63.

64. G.R. No. 184735 - Miriam B. Elleccion vda. De Lecciones v. National Labor
Relations Commission, et al.

SECOND DIVISION

[G.R. NO. 184735 : September 17, 2009]

MIRIAM B. ELLECCION VDA. DE LECCIONES, Petitioner, v. NATIONAL LABOR

RELATIONS COMMISSION, NNA PHILIPPINES CO., INC. and MS. KIMI
KIMURA, Respondents.

RESOLUTION

BRION J.:

We resolve the motion for reconsideration1 of our Resolution2 dated December 8, 2008

denying the Petition for Review on Certiorari 3 filed on November 10, 2004 by petitioner
Miriam B. Elleccion Vda. de Lecciones.

The case arose on November 8, 2002 when the petitioner filed a complaint 4 for illegal
dismissal with several money claims against the NNA Philippines Co., Inc. (respondent).
The respondent, a research and translation service company with less than ten (10)
employees, is a wholly-owned subsidiary of NNA Japan Co., Ltd. 5 (NNA Japan).

The respondent employed the petitioner on August 1, 1997, and she held various
positions in the company, the latest of which as Administrator. 6 Additionally, she served
as Corporate Secretary until July 3, 2002. She alleged that she usually worked from
9:00 a.m. to 10:00 p.m. - 12:00 midnight and sometimes even until 2:00 a.m. or 9:00
a.m.7 She claimed that the respondent promised to compensate her for extra hours, as
well as for doing tasks other than that what she was contracted for.

On May 17, 2002, the Board of Directors of NNA Japan decided to streamline the
operations of its subsidiaries including the respondent, and thus issued a memorandum
directing the respondent to transfer the corporate secretary's functions to the external
counsel. The memorandum also gave management the discretion to determine which
positions should be declared redundant. 8

On July 4, 2002, the respondent's Board of Directors held an organizational meeting

where the petitioner was not re-elected as corporate secretary. The board also directed
the respondent's President at the time, Ms. Kimi Kimura (Kimura), to reorganize the
corporation and abolish any redundant position. 9
On October 17, 2002, the petitioner received a notice of termination of employment on
the ground that her position as Administrator had been declared redundant. 10 On the
same day, the respondent filed a report of the petitioner's separation from service with
the Office of the Department of Labor and Employment in the National Capital Region
(DOLE-NCR).11

On November 15, 2002, the respondent issued the petitioner a memorandum advising
her of the release of checks in her favor representing her salary and accrued benefits
including her separation pay.12 On the same day, she accepted the checks for her last
salary (P23,097.13); 13th month pay (P46,084.00); unused leave credits for seven (7)
days (P8,028.10); year-end tax refund (P803.24); and reimbursement of advances
made to the company (P71,197.05). She refused to accept the check representing her
separation pay in the amount of P244, 182.07 (based on her salary and allowances). 13

On January 16, 2004, Labor Arbiter Aliman D. Mangandog dismissed the complaint for
lack of merit, but ordered the respondent to pay the petitioner separation pay computed
at one (1) month's salary for every year of service. 14 The petitioner appealed the
decision to the National Labor Relations Commission (NLRC).

In a decision promulgated on May 15, 2006,15 the NLRC affirmed the petitioner's

separation from the service; modified the monetary benefits awarded to her; and
affirmed the Arbiter's denial of the petitioner's claim for additional compensation as
corporate secretary on the ground that it was an intra-corporate matter. In addition to
the separation pay of P244,182.07, the NLRC ordered the petitioner reimbursement of
cash advances made by the petitioner to the company amounting to P248,712.72.

The petitioner moved for a partial reconsideration of the NLRC decision, but the NLRC
denied the motion on June 30, 2006. 16 The petitioner then elevated the case to the
Court of Appeals (CA) through a petition for certiorari under Rule 65 of the Rules of
Court.

In its decision of August 28, 2008,17 the CA denied the petition. The appellate court held
that "the decision was rendered on the basis of credible evidence and existing law.
Petitioner was validly terminated from employment." The CA set aside the NLRC's
ruling that the petitioner's money claims involved an intra-corporate matter which was
outside of its jurisdiction. It held that the labor tribunals had jurisdiction over the claim
since it was made by the petitioner as an employee, not as a corporate officer.
Nonetheless, the CA denied her claim for overtime pay on the main ground that, as a
managerial employee, she is not entitled to overtime pay under the law and the rules. 18

The petitioner moved for reconsideration of the CA's decision, but was denied through a
resolution issued on September 26. 2008.19 The petitioner appealed to this Court on
November 10, 2008 pursuant to Rule 45 of the Rules of Court. 20

In a Resolution dated December 8, 2008, 21 we denied the petition "for failure to
sufficiently show any reversible error in the questioned judgment"; there was "failure [by]
petitioner to show any cogent reason why the actions of the Labor Arbiter, the NLRC
and the CA, which have passed upon the same issue, should be reversed. The
petitioner failed to show that their findings are not based on substantial evidence, or that
their decisions are contrary to applicable law and jurisprudence."

On February 17, 2009, the petitioner moved for reconsideration 22 of the Court's ruling,
contending that: (1) the dismissal of an employee on the ground of the redundancy
based on mere allegation and without supporting evidence is invalid; (2) the assailed
decisions run counter to rulings of the Court that "failure to appraise the employee of a
fair and reasonable criteria is a violation of due process," and; (3) the respondent
terminated the employment of the petitioner not for any authorized cause but with
evident malice and bad faith.

In view of the motion for reconsideration, the Court required the respondent to file a
comment,23 which it did on June 1, 2009. The respondent, along with its co-respondent
Kimura, prays for the denial of the motion for its failure to raise new arguments or
compelling reasons to warrant a reversal of the Court's resolution.

We deny the motion for reconsideration.

The arguments raised by the petitioner are not materially different from those she
presented in the compulsory arbitration and before the CA. Nonetheless, we again
carefully examined the parties' submissions, and we are convinced that the rulings
sought to be overturned are supported by substantial evidence and are not contrary to
law and applicable jurisprudence, as we stressed in our Resolution of December 8,
2008.

The separation of the petitioner by reason of redundancy was supported by the

evidence on record. She was separated from the service after the respondent's
reorganization where her position as Administrator was declared redundant. She was
served notice within the statutory period of thirty (30) days and so was the DOLE-NCR.
The petitioner was assured of all the benefits under the law.

The petitioner imputes bad faith and malice on the respondent in declaring her position
as Administrator redundant, but failed to present convincing proof that the respondent
abused its prerogative in terminating her employment or that it was motivated by ill-will
in doing so. It was a business decision arrived at in the face of financial losses being
suffered by the company at the time.24

As aptly cited by the CA:

The general rule is that the characterization by an employer of an employee's services

as no longer necessary or sustainable is an exercise of business judgment on the part
of the employer. The wisdom or soundness of such a characterization or decision is not,
as a general rule, subject to discretionary review on the part of the Labor Arbiter, the
NLRC and the CA. Such characterization may, however, be rejected if the same is
found to be in violation of the law or is arbitrary or malicious. 25

We find no violations of law in the respondent's actions against the petitioner, nor was
the respondent arbitrary or influenced by malice in terminating the petitioner's
employment for redundancy. This ground for termination is a legitimate exercise of
management prerogative unless attended to by arbitrariness or by the failure to follow
statutory requirements. No arbitrariness or any violations took place in the present case.

On the petitioner's claim for overtime pay, the CA correctly took cognizance of the issue,
since this was raised by the petitioner in her capacity as an employee, not as a
corporate officer. At the same time, we affirm the CA's denial of the claim, as the
petitioner was a managerial employee who is not entitled to such pay.

Finally, as the CA did, we find no basis for the petitioner's claim for moral damages and
attorney's fees.

WHEREFORE, premises considered, we hereby DENY the petitioner's motion for

reconsideration for lack of substantial arguments to warrant a reconsideration of our
ruling of December 8, 2008. This denial is immediately final, and we shall not entertain
any further pleadings. Let entry of judgment be made in due course.

SO ORDERED.
65. CASE DIGEST: WPP MARKETING COMMUNICATIONS, INC., JOHN
STEEDMAN, MARK WEBSTER, and NOMINADA LANSANG, Petitioners, v.
JOCELYN M. GALERA, Respondent.

FACTS: Petitioner is Jocelyn Galera (GALERA), an American citizen who was recruited

from the United States of America by private respondent John Steedman, Chairman-
WPP Worldwide and Chief Executive Officer of Mindshare, Co., a corporation based in
Hong Kong, China, to work in the Philippines for private respondent WPP Marketing
Communications, Inc. (WPP), a corporation registered and operating under the laws of
Philippines.

Employment of GALERA with private respondent WPP became effective on September

1, 1999 solely on the instruction of the CEO and upon signing of the contract, without
any further action from the Board of Directors of private respondent WPP.

Four months had passed when private respondent WPP filed before the Bureau of
Immigration an application for petitioner GALERA to receive a working visa, wherein
she was designated as Vice President of WPP. Petitioner alleged that she was
constrained to sign the application in order that she could remain in the Philippines and
retain her employment.

On December 14, 2000, petitioner GALERA alleged she was verbally notified by private
respondent STEEDMAN that her services had been terminated from private respondent
WPP. A termination letter followed the next day. Thus, a complaint for illegal dismissal
was filed against WPP.

The LA held that WPP, Steedman, Webster, and Lansang liable for illegal dismissal and
damages. Arbiter Madriaga stated that Galera was not only illegally dismissed but was
also not accorded due process. The NLRC reversed the LA decision. The NLRC
stressed that Galera was WPPs Vice-President, and therefore, a corporate officer at the
time she was removed by the Board of Directors. Such being the case, the imperatives
of law require that we hold that the Arbiter below had no jurisdiction over Galeras case
as, again, she was a corporate officer at the time of her removal.

On appeal, the CA reversed the NLRC decision. It ruled that a person could be
considered a "corporate officer" only if appointed as such by a corporations Board of
Directors, or if pursuant to the power given them by either the Articles of Incorporation
or the By-Laws.

ISSUE:

Does the LA have jurisdiction over the case?

HELD: Under Section 25 of the Corporation Code, the corporate officers are the
president, secretary, treasurer and such other officers as may be provided in the by-
laws.

An examination of WPPs by-laws resulted in a finding that Galeras appointment as a

corporate officer (Vice-President with the operational title of Managing Director of
Mindshare) during a special meeting of WPP's Board of Directors is an appointment to a
non-existent corporate office. WPPs by-laws provided for only one Vice-President. At
the time of Galeras appointment on 31 December 1999, WPP already had one Vice-
President in the person of Webster. Galera cannot be said to be a director of WPP also
because all five directorship positions provided in the by-laws are already occupied.
Finally, WPP cannot rely on its Amended By-Laws to support its argument that Galera is
a corporate officer. The Amended By-Laws provided for more than one Vice-President
and for two additional directors. Even though WPPs stockholders voted for the
amendment on 31 May 2000, the SEC approved the amendments only on 16 February
2001. Galera was dismissed on 14 December 2000. WPP, Steedman, Webster, and
Lansang did not present any evidence that Galeras dismissal took effect with the action
of WPP's Board of Directors.

Galera being an employee, then the Labor Arbiter and the NLRC have jurisdiction over
the present case.

***

WPPs dismissal of Galera lacked both substantive and procedural due process. Apart
from Steedman's letter dated 15 December 2000 to Galera, WPP failed to prove any
just or authorized cause for Galeras dismissal.

The law further requires that the employer must furnish the worker sought to be
dismissed with two written notices before termination of employment can be legally
effected: (1) notice which apprises the employee of the particular acts or omissions for
which his dismissal is sought; and (2) the subsequent notice which informs the
employee of the employers decision to dismiss him. Failure to comply with the
requirements taints the dismissal with illegality. WPPs acts clearly show that Galeras
dismissal did not comply with the two-notice rule.

***

The employment permit must be acquired prior to employment.

The law and the rules are consistent in stating that the employment permit must be
acquired prior to employment. The Labor Code states: "Any alien seeking admission to
the Philippines for employment purposes and any domestic or foreign employer who
desires to engage an alien for employment in the Philippines shall obtain an
employment permit from the Department of Labor."
Galera cannot come to this Court with unclean hands. To grant Galeras prayer is to
sanction the violation of the Philippine labor laws requiring aliens to secure work permits
before their employment. We hold that the status quo must prevail in the present case
and we leave the parties where they are. Hence, Galera is not entitled to monetary
awards. This ruling, however, does not bar Galera from seeking relief from other
jurisdictions.

