DOCTRINE

IMPORTANT FACTS

ENUMERATION

EXCEPTION

SUPREME COURT DECISION

VILLA REY TRANSIT INC., plaintiff-appellant, vs. EUSEBIO E. FERRER,

PANGASINAN TRANSPORTATION CO., INC., and PUBLIC SERVICE
COMMISSION, defendants, EUSEBIO E. FERRER and PANGASINAN
TRANSPORTATION CO., INC., defendants-appellants.

PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-

appellant, vs. JOSE M. VILLARAMA, third-party defendant-appellee.

Chuidian Law Office for plaintiff-appellant Villa Rey Transit, Inc.

Bengzon, Zarraga & Villegas for defendant-appellant Pangasinan Transportation
Co., Inc.
Laurea & Pison for third-party defendant-appellee Jose Villarama.

SYLLABUS

1. COMMERCIAL LAW; CORPORATIONS; CORPORATION SEPARATE AND

DISTINCT FROM MEMBERS THEREOF; DOCTRINE OF PIERCING THE CORPORATE
VEIL. — The doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected in all cases which
are within reason and the law. When the fiction is urged as a means of perpetrating a fraud
or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention
of statutes, the achievement or perfection of a monopoly or generally the perpetration of
knavery or crime, the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its consideration merely
as an aggregation of individuals.
2. ID.; ID.; ALTER EGO; CORPORATION BOUND BY CONTRACT WHEN SHOWN
AS ALTER EGO OF COVENANTOR. — The preponderance of evidence have shown that
the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive
clause in the contract entered into by the latter and Pantranco is also enforceable and
binding against the said Corporation. For the rule is that a seller or promissor may not
make use of a corporate entity as a means of evading the obligation of his covenant.
Where the corporation is substantially the alter ego of the covenantor to the restrictive
agreement, it can be enjoined from competing with the covenantee.
3. CIVIL LAW; CONTRACTS; VALIDITY OF STIPULATION IN RESTRAINT OF
TRADE. — The 10-year restrictive clause in the contract between Villarama and
Pantranco, while in the nature of an agreement suppressing competition, it is, however,
merely ancillary or incidental to the main agreement which is that of sale. The suppression
 or restraint is only partial or limited: first, in scope, it refers only to application for TPU by
the seller in competition with the lines sold to the buyer; second, in duration, it is only for
ten (10) years; and third, with respect to situs or territory, the restraint is only along the
lines covered by the certificates sold. In view of these limitations, coupled with the
consideration of P350,000.00 for just two certificates of public convenience, and
considering, furthermore, that the disputed stipulation is only incidental to a main
agreement, the same is reasonable and it is not harmful nor obnoxious to public service. It
does not appear that the ultimate result of the clause or stipulation would be to leave solely
to Pantranco the right to operate along the lines in question, thereby establishing a
monopoly or predominance approximating thereto. The main purpose of the restraint was
to protect for a limited time the business of the buyer.
4. ID.; ID.; PURCHASER IN GOOD FAITH; RULE OF CAVEAT EMPTOR. — The
10 year prohibition upon Villarama is not against his application for, or purchase of,
certificates of public convenience, but merely the operation of TPU along the lines covered
by the certificates sold by him to Pantranco. Consequently, the sale between Fernando
and the Corporation is valid, such that the rightful ownership of the disputed certificates
still belongs to the plaintiff being the prior purchaser in good faith and for value thereof. In
view of the ancient rule of caveat emptor prevailing in this jurisdiction, what was acquired
by Ferrer in the sheriff's sale was only the right which Fernando, judgment debtor, had in
the certificates of public convenience on the day of the sale.
5. ADMINISTRATIVE LAW; PUBLIC SERVICE LAW; CERTIFICATE OF PUBLIC
CONVENIENCE; SALE THEREOF; APPROVAL BY PUBLIC SERVICE COMMISSION
NOT NECESSARY FOR THIS CONSUMMATION OF THE SALE IN THE INSTANT
CASE. — There is no merit in Pantranco and Ferrer's theory that the sale of the
certificates of public convenience in question, between the corporation and Fernando, was
not consummated, it being only a conditional sale subject to the suspensive condition of its
approval by the Public Service Commission. It is clear, that the requisite approval of the
PSC is not a condition precedent for the validity and consummation of the sale.

DECISION

ANGELES, J  : p

This is a tri-party appeal from the decision of the Court of First Instance of Manila,
Civil Case No. 41845, declaring null and void the sheriff's sale of two certificates of public
convenience in favor of defendant Eusebio E. Ferrer and the subsequent sale thereof by
the latter to defendant Pangasinan Transportation Co., Inc.; declaring the plaintiff Villa Rey
Transit, Inc., to be the lawful owner of the said certificates of public convenience; and
ordering the private defendants, jointly and severally, to pay to the plaintiff, the sum of
P5,000.00 as and for attorney's fees. The case against the PSC was dismissed.
The rather ramified circumstances of the instant case can best be understood by a
chronological narration of the essential facts, to wit:
Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the
business name of Villa Rey Transit, pursuant to certificates of public convenience granted
him by the Public Service Commission (PSC, for short) in Cases Nos. 44213 and 104651,
which authorized him to operate a total of thirty-two (32) units on various routes or lines
from Pangasinan to Manila, and vice-versa. On January 8, 1959, he sold the
aforementioned two certificates of public convenience to the Pangasinan Transportation
Company, Inc. (otherwise known as Pantranco), for P350,000.00 with the condition,
among others, that the seller (Villarama) "shall not for a period of 10 years from the date of
this sale, apply for any TPU service identical or competing with the buyer."
Barely three months thereafter, or on March 6, 1959, a corporation called Villa Rey
Transit, Inc. (which shall be referred to hereafter as the Corporation) was organized with a
capital stock of P500,000.00 divided into 5,000 shares of the par value of P100.00 each;
P200,000.00 was the subscribed stock; Natividad R. Villarama (wife of Jose M. Villarama)
was one of the incorporators, and she subscribed for P1,000.00; the balance of
P199,000.00 was subscribed by the brother and sister-in-law of Jose M. Villarama; of the
subscribed capital stock, P105,000.00 was paid to the treasurer of the corporation, who
was Natividad R. Villarama.
In less than a month after its registration with the Securities and Exchange
Commission (March 10, 1959), the Corporation, on April 7, 1959, bought five certificates of
public convenience, forty-nine buses, tools and equipment from one Valentin Fernando, for
the sum of P249,000.00, of which P100,000.00 was paid upon the signing of the contract;
P50,000.00 was payable upon the final approval of the sale by the PSC; P49,500.00 one
year after the final approval of the sale; and the balance of P50,000.00 "shall be paid by
the BUYER to the different suppliers of the SELLER."
The very same day that the aforementioned contract of sale was executed, the
parties thereto immediately applied with the PSC for its approval, with a prayer for the
issuance of a provisional authority in favor of the vendee Corporation to operate the
service therein involved. 1 On May 19, 1959, the PSC granted the provisional permit
prayed for, upon the condition that "it may be modified or revoked by the Commission at
any time, shall be subject to whatever action that may be taken on the basic application
and shall be valid only during the pendency of said application." Before the PSC could
take final action on said application for approval of sale, however, the Sheriff of Manila, on
July 7, 1959, levied on two of the five certificates of public convenience involved therein,
namely those issued under PSC cases Nos. 59494 and 63780, pursuant to a writ of
execution issued by the Court of First Instance of Pangasinan in Civil Case No. 13798, in
favor of Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant,
judgment debtor. The Sheriff made and entered the levy in the records of the PSC. On
July 16, 1959, a public sale was conducted by the Sheriff of the said two certificates of
public convenience. Ferrer was the highest bidder, and a certificate of sale was issued in
his name.
Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and
jointly submitted for approval their corresponding contract of sale to the PSC. 2 Pantranco
therein prayed that it be authorized provisionally to operate the service involved in the said
two certificates.
The applications for approval of sale, filed before the PSC, by Fernando and the
Corporation, Case No. 124057, and that of Ferrer and Pantranco, Case No. 126278, were
scheduled for a joint hearing. In the meantime, to wit, on July 22, 1959, the PSC issued an
order disposing that during the pendency of the cases and before a final resolution on the
aforesaid applications, the Pantranco shall be the one to operate provisionally the service
under the two certificates embraced in the contract between Ferrer and Pantranco. The
Corporation took issue with this particular ruling of the PSC and elevated the matter to the
Supreme Court, 3 which decreed, after deliberation, that until the issue on the ownership of
the disputed certificates shall have been finally settled by the proper court, the Corporation
should be the one to operate the lines provisionally.
On November 4, 1959, the Corporation filed in the Court of First Instance of Manila,
a complaint for the annulment of the sheriff's sale of the aforesaid two certificates of public
convenience (PSC Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and the
subsequent sale thereof by the latter to Pantranco, against Ferrer, Pantranco and the
PSC. The plaintiff Corporation prayed therein that all the orders of the PSC relative to the
parties' dispute over the said certificates be annulled.
In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff
Corporation had no valid title to the certificates in question because the contract pursuant
to which it acquired them from Fernando was subject to a suspensive condition — the
approval of the PSC — which has not yet been fulfilled, and, therefore, the Sheriff's levy
and the consequent sale at public auction of the certificates referred to, as well as the sale
of the same by Ferrer to Pantranco, were valid and regular, and vested unto Pantranco, a
superior right thereto.
Pantranco, on its part, filed a third-party complaint against Jose M. Villarama,
alleging that Villarama and the Corporation, are one and the same; that Villarama and/or
the Corporation was disqualified from operating the two certificates in question by virtue of
the aforementioned agreement between said Villarama and Pantranco, which stipulated
that Villarama "shall not for a period of 10 years from the date of this sale, apply for any
TPU service identical or competing with the buyer."
Upon the joinder of the issues in both the complaint and third- party complaint, the
case was tried, and thereafter decision was rendered in the terms as above stated.
As stated at the beginning, all the parties involved have appealed from the decision.
They submitted a joint record on appeal.
Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey
Transit, Inc. (Corporation) is a distinct and separate entity from Jose M. Villarama, that the
restriction clause in the contract of January 8, 1959 between Pantranco and Villarama is
null and void, that the Sheriff's sale of July 16, 1959, is likewise null and void; and the
failure to award damages in its favor and against Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale
is null and void, and the sale of the two certificates in question by Valentin Fernando to the
Corporation, is valid. He also assails the award of P5,000.00 as attorney's fees in favor of
the Corporation, and the failure to award moral damages to him as prayed for in his
counterclaim.
The Corporation, on the other hand, prays for a review of that portion of the decision
awarding only P5,000.00 as attorney's fees, and insisting that it is entitled to an award of
P100,000.00 by way of exemplary damages.
After a careful study of the facts obtaining in the case, the vital issues to be resolved
are: (1) Does the stipulation between Villarama and Pantranco, as contained in the deed of
sale, that the former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF
THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH THE
BUYER," apply to new lines only or does it include existing lines?; (2) Assuming that said
stipulation covers all kinds of lines, is such stipulation valid and enforceable?; (3) In the
affirmative, that said stipulation is valid, did it bind the Corporation?
For convenience, We propose to discuss the foregoing issues by starting with the
last proposition.
The evidence has disclosed that Villarama, albeit was not an incorporator or
stockholder of the Corporation, alleging that he did not become such, because he did not
have sufficient funds to invest, his wife, however, was an incorporator with the least
subscribed number of shares, and was elected treasurer of the Corporation. The finances
of the Corporation which, under all concepts in the law, are supposed to be under the
control and administration of the treasurer keeping them as trust fund for the Corporation,
were, nonetheless, manipulated and disbursed as if they were the private funds of
Villarama, in such a way and extent that Villarama appeared to be the actual owner-
treasurer of the business without regard to the rights of the stockholders. The following
testimony of Villarama, 4 together with the other evidence on record, attests to that effect:
"Q. Doctor, I want to go back again to the incorporation of the Villa Rey Transit, Inc.
You heard the testimony presented here by the bank regarding the initial
opening deposit of ONE HUNDRED FIVE THOUSAND PESOS, of which
amount Eighty-Five Thousand Pesos was a check drawn by yourself
personally. In the direct examination you told the Court that the reason you
drew a check for Eighty-Five Thousand Pesos was because you and your wife,
or your wife, had spent the money of the stockholders given to her for
incorporation. Will you please tell the Honorable Court if you knew at the time
your wife was spending the money to pay debts, you personally know she was
spending the money of the incorporators?
 "A. You know my money and my wife's money are one. We never talk about those
things.
"Q. Doctor, your answer then is that since your money and your wife's money are one
money and you did not know when your wife was paying debts with the
incorporator's money?
"A. Because sometimes she uses my money, and sometimes the money given to her
she gives to me and I deposit the money.
"Q. Actually, aside from your wife, you were also the custodian of some of the
incorporators here, in the beginning?
"A. Not necessarily, they give to my wife and when my wife hands to me I did not
know it belonged to the incorporators.
"Q. It supposes then your wife gives you some of the money received by her in her
capacity as treasurer of the corporation?
"A. Maybe.
"Q. What did you do with the money, deposit in a regular account?
"A. Deposit in my account.
"Q. Of all the money given to your wife, she did not receive any check?
"A. I do not remember.
"Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even asking
what is this?
xxx xxx xxx
JUDGE:Reform the question.
"Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty Two Thousand Pesos,
did your wife give you Fifty-Two Thousand Pesos?
"A. I have testified before that sometimes my wife gives me money and I do not know
exactly for what."
The evidence further show that the initial cash capitalization of the corporation of
P105,000.00 was mostly financed by Villarama. Of the P105,000.00 deposited in the First
National City Bank of New York, representing the initial paid-up capital of the Corporation,
P85,000.00 was covered by Villarama's personal check. The deposit slip for the said
amount of P105,000.00 was admitted in evidence as Exh. 23, which shows on its face that
P20,000.00 was paid in cash and P85,000.00 thereof was covered by Check No. F-50271
of the First National City Bank of New York. The testimonies of Alfonso Sancho 5 and
Joaquin Amansec, 6 both employees of said bank, have proved that the drawer of the
check was Jose Villarama himself.
Another witness, Celso Rivera, accountant of the Corporation, testified that while in
the books of the corporation there appears an entry that the treasurer received P95,000.00
as second installment of the paid-in subscriptions, and, subsequently, also P100,000.00 as
the first installment of the offer for second subscriptions worth P200,000.00 from the
original subscribers, yet Villarama directed him (Rivera) to make vouchers liquidating the
sum. 7 Thus, it was made to appear that the P95,000.00 was delivered to Villarama in
payment for equipment purchased from him, and the P100,000.00 was loaned as
advances to the stockholders. The said accountant, however, testified that he was not
aware of any amount of money that had actually passed hands among the parties
involved, 8 and actually the only money of the corporation was the P105,000.00 covered
by the deposit slip Exh. 23, of which, as mentioned above, P85,000.00 was paid by
Villarama's personal check.
Further, the evidence show that when the Corporation was in its initial months of
operation, Villarama purchased and paid with his personal checks Ford trucks for the
Corporation. Exhibits 20 and 21 disclose that the said purchases were paid by Philippine
Bank of Commerce Checks Nos. 992618-B and 993621-B, respectively. These checks
have been sufficiently established by Fausto Abad, Assistant Accountant of Manila Trading
& Supply Co., from which the trucks were purchased 9 and Aristedes Solano, an employee
of the Philippine Bank of Commerce, 10 as having been drawn by Villarama.
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and
vouchers showing that Villarama had co-mingled his personal funds and transactions with
those made in the name of the Corporation, are very illuminating evidence. Villarama has
assailed the admissibility of these exhibits, contending that no evidentiary value
whatsoever should be given to them since "they were merely photostatic copies of the
originals, the best evidence being the originals themselves." According to him, at the time
Pantranco offered the said exhibits, it was the most likely possessor of the originals thereof
because they were stolen from the files of the Corporation and only Pantranco was able to
produce the alleged photostat copies thereof.
Section 5 of Rule 130 of the Rules of Court provides for the requisites for the
admissibility of secondary evidence when the original is in the custody of the adverse
party, thus: (1) opponent's possession of the original; (2) reasonable notice to opponent to
produce the original; (3) satisfactory proof of its existence; and (4) failure or refusal of
opponent to produce the original in court. 11 Villarama has practically admitted the second
and fourth requisites. 12 As to the third, he admitted their previous existence in the files of
the Corporation and also that he had seen some of them. 13 Regarding the first element,
Villarama's theory is that since even at the time of the issuance of the subpoena duces
tecum, the originals were already missing, therefore, the Corporation was no longer in
possession of the same. However, it is not necessary for a party seeking to introduce
secondary evidence to show that the original is in the actual possession of his adversary. It
is enough that the circumstances are such as to indicate that the writing is in his
possession or under his control. Neither is it required that the party entitled to the custody
of the instrument should, on being notified to produce it, admit having it in his
possession. 14 Hence, secondary evidence is admissible where he denies having it in his
possession. The party calling for such evidence may introduce a copy thereof as in the
case of loss. For, among the exception to the best evidence rule is "when the original has
been lost, destroyed, or cannot be produced in court. 15 The originals of the vouchers in
question must be deemed to have been lost, as even the Corporation admits such loss.
Viewed upon this light, there can be no doubt as to the admissibility in evidence of Exhibits
6 to 19 and 22.
Taking account of the foregoing evidence, together with Celso Rivera's
testimony, 16 it would appear that: Villarama supplied the organization expenses and the
assets of the Corporation, such as trucks and equipments; 17 there was no actual payment
by the original subscribers of the amounts of P95,000.00 and P100,000.00 as appearing in
the books; 18 Villarama made use of the money of the Corporation and deposited them to
his private accounts; 19 and the Corporation paid his personal accounts. 20
Villarama himself admitted that he mingled the corporate funds with his own
money. 21 He also admitted that gasoline purchases of the Corporation were made in his
name 22 because "he had existing account with Stanvac which was properly secured and
he wanted the Corporation to benefit from the rebates that he received." 23
The foregoing circumstances are strong persuasive evidence showing that Villarama
has been too much involved in the affairs of the Corporation to altogether negative the
claim that he was only a part-time general manager. They show beyond doubt that the
Corporation is his alter ego.
It is significant that not a single one of the acts enumerated above as proof of
Villarama's oneness with the Corporation has been denied by him. On the contrary, he has
admitted them with offered excuses.
Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of
the Corporation with the lame excuse that "his wife had requested him to reimburse the
amount entrusted to her by the incorporators and which she had used to pay the
obligations of Dr. Villarama (her husband) incurred while he was still the owner of Villa Rey
Transit, a single proprietorship. "But with his admission that he had received P350,000.00
from Pantranco for the sale of the two certificates and one unit, 24 it becomes difficult to
accept Villarama's explanation that he and his wife, after consultation, 25 spent the money
of their relatives (the stockholders) when they were supposed to have their own money.
Even if Pantranco paid the P50,000.00 in check to him, as claimed, it could have been
easy for Villarama to have deposited said check in his account and issued his own check
to pay his obligations. And there is no evidence adduced that the said amount of
P350,000.00 was all spent or was insufficient to settle his prior obligations in his business,
and in the light of the stipulation in the deed of sale between Villarama and Pantranco that
P350,000.00 of the selling price was earmarked for the payments of accounts due to his
creditors, the excuse appears unbelievable.
On his having paid for purchases by the Corporation of trucks from the Manila
Trading & Supply Co. with his personal checks, his reason was that he was only sharing
with the Corporation his credit with some companies. And his main reason for mingling his
funds with that of the Corporation and for the latter's paying his private bills is that it would
be more convenient that he kept the money to be used in paying the registration fees on
time, and since he had loaned money to the Corporation, this would be set-off by the
latter's paying his bills. Villarama admitted, however, that the corporate funds in his
possession were not only for registration fees but for other important obligations which
were not specified. 26
Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly,
only a part-time Manager, 27 he admitted not only having held the corporate money but
that he advanced and lent funds for the Corporation, and yet there was no Board
Resolution allowing it. 28
Villarama's explanation on the matter of his involvement with the corporate affairs of
the Corporation only renders more credible Pantranco's claim that his control over the
corporation, especially in the management and disposition of its funds, was so extensive
and intimate that it is impossible to segregate and identify which money belonged to
whom. The interference of Villarama in the complex affairs of the corporation, and
particularly its finances, are much too inconsistent with the ends and purposes of the
Corporation Law, which, precisely, seeks to separate personal responsibilities from
corporate undertakings. It is the very essence of incorporation that the acts and conduct of
the corporation be carried out in its own corporate name because it has its own
personality.
The doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected in all cases which
are within reason and the law. 29 When the fiction is urged as a means of perpetrating a
fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, 30 the veil with which the law covers and isolates the
corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.
Upon the foregoing considerations, We are of the opinion, and so hold, that the
preponderance of evidence have shown that the Villa Rey Transit, Inc. is an alter ego of
Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter
and Pantranco is also enforceable and binding against the said Corporation. For the rule is
that a seller or promissor may not make use of a corporate entity as a means of evading
the obligation of his covenant. 31 Where the Corporation is substantially the alter ego of the
covenantor to the restrictive agreement, it can be enjoined from competing with the
covenantee. 32
The Corporation contends that even on the supposition that Villa Rey Transit, Inc.
and Villarama are one and the same, the restrictive clause in the contract between
Villarama and Pantranco does not include the purchase of existing lines but it only applies
to application for new lines. The clause in dispute reads thus:
 "(4) The SELLER shall not, for a period of ten (10) years from the date of this
sale apply for any TPU service identical or competing with the BUYER. " (Emphasis
supplied)
As We read the disputed clause, it is evident from the context thereof that the
intention of the parties was to eliminate the seller as a competitor of the buyer for ten years
along the lines of operation covered by the certificates of public convenience subject of
their transaction. The word "apply" as broadly used has for frame of reference, a service
by the seller on lines or routes that would compete with the buyer along the routes
acquired by the latter. In this jurisdiction, prior authorization is needed before anyone can
operate a TPU service, 33 whether the service consists in a new line or an old one
acquired from a previous operator. The clear intention of the parties was to prevent the
seller from conducting any competitive line for 10 years since, anyway, he has bound
himself not to apply for authorization to operate along such lines for the duration of such
period. 34
If the prohibition is to be applied only to the acquisition of new certificates of public
convenience thru an application with the Public Service Commission, this would, in effect,
allow the seller just the same to compete with the buyer as long as his authority to operate
is only acquired thru transfer or sale from a previous operator, thus defeating the intention
of the parties. For what would prevent the seller, under the circumstances, from having a
representative or dummy apply in the latter's name and then later on transferring the same
by sale to the seller? Since stipulations in a contract is the law between the contracting
parties,
"Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith."
(Art. 19, New Civil Code.)
We are not impressed of Villarama's contention that the rewording of the two
previous drafts of the contract of sale between Villarama and Pantranco is significant in
that as it now appears, the parties intended to effect the least restriction. We are
persuaded, after an examination of the supposed drafts, that the scope of the final
stipulation, while not as long and prolix as those in the drafts, is just as broad and
comprehensive. At most, it can be said that the re- wording was done merely for brevity
and simplicity.
The evident intention behind the restriction was to eliminate the seller as a
competitor, and this must be, considering such factors as the good will 35 that the seller
had already gained from the riding public and his adeptness and proficiency in the trade.
On this matter, Corbin, an authority on Contracts, has this to say: 36
"When one buys the business of another as a going concern, he usually wishes
to keep it going; he wishes to get the location, the building, the stock, in trade, and the
customers. He wishes to step into the seller's shoes and to enjoy the same business
relations with other men. He is willing to pay much more if he can get the `good will' of
the business, meaning by this the good will of the customers, that they may continue
to tread the old footpath to his door and maintain with him the business relations
enjoyed by the seller.
" . . . In order to be well assured of this, he obtains and pays for the seller's
promise not to reopen business in competition with the business sold."
As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence
on the matter 37 says:
"The law concerning contracts which tend to restrain business or trade has
gone through a long series of changes from time to time with the changing condition of
trade and commerce. With trifling exceptions, said changes have been a continuous
development of a general rule. The early cases show plainly a disposition to avoid and
annul all contract which prohibited or restrained any one from using a lawful trade `at
any time or at any place,' as being against the benefit of the state. Later, however, the
rule became well established that if the restraint was limited to `a certain time' and
within `a certain place,' such contracts were valid and not `against the benefit of the
 state.' Later cases, and we think the rule is now well established, have held that a
contract in restraint of trade is valid providing there is a limitation upon either time or
place. A contract, however, which restrains a man from entering into business or trade
without either a limitation as to time or place, will be held invalid.
 
"The public welfare of course must always be considered and if it be not
involved and the restraint upon one party is not greater than protection to the other
requires, contracts like the one we are discussing will be sustained. The general
tendency, we believe, of modern authority, is to make the test whether the restraint is
reasonably necessary for the protection of the contracting parties. If the contract is
reasonable necessary to protect the interest of the parties, it will be upheld."
(Emphasis supplied.)
Analyzing the characteristics of the questioned stipulation, We find that although it is
in the nature of an agreement suppressing competition, it is, however, merely ancillary or
incidental to the main agreement which is that of sale. The suppression or restraint is only
partial or limited: first, in scope, it refers only to application for TPU by the seller in
competition with the lines sold to the buyer; second, in duration, it is only for ten (10)
years; and third, with respect to situs or territory, the restraint is only along the lines
covered by the certificates sold. In view of these limitations, coupled with the consideration
of P350,000.00 for just two certificates of public convenience, and considering,
furthermore, that the disputed stipulation is only incidental to a main agreement, the same
is reasonable and it is not harmful nor obnoxious to public service. 38 It does not appear
that the ultimate result of the clause or stipulation would be to leave solely to Pantranco
the right to operate along the lines in question, thereby establishing a monopoly or
predominance approximating thereto. We believe the main purpose of the restraint was to
protect for a limited time the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There can be no danger of price
controls or deterioration of the service because of the close supervision of the Public
Service Commission. 39 This Court had stated long ago 40 that "when one devotes his
property to a use in which the public has an interest, he virtually grants to the public an
interest in that use and submits it to such public use under reasonable rules and
regulations to be fixed by the Public Utility Commission."
Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful
agreement, the underlying reason sustaining its validity is well explained in 36 Am. Jur.
537-539, to it:
" . . . Numerous authorities hold that a covenant which is incidental to the sale
and transfer of a trade or business, and which purports to bind the seller not to
engage in the same business in competition with the purchaser, is lawful and
enforceable. While such covenants are designed to prevent competition on the part of
the seller, it is ordinarily neither their purpose nor effect to stifle competition generally
in the locality, nor to prevent it at all in a way or to an extent injurious to the public. The
business in the hands of the purchaser is carried on just as it was in the hands of the
seller; the former merely takes the place of the latter; the commodities of the trade are
as open to the public as they were before; the same competition exists as existed
before; there is the same employment furnished to others after as before; the profits of
the business go as they did before to swell the sum of public wealth; the public has the
same opportunities of purchasing, if it is a mercantile business; and production is not
lessened if it is a manufacturing plant."
The reliance by the lower court on the case of Red Line Transportation Co. v.
Bachrach, 41 and finding that the stipulation is illegal and void seems misplaced. In the
said Red Line case, the agreement therein sought to be enforced was virtually a division of
territory between two operators, each company imposing upon itself an obligation not to
operate in any territory covered by the routes of the other. Restraints of this type, among
common carriers, have always been covered by the general rule invalidating agreements
in restraint of trade. 42
 Neither are the other cases relied upon by the plaintiff-appellee applicable to the
instant case. In Pampanga Bus Co. Inc. v. Enriquez, 43 the undertaking of the applicant
therein not to apply for the lifting of restrictions imposed on his certificates of public
convenience was not an ancillary or incidental agreement. The restraint was the principal
objective. On the other hand, in Red Line Transportation Co. Inc. v. Gonzaga, 44 the
restraint there in question not to ask for extension of the line, or trips, or increase of
equipment — was not an agreement between the parties but a condition imposed in the
certificate of public convenience itself.
Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting
Villarama for a period of 10 years to "apply" for TPU service along the lines covered by the
certificates of public convenience sold by him to Pantranco is valid and reasonable. Having
arrived at this conclusion, and considering that the preponderance of the evidence have
shown that Villa Rey Transit, Inc. is itself the alter ego of Villarama, We hold, as prayed for
in Pantranco's third party complaint, that the said Corporation should, until the expiration of
the 1-year period abovementioned, be enjoined from operating the lines subject of the
prohibition.
To avoid any misunderstanding, it is here to be emphasized that the 10-year
prohibition upon Villarama is not against his application for, or purchase of, certificates of
public convenience, but merely the operation of TPU along the lines covered by the
certificates sold by him to Pantranco. Consequently, the sale between Fernando and the
Corporation is valid, such that the rightful ownership of the disputed certificates still
belongs to the plaintiff being the prior purchaser in good faith and for value thereof. In view
of the ancient rule of caveat emptor prevailing in this jurisdiction, what was acquired by
Ferrer in the sheriff's sale was only the right which Fernando, judgment debtor, had in the
certificates of public convenience on the day of the sale. 45
Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public
Service was notified that "by virtue of an Order of Execution issued by the Court of First
Instance of Pangasinan, the rights, interests, or participation which the defendant,
VALENTIN A. FERNANDO — in the above entitled case may have in the following
realty/personalty is attached or levied upon, to wit: The rights, interests and participation
on the Certificates of Public Convenience issued to Valentin A. Fernando, in Cases Nos.
59494, etc. . . . Lines — Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy
only shows that Ferrer, the vendee at auction of said certificates, merely stepped into the
shoes of the judgment debtor. Of the same principle is the provision of Article 1544 of the
Civil Code, that "If the same thing should have been sold to different vendees, the
ownership shall be transferred to the person who may have first taken possession thereof
in good faith, if it should be movable property.
"There is no merit in Pantranco and Ferrer's theory that the sale of the certificates of
public convenience in question, between the Corporation and Fernando, was not
consummated, it being only a conditional sale subject to the suspensive condition of its
approval by the Public Service Commission. "While section 20(g) of the Public Service Act
provides that "subject to established limitation and exceptions and saving provisions to the
contrary, it shall be unlawful for any public service or for the owner, lessee or operator
thereof, without the approval and authorization of the Commission previously had . . . to
sell, alienate, mortgage, encumber or lease its property, franchise, certificates, privileges,
or rights or any part thereof, . . ., "the same section also provides:
" . . . Provided, however, that nothing herein contained shall be construed to
prevent the transaction from being negotiated or completed before its approval or to
prevent the sale, alienation, or lease by any public service of any of its property in the
ordinary course of its business."
It is clear, therefore, that the requisite approval of the PSC is not a condition
precedent for the validity and consummation of the sale.
Anent the question of damages allegedly suffered by the parties, each of the
appellants has its or his own version to allege.
 Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants
(Pantranco and Ferrer) in acquiring the certificates of public convenience in question,
despite constructive and actual knowledge on their part of a prior sale executed by
Fernando in favor of the said corporation, which necessitated the latter to file the action to
annul the sheriff's sale to Ferrer and the subsequent transfer to Pantranco, it is entitled to
collect actual and compensatory damages, and attorney's fees in the amount of
P25,000.00. The evidence on record, however, does not clearly show that said defendants
acted in bad faith in their acquisition of the certificates in question. They believed that
because the bill of sale has yet to be approved by the Public Service Commission, the
transaction was not a consummated sale, and, therefore, the title to or ownership of the
certificates was still with the seller. The award by the lower court of attorney's fees of
P5,000.00 in favor of Villa Rey Transit, Inc. is, therefore, without basis and should be set
aside.
Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's
sale, he had suffered and should be awarded moral, exemplary damages and attorney's
fees, cannot be entertained, in view of the conclusion herein reached that the sale by
Fernando to the Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with the allegation that
when it purchased Villarama's business for P350,000.00, it intended to build up the traffic
along the lines covered by the certificates but it was not afforded an opportunity to do so
since barely three months had elapsed when the contract was violated by Villarama
operating along the same lines in the name of Villa Rey Transit, Inc. It is further claimed by
Pantranco that the underhanded manner in which Villarama violated the contract is
pertinent in establishing punitive or moral damages. Its contention as to the proper
measure of damages is that it should be the purchase price of P350,000.00 that it paid to
Villarama. While We are fully in accord with Pantranco's claim of entitlement to damages it
suffered as a result of Villarama's breach of his contract with it, the record does not
sufficiently supply the necessary evidentiary materials upon which to base the award and
there is need for further proceedings in the lower court to ascertain the proper amount.
PREMISES CONSIDERED, the judgment appealed from is hereby modified as
follows:
1. The sale of the two certificates of public convenience in question by Valentin
Fernando to Villa Rey Transit, Inc. is declared preferred over that made by the Sheriff at
public auction of the aforesaid certificate of public convenience in favor of Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan
Transportation Co. against Jose M. Villarama, holding that Villa Rey Transit, Inc. is an
entity distinct and separate from the personality of Jose M. Villarama, and insofar as it
awards the sum of P5,000.00 as attorney's fees in favor of Villa Rey Transit, Inc.;
3. The case is remanded to the trial court for the reception of evidence in
consonance with the above findings as regards the amount of damages suffered by
Pantranco; and
4. On equitable considerations, without costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Castro and Fernando,
JJ., concur.
Zaldivar, J., is on leave.
Sanchez and Capistrano, JJ., did not take part
|||  (Villa Ray Transit Inc. v. Ferrer, G.R. No. L-23893, [October 29, 1968], 134 PHIL 796-818)

MARVEL BUILDING CORPORATION, ET AL., plaintiffs-appellees, vs.

