Villa Rey Transit v. Ferrer| G.R No. L-23893 | October 29, 1968 | Angeles, J.

Nature: Appeal from a decision of the CFI of Manila

Plaintiff-Appellant: Villa Rey Transit, Inc.
Defendant-Appellant: Eusebio Ferrer; Pangasinan Transportation, Co. Inc
Defendant: Public Service Commission
3rd Party Plaintiff-Appellant: Pangasinan Transportation, Co. Inc
3rd Party Defendant-Appellee: Jose Villarama
TOPIC: Chapter 4: The Corporate Entity
SUMMARY: Plaintiff Villarama, as Villa Rey Transit, sold certificates of public convenience to Defendant Pantranco
for the operation of TPU Service. Their agreement set out 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.” 3 months later, Villa Rey Transit,
Inc., a corporation put up by Villarama’s wife, bought certificates to operate. The issue is WON prohibition against
Villarama and also applies to the Corporation. It was held that YES, it applies, because Villarama was too involved
with the Corporation that it is almost his alter ego. But the SC ultimately ruled that even though the prohibition
applies, the sale was still valid and the Corporation is still deemed the owner, as prior purchaser in good faith and for
value, of the disputed certificates.

Rule: a corporation is a legal entity distinct and separate from the members and stockholders who compose it.
Exception: when the fiction is urged as a means of perpetrating fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statues, the achievement of monopoly, or the
perpetration of a crime, the veil will be lifted. The corporation being a mere alter ego of a person, the two will
be considered one and the same.

FACTS
 Jose Villarama was the operator of Villa Rey Transit [I assume this is a sole-proprietorship], pursuant to
certificates of public convenience granted to him by the Public Service Commission [PSC].
o Jan 1959: He sold 2 certificates to Pangasinan Transportation Company [Pantranco] with the
condition 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.”
 Mar 1959: Villa Rey Transit, Inc. [Corporation] was organized, with Jose’s wife (Natividad), brother, and
sister-in-law as incorporators.
o The Corporation bought 5 certificates from Valentin Fernando. They applied for approval of sale
from PSC. They were issued a provisional authority while the review of the sale was pending.
 July 1959: While the PSC action is pending, the Sheriff of Manila levied on 2 of the 5 certificates bought by
the Corporation, pursuant to a writ of execution in favor of Eusebio Ferrer against Fernando. Ferrer was the
highest bidder. He sold the 2 certificates to Pantranco.
o PSC granted provisional authority to operate to Pantranco.
o The Corporation brought the issue with the SC. The SC held that while the issue of ownership of the
certificates remain pending, the Corporation should be the one to operate the lines provisionally.
 Nov 1959: The Corporation filed a complaint for annulment of the sheriff’s sale, and the subsequent sale to
Pantranco, of the 2 certificates.
o Defendants (Ferrer and Pantranco) claim that the Corporation’s title is subject to the approval of
PSC, which it did not acquire. They claim that the sheriff’s levy gave Pantranco a superior right.
o Pantranco filed a 3rd-party complaint against Villarama and the Corporation, alleging that both are
disqualified from operating the certificates by virtue of the agreement between Villarama and
Pantranco.
o CFI: Declared sheriff’s sale and sale to Pantranco as null and void. The Corporation was declared the
lawful owner of the 2 certificates. Villarama and the Corporation were considered as 2 separate and
distinct entities, therefore the prohibition in the contract with Pantranco does not apply to the
Corporation.
ISSUE: [Issue #3 is the one related to the topic]
1. WON the stipulation prohibiting Villarama from applying for a TPU service applies to new lines only? – NO, it also
includes existing lines
 Villarama: parties intended to effect the least restriction.
 The intention of the parties was to eliminate the seller (Villarama) as a competitor of the buyer
(Pantranco).
 Use of the word “apply” doesn’t mean apply for a new certificate, since any person who wishes to
operate a TPU service, whether under a new or old certificate, has to apply for permission.
 If only new lines are covered, there would be an absurd situation where Villarama can have somebody
else apply for a certificate and then sell it to him.