GRANTED
66. Corporate Law Case Digest: Filipinas Port V. Go (2007)

 G.R. No. 161886             March 16, 2007

Lessons Applicable: Rationale for "Centralized Management" Doctrine

FACTS:

 Sept 4 1992: Eliodoro C. Cruz, Filport’s president from 1968-1991, wrote a letter
to the corporation’s BOD questioning the creation and election of the following
positions with a monthly remuneration of P13,050.00 each.  Cruz requested the
board to take necessary action/actions to recover from those elected to the
aforementioned positions the salaries they have received.
 Jun 4 1993: Cruz, purportedly in representation of Filport and its
stockholders, among which is herein co-petitioner Mindanao Terminal and
Brokerage Services, Inc. (Minterbro), filed with the SEC a derivative suit against
Filport's BOD for acts of mismanagement detrimental to the interest of the
corporation and its shareholders at large.
 Cruz prayed that the BOD be made to pay Filport, jointly and severally, the
sums of money variedly representing the damages incurred as a result of the
creation of the offices/positions complained of and the aggregate amount of the
questioned increased salaries.
 RTC: BOD have the power to create positions not in the by-laws and can
increase salaries.  But Edgar C. Trinidad under the third and fourth causes of action
to restore to the corporation the total amount of salaries he received as assistant
vice president for corporate planning; and likewise ordering Fortunato V. de Castro
and Arsenio Lopez Chua under the fourth cause of action to restore to the
corporation the salaries they each received as special assistants respectively to the
president and board chairman. In case of insolvency of any or all of them, the
members of the board who created their positions are subsidiarily liable.
 Appealed: creation of the positions merely for accommodation purposes -
GRANTED
ISSUES: 
1. W/N there was mismanagement - NO
2. W/N there is a proper derivative suit - YES

HELD: CA Affirmed
1. NO
 Section 35 of the Corporation Code, the creation of an executive committee (as
powerful as the BOD) must be provided for in the bylaws of the corporation
 Notwithstanding the silence of Filport’s bylaws on the matter, we cannot
rule that the creation of the executive committee by the board of directors is illegal or
unlawful. One reason is the absence of a showing as to the true nature and
functions of executive committee 
 But even assuming there was mismanagement resulting to corporate damages
and/or business losses, respondents may not be held liable in the absence of a
showing of bad faith in doing the acts complained of. ("dishonest purpose","some
moral obliquity","conscious doing of a wrong", "partakes of the nature of fraud") 
 determination of the necessity for additional offices and/or positions in a
corporation is a management prerogative which courts are not wont to review in the
absence of any proof that such prerogative was exercised in bad faith or with malice
      2. YES
 Besides, the requisites before a derivative suit can be filed by a stockholder: -
present
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material; - a
stockholder of Filport 
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to
heed his plea; and
  - he wrote a letter 
c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit. - wrong against the stockholders of the corporation generally
Labels: 2007, Case Digest, Centralized Management Doctrine, Corporate
Law, Corporate Law Case Digest, Filipinas Port v. Go, Juris Doctor, Rationale for
Centralized Management Doctrine
FACTS:
            The case involves a petition for review on certiorari.

            We have here Eliodoro C. Cruz suing on behalf of the stockholders of Filipinas
Port Services alleging that there has been numerous cases of mismanagement by the
board of directors:
1. creation of an executive committee not provided for in the by-laws of the
corporation
2. disproportionate increase in the salary of officials
3. re-creation of already existing positions
4. creation of additional positions with holders not doing any work to deserve any
monthly remuneration.
He prayed for the return of the salary received by all the unnecessarily appointed
members.
The Trial Court sided with the respondent and ruled that the creation of the executive
committee and the additional position was legitimate given that it was provided by the
corporation’s by-law. However, the prayer for the return of salaries received was
granted, even if the positions and the committee were valid, for the court ruled that
Filipinas Port Services is not a big corporation requiring multiple executive positions.
The respondents appealed the decision and they received a favourable decision as the
Court of Appeals granted the respondents’ appeal, reversed and set aside the appealed
decision of the trial court and accordingly dismissed the so-called derivative suit filed
by Cruz, et al.,
Cruz did not take the decision sitting down, hence the petition.
To counter the appeal filed by Cruz, respondents also claim that what Cruz filed is not a
derivative suit.
      The petition was denied and the challenged decision of the CA was affirmed. Only,
the Supreme Court clarified the issue involving the legitimacy of the derivative suit.

ISSUE: 
Was the case filed by Cruz, on behalf of Filipinas Port Services Inc., a derivative suit?

HELD:
YES.

Under the Corporation Code, where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. But an individual stockholder or an
individual trustee may be permitted to institute a derivative suit in behalf of the
corporation in order to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or when a demand upon them to file the necessary action
would be futile because they are the ones to be sued, or because they hold control of
the corporation. In such actions, the corporation is the real party-in-interest while the
suing stockholder, in behalf of the corporation, is only a nominal part.
          Here, the action below is principally for damages resulting from alleged
mismanagement of the affairs of Filport by its directors/officers, it being alleged that the
acts of mismanagement are detrimental to the interests of Filport.  Thus, the injury
complained of primarily pertains to the corporation so that the suit for relief should be by
the corporation.  However, since the ones to be sued are the directors/officers of the
corporation itself, a stockholder, like petitioner Cruz, may validly institute a “derivative
suit” to vindicate the alleged corporate injury, in which case Cruz is only a nominal party
while Filport is the real party-in-interest.
 Besides, the requisites before a derivative suit can be filed by a stockholder or
individual trustee are present in this case, to wit:
a)         the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;

b)         he has tried to exhaust intra-corporate remedies, i.e., has made a demand on
the board of directors for the appropriate relief but the latter has failed or refused to
heed his plea;  and

c)         the cause of action actually devolves on the corporation, the wrongdoing or

harm having been, or being caused to the corporation and not to the particular
stockholder bringing the suit.
                         
Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without
success to have its board of directors remedy what he perceived as wrong when he
wrote a letter requesting the board to do the necessary action in his complaint; and (3)
the alleged wrong was in truth a wrong against the stockholders of the corporation
generally, and not against Cruz or Minterbro, in particular. And while it is true that the
complaining stockholder must show to the satisfaction of the court that he has
exhausted all the means within his reach to attain within the corporation itself the
redress for his grievances, or actions in conformity to his wishes, nonetheless, where
the corporation is under the complete control of the principal defendants or other
trustees, as here, there is no necessity of making a demand upon the directors. The
reason is obvious: a demand upon the board to institute an action and prosecute the
same effectively would have been useless and an exercise in futility.

Bottom line, when it comes to cases involving two or more trustees, an individual trustee
can file a derivative suit duly following the requisites without the need to exhaust internal
remedies  where the trusteeship is under the complete control of the other trustees for it
will be a waste of time.
67. BARBA V. LICEO (G .R. NO. 193857; NOVEMBER 28, 2012)
CASE DIGEST: MA. MERCEDES L. BARBA, Petitioner, v. LICEO DE CAGAYAN
UNIVERSITY, Respondent. (G .R. No. 193857; November 28, 2012).

FACTS: Petitioner Dr. Ma. Mercedes L. Barba (Barba) was the Dean of the College of
Physical Therapy of respondent Liceo de Cagayan University, Inc. (Liceo).

When Barba started working for Liceo, she was chosen as a scholar. Her scholarship
contract provides that after the duration of her study, she shall serve the school in
whatever position the school desires for a period of not less than ten (10) years. After
her scholarship, she was appointed as the Dean of the College of Physical Therapy.

In the school year 2003 to 2004, the College of Physical Therapy suffered a dramatic
decline in the number of enrollees from a total of 1,121 students in the school year 1995
to 1996 to only 29 students in the first semester of school year 2003 to 2004.

Due to the low number of enrollees, Liceo decided to freeze the operation of the College
of Physical Therapy indefinitely. Thereafter, the College of Physical Therapy ceased
operations and Barba went on leave without pay starting. Subsequently, Liceo sent
Barba a letter dated April 27, 2005 instructing Barba to return to work on and report to
Ma. Chona Palomares, the Acting Dean of the College of Nursing, to receive her
teaching load and assignment as a full-time faculty member in that department. Barba
did not report to Palomares and requested for the processing of her separation benefits
in view of the closure of the College of Physical Therapy.

Another letter was sent to Barba but the latter still refused to return to work. Hence,
Liceo sent Barba a notice terminating her services on the ground of abandonment.

Barba filed a complaint before the Labor Arbiter for illegal dismissal, payment of
separation pay and retirement benefits against Liceo. She alleged that her transfer to
the College of Nursing as a faculty member is a demotion amounting to constructive
dismissal.

The LA ruled that Barba was not constructively dismissed. The NLRC reversed the LA.
Liceo went to the CA and filed a Supplemental Petition raising for the first time the issue
of lack of jurisdiction of the Labor Arbiter and the NLRC over the case. Liceo claimed
that a College Dean is a corporate officer under its by-laws and Barba was a corporate
officer of Liceo since her appointment was approved by the board of directors. Thus,
Liceo maintained that the jurisdiction over the case is with the regular courts and not
with the labor tribunals.

In its original Decision, the CA reversed the NLRC resolutions. The CA did not find merit
in Liceo’s assertion in its Supplemental Petition that the position of Barba as College
Dean was a corporate office. The CA further found that no constructive dismissal
occurred nor has Barba abandoned her work.

Unsatisfied, both Barba and Liceo sought reconsideration of the CA decision. The CA
reversed its earlier ruling. Hence, Barba filed the present petition.

ISSUES: Does the labor tribunals have jurisdiction over Barba’s complaint for
constructive dismissal?
Was Barba constructively dismissed?

HELD: Corporate officers are elected or appointed by the directors or stockholders, and

are those who are given that character either by the Corporation Code or by the
corporation’s by-laws. Section 25 of the Corporation Code enumerates corporate
officers as the president, the secretary, the treasurer and such other officers as may be
provided for in the by-laws. In Matling Industrial and Commercial Corporation v. Coros,
the phrase “such other officers as may be provided for in the by-laws” has been
clarified, thus: “Conformably with Section 25, a position must be expressly mentioned in
the By-Laws in order to be considered as a corporate office. The rest of the corporate
officers could be considered only as employees of subordinate officials.”

However, an assiduous perusal of these documents does not convince us that Barba
occupies a corporate office position in the university. In Liceo’s by-laws, there are four
officers specifically mentioned, namely, a president, a vice president, a secretary and a
treasurer. In addition, it is provided that there shall be other appointive officials, a
College Director and heads of departments whose appointments, compensations,
powers and duties shall be determined by the board of directors. It is worthy to note that
a College Dean is not among the corporate officers mentioned in Liceo’s by-laws. Barba
was not directly elected nor appointed by the board of directors to any corporate office
but her appointment was merely approved by the board together with the other
academic deans of respondent university in accordance with the procedure prescribed
in Liceo’s Administrative Manual. Though the board of directors may create appointive
positions other than the positions of corporate officers, the persons occupying such
positions cannot be deemed as corporate officers as contemplated by Section 25 of the
Corporation Code. Thus, petitioner, being an employee of respondent, her complaint for
illegal/constructive dismissal against respondent was properly within the jurisdiction of
the Labor Arbiter and the NLRC.

On the issue of constructive dismissal, we agree with the Labor Arbiter and the
appellate court’s earlier ruling that Barba was not constructively dismissed. Barba’s
letter of appointment specifically appointed her as Dean of the College of Physical
Therapy and Doctor-in- Charge of the Rehabilitation Clinic “for a period of three years
effective July 1, 2002 unless sooner revoked for valid cause or causes.” Evidently,
Barba’s appointment as College Dean was for a fixed term, subject to reappointment
and revocation or termination for a valid cause. When Liceo decided to close its College
of Physical Therapy due to drastic decrease in enrollees, Barba’s appointment as its
College Dean was validly revoked and her subsequent assignment to teach in the
College of Nursing was justified as it is still related to her scholarship studies in Physical
Therapy. Particularly, for a transfer not to be considered a constructive dismissal, the
employer must be able to show that such transfer is not unreasonable, inconvenient, or
prejudicial to the employee. GRANTED.
68.
 69. THIRD DIVISION

[G.R. NO. 153413 : March 1, 2007]

NECTARINA S. RANIEL and MA. VICTORIA R. PAG-ONG, Petitioners, v. PAUL

JOCHICO, JOHN STEFFENS and SURYA VIRIYA, Respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

Assailed in the present Petition for Review on Certiorari is the Decision1 of the Court of
Appeals (CA) dated April 30, 2002, affirming with modification the Decision dated
October 27, 2000 rendered by the Securities and Exchange Commission (SEC) which
held as valid the removal of petitioners Ma. Victoria R. Pag-ong (Pag-ong) as director
and Nectarina S. Raniel (Raniel) as director and corporate officer of Nephro Systems
Dialysis Center (Nephro).

Petitioners first questioned their removal in SEC Case No. 02-98-5902 for Declaration of
Nullity of the Illegal Acts of Respondents, Damages and Injunction. Petitioners, together
with respondents Paul Jochico (Jochico), John Steffens and Surya Viriya, were
incorporators and directors of Nephro, with Raniel acting as Corporate Secretary and
Administrator. The conflict started when petitioners questioned respondents' plan to
enter into a joint venture with the Butuan Doctors' Hospital and College, Inc. sometime
in December 1997. Because of this, petitioners claim that respondents tried to compel
them to waive and assign their shares with Nephro but they refused. Thereafter, Raniel
sought an indefinite leave of absence due to stress, but this was denied by Jochico, as
Nephro President. Raniel, nevertheless, did not report for work, causing Jochico to
demand an explanation from her why she should not be removed as Administrator and
Corporate Secretary. Raniel replied, expressing her sentiments over the disapproval of
her request for leave and respondents' decision with regard to the Butuan venture.

On January 30, 1998, Jochico issued a Notice of Special Board Meeting on February 2,
1998. Despite receipt of the notice, petitioners did not attend the board meeting. In said
meeting, the Board passed several resolutions ratifying the disapproval of Raniel's
request for leave, dismissing her as Administrator of Nephro, declaring the position of
Corporate Secretary vacant, appointing Otelio Jochico as the new Corporate Secretary
and authorizing the call of a Special Stockholders' Meeting on February 16, 1998 for the
purpose of the removal of petitioners as directors of Nephro.

Otelio Jochico issued the corresponding notices for the Special Stockholders' Meeting
to be held on February 16, 1998 which were received by petitioners on February 2,
1998. Again, they did not attend the meeting. The stockholders who were present
removed the petitioners as directors of Nephro. Thus, petitioners filed SEC Case No.
02-98-5902.
On October 27, 2000, the SEC rendered its Decision, the dispositive portion of which
reads:

WHEREFORE, the Commission so holds that complainants cannot be awarded the

reliefs prayed for in reinstating Nectarina S. Raniel as secretary and administrator.

The corporation acting thru its Board of Directors can validly remove its corporate
officers, particularly complainant Nectarina S. Raniel as corporate secretary, treasurer
and administrator of the Dialysis Clinic.

Also, the Commission cannot grant the relief prayed for by complainants in restraining
the respondents from interfering in the administration of the Dialysis Clinic owned by the
corporation and the use of corporate funds.

The administration of the Dialysis Clinic of the corporation and the use of corporate
funds, rightfully belong to the officers of the corporation, which in this case are the
respondents.

The counterclaim of respondents to return or assign back the complainants' shares in

favor of respondent Paul Jochico or his nominee is hereby denied for lack of merit.

The respondents failed to show any clear and convincing evidence to rebut the
presumption of the validity and truthfulness of documents submitted to the Commission
in the grant of corporate license.

The claim for attorney's fees and damages of both parties are likewise denied for lack of
merit, as neither party should be punished for vindicating a right, which he/she believes
should be protected or enforced.

SO ORDERED.2

Dissatisfied, petitioners filed a Petition for Review with the CA.

On April 30, 2002, the CA rendered the assailed Decision, with the following dispositive
portion:

WHEREFORE, in light of the foregoing discussions, the appealed decision of the

Securities and Exchange Commission is hereby AFFIRMED with the MODIFICATION
that the renewal of petitioners as directors of Nephro is declared valid.

SO ORDERED.3

Respondents filed a Manifestation and Motion to Correct Typographical Error, stating

that the term "renewal" as provided in the CA Decision should be
"removal."4 Petitioners, on the other hand, filed the present Petition for Review
on Certiorari .
On November 20, 2002, the CA issued a Resolution resolving to refrain from acting on
all pending incidents before it in view of the filing of the petition with the Court. 5

In the present petition, petitioners raised basically the same argument they had before
the SEC and the CA, i.e., their removal from Nephro was not valid.

Both the SEC and the CA held that Pag-ong's removal as director and Raniel's removal
as director and officer of Nephro were valid. For its part, the SEC ruled that the Board of
Directors had sufficient ground to remove Raniel as officer due to loss of trust and
confidence, as her abrupt and unauthorized leave of absence exhibited her disregard of
her responsibilities as an officer of the corporation and disrupted the operations of
Nephro. The SEC also held that the Special Board Meeting held on February 2, 1998
was valid and the resolutions adopted therein are binding on petitioners. 6

The CA upheld the SEC's conclusions, adding further that the special stockholders'
meeting on February 16, 1998 was likewise validly held. The CA also ruled that Pag-
ong's removal as director of Nephro was justified as it was due to her "undenied delay in
the release of Nephro's medical supplies from the warehouse of the Fly-High Brokerage
where she was an officer, on top of her and her co-petitioner Raniel's absence from the
aforementioned directors' and stockholders' meetings of Nephro despite due notice." 7

It is well to stress the settled rule that the findings of fact of administrative bodies, such
as the SEC, will not be interfered with by the courts in the absence of grave abuse of
discretion on the part of said agencies, or unless the aforementioned findings are not
supported by substantial evidence. They carry even more weight when affirmed by the
CA.8 Such findings are accorded not only great respect but even finality, and are binding
upon this Court, unless it is shown that it had arbitrarily disregarded or misapprehended
evidence before it to such an extent as to compel a contrary conclusion had such
evidence been properly appreciated.9 This rule is rooted in the doctrine that this Court is
not a trier of facts, as well as in the respect to be accorded the determinations made by
administrative bodies in general on matters falling within their respective fields of
specialization or expertise.10

A review of the petition failed to demonstrate any reversible error committed by the two
tribunals, hence, the petition must be denied. It does not present any argument which
convinces the Court that the SEC and the CA made any misappreciation of the facts
and the applicable laws such that their decisions should be overturned.

A corporation exercises its powers through its board of directors and/or its duly
authorized officers and agents, except in instances where the Corporation Code
requires stockholders' approval for certain specific acts. 11

Based on Section 23 of the Corporation Code which 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 x x x.

a corporation's board of directors is understood to be that body which (1) exercises all
powers provided for under the Corporation Code; (2) conducts all business of the
corporation; and (3) controls and holds all property of the corporation. Its members have
been characterized as trustees or directors clothed with a fiduciary
character.12 Moreover, the directors may appoint officers and agents and as incident to
this power of appointment, they may discharge those appointed.13

In this case, petitioner Raniel was removed as a corporate officer through the resolution
of Nephro's Board of Directors adopted in a special meeting on February 2, 1998. As
correctly ruled by the SEC, petitioners' removal was a valid exercise of the powers of
Nephro's Board of Directors, viz.:

In the instant complaint, do respondents have sufficient grounds to cause the removal of
Raniel from her positions as Corporate Secretary, Treasurer and Administrator of the
Dialysis Clinic? Based on the facts proven during the hearing of this case, the answer is
in the affirmative.

Raniel's letter of January 26, 1998 speaks for itself. Her request for an indefinite leave,
immediately effective yet without prior notice, reveals a disregard of the critical
responsibilities pertaining to the sensitive positions she held in the corporation. Prior to
her hasty departure, Raniel did not make a proper turn-over of her duties and had to be
expressly requested to hand over documents and records, including keys to the office
and the cabinets (Exh. 15).

x    x    x

Since Raniel occupied all three positions in Nephro, it is not difficult to foresee the
disruption that her immediate and indefinite absence can inflict on the operations of the
company. By leaving abruptly, Raniel abandoned the positions she is now trying to
reclaim. Raniel's actuation has been sufficiently proven to warrant loss of the Board's
confidence.14

The SEC also correctly concluded that petitioner Raniel was removed as an officer of
Nephro in compliance with established procedure, thus:

The resolutions of the Board dismissing complainant Raniel from her various positions
in Nephro are valid. Notwithstanding the absence of complainants from the meeting, a
quorum was validly constituted. x x x.

x    x    x

Based on its articles of incorporation, Nephro has five directors - two of the positions
were occupied by complainants and the remaining three are held by respondents. This
being the case, the presence of all three respondents in the Special Meeting of the
Board on February 2, 1998 established a quorum for the conduct of business. The
unanimous resolutions carried by the Board during such meeting are therefore valid and
binding against complainants.

It bears emphasis that Raniel was given sufficient opportunity to be heard. Jochico's
letters of January 26, 1998 and January 27, 1998, albeit adversarial, recognized her
right to explain herself and gave her the chance to do so. In fact, Raniel did respond to
Jochico's letter on January 28, 1998 and took the occasion to voice her opinions about
Jochico's alleged "practice of using others for your own benefit, without cost." (Exh. 14).
Moreover, the Special Meeting of the Board could have been the appropriate venue for
Raniel to air her side. Had Raniel decided to grace the meeting with her presence, she
could have explained herself before the board and tried to convince them to allow her to
keep her posts.15

Petitioners Raniel and Pag-ong's removal as members of Nephro's Board of Directors

was likewise valid.

Only stockholders or members have the power to remove the directors or trustees
elected by them, as laid down in Section 28 of the Corporation Code,16 which provides
in part:

SEC. 28. Removal of directors or trustees. - - Any director or trustee of a corporation

may be removed from office by a vote of the stockholders holding or representing
at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a
non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to
vote: Provided, that such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either case, after
previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the stockholders or
members of a corporation for the purpose of removal of directors or trustees or any of
them, must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of the
outstanding capital stock, or if it be a non-stock corporation, on the written demand of a
majority of the members entitled to vote. x x x Notice of the time and place of such
meeting, as well as of the intention to propose such removal, must be given by
publication or by written notice as prescribed in this Code. x x x Removal may be with
or without cause: Provided, That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they may be
entitled under Section 24 of this Code. (Emphasis supplied)cralawlibrary

Petitioners do not dispute that the stockholders' meeting was held in accordance with
Nephro's By-Laws. The ownership of Nephro's outstanding capital stock is distributed
as follows: Jochico - 200 shares; Steffens - 100 shares; Viriya - 100 shares; Raniel - 75
shares; and Pag-ong - 25 shares,17 or a total of 500 shares. A two-thirds vote of
Nephro's outstanding capital stock would be 333.33 shares, and during the
Stockholders' Special Meeting held on February 16, 1998, 400 shares voted for
petitioners' removal. Said number of votes is more than enough to oust petitioners from
their respective positions as members of the board, with or without cause.

Verily therefore, there is no cogent reason to grant the present petition.

WHEREFORE, the petition is DENIED for lack of merit.

SO ORDERED.
 70. SECOND DIVISION

[G.R. No. 121143. January 21, 1997.]

PURIFICACION G. TABANG, Petitioner, v. NATIONAL LABOR RELATIONS

COMMISSION and PAMANA GOLDEN CARE MEDICAL CENTER FOUNDATION,
INC., Respondents.

Roldan M. Noynay for Petitioner.

Fernandez C. Fuentes for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; P.D. 902-A; EXCLUSIVE JURISDICTION OF SEC OVER

INTRACORPORATE CONTROVERSY; INTRACORPORATE CONTROVERSIES,
EXPLAINED; CASE AT BENCH. — We agree with the findings of the NLRC that it is
the SEC which has jurisdiction over the case at bar. The charges against herein private
respondent partake of the nature of an intra-corporate controversy. The determination of
the rights of petitioner and the concomitant liability of private respondent arising from
her ouster as a medical director and/or hospital administrator, which are corporate
offices, is an intra-corporate controversy subject to the jurisdiction of the SEC. A
corporate officer’s dismissal is always a corporate act, or an intra-corporate controversy,
and the nature is not altered by the reason or wisdom with which the Board of Directors
may have in taking such action. Also, an intra-corporate controversy is one which arises
between a stockholder and the corporation. There is no distinction, qualification, nor any
exemption whatsoever. The provision is broad and covers all kinds of controversies
between stockholders and corporations. chanroblesvirtualawlibrary

2. ID.; ID.; ID.; OUSTER OF CORPORATE OFFICER IS AN INTRACORPORATE

CONTROVERSY; CASE AT BAR. — Contrary to the contention of petitioner, a medical
director and a hospital administrator are considered as corporate officers under the by-
laws of respondent corporation. Section 2(i), Article I thereof states that one of the
powers of the Board of Trustees is "(t)o appoint a Medical Director,
Comptroller/Administrator, Chiefs of Services and such other officers as it may deem
necessary and prescribe their powers and duties.." . . Considering that petitioner, unlike
an ordinary employee, was appointed by respondent corporation’s Board of Trustees in
its memorandum of October 30, 1990, she is deemed an officer of the corporation.
Perforce, Section 5(c) of Presidential Decree No. 902-A, which provides that the SEC
exercises exclusive jurisdiction over controversies in the election or appointment of
directors, trustees, officers or managers of corporations, partnerships or associations,
applies in the present dispute. Accordingly, jurisdiction over the same is vested in the
SEC, and not in the Labor Arbiter or the NLRC.
3. ID.; ID.; ID.; ID.; OFFICER DISTINGUISHED FROM AN EMPLOYEE. — It has been
held that an "office" is created by the charter of the corporation and the officer is elected
by the directors or stockholders. On the other hand, an "employee" usually occupies no
office and generally is employed not by action of the directors or stockholders but by the
managing officer of the corporation who also determines the compensation to be paid to
such employee.

4. ID.; ID.; ID.; ID.; JURISDICTION OF THE SEC NOT REMOVED BY OTHER CLAIMS
INVOLVING CORPORATE OFFICER; CASE AT BAR. — Even assuming that the
monthly payment of P5,000.00 was a valid claim against respondent corporation, this
would not operate to effectively remove this case from the jurisdiction of the SEC. In the
case of Cagayan de Oro Coliseum, Inc. v. Office of the Minister of Labor and
Employment, etc., Et Al., we ruled that "(a)lthough the reliefs sought by Chavez appear
to fall under the jurisdiction of the labor arbiter as they are claims for unpaid salaries
and other remunerations for services rendered, a close scrutiny thereof shows that said
claims are actually part of the perquisites of his position in, and therefore interlinked with
his relations with the corporation. In Dy, Et Al. v. NLRC, Et Al., the Court said: ‘(t)he
question of remuneration involving as it does, a person who is not a mere employee but
a stockholder and officer, an integral part, it might be said, of the corporation, is not a
simple labor problem but a matter that comes within the area of corporate affairs and
management and is in fact a corporate controversy in contemplation of the Corporation
Code."’ cralawnad

DECISION

REGALADO, J.:

This is a petition for certiorari which seeks to annul the resolution of the National Labor
Relations Commission (NLRC), dated June 26, 1995, affirming in toto the order of the
labor arbiter, dated April 26, 1994, which dismissed petitioner’s complaint for illegal
dismissal with money claims for lack of jurisdiction.

The records show that petitioner Purificacion Tabang was a founding member, a
member of the Board of Trustees, and the corporate secretary of private respondent
Pamana Golden Care Medical Center Foundation, Inc., a non-stock corporation
engaged in extending medical and surgical services.

On October 30, 1990, the Board of Trustees issued a memorandum appointing

petitioner as Medical Director and Hospital Administrator of private respondent’s
Pamana Golden Care Medical Center in Calamba, Laguna.

Although the memorandum was silent as to the amount of remuneration for the position,
petitioner claims that she received a monthly retainer fee of five thousand pesos
(P5,000.00) from private respondent, but the payment thereof was allegedly stopped in
November, 1991.

As medical director and hospital administrator, petitioner was tasked to run the affairs of
the aforesaid medical center and perform all acts of administration relative to its daily
operations.

On May 1, 1993, petitioner was allegedly informed personally by Dr. Ernesto Naval that
in a special meeting held on April 30, 1993, the Board of Trustees passed a resolution
relieving her of her position as Medical Director and Hospital Administrator, and
appointing the latter and Dr. Benjamin Donasco as acting Medical Director and acting
Hospital Administrator, respectively. Petitioner averred that she thereafter received a
copy of said board resolution.

On June 6, 1993, petitioner filed a complaint for illegal dismissal and non-payment of
wages, allowances and 13th month pay before the labor arbiter.

Respondent corporation moved for the dismissal of the complaint on the ground of lack
of jurisdiction over the subject matter. It argued that petitioner’s position as Medical
Director and Hospital Administrator was interlinked with her position as member of the
Board of Trustees, hence, her dismissal is an intra-corporate controversy which falls
within the exclusive jurisdiction of the Securities and Exchange Commission (SEC).

Petitioner opposed the motion to dismiss, contending that her position as Medical
Director and Hospital Administrator was separate and distinct from her position as
member of the Board of Trustees. She claimed that there is no intra-corporate
controversy involved since she filed the complaint in her capacity as Medical Director
and Hospital Administrator, or as an employee of private respondent.

On April 26, 1994, the labor arbiter issued an order dismissing the complaint for lack of
jurisdiction. He ruled that the case falls within the jurisdiction of the SEC, pursuant to
Section 5 of Presidential Decree No. 902-A. 1

Petitioner’s motion for reconsideration was treated as an appeal by the labor arbiter who
consequently ordered the elevation of the entire records of the case to public
respondent NLRC for appellate review. 2

On appeal, respondent NLRC affirmed the dismissal of the case on the additional
ground that "the position of a Medical Director and Hospital Administrator is akin to that
of an executive position in a corporate ladder structure," hence, petitioner’s removal
from the said position was an intra-corporate controversy within the original and
exclusive jurisdiction of the SEC. 3

Aggrieved by the decision, petitioner filed the instant petition which we find, however, to
be without merit.
We agree with the findings of the NLRC that it is the SEC which has jurisdiction over the
case at bar. The charges against herein private respondent partake of the nature of an
intra-corporate controversy. Similarly, the determination of the rights of petitioner and
the concomitant liability of private respondent arising from her ouster as a medical
director and/or hospital administrator, which are corporate offices, is an intra-corporate
controversy subject to the jurisdiction of the SEC.

Contrary to the contention of petitioner, a medical director and a hospital administrator

are considered as corporate officers under the by-laws of respondent corporation.
Section 2(i), Article I thereof states that one of the powers of the Board of Trustees is
"(t)o appoint a Medical Director, Comptroller/Administrator, Chiefs of Services and such
other officers as it may deem necessary and prescribe their powers and duties." 4

The president, vice-president, secretary and treasurer are commonly regarded as the
principal or executive officers of a corporation, and modern corporation statutes usually
designate them as the officers of the corporation. 5 However, other offices are
sometimes created by the charter or by-laws of a corporation, or the board of directors
may be empowered under the by-laws of a corporation to create additional offices as
may be necessary. 6

It has been held that an "office" is created by the charter of the corporation and the
officer is elected by the directors or stockholders. 7 On the other hand, an "employee"
usually occupies no office and generally is employed not by action of the directors or
stockholders but by the managing officer of the corporation who also determines the
compensation to be paid to such employee. 8 chanroblesvirtuallawlibrary

In the case at bar, considering that herein petitioner, unlike an ordinary employee, was
appointed by respondent corporation’s Board of Trustees in its memorandum of October
30, 1990, 9 she is deemed an officer of the corporation. Perforce, Section 5(c) of
Presidential Decree No. 902-A, which provides that the SEC exercises exclusive
jurisdiction over controversies in the election or appointment of directors, trustees,
officers or managers of corporations, partnerships or associations, applies in the
present dispute. Accordingly, jurisdiction over the same is vested in the SEC, and not in
the Labor Arbiter or the NLRC.

Moreover, the allegation of petitioner that her being a member of the Board of Trustees
was not one of the considerations for her appointment is belied by the tenor of the
memorandum itself. It states: "We hope that you will uphold and promote the mission of
our foundation," 10 and this cannot be construed other than in reference to her position
or capacity as a corporate trustee.

A corporate officer’s dismissal is always a corporate act, or an intra-corporate

controversy, and the nature is not altered by the reason or wisdom with which the Board
of Directors may have in taking such action. 11 Also, an intra-corporate controversy is
one which arises between a stockholder and the corporation. There is no distinction,
qualification, nor any exemption whatsoever. The provision is broad and covers all kinds
of controversies between stockholders and corporations. 12

With regard to the amount of P5,000.00 formerly received by herein petitioner every
month, the same cannot be considered as compensation for her services rendered as
Medical Director and Hospital Administrator. The vouchers 13 submitted by petitioner
show that the said amount was paid to her by PAMANA, Inc., a stock corporation which
is separate and distinct from herein private respondent. Although the payments were
considered advances to Pamana Golden Care, Calamba branch, there is no evidence
to show that the Pamana Golden Care stated in the vouchers refers to herein
respondent Pamana Golden Care Medical Center Foundation, Inc.

Pamana Golden Care is a division of Pamana, Inc., while respondent Pamana Golden
Care Medical Center Foundation, Inc. is a non-stock, non-profit corporation. It is stated
in the memorandum of petitioner that Pamana, Inc. is a stock and profit corporation
selling pre-need plan for education, pension and health care. The health care plan is
called Pamana Golden Care Plan and the holders are called Pamana Golden Care
Card Holders or, simply, Pamana Members. 14

It is an admitted fact that herein petitioner is a retained physician of Pamana, Inc.,

whose patients are holders of the Pamana Golden Care Card. In fact, in her complaint
15 filed before the Regional Trial Court of Calamba, herein petitioner is asking, among
others, for professional fees and/or retainer fees earned for her treatment of Pamana
Golden Care card holders. 16 Thus, at most, said vouchers can only be considered as
proof of payment of retainer fees made by Pamana, Inc. to herein petitioner as a
retained physician of Pamana Golden Care.

Moreover, even assuming that the monthly payment of P5,000.00 was a valid claim
against respondent corporation, this would not operate to effectively remove this case
from the jurisdiction of the SEC. In the case of Cagayan de Oro Coliseum, Inc. v. Office
of the Minister of Labor and Employment etc., Et Al., 17 we ruled that "(a)lthough the
reliefs sought by Chavez appear to fall under the jurisdiction of the labor arbiter as they
are claims for unpaid salaries and other remuneration for services rendered, a close
scrutiny thereof shows that said claims are actually part of the perquisites of his position
in, and therefore interlinked with, his relations with the corporation. In Dy, Et Al., v.
NLRC, Et Al., the Court said: ‘(t)he question of remuneration involving as it does, a
person who is not a mere employee but a stockholder and officer, an integral part, it
might be said, of the corporation, is not a simple labor problem but a matter that comes
within the area of corporate affairs and management and is in fact a corporate
controversy in contemplation of the Corporation Code.’"chanroblesvirtuallawlibrary:red

WHEREFORE, the questioned resolution of the NLRC is hereby AFFIRMED, without

prejudice to petitioner’s taking recourse to and seeking relief through the appropriate
remedy in the proper forum.

SO ORDERED.
 71. G.R. No. L-26555 November 16, 1926

BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN J. LACSON Petitioners,

vs. Honorable MARIANO DE LA ROSA, Auxiliary Judge of First Instance of
Occidental Negros, AGUSTIN CORUNA, MAURO LEDESMA and BINALBAGAN
ESTATE, INC., Respondents.

Roman J. Lacson, for petitioners.

The respondent judge in his own behalf.
The respondent corporation in its own behalf.
R. Nolan and Feria and La O for the respondents Coruna and Ledesma.

STREET, J.:

This is an original petition for the writ of certiorari whereby the petitioners, Baldomeo
Roxas, Enrique Echaus, and Roman J. Lacson, seek to procure the abrogation of an
order of the respondent judge granting a preliminary injunction in an action in the Court
of First Instance of Occidental Negros, instituted by Agustin Coruna and Mauro
Ledesma against the petitioners and the Binalbagan Estate, Inc. The cause is now
before us upon the issues made by the answers filed by the
respondents.chanroblesvirtualawlibrary chanrobles virtual law library

It appears that the Binalbagan Estate, Inc., is a corporation having its principal plant in
Occidental Negros where it is engaged in the manufacture of raw sugar from canes
grown upon farms accessible to its central. In July, 1924, the possessors of a majority of
the shares of the Binalbagan Estate, Inc., formed a voting trust composed of three
members, namely, Salvador Laguna, Segunda Monteblanco, and Arthur F. Fisher, as
trustee. By the document constituting this voting trust the trustees were authorized to
represent and vote the shares pertaining to their constituents, and to this end the
shareholders undertook to assign their shares to the trustees on the books of the
company. The total number of outstanding shares of the corporation is somewhat over
5,500, while the number of shares controlled by the voting trust is less than
3,000.chanroblesvirtualawlibrary chanrobles virtual law library

On February 1, 1926, the general annual meeting of the shareholders of the Binalbagan
Estate, Inc., took place, at which Mr. J. P. Heilbronn appeared as representative of the
voting trust, his authority being recognized by the holders of all the other shares present
at this meeting. Upon said occasion Heilbronn, by virtue of controlling the majority of the
shares, was able to nominate and elect a board of directors to his own liking, without
opposition from the minority. After the board of directors had been thus elected and had
qualified, they chose a set of officers constituting of Jose M. Yusay, president, Timoteo
Unson, vice-president, Jose G. Montalvo, secretary-treasurer, and H. W. Corp and
Agustin Coruna, as members. Said officials immediately entered upon the discharged of
their duties and have continued in possession of their respective offices until the present
time.chanroblesvirtualawlibrary chanrobles virtual law library
Since the creation of the voting trust there have been a number of vacancies caused by
resignation or the absence of members from the Philippine Islands, with the result that
various substitutions have been made in the personnel of the voting trust. At the present
time the petitioners Roxas, Echaus, and Lacson presumably constitute its membership.
We say presumably, because in the present proceedings an issue of fact is made by the
respondents upon the point whether the three individuals named have been regularly
substituted for their several predecessors. In the view we take of the case it is not
necessary to determine this issue; and we shall assume provisionally that the three
petitioners are the lawful components of the voting
trust.chanroblesvirtualawlibrary chanrobles virtual law library

Although the present officers of the Binalbagan Estate, Inc., were elected by the
representative of the voting trust, the present trustee are apparently desirous of ousting
said officers, without awaiting the termination of their official terms at the expiration of
one year from the date of their election. In other to effect this purpose the petitioners in
their character as members of the voting trust, on August 2, 1926, caused the secretary
of the Binalbagan Estate, Inc., to issue to the shareholders a notice calling for a special
general meeting of shareholders to be held at 10 a. m., on August 16, 1926, "for the
election of the board of directors, for the amendment of the By-Laws, and for any other
business that can be dealt with in said meeting."chanrobles virtual law library

Within a few days after said notice was issued Agustin Coruña, as member of the
existing board, and Mauro Ledesma, as a simple shareholder of the corporation,
instituted a civil action (No. 3840) in the Court of First Instance of Occidental Negros
against the trustees and the Binalbagan Estate, Inc., for the purpose of enjoining the
meeting completed in the notice above-
mentioned.chanroblesvirtualawlibrary chanrobles virtual law library

In response to a proper for a preliminary injunction, in connection with said action, the
respondent judge issued the restraining order, or preliminary injunction, which gave rise
to the present petition for the writ of certiorari. In the dispositive part of said order the
Binalbagan Estate, Inc., its lawyers, agents, representatives, and all others who may be
assisting or corroborating with them, are restrained from holding the general
shareholders' meeting called for the date mentioned and from electing new directors for
the company in substitution of the present incumbents, said injunction to be effective
until further order of the court. it is now asserted here by the petitioners that the making
of this order was beyond the legitimate powers of the respondent judge, and it is
accordingly prayed that said order be set aside.chanroblesvirtualawlibrary chanrobles
virtual law library

We are of the opinion that this contention is untenable and that the respondent judge
acted within his legitimate powers in making the order against which relief is sought. In
order to expose the true inwardness of the situation before us it is necessary to take not
of the fact that under the law the directors of a corporation can only be removed from
office by a vote of the stockholders representing at least two-thirds of the subscribed
capital stock entitled to vote (Act No. 1459, sec. 34); while vacancies in the board, when
they exist, can be filled by mere majority vote, (Act No. 1459, sec. 25). Moreover, the
law requires that when action is to be taken at a special meeting to remove the
directors, such purpose shall be indicated in the call (Act No. 1459, sec.
34).chanroblesvirtualawlibrary chanrobles virtual law library