SATURNINO DAVID, in his capacity as Collector, Bureau of Internal
Revenue, defendant-appellant.
 Assistant Solicitor General Francisco Carreon for appellant.
Antonio Quirino and Rosendo J. Tansinsin for appellees.

SYLLABUS

CORPORATIONS; CIRCUMSTANTIAL EVIDENCE SHOWING ONE-MAN

CORPORATION. — the existence of endorsed certificates discovered by internal revenue
agents between 1948 and 1949 in the possession of the Secretary-Treasurer of a
supposed corporation; the fact that twenty-five certificates were signed by its president for
no justifiable reason; the fact that its principal stockholder had made enormous profits and,
therefore, had a motive to hide them to evade the payment of taxes; the fact that the other
subscribers had no incomes of sufficient magnitude to justify their big subscriptions; the
fact that the treasurer in the name of the alleged corporation but were kept by the principal
stockholder herself; the fact that the stockholders or the directors never appeared to have
ever met to discuss the business of the corporation; the fact that she advanced big sums
of money to the corporation without any previous arrangement or accounting; and the fact
that the books of accounts were kept as if they belonged to her alone — are circumstantial
evidence which are not only convincing but conclusive that she is the sole and exclusive
owner of all the shares of stock of the corporation and that the other partners are her
dummies.

DECISION

LABRADOR, J  : p

This action was brought by plaintiffs as stockholders of the Marvel Building

Corporation to enjoin the defendant Collector of Internal Revenue from selling at public
auction various properties described in the complaint, including three parcels of land, with
the buildings situated thereon, known as the Aguinaldo Building, the Wise Building, and
the Dewey Boulevard-Padre Faura Mansion, all registered in the name of said corporation.
Said properties were seized and distrained by defendant to collect war profits taxes
assessed against plaintiff Maria B. Castro (Exhibit B). Plaintiffs allege that the said three
properties (lands and buildings) belong to the Marvel Building corporation and not to Maria
B. Castro, while the defendant claims that Maria B. Castro is the true and sole owner of all
the subscribed stock of the Marvel Building Corporation, including those appearing to have
been subscribed and paid for by the other members, and consequently said Maria B.
Castro is also the true and exclusive owner of the properties seized. The trial court held
that the evidence, which is mostly circumstantial, fails to show to its satisfaction that Maria
B. Castro is the true owner of all the stock certificates of the corporation, because the
evidence is susceptible of two interpretations and an interpretation may not be made which
would deprive one of property without due process of law.
It appears that on September 15, 1950, the Secretary of Finance, upon
consideration of the report of a special committee assigned to study the war profits tax
case of Mrs. Maria B. Castro, recommended the collection of P3,593,950.78 as war profits
taxes for the latter, and on September 22, 1953 the President instructed the Collector that
steps be taken to collect the same (Exhibits 114, 114-A to 114-D). Pursuant thereto
various properties, including the three above mentioned, were seized by the Collector of
Internal Revenue on October 31, 1950. On November 13, 1950, the original complaint in
this case was filed. After trial, the Court of First Instance of Manila rendered judgment
ordering the release of the properties mentioned, and enjoined the Collector of Internal
Revenue from selling the same. The Collector of Internal Revenue has appealed to this
Court against the judgment.
The following facts are not disputed, or are satisfactorily proved by the evidence:
 The Articles of Incorporation of the Marvel Building Corporation is dated February
12, 1947 and according to it the capital stock is P2,000,000, of which P1,025,000 was (at
the time of incorporation) subscribed and paid by the following incorporators:
Maria B. Castro -------- 250shares ------P250,000.00
Amado A. Yatco ------- 100" ------ 100,000.00
Santiago Tan ----------- 100" ------ 100,000.00
Jose T. Lopez ---------- 90" ------ 90,000.00
Benita Lamagna --------- 90" ------ 90,000.00
C.S. Gonzales ----------- 80" ------ 80,000.00
Maria Cristobal --------- 70" ------ 70,000.00
Segundo Esguerra, Sr. -- 75" ------ 75,000.00
Ramon Sangalang -------- 70" ------ 70,000.00
Maximo Cristobal ------- 55" ------ 55,000.00
Antonio Cristobal ------ 45" ------ 45,000.00
____________
P1,025,000.00.
Maria B. Castro was elected President and Maximo Cristobal, Secretary-Treasurer
(Exhibit A).
The Wise Building was purchased on September 4, 1946, the purchase being made
in the name of Dolores Trinidad, wife of Amado A. Yatco (Exhibit V), and the Aguinaldo
Building, on January 17, 1947, in the name of Segundo Esguerra, Sr. (Exhibit M). Both
building were purchased for P1,800,00, but as the corporation had only P1,025,000, the
balance of the purchase price was obtained as loans from the Insular Life Assurance Co.,
Ltd. and the Philippine Guaranty Co., Inc. (Exhibit C).
Of the incorporators of the Marvel Building Corporation, Maximo Cristobal and
Antonio Cristobal are half-brothers of Maria B. Castro, Manila Cristobal is a half-sister, and
Segundo Esguerra, Sr. a brother-in-law, husband of Maria Cristobal, Maria B. Castro's
half-sister. Maximo B. Cristobal did not file any income tax returns before the year 1946,
except for the years 1939 and 1940, but in these years he was exempted from the tax. He
has not filed any war profits tax return (Exhibit 54). Antonio Cristobal, Segundo Esguerra,
Sr. and Jose T. Lopez did not file any income tax returns for the years prior to 1946, and
neither did they file any war profits tax returns (Exhibit 52). Maria Cristobal filed income tax
returns for the years 1929 to 1942, but they were exempt from the tax (Exhibit 53). Benita
A. Lamagna did not file any income tax returns prior to 1945, except for 1942 which was
exempt. Since did not file any war profits tax (Exhibit 55). Ramon M. Sangalang did not file
income tax returns up to 1945 except for the years 1936, 1937, 1938, 1939 and 1940. He
has not filed any war profits tax return (Exhibit 56). Santiago Tan did not file any income
tax returns prior to 1945, except for the years 1938, 1939, 1940 and 1942, but all of these
were exempt. He did not file any war profits tax return (Exhibit 57). Amado A. Yatco did not
file income tax returns prior to 1945, except for the years 1937, 1938, 1939, 1941 and
1942, but these were exempt. He did not file any war profits tax return (Exhibit 58).
Antonio Cristobal's income in 1946 is P15,630, and in 1947, P4,550 (Exhibits 59-
60); Maximo B. Cristobal's income in 1946 is P19,759.10, in 1947, P9,773.47 (Exhibits 61-
62); Segundo Esguerra's income in 1946 is P5,500, in 1947, P7,754.32 (Exhibits 63-64);
Jose T. Lopez's income in 1946 is P20,785, in 1947, P14,302.77 (Exhibits 69- 70); Benita
A. Lamagnas income in 1945 is P1,559, in 1946, P6,463.36, in 1947, P6,189.79 and her
husband's income in 1947 is P10,825.53 (Exhibits 65-68); Ramon M. Sangalang's income
in 1945 is P5,500, in 1946, P18,300.00 (Exhibits 71-72); Santiago Tan's income in 1945 is
P456, in 1947 is P9,167.95, and in 1947, P7,620.11 (Exhibits 73-75); and Amado Yatco's
income in 1945 is P12,600 in 1946, P23,960, and in 1947, P11,160 (Exhibits 76-78).
In October, 1945 Maria B. Castro, Nicasio Yatco, Maxima Cristobal de Esguerra,
Maria Cristobal Lopez and Maximo Cristobal organized the Maria B. Castro, Inc. with a
capital stock of P100,00, of which Maria B. Castro subscribed for P99,600 and all the
others for P100 each. This was increased in 1950 to P500,000 and Maria B. Castro
subscribed P76,000 and the others P1,000 each (Exhibit 126).
It does not appear that the stockholders or the board of directors of the Marvel
Building Corporation have ever held a business meeting, for no books thereof or minutes
of meeting were ever mentioned by the officers thereof or presented by them at the trial.
The by-laws of the corporation, if any had ever been approved, has not been presented.
Neither does it appear that any report of the affairs of the corporation has been made,
either of its transactions or accounts.
From the book of accounts of the corporation, advances to the Marvel Building
Corporation of P125,000 were made by Maria B. Castro in 1947, P102,916.05 in 1948,
and P160,910.96 in 1949 (Exhibit 118).
The main issue involved in these proceedings is: Is Maria B. Castro the owner of all
the shares of stock of the Marvel Building Corporation and the other stockholders mere
dummies of hers?
The most important evidence presented by the Collector of Internal Revenue to
prove his claim that Maria B. Castro is the sole and exclusive owner of the shares of stock
of the Marvel Building Corporation is the supposed endorsement in blank of the shares of
stock issued in the name of the other incorporators, and the possession thereof by Maria
B. Castro. The existence of said endorsed certificates was testified to by witnesses Felipe
Aquino, internal revenue examiner, Antonio Mariano, examiner, and Crispin Llamado,
Under-Secretary of Finance, who declared as follows: Towards the end of the year of 1948
and about the beginning of the year 1949, while Aquino and Mariano were examining the
books and papers of the Marvel Building Corporation at its place of business, which books
and papers were furnished by its Secretary, Maximo Cristobal, they came across an
envelope containing eleven stock certificates, bound together by an Acco fastener, which
(certificates) corresponded in number and in amount on their face to the subscriptions of
the stockholders that all the certificates, except that in the name of Maria B. Castro, were
endorsed in blank by the subscribers; that as two revenue agents could not agree what to
do with the certificates, Aquino brought them to Under-Secretary of Finance Llamado, who
thereupon suggested that photostatic copies thereof be taken; that this was done, and the
photostatic copies placed by him in his office safe; that Aquino returned the certificates
that same day after the photostatic copies had been taken; that the photostatic copies
taken are Exhibits 4, 5, 6, 7, 8, 9, 10, 11, 12, and 13; and in that July, 1950, copy-cat
copies of the above photostats were taken, and said copy-cat copies are Exhibits 40-49.
 
Julio Llamado, bookkeeper of the Marvel Building Corporation from 1947 to May,
1948, also testified that he was the one who had prepared the original certificates, putting
therein the number of shares in words in handprint; that the originals were given to him by
Maria B. Castro for comparison with the articles of incorporation; that they were not yet
signed by the President and by the Secretary-Treasurer when he had the certificates; and
that after the checking he returned all of them to Mrs. Castro. He recognized the
photostats, Exhibits 4 to 13 as photostats of the said originals. He also declared that he
also prepared a set of stock certificates, similar to the certificates which were copied in the
photostats, filling the blanks for the name of the stockholder, the number of shares, and
the date of issue, and that the certificates he had prepared are Exhibits H, H-1 to H-7 and
J (Exhibits 30-38). This set of certificates was made him first and the set of which
photostats were taken, a few days later.
The plaintiffs offered a half-hearted denial of the existence of the endorsed blank
certificates, Maximo Cristobal, secretary of the corporation, saying that no investigation
was ever made by Aquino and Mariano in which said certificates were discovered by the
latter. The, however, vigorously attack the credibility of the witnesses for the defendant,
imputing to the Llamados, enmity against Maria B. Castro, and to Aquino and Mariano, a
very doubtful conduct in not divulging the existence of the certificates either to Lobrin,
Chief Income Tax Examiner, or to the Collector of Internal Revenue, both their immediate
chiefs. Reliance is also placed on a certificate, Exhibit W, wherein Aquino and others,
declare that the certificates (Exhibits not endorsed when the same were examined. In
connection with this certificate, Exhibit W, we note that it states that the certificates
examined were Exhibits 30 to 38, the existence or character of which are not disputed. But
the statement contains nothing to the effect that the above certificates were the only ones
in existence, according to their knowledge. Again the certificate was issued for an
examination on September 1949, not by Aquino and Mariano at the end of 1948 or the
beginning of 1949. The certificate, therefore, neither denies the existence of the endorsed
certificates, nor that Aquino and Mariano had made an examination of the papers of the
corporation at the end of the year 1948. It can not, therefore, discredit the testimonies of
the defendant's witnesses.
As to the supposed enmity of the Llamados towards the plaintiff Maria B. Castro, we
note that, supposing that there really was such enmity, it does not appear that it was of
such magnitude or force as could have induced the Llamados to lie or fabricate evidence
against her. It seems that the Llamados and Maria B. Castro were close friends way back
in 1947 and up to 1949; but that at the time of the trial the friendship had been marred by
misunderstandings. We believe that in 1948 and 1949 the Llamados were trusted friends
of Maria B. Castro, and this explains why they had knowledge of her secret transactions.
The younger Llamado even made advances for the hand of Maria B. Castro's daughter,
and this at the time when as a bookkeeper he was entrusted with checking up the
certificates of stock. When the older Llamado kept secret the existence of the endorsed
certificates, the friendship between the two families was yet intact; hence, the existence of
the endorsed certificates must have been kept to himself by the older Llamado. All the
above circumstances reinforce our belief that the Llamados had personal knowledge of the
facts they testified to, and the existence of this knowledge in turn renders improbable
plaintiffs' claim that their testimonies were biased.
Attempt was also made by the plaintiffs to show by expert evidence that the
endorsement could have been super-imposed, i.e., that the signatures made on other
papers and these were pasted and thereafter the documents photographed. Judicial
experience is to the effect that expert witnesses can always be obtained for both sides of
an issue, most likely because expert witnesses are no longer impermeable to the influence
of fees (II Wigmore, Sec. 563 (2), p. 646). and if parties are capable of paying fees, expert
opinion should be received with caution. In the case at bar, the opinion on the supposed
superimposition was merely a possibility, and we note various circumstances which prove
that the signatures were not superimposed and corroborate defendant's claim that they
were genuine. In the first place, the printed endorsement contains a very heavy line at the
bottom for the signature of the endorsee. This line in almost all of the endorsements is as
clear as the printed letters above it, and at the points where the letters of the signature
extend down and traverse it (the line), there is no indication that the line is covered by a
superimposed paper. Again in these places both the signatures and the lines are clear and
distinct where the cross one another. Had there been superimpositions the above features
could not have been possible. In the second place, Maria B. Castro admitted having
singed 25 stock certificates, but only eleven were issued (t.s.n., p. 662). No explanation is
given by her why she had to sign as many as 25 forms when there were only eleven
subscribers and eleven forms to be filled. This circumstances corroborate the young
Llamado's declaration that two sets of certificates had been prepared. The nineteen issued
must be Exhibits H, H-1 to H-7 and J, or Nos. 30 to 38, and the stock certificates endorsed
whose photostatic copies are Exhibits 4 to 13. It is to be remembered also, that it is a
common practice among unscrupulous merchants to carry two sets of books, one set for
themselves and another to be shown to tax collectors. This practice could not have been
unknown to Maria B. Castro, who apparently had been able to evade the payment of her
war profits taxes. These circumstances, coupled with the testimony of Julio Llamado that
two sets of certificates were given to him for checking, show to an impartial mind the
existence of the set of certificates endorsed in blank, thus confirming the testimonies of the
defendant's witnesses, Aquino, Mariano and Crispin Llamado, and thus discrediting the
obviously partial testimony of the expert presented by plaintiffs. The genuineness of the
signatures on the endorsement is not disputed. How could the defendant had secured
these genuine signatures? Plaintiffs offer no explanation for this, although they do not
question them. It follows that the genuine signatures must have been made on the stock
certificates themselves.
Next in importance among the evidence submitted by the defendant collector to
prove his contention that Maria B. Castro is the sole owner of the shares of stock of the
Marvel Building Corporation, is the fact that the other stockholders did not have incomes in
such amounts, during the time of the organization of the corporation in 1947, or
immediately thereto, as to enable them to pay in full for their supposed subscriptions. This
fact is proved by their income tax returns, or the absence thereof. Let us take Amado A.
Yatco as an example. Before 1945 his returns were exempt from the tax, in 1945 he had
P12,600 and in 1946, P23,000. He has four children. How could he have paid P100,000 in
1945 and 1946? Santiago Tan who also contributed P100,000 had no appreciable income
before 1946, and in this year an income of only P9,167.95. Jose T. Lopez also did not file
any income tax returns before 1940 and in 1946 he had an income of only P20,785,
whereas he is supposed to have subscribed P90,000 worth of stock early in 1947. Benita
Lamagna had no returns either up to 1945, except in 1942, which was exempt, and in
1945 she had an income of P1,550 and in 1946, P6,463.36. In the same situation are all
the others, and besides, brothers and sisters and brother-in- law of Maria B. Castro. On
the other hand, Maria B. Castro had been found to have made enormous gains or profits in
her business such that the taxes thereon were assessed at around P3,000,000. There
was, therefore, a prima facie case made out by the defendant collector that Maria B.
Castro had furnished all the money that the Marvel Building Corporation had.
In order to meet the above evidence only three of the plaintiffs testified, namely,
Maximo Cristobal, the corporation's secretary, who made the general assertion on the
witness stand that the other stockholders paid for their shares in full, Maria B. Castro, who
stated that payments of the subscriptions were made to her, and C. S. Gonzales, who
admitted that Maria B. Castro paid for his subscription. After a careful study of the above
testimonies, however, we find them subject to various objections. Maximo Cristobal
declared that he issued provincial receipts for the subscriptions supposedly paid to him in
1946; but none of the supposed receipts was presented. If the subscriptions were really
received by him, big as the amounts were, he would have been able to tell specifically, by
dates and in fixed amounts, when and how the payments were made. The general
assertion of alleged payments, without the concrete days and amounts of payments, are,
according to our experience, positive indications of untruthfulness, for when a witness
testified to a fact that actually occurs, the act is concretely stated and no generalization is
made.
With respect to Maria B. Castro's testimony, we find it to be as untruthful as that of
Cristobal. She declared that payments of the subscriptions took place between July and
December, 1946, and that said payments were first deposited by her in the National City
Bank of New York. A study of her account in said bank (Exhibit 82), however, fails to show
the alleged deposit of the subscriptions during the year 1946 (See Exhibits 83-112). This
fact completely belies her assertion. As to the testimony of C. S. Gonzales that Maria B.
Castro advanced his subscription, there is nothing in the evidence to corroborate it, and
the circumstances show otherwise. If he had really been a stockholder and Maria B.
Castro advanced his subscription, the agreement between him and Castro should have
been put in writing, the amount advanced being quite considerable (P80,000), and it
appearing further that Gonzales is no close relative or confidant of Castro.
 
Lastly, it is significant that the plaintiffs, the supposed subscribers, who should have
come to court to assert that they actually paid for their subscriptions, and are not mere
dummies, did not do so. They could not have afforded such a costly indifference, valued at
from P70,000 to P100,000 each, if they were not actual dummies. This failure on their part
to take the witness stand to deny or refute the charge that they were mere dummies is to
us of utmost significance. What could have been easier to disprove the charge that they
were dummies, than for them to come to court and show their receipts and testify on the
 payments they have made on their subscriptions? This they, however, refused to do. They
had it in their power to rebut the charges, but they chose to keep silent. The non-
production of evidence that would naturally have been produced by an honest and
therefore fearless claimant permits the inference that its tenor is unfavorable to the party's
cause (II Wigmore, Sec. 285, p. 162). A party's silence to adverse testimony is equivalent
to an admission of its truth (Ibid, Sec. 289, p. 175).
Our consideration of the evidence submitted on both sides, leads us to a conclusion
exactly opposite that arrived at by the trial court. In general the evidence offered by the
plaintiffs is testimonial and direct evidence, easy of fabrication; that offered by defendant,
documentary and circumstantial, not only difficult of fabrication but in most cases found in
the possession of plaintiffs. There is very little room for choice as between the two. The
circumstantial evidence is not only convincing; it is conclusive. The existence of endorsed
certificates, discovered by the internal revenue agents between 1943 and 1949 in the
possession of the Secretary-Treasurer, the fact that twenty-five certificates were signed by
the president of the corporation, for no justifiable reason, the fact that two sets of
certificates were issued, the undisputed fact that Maria B. Castro had made enormous
profits and, therefore, had a motive to hide them to evade the payment of taxes, the fact
that the other subscribers had no incomes of sufficient magnitude to justify their big
subscriptions, the fact that the subscriptions were not receipted for and deposited by the
treasurer in the name of the corporation but were kept by Maria B. Castro herself, the fact
that the stockholders or the directors never appeared to have ever met to discuss the
business of the corporation, the fact that Maria B. Castro advanced big sums of money to
the corporation without any previous arrangement or accounting, and the fact that the
books of accounts were kept as if they belonged to Maria B. Castro alone — these facts
are of patent and potent significance. What are their necessary implications? Maria B.
Castro would not have asked them to endorse their stock certificates, or be keeping these
in her possession, if they were really the owners. They never would have consented that
Maria B. Castro keep the funds without receipts or accounting, nor that she manages the
business without their knowledge or concurrence, were they owners of the stocks in their
own rights. Each and every one of the facts all set forth above, in the same manner, is
inconsistent with the claim that the stockholders, other than Maria B. Castro, owned their
shares in their own right. On the other hand, each and every one of them, and all of them,
can point to no other conclusion than that Maria B. Castro was the sole and exclusive
owner of the shares and that they were only her dummies.
In our opinion, the facts and circumstances duly set forth above, all of which have
been proved to our satisfaction, prove conclusively and beyond reasonable doubt (section
89, Rule 123 of the Rules of Court and section 42 of the Provisional law for the application
of the Penal Code) that Maria B. Castro is the sole and exclusive owner of all the shares of
stock of the Marvel Building Corporation and that the other partners are her dummies.
Wherefore, the judgment appealed from should be, as it hereby is, reversed and the
action filed by plaintiffs-appellees, dismissed, with costs against plaintiffs-appellees. So
ordered.
Paras, C. J., Pablo, Bengzon, Padilla, Montemayor, Jugoand Bautista Angelo,
JJ., concur.
 
|||  (Marvel Building Corp. v. David, G.R. No. L-5081, [February 24, 1954], 94 PHIL 376-389)

CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR

RELATIONS, COMMISSION, (First Division); and Norberto Marabe,
Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos,
Pedro Aboigar, Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr.,
Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut, Domingo
Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino
Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents.
 The Law Firm of Araullo and Raymundo for petitioner.
Ciriaco S. Cruz for private respondents.

SYLLABUS

1. COMMERCIAL LAW; CORPORATION LAW; DOCTRINE OF PIERCING THE VEIL

OF CORPORATE ENTITY; WHEN APPLICABLE. — 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.
2. ID.; ID.; ID.; PROBATIVE FACTORS OF IDENTITY THAT WILL JUSTIFY THE
APPLICATION THEREOF. — 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."
3. ID.; ID.; ID.; TEST IN DETERMINING THE APPLICABILITY THEREOF. — The test
in determining the applicability of the doctrine of piercing the veil of corporation 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 prevent '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."
4. ID.; ID.; ID.; APPLICABLE IN CASE AT BAR. — In this case, the NLRC noted that,
while petitioner claimed that it ceased its business operations on April 29, 1986, it filed an
Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating
that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand,
HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating
that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. Furthermore, the
NLRC stated that: "Both information sheets were filed by the same Virgilio O. Casiño as the
corporate secretary of both corporations. It would also not be amiss to note that both
corporations had the same president, the same board of directors, the same corporate
officers, and substantially the same subscribers. From the foregoing, it appears that, among
other things, the respondent (herein petitioner) and the third-party claimant shared the same
address and/or premises. Under this circumstances, (sic) it cannot be said that the property
levied upon by the sheriff were not of respondents." Clearly, petitioner ceased its business
operations in order to evade the payment to private respondents of backwages 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.
5. ID.; NATIONAL LABOR RELATIONS COMMISSION MANUAL OF EXECUTION OF
JUDGMENT; SECTION 3, RULE VII THEREOF; PROPERLY OBSERVED IN CASE AT BAR.
— In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property
subject of the execution, private respondents had no other recourse but to apply for a break-
open order after the third-party claim of HPPI was dismissed for lack of merit by the NLRC.
This is in consonance with Section 3, Rule VII of the NLRC Manual of Execution of Judgment
which provides that: "Should the losing party, his agent or representative, refuse or prohibit
the Sheriff or his representative entry to the place where the property subject of execution is
located or kept, the judgment creditor may apply to the Commissioner or Labor Arbiter
concerned for a break-open order."

DECISION

HERMOSISIMA, JR., J  : p

The corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation. Where badges of
fraud exist; where public convenience is defeated; where a wrong is sought to be justified
thereby, the corporate fiction or the notion of legal entity should come to naught. The law in
these instances will regard the corporation as a mere association of persons and, in case of
two corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary
liability for damages, the corporation may not be heard to say that it has a personality
separate and distinct from the other corporation. The piercing of the corporate veil comes into
play.
This special civil action ostensibly raises the question of whether the National Labor
Relations Commission committed grave abuse of discretion when it issued a "break-open
order" to the sheriff to be enforced against personal property found in the premises of
petitioner's sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355
Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business. Private
respondents were employed by said company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written notices of
termination of employment by petitioner, effective on November 30, 1981. It was stated in
the individual notices that their contracts of employment had expired and the project in
which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the
termination of private respondent's employment, the project in which they were hired had
not yet been finished and completed. Petitioner had to engage the services of sub-
contractors whose workers performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month
pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to
reinstate private respondents and to pay them back wages equivalent to one year or three
hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC)
dismissed the motion for reconsideration filed by petitioner on the ground that the said
decision had already become final and executory. 2
On October 16, 1986, the NLRC Research and Information Department made the
finding that private respondents' backwages amounted to P199,800.00. 3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the
sheriff to execute the Decision, dated December 19, 1984. The writ was partially satisfied
through garnishment of sums from petitioner's debtor, the Metropolitan Waterworks and
Sewerage Authority, in the amount of P81,385.34. Said amount was turned over to the
cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter
directing the sheriff to collect from herein petitioner the sum of P117,414.76, representing
the balance of the judgment award, and to reinstate private respondents to their former
positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias
writ of execution on petitioner through the security guard on duty but the service was
refused on the ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter
issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in his
progress report, dated November 2, 1989:
1. 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 respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the
properties he had levied upon. 4
The said special sheriff recommended that a "break-open order" be issued to enable
him to enter petitioner's premises so that he could proceed with the public auction sale of
the aforesaid personal properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the
Labor Arbiter alleging that the properties sought to be levied upon by the sheriff were
owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-
Open Order," alleging that HPPI and petitioner corporation were owned by the same
incorporator/stockholders. They also alleged that petitioner temporarily suspended its
business operations in order to evade its legal obligations to them and that private
respondents were willing to post an indemnity bond to answer for any damages which
petitioner and HPPI may suffer because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents presented duly certified
copies of the General Information Sheet, dated May 15, 1987, submitted by petitioner to
the Securities Exchange Commission (SEC) and the General Information Sheet, dated
May 15, 1987, submitted by HPPI to the Securities and Exchange Commission.
The General Information Sheet submitted by the petitioner revealed the following:
       
"1. Breakdown of Subscribed Capital  
     
  Name of Stockholder Amount Subscribed
       
  HPPI P6,999,500.00 
  Antonio W. Lim 2,900,000.00 
  Dennis S. Cuyegkeng 300.00 
  Elisa C. Lim 100,000.00 
  Teodulo R. Dino 100.00 
  Virgilio O. Casino 100.00 
2. Board of Directors    
  Antonio W. Lim Chairman  
  Dennis S. Cuyegkeng Member  
  Elisa C. Lim Member  
  Teodulo R. Dino Member  
   Virgilio O. Casino Member  
3. Corporate Officers    
  Antonio W. Lim President  
  Dennis S. Cuyegkeng Assistant to the President
  Elisa O. Lim Treasurer  
  Virgilio O. Casino Corporate Secretary
4. Principal Office    
  355 Maysan Road    
  Valenzuela, Metro Manila." 5    
On the other hand, the General Information Sheet of HPPI revealed the following:
       
"1. Breakdown of Subscribed Capital  
     
  Name of Stockholder Amount Subscribed
       
  Antonio W. Lim P400,000.00 
  Elisa C. Lim 57,700.00 
  AWL Trading 455,000.00 
  Dennis S. Cuyegkeng 40,100.00 
  Teodulo R. Dino 100.00 
  Virgilio O. Casino 100 00  
2. Board of Directors    
  Antonio W. Lim Chairman  
  Elisa C. Lim Member  
  Dennis S. Cuyegkeng Member  
  Virgilio O. Casino Member  
  Teodulo R. Dino Member  
3. Corporate Officers    
  Antonio W. Lim President  
  Dennis S. Cuyegkeng Assistant to the President
  Elisa C. Lim Treasurer  
  Virgilio O. Casino Corporate Secretary
4. Principal Office    
  355 Maysan Road, Valenzuela, Metro Manila." 6
On February 1, 1990, HPPI filed an Opposition to private respondents' motion for
issuance of a break-open order, contending that HPPI is a corporation which is separate and
distinct from petitioner. HPPI also alleged that the two corporations are engaged in two
different kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was then
engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied private
respondents' motion for break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set
aside the order of the Labor Arbiter, issued a break-open order and directed private
respondents to file a bond. Thereafter, it directed the sheriff to proceed with the auction sale
of the properties already levied upon. It dismissed the third-party claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a
Resolution, dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of discretion when it
ordered the execution of its decision despite a third-party claim on the levied property.
Petitioner further contends, that the doctrine of piercing the corporate veil should not have
been applied, in this case, in the absence of any showing that it created HPPI in order to
evade its liability to private respondents. It also contends that HPPI is engaged in the
manufacture and sale of steel, concrete and iron pipes, a business which is distinct and
separate from petitioner's construction business. Hence, it is of no consequence that
petitioner and HPPI shared the same premises, the same President and the same set of
officers and subscribers. 7
We find petitioner's contention to be unmeritorious.
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. 8 But, this separate and distinct personality of a corporation is merely a fiction
created by law for convenience and to promote justice. 9 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, 10 this separate personality
of the corporation may be disregarded or the veil of corporate fiction pierced. 11 This is true
likewise when the corporation is merely an adjunct, a business conduit or an alter ego of
another corporation. 12
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." 13
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 finances, 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." 14
Thus, the question of whether a corporation is a mere alter ego, a mere sheet or
paper corporation, a sham or a subterfuge is purely one of fact. 15
In this case, the NLRC noted that, while petitioner claimed that it ceased its
business operations on April 29, 1986, it filed an Information Sheet with the Securities and
Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant,
submitted on the same day, a similar information sheet stating that its office address is at
355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
"Both information sheets were filed by the same Virgilio O. Casiño as the
corporate secretary of both corporations. It would also not be amiss to note that both
corporations had the same president, the same board of directors, the same corporate
officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or premises.
Under this circumstances, (sic) it cannot be said that the property levied upon by the
sheriff were not of respondents. 16
Clearly, petitioner ceased its business operations in order to evade the payment to
private respondents of backwages 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.
The facts in this case are analogous to Claparols v. Court of Industrial
Relations, 17 where we had the occasion to rule:
"Respondent court's findings that indeed the Claparols Steel and Nail Plant,
which ceased operation of June 30, 1957, was SUCCEEDED by the Claparols Steel
Corporation effective the next day, July 1, 1957, up to December 7, 1962, when the
latter finally ceased to operate, were not disputed by petitioner. It is very clear that the
latter corporation was a continuation and successor of the first entity . . . Both
predecessors and successor were owned and controlled by petitioner Eduardo
Claparols and there was no break in the succession and continuity of the same
business. This 'avoiding-the-liability' scheme is very patent, considering that 90% of
the subscribed shares of stock of the Claparols Steel Corporation (the second
corporation) was owned by respondent . . . Claparols himself, and all the assets of the
dissolved Claparols Steel and Nail Plant were turned over to the emerging Claparols
Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it
was deliberately and maliciously designed to evade its financial obligation to its
employees."
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the
property subject of the execution, private respondents had no other recourse but to apply
for a break-open order after the third-party claim of HPPI was dismissed for lack of merit
by the NLRC. This is in consonance with Section 3, Rule VII of the NLRC Manual of
Execution of Judgment which provides that:
"Should the losing party, his agent or representative, refuse or prohibit the
Sheriff or his representative entry to the place where the property subject of execution
is located or kept, the judgment creditor may apply to the Commission or Labor Arbiter
concerned for a break-open order."
Furthermore, our perusal of the records shows that the twin requirements of due
notice and hearing were complied with. Petitioner and the third-party claimant were given
the opportunity to submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the
break-open order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-
judicial agencies supported by substantial evidence are binding on this Court and are
entitled to great respect, in the absence of showing of grave abuse of discretion. 18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the
NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED.
 SO ORDERED.
 (Concept Builders, Inc. v. National Labor Relations Commission, G.R. No. 108734, [May 29,
|||

1996], 326 PHIL 955-969)

EDUARDO CLAPAROLS, ROMULO AGSAM and/or CLAPAROLS STEEL

AND NAIL PLANT, petitioners, vs. COURT OF INDUSTRIAL RELATIONS,
ALLIED WORKERS' ASSOCIATION and/or DEMETRIO GARLITOS,
ALFREDO ONGSUCO, JORGE SEMILLANO, SALVADOR DOROTEO,
ROSENDO ESPINOSA, LUDOVICO BALOPENOS, ASER AMANCIO,
MAXIMO QUIOYO, GAUDENCIO QUIOYO, and IGNACIO
QUIOYO, respondents.

Ruben G. Bala for petitioners.

Rolando N. Medalla for private respondents.

SYNOPSIS

Found guilty of union busting and of illegally dismissing the respondent workers,
petitioners were ordered to reinstate the former with backwages from date of dismissal to
reinstatement. Petitioners opposed the execution of the judgment as well as the order
directing the court examiner to compute the bonuses aside from backwages. They
contended that the company had ceased to operate and, therefore, pursuant to Sta.
Cecilia Sawmills v. CIR (L-19273, Feb. 20, 1964), the workers, assuming they are entitled
to backwages, should only be limited to three-months' pay. Respondent workers, however,
contended that the company was succeeded by another company which is controlled by
the same stockholders. The Court of Industrial Relations denied the opposition, and on
appeal, the Supreme Court sustained the industrial court.
Thereafter, the Court of Industrial Relations after the recomputation of the award
again directed the petitioners to pay the respective backwages and bonuses of the
respondents. When petitioners' opposition was denied, they again appealed to the
Supreme Court.
The Supreme Court denied the appeal with treble costs against petitioner.

SYLLABUS

1. JUDGMENTS; LAW OF THE CASE; JUDGMENT IN A PRIOR CASE

INVOLVING THE SAME ISSUES CONSTITUTES THE LAW OF THE CASE IN A
SUBSEQUENT CASE. — Where the same issues invoked in a subsequent case were
raised and decided in a prior case, the resolution of the Supreme Court in the prior case
which had long become final constitutes the law of the case in the subsequent case.
2. LABOR RELATIONS; UNFAIR LABOR PRACTICE; REINSTATEMENT; WHEN
BACKWAGES INCLUDED BONUSES. — A bonus is not a demandable and enforceable
obligation, except when it is made part of the wage or salary compensation. Whether or
not bonus forms part of wages depends upon the condition or circumstances for its
payment. If it is an additional compensation which the employer promised and agreed to
give without any condition imposed for its payment then it is part of the wage.
3. ID.; ID.; ID.; ID.; WHERE BONUS IS EARMARKED AS A MATTER OF
TRADITION IT FORMS PART OF RECOVERABLE WAGES FROM COMPANY. — An
employee is not entitled to bonus where there is no showing that it had been granted by
the employer to its employees periodically or regularly as to become part of their wages or
salaries. The clear implication is that bonus is recoverable as part of the wage or salary
where the employer regularly or periodically gives it to employees. Thus, where the bonus
 for a given year is earmarked as a matter of tradition for distribution to employees, and the
company distributes bonuses even if the company has suffered losses, it becomes part of
the recoverable wages from the company.
4. ID.; CORPORATIONS; PIECING THE VEIL OF CORPORATE EXISTENCE. —
The ruling in Sta. Cecilia Sawmills to the effect that the recoverable backwages shall be
limited to only three (3) months where the company had ceased operations, does not
apply to a case where the company after ceasing it as operations is succeeded by another
company, which continued the operations of the first entity, and its emergence was
skillfully timed to avoid the financial liability that already attached to its predecessor, and
where the "avoiding-the-liability" scheme is patently shown by the fact that 90% of the
subscribed shares of stock of the second company was owned by the same person and all
the assets of the dissolved company were turned over to the new company. The second
company cannot seek the protective shield of a corporate function whose veil could and
should be pierced as it was deliberately and maliciously designed to evade its financial
obligation to its employees.
5. CORPORATIONS; NOTION OF LEGAL ENTITY CANNOT BE USED TO
DEFEAT PUBLIC CONVENIENCE. — When the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons, or in the case of two persons, will merge them
into one. Thus, where a corporation is a dummy and serves no business purpose and is
intended only as a blind, the corporate fiction may be ignored. And where a corporation is
merely an adjunct, business conduct or alter ego of another corporation the fiction of
separate and distinct corporate entities should be disregarded.

DECISION

MAKASIAR, J  : p

A petition for certiorari to set aside the order of respondent Court of Industrial
Relations dated May 30, 1969 directing petitioners to pay back wages and bonuses to
private respondents as well as its resolution of July 5, 1969 denying the motion for
reconsideration of said order in Case No. 32-ULP-Iloilo entitled "Allied Workers'
Association, et. al., versus Eduardo Claparols, et. al. . .
It appears that on August 6, 1957, a complaint for unfair labor practice was filed by
herein private respondent Allied Workers' Association, respondent Demetrio Garlitos and
ten (10) respondent workers against herein petitioners on account of the dismissal of
respondent workers from petitioner Claparols Steel and Nail Plant.
On September 16, 1963, respondent Court rendered its decision finding "Mr.
Claparols guilty of union busting and" of having "dismissed said complainants because of
their union activities," and ordering respondents "(1) To cease and desist from committing
unfair labor practices against their employees and laborers; (2) To reinstate said
complainants to their former or equivalent jobs, as soon as possible, with back wages from
the date of their dismissal up to their actual reinstatement" (p. 12, Decision; p. 27, rec.).
A motion to reconsider the above decision was filed by herein petitioners, which
respondent Court, sitting en banc, denied in a resolution dated January 27, 1964.
On March 30, 1964, counsel for herein respondent workers (complainants in the
ULP case) filed a motion for execution of respondent Court's September 16, 1963
decision.
On May 14, 1964, respondent Court, in its order of September 16, 1963, granted
execution and directed herein petitioners.
"to reinstate the above complainants to their former or equivalent jobs within five (5)
days after receipt of a copy of this order. In order to implement the award of back
 wages, the Chief of the Examining Division or any of his assistants is hereby directed
to proceed to the office of the respondents at Matab-ang, Talisay, Negros Occidental,
and examine its payrolls and other pertinent records and compute the back wages of
the complainants in accordance with the decision dated September 16, 1963, and,
upon termination, to submit his report as soon as possible for further disposition" (p. 7,
Brief for Respondents, p. 113, rec.).
which was reiterated by respondent Court in a subsequent order dated November 10,
1964 (pp. 7-8, Brief for Respondents, p. 113, rec.).
On December 14, 1964, respondent workers were accompanied by the Chief of
Police of Talisay, Negros Occidental to the compound of herein petitioner company to
report for reinstatement per order of the court. Respondent workers were, however,
refused reinstatement by company accountant Francisco Cusi for he had no order from
plant owner Eduardo Claparols nor from his lawyer Atty. Plaridel Katalbas, to reinstate
respondent workers.
Again, on December 15, 1964, respondent workers were accompanied by a police
officer to the company compound, but then, they were again refused reinstatement by Cusi
on the same ground.
On January 15, 1965, the CIR Chief Examiner submitted his report containing three
computations, to wit:
"The first computation covers the period February 1, 1957 to October 31, 1964.
The second is up to and including December 7, 1962, when the corporation stopped
operations, while the third is only up to June 30, 1957 when the Claparols Steel and
Nail Plant ceased to operate" (Annex B, Petition for Review on Certiorari, p. 14, Brief
for appellees, p. 113, rec.).
with the explanation that:
"6. Since the records of the Claparols Steel Corporation show that it was
established on July 1, 1957 succeeding the Claparols Steel and Nail Plant which
ceased operations on June 30, 1957, and that the Claparols Steel Corporation
stopped operations on December 7, 1962, three (3) computations are presented
herein for the consideration of this Honorable Court" (p. 2, Report of Examiner, p. 29,
rec.)
On January 23, 1965, petitioners filed an opposition alleging that under the
circumstances presently engulfing the company, petitioner Claparols could not personally
reinstate respondent workers; that assuming the workers are entitled to back wages, the
same should only be limited to three months pursuant to the court ruling in the case of Sta.
Cecilia Sawmills vs. CIR (L-19273-74, February 20, 1964); and that since Claparols Steel
Corporation ceased to operate on December 7, 1962, re-employment of respondent
workers cannot go beyond December 7, 1962.
A reply to petitioner's opposition was filed by respondent workers, alleging among
others, that Claparols Steel and Nail Plant and Claparols Steel and Nail Corporation are
one and the same corporation controlled by petitioner Claparols, with the latter corporation
succeeding the former.
On November 28, 1966, after conducting a series of hearings on the report of the
examiner, respondent Court issued an order, the dispositive portion of which reads:
WHEREFORE, the Report of the Examiner filed on January 15, 1965, is hereby
approved subject to the foregoing findings and dispositions. Consequently, the
Corporation Auditing Examiner is directed to recompute the back wages of
complainants Demetrio Garlitos and Alfredo Ongsuco on the basis of P200.00 and
P270.00 a month, respectively; to compute those of complainant Ignacio Quioyo as
aforesaid; to compute the deductible earnings of complainants Ongsuco, Jorge
Semillano and Garlitos, as found in the body of this order; and to compute the
bonuses of each and every complainant, except Honorato Quioyo. Thereafter, as soon
as possible, the Examiner should submit a report in compliance herewith of the
Court's further disposition" (p. 24, Brief for Respondents, p. 113, rec.)
 On December 7, 1966, a motion for reconsideration was filed by petitioner, assailing
respondent Court's ruling that (1) the ruling in the case of Sta. Cecilia Sawmills Inc. CIR,
et. al. does not apply in the case at bar; and (2) that bonus should be included in the
recoverable wages.
On December 14, 1966, a counter-opposition was filed by private respondents
alleging that petitioners' motion for reconsideration was pro forma, it not making express
reference to the testimony or documentary evidence or to the provision of law alleged to
be contrary to such findings or conclusions of respondent Court.
On February 8, 1967, respondent Court of Industrial Relations dismissed petitioners'
motion for reconsideration for being pro forma.
Whereupon, petitioners filed a petition for certiorari with this COURT in G.R. No. L-
27272 to set aside the November 28, 1966 order of respondent Court, as well as its
February 8, 1967 resolution. Petitioners assigned therein as errors of law the very same
assignment of errors it raises in the present case, to wit:
"I
"THE RESPONDENT COURT ERRED AND/OR ACTED WITH GRAVE
ABUSE OF DISCRETION, AMOUNTING TO LACK OF JURISDICTION, IN
HOLDING IN THE ORDER UNDER REVIEW THAT BONUSES SHOULD BE
PAID TO THE RESPONDENT WORKERS DESPITE THE FACT THAT THE
SAME WAS NOT ADJUDICATED IN ITS ORIGINAL DECISION.
"II
"THE RESPONDENT COURT ERRED AND/OR ACTED WITH GRAVE
ABUSE OF DISCRETION, AMOUNTING TO LACK OF JURISDICTION, IN NOT
APPLYING THE DOCTRINE LAID DOWN BY THIS HONORABLE TRIBUNAL
IN THE CASE OF 'STA. CECILIA SAWMILLS, INC. VS. C.I.R., ET. AL.,' G.R.
No. L-19273-74, PROMULGATED ON FEBRUARY 29, 1964" (pp. 10-11, rec.)
On April 27, 1967, the Supreme Court denied petitioners' petition for certiorari (p. 77,
rec. of L-27272), which was reiterated on May 19, 1967 (p. 27, Respondent's Brief, p. 113,
rec.; p. 81, rec. of L-27272).
On May 3, 1967, private respondents moved to have the workers' back wages
properly recomputed. A motion to the same end was reiterated by private respondents on
June 14, 1967.
On July 13, 1967, respondent Court directed a recomputation of the back wages of
respondent workers in accordance with its order dated November 28, 1966. The said order
in part reads:
"WHEREFORE, the Chief Auditing Examiner of the Court or any of his
assistants, is hereby directed to recompute the back wages of the workers involved in
this case in accordance with the Order of November 28, 1966, within 20 days from
receipt of a copy of this Order" (p. 28, Brief for Respondents, p. 113, rec.)
Then on March 21, 1968, the Chief Examiner came out with his report, the
disputed portion of which (regarding bonuses) reads:
"xxx xxx xxx
"4. The yearly bonuses of the employees and laborers of respondent
corporation are given on the following basis:
"Basic Additional:
"a. For every dependent 1% of monthly salary
"b. For every dependent in elementary grade 2% of monthly salary
"c. For every dependent in high school 3% of monthly salary
"d. For every dependent in college 5% of monthly salary
xxx xxx xxx
 "7. The computed . . . bonuses after deducting the earnings elsewhere of
Messrs. Ongsuco, Garlitos and Semillano, are as follows:
"Name . . . Bonuses . . .
     
1. Alfredo Ongsuco P1,620.00
2. Demetrio Garlitos 1,200.00
3. Ignacio Quioyo 455.23
4. Aser Abancio 461.00
5. Ludovico Belopeños 752.05
6. Salvador Doroteo 714.70
7. Rosendo Espinosa 1,075.40
8. Gaudencio Quioyo 1,167.92
9. Jorge Semillano 1,212.08
10. Maximo Quioyo 449.41
———
Total P9,107.79"
(Pp. 30-31, Respondent's Brief, p. 113, rec.).
On April 16, 1968, petitioners filed their opposition to the report of the Examiner
dated March 21, 1968 on grounds already rejected by respondent Court in its order dated
November 28, 1966, and by the Supreme Court also in its ruling in G.R. No. L-27272.
On May 4, 1968, a rejoinder to petitioners' opposition was filed by private
respondents, alleging among others "that the grounds of petitioners' opposition were the
same grounds raised by them before and passed upon by respondent Court and this
Honorable Tribunal; that this order of November 28, 1966 which passed upon these issues
became final and executory on June 3, 1967 from the Honorable Supreme Court. (Order of
respondent Court dated July 13, 1967)." [P. 32, Brief for Respondents, p. 113, rec.].
On July 26, 1968, private respondents filed their motion for approval of the Report of
the Examiner submitted on March 21, 1968, alleging, among others, that petitioners, in
their opposition, did not actually dispute the data elicited by the Chief Examiner but rather
harped on grounds which, as already stated, had already been turned down by the
Supreme Court.
On October 19, 1968, herein private respondents filed their "Constancia", submitting
the case for resolution of respondent Court of Industrial Relations.
On May 30, 1969, respondent Court issued an order, subject of the present appeal,
the dispositive portion of which reads:
"WHEREFORE, there being no proof offered to substantiate respondent
Eduardo Claparols' opposition, the Examiner's Report should be, and it is hereby,
APPROVED. Consequently, pursuant to the decision dated September 16, 1963,
respondent . . . (petitioners herein) are hereby directed to pay the respective back
wages and bonuses of the complainants (respondents herein) . . ." (p 35, Brief for
Respondents; p. 113, rec.; emphasis supplied).
On June 7, 1969, petitioners filed a motion for reconsideration on practically the
same grounds previously raised by them.
On June 30, 1969, respondents filed an opposition to petitioners' motion for
reconsideration, with the following allegations:
"1. The issues raised, namely, whether bonuses should be included in the
award for back wages had already been resolved by respondent court in its orders
dated November 28, 1966, and December 7, 1966, and in the Resolution of the
Honorable Supreme Court in G.R. No. L-27272 dated April 26, 1967 and May 19,
1967, and the same is already a settled and final issue.
"2. Petitioners' motion for reconsideration is merely a rehash of previous
arguments, effete and unrejuvenated, pro forma, and intended merely to delay the
proceedings.
 As correctly contended by private respondents, the present petition is barred by Our
resolutions of April 26, 1967 and May 19, 1967 in G.R. No. L-27272 (Eduardo Claparols,
et. al. vs. CIR, et. al.) [pp. 77-83, rec. of L-27272], dismissing said case, wherein said
petitioners invoked the applicability of the doctrine in Sta. Cecilia Sawmills, Inc. vs. CIR, et.
al. (L-19273-74, Feb. 29, 1964, 10 SCRA 433) and impugned the illegality of the order of
respondent Court dated November 28, 1966 directing the computation and payment of the
bonuses, aside from back wages on the ground that these bonuses were not included in
the decision of September 16, 1963, which had long become final.
The aforesaid resolutions in G.R. No. L-27272 constitute the law of the instant case,
wherein herein petitioners raised again practically the same issues invoked in the above
mentioned case. The denial of the petition in G.R. No. L-27272 suffices to warrant the
denial of the present petition; and We need not go any further.
However, without lending a sympathetic ear to the obvious desire of herein
petitioners of this Court to re-examine — which would be an exercise in futility — the final
ruling in G.R. No. L-27272, which as above-stated is the law of the instant case, but solely
to remind herein petitioners, We reiterate the governing principles.
WE uniformly held that "a bonus is not a demandable and enforceable
obligation, except when it is made part of the wage or salary compensation" (Philippine
Education Co. vs. CIR and the Union of Philippine Co. Employees [NLU], 92 Phil. 381;
Ansay, et. al. vs. National Development Co., et. al., 107 Phil. 998, 999; Emphasis
supplied).
In Atok Big Wedge Mining Co. vs. Atok Big Wedge Mutual Benefit Association (92
Phil. 754), this Court, thru Justice Labrador, held:
"Whether or not bonus forms part of wages depends upon the condition or
circumstance for its payment. If it is an additional compensation WHICH THE
EMPLOYER PROMISED AND AGREED to give without any condition imposed for its
payment . . . then it is part of the wage." (Emphasis supplied).
In Altomonte vs. Philippine American Drug Co. (106 Phil. 137), the Supreme Court
held that an employee is not entitled to bonus where there is no showing that it had been
granted by the employer to its employees periodically or regularly as to become part of
their wages or salaries. The clear implication is that bonus is recoverable as part of the
wage or salary where the employer regularly or periodically gives it to employees.
American jurisprudence equally regards bonuses as part of compensation or
recoverable wages.
Thus, it was held that ". . . it follows that in determining the regular rate of pay, a
bonus which in fact constitutes PART OF AN EMPLOYEE'S compensation, rather than a
true gift or gratuity, has to be taken into consideration." (48 Am. Jur. 2d, Labor and Labor
Relations, No. 1555, citing the cases of Triple "AAA" Co. vs. Wirtz and Haber vs.
Americana Corporation; Emphasis supplied). It was further held that ". . . the regular rate
includes incentive bonuses paid to the employees in addition to the guaranteed base rates
regardless of any contract provision to the contrary and even though such bonuses could
not be determined or paid until such time after the payday" (48 Am. Jur. 2d, Labor and
Labor Relations, No. 1555, citing the case of Walling vs. Harnischfeger Corp., 325 US 427,
89 L Ed 1711, 65 S Ct. 1246; Emphasis supplied).
Petitioners in the present case do not dispute that as a matter of tradition, the
company has been doling out bonuses to employees. In fact, the company balance sheets
for the years 1956 to 1962 contained bonus and pension computations which were never
repudiated or questioned by petitioners. As such, bonus for a given year earmarked as a
matter of tradition for distribution to employees has formed part of their recoverable wages
from the company. Moreover, with greater reason, should recovery of bonuses as part of
back wages be observed in the present case since the company, in the light of the very
admission of company accountant Francisco Cusi, distributes bonuses to its employees
even if the company has suffered losses. Specifically, petitioner company has done this in
1962 (t.s.n., p. 149, Sept. 20, 1965).
 Since bonuses are part of back wages of private respondents, the order of May 30,
1969, directing the payment of their bonuses, did not amend the decision of September
16, 1963 of respondent Court directing payment of their wages, which has long become
final and executory, in the same way that the previous order of May 14, 1964 granting
execution of said decision of September 16, 1963 also directed the computation of the
wages to be paid to private respondents as decreed by the decision of September 16,
1963. All the orders of May 30, 1969, November 28, 1966 and May 14, 1964 merely
implement the already final and executory decision of September 16, 1963.
Petitioners insist that We adopt the ruling in the Sta. Cecilia Sawmills case wherein
the recoverable back wages were limited to only three (3) months: because as in the Sta.
Cecilia Sawmills case, the Claparols Steel and Nail Plant ceased operations due to
enormous business reverses.
Respondent Court's findings that indeed the Claparols Steel and Nail Plant, which
ceased operation of June 30, 1957, v. as SUCCEEDED by the Claparols Steel
Corporation effective the next day, July 1, 1957 up to December 7, 1962, when the latter
finally ceased to operate, were not disputed by petitioners. It is very clear that the latter
corporation was a continuation and successor of the first entity, and its emergence was
skillfully timed to avoid the financial liability that already attached to its predecessor, the
Claparols Steel and Nail Plant. Both predecessors and successor were owned and
controlled by petitioner Eduardo Claparols and there was no break in the succession and
continuity of the same business. This "avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares of stocks of the Claparols Steel Corporation
(the second corporation) was owned by respondent (herein petitioner) Claparols himself,
and all the assets of the dissolved Claparols Steel and Nail Plant were turned over to the
emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial obligation to its employees.
It is well remembering that in Yutivo & Sons Hardware Company vs. Court of Tax
Appeals (L-13203, Jan. 28, 1961, 1 SCRA 160), We held that when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association or persons, or, in the case of two
corporations, will merge them into one.
In Liddel & Company, Inc. vs. Collector of Internal Revenue (L-9687, June 30, 1961,
2 SCRA 632), this Court likewise held that where a corporation is a dummy and serves no
business purpose and is intended only as a blind, the corporate fiction may be ignored.
In Commissioner of Internal Revenue vs. Norton and Harrison Company (L-17618,
Aug. 31, 1964, 11 SCRA 714), We ruled that where a corporation is merely an adjunct,
business conduit or alter ego of another corporation, the fiction of separate and distinct
corporate entities should be disregarded.
To the same uniform effect are the decisions in the cases of Republic vs. Razon (L-
17462, May 29, 1967, 20 SCRA 234) and A.D. Santos, Inc. vs. Vasquez (L-23586, March
20, 1968, 22 SCRA 1156).
WE agree with respondent Court of Industrial Relations, therefore, that the amount
of back wages recoverable by respondent workers from petitioners should be the amount
accruing up to December 7, 1962 when the Claparols Steel Corporation ceased
operations.
WHEREFORE, PETITION IS HEREBY DENIED WITH TREBLE COSTS AGAINST
PETITIONERS TO BE PAID BY THEIR COUNSEL.
 (Claparols v. Court of Industrial Relations, G.R. No. L-30822, [July 31, 1975], 160 PHIL 624-
|||

637)
 YUTIVO SONS HARDWARE COMPANY, petitioner, vs. COURT OF TAX
APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

Sycip, Quisumbing, Salazar & Associates, for petitioner.

Solicitor General for respondents.

SYLLABUS

1. CORPORATIONS; SEPARATE AND DISTINCT PERSONALITY; WHEN

CORPORATE PERSONALITY IS DISREGARDED. — Although a corporation is an entity
separate and distinct from its stockholders and from other corporations to which it may be
connected, when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association
of persons, or in the case of two corporations merge them into one. (Koppel [Phil.], Inc. vs.
Yatco, 77 Phil., 496, citing I Fletcher Cyclopedia of Corporation, Perm. Ed., pp. 135-136;
United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247; 255 per Sanborn, J.)
2. TAXATION; INTENTION TO MINIMIZE TAXES; DEGREE OF PROOF
REQUIRED TO ESTABLISH FRAUD. — The intention to minimize taxes, when used in
the context of fraud, must be proved to exist by clear and convincing evidence amounting
to more than mere preponderance, and cannot be justified by a mere speculation. This is
because fraud is never lightly to be presumed.
3. ID.; ID.; MEANING OF "TAX EVASION". — "Tax evasion" is a term that connotes
fraud through the use of pretenses and forbidden devices to lessen or defeat taxes.
4. ID.; ID.; RIGHT OF TAXPAYER TO DECREASE TAX DUE BY LEGAL MEANS.
— A taxpayer has the legal right to decrease the amount of what otherwise would be his
taxes or altogether avoid them by means which the law permits. (U.S. vs. Isham. 17 Wall.
496, 596; Gregory vs. Helvering, 293 U.S. 469; Comm. vs. Tower, 327 U.S. 280; Lawton
vs. Comm. 194 F [2] 380).
5. ID.; ID.; MERE UNDERSTATEMENT OF TAX NO PROOF OF FRAUD. — Mere
understatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377,
affirmed 90 F [2] 978, cited in Merten's Sec. 55.11 p. 21.)
6. ID.; ID.; TAXPAYER ESTOPPED TO REPUDIATE CERTAIN WAIVERS OF
STATUTE OF LIMITATIONS. — Estoppel has been employed to prevent the application of
the statute of limitations against the government in certain instances in which the taxpayer
has taken some affirmative action to prevent the collection of the tax within the statutory
period. It is generally held that a taxpayer is estopped to repudiate waivers of the statute of
limitations upon which the government relied. (Mertens Law of Federal Income Taxation,
Vol. 10-A, pp. 159-160.)
7. ASSESSMENT AND REFUNDS OF TAXES; REVIEW OF THE DECISION OF
THE COLLECTOR OF INTERNAL REVENUE. — The procedure prescribed in sections 8
and 9 of Executive Order No. 401-A, Series of 1951, is intended as a check or control
upon the powers of the Collector of Internal Revenue with respect to assessments and
refunds of taxes. If a decision of the Collector on partial remission of taxes is subject to
review by the Secretary of Finance and the Board of Tax Appeals, then with more reason
should his power to withdraw totally an assessment be subject to such review.
8. ID.; SALES TAXES; SCOPE OF TERMS "GROSS SELLING PRICE" AND
"GROSS VALUE IN MONEY". — Section 184-186 of the Tax Code impose a tax on
original sales measured by "gross selling price" or "gross value in money". These terms do
not include the amount of the sales tax, if invoiced separately.

DECISION
GUTIERREZ DAVID, J  : p

This is a petition for review of a decision of the Court of Tax Appeals ordering
petitioner to pay to respondent Collector of Internal Revenue the sum of P1,266,176.73 as
sales tax deficiency for the third quarter of 1947 to the fourth quarter of 1950; inclusive,
plus 75% surcharge thereon, equivalent to P349,632.54, or a sum total of P2,215,809.27,
plus costs of the suit.
From the stipulation of facts and the evidence adduced by both parties, it appears
that petitioner Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic
corporation, organized under the laws of the Philippines, with principal office at 404
Dasmariñas St., Manila. Incorporated in 1916, it was engaged, prior to the last world war,
in the importation and sale of hardware supplies and equipment. After the liberation, it
resumed its business and until June of 1946 bought a number of cars and trucks from
General Motors Overseas Corporation (hereafter referred to as GM for short), an American
corporation licensed to do business in the Philippines. As importer, GM paid sales tax
prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to
Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales
tax on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was
organized to engaged in the business of selling cars, trucks and spare parts. Its original
authorized capital stock was P1,000,000 divided into 10,000 shares with a par value of
P100 each.
At the time of its incorporation 2,500 shares worth P250,000 appear to have been
subscribed in 5 equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh,
and Washington Sycip. The first three named subscribers are brothers, being sons of Yu
Tiong Yee, one of Yutivo's founders. The latter two are respectively sons of Yu Tiong Sin
and Albino Sycip, who are among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of GM from the Philippines in
the middle of 1947, the cars and trucks purchased by Yutivo from GM were sold by Yutivo
to SM which, in turn, sold them to the public in the Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of 1947, the U.S.
manufacturer of GM cars and trucks appointed Yutivo as importer for the Visayas and
Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In
the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as
importer, paid sales tax prescribed on the basis of its selling price to SM, and since such
sales tax, as already stated, is collected only once on original sales, SM paid no sales tax
on its sales to the public.
On November 7, 1950, after several months of investigation by revenue officers
started in July, 1948, the Collector of Internal Revenue made an assessment upon Yutivo
and demanded from the latter P1,804,769.85 as deficiency sales tax plus surcharge
covering the period from the third quarter of 1947 to the fourth quarter of 1949; or from
July 1, 1947 to December 31, 1949, claiming that the taxable sales were the retail sales by
SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as
SM and Yutivo were one and the same corporation, the former being the subsidiary of the
latter.
The assessment was disputed by the petitioner, and a reinvestigation of the case
having been made by the agents of the Bureau of Internal Revenue, the respondent
Collector in his letter dated November 15, 1952 countermanded his demand for sales tax
deficiency on the ground that "after several investigations conducted into the matter no
sufficient evidence could be gathered to sustain the assessment of this Office based on
the theory that Southern Motors is a mere instrumentality or subsidiary of Yutivo." The
withdrawal was subject, however, to the general power of review by the now defunct Board
of Tax Appeals. The Secretary of Finance to whom the papers relative to the case were
endorsed, apparently not agreeing with the withdrawal of the assessment, returned them
to the respondent Collector for reinvestigation.
 After another investigation, the respondent Collector, in a letter to petitioner dated
December 18, 1954, redetermined that the aforementioned tax assessment was lawfully
due the government and in addition assessed deficiency sales tax due from petitioner for
the four quarters of 1950; the respondents' last demand was in the total sum of
P2,215,809.27 detailed as follows:
    Deficiency 75% Total
    Sales Tax Surcharge Amount Due
Assessment (First) of      
  November 7, 1950      
  for deficiency sales      
  Tax for the period      
  from 3rd Qrtr. 1947      
  to 4th Qrtr. 1949      
  inclusive P1,031,296.60 P773,473.45 P1,804,769.05
Additional Assessment      
  for period from 1st      
  to 4th Qrtr. 1950,      
  inclusive P234,880.13 P176,160.09 P411,040.22
Total amount demanded      
  per letter of December      
  16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27
    =========== =========== ===========
This second assessment was contested by the petitioner Yutivo before the Court of
Tax Appeals, alleging that there is no valid ground to disregard the corporate personality of
SM and to hold that it is an adjunct of petitioner Yutivo; (2) that assuming the separate
personality of SM may be disregarded, the sales tax already paid by Yutivo should first he
deducted from the selling price of SM in computing the sales tax due on each vehicle; and
(3) that the surcharge has been erroneously imposed by respondent. Finding against
Yutivo and sustaining the respondent Collector's theory that there was no legitimate
or bona fide purpose in the organization of SM — the apparent objective of its organization
being to evade the payment of taxes — and that it was owned (or the majority of the
stocks thereof are owned) and controlled by Yutivo and is a mere subsidiary, branch,
adjunct conduit, instrumentality or alter ego of the latter, the Court of Tax Appeals — with
Judge Roman Umali not taking part — disregarded its separate corporate existence and
on April 27, 1957, rendered the decision now complained of. Of the two Judges who
signed the decision, one voted for the modification of the computation of the sales tax as
determined by the respondent Collector in his decision so as to give allowance for the
reduction of the tax already paid (resulting in the reduction of the assessment to
P820,509.91 exclusive of surcharges), while the other voted for affirmance. The dispositive
part of the decision, however, affirmed the assessment made by the Collector.
Reconsideration of this decision having been denied, Yutivo brought the case to this Court
thru the present petition for review.
It is an elementary and 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. However, "when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime," the law will regard the
corporation as an association of persons, or in the case of two corporations merge them
into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil., 496, citing I Fletcher Cyclopedia of
Corporation, Perm. Ed., pp. 135-136; United States vs. Milwaukee Refrigeration Transit
Co., 142 Fed., 247; 255 per Sanborn, J.) Another rule is that, when the corporation is the
"mere alter ego or business conduit of a person, it may be disregarded." (Koppel [Phil.],
Inc. vs. Yatco, supra.)
After going over the voluminous record of the present case, we are inclined to rule
that the Court of Tax Appeals was not justified in finding that SM was organized for no
other purpose than to defraud the Government of its lawful revenues. In the first place, this
corporation was organized in June, 1946 when it could not have caused Yutivo any tax
savings. From that date up to June 30, 1947, or a period of more than one year, GM was
the importer of the cars and trucks sold to Yutivo, which, in turn resold them to SM. During
that period, it is not disputed that GM, as importer, was the one solely liable for sales
taxes. Neither Yutivo nor SM was subject to the sales taxes on their sales of cars and
trucks. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became the
importer and simply continued its practice of selling to SM. The decision, therefore, of the
Tax Court that SM was organized purposely as a tax evasion device runs counter to the
fact that there was no tax to evade.
Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945
it was known that GM was preparing to leave the Philippines and terminate its business of
importing vehicles," the court below speculated that Yutivo anticipated the withdrawal of
GM from business in the Philippines in June, 1947. This observation, which was made
only in the resolution on the motion for reconsideration, however, finds no basis in the
record. On the other hand, GM had been an importer of cars in the Philippines even before
the war and had but recently resumed its operation in the Philippines in 1946 under an
ambitious plan to expand its operation by establishing an assembly plant here, so that it
could not have been expected to make so drastic a turnabout of not merely abandoning
the assembly plant project but also totally ceasing to do business as an importer.
Moreover the newspaper clipping Exh. "T", was published on March 24, 1947, and merely
reported a rumored plan that GM would abandon the assembly plant project in the
Philippines. There was no mention of the cessation of business by GM which must not be
confused with the abandonment of the assembly plant project. Even as respect the
assembly plant, the newspaper clipping was quite explicit in saying that the Acting
Manager refused to confirm the rumor as late as March 24, 1947, almost a year after SM
was organized.
At this juncture, it should be stated that the intention to minimize taxes, when used
in the context of fraud, must be proved to exist by clear and convincing evidence
amounting to more than mere preponderance, and cannot be justified by a mere
speculation. This is because fraud is never lightly to be presumed. (Vitelli & Sons vs. U.S.,
250 U.S. 355; Duffin vs. Lucas, 55 F [2d] 786; Budd vs. Commr., 43 F [2d] 509; Maryland
Casualty Co. vs. Palmette Coal Co., 40 F [2d] 374; Schoonfield Bros., Inc. vs. Commr., 38
BTA 943; Charles Heiss vs. Commr., 36 BTA 833; Kerbaugh vs. Commr., 74 F [2d] 749;
Maddas vs. Commr., 114 F [2d] 548; Moore vs. Commr., 37 BTA 378; National City Bank
of New York vs. Commr., 98 F [2d] 93; Richard vs. Commr., 15 BTA 316; Rea Gano vs.
Commr., 19 BTA 518.) (See also Balter, Fraud Under Federal Law, pp. 301-302, citing
numerous authorities; Arroyo vs. Granada, et al., 18 Phil., 484.) Fraud is never imputed
and the courts never sustain findings of fraud upon circumstances which, at the most,
create only suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F [2d] 769; Dalone
vs. Commr., 100 F [2d] 507).
In the second place, SM was organized and it operated, under circumstance that
belied any intention to evade sales taxes. "Tax evasion" is a term that connotes fraud thru
the use of pretenses and forbidden devices to lessen or defeat taxes. The transactions
between Yutivo and SM, however, have always been in the open, embodied in private and
public documents, constantly subject to inspection by the tax authorities. As a matter of
fact, after Yutivo became the importer of GM cars and trucks for Visayas and Mindanao, it
merely continued the method of distribution that it had initiated long before GM withdrew
from the Philippines.
On the other hand, if tax saving was the only justification for the organization of SM,
such justification certainly ceased with the passage of Republic Act No. 594 on February
16, 1951, governing payment of advance sales tax by the importer based on the landed
cost of the imported article, increased by mark-ups of 25%, 50% and 100%, depending on
whether the imported article is taxed under sections 186, 185 and 184, respectively, of
the Tax Code. Under Republic Act No. 594, the amount at which the article is sold is
immaterial to the amount of the sales tax. And yet after the passage of that Act, SM
continued to exist up to the present and operates as it did many years past in the
promotion and pursuit of the business purposes for which it was organized.
In the third place, sections 184 to 186 of the said Code provide that the sales tax
shall be collected "once only on every original sale, barter, exchange . . ., to be paid by the
manufacturer, producer or importer." The use of the word "original" and the express
provision that the tax was collectible "once only" evidently has made the provisions
susceptible of different interpretations. In this connection, it should be stated that a
taxpayer has the legal right to decrease the amount of what otherwise would be his taxes
or altogether avoid them by means which the law permits. (U.S. vs. Isham. 17 Wall. 496,
596; Gregory vs. Helvering, 293 U.S. 465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton
vs. Commr. 194 F [2d] 380). Any legal means used by the tax payer to reduce taxes are all
right (Benny vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that he
honestly believes to be sufficient to exempt him from taxes. He does not incur fraud
thereby even if the act is thereafter found to be insufficient. Thus in the case of Court
Holding Co. vs. Commr., 2 T. Cl. 531, it was held that though an incorrect position in law
had been taken by the corporation there was no suppression of the facts, and a fraud
penalty was not justified.
The evidence for the Collector, in our opinion, falls short of the standard of clear and
convincing proof of fraud. As a matter of fact, the respondent Collector himself showed a
great deal of doubt or hesitancy as to the existence of fraud. He even doubted the validity
of his first assessment dated November 7, 1950. It must be remembered that the fraud
which respondent Collector imputed to Yutivo must be related to its filing of sales tax
returns for less taxes than were legally due. The allegation of fraud, however, cannot be
sustained without the showing that Yutivo, in filing said returns, did so fully knowing that
the taxes called for therein were less than what were legally due. Considering that
respondent Collector himself with the aid of his legal staff, and after some two years of
investigation and study concluded in 1952 that Yutivo's sales tax returns were correct —
only to reverse himself after another two years — it would seem harsh and unfair for him to
say in 1954 that Yutivo fully knew in October 1947 that its sales tax returns were
inaccurate.
On this point, one other consideration would show that the intent to save taxes could
not have existed in the minds of the organizers of SM. The sales tax imposed, in theory
and in practice, is passed on to the vendee, and is usually billed separately as such in the
sales invoice. As pointed out by petitioner Yutivo, had not SM handled the retail, the
additional tax that would have been payable by it, could have been easily passed off to the
consumer, especially since the period covered by the assessment was a "seller's market"
due to the post-war scarcity up to late 1948, and the imposition of controls in late 1949.
It is true that the arrastre charges constitute expenses of Yutivo and its non-
inclusion in the selling price by Yutivo cost the Government P4.00 per vehicle, but said
non-inclusion was explained to have been due to an inadvertent accounting omission, and
could hardly be considered as proof of willful channelling and fraudulent evasion of sales
tax. Mere understatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA
377, affirmed 90 F [2] 978, cited in Merten's Sec. 55.11 p. 21.) The amount involved,
moreover is extremely small inducement for Yutivo to go thru all the trouble of organizing
SM. Besides, the non-inclusion of these small arrastre charge in the sales tax returns of
Yutivo is clearly shown in the records of Yutivo, which is uncharacteristic of fraud (See
Insular Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)
We are, however, inclined to agree with the court below that SM was actually owned
and controlled by petitioner as to make it a mere subsidiary or branch of the latter created
for the purpose of selling the vehicles at retail and maintaining stores for spare parts as
well as service repair shops. It is not disputed that the petitioner, which is engaged
principally in hardware supplies and equipment, is completely controlled by the Yutivo,
Young or Yu family. The founders of the corporation are closely related to each other
either by blood or affinity, and most of its stockholders are members of the Yu (Yutivo or
Young) family. It is, likewise, admitted that SM was organized by the leading stockholders
of Yutivo headed by Yu Khe Thai. At the time of its incorporation, 2,500 shares worth
P250,000.00 appear to have been subscribed in five equal proportions by Yu Khe Thai, Yu
Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first three named
subscribers are brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng
Poh and Washington Sycip are respectively sons of Yu Tiong Sing and Albino Sycip who
are co-founders of Yutivo. According to the Articles of Incorporation of the said
subscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but
actually the said sum was advanced by Yutivo. The additional subscriptions to the capital
stock of SM and subsequent transfers thereof were paid by Yutivo itself. The payments
were made, however, without any transfer of funds from Yutivo to SM. Yutivo simply
charged the accounts of the subscribers for the amount allegedly advanced by Yutivo in
payment of the shares. Whether a charge was to be made against the accounts of the
subscribers or said subscribers were to subscribe shares appears to constitute a unilateral
act on the part of Yutivo, there being no showing that the former initiated the subscription.
The transactions were made solely by and between SM and Yutivo. In effect, it was
Yutivo who undertook the subscription of shares, employing the persons named or
"charged" with corresponding account as nominal stockholders. Of course, Yu Khe Thai,
Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these subscriptions,
but considering that they were the principal officers and constituted the majority of the
board of Directors of both Yutivo and SM, their subscriptions could readily or easily be that
of Yutivo's. Moreover, these persons were related to each other as brothers or first
cousins. There was every reason for them to agree in order to protect their common
interest in Yutivo and SM.
The issued capital stock of SM was increased by additional subscriptions made by
various persons, but except Ng Sam Bak and David Sycip, "payments" thereof were
effected by merely debiting or charging the accounts of said stockholders and crediting the
corresponding amounts in favor of SM, without actually transferring cash from Yutivo.
Again, in this instance, the "payments" were effected by the mere unilateral act of Yutivo.
Yutivo, by virtue of its control over the individual accounts of the persons charged, would
necessarily exercise preferential rights and control, directly or indirectly, over the shares, it
being the party which really undertook to pay or underwrite payment thereof.
The shareholders in SM are mere nominal stockholders holding the shares for and
in behalf of Yutivo, so even conceding that the original subscribers were
stockholders bona fide, Yutivo was at all times in control of the majority of the stock of SM
and that the latter was a mere subsidiary of the former.
True, petitioner and other recorded stockholders transferred their shareholdings, but
the transfers were made to their immediate relatives, either to their respective spouses
and children or sometimes brothers or sisters. Yutivo's shares in SM were transferred to
immediate relatives of persons who constituted its controlling stockholders, directors and
officers. Despite these purported changes in stock ownership in both corporations, the
Board of Directors and officers of both corporations remained unchanged and Messrs. Yu
Khe Thai, Yu Khe Siong, Yu Khe Jin and Yu Eng Poh (all of the Yu or Young family)
continued to constitute the majority in both boards. All these, as observed by the Court of
Tax Appeals, merely serve to corroborate the fact that there was a common ownership
and interest in the two corporations.
SM is under the management and control of Yutivo by virtue of a management
contract entered into between the two parties. In fact, the controlling majority of the Board
of Directors of Yutivo is also the controlling majority of the Board of Directors of SM. At the
same time the principal officers of both corporations are identical. In addition both
corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-
law of Yutivo's president, Yu Khe Thai. There is therefore no doubt that by virtue of such
control, the business, financial and management policies of both corporations could be
directed towards common ends.
Another aspect relative to Yutivo's control over SM operations relates to its cash
transactions. All cash assets of SM were handled by Yutivo and all cash transactions of
SM were actually maintained thru Yutivo. Any and all receipts of cash by SM including its
branches were transmitted or transferred immediately and directly to Yutivo in Manila upon
receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM are
referred to Yutivo which in turn prepares the corresponding disbursement vouchers and
payments in relation thereto, the payment being made out of the cash deposits of SM with
Yutivo, if any, or in the absence thereof which occurs generally, a corresponding charge is
made against the account of SM in Yutivo's books. The payments for and charges against
SM are made by Yutivo as a matter of course and without need of any further request, the
latter would advanced all such cash requirements for the benefit of SM. Any and all
payments and cash vouchers are made on Yutivo stationery and made under authority of
Yutivo's corporate officers, without any copy thereof being furnished to SM. All detailed
records such as cash disbursements, such as expenses, purchases, etc. for the account of
SM, are kept by Yutivo and SM merely keeps a summary record thereof on the basis of
information received from Yutivo.
All the above plainly show that cash or funds of SM, including those of its branches
which are directly remitted to Yutivo, are placed in the custody and control of Yutivo, and
subject to withdrawal only by Yutivo. SM's resources being under Yutivo's control, the
former's operations and existence became dependent upon the latter.
Consideration of various other circumstances, especially when taken together,
indicates that Yutivo treated SM merely as its department or adjunct. For one thing, the
accounting system maintained by Yutivo shows that it maintained a high degree of control
over SM accounts. All transactions between Yutivo and SM are recorded and effected by
mere debit or credit entries against the reciprocal account maintained in their respective
books of accounts and indicate the dependency of SM as branch upon Yutivo.
Apart from the accounting system, other facts corroborate or independently show
that SM is a branch or department of Yutivo. Even the branches of SM in Bacolod, Iloilo,
Cebu, and Davao treat Yutivo- Manila as their "Head-Office" or "Home Office" as shown by
their letter of remittances or other correspondences. These correspondences were actually
received by Yutivo and the reference to Yutivo as the head or home office is obvious from
the fact that all cash collections of the SM's branches are remitted directly to Yutivo.
Added to this fact, is that SM may freely use forms or stationery of Yutivo.
The fact that SM is a mere department or adjunct of Yutivo is made more patent by
the fact that arrastre charges paid for the "operation of receiving, conveying, and loading
or unloading" of imported cars and trucks on piers and wharves, were charged against
SM. Overtime charges for the unloading of cars and trucks as requested by Yutivo and
incurred as part of its acquisition cost thereof, were likewise charged against and treated
as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges were
Yutivo's expenses in importing goods and not SM's. But since those charges were made
against SM, it plainly appears that Yutivo has sole authority to allocate its expenses even
as against SM in the sense that the latter is a mere adjunct, branch or department of the
former.
Proceeding to another aspect of the relation of the parties, the management fees
due from SM to Yutivo were taken up as expenses of SM and credited to the account of
Yutivo. If it were to be assumed that the two organizations are separate juridical entities,
the corresponding receipts or receivables should have been treated as income on the part
of Yutivo. But such management fees were recorded as "Reserve for Bonus" and were
therefore a liability reserve and not an income account. This reserve for bonus were
subsequently distributed directly to and credited in favor of the employees and directors of
Yutivo, thereby clearly showing that the management fees were paid directly to Yutivo
officers and employees.
Briefly stated, Yutivo financed principally, if not wholly, the business of SM and
actually extended all the credit to the latter not only in the form of starting capital but also
in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM as
well as advances or loans for the expenses of the latter when the capital had been
exhausted. Thus the increases in the capital stock were made in advances or "Guarantee"
payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the
cash fund of Yutivo. At all times Yutivo thru officers and directors common to it and SM,
exercised full control over the cash funds, politics, expenditures and obligations of the
latter.
Southern Motors being but a mere instrumentality or adjunct of Yutivo, the Court of
Tax Appeals correctly disregarded the technical defense of separate corporate entity in
order to arrive at the true tax liability of Yutivo.
Petitioner contends that the respondent Collector had lost his right or authority to
issue the disputed assessment by reason of prescription. The contention, in our opinion,
cannot be sustained. It will be noted that the first assessment was made on November 7,
1950 for deficiency sales tax from 1947 to 1949. The corresponding returns filed by
petitioner covering the said period was made at the earliest on October 1 as regards the
third quarter of 1947, so that it cannot be claimed that the assessment was not made
within the five-year period prescribed in section 331 of the Tax Code invoked by petitioner.
The assessment, it is admitted, was withdrawn by the Collector on November 15, 1952
due to insufficiency of evidence, but the withdrawal was made subject to the approval of
the Secretary of Finance and the Board of Tax Appeals, pursuant to the provisions of
section 9 of Executive Order No. 401-A, series of 1951. The decision of the previous
Collector counter-manding the assessment of November 7, 1950 was forwarded to the
Board of Tax Appeals through the Secretary of Finance but that official, apparently
disagreeing with the decision, sent it back for re-investigation. Consequently, the
assessment of November 7, 1950 cannot be considered to have been finally withdrawn.
That the assessment was subsequently reiterated in the decision of respondent Collector
on December 16, 1954 did not alter the fact that it was made seasonably. In this
connection, it would appear that a warrant of distraint and levy has been issued on March
28, 1951 in relation with this case and by virtue thereof the properties of Yutivo were
placed under constructive distraint. Said warrant and constructive distraint have not been
lifted up to the present, which shows that the assessment of November 7, 1950 has
always been valid and subsisting.
Anent the deficiency sales tax for 1950, considering that the assessment thereof
was made on December 16, 1954, the same was assessed well within the prescribed five-
year period.
Petitioner argues that the original assessment of November 7, 1950 did not extend
the prescriptive period on assessment. The argument is untenable, for, as already seen,
the assessment was never finally withdrawn, since it was not approved by the Secretary of
Finance or of the Board of Tax Appeals. The authority of the Secretary to act upon the
assessment cannot be questioned, for he is expressly granted such authority under
section 9 of Executive Order No. 401-A and under section 79(c) of the Revised
Administrative Code, he has "direct control, direction and supervision over all bureaus and
offices under his jurisdiction and may, any provision of existing law to the contrary
notwithstanding, repeal or modify the decision of the chief of said Bureaus or offices when
advisable in the public interest."
It should here also be stated that the assessment in question was consistently
protested by petitioner, making several requests for reinvestigation thereof. Under the
circumstances, petitioner may be considered to have waived the defense of prescription.
"Estoppel has been employed to prevent the application of the statute of
limitations against the government in certain instances in which the taxpayer has
taken some affirmative action to prevent the collection of the tax within the statutory
period. It is generally held that a taxpayer is estopped to repudiate waivers of the
statute of limitations upon which the government relied. The cases frequently involve
dissolved corporations. If no waiver has been given, the cases usually show some
conduct directed to a postponement of collection, such, for example, as some variety
of request to apply an over assessment. The taxpayer has 'benefited' and 'is not in a
position to contest' his tax liability. A definite representation of implied authority may
be involved, and in many cases the taxpayer has received the 'benefit' of being saved
from the inconvenience, if not hardship of immediate collection.
 "Conceivably even in these cases a fully informed Commissioner may err to the
sorrow of the revenues, but generally speaking, the cases present a strong
combination of equities against the taxpayer, and few will seriously quarrel with their
application of the doctrine of estoppel." (Mertens Law of Federal Income Taxation,
Vol. 10-A, pp. 159-160.)
It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 —
requiring the approval of the Secretary of Finance and the Board of Tax Appeals in cases
involving an original assessment of more than P5,000 - refers only to compromises and
refunds of taxes, but not to total withdrawal of the assessment. The contention is without
merit. A careful examination of the provisions of both sections 8 and 9 of Executive Order
No. 401-A, series of 1951, reveals the procedure prescribed therein is intended as a check
or control upon the powers of the Collector of Internal Revenue in respect to assessment
and refunds of taxes. If it be conceded that a decision of the Collector of Internal Revenue
on partial remission of taxes is subject to review by the Secretary of Finance and the
Board of Tax Appeals, then with more reason should the power of the Collector to
withdraw totally an assessment be subject to such review.
We find merit, however, in petitioner's contention that the Court of Tax Appeals
erred in the imposition of the 50% fraud surcharge. As already shown in the early part of
this decision, no element of fraud is present.
Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge
should be added to the deficiency sales tax "in case a false or fraudulent return is willfully
made." Although the sales made by SM are in substance by Yutivo this does not
necessarily establish fraud nor the willful filing of a false or fraudulent return.
The case of Court Holding Co. vs. Commissioner of Internal Revenue (August 9,
1943, 2 T.C. 531, 541-549) is in point. The petitioner Court Holding Co. was a corporation
consisting of only two stockholders, to wit: Minnie Miller and her husband Louis Miller. The
only assets of this husband and wife corporation consisted of an apartment building which
had been acquired for a very low price at a judicial sale. Louis Miller, the husband who
directed the company's business, verbally agreed to sell this property to Abe C. Fine and
Margaret Fine, husband and wife, for the sum of $54,000.00, payable in various
installments. He received $1,000.00 as down payment. The sale of this property for the
price mentioned would have netted the corporation a handsome profit on which a large
corporate income tax would have to be paid. On the afternoon of February 23, 1940, when
the Millers and the Fines got together for the execution of the document of sale, the Millers
announced that their attorney had called their attention to the large corporate tax which
would have to be paid if the sale was made by the corporation itself. So instead of
proceeding with the sale as planned, the Millers approved a resolution to declare a
dividend to themselves "payable in the assets of the corporation, in complete liquidation
and surrender of all the outstanding corporate stock." The building, which as above stated
was the only property of the corporation, was then transferred to Mr. and Mrs. Miller who in
turn sold it to Mr. and Mrs. Fine for exactly the same price and under the same terms as
had been previously agreed upon between the corporation and the Fines.
The return filed by the Court Holding Co. with the respondent Commissioner of
Internal Revenue reported no taxable gain as having been received from the sale of its
assets. The Millers, of course, reported a long term capital gain on the exchange of their
corporate stock with the corporate property. The commissioner of Internal Revenue
contended that the liquidating dividend to stockholders had no purpose other than that of
tax avoidance and that, therefore, the sale by the Millers to the Fines of the corporation's
property was in substance a sale by the corporation itself, for which the corporation is
subject to the taxable profit thereon. In requiring the corporation to pay the taxable profit
on account of the sale, the Commissioner of Internal Revenue, imposed a surcharged of
25% for delinquency, plus an additional surcharge as fraud penalties.
The U.S. Court of Tax Appeals held that the sale by the Millers was for no other
purpose than to avoid the tax and was, in substance, a sale by the Court Holding Co., and
that, therefore, the said corporation should be liable for the assessed taxable profit
thereon. The Court of Tax Appeals also sustained the Commissioner of Internal Revenue
on the delinquency penalty of 25%. However, the Court of Tax Appeals disapproved the
fraud penalties, holding that an attempt to void a tax does not necessarily establish fraud;
that it is a settled principles that a taxpayer may diminish his tax liability by means which
the law permits; that if the petitioner, the Court Holding Co., was of the opinion that the
method by which it attempted to effect the sale in question was legally sufficient to avoid
the imposition of a tax upon it, its adoption of that method is not subject to censure; and
that in taking a position with respect to a question of law, the substance of which was
disclosed by the statement indorsed on its return, it may not be said that position was
taken fraudulently. We quote in full the pertinent portion of the decision of the Court of Tax
Appeals:
". . . The respondent's answer alleges that the petitioner's failure to report as
income the taxable profit on the real estate sale was fraudulent and with intent to
evade the tax. The petitioner filed a reply denying fraud and averring that the loss
reported on its return was correct to the best of its knowledge and belief. We think the
respondent has not sustained the burden of proving a fraudulent intent. We have
concluded that the sale of the petitioner's property was in substance a sale by the
petitioner, and that the liquidating dividend to stockholders had no purpose other than
that of tax avoidance. But the attempt to avoid tax does not necessarily establish
fraud. It is a settled principle that a tax payer may diminish his liability by any means
which the law permits. United States vs. Isham, 17 Wall. 496; Gregory vs.
Helvering, supra; Chisholm vs. Commissioner, 79 Fed. (2d) 14. If the petitioner here
was of the opinion that the method by which it attempted to effect the sale in question
was legally sufficient to avoid the imposition of tax upon it, its adoption of that method
is not subject to censure. Petitioner took a position with respect to a question of law,
the substance of which was disclosed by the statement endorsed on its return. We
can not say, under the record before us, that position was taken fraudulently. The
determination of the fraud penalties is reversed."
When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the
sales tax was paid only once and on the original sales by the former and neither the latter
nor SM paid taxes on their subsequent sales. Yutivo might have, therefore, honestly
believed that the payment by it, as importer, of the sales tax was enough as in the case of
GM. Consequently, in filing its return on the basis of its sales to SM and not on those by
the latter to the public, it cannot be said that Yutivo deliberately made a false return for the
purpose of defrauding the government of its revenues which will justify the imposition of
the surcharge penalty.
We likewise find meritorious the contention that the Tax Court erred in computing
the alleged deficiency sales tax on the selling price of SM without previously deducting
therefrom the sales tax due thereon. The sales tax provisions (secs. 184-186, Tax Code)
impose a tax on original sales measured by "gross selling price" or "gross value in money."
These terms, as interpreted by the respondent Collector, do not include the amount of the
sales tax, if invoiced separately. Thus General Circular No. 431 of the Bureau of Internal
Revenue dated July 29, 1939, which implements sections 184-186 of the Tax
Code provides:
". . . 'Gross selling price' or 'gross value in money' of the articles sold, bartered,
exchanged, or transferred as the term is used in the aforecited sections (sections 184,
185 and 186) of the National Internal Revenue Code, is the total amount of money or
its equivalent which the purchaser pays to the vendor to receive or get the goods.
However, if a manufacturer producer, or importer, in fixing the gross selling price of an
article sold by him has included an amount intended to cover the sales tax in the gross
selling price of the articles, the sales tax shall be based on the gross selling price less
the amount intended to cover the tax, if the same is billed to the purchaser as a
separate item.
General Circular No. 440 of the same Bureau reads:
"Amount intended to cover the tax must be billed as a separate item so as not
to pay a tax on the tax. — On sales made after the third quarter of 1939, the amount
intended to cover the sales tax must be billed to the purchaser as separate items in
 the invoices in order that the reduction thereof from the gross selling price may be
allowed in the computation of the merchants' percentage tax on the sales. Unless
billed to the purchaser as a separate item in the invoice, the amount intended to cover
the sales tax shall be considered as part of the gross selling price of the articles sold,
and deductions thereof will not be allowed." (Cited in Dalupan, Nat. Int. Rev. Code,
Annoted, Vol. II, pp. 52-53.)
Yutivo complied with the above circulars on its sales to SM, and as separately billed,
the sales taxes did not form part of the "gross selling price" as the measure of the tax.
Since Yutivo has previously billed the sales tax separately in its sales invoices to SM.
General Circulars Nos. 431 and 440 should be deemed to have been complied with.
Respondent Collector's method of computation, as opined by Judge Nable in the decision
complained of—
". . . is unfair, because . . . (it is) practically imposing a tax on a tax already
paid. Besides, the adoption of the procedure would in certain cases elevate the
bracket under which the tax is based. The late payment is already penalized, thru the
imposition of surcharges; by adopting the theory of the Collector, we will be creating
an additional penalty not contemplated by law."
If the taxes based on the sales of SM are computed in accordance with Gen.
Circulars Nos. 431 and 440, the total deficiency sales taxes, exclusive of the 25% and
50% surcharges for the late payment and for fraud, would amount only to P820,549.91 as
shown in the following computation:
    Gross Sales Sales Taxes Due Total Gross
Rates   of Vehicles and Computed Selling Price
of Sales   Exclusive of under Gen. Cir. Charged to
Tax   Sales Tax Nos. 431 & 400 the Public
         
5%   P11,912,219.57 P595,610.98 P12,507,830.55
    909,559.50 63,669.16 973,228.66
7%
10%   2,618,695.28 261,896.53 2,880,564.81
15%   3,602,397.65 540,359.65 4,142,757.30
20%   267,150.50 53,430.10 320,580.60
30%   837,146.97 251,144.09 1,088,291.06
50%   74,244.30 37,122.16 111,366.46
75%   8,000.00 6,000.00 14,000.00
    —————— —————— ——————
TOTAL   P20,220,413.77 P1,809,205.67 P22,038,619.44
Less Taxes Paid      
  by Yutivo 988,655.76    
Deficiency tax      
  still due P820,549.91    
This is the exact amount which, according to Presiding Judge Nable of the Court of
Tax Appeals, Yutivo would pay, exclusive of the surcharges.
Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of
its jurisdiction in promulgating judgment for the affirmance of the decision of respondent
Collector by less than the statutory requirement of at least two votes of its judges. Anent
this contention, section 2 of Republic Act No. 1125, creating the Court of Tax Appeals,
provides that "Any two judges of the Court of Tax Appeals shall constitute a quorum, and
the concurrence of two judges shall be necessary to promulgate any decision
thereof. . . . ." It is on record that the present case was heard by two judges of the lower
court. And while Judge Nable expressed his opinion on the issue of whether or not the
amount of the sales tax should be excluded from the gross selling price in computing the
deficiency sales tax due from the petitioner, the opinion, apparently, is merely an
expression of his general or "private sentiment" on the particular issue, for he concurred in
the dispositive part of the decision. At any rate, assuming that there is no valid decision for
 lack or concurrence of two judges, the case was submitted for decision to the court below
on March 28, 1957 and under section 13 of Republic Act 1125, cases brought before said
court shall be decided within 30 days after submission thereof. "If no decision is rendered
by the Court within thirty days from the date a case is submitted for decision, the party
adversely affected by said ruling, order or decision may file with said Court a notice of his
intention to appeal to the Supreme Court, and if no decision has as yet been rendered by
the Court, the aggrieved party may file directly with the Supreme Court an appeal from
said ruling, order or decision, notwithstanding the foregoing provisions of this section." The
case having been brought before us on appeal, the question raised by petitioner has
become purely academic.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under
review is hereby modified in that petitioner shall be ordered to pay to respondent the sum
of P820,549.91, plus 25% surcharge thereon for late payment. So ordered without costs.
 (Yutivo Sons Hardware Co. v. Court of Tax Appeals, G.R. No. L-13203, [January 28, 1961],
|||

110 PHIL 751-776)

JARDINE DAVIES, INC., petitioner, vs. JRB REALTY, INC., respondent.

Abello Concepcion Regala & Cruz for petitioner.

Blanco Law Firm for respondent.