2. WON the stipulation is valid and enforceable? – YES

 Early cases tend to annul contracts which prohibit or restrain any one from using a lawful trade as being
against the benefit of the State.
 BUT, if the rule is limited to a certain time and within a certain place, such contracts are valid and not
against the benefit of the State.
 Test: Whether the restraint is reasonably necessary for the protection of the contracting parties?
 Red Line v. Bachrach: the stipulation was held null and void because the restraints therein is practically a
division of territory (either can’t operate within the territory of the other).
 Pampanga Bus v. Enriquez: the restrain was the principal objective of the agreement, therefore null and
void.
 Here, the nature of the agreement is not to suppress competition. The restrain is merely
ancillary/incidental to the main agreement which is that of sale.

3. WON the stipulation entered into by Villarama binds the Corporation? – YES
 Rule: a corporation is a legal entity distinct and separate from the members and stockholders who
compose it.
 Exception: when the fiction is urged as a means of perpetrating fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statues, the
achievement of monopoly, or the perpetration of a crime, the veil will be lifted. The
corporation being a mere alter ego of a person, the two will be considered one and the same.
 Villarama: he was only sharing his credit with other companies with the Corporation for convenience.
 Villarama is too involved with the Corporation. He didn’t even deny any of the things he did, but
merely tried to excuse them to try to separate himself from the Corporation. 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.
 It appears that Villarama is really the actual owner-treasurer of the Corporation.
 Villarama himself said that his and his wife’s money are one and the same. His wife’s
contribution to the company is his also.
 He received money from the company through his wife. He disbursed them as if they are his
personal funds. His denial that he doesn’t know where the money comes from when his wife
gives him money holds no water.
 The intial cash capitalization was mostly financed by Villarama. The Ford trucks of the
Corporation was bought by him.
 His accountant, Celso Rivera, testified that he was instructed by Villarama to make it appear that
the Corporation received cash from the other subscribers.

4. Who owns the subject certificates? – the Corporation

 Corporation should, until the expiration of the period, be enjoined from operating the lines subject of
the prohibition.
 The prohibition merely covers the operation of TPU along the lines covered by the certificates
sold by Villarama to Pantranco.
 Sale between Fernando and the Corporation is valid. The rightful ownership of the disputed certificates
belongs to the Corporation, being the prior purchaser in good faith and for value thereof.
 The pending approval of the Corporation with the PSC did not prevent them from consummating
the sale.
  What was acquired by Ferrer in the sheriff's sale was only the right which Fernando, judgment debtor,
had in the certificates. Ferrer merely stepped into the shoes of Fernando.
 [The case didn’t say explicitly but it was mentioned that stipulation binds the corporation, but only over
the lines competing with Pantranco. So I thought maybe the certificates sold by Fernando isn’t in the
same line as those Villarama sold to Pantranco. That’s why the sale was held valid despite the SC holding
that the prohibition applies to the Corporation also.]

Other issues:
5. Best evidence rule
 Evidence presented to show that Villarama co-mingled his funds with the Corporation is merely
photostatic copies of the original. Therefore, Villarama invokes the Best Evidence Rule to claim that such
evidence should not be admissible.
 Exception: when the original has been lost, destroyed, or cannot be produced in court.
 Villarama himself testified that the originals have been stolen from the files of the Corporation.
Therefore, the photostatic copies are admissible.

6. Damages
 The Corporation is claiming atty’s fees. They are not entitled to it. The defendants did not act in bad
faith. They believed that because the bill of sale has yet to be approved by the PSC, the transaction was
not a consummated sale, and, therefore, the certificates are still owned by Fernando (and therefore, can
be levied against).
 Ferrer was claiming damages because he allegedly suffered from the suit to annul the sheriff’s sale. He is
not entitled to it, by virtue of the conclusion herein reached that the sale to the Corporation is valid.
 Pantranco claims damages because his intentions when he bought the certificates from Villarama were
not realized because Villarama violated their agreement thru the Corporation. Pantranco is entitled to
damages, but the record does not sufficiently supply the necessary evidentiary materials to compute the
award.

DISPOSITION: Premises considered, the judgment appealed from is hereby MODIFIED. The same to Villa Rey
Transit, Inc. prevails over the sheriff’s sale. The Corporation and Villarama are one and the same. The case is
REMANDED as regards the amount of damages suffered by Pantranco.

NOTES: