MERC - Consolidated Case Digests 2012-2016 PDF

MERCANTILE LAW DIGESTS 2012-2017
LETTERS OF CREDIT
RIGHTS AND OBLIGATIONS OF PARTIES
MARPHIL EXPORT CORPORATION and IRENEO LIM, Petitioners, - versus - ALLIED

BANKING CORPORATION, substituted by PHILIPPINE NATIONAL BANK, Respondent.
G.R. No. 187922, September 21, 2016, THIRD DIVISION, JARDELEZA, J.
In order to consider a correspondent bank as a confirming bank, it must have assumed a direct
obligation to the seller as if it had issued the letter of credit itself. If the correspondent bank
was a confirming bank, then a categorical declaration should have been stated in the letter of
credit that the correspondent bank is to honor all drafts drawn in conformity with the letter of credit."
Thus, if we were to hold Allied Bank liable to based on the rule of strict compliance, it must be because
Allied Bank acted as confirming bank under the language of L/C No. 21970.
It must be remembered that a Letter Agreement was executed by Marphil and Allied Bank. The
Letter of Agreement is a contract between Marphil and Allied Bank where the latter agreed to purchase
the draft and credit the former its value on the undertaking that Allied Bank will be reimbursed in
case the draft is dishonored. This obligation is direct, and is independent, not only from the
obligation under the draft, but also from the obligation under L/C No. 21970. The Letter Agreement
simply creates a separate obligation on Marphil' s part to refund the amount of the proceeds, in
case of dishonor.
In this case, when Allied Bank credited the amount of Pl,913,763.45 to Marphil' s account, it became
the debtor of Marphil. However, once Nanyang Bank dishonored the export documents and draft for
L/C No. 21970, Marphil became the debtor of Allied Bank for the amount by virtue of its obligation to
reimburse the bank under the Letter Agreement. This obligation consisting of sum of money became
demandable upon notice of the dishonor by Nanyang Bank. Thus, legal compensation may take
place between the two debts.
FACTS:
Marphil is a domestic company engaged in the exportation of cuttlefish, cashew nuts and similar
agricultural products. To finance its purchase and export of these products, Allied Bank granted
Marphil a credit line from which Marphil availed of several loans evidenced by promissory notes
(PN). These loans were in the nature of advances to finance the exporter's working capital
requirements and export bills. Irrevocable letters of credits served as collaterals for the loans
obtained to pay export bills. Allied Bank purchases the drafts for the letters of credit from Marphil,
credits the amount to the latter's credit line and deducts from the total amount of Marphil's existing
loans from Allied Bank. In turn, Allied Bank required Marphil, through its authorized signatories
Lim and Rebecca Lim So, to execute a Letter of Agreement where they undertake to
reimburse Allied Bank in the event the export bills/drafts covering the letters of credit are
refused by the drawee.
The transaction involved in this petition is the export of cashew nuts to Intan Trading Ltd.
Hongkong (Intan) in Hong Kong. Upon application of Intan, Nanyang Commercial Bank (Nanyang
Page 1 of 434
Bank), a bank based in China, issued irrevocable letters of credit with Marphil as beneficiary and
Allied Bank as correspondent bank.
When Intan placed a second order for cashew nuts, Marphil availed additional loans in their credit
line evidenced by PN No. 2463 and PN No. 2730. Similar to the previous transaction, Intan applied
for and opened L/C No. 21970 with Nanyang Bank in the amount of US$185,000.00, with Marphil as
the beneficiary and Allied Bank as correspondent bank. After receiving the export documents
including the draft issued by Marphil, Allied Bank credited Marphil in the amount of Pl,913,763.45,
the peso value of the amount in the letter of credit.
However, on July 2, 1988, Allied Bank informed Marphil that it received a cable from Nanyang Bank
noting some discrepancies in the shipping documents. Consequently, Nanyang Bank refused to
reimburse Allied Bank the amount the latter had credited in Marphil' s credit line. In its debit
memo, Allied Bank informed Marphil of the dishonor of L/C No. 21970 and that it was reversing
the earlier credit entry of Pl,913,763.45. Lim was made to sign a blank promissory note, PN No.
4202, on to cover for the amount.
Marphil filed a Complaint for declaratory relief and damages against Allied Bank (Declaratory Relief
Case) in the RTC. In its Complaint, Marphil asked the court to declare PN No. 4202 void, to declare
as fully paid its other obligations to Allied Bank, and to award it actual, moral and exemplary
damages, and attorney's fees.
RTC granted Marphil's complaint for declaratory relief, and declared PN No. 4202 void. On appeal,
CA upheld the nullity of PN No. 4202 but held petitioners liable for the amount of Pl,913,763.45, the
amount equal to the face value of L/C No. 21970. The CA found that Allied Bank is not directly liable
for the Pl,913,763.45 under L/C No. 21970 because it was not a confirming bank and did not
undertake to assume the obligation of Nanyang Bank to Marphil as its own. At most, it could only
be a discounting bank which bought drafts under the letter of credit.
ISSUE:
Whether or not the debit memo made by Allied Bank against the account of Marphil is valid.
RULING:
The debit memo is valid.
a. Allied Bank as correspondent bank in LIC No. 21970
The Court affirms the finding of both the RTC and CA that Allied Bank is not a confirming bank,
which undertakes Nanyang Bank's obligation as issuing bank, but at
most, buys the drafts drawn by Marphil as exporter at a discount.
In order to consider a correspondent bank as a confirming bank, it must have assumed a direct
obligation to the seller as if it had issued the letter of credit itself. If the correspondent bank
was a confirming bank, then a categorical declaration should have been stated in the letter of
credit that the correspondent bank is to honor all drafts drawn in conformity with the letter of
credit." Thus, if we were to hold Allied Bank liable to Marphil (which would result in a finding that
Page 2 of 434
the former' s debit from the latter's account is wrong) based on the rule of strict compliance, it must
be because Allied Bank acted as confirming bank under the language of L/C No. 21970.
In finding that Allied Bank, as correspondent bank, did not act as confirming bank, the CA reviewed
the instructions of Nanyang Bank to Allied Bank in L/C No. 21970. It found that based on the
instructions, there is nothing to support Marphil's argument that Allied Bank undertook, as its own,
Nanyang Bank's obligations in the letter of credit:
In the instant case, the letter of Nanyang to Allied provided the following instructions: 1)
the negotiating bank is kindly requested to forward all documents to Nanyang in one lot; 2)
in reimbursement for the negotiation(s), Nanyang shall remit cover to Allied upon receipt
of documents in compliance with the terms and conditions of the credit; 3) the drafts drawn
must be marked "drawn under Nanyang Commercial Bank"; and 4) to advise beneficiary.
From the above-instructions, it is clear that Allied did not undertake to assume the
obligation of Nanyang to Marphil as its own, as if it had itself issued the L/C. At most, it
can only be a discounting bank which bought the drafts under the L/C.
Having been established that Allied Bank is not a confirming bank and therefore not obliged to
honor the draft upon submission of stipulated documents in the letter of credit, the issue that
must now be resolved is the validity of debit memo it made against the Marphil account.
b. Allied Bank's right to reimbursement under the Letter Agreement
It must be remembered that a Letter Agreement was executed by Marphil and Allied Bank. The
Letter of Agreement is a contract between Marphil and Allied Bank where the latter agreed to
purchase the draft and credit the former its value on the undertaking that Allied Bank will be
reimbursed in case the draft is dishonored. This obligation is direct, and is independent, not
only from the obligation under the draft, but also from the obligation under L/C No. 21970. The
Letter Agreement simply creates a separate obligation on Marphil' s part to refund the amount of
the proceeds, in case of dishonor. As an independent obligation, Marphil is bound to fulfill this
obligation to reimburse Allied Bank.
However, a conflict arose because instead of waiting for Marphil's own initiative to return the
amount, Allied Bank on its own debited from the former's credit line.
c. Allied Bank's right to debit Marphil 's account
In this case, when Allied Bank credited the amount of.Pl,913,763.45 to Marphil' s account, it became
the debtor of Marphil. However, once Nanyang Bank dishonored the export documents and draft
for L/C No. 21970, Marphil became the debtor of Allied Bank for the amount by virtue of its
obligation to reimburse the bank under the Letter Agreement. This obligation consisting of sum of
money became demandable upon notice of the dishonor by Nanyang Bank. Thus, legal
compensation may take place between the two debts.
In Associated Bank vs. Tan, the Court nevertheless emphasized that while the bank has the right to
set off, the exercise of such right must be consistent with the required degree of diligence from
Page 3 of 434
banks, i.e., highest degree of care. Thus, the question that needs to be resolved now is whether
Allied Bank properly exercised its right to set off.
The Court ruled that Allied Bank properly exercised its right to set off. Firstly, having signed
the Letter Agreement, Marphil expressly undertook that in case of dishonor of the draft for the
letter of the credit, it· will refund to Allied Bank whatever the latter has credited in its favor. This
places Marphil on its guard that the dishonor will create an obligation to refund the amount
credited. Secondly, prior to debiting the amount, Allied Bank informed Marphil twice of Nanyang
Bank's refusal to honor the tender of documents on L/C No. 21970. Thirdly, it immediately informed
Marphil that it was debiting the amount of the dishonored draft from the credit line.
In sum, the Court affirmed that Allied Bank is not a confirming bank under L/C No. 21970. In any
case, whether Allied Bank is directly liable as confirming bank will not affect Marphil's obligation
to reimburse Allied Bank the amount of Pl ,913,763.45 because its liability to refund the amount
arose under an independent contract, i.e. the Letter Agreement. And while Allied Bank is the
debtor of Marphil for the amount it credited under the draft, the obligation under the Letter
Agreement made Allied Bank the creditor of Marphil for the same amount. Being debtor and
creditor of each other, Allied Bank was entitled to legal compensation by debiting the
amount, which did not result in any loss to Marphil.
_____________________________________________________________________________________
BASIC PRINCIPLES OF LETTER OF C REDIT
DOCTRINE OF INDEPENDENCE
THE HONGKONG & SHANGHAI BANKING CORPORATION,

LIMITED, Petitioner, v. NATIONAL STEEL CORPORATION AND CITYTRUST BANKING
CORPORATION (NOW BANK OF THE PHILIPPINE ISLANDS), Respondents.
G.R. No. 183486, February 24, 2016, JARDELEZA, J.
Letters of credit are governed primarily by their own provisions, by laws specifically applicable to
them, and by usage and custom. Consistent with the rulings in several cases, usage and custom refers
to UCP 400.
Article 17 of UCP 400 explains that under this principle, an issuing bank assumes no liability or
responsibility "for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the documents or
superimposed thereon..." Thus, as long as the proper documents are presented, the issuing
bank has an obligation to pay even if the buyer should later on refuse payment. To allow
issuing bank to refuse to honor the Letter of Credit simply because it could not collect first
from the buyer is to countenance a breach of the Independence Principle.
A bank such as HSBC has the duty to observe the highest degree of diligence. HSBC ought to have
noticed the discrepancy between City Trust's request for collection under URC 322 and the terms of
the Letter of Credit requiring application of UCP 400. Regardless of any error that City Trust may
have committed, the standard of care expected of HSBC dictates that it should have made a separate
Page 4 of 434
determination of the significance of the presentment of the Letter of Credit and the attached
documents.
FACTS:
Respondent National Steel Corporation (NSC) entered into an Export Sales Contract (the Contract)
with Klockner East Asia Limited (Klockner). NSC sold 1,200 metric tons of prime cold rolled coils
to Klockner. In accordance with the requirements in the Contract, Klockner applied for an
irrevocable letter of credit with HSBC in favor of NSC as the beneficiary in the amount of
US$468,000. HSBC issued an irrevocable and onsight letter of credit no. HKH 239409 (the Letter of
Credit) in favor of NSC. The Letter of Credit stated that it is governed by the International Chamber
of Commerce Uniform Customs and Practice for Documentary Credits, Publication No. 400 (UCP
400). Under UCP 400, HSBC as the issuing bank, has the obligation to immediately pay NSC upon
presentment of the documents listed in the Letter of Credit.
NSC coursed the collection of its payment from Klockner through City Trust Banking Corporation
(City Trust). City Trust sent a collection order (Collection Order) to HSBC respecting the collection
of payment from Klockner. The Collection Order also contained the following statement: "Subject to
Uniform Rules for the Collection of Commercial Paper Publication No. 322."
HSBC sent a cablegram advising that Klockner had refused payment. CityTrust requested HSBC to
inform it of Klockner's reason for refusing payment so that it may refer the matter to NSC. City
Trust insisted that a demand for payment must be made from Klockner since the documents "were
found in compliance with LC terms and conditions." HSBC replied on the same day stating that in
accordance with CityTrust's instruction in its Collection Order, HSBC treated the transaction as a
matter under URC 322. Thus, it demanded payment from Klockner which unfortunately refused
payment for unspecified reasons. It then noted that under URC 322, Klockner has no duty to provide
a reason for the refusal.
Klockner continued to refuse payment and HSBC notified CityTrust in a cablegram that should
Klockner still refuse to accept the bill, it will return the full set of documents to City Trust with all
the charges for the account of the drawer.
HSBC then returned the documents to City Trust. In a letter accompanying the returned
documents, HSBC stated that it considered itself discharged of its duty under the transaction. In
response, CityTrust sent a cablegram to HSBC stating that it is "no longer possible for beneficiary
to wait for you to get paid by applicant." It explained that since the documents required under the
Letter of Credit have been properly sent to HSBC, Citytrust demanded payment from it. CityTrust
also stated, for the first time in all of its correspondence with HSBC, that "re your previous telexes,
ICC Publication No. 322 is not applicable." HSBC insisted that CityTrust sent documents which
clearly stated that the collection was being made under URC 322. Thus, with the continued refusal
of Klockner to pay, it opted to return the documents.
Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of money
(Complaint). HSBC filed its Answer denying any liability under the Letter of Credit. It argued in its
Answer that CityTrust modified the obligation when it stated in its Collection Order that the
transaction is subject to URC 322 and not under UCP 400.
Page 5 of 434
RTC Makati rendered a decision (RTC Decision) declaring that HSBC is not liable to pay NSC the
amount stated in the Letter of Credit. It ruled that the applicable law is URC 322 as it was the law
which CityTrust intended to apply to the transaction. Under URC 322, HSBC has no liability to pay
when Klockner refused payment.
The CA found that it is UCP 400 and not URC 322 which governs the transaction. According to the
CA, the terms of the Letter of Credit clearly stated that UCP 400 shall apply. Further, the CA
explained that even if the Letter of Credit did not state that UCP 400 governs, it nevertheless finds
application as this Court has consistently recognized it under Philippine jurisdiction. Thus,
applying UCP 400 and principles concerning letters of credit, the CA explained that the obligation
of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required
documents are properly presented. Under the independence principle, the issuing bank's obligation
to pay under the letter of credit is separate from the compliance of the parties in the main contract.
ISSUE:
The central question in this case is who among the parties bears the liability to pay the amount
stated in the Letter of Credit. This requires a determination of which between UCP 400 and URC
322 governs the transaction. The obligations of the parties under the proper applicable rule will, in
turn, determine their liability.
RULING:
UCP 400 shall govern and hence, HSBC is liable to pay the amount stated in the LC.
Article 2 of the Code of Commerce states that acts of commerce are governed by their provisions,
by the usages and customs generally observed in the particular place and, in the absence of both
rules, by civil law.
The International Chamber of Commerce (ICC) drafted a set of rules to govern transactions
involving letters of credit. This set of rules is known as the Uniform Customs and Practice for
Documentary Credits (UCP). Since its first issuance in 1933, the UCP has seen several revisions, the
latest of which was in 2007, known as the UCP 600. However, for the period relevant to this case, the
prevailing version is the 1993 revision called the UCP 400.
For the purpose of clarity, letters of credit are governed primarily by their own provisions, by laws
specifically applicable to them, and by usage and custom. Consistent with the rulings in several
cases, usage and custom refers to UCP 400. When the particular issues are not covered by the
provisions of the letter of credit, by laws specifically applicable to them and by UCP 400, our general
civil law finds suppletory application.
Applying this set of laws and rules, this Court rules that HSBC is liable under the provisions of the
Letter of Credit, in accordance with usage and custom as embodied in UCP 400, and under the
provisions of general civil law.
The Letter of Credit categorically stated that it is subject to UCP 400, to wit:
Except so far as otherwise expressly stated, this documentary credit is subject to uniform
Page 6 of 434
Customs and Practice for Documentary Credits (1983 Revision), International Chamber of
Commerce Publication No. 400.
From the moment that HSBC agreed to the terms of the Letter of Credit - which states that UCP
400 applies - its actions in connection with the transaction automatically became bound by the
rules set in UCP 400. Even assuming that URC 322 is an international custom that has been
recognized in commerce, this does not change the fact that HSBC, as the issuing bank of a letter of
credit, undertook certain obligations dictated by the terms of the Letter of Credit itself and by UCP
400.
URC 322 is a set of norms compiled by the ICC. A bank acting in accordance with the terms of URC
322 merely facilitates collection. Its duty is to forward the letter of credit and the required documents
from the entity seeking payment to another entity which has the duty to pay. The bank incurs no
obligation other than as a collecting agent. This is different in the case of an issuing bank acting in
accordance with UCP 400. In this case, the issuing bank has the duty to pay the amount stated in the
letter of credit upon due presentment.
HSBC claims that while UCP 400 applies to letters of credit, it is also common for beneficiaries of
such letters to seek collection under URC 322. HSBC further claims that URC 322 is an accepted
custom in commerce. However, HSBC failed to present evidence to prove that URC 322 constitutes
custom and usage recognized in commerce. Neither was there sufficient evidence to prove that
beneficiaries under a letter of credit commonly resort to collection under URC 322 as a matter of
industry practice.
The entire system of letters of credit rely on the assurance that upon presentment of the proper
documents, the beneficiary has an enforceable right and the issuing bank a demandable obligation,
to pay the amount agreed upon. Any law or custom governing letters of credit should have, at its
core, an emphasis on the imperative that issuing banks respect their obligation to pay and that
seller-beneficiaries may reasonably expect payment in accordance with the terms of a letter of
credit.
Having arrived at the applicability of UCP 400, the Independence Principle can now be applied
in this case. Article 17 of UCP 400 explains that under this principle, an issuing bank assumes no
liability or responsibility "for the form, sufficiency, accuracy, genuineness, falsification or legal
effect of any documents, or for the general and/or particular conditions stipulated in the documents
or superimposed thereon..." Thus, as long as the proper documents are presented, the issuing
bank has an obligation to pay even if the buyer should later on refuse payment. Hence,
Klockner's refusal to pay carries no effect whatsoever on HSBC's obligation to pay under the
Letter of Credit. To allow HSBC to refuse to honor the Letter of Credit simply because it
could not collect first from Klockner is to countenance a breach of the Independence
Principle.
Further, as a bank, HSBC has the duty to observe the highest degree of diligence. Thus, upon receipt
of City Trust's Collection Order with the Letter of Credit, HSBC had the obligation to carefully
examine the documents it received. Had it observed the standard of care expected of it, HSBC would
have discovered that the Letter of Credit is the very same document which it issued upon the
request of Klockner, its client. Had HSBC taken the time to perform its duty with the highest degree
of diligence, it would have been alerted by the fact that the documents presented to it corresponded
Page 7 of 434
with the documents stated in the Letter of Credit, to which HSBC freely and knowingly agreed.
HSBC ought to have noticed the discrepancy between City Trust's request for collection under URC
322 and the terms of the Letter of Credit. Regardless of any error that City Trust may have committed,
the standard of care expected of HSBC dictates that it should have made a separate determination
of the significance of the presentment of the Letter of Credit and the attached documents. A bank
exercising the appropriate degree of diligence would have, at the very least, inquired if NSC was
seeking payment under the Letter of Credit or merely seeking collection under URC 322. In failing
to do so, HSBC fell below the standard of care imposed upon it.
_____________________________________________________________________________________
Philippine National Bank vs. San Miguel Corporation

G.R. No. 186063; January 15, 2014
J. Peralta
Where the trial court rendered a decision finding the applicant of a letter of credit solely liable
to pay the beneficiary and omitted by inadvertence to insert in its decision the phrase ‘without
prejudice to the decision that will be made against the issuing bank,’ the bank cannot evade
responsibility base on this ground.The Independence Principle assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or not.
Facts:
San Miguel Corporation (SMC) entered into an Exclusive Dealership Agreement with Rodolfo
Goroza, wherein the latter was given by SMC the right to trade, deal, market or otherwise sell its
various beer products. Goroza applied for a credit line with SMC. To comply with the credit line
application requirement, he applied for and was granted a letter of credit by PNB. Subsequently,
Goroza availed of his credit line with PNB and started selling SMC’s beer products.
An additional credit line with PNB was applied for by Goroza and his total credit line reached
P4,400,000. Initially, Goroza was able to pay his credit purchases with SMC, but after sometime he
started to become delinquent with his accounts.
SMC demanded Goroza and PNB to pay the amount of P3,722,440.88, but neither of them paid. As
a result, SMC filed a Complaint for collection of sum of money against PNB and Goroza.
After summons, PNB filed its answer, while Goroza did not. Upon motion, Goroza was subsequently
declared in default. RTC later on rendered a decision in favor of SMC and against Goroza.
In the meantime, trial continued with respect to PNB. AN Urgent Motion to Terminate Proceedings
was filed by PNB on the ground that a decision was already rendered finding Goroza solely liable.
The RTC denied this motion and subsequently issued a Supplemental Judgment stating that: “the
phrase ‘without prejudice to the decision made against the other defendant PNB which was not
declared in default’ shall be inserted in the dispositive portion of the decision.” PNB then filed a
motion for reconsideration, but the RTC denied the same. Aggrieved, PNB filed a special civil action
for certiorari with the CA, but was denied. A motion for reconsideration was filed, but was again
denied. Hence, the petition.
Page 8 of 434
PNB argues that the RTC decision, finding Goroza solely liable to pay the entire amount sought to
be recovered by SMC, has settled the obligation of both Goroza and PNB.
Issue:
Whether or not the issuing bank is released from its liability to pay the beneficiary.
Ruling:
Petition Denied.
In the case ofTransfield Philippines, Inc. v. Luzon Hydro Corporation:
By definition, a letter of credit is a written instrument whereby the writer requests

or authorizes the addressee to pay money or deliver goods to a third person and
assumes responsibility for payment of debt therefor to the addressee. A letter of
credit, however, changes its nature as different transactions occur and if carried
through to completion ends up as a binding contract between the issuing and
honoring banks without any regard or relation to the underlying contract or
disputes between the parties thereto.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the
credit once the draft and the required documents are presented to it. The so-called
"independence principle" assures the seller or the beneficiary of prompt payment
independent of any breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or not. Under this
principle, banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents, or for the
general and/or particular conditions stipulated in the documents or superimposed
thereon, nor do they assume any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value or existence of the
goods represented by any documents, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the carriers, or the insurers of
the goods, or any other person whomsoever.
In a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable,
there is a definite undertaking by the issuing bank to pay the beneficiary provided that the
stipulated documents are presented and the conditions of the credit are complied with. Precisely,
the independence principle liberates the issuing bank from the duty of ascertaining compliance by
the parties in the main contract. As the principle's nomenclature clearly suggests, the obligation
under the letter of credit is independent of the related and originating contract. In brief, the letter
of credit is separate and distinct from the underlying transaction.
In other words, PNB cannot evade responsibility on the sole ground that the RTC judgment found
Goroza liable and ordered him to pay the amount sought to be recovered by SMC. PNB's liability,
if any, under the letter of credit is yet to be determined.
Page 9 of 434
LOAN SECURITY FEATURE
TRUST RECEIPTS LAW
BANGKO SENTRAL NG PILIPINAS v. AGUSTIN LIBO-ON

G.R. No. 173864, November 23, 2015, REYES, J.
In the absence of such absolute conveyance of title to qualify as an assignment of credit,

the subject promissory note with trust receipt agreement should be interpreted as it is
denominated. The contract being that of a mere loan, and because there was no valid assignment
of credit, BSP may not foreclose the mortgage
Facts:
The Spouses Libo-on secured loans from the Rural Bank of Hinigaran, Inc. As security
for the loan, the Spouses Libo-on executed a Deed of Real Estate Mortgage over a parcel of
land in favor of the Rural Bank of Hinigaran. The Rural Bank of Hinigaran, in turn, secured a
loan with Bangko Sentral ng Pilipinas (BSP). As a security for the loan, the Rural Bank of
Hinigaran pledged and deposited to BSP promissory notes with supporting TCTs, including
the promissory note and TCT of the Spouses Libo-ons mortgaged with the former. Despite
BSP's demand, the Spouses Libo-on failed to pay. The loan obligation of the Rural Bank of
Hinigaran with BSP likewise fell due and demandable as the former failed to pay its loan
from BSP. As a result, BSP filed an application for extrajudicial foreclosure against the
mortgage security of the Spouses Libo-on with the Rural Bank of Hinigaran. However, before
BSP could complete the auction sale, Agustin Libo-on filed an action against BSP for damages
with prayer for the issuance of a TRO and a writ of preliminary injunction before the RTC.
The Spouses Libo-on argued that there is no privity of contract between them and BSP as the
latter was not authorized by the Rural Bank of Hinigaran to act on its behalf, nor was the
mortgage assigned to it. BSP claimed that its authority to foreclose the subject mortgage was
by virtue of an assignment of credit, i.e., "Promissory Note with Trust Receipt Agreement"
executed by the Rural Bank of Hinigaran in their favor where the latter assigned, deposited,
and pledged the promissory notes executed by the Spouses Libo-on including the contract of
real estate mortgage to it.
Issue:
Whether BSP has the authority to foreclose the mortgage
Ruling:
No. In a trust receipt transaction, the entrustee has the obligation to deliver to the entruster
the price of the sale, or if the merchandise is not sold, to return the merchandise to the
entruster. There are, therefore, two obligations in a trust receipt transaction: the first refers to
money received under the obligation involving the duty to turn it over to the owner of the
merchandise sold, while, the second refers to the merchandise received under the obligation to
"return" it to the owner. Clearly, this concept of trust receipt is inconsistent with that of an
assignment of credit where there is an absolute conveyance of title that would have in effect
given authority to BSP to foreclose the subject mortgage. Without a valid assignment of
Page 10 of 434
credit, as in this case, BSP has no authority to foreclose the mortgaged property of the Spouses
Libo-on to the Rural Bank of Hinigaran. Moreso, BSP could not possibly sell the subject property
without violating the prohibition against pactum commissorium since without a valid
assignment of credit, BSP cannot ipso facto appropriate for itself the Spouses Libo-on's
mortgaged property to the Rural Bank of Hinigaran.
The character of the transactions between the parties is not only determined by the language used
in the document but by their intention. However, the intent of the parties to the transaction is to
be determined in the first instance, by the very language which they used. A deed of
assignment usually contains language which suggests that the parties intended to effect a
complete alienation of title to and rights over the receivables which are the subject of the
assignment. This language is comprised of works like "remise," "release and quitclaim" and
clauses like "the title and right of possession to said accounts receivable is to remain in said
assignee" who "shall have the right to collect directly from the debtor." The same intent is
also suggested by the use of the words "agent and representative of the assignee" in referring
to the assignor. This concept of complete alienation of title and rights in an assignment of credit
is lacking.
___________________________________________________________________________________
RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS IN CASE OF SALE
HUR TIN YANG vs. PEOPLE OF THE PHILIPPINES

G.R. No. 195117. August 14, 2013
J. Velasco, Jr.
When both parties enter into an agreement knowing fully well that the return of the goods subject of
the trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt
transaction penalized under Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the RPC, as the only
obligation actually agreed upon by the parties would be the return of the proceeds of the sale
transaction. This transaction becomes a mere loan, where the borrower is obligated to pay the bank
the amount spent for the purchase of the goods.
Facts:
Supermax Philippines, Inc. (Supermax) is a domestic corporation engaged in the construction

business. On various occasions in the year 1998, Metropolitan Bank and Trust Company
(Metrobank), Magdalena Branch, Manila, extended several commercial letters of credit (LCs) to
Supermax. These commercial LCs were used by Supermax to pay for the delivery of several
construction materials which will be used in their construction business. Thereafter, Metrobank
required petitioner, to sign twenty-four (24) trust receipts as security for the construction materials
and to hold those materials or the proceeds of the sales in trust for Metrobank.
When the 24 trust receipts fell due and despite the receipt of a demand letter, Supermax failed to
pay or deliver the goods or proceeds to Metrobank. Instead, Supermax, through petitioner,
requested the restructuring of the loan. When the intended restructuring of the loan did not
materialize, Metrobank sent another demand letter. As the demands fell on deaf ears, Metrobank,
Page 11 of 434
through its representative, Winnie M. Villanueva, filed the instant criminal complaints against
petitioner.
The trial court charged and sentenced Hur Tin Yang of estafa under Article 315 paragraph 1 (a).
Petitioner appealed to the CA but to no avail. CA affirmed the decision of the trial court and held
that since the offense under PD 15 is malum prohibitum, the mere failure to deliver the proceeds or
the return of goods is sufficient for conviction. Not satisfied, petitioner filed a petition for review
under Rule 45 of the Rules of Court. The SC dismissed the Petition via a Minute Resolution on the
ground that the CA committed no reversible error in the assailed Decision. Hence, petitioner filed
the present Motion for Reconsideration contending that the transactions between the parties do
not constitute trust receipt agreements but rather of simple loans.
Issue:
Whether or not petitioner is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD
115, even if it was sufficiently proved that the entruster (Metrobank) knew beforehand that the
goods (construction materials) subject of the trust receipts were never intended to be sold but only
for use in the entrustee’s construction business
Ruling:
The petition has merit.
In determining the nature of a contract, courts are not bound by the title or name given by the
parties. The decisive factor in evaluating such agreement is the intention of the parties, as shown
not necessarily by the terminology used in the contract but by their conduct, words, actions and
deeds prior to, during and immediately after executing the agreement.
A trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster
the price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster.
There are, therefore, two obligations in a trust receipt transaction: the first refers to money received
under the obligation involving the duty to turn it over (entregarla) to the owner of the merchandise
sold, while the second refers to the merchandise received under the obligation to “return” it
(devolvera) to the owner. A violation of any of these undertakings constitutes Estafa defined under
Art. 315, par. 1(b) of the RPC, as provided in Sec. 13 of PD 115. The purpose why Trust Receipts Law
was created is to aid in financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the merchandise imported or purchased.
Nonetheless, when both parties enter into an agreement knowing fully well that the return of the
goods subject of the trust receipt is not possible even without any fault on the part of the trustee,
it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in relation to Art. 315, par. 1(b)
of the RPC, as the only obligation actually agreed upon by the parties would be the return of the
proceeds of the sale transaction. This transaction becomes a mere loan, where the borrower is
obligated to pay the bank the amount spent for the purchase of the goods.
In the instant case, the factual findings of the trial and appellate courtsreveal that the dealing
between petitioner and Metrobank was not a trust receipt transaction but one of simple loan.
Page 12 of 434
Petitioner’s admission––that he signed the trust receipts on behalf of Supermax, which failed to pay
the loan or turn over the proceeds of the sale or the goods to Metrobank upon demand––does not
conclusively prove that the transaction was, indeed, a trust receipts transaction. In contrast to the
nomenclature of the transaction, the parties really intended a contract of loan. This Court––in Ng
v. People and Land Bank of the Philippines v. Perez, cases which are in all four corners the same as
the instant case––ruled that the fact that the entruster bank knew even before the execution of the
trust receipt agreements that the construction materials covered were never intended by the
entrustee for resale or for the manufacture of items to be sold is sufficient to prove that the
transaction was a simple loan and not a trust receipts transaction.
CRIMINAL LIABILITY
LISAM V. PHILIPPINE NATIONAL BANK

G.R. NO. 164051, OCTOBER 3, 2012
In March 1997 and in various dates thereafter, LISAM made several credit availments with PNB in
the total amount of P 29,645,944.55, the proceeds of which were credited to its current account
with PNB. For each availment, LISAM, through its President Soriano, executed 52 Trust Receipts in
addition to the promissory notes, showing its receipt of the items (motorcycles) in trust with the
duty to turn-over the proceeds of the sale thereof to PNB. Later, PNB discovered that almost all of
the motorcycles have already been sold without LISAM turning over the proceeds of the sale. Thus
PNB filed a complaint-affidavit charging Soriano with fifty two (52) counts of violation of the Trust
Receipts Law, in relation to Article 315, paragraph 1(b) of the Revised Penal Code.
Soriano essentially advance the defense of novation. She claims that LISAM has several credit
facilities with PNB. LISAM requested PNB to convert these existing credit facilities, including the
facility from where the trust receipts originated, to [an] Omnibus Line (OL). PNB acted favorably
on the request with a "Full waiver of penalty charges” on the facility on which the trust receipts are
availments.
PNB admits that although it had approved LISAM’s restructuring proposal, the actual restructuring
of LISAM’s account consisting of several credit lines was never reduced into writing. PNB argues
that the stipulations therein such as the provisions on the schedule of payment of the principal
obligation, interests, and penalties, must be in writing to be valid and binding between the parties.
PNB further postulates that assuming the restructuring was reduced into writing, LISAM failed to
comply with the conditions precedent for its effectivity, specifically, the payment of interest and
other charges, and the submission of the titles to the real properties in Tandang Sora, Quezon City.
On the whole, PNB is adamant that the events concerning the restructuring of LISAM’s loan did
not affect the TR security, thus, Soriano’s criminal liability thereunder subsists.
Issue: whether the restructuring of LISAM’s loan account extinguished Soriano’s criminal liability?
Held: No. Novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and unmistakable.
Here, there is no express novation because there is no written contract stating in unequivocal terms
that the parties were novating the original loan agreement. Neither is there an implied novation
because there is no incompatibility between credit line secured by TR’s and the subsequent
restructured Omnibus Line approved by PNB. While the restructuring was approved in principle,
Page 13 of 434
the effectivity thereof was subject to conditions precedent such as the payment of interest and other
charges, and the submission of the titles to the real properties in Tandang Sora, Quezon City. These
conditions precedent imposed on the restructured Omnibus Line were never refuted by Soriano.
Thus, her bare assertion that the restructuring was approved by PNB cannot equate to a finding of
an implied novation which extinguished Soriano’s obligation as entrustee under the TRs.
Moreover, the waiver pertains to penalty charges on the credit line on which the TRs originated.
There is no showing that the waiver extinguished Soriano’s obligation to "sell the [merchandise] for
cash for [LISAM’s] account and to deliver the proceeds thereof to PNB to be applied against its
acceptance on [LISAM’s] account." Soriano further agreed to hold the "vehicles and proceeds of the
sale thereof in Trust for the payment of said acceptance and of any of its other indebtedness to
PNB." Well-settled is the rule that, with respect to obligations to pay a sum of money, the obligation
is not novated by an instrument that expressly recognizes the old, changes only the terms of
payment, adds other obligations not incompatible with the old ones, or the new contract merely
supplements the old one.
_____________________________________________________________________________________
CRISOLOGO V. PEOPLE
G.R. NO. 199481, DECEMBER 3, 2012
In 1989, petitioner, as President of Novachemical Industries, Inc. (Novachem), applied for

commercial letters of credit from private respondent China Banking Corporation (Chinabank) to
finance the purchase of raw materials from Hyundai and of glass containers from San Miguel
Corporation. Subsequently, Chinabank issued Letters of Credit Nos. 89/03015 and DOM-330416 in
the respective amounts of US$114,400.007 (originally US$135,850.00)8 with a peso equivalent of
P2,139,119.809 and P1,712,289.90. After petitioner received the goods, he executed for and in behalf
of Novachem the corresponding trust receipt agreements dated May 24, 1989 and August 31, 1989
in favor of Chinabank. For allegedly failing to turn over the proceeds of the sale of the goods,
Chinabank sued petitioner for criminal violation of the trust receipts law.
While petitioner was acquitted, he was adjudged civilly liable. Now, petitioner argues that he
cannot be held civilly liable under the subject L/Cs because these are corporate obligations of
Novachem.
Held: Section 13 of the Trust Receipts Law explicitly provides that if the violation or offense is
committed by a corporation, as in this case, the penalty provided for under the law shall be imposed
upon the directors, officers, employees or other officials or person responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense. In this case, petitioner
was acquitted of the charge for violation of the Trust Receipts Law in relation to Article 315 1(b)13
of the RPC. As such, he is relieved of the corporate criminal liability as well as the corresponding
civil liability arising therefrom.
However, as correctly found by the RTC and the CA, he may still be held liable for the trust receipts
and L/C transactions he had entered into in behalf of Novachem. Settled is the rule that debts
incurred by directors, officers, and employees acting as corporate agents are not their direct liability
but of the corporation they represent, except if they contractually agree/stipulate or assume to be
personally liable for the corporation’s debts, as in this case.
Page 14 of 434
The RTC and the CA adjudged petitioner personally and solidarily liable with Novachem for the
obligations secured by the subject trust receipts based on the finding that he signed the guarantee
clauses therein in his personal capacity and even waived the benefit of excussion. However, a review
of the records shows that petitioner signed only the guarantee clauses of the Trust Receipt dated
May 24, 198915 and the corresponding Application and Agreement for Commercial Letter of Credit
No. L/C No. 89/0301.16 With respect to the Trust Receipt17 dated August 31, 1989 and Irrevocable
Letter of Credit18 No. L/C No. DOM-33041 issued to SMC for the glass containers, the second pages
of these documents that would have reflected the guarantee clauses were missing and did not form
part of the prosecution's formal offer of evidence.
NEGOTIABLE INSTRUMENTS LAW
KINDS OF NEGOTIABLE INSTRUMENTS
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE

BRANCHES vs. COMMISSIONER OF INTERNAL REVENUE
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE
BRANCHES vs. COMMISSIONER OF INTERNAL REVENUE
G.R. Nos. 166018 & 167728, 04 June 2014, Leonardo-De Castro, J. (FIRST DIVISION)
The electronic messages are not signed by the investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional order to pay a sum certain in money as the payment
is supposed to come from a specific fund or account of the investor-clients; and, they are not payable
to order or bearer but to a specifically designated third party. Thus, the electronic messages are not
bills of exchange. As there was no bill of exchange or order for the payment drawn abroad and made
payable here in the Philippines, there could have been no acceptance or payment that will trigger the
imposition of the DST under Section 181 of the Tax Code.
FACTS:
HSBC performs, among others, custodial services on behalf of its investor-clients, corporate
and individual, resident or non-resident of the Philippines, with respect to their passive
investments in the Philippines, particularly investments in shares of stocks in domestic
corporations. As a custodian bank, HSBC serves as the collection/payment agent with respect to
dividends and other income derived from its investor-clients’ passive investments.
HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which
are managed by HSBC through instructions given through electronic messages. The said
instructions are standard forms known in the banking industry as SWIFT, or “Society for Worldwide
Interbank Financial Telecommunication.” In purchasing shares of stock and other investment in
securities, the investor-clients would send electronic messages from abroad instructing HSBC to
debit their local or foreign currency accounts and to pay the purchase price therefor upon receipt
of the securities.
Page 15 of 434
Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid
Documentary Stamp Tax (DST) from September to December 1997 and also from January to
December 1998.
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner, Beethoven
Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from abroad on the
management of funds located in the Philippines which do not involve transfer of funds from abroad
are not subject to DST. With the said BIR Ruling as its basis, and administrative claim for refund
was filed by HSBC. When the claim for refund was not acted upon by the BIR, HSBC brought the
matter to the Court of Tax Appeals. The CTA granted the claim for refund. On appeal, the Court of
Appeals reversed the decision of the CTA ruling that the electronic messages of HSBC’s investor-
clients are subject to DST. Hence, the instant petition.
ISSUE:
Whether or not the electronic messages of HSBC’s investor-clients are subject to the
payment of Documentary stamp Tax
HELD:
The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the
acceptance or payment of “a bill of exchange purporting to be drawn in a foreign country but
payable in the Philippines” and that “a bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the person giving it, requiring the person to whom
it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money
to order or to bearer.” A bill of exchange is one of two general forms of negotiable instruments
under the Negotiable Instruments Law.
The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients
containing instructions to debit their respective local or foreign currency accounts in the
Philippines and pay a certain named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the Tax Code as such instructions are “parallel to an automatic
bank transfer of local funds from a savings account to a checking account maintained by a depositor
in one bank.” The Court favorably adopts the finding of the CTA that the electronic messages
“cannot be considered negotiable instruments as they lack the feature of negotiability, which, is the
ability to be transferred” and that the said electronic messages are “mere memoranda” of the
transaction consisting of the “actual debiting of the [investor-client-]payor’s local or foreign
currency account in the Philippines” and “entered as such in the books of account of the local bank,”
HSBC.
More fundamentally, the instructions given through electronic messages that are subjected to DST
in these cases are not negotiable instruments as they do not comply with the requisites of
negotiability under Section 1 of the Negotiable Instruments Law, which provides:
Page 16 of 434
Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must conform to the

following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The electronic messages are not signed by the investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional order to pay a sum certain in money as the payment
is supposed to come from a specific fund or account of the investor-clients; and, they are not
payable to order or bearer but to a specifically designated third party. Thus, the electronic messages
are not bills of exchange. As there was no bill of exchange or order for the payment drawn abroad
and made payable here in the Philippines, there could have been no acceptance or payment that
will trigger the imposition of the DST under Section 181 of the Tax Code.
In general, DST is levied on the exercise by persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal relationships through the execution of specific
instruments. Examples of such privileges, the exercise of which, as effected through the issuance
of particular documents, are subject to the payment of DST are leases of lands, mortgages, pledges
and trusts, and conveyances of real property.
Section 230 of the 1977 Tax Code, as amended, now Section 181 of the 1997 Tax Code, levies DST on
either (a) the acceptance or (b) the payment of a foreign bill of exchange or order for the payment
of money that was drawn abroad but payable in the Philippines. In other words, it levies DST as an
excise tax on the privilege of the drawee to accept or pay a bill of exchange or order for the payment
of money, which has been drawn abroad but payable in the Philippines, and on the corresponding
privilege of the drawer to have acceptance of or payment for the bill of exchange or order for the
payment of money which it has drawn abroad but payable in the Philippines.
Acceptance applies only to bills of exchange. Acceptance of a bill of exchange has a very definite
meaning in law. In particular, Section 132 of the Negotiable Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange is the
signification by the drawee of his assent to the order of the drawer. The acceptance must be in
writing and signed by the drawee. It must not express that the drawee will perform his promise by
any other means than the payment of money.
Page 17 of 434
Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill of
exchange is both the manifestation of the drawee’s consent to the drawer’s order to pay money and
the expression of the drawee’s promise to pay. It is “the act by which the drawee manifests his
consent to comply with the request contained in the bill of exchange directed to him and it
contemplates an engagement or promise to pay.” Once the drawee accepts, he becomes an acceptor.
As acceptor, he engages to pay the bill of exchange according to the tenor of his acceptance.
Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such
presentment. Presentment for acceptance is the production or exhibition of the bill of exchange to
the drawee for the purpose of obtaining his acceptance.
Presentment for acceptance is necessary only in the instances where the law requires it. In the
instances where presentment for acceptance is not necessary, the holder of the bill of exchange can
proceed directly to presentment for payment.
Presentment for payment is the presentation of the instrument to the person primarily liable for
the purpose of demanding and obtaining payment thereof.
Thus, whether it be presentment for acceptance or presentment for payment, the negotiable
instrument has to be produced and shown to the drawee for acceptance or to the acceptor for
payment.
Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of exchange or
orders for the payment of money that have been drawn abroad but payable in the Philippines) that
is subjected to DST under Section 181 of the 1997 Tax Code is done after presentment for acceptance
or presentment for payment, respectively. In other words, the acceptance or payment of the subject
bill of exchange or order for the payment of money is done when there is presentment either for
acceptance or for payment of the bill of exchange or order for the payment of money.
Applying the above concepts to the matter subjected to DST in these cases, the electronic messages
received by HSBC from its investor-clients abroad instructing the former to debit the latter’s local
and foreign currency accounts and to pay the purchase price of shares of stock or investment in
securities do not properly qualify as either presentment for acceptance or presentment for
payment. There being neither presentment for acceptance nor presentment for payment, then
there was no acceptance or payment that could have been subjected to DST to speak of.
_____________________________________________________________________________________
NUNELON MARQUEZ v. ELISAN CREDIT CORPORATION

G.R. No. 194642, April 6, 2015, BRION, J.
The promissory notes securing the first and second loan contained exactly the same terms and
conditions, except for the date and amount of principal. Marquez knew of such terms and
conditions even assuming that the entries on the interest and penalty charges were in blank when
he signed the promissory note.
Page 18 of 434
Facts:
Nunelon Marquez obtained a first loan from Elisan Credit Corporation (ECC) for P53,000
payable in 180 days. Marquez signed a promissory note which provides that it is payable in
weekly installments and subject to 26% annual interest. In case of non-payment, he agreed
to pay 10% monthly penalty based on the total amount unpaid and another 25% of such for
attorney’s fees. To further secure payment of the loan, Marquez executed a chattel mortgage over
a motor vehicle which reads that, among others, “the motor vehicle shall stand as a security for
the first loan and all other obligations of every kind already incurred or which may hereafter be
incurred."
Subsequently, Marquez obtained a second loan from ECC for P55,000, as evidenced by a
promissory note and a cash voucher. The promissory note covering the second loan contained
exactly the same terms and conditions as the first promissory note. When the second loan
had matured, Marquez only paid P29,600, leaving an unpaid balance of P25,040. Due to
liquidity problems, Marquez asked ECC if he could pay in daily installments until the second
loan is paid, to which the latter acquiesced. Twenty-one months after the second loan’s
maturity, Marquez had already paid P56,440, an amount greater than the principal.
Despite the receipt of such an amount, ECC filed a complaint for judicial foreclosure of
the chattel mortgage because Marquez allegedly failed to settle the balance of the second loan
despite demand. It further alleged that pursuant to the terms of the promissory note, Marquez’s
failure to fully pay upon maturity triggered the imposition of the 10% monthly penalty and 25%
attorney’s fees. Before Marquez could file an answer, the MTC approved the writ of replevin which
ECC sought for. The MTC found for Marquez and held that the second loan was fully
extinguished. The RTC initially affirmed the ruling but reversed the same upon reconsideration.
The CA affirmed the reversal.
Issue:
Whether the second promissory note was genuine and duly executed
Ruling:
Yes. Marquez denies that he stipulated upon and consented to the interest, penalty
and attorney's fees because he purportedly signed the promissory note in blank. This
allegation deserves scant consideration. It is self-serving and unsupported by evidence.
Moreover, Marquez does not deny the genuineness and due execution of the first promissory
note. Only when he failed to pay the second loan did he impugn the validity of the interest,
penalty and attorney's fees. The CA and the RTC also noted that Marquez is a schooled
individual, an engineer by profession, who, because of these credentials, will not just sign a
document in blank without appreciating the import of his action.
Page 19 of 434
CONSIDERATION
Ting Ting Pua vs. Spouses Benito Lo Bun Tiong and Caroline Siok Ching Teng
G.R. No. 198660, October 23, 2013
J. Velasco, Jr.
A check constitutes an evidence of indebtedness and is a veritable proof of an obligation. Under

Section 24 of the Negotiable Instruments Law, “Every negotiable instrument is deemed prima facie to
have been issued for a valuable consideration; and every person whose signature appears thereon to
have become a party for value.” Thus, checks completed and delivered to a person by another are
sufficient by themselves to prove the existence of the loan obligation obtained by the latter from the
former.
Facts:
Spouses Benito Lo Bun Tiong (Benito) and Caroline Siok Ching Teng (Caroline) obtained loans
from Ting Ting Pua (Pua) on various dates in 1988. Spouses Benito and Carol issued 17 checks for
a total amount of P 1,975,000. However, these checks were dishonored upon presentment to the
drawee bank. As a result of the dishonor, Pua demanded payment. By reason of financial difficulties,
the spouses pleaded for more time. Pua obliged.
When the financial situation of the spouses turned better, they asked Pua for the computation of
their loan obligations. Hence, Pua handed them a computation which showed that, at the agreed
2% compounded interest rate per month, the amount of the loan payable to her rose to P13, 218,
544.20. The spouses asked for the reduction of their indebtedness to P 8,500,000, which Pua,
wanting to get paid as soon as possible, agreed.
The spouses then delivered to Pua Asiatrust Check No.BND057750 bearing the reduced amount
dated March 30, 1997 with the assurance that the check was good. Pua, however, refused to return
the bad checks and advised respondents that she will do so only after the encashment of the check
recently given.
Like the 17 previously issued checks, Check No.BND057750 was also dishonored when it was
presented by Pua to the drawee bank. This prompted Pua to file a Complaint for Sum of Money
against the spouses.
In their defense, the spouses categorically denied the existence of the debt. Caroline, in particular,
narrated that she and Pua’s sister, Lilian, forged a partnership that operated a gambling business.
As the parties anticipated that Caroline will not always be in town to prepare the checks, she left
with Lilian five pre-signed and consecutively numbered checks. Caroline further claimed that she
could not have gone to see Pua with her husband as they have been separated in fact for nearly 10
years. Benito corroborated Caroline’s testimony respecting their almost decade separation. Benito
claimed that he was impleaded in the case to attach his property and force him to enter into an
amicable settlement with petitioner. He further pointed out that Check No. BND057750 was issued
solely under the name of his wife.
After trial, the RTC issued a Decision in favor petitioner Pua. The trial court stated that the
possession by petitioner of checks signed by Caroline, under the Negotiable Instruments Law, raises
Page 20 of 434
the presumption that they were issued and delivered for a valuable consideration. However, for
the reason that the agreement to pay interest had not been stipulated in writing, said court ordered
respondents to pay the principal amount of the loan as represented by the 17 checks plus legal
interest from the date of demand.
Aggrieved, respondent spouses elevated the case to the CA. Subsequently, the appellate court set
aside the RTC Decision holding that Asiatrust Bank Check No. BND057750 was an incomplete
delivered instrument and that petitioner has failed to prove the existence of respondents
indebtedness to her. Hence, the petition for Review on Certiorari.
Issue:
Whether the possession of checks is sufficient to prove the existence of indebtedness.
Ruling:
In Pacheco v. Court of Appeals, this Court has expressly recognized that a check "constitutes an
evidence of indebtedness"and is a veritable "proof of an obligation."Hence, it can be used "in lieu
of and for the same purpose as a promissory note." In fact, in the seminal case of Lozano v.
Martinez,We pointed out that a check functions more than a promissory note since it not only
contains an undertaking to pay an amount of money but is an "order addressed to a bank and
partakes of a representation that the drawer has funds on deposit against which the check is drawn,
sufficient to ensure payment upon its presentation to the bank."This Court reiterated this rule in
the relatively recent Lim v. Mindanao Wines and Liquour Galleria stating that "a check, the entries
of which are in writing, could prove a loan transaction." This very same principle underpins Section
24 of the Negotiable Instruments Law (NIL):
Section 24. Presumption of consideration. – Every negotiable instrument is deemed

prima facie to have been issued for a valuable consideration; and every person whose
signature appears thereon to have become a party for value.
Consequently, the 17 original checks, completed and delivered to petitioner, are sufficient by
themselves to prove the existence of the loan obligation of the respondents to petitioner. Note that
respondent Caroline had not denied the genuineness of these checks. Instead, respondents argue
that they were given to various other persons and petitioner had simply collected all these 17 checks
from them in order to damage respondents’ reputation.This account is not only incredible; it runs
counter to human experience, as enshrined in Sec. 16 of the NIL which provides that when an
instrument is no longer in the possession of the person who signed it and it is complete in its terms
"a valid and intentional delivery by him is presumed until the contrary is proved.
HOLDER IN DUE COURSE
ALVIN PATRIMONIO vs. NAPOLEON GUTIERREZ AND OCTAVIO MARASIGAN III

G.R. No. 187769, June 4, 2014, J. Brion
Arguing that Gutierrez is not a holder in due course, Patrimonio filed the instant petition
praying that the ruling of the CA, ordering him to pay Gutierrez, be reversed. Ruling in favor of the
Patrimonio the SC ruled that Section 52(c) of the NIL states that a holder in due course is one who
Page 21 of 434
takes the instrument "in good faith and for value." Acquisition in good faith means taking without
knowledge or notice of equities of any sort which could be set up against a prior holder of the
instrument. It means that he does not have any knowledge of fact which would render it dishonest for
him to take a negotiable paper. The absence of the defense, when the instrument was taken, is the
essential element of good faith. In this case, after having been found out that the blanks were not filled
up in accordance with the authority the Patrimonio gave, Gutierrez has no right to enforce payment
against Patrimonio, thus, the latter cannot be obliged to pay the face value of the check.
Facts:
Patrimonio and Gutierrez entered in a business venture under the name of Slam Dunk
Corporation, a corporation which produces mini-concerts and shows related to basketball. In the
course of their business, Patrimonio pre-signed several checks to answer for the expenses of their
business. Although signed, these checks had no payee’s name, date or amount. The blank checks
were entrusted to Gutierrez with the specific instruction not to fill them out without previous
notification to and approval by Patrimonio. However, in the middle of 1993, without Patrimonio’s
knowledge and consent, Gutierrez went to Marasigan (Patrimonio’s former teammate), to secure a
loan in the amount of P200,000.00 alleging that Patrimonio needed the money for the construction
of his house. Marasigan agreed to the request and gave him P 200, 000. Consequently, Guitierrez
delivered to Marasigan one of the pre-signed blank checks with the blank portions filled out with
the words "Cash" "Two Hundred Thousand Pesos Only", and the amount of "P200,000.00". The
portion of the check corresponding to the date was also filled out with the words "May 23, 1994".
When Marasigan deposited the check, the same was dishonored for the reason of Account
Closed. Thereafter, Marasigan sought recovery from Gutierrez but to no avail. He then sent several
demand letters to Patrimonio asking for payment but his demands likewise went unheeded.
Consequently, he filed a criminal case for violation of B.P. 22 against Patrimonio. Thereafter,
Patrimonio filed before the RTC a complaint for the declaration of nullity of the loan and recovery
of damages against herein Gutierrez and Marasigan. Patrmonio completely denied authorizing the
loan or the check’s negotiation, and asserted that he was not privy to the parties’ loan agreement.
The RTC ruled in favor of Marasigan. It declared Marasigan as a holder in due course and
dismissed Patrimonio’s complaint. It further ordered Patrimonio to pay Marasigan the face value
of the check with a right to claim reimbursement from Gutierrez. On appeal, the CA affirmed the
ruling of the RTC but agreed with Patrimonio that Marasigan is not a holder in due course.
However, since the loan is grounded on an obligation arising from law, it held that it cannot be
nullified and that Patrimonio is still liable to pay Marasigan the sum of P 200, 000. Hence, this
petition.
Issues:
1. Whether Marasigan is a holder in due course.
2. Whether respondent Gutierrez has completely filled out the subject check strictly under the
authority given by Patrimonio.
Page 22 of 434
Ruling:
1. No. Marasigan is Not a Holder in Due Course
The Negotiable Instruments Law (NIL) defines a holder in due course, thus:
Sec. 52 — A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
Acquisition in good faith means taking without knowledge or notice of equities of any sort
which could be set up against a prior holder of the instrument. It means that he does not have any
knowledge of fact which would render it dishonest for him to take a negotiable paper. The absence
of the defense, when the instrument was taken, is the essential element of good faith.
Since he (Marasigan) knew that the underlying obligation was not actually for Patrimonio,
the rule that a possessor of the instrument is prima facie a holder in due course is inapplicable. As
correctly noted by the CA, his inaction and failure to verify, despite knowledge that Patrimonio was
not a party to the loan, may be construed as gross negligence amounting to bad faith.
2. No, the Check Was Not Completed Strictly Under The Authority Given by Patrimonio.
The answer is supplied by the applicable statutory provision found in Section 14 of the
Negotiable Instruments Law (NIL) which states:
Sec. 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. And a signature on a blank paper delivered by the person
making the signature in order that the paper may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as such for any amount. 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. But if any such instrument, after completion,
is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands,
and he may enforce it as if it had been filled up strictly in accordance with the authority given
and within a reasonable time.
This provision applies to an incomplete but delivered instrument. Under this rule, if the
maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting
it into a negotiable instrument, that person is deemed to have prima facie authority to fill it up. It
Page 23 of 434
merely requires that the instrument be in the possession of a person other than the drawer or maker
and from such possession, together with the fact that the instrument is wanting in a material
particular, the law presumes agency to fill up the blanks.
In order however that one who is not a holder in due course can enforce the instrument
against a party prior to the instrument’s completion, two requisites must exist: (1) that the blank
must be filled strictly in accordance with the authority given; and (2) it must be filled up within a
reasonable time. If it was proven that the instrument had not been filled up strictly in accordance
with the authority given and within a reasonable time, the maker can set this up as a personal
defense and avoid liability. However, if the holder is a holder in due course, there is a conclusive
presumption that authority to fill it up had been given and that the same was not in excess of
authority.
While under the law, Gutierrez had a prima facie authority to complete the check, such
prima facie authority does not extend to its use (i.e., subsequent transfer or negotiation) once the
check is completed. In other words, only the authority to complete the check is presumed. Further,
the law used the term "prima facie" to underscore the fact that the authority which the law accords
to a holder is a presumption juris tantum only; hence, subject to subject to contrary proof. Thus,
evidence that there was no authority or that the authority granted has been exceeded may be
presented by the maker in order to avoid liability under the instrument.
Notably, Gutierrez was only authorized to use the check for business expenses; thus, he
exceeded the authority when he used the check to pay the loan he supposedly contracted for the
construction of Patrimonio's house. This is a clear violation of Patrimonio 's instruction to use the
checks for the expenses of Slam Dunk. It cannot therefore be validly concluded that the check was
completed strictly in accordance with the authority given by Patrimonio.
Considering that Marasigan is not a holder in due course, Patrimonio can validly set up the
personal defense that the blanks were not filled up in accordance with the authority he gave.
Consequently, Marasigan has no right to enforce payment against Patrimonio and the latter cannot
be obliged to pay the face value of the check.
RIGHTS OF THE HOLDER
DEFENSES AGAINST THE HOLDER
RCBC SAVINGS BANK, Petitioner, - versus - NOEL M. ODRADA, Respondent.

G.R. No. 219037, SECOND DIVISION, October 19, 2016, CARPIO,J.
While a manager's check is automatically accepted, a holder other than a holder in due course is still
subject to defenses.
The drawee bank of a manager's check may interpose personal defenses of the purchaser of the
manager's check if the holder is not a holder in due course. In short, the purchaser of a manager's
check may validly countermand payment to a holder who is not a holder in due course. Accordingly,
the drawee bank may refuse to pay the manager's check by interposing a personal defense of the
purchaser.
Page 24 of 434
FACTS:
Respondent Noel M. Odrada (Odrada) sold a secondhand Mitsubishi Montero (Montero) to

Teodoro L. Lim (Lim). Of the total consideration, Six. Hundred Ten Thousand Pesos (P610,000)
was initially paid by Lim and the balance of Nine Hundred Thousand Pesos (P900,000) was
financed by petitioner RCBC Savings Bank (RCBC) through a car loan obtained by Lim.
RCBC issued two manager's checks dated 12 April 2002 payable to Odrada. After the issuance of the
manager's checks and their turnover to Odrada but prior to the checks' presentation, Lim notified
Odrada in a letter dated 15 April 2002 that there was an issue regarding the roadworthiness of the
Montero. Despite the notice, Odrada deposited the manager's checks with International Exchange
Bank (Ibank) on 16 April 2002 and redeposited them on 19 April 2002 but the checks were
dishonored both times apparently upon Lim's instruction to RCBC. Consequently, Odrada filed a
collection suit9 against Lim and RCBC in the Regional Trial Court of Makati. In his Answer, Lim
alleged that the cancellation of the loan was at his instance, upon discovery of the
misrepresentations by Odrada about the Montero 's roadworthiness. On the other hand, RCBC
contended that the manager's checks were dishonored because Lim had cancelled the loan.
Both RTC and CA ruled in favor of Odrada and ordered RCBC to pay the amount of check. CA
reasoned that the effective delivery of the manager’s checks to Odrada made RCBC liable for the
checks. Furthermore, the Court of Appeals affirmed the finding of the trial court that Odrada was
a holder in due course. The appellate court ruled that the defense of want of consideration
because of the defective Montero delivered, as alleged by Lim and RCBC, is not available against
a holder in due course.
ISSUES:
1. Whether or not Odrada is a holder in due course.

2. Whether or not RCBC correctly reused the payment of manager’s checks.
RULING:
1. Odrada is not a holder in due course.
To be a holder in due course, Section 52 of the Negotiable Instruments Law requires that a party
must have acquired the instrument in good faith and/or value. Good faith means that the person
taking the instrument has acted with due honesty with regard to the rights of the parties liable on
the instrument and that at the time he took the instrument, the holder has no knowledge of any
defect or infirmity of the instrument. acquired the instrument in good faith and/or value. Value, on
the other hand, is defined as any consideration sufficient to support a simple contract.
In the present case, Odrada attempted to deposit the manager's checks on 16 April 2002, a
day after Lim had informed him that there was a serious problem with the Montero. Instead
of addressing the issue, Odrada decided to deposit the manager's checks. Odrada's actions do not
amount to good faith. Clearly, Odrada failed to make an inquiry even when the circumstances
strongly indicated that there arose, at the very least, a partial failure of consideration due to the
hidden defects of the Montero. Odrada's action in depositing the manager's checks despite
knowledge of the Montero's defects amounted to bad faith. Moreover, when Odrada redeposited
Page 25 of 434
the manager's checks on 19 April 2002, he was already formally notified by RCBC the previous day
of the cancellation of Lim's auto loan transaction.
2. RCBC correctly refused the payment of the manager’s checks.
Jurisprudence defines a manager's check as a check drawn by the bank's manager upon the bank
itself and accepted in advance by the bank by the act of its issuance. Consequently, upon its
purchase, the check becomes the primary obligation of the bank and constitutes its written promise
to pay the holder upon demand.
As a general rule, the drawee bank is not liable until it accepts. Accordingly, acceptance is the act
which triggers the operation of the liabilities of the drawee (acceptor) under Section 62 of the
Negotiable Instruments Law. However, as can be gleaned in a long line of cases decided by this
Court, a manager's check is accepted by the bank upon its issuance. As compared to an ordinary
bill of exchange where acceptance occurs after the bill is presented to the drawee, the distinct
feature of a manager's check is that it is accepted in advance. Notably, the mere issuance of a
manager's check creates a privity of contract between the holder and the drawee bank, the
latter primarily binding itself to pay according to the tenor of its acceptance. The drawee bank, as
a result, has the unconditional obligation to pay a manager's check to a holder in due course
irrespective of any available personal defenses. However, while this Court has consistently held
that a manager's check is automatically accepted, a holder other than a holder in due
course is still subject to defenses.
The Supreme Court ruled that the drawee bank of a manager's check may interpose personal
defenses of the purchaser of the manager's check if the holder is not a holder in due course. In
short, the purchaser of a manager's check may validly countermand payment to a holder who is not
a holder in due course. Accordingly, the drawee bank may refuse to pay the manager's check by
interposing a personal defense of the purchaser.
Having established that Odrada is not a holder in due course, RCBC may refuse payment by
interposing a personal defense of Lim - that the title of Odrada had become defective when there
arose a partial failure or lack of consideration.
RCBC acted in good faith in following the instructions of Lim. The records show that Lim notified
RCBC of the defective condition of the Montero before Odrada presented the manager's checks.
Lim informed RCBC of the hidden defects of the Montero including a misaligned engine, smashed
condenser, crippled bumper support, and defective transmission. RCBC also received a formal
notice of cancellation of the auto loan from Lim and this prompted RCBC to cancel the manager's
checks since the auto loan was the consideration for issuing the manager's checks. RCBC acted in
good faith in stopping the payment of the manager's checks.
Section 58 of the Negotiable Instruments Law provides: "In the hands of any holder other than a
holder in due course, a negotiable instrument is subject to the same defenses as if it were non-
negotiable. x x x." Since Odrada was not a holder in due course, the instrument becomes subject to
personal defenses under the Negotiable Instruments Law. Hence, RCBC may legally act on a
countermand by Lim, the purchaser of the manager's checks.
Page 26 of 434
MATERIAL ALTERATION
CESAR V. AREZA and LOLITA B. AREZA vs. EXPRESS SAVINGS BANK, INC. and MICHAEL
POTENCIANO
G.R. No. 176697, September 10, 2014, J. PEREZ
When the drawee bank pays a materially altered check, it violates the terms of the check, as
well as its duty to charge its client’s account only for bona fide disbursements he had made. If the
drawee did not pay according to the original tenor of the instrument, as directed by the drawer, then
it has no right to claim reimbursement from the drawer, much less, the right to deduct the erroneous
payment it made from the drawer’s account which it was expected to treat with utmost fidelity. The
drawee, however, still has recourse to recover its loss. The collecting banks are ultimately liable for
the amount of the materially altered check. It cannot further pass the liability back to Cesar and Lolita
absent any showing in the negligence on the part of Cesar and Lolita which substantially contributed
to the loss from alteration.
Facts:
Cesar V. Areza and Lolita B. Areza maintained two bank deposits with Express Savings
Bank’s Biñan branch (the Bank).
They were engaged in the business of "buy and sell" of brand new and second-hand motor
vehicles. On 2 May 2000, they received an order from a certain Gerry Mambuay (Mambuay) for the
purchase of a second-hand Mitsubishi Pajero and a brand-new Honda CRV.
The buyer, Mambuay, paid Cesar and Lolita with nine (9) Philippine Veterans Affairs Office
(PVAO) checks payable to different payees and drawn against the Philippine Veterans Bank
(drawee), each valued at Two Hundred Thousand Pesos (P200,000.00) for a total of One Million
Eight Hundred Thousand Pesos (P1,800,000.00).
About this occasion, Cesar and Lolita claimed that Michael Potenciano (Potenciano), the
branch manager of the Bank was present during the transaction and immediately offered the
services of the Bank for the processing and eventual crediting of the said checks to Cesar and Lolita’
account. On the other hand, Potenciano countered that he was prevailed upon to accept the checks
by way of accommodation of Cesar and Lolita who were valued clients of the Bank.
On 3 May 2000, Cesar and Lolita deposited the said checks in their savings account with the
Bank. The Bank, in turn, deposited the checks with its depositary bank, Equitable-PCI Bank, in
Biñan, Laguna. Equitable-PCI Bank presented the checks to the drawee, the Philippine Veterans
Bank, which honored the checks.
On 6 May 2000, Potenciano informed Cesar and Lolita that the checks they deposited with
the Bank were honored. He allegedly warned Cesar and Lolita that the clearing of the checks
pertained only to the availability of funds and did not mean that the checks were not
infirmed. Thus, the entire amount of P1,800,000.00 was credited to Cesar and Lolita’ savings
account. Based on this information, Cesar and Lolita released the two cars to the buyer.
Page 27 of 434
Sometime in July 2000, the subject checks were returned by PVAO to the drawee on the
ground that the amount on the face of the checks was altered from the original amount of P4,000.00
to P200,000.00. The drawee returned the checks to Equitable-PCI Bank by way of Special Clearing
Receipts. In August 2000, the Bank was informed by Equitable-PCI Bank that the drawee
dishonored the checks on the ground of material alterations. Equitable-PCI Bank initially filed a
protest with the Philippine Clearing House. In February 2001, the latter ruled in favor of the drawee
Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account of the Bank in
the amount of P1,800,000.00.
The Bank insisted that they informed Cesar and Lolita of said development in August 2000
by furnishing them copies of the documents given by its depositary bank. On the other hand, Cesar
and Lolita maintained that the Bank never informed them of these developments.
On 9 March 2001, Cesar and Lolita issued a check in the amount of P500,000.00. Said check
was dishonored by the Bank for the reason "Deposit Under Hold." According to Cesar and Lolita,
the Bank unilaterally and unlawfully put their account with the Bank on hold. On 22 March 2001,
Cesar and Lolita’ counsel sent a demand letter asking the Bank to honor their check. The Bank
refused to heed their request and instead, closed the Special Savings Account of the Cesar and Lolita
with a balance of P1,179,659.69 and transferred said amount to their savings account. The Bank then
withdrew the amount of P1,800,000.00 representing the returned checks from Cesar and Lolita’
savings account.
Acting on the alleged arbitrary and groundless dishonoring of their checks and the unlawful
and unilateral withdrawal from their savings account, Cesar and Lolita filed a Complaint for Sum
of Money with Damages against the Bank and Potenciano with the RTC of Calamba. The RTC ruled
in favor of Cesar and Lolita.
Express Savings Bank and Potenciano filed a motion for reconsideration while Cesar and
Lolita filed a motion for execution from the Decision of the RTC. On appeal, the Court of Appeals
affirmed the ruling of the trial court but deleted the award of damages. Hence, Cesar and Lolita
filed the present petition for review on certiorari.
Issues:
1. Whether or not the Bank had the right to debit P1,800,000.00 from Cesar and Lolita’
accounts.
2. What are the liabilities of the drawee, the intermediary banks, and the Cesar and Lolita for
the altered checks?
Ruling:
The Bank cannot debit the savings account of Cesar and Lolita.
When the drawee bank pays a materially altered check, it violates the terms of the check,
as well as its duty to charge its client’s account only for bona fide disbursements he had made. If
the drawee did not pay according to the original tenor of the instrument, as directed by the drawer,
then it has no right to claim reimbursement from the drawer, much less, the right to deduct the
Page 28 of 434
erroneous payment it made from the drawer’s account which it was expected to treat with utmost
fidelity. The drawee, however, still has recourse to recover its loss. It may pass the liability back to
the collecting bank which is what the drawee bank exactly did in this case. It debited the account
of Equitable-PCI Bank for the altered amount of the checks.
When Cesar and Lolita deposited the check with the Bank, they were designating the latter
as the collecting bank. This is in consonance with the rule that a negotiable instrument, such as a
check, whether a manager's check or ordinary check, is not legal tender. As such, after receiving
the deposit, under its own rules, the Bank shall credit the amount in Cesar and Lolita’ account or
infuse value thereon only after the drawee bank shall have paid the amount of the check or the
check has been cleared for deposit.
As collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount of the
materially altered checks. Since Equitable-PCI Bank is not a party to this case and the Bank allowed
its account with Equitable PCI Bank to be debited, it has the option to seek recourse against the
latter in another forum.
As the rule now stands, the 24-hour rule is still in force, that is, any check which should be
refused by the drawee bank in accordance with long standing and accepted banking practices shall
be returned through the PCHC/local clearing office, as the case may be, not later than the next
regular clearing (24-hour). The modification, however, is that items which have been the subject of
material alteration or bearing forged endorsement may be returned even beyond 24 hours so long
that the same is returned within the prescriptive period fixed by law. The consensus among lawyers
is that the prescriptive period is ten (10) years because a check or the endorsement thereon is a
written contract. Moreover, the item need not be returned through the clearing house but by direct
presentation to the presenting bank. In short, the 24-hour clearing rule does not apply to altered
checks.
The Bank cannot debit the savings account of Cesar and Lolita. A depositary/collecting bank
may resist or defend against a claim for breach of warranty if the drawer, the payee, or either the
drawee bank or depositary bank was negligent and such negligence substantially contributed to the
loss from alteration. In the instant case, no negligence can be attributed to Cesar and Lolita.
The drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of the
check prior to alteration. Since Philippine Veterans Bank paid the altered amount of the check, it
may pass the liability back as it did, to Equitable-PCI Bank, the collecting bank. The collecting
banks, Equitable-PCI Bank and the Bank, are ultimately liable for the amount of the materially
altered check. It cannot further pass the liability back to the Cesar and Lolita absent any showing
in the negligence on the part of the Cesar and Lolita which substantially contributed to the loss
from alteration.
CHECKS
AGLIBOT V. SANTIA
G.R. NO. 185945, DECEMBER 5, 2012
Santia loaned the amount of P2,500,000.00 to Pacific Lending & Capital Corporation (PLCC),
through its Manager, petitioner Fideliza J. Aglibot (Aglibot). The loan was evidenced by a
Page 29 of 434
Promissory Note dated July issued by Aglibot in behalf of PLCC, payable in one year subject to
interest at 24% per annum. Allegedly as a guaranty or security for the payment of the note, Aglibot
also issued and delivered to Santia eleven (11) post-dated personal checks drawn from her own
demand account maintained at Metrobank, Camiling Branch.
Upon presentment of the aforesaid checks for payment, they were dishonored by the bank for
having been drawn against insufficient funds or closed account. Hence, Algibot was tried for
violation of BP 22. In her defense, Aglibot claimed that before granting the loan, Santia demanded
and obtained from her a security for the repayment thereof in the form of the aforesaid checks, but
with the understanding that upon remittance in cash of the face amount of the checks, Santia would
correspondingly return to her each check so paid; but despite having already paid the said checks,
Santia refused to return them to her, although he gave her assurance that he would not deposit
them.
Although acquitted on reasonable doubt, Santia was found civilly liable.
Issue: Should Aglibot be held civilly liable on the checks?
Held: Yes. The facts below present a clear situation where Aglibot, as the manager of PLCC, agreed
to accommodate its loan to Santia by issuing her own post-dated checks in payment thereof. She is
what the Negotiable Instruments Law calls an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one of principal and surety — the
accommodation party being the surety. It is a settled rule that a surety is bound equally and
absolutely with the principal and is deemed an original promisor and debtor from the beginning.
The liability is immediate and direct. It is not a valid defense that the accommodation party did not
receive any valuable consideration when he executed the instrument; nor is it correct to say that
the holder for value is not a holder in due course merely because at the time he acquired the
instrument, he knew that the indorser was only an accommodation party.
_____________________________________________________________________________________
METROPOLITAN BANK AND TRUST COMPANY vs. WILFRED N. CHIOK

BANK OF THE PHILIPPINE ISLANDS vs. WILFRED N. CHIOK
GLOBAL BUSINESS BANK, INC. vs. WILFRED N. CHIOK
G.R. No. 172652, G.R. No. 175302, G.R. No. 175394, November 26, 2014,
J. LEONARDO-DE CASTRO
Clearing should not be confused with acceptance. Manager’s and cashier’s checks are still the
subject of clearing to ensure that the same have not been materially altered or otherwise completely
counterfeited. However, manager’s and cashier’s checks are pre-accepted by the mere issuance thereof
by the bank, which is both its drawer and drawee. Thus, while manager’s and cashier’s checks are still
subject to clearing, they cannot be countermanded for being drawn against a closed account, for being
drawn against insufficient funds, or for similar reasons such as a condition not appearing on the face
of the check. Long standing and accepted banking practices do not countenance the countermanding
of manager’s and cashier’s checks on the basis of a mere allegation of failure of the payee to comply
with its obligations towards the purchaser. On the contrary, the accepted banking practice is that
such checks are as good as cash. However, in view of the peculiar circumstances of the case at bench,
Page 30 of 434
We are constrained to set aside the foregoing concepts and principles in favor of the exercise of the
right to rescind a contract upon the failure of consideration thereof.
Facts:
Wilfred N. Chiok (Chiok) had been engaged in dollar trading for several years. He usually
buys dollars from Gonzalo B. Nuguid (Nuguid) at the exchange rate prevailing on the date of the
sale. Chiok pays Nuguid either in cash or manager’s check, to be picked up by the latter or deposited
in the latter’s bank account. Nuguid delivers the dollars either on the same day or on a later date as
may be agreed upon between them, up to a week later. Chiok and Nuguid had been dealing in this
manner for about six to eight years, with their transactions running into millions of pesos. For this
purpose, Chiok maintained accounts with Metropolitan Bank and Trust Company
(Metrobank) and Global Business Bank, Inc. (Global Bank), the latter being then referred to as the
Asian Banking Corporation (Asian Bank). Chiok likewise entered into a Bills Purchase Line
Agreement (BPLA) with Asian Bank. Under the BPLA, checks drawn in favor of, or negotiated to,
Chiok may be purchased by Asian Bank. Upon such purchase, Chiok receives a discounted cash
equivalent of the amount of the check earlier than the normal clearing period.
On July 5, 1995, pursuant to the BPLA, Asian Bank “bills purchased” Security Bank & Trust
Company (SBTC) Manager’s Check (MC) No. 037364 in the amount of P25,500,000.00 issued in the
name of Chiok, and credited the same amount to the latter’s Savings Account No. 2-007-03-00201-
3.
On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the amount of
P7,550,000.00 and MC No. 025939 in the amount of P10,905,350.00 to Gonzalo Bernardo, who is the
same person as Gonzalo B. Nuguid. The two Asian Bank manager’s checks, with a total value of
P18,455,350.00 were issued pursuant to Chiok’s instruction and was debited from his account.
Likewise upon Chiok’s application, Metrobank issued Cashier’s Check (CC) No. 003380 in the
amount of P7,613,000.00 in the name of Gonzalo Bernardo. The same was debited from Chiok’s
Savings Account No. 154-42504955.
Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and 025939, and
Metrobank CC No. 003380), with an aggregate value of P26,068,350.00 in Nuguid’s account with
Far East Bank & Trust Company (FEBTC), the predecessor-in-interest of Bank of the Philippine
Islands (BPI). Nuguid was supposed to deliver US$1,022,288.50, the dollar equivalent of the three
checks as agreed upon, in the afternoon of the same day. Nuguid, however, failed to do so,
prompting Chiok to request that payment on the three checks be stopped. Chiok was allegedly
advised to secure a court order within the 24-hour clearing period.
On the following day, July 6, 1995, Chiok filed a Complaint for damages with application
for ex parterestraining order and/or preliminary injunction with the Regional Trial Court (RTC) of
Quezon City against the spouses Gonzalo and Marinella Nuguid, and the depositary banks, Asian
Bank and Metrobank, represented by their respective managers, Julius de la Fuente and Alice
Rivera. The complaint was docketed as Civil Case No. Q-95-24299 and was raffled to Branch 96.
The complaint was later amended to include the prayer of Chiok to be declared the legal owner of
the proceeds of the subject checks and to be allowed to withdraw the entire proceeds thereof.
Page 31 of 434
On the same day, July 6, 1995, the RTC issued a temporary restraining order (TRO) directing
the spouses Nuguid to refrain from presenting the said checks for payment and the depositary
banks from honoring the same until further orders from the court.
Asian Bank refused to honor MC Nos. 025935 and 025939 in deference to the TRO.
Metrobank claimed that when it received the TRO on July 6, 1995, it refused to honor CC No. 003380
and stopped payment thereon. However, in a letter also dated July 6, 1995, Ms. Jocelyn T. Paz of
FEBTC, Cubao-Araneta Branch informed Metrobank that the TRO was issued a day after the check
was presented for payment. Thus, according to Paz, the transaction was already consummated and
FEBTC had already validly accepted the same. In another letter, FEBTC informed Metrobank that
“the restraining order indicates the name of the payee of the check as GONZALO NUGUID, but the
check is in fact payable to GONZALO BERNARDO. We believe there is a defect in the restraining
order and as such should not bind your bank.” Alice Rivera of Metrobank replied to said letters,
reiterating Metrobank’s position to comply with the TRO lest it be cited for contempt by the trial
court. However, as would later be alleged in Metrobank’s Answer before the trial court, Metrobank
eventually acknowledged the check when it became clear that nothing more can be done to retrieve
the proceeds of the check. Metrobank furthermore claimed that since it is the issuer of CC No.
003380, the check is its primary obligation and should not be affected by any prior transaction
between the purchaser (Chiok) and the payee (Nuguid).
In the meantime, FEBTC, as the collecting bank, filed a complaint against Asian Bank before
the Philippine Clearing House Corporation (PCHC) Arbitration Committee for the collection of the
value of Asian Bank MC No. 025935 and 025939, which FEBTC had allegedly allowed Nuguid to
withdraw on July 5, 1995, the same day the checks were deposited. The case was docketed as
Arbicom Case No. 95-082. The PCHC Arbitration Committee later relayed, in a letter dated August
4, 1995, its refusal to assume jurisdiction over the case on the ground that any step it may take
might be misinterpreted as undermining the jurisdiction of the RTC over the case or a violation of
the July 6, 1995 TRO. On July 25, 1995, the RTC issued an Order directing the issuance of a writ of
preliminary prohibitory injunction. On May 5, 2006, the Court of Appeals rendered the assailed
Decision affirming the RTC Decision with modifications.
Global Bank and BPI filed separate Motions for Reconsideration of the May 5, 2006 Court
of Appeals’ Decision. On November 6, 2006, the Court of Appeals denied the Motions for
Reconsideration.
Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank (G.R. No. 175394) filed
with this Court separate Petitions for Review on Certiorari. In Resolutions dated February 21, 2007
and March 12, 2007, this Court resolved to consolidate the three petitions.
Issues:
1. Whether or not payment of manager’s and cashier’s checks are subject to the condition that
the payee thereof should comply with his obligations to the purchaser of the checks.
2. Whether or not the purchaser of manager’s and cashier’s checks has the right to have the
checks cancelled by filing an action for rescission of its contract with the payee.
Page 32 of 434
3. Whether or not the peculiar circumstances of this case justify the deviation from the
general principles on causes and effects of manager’s and cashier’s checks.
Ruling:
1.
The legal effects of a manager’s check and a cashier’s check are the same. A manager’s check,
like a cashier’s check, is an order of the bank to pay, drawn upon itself, committing in effect its total
resources, integrity, and honor behind its issuance. By its peculiar character and general use in
commerce, a manager’s check or a cashier’s check is regarded substantially to be as good as the
money it represents.
The RTC effectively ruled that payment of manager’s and cashier’s checks are subject to the
condition that the payee thereof complies with his obligations to the purchaser of the checks.
The dedication of such checks pursuant to specific reciprocal undertakings between their
purchasers and payees authorizes rescission by the former to prevent substantial and material
damage to themselves, which authority includes stopping the payment of the checks.
Moreover, it seems to be fallacious to hold that the unconditional payment of

manager’s and cashier’s checks is the rule. To begin with, both manager’s and cashier’s checks are
still subject to regular clearing under the regulations of the Bangko Sentral ng Pilipinas, a fact borne
out by the BSP manual for banks and intermediaries, which provides, among others, in its Section
1603.1, c.
It goes without saying that under the aforecited clearing rule, the enumeration of causes to
return checks is not exclusive but may include other causes which are consistent with long standing
and accepted banking practices. The reason of plaintiffs can well constitute such a justifiable cause
to enjoin payment.
The RTC made an error at this point. While indeed, it cannot be said that manager’s and
cashier’s checks are pre-cleared, clearing should not be confused with acceptance. Manager’s and
cashier’s checks are still the subject of clearing to ensure that the same have not been materially
altered or otherwise completely counterfeited. However, manager’s and cashier’s checks are pre-
accepted by the mere issuance thereof by the bank, which is both its drawer and drawee. Thus,
while manager’s and cashier’s checks are still subject to clearing, they cannot be countermanded
for being drawn against a closed account, for being drawn against insufficient funds, or for similar
reasons such as a condition not appearing on the face of the check. Long standing and accepted
banking practices do not countenance the countermanding of manager’s and cashier’s checks on
the basis of a mere allegation of failure of the payee to comply with its obligations towards the
purchaser. On the contrary, the accepted banking practice is that such checks are as good as cash.
2.
The right to rescind invoked by the Court of Appeals is provided by Article 1191 of the Civil
Code.
Page 33 of 434
The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired
the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
The cause of action supplied by the above article, however, is clearly predicated upon the
reciprocity of the obligations of the injured party and the guilty party. Reciprocal obligations are
those which arise from the same cause, and in which each party is a debtor and a creditor of the
other, such that the obligation of one is dependent upon the obligation of the other. They are to be
performed simultaneously such that the performance of one is conditioned upon the simultaneous
fulfillment of the other. When Nuguid failed to deliver the agreed amount to Chiok, the latter had
a cause of action against Nuguid to ask for the rescission of their contract. On the other hand, Chiok
did not have a cause of action against Metrobank and Global Bank that would allow him to rescind
the contracts of sale of the manager’s or cashier’s checks, which would have resulted in the crediting
of the amounts thereof back to his accounts.
Otherwise stated, the right of rescission under Article 1191 of the Civil Code can only be
exercised in accordance with the principle of relativity of contracts under Article 1131 of the same
code.
3.
In view of the peculiar circumstances of this case, and in the interest of substantial
justice, the Court is constrained to rule in the affirmative.
The Court does not detract from well-settled concepts and principles in commercial law
regarding the nature, causes and effects of a manager’s check and cashier’s check. Such checks are
primary obligations of the issuing bank and accepted in advance by the mere issuance thereof. They
are a bank’s order to pay drawn upon itself, committing in effect its total resources, integrity, and
honor. By their peculiar character and general use in the commercial world, they are regarded
substantially as good as the money they represent. However, in view of the peculiar circumstances
of the case at bench, the Court is constrained to set aside the foregoing concepts and principles in
favor of the exercise of the right to rescind a contract upon the failure of consideration thereof.
In deviating from general banking principles and disposing the case on the basis of equity,
the courtsa quo should have at least ensured that their dispositions were indeed equitable. This
Court observes that equity was not served in the dispositions below wherein Nuguid, the very
person found to have violated his contract by not delivering his dollar obligation, was absolved from
his liability, leaving the banks who are not parties to the contract to suffer the losses of millions of
pesos.
Asian Bank, which is now Global Bank, obeyed the TRO and denied the clearing of the
manager’s checks. As such, Global Bank may not be held liable on account of the knowledge of
whatever else Chiok told them when he asked for the procedure to secure a Stop Payment Order.
Page 34 of 434
On the other hand, there was no mention that Metrobank was ever notified of the alleged failure
of consideration. Only Asian Bank was notified of such fact. Furthermore, the mere allegation of
breach on the part of the payee of his personal contract with the purchaser should not be considered
a sufficient cause to immediately nullify such checks, thereby eroding their integrity and honor as
being as good as cash.CHARACTERISTICS/NATURE
CHECKS
Philippine National Bank v. Sps. Chea Chee Chong

G.R. No. 170865, April 25, 2012; Del Castillo, J:
PNB’s act of releasing the proceeds of the check prior to the lapse of the 15-day clearing period
(construed as 15 banking days) was the proximate cause of the loss. The Court held that the payment
of the amounts of checks without previously clearing them with the drawee bank especially so where
the drawee bank is a foreign bank and the amounts involved were large is contrary to normal or
ordinary banking practice.
Facts:
Ofelia Cheah (Ofelia) and her friend Adelina Guarin (Adelina) were having a conversation in the
latter’s office when Adelina’s friend, Filipina Tuazon (Filipina), approached her to ask if she could
have Filipina’s check cleared and encashed for a service fee of 2.5%. The check is Bank of America
Check No. 190 under the account of Alejandria Pineda and Eduardo Rosales and drawn by Atty.
Eduardo Rosales against Bank of America Alhambra Branch in California, USA, with a face amount
of $300,000.00, payable to cash. Because Adelina does not have a dollar account in which to deposit
the check, she asked Ofelia if she could accommodate Filipina’s request since she has a joint dollar
savings account with her Malaysian husband Cheah Chee Chong (Chee Chong) with PNB.
That same day, Ofelia and Adelina went to PNB Buendia Branch. Assured that the deposit and
subsequent clearance of the check is a normal transaction, Ofelia deposited Filipina’s check. PNB
then sent it for clearing through its correspondent bank, Philadelphia National Bank. Five days
later, PNB received a credit advice from Philadelphia National Bank that the proceeds of the subject
check had been temporarily credited to PNB’s account. Thereafter, Garin called up Ofelia to inform
her that the check had already been cleared. The following day, PNB Buendia Branch, after
deducting the bank charges, credited $299,248.37 to the account of the spouses Cheah. Acting on
Adelina’s instruction to withdraw the credited amount, Ofelia that day personally withdrew
$180,000.00. Adelina was able to withdraw the remaining amount the next day after having been
authorized by Ofelia. Filipina received all the proceeds.
Thereafter, Philadelphia National Bank contacted PNB and informed the latter that the check was
returned due to insufficiency of funds. PNB was demanding the return of the money but the same
can no longer be returned.
Meanwhile, the spouses Cheah have been constantly meeting with the bank officials to discuss
matters regarding the incident and the recovery of the value of the check while the cases against
the alleged perpetrators remain pending. Chee Chong in the end signed a PNB drafted letter which
states that the spouses Cheah are offering their condominium units as collaterals for the amount
withdrawn. Under this setup, the amount withdrawn would be treated as a loan account with
Page 35 of 434
deferred interest while the spouses try to recover the money from those who defrauded them.
Apparently, Chee Chong signed the letter after the Vice President and Manager of PNB Buendia
Branch asked the spouses Cheah to help him and the other bank officers as they were in danger of
losing their jobs because of the incident.
Although some of the officers of PNB were amenable to the proposal, the same did not materialize.
Subsequently, PNB sent a demand letter to spouses Cheah for the return of the amount of the
check, froze their peso and dollar deposits and filed a complaint against them for Sum of Money
with the Regional Trial Court (RTC) of Manila. In said complaint, PNB demanded payment of
around P8,202,220.44, plus interests and attorney’s fees, from the spouses Cheah. The RTC ruled in
favor of PNB and held Sps. Cheah guilty of contributory negligence.
Sps. Cheah appealed to the CA. The latter held the parties equally liable for the loss, hence, this
petition.
Issue: Whether PNB can be held liable for the loss
Held: Yes. PNB’s act of releasing the proceeds of the check prior to the lapse of the 15-day clearing
period (construed as 15 banking days) was the proximate cause of the loss. The Court held that the
payment of the amounts of checks without previously clearing them with the drawee bank
especially so where the drawee bank is a foreign bank and the amounts involved were large is
contrary to normal or ordinary banking practice.
The Court further reiterated that before the check shall have been cleared for deposit, the collecting
bank can only ‘assume’ at its own risk that the check would be cleared and paid out. The delay in
the receipt by PNB Buendia Branch of the November 13, 1992 SWIFT message notifying it of the
dishonor of the subject check is of no moment, because had PNB Buendia Branch waited for the
expiration of the clearing period and had never released during that time the proceeds of the check,
it would have already been duly notified of its dishonor. Clearly, PNB’s disregard of its preventive
and protective measure against the possibility of being victimized by bad checks had brought upon
itself the injury of losing a significant amount of money.
INSURANCE LAW
CONTRACT OF INSURANCE
INSURANCE CONTRACTS
ALPHA INSURANCE AND SURETY CO. vs. ARSENIA SONIA CASTOR
G.R. No. 198174, September 02, 2013
J. Peralta
Contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense.
Accordingly, in interpreting the exclusions in an insurance contract, the terms used specifying the
excluded classes therein are to be given their meaning as understood in common speech.
A contract of insurance is a contract of adhesion. So, when the terms of the insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the insurer
Page 36 of 434
from non-compliance with his obligation.
Facts:
On February 21, 2007, respondent entered into a contract of insurance, Motor Car Policy No.
MAND/CV-00186, with petitioner, involving her motor vehicle, a Toyota Revo DLX DSL. The
contract of insurance obligates the petitioner to pay the respondent the amount of Six Hundred
Thirty Thousand Pesos (P630,000.00) in case of loss or damage to said vehicle during the period
covered, which is from February 26, 2007 to February 26, 2008.
On April 16, 2007, respondent's car was stolen by his driver but petitioner denied the insurance
claim on the ground that the insurance policy provides that: The Company shall not be liable for
any malicious damage caused by the Insured, any member of his family or by “A PERSON IN THE
INSURED’S SERVICE.
Respondent filed a Complaint for Sum of Money where RTC rendered a decision in favor of
respondent and directed petitioner to pay respondent the amount of the car plus interest. The
Court of Appeals affirmed the ruling of the RTC. Hence, this petition.
Issue:
Whether the theft perpetrated by the driver of the insured is an exception to the coverage from the
insurance policy of respondent.
Ruling:
The petition is denied.
Ruling in favor of respondent, the RTC of Quezon City scrupulously elaborated that theft
perpetrated by the driver of the insured is not an exception to the coverage from the insurance
policy, since Section III thereof did not qualify as to who would commit the theft. Thus:
Theft perpetrated by a driver of the insured is not an exception to the coverage from the insurance
policy subject of this case. This is evident from the very provision of Section III – “Loss or Damage.”
The insurance company, subject to the limits of liability, is obligated to indemnify the insured
against theft. Said provision does not qualify as to who would commit the theft. Thus, even if the
same is committed by the driver of the insured, there being no categorical declaration of exception,
the same must be covered. As correctly pointed out by the plaintiff, “(A)n insurance contract should
be interpreted as to carry out the purpose for which the parties entered into the contract which is
to insure against risks of loss or damage to the goods. Such interpretation should result from the
natural and reasonable meaning of language in the policy.
Where restrictive provisions are open to two interpretations, that which is most favorable to the
insured is adopted.” The defendant would argue that if the person employed by the insured would
commit the theft and the insurer would be held liable, then this would result to an absurd situation
where the insurer would also be held liable if the insured would commit the theft. This argument
is certainly flawed. Of course, if the theft would be committed by the insured himself, the same
would be an exception to the coverage since in that case there would be fraud on the part of the
Page 37 of 434
insured or breach of material warranty under Section 69 of the Insurance Code.
Moreover, contracts of insurance, like other contracts, are to be construed according to the sense
and meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense.
Accordingly, in interpreting the exclusions in an insurance contract, the terms used specifying the
excluded classes therein are to be given their meaning as understood in common speech.
Adverse to petitioner’s claim, the words “loss” and “damage” mean different things in common
ordinary usage. The word “loss” refers to the act or fact of losing, or failure to keep possession, while
the word “damage” means deterioration or injury to property. Therefore, petitioner cannot exclude
the loss of respondent’s vehicle under the insurance policy under paragraph 4 of “Exceptions to
Section III,” since the same refers only to “malicious damage,” or more specifically, “injury” to the
motor vehicle caused by a person under the insured’s service. Paragraph 4 clearly does not
contemplate “loss of property,” as what happened in the instant case.
Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the insurance
contract contain limitations on liability, courts should construe them in such a way as to preclude
the insurer from non-compliance with his obligation.
_____________________________________________________________________________________
PARAMOUNT LIFE & GENERAL INSURANCE CORPORATION, Petitioner, v.

CHERRY T. CASTRO AND GLENN ANTHONY T. CASTRO, Respondents.
G.R. No. 195728
CHERRY T. CASTRO AND GLENN ANTHONY T. CASTRO, Petitioners, v.

PARAMOUNT LIFE & GENERAL INSURANCE CORPORATION, Respondent.
G.R. No. 211329, April 19, 2016, SERENO, C.J.
Mortgage redemption insurance is a device for the protection of both the mortgagee and the
mortgagor. On the part of the mortgagee, it has to enter into such form of contract so that in the
event of the unexpected demise of the mortgagor during the subsistence of the mortgage contract, the
proceeds from such insurance will be applied to the payment of the mortgage debt, thereby relieving
the heirs of the mortgagor from paying the obligation. In a similar vein, ample protection is given to
the mortgagor under such a concept so that in the event of death, the mortgage obligation will be
extinguished by the application of the insurance proceeds to the mortgage indebtedness.
In allowing the inclusion of the mortgagee bank as a third-party defendant, the Court
recognizes the inseparable interest of the bank (as policyholder of the group policy) in the validity of
the individual insurance certificates issued by the insurer. The mortgagee bank need not institute a
separate case, considering that its cause of action is intimately related to that of the insurer as against
the insured-mortgagor. The soundness of admitting a third-party complaint hinges on causal
connection between the claim of the plaintiff in his complaint and a claim for contribution, indemnity
or other relief of the defendant against the third-party defendant.
Page 38 of 434
FACTS:
In 2004, the Philippine Postal Savings Bank, Incorporated (PPSBI) applied for and obtained
insurance from Paramount, which accordingly issued Group Master Policy No. G-086. Under
Section 20, Article IV of the said policy, "all death benefits shall be payable to the creditor,
PPSBI, as its interest may appeal."
Meanwhile, Virgilio J. Castro (Virgilio) - Cherry's husband and Glenn's father - obtained a housing
loan from the PPSBI in the amount of P1.5 million. PPSBI required Virgilio to apply for a mortgage
redemption insurance (MRI) from Paramount to cover the loan. In his application for the said
insurance policy, Virgilio named Cherry and Glenn as beneficiaries. Paramount issued Certificate
No. 041913 effective 12 March 2008 in his favor, subject to the terms and conditions of Group Master
Policy No. G-086.
On 26 February 2009, Virgilio died of septic shock. Consequently, a claim was filed for death
benefits under the individual insurance coverage issued under the group policy. Paramount
however denied the claim, on the ground of the failure of Virgilio to disclose material information,
or material concealment or misrepresentation. It said that when Virgilio submitted his insurance
application on 12 March 2008, he made some material misrepresentations by answering "no" to
questions on whether he had any adverse health history and whether he had sought medical advice
or consultation concerning it. Paramount learned that in 2005, Virgilio had sought consultation in
a private hospital after complaining of a dull pain in his lumbosacral area. Because of the alleged
material concealment or misrepresentation, it declared Virgilio's individual insurance certificate
(No. 041913) rescinded, null, and absolutely void from the very beginning.
Paramount filed a Complaint with the RTC praying that the Application and Insurance Certificate
No. 041913 covering the individual insurance of Virgilio be declared null and void by reason of
material concealment and misrepresentation.
The Castros filed a motion to include the PPSBI as an indispensable party-defendant. The RTC
thereafter denied the motion, reasoning that Paramount's Complaint could be fully resolved
without the PPSBI's participation.
Consequently, the Castros filed a Motion for Leave to File a Third Party-Complaint and to Admit
Attached Third-Party Complaint. They argued that due to the death of Virgilio, and by virtue of
Group Policy No. G-086 in relation to Certificate No. 041913, PPSBI stepped into the shoes of Cherry
and Glen under the principle of "indemnity, subrogation, or any other reliefs" found in Section 22,
Rule 6 of the Rules of Court. This motion was likewise denied, on the ground that "what the
defendants herein want is the introduction of a controversy that is entirely foreign and distinct
from the main cause." The Castros' Motion for Reconsideration was again denied in a
Resolution dated 19 April 2010.
The Castros assailed the RTC Resolutions through a Petition for Certiorari filed with the CA. The
CA partially granted the Petition by allowing a third-party complaint to be filed against the PPSBI.
Page 39 of 434
ISSUE:
Whether the CA erred in remanding the case to the RTC for the admission of the Third-Party
Complaint against PPSBI.
RULING:
The CA correctly ruled to admit the Castros' Third-Party Complaint.
In Great Pacific Life Assurance Corp. v. Court of Appeals, we defined mortgage redemption
insurance as a device for the protection of both the mortgagee and the mortgagor:
On the part of the mortgagee, it has to enter into such form of contract so that in the event
of the unexpected demise of the mortgagor during the subsistence of the mortgage contract,
the proceeds from such insurance will be applied to the payment of the mortgage debt,
thereby relieving the heirs of the mortgagor from paying the obligation. In a similar vein,
ample protection is given to the mortgagor under such a concept so that in the event of
death, the mortgage obligation will be extinguished by the application of the insurance
proceeds to the mortgage indebtedness.
In this case, the PPSBI, as the mortgagee-bank, required Virgilio to obtain a Mortgage Redemption
Insurance (MRI) from Paramount to cover his housing loan. The issuance of the MRI, as evidenced
by the Individual Insurance Certificate in Virgilio's favor, was derived from the group insurance
policy issued by Paramount in favor of the PPSBI. Paramount undertook to pay the PPSBI "the
benefits in accordance with the Insurance Schedule, upon receipt and approval of due proof that
the member has incurred a loss for which benefits are payable."
Should Paramount succeed in having the individual insurance certificate nullified, the PPSBI shall
then proceed against the Castros. This would contradict the provisions of the group insurance
policy that ensure the direct payment by the insurer to the bank:
Notwithstanding the provision on Section 22 "No Assignment" of Article IV Benefit

Provisions, and in accordance with provisions of Section 6 "Amendment of this Policy"
under Article II General Provisions of the Group Policy, it is hereby agreed that all death
benefits shall be payable to the Creditor, Philippine Postal Savings Bank as its
interest may appeal.
In allowing the inclusion of the PPSBI as a third-party defendant, the Court recognizes the
inseparable interest of the bank (as policyholder of the group policy) in the validity of the individual
insurance certificates issued by Paramount. The PPSBI need not institute a separate case,
considering that its cause of action is intimately related to that of Paramount as against the Castros.
The soundness of admitting a third-party complaint hinges on causal connection between the claim
of the plaintiff in his complaint and a claim for contribution, indemnity or other relief of the
defendant against the third-party defendant. In this case, the Castros stand to incur a bad debt to
the PPSBI - the exact event that is insured against by Group Master Policy No. G-086 - in the event
that Paramount succeeds in nullifying Virgilio's Individual Insurance Certificate.
Page 40 of 434
The CA correctly ruled that to admit the Castros' Third-Party Complaint, in which they can assert
against the PPSBI an independent claim they would otherwise assert in another action, would
prevent multiplicity of suits.
LIFE INSURANCE
MANILA BANKERS LIFE INSURANCE CORPORATION vs. CRESENCIA P. ABAN

G.R. No. 175666. July 29, 2013
J. Del Castillo
The "Incontestability Clause" under Section 48 of the Insurance Code provides that an insurer
is given two years – from the effectivity of a life insurance contract and while the insured is alive – to
discover or prove that the policy is void ab initio or is rescindible by reason of the fraudulent
concealment or misrepresentation of the insured or his agent. After the two-year period lapses, or
when the insured dies within the period, the insurer must make good on the policy, even though the
policy was obtained by fraud, concealment, or misrepresentation.
Facts:
Delia Sotero (Sotero) took out a life insurance policy from Manila Bankers Life Insurance
Corporation (Bankers Life), designating respondent Cresencia P. Aban (Aban), her niece, as
beneficiary. Petitioner issued the policy, with a face value of P100,000.00, in Sotero’s favor after the
requisite medical examination and payment of the insurance premium.
On April 10, 1996, when the insurance policy had been in force for more than two years and seven
months, Sotero died. Respondent filed a claim for the insurance proceeds but petitioner denied
respondent’s claim and refunded the premiums paid on the policy allegedly because the policy is
obtained with of fraud, concealment and/or misrepresentation which renders it voidable. Petitioner
filed a civil case for rescission and/or annulment of the policy.
The RTC rendered a decision in favor of Aban. In dismissing the case, it found out that Sotero, and
not respondent,was the one who procured the insurance. It held further that under Section 48,
petitioner had only two years from the effectivity of the policy to question the same; since the
policy had been in force for more than two years, hence petitioner is now barred from contesting
the same or seeking a rescission or annulment thereof. The petitioner interpose an appeal with the
CA but the appellate court affirmed the RTC decision. Hence the present petition.
Issue:
Whether or not the Court of Appeals erred in sustaining the application of the incontestability
provision in the Insurance Code
Ruling:
With the crucial finding of fact – that it was Sotero who obtained the insurance for herself –
petitioner’s case is severely weakened, if not totally disproved. Allegations of fraud, which are
Page 41 of 434
predicated on respondent’s alleged posing as Sotero and forgery of her signature in the insurance
application, are at once belied by the trial and appellate courts’ finding that Sotero herself took out
the insurance for herself. Fraudulent intent on the part of the insured must be established to entitle
the insurer to rescind the contract. In the absence of proof of such fraudulent intent, no right to
rescind arises.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured.
Under the provision, an insurer is given two years – from the effectivity of a life insurance contract
and while the insured is alive – to discover or prove that the policy is void ab initio or is rescindible
by reason of the fraudulent concealment or misrepresentation of the insured or his agent. After the
two-year period lapses, or when the insured dies within the period, the insurer must make good on
the policy, even though the policy was obtained by fraud, concealment, or misrepresentation. This
is not to say that insurance fraud must be rewarded, but that insurers who recklessly and
indiscriminately solicit and obtain business must be penalized, for such recklessness and lack of
discrimination ultimately work to the detriment of bona fide takers of insurance and the public in
general.
Further, Section 48 prevents a situation where the insurer knowingly continues to accept annual
premium payments on life insurance, only to later on deny a claim on the policy on specious claims
of fraudulent concealment and misrepresentation, such as what obtains in the instant case. Thus,
instead of conducting at the first instance an investigation into the circumstances surrounding the
issuance of the policy which would have timely exposed the supposed flaws and irregularities
attending it as it now professes, petitioner appears to have turned a blind eye and opted instead to
continue collecting the premiums on the policy. For nearly three years, petitioner collected the
premiums and devoted the same to its own profit. It cannot now deny the claim when it is called
to account. Section 48 must be applied to it with full force and effect.
Petitioner claims that its insurance agent, who solicited the Sotero account, happens to be the
cousin of respondent’s husband, and thus insinuates that both connived to commit insurance fraud.
If this were truly the case, then petitioner would have discovered the scheme earlier if it had in
earnest conducted an investigation into the circumstances surrounding the Sotero policy. But
because it did not and it investigated the Sotero account only after a claim was filed thereon more
than two years later, naturally it was unable to detect the scheme. For its negligence and inaction,
the Court cannot sympathize with its plight.
Finally, insurers may not be allowed to delay the payment of claims by filing frivolous cases in court,
hoping that the inevitable may be put off for years – or even decades – by the pendency of these
unnecessary court cases. In the meantime, they benefit from collecting the interest and/or returns
on both the premiums previously paid by the insured and the insurance proceeds which should
otherwise go to their beneficiaries. The business of insurance is a highly regulated commercial
activity in the country, and is imbued with public interest. An insurance contract is a contract of
adhesion which must be construed liberally in favor of the insured and strictly against the insurer
in order to safeguard the former’s interest.
Page 42 of 434
NON-LIFE INSURANCE
Fortune Medicare, Inc. vs. David Robert Amorin

G.R. No195872; March 12, 2014
J. Reyes
For purposes of determining the liability of a health care provider to its members, a health
care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. Once
the member incurs hospital, medical or any other expense arising from sickness, injury or other
stipulated contingent, the health care provider must pay for the same to the extent agreed upon under
the contract. Limitations as to liability must be distinctly specified and clearly reflected in the extent
of coverage which the company voluntary assume, otherwise, any ambiguity arising therein shall be
construed in favor of the member.
Facts:
David Robert Amorin was a cardholder/member of Fortune Medicare, Inc. (Fortune Care). While
on vacation in Hawaii, Amorin underwent an emergency surgery, specifically appendectomy, at St.
Francis Medical Center, causing him to incur professional and hospitalization expenses of $7,242.35
and $1,777.79, respectively. He attempted to recover from Fortune Care the full amount thereof
upon his return to Manila, but the company merely approved a reimbursement of P12, 151, an
amount that was based on the average cost of appendectomy if the procedure were performed in
an accredited hospital in Metro Manila. Amorin received the said amount under protest, but asked
for its adjustment to cover the total amount of professional fees which he had paid, and 80% of the
approved standard charges based on “American standard” considering that the emergency
procedure occurred in the US. To support his claim, Amorin cited Section 3, Art. V on Benefits and
Coverages of the Health Care Contract.
Fortune Care denied the request thereby prompting Amorin to file a complaint for breach of
contract with damages. For its part, Fortune Care argued that the Health Care Contract did not
cover hospitalization costs and professional fees incurred in foreign countries, as the contract’s
operation was confined to Philippine territory. The RTC dismissed Amorin’s complaint.
Dissatisfied, Amorin appealed the RTC decision to the CA. Subsequently, the CA rendered its
decision granting the appeal, thereby reversing and setting aside the trial court decision. Hence,
the appeal. Fortune Care argues that the phase “approved standard charges” did not automatically
mean “Philippine Standard”
Issue:
Whether Fortune Care is liable to the member for the amount demanded by the latter.
Ruling:
Petition Denied.
For purposes of determining the liability of a health care provider to its members, jurisprudence
holds that a health care agreement is in the nature of non-life insurance, which is primarily a
contract of indemnity. Once the member incurs hospital, medical or any other expense arising
Page 43 of 434
from sickness, injury or other stipulated contingent, the health care provider must pay for the same
to the extent agreed upon under the contract.
In the instant case, the extent of Fortune Care’s liability to Amorin under the attendant
circumstances was governed by Section 3(B), Article V of the subject Health Care Contract,
considering that the appendectomy which the member had to undergo qualified as an emergency
care, but the treatment was performed at St. Francis Medical Center in Honolulu, Hawaii, U.S.A., a
non-accredited hospital. We restate the pertinent portions of Section 3(B):
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL

1. Whether as an in-patient or out-patient, FortuneCare shall reimburse the total
hospitalization cost including the professional fee (based on the total approved
charges) to a member who receives emergency care in a non-accredited
hospital. The above coverage applies only to Emergency confinement within
Philippine Territory. However, if the emergency confinement occurs in foreign
territory, Fortune Care will be obligated to reimburse or pay eighty (80%)
percent of the approved standard charges which shall cover the
hospitalization costs and professional fees.
The point of dispute now concerns the proper interpretation of the phrase “approved standard
charges”, which shall be the base for the allowable 80% benefit. The trial court ruled that the phrase
should be interpreted in light of the provisions of Section 3(A), i.e., to the extent that may be
allowed for treatments performed by accredited physicians in accredited hospitals. As the appellate
court however held, this must be interpreted in its literal sense, guided by the rule that any
ambiguity shall be strictly construed against Fortune Care, and liberally in favor of Amorin.
As may be gleaned from the Health Care Contract, the parties thereto contemplated the possibility
of emergency care in a foreign country. As the contract recognized Fortune Care’s liability for
emergency treatments even in foreign territories, it expressly limited its liability only insofar as the
percentage of hospitalization and professional fees that must be paid or reimbursed was concerned,
pegged at a mere 80% of the approved standard charges.
In the absence of any qualifying word that clearly limited Fortune Care’s liability to costs that are
applicable in the Philippines, the amount payable by Fortune Care should not be limited to the cost
of treatment in the Philippines, as to do so would result in the clear disadvantage of its member. If,
as Fortune Care argued, the premium and other charges in the Health Care Contract were merely
computed on assumption and risk under Philippine cost and, that the American cost standard or
any foreign country’s cost was never considered, such limitations should have been distinctly
specified and clearly reflected in the extent of coverage which the company voluntarily assumed.
FIRE INSURANCE
On 6 September 1995, United Merchants Corporation (UMC) insured its stocks in trade against fire
with Country Bankers Insurance Corporation (CBIC) for P15,000,000.00 valid until 6 September
1996. On 7 May 1996, the parties increased the insured amount to 50 million effective 7 May 1996
to 10 January 1997. During the duration of the policy, fire gutted the warehouse where the insured
property was located. When CBIC refused to pay, UMC filed a Complaint.
Page 44 of 434
Issues:
[i] Can CBIC avoid payment on the ground that the fire was intentional?
[ii] Can CBIC avoid payment on the ground of fraud?
Held: CBIC cannot avoid payment on the ground that the fire was intentional. An insurer who
seeks to defeat a claim because of an exception or limitation in the policy has the burden of
establishing that the loss comes within the purview of the exception or limitation. If loss is proved
apparently within a contract of insurance, the burden is upon the insurer to establish that the loss
arose from a cause of loss which is excepted or for which it is not liable, or from a cause which limits
its liability. In the present case, CBIC failed to discharge its primordial burden of establishing that
the damage or loss was caused by arson, a limitation in the policy.
In prosecutions for arson, proof of the crime charged is complete where the evidence establishes:
(1) the corpus delicti, that is, a fire caused by a criminal act; and (2) the identity of the defendants
as the one responsible for the crime. Corpus delicti means the substance of the crime, the fact that
a crime has actually been committed. This is satisfied by proof of the bare occurrence of the fire
and of its having been intentionally caused. In the present case, CBICs evidence did not prove that
the fire was intentionally caused by the insured. First, the findings of CBICs witnesses, Cabrera and
Lazaro, were based on an investigation conducted more than four months after the fire. The
testimonies of Cabrera and Lazaro, as to the boxes doused with kerosene as told to them
by barangay officials, are hearsay because the barangay officials were not presented in court.
Cabrera and Lazaro even admitted that they did not conduct a forensic investigation of the
warehouse nor did they file a case for arson. Second, the Sworn Statement of Formal Claim
submitted by UMC, through its adjuster, states that the cause of the fire was faulty electrical
wiring/accidental in nature. CBIC is bound by this evidence because in its Answer, it admitted that
it designated said adjuster to evaluate UMCs loss. Third, the Certification by the Bureau of Fire
Protection states that the fire was accidental in origin. This Certification enjoys the presumption of
regularity, which CBIC failed to rebut.
However, CBIC can avoid the policy on the ground of fraud. The documents that it submitted as
proof of its loss of stocks in trade amounting to P50,000,000.00 are fraudulent. First, the invoices
reveal that the stocks in trade purchased for 1996 amounts to P20,000,000.00 which were purchased
in one month. Thus, UMC needs to prove purchases amounting to P30,000,000.00 worth of stocks
in trade for 1995 and prior years. However, in the Statement of Inventory it submitted to the BIR,
which is considered an entry in official records, UMC stated that it had no stocks in trade as of 31
December 1995. Equally important, the invoices (Exhibits P-DD) from Fuze Industries
Manufacturer Phils. were suspicious. In its 1996 Financial Report, which UMC admitted as existing,
authentic and duly executed during the 4 December 2002 hearing, it had P1,050,862.71 as total
assets and P167,058.47 as total liabilities. Thus, either amount in UMCs Income Statement or
Financial Reports is twenty-five times the claim UMC seeks to enforce.
Such difference point to a deliberate intent to demand from insurance companies payment for
indemnity of goods not existing at the time of the fire. This constitutes the so-called fraudulent
claim which, by express agreement between the insurers and the insured, is a ground for the
exemption of insurers from civil liability even if the difference does not void any warranty.
Page 45 of 434
INSURANCE POLICY
Gaisano v. Development Insurance Corporation, G.R. No. 190702
On September 27, 1996, respondent issued a comprehensive commercial vehicle policy to petitioner
in the amount of Pl,500,000.00 over petitioner’s vehicle for a period of one year commencing on
September 27, 1996 up to September 27, 1997. To collect the premiums and other charges on the
policies, respondent's agent, Trans-Pacific Underwriters Agency (Trans-Pacific), issued a statement
of account to petitioner's company, Noah's Ark Merchandising (Noah's Ark). Noah's Ark
immediately processed the payments and issued a Far East Bank check dated September 27, 1996
payable to Trans-Pacific on the same day. However, nobody from Trans-Pacific picked up the check
that day (September 27). Trans-Pacific informed Noah's Ark that its messenger would get the check
the next day, September 28. In the evening of September 27, 1996, the vehicle was stolen. Oblivious
of the incident, Trans-Pacific picked up the check the next day, September 28. It issued an official
receipt numbered 124713 dated September 28, 1996, acknowledging the receipt of P55,620.60 for the
premium and other charges over the vehicle. The check issued to TransPacific for P140,893.50 was
deposited with Metrobank for encashment on October 1, 1996. Was there a valid insurance contract
from which petitioner can claim?
There was none. The general rule in insurance laws is that unless the premium is paid, the insurance
policy is not valid and binding. Here, there is no dispute that the check was delivered to and was
accepted by respondent's agent, Trans-Pacific, only on September 28, 1996. No payment of
premium had thus been made at the time of the loss of the vehicle on September 27, 1996. While
petitioner claims that Trans-Pacific was informed that the check was ready for pick-up on
September 27, 1996, the notice of the availability of the check, by itself, does not produce the effect
of payment of the premium. Trans-Pacific could not be considered in delay in accepting the check
because when it informed petitioner that it will only be able to pick-up the check the next day,
petitioner did not protest to this, but instead allowed Trans-Pacific to do so. Thus, at the time of
loss, there was no payment of premium yet to make the insurance policy effective.
In UCPB General Insurance Co., Inc., we summarized the exceptions to the general rule above as
follows: (1) in case of life or industrial life policy, whenever the grace period provision applies, as
expressly provided by Section 77 itself; (2) where the insurer acknowledged in the policy or contract
of insurance itself the receipt of premium, even if premium has not been actually paid, as expressly
provided by Section 78 itself; (3) where the parties agreed that premium payment shall be in
installments and partial payment has been made at the time of loss, as held in Makati Tuscany
Condominium Corp. v. Court of Appeals (4) where the insurer granted the insured a credit term for
the payment of the premium, and loss occurs before the expiration of the term, as held in Makati
Tuscany Condominium Corp.; and (5) where the insurer is in estoppel as when it has consistently
granted a 60 to 90-day credit term for the payment of premiums. The insurance policy in question
does not fall under any of these exceptions. We cannot sustain petitioner's claim that the parties
agreed that the insurance contract is immediately effective upon issuance despite nonpaymentof
the premiums. Even if there is a waiver of pre-payment ofpremiums, that in itself does not become
an exception to Section 77, unless the insured clearly gave a credit term or extension. This is the
clear import of the fourth exception in the UCPB General Insurance Co., Inc. To rule otherwise
would render nugatory the requirement in Section 77 that "[n]otwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid, x x x."
Page 46 of 434
INCONTESTABILITY PERIOD
THE INSULAR LIFE ASSURANCE COMPANY, LTD., Petitioner, v. PAZ Y. KHU, FELIPE Y.
KHU, JR., AND FREDERICK Y. KHU, Respondents.
G.R. No. 195176, April 18, 2016, DEL CASTILLO, J.
The date of last reinstatement mentioned in Section 48 of the Insurance Code pertains to the
date that the insurer approved' the application for reinstatement. However, in light of the ambiguity
in the insurance documents to this case, this Court adopts the interpretation favorable to the insured
in determining the date when the reinstatement was approved.
Facts:
On March 6, 1997, Felipe N. Khu, Sr. (Felipe) applied for a life insurance policy with Insular Life
under the latter’s Diamond Jubilee Insurance Plan. Felipe accomplished the required medical
questionnaire wherein he did not declare any illness or adverse medical condition. Insular Life
thereafter issued him an insurance policy with a face value of P1 million. This took effect on June
22, 1997.
On June 23, 1999, Felipe’s policy lapsed due to non-payment of the premium covering the period
from June 22, 1999 to June 23, 2000.
On September 7, 1999, Felipe applied for the reinstatement of his policy and paid P25,020.00 as
premium. Except for the change in his occupation of being self-employed to being the Municipal
Mayor of Binuangan, Misamis Oriental, all the other information submitted by Felipe in his
application for reinstatement was virtually identical to those mentioned in his original policy.
On October 12, 1999, Insular Life advised Felipe that his application for reinstatement may only be
considered if he agreed to certain conditions such as payment of additional premium and the
cancellation of the riders pertaining to premium waiver and accidental death benefits. Felipe agreed
to these conditions and paid the premium. On June 23, 2000, Felipe paid the annual premium in
the amount of P28,000.00 covering the period from June 22, 2000 to June 22, 2001. And on July 2,
2001, he also paid the same amount as annual premium covering the period from June 22, 2001 to
June 21, 2002. On September 22, 2001, Felipe died.
The beneficiaries demanded for the proceeds but the same was denied by Insular Life on the ground
that Felipe did not disclose the ailments (viz., Type 2 Diabetes Mellitus, Diabetes Nephropathy and
Alcoholic Liver Cirrhosis with Ascites) that he already had prior to his application for reinstatement
of his insurance policy; and that it would not have reinstated the insurance policy had Felipe
disclosed the material information on his adverse health condition. It contended that when Felipe
died, the policy was still contestable.
The RTC ruled in favor of the beneficiaries. This was upheld by the CA, hence, this petition.
Issue: Whether Felipe’s reinstated life insurance policy is already incontestable at the time of his
death.
Held: Petition denied.
Page 47 of 434
1. After a policy of life insurance made payable on the death of the insured shall have been in
force during the lifetime of the insured for a period of two years from the date of its issue
or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is
rescindible by reason of the fraudulent concealment or misrepresentation of the insured or
his agent.
Section 48 regulates both the actions of the insurers and prospective takers of life insurance.
It gives insurers enough time to inquire whether the policy was obtained by fraud,
concealment, or misrepresentation; on the other hand, it forewarns scheming individuals
that their attempts at insurance fraud would be timely uncovered – thus deterring them
from venturing into such nefarious enterprise. At the same time, legitimate policy holders
are absolutely protected from unwarranted denial of their claims or delay in the collection
of insurance proceeds occasioned by allegations of fraud, concealment, or
misrepresentation by insurers, claims which may no longer be set up after the two-year
period expires as ordained under the law.
The insurer is deemed to have the necessary facilities to discover such fraudulent
concealment or misrepresentation within a period of two (2) years. It is not fair for the
insurer to collect the premiums as long as the insured is still alive, only to raise the issue of
fraudulent concealment or misrepresentation when the insured dies in order to defeat the
right of the beneficiary to recover under the policy.
At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary
is given the stability to recover under the policy when the insured dies. The provision also
makes clear when the two-year period should commence in case the policy should lapse
and is reinstated, that is, from the date of the last reinstatement.
2. The policy was reinstated in June 1999 (instead of December 1999 as claimed by the insurer).
The court ruled in favor of the insured and in favor of the effectivity of the insurance
contract in the midst of ambiguity in the insurance contract provisions.
Indemnity and liability insurance policies are construed in accordance with the general rule
of resolving any ambiguity therein in favor of the insured, where the contract or policy is
prepared by the insurer. A contract of insurance, being a contract of adhesion, par
excellence, any ambiguity therein should be resolved against the insurer; in other
words, it should be construed liberally in favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with extreme jealousy and must be construed in
such a way as to preclude the insurer from noncompliance with its obligations.
RESCISSION OF INSURANCE CONTRACTS
MALAYAN INSURANCE V. PHILIPPINES FIRST INSURANCE CO.,

GR No. 184300, July 11, 2012
Reputable is the forwarder of Wyeth’s goods. Under their contract, Reputable agreed to be liable
for any cause whatsoever, including that due to theft or robbery and other force majeure.
Page 48 of 434
Pursuant to their contract of carriage, Reputable insured Wyeth’s goods with Malayan. Wyeth also
has its own insurance policy from Philippines First Insurance Co., Inc. (Phil First).
During the life of these insurance policies, the truck carrying Wyeth’s goods were hijacked. Thus,
Phil-First paid Wyeth on its policy and sued Reputable and Malayan for reimbursement. It was
established that Reputable is a private carrier and that its agreement to be liable in the manner it
assumed is valid. Seeking to avoid liability, Malayan invoked Section 5 of its SR Policy which reads:
Section 5. INSURANCE WITH OTHER COMPANIES. The insurance does not cover
any loss or damage to property which at the time of the happening of such loss or damage
is insured by or would but for the existence of this policy, be insured by any Fire or Marine
policy or policies except in respect of any excess beyond the amount which would have been
payable under the Fire or Marine policy or policies had this insurance not been effected].
Malayan argued that inasmuch as there was already a marine policy issued by Philippines
First securing the same subject matter against loss and that since the monetary coverage/value of
the Marine Policy is more than enough to indemnify the hijacked cargo, Philippines First alone
must bear the loss. In the alternative, it argues that its liability should be pro rata only based on
Section 12 of its SR policy which reads:
12. OTHER INSURANCE CLAUSE. If at the time of any loss or damage happening to any
property hereby insured, there be any other subsisting insurance or insurances, whether
effected by the insured or by any other person or persons, covering the same property, the
company shall not be liable to pay or contribute more than its ratable proportion of such
loss or damage.
Issue: Is Malayan’s position tenable?
Held: No. Section 5 is actually the other insurance clause (also called “additional insurance” and
“double insurance”). In interpreting the “other insurance clause” in Geagonia, the Court ruled that
the prohibition applies only in case of double insurance. The Court ruled that in order to constitute
a violation of the clause, the other insurance must be upon the same subject matter, the same
interest therein, and the same risk. Thus, even though the multiple insurance policies involved were
all issued in the name of the same assured, over the same subject matter and covering the same
risk, it was ruled that there was no violation of the “other insurance clause” since there was no
double insurance.
Section 12 of the SR Policy, on the other hand, is the over insurance clause. More particularly, it
covers the situation where there is over insurance due to double insurance. In such case, Section 15
provides that Malayan shall “not be liable to pay or contribute more than its ratable proportion of
such loss or damage.” This is in accord with the principle of contribution provided under Section
94(e) of the Insurance Code, which states that “where the insured is over insured by double
insurance, each insurer is bound, as between himself and the other insurers, to contribute ratably
to the loss in proportion to the amount for which he is liable under his contract.” Clearly, both
Sections 5 and 12 presuppose the existence of a double insurance.
Page 49 of 434
But there is no double insurance in this case because the policies were issued to two different
persons or entities. Wyeth is the recognized insured of Philippines First under its Marine Policy,
while Reputable is the recognized insured of Malayan under the SR Policy. The fact that Reputable
procured Malayan’s SR Policy over the goods of Wyeth pursuant merely to the stipulated
requirement under its contract of carriage with the latter does not make Reputable a mere agent of
Wyeth in obtaining the said SR Policy. The interest of Wyeth over the property subject matter of
both insurance contracts is also different and distinct from that of Reputable’s. Thus, neither
Section 5 nor Section 12 of the SR Policy may be applied. Accordingly, Malayan cannot avoid its
liability to Reputable under their policy.
_____________________________________________________________________________________
PARAMOUNT INSURANCE V. SPOUSES REMONDEULAZ

GR 173773, NOVEMBER 28 2012
On May 26, 1994, respondents insured with petitioner their 1994 Toyota Corolla sedan under a
comprehensive motor vehicle insurance policy for one year. During the policy’s effectivity,
respondents’ car was unlawfully taken when it was no longer returned to the respondents by
someone (Sales) whom they requested to repair and install accessories on the vehicle. Hence,
respondents claimed reimbursement from petitioner. When the latter refused, respondents
brought suit.
The RTC however dismissed respondents’ complaint on demurrer based on the fact that
respondents were able to successfully prosecute another action involving the loss of the same
vehicle under the same circumstances although under a different policy and insurance company.
Issue: whether petitioner is liable under the insurance policy for the loss of respondents’ vehicle.
Held: Yes. Petitioner argues it is not liable for the loss, since the car cannot be classified as stolen
as respondents entrusted the possession thereof to another person. This is wrong. Respondents’
policy clearly undertook to indemnify the insured against loss of or damage to the scheduled vehicle
when caused by “theft.”
In People v. Bustinera, this Court had the occasion to interpret the “theft clause” of an insurance
policy. In this case, the Court explained that when one takes the motor vehicle of another without
the latter’s consent even if the motor vehicle is later returned, there is theft – there being intent to
gain as the use of the thing unlawfully taken constitutes gain. Also, in Malayan Insurance Co., Inc.
v. Court of Appeals, this Court held that the taking of a vehicle by another person without the
permission or authority from the owner thereof is sufficient to place it within the ambit of the word
theft as contemplated in the policy, and is therefore, compensable.
Sales' act of depriving respondents of respondents of their motor vehicle at, or soon after the
transfer of physical possession of the movable property, constitutes theft under the insurance
policy, which is compensable.
_____________________________________________________________________________________
Page 50 of 434
MALAYAN INSURANCE COMPANY, INC. vs. PAP CO., LTD. (PHILIPPINE BRANCH)
G.R. No. 200784. August 7, 2013
J. Mendoza
An alteration in the use or condition of a thing insured from that to which it is limited by the policy
made without the consent of the insurer, by means within the control of the insured, and increasing
the risks, entitles an insurer to rescind a contract of fire insurance.
Facts:
On May 13, 1996, Malayan Insurance Company (Malayan) issued a Fire Insurance Policy to PAP Co.,
Ltd. (PAP Co.) for the latter’s machineries and equipment located at Sanyo Precision Phils. Bldg.,
Phase III, Lot 4, Block 15, PEZA, Rosario, Cavite (Sanyo Building). The insurance, which was for
Fifteen Million Pesos (₱15,000,000.00) and effective for a period of one (1) year, was procured by
PAP Co. for Rizal Commercial Banking Corporation (RCBC), the mortgagee of the insured
machineries and equipment.
After the passage of almost a year but prior to the expiration of the insurance coverage, PAP Co.
renewed the policy on an “as is” basis. Pursuant thereto, a renewal policy was issued by Malayan to
PAP Co. for the period May 13, 1997 to May 13, 1998.
On October 12, 1997 and during the subsistence of the renewal policy, the insured machineries and
equipment were totally lost by fire. Hence, PAP Co. filed a fire insurance claim with Malayan in the
amount insured.
In a letter, dated December 15, 1997, Malayan denied the claim upon the ground that, at the time
of the loss, the insured machineries and equipment were transferred by PAP Co. to a location
different from that indicated in the policy. Specifically, that the insured machineries were
transferred in September 1996 from the Sanyo Building to the Pace Pacific Bldg., Lot 14, Block 14,
Phase III, PEZA, Rosario, Cavite (Pace Pacific). Contesting the denial, PAP Co. argued that Malayan
cannot avoid liability as it was informed of the transfer by RCBC, the party duty-bound to relay
such information. However, Malayan reiterated its denial of PAP Co.’s claim. Distraught, PAP Co.
filed the complaint below against Malayan.
The RTC handed down its decision, ordering Malayan to pay PAP Company Ltd (PAP) an
indemnity for the loss under the fire insurance policy. The CA affirmed the RTC decision.
Issue:
Whether or not Malayan should be held liable under the fire insurance policy
Ruling:
The petition is granted.
The Court agrees with the position of Malayan that it cannot be held liable for the loss of the insured
properties under the fire insurance policy.
The policy forbade the removal of the insured properties unless sanctioned by Malayan
Page 51 of 434
Condition No. 9(c) of the renewal policy provides:
9. Under any of the following circumstances the insurance ceases to attach as

regards the property affected unless the insured, before the occurrence of any loss or
damage, obtains the sanction of the company signified by endorsement upon the policy, by
or on behalf of the Company:
xxxxxxxxxxxx
(c) If property insured be removed to any building or place other than in that which
is herein stated to be insured.
Evidently, by the clear and express condition in the renewal policy, the removal of the insured
property to any building or place required the consent of Malayan. Any transfer effected by the
insured, without the insurer’s consent, would free the latter from any liability.
The transfer from the Sanyo Factory to the PACE Factory increased the risk
The Court agrees with Malayan that the transfer to the Pace Factory exposed the properties to a
hazardous environment and negatively affected the fire rating stated in the renewal policy. The
increase in tariff rate from 0.449% to 0.657% put the subject properties at a greater risk of loss. Such
increase in risk would necessarily entail an increase in the premium payment on the fire policy.
Unfortunately, PAP chose to remain completely silent on this very crucial point. Despite the
importance of the issue, PAP failed to refute Malayan’s argument on the increased risk.
Malayan is entitled to rescind the insurance contract
Considering that the original policy was renewed on an “as is basis,” it follows that the renewal
policy carried with it the same stipulations and limitations. The terms and conditions in the renewal
policy provided, among others, that the location of the risk insured against is at the Sanyo factory
in PEZA. The subject insured properties, however, were totally burned at the Pace Factory.
Although it was also located in PEZA, Pace Factory was not the location stipulated in the renewal
policy. There being an unconsented removal, the transfer was at PAP’s own risk. Consequently, it
must suffer the consequences of the fire.
It can also be said that with the transfer of the location of the subject properties, without notice
and without Malayan’s consent, after the renewal of the policy, PAP clearly committed
concealment, misrepresentation and a breach of a material warranty. Section 26 of the Insurance
Code provides:
Section 26. A neglect to communicate that which a party knows and ought to
communicate, is called a concealment.
and under Section 27 of the Insurance Code, “a concealment entitles the injured party to rescind a
contract of insurance.”
Page 52 of 434
Moreover, under Section 168 of the Insurance Code, the insurer is entitled to rescind the insurance
contract in case of an alteration in the use or condition of the thing insured. Section 168 of the
Insurance Code provides, as follows:
Section 168. An alteration in the use or condition of a thing insured from that to
which it is limited by the policy made without the consent of the insurer, by means
within the control of the insured, and increasing the risks, entitles an insurer to
rescind a contract of fire insurance.
Accordingly, an insurer can exercise its right to rescind an insurance contract when the following
conditions are present, to wit:
1) the policy limits the use or condition of the thing insured;
2) there is an alteration in said use or condition;
3) the alteration is without the consent of the insurer;
4) the alteration is made by means within the insured's control; and
5) the alteration increases the risk of loss
In the case at bench, all these circumstances are present. It was clearly established that the renewal
policy stipulated that the insured properties were located at the Sanyo factory; that PAP removed
the properties without the consent of Malayan; and that the alteration of the location increased the
risk of loss.
_____________________________________________________________________________________
Sunlife of Canada (Philippines), Inc. v. Sibya, et. al.

G.R. No. 211212, 08 June 2016, Reyes, J:
After the two-year period from the effectivity of a life insurance contract lapses, or when
the insured dies within said period, the insurer must make good on the policy, even though the policy
was obtained by fraud, concealment, or misrepresentation.
Facts:
On January 10, 2001, Atty. Jesus Sibya, Jr. (Atty. Jesus Jr.) applied for life insurance with Sun Life. In
his Application for Insurance, he indicated that he had sought advice for kidney problems. On
February 5, 2001, Sun Life approved Atty. Jesus Jr.'s application and issued an insurance policy in
his favor. The policy indicated the respondents as beneficiaries and entitles them to a death benefit
of PhPl,000,000.00 should Atty. Jesus Jr. dies on or before February 5, 2021, or a sum of money if
Atty. Jesus Jr. is still living on the endowment date.
On May 11, 2001, Atty. Jesus Jr. died as a result of a gunshot wound in San Joaquin, Iloilo. As such,
Ma. Daisy filed a Claimant's Statement with Sun Life to seek the death benefits indicated in his
insurance policy. In a letter dated August 27, 2001, however, Sun Life denied the claim on the ground
that the details on Atty. Jesus Jr.'s medical history were not disclosed in his application.
The respondents reiterated their claim against Sun Life thru a letter dated September 17, 2001. Sun
Life, however, refused to heed the respondents' requests and instead filed a Complaint for
Rescission before the RTC and prayed for judicial confirmation of Atty. Jesus Jr.'s rescission.
Page 53 of 434
In its Complaint, Sun Life alleged that Atty. Jesus Jr. did not disclose in his insurance application
his previous medical treatment at the National Kidney Transplant Institute in May and August of
1994. According to Sun Life, the undisclosed fact suggested that the insured was in "renal failure"
and at a high risk medical condition. Consequently, had it known such fact, it would not have issued
the insurance policy in favor of Atty. Jesus Jr. Simultaneously, Sun Life tendered a check
representing the refund ofthe premiums paid by Atty. Jesus Jr.
For their defense, the respondents claimed that Atty. Jesus Jr. did not commit misrepresentation in
his application for insurance. They averred that Atty. Jesus Jr. was in good faith when he signed the
insurance application and even authorized Sun Life to inquire further into his medical history for
verification purposes.
The RTC held that Atty. Jesus Jr. did not commit material concealment and misrepresentation when
he applied for life insurance with Sun Life. It observed that given the disclosures and the waiver
and authorization to investigate executed by Atty. Jesus Jr. to Sun Life, the latter had all the means
of ascertaining the facts allegedly concealed by the applicant.
Hence, it held that the petitioner violated Sections 241 and 242 of the Insurance Code of the
Philippines and ordered petitioner Sun Life of Canada (Philippines), Inc. (Sun Life) to pay Ma. Daisy
S. Sibya (Ma. Daisy), Jesus Manuel S. Sibya III, and Jaime Luis S. Sibya (respondents) the amounts
of PhPl,000,000.00 as death benefits, PhPl00,000.00 as moral damages, PhPl00,000.00 as exemplary
damages, and PhPl00,000.00 as attorney's fees and costs of suit. This was upheld by the CA but
modified the decision of the RTC in so far as petitioner’s alleged violation of Sections 241 and 242
of the Insurance Code of the Philippines. Hence, this petition.
Issue: Whether Atty. Sibuya is entitled to the proceeds of the insurance policy given the alleged
concealment/misrepresentation when he applied for an insurance policy
Held: The petition has no merit. The Court held that if the insured dies within the two-year
contestability period, the insurer is bound to make good its obligation under the policy, regardless
of the presence or lack of concealment or misrepresentation.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured.
Under the provision, an insurer is given two years - from the effectivity of a life insurance contract
and while the insured is alive - to discover or prove that the policy is void ab initio or is rescindible
by reason of the fraudulent concealment or misrepresentation of the insured or his agent. After the
two-year period lapses, or when the insured dies within the period, the insurer must make good on
the policy, even though the policy was obtained by fraud, concealment, or misrepresentation. This
is not to say that insurance fraud must be rewarded, but that insurers who recklessly and
indiscriminately solicit and obtain business must be penalized, for such recklessness and lack of
discrimination ultimately work to the detriment of bona fide takers of insurance and the public in
general.
In the present case, Sun Life issued Atty. Jesus Jr.'s policy on February 5, 2001. Thus, it has two years
from its issuance, to investigate and verify whether the policy was obtained by fraud, concealment,
or misrepresentation. Upon the death of Atty. Jesus Jr., however, on May 11, 2001, or a mere three
months from the issuance ofthe policy, Sun Life loses its right to rescind the policy.
Page 54 of 434
Assuming, however, for the sake of argument, that the incontestability period has not yet set in,
the Court agreed with the CA when it held that Sun Life failed to show that Atty. Jesus Jr. committed
concealment and misrepresentation.
_____________________________________________________________________________________
Manulife Philippines v. Ybanez, G.R. No. 204736, November 28, 2016, GR No. 204736
The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind
the contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense
and the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer.
For failure of Manulife to prove intent to defraud on the part of the insured, it cannot validly sue for
rescission of insurance contracts.
The insurer filed an action for rescission of an insurance contract against the insured for supposed
misrepresentation by the insured of her real state of health. The claim is largely based on the
insured’s alleged failure to disclose her confinement at the CDH hospital and the records pertaining
thereto. During trial, the insured presented its sole witness, the Senior Manager of its Claims and
Settlements Department, whose testimony chiefly involved identifying the CDH records, among
others. Will this testimony suffice to rescind the contract? No.
The RTC correctly held that the CDH's medical records that might have established the insured's
purported misrepresentation/s or concealment/s was inadmissible for being hearsay, given the fact
that Manulife failed to present the physician or any responsible official of the CDH who could
confirm or attest to the due execution and authenticity of the alleged medical records. Manulife
had utterly failed to prove by convincing evidence that it had been beguiled, inveigled, or cajoled
into selling the insurance to the insured who purportedly with malice and deceit passed himself off
as thoroughly sound and healthy, and thus a fit and proper applicant for life insurance. Manulife's
sole witness gave no evidence at all relative to the particulars of the purported concealment or
misrepresentation allegedly perpetrated by the insured. In fact, Victoriano merely perfunctorily
identified the documentary exhibits adduced by Manulife; she never testified in regard to the
circumstances attending the execution of these documentary exhibits much less in regard to its
contents. Of course, the mere mechanical act of identifying these documentary exhibits, without
the testimonies of the actual participating parties thereto, adds up to nothing. These documentary
exhibits did not automatically validate or explain themselves. "The fraudulent intent on the part of
the insured must be established to entitle the insurer to rescind the contract. Misrepresentation as
a defense of the insurer to avoid liability is an affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence rests upon the insurer." For failure of Manulife to
prove intent to defraud on the part of the insured, it cannot validly sue for rescission of insurance
contracts.
CLAIMS SETTLEMENT AND SUBROGRATION
Malayan Insurance Co., Inc. v. Alberto

G.R. No. 194320, February 1, 2012, Velasco, Jr., J:
The payment by the insurer to the insured operates as an equitable assignment to the insurer
of all the remedies that the insured may have against the third party whose negligence or wrongful
act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity
Page 55 of 434
of contract. It accrues simply upon payment by the insurance company of the insurance claim. The
doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice;
and is the mode that equity adopts to compel the ultimate payment of a debt by one who, in justice,
equity, and good conscience, ought to pay.
Facts:
At around 5 o’clock in the morning of December 17, 1995, an accident occurred at the corner of
EDSA and Ayala Avenue, Makati City, involving four (4) vehicles, to wit: (1) a Nissan Bus; (2) an
Isuzu Tanker; (3) a Fuzo Cargo Truck; and (4) a Mitsubishi Galant.
Based on the Police Report issued by the on-the-spot investigator, the Isuzu Tanker was in front of
the Mitsubishi Galant with the Nissan Bus on their right side shortly before the vehicular incident.
All three (3) vehicles were at a halt along EDSA facing the south direction when the Fuzo Cargo
Truck simultaneously bumped the rear portion of the Mitsubishi Galant and the rear left portion of
the Nissan Bus. Due to the strong impact, these two vehicles were shoved forward and the front left
portion of the Mitsubishi Galant rammed into the rear right portion of the Isuzu Tanker.
Malayan Insurance issued a car insurance policyin favor of First Malayan Leasing and Finance
Corporation (the assured), insuring the aforementioned Mitsubishi Galant against third party
liability, own damage and theft, among others. Having insured the vehicle against such risks,
Malayan Insurance paid the damages sustained by the assured amounting to PhP700,000.
Maintaining that it has been subrogated to the rights and interests of the assured by operation of
law upon its payment to the latter, Malayan Insurance sent several demand letters to respondents,
requiring them to pay the amount it had paid to the assured. When respondents refused to settle
their liability, Malayan Insurance was constrained to file a complaint for damages for gross
negligence against respondents.
In their Answer, respondents asserted that they cannot be held liable for the vehicular accident,
since its proximate cause was the reckless driving of the Nissan Bus driver. In its decision, the
Regional Trial Court ruled in favor of Malayan Insurance. On appeal, the CA reversed its decision.
The CA held that the evidence on record has failed to establish not only negligence on the part of
respondents, but also compliance with the other requisites and the consequent right of Malayan
Insurance to subrogation. Hence, this petition.
Malayan Insurance contends that there was a valid subrogation in the instant case, as evidenced by
the claim check voucher and the Release of Claim and Subrogation Receipt presented by it before
the trial court. Respondents, however, claim that the documents presented by Malayan Insurance
do not indicate certain important details that would show proper subrogation.
Issue: Whether or not there is a valid subrogration in this case
Held: Yes. The Court held that since the claim check voucher, the Release of Claim and the
Subrogation Receipt presented by Malayan Insurance were undisputed as proofs of payment, a valid
subrogation is present in the case at bar.
Page 56 of 434
The payment by the insurer to the insured operates as an equitable assignment to the insurer of all
the remedies that the insured may have against the third party whose negligence or wrongful act
caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity
of contract. It accrues simply upon payment by the insurance company of the insurance claim. The
doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice;
and is the mode that equity adopts to compel the ultimate payment of a debt by one who, in justice,
equity, and good conscience, ought to pay.
_____________________________________________________________________________________
H.H. HOLLERO CONSTRUCTION, INC. vs. GOVERNMENT SERVICE INSURANCE SYSTEM

and POOL OF MACHINERY INSURERS
G.R. No. 152334, September 24, 2014, J. Perlas-Bernabe
The prescriptive period for the insured’s action for indemnity should be reckoned from the
"final rejection" of the claim. "Final rejection" simply means denial by the insurer of the claims of the
insured and not the rejection or denial by the insurer of the insured’s motion or request for
reconsideration. A perusal of the letter dated April 26, 1990 shows that the GSIS denied Hollero
Construction’s indemnity claims. The same conclusion obtains for the letter dated June 21, 1990
denying Hollero Construction’s indemnity claim. Holler's causes of action for indemnity respectively
accrued from its receipt of the letters dated April 26, 1990 and June 21, 1990, or the date the GSIS
rejected its claims in the first instance. Consequently, given that it allowed more than twelve (12)
months to lapse before filing the necessary complaint before the RTC on September 27, 1991, its causes
of action had already prescribed.
Facts:
The GSIS and Hollero Construction entered into a Project Agreement whereby the latter
undertook the development of a GSIS housing project known as Modesta Village Section B. Hollero
obligated itself to insure the Project, including all the improvements, upon the execution of the
Agreement under a Contractors’ All Risks (CAR) Insurance with the GSIS General Insurance
Department for an amount equal to its cost or sound value, which shall not be subject to any
automatic annual reduction.
Pursuant to its undertaking, Holler secured a CAR Policy for land development and for the
construction of twenty (20) housing units. In turn, the GSIS reinsured the CAR Policy with Pool of
Machinery Insurers. Under both policies, it was provided that: (a) there must be prior notice of
claim for loss, damage or liability within fourteen (14) days from the occurrence of the loss or
damage; (b) all benefits thereunder shall be forfeited if no action is instituted within twelve(12)
months after the rejection of the claim for loss, damage or liability; and (c) if the sum insured is
found to be less than the amount required to be insured, the amount recoverable shall be reduced
to such proportion before taking into account the deductibles stated in the schedule (average clause
provision).
During the construction, three (3) typhoons hit the country, namely, Typhoon, Typhoon
Huaning, and Typhoon, which caused considerable damage to the Project. Accordingly, Hollero
Construction filed several claims for indemnity with the GSIS. In a letter dated April 26, 1990, the
GSIS rejected Hollero Construction’s indemnity claims for the damages wrought by Typhoons
Biring and Huaning, finding that no amount is recoverable pursuant to the average clause provision
Page 57 of 434
under the policies. In a letter dated June 21, 1990, the GSIS similarly rejected Hollero Construction’s
indemnity claim for damages wrought by Typhoon Saling on a "no loss" basis, it appearing from its
records that the policies were not renewed before the onset of the said typhoon.
Hollero filed a Complaint for Sum of Money and Damages before the RTC which was
opposed by the GSIS through a Motion to Dismiss on the ground that the causes of action stated
therein are barred by the twelve-month limitation provided under the policies, i.e., the complaint
was filed more than one (1) year from the rejection of the indemnity claims. The RTC granted
Hollero Construction’s indemnity claims. The CA set aside and reversed the RTC Judgment.
Issue:
Whether or not the CA committed reversible error in dismissing the complaint on the ground of
prescription.
Ruling:
No. Contracts of insurance, like other contracts, are to be construed according to the sense
and meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary, and popular sense.
Section 10 of the General Conditions of the subject CAR Policies commonly read:
10. If a claim is in any respect fraudulent, or if any false declaration is made or used in support
thereof, or if any fraudulent means or devices are used by the Insured or anyone acting on his behalf
to obtain any benefit under this Policy, or if a claim is made and rejected and no action or suit is
commenced within twelve months after such rejection or, in case of arbitration taking place as
provided herein, within twelve months after the Arbitrator or Arbitrators or Umpire have made
their award, all benefit under this Policy shall be forfeited.
In this relation, case law illumines that the prescriptive period for the insured’s action for
indemnity should be reckoned from the "final rejection" of the claim.
A perusal of the letter dated April 26, 1990 shows that the GSIS denied Hollero
Construction’s indemnity claims wrought by Typhoons Biring and Huaning, it appearing that no
amount was recoverable under the policies. While the GSIS gave Hollero Construction the
opportunity to dispute its findings, neither of the parties pursued any further action on the matter;
this logically shows that they deemed the said letter as a rejection of the claims. Lest it cause any
confusion, the statement in that letter pertaining to any queries Hollero Construction may have on
the denial should be construed, at best, as a form of notice to the former that it had the opportunity
to seek reconsideration of the GSIS’s rejection. Surely, Hollero Construction cannot construe the
said letter to be a mere "tentative resolution." In fact, despite its disavowals, Hollero Construction
admitted in its pleadings that the GSIS indeed denied its claim through the aforementioned letter,
but tarried in commencing the necessary action in court.
The same conclusion obtains for the letter dated June 21, 1990 denying Hollero Construction
s indemnity claim caused by Typhoon Saling on a "no loss" basis due to the non-renewal of the
policies therefor before the onset of the said typhoon. The fact that Hollero Construction filed a
letter of reconsideration therefrom dated April 18, 1991, considering too the inaction of the GSIS on
Page 58 of 434
the same similarly shows that the June 21, 1990 letter was also a final rejection of Hollero
Construction’s indemnity claim.
As correctly observed by the CA, "final rejection" simply means denial by the insurer of the
claims of the insured and not the rejection or denial by the insurer of the insured’s motion or
request for reconsideration. The rejection referred to should be construed as the rejection in the
first instance, as in the two instances above-discussed.
Holler's causes of action for indemnity respectively accrued from its receipt of the letters
dated April 26, 1990 and June 21, 1990, or the date the GSIS rejected its claims in the first instance.
Consequently, given that it allowed more than twelve (12) months to lapse before filing the
necessary complaint before the RTC on September 27, 1991, its causes of action had already
prescribed.
REINSURANCE
COMMUNICATION AND INFORMATION SYSTEMS CORPORATION v. MARK SENSING

AUSTRALIA PTY. LTD.G.R. No. 192159, January 25, 2017
After securing a writ of attachment, the plaintiff posted a bond in the amount of P113,197,309.10
through Plaridel Surety and Insurance Company (Plaridel) in favor of defendant MSAPL, which the
RTC approved. Defendant moved to recall and set aside the approval of the attachment bond on
the ground that Plaridel had no capacity to underwrite the bond pursuant to Section 215 of the old
Insurance Code because its net worth was only P214,820,566.00 and could therefore only
underwrite up to P42,964,113.20. On September 4, 2009, the RTC denied MSAPL's motion, finding
that although Plaridel cannot underwrite the bond by itself, the amount covered by the attachment
bond "was likewise reinsured to sixteen other insurance companies." However, "for the best interest
of both parties," the RTC ordered Plaridel to submit proof that the amount of P95,819,770.91 was
reinsured. Plaridel submitted its compliance on September 11, 2009, attaching therein the
reinsurance contracts.
Is the RTC’s ruling proper? Yes. Section 215 of the old Insurance Code, the law in force at the time
Plaridel issued the attachment bond, limits the amount of risk that insurance companies can retain
to a maximum of 20% of its net worth. However, in computing the retention limit, risks that have
been ceded to authorized reinsurers are ipso jure deducted. In mathematical terms, the amount of
retained risk is computed by deducting ceded/reinsured risk from insurable risk. If the resulting
amount is below 20% of the insurer's net worth, then the retention limit is not breached. In this
case, both the RTC and CA determined that, based on Plaridel's financial statement that was
attached to its certificate of authority issued by the Insurance Commission, its net worth is
P289,332,999.00.50 Plaridel's retention limit is therefore P57,866,599.80, which is below the
Pl13,197,309.10 face value of the attachment bond. However, it only retained an insurable risk of
P17,377,938.19 because the remaining amount of P98,819,770.91 was ceded to 16 other insurance
companies. Thus, the risk retained by Plaridel is actually P40 Million below its maximum retention
limit. Therefore, the approval of the attachment bond by the RTC was in order. Contrary to MSAPL's
contention that the RTC acted with grave abuse of discretion, we find that the RTC not only
correctly applied the law but also acted judiciously when it required Plaridel to submit proof of its
reinsurance contracts after MSAPL questioned Plaridel's capacity to underwrite the attachment
bond. Apparently, MSAPL failed to appreciate that by dividing the risk through reinsurance,
Page 59 of 434
Plaridel's attachment bond actually became more reliable-as it is no longer dependent on the
financial stability of one company-and, therefore, more beneficial to MSAPL.
In cancelling Plaridel's insurance bond, the CA also found that because the reinsurance contracts
were issued in favor of Plaridel, and not MSAPL, these failed to comply with the requirement of
Section 4, Rule 57 of the Rules of Court requiring the bond to be executed to the adverse party. This
led the CA to conclude that "the bond has been improperly and insufficiently posted." We reverse
the CA and so hold that the reinsurance contracts were correctly issued in favor of Plaridel. A
contract of reinsurance is one by which an insurer (the "direct insurer" or "cedant") procures a third
person (the "reinsurer") to insure him against loss or liability by reason of such original insurance. It
is a separate and distinct arrangement from the original contract of insurance, whose contracted
risk is insured in the reinsurance agreement. The reinsurer's contractual relationship is with the
direct insurer, not the original insured, and the latter has no interest in and is generally not privy
to the contract of reinsurance. Put simply, reinsurance is the "insurance of an insurance."
By its nature, reinsurance contracts are issued in favor of the direct insurer because the subject of
such contracts is the direct insurer's risk-in this case, Plaridel's contingent liability to MSAPL and
not the risk assumed under the original policy. The requirement under Section 4, Rule 57 of the
Rules of Court that the applicant's bond be executed to the adverse party necessarily pertains only
to the attachment bond itself and not to any underlying reinsurance contract. With or without
reinsurance, the obligation of the surety to the party against whom the writ of attachment is issued
remains the same.
_____________________________________________________________________________________
BANK OF THE PHILIPPINE ISLANDS AND FGU INSURANCE CORPORATION (PRESENTLY

KNOWN AS BPI/MS INSURANCE CORPORATION), Petitioners, v. YOLANDA
LAINGO, Respondent.
G.R. No. 205206, March 16, 2016, CARPIO, J.
There is a rationale in the contract of agency, which flows from the "doctrine of
representation," that notice to the agent is notice to the principal. Here, BPI had been informed of
Rheozel's(insured party) death by the latter's family. Since BPI is the agent of FGU Insurance, then
such notice of death to BPI is considered as notice to FGU Insurance as well. FGU Insurance cannot
now justify the denial of a beneficiary's insurance claim for being filed out of time when notice of death
had been communicated to its agent within a few days after the death of the depositor-insured. In
short, there was timely notice of Rheozel's death given to FGU Insurance within three months from
Rheozel's death as required by the insurance company.
FACTS:
Rheozel Laingo (Rheozel), the son of respondent Yolanda Laingo (Laingo), opened a "Platinum 2-
in-1 Savings and Insurance" account with petitioner Bank of the Philippine Islands (BPI) in its
Claveria, Davao City branch. The Platinum 2-in-1 Savings and Insurance account is a savings
account where depositors are automatically covered by an insurance policy against disability or
death issued by petitioner FGU Insurance Corporation (FGU Insurance), now known as BPI/MS
Insurance Corporation. A Personal Accident Insurance Coverage Certificate was issued by FGU
Insurance in the name of Rheozel with Laingo as his named beneficiary.
Page 60 of 434
Rheozel died due to a vehicular accident as evidenced by a Certificate of Death issued by the Office
of the Civil Registrar General of Tagum City, Davao del Norte.
Laingo instructed the family's personal secretary, Alice Torbanos (Alice) to go to BPI, Claveria,
Davao City branch and inquire about the savings account of Rheozel. Laingo wanted to use the
money in the savings account for Rheozel's burial and funeral expenses. Alice went to BPI and
talked to BPI's Branch Manager regarding Laingo's request. Due to Laingo's credit standing and
relationship with BPI, BPI accommodated Laingo who was allowed to withdraw P995,000 from the
account of Rheozel.
More than two years later, Rheozel's sister, Rhealyn Laingo-Concepcion, while arranging
Rheozel's personal things in his room at their residence found the Personal Accident Insurance
Coverage Certificate issued by FGU Insurance. Rhealyn immediately conveyed the information to
Laingo.
Laingo sent two letters to BPI and FGU Insurance requesting them to process her claim as
beneficiary of Rheozel's insurance policy. FGU Insurance sent a reply-letter to Laingo denying her
claim. FGU Insurance stated that Laingo should have filed the claim within three calendar months
from the death of Rheozel as required under Paragraph 15 of the Personal Accident Certificate of
Insurance which states:
15. Written notice of claim shall be given to and filed at FGU Insurance Corporation within
three calendar months of death or disability.
Laingo filed a Complaint for Specific Performance with Damages and Attorney's Fees with the
Regional Trial Court of Davao City, Branch 16 (trial court) against BPI and FGU Insurance. The trial
court decided the case in favor of respondents ruling that the prescriptive period of 90 days shall
commence from the time of death of the insured and not from the knowledge of the beneficiary.
Since the insurance claim was filed more than 90 days from the death of the insured, the case must
be dismissed
The Court of Appeals ruled that Laingo could not be expected to do an obligation which she did
not know existed. The appellate court added that Laingo was not a party to the insurance contract
entered into between Rheozel and petitioners. Thus, she could not be bound by the 90-day
stipulation.
ISSUE:
Whether or not Laingo, as named beneficiary, can still claim the proceeds from insurance despite
the non-filing of written notice of claim within the 3 months from death or disability as mandated
in the insurance contract.
RULING:
Yes. Laingo can is still entitled to the proceeds of insurance.
Page 61 of 434
Under the law, an agent is one who binds himself to render some service or to do something in
representation of another. For an agency to arise, it is not necessary that the principal personally
encounter the third person with whom the agent interacts.
As the main proponent of the 2-in-1 deposit account, BPI tied up with its affiliate, FGU Insurance,
as its partner. Any customer interested to open a deposit account under this 2-in-1 product will
automatically be given insurance coverage. Thus, BPI acted as agent of FGU Insurance with respect
to the insurance feature of its own marketed product. Rheozel did not interact with FGU Insurance
directly and every transaction was coursed through BPI. BPI, as agent of FGU Insurance, had the
primary responsibility to ensure that the 2-in-1 account be reasonably carried out with full
disclosure to the parties concerned, particularly the beneficiaries. Thus, it was incumbent upon BPI
to give proper notice of the existence of the insurance coverage and the stipulation in the insurance
contract for filing a claim to Laingo, as Rheozel's beneficiary, upon the latter's death.
Upon Rheozel's death, which was properly communicated to BPI by his mother Laingo, BPI, in turn,
should have fulfilled its duty, as agent of FGU Insurance, of advising Laingo that there was an added
benefit of insurance coverage in Rheozel's savings account. An insurance company has the duty to
communicate with the beneficiary upon receipt of notice of the death of the insured.
There is a rationale in the contract of agency, which flows from the "doctrine of representation,"
that notice to the agent is notice to the principal. Here, BPI had been informed of Rheozel's death
by the latter's family. Since BPI is the agent of FGU Insurance, then such notice of death to BPI is
considered as notice to FGU Insurance as well. FGU Insurance cannot now justify the denial of a
beneficiary's insurance claim for being filed out of time when notice of death had been
communicated to its agent within a few days after the death of the depositor-insured. In short,
there was timely notice of Rheozel's death given to FGU Insurance within three months from
Rheozel's death as required by the insurance company.
Since BPI, as agent of FGU Insurance, fell short in notifying Laingo of the existence of the insurance
policy, Laingo had no means to ascertain that she was entitled to the insurance claim. It would be
unfair for Laingo to shoulder the burden of loss when BPI was remiss in its duty to properly notify
her that she was a beneficiary. Thus, as correctly decided by the appellate court, BPI and FGU
Insurance shall bear the loss and must compensate Laingo for the actual damages suffered by her
family plus attorney's fees. Likewise, FGU Insurance has the obligation to pay the insurance
proceeds of Rheozel's personal accident insurance coverage to Laingo, as Rheozel's named
beneficiary.
_____________________________________________________________________________________
STRONGHOLD INSURANCE CO., INC., Petitioner, v. PAMANA ISLAND RESORT HOTEL

AND MARINA CLUB, INC., Respondent.
G.R. No. 174838, June 01, 2016, REYES, J.
Given the provisions of the Insurance Code, which is a special law, the applicable rate of
interest shall be that imposed in a loan or forbearance of money as imposed by the Bangko Sentral ng
Pilipinas (BSP), even irrespective of the nature of insurer's liability. In the past years, this rate was at
12% per annum. However, in light of Circular No. 799 issued by the BSP on June 21, 2013 decreasing
interest on loans or forbearance of money, the CA's declared rate of 12% per annum shall be reduced
to 6% per annum from the time of the circular's effectivity on July 1, 2013. The Court explained in Nacar
Page 62 of 434
v. Gallery Frames that the new rate imposed under the circular could only be applied prospectively,
and not retroactively.
FACTS:
The case stems from an action for sum of money filed by Pamana Island Resort Hotel and Marina
Club, Inc. (Pamana) and Flowtech Construction Corporation (Flowtech) against Stronghold on the
basis of a Contractor's All Risk Bond of P9,047,960.14 obtained by Flowtech in relation to the
construction of Pamana's project in Pamana Island, Subic Bay. On January 27, 1992, a fire in the
project burned down cottages being built by Flowtech, resulting in losses to Pamana.
The Regional Trial Court (RTC) of Makati City, Branch 135 declared Stronghold liable for the claim.
Besides the award of insurance proceeds, exemplary damages and attorney's fees, the trial court
ordered the payment of interest at double the applicable rate, following Section 243 of the Insurance
Code which Stronghold was declared to have violated , and reads:
Sec. 243. xxxxxx Refusal or failure to pay the loss or damage within the time prescribed
herein will entitle the assured to collect interest on the proceeds of the policy for the duration
of the delay at the rate of twice the ceiling prescribed by the Monetary Board, unless such
failure or refusal to pay is based on the ground that the claim is fraudulent.
Stronghold's appeal seeking the reversal of the RTC judgment was denied by the CA and thereafter,
by the SC. On March 4, 2005, Flowtech filed with the RTC a motion for execution, which was
granted. A Writ of Execution was issued on May 12, 2005. Thereafter, Stronghold filed an Urgent
Motion to Suspend Execution contending that the interest penalty being demanded from it through
the Sheriff was unconscionable and iniquitous.
The RTC rendered its Order granting Stronghold's motion and reducing substantially the interest
due from Stronghold. CA reversed the order of RTC explaining that the decision in the original case
has become final and executory, and thus immutable and unalterable.
ISSUE:
Whether CA erred in reversing the RTC’s order of reduction of interest.
RULING:
The Court denies the petition. As correctly pointed out by the CA, the RTC's order to implement
carried substantial changes in a judgment that had become final and executory. Instead of "double
the rate of interest [on the proceeds of insurance] from the date of demand until fully paid," the
RTC's computation for purposes of execution was limited to an interest rate of 6% per annum,
resulting in a double rate of only 12% per annum, to be reckoned from the date of the trial court's
judgment until it became final and executory.
While exceptions to the rule on immutability of final judgments are applied in some cases, these
are limited to the following instances: (1) the correction of clerical errors; (2) the so-called nunc pro
tuncentries which cause no prejudice to any party; and (3) void judgments. None of these exceptions
attend Stronghold's case.
Page 63 of 434
Applicable Rate of Interest

A disagreement, however, concerns the question of whether an interest rate of 6% or 12% per annum
should apply in the computation, as this subject was not specifically defined in the RTC judgment
in the main case. The RTC, in the Order dated November 22, 2005, pegged the interest rate at 6% per
annum by explaining that Stronghold's obligation did not equate to a loan or forbearance of money.
On the other hand, the CA explained that the double rate should be based on 12% per annum, as
the Insurance Code pertained to a rate "twice the ceiling prescribed by the Monetary Board" and
thus could only refer to the rate applicable to obligations constituting a loan or forbearance of
money.
The Court agrees with the CA that given the provisions of the Insurance Code, which is a
special law, the applicable rate of interest shall be that imposed in a loan or forbearance of
money as imposed by the Bangko Sentral ng Pilipinas (BSP), even irrespective of the nature
of Stronghold's liability. In the past years, this rate was at 12% per annum. However, in light of
Circular No. 799 issued by the BSP on June 21, 2013 decreasing interest on loans or forbearance of
money, the CA's declared rate of 12% per annum shall be reduced to 6% per annum from the time
of the circular's effectivity on July 1, 2013. The Court explained in Nacar v. Gallery Frames that
the new rate imposed under the circular could only be applied prospectively, and not
retroactively.
TRANSPORTATION LAWS
V. COMMON CARRIERS
ALFREDO MANAY, JR., FIDELINO SAN LUIS, ADRIAN SAN LUIS, ANNALEE SAN LUIS,
MARK ANDREW JOSE, MELISSA JOSE, CHARLOTTE JOSE, DAN JOHN DE GUZMAN, PAUL
MARK BALUYOT, AND CARLOS S. JOSE, Petitioners, v. CEBU AIR,INC, Respondent.
G.R. No. 210621, April 04, 2016, LEONEN, J.
The Air Passenger Bill of Right mandates that the airline must inform the passenger in writing of all
the conditions and restrictions in the contract of carriage. Purchase of the contract of carriage binds
the passenger and imposes reciprocal obligations on both the airline and the passenger. The airline
must exercise extraordinary diligence in the fulfillment of the terms and conditions of the contract of
carriage. The passenger, however, has the correlative obligation to exercise ordinary diligence in the
conduct of his or her affairs.
Common carriers are required to exercise extraordinary diligence in the performance of its obligations
under the contract of carriage. This extraordinary diligence must be observed not only in the
transportation of goods and services but also in the issuance of the contract of carriage, including its
ticketing operations.
FACTS:
Carlos S. Jose (Jose) purchased 20 Cebu Pacific round-trip tickets from Manila to Palawan for
himself and on behalf of his relatives and friends. Jose alleged that he specified to "Alou," the Cebu
Pacific ticketing agent, that his preferred date and time of departure from Manila to Palawan should
Page 64 of 434
be on July 20, 2008 at 0820 (or 8:20 a.m.) and that his preferred date and time for their flight back
to Manila should be on July 22, 2008 at 1615 (or 4:15 p.m.). He paid a total amount of P42,957.00
using his credit card. He alleged that after paying for the tickets, Alou printed the tickets, which
consisted of three (3) pages, and recapped only the first page to him. Since the first page contained
the details he specified to Alou, he no longer read the other pages of the flight information.
On July 20, 2008, Jose and his 19 companions boarded the 0820 Cebu Pacific flight to Palawan and
had an enjoyable stay. On the afternoon of July 22, 2008, the group proceeded to the airport for
their flight back to Manila. During the processing of their boarding passes, they were informed by
Cebu Pacific personnel that nine (9) of them could not be admitted because their tickets were for
the 1005 (or 10:05 a.m.) flight earlier that day. Jose informed the ground personnel that he personally
purchased the tickets and specifically instructed the ticketing agent that all 20 of them should be
on the 4:15 p.m. flight to Manila.
Upon checking the tickets, they learned that only the first two (2) pages had the schedule Jose
specified. They were left with no other option but to rebook their tickets.
Jose and his companions were unsatisfied with Cebu Pacific’s response so they filed a Complaint
for Damages against Cebu Pacific before the Metropolitan Trial Court of Mandaluyong. MTC
ordered Cebu Pacific to pay petitioners the damages prayed for on account of its failure to exercise
extraordinary diligence in performing its contractual obligation. RTC affirmed the decision of MTC.
However, on appeal, the CA reversed the decision of MTC and RTC. According to the Court of
Appeals, the extraordinary diligence expected of common carriers only applies to the carriage of
passengers and not to the act of encoding the requested flight schedule. It was incumbent upon the
passenger to exercise ordinary care in reviewing flight details and checking schedules.
ISSUE:
Whether respondent Cebu Air, Inc. is liable to petitioners for damages on account of its issuance
of a plane ticket with an allegedly erroneous flight schedule.
RULING:
Cebu Pacific is not liable for damages.
Common carriers are required to exercise extraordinary diligence in the performance of its
obligations under the contract of carriage. This extraordinary diligence must be observed not only
in the transportation of goods and services but also in the issuance of the contract of carriage,
including its ticketing operations.
The common carrier’s obligation to exercise extraordinary diligence in the issuance of the contract
of carriage is fulfilled by requiring a full review of the flight schedules to be given to a prospective
passenger before payment. Based on the information stated on the contract of carriage, all three (3)
pages were recapped to petitioner Jose.
The only evidence petitioners have in order to prove their true intent of having the entire group on
the 4:15p.m. flight is petitioner Jose’s self serving testimony that the airline failed to recap the last
Page 65 of 434
page of the tickets to him. They have neither shown nor introduced any other evidence before the
Metropolitan Trial Court, Regional Trial Court, Court of Appeals, or this Court.
Even assuming that the ticketing agent encoded the incorrect flight information, it is incumbent
upon the purchaser of the tickets to at least check if all the information is correct before making
the purchase. Once the ticket is paid for and printed, the purchaser is presumed to have agreed to
all its terms and conditions.
Most of the petitioners were balikbayans It is reasonable to presume that they were adequately
versed with the procedures of air travel, including familiarizing themselves with the itinerary before
departure. Moreover, the tickets were issued 37 days before their departure from Manila and 39
days from their departure from Palawan. There was more than enough time to correct any alleged
mistake in the flight schedule.
Petitioners, in failing to exercise the necessary care in the conduct of their affairs, were without a
doubt negligent. Thus, they are not entitled to damages. The cause of petitioners’ injury was their
own negligence; hence, there is no reason to award moral damages. Since the basis for moral
damages has not been established, there is no basis to recover exemplary damages and attorney’s
fees as well.
The duty of an airline to disclose all the necessary information in the contract of carriage does not
remove the correlative obligation of the passenger to exercise ordinary diligence in the conduct of
his or her affairs. The passenger is still expected to read through the flight information in the
contract of carriage before making his or her purchase. If he or she fails to exercise the ordinary
diligence expected of passengers, any resulting damage should be borne by the passenger.
_____________________________________________________________________________________
GREENSTAR EXPRESS, INC. and FRUTO L. SAYSON, JR., Petitioners, -versus - UNIVERSAL
ROBINA CORPORATION and NISSIN UNIVERSAL ROBINA CORPORATION, Respondents.
G.R. No. 205090, SECOND DIVISION, October 17, 2016, DEL CASTILLO, J.
Applying the pronouncement in the Caravan Travel and Tours case, it must be said that when
by (1)evidence the ownership of the van and (2)Bicomong's employment were proved, the
presumption of negligence on respondents' part attached, as the registered owner of the van
and as Bicomong's employer. The burden of proof then shifted to respondents to show that no
liability under Article 2180 arose. This may be done by proof of any of the following:
1. That they had no employment relationship with Bicomong; or

2. That Bicomong acted outside the scope of his assigned tasks; or
3. That they exercised the diligence of a good father of a family in the selection and supervision
of Bicomong.
The doctrine of last clear chance provides that where both parties are negligent but the
negligent act of one is appreciably later in point of time than that of the other, or where it is impossible
to determine whose fault or negligence brought about the occurrence of the incident, the one who had
the last clear opportunity to avoid the impending harm but failed to do so, is chargeable with the
consequences arising therefrom. Stated differently, the rule is that the antecedent negligence of a
Page 66 of 434
person does not preclude recovery of damages caused by the supervening negligence of the latter, who
had the last fair chance to prevent the impending harm by the exercise of due diligence.
FACTS:
Petitioner Greenstar Express, Inc. (Greenstar) is domestic corporation engaged in the business of
public transportation, while petitioner Fruto L. Sayson, Jr. (Sayson) is one of its bus drivers.
Respondents Universal Robina Corporation (URC) and Nissin Universal Robina Corporation
(NURC) are domestic corporations engaged in the food business NURC is a subsidiary of URC. URC
is the registered owner of a Mitsubishi L-300 van with plate number WRN 403 (URC van).
At about 6:50 a.m, on February 25, 2003, which was then a declared national holiday, petitioner's
bus, which was then being driven toward the direction of Manila by Sayson, collided head-on with
the URC van, which was then being driven Quezon province-bound by NURC 's Operations
Manager, Renante Bicomong (Bicomong). Bicomong died on the spot while the colliding
vehicles sustained considerable damage.
Petitioners filed Complaint in the RTC against NURC to recover damages sustained during the
collision, premised on negligence. An Amended Complaint was later filed, wherein URC was
impleaded as additional defendant.
Petitioners insist that respondents should be held liable for Bicomong's negligence under Articles
2176, 2180, and 2185 of the Civil Code; that Bicomong's negligence was the direct and proximate
cause of the accident, in that he unduly occupied the opposite lane which the bus was lawfully
traversing, thus resulting in the collision with Greenstar's bus; that Bicomong's driving on the
opposite lane constituted a traffic violation, therefore giving rise to the presumption of negligence
on his part; that in view of this presumption, it became incumbent upon respondents to rebut the
same by proving that they exercised care and diligence in the selection and supervision of their
employees.
Respondents argue that the collision occurred on a holiday and while Bicomong was using the URC
van for a purely personal purpose, it should be sufficient to absolve respondents of liability as
evidently, Bicomong was not performing his official duties on that day; that the totality of the
evidence indicates that it was Sayson who was negligent in the operation of Greenstar' s bus when
the collision occurred; that Bicomong was not negligent in driving the URC van.
RTC dismissed the complaint for lack of cause of action as Renante Bicomong was not perfoming
his assigned tasks at the time of the incident. CA affirmed the decision of RTC.
ISSUE:
Whether the dismissal of the complaint against herein respondents is proper. (YES)
RULING:
In Caravan Travel and Tours International, Inc. v. Abejar, the Court made the following relevant
pronouncement:
Page 67 of 434
The resolution of this case must consider two (2) rules. First, Article 2180's specification
that employers shall be liable for the damages caused by their employees ... acting within
the scope of their assigned tasks. Second, the operation of the registered-owner rule
that registered owners are liable for death or injuries caused by the operation of their
vehicles.
xxxxxxx
Therefore, the appropriate approach is that in cases where both the registered-owner rule
and Article 2180 apply, the plaintiff must first establish that the employer is the
registered owner of the vehicle in question. Once the plaintiff successfully proves
ownership, there arises a disputable presumption that the requirements of Article 2180 have
been proven. As a consequence, the burden of proof shifts to the defendant to show
that no liability under Article 2180 has arisen.
xxxxxx
This it can do by presenting proof of any of the following: first, that it had no employment
relationship with Bautista; second, that Bautista acted outside the scope of his assigned
tasks; or third, that it exercised the diligence of a good father of a family in the selection
and supervision of Bautista.
In the present case, it has been established that on the day of the collision - or on Februaruy 25,
2003 - URC was the registered owner of the URC van, although it appears that it was designated for
use by NURC, as it was officially assigned to the latter's Logistics Manager, Florante Soro-Soro
(Soro-Soro); that Bicomong was the Operations Manager of NURC and assigned to the First Cavite
Industrial Estate; that there was no work as the day was declared a national holiday; that Bicomong
was on his way home to his family in Quezon province; that the URC van was not assigned to
Bicomong as well, but solely for SoroSoro' s official use.
Applying the pronouncement in the Caravan Travel and Tours case, it must be said that when by
evidence the ownership of the van and Bicomong's employment were proved, the presumption of
negligence on respondents' part attached, as the registered owner of the van and as Bicomong's
employer. The burden of proof then shifted to respondents to show that no liability under Article
2180 arose. This may be done by proof of any of the following:
1. That they had no employment relationship with Bicomong; or

2. That Bicomong acted outside the scope of his assigned tasks; or
3. That they exercised the diligence of a good father of a family in the selection and supervision
of Bicomong.
Respondents succeeded in overcoming the presumption of negligence, having shown that when the
collision took place, Bicomong was not in the performance of his work; that he was in
possession of a service vehicle that did not belong to his employer NURC, but to URC, and which
vehicle was not officially assigned to him, but to another employee; that his use of the URC van
was unauthorized - even if he had used the same vehicle in furtherance of a personal undertaking
in the past; that the accident occurred on a holiday and while Bicomong was on his way home
to his family in Quezon province; and that Bicomong had no official business whatsoever in
Page 68 of 434
his hometown in Quezon, or in Laguna where the collision occurred, his area of operations
being limited to the Cavite area.
On the other hand, the evidence suggests that the collision could have been avoided if Sayson
exercised care and prudence, given the circumstances and information that he had immediately
prior to the accident. From the trial court's findings and evidence on record, it would appear that
immediately prior to the collision, which took place very early in the morning - or at around 6:50
a.m., Sayson saw that the URC van was traveling fast Quezon-bound on the shoulder of the opposite
lane about 250 meters away from him; that at this point, Sayson was driving the Greenstar bus
Manila-bound at 60 kilometers per hour; that Sayson knew that the URC van was traveling fast as
it was creating dust clouds from traversing the shoulder of the opposite lane; that Sayson saw the
URC van get back into its proper lane but directly toward him; that despite being apprised of the
foregoing information, Sayson, instead of slowing down, maintained his speed and tried to
swerve the Greenstar bus, but found it difficult to do so at his speed; that the collision or point of
impact occurred right in the middle of the road; and that Sayson absconded from the scene
immediately after the collision.
From the foregoing facts, one might think that from the way he was driving immediately before the
collision took place, Bicomong could have fallen asleep or ill at the wheel, which led him to
gradually steer the URC van toward the shoulder of the highway; and to get back to the road after
realizing his mistake, Bicomong must have overreacted, thus overcompensating or oversteering to
the left, or toward the opposite lane and right into Sayson's bus. Given the premise of dozing off or
falling ill, this explanation is not far-fetched. The collision occurred very early in the mommg in
Alaminos, Laguna. Sayson himself testified that he found Bicomong driving on the service road or
shoulder of the highway 250 meters away, which must have been unpaved, as it caused dust clouds
to rise on the heels of the URC van. And these dust clouds stole Sayson's attention, leading him to
conclude that the van was running at high speed. At any rate, the evidence places the point of
impact very near the middle of the road or just within Sayson's lane. In other words, the collision
took place with Bicomong barely encroaching on Sayson's lane. This means that prior to and at
the time of collision, Sayson did not take any defensive maneuver to prevent the accident
and minimize the impending damage to life and property, which resulted in the collision in the
middle of the highway, where a vehicle would normally be traversing. If Sayson took defensive
measures, the point of impact should have occurred further inside his lane or not at the front of the
bus - but at its side, which should have shown that Sayson either slowed down or swerved to the
right to avoid a collision.
The collision was certainly foreseen and avoidable but Sayson took no measures to avoid it. Rather
than exhibit concern for the welfare of his passengers and the driver of the oncoming vehicle, who
might have fallen asleep or suddenly fallen ill at the wheel, Sayson coldly and uncaringly stood his
ground, closed his eyes, and left everything to fate, without due regard for the consequences. Such
a suicidal mindset cannot be tolerated, for the grave danger it poses to the public and passengers
availing of petitioners' services. To add insult to injury, Sayson hastily fled the scene of the collision
instead of rendering assistance to the victims - thus exhibiting a selfish, cold-blooded attitude and
utter lack of concern motivated by the self-centered desire to escape liability, inconvenience, and
possible detention by the authorities, rather than secure the well-being of the victims of his own
negligent act.
Page 69 of 434
The doctrine of last clear chance provides that where both parties are negligent but the negligent
act of one is appreciably later in point of time than that of the other, or where it is impossible to
determine whose fault or negligence brought about the occurrence of the incident, the one who
had the last clear opportunity to avoid the impending harm but failed to do so, is chargeable with
the consequences arising therefrom. Stated differently, the rule is that the antecedent negligence
of a person does not preclude recovery of damages caused by the supervening negligence of the
latter, who had the last fair chance to prevent the impending harm by the exercise of due diligence.
_____________________________________________________________________________________
ASIAN TERMINALS, INC. vs. PHILAM INSURANCE CO., INC. (NOW CHARTIS PHILIPPINE
INSURANCE)/ PHILAM INSURANCE CO., INC. vs. WESTWIND SHIPPING CORPORATION
AND ASIAN TERMINALS, INC./ WESTWIND SHIPPING CORPORATION vs. PHILAM
INSURANCE CO., INC. AND ASIAN TERMINALS, INC.
G.R. Nos. 181163/181262/181319. July 24, 2013
J. Villarama, Jr.
(1)Payment by the insurer to the insured operates as an equitable assignment to the insurer of
all the remedies that the insured may have against the third party whose negligence or wrongful act
caused the loss. (2)Common carriers, from the nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence in the vigilance of goods transported. The
extraordinary responsibility of the common carrier lasts from the time the goods are unconditionally
placed in the possession of, and received by the carrier for transportation until the same are delivered,
actually or constructively, by the carrier to the consignee, or to the person who has a right to receive
them. (3)The prescriptive period for filing an action for the loss or damage of the goods under the
COGSA is found in paragraph (6), Section 3.
Facts:
On April 15, 1995, Nichimen Corporation shipped to Universal Motors Corporation 219 packages
containing 120 units of brand new Nissan Pickup Truck Double Cab 4x2 model, without engine,
tires and batteries, on board the vessel S/S “Calayan Iris” from Japan to Manila. The shipment was
insured with Philam against all risks under Marine Policy No. 708-8006717-4. The carrying vessel
arrived at the port of Manila on April 20, 1995, and when the shipment was unloaded by the staff of
ATI, it was found that the package marked as 03-245-42K/1 was in bad order being dented and
broken.
The shipment was withdrawn by R.F. Revilla Customs Brokerage, Inc., the authorized broker of
Universal Motors, and delivered to the latter’s warehouse in Mandaluyong City. Upon the request
of Universal Motors, a bad order survey was conducted on the cargoes and it was found that one
Frame Axle Sub without LWR was deeply dented while six Frame Assembly with Bush were
deformed and misaligned. Universal Motors declared them a total loss. Universal Motors filed a
formal claim for damages in the amount of P643,963.84 against Westwind, ATI and R.F. Revilla
Customs Brokerage, Inc. The demands remained unheeded hence it sought reparation from and
was compensated in the sum of P633,957.15 by Philam. Accordingly, Universal Motors issued a
Subrogation Receipt in favor of Philam. Philam, as subrogee filed a Complaint for damages against
Westwind, ATI and R.F. Revilla Customs Brokerage, Inc. before the RTC. The RTC rendered
judgment in favor of Philam and ordered Westwind and ATI to pay Philam, jointly and severally,
the sum of P633,957.15 with interest. On appeal, the CA affirmed with modification the ruling of
Page 70 of 434
the RTC. The appellate court directed Westwind and ATI to pay Philam, jointly and severally, the
amount of P190,684.48 with interest. The amount was limited only to (1) unit of Frame Axle Sub.
Issues:
(1) Who between Westwind and ATI should be held liable for the damaged cargoes;
(2) What is the extent of their liability? and
(3) Has Philam’s action for damages prescribed?
Ruling:
Westwind and ATI are both liable to Philam, the subrogee of Universal Motors
As to Westwind's liability, the Court agreed with ATI's contention that Steel Case No. 03-245-42K/1
was partly torn and crumpled on one side while it was being unloaded from the carrying vessel.
Clearly the contents were damaged while in the custody of Westwind. Further it was proven that
Westwind’s duty officer exercised full supervision and control over the entire process of unloading.
This is a clear violation of the extraordinary diligence required for common carriers in the vigilance
of goods transported by them. It must be noted that the extraordinary responsibility of the common
carrier lasts from the time the goods are unconditionally placed in the possession of, and received
by the carrier for transportation until the same are delivered, actually or constructively, by the
carrier to the consignee, or to the person who has a right to receive them. As to ATI's liability the
Court held it solidarily liable with Westwind. Being the custodian of the goods discharged from a
vessel, an arrastre operator’s duty is to take good care of the goods and to turn them over to the
party entitled to their possession. Handling cargo is mainly the arrastre operator’s principal work
so its drivers/operators or employees should observe the standards and measures necessary to
prevent losses and damage to shipments under its custody. While it is true that an arrastre operator
and a carrier may not be held solidarily liable at all times, the facts of these cases show that apart
from ATI’s stevedores being directly in charge of the physical unloading of the cargo, its foreman
picked the cable sling that was used to hoist the packages for transfer to the dock. Moreover, the
fact that 218 of the 219 packages were unloaded with the same sling unharmed is telling of the
inadequate care with which ATI’s stevedore handled and discharged the goods. The Court also
agreed with the CA that the liability should be confined to the value of the one piece Frame Axle
Sub without Lower since there is nothing in the records to show conclusively that the six Frame
Assembly with Bush were likewise contained in and damaged inside. Lastly, the Court held that
petitioner Philam has adequately established the basis of its claim against petitioners ATI and
Westwind. Philam, as insurer, was subrogated to the rights of the consignee, Universal Motors
Corporation, pursuant to the Subrogation Receipt executed by the latter in favor of the former.
Philam's action has not prescribed
Moreover, paragraph (6), Section 3 of the COGSA clearly states that failure to comply with the
notice requirement shall not affect or prejudice the right of the shipper to bring suit within one
year after delivery of the goods. Petitioner Philam, as subrogee of Universal Motors, filed the
Complaint for damages on January 18, 1996, just eight months after all the packages were delivered
to its possession on May 17, 1995. Evidently, petitioner Philam’s action against petitioners Westwind
and ATI was seasonably filed.
Page 71 of 434
_____________________________________________________________________________________
Westwind Shipping Corporation vs. UCPB General Insurace Co., Inc.

G.R. No. 2002289; November 25, 2013
Peralta J.
The liability of a common carrier does not cease by mere transfer of custody of the cargo to
the arrastre operator. Like the duty of seaworthiness, the duty of care of the cargo is non-delegable,
and the carrier is accordingly responsible for the acts of the master, the crew, the stevedore, and his
other agents. The fact that a consignee is required to furnish persons to assist in unloading a shipment
may not relieve the carrier of its duty as to such unloading. It is settled in maritime law jurisprudence
that cargoes while being unloaded generally remain under the custody of the carrier.
A customs broker cannot escape liability by claiming that it cannot be considered a common
carrier. With transportation of goods being an integral part of its business, a customs broker may be
regarded as a common carrier. As defined under Article 1732 of the Civil Code, “Common carriers are
persons, corporations, firms or associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for compensation, offering their services to the
public.” Article 1732 does not distinguish between one whose principal business activity is the carrying
of goods and one who does such carrying only as an ancillary activity.
Facts:
Kinsho-Mataichi Corporation shipped from the port of Kobe, Japan, 197 metal containers/skids of
tin-free steel for delivery to the consignee, San Miguel Corporation (SMC). The shipment was
loaded and received clean on board M/V Golden Harvest Voyage, a vessel owned and operated by
Westwind Shipping Corporation (Westwind).
SMC insured the cargoes against all risks with UCPB General Insurance Co., Inc. (UCPB).
When the shipment arrived in Manila, Philippines, it was discharged in the custody of the arrastre
operator, Asian Terminals, Inc. (ATI). During the unloading operation, six containers/skids,
sustained dents and punctures from the forklift used by the stevedores of Ocean Terminal Services,
Inc. (OTSI) in centering and shuttling the containers/skids.
Subsequently, Orient Freight International Inc. (OFII), the customs broker of SMC, withdrew from
ATI the 197 containers/skits, including the six in damaged condition and delivered the same at
SMC’s warehouse. Upon discharged, it was discovered that additional containers/skids were also
damaged due to the forklift operations; thus, making the total number of 15 containers/skids in bad
order.
Almost a year after, SMC filed a claim against UCPB, Westwind, ATI and OFII to recover the amount
corresponding to the damaged 15 containers/skids. UCPB then paid SMC the total sum of
P292,732.80. Thereafter, in the exercise of its right of subrogation, UCPB instituted a complaint for
damages against Westwind, ATI and OFII.
After trial, RTC dismissed UCPB’s complaint and ruled that the right, if any, against ATI already
prescribed. With respect to the claim against Westwind, the trial court ruled that Westwind is not
Page 72 of 434
liable since the discharging of the cargoes were done by ATI personnel using forklifts. Finally, the
trial court likewise absolved OFII from any liability, reasoning that it never undertook the operation
of the forklifts which caused the dents and punctures.
On appeal by UCPB, the CA reversed and set aside the decision of the trial court. While the CA
sustained the RTC judgment that the claim against ATI already prescribed, the appellate court
rendered a decision holding Westwind responsible for the six damage containers/skids at the time
of its unloading. The CA also considered that OFII is liable for the additional nine damaged
containers/skids, on the ground that OFII is a common carrier bound to observe extraordinary
diligence and is presumed to be at fault or have acted negligently for such damage.
Westwind and OFII filed their respective motions for reconsideration, which the CA denied; hence,
the petition. Westwind argues that it no longer had actual or constructive custody of the
containers/skids at the time they were damaged by ATI’s forklift operator. It contended that its
responsibility already ceased from the moment the cargoes were delivered to ATI. As for OFII, it
maintains that it is not a common carrier, but only a customs broker.
Issue:
1) Whether the liability of a common carrier ceased from the time the cargoes were discharged
in the custody of the arrastre operator.
2) Whether a customs carrier may be regarded as a common carrier.
Ruling:
Petition Denied.
1) Section 3 (2) of the COGSA states that among the carriers’ responsibilities are to properly
and carefully load, care for and discharge the goods carried. The bill of lading covering the subject
shipment likewise stipulates that the carrier’s liability for loss or damage to the goods ceases after
its discharge from the vessel. Article 619 of the Code of Commerce holds a ship captain liable for
the cargo from the time it is turned over to him until its delivery at the port of unloading.
In a case decided by a U.S. Circuit Court, Nichimen Company v. M/V Farland, it was ruled that like
the duty of seaworthiness, the duty of care of the cargo is non-delegable, and the carrier is
accordingly responsible for the acts of the master, the crew, the stevedore, and his other agents. It
has also been held that it is ordinarily the duty of the master of a vessel to unload the cargo and
place it in readiness for delivery to the consignee, and there is an implied obligation that this shall
be accomplished with sound machinery, competent hands, and in such manner that no unnecessary
injury shall be done thereto. And the fact that a consignee is required to furnish persons to assist
in unloading a shipment may not relieve the carrier of its duty as to such unloading. It is settled in
maritime law jurisprudence that cargoes while being unloaded generally remain under the custody
of the carrier.
What Westwind failed to realize is that the extraordinary responsibility of the common carrier lasts
until the time the goods are actually or constructively delivered by the carrier to the consignee or
to the person who has a right to receive them. There is actual delivery in contracts for the transport
of goods when possession has been turned over to the consignee or to his duly authorized agent
Page 73 of 434
and a reasonable time is given him to remove the goods. In this case, since the discharging of the
containers/skids, which were covered by only one bill of lading, had not yet been completed at the
time the damage occurred, there is no reason to imply that there was already delivery, actual or
constructive, of the cargoes to ATI.
Common carriers, from the nature of their business and for reasons of public policy, are bound to
observe extraordinary diligence in vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case. The mere proof of delivery of
goods in good order to the carrier, and their arrival in the place of destination in bad order, make
out a prima facie case against the carrier, so that if no explanation is given as to how the injury
occurred, the carrier must be held responsible. It is incumbent upon the carrier to prove that the
loss was due to accident or some other circumstances inconsistent with its liability.
2) A customs broker has been regarded as a common carrier because transportation of goods
is an integral part of its business. In Schmitz Transport & Brokerage Corporation v. Transport
Venture, Inc., the Court already reiterated: It is settled that under a given set of facts, a customs
broker may be regarded as a common carrier. Thus, this Court, in A.F. Sanchez Brokerage, Inc. v.
The Honorable Court of Appeals held:
The appellate court did not err in finding petitioner, a customs broker, to be
also a common carrier, as defined under Article 1732 of the Civil Code, to wit, Art.
1732. Common carriers are persons, corporations, firms or associations engaged in
the business of carrying or transporting passengers or goods or both, by land,
water, or air, for compensation, offering their services to the public.
Article 1732 does not distinguish between one whose principal business
activity is the carrying of goods and one who does such carrying only as an
ancillary activity. The contention, therefore, of petitioner that it is not a common
carrier but a customs broker whose principal function is to prepare the correct
customs declaration and proper shipping documents as required by law is bereft
of merit. It suffices that petitioner undertakes to deliver the goods for pecuniary
consideration.
As a common carrier, OFII is mandated to observe, under Article 1733 of the Civil Code,
extraordinary diligence in the vigilance over the goods it transports according to the peculiar
circumstances of each case. In the event that the goods are lost, destroyed or deteriorated, it is
presumed to have been at fault or to have acted negligently unless it proves that it observed
extraordinary diligence. In the case at bar it was established that except for the six containers/skids
already damaged OFII received the cargoes from ATI in good order and condition; and that upon
its delivery to SMC additional nine containers/skids were found to be in bad order as noted in the
Delivery Receipts issued by OFII and as indicated in the Report of Cares Marine Cargo Surveyors.
Instead of merely excusing itself from liability by putting the blame to ATI and SMC it is incumbent
upon OFII to prove that it actively took care of the goods by exercising extraordinary diligence in
the carriage thereof. It failed to do so. Hence its presumed negligence under Article 1735 of the Civil
Code remains unrebutted.
_____________________________________________________________________________________
Page 74 of 434
LIABILITIES OF COMMON CARRIERS
SULPICIO LINES, INC. vs. NAPOLEON SESANTE, NOW SUBSTITUTED BY MARIBEL

ATILANO, KRISTEN MARIE, CHRISTIAN IONE, KENNETH KERRN AND KARISNA KATE,
ALL SURNAMED SESANTE
G.R. NO. 172682, July 27, 2016, BERSAMIN, J.
Section 1, Rule 87 of the Rules of Court enumerates the following actions that survive the death of a
party, namely: (1) recovery of real or personal property, or an interest from the estate; (2) enforcement
of liens on the estate; and (3) recovery of damages for an injury to person or property. Sesante's claim
against the petitioner involved his personal injury caused by the breach of the contract of carriage and
hence, the complaint survived his death, and could be continued by his heirs following the rule on
substitution.
Clearly, the trial court is not required to make an express finding of the common carrier's fault or
negligence. The presumption of negligence applies so long as there is evidence showing that: (a) a
contract exists between the passenger and the common carrier; and (b) the injury or death took place
during the existence of such contract. In such event, the burden shifts to the common carrier to prove
its observance of extraordinary diligence, and that an unforeseen event or force majeure had caused
the injury. However, for a common carrier to be absolved from liability in case of force majeure, it is
not enough that the accident was caused by a fortuitous event. The common carrier must still prove
that it did not contribute to the occurrence of the incident due to its own or its employees' negligence.
FACTS:
On September 18, 1998, at around 12:55 p.m., the M/V Princess of the Orient, a passenger vessel
owned and operated by the petitioner, sank near Fortune Island in Batangas. Of the 388 recorded
passengers, 150 were lost. Napoleon Sesante, then a member of the Philippine National Police (PNP)
and a lawyer, was one of the passengers who survived the sinking. He sued the petitioner for breach
of contract and damages alleging that Sulpicio Lines committed bad faith in allowing the vessel to
sail despite the storm signal. In its defense, the petitioner insisted on the seaworthiness of the M/V
Princess of the Orient due to its having been cleared to sail from the Port of Manila by the proper
authorities; that the sinking had been due to force majeure.
RTC rendered its judgment against defendant Sulpicio Lines ordering it to pay Temperate damages
in the amount of P400,000.00 and Moral damages in the amount of P1,000,000.00. CA promulgated
its assailed decision. It lowered the temperate damages to P120,000.00, which approximated the
cost of Sesante's lost personal belongings; and held that despite the seaworthiness of the vessel, the
petitioner remained civilly liable because its officers and crew had been negligent in performing
their duties.
During the pendency of the case, herein petitioner died and was substituted by his heirs.
ISSUES:
1. Is the complaint for breach of contract and damages a personal action that does not survive the
death of the plaintiff?
2. Is the petitioner liable for damages under Article 1759 of the Civil Code?; and
Page 75 of 434
3. Is there sufficient basis for awarding moral, temperate and exemplary damages?
RULING:
1. An action for breach of contract of carriage survives the death of the plaintiff.
The petitioner urges that Sesante's complaint for damages was purely personal and cannot be
transferred to his heirs upon his death. Hence, the complaint should be dismissed because the
death of the plaintiff abates a personal action.
Section 1, Rule 87 of the Rules of Court enumerates the following actions that survive the death of
a party, namely: (1) recovery of real or personal property, or an interest from the estate; (2)
enforcement of liens on the estate; and (3) recovery of damages for an injury to person or property.
Sesante's claim against the petitioner involved his personal injury caused by the breach of the
contract of carriage and hence, the complaint survived his death, and could be continued by his
heirs following the rule on substitution.
2. The petitioner is liable for breach of contract of carriage.
Article 1759 of the Civil Code does not establish a presumption of negligence because it explicitly
makes the common carrier liable in the event of death or injury to passengers due to the negligence
or fault of the common carrier's employees.
Clearly, the trial court is not required to make an express finding of the common carrier's fault or
negligence. The presumption of negligence applies so long as there is evidence showing that: (a) a
contract exists between the passenger and the common carrier; and (b) the injury or death took
place during the existence of such contract. In such event, the burden shifts to the common carrier
to prove its observance of extraordinary diligence, and that an unforeseen event or force majeure
had caused the injury. However, for a common carrier to be absolved from liability in case of force
majeure, it is not enough that the accident was caused by a fortuitous event. The common carrier
must still prove that it did not contribute to the occurrence of the incident due to its own or its
employees' negligence.
The petitioner has attributed the sinking of the vessel to the storm notwithstanding its position on
the seaworthiness of M/V Princess of the Orient. Yet, the findings of the Board of Marine Inquiry
(BMI) directly contradicted the petitioner's attribution. The BMI found that the "erroneous
maneuvers" during the ill-fated voyage by the captain of the petitioner's vessel had caused the
sinking. After the vessel had cleared Limbones Point while navigating towards the direction of
Fortune Island, the captain already noticed the listing of the vessel by three degrees to the portside
of the vessel, but, according to the BMI, he did not exercise prudence as required by the situation
in which his vessel was suffering the battering on the starboard side by big waves of seven to eight
meters high and strong southwesterly winds of 25 knots. The BMI pointed out that he should have
considerably reduced the speed of the vessel based on his experience about the vessel - a close-type
ship of seven decks, and of a wide and high superstructure - being vulnerable if exposed to strong
winds and high waves. He ought to have also known that maintaining a high speed under such
circumstances would have shifted the solid and liquid cargo of the vessel to port, worsening the
tilted position of the vessel. It was only after a few minutes thereafter that he finally ordered the
speed to go down to 14 knots, and to put ballast water to the starboardheeling tank to arrest the
Page 76 of 434
continuous listing at portside. By then, his moves became an exercise in futility because, according
to the BMI, the vessel was already listing to her portside between 15 to 20 degrees, which was almost
the maximum angle of the vessel's loll. It then became inevitable for the vessel to lose her stability.
As borne out by the aforequoted findings of the BMI, the immediate and proximate cause of the
sinking of the vessel had been the gross negligence of its captain in maneuvering the vessel.
3. The award of moral damages and temperate damages is proper.
Moral damages may be recovered in an action upon breach of contract of carriage only when: (a)
death of a passenger results, or ( b) it is proved that the carrier was guilty of fraud and bad faith,
even if death does not result. The totality of the negligence by the officers and crew of M/V Princess
of the Orient warranted the award of moral damages.
With regard to the temperate damages, the petitioner contends that its liability for the loss of
Sesante' s personal belongings should conform with Art. 1754. The petitioner denies liability
because Sesante' s belongings had remained in his custody all throughout the voyage until the
sinking, and he had not notified the petitioner or its employees about such belongings. Hence,
absent such notice, liability did not attach to the petitioner.
Accordingly, actual notification was not necessary to render the petitioner as the common carrier
liable for the lost personal belongings of Sesante. By allowing him to board the vessel with his
belongings without any protest, the petitioner became sufficiently notified of such belongings. So
long as the belongings were brought inside the premises of the vessel, the petitioner was thereby
effectively notified and consequently duty-bound to observe the required diligence in ensuring the
safety of the belongings during the voyage. Applying Article 2000 of the Civil Code, the petitioner
assumed the liability for loss of the belongings caused by the negligence of its officers or crew. In
view of the Court’s finding that the negligence of the officers and crew of the petitioner was the
immediate and proximate cause of the sinking of the M/V Princess of the Orient, its liability for
Sesante's lost personal belongings was beyond question.
The Court also awarded exemplary damages even if the same was not specifically prayed for in the
complaint. The Court has the discretion to award exemplary damages if the defendant acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner. Accordingly, the Court fix the sum
of Pl,000,000.00 in order to serve fully the objective of exemplarity among those engaged in the
business of transporting passengers and cargo by sea.
_____________________________________________________________________________________
ALFREDO S. RAMOS, CONCHITA S. RAMOS, BENJAMIN B. RAMOS, NELSON T. RAMOS

and ROBINSON T. RAMOS, Petitioners, - versus –
CHINA SOUTHERN AIRLINES CO. LTD., Respondent.
G.R. No. 213418, September 21, 2016, THIRD DIVISION, PEREZ,J.
When an airline issues a ticket to a passenger confirmed on a particular flight, on a certain

date, a contract of carriage arises, and the passenger has every right to expect that he would fly on
that flight and on that date. If that does not happen, then the carrier opens itself to a suit for breach
of contract of carriage. In an action based on a breach of contract of carriage, the aggrieved party
does not have to prove that the common carrier was at fault or was negligent. All he has to prove is
Page 77 of 434
the existence of the contract and the fact of its non-performance by the carrier, through the latter's
failure to carry the passenger to its destination.
FACTS:
On 7 August 2003, petitioners purchased five China Southern Airlines roundtrip plane tickets from
Active Travel Agency. It is provided in their itineraries that petitioners will be leaving Manila on 8
August 2003 and will be leaving Xiamen on 12 August 2003. On their way back to the Manila,
petitioners were prevented from taking their designated flight despite the fact that earlier that day
an agent from Active Tours informed them that their bookings for China Southern Airlines 1920H
are confirmed. The refusal came after petitioners already checked in all their baggages and were
given the corresponding claim stubs and after they had paid the terminal fees. According to the
airlines' agent with whom they spoke at the airport, petitioners were merely chance passengers but
they may be allowed to join the flight if they are willing to pay an additional 500 Renminbi (RMB)
per person. When petitioners refused to defray the additional cost, their baggages were offloaded
from the plane and China Southern Airlines 1920H flight then left Xiamen International Airport
without them. Because they have business commitments waiting for them in Manila, petitioners
were constrained to rent a car that took them to Chuan Chio Station where they boarded the train
to Hongkong. Upon reaching Hong Kong, petitioners purchased new plane tickets from Philippine
Airlines (PAL) that flew them back to Manila.
Petitioners initiated an action for damages before the RTC of Manila against China Southern
Airlines and Active Travel for damages. RTC rendered a Decision in favor of the petitioners
awarding them actual, moral and exemplary damages as well as attorney’s fees. On appeal, the CA
delete award of moral and exemplary damages. According to the appellate court, petitioners failed
to prove that China Southern Airlines' breach of contractual obligation was attended with bad faith.
ISSUE:
Whether or not the petitioner is entitled to actual, moral and exemplary damages.
RULING:
The petitioner is entitled to actual, moral and exemplary damages.
When an airline issues a ticket to a passenger confirmed on a particular flight, on a certain date, a
contract of carriage arises, and the passenger has every right to expect that he would fly on that
flight and on that date. If that does not happen, then the carrier opens itself to a suit for breach of
contract of carriage. In an action based on a breach of contract of carriage, the aggrieved party does
not have to prove that the common carrier was at fault or was negligent. All he has to prove is the
existence of the contract and the fact of its non-performance by the carrier, through the latter's
failure to carry the passenger to its destination.
There is no doubt that petitioners are entitled to actual or compensatory damages. Both the RTC
and the CA uniformly held that there was a breach of contract committed by China Southern
Airlines when it failed to deliver petitioners to their intended destination, a factual finding that we
do not intend to depart from in the absence of showing that it is unsupported by evidence. As the
aggrieved parties, petitioners had satisfactorily proven the existence of the contract and the fact of
Page 78 of 434
its nonperformance by China Southern Airlines; the concurrence of these elements called for the
imposition of actual or compensatory damages.
With respect to moral damages, the same is awarded in cases of breaches of contract where the
defendant acted fraudulently or in bad faith. The Court finds that the airline company acted in
bad faith in insolently bumping petitioners off the flight after they have completed all the pre-
departure routine. Bad faith is evident when the ground personnel of the airline company unjustly
and unreasonably refused to board petitioners to the plane which compelled them to rent a car and
take the train to the nearest airport where they bought new sets of plane tickets from another airline
that could fly them home. Petitioners have every reason to expect that they would be transported
to their intended destination after they had checked in their luggage and had gone through all the
security checks. Instead, China Southern Airlines offered to allow them to join the flight if they are
willing to pay additional cost; this amount is on top of the purchase price of the plane tickets. The
requirement to pay an additional fare was insult upon injury.
China Southern Airlines is also liable for exemplary damages as it acted in a wantonly oppressive
manner as succinctly discussed above against the petitioners. Exemplary damages which are
awarded by way of example or correction for the public good, may be recovered in contractual
obligations, as in this case, if defendant acted in wanton, fraudulent, reckless, oppressive or
malevolent manner.
_____________________________________________________________________________________
CATHAY PACIFIC AIRWAYS, LTD., Petitioner, - versus - SPOUSES ARNULFO and EVELYN
FUENTEBELLA, Respondents.
G. R. No. 188283, FIRST DIVISION, July 20, 2016, SERENO, CJ
In Air France v. Gillego, the Court ruled that in an action based on a breach of contract of
carriage, the aggrieved party does not have to prove that the common carrier was at fault or was
negligent; all that he has to prove is the existence of the contract and the fact of its nonperformance
by the carrier. In this case, both the trial and appellate courts found that respondents were entitled to
First Class accommodations under the contract of carriage, and that petitioner failed to perform its
obligation.
However, the award of P5 million as moral damages is excessive, considering that the highest
amount ever awarded by this Court for moral damages in cases involving airlines is P500,000. As said
in Air France v. Gillego, "the mere fact that respondent was a Congressman should not result
in an automatic increase in the moral and exemplary damages." Upon the facts established,
the amount of P500,000 as moral damages is reasonable to obviate the moral suffering that
respondents have undergone. With regard to exemplary damages, jurisprudence shows that P50,000
is sufficient to deter similar acts of bad faith attributable to airline representatives.
FACTS:
The case originated from a Complaint for damages filed by respondents Arnulfo and Evelyn
Fuentebella against petitioner Cathay Pacific Airways Ltd. Respondents prayed damages for the
alleged besmirched reputation and honor, as well as the public embarrassment they had suffered
as a result of a series of involuntary downgrades of their trip from Manila to Sydney via Hong
Page 79 of 434
Kong. The RTC ruled in favor of respondents and awarded moral damages, exemplary damages,
and attorney’s fees. CA affirmed the decision of RTC.
In 1993, the Speaker of the House authorized Congressmen Arnulfo Fuentebella (respondent
Fuentebella), Alberto Lopez (Cong. Lopez) and Leonardo Fugoso (Cong. Fugoso) to travel on
official business to Sydney, Australia, to confer with their counterparts in the Australian Parliament.
On 22 October 1993, respondents bought Business Class tickets for Manila to Sydney via Hong Kong
and back. They changed their minds, however, and decided to upgrade to First Class. From this
point, the parties presented divergent versions of facts. The overarching disagreement was on
whether respondents should have been given First Class seat accommodations for all the
segments of their itinerary.
Petitioner admits that First Class tickets were issued to respondents, but clarifies that the
tickets were open-dated (waitlisted). There was no showing whether the First Class tickets issued
to Lopez and Fugoso were open-dated or otherwise, but it appears that they were able to fly First
Class on all the segments of the trip, while respondents were not.
On 25 October 1993, respondents queued in front of the First Class counter in the airport. They
were issued boarding passes for Business Class seats on board CX 902 bound for Hong Kong from
Manila and Economy Class seats on board CX 101 bound for Sydney from Hong Kong. They only
discovered that they had not been given First Class seats when they were denied entry into
the First Class lounge. Respondent Fuentebella went back to the check-in counter to demand
that they be given First Class seats or at the very least, access to the First Class Lounge. He recalled
that he was treated by the ground staff in a discourteous, arrogant and rude manner. He was
allegedly told that the plane would leave with or without them. Both the trial court and the CA
gave credence to the testimony of respondent Fuentebella.
ISSUE:
Whether or not the respondents are liable for the damages prayed for.
RULING:
The respondents are entitled to moral damages, exemplary damages and attorney’s fees.
In Air France v. Gillego, the Court ruled that in an action based on a breach of contract of carriage,
the aggrieved party does not have to prove that the common carrier was at fault or was negligent;
all that he has to prove is the existence of the contract and the fact of its nonperformance by the
carrier. In this case, both the trial and appellate courts found that respondents were entitled to First
Class accommodations under the contract of carriage, and that petitioner failed to perform its
obligation.
According to the senior reservation supervisor of the petitioner, Nenita Montillana (Montillana), a
reservation is deemed confirmed when there is a seat available on the plane. When asked how a
passenger was informed of the confirmation, Montillana replied that computer records were
consulted upon inquiry. By its issuance of First Class tickets on the same day of the flight in
place of Business Class tickets that indicated the preferred and confirmed flight, petitioner
led respondents to believe that their request for an upgrade had been approved.
Page 80 of 434
Petitioner tries to downplay the factual finding that no explanation was given to respondents with
regard to the types of ticket that were issued to them. It ventured that respondents were seasoned
travelers and therefore familiar with the concept of open-dated tickets. Petitioner attempts to draw
a parallel with Sarreal, Jr. v. JAL, in which it was ruled that the airline could not be faulted for the
negligence of the passenger, because the latter was aware of the restrictions carried by his ticket and
the usual procedure for travel. In that case, though, records showed that the plaintiff was a well
travelled person who averaged two trips to Europe and two trips to Bangkok every month for 34
years. In the present case, no evidence was presented to show that respondents were indeed familiar
with the concept of open-dated ticket. In fact, the tickets do not even contain the term "open-dated."
Moral and exemplary damages are not ordinarily awarded in breach of contract cases. This Court
has held that damages may be awarded only when the breach is wanton and deliberately injurious,
or the one responsible had acted fraudulently or with malice or bad faith. Bad faith is a question of
fact that must be proven by clear and convincing evidence. Both the trial and the appellate courts
found that petitioner had acted in bad faith.
However, the award of P5 million as moral damages is excessive, considering that the highest
amount ever awarded by this Court for moral damages in cases involving airlines is P500,000. As
We said in Air France v. Gillego, "the mere fact that respondent was a Congressman should
not result in an automatic increase in the moral and exemplary damages." We find that upon
the facts established, the amount of P500,000 as moral damages is reasonable to obviate the moral
suffering that respondents have undergone. With regard to exemplary damages, jurisprudence
shows that P50,000 is sufficient to deter similar acts of bad faith attributable to airline
representatives.
VIGILANCE OVER GOODS
TORRES-MADRID BROKERAGE, INC. vs. FEB MITSUI MARINE INSURANCE CO., INC. and
BENJAMIN P. MANALAST AS, doing business under the name of BMT TRUCKING
SERVICES
G.R. No. 194121, July 11, 2016, BRION, J.
A brokerage may be considered a common carrier if it also undertakes to deliver the goods for
its customers. The law does not distinguish between one whose principal business activity is the
carrying of goods and one who undertakes this task only as an ancillary activity.
Theft or the robbery of the goods is not considered a fortuitous event or a force majeure.
Nevertheless, a common carrier may absolve itself of liability for a resulting loss: (1) if it proves that
it exercised extraordinary diligence in transporting and safekeeping the goods; or (2) if it stipulated
with the shipper/owner of the goods to limit its liability for the loss, destruction, or deterioration of
the goods to a degree less than extraordinary diligence.
FACTS:
A shipment of various electronic goods arrived at the Port of Manila for Sony Philippines, Inc.
(Sony). Previous to the arrival, Sony had engaged the services of TMBI to facilitate, process,
withdraw, and deliver the shipment from the port to its warehouse in Biñan, Laguna. TMBI – who
Page 81 of 434
did not own any delivery trucks – subcontracted the services of Benjamin Manalastas’ company,
BMT Trucking Services (BMT), to transport the shipment from the port to the Biñan warehouse.
Four BMT trucks picked up the shipment from the port. However, only three trucks arrived at
Sony’s Biñan warehouse. The fourth truck driven by Rufo Reynaldo Lapesura was found abandoned.
Sony filed an insurance claim with the Mitsui, the insurer of the goods. After evaluating the merits
of the claim, Mitsui paid Sony the value of the lost goods. After being subrogated to Sony’s rights,
Mitsui sent TMBI a demand letter for payment of the lost goods. TMBI refused to pay Mitsui’s claim.
As a result, Mitsui filed a complaint against TMBI. TMBI, in turn, impleaded Benjamin Manalastas,
the proprietor of BMT, as a third-party defendant. TMBI prayed that in the event it is held liable to
Mitsui for the loss, it should be reimbursed by BMT.
RTC found TMBI and Benjamin Manalastas jointly and solidarily liable to pay Mitsui. CA affirmed
the RTC’s decision.
TMBI denies being a common carrier because it does not own a single truck to transport its
shipment and it does not offer transport services to the public for compensation and hence, it is
not bound to observe extra-ordinary diligence. Furthermore, TMBI insists that the hijacking of the
truck was a fortuitous event which should exonerate its liability.
ISSUES:
1. Whether TMBI is a common carrier.

2. Whether TMBI should be held liable for the hijacking of the truck.
3. Whether BMT should be held liable with TMBI.
RULING:
1. TMBI is a common carrier. A brokerage may be considered a common carrier if it also undertakes
to deliver the goods for its customers.
Common carriers are persons, corporations, firms or associations engaged in the business of
transporting passengers or goods or both, by land, water, or air, for compensation, offering their
services to the public.
In A.F. Sanchez Brokerage Inc. v. Court of Appeals, we held that a customs broker – whose principal
business is the preparation of the correct customs declaration and the proper shipping documents
– is still considered a common carrier if it also undertakes to deliver the goods for its customers.
The law does not distinguish between one whose principal business activity is the carrying of goods
and one who undertakes this task only as an ancillary activity.
Despite TMBI’s present denials, we find that the delivery of the goods is an integral, albeit ancillary,
part of its brokerage services. TMBI admitted that it was contracted to facilitate, process, and clear
the shipments from the customs authorities, withdraw them from the pier, then transport and
deliver them to Sony’s warehouse in Laguna.
Page 82 of 434
That TMBI does not own trucks and has to subcontract the delivery of its clients’ goods, is
immaterial. As long as an entity holds itself to the public for the transport of goods as a business, it
is considered a common carrier regardless of whether it owns the vehicle used or has to actually
hire one.
Lastly, TMBI’s customs brokerage services – including the transport/delivery of the cargo – are
available to anyone willing to pay its fees. Given these circumstances, we find it undeniable that
TMBI is a common carrier.
2. TMBI is liable for the hijacking of the truck.
Theft or the robbery of the goods is not considered a fortuitous event or a force majeure.
Nevertheless, a common carrier may absolve itself of liability for a resulting loss: (1) if it proves that
it exercised extraordinary diligence in transporting and safekeeping the goods; or (2) if it stipulated
with the shipper/owner of the goods to limit its liability for the loss, destruction, or deterioration
of the goods to a degree less than extraordinary diligence.
Instead of showing that it had acted with extraordinary diligence, TMBI simply argued that it was
not a common carrier bound to observe extraordinary diligence. Its failure to successfully establish
this premise carries with it the presumption of fault or negligence, thus rendering it liable to
Sony/Mitsui for breach of contract.
3. TMBI and BMT are not solidarily liable to Mitsui.
TMBI’s liability to Mitsui does not stem from a quasi-delict (culpa aquiliana) but from its breach of
contract (culpa contractual). The tie that binds TMBI with Mitsui is contractual, albeit one that
passed on to Mitsui as a result of TMBI’s contract of carriage with Sony to which Mitsui had been
subrogated as an insurer who had paid Sony’s insurance claim. The legal reality that results from
this contractual tie precludes the application of Article 2194 on solidary liability of the parties based
on quasi-delict.
The Court likewise disagree with the finding that BMT is directly liable to Sony/Mitsui for the loss
of the cargo. While it is undisputed that the cargo was lost under the actual custody of BMT (whose
employee is the primary suspect in the hijacking or robbery of the shipment), no direct contractual
relationship existed between Sony/Mitsui and BMT. If at all, Sony/Mitsui’s cause of action against
BMT could only arise from quasi-delict, as a third party suffering damage from the action of another
due to the latter’s fault or negligence, pursuant to Article 2176 of the Civil Code. In the present case,
Mitsui’s action is solely premised on TMBI’s breach of contract. Mitsui did not even sue BMT, much
less prove any negligence on its part. If BMT has entered the picture at all, it is because TMBI sued
it for reimbursement for the liability that TMBI might incur from its contract of carriage with
Sony/Mitsui. Accordingly, there is no basis to directly hold BMT liable to Mitsui for quasi-delict.
The Court, however, do not say that TMBI must absorb the loss. By subcontracting the cargo
delivery to BMT, TMBI entered into its own contract of carriage with a fellow common carrier. Since
BMT failed to prove that it observed extraordinary diligence in the performance of its obligation to
TMBI, it is liable to TMBI for breach of their contract of carriage.
_____________________________________________________________________________________
Page 83 of 434
TRANSIMEX CO. vs. MAFRE ASIAN INSURANCE CORP.

G.R. No. 190271, September 14, 2016, SERENO, CJ.
According to the New Civil Code, the law of the country to which the goods are to be
transported shall govern the liability of the common carrier for their loss, destruction or deterioration.
The Code takes precedence as the primary law over the rights and obligations of common carriers
with the Code of Commerce and COGSA applying suppletorily.
The strong winds accompanying the southwestern monsoon could not be classified as a
"storm." Such winds are the ordinary vicissitudes of a sea voyage.
Strong winds and waves are not automatically deemed perils of the sea, if these conditions
are not unusual for that particular sea area at that specific time, or if they could have been reasonably
anticipated or foreseen.
Even assuming that the inclement weather encountered by the vessel amounted to a "storm"
under Article 1734(1) of the Civil Code, there are two other reasons why this Court cannot absolve
petitioner from liability for loss or damage to the cargo under the Civil Code. First, there is no proof
that the bad weather encountered by M/V Meryem Ana was the proximate and only cause of
damage to the shipment. Second, petitioner failed to establish that it had exercised the diligence
required from common carriers to prevent loss or damage to the cargo.
FACTS:
This case involves a money claim filed by an respondent insurance company against the petitioner
ship agent of a common carrier. The dispute stemmed from an alleged shortage in a shipment of
fertilizer delivered by the carrier to a consignee. Before this Court, the ship agent insists that the
shortage was caused by bad weather, which must be considered either a storm under Article 1734 of
the Civil Code or a peril of the sea under the Carriage of Goods by Sea Act ( COGSA ). Petitioner is
the local ship agent of the vessel, while respondent is the subrogee of Fertiphil Corporation
(Fertiphil), the consignee of a shipment of Prilled Urea Fertilizer transported by M/V Meryem Ana.
M/V Meryem Ana received a shipment of Prilled Urea Fertilizer from Ukraine. The ship sailed on to
Tabaco, Albay, to unload the cargo. The fertilizer unloaded at Albay appeared to have a gross weight
of 7,700 metric tons. As soon as the vessel docked at the Tabaco port, the fertilizer was bagged and
stored inside a warehouse by employees of the consignee. When the cargo was subsequently
weighed, it was discovered that only 7,350.35 metric tons of fertilizer had been delivered. Because
of the alleged shortage of 349.65 metric tons, Fertiphil filed a claim with respondent for
Pl,617,527.37, which was found compensable.
After paying the claim of Fertiphil, respondent demanded reimbursement from petitioner on the
basis of the right of subrogation. The claim was denied, prompting respondent to file a Complaint
with the RTC for recovery of sum of money. In support of its claim, respondent presented a Report
of Survey and a Certification from David Cargo Survey Services to prove the shortage. In the report,
the adjuster also stated that the shortage was attributable to the melting of the fertilizer while inside
the hatches, when the vessel took on water because of the bad weather experienced at sea.
Page 84 of 434
The RTC ruled in favor of respondent and ordered petitioner to pay the claim of Pl,617,527.37. The
CA affirmed the ruling of the RTC.
ISSUES:
1. Whether the transaction is governed by the provisions of the Civil Code on common carriers
or by the provisions of COGSA.
2. Whether petitioner is liable for the loss or damage sustained by the cargo because of bad
weather.
RULING:
1. The provisions of the Civil Code on common carriers are applicable.
As expressly provided in Article 1753 of the Civil Code, "the law of the country to which the goods
are to be transported shall govern the liability of the common carrier for their loss, destruction or
deterioration." Since the cargo in this case was transported from Odessa, Ukraine, to Tabaco, Albay,
the liability of petitioner for the alleged shortage must be determined in accordance with the
provisions of the Civil Code on common carriers. In Eastern Shipping Lines, Inc. v. BPI/MS Insurance
Corp., the Court declared:
According to the New Civil Code, the law of the country to which the goods are to be
transported shall govern the liability of the common carrier for their loss, destruction or
deterioration. The Code takes precedence as the primary law over the rights and obligations
of common carriers with the Code of Commerce and COGSA applying suppletorily.
2. Petitioner is liable for the shortage incurred by the shipment.
Petitioner asserts that the shortage was caused by bad weather, which must be considered either a
storm under Article 1734 of the Civil Code or a peril of the sea under the Carriage of Goods by Sea Act
(COGSA). The Court, however, found that petitioner failed to prove the existence of a storm or a
peril of the sea within the context of Article 1734(1) of the Civil Code or Section 4(2)( c) of COGSA.
It must be emphasized that not all instances of bad weather may be categorized as "storms" or
"perils of the sea" within the meaning of the provisions of the Civil Code and COGSA on common
carriers.
With respect to storms, this Court has explained the difference between a storm and ordinary
weather conditions in Central Shipping Co. Inc. v. Insurance Company of North America:
According to PAGASA, a storm has a wind force of 48 to 55 knots, equivalent to 55 to

63 miles per hour or 10 to 11 in the Beaufort Scale. The second mate of the vessel stated
that the wind was blowing around force 7 to 8 on the Beaufort Scale. Consequently, the
strong winds accompanying the southwestern monsoon could not be classified as a
"storm." Such winds are the ordinary vicissitudes of a sea voyage.
The phrase "perils of the sea" carries the same connotation. Although the term has not been
definitively defined in Philippine jurisprudence, courts in the United States of America generally
Page 85 of 434
limit the application of the phrase to weather that is "so unusual, unexpected and catastrophic as
to be beyond reasonable expectation." Accordingly, strong winds and waves are not
automatically deemed perils of the sea, if these conditions are not unusual for that
particular sea area at that specific time, or if they could have been reasonably anticipated
or foreseen.
In this case, the documentary and testimonial evidence cited by petitioner indicate that M/V
Meryem Ana faced winds of only up to 40 knots while at sea. This wind force clearly fell short of the
48 to 55 knots required for "storms" under Article 1734(1) of the Civil Code based on the threshold
established by PAG ASA. Petitioner also failed to prove that the inclement weather encountered by
the vessel was unusual, unexpected, or catastrophic. In particular, the strong winds and waves,
which allegedly assaulted the ship, were not shown to be worse than what should have been
expected in that particular location during that time of the year. Consequently, this Court cannot
consider these weather conditions as "perils of the sea" that would absolve the carrier from liability.
Even assuming that the inclement weather encountered by the vessel amounted to a "storm" under
Article 1734(1) of the Civil Code, there are two other reasons why this Court cannot absolve
petitioner from liability for loss or damage to the cargo under the Civil Code. First, there is no proof
that the bad weather encountered by M/V Meryem Ana was the proximate and only cause of
damage to the shipment. Second, petitioner failed to establish that it had exercised the diligence
required from common carriers to prevent loss or damage to the cargo.
_____________________________________________________________________________________
ASIAN TERMINALS, INC. vs. FIRST LEPANTO-TAISHO INSURANCE CORPORATION

G.R. No. 185964, June 16, 2014, J. Reyes
The shipment received by the ATI from the vessel of COCSCO was found to have sustained
loss and damages. An arrastre operator’s duty is to take good care of the goods and to turn them over
to the party entitled to their possession. It must prove that the losses were not due to its negligence
or to that of its employees. The Court held that ATI failed to discharge its burden of proof. ATI blamed
COSCO but when the damages were discovered, the goods were already in ATI’s custody for two
weeks. Witnesses also testified that the shipment was left in an open area exposed to the elements,
thieves and vandals.
Facts:
About 3,000 bags of sodium tripolyphosphate contained in 100 plain jumbo bags were
loaded on M/V “Da Feng” owned by China Ocean Shipping Co. (COSCO) in favor of Grand Asian
Sales, Inc. (GASI). It was insured by GASI with FIRST LEPANTO for P7,959,550.50 under Marine
Open Policy No. 0123.
The shipment arrived in Manila and was discharged into the custody of ATI, which was
engaged in arrastre business. It remained at ATI’s storage area until withdrawen by broker, Proven
Customs Brokerage Corporation (PROVEN) for delivery to GASI.
Upon receipt, GASI found that the goods incurred shortages of 8,600 kg. and spillages of
3,315 kg. for a total of loss valued at P166,722.41. GASI sought recompense from COSCO through its
Page 86 of 434
Philippine agent Smith Bell Shipping Lines, Inc. (SMITH BELL), ATI, and PROVEN, but was denied.
Thus, FIRST LEPANTO paid P165,772.40 as insurance indemnity.
Then GASI executed a Release of Claim, discharging FIRST LEPANTO from any and all
liabilities pertaining to the damaged shipment and subrogating it to all the rights of recovery and
claims the former may have against any person or corporation in relation to the damaged shipment.
FIRST LEPANTO demanded reimbursement from COSCO through SMITH BELL, PROVEN,
and ATI. When denied, it filed a Complaint for sum of money before the MeTC.
ATI denied liability and claimed it exercised due diligence and care in handling the goods.
ATI alleged that upon arrival, it was discovered that one jumbo bag sustained loss/damage while in
custody of COSCO as evidenced by Turn Over Survey of Bad Order Cargo No. 47890. During
withdrawal of PROVEN, it was re-examined and the goods were found to be in the same condition
as when it was turned over to ATI such that one jumbo bag was damaged. ATI also averred that
even if it was liable, its contract for cargo handling service limits its liability to not more than P5,000
per package.
PROVEN also denied liability and claimed that the damages were sustained before they
were withdrawn from ATI’s custody under which the shipment was left in an open area exposed to
the elements, thieves and vandals. Despite receipt of summons, COSCO and SMITH BELL failed to
file an answer to the complaint.
MeTC dismissed the claim, absolving ATI and PROVEN of liability and finding COSCO to
be liable but ruling that it had no jurisdiction over it since it was a foreign corporation and it was
not established that SMITH BELL is its Philippine Agent. On appeal, the RTC reversed this decision,
by which it held ATI liable. ATI challenged the RTC’s decision before the Court of Appeals in which
it argued that there was no valid subrogation because FIRST LEPANTO failed to present a valid and
existing Marine Open Policy or insurance contract. The CA dismissed the appeal.
Issue:
1. Is ATI liable for the damages of the shipment?
2. Whether or not the presentation of the insurance policy is indispensable in proving right
of FIRST LEPANTO to be subrogated
Ruling:
1. Yes, ATI failed to prove that it exercised due care and diligence while shipment was under
its custody, control and possession as arrastre operator.
Factual questions pertaining to ATI’s liability has already been settled in the uniform factual
findings of the RTC and the CA. Such findings are binding and conclusive upon the Supreme Court.
Only questions of law are allowed in petitions for review on certiorari under Rule 45 of the Rules of
Court.
Page 87 of 434
The relationship between the consignee and the arrastre operator is akin to that existing
between the consignee and/or the owner of the shipped goods and the common carrier, or that
between a depositor and a warehouseman. Hence, in the performance of its obligations, an arrastre
operator should observe the same degree of diligence as that required of a common carrier and a
warehouseman. An arrastre operator’s duty is to take good care of the goods and to turn them over
to the party entitled to their possession.
Since the safekeeping of the goods is its responsibility, it must prove that the losses were
not due to its negligence or to that of its employees. ATI failed to discharge its burden of proof.
Instead, it insisted on shifting the blame to COSCO on the basis of the Request for Bad Order
Survey, purportedly showing that when ATI received the shipment, one jumbo bag thereof was
already in damaged condition.
The Court affirmed the finding of the RTC and CA that ATI’s contention was improbable
and illogical. The date of the said document was too distant from the date when the shipment was
actually received by ATI from COSCO. In fact, what the document established is that when the
loss/damage was discovered, the shipment has been in ATI’s custody for at least two weeks. This
circumstance, coupled with the undisputed declaration of PROVEN’s witnesses that while the
shipment was in ATI’s custody, it was left in an open area exposed to the elements, thieves and
vandals, all generate the conclusion that ATI failed to exercise due care and diligence.
2. No, the non-presentation of the insurance contract is not fatal to FIRST LEPANTO’s cause
of action.
ATI put in issue the submission of the insurance contract for the first time before the CA.
ATI also failed to allege the necessity of the insurance contract in its answer to the complaint before
the MeTC. Neither was the same considered during pre-trial as one of the decisive matters in the
case.
Since it was not agreed during the pre-trial proceedings that FIRST LEPANTO will have to
prove its subrogation rights by presenting a copy of the insurance contract, ATI is barred from
pleading the absence of such contract in its appeal. It is imperative for the parties to disclose during
pre-trial all issues they intend to raise during the trial because they are bound by the delimitation
of such issues. The determination of issues during the pre-trial conference bars the consideration
of other questions, whether during trial or on appeal.
However, the Court ruled that the non-presentation of the insurance contract is not fatalto
FIRST LEPANTO’s right to collect reimbursement. Subrogation is the substitution of one person in
the place of another with reference to a lawful claim or right, so that he who is substituted succeeds
to the rights of the other in relation to a debt or claim, including its remedies or securities.
As a general rule, the marine insurance policy needs to be presented in evidence before the
insurer may recover the insured value of the lost/damaged cargo in the exercise of its subrogatory
right. Presentation of the contract constitutive of the insurance relationship between the consignee
and insurer is critical because it is the legal basis of the latter’s right to subrogation.
But the Court held that there are exceptions to this rule. The right of subrogation accrues
simply upon payment by the insurance company of the insurance claim. Hence, presentation in
Page 88 of 434
evidence of the marine insurance policy is not indispensable before the insurer may recover from
the common carrier the insured value of the lost cargo in the exercise of its subrogatory right. The
subrogation receipt, by itself, was held sufficient to establish not only the relationship between the
insurer and consignee, but also the amount paid to settle the insurance claim.
It was held that the Certificate of Insurance and the Release of Claim presented as evidence
sufficiently established FIRST LEPANTO’s right to collect reimbursement as the subrogee of GASI.
LIABILITY FOR ACTS OF OTHERS
MARIANO C. MENDOZA AND ELVIRA LIM vs. SPOUSES LEONORA J. GOMEZ

AND GABRIEL V. GOMEZ
G.R. No. 160110, June 18, 2014, J. Perez
The operator of a bus company cannot renege on the obligation brought about by collision of
vehicles by claiming that she is not the true owner of the bus. In case of collision of motor vehicles,
the person whose name appears in the certificate of registration shall be considered the employer of
the person driving the vehicle and shall be directly and primarily liable with the driver under the
principle of vicarious liability.
Facts:
An Isuzu Elf truck (Isuzu truck) owned by Leonora J. Gomez (Leonora) and driven by
Antenojenes Perez (Perez), was hit by a Mayamy Transportation bus (Mayamy bus) with registered
under the name of Elvira Lim (Lim) and driven by Mariano C. Mendoza (Mendoza). Mendoza was
charged with reckless imprudence resulting in damage to property and multiple physical injuries,
however, he eluded arrest, prompting the spouses Gomez to file a separate complaint for damages
against Mendoza and Lim, seeking actual damages, compensation for lost income, moral damages,
exemplary damages, attorney’s fees and costs of the suit.
At the trial, it was found out that the Isuzu truck was on its right lane when the Mayamy
bus intruded the lane which caused the collision. As a result, the helpers on board the truck
sustained injuries necessitating medical treatment amounting to P11,267.35, which amount was
shouldered by spouses Gomez. The spouses also contended that the collision deprived them the
daily income of P1,000.00 as they were engaged in buying plastic scraps and delivering them to
recycling plants, truck was vital in the furtherance of the business. Lastly, the spouses claimed that
the Isuzu truck sustained extensive damages on its cowl, chassis, lights and steering wheel,
amounting to P142,757.40.
Lim raised the issue of ownership of the bus in question that although the registered owner
was Lim, the actual owner of the bus was one SPO1 Cirilo Enriquez, who had the bus attached with
Mayamy Transportation Company under the so-called "kabit system."
The RTC found Mendoza liable for direct personal negligence under Article 2176 of the Civil
Code, and it also found Lim vicariously liable under Article 2180 of the same Code. The RTC relied
on the Certificate of Registration in concluding that she is the registered owner of the bus in
question. Although actually owned by Enriquez, following the established principle in
transportation law, Lim, as the registered owner, is the one who can be held liable. Mendoza and
Page 89 of 434
Lim were ordered to pay spouses Gomez 1) the costs of repair of the damaged vehicle in the amount
of P142,757.40; 2) the amount ofP1,000.00 per day from March 7, 1997 up to November 1997
representing the unrealized income of the spouses Gomez when the incident transpired up to the
time the damaged Isuzu truck was repaired; 3) P100,000.00 as moral damages, plus a separate
amount of P50,000.00 as exemplary damages; 4) P50,000.00 as attorney’s fees; and lastly 5) the costs
of suit. Aggrieved, Mendoza appealed to the CA which affirmed the decision of the RTC with the
exception of the award of unrealized income. Hence, the present petition.
Issues:
1. Whether or not Lim is liable as the employer despite the fact that the original owner of the
bus is Enriquez
2. Whether or not the award of moral and exemplary damages as well as attorney’s fees and
costs of suit is proper
Ruling:
1. Yes, Lim shall be vicariously liable with Mendoza.
In Filcar Transport Services v. Espinas, we held that the registered owner is deemed the
employer of the negligent driver, and is thus vicariously liable under Article 2176, in relation to
Article 2180, of the Civil Code. Citing Equitable Leasing Corporation v. Suyom, the Court ruled that
in so far as third persons are concerned, the registered owner of the motor vehicle is the employer
of the negligent driver, and the actual employer is considered merely as an agent of such owner.
Thus, whether there is an employer-employee relationship between the registered owner and the
driver is irrelevant in determining the liability of the registered owner who the law holds primarily
and directly responsible for any accident, injury or death caused by the operation of the vehicle in
the streets and highways.
As early as Erezo v. Jepte, the Court, speaking through Justice Alejo Labrador summarized
the justification for holding the registered owner directly liable, to wit:
x x x The main aim of motor vehicle registration is to identify the owner so that if
any accident happens, or that any damage or injury is caused by the vehicles on the
public highways, responsibility therefore can be fixed on a definite individual, the
registered owner. Instances are numerous where vehicle running on public
highways caused accidents or injuries to pedestrians or other vehicles without
positive identification of the owner or drivers, or with very scant means of
identification. It is to forestall these circumstances, so inconvenient or prejudicial
to the public, that the motor vehicle registration is primarily ordained, in the
interest of the determination of persons responsible for damages or injuries caused
on public highways. As such, there can be no other conclusion but to hold Lim
vicariously liable with Mendoza.
2. As to exemplary damages and costs of suit, yes but as to moral damages and attorney’s
fees, no.
Page 90 of 434
Moral Damages. Moral damages are awarded to enable the injured party to obtain means,
diversions or amusements that will serve to alleviate the moral suffering he has undergone, by
reason of the defendant's culpable action. In fine, an award of moral damages calls for the
presentation of 1) evidence of besmirched reputation or physical, mental or psychological suffering
sustained by the claimant; 2)a culpable act or omission factually established; 3) proof that the
wrongful act or omission of the defendant is the proximate cause of the damages sustained by the
claimant; and 4) the proof that the act is predicated on any of the instances expressed or envisioned
by Article 2219 and Article 2220 of the Civil Code.
A review of the complaint and the transcript of stenographic notes yields the
pronouncement that respondents neither alleged nor offered any evidence of besmirched
reputation or physical, mental or psychological suffering incurred by them.
Spouses Gomez cannot rely on Article 2219 (2) of the Civil Code which allows moral damages
in quasi-delicts causing physical injuries because in physical injuries, moral damages are
recoverable only by the injured party, and in the case at bar, herein respondents were not the ones
who were actually injured. In B.F. Metal (Corp.) v. Sps. Lomotan, et al., the Court, in a claim for
damages based on quasi-delict causing physical injuries, similarly disallowed an award of moral
damages to the owners of the damaged vehicle, when neither of them figured in the accident and
sustained injuries.
Neither can respondents rely on Article 21 of the Civil Code as the RTC erroneously did.
Article 21 deals with acts contra bonus mores, and has the following elements: (1) There is an act
which is legal; (2) but which is contrary to morals, good custom, public order, or public policy; (3)
and it is done with intent to injure. In the present case, it can hardly be said that Mendoza’s
negligent driving and violation of traffic laws are legal acts. Moreover, it was not proven that
Mendoza intended to injure Perez, et al. Thus, Article 21 finds no application to the case at bar. All
in all, we find that the RTC and the CA erred in granting moral damages to respondents.
Exemplary Damages. Article 2229 of the Civil Code provides that exemplary or corrective
damages are imposed, by way of example or correction for the public good, in addition to moral,
temperate, liquidated or compensatory damages. Article 2231 of the same Code further states that
in quasi-delicts, exemplary damages may be granted if the defendant acted with gross negligence.
In motor vehicle accident cases, exemplary damages may be awarded where the defendant’s
misconduct is so flagrant as to transcend simple negligence and be tantamount to positive or
affirmative misconduct rather than passive or negative misconduct. In characterizing the requisite
positive misconduct which will support a claim for punitive damages, the courts have used such
descriptive terms as willful, wanton, grossly negligent, reckless, or malicious, either alone or in
combination.
Gross negligence is the absence of care or diligence as to amount to a reckless disregard of

the safety of persons or property. It evinces a thoughtless disregard of consequences without
exerting any effort to avoid them. In the case at bar, having established respondents’ right to
compensatory damages, exemplary damages are also in order, given the fact that Mendoza was
grossly negligent in driving the Mayamy bus. His act of intruding or encroaching on the lane
rightfully occupied by the Isuzu truck shows his reckless disregard for safety.
Page 91 of 434
Attorney’s Fees. Article 2208 of the Civil Code enumerates the instances when attorney’s
fees may be recovered:
Art. 2208. In the absence of stipulation, attorney’s fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendant’s act or omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy
the plaintiff’s valid and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled
workers;
(8) In actions for indemnity under workmen’s compensation and employer’s
liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorney’s
fees and expenses of litigation should be recovered;
In all cases, the attorney’s fees and expenses of litigation must be reasonable.
In Spouses Agustin v. CA, we held that, the award of attorney’s fees being an exception
rather than the general rule, it is necessary for the court to make findings of facts and law that
would bring the case within the exception and justify the grant of such award. Thus, the reason for
the award of attorney’s fees must be stated in the text of the court’s decision; otherwise, if it is stated
only in the dispositive portion of the decision, the same must be disallowed on appeal.
In the case at bar, the RTC Decision had nil discussion on the propriety of attorney’s fees,
and it merely awarded such in the dispositive portion. Following established jurisprudence,
however, the CA should have disallowed on appeal said award of attorney’s fees as the RTC failed
to substantiate said award.
Costs of suit. The Rules of Court provide that, generally, costs shall be allowed to the
prevailing party as a matter of course, thus:
Section 1. Costs ordinarily follow results of suit.- Unless otherwise provided in these
rules, costs shall be allowed to the prevailing party as a matter of course, but the
court shall have power, for special reasons, to adjudge that either party shall pay the
costs of an action, or that the same be divided, as may be equitable. No costs shall
be allowed against the Republic of the Philippines, unless otherwise provided by
law.
In the present case, the award of costs of suit to respondents, as the prevailing party, is in
order.
Page 92 of 434
STIPULATION FOR LIMITATION OF LIABILITY
PHILAM INSURANCE COMPANY, INC. (now CHARTIS PHILIPPINES INSURANCE,

INC.*) vs. HEUNG-A SHIPPING CORPORATION and
WALLEM PHILIPPINES SHIPPING, INC
G.R. No. 1877l
HEUNG-A SHIPPING CORPORATION and W ALLEM PHILIPPINES SHIPPING, INC. vs.

PHILAM INSURANCE COMPANY, INC. (now CHARTIS PHILIPPINES INSURANCE, INC.),
G.R. No. 187812, July 23, 2014, J. Reyes
Common carriers, as a general rule, are presumed to have been at fault or negligent if the
goods they transported deteriorated or got lost or destroyed. That is, unless they prove that they
exercised extraordinary diligence in transporting the goods. In order to avoid responsibility for any
loss or damage, therefore, they have the burden of proving that they observed such diligence. As the
carrier of the subject shipment, HEUNG-A was bound to exercise extraordinary diligence in conveying
the same and its slot charter agreement with DONGNAMA did not divest it of such characterization
nor relieve it of any accountability for the shipment. However, the liability of HEUNG-A is limited to
$500 per package or pallet because in case of the shipper’s failure to declare the value of the goods in
the bill of lading, Section 4, paragraph 5 of the COGSA provides that neither the carrier nor the ship
shall in any event be or become liable for any loss or damage to or in connection with the
transportation of goods in an amount exceeding $500 per package
Facts:
On December 19, 2000, Novartis Consumer Health Philippines, Inc. (NOVARTIS) imported
from Jinsuk Trading Co. Ltd., (JINSUK) in South Korea, 19 pallets of 200 rolls of Ovaltine Power 18
G laminated plastic packaging material.
In order to ship the goods to the Philippines, JINSUK engaged the services of Protop
Shipping Corporation (PROTOP), a freight forwarder likewise based in South Korea, to forward the
goods to their consignee, NOVARTIS. PROTOP shipped the cargo through Dongnama Shipping
Co. Ltd. (DONGNAMA) which in turn loaded the same on M/V Heung-A Bangkok V-019 owned
and operated by Heung-A Shipping Corporation, (HEUNG-A), a Korean corporation, pursuant
to a ‘slot charter agreement’ whereby a space in the latter’s vessel was reserved for the exclusive use
of the former. Wallem Philippines Shipping, Inc. (WALLEM) is the ship agent of HEUNG-A in the
Philippines.
NOVARTIS insured the shipment with Philam Insurance Company, Inc. (PHILAM, now
Chartis Philippines Insurance, Inc.) under All Risk Marine Open Insurance Policy No. MOP-
0801011828 against all loss, damage, liability, or expense before, during transit and even after the
discharge of the shipment from the carrying vessel until its complete delivery to the consignee’s
premises.
The vessel arrived at the port of Manila, South Harbor, on December 27, 2000. The shipment
reached NOVARTIS’ premises on January 5, 2001 and was thereupon inspected by the company’s
Senior Laboratory Technician, Annie Rose Caparoso (Caparoso). Upon initial inspection, Caparoso
found the container van locked with its load intact. After opening the same, she inspected its
Page 93 of 434
contents and discovered that the boxes of the shipment were wet and damp. The boxes on one side
of the van were in disarray while others were opened or damaged due to the dampness. Caparoso
further observed that parts of the container van were damaged and rusty. There were also water
droplets on the walls and the floor was wet. Since the damaged packaging materials might
contaminate the product they were meant to hold, Caparoso rejected the entire shipment.
Aggrieved, NOVARTIS demanded indemnification for the lost/damaged shipment from

PROTOP but was denied. Insurance claims were, thus, filed with PHILAM which paid the insured
value of the shipment in the adjusted amount of One Million Nine Hundred Four Thousand Six
Hundred Thirteen Pesos and Twenty Centavos (1,904,613.20). Claiming that after such payment,
it was subrogated to all the rights and claims of NOVARTIS against the parties liable for the
lost/damaged shipment, PHILAM filed on June 4, 2001, a complaint for damages against PROTOP.
On December 11, 2001, PHILAM filed a Motion to Admit Second Amended Complaint this time
designating PROTOP as the owner/operator of M/V Heung-A Bangkok V-019 and adding HEUNG-
A as party defendant for being the registered owner of the vessel. The motion was granted and the
second amended complaint was admitted by the trial court on December 14, 2001.
In a Decision dated February 26, 2007, the RTC rendered HEUNG-A, PROTOP and
WALLEM liable for the loss. PHILAM was declared to have been validly subrogated in NOVARTIS’
stead and thus entitled to recover the insurance claims it paid to the latter.
An appeal to the CA was interposed by PHILAM, WALLEM and HEUNG-A. The CA ruled
that proximate cause of the damage was the failure of HEUNG-A to inspect and examine the actual
condition of the sea van before loading it on the vessel. However, the CA limited the liability of
PROTOP, WALLEM and HEUNG-A to US$8,500.00 pursuant to the liability limitation under the
COGSA since the shipper failed to declare the value of the subject cargo in the bill of lading and
since they could not be made answerable for the two (2) unaccounted pallets because the shipment
was on a “shipper’s load, count and seal” basis.
Issues:
1. Whether HEUNG-A should be liable for the loss sustained.
2. Whether HEUNG-A’s liability can be limited to US$500 per package pursuant to the
COGSA.
Ruling:
1. As the carrier of the subject shipment, HEUNG-A was bound to exercise extraordinary
diligence in conveying the same and its slot charter agreement with DONGNAMA did not divest it
of such characterization nor relieve it of any accountability for the shipment.
“[C]ommon carriers, as a general rule, are presumed to have been at fault or negligent if the
goods they transported deteriorated or got lost or destroyed. That is, unless they prove that they
exercised extraordinary diligence in transporting the goods. In order to avoid responsibility for any
loss or damage, therefore, they have the burden of proving that they observed such diligence.”
Further, under Article 1742 of the Civil Code, even if the loss, destruction, or deterioration of the
Page 94 of 434
goods should be caused by the faulty nature of the containers, the common carrier must exercise
due diligence to forestall or lessen the loss.
Here, HEUNG-A failed to rebut this prima facie presumption when it failed to give adequate
explanation as to how the shipment inside the container van was handled, stored and preserved to
forestall or prevent any damage or loss while the same was in its possession, custody and control.
2. Yes. Under Article 1753 of the Civil Code, the law of the country to which the goods are to
be transported shall govern the liability of the common carrier for their loss, destruction or
deterioration. Since the subject shipment was being transported from South Korea to the
Philippines, the Civil Code provisions shall apply. In all matters not regulated by the Civil Code,
the rights and obligations of common carriers shall be governed by the Code of Commerce and by
special laws such as the COGSA. While the Civil Code contains provisions making the common
carrier liable for loss/damage to the goods transported, it failed to outline the manner of
determining the amount of such liability. Article 372 of the Code of Commerce fills in this gap,
thus:
Article 372. The value of the goods which the carrier must pay in cases if loss or
misplacement shall be determined in accordance with that declared in the bill of lading, the
shipper not being allowed to present proof that among the goods declared therein there
were articles of greater value and money.
In case, however, of the shipper’s failure to declare the value of the goods in the bill of
lading, Section 4, paragraph 5 of the COGSA provides:
Neither the carrier nor the ship shall in any event be or become liable for any loss
or damage to or in connection with the transportation of goods in an amount exceeding
$500 per package lawful money of the United States, or in case of goods not shipped in
packages, per customary freight unit, or the equivalent of that sum in other currency, unless
the nature and value of such goods have been declared by the shipper before shipment and
inserted in the bill of lading. This declaration, if embodied in the bill of lading shall be prima
facie evidence, but shall be conclusive on the carrier.
Hence, when there is a loss/damage to goods covered by contracts of carriage from a foreign
port to a Philippine port and in the absence a shipper’s declaration of the value of the goods in the
bill of lading, as in the present case, the foregoing provisions of the COGSA shall apply. The CA,
therefore, did not err in ruling that HEUNG-A, WALLEM and PROTOP’s liability is limited to $500
per package or pallet.
DILIGENCE REQUIRED OF COMMON CARRIERS
NEDLLOYD LIJNEN B.V. ROTTERDAM AND THE EAST ASIATIC CO., LTD. vs. GLOW LAKS
ENTERPRISES, LTD.
G.R. No. 156330, November 19, 2014, J. Perez
There is no dispute that the custody of the goods was never turned over to the consignee or
his agents but was lost into the hands of unauthorized persons who secured possession thereof on the
strength of falsified documents. When the goods shipped are either lost or arrived in damaged
Page 95 of 434
condition, a presumption arises against the carrier of its failure to observe that diligence, and there
need not be an express finding of negligence to hold it liable. To overcome the presumption of
negligence, the common carrier must establish by adequate proof that it exercised extraordinary
diligence over the goods. In the present case, Nedlloyd failed to prove that they did exercise the degree
of diligence required by law over the goods they transported, it failed to adduce sufficient evidence
they exercised extraordinary care to prevent unauthorized withdrawal of the shipments.
Facts:
Nedlloyd Lijnen B.V. Rotterdam is a foreign corporation engaged in the business of carrying
goods by sea, whose vessels regularly call at the port of Manila. It is doing business in the
Philippines thru its local ship agent, co-petitioner East Asiatic Co., Ltd. Glow Laks Enterprises, Ltd.,
is likewise a foreign corporation organized and existing under the laws of Hong Kong. It is not
licensed to do, and it is not doing business in, the Philippines. On or about 14 September 1987, Glow
loaded on board M/S Scandutch at the Port of Manila a total 343 cartoons of garments, complete
and in good order for pre-carriage to the Port of Hong Kong. The goods covered by Bills of Lading
Nos. MHONX-2 and MHONX-34 arrived in good condition in Hong Kong and were transferred to
M/S Amethyst for final carriage to Colon, Free Zone, Panama. Both vessels, M/S Scandutch and
M/S Amethyst, are owned by Nedlloyd represented in the Phlippines by its agent, East Asiatic. The
goods which were valued at US$53,640.00 was agreed to be released to the consignee, Pierre Kasem,
International, S.A., upon presentation of the original copies of the covering bills of lading. Upon
arrival of the vessel at the Port of Colon on 23 October 1987, Nedlloyd purportedly notified the
consignee of the arrival of the shipments, and its custody was turned over to the National Ports
Authority in accordance with the laws, customs regulations and practice of trade in Panama. By an
unfortunate turn of events, however, unauthorized persons managed to forge the covering bills of
lading and on the basis of the falsified documents, the ports authority released the goods.
On 16 July 1988, Glow filed a formal claim with Nedlloyd for the recovery of the amount of
US$53,640.00 representing the invoice value of the shipment but to no avail. Claiming that Nedlloyd
are liable for the misdelivery of the goods, Glow initiated Civil Case before the RTC of Manila,
seeking for the recovery of the amount of US$53,640.00, including the legal interest from the date
of the first demand. After the Pre-Trial Conference, trial on the merits ensued. The RTC rendered
a Decision ordering the dismissal of the complaint but granted Nedlloyd counterclaims. The Court
of Appeals reversed the findings of the RTC and held that foreign laws were not proven in the
manner provided by Section 24, Rule 132 of the Revised Rules of Court, and therefore, it cannot be
given full faith and credit.
Issue:
Whether or not Nedllyod are liable for the misdelivery of goods under Philippine laws.
Ruling:
Yes, Nedlloyd is laible.
Explicit is the rule under Article 1736 of the Civil Code that the extraordinary responsibility
of the common carrier begins from the time the goods are delivered to the carrier. This
responsibility remains in full force and effect even when they are temporarily unloaded or stored in
Page 96 of 434
transit, unless the shipper or owner exercises the right of stoppage in transitu, and terminates only
after the lapse of a reasonable time for the acceptance, of the goods by the consignee or such other
person entitled to receive them. It was further provided in the same statute that the carrier may be
relieved from the responsibility for loss or damage to the goods upon actual or constructive delivery
of the same by the carrier to the consignee or to the person who has the right to receive them.
In this case, there is no dispute that the custody of the goods was never turned over to the
consignee or his agents but was lost into the hands of unauthorized persons who secured possession
thereof on the strength of falsified documents. The loss or the misdelivery of the goods in the
instant case gave rise to the presumption that the common carrier is at fault or negligent. A
common carrier is presumed to have been negligent if it fails to prove that it exercised extraordinary
vigilance over the goods it transported. When the goods shipped are either lost or arrived in
damaged condition, a presumption arises against the carrier of its failure to observe that diligence,
and there need not be an express finding of negligence to hold it liable. To overcome the
presumption of negligence, the common carrier must establish by adequate proof that it exercised
extraordinary diligence over the goods. It must do more than merely show that some other party
could be responsible for the damage.
In the present case, Nedlloyd failed to prove that they did exercise the degree of diligence
required by law over the goods they transported. Indeed, aside from their persistent disavowal of
liability by conveniently posing an excuse that their extraordinary responsibility is terminated upon
release of the goods to the Panamanian Ports Authority, Nedlloyd failed to adduce sufficient
evidence they exercised extraordinary care to prevent unauthorized withdrawal of the shipments.
Nothing in the New Civil Code, however, suggests, even remotely, that the common carriers’
responsibility over the goods ceased upon delivery thereof to the custom authorities. The contract
of carriage remains in full force and effect even after the delivery of the goods to the port authorities;
the only delivery that releases it from their obligation to observe extraordinary care is the delivery
to the consignee or his agents. Even more telling of Nedlloyd’ continuing liability for the goods
transported to the fact that the original bills of lading up to this time, remains in the possession of
the notify party or consignee.
While surrender of the original bill of lading is not a condition precedent for the common
carrier to be discharged from its contractual obligation, there must be, at the very least, an
acknowledgement of the delivery by signing the delivery receipt, if surrender of the original of the
bill of lading is not possible. There was neither surrender of the original copies of the bills of lading
nor was there acknowledgment of the delivery in the present case. This leads to the conclusion
that the contract of carriage still subsists and Nedlloyd could be held liable for the breach thereof.
Petitioners could have offered evidence before the trial court to show that they exercised the highest
degree of care and caution even after the goods was turned over to the custom authorities, by
promptly notifying the consignee of its arrival at the Port of Cristobal in order to afford them ample
opportunity to remove the cargoes from the port of discharge. This court have scoured the records
and found that neither the consignee nor the notify party was informed by Nedlloyd of the arrival
of the goods, a crucial fact indicative of Nedlloyd’s failure to observe extraordinary diligence in
handling the goods entrusted to their custody for transport.
Page 97 of 434
LIABILITIES OF COMMON CARRIERS
LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR INTERNATIONAL

SHIPPING COMPANY, INCORPORATED vs. MALAYAN INSURANCE COMPANY,
INCORPORATED
G.R. No. 185565, November 26, 2014, J. Reyes
Under the Code of Commerce, if the goods are delivered but arrived at the destination in
damaged condition, the remedies to be pursued by the consignee depend on the extent of damage on
the goods. If the effect of damage on the goods consisted merely of diminution in value, the carrier is
bound to pay only the difference between its price on that day and its depreciated value as provided
under Article 364. Malayan, as the insurer of PASAR, neither stated nor proved that the goods are
rendered useless or unfit for the purpose intended by PASAR due to contamination with seawater.
Hence, there is no basis for the goods’ rejection under Article 365 of the Code of Commerce. Clearly,
it is erroneous for Malayan to reimburse PASAR as though the latter suffered from total loss of goods
in the absence of proof that PASAR sustained such kind of loss.
Facts:
Loadstar International Shipping (Loadstar Shipping) and PASAR entered into a contract of
affreightment of the latter’s copper concentrates. A shipment of cooper concentrates were loaded
in MV Bobcat, the vessel of Loadstar International Shipping Co., Inc. (Loadstar International), with
Philex as shipper and PASAR as consignee. The cargo was insured by Malayan Insurance Company,
Inc. (Malayan). While out in the sea, the crew of the vessel found a crack on the vessel which caused
seawater to enter and wet the copper concentrates.
Immediately after the vessel arrived at port, PASAR and Philex’s tested the copper
concentrates and found them to be contaminated. PASAR sent a formal notice of claim to Loadstar
Shipping, and surveyors recommended the value of the claim at P 32,351,102.32. Malayan paid
PASAR said amount.
Meanwhile, Malayan wrote Loadstar Shipping informing the latter of a prospective buyer
for the damaged copper concentrates and the opportunity to nominate/refer other salvage buyers
to PASAR. Malayan later wrote Loadstar Shipping informing the latter of the acceptance of PASAR’s
proposal to take the damaged copper concentrates at a residual value of US$90,000.00. Loadstar
Shipping wrote Malayan requesting for the reversal of its decision to accept PASAR’s proposal and
the conduct of a public bidding to allow Loadstar Shipping to match or top PASAR’s bid by 10%.
PASAR then signed a subrogation receipt in favor of Malaya. To recover the amount Malaya
paid to PASAR, it demanded reimbursement from Loadstar Shipping, which refused to comply,
prompting Malaya to file a case of damages with the RTC, against Loadstar Shipping, and later
including Loadstar International. Malayan alleged that due to the unseaworthiness of the vessel,
PASAR suffered loss of the cargo. Petitioners maintain, among others, that Malayan’s claim is
excessive, grossly overstated, unreasonable and unsubstantiated; that their liability, if any, should
not exceed the CIF value of the lost/damaged cargo as set forth in the bill of lading, charter party
or customary rules of trade; and that the arbitration clause in the contract of affreightment should
be followed.
Page 98 of 434
The RTC dismissed the complaint, finding that although contaminated by seawater, the
copper concentrates can still be used. It gave credence to the testimony of Francisco Esguerra,
petitioners expert witness, that despite high chlorine content, the copper concentrates remain
intact and will not lose their value. The gold and silver remain with the grains/concentrates even if
soaked with seawater and does not melt. The RTC observed that the purchase agreement between
PASAR and Philex contains a penalty clause and has no rejection clause. Despite this agreement,
the parties failed to sit down and assess the penalty.
The CA reversed and set aside the RTC, holding that petitioners must pay Malayan the
amount of P33,934,948.74 as actual damages, less $90,000.00-the residual value of the copper
concentrates it sold to PASAR in 2000.
Issue:
Did PASAR not suffer total loss of the copper concentrates as to warrant rejection of the
goods and reimbursement from Malayan?
Ruling:
The contract between PASAR and the petitioners is a contract of carriage of goods and not
a contract of sale. Therefore, the petitioners and PASAR are bound by the laws on transportation
of goods and their contract of affreightment. Since the Contract of Affreightment between the
petitioners and PASAR is silent as regards the computation of damages, whereas the bill of lading
presented before the trial court is undecipherable, the New Civil Code and the Code of Commerce
shall govern the contract between the parties.
Malayan paid PASAR the amount of P32,351,102.32 covering the latter’s claim of damage to
the cargo. This represents damages for the total loss of that portion of the cargo which were
contaminated with seawater and not merely the depreciation in its value. Strangely though, after
claiming damages for the total loss of that portion, PASAR bought back the contaminated copper
concentrates from Malayan at the price of US$90,000.00. The fact of repurchase is enough to
conclude that the contamination of the copper concentrates cannot be considered as total loss on
the part of PASAR.
[Under the Code of Commerce], if the goods are delivered but arrived at the destination in
damaged condition, the remedies to be pursued by the consignee depend on the extent of damage
on the goods.
If the goods are rendered useless for sale, consumption or for the intended purpose, the
consignee may reject the goods and demand the payment of such goods at their market price on
that day pursuant to Article 365. In case the damaged portion of the goods can be segregated from
those delivered in good condition, the consignee may reject those in damaged condition and accept
merely those which are in good condition. But if the consignee is able to prove that it is impossible
to use those goods which were delivered in good condition without the others, then the entire
shipment may be rejected. To reiterate, under Article 365, the nature of damage must be such that
Page 99 of 434
the goods are rendered useless for sale, consumption or intended purpose for the consignee to be
able to validly reject them.
If the effect of damage on the goods consisted merely of diminution in value, the carrier is
bound to pay only the difference between its price on that day and its depreciated value as provided
under Article 364.
Malayan, as the insurer of PASAR, neither stated nor proved that the goods are rendered
useless or unfit for the purpose intended by PASAR due to contamination with seawater. Hence,
there is no basis for the goods’ rejection under Article 365 of the Code of Commerce. Clearly, it is
erroneous for Malayan to reimburse PASAR as though the latter suffered from total loss of goods
in the absence of proof that PASAR sustained such kind of loss. Otherwise, there will be no
difference in the indemnification of goods which were not delivered at all; or delivered but rendered
useless, compared against those which were delivered albeit, there is diminution in value.
Malayan also failed to establish the legal basis of its decision to sell back the rejected copper
concentrates to PASAR. It cannot be ascertained how and when Malayan deemed itself as the owner
of the rejected copper concentrates to have these validly disposed of. If the goods were rejected, it
only means there was no acceptance on the part of PASAR from the carrier. Furthermore, PASAR
and Malayan simply agreed on the purchase price of US$90,000.00 without any allegation or proof
that the said price was the depreciated value based on the appraisal of experts as provided under
Article 364 of the Code of Commerce.
BILL OF LADING
EASTERN SHIPPING LINES, INC. vs. BPI/MS INSURANCE CORP., &MITSUI SUMITOMO
INSURANCE CO., LTD.,
G.R. No. 182864, January 12, 2015, J. Perez
Mere proof of delivery of the goods in good order to a common carrier and of their arrival in
bad order at their destination constitutes a prima facie case of fault or negligence against the carrier.
If no adequate explanation is given as to how the deterioration, loss, or destruction of the goods
happened, the transporter shall be held responsible. In this case, the fault is attributable to ESLI.
Facts:
BPI/MS and Mitsui alleged that on 2 February 2004 at Yokohama, Japan, Sumitomo
Corporation shipped on board Eastern Shipping Lines’ vessel M/V “Eastern Venus 22” 22 coils of
various Steel Sheet weighing in good order and condition for transportation to and delivery at the
port of Manila in favor of consignee Calamba Steel Center, Inc. The declared value of the shipment
was US$83,857.59. The shipment was insured with the BPI/MS and Mitsui against all risks under
Marine Policy No. 103-GG03448834. The complaint alleged that the shipment arrived and upon
withdrawal of the shipment by the Calamba Steel’s representative, it was found out that part of the
shipment was damaged and was in bad order condition such that there was a Request for Bad Order
Survey. It was found out that the damage amounted to US$4,598.85 prompting Calamba Steel to
reject the damaged shipment for being unfit for the intended purpose. On 12 May 2004, Sumitomo
Corporation again shipped on board ESLI’s vessel M/V “Eastern Venus 25” 50 coils in various Steel
Sheet weighing 383,532 kilograms in good order and condition for transportation to and delivery at
Page 100 of 434

the port of Manila, Philippines in favor of the same consignee Calamba Steel. The shipment was
insured with the BPI/MS and Mitsui against all risks under Marine Policy No. 104-GG04457785.
ESLI’s vessel with the second shipment arrived at the port of Manila partly damaged and in bad
order. The coils sustained further damage during the discharge from vessel to shore until its
turnover to ATI’s custody for safekeeping. Upon withdrawal from ATI and delivery to Calamba
Steel, it was found out that the damage amounted to US$12,961.63. As it did before, Calamba Steel
rejected the damaged shipment for being unfit for the intended purpose.
Calamba Steel attributed the damages on both shipments to ESLI as the carrier and ATI as
the arrastre operator in charge of the handling and discharge of the coils and filed a claim against
them. When ESLI and ATI refused to pay, Calamba Steel filed an insurance claim for the total
amount of the cargo against BPI/MS and Mitsui as cargo insurers. As a result, BPI/MS and Mitsui
became subrogated in place of and with all the rights and defenses accorded by law in favor of
Calamba Steel.
BPI/MS and Mitsui filed a Complaint before the RTC of Makati City against ESLI and ATI to
recover actual damages amounting to US$17,560.48 with legal interest, attorney’s fees and costs of
suit. ATI, in its Answer, denied the allegations and insisted that the coils in two shipments were
already damaged upon receipt from ESLI’s vessels. It likewise insisted that it exercised due diligence
in the handling of the shipments and invoked that in case of adverse decision. On its part, ESLI
denied the allegations of the complainants and averred that the damage to both shipments was
incurred while the same were in the possession and custody of ATI and/or of the consignee or its
representatives.
BPI/MS and Mitsui, to substantiate their claims, submitted the Affidavits of (1) Manuel, the
Cargo Surveyor of Philippine Japan Marine Surveyors and Sworn Measurers Corporation who
personally examined and conducted the surveys on the two shipments; (2) Richatto P. Almeda, the
General Manager of Calamba Steel who oversaw and examined the condition, quantity, and quality
of the shipped steel coils, and who thereafter filed formal notices and claims against ESLI and ATI;
and (3) Virgilio G. Tiangco, Jr., the Marine Claims Supervisor of BPI/MS who processed the
insurance claims of Calamba Steel. Along with the Affidavits were the Bills of Lading covering the
two shipments, Invoices, Notices of Loss of Calamba Steel, Subrogation Form, Insurance
Claims, Survey Reports, Turn Over Survey of Bad Order Cargoes and Request for Bad Order Survey.
ESLI, in turn, submitted the Affidavits of Captain Hermelo M. Eduarte, who monitored in
coordination with ATI the discharge of the two shipments, and Rodrigo Victoria who personally
surveyed the subject cargoes on board the vessel as well as the manner the ATI employees
discharged the coils. Lastly, ATI submitted the Affidavits of its Bad Order Inspector Ramon Garcia
and Claims Officer Ramiro De Vera.
RTC Makati City rendered a decision finding both the ESLI and ATI liable for the damages
sustained by the two shipments. On appeal, ESLI argued that the trial court erred when it found
BPI/MS has the capacity to sue and when it assumed jurisdiction over the case. It also questioned
the ruling on its liability since the Survey Reports indicated that the cause of loss and damage was
due to the “rough handling of ATI’s stevedores during discharge from vessel to shore and during
loading operation onto the trucks.” It invoked the limitation of liability of US$500.00 per package as
provided in Commonwealth Act No. 65 or the Carriage of Goods by Sea Act (COGSA). The CA
denied the appeal of ESLI while granted that of ATI.
Page 101 of 434

Issue:
Whether or not CA correctly ruled that ESLI is liable.
Ruling:
On the liability of ESLI
ESLI bases of its non-liability on the survey reports prepared by BPI/MS and Mitsui’s witness
Manuel which found that the cause of damage was the rough handling on the shipment by the
stevedores of ATI during the discharging operations. However, Manuel does not absolve ESLI of
liability. The witness in fact includes ESLI in the findings of negligence. As stated in the affidavit of
Manuel: “During the aforesaid operations, the employees and forklift operators of ESLI and
ATI were very negligent in the handling of the subject cargoes.” ESLI cites the affidavit of its
witness Rodrigo who stated that the cause of the damage was the rough mishandling by ATI’s
stevedores. As Rodrigo admits, it was also his duty to inspect and monitor the cargo on-board upon
arrival of the vessel. ESLI cannot invoke its non-liability solely on the manner the cargo was
discharged and unloaded. The actual condition of the cargoes upon arrival prior to discharge is
equally important and cannot be disregarded. Proof is needed that the cargo arrived at the port of
Manila in good order condition and remained as such prior to its handling by ATI.
Based on the bills of lading issued, it is undisputed that ESLI received the two shipments of
coils from shipper Sumitomo Corporation in good condition at the ports of Yokohama and
Kashima, Japan. However, upon arrival at the port of Manila, some coils from the two shipments
were partly dented and crumpled as evidenced turn over survey of bad cargoes signed by ESLI’s
representatives, a certain Tabanao and Rodrigo together with ATI’s representative Garcia.
According to the report, four coils and one skid were partly dented and crumpled prior to turnover
by ESLI to ATI’s possession while a total of eleven coils were partly dented and crumpled prior to
turnover.
Mere proof of delivery of the goods in good order to a common carrier and of their arrival
in bad order at their destination constitutes a prima facie case of fault or negligence against the
carrier. If no adequate explanation is given as to how the deterioration, loss, or destruction of the
goods happened, the transporter shall be held responsible. From the foregoing, the fault is
attributable to ESLI.
Limitation of Liability
ESLI assigns as error the appellate court’s finding and reasoning that the package limitation
under the COGSA is inapplicable even if the bills of lading covering the shipments only made
reference to the corresponding invoices. ESLI argues that the value of the cargoes was not
incorporated in the bills of lading and that there was no evidence that the shipper had presented to
the carrier in writing prior to the loading of the actual value of the cargo, and, that there was a no
payment of corresponding freight
The New Civil Code provides that a stipulation limiting a common carrier’s liability to the
value of the goods appearing in the bill of lading is binding, unless the shipper or owner declares a
greater value. In addition, a contract fixing the sum that may be recovered by the owner or shipper
Page 102 of 434

for the loss, destruction, or deterioration of the goods is valid, if it is reasonable and just under the
circumstances, and has been fairly and freely agreed upon. COGSA, on the other hand, provides
under Section 4, Subsection 5 that an amount recoverable in case of loss or damage shall not exceed
US$500.00 per package or per customary freight unless the nature and value of such goods have
been declared by the shipper before shipment and inserted in the bill of lading. The Code
takes precedence as the primary law over the rights and obligations of common carriers with the
Code of Commerce and COGSA applying suppletorily.
ESLI contends that there must be an insertion of this declaration in the bill of lading itself
to fall outside the statutory limitation of liability.
The bills of lading represent the formal expression of the parties’ rights, duties and
obligations. It is the best evidence of the intention of the parties which is to be deciphered from the
language used in the contract, not from the unilateral post facto assertions of one of the parties, or
of third parties who are strangers to the contract.
As to the non-declaration of the value of the goods on the second bill of lading, there is no
error on the part of the appellate court when it ruled that there was a compliance of the requirement
provided by COGSA. The declaration requirement does not require that all the details must be
written down on the very bill of lading itself. It must be emphasized that all the needed details are
in the invoice, which “contains the itemized list of goods shipped to a buyer, stating quantities,
prices, shipping charges,” and other details which may contain numerous sheets. Compliance can
be attained by incorporating the invoice, by way of reference, to the bill of lading provided that the
former containing the description of the nature, value and/or payment of freight charges is as in
this case duly admitted as evidence. A review of the bill of ladings and invoice on the second
shipment indicates that the shipper declared the nature and value of the goods with the
corresponding payment of the freight on the bills of lading. Further, under the caption “description
of packages and goods,” it states that the description of the goods to be transported as “various steel
sheet in coil” with a gross weight of 383,532 kilograms (89.510 M3). On the other hand, the amount
of the goods is referred in the invoice, the due execution and genuineness of which has already been
admitted by ESLI, is US$186,906.35 as freight on board with payment of ocean freight of
US$32,736.06 and insurance premium of US$1,813.17. From the foregoing, the Court ruled that the
non- limitation of liability applies in the present case.
_____________________________________________________________________________________
Designer Baskets, Inc. v. Air Sea Transport, Inc., et. al.

G.R. No. 184513, March 9, 2016, Jardeleza, J:
The general rule is that upon receipt of the goods, the consignee surrenders the bill of lading
to the carrier and their respective obligations are considered canceled. Article 353 of the Code of
Commerce, however, provides two exceptions where the goods may be released without the
surrender of the bill of lading because the consignee can no longer return it. These exceptions are
when the bill of lading gets lost or for other cause. In either case, the consignee must issue a
receipt to the carrier upon the release of the goods. Such receipt shall produce the same effect
as the surrender of the bill of lading.
Here, the buyer could not produce the bill of lading covering the shipment not because it was
lost, but for another cause: the bill of lading was retained by the seller pending buyer's full payment
Page 103 of 434

of the shipment. Buyer and carrier then entered into an Indemnity Agreement, wherein the former
asked the latter to release the shipment even without the surrender of the bill of lading. The execution
of this Agreement, and the undisputed fact that the shipment was released to seller
pursuant to it, operates as a receipt in substantial compliance with the last paragraph of Article
353 of the Code of Commerce.
Facts:
DBI is a domestic corporation engaged in the production of housewares and handicraft items for
export. Sometime in October 1995, Ambiente, a foreign-based company, ordered from DBI 223
cartons of assorted wooden items (the “Shipment”). The Shipment was worth US$12,590.87 and
payable through telegraphic transfer. Ambiente designated ACCLI as the forwarding agent that will
ship out its order from the Philippines to the United States (US). ACCLI is a domestic corporation
acting as agent of ASTI, a US based corporation engaged in carrier transport business, in the
Philippines.
On January 7, 1996, DBI delivered the shipment to ACCLI for sea transport from Manila and delivery
to Ambiente at 8306 Wilshire Blvd., Suite 1239, Beverly Hills, California. To acknowledge receipt
and to serve as the contract of sea carriage, ACCLI issued to DBI triplicate copies of the Bill of
Lading. DBI retained possession of the originals of the bills of lading pending the payment of the
goods by Ambiente. ASTI released the Shipment to Ambiente on the strength of an Indemnity
Agreement executed in its favor.
DBI then made several demands to Ambiente for the payment of the shipment, but to no avail.
Thus, on October 7, 1996, DBI filed the Original Complaint against Ambiente, ACCLI and ASTI for
the payment of the value of the Shipment, damages and legal fees.
ASTI, ACCLI and its directors and incorporators filed a motion to dismiss. They argued that: (a)
they are not the real parties-in-interest in the action because the cargo was delivered and accepted
by Ambiente. The case, therefore, was a simple case of non- payment of the buyer; (b) relative to
the incorporators-stockholders of ACCLI, piercing the corporate veil is misplaced; (c) contrary to
the allegation of DBI, the bill of lading covering the shipment does not contain a proviso exposing
ASTI to liability in case the shipment is released without the surrender of the bill of lading; and (d)
the Original Complaint did not attach a certificate of non-forum shopping.
DBI opposed the said motion, asserting that ASTI and ACCLI failed to exercise the required
extraordinary diligence when they allowed the cargoes to be withdrawn by the consignee without
the surrender of the original bill of lading. ASTI, ACCLI, and ACCLI’s incorporators-stockholders
countered that it is DBI who failed to exercise extraordinary diligence in protecting its own interest.
They averred that whether or not the buyer-consignee pays the seller is already outside of their
concern.
Before the case was resolved by the lower court, DBI impleaded Ambiente as additional party
defendant. The RTC found ASTI, ACCLI and its incorporators solidarily liable with Ambiente. The
incorporators were, however, absolved from liability. The CA affirmed that Ambiente is liable but
absolved ASTI and ACCLI. According to the CA, there is nothing in the applicable laws that require
the surrender of bills of lading before the goods may be released to the buyer/consignee. The CA
Page 104 of 434

stressed that DBI failed to present evidence to prove its assertion that the surrender of the bill of
lading upon delivery of the goods is a common mercantile practice.
As for ASTI, the CA explained that its only obligation as a common carrier was to deliver the
shipment in good condition. It did not include looking beyond the details of the transaction
between the seller and the consignee, or more particularly, ascertaining the payment of the goods
by the buyer Ambiente.
Issue: Whether ASTI/ACCLI may be held liable for releasing the Shipment without first demanding
for the surrender of the Bill of Lading
Held: No. A common carrier may release the goods to the consignee even without the surrender
of the bill of lading.
Under Article 350 of the Code of Commerce, “the shipper as well as the carrier of the merchandise
or goods may mutually demand that a bill of lading be made.” A bill of lading, when issued by the
carrier to the shipper, is the legal evidence of the contract of carriage between the former and the
latter. It defines the rights and liabilities of the parties in reference to the contract of carriage. The
stipulations in the bill of lading are valid and binding unless they are contrary to law, morals,
customs, public order or public policy.
Here, ACCLI, as agent of ASTI, issued Bill of Lading No. AC/MLLA601317 to DBI. This bill of lading
governs the rights, obligations and liabilities of DBI and ASTI. DBI claims that Bill of Lading No.
AC/MLLA601317 contains a provision stating that ASTI and ACCLI are “to release and deliver the
cargo/shipment to the consignee, x x x, only after the original copy or copies of the said Bill of
Lading is or are surrendered to them; otherwise they become liable to [DBI] for the value of the
shipment. Quite tellingly, however, DBI does not point or refer to any specific clause or provision
on the bill of lading supporting this claim. The language of the bill of lading shows no such
requirement. There is no obligation, therefore, on the part of ASTI and ACCLI to release the goods
only upon the surrender of the original bill of lading.
Further, a carrier is allowed by law to release the goods to the consignee even without the latter’s
surrender of the bill of lading. The third paragraph of Article 353 of the Code of Commerce is
enlightening:
Article 353. The legal evidence of the contract between the shipper and the
carrier shall be the bills of lading, by the contents of which the disputes which
may arise regarding their execution and performance shall be decided, no
exceptions being admissible other than those of falsity and material error in
the drafting.
After the contract has been complied with, the bill of lading which the carrier
has issued shall be returned to him, and by virtue of the exchange of this title
with the thing transported, the respective obligations and actions shall be
considered cancelled, unless in the same act the claim which the parties may
wish to reserve be reduced to writing, with the exception of that provided for
in Article 366.
Page 105 of 434

In case the consignee, upon receiving the goods, cannot return the bill
of lading subscribed by the carrier, because of its loss or any other
cause, he must give the latter a receipt for the goods delivered, this
receipt producing the same effects as the return of the bill of lading.
(Emphasis supplied.)
The general rule is that upon receipt of the goods, the consignee surrenders the bill of lading to the
carrier and their respective obligations are considered canceled. The law, however, provides two
exceptions where the goods may be released without the surrender of the bill of lading because the
consignee can no longer return it. These exceptions are when the bill of lading gets lost or for other
cause. In either case, the consignee must issue a receipt to the carrier upon the release of the goods.
Such receipt shall produce the same effect as the surrender of the bill of lading.
The non-surrender of the original bill of lading does not violate the carrier’s duty of extraordinary
diligence over the goods. The surrender of the original bill of lading is not a condition precedent
for a common carrier to be discharged of its contractual obligation.
DELIVERY OF GOODS TO COMMON CARRIER
Eastern Shipping Lines Inc. vs. BPI/MS Insurance Corp.

and Mitsui Sum Tomo Insurance Co. Ltd.
G.R. No. 193986; January 15, 2014, J. Villarama, Jr.
When the goods were damaged even before they were turned over to the stevedore and such
damage was even compounded by the negligent acts of the common carrier and stevedore when both
mishandled the goods during the discharging operation, the common carrier cannot deny its liability.
From the nature of their business and for reasons of public policy, common carriers are bound to
observe extraordinary diligence in the vigilance over the goods transported by them. The
extraordinary responsibility of the common carrier lasts from the time the goods are unconditionally
placed in the possession of, and received by the carrier for transportation until the same are delivered,
actually or constructively, by the carrier to the consignee, or to the person who has a right to receive
them.
Facts:
On several occasions, Sumimoto Corporation (Sumimoto) shipped though a vessel owned by

Eastern Shipping Lines various steel sheets in coil in favor of the consignee Calamba Steel Center
Inc. (Calamba Steel). The cargo was insured against all risk by umimoto with Mitsui Sumimoto
Insurance (Mitsui). Upon arrival of the shipments on various dates, a number of coils were observed
to be in bad condition upon its discharge. The possession of the cargoes were then turned over to
ATI for stevedoring, storage and safekeeping pending the withdrawal thereof by Calamba Steel.
Being unfit for its intended purpose, Calamba steel rejected the damaged portion of the goods.
Thereafter it filed an insurance claim with Mitsui though the latter’s settling agent, respondent
BPI/MI Insurance Corporation (BPI/MS), and the former was paid the total amount of the damages
suffered by all the shipments. Subsequently, as insurer and subrogee of Calamba Steel, Mitsui and
BPI/MS filed a Complaint for Damages against Eastern Shipping and ATI.
Page 106 of 434

The RTC rendered its decision in favor of the respondents. Aggrieved, the petitioner appealed to
the CA, which later on affirmed the RTC’s findings and ruling. After the denial of its motion for
reconsideration, petitioner filed the petition for review. The petitioner argued that it had no
participation in the discharging operations and that it did not have a choice in selecting the
stevedore since ATI is the only arrastre operator mandated to conduct the discharging operations.
Thus, petitioner prays that it be absolve from any liability relative to the damage incurred by the
goods.
Issue:
Whether or not the petitioner is solidarily liable with ATI on account of the damage incurred by
the goods.
Ruling:
Petition Denied.
It is settled in maritime law jurisprudence that cargoes while being loaded generally remain under
the custody of the carrier. As hereinbefore found by the RTC and affirmed by the CA based on the
evidence presented, the goods were damaged even before they were turned over to ATI. Such
damage was even compounded by the negligent acts of the petitioner and ATI which both
mishandled the goods during the discharging operation. Thus, it bears stressing unto petitioner
that common carriers, from the nature of their business and for reasons of public policy, are bound
to observe extraordinary diligence in the vigilance over the goods transported by them. Subject to
certain exceptions enumerated under Article 1734 of the Civil Code, common carriers are
responsible for the loss, destruction, or deterioration of the goods. The extraordinary responsibility
of the common carrier lasts from the time the goods are unconditionally placed in the possession
of, and received by the carrier for transportation until the same are delivered, actually or
constructively, by the carrier to the consignee, or to the person who has a right to receive them.
Owing to this high degree of diligence required of them, common carriers, as a general rule, are
presumed to have been at fault or are negligent if the goods they transported deteriorated or got
lost or destroyed. That is, unless they prove that they exercised extraordinary diligence in
transporting the goods. In order to avoid responsibility for any loss or damage, therefore, they have
the burden of proving that they observed such high level of diligence. In this case, petitioner failed
to hurdle such burden.
CARRIAGE OF GOODS BY SEA ACT
Insurance Company of North America v. Asian Terminals, Inc.

G.R. No. 180784, February 15, 2012, Peralta, J:
The COGSA does not mention that an arrastre operator may invoke the prescriptive period of
one year; hence, it does not cover the arrastre operator. Prescinding from Section 6 of the COGSA,
only the carrier and the ship may put up the defense of prescription if the action for damages is not
brought within one year after the delivery of the goods or the date when the goods should have been
delivered. It has been held that not only the shipper. Additionally, the consignee or legal holder of the
bill may invoke the prescriptive period.
Page 107 of 434

Facts:
On November 9, 2002, Macro-Lite Korea Corporation shipped to San Miguel Corporation, through
M/V "DIMI P" vessel, one hundred eighty-five (185) packages (231,000 sheets) of electrolytic tin free
steel, complete and in good order condition and covered by a Bill of Lading. The shipment had a
declared value of US$169,850.35 and was insured with petitioner Insurance Company of North
America against all risks.
The carrying vessel arrived at the port of Manila on November 19, 2002, and when the shipment
was discharged therefrom, it was noted that seven (7) packages thereof were damaged and in bad
order. The shipment was then turned over to the custody of respondent Asian Terminals, Inc. (ATI)
on November 21, 2002 for storage and safekeeping pending its withdrawal by the consignee's
authorized customs broker.
The subject shipment was withdrawn by Marzan from the custody of respondent. Prior to the last
withdrawal of the shipment, a joint inspection of the said cargo was conducted which showed that
an additional five (5) packages were found to be damaged and in bad order. On January 6, 2003, the
consignee, San Miguel Corporation, filed separate claims against respondent and petitioner for the
damage to 11,200 sheets of electrolytic tin free steel.
Petitioner engaged the services of an independent adjuster/surveyor. The adjuster noted that out
of the reported twelve (12) damaged skids, nine (9) of them were rejected and three (3) skids were
accepted by the consignee’s representative as good order. The total loss was computed to be
P431,592.14.
The petitioner, as insurer of the said cargo, paid the consignee the amount of P431,592.14 for the
damage caused to the shipment, as evidenced by the Subrogation Receipt Thereafter, petitioner,
formally demanded reparation against respondent. As respondent failed to satisfy its demand,
petitioner filed an action for damages with the RTC of Makati City.
Although the trial court found the subrogation proper, the trial court dismissed the complaint on
the ground that the petitioner’s claim was already barred by the statute of limitations. It held that
COGSA, embodied in Commonwealth Act (CA) No. 65, applies to this case, since the goods were
shipped from a foreign port to the Philippines. The trial court stated that under the said law,
particularly paragraph 4, Section 3 (6) thereof, the shipper has the right to bring a suit within one
year after the delivery of the goods or the date when the goods should have been delivered, in
respect of loss or damage thereto. According to the trial court, the petitioner waited for three (3)
years within which to pay the claim of San Miguel.
Petitioner directly filed a petition for review before the Supreme Court.
Issue: Whether or not the one-year prescriptive period for filing a suit under the COGSA applies
to respondent arrastre operator.
Held: No. The COGSA does not mention that an arrastre operator may invoke the prescriptive
period of one year; hence, it does not cover the arrastre operator. Prescinding from Section 6 of the
COGSA, only the carrier and the ship may put up the defense of prescription if the action for
damages is not brought within one year after the delivery of the goods or the date when the goods
Page 108 of 434

should have been delivered. It has been held that not only the shipper. Additionally, the consignee
or legal holder of the bill may invoke the prescriptive period.
_____________________________________________________________________________________
Ace Navigation Co., Inc. v. FGU Insurance Corporation

G.R. No. 171591, 25 June 2012, Perlas-Bernabe, J:
ACENAV is merely an agent of CARDIA and not a ship agent. By ship agent is understood the
person entrusted with the provisioning of a vessel, or who represents her in the port in which she may
be found.
As such, it cannot be liable for the obligations of its principal.
Facts:
Cardia Limited (CARDIA) shipped on board the vessel M/V Pakarti Tiga at Shanghai Port China,
8,260 metric tons or 165,200 bags of Grey Portland Cement to be discharged at the Port of Manila
and delivered to its consignee, Heindrich Trading Corp. (HEINDRICH). The subject shipment was
insured with respondents, FGU Insurance Corp. (FGU) and Pioneer Insurance and Surety Corp.
(PIONEER), against all risks.
The subject vessel is owned by P.T. Pakarti Tata (PAKARTI) which it chartered to Shinwa Kaiun
Kaisha Ltd. (SHINWA). Representing itself as owner of the vessel, SHINWA entered into a charter
party contract with Sky International, Inc. (SKY), an agent of Kee Yeh Maritime Co. (KEE YEH),
which further chartered it to Regency Express Lines S.A. (REGENCY). Thus, it was REGENCY that
directly dealt with consignee HEINDRICH, and accordingly, issued Clean Bill of Lading No. SM-1.
On July 23, 1990, the vessel arrived at the Port of Manila and the shipment was discharged. However,
upon inspection of HEINDRICH and petitioner Ace Navigation Co., Inc. (ACENAV), agent of
CARDIA, it was found that out of the 165,200 bags of cement, 43,905 bags were in bad order and
condition. Unable to collect the sustained damages in the amount of P1,423,454.60 from the
shipper, CARDIA, and the charterer, REGENCY, the respondents, as co-insurers of the cargo, each
paid the consignee, HEINDRICH, the amounts of P427,036.40 and P284,690.94, respectively, and
consequently became subrogated to all the rights and causes of action accruing to HEINDRICH.
Thus, on August 8, 1991, respondents filed a complaint for damages against the following
defendants. In their answer with counterclaim and cross-claim, PAKARTI and SHINWA alleged
that the suits against them cannot prosper because they were not named as parties in the bill of
lading. The complaint was dismissed by the trial court. Upon appeal, the RTC’s decision was
modified by the CA.
Finding that the parties entered into a time charter party, not a demise or bareboat charter where
the owner completely and exclusively relinquishes possession, command and navigation to the
charterer, the CA held PAKARTI, SHINWA, KEE YEH and its agent, SKY, solidarily liable for 70%
of the damages sustained by the cargo. This solidarity liability was borne by their failure to prove
that they exercised extraordinary diligence in the vigilance over the bags of cement entrusted to
them for transport. On the other hand, the CA passed on the remaining 30% of the amount claimed
Page 109 of 434

to the shipper, CARDIA, and its agent, ACENAV, upon a finding that the damage was partly due to
the cargo's inferior packing.
The respondents maintain that ACENAV is a ship agent and not a mere agent of CARDIA, as found
by both the CA and the RTC.
Issue: Whether ACENAV may be held liable for the 30% claim
Held: No. ACENAV is merely an agent of CARDIA.
By ship agent is understood the person entrusted with the provisioning of a vessel, or who
represents her in the port in which she may be found.
Records show that the obligation of ACENAV was limited to informing the consignee HEINDRICH
of the arrival of the vessel in order for the latter to immediately take possession of the goods. No
evidence was offered to establish that ACENAV had a hand in the provisioning of the vessel or that
it represented the carrier, its charterers, or the vessel at any time during the unloading of the goods.
Clearly, ACENAV's participation was simply to assume responsibility over the cargo when they were
unloaded from the vessel. Hence, no reversible error was committed by the courts a quo in holding
that ACENAV was not a ship agent within the meaning and context of Article 586 of the Code of
Commerce, but a mere agent of CARDIA, the shipper.
As such agent, ACENAV is not personally liable to the party with whom he contracts, unless he
expressly binds himself or exceeds the limits of his authority without giving such party sufficient
notice of his powers. Both exceptions do not obtain in this case. Records are bereft of any showing
that ACENAV exceeded its authority in the discharge of its duties as a mere agent of CARDIA.
Neither was it alleged, much less proved, that ACENAV's limited obligation as agent of the shipper,
CARDIA, was not known to HEINDRICH.
Furthermore, since CARDIA was not impleaded as a party in the instant suit, the liability attributed
upon it by the CA on the basis of its finding that the damage sustained by the cargo was due to
improper packing cannot be borne by ACENAV. As mere agent, ACENAV cannot be made
responsible or held accountable for the damage supposedly caused by its principal.
_____________________________________________________________________________________
CUA V. WALLEM PHILIPPINES

G.R. NO. 171337, JULY 11, 2012
On November 12, 1990, Cua filed a civil action for damages against Wallem and Advance Shipping
before the RTC of Manila. Cua sought the payment of P2,030,303.52 for damage to 218 tons and for
a shortage of 50 tons of shipment of Brazilian Soyabean consigned to him, as evidenced by Bill of
Lading No. 10. He claimed that the loss was due to the respondents’ failure to observe extraordinary
diligence in carrying the cargo. Advance Shipping (a foreign corporation) was the owner and
manager of M/V Argo Trader that carried the cargo, while Wallem was its local agent.
Wallem filed its own motion to dismiss, raising the sole ground of prescription. Section 3(6) of the
Carriage of Goods by Sea Act (COGSA) provides that “the carrier and the ship shall be discharged
from all liability in respect of loss or damage unless suit is brought within one year after delivery of
Page 110 of 434

the goods.” Wallem alleged that the goods were delivered to Cua on August 16, 1989, but the
damages suit was instituted only on November 12, 1990 – more than one year than the period
allotted under the COGSA.
In response, Cua referred to the August 10, 1990 telex message sent by Mr. A.R. Filder of Thomas
Miller, manager of the UK P&I Club, which stated that Advance Shipping agreed to extend the
commencement of suit for 90 days, from August 14, 1990 to November 12, 1990; the extension was
made with the concurrence of the insurer of the vessel, the UK P&I Club. Wallem withdrew its
Motion to Dismiss withut prejudice to its right to raise prescription as a defense.
Held: The COGSA is the applicable law for all contracts for carriage of goods by sea to and from
Philippine ports in foreign trade;28 it is thus the law that the Court shall consider in the present
case since the cargo was transported from Brazil to the Philippines.
Under Section 3(6) of the COGSA, the carrier is discharged from liability for loss or damage to the
cargo “unless the suit is brought within one year after delivery of the goods or the date when the
goods should have been delivered.”29 Jurisprudence, however, recognized the validity of an
agreement between the carrier and the shipper/consignee extending the one-year period to file a
claim.30 The vessel MV Argo Trader arrived in Manila on July 8, 1989; Cua’s complaint for damages
was filed before the RTC of Manila on November 12, 1990. Although the complaint was clearly filed
beyond the one-year period, Cua additionally alleged in his complaint (under paragraph 11) that
“[t]he defendants x x x agreed to extend the time for filing of the action up to November 12, 1990.”
The allegation of an agreement extending the period to file an action in Cua’s complaint is a
material averment that, under Section 11, Rule 8 of the Rules of Court, must be specifically denied
by the respondents; otherwise, the allegation is deemed admitted.
A review of the pleadings submitted by the respondents discloses that they failed to specifically
deny Cua’s allegation of an agreement extending the period to file an action to November 12, 1990.
Wallem’s motion to dismiss simply referred to the fact that Cua’s complaint was filed more than
one year from the arrival of the vessel, but it did not contain a denial of the extension. While the
joint answer submitted by the respondents denied Cua’s allegation of an extension, they made no
further statement other than a bare and unsupported contention that Cua’s “complaint is barred
by prescription and/or laches[.]”The respondents did not provide in their joint answer any factual
basis for their belief that the complaint had prescribed. Hence, the Court considers the extension
of the period as an admitted fact.
_____________________________________________________________________________________
MARINA PORT SERVICES, INC v. AMERICAN HOME ASSURANCE CORPORATION, G.R.

No. 201822, August 12, 2015
MSC’s shipment of bags of flour arrived at the Marina Port Services (MPSI) and was duly checked
and assessed. However, upon receipt of the container vans containing the shipment at its
warehouse, MSC discovered substantial shortages in the number of bags of flour delivered. Hence,
it filed a formal claim for loss with MPSI. When MPSI denied the claim, MSC’s insurer paid the
same and was subrogated to MSC.
Issue: Can MPSI be held liable for the loss?
Page 111 of 434

Held: No. The relationship between an arrastre operator and a consignee is similar to that between
a warehouseman and a depositor, or to that between a common carrier and the consignee and/or
the owner of the shipped goods. Thus, an arrastre operator should adhere to the same degree of
diligence as that legally expected of a warehouseman or a common carrier as set forth in Section
3[b] of the Warehouse Receipts [Act] and Article 1733 of the Civil Code. As custodian of the
shipment discharged from the vessel, the arrastre operator must take good care of the same and
turn it over to the party entitled to its possession.
In case of claim for loss filed by a consignee or the insurer as subrogee, it is the arrastre operator
that carries the burden of proving compliance with the obligation to deliver the goods to the
appropriate party. It must show that the losses were not due to its negligence or that of its
employees. It must establish that it observed the required diligence in handling the shipment.
Otherwise, it shall be presumed that the loss was due to its fault.
To prove proper delivery, MPSI presented 10 gate passes which bore the duly identified signature of
MSC's representative. In the gate pass, it was acknowledged that “Issuance of [the] Gate Pass
constitutes delivery to and receipt by consignee of the goods as described above in good order and
condition, unless an accompanying B.O. certificate duly issued and noted on the face of [the] Gate
Pass appears. As held in International Container Terminal Services, Inc. v. Prudential Guarantee &
Assurance Co., Inc., the signature of the consignee's representative on the gate pass is evidence of
receipt of the shipment in good order and condition. Also, that MPSI delivered the subject shipment
to MSC's representative in good and complete condition and with lock and seals intact is
established by the testimonies.
At any rate, MPSI cannot just the same be held liable for the missing bags of flour since the
consigned goods were shipped under "Shipper's Load and Count" arrangement. "This means that
the shipper was solely responsible for the loading of the container, while the carrier was oblivious
to the contents of the shipment. Protection against pilferage of the shipment was the consignee's
lookout. The arrastre operator was, like any ordinary depositary, duty-bound to take good care of
the goods received from the vessel and to turn the same over to the party entitled to their
possession, subject to such qualifications as may have validly been imposed in the contract between
the parties. The arrastre operator was not required to verify the contents of the container received
and to compare them with those declared by the shipper because, as earlier stated, the cargo was
at the shipper's load and count. The arrastre operator was expected to deliver to the consignee only
the container received from the carrier."
_____________________________________________________________________________________
MARITIME COMMERCE
PHIL-NIPPON KYOEI, CORP. vs. ROSALIA T. GUDELOSAO, on her behalf and in behalf of
minor children CHRISTY MAE T. GUDELOSAO and ROSE ELDEN T. GUDELOSAO,
CARMEN TANCONTIAN, on her behalf and in behalf of the children CAMELA B.
TANCONTIAN, BEVERLY B. TANCONTIAN, and ACE B. TANCONTIAN
G.R. No. 181375, July 13, 2016, JARDELEZA, J.
In Abueg v. San Diego, it was ruled that the limited liability rule found in the Code of
Commerce is inapplicable in a liability created by statute to compensate employees and laborers, or
Page 112 of 434

the heirs and dependents, in cases of injury received by or inflicted upon them while engaged in the
performance of their work or employment.
Based on Section 176 of the Insurance Code, casualty insurance may cover liability or loss
arising from accident or mishap. In a liability insurance, the insurer assumes the obligation to pay
third party in whose favor the liability of the insured arises. On the other hand, personal accident
insurance refers to insurance against death or injury by accident or accidental means. In an accidental
death policy, the accident causing the death is the thing insured against. The Court ruled that while
the Personal Accident Policies are casualty insurance, they do not answer for petitioner's liabilities
arising from the sinking of the vessel. It is an indemnity insurance procured by petitioner for the
benefit of the seafarers. As a result, petitioner is not directly liable to pay under the policies because
it is merely the policyholder of the Personal Accident Policies.
FACTS:
Petitioner, a domestic shipping corporation, purchased a "Ro-Ro" passenger/cargo vessel "MV

Mahlia" in Japan. For the vessel's one month conduction voyage from Japan to the Philippines,
petitioner, as local principal, and Top Ever Marine Management Maritime Co., Ltd. (TMCL), as
foreign principal, hired Edwin C. Gudelosao, Virgilio A. Tancontian, and six other crewmembers.
They were hired through the local manning agency of TMCL, Top Ever Marine Management
Philippine Corporation (TEMMPC). TEMMPC, through their president and general manager, Capt.
Oscar Orbeta (Capt. Orbeta), and the eight crewmembers signed separate contracts of
employment. Petitioner secured a Marine Insurance Policy (Maritime Policy No. 00001) from SSSICI
over the vessel for Pl 0,800,000.00 against loss, damage, and third party liability or expense, arising
from the occurrence of the perils of the sea for the voyage of the vessel from Onomichi, Japan to
Batangas, Philippines. This Marine Insurance Policy included Personal Accident Policies for the
eight crewmembers for P3,240,000.00 each in case of accidental death or injury.
While still within Japanese waters, the vessel sank due to extreme bad weather condition. Only
Chief Engineer Nilo Macasling survived the incident while the rest of the crewmembers, including
Gudelosao and Tancontian, perished. Respondents, as heirs and beneficiaries of Gudelosao and
Tancontian, filed separate complaints for death benefits and other damages against petitioner,
TEMMPC, Capt. Orbeta, TMCL, and SSSICI, with the Arbitration Branch of the National Labor
Relations Commission (NLRC). The NLRC absolved petitioner, TEMMPC and TMCL and Capt.
Orbeta from any liability based on the limited liability rule. It, however, affirmed SSSICI's liability
after finding that the Personal Accident Policies answer for the death benefit claims under the
Philippine Overseas Employment Administration Standard Employment Contract (POEASEC).
However, the CA found that the NLRC erred when it ruled that the obligation of petitioner,
TEMMPC and TMCL for the payment of death benefits under the POEA-SEC was ipso facto
transferred to SSSICI upon the death of the seafarers. The CA noted that the benefits being claimed
are not dependent upon whether there is total loss of the vessel, because the liability attaches even
if the vessel did not sink.
Thus, it was error for the NLRC to absolve TEMMPC and TMCL on the basis of the limited liability
rule.
Significantly though, the CA ruled that petitioner is not liable under the POEA-SEC, but by virtue
of its being a shipowner. Thus, petitioner is liable for the injuries to passengers even without a
Page 113 of 434

determination of its fault or negligence. It is for this reason that petitioner obtained insurance from
SSSICI - to protect itself against the consequences of a total loss of the vessel caused by the perils
of the sea. Consequently, SSSICI's liability as petitioner's insurer directly arose from the contract of
insurance against liability (i.e., Personal Accident Policy). The CA then ordered that petitioner's
liability will only be extinguished upon payment by SSSICI of the insurance proceeds.
Hence, this petition to the SC where petitioner claims that the CA erred in ignoring the
fundamental rule in Maritime Law that the shipowner may exempt itself from liability by
abandoning the vessel and freight it may have earned during the voyage, and the proceeds of the
insurance if any. Since the liability of the shipowner is limited to the value of the vessel unless there
is insurance, any claim against petitioner is limited to the proceeds arising from the insurance
policies procured from SSSICI. Thus, there is no reason in making petitioner's exoneration from
liability conditional on SSSICI's payment of the insurance proceeds.
ISSUES:
1. Whether the doctrine of real and hypothecary nature of maritime law (also known as the limited
liability rule) applies in favor of petitioner.
2. Whether the CA erred in ruling that the liability of petitioner is extinguished only upon SSSICI's
payment of insurance proceeds.
RULING:
1. Doctrine of limited liability is not applicable to claims under POEA-SEC.
The limited liability rule intends to limit the liability of the shipowner or agent to the value of the
vessel, its appurtenances and freightage earned in the voyage, provided that the owner or agent
abandons the vessel. When the vessel is totally lost, in which case abandonment is not required
because there is no vessel to abandon, the liability of the shipowner or agent for damages is
extinguished. Nonetheless, the limited liability rule is not absolute and is without exceptions. It
does not apply in cases: (1) where the injury or death to a passenger is due either to the fault of the
shipowner, or to the concurring negligence of the shipowner and the captain; (2) where the vessel
is insured; and (3) in workmen's compensation claims.
In Abueg v. San Diego, it was ruled that the limited liability rule found in the Code of Commerce is
inapplicable in a liability created by statute to compensate employees and laborers, or the heirs and
dependents, in cases of injury received by or inflicted upon them while engaged in the performance
of their work or employment.
Akin to the death benefits under the Labor Code, death benefits under the POEA-SEC are given
when the employee dies due to a work-related cause during the term of his contract. The liability
of the shipowner or agent under the POEA-SEC has likewise nothing to do with the provisions of
the Code of Commerce regarding maritime commerce. But while the nature of death benefits under
the Labor Code and the POEA-SEC are similar, the death benefits under the POEA-SEC are
intended to be separate and distinct from, and in addition to, whatever benefits the seafarer is
entitled to under Philippine laws, including those benefits which may be claimed from the State
Insurance Fund.
Page 114 of 434

Thus, the claim for death benefits under the POEA-SEC is the same species as the workmen's
compensation claims under the Labor Code - both of which belong to a different realm from that
of Maritime Law. Therefore, the limited liability rule does not apply to petitioner's liability under
the POEA-SEC.
2. SSSICI 's liability as insurer under the Personal Accident Policies is direct.
The Court, however, find that the CA erred in ruling that "upon payment of the insurance proceeds
to said widows by respondent SOUTH SEA SURETY & INSURANCE CO., INC., respondent PHIL-
NIPPON CORPORATION's liability to all the complainants is deemed extinguished. "
This ruling makes petitioner's liability conditional upon SSSICI's payment of the insurance
proceeds. In doing so, the CA determined that the Personal Accident Policies are casualty
insurance, specifically one of liability insurance. The CA determined that petitioner, as insured,
procured from SSSICI the Personal Accident Policies in order to protect itself from the
consequences of the total loss of the vessel caused by the perils of the sea. The CA found that the
liabilities insured against are all monetary claims, excluding the benefits under the POEA-SEC, of
respondents in connection with the sinking of the vessel.
The Court ruled that while the Personal Accident Policies are casualty insurance, they do not
answer for petitioner's liabilities arising from the sinking of the vessel. It is an indemnity insurance
procured by petitioner for the benefit of the seafarers. As a result, petitioner is not directly liable to
pay under the policies because it is merely the policyholder of the Personal Accident Policies.
Based on Section 176 of the Insurance Code, casualty insurance may cover liability or loss arising
from accident or mishap. In a liability insurance, the insurer assumes the obligation to pay third
party in whose favor the liability of the insured arises. On the other hand, personal accident
insurance refers to insurance against death or injury by accident or accidental means. In an
accidental death policy, the accident causing the death is the thing insured against.
The liability of SSSICI to the beneficiaries is direct under the insurance contract. Under the
contract, petitioner is the policyholder, with SSSICI as the insurer, the crewmembers as the cestui
que vie or the person whose life is being insured with another as beneficiary of the proceeds, and
the latter's heirs as beneficiaries of the policies. Upon petitioner's payment of the premiums
intended as additional compensation to the crewmembers, SSSICI as insurer undertook to
indemnify the crewmernbers' beneficiaries from an unknown or contingent event. Thus, when the
CA conditioned the extinguishment of petitioner's liability on SSSICI's payment of the Personal
Accident Policies' proceeds, it made a finding that petitioner is subsidiarily liable for the face value
of the policies. To reiterate, however, there is no basis for such finding; there is no obligation on
the part of petitioner to pay the insurance proceeds because petitioner is, in fact, the obligee or
policyholder in the Personal Accident Policies. Since petitioner is not the party liable for the value
of the insurance proceeds, it follows that the limited liability rule does not apply as well.
CORPORATION LAW
CLASSES OF CORPORATIONS
Page 115 of 434

ALLEN A. MACASAET, NICOLAS V. QUIJANO, JR., ISAIAS ALBANO, LILY REYES, JANET BAY,
JESUS R. GALANG and RANDY HAGOS vs. FRANCISCO R. CO, JR.
G.R. No. 156759, June 5, 2013, J. Bersamin
Corporation by estoppel results when a corporation represented itself to the reading public as
such despite its not being incorporated. It is founded on principles of equity and is designed to prevent
injustice and unfairness.
Facts:
On July 3, 2000, respondent, a retired police officer sued AbanteTonite, a daily tabloid of general
circulation; its Publisher Allen A. Macasaet; and the other officers of such tabloid (other
petitioners). The suit was raffled to Branch 51 of the RTC, which in due course issued summons to
be served on each defendant, including AbanteTonite, at their business address.
The Sheriff proceeded to the stated address to effect the personal service of the summons. But his
efforts to personally serve each defendant in the address were futile because the defendants were
then out of the office and unavailable. He returned in the afternoon of that day to make a second
attempt but still failed to serve the summons. He decided to resort to substituted service.
The petitioners moved for the dismissal of the complaint alleging lack of jurisdiction over their
persons because of the invalid and ineffectual substituted service of summons. They contended that
the sheriff had made no prior attempt to serve the summons personally on each of them in
accordance with Section 6 and Section 7, Rule 14 of the Rules of Court. They further moved to drop
AbanteTonite as a defendant by virtue of its being neither a natural nor a juridical person that
could be impleaded as a party in a civil action.
The RTC denied the motion to dismiss, and directed petitioners to file their answers. Regarding the
impleading of AbanteTonite as defendant, it held that assuming arguendo that AbanteTonite is not
registered with the Securities and Exchange Commission, it is deemed a corporation by estoppels
considering that it possesses attributes of a juridical person, otherwise it cannot be held liable for
damages and injuries it may inflict to other persons. The CA affirmed the RTC decision in all
respects.
Issue:
Whether or not the Court of Appeals committed reversible error in sustaining the inclusion of
Abanate Tonite as a party in the case
Ruling:
The petition for review lacks merit.
The Court held that they cannot sustain petitioner's contention that AbanteTonite could not be
sued as a defendant due to its not being either a natural or a juridical person. In rejecting their
contention, the CA categorized AbanteTonite as a corporation by estoppel as the result of its having
represented itself to the reading public as a corporation despite its not being incorporated. Thereby,
the CA concluded that the RTC did not gravely abuse its discretion in holding that the non-
Page 116 of 434

incorporation of AbanteTonite with the Securities and Exchange Commission was of no

consequence for, otherwise, whoever of the public would suffer any damage from the publication
of the articles in the pages of its tabloids would be left without recourse. The Court also elucidated
that considering that the editorial box of the daily tabloid disclosed that although Monica
Publishing Corporation had published the tabloid on a daily basis, nothing in the box indicated
that Monica Publishing Corporation owned AbanteTonite.
_____________________________________________________________________________________
Iglesia Filipina Independente vs. Heirs of Bernardino Taeza

G.R. No. 179597; February 3, 2014 J. Peralta
Sec. 113 of the Corporation Code states that: “Any corporation sole may purchase and hold real
estate and personal property for its church, charitable, benevolent or educational purposes, and may
receive bequests or gifts for such purposes. Such corporation may mortgage or sell real property held
by it upon obtaining an order for that purpose from the Court of First Instance of the province where
the property is situated; Provided, That in cases where the rules, regulations and discipline of the
religious denomination, sect or church, religious society or order concerned represented by such
corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and
personal property, such rules, regulations and discipline shall control, and the intervention of the
courts shall not be necessary.” Hence, the sale of real properties owned by a religious corporation by
the Supreme Bishop alone is unenforceable where its Canons require not just the consent of the
Supreme Bishop but also the concurrence of the laymen’s committee, the parish priest, and the
Diocesan Bishop.
Facts:
Iglesia Filipina Independiente (IFI), a duly registered religious corporation, owned a parcel of land
decscribed as Lot 3653. The lot is subdivided as follows: Lot Nos. 3653-A, 3653-B, 3653-C, and 3653-
D.
Through IFI’s Supreme Bishop Rev. Macario Ga, Lot 3653-D was sold to one Bienveniedo de
Guzman. Years after, Lot Nos. 3653-A and 3653-B were likewise sold by Bishop Rev. Ga to
Bernardino Taeza. Subsequently, Taeza registered the subject parcels of land and occupied a
portion thereof.
IFI demanded Taeza to vacate said land which he failed to do. A complaint for annulment of sale
was filed by IFI against Taeza before the RTC of Tuguegarao City. The trial court rendered judgment
in favor of IFI and held that the deed of sale executed between Rev. Ga and Taeza is null and void.
On appeal, the CA rendered its decision reversing and setting aside the RTC decision. It ruled that
IFI, being a corporation sole, validly transferred ownership over the land in question through its
Supreme Bishop, who was at the time the administrator of all properties and the official
representative of the church. It further held that the authority of Supreme Bishop Rev. Ga to enter
into a contract and represent IFI cannot be assailed, as there are no provisions in its constitution
and canons giving the said authority to any other person or entity.
Page 117 of 434

IFI elevated the case to the SC. It maintained that there was no consent to the contract of sale as
Supreme Bishop Ga had no authority to give such consent.
Issue:
Whether or not the Supreme Bishop is authorized to enter into a contract of sale in behalf of the
religious corporation.
Ruling:
Petition Granted.
Section 113 of the Corporation Code of the Philippines provides that:

Sec. 113. Acquisition and alienation of property. - Any corporation sole may purchase
and hold real estate and personal property for its church, charitable, benevolent or
educational purposes, and may receive bequests or gifts for such purposes. Such
corporation may mortgage or sell real property held by it upon obtaining an order
for that purpose from the Court of First Instance of the province where the property
is situated; Provided, That in cases where the rules, regulations and discipline of the
religious denomination, sect or church, religious society or order concerned
represented by such corporation sole regulate the method of acquiring, holding,
selling and mortgaging real estate and personal property, such rules, regulations and
discipline shall control, and the intervention of the courts shall not be necessary.
Pursuant to the foregoing, petitioner provided in Article IV (a) of its Constitution and Canons of
the Philippine Independent Church, that "[a]ll real properties of the Church located or situated in
such parish can be disposed of only with the approval and conformity of the laymen'scommittee,
the parish priest, the Diocesan Bishop, with sanction of the Supreme Council, and finally with the
approval of the Supreme Bishop, as administrator of all the temporalities of the Church."
Evidently, under petitioner's Canons, any sale of real property requires not just the consent of the
Supreme Bishop but also the concurrence of the laymen's committee, the parish priest, and the
Diocesan Bishop, as sanctioned by the Supreme Council. However, petitioner's Canons do not
specify in what form the conformity of the other church entities should be made known. Thus, as
petitioner's witness stated, in practice, such consent or approval may be assumed as a matter of
fact, unless some opposition is expressed.
Here, the trial court found that the laymen's committee indeed made its objection to the sale known
to the Supreme Bishop. The CA, on the other hand, glossed over the fact of such opposition from
the laymen's committee, opining that the consent of the Supreme Bishop to the sale was sufficient,
especially since the parish priest and the Diocesan Bishop voiced no objection to the sale.
The Court finds it erroneous for the CA to ignore the fact that the laymen's committee objected to
the sale of the lot in question. The Canons require that ALL the church entities listed in Article IV
(a) thereof should give its approval to the transaction. Thus, when the Supreme Bishop executed
the contract of sale of petitioner's lot despite the opposition made by the laymen's committee, he
acted beyond his powers.
Page 118 of 434

_____________________________________________________________________________________
Dennis A.B. Funa vs. Manila Economic and Cultural Office and the Commission on Audit
G.R. No. 193462; February 4, 2014, J. Perez
The Manila Economic and Cultural Office (MECO) is not a GOCC or government
instrumentality. It is a sui generis private entity especially entrusted by the government with the
facilitation of unofficial relations with the people in Taiwan without jeopardizing the country’s faithful
commitment to the One China policy of the PROC. However, despite its non-governmental character,
the MECO handles government funds in the form of the verification fees it collects on behalf of the
DOLE and the consular fees it collects under Section 2(6) of EO No. 15, s. 2001. Hence, under existing
laws, the accounts of the MECO pertaining to its collection of such "verification fees" and "consular
fees" should be audited by the COA.
Facts:
Manila Economic and Cultural Office (MECO) was organized as a non-stock, non-profit
corporation under the Corporation Code. From the moment it was incorporated, MECO became
the corporate entity entrusted by the Philippine government with the responsibility of fostering
friendly and unofficial relations with the people of Taiwan, particularly in the areas of trade,
economic cooperation, investment, cultural, scientific and educational exchanges. To enable it to
carry out such responsibility, MECO was authorized by the government to perform certain consular
and other functions that relates to the promotion, protection and facilitation of Philippine interests
in Taiwan.
On August 23, 2010, the petitioner sent a letter to the COA requesting for a copy of the latest
financial and audit report of MECO invoking, for that purpose, his constitutional right to
information of matters of public concern. The petitioner made the request on the belief that MECO,
being under the operational supervision of the DTI, is a GOCC and thus subject to the audit
jurisdiction of COA.
Two days later, the Assistant Commissioner issued a memorandum stating that MECO was not
among the agencies audited by any of the three Clusters of the Corporate Government Sector.
Perceiving the memorandum as an admission that COA had never audited and examined the
accounts of MECO, the petitioner filed the instant petition for mandamus and impleaded both COA
and MECO. According to the petitioner, MECO possesses all the essential characteristics of a GOCC
and an instrumentality under the Administrative Code as it is controlled by the government thru a
board of directors appointed by the President of the Philippines and while not integrated within
the executive departmental framework, it is nonetheless under the operational and policy
supervision of the DTI.
MECO, for its part, maintains that while it performs public functions, it is not a GOCC, and its
funds are private funds. COA, on the other hand, claims that MECO is a non-governmental entity,
but argues that, despite being such, it may still be audited with respect to the verification fees for
overseas employment documents that it collects from Taiwanese employers on behalf of DOLE.
Page 119 of 434

Issue:
Whether or not the Manila Economic and Cultural Office (MECO) is a GOCC subject to the audit
jurisdiction of COA.
Ruling:
Petition is Partially Granted.
GOCCs are "stock or non-stock" corporations "vested with functions relating to public needs" that
are "owned by the Government directly or through its instrumentalities." By definition, three
attributes thus make an entity a GOCC: first, its organization as stock or non-stock
corporation; second, the public character of its function; and third, government ownership over the
same. Possession of all three attributes is necessary to deem an entity a GOCC.
In this case, there is not much dispute that the MECO possesses the first and second attributes. It
is the third attribute, which the MECO lacks.The organization of the MECO as a non-stock
corporation cannot at all be denied. Records disclose that the MECO was incorporated as a non-
stock corporation under the Corporation Code on 16 December 1977. The purposes for which the
MECO was organized are somewhat analogous to those of a trade, business or industry
chamber, but only on a much larger scale i.e., instead of furthering the interests of a particular line
of business or industry within a local sphere, the MECO seeks to promote the general interests of
the Filipino people in a foreign land.
Finally, it is not disputed that none of the income derived by the MECO is distributable as dividends
to any of its members, directors or officers. Verily, the MECO is organized as a non-stock
corporation.
The public character of the functions vested in the MECO cannot be doubted either. Indeed, to a
certain degree, the functions of the MECO can even be said to partake of the nature of governmental
functions. As earlier intimated, it is the MECO that, on behalf of the people of the Philippines,
currently facilitates unofficial relations with the people in Taiwan.Consistent with its corporate
purposes, the MECO was "authorized" by the Philippine government to perform certain "consular
and other functions" relating to the promotion, protection and facilitation of Philippine interests
in Taiwan.
A perusal of the functions of the MECO reveals its uncanny similarity to some of the functions
typically performed by the DFA itself, through the latter’s diplomatic and consular missions. The
functions of the MECO, in other words, are of the kind that would otherwise be performed by the
Philippines’ own diplomatic and consular organs, if not only for the government’s acquiescence
that they instead be exercised by the MECO. Evidently, the functions vested in the MECO are
impressed with a public aspect.
The MECO Is Not Owned or Controlled by the Government Organization as a non-stock

corporation and the mere performance of functions with a public aspect, however, are not by
themselves sufficient to consider the MECO as a GOCC. In order to qualify as a GOCC, a
corporation must also, if not more importantly, be owned by the government.
Page 120 of 434

The government owns a stock or non-stock corporation if it has controlling interest in the
corporation. In a stock corporation, the controlling interest of the government is assured by its
ownership of at least fifty-one percent (51%) of the corporate capital stock. In a non-stock
corporation, like the MECO, jurisprudence teaches that the controlling interest of the government
is affirmed when "at least majority of the members are government officials holding such
membership by appointment or designation"or there is otherwise "substantial participation of the
government in the selection" of the corporation’s governing board.
In this case, the petitioner argues that the government has controlling interest in the MECO
because it is the President of the Philippines that indirectly appoints the directors of the
corporation. The petitioner claims that the President appoints directors of the MECO thru "desire
letters" addressed to the corporation’s board. The fact of the incorporation of the MECO under the
Corporation Code is key. The MECO was correct in postulating that, as a corporation organized
under the Corporation Code, it is governed by the appropriate provisions of the said code, its
articles of incorporation and its by-laws. In this case, it is the by-laws of the MECO that stipulates
that its directors are elected by its members; its officers are elected by its directors; and its members,
other than the original incorporators, are admitted by way of a unanimous board resolution.
It is significant to note that none of the original incorporators of the MECO were shown to be
government officials at the time of the corporation’s organization. Indeed, none of the members,
officers or board of directors of the MECO, from its incorporation up to the present day, were
established as government appointees or public officers designated by reason of their office. There
is, in fact, no law or executive order that authorizes such an appointment or designation. Hence,
from a strictly legal perspective, it appears that the presidential "desire letters" pointed out by
petitioner are, no matter how strong its persuasive effect may be, merely recommendatory.
The MECO Is Not a Government Instrumentality; It Is a Sui Generis Entity.The categorical

exclusion of the MECO from a GOCC makes it easier to exclude the same from any other class of
government instrumentality. The other government instrumentalities are all, by explicit or implicit
definition, creatures of the law. The MECO cannot be any other instrumentality because it was, as
mentioned earlier, merely incorporated under the Corporation Code.
It is evident, from the peculiar circumstances surrounding its incorporation, that the MECO was
not intended to operate as any other ordinary corporation. And it is not. Despite its private origins,
and perhaps deliberately so, the MECO was "entrusted" by the government with the "delicate and
precarious" responsibility of pursuing "unofficial"relations with the people of a foreign land whose
government the Philippines is bound not to recognize. The intricacy involved in such undertaking
is the possibility that, at any given time in fulfilling the purposes for which it was incorporated, the
MECO may find itself engaged in dealings or activities that can directly contradict the Philippines’
commitment to the One China policy of the PROC. Such a scenario can only truly be avoided if the
executive department exercises some form of oversight, no matter how limited, over the operations
of this otherwise private entity.
Indeed, from hindsight, it is clear that the MECO is uniquely situated as compared with other
private corporations. From its over-reaching corporate objectives, its special duty and authority to
exercise certain consular functions, up to the oversight by the executive department over its
operations—all the while maintaining its legal status as a non-governmental entity—the MECO is,
for all intents and purposes, sui generis.
Page 121 of 434

The Accounts of the MECO Pertaining to the Verification Fees and Consular Fees May Be Audited
by the COA. Section 14(1), Book V of the Administrative Code authorizes the COA to audit accounts
of non-governmental entities "required to pay or have government share" but only with respect to
"funds xxx coming from or through the government." This provision of law perfectly fits the MECO:
First. The MECO receives the "verification fees" by reason of being the collection agent of
the DOLE—a government agency. Out of its collections, the MECO is required, by
agreement, to remit a portion thereof to the DOLE. Hence, the MECO is accountable to the
government for its collections of such "verification fees" and, for that purpose, may be
audited by the COA.
Second. Like the "verification fees," the "consular fees" are also received by the MECO
through the government, having been derived from the exercise of consular functions
entrusted to the MECO by the government. Hence, the MECO remains accountable to the
government for its collections of "consular fees" and, for that purpose, may be audited by
the COA.
_____________________________________________________________________________________
THE PHILIPPINE GEOTHERMAL, GEOTHERMAL, INC. EMPLOYEES UNION, Petitioner, -

versus- UNOCAL PHILIPPINES, INC. (now known as CHEVRON GEOTHERMAL
PHILIPPINES HOLDINGS, INC.), Respondent.
GR. No. 190187, September 28, 2016, SECOND DIVISION, LEONEN,J.
The merger of a corporation with another does not operate to dismiss the employees of the
corporation absorbed by the surviving corporation. This is in keeping with the nature and effects of a
merger as provided under law and the constitutional policy protecting the rights of labor. The
employment of the absorbed employees subsists. Necessarily, these absorbed employees are not
entitled to separation pay on account of such merger in the absence of any other ground for its award.
Branch and Subsidiary
If a party before the DOLE voluntary mediation proceedings claimed that it is a “branch” of another
corporation, can it later claim before the Court of Appeals that it is a “subsidiary” of said
corporation? No. A branch and a subsidiary differ in its corporate existence: a branch is not a legally
independent unit, while a subsidiary has a separate and distinct personality from its parent
corporation. In Philippine Deposit Insurance Corp. v. Citibank, we observed: “The Court begins by
examining the manner by which a foreign corporation can establish its presence in the Philippines.
It may choose to incorporate its own subsidiary as a domestic corporation, in which case such
subsidiary would have its own separate and independent legal personality to conduct business in the
country. In the alternative, it may create a branch in the Philippines, which would not be a legally
independent unit, and simply obtain a license to do business in the Philippines.”
FACTS:
Philippine Geothermal, Inc. Employees Union is the bargaining agent of the rank-and-file
employees of Unocal Philippines.
Page 122 of 434

On April 4, 2005, Unocal Corporation executed an Agreement and Plan of Merger (Merger
Agreement) with Chevron Texaco Corporation (Chevron) and Blue Merger Sub, Inc. (Blue Merger).
Blue Merger is a wholly owned subsidiary of Chevron. Under the Merger Agreement, Unocal
Corporation merged with Blue Merger, and Blue Merger became the surviving corporation.
Chevron then became the parent corporation of the merged corporations: After the merger, Blue
Merger, as the surviving corporation, changed its name to Unocal Corporation.
The Union wrote Unocal Philippines asking for the separation benefits provided for under the
Collective Bargaining Agreement. According to the Union, the Merger Agreement of Unocal
Corporation, Blue Merger, and Chevron resulted in the closure and cessation of operations of
Unocal Philippines and the implied dismissal of its employees.
The parties agreed to submit their dispute for voluntary arbitration before the Department of Labor
and Employment, with the Secretary of Labor and Employment as Voluntary Arbitrator who ruled
that the Union's members were impliedly terminated from employment as a result of the Merger
Agreement. The Court of Appeals granted the appeal of Unocal Philippines and reversed the
Decision of the Secretary of Labor. It held that Unocal Philippines has a separate and distinct
juridical personality from its parent company, Unocal Corporation, which was the party that
entered into the Merger Agreement. The Court of Appeals ruled that Unocal Philippines remained
undissolved and its employees were unaffected by the merger. Moreover, the Court of Appeals
found that although Unocal Corporation became a part of Chevron, Unocal Philippines still
remained as a wholly owned subsidiary of Unocal California after the merger.
ISSUE:
Whether the Merger Agreement executed by Unocal Corporation, Blue Merger, and Chevron
resulted in the termination of the employment of petitioner's members and thereby entitling them
to separation pay.
RULING:
Whether or not respondent is a party to the Merger Agreement, there is no implied dismissal of its
employees as a consequence of the merger.
A merger is a consolidation of two or more corporations, which results in one or rriore corporations
being absorbed into one surviving corporation. The separate existence of the absorbed corporation
ceases, and the surviving corporation "retains its identity and takes over the rights, privileges,
franchises, properties, claims, liabilities and obligations of the absorbed corporation(s)."
If respondent is a subsidiary of Unocal California, which, in tum, is a subsidiary of Unocal

Corporation, then the merger of Unocal Corporation with Blue Merger and Chevron does not affect
respondent or any of its employees. Respondent has a separate and distinct personality from its
parent corporation.
Nonetheless, if respondent is indeed a party to the merger, the merger still does not result in the
dismissal of its employees. Section 80 of the Corporation Code provides that the surviving
corporation shall possess all the rights, privileges, properties, and receivables due of the absorbed
corporation. Moreover, all interests of, belonging to, or due to the absorbed corporation "shall be
Page 123 of 434

taken and deemed to be transferred to and vested in such surviving or consolidated corporation
without further act or deed. The surviving corporation likewise acquires all the liabilities and
obligations of the absorbed corporation as if it had itself incurred these liabilities or obligations.
This acquisition of all assets, interests, and liabilities of the absorbed corporation necessarily
includes the rights and obligations of the absorbed corporation under its employment contracts.
Consequently, the surviving corporation becomes bound by the employment contracts entered into
by the absorbed corporation. These employment contracts are not terminated. They subsist unless
their termination is allowed by law. Given these considerations, the petitioner is not entitled to the
separation benefits it claims from respondent.
PLACE OF INCORPORATION RULE
1. Pilipinas Shell Petroleum v. Royal Ferry Services, G.R. No. 188146
On August 28, 2005, Royal Ferry filed a verified Petition for Voluntary Insolvency before the
Regional Trial Court of Manila. According to its Articles of Incorporation, Royal Ferry's principal
place of business is located at 2521 A. Bonifacio Street, Bangkal, Makati City. However, it currently
holds office at Room 203, BF Condominium Building, Andres Soriano comer Solano Streets,
Intramuros, Manila. Pilipinas Shell filed a Motion to Dismiss on the ground of improper venue. The
RTC granted the Motion holding that a corporation cannot change its place of business without
amending its Articles of Incorporation. Was the grant of the motion proper?
No. The FRIA is currently the special law that governs insolvency. However, because the relevant
proceedings in this case took place before the enactment of the FRIA, the case needs to be resolved
under the provisions of the Insolvency Law.
To determine the venue of an insolvency proceeding, the residence of a corporation should be the
actual place where its principal office has been located for six ( 6) months before the filing of the
petition. If there is a conflict between the place stated in the articles of incorporation and the
physical location of the corporation's main office, the actual place of business should control.
Requiring a corporation to go back to a place it has abandoned just to file a case is the very definition
of inconvenience. There is no reason why an insolvent corporation should be forced to exert
whatever meager resources it has to litigate in a city it has already left. If the address in a
corporation's articles of incorporation is proven to be no longer accurate, then legal fiction should
give way to fact.
GRANDFATHER RULE
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND

DEVELOPMENT, INC., and MCARTHUR MINING, INC. vs. REDMONT CONSOLIDATED
MINES CORP.
G.R. No. 195580, April 21, 2014, J. Velasco Jr.
The Grandfather Rule is a method to determine the nationality of the corporation by making
reference to the nationality of the stockholders of the investor corporation. Based on a SEC Rule and
DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40
Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with
Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other
Page 124 of 434

joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated
differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule
will not apply.
Facts:
Redmont Consolidated Mines Corp. (Redmont), a domestic corporation organized and

existing under Philippine laws, took interest in mining and exploring certain areas of the province
of Palawan. After inquiring with the Department of Environment and Natural Resources (DENR),
it learned that the areas where it wanted to undertake exploration and mining activities where
already covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners
Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI),
filed an application for an MPSA. Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an
area of over 1,782 hectares and EPA-IVB-44 which includes an area of 3,720 hectares. The MPSA and
EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006,
assigned to petitioner McArthur. Petitioner Narra acquired its MPSA from Alpha Resources and
Development Corporation and Patricia Louise Mining & Development Corporation (PLMDC)
which previously filed an application for an MPSA. Through the said application, the DENR issued
MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San Isidro, Municipality
of Narra, Palawan. Subsequently, another MPSA application of SMMI was filed with the DENR
Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in
Barangays Malinao and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI
subsequently conveyed, transferred and assigned its rights and interest over the said MPSA
application to Tesoro.
On 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3)
separate petitions for the denial of petitioners’ applications for MPSA. In the petitions, Redmont
alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and
controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that
since MBMI is a considerable stockholder of petitioners, it was the driving force behind petitioners’
filing of the MPSA’s over the areas covered by applications since it knows that it can only participate
in mining activities through corporations which are deemed Filipino citizens. Redmont argued that
given that petitioners’ capital stocks were mostly owned by MBMI, they were likewise disqualified
from engaging in mining activities through MPSAs, which are reserved only for Filipino citizens.
Issue:
Whether or not petitioner corporations Narra, Tesoro and McArthur are foreign
corporations based on the "Grandfather Rule".
Ruling:
Yes.
Grandfather Rule is a method to determine the nationality of the corporation by making

reference to the nationality of the stockholders of the investor corporation. Based on a SEC Rule
Page 125 of 434

and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the
60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture
corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or
59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59%
less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt,
the Grandfather Rule will not apply.
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since doubt prevails and persists in the corporate ownership of
petitioners. Also doubt is present in the 60-40 Filipino equity ownership of petitioners Narra,
McArthur and Tesoro, since their common investor, the 100% Canadian corporation––MBMI,
funded them. Obviously, the instant case presents a situation which exhibits a scheme employed
by stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine,
therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of petitioners’

corporate structure, they have to be "grandfathered." As previously discussed, McArthur acquired
its MPSA application from MMC, which acquired its application from SMMI. McArthur has a capital
stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at one thousand
pesos (PhP 1,000) per share, subscribed to by the following:
Name Nationality Number of Amount Amount Paid

Shares Subscribed
Madridejos Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Mining
Corporation
MBMI Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
Resources, Inc.
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP PhP 2,708,174.60
10,000,000.00
Page 126 of 434

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar
structure and composition as McArthur. In fact, it would seem that MBMI is also a major investor
and "controls" MBMI and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra
(Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation
In the case of Madridejos Mining Corporation, noticeably, Olympic Mines & Development
Corporation (Olympic) as one of its stockholders did not pay any amount with respect to the
number of shares they subscribed to in the corporation, which is quite absurd since Olympic is the
major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay
any amount with respect to the number of shares it subscribed to. MBMI states that Olympic
entered into joint venture agreements with several Philippine companies, wherein MBMI holds
directly and indirectly a 60% effective equity interest in the Olympic Properties. Thus, as
demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was
utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or
more equity interest in McArthur, making the latter a foreign corporation.
Tesoro Mining and Development, Inc.
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million
pesos (PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share.
Except for the name "Sara Marie Mining, Inc.," Tesoro’s corporate structure shows exactly the same
figures as the corporate structure of petitioner McArthur, down to the last centavo. All the other
shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures
under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the
same.
Sara Marie Mining, Inc.
After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot
the glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of
identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar,
Hernando, Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares,"
"Amount Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI
which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP
2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand
nine hundred pesos (PhP 2,809,900). Accordingly, after "grandfathering" petitioner Tesoro and
factoring in Olympic’s participation in SMMI’s corporate structure, it is clear that MBMI is in
control of Tesoro and owns 60% or more equity interest in Tesoro. This makes petitioner Tesoro a
non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization and
development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s
MPSA application, whose corporate structure’s arrangement is similar to that of the first two
petitioners discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is
Page 127 of 434

divided into ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share.
Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present
in this corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDC’s corporate structure:
Name Nationality Number of Amount Amount Paid

Shares Subscribed
Palawan Alpha South Filipino 6,596 PhP PhP 0
Resources Development 6,596,000.00
Corporation
MBMI Resources, Canadian 3,396 PhP PhP
Inc. 3,396,000.00 2,796,000.00
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
Yet again, the same stockholders in petitioners’ corporate structures are present. Similarly,
the amount of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South
Resources and Development Corp. (PASRDC), is zero.
Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur,
Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of
their equity interests. Such conclusion is derived from grandfathering petitioners’ corporate
owners, namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s
Summary of Significant Accounting Policies statement– –regarding the "joint venture" agreements
that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and
Narra. Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or
corporations under the "Alpha" group wherein MBMI has joint venture agreements with, practically
exercising majority control over the corporations mentioned. In effect, whether looking at the
capital structure or the underlying relationships between and among the corporations, petitioners
Page 128 of 434

are NOT Filipino nationals and must be considered foreign since 60% or more of their capital stocks
or equity interests are owned by MBMI.
_____________________________________________________________________________________
JOSE M. ROY III, Petitioner,- versus - CHAIRPERSON TERESITA

HERBOSA,THESECURITIESAND EXCHANGE COMMISSION, and PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY, Respondents.
WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE,