SYLLABUS

 
1. COMMERCIAL LAW; CORPORATION LAW; CORPORATIONS; DOCTRINE OF
PIERCING THE VEIL OF CORPORATE FICTION; WHEN APPLICABLE; RATIONALE
BEHIND THE DOCTRINE. — It is an elementary and fundamental principle of corporation
law that a corporation is an artificial being invested by law with a personality separate and
distinct from its stockholders and from other corporations to which it may be connected.
While a corporation is allowed to exist solely for a lawful purpose, the law will regard it as
an association of persons or in case of two corporations, merge them into one, when this
corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate fiction which applies only when such corporate fiction is used
to defeat public convenience, justify wrong, protect fraud or defend crime. The rationale
behind piercing a corporation's identity is to remove the barrier between the corporation
from the persons comprising it to thwart the fraudulent and illegal schemes of those who
use the corporate personality as a shield for undertaking certain proscribed activities.
2. ID.; ID.; ID.; ID.; REQUISITES; A SUBSIDIARY HAS AN INDEPENDENT AND
SEPARATE JURIDICAL PERSONALITY DISTINCT FROM THAT OF ITS PARENT
COMPANY; CASE AT BAR. — While it is true that Aircon is a subsidiary of the petitioner,
it does not necessarily follow that Aircon's corporate legal existence can just be
disregarded. In Velarde v. Lopez, Inc., the Court categorically held that a subsidiary has an
independent and separate juridical personality, distinct from that of its parent company;
hence, any claim or suit against the latter does not bind the former, and vice versa. In
applying the doctrine, the following requisites must be established: (1) control, not merely
majority or complete stock control; (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 acts 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 records bear out that Aircon is a subsidiary of the petitioner only because the latter
acquired Aircon's majority of capital stock. It, however, does not exercise complete control
over Aircon; nowhere can it be gathered that the petitioner manages the business affairs of
Aircon. Indeed, no management agreement exists between the petitioner and Aircon, and
the latter is an entirely different entity from the petitioner.
3. ID.; ID.; ID.; ID.; ABSENT FRAUD OR OTHER PUBLIC CONSIDERATIONS,
THE EXISTENCE OF INTERLOCKING DIRECTORS, CORPORATE OFFICERS AND
SHAREHOLDERS DOES NOT JUSTIFY PIERCING THE VEIL OF CORPORATE
FICTION; CASE AT BAR. — The existence of interlocking directors, corporate officers and
shareholders, which the respondent court considered, is not enough justification to pierce
the veil of corporate fiction, in the absence of fraud or other public policy considerations.
But even when there is dominance over the affairs of the subsidiary, the doctrine of
piercing the veil of corporate fiction applies only when such fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime. To warrant resort to this
extraordinary remedy, there must be proof that the corporation is being used as a cloak or
cover for fraud or illegality, or to work injustice. Any piercing of the corporate veil has to be
done with caution. The wrongdoing must be clearly and convincingly established. It cannot
just be presumed. In the instant case, there is no evidence that Aircon was formed or
utilized with the intention of defrauding its creditors or evading its contracts and
obligations. There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a
manufacturing firm of air conditioners, complied with its obligation of providing two air
conditioning units for the second floor of the Blanco Center in good faith, pursuant to its
contract with the respondent. Unfortunately, the performance of the air conditioning units
did not satisfy the respondent despite several adjustments and corrective measures. In a
Letter dated October 22, 1980, the respondent even conceded that Fedders Air
Conditioning USA has not yet perhaps perfected its technology of rotary compressors, and
agreed to change the compressors with the semi-hermetic type. Thus, Aircon substituted
the units with serviceable ones which delivered the cooling temperature needed for the law
office. After enjoying ten (10) years of its cooling power, respondent cannot now complain
about the performance of these units, nor can it demand a replacement thereof.
4. CIVIL LAW; DAMAGES; ACTUAL OR COMPENSATORY DAMAGES; ACTUAL
AMOUNT OF LOSS MUST BE PROVED WITH A REASONABLE DEGREE OF
CERTAINTY PREMISED UPON COMPETENT PROOF AND ON THE BEST EVIDENCE
OBTAINABLE BY THE INJURED PARTY; CASE AT BAR. — Moreover, it was reversible
error to award the respondent the amount of P556,551.55 representing the alleged 30%
unsaved electricity costs and P185,951.67 as maintenance cost without showing any basis
for such award. To justify a grant of actual or compensatory damages, it is necessary to
prove with a reasonable degree of certainty, premised upon competent proof and on the
best evidence obtainable by the injured party, the actual amount of loss. The respondent
merely based its cause of action on Aircon's alleged representation that Fedders air
conditioners with rotary compressors can save as much as 30% on electricity compared to
other brands. Offered in evidence were newspaper advertisements published on April 12
and 26, 1981. The respondent then recorded its electricity consumption from October 21,
1981 up to April 3, 1995 and computed 30% thereof, which amounted to P556,551.55. The
Court rules that this amount is highly speculative and merely hypothetical, and for which
the petitioner can not be held accountable.
5. ID.; ID.; ID.; MAINTENANCE COST CANNOT BE AWARDED ABSENT
CONVINCING PROOF THEREOF. — Likewise, there is no basis for the award of
P185,951.67 representing maintenance cost. The respondent merely submitted a
schedule prepared by the respondent's accountant, listing the alleged repair costs from
March 1987 up to June 1994. Such evidence is self-serving and can not also be given
probative weight, considering that there are no proofs of receipts, vouchers, etc., which
would substantiate the amounts paid for such services. Absent any more convincing proof,
the Court finds that the respondent's claims are without basis, and cannot, therefore, be
awarded.
6. ID.; OBLIGATIONS AND CONTRACTS; CONTRACTS; PRIVITY OF
CONTRACTS TAKE EFFECT ONLY BETWEEN PARTIES, THEIR SUCCESSORS-IN-
INTEREST, HEIRS AND ASSIGNS. — We sustain the petitioner's separateness from that
of Aircon in this case. It bears stressing that the petitioner was never a party to the
contract. Privity of contracts take effect only between parties, their successors-in-interest,
heirs and assigns. The petitioner, which has a separate and distinct legal personality from
that of Aircon, cannot, therefore, be held liable.
 

DECISION

CALLEJO, SR., J  : p

Before us is a petition for review of the Decision 1 of the Court of Appeals (CA) in
CA-G.R. CV No. 54201 affirming in toto that of the Regional Trial Court (RTC) in Civil
Case No. 90-237 for specific performance; and the Resolution dated January 11, 2002
denying the motion for reconsideration thereof.
The facts are as follows:
In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named
Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo Village, Makati City.
An air conditioning system was needed for the Blanco Law Firm housed at the second
floor of the building. On March 13, 1980, the respondent's Executive Vice-President, Jose
R. Blanco, accepted the contract quotation of Mr. A.G. Morrison, President of Aircon and
Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal
(Code: 10-TR) air conditioning equipment with a net total selling price of
P99,586.00. 2 Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity
each to deliver 30,000 kcal or 120,000 BTUH 3 were installed by Aircon. When the units
with rotary compressors were installed, they could not deliver the desired cooling
temperature. Despite several adjustments and corrective measures, the respondent
conceded that Fedders Air Conditioning USA's technology for rotary compressors for big
capacity conditioners like those installed at the Blanco Center had not yet been perfected.
The parties thereby agreed to replace the units with reciprocating/semi-hermetic
compressors instead. In a Letter dated March 26, 1981, 4 Aircon stated that it would be
replacing the units currently installed with new ones using rotary compressors, at the
earliest possible time. Regrettably, however, it could not specify a date when delivery
could be effected.
TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the
maintenance of the units, inclusive of parts and services. In October 1987, the respondent
learned, through newspaper ads, 5 that Maxim Industrial and Merchandising Corporation
(Maxim, for short) was the new and exclusive licensee of Fedders Air Conditioning USA in
the Philippines for the manufacture, distribution, sale, installation and maintenance of
Fedders air conditioners. The respondent requested that Maxim honor the obligation of
Aircon, but the latter refused. Considering that the ten-year period of prescription was fast
approaching, to expire on March 13, 1990, the respondent then instituted, on January 29,
1990, an action for specific performance with damages against Aircon & Refrigeration
Industries, Inc., Fedders Air Conditioning USA, Inc., Maxim Industrial & Merchandising
Corporation and petitioner Jardine Davies, Inc. 6 The latter was impleaded as defendant,
considering that Aircon was a subsidiary of the petitioner. The respondent prayed that
judgment be rendered, as follows:
1. Ordering the defendants to jointly and severally at their account and
expense deliver, install and place in operation two brand new units of each 10-tons
capacity Fedders unitary packaged air conditioners with Fedders USA's technology
perfected rotary compressors to always deliver 30,000 kcal or 120,000 BTUH to the
second floor of the Blanco Center building at 119 Alfaro St., Salcedo Village, Makati,
Metro Manila;
2. Ordering defendants to jointly and severally reimburse plaintiff not only the
sums of P415,118.95 for unsaved electricity from 21st October 1981 to 7th January
1990 and P99,287.77 for repair costs of the two service units from 7th March 1987
to 11th January 1990, with legal interest thereon from the filing of this Complaint until
fully reimbursed, but also like unsaved electricity costs and like repair costs
therefrom until Prayer No. 1 above shall have been complied with;
3. Ordering defendants to jointly and severally pay plaintiff's P150,000.00
attorney's fees and other costs of litigation, as well as exemplary damages in an
amount not less than or equal to Prayer 2 above; and
4. Granting plaintiff such other and further relief as shall be just and equitable
in the premises. 7
Of the four defendants, only the petitioner filed its Answer. The court did not acquire
jurisdiction over Aircon because the latter ceased operations, as its corporate life ended on
December 31, 1986. 8 Upon motion, defendants Fedders Air Conditioning USA and Maxim
were declared in default. 9
On May 17 1996, the RTC rendered its Decision, the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered ordering defendants Jardine
Davies, Inc., Fedders Air Conditioning USA, Inc. and Maxim Industrial and
Merchandising Corporation, jointly and severally:
1. To deliver, install and place into operation the two (2) brand new units of
Fedders unitary packaged airconditioning units each of 10 tons capacity
with rotary compressors to deliver 30,000 kcal or 120,000 BTUH to the
second floor of the Blanco Center building, or to pay plaintiff the current
price for two such units;
2. To reimburse plaintiff the amount of P556,551.55 as and for the unsaved
electricity bills from October 21, 1981 up to April 30, 1995; and another
amount of P185,951.67 as and for repair costs;
3. To pay plaintiff P50,000.00 as and for attorney's fees; and
4. Cost of suit. 10
The petitioner filed its notice of appeal with the CA, alleging that the trial court erred
in holding it liable because it was not a party to the contract between JRB Realty, Inc. and
Aircon, and that it had a personality separate and distinct from that of Aircon.  HDCTAc

On March 23, 2000, the CA affirmed the trial court's ruling in toto; hence, this
petition.
The petitioner raises the following assignment of errors:
I.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR
THE ALLEGED CONTRACTUAL BREACH OF AIRCON SOLELY BECAUSE' THE
LATTER WAS FORMERLY JARDINE'S SUBSIDIARY.
II.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS
JARDINE'S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT
DECLARING AIRCON'S OBLIGATION TO DELIVER THE TWO (2)
 AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY
COMPLIED WITH IN GOOD FAITH.
III.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS
JARDINE'S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT
DECLARING JRB'S CAUSES OF ACTION AS HAVING BEEN BARRED BY
LACHES.
IV.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS
JARDINE'S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN FINDING
JRB ENTITLED TO RECOVER ALLEGED UNSAVED ELECTRICITY EXPENSES.
V.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY
ATTORNEY'S FEES.
VI.
THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO
JARDINE FOR DAMAGES. 11
It is the well-settled rule that factual findings of the trial court, as affirmed by the CA,
are accorded high respect, even finality at times. However, considering that the factual
findings of the CA and the RTC were based on speculation and conjectures, unsupported
by substantial evidence, the Court finds that the instant case falls under one of the
excepted instances. There is, thus, a need to correct the error.
The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded,
thus:
Plaintiff's documentary evidence shows that at the time it contracted with
Aircon on March 13, 1980 (Exhibit "D") and on the date the revised agreement was
reached on March 26, 1981, Aircon was a subsidiary of Jardine. The phrase "A
subsidiary of Jardine Davies, Inc." was printed on Aircon's letterhead of its March 13,
1980 contract with plaintiff (Exhibit "D-1"), as well as the Aircon's letterhead of
Jardine's Director and Senior Vice-President A.G. Morrison and Aircon's President in
his March 26, 1981 letter to plaintiff (Exhibit "J-2") confirming the revised agreement.
Aircon's newspaper ads of April 12 and 26, 1981 and a press release on August 30,
1982 (Exhibits "E," "F" and "L") also show that defendant Jardine publicly
represented Aircon to be its subsidiary.
Records from the Securities and Exchange Commission (SEC) also reveal
that as per Jardine's December 31, 1986 and 1985 Financial Statements that "The
company acts as general manager of its subsidiaries" (Exhibit "P"). Jardine's
Consolidated Balance Sheet as of December 31, 1979 filed with the SEC listed
Aircon as its subsidiary by owning 94.35% of Aircon (Exhibit "P-1"). Also, Aircon's
reportorial General Information Sheet as of April 1980 and April 1981 filed with the
SEC show that Jardine was 94.34% owner of Aircon (Exhibits "Q" and "R") and that
out of seven members of the Board of Directors of Aircon, four (4) are also of
Jardine. SEACTH

Defendant Jardine's witness, Atty. Fe delos Santos-Quiaoit admitted that

defendant Aircon, renamed Aircon & Refrigeration Industries, Inc. "is one of the
subsidiaries of Jardine Davies" (TSN, September 22, 1995, p. 12). She also testified
that Jardine nominated, elected, and appointed the controlling majority of the Board
of Directors and the highest officers of Aircon (Ibid, pp. 10, 13-14).
The foregoing circumstances provide justifiable basis for this Court to
disregard the fiction of corporate entity and treat defendant Aircon as part of the
instrumentality of co-defendant Jardine. 12
The respondent court arrived at the same conclusion basing its ruling on the
following documents, to wit:
(a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1);
 (b) Newspaper Advertisements (Exhs. E-1 and F-1);
(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty.
J.R. Blanco (Exh. J);
(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);
(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing
Aircon as one of its subsidiaries (Exh. P);
(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);
 
(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1). 13
Applying the doctrine of piercing the veil of corporate fiction, both the respondent
and trial courts conveniently held the petitioner liable for the alleged omissions of Aircon,
considering that the latter was its instrumentality or corporate alter ego. The petitioner is
now before us, reiterating its defense of separateness, and the fact that it is not a party to
the contract. 
DcaSIH

We find merit in the petition.

It is an elementary and fundamental principle of corporation law that a corporation is
an artificial being invested by law with a personality separate and distinct from its
stockholders and from other corporations to which it may be connected. While a
corporation is allowed to exist solely for a lawful purpose, the law will regard it as an
association of persons or in case of two corporations, merge them into one, when this
corporate legal entity is used as a cloak for fraud or illegality. 14 This is the doctrine of
piercing the veil of corporate fiction which applies only when such corporate fiction is used
to defeat public convenience, justify wrong, protect fraud or defend crime. 15 The rationale
behind piercing a corporation's identity is to remove the barrier between the corporation
from the persons comprising it to thwart the fraudulent and illegal schemes of those who
use the corporate personality as a shield for undertaking certain proscribed activities. 16
While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily
follow that Aircon's corporate legal existence can just be disregarded. In Velarde v. Lopez,
Inc., 17 the Court categorically held that a subsidiary has an independent and separate
juridical personality, distinct from that of its parent company; hence, any claim or suit
against the latter does not bind the former, and vice versa. In applying the doctrine, the
following requisites must be established: (1) control, not merely majority or complete stock
control; (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 acts 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. 18
The records bear out that Aircon is a subsidiary of the petitioner only because the
latter acquired Aircon's majority of capital stock. It, however, does not exercise complete
control over Aircon; nowhere can it be gathered that the petitioner manages the business
affairs of Aircon. Indeed, no management agreement exists between the petitioner and
Aircon, and the latter is an entirely different entity from the petitioner. 19
Jardine Davies, Inc., incorporated as early as June 28, 1946, 20 is primarily a
financial and trading company. Its Articles of Incorporation states among many others that
the purposes for which the said corporation was formed, are as follows:
(a) To carry on the business of merchants, commission merchants, brokers,
factors, manufacturers, and agents;
(b) Upon complying with the requirements of law applicable thereto, to act as
agents of companies and underwriters doing and engaging in any and all kinds of
insurance business. 21
On the other hand, Aircon, incorporated on December 27, 1952, 22 is a
manufacturing firm. Its Articles of Incorporation states that its purpose is mainly —
 To carry on the business of manufacturers of commercial and household
appliances and accessories of any form, particularly to manufacture, purchase, sell
or deal in air conditioning and refrigeration products of every class and description
as well as accessories and parts thereof, or other kindred articles; and to erect, or
buy, lease, manage, or otherwise acquire manufactories, warehouses, and depots
for manufacturing, assemblage, repair and storing, buying, selling, and dealing in the
aforesaid appliances, accessories and products. . . . 23
The existence of interlocking directors, corporate officers and shareholders, which
the respondent court considered, is not enough justification to pierce the veil of corporate
fiction, in the absence of fraud or other public policy considerations. 24 But even when
there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of
corporate fiction applies only when such fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime. 25 To warrant resort to this extraordinary remedy,
there must be proof that the corporation is being used as a cloak or cover for fraud or
illegality, or to work injustice. 26 Any piercing of the corporate veil has to be done with
caution. 27 The wrongdoing must be clearly and convincingly established. It cannot just be
presumed. 28
In the instant case, there is no evidence that Aircon was formed or utilized with the
intention of defrauding its creditors or evading its contracts and obligations. There was
nothing fraudulent in the acts of Aircon in this case. Aircon, as a manufacturing firm of air
conditioners, complied with its obligation of providing two air conditioning units for the
second floor of the Blanco Center in good faith, pursuant to its contract with the
respondent. Unfortunately, the performance of the air conditioning units did not satisfy the
respondent despite several adjustments and corrective measures. In a Letter 29 dated
October 22, 1980, the respondent even conceded that Fedders Air Conditioning USA has
not yet perhaps perfected its technology of rotary compressors, and agreed to change the
compressors with the semi-hermetic type. Thus, Aircon substituted the units with
serviceable ones which delivered the cooling temperature needed for the law office. After
enjoying ten (10) years of its cooling power, respondent cannot now complain about the
performance of these units, nor can it demand a replacement thereof.
Moreover, it was reversible error to award the respondent the amount of
P556,551.55 representing the alleged 30% unsaved electricity costs and P185,951.67 as
maintenance cost without showing any basis for such award. To justify a grant of actual or
compensatory damages, it is necessary to prove with a reasonable degree of certainty,
premised upon competent proof and on the best evidence obtainable by the injured party,
the actual amount of loss. 30 The respondent merely based its cause of action on Aircon's
alleged representation that Fedders air conditioners with rotary compressors can save as
much as 30% on electricity compared to other brands. Offered in evidence were
newspaper advertisements published on April 12 and 26, 1981. The respondent then
recorded its electricity consumption from October 21, 1981 up to April 3, 1995 and
computed 30% thereof, which amounted to P556,551.55. The Court rules that this amount
is highly speculative and merely hypothetical, and for which the petitioner can not be held
accountable.
First. The respondent merely relied on the newspaper advertisements showing the
Fedders window-type air conditioners, which are far different from the big capacity air
conditioning units installed at Blanco Center.
Second. After such print advertisements, the respondent informed Aircon that it was
going to install an electric meter to register its electric consumption so as to determine the
electric costs not saved by the presently installed units with semi-hermetic compressors.
Contrary to the allegations of the respondent that this was in pursuance to their Revised
Agreement, no proof was adduced that Aircon agreed to the respondent's proposition. It
was a unilateral act on the part of the respondent, which Aircon did not oblige or commit
itself to pay.
Third. Needless to state, the amounts computed are mere estimates representing
the respondent's self-serving claim of unsaved electricity cost, which is too speculative and
 conjectural to merit consideration. No other proofs, reports or bases of comparison
showing that Fedders Air Conditioning USA could indeed cut down electricity cost by 30%
were adduced.
Likewise, there is no basis for the award of P185,951.67 representing maintenance
cost. The respondent merely submitted a schedule 31 prepared by the respondent's
accountant, listing the alleged repair costs from March 1987 up to June 1994. Such
evidence is self-serving and can not also be given probative weight, considering that there
are no proofs of receipts, vouchers, etc., which would substantiate the amounts paid for
such services. Absent any more convincing proof, the Court finds that the respondent's
claims are without basis, and cannot, therefore, be awarded.
We sustain the petitioner's separateness from that of Aircon in this case. It bears
stressing that the petitioner was never a party to the contract. Privity of contracts take
effect only between parties, their successors-in-interest, heirs and assigns. 32 The
petitioner, which has a separate and distinct legal personality from that of Aircon, cannot,
therefore, be held liable.
IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed decision of
the Court of Appeals, affirming the decision of the Regional Trial Court is REVERSED and
SET ASIDE. The complaint of the respondent is DISMISSED. Costs against the
respondent.
SO ORDERED.
 (Jardine Davies Inc. v. JRB Realty Inc., G.R. No. 151438, [July 15, 2005], 502 PHIL 129-
|||

142)

PHILIPPINE NATIONAL BANK, petitioner, vs. RITRATTO GROUP INC.,

RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE, respondents.

Cayetano Sebastian Dado & Cruz for petitioner.

Zulueta Puno and Associates for respondents.

SYNOPSIS

On May 29, 1996, PNB International Finance Ltd. (PNB-IFL), a subsidiary company of
petitioner Philippine National Bank (PNB), and respondents entered into loan contracts
whereby the former extended credit facility in favor of the latter secured by real estate
mortgages constituted over four (4) parcels of land in Makati City. When respondents failed to
pay their obligations, a foreclosure proceeding was instituted by PNB-IFL, through its
attorney-in-fact, PNB. Hence, respondents filed a complaint for injunction with prayer for the
issuance of a writ of preliminary injunction and/or temporary restraining order before the
Regional Trial Court of Makati. Respondents anchored their prayer for injunction on alleged
invalid provisions of the contract. Petitioner filed a motion to dismiss on the grounds of failure
to state a cause of action and the absence of any privity between the petitioner and
respondents. The trial court granted respondents' application for preliminary injunction and
eventually denied petitioner's motion for lack of merit. Applying the doctrine of "Piercing the
Veil of Corporate Identity," the trial court ruled that since PNB-IFL is a wholly owned
subsidiary of petitioner PNB, the suit against the petitioner is a suit against PNB-IFL. A
petition for certiorari and prohibition was thereafter filed by the petitioner before the Court of
Appeals, but the same was denied by the appellate court. Hence, petitioner sought recourse
before the Supreme Court.
In granting the petition, the Court held that the respondents do not have a cause of
action against the petitioner, as the latter was not a privy to the contract the provisions of
which respondents seek to declare void.
 The Court found the doctrine of piercing the corporate veil based on the alter ego or
instrumentality doctrine inapplicable in the case at bar. Aside from the fact that PNB-IFL is a
wholly owned subsidiary of petitioner PNB, there was no showing of the indicative factors that
the former corporation was a mere instrumentality of the latter are present. Neither was there
a demonstration that any of the evils sought to be prevented by the doctrine of piercing the
corporate veil exist.
Anent the preliminary injunction issued, the Court ordered that the same be lifted as
there was no showing that respondents were entitled to the issuance of the writ. Respondents
have failed to prove that they have a right protected and that the act against which the writ is
to be directed are violative of said right.

SYLLABUS

1. COMMERCIAL LAW; CORPORATION LAW; CORPORATION; HAS A

PERSONALITY SEPARATE AND DISTINCT FROM ITS STOCKHOLDERS OR MEMBERS.
— The general rule is that as a legal entity, a corporation has a personality distinct and
separate from its individual stockholders or members, and is not affected by the personal
rights, obligations and transactions of the latter. The mere fact that a corporation owns all of
the stocks of another corporation, taken alone is not sufficient to justify their being treated as
one entity. If used to perform legitimate functions, a subsidiary's separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary will be confined
to those arising in their respective business. The courts may in the exercise of judicial
discretion step in to prevent the abuses of separate entity privilege and pierce the veil of
corporate entity. 
ACaEcH

2. ID.; ID.; ID.; DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION;

CIRCUMSTANCES RENDERING SUBSIDIARY A MERE INSTRUMENTALITY. — While
there exists no definite test of general application in determining when a subsidiary may be
treated as a mere instrumentality of the parent corporation, some factors have been identified
that will justify the application of the treatment of the doctrine of the piercing of the corporate
veil. The case of Garett vs. Southern Railway Co. is enlightening. The case involved a suit
against the Southern Railway Company. Plaintiff was employed by Lenoir Car Works and
alleged that he sustained injuries while working for Lenoir. He, however, filed a suit against
Southern Railway Company on the ground that Southern had acquired the entire capital stock
of Lenoir Car Works, hence, the latter corporation was but a mere instrumentality of the
former. The Tennessee Supreme Court stated that as a general rule the stock ownership
alone by one corporation of the stock of another does not thereby render the dominant
corporation liable for the torts of the subsidiary unless the separate corporate existence of the
subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an
instrumentality or adjunct of the dominant corporation. Said Court then outlined the
circumstances which may be useful in the determination of whether the subsidiary is but a
mere instrumentality of the parent-corporation. The Circumstances rendering the subsidiary
an instrumentality. It is manifestly impossible to catalogue the infinite variations of fact that
can arise but there are certain common circumstances which are important and which, if
present in the proper combination, are controlling. These are as follows; (a) The parent
corporation owns all or most of the capital stock of the subsidiary. (b) The parent and
subsidiary corporations have common directors or officers. (c) The parent corporation
finances the subsidiary. (d) The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation. (e) The subsidiary has grossly inadequate
capital. (f) The parent corporation pays the salaries and other expenses or losses of the
subsidiary. (g) The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent corporation. (h) In the
papers of the parent corporation or in the statements of its officers, the subsidiary is described
as a department or division of the parent corporation, or its business or financial responsibility
is referred to as the parent corporation's own. (i) The parent corporation uses the property of
the subsidiary as its own. (j) The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary but take their orders from the parent
corporation. (k) The formal legal requirements of the subsidiary are not observed. The
Tennessee Supreme Court thus ruled: In the case at bar only two of the eleven listed indicia
occur, namely, the ownership of most of the capital stock of Lenoir by Southern, and possibly
subscription to the capital stock of Lenoir . . . The complaint must be dismissed.
3. ID.; ID.; ID.; ID.; WHEN APPLICABLE. — In this jurisdiction, we have held that the
doctrine of piercing the corporate veil is an equitable doctrine developed to address
situations, where the separate corporate personality of a corporation is abused or used for
wrongful purposes. The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to
confuse the legitimate issues, or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.
4. ID.; ID.; ID.; ID.; ELEMENTS. — In Concept Builders, Inc. v. NLRC, we have laid the
test in determining the applicability of the doctrine of piercing the veil of corporate fiction, to
wit: 1. Control, not mere majority or complete control, but complete domination, not only of
finances but of policies 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 the operation.  EIDATc

5. ID.; ID.; ID.; ID.; NOT APPLICABLE TO CASE AT BAR. — Aside from the fact that
PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing of the indicative
factors that the former corporation is a mere instrumentality of the latter are present. Neither
is there a demonstration that any of the evils sought to be prevented by the doctrine of
piercing the corporate veil exists. Inescapably, therefore, the doctrine of piercing the
corporate veil based on the alter ego or instrumentality doctrine finds no application in the
case at bar.
6. ID.; PROVISIONAL REMEDIES; WRIT OF PRELIMINARY INJUNCTION;
DISMISSAL OF THE PRINCIPAL ACTION RESULTS IN DENIAL OF ISSUANCE THEREOF.
— Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere
provisional remedy but adjunct to the main suit. A writ of preliminary injunction is an ancillary
or preventive remedy that may only be resorted to by a litigant to protect or preserve his rights
or interests and for no other purposes during the pendency of the principal action. The
dismissal of the principal action thus results in the denial of the prayer for the issuance of the
writ. Further, there is no showing that respondents are entitled to the issuance of the writ.
7. ID.; ID.; ID.; WHEN MAY BE GRANTED. — An injunctive remedy may only be
resorted to when there is a pressing necessity to avoid injurious consequences which cannot
be remedied under any standard compensation. Respondents do not deny their
indebtedness. Their properties are by their own choice encumbered by real estate mortgages.
Upon the non-payment of the loans, which were secured by the mortgages sought to be
foreclosed, the mortgaged properties are properly subject to a foreclosure sale. Moreover,
respondents questioned the alleged void stipulations in the contract only when petitioner
initiated the foreclosure proceedings. Clearly, respondents have failed to prove that they have
a right protected and that the acts against which the writ is to be directed are violative of said
right. The Court is not unmindful of the findings of both the trial court and the appellate court
that there may be serious grounds to nullify the provisions of the loan agreement. However,
as earlier discussed, respondents committed the mistake of filing the case against the wrong
party, thus, they must suffer the consequences of their error.
 8. CIVIL LAW; AGENCY; A SUIT AGAINST AN AGENT, ABSENT COMPELLING
REASONS, IS NOT A SUIT AGAINST THE PRINCIPAL. — In any case, the parent-
subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship
involved in this case since the petitioner was not sued because it is the parent company of
PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-in-fact of PNB-IFL
in initiating the foreclosure proceedings. As suit against an agent cannot without compelling
reasons be considered as a suit against the principal. Under the Rules of Court, every action
must be prosecuted of defended in the name of the real party-in-interest, unless otherwise
authorized by law or these Rules. In mandatory terms, the Rules require that "parties-in-
interest without whom no final determination can be had, an action shall be joined either as
plaintiffs or defendants." In the case at bar, the injunction suit is directed only against the
agent, not the principal.

