Resnick. It assailed
the May 26, 2011 Decision of the Court of Appeals and the April 12, 2005 and July 5, 2006
Resolutions of Secretary Gonzalez and prayed for the filing of an information against
respondents for violation of Sections 26.3 and 28 of the Securities Regulation Code. 66
Petitioner claims that Secretary Gonzalez committed grave abuse of discretion in not finding
probable cause to indict respondents. 67 The complainants who claimed to have been
defrauded by respondents and the documents and equipment seized show that respondent
Price Richardson was engaged in buying and selling securities without license or
authority.68 On the liability of respondents Velarde-Albert and Resnick, petitioner asserts that
the seized documents sufficiently show that they acted as salesmen or associated persons
under Section 28 of the Securities Regulation Code.69
On December 7, 2011, respondent Price Richardson filed its Comment, 70 arguing that the
determination of probable cause is an executive function and is reviewable by courts only
upon showing of grave abuse of discretion. 71 The Department of Justice did not gravely abuse
its discretion when it found that there was no probable cause to indict respondents for
violation of the Securities Regulation Code. 72 Respondent Price Richardson's former
employees' sworn statements contained factual claims that were outside their personal
knowledge or conclusions of law that were beyond their capacity to make. 73
Respondent Price Richardson insists that Section 28 of the Securities Regulation Code
prohibits anyone from engaging in the business of buying and selling securities without
registration from the Securities and Exchange Commission if those transactions are offered
"to the public within the Philippines[.]"74 This provision does not apply in this case because
the alleged buyers of securities were not citizens of or resided in the Philippines. Additionally,
the allegedly sold or offered securities were registered outside the Philippines, where the
alleged sales also transpired. Hence, these sales are not under the Philippine jurisdiction. 75
Respondent Resnick filed his Comment 76 on January 11, 2012 while respondent Velarde-
Albert filed her Comment77 on April 23, 2013. Both respondents argue that the complaints did
not allege any act attributable to them or related to the alleged transactions
involved.78 Respondent Velarde Albert also contends that there was no question of law raised
in the Petition, which is required in a Rule 45 petition. 79
On November 4, 2013, petitioner filed its Consolidated Reply. 80 Petitioner posits that direct
invocation of this Court's original jurisdiction is allowed as its petition is an exception to the
rule that only questions of law may be raised in a Rule 45 petition. 81 Petitioner alleges that
the Court of Appeals' grave abuse of discretion and its Decision, which was based on a
misapprehension of facts and was contradicted by evidence on record, 82 make its Petition an
exception to the rule.83
On December 2, 2013, this Court issued a Resolution, 84 giving due course to the Petition and
required the parties to file their respective memoranda.
Petitioner filed its Memorandum 85 on March 21, 2014. Respondents Velarde-Albert, Resnick,
and Price Richardson submitted their Memoranda on February 24, 2014, 86 April 3, 2014,87 and
May 8, 2014,88 respectively.
This Court resolves the following issues:
First, whether courts may pass upon the prosecutor's determination of probable cause; and
Finally, whether there is probable cause to indict respondents for violation of Sections 26.3
and 28 of the Securities Regulation Code and Article 315(1)(b) of the Revised Penal Code
I
Courts may pass upon the prosecutor's determination of probable cause only upon a showing
of grave abuse of discretion.
Probable cause, in relation to the filing of an information, was explained by this Court
in Villanueva v. Secretary of Justice: 89
Probable cause, for purposes of filing a criminal information, has been defined as such facts
as are sufficient to engender a well-founded belief that a crime has been committed and that
the private respondent is probably guilty thereof. It is such a state of facts in the mind of the
prosecutor as would lead a person of ordinary caution and prudence to believe or entertain
an honest or strong suspicion that a thing is so. The term does not mean "actual or positive
cause;" nor does it import absolute certainty. It is merely based on opinion and reasonable
belief. Thus, a finding of probable cause does not require an inquiry into whether there is
sufficient evidence to procure a conviction. It is enough that it is believed that the act or
omission complained of constitutes the offense charged. 90
The definition of probable cause was lifted from Rule 112, Section 1, paragraph 1 of the
Revised Rules of Criminal Procedure, which states:
RULE 112
Preliminary Investigation
162
Section 1. Preliminary Investigation Defined; When Required. - Preliminary investigation is an
inquiry or proceeding to determine whether there is sufficient ground to engender a well-
founded belief that a crime has been committed and the respondent is probably guilty
thereof, and should be held for trial.
Under Rule 112, preliminary investigation must be conducted to determine the existence of
probable cause.91 In Andres v. Justice Secretary Cuevas,92this Court stressed that:
[Preliminary investigation] is not the occasion for the full and exhaustive display of their
evidence. The presence or absence of the elements of the crime is evidentiary in nature and
is a matter of defense that may be passed upon after a full-blown trial on the merits.
In fine, the validity and merits of a party's defense or accusation, as well as admissibility of
testimonies and evidence, are better ventilated during trial proper than at the preliminary
investigation level.93 (Citations omitted)
It has long been established that the determination of probable cause to charge a person of a
crime is an executive function, 94 which pertains to and lies within the discretion of the public
prosecutor and the justice secretary. 95
If the public prosecutor finds probable cause to charge a person with a crime, he or she
causes the filing of an information before the court. 96 The court may not pass upon or
interfere with the prosecutor's determination of the existence of probable cause to file an
information regardless of its correctness. 97 It does not review the determination of probable
cause made by the prosecutor. It does not function as the prosecutor's appellate
court.98 Thus, it is also the public prosecutor who decides "what constitutes sufficient
evidence to establish probable cause."99
However, if the public prosecutor erred in its determination of probable cause, an appeal can
be made before the Department of Justice Secretary. Simultaneously, the accused may move
for the suspension of proceedings until resolution of the appeal. 100
Upon filing of the information before the court, judicial determination of probable cause is
initiated. The court shall make a personal evaluation of the prosecutor's resolution and its
supporting evidence.101 Unlike the executive determination of probable cause, the purpose of
judicial determination of probable cause is "to ascertain whether a warrant of arrest should
be issued against the accused."102 This determination is independent of the prosecutor's
determination of probable cause and is a function of courts for purposes of issuance of a
warrant of arrest.
Judicial determination of probable cause is in consonance with Article III, Section 2 of the
Constitution:
ARTICLE III
Bill of Rights
....
Section 2. The right of the people to be secure in their persons, houses, papers, and effects
against unreasonable searches and seizures of whatever nature and for any purpose shall be
inviolable, and no search warrant or warrant of arrest shall issue except upon probable cause
to be determined personally 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. (Emphasis supplied)
Accordingly, a judge may immediately dismiss the case if he or she finds that there is no
probable cause to issue a warrant of arrest based on the records. 103 To protect the accused's
right to liberty,104 the trial court may dismiss an information based on "its own independent
finding of lack of probable cause"105 when an information has already been filed and the court
is already set to determine probable cause to issue a warrant of arrest.
Thus, the general rule is that the determination of probable cause is an executive function
which courts cannot pass upon. As an exception, courts may interfere with the prosecutor's
determination of probable cause only when there is grave abuse of discretion. 106 Grave abuse
of discretion constitutes "a refusal to act in contemplation of law or a gross disregard of the
Constitution, law, or existing jurisprudence, [accompanied by] a whimsical and capricious
exercise of judgment amounting to lack of jurisdiction." 107
A prosecutor gravely abuses his or her discretion in not finding probable cause by
disregarding or overlooking evidence that "are sufficient to form a reasonable ground to
believe that the crime ... was committed and that the respondent was its author." 108 Further,
"what is material to a finding of probable cause is the commission of acts constituting [the
offense], the presence of all its elements and the reasonable belief, based on evidence, that
the respondent had committed it."109
In this case, grave abuse of discretion exists, which warrants this Court's interference in the
conduct of the executive determination of probable cause.
II
Petitioner provided sufficient bases to form a belief that a crime was possibly committed by
respondent Price Richardson.
The complaint alleged that respondents committed violations of the following:
SECURITIES REGULATION CODE
Section 26. Fraudulent Transactions. - It shall be unlawful for any person, directly or indirectly,
in connection with the purchase or sale of any securities to:
....
163
26.3. Engage in any act, transaction, practice or course of business which operates or would
operate as a fraud or deceit upon any person.
....
Section 28. Registration of Brokers, Dealers, Salesmen and Associated Persons. - 28.1. No
person shall engage in the business of buying or selling securities in the Philippines as a
broker or dealer, or act as a salesman, or an associated person of any broker or dealer unless
registered as such with the Commission.
REVISED PENAL CODE
ARTICLE 315. Swindling (Estafa). - Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:
....
4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed
200 pesos, provided that in the four cases mentioned, the fraud be committed by any of the
following means:
1. With unfaithfulness or abuse of confidence, namely:
....
(b) By misappropriating or converting, to the prejudice of another, money, goods, or any
other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or to
return the same, even though such obligation be totally or partially guaranteed by a bond; or
by denying having received such money, goods, or other property.
An examination of the records reveals that probable cause exists to file an information against
respondent Price Richardson for violating the laws.
Based on the Certification110 dated October 11, 2001 issued by the Market Regulation
Department of the Securities and Exchange Commission, respondent Price Richardson "has
never been issued any secondary license to act as broker/dealer in securities, investment
house and dealer in government securities." 111 Petitioner also certified that respondent Price
Richardson "is not, under any circumstances, authorized or licensed to engage and/or solicit
investments from clients."112
However, the documents seized from respondent Price Richardson's office show possible
sales of securities. These documents include:
a) A company brochure consisting of 8 pages which declares that it is a financial consultant
geared towards portfolio investment advice and other financial services to investors ...
b) Detailed Quotes of OWTNF Otis-Winston Ltd. shares downloaded from the Bloomberg.com
website which indicates its price, return, fundamentals and other matters ...
c) Confirmation of Trade issued by the respondent to its client MR. PETER VAN DER HAEGEN
which indicates that he bought on Oc[to]ber 16, 2001 750 Otis-[W]inston Ltd at $4.15 price
per share for $3,112.50 ...
d) Confirmation of Trade issued by the respondent to MR. RENNY NAIR who bought 500
shares of Hugo International (HGOI) at $5.75 per share for which he paid $2,932.50 ... and
Telegraphic Transfer from Oman U.A.E. Exchange Centre & Co. LLC made by Mr. Nair to PRICE
RICHARDSON to the latter's bank account No. 103-719221-0 in China Banking Corporation in
the amount of $2932.50 ...
e) Confirmation of Trade issued by the respondent to MR. JOHANNES DE KORTE who bought
500 shares of Otis-Winston Ltd (OWTNF) at $5.05 per share for which he paid $2,575.50 ...
f) Confirmation of Trade issued by the respondent to MR. JUERGEN GEIGER who bought 2500
shares of Hugo International at $4.65 per share for which he paid $11,857.50 ...
g) Confirmation of Trade issued by the respondent to MR. ZULKEPLI HAMID who bought 2000
shares of OWTNF at $5.05 per share for which he paid $10,302 ...
h) Telegraphic Transfers issued by China Banking Corporation to Union Bank of California
International NY with Price Richardson as the Order Party and M.L. Vitale as the beneficiary in
the amount of $2000 and Citibank Belgium as the Beneficiary Bank ...
i) Confirmation of Trade issued by the respondent to MR. Junzo Watanabe who bought 2500
shares of OWTNF at $3.90 per share and sold 1500 Geoalert (GEOA) shares for which he paid
$3,525 ...
j) First Hawaiian Bank check issued by Junzo Watanabe payable to the Order of Price
Richardson[.]113
Petitioner further supports its charges by submitting the complaint-affidavits and letters of
individuals who transacted with Price Richardson:
The SEC has submitted the complaint of Mr. Don Sextus Nilantha, a citizen of Sri Lanka who
clearly named Price Richardson as selling him 1000 shares of Hugo Intl. Telecom, Inc.
sometime in April 2001. At such time, and until today, Price Richardson was not authorized to
act as traders or brokers o[f] securities in the Philippines.
Furthermore, there are other complainants against Price Richardson who deserve to have
their complaints aired and tried before the proper court.1âwphi1 Mr. Johannes Jacob Van
Prooyen filed a complaint against Price Richardson with the National Bureau of
Investigation ... In the said complaint, Mr. Van Prooyen clearly pointed to Price Richardson as
the ones who contacted him on June 12, 2001 to buy 2000 shares of Hugo Intl. Telecom, Inc.
164
and on July 10, 2001 to buy 2000 shares of GeoAlert. At no time at such relevant dates was showing that its officers, directors, and shareholders actively participated in or had the power
Price Richardson licensed to act as traders or brokers of securities in the Philippines. to prevent the wrongful act.117

Mr. Bjorn L. Nymann of Oslo, Norway wrote about Price Richardson to this very same
Department of Justice, which letter was received on July 9, 2002. In his letter Mr. Nymann
admitted dealing with Price Richardson. He admitted to having bought 3000 shares of Hugo
Intl. Telecom, Inc .... Although Mr. Nymann is not a complaining witness against Price
Richardson, his letter is relevant as at no time at such relevant date was Price Richardson
licensed to act as traders or brokers of securities in the Philippines. 114
In addition, respondent Price Richardson stated in its Memorandum:
If this Honorable Court were to consider the set-up of Price Richardson, it was as if it engaged
in outsourced operations wherein persons located in the Philippines called up persons
located in foreign locations to inform them of certain securities available in certain locations,
and to determine if they wanted to buy these securities which are offered in a different
country.115
WHEREFORE, premises considered, the Petition is PARTIALLY GRANTED. The Court of Appeals
Decision dated May 26, 2011 and Department of Justice Secretary Raul M. Gonzalez's
Resolutions dated April 12, 2005 and July 5, 2006 are AFFIRMED in so far as they find no grave
abuse of discretion in the dismissal of the complaints for lack of probable cause against
Consuelo Velarde-Albert and Gordon Resnick for: a) committing Estafa under Article 315(1)(b)
of the Revised Penal Code and b) violating Sections 26.3 and 28 of the Securities Regulation
Code.
This Court, however, finds that the dismissal of the complaint for lack of probable cause
against Price Richardson Corporation for violation of Sections 26.3 and 28 of the Securities
Regulation Code was rendered with grave abuse of discretion amounting to lack or excess of
jurisdiction and is, thus, ANNULLED and SET ASIDE.
SO ORDERED.

The evidence gathered by petitioner and the statement of respondent Price Richardson are
facts sufficient enough to support a reasonable belief that respondent is probably guilty of
the offense charged.

III

However, respondents Velarde-Albert and Resnick cannot be indicted for violations of the
Securities Regulation Code and the Revised Penal Code.

Petitioner failed to allege the specific acts of respondents Velarde-Albert and Resnick that
could be interpreted as participation in the alleged violations.1âwphi1 There was also no
showing, based on the complaints, that they were deemed responsible for Price Richardson's
violations. As found byState Prosecutor Reyes in his March 13, 2002 Resolution:

[T]here is no sufficient evidence to substantiate SEC's allegation that individual respondents,

Connie Albert and Gordon Resnick, acted as broker, salesman or associated person without
prior registration with the Commission. The evidence at hand merely proves that the above-
named respondents were not licensed to act as broker, salesman or associated person. No
further proof, however, was presented showing that said respondents have indeed acted as
such in trading securities. Although complainant SEC presented several confirmation of trade
receipts and documents intended to establish respondents Albert and Resnick illegal
activities, the said documents, standing alone as heretofore stated, could not warrant the
indictment of the two respondents for the offense charged. 116

A corporation's personality is separate and distinct from its officers, directors, and
shareholders. To be held criminally liable for the acts of a corporation, there must be a