ANTONIO V. PESINA, JR., MODESTO MARTINY. MAMON i l l , and GERARDO C.
EREBAREN, Petitioners-in-Intervention,
PHILIPPINE STOCK EXCHANGE, INC., Respondent-in-Intervention,
SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-Intervention.
G.R. No. 207246, Novmber 22, 2016, EN BANC, CAGUIOA, J.
The pronouncement of the Court in the Gamboa Resolution -the constitutional requirement
to "apply uniformly and across the board to all classes of shares, regardless of nomenclature
and category, comprising the capital of a corporation - is clearly an obiter dictum that cannot
override the Court's unequivocal definition of the term "capital" in both the Gamboa Decision and
Resolution.
Nowhere in the discussion of the definition of the term "capital" in Section 11, Article XII of the
1987 Constitution in the Gamboa Decision did the Court mention the 60% Filipino equity requirement
to be applied to each class of shares. The definition of "Philippine national" in the FIA and expounded
in its IRR, which the Court adopted in its interpretation of the term "capital", does not support such
application. In fact, even the Final Word of the Gamboa Resolution does not even intimate or suggest
the need for a clarification or re-interpretation.
To revisit or even clarify the unequivocal definition of the term "capital" as referring "only to
shares of stock entitled to vote in the election of directors" and apply the 60% Filipino ownership
requirement to each class of share is effectively and unwarrantedly amending or changing the Gamboa
Decision and Resolution. The Gamboa Decision and Resolution Doctrine did NOT make any
definitive ruling that the 60% Filipino ownership requirement was intended to apply to each
class of share.
The fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are
definite, clear and unequivocal. While there is a passage in the body of the Gamboa Resolution that
might have appeared contrary to the fallo of the Gamboa Decision – capitalized upon by petitioners
to espouse a restrictive re-interpretation of "capital" - the definiteness and clarity of the fallo of the
Gamboa Decision must control over the obiter dictum in the Gamboa Resolution regarding the
application of the 60-40 Filipino-foreign ownership requirement to "each class of shares, regardless of
differences in voting rights, privileges and restrictions."
Capital Stock
In Gamboa v. Teves, the Supreme Court said that the term 'capital' in Section 11, Article XII of the
1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and not
Page 129 of 434

to the total outstanding capital stock (common and non-voting preferred shares). On Motion for
Reconsideration, Gamboa made a pronouncement that Pursuant to the Gamboa ruling, the SEC
issued SEC-MC No. 8, Section 2, of which provides, “All covered corporations shall, at all times,
observe the constitutional or statutory ownership requirement. For purposes of determining
compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a)
the total number of outstanding shares of stock entitled to vote in the election of directors; AND
(b) the total number of outstanding shares of stock, whether or not entitled to vote in the election
of directors.” Is this compliant with the Gamboa Decision? Yes.
Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond requiring a 60-40 ratio in favor of Filipino nationals in
the voting stocks; it moreover requires the 60-40 percentage ownership in the total number of
outstanding shares of stock, whether voting or not. The SEC formulated SEC-MC No. 8 to adhere
to the Court's unambiguous pronouncement that "[f]ull beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights is required." While SEC-MC
No. 8 does not expressly mention the Beneficial Ownership Test or full beneficial ownership of
stocks requirement in the FIA, this will not, as it does not, render it invalid meaning, it does not
follow that the SEC will not apply this test in determining whether the shares claimed to be owned
by Philippine nationals are Filipino, i.e., are held by them by mere title or in full beneficial
ownership. To be sure, the SEC takes its guiding lights also from the FIA and its implementing rules,
the Securities Regulation Code (Republic Act No. 8799; "SRC") and its implementing rules.
Petitioners' insistence that the 60% Filipino equity requirement must be applied to each class of
shares is simply beyond the literal text and contemplation of Section 11, Article XII of the 1987
Constitution. The application of the 60-40 Filipino-foreign ownership requirement separately to
each class of shares, whether common, preferred non-voting, preferred voting or any other class of
shares fails to understand and appreciate the nature and features of stocks as financial instruments
and the real nature of the share could be a financial liability or a financial asset or an equity
instrument. To require Filipino shareholders to acquire preferred shares that are substantially debts
(financial liability), in order to meet the "restrictive" Filipino ownership requirement that
petitioners espouse, may not bode well for the Philippine corporation and its Filipino shareholders.
Parenthetically, given the innumerable permutations that the types and classes of stocks may take,
requiring the SEC and other government agencies to keep track of the ever-changing capital classes
of corporations will be impracticable, if not downright impossible. And the law does not require
the impossible. (Lex non cogit ad impossibilia.)
That stock corporations are allowed to create shares of different classes with varying features is a
flexibility that is granted, among others, for the corporation to attract and generate capital (funds)
from both local and foreign capital markets. This access to capital - which a stock corporation may
need for expansion, debt relief/repayment, working capital requirement and other corporate
pursuits - will be greatly eroded with further unwarranted limitations that are not articulated in the
Constitution. The intricacies and delicate balance between debt instruments (liabilities) and equity
(capital) that stock corporations need to calibrate to fund their business requirements and achieve
their financial targets are better left to the judgment of their boards and officers, whose bounden
duty is to steer their companies to financial stability and profitability and who are ultimately
answerable to their shareholders.
Page 130 of 434

DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
JOSE EMMANUEL P. GUILLERMO v. CRISANTO P. USON

G.R. No. 198967, March 07, 2016
The common thread running among the aforementioned cases, however, is that the veil of
corporate fiction can be pierced, and responsible corporate directors and officers or even a separate
but related corporation, may be impleaded and held answerable solidarily in a labor case, even after
final judgment and on execution, so long as it is established that such persons have deliberately
used the corporate vehicle to unjustly evade the judgment obligation, or have resorted to fraud, bad
faith or malice in doing so
On March 11, 1996, respondent Crisanto P. Uson (Uson) began his employment with Royal Class
Venture Phils., Inc. (Royal Class Venture) as an accounting clerk. Eventually, he was promoted to
the position of accounting supervisor, with a salary of Php13,000.00 a month, until he was allegedly
dismissed from employment on December 20, 2000.
On March 2, 2001, Uson filed with the Sub-Regional Arbitration . Branch No. 1, Dagupan City, of
the NLRC a Complaint for Illegal Dismissal, with prayers for backwages, reinstatement, salaries and
13th month pay, moral and exemplary damages and attorney's fees against Royal Class Venture.
Royal Class Venture did not make an appearance in the case despite its receipt of summons.
On May 15, 2001, Uson filed his Position Paper as complainant.
On October 22, 2001, Labor Arbiter Jose G. De Vera rendered a Decision in favor of the complainant
Uson and ordering therein respondent Royal Class Venture to reinstate him to his former position
and pay his backwages, 13th month pay as well as moral and exemplary damages and attorney's fees.
Royal Class Venture, as the losing party, did not file an appeal of the decision. Consequently, upon
Uson's motion, a Writ of Execution dated February 15, 2002 was issued to implement the Labor
Arbiter's decision.
On May 17, 2002, an Alias Writ of Execution was issued. But with the judgment still unsatisfied, a
Second Alias Writ of Execution was issued on September 11, 2002.
Again, it was reported in the Sheriff's Return that the Second Alias Writ of Execution dated
September 11, 2002 remained "unsatisfied." Thus, on November 14, 2002, Uson filed a Motion for
Alias Writ of Execution and to Hold Directors and Officers of Respondent Liable for Satisfaction of
the Decision.
On December 26, 2002, Labor Arbiter Irenarco R. Rimando issued an Order granting the motion
filed by Uson. The order held that officers of a corporation are jointly and severally liable for the
obligations of the corporation to the employees and there is no denial of due process in holding
them so even if the said officers were not parties to the case when the judgment in favor of the
employees was rendered. Thus, the Labor Arbiter pierced the veil of corporate fiction of Royal Class
Venture and held herein petitioner Jose Emmanuel Guillermo (Guillermo), in his personal capacity,
jointly and severally liable with the corporation for the enforcement of the claims of Uson.
Page 131 of 434

Guillermo filed, by way of special appearance, a Motion for Reconsideration/To Set Aside the Order
of December 26, 2002. The same, however, was not granted as, this time, in an Order dated
November 24, 2003, Labor Arbiter Niña Fe S. Lazaga-Rafols sustained the findings of the labor
arbiters before her and even castigated Guillenno for his unexplained absence in the prior
proceedings despite notice, effectively putting responsibility on Guillermo for the case's outcome
against him.
On January 5, 2004, Guillermo filed a Motion for Reconsideration of the above Order, but the same
was promptly denied by the Labor Arbiter in an Order dated January 7, 2004.
On January 26, 2004, Uson filed a Motion for Alias Writ of Execution, to which Guillermo filed a
Comment and Opposition on April 2, 2004.
On May 18, 2004, the Labor Arbiter issued an Order granting Uson's Motion for the Issuance of an
Alias Writ of Execution and rejecting Guillermo's arguments posed in his Comment and
Opposition.
Guillermo elevated the matter to the NLRC by filing a Memorandum of Appeal with Prayer for a
(Writ of) Preliminary Injunction dated June 10, 2004.crawred
In a Decision dated May 11, 2010, the NLRC dismissed Guillermo's appeal and denied his prayers for
injunction.
On August 20, 2010, Guillermo filed a Petition for Certiorari before the Court of Appeals, assailing
the NLRC decision.
On June 8, 2011, the Court of Appeals rendered its assailed Decision which denied Guillermo's
petition and upheld all the findings of the NLRC.
Issue
Whether an officer of a corporation may be included as judgment obligor in a labor case for the
first time only after the decision of the Labor Arbiter had become final and executory, and whether
the twin doctrines of "piercing the veil of corporate fiction" and personal liability of company
officers in labor cases apply.
Ruling
In the earlier labor cases of Claparols v. Court of Industrial Relations and A.C. Ransom Labor Union-
CCLU v. NLRC, persons who were not originally impleaded in the case were, even during execution,
held to be solidarity liable with the employer corporation for the latter's unpaid obligations to
complainant-employees. These included a newly-formed corporation which was considered a mere
conduit or alter ego of the originally impleaded corporation, and/or the officers or stockholders of
the latter corporation. Liability attached, especially to the responsible officers, even after final
judgment and during execution, when there was a failure to collect from the employer corporation
the judgment debt awarded to its workers. In Naguiat v. NLRC, the president of the corporation
was found, for the first time on appeal, to be solidarily liable to the dismissed employees. Then, in
Page 132 of 434

Reynoso v. Court of Appeals, the veil of corporate fiction was pierced at the stage of execution,
against a corporation not previously impleaded, when it was established that such corporation had
dominant control of the original party corporation, which was a smaller company, in such a manner
that the latter's closure was done by the former in order to defraud its creditors, including a former
worker.
The rulings of this Court in A.C. Ransom, Naguiat, and Reynoso, however, have since been
tempered, at least in the aspects of the lifting of the corporate veil and the assignment of personal
liability to directors, trustees and officers in labor cases. The subsequent cases of McLeod v. NLRC,
Spouses Santos v. NLRC and Carag v. NLRC, have all established, save for certain exceptions, the
primacy of Section 31 of the Corporation Code in the matter of assigning such liability for a
corporation's debts, including judgment obligations in labor cases. According to these cases, a
corporation is still an artificial being invested by law with a personality separate and distinct from
that of its stockholders and from that of other corporations to which it may be connected. It is not
in every instance of inability to collect from a corporation that the veil of corporate fiction is
pierced, and the responsible officials are made liable. Personal liability attaches only when, as
enumerated by the said Section 31 of the Corporation Code, there is a wilfull and knowing assent to
patently unlawful acts of the corporation, there is gross negligence or bad faith in directing the
affairs of the corporation, or there is a conflict of interest resulting in damages to the corporation.
Further, in another labor case, Pantranco Employees Association (PEA-PTGWO), et al. v. NLRC, et
al., the doctrine of piercing the corporate veil is held to apply 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. 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. Indeed, in Reahs Corporation v. NLRC, the conferment of liability on officers
for a corporation's obligations to labor is held to be an exception to the general doctrine of separate
personality of a corporation.
It also bears emphasis that in cases where personal liability attaches, not even all officers are made
accountable. Rather, only the "responsible officer," i.e., the person directly responsible for and who
"acted in bad faith" in committing the illegal dismissal or any act violative of the Labor Code, is held
solidarily liable, in cases wherein the corporate veil is pierced. In other instances, such as cases of
so-called corporate tort of a close corporation, it is the person "actively engaged" in the
management of the corporation who is held liable. In the absence of a clearly identifiable officer(s)
directly responsible for the legal infraction, the Court considers the president of the corporation as
such officer.
The common thread running among the aforementioned cases, however, is that the veil of
corporate fiction can be pierced, and responsible corporate directors and officers or even a separate
but related corporation, may be impleaded and held answerable solidarily in a labor case, even after
final judgment and on execution, so long as it is established that such persons have deliberately
used the corporate vehicle to unjustly evade the judgment obligation, or have resorted to fraud, bad
faith or malice in doing so. When the shield of a separate corporate identity is used to commit
wrongdoing and opprobriously elude responsibility, the courts and the legal authorities in a labor
Page 133 of 434

case have not hesitated to step in and shatter the said shield and deny the usual protections to the
offending party, even after final judgment. The key element is the presence of fraud, malice or bad
faith. Bad faith, in this instance, does not connote bad judgment or negligence but imports a
dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a
known duty through some motive or interest or ill will; it partakes of the nature of fraud.
As the foregoing implies, there is no hard and fast rule on when corporate fiction may be
disregarded; instead, each case must be evaluated according to its peculiar circumstances. For the
case at bar, applying the above criteria, a finding of personal and solidary liability against a
corporate officer like Guillermo must be rooted on a satisfactory showing of fraud, bad faith or
malice, or the presence of any of the justifications for disregarding the corporate fiction. As stated
in McLeod, bad faith is a question of fact and is evidentiary, so that the records must first bear
evidence of malice before a finding of such may be made.
It is our finding that such evidence exists in the record. Like the A. C. Ransom, and Naguiat cases,
the case at bar involves an apparent family corporation. As in those two cases, the records of the
present case bear allegations and evidence that Guillermo, the officer being held liable, is the person
responsible in the actual running of the company and for the malicious and illegal dismissal of the
complainant; he, likewise, was shown to have a role in dissolving the original obligor company in
an obvious "scheme to avoid liability" which jurisprudence has always looked upon with a
suspicious eye in order to protect the rights of labor.
Part of the evidence on record is the second page of the verified Position Paper of complainant
(herein respondent) Crisanto P. Uson, where it was clearly alleged that Uson was "illegally
dismissed by the President/General Manager of respondent corporation (herein petitioner) Jose
Emmanuel P. Guillermo when Uson exposed the practice of the said President/General Manager of
dictating and undervaluing the shares of stock of the corporation." The statement is proof that
Guillermo was the responsible officer in charge of running the company as well as the one who
dismissed Uson from employment. As this sworn allegation is uncontroverted - as neither the
company nor Guillermo appeared before the Labor Arbiter despite the service of summons and
notices - such stands as a fact of the case, and now functions as clear evidence of Guillermo's bad
faith in his dismissal of Uson from employment, with the motive apparently being anger at the
latter's reporting of unlawful activities.
Then, it is also clearly reflected in the records that it was Guillermo himself, as President and
General Manager of the company, who received the summons to the case, and who also
subsequently and without justifiable cause refused to receive all notices and orders of the Labor
Arbiter that followed. This makes Guillermo responsible for his and his company's failure to
participate in the entire proceedings before the said office. The fact is clearly narrated in the
Decision and Orders of the Labor Arbiter, Uson's Motions for the Issuance of Alias Writs of
Execution, as well as in the Decision of the NLRC and the assailed Decision of the Court of Appeals,
which Guillermo did not dispute in any of his belated motions or pleadings, including in his petition
for certiorari before the Court of Appeals and even in the petition currently before this Court. Thus,
again, the same now stands as a finding of fact of the said lower tribunals which binds this Court
and which it has no power to alter or revisit. Guillermo's knowledge of the case's filing and existence
and his unexplained refusal to participate in it as the responsible official of his company, again is
an indicia of his bad faith and malicious intent to evade the judgment of the labor tribunals.
Page 134 of 434

Finally, the records likewise bear that Guillermo dissolved Royal Class Venture and helped
incorporate a new firm, located in the same address as the former, wherein he is again a
stockl1older. This is borne by the Sherif11s Return which reported: that at Royal Class Venture's
business address at Minien East, Sta. Barbara, Pangasinan, there is a new establishment named "Joel
and Sons Corporation," a family corporation owned by the Guillermos in which Jose Emmanuel F.
Guillermo is again one of the stockholders; that Guillermo received the writ of execution but used
the nickname "Joey" and denied being Jose Emmanuel F. Guillermo and, instead, pretended to be
Jose's brother; that the guard on duty confirmed that Jose and Joey are one and the same person;
and that the respondent corporation Royal Class Venture had been dissolved. Again, the facts
contained in the Sheriffs Return were not disputed nor controverted by Guillermo, either in the
hearings of Uson's Motions for Issuance of Alias Writs of Execution, in subsequent motions or
pleadings, or even in the petition before this Court. Essentially, then, the facts form part of the
records and now stand as further proof of Guillermo's bad faith and malicious intent to evade the
judgment obligation.
The foregoing clearly indicate a pattern or scheme to avoid the obligations to Uson and frustrate
the execution of the judgment award, which this Court, in the interest of justice, will not
countenance.
As for Guillermo's assertion that the case is an intra-corporate controversy, the Court sustains the
finding of the appellate court that the nature of an action and the jurisdiction of a tribunal are
determined by the allegations of the complaint at the time of its filing, irrespective of whether or
not the plaintiff is entitled to recover upon all or some of the claims asserted therein. Although
Uson is also a stockholder and director of Royal Class Venture, it is settled in jurisprudence that
not all conflicts between a stockholder and the corporation are intra-corporate; an examination of
the complaint must be made on whether the complainant is involved in his capacity as a
stockholder or director, or as an employee. If the latter is found and the dispute does not meet the
test of what qualities as an intra-corporate controversy, then the case is a labor case cognizable by
the NLRC and is not within the jurisdiction of any other tribunal. In the case at bar, Uson's
allegation was that he was maliciously and illegally dismissed as an Accounting Supervisor by
Guillermo, the Company President and General Manager, an allegation that was not even disputed
by the latter nor by Royal Class Venture. It raised no intra-corporate relationship issues between
him and the corporation or Guillermo; neither did it raise any issue regarding the regulation of the
corporation. As correctly found by the appellate court, Uson's complaint and redress sought were
centered alone on his dismissal as an employee, and not upon any other relationship he had with
the company or with Guillermo. Thus, the matter is clearly a labor dispute cognizable by the labor
tribunals.c
_____________________________________________________________________________________
REPUBLIC OF THE PHILIPPINES, Petitioner, - versus - MEGA PACIFIC eSOLUTIONS, INC.,

WILLY U. YU, BONNIE S. YU, ENRIQUE T. TANSIPEK, ROSITA Y. TANSIPEK, PEDRO O.
TAN, JOHNSON W. FONG, BERNARD I. FONG, and LAURIANO A. BARRIOS, Respondents.
G.R. No. 184666, June 27, 2016, FIRST DIVISION, SERENO, CJ
Page 135 of 434

Veil-piercing in fraud cases requires that the legal fiction of separate juridical personality is
used for fraudulent or wrongful ends. The Court identified red flags of fraudulent schemes in public
procurement, all of which were established and the totality of which strongly indicate that MPEI was
a sham corporation formed merely for the purpose of perpetrating a fraudulent scheme. The red flags
are as follows: (1) overly narrow specifications; (2) unjustified recommendations and unjustified
winning bidders; (3) failure to meet the terms of the contract; and (4) shell or fictitious company.
Fictitious companies are by definition fraudulent and may also serve as fronts for
government officials. The typical scheme involves corrupt government officials creating a fictitious
company that will serve as a "vehicle" to secure contract awards. Often, the fictitious-or
ghostcompany will subcontract work to lower cost and sometimes unqualified firms. Shell
companies have no significant assets, staff or operational capacity. They pose a serious red
flag as a bidder on public contracts, because they often hide the interests of project or government
officials, concealing a conflict of interest and opportunities for money laundering. Also, by
definition, they have no experience. MPEI qualifies as a shell or fictitious company. It was
nonexistent at the time of the invitation to bid; to be precise, it was incorporated only 11 days before
the bidding. It was a newly formed corporation and, as such, had no track record to speak of.
Because all the individual respondents actively participated in the perpetration of

the fraud against petitioner, their personal assets may be subject to a writ of preliminary
attachment by piercing the corporate veil. Contrary to respondent the claim of Willy(President
of MPEI), his participation in the fraud is clearly established by his unequivocal agreement to the
execution of the automation contract with the COMELEC, and his signature that appears on the
voided contract. That his signature appears on the automation contract means that he
agreed and acceded to its terms. His participation in the fraud involves his signing and
executing the voided contract. With respect to the other individual respondents, they never
denied their participation in the questioned transactions of MPEI, merely raising the defense
of good faith and shifting the blame to the COMELEC. The individual respondents have, in effect,
admitted that they had knowledge of and participation in the fraudulent subcontracting of the
automation contract to the four corporations.
FACTS:
For the 2004 elections, the COMELEC attempted to implement the automated election system. For
this purpose, it invited bidders to apply for the procurement of supplies, equipment, and services.
Respondent Mega Pacific eSolutions, Inc. (MPEI), as lead company, purportedly formed a joint
venture - known as the Mega Pacific Consortium (MPC). Subsequently, MPEI, on behalf of MPC,
submitted its bid proposal to COMELEC. After due assessment, the Bids and Awards Committee
(BAC) recommended that the project be awarded to MPC. The COMELEC favorably acted on the
recommendation and awarded the automation project to MPC.
Despite the award to MPC, the COMELEC and MPEI executed on 2 June 2003 the Automated
Counting and Canvassing Project Contract (automation contract) for the aggregate amount of
Pl,248,949,088. MPEI agreed to supply and deliver 1,991 units of ACMs and such other equipment
and materials necessary for the computerized electoral system in the 2004 elections. Pursuant to
the automation contract, MPEI delivered 1,991 ACMs to the COMELEC. The latter, for its part, made
partial payments to MPEI in the aggregate amount of Pl .05 billion.
Page 136 of 434

In the 2004 case of Information Technology Foundation of the Philippines v. Commission on

Elections, the Court declared void the automation contract executed by respondent Mega
Pacific eSolutions, Inc. (MPEI) and the Commission on Elections (COMELEC) for the supply of
automated counting machines (ACMs) for the 2004 national elections.
The present case involves the attempt of petitioner Republic of the Philippines to cause the
attachment of the properties owned by respondent MPEI, as well as by its incorporators and
stockholders (individual respondents in this case), in order to secure petitioner's interest and to
ensure recovery of the payments it made to respondents for the invalidated automation contract.
The petitioner argued that individual respondents, being the incorporators of MPEI, likewise ought
to be impleaded and held accountable for MPEI's liabilities. The creation of MPC was, after all,
merely an ingenious scheme to feign eligibility to bid.
The RTC Makati denied the prayer for the issuance of a writ of preliminary attachment, ruling that
there was an absence of factual allegations as to how the fraud was actually committed. CA initially
reversed the trial court’s decision but upon motion for reconsideration, the CA remanded the case
to the RTC Makati for the reception of evidence of allegations of fraud and to determine whether
attachment should necessarily issue. The CA explained in its Amended Decision that respondents
could not be considered to have fostered a fraudulent intent to dishonor their obligation, since they
had delivered 1,991 units of ACMs.
ISSUE:
Whether the writ of preliminary attachment shall be issued against the properties of respondent
MPEI and other individual respondents.
RULING:
A writ of preliminary attachment should issue in favor of petitioner over the properties of
respondents MPEI, Willy Yu (Willy) and the remaining individual respondents, namely:
Bonnie S. Yu (Bonnie), Enrique T. Tansipek (Enrique), Rosita Y. Tansipek (Rosita), Pedro O. Tan
(Pedro), Johnson W. Fong (Johnson), Bernard I. Fong (Bernard), and Lauriano Barrios (Lauriano).
Petitioner relied upon Section 1(d), Rule 57 of the Rules of Court as basis for its application for a
writ of preliminary attachment where the said writ maybe issued “In an action against a party who
has been guilty of a fraud in contracting the debt or incurring the obligation upon which the
action is brought or in the performance thereof”.
With respect to respondent MPEI, fraud was sufficiently established by the factual findings
of this Court in the latter's 2004 Decision. Respondent MPEI committed fraud in the execution
of the automation contract in two ways.
First, respondent MPEI had perpetrated a scheme against petitioner to secure the automation
contract by using MPC as supposed bidder and eventually succeeding in signing the
automation contract as MPEI alone, an entity which was ineligible to bid in the first place.
These findings found their way into petitioner's application for a writ of preliminary
attachment, in which it claimed the following as bases for fraud: (1) respondents committed
fraud by securing the election automation contract and, in order to perpetrate the fraud, by
Page 137 of 434

misrepresenting the actual bidder as MPC and MPEI as merely acting on MPC's behalf; (2)
while knowing that MPEI was not qualified to bid for the automation contract, respondents
still signed and executed the contract; and (3) respondents acted in bad faith when they
claimed that they had bound themselves to the automation contract, because it was not
executed by MPC - or by MPEI on MPC's behalf - but by MPEI alone.
Second, fraud on the part of respondent MPEI was further shown by the fact that despite the
failure of its ACMs to pass the tests conducted by the DOST, respondent still acceded to being
awarded the automation contract. Again, these factual findings found their way into the
application of petitioner for a writ of preliminary attachment, as it claimed that respondents
could not dissociate themselves from their telltale acts of supplying defective machines and
nonexistent software. The latter offered no defense in relation to these claims.
With respect to individual respondents, a writ of preliminary attachment may issue over
their properties using the doctrine of piercing the corporate veil.
Veil-piercing in fraud cases requires that the legal fiction of separate juridical personality is used
for fraudulent or wrongful ends. The Court identified red flags of fraudulent schemes in public
procurement, all of which were established in the 2004 Decision, the totality of which strongly
indicate that MPEI was a sham corporation formed merely for the purpose of perpetrating a
fraudulent scheme. The red flags are as follows: (1) overly narrow specifications; (2) unjustified
recommendations and unjustified winning bidders; (3) failure to meet the terms of the contract;
and (4) shell or fictitious company.
Overly Narrow Specifications
In the 2004 Decision, the Court identified a red flag of rigged bidding in the form of overly
narrow specifications. It must be remembered the accuracy requirement of 99.9995 percent
was set up by COMELEC bidding rules. The Court recognized that this rating was "too high
and was a sure indication of fraud in the bidding, designed to eliminate fair competition."
Indeed, "the essence of public bidding is violated by the practice of requiring very high
standards or unrealistic specifications that cannot be met... only to water them down after
the bid has been awarded."
Unjustified Recommendations and Unjustified Winning Bidders
The red flags of questionable recommendation and unjustified awards are raised in this case.
As earlier discussed, the project was awarded to MPC, which proved to be a nonentity. It
was MPEI that actually participated in the bidding process, but it was not qualified to be a
bidder in the first place. Moreover, its ACMs failed the accuracy requirement set by
COMELEC. Yet, MPC - the nonentity - obtained a favorable recommendation from the BAC,
and the automation contract was awarded to the former.
Failure to Meet Contract Terms
The Court already found the ACMs to be below the standards set by the COMELEC as
proven by the fact that it failed the test conducted by DOST. The World Bank's Fraud and
Corruption Awareness Handbook: A Handbook for Civil Servants Involved in Public
Page 138 of 434

Procurement (Handbook) regard as a scheme for fraud the failure to meet contract terms.
Said handbook provides:
Firms may deliberately fail to comply with contract requirements. The contractor
will attempt to conceal such actions often by falsifying or forging supporting
documentation and bill for the work as if it were done in accordance with
specifications. In many cases, the contractors must bribe inspection or project
personnel to accept the substandard goods or works, or supervision agents are
coerced to approve substandard work. x x x
Shell or fictitious company
The Handbook regards a shell or fictitious company as a "serious red flag," a concept that it
elaborates upon:
Fictitious companies are by definition fraudulent and may also serve as fronts for
government officials. The typical scheme involves corrupt government officials
creating a fictitious company that will serve as a "vehicle" to secure contract
awards. Often, the fictitious-or ghostcompany will subcontract work to lower
cost and sometimes unqualified firms. The fictitious company may also utilize
designated losers as subcontractors to deliver the work, thus indicating collusion.
Shell companies have no significant assets, staff or operational capacity. They

pose a serious red flag as a bidder on public contracts, because they often hide the
interests of project or government officials, concealing a conflict of interest and
opportunities for money laundering. Also, by definition, they have no
experience.
MPEI qualifies as a shell or fictitious company. It was nonexistent at the time of the
invitation to bid; to be precise, it was incorporated only 11 days before the bidding. It was a
newly formed corporation and, as such, had no track record to speak of.
Further, MPEI misrepresented itself in the bidding process as "lead company" of the
supposed joint venture. The misrepresentation appears to have been an attempt to justify
its lack of experience. As a new company, it was not eligible to participate as a bidder. It
could do so only by pretending that it was acting as an agent of the putative consortium.
The timing of the incorporation of MPEI is particularly noteworthy. Its close nexus to the
date of the invitation to bid and the date of the bidding (11 days) provides a strong indicium
of the intent to use the corporate vehicle for fraudulent purposes. This proximity
unmistakably indicates that the automation contract served as motivation for the formation
of MPEI: a corporation had to be organized so it could participate in the bidding by claiming
to be an agent of a pretended joint venture.
The totality of the red flags found in this case leads the Court to the inevitable conclusion that MPEI
was nothing but a sham corporation formed for the purpose of defrauding petitioner. Its ultimate
objective was to secure the Pl ,248,949,088 automation contract.
Page 139 of 434

Because all the individual respondents actively participated in the perpetration of the fraud against
petitioner, their personal assets may be subject to a writ of preliminary attachment by piercing the
corporate veil.
Contrary to respondent the claim of Willy(President of MPEI), his participation in the fraud is
clearly established by his unequivocal agreement to the execution of the automation contract with
the COMELEC, and his signature that appears on the voided contract. That his signature appears
on the automation contract means that he agreed and acceded to its terms. His participation in
the fraud involves his signing and executing the voided contract.
With respect to the other individual respondents, they never denied their participation in the
questioned transactions of MPEI, merely raising the defense of good faith and shifting the blame to
the COMELEC. The individual respondents have, in effect, admitted that they had knowledge of
and participation in the fraudulent subcontracting of the automation contract to the four
corporations.
It bears stressing that the remaining individual respondents, together with respondent Willy,
incorporated MPEI. As incorporators, they are expected to be involved in the management of the
corporation and they are charged with the duty of care. As incorporators and businessmen about
to embark on a new business venture involving a sizeable capital (P300 million), the remaining
individual respondents should have known of Willy's scheme to perpetrate the fraud against
petitioner, especially because the objective was a billion peso automation contract. Still, they
proceeded with the illicit business venture.
____________________________________________________________________________________
ERSON ANG LEE DOING BUSINESS as "SUPER LAMINATION SERVICES," Petitioner, -

versus - SAMAHANG MANGGAGA WA NG SUPER LAMINATION (SMSLSNAFLU-KMU),
Respondent.
G.R. No. 193816, First Division, November 21, 2016, SERENO, CJ
The Court has time and again disregarded separate juridical personalities under the doctrine
of piercing the corporate veil where a separate legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, among other grounds.
In order to safeguard the right of the workers and Unions A, B, and C to engage in
collective bargaining, the corporate veil of Express Lamination and Express Coat must be pierced.
FACTS:
Super Lamination is a sole proprietorship under petitioner's name,5 while Express Lamination and
Express Coat are duly incorporated entities separately registered with the Securities and Exchange
Commission (SEC). Union A filed a Petition for Certification Election to represent all the rank-and-
file employees of Super Lamination. Express Lamination Workers' Union (Union B) also filed a
Petition for Certification Election to represent all the rank-and-file employees of Express
Lamination. Samahan ng mga Manggagawa ng Express Coat Enterprises, Inc. (Union C) filed a
Petition for Certification Election to represent the rank-and-file employees of Express Coat.
Page 140 of 434

Super Lamination, Express Lamination, and Express Coat, all represented by one counsel,
separately claimed in their Comments and Motions to Dismiss that the petitions must be dismissed
on the same ground - lack of employer-employee relationship between these establishments and
the bargaining units that Unions A, B, and C seek to represent as well as these unions' respective
members. Super Lamination, in its Motion, posited that a majority of the persons who were
enumerated in the list of members and officers of Union A were not its employees, but were
employed by either Express Lamination or Express Coat. Interestingly, both Express Lamination
and Express Coat, in turn, maintained the same argument - that a majority of those who had
assented to the Petition for Certification Election were not employees of either company, but of
one of the two other companies involved.
The Motions to Dismiss were granted by the Med-Arbiter resulting to the denial of all three
Petitions for Certification Election. The Office of the DOLE Secretary reversed the finding the
decision of the Med-Arbiter and granted the Petitions for Certification Election. DOLE found that
Super Lamination, Express Lamination, and Express Coat were sister companies that had a common
human resource department responsible for hiring and disciplining the employees of the three
companies. The same department was found to have also given them daily instructions on how to
go about their work and where to report for work. It also found that the three companies involved
constantly rotated their workers, and that the latter's identification cards had only one signatory.
To DOLE, these circumstances showed that the companies were engaged in a work-pooling scheme,
in light of which they might be considered as one and the same entity for the purpose of determining
the appropriate bargaining unit in a certification election. DOLE applied the concept of multi-
employer bargaining under Sections 5 and 6 of DOLE Department Order 40-03, Series of 2003.
Under that concept, the creation of a single bargaining unit for the rank-and-file employees
of all three companies was not implausible and was justified under the given circumstances. Thus,
it considered these rank-and-file employees as one bargaining unit and ordered the conduct of a
certification election as uniformly prayed for by the three unions. CA affirmed the Decision of the
DOLE Secretary.
ISSUE:
Whether the application of the doctrine of piercing the corporate veil is warranted.
RULING:
An application of the doctrine of piercing the corporate veil is warranted.
The Court has time and again disregarded separate juridical personalities under the doctrine of
piercing the corporate veil where a separate legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, among other grounds.
The following established facts show that Super Lamination, Express Lamination, and Express Coat
are under the control and management of the same party - petitioner Ang Lee. In effect, the
employees of these three companies have petitioner as their common employer, as shown by the
following facts:
1. Super Lamination, Express Lamination, and Express Coat were engaged in the same business of
providing lamination services to the public as admitted by petitioner in his petition.
Page 141 of 434

2. The three establishments operated and hired employees through a common human resource
department as found by DOLE in a clarificatory hearing.
3. The workers of all three companies were constantly rotated and periodically assigned to Super
Lamination or Express Lamination or Express Coat to perform the same or similar tasks. This
finding was further affirmed when petitioner admitted in his petition before us that the Super
Lamination had entered into a work-pooling agreement with the two other companies and
shared a number of their employees.
4. DOLE found and the CA affirmed that the common human resource department imposed
disciplinary sanctions and directed the daily performance of all the members of Unions A, B, an
C.
5. Super Lamination included in its payroll and SSS registration not just its own employees, but
also the supposed employees of Express Lamination and Express Coat.
6. Petitioner admitted that Super Lamination had issued and signed the identification cards of
employees who were actually working for Express Lamination and Express Coat.
7. Super Lamination, Express Lamination, and Express Coat were represented by the same counsel
who interposed the same arguments in their motions before the Med-Arbiters and DOLE.
Further, the Court discern from the synchronized movements of petitioner and the two other
companies an attempt to frustrate or defeat the workers' right to collectively bargain through
the shield of the corporations' separate juridical personalities. This finding is based on the motions
to dismiss filed by the three companies. While similarly alleging the absence of an employer-
employee relationship, they alternately referred to one another as the employer of the members of
the bargaining units sought to be represented respectively by the unions. This fact was affirmed by
the Med-Arbiters' Orders finding that indeed, the supposed employees of each establishment were
found to be alternately the employees of either of the two other companies as well.
Due to the finger-pointing by the three companies at one another, the petitions were dismissed. As
a result, the three unions were not able to proceed with the conduct of the certification election.
The Court held that if the petitioner and the two other companies were allowed to continue
obstructing the holding of the election in this manner, their employees and their respective unions
will never have a chance to choose their bargaining representative. It must be noted that that all
three establishments were unorganized. That is, no union therein was ever duly recognized or
certified as a bargaining representative.
Therefore, it is only proper that, in order to safeguard the right of the workers and Unions A, B, and
C to engage in collective bargaining, the corporate veil of Express Lamination and Express Coat
must be pierced. The separate existence of Super Lamination, Express Lamination, and Express
Coat must be disregarded.
_____________________________________________________________________________________
MANUELA AZUCENA MAYOR, Petitioner, - versus - EDWIN TIU and DAMIANA CHARITO
MARTY, Respondents.
G.R. No. 203770, SECOND DIVISION, November 23, 2016, MENDOZA, J.
Instead of holding the decedent's interest in the corporation separately as a stockholder, the
situation was reversed. Instead, the probate court ordered the lessees of the corporation to remit
rentals to the estate's administrator without taking note of the fact that the decedent was not the
Page 142 of 434

absolute owner of Primrose but only an owner of shares thereof. Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stocks of a corporation is not
of itself a sufficient reason for disregarding the fiction of separate corporate personalities.
Furthermore, the probate court in this case has not acquired jurisdiction over Primrose and
its properties. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. It is not available to confer on the court a jurisdiction it has not acquired, in the first
place, over a party not impleaded in a case. This is so because the doctrine of piercing the veil of
corporate fiction comes to play only during the trial of the case after the court has already acquired
jurisdiction over the corporation. Hence, before this doctrine can be even applied, based on the
evidence presented, it is imperative that the court must first have jurisdiction over the corporation. A
corporation not impleaded in a suit cannot be subject to the court's process of piercing the veil of its
corporate fiction. Resultantly, any proceedings taken against the corporation and its properties would
infringe on its right to due process.
FACTS:
On May 25, 2008, Rosario Guy-Juco Villasin Casilan (Rosario), the widow of the late Primo Villasin
(Primo), passed away and left a holographic Last Will and Testament, wherein she named her sister,
Remedios Tiu (Remedios), and her niece, Manuela Azucena Mayor (Manuela), as executors.
Immediately thereafter, Remedios and Manuela filed a petition for the probate of Rosario's
holographic will with prayer for the issuance of letters testamentary (probate proceedings).
The RTC (probate court) found the petition for probate of will filed by Remedios and Manuela as
sufficient in form and substance and set the case for hearing. Consequently, Respondent Damiana
Charito Marty (Marty), claiming to be the adopted daughter of Rosario, filed her Verified Urgent
Manifestation and Motion. She prayed for the probate court to: 1) order an immediate inventory of
all the properties subject of the proceedings; 2) direct the tenants of the Primrose Development
Corporation (Primrose), namely, Mercury Drug and Chowking, located at Primrose Hotel,
to deposit their rentals with the court.
Remedios and Manuela filed their Comment/Opposition. They argued that the probate court
had no jurisdiction over the properties mistakenly claimed by Marty as part of Rosario's
estate because these properties were actually owned by, and titled in the name of,
Primrose. Anent the prayer to direct the tenants to deposit the rentals to the probate court,
Remedios and Manuela countered that the probate court had no jurisdiction over
properties owned by third persons, particularly by Primrose, the latter having a separate
and distinct personality from the decedent's estate.
The probate court applied the doctrine of piercing the veil of corporate fiction and issued an order
directing DEPOSIT OR CONSIGNMENT of all the rental payments or such other passive incomes
from the properties and assets registered in the name of Primrose Development Corporation,
including all income derived from the Primrose Hotel and the lease contracts with Mercury Drug
and Chowking Restaurant. The probate court likewise ordered the inventory of the assets of
Primrose.
Page 143 of 434

ISSUE:
Whether the doctrine of piercing the veil is applicable under the circumstances.
RULING:
The doctrine of piercing the corporate veil has no relevant application in this case. Under
this doctrine, 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. 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. The purpose
behind piercing a corporation's identity is to remove the barrier between the corporation and 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.
Here, instead of holding the decedent's interest in the corporation separately as a

stockholder, the situation was reversed. Instead, the probate court ordered the lessees of
the corporation to remit rentals to the estate's administrator without taking note of the
fact that the decedent was not the absolute owner of Primrose but only an owner of shares
thereof. Mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stocks of a corporation is not of itself a sufficient reason for disregarding
the fiction of separate corporate personalities.
A perusal of the records of this case would show that that no compelling evidence was ever
presented to substantiate the position of Marty that Rosario and Primrose were one and the same,
justifying the inclusion of the latter's properties in the inventory of the decedent's properties. This
has remained a vacant assertion. At most, what Rosario owned were shares of stock in
Primrose. In turn, this boldly underscores the fact that Primrose is a separate and distinct
personality from the estate of the decedent. Inasmuch as the real properties included in the
inventory of the estate of Rosario are in the possession of, and are registered in the name of,
Primrose, Marty's claims are bereft of any logical reason and conclusion to pierce the veil of
corporate fiction.
Furthermore, the probate court in this case has not acquired jurisdiction over Primrose and its
properties. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. It is not available to confer on the court a jurisdiction it has not acquired, in the first
place, over a party not impleaded in a case. This is so because the doctrine of piercing the veil of
corporate fiction comes to play only during the trial of the case after the court has already acquired
jurisdiction over the corporation. Hence, before this doctrine can be even applied, based on the
evidence presented, it is imperative that the court must first have jurisdiction over the corporation.
A corporation not impleaded in a suit cannot be subject to the court's process of piercing the veil
of its corporate fiction. Resultantly, any proceedings taken against the corporation and its
properties would infringe on its right to due process.
In this case, the probate court applied the doctrine of piercing the corporate veil ratiocinating that
Rosario had no other properties that comprise her estate other than her shares in Primrose.
Page 144 of 434

Although the probate court's intention to protect the decedent's shares of stock in Primrose from
dissipation is laudable, it is still an error to order the corporation's tenants to remit their rental
payments to the estate of Rosario.
_____________________________________________________________________________________
REYNO C. DIMSON, Petitioner, - versus - GERRY T. CHUA, Respondent.

G.R. No. 192318, THIRD DIVISION, December 5, 2016, REYES, J.
The Court had repeatedly emphasized that the piercing of the veil of corporate fiction is
frowned upon and can only be done if it has been clearly established that the separate and distinct
personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a deception. To
disregard the separate juridical personality of a corporation, the wrongdoing must be established
clearly and convincingly. It cannot be presumed.
As a general rule, an officer may not be held liable for the corporation's labor obligations
unless he acted with evident malice and/or bad faith in dismissing an employee." Section 31 of the
Corporation Code is the governing law on personal liability of officers for the debts of the corporation.
To hold a director or officer personally liable for corporate obligations, two requisites must concur:
(1) it must be alleged in the complaint that the director or officer assented to patently unlawful acts
of the corporation or that the officer was guilty of gross negligence or bad faith; and (2) there must be
proof that the officer acted in bad faith.
FACTS:
This is a petition for review on certiorari assailing the Decision of NLRC granting Reyno C. Dimson's
(petitioner) motion for the issuance of an amended alias writ of execution to include Gerry T. Chua
(respondent), as well as the other corporate officers of South East Asia Sugar Mill Corporation
(SEASUMCO) and Mindanao. Azucarera Corporation (MAC), to be held solidarily liable with the
said corporations for the money claims of the employees of SEASUMCO.
The instant case filed by the petitioner, representing the other 14 complainants, against the
respondent, is an offshoot of the labor case entitled "Reyno Dimson, et al. v. SEASUMCO, MAC,
United Coconut Planters Bank (UPCB), and Cotabato Sugar Central Co., Inc. (COSUCECO)." The
said labor case for illegal dismissal with monetary claims was decided in favor of the complainants.
Hence, SEASUMCO and MAC, as well as the members of their board of directors, were ordered to
pay jointly and severally P3,827,470.51.
The LA's decision became final and executory but the judgment remained unsatisfied.
Consequently, the petitioner filed an Ex-parte Motion for the issuance of an amended alias writ of
execution asking for the inclusion of the board of directors and corporate officers of SEASUMCO
and MAC to hold them liable for satisfaction of the said decision. The LA granted the motion and
an amended alias writ of execution was issued which now included the respondent. The NLRC
likewise dismissed the appeal filed by the respondent.
CA rendered the assailed judgment, which nullified and set aside the rulings of the NLRC. The CA
emphasized the rule that a corporation is clothed with a personality distinct from that of its officers
Page 145 of 434

and the petitioner has not shown any ground that would necessitate the piercing of the corporate
veil and disregarding SEASUMCO's corporate fiction.
ISSUE:
Whether the respondent can be held solidarily liable with the corporation, of which he was an
officer and a stockholder.
RULING:
The Court sustains the CA's ruling that the respondent, as one of SEASUMCO's corporate officer
and stockholder, should not be held solidarily liable with the corporation for its monetary liabilities
with the petitioner.
Here, the LA pierced the veil of corporate fiction of SEASUMCO and held the respondent, in his
personal capacity, jointly and severally liable with the corporation for the enforcement of the
monetary awards to the petitioner.
As a general rule, an officer may not be held liable for the corporation's labor obligations unless he
acted with evident malice and/or bad faith in dismissing an employee." Section 31 of the
Corporation Code is the governing law on personal liability of officers for the debts of the
corporation. To hold a director or officer personally liable for corporate obligations, two requisites
must concur: (1) it must be alleged in the complaint that the director or officer assented to patently
unlawful acts of the corporation or that the officer was guilty of gross negligence or bad faith; and
(2) there must be proof that the officer acted in bad faith.
Based on the records, the petitioner and the private respondents in the NLRC case failed to
specifically allege either in their complaint or position paper that the respondent, as an officer of
SEASUMCO, willfully and knowingly assented to the corporations' patently unlawful act of closing
the corporation, or that the respondent had been guilty of gross negligence or bad faith in directing
the affairs of the corporation. In fact, there was no evidence at all to show the respondent's
participation in the petitioner's illegal dismissal.
The respondent is merely one of the officers of SEASUMCO and to single him out and require him
to personally answer for the liabilities of SEASUMCO are without basis. In the absence of a finding
that he acted with malice or bad faith, it was error for the labor tribunals to hold him responsible.
The Court had repeatedly emphasized that the piercing of the veil of corporate fiction is frowned
upon and can only be done if it has been clearly established that the separate and distinct
personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a deception.
To disregard the separate juridical personality of a corporation, the wrongdoing must be established
_____________________________________________________________________________________
Page 146 of 434

SITUS DEVELOPMENT CORPORATION ET.AL V. ASIATRUST BANK

G. R. NO. 180036, JULY 25 2012
The Chuas are the interlocking directors and stockholders of the petitioner corporations.
Petitioners obtained several loans from the respondent banks using the Chua’s properties as
collateral. When petitioners defaulted in the payment of their obligations, the banks initiated
foreclosure proceedings. Petitioners responded by filing a petition for rehabilitation which included
the mortgaged properties in the petitioners’ inventory of assets. A stay order was then issued.
During the pendency of the petition, respective certificates of sale were issued to the banks and
these were annotated on Chua’s titles. The certificates of sale were likewise registered.
Issue: Did the issuance of certificates of sale, its annotation on Chua’s title, and its registration
violate the Stay Order?
Held: No. It is a fundamental principle in corporate law that a corporation is a juridical entity with
a legal personality separate and distinct from the people comprising it. Hence, the rule is that assets
of stockholders may not be considered as assets of the corporation, and vice-versa. The mere fact
that one is a majority stockholder of a corporation does not make one’s property that of the
corporation, since the stockholder and the corporation are separate entities. In this case, the parcels
of land mortgaged to respondent banks are owned not by petitioners, but by spouses Chua.
Applying the doctrine of separate juridical personality, these properties cannot be considered as
part of the corporate assets. Even if spouses Chua are the majority stockholders in petitioner
corporations, they own these properties in their individual capacities. Thus, the parcels of land in
question cannot be included in the inventory of assets of petitioner corporations. The fact that these
properties were mortgaged to secure corporate debts is of no moment because the mortgage did
not make the properties corporate properties.
Under the Rules, one of the effects of a Stay Order is the stay of the “enforcement of all claims,
whether for money or otherwise and whether such enforcement is by court action or otherwise,
against the debtor, its guarantors and sureties not solidarily liable with the debtor.” Spouses Chua
do not fall under this category. While spouses Chua executed Continuing Guaranty and
Comprehensive Surety undertakings in favor of Allied Bank, the bank did not proceed against them
as individual guarantors or sureties. Rather, by initiating extrajudicial foreclosure proceedings, the
bank was directly proceeding against the property mortgaged to them by the spouses as security.
Moreover, the intent of the Rules is to exclude from the scope of the Stay Order the foreclosure of
properties owned by accommodation mortgagors (Section 7)
Furthermore, even assuming that the properties in question fall under the ambit of the Stay Order,
the issuance thereof should not affect the execution of the Certificate of Sale because the foreclosure
proceedings commenced and the auction sale was conducted before the issuance of the Stay Order
and the appointment of the Rehabilitation Receiver on 17 June 2002.
_____________________________________________________________________________________
Page 147 of 434

STRONGHOLD INSURANCE COMPANY, INC. vs. TOMAS CUENCA, et al.

G.R. No. 173297, March 6, 2013
J. Bersamin
The personality of a corporation is distinct and separate from the personalities of its
stockholders. Hence, its stockholders are not themselves the real parties in interest to claim and
recover compensation for the damages arising from the wrongful attachment of its assets. Only the
corporation is the real party in interest for that purpose.
Facts:
On January 19, 1998, Marañon filed a complaint in the RTC against the Cuencas for the collection
of a sum of money and damages with application for the issuance of a writ of preliminary
attachment conditioned upon the posting of a bond of P1,000,000.00 executed in favor of the
Cuencas. Marañon posted a bond in the amount of P1,000,000.00 issued by Stronghold Insurance.
Enforcing the writ of preliminary attachment, the sheriff levied upon the equipment, supplies,
materials and various other personal property belonging to Arc Cuisine, Inc. that were found in
the leased corporate office-cum-commissary or kitchen of the corporation.
The Cuencas and Tayactac filed a in the RTC a Motion to Dismiss and to Quash Writ of Preliminary
Attachment. RTC denied the motions. Thus, on October 14, 1998, the Cuencas and Tayactac went
to the CA on certiorari and prohibition to challenge the orders of the RTC on the basis of being
issued with grave abuse of discretion amounting to lack or excess of jurisdiction.CA rendered a
decision in favor of the Cuencas and Tayacytac.
The CA remanded the case to the RTC for hearing and resolution of the Cuencas and Tayactac’s
claim for the damages sustained from the enforcement of the writ of preliminary attachment. After
trial, the RTC rendered its judgment holding Marañon and Stronghold Insurance jointly and
solidarily liable for damages to the Cuencas and Tayactac. The CA, finding no reversible error,
promulgated its decision affirming the judgment of the RTC. Stronghold Insurance moved for
reconsideration, but the CA denied its motion for reconsideration on June 22, 2006.
Issue:
Whether the Cuencas and Tayactac could themselves recover damages arising from the wrongful
attachment of the assets of Arc Cuisine, Inc. by claiming against the bond issued by Stronghold
Insurance.
Ruling:
There is no dispute that the properties subject to the levy on attachment belonged to Arc Cuisine,
Inc. alone, not to the Cuencas and Tayactac in their own right. They were only stockholders of Arc
Cuisine, Inc., which had a personality distinct and separate from that of any or all of them. The
damages occasioned to the properties by the levy on attachment, wrongful or not, prejudiced Arc
Cuisine, Inc., not them. As such, only Arc Cuisine, Inc. had the right under the substantive law to
Page 148 of 434

claim and recover such damages. This right could not also be asserted by the Cuencas and Tayactac
unless they did so in the name of the corporation itself. But that did not happen herein, because
Arc Cuisine, Inc. was not even joined in the action either as an original party or as an intervenor.
The Cuencas and Tayactac were clearly not vested with any direct interest in the personal properties
coming under the levy on attachment by virtue alone of their being stockholders in Arc Cuisine,
Inc. Their stockholdings represented only their proportionate or aliquot interest in the properties
of the corporation, but did not vest in them any legal right or title to any specific properties of the
corporation. Without doubt, Arc Cuisine, Inc. remained the owner as a distinct legal person.
Given the separate and distinct legal personality of Arc Cuisine, Inc., the Cuencas and Tayactac
lacked the legal personality to claim the damages sustained from the levy of the former’s properties.
That Marafion knew that Arc Cuisine, Inc. owned the properties levied on attachment but he still
excluded Arc Cuisine, Inc. from his complaint was of no consequence now. The Cuencas and
Tayactac still had no right of action even if the affected properties were then under their custody
at the time of the attachment, considering that their custody was only incidental to the operation
of the corporation.
It is true, too, that the Cuencas and Tayactac could bring in behalf of Arc Cuisine, Inc. a proper
action to recover damages resulting from the attachment. Such action would be one directly
brought in the name of the corporation. Yet, that was not true here, for, instead, the Cuencas and
Tayactac presented the claim in their own names.
_____________________________________________________________________________________
ROLANDO DS. TORRES vs. RURAL BANK OF SAN JUAN, INC. et al.
G.R. No. 184520, March 13, 2013
J. Reyes
A corporation has its own legal personality separate and distinct from those of its
stockholders, directors or officers. Hence, absent any evidence that they have exceeded their
authority, corporate officers are not personally liable for their official acts. Corporate directors and
officers may be held solidarily liable with the corporation for the termination of employment only if
done with malice or in bad faith.
Further, the law mandates that before validity can be accorded to a dismissal premised on loss
of trust and confidence, two requisites must concur, viz: (1) the employee concerned must be holding
a position of trust; and (2) the loss of trust must be based on willful breach of trust founded on clearly
established facts.
Facts:
The petitioner was initially hired by RBSJI as Personnel and Marketing Manager in 1991 wherein
after a six month probationary period, he was given a permanent status. In June 1996, the petitioner
was offered the position of Vice-President for RBSJI’s newly created department to which he
accepted. The petitioner was temporarily assigned as the manager of RBSJI’s N. Domingo branch in
view of the resignation of Jacinto Figueroa (Jacinto). On September 27, 1996, Jacinto requested the
Page 149 of 434

petitioner to sign a standard employment clearance pertaining to his accountabilities with RBSJI.
At first he declined but to pacify Jacinto, the petitioner bargained to issue a clearance but only for
Jacinto’s paid cash advances and salary loan.
About seven months later, respondent Jesus issued a memorandum to the petitioner requiring him
to explain why no administrative action should be imposed on him for his unauthorized issuance
of a clearance to Jacinto whose accountabilities were yet to be audited. Jacinto was later found to
have unliquidated cash advances and was responsible for a questionable transaction involving P11
million for which RBSJI is being sued. The memorandum stressed that the clearance petitioner
issued effectively barred RBSJI from running after Jacinto.
The petitioner submitted his explanation clarifying that the clearance was limited only to Jacinto’s
paid cash advances and salary loan based on the receipts presented by Lily Aguilar (Lily), the cashier
of N. Domingo branch. He emphasized that he had no foreknowledge nor was he forewarned of
Jacinto’s unliquidated cash advances and questionable transactions and that the clearance did not
extend to those matters.
RBSJI’s Board of Directors adopted a Resolution terminating the petitioner from. Feeling aggrieved,
the petitioner filed the herein complaint for illegal dismissal. The petitioner averred that the
supposed loss of trust and confidence on him was a sham as it is in fact the calculated result of the
respondents’ dubious plot to conveniently oust him from RBSJI. The LA and the NLRC ruled in
favor of petitioner. However the CA reversed it. Hence, this petition.
Issues:
(1) Whether or not the petitioner was dismissed for just cause
(2) Whether or not the individual respondents as corporate officers should be held solidarily liable
Ruling:
The respondents failed to prove that the petitioner was dismissed for a just cause. The law mandates
that before validity can be accorded to a dismissal premised on loss of trust and confidence, two
requisites must concur, viz: (1) the employee concerned must be holding a position of trust; and (2)
the loss of trust must be based on willful breach of trust founded on clearly established facts. The
presence of the first requisite is certain since the petitioner was part of the upper echelons of RBSJI’s
management from whom greater fidelity to trust is expected. At the time when he committed the
act which allegedly led to the loss of RBSJI’s trust and confidence in him, he was the Acting Manager
of N. Domingo branch. Anent the second requisite, the Court finds that the respondents failed to
meet their burden of proving that the petitioner’s dismissal was for a just cause. As correctly argued
by the petitioner, the onus of submitting a copy of the clearance allegedly exonerating Jacinto from
all his accountabilities fell on the respondents. It was the single and absolute evidence of the
petitioner’s act that purportedly kindled the respondents’ loss of trust. Without it, the respondents’
allegation of loss of trust and confidence has no leg to stand on and must thus be rejected.
Moreover, one can reasonably expect that a copy of the clearance, an essential personnel document,
is with the respondents. Their failure to present it and the lack of explanation for such failure or
the document’s unavailability props up the presumption that its contents are unfavorable to the
Page 150 of 434

respondents’ assertions. Further, RBSJI also failed to substantiate its claim that the petitioner’s act
estopped them from pursuing Jacinto for his standing obligations. There is no proof that RBSJI
attempted or at least considered to demand from Jacinto the payment of his unpaid cash advances.
Neither was RBSJI able to show that it filed a civil or criminal suit against Jacinto to make him
responsible for the alleged fraud. There is thus no factual basis for RBSJI’s allegation that it incurred
damages or was financially prejudiced by the clearance issued by the petitioner. More importantly,
the complained act of the petitioner did not evince intentional breach of the respondents’ trust and
confidence. Neither was the petitioner grossly negligent or unjustified in pursuing the course of
action he took.
However as to the solidary liability of individual respondents as corporate officers, it must be

recalled. Corporate directors and officers may be held solidarily liable with the corporation for the
termination of employment only if done with malice or in bad faith. As discussed above, the acts
imputed to the respondents do not support a finding of bad faith. In addition, the lack of a valid
cause for the dismissal of an employee does not ipso facto mean that the corporate officers acted
with malice or bad faith. There must be an independent proof of malice or bad faith, which is absent
in the case at bar.
_____________________________________________________________________________________
POLYMER RUBBER CORPORATION and JOSEPH ANG vs. BAYOLO SALAMUDING

G.R. No. 185160. July 24, 2013
J. Reyes
To hold a director or officer personally liable for corporate obligations, two requisites must
concur: (1) it must be alleged in the complaint that the director or officer assented to patently
unlawful acts of the corporation or that the officer was guilty of gross negligence or bad faith; and (2)
there must be proof that the officer acted in bad faith.
Facts:
Bayolo Salamuding (Salamuding), Mariano Gulanan and Rodolfo Raif (referred to as the
complainants) were employees of petitioner Polymer Rubber Corporation (Polymer), who were
dismissed after allegedly committing certain irregularities against Polymer. The three employees
filed a complaint against Polymer and Ang (petitioners) for unfair labor practice and illegal
dismissal with prayer for reinstatement and payment of back wages, attorney’s fees, moral and
exemplary damages.
The Labor Arbiter (LA) rendered a decision, dismissing the complaint for unfair labor practice but
directing the respondent to reinstate complainants and pay them labor standard benefits. As a
consequence of such decision, a writ of execution was issued. The petitioners appealed to the NLRC
but the latter affirmed the LA's decision with modification. The case was subsequently elevated to
the Supreme Court (SC) on a petition for certiorari which affirmed the NLRC.
On September 30, 1993, Polymer ceased its operations. However, upon a motion the LA issued a
writ of execution based on the SC resolution. Since the writ of execution was returned unsatisfied,
another alias writ of execution was issued. Since the alias writ was also not implemented, the LA
Page 151 of 434

issued a 5th Alias Writ of Execution and in the implementation of this alias writ of execution the
shares of stocks of Ang at USA Resources Corporation were levied.
The petitioners moved to quash the 5th alias writ of execution, and to lift the notice of garnishment
alleging that Ang should not be held jointly and severally liable with Polymer since it was only the
latter which was held liable in the decision of the LA, NLRC and the Supreme Court. The LA granted
the motion but the NLRC and CA reversed.
Issue:
Whether or not Ang as an officer of the corporation (Polymers) can be held personally liable to pay
the liability of the corporation
Ruling:
The petition is meritorious.
A corporation, as a juridical entity, may act only through its directors, officers and employees.
Obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are not their
personal liability but the direct responsibility of the corporation they represent. As a rule, they are
only solidarily liable with the corporation for the illegal termination of services of employees if they
acted with malice or bad faith.
To hold a director or officer personally liable for corporate obligations, two requisites must concur:
(1) it must be alleged in the complaint that the director or officer assented to patently unlawful acts
of the corporation or that the officer was guilty of gross negligence or bad faith; and (2) there must
be proof that the officer acted in bad faith.
In the instant case, the CA imputed bad faith on the part of the petitioners when Polymer ceased
its operations the day after the promulgation of the SC resolution in 1993 which was allegedly
meant to evade liability. The CA found it necessary to pierce the corporate fiction and pointed at
Ang as the responsible person to pay for Salamuding’s money claims. Except for this assertion, there
is nothing in the records that show that Ang was responsible for the acts complained of. At any
rate, the Court finds that it will require a great stretch of imagination to conclude that a corporation
would cease its operations if only to evade the payment of the adjudged monetary awards in favor
of three (3) of its employees.
Further, the dispositive portion of the LA Decision dated November 21, 1990 which Salamuding
attempts to enforce does not mention that Ang is jointly and severally liable with Polymer. Ang is
merely one of the incorporators of Polymer and to single him out and require him to personally
answer for the liabilities of Polymer is without basis. In the absence of a finding that he acted with
malice or bad faith, it was error for the CA to hold him responsible.
To hold Ang personally liable at this stage is quite unfair. The judgment of the LA, as affirmed by
the NLRC and later by the SC had already long become final and executory. It has been held that a
final and executory judgment can no longer be altered. The judgment may no longer be modified
in any respect, even if the modification is meant to correct what is perceived to be an erroneous
conclusion of fact or law, and regardless of whether the modification is attempted to be made by
Page 152 of 434

the court rendering it or by the highest Court of the land. Since the alias writ of execution did not
conform, is different from and thus went beyond or varied the tenor of the judgment which gave it
life, it is a nullity. To maintain otherwise would be to ignore the constitutional provision against
depriving a person of his property without due process of law.
_____________________________________________________________________________________
Nuccio Saverio and NS International Inc. vs. Alfonso Puyat

G.R. No. 186433; November 27, 2013
J. Brion
Mere ownership by a stockholder of all or nearly all of the capital stocks of a corporation does
not, by itself, justify the disregard of the separate corporate personality. In order for the ground of
corporate ownership to stand, the following circumstances should also be established: (1) that the
stockholders had control or complete domination of the corporation’s finances and that the latter had
no separate existence with respect to the act complained of; (2) that they used such control to commit
a wrong or fraud; and (3) the control was the proximate cause of the loss or injury. Thus, the mere
fact that the stockholder signed the Memorandum of Agreement in behalf of the corporation is not
sufficient to prove that he exercised control over the corporation’s finances. Neither is the absence of
a board resolution authorizing the stockholder to contract a loan nor the corporation’s failure to
object thereto warrant the application of piercing the veil of corporate fiction. While these may be
indicators that may point the proof required to justify disregarding the veil of corporate fiction, by
themselves, they do not rise to the level of proof required to support the desired conclusion.
Facts:
Alfonso Puyat granted a loan to NS International (NSI) pursuant to the Memorandum of Agreement
and Promissory note (MOA) between him and NSI, represented by Nuccio. It was agreed that Puyat
would extend a credit line with a limit of P 500,000 to NSI, to be paid within thirty (30) days from
the time of the signing of the document. Subsequently, NSI received a total amount of P 300,000
certain machineries intended for their business. However, the proposed business failed to
materialized.
On several occasions, Nuccio made personal payments amounting to P 600,000. It appeared,

however, that as of December 1999, the petitioners allegedly had an outstanding balance of P 460,
505.86. With the petitioners defaulting in the payment of the loan, respondent Puyat filed a
collection suit with the RTC alleging that the petitioners still owe him the value of the machineries.
The petitioners refuted the respondent’s allegation and insisted that they have already paid the
load, evidenced by the respondent’s receipt for the amount of P 600,000. They submitted that their
remaining obligation to pay the machineries’ value, if any, had long been extinguished by their
business’ failure to materialize.
Subsequently, RTC rendered a decision ruling that the payment of P 600,000 did not completely
extinguish the petitioners’ obligation. Furthermore, said court declared that the petitioners are one
and the same and applied the doctrine of piercing the veil of corporate fiction.
Page 153 of 434

The petitioners appealed the RTC ruling to the CA and argued that by virtue of NSI’s separate and
distinct personality, Nuccio cannot be made solidarily liable with NSI. The appellate court rendered
a decision declaring the patitioners jointly and severally liable for the amount that the respondent
sought. Hence, the petitition. The petitioners submit that in the absence of any showing that
corporate fiction was used to defeat public convenience, justify a wrong, protect fraud or defend a
crime, or where the corporation is a mere alter ego or business conduit of a person, Nuccio’s mere
ownership of forty percent (40%) does not justify the piercing of the separate and distinct
personality of NSI.
Issue:
Whether the application of the doctrine of piercing the veil of corporate fiction is proper.
Ruling:
Petition Granted.
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stocks of the corporation is not, by itself, a sufficient ground for disregarding the separate corporate
personality. Other than mere ownership of capital stocks, circumstances showing that the
corporation is being used to commit fraud or proof of existence of absolute control over the
corporation have to be proven. In short, before the corporate fiction can be disregarded, alter-ego
elements must first be sufficiently established.
In Hi-Cement Corporation v. Insular Bank of Asia and America (later PCI-Bank, now Equitable PCI-
Bank), we refused to apply the piercing the veil doctrine on the ground that the corporation was a
mere alter ego because mere ownership by a stockholder of all or nearly all of the capital stocks of
a corporation does not, by itself, justify the disregard of the separate corporate personality. In this
cited case, we ruled that in order for the ground of corporate ownership to stand, the following
circumstances should also be established: (1) that the stockholders had control or complete
domination of the corporation’s finances and that the latter had no separate existence with respect
to the act complained of; (2) that they used such control to commit a wrong or fraud; and (3) the
control was the proximate cause of the loss or injury.
Applying these principles to the present case, we opine and so hold that the attendant
circumstances do not warrant the piercing of the veil of NSI’s corporate fiction.
Aside from the undisputed fact of Nuccio’s 40% shareholdings with NSI, the RTC applied the
piercing the veil doctrine based on the following reasons. First, there was no board resolution
authorizing Nuccio to enter into a contract of loan. Second, the petitioners were represented by
one and the same counsel. Third, NSI did not object to Nuccio’s act of contracting the loan. Fourth,
the control over NSI was used to commit a wrong or fraud. Fifth, Nuccio’s admission that "NS" in
the corporate name "NSI" means "Nuccio Saverio."
We are not convinced of the sufficiency of these cited reasons. In our view, the RTC failed to provide
a clear and convincing explanation why the doctrine was applied. It merely declared that its
application of the doctrine of piercing the veil of corporate fiction has a basis, specifying for this
Page 154 of 434

purpose the act of Nuccio’s entering into a contract of loan with the respondent and the reasons
stated above.
The records of the case, however, do not show that Nuccio had control or domination over NSI’s
finances. The mere fact that it was Nuccio who, in behalf of the corporation, signed the MOA is not
sufficient to prove that he exercised control over the corporation’s finances. Neither the absence of
a board resolution authorizing him to contract the loan nor NSI’s failure to object thereto supports
this conclusion. These may be indicators that, among others, may point the proof required to justify
the piercing the veil of corporate fiction, but by themselves, they do not rise to the level of proof
required to support the desired conclusion. It should be noted in this regard that while Nuccio was
the signatory of the loan and the money was delivered to him, the proceeds of the loan were
unquestionably intended for NSI’s proposed business plan. That the business did not materialize is
not also sufficient proof to justify a piercing, in the absence of proof that the business plan was a
fraudulent scheme geared to secure funds from the respondent for the petitioners’ undisclosed
goals.
_____________________________________________________________________________________
PHILIPPINE NATIONAL BANK vs. MERELO B. AZNAR et al.

G.R. No. 171805, May 30, 2014, J. Leonardo-De Castro
Stockholders cannot claim ownership over corporate properties by virtue of the Minutes of a
Stockholder’s meeting which merely evidence a loan agreement between the stockholders and the
corporation. As such, there interest over the properties are merely inchoate.
Facts:
In 1958, RISCO ceased operation due to business reverses. Due to Merelo B. Aznar, Matias
B. Aznar III, Jose L. Aznar, Rosario T. Barcenilla, Jose B. Enad and Ricardo Gabuya’s (Aznar et
al)desire to rehabilitate RISCO, they contributed a total amount of P212,720.00 which was used in
the purchase of the three (3) parcels of land located in various areas in the Cebu Province.
After the purchase of the above lots, titles were issued in the name of RISCO. The amount
contributed by plaintiffs constituted as liens and encumbrances on the aforementioned properties
as annotated in the titles of said lots. Such annotation was made pursuant to the Minutes of the
Special Meeting of the Board of Directors of RISCO stating that;
“And that the respective contributions above-mentioned shall constitute as their lien
or interest on the property described above, if and when said property are titled in the
name of RURAL INSURANCE & SURETY CO., INC., subject to registration as their
adverse claim in pursuance of the Provisions of Land Registration Act, (Act No. 496,
as amended) until such time their respective contributions are refunded to them
completely.”
Thereafter, various subsequent annotations were made on the same titles in favor of PNB.
As a result, a Certificate of Sale was issued in favor of PNB, being the lone and highest bidder of the
three (3) parcels of land and was also issued Transfer Certificate of Title over the said parcels of
land.
Page 155 of 434

This prompted Aznar et. al to file a complaint seeking the quieting of their supposed title
to the subject properties. They alleged that the subsequent annotations on the titles are subject to
the prior annotation of their liens and encumbrances. On the other hand, asserts that plaintiffs, as
mere stockholders of RISCO do not have any legal or equitable right over the properties of the
corporation. PNB posited that even if plaintiff’s monetary lien had not expired, their only recourse
was to require the reimbursement or refund of their contribution.
Aznar, et al., filed a Manifestation and Motion for Judgment on the Pleadings. Thus, the
trial court rendered the November 18, 1998 Decision, which ruled against PNB. It further declared
that the Minutes of the Special Meeting of the Board of Directors of RISCO annotated on the titles
to subject properties as an express trust whereby RISCO was a mere trustee and the above-
mentioned stockholders as beneficiaries being the true and lawful owners of Lots 3597, 7380 and
1323.
On appeal, the CA set aside the ruling of the trial court and ruled that there was no trust
created. The lien is merely an evidence of the loan. Thus, it directed PNB to pay Aznar, et al., the
amount of their contributions plus legal interest from the time of acquisition of the property until
finality of judgment.
Issue:
Whether or not Aznar et al as stockholders has the legal or equitable rights over the subject
properties
Ruling:
No. Aznar et al do not have any legal or equitable rights over the properties.
Indeed, we find that Aznar, et al., have no right to ask for the quieting of title of the
properties at issue because they have no legal and/or equitable rights over the properties that are
derived from the previous registered owner which is RISCO.
As a consequence thereof, a corporation has a personality separate and distinct from those
of its stockholders and other corporations to which it may be connected. Thus, we had previously
ruled in Magsaysay-Labrador v. Court of Appeals that the interest of the stockholders over the
properties of the corporation is merely inchoate and therefore does not entitle them to intervene
in litigation involving corporate property.
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote,

conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in
sheer expectancy of a right in the management of the corporation and to share in the profits thereof
and in the properties and assets thereof on dissolution, after payment of the corporate debts and
obligations.
In the case at bar, there is no allegation, much less any proof, that the corporate existence
of RISCO has ceased and the corporate property has been liquidated and distributed to the
stockholders. The records only indicate that, as per Securities and Exchange Commission (SEC)
Page 156 of 434

Certification dated June 18, 1997, the SEC merely suspended RISCO’s Certificate of Registration
beginning on September 5, 1988 due to its non-submission of SEC required reports and its failure
to operate for a continuous period of at least five years.
Verily, Aznar, et al., who are stockholders of RISCO, cannot claim ownership over the
properties at issue in this case on the strength of the Minutes which, at most, is merely evidence of
a loan agreement between them and the company. There is no indication or even a suggestion that
the ownership of said properties were transferred to them which would require no less that the said
properties be registered under their names. For this reason, the complaint should be dismissed
since Aznar, et al., have no cause to seek a quieting of title over the subject properties.
At most, what Aznar, et al., had was merely a right to be repaid the amount loaned to RISCO.
Unfortunately, the right to seek repayment or reimbursement of their contributions used to
purchase the subject properties is already barred by prescription.
_____________________________________________________________________________________
COMMISSIONER OF CUSTOMS vs. OILINK INTERNATIONAL CORPORATION

G.R. No. 161759, July 2, 2014, J. Bersamin
URC and Oilink had the same Board of Directors and Oilink was 100% owned by URC. The
Court held that the doctrine of piercing the corporate veil has no application here because the
Commissioner of Customs did not establish that Oilink had been set up to avoid the payment of taxes
or duties, or for purposes that would defeat public convenience, justify wrong, protect fraud, defend
crime, confuse legitimate legal or judicial issues, perpetrate deception or otherwise circumvent the
law.
Facts:
In the course of its business undertakings, particularly in the period from 1991 to 1994,
Union Refinery Corporation (URC) imported oil products into the country. URC and Oilink had
interlocking directors when Oilink started its business. They had the same Board of Directors and
Oilink was 100% owned by URC.
The District Collector of the Port of Manila, formally demanded that URC pay the taxes and
duties on its oil imports that had arrived between January 6, 1991 and November 7, 1995 at the Port
of Lucanin in Mariveles, Bataan.
On July 2, 1999, Commissioner Tan made a final demand for the total liability of
P138,060,200.49 upon URC and Oilink. Co requested from Commissioner Tan a complete finding
of the facts and law in support ofthe assessment made in the latter’s July 2, 1999 final
demand. Oilink formally protested the assessment on the ground that it was not the party liable for
the assessed deficiency taxes.
On July 12, 1999, after receiving the letter from Co, Commissioner Tan communicated in
writing the detailed computation of the tax liability, stressing that the Bureau of Customs (BoC)
would not issue any clearance to Oilink unless the amount of P138,060,200.49 demanded as Oilink’s
tax liability be first paid, and a performance bond be posted by URC/Oilink to secure the payment
Page 157 of 434

of any adjustments that would result from the BIR’s review of the liabilities for VAT, excise tax,
special duties, penalties, etc.
Thus, on July 30, 1999, Oilink appealed to the CTA, seeking the nullification of the
assessment for having been issued without authority and with grave abuse of discretion tantamount
to lack of jurisdiction because the Government was thereby shifting the imposition from URC to
Oilink.
The CTA rendered its decision declaring as null and void the assessment of the Commissioner of
Customs. The CA ruled in favor of Oilink.
Issue:
Whether or not the Commissioner of Customs could pierce the veil of corporate fiction
Ruling:
No. A corporation, upon coming into existence, is invested by law with a personality
separate and distinct from those of the persons composing it as well as from any other legal entity
to which it may be related. For this reason, a stockholder is generally not made to answer for the
acts or liabilities of the corporation, and viceversa. The separate and distinct personality of the
corporation is, however, a mere fiction established by law for convenience and to promote the ends
of justice. It may not be used or invoked for ends that subvert the policy and purpose behind its
establishment, or intended by law to which the corporation owes its being. This is true particularly
when the fiction is used to defeat public convenience, to justify wrong, to protect fraud, to defend
crime, to confuse legitimate legal or judicial issues, to perpetrate deception or otherwise to
circumvent the law. This is likewise true where the corporate entity is being used as an alter ego,
adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity.
In such instances, the veil of corporate entity will be pierced or disregarded with reference to the
particular transaction involved.
In Philippine National Bank v. Ritratto Group, Inc., the Court has outlined the following
circumstances thatare useful in the determination of whether a subsidiary is a mere instrumentality
of the parent-corporation, viz:
1. Control, not mere majority or complete control, but complete domination, not only of
finances butof 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
perpetrate the violation of a statutory or other positive legal duty, or dishonest and, unjust act
incontravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
In applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with
reality, not form, and with how the corporation operated and the individual defendant's
relationship to the operation. Consequently, the absence of any one of the foregoing elements
disauthorizes the piercing of the corporate veil.
Page 158 of 434

Indeed, the doctrine of piercing the corporate veil has no application here because the
Commissioner of Customs did not establish that Oilink had been set up to avoid the payment of
taxes or duties, or for purposes that would defeat public convenience, justify wrong, protect fraud,
defend crime, confuse legitimate legal or judicial issues, perpetrate deception or otherwise
circumvent the law. It is also noteworthy that from the outset the Commissioner of Customs sought
to collect the deficiency taxes and duties from URC, and that it was only on July 2, 1999 when the
Commissioner of Customs sent the demand letter to both URC and Oilink. That was revealing,
because the failure of the Commissioner of Customs to pursue the remedies against Oilink from
the outset manifested that its belated pursuit of Oilink was only an afterthought.
_____________________________________________________________________________________
GIRLY G. ICO vs. SYSTEMS TECHNOLOGY INSTITUTE, INC., MONICO V.

JACOB and PETER K. FERNANDEZ
G.R. No. 185100, July 9, 2014, J. Del Castillo
A corporation, as a juridical entity, may act only through its directors, officers and employees.
Obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are not their
personal liability but the direct responsibility of the corporation they represent. As a rule, they are
only solidarily liable with the corporation for the illegal termination of services of employees if they
acted with malice or bad faith.
concur: (1) it must be alleged in the complaint that the director or officer assented to patently unlawful
acts of the corporation or that the officer was guilty of gross negligence or bad faith; and (2) there
must be proof that the officer acted in bad faith.
Facts:
Systems Technology Institute, Inc. (STI) is an educational institution duly incorporated,

organized, and existing under Philippine laws. Monico V. Jacob (Jacob) and Peter K. Fernandez
(Fernandez) are STI officers, the former being the President and Chief Executive Officer (CEO) and
the latter Senior Vice-President. STI offers pre-school, elementary, secondary and tertiary
education, as well as post-graduate courses either through franchisees or STI wholly-owned
schools.
Girly G. Ico (Ico), a masteral degree holder with doctorate units earned, was hired as Faculty
Member by STI College Makati (Inc.), which operates STI College-Makati (STI-Makati). STI College
Makati (Inc.) is a wholly-owned subsidiary of STI. Ico was subsequent promoted as Dean of STI
College- Parañaque and, thereafter, as Chief Operating Officer (COO) of STI-Makati.
However, after the merger between STI and STI College Makati (Inc.), Ico received a
memorandum cancelling her COO assignment at STI-Makati, citing management’s decision to
undertake an "organizational restructuring" in line with the merger of STI and STI-Makati. Further
ordering Ico to report to turn over her work to one Victoria Luz (Luz), who shall function as STI-
Makati’s School Administrator. According to STI, the "organizational re-structuring" was
undertaken "in order to streamline operations. In the process, the positions of Chief Executive
Officer and Chief Operating Officer of STI Makati were abolished."
Page 159 of 434

Furthermore, the STI’s Corporate Auditor/Audit Advisory Group conducted an audit of STI-
Makati covering the whole period of Ico’s stint as COO/School Administrator therein. In a report
(Audit Report) later submitted to Fernandez, the auditors claim to have discovered several
irregularities. In another memorandum, it was recommended that an investigation committee be
formed to investigate Ico for grave abuse of authority, falsification, gross dishonesty, maligning and
causing intrigues, and other charges. Fernandez recommended that Ico be placed under preventive
suspension pending investigation. Hence, pursuant to said recommendation, Ico was placed under
preventive suspension and banning her entry to any of STI’s premises.
Labor Arbiter (LA) found Ico to have been illegally constructively and in bad faith dismissed
by respondents in her legally acquired status as regular employee thus, ordering respondents
SYSTEMS TECHNOLOGY INSTITUTE, INC. and/or MONICO V. JACOB, PETER K. FERNANDEZ
in solido to reinstate her to her former position and pay Ico’s full back wages plus damages. On
appeal, NLRC reversed the ruling of the LA. On petition for certiorari by Ico before the CA, CA
affirmed the ruling of the NLRC, hence, this petition.
Issue:
Whether Jacob, as officer of STI, may be held solidarily liable with STI.
Ruling:
Nonetheless, the Court fails to discern any bad faith or negligence on the part of respondent
Jacob. The principal character that figures prominently in this case is Fernandez; he alone
relentlessly caused petitioner’s hardships and suffering. He alone is guilty of persecuting petitioner.
Indeed, some of his actions were without sanction of STI itself, and were committed outside of the
authority given to him by the school; they bordered on the personal, rather than official. His
superior, Jacob, may have been, for the most part, clueless of what Fernandez was doing to
petitioner. After all, Fernandez was the Head of the Academic Services Group of the EMD, and
petitioner directly reported to him at the time; his position enabled him to pursue a course of action
with petitioner that Jacob was largely unaware of.
A corporation, as a juridical entity, may act only through its directors, officers and
employees. Obligations incurred as a result of the directors’ and officers’ acts as corporate agents,
are not their personal liability but the direct responsibility of the corporation they represent. As a
rule, they are only solidarily liable with the corporation for the illegal termination of services of
employees if they acted with malice or bad faith.
concur: (1) it must be alleged in the complaint that the director or officer assented to patently
unlawful acts of the corporation or that the officer was guilty of gross negligence or bad faith; and
(2) there must be proof that the officer acted in bad faith.
Hence, Jacob is absolved from any liability.
_____________________________________________________________________________________
Page 160 of 434

PALM AVENUE HOLDING CO.,INC., and PALM AVENUE REALTY AND DEVELOPMENT
CORPORATION vs. SANDIGANBAYAN 5TH Division, REPUBLIC OF THE PHILIPPINES,
represented by the PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG)
G.R. No. 173082, August 6, 2014, J. Peralta
The writ of sequestration issued against the assets of the corporation is not valid because the
suit in the civil case was against the shareholder in the corporation and is not a suit against the latter.
Thus, the failure to implead these corporations as defendants and merely annexing a list of such
corporations to the complaints is a violation of their right to due process for it would be, in effect,
disregarding their distinct and separate personality without a hearing.
Furthermore, the sequestration order issued against the corporation is deemed automatically
lifted due to the failure of the Republic to commence the proper judicial action or to implead them
therein within the period under the Constitution.
Facts:
Through a writ of sequestration dated October 27, 1986, the Presidential Commission on
Good Government (PCGG) sequestered all the assets, properties, records, and documents of the
Palm Companies.The PCGG had relied on a letter from the Palm Companies’ Attorney-in-Fact, Jose
S. Sandejas, specifically identifying Benjamin “Kokoy” Romualdez, a known crony of former
President Ferdinand E. Marcos, as the beneficial owner of the Benguet Corporation shares in the
Palm Companies’ name.
The Republic, represented by the PCGG, filed a complaint with the Sandiganbayan docketed
as Civil Case No. 0035 but did not initially implead the Palm Companies as defendants. However, the
Sandiganbayan issued a Resolution dated June 16, 1989 where it ordered said companies to be
impleaded. Pursuant to said order, the Republic filed an amended complaint dated January 17, 1997
and named therein the Palm Companies as defendants. The graft court admitted the amended
complaint on October 15, 2001.
Thereafter, the companies filed a Motion for Bill of Particulars to direct the Republic to
submit a bill of particulars regarding matters in the amended complaint which were not alleged with
certainty or particularity.
Hence, the Republic submitted its bill of particulars. Subsequently, the Palm Companies filed
a motion to dismiss the Republic’s complaint. They argued that the bill of particulars did not
satisfactorily comply with the requested details.
Furthermore, the Palm Companies filed another motion to order the PCGG to release all the
companies’ shares of stock and funds in its custody on the ground that since they were not impleaded
as parties-defendants in Civil Case No. 0035 within the period prescribed by the Constitution.
The Sandiganbayan then issued its October 21, 2010 Resolution, granting the companies’
foregoing motion.
Page 161 of 434

Issue:
Whether the Sandiganbayan committed grave abuse of discretion amounting to excess off
jurisdiction in granting the Palm Companies motion to release all shares of stock and funds in the
custody of the PCGG
Ruling:
No.
Under Sec. 26, Article XVIII of the 1987 Constitution, it mandates the Republic to file the
corresponding judicial action or proceedings within a six-month period (from its ratification on
February 2, 1987) in order to maintain sequestration, non-compliance with which would result in the
automatic lifting of the sequestration order. Hence, there is a necessity on the part of the Republic
to actually implead corporations as defendants in the complaint, out of recognition for their distinct
and separate personalities, failure to do so would necessarily be denying such entities their right to
due process.
Here, the writ of sequestration issued against the assets of the Palm Companies is not valid
because the suit in Civil Case No. 0035 against Benjamin Romualdez as shareholder in the Palm
Companies is not a suit against the latter. Thus, the failure to implead these corporations as
defendants and merely annexing a list of such corporations to the complaints is a violation of their
right to due process for it would be, in effect, disregarding their distinct and separate personality
without a hearing.
In the case at bar, the Palm Companies were merely mentioned as Item Nos. 47 and 48, Annex
A of the Complaint, as among the corporations where defendant Romualdez owns shares of stocks.
Furthermore, while the writ of sequestration was issued on October 27, 1986, the Palm Companies
were impleaded in the case only in 1997, or already a decade from the ratification of the Constitution
in 1987, way beyond the prescribed period.
The sequestration order issued against the Palm Companies is therefore deemed
automatically lifted due to the failure of the Republic to commence the proper judicial action or to
implead them therein within the period under the Constitution. However, the lifting of the writ of
sequestration will not necessarily be fatal to the main case since the same does not ipso facto mean
that the sequestered properties are, in fact, not illgotten. The effect of the lifting of the sequestration
will merely be the termination of the government’s role as conservator.
_____________________________________________________________________________________
OLONGAPO CITY vs. SUBIC WATER AND SEWERAGE CO., INC.

G.R. No. 171626, August 6, 2014, J. Brion
OCWD and Subic Water are two separate and different entities. Subic Water clearly
demonstrated that it was a separate corporate entity from OCWD. OCWD is just a ten percent (10%)
shareholder of Subic Water. As a mere shareholder, OCWD’s juridical personality cannot be equated
nor confused with that of Subic Water. It is basic in corporation law that a corporation is a juridical
entity vested with a legal personality separate and distinct from those acting for and in its behalf and,
Page 162 of 434

in general, from the people comprising it. Under this corporate reality, Subic Water cannot be held
liable for OCWD’s corporate obligations in the same manner that OCWD cannot be held liable for
the obligations incurred by Subic Water as a separate entity. The corporate veil should not and cannot
be pierced unless it is clearly established that the separate and distinct personality of the corporation
was used to justify a wrong, protect fraud, or perpetrate a deception.
Facts:
The Olongapo City filed a complaint for sum of money and damages against Olongapo City
Water District (OCWD). It alleged that OCWD failed to pay its electricity bills to Olongapo City
and remit its payment under the contract to pay, pursuant to OCWD’s acquisition of Olongapo
City’s water system.
In the interim, OCWD entered into a Joint Venture Agreement (JVA) with Subic Bay
Metropolitan Authority (SBMA), Biwater International Limited (Biwater), and D.M. Consunji, Inc.
(DMCI). Pursuant to this agreement, Subic Water– a new corporate entity – was incorporated, with
the following equity participation from its shareholders: SBMA 19.99% or 20%; OCWD 9.99% or
10%; Biwater 29.99% or 30%; and DMCI 39.99% or 40%.
Subic Water was granted the franchise to operate and to carry on the business of providing
water and sewerage services in the Subic Bay Free Port Zone, as well as in Olongapo City. Hence,
Subic Water took over OCWD’s water operations in Olongapo City. To finally settle their money
claims against each other, Olongapo City and OCWD entered into a compromise agreement.
The compromise agreement also contained a provision regarding the parties’ request that
Subic Water, Philippines, which took over the operations of the defendant Olongapo City Water
District be made the co-maker for OCWD’s obligations. Mr. Noli Aldip, then chairman of Subic
Water, acted as its representative and signed the agreement on behalf of Subic Water.
To enforce the compromise agreement, Olongapo City filed a motion for the issuance of a
writ of execution with the RTC. It granted the motion, but did not issue the corresponding writ of
execution. Almost four years later, the Olongapo City, prayed again for the issuance of a writ of
execution against OCWD.
OCWD’s former counsel, filed a manifestation alleging that OCWD had already been
dissolved and that Subic Water is now the former OCWD. Because of this assertion, Subic Water
also filed a manifestation informing the RTC that as borne out by the articles of incorporation and
general information sheet of Subic Water defendant OCWD is not Subic Water. The manifestation
also indicated that OCWD was only a ten percent (10%) shareholder of Subic Water; and that its
10% share was already in the process of being transferred to Olongapo City pursuant to a Deed of
Assignment .
The RTC granted the motion for execution and directed its issuance against OCWD and/or
Subic Water. The CA granted Subic Water’s petition for certiorari and reversed the trial court’s
rulings.
Issue:
Page 163 of 434

Whether or not Subic Water can be made liable under the writ of execution issued by RTC
in favor of Olongapo City
Ruling:
No, the writ of execution issued by the RTC, in favor of Olongapo City, is null and void.
OCWD and Subic Water are two separate and different entities.
Olongapo City practically suggests that since Subic Water took over OCWD’s water
operations in Olongapo City, it also acquired OCWD’s juridical personality, making the two entities
one and the same.
This is an interpretation that we cannot make or adopt under the facts and the evidence of
this case. Subic Water clearly demonstrated that it was a separate corporate entity from OCWD.
OCWD is just a ten percent (10%) shareholder of Subic Water. As a mere shareholder, OCWD’s
juridical personality cannot be equated nor confused with that of Subic Water. It is basic in
corporation law that a corporation is a juridical entity vested with a legal personality separate and
distinct from those acting for and in its behalf and, in general, from the people comprising it.
Under this corporate reality, Subic Water cannot be held liable for OCWD’s corporate
obligations in the same manner that OCWD cannot be held liable for the obligations incurred by
Subic Water as a separate entity. The corporate veil should not and cannot be pierced unless it is
clearly established that the separate and distinct personality of the corporation was used to justify
a wrong, protect fraud, or perpetrate a deception.
In Concept Builders, Inc. v. NLRC, the Court enumerated the possible probative factors of
identity which could justify the application of the doctrine of piercing the corporate veil. These are:
(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; and
(4) Methods of conducting the business.
The burden of proving the presence of any of these probative factors lies with the one
alleging it. Unfortunately, Olongapo City simply claimed that Subic Water took over OCWD's water
operations in Olongapo City. Apart from this allegation, Olongapo City failed to demonstrate any
link to justify the construction that Subic Water and OCWD are one and the same. Under this
evidentiary situation, our duty is to respect the separate and distinct personalities of these two
juridical entities.
Furthermore, an officer’s actions can only bind the corporation if he had been authorized
to do so. An examination of the compromise agreement reveals that it was not accompanied by any
document showing a grant of authority to Mr. Noli Aldip to sign on behalf of Subic Water.
Subic Water is a corporation. A corporation, as a juridical entity, primarily acts through its
board of directors, which exercises its corporate powers. In this capacity, the general rule is that, in
the absence of authority from the board of directors, no person, not even its officers, can validly
bind a corporation.
Page 164 of 434

A corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that the authority to do so has been conferred upon him, and this
includes powers which have been intentionally conferred, and also such powers as, in the usual
course of the particular business, are incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually pertaining to the particular officer or
agent, and such apparent powers as the corporation has caused persons dealing with the officer or
agent to believe that it has conferred.
Mr. Noli Aldip signed the compromise agreement purely in his own capacity. Moreover, the
compromise agreement did not expressly provide that Subic Water consented to become OCWD’s
co-maker. As worded, the compromise agreement merely provided that both parties also request
Subic Water, Philippines, which took over the operations of Olongapo City Water District be made
as co-maker for the obligations above-cited. This request was never forwarded to Subic Water’s
board of directors. Even if due notification had been made (which does not appear in the records),
Subic Water’s board does not appear to have given any approval to such request. No document such
as the minutes of Subic Water’s board of directors’ meeting or a secretary’s certificate, purporting
to be an authorization to Mr. Aldip to conform to the compromise agreement, was ever presented.
In effect, Mr. Aldip’s act of signing the compromise agreement was outside of his authority to
undertake.
Since Mr. Aldip was never authorized and there was no showing that Subic Water’s articles
of incorporation or by-laws granted him such authority, then the compromise agreement he signed
cannot bind Subic Water. Subic Water cannot likewise be made a surety or even a guarantor for
OCWD’s obligations. OCWD’s debts under the compromise agreement are its own corporate
obligations to Olongapo City.
The SC confirmed that the writ of execution issued by RTC Olongapo, in favor of Olongapo
City, is null and void. Accordingly, Subic Water cannot be made liable under the writ.
_____________________________________________________________________________________
GERARDO LANUZA, JR. AND ANTONIO 0. OLBES vs. BF CORPORATION, SHANGRI- LA

PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO,
MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS
G.R. No. 174938, October 01, 2014, J. Leonen
BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-La
and the members of its board of directors. A corporation’s representatives are generally not bound by
the terms of the contract executed by the corporation. They are not personally liable for obligations
and liabilities incurred on or in behalf of the corporation.
Facts:
In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-La and the members of its board of directors.
Page 165 of 434

BF Corporation alleged that Shangri-La induced BF Corporation to continue with the

construction of the buildings using its own funds and credit despite Shangri-La’s default. According
to BF Corporation, Shangri- La misrepresented that it had funds to pay for its obligations with BF
Corporation, and the delay in payment was simply a matter of delayed processing of BF
Corporation’s progress billing statements. BF Corporation eventually completed the construction
of the buildings. Shangri-La allegedly took possession of the buildings while still owing BF
Corporation an outstanding balance.
On August 3, 1993, Shangri-La, and its BOD filed a motion to suspend the proceedings in
view of BF Corporation’s failure to submit its dispute to arbitration, in accordance with the
arbitration clause provided in its contract.
Petitioners’ main argument arises from the separate personality given to juridical
persons vis-à-vis their directors, officers, stockholders, and agents. Since they did not sign the
arbitration agreement in any capacity, they cannot be forced to submit to the jurisdiction of the
Arbitration Tribunal in accordance with the arbitration agreement. Moreover, they had already
resigned as directors of Shangri-La at the time of the alleged default.
The Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove the
existence of circumstances that render petitioners and the other directors solidarily liable. It ruled
that petitioners and Shangri-La’s other directors were not liable for the contractual obligations of
Shangri-La to BF Corporation.
Issue:
Whether or not Shangri-La’s directors were liable for the contractual obligations of Shangri-
La to BF Corporation
Ruling:
No.
Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate
and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law. This means that while it is not
a person, naturally, the law gives it a distinct personality and treats it as such. A corporation, in the
legal sense, is an individual with a personality that is distinct and separate from other persons
including its stockholders, officers, directors, representatives, and other juridical entities.
The law vests in corporations rights, powers, and attributes as if they were natural persons with
physical existence and capabilities to act on their own. For instance, they have the power to sue and
enter into transactions or contracts. A consequence of a corporation’s separate personality is that
consent by a corporation through its representatives is not consent of the representative,
personally. Its obligations, incurred through official acts of its representatives, are its own. A
stockholder, director, or representative does not become a party to a contract just because a
corporation executed a contract through that stockholder, director or representative. Hence, a
corporation’s representatives are generally not bound by the terms of the contract executed by the
Page 166 of 434

corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of
the corporation.
This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation that an
arbitration clause shall not apply to persons who were neither parties to the contract nor assignees
of previous parties, thus: “A submission to arbitration is a contract. As such, the Agreement,
containing the stipulation on arbitration, binds the parties thereto, as well as their assigns and heirs.
But only they.”
As a general rule, therefore, a corporation’s representative who did not personally bind
himself or herself to an arbitration agreement cannot be forced to participate in arbitration
proceedings made pursuant to an agreement entered into by the corporation. He or she is generally
not considered a party to that agreement.
However, there are instances when the distinction between personalities of directors,
officers, and representatives, and of the corporation, are disregarded. The Court calls this piercing
the veil of corporate fiction. When there are allegations of bad faith or malice against corporate
directors or representatives, it becomes the duty of courts or tribunals to determine if these persons
and the corporation should be treated as one. Without a trial, courts and tribunals have no basis
for determining whether the veil of corporate fiction should be pierced. Courts or tribunals do not
have such prior knowledge. Thus, the courts or tribunals must first determine whether
circumstances exist to warrant the courts or tribunals to disregard the distinction between the
corporation and the persons representing it.
Hence, when the directors, as in this case, are impleaded in a case against a corporation,
alleging malice or bad faith on their part in directing the affairs of the corporation, complainants
are effectively alleging that the directors and the corporation are not acting as separate entities.
In that case, complainants have no choice but to institute only one proceeding against the
parties. Under the Rules of Court, filing of multiple suits for a single cause of action is prohibited.
Institution of more than one suit for the same cause of action constitutes splitting the cause of
action, which is a ground for the dismissal of the others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. — A party may not institute more than one
suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action; effect of. — If two or more suits are instituted
on the basis of the same cause of action, the filing of one or a judgment upon the merits in any one
is available as a ground for the dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may later be found to be
indistinct that we rule that petitioners may be compelled to submit to arbitration.
_____________________________________________________________________________________
Page 167 of 434

FVR SKILLS AND SERVICES EXPONENTS, INC. (SKILLEX), FULGENCIO V. RANA and
MONINA R. BURGOS vs. JOVERT SEV A, JOSUEL V. V ALENCERINA, JANET ALCAZAR,
ANGELITO AMPARO, BENJAMIN ANAEN, JR., JOHN HILBERT BARBA, BONIFACIO
BATANG, JR., VALERIANO BINGCO,JR., RONALD CASTRO, MARLON CONSORTE,
ROLANDO CORNELIO, EDITO CULDORA, RUEL DUNCIL, MERVIN FLORES, LORD
GALISIM, SOTERO GARCIA, JR., REY GONZALES, DANTE ISIP, RYAN ISMEN, JOEL JUNIO,
CARLITO LATOJA, ZALDY MARRA, MICHAEL PANTANO, GLENN PILOTON, NORELDO
QUIRANTE, ROEL RANCE, RENANTE ROSARIO and LEONARDA TANAEL
G.R. No. 200857, October 22, 2014, J. Arturo D. Brion
A corporation is a juridical entity with legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it. The general rule is that,
obligations incurred by the corporation, acting through its directors, officers and employees, are its
sole liabilities.
A director or officer shall only be personally liable for the obligations of the corporation, if the
following conditions concur: (1) the complainant alleged in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence
or bad faith; and (2) the complainant clearly and convincingly proved such unlawful acts, negligence
or bad faith.
In the present case, the respondents failed to show the existence of the first requisite. They did
not specifically allege in their complaint that Rana and Burgos willfully and knowingly assented to
the petitioner's patently unlawful act of forcing the respondents to sign the dubious employment
contracts in exchange for their salaries. The respondents also failed to prove that Rana and Burgos
had been guilty of gross negligence or bad faith in directing the affairs of the corporation.
Facts:
The twenty-eight (28) respondents in this case were employees of petitioner FVR Skills and
Services Exponents, Inc. (petitioner), an independent contractor engaged in the business of
providing janitorial and other manpower services to its clients.
Skillex entered into a Contract of Janitorial Service (service contract) with Robinsons Land
Corporation (Robinsons). Both agreed that the petitioner shall supply janitorial, manpower and
sanitation services to Robinsons Place Ermita Mall for a period of one year. Halfway through the
service contract, the Skillex asked the respondents to execute individual contracts which stipulated
that their respective employments shall end at the last day of the year.
The Skillex and Robinsons no longer extended their contract of janitorial services.
Consequently, the Skillex dismissed the respondents as they were project employees whose
duration of employment was dependent on the petitioner's service contract with Robinsons.
Respondents filed a complaint for illegal dismissal with the NLRC. They argued that they
were not project employees; they were regular employees who may only be dismissed for just or
authorized causes. The LA ruled in the Skillex's favor but was reversed by NLRC considering that
the respondents had been under the petitioner's employ for more than a year already and was
affirmed by CA.
Page 168 of 434

Issue:
Whether or not Rana and Burgos should be held solidarily liable with the corporation for
respondents' monetary claims having personalities separate and distinct from the corporation.
Ruling:
No, Rana and Burgos, as the petitioner's president and general manager, should not be held
solidarily liable with the corporation for its monetary liabilities with the respondents.
A corporation is a juridical entity with legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it. The general rule is that,
obligations incurred by the corporation, acting through its directors, officers and employees, are its
sole liabilities.
A director or officer shall only be personally liable for the obligations of the corporation, if
the following conditions concur: (1) the complainant alleged in the complaint that the director or
officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and (2) the complainant clearly and convincingly proved such unlawful
acts, negligence or bad faith.
In the present case, the respondents failed to show the existence of the first requisite. They
did not specifically allege in their complaint that Rana and Burgos willfully and knowingly assented
to the petitioner's patently unlawful act of forcing the respondents to sign the dubious employment
contracts in exchange for their salaries. The respondents also failed to prove that Rana and Burgos
had been guilty of gross negligence or bad faith in directing the affairs of the corporation.
To hold an officer personally liable for the debts of the corporation, and thus pierce the veil
of corporate fiction, it is necessary to clearly and convincingly establish the bad faith or wrongdoing
of such officer, since bad faith is never presumed. Because the respondents were not able to clearly
show the definite participation of Burgos and Rana in their illegal dismissal, the Court upholds the
general rule that corporate officers are not personally liable for the money claims of the discharged
employees, unless they acted with evident malice and bad faith in terminating their employment.
_____________________________________________________________________________________
INCORPORATION AND ORGANIZATION
LIMITATIONS ON USE OF CORPORATE NAME
INDIAN CHAMBER OF COMMERCE PHILS., INC. vs. FILIPINO INDIAN CHAMBER OF

COMMERCE IN THE PHILIPPINES, INC.
G .R. No. 184008, August 3, 2016, JARDELEZA, J.
The name of a dissolved firm shall not be allowed to be used by other firms within three (3)
years after the approval of the dissolution of the corporation by the Commission, unless allowed by
the last stockholders representing at least majority of the outstanding capital stock of the dissolved
firm.
Page 169 of 434

ICCPl's name is identical and deceptively or confusingly similar to that of FICCPI. ICCPI's and
FICCPI's corporate names both contain the same words "Indian Chamber of Commerce."
FACTS:
Filipino-Indian Chamber of Commerce of the Philippines, Inc. (defunct FICCPI) was originally
registered with the SEC as Indian Chamber of Commerce of Manila, Inc. on November 24, 1951. On
October 7, 1959, it amended its corporate name into Indian Chamber of Commerce of the
Philippines, Inc., and further amended it into Filipino-Indian Chamber of Commerce of the
Philippines, Inc. on March 4, 1977. Pursuant to its Articles of Incorporation, and without applying
for an extension of its corporate term, the defunct FICCPI's term of existence expired on November
24, 2001.
SEC Case No. 05-008

On January 20, 2005, Mr. Naresh Mansukhani (Mansukhani) reserved the corporate name "Filipino
Indian Chamber of Commerce in the Philippines, Inc." (FICCPI) with the Company Registration
and Monitoring Department (CRMD) of the SEC. In an opposition letter, Ram Sitaldas (Sitaldas),
claiming to be a representative of the defunct FICCPI, alleged that the corporate name has been
used by the defunct FICCPI since 1951, and that the reservation by another person who is not its
member or representative is illegal.
The SEC dismissed the opposition. On September 27, 2006, CA affirmed the SEC on appeal. On
March 14, 2006, pending resolution by the CA, the SEC issued the Certificate of lncorporation of
respondent FICCPI, pursuant to its ruling in SEC Case No. 05-008.
SEC Case No. 06-014

Meanwhile, on December 8, 2005, Mr. Pracash Dayacan, who allegedly represented the defunct
FICCPI, filed an application with the CRMD for the reservation of the corporate name "Indian
Chamber of Commerce Phils., Inc." (ICCPI). Upon knowledge, Mansukhani, in a letter dated
February 14, 2006, formally opposed the application. Mansukhani cited the SEC En Banc decision
in SEC Case No. 05-008 recognizing him as the one possessing the better right over the corporate
name "Filipino Indian Chamber of Commerce in the Philippines, Inc."
On November 30, 2006, the SEC En Banc granted the opposition of Mansukhani. Citing Section 18
of the Corporation Code, the SEC En Banc made a finding that "both from the standpoint of their
[ICCPI and FICCPI] corporate names and the purposes for which they were established, there exists
a similarity that could inevitably lead to confusion." CA affirmed the decision of the SEC En Banc.
ISSUE:
Whether the CA erred in affirming SEC decision in SEC Case No. 06-014.
RULING:
The Court upholds the decision of the CA.
Page 170 of 434

Section 18 of the Corporation Code expressly prohibits the use of a corporate name which is
identical or deceptively or confusingly similar to that of any existing corporation. In Philips Export
B. V. v. Court of Appeals, this Court ruled that to fall within the prohibition, two requisites must be
proven, to wit:
(1) that the complainant corporation acquired a prior right over the use of such corporate
name; and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
These two requisites are present in this case.
FICCPI acquired a prior right over the use of the corporate name.
In Industrial Refractories Corporation of the Philippines v. Court of Appeals, the Court applied the
priority of adoption rule to determine prior right, taking into consideration the dates when the
parties used their respective corporate names. In this case, FICCPI was incorporated on March 14,
2006. On the other hand, ICCPI was incorporated only on April 5, 2006, or a month after FICCPI
registered its corporate name. Thus, applying the principle in the Refractories case, we hold that
FICCPI, which was incorporated earlier, acquired a prior right over the use of the corporate name.
ICCPI cannot argue that it first incorporated and held the name "Filipino Indian Chamber of
Commerce," in 1977; and that it established the name's goodwill until it failed to renew its name
due to oversight. It is settled that a corporation is ipso facto dissolved as soon as its term of existence
expires. SEC Memorandum Circular No. 14-2000 likewise provides for the use of corporate names
of dissolved corporations:
The name of a dissolved firm shall not be allowed to be used by other firms within three (3)
years after the approval of the dissolution of the corporation by the Commission, unless
allowed by the last stockholders representing at least majority of the outstanding capital
stock of the dissolved firm.
When the term of existence of the defunct FICCPI expired on November 24, 2001, its corporate
name cannot be used by other corporations within three years from that date, until November 24,
2004. FICCPI reserved the name "Filipino Indian Chamber of Commerce in the Philippines, Inc."
on January 20, 2005, or beyond the three-year period. Thus, the SEC was correct when it allowed
FICCPI to use the reserved corporate name.
ICCPl's name is identical and deceptively or confusingly similar to that of FICCPI
On the first point, ICCPI's name is identical to that of FICCPI. ICCPI's and FICCPI's corporate names
both contain the same words "Indian Chamber of Commerce." ICCPI argues that the word
"Filipino" in FICCPI's corporate name makes it easily distinguishable from ICCPI. Further, ICCPI
claims that the corporate name of FICCPI uses the words "in the Philippines" while ICCPI uses only
"Phils., Inc."
Page 171 of 434

As correctly found by the SEC en bane, the word 'Filipino' in the corporate name of the respondent
[FICCPI] is merely descriptive and can hardly serve as an effective differentiating medium necessary
to avoid confusion. On the other, the words "in the Philippines" and "Phils., Inc." are simply
geographical locations of the corporations which, even if appended to both the corporate names,
will not make one distinct from the other. Under the facts of this case, these words cannot be
separated from each other such that each word can be considered to add distinction to the
corporate names. Taken together, the words in the phrase "in the Philippines" and in the phrase
"Phils. Inc." are synonymous-they both mean the location of the corporation.
_____________________________________________________________________________________
DOCTRINE OF PIERCING THE CORPORATE VEIL
PARK HOTEL ET. AL V. SORIANO ET. AL, G.R. No. 171118, September 10, 2012
Petitioner Park Hotel is a corporation engaged in the hotel business. Petitioners Gregg
Harbutt (Harbutt) and Bill Percy (Percy) are the General Manager and owner, respectively, of Park
Hotel. Percy, Harbutt and Atty. Roberto Enriquez are also the officers and stockholders of Burgos
Corporation (Burgos), a sister company of Park Hotel.
Respondent Manolo Soriano (Soriano) was hired by Park Hotel in July 1990 as Maintenance
Electrician, and then transferred to Burgos in 1992. Respondent Lester Gonzales (Gonzales) was
employed by Burgos as Doorman, and later promoted as Supervisor. Respondent Yolanda Badilla
(Badilla) was a bartender of J's Playhouse operated by Burgos. In October of 1997, Soriano, Gonzales
and Badilla were dismissed from work. Thus, they filed a case for illegal dismissal which was the
LA, NLRC and the CA unanimously found to exist.
Issue: Who should be held liable among the petitioners?
Held: As to whether Park Hotel may be held solidarily liable with Burgos, the Court rules that before
a corporation can be held accountable for the corporate liabilities of another, the veil of corporate
fiction must first be pierced. Thus, before Park Hotel can be held answerable for the obligations of
Burgos to its employees, it must be sufficiently established that the two companies are actually a
single corporate entity, such that the liability of one is the liability of the other.
While a corporation may exist for any lawful purpose, the law will regard it as an association of
persons or, in case of two corporations, merge them into one, when its corporate legal entity is used
as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. To
disregard the separate juridical personality of a corporation, the wrongdoing must be established
In the case at bar, respondents utterly failed to prove by competent evidence that Park Hotel was a
mere instrumentality, agency, conduit or adjunct of Burgos, or that its separate corporate veil had
been used to cover any fraud or illegality committed by Burgos against the respondents.
Accordingly, Park Hotel and Burgos cannot be considered as one and the same entity, and Park
Hotel cannot be held solidary liable with Burgos.
Nonetheless, although the corporate veil between Park Hotel and Burgos cannot be pierced, it does
not necessarily mean that Percy and Harbutt are exempt from liability towards respondents. Verily,
a corporation, being a juridical entity, may act only through its directors, officers and employees.
Page 172 of 434

Obligations incurred by them, while acting as corporate agents, are not their personal liability but
the direct accountability of the corporation they represent. However, corporate officers may be
deemed solidarily liable with the corporation for the termination of employees if they acted with
malice or bad faith. In the present case, the lower tribunals unanimously found that Percy and
Harbutt, in their capacity as corporate officers of Burgos, acted maliciously in terminating the
services of respondents without any valid ground and in order to suppress their right to self-
organization.
Section 31 of the Corporation Code makes a director personally liable for corporate debts if he
willfully and knowingly votes for or assents to patently unlawful acts of the corporation. It also
makes a director personally liable if he is guilty of gross negligence or bad faith in directing the
affairs of the corporation. Thus, Percy and Harbutt, having acted in bad faith in directing the affairs
of Burgos, are jointly and severally liable with the latter for respondents' dismissal.
_____________________________________________________________________________________
MERCY Vda. DE ROXAS, represented by ARLENE C. ROXAS-CRUZ, in her capacity as

substitute appellant-petitioner vs. OUR LADY'S FOUNDATION, INC.
G.R. No. 182378. March 6, 2013
C.J. Sereno
A corporation is a juridical entity with a legal personality separate and distinct from those
acting for and on its behalf and, in general, of the people comprising it. The obligations incurred by
the corporation, acting through its officers, are its sole liabilities.
To hold corporate officers personally liable alone for the debts of the corporation and thus
pierce the veil of corporate fiction, it is required that the bad faith of the officer be established clearly
and convincingly. A court should be mindful of the milieu where piercing of the veil should be applied.
It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or
crime was committed against another, in disregard of rights.
Facts:
Salve Dealca Latosa filed before the RTC a Complaint for the recovery of ownership of a portion of
her residential land located at Our Lady’s Village, Bibincahan, Sorsogon, Sorsogon. According to
her, Atty. Henry Amado Roxas (Roxas), represented by petitioner herein, encroached on a quarter
of her property by arbitrarily extending his concrete fence beyond the correct limits.
In his Answer, Roxas imputed the blame to respondent Our Lady’s Village Foundation, Inc., now
Our Lady’s Foundation, Inc. (OLFI). He then filed a Third-Party Complaint against respondent
which was admitted by the trial court.
The trial court ruled in favor of Latosa. It found that Roxas occupied a total of 112 square meters of
Latosa’s lots, and that, in turn, OLFI trimmed his property by 92 square meters. Subsequently,
Roxas appealed to the CA, which later denied the appeal. Since the Decision had become final, the
RTC issued a Writ of Execution to implement the ruling ordering OLFI to reimburse Roxas for the
value of the 92-square-meter property plus legal interest at a rate of P1800 per square meter to be
reckoned from the time the amount was paid to the third-party defendant.
Page 173 of 434

To collect the aforementioned amount, Notices of Garnishment were then issued by the sheriff to
the managers of the Development Bank of the Philippines and the United Coconut Planters Bank
for them to garnish the account of Bishop Robert Arcilla-Maullon (Arcilla-Maullon), OLFI’s general
manager.
Refusing to pay Roxas, OLFI filed a Rule 65 Petition before the CA. The CA nullified the Notices of
Garnishment. It noted that since the general manager of OLFI was not impleaded in the
proceedings, he could not be held personally liable for the obligation of the corporation. Hence this
petition.
Issue:
Whether or not the issuance of Notices of Garnishment against the bank accounts of Arcilla-
Maullon as OLFI’s general manager justifiable.
Ruling:
The Supreme Court affirmed the decision of the Court of Appeals.
The appellate court appreciated that in the main case for the recovery of ownership before the court
of origin, only OLFI was named as respondent corporation, and that its general manager was never
impleaded in the proceedings a quo.
Given this finding, the Court held that since OLFI’s general manager was not a party to the case,
the CA correctly ruled that Arcilla-Maullon cannot be held personally liable for the obligation of
the corporation. The Court relied in the case of Santos vs. NLRC where the doctrine of separate
personality was discussed.
To hold the general manager of OLFI liable, petitioner claims that it is a mere business conduit of
Arcilla-Maullon, hence, the corporation does not maintain a bank account separate and distinct
from the bank accounts of its members. In support of this claim, petitioner submits that because
OLFI did not rebut the attack on its legal personality, as alleged in petitioner’s Opposition and
Comments on the Motion to Quash Notice/Writ of Garnishment respondent effectively admitted
by its silence that it was a mere dummy corporation.
The argument did not persuade the Court, for any piercing of the corporate veil has to be done with
caution. Save for its rhetoric, petitioner failed to adduce any evidence that would prove OLFI's
status as a dummy corporation.
A court should be mindful of the milieu where piercing of the veil should be applied. It must be
certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended
may result from an erroneous application.
To hold Arcilla-Maullon personally liable alone for the debts of the corporation and thus pierce the
veil of corporate fiction, it is required that the bad faith of the officer be established clearly and
convincingly. Petitioner, however, has failed to include any submission pertaining to any
wrongdoing of the general manager. Necessarily, it would be unjust to hold the latter personally
liable.
Page 174 of 434

Therefore, the execution of a corporate judgment debt against the general manager of the
corporation has no basis.
_____________________________________________________________________________________
PHILIPPINE NATIONAL BANK vs. HYDRO RESOURCES CONTRACTORS CORP.;

ASSET PRIVITIZATION TRUST vs. HYDRO RESOURCES CONTRACTORS CORP.;
DEVELOPMENT BANK OF THE PHILIPPINES vs.
HYDRO RESOURCES CONTRACTORS CORP.
G.R. Nos. 167530, 167561, 16760311, March 13, 2013
J. Leonardo-De Castro
Piercing the corporate veil based on the alter ego theory requires the concurrence of three
elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental
unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or
unfair act of the corporation. The absence of any of these elements prevents piercing of the veil.
Facts:
Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the
properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the
foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the business
operations of the defunct MMIC by organizing NMIC. DBP and PNB owned 57% and 43% of the
shares of NMIC, respectively, except for five qualifying shares. Directors of NMIC were either from
DBP or PNB.
Thereafter, NMIC engaged the services of Hercon, Inc., for a Mine Stripping and Road Construction
Program for a total contract price of P35,770,120. After computing the payments already made and
crediting the NMIC’s receivables from Hercon, Inc., the latter found that NMIC still has an unpaid
balance of P8,370,934.74. Hercon, Inc. made several demands on NMIC, including a letter of final
demand dated August 12, 1986, and when these were not heeded, a complaint for sum of money
was filed in the RTC of Makati seeking to hold petitioners NMIC, DBP, and PNB solidarily liable.
Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This
prompted the amendment of the complaint to substitute HRCC for Hercon, Inc. Further, on
December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the APT
for the disposition and privatization of certain government corporations and/or the assets thereof.
Pursuant to the said Proclamation DBP and PNB executed their respective deeds of transfer in favor
of the National Government assigning certain assets and liabilities, including their respective stakes
in NMIC. In turn, the National Government transferred the said assets and liabilities to the APT as
trustee under a Trust Agreement. Thus, the complaint was amended for the second time to implead
and include the APT as a defendant.
The RTC rendered a decision in favor of HRCC and holding NMIC, PNB and DBP solidarily liable
on the ground that NMIC was merely an alter ego of PNB and DBP. The RTC held that considering
that DBP and PNB owned almost all of the shares in NMIC except for 5 qualifying shares then NMIC
is merely an alter ego of the two banks. The directors also of NMIC were from PNB and DBP. On
appeal, the CA affirmed the RTC decision. Hence, these consolidated petitions.
Page 175 of 434

Issue:
Whether or not the CA erred in piercing the corporate veil
Ruling:
The petitions are granted.
A corporation is an artificial entity created by operation of law. It has a personality separate and
distinct from that of its stockholders and from that of other corporations to which it may be
connected. By virtue of the separate juridical personality of a corporation, the corporate debt or
credit is not the debt or credit of the stockholder. This protection from liability for shareholders is
the principle of limited liability. Equally well-settled is the principle that the corporate mask may
be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the interest of justice, the corporate veil
will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed
against third persons. However the court should be careful in assessing the milieu where the
doctrine of the corporate should be applied otherwise injustice may result from its erroneous
application.
Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee
of DBP and PNB) should be held solidarily liable for using NMIC as alter ego. The Court did not
agree. In this connection, case law lays down a three-pronged test to determine the application of
the alter ego theory, which is also known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury
or unjust loss complained of.
None of the tests apply in the case. While ownership by one corporation of all or a great majority
of stocks of another corporation and their interlocking directorates may serve as indicia of control,
by themselves and without more, however, these circumstances are insufficient to establish an alter
ego relationship between DBP and PNB on the one hand and NMIC on the other hand. Moreover
in this case, nothing in the records shows that the corporate finances, policies and practices of
NMIC were dominated by DBP and PNB in such a way that NMIC could be considered to have no
separate mind, will or existence of its own. On the contrary, the evidence establishes that HRCC
knew and acted on the knowledge that it was dealing with NMIC, not with NMIC’s stockholders.
The finding that the respective boards of directors of NMIC, DBP, and PNB were interlocking has
also no basis. The initial General Information Sheet submitted by NMIC to the Securities and
Exchange Commission, may have proven that DBP and PNB owned the stocks of NMIC to the extent
Page 176 of 434

of 57% and 43% respectively. however it also showed that only two members of the board of
directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were established to be members of the board
of governors of DBP and none was proved to be a member of the board of directors of PNB.
In relation to the second element, there is also no evidence that the juridical personality of NMIC
was used by DBP and PNB to commit a fraud or to do a wrong against HRCC.
As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud
or fundamental unfairness perpetuated by DBP and PNB through the corporate cover of NMIC, no
harm could be said to have been proximately caused by DBP and PNB on HRCC for which HRCC
could hold DBP and PNB solidarily liable with NMIC.
Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as
transferee of the rights, titles and interests of DBP and PNB in NMIC will attach only if DBP and
PNB are held liable, the APT incurs no liability for the judgment indebtedness of NMIC. Even HRCC
recognizes that "as assignee of DBP and PNB 's loan receivables," the APT simply "stepped into the
shoes of DBP and PNB with respect to the latter's rights and obligations" in NMIC. As such assignee,
therefore, the APT incurs no liability with respect to NMIC other than whatever liabilities may be
imputable to its assignors, DBP and PNB.
_____________________________________________________________________________________
Eric Godfrey Stanley Livesey vs. Binswanger Philippines, Inc. and Keth Elliot
G.R. No. 177493; March 19, 2014
J. Brion
Piercing the veil of corporate fiction is warranted when a corporation ceased to exist only in
name, as it re-emerged in the person of another corporation, for the purpose of evading its unfulfilled
financial obligation under a compromise agreement
Facts:
CBB Philippines Strategic Property Services, Inc. (CBB) hired Livesy as Director and Head of
Business Space Development with a monthly salary of $5,000. Later on, Livesy was appointed as
Managing Director and his salary was increased to $16,000 a month. Despite the several deals that
Livesy was able to draw up for CBB, the latter failed to pay him a significant portion of his salary.
For this reason, he was compelled to resign.
Subsequently, Livesy filed a complaint for illegal dismissal with money claims against CBB and
Dwyer, CBB’s president, with the Labor Arbiter. Livesy demanded that CBB pay him $25,000 for the
unpaid salaries. For its part, CBB posited that the LA had no jurisdiction as the complaint involved
an intra-corporate dispute.
The LA rendered decision in favor of Livesy and ordered CBB to pay him $23,000 in accrued salaries
and $5,000 a month in back salaries until restatement. Thereafter, the parties entered into a
compromise agreement which the LA approved. In the agreement, Livesey was to receive an
amount in full satisfaction of the LA’s decision, broken down into three installments.
Page 177 of 434

CBB was able to pay Livesey the initial amount, but not the two installments as the company ceased
operations. Because of this, Livesey moved for the issuance of writ of execution which the LA
granted. However, the same was not enforced. Livesey claimed that there was evidence showing
the CBB and Binswanger Philippines Inc. (Binswanger) are one and the same corporation. Invoking
the doctrine of piercing the veil of corporate fiction, Livesey prayed that an alias writ of execution
be issued against Binswanger and Keith Elliot, CBB’s former President and current President and
CEO of Brinswanger. The LA denied the motion.
On appeal, the NLRC ruled in favor of Livesy and declared the respondents jointly and severally
liable with CBB. When the case was elevated to the CA, the NLRC decision was reversed. The CA
emphasized that the mere fact that Binswanger and CBB have the same President is not itself
sufficient to peirce the viel of corporate fiction of the two entities. Thereafter, Livesy moved for
reconsideration, but the CA denied the same. Hence, the petition.
Issue:
Whether or not the veil of corporate fiction may be disregarded.
Ruling:
Petition Granted.
Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where
the separate corporate personality of a corporation is abused or used for wrongful purposes. Under
the doctrine, the corporate existence may be disregarded where the entity is formed or used for
non-legitimate purposes, such as to evade a just and de obligation, to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing it and the
two corporations will be treated as identical.
In the present case, we see an indubitable link between CBB’s closure and Binswanger’s
incorporation. CBB ceased to exist only in name; it re-emerge in the person of Binswanger for an
urgent purpose—to avoid payment by CBB of the last two installments of its monetary obligation
to Livesey as well as its other financial liabilities. Freed of CBB’s liabilities, especially that owing to
Livesy, Binswanger can continue, as it did continue, CBB’s real estate brokerage business.
While the ostensible reason for Binswanger’s establishment is to continue CBB’s business
operations in the Philippines, which by itself is not illegal, the close proximity between CBB’s
disestablishment and Binswanger’s coming into existence points to an unstated but urgent
consideration which, as earlier noted, was to evade CBB’s unfulfilled financial obligation to Livesy
under the compromise agreement.
_____________________________________________________________________________________
Page 178 of 434

Pacific Rehouse Corporation vs. CA and Export and Industry Bank, Inc.
G.R. Nos. 199687 & 201537; March 24, 2014
J. Reyes
The court cannot have jurisdiction over both the parent corporation and its wholly-owned
subsidiary where service of summons was only made upon the parent corporation. If the court has no
jurisdiction over the corporation, it follows that the court has no business piercing its veil of corporate
fiction because such action offends the corporation’s right to due process.
Furthermore, the alter ego doctrine is inapplicable where fraudulent intent is lacking. Control,
by itself, does not mean that the controlled corporation is a mere instrumentality or a business
conduit of the mother company. Even control over the financial and operational concerns of a
subsidiary company does not by itself call for disregarding its corporate fiction. There must bear
perpetuation of fraud behind the control or at least a fraudulent or illegal purpose behind the control
in order to justify piercing the veil of corporate fiction.
Facts:
A Complaint was instituted against EIB Securities Inc. (E-Securities) for unauthorized sale of
32,180,000 DMCI shares of private respondents Pacific Rehouse Corporation, et al. When judgment
was rendered, the RTC directed E-Securities to return to the private respondents the DMCI shares.
After attaining finality of the judgment, a writ of execution was issued, but was returned unsatisfied.
Alleging that E-Securities is a wholly-owned controlled and dominated subsidiary of Export and
Industry Bank and is thus a mere alter ego and business conduit of Export and Industry Bank, the
respondents moved for the issuance of an alias writ of execution to hold Export and Industry Bank
liable.
Concluding that E-Securities is a mere business conduit or alter ego of Export and Industry Bank,
the dominant parent corporation, RTC ruled that the piercing of the veil of corporate fiction is
justified. Furthermore, the RTC ratiocinated that being one and the same entity in the eyes of law,
the service of summons upon E-Securities has bestowed jurisdiction over both the parent and
wholly-owned subsidiary.
Export Bank filed before the CA a petition for certiorari with prayer for TRO seeking the
nullification of the RTC Order. Later on, the CA rendered decision granting Export Bank’s petition.
The CA explained that the alter ego theory cannot be sustained because ownership of a subsidiary
by the parent company is not enough justification to pierce the veil of corporate fiction.
Issue:
1) Whether or not the court validly acquired jurisdiction.