DECISION

KAPUNAN, J  : p

In a petition for review on certiorari under Rule 45 of the Revised Rules of Court,

petitioner seeks to annul and set aside the Court of Appeals' decision in C.A. CV G.R. S.P.
No. 55374 dated March 27, 2000, affirming the Order issuing a writ of preliminary injunction of
the Regional Trial Court of Makati, Branch 147 dated June 30, 1999, and its Order dated
October 4, 1999, which denied petitioner's motion to dismiss.  CcSEIH

The antecedents of this case are as follows:

Petitioner Philippine National Bank is a domestic corporation organized and existing
under Philippine law. Meanwhile, respondents Ritratto Group, Inc., Riatto International, Inc.
and Dadasan General Merchandise are domestic corporations, likewise, organized and
existing under Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of
PNB, organized and doing business in Hong Kong, extended a letter of credit in favor of the
respondents in the amount of US$300,000.00 secured by real estate mortgages constituted
over four (4) parcels of land in Makati City. This credit facility was later increased successively
to US$1,140,000.00 in September 1996; to US$1,290,000.00 in November 1996; to
US$1,425,000.00 in February 1997; and decreased to US$1,421,316.18 in April 1998.
Respondents made repayments of the loan incurred by remitting those amounts to their loan
account with PNB-IFL in Hong Kong.
However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70.
Pursuant to the terms of the real estate mortgages, PNB-IFL, through its attorney-in-fact PNB,
notified the respondents of the foreclosure of all the real estate mortgages and that the
properties subject thereof were to be sold at a public auction on May 27, 1999 at the Makati
City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer for the
issuance of a writ of preliminary injunction and/or temporary restraining order before the
Regional Trial Court of Makati. The Executive Judge of the Regional Trial Court of Makati
issued a 72-hour temporary restraining order. On May 28, 1999, the case was raffled to
Branch 147 of the Regional Trial Court of Makati. The trial judge then set a hearing on June 8,
1999. At the hearing of the application for preliminary injunction, petitioner was given a period
of seven days to file its written opposition to the application. On June 15, 1999, petitioner filed
an opposition to the application for a writ of preliminary injunction to which the respondents
filed a reply. On June 25, 1999, petitioner filed a motion to dismiss on the grounds of failure to
state a cause of action and the absence of any privity between the petitioner and
respondents. On June 30, 1999, the trial court judge issued an Order for the issuance of a
writ of preliminary injunction, which writ was correspondingly issued on July 14, 1999. On
October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of merit.
 Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of
the writ of preliminary injunction before the Court of Appeals. In the impugned decision, 1 the
appellate court dismissed the petition. Petitioner thus seeks recourse to this Court and raises
the following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE
COMPLAINT A QUO, CONSIDERING THAT BY THE ALLEGATIONS OF THE
COMPLAINT, NO CAUSE OF ACTION EXISTS AGAINST PETITIONER, WHICH IS
NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT
AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT
TO ISSUE IN EXCESS OR LACK OF JURISDICTION A WRIT OF PRELIMINARY
INJUNCTION OVER AND BEYOND WHAT WAS PRAYED FOR IN THE
COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101
SCRA 827. 2
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000
and the trial court's Orders dated June 30, 1999 and October 4, 1999 be set aside and the
dismissal of the complaint in the instant case. 3
In their Comment, respondents argue that even assuming arguendo that petitioner and
PNB-IFL are two separate entities, petitioner is still the party-in-interest in the application for
preliminary injunction because it is tasked to commit acts of foreclosing respondents'
properties. 4 Respondents maintain that the entire credit facility is void as it contains
stipulations in violation of the principle of mutuality of contracts. 5 In addition, respondents
justified the act of the court a quo in applying the doctrine of "Piercing the Veil of Corporate
Identity" by stating that petitioner is merely an alter ego or a business conduit of PNB-IFL. 6
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid
provisions of the contract:
GROUNDS
I
THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE
DISCRETION OF THE DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF
MUTUALITY OF CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF
INTEREST AGREED UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT,
THERE WAS NO STIPULATION THAT THE RATE OF INTEREST SHALL BE
REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF
INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD. 7
Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB
from the foreclosure and eventual sale of the property in order to protect their rights to said
property by reason of void credit facilities as bases for the real estate mortgage over the said
property. 8
The contract questioned is one entered into between respondent and PNB-IFL, not
PNB. In their complaint, respondents admit that petitioner is a mere attorney-in-fact for the
PNB-IFL with full power and authority to, inter alia, foreclose on the properties mortgaged to
secure their loan obligations with PNB-IFL. In other words, herein petitioner is an agent with
limited authority and specific duties under a special power of attorney incorporated in the real
estate mortgage. It is not privy to the loan contracts entered into by respondents and PNB-
IFL. 
DAHaTc
 The issue of the validity of the loan contracts is a matter between PNB-IFL, the
petitioner's principal and the party to the loan contracts, and the respondents. Yet, despite the
recognition that petitioner is a mere agent, the respondents in their complaint prayed that the
petitioner PNB be ordered to re-compute the rescheduling of the interest to be paid by them in
accordance with the terms and conditions in the documents evidencing the credit facilities,
and crediting the amount previously paid to PNB by herein respondents. 9
Clearly, petitioner not being a part to the contract has no power to re-compute the
interest rates set forth in the contract. Respondents, therefore, do not have any cause of
action against petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL is
a wholly owned subsidiary of defendant Philippine National Bank, the suit against the
defendant PNB is a suit against PNB-IFL. 10 In justifying its ruling, the trial court, citing the
case of Koppel Phil. Inc. vs. Yatco, 11 reasoned that the corporate entity may be disregarded
where a corporation is the mere alter ego, or business conduit of a person or where the
corporation is so organized and controlled and its affairs are so conducted, as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation. 12
We disagree.
The general rule is that as a legal entity, a corporation has a personality distinct and
separate from its individual stockholders or members, and is not affected by the personal
rights, obligations and transactions of the latter. 13 The mere fact that a corporation owns all of
the stocks of another corporation, taken alone is not sufficient to justify their being treated as
one entity. If used to perform legitimate functions, a subsidiary's separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary will be confined
to those arising in their respective business. The courts may in the exercise of judicial
discretion step in to prevent the abuses of separate entity privilege and pierce the veil of
corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at bar. In
said case, this Court disregarded the separate existence of the parent and the subsidiary on
the ground that the latter was formed merely for the purpose of evading the payment of higher
taxes. In the case at bar, respondents fail to show any cogent reason why the separate
entities of the PNB and PNB-IFL should be disregarded.
While there exists no definite test of general application in determining when a
subsidiary may be treated as a mere instrumentality of the parent corporation, some factors
have been identified that will justify the application of the treatment of the doctrine of the
piercing of the corporate veil. The case of Garrett vs. Southern Railway Co. 14 is enlightening.
The case involved a suit against the Southern Railway Company. Plaintiff was employed by
Lenoir Car Works and alleged that he sustained injuries while working for Lenoir. He,
however, filed a suit against Southern Railway Company on the ground that Southern had
acquired the entire capital stock of Lenoir Car Works, hence, the latter corporation was but a
mere instrumentality of the former. The Tennessee Supreme Court stated that as a general
rule the stock ownership alone by one corporation of the stock of another does not thereby
render the dominant corporation liable for the torts of the subsidiary unless the separate
corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is
such that it is but an instrumentality or adjunct of the dominant corporation. Said Court then
outlined the circumstances which may be useful in the determination of whether the
subsidiary is but a mere instrumentality of the parent-corporation:
The Circumstance rendering the subsidiary an instrumentality. It is manifestly
impossible to catalogue the infinite variations of fact that can arise but there are
certain common circumstances which are important and which, if present in the proper
combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital stock of the
subsidiary. 
CAaDTH
 (b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the
subsidiary.
(g) The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers,
the subsidiary is described as a department or division of the parent corporation, or its
business or financial responsibility is referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur, namely, the
ownership of most of the capital stock of Lenoir by Southern, and possibly subscription
to the capital stock of Lenoir. . . The complaint must be dismissed. ECTHIA

Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil
is an equitable doctrine developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful purposes. The doctrine applies
when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or
defend crime, or when it is made as a shield to confuse the legitimate issues, or where a
corporation is the mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. 15
In Concept Builders, Inc. v. NLRC, 16 we have laid the test in determining the
applicability of the doctrine of piercing the veil of corporate fiction, to wit:
1. Control, not mere majority or complete 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 plaintiffs 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 the operation. 17
Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there
is no showing of the indicative factors that the former corporation is a mere instrumentality of
the latter are present. Neither is there a demonstration that any of the evils sought to be
prevented by the doctrine of piercing the corporate veil exists. Inescapably, therefore, the
doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine finds
no application in the case at bar.  AcTDaH
 In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the
significant legal relationship involved in this case since the petitioner was not sued because it
is the parent company of PNB-IFL. Rather, the petitioner was sued because it acted as an
attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an agent
cannot without compelling reasons be considered a suit against the principal. Under the Rules
of Court, every action must be prosecuted or defended in the name of the real party-in-
interest, unless otherwise authorized by law or these Rules. 18 In mandatory terms, the Rules
require that "parties-in-interest without whom no final determination can be had, an action
shall be joined either as plaintiffs or defendants." 19 In the case at bar, the injunction suit is
directed only against the agent, not the principal.
Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere
provisional remedy but adjunct to the main suit. 20 A writ of preliminary injunction is an
ancillary or preventive remedy that may only be resorted to by a litigant to protect or preserve
his rights or interests and for no other purpose during the pendency of the principal action.
The dismissal of the principal action thus results in the denial of the prayer for the issuance of
the writ. Further, there is no showing that respondents are entitled to the issuance of the
writ. Section 3, Rule 58, of the 1997 Rules of Civil Procedure provides:
SECTION 3.  Grounds for issuance of preliminary injunction. — A preliminary
injunction may be granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or part
of such relief consists in restraining the commission or continuance of the act or acts
complained of, or in requiring the performance of an act or acts, either for a limited
period or perpetually,
(b) That the commission, continuance or non-performance of the acts or acts
complained of during the litigation would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is
attempting to do, or is procuring or suffering to be done, some act or acts probably in
violation of the rights of the applicant respecting the subject of the action or
proceeding, and tending to render the judgment ineffectual.
Thus, an injunctive remedy may only be resorted to when there is a pressing necessity
to avoid injurious consequences which cannot be remedied under any standard
compensation. 21 Respondents do not deny their indebtedness. Their properties are by their
own choice encumbered by real estate mortgages. Upon the non-payment of the loans, which
were secured by the mortgages sought to be foreclosed, the mortgaged properties are
properly subject to a foreclosure sale. Moreover, respondents questioned the alleged void
stipulations in the contract only when petitioner initiated the foreclosure proceedings. Clearly,
respondents have failed to prove that they have a right protected and that the acts against
which the writ is to be directed are violative of said right. 22 The Court is not unmindful of the
findings of both the trial court and the appellate court that there may be serious grounds to
nullify the provisions of the loan agreement. However, as earlier discussed, respondents
committed the mistake of filing the case against the wrong party, thus, they must suffer the
consequences of their error.
All told, respondents do not have a cause of action against the petitioner as the latter is
not privy to the contract the provisions of which respondents seek to declare void.
Accordingly, the case before the Regional Trial Court must be dismissed and the preliminary
injunction issued in connection therewith, must be lifted.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed
decision of the Court of Appeals is hereby REVERSED. The Orders dated June 30, 1999 and
October 4, 1999 of the Regional Trial Court of Makati, Branch 147 in Civil Case No. 99-1037
are hereby ANNULLED and SET ASIDE and the complaint in said case DISMISSED.  DHSaCA

SO ORDERED.
 (Philippine National Bank v. Ritratto Group Inc., G.R. No. 142616, [July 31, 2001], 414 PHIL
|||

494-508)
 PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and
PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION
(PANREA), petitioners, vs. NATIONAL LABOR RELATIONS COMMISSION
(NLRC), PANTRANCO NORTH EXPRESS, INC. (PNEI), PHILIPPINE
NATIONAL BANK (PNB), PHILIPPINE NATIONAL BANK-MANAGEMENT
AND DEVELOPMENT CORPORATION (PNB-MADECOR), and MEGA
PRIME REALTY AND HOLDINGS CORPORATION (MEGA
PRIME), respondents.

[G.R. No. 170705. March 17, 2009.]

PHILIPPINE NATIONAL BANK, petitioner, vs. PANTRANCO EMPLOYEES

ASSOCIATION, INC. (PEA-PTGWO), PANTRANCO RETRENCHED
EMPLOYEES ASSOCIATION (PANREA) AND PANTRANCO ASSOCIATION
OF CONCERNED EMPLOYEES (PACE), ET AL., PHILIPPINE NATIONAL
BANK-MANAGEMENT DEVELOPMENT CORPORATION (PNB-MADECOR),
and MEGA PRIME REALTY HOLDINGS, INC., respondents.

DECISION

NACHURA, J  : p

Before us are two consolidated petitions assailing the Court of Appeals (CA)
Decision 1 dated June 3, 2005 and its Resolution 2 dated December 7, 2005 in CA-G.R.
SP No. 80599.  aATCDI

In G.R. No. 170689, the Pantranco Employees Association (PEA) and

Pantranco Retrenched Employees Association (PANREA) pray that the CA decision
be set aside and a new one be entered, declaring the Philippine National Bank (PNB)
and PNB Management and Development Corporation (PNB-Madecor) jointly and
solidarily liable for the P722,727,150.22 National Labor Relations Commission
(NLRC) judgment in favor of the Pantranco North Express, Inc. (PNEI)
employees; 3 while in G.R. No. 170705, PNB prays that the auction sale of the Pantranco
properties be declared null and void. 4
The facts of the case, as found by the CA, 5 and established in Republic of the
Phils. v. NLRC, 6 Pantranco North Express, Inc. v. NLRC, 7 and PNB MADECOR v.
Uy, 8 follow:
The Gonzales family owned two corporations, namely, the PNEI and Macris Realty
Corporation (Macris). PNEI provided transportation services to the public, and had its bus
terminal at the corner of Quezon and Roosevelt Avenues in Quezon City. The terminal
stood on four valuable pieces of real estate (known as Pantranco properties) registered
under the name of Macris. 9 The Gonzales family later incurred huge financial losses
despite attempts of rehabilitation and loan infusion. In March 1975, their creditors took
over the management of PNEI and Macris. By 1978, full ownership was transferred to one
of their creditors, the National Investment Development Corporation (NIDC), a subsidiary
of the PNB.
Macris was later renamed as the National Realty Development Corporation
(Naredeco) and eventually merged with the National Warehousing Corporation (Nawaco)
to form the new PNB subsidiary, the PNB-Madecor.
In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company
owned by Gregorio Araneta III. In 1986, PNEI was among the several companies placed
under sequestration by the Presidential Commission on Good Government (PCGG) shortly
after the historic events in EDSA. In January 1988, PCGG lifted the sequestration order to
pave the way for the sale of PNEI back to the private sector through the Asset Privatization
Trust (APT). APT thus took over the management of PNEI.
In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for
suspension of payments. A management committee was thereafter created which
recommended to the SEC the sale of the company through privatization. As a cost-saving
measure, the committee likewise suggested the retrenchment of several PNEI employees.
Eventually, PNEI ceased its operation. Along with the cessation of business came the
various labor claims commenced by the former employees of PNEI where the latter
obtained favorable decisions.  TEIHDa

On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of
Execution 10 commanding the NLRC Sheriffs to levy on the assets of PNEI in order to
satisfy the P722,727,150.22 due its former employees, as full and final satisfaction of the
judgment awards in the labor cases. The sheriffs were likewise instructed to proceed
against PNB, PNB-Madecor and Mega Prime. 11 In implementing the writ, the sheriffs
levied upon the four valuable pieces of real estate located at the corner of Quezon and
Roosevelt Avenues, on which the former Pantranco Bus Terminal stood. These properties
were covered by Transfer Certificate of Title (TCT) Nos. 87881-87884, registered under
the name of PNB-Madecor. 12 Subsequently, Notice of Sale of the foregoing real
properties was published in the newspaper and the sale was set on July 31, 2002. Having
been notified of the auction sale, motions to quash the writ were separately filed by PNB-
Madecor and Mega Prime, and PNB. They likewise filed their Third-Party Claims. 13 PNB-
Madecor anchored its motion on its right as the registered owner of the Pantranco
properties, and Mega Prime as the successor-in-interest. For its part, PNB sought the
nullification of the writ on the ground that it was not a party to the labor case. 14 In its Third-
Party Claim, PNB alleged that PNB-Madecor was indebted to the former and that the
Pantranco properties would answer for such debt. As such, the scheduled auction sale of
the aforesaid properties was not legally in order. 15
On September 10, 2002, the Labor Arbiter declared that the subject Pantranco
properties were owned by PNB-Madecor. It being a corporation with a distinct and
separate personality, its assets could not answer for the liabilities of PNEI. Considering,
however, that PNB-Madecor executed a promissory note in favor of PNEI for
P7,884,000.00, the writ of execution to the extent of the said amount was concerned was
considered valid. 16
PNB's third-party claim — to nullify the writ on the ground that it has an interest in
the Pantranco properties being a creditor of PNB-Madecor, — on the other hand, was
denied because it only had an inchoate interest in the properties. 17
The dispositive portion of the Labor Arbiter's September 10, 2002 Resolution is
quoted hereunder:
WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime
Holdings, Inc. is hereby GRANTED and concomitantly the levies made by the sheriffs
of the NLRC on the properties of PNB Madecor should be as it (sic) is hereby LIFTED
subject to the payment by PNB Madecor to the complainants the amount of
P7,884,000.00.  ScAaHE

The Motion to Quash and Third Party Claim of PNB is hereby DENIED.
The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is hereby
PARTIALLY GRANTED insofar as the amount of the writ exceeds P7,884,000.00.
The Motion for Recomputation and Examination of Judgment Awards is hereby
DENIED for want of merit.
The Motion to Expunge from the Records claimants/complainants Opposition
dated August 3, 2002 is hereby DENIED for lack of merit.
SO ORDERED. 18
On appeal to the NLRC, the same was denied and the Labor Arbiter's disposition
was affirmed. 19 Specifically, the NLRC concluded as follows:
 (1) PNB-Madecor and Mega Prime contended that it would be impossible for
them to comply with the requirement of the labor arbiter to pay to the PNEI employees
the amount of P7.8 million as a condition to the lifting of the levy on the properties,
since the credit was already garnished by Gerardo Uy and other creditors of PNEI.
The NLRC found no evidence that Uy had satisfied his judgment from the promissory
note, and opined that even if the credit was in custodia legis, the claim of the PNEI
employees should enjoy preference under the Labor Code.
(2) The PNEI employees contested the finding that PNB-Madecor was indebted
to the PNEI for only P7.8 million without considering the accrual of interest. But the
NLRC said that there was no evidence that demand was made as a basis for
reckoning interest.
(3) The PNEI employees further argued that the labor arbiter may not properly
conclude from a decision of Judge Demetrio Macapagal Jr. of the RTC of Quezon City
that PNB-Madecor was the owner of the properties as his decision was reconsidered
by the next presiding judge, nor from a decision of the Supreme Court that PNEI was
a mere lessee of the properties, the fact being that the transfer of the properties to
PNB-Madecor was done to avoid satisfaction of the claims of the employees with the
NLRC and that as a result of a civil case filed by Mega Prime, the subsequent sale of
the properties by PNB to Mega Prime was rescinded. The NLRC pointed out that while
the Macapagal decision was set aside by Judge Bruselas and hence, his findings
could not be invoked by the labor arbiter, the titles of PNB-Madecor are conclusive
and there is no evidence that PNEI had ever been an owner. The Supreme Court had
observed in its decision that PNEI owed back rentals of P8.7 million to PNB-Madecor.
(4) The PNEI employees faulted the labor arbiter for not finding that PNEI,
PNB, PNB-Madecor and Mega Prime were all jointly and severally liable for their
claims. The NLRC underscored the fact that PNEI and Macris were subsidiaries of
NIDC and had passed through and were under the Asset Privatization Trust (APT)
when the labor claims accrued. The labor arbiter was correct in not granting PNB's
third-party claim because at the time the causes of action accrued, the PNEI was
managed by a management committee appointed by the PNB as the new owner of
PNRI (sic) and Macris through a deed of assignment or transfer of ownership. The
NLRC says at length that the same is not true with PNB-Madecor which is now the
registered owner of the properties. 20 
CIaHDc

The parties' separate motions for reconsideration were likewise denied. 21 Thereafter, the
matter was elevated to the CA by PANREA, PEA-PTGWO and the Pantranco Association
of Concerned Employees. The latter group, however, later withdrew its petition. The former
employees' petition was docketed as CA-G.R. SP No. 80599.
PNB-Madecor and Mega Prime likewise filed their separate petition before the CA
which was docketed as CA-G.R. SP No. 80737, but the same was dismissed. 22
In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, on June 23, 2004, an
auction sale was conducted over the Pantranco properties to satisfy the claim of the PNEI
employees, wherein CPAR Realty was adjudged as the highest bidder. 23
On June 3, 2005, the CA rendered the assailed decision affirming the NLRC
resolutions.
The appellate court pointed out that PNB, PNB-Madecor and Mega Prime are
corporations with personalities separate and distinct from PNEI. As such, there being no
cogent reason to pierce the veil of corporate fiction, the separate personalities of the
above corporations should be maintained. The CA added that the Pantranco properties
were never owned by PNEI; rather, their titles were registered under the name of PNB-
Madecor. If PNB and PNB-Madecor could not answer for the liabilities of PNEI, with more
reason should Mega Prime not be held liable being a mere successor-in-interest of PNB-
Madecor.
Unsatisfied, PEA-PTGWO and PANREA filed their motion for
reconsideration; 24 while PNB filed its Partial Motion for Reconsideration. 25 PNB pointed
out that PNB-Madecor was made to answer for P7,884,000.00 to the PNEI employees by
virtue of the promissory note it (PNB-Madecor) earlier executed in favor of PNEI. PNB,
however, questioned the June 23, 2004 auction sale as the P7.8 million debt had already
been satisfied pursuant to this Court's decision in PNB MADECOR v. Uy. 26
Both motions were denied by the appellate court. 27
In two separate petitions, PNB and the former PNEI employees come up to this
Court assailing the CA decision and resolution. The former PNEI employees raise the lone
error, thus:
The Honorable Court of Appeals palpably departed from the established rules
and jurisprudence in ruling that private respondents Pantranco North Express, Inc.
(PNEI), Philippine National Bank (PNB), Philippine National Bank Management and
Development Corporation (PNB-MADECOR), Mega Prime Realty and Holdings, Inc.
(Mega Prime) are not jointly and severally answerable to the P722,727,150.22 Million
NLRC money judgment awards in favor of the 4,000 individual members of the
Petitioners. 28 
DAcSIC

They claim that PNB, through PNB-Madecor, directly benefited from the operation of PNEI
and had complete control over the funds of PNEI. Hence, they are solidarily answerable
with PNEI for the unpaid money claims of the employees. 29 Citing A.C. Ransom Labor
Union-CCLU v. NLRC, 30 the employees insist that where the employer corporation ceases
to exist and is no longer able to satisfy the judgment awards in favor of its employees, the
owner of the employer corporation should be made jointly and severally liable. 31 They
added that malice or bad faith need not be proven to make the owners liable.
On the other hand, PNB anchors its petition on this sole assignment of error, viz.:
THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884
INTENDED TO PARTIALLY SATISFY THE CLAIMS OF FORMER WORKERS OF
PNEI IN THE AMOUNT OF P7,884,000.00 (THE AMOUNT OF PNB-MADECOR'S
PROMISSORY NOTE IN FAVOR OF PNEI) IS NOT IN ORDER AS THE SAID
PROPERTY IS NOT OWNED BY PNEI. FURTHER, THE SAID PROMISSORY NOTE
HAD ALREADY BEEN GARNISHED IN FAVOR OF GERARDO C. UY WHICH LED
TO THREE (3) PROPERTIES UNDER THE NAME OF PNB-MADECOR, NAMELY
TCT NOS. 87881, 87882 AND 87883, BEING LEVIED AND SOLD ON EXECUTION
IN THE "PNB-MADECOR VS. UY" CASE (363 SCRA 128 [2001]) AND "GERARDO
C. UY VS. PNEI" (CIVIL CASE NO. 95-72685, RTC MANILA, BRANCH 38). 32
PNB insists that the Pantranco properties could no longer be levied upon because
the promissory note for which the Labor Arbiter held PNB-Madecor liable to PNEI, and in
turn to the latter's former employees, had already been satisfied in favor of Gerardo C. Uy.
It added that the properties were in fact awarded to the highest bidder. Besides, says PNB,
the subject properties were not owned by PNEI, hence, the execution sale thereof was not
validly effected. 33
Both petitions must fail.
G.R. No. 170689
Stripped of the non-essentials, the sole issue for resolution raised by the former
PNEI employees is whether they can attach the properties (specifically the Pantranco
properties) of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims
against PNEI.
We answer in the negative.
First, the subject property is not owned by the judgment debtor, that is, PNEI.
Nowhere in the records was it shown that PNEI owned the Pantranco properties.
Petitioners, in fact, never alleged in any of their pleadings the fact of such ownership. What
was established, instead, in PNB MADECOR v. Uy 34 and PNB v. Mega Prime Realty and
Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB  35 was that the
properties were owned by Macris, the predecessor of PNB-Madecor. Hence, they cannot
be pursued against by the creditors of PNEI.  TIcAaH

We would like to stress the settled rule that the power of the court in executing
judgments extends only to properties unquestionably belonging to the judgment debtor
alone. 36 To be sure, one man's goods shall not be sold for another man's debts. 37 A
sheriff is not authorized to attach or levy on property not belonging to the judgment debtor,
and even incurs liability if he wrongfully levies upon the property of a third person. 38
Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities
separate and distinct from that of PNEI. PNB is sought to be held liable because it
acquired PNEI through NIDC at the time when PNEI was suffering financial reverses.
PNB-Madecor is being made to answer for petitioners' labor claims as the owner of the
subject Pantranco properties and as a subsidiary of PNB. Mega Prime is also included for
having acquired PNB's shares over PNB-Madecor.
The general rule is that a corporation has a personality separate and distinct from
those of its stockholders and other corporations to which it may be connected. 39 This is a
fiction created by law for convenience and to prevent injustice. 40 Obviously, PNB, PNB-
Madecor, Mega Prime, and PNEI are corporations with their own personalities. The
"separate personalities" of the first three corporations had been recognized by this Court
in PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings
Corporation v. PNB  41 where we stated that PNB was only a stockholder of PNB-Madecor
which later sold its shares to Mega Prime; and that PNB-Madecor was the owner of the
Pantranco properties. Moreover, these corporations are registered as separate entities
and, absent any valid reason, we maintain their separate identities and we cannot treat
them as one.
Neither can we merge the personality of PNEI with PNB simply because the latter
acquired the former. Settled is the rule that where one corporation sells or otherwise
transfers all its assets to another corporation for value, the latter is not, by that fact alone,
liable for the debts and liabilities of the transferor. 42
Lastly, while we recognize that there are peculiar circumstances or valid grounds
that may exist to warrant the piercing of the corporate veil, 43 none applies in the present
case whether between PNB and PNEI; or PNB and PNB-Madecor.
Under the doctrine of "piercing the veil of corporate fiction", the court looks at the
corporation as a mere collection of individuals or an aggregation of persons undertaking
business as a group, disregarding the separate juridical personality of the corporation
unifying the group. 44 Another formulation of this doctrine is that when two business
enterprises are owned, conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or as one and the same. 45  DCcTHa

Whether the separate personality of the corporation should be pierced hinges on

obtaining facts appropriately pleaded or proved. However, any piercing of the corporate
veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate
veil when it is misused or when necessary in the interest of justice. After all, the concept of
corporate entity was not meant to promote unfair objectives. 46
As between PNB and PNEI, petitioners want us to disregard their separate
personalities, and insist that because the company, PNEI, has already ceased operations
and there is no other way by which the judgment in favor of the employees can be
satisfied, corporate officers can be held jointly and severally liable with the company.
Petitioners rely on the pronouncement of this Court in A.C. Ransom Labor Union-CCLU v.
NLRC  47 and subsequent cases. 48
This reliance fails to persuade. We find the aforesaid decisions inapplicable to the
instant case.
For one, in the said cases, the persons made liable after the company's cessation of
operations were the officers and agents of the corporation. The rationale is that, since the
corporation is an artificial person, it must have an officer who can be presumed to be the
employer, being the person acting in the interest of the employer. The corporation, only in
the technical sense, is the employer. 49 In the instant case, what is being made liable is
another corporation (PNB) which acquired the debtor corporation (PNEI).
 Moreover, in the recent cases Carag v. National Labor Relations
Commission  50 and McLeod v. National Labor Relations Commission, 51 the Court
explained the doctrine laid down in AC Ransom relative to the personal liability of the
officers and agents of the employer for the debts of the latter. In AC Ransom, the Court
imputed liability to the officers of the corporation on the strength of the definition of an
employer in Article 212 (c) (now Article 212 [e]) of the Labor Code. Under the said
provision, employer includes any person acting in the interest of an employer, directly or
indirectly, but does not include any labor organization or any of its officers or agents
except when acting as employer. It was clarified in Carag and McLeod that Article 212 (e)
of the Labor Code, by itself, does not make a corporate officer personally liable for the
debts of the corporation. It added that the governing law on personal liability of directors or
officers for debts of the corporation is still Section 31 52 of the Corporation Code.
More importantly, as aptly observed by this Court in AC Ransom, it appears that
Ransom, foreseeing the possibility or probability of payment of backwages to its
employees, organized Rosario to replace Ransom, with the latter to be eventually phased
out if the strikers win their case. The execution could not be implemented against Ransom
because of the disposition posthaste of its leviable assets evidently in order to evade its
just and due obligations. 53 Hence, the Court sustained the piercing of the corporate veil
and made the officers of Ransom personally liable for the debts of the latter.  SDIaCT

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing
the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a
farce since it is a mere alter ego or business conduit of a person, or where the corporation
is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. 54 In the absence of
malice, bad faith, or a specific provision of law making a corporate officer liable, such
corporate officer cannot be made personally liable for corporate liabilities. 55
Applying the foregoing doctrine to the instant case, we quote with approval the CA
disposition in this wise:
It would not be enough, then, for the petitioners in this case, the PNEI
employees, to rest on their laurels with evidence that PNB was the owner of PNEI.
Apart from proving ownership, it is necessary to show facts that will justify us to pierce
the veil of corporate fiction and hold PNB liable for the debts of PNEI. The burden
undoubtedly falls on the petitioners to prove their affirmative allegations. In line with
the basic jurisprudential principles we have explored, they must show that PNB was
using PNEI as a mere adjunct or instrumentality or has exploited or misused the
corporate privilege of PNEI.
We do not see how the burden has been met. Lacking proof of a nexus apart
from mere ownership, the petitioners have not provided us with the legal basis to
reach the assets of corporations separate and distinct from PNEI. 56
Assuming, for the sake of argument, that PNB may be held liable for the debts of
PNEI, petitioners still cannot proceed against the Pantranco properties, the same being
owned by PNB-Madecor, notwithstanding the fact that PNB-Madecor was a subsidiary of
PNB. The general rule remains that PNB-Madecor has a personality separate and distinct
from PNB. The mere fact that a corporation owns all of the stocks of another corporation,
taken alone, is not sufficient to justify their being treated as one entity. If used to perform
legitimate functions, a subsidiary's separate existence shall be respected, and the liability
of the parent corporation as well as the subsidiary will be confined to those arising in their
respective businesses. 57
In PNB v. Ritratto Group, Inc., 58 we outlined the circumstances which are useful in
the determination of whether a subsidiary is but a mere instrumentality of the parent-
corporation, to wit:
1. The parent corporation owns all or most of the capital stock of the subsidiary;  HEDaTA
 2. The parent and subsidiary corporations have common directors or officers;
3. The parent corporation finances the subsidiary;
4. The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation;
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and other expenses or losses of the
subsidiary;
7. The subsidiary has substantially no business except with the parent corporation or
no assets except those conveyed to or by the parent corporation;
8. In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation, or
its business or financial responsibility is referred to as the parent corporation's
own;
9. The parent corporation uses the property of the subsidiary as its own;
10. The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary, but take their orders from the parent corporation;
11. The formal legal requirements of the subsidiary are not observed.
None of the foregoing circumstances is present in the instant case. Thus, piercing of PNB-
Madecor's corporate veil is not warranted. Being a mere successor-in-interest of PNB-
Madecor, with more reason should no liability attach to Mega Prime.
G.R. No. 170705
In its petition before this Court, PNB seeks the annulment of the June 23, 2004
execution sale of the Pantranco properties on the ground that the judgment debtor (PNEI)
never owned said lots. It likewise contends that the levy and the eventual sale on
execution of the subject properties was null and void as the promissory note on which
PNB-Madecor was made liable had already been satisfied.
It has been repeatedly stated that the Pantranco properties which were the subject
of execution sale were owned by Macris and later, the PNB-Madecor. They were never
owned by PNEI or PNB. Following our earlier discussion on the separate personalities of
the different corporations involved in the instant case, the only entity which has the right
and interest to question the execution sale and the eventual right to annul the same, if any,
is PNB-Madecor or its successor-in-interest. Settled is the rule that proceedings in court
must be instituted by the real party in interest.  HSEcTC

A real party in interest is the party who stands to be benefited or injured by the
judgment in the suit, or the party entitled to the avails of the suit. 59 "Interest" within the
meaning of the rule means material interest, an interest in issue and to be affected by the
decree, as distinguished from mere interest in the question involved, or a mere incidental
interest. 60 The interest of the party must also be personal and not one based on a desire
to vindicate the constitutional right of some third and unrelated party. 61 Real interest, on
the other hand, means a present substantial interest, as distinguished from a mere
expectancy or a future, contingent, subordinate, or consequential interest. 62
Specifically, in proceedings to set aside an execution sale, the real party in interest
is the person who has an interest either in the property sold or the proceeds thereof.
Conversely, one who is not interested or is not injured by the execution sale cannot
question its validity. 63
In justifying its claim against the Pantranco properties, PNB alleges that Mega
Prime, the buyer of its entire stockholdings in PNB-Madecor was indebted to it (PNB).
Considering that said indebtedness remains unpaid, PNB insists that it has an interest
over PNB-Madecor and Mega Prime's assets.
Again, the contention is bereft of merit. While PNB has an apparent interest in Mega
Prime's assets being the creditor of the latter for a substantial amount, its interest remains
 inchoate and has not yet ripened into a present substantial interest, which would give it the
standing to maintain an action involving the subject properties. As aptly observed by the
Labor Arbiter, PNB only has an inchoate right to the properties of Mega Prime in case the
latter would not be able to pay its indebtedness. This is especially true in the instant case,
as the debt being claimed by PNB is secured by the accessory contract of pledge of the
entire stockholdings of Mega Prime to PNB-Madecor. 64
The Court further notes that the Pantranco properties (or a portion thereof ) were
sold on execution to satisfy the unpaid obligation of PNB-Madecor to PNEI. PNB-Madecor
was thus made liable to the former PNEI employees as the judgment debtor of PNEI. It
has long been established in PNB-Madecor v. Uy and other similar cases that PNB-
Madecor had an unpaid obligation to PNEI amounting to more or less P7 million which
could be validly pursued by the creditors of the latter. Again, this strengthens the proper
parties' right to question the validity of the execution sale, definitely not PNB.
Besides, the issue of whether PNB has a substantial interest over the Pantranco
properties has already been laid to rest by the Labor Arbiter. 65 It is noteworthy that in its
Resolution dated September 10, 2002, the Labor Arbiter denied PNB's Third-Party Claim
primarily because PNB only has an inchoate right over the Pantranco properties. 66 Such
conclusion was later affirmed by the NLRC in its Resolution dated June 30,
2003. 67 Notwithstanding said conclusion, PNB did not elevate the matter to the CA via a
petition for review. Hence it is presumed to be satisfied with the adjudication
therein. 68 That decision of the NLRC has become final as against PNB and can no longer
be reviewed, much less reversed, by this Court. 69 This is in accord with the doctrine that a
party who has not appealed cannot obtain from the appellate court any affirmative relief
other than the ones granted in the appealed decision. 70  IAaCST

WHEREFORE, premises considered, the petitions are hereby DENIED for lack of merit.
SO ORDERED.
 (Pantranco Employees Association v. National Labor Relations Commission, G.R. Nos.
|||

170689 & 170705, [March 17, 2009], 600 PHIL 645-668)

ANDRE T. ALMOCERA, petitioner, vs. JOHNNY ONG, respondent.