Now, upon examining into the number of shares controlled by the voting trust, it will be
seen that, while the trust controls a majority of the stock, it does not have a clear two-
thirds majority. It was therefore impolitic for the petitioners, in forcing the call for the
meeting of August 16, to come out frankly and say in the notice that one of the purpose
of the meeting was to removed the directors of the corporation from office. Instead, the
call was limited to the election of the board of directors, it being the evident intention of
the voting trust to elect a new board as if the directorate had been then
vacant.chanroblesvirtualawlibrary chanrobles virtual law library

But the complaint in civil No. 3840 directly asserts that the members of the present
directorate were regularly elected at the general annual meeting held in February, 1926;
and if that assertion be true, the proposal to elect, another directorate, as per the call of
August 2, if carried into effect, would result in the election of a rival set of directors, who
would probably need the assistance of judgment of court in an independent action
of quo warranto to get them installed into office, even supposing that their title to the
office could be maintained. That the trial judge had jurisdiction to forestall that step and
enjoin the contemplated election is a matter about which there cannot be the slightest
doubt. The law contemplates and intends that there will be one of directors at a time
and that new directors shall be elected only as vacancies occur in the directorate by
death, resignation, removal, or otherwise.chanroblesvirtualawlibrary chanrobles virtual
law library

It is instituted that there was some irregularity or another in the election of the present
directorate. We see nothing upon which this suggestion can be safely planted; And at
any rate the present board of directors are de facto incumbents of the office whose acts
will be valid until they shall be lawfully removed from the office or cease from the
discharge of their functions. In this case it is not necessary for us to agitate ourselves
over the question whether the respondent judge properly exercised his judicial
discretion in granting the order complained of. If suffices to know that in making the
order he was acting within the limits of his judicial
powers.chanroblesvirtualawlibrary chanrobles virtual law library

It will be noted that the order in question enjoins the defendants from holding the
meeting called for August 16; and said order must not be understood as constituting any
obstacle for the holding of the regular meeting at the time appointed in the by-laws of
the corporation.chanroblesvirtualawlibrary chanrobles virtual law library

For the reasons stated the petition will be denied, and it is so ordered, with
costs.chanroblesvirtualawlibrary chanrobles
72. Tan vs Sycip -same sa previous case

73. Facts: Private respondents are the majority and controlling members of the Board of
Trustees of Western Institute of Technology, Inc. a stock corporation engaged in the
operation, among others, of an educational institution. Then, the board of directors
amended their by laws giving the members of board of directors a compensation. The
ten per centum of the net profits shall be distributed equally among the ten members of
the Board of Trustees.  Few years later, the private respondents were charged of
falsification of public documents and estafa. The charge for falsification of public
document was anchored on the private respondents’ submission of WIT’s income
statement for the fiscal year 1985-1986 with the Securities and Exchange Commission
(SEC) reflecting therein the disbursement of corporate funds making it appear that the
same was passed by the board on March 30, 1986, when in truth, the same was
actually passed on June 1, 1986, a date not covered by the corporation’s fiscal year
1985-1986. After a full-blown hearing TC handed down a verdict of acquittal on both
counts without imposing any civil liability against the accused therein.

Issue: WON the compensation of the board of directors as stated in their by laws
violates the corporation code?

Held: NO. There is no argument that directors or trustees, as the case may be, are not
entitled to salary or other compensation when they perform nothing more than the usual
and ordinary duties of their office. This rule is founded upon a presumption that
directors/trustees render service gratuitously, and that the return upon their shares
adequately furnishes the motives for service, without compensation.  

Under the foregoing section, there are only two (2) ways by which members of the
board can be granted compensation apart from reasonable per diems: (1) when there is
a provision in the by-laws fixing their compensation; and (2) when the stockholders
representing a majority of the outstanding capital stock at a regular or special
stockholders’ meeting agree to give it to them. In the case at bench, Resolution No. 48,
s. 1986 granted monthly compensation to private respondents not in their capacity as
members of the board, but rather as officers of the corporation, more particularly as
Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology.
Clearly, therefore, the prohibition with respect to granting compensation to corporate
directors/trustees as such under Section 30 is not violated in this particular case.

http://www.pinoycasedigest.com/2012/12/western-institute-of-technology-inc-vs.html
74.

RULING: NEGATIVE
 75. THIRD DIVISION

G.R. No. 206806, June 25, 2014

ARCO PULP AND PAPER CO., INC. AND CANDIDA A. SANTOS, Petitioners, v. DAN

T. LIM, DOING BUSINESS UNDER THE NAME AND STYLE OF QUALITY PAPERS
& PLASTIC PRODUCTS ENTERPRISES, Respondent.

DECISION

LEONEN, J.:

Novation must be stated in clear and unequivocal terms to extinguish an obligation. It

cannot be presumed and may be implied only if the old and new contracts are
incompatible on every point.

Before us is a petition for review on certiorari 1 assailing the Court of Appeals’

decision2 in CA-G.R. CV No. 95709, which stemmed from a complaint 3 filed in the
Regional Trial Court of Valenzuela City, Branch 171, for collection of sum of money.

The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw
materials, under the name Quality Paper and Plastic Products, Enterprises, to factories
engaged in the paper mill business.4 From February 2007 to March 2007, he delivered
scrap papers worth P7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp
and Paper) through its Chief Executive Officer and President, Candida A. Santos. 5 The
parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the
value of the raw materials or deliver to him their finished products of equivalent
value.6cralawred

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper
issued a post-dated check dated April 18, 2007 7 in the amount of P1,487,766.68 as
partial payment, with the assurance that the check would not bounce. 8 When he
deposited the check on April 18, 2007, it was dishonored for being drawn against a
closed account.9cralawred

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum
of agreement10 where Arco Pulp and Paper bound themselves to deliver their finished
products to Megapack Container Corporation, owned by Eric Sy, for his account.
According to the memorandum, the raw materials would be supplied by Dan T. Lim,
through his company, Quality Paper and Plastic Products. The memorandum of
agreement reads as follows:chanRoblesvirtualLawlibrary
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs.
Candida A. Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175
GSM, full width 76 inches at the price of P18.50 per kg. to Megapack Container for Mr.
Eric Sy’s account. Schedule of deliveries are as follows:

....

It has been agreed further that the Local OCC materials to be used for the production of
the above Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of
600 Metric Tons at P6.50 per kg. (price subject to change per advance notice). Quantity
of Local OCC delivery will be based on the quantity of Test Liner delivered to Megapack
Container Corp. based on the above production schedule. 11

On May 5, 2007, Dan T. Lim sent a letter12 to Arco Pulp and Paper demanding payment
of the amount of ?7,220,968.31, but no payment was made to him. 13cralawred

Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment
with the Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp
and Paper filed its answer15 but failed to have its representatives attend the pre-trial
hearing. Hence, the trial court allowed Dan T. Lim to present his evidence ex
parte.16cralawred

On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and
Paper and dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy
entered into the memorandum of agreement, novation took place, which extinguished
Arco Pulp and Paper’s obligation to Dan T. Lim. 17cralawred

Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him,
novation did not take place since the memorandum of agreement between Arco Pulp
and Paper and Eric Sy was an exclusive and private agreement between them. He
argued that if his name was mentioned in the contract, it was only for supplying the
parties their required scrap papers, where his conformity through a separate contract
was indispensable.19cralawred

On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting

aside the judgment dated September 19, 2008 and ordering Arco Pulp and Paper to
jointly and severally pay Dan T. Lim the amount of P7,220,968.31 with interest at
12% per annum from the time of demand; P50,000.00 moral damages; P50,000.00
exemplary damages; and P50,000.00 attorney’s fees. 22cralawred

The appellate court ruled that the facts and circumstances in this case clearly showed
the existence of an alternative obligation.23 It also ruled that Dan T. Lim was entitled to
damages and attorney’s fees due to the bad faith exhibited by Arco Pulp and Paper in
not honoring its undertaking.24cralawred
Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its
President and Chief Executive Officer, Candida A. Santos, bring this petition for review
on certiorari.

On one hand, petitioners argue that the execution of the memorandum of agreement
constituted a novation of the original obligation since Eric Sy became the new debtor of
respondent. They also argue that there is no legal basis to hold petitioner Candida A.
Santos personally liable for the transaction that petitioner corporation entered into with
respondent. The Court of Appeals, they allege, also erred in awarding moral and
exemplary damages and attorney’s fees to respondent who did not show proof that he
was entitled to damages. 27cralawred

Respondent, on the other hand, argues that the Court of Appeals was correct in ruling
that there was no proper novation in this case. He argues that the Court of Appeals was
correct in ordering the payment of ?7,220,968.31 with damages since the debt of
petitioners remains unpaid.28 He also argues that the Court of Appeals was correct in
holding petitioners solidarily liable since petitioner Candida A. Santos was “the prime
mover for such outstanding corporate liability.” 29cralawred

In their reply, petitioners reiterate that novation took place since there was nothing in the
memorandum of agreement showing that the obligation was alternative. They also
argue that when respondent allowed them to deliver the finished products to Eric Sy, the
original obligation was novated.30cralawred

A rejoinder was submitted by respondent, but it was noted without action in view of A.M.
No. 99-2-04-SC dated November 21, 2000.31cralawred

The issues to be resolved by this court are as follows:chanRoblesvirtualLawlibrary

1. Whether the obligation between the parties was extinguished by novation

2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.

3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded

The petition is denied.

The obligation between the

parties was an alternative
obligation

The rule on alternative obligations is governed by Article 1199 of the Civil Code, which
states:chanRoblesvirtualLawlibrary
Article 1199. A person alternatively bound by different prestations shall completely
perform one of them.

The creditor cannot be compelled to receive part of one and part of the other
undertaking.

“In an alternative obligation, there is more than one object, and the fulfillment of one is
sufficient, determined by the choice of the debtor who generally has the right of
election.”32 The right of election is extinguished when the party who may exercise that
option categorically and unequivocally makes his or her choice known. 33 The choice of
the debtor must also be communicated to the creditor who must receive notice of it
since:chanRoblesvirtualLawlibrary

The object of this notice is to give the creditor . . . opportunity to express his consent, or
to impugn the election made by the debtor, and only after said notice shall the election
take legal effect when consented by the creditor, or if impugned by the latter, when
declared proper by a competent court.34

According to the factual findings of the trial court and the appellate court, the original
contract between the parties was for respondent to deliver scrap papers worth
P7,220,968.31 to petitioner Arco Pulp and Paper. The payment for this delivery became
petitioner Arco Pulp and Paper’s obligation. By agreement, petitioner Arco Pulp and
Paper, as the debtor, had the option to either (1) pay the price or (2) deliver the finished
products of equivalent value to respondent.35cralawred

The appellate court, therefore, correctly identified the obligation between the parties as
an alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the
raw materials from respondent, would either pay him the price of the raw materials or, in
the alternative, deliver to him the finished products of equivalent value.

When petitioner Arco Pulp and Paper tendered a check to respondent in partial
payment for the scrap papers, they exercised their option to pay the price.
Respondent’s receipt of the check and his subsequent act of depositing it constituted
his notice of petitioner Arco Pulp and Paper’s option to pay.

This choice was also shown by the terms of the memorandum of agreement, which was
executed on the same day. The memorandum declared in clear terms that the delivery
of petitioner Arco Pulp and Paper’s finished products would be to a third person, thereby
extinguishing the option to deliver the finished products of equivalent value to
respondent.

The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum of agreement
constituted a novation of the contract between the parties. When petitioner Arco Pulp
and Paper opted instead to deliver the finished products to a third person, it did not
novate the original obligation between the parties.

The rules on novation are outlined in the Civil Code, thus:chanRoblesvirtualLawlibrary

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)

Article 1292. In order that an obligation may be extinguished by another which

substitute the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each other. (1204)

Article 1293. 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,
but not without the consent of the creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237. (1205a)

Novation extinguishes an obligation between two parties when there is a substitution of

objects or debtors or when there is subrogation of the creditor. It occurs only when the
new contract declares so “in unequivocal terms” or that “the old and the new obligations
be on every point incompatible with each other.” 36cralawred

Novation was extensively discussed by this court in Garcia v. Llamas:37cralawred

Novation is a mode of extinguishing an obligation by changing its objects or

principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. Article 1293 of the Civil
Code defines novation as follows:

“Art. 1293. 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,
but not without the consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237.”

In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the change does
not come from — and may even be made without the knowledge of — the debtor, since
it consists of a third person’s assumption of the obligation. As such, it logically requires
the consent of the third person and the creditor. In delegacion, the debtor offers, and the
creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary. Both modes of
substitution by the debtor require the consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is

terminated by the creation of a new one that takes the place of the former. It is merely
modificatory when the old obligation subsists to the extent that it remains compatible
with the amendatory agreement. Whether extinctive or modificatory, novation is made
either by changing the object or the principal conditions, referred to as objective or real
novation; or by substituting the person of the debtor or subrogating a third person to the
rights of the creditor, an act known as subjective or personal novation. For novation to
take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares
in unequivocal terms that the old obligation is extinguished. It is implied when the new
obligation is incompatible with the old one on every point. The test of incompatibility
is whether the two obligations can stand together, each one with its own
independent existence.38 (Emphasis supplied)

Because novation requires that it be clear and unequivocal, it is never presumed,

thus:chanRoblesvirtualLawlibrary

In the civil law setting, novatio is literally construed as to make new. So it is deeply

rooted in the Roman Law jurisprudence, the principle — novatio non praesumitur
— that novation is never presumed. At bottom, for novation to be a jural reality,
its animus must be ever present, debitum pro debito — basically extinguishing the old
obligation for the new one.39 (Emphasis supplied)

There is nothing in the memorandum of agreement that states that with its execution,
the obligation of petitioner Arco Pulp and Paper to respondent would be extinguished. It
also does not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper as
respondent’s debtor. It merely shows that petitioner Arco Pulp and Paper opted to
deliver the finished products to a third person instead.