2) Whether or not the alter ego doctrine is not applicable.
Ruling:
JURISDICTION
Page 179 of 434

The Court already ruled in Kukan International Corporation v. Reyes that compliance with the
recognized modes of acquisition of jurisdiction cannot be dispensed with even in piercing the veil
of corporate fiction.
It is therefore correct to say that the court must first and foremost acquire jurisdiction over the
parties; and only then would the parties be allowed to present evidence for and/or against piercing
the veil of corporate fiction. If the court has no jurisdiction over the corporation, it follows that the
court has no business piercing its veil of corporate fiction because such action offends the
corporation’s right to due process.
“Jurisdiction over the defendant is acquired either upon a valid service of summons or the
defendant’s voluntary appearance in court. When the defendant does not voluntarily submit to the
court’s jurisdiction or when there is no valid service of summons, any judgment of the court which
has no jurisdiction over the person of the defendant is null and void. The defendant must be
properly apprised of a pending action against him and assured of the opportunity to present his
defenses to the suit. Proper service of summons is used to protect one’s right of due process.”
As Export Bank was neither served with summons, nor has it voluntarily appeared before the court,
the judgment sought to be enforced as against E-Securities cannot be made against its parent
company, Export Bank. Export bank has consistently disputed the RTC jurisdiction, commencing
from its filing of an Omnibus Motion by way of special appearance during the execution state until
the filling of its Comment before the Court wherein it was pleaded that “RTC of Makati never
acquired jurisdiction over Export Bank. Export Bank was not pleaded as a party in the case. It was
never served with summons by nor did it voluntarily appear before RTC of Makati so as to be
subjected to the latter’s jurisdiction.”
ALTER EGO DOCTRINE IS NOT 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 used to defeat the
labor law, 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.
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
excercised 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 Court has laid down a three-prolonged control test to establish when the alter ego doctrine
should be operative:
Page 180 of 434

1. Control, not mere majority or complete stock control, but complete domination, not
only of finances by 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 the plaintiff’s legal right; and
3. The aforesaid control and breach of duty must have proximately caused the injury or
unjust loss complained of.
The absence of any one of these elements prevents piercing the 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. Hence, all three elements
should concur for the alter ego doctrine to be applicable.
The RTC bore emphasis on the alleged control exercised by Export Bank upon its subsidiary E-
Securities, “control, by itself, does not mean that the controlled corporation is a mere
instrumentality or a business conduit of the mother company. Even control over the financial and
operational concerns of a subsidiary company does not by itself call for disregarding its corporate
fiction. There must bear perpetuation of fraud behind the control or at least a fraudulent or illegal
purpose behind the control in order to justify piercing the veil of corporate fiction. Such fraudulent
intent is lacking in this case.
Moreover, there was nothing on record demonstrative of Export Bank’s wrongful intent in setting
up a subsidiary, E-Securities. 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 business. To justify treating the sole stockholder or
holding company as responsible, it is not enough that the subsidiary is so organized and controlled
as to make it merely an instrumentality, conduit or adjunct of its stockholders. It must further
appear that to organize their separate entities would aid in the consummation of a wrong.
As established in the main case and reiterated by the CA, the subject 32,180,000 DMCI shares which
E-Securities is obliged to return to the petitioners were an average price of P0.24 per share. The
proceeds were then used to buy back 61,000,000 KPP shares earlier sold by E-Securities. Quite
unexpectedly however, the total amount of these DMCI shares ballooned to P1,465,799,000.00. It
must be taken into account that this unexpected turnabout did not inure to the benefit of E-
Securities, much less Export Bank.
Furthermore, ownership by Export Bank of great majority or all of stocks of E-Securities and the
existence of interlocking directorates may serve as badges of control, but ownership of another
corporation, per se, without proof of actuality of the other conditions are insufficient to establish
an alter ego relationship or connection between the two corporations, which will justify the setting
aside of the cover of corporate fiction. The court has declared that mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of the corporation is
not of itself sufficient ground for disregarding the separate corporate personality. The Court
likewise ruled that the existence of interlocking directors, corporate officers, and shareholders is
not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public
policy considerations.
Page 181 of 434

_____________________________________________________________________________________
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS vs. DAN T. LIM, doing
business under the name and style of QUALITY PAPERS & PLASTIC PRODUCTS
ENTERPRISES
G.R. No. 206806, June 25, 2014, J. Leonen
The corporate existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing it and the two
corporations will be treated as identical. In the case at bar, when petitioner Arco Pulp and Paper’s
obligation to Lim became due and demandable, she not only issued an unfunded check but also
contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s liability. She
unjustifiably refused to honor petitioner corporation’s obligations to respondent. These acts clearly
amount to bad faith. In this instance, the corporate veil may be pierced, and petitioner Santos may be
held solidarily liable with petitioner Arco Pulp and Paper.
Facts:
Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw
materials, under the name Quality Paper and Plastic Products, Enterprises, to factories engaged in
the paper mill business. Lim delivered scrap papers worth 7,220,968.31 to Arco Pulp and Paper
Company, Inc. through its Chief Executive Officer and President, Candida A. Santos. The parties
allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw
materials or deliver to him their finished products of equivalent value.
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a
post-dated check as partial payment, with the assurance that the check would not bounce. When
he deposited the check, it was dishonored for being drawn against a closed account. On the same
day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement where Arco
Pulp and Paper bound themselves to deliver their finished products to Megapack Container
Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw materials
would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic Products.
Despite repeated demands by Lim, Arco Pulp and Paper did not pay. Lim filed a
complaint for collection of sum of money with prayer for attachment with the RTC. The trial court
rendered a judgment in favor of Arco Pulp and Paper and dismissed the complaint, holding that
when Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement, novation took
place, which extinguished Arco Pulp and Paper’s obligation to. Lim. The CA reversed said decision.
Issue:
Whether or not Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
Ruling:
Yes.
Page 182 of 434

In Heirs of Fe Tan Uy v. International Exchange Bank, the Court has ruled:
Basic is the rule in corporation law that a corporation is a juridical entity which is vested
with a legal personality separate and distinct from those acting for and in its behalf and, in general,
from the people comprising it. Following this principle, obligations incurred by the corporation,
acting through its directors, officers and employees, are its sole liabilities. A director, officer or
employee of a corporation is generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate
fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues.
Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur: (1) the complainant must allege in the
complaint that the director or officer assented to patently unlawful acts of the corporation, or that
the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence or bad faith.
As a general rule, directors, officers, or employees of a corporation cannot be held personally

liable for obligations incurred by the corporation. However, this veil of corporate fiction may be
pierced if complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or
bad faith, and (2) such negligence or bad faith was clearly and convincingly proven.
Here, Santos entered into a contract with respondent in her capacity as the President and
Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of
petitioner corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This
is clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc." Any
obligation arising from these acts would not, ordinarily, be Santos’ personal undertaking for which
she would be solidarily liable with petitioner Arco Pulp and Paper.
The Court found, however, that the corporate veil must be pierced. In Livesey v. Binswanger
Philippines:
Piercing the veil of corporate fiction is an equitable doctrine developed to address

situations where the separate corporate personality of a corporation is abused or
used for wrongful purposes. Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-legitimate purposes, such as
to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud
or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals
composing it and the two corporations will be treated as identical.
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide
behind the corporate veil. When petitioner Arco Pulp and Paper’s obligation to
respondent became due and demandable, she not only issued an unfunded check
but also contracted with a third party in an effort to shift petitioner Arco Pulp and
Paper’s liability. She unjustifiably refused to honor petitioner corporation’s
obligations to respondent. These acts clearly amount to bad faith. In this instance,
Page 183 of 434

the corporate veil may be pierced, and petitioner Santos may be held solidarily liable
with petitioner Arco Pulp and Paper.
_____________________________________________________________________________________
WPM INTERNATIONAL TRADING , INC. and WARLITO P. MANLAPAZ vs.

FE CORAZON LABAYEN
G.R. No. 182770, September 17, 2014, J. Brion
When an officer owns almost all of the stocks of a corporation, it does not ipso facto warrant
the application of the principle of piercing the corporate veil unless it is proven that the officer has
complete dominion over the corporation.
Facts:
WPM International Trading, Inc. (WPM) is engaged in the restaurant business, with
Warlito P. Manlapaz as its president. WPM entered into a management agreement with the
Labayen, by virtue of which the Labayen was authorized to operate, manage and rehabilitate
Quickbite, a restaurant owned and operated by WPM. As part of her tasks, the respondent looked
for a contractor who would renovate the two existing Quickbite outlets. She engaged the services
of CLN Engineering Services to renovate one of the outlets at the cost of P432,876.02. However, out
of the P432,876.02 renovation cost, only the amount of P320,000.00 was paid to CLN, leaving a
balance of P112,876.02.
CLN filed a complaint for sum of money and damages before the RTC against the
respondent and Manlapaz. CLN later amended the complaint to exclude Manlapaz as defendant.
Labayen was declared in default for her failure to file a responsive pleading. The RTC found the
respondent liable to pay CLN actual damages in the amount of P112,876.02 with 12% interest per
annum and 20% of the amount recoverable as attorney’s fees.
As a result, Labayen instituted a complaint for damages against WPM and Manlapaz. She
alleged that she should be entitled to reimbursement. Labayen also contended that her
participation in the management agreement was limited only to introducing Manlapaz to CLN’s
general manager and that it was actually Manlapaz and the general manager who agreed on the
terms and conditions of the agreement. Manlapaz, on the other hand, claimed Labayen had entered
into the renovation agreement with CLN in her own personal capacity and that since she had
exceeded her authority as agent of WPM, the renovation agreement should only bind her. Further,
WPM has a separate and distinct personality, Manlapaz cannot be made liable for the Labayen’s
claim.
RTC held that Labayen was entitled to indemnity from Manlapaz. The RTC found that based
on the records, there is a clear indication that WPM is a mere instrumentality or business conduit
of Manlapaz and as such, WPM and Manlapaz are considered one and the same. The RTC also
found that Manlapaz had complete control over WPM considering that he is its chairman, president
and treasurer at the same time. The RTC thus concluded that Manlapaz is liable in his personal
capacity to reimburse the respondent the amount she paid to CLN in connection with the
renovation agreement. CA affirmed the decision of the RTC applying the principle of piercing the
veil of corporate fiction.
Page 184 of 434

Issue:
Whether or not CA correctly applied the principle of piercing the veil of corporate fiction
Ruling:
No, the CA erred in applying the doctrine.
The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely:
a) when the separate and distinct corporate personality defeats public convenience, as when the
corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud cases, or
when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used
in alter ego cases, i.e., where a corporation is essentially 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
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.
Piercing the corporate veil based on the alter ego theory requires the concurrence of three
elements, namely:
(1) Control, not mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong,
to perpetuate the violation of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the
injury or unjust loss complained of. The absence of any of these elements prevents
piercing the corporate veil.
In the present case, the attendant circumstances do not establish that WPM is a mere alter
ego of Manlapaz. Aside from the fact that Manlapaz was the principal stockholder of WPM, records
do not show that WPM was organized and controlled, and its affairs conducted in a manner that
made it merely an instrumentality, agency, conduit or adjunct of Manlapaz. As held in Martinez v.
Court of Appeals, the mere ownership by a single stockholder of even all or nearly all of the capital
stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate
personality. To disregard the separate juridical personality of a corporation, the wrongdoing must
be clearly and convincingly established.
In this connection, the Court stresses that the control necessary to invoke the
instrumentality or alter ego 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. 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.
Page 185 of 434

Here, Labayen failed to prove that Manlapaz, acting as president, had absolute control over
WPM. Even granting that he exercised a certain degree of control over the finances, policies and
practices of WPM, in view of his position as president, chairman and treasurer of the corporation,
such control does not necessarily warrant piercing the veil of corporate fiction since there was not
a single proof that WPM was formed to defraud CLN or the respondent, or that Manlapaz was guilty
of bad faith or fraud.
On the contrary, the evidence establishes that CLN and Labayen knew and acted on the
knowledge that they were dealing with WPM for the renovation of the latter’s restaurant, and not
with Manlapaz. That WPM later reneged on its monetary obligation to CLN, resulting to the filing
of a civil case for sum of money against the respondent, does not automatically indicate fraud, in
the absence of any proof to support it.
_____________________________________________________________________________________
HACIENDA CATAYWA/MANUEL VILLANUEVA, et al. vs. ROSARIO LOREZO

G.R. No. 179640, March 18, 2015, J. Peralta
This Court agrees with the petitioners that there is no need to pierce the corporate veil.
Respondent failed to substantiate her claim that Mancy and Sons Enterprises, Inc. and Manuel and
Jose Marie Villanueva are one and the same. She based her claim on the SSS form wherein Manuel
Villanueva appeared as employer. However, this does not prove, in any way, that the corporation 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, warranting that its separate and distinct personality be set
aside.
Facts:
Rosario Lorezo received, upon inquiry, a letter from the Social Security System, informing
her that she cannot avail of their retirement benefits since per their record she has only paid 16
months. Such is 104 months short of the minimum requirement of 120 months payment to be
entitled to the benefit.
Aggrieved, Lorezo then filed her Amended Petition before the SSC, alleging that she was
employed as laborer in Hda. Cataywa managed by Jose Marie Villanueva in 1970 but was reported
to the SSS only in 1978. She alleged that SSS contributions were deducted from her wages from 1970
to 1995, but not all were remitted to the SSS which, subsequently, caused the rejection of her claim.
She also impleaded Talisay Farms, Inc. by virtue of its Investment Agreement with Mancy and Sons
Enterprises. She also prayed that the veil of corporate fiction be pierced since she alleged that
Mancy and Sons Enterprises and Manuel and Jose Marie Villanueva are one and the same.
Petitioners Manuel and Jose Villanueva refuted in their answer, the allegation that not all
contributions of respondent were remitted. Petitioners alleged that all farm workers of Hda.
Cataywa were reported and their contributions were duly paid and remitted to SSS. It was the late
Domingo Lizares, Jr. who managed and administered the hacienda. While, Talisay Farms, Inc. filed
a motion to dismiss on the ground of lack of cause of action in the absence of an allegation that
there was an employer-employee relationship between Talisay Farms and respondent.
Page 186 of 434

The SSC found that Lorezo was a regular employee subject to compulsory coverage of Hda.
Cataywa/Manuel Villanueva/ Mancy and Sons Enterprises, Inc. within the period of 1970 to
February 25, 1990. The SSC denied petitioners' Motion for Reconsideration. The petitioners, then,
elevated the case before the CA where the case was dismissed outright because the signatory to the
Verification failed to attach his authority to sign for and in behalf of the other Petitioners and the
certified true copies of pleadings and documents relevant and pertinent to the petition are
incomplete.
Issues:
Whether or not the corporate veil should be pierced
Ruling:
No. It was held in Rivera v. United Laboratories, Inc. that –
While a corporation may exist for any lawful purpose, the law will regard it as an association
of persons or, in case of two corporations, merge them into one, when its corporate legal entity is
used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction.
The doctrine applies only when such 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. To disregard the separate
juridical personality of a corporation, the wrongdoing must be established clearly and convincingly.
It cannot be presumed.
This Court has cautioned against the inordinate application of this doctrine, reiterating the
basic rule that "the corporate veil may be pierced only if it becomes a shield for fraud, illegality or
inequity committed against a third person.
The Court has expressed the language of piercing doctrine when applied to alter ego cases,
as follows: Where the stock of a corporation is owned by one person whereby the corporation
functions only for the benefit of such individual owner, the corporation and the individual should be
deemed the same.
This Court agrees with the petitioners that there is no need to pierce the corporate veil.
Respondent failed to substantiate her claim that Mancy and Sons Enterprises, Inc. and Manuel and
Jose Marie Villanueva are one and the same. She based her claim on the SSS form wherein Manuel
Villanueva appeared as employer. However, this does not prove, in any way, that the corporation 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, warranting that its separate and distinct personality be
set aside. Also, it was not alleged nor proven that Mancy and Sons Enterprises, Inc. functions only
for the benefit of Manuel Villanueva, thus, one cannot be an alter ego of the other.
Page 187 of 434

INCORPORATION AND ORGANZATION
BY-LAWS
FOREST HILLS GOLF AND COUNTRY CLUB, INC. vs. GARDPRO, INC.
G.R. No. 164686, October 22, 2014, J. Bersamin
The relevant provisions of the articles of incorporation and the by-laws of Forest Hills
governed the relations of the parties as far as the issues between them were concerned. Indeed, the
articles of incorporation of Forest Hills defined its charter as a corporation and the contractual
relationships between Forest Hills and the State, between its stockholders and the State, and between
Forest Hills and its stockholder; hence, there could be no gainsaying that the contents of the articles
of incorporation were binding not only on Forest Hills but also on its shareholders. On the other hand,
the by-laws were the self-imposed rules resulting from the agreement between Forest Hills and its
members to conduct the corporate business in a particular way. In that sense, the by-laws were the
private “statutes” by which Forest Hills was regulated, and would function. The charter and the by-
laws were thus the fundamental documents governing the conduct of Forest Hills’ corporate affairs;
they established norms of procedure for exercising rights, and reflected the purposes and intentions
of the incorporators. Until repealed, the by-laws were a continuing rule for the government of Forest
Hills and its officers, the proper function being to regulate the transaction of the incidental business
of Forest Hills. The by-laws constituted a binding contract as between Forest Hills and its members,
and as between the members themselves. Every stockholder governed by the by-laws was entitled to
access them. The by-laws were self-imposed private laws binding on all members, directors and
officers of Forest Hills. The prevailing rule is that the provisions of the articles of incorporation and
the by-laws must be strictly complied with and applied to the letter.
Facts:
Petitioner Forest Hills Golf and Country Club, Inc. (interchangeably Forest Hills or Club), a
non-profit stock corporation, was established to promote social, recreational and athletic activities
among its members. It was an exclusive and private club organized for the sole benefit of its
members. Fil-Estate Properties, Inc., a party to a Project Agreement to develop the Forest Hills
Residential Estates and the Forest Hills Golf and Country Club, undertook to market the golf club
shares of Forest Hills for a fee. In July 1995, Fil-Estate Properties, Inc. (FEPI) assigned its rights and
obligations under the Project Agreement to Fil- Estate Golf and Development, Inc. (FEGDI).
In 1995, FEPI and FEGDI engaged Fil-Estate Marketing Associates Inc., (FEMAI) to market
and offer for sale the shares of stocks of Forest Hills. Leandro de Mesa, the President of FEMAI,
oriented the sales staff on the information that would usually be inquired about by prospective
buyers. He made it clear that membership in the Club was a privilege, such that purchasers of shares
of stock would not automatically become members of the Club, but must apply for and comply with
all the requirements in order to qualify them for membership, subject to the approval of the Board
of Directors.
Gardpro, Inc. (Gardpro) bought class “C” common shares of stock, which were special
corporate shares that entitled the registered owner to designate two nominees or representatives
for membership in the Club. Subsequently, Ramon Albert, the General Manager of the Club,
Page 188 of 434

notified the shareholders that it was already accepting applications for membership. In that regard,
Gardpro designated Fernando R. Martin and Rolando N. Reyes to be its corporate nominees; hence,
the two applied for membership in the Club. Forest Hills charged them membership fees of P50,
000.00 each, prompting Martin to immediately call up Albert and complain about being thus
charged despite having been assured that no such fees would be collected from them. With Albert
assuring that the fees were temporary, both nominees of Gardpro paid the fees. At that time, the
P45, 000.00 membership fees of corporate members were increased to P75,000.00 per nominee by
virtue of the resolution of the Board of Directors. Any nominee who paid the fees within a specified
period was entitled to a discount of P25, 000.00. Both nominees of Gardpro were then admitted as
members upon approval of their applications by the Board of Directors. Later, Gardpro decided to
change its designated nominees, and Forest Hills charged Gardpro new membership fees of P75,
000.00 per nominee. When Gardpro refused to pay, the replacement did not take place.
Later, Gardpro filed a complaint in the SEC. SEC Hearing Officer rendered decision in favor
of Gardpro which were later affirmed by both the SEC En Bank and the CA.
Issue:
Whether or not the replacement nominees of Gardpro are required to pay membership fees.
Ruling:
No. Forest Hills was not authorized under its articles of incorporation and by-laws to collect
new membership fees for the replacement nominees of Gardpro.
There is no question that Gardpro held class “C” common stocks that entitled it to two
memberships in the Club. Its nominees could be admitted as regular members upon approval of
the Board of Directors but only one nominee for each class “C” share as designated in the resolution
could vote as such. A regular member was then entitled to use all the facilities and privileges of the
Club. In that regard, Gardpro could only designate as its nominees/representatives its officers
whose functions and office were defined by its own by-laws.
The membership in the Club was a privilege, it being clear that the mere purchase of a share
in the Club did not immediately qualify a juridical entity for membership. Admission for
membership was still upon the favorable action of the Board of Directors of the Club. Under Section
2.2.7 of its by-laws, the application form was accomplished by the chairman of the board, president
or chief executive officer of the applicant juridical entity. The designated nominees also
accomplished their respective application forms, duly proposed and seconded, and the nominees
were evaluated as to their qualifications. The nominees automatically became ineligible for
membership once they ceased to be officers of the corporate member under its by-laws upon
certification of such loss of tenure by a responsible officer of the corporate member.
Corporations buy shares in clubs in order to invest for earnings. Their purchases may also
be to reward their corporate executives by having them enjoy the facilities and perks concomitant
to the club memberships. When Gardpro purchased and registered its ownership of the class “C”
common shares, it did not only invest for earnings because it also became entitled to nominate two
of its officers in the Club as set forth in its seventh purpose of the articles of incorporation and
Section 2.2.2 of the by-laws.
Page 189 of 434

Golf clubs usually sell shares to individuals and juridical entities in order to raise capital for
the construction of their recreational facilities. In that regard, golf clubs accept juridical entities to
become regular members, and allow such entities to designate corporate nominees because only
natural persons can enjoy the sports facilities. In the context of this arrangement, Gardpro’s two
nominees held playing rights. But the articles of incorporation of Forest Hills and Section 2.2.2 of
its by-laws recognized the right of the corporate member to replace the nominees, subject to the
payment of the transfer fee in such amount as the Board of Directors determined for every change.
The replacement could take place for any of the following reasons, namely: (a) if the nominee
should cease to be an officer of the corporate member; or (b) if the corporate member should
request the replacement. In case of a replacement, the playing rights would also be transferred to
the new nominees.
The relevant provisions of the articles of incorporation and the by-laws of Forest Hills
governed the relations of the parties as far as the issues between them were concerned. Indeed, the
articles of incorporation of Forest Hills defined its charter as a corporation and the contractual
relationships between Forest Hills and the State, between its stockholders and the State, and
between Forest Hills and its stockholder; hence, there could be no gainsaying that the contents of
the articles of incorporation were binding not only on Forest Hills but also on its shareholders. On
the other hand, the by-laws were the self-imposed rules resulting from the agreement between
Forest Hills and its members to conduct the corporate business in a particular way. In that sense,
the by-laws were the private “statutes” by which Forest Hills was regulated, and would function.
The charter and the by-laws were thus the fundamental documents governing the conduct of Forest
Hills’ corporate affairs; they established norms of procedure for exercising rights, and reflected the
purposes and intentions of the incorporators. Until repealed, the by-laws were a continuing rule for
the government of Forest Hills and its officers, the proper function being to regulate the transaction
of the incidental business of Forest Hills. The by-laws constituted a binding contract as between
Forest Hills and its members, and as between the members themselves. Every stockholder governed
by the by-laws was entitled to access them. The by-laws were self-imposed private laws binding on
all members, directors and officers of Forest Hills. The prevailing rule is that the provisions of the
articles of incorporation and the by-laws must be strictly complied with and applied to the letter.
Anent the second issue, the Court disagrees with the contention of Forest Hills that the CA
encroached upon its prerogative to determine its own rules and procedures and to decide all issues
on the construction of its articles of incorporation and by-laws. On the contrary, the CA acted
entirely within its legal competence to decide the issues between the parties. The complaint of
Gardpro stated a cause of action, and thus contained the operative acts that gave rise to its remedial
right against Forest Hills. The cause of action required not only the interpretation of contracts and
the application of corporate laws but also the application of the civil law itself, particularly its tenets
on unjust enrichment and those regulating property rights arising from ownership. If Forest Hills
were allowed to charge nominees membership fees, and then to still charge their replacement
nominees every time a corporate member changed its nominees, Gardpro would be unduly
deprived of its full enjoyment and control of its property even as the former would be unjustly
enriched.
_____________________________________________________________________________________
Page 190 of 434

Agdao Landless Residents Association et. al v. Maramion et. al

G.R. Nos. 188642 & 189425
By laws
If the by-laws of the Corporation require a particular procedure before expulsion of its members
may be made, such procedure should be followed; otherwise, the expulsion is void. Here, the
evidence presented revealed that the General Meeting for the termination of membership was to
be held on July 29, 2001, at 2 o'clock in the afternoon; but the Notice to all officers and members of
ALRAI informing them about the General Meeting appeared to have been signed by ALRAI's
President only on July 27, 2001. Thus, the CA correctly held that the "notice for the July 29, [2001]
meeting where the general membership of ALRAI approved the expulsion of some of the
respondents was short of the three (3)-day notice requirement. More importantly, the petitioners
have failed to adduce evidence showing that the expelled members were indeed notified of any
meeting or investigation proceeding where they are given the opportunity to be heard prior to the
termination of their membership.
Derivate Suit
A suit filed by the members of a corporation against its officers for mismanaging corporate
properties may be liberally treated as derivative suit where the defendants did not object to the
erroneous filing of the suit (in the name of the members instead of the corporation) and the
complaint’s prayer sought relief for the benefit of the corporation and not for the benefit of the
members personally.
Duties of Director
A transfer of corporate property to the corporation’s President as compensation for his “outstanding
service” cannot be considered valid if it does not comply with Section 32 of the Corporation Code.
Here, we note that Javonillo, as a director, signed the Board Resolutions confirming the transfer of
the corporate properties to himself, and to Armentano (the Corporate Secretary). The transfer is
not valid even if there was a Resolution by the general membership of ALRAI confirming the
transfer. First, Section 32 requires that the contract should be ratified by a vote representing at least
two-thirds of the members in a meeting called for the purpose. Records of this case do not show
whether the Resolution was indeed voted by the required percentage of membership. In fact,
respondents take exception to the credibility of the signatures of the persons who voted in the
Resolution. Second, there is also no showing that there was full disclosure of the adverse interest
of the directors involved when the Resolution was approved. Third, Section 32 requires that the
contract be fair and reasonable under the circumstances. As previously discussed, we find that the
transfer of the corporate properties to the individual petitioners is not fair and reasonable for (1)
want of (proof of) legitimate corporate purpose because there was no basis by which it could have
been determined whether the transfer of properties to Javonillo and Armentano was reasonable
under the circumstances at that time and for (2) the breach of the fiduciary nature of the positions
held by Javonillo and Armentano. Lacking any of these (full disclosure and a showing that the
contract is fair and reasonable), ratification by the two-thirds vote would be of no avail.
GENERAL POWERS, THEORY OF GENERAL CAPACITY
LIGAYA ESGUERRA, et al. vs. HOLCIM PHILIPPINES, INC.

G.R. No. 182571. September 2, 2013
J. Reyes
Page 191 of 434

The power of a corporation to sue and be sued is exercised by the board of directors. The physical acts
of the corporation, like the signing of documents, can be performed only by natural persons duly
authorized for the purpose by corporate bylaws or by a specific act of the board. Absent the said board
resolution, a petition may not be given due course.
Facts:
The present petition is an offshoot of the final and executory decision promulgated on December
27, 2002 in the case of Iluminada de Guzman v. Court of Appeals and Jorge Esguerra. Herein
petitioners are the heirs of Jorge Esguerra while respondent HOLCIM Philippines, Inc. is the
successor-in-interest of Iluminada de Guzman.
As a backgrounder, respondent Esguerra filed on December 12, 1989 with the RTC, Malolos,
Bulacan, an action to annul the Free Patent in the name of de Guzman. Esguerra claimed that he
was the owner the subject land with an approximate area of 47,000 square meters. Esguerra learned
that the said parcel of land was being offered for sale by de Guzman to Hi-Cement Corporation
(now HOLCIM Philippines, Inc.). He later amended his complaint to implead Hi-Cement as a co-
defendant since the latter was hauling marble from the subject land. The RTC dismissed Esguerra’s
complaint but on appeal, the CA reversed. The Supreme Court in its Decision dated December 27,
2002 affirmed the CA’s decision. After attaining finality, the case was remanded to the RTC for
execution.
Now, herein petitioners (heirs of Esguerra), filed an Omnibus Motion with the RTC, manifesting
that the Court’s December 27, 2002 decision has yet to be executed. HOLCIM filed a motion for
reconsideration alleging that it did not owe any amount of royalty to the petitioners for the
extracted limestone from the subject land. It also filed a Manifestation and Motion (for Ocular
Inspection) to prove that it did not extract limestone from the subject land. Despite all of this, an
alias writ of execution and notices of garnishment on several banks against HOLCIM have been
issued by the RTC to cover the payment of royalties to petitioner for the former's extraction of
limestone, etc. HOLCIM filed a Petition for Certiorari with Urgent Applications for Temporary
Restraining Order and/or Writ of Preliminary Injunction with the CA. The CA granted the motion.
Hence, this petition.
Issue:
Whether or not the CA gravely erred in not dismissing HOLCIM's petition for certiorari on the
ground of lack of Board Resolution authorizing the filing of petition
Ruling:
The petitioners claim that HOLCIM’s petition for certiorari in the CA failed to comply with the
rules on Verification and Certification of Non-Forum Shopping because the latter did not secure
and/or attach a certified true copy of a board resolution authorizing any of its officers to file said
petition. Thus, the CA should have dismissed outright HOLCIM’s petition before it. The Court did
not agree.
The general rule is that a corporation can only exercise its powers and transact its business through
its board of directors and through its officers and agents when authorized by a board resolution or
Page 192 of 434

its bylaws. The power of a corporation to sue and be sued is exercised by the board of directors.
The physical acts of the corporation, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate bylaws or by a specific act of the
board. Absent the said board resolution, a petition may not be given due course.
In the case at bar, HOLCIM attached to its Petition for Certiorari before the CA a Secretary’s
Certificate authorizing Mr. Paul M. O’Callaghan (O’Callaghan), its Chief Operating Officer, to
nominate, designate and appoint the corporation’s authorized representative in court hearings and
conferences and the signing of court pleadings. It also attached the Special Power of Attorney dated
June 9, 2006, signed by O’Callaghan, appointing Sycip Salazar Hernandez & Gatmaitan and/or any
of its lawyers to represent HOLCIM; and consequently, the Verification and Certification of Non
Forum Shopping signed by the authorized representative. To be sure, HOLCIM, in its Reply filed in
the CA, attached another Secretary’s Certificate, designating and confirming O’Callaghan’s power
to authorize Sycip Salazar Hernandez & Gatmaitan and/or any of its lawyers to file for and on behalf
of HOLCIM, the pertinent civil and/or criminal actions pending before the RTC.
The foregoing convinces the Court that the CA did not err in admitting HOLCIM’s petition before
it. HOLCIM attached all the necessary documents for the filing of a petition for certiorari before
the CA. Indeed, there was no complete failure to attach a Certificate of Non-Forum Shopping. In
fact, there was such a certificate. While the board resolution may not have been attached, HOLCIM
complied just the same when it attached the Secretary’s Certificate dated July 17, 2006, thus proving
that O’Callaghan had the authority from the board of directors to appoint the counsel to represent
them. The Court recognizes the compliance made by HOLCIM in good faith since after the
petitioners pointed out the said defect, HOLCIM submitted the Secretary’s Certificate dated July
17, 2006, confirming the earlier Secretary’s Certificate dated June 9, 2006.
POWER TO SELL OR DISPOSE OF CORPORATE PROPERTY
Metrobank v. Centro Development Corporation, et. al.

G.R. No. 180974, June 13, 2012, Sereno, J:
Section 40 of the Corporation Code finds no application in the present case, as there was no
new mortgage to speak of under the assailed directors Resolution. Nevertheless, while the Court
upheld the validity of the stockholders Resolution appointing Metrobank as successor-trustee, the
Court held that the extrajudicial foreclosure of the mortgage is invalid. After a careful review of the
records of this case, the Court fond that petitioner failed to establish its right to be entitled to the
proceeds of the MTI. There is no evidence that petitioner, as creditor or as trustee, had a cause of
action to move for the extrajudicial foreclosure of the subject properties mortgaged under the MTI.
Facts:
On 20 March 1990, in a special meeting of the board of directors of respondent Centro Development
Corporation (Centro), its president Go Eng Uy was authorized to mortgage its properties and assets
to secure the medium-term loan of ₱84 million of Lucky Two Corporation and Lucky Two
Repacking. The properties and assets consisted of a parcel of land with a building and
improvements located at Salcedo St., Legaspi Village, Makati City. his authorization was
subsequently approved on the same day by the stockholders.
Page 193 of 434

Thus, on 21 March 1990, respondent Centro, represented by Go Eng Uy, executed a Mortgage Trust
Indenture (MTI) with the Bank of the Philippines Islands (BPI). Under the MTI, respondent Centro,
together with its affiliates Lucky Two Corporation and Lucky Two Repacking or Go Eng Uy,
expressed its desire to obtain from time to time loans and other credit accommodations from
certain creditors for corporate and other business purposes. To secure these obligations from
different creditors, respondent Centro constituted a continuing mortgage on all or substantially all
of its properties and assets enumerated above unto and in favor of BPI, the trustee. Should
respondent Centro or any of its affiliates fail to pay their obligations when due, the trustee shall
cause the foreclosure of the mortgaged property. Thereafter, the mortgage was duly recorded with
the Registry of Deeds of Makati City.
Meanwhile, respondent Centro, represented by Go Eng Uy, approached petitioner Metropolitan

Bank and Trust Company (Metrobank) sometime in 1994 and proposed that the latter assume the
role of successor-trustee of the existing MTI. After petitioner Metrobank agreed to the proposal,
the board of directors of respondent Centro allegedly resolved on 12 August 1994 to constitute
petitioner as successor-trustee of BPI. Thereafter, petitioner and respondent Centro executed the
assailed MTI, amending the previous agreements by appointing the former as the successor-trustee
of BPI. It is worth noting that this MTI did not amend the amount of the total obligations covered
by the previous MTIs.
It was only sometime in 1998 that respondents herein, Chongking Kehyeng, Manuel Co Kehyeng
and Quirino Kehyeng, allegedly discovered that the properties of respondent Centro had been
mortgaged, and that the MTI that had been executed appointing petitioner as trustee. Notably,
respondent Chongking Kehyeng had been a member of the board of directors of Centro since 1989,
while the two other respondents, Manuel Co Kehyeng and Quirino Keyheng, had been stockholders
since 1987. Respondents Kehyeng were minority stockholders who owned thirty percent (30%) of
the outstanding capital stock of respondent Centro.
Meanwhile, during the period April 1998 to December 1998, San Carlos obtained loans in the total
principal amount of ₱812,793,513.23 from petitioner Metrobank. San Carlos failed to pay these
outstanding obligations despite demand.Thus, petitioner, as trustee of the MTI, enforced the
conditions thereof and initiated foreclosure proceedings.
Before the scheduled foreclosure date, on 3 August 2000, respondents herein filed a Complaint for
the annulment of the 27 September 1994 MTI with a prayer for a temporary restraining order (TRO)
and preliminary injunction at Branch 138 of the RTC of Makati City.
The bone of contention was that since the mortgaged properties constituted all or substantially all
of the corporate assets, the amendment of the MTI failed to meet the requirements of Section 40
of the Corporation Code on notice and voting requirements. Under this provision, in order for a
corporation to mortgage all or substantially all of its properties and assets, it should be authorized
by the vote of its stockholders representing at least 2/3 of the outstanding capital stock in a meeting
held for that purpose.
The RTC dismissed the complaint. It held that the evidence presented by respondents was
insufficient to support their claim that there were no meetings held authorizing the mortgage of
Centros properties. It noted that the stocks of respondents Kehyeng constituted only 30% of the
outstanding capital stock, while the Go family owned the majority 70%, which represented more
Page 194 of 434

than the 2/3 vote required by Section 40 of the Corporation Code. This was affirmed by the CA,
hence, this petition.
Issue: Whether the requirements of Section 40 of the Corporation Code was complied with in the
execution of the MT
Held: Section 40 of the Corporation Code finds no application in the present case, as there was no
new mortgage to speak of under the assailed directors Resolution. Nevertheless, while the Court
upheld the validity of the stockholders Resolution appointing Metrobank as successor-trustee, the
Court held that the extrajudicial foreclosure of the mortgage is invalid. After a careful review of the
records of this case, the Court fond that petitioner failed to establish its right to be entitled to the
proceeds of the MTI. There is no evidence that petitioner, as creditor or as trustee, had a cause of
action to move for the extrajudicial foreclosure of the subject properties mortgaged under the MTI.
CORORATE POWERS: HOW EXERCISED
Advance Paper Corporation and George Haw, in his capacity as President of Advance Paper
Corporation vs. ARMA Traders Corporation, et al.
G.R. No. 176897; December 11, 2013
J. Brion
Apparent authority is derived not merely from practice. Its existence may be ascertained
though (1) the general manner in which the corporation holds out an officer or agent as having the
power to act or, in other words the apparent authority to act in general, with which it clothes him; or
(2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
within or beyond the scope of his ordinary powers. Thus, the authority of the president and treasurer
who were given broad powers by allowing them to transact with third persons without the necessary
written authority from the non-performing board of directors cannot be denied by the corporation
who failed to take precautions to prevent its own corporate officers from abusing their powers.
Facts:
On various dates, Arma Traders purchased on credit notebooks and other paper products from
Advance Paper. Upon the representation of Arma’s president and treasurer, Tan and Uy, Arma also
obtained three loans from Advance Paper for the settlement of its obligations to other suppliers. As
payment for the purchases on the credit and the loan transactions, Arma Traders issued 82
postdated checks payable to Advance Paper.
Later on, when Advance Paper presented the checks to the drawee bank, it was dishonored either
for insufficiency of funds or account closed. For failure to settle its account despite repeated
demands, Advance Paper filed a complaint for collection of some of money against Arma Traders
and its officers.
Advance Paper claimed that the respondents fraudulently issued the postdated checks as payment
for the purchases and loan transactions knowing that they did not have sufficient funds with the
drawee banks. The respondents, on the other hand, claimed that the loan transactions were ultra
vires because the board of directors of Arma Traders did not issue a board resolution authorizing
Tan and Uy to obtain the loans.
Page 195 of 434

After trial, the RTC rendered judgment in favor of petitioner Advance Paper. On appeal, the CA
rendered a decision setting aside RTC’s order for Arma Traders to pay Advance Paper. Hence, the
petition. Petitioners argue that they were led to believe that Tan and Uy had the authority to obtain
loans since the respondents left the active and sole management of the company to Tan and Uy.
Citing Lipat v. Pacific Banking Corporation, the petitioners said that if a corporation knowingly
permits one of its officers or any other agent to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts; thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from denying
the agent’s authority.
Issue:
Whether or not Arma Traders is liable to pay the loans on the basis of the doctrine of apparent
authority.
Ruling:
Petition Granted.
Apparent authority is derived not merely from practice. Its existence may be ascertained though (1)
the general manner in which the corporation holds out an officer or agent as having the power to
act or, in other words the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
within or beyond the scope of his ordinary powers. It requires representation of evidence of similar
acts executed either in its favor or in favor of other parties. It is not the quantity of similar acts
which establishes apparent authority, but the vesting of a corporate officer with the power to bind
the corporation.
In the present petition, we do not agree with the CA’s findings that Arma Traders is not liable to
pay the loans due to lack of board resolution authorizing Tan and Uy to obtain the loans. To begin
with, Arma Traders’ Article of Incorporation provides that the corporation may borrow or raise
money to meet the financial requirements of its business by the issuance of bonds, promissory notes
and other evidence of indebtedness. Likewise, it states that Tan and Uy are not just ordinary
corporate officers and authorized bank signatories because they are also Arma Trader’s
incorporators along with the other respondents. Furthermore, the respondents, through Ng who is
Arma Trading’s corporate secretary, incorporator, stockholder, and director, testified that the sole
management of Arma Traders was left to Tan and Uy and that he and the other officers never dealt
with the business and management of Arma Traders for 14 years. He also confirmed that since 1984
up to the filing of the complaint against Arma Traders, its stockholders and board of directors never
had its meeting.
Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them to transact with
third persons without the necessary written authority from its non-performing board of directors.
Arma Traders failed to take precautions to prevent its own corporate officers from abusing their
powers. Because of its own laxity in its business dealings, Arma Traders is now estopped from
denying Tan and Uy’s authority to obtain loan from Advance paper.
Page 196 of 434

_____________________________________________________________________________________
PHILIPPINE RACE HORSE TRAINER'S ASSOCIATION, INC. v. PIEDRAS NEGRAS

CONSTRUCTION AND DEVELOPMENT CORPORATION
G.R. No. 192659, December 02, 2015, PERALTA, J.
The doctrine of apparent authority provides that a corporation will be estopped from
denying the agent's authority if it knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, and it holds him out to the public as possessing the
power to do those acts. The doctrine does not apply, however, if the principal did not commit
any act or conduct which a third party knew and relied upon in good faith as a result of the
exercise of reasonable prudence.
Facts:
Through its president, Rogelio Catajan, and pursuant to a Resolution it issued,

Philippine Race Horse Trainer’s Association (PRHTC) entered into an agreement with Fil-
Estate Properties Inc., (FEPI) whereby the latter would render construction services for the
former. Through a Deed of Assignment, all the rights and obligations of FEPI were
transferred to Piedras Negras Construction and Development Corporation (PNCDC) for the
continuation of the construction works. However, when the obligation of PRHTC became
due, it refused to pay PNCDC for the construction on the ground that it was suffering from
financial difficulties. Meanwhile, there was a change in the composition of the Board of
Directors of PRHTC. PNCDC was prompted to bring the case before the Construction
Industry Arbitration Commission (CIAC) for satisfaction of PRHTC’s obligation.
Issue:
Whether the contract between PRHTC and PNCDC is enforceable
Ruling:
No. The Resolution by the Board of Directors of PRHTC cannot be construed to

authorize Catajan to enter into a contract with PNCDC since the Resolution provides that
Catajan’s authority is limited only to dealing with FEPI and not with PNCDC. The doctrine
of apparent authority finds no application in this case. The board of directors, not the
president, exercises corporate power. While in the absence of a charter or bylaw provision
to the contrary the president is presumed to have authority, the questioned act should
still be within the domain of the general objectives of the company's business and within
the scope of his or her usual duties. Here, PRHTAI is an association of professional horse
trainers in the Philippine horse racing industry organized as a non-stock corporation and
it is committed to the uplifting of the economic condition of the working sector of the racing
industry. It is not in its ordinary course of business to enter into housing projects, especially
not in such scale and magnitude so massive as to amount to P101,150,000.00.
Page 197 of 434

CORPORATE OFFICERS
BARBA V. LICEO DE CAGAYAN UNIVERSITY

G .R. NO. 193857, NOVEMBER 28, 2012
Petitioner Dr. Ma. Mercedes L. Barba was the Dean of the College of Physical Therapy of respondent
Liceo de Cagayan University, Inc., a private educational institution. Due to the low number of
enrollees, LDCU decided to freeze the operation of the College of Physical Therapy indefinitely.
Respondent’s President Dr. Rafaelita Pelaez-Golez wrote petitioner informing her that her services
as dean of the said college will end at the close of the school year. Thereafter, the College of Physical
Therapy ceased operations on March 31, 2005, and petitioner went on leave without pay starting on
April 9, 2005. Subsequently, respondent’s Executive Vice President, Dr. Mariano M. Lerin, through
Dr. Glory S. Magdale, respondent’s Vice President for Academic Affairs, sent petitioner a letter
instructing petitioner to return to work on June 1, 2005 and report to Ma. Chona Palomares, the
Acting Dean of the College of Nursing, to receive her teaching load and assignment as a full-time
faculty member in that department for the school year 2005-2006. Petitioner however refused on
that teaching in the college of nursing is not part of her contract and that it amounts to demotion.
So, petitioner filed a complaint with the Labor Arbiter.
Before the CA, respondent claimed that a College Dean is a corporate officer under its by-laws and
petitioner was a corporate officer of respondent since her appointment was approved by the board
of directors. Respondent posited that petitioner was a corporate officer since her office was created
by the by-laws and her appointment, compensation, duties and functions were approved by the
board of directors. Thus, respondent maintained that the jurisdiction over the case is with the
regular courts and not with the labor tribunals.
Issue: Does the labor tribunals have jurisdiction?
Held: Yes. Corporate officers are elected or appointed by the directors or stockholders, and are
those who are given that character either by the Corporation Code or by the corporation’s by-laws.
Section 25 of the Corporation Code enumerates corporate officers as the president, the secretary,
the treasurer and such other officers as may be provided for in the by-laws. In Matling Industrial
and Commercial Corporation v. Coros, the phrase “such other officers as may be provided for in the
by-laws” has been clarified, thus: “Conformably with Section 25, a position must be expressly
mentioned in the By-Laws in order to be considered as a corporate office.”
In respondent’s by-laws, there are four officers specifically mentioned, namely, a president, a vice
president, a secretary and a treasurer. In addition, it is provided that there shall be other appointive
officials, a College Director and heads of departments whose appointments, compensations, powers
and duties shall be determined by the board of directors. It is worthy to note that a College Dean is
not among the corporate officers mentioned in respondent’s by-laws. Petitioner, being an academic
dean, also held an administrative post in the university but not a corporate office as contemplated
by law. Petitioner was not directly elected nor appointed by the board of directors to any corporate
office but her appointment was merely approved by the board together with the other academic
deans of respondent university in accordance with the procedure prescribed in respondent’s
Administrative Manual. The act of the board of directors in approving the appointment of
petitioner as Dean of the College of Therapy did not make her a corporate officer of the corporation.
Page 198 of 434

Moreover, the CA, in its amended decision erroneously equated the position of a College Director
to that of a College Dean thereby concluding that petitioner is an officer of respondent. It bears
stressing that the appointive officials mentioned in Article V of respondent’s by-laws are not
corporate officers under the contemplation of the law. Though the board of directors may create
appointive positions other than the positions of corporate officers, the persons occupying such
positions cannot be deemed as corporate officers as contemplated by Section 25 of the Corporation
Code.
MEETINGS
Nieto, Jr. v. Securities and Exchange Commission, et. al.

G.R. No. 175263, March 14, 2012, Perez, J:
Whichever way the Court of Appeals decides the case would not have any effect on Nieto. The
nullification of the SEC’s decision to call for a stockholders’ meeting is a decision on the SEC’s
authority to call for a meeting. It was not about, and would not result into, a prohibition against an
agreement by the parties to, in fact and of their own accord, call for a stockholder’s meeting.
The parties, specifically Nieto, effectively removed the issues from the courts. While the courts
can go ahead and render a decision, as did the Court of Appeals, Nieto has divested himself of interest
therein and as to him, mooted the case. Nieto could not stop the Court of Appeals from proceeding
until rendition of judgment, and he cannot now question such judgment.
Facts:
The voting shares of PHC were 80.5% owned by Philcomsat, which in turn, was wholly owned by
the Philippine Overseas Telecommunications Corporation (POTC).
The PHC Board of Directors (Board) informed the SEC that they had decided not to convene the
stockholders’ meeting for 2005 pending results of the 2004 election, which was then the subject of
various court litigations. Jose Ozamiz (Ozamiz), a minority stockholder of PHC, wrote to SEC and
requested the issuance of a cease and desist order from SEC against the group of Nieto, consisting
of directors and officers of PHC, in order to prevent the latter from allegedly dissipating the
corporate assets; and that a stockholders’ meeting be convened. In response to Ozamiz’s letter,
Nieto alleged that Ozamiz was attempting to pre-empt any judgment in cases pending before the
various courts involving the stockholders of Philcomsat, POTC and PHC.
Another letter was filed by Ozamiz to SEC urging the latter to order PHC to hold a stockholders’
meeting to elect a new set of directors and officers and to form the NOMELEC (A Nomination’s
Committee). The SEC issued another Order reiterating the demand that PHC convene its annual
stockholders’ meeting. Nieto filed a petition for certiorari and prohibition to enjoin the SEC from
calling the PHC’s annual stockholder’s meeting. During the pendency of the petition before the
Court of Appeals, the majority stockholders of PHC entered into a Memorandum of Understanding
(MOU) agreeing to unite and form a common slate for the Board in POTC, Philcomsat and PHC.
They requested the SEC to set a date for the annual stockholders’ meeting. The group of Nieto was
a party to the MOU.
Page 199 of 434

Four (4) days after the execution of the MOU, the Court of Appeals issued a Temporary Restraining
Order (TRO) enjoining SEC from implementing its orders. Thereafter, petitioner filed a Motion to
Withdraw Petition in view of the MOU. This action notwithstanding, the Court of Appeals
proceeded to render a Decision annulling the assailed orders of the SEC and directing it to cease
exercising its regulatory powers.
In this petition with prayer for a TRO and preliminary injunction, petitioner anchors its argument
mainly on the view that the Court of Appeals should have granted the withdrawal of the petition
and should not have proceeded to decide the case.
Issue: Whether the Court of Appeals erred in resolving the issue on SEC’s authority to compel the
calling of the stockholders’ meeting notwithstanding the fact that supervening events
Held: The petition was dismissed for being moot and academic.
Whichever way the Court of Appeals decides the case would not have any effect on Nieto. The
nullification of the SEC’s decision to call for a stockholders’ meeting is a decision on the SEC’s
authority to call for a meeting. It was not about, and would not result into, a prohibition against an
agreement by the parties to, in fact and of their own accord, call for a stockholder’s meeting.
The parties, specifically Nieto, effectively removed the issues from the courts. While the courts can
go ahead and render a decision, as did the Court of Appeals, Nieto has divested himself of interest
therein and as to him, mooted the case. Nieto could not stop the Court of Appeals from proceeding
until rendition of judgment, and he cannot now question such judgment.
_____________________________________________________________________________________
LOPEZ REALTY, INC. AND ASUNCION LOPEZ-GONZALES vs. SPOUSES REYNALDO

TANJANGCO AND MARIA LUISA ARGUELLES-TANJANGCO
G.R. No. 154291, November 12, 2014, J. Reyes
The petitioner assails the validity of sale of shares of stocks to the respondents claiming that
there was no compliance with the requirement of prior notice to the Board of Directors when the Board
Resolution authorizing the sale to the respondent spouses were promulgated. The Supreme Court
ruled that the general rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general law. However,
the actions taken in such a meeting by the directors or trustees may be ratified expressly or impliedly.
Facts:
The petitioner Lopez Realty, Inc. issued a Board Resolution authorizing Arturo, a member
of the Board of Directors of the corporation, to negotiate with the Tanjanco spouses for the sale of
the ½ shares of LRI (Lopez Realty Corporation). Because of this, Arturo and the spouses executed
a Deed of Sale for the shares for a consideration of Php3.6M. However, Asuncion, another Board of
Director of the said corporation, submitted a letter requesting the Board to defer any transaction
with Tanjanco as she was not apprised and given notice of the said transaction. Despite this, the
execution of the Deed of Absolute Sale between Arturo and spouses Tanjanco proceeded. Asuncion
then filed a complaint for the Annulment of the Deed of Sale with a prayer for a writ of preliminary
Page 200 of 434

injuction in the Regional Trial Court. Asuncion alleges that she was neither notified nor apprised
of the on-going sale of the shares of LRI.
The Regional Trial Court granted the prayer of Asuncion and declared the subject deed null
and void for failure to comply with the strict procedural requirements. The RTC ruled that for a
Board Resolution authorizing the sale of share to be valid, it is necessary that notice must be sent
to the Board of Directors at least one day prior to the said board meeting. However, on appeal, the
Court of Appeals reversed and set aside the decision of the RTC. Hence, the current petition.
Issue:
Whether or not the sale of the shares of stock of LRI to respondent spouses Tanjanco are
valid pursuant to the Board Resolution promulgated by LRI despite lack of notice to Asuncion, one
of its Board of Directors.
Ruling:
The sale of the shares of stock of LRI to the respondent spouses Tanjanco is deemed valid
because the Board Resolution from which it is derived is also valid despite the lack of the required
prior notice to its Board of Directors. The Supreme Court reinstated the decision of the RTC and
affirmed the decision of the Court of Appeals.
Section 53 of the Corporation Code provides for the following:
SEC. 53. Regular and special meetings of directors or trustees.— Regular meetings of the
board of directors or trustees of every corporation shall be held monthly, unless the by-laws
provide otherwise.
Special meetings of the board of directors or trustees may be held at any time upon call of
the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or outside of the

Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings
stating the date, time and place of the meeting must be sent to every director or trustee at
least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws.
A director or trustee may waive this requirement, either expressly or impliedly.
The general rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general law. Thus,
directors must act as a body in a meeting called pursuant to the law or the corporation's by-laws,
otherwise, any action taken therein may be questioned by any objecting director or shareholder.
However, the actions taken in such a meeting by the directors or trustees may be ratified
expressly or impliedly. "Ratification means that the principal voluntarily adopts, confirms and gives
sanction to some unauthorized act of its agent on its behalf. It is this voluntary choice, knowingly
made, which amounts to a ratification of what was theretofore unauthorized and becomes the
authorized act of the party so making the ratification. The substance of the doctrine is confirmation
after conduct, amounting to a substitute for a prior authority. Ratification can be made either
Page 201 of 434

expressly or impliedly. Implied ratification may take various forms — like silence or acquiescence,
acts showing approval or adoption of the act, or acceptance and retention of benefits flowing
therefrom."
In the present case, the ratification was expressed through the July 30, 1982 Board
Resolution. Asuncion claims that the July 30, 1982 Board Resolution did not ratify the Board
Resolution dated August 17, 1981 for lack of the required number of votes because Juanito is not
entitled to vote while Leo voted "no" to the ratification of the sale even if the minutes stated
otherwise.
_____________________________________________________________________________________
SIMNY G. GUY, AS MINORITY STOCKHOLDER AND FOR AND IN BEHALF OF

GOODLAND COMPANY, INC., Petitioner, v. GILBERT G. GUY, ALVIN AGUSTIN T. IGNACIO
AND JOHN AND/OR JANE DOES, Respondents.
G.R. No. 184068, April 19, 2016, SERENO, C.J.
Where the law speaks in clear and categorical language, there is no room for interpretation.
The provisions under Section 50 of the Corporation Code and the by-laws of GCI are clear and
unambiguous. The provisions only require the sending/mailing of the notice of a stockholders'
meeting to the stockholders of the corporation. "Send" means to deposit in the mail or deliver for
transmission by any other usual means of communication with postage or cost of transmission
provided for and properly addressed. It is not required that the notice of stockholder’s meeting
be actually received by the stockholder within the period allowed in the Corporation Code or the By-
laws.
A "stockholder of record" is defined as a person who desires to be recognized as stockholder

for the purpose of exercising stockholders' right and must secure standing by having his ownership of
share recorded on the stock and transfer book. Thus, only those whose ownership of shares are
duly registered in the stock and transfer book are considered stockholders of record and are
entitled to all rights of a stockholder.
FACTS:
Goodland Company, Inc. (GCI) is a family-owned corporation of the Guy family duly organized and
existing under Philippine laws. Petitioner Simny G. Guy (Simny) is a stockholder of record and
member of the board of directors of the corporation. Respondents are also GCI stockholders of
record who were allegedly elected as new directors by virtue of the assailed stockholders' meeting
held on 7 September 2004.
On 22 September 2004, or fifteen (15) days after the stockholders' meeting, petitioner received the
notice of meeting. Petitioner, for himself and on behalf of GCI and Grace Guy Cheu (Cheu), filed a
Complaint against respondents before the RTC of Manila for the "Nullification of Stockholders'
Meeting and Election of Directors. Petitoner assailed the election held on 7 September 2004 on the
following grounds: (1) there was no previous notice to petitioner and Cheu; (2) the meeting was not
called by the proper person; and (3) the notices were not issued by the person who had the legal
authority to do so.
Page 202 of 434

The RTC dismissed the Complaint filed by petitioner and Cheu and upheld the validity of the
stockholders’ meeting and election of directors. The same was affirmed by CA in toto.
ISSUES:
1. Whether or not the stockholders’ meeting is valid. This issue is dependent on

a. whether the notice of meeting was properly given in accordance with the Corporation Code
and the By-laws.
b. whether the stockholders’ meeting was called by the proper person.
2. Whether Cheu is entitled to the notice of meeting.
RULING:
1. The stockholders’ meeting is valid.
a. Notice of the stockholders' meeting was properly sent in compliance with law and the by-laws
of the corporation.
For a stockholders' special meeting to be valid, there must be a previous written notice sent to
all stockholders at least one (1) week prior to the scheduled meeting, unless otherwise provided
in the by-laws.
Under the by-laws of GCI, the notice of meeting shall be mailed not less than five (5) days prior
to the date set for the special meeting. The pertinent provision reads:
Section 3. Notice of meeting written or printed for every regular or special meeting of the
stockholders shall be prepared and mailed to the registered post office address of each
stockholder not less than five (5) days prior to the date set for such meeting xxxxxxxxxxxx
The Corporation Code itself permits the shortening (or lengthening) of the period within which
to send the notice to call a special (or regular) meeting. Thus, no irregularity exists in the
mailing of the notice sent by respondent Gilbert G. Guy on 2 September 2004 calling for
the special stockholders' meeting to be held on 7 September 2004, since it abides by what is
stated in GCI's by-laws as quoted above.
Petitioner avers that although the notice was sent by registered mail on 2 September 2004, the
registry return card shows that he received it only on 22 September 2004 or fifteen (15) days
after the stockholders' meeting was held. He insists that actual receipt of the notice of the
stockholders' meeting prior to the date of the meeting is mandatory.
Where the law speaks in clear and categorical language, there is no room for interpretation. The
provisions under Section 50 of the Corporation Code and the by-laws of GCI are clear and
unambiguous. The provisions only require the sending/mailing of the notice of a
stockholders' meeting to the stockholders of the corporation. "Send" means to deposit in the mail
or deliver for transmission by any other usual means of communication with postage or cost of
transmission provided for and properly addressed.
Page 203 of 434

b. Stockholders' meeting was called by the proper person.

c.
As correctly pointed out by defendants [respondents], the applicable provisions of the by-laws
of Goodland are Article II, Sec. 2 which provides that the "special meeting of the stockholders
may be called xxx by order of the President and must be called upon the written request of
stockholders registered as the owners of one-third ( l/3) of the total outstanding stock
and Article IV, Section 3 which provides that "the Vice President, if qualified, shall exercise all
of the functions and perform all the duties of the President, in the absence or disability, for any
cause, of the latter."
Based on the evidence on record and considering the above quoted provisions of Goodland's
By-laws, we rule in favor of defendants [respondents]. The evidence conclusively show that
defendant Gilbert [respondent Guy] is the owner of more than one-third (1/3) of the
outstanding stock of Goodland. In fact, it is around 79.99%. Thus, pursuant to Art. II,
Sec. 2 of the By-laws of Goodland, defendant Gilbert [respondent Guy] may validly call
such special stockholders' meeting.
2. Cheu is not entitled to the notice of meeting since she is not a stockholder of record.
A "stockholder of record" is defined as a person who desires to be recognized as stockholder for the
purpose of exercising stockholders' right and must secure standing by having his ownership of share
recorded on the stock and transfer book. Thus, only those whose ownership of shares are duly
registered in the stock and transfer book are considered stockholders of record and are
entitled to all rights of a stockholder.
Section 63 of the Corporation Code provides that “No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.”
Evidence presented reveals that Cheu’s stockholder certificates were already cancelled and new
certificates were issued already to the buyer of her shares.
ELECTIONS OF BOARD OF DIRECTORS AND TRUSTEES
ESTATE OF DR. JUVENCIO P. ORTAÑEZ, REPRESENTED BY DIVINA ORTAÑEZ-ENDERES,

LIGAYA NOVICIO, AND CESAR ORTAÑEZ, Petitioners, v. JOSE C. LEE, BENJAMIN C. LEE,
CARMENCITA TAN, ANGEL ONG, MA. PAZ CASAL-LEE, JOHN OLIVER PASCUAL,
CONRADO CRUZ, JR., BRENDA ORTAÑEZ, AND JULIE ANN PARADO AND JOHN
DOES, Respondents.
G.R. No. 184251, March 09, 2016, PEREZ, J.
The SC ruled that in the absence of evidence to the contrary, the presumption is that the
respondents were duly elected as directors/officers of Philinterlife during the aforesaid annual
stockholders' meeting.
Facts:
Page 204 of 434

On 6 July 1956, Dr. Ortañez organized and founded the Philippine International Life Insurance
Company, Inc. (Philinterlife). At the time of its incorporation, Dr. Ortañez owned ninety percent
(90%) of the subscribed capital stock of Philinterlife.
Upon his death on 21 July 1980, Dr. Ortañez left behind an estate consisting of, among others, 2,029
shares of stock in Philinterlife, then representing at least 50.725% of the outstanding capital stock
of Philinterlife which was at 4,000 shares valued at P4,000,000.00.
On 30 March 2006, petitioners filed a Complaint for Election Contest before the RTC of Quezon
City. The complaint challenged the lawfulness and validity of the meeting and election conducted
by the group of Jose C. Lee (respondents) et. al. on 15 March 2006. During the assailed meeting, Jose
C. Lee (Lee) et. al. were elected as members of the Board of Directors of Philinterlife.
Petitioners claimed that before the contested election, they formally informed the respondents that
without the participation of the Estate, no quorum would be constituted in the scheduled annual
stockholders’ meeting. Petitioners averred that in spite of their formal announcement and notice
that they were not participating in the session, the respondents continued, in bad faith, with the
illegal meeting. Further, respondents allegedly elected themselves as directors of Philinterlife and
proceeded to elect their own set of officers.
Petitioners, who insisted that they represented at least 51% of the outstanding capital stock of 5,000
shares of Philinterlife, conducted on the same day and in the same venue but in a different room,
their own annual stockholders’ meeting and proceeded to elect their own set of directors. According
to the petitioners, the sale of the shares of the estate to the respondents through the Filipino Loan
Assistance Group (FLAG), as well as the increases in the authorized capita stock of the corporation,
was declared null and void by the court, which decision was affirmed by no longer than the Supreme
Court. They further submitted that the exercise of pre-emptive right of the Estate to acquire 51% of
the additional 1,000 paid up shares of stock, raising the total outstanding capital stock to 5,000
shares, was recognized by the RTC of Quezon City.
Respondents, for their part, categorically denied the material allegations of the complaint and
raised the defense that the stockholders’ meeting they conducted on 15 March 2006 was valid as it
was allegedly attended by stockholders representing 98.76% of the 50,000 shares representing the
authorized and issued capital stock of Philinterlife.
The RTC ruled in favor of the respondents on the ground that the petitioners failed to present the
required preponderance of evidence to substantiate their claim that they were the owners of at least
51% of the outstanding capital stock of Philinterlife. The ruling of the RTC was affirmed by the CA;
Issue: Whether the respondents were validly elected as directors of Philinterlife
Held: Yes. The Court agreed with the lower courts that the petitioners failed to present credible
and convincing evidence that Philinterlife’s outstanding capital stock during the 15 March 2006
annual stockholders’ meeting was 5,000 and that they own more than 2,550 shares or 51% thereof.
The unrebutted presumption is that respondents, were duly elected as directors-officers of
Philinterlife. In the absence of evidence to the contrary, the presumption is that the respondents
Page 205 of 434

were duly elected as directors/officers of Philinterlife during the aforesaid annual stockholders’
meeting. Petitioners cannot, in the instant election contest case, question the increases in the
capital stocks of the corporation.
FIDUCIARY DUTIES AND LIABILITY RULES
Lynvil Fishing Enterprises, Inc., et. al. v. Ariola et.al.

G.R. no. 181974, February 1, 2012; Perez, J:
A corporation being a juridical entity, may act only through its directors, officers and
employees. Obligations incurred by them, acting as such corporate agents, are not theirs but the
direct accountabilities of the corporation they represent. True, solidary liabilities may at times be
incurred but only when exceptional circumstances warrant such as when directors and trustees or, in
appropriate cases, the officers of a corporation act in bad faith or with gross negligence in directing
the corporate affairs.
Facts:
Lynvil Fishing Enterprises, Inc. (Lynvil) is a company engaged in deep-sea fishing, operating along
the shores of Palawan and other outlying islands of the Philippines.4 It is operated and managed by
Rosendo S. de Borja.
On 1 August 1998, Lynvil received a report from Romanito Clarido, one of its employees, that on 31
July 1998, he witnessed that while on board the company vessel Analyn VIII, Lynvil employees,
namely: Andres G. Ariola (Ariola), the captain; Jessie D. Alcovendas (Alcovendas), Chief Mate;
Jimmy B. Calinao (Calinao), Chief Engineer; Ismael G. Nubla (Nubla), cook; Elorde Bañez (Bañez),
oiler; and Leopoldo D. Sebullen (Sebullen), bodegero, conspired with one another and stole eight
(8) tubs of "pampano" and "tangigue" fish and delivered them to another vessel, to the prejudice of
Lynvil.
The said employees were engaged on a per trip basis or "por viaje" which terminates at the end of
each trip. Ariola, Alcovendas and Calinao were managerial field personnel while the rest of the crew
were field personnel.
By reason of the report and after initial investigation, Lynvil’s General Manager summoned
respondents to explain within five (5) days why they should not be dismissed from service.
However, except for Alcovendas and Bañez, the respondents refused to sign the receipt of the
notice.
Failing to explain as required, respondents’ employment was terminated. Lynvil further filed a
criminal complaint against the dismissed employees for violation of P.D. 532, or the Anti-Piracy and
Anti-Highway Robbery Law of 1974 before the Office of the City Prosecutor of Malabon City for
which a probable cause was found.
The respondents, on the other hand, interposed that they delivered the fish to a consignee and that
except for Alcovenda and Banez, no notice was sent to them. Aggrieved, the employees filed with
the Arbitration Branch of the National Labor Relations Commission a complaint for illegal dismissal
with claims for backwages, salary differential reinstatement, service incentive leave, holiday pay
Page 206 of 434

and its premium and 13th month pay from 1996 to1998. They also claimed for moral, exemplary
damages and attorney’s fees for their dismissal with bad faith.
The Labor Arbiter sided with the employees and upheld their illegal dismissal. The NLRC reversed
the decision on the ground that the employees were merely contractual employees. The employees
filed a petition for certiorari. The CA reversed the decision of the NLRC and reinstated the decision
of the NLRC. The CA further ruled that the General Manager is not solidarily liable for damages.
Issue: Whether the General Manager may be held solidarily liable for the illegal dismissal of the
employees
Held: No.
A corporation being a juridical entity, may act only through its directors, officers and employees.
Obligations incurred by them, acting as such corporate agents, are not theirs but the direct
accountabilities of the corporation they represent. True, solidary liabilities may at times be incurred
but only when exceptional circumstances warrant such as when directors and trustees or, in
appropriate cases, the officers of a corporation act in bad faith or with gross negligence in directing
the corporate affairs.
In this case, there was no evidence on record that indicates commission of bad faith on the part of
De Borja. He is the general manager of Lynvil, the one tasked with the supervision by the employees
and the operation of the business. However, there is no proof that he imposed on the respondents
the "por viaje" provision for purpose of effecting their summary dismissal.
_____________________________________________________________________________________
MORESCO II V. CAGALAWAN
G.R. NO. 175170, SEPTEMBER 5, 2012
Respondent Cagalawan filed a case for illegal constructive dismissal against petitioner. Aside from
reinstatement and backwages, Cagalawan sought to recover damages and attorney’s fees because
to him, his transfer was effected in a wanton, fraudulent, oppressive or malevolent manner. Apart
from MORESCO II, he averred that Ke-e (General Manager) and Subrado (Board Chairman) should
also be held personally liable for damages since the two were guilty of bad faith in effecting his
transfer. He believed that Subrado had a hand in his arbitrary transfer considering that he is the
son-in-law of Subrado’s opponent in the recent election for directorship in the electric cooperative.
Issue: Can Ke-e and Subrado be held solidarily liable?
Held: No. In the Decision of the Labor Arbiter, the manager of MORESCO II was held to have acted
in an arbitrary manner in effecting Cagalawan’s transfer such that moral and exemplary damages
were awarded in the latter’s favor. However, the said Decision did not touch on the issue of bad
faith on the part of MORESCO II’s officers, namely, Ke-e and Subrado. Consequently, no
pronouncement was made as to whether the two are also personally liable for Cagalawan’s money
claims arising from his constructive dismissal. Still, we hold that Ke-e and Subrado cannot be held
personally liable for Cagalawan’s money claims.
Page 207 of 434

"Bad faith does not simply connote bad judgment or negligence; it imputes a dishonest purpose or
some moral obliquity and conscious doing of a wrong; a breach of sworn duty through some motive
or intent or ill will; it partakes of the nature of fraud." Here, although Ke-e acted in an arbitrary
manner in effecting Cagalawan’s transfer, the same, absent any showing of some dishonest or
wrongful purpose, does not amount to bad faith.
Suffice it to say that bad faith must be established clearly and convincingly as the same is never
presumed. Similarly, no bad faith can be presumed from the fact that Subrado was the opponent of
Cagalawan’s father-in-law in the election for directorship in the cooperative. Cagalawan's claim that
this was one of the reasons why he was transferred is a mere allegation without proof. Neither does
Subrado 's alleged instruction to file a complaint against Cagalawan bolster the Iatter's claim that
the former had malicious intention against him. As the Chairman of the Board of Directors of
MORESCO II, Subrado has the duty and obligation to act upon complaints of its clients. On the
contrary, the Court finds that Subrado had no participation whatsoever in Cagalawan's illegal
dismissal; hence the imputation of bad faith against him is untenable.
_____________________________________________________________________________________
Elizabeth M. Gagui vs. Simeon Dejero and Teodoro Permejo

G.R. No. 196036; October 23, 2013
CJ. Sereno
Although joint and solidary liability for money claims and damages against a corporation
attaches to its corporate directors and officers under R.A. 8042, it is not automatic. To make them
jointly and solidarily liable, there must be a finding that they were remiss in directing the affairs of
the corporation, resulting in the conduct of illegal activities. Absent any findings regarding the same,
the corporate directors and officers cannot be held liable for the obligation of the corporation against
the judgment debtor.
Furthermore, an order impleading a corporate officer for the purpose of execution is

tantamount to modifying a decision that had long become final and executory. Holding a corporate
officer liable despite not being ordained as such by the decision contravenes with the doctrine on
immutability of judgments and is, therefore, null and void for lack of jurisdiction, including the entire
proceedings held for that purpose.
Facts:
Respondents Dejero and Permejo filed separate Complaints for illegal dismissal, non-payment of
salaries and overtime pay, refund of transportation expenses, damages and attorney’s fees against
PRO Agency Manila, Inc. and Abdul Rahman Al Mahwes.
After due proceedings, on 7 May 1997, the Labor Arbiter rendered decision orderingPRO Agency
Manila, Inc. and Abdul Rahman Al Mahwes to jointly and severally pay complainants. Pursuant to
this Decision, a Writ of Execution was issued. When the writ was returned unsatisfied, an Alias
Writ of Execution was issued, but was also returned unsatisfied. Subsequently, respondents filed a
Motion to Implead Pro Agency Manila’s Corporate Officers and Directors as Judgment Debtors.
Page 208 of 434

Later on, the Labor Arbiter issued an Order granting the motion to implead. As a result, Merlita
Lapuz and Elizabeth Gagui were held liable to pay the complainants jointly and solidarily.
A 2nd Alias Writ of Execution was issued, which resulted in the garnishment of petitioner’s bank
deposit. However, since the judgment remained unsatisfied, respondents sought the issuance of a
3rd alias writ of execution, which was granted by the Labor Arbiter. This resulted in the levying of
two parcels of lot owned by the petitioner.
Subsequently, the petitioner filed a Motion to Quash 3rd Alias Writ of Execution and a Supplemental
Motion to Quash Alias Writ of Execution. In these motions, petitioner alleged that apart from not
being made aware that she was impleaded as one of the parties to the case, the dispositive portion
of the 1997 Decision did not hold her liable in any form whatsoever. More importantly, impleading
her for the purpose of execution was tantamount to modifying a decision that had long become
final and executory.
On June 26, 2006, the Executive Labor Arbiter denied the petitioner’s motions. Aggrieved,
petitioner appealed to the NLRC, which later on rendered a decision denying the appeal for lack of
merit. Upon appellate review, the CA affirmed the NLRC Decision and stated that there was “no
need for the petitioner to be impleaded because by express provision of the law, she is made
solidarily liable with Pro Agency Manila, Inc., for any and all money claims filed by private
respondents. The CA further said that the same is not a case in which the liability of the corporate
officer must be established because an allegation of malice must be proven. The general rule is that
corporate officers, directors and stockholders are not liable, except when they are made liable for
their corporate act by a specific provision of law, such as R.A. 8042.
The petitioner filed two Motions for Reconsideration, but both were denied. Hence, the petition
for review.
Issues:
1) Whether or not the corporate officers and directors may be held liable jointly and severally
liable with the corporation in accordance with Section 10 of R.A. 8042, despite not having
been impleaded in the Complaint and named in the Decision.
2) Whether or not impleading and holding a corporate officer or director for the purpose of
execution, despite not being ordained as such by the decision, is proper.
RULING:
Petition Granted.
1) In Sto. Tomas v. Salac, the Court had the opportunity to pass upon the constitutionality of
this provision. The Court have thus maintained:
The key issue that Gumabay, et al. present is whether or not the 2nd paragraph of
Section 10, R.A. 8042, which holds the corporate directors, officers, and partners of
recruitment and placement agencies jointly and solidarily liable for money claims
and damages that may be adjudged against the latter agencies, is unconstitutional.
xxxx
Page 209 of 434

But the Court has already held, pending adjudication of this case, that the liability
of corporate directors and officers is not automatic. To make them jointly and
solidarily liable with their company, there must be a finding that they were remiss
in directing the affairs of that company, such as sponsoring or tolerating the conduct
of illegal activities. In the case of Becmen and White Falcon, while there is evidence
that these companies were at fault in not investigating the cause of Jasmin’s death,
there is no mention of any evidence in the case against them that intervenors
Gumabay, et al., Becmen’s corporate officers and directors, were personally involved
in their company’s particular actions or omissions in Jasmin’s case.
Hence, for petitioner to be found jointly and solidarily liable, there must be a separate finding that
she was remiss in directing the affairs of the agency, resulting in the illegal dismissal of respondents.
Examination of the records would reveal that there was no finding of neglect on the part of the
petitioner in directing the affairs of the agency. In fact, respondents made no mention of any
instance when petitioner allegedly failed to manage the agency in accordance with law, thereby
contributing to their illegal dismissal.
2) The petitioner is correct in saying that impleading her for the purpose of execution
is tantamount to modifying a decision that had long become final and executory. The fallo of the
1997 Decision by the NLRC only held "respondents Pro Agency Manila Inc., and Abdul Rahman Al
Mahwes to jointly and severally pay complainants x x x." By holding her liable despite not being
ordained as such by the decision, both the CA and NLRC violated the doctrine on immutability of
judgments.
Once a decision or order becomes final and executory, it is removed from the power or jurisdiction
of the court which rendered it to further alter or amend it. It thereby becomes immutable and
unalterable and any amendment or alteration which substantially affects a final and executory
judgment is null and void for lack of jurisdiction, including the entire proceedings held for that
purpose.
While labor laws should be construed liberally in favor of labor, we must be able to balance this
with the equally important right of petitioner to due process. Because the 1997 Decision of Labor
Arbiter was not appealed, it became final and executory and was therefore removed from his
jurisdiction. Modifying the tenor of the judgment via a motion impleading petitioner and filed only
in 2002 runs contrary to settled jurisprudence, rendering such action a nullity.
_____________________________________________________________________________________
Rodolfo Laborte and Philippine Tourism Authority vs. Pagsanjan Tourism Consumers
Cooperative
G.R. No. 183860; January 15, 2014
J. Reyes
Operation by a cooperative of a restaurant and boat ride services in an administration

complex owned by a Government Owned and Controlled Corporation may, in the absence of any
contract, concession and franchise, be terminated any time so as to allow the latter to fulfil its
mandated duty as tourism administrator.
Page 210 of 434

Facts:
Petitioner Philippine Tourism Authority (PTA) is a GOCC that administers tourism zones as
mandated by P.D. 564. PTA used to operate the Philippine Gorge Tourist Zone (PGTZ)
Administration Complex (PTA Complex), a declared tourist zone in Pagsanjan, Laguna.
On the other hand, respondent Pagsanjan Tourism Consumers’ Cooperative (PTCC), is a

cooperative organized under the Cooperative Code of the Philippines and the other respondents
are PTCC employees, consisting of restaurant staff and boatmen at the PTA Complex.
During sometime, PTA implemented a reorganization and reshuffling in its top level management.
Rodolfo Laborte was designated as Area Manager in the CALABARZON area with direct supervision
over the PTA Complex and other entities at the Southern Luzon.
In view of PTA Complex’s rehabilitation and upgrading project, Laborte served a written notice to
the respondents to cease operation of the restaurant business and boat ride services. Consequently,
PTCC filed a Complaint for Prohibition, Injunction and Damages with TRO and Preliminary
Injunction against Laborte. Subsequently, the trial court issued the TRO prayed for.
Opposing the issuance of the TRO, Laborte averred that the PTCC does not own the restaurant
facility as it was onlyt olerated to operate the same by the PTA as a matter of lending support and
assistance to the cooperative in its formative years. Since PTCC had no contract, concession, or
exclusive franchise to operate the restaurant business and the boating services in the PTA Complex,
no existing right has been allegedly violated by the petitioners. RTC rendered a decision in favor of
the respondents.
Laborte and PTA appealed to the CA. Later on, CA promulgated its decision affirming RTC’s
decision. A motion for reconsideration was filed, but was denied for lack of merit. Hence, the
petition.
Petitioners assert that the PTA is mandated to administer tourism zones and it has adopted a
comprehensive program and project to rehabilitate and upgrade the facilities of the PTA complex
and that PTCC has novested right to continue operating the restaurant and boat ride services since
it has no contract, concession or exclusive franchise with PTA.
Issue:
Whether or not PTA can validly terminate PTCC’s operation.
Ruling:
Petition Granted.
The PTA is a government owned and controlled corporation which was mandated to administer
tourism zones. Based on this mandate, it was the PTA’s obligation to adopt a comprehensive
program and project to rehabilitate and upgrade the facilities of the PTA. The Court finds that there
was indeed a renovation of the Pagsanjan Administration Complex which was sanctioned by the
PTA main office; and such renovation was done in good faith in performance of its mandated duties
Page 211 of 434

as tourism administrator. In the exercise of its management prerogative to determine what is best
for the said agency, the PTA had the right to terminate at any moment the PTCC’s operations of
the restaurant and the boat ride services since the PTCC has no contract, concession or franchise
from the PTA to operate the above-mentioned businesses. As shown by the records, the operation
of the restaurant and the boat ride services was merely tolerated, in order to extend financial
assistance to its PTA employee-members who are members of the then fledging PTCC.
Except for receipts for rents paid by the PTCC to the PTA, the respondents failed to show any
contract, concession agreement or franchise to operate the restaurant and boat ride services. In
fact, the PTCC initially did not implead the PTA in its Complaint since it was well aware that there
was no contract executed between the PTCC and the PTA. While the PTCC has been operating the
restaurant and boat ride services for almost ten (10) years until its closure, the same was by mere
tolerance of the PTA. In the consolidated case of Phil. Ports Authority v. Pier 8 Arrastre &
Stevedoring Services, Inc., the Court upheld the authority of government agencies to terminate at
any time hold-over permits. Thus, considering that the PTCC’s operation of the restaurant and the
boat ride services was by mere tolerance, the PTA can, at any time, terminate such operation.
With respect to Laborte's liability in his official and personal capacity, the Court finds that Laborte
was simply implementing the lawful order of the PTA Management. As a general rule the officer
cannot be held personally liable with the corporation, whether civilly or otherwise, for the
consequences of his acts, if acted for and in behalf of the corporation, within the scope of his
authority and in good faith. Thus, the Court finds no basis to hold petitioner Laborte liable.
RESPONSIBILITY FOR CRIMES
FEDERATED LPG DEALERS ASSOCIATION, Petitioner, -versus- MA. CRISTINA L. DEL

ROSARIO, CELSO E. ESCOBIDO U, SHIELA M. ESCOBIDO, and RESTY P. CAPILI,
Respondents.
G.R. No. 202639, November 9, 2016, SECOND DIVISION, DEL CASTILLO, J.
In the case of Ty v. NBI Supervising Agent De Jemil, the Court ruled that a member of the
Board of Directors of a corporation, cannot, by mere reason of such membership, be held liable for the
corporation's probable violation of BP 33.
FACTS:
Respondent Antonio is the General Manager of ACCS Ideal Gas Corporation (ACCS) while the other
respondents are members of the Board of Directors.
Atty. Adarlo wrote the CIDG-AFCCD informing the latter that ACCS, which allegedly has been
refilling branded LPG cylinders in its refilling plant, has no authority to refill per certifications from
gas companies owning the branded LPG cylinders.
Having reasonable grounds to believe that ACCS was in violation of BP 33, P/Supt. Esguerra filed
with the Regional Trial Court (RTC) of Manila applications for search warrant against the officers
of ACCS. This resulted in the seizure of an electric motor, a hose with filling head, scales, v-belt,
vapor compressor, booklets of various receipts, and 73 LPG cylinders of various brands and sizes,
Page 212 of 434

four of which were filled, i.e., two Superkalan 3.7 kg. LPG cylinders, one Shellane 11 kg. LPG cylinder,
and one Totalgaz 11 kg. cylinder. Inspection and evaluation of the said filled LPG cylinders showed
that they were underfilled by 0.5 kg. to 0.9 kg.
Complaint-Affidavits were filed before the Department of Justice (DOJ) against Antonio and
respondents for illegal trading of petroleum products and for underfilling of LPG cylinders under
Section 2(a) and 2(c), respectively, of BP 33, as amended. Secretary of Justice approved the finding
of probable cause albeit only against Antonio. P/Supt. Esguerra and petitioner elevated the matter
to the CA through a certiorari petition. They contended that the Secretary of Justice acted with
grave abuse of discretion amounting to lack of or in excess of jurisdiction in affirming the dropping
of other respondents from the complaints. CA, however, sustatined the Secretary of Justice.
ISSUE:
Can respondents, as members of the Board of Directors of ACCS, be criminally prosecuted for the
latter's alleged violation/s of BP 33 as amended?
RULING;
Respondents cannot be prosecuted for ACCS' alleged violations of BP 33. They were thus
correctly dropped as respondents in the complaints.
The CA ratiocinated that by the election or designation of Antonio as General Manager of ACCS,
the daily business operations of the corporation were vested in his hands and had ceased to be the
responsibility of respondents as members of the Board of Directors. Respondents, therefore, were
not officers charged with the management of the business affairs who could be held liable pursuant
to paragraph 3, Section 4 of BP 33, as amended, which states that:
When the offender is a corporation, partnership, or other juridical person, the president,
the general manager, managing partner, or such other officer charged with the management
of the business affairs thereof, or employee responsible for the violation shall be criminally
liable. xxx
In the case of Ty v. NBI Supervising Agent De Jemil, the Court ruled that a member of the Board of
Directors of a corporation, cannot, by mere reason of such membership, be held liable for the
corporation's probable violation of BP 33. If one is not the President, General Manager or Managing
Partner, it is imperative that it first be shown that he/she falls under the catch-all ''such other officer
charged with the management of the business affairs," before he/she can be prosecuted. However,
it must be stressed, that the matter of being an officer charged with the management of the business
affairs is a factual issue which must be alleged and supposed by evidence. Here, there is no dispute
that neither of the respondents was the President, General Manager, or Managing Partner of ACCS.
Hence, it becomes incumbent upon petitioner to show that respondents were officers charged with
the management of the business affairs. However, the Complaint-Affidavit attached to the records
merely states that respondents were members of the Board of Directors based on the AOI of ACCS.
There is no allegation whatsoever that they were in-charge of the management of the corporation's
business affairs.
Page 213 of 434

At any rate, the Court has gone through the By-Laws of ACCS and found nothing therein which
would suggest that respondents were directly involved in the day-to-day operations of the
corporation. The By-laws contains a general statement that the corporate powers of ACCS shall be
exercised, all business conducted, and all property of the corporation controlled and held by the
Board of Directors. Notably, however, the bylaws likewise significantly vests the Board with specific
powers that were generally concerned with policy making from which it can reasonably be deduced
that the Board only concerns itself in the business affairs by setting administrative and operational
policies.
Clearly, therefore, it is only Antonio, who undisputedly was the General Manager - a position among
those expressly mentioned as criminally liable under paragraph 4, Section 3 of BP 33, as amended -
can be prosecuted for ACCS' perceived violations of the said law. Respondents who were mere
members of the Board of Directors and not shown to be charged with the management of the
business affairs were thus correctly dropped as respondents in the complaints.
A transfer of corporate property to the corporation’s President as compensation for his “outstanding
service” cannot be considered valid if it does not comply with Section 32 of the Corporation Code.
Here, we note that Javonillo, as a director, signed the Board Resolutions confirming the transfer of
the corporate properties to himself, and to Armentano (the Corporate Secretary). The transfer is
not valid even if there was a Resolution by the general membership of ALRAI confirming the
transfer. First, Section 32 requires that the contract should be ratified by a vote representing at least
two-thirds of the members in a meeting called for the purpose. Records of this case do not show
whether the Resolution was indeed voted by the required percentage of membership. In fact,
respondents take exception to the credibility of the signatures of the persons who voted in the
Resolution. Second, there is also no showing that there was full disclosure of the adverse interest
of the directors involved when the Resolution was approved. Third, Section 32 requires that the
contract be fair and reasonable under the circumstances. As previously discussed, we find that the
transfer of the corporate properties to the individual petitioners is not fair and reasonable for (1)
want of (proof of) legitimate corporate purpose because there was no basis by which it could have
been determined whether the transfer of properties to Javonillo and Armentano was reasonable
under the circumstances at that time and for (2) the breach of the fiduciary nature of the positions
held by Javonillo and Armentano. Lacking any of these (full disclosure and a showing that the
contract is fair and reasonable), ratification by the two-thirds vote would be of no avail. Agdao
Landless Residents Association et. al v. Maramion et. al G.R. Nos. 188642 & 189425, October
17, 2016
RIGHT TO INSPECT
ADERITO Z. YUJUICO AND BONIFACIO C. SUMBILLA vs. CEZAR T. QUIAMBAO

AND ERIC C. PILAPIL
G.R. No. 180416, June 02, 2014, J. Perez
A criminal action based on the violation of a stockholder's right to examine or inspect the
corporate records and the stock and transfer hook of a corporation under the second and fourth
paragraphs of Section 74 of the Corporation Code can only he maintained against corporate officers
or any other persons acting on behalf of such corporation. The complaint and the evidence Quiambao
and Sumbilla submitted during preliminary investigation do not establish that Quiambao and Pilapil
were acting on behalf of STRADEC. Violations of Section 74 contemplates a situation wherein a
Page 214 of 434

corporation, acting thru one of its officers or agents, denies the right of any of its stockholders to
inspect the records, minutes and the stock and transfer book of such corporation. Thus, the dismissal
is valid.
Facts:
Strategic Alliance Development Corporation is a domestic corporation operating as a

business development and investment company. On 1 March 2004, during the annual stockholder's
meeting of STRADEC, Aderito Z. Yujuico was elected as president and chairman of the
company. Yujuico replaced Cezar T. Quiambao, who had been the president and chairman of
STRADEC since 1994. STRADEC appointed petitioner Bonifacio C. Sumbilla as treasurer and one
Joselito John G. Blando as corporate secretary. Blando replaced respondent Eric C. Pilapil, the
previous corporate secretary of STRADEC. On 12 August 2005, Yujuico and Sumbilla filed a criminal
complaint against Quiambao and Pilapil and one Giovanni T. Casanova before the Office of the City
Prosecutor of Pasig City. The complaint accuses Quiambao, Pilapil and Casanova of violating
Section 74 in relation to Section 144 of the Corporation Code.
That during the stockholders' meeting, Yujuico--as newly elected president and chairman
of STRADEC--demanded Quiambao for the turnover of the corporate records of the company,
particularly the accounting files, ledgers, journals and other records of the corporation's business.
Quiambao refused. After the stockholders' meeting, Quiambao and Casanova caused the removal
of the corporate records of STRADEC from the company's offices in Pasig City. Upon his
appointment as corporate secretary, Blando likewise demanded Pilapil for the turnover of the stock
and transfer book of STRADEC. Pilapil refused. On 25 June 2004, Pilapil proposed to Blando to have
the stock and transfer book deposited in a safety deposit box with Equitable Pel Bank. Blando
acceded to the proposal and the stock and transfer book was deposited in a safety deposit box with
the bank identified. It was agreed that the safety deposit box may only be opened in the presence
of both Quiambao and Blando. Quiambao and Pilapil withdrew the stock and transfer book from
the safety deposit box and brought it to the offices of the Stradcom Corporation in Quezon City.
Quiambao thereafter asked Blando to proceed to the STRADCOM offices. Upon arriving thereat,
Quiambao pressured Blando to make certain entries in the stock and transfer books. After making
such entries, Blando again demanded that he be given possession of the stock and transfer book.
Quiambao refused.
Blando received an order issued by the RTC of Pasig City, which directed him to cancel the
entries he made in the stock and transfer book. Blando wrote letters to Quiambao and Pilapil once
again demanding for the turnover of the stock and transfer book. Pilapil replied where he appeared
to agree to Blando's demand. However, Quiambao still refused to turnover the stock and transfer
book to Blando. Blando was once again constrained to agree to a proposal by Pilapil to have the
stock and transfer book deposited with the RTC of Pasig City. The said court, however, refused to
accept such deposit on the ground that it had no place for safekeeping.
Since Quiambao and Pilapil still refused to turnover the stock and transfer book, Blando
again acceded to have the book deposited in a safety deposit box, this time, with the Export and
Industry Bank. Yujuico and Sumbilla theorize that the refusal by the Quiambao, Pilapil and
Casanova to turnover STRADEC's corporate records and stock and transfer book violates their right,
as stockholders, directors and officers of the corporation, to inspect such records and book under
Page 215 of 434

Section 74 of the Corporation Code and may be held criminally liable pursuant to Section 144 of the
Corporation Code.
The MeTC partially granted the Urgent Omnibus Motion. The MeTC ordered the issuance
of a warrant of arrest against Quiambao and Pilapil. The RTC issued a TRO enjoining the MeTC
from conducting further proceedings in Criminal Case No. 89724.
The RTC granted Quiambao and Pilapil’s certiorari petition and directing the dismissal of
Criminal Case No. 89724. According to the RTC, the MeTC committed grave abuse of discretion in
issuing a warrant of arrest against Quiambao and Pilapil. The RTC opined that refusing to allow
inspection of the stock and transfer book, as opposed to refusing examination of other corporate
records, is not punishable as an offense under the Corporation Code. The petitioners moved for
reconsideration, but the RTC remained steadfast. Hence, this petition by Yujuico and Sumbilla.
Issue:
Whether or not the RTC’s refusal to allow inspection of the stock and transfer book of a
corporation is not a punishable offense under the Corporation Code, such a refusal still amounts to
a violation of Section 74 of the Corporation Code, for which Section 144 of the same code prescribes
a penalty.cra1aw
Ruling:
No, there is no violation of the Corporation, thus, dismissal of the complaint is warranted.
The act of refusing to allow inspection of the stock and transfer book of a corporation, when
done in violation of Section 74(4) of the Corporation Code, is punishable as an offense under
Section 144 of the same code. In justifying this conclusion, the RTC seemingly relied on the fact
that, under Section 74 of the Corporation Code, the application of Section 144 is expressly
mentioned only in relation to the act of "refusing to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from the corporation's records or
minutes" that excludes its stock and transfer book, the same does not mean that the latter section
no longer applies to any other possible violations of the former section. It must be emphasized that
Section 144 already purports to penalize "violations" of "any provision" of the Corporation Code "not
otherwise specifically penalized therein." Hence, we find inconsequential the fact that that Section
74 expressly mentions the application of Section 144 only to a specific act, but not with respect to
the other possible violations of the former section.
A criminal action based on the violation of a stockholder's right to examine or inspect the
corporate records and the stock and transfer hook of a corporation under the second and fourth
paragraphs of Section 74 of the Corporation Code can only he maintained against corporate officers
or any other persons acting on behalf of such corporation. The submissions of the Yujuico and
Sumbilla during the preliminary investigation clearly suggest that Quiambao and Pilapil are neither
in relation to STRADEC. Thus, we sustain the dismissal of Criminal Case No. 89724.
Criminal Case No. 89724 accuses Quiambao and Pilapil of denying Yujuico and Sumbilla's
right to examine or inspect the corporate records and the stock and transfer book of STRADEC. It
is thus a criminal action that is based on the violation of the second and fourth paragraphs of
Page 216 of 434

Section 74 of the Corporation Code. A perusal of the second and fourth paragraphs of Section 74,
as well as the first paragraph of the same section, reveal that they are provisions
that obligates a corporation: they prescribe what books or records a corporation is required to
keep; where the corporation shall keep them; and what are the other obligations of
the corporation to its stockholders or members in relation to such books and records. Hence, by
parity of reasoning, the second and fourth paragraphs of Section 74, including the first paragraph
of the same section, can only be violated by a corporation.
It is clear then that a criminal action based on the violation of the second or fourth
paragraphs of Section 74 can only be maintained against corporate officers or such other persons
that are acting on behalf of the corporation. Violations of Section 74 contemplates a situation
wherein a corporation, acting thru one of its officers or agents, denies the right of any of its
stockholders to inspect the records, minutes and the stock and transfer book of such corporation.
The problem with the Yujuico and Sumbilla's complaint and the evidence that they
submitted during preliminary investigation is that they do not establish that Quiambao and Pilapil
were acting on behalf of STRADEC. Quiambao and Sumbilla are not actually invoking their right
to inspect the records and the stock and transfer book of STRADEC under the second and fourth
paragraphs of Section 74. What they seek to enforce is the proprietary right of STRADEC to be in
possession of such records and book. Such right, though certainly legally enforceable by other
means, cannot be enforced by a criminal prosecution based on a violation of the second and fourth
paragraphs of Section 74.
_____________________________________________________________________________________
ALFREDO L. CHUA, TOMAS L. CHUA and MERCEDES P. DIAZ, Petitioners, - versus -

PEOPLE OF THE PHILIPPINES, Respondent.
G.R. No. 216146, August 24, 2016, THIRD DIVISION, REYES, J.
Despite the expiration of CTCM's corporate term in 1999, duties as corporate officers still pertained
to the petitioners when Joselyn 's complaint was filed in 2000. As correctly pointed out by the OSG,
Sections 122 and 145 of the Corporation Code explicitly provide for the continuation of the body
corporate for three years after dissolution. The rights and remedies against, or liabilities of, the
officers shall not be removed or impaired by reason of the dissolution of the corporation. Corollarily
then, a stockholder's right to inspect corporate records subsists during the period of liquidation.
Hence, Joselyn, as a stockholder, had the right to demand for the inspection of records. Lodged upon
the corporation is the corresponding duty to allow the said inspection.
In the case at bar, the petitioners were charged with violations of Section 74, in relation to Section
144, of the Corporation Code, a special law. Accordingly, since Joselyn was deprived of the exercise of
an effective right of inspection, offenses had in fact been committed, regardless of the petitioners'
intent.
Right of Inspection
If a corporation is dissolved and is undergoing liquidation, does the right to inspect still exist? Yes.
The corporation continues to be a body corporate for three (3) years after its dissolution for
purposes of prosecuting and defending suits by and against it and for enabling it to settle and close
Page 217 of 434

its affairs, culminating in the disposition and distribution of its remaining assets. x x x The
termination of the life of a juridical entity does not by itself cause the extinction or diminution of
the rights and liabilities of such entity x x x nor those of its owners and creditors. x x x. Further, as
correctly pointed out by the OSG, Sections 122 and 145 of the Corporation Code explicitly provide
for the continuation of the body corporate for three years after dissolution. The rights and remedies
against, or liabilities of, the officers shall not be removed or impaired by reason of the dissolution
of the corporation. Corollarily then, a stockholder's right to inspect corporate records subsists
during the period of liquidation. Hence, Joselyn, as a stockholder, had the right to demand for the
inspection of records. Lodged upon the corporation is the corresponding duty to allow the said
inspection.
FACTS:
Joselyn was a stockholder of Chua Tee Corporation of Manila. Alfredo was the president and
chairman of the board, while Tomas was the corporate secretary and also a member of the board of
the same corporation. Mercedes was the accountant/bookkeeper tasked with the physical custody
of the corporate records.
In the Complaint-Affidavit filed before the Quezon City Prosecutors' Office, Joselyn alleged that
despite written demands, the petitioners conspired in refusing without valid cause the exercise of
her right to inspect Chua Tee Corporation of Manila's (CTCM) business transactions records,
financial statements and minutes of the meetings of both the board of directors and stockholders.
An Information indicting the petitioners for alleged violation of Section 74, in relation to Section
144, of the Corporation Code was filed before the MeTC of Quezon City on July 4, 2001.
The petitioners argue that since CTCM had ceased business operations since May 26, 1999 which
is prior to Joselyn's filing of her complaint before the MeTC, there was no longer any duty pertaining
to corporate officers to allow a stockholder to inspect the records.
MeTC rendered its Judgment convicting the petitioners as charged, sentencing them to suffer the
penalty of 30 days of imprisonment, and directing them to pay the costs of suit. Petitioners appealed
to RTC but the same was denied. The petition for review filed to CA was likewise denied.
ISSUE:
Whether the conviction for alleged violation of Section 74, in relation to Section 144, of the
Corporation Code was proper.
RULING:
The Court affirms the conviction but directs the payment of fine, in lieu of the penalty of
imprisonment imposed by the courts a quo.
Despite the expiration of CTCM's corporate term in 1999, duties as corporate officers still pertained
to the petitioners when Joselyn 's complaint was filed in 2000. As correctly pointed out by the OSG,
Sections 122 and 145 of the Corporation Code explicitly provide for the continuation of the body
corporate for three years after dissolution. The rights and remedies against, or liabilities of, the
officers shall not be removed or impaired by reason of the dissolution of the corporation. Corollarily
Page 218 of 434

then, a stockholder's right to inspect corporate records subsists during the period of liquidation.
Hence, Joselyn, as a stockholder, had the right to demand for the inspection of records. Lodged
upon the corporation is the corresponding duty to allow the said inspection.
It is settled that "a re-examination of factual findings is outside the province of a petition for review
on certiorari," especially in the instant petition where the MeTC, RTC and CA concurred in
convicting the petitioners of the charges against them. Be that as it may, the Court takes exception
and notes the following circumstances: (a) during cross-examination, Joselyn admitted that
permission was granted for her to see the documents, but she was unable to actually view
them as she was represented by her accountant; (b) Joselyn lacked personal knowledge as . to
whether or not the petitioners in fact allowed or denied the checking of the records she had
requested; (c) the accountant of Joselyn stated that the letter requesting for the examination of
CTCM's records was addressed to the Accounting Department, and he and his colleagues did not
have personal dealings with the petitioners.
From the foregoing, it is apparent that a complete examination of CTCM's records did not occur
resulting to an effective deprivation of Joselyn's right as a stockholder. However, from Joselyn and
the accountant’s testimonies, it can be inferred that permission to view the records was granted,
albeit not fully effected. The petitioners, on their part, explained that they never prevented Joselyn
from exercising her right of inspection, but when the latter made her request, Mercedes was too
occupied in winding up the affairs of CTCM.
In the case at bar, the petitioners were charged with violations of Section 74, in relation to Section
144, of the Corporation Code, a special law. Accordingly, since Joselyn was deprived of the exercise
of an effective right of inspection, offenses had in fact been committed, regardless of the petitioners'
intent.
No exceptional grounds exist justifying the reversal of the conviction previously rendered by the
MeTC, RTC and CA. However, in lieu of the penalty of 30 days of imprisonment, the Court finds it
more just to impose upon each of the petitioners a fine of Ten Thousand Pesos (P10,000.00)
considering the reasons below. First. Malicious intent was seemingly wanting. Permission to check
the records was granted, albeit not effected. Second. Joselyn had predeceased Alfredo and Tomas,
her uncles, who are in their twilight years. Third. Joselyn's mother, Rosario, had executed an
Affidavit of Desistance stating that the filing of the complaint before was "merely the result of [a]
serious misunderstanding anent the management and operation of [CTCM], which had long ceased
to exist as a corporate entity even prior to the alleged commission of the crime in question, rather
than by reason of any criminal intent or actuation on the part of the [petitioners]. "
_____________________________________________________________________________________
REMEDIAL RIGHTS
INTRA-CORPORATE CONTROVERSY
CONCORDE CONDOMINIUM, INC., BY ITSELF AND COMPRISING THE UNIT OWNERS

OF CONCORDE CONDOMINIUM BUILDING, Petitioner, v. AUGUSTO H. BACULIO; NEW
PPI CORPORATION; ASIAN SECURITY AND INVESTIGATION AGENCY AND ITS SECURITY
GUARDS; ENGR. NELSON B. MORALES, IN HIS CAPACITY AS BUILDING OFFICIAL OF
THE MAKATI CITY ENGINEERING DEPARTMENT; SUPT. RICARDO C. PERDIGON, IN HIS
Page 219 of 434

CAPACITY AS CITY FIRE MARSHAL OF THE MAKATI CITY FIRE STATION; F/C SUPT.
SANTIAGO E. LAGUNA, IN HIS CAPACITY AS REGIONAL DIRECTOR OF THE BUREAU OF
FIRE PROTECTION-NCR, AND ANY AND ALL PERSONS ACTING WITH OR UNDER
THEM, Respondents.
G.R. No. 203678, February 17, 2016, PERALTA, J.
The designation of the said branch as a Special Commercial Court by no means diminished its
power as a court of general jurisdiction to hear and decide cases of all nature, whether civil, criminal
or special proceedings. There is no question, therefore, that the Makati RTC, Branch 149 erred in
dismissing the petition for injunction with damages, which is clearly an ordinary civil case. As a court
of general jurisdiction, it still has jurisdiction over the subject matter thereof.
As the suit between petitioner and respondents neither arises from an intra-corporate
relationship nor does it pertain to the enforcement of their correlative rights and obligations under
the Corporation Code, and the internal and intra-corporate regulatory rules of the corporation, RTC
correctly found that the subject matter of the petition is in the nature of an ordinary civil action.
FACTS:
Petitioner Concorde Condominium, Inc., by itself and comprising the Unit Owners of Concorde
Condominium Building, {petitioner) filed with the Regional Trial Court (RTC) of Makati City a
Petition for Injunction [with Damages with prayer for the issuance of a Temporary Restraining
Order (TRO), Writ of Preliminary (Prohibitory) Injunction, and Writ of Preliminary Mandatory
Injunction] against respondents.
Petitioner seeks (1) to enjoin respondents Baculio and New PPI Corporation from misrepresenting
to the public, as well as to private and government offices/agencies, that they are the owners of the
disputed lots and Concorde Condominium Building, and from pushing for the demolition of the
building which they do not even own; (2) to prevent respondent Asian Security and Investigation
Agency from deploying its security guards within the perimeter of the said building; and (3) to
restrain respondents Engr. Morales, Supt. Perdigon and F/C Supt. Laguna from responding to and
acting upon the letters being sent by Baculio, who is a mere impostor and has no legal personality
with regard to matters concerning the revocation of building and occupancy permits, and the fire
safety issues of the same building. It also prays to hold respondents solidarily liable for actual
damages, moral damages, exemplary damages, attorney's fees, litigation expenses and costs of suit.
The case was docketed as Civil Case No. No. 12-309 and raffled to the Makati RTC, Branch 149, which
was designated as a Special Commercial Court.
Respondents filed a Motion to Dismiss stating that the case is beyond its jurisdiction as a Special
Commercial Court. Respondents claimed that the petition seeks to restrain or compel certain
individuals and government officials to stop doing or performing particular acts, and that there is
no showing that the case involves a matter embraced in Section 5 of Presidential Decree (P.D.) No.
902-A, which enumerates the cases over which the SEC [now the RTC acting as Special Commercial
Court pursuant to Republic Act (R.A.) No. 8799] exercises exclusive jurisdiction. They added that
petitioner failed to exhaust administrative remedies, which is a condition precedent before filing
the said petition.
Page 220 of 434

RTC dismissed the case for lack of jurisdiction. It noted that by petitioner's own allegations and
admissions, respondents Baculio and New PPI Corporation are not owners of the subject lots and
the building. Due to the absence of intra-corporate relations between the parties, it ruled that the
case does not involve an intra-corporate controversy cognizable by it sitting as a Special
Commercial Court.
Petitioner filed a motion for reconsideration, which the RTC denied for lack of merit. Hence, this
petition for review on certiorari.
ISSUE:
1. Whether the RTC erred in dismissing the petition on the ground of lack of jurisdiction;
2. Whether the allegations in the complaint constitutes an intra-corporate controversy that falls
within the jurisdiction of a special commercial court.
RULING:
1. Branch 149 of the Makati RTC, a designated Special Commercial Court, has jurisdiction
over the petition for injunction with damages and hence, it erred in dismissing the case
on the ground of lack of jurisdiction over the subject matter.
As a rule, actions for injunction and damages lie within the jurisdiction of the RTC, pursuant to
Section 19 of Batas Pambansa Blg. 129, otherwise known as the Judiciary Reorganization Act of
1980, as amended by R.A. 7691.
Meanwhile, Section 6 (a) of P.D. No. 902-A empowered the SEC to issue preliminary or
permanent injunctions, whether prohibitory or mandatory, in all controversies arising out of
intra-corporate relations. However, jurisdiction of the SEC over intra-corporate cases was
transferred to Courts of general jurisdiction or the appropriate Regional Trial Court when R.A.
No. 8799 took effect on August 8, 2000.
In GD Express Worldwide N. V., et al. v. Court of Appeals (4th Div.) et al, the Court stressed that
Special Commercial Courts are still considered courts of general jurisdiction which have the
power to hear and decide cases of all nature, whether civil, criminal or special proceedings.
The designation of the said branch as a Special Commercial Court by no means diminished its
power as a court of general jurisdiction to hear and decide cases of all nature, whether civil,
criminal or special proceedings. There is no question, therefore, that the Makati RTC, Branch 149
erred in dismissing the petition for injunction with damages, which is clearly an ordinary civil
case. As a court of general jurisdiction, it still has jurisdiction over the subject matter thereof.
2. The petition for injunction with damages is an ordinary civil case, and not an intra-
corporate controversy.
There is no doubt that the petition filed before the RTC is an action for injunction, as can be
gleaned from the allegations made and reliefs sought by petitioner, namely: (1) to enjoin
respondents Baculio and New PPI Corporation from misrepresenting to the public, as well as to
private and government offices/agencies, that they are the owners of the disputed lots and
Concorde Condominium Building, and from pushing for the demolition of the building which
Page 221 of 434

they do not even own; (2) to prevent respondent Asian Security and Investigation Agency from
deploying its security guards within the perimeter of the said building; and (3) to restrain
respondents Engr. Morales, Supt. Perdigon and F/C Supt. Laguna from responding to and acting
upon the letters being sent by Baculio, who is a mere impostor and has no legal personality with
regard to matters concerning the revocation of building and occupancy permits, and the fire
safety issues of the same building.
Applying the relationship test and the nature of the controversy test in determining whether a
dispute constitutes an intra-corporate controversy, as enunciated in Medical Plaza Makati
Condominium Corporation v. Cullen, the Court agrees with Branch 149 that Civil Case No. 12-
309 for injunction with damages is an ordinary civil case, and not an intra-corporate
controversy.
A careful review of the allegations in the petition for injunction with damages indicates no intra-
corporate relations exists between the opposing parties, namely (1) petitioner condominium
corporation, by itself and comprising all its unit owners, on the one hand, and (2) respondent
New PPI Corporation which Baculio claims to be the owner of the subject properties, together
with the respondents Building Official and City Fire Marshal of Makati City, the Regional
Director of the Bureau of Fire Protection, and the private security agency, on the other hand.
Moreover, the petition deals with the conflicting claims of ownership over the lots where
Concorde Condominium Building stands and the parking lot for unit owners, which were
developed by Pulp and Paper Distributors, Inc. (now claimed by respondent Baculio as the New
PPI Corporation), as well as the purported violations of the National Building Code which
resulted in the revocation of the building and occupancy permits by the Building Official of
Makati City. Clearly, as the suit between petitioner and respondents neither arises from an
intra-corporate relationship nor does it pertain to the enforcement of their correlative rights
and obligations under the Corporation Code, and the internal and intra-corporate regulatory
rules of the corporation, Branch 149 correctly found that the subject matter of the petition is in
the nature of an ordinary civil action.
_____________________________________________________________________________________
JUANITO ANG, for and in behalf of SUNRISE MARKETING (BACOLOD), INC.

vs. SPOUSES ROBERTO AND RACHEL ANG
G.R. No. 201675, June 19, 2013
J. Carpio
The stockholder’s right to institute a derivative suit is not based on any express provision of
the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties.
Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative suits:
(1) The person filing the suit must be a stockholder or member at the time the acts or transactions
subject of the action occurred and the time the action was filed; (2) He must have exerted all
reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, by-laws, laws or rules governing the corporation or
Page 222 of 434

partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts
complained of; and (4) The suit is not a nuisance or harassment suit.
Facts:
Sunrise Marketing (Bacolod), Inc. (SMBI) is a duly registered corporation owned by the Ang family.
Roberto was elected President of SMBI, while Juanito was elected as its Vice President. Rachel Lu-
Ang (Rachel) and Anecita are SMBI’s Corporate Secretary and Treasurer, respectively.
On 31 July 1995, Nancy Ang (Nancy), the sister of Juanito and Roberto, and her husband, Theodore
Ang (Theodore), agreed to extend a loan to settle the obligations of SMBI and other corporations
owned by the Ang family. Nancy and Theodore issued a check in the amount of $1,000,000.00
payable to "Juanito Ang and/or Anecita Ang and/or Roberto Ang and/or Rachel Ang. Part of the
loan was also used to purchase real properties for SMBI, for Juanito, and for Roberto.
Juanito claimed that payments to Nancy and Theodore ceased sometime after 2006. Nancy and
Theodore, through their counsel here in the Philippines, sent a demand letter to "Spouses Juanito
L. Ang/Anecita L. Ang and Spouses Roberto L. Ang/Rachel L. Ang" for payment.
Juanito and Anecita executed a Deed of Acknowledgment and Settlement Agreement and an Extra-
Judicial Real Estate Mortgage (Mortgage) in favor of Nancy and Theodore. Thereafter, Juanito filed
a Stockholder Derivative Suit. He alleged that the intentional and malicious refusal of defendant
Sps. Roberto and Rachel Ang to settle their 50% share of the total obligation will definitely affect
the financial viability of plaintiff SMBI. Juanito also claimed that he has been illegally excluded from
the management and participation in the business of SMBI.
The RTC Bacolod issued an Order declaring the present action as a DERIVATIVE SUIT and the
Motion to Dismiss based on Affirmative Defenses raised by defendants denied. Aggrieved, Rachel
filed a Petition for Certiorari with the CA-Cebu which reversed the Order of the RTC Bacolod.
Issue:
Whether or not the nature of the case is one of a derivative suit
Ruling:
The petition is dismissed. The Court upheld the CA-Cebu’s finding that the Complaint is not a
derivative suit.
A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce

corporate rights against the corporation’s directors, officers or other insiders. Under Sections 23
and 36 of the Corporation Code, the directors or officers, as provided under the by-laws, have the
right to decide whether or not a corporation should sue. Since these directors or officers will never
be willing to sue themselves, or impugn their wrongful or fraudulent decisions, stockholders are
permitted by law to bring an action in the name of the corporation to hold these directors and
officers accountable. In derivative suits, the real party in interest is the corporation, while the
stockholder is a mere nominal party.
Page 223 of 434

There was no compliance with the requirements for a derivative suit under Section 1, Rule 8 of the
Interim Rules. The Complaint failed to show how the acts of Rachel and Roberto resulted in any
detriment to SMBI. The CA-Cebu correctly concluded that the loan was not a corporate obligation,
but a personal debt of the Ang brothers and their spouses. The check was issued to "Juanito Ang
and/or Anecita Ang and/or Roberto Ang and/or Rachel Ang" and not SMBI. The proceeds of the
loan were used for payment of the obligations of the other corporations owned by the Angs as well
as the purchase of real properties for the Ang brothers. SMBI was never a party to the Settlement
Agreement or the Mortgage. It was never named as a co-debtor or guarantor of the loan. Both
instruments were executed by Juanito and Anecita in their personal capacity, and not in their
capacity as directors or officers of SMBI. Thus, SMBI is under no legal obligation to satisfy the
obligation.
The fact that Juanito and Anecita attempted to constitute a mortgage over "their" share in a
corporate asset cannot affect SMBI. The wording of the Mortgage reveals that it was signed by
Juanito and Anecita in their personal capacity as the "owners" of a pro-indiviso share in SMBI’s land
and not on behalf of SMBI.
The Complaint also failed to allege that all available corporate remedies under the articles of
incorporation, by-laws, laws or rules governing the corporation were exhausted, as required under
the Interim Rules. No written demand was ever made for the board of directors to address private
respondent Juanito Ang’s concerns. The fact that SMB is a family corporation does not exempt
private respondent Juanito Ang from complying with the Interim Rules.
Finally, the suit should be dismissed since it is a nuisance or harassment suit under Section 1(b) of
the Interim Rules. Section 1(b) thereof provides:
b) Prohibition against nuisance and harassment suits. - Nuisance and harassment suits are
prohibited. In determining whether a suit is a nuisance or harassment suit, the court shall
consider, among others, the following:
(1) The extent of the shareholding or interest of the initiating stockholder or member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained of; and
(5) Prejudice or damage to the corporation, partnership, or association in relation to the
relief sought.
In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith
dismiss the case.
DERIVATIVE SUIT
MARCELINO M. FLORETE, JR., MARIA ELENA F. MUYCO AND RAUL A. MUYCO,

Petitioners, v. ROGELIO M. FLORETE, IMELDA C. FLORETE, DIAMEL
CORPORATION, ROGELIO C. FLORETE JR., AND MARGARET RUTH C. FLORETE,
Respondents.,
G.R. No. 174909, January 20, 2016, 2016, LEONEN, J.
Page 224 of 434

ROGELIO M. FLORETE SR., Petitioner, v. MARCELINO M. FLORETE, JR., MARIA

ELENA F. MUYCO AND RAUL A. MUYCO, Respondents.,
G.R. NO. 177275, January 20, 2016, LEONEN, J.
A stockholder may suffer from a wrong done to or involving a corporation, but this does not vest in
the aggrieved stockholder a sweeping license to sue in his or her own capacity. The determination of
the stockholder's appropriate remedy—whether it is an individual suit, a class suit, or a derivative
suit—hinges on the object of the wrong done. When the object of the wrong done is the corporation
itself or "the whole body of its stock and property without any severance or distribution among
individual holders," it is a derivative suit, not an individual suit or class/representative suit, that a
stockholder must resort to.
What the Marcelino, Jr. Group asks is the complete reversal of a number of corporate acts undertaken
by People' Broadcasting's different boards of directors. These boards supposedly engaged in outright
fraud or, at the very least, acted in such a manner that amounts to wanton mismanagement of
People's Broadcasting's affairs. The ultimate effect of the remedy they seek is the
reconfiguration of People's Broadcasting's capital structure. The remedies that the
Marcelino, Jr. Group seeks are for People's Broadcasting itself to avail.
FACTS:
This resolves consolidated cases involving a Complaint for Declaration of Nullity of Issuances,
Transfers and Sale of Shares in People's Broadcasting Service, Inc. and All Posterior Subscriptions and
Increases thereto with Damages. The Complaint did not implead as parties the concerned
corporation, some of the transferees, transferors and other parties involved in the assailed
transactions.
People's Broadcasting Service, Inc. (People's Broadcasting) is a private corporation authorized to

operate, own, maintain, install, and construct radio and television stations in the Philippines.
In October 1993, People's Broadcasting sought the services of the accounting and auditing firm
Sycip Gorres Velayo and Co. in order to determine the ownership of equity in the corporation. Sycip
Gorres Velayo and Co. submitted a report detailing the movements of the corporation's shares from
November 23, 1967 to December 8, 1989. Even as it tracked the movements of shares, Sycip Gorres
Velayo and Co. declined to give a categorical statement on equity ownership as People's
Broadcasting's corporate records were incomplete.
On June 23, 2003, Marcelino, Jr., Ma. Elena, and Raul Muyco (Marcelino, Jr. Group) filed before
the Regional Trial Court a Complaint for Declaration of Nullity of Issuances, Transfers and Sale of
Shares in People's Broadcasting Service, Inc. and All Posterior Subscriptions and Increases thereto
with Damages against Diamel Corporation, Rogelio, Sr., Imelda Florete, Margaret Florete, and
Rogelio Florete, Jr. (Rogelio, Sr. Group).
The Marcelino, Jr. Group seeks to nullify the following transactions on the shares of stock of
People's Broadcasting, as noted in the report of Sycip Gorres Velayo and Co.:
Page 225 of 434

(a) Issuance of 1,240 shares to Consolidated Broadcasting System, Inc. on September 1,

1982,
(b) Transfer of 10 shares from Salome to Consolidated Broadcasting System, Inc. on

September 1, 1982,
(c) Issuance of 610 shares to Newsounds Broadcasting Network, Inc. on November 17,
1967,
(d) Transfer of 610 shares from Newsounds Broadcasting Network, Inc. to Rogelio, Sr. on
March 1, 1983,
(e) Transfer of 750 shares from Consolidated Broadcasting System, Inc. to Marcelino, Sr.
on March 1, 1983,
(f) Transfer of 500 shares from Consolidated Broadcasting System, Inc. to Rogelio, Sr.,
(g) Transfer of 680 shares from Marcelino, Sr. to the following: 370 shares to Rogelio, Sr.,
270 shares to Divinagracia, 20 shares to Marcelino, Jr., and 20 shares to Teresita, and
(h) Increase in the authorized capital stock to PI00,000,000.00 divided into 1,000,000
shares with a par value of PI00.00 per share on December 8, 1989, and the resulting
subscriptions.
For the issuance of 1,250 shares to Consolidated Broadcasting System, Inc., the Marcelino, Jr. Group
argues that Board Resolution No. 4 dated August 5, 1982, the basis for the issuance of the 1,250
shares in favor of Consolidated Broadcasting System, Inc., was a forgery: it was simulated,
unauthorized, and issued without a quorum as required under Section 25 of the Corporation Code.
They add that Salome(an original subscriber), who allegedly transferred her 10 shares to complete
the 1,250 share transfer, was already dead at the time of the alleged transfer on September 1, 1982.
The Marcelino, Jr. Group claims that no member of the Board attended the meeting referred to in
Board Resolution No. 4. They further allege that the signature of Marcelino, Sr.(an original
subscriber) in Board Resolution No. 4 is a forgery. They argue that Marcelino, Sr. could not have
attended the meeting on August 5, 1982 because from July 12, 1982 to August 26, 1982, he was
confined in Gov. B. Lopez Memorial Hospital for quadriparesis and motor aphasia.
With respect to the issuance of 610 shares to Newsounds Broadcasting Network, Inc. and the
subsequent transfer of 610 shares to Rogelio, Sr., the Marcelino, Jr. Group argues that there is no
deed of conveyance to support the transfer and that the stock certificates representing the 610 shares
are missing. They conclude that because of the absence of the stock certificates, there is no valid
delivery and endorsement as required by Section 63 of the Corporation Code. Hence, the transfer
is invalid.
Regarding the increase in the authorized capital stock of People's Broadcasting, the Marcelino, Jr.
Group argues that the increase was procured by fraud because it was made "by the new Board of
Directors who were elected by stockholders who were transferees of the illegal, fraudulent and
anomalous transfers, and therefore have no power and authority to procure such increase." They also
pray that the subscriptions to the increase be nullified.
Page 226 of 434

The Rogelio, Sr. Group filed their Answer with compulsory counterclaim.
The Regional Trial Court issued a Decision (which it called a "Placitum") dismissing the Marcelino,
Jr. Group's Complaint. It ruled that the Marcelino, Jr. Group did not have a cause of action against
the Rogelio, Sr. Group. It also ruled that indispensible parties were not joined in their Complaint. The
Regional Trial Court granted Rogelio, Sr.'s compulsory counterclaim for moral and exemplary
damages amounting to P25,000,000.00 and P5,000,000.00, respectively, reasoning that Rogelio, Sr.
suffered from the besmirching of his personal and commercial reputation.
The Court of Appeals denied the Marcelino, Jr. Group's Petition and affirmed the trial court
Decision.
ISSUES:
1. Whether it was proper for the Regional Trial Court to dismiss the Complaint filed by the
Marcelino, Jr. Group on the ground that indispensable parties were not joined in the Complaint.
2. Whether the Regional Trial Court's award of moral and exemplary damages in favor of Rogelio,
Sr. may be executed.
RULING:
1. Yes, the dismissal is proper.
In this case, the Marcelino, Jr. Group anchored their Complaint on violations of and liabilities
arising from the Corporation Code, specifically: Section 23 (on corporate decision-making being
vested in the board of directors), Section 25 (quorum requirement for the transaction of corporate
business), Sections 39 and 102 (both on stockholders' pre-emptive rights), Section 62 (stipulating the
consideration for which stocks must be issued), Section 63 (stipulating that no transfer of shares
"shall be valid, except as between the parties, until the transfer is recorded in the books of the
corporation"), and Section 65 (on liabilities of directors and officers "to the corporation and its
creditors" for the issuance of watered stocks) in relation to provisions in People's Broadcasting's
Articles of Incorporation and By-Laws as regards conditions for issuances of and subscription to
shares. The Marcelino, Jr. Group ultimately prays that People's Broadcasting's entire capital structure
be reconfigured to reflect a status quo ante.
The action should be a proper derivative suit even if the assailed acts do not pertain to a
corporation's transactions with third persons. The pivotal consideration is whether the wrong done
as well as the cause of action arising from it accrues to the corporation itself or to the whole body of
its stockholders. An action "seeking to nullify and invalidate the duly constituted acts [of a
corporation]" entails a cause of action that "rightfully pertains to [the corporation itself and which
stockholders] cannot exercise . . . except through a derivative suit.
What the Marcelino, Jr. Group asks is the complete reversal of a number of corporate acts
undertaken by People' Broadcasting's different boards of directors. These boards supposedly
engaged in outright fraud or, at the very least, acted in such a manner that amounts to wanton
mismanagement of People's Broadcasting's affairs. The ultimate effect of the remedy they seek is
Page 227 of 434

the reconfiguration of People's Broadcasting's capital structure. The remedies that the Marcelino,
Jr. Group seeks are for People's Broadcasting itself to avail.
The specific provisions adverted to by the Marcelino, Jr. Group signify alleged wrongdoing
committed against the corporation itself and not uniquely to those stockholders who now comprise
the Marcelino, Jr. Group. A violation of Sections 23 and 25 of the Corporation Code—on how
decision-making is vested in the board of directors and on the board's quorum requirement—
implies that a decision was wrongly made for the entire corporation, not just with respect to a
handful of stockholders. Section 65 specifically mentions that a director's or officer's liability for the
issuance of watered stocks in violation of Section 62 is solidary "to the corporation and its creditors,"
not to any specific stockholder. Transfers of shares made in violation of the registration
requirement in Section 63 are invalid and, thus, enable the corporation to impugn the transfer.
Notably, those in the Marcelino, Jr. Group have not shown any specific interest in, or unique
entitlement or right to, the shares supposedly transferred in violation of Section 63.
Accordingly, it was upon People's Broadcasting itself that the causes of action now claimed by the
Marcelino Jr. Group accrued. While stockholders in the Marcelino, Jr. Group were permitted to seek
relief, they should have done so not in their unique capacity as individuals or as a group of
stockholders but in place of the corporation itself through a derivative suit. As they, instead, sought
relief in their individual capacity, they did so bereft of a cause of action. Likewise, they did so
without even the slightest averment that the requisites for the filing of a derivative suit, as spelled
out in Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies, have
been satisfied. Since the Complaint lacked a cause of action and failed to comply with the
requirements of the Marcelino, Jr. Group's vehicle for relief, it was only proper for the Complaint
to have been dismissed.
Erroneously pursuing a derivative suit as a class suit not only meant that the Marcelino, Jr. Group
lacked a cause of action; it also meant that they failed to implead an indispensable party. In
derivative suits, the corporation concerned must be impleaded as a party. Hence, the
Marcellino Jr. Group’s complaint must fail for failure to implead People's Broadcasting, Inc.
2. No, the award of moral and exemplary damages in favor of Rogelio, Sr. cannot be
executed.
There are two consequences of a finding on appeal that indispensable parties have not been joined.
First, all subsequent actions of the lower courts are null and void for lack of jurisdiction. Second, the
case should be remanded to the trial court for the inclusion of indispensable parties. It is only upon
the plaintiff's refusal to comply with an order to join indispensable parties that the case may be
dismissed.
The second consequence is unavailing in this case. While "neither misjoinder nor non-joinder of
parties is ground for dismissal of an action" and is, thus, not fatal to the Marcelino, Jr. Group's
action, it was shown that they lack a cause of action. This warrants the dismissal of their Complaint.
The first consequence, however, is crucial. It determines the validity of the Regional Trial Court's
award of damages to Rogelio, Sr. Since the Regional Trial Court did not have jurisdiction, the decision
awarding damages in favor of Rogelio, Sr. is void. Apart from this, there is no basis in jurisprudence
Page 228 of 434

for awarding moral and exemplary damages in cases where individual suits that were erroneously filed
were dismissed.
A suit filed by the members of a corporation against its officers for mismanaging corporate
properties may be liberally treated as derivative suit where the defendants did not object to the
erroneous filing of the suit (in the name of the members instead of the corporation) and the
complaint’s prayer sought relief for the benefit of the corporation and not for the benefit of the
members personally. Agdao Landless Residents Association et. al v. Maramion et. al G.R. Nos.
188642 & 189425, October 17, 2016
NESTOR CHING and ANDREW WELLINGTON vs. SUBIC BAY GOLF AND COUNTRY CLUB,
INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH alias JACK HU, HU TSUNG
HUI, HU TSUNG TZU and REYNALD R. SUAREZ
G.R. No. 174353, September 10, 2014, J. LEONARDO-DE CASTRO
A derivative suit cannot prosper without first complying with the legal requisites for its
institution. Thus, a complaint which contained no allegation whatsoever of any effort to avail of intra-
corporate remedies allows the court to dismiss it, even motu proprio. Indeed, even if petitioners
thought it was futile to exhaust intra-corporate remedies, they should have stated the same in the
Complaint and specified the reasons for such opinion. The requirement of this allegation in the
Complaint is not a useless formality which may be disregarded at will.
Facts:
On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a
Complaint with the RTC of Olongapo City on behalf of the members of Subic Bay Golf and Country
Club, Inc. (SBGCCI) against the said country club and its Board of Directors and officers under the
provisions of Presidential Decree No. 902-A in relation to Section 5.2 of the Securities Regulation
Code. The complaint alleged that the defendant corporation sold shares to plaintiffs at
US$22,000.00 per share, presenting to them the Articles of Incorporation. However, on June 27,
1996, an amendment to the Articles of Incorporation was approved by the Securities and Exchange
Commission (SEC).
Petitioners claimed in the Complaint that SBGCCI did not disclose to them the above
amendment which allegedly makes the shares non-proprietary, as it takes away the right of the
shareholders to participate in the pro-rata distribution of the assets of the corporation after its
dissolution. According to petitioners, this is in fraud of the stockholders who only discovered the
amendment when they filed a case for injunction to restrain the corporation from suspending their
rights to use all the facilities of the club. Furthermore, petitioners alleged that the Board of
Directors and officers of the corporation did not call any stockholders’ meeting from the time of
the incorporation, in violation of Section 50 of the Corporation Code and the By-Laws of the
corporation. Neither did the defendant directors and officers furnish the stockholders with the
financial statements of the corporation nor the financial report of the operation of the corporation
in violation of Section 75 of the Corporation Code. Petitioners also claim SBGCCI presented to the
SEC an amendment to the By-Laws of the corporation suspending the voting rights of the
shareholders except for the five founders’ shares. Said amendment was allegedly passed without
Page 229 of 434

any stockholders’ meeting or notices to the stockholders in violation of Section 48 of the

Corporation Code.
The Complaint furthermore enumerated several instances of fraud in the management of

the SBGCCI allegedly committed by the Board of Directors and officers of the corporation.
The RTC issued an Order dismissing the Complaint. The RTC held that the action is a
derivative suit. Petitioners Ching and Wellington elevated the case to the Court of Appeals which
rendered the assailed Decision affirming that of the RTC.
Hence, petitioners resort to the present Petition for Review, wherein they argue that the
Complaint they filed with the RTC was not a derivative suit.
Issue:
Whether or not the Complaint is indeed a derivative suit.
Ruling:
The nature of an action, as well as which court or body has jurisdiction over it, is determined
based on the allegations contained in the complaint of the plaintiff, irrespective of whether or not
the plaintiff is entitled to recover upon all or some of the claims asserted therein.
While there were allegations in the Complaint of fraud in their subscription agreements,
such as the misrepresentation of the Articles of Incorporation, petitioners do not pray for the
rescission of their subscription or seek to avail of their appraisal rights. Instead, they ask that
defendants be enjoined from managing the corporation and to pay damages for their
mismanagement. Petitioners’ only possible cause of action as minority stockholders against the
actions of the Board of Directors is the common law right to file a derivative suit. The legal standing
of minority stockholders to bring derivative suits is not a statutory right, there being no provision
in the Corporation Code or related statutes authorizing the same, but is instead a product of
jurisprudence based on equity. However, a derivative suit cannot prosper without first complying
with the legal requisites for its institution.
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra Corporate Controversies
imposes the following requirements for derivative suits:
(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
The RTC dismissed the Complaint for failure to comply with the second and fourth
requisites above.
Page 230 of 434

Upon a careful examination of the Complaint, this Court finds that the same should not
have been dismissed on the ground that it is a nuisance or harassment suit. Although the
shareholdings of petitioners are indeed only two out of the 409 alleged outstanding shares or 0.24%,
the Court has held that it is enough that a member or a minority of stockholders file a derivative
suit for and in behalf of a corporation.
With regard, however, to the second requisite, we find that petitioners failed to state with
particularity in the Complaint that they had exerted all reasonable efforts to exhaust all remedies
available under the articles of incorporation, by-laws, and laws or rules governing the corporation
to obtain the relief they desire. The Complaint contained no allegation whatsoever of any effort to
avail of intra-corporate remedies. Indeed, even if petitioners thought it was futile to exhaust intra-
corporate remedies, they should have stated the same in the Complaint and specified the reasons
for such opinion. Failure to do so allows the RTC to dismiss the Complaint, even motu proprio, in
accordance with the Interim Rules. The requirement of this allegation in the Complaint is not a
useless formality which may be disregarded at will.
_____________________________________________________________________________________
ALFREDO L. VILLAMOR, JR. vs. JOHN S. UMALE, IN SUBSTITUTION OF

HERNANDO F. BALMORES
G.R. No. 172843, September 24, 2014, J. Leonen
Derivative Suit: The Court has recognized that a stockholder's right to institute a derivative
suit is not based on any express provision of the Corporation Code, or even the Securities Regulation
Code, but is impliedly recognized when the said laws make corporate directors or officers liable for
damages suffered by the corporation and its stockholders for violation of their fiduciary duties. In
effect, the suit is an action for specific performance of an obligation, owed by the corporation to the
stockholders, to assist its rights of action when the corporation has been put in default by the wrongful
refusal of the directors or management to adopt suitable measures for its protection.
Management committees: Management committees and receivers are appointed when the
corporation is in imminent danger of (1) dissipation, loss, wastage or destruction of assets or other
properties; and (2) paralysation of its business operations that may be prejudicial to' the interest of
the minority stockholders, parties-litigants, or the general public." Applicants for the appointment of
a receiver or management committee need to establish the confluence of these two requisites. This is
because appointed receivers and management committees will immediately take over the
management of the corporation and will have the management powers specified in law.
Jurisdiction to appoint receiver: The Court of Appeals has no power to appoint a receiver or
management committee. The Regional Trial Court has original and exclusive jurisdiction to hear and
decide intra-corporate controversies, including incidents of such controversies. These incidents
include applications for the appointment of receivers or management committees.
Facts:
MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part
of the area owned by Mid-Pasig Development Corporation. Pasig Printing Corporation (PPC)
obtained an option to lease portions of Mid-Pasig's property, including the Rockland area. PPC's
board of directors issued a resolution waiving all its rights, interests, and participation in the option
Page 231 of 434

to lease contract in favor of the law firm of Atty. Villamor. PPC, represented by Villamor, entered
into a memorandum of agreement with MC Home Depot. Under the MOA, MC Home Depot would
continue to occupy the area as PPC's sub-lessee for 4 years, renewable for another 4 years, at a
monthly rental of P4,500,000.00 plus goodwill of P18,000,000.00.
In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks
representing rental payments for one year and the goodwill money. The checks were given to
Villamor who did not turn these or the equivalent amount over to PPC, upon encashment.
Hernando Balmores, stockholder and director of PPC, wrote a letter addressed to PPJC's directors
informing them that Villamor should be made to deliver to PPC and account for MC Home Depot's
checks or their equivalent value. Due to the alleged inaction of the directors, respondent Balmores
filed with the RTC an intra-corporate controversy complaint against petitioners for their alleged
devices or schemes amounting to fraud or misrepresentation. Respondent Balmores alleged that
because of petitioners' actions, PPC's assets were ". . . not only in imminent danger, but have
actually been dissipated, lost, wasted and destroyed." Respondent Balmores prayed that a receiver
be appointed from his list of nominees. He also prayed for petitioners' prohibition from "selling,
encumbering, transferring or disposing in any manner any of PPC's properties, including the MC
Home Depot checks and/or their proceeds." He prayed for the accounting and remittance to PPC
of the MC Home Depot checks or their proceeds and for the annulment of the board's resolution
"waiving PPC's rights in favor of Villamor's law firm.
The RTC denied respondent Balmores' prayer for the appointment of a receiver or the
creation of a management committee. According to it, PPC's entitlement to the checks was
doubtful. The resolution issued by PPC's board of directors; waiving its rights to the option to lease
contract in favor of Villamor's law firm, must be accorded prima facie validity. Balmores filed with
CA a petition for certiorari which was given due course. It reversed the trial court's decision, and
issued a new order placing PPC under receivership and creating an interim management
committee. The CA considered the danger of dissipation, wastage, and loss of PPC's assets if the
review of the trial court's judgment would be delayed. It stated that the board's waiver of PPC's
rights in favor of Villamor's law firm without any consideration and its inaction on Villamor's failure
to turn over the proceeds of rental payments to PPC warrant the creation of a management
committee. Also, the CA ruled that the case filed by respondent Balmores with the trial court "was
a derivative suit because there were allegations of fraud or ultra vires acts ... by PPC's directors.”
Issues:
1. Whether the Court of Appeals correctly characterized respondent Balmores' action as a

derivative suit
2. Whether the Court of Appeals properly placed PPC under receivership and created a
receiver or management committee
Ruling:
1. No.
The requisites of a derivative suit are as follows:
Page 232 of 434

a. He was a stockholder or member at the time the acts or transactions subject of

the action occurred and at the time the action was filed;
b. He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation,
by-laws, laws or rules governing the corporation or partnership to obtain the
relief he desires;
c. No appraisal rights are available for the act or acts complained of; and
d. The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
Balmores' action in the trial court failed to satisfy all the requisites of a derivative suit.
Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for. Though he tried
to communicate with PPC's directors about the checks in Villamor's possession before he filed an
action with the trial court, Balmores was not able to show that this comprised -all the remedies
available under the articles of incorporation, bylaws, laws, or rules governing PPC. Neither did
respondent Balmores implead PPC as party in the case nor did he allege that he was filing on behalf
of the corporation. The non-derivative character of Balmores' action may also be gleaned from his
allegations in the trial court complaint. In the complaint, he described the nature of his action as
an action under Rule 1, Section l(a)(l) of the Interim Rules, and not an action under Rule 1, Section
l(a)(4) of the Interim Rules, which refers to derivative suits. Respondent Balmores filed an
individual suit. His intent was very clear from his manner of describing the nature of his action as
being based on Rule 1, Sec. 1(a)(1) of the Interim Rules, “involving devices or schemes employed by,
or acts of, the petitioners as board of directors, business associates and officers of PPC, amounting
to fraud or misrepresentation, which are detrimental to the interest of the plaintiff as stockholder
of PPC.”
Balmores did not bring the action for the benefit of the corporation. Instead, he was alleging
that the acts of PPC’s directors, specifically the waiver of rights in favor of Villamor’s law firm and
their failure to take back the MC Home Depot checks from Villamor, were detrimental to his
individual interest as a stockholder. In filing an action, therefore, his intention was to vindicate his
individual interest and not PPC’s or a group of stockholders’.
2. No.
The CA still erred in placing PPC under receivership and in creating and appointing a
management committee. A corporation may be placed under receivership, or management
committees may be created to preserve properties involved in a suit and to protect the rights of
the parties under the control and supervision of the court. Management committees and
receivers are appointed when the corporation is in imminent danger of (1) dissipation, loss,
wastage or destruction of assets or other properties; and (2) paralysation of its business
operations that may be prejudicial to' the interest of the minority stockholders, parties-litigants,
or the general public." PPC waived its rights, without any consideration in favor of Villamor.
The checks were already in Villamor's possession. Some of the checks may have already been
encashed. It is, therefore, enough to constitute loss or dissipation of assets under the Interim
Rules. Balmores, however, failed to show that there was an imminent danger of paralysis of
PPC's business operations. Apparently, PPC was- earning substantial amounts from its other
Page 233 of 434

sub-lessees. Balmores did not prove otherwise. He, therefore, failed to show at least one of the
requisites for appointment of a receiver or management committee.
_____________________________________________________________________________________
CORAZON H. RICAFORT, JOSE MANUEL H. RICAFORT AND MARIE GRACE H.

RICAFORT,Petitioners, v. THE HONORABLE ISAIAS P. DICDICAN, THE HONORABLE
RAMON M. BATO, JR., AND THE HONORABLE EDUARDO B. PERALTA, JR., IN THEIR
OFFICIAL CAPACITIES AS MEMBERS OF THE SPECIAL FOURTEENTH DIVISION OF THE
COURT OF APPEALS, NATIONWIDE DEVELOPMENT CORPORATION, ROBERTO R.
ROMULO, CONRADO T. CALALANG, ALFREDO I. AYALA, JOHN ENGLE, LEOCADIO
NITORREDA AND LUIS MANUEL GATMAITAN,Respondents.
G.R. Nos. 202647-50, March 09, 2016
CORAZON H. RICAFORT, JOSE MANUEL H. RICAFORT AND MARIE GRACE H.

RICAFORT,Petitioners, v. ROBERTO R. ROMULO, CONRADO T. CALALANG, ALFREDO I.
AYALA, JOHN ENGLE, LEOCADIO NITORREDA, NATIONWIDE DEVELOPMENT
CORPORATION AND LUIS MANUEL L. GATMAITAN, Respondents.
G.R. NOS. 205921-24, March 09, 2016, REYES, J.
Where one of the reliefs sought in the complaint is to nullify the election of the Board
of Directors at the annual stockholders’ meeting, the complaint involves an election
contest. Under Section 3, Rule 6 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies (Interim Rules), an election contest should be filed within 15 days from the date
of the election.
Section 50 (of the Corporation Code) provides in effect that failure to give notice of the
regular or annual meetings, when the date thereof is fixed in the by-laws, as in Section 1, Article 1
of the Amended By-Laws of NADECOR, which is "at twelve thirty P.M., on the THIRD MONDAY
OF AUGUST in each year, if not a legal holiday, and if a legal holiday, then on the first day
following which is not a legal holiday," will not affect the validity of the ASM or the
proceedings therein.
FACTS:
The NADECOR is a domestic company and holder of a Mining Production Sharing Agreement
(MPSA), MPSA 009-92-XI, with the Department of Environment and Natural Resources (DENR),
which covers the King-king Gold and Copper Project (King-king Project), a 1,656-hectare gold and
copper mining concession in Barangay King-king, Municipality of Pantukan, Province of
Compostela Valley in Mindanao.
Pursuant to Section 1, Article I of NADECOR's Amended By-Laws, its regular annual

stockholders' meeting (ASM) was held on August 15, 2011 to elect its Board of Directors for
Fiscal Year (FY) 2011-2012. In his Affidavit dated November 21, 2011, Gatmaitan, NADECOR
Corporate Secretary, attested to the presence of a quorum representing 94.81% of NADECOR's
outstanding shares of stock, and the election of new set of its Board of Directors, namely, Calalang,
Jose G. Ricafort (JG Ricafort), Jose P. De Jesus (De Jesus), Romulo, Ayala, Victor P. Lazatin
(Lazatin), Ethelwoldo E. Fernandez (Fernandez), Nitorreda and Engle.
Page 234 of 434

But on October 20, 2011, more than two months after the ASM, Corazon H. Ricafort (Corazon),
wife of JG Ricafort, along with their children, Jose Manuel H. Ricafort (Jose Manuel), Marie Grace
H. Ricafort (Marie Grace) (petitioners), and Maria Teresa Flora R. Santos (Maria Teresa) (plaintiffs),
claiming to be stockholders of record, filed a complaint before the RTC to declare null and void "the
15 August 2011 [ASM] of NADECOfRJ, including all proceedings taken thereat, all the consequences
thereof, and all acts carried out pursuant thereto," against NADECOR itself, the newly-elected
members of its Board of Directors, and Gatmaitan (defendants). The plaintiffs alleged, among
others, that "they had no knowledge or prior notice of, and were thus unable to attend, participate
in, and vote at, the said [ASM]" since they received the notice of the ASM only on August 16, 2011, or
one day late, in violation of the three-day notice provided in NADECOR's By-Laws; that due to lack
of notice, they failed to attend the said ASM and to exercise their right as stocldiolders to participate
in the management and control of NADECOR.
The defendants sought the dismissal of SEC Case No. 11-164 on the following grounds:
a. that the complaint involved an election contest, since in effect it sought to nullify the
election of the Board of Directors of NADECOR for FY2011-2012, and under Section 3, Rule
6 of the Interim Rules of Procedure Governing Intra-Corporate Controversies (Interim
Rules), it should have been filed within 15 days from the date of the election;
b. that the complaint is not only barred by prescription for having been filed more than two
months after the ASM complained of, but the plaintiffs have no cause of action because they
were duly served with notice of the said meeting, as shown in the affidavit dated October
13, 2011 of the NADECOR messenger, Mario S. San Juan (San Juan), who mailed the notices
on August 11, 2011 at the Ortigas Post Office to all stockholders of record of NADECOR, four
days prior to the scheduled ASM;
c. that a valid ASM was held on August 15, 2011, the third Monday of August 2011, at which the
required quorum was present and successfully conducted business; that the plaintiffs
although physically absent were in fact represented by their proxy, JG Ricafort, by
virtue of irrevocable proxies which they executed;
d. that JG Ricafort attended and signed the attendance sheet as the plaintiffs' proxy and
participated in the ASM for himself as well as in the plaintiffs' behalf;
e. that the true and beneficial owner of the shares of stock issued in the plaintiffs'
names is JG Ricafort, not the plaintiffs, as shown in the Nominee Agreements which
they executed;
f. that aided by the irrevocable proxies and Nominee Agreements, JG Ricafort won election to
the NADECOR Board.
The RTC ruled that the petitioners were not validly served with notice of the ASM as required in
the Amended By-Laws, and moreover, that their complaint did not involve an election contest, and
thus, was not subject to the 15-day prescriptive period for filing an election protest under Section 3,
Rule 6 of the Interim Rules. The RTC thus declared as "void and of no force and effect" the assailed
ASM, nullified all acts performed by the new Board of Directors elected thereat. The CA nullified
and set aside the Order of the Regional Trial Court.
Page 235 of 434

ISSUES:
1. Whether SEC Case No. 11-164 involves an election contest subject to the 15-day prescriptive
period for filling an election protest.
2. Whether the petitioners has cause of action despite their execution of an irrevocable proxy in
favor of JG Ricafort.
3. Whether the annual stockholders’ meeting and proceedings therein will be invalidated
assuming that proper notice was not given to petitioners.
RULING:
1. SEC Case No. 11-164 is time-barred because it involves an election contest and therefore
is subject to the 15-day prescription period.
An election contest refers to any controversy or dispute involving title or claim to any elective
office in a stock or non-stock corporation, the validation of proxies, the manner and validity
of elections, and the qualifications of candidates, including the proclamation of winners, to
the office of director, trustee or other officer directly elected by the stockholders in a close
corporation or by members of a non-stock corporation where the articles of incorporation or
by-laws so provide. (Section 2, Rule 6 of the Interim Rules)
In justifying its Order declaring that the complaint had not prescribed since it did not involve
an election contest, the RTC adverted to the fact that none of the petitioners was claiming an
elective office in NADECOR, or questioning the manner and validity of the election of the New
Board, or the qualifications of the candidates for directors.
Yet, there can be no denying that the petitioners were really seeking the holding of a new
election for members of the Board of Directors of NADECOR for FY2011-2012 by
(a) asserting their "right to choose the persons who will direct, manage and operate the
corporation is significant because it is the primary way in which a stockholder can have
a voice in the management of corporate affairs," because they said they had been
unlawfully deprived thereof due to late notification of the aforesaid meeting, and
(b) by praying for the voiding of the August 15, 2011 ASM, and for "other just and equitable
reliefs."
As the CA noted, by seeking to nullify the August 15, 2011 ASM of NADECOR, "including all
proceedings taken thereat, all the consequences thereof, and all acts carried out pursuant thereto"
the petitioners were clearly challenging the validity of the election of the new Board of
Directors. As the NADECOR's Amended By-Laws itself expressly provides, the purpose of the
ASM is "for the election of Directors and for the transaction of general business of its office."
Under Sections 1 to 3 of Rule 6 of the Interim Rules, SEC Case No. 11-164 should have been
dismissed for having been filed beyond the 15-day prescriptive period allowed for an
election protest. In substance, the main issues therein are on all fours with Yujuico, wherein
the Court expressly ruled that where one of the reliefs sought in the complaint is to nullify
the election of the Board of Directors at the ASM, the complaint involves an election
contest. Both cases put in issue the validity of the ASM and the election of the members of the
Board of Directors. The ostensible difference is that in SEC Case No. 11-164 the petitioners
Page 236 of 434

invoked lack of notice of the August 15, 2011 ASM, while in Yujuico the ground invoked
was improper venue.
2. The petitioners have no cause of action because they were duly represented at the
August 15, 2011 ASM by their proxy, JG Ricafort.
As found by the CA, the petitioners did participate in the stockholders' meeting through their
authorized representative and proxy, JG Ricafort. In his Affidavit dated November 21, 2011,
Gatmaitan, NADECOR Corporate Secretary, categorically declared under oath that JG Ricafort
held a valid irrevocable proxy from the petitioners to attend and vote their shares at all meetings
of the stockholders, and that JG Ricafort signed the attendance sheet for and in behalf of the
plaintiffs as shown by his signatures in the rows in the said attendance sheet for the names of
the plaintiffs who had appointed him as his proxy.
JG Ricafort's proxy authority was "to attend and represent the petitioners at any and all meetings
of the shareholders of the Company, and for and on behalf of the petitioners, to vote upon any
and all matters to be taken up at said meeting, according to the number of shares of stock of the
Company of which the [petitioners] are the lawful record and beneficial owners, and which they
would be entitled to vote if personally present." Thus there is no doubt that JG Ricafort was duly
constituted by the petitioners as their proxy to attend "any and all" stockholders' meetings.
Moreover, the petitioners do not deny that they each executed a Nominee Agreement dated
June 4, 2007 wherein they acknowledged that JG Ricafort is the true and beneficial owner of the
shares of stock in their names. Each of the nominee agreements uniformly provide that “The
Nominee holds the legal title to the Shares for and in behalf of Principal who is the
beneficial owner thereof.”
As Nominees, the petitioners expressly acknowledged that they held "the legal title to the Shares
for and in behalf of Principal [JG Ricafort] who is the beneficial owner thereof" and that "any and
all payments made by the Nominee on the Shares, including but not limited to the subscription
payment therefor, were funded by, and made on behalf and for the benefit of the Principal [JG
Ricafort]." Thus, the petitioners misled the trial court into thinking that they had an inherent
right to vote as an incident of their ownership of corporate stock, although they always knew
that JG Ricafort was the real and beneficial owner and that he himself attended the stockholders'
meeting and voted as their "proxy" the shares in their names.
Thus, JG Ricafort being the real and beneficial owner of the petitioners' shares, lack of notice to
them is inconsequential because he attended and represented them at the August 15, 2011 ASM.
It defies reason, too, that he could not have informed his wife and children, who live in the same
house with him, of the scheduled ASM.
3. The annual stockholders’ meeting date August 15, 2011 and the proceedings therein
would not be affected by failure to give notice of the meeting to the petitioner.
It must be noted that under Article I, Section 3 of NADECOR's Amended By-Laws, what is
required is the mailing out of notices by registered mail at least three days before the ASM.
The shorter notice of three days instead of two weeks for stockholders' regular or special
meeting is clearly allowed under Section 50 of the Corporation Code.
Page 237 of 434

SECTION 50. Regular and Special Meetings of Stockholders or Members. - Regular

meetings of stockholders or members shall be held annually on a date fixed in the by-laws,
or if not so fixed, on any date in April of every year as determined by the board of directors
or trustees: Provided, That written notice of regular meetings shall be sent to all
stockholders or members of record at least two (2) weeks prior to the meeting, unless a
different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed necessary
or as provided in the by-laws: Provided, however, That at least one (1) week written notice
shall be sent to all stockholders or members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or

member, x x x.
By failing to file their complaint seasonably, the petitioners must be deemed to have waived
their right to notice of the August 15, 2011 ASM. Section 50 provides in effect that failure to give
notice of the regular or annual meetings, when the date thereof is fixed in the by-laws, as in
Section 1, Article 1 of the Amended By-Laws of NADECOR, which is "at twelve thirty P.M., on
the THIRD MONDAY OF AUGUST in each year, if not a legal holiday, and if a legal
holiday, then on the first day following which is not a legal holiday," will not affect the
validity of the ASM or the proceedings therein. Thus, it is also provided in Section 3, Article 1 of
NADECOR's Amended By-Laws that:
Sec. 3. x x x. Failure to give notice of annual meeting, or any irregularity in such notice,shall
not affect the validity of such annual meeting or of any proceedings at such meeting(other
than proceedings of which special notice is required by law or by these By-laws), x x x.
_____________________________________________________________________________________
SHARES OF STOCK
Victor Africa vs. The Honorable Sandiganbayan and Barbara Anne C. Migallos
G.R. No 172222, 174493 and 184636; November 11, 2013
J. Abad
Pursuant to Section 2 of E.O. 14, the Sandiganbayan is vested with the exclusive jurisdiction
over all cases regarding "the Funds, Moneys, Assets and Properties Illegally Acquired or
Misappropriated by Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their Close
Relatives, Subordinates, Business Associates, Dummies, Agents or Nominees" including "all incidents
arising from, incidental to, or related to, such cases.” Hence, it is well-within the jurisdiction of the
Sandiganbayan to order the holding of the stockholders’ meeting of a corporation whose shares were
sequestered by the PCGG.
Also, when it comes to the validity of voting the sequestered shares, the second tier of the two-
tiered test is satisfied where, although no dissipation threatened the company assets, the PCGG
initially stepped in, voted the sequestered shares, and seized control of its board of directors to save
those assets.
Page 238 of 434

Facts:
Eastern Extension Australasia and China Telegraph Company, Ltd. (Eastern Extension) got
instructions from the Marcos government to reorganize its telecommunications business in the
Philippines into a 60/40 corporation in favor of Filipinos. As a result, Eastern Extension negotiated
with Philippine Overseas Telecoms, for the formation of Eastern Telecommunications Philippines,
Inc. (ETPI), 60% of the capital stock of which went to the group consisting of Benedicto, Atty.
Africa, and Nieto (BAN group). Subsequently, The BAN group spread its shares to three
corporations, namely: Aerocom Investors, Universal Molasses, and Polygon Investors and
Managers.
With the fall of the Marcos government, the Presidential Commission on Good Government
(PCGG) sequestered the ETPI shares of the BAN group upon a prima facie finding that the same
belonged to the favored Marcos cronies. On July 1987, PCGG filed with the Sandiganbayan a Civil
Case 0009 to recover said shares. This suit gave rise to the filing of three consolidated cases. In 1991,
during the annual stockholders’ meeting, PCGG voted the sequestered shares. This resulted in the
PCGG Board acquiring control of ETPI’s operations. Thereafter, in order to comply with the
requirements of E.O. 109 and R.A. 7925, a 1997 stockholders’ meeting was held and PCGG again
voted the sequestered shares to approve the increase in ETPI’s authorized capital stock.
In G.R. 172222, Aerocom notified ETPI of its intention to sell its Class B shares to A.G.N Philippines
(AGNP) so as to enable the latter to decide whether to exercise its option of first refusal.
Subsequently, ETPI Board decided to waive the option. Upon notice to the shareholders, the Africa-
led group wrote ETPI a letter, reserving the exercise of their own options until after a validly
constituted ETPI Board could waive the company’s option. This did not keep Aerocom from
transferring its shares to AGNP. However, because of the need to comply with certain requirements,
the transfer of shares in the Stock Transfer Book (STB) was delayed for more than four years after
the sale. To complete the transfer, ETPI’s corporate secretary filed with the Sandiganbayan a motion
for the issuance of new stock certificates and the recording of entries in its Stock and Transfer Book
(STB). Afterwards, Sandiganbayan granted the motion. However, Africa filed a motion for
reconsideration alleging that the Sandiganbayan should first determine, before allowing transfer in
its book, whether the PCGG validly voted the sequestered shares that elected ETPI’s board. The
Sandiganbayan denied the motion.
In G.R. 174493, Sandiganbayan rendered a decision ruling that the PCGG’s votes during the ETPI
stockholders’ meetings were invalid for failure to satisfy the two-tiered test. It found that, while the
sequestered shares were prima facie ill-gotten, the PCGG failed to prove that ETPI’s assets were in
such imminent danger of dissipation as to warrant their intervention in the 1991 and 1997
stockholders’ meetings.
With ETPI’s motion for partial reconsideration denied, the PCGG-dominated BODs filed a petition
for certiorari claiming that the two-tiered test did not apply to ETPI. They alleged that, while the
company was in no imminent danger of dissipation, this became possible only because the PCGG
had ousted the BAN group from control. They claimed that the PCGG acted as conservator and
saved ETPI from dissipation.
Page 239 of 434

In G.R. 184636,Africa filed a petition to allow him to hold a stockholders’ meeting to elect a new
ETPI BODs, however, this was denied by the Sandiganbayan stating that the holding of a
stockholders’ meeting was not within its powers to decide.
Issues:
1) Whether or not determination on the validity of PCGG voting the sequestered shares must
first be had before allowing transfer in ETPI’s stock and transfer book.
2) Whether or not the two-tiered test has been satisfied.
3) WON Sandiganbayan has jurisdiction to order the holding of stockholders’ meeting.
Ruling:
1) Since neither the Sandiganbayan nor this Court enjoined that Board from performing its
functions, no legal impediment prevented it from waiving ETPI’s right of first refusal when Aerocom
gave notice of its intent to sell its shares to AGNP. For the same reason, the Sandiganbayan
committed no error in allowing the subsequent registration of the sale in the book of the
corporation in 2006 following some delays.
The fact that the corporate secretary asked for leave to register the transfer five years after the sale
did not make the transfer irregular. This Court held in Lee E. Won v. Wack Wack Golf & Country
Club, Inc., that since the law does not prescribe a period for such kind of registration, the action to
enforce the right to have it done does not begin to toll until a demand for it had been made and
was refused. This did not happen in this case.
2) The second tier of the two-tiered test assumes a situation where the registered shareholders
had been dissipating company assets and the PCGG wanted to step in, vote the sequestered shares,
and seize control of its board of directors to save those assets. Apparently, this was the situation
obtaining at ETPI before 1991. The BAN group was then in control but the PCGG held a
stockholders’ meeting that year, sanctioned by this Court, and voted the sequestered shares to elect
a new Board of Directors.
The Sandiganbayan said that no such dissipation threatened the company assets in 1991. Evidently,
however, it overlooked the fact that when the BAN group was still in control of the company, this
Court had occasion to admonish the Sandiganbayan for prohibiting the PCGG from calling a
stockholders’ meeting to elect a new Board of Directors. The clear implication of that admonition
is that the PCGG was justified in seeking a change in the management of the company. Thus, when
the stockholders’ meeting took place on August 7, 1991, it was simply assumed that the PCGG could
vote the sequestered shares it held. It in fact did so and elected a new Board of Directors. Since
neither the Sandiganbayan nor this Court enjoined that Board from assuming control, it cannot
now be said that the PCGG had cast an invalid vote, rendering void all the Board’s actions in the
last 22 years.
The two- tiered test contemplates a situation where the registered stockholders were in control and
had been dissipating company assets and the PCGG wanted to vote the sequestered shares to save
the company. This was not the situation in ETPI in 1997. It was the PCGG elected board that
remained in control during that year and it apparently had done well in the preceding years
guarding company assets. Besides the 1997 shareholders’ meeting had a limited purpose: to approve
Page 240 of 434

the increase in ETPI’s authorized capital stock in order to comply with the requirements of
Executive Order 109 and R.A. 7925. There is no allegation that such increase was irregular or had
prejudiced the company’s interest.
3) Sandiganbayan has the authority to order the holding of a stockholders’ meeting at ETPI.
The PCGG had sequestered the substance of that company’s shares of stock. And, since Section 2
of Executive Order 14 dated May 7, 1986 vests in the Sandiganbayan exclusive jurisdiction over all
cases regarding "the Funds, Moneys, Assets and Properties Illegally Acquired or Misappropriated
by Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their Close Relatives,
Subordinates, Business Associates, Dummies, Agents or Nominees" including "all incidents arising
from, incidental to, or related to, such cases," it follows that the Sandiganbayan can issue the
requested order. Besides, with the PCGG in effective control of ETPI, it is expected to obey the
Sandiganbayan’s orders as it has always done.
CERTIFICATE OF STOCK
FOREST HILLS GOLF & COUNTRY CLUB vs. VERTEX SALES AND TRADING, INC.
G.R. No. 202205, March 6, 2013
J. Brion
The corporation whose shares of stock are the subject of a transfer transaction (through sale,
assignment, donation, or any other mode of conveyance) need not be a party to the transaction, as
may be inferred from the terms of Section 63 of the Corporation Code. However, to bind the
corporation as well as third parties, it is necessary that the transfer is recorded in the books of the
corporation.
Facts:
Petitioner Forest Hills Golf & Country Club (Forest Hills) is a domestic non-profit stock
corporation. It was created as a result of a joint venture agreement between Kings Properties
Corporation (Kings) and Fil-Estate Golf and Development, Inc. (FEGDI).
In August 1997, FEGDI sold to RS Asuncion Construction Corporation (RSACC) one (1) Class “C”
common share of Forest Hills for P1.1 million. Prior to the full payment of the purchase price, RSACC
transferred its interests over FEGDI's Class “C” common share to respondent Vertex Sales and
Trading, Inc. (Vertex). RSACC advised FEGDI of the transfer and FEGDI, in turn, requested Forest
Hills to recognize Vertex as a shareholder. Forest Hills acceded to the request, and Vertex was able
to enjoy membership privileges in the golf and country club.
Despite the sale of FEGDI's Class “C” common share to Vertex, the share remained in the name of
FEGDI, prompting Vertex to demand for the issuance of a stock certificate in its name. As its
demand went unheeded, Vertex filed a complaint for rescission with damages against defendants
Forest Hills, FEGDI, and Fil-Estate Land, Inc. (FELI) – the developer of the Forest Hills golf course.
The Regional Trial Court (RTC) dismissed Vertex's complaint after finding that the failure to issue
a stock certificate did not constitute a violation of the essential terms of the contract of sale that
would warrant its rescission.
Page 241 of 434

The CA reversed the RTC. It declared that in the sale of shares of stock, physical delivery of a stock
certificate is one of the essential requisites for the transfer of ownership of the stocks purchased.
It based its ruling on Section 63 of the Corporation Code, Hence, the CA rescinded the sale of the
share and ordered the defendants to return the amount paid by Vertex by reason of the sale.
Issue:
Whether the delay in the issuance of a stock certificate can be considered a substantial breach as
to warrant rescission of the contract of sale
Ruling:
As correctly pointed out by Forest Hills, it was not a party to the sale even though the subject of the
sale was its share of stock. The corporation whose shares of stock are the subject of a transfer
transaction (through sale, assignment, donation, or any other mode of conveyance) need not be a
party to the transaction, as may be inferred from the terms of Section 63 of the Corporation Code.
However, to bind the corporation as well as third parties, it is necessary that the transfer is recorded
in the books of the corporation.
In the present case, the parties to the sale of the share were FEGDI as the seller and Vertex as the
buyer (after it succeeded RSACC). As party to the sale, FEGDI is the one who may appeal the ruling
rescinding the sale. The remedy of appeal is available to a party who has “a present interest in the
subject matter of the litigation and is aggrieved or prejudiced by the judgment. A party, in turn, is
deemed aggrieved or prejudiced when his interest, recognized by law in the subject matter of the
lawsuit, is injuriously affected by the judgment, order or decree. The rescission of the sale does not
in any way prejudice Forest Hills in such a manner that its interest in the subject matter – the share
of stock – is injuriously affected. Thus, Forest Hills is in no position to appeal the ruling rescinding
the sale of the share. Since FEGDI, as party to the sale, filed no appeal against its rescission, we
consider as final the CA’s ruling on this matter.
With regard to the amounts paid by Vertex, Forest Hills is under no obligation to return such
amount for not being a party in the contract of sale. Indeed, Vertex failed to present sufficient
evidence showing that Forest Hills received the purchase price for the share or any other fee paid
on account of the sale (other than the membership fee) to make Forest Hills jointly or solidarily
liable with FEGDI for restitution.
Although Forest Hills received P150,000.00 from Vertex as membership fee, it should be allowed to
retain this amount. For three years prior to the rescission of the sale, the nominees of Vertex
enjoyed membership privileges and used the golf course and the amenities of Forest Hills. The
Court considered the amount paid as sufficient consideration for the privileges enjoyed by Vertex's
nominees as members of Forest Hills.
_____________________________________________________________________________________
FIL-ESTATE GOLF AND DEVELOPMENT, INC. and FILESTATE LAND, INC.

vs. VERTEX SALES AND TRADING, INC.
G.R. No. 2012079, June 10, 2013
J. Brion
Page 242 of 434

The physical delivery of the shares of stock thru the stock certificate is necessary to transfer
ownership of stocks. Failure of the seller to deliver the shares of stock constituted substantial breach
of their contract which gave rise to a right on the part of the purchaser to rescind the sale.
Facts:
FEGDI is a stock corporation whose primary business is the development of golf courses. FELI is
also a stock corporation, but is engaged in real estate development. FEGDI was the developer of the
Forest Hills Golf and Country Club (Forest Hills) and, in consideration for its financing support and
construction efforts, was issued several shares of stock of Forest Hills.
Sometime in August 1997, FEGDI sold, on installment, to RS Asuncion Construction Corporation

(RSACC) one Class "C" Common Share of Forest Hills for P1,100,000.00. Prior to the full payment
of the purchase price, RSACC sold the Class "C" Common Share to respondent Vertex Sales and
Trading, Inc. (Vertex). RSACC advised FEGDI of the sale to Vertex and FEGDI, in turn, instructed
Forest Hills to recognize Vertex as a shareholder. For this reason, Vertex enjoyed membership
privileges in Forest Hills.
Despite Vertex’s full payment, the share remained in the name of FEGDI. Because of this, Vertex
wrote FEDGI a letter demanding the issuance of a stock certificate in its name. FELI replied, initially
requested Vertex to first pay the necessary fees for the transfer. Although Vertex complied with the
request, no certificate was issued.
Vertex filed a Complaint for Rescission with Damages and Attachment against FEGDI, FELI and
Forest Hills. The RTC dismissed the complaint for insufficiency of evidence. It ruled that delay in
the issuance of stock certificates does not warrant rescission of the contract as this constituted a
mere casual or slight breach. Vertex appealed the dismissal of its complaint. In its decision, the CA
reversed the RTC and rescinded the sale of the share. Citing Section 63 of the Corporation Code,
the CA held that there can be no valid transfer of shares where there is no delivery of the stock
certificate.
Issue:
Whether the delay in the issuance of a stock certificate can be considered a substantial breach as
to warrant rescission of the contract of sale.
Ruling:
The factual backdrop of this case is similar to that of Raquel-Santos v. Court of Appeals, where the
Court held that in a sale of shares of stock, physical delivery of a stock certificate is one of the
essential requisites for the transfer of ownership of the stocks purchased.
Section 63 of the Corporation Code provides:
SEC. 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations
shall be divided into shares for which certificates signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the
Page 243 of 434

corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed
by the owner or his attorney-in-fact or other person legally authorized to make the
transfer.1âwphi1 No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable
in the books of the corporation.
In this case, Vertex fully paid the purchase price by February 11, 1999 but the stock certificate was
only delivered on January 23, 2002 after Vertex filed an action for rescission against FEGDI.
Under these facts, considered in relation to the governing law, FEGDI clearly failed to deliver the
stock certificates, representing the shares of stock purchased by Vertex, within a reasonable time
from the point the shares should have been delivered. This was a substantial breach of their contract
that entitles Vertex the right to rescind the sale under Article 1191 of the Civil Code. It is not entirely
correct to say that a sale had already been consummated as Vertex already enjoyed the rights a
shareholder can exercise. The enjoyment of these rights cannot suffice where the law, by its express
terms, requires a specific form to transfer ownership.
Regarding the involvement of FELI in this case, no privity of contract exists between Vertex and
FELI. In the sale of the Class "C" Common Share, the parties are only FEGDI, as seller, and Vertex,
as buyer. As can be seen from the records, FELI was only dragged into the action when its staff used
the wrong letterhead in replying to Vertex and issued the wrong receipt for the payment of transfer
taxes. Thus FELI should be absolved from any liability.
STOCK AND TRANSFER BOOK
Ferro Chemicals v. Garcia

G.R. No. 168134, October 05, 2016
Stock and Transfer Book
If a corporate secretary fails to record the attachment of a stockholder’s shares in the stock and
transfer book, and eventually said stockholder sold his share to another person, can the latter hold
the corporate secretary liable on the ground that the corporate secretary’s failure to record the
earlier lien (attachment) lured him to buy the shares? No. Even if we lend credence to the graver
allegation that Rolando Navarro (the corporate secretary) showed the stock and transfer books of
the corporation to Ramon Garcia (the buyer of the shares) which bore no record of the Consortium
Banks' lien (attachment), still he could not be faulted in the absence of showing that he acted in
bad faith with the intention to lure the buyer to believe that the subject shares were lien-free. As
the Corporate Secretary of Chemical Industries, he is under no obligation to record the attachment
of the Consortium Banks, not being a transfer of ownership but merely a burden on the title of the
owner. Only absolute transfers of shares of stock are required to be recorded in the corporation's
stock and transfer book in order to have "force and effect as a ainst third persons.” In Chemphil
Export and Import Corporation v. Court of Appeals, et al., the Court enunciated the rule that
Page 244 of 434

attachments of shares are not considered "transfer" and need not be recorded in the corporations'
stock and transfer book.
DISPOSITION AND ENCUMBRANCES OF SHARES
INTERPORT RESOURCES CORPORATION vs. SECURITIES SPECIALIST,

INC., and R.C. LEE SECURITIES INC.
G .R. No. 154069, June 6, 2016, BERSAMIN, J.
Novation extinguished an obligation between two parties. Clearly, the effect of the assignment
of the subscription agreements to SSI was to extinguish the obligation of R.C. Lee to Oceanic, now
Interport, to settle the unpaid balance on the subscription. As a result of the assignment, Interport
was no longer obliged to accept any payment from R.C. Lee because the latter had ceased to be privy
to Subscription Agreements. On the other hand, Interport was legally bound to accept SSI's tender of
payment for the 75% balance on the subscription price because SSI had become the new debtor under
Subscription Agreements. As such, the issuance of the stock certificates in the name of R.C. Lee had
no legal basis in the absence of a contractual agreement between R. C. Lee and Interport.
Facts:
In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic) entered into a subscription
agreement with R.C. Lee, a domestic corporation engaged in the trading of stocks and other
securities, covering 5,000,000 of its shares with par value of PO.O1 per share, for a total of
P50,000.00. Thereupon, R.C. Lee paid 25% of the subscription, leaving 75% unpaid. Oceanic issued
Subscription Agreements to R.C. Lee.
On July 28, 1978, Oceanic merged with Interport, with the latter as the surviving corporation. Under
the terms of the merger, each share of Oceanic was exchanged for a share of lnterport. Thereafter,
R.C. Lee endorsed the Subscription Agreements to SSI, a domestic corporation registered as a dealer
in securities.
Later on, R.C. Lee requested Interport for a list of subscription agreements and stock certificates
issued in the name of R.C. Lee and other individuals named in the request. Upon finding no record
showing any transfer or assignment of the Oceanic subscription agreements and stock certificates
of Interport as contained in the list, R.C. Lee paid its unpaid subscriptions and was accordingly
issued stock certificates corresponding thereto.
On February 8, 1989, Interport issued a call for the full payment of subscription receivables, setting
March 15, 1989 as the deadline. SSI tendered payment prior to the deadline through two
stockbrokers of the Manila Stock Exchange. However, the stockbrokers reported to SSI that
lnterport refused to honor the Oceanic subscriptions.
On the date of the deadline, SSI directly tendered payment to lnterport for the balance of the
5,000,000 shares covered by the Oceanic Subscription Agreements. Interport rejected the same.
SSI learned that Interport had issued the 5,000,000 shares to R.C. Lee, relying on the latter's
registration as the owner of the subscription agreements in the books of the former, Thus, SSI wrote
Page 245 of 434

R.C. Lee demanding the delivery of the 5,000,000 Interport shares on the basis of a purported
assignment of the subscription agreements covering the shares made in 1979. R.C. Lee failed to
return the subject shares inasmuch as it had already sold the same to other parties. SSI thus
demanded that R.C. Lee pay not only the equivalent of the 25% it had paid on the subscription but
the whole 5,000,000 shares at current market value. SSI also made demands upon Interport and
R.C. Lee for the cancellation of the shares issued to R.C. Lee and for the delivery of the shares to
SSl.
After its demands were not met, SSI commenced this case in the SEC to compel the respondents to
deliver the shares and pay damages.
The SEC ruled in favor of SSI and required Interport to issue all the 5,000,000 shares and pay
damages. The respondents appealed to the SEC En Bank. The latter modified the decision and
stated that it would be inequitable to issue the 5,000,000 shares in favor of SSI since it only paid
25% thereof. The decision of the SEC En Banc was affirmed by the CA, hence, this petition.
lnterport argues that R.C. Lee should be held liable for the delivery of 25% of the shares under the
subject subscription agreements inasmuch as R.C. Lee had already received all the 5,000,000 shares
upon its payment of the 75% balance on the subscription price to Interport; that it was only proper
for R.C. Lee to deliver 25% of the shares under the Oceanic subscription agreements because it had
already received the corresponding payment therefor from SSI for the assignment of the shares;
that R.C. Lee would be unjustly enriched if it retained the 5,000,000 shares and the 25% payment
of the subscription price made by SSI in favor of R.C. Lee as a result of the assignment; and that it
merely relied on its records, in accordance with Section 74 of the Corporation Code, when it issued
the stock certificates to R.C. Lee upon its full payment of the subscription price.
Issue: Whether Interport is liable to deliver the Oceanic shares of stock to SSI
Held:
1. The SEC correctly categorized the assignment of the subscription agreements as a form of
novation by substitution of a new debtor and which required the consent of or notice to the
creditor. Under the Civil Code, obligations may be modified by: (l) changing their object or
principal conditions; or (2) substituting the person of the debtor; or (3) subrogating a third
person of the original one, may be made even without the knowledge or against the will of
the latter, but not without the consent of the creditor. In this case, the change of debtor
took place when R.C. Lee assigned the Oceanic shares under Subscription Agreement to SSI
so that the latter became obliged to settle the 75% unpaid balance on the subscription.
Clearly, the effect of the assignment of the subscription agreements to SSI was to extinguish
the obligation of R.C. Lee to Oceanic, now Interport, to settle the unpaid balance on the
subscription. As a result of the assignment, Interport was no longer obliged to accept any
payment from R.C. Lee because the latter had ceased to be privy to Subscription Agreements
for having been extinguished insofar as it was concerned. On the other hand, Interport was
legally bound to accept SSI's tender of payment for the 75% balance on the subscription
price because SSI had become the new debtor under Subscription Agreements Nos. 1805,
and 1808 to 1811. As such, the issuance of the stock certificates in the name of R.C. Lee had
no legal basis in the absence of a contractual agreement between R.C. Lee and Interport.
Page 246 of 434

2. Under Section 63 of the Corporation Code, no transfer of shares of stock shall be valid, except
as between the parties, until the transfer is recorded in the books of the corporation. This
statutory rule cannot be strictly applied herein, however, because lnterport had unduly
refused to recognize the assignment of the shares between R.C. Lee and SSL
_____________________________________________________________________________________
ANNA TENG, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION (SEC) AND TING
PING LAY, Respondents.
G.R. No. 184332, February 17, 2016, REYES, J.
The delivery or surrender of certificate of stock is not a requisite before the conveyance may
be recorded in its books. To compel delivery to the corporation of the certificates as a condition
for the registration of the transfer would amount to a restriction on the right of a
stockholder to have the stocks transferred to his name, which is not sanctioned by law. The
only limitation imposed by Section 63 is when the corporation holds any unpaid claim against the
shares intended to be transferred.
Facts:
This case has its origin in the case entitled TCL Sales Corporation and Anna Teng v. Hon. Court of
Appeals and Ting Ping Lay (G.R. No. 129777). Herein respondent Ting Ping purchased 480 shares of
TCL Sales Corporation (TCL) from Peter Chiu (Chiu) on February 2, 1979; 1,400 shares on September
22, 1985 from his brother Teng Ching Lay (Teng Ching), who was also the president and operations
manager of TCL; and 1,440 shares from Ismaelita Maluto (Maluto) on September 2, 1989.
Upon Teng Ching's death in 1989, his son Henry Teng (Henry) took over the management of TCL.
To protect his shareholdings with TCL, Ting Ping on August 31, 1989 requested TCL's Corporate
Secretary, herein petitioner Teng, to enter the transfer in the Stock and Transfer Book of TCL for
the proper recording of his acquisition. He also demanded the issuance of new certificates of stock
in his favor. TCL and Teng, however, refused despite repeated demands. Because of their refusal,
Ting Ping filed a petition for mandamus with the SEC against TCL and Teng,
The Securities and Exchange Commission (SEC) granted the issuance of an alias writ of execution,
compelling petitioner Anna Teng (Teng) to register and issue new certificates of stock in favor of
respondent Ting Ping Lay (Ting Ping). The order of the SEC was affirmed by the CA; hence, this
petition.
Issue: Whether the surrender of the certificates of stock is a requisite before registration of the
transfer may be made in the corporate books and for the issuance of new certificates in its stead.
Held: No. Under Section 63 of the Corporation Code, certain minimum requisites must be
complied with for there to be a valid transfer of stocks, to wit: (a) there must be delivery of the
stock certificate; (b) the certificate must be endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and (c) to be valid against third parties, the transfer
must be recorded in the books of the corporation.
It is the delivery of the certificate, coupled with the endorsement by the owner or his duly
authorized representative that is the operative act of transfer of shares from the original owner to
Page 247 of 434

the transferee.41 The Court even emphatically declared. in Fil-Estate Golf and Development, Inc., et
al. v. Vertex Sales and Trading, Inc. that in "a sale of shares of stock, physical delivery of a stock
certificate is one of the essential requisites for the transfer of ownership of the stocks
purchased."43 The delivery contemplated in Section 63, however, pertains to the delivery of the
certificate of shares by the transferor to the transferee, that is, from the original stockholder
named in the certificate to the person or entity the stockholder was transferring the shares to,
whether by sale or some other valid form of absolute conveyance of ownership. "[S]hares of stock
may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be
vested in the transferee by the delivery of the duly indorsed certificate of stock."
It is thus clear that Teng's position - that Ting Ping must first surrender Chiu's and Maluto's
respective certificates of stock before the transfer to Ting Ping may be registered in the books of
the corporation - does not have legal basis. The delivery or surrender adverted to by Teng, i.e., from
Ting Ping to TCL, is not a requisite before the conveyance may be recorded in its books. To compel
Ting Ping to deliver to the corporation the certificates as a condition for the registration of the
transfer would amount to a restriction on the right of Ting Ping to have the stocks transferred to
his name, which is not sanctioned by law. The only limitation imposed by Section 63 is when the
corporation holds any unpaid claim against the shares intended to be transferred.
_____________________________________________________________________________________
JOSEPH OMAR O. ANDAYA vs. RURAL BANK OF CABADBARAN, INC., DEMOSTHENES P.

ORAIZ and RICARDO D. GONZALEZ
G.R. No. 188769, August 3, 2016, SERENO, CJ
Transferees of shares of stock are real parties in interest having a cause of action for
mandamus to compel the registration of the transfer and the corresponding issuance of stock
certificates.
FACTS:
Andaya bought from Chute 2,200 shares of stock in the Rural Bank of Cabadbaran. The transaction
was evidenced by a notarized document denominated as Sale of Shares of Stocks. Chute duly
endorsed and delivered the certificates of stock to Andaya and, subsequently, requested the bank
to register the transfer and issue new stock certificates in favor of the latter. Andaya also separately
communicated with the bank's corporate secretary, respondent Oraiz, reiterating Chute's request
for the issuance of new stock certificates in petitioner's favor.
The bank eventually denied the request of Andaya. It reasoned that he had a conflict of interest, as
he was then president and chief executive officer of the Green Bank of Caraga, a competitor bank.
Respondent bank concluded that the purchase of shares was not in good faith, and that the
purchase "could be the beginning of a hostile bid to take-over control of the Rural Bank of
Cabadbaran." Citing Gokongwei v. Securities and Exchange Commission, respondent insisted that it
may refuse to accept a competitor as one of its stockholders. It also maintained that Chute should
have first offered her shares to the other stockholders, as agreed upon during the 2001 stockholders'
meeting.
Page 248 of 434

Andaya instituted an action for mandamus and damages to compel the recording of the transfer in
the bank's stock and transfer book and to issue new certificates of stock in his name.
The R TC issued a Decision dismissing the complaint. Citing Ponce v. Alsons Cement Corporation,
the trial court ruled that Andaya had no standing to compel the bank to register the transfer and
issue stock certificates in his name. It explained that he had failed "to show that the transfer of
subject shares of stock was recorded in the stock and transfer book of the bank or that he was
authorized by Chute to make the transfer."
ISSUES:
2. Whether Andaya, as a transferee of shares of stock, may initiate an action for mandamus
compelling the Rural Bank of Cabadbaran to record the transfer of shares in its stock and
transfer book, as well as issue new stock certificates in his name.
3. Whether a writ of mandamus should issue in favor of petitioner.
RULING:
1. Transferees of shares of stock are real parties in interest having a cause of action for
mandamus to compel the registration of the transfer and the corresponding issuance of stock
certificates.
Andaya has been able to establish that he is a bona fide transferee of the shares of stock of Chute.
In proving this fact, he presented to the RTC the following documents evidencing the sale: (1) a
notarized Sale of Shares of Stocks showing Chute's sale of 2,200 shares of stock to petitioner; (2) a
Documentary Stamp Tax Declaration/ Retum; (3) a Capital Gains Tax Return; and ( 4) stock
certificates covering the subject shares duly endorsed by Chute. There is no doubt that Andaya had
the standing to initiate an action for mandamus to compel the Rural Bank of Cabadbaran to record
the transfer o shares in its stock and transfer book and to issue new stock certificates in his name.
As the transferee of the shares, petitioner stands to be benefited or injured by the judgment in the
instant petition, a judgment that will either order the bank to recognize the legitimacy of the
transfer and petitioner's status as stockholder or to deny the legitimacy thereof.
This Court further finds that the reliance of the RTC on Ponce in finding that petitioner had no
cause of action for mandamus against the defendant bank was misplaced. In Ponce, the issue
resolved by this Court was whether the petitioner therein had a cause of action for mandamus to
compel the issuance of stock certificates, not the registration of the transfer. Ruling in the negative,
the Court said in that case that without any record of the transfer of shares in the stock and transfer
book of the corporation, there would be no clear basis to compel that corporation to issue a stock
certificate. By the import of Section 63 of the Corporation Code, the stock and transfer book would
be the main reference book in ascertaining a person's entitlement to the rights of a stockholder.
Consequently, without the registration of the transfer, the alleged transferee could not yet be
recognized as a stockholder who is entitled to be given a stock certificate.
In contrast, at the crux of this petition are the registration of the transfer and the issuance of the
corresponding stock certificates. Requiring petitioner to register the transaction before he could
institute a mandamus suit in supposed abidance by the ruling in Ponce was a palpable error. It led
to an absurd, circuitous situation in which Andaya was prevented from causing the registration of
Page 249 of 434

the transfer, ironically because the shares had not been registered. With the logic resorted to by the
RTC, transferees of shares of stock would never be able to compel the registration of the transfer
and the issuance of new stock certificates in their favor. They would first be required to show the
registration of the transfer in their names – the ministerial act that is the subject of the mandamus
suit in the first place.
2. On the issue of propriety of issuing a writ of mandamus, Respondents primarily challenge the
mandamus suit on the grounds that the transfer violated the bank stockholders' right of first
refusal and that petitioner was a buyer in bad faith. Both parties refer to Section 98 of the
Corporation Code to support their arguments, which reads as follows:
SECTION 98. Validity of restrictions on transferof shares. - Restrictions on the right to

transfer shares must appear in the articles of incorporation and in the by-laws as
well as in the certificate of stock; otherwise, the same shall not be binding on any
purchaser thereof in good faith. Said restrictions shall not be more than onerous than
granting the existing stockholders or the corporation the option to purchase the shares of
the transferring stockholder with such reasonable terms, conditions or period stated
therein. If upon the expiration of said period, the existing stockholders or the corporation
fails to exercise the option to purchase, the transferring stockholder may sell his shares to
any third person.
It must be noted that Section 98 applies only to close corporations. Hence, before the Court can
allow the operation of this section in the case at bar, there must first be a factual determination
that respondent Rural Bank of Cabadbaran is indeed a close corporation. There needs to be a
presentation of evidence on the relevant restrictions in the articles of incorporation and bylaws of
the said bank. From the records or the RTC Decision, there is apparently no such determination or
even allegation that would assist this Court in ruling on these two major factual matters. With the
foregoing, the validity of the transfer cannot yet be tested using that provision. These are the factual
matters that the parties must first thresh out before the RTC.
After finding that petitioner has legal standing to initiate an action for mandamus, the Court now
reinstates the action he filed and remands the case to the RTC to resolve the propriety of issuing a
writ of mandamus.
If a corporate secretary fails to record the attachment of a stockholder’s shares in the stock and
transfer book, and eventually said stockholder sold his share to another person, can the latter hold
the corporate secretary liable on the ground that the corporate secretary’s failure to record the
earlier lien (attachment) lured him to buy the shares? No. Even if we lend credence to the graver
allegation that Rolando Navarro (the corporate secretary) showed the stock and transfer books of
the corporation to Ramon Garcia (the buyer of the shares) which bore no record of the Consortium
Banks' lien (attachment), still he could not be faulted in the absence of showing that he acted in
bad faith with the intention to lure the buyer to believe that the subject shares were lien-free. As
the Corporate Secretary of Chemical Industries, he is under no obligation to record the attachment
of the Consortium Banks, not being a transfer of ownership but merely a burden on the title of the
owner. Only absolute transfers of shares of stock are required to be recorded in the corporation's
stock and transfer book in order to have "force and effect as a ainst third persons.” In Chemphil
Export and Import Corporation v. Court of Appeals, et al., the Court enunciated the rule that
Page 250 of 434

attachments of shares are not considered "transfer" and need not be recorded in the corporations'
stock and transfer book. Ferro Chemicals v. Garcia G.R. No. 168134, October 05, 2016
_____________________________________________________________________________________
DISSOLUTION AND LIQUIDATION
SPS. AURELIO HITEROZA and CYNTHIA HITEROZA, Petitioners, - versus - CHARITO S.

CRUZADA, President and Chairman, CHRIST'S ACHIEVERS MONTESSORI, INC., and
CHRIST'S ACHIEVERS MONTESSORI, INC., Respondents.
G.R. No. 203527, June 27, 2016, SECOND DIVISION, BRION J
Section 4, Rule 4 of the Interim Rules provides that a judgment before pre-trial, as in the
present case, may only be rendered after the parties’ submission of their respective pre-
trial briefs. Complementing Section 4 is Section 1, Rule 4 of the Interim Rules which provides for
the mandatory conduct of a pre-trial conference. Except in cases of default, Sections 1 and 4 of
Rule 4 of the Interim Rules require the conduct of a pre-trial conference and the submission of the
parties’ pre-trial briefs before the court may render a judgment on intracorporate disputes.
In the case of Villamor, Jr. v. Umale, the Court recognized that Section 1, Rule 9 of the Interim Rules
applies to both the appointment of a receiver and the creation of a management committee.
Further, the Court held that there must be imminent danger of both the dissipation, loss, wastage,
or destruction of assets or other properties; and paralysation of its business operations that may be
prejudicial to the interest of the minority stockholders, parties-litigants, or the general public,
before allowing the appointment of a receiver or the creation of a management committee.
The Court finds that the CA correctly ruled that RTC prematurely appointed a receiver
considering that (1)the RTC explicitly stated in its May 14, 2010 decision that there was yet no
evidence to support the Sps. Hiteroza’s allegations on Charito’s fraud and misrepresentation to
justify the appointment of a receiver and (2)the appointment of the receiver was based on the
“inability of the parties to work out an amicable settlement of their dispute, and in order to enable
the court to ascertain the veracity of the claim of the [spouses Hiteroza] that Charito has
unjustifiably failed and refused to comply with the final Decision in this case dated May 14, 2010.”
FACTS:
Christ’s Achievers Montessori Inc. is a non-stock, non-profit corporation that operates a school.
The petitioner Sps. Hiteroza and the respondent Charito Cruzada (Charito) are the incorporators,
members and trustees of the School.
The Sps. Hiteroza filed a Complaint for a derivative suit with prayer for the creation of a
management committee, the appointment of a receiver, and a claim for damages against Charito,
the President and Chairman of the school. The Sps. Hiteroza alleged that Charito employed
schemes and acts resulting in dissipation, loss, or wastage of the school’s assets that, if left
unchecked, would likely cause paralysis of the school operations, amounting to fraud and
misrepresentation detrimental and prejudicial to the school’s interests. The Sps. Hiteroza further
alleged that they were denied the right to examine corporate and financial records of the schoold
by Charito.
Page 251 of 434

On May 14, 2010, the Regional Trial Court (RTC) rendered a decision (the May 14, 2010 RTC
decision) directing Charito to allow the Sps. Hiteroza or their duly authorized representative to
have access to, inspect, examine, and secure copies of books of accounts and other pertinent records
of the school. The RTC, however, held that the allegations in the complaint do not amount to a
derivative suit since any injury that may result from the claimed fraudulent acts of Charito will only
affect the Sps. Hiteroza and not the school. The RTC also held that the prayer for the creation of a
management committee or the appointment of a receiver was premature since there was yet no
evidence in the complaint to support the Sps. Hiteroza’s allegations of fraud or misrepresentation.
On January 17, 2011, the Sps. Hiteroza filed a Report on the Inspection of Corporate Documents and
reiterated their prayer for the creation of a management committee and the appointment of a
receiver for the school. The Sps. Hiteroza alleged that Charito again refused to produce the school’s
main bank accounts records. The Sps. Hiteroza also alleged that their accountants found that, based
on the declared amounts in the corporate books of accounts, the total unaccounted income of the
School for the years 2000 to 2009 amounted to P27,446,989.35.
The RTC issued an Order, referring the dispute for mediation at the Philippine Mediation Center.
The parties appeared for mediation as directed but no settlement was reached. On March 16, 2012,
the RTC issued an Order (assailed RTC order) appointing Atty. Rafael Chris F. Teston as the school’s
receiver in view of the “inability of the parties to work out an amicable settlement of their dispute,
and in order to enable the court to ascertain the veracity of the claim of the [spouses Hiteroza] that
Charito has unjustifiably failed and refused to comply with the final decision in this case dated May
14, 2010.”
Charito sought to nullify the assailed RTC order and filed a Petition for Certiorari before CA. CA
granted Charito’s petition and nullified the assailed RTC order on the appointment of a
receiver.
The CA explained that the May 14, 2010 RTC decision already denied the Sps. Hiteroza’s prayer for
the creation of a management committee or the appointment of a receiver for lack of evidence and
for being premature. The May 14, 2010 RTC decision eventually became final and executory
since no appeal was filed.
The CA also held that there was noncompliance with the requisites for the appointment of a
receiver under Section 1, Rule 9 of the Interim Rules. The CA declared that the allegations on
the school’s dissipation of assets and funds have yet to be proven and that the RTC was still in the
process of ascertaining the veracity of the Sps. Hiteroza’s claims. Further, there is no showing that
the school is in imminent danger of paralysation of its business operations.
ISSUES:
1. Whether the May 14, 2010 RTC Decision is a final judgment; and
2. Whether the CA correctly nullified the assailed RTC Order which directed the appointment of
a receiver.
Page 252 of 434

RULING:
1. The May 14, 2010 RTC decision is not a final judgment since the case is not ripe for
decision. No pre-trial has been conducted pursuant to the Interim Rules and the parties
have not submitted their pre-trial briefs.
Section 4, Rule 4 of the Interim Rules provides that a judgment before pre-trial, as in the
present case, may only be rendered after the parties’ submission of their respective pre-
trial briefs. Complementing Section 4 is Section 1, Rule 4 of the Interim Rules which provides for
the mandatory conduct of a pre-trial conference. Except in cases of default, Sections 1 and 4 of
Rule 4 of the Interim Rules require the conduct of a pre-trial conference and the submission of the
parties’ pre-trial briefs before the court may render a judgment on intracorporate disputes.
Rule 7 of the Interim Rules (Inspection of Corporate Books and Records) dispenses with the need for
a pre-trial conference or the submission of a pre-trial brief before the court may render a judgment.
This Rule, however, applies only to disputes exclusively involving the rights of stockholders
or members to inspect the books and records and/or to be furnished with the financial
statements of a corporation.
In the present case, Rule 7 of the Interim Rules does not apply since the Sps. Hiteroza’s complaint
did not exclusively involve the denial of the Sps. Hiteroza’s right to inspect the school’s records, but
also several other allegations of Charito’s fraud and misrepresentation in the School’s management.
There has been no conduct of a pre-trial conference or the submission of the parties’ respective pre-
trial briefs before the issuance of the May 14, 2010 RTC decision. The issuance of the May 14, 2010
RTC decision was, thus, premature.
2. The CA correctly nullified the assailed RTC Order which directed the appointment of a
receiver.
The requirements in Section 1, Rule 9 of the Interim Rules apply to both the creation of a management
committee and/or the appointment of a receiver.
Section 1, Rule 9 of the Interim Rules provides:
SECTION 1. Creation of a management committee. — As an incident to any of the cases filed

under these Rules or the Interim Rules on Corporate Rehabilitation, a party may apply for the
appointment of a management committee for the corporation, partnership or association, when
there is imminent danger of:
(1) Dissipation, loss, wastage, or destruction of assets or other properties; and
(2) Paralyzation of its business operations which may be prejudicial to the interest of the
minority stockholders, parties-litigants, or the general public.
Section 2, Rule 9 of the Interim Rules, on the other hand, provides for the appointment of a receiver,
to quote:
SEC. 2. Receiver. — In the event the court finds the application to be sufficient in form
and substance, the court shall issue an order: (a) appointing a receiver xxxxxxx.
Page 253 of 434

While the caption of Section 1, Rule 9 states “the creation of a management committee,” the
requirements stated in Section 1 apply to both the creation of a management committee and the
appointment of a receiver, as can be gleaned from Section 2, Rule 9 which refers to “the application
sufficient in form and substance.” The “application” referred to in Section 2 on Receiver is the same
application referred to in Section 1 of Rule 9.
In the case of Villamor, Jr. v. Umale, the Court recognized that Section 1, Rule 9 of the Interim Rules
applies to both the appointment of a receiver and the creation of a management committee.
Further, the Court held that there must be imminent danger of both the dissipation, loss, wastage,
or destruction of assets or other properties; and paralysation of its business operations that may be
prejudicial to the interest of the minority stockholders, parties-litigants, or the general public,
before allowing the appointment of a receiver or the creation of a management committee.
Considering the requirements for the appointment of a receiver, the Court finds that the CA
correctly attributed grave abuse of discretion on the part of the RTC when the RTC prematurely
appointed a receiver without sufficient evidence to show that there is an imminent danger of: (1)
dissipation, loss, wastage, or destruction of assets or other properties; and (2) paralysation of its
business operations that may be prejudicial to the interest of the minority stockholders, parties-
litigants, or the general public. The RTC explicitly stated in its May 14, 2010 decision that there was
yet no evidence to support the Sps. Hiteroza’s allegations on Charito’s fraud and misrepresentation
to justify the appointment of a receiver.
Further, the appointment of the school’s receiver was not based on the presence of the
requirements of Section 1, Rule 9 of the Interim Rules, but based on the “inability of the parties to
work out an amicable settlement of their dispute, and in order to enable the court to ascertain the
veracity of the claim of the [spouses Hiteroza] that Charito has unjustifiably failed and refused to
comply with the final Decision in this case dated May 14, 2010.”
_____________________________________________________________________________________
Bank of the Philippine Islands v. as successor-in-interest of Far East Bank and Trust
Company v. EDUARDO HONG, doing business under the name and style "SUPER LINE
PRINTING PRESS" and the Court of Appeals;
G.R. No. 161771, February 15, 2012 Villarama, Jr., J:
While the SEC has jurisdiction to order the dissolution of a corporation, jurisdiction over the
liquidation of the corporation now pertains to the appropriate regional trial courts.
Facts:
On September 16, 1997, the EYCO Group of Companies ("EYCO") filed a petition for suspension of
payments and rehabilitation before the Securities and Exchange Commission (SEC). A stay order
was issued on September 19, 1997 enjoining the disposition in any manner except in the ordinary
course of business and payment outside of legitimate business expenses during the pendency of the
proceedings, and suspending all actions, claims and proceedings against EYCO until further orders
from the SEC.
On December 18, 1998, the hearing panel approved the proposed rehabilitation plan prepared by
EYCO despite the recommendation of the management committee for the adoption of the
Page 254 of 434

rehabilitation plan prepared and submitted by the steering committee of the Consortium of
Creditor Banks which appealed the order to the Commission. On September 14, 1999, the SEC
rendered its decision disapproving the petition for suspension of payments, terminating EYCO’s
proposed rehabilitation plan and ordering the dissolution and liquidation of the petitioning
corporation. The case was remanded to the hearing panel for liquidation proceedings. On appeal
by EYCO, the CA upheld the SEC ruling. EYCO then filed a petition for certiorari before the
Supreme Court, which case was eventually dismissed.
However, sometime in November 2000, while the case was still pending with the CA, petitioner
Bank of the Philippine Islands (BPI), filed with the Office of the Clerk of Court, Regional Trial Court
of Valenzuela City, a petition for extra-judicial foreclosure of real properties mortgaged to it by Eyco
Properties, Inc. and Blue Star Mahogany, Inc. Public auction of the mortgaged properties was
scheduled on December 19, 2000.
Claiming that the foreclosure proceedings initiated by petitioner was illegal, respondent Eduardo
Hong, an unsecured creditor of Nikon Industrial Corporation, one of the companies of EYCO, filed
an action for injunction and damages against the petitioner in the same court (RTC of Valenzuela
City). After hearing, the trial court issued a temporary restraining order (TRO). Petitioner filed a
motion to dismiss but the same was denied. The CA affirmed the lower court’s decision; hence, this
petition.
Issue: Whether the RTC can take cognizance of the injunction suit despite the pendency of SEC
Case
Held: Yes.
Upon the effectivity of R.A. No. 8799 (which took effect on August 8, 2000), the SEC’s jurisdiction
over cases enumerated in Section 5 of P.D. No. 902-A was transferred to the appropriate regional
trial courts. Hence, jurisdiction over the liquidation proceedings ordered by the SEC on 14
September 1999 was transferred to the RTC branch designated by the Supreme Court to exercise
jurisdiction over cases formerly cognizable by the SEC.
Given the foregoing, and considering that a) the liquidation case has not been transferred to the
appropriate RTC designated as Special Commercial Court at the time of the commencement of the
injunction suit on December 18, 2000 and b) the urgency of the situation and the proximity of the
scheduled public auction of the mortgaged properties as per the Notice of Sheriff’s Sale, the RTC of
Valenzuela City, properly took cognizance of the injunction case filed by the respondent. No
reversible error was therefore committed by the CA when it ruled that the RTC of Valenzuela City
had jurisdiction to hear and decide respondent’s complaint for injunction and damages.
_____________________________________________________________________________________
ZUELLIG FREIGHT AND CARGO SYSTEMS vs. NATIONAL LABOR RELATIONS

COMMISSION, et al.
G.R. No. 157900. July 22, 2013
J. Bersamin
Page 255 of 434

The mere change in the corporate name is not considered under the law as the creation of a new
corporation; hence, the renamed corporation remains liable for the illegal dismissal of its employee
separated under that guise.
Verily, the amendments of the articles of incorporation of Zeta to change the corporate name to
Zuellig Freight and Cargo Systems, Inc. did not produce the dissolution of the former as a corporation.
For sure, the Corporation Code defined and delineated the different modes of dissolving a corporation,
and amendment of the articles of incorporation was not one of such modes.
Facts:
Private respondent San Miguel brought a complaint for unfair labor practice, illegal dismissal, non-
payment of salaries and moral damages against petitioner, formerly known as Zeta Brokerage
Corporation (Zeta). He alleged that he and the other employees were informed that Zeta would
cease operations, and that all affected employees, including him, would be separated.
On its part, petitioner countered that San Miguel’s termination from Zeta had been for a cause
authorized by the Labor Code; that its non- acceptance of him had not been by any means irregular
or discriminatory; that its predecessor-in-interest had complied with the requirements for
termination due to the cessation of business operations; that it had no obligation to employ San
Miguel in the exercise of its valid management prerogative.
San Miguel however contended that the amendments of the articles of incorporation of Zeta were
for the purpose of changing the corporate name, broadening the primary functions, and increasing
the capital stock; and that such amendments could not mean that Zeta had been thereby dissolved.
The Labor Arbiter rendered a decision in favor of San Miguel. It held that contrary to herein
petitioner's claim that Zeta ceased operations and closed its business, there was merely a change of
business name and primary purpose and upgrading of stocks of the corporation. Zuellig and Zeta
are therefore legally the same person and entity and this was admitted by Zuellig’s counsel in its
letter to the VAT Department of the Bureau of Internal Revenue. As such, the termination of
complainant’s services allegedly due to cessation of business operations of Zeta is deemed illegal.
Notwithstanding his receipt of separation benefits from respondents, complainant is not estopped
from questioning the legality of his dismissal. The petitioner filed a motion for reconsideration with
the NLRC but was dismissed. The petition for certiorari filed with the CA was also not given
credence.
Issue:
Whether the change of corporate name resulted in the dissolution of the corporation
Ruling:
The amendments of the articles of incorporation of Zeta to change the corporate name to Zuellig
Freight and Cargo Systems, Inc. did not produce the dissolution of the former as a corporation. For
sure, the Corporation Code defined and delineated the different modes of dissolving a corporation,
Page 256 of 434

and amendment of the articles of incorporation was not one of such modes. The effect of the change
of name was not a change of the corporate being, for, as well stated in Philippine First Insurance
Co., Inc. v. Hartigan: "The changing of the name of a corporation is no more the creation of a
corporation than the changing of the name of a natural person is begetting of a natural person. The
act, in both cases, would seem to be what the language which we use to designate it imports – a
change of name, and not a change of being.”
The consequences, legal and otherwise, of the change of name were similarly dealt with in P.C.
Javier & Sons, Inc. v. Court of Appeals, the Court holding thusly:
A change in the corporate name does not make a new corporation, whether effected by a special act
or under a general law. It has no effect on the identity of the corporation, or on its property, rights, or
liabilities. 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.
In short, Zeta and petitioner remained one and the same corporation. The change of name did not
give petitioner the license to terminate employees of Zeta like San Miguel without just or
authorized cause. The situation was not similar to that of an enterprise buying the business of
another company where the purchasing company had no obligation to rehire terminated
employees of the latter. Petitioner, despite its new name, was the mere continuation of Zeta's
corporate being, and still held the obligation to honor all of Zeta's obligations, one of which was to
respect San Miguel's security of tenure. The dismissal of San Miguel from employment on the
pretext that petitioner, being a different corporation, had no obligation to accept him as its
employee, was illegal and ineffectual.
_____________________________________________________________________________________
ALABANG DEVELOPMENT CORPORATION vs. ALABANG HILLS VILLAGE ASSOCIATION

AND RAFAEL TINIO
G.R. No. 187456, June 02, 2014, J. Peralta
ADC filed its complaint not only after its corporate existence was terminated but also beyond
the three-year period allowed by Section 122 of the Corporation Code. To allow ADC to initiate the
subject complaint and pursue it until final judgment, on the ground that such complaint was filed for
the sole purpose of liquidating its assets, would be to circumvent the provisions of Section 122 of the
Corporation Code. Thus, it is clear that at the time of the filing of the subject complaint petitioner
lacks the capacity to sue as a corporation.
Facts:
The case traces its roots to the Complaint for Injunction and Damages filed with the RTC of
Muntinlupa City on Alabang Development Corporation against Alabang Hills Village Association,
Inc. and Rafael Tinio Tinio, President of AHVAI. The Complaint alleged that Alabang is the
developer of Alabang Hills Village and still owns certain parcels of land therein that are yet to be
sold, as well as those considered open spaces that have not yet been donated to the local
government of Muntinlupa City or the Homeowner's Association. In September 2006, ADC learned
that AHVAI started the construction of a multi-purpose hall and a swimming pool on one of the
parcels of land still owned by ADC without the latter's consent and approval, and that despite
Page 257 of 434

demand, AHVAI failed to desist from constructing the said improvements. ADC thus prayed that
an injunction be issued enjoining defendants from constructing the multi-purpose hall and the
swimming pool at the Alabang Hills Village.
In its Answer With Compulsory Counterclaim, AHVAI denied ADC's asseverations and
claimed that the latter has no legal capacity to sue since its existence as a registered corporate entity
was revoked by the SEC on May 26, 2003; that ADC has no cause of action because by law it is no
longer the absolute owner but is merely holding the property in question in trust for the benefit of
AHVAI as beneficial owner thereof; and that the subject lot is part of the open space required by
law to be provided in the subdivision. As counterclaim, it prayed that an order be issued divesting
ADC of the title of the property and declaring AHVAI as owner thereof; and that ADC be made
liable for moral and exemplary damages as well as attorney's fees. On January 4, 2007, the RTC of
Muntinlupa City, rendered judgment dismissing ADC’s complaint. ADC filed a Notice of Appeal of
the RTC decision. The RTC approved ADC's notice of appeal but dismissed respondent AHVAI’s
counterclaim on the ground that it is dependent on ADC's complaint. Respondent AHVAI then
filed an appeal with the CA. The CA dismissed both appeals of ADC and AHVAI, and affirmed the
decision of the RTC. Thus, the instant petition.
Issue:
1. Whether or not the Court of Appeals erred in relying on the case of “Columbia Pictures,
Inc. V. Court of appeals” in resolving ADC's lack of capacity
2. Whether or not the Court of Appeals erred in finding lack of capacity of the ADC in
filing the case contrary to the earlier rulings of this honorable court
Ruling:
1. No, the CA did not err.
The Court does not agree that the CA erred in relying on the case of Columbia Pictures, Inc.
v. Court of Appeals. The CA cited the case for the purpose of restating and distinguishing the
jurisprudential definition of the terms “lack of capacity to sue” and “lack of personality to sue;” and
of applying these definitions to the present case. Unlike in the instant case, the corporations
involved in the Columbia case were foreign corporations is of no moment. The definition of the
term “lack of capacity to sue” enunciated in the said case still applies to the case at bar. Indeed, as
held by this Court and as correctly cited by the CA in the case of Columbia: “lack of legal capacity
to sue means that the plaintiff is not in the exercise of his civil rights, or does not have the necessary
qualification to appear in the case, or does not have the character or representation he claims; ‘lack
of capacity to sue' refers to a plaintiff's general disability to sue, such as on account of minority,
insanity, incompetence, lack of juridical personality or any other general disqualifications of a party.
In the instant case, petitioner lacks capacity to sue because it no longer possesses juridical
personality by reason of its dissolution and lapse of the three-year grace period provided under
Section 122 of the Corporation Code.
2. As provided by Section 122 of the Corporation Code.
Page 258 of 434

It is to be noted that the time during which the corporation, through its own officers, may
conduct the liquidation of its assets and sue and be sued as a corporation is limited to three years
from the time the period of dissolution commences; but there is no time limit within which the
trustees must complete a liquidation placed in their hands. It is provided only that the conveyance
to the trustees must be made within the three-year period. It may be found impossible to complete
the work of liquidation within the three-year period or to reduce disputed claims to judgment. The
authorities are to the effect that suits by or against a corporation abate when it ceased to be an
entity capable of suing or being sued but trustees to whom the corporate assets have been conveyed
pursuant to the authority of Sec. 78 may sue and be sued as such in all matters connected with the
liquidation.
Still in the absence of a board of directors or trustees, those having any pecuniary interest
in the assets, including not only the shareholders but likewise the creditors of the corporation,
acting for and in its behalf, might make proper representations with the SEC which has primary
and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of
the corporate concerns. In the instant case, there is no dispute that petitioner's corporate
registration was revoked on May 26, 2003. Based on law, it had three years, or until May 26, 2006,
to prosecute or defend any suit by or against it. The subject complaint, however, was filed only on
October 19, 2006, more than three years after such revocation. It is not disputed that the subject
complaint was filed by ADC and not by its directors or trustees.
In the present case, petitioner filed its complaint not only after its corporate existence was
terminated but also beyond the three-year period allowed by Section 122 of the Corporation Code.
Thus, it is clear that at the time of the filing of the subject complaint petitioner lacks the capacity
to sue as a corporation. To allow petitioner to initiate the subject complaint and pursue it until final
judgment, on the ground that such complaint was filed for the sole purpose of liquidating its assets,
would be to circumvent the provisions of Section 122 of the Corporation Code.
_____________________________________________________________________________________
METHODS OF LIQUIDATION
BENIGNO M. VIGILLA, et al. vs. PHILIPPINE COLLEGE OF CRIMINOLOGY INC. and/or

GREGORY ALAN F. BAUTISTA
G.R. No. 200094. June 10, 2013
J. Mendoza
Section 122 of the Corporation Code provides for a three-year winding up period (or in recent
jurisprudence even longer) for a corporation whose charter is annulled by forfeiture or otherwise to
continue as a body corporate for the purpose, among others, of settling and closing its affairs.
Furthermore, Section 145 of the Corporation Code also provides that no right or remedy (as well as
liability) in favor of or against any corporation, its stockholders, members, directors, trustees, or
officers incurred shall be removed or impaired because of the subsequent dissolution of said
corporation.
Facts:
Philippine College of Criminology (PCCr) is a non-stock educational institution, while the

petitioners were janitors, janitresses and supervisor in the Maintenance Department of PCCr under
Page 259 of 434

the supervision and control of Atty. Florante A. Seril. The petitioners, however, were made to
understand, upon application with respondent school, that they were under MBMSI, a corporation
engaged in providing janitorial services to clients. Atty. Seril is also the President and General
Manager of MBMSI.
Sometime in 2008, PCCr discovered that the Certificate of Incorporation of MBMSI had been
revoked as of July 2, 2003. On March 16, 2009, PCCr, through its President, respondent Gregory
Alan F. Bautista , citing the revocation, terminated the school’s relationship with MBMSI, resulting
in the dismissal of the employees. As a consequence, the dismissed employees filed their respective
complaints for illegal dismissal against PCCR alleging that that the latter was their employer since
MBMSI’s certification had been revoked and PCCr had direct control over MBMSI’s operations. On
the other hand, PCCr and Bautista contended it was not their direct employer. PCCr also submitted
releases, waivers and quitclaims in favor of MBMSI executed by the complainants to prove that they
were employees of MBMSI and not PCCr. The said documents appeared to have been notarized.
The LA handed down his decision, finding that PCCr was the real principal employer of the
complainants and MBMSI was a mere adjunct or alter ego/labor-only contractor. Despite the
presentation by the respondents of the releases, waivers and quitclaims executed by petitioners in
favor of MBMSI, the LA did not discuss the effects of such releases nor its authenticity. On appeal,
NLRC affirmed the LA's decision however made a pronouncement that PCCR is not liable anymore
since the awards had been superseded by their respective releases, waivers and quitclaims. CA
agreed with the NLRC adding that applying Article 1217 of the New Civil Code, petitioners’
respective releases, waivers and quitclaims in favor of MBMSI and Atty. Seril redounded to the
benefit of the respondents.
Issue:
Whether or not the claims of the dismissed employees against the respondents were amicably
settled by virtue of the releases, waivers and quitclaims which they had executed in favor of MBMSI.
As sub-issue there is a need to address the issue of whether or not a dissolved corporation can enter
into an agreement such as releases, waivers and quitclaims beyond the 3-year winding up period
under Section 122 of the Corporation Code
Ruling:
On the Revocation of MBMSI’s Certificate of Incorporation
Petitioners argue that MBMSI had no legal personality to incur civil liabilities as it did not exist as
a corporation on account of the fact that its Certificate of Incorporation had been revoked on July
2, 2003. Petitioners ask this Court to exempt MBMSI from its liabilities because it is no longer
existing as a corporation. The Court did not agree.
The Court held that the executed releases, waivers and quitclaims are valid and binding
notwithstanding the revocation of MBMSI’s Certificate of Incorporation. The revocation does not
result in the termination of its liabilities. Section 122 of the Corporation Code provides for a three-
Page 260 of 434

year winding up period for a corporation whose charter is annulled by forfeiture or otherwise to
continue as a body corporate for the purpose, among others, of settling and closing its affairs. The
three year winding up period may even be extended in accordance with the ruling in Premiere
Development Bank v. Flores. Furthermore, Section 145 of the Corporation Code clearly provides
that "no right or remedy in favor of or against any corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution
of said corporation." Even if no trustee is appointed or designated during the three-year period of
the liquidation of the corporation, the Court has held that the board of directors may be permitted
to complete the corporate liquidation by continuing as "trustees" by legal implication. In the case,
even if said documents were executed in 2009, six (6) years after MBMSI’s dissolution in 2003, the
same are still valid and binding upon the parties and the dissolution will not terminate the liabilities
incurred by the dissolved corporation pursuant to Sections 122 and 145 of the Corporation Code.
NON-STOCK CORPORATIONS
CATHERINE CHING, LORENZO CHING, LAURENCE CHING, AND CHRISTINE CHING,

Petitioners, - versus - QUEZON CITY SPORTS CLUB, INC.; MEMBERS OF THE BOARD OF
DIRECTORS, NAMELY: ANTONIO T. CHUA, MARGARET MARY A. RODAS, ALEJANDRO G.
YABUT, JR., ROBERT C. GAW, EDGARDO A. HO, ROMULO D. SALES, BIENVENIDO
ALANO, AUGUSTO E. OROSA, AND THE FINANCE MANAGER, LOURDES RUTH M.
LOPEZ, Respondents.
G.R. No. 200150, November 7, 2016, FIRST DIVISION, LEONARDO-DE CASTRO, J.
The Court had previously recognized in Forest Hills Golf and Country Club, Inc. v. Gardpro,
lnc., that articles of incorporation and by-laws of a country club are the fundamental documents
governing the conduct of the corporate affairs of said club; they establish the norms of procedure for
exercising rights, and reflected the purposes and intentions of the incorporators. The by-laws are the
self-imposed rules resulting from the agreement between the country club and its members to conduct
the corporate business in a particular way. In that sense, the by-laws are the private "statutes" by
which the country club is regulated, and will function.
Can a Sports Club validly suspend a member, without prior hearing, for non-payment of an
assessment imposed by the club to meet an obligation it incurred as judgment obligor in a labor
case? It depends on the provisions of the Club’s by-laws. The articles of incorporation and by-laws
of a country club are the fundamental documents governing the conduct of the corporate affairs of
said club; they establish the norms of procedure for exercising rights, and reflected the purposes
and intentions of the incorporators. The by-laws are the self-imposed rules resulting from the
agreement between the country club and its members to conduct the corporate business in a
particular way. In that sense, the by-laws are the private "statutes" by which the country club is
regulated, and will function. Until repealed, the by-laws are the continuing rules for the
government of the country club and its officers, the proper function being to regulate the
transaction of the incidental business of the country club. The by-laws constitute a binding contract
as between the country club and its members, and as among the members themselves. The by-laws
are self-imposed private laws binding on all members, directors, and officers of the country club.
The prevailing rule is that the provisions of the articles of incorporation and the by-laws must be
strictly complied with and applied to the letter.
Page 261 of 434

In this case, the by-laws (Section 33) allow the immediate suspension of a member only if the latter
failed to pay his his regular dues and not extraordinary dues as in this case. In contrast, Section
35(a) of the By-Laws requires notice and hearing prior to a member's suspension. Definitely, in this
case, petitioner Catherine did not receive notice specifically advising her that she could be
suspended for nonpayment of the special assessment imposed by Board Resolution No. 7-2001 and
affording her a hearing prior to her suspension through Board Resolution No. 3-2002. Respondents
merely relied on the general notice printed in petitioner Catherine's Statements of Account from
September 2001 to April 2002 warning of automatic suspension for accounts of over P20,000.00
which are past due for 60 days, and accounts regardless of amount which are 75 days in arrears.
While said general notice in the Statements of Account might have been sufficient for purposes of
Section 33(a) of the By-Laws, it fell short of the stricter requirement under Section 35(a) of the same
By-Laws. Petitioner Catherine's right to due process was clearly violated.
_____________________________________________________________________________________
Lim v.Moldex Land Inc, G.R. No. 206038, January 25, 2017
Petitioner is registered Unit Owner of Golden Empire Tower, a condominium project of Moldex
Land. Condocor, a non-stock, non-profit corporation, is the registered condominium corporation
for the Golden Empire Tower. Moldex became a member of Condocor on the basis of its ownership
of the 220 unsold units in the Golden Empire Tower. The individual respondents acted as its
representatives. During the annual general membership meeting, the respondents declared the
presence of quorum even though only 29 of the 108 unit buyers were present. The declaration was
based on the presenceof the majority of the voting rights, including those pertaining to the 220
unsold units held by Moldex through its representatives. Lim objected to the validity of the
meeting. When the case reached the Supreme Court, the issues are:
Whether the determination of quorum was proper? The High Court said no. Under Section 52 of
the Corporation Code, for stock corporations, the quorum is based on the number of outstanding
voting stocks while for non-stock corporations, only those who are actual, living members with
voting rights shall be counted in determining the existence of a quorum. To be clear, the basis in
determining the presence of quorum in nonstock corporations is the numerical equivalent of all
members who are entitled to vote, unless some other basis is provided by the By-Laws of the
corporation. The qualification "with voting rights" simply recognizes the power of a non-stock
corporation to limit or deny the right to vote of any of its members. To include these members
without voting rights in the total number of members for purposes of quorum would be superfluous
for although they may attend a particular meeting, they cannot cast their vote on any matter
discussed therein. Similarly, Section 6 of Condocor's By-Laws reads: "The attendance of a simple
majority of the members who are in good standing shall constitute a quorum ... xx x." The phrase,
"members in good standing," is a mere qualification as to which members will be counted for
purposes of quorum. As can be gleaned from Condocor's By-Laws, there are two (2) kinds of
members: 1) members in good standing; and 2) delinquentmembers. Section 6 merely stresses that
delinquent members are not to be taken into consideration in determining quorum. In relation
thereto, Section 733 of the By-Laws, referring to voting rights, also qualified that only those
members in good standing are entitled to vote. Delinquent members are stripped off their right to
vote. Clearly, contrary to the ruling of the RTC, Sections 6 and 7 of Condocor's By-Laws do not
provide that majority of the total voting rights, without qualification, will constitute a quorum. It
Page 262 of 434

must be emphasized that insofar as Condocor is concerned, quorum is different from voting rights.
Applying the law and Condocor's By-Laws, if there are 100 members in a non-stock corporation, 60
of which are members in good standing, then the presence of 50% plus 1 of those members in good
standing will constitute a quorum. Thus, 31 members in good standing will suffice in order to
consider a meeting valid as regards the presence of quorum. The 31 members will naturally have to
exercise their voting rights. It is in this instance when the number of voting rights each member is
entitled to becomes significant. If 29 out of the 31 members are entitled to 1 vote each, another
member (known as A) is entitled to 20 votes and the remaining member (known as B) is entitled to
15 votes, then thetotal number of voting rights of all 31 members is 64. Thus, majority of the 64 total
voting rights, which is 33 (50% plus 1), is necessary to pass a valid act. Assuming that only A and B
concurred in approving a specific undertaking, then their 3 5 combined votes are more than
sufficient to authorize such act. The By-Laws of Condocor has no rule different from that provided
in the Corporation Code with respect the determination of the existence of a quorum. The quorum
during the July 21, 2012 meeting should have been majority of Condocor's members in good
standing. Accordingly, there was no quorum during the July 21, 2012 meeting considering that only
29 of the 108 unit buyers were present.
Whether Moldex is a member of Condocor? Yes. Law and jurisprudence dictate that ownership of
a unit entitled one to become a member of a condominium corporation. The Condominium Act
does not provide a specific mode of acquiring ownership.
Whether, as member, Moldex can appoint appoint duly authorized representatives who will
exercise its membership rights, specifically theright to be voted as corporate directors/officers? Yes
Moldex can send representatives. This is allowed under Section 58 of the Corporation Code. But
whether these representatives can vote themselves as directors is another story because Section 23
and 92 of the Corporation Code requires that trustees of non-stock corporations must be members
thereof. While Moldex may rightfully designate proxies or representatives, thelatter, however,
cannot be elected as directors or trustees of Condocor. First, the Corporation Code clearly provides
that a director or trustee must be a member of record of the corporation. Further, the power of the
proxy is merely to vote. If said proxy is not a member in his own right, he cannot be
elected as a director or proxy.
_____________________________________________________________________________________
CORPORATE POWERS
BENJIE B. GEORG represented by BENJAMIN C. BELARMINO, JR. vs.

HOLY TRINITY COLLEGE, INC.
G .R. No. 190408, July 20, 2016, PEREZ, J.
The existence of apparent authority may be ascertained through ( 1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his
ordinary powers. In this case, Sr. Medalle formed and organized the Group. She had been giving
financial support to the Group, in her capacity as President of Holy Trinity College. The Board of
Trustees never questioned the existence and activities of the Group. Thus, any agreement or contract
entered into by Sr. Medalle as President of Holy Trinity College relating to the Group bears the consent
Page 263 of 434

and approval of respondent. It is through these dynamics that we cannot fault petitioner for relying
on Sr. Medalle's authority to transact with petitioner.
FACTS:
The Holy Trinity College Grand Chorale and Dance Company (the Group) was organized in 1987 by
Sister Teresita Medalle (Sr. Medalle), the President of respondent Holy Trinity College in Puerto
Princesa City. The Grand Chorale and Dance Company were two separate groups but for the
purpose of performing locally or abroad, they were usually introduced as one entity. The Group was
composed of students from Holy Trinity College.
In 2001, the Group was slated to perform in Greece, Italy, Spain and Germany. Edward Enriquez
(Enriquez), who allegedly represented Sr. Medalle, contacted petitioner Benjie B. Georg to seek
assistance for payment of the Group's international airplane tickets. Petitioner is the Filipino wife
of a German national Heinz Georg. She owns a German travel agency named D'Travellers Reiseburo
Georg. Petitioner, in tum, requested her brother, Atty. Benjamin Belarmino, Jr. (Atty. Belarmino),
to represent her in the negotiation with Enriquez. Enriquez was referred to petitioner by Leonora
Dietz (Dietz), another Filipino-German who has helped Philippine cultural groups obtain European
engagements, including financial assistance.
On 24 April 2001, a Memorandum of Agreement with Deed of Assignment (MOA) was executed
between petitioner, represented by Atty. Belarmino, as first party-assignee; the Group, represented
by Sr. Medalle, O.P. and/or its Attorney-in-Fact Enriquez, as second-party assignor and S.C. Roque
Group of Companies Holding Limited Corporation and S.C. Roque Foundation Incorporated,
represented by Violeta P. Buenaventura, as foundation-grantor. Under the said Agreement,
petitioner, through her travel agency, will advance the payment of international airplane tickets
amounting to P4,624,705.00 in favor of the Group on the assurance of the Group represented by Sr.
Medalle through Enriquez that there is a confirmed financial allocation of P4,624,705.00 from the
foundation-grantor, S.C. Roque Foundation (the Foundation). The second-party assignor assigned
said amount in favor of petitioner. Petitioner paid for the Group's domestic and international
airplane tickets.
In an Amended Complaint for a Sum of Money with Damages filed before the RTC, petitioner
claimed that the second-party assignor/respondent and the foundation-grantor have not paid and
refused to pay their obligation under the MOA. Petitioner prayed that they be ordered to solidarily
pay the amount of P4,624,705.00 representing the principal amount mentioned in the Agreement
and damages.
RTC ruled in favor of petitioner. However, Court of Appeals relieved respondent of any liability for
petitioner's monetary claims. The Court of Appeals noted the absence of respondent's name in the
MOA, thus it concluded that respondent was clearly not a party to the MOA. The Court of Appeals
also pointed out that Sr. Medalle affixed her thumbmark on the MOA under the mistaken belief
that said agreement would facilitate the release of the donation from the foundation-grantor. The
Court of Appeals added that the trial court should have considered that Sr. Medalle was confined
at the hospital at that time. In addition, the Court of Appeals ruled that there was no showing that
Sr. Medalle was duly authorized by respondent to enter into the subject MOA. According to the
Court of Appeals, the Group's general affiliation with respondent cannot be used by petitioner to
justify her failure to exercise reasonable diligence in the conduct of her own travel agency business.
Page 264 of 434

The doctrine of corporation by estoppel cannot apply to respondent in absence of any showing that
it was complicit to or had benefited from said mispresentations.
ISSUE:
The primordial issue is whether respondent is liable under the MOA. Respondent primarily argues
that it is not a party to the MOA. Petitioner claims otherwise because Sr. Medalle, in her capacity
as President of Holy Trinity College, affixed her thumbmark in the MOA. Two sub-issues necessarily
arise therefrom: 1) whether Sister Medalle freely gave her full consent to the MOA by affixing her
thumbmark and 2) whether she is authorized by respondent to enter into the MOA.
RULING:
The responded is liable under the MOA.
Second, Sr. Medalle is presumed to know the import of her thumbmark in the MOA. While she was
indeed confined at the UST Hospital at that time, respondent however failed to prove that Sr.
Medalle was too ill to comprehend the terms of the contract. True, Sr. Medalle suffered a
stroke but respondent did not present any evidence to show that her mental faculty was impaired
by her illness. Sr. Medalle claimed that she affixed her thumbmark on the MOA on the basis of
Enriquez's representation that her signature/thumbmark is necessary to facilitate the release of the
loan. As intended, the affixing of her thumbmark in fact caused the immediate release of the loan.
Petitioner's claim that the provisions of the MOA were read to Sr. Medalle was found credible by
the Court of Appeals. The Court of Appeals discussed at length how proper care and caution was
taken by Atty. Belarmino to verify what the Groups's trip was all about and the extent of the
authority of Sr. Medalle regarding the project.
Respondent further claims that Sr. Medalle was not authorized by the corporation to enter into any
loan agreement thus the MOA executed was null and void for being ultra vires.
However, per records, it appears that the Holy Trinity Grand Chorale and Dance Company were
actually two separate entities formed and organized by Sr. Medalle in her capacity as President of
Holy Trinity College. It was established, through the testimonies of the Group's Artistic Director,
Jearold Loyola, the Musical Director, and Vocal Coach Errol Gallespen, that they were hired and
given honorarium by Sr. Medalle. The costumes of the Group were financed by respondent. They
also testified that all the performances of the group were directly under the supervision of the
school administration. Effectively, respondent has control and supervision of the Group particularly
in the selection, hiring and termination of the members. The trial court was convinced that the
Group derived its existence and continuous operation from the school administration.
Sr. Medalle, as President of Holy Trinity, is clothed with sufficient authority to enter into a loan
agreement. As held by the trial court, the Holy Trinity College's Board of Trustees never contested
the standing of the Dance and Chorale Group and had in fact lent its support in the form of
sponsoring unifonns or freely allowed the school premises to be used by the group for their practice
sessions.
Assuming arguendo that Sr. Medalle was not authorized by the Holy Trinity College Board, the
doctrine of apparent authority applies in this case.
Page 265 of 434

The existence of apparent authority may be ascertained through ( 1) the general manner in which
the corporation holds out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts
of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the
scope of his ordinary powers. In this case, Sr. Medalle formed and organized the Group. She had
been giving financial support to the Group, in her capacity as President of Holy Trinity College. The
Board of Trustees never questioned the existence and activities of the Group. Thus, any agreement
or contract entered into by Sr. Medalle as President of Holy Trinity College relating to the Group
bears the consent and approval of respondent. It is through these dynamics that we cannot fault
petitioner for relying on Sr. Medalle's authority to transact with petitioner.
_____________________________________________________________________________________
LYLITH B. FAUSTO, JONATHAN FAUSTO, RICO ALVIA, ARSENIA TOCLOY, LOURDES

ADOLFO and ANECITA MANCITA, Petitioners, - versus - MULTI AGRI-FOREST AND
COMMUNITY DEVELOPMENT COOPERATIVE (formerly MAF CAMARINES SUR
EMPLOYEES COOPERATIVE, INC.), Respondent.
G.R. No. 213939, THIRD DIVISION, October 12, 2016, REYES, J.
That the applicable law should be the Cooperative Code and not the Corporation Code is not
sufficient to warrant a different resolution of this case. Verily, both codes recognize the authority of
the BOD, through a duly-issued board resolution, to act and represent the corporation or the
cooperative, as the case maybe, in the conduct of official business. In Section 23 of the Corporation
Code, it is provided that all corporate powers of all corporations formed under the Code shall be
exercised by the BOD. All businesses are conducted and all properties of corporations are controlled
and held by the same authority. In the same manner, under Section 39 of the Cooperative Code, the
BOD is given the power to direct and supervise the business, manages the property of the cooperative
and may, by resolution, exercise all such powers of the cooperative. The BOD, however, may authorize
a responsible officer to act on its behalf through the issuance of a board resolution attesting to its
consent to the representation and providing for the scope of authority.
In Cagayan Valley Drug Corporation v. Commissioner of Internal Revenue, it was noted that
he following officials or employees of the company can sign the verification and
certification without need of a board resolution: (1) the Chairperson of the Board of Directors,
(2) the President of a corporation, (3) the General Manager or Acting General Manager, (4)
Personnel Officer, and (5) an Employment Specialist in a labor case. In this case, Nacario, being the
acting manager of the respondent, clearly falls under the enumeration above.
The lack of authority of a corporate officer to undertake an action on behalf of the corporation
or cooperative may be cured by ratification through the subsequent issuance of a board
resolution, recognizing the validity of the action or the authority of the concerned officer.
The RTC correctly ruled that the stipulated interest rate of 2.3% per month on the promissory
notes and 2% per month surcharge are excessive, iniquitous, exorbitant and unconscionable, thus,
rendering the same void. Since the stipulation on the interest rate is void, it is as if there was
no express contract thereon, in which case, courts may reduce the interest rate as reason
and equity demand.
Page 266 of 434

FACTS:
Herein petitioners are members of Multi Agri-Forest and Community Development Cooperative
(respondent). Petitioner Lylith and Jonathan obtained a loan from the respondent with an interest
of 2.3% per month, with surcharge of 2% in case of default in payment of any installment due.
The other petitioners serve as co-makers to the promissory note executed by Lylith and Jonathan.
Lylith and Jonathan, however, failed to pay their loans despite repeated demands. Thus, the
respondent, through its Acting Manager Ma. Lucila G. Nacario (Nacario), filed five separate
complaints for Collection of Sum of Money before the Municipal Trial Court in Cities (MTCC) of
Naga City against the petitioners.
Petitioners filed a motion to dismiss by way of a demurrer to evidence on the ground of lack of
authority of Nacario to file the complaints and to sign the verification against forum shopping.
Respondent filed an opposition to the demurrer averring that there was a subsequent board
resolution confirming the authority of Nacario to file the complaints on behalf of the respondent.
MTCC of Naga City, Branch 1 denied the petitioners' demurrer to evidence for lack of merit.
Subsequently, the MTCC ruled in favor of the respondent and held the petitioners liable for the
payment of specified amount of loans, which include interests, penalties and surcharges. On appeal,
the RTC affirmed the decision of MTCC but reduced the interest and surcharge to 12% per
annum, respectively. The decision of RTC was likewise affirmed by CA.
ISSUE:
1. Whether or not the MTCC correctly denied the motion to dismiss filed by petitioners on the
ground that Nacario lacks authority to act on behalf of the respondent, there being no board
resolution empowering her to do so at the time she filed the complaints.
2. Whether or not the RTC and CA correctly imposed interest and surcharge at 12% per annum
respectively.
RULING:
1. MTCC correctly denied the motion to dismiss.
Petitioners contend that the Corporation Code should not be applied because the
applicable law is the Cooperative Code of the Philippines. That the applicable law should be
the Cooperative Code and not the Corporation Code is not sufficient to warrant a different
resolution of this case. Verily, both codes recognize the authority of the BOD, through a duly-issued
board resolution, to act and represent the corporation or the cooperative, as the case maybe, in the
conduct of official business. In Section 23 of the Corporation Code, it is provided that all corporate
powers of all corporations formed under the Code shall be exercised by the BOD. All businesses are
conducted and all properties of corporations are controlled and held by the same authority. In the
same manner, under Section 39 of the Cooperative Code, the BOD is given the power to direct and
supervise the business, manages the property of the cooperative and may, by resolution, exercise
all such powers of the cooperative. The BOD, however, may authorize a responsible officer to act
on its behalf through the issuance of a board resolution attesting to its consent to the representation
and providing for the scope of authority.
Page 267 of 434

Nevertheless, there were instances when the Court recognized the authority of some officers to file
a case on behalf of the corporation even without the presentation of the board resolution. In
Cagayan Valley Drug Corporation v. Commissioner of Internal Revenue, it was noted that he
following officials or employees of the company can sign the verification and certification
without need of a board resolution: (1) the Chairperson of the Board of Directors, (2) the
President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel
Officer, and (5) an Employment Specialist in a labor case. In this case, Nacario, being the acting
manager of the respondent, clearly falls under the enumeration above.
Furthermore, the lack of authority of a corporate officer to undertake an action on behalf of the
corporation or cooperative may be cured by ratification through the subsequent issuance of a
board resolution, recognizing the validity of the action or the authority of the concerned officer.
In this case, the respondent expressly recognized the authority of Nacario to file the complaints in
Resolution No. 47, Series of 2008, in which the BOD resolved to recognize, ratify and affirm as if
the same were fully authorized by the BOD, the filing of the complaints before the MTCC of Naga
City by Nacario.
2. The RTC correctly ruled that the stipulated interest rate of 2.3% per month on the promissory
notes and 2% per month surcharge are excessive, iniquitous, exorbitant and unconscionable,
thus, rendering the same void. Since the stipulation on the interest rate is void, it is as if
there was no express contract thereon, in which case, courts may reduce the interest
rate as reason and equity demand. Thus, it is only just and reasonable for the RTC to reduce
the interest to the acceptable legal rate of 1 % per month or 12% per annum. This ruling was
affirmed by the CA.
However, there is a need to modify the rate of legal interest imposed on the money judgment in
order to conform Resolution No. 796 dated May 16, 2013 issued by the Bangko Sentral ng Pilipinas
Monetary Board. Consistent with the foregoing, the Court hereby reduces the rate of interest on
the principal loans to six percent ( 6%) per annum and the surcharge imposed thereon also to the
prevailing legal rate of six percent (6%) per annum.
_____________________________________________________________________________________
GABRIEL YAP, SR. duly represented by GILBERT YAP and also in his personal capacity,
GABRIEL YAP, JR., and HYMAN YAP, vs. LETECIA SIAO, L YNEL SIAO, JANELYN SIAO,
ELEANOR FAYE SIAO, SHELETT SIAO and HONEYLET SIAO
G.R. No. 212493
CEBU SOUTH MEMORIAL GARDEN, INC. vs. LETECIA SIAO, L YNEL SIAO, JANELYN SIAO,
ELEANOR FAYE SIAO, SHELETT SIAO and HONEYLET SIAO
G.R. No. 212504, June 1, 2016, PEREZ, J.
In the leading case of Cagayan Valley Drug Corporation v. Commission on Internal Revenue,
the Court, in summarizing numerous jurisprudence, rendered a definitive rule that the following
officials or employees of the company can sign the verification and certification without need of a
board resolution: (1) the Chairperson of the Board of Directors, (2) the President of a corporation, (3)
the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an Employment
Page 268 of 434

Specialist in a labor case. The rationale behind the rule is that these officers are "in a position to verify
the truthfulness and correctness of the allegations in the petition."
FACTS:
Petitioners in G.R. No. 212493 are deceased Gabriel Yap, Sr., represented by his son and the
President of Cebu South Memorial Garden, Inc., Gilbert Yap; Gabriel Yap, Jr., in his capacity as
Treasurer; and Hyman Yap, as one of the directors, while petitioner in G.R. No. 212504 is Cebu South
Memorial Garden, Inc. Respondents in both cases are Letecia Siao and her children, Lynel, Janelyn,
Eleonor, Shellett and Honeylet.
These consolidated cases arose from a Complaint for Specific Performance filed by petitioners Cebu
South Memorial Gardens, Inc. and Gabriel Yap, Sr., both represented by Gilbert Yap against
respondents Honeylet Siao and Letecia Siao. The petitioners alleged in a Complaint that Gabriel
Yap, Sr. and Letecia Siao entered into a Certificate of Agreement where the parties agreed, among
others, on the following terms:
1. To convert the parcels of land covered by TCT Nos. 66716, 66714 and 66713, registered in the
names of Spouses Sergio and Letecia Siao, into memorial lots;
2. To give advance payment to Letecia Siao in the amount of Pl 00,000.00 per month until
Letecia Siao is financially stable to support herself and her family.
As a backgrounder, respondent Letecia Siao's husband Sergio Siao was indebted to petitioner
Gabriel Yap, Sr. Petitioners claim that the titles to the subject parcels of land were in the possession
of Gabriel Yap, Sr. as collateral for the loan. In consideration of condoning the loan, Gabriel Yap,
Sr. returned the titles to Letecia Siao on the condition that the parcels of land covered by the titles
would be developed into memorial lots.
Petitioners claimed that respondents refused to transfer the ownership of the three parcels of land
to Cebu South Memorial Garden, Inc., causing them to be exposed to numerous lawsuits from the
buyers of the burial plots.
During the pendency of the case, respondents filed a Motion for Payment of Monthly Support5 for
Leticia Siao's family and herself. Respondents relied on the agreement made by the parties during
the preliminary conference to abide by the terms of the Certificate of Agreement. The RTC granted
the motion for monthly support and ordered Gabriel Yap, Sr. to pay immediately Letecia Siao.
Resultantly, petitioners filed a Motion for Summary Judgment alleging that respondents had
abandoned their defense of the nullity of the Certificate of Agreement when they agreed to
implement its provisions.
Regional Trial Court (RTC) of Cebu City issued an Order denying the motion and holding that there
were no existing admissions or admitted facts by respondents to be considered. The Court of
through Associate Justice Eugenio S. Labitoria, reversed the trial court's decision and ordered its
judge to render summary judgment in favor of petitioners. The appellate court ruled that by
claiming benefits arising from the Certificate of Agreement, respondents had invoked the validity
and effectiveness of the Agreement. The decision became final and executor for failure of the
respondednts to appeal.
Page 269 of 434

In compliance with the Order that had become final, RTC Branch 13 of Cebu City rendered a
Summary Judgment. Once again, respondents filed an appeal under Rule 41 of the Rules of Court
seeking to reverse and set aside the Summary Judgment rendered by the RTC.
On 9 October 2013, the Court of Appeals set aside the Summary Judgment on a technicality. The
appellate court found that the certification against forum-shopping appended to the complaint is
defective because there was no board resolution and special power of attorney vesting upon Gilbert
Yap the authority to sign the certification on behalf of petitioner corporation and individual
petitioners. CA reasoned that even if Gilbert Yap is the president of petitioner corporation the same
had no authority to institute the complaint unless he can produce a board resolution showing his
authority.
ISSUES:
1. Whether the appellate court erred when it ruled that the certification against forum-shopping
is defective because it was signed by Gilbert Yap without a valid board resolution.
2. Whether motion for summary judgment is proper under the cirmcumstances.
RULING:
1. The CA did not err in its decision for there was substantial compliance with the Rules.
In the leading case of Cagayan Valley Drug Corporation v. Commission on Internal Revenue,the
Court, in summarizing numerous jurisprudence, rendered a definitive rule that the following
officials or employees of the company can sign the verification and certification without need of a
board resolution: ( 1) the Chairperson of the Board of Directors, (2) the President of a corporation,
(3) the General Manager or Acting General Manager, ( 4) Personnel Officer, and ( 5) an Employment
Specialist in a labor case. The rationale behind the rule is that these officers are "in a position to
verify the truthfulness and correctness of the allegations in the petition."
Bolstering the Court’s conclusion that the certification of non-forum shopping is valid is the
subsequent appending of the board resolution to petitioners' motion for reconsideration. The Board
of Directors of Cebu South Memorial Garden, through a Board Resolution, not only authorized the
President of the corporation to sign the Certificate of Forum-Shopping but it ratified the action
taken by Gilbert Yap in signing the forum-shopping certificate. In Swedish Match Philippines, Inc.
v. The Treasurer of the City of Manila, the Court held that the belated submission of a Secretary's
certification constitutes substantial compliance with the rules.
2. Motion for summary judgment is proper.
A summary judgment is permitted only if there is no genuine issue as to any material fact and a
moving party is entitled to a judgment as a matter of law. A summary judgment is proper if, while
the pleadings on their face appear to raise issues, the affidavits, depositions, and admissions
presented by the moving party show that such issues are not genuine.
Petitioners' complaint seeks for specific performance from respondents, i.e. to transfer ownership
of the subject properties to petitioner corporation based on the Certificate of Agreement. As their
defense, respondents challenge the validity of the Agreement. However, respondents filed a motion
Page 270 of 434

for support relying on the same Agreement that they are impugning. In view of this admission,
respondents are effectively banking on the validity of the Agreement. Thus, there are no more issues
that need to be threshed out.
_____________________________________________________________________________________
UNIVERSITY OF MINDANAO, INC., Petitioner, v. BANGKO SENTRAL PILIPINAS, ET

AL.,Respondents.
G.R. No. 194964-65, January 11, 2016, LEONEN,J.
Acts of an officer that are not authorized by the board of directors/trustees do not bind the
corporation unless the corporation ratifies the acts or holds the officer out as a person with authority
to transact on its behalf.
Petitioner does not have the power to mortgage its properties in order to secure loans of other
persons. Securing FISLAI's loans by mortgaging petitioner's properties does not appear to have even
the remotest connection to the operations of petitioner as an educational institution.
Not having the proper board resolution to authorize Saturnino Petalcorin to execute the
mortgage contracts for petitioner, the contracts he executed are unenforceable against petitioner.
FACTS:
University of Mindanao is an educational institution. For the year 1982, its Board of Trustees was
chaired by Guillermo B. Torres. His wife, Dolores P. Torres, sat as University of Mindanao's
Assistant Treasurer.
Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and operated two (2) thrift
banks: (1) First Iligan Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings and Loan
Association, Inc. (DSLAI). Guillermo B. Torres chaired both thrift banks.
Upon Guillermo B. Torres' request, Bangko Sentral ng Pilipinas issued a P1.9 million standby
emergency credit to FISLAI. On May 25, 1982, University of Mindanao's Vice President for Finance,
Saturnino Petalcorin, executed a deed of real estate mortgage over University of Mindanao's
property in Cagayan de Oro City in favor of Bangko Sentral ng Pilipinas. "The mortgage served as
security for FISLAI's PI.9 Million loan." On October 21, 1982, Bangko Sentral ng Pilipinas granted
FISLAI an additional loan of P620,700.00. On November 5, 1982, Saturnino Petalcorin executed
another deed of real estate mortgage, allegedly on behalf of University of Mindanao, over its two
properties in Iligan City. This mortgage served as additional security for FISLAI's loans.
On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines entered into a Memorandum
of Agreement intended to rehabilitate the thrift banks. Among the terms of the agreement was the
merger of FISLAI and DSLAI, with DSLAI as the surviving corporation. DSLAI later became known
as Mindanao Savings and Loan Association, Inc. (MSLAI).
On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to University of Mindanao, informing it
that the bank would foreclose its properties if MSLAI's total outstanding obligation of
P12,534,907.73 remained unpaid. In its reply to Bangko Sentral ng Pilipinas, University of Mindanao,
through its Vice President for Accounting, Gloria E. Detoya, denied that University of Mindanao's
Page 271 of 434

properties were mortgaged. It also denied having received any loan proceeds from Bangko Sentral
ng Pilipinas.
On July 16, 1999, University of Mindanao filed two Complaints for nullification and cancellation of
mortgage. University of Mindanao also alleged Corporate Secretary's certification was anomalous.
It never authorized Saturnino Petalcorin to execute real estate mortgage contracts involving its
properties to secure FISLAI's debts. It never ratified the execution of the mortgage contracts.
Moreover, as an educational institution, it cannot mortgage its properties to secure another
person's debts.
The Regional Trial Court of Cagayan de Oro City rendered a Decision in favor of University of
Mindanao. The Regional Trial Court of Cagayan de Oro City found that there was no board
resolution giving Saturnino Petalcorin authority to execute mortgage contracts on behalf of
University of Mindanao. Saturnino Petalcorin testified that he had no authority to execute a
mortgage contract on University of Mindanao's behalf. He merely executed the contract because of
Guillermo B. Torres' request.
The Court of Appeals issued a Decision on December 17, 2009 in favor of Bangko Sentral ng
Pilipinas. The Court of Appeals ruled that "although BSP failed to prove that the UM Board of
Trustees actually passed a Board Resolution authorizing Petalcorin to mortgage the subject real
properties," Corporate Secretary's Certificate "clothed Petalcorin with apparent and ostensible
authority to execute the mortgage deed on its behalf." Bangko Sentral ng Pilipinas merely relied in
good faith on the Secretary's Certificate.
The Court of Appeals also ruled that since University of Mindanao's officers, Guillermo B. Torres
and his wife, Dolores P. Torres, signed the promissory notes, University of Mindanao was presumed
to have knowledge of the transaction. The annotations on University of Mindanao's certificates of
title also operate as constructive notice to it that its properties were mortgaged. Its failure to disown
the mortgages for more than a decade was implied ratification.
The Court of Appeals also ruled that Bangko Sentral ng Pilipinas' action for foreclosure had not yet
prescribed.
ISSUES:
1. Whether respondent Bangko Sentral ng Pilipinas' action to foreclose the mortgaged properties
had already prescribed;
2. Whether petitioner University of Mindanao is bound by the real estate mortgage contracts
executed by Saturnino Petalcorin.
RULING:
1. No, the action to foreclose has not yet prescribed.
The prescriptive period for actions on mortgages is ten (10) years from the day they may be
brought. Actions on mortgages may be brought not upon the execution of the mortgage contract
but upon default in payment of the obligation secured by the mortgage.
Page 272 of 434

As a general rule, a person defaults and prescriptive period for action runs when (1) the obligation
becomes due and demandable; and (2) demand for payment has been made subject to certain
exceptions. The mortgage contracts in this case were executed by Saturnino Petalcorin in 1982. The
maturity dates of FISLAI's loans were repeatedly extended until the loans became due and
demandable only in 1990. Respondent informed petitioner of its decision to foreclose its
properties and demanded payment in 1999.
Given the termination of all traces of FISLAI's existence, demand may have been rendered
unnecessary under Article 1169(3) of the Civil Code. Granting that this is the case, respondent would
have had ten (10) years from due date in 1990 or until 2000 to institute an action on the mortgage
contract. However, under Article 1155 of the Civil Code, prescription of actions may be interrupted
by (1) the filing of a court action; (2) a written extrajudicial demand; and (3) the written
acknowledgment of the debt by the debtor. Therefore, the running of the prescriptive period was
interrupted when respondent sent its demand letter to petitioner on June 18, 1999. This eventually led
to petitioner's filing of its annulment of mortgage complaints before the Regional Trial Courts of
Iligan City and Cagayan De Oro City on July 16, 1999.
Even assuming that demand was necessary, respondent's action was within the ten (10)-year
prescriptive period. Respondent demanded payment of the loans in 1999 and filed an action in the
same year.
2. No, the University of Mindanao is not bound by the real estate mortgage contracts
executed by Saturnino Petalcorin.
Petitioner does not have the power to mortgage its properties in order to secure loans of other
persons. Securing FISLAI's loans by mortgaging petitioner's properties does not appear to have even
the remotest connection to the operations of petitioner as an educational institution.
The respondent is not correct in arguing that petitioner's act of mortgaging its properties to
guarantee FISLAI's loans was consistent with petitioner's business interests, since petitioner was
presumably a FISLAI shareholder whose officers and shareholders interlock with FISLAI. Acquiring
shares in another corporation is not a means to create new powers for the acquiring corporation.
Being a shareholder of another corporation does not automatically change the nature and purpose
of a corporation's business. In attempting to show petitioner's interest in securing FISLAI's loans
by adverting to their interlocking, directors and shareholders, respondent disregards petitioner's
separate personality from its officers, shareholders, and other juridical persons.
The mortgage contracts executed in favor of respondent do not bind petitioner. They were executed
without authority from petitioner. Without delegation by the board of directors or trustees, acts of
a person—including those of the corporation's directors, trustees, shareholders, or officers—
executed on behalf of the corporation are generally not binding on the corporation. It was found
that the Secretary's Certificate and the board resolution were either non-existent or fictitious. The
trial courts based their findings on the testimony of the Corporate Secretary, Aurora de Leon
herself. She signed the Secretary's Certificate and the excerpt of the minutes of the alleged board
meeting purporting to authorize Saturnino Petalcorin to mortgage petitioner's properties. There
was no board meeting to that effect. Guillermo B. Torres ordered the issuance of the Secretary's
Certificate. Hence, not having the proper board resolution to authorize Saturnino Petalcorin to
Page 273 of 434

execute the mortgage contracts for petitioner, the contracts he executed are unenforceable against
petitioner. They cannot bind petitioner.
No act by petitioner can be interpreted as anything close to ratification. It was not shown that it
issued a resolution ratifying the execution of the mortgage contracts. It was not shown that it
received proceeds of the loans secured by the mortgage contracts. There was also no showing that
it received any consideration for the execution of the mortgage contracts. It even appears that
petitioner was unaware of the mortgage contracts until respondent notified it of its desire to
foreclose the mortgaged properties. Respondent further argues that petitioner is presumed to have
knowledge of its transactions with respondent because its officers, the Spouses Guillermo and
Dolores Torres, participated in obtaining the loan. However, even though the Spouses Guillermo
and Dolores Torres were officers of both the thrift banks and petitioner, their knowledge of the
mortgage contracts cannot be considered as knowledge of the corporation. The rule that knowledge
of an officer is considered knowledge of the corporation applies only when the officer is acting
within the authority given to him or her by the corporation.
There can be no apparent authority and the corporation cannot be estopped from denying the
binding affect of an act when there is no evidence pointing to similar acts and other circumstances
that can be interpreted as the corporation holding out a representative as having authority to
contract on its behalf. Saturnino Petalcorin's authority to transact on behalf of petitioner cannot
be presumed based on a Secretary's Certificate and excerpt from the minutes of the alleged board
meeting that were found to have been simulated. These documents cannot be considered as the
corporate acts that held out Saturnino Petalcorin as petitioner's authorized representative for
mortgage transactions. They were not supported by an actual board meeting.
According to respondent, the annotations of respondent's mortgage interests on the certificates of

titles of petitioner's properties operated as constructive notice to petitioner of the existence of such
interests. Hence, petitioners are now estopped from claiming that they did not know about the
mortgage. However, annotations are merely claims of interest or claims of the legal nature and
incidents of relationship between the person whose name appears on the document and the person
who caused the annotation. It does not say anything about the validity of the claim or convert a
defective claim or document into a valid one. Thus, annotations are not conclusive upon courts or
upon owners who may not have reason to doubt the security of their claim as their properties' title
holders.
_____________________________________________________________________________________
FOREIGN CORPORATIONS
Tuna Processing, Inc. v. Philippine Kingford, Inc.

G.R. No. 185582, February 29, 2012, Perez, J:
Although generally, corporations doing business in the Philippines cannot be permitted to

maintain or intervene in any action, suit or proceedings in any court or administrative agency of the
Philippines, it is in the best interest of justice that in the enforcement of a foreign arbitral award, the
losing party be not allowed to interpose the rule that bars foreign corporations not licensed to do
business in the Philippines from maintaining a suit in our courts. When a party enters into a contract
containing a foreign arbitration clause and, as in this case, in fact submits itself to arbitration, it
Page 274 of 434

becomes bound by the contract, by the arbitration and by the result of arbitration, conceding thereby
the capacity of the other party to enter into the contract, participate in the arbitration and cause the
implementation of the result.
Facts:
On 14 January 2003, Kanemitsu Yamaoka (hereinafter referred to as the "licensor) and five (5)
Philippine tuna processors, namely, Angel Seafood Corporation, East Asia Fish Co., Inc., Mommy
Gina Tuna Resources, Santa Cruz Seafoods, Inc., and respondent Kingford (collectively referred to
as the "sponsors"/"licensees") entered into a Memorandum of Agreement (MOA) for the to the
establishment of Tuna Processors, Inc. ("TPI"), a corporation established in the State of California.
Due to a series of events not mentioned in the petition, the licensees, including respondent
Kingford, withdrew from petitioner TPI and correspondingly reneged on their obligations.
Petitioner submitted the dispute for arbitration before the International Centre for Dispute
Resolution in the State of California, United States and won the case against respondent. To enforce
the award, petitioner TPI filed on 10 October 2007 a Petition for Confirmation, Recognition, and
Enforcement of Foreign Arbitral Award before the RTC of Makati City. The court denied the petition
on the ground of lack of petitioner’s legal capacity to sue. Hence, this case.
Issue: Whether a foreign corporation not licensed to do business in the Philippines, but which
collects royalties from entities in the Philippines, sue here to enforce a foreign arbitral award
Held: Yes. The Court, in an effort to reconcile the provisions of the Corporation Code of the
Philippines on one hand, and the Alternative Dispute Resolution Act of 2004, on the other, opined
that the latter law, being a special law, shall prevail. - generalia specialibus non derogant.
Although generally, corporations doing business in the Philippines cannot be permitted to

maintain or intervene in any action, suit or proceedings in any court or administrative agency of
the Philippines, it is in the best interest of justice that in the enforcement of a foreign arbitral award,
the losing party be not allowed to interpose the rule that bars foreign corporations not licensed to
do business in the Philippines from maintaining a suit in our courts. When a party enters into a
contract containing a foreign arbitration clause and, as in this case, in fact submits itself to
arbitration, it becomes bound by the contract, by the arbitration and by the result of arbitration,
conceding thereby the capacity of the other party to enter into the contract, participate in the
arbitration and cause the implementation of the result.
_____________________________________________________________________________________
Steelcase, Inc. v. Design International Selections, Inc.

G.R. No. 171995, April 18, 2012, Mendoza, J:
The appointment of a distributor in the Philippines is not sufficient to constitute "doing

business" unless it is under the full control of the foreign corporation.
Page 275 of 434

Facts:
Petitioner Steelcase, Inc. (Steelcase) is a foreign corporation existing under the laws of Michigan,
United States of America (U.S.A.), and engaged in the manufacture of office furniture with dealers
worldwide. Respondent Design International Selections, Inc. (DISI) is a corporation existing under
Philippine Laws and engaged in the furniture business, including the distribution of furniture.
Sometime in 1986 or 1987, Steelcase and DISI orally entered into a dealership agreement whereby
Steelcase granted DISI the right to market, sell, distribute, install, and service its products to end-
user customers within the Philippines. The business relationship continued smoothly until it was
terminated sometime in January 1999 after the agreement was breached with neither party
admitting any fault.
Steelcase filed a complaint for sum of money against DISI alleging, among others, that DISI had an
unpaid account of US$600,000.00. Steelcase prayed that DISI be ordered to pay actual or
compensatory damages, exemplary damages, attorney’s fees, and costs of suit. In its Answer with
Compulsory Counterclaims, DISI alleged that Steelcase has no legal capacity to sue as it is doing
business in the Philippines without the required license.
The RTC dismissed the complained filed by Steelcase and granted the TRO prayed for by DISI.
Steelcase moved for a reconsideration but the same was denied. The case was appealed to the CA.
The latter ruled that Steelcase is doing business in the Philippines without the required license. The
CA stated that the following acts of Steelcase showed its intention to pursue and continue the
conduct of its business in the Philippines: (1) sending a letter to Phinma, informing the latter that
the distribution rights for its products would be established in the near future and directing other
questions about orders for Steelcase products to Steelcase International; (2) cancelling orders from
DISI’s customers, particularly Visteon, Phils., Inc. (Visteon); (3) continuing to send its products to
the Philippines through Modernform Group Company Limited (Modernform), as evidenced by an
Ocean Bill of Lading; and (4) going beyond the mere appointment of DISI as a dealer by making
several impositions on management and operations of DISI. Thus, the CA ruled that Steelcase was
barred from access to our courts for being a foreign corporation doing business here without the
requisite license to do so.
Issue: Whether Steelcase is a foreign corporation doing business in the Philippines without a
license
Held: No.
The appointment of a distributor in the Philippines is not sufficient to constitute "doing business"
unless it is under the full control of the foreign corporation. On the other hand, if the distributor is
an independent entity which buys and distributes products, other than those of the foreign
corporation, for its own name and its own account, the latter cannot be considered to be doing
business in the Philippines. It should be kept in mind that the determination of whether a foreign
corporation is doing business in the Philippines must be judged in light of the attendant
circumstances.
Page 276 of 434

In the case at bench, it is undisputed that DISI was founded in 1979 and is independently owned
and managed by the spouses Leandro and Josephine Bantug. In addition to Steelcase products, DISI
also distributed products of other companies including carpet tiles, relocatable walls and theater
settings.
MERGERS AND CONSOLIDATIONS
BPI V. CARLITO LEE, G.R. No. 190144, August 1, 2012
On April 26, 1988, respondent Carlito Lee (Lee) filed a complaint for sum of money with damages
with application for the issuance of a writ of attachment against Trendline and Buelva (collectively
called "defendants") seeking to recover his total investment in the amount of P5.8 million. Lee
alleged that he was enticed to invest his money with Trendline upon Buelva’s misrepresentation
that she was its duly licensed investment consultant or commodity saleswoman. His investments,
however, were lost without any explanation from the defendants.
On May 4, 1988, the RTC issued a writ of preliminary attachment whereby the Check-O-Matic
Savings Accounts of Trendline with Citytrust Banking Corporation in the total amount of
P700,962.10 were garnished. Subsequently, the RTC rendered a decision on August 8, 1989 finding
defendants jointly and severally liable to Lee for the full amount of his investment. This decision
was affirmed on appeal and became final and executory.
On October 4, 1996, Citytrust and BPI merged, with the latter as the surviving corporation. The
Articles of Merger provide, among others, that "all liabilities and obligations of Citytrust shall be
transferred to and become the liabilities and obligations of BPI in the same manner as if the BPI
had itself incurred such liabilities or obligations.”
On December 16, 2002, Lee filed a Motion for Execution and/or Enforcement of Garnishment before
the RTC seeking to enforce against BPI the garnishment of Trendline’s deposit in the amount of
P700,962.10 and other deposits it may have had with Citytrust.
Issue: Can BPI be held liable?
Held: Yes. Upon the merger of Citytrust and BPI, with the latter as the surviving corporation, and
with all the liabilities and obligations of Citytrust transferred to BPI as if it had incurred the same,
BPI undoubtedly became a party interested in sustaining the proceedings, as it stands to be
prejudiced by the outcome of the case. It is a settled rule that upon service of the writ of
garnishment, the garnishee becomes a "virtual party" or "forced intervenor" to the case and the trial
court thereby acquires jurisdiction to bind the garnishee to comply with its orders and processes.
Citytrust, therefore, upon service of the notice of garnishment and its acknowledgment that it was
in possession of defendants' deposit accounts, became a "virtual party" to or a "forced intervenor"
in the civil case. As such, it became bound by the orders and processes issued by the trial court
despite not having been properly impleaded therein. Consequently, by virtue of its merger with BPI
on October 4, 1996, BPI, as the surviving corporation, effectively became the garnishee, thus the
"virtual party" to the civil case.
Under Article 80 of the Corporation Code, as the surviving corporation, BPI simply continued the
combined businesses of the two banks and absorbed all the rights, privileges, assets, liabilities and
Page 277 of 434

obligations of Citytrust, including the latter’s obligation over the garnished deposits of the
defendants.
Moreover, BPI cannot avoid the obligation attached to the writ of garnishment by claiming that the
fund was not transferred to it, in light of the Articles of Merger which provides that "all liabilities
and obligations of Citytrust shall be transferred to and become the liabilities and obligations of BPI
in the same manner as if the BPI had itself incurred such liabilities or obligations, and in order that
the rights and interest of creditors of Citytrust or liens upon the property of Citytrust shall not be
impaired by merger."
_____________________________________________________________________________________
Commission of Internal Revenue vs. Bank of Commerce

G.R. No. 180529; November 25, 2013
J. Leonardo- De Castro
Where the purchase and sale of identified assets between two companies under a Purchase
and Sale Agreement does not constitute a merger as defined under Section 40 (C)(6)(b) of the Tax
Code, the seller and the purchaser are considered entities different from one another. Thus, the
purchaser company cannot be held liable for the payment of the deficiency Documentary Stamp Tax
assessed against the seller company.
Facts:
Bank of Commerce (BOC) and Traders Royal Bank (TRB) executed a Purchase and Sale Agreement
whereby it stipulated TRB’s desire to sell and BOC’s desire to purchase identified recorded assets
of TRB in consideration of BOC assuming identified record liabilities. Under the Agreement, it was
stated that BOC and TRB shall continue to exist as separate corporations with distinct corporate
personalities.
During sometime, BOC received copies of a Formal Letter of Demand and Assessment Notice
addressed to TRB demanding payment of the amount of P41,467,887.51 as deficiency documentary
stamp taxes (DST) on Special Savings Deposit (SSD) account of the latter for taxable year 1999.
TRB protested the assessment, which was denied. With the denial constituting as the final decision,
BOC filed a Petition for review before the CTA 2nd division praying that it be held not liable for the
DST. To support its claim, BOC argued that as stated in the Purchase and Sale Agreement, the
parties therein continued to exist as separate corporations with distinct corporate personalities.
BOC emphasized that there was no merger between it and TRB as it only acquired certain assets of
TRB in return for its assumption of some of TRB’s liabilities. Later on, the CTA 2nd Division rendered
a decision dismissing BOC’s petition for lack of merit.
After the denial of the subsequent motion for reconsideration filed by BOC, it filed a petition for
review before the CTA En Banc. Said court then affirmed the CTA 2nd Division’s Decision, ruling
that BOC was liable for the DST of TRB’s SSD accounts. On BOC’s motion for reconsideration, CTA
En Banc reversed itself and ruled that BOC could not be held liable for the deficiency DST of TRB
on its SSD accounts.In resolving the case, CTA En Banc relied on the Resolution in the Traders
Royal Bank case, wherein the CTA 1st Division made a categorical pronouncement on the issue of
merger based on the evidence at its disposal, which included the Purchase and Sale Agreement and
Page 278 of 434

the CIR’s own administrative ruling on the issue of merger in BIR Ruling No. 10-2006 dated October
6, 2006.
With the reversal, CIR filed a motion for reconsideration, but was denied. Hence, the petition.
Issue:
Whether or not BOC is liable for TRB’s deficiency in the Document Stamp Tax.
Ruling:
Petition Denied.
After carefully evaluating the records, the CTA 1st Division agrees with BOC for the following
reasons:
First, a close reading of the Purchase and Sale Agreement shows the following self-
explanatory provisions:
a) Items in litigation, both actual and prospective, against [TRB] are excluded from
the liabilities to be assumed by the Bank of Commerce (Article II, paragraph 2); and
b) The Bank of Commerce and Traders Royal Bank shall continue to exist as
separate corporations with distinct corporate personalities (Article III, paragraph
1).
Second, aside from the foregoing, the Purchase and Sale Agreement does not
contain any provision that the [BOC] acquired the identified assets of [TRB] solely
in exchange for the latter’s stocks. Merger is defined under Section 40 (C)(6)(b) of
the Tax Code as follows:
"b) The term "merger" or "consolidation", when used in this Section, shall be
understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition
by one corporation of all or substantially all the properties of another corporation
solely for stock: Provided, [t]hat for a transaction to be regarded as a merger or
consolidation within the purview of this Section, it must be undertaken for a bona
fide business purpose and not solely for the purpose of escaping the burden of
taxation: x x x."
Since the purchase and sale of identified assets between the two companies does
not constitute a merger under the foregoing definition, the Bank of Commerce is
considered an entity separate from petitioner. Thus, it cannot be held liable for the
payment of the deficiency DST assessed against petitioner.
Thus, when the CTA En Banc took into consideration the above ruling in its Amended Decision, it
necessarily affirmed the findings of the CTA 1st Division and found them to be correct. This Court
likewise finds the foregoing ruling to be correct. The CTA 1st Division was spot on when it
interpreted the Purchase and Sale Agreement to be just that and not a merger.
In this petition however, the CIR insists that BIR Ruling No. 10-2006 cannot be used as a basis for
the CTA En Banc’s Amended Decision, due to BOC’s failure, at the time it requested for such ruling,
to inform the CIR of TRB’s deficiency DST assessments for taxable years 1996, 1997, and 1999. The
Page 279 of 434

CIR’s contention is untenable. A perusal of BIR Ruling No. 10-2006 will show that the CIR ruled on
the issue of merger without any reference to TRB’s subject tax liabilities.
Clearly, the CIR, in BIR Ruling No. 10-2006, ruled on the issue of merger without taking into
consideration TRB’s pending tax deficiencies. The ruling was based on the Purchase and Sale
Agreement, factual evidence on the status of both companies, and the Tax Code provision on
merger. The CIR’s knowledge then of TRB’s tax deficiencies would not be material as to affect the
CIR’s ruling. The resolution of the issue on merger depended on the agreement between TRB and
BOC, as detailed in the Purchase and Sale Agreement, and not contingent on TRB’s tax liabilities.
_____________________________________________________________________________________
BANK OF COMMERCE vs. RADIO PHILIPPINES NETWORK, INC., ET. AL.

G.R. No. 195615, April 21, 2014, J. Abad
Indubitably, it is clear that no merger took place between Bancommerce and TRB as the
requirements and procedures for a merger were absent. A merger does not become effective upon the
mere agreement of the constituent corporations. All the requirements specified in the law must be
complied with in order for merger to take effect. Here, Bancommerce and TRB remained separate
corporations with distinct corporate personalities. What happened is that TRB sold and
Bancommerce purchased identified recorded assets of TRB in consideration of Bancommerce’s
assumption of identified recorded liabilities of TRB including booked contingent accounts. There is no
law that prohibits this kind of transaction especially when it is done openly and with appropriate
government approval.
Facts:
Traders Royal Bank (TRB) sold to petitioner Bank of Commerce (Bancommerce) its banking
business consisting of specified assets and liabilities through a Purchase and Assumption (P & A)
Agreement. Bangko Sentral ng Pilipinas' (BSP's) approval of their P & A Agreement was however
necessary. On November 8, 2001 the BSP approved that agreement subject to the condition that
Bancommerce and TRB would set up an escrow fund of PSO million with another bank to cover
TRB liabilities for contingent claims that may subsequently be adjudged against it, which liabilities
were excluded from the purchase. Subsequently, P & A Agreement was approved by BSP. To comply
with a BSP mandate, TRB placed P50 million in escrow with Metropolitan Bank and Trust Co.
(Metrobank) to answer for those claims and liabilities that were excluded from the P & A Agreement
and remained with TRB.
Shortly after acting in G.R. 138510, Traders Royal Bank v. Radio Philippines Network (RPN),
Inc., this Court ordered TRB to pay respondents RPN, Intercontinental Broadcasting Corporation,
and Banahaw Broadcasting Corporation (collectively, RPN, et al.) actual damages plus 12% legal
interest and some amounts. Based on this decision, RPN, et al.filed a motion for execution against
TRB before the Regional Trial Court (RTC). But rather than pursue a levy in execution of the
corresponding amounts on escrow with Metrobank, RPN, et al. filed a Supplemental Motion for
Execution where they described TRB as "now Bank of Commerce" based on the assumption that
TRB had been merged into Bancommerce.
Subsequently, the RTC issued the assailed Order directing the release to the Sheriff of
Bancommerce’s "garnished monies and shares of stock or their monetary equivalent" and for the
sheriff to pay 25% of the amount "to the respondents’ counsel representing his attorney’s fees
Page 280 of 434

and appearance fees and litigation expenses" and the balance to be paid to the respondents after
deducting court dues.
Issue:
Whether or not there was a merger or de facto merger between TRB and Bancommerce
thereby considering the latter as judgment debtor.
Ruling:
None.
Indubitably, it is clear that no merger took place between Bancommerce and TRB as the
requirements and procedures for a merger were absent. A merger does not become effective upon
the mere agreement of the constituent corporations. All the requirements specified in the law must
be complied with in order for merger to take effect. Section 79 of the Corporation Code further
provides that the merger shall be effective only upon the issuance by the Securities and Exchange
Commission (SEC) of a certificate of merger. Here, Bancommerce and TRB remained separate
corporations with distinct corporate personalities. What happened is that TRB sold and
Bancommerce purchased identified recorded assets of TRB in consideration of Bancommerce’s
assumption of identified recorded liabilities of TRB including booked contingent accounts. There
is no law that prohibits this kind of transaction especially when it is done openly and with
appropriate government approval.
In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that under the
Corporation Code, "a de facto merger can be pursued by one corporation acquiring all or
substantially all of the properties of another corporation in exchange of shares of stock of the
acquiring corporation. The acquiring corporation would end up with the business enterprise of the
target corporation; whereas, the target corporation would end up with basically its only remaining
assets being the shares of stock of the acquiring corporation."
No de facto merger took place in the present case simply because the TRB owners did not
get in exchange for the bank’s assets and liabilities an equivalent value in Bancommerce shares of
stock. Moreover, Bancommerce and TRB agreed with BSP approval to exclude from the sale the
TRB’s contingent judicial liabilities, including those owing to RPN, et al. The Bureau of Internal
Revenue (BIR) treated the transaction between the two banks purely as a sale of specified assets
and liabilities when it rendered its opinion on the tax consequences of the transaction given that
there is a difference in tax treatment between a sale and a merger or consolidation. Furthermore,
what was "consolidated" was the banking activities and transactions of Bancommerce and TRB, not
their corporate existence. The BSP did not remotely suggest a merger of the two corporations.
To end, since there had been no merger, Bancommerce cannot be considered as TRB’s
successor-in-interest and against which the Court’s Decision of October 10, 2002 in G.R. 138510 may
be enforced. Bancommerce did not hold the former TRBs assets in trust for it as to subject them to
garnishment for the satisfaction of the latter’s liabilities to RPN, et al. Bancommerce bought and
acquired those assets and thus, became their absolute owner.
Page 281 of 434

PENAL PROVISIONS ON THE CORPORATION CODE
Ient v. Tullett Prebon

G.R. No. 189158, January 11, 2017
In a criminal complaint that alleges violation of Section 31 and 34 of the Corporation, can
Section 144 of the same code be used as legal basis for the supposed criminal liability of the
respondents? No. There is textual ambiguity in Section 144; moreover, such ambiguity remains even
after an examination of its legislative history and the use of other aids to statutory construction,
necessitating the application of the rule of lenity in favor of respondents. Section 22 imposes the
penalty of involuntary dissolution for non-use of corporate charter. The rest of the above-quoted
provisions, like Sections 31 and 34, provide for civil or pecuniary liabilities for the acts covered
therein but what is significant is the fact that, of all these provisions that provide for consequences
other than penal, only Section 74 expressly states that a violation thereof is likewise considered an
offense under Section 144. If respondent and the Court of Appeals are correct, that Section 144
automatically imposes penal sanctions on violations of provisions for which no criminal penalty
was imposed, then such language in Section 74 defining a violation thereof as an offense would
have been superfluous. There would be no need for legislators to clarify that, aside from civil
liability, violators of Section 74 are exposed to criminal liability as well. We agree with petitioners
that the lack of specific language imposing criminal liability in Sections 31 and 34 shows legislative
intent to limit the consequences of their violation to the civil liabilities mentioned therein. Had it
been the intention of the drafters of the law to define Sections 31 and 34 as offenses, they could have
easily included similar language as that found in Section 74.
Legislative history also supports this conclusion. In the instances that Sections 31 and 34
were taken up on the floor, legislators did not veer away from the civil consequences as stated
within the four corners of these provisions. Contrasted with the interpellations on Section 74
(regarding the right to inspect the corporate records), the discussions on said provision leave no
doubt that legislators intended both civil and penal liabilities to attach to corporate officers who
violate the same, as was repeatedly stressed in the excerpts from the legislative record.
Besides, the Corporation Code was intended as a regulatory measure, not primarily as a
penal statute. Sections 31 to 34 in particular were intended to impose exacting standards of fidelity
on corporate officers and directors but without unduly impeding them in the discharge of their
work with concerns of litigation. Considering the object and policy of the Corporation Code to
encourage the use of the corporate entity as a vehicle for economic growth, we cannot espouse a
strict construction of Sections 31 and 34 as penal offenses in relation to Section 144 in the absence
of unambiguous statutory language and legislative intent to that effect.
SECURITIES REGULATION CODE

SECURITIES AND EXCHANGE COMMISSION
PRIMANILA PLANS, INC., HEREIN REPRESENTED BY EDUARDO S. MADRID vs.

SECURITIES AND EXCHANGE COMMISSION
G.R. No. 193791, August 6, 2014, J. Reyes
Page 282 of 434

The authority of the SEC and the manner by which it can issue cease and desist orders are
provided in Section 64 of the SRC. The law is clear on the point that a cease and desist order may be
issued by the SEC motu proprio, it being unnecessary that it results from a verified complaint from an
aggrieved party. A prior hearing is also not required whenever the Commission finds it appropriate to
issue a cease and desist order that aims to curtail fraud or grave or irreparable injury to investors. It
is beyond dispute that Primasa plans were not registered with the SEC. Primanila was then barred
from selling and offering for sale the said plan product. A continued sale by the company would
operate as fraud to its investors, and would cause grave or irreparable injury or prejudice to the
investing public, grounds which could justify the issuance of a cease and desist order under Section
64 of the SRC.
Facts:
Primanila’s website www.primanila.com was offering a pension plan product called Primasa
Plan. The website contains detailed instructions as to how interested persons can apply for the said
plan and where initial contributions and succeeding installment payments can be made by
applicants and planholders.
Primanila failed to renew its Dealer’s License for 2008. In view of the expiration of the said
license, the SEC’s Non Traditional Securities and Instruments Department (NTD) enjoined
Primanila from selling and/or offering for sale pre-need plans to the public.
Primanila has not been issued a secondary license to act as dealer or general agent for pre-
need pension plans for 2008. Also, no registration statement has been filed by Primanila for the
approval of a pension plan product called Primasa Plan. This is shown in the certification issued by
NTD upon the request of SEC’s Compliance and Enforcement Department (CED).
It was discovered by CED Primanila’s Bank Account is still active when it deposited on
March 6, 2008 the sum of Php 50.00. Among the many planholders of PRIMANILA are enlisted
personnel of the PNP. The PNP remitted the total amount of Php 2,072,149.38 to PRIMANILA
representing the aforementioned premium collections via salary deductions of the 410 enlisted
personnel of PNP who are planholders. But Primanila failed to deposit the required monthly
contributions to the trust fund in violation of Pre-need Rule 19.1. This is shown in the Trust Fund
Reports for the months of November and December 2007 prepared by ASIATRUST BANK, the
trustee of Primanila.
Primanila under-declared the total amount of its collections as shown in its SEC Monthly
Collection Reports which it submitted to NTD. Its reports show that it only collected Php 302,081.00
from January to September 2007. However, the remittance report of the PNP shows that Primanila
received the amount of Php 1,688,965.22 from the PNP planholders alone for the said period.
Therefore, it under-declared its report by Php 1,386,884.22.7
From these findings, the SEC declared that Primanila committed a flagrant violation of
Republic Act No. 8799, otherwise known as The Securities Regulation Code (SRC), particularly
Section 16 thereof. The SEC then issued the subject cease and desist order "in order to prevent
further violations and in order to protect the interest of its plan holders and the public."
Page 283 of 434

Feeling aggrieved, Primanila filed a Motion for Reconsideration/Lift Cease and Desist
Order, arguing that it was denied due process as the order was released without any prior issuance
by the SEC of a notice or formal charge that could have allowed the company to defend itself. The
cease and desist order issued on April 9, 2008 was then made permanent. The CA affirmed in toto
the issuances of the SEC.
Issue:
Whether or not Primanila was accorded due process notwithstanding the SEC’s immediate
issuance of the cease and desist order on April 9, 2008
Ruling:
Yes, the authority of the SEC and the manner by which it can issue cease and desist orders
are provided in Section 64 of the SRC.
The law is clear on the point that a cease and desist order may be issued by the SEC motu
proprio, it being unnecessary that it results from a verified complaint from an aggrieved party. A
prior hearing is also not required whenever the Commission finds it appropriate to issue a cease
and desist order that aims to curtail fraud or grave or irreparable injury to investors. There is good
reason for this provision, as any delay in the restraint of acts that yield such results can only
generate further injury to the public that the SEC is obliged to protect.
To equally protect individuals and corporations from baseless and improvident issuances,
the authority of the SEC under this rule is nonetheless with defined limits. A cease and desist order
may only be issued by the Commission after proper investigation or verification, and upon showing
that the acts sought to be restrained could result in injury or fraud to the investing public. Without
doubt, these requisites were duly satisfied by the SEC prior to its issuance of the subject cease and
desist order.
Records indicate the prior conduct of a proper investigation on Primanila’s activities by the
Commission’s CED. Investigators of the CED personally conducted an ocular inspection of
Primanila’s declared office, only to confirm reports that it had closed even without the prior
approval of the SEC. Members of CED also visited the company website of Primanila, and
discovered the company’s offer for sale thereon of the pension plan product called Primasa Plan,
with instructions on how interested applicants and planholders could pay their premium payments
for the plan. One of the payment options was through bank deposit to Primanila’s given Metrobank
account which, following an actual deposit made by the CED was confirmed to be active.
As part of their investigation, the SEC also looked into records relevant to Primanila’s
business. Records with the SEC’s Non-Traditional Securities and Instruments Department (NTD)
disclosed Primanila’s failure to renew its dealer’s license for 2008, orto apply for a secondary license
as dealer or general agent for pre-need pension plans for the same year. SEC records also confirmed
Primanila’s failureto file a registration statement for Primasa Plan, to fully remit premium
collections from planholders, and to declare truthfully its premium collections from January to
September 2007.
Page 284 of 434

The SEC was not mandated to allow Primanila to participate in the investigation conducted
by the Commission prior to the cease and desist order’s issuance. Given the circumstances, it was
sufficient for the satisfaction of the demands of due process that the company was amply apprised
of the results of the SEC investigation, and then given the reasonable opportunity to present its
defense. Primanila was able to do this via its motion to reconsider and lift the cease and desist
order. After the CED filed its comment on the motion, Primanila was further given the chance to
explain its side to the SEC through the filing of its reply. "Trite to state, a formal trial or hearing
isnot necessary to comply with the requirements of due process. Its essence is simply the
opportunity to explain one’s position."
The validity of the SEC’s cease and desist order is further sustained for having sufficient
factual and legal bases.
The acts specifically restrained by the subject cease and desist order were Primanila’s sale,
offer for sale and collection of payments specifically for its Primasa plans. Notwithstanding the
findings of both the SEC and the CA on Primanila’s activities, the company still argued in its petition
that it neither sold nor collected premiums for the Primasa product. Primanila argued that the offer
for sale of Primasa through the Primanila website was the result of mere inadvertence, after the
website developer whom it hired got hold of a copy of an old Primasa brochure and then included
its contents in the company website even without the knowledge and prior approval of Primanila.
In the instant case, the substantial evidence is derived from the results of the SEC
investigation on Primanila’s activities. Specifically on the product Primasa plans, the SEC
ascertained that there were detailed instructions on Primanila’s website as to how interested
persons could apply for a plan, together with the manner by which premium payments therefor
could be effected. A money deposit by CED to Primanila’s Metrobank account indicated in the
advertisement confirmed that the bank account was active.
There could be no better conclusion from the foregoing circumstances that Primanila was
engaged in the sale or, at the very least, an offer for sale to the public of the Primasa plans. The offer
for Primasa was direct and its reach was even expansive, especially as it utilized its website as a
medium and visits to it were, as could be expected, from prospective clients.
It is beyond dispute that Primasa plans were not registered with the SEC. Primanila was
then barred from selling and offering for sale the said plan product. A continued sale by the
company would operate as fraud to its investors, and would cause grave or irreparable injury or
prejudice to the investing public, grounds which could justify the issuance of a cease and desist
order under Section 64 of the SRC. Furthermore, even prior to the issuance of the subject cease and
desist order, Primanila was already enjoined by the SEC from selling and/or offering for sale pre-
need products to the public. The SEC Order dated April 9, 2008 declared that Primanila failed to
renew its dealer’s license for 2008, prompting the SEC’s NTD to issue a letter dated January3, 2008
addressed to Primanila’s Chairman and Chief Executive Officer Eduardo S. Madrid, enjoining the
company from selling and/or offering for sale pre-need plans to the public. It also had not obtained
a secondary license to act as dealer or general agent for pre-need pension plans for 2008.
In view of the foregoing, Primanila clearly violated Section 16 of the SRC and pertinent rules
which barred the sale or offer for sale to the public of a pre-need product except in accordance with
SEC rules and regulations.
Page 285 of 434

_____________________________________________________________________________________
COSMOS BOTTLING CORPORATION vs. COMMISSION EN BANC of the

SECURITIES AND EXCHANGE COMMISSION (SEC) and JUSTINA F. CALLANGAN, in her
capacity as Director of the Corporation Finance Department of the SEC
G.R. No. 199028, November 12, 2014, J. Perlas- Bernabe
As an administrative agency with both regulatory and adjudicatory functions, the SEC was
given the authority to delegate some of its functions to, inter alia, its various operating departments,
such as the SECCFD, the Enforcement and Investor Protection Department, and the Company
Registration and Monitoring Department. In this case, the Court disagrees with the findings of both
the SEC En Banc and the CA that the Revocation Order emanated from the SEC En Banc. Rather, such
Order was merely issued by the SEC-CFD as one of the SEC’s operating departments. In other words,
the Revocation Order is properly deemed as a decision issued by the SEC-CFD as one of the Operating
Departments of the SEC, and accordingly, may be appealed to the SEC En Banc, as what Cosmos
properly did in this case. Perforce, the SEC En Banc and the CA erred in deeming Cosmos’s appeal as
a motion for reconsideration and ordering its dismissal on such ground.
Facts:
The instant case stemmed from Cosmos’s failure to submit its 2005 Annual Report to the
SEC within the prescribed period. In connection therewith, it requested an extension of time within
which to file the same. In response, the SEC-Corporation Finance Department (SEC-CFD), through
respondent Director Callangan, sent Cosmos a letter denying the latter’s request and directing it to
submit its 2005 Annual Report. The same letter also ordered Cosmos to show cause why the
Cosmos’s Registration of Securities/Permit to Sell Securities to the Public (Subject
Registration/Permit) should not be revoked for violating Section 17.1 (a) of Republic Act No. 8799,
otherwise known as "The Securities Regulation Code" (SRC).
Cosmos sent a reply-letter to the SEC-CFD, explaining that its failure to file its 2005 Annual
Report was due to the non-completion by its external auditors of their audit procedures. For this
reason, Cosmos implored the SEC-CFD to reconsider its previous denial of Cosmos’s request for
additional time to file its 2005 Annual Report. Thereafter, hearings for the suspension of the Subject
Registration/Permit commenced, with Cosmos advancing the same reasons for the non-
submission of its 2005 Annual Report. The SEC-CFD ordered the suspension of the Subject
Registration/Permit (suspension order) for a period of 60 days from receipt of the same, or until
Cosmos files its 2005 Annual Report, whichever is earlier. The SEC-CFD also stated that Cosmos’s
failure to submit its 2005 Annual Report within the 60-day period shall constrain the SEC to initiate
proceedings for revocation of the Subject Registration/Permit.
On October 31, 2007, Cosmos finally submitted its 2005 and 2006 Annual Reports to the
SEC. In connection therewith, Cosmos requested SEC-CFD that the latter lift the suspension order
and abandon the revocation proceedings against the former. The SEC-CFD referred the matter to
the SEC En Banc for its consideration. After the said meeting, the SEC En Banc issued Resolution
No. 87, series of (s.) 2008 wherein they resolved to: (a) deny Cosmos’s request for the lifting of the
suspension order; and (b) revoke the Subject Registration/Permit. On the basis thereof, the SEC-
CFD issued a Revocation Order echoing the pronouncements indicated in the aforesaid resolution.
On appeal, this resolution was later on affirmed by SEC En Banc and CA stating that the Revocation
Page 286 of 434

Order was a mere articulation of the SEC En Banc’s Resolution No. 87, s. 2008, and thus, should be
considered an issuance of the SEC En Banc itself. The SEC En Banc deemed Cosmos’s appeal as a
motion for reconsideration, a prohibited pleading under Section 3-6, Rule III of the 2006 SEC Rules
of Procedure. Furthermore, CA held that Cosmos’s appeal, which was treated as a prohibited
motion for reconsideration under the 2006 SEC Rules of Procedure, did not toll the reglementary
period for filing an appeal before it. As such, the SEC En Banc’s Ruling, as well as the Revocation
Order, had already lapsed into finality and could no longer be disturbed.
Issue:
Whether or not the CA correctly treated Cosmos’s appeal before the SEC En Banc as a
motion for reconsideration, and consequently, affirmed its dismissal for being a prohibited pleading
under the 2006 SEC Rules of Procedure.
Ruling:
No.
As an administrative agency with both regulatory and adjudicatory functions, the SEC was
given the authority to delegate some of its functions to, inter alia, its various operating departments,
such as the SECCFD, the Enforcement and Investor Protection Department, and the Company
Registration and Monitoring Department, pursuant to Section 4.6 of the SRC. Naturally, the
aforesaid provision also gives the SEC the power to review the acts performed by its operating
departments in the exercise of the former’s delegated functions. This power of review is squarely
addressed by Section 11-1, Rule XI of the 2006 SEC Rules of Procedure.
In this case, the Court disagrees with the findings of both the SEC En Banc and the CA that
the Revocation Order emanated from the SEC En Banc. Rather, such Order was merely issued by
the SEC-CFD as one of the SEC’s operating departments, as evidenced by the following: (a) it was
printed and issued on the letterhead of the SEC-CFD, and not the SEC En Banc; (b) it was docketed
as a case under the SEC-CFD as an operating department of the SEC, since it bore the serial number
"SEC-CFD Order No. 027, [s.] 2008;" and (c) it was signed solely by Director Callangan as director
of the SEC-CFD, and not by the commissioners of the SEC En Banc. Further, both the SEC En Banc
and the CA erred in holding that the Revocation Order merely reflected Resolution No. 87, s. 2008,
and thus, should already be considered as the ruling of the SEC En Banc in this case. As admitted
by respondents, the SEC-CFD’s referral of the case to the SEC En Banc for its consideration in its
March 13, 2008 meeting, which eventually resulted in the issuance of Resolution No. 87, s.2008, was
merely an internal procedure inherent in the exercise by the SEC of its administrative and
regulatory functions.
In sum, the Revocation Order is properly deemed as a decision issued by the SEC-CFD as
one of the Operating Departments of the SEC, and accordingly, may be appealed to the SEC En
Banc, as what Cosmos properly did in this case. Perforce, the SEC En Banc and the CA erred in
deeming Cosmos’s appeal as a motion for reconsideration and ordering its dismissal on such
ground. In view thereof, the Court deems it prudent to reinstate and remand the case to the SEC
En Banc for its resolution on the merits.
Page 287 of 434

SECURITIES
Securities and Exchange Commission v. Prosperity.Com, Inc.

G.R. No. 164197, January 25, 2012, Abad, J:
For an investment contract to exist, the following elements (referred to as the Howey test)
must concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3) investment is
made in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the
efforts of others. Thus, to sustain the SEC position in this case, PCI’s scheme or contract with its
buyers must have all these elements.
An example that comes to mind would be the long-term commercial papers that large
companies, like San Miguel Corporation (SMC), offer to the public for raising funds that it needs
for expansion. When an investor buys these papers or securities, he invests his money, together
with others, in SMC with an expectation of profits arising from the efforts of those who manage and
operate that company. SMC has to register these commercial papers with the SEC before offering
them to investors.
Here, PCI’s clients do not make such investments. They buy a product of some value to
them: an Internet website of a 15-MB capacity.
Facts:
Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without providing internet
service. To make a profit, PCI devised a scheme in which, for the price of US$234.00 (subsequently
increased to US$294), a buyer could acquire from it an internet website of a 15-Mega Byte (MB)
capacity. At the same time, by referring to PCI his own down-line buyers, a first-time buyer could
earn commissions, interest in real estate in the Philippines and in the United States, and insurance
coverage worth P50,000.00.
To benefit from this scheme, a PCI buyer must enlist and sponsor at least two other buyers as his
own down-lines. These second tier of buyers could in turn build up their own down-lines. For each
pair of down-lines, the buyer-sponsor received a US$92.00 commission. But referrals in a day by the
buyer-sponsor should not exceed 16 since the commissions due from excess referrals inure to PCI,
not to the buyer-sponsor.
Apparently, PCI patterned its scheme from that of Golconda Ventures, Inc. (GVI), which company
stopped operations after the Securities and Exchange Commission (SEC) issued a cease and desist
order (CDO) against it. As it later on turned out, the same persons who ran the affairs of GVI
directed PCI’s actual operations.
In 2001, disgruntled elements of GVI filed a complaint with the SEC against PCI, alleging that the
latter had taken over GVI’s operations. After hearing, the SEC, through its Compliance and
Enforcement unit, issued a CDO against PCI. The SEC ruled that PCI’s scheme constitutes an
Investment contract and, following the Securities Regulations Code, it should have first registered
such contract or securities with the SEC. Instead of asking the SEC to lift its CDO in accordance
with Section 64.3 of Republic Act (R.A.) 8799, PCI filed with the Court of Appeals (CA) a petition
Page 288 of 434

for certiorari against the SEC with an application for a temporary restraining order (TRO) and
preliminary injunction.
Issue: Whether or not PCI’s scheme constitutes an investment contract that requires registration
under R.A. 8799.
Held: No.
The Securities Regulation Code treats investment contracts as "securities" that have to be registered
with the SEC before they can be distributed and sold. An investment contract is a contract,
transaction, or scheme where a person invests his money in a common enterprise and is led to
expect profits primarily from the efforts of others.
For an investment contract to exist, the following elements, referred to as the Howey test must
concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3) investment is made
in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts
of others. Thus, to sustain the SEC position in this case, PCI’s scheme or contract with its buyers
must have all these elements.
An example that comes to mind would be the long-term commercial papers that large companies,
like San Miguel Corporation (SMC), offer to the public for raising funds that it needs for expansion.
When an investor buys these papers or securities, he invests his money, together with others, in
SMC with an expectation of profits arising from the efforts of those who manage and operate that
company. SMC has to register these commercial papers with the SEC before offering them to
investors.
Here, PCI’s clients do not make such investments. They buy a product of some value to them: an
Internet website of a 15-MB capacity. The client can use this website to enable people to have
internet access to what he has to offer to them, say, some skin cream. The buyers of the website do
not invest money in PCI that it could use for running some business that would generate profits for
the investors. The price of US$234.00 is what the buyer pays for the use of the website, a tangible
asset that PCI creates, using its computer facilities and technical skills.
_____________________________________________________________________________________
Go, et. al. v. Distinction Properties Development and Construction, Inc.

G.R. No. 194024, April 25, 2012; Mendoza, J:
Considering that petitioners, who are members of PHCC, are ultimately challenging the
agreement entered into by PHCC with DPDCI, they are assailing, in effect, PHCC’s acts as a body
corporate. This action, therefore, partakes the nature of an "intra-corporate controversy," the
jurisdiction over which used to belong to the Securities and Exchange Commission (SEC), but
transferred to the courts of general jurisdiction or the appropriate Regional Trial Court.
An intra-corporate controversy is one which "pertains to any of the following relationships:

(1) between the corporation, partnership or association and the public; (2) between the corporation,
partnership or association and the State in so far as its franchise, permit or license to operate is
Page 289 of 434

concerned; (3) between the corporation, partnership or association and its stockholders, partners,
members or officers; and (4) among the stockholders, partners or associates themselves.”
Based on the foregoing definition, there is no doubt that the controversy in this case is
essentially intra-corporate in character, for being between a condominium corporation and its
members-unit owners.
The mere relationship between the parties, i.e., that of being subdivision owner/developer and
subdivision lot buyer, does not automatically vest jurisdiction in the HLURB. For an action to fall
within the exclusive jurisdiction of the HLURB, the decisive element is the nature of the action as
enumerated in Section 1 of P.D. 1344. On this matter, we have consistently held that the concerned
administrative agency, the National Housing Authority (NHA) before and now the HLURB, has
jurisdiction over complaints aimed at compelling the subdivision developer to comply with its
contractual and statutory obligations.
Facts:
Petitioners are registered individual owners of condominium units in Phoenix Heights

Condominium located at H. Javier/Canley Road, Bo. Bagong Ilog, Pasig City, Metro Manila.
Respondent, on the other hand, is a domestic corporation engaged in real estate business and is the
developer of the said condominium.
The petitioners, as condominium unit-owners, filed a complaint before the HLURB against
respondent for unsound business practices and violation of the MDDR on the following grounds:
1) Respondent settled its association dues arrears by assigning certain titles; 2) the settlement
between Phoenix Heights Condominium Corporation (“PHCC”) and respondent included the
reversion of the 22 storage spaces into common areas. With the conformity of PHCC, DPDCI’s
application for alteration (conversion of unconstructed 22 storage units and units GF4-A and BAS
from saleable to common areas) was granted by the Housing and Land Use Regulatory Board
(HLURB).
In defense, DPDCI denied that it had breached its promises and representations to the public
concerning the facilities in the condominium. It alleged that the brochure attached to the
complaint was "a mere preparatory draft" and not the official one actually distributed to the public,
and that the said brochure contained a disclaimer as to the binding effect of the supposed offers
therein. Also, DPDCI questioned the petitioners’ personality to sue as the action was a derivative
suit.
After due hearing, the HLURB ruled in favor of the petitioners. It held as invalid the agreement
entered into between DPDCI and PHCC, as to the alteration or conversion of the subject units into
common areas, which it previously approved, for the reason that it was not approved by the
majority of the members of PHCC. The HLURB further stated that the case was not a derivative suit
but one which involved contracts of sale of the respective units between the complainants and
DPDCI, hence, within its jurisdiction.
Aggrieved, DPDCI filed with the CA. The CA ruled in favor of the respondent, hence, this petition.
Issue: Whether the HLURB has jurisdiction over the case
Page 290 of 434

Held: No.
Considering that petitioners, who are members of PHCC, are ultimately challenging the agreement
entered into by PHCC with DPDCI, they are assailing, in effect, PHCC’s acts as a body corporate.
This action, therefore, partakes the nature of an "intra-corporate controversy," the jurisdiction over
which used to belong to the Securities and Exchange Commission (SEC), but transferred to the
courts of general jurisdiction or the appropriate Regional Trial Court.
An intra-corporate controversy is one which "pertains to any of the following relationships: (1)
between the corporation, partnership or association and the public; (2) between the corporation,
partnership or association and the State in so far as its franchise, permit or license to operate is
members or officers; and (4) among the stockholders, partners or associates themselves.”
Based on the foregoing definition, there is no doubt that the controversy in this case is essentially
intra-corporate in character, for being between a condominium corporation and its members-unit
owners.
The mere relationship between the parties, i.e., that of being subdivision owner/developer and
subdivision lot buyer, does not automatically vest jurisdiction in the HLURB. For an action to fall
within the exclusive jurisdiction of the HLURB, the decisive element is the nature of the action as
enumerated in Section 1 of P.D. 1344. On this matter, we have consistently held that the concerned
administrative agency, the National Housing Authority (NHA) before and now the HLURB, has
jurisdiction over complaints aimed at compelling the subdivision developer to comply with its
contractual and statutory obligations.
In this case, the complaint filed by petitioners alleged causes of action that apparently are not
cognizable by the HLURB considering the nature of the action and the reliefs sought. A perusal of
the complaint discloses that petitioners are actually seeking to nullify and invalidate the duly
constituted acts of PHCC - the April 29, 2005 Agreement27 entered into by PHCC with DPDCI and
its Board Resolution28 which authorized the acceptance of the proposed offsetting/settlement of
DPDCI’s indebtedness and approval of the conversion of certain units from saleable to common
areas.
_____________________________________________________________________________________
GULFO V. ANCHETA
G.R. NO. 175301, August 15, 2012
The petitioners are the neighbors of Jose Ancheta (respondent). The parties occupy a duplex
residential unit on Zodiac Street, Veraville Homes, Almanza Uno, Las Piñas City. The petitioners
live in unit 9-B, while the respondent occupies unit 9-A of the duplex. Sometime in 1998,
respondent’s septic tank overflowed. As a result, respondent and his family lived through a very
unsanitary environment, suffering foul odor and filthy premises for several months. Believing that
this was maliciously caused by the petitioners, on May 19, 1999, the respondent filed a complaint
for damages against the petitioners with the RTC. Petitioners argued that since the parties reside
in the same subdivision and are also members of the same homeowners’ association (Veraville
Page 291 of 434

Homeowners Association, Inc.), the case falls within the jurisdiction of the Home Insurance and
Guaranty Corporation (HIGC) as an intracorporate case under Section 1(b), Rule II of the 1994
Revised Rules of Procedure of HIGC which regulates the Hearing of Homeowner’s Disputes.
Issue: Does the RTC have jurisdiction?
Held: Yes. We take this opportunity to reiterate what constitutes intra-corporate disputes.
Jurisprudence consistently states that an intra-corporate dispute is one that arises from intra-
corporate relations; relationships between or among stockholders; or the relationships between the
stockholders and the corporation. In order to limit the broad definition of intra-corporate dispute,
this Court has applied the relationship test and the controversy test. These two tests, when applied,
have been the guiding principle in determining whether the dispute is an intra-corporate
controversy or a civil case.
In Union Glass & Container Corp., et al. v. SEC, et al. the Court declared that the relationship test
determines whether the relationship is: "[a] between the corporation, partnership or association
and the public; [b] between the corporation, partnership or association and its stockholders,
partners, members, or officers; [c] between the corporation, partnership or association and the
State [insofar] as its franchise, permit or license to operate is concerned; and [d] among the
stockholders, partners or associates themselves."
Under this test, no doubt exists that the parties were members of the same association, but this
conclusion must still be supplemented by the controversy test before it may be considered as an
intra-corporate dispute. Relationship alone does not ipso facto make the dispute intra-corporate;
the mere existence of an intra-corporate relationship does not always give rise to an intra-corporate
controversy. The incidents of that relationship must be considered to ascertain whether the
controversy itself is intra-corporate. This is where the controversy test becomes material.
Under the controversy test, the dispute must be rooted in the existence of an intra-corporate
relationship, and must refer to the enforcement of the parties' correlative rights and obligations
under the Corporation Code, as well as the internal and intra-corporate regulatory rules of the
corporation, in order to be an intra-corporate dispute. These are essentially determined through
the allegations in the complaint which determine the nature of the action.
We found from the allegations in the complaint that the respondent did not question the status of
the petitioners as members of the association. There were no allegations assailing the petitioners'
rights or obligations on the basis of the association's rules and by-laws, or regarding the petitioners'
relationships with the association. What were alleged were only demands for civil indemnity and
damages. The intent to seek indemnification only (and not the petitioners' status, membership, or
their rights in the association) is clear from paragraphs 7, 8 and 9 of the complaint. In light of these,
the case before us involves a simple civil action -the petitioners' liability for civil indemnity or
damages- that could only be determined through a full-blown hearing for the purpose before the
RTC.
_____________________________________________________________________________________
Page 292 of 434

GUY V. GUY
G.R. NO. 189486, SEPTEMBER 5, 2012
Gilbert is the son of Spouses Francisco and Simny Guy. The Guys are the owners of GoodGold
Corporation. According to Gilbert, his true shares in GoodGold supposedly totaled to 595,000
shares and not 65,000 only. He questions the redistribution that was made a few years ago which
resulted in the drastic reduction of his shares. The redistribution in turn is based on stock
certificates which appears to have been duly endorsed by Gilbert. Thus, he filed an intracorporate
case challenging the redistribution and denying the existence of the endorsed stock certificates. For
lack of particulars of how fraud was perpetrated against him, his Complaint was dismissed.
Issue: Is the dismissal proper?
Held: Yes. While In ordinary cases, the failure to specifically allege the fraudulent acts does not
constitute a ground for dismissal since such a defect can be cured by a bill of particulars, this does
not apply to intra-corporate controversies. In Reyes, we pronounced that "in cases governed by the
Interim Rules of Procedure on Intra-Corporate Controversies a bill of particulars is a prohibited
pleading. It is essential, therefore, for the complaint to show on its face what are claimed to be the
fraudulent corporate acts if the complainant wishes to invoke the court’s special commercial
jurisdiction." This is because fraud in intra-corporate controversies must be based on "devises and
schemes employed by, or any act of, the board of directors, business associates, officers or partners,
amounting to fraud or misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, or members of any corporation, partnership, or association,"
as stated under Rule 1, Section 1 (a)(1) of the Interim Rules. The act of fraud or misrepresentation
complained of becomes a criterion in determining whether the complaint on its face has merits, or
within the jurisdiction of special commercial court, or merely a nuisance suit.
Because of Gilbert’s failure to allege the particulars of fraud, the stock certificate he endorsed in
blank is considered authentic. In Santamaria v. Hongkong and Shanghai Banking Corp. this Court
held that when a stock certificate is endorsed in blank by the owner thereof, it constitutes what is
termed as "street certificate," so that upon its face, the holder is entitled to demand its transfer into
his name from the issuing corporation. Such certificate is deemed quasi-negotiable, and as such the
transferee thereof is justified in believing that it belongs to the holder and transferor.
While there is a contrary ruling, as an exception to the general rule enunciated above, what the
Court held in Neugene Marketing Inc., et al., v CA, where stock certificates endorsed in blank were
stolen from the possession of the beneficial owners thereof constraining this Court to declare the
transfer void for lack of delivery and want of value, the same cannot apply to Gilbert because the
stock certificates which Gilbert endorsed in blank were in the undisturbed possession of his parents
who were the beneficial owners thereof and who themselves as such owners caused the transfer in
their names. Indeed, even if Gilbert’s parents were not the beneficial owners, an endorsement in
blank of the stock certificates coupled with its delivery, entitles the holder thereof to demand the
transfer of said stock certificates in his name from the issuing corporation.
_____________________________________________________________________________________
Page 293 of 434

ALDERSGATE COLLEGE ET AL V. GAUUAN ET. AL,

G.R. NO. 192951, NOVEMBER 14, 2012
Petitioners filed an intracorporate case against the respondents involving the issue of among others
which of the contending trustees and officers are legally elected in accordance with the 1970 By-
Laws. On motion (to Withdraw and/or to Dismiss the Case) of the respondents however, the RTC
On March 30, 2010 dismissed the case on the basis of the Resolution passed by the members of the
Board of Trustees of petitioner Aldersgate College dated December 14, 2009 recommending the
dismissal of the case.
Issue: whether the RTC erred in dismissing the case?
Held: Yes. As this case involves an intra-corporate dispute, the motion to dismiss is undeniably a
prohibited pleading. Moreover, the Court finds no justification for the dismissal of the case based
on the mere issuance of a board resolution by the incumbent members of the Board of Trustees of
petitioner corporation recommending its dismissal, especially considering the various issues raised
by the parties before the court a quo. Hence, the RTC should not have entertained, let alone have
granted the subject motion to dismiss.
_____________________________________________________________________________________
PHILIPPINE OVERSEAS TELECOMMUNICATIONS CORPORATION (POTC), et al. vs.

VICTOR V. AFRICA/ POTC, et al. vs. VICTOR V. AFRICA, PURPORTEDLY REPRESENTING
PHILCOMSAT, et al./ PHILCOMSAT HOLDINGS CORPORATION, REPRESENTED BY
CONCEPCION POBLADOR vs. PHILCOMSTAT, REPRESENTED BY VICTOR V. AFRICA/
HILCOMSAT HOLDINGS CORPORATION, REPRESENTED BY ERLINDA T. BILDNER vs.
HILCOMSTAT HOLDINGS CORPORATION, REPRESENTED BY ENRIQUE L. LOCSIN
G.R. Nos. 184622/184712-14/186066/186590. July 3, 2013
J. Bersamin
An intra-corporate dispute involving a corporation under sequestration of the Presidential

Commission on Good Government (PCGG) falls under the jurisdiction of the Regional Trial Court
(RTC), not the Sandiganbayan. Hence, RTC (Branch 138) had jurisdiction over the election contest
between the Ilusorio-Africa Groups and Nieto-Locsin Groups.
Facts:
The case involves a dispute between two groups battling over to control three domestic
corporations namely the POTC, PHILCOMSAT and PHC. The ownership structure of these
corporations implies that whoever had control of POTC necessarily held 100% control of
PHILCOMSAT, and in turn whoever controlled PHILCOMSAT wielded 81% majority control of
PHC.
As prelude, the EDSA People Power Revolution deposed President Marcos from power and led to
the issuance by newly-installed President Corazon C. Aquino of Executive Order No. 1 to create the
PCGG whose task was to assist the President in the recovery of all ill-gotten wealth amassed by
President Marcos and his subordinates. Subsequently among the corporations surrendered were
Page 294 of 434

IRC (which, in the books of POTC, held 3,644 POTC shares) and Mid-Pasig (which, in the books of
POTC, owned 1,755 POTC shares). Also turned over was one POTC share in the name of Ferdinand
Marcos, Jr. Hence the above mentioned corporations were now under sequestration of the PCGG.
Two groups were formed in the corporations, the Ilusorio-Africa group and the Nieto-Locsin group.
In separate dates as revealed by the records, both groups held a Stockholder's Meeting and elected
the set of directors for each corporations. This incident led to the filing of many petitions in court
including writs of preliminary injunction and TRO. The petitioners postulate that the
Sandiganbayan had original and exclusive jurisdiction over sequestered corporations,
sequestration-related cases, and any and over all incidents arising therefrom; that it was error on
the part of the CA to conclude that the Sandiganbayan was automatically ousted of jurisdiction over
the sequestered assets once the complaint alleged an intra-corporate dispute due to the sequestered
assets being in custodia legis. Respondent on the other hand counters the argument of the
petitioner by asserting that that the RTC had ample authority to rule upon the intra-corporate
dispute.
Issue:
Did RTC (Branch 138) have jurisdiction over the intra-corporate controversy (election contest)
Ruling:
RTC (Branch 138) had jurisdiction over the election contest between the Ilusorio-Africa
Groups and Nieto-Locsin Groups
It is settled that there is an intra-corporate controversy when the dispute involves any of the
following relationships, to wit: (a) between the corporation, partnership or association and the
public; (b) between the corporation, partnership or association and the State in so far as its
franchise, permit or license to operate is concerned; (c) between the corporation, partnership or
association and its stockholders, partners, members or officers; and (d) among the stockholders,
partners or associates themselves.
Originally, Section 5 of Presidential Decree (P.D.) No. 902-A vested the original and exclusive
jurisdiction over intracorporate dispute with the SEC. However, upon the enactment of Republic
Act No. 8799 (The Securities Regulation Code), effective on August 8, 2000, the jurisdiction of the
SEC over intra-corporate controversies was transferred to the Regional Trial. To implement
Republic Act No. 8799, the Court promulgated its resolution of November 21, 2000 in A.M. No. 00-
11-03-SC designating certain branches of the RTC to try and decide the cases enumerated in Section
5 of P.D. No. 902-A. Among the RTCs designated as special commercial courts was the RTC (Branch
138) in Makati City, the trial court for Civil Case No. 04-1049.
In the cases now before the Court, what are sought to be determined are the propriety of the
election of a party as a Director, and his authority to act in that capacity. Such issues should be
exclusively determined only by the RTC pursuant to the pertinent law on jurisdiction because they
did not concern the recovery of ill-gotten wealth.
Page 295 of 434

Proper mode of appeal in intra-corporate cases is by petition for review under Rule 43
The rule providing that a petition for review under Rule 43 of the Rules of Court is the proper mode
of appeal in intra-corporate controversies, as embodied in A. M. No. 04-9-07-SC, has been in effect
since October 15, 2004. Hence, the filing by POTC and PHC (Nieto Group) of the petition for
certiorari on March 21, 2007 (C.A.-G.R. SP No. 98399) was inexcusably improper and ineffectual. By
virtue of its being an extraordinary remedy, certiorari could neither replace nor substitute an
adequate remedy in the ordinary course of law, like appeal in due course. Indeed, the appeal under
Rule 43 of the Rules of Court would have been adequate to review and correct even the grave abuse
of discretion imputed to the RTC. As a consequence of the impropriety and ineffectuality of the
remedy chosen by POTC and PHC (Nieto Group), the TRO and the WPI initially issued by the CA
in C.A.-G.R. SP No. 98399 did not prevent the immediately executory character of the decision in
Civil Case No. 04-1049.
_____________________________________________________________________________________
JOSE U. PUA and BENJAMIN HANBEN U. PUA

vs. CITIBANK, N.A.
G.R. No. 180064. September 16, 2013
J. Perlas- Bernabe
Civil suits falling under the SRC are under the exclusive original jurisdiction of the regional
trial courts and hence, need not be first filed before the SEC, unlike criminal cases wherein the latter
body exercises primary jurisdiction.
Facts:
Petitioners are depositors of Citibank Binondo Branch. In their complaint, they alleged that
sometime in 1999 Chingyee Yau (Yau), Vice-President of Citibank Hongkong, came to the
Philippines to sell securities to Jose. They averred that Yau required Jose to open an account with
Citibank Hongkong as it is one of the conditions for the sale of the securities. After opening such
account, Yau sold to petitioners numerous securities issued by various public limited companies
established in Jersey, Channel Islands. The signing of the subscription agreements of said securities
were all made and perfected at Citibank Binondo in the presence of its officers and employees. Later
on, petitioners discovered that the securities sold to them were not registered with the Securities
and Exchange Commission (SEC) and that the terms and conditions covering the subscription were
not likewise submitted to the SEC for evaluation, approval, and registration. Asserting that
respondent’s actions are in violation of Republic Act No. 8799 they filed before the RTC a Complaint
for declaration of nullity of contract and sums of money with damages.
Respondent filed a motion to dismiss for violation of the doctrine of primary jurisdiction. It pointed
out that the merits of the case would largely depend on the issue of whether or not there was a
violation of the SRC, in particular, whether or not there was a sale of unregistered securities. In this
regard, SRC conferred upon the SEC jurisdiction to investigate compliance with its provisions and
thus, petitioners’ complaint should be first filed with the SEC and not directly before the RTC.
Petitioners opposed respondent’s motion to dismiss, maintaining that the RTC has jurisdiction over
their complaint. They asserted that Section 63 of the SRC expressly provides that the RTC has
exclusive jurisdiction to hear and decide all suits to recover damages pursuant to Sections 56 to 61.
Page 296 of 434

RTC denied respondent’s motion to dismiss. It noted that petitioners’ complaint is for declaration
of nullity of contract and sums of money with damages and, as such, it has jurisdiction to hear and
decide upon the case even if it involves the alleged sale of securities. On appeal, the CA reversed
and set aside the RTC’s Orders and dismissed petitioners’ complaint for violation of the doctrine of
primary jurisdiction.
Issue:
Whether or not petitioners’ action falls within the primary jurisdiction of the SEC
Ruling:
The Court held that respondent's reliance on the Baviera case that all complaints involving
purported violations of the SRC should be first referred to the SEC is misplaced. A careful reading
of the Baviera case would reveal that the same involves a criminal prosecution of a purported
violator of the SRC, and not a civil suit such as the case at bar. Records show that petitioners’
complaint constitutes a civil suit for declaration of nullity of contract and sums of money with
damages, which stemmed from respondent’s alleged sale of unregistered securities, in violation of
the various provisions of the SRC and not a criminal case such as that involved in Baviera.
It is apparent that the SRC provisions governing criminal suits are separate and distinct from those
which pertain to civil suits. On one hand Section 53 of the SRC deals with criminal suits involving
violation of the said law. On the other hand, Sections 56, 57, 58, 59, 60, 61, 62, and 63 of the SRC
pertain to civil suits. The applicable provisions provide:
SEC. 57. Civil Liabilities Arising in Connection With Prospectus, Communications and
Reports. – 57.1. Any person who:(a) Offers to sell or sells a security in violation
of Chapter III; or (b) XXX shall be liable to the person purchasing such security
from him, who may sue to recover the consideration paid for such security with
interest thereon, less the amount of any income received thereon, upon the
tender of such security, or for damages if he no longer owns the security.
xxxx
SEC. 63. Amount of Damages to be Awarded. – 63.1. All suits to recover damages
pursuant to Sections 56, 57, 58, 59, 60 and 61 shall be brought before the Regional
Trial Court which shall have exclusive jurisdiction to hear and decide such
suits. The Court is hereby authorized to award damages in an amount not exceeding
triple the amount of the transaction plus actual damages.(Emphases and
underscoring supplied)
Based on the foregoing, it is clear that cases falling under Section 57 of the SRC, which pertain to
civil liabilities arising from violations of the requirements for offers to sell or the sale of securities,
as well as other civil suits under Sections 56, 58, 59, 60, and 61 of the SRC shall be exclusively
brought before the regional trial courts.
_____________________________________________________________________________________
Page 297 of 434

Medical Plaza Makati Condominium Corporation vs. Robert Cullen

G.R. No. 181416; November 11, 2013
J. Peralta
A dispute between a condominium corporation and a registered condominium owner involving

non-payment of association dues and assessments and the subsequent filing of damages by the latter
against the former is an intra-corporate controversy as it obviously arose from the intra-corporate
relations between the parties, and the questions involved pertain to their rights and obligations under
the Corporation Code and matters relating to the regulation of the corporation. Jurisdiction over this
kind of controversy is lodged with the RTC acting as a special commercial court.
Facts:
Cullen purchased from Maridien Land Holding Inc. (MLHI) a condominium unit of the Medical
Plaza Makati (Medical Plaza). On September 2002, petitioner Medical Plaza demanded from Cullen
payment for the alleged unpaid association dues and assessments. Cullen disputed this demand
saying that he had been religiously paying his dues. For its part, Medical Plaza claimed that Cullen’s
obligation was a carry-over of that of MLHI. This resulted in Cullen being prevented from exercising
his right to vote and be voted during the 2002 election of Medical Plaza’s Board of Directors. When
asked regarding the veracity of Medical Plaza’s claim, MLHI allegedly said that the same has already
been settled. Later on, Cullen demanded an explanation from Medical Plaza why he was considered
a delinquent payer despite the settlement of his obligation. For failure to make such explanation,
Cullen filed a Complaint for Damages against Medical Plaza.
Medical Plaza and MLHI filed their separate motions to dismiss. MLHI claims that it is the HLURB
which is vested with the exclusive jurisdiction to hear and decide the case. Medical Plaza’s ground
for dismissal, on the other hand, is based on the ground of lack of jurisdiction as the case involves
and intra-corporate controversy.
Subsequently, RTC rendered a Decision dismissing Cullen’s complaint. The trial court ruled that
the action filed by Cullen falls within the exclusive jurisdiction of the HLURB and that the issues
raised are intra-corporate between the corporation and a member.
On appeal, the CA reversed and set aside the trial court’s decision and held that the controversy is
an ordinary civil action for damages which falls within the jurisdiction of regular courts. Medical
Plaza and MLHI’s motions for reconsideration were denied. Hence, the petition.
Issues:
1) Whether or not the case constitutes an intra-corporate controversy.