DECISION

CHICO-NAZARIO, J  : p

Before Us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of

Civil Procedure which seeks to set aside the Decision 1 of the Court of Appeals dated 18
July 2005 in CA-G.R. CV No. 75610 affirming in toto the Decision 2 of Branch 11 of the
Regional Trial Court (RTC) of Cebu City in Civil Case No. CEB-23687 and its
Resolution 3 dated 16 November 2005 denying petitioner's motion for reconsideration. The
RTC decision found petitioner Andre T. Almocera, Chairman and Chief Executive Officer
of First Builder Multi-Purpose Cooperative (FBMC), solidarily liable with FMBC for
damages.
Stripped of non-essentials, the respective versions of the parties have been
summarized by the Court of Appeals as follows:
Plaintiff Johnny Ong tried to acquire from the defendants a "townhome"
described as Unit No. 4 of Atrium Townhomes in Cebu City. As reflected in a Contract
to Sell, the selling price of the unit was P3,400,000.00 pesos, for a lot area of eighty-
eight (88) square meters with a three-storey building. Out of the purchase price,
plaintiff was able to pay the amount of P1,060,000.00. Prior to the full payment of this
amount, plaintiff claims that defendants Andre Almocera and First Builders
fraudulently concealed the fact that before and at the time of the perfection of the
 aforesaid contract to sell, the property was already mortgaged to and encumbered
with the Land Bank of the Philippines (LBP). In addition, the construction of the house
has long been delayed and remains unfinished. On March 13, 1999, Lot 4-a covered
by TCT No. 148818, covering the unit was advertised in a local tabloid for public
auction for foreclosure of mortgage. It is the assertion of the plaintiff that had it not for
the fraudulent concealment of the mortgage and encumbrance by defendants, he
would have not entered into the contract to sell.
On the other hand, defendants assert that on March 20, 1995, First Builders
Multi-purpose Coop. Inc., borrowed money in the amount of P500,000.00 from
Tommy Ong, plaintiff's brother. This amount was used to finance the documentation
requirements of the LBP for the funding of the Atrium Town Homes. This loan will be
applied in payment of one (1) town house unit which Tommy Ong may eventually
purchase from the project. When the project was under way, Tommy Ong wanted to
buy another townhouse for his brother, Johnny Ong, plaintiff herein, which then, the
amount of P150,000.00 was given as additional partial payment. However, the
particular unit was not yet identified. It was only on January 10, 1997 that
Tommy Ong identified Unit No. 4 plaintiff's chosen unit and again tendered
P350,000.00 as his third partial payment. When the contract to sell for Unit 4 was
being drafted, Tommy Ong requested that another contract to sell covering Unit 5 be
made so as to give Johnny Ong another option to choose whichever unit he might
decide to have. When the construction was already in full blast, defendants were
informed by Tommy Ong that their final choice was Unit 5. It was only upon knowing
that the defendants will be selling Unit 4 to some other persons for P4million that
plaintiff changed his choice from Unit 5 to Unit 4. 4
In trying to recover the amount he paid as down payment for the townhouse unit,
respondent Johnny Ong filed a complaint for Damages before the RTC of Cebu City,
docketed as Civil Case No. CEB-23687, against defendants Andre T. Almocera and FBMC
alleging that defendants were guilty of fraudulent concealment and breach of contract
when they sold to him a townhouse unit without divulging that the same, at the time of the
perfection of their contract, was already mortgaged with the Land Bank of the Philippines
(LBP), with the latter causing the foreclosure of the mortgage and the eventual sale of the
townhouse unit to a third person.
In their Answer, defendants denied liability claiming that the foreclosure of the
mortgage on the townhouse unit was caused by the failure of complainant Johnny Ong to
pay the balance of the price of said townhouse unit.
After the pre-trial conference was terminated, trial on the merits ensued.
Respondent and his brother, Thomas Y. Ong, took the witness stand. For defendants,
petitioner testified.
In a Decision dated 20 May 2002, the RTC disposed of the case in this manner:
WHEREFORE, in view of all the foregoing premises, judgment is hereby
rendered in this case in favor of the plaintiff and against the defendants:
(a) Ordering the defendants to solidarily pay to the plaintiff the sum of
P1,060,000.00, together with a legal interest thereon at 6% per annum from April 21,
1999 until its full payment before finality of the judgment. Thereafter, if the amount
adjudged remains unpaid, the interest rate shall be 12% per annum computed from
the time when the judgment becomes final and executory until fully satisfied;
(b) Ordering the defendants to solidarily pay to the plaintiff the sum of
P100,000.00 as moral damages, the sum of P50,000.00 as attorney's fee and the sum
of P15,619.80 as expenses of litigation; and
(c) Ordering the defendants to pay the cost of this suit. 5
The trial court ruled against defendants for not acting in good faith and for not
complying with their obligations under their contract with respondent. In the Contract to
Sell 6 involving Unit 4 of the Atrium Townhomes, defendants agreed to sell said townhouse
to respondent for P3,400,000.00. The down payment was P1,000,000.00, while the
balance of P2,400,000.00 was to be paid in full upon completion, delivery and acceptance
of the townhouse. Under the contract which was signed on 10 January 1997, defendants
agreed to complete and convey to respondent the unit within six months from the signing
thereof.
The trial court found that respondent was able to make a down payment or partial
payment of P1,060,000.00 and that the defendants failed to complete the construction of,
as well as deliver to respondent, the townhouse within six months from the signing of the
contract. Moreover, respondent was not informed by the defendants at the time of the
perfection of their contract that the subject townhouse was already mortgaged to LBP. The
mortgage was foreclosed by the LBP and the townhouse was eventually sold at public
auction. It said that defendants were guilty of fraud in their dealing with respondent
because the mortgage was not disclosed to respondent when the contract was perfected.
There was also non-compliance with their obligations under the contract when they failed
to complete and deliver the townhouse unit at the agreed time. On the part of respondent,
the trial court declared he was justified in suspending further payments to the defendants
and was entitled to the return of the down payment.
Aggrieved, defendants appealed the decision to the Court of Appeals assigning the
following as errors:
1. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF HAS A VALID
CAUSE OF ACTION FOR DAMAGES AGAINST DEFENDANT(S).
2. THE LOWER COURT ERRED IN HOLDING THAT DEFENDANT ANDRE
T. ALMOCERA IS SOLIDARILY LIABLE WITH THE COOPERATIVE FOR THE
DAMAGES TO THE PLAINTIFF. 7
The Court of Appeals ruled that the defendants incurred delay when they failed to
deliver the townhouse unit to the respondent within six months from the signing of the
contract to sell. It agreed with the finding of the trial court that the nonpayment of the
balance of P2.4M by respondent to defendants was proper in light of such delay and the
fact that the property subject of the case was foreclosed and auctioned. It added that the
trial court did not err in giving credence to respondent's assertion that had he known
beforehand that the unit was used as collateral with the LBP, he would not have
proceeded in buying the townhouse. Like the trial court, the Court of Appeals gave no
weight to defendants' argument that had respondent paid the balance of the purchase
price of the townhouse, the mortgage could have been released. It explained:
We cannot find fault with the choice of plaintiff not to further dole out money for
a property that in all events, would never be his. Moreover, defendants could, if they
were really desirous of satisfying their obligation, demanded that plaintiff pay the
outstanding balance based on their contract. This they had not done. We can fairly
surmise that defendants could not comply with their obligation themselves, because
as testified to by Mr. Almocera, they already signified to LBP that they cannot pay their
outstanding loan obligations resulting to the foreclosure of the townhouse. 8
Moreover, as to the issue of petitioner's solidary liability, it said that this issue was
belatedly raised and cannot be treated for the first time on appeal.
On 18 July 2005, the Court of Appeals denied the appeal and affirmed in toto the
decision of the trial court. The dispositive portion of the decision reads:
IN LIGHT OF ALL THE FOREGOING, this appeal is DENIED. The assailed
decision of the Regional Trial Court, Branch 11, Cebu City in Civil Case No. CEB-
23687 is AFFIRMED in toto. 9
In a Resolution dated 16 November 2005, the Court of Appeals denied defendants'
motion for reconsideration.
Petitioner is now before us pleading his case via a Petition for Review
on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure. The petition raises the
following issues:
I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
DEFENDANT HAS INCURRED DELAY.
 II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN SUSTAINING
RESPONDENT'S REFUSAL TO PAY THE BALANCE OF THE PURCHASE
PRICE.
III. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
DEFENDANT ANDRE T. ALMOCERA IS SOLIDARILY LIABLE WITH THE
DEFENDANT COOPERATIVE FOR DAMAGES TO PLAINTIFF. 10
It cannot be disputed that the contract entered into by the parties was a contract to
sell. The contract was denominated as such and it contained the provision that the unit
shall be conveyed by way of an Absolute Deed of Sale, together with the attendant
documents of Ownership — the Transfer Certificate of Title and Certificate of Occupancy
— and that the balance of the contract price shall be paid upon the completion and
delivery of the unit, as well as the acceptance thereof by respondent. All these clearly
indicate that ownership of the townhouse has not passed to respondent.
In Serrano  v. Caguiat, 11 we explained:
A contract to sell is akin to a conditional sale where the efficacy or obligatory
force of the vendor's obligation to transfer title is subordinated to the happening of a
future and uncertain event, so that if the suspensive condition does not take place, the
parties would stand as if the conditional obligation had never existed. The suspensive
condition is commonly full payment of the purchase price.
The differences between a contract to sell and a contract of sale are well-
settled in jurisprudence. As early as 1951, in Sing Yee v. Santos [47 O.G. 6372
(1951)], we held that:
" . . . [a] distinction must be made between a contract of sale in which
title passes to the buyer upon delivery of the thing sold and a contract to
sell . . . where by agreement the ownership is reserved in the seller and is not
to pass until the full payment of the purchase price is made. In the first case,
non-payment of the price is a negative resolutory condition; in the second case,
full payment is a positive suspensive condition. Being contraries, their effect in
law cannot be identical. In the first case, the vendor has lost and cannot
recover the ownership of the land sold until and unless the contract of sale is
itself resolved and set aside. In the second case, however, the title remains in
the vendor if the vendee does not comply with the condition precedent of
making payment at the time specified in the contract."
In other words, in a contract to sell, ownership is retained by the seller and is
not to pass to the buyer until full payment of the price.
The Contract to Sell entered into by the parties contains the following pertinent
provisions:
4. TERMS OF PAYMENT:
4a. ONE MILLION PESOS (P1,000,000.00) is hereby acknowledged as
Downpayment for the above-mentioned Contract Price.
4b. The Balance, in the amount of TWO MILLION FOUR HUNDRED PESOS
(P2,400,000.00) shall be paid thru financing Institution facilitated by the SELLER,
preferably Landbank of the Philippines (LBP).
Upon completion, delivery and acceptance of the BUYER of the Townhouse
Unit, the BUYER shall have paid the Contract Price in full to the SELLER.
xxx xxx xxx
6. COMPLETION DATES OF THE TOWNHOUSE UNIT:
The unit shall be completed and conveyed by way of an Absolute Deed of Sale
together with the attendant documents of Ownership in the name of the BUYER — the
Transfer Certificate of Title and Certificate of Occupancy within a period of six (6)
months from the signing of Contract to Sell. 12
From the foregoing provisions, it is clear that petitioner and FBMC had the obligation
to complete the townhouse unit within six months from the signing of the contract. Upon
compliance therewith, the obligation of respondent to pay the balance of P2,400,000.00
arises. Upon payment thereof, the townhouse shall be delivered and conveyed to
respondent upon the execution of the Absolute Deed of Sale and other relevant
documents.
The evidence adduced shows that petitioner and FBMC failed to fulfill their
obligation — to complete and deliver the townhouse within the six-month period. With
petitioner and FBMC's non-fulfillment of their obligation, respondent refused to pay the
balance of the contract price. Respondent does not ask that ownership of the townhouse
be transferred to him, but merely asks that the amount or down payment he had made be
returned to him.
Article 1169 of the Civil Code reads:
Art. 1169. Those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.
However, the demand by the creditor shall not be necessary in order that delay
may exist: TIaCAc

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon him.
From the moment one of the parties fulfills his obligation, delay by the other begins.
The contract subject of this case contains reciprocal obligations which were to be
fulfilled by the parties, i.e., to complete and deliver the townhouse within six months from
the execution of the contract to sell on the part of petitioner and FBMC, and to pay the
balance of the contract price upon completion and delivery of the townhouse on the part of
the respondent.
In the case at bar, the obligation of petitioner and FBMC which is to complete and
deliver the townhouse unit within the prescribed period, is determinative of the
respondent's obligation to pay the balance of the contract price. With their failure to fulfill
their obligation as stipulated in the contract, they incurred delay and are liable for
damages. 13 They cannot insist that respondent comply with his obligation. Where one of
the parties to a contract did not perform the undertaking to which he was bound by the
terms of the agreement to perform, he is not entitled to insist upon the performance of the
other party. 14
On the first assigned error, petitioner insists there was no delay when the
townhouse unit was not completed within six months from the signing of the contract
inasmuch as the mere lapse of the stipulated six (6) month period is not by itself enough to
constitute delay on his part and that of FBMC, since the law requires that there must either
be judicial or extrajudicial demand to fulfill an obligation so that the obligor may be
declared in default. He argues there was no evidence introduced showing that a prior
demand was made by respondent before the original action was instituted in the trial court.
We do not agree.
Demand is not necessary in the instant case. Demand by the respondent would be
useless because the impossibility of complying with their (petitioner and FBMC) obligation
was due to their fault. If only they paid their loans with the LBP, the mortgage on the
subject townhouse would not have been foreclosed and thereafter sold to a third person.
 Anent the second assigned error, petitioner argues that if there was any delay, the
same was incurred by respondent because he refused to pay the balance of the contract
price.
We find his argument specious.
As above-discussed, the obligation of respondent to pay the balance of the contract
price was conditioned on petitioner and FBMC's performance of their obligation.
Considering that the latter did not comply with their obligation to complete and deliver the
townhouse unit within the period agreed upon, respondent could not have incurred delay.
For failure of one party to assume and perform the obligation imposed on him, the other
party does not incur delay. 15
Under the circumstances obtaining in this case, we find that respondent is justified in
refusing to pay the balance of the contract price. He was never in possession of the
townhouse unit and he can no longer be its owner since ownership thereof has been
transferred to a third person who was not a party to the proceedings below. It would simply
be the height of inequity if we are to require respondent to pay the balance of the contract
price. To allow this would result in the unjust enrichment of petitioner and FBMC. The
fundamental doctrine of unjust enrichment is the transfer of value without just cause or
consideration. The elements of this doctrine which are present in this case are: enrichment
on the part of the defendant; impoverishment on the part of the plaintiff; and lack of cause.
The main objective is to prevent one to enrich himself at the expense of another. It is
commonly accepted that this doctrine simply means a person shall not be allowed to profit
or enrich himself inequitably at another's expense. 16 Hence, to allow petitioner and FBMC
keep the down payment made by respondent amounting to P1,060,000.00 would result in
their unjust enrichment at the expense of the respondent. Thus, said amount should be
returned.
What is worse is the fact that petitioner and FBMC intentionally failed to inform
respondent that the subject townhouse which he was going to purchase was already
mortgaged to LBP at the time of the perfection of their contract. This deliberate withholding
by petitioner and FBMC of the mortgage constitutes fraud and bad faith. The trial court had
this say:
In the light of the foregoing environmental circumstances and milieu, therefore,
it appears that the defendants are guilty of fraud in dealing with the plaintiff. They
performed voluntary and willful acts which prevent the normal realization of the
prestation, knowing the effects which naturally and necessarily arise from such acts.
Their acts import a dishonest purpose or some moral obliquity and conscious doing of
a wrong. The said acts certainly give rise to liability for damages (8 Manresa 72;
Borrell-Macia 26-27; 3 Camus 34; O'Leary v. Macondray & Company, 454 Phil.
812; Heredia v. Salinas, 10 Phil. 157). Article 1170 of the New Civil Code of the
Philippines provides expressly that "those who in the performance of their obligations
are guilty of fraud and those who in any manner contravene the tenor thereof are
liable for damages. 17
On the last assigned error, petitioner contends that he should not be held solidarily
liable with defendant FBMC, because the latter is a separate and distinct entity which is
the seller of the subject townhouse. He claims that he, as Chairman and Chief Executive
Officer of FBMC, cannot be held liable because his representing FBMC in its dealings is a
corporate act for which only FBMC should be held liable.
This issue of piercing the veil of corporate fiction was never raised before the trial
court. The same was raised for the first time before the Court of Appeals which ruled that it
was too late in the day to raise the same. The Court of Appeals declared:
In the case below, the pleadings and the evidence of the defendants are one
and the same and never had it made to appear that Almocera is a person distinct and
separate from the other defendant. In fine, we cannot treat this error for the first time
on appeal. We cannot in good conscience, let the defendant Almocera raise the issue
of piercing the veil of corporate fiction just because of the adverse decision against
him. . . . . 18
 To allow petitioner to pursue such a defense would undermine basic considerations of due
process. Points of law, theories, issues and arguments not brought to the attention of the
trial court will not be and ought not to be considered by a reviewing court, as these cannot
be raised for the first time on appeal. It would be unfair to the adverse party who would
have no opportunity to present further evidence material to the new theory not ventilated
before the trial court. 19
As to the award of damages granted by the trial court, and affirmed by the Court of
Appeals, we find the same to be proper and reasonable under the circumstances.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated
18 July 2005 in CA-G.R. CV No. 75610 is AFFIRMED. Costs against the petitioner.
SO ORDERED.
|||  (Almocera v. Ong, G.R. No. 170479, [February 18, 2008], 569 PHIL 497-511)

THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs. THE CLUB

FILIPINO, INC. DE CEBU, respondent.

Solicitor General for petitioner.

V .Jaime & L. E. Petilla for respondent.

SYLLABUS

1. TAXATION; PERCENTAGE TAX; BAR AND RESTAURANT; WHEN OPERATOR

NOT ENGAGED IN BUSINESS. — The liability for fixed and percentage taxes as provided
by Section 182, 183 and 191 of the Tax Code does not ipso facto attach by mere reason of
the operation of a bar and restaurant. For the liability to attach, the operator thereof must
be engaged in the business as a barkeeper and restauranteur.
2. ID.; WORDS AND PHRASES; "BUSINESS" MEANING OF. — The plain and
ordinary meaning of a business is restricted to activities or affairs where profit is the
purpose or livelihood is the motive, and the term business when used without qualification,
should be construed in its plain and ordinary meaning, restricted to activities for profit or
livelihood.
3. ID.; CLUB FILIPINO INC. DE CEBU; NOT ENGAGED IN BAR AND
RESTAURANT. — The Club Filipino Inc. de Cebu was organized to develop and cultivate
sports of all class and denomination, for the healthful recreation and entertainment of its
stockholders and members; that upon its dissolution, its remaining assets after paying
debts shall be donated to a charitable Philippine Institution in Cebu; that it is operated
mainly with funds derived from membership fees and dues; that the Club's bar and
restaurant catered only to its members and their guests; that there was in fact no cash
dividend distribution to its stockholders and that whatever was derived on retail from its bar
and restaurant was used to defray its overall overhead expenses and to improve its golf
course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the
business of an operator of bar and restaurant.

DECISION

PAREDES, J  : p

This is a petition to review the decision of the Court of Tax Appeals, reversing the
decision of the Collector of Internal Revenue, assessing against and demanding from the
"Club Filipino, Inc. de Cebu," the sum of P12,068.84 as fixed and percentage taxes,
surcharge and compromise penalty, allegedly due from it as a keeper of bar and
restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for
short), is a civic corporation organized under the laws of the Philippines, with an original
authorized capital stock of P22,000.00, which was subsequently increased to
P200,000.00, among others, to "proporcionar, operar, y mantener un campo de golf, tenis,
gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda
clase de juegos no prohibidos por leyes generales y ordenanzas generales; y desarollar y
cultivar deportes de toda clase y denominacion cualquiera para el recreo y entrenamiento
saludable de sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club
Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a provision relative to
dividends and their distribution, although it is covenanted that upon its dissolution, the
Club's remaining assets, after paying debts, shall be donated to a charitable Philippine
Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot
leased from the government), and a bar-restaurant where it sells wines and liquors, soft
drinks, meals and short orders to its members and their guests. The bar-restaurant was a
necessary incident to the operation of the club and its golf-course. The club is operated
mainly with funds derived from membership fees and dues. Whatever profits it had, were
used to defray its overhead expenses and to improve its golf-course. In 1951, as a result
of a capital surplus, arising from the re-valuation of its real properties, the value or price of
which increased, the Club declared stock dividends; but no actual cash dividends were
distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never
paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-
4, B-9 (a) and B-7 licenses. In a letter dated December 22, 1952, the Collector of Internal
Revenue assessed against and demanded from the Club, the following sums:—
As percentage tax on its gross receipts during the  
taxyears 1946 to 1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years 1946 to 1952 70.00
Compromise penalty 500.00
The Club wrote the Collector, requesting for the cancellation of the assessment. The
request having been denied, the Club filed the instant petition for review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of the sum of
P12,068.84, as fixed and percentage taxes and surcharges prescribed in
sections 182, 183 and 191 of the Tax Code, under which the assessment
was made, in connection with the operation of its bar and restaurant,
during the periods mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as compromise
penalty.
Section 182, of the Tax Code states "Unless otherwise provided, every person
engaging in a business on which the percentage tax is imposed shall pay in full a fixed
annual tax of ten pesos for each calendar year or fraction thereof in which such person
shall engage in said business." Section 183 provides in general that "the percentage taxes
on business shall be payable at the end of each calendar quarter in the amount lawfully
due on the business transacted during each quarter; etc." And section 191, same Tax
Code, provides "Percentage tax . . . Keepers of restaurants, refreshment parlors and other
eating places shall pay a tax three per centum, and keepers of bars and cafes where
wines or liquors are served, five per centum of their gross receipts . . ." It has been held
that the liability for fixed and percentage taxes, as provided by these sections, does
not ipso facto attach by mere reason of the operation of a bar and restaurant. For the
liability to attach, the operator thereof must be engaged in the business as a barkeeper
and restauranteur. The plain and ordinary meaning of business is restricted to activities or
affairs where profit is the purpose or livelihood is the motive, and the term business when
used without qualification, should be construed in its plain and ordinary meaning, restricted
to activities for profit or livelihood (The Coll. of Int. Rev. vs. Manila Lodge No. 761 of the
BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959, giving
full definitions of the word "business"; Coll. of Int. Rev. vs. Sweeney, et al. [International
Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which are similar to ones
at bar; Manila Polo Club v. B.L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and cultivate sports
of all class and denomination, for the healthful recreation and entertainment of its
stockholders and members; that upon its dissolution, its remaining assets, after paying
debts, shall be donated to a charitable Philippine Institution in Cebu; that it is operated
mainly with funds derived from membership fees and dues; that the Club's bar and
restaurant catered only to its members and their guests; that there was in fact no cash
dividend distribution to its stockholders and that whatever was derived on retail from its bar
and restaurant was used to defray its overall overhead expenses and to improve its golf-
course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the
business of an operator of bar and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and
restaurant, but such fact does not necessarily convert it into a profit-making enterprise.
The bar and restaurant are necessary adjuncts' of the Club to foster its purposes and the
profits derived therefrom are necessarily incidental to the primary object of developing and
cultivating sports for the healthful recreation and entertainment of the stockholders and
members. That a Club makes some profit, does not make it a profit-making club. As has
been remarked, a club should always strive, whenever possible, to have a surplus (Jesus
Sacred Heart College vs. Collector of Int. Revenue, G.R. No. L-6807, May 24, 1954;
Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23 1956).
It is claimed that unlike the two cases just cited (supra), which are non-stock, the
appellee Club is a stock corporation. This is unmeritorious. The facts that the capital stock
of the respondent Club is divided into shares, does not detract from the finding of the trial
court that it is not engaged in the business of operator of bar and restaurant. What is
determinative of whether or not the Club is engaged in such business is its object or
purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is
not controlled by the corporate form or by the commercial aspect of the business
prosecuted, but may be shown by extrinsic evidence, including the by-laws and the
method of operation. From the extrinsic evidence adduced, the Tax Court concluded that
the Club is not engaged in the business as a barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to
wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of
such shares, dividends or allotments of the surplus profits on the basis of the shares held
(sec. 3, Act No. 1459). In the case at bar, while the respondent Club's, capital stock is
divided into shares, nowhere in its articles of incorporation or by-laws could be found an
authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot,
therefore, be considered a stock corporation, within the contemplation of the corporation
law.
"A tax is a burden, and, as such, it should not be deemed imposed upon fraternal,
civic, non-profit, non-stock organizations, unless the intent to the contrary is manifest and
patent" (Collector vs. BPOE Elks Club, et al., supra), which is not the case in the present
appeal.
Having arrived at the conclusion that respondent Club is not engaged in the
business as an operator of a bar and restaurant, and therefore, not liable for fixed and
percentage taxes, it follows that it is not liable for any penalty, much less of a compromise
penalty.
WHEREFORE, the decision appealed from, is affirmed, without costs.
 (Collector of Internal Revenue v. Club Filipino, Inc., de Cebu, G.R. No. L-12719, [May 31,
|||

1962], 115 PHIL 310-315)

OTHER CLASSES OF CORPORATION UNDER THE CORPORATION CODE

1. ONE PERSON CORPORATION – SECTION 116. – A One Person Corporation is a corporation
with a single stockholder: Provided, That only a natural person, trust, or an estate may form a
One Person Corporation.
Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies, and
non-charted government-owned and –controlled corporations may not incorporate as One
Person Corporations: Provided Further, That a natural person who is licensed to exercise a
profession may not organize as a One Person Corporation for the Purpose of exercising such
profession except as otherwise provided under special laws.
2. CLOSE CORPORATION – SECTION 95 – A close corporation, within the meaning of this Code, is
one whose articles of incorporation provides that:
(a.) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held
of record by not more than a specified number of persons, not exceeding twenty (20);
(b.)All the issued stock of all classes shall be subject to one (1) or more specified restrictions
on transfer permitted by this Title;
(c.) The corporation shall not list in any stock exchange or make any public offering of its stock
of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at
least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest in accordance with the provisions of this
Code.
The Provisions of this Title shall primarily govern close corporations: Provided, That other
Titles in this Code shall apply suppletorily, except as otherwise provided under this Title.

3. FOREIGN CORPORATIONS – SECTION 140 – For purposes of this Code, a foreign corporation is
one formed, organized or existing under laws other than those of the Philippines’ and whose
laws allow Filipino Citizens and corporations to do business in its own country or State. It shall
have the right to transact business in the Philippines after obtaining a license for that purpose
in accordance with this Code and a certificate of authority from the appropriate government
agency.
CREATION OF CORPORATION
a. Promotion
b. Incorporation

CAGAYAN FISHING DEVELOPMENT CO., Inc., plaintiff-appellant, vs.

TEODORO SANDIKO, defendant-appellee.

Arsenio P. Dizon for appellant.

Sumulong, Lavides & Sumulong for appellee.

SYLLABUS

1. CORPORATIONS; TRANSFER MADE TO A NON-EXISTENT CORPORATION;

JURIDICAL CAPACITY TO ENTER INTO A CONTRACT. — The transfer made by T to
the C. F. D. Co., Inc., was, effected on May 31, 1930 and the actual incorporation of said
company was effected later on (October 22, 1930. In other words, the transfer was made
 almost five months before the incorporation of the company. Unquestionably, a duly
organized corporation has the power to purchase and hold such real property as the
purposes for which such corporation was formed may permit and for this purpose may
enter into such contracts as may be necessary. But before a corporation may be said to be
lawfully organized, many things have to be done. Among other things, the law requires the
filing of articles of incorporation. Although there is a presumption that all the requirements
of law have been complied with in the case before us it can not be denied that the plaintiff
was not yet incorporated when it entered into take contract of sale The contract itself
referred to the plaintiff as "una sociodad en vias de incorporacion." It was not even a de
facto corporation at the time. Not being in legal existence then, it did not possess juridical
capacity to enter into the contract.
2. ID.; ID.; ID. — Corporation are creatures of the law, and can only, come into
existence in the manner prescribed by law. General laws authorizing the formation of
corporations are general offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute, or certain acts are
required to be done, they are terms of the offer, and must be complied wish substantially
before legal corporate existence can be acquired. That a corporation should have a full
and complete organization and existence as an entity before it can enter Into any kind of a
contract or transact any business, would seem to be self-evident.
3. ID.; ID.; ID. — A corporation, until organized, has no life and, therefore, no
faculties. It is, as it were, a child in venture sa mere. This is not saying, that under no
circumstances may the acts of promoters of a corporation he ratified by the corporation if
and when subsequently organized. There are, of course, exceptions, but under the
peculiar facts and circumstances of the present case the doctrine of ratification should not
be extended because to do so would result in injustice or fraud to the candid and unwary.

DECISION

LAUREL, J  :p

This is an appeal from a judgment of the Court of First Instance of Manila absolving
the defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the barrio
of Linao, town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title
No. 217 of the land records of Cagayan, a copy of which is in evidence as Exhibit 1. To
guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August 14,
1929, executed in favor of the Philippine National Bank a first mortgage on the four parcels
of land above-mentioned. A second mortgage in favor of the same bank was in April of
1930 executed by Tabora over the same lands to guarantee the payment of another loan
amounting to P7,000. A third mortgage on the same lands was executed on April 16, 1930
in favor of Severina Buzon to whom Tabora was indebted in the sum of P2,900. These
mortgages were registered and annotations thereof appear at the back of transfer
certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de
Traspaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land
owned by him were sold to the plaintiff company, said to be under process of
incorporation, in consideration of one peso (P1) subject to the mortgages in favor of the
Philippine National Bank and Severina Buzon and, to the condition that the certificate of
title to said lands shall not be transferred to the name of the plaintiff company until the
latter has fully and completely paid Tabora's indebtedness to the Philippine National Bank.
The plaintiff company filed its articles of incorporation with the Bureau of Commerce
and Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board
of directors of the said company adopted a resolution (Exhibit G) authorizing its president,
Jose Ventura, to sell the four parcels of land in question to Teodoro Sandiko for P42,000.
Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of sale
executed before a notary public by the terms of which the plaintiff sold, ceded and
transferred to the defendant all its rights, titles and interest in and to the four parcels of
land described in transfer certificate of title No. 217 for P25,300; and the defendant in turn
obligated himself to shoulder the three mortgages hereinbefore referred to. Exhibit C is a
promissory note for P25,300 drawn by the defendant in favor of the plaintiff, payable after
one year from the date thereof. Exhibit D is a deed of mortgage executed before a notary
public in accordance with which the four parcels of land were given as security for the
payment of the promissory note, Exhibit C. All these three instruments were dated
February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note, plaintiff,
on January 25, 1934, brought this action in the Court of First Instance of Manila praying
that judgment be rendered against the defendant for the sum of P25,300, with interest at
the legal rate from the date of the filing of the complaint, and the costs of the suit. After
trial, the court below, on December 18, 1934, rendered judgment absolving the defendant,
with costs against the plaintiff. Plaintiff presented a motion for new trial on January 14,
1935, which motion was denied by the trial court on January 19 of the same year. After
due exception and notice, plaintiff has appealed to this court and makes an assignment of
various errors.
In dismissing the complaint against the defendant, the court below reached the
conclusion that Exhibit B is invalid because of vice in consent and repugnancy to law.
While we do not agree with this conclusion, we have however voted to affirm the judgment
appealed from for reasons which we shall presently state.
The transfer made by Tabora to the Cagayan Fishing Development Co., Inc.,
plaintiff herein, was effected on May 31, 1930 (Exhibit A) and the actual incorporation of
said company was effected later on October 22, 1930 (Exhibit 2). In other words, the
transfer was made almost five months before the incorporation of the company.
Unquestionably, a duly organized corporation has the power to purchase and hold such
real property as the purposes for which such corporation was formed may permit and for
this purpose may enter into such contracts as may be necessary (sec. 13, pars. 5 and 9,
and sec. 14, Act No. 1459). But before a corporation may be said to be lawfully organized,
many things have to be done. Among other things, the law requires the filing of articles of
incorporation (secs. 6 et seq., Act No. 1459). Although there is a presumption that all the
requirements of law have been complied with (sec. 334, par. 31, Code of Civil Procedure),
in the case before us it can not be denied that the plaintiff was not yet incorporated when it
entered into the contract of sale, Exhibit A. The contract itself referred to the plaintiff as
"una sociedad en vias de incorporacion." It was not even a de facto corporation at the
time. Not being in legal existence then, it did not possess juridical capacity to enter into the
contract.
"Corporations are creatures of the law, and can only come into existence in the
manner prescribed by law. As has already been stated, general laws authorizing the
formation of corporations are general offers to any persons who may bring themselves
within their provisions; and if conditions precedent are prescribed in the statute, or
certain acts are required to be done, they are terms of the offer, and must be complied
with substantially before legal corporate existence can be acquired." (14 C. J., sec.
111, p. 118.)
"That a corporation should have a full and complete organization and existence
as an entity before it can enter into any kind of a contract or transact any business,
would seem to be self evident. . . . A corporation, until organized, has no being,
franchises or faculties. Nor do those engaged in bringing it into being have any power
to bind it by contract, unless so authorized by the charter. Until organized as
authorized by the charter there is not a corporation, nor does it possess franchises or
faculties for it or others to exercise, until it acquires a complete existence."
(Gent vs. Manufacturers and Merchants' Mutual Insurance Company, 107 Ill., 652,
658.)
 Boiled down to its naked reality, the contract here (Exhibit A) was entered into not
only between Manuel Tabora and a non-existent corporation but between Manuel Tabora
as owner of four parcels of land on the one hand and the same Manuel Tabora, his wife
and others, as mere promoters of a corporation on the other hand. For reasons that are
self-evident, these promoters could not have acted as agents for a projected corporation
since that which had no legal existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere.
This is not saying that under no circumstances may the acts of promoters of a corporation
be ratified by the corporation if and when subsequently organized. There are, of course,
exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but
under the peculiar facts and circumstances of the present case we decline to extend the
doctrine of ratification which would result in the commission of injustice or fraud to the
candid and unwary. (Massachusetts rule, Abbott vs. Hapgood, 150 Mass., 248; 22 N. E.,
907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English cases;
Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke Envelope
Co. vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be observed that
Manuel Tabora was the registered owner of the four parcels of land, which he succeeded
in mortgaging to the Philippine National Bank so that he might have the necessary funds
with which to convert and develop them into fishery. He appeared to have met with
financial reverses. He formed a corporation composed of himself, his wife, and a few
others. From the articles of incorporation, Exhibit 2, it appears that out of the P48,700,
amount of capital stock subscribed, P45,000 was subscribed by Manuel Tabora himself
and P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount paid on
subscriptions, P42,100 is made to appear as paid by Tabora and P200 by his wife. Both
Tabora and his wife were directors and the latter was treasurer as well. In fact, to this day,
the lands remain inscribed in Tabora's name. The defendant always regarded Tabora as
the owner of the lands. He dealt with Tabora directly. Jose Ventura, president of the
plaintiff corporation, intervened only to sign the contract, Exhibit B, in behalf of the plaintiff.
Even the Philippine National Bank, mortgagee of the four parcels of land, always treated
Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits (Nos. 1931 and
38641) were brought against Tabora in the Court of First Instance of Manila and in both
cases a writ of attachment against the four parcels of land was issued. The Philippine
National Bank threatened to foreclose its mortgages. Tabora approached the defendant
Sandiko and succeeded in making him sign Exhibits B, C, and D and in making him,
among other things, assume the payment of Tabora's indebtedness to the Philippine
National Bank. The promissory note, Exhibit C, was made payable to the plaintiff company
so that it may not be attached by Tabora's creditors, two of whom had obtained writs of
attachment against the four parcels of land.
 
If the plaintiff corporation could not and did not acquire the four parcels of land here
involved, it follows that it did not possess any resultant right to dispose of them by sale to
the defendant, Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer from
Manuel Tabora to the Cagayan Fishing Development Company, Inc., which transfer is
evidenced by Exhibit A, was subject to a condition precedent (condicion suspensiva),
namely, the payment of a mortgage debt of the said Tabora to the Philippine National
Bank, and that this condition not having been complied with by the Cagayan Fishing
Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise &
Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at
the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing Development
Company, Inc. was null because at the time it was effected the corporation was non-
existent, we deem it unnecessary to discuss this point.
The decision of the lower court is accordingly affirmed, with costs against the
appellant. So ordered.
 (Cagayan Fishing Development Co., Inc. v. Sandiko, G.R. No. 43350, [December 23, 1937],
|||

65 PHIL 223-230)

FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioner, vs. THE

HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents.

DECISION

CRUZ, J  : p

We gave limited due course to this petition on the question of the solidary liability of
the petitioners with their co-defendants in the lower court 1 because of the challenge to the
following paragraph in the dispositive portion of the decision of the respondent court: **
"1. Defendants are hereby ordered to jointly and severally pay the plaintiff the
amount of P50,000.00 for the preparation of the project study and his technical
services that led to the organization of the defendant corporation, plus P10,000.00
attorney's fees;" 2
The petitioners claim that this order has no support in fact and law because they had
no contract whatsoever with the private respondent regarding the above-mentioned
services. Their position is that as mere subsequent investors in the corporation that was
later created, they should not be held solidarily liable with the Filipinas Orient Airways, a
separate juridical entity, and with Barretto and Garcia, their co-defendants in the lower
court, *** who were the ones who requested the said services from the private
respondent. 3
We are not concerned here with the petitioners' co-defendants, who have not
appealed the decision of the respondent court and may, for this reason, be presumed to
have accepted the same. For purposes of resolving this case before us, it is not necessary
to determine whether it is the promoters of the proposed corporation, or the corporation
itself after its organization, that shall be responsible for the expenses incurred in
connection with such organization.
The only question we have to decide now is whether or not the petitioners
themselves are also and personally liable for such expenses and, if so, to what extent.
The reasons for the said order are given by the respondent court in its decision in
this wise:
"As to the 4th assigned error we hold that as to the remuneration due the
plaintiff for the preparation of the project study and the pre-organizational services in
the amount of P50,000.00, not only the defendant corporation but the other
defendants including defendants Caram should he jointly and severally liable for this
amount. As we above related it was upon the request of defendants Barretto and
Garcia that plaintiff handled the preparation of the project study which project study
was presented to defendant Caram so the latter was convinced to invest in the
proposed airlines. The project study was revised for purposes of presentation to
financiers and the banks. It was on the basis of this study that defendant corporation
was actually organized and rendered operational. Defendants Garcia and Caram, and
Barretto became members of the Board and/or officers of defendant corporation.
Thus, not only the defendant corporation but all the other defendants who were
involved in the preparatory stages of the incorporation, who caused the preparation
and/or benefited from the project study and the technical services of plaintiff must be
liable." 4
It would appear from the above justification that the petitioners were not really
involved in the initial steps that finally led to the incorporation of the Filipinas Orient
Airways. Elsewhere in the decision, Barretto was described as "the moving spirit." The
 finding of the respondent court is that the project study was undertaken by the private
respondent at the request of Barretto and Garcia who, upon its completion, presented it to
the petitioners to induce them to invest in the proposed airline. The study could have been
presented to other prospective investors. At any rate, the airline was eventually organized
on the basis of the project study with the petitioners as major stockholders and, together
with Barretto and Garcia, as principal officers.
The following portion of the decision in question is also worth considering:
". . .. Since defendant Barretto was the moving spirit in the pre-organization
work of defendant corporation based on his experience and expertise, hence he was
logically compensated in the amount of P200,000.00 shares of stock not as industrial
partner but more for is technical services that brought to fruition the defendant
corporation. By the same token, We find no reason why the plaintiff should not be
similarly compensated not only for having actively participated in the preparation of the
project study for several months and its subsequent revision but also in his having
been involved in the pre-organization of the defendant corporation, in the preparation
of the franchise, in inviting the interest of the financiers and in the training and
screening of personnel. We agree that for these special services of the plaintiff the
amount of P50,000.00 as compensation is reasonable." 5
The above finding bolsters the conclusion that the petitioners were not involved in
the initial stages of the organization of the airline, which were being directed by Barretto as
the main promoter. It was he who was putting all the pieces together, so to speak. The
petitioners were merely among the financiers whose interest was to be invited and who
were in fact persuaded, on the strength of the project study, to invest in the proposed
airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify making the
petitioners, as principal stockholders thereof, responsible for its obligations. As a bona
fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts
as duly authorized by its officers and directors.
In the light of these circumstances, we hold that the petitioners cannot be held
personally liable for the compensation claimed by the private respondent for the services
performed by him in the organization of the corporation. To repeat, the petitioners did not
contract such services. It was only the results of such services that Barretto and Garcia
presented to them and which persuaded them to invest in the proposed airline. The most
that can be said is that they benefited from such services, but that surely is no justification
to hold them personally liable therefor. Otherwise, all the other stockholders of the
corporation, including those who came in later, and regardless of the amount of their
shareholdings, would be equally and personally liable also with the petitioners for the
claims of the private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous ambivalence.
Our impression is that it is opposed to the imposition of solidary responsibility upon the
Carams but seems to be willing, in a vague, unexpressed offer of compromise, to accept
joint liability. While it is true that it does here and there disclaim total liability, the thrust of
the petition seems to be against the imposition of solidary liability only rather than against
any liability at all, which is what it should have categorically argued.
Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly
and severally, under the first paragraph of the dispositive portion of the challenged
decision. So holding, we find it unnecessary to examine at this time the rules on solidary
obligations, which the parties — needlessly, as it turns out — have belabored unto death.
WHEREFORE, the petition is granted. The petitioners are declared not liable under
the challenged decision, which is hereby modified accordingly. It is so ordered.
|||  (Caram, Jr. v. Court of Appeals, G.R. No. L-48627, [June 30, 1987], 235 PHIL 369-374)
 REPUBLIC PLANTERS BANK, petitioner, vs. COURT OF APPEALS and
FERMIN CANLAS, respondents.

SYLLABUS

1. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; PROMISSORY

NOTES; CO-MAKER; CANNOT ESCAPE LIABILITY ARISING THEREFROM; CASE AT
BAR. — Under the Negotiable Instruments Law, persons who write their names on the
face of promissory notes are makers and are liable as such. By signing the notes, the
maker promises to pay to the order of the payee or any holder according to the tenor
thereof. Based on the above provisions of law, there is no denying that private respondent
Fermin Canlas is one of the co-makers of the promissory notes. As such, he cannot
escape liability arising therefrom.
2. ID.; ID.; ID.; LIABILITY THERETO IS SOLIDARY WHERE SINGULAR
PRONOUN ARE USED IN THE INSTRUMENT. — Where an instrument containing the
words "I promise to pay" is signed by two or more persons, they are deemed to be jointly
and severally liable thereon. An instrument which begins with "I", "We", or "Either of us"
promise to pay, when signed by two or more persons, makes them solidarily liable. The
fact that the singular pronoun is used indicates that the promise is individual as to each
other; meaning that each of the co-signers is deemed to have made an independent
singular promise to pay the notes in full.
3. ID.; ID.; ID.; JOINT AND SEVERAL OBLIGATION, CONSTRUED; CASE AT
BAR. — In the case at bar, the solidary liability of private respondent Fermin Canlas is
made clearer and certain, without reason for ambiguity, by the presence of the phrase
"Joint and several" as describing the unconditional promise to pay to the order of Republic
Planters Bank. A joint and several note is one in which the makers bind themselves both
jointly and individually to the payee so that all may be sued together for its enforcement, or
the creditor may select one or more as the object of the suit. A joint and several obligation
in common law corresponds to a civil law solidary obligation; that is, one of several debtors
bound in such wise that each is liable for the entire amount, and not merely for his
proportionate share. By making a joint and several promise to pay to the order of Republic
Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor
and the payee may choose to enforce the notes against him alone or jointly with
Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.
4. ID.; ID.; ID.; LIABILITY THERETO NOT AFFECTED BY CHANGE OF
CORPORATE NAME; REASON. — Finally, the respondent Court made a grave error in
holding that an amendment in a corporation's Articles of Incorporation effecting a change
of corporate name, in this case from Worldwide Garment Manufacturing, Inc. to Pinch
Manufacturing Corporation, extinguished the personality of the original corporation. The
corporation, upon such change in its name, is in no sense a new corporation, nor the
successor of the original corporation. It is the same corporation with a different name, and
its character is in no respect changed. A change in the corporate name does not make a
new corporation, and whether effected by special act or under a general law, has no effect
on the identity of the corporation, or on its property, rights, or liabilities. The corporation
continues, as before, responsible in its new name for all debts or other liabilities which it
had previously contracted or incurred.
5. ID.; ID.; LIABILITY OF AN AGENT TO AN INSTRUMENT IS PERSONAL WHEN
THERE IS FAILURE TO DISCLOSE PRINCIPAL. — As a general rule, officers or directors
under the old corporate name bear no personal liability for acts done or contracts entered
into by officers of the corporation, if duly authorized. Inasmuch as such officers acted in
their capacity as agent of the old corporation and the change of name meant only the
continuation of the old juridical entity, the corporation bearing the same name is still bound
by the acts of its agents if authorized by the Board. Under the Negotiable Instruments Law,
the liability of a person signing as an agent is specifically provided for in Section 20
thereof. Where the instrument contains or a person adds to his signature words indicating
that he signs for or on behalf of a principal, or in a representative capacity, he is not liable
on the instrument if he was duly authorized; but the mere addition of words describing him
as an agent, or as filling a representative character, without disclosing his principal, does
not exempt him from personal liability.
6. ID.; ID.; PROMISSORY NOTES; RULE IN THE CASE OF
REFORMINA VS. TOMOL (139 SCRA 260 [1985]), NOT APPLICABLE TO
INSTRUMENTS WITH STIPULATED INTEREST; CASE AT BAR. — This Court takes
note that the respondent Court, relying on Reformina vs. Tomol, lowered the interest rate
on the promissory notes from 16% to 12%. The ruling in the case of Reformina vs.
Tomol relied upon by the appellate court in reducing the interest rate on the promissory
notes from 16% to 12% per annum does not squarely apply to the instant petition. In the
abovecited case, the rate of 12% was applied to forebearances of money, goods or credit
and court judgments thereon, only in the absence of any stipulation between the parties. In
the case at bar however, it was found by the trial court that the rate of interest is 9% per
annum, which interest rate the plaintiff may at any time without notice, raise within the
limits allowed by law. And so, as of February 16, 1984, the plaintiff had fixed the interest at
16% per annum.
7. ID.; USURY LAW; RATE, APPLICABLE ONLY TO INTEREST FOR USE OR
FORBEARANCE OF MONEY; INCREASE IN RATE, NOT SUBJECT TO ANY CEILING.
— This Court has held that the rates under the Usury Law, as amended by Presidential
Decree No. 116, are applicable only to interests by way of compensation for the use or
forebearance of money. Article 2209 of the Civil Code, on the other hand, governs
interests by way of damages. This fine distinction was not taken into consideration by the
appellate court, which instead made a general statement that the interest rate be at 12%
per annum. Inasmuch as this Court had declared that increases in interest rates are not
subject to any ceiling prescribed by the Usury Law, the appellate court erred in limiting the
interest rate at 12% per annum. Central Bank Circular No. 905, Series of 1982
removed the Usury Law ceiling on interest rates.

DECISION

CAMPOS, JR., J  : p

This is an appeal by way of a Petition for Review on Certiorari from the decision * of
the Court of Appeals in CA G.R. CV No. 07302, entitled "Republic Planters Bank, Plaintiff-
Appellee vs. Pinch Manufacturing Corporation, et al., Defendants and Fermin Canlas,
Defendant-Appellant", which affirmed the decision ** in Civil Case No. 82-5448 except that
it completely absolved Fermin Canlas from liability under the promissory notes and
reduced the award for damages and attorney's fees. The RTC decision, rendered on June
20, 1985, is quoted hereunder:
"WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff Republic Planters Bank, ordering defendant Pinch Manufacturing Corporation
(formerly Worldwide Garment Manufacturing, Inc.) and defendants Shozo Yamaguchi
and Fermin Canlas to pay, jointly and severally, the plaintiff bank the following sums
with interest thereon at 16% per annum from the dates indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from
January 29, 1981 until fully paid; under promissory note (Exhibit "B"), the sum of
P40,000.00 with interest from November 27, 1980; under the promissory note (Exhibit
"C"), the sum of P166,466.00 with interest from January 29, 1981; under the
promissory note (Exhibit "E"), the sum of P86,130.31 with interest from January 29,
1981; under the promissory note (Exhibit "G"), the sum of P12,703.70 with interest
from November 27, 1980; under the promissory note (Exhibit "H"), the sum of
P281,875.91 with interest from January 29, 1981; and under the promissory note
(Exhibit "I"), the sum of P200,000.00 with interest from January 29, 1981.
 Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation
(formerly named Worldwide Garment Manufacturing, Inc.) and Shozo Yamaguchi are
ordered to pay, jointly and severally, the plaintiff bank the sum of P367,000.00 with
interest of 16% per annum from January 29, 1981 until fully paid.  llcd

Under the promissory note (Exhibit "F"), defendant corporation Pinch (formerly
Worldwide) is ordered to pay the plaintiff bank the sum of P140,000.00 with interest at
16% per annum from November 27, 1980 until fully paid.
Defendant Pinch (formerly Worldwide) is hereby ordered to pay the plaintiff the sum of
P231,120.81 with interest at 12% per annum from July 1, 1981, until fully paid and the
sum of P331,870.97 with interest from March 28, 1981, until fully paid.
All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of
P100,000.00 as and for reasonable attorney's fee and the further sum equivalent to
3% per annum of the respective principal sums from the dates above stated as
penalty charge until fully paid, plus one percent (1%) of the principal sums as service
charge.
With costs against the defendants.
SO ORDERED." 1
From the above decision only defendant Fermin Canlas appealed to the then
Intermediate Appellate Court (now the Court of Appeals). His contention was that
inasmuch as he signed the promissory notes in his capacity as officer of the defunct
Worldwide Garment Manufacturing, Inc., he should not be held personally liable for such
authorized corporate acts that he performed. It is now the contention of the petitioner
Republic Planters Bank that having unconditionally signed the nine (9) promissory notes
with Shozo Yamaguchi, jointly and severally, defendant Fermin Canlas is solidarily liable
with Shozo Yamaguchi on each of the nine notes.
We find merit in this appeal.
From the records, these facts are established: Defendant Shozo Yamaguchi and
private respondent Fermin Canlas were President/Chief Operating Officer and Treasurer
respectively, of Worldwide Garment Manufacturing, Inc. By virtue of Board Resolution No.
1 dated August 1, 1979, defendant Shozo Yamaguchi and private respondent Fermin
Canlas were authorized to apply for credit facilities with the petitioner Republic Planters
Bank in the forms of export advances and letters of credit/trust receipts accommodations.
Petitioner bank issued nine promissory notes, marked as Exhibits A to I inclusive, each of
which were uniformly worded in the following manner:
"_____________, after date, for value received, I/we, jointly and severally promise to
pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of __________ PESOS ( ), Philippine Currency . . . ."
On the right bottom margin of the promissory notes appeared the signatures of
Shozo Yamaguchi and Fermin Canlas above their printed names with the phrase "and (in)
his personal capacity" typewritten below. At the bottom of the promissory notes appeared:
"Please credit proceeds of this note to:
_____ Savings Account ___ XX Current Account No. 1372-00257-6 of WORLDWIDE
GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line which ran
horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name Worldwide
Garment Manufacturing, Inc. was apparently rubber stamped above the signatures of
defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. voted to change its
corporate name to Pinch Manufacturing Corporation.  cdll

On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of
money covered among others, by the nine promissory notes with interest thereon, plus
attorney's fees and penalty charges. The complaint was originally brought against
Worldwide Garment Manufacturing, Inc. inter alia, but it was later amended to drop
Worldwide Manufacturing, Inc. as defendant and substitute Pinch Manufacturing
Corporation in its place. Defendants Pinch Manufacturing Corporation and Shozo
Yamaguchi did not file an Amended Answer and failed to appear at the scheduled pre-trial
conference despite due notice. Only private respondent Fermin Canlas filed an Amended
Answer wherein he denied having issued the promissory notes in question since according
to him, he was not an officer of Pinch Manufacturing Corporation, but instead of Worldwide
Garment Manufacturing, Inc., and that when he issued said promissory notes in behalf of
Worldwide Garment Manufacturing, Inc., the same were in blank, the typewritten entries
not appearing therein prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this appeal is
whether private respondent Fermin Canlas is solidarily liable with the other defendants,
namely Pinch Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory
notes.
We hold that private respondent Fermin Canlas is solidarily liable on each of the
promissory notes bearing his signature for the following reasons:
The promissory notes are negotiable instruments and must be governed by the
Negotiable Instruments Law. 2
Under the Negotiable Instruments Law, persons who write their names on the face
of promissory notes are makers and are liable as such. 3 By signing the notes, the maker
promises to pay to the order of the payee or any holder 5 Based on the above provisions of
law, there is no denying that private respondent Fermin Canlas is one of the co-makers of
the promissory notes. As such, he cannot escape liability arising therefrom.
Where an instrument containing the words "I promise to pay" is signed by two or
more persons, they are deemed to be jointly and severally liable thereon. 6 An instrument
which begins with "I", "We", or "Either of us" promise to pay, when signed by two or more
persons, makes them solidarily liable. 7 The fact that the singular pronoun is used
indicates that the promise is individual as to each other; meaning that each of the co-
signers is deemed to have made an independent singular promise to pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin Canlas is made
clearer and certain, without reason for ambiguity, by the presence of the phrase "Joint and
several" as describing the unconditional promise to pay to the order of Republic Planters
Bank. A joint and several note is one in which the makers bind themselves both jointly and
individually to the payee so that all may be sued together for its enforcement, or the
creditor may select one or more as the object of the suit. 8 A joint and several obligation in
common law corresponds to a civil law solidary obligation; that is, one of several debtors
bound in such wise that each is liable for the entire amount, and not merely for his
proportionate share. 9 By making a joint and several promise to pay to the order of
Republic Planters Bank, private respondent Fermin Canlas assumed the solidary liability of
a debtor and the payee may choose to enforce the notes against him alone or jointly with
Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.
As to whether the interpolation of the phrase "and (in) his personal capacity" below
the signatures of the makers in the notes will affect the liability of the makers, We do not
find it necessary to resolve and decide, because it is immaterial and will not affect the
liability of private respondent Fermin Canlas as a joint and several debtor of the notes.
With or without the presence of said phrase, private respondent Fermin Canlas is primarily
liable as a co maker of each of the notes and his liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an amendment in a
corporation's Articles of Incorporation effecting a change of corporate name, in this case
from Worldwide Garment Manufacturing, Inc. to Pinch Manufacturing Corporation,
extinguished the personality of the original corporation.
 The corporation, upon such change in its name, is in no sense a new corporation,
nor the successor of the original corporation. It is the same corporation with a different
name, and its character is in no respect changed. 10
A change in the corporate name does not make a new corporation, and whether
effected by special act or under a general law, has no effect on the identity of the
corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for all debts or
other liabilities which it had previously contracted or incurred. 12
As a general rule, officers or directors under the old corporate name bear no
personal liability for acts done or contracts entered into by officers of the corporation, if
duly authorized. Inasmuch as such officers acted in their capacity as agent of the old
corporation and the change of name meant only the continuation of the old juridical entity,
the corporation bearing the same name is still bound by the acts of its agents if authorized
by the Board. Under the Negotiable Instruments Law, the liability of a person signing as an
agent is specifically provided for as follows:  LibLex

SECTION 20. Liability of a person signing as agent and so forth. — Where the

instrument contains or a person adds to his signature words indicating that he signs
for or on behalf of a principal, or in a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere addition of words describing him as
an agent, or as filling a representative character, without disclosing his principal, does
not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he disclosed the
fact that he is acting in a representative capacity or the name of the third party for whom
he might have acted as agent, the agent is personally liable to the holder of the instrument
and cannot be permitted to prove that he was merely acting as agent of another and parol
or extrinsic evidence is not admissible to avoid the agent's personal liability. 13
On the private respondent's contention that the promissory notes were delivered to
him in blank for his signature, we rule otherwise. A careful examination of the notes in
question shows that they are the stereotype printed form of promissory notes generally
used by commercial banking institutions to be signed by their clients in obtaining loans.
Such printed notes are incomplete because there are blank spaces to be filled up on
material particulars such as payee's name, amount of the loan, rate of interest, date of
issue and the maturity date. The terms and conditions of the loan are printed on the note
for the borrower-debtor's perusal. An incomplete instrument which has been delivered to
the borrower for his signature is governed by Section 14 of the Negotiable Instruments
Law which provides, in so far as relevant to this case, thus:
SECTION 14. Blanks; when may be filled. — Where the instrument is wanting in any
material particular, the person in possession thereof has a prima facie authority to
complete it by filling up the blanks therein. . . . In order, however, that any such
instrument when completed may be enforced against any person who became a party
thereto prior to its completion, it must be filled up strictly in accordance with the
authority given and within a reasonable time. . . .
Proof that the notes were signed in blank was only the self-serving testimony of
private respondent Fermin Canlas, as determined by the trial court, so that the trial court
"doubts that the defendant (Canlas) signed in blank the promissory notes". We chose to
believe the bank's testimony that the notes were filled up before they were given to private
respondent Fermin Canlas and defendant Shozo Yamaguchi for their signatures as joint
and several promissors. For signing the notes above their typewritten names, they bound
themselves as unconditional makers. We take judicial notice of the customary procedure
of commercial banks of requiring their clientele to sign promissory notes prepared by the
banks in printed form with blank spaces already filled up as per agreed terms of the loan,
leaving the borrowers-debtors to do nothing but read the terms and conditions therein
printed and to sign as makers or co-makers. When the notes were given to private
respondent Fermin Canlas for his signature, the notes were complete in the sense that the
spaces for the material particular had been filled up by the bank as per agreement. The
 notes were not incomplete instruments; neither were they given to private respondent
Fermin Canlas in blank as he claims. Thus, Section 14 of the Negotiable Instruments Law
is not applicable.
This Court takes note that the respondent Court, relying on Reformina vs.
Tomol, 14 lowered the interest rate on the promissory notes from 16% to 12%.
The ruling in the case of Reformina vs. Tomol relied upon by the appellate court in
reducing the interest rate on the promissory notes from 16% to 12% per annum does not
squarely apply to the instant petition. In the abovecited case, the rate of 12% was applied
to forebearances of money, goods or credit and court judgments thereon, only in the
absence of any stipulation between the parties.
In the case at bar however, it was found by the trial court that the rate of interest is
9% per annum, which interest rate the plaintiff may at any time without notice, raise within
the limits allowed by law. And so, as of February 16, 1984, the plaintiff had fixed the
interest at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by Presidential
Decree No. 116, are applicable only to interests by way of compensation for the use or
forebearance of money. Article 2209 of the Civil Code, on the other hand, governs
interests by way of damages. 15 This fine distinction was not taken into consideration by
the appellate court, which instead made a general statement that the interest rate be at
12% per annum.
Inasmuch as this Court had declared that increases in interest rates are not subject
to any ceiling prescribed by the Usury Law, the appellate court erred in limiting the interest
rate at 12% per annum. Central Bank Circular No. 905, Series of 1982 removed the Usury
Law ceiling on interest rates. 16
In the light of the foregoing analysis and under the plain language of the statute and
jurisprudence on the matter, the decision of the respondent Court of Appeals absolving
private respondent Fermin Canlas is REVERSED and SET ASIDE. Judgment is hereby
rendered declaring private respondent Fermin Canlas jointly and severally liable on all the
nine promissory notes with the following sums and at 16% interest per annum from the
dates indicated, to wit:
Under the promissory note marked as Exhibit A, the sum of P300,000.00 with
interest from January 29, 1981 until fully paid; under promissory note marked as Exhibit B,
the sum of P40,000.00 with interest from November 27, 1980; under the promissory note
denominated as Exhibit C, the amount of P166,466.00 with interest from January 29,
1981; under the promissory note denominated as Exhibit D, the amount of P367,000.00
with interest from January 29, 1981 until fully paid; under the promissory note marked as
Exhibit E, the amount of P86,130.31 with interest from January 29, 1981; under the
promissory note marked as Exhibit F, the sum of P140,000.00 with interest from
November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the
amount of P12,703.70 with interest from November 27, 1980; the promissory note marked
as Exhibit H, the sum of P281,875.91 with interest from January 29, 1981; and the
promissory note marked as Exhibit I, the sum of P200,000.00 with interest from January
29, 1981. LLpr

The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide

Garment Manufacturing, Inc.) and Shozo Yamaguchi, for not having appealed from the
decision of the trial court, shall be adjudged in accordance with the judgment rendered by
the Court a quo.
With respect to attorney's fees, and penalty and service charges, the private
respondent Fermin Canlas is hereby held jointly and solidarily liable with defendants for
the amounts found by the Court a quo. With costs against private respondent.
SO ORDERED.
 (Republic Planters Bank v. Court of Appeals, G.R. No. 93073, [December 21, 1992], 290-A
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PHIL 534-547)