165
G.R. No. 199825
BRO. BERNARD OCA, BRO. DENNIS MAGBANUA, CIRILA N. MOJICA, ALEJANDRO N. MOJICA,
JOSEFINA PASCUAL, SILVESTRE PASCUAL AND ST. FRANCIS SCHOOL OF GENERAL TRIAS,
CAVITE, INC., Petitioners
vs.
LAURITA CUSTODIO, Respondent
DECISION
LEONEN, J.:
This resolves a Petition for Review on Certiorari1 assailing the May 25, 2011 Decision 2 and the
December 19, 2011 Resolution 3 of the Court of Appeals in CA-G.R. CR. No. 31985. The
assailed Decision affirmed theRegional Trial Court Decision, 4 which found petitioners Bro.
Bernard Oca, Bro. Dennis Magbanua, Cirila N. Mojica, Alejandro N. Mojica, Josefina Pascual,
Atty. Silvestre Pascual, and St. Francis School of General Trias, Cavite, Inc. (petitioners) guilty
of Indirect Contempt.1âwphi1 The assailed Resolution denied petitioners' Motion for
Reconsideration.5
This indirect contempt case stemmed from an intra-corporate controversy among the Board
of Trustees of petitioner St. Francis School of General Trias, Cavite, Inc. (St. Francis School). 6
St. Francis School was established with the assistance of the La Salle brothers on July 9, 1973
by respondent Laurita Custodio (Custodio), petitioner Cirila N. Mojica (Cirila), petitioner
Josefina Pascual (Josefina), Monsignor Felix Perez, and Brother Vernon Poore. 7 These five (5)
incorporators served as St. Francis School's Board of Trustees until the latter two (2) passed
away.8
Without a written agreement, the La Salle brothers agreed to give the necessary supervision
to establish the school's academic foundation. 9
On September 8, 1988, the incorporators and the La Salle brothers formalized their
arrangement in a Memorandum of Agreement, under which De La Salle Greenhills (La Salle)
would supervise the academic affairs of St. Francis School to increase enrollment. La Salle
appointed supervisors to sit in the Board of Trustees without voting rights. 10
In 1998, petitioner Bro. Bernard Oca (Bro. Oca) became a member of St. Francis School as a
La Salle-appointed supervisor. He sat in the Board of Trustees and was later elected as its
Chairman and St. Francis School's President. 11 In 2000, petitioner Bro. Dennis Magbanua (Bro.
Magbanua) was also admitted as a La Salle-appointed supervisor. 12 He sat as a trustee and
was later elected as Treasurer of St. Francis School. 13
Sometime in August 2001, the members of the Board of Trustees came into a disagreement
regarding the school's administrative structure and La Salle's supervision over the school.
Cirila, Josefina, Bro. Oca, and Bro. Magbanua wanted to expand the scope of La Salle's
supervision to includematters relating to the school's finances, administration, and
operations.14
This was opposed by Custodio. 15 After several incidents relating to the disagreement,
Custodio filed a complaint against St. Francis School, Bro. Oca, and Bro. Magbanua on June 7,
2002 with Branch 23, Regional Trial Court, Trece Martires, Cavite. She alleged that Bro. Oca
and Bro. Magbanua were never qualified to sit in the Board of Trustees. 16 She also prayed for
a Temporary Restraining Order to prevent Bro. Oca from calling a special membership
meeting to remove her from the Board of Trustees. 17
This case was dismissed.18 Custodio was subsequently removed from the Board of Trustees
and as Curriculum Administrator. 19
Custodio filed a motion for reconsideration of the dismissal but eventually withdrew her
appeal to file a new suit instead.20
On October 3, 2002, Custodio again filed a complaint against petitioners for violating the
Corporation Code with Branch 21, Regional Trial Court, Imus, Cavite. 21 She sought to
disqualify Bro. Oca and Bro. Magbanua as members and trustees of the school and to declare
void all their acts as President and Treasurer, respectively. 22 She likewise prayed for a
temporary restraining order and/or a preliminary injunction to enjoin the remaining board
members from holding meetings and to prevent Bro. Oca and Bro. Magbanua from
discharging their functions as members, trustees, and officers of St. Francis School. 23 This case
was docketed as SEC Case No. 024-02.24
On October 8, 2002, the Regional Trial Court heard Custodio's prayer for the issuance of a
Temporary Restraining Order.25
The day after the hearing, Custodio filed a Manifestation and Motion dated October 9, 2002.
She alleged that after the hearing for the Temporary Restraining Order, the counsel for
petitioners went to St. Francis School to instruct several parents not to acknowledge
Custodio's administration as she had been removed as a member, trustee, and curriculum
administrator and that her complaint had been dismissed. The parents were also allegedly
directed to pay the students' matriculation fees exclusively to petitioner Alejandro N. Mojica
(Alejandro), son of petitioner Cirila. Alejandro held office at the Rural Bank of General Trias,
Inc. which was allegedly owned by the family of petitioner Josefina. 26 This meeting allegedly
caused 15 teachers to hold a strike, which nearly disrupted classes and caused parents to
request the early dismissal of their children for fear that violence would ensue. 27 Custodio
reiterated her prayer for a Temporary Restraining Order. She moved that the hearing be
converted into an injunction hearing or that a status quo order be issued to allow her to
continue functioning as school director and curriculum administrator. 28
Custodio also filed a Motion for Clarification praying that the trial court clarify to whom the
school's fees should be paid while her Complaint and Manifestation and Motion were still
pending. Petitioners allegedly manifested that the payment of matriculation fees must be
166
made to Alejandro. However, Custodio pointed out that Alejandro was not the school cashier
and that the Rural Bank of General Trias, Inc. was not authorized to receive payments for St.
Francis School. She also manifested that prior to October 8, 2002, the school cashier was Ms.
Herminia Reynante (Reynante).29 This Motion was set for hearing on October 18, 2002.30
On October 21, 2002, the Regional Trial Court issued an Order designating Reynante to act as
school cashier "with authority to collect all fees" and, together with Custodio, "to pay all
accounts."31 The trial court also directed all parties in the case to submit a report on and to
turn over to Reynante all money previously collected, thus:
Regarding the collection of matriculation fees and other collectibles, Ms. Herminia Reynante
is hereby designated by the Court to act as cashier of the school to the exclusion of others
with authority to collect all fees and, together with plaintiff Laurita Custodio, to pay all
accounts. Said authority shall continue until the matter of the application for temporary
restraining order and preliminary injunction is heard and resolved. This is hereby ordered so
that an orderly operation of the school will be achieved.
Plaintiff and defendants, as well as Mr. Al Mojica, are directed to turn-over to Ms. Herminia
Reynante all money previously collected and to submit a report on what have been collected,
how much, from whom, and the dates collected Effective October 22, 2002, Ms. Herminia
Reynante shall submit to the Court, to the plaintiff and to all the defendants a monthly report
of all receivables collected and all disbursements made.
SO ORDERED.32 (Emphasis supplied)
Petitioners filed a motion for reconsideration, alleging that they would have proven that
Reynante lacked the moral integrity to act as court-appointed cashier had they been given the
opportunity to be heard.33
On January 3, 2003, the Regional Trial Court denied reconsideration. 34
On February 21, 2003, petitioners filed an Explanation, Manifestation and Compliance. They
alleged that they partially complied with the October 21, 2002 Order by submitting an
accounting on the tuition fee collections and by turning over to Reynante a manager's check
in the amount of P397,127.64 payable to St. Francis School. 35 The amount allegedly
represented the school's matriculation fees from October to December 2002. 36 However, they
alleged that Reynante refused to accept the check and required that the amount be turned
over in cash or in a check payable to cash. Thus, petitioners placed the check in the custody of
the Regional Trial Court for safekeeping. 37
38
Custodio filed a Comment dated February 26, 2003. Custodio manifested that petitioners
did not even substantially comply with the October 21, 2002 Order because it excluded from
its accounting and turnover the following amounts:
1) ₱4,339,601.54 deposited in Special Savings Deposit No. 239 of the Rural Bank of General
Trias, Inc.;
2) ₱5,639,856.11 deposited in Special Savings Deposit No. 459 of the Rural Bank of General
Trias, Inc.;
3) ₱92,970.00 representing fees paid by the school canteen; and
4) All other fees collected from January 2003 to February 19, 2003. 39
Custodio also claimed that petitioners violated the trial court order that only she and
Reynante were authorized to pay the outstanding accounts of St. Francis School. Petitioners
allegedly made salary payments to four (4) employees who had resigned. 40
On March 24, 2003, the Regional Trial Court issued another Order 41 directing petitioners to
fully comply with its earlier order to submit a report and to turn over to Reynante all the
money they had collected:
This treats of defendants' explanation, manifestation and compliance and plaintiff's
comments thereto.
A pernsal of the allegations of defendants' pleading shows that they merely turned-over a
manager's check in the amount of ₱397,127.64 representing money collected from the
students from October 2002 to December 2002. The Order of October 21, 2002 directed
plaintiff and defendants, as well as, Mr. Al Mojica to turn-over to Ms. Herminia Reynante all
money previously collected and to submit a report on what have been collected, how much,
from whom and the dates collected.
Defendants and Mr. Al Mojica are hereby directed, within ten days from receipt hereof, to
submit a report and to turn-over to Ms. Herminia Reynante all money collected by them,
more particularly:
(1) ₱4,339,601.54 deposited in Special Savings Deposit No. 239 (Rural Bank of Gen. Trias,
Inc.);
(2) ₱5,639,856. l 1 deposited in Special Savings Deposit No. 459 (Rural Bank of Gen. Trias,
Inc.);
(3) ₱92,970.00 representing amount paid by the school canteen;
(4) Other fees collected from January 2003 to Febrnary 19, 2003; and
(5) Accounting on how and how much defendants are paying Ms. Daisy Romero and three (3)
other teachers who already resigned.
SO ORDERED.42
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Petitioners filed a Manifestation, Observation, Compliance, Exception and Motion on April 18,
2003, praying, among others, that the trial court issue an order excluding from its March 24,
2003 Order the amounts which were not covered in its October 21, 2002 Order. 43
On August 5, 2003, the Regional Trial Court issued an Order denying all motions raised in
petitioners' Manifestation, Observation, Compliance, Exception and Motion and declared that
they had not complied with the March 24, 2003 Order: 44
This treats of defendants' manifestation, observation, compliance, exception and motion
dated April 18, 2003, plaintiff's comment/opposition and defendants' rejoinder thereto filed
on July 2, 2003.
Defendants are asking the Court first to set aside its orders dated October 21[, 2002] and
March 24, 2003 for having been issued "without notice and hearing" and in "acting without
or in excess of its authority/jurisdiction and with grave abuse of discretion amounting to lack
or excess of jurisdiction" ...
With respect to the first matter, the motion is denied for being a prohibited pleading under
Section 8 of the Interim Rules of Procedure for Intra-Corporate Controversies (A.M. No. 01-2-
04-SC). The motion which assails the two questioned orders is actually a motion for
reconsideration but worded differently - "motion to set aside March 24, 2003 Order" but both
have the same purpose and objective and that is to reconsider the order(s).
....
On the contrary, the court found out that defendants have not complied with the order of the
court dated March 24, 2003 directing defendants and Mr. Al Mojica to submit a report and to
turn over to Ms. Herminia Reynante all money collected by them, more particularly:
1. ₱4,339,601.54 deposited in Special Savings Deposit No. 239 (Rural Bank of Gen. Trias, Inc.)
2. ₱5,639,856.11 deposited in Special Savings Deposit No. 459 (Rural Bank of Gen. Trias, Inc.)
3. ₱92,970.00 representing amount paid by the school canteen.
4. Other fees collected from January 2003 to February 19, 2003.
5. Accounting on how and how much defendants are paying Ms. Daisy Romero and the three
(3) other teachers who already resigned.
Accordingly, the defendants and Mr. Al Mojica are hereby directed to comply with the
aforementioned order of March 24, 2003, within ten days from receipt hereof.
....
SO ORDERED.45
In the meantime, La Salle served Custodio a notice dated January 4, 2003, that they were
terminating the Memorandum of Agreement with St. Francis School. 46
On August 21, 2003, the Regional Trial Court issued an Order granting Custodio's
Manifestation and Motion dated October 9, 2002 and issuing a status quo order 47 allowing
Custodio to discharge her functions as school director and curriculum administrator. 48 The
trial court ruled in favor of Custodio when it found that petitioners had already established
another school, the Academy of St. John (Academy of St. John) in Sta. Clara, General Trias,
Cavite:49
This treats of plaintiff's manifestation and motion praying that the court "immediately issue a
temporary restraining order ... where plaintiff will be allowed to continue discharging the
functions of a school director and curriculum administrator ... "
During the hearing of the said motion and manifestation on October 11, 2002, both parties
and counsel agreed before the court that no incident similar to what happened on October 8,
2002 will occur while the motion is being heard.
Plaintiff and defendants presented evidence, testimonial and documentary, to prove their
respective causes. It took them nine months to present their evidence before the matter was
submitted for the court's resolution.
After a thorough review of all the evidences presented by both parties, the Court is inclined
to rule in favor of the plaintiff. The [pieces of] evidence of both parties are convincing. But,
the factor that convinced the Court to rule in favor of plaintiff was the information conveyed
to the court by plaintiff and admitted by defendants, through their counsel, that another
school named Academy of St. John, a new La Sallian Supervised School in Sta. Clara, General
Tria[s], Cavite, was opened by defendants Josefina A. Pascual and Cirila N. Mojica and their
respective families. In a brochure handed by plaintiff's counsel to the court during the hearing
on June 17, 2003 with a heading of Academy of Saint John, De La Salle[-] Supervised, General
Tria[s], Cavite, it said that "such idea was conceived as a result of the corporate problems and
the never ending dispute in a former La Salle[-]supervised school that finally brought
confusion and havoc in the said community."
It further said that "alarmed with the impending loss of the La Salle Supervision which they
both thought of leaving it as a legacy to the youth, Mrs. Pascual and Mrs. Mojica together
with their respective families were convinced to continue their mission of spreading quality
education etc."
It appears from the brochure that defendants Pascual and Mojica have set up another school
in the same municipality where the St. Francis School is located. The name of the school is
Academy of St. John. The Academy of St. John likewise offers the same courses as th[ose]
offered by St. Francis [S]chool. Needless to state, this action of defendants Pascual and Mojica
is very inimical to the interest of St. Francis School as the Academy of St. John put up by the
aforementioned defendants is in direct competition with St. Francis School. In other words, a
168
conflict of interest now exists insofar as defendants Pascual and Mojica are concerned in view
of their establishment of the Academy of St. John which is of the same kind and of the same
nature of business as that of St. Francis School. One cannot serve two masters a[t] the same
time. And as already intimated above, considering that there are now two competingschools
in the same locality where defendants Pascual and Mojica hold an interest, they cannot be
expected to give their full devotion and cooperation to one without being disloyal and
unfaithful to the other.
WHEREFORE, in view of the foregoing, the motion is granted. Accordingly, a status quo order
is hereby issued wherein the plaintiff is hereby allowed to continue discharging her functions
as school director and curriculum administrator as well as those who are presently and
actually discharging functions as school officer[s] to continue performing their duties until the
application for the issuance of a temporary restraining order is resolved.
SO ORDERED.50
Petitioners filed their Motion for Clarification, 51 They alleged that the bulk of the money
ordered to be turned over to Custodio and Reynante was allotted to St. Francis School's
teachers' retirement fund. Considering that it must be preserved, petitioners raised several
queries. They wanted to know if Custodio and Reynante would use the money for other
purposes other than for the teachers' retirement benefit and if Custodio and Reynante would
be required to file a bond to guaranty its safekeeping and exclusive use as teacher's
retirement compensation. Finally, they asked who would be held liable in case of Custodio
and Reynante's unlawful use of this fund. 52
On September 2, 2003, Custodio filed the Petition to Cite Respondents in Contempt of
Court53 under Rule 71 of the Rules of Court. 54 She likewise prayed that an order be issued
reiterating the Orders dated October 21, 2002, March 24, 2003, and August 5, 2003. 55
In response to petitioners' Motion for Clarification, the trial court issued an Order dated
October 8, 200356 clarifying that the retirement fund was to be held in trust by Custodio and
Reynante. It also directed Custodio and Reynante to file a bond of ₱300,000.00 each. 57 Later,
it ordered petitioners to comply with the mandate in the March 24, 2003 and August 5, 2003
Orders and directed them to disclose to the court the total amount of the fund deposited and
reserved for teachers' retirement benefit and its bank details: 58
This treats of the motion for clarification filed by the defendants through counsel.
The motion sprung from the Order dated March 24, 2003 and again reiterated in the Order of
August 5, 2003 which required the defendants and Mr. Al Mojica to turn-over to Ms.
Herminia Reynante all the money which [is] in their possession enumerated in the aforesaid
orders.
Considering that the bulk of the money pertains to the teacher[s'] retirement funds,
defendants seek to clarify (1) for what purpose the funds will be used by the plaintiff and Ms.
Reynante; (2) whether the funds will be turned-over to the plaintiff and Ms. Reynante
without them having to put up a bond as a security for the protection of the teachers; and (3)
whether defendants will be held liable civilly and criminally, in case of unlawful use and
disbursement of the funds.
Teachers' retirement funds are funds principally set aside for the purpose of the retirement of
the teachers. As such, these funds cannot be used for any other purpose other than that for
which it is intended. Thus, neither the plaintiff nor Ms. Reynante may use this amount for the
operation of the school. They should hold the same in trust for the beneficiaries of the same.
As to whether the plaintiff and Ms. Reynante shall be required to put up a bond as a security
for the protection of the teachers before they receive the teachers' retirement funds, the
same is not only correct but also proper. Considering that they will hold these funds in trust
for the retiring teachers, they should be required to file a bond to guarantee their obligations
as trustees of these funds. Accordingly, the plaintiff and Ms. Herminia Reynante are hereby
directed to file a bond in the amount of ₱300,000.00 each.
As to whether the defendants will be held liable, civilly and criminally, in case of unlawful use
and disbursement of the teachers' retirement funds, the answer is in the negative. A person
cannot be held liable for his action when such was done in compliance with the lawful order
of the court. Besides, considering that the plaintiff and Ms. Reynante are required to file a
bond, the bond shall guarantee for whatever damage the retiring teachers may incur by
reason of the unlawful use and disbursement of the funds.
WHEREFORE, in view of the foregoing, the defendants are hereby ordered to comply with the
mandate contained in the order dated March 24 and August 5, 2003.
Defendants are further directed to inform the court of the total amount of the funds
deposited reserved for teachers' retirement, and in what bank and under what account the
same is deposited.
SO ORDERED.59
On October 10, 2003, petitioners filed their Petition for Certiorari before the Court of Appeals
to question the Regional Trial Court's Orders 60 dated August 5, 2003, August 21, 2003 and
October 8, 2003. Eventually, this was elevated to this Court and was docketed as G.R. No.
174996.61
Meanwhile, trial commenced for the contempt case. Custodio presented as her lone witness,
Joseph Custodio (Joseph), St. Francis School's finance and property resource development
administrator. Petitioners did not present any witness.62
In its Decision63 dated February 6, 2008, Branch 90, Regional Trial Court, Dasmariñas, Cavite
found petitioners guilty of indirect contempt for failing to comply with the Orders dated
October 21, 2002 and March 24, 2003 and ordered them to jointly and severally pay a fine of
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₱30,000.00.64 It likewise directed them to account for the amount that they had paid the four
(4) teachers who had already resigned:65
WHEREFORE, premises considered, judgment is hereby rendered finding the respondents,
namely: Bro. Bernard Oca, Bro. Dennis Magbanua, Ms. Cirila N. Mojica, Mrs. Josefina Pascual,
Al N. Mojica, Atty. Silvestre Pascual and St. Francis School of General Trias, Cavite, GUILTY of
INDIRECT CONTEMPT of Court against the Regional Trial Court, Branch 21, Imus, Cavite for
their failure to comply with the Orders of the Court dated October 21, 2002 and March 24,
2003, and they are hereby ordered to pay a FINE, jointly and severally, in the amount of
Php30,000.00 for the restoration of the dignity of the Court and to comply with the Orders of
the Court dated October 21, 2002 and March 24, 2003 within fifteen (15) days from receipt of
this judgment.
....
SO ORDERED.66
In its May 25, 2011 Decision, the Court of Appeals affirmed the trial court Decision. 67 It found
that it was sufficiently established that petitioners did not remit all the money they had
previously collected despite the trial court's October 21, 2002 Order, which they admitted to
be lawful.68
It found that the March 24, 2003 Order merely reiterated the October 21, 2002 Order
directing the payment of all money they had collected and specified the amounts to be
remitted.69 It noted that the trial court already clarified which funds to turn over but
petitioners still refused to obey the orders.70
The Court of Appeals ruled that defying the trial court orders amounted to contumacious
conduct, which "tended to prejudice St. Francis School's operations due to lack of operational
funds."71
The Court of Appeals also noted that petitioners did not deny that the Motion for Clarification
dated October 14, 2002 was heard on October 18, 2002; thus, contradicting their claim that
they were not afforded an opportunity to be heard. 72
The Court of Appeals denied reconsideration in its Resolution dated December 19, 2011. 73
Petitioners filed a Petition for Review via Rule 45 arguing that they complied with the October
21, 2002 Order in good faith and that the validity of the March 24, 2003 and August 5, 2003
Orders were being assailed in a separate case with this Court. 74 Likewise, they contended that
there was reasonable doubt on their guilt and that the Court of Appeals erred in failing to
dismiss the petition with respect to petitioners Alejandro and Atty. Silvestre Pascual (Atty.
Silvestre) who were not parties in SEC Case No. 024-02 where the assailed orders were
issued.75
Petitioners held that to be cited for contempt, the contemnor must be guilty of willful
disobedience.76 However, they did not disobey the trial court orders. 77 They insisted that they
had complied in good faith because the trial court October 21, 2002 Order only pertained to
the school's matriculation fees and not any other fees. 78 They claimed that the October 21,
2002 Order was a response to Custodio's Motion for Clarification dated October 14, 2002,
which only requested that the matriculation fees be turned over to Reynante. 79 Thus, they
averred that it was reasonable for them to conclude that the subject of the turnover was the
matriculation fees only.80
Petitioners further claimed that in Custodio 's Comment to their February 19, 2003
Explanation, Manifestation and Compliance, Custodio surreptitiously included a prayer for the
turnover of other funds. 81 They attested that Custodio's Comment became a litigated motion
that should have been set for hearing by the trial court. 82 However, the trial court did not set
a hearing or require the filing of a responsive pleading. 83 They insisted that they were denied
due process because the trial court's March 24, 2003 Order expanded the scope of its
October 21, 2002 Order and required the turnover of additional sums which were not
included in the October 21, 2002 Order. 84
Petitioners insisted that the lack of due process and the expansion of the scope of the
October 21, 2002 Order rendered the trial court March 24, 2003 and August 5, 2003 Orders
unlawful.85 They questioned these orders in GR. No. 17 4996 and insisted that their resort to
legal remedies showed that they acted in good faith. They argued that to be charged with
indirect contempt, the violated order must have been a lawful order. 86 Since the validity of
the trial court orders was being questioned in GR. No. 174996, the Court of Appeals' ruling
was premature as it should have waited for this Court's finding on the orders' validity before
charging them with indirect contempt. 87
Petitioners asserted that these circumstances showed that there was reasonable doubt on
their guilt and their acquittal was warranted. 88
Lastly, they held that Alejandro and Atty. Silvestre ought to be dropped as parties in the
petition for indirect contempt as they were not parties in the intra-corporate controversy
filed with the trial court and were not subject to its jurisdiction. Alejandro and Atty. Silvestre
could not have been aware of the trial court's orders. They averred that there was no
showing that they acted in conspiracy with the other petitioners and that their guilt could not
be assumed or based on mere inference. 89
In its March 5, 2012 Resolution, this Court denied the Petition on the ground that the issues
raised were factual in nature and petitioners failed to raise any reversible error on the part of
the Court of Appeals.90
Petitioners filed a Motion for Reconsideration.91
In its February 18, 2013 Resolution, this Court set aside its March 5, 2012 Resolution and
ordered Custodio to file a Comment. 92
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Custodio filed her Comment93 arguing that there was clear and contumacious defiance of the
trial court orders and that the guilt of petitioners was established beyond reasonable doubt. 94
Custodio posited that petitioners only remitted the matriculation fees in the amount of
₱397,127.64. They did not render a report on the amount or turned over any other amounts.
They only partially complied with the trial court orders. 95
Custodio pointed out that petitioners paid the salaries of four (4) teachers who had already
resigned despite the trial court order that only Custodio and Reynante were authorized to
settle St. Francis School's accountabilities.96
Custodio argued that petitioners did not refute the evidence she presented but merely
attested that the orders only pertained to matriculation fees. 97
Custodio ave1Ted that petitioners were afforded due process. She pointed out that her
Motion for Clarification dated October 14, 2002 was set for hearing on October 18, 2002,
which was attended by petitioners' counsel. 98
Custodio claimed that petitioners' Explanation, Manifestation and Compliance dated February
19, 2003 was heard by the trial court. Thus, petitioners were not denied due process when
she filed her Comment. If petitioners wanted to assail the Comment, they could have easily
filed a Reply.99
Custodio insisted that the trial court March 24, 2003 Order was a clarification, not an
expanded version, of its October 21, 2002 Order. Custodio reasoned that the March 24, 2003
Order was not even among the orders they questioned in G.R. No. 174996; thus, showing
that they were not acting in good faith. She insisted that their claim of lack of due process
was merely an afterthought after they were directed several times to comply with the trial
court orders.100
Similarly, Custodio claimed that the August 5, 2003 Order of the Regional Trial Court was not
a violation of petitioners' right to due process. It was issued in connection with their motion
to set aside the March 24, 2003 Order, which was heard. Moreover, the August 5, 2003 Order
was a mere reiteration of the March 24, 2003 Order. 101
Custodio held that the trial court orders are deemed valid and are entitled to respect while
they are not yet reversed by a higher court. 102
Custodio averred that despite the trial court's rulings on the issues raised, petitioners insisted
on filing prohibited pleadings under A.M. No. 01- 2-04-SC, or the Interim Rules of Procedure
for Intra-Corporate Controversies. These pleadings by petitioners were their (i) Motion for
Reconsideration dated November 8, 2002, (ii) Explanation, Manifestation, and Compliance
dated February 19, 2003, (iii) Manifestation, Observation, Compliance, Exception and Motion
dated April 18, 2003, and (iv) Motion for Clarification dated September 1, 2003. 103
Custodio posited that in filing these pleadings, petitioners abused court processes as they
served no purpose other than to avoid compliance with the trial court orders. 104
She claimed that Alejandro and Atty. Silvestre were equally guilty of indirect contempt.
Despite the fact that they were not parties to the complaint, Alejandro collected the
matriculation fees for the school while Atty. Silvestre, as a member of the Board of Trustees,
was empowered to cause compliance of court orders. 105
Lastly, Custodio pointed out that petitioners' raising of factual issues was not proper in a
Petition for Review on Certiorari.106
Petitioners filed their Reply.107
Later, the parties filed their respective Memoranda. 108
Meanwhile, on December 3, 2014, during the pendency of this indirect contempt case, this
Court issued a Decision in G.R. No. 174996, which found that the assailed Orders dated
August 5, 2003 and October 8, 2003 of the Regional Trial Court were valid. The dispositive
portion of the December 3, 2014 Decision read:
WHEREFORE, premises considered, the petition is PARTLY GRANTED. The assailed Decision
dated September 16, 2005 and the Resolution dated October 9, 2006 of the Court of Appeals
in CA-G.R. SP No. 79791 are hereby AFFIRMED in part insofar as they upheld the assailed
August 5, 2003 and October 8, 2003 Orders of the trial court. They are REVERSED with
respect to the assailed August 21, 2003 Status Quo Order which is hereby SET ASIDE for
having been issued with grave abuse of discretion. The trial court is further DIRECTED to
resolve respondent's application for injunctive relief with dispatch.
SO ORDERED.109
For resolution is whether petitioners are guilty of indirect contempt.
To resolve this, it is important to determine:
First, whether petitioners are guilty of willful disobedience;
Second, whether petitioners can refuse to follow the orders of the Regional Trial Court on the