The consent of the creditor must also be secured for the novation to be
valid:chanRoblesvirtualLawlibrary

Novation must be expressly consented to. Moreover, the conflicting intention and
acts of the parties underscore the absence of any express disclosure or circumstances
with which to deduce a clear and unequivocal intent by the parties to novate the old
agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his
conformity to the contract need not be secured. This is clear from the first line of the
memorandum, which states:chanRoblesvirtualLawlibrary

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs.
Candida A. Santos and Mr. Eric Sy. . . .41

If the memorandum of agreement was intended to novate the original agreement

between the parties, respondent must have first agreed to the substitution of Eric Sy as
his new debtor. The memorandum of agreement must also state in clear and
unequivocal terms that it has replaced the original obligation of petitioner Arco Pulp and
Paper to respondent. Neither of these circumstances is present in this case.

Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also
conflicts with their alleged intent to pass on their obligation to Eric Sy. When respondent
sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it
showed that the former neither acknowledged nor consented to the latter as his new
debtor. These acts, when taken together, clearly show that novation did not take place.

Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent
remains valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay
respondent the full amount of P7,220,968.31.

Petitioners are liable for damages 

Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach
of contract where the breach is due to fraud or bad faith:chanRoblesvirtualLawlibrary

Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages
if the court should find that, under the circumstances, such damages are justly due. The
same rule applies to breaches of contract where the defendant acted fraudulently
or in bad faith. (Emphasis supplied)

Moral damages are not awarded as a matter of right but only after the party claiming it
proved that the breach was due to fraud or bad faith. As this court
stated:chanRoblesvirtualLawlibrary

Moral damages are not recoverable simply because a contract has been breached.
They are recoverable only if the party from whom it is claimed acted fraudulently or in
bad faith or in wanton disregard of his contractual obligations. The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive. 42

Further, the following requisites must be proven for the recovery of moral
damages:chanRoblesvirtualLawlibrary
An award of moral damages would require certain conditions to be met, to wit: (1) first,
there must be an injury, whether physical, mental or psychological, clearly sustained by
the claimant; (2) second, there must be culpable act or omission factually established;
(3) third, the wrongful act or omission of the defendant is the proximate cause of the
injury sustained by the claimant; and (4) fourth, the award of damages is predicated on
any of the cases stated in Article 2219 of the Civil Code. 43

Here, the injury suffered by respondent is the loss of P7,220,968.31 from his business.
This has remained unpaid since 2007. This injury undoubtedly was caused by petitioner
Arco Pulp and Paper’s act of refusing to pay its obligations.

When the obligation became due and demandable, petitioner Arco Pulp and Paper not
only issued an unfunded check but also entered into a contract with a third person in an
effort to evade its liability. This proves the third requirement.

As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages
may be awarded in the following instances:chanRoblesvirtualLawlibrary

Article 2219. Moral damages may be recovered in the following and analogous
cases:ChanRoblesVirtualawlibrary
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this
enumeration. When a party breaches a contract, he or she goes against Article 19 of
the Civil Code, which states:chanRoblesvirtualLawlibrary

Article 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.

Persons who have the right to enter into contractual relations must exercise that right
with honesty and good faith. Failure to do so results in an abuse of that right, which may
become the basis of an action for damages. Article 19, however, cannot be its sole
basis:chanRoblesvirtualLawlibrary

Article 19 is the general rule which governs the conduct of human relations. By itself, it
is not the basis of an actionable tort. Article 19 describes the degree of care required so
that an actionable tort may arise when it is alleged together with Article 20 or Article
21.44
Article 20 and 21 of the Civil Code are as follows:chanRoblesvirtualLawlibrary

Article 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for the same.

Article 21. Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.

To be actionable, Article 20 requires a violation of law, while Article 21 only concerns

with lawful acts that are contrary to morals, good customs, and public
policy:chanRoblesvirtualLawlibrary

Article 20 concerns violations of existing law as basis for an injury. It allows recovery
should the act have been willful or negligent. Willful may refer to the intention to do the
act and the desire to achieve the outcome which is considered by the plaintiff in tort
action as injurious. Negligence may refer to a situation where the act was consciously
done but without intending the result which the plaintiff considers as injurious.

Article 21, on the other hand, concerns injuries that may be caused by acts which are
not necessarily proscribed by law. This article requires that the act be willful, that is, that
there was an intention to do the act and a desire to achieve the outcome. In cases
under Article 21, the legal issues revolve around whether such outcome should be
considered a legal injury on the part of the plaintiff or whether the commission of the act
was done in violation of the standards of care required in Article 19. 45

When parties act in bad faith and do not faithfully comply with their obligations under
contract, they run the risk of violating Article 1159 of the Civil
Code:chanRoblesvirtualLawlibrary

Article 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.

Article 2219, therefore, is not an exhaustive list of the instances where moral damages
may be recovered since it only specifies, among others, Article 21. When a party
reneges on his or her obligations arising from contracts in bad faith, the act is not only
contrary to morals, good customs, and public policy; it is also a violation of Article 1159.
Breaches of contract become the basis of moral damages, not only under Article 2220,
but also under Articles 19 and 20 in relation to Article 1159.

Moral damages, however, are not recoverable on the mere breach of the contract.
Article 2220 requires that the breach be done fraudulently or in bad faith. In Adriano v.
Lasala:46cralawred
To recover moral damages in an action for breach of contract, the breach must be
palpably wanton, reckless and malicious, in bad faith, oppressive, or abusive. Hence,
the person claiming bad faith must prove its existence by clear and convincing evidence
for the law always presumes good faith.

Bad faith does not simply connote bad judgment or negligence. It imports a
dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of known duty through some motive or interest or ill will that partakes of
the nature of fraud. It is, therefore, a question of intention, which can be inferred
from one’s conduct and/or contemporaneous statements.47 (Emphasis supplied)

Since a finding of bad faith is generally premised on the intent of the doer, it requires an
examination of the circumstances in each case.

When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation
to respondent, it was presumably with the knowledge that it was being drawn against a
closed account. Worse, it attempted to shift their obligations to a third person without
the consent of respondent.

Petitioner Arco Pulp and Paper’s actions clearly show “a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of known duty through some
motive or interest or ill will that partakes of the nature of fraud.” 48 Moral damages may,
therefore, be awarded.

Exemplary damages may also be awarded. Under the Civil Code, exemplary damages
are due in the following circumstances:chanRoblesvirtualLawlibrary

Article 2232. In contracts and quasi-contracts, the court may award exemplary damages
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner.

Article 2233. Exemplary damages cannot be recovered as a matter of right; the court
will decide whether or not they should be adjudicated.

Article 2234. While the amount of the exemplary damages need not be proven, the
plaintiff must show that he is entitled to moral, temperate or compensatory damages
before the court may consider the question of whether or not exemplary damages
should be awarded.

In Tankeh v. Development Bank of the Philippines,49 we stated

that:chanRoblesvirtualLawlibrary

The purpose of exemplary damages is to serve as a deterrent to future and

subsequent parties from the commission of a similar offense. The case of People
v. Rante citing People v. Dalisay held that:ChanRoblesVirtualawlibrary
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective
damages are intended to serve as a deterrent to serious wrong doings, and as a
vindication of undue sufferings and wanton invasion of the rights of an injured or
a punishment for those guilty of outrageous conduct. These terms are generally,
but not always, used interchangeably. In common law, there is preference in the use of
exemplary damages when the award is to account for injury to feelings and for the
sense of indignity and humiliation suffered by a person as a result of an injury that has
been maliciously and wantonly inflicted, the theory being that there should be
compensation for the hurt caused by the highly reprehensible conduct of the defendant
—associated with such circumstances as willfulness, wantonness, malice, gross
negligence or recklessness, oppression, insult or fraud or gross fraud—that intensifies
the injury. The terms punitive or vindictive damages are often used to refer to those
species of damages that may be awarded against a person to punish him for his
outrageous conduct. In either case, these damages are intended in good measure to
deter the wrongdoer and others like him from similar conduct in the future. 50 (Emphasis
supplied; citations omitted)

The requisites for the award of exemplary damages are as

follows:ChanRoblesVirtualawlibrary
(1) they may be imposed by way of example in addition to compensatory damages,
and only after the claimant's right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending
upon the amount of compensatory damages that may be awarded to the claimant;
and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent,
oppressive or malevolent manner.51

Business owners must always be forthright in their dealings. They cannot be allowed to
renege on their obligations, considering that these obligations were freely entered into
by them. Exemplary damages may also be awarded in this case to serve as a deterrent
to those who use fraudulent means to evade their liabilities.

Since the award of exemplary damages is proper, attorney’s fees and cost of the suit
may also be recovered. Article 2208 of the Civil Code
states:chanRoblesvirtualLawlibrary

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded[.]

Petitioner Candida A. Santos

is solidarily liable with petitioner
corporation

Petitioners argue that the finding of solidary liability was erroneous since no evidence
was adduced to prove that the transaction was also a personal undertaking of petitioner
Santos. We disagree.

In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated

that:chanRoblesvirtualLawlibrary

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

....

Before a director or officer of a corporation can be held personally liable for

corporate obligations, however, the following requisites must concur: (1) the
complainant must allege in the complaint that the director or officer assented to
patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and (2) the complainant must clearly and convincingly
prove such unlawful acts, negligence or bad faith.

While it is true that the determination of the existence of any of the circumstances that
would warrant the piercing of the veil of corporate fiction is a question of fact which
cannot be the subject of a petition for review on certiorari under Rule 45, this Court can
take cognizance of factual issues if the findings of the lower court are not supported by
the evidence on record or are based on a misapprehension of facts. 53 (Emphasis
supplied)

As a general rule, directors, officers, or employees of a corporation cannot be held

personally liable for obligations incurred by the corporation. However, this veil of
corporate fiction may be pierced if complainant is able to prove, as in this case, that (1)
the officer is guilty of negligence or bad faith, and (2) such negligence or bad faith was
clearly and convincingly proven.

Here, petitioner Santos entered into a contract with respondent in her capacity as the
President and Chief Executive Officer of Arco Pulp and Paper. She also issued the
check in partial payment of petitioner corporation’s obligations to respondent on behalf
of petitioner Arco Pulp and Paper. This is clear on the face of the check bearing the
account name, “Arco Pulp & Paper, Co., Inc.” 54 Any obligation arising from these acts
would not, ordinarily, be petitioner Santos’ personal undertaking for which she would be
solidarily liable with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger
Philippines:55cralawred

Piercing the veil of corporate fiction is an equitable doctrine developed to address

situations where the separate corporate personality of a corporation is abused or used
for wrongful purposes. Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-legitimate purposes, such
as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate
fraud or to carry out similar or inequitable considerations, other unjustifiable
aims or intentions, in which case, the fiction will be disregarded and the
individuals composing it and the two corporations will be treated as
identical.56 (Emphasis supplied)

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner
Arco Pulp and Paper, stating that:chanRoblesvirtualLawlibrary

In the present case, We find bad faith on the part of the [petitioners] when they
unjustifiably refused to honor their undertaking in favor of the [respondent]. After the
check in the amount of P1,487,766.68 issued by [petitioner] Santos was dishonored for
being drawn against a closed account, [petitioner] corporation denied any privity with
[respondent]. These acts prompted the [respondent] to avail of the remedies provided
by law in order to protect his rights.57

We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind
the corporate veil. When petitioner Arco Pulp and Paper’s obligation to respondent
became due and demandable, she not only issued an unfunded check but also
contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s liability.
She unjustifiably refused to honor petitioner corporation’s obligations to respondent.
These acts clearly amount to bad faith. In this instance, the corporate veil may be
pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and
Paper.

The rate of interest due on

the obligation must be reduced
in view of Nacar v. Gallery
Frames58cralawred

In view, however, of the promulgation by this court of the decision dated August 13,
2013 in Nacar v. Gallery Frames,59 the rate of interest due on the obligation must be
modified from 12% per annum to 6% per annum from the time of demand.

Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of

Appeals,60 and we have laid down the following guidelines with regard to the rate of
legal interest:chanRoblesvirtualLawlibrary
To recapitulate and for future guidance, the guidelines laid down in the case
of Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular
No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

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.61 (Emphasis supplied; citations omitted.)

According to these guidelines, the interest due on the obligation of P7,220,968.31

should now be at 6% per annum, computed from May 5, 2007, when respondent sent
his letter of demand to petitioners. This interest shall continue to be due from the finality
of this decision until its full satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709
is AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered
solidarily to pay respondent Dan T. Lim the amount of P7,220,968.31 with interest of 6%
per annum at the time of demand until finality of judgment and its full satisfaction, with
moral damages in the amount of P50,000.00, exemplary damages in the amount of
P50,000.00, and attorney’s fees in the amount of P50,000.00.