premise that their legality is being questioned in this Court; and
Finally, whether Alejandro N. Mojica and Atty. Silvestre Pascual are equally guilty of indirect
contempt despite the fact that they are not parties to the complaint.
I
This Court rules that petitioners Oca, Magbanua, Cirila, and Josefina are guilty of indirect
contempt. There is a contumacious refusal on their part to comply with the Regional Trial
Court Orders.
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Contempt of court is willful disobedience to the court and disregard or defiance of its
authority, justice, and dignity. 110 It constitutes conduct which "tends to bring the authority of
the court and the administration of law into disrepute or in some manner to impede the due
administration of justice" or "interfere with or prejudice parties['] litigant or their witnesses
during litigation."111
All courts are given the inherent power to punish contempt. 112 This power is an essential
necessity to preserve order in judicial proceedings and to enforce the due administration of
justice and the court's mandates, orders, and judgments. 113 It safeguards the respect due to
the courts and, consequently, ensures the stability of the judicial institution. 114
In Sison v. Caoibes, Jr.:115
Thus, the power to declare a person in contempt of court and in dealing with him accordingly
is an inherent power lodged in courts of justice, to be used as a means to protect and
preserve the dignity of the court, the solemnity of the proceedings therein, and the
administration of justice from callous misbehavior, offensive personalities, and contumacious
refusal to comply with court orders. Indeed, the power of contempt is power assumed by a
court or judge to coerce cooperation and punish disobedience, disrespect or interference
with the court's orderly process by exacting summary punishment. The contempt power was
given to the courts in trust for the public, by tradition and necessity, in as much as respect for
the courts, which are ordained to administer the laws which are necessary to the good order
of society, is as necessary as respect for the laws themselves. 116 (Citations omitted)
There are two (2) types of contempt of court: (i) direct contempt and (ii) indirect contempt.
Direct contempt consists of "misbehavior in the presence of or so near a court as to obstruct
or interrupt the proceedings before [it]." 117 It includes: (i) disrespect to the court, (ii) offensive
behavior against others, (iii) refusal, despite being lawfully required, to be sworn in or to
answer as a witness, or to subscribe an affidavit or deposition. It can be punished summarily
without a hearing.118
Indirect contempt is committed through any of the acts enumerated under Rule 71, Section 3
of the Rules of Court:
(a) Misbehavior of an officer of a court in the performance of his [or her] official duties or in
his [or her] official transactions;
(b) Disobedience of or resistance to a lawful writ, process, order, or judgment of a
court, including the act of a person who, after being dispossessed or ejected from any real
property by the judgment or process of any court of competent jurisdiction, enters or
attempts or induces another to enter into or upon such real property, for the purpose of
executing acts of ownership or possession, or in any manner disturbs the possession given to
the person adjudged to be entitled thereto;
(c) Any abuse of or any unlawful interference with the processes or proceedings of a court
not constituting direct contempt under Section 1 of this Rule;
(d) Any improper conduct tending, directly or indirectly, to impede, obstruct, or degrade the
administration of justice;
(e) Assuming to be an attorney or an officer of a court, and acting as such without authority;
(f) Failure to obey a subpoena duly served;
(g) The rescue, or attempted rescue, of a person or property in the custody of an officer by
virtue of an order or process of a court held by him [or her]. 119 (Emphasis supplied)
Indirect contempt is only punished after a written petition is filed and an opportunity to be
heard is given to the party charged.120
In the case at bar, petitioners were charged with indirect contempt through "disobedience of
or resistance to a lawful writ, process, order, orjudgment of a court."
II
Petitioners insist that they have complied with the October 21, 2002 Order in good faith as
they have already turned over the matriculation fees to Reynante. 121 They claim that this
Order pertained to the matriculation fees only, excluding any other fees, as it was issued in
connection with Custodio's Motion for Clarification dated October 14, 2002, which requested
that the matriculation fees be turned over to Reynante. 122 Custodio's Motion for Clarification
dated October 14, 2002 allegedly did not cover other fees. 123
However, the October 21, 2002 Order did not pertain to matriculation fees only:
Regarding the collection of matriculation fees and other collectibles, Ms. Herminia Reynante
is hereby designated by the Court to act as cashier of the school to the exclusion of others
with authority to collect all fees and, together with plaintiff Laurita Custodio, to pay all
accounts. Said authority shall continue until the matter of the application for temporary
restraining order and preliminary injunction is heard and resolved. This is hereby ordered so
that an orderly operation of the school will be achieved.
Plaintiff and defendants, as well as Mr. Al Mojica, are directed to turn-over to Ms. Herminia
Reynante all money previously collected and to submit a report on what have been collected,
how much, from whom and the dates collected. Effective October 22, 2002, Ms. Herminia
Reynante shall submit to the Court, to the plaintiff and to all the defendants a monthly report
of all receivables collected and all disbursements made.
SO ORDERED.124 (Emphasis supplied)
The wording of the October 21, 2002 Order is clear that the amounts do not pertain only to
the matriculation fees but to all collectibles, all fees, and all accounts. It also states that
172
petitioners were to render a report and turn over all the amounts they had previously
collected. It does not state that only matriculation fees were to be handed over.
Likewise, the subject of Custodio's Motion for Clarification dated October 14, 2002 did not
solely cover matriculation fees. Her prayer sought to clarify "where the matriculation
fees and other fees should be paid pending the hearing of the Complaint and the
Manifestation and Motion."125 She also prayed for other just and equitable reliefs. 126 Thus, the
trial court ordered that all amounts be turned over to Reynante for the orderly operation of
the school.127 Understandably, the school would operate better if all accounts were handled
by one (1) person and not divided into two (2) arguing factions.
Petitioners insist that Custodio's Comment to their February 19, 2003 Explanation,
Manifestation and Compliance surreptitiously included a prayer for the turnover of other
funds, making it a litigated motion. 128 Petitioners claim that they were denied due process
because the trial court did not set it for hearing. 129 Moreover, in its March 24, 2003 Order, the
trial court allegedly required the turnover of additional sums which were not included in the
October 21, 2002 Order.130
This Court finds that the subsequent trial court orders did not unduly expand the scope of the
October 21, 2002 Order as petitioners argue. The October 21, 2002 Order itself already
directed that all fees be turned over to Reynante.
Furthermore, Custodio's Comment dated February 26, 2003 simply argued that petitioners
did not comply with the October 21, 2002 Order because they did not remit the following
amounts:
1) ₱4,339,601.54 deposited in Special Savings Deposit No. 239 of the Rural Bank of General
Trias, Inc.;
2) ₱5,639,856.ll deposited in Special Savings Deposit No. 459 of the Rural Bank of General
Trias, Inc.;
3) ₱92,970.00 representing fees paid by the school canteen; and
4) All other fees collected from January 2003 to February 19, 2003. 131
Custodio pointed out that petitioners paid the salaries of four (4) other employees who had
already resigned, violating the court order that only Reynante and Custodio were authorized
to pay the outstanding accounts of St. Francis School. 132
Thus, it cannot be said that Custodio inserted a surreptitious prayer for the turnover of funds
not included in the October 21, 2002 Order. She simply stated that petitioners failed to
substantially comply with the October 21, 2002 Order and specified the other amounts that
petitioners needed to turn over.133 When she prayed for the turnover of the other amounts,
she merely sought petitioners' compliance of the trial court October 21, 2002 Order. 134
The trial court reiterated this in its March 24, 2003 Order and specified more particularly the
amounts that needed to be remitted. It stated:
A perusal of the allegations of defendants' pleading shows that they merely turned-over a
manager's check in the amount of P397,127.64 representing money collected from the
students from October 2002 to December 2002. The Order of October 21, 2002 directed
plaintiff and defendants, as well as, Mr. Al Mojica to turn-over to Ms. Herminia Reynante all
money previously collected and to submit a report on what have been collected, how much,
from whom and the dates collected.
Defendants and Mr. Al Mojica are hereby directed, within ten days from receipt hereof, to
submit a report and to turn-over to Ms. Herminia Reynante all money collected by them,
more particularly:
1. ₱4,339,601.54 deposited in Special Savings Deposit No. 239 (Rural Bank of Gen. Trias, Inc.);
2. ₱5,639,856. l 1 deposited in Special Savings Deposit No. 459 of (Rural Bank of Gen. Trias,
Inc.);
3. ₱92,970.00 representing amount paid by the school canteen;
4. Other fees collected from January 2003 to February 19, 2003;
5. Accounting on how and how much defendants are paying Ms. Daisy Romero and three (3)
other teachers who already resigned.
SO ORDERED.135
Consequently, the Regional Trial Court did not unduly expand the scope of the October 21,
2002 Order when it issued its March 24, 2003 Order.
However, despite its clear wording, petitioners still did not comply with the March 24, 2003
Order. Instead, they filed a Manifestation, Observation, Compliance, Exception and Motion on
April 18, 2003, praying that the trial court exclude the other amounts, which were allegedly
not included in the October 21, 2002 Order. 136
The trial court denied petitioners' Manifestation, Observation,Compliance, Exception and
Motion in its August 5, 2003 Order for being a differently worded motion for reconsideration,
which is a prohibited pleading under Section 8 of the Interim Rules of Procedure for Intra-
Corporate Controversies (A.M. No. 01-2-04-SC). 137 The trial court noted that petitioners still
had not complied with its March 24, 2003 Order and reiterated that they must submit a
report and turn over all the money they had collected. 138
Still, petitioners refused to comply.
On August 21, 2003, the trial court granted Custodio's Manifestation and Motion dated
October 9, 2002. It issued a status quo order allowing Custodio to discharge her functions as
173
school director and curriculum administrator because it found that petitioners had already
established a new school.139
However, petitioners still did not comply despite this Order. Instead, they filed their
September 1, 2003 Motion for Clarification, raising questions on Custodio's use of the turned
over money, Custodio's and Reynante's bonds as guaranty to the money's exclusive use as
teachers' retirement fund, and petitioners' liability in case of Custodio's misuse of this
amount.140
This prompted Custodio to petition the trial court to cite petitioners in indirect contempt. 141
The trial court responded to petitioners' Motion for Clarification dated September 1, 2003
and issued its October 8, 2003 Order, agreeing that the retirement fund would be merely held
in trust by Custodio and Reynante.142 It also directed Custodio and Reynante to file a bond of
₱300,000.00 each. Again, it ordered petitioners to comply with the mandate in its March 24,
2003 and August 5, 2003 Orders and directed them to inform the court the total amount of
the money deposited and reserved for teachers' retirement and its bank account details. 143
Nonetheless, petitioners still did not comply. Instead, they argued in the contempt proceeding
that the March 24, 2003 and August 5, 2003 Orders were unlawful and were being
questioned in G.R. No. 174996. They claimed that their availment of legal remedies showed
their good faith.144
All these acts show petitioners' contumacious refusal to abide by the orders of the trial court.
Again, the trial court did not exclude any other kind of money in its October 21, 2002, March
24, 2003, and August 5, 2003 Orders, all of which directed petitioners to turn
over all monies.145 Petitioners, however, still insisted that they had complied because they
had remitted the matriculation fees. Even after clarification, petitioners were defiant.
The trial court also noted that even after petitioners had already established another
competitor school and Custodio and Reynante had already posted bond, petitioners still
refused to comply.146
The trial court reiterated the orders to turn over the amounts at least thrice. Petitioners' filing
of numerous pleadings reveals their contumacious refusal to comply and their abuse of court
processes.
Their defense that they were denied due process deserves little consideration. Petitioners
had attended hearings and had filed several pleadings showing that they were given several
opportunities to present their position on the matter. All these were considered before the
trial court rendered its orders.
In Oca vs. Custodio,147 this Court ruled on the validity of the trial court August 5, 2003 and
October 8, 2003 Orders:
With regard to the right to due process, we have emphasized in jurisprudence that while it is
true that the right to due process safeguards the opportunity to be heard and to submit any
evidence one may have in support of his claim or defense, the Court has time and again held
that where the opportunity to be heard, either through verbal arguments or pleadings, is
accorded, and the party can "present its side" or defend its "interest in due course," there is
no denial of due process because what the law proscribes is the lack of opportunity to be
heard.
In the case at bar, we find that petitioners were not denied due process by the trial court
when it issued the assailed Orders dated August 5, 2003, August 21, 2003 and October 8,
2003. The records would show that petitioners were given the opportunity to ventilate their
arguments through pleadings and that the same pleadings were acknowledged in the text of
the questioned rulings. Thus, petitioners cannot claim grave abuse of discretion on the part of
the trial court on the basis of denial of dueprocess. 148 (Citation omitted)
Thus, the question of whether petitioners were denied due process has already been settled.
This Court notes that petitioners' justification for refusing to turn over the stated amounts
was that the amounts constituted teachers' retirement fund, which consequently did not
belong to St. Francis School and was not covered by the assailed Orders. 149 However, the trial
court lent credence to Joseph's testimony that the amounts deposited in the Special Savings
Accounts were funds for the operations of the school.150
In any case, whether the amounts are for the teachers' retirement fund or the school's
operation fund, the trial court had determined who was to have custody over these amounts
during the pendency of the intra-corporate case. Thus, it is not for petitioners to choose
which amounts to turn over.
III
The same principle applies to petitioners' argument that the trial court orders were being
questioned in G.R. No. 174996.
In intra-corporate controversies, all orders of the trial court are immediately executory: 151
Section 4. Executory nature of decisions and orders. - All decisions and orders issued under
these Rules shall immediately be executory except the awards for moral damages, exemplary
damages and attorney's fees, if any. No appeal or petition taken therefrom shall stay the
enforcement or implementation of the decision or order, unless restrained by an appellate
court. Interlocutory orders shall not be subject to appeal.
Questioning the trial court orders does not stay its enforcement or implementation. There is
no showing that the trial court orders were restrained by the appellate court.
Hence, petitioners could not refuse to comply with the trial court orders just because they
opined that they were invalid. It is not for the parties to decide whether they should or
174
should not comply with a court order. Petitioners did not obtain any injunction to stop the
implementation of the trial court orders nor was there an injunction to prevent the trial court
from hearing and ruling on the contempt case. 152 Petitioners' stubborn refusal cannot be
excused just because they were convinced of its invalidity. Their resort to the processes of
questioning the orders does not show that they are in good faith.
Petitioners likewise cannot invoke the principle of judicial courtesy.
Judicial courtesy is exercised by suspending a lower court's proceedings although there is no
injunction or an order from a higher court. 153 The purpose is to avoid mooting the matter
raised in the higher court. 154 It is exercised as a matter of respect and for practical
considerations.155
However, this principle applies only if the continuation of the lower court's proceedings will
render moot the issue raised in the higher court. 156
In the two (2) cases involved, there are two (2) separate issues. In G.R. No. 174996, the issue
was whether the orders of the trial court were valid. In this indirect contempt case, the issue
is whether petitioners willfully disobeyed the orders of the trial court. Although this Court
may find the orders invalid in G.R. No. 174996, the petitioners may still be cited in contempt
for their contumacious refusal and defiance of the trial court orders. Therefore, the finding of
indirect contempt will not render moot this Court's ruling in G.R. No. 174996.
This Court has acknowledged the trial court's power to cite parties in indirect contempt for
their refusal to follow its orders, although the validity of the orders is being questioned in
another proceeding.
157
In Roxas v. Tipon, this Court found a party guilty of contempt although the disobeyed order
was the subject of a pending petition before the Court of Appeals:
The issue of indirect contempt needs further discussion because while the Order of the RTC
to allow audit of books of HEVRI has been rendered moot, it does not change the fact that at
the time that the Order was a standing pronouncement, petitioners refused to heed it ...
....
Contempt of court is defined as a disobedience to the Court by acting in opposition to its
authority, justice and dignity. It signifies not only a willful disregard or disobedience of the
court's orders, but such conduct which tends to bring the authority of the court and the
administration of law into disrepute or in some manner to impede the due administration of
justice. Contempt of court is a defiance of the authority, justice or dignity of the court; such
conduct as tends to bring the authority and administration of the law into disrespect or to
interfere with or prejudice parties-litigant or their witnesses during litigation. The
asseverations made by petitioners to justify their refusal to allow inspection or audit were
rejected by the trial court.
....
The RTC initiated the contempt charge. In the Order dated 9 January 2002, petitioners were
directed to appear in court and to show cause why they should not be held in contempt of
court for their refusal to allow Financial Catalyst, Inc. to audit the books of HEVRI. Petitioners
filed an urgent motion for reconsideration claiming that said order was the subject of a
pending petition before the Court of Appeals and that they can only be cited for contempt by
the filing of a verified petition. The RTC denied the motion and reiterated in its Order on 26
April 2002 explaining that it chose to initiate the contempt charge.
The RTC acted on the basis of the unjustified refusal of petitioners to abide by its lawful
order. It is of no moment that private respondents may have filed several pleadings to urge
the R TC to cite petitioners in contempt. Petitioners utterly violated an order issued by the
trial court which act is considered contemptuous. Thus, in Leonidas v. Judge Supnet, the
MTC's order to the bank to show cause why it should not be held in contempt, was adjudged
as a legitimate exercise of the MTC's judicial discretion to determine whether the bank should
be sanctioned for disregarding its previous orders. 158 (Emphasis supplied, citations omitted)
In this case, petitioners were given several opportunities to comply with the trial court
orders. Even after the trial court clarified which funds to turn over, they still refused to obey.
While petitioners questioned the legality of these orders, they are immediately executory.
Moreover, the parties do not have the power to determine for themselves what should and
should not be excluded from the orders. Their failure to turn over the amounts showed
petitioners' defiance and disregard for the authority of the trial court.
Petitioners argue that contempt proceedings are similar to criminal proceedings, and thus,
there must be proof beyond reasonable doubt of their guilt. 159
The punishment for contempt is classified into two (2): civil contempt and criminal contempt.
Civil contempt is committed when a party fails to comply with an order of a court or judge
"for the benefit of the other party." 160 A criminal contempt is committed when a party acts
against the court's authority and dignity or commits a forbidden act tending to disrespect the
court or judge.161
This stems from the two (2)-fold aspect of contempt which seeks: (i) to punish the party for
disrespecting the court or its orders; and (ii) to compel the party to do an act or duty which it
refuses to perform.162
In Halili v. Court of Industrial Relations:163
Due to this twofold aspect of the exercise of the power to punish them, contempts are
classified as civil or criminal. A civil contempt is the failure to do something ordered to be
done by a court or a judge for the benefit of the opposing party therein; and a criminal
contempt, is conduct directed against the authority and dignity of a court or of a judge, as in
175
unlawfully assailing or discrediting the authority or dignity of the court or judge, or in doing a
duly forbidden act. Where the punishment imposed, whether against a party to a suit or a
stranger, is wholly or primarily to protect or vindicate the dignity and power of the court,
either by fine payable to the government or by imprisonment, or both, it is deemed a
judgment in a criminal case. Where the punishment is by fine directed to be paid to a party in
the nature of damages for the wrong inflicted, or by imprisonment as a coercive measure to
enforce the performance of some act for the benefit of the party or in aid of the final
judgment or decree rendered in his behalf, the contempt judgment will, if made before final
decree, be treated as in the nature of an interlocutory order, or, if made after final decree, as
remedial in nature, and may be reviewed only on appeal from the final decree, or in such
other mode as is appropriate to the review of judgments in civil cases. . . . The question of
whether the contempt committed is civil or criminal, does not affect the jurisdiction or the
power of a Court to punish the same ....164 (Emphasis supplied)
The difference between civil contempt and criminal contempt was further elaborated
in People v. Godoy:165
It has been said that the real character of the proceedings is to be determined by the relief
sought, or the dominant purpose, and the proceedings are to be regarded as criminal when
the purpose is primarily punishment, and civil when the purpose is primarily compensatory
or remedial.
Criminal contempt proceedings are generally held to be in the nature of criminal or quasi-
criminal actions. They are punitive in nature, and the Government, the courts, and the people
are interested in their prosecution. Their purpose is to preserve the power and vindicate the
authority and dignity of the court, and to punish for disobedience of its orders. Strictly
speaking, however, they are not criminal proceedings or prosecutions, even though the
contemptuous act involved is also a crime. The proceeding has been characterized as sui
generis, partaking of some of the elements of both a civil and criminal proceeding, but really
constituting neither. In general, criminal contempt proceedings should be conducted in
accordance with the principles and rules applicable to criminal cases, in so far as such
procedure is consistent with the summary nature of contempt proceedings. So it has been
held that the strict rules that govern criminal prosecutions apply to a prosecution for criminal
contempt, that the accused is to be afforded many of the protections provided in regular
criminal cases, and that proceedings under statutes governing them are to be strictly
construed. However, criminal proceedings are not required to take any particular form so long
as the substantial rights of the accused are preserved.
Civil contempt proceedings are generally held to be remedial and civil in their nature; that
is, they are proceedings for the enforcement of some duty, and essentially a remedy for
coercing a person to do the thing required. As otherwise expressed, a proceeding for civil
contempt is one instituted to preserve and enforce the rights of a private party to an action
and to compel obedience to a judgment or decree intended to benefit such a party litigant. So
a proceeding is one for civil contempt, regardless of its form, if the act charged is wholly the
disobedience, by one party to a suit, of a special order made in behalf of the other party and
the disobeyed order may still be obeyed, and the purpose of the punishment is to aid in an
enforcement of obedience. The rules of procedure governing criminal contempt proceedings,
or criminal prosecutions, ordinarily are inapplicable to civil contempt proceedings ...
In general, civil contempt proceedings should be instituted by an aggrieved party, or his
successor, or someone who has a pecuniary interest in the right to be protected. In criminal
contempt proceedings, it is generally held that the State is the real prosecutor.
Contempt is not presumed. In proceedings for criminal contempt, the defendant is presumed
innocent and the burden is on the prosecution to prove the charges beyond reasonable
doubt. In proceedings for civil contempt, there is no presumption, although the burden of
proof is on the complainant, and while the proof need not be beyond reasonable doubt, it
must amount to more than a mere preponderance of evidence. It has been said that the
burden of proof in a civil contempt proceeding lies somewhere between the criminal
"reasonable doubt" burden and the civil "fair preponderance" burden.166 (Citations omitted)
Civil contempt proceedings seek to compel the contemnor to obey acourt order, judgment, or
decree which he or she refuses to do for the benefit of another party. It is for the
enforcement and the preservation of a right of a private party, who is the real party in
interest in the proceedings. The purpose of the contemnor's punishment is to compel
obedience to the order. Thus, civil contempt is not treated like a criminal proceeding and
proof beyond reasonable doubt is not necessary to prove it. 167
In the case at bar, the dispositive portion of the Decision of the trial court, as affirmed by the
Court of Appeals, read:
WHEREFORE, premises considered, judgment is hereby rendered finding the respondents,
namely: Bro. Bernard Oca, Bro. Dennis Magbanua, Ms. Cirila N. Mojica, Mrs. Josefina Pascual,
Al N. Mojica, Atty. Silvestre Pascual and St. Francis School of General Trias, Cavite, GUILTY of
INDIRECT CONTEMPT of Court against the Regional Trial Court, Branch 21, Imus, Cavite for
their failure to comply with the Orders of the Court dated October 21, 2002 and March 24,
2003, and they are hereby ordered to pay a FINE, jointly and severally, in the amount of
Php30,000.00 for the restoration of the dignity of the Court and to comply with the Orders of
the Court dated October 21, 2002 and March 24, 2003 within fifteen (15) days from receipt of
this judgment.
....
SO ORDERED.168
While the nature of the punishment imposed is a mixture of both criminal and civil, the
contempt proceeding in this case is more civil than criminal.
176
The purpose of the filing and the nature of the contempt proceeding show that Custodio was
seeking enforcement of the trial court orders in the intra-corporate controversy because
petitioners refused to comply. Hence, this is a civil contempt case, which does not need proof
beyond reasonable doubt.
This Court has ruled that while the power to cite parties in contempt should be used
sparingly, it should be allowed to exercise its power of contempt to maintain the respect due
to it and to ensure the infallibility of justice where the defiance is so clear and contumacious
and there is an evident refusal to obey.169
This Court finds that it was sufficiently proven that there was willful disobedience on the part
of petitioners. Therefore, petitioners ought to be cited in contempt.
IV
However, this Court rues that the charges against Alejandro and Atty. Silvestre ought to be
dismissed.
While they were not parties to SEC Case No. 024-02, the trial court ruled that they were guilty
of indirect contempt on the following premise:
The latter Orders are directed to "ALL" the defendants in SEC Case No. 024-02, namely: Bro.
Bernard Oca, Bro. Dennis Magbanua, Ms. Cirila N. Mojica, Mrs. Josefina Pascual and St.
Francis School; while the respondent Al N. Mojica was particularly mentioned in the said
orders in view of the fact that it was he that collected matriculation fees, as a cashier. With
respect to Atty. Silvestre Pascual, the latter was impleaded in this case because he was a
member of the Board of St. Francis School at the time the petition was filed, and he is
empowered to cause compliance with these Orders. His failure to prove that he has the
intention to comply with the subject orders showed his acquiescence to the collective act of
defiance.170
However, there is no evidence of conspiracy in this case. The powerto punish contempt must
be "exercised cautiously, sparingly, and judiciously."173 Without evidence of conspiracy, it
cannot be said that the non-litigants are guilty of contempt.
This Court finds that there is no sufficient evidence of conspiracy to hold both Alejandro and
Atty. Silvestre liable for contempt.
Alejandro merely collected the matriculation fees as a designated cashier who worked in the
Rural Bank of General Trias, Inc. He neither exercised power over the money nor had the
authority to order how it would be kept or disposed. Moreover, it has been established that
the matriculation fees had already been turned over to Reynante.
Atty. Silvestre was indeed a member of the Board of Trustees. However, decisions of the
Board of Trustees are not subject to the control of just one (1) person. While a board member
may protest, the majority of the board may overrule him or her. Thus, it is not correct to say
that a board member is empowered to cause compliance of the trial court orders. It does not
matter if Atty. Silvestre was unable to prove his intention to comply with the orders. The
burden of proving contempt is upon complainants and there is no presumption of guilt in
contempt proceedings such that the party accused of contempt must prove that he is
innocent.174
In the absence of proof of conspiracy, it cannot be said that Alejandro and Atty. Silvestre are
guilty of contempt.
WHEREFORE, the Petition is DENIED. The May 25, 2011 Decision175 and December 19, 2011
Resolution176 of the Court of Appeals in CA-G.R. CR. No. 31985 are AFFIRMED. However, the
complaint against Alejandro Mojica and Atty. Silvestre Pascual is hereby DISMISSED.
SO ORDERED.

In Ferrer v. Rodriguez,171 this Court ruled that a non-litigant may be cited in contempt if he or
she acted in conspiracy with the parties in violating the court order:

Nevertheless, persons who are not parties in a proceeding may be declared guilty of
contempt for willful violation of an order issued in the case if said persons are guilty of
conspiracy with any of the parties in violating the court's order.

"In a proceeding to punish for criminal contempt for willful disobedience of an injunction, the
fact that those disobeying the injunction were not parties eo nomine to the action in which it
was granted, and were not personally served, is no defense, where the injunction restrains
not only the parties, but those who act in connection with the party as attorneys, agents, or
employees, and the parties accused, with knowledge of the order and its terms, acting as the
employees of a party, willfully violate it." (People ex rel. Stearns, et al. vs. Marr, et al., 74 N.E.
431.)172

177
[ G.R. No. 201306, August 09, 2017 ]
LYDIA LAO, JEFFREY ONG, HENRY SY, SY TIAN TIN, SY TIAN TIN, JR., AND PAUL CHUA,
PETITIONERS, V. YAO BIO LIM AND PHILIP KING, RESPONDENTS.
DECISION
LEONEN, J.:
This resolves a Petition for Review on Certiorari [1] seeking to annul and set aside the
Decision[2] dated August 3, 2011 and Resolution[3] dated March 21, 2012 of the Court of
Appeals in CA-G.R. CV. No. 90314. The Court of Appeals affirmed the March 20, 2007 Decision
of Branch 90, Regional Trial Court, Quezon City.[4] This trial court Decision annulled the
elections of the board of directors of Philadelphia School, Inc. (PSI) held on March 15, 2002
and the issuance of stock dividends and transfer of shares of stock, and awarded damages to
Yao Bio Lim and Philip King (respondents). [5]
This case is a continuation of a dispute between two (2) groups of stockholders for the control
and management of PSI. One group was headed by Lydia Lao (Lao) and the other was led by
Philip King (King). Their dispute eventually reached this Court in G.R. No. 160358,
entitled Lydia Lao, William Chua Lian, Jeffrey Ong and Henry Sy v. Philip King.[6] The relevant
facts in that case were as follows:
PSI was organized in 1970 with an authorized capital stock of P2,000,000.00, divided into
20,000 shares with a par value of P100 per share. Out of this authorized capital stock, 4,600
shares were subscribed and paid up. [7]
Ong Y. Seng, King's father, had the most number of subscribed shares, holding 1,200 shares.
Before his death in 1994, he sought, and was granted, the approval of the PSI board of
directors to transfer his shares to King. Since then, King had been consistently elected as a
member of the PSI board of directors. [8]
During the special stockholders' meeting on May 23, 1998, a new set of directors and officers
was elected. Yao Bio Lim was elected President and King was Vice President. [9]
Lao, the former president, refused to acknowledge the newly elected directors and officers as
well as King's ownership of 1,200 PSI shares. On August 15, 1998, Lao issued a Secretary's
Certificate stating that a board meeting was held on the same date wherein the board of
directors resolved to nullify the transfer to King of the shares owned by his father. [10]
In April 1999, King discovered that a stockholders' meeting was conducted on March 19,
1999, wherein Lao, William Chua Lian (Chua Lian), Jeffrey Ong (Ong), and Henry Sy were
elected as new members of the board of directors. [11]
King filed a petition before the Securities and Exchange Commission "to enjoin [Lao, Chua
Lian, Ong, and Henry Sy] from representing themselves as officers and members of the board
of directors of the Philadelphia School, Inc. and to nullify all acts done and resolutions passed
by them. The petition was docketed as SEC Case No. 05-99-6297." [12]
When Republic Act No. 8799 [13] took effect, the case was transferred to Branch 93, Regional
Trial Court, Quezon City and was docketed as Civil CaseNo.Q-01-42972. [14]
On September 25, 2002, Judge Apolinario D. Bruselas, Jr. rendered a decision granting King's
petition. It disposed as follows:
WHEREFORE, the foregoing premises considered, the court finds for [King] and as prayed for,
hereby orders as follows:
1) The meetings held by the [petitioners] on 15 August 1998 and all acts performed by them
as the alleged officers and Board of Directors of the corporation are declared null and void;
2) The alleged election of [petitioner] Lydia Lao as president and other [petitioners] as
members of the Board of Directors of the corporation during the aforementioned meeting,
declared null and void;
3) The reduction in the shareholdings of [King] from 1,200 shares to only 500 shares, declared
null and void; the shares of [King] should be restored to 1,200 and which number he is
entitled to vote;
4) The increase in the number of the shares of Mr. Sy Tian Ting and Dy Siok Bee, declared null
and void;
5) The [petitioners] to account for the funds of the corporation disbursed by them during the
period they took control;
6) The new elections of the corporate directors and officers should be based on the
shareholdings reflected in the Articles of Incorporation modified only by such transfers as
may be shown to be valid and legitimate.
SO ORDERED.[15]
King filed a motion for execution, which was granted by the Regional Trial Court. [16] Lao's
group questioned the order of the trial court granting execution through a petition for
certiorari filed before the Court of Appeals. [17] The Court of Appeals upheld the validity of the
order,[18] which this Court eventually sustained on August 31, 2006 in G.R. No. 160358. [19]
Meanwhile, on March 15, 2002, a general stockholders' meeting was held wherein Lao, Ong,
Henry- Sy, Sy Tian Tin, Sy Tian Tin, Jr. and Paul Chua (petitioners) were elected as members of
the board of directors, with Chua Lian as chairman of the board. [20]
On March 26, 2002, Yao Bio Lim and King filed a Petition [21] before Branch 90, Regional Trial
Court, Quezon City against petitioners, the newly elected board of directors. They sought,
among others, to annul: (1) "the elections held on March 15, 2002 and all corporate acts of
178
the supposedly new board of directors and officers of [PSI]," (2) the "issuance of stock
dividends," and (3) the "illegal transfer of shares of stock." [22] They also prayed that
petitioners, together with Chua Lian, be ordered to account for damages and for the funds
and assets of the corporation since August 1998.[23]
Yao Bio Lim and King averred that on March 10, 2002, they received the Notice of meeting
informing them about the general stockholders' meeting to be held on March 15, 2002 at
9:00 a.m. at the PSI's board room. "The notice, however, did not state the agenda or the
purpose of the meeting." [24] Moreover, they alleged that the Notice sent to King was still in
the name of his father, Ong Y. Seng, while that sent to Yao Bio Lim included the name of his
deceased father, Yao Chek.[25]
Yao Bio Lim claimed that he acquired his PSI shares from his father, who owned 300 PSI
shares during his lifetime. Specifically, in 1995, Yao Chek transferred one (1) share to him and
100 shares to his brother, Yao Tok Lim. After Yao Chek's death in 1999, his remaining shares
were divided among his five (5) children. Yao Bio Lim's brothers, in turn, agreed to assign
their corresponding shares to Yao Bio Lim and Yao Juan Lim. [26]
During the meeting, "Philip King and a certain Atty. Garaygay were asked to leave the board
room because they were allegedly not stockholders." [27] On the other hand, Yao Bio Lim was
allowed to vote for only one (1) share during the elections despite the proxies he held for his
brothers, Yao Tok Lim and Yao Juan Lim.[28]
Yao Bio Lim and King further attested that the Securities and Exchange Commission and the
Regional Trial Court had previously ordered that the stockholders listed in the 1997 General
Information Sheet be used as basis for the 2000 and 2001 elections of PSI board of directors.
Lao, Chua Lian, Ong, and Henry Sy allegedly violated these orders when they used a different
list of stockholders during the elections held on March 15, 2002. Moreover, they had
purportedly previously issued 300% stock dividends to some stockholders without the
required approval of stockholders representing two-thirds (2/3) of the outstanding capital
stock of PSI.[29]
Finally, Yao Bio Lim and King assailed the transfer of the following shares of stocks without
the required prior notice to all stockholders, which allegedly deprived them of "the
opportunity to exercise their option to buy the shares" [30]:
NUMBER OF
SELLER TRANSFEREE
SHARES
Betty Lao/Lydia
David Lio 200 shares
Lao
Ong Giok KingLydia Lao/Sy Tian99 shares
Tin
William Chua 1 shares [sic]
Paul Chua [31]
Lian
On the other hand, petitioners claimed that the stockholders' meeting and the elections held
on March 15, 2002 were conducted in accordance with the PSI's by-laws and the Corporation
Code.[32]
On March 20, 2007, the trial court rendered its decision in favor of Yao Bio Lim and King. The
dispositive portion of this decision read:
IN VIEW OF THE FOREGOING, judgment is rendered in favor of [respondents] and against
[petitioners] as follows:
(a) Declaring the March 15, 2002 general stockholders' meeting and elections null and void
and the results thereof invalid;
(b) Declaring the issuance of 300% stock dividend[s] by [petitioners]/Philadelphia School, Inc.
in 199[7][33] null and void;
(c) Declaring the sale/transfer of shares of stocks of David Lao, Ong Giok King and William
Chua Lian illegal and void;
(d) Ordering [petitioners] to pay [respondents]: (i) PhP100,000.00 as temperate damages, (ii)
PhP50,000.00 as moral damages, (iii) PhP100,000 as reasonable attorney's fees and expenses
of litigation plus costs of suit.
All other claims are dismissed fort (sic) lack of factual/legal basis. [34]
The Court of Appeals affirmed the Regional Trial Court Decision. It held that there were valid
grounds to nullify the March 15, 2002 stockholders' meeting. First, the Notice of meeting did
not state the purpose of the stockholders' meeting as required by Article VIII (5) of PSI's by-
laws.[35] Additionally, it was not sent to the stockholders at least two (2) weeks prior to the
meeting as required under Section 50 of the Corporation Code. [36] Finally, petitioners used a
schedule of stockholders different from the list contained in the 1997 General Information
Sheet, contrary to previous orders of the Securities and Exchange Commission and of the
Regional Trial Court.[37]
The Court of Appeals further found that the issuance of 300% stock dividends was not
approved by stockholders representing two-thirds (2/3) of the outstanding capital stock in
violation of Section 43 of the Corporation Code.[38]
Petitioners filed a motion for reconsideration, which was likewise denied by the Court of
Appeals in its March 21, 2012 Resolution. [39]
Hence, this Petition was filed[40] anchored on the following grounds:
179
 I. [The Court of Appeals] seriously erred in concluding that the March 15, 2002
General Stockholders[‘] Meeting was a special meeting, despite th[e] fact that it
was a regular meeting which does not require that the notice of the meeting shall
state its object and purpose;
II. [The Court of Appeals] seriously erred in ruling that [the] notice of regular meetings
should be sent to all stockholders at least two (2) weeks prior to the meeting,
despite th[e] fact that the by-laws of [PSI] specifically provide that the notice should
be sent not less than five (5) days prior to the meeting;
III. [The Court of Appeals] seriously erred in ruling that. . . Yao Bio Lim was not properly
notified of the March 15, 2002 General Stockholders[‘] [Meeting] . . . because the
notice sent to him also included the name of his rather, Yao Check, despite the fact
that he actually received the notice and personally attended the meeting;
March 15, 2002 stockholders' meeting was sent to the stockholders at least five (5) days
before the meeting in compliance with the PSI's by-laws.
Respondents counter that the issue of whether or not the March 15, 2002 meeting was a
special meeting is a factual issue that is not proper in a Rule 45 petition. Furthermore, they
argue that petitioners are estopped from raising this issue for the first time on their appeal.
This Court finds for petitioners on this issue.
The rule that factual findings of the Court of Appeals are not reviewable by this Court is
subject to certain exceptions, such as when the inference made is manifestly mistaken [42] and
when the "findings of fact are conclusions without citation of specific evidence on which they
are based."[43]
Here, the Court of Appeals, in ruling that the Notice of the March 15, 2002 meeting sent to
the stockholders did not comply with the requirement set forth in Article VIII (5) of the PSI's
by-laws,[44] explained:

[T]he notice of meeting sent to the stockholders did not comply with the requirement set
IV. [The Court of Appeals] seriously erred in concluding that Philip King was a forth in Article VIII (5) of the [By-Laws] of Philadephia School, Inc., which expressly provides
stockholder of PSI in the year 2002 as the determination of the true ownership of that:
shares of stock left by the late Ong Y. Seng was then still pending before the
Regional Trial Court of Quezon City, Branch 93 (SEC Case No. 05-099-6297, Civil [5]. - NOTICE OF MEETINGS: Notice of the meetings, which shall be written or printed, for
Case No. Q-01-42972) V. [The Court of Appeals] seriously erred in ruling that the every regular or special meeting of the stockholders, shall be mailed or personally delivered
distribution in the year 2002 of the previously approved and declared 300% stock to each stockholder, at their respective addresses as they appear in the book of the
dividends in the year 1997 is invalid ... corporation, not less than five (5) days prior to the date set for such meeting; and in case of
special meeting the notice shall state the object and purpose of the same . . .

V. [The Court of Appeals] erred in ruling that petitioners defied a purported order of Clearly, in case of a special meeting, the corporate by-laws require that the notice shall state
the Securities and Exchange Commission ... the object and purpose for which the meeting is called. This, however, was transgressed as
there was no mention in the notice as to the purpose for calling the March 15, 2002
stockholders' meeting.[45] (Emphasis supplied)
VI. [The Court of Appeals] erred in ruling that petitioners should be ordered to pay
moral and temporary damages, attorney's fees, and litigation expenses in favor of The Court of Appeals sweepingly considered the March 15, 2002 stockholders' meeting as a
[respondents] ...[41] special meeting without discussing the factual bases for its conclusion.

The petition is denied.
I evidence by the adverse party. An exception to the rule that a party may not change his or
On the first and second assigned errors, petitioners contend that the Court of Appeals erred
in considering the March 15, 2002 stockholders' meeting as a special meeting. They aver that
the Court of Appeals erred in ruling that the meeting was not properly called due to the
Notice's failure to state the meeting's purpose and to meet the two (2)-week notice
requirement under Section 50 of the Corporation Code, They maintain that the Notice of the
Furthermore, although raised for the first time on appeal as respondents argued, this Court
resolves to pass on these issues as their resolution would not require presentation of further
her theory on appeal was recognized in Lianga Lumber Co. v. Lianga Timber Co., Inc.,
[46]
wherein this Court said:
[I]n the interest of justice arid within the sound discretion of the appellate court, a party may
change his legal theory on appeal only when the factual bases thereof would not require
presentation of any further evidence by the adverse party in order to enable it to properly
meet the issue raised in the new theory. [47]
180
In this case, the issues raised do not involve any disputed evidentiary matter.
A copy of the Notice dated March 4, 2002 for the March 15, 2002 stockholders' meeting that
was sent to respondents specifically stated:
March 4, 2002
NOTICE
TO: ALL STOCKHOLDERS:
This is to inform you that the annual Meeting of the Stockholders of Philadelphia School, Inc.
is scheduled on March 15, 2002 at 9:00 a.m. to be held at the school board room.
Any proxy should be presented to the Corporation at least three (3) days before the meeting
or on or before March 12, 2002.
[sgd.]
JEFFREY ONG
Corporate Secretary[48]
(Emphasis supplied)
Section 50 of Batas Pambansa Blg. 68 or the Corporation Code prescribes that "regular
meetings of stockholders or members shall be held annually on a date fixed in the by-laws."
Respondents do not dispute that Article VIII (3) of the PSI's by-laws fixed the annual meeting
of stockholders on the third Friday of March of every year. [49] This Court takes judicial notice
that March 15, 2002 was the third Friday of March 2002.
Furthermore, the agenda[50] for the meeting, which includes the elections of the new board of
directors and ratification of acts of the incumbent board of directors and management, was
the standard order of business in a regular annual meeting of stockholders of a corporation.
Thus, this Court holds that the March 15, 2002 annual stockholders' meeting was a regular
meeting. Hence, the requirement to state the object and purpose in case of a special meeting
as provided for in Article VIII (5) of the PSI’s by-laws does not apply to the Notice for the
March 15, 2002 annual stockholders' meeting.
Regarding the time for serving notice of the meeting to all the stockholders, Section 50 of
Batas Pambansa Blg. 68 reads in part:
Section 50. Regular and Special Meetings of Stockholders or Members. — Regular meetings of
stockholders or members shall be held annually on a date fixed in the by-laws, or if not so
fixed, on any date in April of every year as determined by the board of directors or
trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior to the meeting, unless a different period is
required by the by-laws. (Emphasis supplied)
Under PSI's by-laws, notice of every regular or special meeting must be mailed or personally
delivered to each stockholder not less than five (5) days prior to the date set for the meeting.
Article VIII (5) of PSI's by-laws expressly provides:
5. - NOTICE OF MEETINGS: Notice of the meetings, which shall be written or printed, for every
regular or special meeting of the stockholders, shall be mailed or personally delivered to each
stockholder, at their respective addresses as they appear in the book of the corporation, not
less than five (5) days prior to the date set for such meeting; and in case of special meeting
the notice shall state the object and purpose of the same. Provided, however, that any
irregularity either in calling the meeting or in serving notice shall not invalidate any act duly
voted upon in such meeting or any proceeding held thereafter, provided that all stockholders
are present at the meeting.[51] (Emphasis supplied)
In this case, the PSI's by-laws providing only for a five (5)-day prior notice must prevail over
the two (2)-week notice under the Corporation Code. By its express terms, the Corporation
Code allows "the shortening (or lengthening) of the period within which to send the notice to
call a special (or regular) meeting." [52] Thus, the mailing of the Notice to respondents on
March 5, 2002[53] calling for the annual stockholders' meeting to be held on March 15, 2002 is
not irregular, since it complies with what was stated in PSI's by-laws.
II
Despite the foregoing circumstances, there were other grounds to nullify the March 15, 2002
annual stockholders' meeting. As found by the Court of Appeals, petitioners did not recognize
respondents' rights as stockholders, making the proceedings and elections during the March
15, 2002 meeting void. The Court of Appeals discussed:
[D]uring the same meeting, [petitioners] made use of a schedule of stockholders which was
different from the list contained in the 1997 [General Information Sheet]. Obviously,
[petitioners] defied the previously issued Order of both the SEC and the RTC requiring the use
of the 1997 [General Information Sheet], it being the last, official and recorded submission by
the Philadelphia School in keeping with its reportorial requirement with the SEC. As disclosed
in the records, the 1997 [General Information Sheet] specified the stockholders of
Philadelphia School and their respective shareholdings. Since the composition in 1997
[General Information Sheet] was not changed up to the time the March 15, 2002 meeting was
called, the same should have been used as the basis for the schedule of stockholders and
their respective shareholdings relative to the election of its board of directors. By so defying
the Order of both the SEC and the RTC as regards the use of the 1997 [General Information
Sheet], [petitioners], in effect, refused to recognize [respondents'] shareholdings and their
right to vote, thus, rendering void all the acts done during the meeting, particularly the
holding of the election of the officers and the declaration and issuance of the 300% stock
dividend.[54]
181
The foregoing disquisitions of the Court of Appeals render untenable and irrelevant
petitioners' contention that King could not be considered a legitimate stockholder of PSI
during the stockholders' meeting in 2002. This is because the validity of Ong Y. Seng's transfer
of shares to his son was still at issue and King's ownership of PSI stocks was finally resolved by
this Court only on April 28, 2011.[55]
Petitioners also fault the Court of Appeals for not specifying which orders of the Securities
and Exchange Commission and of the Regional Trial Court they allegedly violated.
Respondents counter that had petitioners been mindful to search the records of the case,
they would have easily known that the Court of Appeals was referring to the following
Orders:
(1) the March 13, 2000 Order of the Securities and Exchange Commission issued relative
to SEC Case No. 05-99-6297, which recognized the 1997 General Information Sheet as
reference of stockholders' names to be used in any stockholders' meeting and elections for
the members of the board of directors of PSI; and
(2) the March 23, 2001 Order issued by Judge Apolinario Bruselas of Branch 93, Regional Trial
Court, Quezon City in Civil Case No. Q-01-42972, where he instructed that the 1997 General
Information Sheet be the basis for the schedule of stockholders and their respective
shareholdings. [56]
Nonetheless, petitioners harp on the self-serving nature of the 1997 General Information
Sheet, which they assert was prepared by Yao Bio Lim. Furthermore, they insist that the issue
of King's rightful ownership of the stocks was resolved with finality only on April 28, 2011.
This Court is not persuaded.
Petitioners cannot unilaterally disobey or disregard the Orders of the Securities and Exchange
Commission and of the Regional Trial Court despite their own views of the correctness or
propriety thereof. In Republic Commodities Corporation v. Oca,[57] the president and general
manager of Republic Commodities Corporation were held in contempt for their refusal to
comply with the order of the trial court, then Court of First Instance, to redeliver the seized
air-conditioning units to Salustiano Oca. This Court, in affirming the lower court, said:
The theory espoused by appellants that a party may, at his own choice, directly disobey a
court order which said party believes to be erroneous or beyond the court's authority is
fraught with serious consequences. This Court, speaking through Mr. Justice Enrique
Fernando, has had occasion to condemn a similar attitude in another case:
. . . The failure to abide by the orders and processes of judicial . . . agencies . . . gives, rise to a
serious concern. It engenders at the very least the well-founded suspicion that such an
attitude betrays an absence of good faith. It is indicative of a belief at war with all that
adjudication stands for.
No one may be permitted to take the law into his own hands. No one, much less the party
immediately concerned, should have the final say on the validity or lack of it of one's course
of conduct. Centuries of reliance on the judicial process repel such a notion ...
. . . Such refusal to accord due respect and yield obedience to what a court or administrative
tribunal ordains is fraught with much gravel [sic] consequences ... If such a conduct were not
condemned, some other group or groups emboldened by the absence of any reproof or
disapproval may conduct themselves similarly. The injury to the rule of law may well-nigh be
irreparable.
Law stands for order, for the peaceful and systematic adjustment of frictions and conflicts
unavoidable in a modern society with his complexities and clashing interests, The
instrumentality for such balancing or harmonization is the judiciary and other agencies
exercising quasi-judicial powers. When judicial or quasi-judicial tribunals speak, what they
decree must be obeyed; what they ordain must be followed. A party dissatisfied may ask for
reconsideration and, if denied, may go on to higher tribunal. As long as the orders stand
unmodified, however, they must, even if susceptible to well-founded doubts on jurisdictional
grounds, be faithfully complied with.[58]
While it may be true that SEC Case No. 05-99-6297 and Civil Case No. Q-01-42972 were finally
resolved only on April 28, 2011, the Orders mentioned in the Court of Appeals Decision were
issued before the March 15, 2002 annual stockholders' meeting. Hence, petitioners were
obliged to use the list of stockholders indicated in the 1997 General Information Sheet in
compliance with the Orders dated March 13, 2000 and March 23, 2001 issued by the
Securities and Exchange Commission and by the Regional Trial Court, respectively.
III
On the issue of the validity of the 300% stock dividends declaration, petitioners insist that the
300% stock dividends were validly declared by the PSI board of directors. They claim that
these were ratified by the stockholders owning two-thirds (2/3) of the outstanding capital
stock in the meeting held on March 22, 1997, although its distribution was implemented only
on February 28, 2002.[59]
The Court of Appeals rejected this stance. It held that the handwritten minutes of the March
22, 1997 meeting offered by petitioners as proof that the declaration and issuance of stock
dividends were valid was questionable because "it [did] not even indicate the number of
stock dividends to be declared."[60]
This Court agrees with the Court of Appeals.
The handwritten minutes of the March 22, 1997 stockholders' meeting recorded the
following:
182
Quorum established.
Ratified all acts and proceedings of the Board of Directors and Management
Declaration of stock dividends
Nomination and the election of same Board and Officers in the preceding years as new Board
Meeting adjourned. 1:05 P.M.[61] (Emphasis supplied)
Clearly, the foregoing minutes alone would be insufficient to prove petitioners' claim that the
300% stock dividends were approved by the board of directors and ratified by the
stockholders in the March 22, 1997 meeting. The minutes did not provide any other detail
that would convincingly show that the 300% stock, dividends distributed in 2002 were the
same stock dividends that were ratified by the stockholders in 1997.
Furthermore, while the minutes contain the names and signatures of stockholders who were
present at the meeting, the shares held by each were not indicated. On its face, the minutes
did not readily confirm how many shares were represented and voted at the meeting,
particularly on the stock dividends declaration.
This Court finds no reversible error on the part of the Court of Appeals in nullifying the 300%
stock dividends, a declaration on the basis of the following findings of the Regional Trial
Court:
[O]n the declaration, issuance and distribution of a three hundred percent (300%) stock
dividend by [petitioners] in favor of certain stockholders, the evidence shows that the action
or actions of the [petitioners] with respect to the 300% stock dividends was or were done
without the approval of. . . Yao Bio Lim, . . . Philip King and Lucia Cheng who own and/or are
entitled to vote one thousand nine hundred fifty (1,950) shares of stocks of the outstanding
capital stock of the School of 4,600 shares, or approximately forty-two percent (42%) of the
outstanding capital stock of the School. The act/s of the [petitioners] violated Section 43 of
the Corporation Code which provides that ". . . no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the capital stock[.]" [62]
Petitioners have not presented any cogent reason for this Court to set aside these findings.
Without respondents' and Lucia Cheng's approval, who held 42% of the outstanding capital
stock of PSI collectively, the required two-thirds (2/3) or 67% vote for stock dividends
declaration prescribed under Section 43[63] of the Corporation Code clearly could not have
been met.
They did this despite the previous Orders of the Securities and Exchange Commission and of
the Regional Trial Court; thus, depriving respondents of their property rights. The Court of
Appeals found that "the acts of the [petitioners] have caused mental anguish, serious anxiety
and social humiliation to [respondents]." [67]
Similarly, the award of attorney's fees and litigation expenses is proper because respondents
were compelled to litigate to protect or vindicate their stockholders' rights [68] against the
unlawful acts of the petitioners.
The Court of Appeals likewise correctly sustained the award of temperate damages.
Petitioners contest the award on the ground that respondents have not prayed for it. [69] While
this may be true, it is also true that respondents have prayed for actual damages in their
complaint.[70] Under the law, courts may award other kinds of damages in lieu of actual
damages:
Article 2224, Temperate or moderate damages, which are more than nominal but less than
compensatory damages, may be recovered when the court finds that some pecuniary loss
has been suffered but its amount cannot, from the nature of the case, be provided with
certainty. (Emphasis supplied)
In several cases,[71] this Court has sustained the award of temperate damages where the
amount of actual damages was not sufficiently proven.
Here, in sustaining the Regional Trial Court Decision, the Court of Appeals found that
respondents have suffered some pecuniary loss. [72] Petitioners' wrongful acts have prevented
respondents from exercising their rights as legitimate stockholders of the corporation. Under
the circumstances of this case, this Court, finds the amount of P100,000.00 awarded by the
lower court to be fair and reasonable.
WHEREFORE, the petition is DENIED.
SO ORDERED.