SO ORDERED.
76. Concept Builders vs NLRC

GR 108734; 29 May 1996

Facts:

Petitioner Concept Builders, Inc., a domestic corporation engaged in the construction

business. Private respondents were employed by said company as laborers, carpenters
and riggers. However, they were illegally dismissed.
Aggrieved, private respondents filed a complaint for illegal dismissal. The Labor Arbiter
rendered judgment ordering petitioner to reinstate private respondents and to pay them
back wages. It became final and executory.
The alias Writ of Execution cannot be enforced by the sheriff because all the employees
inside petitioner’s premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed
that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by petitioner.
Thus, NLRC issued a break-open order against Concept Builders and HPPI.
Issue:  Whether the piercing the veil of corporate entity is proper.
Held: Yes.
It is a fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other corporations to which it may be
connected. But, this separate and distinct personality of a corporation is merely a fiction
created by law for convenience and to promote justice. So, when the notion of separate
juridical personality is used to defeat public convenience, justify wrong, protect fraud or
defend crime, or is used as a device to defeat the labor laws, this separate personality
of the corporation may be disregarded or the veil of corporate fiction pierced. This is
true likewise when the corporation is merely an adjunct, a business conduit or an alter
ego of another corporation.
The conditions under which the juridical entity may be disregarded vary according to the
peculiar facts and circumstances of each case. No hard and fast rule can be accurately
laid down, but certainly, there are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.
The SEC en banc explained the “instrumentality rule” which the courts have applied in
disregarding the separate juridical personality of corporations as follows:
Where one corporation is so organized and controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the “instrumentality” may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of
instances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. It must
be kept in mind that the control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate
fiction is as follows:
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 rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The absence of any one of these elements prevents “piercing the corporate veil.” In
applying the “instrumentality” or “alter ego” doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual defendant’s
relationship to that operation. 
Clearly, petitioner ceased its business operations in order to evade the payment to
private respondents of back wages and to bar their reinstatement to their former
positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already attached
to petitioner corporation.
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77.
 78. [G.R. NO. 153535. July 28, 2005]

SOLIDBANK CORPORATION, Petitioners, v. MINDANAO FERROALLOY

CORPORATION, Spouses JONG-WON HONG and SOO-OK KIM HONG,* TERESITA
CU, and RICARDO P. GUEVARA and Spouse,**Respondents.

DECISION

PANGANIBAN, J.:

To justify an award for moral and exemplary damages under Articles 19 to 21 of the
Civil Code (on human relations), the claimants must establish the other party's malice or
bad faith by clear and convincing evidence.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the
December 21, 2001 Decision2 and the May 15, 2002 Resolution3 of the Court of
Appeals (CA) in CA-GR CV No. 67482. The CA disposed as follows:

"IN THE LIGHT OF ALL THE FOREGOING, the appeal is DISMISSED. The Decision
appealed from is AFFIRMED."4

The assailed Resolution, on the other hand, denied petitioner's Motion for
Reconsideration.

The Facts

The CA narrated the antecedents as follows:

"The Maria Cristina Chemical Industries (MCCI) and three (3) Korean corporations,
namely, the Ssangyong Corporation, the Pohang Iron and Steel Company and the
Dongil Industries Company, Ltd., decided to forge a joint venture and establish a
corporation, under the name of the Mindanao Ferroalloy Corporation (Corporation for
brevity) with principal offices in Iligan City. Ricardo P. Guevara was the President and
Chairman of the Board of Directors of the Corporation. Jong-Won Hong, the General
Manager of Ssangyong Corporation, was the Vice-President of the Corporation for
Finance, Marketing and Administration. So was Teresita R. Cu. On November 26, 1990,
the Board of Directors of the Corporation approved a 'Resolution' authorizing its
President and Chairman of the Board of Directors or Teresita R. Cu, acting together
with Jong-Won Hong, to secure an omnibus line in the aggregate amount
of P30,000,000.00 from the Solidbank x x x.

xxx
"In the meantime, the Corporation started its operations sometime in April, 1991. Its
indebtedness ballooned to P200,453,686.69 compared to its assets of
only P65,476,000.00. On May 21, 1991, the Corporation secured an ordinary time loan
from the Solidbank in the amount of P3,200,000.00. Another ordinary time loan was
granted by the Bank to the Corporation on May 28, 1991, in the amount
of P1,800,000.00 or in the total amount of P5,000,000.00, due on July 15 and 26, 1991,
respectively.

"However, the Corporation and the Bank agreed to consolidate and, at the same time,
restructure the two (2) loan availments, the same payable on September 20, 1991. The
Corporation executed 'Promissory Note No. 96-91-00865-6' in favor of the Bank
evidencing its loan in the amount of P5,160,000.00, payable on September 20, 1991.
Teresita Cu and Jong-Won Hong affixed their signatures on the note. To secure the
payment of the said loan, the Corporation, through Jong-Won Hong and Teresita Cu,
executed a 'Deed of Assignment' in favor of the Bank covering its rights, title and
interest to the following:

'The entire proceeds of drafts drawn under Irrevocable Letter of Credit No. M-S-041-
2002080 opened with The Mitsubishi Bank Ltd. 'Tokyo dated June 13, 1991 for the
account of Ssangyong Japan Corporation, 7F. Matsuoka-Tamura-Cho Bldg., 22-10, 5-
Chome, Shimbashi, Minato-Ku, Tokyo, Japan up to the extent of US$197,679.00'

"The Corporation likewise executed a 'Quedan' , by way of additional security, under

which the Corporation bound and obliged to keep and hold, in trust for the Bank or its
Order, 'Ferrosilicon for US$197,679.00' . Jong-Won Hong and Teresita Cu affixed their
signatures thereon for the Corporation. The Corporation, also, through Jong-Won Hong
and Teresita Cu, executed a 'Trust Receipt Agreement', by way of additional security for
said loan, the Corporation undertaking to hold in trust, for the Bank, as its property, the
following:

'1. THE MITSUBISHI BANK LTD., Tokyo L/C No. M-S-041-2002080 for account of
Ssangyong Japan Corporation, Tokyo, Japan for US$197,679.00 Ferrosilicon to expire
September 20, 1991.

'2. SEC QUEDAN NO. 91-476 dated June 26, 1991 covering the following:

Ferrosilicon for US$197,679.00'

"However, shortly after the execution of the said deeds, the Corporation stopped its
operations. The Corporation failed to pay its loan availments from the Bank inclusive of
accrued interest. On February 11, 1992, the Bank sent a letter to the Corporation
demanding payment of its loan availments inclusive of interests due. The Corporation
failed to comply with the demand of the Bank. On November 23, 1992, the Bank sent
another letter to the [Corporation] demanding payment of its account which, by
November 23, 1992, had amounted to P7,283,913.33. The Corporation again failed to
comply with the demand of the Bank.
"On January 6, 1993, the Bank filed a complaint against the Corporation with the
Regional Trial Court of Makati City, entitled and docketed as 'Solidbank Corporation v.
Mindanao Ferroalloy Corporation, Sps. Jong-Won Hong and the Sps. Teresita R.
Cu, Civil Case No. 93-038' for 'Sum of Money' with a plea for the issuance of a writ of
preliminary attachment. x x x

xxx

"Under its 'Amended Complaint', the Plaintiff alleged that it impleaded Ricardo Guevara
and his wife as Defendants because, [among others]:

'Defendants JONG-WON HONG and TERESITA CU, are the Vice-Presidents of

defendant corporation, and also members of the company's Board of Directors. They
are impleaded as joint and solidary debtors of [petitioner] bank having signed the
Promissory Note, Quedan, and Trust Receipt agreements with [petitioner], in this case.

x x x x x x x x x'

"[Petitioner] likewise filed a criminal complaint x x x entitled and docketed as 'Solidbank

Corporation v. Ricardo Guevara, Teresita R. Cu and Jong Won Hong x x x for 'Violation
of P.D. 115'. On April 14, 1993, the investigating Prosecutor issued a 'Resolution'
finding no probable cause for violation of P.D. 115 against the Respondents as the
goods covered by the quedan 'were nonexistent' :

xxx

"In their Answer to the complaint [in the civil case], the Spouses Jong-Won Hong and
Soo-ok Kim Hong alleged, inter alia, that [petitioner] had no cause of action against
them as:

'x x x the clean loan of P5.1 M obtained was a corporate undertaking of defendant
MINFACO executed through its duly authorized representatives, Ms. Teresita R. Cu and
Mr. Jong-Won Hong, both Vice Presidents then of MINFACO. x x x.'

xxx

"[On their part, respondents] Teresita Cu and Ricardo Guevara alleged that [petitioner]
had no cause of action against them because: (a) Ricardo Guevara did not sign any of
the documents in favor of [petitioner]; (b) Teresita Cu signed the 'Promissory Note' ,
'Deed of Assignment' , 'Trust Receipt' and 'Quedan' in blank and merely as
representative and, hence, for and in behalf of the Defendant Corporation and, hence,
was not personally liable to [petitioner].

"In the interim, the Corporation filed, on June 20, 1994, a 'Petition' , with the Regional
Trial Court of Iligan City, for 'Voluntary Insolvency' x x x.
 xxx

"Appended to the Petition was a list of its creditors, including [petitioner], for the amount
of P8,144,916.05. The Court issued an Order, on July 12, 1994, finding the Petition
sufficient in form and substance x x x.

xxx

"In view of said development, the Court issued an Order, in Civil Case No. 93-038,
suspending the proceedings as against the Defendant Corporation but ordering the
proceedings to proceed as against the individual defendants x x x.

xxx

"On December 10, 1999, the Court rendered a Decision dismissing the complaint for
lack of cause of action of [petitioner] against the Spouses Jong-Won Hong, Teresita Cu
and the Spouses Ricardo Guevara, x x x.

xxx

"In dismissing the complaint against the individual [respondents], the Court a quo found
and declared that [petitioner] failed to adduce a morsel of evidence to prove the
personal liability of the said [respondents] for the claims of [petitioner] and that the latter
impleaded the [respondents], in its complaint and amended complaint, solely to put
more pressure on the Defendant Corporation to pay its obligations to [petitioner].

"[Petitioner] x x x interposed an appeal, from the Decision of the Court a quo and posed,
for x x x resolution, the issue of whether or not the individual [respondents], are jointly
and severally liable to [petitioner] for the loan availments of the [respondent]
Corporation, inclusive of accrued interests and penalties.

"In the meantime, on motion of [petitioner], the Court set aside its Order, dated February
2, 1995, suspending the proceedings as against the [respondent] Corporation.
[Petitioner] filed a 'Motion for Summary Judgment' against the [respondent] Corporation.
On February 28, 2000, the Court rendered a 'Summary Judgment' against the
[respondent] Corporation, the decretal portion of which reads as follows:

'WHEREFORE, premises considered, this Court hereby resolves to give due course to
the motion for summary judgment filed by herein [petitioner]. Consequently, judgment is
hereby rendered in favor of [Petitioner] SOLIDBANK CORPORATION and against
[Respondent] MINDANAO FERROALLOY CORPORATION, ordering the latter to pay
the former the amount of P7,086,686.70, representing the outstanding balance of the
subject loan as of 24 September 1994, plus stipulated interest at the rate of 16% per
annum to be computed from the aforesaid date until fully paid together with an amount
equivalent to 12% of the total amount due each year from 24 September 1994 until fully
paid. Lastly, said [respondent] is hereby ordered to pay [petitioner] the amount
of P25,000.00 to [petitioner] as reasonable attorney's fees as well as cost of litigation." 5

In its appeal, petitioner argued that (1) it had adduced the requisite evidence to prove
the solidary liability of the individual respondents, and (2) it was not liable for their
counterclaims for damages and attorney's fees.

Ruling of the Court of Appeals

Affirming the RTC, the appellate court ruled that the individual respondents were not
solidarily liable with the Mindanao Ferroalloy Corporation, because they had acted
merely as officers of the corporation, which was the real party in interest. Respondent
Guevara was not even a signatory to the Promissory Note, the Trust Receipt
Agreement, the Deed of Assignment or the Quedan; he was merely authorized to
represent Minfaco to negotiate with and secure the loans from the bank. On the other
hand, the CA noted that Respondents Cu and Hong had not signed the above
documents as comakers, but as signatories in their representative capacities as officers
of Minfaco.

Likewise, the CA held that the individual respondents were not liable to petitioner for
damages, simply because (1) they had not received the proceeds of the irrevocable
Letter of Credit, which was the subject of the Deed of Assignment; and (2) the goods
subject of the Trust Receipt Agreement had been found to be nonexistent. The
appellate court took judicial notice of the practice of banks and financing institutions to
investigate, examine and assess all properties offered by borrowers as collaterals, in
order to determine the feasibility and advisability of granting loans. Before agreeing to
the consolidation of Minfaco's loans, it presumed that petitioner had done its homework.

As to the award of damages to the individual respondents, the CA upheld the trial
court's findings that it was clearly unfair on petitioner's part to have impleaded the wives
of Guevara and Hong, because the women were not privy to any of the transactions
between petitioner and Minfaco. Under Articles 19, 20 and 2229 of the Civil Code, such
reckless and wanton act of pressuring individual respondents to settle the corporation's
obligations is a ground to award moral and exemplary damages, as well as attorney's
fees.

Hence this Petition.6

Issues

In its Memorandum, petitioner raises the following issues:

"A. Whether or not there is ample evidence on record to support the joint and solidary
liability of individual respondents with Mindanao Ferroalloy Corporation.
"B. In the absence of joint and solidary liability[,] will the provision of Article 1208 in
relation to Article 1207 of the New Civil Code providing for joint liability be applicable to
the case at bar.

"C. May bank practices be the proper subject of judicial notice under Sec. 1 [of] Rule
129 of the Rules of Court.

"D. Whether or not there is evidence to sustain the claim that respondents were
impleaded to apply pressure upon them to pay the obligations in lieu of MINFACO that
is declared insolvent.

"E. Whether or not there are sufficient bases for the award of various kinds of and
substantial amounts in damages including payment for attorney's fees.

"F. Whether or not respondents committed fraud and misrepresentations and acted in
bad faith.

"G. Whether or not the inclusion of respondents spouses is proper under certain
circumstances and supported by prevailing jurisprudence." 7

In sum, there are two main questions: (1) whether the individual respondents are liable,
either jointly or solidarily, with the Mindanao Ferroalloy Corporation; and (2) whether the
award of damages to the individual respondents is valid and legal.

The Court's Ruling

The Petition is partly meritorious.

First Issue:

Liability of Individual Respondents

Petitioner argues that the individual respondents were jointly or solidarily liable with
Minfaco, either because their participation in the loan contract and the loan documents
made them comakers; or because they committed fraud and deception, which justifies
the piercing of the corporate veil.

The first contention hinges on certain factual determinations made by the trial and the
appellate courts. These tribunals found that, although he had not signed any document
in connection with the subject transaction, Respondent Guevara was authorized to
represent Minfaco in negotiating for a P30 million loan from petitioner. As to Cu and
Hong, it was determined, among others, that their signatures on the loan documents
other than the Deed of Assignment were not prefaced with the word "by," and that there
were no other signatures to indicate who had signed for and on behalf of Minfaco, the
principal borrower. In the Promissory Note, they signed above the printed name of the
corporation - - on the space provided for "Maker/Borrower," not on that provided for "Co-
maker."

Petitioner has not shown any exceptional circumstance that sanctions the disregard of
these findings of fact, which are thus deemed final and conclusive upon this Court and
may not be reviewed on appeal.8

No Personal Liability

for Corporate Deeds

Basic is the principle that a corporation is vested by law with a personality separate and
distinct from that of each person composing9 or representing it.10 Equally fundamental is
the general rule that corporate officers cannot be held personally liable for the
consequences of their acts, for as long as these are for and on behalf of the
corporation, within the scope of their authority and in good faith. 11 The separate
corporate personality is a shield against the personal liability of corporate officers,
whose acts are properly attributed to the corporation. 12

Tramat Mercantile v. Court of Appeals13 held 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. '"

Consistent with the foregoing principles, we sustain the CA's ruling that Respondent
Guevara was not personally liable for the contracts. First, it is beyond cavil that he was
duly authorized to act on behalf of the corporation; and that in negotiating the loans with
petitioner, he did so in his official capacity. Second, no sufficient and specific evidence
was presented to show that he had acted in bad faith or gross negligence in that
negotiation. Third, he did not hold himself personally and solidarily liable with the
corporation. Neither is there any specific provision of law making him personally
answerable for the subject corporate acts.
On the other hand, Respondents Cu and Hong signed the Promissory Note without the
word "by" preceding their signatures, atop the designation "Maker/Borrower" and the
printed name of the corporation, as follows:

__(Sgd) Cu/Hong__

(Maker/Borrower)

MINDANAO FERROALLOY

While their signatures appear without qualification, the inference that they signed in their
individual capacities is negated by the following facts: 1) the name and the address of
the corporation appeared on the space provided for "Maker/Borrower"; 2) Respondents
Cu and Hong had only one set of signatures on the instrument, when there should have
been two, if indeed they had intended to be bound solidarily - - the first as
representatives of the corporation, and the second as themselves in their individual
capacities; 3) they did not sign under the spaces provided for "Co-maker," and neither
were their addresses reflected there; and 4) at the back of the Promissory Note, they
signed above the words "Authorized Representative."

Solidary Liability

Not Lightly Inferred

Moreover, it is axiomatic that solidary liability cannot be lightly inferred. 14 Under Article
1207 of the Civil Code, "there is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity." Since solidary
liability is not clearly expressed in the Promissory Note and is not required by law or the
nature of the obligation in this case, no conclusion of solidary liability can be made.

Furthermore, nothing supports the alleged joint liability of the individual petitioners
because, as correctly pointed out by the two lower courts, the evidence shows that
there is only one debtor: the corporation. In a joint obligation, there must be at least two
debtors, each of whom is liable only for a proportionate part of the debt; and the creditor
is entitled only to a proportionate part of the credit. 15

Moreover, it is rather late in the day to raise the alleged joint liability, as this matter has
not been pleaded before the trial and the appellate courts. Before the lower courts,
petitioner anchored its claim solely on the alleged joint and several (or solidary) liability
of the individual respondents. Petitioner must be reminded that an issue cannot be
raised for the first time on appeal, but seasonably in the proceedings before the trial
court.16

So too, the Promissory Note in question is a negotiable instrument. Under Section 19 of

the Negotiable Instruments Law, agents or representatives may sign for the principal.
Their authority may be established, as in other cases of agency. Section 20 of the law
provides that a person signing "for and on behalf of a [disclosed] principal or in a
representative capacity x x x is not liable on the instrument if he was duly authorized."

The authority of Respondents Cu and Hong to sign for and on behalf of the corporation
has been amply established by the Resolution of Minfaco's Board of Directors, stating
that "Atty. Ricardo P. Guevara (President and Chairman), or Ms. Teresita R. Cu (Vice
President), acting together with Mr. Jong Won Hong (Vice President), be as they are
hereby authorized for and in behalf of the Corporation to: 1. Negotiate with and obtain
from (petitioner) the extension of an omnibus line in the aggregate of P30 million x x x;
and 2. Execute and deliver all documentation necessary to implement all of the
foregoing."17

Further, the agreement involved here is a "contract of adhesion," which was prepared
entirely by one party and offered to the other on a "take it or leave it" basis. Following
the general rule, the contract must be read against petitioner, because it was the party
that prepared it,18 more so because a bank is held to high standards of care in the
conduct of its business.19

In the totality of the circumstances, we hold that Respondents Cu and Hong clearly
signed the Note merely as representatives of Minfaco.

No Reason to Pierce

the Corporate Veil

Under certain circumstances, courts may treat a corporation as a mere aggroupment of

persons, to whom liability will directly attach. The distinct and separate corporate
personality may be disregarded, inter alia, when the corporate identity is used to defeat
public convenience, justify a wrong, protect a fraud, or defend a crime. Likewise, the
corporate veil may be pierced when the corporation acts as a mere alter ego or
business conduit of a person, or when it is so organized and controlled and its affairs so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.20 But to disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established; it cannot be presumed. 21

Petitioner contends that the corporation was used to protect the fraud foisted upon it by
the individual respondents. It argues that the CA failed to consider the following badges
of fraud and evident bad faith: 1) the individual respondents misrepresented the
corporation as solvent and financially capable of paying its loan; 2) they knew that
prices of ferrosilicon were declining in the world market when they secured the loan in
June 1991; 3) not a single centavo was paid for the loan; and 4) the corporation
suspended its operations shortly after the loan was granted. 22

Fraud refers to all kinds of deception - - whether through insidious machination,

manipulation, concealment or misrepresentation - - that would lead an ordinarily prudent
person into error after taking the circumstances into account. 23 In contracts, a fraud
known as dolo causante or causal fraud24 is basically a deception used by one party
prior to or simultaneous with the contract, in order to secure the consent of the
other.25 Needless to say, the deceit employed must be serious. In contradistinction, only
some particular or accident of the obligation is referred to by incidental fraud or dolo
incidente,26 or that which is not serious in character and without which the other party
would have entered into the contract anyway. 27

Fraud must be established by clear and convincing evidence; mere preponderance of

evidence is not adequate.28 Bad faith, on the other hand, imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, not simply bad judgment or
negligence.29 It is synonymous with fraud, in that it involves a design to mislead or
deceive another.30

Unfortunately, petitioner was unable to establish clearly and precisely how the alleged
fraud was committed. It failed to establish that it was deceived into granting the loans
because of respondents' misrepresentations and/or insidious actions. Quite the
contrary, circumstances indicate the weakness of its submission.

First, petitioner does not deny that the P5 million loan represented the consolidation of
two loans,31 granted long before the bank required the individual respondents to execute
the Promissory Note, Trust Receipt Agreement, Quedan or Deed of Assignment.
Hence, no words, acts or machinations arising from any of those instruments could
have been used by them prior to or simultaneous with the execution of the contract, or
even as some accident or particular of the obligation.

Second, petitioner bank was in a position to verify for itself the solvency and
trustworthiness of respondent corporation. In fact, ordinary business prudence required
it to do so before granting the multimillion loans. It is of common knowledge that, as a
matter of practice, banks conduct exhaustive investigations of the financial standing of
an applicant debtor, as well as appraisals of collaterals offered as securities for loans to
ensure their prompt and satisfactory payment. To uphold petitioner's cry of fraud when it
failed to verify the existence of the goods covered by the Trust Receipt Agreement and
the Quedan is to condone its negligence.

Judicial Notice

of Bank Practices

This point brings us to the alleged error of the appellate court in taking judicial notice of
the practice of banks in conducting background checks on borrowers and sureties.
While a court is not mandated to take judicial notice of this practice under Section 1 of
Rule 129 of the Rules of Court, it nevertheless may do so under Section 2 of the same
Rule. The latter Rule provides that a court, in its discretion, may take judicial notice of
"matters which are of public knowledge, or ought to be known to judges because of their
judicial functions."
Thus, the Court has taken judicial notice of the practices of banks and other financial
institutions. Precisely, it has noted that it is their uniform practice, before approving a
loan, to investigate, examine and assess would-be borrowers' credit standing or real
estate32 offered as security for the loan applied for.

Second Issue:

Award of Damages

The individual respondents were awarded moral and exemplary damages as well as
attorney's fees under Articles 19 to 21 of the Civil Code, on the basic premise that the
suit was clearly malicious and intended merely to harass.

Article 19 of the Civil Code expresses the fundamental principle of law on human
conduct that a person "must, in the exercise of his rights and in the performance of his
duties, act with justice, give every one his due, and observe honesty and good faith."
Under this basic postulate, the exercise of a right, though legal by itself, must
nonetheless be done in accordance with the proper norm. When the right is exercised
arbitrarily, unjustly or excessively and results in damage to another, a legal wrong is
committed for which the wrongdoer must be held responsible. 33

To be liable under the abuse-of-rights principle, three elements must concur: a) a legal
right or duty, b) its exercise in bad faith, and c) the sole intent of prejudicing or injuring
another.34 Needless to say, absence of good faith35 must be sufficiently established.

Article 20 makes "[e]very person who, contrary to law, willfully or negligently causes
damage to another" liable for damages. Upon the other hand, held liable for damages
under Article 21 is one who "willfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy."

For damages to be properly awarded under the above provisions, it is necessary to

demonstrate by clear and convincing evidence36 that the action instituted by petitioner
was clearly so unfounded and untenable as to amount to gross and evident bad
faith.37 To justify an award of damages for malicious prosecution, one must prove two
elements: malice or sinister design to vex or humiliate and want of probable cause. 38

Petitioner was proven wrong in impleading Spouses Guevara and Hong. Beyond that
fact, however, respondents have not established that the suit was so patently
malicious as to warrant the award of damages under the Civil Code's Articles 19 to 21,
which are grounded on malice or bad faith. 39 With the presumption of law on the side of
good faith, and in the absence of adequate proof of malice, we find that petitioner
impleaded the spouses because it honestly believed that the conjugal partnerships had
benefited from the proceeds of the loan, as stated in their Complaint and subsequent
pleadings. Its act does not amount to evident bad faith or malice; hence, an award for
damages is not proper. The adverse result of an act per se neither makes the act
wrongful nor subjects the actor to the payment of damages, because the law could not
have meant to impose a penalty on the right to litigate. 40

For the same reason, attorney's fees cannot be granted. Article 2208 of the Civil Code
states that in the absence of a stipulation, attorney's fees cannot be recovered, except
in any of the following circumstances:

"(1) When exemplary damages are awarded;

"(2) When the defendant's act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest;

"(3) In criminal cases of malicious prosecution against the plaintiff;

"(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

"(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff's plainly valid, just and demandable claim;

"(6) In actions for legal support;

"(7) In actions for the recovery of wages of household helpers, laborers and skilled
workers;

"(8) In actions for indemnity under workmen's compensation and employer's liability
laws;

"(9) In a separate civil action to recover civil liability arising from a crime;

"(10) When at least double judicial costs are awarded;

"(11) In any other case where the court deems it just and equitable that attorney's fees
and expenses of litigation should be recovered."

In the instant case, none of the enumerated grounds for recovery of attorney's fees are
present.

WHEREFORE, this Petition is PARTIALLY GRANTED. The assailed Decision

is AFFIRMED, but the award of moral and exemplary damages as well as attorney's
fees is DELETED. No costs.

SO ORDERED.