IV

Finally, this Court finds no reason to reverse the award of damages. The award of moral
damages finds legal basis in Articles 2217 [64] and 2220[65] of the New Civil Code, which allow
recovery of moral damages in case of willful injury to property. A stockholder's right to vote is
inherent in and incidental to the ownership of a capital stock. [66] Here, petitioners unjustifiably
and obstinately refused to recognize respondents' shareholdings in PSI and to allow them to
participate in the 2002 stockholders' meeting and elections of the corporation's directors.
183
[ G.R. No. 185894, August 30, 2017 ]
BELO MEDICAL GROUP, INC., PETITIONER, VS. JOSE L. SANTOS AND VICTORIA G. BELO,
RESPONDENTS.
DECISION
LEONEN, J.:
A conflict between two (2) stockholders of a corporation does not automatically render their
dispute as intra-corporate. The nature of the controversy must also be examined. [1]
In this Petition for Review on Certiorari [2] under Rule 45 of the Rules of Court, Belo Medical
Group, Inc. (Belo Medical Group) assails the Regional Trial Court December 8, 2008 Joint
Resolution in Civil Case No. 08-397.[3] This Joint Resolution granted respondent Jose L. Santos'
(Santos) Motion to Dismiss and Belo Medical Group's Complaint for interpleader and
Supplemental Complaint for Declaratory Relief against Santos and Victoria G. Belo (Belo), and
declared all other pending incidents as moot. [4]
The controversy began on May 5, 2008 [5] when Belo Medical Group received a request from
Santos for the inspection of corporate records. [6] Santos claimed that he was a registered
shareholder and a co-owner of Belo's shares, as these were acquired while they cohabited as
husband and wife.[7] Santos sought advice on his probable removal as director of the
corporation considering that he was not notified of meetings where he could have been
removed. He also inquired on the election of Alfredo Henares (Henares) as Corporate
Secretary in 2007 when Santos had not been notified of a meeting for Henares' possible
election. Finally, he sought explanation on the corporation's failure to inform him of the 2007
annual meeting and the holding of an annual meeting in 2008. [8] Santos' concern over the
corporate operations arose from the alleged death of a patient in one (1) of its clinics. [9]
Santos was unsuccessful in inspecting the corporate books as Henares, the officer-in-charge
of corporate records, was travelling. Belo Medical Group asked for time in order for Henares
to accommodate Santos' request.[10]
After the first attempt to inspect, Belo wrote Belo Medical Group on May 14, 2007 to
repudiate Santos' co-ownership of her shares and his interest in the corporation. She claimed
that Santos held the 25 shares in his name merely in trust for her, as she, and not Santos, paid
for these shares. She informed Belo Medical Group that Santos already had a pending
petition with the Regional Trial Court to be declared as co-owner of her properties. She
asserted that unless a decision was rendered in Santos' favor, he could not exercise
ownership rights over her properties. [11]
Belo also informed Belo Medical Group that Santos had a business in direct competition with
it. She suspected that Santos' request to inspect the records of Belo Medical Group was a
means to obtain a competitor's business information, and was, therefore, in bad faith. [12]
A second inspection was attempted through a written demand by Santos on May 15, 2008.
[13]
Again, he was unsuccessful.
Belo wrote to Belo Medical Group on May 20, 2008 to reiterate her objections to Santos'
attempts at inspecting corporate books and his inquiry regarding a patient. Belo further
manifested that she was exercising her right as a shareholder to inspect the books herself to
establish that the 25 shares were not owned by Santos, and that he did not pay for these
shares.[14]
Thus, Belo Medical Group filed a Complaint for Interpleader [15] with Branch 149, Regional Trial
Court, Makati City on May 21, 2008. Belo Medical Group alleged that while Santos appeared
to be a registered stockholder, there was nothing on the record to show that he had paid for
the shares under his name. The Complaint was filed "to protect its interest and compel [Belo
and Santos] to interplead and litigate their conflicting claims of ownership of, as well as the
corresponding right of inspection arising from, the twenty-five (25) [Belo Medical Group]
shares between themselves pursuant to Rule 62 of the 1997 Rules of Civil
Procedure . . ."[16] The following reliefs were prayed for:
(i) issue an Order summoning and requiring defendants Santos and Belo to interplead with
each other to resolve their conflicting claims of ownership of the 25 shares of stock of [Belo
Medical Group], including their opposing claims of exclusive entitlement to inspect [Belo
Medical Group] corporate records;
(ii) after due proceedings render judgment in favor of the proper defendant; and
(iii) allow plaintiff [Belo Medical Group] to recover attorney's fees and litigation expenses in
the amount of at least Php1,000,000.00 jointly and solidarity against both defendants and for
them to pay the costs of suit.[17]
On the same day, Henares wrote Belo's and Santos' respective counsels to inform them of the
Complaint.[18] Despite receipt, Santos' counsel still proceeded to Belo Medical Group's Makati
office on May 22, 2008, where, again, they were unsuccessful in inspecting the corporate
books.[19]
Santos, for the third time, sent a letter on May 22, 2008 to schedule an inspection of the
corporate books and warned that continued rejection of his request exposed the corporation
to criminal liability.[20] Nothing came out of this last attempt as well.
Bela and Bela Medical Group wrote to Santos on May 27, 2008 to inform him that he was
184
barred from accessing corporate records because doing so would be inimical to Belo Medical an intra-corporate controversy. It argued that the Interim Rules of Procedure Governing Intra-
Group's interests.[21] Through another letter on May 28, 2008, Santos was reminded of his Corporate Controversies[35] did not include special civil actions for interpleader and
majority share in The Obagi Skin Health, Inc. the owner and operator of the House of Obagi declaratory relief found under the Rules of Court. Belo Medical Group clarified that the issue
(House of Obagi) clinics. He was likewise reminded of the service of a notice of the 2007 on ownership of the shares of stock must first be resolved before the issue on inspection
special meeting of stockholders to his address at Valero Street, Makati City, contrary to his could even be considered ripe for determination. [36]
claim.[22]
Belo Medical Group later on moved that Santos be declared in default. [37] Instead of filing an
[23]
On May 29, 2008, Belo Medical Group filed a Supplemental Complaint for declaratory relief answer Santos filed a Motion to Dismiss.[38]
under Rule 63 of the Rules of Court. In its Supplemental Complaint, Belo Medical Group relied
on Section 74[24] of the Corporation Code to deny Santos' request for inspection. It prayed Apart from procedural infirmities, Santos argued that Belo Medical Group's Complaint and
that Santos be perpetually barred from inspecting its books due to his business interest in a Supplemental Complaint must be dismissed "for its failure to state, and ultimately, lack of, a
competitor.[25] Should the ruling for interpleader be in favor of Santos, Belo Medical Group cause of action."[39] No ultimate facts were given to establish the act or omission of Santos
prayed that the trial court: and Belo that violated Belo Medical Group's rights. There was simply no conflict on the
ownership of the 25 shares of stock under Santos' name. Based on the corporation's 2007
Articles of Incorporation and General Information Sheet, Santos was reflected as a
a. exercise its power under Rule 63 of the Revised Rules of Civil Procedure and give a proper stockholder and owner of the 25 shares of stock. No documentary evidence was submitted to
construction of Sections 74 and 75 of the Corporation Code in relation to the facts presented prove that Belo owned these shares and merely transferred them to Santos as nominal
above, and declare that plaintiff can rightfully decline defendant Santos's request for shares.[40]
inspection under those sections and related provisions and jurisprudence; and
Santos further argued that the filing of the complaints was an afterthought to take attention
b. allow plaintiff to recover attorney's fees and litigation expenses from defendant Santos in away from Belo Medical Group's criminal liability when it refused Santos' demand to inspect
the amount of at least PHP1,000,000.00 and the costs of suit. [26] the records of the corporation. For years, neither Belo Medica1 Group nor Belo questioned
Santos' standing in the corporation. No change in ownership from Santos to another person
Belo Medical Group's Complaint and Supplemental Complaint were raffled to Branch 149 of
was reflected in the company's General Information Sheet. [41]
the Regional Trial Court of Makati, a special commercial court, [27] thus classifying them as
intra-corporate.[28]
Santos also invoked the doctrine of piercing the corporate veil as Belo owned 90% of Belo
Medical Group. Her claim over the 25 shares was a ploy to defeat Santos' right to inspect
Belo filed her Answer Ad Cautelam with Cross-Claim to put on record her defenses that
corporate records. He asserts that the Complaint for interpleader was an anticipatory move
Santos had no right to inspect the books as he was not the owner of the 25 shares of stock in
by the company to evade criminal liability upon its denial of Santos' requests. [42]
his name and that he was acting in bad faith because he was a majority owner of House of
Obagi.[29]
In addition, Santos argued that a prerequisite to filing these cases is that the plaintiff has not
yet incurred liability to any of the parties. Since Belo Medical Group had already incurred
Belo further argued that the proceedings should not have been classified as intra-corporate
criminal liability, it could no longer file a complaint for interpleader or declaratory relief. [43]
because while their right of inspection as shareholders may be considered intra-corporate, "it
ceases to be that and becomes a full-blown civil law question if competing rights of
Santos denied any conflict of interest because Belo Medical Group's products and services
ownership are asserted as the basis for the right of inspection." [30]
differed from House of Obagi's [44] Belo Medical Group's primary purpose was the
management and operation of skin clinics [45] while the House of Obagi's main purpose was
Meanwhile, on several dates, the trial court sheriff attempted to personally serve Santos with
the sale and distribution of high-end facial products. [46]
summons.[31] After unsuccessful attempts,[32] the sheriff resorted to substituted service in
Santos' Makati office condominium unit. [33]
On October 29, 2008, Belo Medical Group filed its Opposition [47] and argued that the Motion
to Dismiss was a prohibited pleading under Section 8 of the Interim Rules of Procedure
On July 4, 2008, Belo Medical Group filed an Omnibus Motion for Clarificatory Hearing and
Governing Intra-Corporate Controversies.
for Leave to File Consolidated Reply,[34] praying that the case be tried as a civil case and not as
185
 now defendant Belo who is the registered stockholder thereof. In fact, the complaint even
Belo Medical Group reiterated that Belo and Santos must litigate against each other to alleges that defendant Santos holds the 25 BMGI shares merely as nominal qualifying shares
determine who rightfully owned the 25 shares. An accommodation of one of them, absent a in trust for defendant Belo. Thus, the complaint failed to state a cause of action that would
resolution to this issue, would make Belo Medical Group liable to the other. [48] warrant the resort to an action for interpleader. [61]

On its supposed criminal liability when it refused Santos access to corporate records, Belo Though a motion to dismiss is a prohibited pleading under the Interim Rules of Procedure
Medical Group explained that the independent liability necessary to defeat complaints for Governing Intra-Corporate Controversies, the trial court ruled that Section 2, Rule 1 of these
interpleader arose from a final judgment and not merely a cause of action that has accrued. rules allowed for the Rules of Court to apply suppletorily. According to the Rules of Court,
[49] motions to dismiss are allowed in interpleader cases. [62]

Finally, Belo Medical Group averred that substantiation must be done during trial. The Finally, the Complaint for Declaratory Relief was struck down as improper because it sought
dismissal of the case would be premature. [50] an initial determination on whether Santos was in bad faith and if he should be barred from
inspecting the books of the corporation. Only after resolving these issues can the trial court
Belo's Opposition dated October 29, 2008 raised the same arguments of Belo Medical Group. determine his rights under Sections 74 and 75 of the Corporation Code. The act of resolving
[51] these issues is not within the province of the special civil action as declaratory relief is limited
to the construction and declaration of actual rights and does not include the determination of
Santos filed his Reply to the Oppositions on November 18, 2008. [52] He agreed that the issues.[63]
controversy was not intra-corporate but civil in nature, as it involved ownership. [53] However,
he stood firm on his arguments that the case should be dismissed due to the Complaints' From the Joint Resolution, Belo and Belo Medical Group pursued different remedies.
failure to state a cause of action [54] and the trial court's failure to acquire jurisdiction over his
person.[55] Belo filed her Petition for Review before the Court of Appeals docketed as CA G.R. No. 08-
397.[64]
On December 8, 2008, the assailed Joint Resolution [56] was issued by the trial court resolving
the following incidents: Belo Medical Group's Omnibus Motion for Clarificatory Hearing and Belo Medical Group, on the other hand, directly filed its Petition for Review with this Court,
for Leave to File Consolidated Reply and Motion to Declare Santos in Default, and Santos' alleging that purely questions of law are at issue.
Motion to Dismiss. The trial court declared the case as an intra-corporate controversy but
dismissed the Complaints.[57] Belo Medical Group argues that it is enough that there are two (2) people who have adverse
claims against each other and who are in positions to make effective claims for interpleader
The trial court characterized the dispute as "intrinsically connected with the regulation of the to be given due course.[65] Belo Medical Group cites Lim v. Continental Development
corporation as it involves the right of inspection of corporate records." [58] Included in Santos Corporation,[66] which allowed a complaint for interpleader to continue because two (2)
and Belo's conflict was a shareholder's exclusive right to inspect corporate records. In parties claimed ownership over the same shares of stock. [67]
addition, the issue on the ownership of shares requires the application of laws and principles
regarding corporations.[59] On January 30, 2009, Belo Medical Group filed a Manifestation/Disclosure [68] informing this
Court that on January 28, 2009, it received Belo's Petition for Review filed before the Court of
However, the Complaint could not flourish as Belo Medical Group "failed to sufficiently allege Appeals. On February 4, 2009, this Court also received Belo's Manifestation [69] that she filed a
conflicting claims of ownership over the subject shares." [60] In justifying failure to state a cause Petition for Review before the Court of Appeals, assailing the Joint Resolution primarily
of action, the trial court reasoned: because it dismissed her counterclaims. She also furnished this Court a copy of her
Manifestation filed with the Court of Appeals to inform it of Belo Medical Group's Petition for
Review before this Court.[70]
Plaintiff clearly admits in the complaint that defendant Santos is the registered stockholder of
the subject shares albeit no records show that he made any payments thereof. Also, On April 15, 2009, Belo filed her Comment [71] and manifested that she agrees with the
notwithstanding defendant Belo's claim that she is the true owner thereof, there was no arguments raised by Belo Medical Group.
allegation that defendant Santos is no longer the holder on record of the same or that it is
186
On April 28, 2009, Santos filed his Comment. [72] He argues that the Petition filed by Belo same reliefs and in the process creates the possibility of conflicting decisions being rendered
Medical Group should be dismissed as the wrong mode of appeal. It should have filed an by the different fora upon the same issues. [80]
appeal under Rule 43, pursuant to the Interim Rules on Intra-Corporate Disputes. [73] He
alleges that Belo Medical Group committed forum shopping. It filed the present Petition for Rule 7, Section 5 of the Rules of Court contains the rule against forum shopping:
Review after Belo had already filed an appeal under Rule 43 before the Court of Appeals. He
asserts that Belo and Belo Medical Group have the san1e interest. Belo, owner of 90% of the Section 5. Certification against forum shopping. - The plaintiff or principal party shall certify
shares of stock of the corporation, dictates Belo Medical Group's actions, which were under oath in the complaint or other initiatory pleading asserting a claim for relief, or in a
ultimately for Belo's benefit and interests. [74] sworn certification annexed thereto and simultaneously filed therewith: (a) that he has not
theretofore commenced any action or filed any claim involving the same issues in any court,
Meanwhile, on July 31, 2009, the Court of Appeals dismissed Belo's Petition for Review and tribunal or quasi-judicial agency and, to the best of his knowledge, no such other action or
ruled that the pending case before this Court was the more appropriate vehicle to determine claim is pending therein; (b) if there is such other per ding action or claim, a complete
the issues.[75] statement of the present status thereof; and (c) if he should thereafter learn that the same or
similar action or claim has been filed or is pending, he shall report that fact within five (5)
The issues for this Court's resolution are as follows: days therefrom to the court wherein his aforesaid complaint or initiatory pleading has been
filed.
First, whether or not Belo Medical Group, Inc. committed forum shopping;
Failure to comply with the foregoing requirements shall not be curable by mere amendment
Second, whether or not the present controversy is intra-corporate; Third, whether or not Belo of the complaint or other initiatory pleading but shall be cause for the dismissal of the case
Medical Group, Inc. came to this Court using the correct mode of appeal; and without prejudice; unless otherwise provided, upon motion and after hearing. The
submission of a false certification or non-compliance with any of the undertakings therein
Finally, whether or not the trial court had basis in dismissing Belo Medica] Group, Inc.'s shall constitute indirect contempt of court, without prejudice to the corresponding
Complaint for Declaratory Relief. administrative and criminal actions. If the acts of the party or his counsel clearly constitute
willful and deliberate forum shopping, the same shall be ground for summary dismissal with
prejudice and shall constitute direct contempt, as well as a cause for administrative sanctions.

I When willful and deliberate violation is clearly shown, it can be a ground for all pending
cases' summary dismissal with prejudice [81] and direct contempt [82]

Neither Belo nor the Belo Medical Group is guilty of forum shopping.
Belo Medical Group filed its Petition for Review on Certiorari under Rule 45 before this Court
to appeal against the Joint Resolution of the trial court. It did not file any other petition
Forum shopping exists when parties seek multiple judicial remedies simultaneously or
related to the case, as indicated in it verification and certification against forum shopping. It
successively, involving the same causes of action, facts, circumstances, and transactions, in
was Belo, a defendant in Belo Medical Groups Complaint, who filed a separate appeal under
the hopes of obtaining a favorable decision. [76] It may be accomplished by a party defeated in
Rule 43 with the Court of Appeals primarily to protect her counterclaims. Belo and Belo
one forum, in an attempt to obtain a favorable outcome in another, "other than by appeal or
Medical Group both filed their respective Petitions for Review on January 28, 2009, the lat
a special civil action for certiorari."[77]
day within the period allowed to do so. [83] The Court of Appeals already ruled that litis
pendencia was present when Belo and Belo Medical Group filed their respective petitions on
Forum shopping trivializes rulings of courts, abuses their processes, cheapens the
the same date before different fora. The two petitions involved the same parties, rights and
administration of justice, and clogs court dockets. [78] In Top Rate Construction & General
reliefs sought, and causes of action. [84] This is a decision this Court can no longer disturb.
Services, Inc. v. Paxton Development Corporation:[79]
Neither Belo Medical Group nor Belo can be faulted for willful and deliberate violation of the
rule against forum shopping. Their prompt compliance of the certification against forum
What is critical is the vexation brought upon the courts and the litigants by a party who asks
shopping appended to their Petitions negates willful and deliberate intent.
different courts to rule on the same or related causes and grant the same or substantially the

187
 4. Derivative suits; and
Belo Medical Group was not remiss in its duty to inform this Court of a similar action or
proceeding related to its Petition. It promptly manifested before this Court its receipt of
Belo's Petition before the Court of Appeals. Belo Medical Group and Belo manifested before 5. Inspection of corporate books.[87]
this Court that Belo filed a Rule 43 petition to protect her counterclaims and to question the The same rules prohibit the filing of a motion to dismiss:
same Joint Resolution issued by the trial court. Both did so within five (5) days from discovery,
as they undertook in their respective certificates against forum shopping.
Section 8. Prohibited Pleadings. -The following pleadings are prohibited: (1) Motion to
The issue of forum shopping has become moot. The appeal under Rule 43 filed by Belo has dismiss;
been dismissed by the Court of Appeals on the ground of litis pendencia.[85] The purpose of
proscribing forum shopping is the proliferation of contradictory decisions on the same (2) Motion for a bill of particulars;
controversy.[86] This possibility no longer exists in this case.
(3) Motion for new trial or for reconsideration of judgment or order, or for reopening of trial;

(4) Motion for extension of time to file pleadings, affidavits or any other paper, except those
II filed due to clearly compelling reasons. Such motion must be verified and under oath; and

(5) Motion for postponement and other motions of similar intent, except those filed due to
Belo Medical Group filed a case for interpleader, the proceedings of which are covered by the
clearly compelling reasons. Such motion must be verified and under oath.
Rules of Court. At its core, however, it is an intra-corporate controversy.
To determine whether an intra-corporate dispute exists and whether this case requires the
A.M. No. 01-2-04-SC, or the Interim Rules of Procedure Governing Intra-Corporate application of these rules of procedure, this Court evaluated the relationship of the parties.
Controversies, enumerates the cases where the rules will apply: The types of intra-corporate relationships were reviewed in Union Glass & Container
Corporation v. Securities and Exchange Commission:[88]

Section 1. (a) Cases Covered - These Rules shall govern the procedure to be observed in civil
cases involving the following: [a] between the corporation, partnership or association and the public; [b] between the
corporation, partnership or association and its stockholders, partners, members, or officers;
[c] between the corporation, partnership or association and the state in so far as its franchise,
1. Devices or schemes employed by, or any act of, the board of directors, business
permit or license to operate is concerned; and [d] among the stockholders, partners or
associates, officers or partners, amounting to fraud or misrepresentation which may
associates themselves.[89]
be detrimental to the interest of the public and/or of the stockholders, partners, or
members of any corporation, partnership, or association; For as long as any of these intra-corporate relationships exist between the parties, the
controversy would be characterized as intra-corporate. [90] This is known as the "relationship
test."
2. Controversies arising out of intra-corporate, partnership, or association relations,
between and among stockholders, members, or associates; and between, any or all
DMRC Enterprises v. Este del Sol Mountain Reserve, Inc. [91] employed what would later be
of them and the corporation, partnership, or association of which they are
called as the "nature of controversy test." It became another means to determine if the
stockholders, members, or associates, respectively;
dispute should be considered as intra-corporate.

3. Controversies in the election or appointment of directors, trustees, officers, or In DMRC Enterprises, Este del Sol leased equipment from DMRC Enterprises. Part of Este del
managers of corporations, partnerships, or associations; Sol's payment was shares of stock in the company. When Este del Sol defaulted, DMRC
Enterprises filed a collection case before the Regional Trial Court. Este del Sol argued that it

188
should have been filed before the Securities and Exchange Commission as it involved an intra-
corporate dispute where a corporation was being compelled to issue its shares of stock to
subscribers. This Court held that it was not just the relationship of the parties that mattered
but also the conflict between them:
The purpose and the wording of the law escapes the respondent. Nowhere in said decree do
we find even so much as an intimidation that absolute jurisdiction and control is vested in the
Securities and Exchange Commission in all matters affecting corporations. To uphold the
respondent's argument would remove without legal imprimatur from the regular courts all
conflicts over matters involving or affecting corporations, regardless of the nature of the
transactions which give rise to such disputes. The courts would then be divested of
jurisdiction not by reason of the nature of the dispute submitted to them for adjudication,
but solely for the reason that the dispute involves a corporation. This cannot be done. To do
so would not only be to encroach on the legislative prerogative to grant and revoke
jurisdiction of the courts but such a sweeping interpretation may suffer constitutional
infirmity. Neither can we reduce jurisdiction of the courts by judicial fiat (Article X, Section 1,
The Constitution).[92]
This Court now uses both the relationship test and the nature of the controversy test to
determine if an intra-corporate controversy is present. [93]
Applying the relationship test, this Court notes that both Belo and Santos are named
shareholders in Belo Medical Group's Articles of Incorporation [94] and General Information
Sheet for 2007.[95] The conflict is clearly intra-corporate as it involves two (2) shareholders
although the ownership of stocks of one stockholder is questioned. Unless Santos is adjudged
as a stranger to the corporation because he holds his shares only in trust for Belo, then both
he and Belo, based on official records, are stockholders of the corporation. Belo Medical
Group argues that the case should not have been characterized as intra-corporate because it
is not between two shareholders as only Santos or Belo can be the rightful stockholder of the
25 shares of stock. This may be true. But this finding can only be made after trial where
ownership of the shares of stock is decided.
The trial court cannot classify the case based on potentialities. The two defendants in that
case are both stockholders on record. They continue to be stockholders until a decision is
rendered on the true ownership of the 25 shares of stock in Santos' name. If Santos'
subscription is declared fictitious and he still insists on inspecting corporate books and
exercising rights incidental to being a stockholder, then, and only then, shall the case cease to
be intra-corporate.
Applying the nature of the controversy test, this is still an intra-corporate dispute. The
Complaint for interpleader seeks a determination of the true owner of the shares of stock
registered in Santos' name. Ultimately, however, the goal is to stop Santos from inspecting
corporate books. This goal is so apparent that, even if Santos is declared the true owner of
the shares of stock upon completion of the interpleader case, Belo Medical Group still seeks
his disqualification from inspecting the corporate books based on bad faith. Therefore, the
controversy shifts from a mere question of ownership over movable property to the exercise
of a registered stockholder's proprietary right to inspect corporate books.
Belo Medical Group argues that to include inspection of corporate books to the controversy is
premature considering that there is still no determination as to who, between Belo and
Santos, is the rightful owner of the 25 shares of stock. Its actions belie its arguments. Belo
Medical Group wants the trial court not to prematurely characterize the dispute as intra-
corporate when, in the same breath, it prospectively seeks Santos' perpetual disqualification
from inspecting its books. This case was never about putting into light the ownership of the
shares of stock in Santos' name. If that was a concern at all, it was merely secondary. The
primary aim of Belo and Belo Medical Group was to defeat his right to inspect the corporate
books, as can be seen by the filing of a Supplemental Complaint for declaratory relief.
The circumstances of the case and the aims of the parties must not be taken in isolation from
one another. The totality of the controversy must be taken into account to improve upon the
existing tests. This Court notes that Belo Medical Group used its Complaint for interpleader as
a subterfuge in order to stop Santos, a registered stockholder, from exercising his right to
inspect corporate books.
Belo made no claims to Santos' shares before he attempted to inspect corporate books, and
inquired about the Henares' election as corporate secretary and the conduct of stockholders'
meetings. Even as she claimed Santos' shares as hers, Belo proffered no initial proof that she
had paid for these shares. She failed to produce any document except her bare allegation that
she had done so. Even her Answer Ad Cautelam with Cross-Claim[96] contained bare
allegations of ownership.
According to its Complaint, although Belo Medical Group's records reflect Santos as the
registered stockholder of the 25 shares, they did not show that Santos had made payments to
Belo Medical Group for these shares, "consistent with Bela's claim of ownership over
them."[97] The absence of any document to establish that Santos had paid for his shares does
not bolster Belo's claim of ownership of the same shares. Santos remains a stockholder on
record until the contrary is shown.
Belo Medical Group cites Lim v. Continental Development Corporation [98] as its basis for filing
its Complaint for interpleader. In Lim, Benito Gervasio Tan (Tan) appeared as a stockholder of
Continental Development Corporation. He repeatedly requested the corporation to issue
certificates of shares of stock in his name but Continental Development Corporation could
not do this due to the claims of Zoila Co Lim (Lim). Lim alleged that her mother, So Bi, was the
actual owner of the shares that were already registered in the corporate books as Lim's, and
189
she delivered these in trust to Lim before she died. Lim wanted to have the certificates of . . . that there be two or more claimants to the fund or thing in dispute through separate and
shares cancelled and new ones re-issued in his name. This Court ruled that Continental different interests. The claims must be adverse before relief can be granted and the parties
Development Corporation was correct in filing a case for interpleader: sought to be interpleaded must be in a position to make effective claims (33 C.J. 430).

Additionally, the fund thing, or duty over which the parties assert adverse claims must be one
Since there is an active conflict of interests between the two defendants, now herein and the same and derived from the same source (33 C.J., 328; Martin, Rules of Court, 1969
respondent Benito Gervasio Tan and petitioner Zoila Co Lim, over the disputed shares of ed., Vol. 3, 133-134; Moran, Rules of Court, 1970 ed., Vol. 3, 134-136).
stock, the trial court gravely abused its discretion in dismissing the complaint for interpleader,
which practically decided ownership of the shares of stock in favor of defendant Benito Indeed, petitioner corporation is placed in the same situation as a lessee who does not know
Gervasio Tan. The two defendants, now respondents in G.R. No. L-41831, should be given full the person to whom he will pay the rentals due to the conflicting claims over t[h]e property
opportunity to litigate their respective claims. leased, or a sheriff who finds himself puzzled by conflicting claims to a property seized by
him. In these examples, the lessee (Pangkalinawan vs. Rodas, 80 Phil. 28) and the sheriff (Sy-
Rule 63, Section 1 of the New Rules of Court tells us when a cause of action exists to support Quia vs. Sheriff, 46 Phil. 400) were each allowed to file a complaint in interpleader to
a complaint in interpleader: determine the respective rights of the claimants. [99]

In Lim, the corporation was presented certificates of shares of stock in So Bi's name. This
Whenever conflicting claims upon the same subject matter are or may be made against a proof was sufficient for Continental Development Corporation to reasonably conclude that
person, who claims no interest whatever in the subject matter, or an interest which in whole controversy on ownership of the shares of stock existed.
or in part is not disputed by the claimants, he may bring an action against the conflicting
claimants to compel them to interplead and litigate their several claims among Furthermore, the controversy in Lim was between a registered stockholder in the books of
themselves . . . the corporation and a stranger who claimed to be the rightful transferee of the shares of
stock of her mother. The relationship of the parties and the circumstances of the case
This provision only requires as an indispensable requisite: establish the civil nature of the controversy, which was plainly, ownership of shares of stock.
Interpleader was not filed to evade or defeat a registered stockholder's right to inspect
corporate books. It was borne by the sincere desire of a corporation, not interested in the
that conflicting claims upon the same subject matter are or may be made against the plaintiff-
certificates of stock to be issued to either claimant, to eliminate its liability should it favor one
in-interpleader who claims no interest whatever in the subject matter or an interest which in
over the other.
whole or in part is not disputed by the claimants (Beltran vs. People's Homesite and Housing
Corporation, No. L-25138, 29 SCRA 145).
On the other hand, based on the facts of this case and applying the relationship and nature of
This ruling, penned by Mr. Justice Teehankee, reiterated the principle in Alvarez vs. the controversy tests, it was understandable how the trial court could classify the
Commonwealth (65 Phil. 302), that interpleader case as intra-corporate and dismiss it. There was no ostensible debate on the
ownership of the shares that called for an interpleader case. The issues and remedies sought
have been muddled when, ultimately, at the front and center of the controversy is a
The action of interpleader, under section 120, is a remedy whereby a person who has registered stockholder's right to inspect corporate books.
personal property in his possession. or an obligation to render wholly or partially, without
claiming any right in both comes to court and asks that the persons who claim the said As an intra-corporate dispute, Santos should not have been allowed to file a Motion to
personal property or who consider themselves entitled to demand compliance with the Dismiss.[100] The trial court should have continued on with the case as an intra-corporate
obligation. be required to litigate among themselves, in order to determine finally who is dispute considering that it called for the judgments on the relationship between a
entitled to one or the other thing. The remedy is afforded not to protect a person against a corporation and its two warring stockholders and the relationship of these two stockholders
double liability but to protect him against a double vexation in respect of one liability. with each other.

An interpleader merely demands as a sine qua non element

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III

Rule 45 is the wrong mode of appeal. IV

A.M. No. 04-9-07-SC promulgated by this Court En Banc on September 14, 2004 laid down
the rules on modes of appeal m cases formerly cognizable by the Securities and Exchange
Commission:
1. All decisions and final orders in cases falling under the Interim Rules of Corporate
Rehabilitation and the Interim Rules of Procedure Governing Intra-Corporate Controversies
under Republic Act No. 8799 shall be appealable to the Court of Appeals through a petition
for review under Rule 43 of the Rules of Court.
2. The petition for review shall be taken within fifteen (15) days from notice of the decision or
final order of the Regional Trial Court. Upon proper motion and the payment of the full
amount of the legal fee prescribed in Rule 141 as amended before the expiration of the
reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days
within which to file the petition for review. No further extension shall be granted except for
the most compelling reasons and in no case to exceed fifteen (15) days.
On the other hand, Rule 43 of the Rules of Court allows for appeals to the Court of Appeals to
raise questions of fact, of law, or a mix of both. Hence, a party assailing a decision or a final
order of the trial court acting as a special commercial court, purely on questions of law, must
raise these issues before the Court of Appeals through a petition for review. [101] A.M. No. 04-
9-07-SC mandates it. Rule 43 allows it.
Belo Medical Group argues that since it raises only questions of law, the proper mode of
appeal is Rule 45 filed directly to this Court. This is correct assuming there were no rules
specific to intra-corporate disputes. Considering that the controversy was still classified as
intra-corporate upon filing of appeal, special rules, over general ones, must apply.
Based on the policy of judicial economy and for practical considerations, [102] this Court will not
dismiss the case despite the wrong mode of appeal utilized. For one, it would be taxing in
time and resources not just for Belo Medical Group but also for Santos and Belo to dismiss
this case and have them refile their petitions for review before the Court of Appeals. There
would be no benefit to any of the parties to dismiss the case especially since the issues can
already be resolved based n the records before this Court. Also, the Court of Appeals already
referred the matter to this Court when it dismissed Belo's Petition for Review. Remanding this
case to the Court of Appeals would not only be unprecedented, it would further delay its
resolution.
At the outset, this Court notes that two cases were filed by Belo Medical Group: the
Complaint for interpleader and the Supplemental Complaint for Declaratory Relief. Under
Rule 2, Section 5 of the Rules of Court, a joinder of cause of action is allowed, provided that it
follows the conditions enumerated below:
Section 5. Joinder of Causes of Action. A party may in one pleading assert, in the alternative
or otherwise, as many causes of action as he may have against an opposing party, subject to
the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties;
(b) The joinder shall not include special civil actions or actions governed by special rules;
(c) Where the causes of action are between the same parties but pertain to different venues
or jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the
causes of action falls within the jurisdiction of said court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of money, the
aggregate amount claimed shall be the test of jurisdiction. (Emphasis supplied)
Assuming this case continues on as an interpleader, it cannot be joined with the
Supplemental Complaint for declaratory relief as both are special civil actions. However, as
the case was classified and will continue as an intra-corporate dispute, the simultaneous
complaint for declaratory relief becomes superfluous. The right of Santos to inspect the
books of Belo Medical Group and the appreciation for his motives to do so will necessarily be
determined by the trial court together with determining the ownership of the shares of stock
under Santos' name.
The trial court may make a declaration first on who owns the shares of stock and suspend its
ruling on whether Santos should be allowed to inspect corporate records. Or, it may rule on
whether Santos has the right to inspect corporate books in the meantime while there has yet
to be a resolution on the ownership of shares. Remedies are available to Belo Medical Group
and Belo at any stage of the proceeding, should they carry on in prohibiting Santos from
inspecting the corporate books.
WHEREFORE, the Petition for Review of Belo Medical Group, Inc. is PARTIALLY GRANTED. The
December 8, 2008 Joint Resolution of Branch 149, Regional Trial Court, Makati City in Civil
191
Case No. 08-397 is REVERSED regarding its dismissal of the intra-corporate case. Let this case
be REMANDED to the commercial court of origin for further proceedings.

SO ORDERED.

192
[ G.R. No. 191274, December 06, 2017 ] OACL/82/548/92 P2,000,000.00 11/25/92 1/29/93

ERMA INDUSTRIES, INC., ERNESTO B. MARCELO AND FLERIDA O. MARCELO, PETITIONERS, VS. (Batch Two)
SECURITY BANK CORPORATION AND SERGIO ORTIZ-LUIS, JR., RESPONDENTS.
OACL/82/179/92 P5,580,000.00 8/10/92 11/8/92
DECISION OACL/82/341/93 P350,000.00 5/31/93 7/7/93
LEONEN, J.: OACL/82/347/93 P120,000.00 6/2/93 7/7/93
[1] [2]
This Petition for Review is an appeal from the Court of Appeals: (1) Decision dated June OACL/82/352/93 P479,000.00 6/3/93 7/7/93[9]
17, 2009, which affirmed in toto the Decision[3] dated May 31, 2004 of Branch 64, Regional
Trial Court, Makati City; and (2) Resolution [4] dated February 3, 2010, which denied The promissory notes uniformly contain the following stipulations:
petitioners' motion for reconsideration.
1. Interest on the principal at varying rates (7.5% per annum for dollar obligation and
On May 5, 1992, Erma Industries, Inc. (Erma) obtained from Security Bank Corporation 16.75% or 21% per annum on peso obligation);
(Security Bank) a credit facility, the conditions for which are embodied in the Credit
Agreement[5] executed between the parties.[6]
2. Interest not paid when due shall be compounded monthly from due date;
On the same date, a Continuing Suretyship [7] agreement was executed in favor of Security
Bank, and signed by Spouses Ernesto and Flerida Marcelo and Spouses Sergio and Margarita
Ortiz-Luis. Under the Continuing Suretyship Agreement, the sureties agreed to be bound by 3. Penalty charge of 2% per month of the total outstanding principal and interest due
the provisions of the Credit Agreement and to be jointly and severally liable with Erma in case and unpaid; and
the latter defaults in any of its payments with Security Bank.
4. Attorney's fees equivalent to 20% of the total amount due plus expenses and costs
Following the execution of the two agreements and during the period covering May 1992 to of collection.[10]
July 1993, Erma obtained various peso and dollar denominated loans from Security Bank
evidenced by promissory notes, [8] as follows: After defaulting in the payment of the loans, Erma, through its President, Ernesto Marcelo,
wrote a letter[11] dated February 2, 1994 to Security Bank, requesting for the restructuring of
the whole of Erma's obligations and converting it into a five-year loan. [12] A certain property
valued at P12 million covered by TCT No. M-7021 and registered in the name of petitioner
Principal AmountDate Loan wasMaturity Date Ernesto Marcelo was also offered as security. [13] The title was received by Security Bank and
Promissory Note No.
Loaned obtained has since then remained in its possession. [14]

(Batch One) In a letter[15] dated April 27, 1994, Security Bank approved the partial restructuring of the
loans or only up to P5 million.[16]
FCDL/82/013/92 US$175,000.00 5/14/92 8/10/92
On May 10, 1994, Erma reiterated its request for the restructuring of the entire obligation.
FCDL/82/022/92 US$135,000.00 11/3/92 1/29/93
Erma also stated that the property they offered as collateral could answer for a far bigger
OACL/82/490/93 P7,300,000.00 7/26/93 10/25/93 amount than what Security Bank had recommended. Nevertheless, Erma suggested that it
could add another property as additional security so long as the entire obligation is covered.
OACL/82/509/92 P3,000,000.00 11/9/92 1/29/93 [17]

OACL/82/520/92 P1,700,000.00 11/13/92 1/29/93

Through a letter[18] dated November 8, 1994, Security Bank demanded payment, from Erma

193
and the sureties, of Erma's outstanding peso and dollar obligations in the total amounts of
P17,995,214.47 and US$289,730.10, respectively, as of October 31, 1994. The Court of Appeals affirmed the Regional Trial Court's Decision in toto.[35] It held that there
was no perfected agreement on the restructuring of the loans because Erma never complied
On January 10, 1995, Security Bank filed a Complaint [19] with the Regional Trial Court of with the condition to submit documentary requirements; [36] and Erma did not accept the
Makati City, for payment of Erma's outstanding loan obligation plus interests and penalties. partial restructuring of the loan offered by Security Bank. [37] On the issue of Sergio Ortiz's
liability, the Court of Appeals held that under the terms of the Continuing Suretyship
Upon the filing of said Complaint and as "it became clear that the Bank would agree only to agreement, Sergio Ortiz undeniably bound himself jointly and severally with Ernesto Marcelo
partial restructuring,"[20] Erma requested the return of the TCT in its letter dated June 10, for the obligations of Erma.[38]
1996.[21] However, Security Bank retained possession of TCT M-7021.
Finally, the Court of Appeals agreed with the Regional Trial Court that "the 2% penalty per
On June 24, 1999 (after the case was reraffled to Branch 64 from Branch 143), [22] Security month ... imposed by the [B]ank: on top of the 20% interest per annum on the peso
Bank filed its Amended Complaint[23] for Sum of Money praying that Erma, Spouses Marcelo, obligation and 7.5% interest per annum on the dollar obligation was
and Spouses Ortiz be compelled to execute a Real Estate Mortgage in its favor over the iniquitous[.]"[39] Consequently, the Court of Appeals held that a straight 12% per annum
property covered by TCT M-7021. interest on the total amount due would be fair and equitable. In this regard, Erma's prayer to
remand the case to the court a quo for reception of additional evidence that would further
In Erma and Spouses Marcelo's Amended Answer [24] dated November 9, 1999, a counterclaim reduce their outstanding obligation was rejected by the Court of Appeals on the grounds that
against Security Bank was included for the return of said title to its rightful owner, petitioner Erma should have presented all evidence at the trial and that it would unduly delay the case
Ernesto Marcelo. even further.[40]

Spouses Ortiz, for their part, essentially denied liability. Sergio claimed that he signed the On April 5, 2010, Erma and Spouses Marcelo filed their Petition for Review. In a
Suretyship Agreement only as an accommodation party and nominal surety; and his Resolution[41] dated April 28, 2010, the Court denied the petition for failure:
obligation, if any, was extinguished by novation when the loan was restructured without his
knowledge and consent. Margarita, on the other hand, claimed that she signed the
Suretyship Agreement only to signify her marital consent. [25] to state the material dates when the assailed decision of the Court of Appeals was
received and when petitioners' motion for reconsideration was filed, in violation of
(1)
After trial, the Regional Trial Court rendered its Decision [26] dated May 31, 2004, where it Sections 4(b) and 5, Rule 45 in relation to Section 5(d), Rule 56 of the 1997 Rules of Civil
adjudged Erma liable to pay Security Bank the amounts of P17,995,214.47 and Procedure, as amended; and
US$289,730.10, inclusive of the stipulated interest and penalty as of October 31, 1994, plus
legal interest of 12% per annum from November 1, 1994 until full payment is made. [27] Given
Erma's partial payments of its loan obligation, and the serious slump suffered by its export to sufficiently show any reversible error committed by the Court of Appeals in its
business, the trial court considered iniquitous to still require Erma to pay 2% penalty per (2)
decision and resolution.
month and legal interest on accrued interest after October 1994. [28] The Regional Trial Court
further denied Security Bank's prayer for attorney's fees on the ground that "there was no
conscious effort to evade payment of the obligation." [29] It likewise denied Erma's prayer for However, in a Resolution dated September 27, 2010, the Court granted petitioners' Motion
attorney's fees.[30] for Reconsideration and reinstated the Petition. Security Bank Corporation and Sergio R.
Ortiz-Luis, Jr. filed their respective Comments; and petitioners their Consolidated Reply. [42]
Ernesto Marcelo and Sergio Ortiz-Luis were also held liable to Security Bank as sureties.
[31]
Their spouses, on the other hand, were not held liable as sureties as they affixed their In compliance with the Court's Resolution [43] dated October 8, 2012, petitioners and
signatures in the Continuing Suretyship Agreement only to signify their marital consent. respondents filed their respective memoranda.
[32]
The trial court further held that there was no novation because the restructuring of Erma's
loan obligation whether total or partial, did not materialize. [33] Consequently, Security Bank The issues for resolution are:
was ordered to return TCT No. M-7021 to Spouses Marcelo. [34]
First, whether the Court of Appeals and the Regional Trial Court erred in finding that
194
petitioners are liable to pay respondent Bank the amounts of P17,995,214.47 and charges for being iniquitous, and imposed instead a 12% legal interest on the total
US$289,730.10, inclusive of interests and penalty charge as of October 31, 1994; outstanding obligation. Agreeing with the trial court, the Court of Appeals explained that it
would only be fair and equitable to impose a straight 12% per annum on the total amount
Second, whether the Court of Appeals and the Regional Trial Court erred in finding that due starting October 1994, rather than the 2% penalty per month on top of the 20% and 7.5%
petitioners are liable to pay respondent Bank legal interest of twelve percent (12%) per interest on the peso and dollar obligation, respectively, being demanded by the Bank.
annum from October 1994 until full payment is made;
Petitioners now contend that since the trial and appellate courts found the stipulated
Third, whether petitioners are entitled to attorney's fees; and interests and penalty charges to be excessive and iniquitous, [45] then the amounts of
P17,995,214.47 and US$289,730.10 adjudged against them (which already incorporated the
Fourth, whether the Court of Appeals erred in holding respondent Sergio Ortiz - Luis, Jr. interests and penalty charges) should have been reduced to the actual unpaid principals of
solidarily liable with the petitioners to pay the sums of P17,995,214.47 and US$289,730.10 P12,957,500.00 and US$209,941.55, respectively, devoid of any interests and penalty
plus 12% legal interest. charges.[46]

We deny the petition. The Court of Appeals committed no reversible error in affirming Security Bank counters that petitioners raise purely factual questions, which are not proper in
in toto the decision of the Regional Trial Court. a Rule 45 petition before this Court;[47] and petitioners' arguments were a mere rehash of
their arguments before the Court of Appeals, which have already been judiciously passed
upon.[48]

I Petitioners are mistaken.

The Regional Trial Court did not delete altogether the 2% monthly penalty charges and
In its Amended Complaint, Security Bank claimed for payment of the total outstanding peso
stipulated interests of 7.5% (on the dollar obligations) and 20% (on peso obligations). The trial
obligation of P17,995,214.47 and total outstanding dollar obligation of US$289,730.10 as of
court, in fact, adjudged petitioner Erma liable to pay the amounts of P17,995,214.47 and
October 31, 1994. The Bank additionally claimed for:
US$289,730.10, inclusive of the stipulated interest and penalty as of October 31, 1994, on the
basis of Article 1308[49] of the Civil Code and jurisprudential pronouncements on the
Interest of 20% per annum on the peso obligation and 7.5% per annum on the dollar obligatory force of contracts - not otherwise contrary to law, morals, good customs or public
(1) policy - between contracting parties.[50]
obligation from November 1, 1994 until fully paid;

The stipulated 7.5% or 21% per annum interest constitutes the monetary or conventional
interest for borrowing money and is allowed under Article 1956 of the New Civil Code. [51] On
Penalty charges of 2% per month on the total outstanding obligation from November 1,
(2) the other hand, the penalty charge of 2% per month accrues from the time of Erma's default
1994 until fully paid;
in the payment of the principal and/or interest on due date. [52] This 2% per month charge is
penalty or compensatory interest for the delay in the payment of a fixed sum of money,
which is separate and distinct from the conventional interest on the principal of the loan. [53] In
Legal interest on the accrued interest from the filing of the Complaint until fully paid; this connection, this Court, construing Article 2209 [54] of he Civil Code, held that:
(3)
and

[T]he appropriate measure for damages in case of delay in discharging an obligation

Attorney's fees equivalent to 20% of total outstanding obligations, including interests and
(4)
penalties.[44]
The Regional Trial Court denied Security Bank's additional claims for interests and penalty
consisting of the payment of a sum or money, is the payment of penalty interest at the rate
agreed upon; and in the absence of a stipulation of a particular rate of penalty interest, then
the payment of additional interest at a rate equal to the regular monetary interest; and if no
regular interest had been agreed upon, then payment of legal interest or six percent (6%) per
annum.[55]
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Furthermore, the promissory notes provide for monthly compounding of interest: "Interest or unreasonableness of a penalty would depend on such factors as "the type, extent and
not paid when due shall be compounded monthly from due date." [56] Compounding is purpose of the penalty, the nature of the obligation, the mode of breach and its
sanctioned under Article 1959 of the Civil Code: consequences, the supervening realities, the standing and relationship of the parties[.]" [60]

For instance, in Palmares v. Court of Appeals,[61] the Court eliminated altogether the payment
Article 1959. Without prejudice to the provisions of Article 2212, interest due and unpaid of the penalty charge of 3% per month for being inequitable and unreasonable. It ruled that
shall not earn interest. However, the contracting parties may by stipulation capitalize the the purpose of the penalty interest - that is to punish the obligor - have been sufficiently
interest due and unpaid, which as added principal, shall earn new interest. (Emphasis served by the compounded interest of 6% per month on the P30,000 loan. [62]
supplied)
In Tan v. Court of Appeals,[63] the continued monthly accrual of the 2% penalty on the total
What the trial court did was to stop the continued accrual of the 2% monthly penalty charges
amount due of about P7.996 million was held to be unconscionable. Considering the debtor's
on October 31, 1994, and to thereafter impose instead a straight 12% per annum on the total
partial payments and offer to settle his outstanding loan in good faith, the Court found it fair
outstanding amounts due. In making this ruling, the Regional Trial Court took into account
and equitable to reduce the 2% penalty charge, compounded monthly, to a straight twelve
the partial payments made by petitioners, their efforts to settle/restructure their loan
(12%) per annum.[64]
obligations and the serious slump in their export business in 1993. The Regional Trial Court
held that, under those circumstances, it would be "iniquitous, and tantamount to merciless
Similarly, in this case, the Regional Trial Court and the Court of Appeals found it reasonable to
forfeiture of property" [57] if the interests and penalty charges would be continually imposed.
reduce the 2% penalty charges, compounded monthly as to interests due and unpaid, to 12%
The Regional Trial Court held:
per annum of the total outstanding obligations, in light of petitioners' partial payments and
their good faith to settle their obligations. This reduction is essentially discretionary with the
trial court and, in the absence of any abuse of discretion will not be disturbed.
It is no longer disputed that defendant ERMA was paying interest on its loan obligation until
October 1994; that defendant ERMA exerted efforts to settle its obligation to SBC, as in fact it
Furthermore, we find no cogent reason to disturb the sums of Pl7,995,214.47 and
proposed to SBC the restructuring of its loan; and delivered to SBC, TCT No. M-7021 to
US$289,730.10 adjudged against the petitioners in favor of Security Bank. Time and again,
manifest its sincere effort to settle the obligation by way of restructuring its loan obligation
this Court has held that factual determinations of the Regional Trial Court, especially when
into five-year term loan. Additionally, plaintiff ERMA's export business suffered serious slump
adopted and confirmed by the Court of Appeals, are final and conclusive [65] barring a showing
in 1993 which prompted it to seek a restructuring of its entire loan. Were it not for said
that the findings were devoid of support or that a substantial matter had been overlooked by
financial crisis, defendant ERMA would not have defaulted in the payment of its obligation, or
the lower courts, which would have materially affected the result if considered. This case
at least the interest thereon.
does not fall within any of the recognized exceptions justifying a factual review in a Rule 45
petition.[66]
Recognizing the predicament which ERMA found itself, it is considered iniquitous, and
tantamount to merciless forfeiture of property to require defendant ERMA to continue paying
Petitioners further assert that they should be awarded at least P50,000.00 as attorney's fees
2% penalty per month as well as payment of legal interest upon all accrued interest after
for having been forced to defend themselves in needless litigation. [67]
October 1994. This court therefore finds plaintiff SBC not entitled to the recovery of the
amount corresponding to 2% penalty per month and to the legal interest on the accrued
The Court is not persuaded.
interest.[58]

The Regional Trial Court, as affirmed by the Court of Appeals, acted in accordance with Article The award of attorney's fees under Article 2208 of the Civil Code demands factual, legal and
1229 of the Civil Code, which allows judges to equitably reduce the penalty when there is equitable justification. Even when a claimant is compelled to litigate to defend
partial or irregular compliance with the principal obligation, or when the penalty is iniquitous himself/herself, still attorney's fees may not be awarded where there is no sufficient showing
or unconscionable. of bad faith of the other party. [68] It is well within Security Bank's right to institute an action
for collection and to claim full payment. [69] Absent any proof that respondent Bank intended
Whether a penalty charge is reasonable or iniquitous is addressed to the sound discretion of to prejudice or injure petitioners when it rejected petitioners' offer and filed the action for
the courts and determined according to the circumstances of the case. [59] The reasonableness collection, we find no basis to grant attorney's fees.

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II
For his part, respondent Sergio Ortiz-Luis, Jr. insists that he is not liable to Security Bank
because he merely signed the Suretyship Agreement as an accommodation party being the
Administrative Vice President of Erma at that time; and there was novation of the Credit
Agreement.[70]
Respondent Ortiz's position had been consistently rejected by the Regional Trial Court and
the Court of Appeals. The lower courts found that while respondent Ortiz signed the Credit
Agreement as an officer of Erma, as shown by his signature under Erma Industries Inc.
(Borrower),[71] this does not absolve him from liability because he subsequently executed a
Continuing Suretyship agreement [72] wherein he guaranteed the "due and full payment and
performance"[73] of all credit accommodations granted to Erma and bound himself solidarily
liable with Ernesto Marcelo for the obligations of Erma. Sections 3 and 11 of the Continuing
Suretyship clearly state as follows:
3. Liability of the Surety. - The liability of the Surety is solidary and not contingent upon the
pursuit by the Bank of whatever remedies it may have against the Debtor or the
collateralslliens it may possess. If any of the Guaranteed Obligations is- not paid or performed
on due date (at stated maturity or by acceleration), the Surety shall, without need for any
notice, demand or any other act or deed, immediately become liable therefor and the Surety
shall pay and perform the same.
....
11. Joint and Several Suretyship. - If the Surety is more than one person, all of their
obligations under this Suretyship shall be joint and several with the Debtor and with each
other. The Bank may proceed under this Suretyship against any of the sureties for the entire
Guaranteed Obligations, without first proceeding against the Debtor or any other surety or
sureties of the Guaranteed Obligations, and without exhausting the property of the Debtor,
the Surety hereby expressly waiving all benefits under Article 2058 and Article 2065 and
Articles 2077 to 2081, inclusive, of the Civil Code. [74] (Emphasis supplied)
Furthermore, respondent Ortiz's claim that he is a mere accommodation party is immaterial
and does not discharge him as a surety. He remains to be liable according to the character of
his undertaking and the terms and conditions of the Continuing Suretyship, which he signed
in his personal capacity and not in representation of Erma.
The Court has elucidated on the distinction between an accommodation and a compensated
surety and the reasons for treating them differently:
The law has authorized the formation of corporations for the purpose of conducting surety
business, and the corporate surety differs significantly from the individual private surety. First,
unlike the private surety, the corporate surety signs for cash and not for friendship. The
private surety is regarded as someone doing a rather foolish act for praiseworthy motives; the
corporate surety, to the contrary, is in business to make a profit and charges a premium
depending upon the amount of guaranty and the risk involved. Second, the corporate surety,
like an insurance company, prepares the instrument, which is a type of contract of adhesion
whereas the private surety usually does not prepare the note or bond which he signs. Third,
the obligation of the private surety often is assumed simply on the basis of the debtor's
representations and without legal advice, while the corporate surety does not bind itself until
a full investigation has been made. For these reasons, the courts distinguish between the
individual gratuitous surety and the vocational corporate surety. In the case of the corporate
surety, the rule of strictissimi juris is not applicable, and courts apply the rules of
interpretation . . . of appertaining to contracts of insurance. [75]
Consequently, the rule of strict construction of the surety contract is commonly applied to an
accommodation surety but is not extended to favor a compensated corporate surety.
The rationale of this doctrine is reasonable; an accommodation surety acts without motive of
pecuniary gain and, hence, should be protected against unjust pecuniary impoverishment by
imposing on the principal duties akin to those of a fiduciary. This cannot be said of a
compensated corporate surety which is a business association organized for the purpose of
assuming classified risks in large numbers, for profit and on an impersonal basis, through the
medium of standardized written contractual forms drawn by its own representatives with the
primary aim of protecting its own interests. [76]
The nature and extent of respondent Ortiz's liability are set out in clear and unmistakable
terms in the Continuing Suretyship agreement. Under its express terms, respondent Ortiz, as
surety, is "bound by all the terms and conditions of the credit instruments." [77] His liability is
solidary with the debtor and co-sureties; and the surety contract remains in full force and
effect until full payment of Erma's obligations to the Bank. [78]
Respondent Ortiz's claim of novation was likewise rejected by the lower courts. The Regional
Trial Court and the Court of Appeals were in agreement that while there were ongoing
negotiations between Erma and Security Bank for the restructuring of the loan, the same did
not materialize.[79] Erma offered to restructure its entire outstanding obligation and delivered
TCT No. M-7021 as collateral, to which Security Bank counter-offered a partial restructuring
or only up to P5,000,000. This counter-offer was not accepted by Erma. There was no new
contract executed between the parties evidencing the restructured loan. Neither did Erma
197
execute a real estate mortgage over the property covered by TCT No. M-7021.

WHEREFORE, the Petition is DENIED. The Decision dated June 17, 2009 and Resolution dated
February 3, 2010 of the Court of Appeals are AFFIRMED.

SO ORDERED.

198