2) Whether or not the regular courts have jurisdiction over the case.
Ruling:
1) In determining whether a dispute constitutes an intra-corporate controversy, the Court uses

two tests, namely, the relationship test and the nature of the controversy test.
Page 298 of 434

An intra-corporate controversy is one which pertains to any of the following relationships: (1)
between the corporation, partnership or association and the public; (2) between the corporation,
partnership or association and the State insofar as its franchise, permit or license to operate is
members or officers; and (4) among the stockholders, partners or associates themselves. Thus,
under the relationship test, the existence of any of the above intra-corporate relations makes the
case intra-corporate.
Under the nature of the controversy test, "the controversy must not only be rooted in the existence
of an intra-corporate relationship, but must as well pertain to the enforcement of the parties’
correlative rights and obligations under the Corporation Code and the internal and intra-corporate
regulatory rules of the corporation."24 In other words, jurisdiction should be determined by
considering both the relationship of the parties as well as the nature of the question involved.
Applying the two tests, the case involves intra-corporate controversy. It obviously arose from the
intra-corporate relations between the parties, and the questions involved pertain to their rights and
obligations under the Corporation Code and matters relating to the regulation of the corporation.
Admittedly, petitioner is a condominium corporation duly organized and existing under Philippine
laws, charged with the management of the Medical Plaza Makati. Respondent, on the other hand,
is the registered owner of Unit No. 1201 and is thus a stockholder/member of the condominium
corporation. Clearly, there is an intra-corporate relationship between the corporation and a
stockholder/member.
2) Pursuant to Section 5.2 of Republic Act No. 8799, otherwise known as the Securities
Regulation Code, the jurisdiction of the SEC over all cases enumerated under Section 5 of
Presidential Decree No. 902-A has been transferred to RTCs designated by this Court as Special
Commercial Courts. While the CA may be correct that the RTC has jurisdiction, the case should
have been filed not with the regular court but with the branch of the RTC designated as a special
commercial court. Considering that the RTC of Makati City, Branch 58 was not designated as a
special commercial court, it was not vested with jurisdiction over cases previously cognizable by
the SEC. The CA, therefore, gravely erred in remanding the case to the RTC for further proceedings.
_____________________________________________________________________________________
Raul Cosare vs. Bradcom Asia, Inc. and Dante Arevalo

G.R. No. 201298; February 5, 2014
J. Reyes
When the officer claiming to have been illegally dismissed is an ordinary employee of the
corporation, jurisdiction over the same lies with the Labor Arbiter. It is only when the officer claiming
to have been illegally dismissed is classified as a corporate officer that the issue is deemed an intra-
corporate dispute which falls within the jurisdiction of the trial courts
Furthermore, the mere fact that the stockholder of a corporation is the one who filed the case
for illegal dismissal does not necessarily make the action an intra-corporate controversy. Not all
conflicts between the stockholders and the corporation are classified as intra-corporate. There are
Page 299 of 434

other facts to consider in determining whether the dispute involves corporate matters as to consider
them as intra-corporate controversies.
Facts:
Cosare was named as an incorporator of Broadcom, a company set up by Arevalo, with an assigned
100 shares of stock. Cosare was promoted to the position of Assistant Vice President and Head of
the Technical Coordination. Sometime in 2003, Abiong was appointed as Broadcom’s Vice
President for Sales, and thus, became Cosare’s immediate superior.
On March 2009, Cosare sent a confidential memo to Arevalo informing the latter of certain
anomalies which were allegedly being committed by Abiog against the company. Instead of acting
on Cosare’s accusations, he was instead called for a meeting by Arevalo wherein he was asked to
tender his resignation. Cosare refused to comply with the dirtive.
Later on, Cosare filed a labor complaint claiming that he was constructively dismissed from
employment by the respondents and further argued that he was illegally suspended. The Labor
Arbiter rendered decision dismissing the complaint. On appeal, the NLRC reversed the Decision of
the Labor Arbiter. After the denial of their motion for reconsideration, the respondents filed a
petition for certiorari with the CA and argued that the case involved an intra-corporate controversy
which is within the jurisdiction of the RTC, instead of the LA. The CA granted the petition and
ruled that the case involved an intra-corporate controversy. Cosare filed a motion for
reconsideration, but was denied. Hence, the petition.
Issue:
Whether or not the case instituted by Cosare was an intra-corporate dispute that falls within the
jurisdiction of the RTC.
Ruling:
Petition Granted.
When the dispute involves a charge of illegal dismissal, the action may fall under the jurisdiction
of the LAs upon whose jurisdiction, as a rule, falls termination disputes and claims for damages
arising from employer-employee relations as provided in Article 217 of the Labor Code. Consistent
with this jurisprudence, the mere fact that Cosare was a stockholder and an officer of Broadcom at
the time the subject controversy developed failed to necessarily make the case an intra-corporate
dispute.
In Matling Industrial and Commercial Corporation v. Coros, the Court distinguished between a
"regular employee" and a "corporate officer" for purposes of establishing the true nature of a dispute
or complaint for illegal dismissal and determining which body has jurisdiction over it. Succinctly,
it was explained that "[t]he determination of whether the dismissed officer was a regular employee
or corporate officer unravels the conundrum" of whether a complaint for illegal dismissal is
cognizable by the LA or by the RTC. "In case of the regular employee, the LA has jurisdiction;
otherwise, the RTC exercises the legal authority to adjudicate.
Page 300 of 434

There are two circumstances which must concur in order for an individual to be considered a
corporate officer, as against an ordinary employee or officer, namely: (1) the creation of the position
is under the corporation’s charter or by-laws; and (2) the election of the officer is by the directors
or stockholders. It is only when the officer claiming to have been illegally dismissed is classified as
such corporate officer that the issue is deemed an intra-corporate dispute which falls within the
jurisdiction of the trial courts.
Finally, the mere fact that Cosare was a stockholder of Broadcom at the time of the case’s filing did
not necessarily make the action an intra- corporate controversy. "Not all conflicts between the
stockholders and the corporation are classified as intra-corporate. There are other facts to consider
in determining whether the dispute involves corporate matters as to consider them as intra-
corporate controversies." Time and again, the Court has ruled that in determining the existence of
an intra-corporate dispute, the status or relationship of the parties and the nature of the question
that is the subject of the controversy must be taken into account. Considering that the pending
dispute particularly relates to Cosare’s rights and obligations as a regular officer of Broadcom,
instead of as a stockholder of the corporation, the controversy cannot be deemed intra-corporate.
This is consistent with the "controversy test" explained by the Court in Reyes v. Hon. RTC, Br. 142,
to wit:
Under the nature of the controversy test, the incidents of that relationship must also
be considered for the purpose of ascertaining whether the controversy itself is intra-
corporate. The controversy must not only be rooted in the existence of an intra-
corporate relationship, but must as well pertain to the enforcement of the parties’
correlative rights and obligations under the Corporation Code and the internal and
intra-corporate regulatory rules of the corporation. If the relationship and its
incidents are merely incidental to the controversy or if there will still be conflict
even if the relationship does not exist, then no intra-corporate controversy exists.
All told, it is then evident that the CA erred in reversing the NLRC’s ruling that favored Cosare
solely on the ground that the dispute was an intra-corporate controversy within the jurisdiction of
the regular courts.
_____________________________________________________________________________________
ROBERTO L. ABAD, MANUEL D. ANDAL, BENITO V. ARANETA, PHILIP G. BRODETT,

ENRIQUE L. LOCSIN and ROBERTO V. SAN JOSE vs. PHILIPPINE COMMUNICATIONS
SATELLITE CORPORATION
G.R. No. 200620, March 18, 2015, J. Villarama, Jr.
. Upon the enactment of Republic Act No. 8799, the jurisdiction of the SEC over intra-
corporate controversies and the other cases enumerated in Section 5 of P.D. No. 902-A was transferred
to the Regional Trial Court. The jurisdiction of the Sandiganbayan has been held not to extend even
to a case involving a sequestered company notwithstanding that the majority of the members of the
board of directors were PCGG nominees.
Facts:
Respondent PHILCOMSA, along with Philippine Overseas Telecommunications

Corporation (POTC) were among those private companies sequestered by the PCGG after the EDSA
Page 301 of 434

People Power Revolution in 1986. PHILCOMSAT owns 81% of the outstanding capital stock of
Philcomsat Holdings Corporation (PHC). The majority shareholders of PHILCOMSAT are also the
seven families who have owned and controlled POTC.
During the administration of President Gloria Macapagal-Arroyo, Enrique L. Locsin and

Manuel D. Andal, along with Julio Jalandoni, were appointed nominee-directors representing the
Republic of the Philippines. These PCGG nominees have aligned with the Nieto family (Nieto-
PCGG) against the group of Africa and Ilusorio (Africa-Bildner), in the ensuing battle for control
over the respective boards of POTC, PHILCOMSAT and PHC.
On August 31, 2004, the following were elected during the annual stockholders’ meeting of
PHC conducted by the Nieto-PCGG group wherein Locsin was elected Chairman. Said election at
PHC was the offshoot of separate elections conducted by the two factions in POTC and
PHILCOMSAT, the Africa-Bildner group and the Nieto-PCGG group. In the July 28, 2004
stockholders’ meetings of POTC and PHILCOMSAT, Victor Africa was among those in the Africa-
Bildner group who were elected as Directors. He was designated as the POTC proxy to the
PHILCOMSAT stockholders’ meeting. While Locsin, Andal and Nieto, Jr. were also elected as
Directors, they did not accept their election as POTC and PHILCOMSAT Directors. Instead, the
Nieto-PCGG group held the stockholders’ meeting for PHILCOMSAT on August 9, 2004 at the
Manila Golf Club. Immediately after the stockholders’ meeting, an organizational meeting was held,
and Nieto, Jr. and Locsin were respectively elected as Chairman and President of PHILCOMSAT.
At the same meeting, they issued a proxy in favor of Nieto, Jr. and/or Locsin authorizing them to
represent PHILCOMSAT and vote the PHILCOMSAT shares in the stockholders’ meeting of PHC
scheduled on August 31, 2004.
Thereafter, the two factions took various legal steps including the filing of suits and
countersuits to gain legitimacy for their respective election as directors and officers of POTC and
PHILCOMSAT. The Africa group had sought the invalidation of the proxy issued in favor of Nieto,
Jr. and/or Locsin and consequent nullification of the elections held during the annual stockholders’
meeting of PHC on August 31, 2004. Africa in his capacity as President and CEO of PHILCOMSAT,
and as stockholder in his own right, wrote the board and management of PHC that PHILCOMSAT
will exercise its right of inspection over the books, records, papers, etc. pertinent to the business
transactions of PHC. In his letter, Nieto, Jr. said that Africa’s request will be referred to the PHC
Board of Directors or Executive Committee in view of the several pending cases involving the Africa
and Nieto-PCGG groups on one hand, and the PHC and its board of directors on the other. He
further advised Africa to inform them in writing of his reasons and purposes for such inspection. In
reply, Africa reiterated his request for inspection asserting that the PHILCOMSAT board of
directors was elected on September 22, 2005. On the day of the scheduled inspection,
PHILCOMSAT sent its representatives. However, Brodett disallowed the conduct of the inspection
which prompted PHILCOMSAT through its counsel to make a written query whether the refusal of
Brodett to permit the conduct of PHC’s inspection of corporate books and financial documents was
with the knowledge and authority of PHC’s board of directors. But no reply or communication was
received by Africa from the PHC.
PHILCOMSAT filed in the RTC a Complaint for Inspection of Books against the incumbent
PHC directors and/or officers, to enforce its right under Sections 74 and 75 of the Corporation Code
of the Philippines. The RTC dismissed the complaint for lack of jurisdiction. PHILCOMSAT
appealed to the CA thru a petition for review arguing that it is the RTC and not Sandiganbayan
Page 302 of 434

which has jurisdiction over the case involving a stockholder’s right to inspect corporate books and
records. The CA granted the petition.
Issue:
Whether it is the Sandiganbayan or RTC which has jurisdiction over a stockholders’ suit to
enforce its right of inspection under Section 74 of the Corporation Code
Ruling:
It is the RTC and not the Sandiganbayan which has jurisdiction over cases which do not
involve a sequestration-related incident but an intra-corporate controversy.
Originally, Section 5 of P.D. No. 902-A vested the original and exclusive jurisdiction over
cases involving the following in the SEC: Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members or associates; between any or all of them and
the corporation. Upon the enactment of Republic Act No. 8799, effective on August 8, 2000, the
jurisdiction of the SEC over intra-corporate controversies and the other cases enumerated in
Section 5 of P.D. No. 902-A was transferred to the Regional Trial Court.
The jurisdiction of the Sandiganbayan has been held not to extend even to a case involving
a sequestered company notwithstanding that the majority of the members of the board of directors
were PCGG nominees. The Court marked this distinction clearly in Holiday Inn (Phils.), Inc. v.
Sandiganbayan:
The original and exclusive jurisdiction given to the Sandiganbayan over PCGG cases
pertains to (a) cases filed by the PCGG, pursuant to the exercise of its powers under
Executive Order Nos. 1, 2 and 14, as amended by the Office of the President, and
Article XVIII, Section 26 of the Constitution, i.e., where the principal cause of action
is the recovery of ill-gotten wealth, as well as all incidents arising from, incidental
to, or related to such cases and (b) cases filed by those who wish to question or
challenge the commission’s acts or orders in such cases.
The complaint concerns PHILCOMSAT’s demand to exercise its right of inspection as

stockholder of PHC but which petitioners refused on the ground of the ongoing power struggle
within POTC and PHILCOMSAT that supposedly prevents PHC from recognizing PHILCOMSAT’s
representative (Africa) as possessing such right or authority from the legitimate directors and
officers. Clearly, the controversy is intra-corporate in nature as they arose out of intra-corporate
relations between and among stockholders, and between stockholders and the corporation.
_____________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION v. SUBIC BAY GOLF AND COUNTRY CLUB,
INC. AND UNIVERSAL INTERNATIONAL GROUP DEVELOPMENT CORPORATION
G.R. No. 179047, March 11, 2015, LEONEN, J.
Intra-corporate controversies, previously under the SEC's jurisdiction, are now under the
jurisdiction of RTCs designated as commercial courts. However, this does not oust the SEC of its
jurisdiction to determine if administrative rules and regulations were violated.
Page 303 of 434

Facts:
Subic Bay Golf Course operated by Subic Bay Metropolitan Authority (SBMA) and Universal
International Group of Taiwan (UIG) entered into a Lease and Development Agreement. SBMA
agreed to lease the golf course to UIG for 50 years while UIG agreed to develop, manage and
maintain the golf course and other related facilities within the complex. Later, Universal
International Group Development Corporation (UIGDC) which succeeded to the interests of
UIG executed a Deed of Assignment in favor of Subic Bay Golf and Country Club, Inc.
(SBGCCI). SBGCCI and UIGDC entered into a Development Agreement. After application,
SBGCCI was issued by SEC a Certificate of Permit to Offer Securities for Sale to the Public of its
propriety shares.
Regina Filart and Margarita Villareal informed the SEC that they had been asking UIGDC for
the refund of their payment for their SBGCCI shares claiming that there was failure to deliver
the promised amenities. SEC's Corporation Finance Department gave due course to Villareal and
Filart's letter-complaint. Due to UIGDC’s failure to comply with undertakings in the
Registration Statement and Prospectus, tantamount to misrepresentation, and in violation of
the provisions of the Securities Regulation Code, and its implementing rules and regulation, the
Certificate of Registration and Permit to Sell Securities to the Public issued to respondent
Subic Bay Golf and Country Club, Inc., were suspended.
SBGCCI and UIGDC filed a Petition for Review arguing that the letter-complaint filed by
Villareal and Filart involved an intra-corporate dispute that was under the jurisdiction of the
RTC and not the SEC. They also argued that the Securities Regulation Code does not grant
the SEC the power to order the refund of payment for shares of stock. The CA found that the
case involved an intra-corporate controversy and that SEC acted in excess of its jurisdiction
when it ordered UIGDC and SBGCCI to refund Villareal and Filart the amount they paid for
SBGCCI shares of stock.
Issue:
Whether the SEC has jurisdiction over the case
Ruling:
No. Actions pertaining to intra-corporate disputes should be filed directly before designated
Regional Trial Courts. Intra-corporate disputes brought before other courts or tribunals are
dismissible for lack of jurisdiction. The relationship test requires that the dispute be between
a corporation/partnership/association and the public; a corporation/partnership/association
and the state regarding the entity's franchise, permit, or license to operate; a
corporation/partnership/association and its stockholders, partners, members, or officers; and
among stockholders, partners, or associates of the entity.
The nature of the controversy test requires that the action involves the enforcement of
corporate rights and obligations. This case is an intra-corporate dispute, over which the RTC
has jurisdiction. It is a dispute between the corporation, SBGCCI, and its shareholders, Villareal
and Filart.
Page 304 of 434

Villareal and Filart's right to a refund of the value of their shares was based on SBGCCI and
UIGDC's alleged failure to abide by their representations in their prospectus. Specifically,
Villareal and Filart alleged in their letter-complaint that the world-class golf course that was
promised to them when they purchased shares did not materialize. This is an intra-corporate
matter under the RTC's jurisdiction. It involves the determination of a shareholder's rights under
the Corporation Code or other intra-corporate rules when the corporation or association fails to
fulfill its obligations.
However, even though the Complaint filed before SEC contains allegations that are intra-
corporate in nature, it does not necessarily oust it of its regulatory and administrative jurisdiction
to determine and act if there were administrative violations committed. Thus, when Villareal
and Filart alleged in their letter-complaint that SBGCCI and UIGDC committed
misrepresentations in the sale of their shares, nothing prevented the SEC from taking
cognizance of it to determine if SBGCCI and UIGDC committed administrative violations and
were liable under the Securities Regulation Code.
However, SEC's regulatory power does not include the authority to order the refund of the
purchase price of Villareal's and Filart's shares in the golf club. The issue of refund is intra-
corporate or civil in nature. Similar to issues such as the existence or inexistence of appraisal
rights, pre- emptive rights, and the right to inspect books and corporate records, the issue of
refund is an intra- corporate dispute that requires the court to determine and adjudicate the
parties' rights based on law or contract. Injuries, rights, and obligations involved in intra-
corporate disputes are specific to the parties involved. They do not affect the SEC or the public
directly.
__________________________________________________________________________________
ROBERTO L. ABAD, MANUEL D. ANDAL, BENITO V. ARANETA, PHILIP G.

BRODETT, ENRIQUE L. LOCSIN AND ROBERTO V. SAN JOSE v. PHILIPPINE
COMMUNICATIONS SATELLITE CORPORATION, REPRESENTED BY VICTOR
AFRICA
G.R. No. 200620, March 18, 2015, VILLARAMA, JR., J.
The jurisdiction of the Sandiganbayan has been held not to extend even to a case
involving a sequestered company notwithstanding that the majority of the members of the
board of directors were PCGG nominees.
Facts:
This case is a remnant of the multiple suits generated by the two factions (Nieto-PCGG
group and Africa-Bildner group) battling for control of two sequestered corporations.
Philcomsat and POTC were sequestered by PCGG. Philcomsat owns 81% of the outstanding
capital stock of Philcomsat Holdings (PHC). The majority shareholders of Philcomsat are
also the seven families who have owned and controlled POTC.
Africa, in his capacity as President of Philcomsat, and as stockholder in his own right,
wrote the board and management of PHC that Philcomsat will exercise its right of inspection
over the books of PHC. PHC refused prompting Africa to file a case in the RTC. The Nieto-
Page 305 of 434

PCGG group claim that RTC has no jurisdiction since the main controversy is rooted upon
the issue of who between the Africa and Nieto-PCGG groups is the legitimate board of
directors. It was further pointed out that POTC and PHILCOMSAT were both under
sequestration by the PCGG, and hence all issues and controversies arising therefrom or
related or incidental thereto fall under the exclusive and original jurisdiction of the
Sandiganbayan.
Issue:
Whether the RTC has jurisdiction over a stockholders’ suit
Ruling:
Yes. It is the RTC and not the Sandiganbayan which has jurisdiction over cases which
do not involve a sequestration-related incident but an intra-corporate controversy. Upon the
enactment of Republic Act No. 8799 (The Securities Regulation Code), the jurisdiction of
the SEC over intra- corporate controversies and the other cases enumerated in Section 5 of
P.D. No. 902-A was transferred to the RTC. Issues regarding the propriety of the election of
a party as a Director and his authority to act in that capacity should be determined only by
the RTC pursuant to the pertinent law on jurisdiction because they do not concern the
recovery of ill-gotten wealth.
The complaint concerns PHILCOMSAT’s demand to exercise its right of inspection

as stockholder of PHC which petitioners refused on the ground of the ongoing power
struggle within POTC and PHILCOMSAT that supposedly prevents PHC from recognizing
PHILCOMSAT’s representative (Africa) as possessing such right or authority from the
legitimate directors and officers. The controversy is intra-corporate in nature as they arose
out of intra-corporate relations between and among stockholders, and between stockholders
and the corporation.
PROHIBITIONS ON FRAUD, MANIPULATION AND INSIDER TRADING
Securities and Exchange Commission vs. Oudine Santos

G.R. No. 195542; March 19, 2014
J. Perez
The violation of Section 28 of the SRC has the following elements: (a) engaging in the business
of buying or selling securities in the Philippines as a broker or dealer; or (b) acting as a salesman; or(c)
acting as an associated person of any broker or dealer, unless registered as such with the SEC. Thus,
a person is liable for violating Section 28 of the SRC where, acting as a broker, dealer or salesman, is
in the employ of a corporation which sold or offered for sale unregistered securities in the Philippines.
Facts:
To do business in the Philippines, PIPC-BVI, a foreign corporation registered in the British Virgin
Islands, was incorporated as Philippine International Planning Center Corporation (PIPC
Corporation).
Page 306 of 434

When the head of PIPC Corporation had gone missing with the monies and investments of
significant number of investors, the SEC was flooded with complaints against PICP Corporation, its
directors, officers, employees, agents and brokers for the alleged violation of certain provisions of
the Securities Regulation Code. Soon thereafter, the SEC filed a complaint-affidavit for the violation
of Sections 8, 26 and 28 of the SRC before the DOC. Among the respondents were the directors,
officers and employees of PIPC, including Oudine Santos.
Private complainants Luisa Lorenzo and Ricky Sy charged Santos in her capacity as investment
consultant of PIPC who actively engaged in the solicitation and recruitment of investors. Private
complainants maintain that Santos acted as the corporation’s agent and made representations
regarding tis investment products and that of the supposed global corporation PIPC-BVI.
Facilitating Lorenzo’s and Sy’s investment with the corporation, Santos represented to the tow that
investing with PIPC Corporation, an affiliate of PIPC-BVI, would be safe and full-proof.
Later on, the DOJ issued a resolution indicting, among others, Santos for the violation of Section
28 of the SRC. Specifically referring to Santos as Investment Consultant of the corporation, the DOJ
found probable cause to indict her for violation of Section 28 of the SRC for engaging in the business
of selling or offering for sale securities on behalf of the PIPC Corporation without her being
registered as a broker, dealer, salesman or an associated person.
Upon separate motions for reconsideration, the DOJ panel issued a Resolution modifying its
previous ruling and excluding one of the respondents therein. Santos filed a petition for review
before the Office of the Secretary of the DOJ assailing the Resolution and claiming that she was a
mere clerical employee/information provider who never solicited nor recruited investors,
particularly Lorenzo and Sy. Thereafter, the Office of the Secretary of the DOJ issued a Resolution
excluding Santos from prosecution for violation of Section 28 of the SRC.
After the denial of the motion for reconsideration, the SEC filed a petition for certiorari before the
CA seeking to annul the Resolution of the DOJ. The CC dismissed SEC’s petition. Hence, the appeal
by certiorari raising the sole error of Santos’ exclusion from the Information for violation of Section
28 of the SRC.
Issue:
Whether or not the respondent is an Investment Consultant and the transaction between her and
the petitioners constitutes as an investment contract.
Ruling:
Petition Granted.
We sustain the DOJ panel’s findings which were not overruled by the Secretary of the DOJ and the
appellate court, that PIPC Corporation and/or PIPC-BVI was: (1) an insurer of securities without
the necessary registration or license form the SEC, and (2) engage in the business of buying or
selling securities. In connection therewith, we look to Section 3 of the Securities Regulation Code
for pertinent definition of terms:
Page 307 of 434

Sec. 3. Definition of Terms.-xxx

xxx
3.3. “Broker” is a person engaged in the business of buying and selling
securities for the account of others.
3.4. “Dealer” means any person who buys and sells securities for his/her own
account in the ordinary course of business.
3.5. “Associated person of a broker or dealer” is an employee thereof whom,
directly exercises control of supervisory authority, but does not include a salesman,
or an agent or a person whose functions are solely clerical or ministerial.
xxx
3.13. “Salesman” is a natural person, employed as such or as an agent, by a
dealer, issuer or broker to buy and sell securities.
To determine whether the DOJ Secretary’s Resolution was tainted with grave abuse of discretion,
we pass upon the elements for violation of Section 28 of the SRC: (a) engaging in the business of
buying or selling securities in the Philippines as a broker or dealer; or (b) acting as a salesman; or(c)
acting as an associated person of any broker or dealer, unless registered as such with the SEC.
Trying it all in, there is no quarrel that Santos was in the employ of PIPC Corporation and/or PIPC-
BVI, a corporation which sold or offered for sale unregistered securities in the Philippines. To
escape probable culpability, Santos claims that she was a mere clerical employee of PIPC
Corporation and/or PIPC-BVI and was never an agent or salesman who actually solicited the sale
of or sold unregistered securities issued by PIPC Corporation and/or PIPC-BVI.
Solicitation is that act of seeking or asking for business or information; it is not a commitment to
an agreement.
Santos, by the very nature of her function as when she now unaffectedly calls an information
provider, brought about by the sale of securities made by PIPC Corporation and/or PIPC-BVI to
certain individuals, specifically private complainants Sy and Lorenzo by providing information on
the investment products of PIPC Corporation and/or PIPC-BVI with the end in view of PIPC
Corporation closing a sale.
While Santos was not a signatory to the contracts Sy’s or Lorenzo’s investments, Santos procured
the sales of these unregistered securities to the two complainants by providing information on the
investment products being offered for sale byPIPC Corporation and/or PIPC-BVI and convincing
them to invest therein.
No matter Santos’ strenuous objections, it is apparent that she connected the probable investors,
Sy and Lorenzo, to PIPC Corporation and/or PIPC-BVI, acting as an ostensible agent of the latter
on the viability of PIPC Corporation as an investment company. At each point of Sy’s and Lorenzo’s
investment, Santos’ participation thereon, even if not shown strictly on paper, was prima facie
established.
In all of the documents presented by Santos, she never alleged or pointed out that she did not
receive extra consideration for her simply providing information to Sy and Lorenzo about PIPC
Corporation and/or PIPC-BVI. Santos only claims that the monies invested by Sy and Lorenzo did
not pass though her hands. In short, Santos did not present in evidence her salaries as supposed
Page 308 of 434

“mere clerical employee or information provider” of PIPC-BVI. Such presentation would have
foreclosed all questions on her status within PIPC Corporation and/or PIPC-BVI at the lowest rung
of the ladder who only provided information and who did not use her discretion in any capacity.
The transaction initiated by Santos with Sy and Lorenzo, respectively, is an investment contract or
participation in a profit sharing agreement that falls within the definition of law. When the investor
is relatively uniformed and turns over his money to others, essentially depending upon their
representations and their honesty and skill in managing it, the transaction generally is considered
to be an investment contract. The touchstone is the presence of an investment in a common venture
premised on a reasonable expectation of profits to be derived from the entrepreneurial or
managerial efforts of others.
At the bottom, the exculpation of Santos cannot be preliminarily established simply by asserting
that she did not sign the investment contracts, as the facts alleged in this case constitute fraud
perpetrated on the public. Specially so because the absence of Santo’s signature in the contract is,
likewise, indicative of a scheme to circumvent and evade liability should the pyramid fall apart.
_____________________________________________________________________________________
MARGARITA M. BENEDICTO-MUÑOZ v. MARIA ANGELES CACHO-OLIVARES,

EDGARDO P. OLIVARES, PETER C. OLIVARES, CARMELA Q. OLIVARES, MICHAEL C.
OLIVARES, ALEXANDRA B. OLIVARES, AND MELISSA C. OLIVARES
G.R. No. 179121, November 09, 2015, JARDELEZA, J.
The SRC punishes the persons primarily liable for fraudulent transactions under Section
58 and their aiders or abettors under Section 51.5, by making their liability for damages joint
and solidary. Thus, one cannot condone the liability of the person primarily liable and proceed
only against his aiders or abettors because the liability of the latter is tied up with the former.
Liability attaches to the aider or abettor precisely because of the existence of the liability of the
person primarily liable.
Facts:
Olivares filed a complaint for stock market fraud against Cuaycong and other
defendant stock market brokerage firms such as Abacus Securities Corporation, and Sapphire
Securities, Inc., among others. Later on, the Cuaycong brothers and Olivares manifested to
the RTC that they had amicably settled their differences and entered into a Compromise
Agreement. Olivares also agreed to drop the Cuaycong brothers as defendants in the Case.
Thereafter the RTC dismissed the complaint, holding that the Cuaycong brothers were
indispensable parties sued with the other defendants, under a common cause of action,
and that by reason of the dismissal of the complaint against the Cuaycongs, it had lost
competency to act on the instant complaint for lack of sufficient legal basis, the benefits of
dismissal having been extended to the other defendants.
Issue:
Whether the dismissal of the case as against the Cuaycong brothers benefits the
other defendants in the stock market fraud case
Page 309 of 434

Ruling:
Yes. The dismissal of the case as against the Cuaycong brothers inures to the benefit of
other defendants because they were sued under a single and/or common cause of action
with the Cuaycong brothers; and the Cuaycong brothers are indispensable parties, without
whom no final determination can be had on the case. The allegations plead the substantive
unity in the alleged fraud and deceit that the Cuaycong brothers and the brokerage firms
committed against Olivares. The indispensable parties are not only the Cuaycong brothers
but also the petitioners. As indispensable parties, since they had played various
interconnected roles that led to the singular injury and loss of the Olivares, their liabilities
cannot be separately determined. The dismissal of the action against the Cuaycong brothers
also warrants the dismissal of the suit against the other defendants.
PROXY SOLICITATION
SECURITIES AND EXCHANGE COMMISSION, vs. THE HONORABLE COURT OF APPEALS,

OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING TIA
ASTRA SECURITIES CORPORATION, vs. OMICO CORPORATION, EMILIO S. TENG AND
TOMMY KIN HING TIA,
G.R. No. 187702, October 22, 2014, CJ. SERENO,
The power of the SEC to investigate violations of its rules on proxy solicitation is unquestioned
when proxies are obtained to vote on matters unrelated to the cases enumerated under Section 5 of
Presidential Decree No. 902-A. However, when proxies are solicited in relation to the election of
corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules
on proxy solicitation, should be properly seen as an election controversy within the original and
exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5 (c)
of Presidential Decree No. 902-A
Indeed, the validation of proxies in this case relates to the determination of the existence of a
quorum. Nonetheless, it is a quorum for the election of the directors, and, as such, which requires the
presence – in person or by proxy – of the owners of the majority of the outstanding capital stock of
Omico. Also, the fact that there was no actual voting did not make the election any less so, especially
since Astra had never denied that an election of directors took place.
Facts:
Omico Corporation (Omico) is a company whose shares of stock are listed and traded in
the Philippine Stock Exchange, Inc. Astra Securities Corporation (Astra) is one of the stockholders
of Omico owning about 18% of the latter’s outstanding capital stock.
Omico scheduled its annual stockholders’ meeting. It set the deadline for submission of
proxies on and the validation of proxies. Astra objected to the validation of the proxies issued in
favor of Tommy Kin Hing Tia (Tia) as well as the inclusion of the proxies issued in favor of Tia
and/or Martin Buncio.
Page 310 of 434

Astra maintained that the proxy issuers, who were brokers, did not obtain the required
express written authorization of their clients when they issued the proxies in favor of Tia. In so
doing, the issuers were allegedly in violation of SRC or Republic Act No. 8799 Rules. Despite the
objections of Astra, Omico’s Board of Inspectors declared that the proxies issued in favor of Tia
were valid.
Astra filed a Complaint before the Securities and Exchange Commission (SEC) praying for
the invalidation of the proxies issued in favor of Tia. Astra also prayed for the issuance of a cease
and desist order (CDO) enjoining the holding of Omico’s annual stockholders’ meeting until the
SEC had resolved the issues pertaining to the validation of proxies which SEC granted.
The stockholders’ meeting proceeded as scheduled prompting Astra to institute before the
SEC a Complaint for indirect contempt against Omico for disobedience of the CDO. On the other
hand, Omico filed before the CA a Petition for Certiorari and Prohibition imputing grave abuse of
discretion on the part of the SEC for issuing the CDO. CA declared the CDO null and void since the
controversy was an intra-corporate dispute. The SRC expressly transferred the jurisdiction over
actions involving intracorporate controversies from the SEC to the regional trial courts.
Issue:
Whether or not the SEC has jurisdiction over controversies arising from the validation of
proxies for the election of the directors of a corporation.
Ruling:
No, SEC has no jurisdiction over controversies arising from the validation of proxies for the
election of the directors of a corporation
In GSIS v. CA, it was necessary for the Court to determine whether the action to invalidate
the proxies was intimately tied to an election controversy. Hence, the Court pronounced: Under
Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular
trial courts with respect to election related controversies is specifically confined to "controversies
in the election or appointment of directors, trustees, officers or managers of corporations,
partnerships, or associations." Evidently, the jurisdiction of the regular courts over so-called
election contests or controversies under Section 5 (c) does not extend to every potential subject
that may be voted on by shareholders, but only to the election of directors or trustees, in which
stockholders are authorized to participate under Section 24 of the Corporation Code.
This qualification allows for a useful distinction that gives due effect to the statutory right
of the SEC to regulate proxy solicitation, and the statutory jurisdiction of regular courts over
election contests or controversies. The power of the SEC to investigate violations of its rules on
proxy solicitation is unquestioned when proxies are obtained to vote on matters unrelated to the
cases enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies are
solicited in relation to the election of corporate directors, the resulting controversy, even if it
ostensibly raised the violation of the SEC rules on proxy solicitation, should be properly seen as an
election controversy within the original and exclusive jurisdiction of the trial courts by virtue of
Section 5.2 of the SRC in relation to Section 5 (c) of Presidential Decree No. 902-A.
Page 311 of 434

The Court explained that the power of the SEC to regulate proxies remains in place in
instances when stockholders vote on matters other than the election of directors. The test is
whether the controversy relates to such election. All matters affecting the manner and conduct of
the election of directors are properly cognizable by the regular courts. Otherwise, these matters
may be brought before the SEC for resolution based on the regulatory powers it exercises over
corporations, partnerships and associations.
Indeed, the validation of proxies in this case relates to the determination of the existence of
a quorum. Nonetheless, it is a quorum for the election of the directors, and, as such, which requires
the presence – in person or by proxy – of the owners of the majority of the outstanding capital stock
of Omico. Also, the fact that there was no actual voting did not make the election any less so,
especially since Astra had never denied that an election of directors took place.
Court finds no merit either in the proposal of Astra regarding the "two (2) viable, non-
exclusive and successive legal remedies to question the validity of proxies." It suggests that the
power to pass upon the validity of proxies to determine the existence of a quorum prior to the
conduct of the stockholders’ meeting should lie with the SEC; but, after the stockholders’ meeting,
questions regarding the use of invalid proxies in the election of directors should be cognizable by
the regular courts, since there was already an election to speak of. There is no point in making
distinctions between who has jurisdiction before and who has jurisdiction after the election of
directors, as all controversies related thereto - whether before, during or after - shall be passed upon
by regular courts as provided by law. The Court closes with an observation.
CIVIL LIABILITY
CITIBANK, N.A. and the CITIGROUP PRIVATE BANK vs. ESTER H. TANCO- GABALDON, et
al./ CAROL LIM vs. ESTER H. TANCO- GABALDON, et al.
G.R. No. 198444/G.R. No. 198469-70. September 4, 2013
J. Reyes
The phrase "any liability" in Section 62.2 of the SRC refers only to civil liability applying the
rule on statutory construction that every part of the statute must be interpreted with reference to the
context, i.e., that every part of the statute must be considered together with the other parts, and kept
subservient to the general intent of the whole enactment. Section 62.2 when read together with
Sections 56 57, 57.1 (a) and (b) indicates that the liability is limited only to civil liability. Given the
absence of a prescriptive period for the enforcement of the criminal liability in violations of the SRC,
Act No. 3326 now comes into play.
Facts:
On September 21, 2007, Ester Gabaldon , Arsenio Tanco and the Heirs of Ku Tiong Lam
(respondents) filed with the Securities and Exchange Commission’s Enforcement and Prosecution
Department (SEC-EPD) a complaint for violation of the Revised Securities Act and the Securities
Regulation Code (SRC) against petitioners Citibank, Citigroup and Carol Lim, who is Citigroup’s
Vice-President and Director. In their Complaint, the respondents alleged that they were joint
account holders of petitioner Citigroup and sometime in the year 2000, Lim induced them into
Page 312 of 434

signing subscription agreements- one for the purchase of USD 2,000,000.00 worth of Ceres II
Finance Ltd. Income Notes and two for the purchase of USD 500,000.00 worth of Aeries Finance II
Ltd. Senior Subordinated Income Notes. Later on the respondents learned that their investments
declined, until their account was totally wiped out. Upon verification with the SEC, they learned
that the Notes they purchased were not duly registered securities. They petitioners are not duly-
registered security issuers, brokers, dealers or agents.
Hence, the respondents prayed in their complaint that petitioners be held administratively liable
pursuant to Section 54(ii), SRC; that the petitioners’ existing registration/s or secondary license/s
to act as a broker/dealer in securities be revoked and a criminal complaint be filed and endorsed to
the Department of Justice (DOJ) for investigation. The respondents replied to the BSP disclaiming
any participation by the Citibank or its officers on the transactions and products complained of.
Meanwhile, the SEC-EPD issued an order terminating the investigation on the ground that
respondents' action already prescribed. According to the SEC-EPD, the aforesaid complaint was
filed before the [SEC-EPD] on 21 September 2007 while a similar complaint was lodged before the
[DOJ] on October 2005. Seven (7) years had lapsed before the filing of the action before the SEC
while the complaint instituted before the DOJ was filed one month after the expiration of the
allowable period. The respondents filed a Notice and Memorandum of Appeal to the SEC en banc
and the latter reinstated the complaint and ordered the investigation of the case. Thus, petitioners
Citibank and Citigroup filed a petition for review with the Court of Appeals. The CA affirmed the
SEC en banc decision.
Issues:
(1) Whether the criminal action for offenses punished under the SRC filed by the respondents
against the petitioners has already prescribed; and
(2) Whether the filing of the action for petitioners' administrative liability barred by laches
Ruling:
As to prescriptive period
The Resolution of the issue raised by the petitioners call for an examination of the pertinent
provisions of the SRC, particularly Section 62. Section 62 provides for two different prescriptive
periods: Section 62.1 specifically sets out the prescriptive period for the liabilities created under
Sections 56, 57, 57.1(a) and 57.1(b). Section 56 refers to Civil Liabilities on Account of False
Registration Statement while Section 57 pertains to Civil Liabilities on Arising in Connection with
Prospectus, Communications and Reports. Under these provisions, enforcement of the civil liability
must be brought within two (2) years or five (5) years, as the case may be. On the other hand,
Section 62.2 provides for the prescriptive period to enforce any liability created under the SRC. The
phrase "any liability" refers only to civil liability applying the rule on statutory construction that
every part of the statute must be interpreted with reference to the context, i.e., that every part of
the statute must be considered together with the other parts, and kept subservient to the general
intent of the whole enactment. Section 62.2 when read together with Sections 56 57, 57.1 (a) and (b)
indicates that the liability is limited only to civil liability.
Page 313 of 434

Given the absence of a prescriptive period for the enforcement of the criminal liability in violations
of the SRC, Act No. 3326 now comes into play. Panaguiton, Jr. v. Department of Justice expressly
ruled that Act No. 3326 is the law applicable to offenses under special laws which do not provide
their own prescriptive periods. Under Section 73 of the SRC, violation of its provisions or the rules
and regulations is punishable with imprisonment of not less than seven (7) years nor more than
twenty-one (21) years. Applying Section 1 of Act No. 3326, a criminal prosecution for violations of
the SRC shall, therefore, prescribe in twelve (12) years. The prescription shall begin to run from the
day of the commission of the violation of the law and if the same be not known at the time, from
the discovery thereof and the institution of judicial proceedings for its investigation and
punishment.
In the given case, respondents alleged in their complaint that the transactions occurred between
September 2000, when they purchased the Notes and July 31, 2003, when their account was totally
wiped out. Nevertheless, it was only sometime in November 2004 that the respondents discovered
that the securities they purchased were actually worthless. Thereafter, the respondents filed on
October 23, 2005 with the Mandaluyong City Prosecutor’s Office a complaint for violation of the
RSA and SRC. In Resolution dated July 18, 2007, however, the prosecutor’s office referred the
complaint to the SEC. Finally, the respondents filed the complaint with the SEC on September 21,
2007. Based on the foregoing antecedents, only seven (7) years lapsed since the respondents
invested their funds with the petitioners, and three (3) years since the respondents’ discovery of the
alleged offenses, that the complaint was correctly filed with the SEC for investigation. Hence, the
respondents’ complaint was filed well within the twelve (12)-year prescriptive period provided by
Section 1 of Act No. 3326.
As to laches
Laches has been defined as the failure or neglect for an unreasonable and unexplained length of
time to do that which, by exercising due diligence, could or should have been done earlier, thus,
giving rise to a presumption that the party entitled to assert it either has abandoned or declined to
assert it.
Section 54 of the SRC provides for the administrative sanctions to be imposed against persons or
entities violating the Code, its rules or SEC orders. Just as the SRC did not provide a prescriptive
period for the filing of criminal actions, it likewise omitted to provide for the period until when
complaints for administrative liability under the law should be initiated. On this score, it is a well-
settled principle of law that laches is a recourse in equity, which is, applied only in the absence of
statutory law. And though laches applies even to imprescriptible actions, its elements must be
proved positively. Ultimately, the question of laches is addressed to the sound discretion of the
court and, being an equitable doctrine, its application is controlled by equitable considerations.
In this case, records bear that immediately after the respondents discovered in 2004 that the
securities they invested in were actually worthless, they filed on October 23, 2005 a complaint for
violation of the RSA and SRC with the Mandaluyong City Prosecutor's Office. It took the prosecutor
three (3) years to resolve the complaint and refer the case to the SEC, in conformity with the Court's
pronouncement in Baviera that all complaints for any violation of the SRC and its implementing
rules and regulations should be filed with the SEC. Clearly, the filing of the complaint with the SEC
on September 21, 2007 is not barred by laches as the respondents' judicious actions reveal otherwise.
Page 314 of 434

_____________________________________________________________________________________
SALLY YOSHIZAKI vs. JOY TRAINING CENTER OF AURORA, INC.

G.R. No. 174978. July 31, 2013
J. Brion
An action to nullify the sale of real properties on the ground that there is no contract of agency
between the parties is cognizable by courts of general jurisdiction. It is beyond the ambit of SEC's
original and exclusive jurisdiction prior to the enactment of RA 8799 which only took effect August 3,
2000.
The determination of the existence of a contract of agency and the validity of a contract of
sale requires the application of the relevant provisions of the Civil Code. It is a well-settled rule that
disputes concerning the application of the Civil Code are properly cognizable by courts of general
jurisdiction.
Facts:
Respondent Joy Training Center of Aurora, Inc. (Joy Training) is a non-stock, non-profit religious
educational institution. It was the registered owner of a parcel of land and the building thereon
(real properties) located in Baler, Aurora. On November 10, 1998, the spouses Richard and Linda
Johnson (members of the BOT) sold the real properties, a Wrangler jeep, and other personal
properties in favor of the spouses Sally and Yoshio Yoshizaki. On the same date, a Deed of Absolute
Sale were executed.
As a consequence of the sale, Joy Training represented by its Acting Chairperson Reuben V. Rubio
filed an action for the Cancellation of Sale and Damages with prayer for the issuance of a Temporary
Restraining Order and/or Writ of Preliminary Injunction against the respondent spouses before the
Regional Trial Court of Baler, Aurora (RTC). In the complaint, Joy Training alleged that the spouses
Johnson sold its properties without the requisite authority from the board of directors. It assailed
the validity of a board resolution which purportedly granted the spouses Johnson the authority to
sell its real properties. It averred that only a minority of the board authorized the sale through the
resolution.
The spouses Yoshizaki on the other hand raised as defense that Joy Training authorized the spouses
Johnson to sell the parcel of land; that a majority of the board of trustees approved the resolution;
that Connie Dayot, the corporate secretary, issued a certification authorizing the spouses Johnson
to act on Joy Training’s behalf; and lastly, they assailed the RTC’s jurisdiction over the case. They
posited that the case is an intra-corporate dispute cognizable by the Securities and Exchange
Commission (SEC). RTC ruled in favor of spouses Yoshizaki.
Joy Training appealed to the CA. The CA rendered a decision affirming the jurisdiction of RTC to
hear the case since it involves recovery of ownership. However as to the resolution of the BOT
authorizing spouses Johnson it held that it is void because it was not approved by a majority of the
board of trustees. It stated that under Section 25 of the Corporation Code, the basis for determining
the composition of the board of trustees is the list fixed in the articles of incorporation.
Furthermore, Section 23 of the Corporation Code provides that the board of trustees shall hold
Page 315 of 434

office for one year and until their successors are elected and qualified. Seven trustees constitute the
board since Joy Training did not hold an election after its incorporation.
Issues:
1) Whether or not the RTC has jurisdiction over the present case; and
2) Whether or not there was a contract of agency to sell the real properties between Joy Training
and the spouses Johnson.
3) As a consequence of the second issue, whether or not there was a valid contract of sale of the real
properties between Joy Training and the spouses Yoshizaki.
Ruling:
RTC has jurisdiction over the case. Joy Training seeks to nullify the sale of the real properties on
the ground that there was no contract of agency between Joy Training and the spouses Johnson.
This was beyond the ambit of the SEC’s original and exclusive jurisdiction prior to the enactment
of Republic Act No. 8799 which only took effect on August 3, 2000. The determination of the
existence of a contract of agency and the validity of a contract of sale requires the application of the
relevant provisions of the Civil Code. It is a well-settled rule that disputes concerning the
application of the Civil Code are properly cognizable by courts of general jurisdiction. Indeed, no
special skill requiring the SEC’s technical expertise is necessary for the disposition of this issue and
of this case.
As to the issue of contract of agency, the Court ruled in the negative. As a general rule, a contract
of agency may be oral. However, it must be written when the law requires a specific form.
Specifically, Article 1874 of the Civil Code provides that the contract of agency must be written for
the validity of the sale of a piece of land or any interest therein. Otherwise, the sale shall be void. A
related provision, Article 1878 of the Civil Code, states that special powers of attorney are necessary
to convey real rights over immovable properties. Further the special power of attorney mandated
by law must be one that expressly mentions a sale or that includes a sale as a necessary ingredient
of the authorized act. Such power must be must express in clear and unmistakable language. In the
present case, the pieces of documentary evidence (TCT No. T-25334, the resolution, and the
certification) by Sally did not convince the Court as to the existence of agency. Necessarily, the
absence of a contract of agency renders the contract of sale unenforceable. Joy Training effectively
did not enter into a valid contract of sale with the spouses Yoshizaki.
Finally, the Court reiterated the established principle that persons dealing with an agent must
ascertain not only the fact of agency, but also the nature and extent of the agent’s authority. A third
person with whom the agent wishes to contract on behalf of the principal may require the
presentation of the power of attorney, or the instructions as regards the agency. The basis for agency
is representation and a person dealing with an agent is put upon inquiry and must discover on his
own peril the authority of the agent. Thus, Sally bought the real properties at her own risk; she
bears the risk of injury occasioned by her transaction with the spouses Johnson.
_____________________________________________________________________________________
Page 316 of 434

THE SECURITIES AND EXCHANGE COMMISSION (SEC) CHAIRPERSON TERESITA J.

HERBOSA, COMMISSIONER MA. JUANITA E. CUETO, COMMISIONER RAUL J.
PALABRICA, COMMISSIONER MANUEL HUBERTO B. GAITE, COMMISIONER ELADIO M.
JALA, and THE SEC ENFORCEMENT AND PROSECUTION DEPARTMENT, Petitioners, -
versus - CJH DEVELOPMENT CORPORATION and CJH SUITES CORPORATION, herein
represented by its EXECUTIVE VICEPRESIDENT AND CHIEF OPERATING OFFICER,
ALFREDO R. YNIGUEZ III, Respondents.
G.R. No. 210316, THIRD DIVISION, November 28, 2016, PERALTA, J.
In fact, the non-appealability of a CDO issued by the SEC is provided for under the 2006 Rules
of Procedure of the Commission. Thus, Section 10- 8 of the Rules provides: xxx A CDO when issued,
shall not be the subject of an appeal and no appeal from it will be entertained; xxx. Furthermore,
Section 10-3 of the 2006 Rules of Procedure of the SEC provides that the appropriate remedy to a party
against whom a CDO was issued is to file a motion to lift the assailed CDO. Since the law and the
SEC Rules require that this motion be heard by the SEC, it is during this hearing that respondents
could have presented evidence in support of their contentions.
The SEC was not mandated to allow herein respondents to participate in the investigation
conducted by the Commission prior to the cease and desist order's issuance. In the case of Primanila
Plans, Inc. v. Securities and Exchange Commission, the Court held: The law is clear on the point that
a cease and desist order may be issued by the SEC motu proprio, it being unnecessary that it results
from a verified complaint from an aggrieved party. A prior hearing is also not required whenever
the Commission finds it appropriate to issue a cease and desist order that aims to curtail fraud or
grave or irreparable injury to investors.
The main issue, as to whether or not the sale of "The Manor" or "The Suites" units to the
general public under the "leaseback" or "money-back" scheme is a form of investment
contract or sale of securities, is not a pure question of law. On the contrary, it involves a
question of fact that falls under the primary jurisdiction of the SEC.
FACTS:
Herein respondent CJH Development Corporation (CJHDC) is engaged in the acquisition,

development, sale, lease and management of real estate and any improvements thereon or any
interest and right therein. Respondent CJH Suites Corporation (CJHSC), on the other hand, is a
wholly-owned subsidiary of CJHDC which was formed primarily for the purpose of acquiring,
maintaining, operating and managing hotels, inns, lodging houses, restaurants and other allied
businesses.
CJHDC entered into a Lease Agreement (Agreement) with the Bases Conversion and Development
Authority (BCDA) for the development into a public tourism complex, multiple-use forest
watershed and human resource development center, of a 247-hectare property within the John Hay
Special Economic Zone in Baguio City. Subsequently, CJHDC came up with a development plan
and put it into effect. Part of such development plan was the construction of two (2) condominium-
hotels (condo tels) which it named as "The Manor" and "The Suites".
Subject to CJHDC's leasehold rights under the Agreement, the residential units in these condotels
were then offered for sale to the general public by means of two schemes. The first is a straight
Page 317 of 434

purchase and sale contract where the buyer pays the purchase price for the unit bought, either in
lump sum or on installment basis and, thereafter, enjoys the benefits of full ownership, subject to
payment of maintenance dues and utility fees. The second scheme involved the sale of the unit with
an added option to avail of a "leaseback" or a "money-back" arrangement. Under this added option,
the buyer pays for the unit bought and, subsequently, surrenders its possession to the management
of CJHDC or CJHSC. These corporations would then create a pool of these units and, in turn, will
offer them for billeting under the management of the hotel operated by the Camp John Hay Leisure,
Inc. (CJHLJ). The buyers who opt for the "leaseback" arrangement will receive either a proportionate
share in seventy percent (70%) of the annual income derived from the hotel operation of the pooled
rooms or a guaranteed eight percent (8%) return on their investment. On the other hand, those
who choose to avail of the "money-back" arrangement are entitled to a return of the purchase price
they paid for the units by expiration of the Lease Agreement in 2046.
Subsequently, the BCDA acquired information regarding CJHDC and CJHSC's scheme of selling
"The Manor" and "The Suites" units through "leaseback" or "money-back" terms. Hence, the BCDA
requested the SEC to conduct an investigation into the operations of CJHDC and CJHSC on the
belief that the "leaseback" or "money-back" arrangements they are offering to the public is, in
essence, investment contracts which are considered as securities under Republic Act No. 8799,
otherwise known as the Securities Regulation Code (SRC). The Enforcement and Prosecution
Department (EPD) of the SEC conducted its own investigation and on the basis of its findings, it
filed a Motion for Issuance of Cease and Desist Order (CDO) with the SEC En Banc praying that
CJHDC and CJHSC immediately cease and desist "from further engaging in activities of selling
and/or offering for sale investment contracts covering the condotel units on "leaseback" and/or
"money-back" arrangements until the requisite registration statement is duly filed with and
approved by the Commission and the corresponding permit to offer/sell securities is issued."
The SEC En Banc issued the CDO finding that there is a prima facie evidence that respondents
CJH DEVELOPMENT CORPORATION and its wholly-owned subsidiary CJH SUITES
CORPORATION, are engaged in the business of selling securities without the proper registration
issued by this Commission in violation of Section 8 of the SRC. However, on appeal to CA, the CDO
was annulled.
ISSUE:
1. Whether the appeal to CA is the appropriate remedy to assail the issuance of CDO by SEC en
banc.
2. Whether the respondents have exhausted all available administrative remedies to justify its
immediate recourse for relief before the CA.
RULING:
1. Appeal is not an appropriate remedy since the challenged CDO is an interlocutory

order. It is a settled rule that an appeal may only be taken from a judgment or final order that
completely disposes of the case and that an interlocutory order is not appealable until after the
rendition of the judgment on the merits.
In the present case, it is clear from the dispositive portion of the CDO that its issuance is based on
the findings of the SEC that there exists prima facie evidence that respondents are engaged in the
Page 318 of 434

business of selling securities without the proper registration issued by the Commission. It means
that the findings of the SEC, as contained in the assailed CDO, can still be refuted and disproved
by contrary evidence. This only means that the CDO is not final, is just provisional, and that the
prohibition thereunder is merely temporary, subject to the determination of the parties' respective
evidence in a subsequent hearing. It is therefore, clear that the subject CDO, being interlocutory,
may not be the subject of an appeal.
In fact, the non-appealability of a CDO issued by the SEC is provided for under the 2006 Rules of
Procedure of the Commission. Thus, Section 10- 8 of the Rules provides: xxx A CDO when issued,
shall not be the subject of an appeal and no appeal from it will be entertained; xxx. Furthermore,
Section 10-3 of the 2006 Rules of Procedure of the SEC provides that the appropriate remedy to a
party against whom a CDO was issued is to file a motion to lift the assailed CDO. Since the law
and the SEC Rules require that this motion be heard by the SEC, it is during this hearing that
respondents could have presented evidence in support of their contentions.
2. Respondents' failed to exhaust all administrative remedies available to them and

hence, the CA has no jurisdiction to annul the CDO issued by SEC en banc.
The CA, in justifying that it has jurisdiction over the case, ruled that the following exceptions to the
doctrine of exhaustion of administrative remedies are present: (1) when there is a violation of due
process; (2) when the issue involved is purely a legal question.
The present case does not fall under the exceptions to the doctrine of exhaustion of administrative
remedies as there is no violation of respondents' right to due process. The Court does not
agree with the CA in sustaining petitioners' contention that the investigation conducted by the EPD
necessitated the participation of petitioners and that they should have been given opportunity to
explain their side prior to the issuance of the questioned CDO. The SEC was not mandated to allow
herein respondents to participate in the investigation conducted by the Commission prior to the
cease and desist order's issuance. In the case of Primanila Plans, Inc. v. Securities and Exchange
Commission,the Court held: The law is clear on the point that a cease and desist order may be issued
by the SEC motu proprio, it being unnecessary that it results from a verified complaint from an
aggrieved party. A prior hearing is also not required whenever the Commission finds it
appropriate to issue a cease and desist order that aims to curtail fraud or grave or irreparable injury
to investors.
The question raised by respondent before CA does not also involved a pure question of law which
will exempt it from exhausting administrative remedies. The main issue, as to whether or not the
sale of "The Manor" or "The Suites" units to the general public under the "leaseback" or
"money-back" scheme is a form of investment contract or sale of securities, is not a pure
question of law. On the contrary, it involves a question of fact that falls under the primary
jurisdiction of the SEC. Under the doctrine of primary administrative jurisdiction, courts will not
determine a controversy where the issues for resolution demand the exercise of sound
administrative discretion requiring the special knowledge, experience, and services of the
administrative tribunal to determine technical and intricate matters of fact, which under a
regulatory scheme have been placed within the special competence of such tribunal or agency. In
the instant case, the resolution of the issue as to whether respondents' scheme of selling the subject
condotel units is tantamount to an investment contract and/or sale of securities, as defined under
the SRC, requires the expertise and technical knowledge of the SEC being the government agency
Page 319 of 434

which is tasked to enforce and implement the provisions of the said Code as well as its
implementing rules and regulations.
_____________________________________________________________________________________
BANKING LAWS
THE NEW CENTRAL BANK ACT (R.A. NO. 7653)
MONETARY BOARD-POWERS AND FUNCTIONS
Philippine Deposit Insurance Corporation v. Citibank, N.A

G.R. No. 170290, April 11, 2012, Mendoza, J:
It is clear that the head office of a bank and its branches are considered as one under the eyes
of the law. While branches are treated as separate business units for commercial and financial
reporting purposes, in the end, the head office remains responsible and answerable for the liabilities
of its branches which are under its supervision and control. As such, it is unreasonable for PDIC to
require the respondents, Citibank and BA, to insure the money placements made by their home office
and other branches. Deposit insurance is superfluous and entirely unnecessary when, as in this case,
the institution holding the funds and the one which made the placements are one and the same legal
entity.
Facts:
Petitioner Philippine Deposit Insurance Corporation (PDIC) is a government instrumentality

created by virtue of Republic Act (R.A.) No. 3591, as amended by R.A. No. 9302. Respondent
Citibank, N.A. (Citibank) is a banking corporation while respondent Bank of America, S.T. &
N.A. (BA) is a national banking association, both of which are duly organized and existing under
the laws of the United States of America and duly licensed to do business in the Philippines, with
offices in Makati City.
In 1977, PDIC conducted an examination of the books of account of Citibank. It discovered that
Citibank, in the course of its banking business, from September 30, 1974 to June 30, 1977, received
from its head office and other foreign branches a total of P11,923,163,908.00 in dollars, covered by
Certificates of Dollar Time Deposit that were interest-bearing with corresponding maturity dates.
These funds were not reported to PDIC as deposit liabilities that were subject to assessment for
insurance. As such, PDIC assessed Citibank for deficiency in the sum of P1,595,081.96. Similarly,
sometime in 1979, PDIC examined the books of accounts of BA which revealed that from September
30, 1976 to June 30, 1978, BA received from its head office and its other foreign branches a total
of P629,311,869.10 in dollars. PDIC likewise assessed BA for the deficiency.
Believing that litigation would inevitably arise from this dispute, Citibank and BA each filed a
petition for declaratory relief before the the Regional Trial Court of Rizal stating that the money
placements they received from their head office and other foreign branches were not deposits and
did not give rise to insurable deposit liabilities under Sections 3 and 4 of R.A. No. 3591 and, as a
consequence, the deficiency assessments made by PDIC were improper and erroneous. The RTC
ruled in favor of Citibank and BA. Aggrieved, PDIC appealed to the CA which affirmed the ruling
Page 320 of 434

of the RTC. In so ruling, the CA found that the money placements were received as part of the
bank’s internal dealings by Citibank and BA as agents of their respective head offices. This showed
that the head office and the Philippine branch were considered as the same entity. Thus, no bank
deposit could have arisen from the transactions between the Philippine branch and the head office
because there did not exist two separate contracting parties to act as depositor and depositary.
Issue: Whether the funds placed in the Philippine branch by the head office and foreign branches
of Citibank and BA are insurable deposits under the PDIC Charter and, as such, are subject to
assessment for insurance premiums.
Held: No. It is apparent that Citibank and BA both did not incorporate a separate domestic
corporation to represent its business interests in the Philippines. Their Philippine branches are, as
the name implies, merely branches, without a separate legal personality from their parent company,
Citibank and BA. Thus, being one and the same entity, the funds placed by the respondents in their
respective branches in the Philippines should not be treated as deposits made by third parties
subject to deposit insurance under the PDIC Charter.
It is clear that the head office of a bank and its branches are considered as one under the eyes of
the law. While branches are treated as separate business units for commercial and financial
reporting purposes, in the end, the head office remains responsible and answerable for the liabilities
of its branches which are under its supervision and control. As such, it is unreasonable for PDIC to
require the respondents, Citibank and BA, to insure the money placements made by their home
office and other branches. Deposit insurance is superfluous and entirely unnecessary when, as in
this case, the institution holding the funds and the one which made the placements are one and
the same legal entity.
_____________________________________________________________________________________
BANGKO SENTRAL NG PILIPINAS, Petitioner, v. FELICIANO P. LEGASPI, Respondent.

G.R. No. 205966, March 02, 2016, PERALTA, J.
Under Republic Act No. 7653, or the New Central Bank Act, the BSP Governor is authorized to
represent the Bangko Sentral, either personally or through counsel, including private counsel, as may
be authorized by the Monetary Board, in any legal proceedings, action or specialized legal
studies. Under the same law, the BSP Governor may also delegate his power to represent the BSP to
other officers upon his own responsibility.
FACTS:
Petitioner BSP filed a Complaint for annulment of title, revocation of certificate and damages
(with application for TRO/writ of preliminary injunction) against Secretary Jose L. Atienza, Jr.,
Luningning G. De Leon, Engr. Ramon C. Angelo, Jr., Ex-Mayor Matilde A. Legaspi and respondent
Feliciano P. Legaspi before the RTC of Malolos, Bulacan. Respondent, together with his fellow
defendants, filed their Answer to the complaint. Thereafter, the RTC issued an Order mandating
the issuance of preliminary injunction, enjoining the construction, development and/or operation
of a dumpsite or landfill in Barangay San Mateo, Norzagaray, Bulacan, in an area allegedly covered
by OCT No. P858/Free Patent No. 257917, the property subject of the complaint.
Page 321 of 434

Herein respondent Legaspi filed a Motion to Dismiss alleging that the RTC did not acquire
jurisdiction over the person of the petitioner BSP because the suit is unauthorized by petitioner BSP
itself and that the counsel representing petitioner BSP is not authorized and thus cannot bind the
same petitioner. In addition, respondent Legaspi asserted that the complaint was initiated without
the authority of the Monetary Board and that the complaint was not prepared and signed by the Office
of the Solicitor General (OSG), the statutory counsel of government agencies.
In opposing the Motion to Dismiss, petitioner BSP argued that the complaint was filed pursuant to
Monetary Board Resolution No. 8865. Petitioner BSP further claimed that it is not precluded from
being represented by a private counsel of its own choice.
In denying the Motion to Dismiss, the RTC ruled that it had acquired jurisdiction over the person
of the petitioner when the latter filed with the court the Complaint. Furthermore, the RTC adjudged
that in suits involving the BSP, the Monetary Board may authorize the Governor to represent it
personally or through counsel, even a private counsel, and the authority to represent the BSP may
be delegated to any other officer thereof. It took into account the Monetary Board Resolution No.
900 containing the Board's approval of the recommendation of the Asset Management Department
(AMD) to engage the services of Ongkiko Kalaw Manhit and Acorda Law Offices (OKMA Law).
Respondent Legaspi filed a motion for reconsideration, adding as its argument that the RTC failed
to acquire jurisdiction over the action because the complaint, a real action, failed to allege the
assessed value of the subject property. As an opposition to respondent Legaspi's additional
contention, petitioner BSP claimed that since the subject property contains an area of 4,838,736
square meters, it is unthinkable that said property would have an assessed value of less than
P20,000.00 which is within the jurisdiction of the Municipal Trial Courts. Petitioner BSP further
stated that a tax declaration showing the assessed value of P28,538,900.00 and latest zonal value of
P145,162,080.00 was attached to the complaint.
RTC likewise denied respondent Legaspi's motion for reconsideration.
Respondent Legaspi elevated the case to the CA via a petition for certiorari under Rule 65 of the
Rules of Court. CA granted respondent’s motion and dismissed BSP’s complaint.
ISSUES:
1. Whether or not The Regional Trial Court of Malolos City has exclusive original jurisdiction over
the subject matter of the action.
2. Whether or not BSP can lawfully engaged the services of a private counsel.
RULING:
1. The RTC has exclusive original jurisdiction over the case.
Under Batas Pambansa Bilang 129, as amended by Republic Act No. 7691, the RTC has exclusive
original jurisdiction over civil actions which involve title to possession of real property, or any
interest therein, where the assessed value of the property involved exceeds Twenty Thousand
Pesos (P20,000.00).
Page 322 of 434

Petitioner BSP insists that the property involved has an assessed value of more than P20,000.00,
as shown in a Tax Declaration attached to the complaint. Incidentally, the complaint, on its
face, is devoid of any amount that would confer jurisdiction over the RTC. The non-inclusion
on the face of the complaint of the amount of the property, however, is not fatal because
attached in the complaint is a tax declaration (Annex "N" in the complaint) of the property in
question showing that it has an assessed value of P215,320.00. It must be emphasized that
annexes to a complaint are deemed part of, and should be considered together with the
complaint.
Since a copy of the tax declaration, which is a public record, was attached to the complaint, the
same document is already considered as on file with the court, thus, the court can now take
judicial notice of such.
2. BSP can lawfully engage the services of a private counsel.
Anent the issue of the legal representation of petitioner BSP, the CA ruled that the BSP, being
a government-owned and controlled corporation, should have been represented by the Office
of the Solicitor General (OSG) or the Office of the Government Corporate Counsel (OGCC) and
not a private law firm or private counsel, as in this case.
Under Republic Act No. 7653, or the New Central Bank Act, the BSP Governor is authorized to
represent the Bangko Sentral, either personally or through counsel, including private counsel, as
may be authorized by the Monetary Board, in any legal proceedings, action or specialized legal
studies. Under the same law, the BSP Governor may also delegate his power to represent the
BSP to other officers upon his own responsibility.
As aptly found by the RTC, petitioner BSP was able to justify its being represented by a private
counsel, thus:
BSP's complaint dated April 10, 2008 was verified by Geraldine C. Alag, an officer of
the BSP being the Director of its Asset Management Department. It has been
explained that this was authorized by the Monetary Board, as per Resolution No.
865 dated June 17, 2004, which reads:
To approve delegation of authority to the Director, Asset Management

Department (AMD), or in his absence, the Officer-in-Charge, AMD to sign
all documents, contracts, agreements and affidavits relating to the
consolidation of ownership, lease, cancellation of decision, redemption and
sale of acquired assets, and all documents to be filed in court upon clearance
by the Office of the General Counsel and Legal Services x x x.
Also submitted to this Court is the Secretary's Certificate issued by Silvina Q. Mamaril-Roxas,
Officer-in-Charge, Office of the Secretary of BSP's Monetary Board attesting to Monetary Board
Resolution No. 900, adopted and passed on July 18, 2008, which reads:
At the regular meeting of the MB on 18 July 2008, the MB adopted and passed MB
Resolution No. 900, to wit: xxx The Board approved the recommendation of the
Asset Management Department (AMD) to engage the services of Ongkiko Kalaw
Page 323 of 434

Manhit and Acorda Law Offices (OKMA Law) as follows: xxx To act as counsel for
the Bangko Sentral ng Pilipinas (BSP) in a complaint to be filed against the
Department of Environment and Natural Resources (DENR) Secretary, et al., xxx
_____________________________________________________________________________________
HOW THE BSP HNADLES BANKS IN DISTRESS
SPOUSES JAIME and MATILDE POON vs. PRIME SAVINGS BANK represented by the
PHILIPPINE DEPOSIT INSURANCE CORPORATION as Statutory Liquidator
G.R. No. 183794, June 13, 2016, SERENO, CJ
The period during which the bank cannot do business due to insolvency is not a fortuitous
event, unless it is shown that the government's action to place a bank under receivership or liquidation
proceedings is tainted with arbitrariness, or that the regulatory body has acted without jurisdiction.
FACTS:
Petitioners owned a commercial building in Naga City. On 3 November 2006, Matilde Poon and
respondent executed a 10-year Contract of Lease (Contract) over the building for the latter's use as
its branch office in Naga City. They agreed to a fixed monthly rental of P60,000, with an advance
payment of the rentals for the first 100 months in the amount of P6,000,000. As agreed, the advance
payment was to be applied immediately.
In addition, paragraph 24 of the Contract provides:
Should the leased premises be closed, deserted or vacated by the LESSEE, the LESSOR shall
have the right to terminate the lease without the necessity of serving a court order and to
immediately repossess the leased premises. xxxxxxxxxxx
The LESSOR shall thereupon have the right to enter into a new contract with another party.
All advanced rentals shall be forfeited in favor of the LESSOR.
Barely three years later, however, the BSP placed respondent under the receivership of the
Philippine Deposit Insurance Corporation (PDIC) for wilfully violating a cease and desist orders
that has become final, involving acts or transactions which amount to fraud or a dissipation of the
assets of the institution, among other grounds. The BSP eventually ordered respondent's
liquidation.
On 12 May 2000, respondent vacated the leased premises and surrendered them to petitioners.
Subsequently, the PDIC issued petitioners a demand letter asking for the return of the unused
advance rental amounting to P3,480,000 on the ground that paragraph 24 of the lease agreement
had become inoperative, because respondent's closure constituted force majeure. The PDIC likewise
invoked the principle of rebus sic stantibus under Article 1267 of Republic Act No. 386 (Civil Code)
as alternative legal basis for demanding the refund. Petitioners, however, refused the PDIC's
demand. They maintained that they were entitled to retain the remainder of the advance rentals
following paragraph 24 of their Contract. Consequently, respondent sued petitioners before the
RTC of Naga City for a partial rescission of contract and/or recovery of a sum of money.
Page 324 of 434

RTC ordered the partial rescission of the lease agreement and directed petitioner spouses Jaime and
Matilde Poon to return or refund the sum of One Million Seven Hundred Forty Thousand Pesos
(Pl,740,000) representing one-half of the unused portion of the advance rentals. CA affirmed the
RTC Decision.
ISSUES:
1. Whether respondent may be released from its contractual obligations to petitioners on grounds
of fortuitous event under Article 1174 of the Civil Code and unforeseen event under Article 1267
of the Civil Code;
2. Whether the proviso in the parties' Contract allowing the forfeiture of advance rentals was a
penal clause; and
3. Whether the penalty agreed upon by the parties may be equitably reduced under Article 1229
of the Civil Code.
RULING:
1. The closure of respondent's business was neither a fortuitous nor an unforeseen event
that rendered the lease agreement functus officio.
Respondent posits that it should be released from its contract with petitioners, because the closure
of its business upon the BSP' s order constituted a fortuitous event as the Court held in Provident
Savings Bank. The cited case, however, must always be read in the context of the earlier Decision
in Central Bank v. Court of Appeals. The Court ruled in that case that the Monetary Board had acted
arbitrarily and in bad faith in ordering the closure of Provident Savings Bank. Accordingly, in the
subsequent case of Provident Savings Bank it was held that fuerza mayor had interrupted the
prescriptive period to file an action for the foreclosure of the subject mortgage.
In contrast, there is no indication or allegation that the BSP's action in this case was tainted with
arbitrariness or bad faith. Instead, its decision to place respondent under receivership and
liquidation proceedings was pursuant to Section 30 of Republic Act No. 7653. Moreover, respondent
was partly accountable for the closure of its banking business. It cannot be said, then, that the
closure of its business was independent of its will as in the case of Provident Savings Bank. The legal
effect is analogous to that created by contributory negligence in quasi-delict actions.
The period during which the bank cannot do business due to insolvency is not a fortuitous event,
unless it is shown that the government's action to place a bank under receivership or liquidation
proceedings is tainted with arbitrariness, or that the regulatory body has acted without jurisdiction.
The Court cannot also give due course respondent lessee’s invocation of the doctrine of unforeseen
event under Article 1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in
part.
Tagaytay Realty Co., Inc. v. Gacutan lays down the requisites for the application of Article 1267, as
follows:
Page 325 of 434

1. The event or change in circumstance could not have been foreseen at the time of the
execution of the contract.
2. It makes the performance of the contract extremely difficult but not impossible.
3. It must not be due to the act of any of the parties.
4. The contract is for a future prestation.
The first and the third requisites, however, are lacking. It must be noted that the lease agreement
was for 10 years. As shown by the unrebutted testimony of Jaime Poon during trial, the parties had
actually considered the possibility of a deterioration or loss of respondent's business within that
period. Moreover, the closure of respondent's business was not an unforeseen event. As the lease
was long-term, it was not lost on the parties that such an eventuality might occur, as it was in fact
covered by the terms of their Contract. Besides, the event was not independent of respondent's will.
2. The forfeiture clause in the Contract is penal in nature.
It is settled that a provision is a penal clause if it calls for the forfeiture of any remaining deposit
still in the possession of the lessor, without prejudice to any other obligation still owing, in the
event of the termination or cancellation of the agreement by reason of the lessee's violation of any
of the terms and conditions thereof. This kind of agreement may be validly entered into by the
parties. The clause is an accessory obligation meant to ensure the performance of the principal
obligation by imposing on the debtor a special prestation in case of nonperformance or inadequate
performance of the principal obligation. The forfeiture clauses of the Contract, therefore, served
the two functions of a penal clause, i.e., (1) to provide for liquidated damages and (2) to strengthen
the coercive force of the obligation by the threat of greater responsibility in case of breach.
3. A reduction of the penalty agreed upon by the parties is warranted under Article 1129 of
the Civil Code.
At stake in this case are not just the rights of petitioners and the correlative liabilities of respondent
lessee. Over and above those rights and liabilities is the interest of innocent debtors and creditors
of a delinquent bank establishment. These overriding considerations justify the 50% reduction of
the penalty agreed upon by petitioners and respondent lessee in keeping with Article 1229 of the
Civil Code. Under the circumstances, it is neither fair nor reasonable to deprive depositors and
creditors of what could be their last chance to recoup whatever bank assets or receivables the PDIC
can still legally recover. Besides, nothing has prevented petitioners from putting their building to
other profitable uses, since respondent surrendered the premises immediately after the closure of
its business.
Distinguish a deposit substitute under the banking law and deposit substitute under the tax
law. The distinction is on the purpose. If a bank or non-bank financial intermediary sells debt
instruments to 20 or more lenders/placers at any one time, irrespective of outstanding amounts,
for the purpose of relending or purchasing of receivables or obligations, it is considered to be
performing a quasi-banking function. Under the National Internal Revenue Code, however, deposit
substitutes include not only the issuances and sales of banks and quasi-banks for relending or
purchasing receivables and other similar obligations, but also debt instruments issued by
commercial, industrial, and other nonfinancial companies to finance their own needs or the needs
of their agents or dealers. Banco de Oro v. Republic of the Philippines, G.R. No. 198756, August
16, 2016
Page 326 of 434

_____________________________________________________________________________________
DILIGENCE REQUIRED OF BANKS
FAR EAST BANK AND TRUST COMPANY (now Bank of the Philippine Islands), vs.
TENTMAKERS GROUP, INC., GREGORIA PILARES SANTOS and RHOEL P. SANTOS, G.R.
No. 171050, July 4, 2012
The respondents purportedly obtained a loan from the bank. For failure to pay despite demand, the
bank sued the corporate and individual respondents who argued that there is no resolution coming
from the Board of Directors, authorizing the signatories to the promissory notes to receive the
proceeds of the purported bank loan and that they had no knowledge that a loan had been taken
out in the corporate respondent’s name.
Issue: Should respondents be liable for the loan?
Held: No. There is no evidence that the signatories received the proceeds of the promissory
notes. Moreover, the bank violated the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP) by its failure to strictly follow the guidelines in the conferment of unsecured loans.
Although there were promissory notes, there was no proof of receipt by the respondents of the same
amounts reflected therein. There was no Board Resolution/Corporate Secretary’s Certificate either,
designating the authorized signatories for the corporation specifically for the loan covered by the
Promissory Notes. Even granting that the two Board Resolutions (Exhibits A and B) dated March 3,
1995 and April 11, 1995, respectively, authorizing the signatories to transact business with the bank,
were binding, still there is no evidence of crediting of the proceeds of the promissory notes. Further,
there were no collaterals, real estate mortgage, chattel mortgage or pledges to ensure the payment
of the loan.
In handling loan transactions, banks are under obligation to ensure compliance by the clients with
all the documentary requirements pertaining to the approval and release of the loan
applications. For failure of its branch manager to exercise the requisite diligence in abiding by the
MORB and the banking rules and practices, FEBTC was negligent in the selection and supervision
of its employees. For the loss suffered by FEBTC the bank has no one to blame but itself.
_____________________________________________________________________________________
WESTMONT BANK V. RAMOS, G.R. NO. 160260, OCTOBER 24, 2012
Myrna Ramos has a checking/savings accounts with Westmont Bank. In order to ensure that her
checks would not bounce at any given point in time, she entered into a “special arrangement” with
bank’s Signature Verifier (Domingo Tan), wherein the latter would finance or place sufficient funds
in Myrna’s checking/current account for a fee. In order to guarantee payment for such funding,
Myrna issued postdated checks payable to cash. One of those checks is Check No. 467322 for
P200,000.00 which according to Myrna is a “stale” guarantee check. The check was originally dated
August 28, 1987 but was altered to make it appear that it was dated May 8, 1988. Tan then deposited
the check in the account of William Co (Co), despite the obvious superimposed date. As a result,
the amount of P200,00.00 or the value indicated in the check was eventually charged against her
checking account.
Page 327 of 434

Issue: Should be the Bank be held liable for the amount of charged against Myrna’s account?
Held: As regards Check No. 467322, the Bank avers that Dela Rosa- Ramos’ acquiesced to the
change of the date in the said check. It argues that her continued acts of dealing and transacting
with the Bank like subsequently issuing checks despite her experience with this check only shows
her acquiescence which is tantamount to giving her consent. Obviously, the Bank has not taken to
heart its fiduciary responsibility to its clients. Rather than ask and wonder why there were indeed
subsequent transactions, the more paramount issue is why the Bank through its several competent
employees and officers, did not stop, double check and ascertain the genuineness of the date of the
check which displayed an obvious alteration. This failure on the part of the Bank makes it liable for
that loss. As the RTC held: x x x defendant-bank is not faultless in the irregularities of its signature-
verifier. In the first place, it should have readily rejected the obviously altered plaintiff’s
P200,000.00-check, thus, avoid its unwarranted deposit in defendant-Co’s account and its corollary
loss from plaintiff’s deposit, had its other employees, even excepting TAN, performed their duties
efficiently and well. x x x
_____________________________________________________________________________________
Development Bank of the Philippines v. Guariña Agricultural and Realty Dev’t Corp.
G.R. No. 160758; January 15, 2014
J. Bersamin
The lender who refuses to release the full amount of the loan cannot foreclose the mortgage
constituted thereon. Foreclosure prior to the mortgagor’s default is premature and unenforceable and
the mortgagee who has been given possession over the mortgaged property by virtue of a writ of
possession may be ordered to restore the possession of the same to the mortgagor and to pay
reasonable rent for its use during the intervening period
Facts:
In order to finance the development of a resort complex, Guariña Corporation applied for a loan
from DBP in the amount of P3,387,000. Guariña Corporation executed a real estate mortgage over
several real properties in favor of DBP as security for the repayment of the loan and a chattel
mortgage over the personal properties existing at the resort complex and those yet to be acquired
out of the proceeds of the loan.
The loan was released in several instalments and the same was used by Guariña Corporation to
defray the cost of additional improvements in the resort complex. In all, the amount released
totalled P3,003,617.49. Subsequently, Guariña Corporation demanded the release of the balance of
the loan. DPB refused and directly paid some suppliers of Guariña Corporation instead. Later on,
upon inspection, DBP discovered that Guariña Corporation had not completed the construction
works. DBP thus demanded to expedite the completion of the project and warned that it would
initiate foreclosure proceedings shouldGuariña Corporation not do so.
With the non-action and objection of Guariña Corporation, DBP initiated extrajudicial foreclosure
proceedings. This resulted in Guariña Corporation suing DPB for specific performance of the latter’s
obligations under the loan agreement and to stop the foreclosure of the mortgage. Due to the fact
that DBP had already sold the mortgaged properties, Guariña Corporation amended the complaint
Page 328 of 434

to seek the nullification of the foreclosure proceedings and cancellation of the certificate of sale.
Thereafter, a writ of possession was issued in favor of DBP.
RTC rendered judgment declaring the extra-judicial sales of the mortgage properties null and void
and ordered DBP to return to Guariña Corporation the actuall possession and enjoyment of all the
properties foreclosed and possessed by it. On appeal, the CA affirmed the decision of the trial court.
DBP filed a motion for reconsideration, but the CA denied the same. Hence, the appeal.
Issue:
Whether or not the foreclosure was valid.
Ruling:
By its failure to release the proceeds of the loan in their entirety, DBP had no right yet to exact on
Guariña Corporation the latter's compliance with its own obligation under the loan. Indeed, if a
party in a reciprocal contract like a loan does not perform its obligation, the other party cannot be
obliged to perform what is expected of it while the other's obligation remains unfulfilled. In other
words, the latter party does not incur delay.
Still, DBP called upon Guariña Corporation to make good on the construction works pursuant to
the acceleration clause written in the mortgage contract or else it would foreclose the mortgages.
DBP's actuations were legally unfounded. It is true that loans are often secured by a mortgage
constituted on real or personal property to protect the creditor's interest in case of the default of
the debtor. By its nature, however, a mortgage remains an accessory contract dependent on the
principal obligation, such that enforcement of the mortgage contract will depend on whether or
not there has been a violation of the principal obligation. While a creditor and a debtor could
regulate the order in which they should comply with their reciprocal obligations, it is presupposed
that in a loan the lender should perform its obligation - the release of the full loan amount - before
it could demand that the borrower repay the loaned amount. In other words, Guariña Corporation
would not incur in delay before DBP fully performed its reciprocal obligation.
Considering that it had yet to release the entire proceeds of the loan, DBP could not yet make an
effective demand for payment upon Guariña Corporation to perform its obligation under the loan.
According to Development Bank of the Philippines v. Licuanan, it would only be when a demand to
pay had been made and was subsequently refused that a borrower could be considered in default,
and the lender could obtain the right to collect the debt or to foreclose the mortgage. Hence,
Guariña Corporation would not be in default without the demand.
Assuming that DBP could already exact from the latter its compliance with the loan agreement, the
letter dated February 27, 1978 that DBP sent would still not be regarded as a demand to render
Guariña Corporation in default under the principal contract because DBP was only thereby
requesting the latter "to put up the deficiency in the value of improvements."
Under the circumstances, DBP's foreclosure of the mortgage and the sale of the mortgaged
properties at its instance were premature, and, therefore, void and ineffectual. The Court thereby
Page 329 of 434

affirms the order for the restoration of possession to Guariña Corporation and the payment of
reasonable rentals for the use of the resort.
_____________________________________________________________________________________
Land Bank of the Philippines vs. Emmanuel Oñate

G.R. No. 192371; January
J. Del Castillo
A bank who mismanages the trust accounts of its client cannot benefit from the inaccuracies
of the reports resulting therefrom. It cannot impute the consequence of its negligence to the client.
The bank must record every single transaction accurately, down to the last centavo and as promptly
as possible. This has to be done if the account is to reflect at any given time the amount of money the
depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he
directs.
Facts:
Oñate opened and maintained seven trust accounts with Land Bank. Each trust account was
covered by an Investment Management Account (IMA) with Full Discretion and has a
corresponding passbook where deposits and withdrawals were recorded.
In a letter dated October 1981, Land Bank demanded from Oñate the return of P4 million it claimed
to have been inadvertently deposited to Trust Account No. 01-125 as additional funds. Oñate
refused. To settle the matter, a meeting was held, but the parties failed to reach an agreement. Since
then, the issue of “miscrediting” remained unsettled. Subsequently, Land Bank unilaterally applied
the outstanding balance in all of Oñate’s trust accounts against his resulting indebtedness reason
of the miscrediting of funds. Although it exhausted the funds in all of Oñate’s trust accounts, Land
Bank was able to debit the amount of P1,528,583.48 only. To recover the remaining balance of
Oñate’s indebtedness, Land Bank filed a Complaint for Sum of Money.
In his Answer, Oñate asserted that the set-off was without legal and factual bases. He maintained
that all the funds in his accounts came from legitimate sources and that he was totally unaware of
and had nothing to do with the alleged miscrediting.
RTC issued and Order creating a Board of Commissioners for the purpose of examining the records
of Oñate’s seven trust accounts, as well as to determine the total amount of deposits, withdrawals,
funds invested, earnings, and expenses incurred. Subsequently, the Board submitted a consolidated
report which revealed that there were undocumented and over withdrawals and drawings from
Oñate’s trust accounts.
In his comment, Oñate asserted that the undocumented withdrawals mentioned in the
consolidated report should not be considered as cash outflows. Rather, they should be treated as
unauthorized transactions and the amounts subject thereof must be credited back to his accounts.
Land Bank for its part did not object to the Board’s findings.
Eventually, RTC rendered a decision dismissing Land Bank’s Complaint. On appeal, the CA affirmed
RTC’s ruling. Land Bank filed a Motion for Reconsideration, but was denied. Hence, the petition
for review.Land Bank argues that Oñate is not entitled to the undocumented withdrawals and
Page 330 of 434

insisted that it made proper accounting and apprised Oñate of the status of his investments in
accordance with the terms of the IMAs. According to the bank, it made a full disclosure in its
demand letter that the total outstanding balance of all the trust accounts amounted to P1,471,416.52,
but that the same was setoff to recoup the "miscredited" funds. It faults Oñate for not interposing
any objection as his silence constitutes as his approval after 30 days from receipt thereof. Land Bank
asseverates that Oñate could have also inspected and audited the records of his accounts at any
reasonable time. But he never did.For his part, Oñate refuted Land Bank’s claim to negative
balances and over withdrawals and posited that the bank cannot benefit from its own negligence
in mismanaging the trust accounts.
Issue:
Whether or not the bank can be held liable for the inaccuracies of the reports.
Ruling:
In Simex International (Manila), Inc. v. Court of Appeals, we elucidated on the nature of banking
business and the responsibility of banks:
The banking system is an indispensable institution in the modern world and plays a
vital role in the economic life of every civilized nation. Whether as mere passive
entities for the safekeeping and saving of money or as active instruments of business
and commerce, banks have become an ubiquitous presence among the people, who
have come to regard them with respect and even gratitude and, most of all,
confidence. Thus, even the humble wage-earner has not hesitated to entrust his life’s
savings to the bank of his choice, knowing that they will be safe in its custody and
will even earn some interest for him. The ordinary person, with equal faith, usually
maintains a modest checking account for security and convenience in the settling
of his monthly bills and the payment of ordinary expenses. As for business entities
like the petitioner, the bank is a trusted and active associate that can help in the
running of their affairs, not only in the form of loans when needed but more often
in the conduct of their day-to-day transactions like the issuance or encashment of
checks.
In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of millions.
The bank must record every single transaction accurately, down to the last centavo
and as promptly as possible. This has to be done if the account is to reflect at any
given time the amount of money the depositor can dispose of as he sees fit, confident
that the bank will deliver it as and to whomever he directs.
The point is that as a business affected with public interest and because of the nature
of its functions, the bank is under obligations to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their
relationship.
As to the conceded inaccuracies in the reports, we cannot allow Land Bank to benefit therefrom.
Time and again, we have cautioned banks to spare no effort in ensuring the integrity of the records
of its clients. And in Philippine National Bank v. Court of Appeals, we held that "as between parties
where negligence is imputable to one and not to the other, the former must perforce bear the
consequences of its neglect." In this case, the Board could have submitted a more accurate report
Page 331 of 434

had Land Bank faithfully complied with its duty of maintaining a complete and accurate record of
Oñate’s accounts. But the Board could not find and present the corresponding slips for the
withdrawals reflected in the passbooks. In addition, Land Bank was less than cooperative when the
Board was examining the records of Oñate’s accounts. It did not give the Board enough leeway to
go over the records systematically or in orderly fashion. Hence, we cannot allow Land Bank to
benefit from possible inaccuracies in the report.
_____________________________________________________________________________________
DRA. MERCEDES OLIVER, Petitioner, v. PHILIPPINE SAVINGS BANK AND LILIA

CASTRO,Respondents.
G.R. No. 214567, April 04, 2016, MENDOZA, J.
In the case of banks, the degree of diligence required is more than that of a good father of a
family. Considering the fiduciary nature of their relationship with their depositors, banks are duty
bound to treat the accounts of their clients with the highest degree of care.
A bank was expected to ensure that a substantial withdrawal should only be transacted with
the consent and authority of its depositor. In this case, PSBank, reneged on its fiduciary duty by
allowing an encroachment upon its depositor's account without the latter's permission. Hence,
PSBank must be held liable for such improper transaction.
Facts:
Sometime in 1997, Olive made an initial deposit of PhP12 million into her PSBank account. During
that time, Castro convinced her to loan out her deposit as interim or bridge financing for the
approved loans of bank borrowers who were waiting for the actual release of their loan proceeds.
Under this arrangement, Castro would first show the approved loan documents to Oliver.
Thereafter, Castro would withdraw the amount needed from Oliver’s account. Upon the actual
release of the loan by PSBank to the borrower, Castro would then charge the rate of 4% a month
from the loan proceeds as interim or bridge financing interest. Together with the interest income,
the principal amount previously withdrawn from Oliver’s bank account would be deposited back
to her account. Meanwhile, Castro would earn a commission of 10% from the interest.
Their arrangement went on smoothly for months. Due to the frequency of bank transactions, Oliver
even entrusted her passbook to Castro. Because Oliver earned substantial profit, she was further
convinced by Castro to avail of an additional credit line in the amount of P10 million. The said credit
line was secured by a real estate mortgage on her house and lot in Ayala Alabang.
Oliver instructed Castro to pay P2 million monthly to PSBank starting on September 3, 1998 so that
her credit line for P10 million would be fully paid by January 3, 1999.
Beginning September 1998, Castro stopped rendering an accounting for Oliver. The latter then
demanded the return of her passbook. When Castro showed her the passbook sometime in late
January or early February 1998, she noticed several erasures and superimpositions therein. She
became very suspicious of the many erasures pertaining to the December 1998 entries so she
requested a copy of her transaction history register from PSBank.
Page 332 of 434

When her transaction history register6 was shown to her, Oliver was surprised to discover that the
amount of PhP4,491,250.00 (estimated at PhP4.5 million) was entered into her account on
December 21, 1998. While a total of PhP7 million was withdrawn from her account on the same day,
Oliver asserted that she neither applied for an additional loan of PhP4.5 million nor authorized the
withdrawal of PhP7 million. She also discovered another loan for PhP1,396,310.45, acquired on
January 5, 1999 and allegedly issued in connection with the P10 million credit line. There were,
however, no entries in her passbook.
PS Bank demanded payment of the unpaid loans (i.e. PhP4.5 million and PhP1.396 million) but she
alleged that she did not contract the same and that her PhP10 million credit line has already paid
in full. Thereafter, Oliver received a notice of sale (i.e. the impeding extrajudicial foreclosure of her
property in Alabang). Hence, the complaint of Oliver against PS Bank and Castro.
The RTC ruled in favor of PS Bank and Castro. According to the Court, there was enough evidence
to prove that Oliver contracted the additional loans. The court reversed this decision when Oliver
moved for a reconsideration. Upon appeal, the CA reinstated the original decision of the RTC;
Issues:
1. Whether Castro is liable for damages for having defrauded Oliver

2. Whether the bank may be held liable for the withdrawal made on Oliver’s bank account
Held:
1. Yes. Although the Court declared that there was an agency relationship between Castro and
Oliver (and that the additional loans were properly made as Oliver did not dispute her
signatures on the promissory notes), Castro exceeded her authority as an agent when a PhP7
million withdrawal was made from Oliver’s account. The Court noted that there was
nothing in the records which proved that she also allowed the withdrawal of P7 million from
her bank account.
Verily, Castro, as agent of Oliver and as branch manager of PS Bank, utterly failed to secure
the authorization of Oliver to withdraw such substantial amount. As a standard banking
practice intended precisely to prevent unauthorized and fraudulent withdrawals, a bank
manager must verify with the client-depositor to authenticate and confirm that he or she
has validly authorized such withdrawal. Castro’s lack of authority to withdraw the P7
million on behalf of Oliver became more apparent when she altered the passbook to hide
such transaction.
2. PSBank failed to exercise the highest degree of diligence required of banking institutions.
Aside from Castro, PSBank must also be held liable because it failed to exercise utmost
diligence in the improper withdrawal of the P7 million from Oliver’s bank account.
In the case of banks, the degree of diligence required is more than that of a good father of a
family. Considering the fiduciary nature of their relationship with their depositors, banks
are duty bound to treat the accounts of their clients with the highest degree of care. The
point is that as a business affected with public interest and because of the nature of its
Page 333 of 434

functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship.
_____________________________________________________________________________________
LAND BANK OF THE PHILIPPINES vs. NARCISO L. KHO

G.R. No. 205839
MA. LORENA FLORES and ALEXANDER CRUZ vs. NARCISO L. KHO

G.R. No. 205840, July 7, 2016, BRION, J.
Banks are expected to exert the highest degree of, if not the utmost, diligence. Stemming from
their primordial duty of diligence, one of a bank’s prime duties is to ascertain the genuineness of the
drawer’s signature on check being encashed. This holds especially true for manager’s checks.
FACTS:
The respondent Narciso Kho is the sole proprietor of United Oil Petroleum, a business engaged in
trading diesel fuel. Sometime in December 2006, he entered into a verbal agreement to purchase
lubricants from Red Orange International Trading (Red Orange), represented by one Rudy Medel.
Red Orange insisted that it would only accept a Land Bank manager’s check as payment. On
December 28, 2005, Kho, accompanied by Rudy Medel, opened Savings Account at the Araneta
Branch of petitioner Land Bank of the Philippines (Land Bank). Kho also purchased Land Bank
Manager’s Check No. 07410 leveraged by his newly opened savings account.
Kho requested a photocopy of the manager’s check to provide Red Orange with proof that he had
available funds for the transaction. The branch manager, petitioner Ma. Lorena Flores,
accommodated his request. Kho gave the photocopy of the check to Rudy Medel. Kho returned to
the bank and picked up check No. 07410. Accordingly, P25,000,000.00 was debited from his savings
account.
Unfortunately, his deal with Red Orange did not push through.
An employee of the Bank of the Philippine Islands (BPI) called Land Bank, Araneta Branch, to
inform them that Red Orange had deposited check No. 07410 for payment. Flores confirmed with
BPI that Land Bank had issued the check to Kho. The Central Clearing Department (CCD) of the
Land Bank Head Office faxed a copy of the deposited check to the Araneta branch for payment. The
officers of the Araneta branch examined the fax copy and thought that the details matched the check
purchased by Kho. Thus, Land Bank confirmed the deposited check.
Flores then informed Kho by phone that Check No. 07410 was cleared and paid by the BPI,
Kamuning branch. Shocked, Kho informed Flores that he never negotiated the check because the
deal did not materialize. More importantly, the actual check was still in his possession.
Having discovered that what was deposited and encashed with BPI was a spurious manager’s check,
Kho sent Land Bank a final demand letter for the return of his P25,000,000.00 but the bank did not
comply. Kho filed a Complaint for Specific Performance and Damages against Land Bank,
represented by its Araneta Avenue Branch Manager Flores and its OIC Cruz.
Page 334 of 434

RTC dismissed the complaint. It held that (1) Kho’s act of giving Medel a photocopy of the check
and (2) his failure to inform the bank that the transaction with Red Orange did not push through
were the proximate causes of his loss. CA set aside the RTC’s decision and remanded the case for
further proceedings
ISSUE:
Whether Landbank should be held liable to Kho for the value of the encashed spurious manager’s
check.
RULING:
Yes, Landbank should be held liable to Kho.
Banks are expected to exert the highest degree of, if not the utmost, diligence. Stemming from
their primordial duty of diligence, one of a bank’s prime duties is to ascertain the genuineness of
the drawer’s signature on check being encashed. This holds especially true for manager’s checks.
The genuine check No. 07410 remained in Kho’s possession the entire time and Land Bank admits
that the check it cleared was a fake. When Land Bank’s CCD forwarded the deposited check to its
Araneta branch for inspection, its officers had every opportunity to recognize the forgery of their
signatures or the falsity of the check. Whether by error or neglect, the bank failed to do so, which
led to the withdrawal and eventual loss of the P25,000,000.00. This is the proximate cause of the
loss. Land Bank breached its duty of diligence and assumed the risk of incurring a loss on account
of a forged or counterfeit check. Hence, it should suffer the resulting damage.
_____________________________________________________________________________________
ANNA MARIE L. GUMABON vs. PHILIPPINE NATIONAL BANK

G.R. No. 202514, July 25, 2016, BRION, J.
A certificate of deposit is a written acknowledgment by the bank of the receipt of a sum of

money on deposit which the bank promises to pay to the depositor, to the latter’s order, or to some
other person or the latter’s order. To discharge a debt, the bank must pay to someone authorized to
receive the payment. A bank acts at its peril when it pays deposits evidenced by a certificate of deposit,
without its production and surrender after proper indorsement.
The bank is required to assume a degree of diligence higher than that of a good father of a
family. PNB was negligent for its failure to update and properly handle its depositor’s accounts.
FACTS:
On August 12, 2004, Anna Marie filed a complaint for recovery of sum of money and damages before
the RTC against the Philippine National Bank (PNB) and the PNB Delta branch manager Silverio
Fernandez(Fernandez). The case stemmed from the PNB’s refusal to release Anna Marie’s money in
a consolidated savings account and in two foreign exchange time deposits, evidenced by Foreign
Exchange Certificates of Time Deposit (FXCTD).
Page 335 of 434

In 2001, Anna Marie, together with her mother Angeles and her siblings Anna Elena and Santiago,
(the Gumabons) deposited with the PNB Delta Branch $10,945.28 and $16,830.91, for which they
were issued FXCTD Nos. A-993902 and A-993992, respectively. The Gumabons also maintained
eight (8) savings accounts in the same bank. Anna Marie decided to consolidate the eight (8)
savings accounts and to withdraw P2,727,235.85 from the consolidated savings account to help her
sister’s financial needs.
Anna Marie called the PNB employee handling her accounts, Reino Antonio Salvoro (Salvoro),
to facilitate the consolidation of the savings accounts and the withdrawal. When she went to the
bank on April 14, 2003, she was informed that she could not withdraw from the savings accounts
since her bank records were missing and Salvoro could not be contacted. On April 15, 2003, Anna
Marie presented her two FXCTDs, but was also unable to withdraw against them. Fernandez
informed her that the bank would still verify and investigate before allowing the withdrawal since
Salvoro had not reported for work.
After a month, the PNB finally consolidated the savings accounts and issued a passbook for Savings
Account (SA) No. 6121200. The PNB also confirmed that the total deposits amounted to
P2,734,207.36. Anna Marie, her mother, and the PNB executed a Deed of Waiver and Quitclaim
dated May 23, 2003 to settle all questions regarding the consolidation of the savings accounts. After
withdrawals, the balance of her consolidated savings account was P250,741.82.
On July 30, 2003, the PNB sent letters to Anna Marie to inform her that the PNB refused to honor
its obligation under FXCTD Nos. 993902 and 993992, and that the PNB withheld the release of the
balance of P250,741.82 in the consolidated savings account. According to the PNB, Anna Marie pre-
terminated, withdrew and/or debited sums against her deposits.
Thus, Anna Marie filed before the RTC a complaint for sum of money and damages against the
PNB and Fernandez. As to the two FXCTDs, Anna Marie contended that PNB cannot claim that the
bank deposits have been paid since the certificates of the time deposits are still with Anna Marie.
As to the consolidated savings account, Anna Marie stated that the PNB had already acknowledged
the account’s balance in the Deed of Waiver and Quitclaim amounting to P2,734,207.36. As of
January 26, 2004, the remaining balance was P250,741.82. PNB presented no concrete proof that
this amount had been withdrawn.
RTC ruled in Anna Marie’s favour. However, the CA reversed the RTC’s ruling.
ISSUE:
The issue before this Court is whether Anna Marie is entitled to the payment of the following
amounts:
(a) $10,058.01 or the outstanding balance under FXCTD No. 993902;
(b) $20,244.42 for FXCTD No. 993992;
(c) P250,741.82 for SA No. 6121200; and
(d) Damages.
Page 336 of 434

RULING:
The Court grants the petition and reverse the CA’s ruling. PNB failed to establish the fact of
payment to Anna Marie in FXCTD Nos. 993902 and 993992, and SA No. 6121200. The CA
considered pieces of evidence which are inadmissible under the Rules of Court, particularly the
manager’s check and the corresponding miscellaneous ticket, Anna Rose’s SOA, and the affidavit
of the PNB New York’s bank officer.
The PNB’s alleged payment of the amount covered by SA No. 6121200
The PNB alleged that it had already paid the balance of the consolidated savings account (SA No.
6121200) amounting to P250,741.82. It presented the manager’s check to prove that Anna Marie
purchased the check using the amounts covered by the Gumabon’s two savings accounts which
were later part of Anna Marie’s consolidated savings account. The PNB also presented the
miscellaneous ticket to prove Anna Marie’s withdrawal from the savings accounts. The RTC denied
the admission of the manager’s check and the miscellaneous ticket since the original copies were
never presented.
The PNB cannot simply substitute the mere photocopies of the subject documents for the original
copies without showing the court that any of the exceptions under Section 3 of Rule 130 of the Rules
of Court applies. The PNB’s failure to give a justifiable reason for the absence of the original
documents and to maintain a record of Anna Marie’s transactions only shows the PNB’s dismal
failure to fulfill its fiduciary duty to Anna Marie. Consequently, the CA should not have admitted
the subject documents even if the PNB tendered the excluded evidence.
Notably, the PNB clearly admitted in the executed Deed of Waiver and Quitclaim that it owed Anna
Marie P2,734,207.36 under the consolidated savings account. After a number of uncontested
transactions, the remaining balance of Anna Marie’s deposit became P250,741.82. The inevitable
conclusion is that PNB’s obligation to pay P250,741.82 under SA No. 6121200 subsists.
The PNB’s alleged payment of the amount covered by FXCTD No. 993902
The PNB claimed that it had already paid the amount of $10,058.01 covered by FXCTD No. 993902.
It presented the foreign demand draft dated March 11, 2002 which Anna Marie allegedly purchased
with the funds of FXCTD No. 993902. In addition, the PNB also presented Anna Rose’s SOA to show
that there was a fund transfer involving the contested amount. To further support its claim, the
PNB annexed the affidavit of the PNB New York’s branch officer about the fund transfer. The PNB,
however, failed to formally offer the affidavit as evidence.
The Court ruled that the SOA is inadmissible because it fails to qualify as relevant evidence. As
the RTC correctly stated, the SOA “does not show which of the amount stated therein came from
the funds of Certificate of Time Deposit No. A-993902.”
The affidavit of the PNB New York’s bank officer is also inadmissible since Sec. 34 of the Rules
of Court states that “The court shall consider no evidence which has not been formally offered”.
The PNB’s alleged payment of the amount covered by FXCTD No. 993992
Page 337 of 434

The PNB alleged that Anna Marie’s claim over FXCTD No. 993992 should only be limited to
$5,857.79. It presented the manager’s check, which admissibility we have heretofore discussed and
settled, and the miscellaneous tickets.
The Court cannot absolve the PNB from liability based on these miscellaneous tickets alone. As the
RTC correctly stated, the transactions allegedly evidenced by these tickets were neither posted at
the back of Anna Marie’s certificate, nor recorded on her ledger to show that several withdrawals
had been made on the account.
A certificate of deposit is a written acknowledgment by the bank of the receipt of a sum of money
on deposit which the bank promises to pay to the depositor, to the latter’s order, or to some other
person or the latter’s order. To discharge a debt, the bank must pay to someone authorized to
receive the payment. A bank acts at its peril when it pays deposits evidenced by a certificate of
deposit, without its production and surrender after proper indorsement.
As the RTC had correctly stated, the PNB should not have allowed the withdrawals, if there were
indeed any, without the presentation of the covering foreign certificates of time deposit. There are
no irregularities on Anna Marie’s certificates to justify the PNB’s refusal to pay the stated amounts
in the certificates when it was presented for payment.
PNB is liable to Anna Marie for actual, moral, and exemplary damages as well as attorney’s
fees for its negligent acts as a banking institution.
The bank is required to assume a degree of diligence higher than that of a good father of a family.
PNB was negligent for its failure to update and properly handle Anna Marie’s accounts. This is
patent from the PNB’s letter to Anna Marie, admitting the error and unauthorized withdrawals
from her account. Moreover, Anna Marie was led to believe that the amounts she has in her
accounts would remain because of the Deed of Waiver and Quitclaim executed by her, her mother,
and PNB. Assuming arguendo that Anna Marie made the contested withdrawals, due diligence
requires the PNB to record the transactions in her passbooks.
Indeed, a great possibility exists that Salvoro was involved in the unauthorized withdrawals. Anna
Marie entrusted her accounts to and made her banking transactions only through him. Salvaro’s
unexplained disappearance further confirms this Court’s suspicions. The Court is alarmed that he
was able to repeatedly do these unrecorded transactions without the bank noticing it. This only
shows that the PNB has been negligent in the supervision of its employees.
_____________________________________________________________________________________
PHILIPPINE NATIONAL BANK vs. JUAN F. VILA

G.R. No. 213241, August 1, 2016, PEREZ,J
Before approving a loan application, it is standard operating procedure for banks and financial
institutions to conduct an ocular inspection of the property offered for mortgage and to determine the
real owners thereof. The apparent purpose of an ocular inspection is to protect the "true owner" of the
property as well as innocent third parties with a right, interest or claim thereon from a usurper who
may have acquired a fraudulent certificate of title thereto.
Page 338 of 434

FACTS:
Sometime in 1986, Spouses Reynaldo Cornista and Erlinda Gamboa Cornista (Spouses Cornista)
obtained a loan from Traders Royal Bank (Traders Bank). To secure the said obligation, the Spouses
Cornista mortgaged to the bank a parcel of land registered under their names by the Register of
Deeds of Pangasinan. For failure of the Spouses Cornista to make good of their loan obligation after
it has become due, Traders Bank foreclosed the mortgage constituted on the security of the loan.
After the notice and publication requirements were complied with, the subject property was sold
at the public auction. During the public sale, respondent Juan F. Vila (Vila) was declared as the
highest bidder. A Certificate of Final Sale was issued to Vila after the one-year redemption period
had passed without the Spouses Cornista exercising their statutory right to redeem the subject
property. He was, however, prevented from consolidating the ownership of the property under his
name because the owner's copy of the certificate of title was not turned over to him by the Sheriff.
Despite the lapse of the redemption period and the fact of issuance of a Certificate of Final Sale to
Vila, the Spouses Cornista were nonetheless allowed to buy back the subject property. A Certificate
of Redemption was issued for this purpose and was duly annotated in the title. Claiming that the
Spouses Cornista already lost their right to redeem the subject property, Vila filed an action for
nullification of redemption, transfer of title and damages against the Spouses Cornista. A Notice of
Lis Pendens was issued for this purpose and was duly recorded in the certificate of title of the
property.
RTC rendered a Decision in favor of Vila. The same was affirmed by CA and the decision eventually
became final and executor. In order to enforce the favorable decision, Vila filed before the RTC a
Motion for the Issuance of Writ of Execution which was granted by the court. By unfortunate tum
of events, the Sheriff could not successfully enforce the decision because the certificate of title
covering the subject property was no longer registered under the names of the Spouses Cornista.
Upon investigation it was found out that during the interregnum the Spouses Cornista were able to
secure a loan from the PNB using the same property subject of litigation as security. The Real Estate
Mortgage (REM) was recorded month before the Notice of Lis Pendens was annotated. Eventually,
the Spouses Cornista defaulted in the payment of their loan obligation with the PNB prompting the
latter to foreclose the property offered as security. The bank emerged as the highest bidder during
the public sale as shown at the Certificate of Sale issued by the Sheriff. As with the prior mortgage,
the Spouses Cornista once again failed to exercise their right of redemption within the required
period allowing PNB to consolidate its ownership over the subject property.
The foregoing tum of events left Vila with no other choice but to commence another round of
litigation against the Spouses Cornista and PNB seeking for the nullification of TCT issued under
the name of PNB and for the payment of damages.
ISSUE:
Whether or not PNB is a mortgagee in good faith.
RULING:
PNB failed to observe the exacting standards required of banking institutions which are behooved
by statutes and jurisprudence to exercise greater care and prudence before entering into a mortgage
contract.
Page 339 of 434

Before approving a loan application, it is standard operating procedure for banks and financial
institutions to conduct an ocular inspection of the property offered for mortgage and to determine
the real owners thereof. The apparent purpose of an ocular inspection is to protect the "true owner"
of the property as well as innocent third parties with a right, interest or claim thereon from a
usurper who may have acquired a fraudulent certificate of title thereto.
Had the bank been prudent and diligent enough in ascertaining the condition of the property, it
could have discovered that the same was in the possession of Vila who, at that time, possessed a
colorable title thereon being a holder of a Final Certificate of Sale. The RTC further exposed the
frailty of PNB' s claim by pointing to the fact that it was Vila who was paying the realty tax on the
property, a crucial information that the bank could have easily discovered had it exercised due
diligence. The failure of the PNB to take precautionary steps would mean negligence on its part and
would thereby preclude it from invoking that it is a mortgagee in good faith.
_____________________________________________________________________________________
PHILIPPINE NATIONAL BANK, Petitioner, -versus- PABLO V. RAYMUNDO, Respondents.

G.R. No. 208672, THIRD DIVISION, December 7, 2016, PERALTA, J.
A bank's disregard of its own banking policy amounts to gross negligence, which is
described as "negligence characterized by the want of even slight care, acting or omitting to act in a
situation where there is duty to act, not inadvertently but willfully and unintentionally with a
conscious indifference to consequences insofar as other persons may be affected." Payment of the
amounts of checks without previously clearing them with the drawee bank, especially so
where the drawee bank is a foreign bank and the amounts involved were large, is contrary
to normal or ordinary banking practice. Before the check shall have been cleared for deposit, the
collecting bank can only assume at its own risk that the check would be cleared and paid out. As a
bank Branch Manager, Raymundo is expected to be an expert in banking procedures, and he has the
necessary means to ascertain whether a check, local or foreign, is sufficiently funded.
FACTS:
On July 30, 1993, accused-appellee Pablo V. Raymundo (Raymundo), then Department Manager of
PNB San Pedro Branch, approved for deposit a foreign draft check dated June 23, 1993, in the
amount of $172,54.9.00 issued by Solomon Guggenheim Foundation, drawn against Morgan
Guaranty Company of New York, payable to Merry May Juan (Ms. Juan) in the opening of the latter's
checking account with PNB San Pedro Branch. Consequent to the approval for deposit of the foreign
draft check, Checking Account No. 447-810168-1 and a check booklet were issued to Ms. Juan. On
even date, Ms. Juan drew six (6) PNB Checks, five (5) of which were made payable to C&T Global
Futures and one (1) payable to "CASH", all in the aggregate amount of FOUR MILLION PESOS
(P4,000,000.00). The six (6) checks were negotiated by Ms. Juan and were approved for
payment on the same day by Raymundo, without waiting for the foreign draft check,
intended to fund the issued check, to be cleared by the PNB Foreign Currency Clearing
Unit.
On August 6, 1993 and within the clearing period of twenty-one (21) days for foreign draft checks,
the PNB received a telex message from BTCNY that the foreign draft check was dishonored for
being fraudulent. PNB Foreign Currency Clearing Unit, sent a memorandum to Raymundo, as then
Page 340 of 434

Manager of PNB San Pedro, and informed the latter of the return and dishonor of the foreign
currency draft and the corresponding debit of the PNB' s account to collect the proceeds of the
erroneously paid foreign draft check.
For irregularly approving the payment of the six (6) checks issued by Ms. Juan, without waiting for
the foreign draft check to be cleared, Raymundo, as then Department Manager of PNB San Pedro
Branch, was administratively charged by PNB for Conduct Prejudicial to the Interest of the Service
and/or Gross Violation of Bank's Rules and Regulations.
Both the RTC and CA ruled in favor of Raymundo. The CA ruled that Raymundo acted in good
faith in relying upon his subordinates, i.e., the bookkeeper and accountant, who were primarily
assigned with the task of clearing the checks and ensuring that they are sufficiently funded. It held
that he has no duty to go beyond the verification of the documents submitted by the bookkeeper
and the accountant, and to personally authenticate the procedures taken. It added that considering
that his duties as Branch Manager entails a lot of responsibility, it is unreasonable to require him
to accomplish and direct a personal examination of the records of the account of each particular
client before affixing his signature on the documents as approving authority.
ISSUE:
Whether or not Raymundo is guilty of gross negligence and should be held liable for losses
sustained by the bank from the fraudulent transaction of Ms. Juan.
RULING:
Raymundo is guilty of gross negligence and should be held liable to bank for damages.
Raymundo's gross negligence is shown (1) in allowing the peso conversion of the foreign check to
be credited to her newly-opened peso checking account, even before the lapse of the 21-day clearing
period, and (2) in issuing her a check booklet, all on the very same day the said account was opened
on July 30, 1993. In his desire to secure bigger bank deposits, Raymundo disregarded the bank's
foreign check clearing policy, and risked his trust and confidence on Ms. Juan's and her cohorts'
assurance that the foreign check was good and that they would not negotiate any check until the
former check is cleared.
A bank's disregard of its own banking policy amounts to gross negligence, which is described as
"negligence characterized by the want of even slight care, acting or omitting to act in a situation
where there is duty to act, not inadvertently but willfully and unintentionally with a conscious
indifference to consequences insofar as other persons may be affected." Payment of the amounts of
checks without previously clearing them with the drawee bank, especially so where the drawee
bank is a foreign bank and the amounts involved were large, is contrary to normal or ordinary
banking practice. Before the check shall have been cleared for deposit, the collecting bank can only
assume at its own risk that the check would be cleared and paid out. As a bank Branch Manager,
Raymundo is expected to be an expert in banking procedures, and he has the necessary means to
ascertain whether a check, local or foreign, is sufficiently funded.
_____________________________________________________________________________________
Page 341 of 434

GENERAL BANKING LAW
GOLDENWAY MERCHANDISING CORPORATION vs. EQUITABLE PCI BANK

G.R. No. 195540, March 13, 2013
J. Villarama, Jr.
Section 47 of R.A. No. 8791 otherwise known as “The General Banking Law of 2000” which took
effect on June 13, 2000, amended Act No. 3135. Under the new law, an exception is thus made in the
case of juridical persons which are allowed to exercise the right of redemption only “until, but not
after, the registration of the certificate of foreclosure sale” and in no case more than three (3) months
after foreclosure, whichever comes first.
The law does not violate the constitutional proscription against impairment of the obligation
of contract and the equal protection clause. It did not divest juridical persons of the right to redeem
their foreclosed properties but only modified the time for the exercise of such right by reducing the
one-year period originally provided in Act No. 3135. The difference in the treatment of juridical persons
and natural persons was based on the nature of the properties foreclosed – whether these are used as
residence, for which the more liberal one-year redemption period is retained, or used for industrial or
commercial purposes, in which case a shorter term is deemed necessary to reduce the period of
uncertainty in the ownership of property and enable mortgagee-banks to dispose sooner of these
acquired assets.
Facts:
On November 29, 1985, Goldenway Merchandising Corporation executed a Real Estate Mortgage in
favor of Equitable PCI Bank over its real properties situated in Valenzuela to secure the Two Million
Pesos (P2,000,000.00) loan granted by respondent to petitioner.
Petitioner failed to settle its loan obligation hence respondent extrajudicially foreclosed the
mortgage. The mortgaged properties were sold for P3,500,000.00 to respondent. Accordingly, a
Certificate of Sale was issued and such certificate was registered.
Petitioner’s counsel offered to redeem the foreclosed properties by tendering a check in the amount
of P3,500,000.00. However, petitioner was told that such redemption is no longer possible because
the certificate of sale had already been registered. Petitioner also verified with the Registry of Deeds
that title to the foreclosed properties had already been consolidated in favor of respondent and
that new certificates of title were issued in the name of respondent.
As a consequence, petitioner filed a complaint for specific performance and damages against the
respondent. Petitioner argued that applying the shortened redemption period in Section 47 of R.A.
8791 to the real estate mortgage executed in 1985 would result in the impairment of obligation of
contracts and violation of the equal protection clause under the Constitution.
The trial court rendered its decision dismissing the complaint. Aggrieved, petitioner appealed to
the CA which affirmed the trial court’s decision.
Page 342 of 434

Issue:
Whether or not the amendment in Section 47 of RA 8791 providing for a shortened redemption
period in case of juridical person impairs the obligation of contracts and violates equal protection
clause
Ruling:
Petitioner’s contention that Section 47 of R.A. 8791 violates the constitutional proscription against
impairment of the obligation of contract has no basis.
Section 47 did not divest juridical persons of the right to redeem their foreclosed properties but
only modified the time for the exercise of such right by reducing the one-year period originally
provided in Act No. 3135. The new redemption period commences from the date of foreclosure sale,
and expires upon registration of the certificate of sale or three months after foreclosure, whichever
is earlier. There is likewise no retroactive application of the new redemption period because Section
47 exempts from its operation those properties foreclosed prior to its effectivity and whose owners
shall retain their redemption rights under Act No. 3135.
Petitioner’s claim that Section 47 infringes the equal protection clause as it discriminates
mortgagors/property owners who are juridical persons is equally bereft of merit.
The Court agreed with the CA that the legislature clearly intended to shorten the period of
redemption for juridical persons whose properties were foreclosed and sold in accordance with the
provisions of Act No. 3135.
The difference in the treatment of juridical persons and natural persons was based on the nature
of the properties foreclosed – whether these are used as residence, for which the more liberal one-
year redemption period is retained, or used for industrial or commercial purposes, in which case a
shorter term is deemed necessary to reduce the period of uncertainty in the ownership of property
and enable mortgagee-banks to dispose sooner of these acquired assets. It must be underscored
that the General Banking Law of 2000, crafted in the aftermath of the 1997 Southeast Asian financial
crisis, sought to reform the General Banking Act of 1949 by fashioning a legal framework for
maintaining a safe and sound banking system. In this context, the amendment introduced by
Section 47 embodied one of such safe and sound practices aimed at ensuring the solvency and
liquidity of our banks. It cannot therefore be disputed that the said provision amending the
redemption period in Act 3135 was based on a reasonable classification and germane to the purpose
of the law.
The right of redemption being statutory, it must be exercised in the manner prescribed by the
statute, and within the prescribed time limit, to make it effective.
CENTRAL BANK ACT
BANK OF COMMERCE V. PLANTERS DEVELOPMENT BANK, G.R. NOS. 154470-71,

SEPTEMBER 24, 2012
Page 343 of 434

Under Central Bank Circular No. 769-80 in case of an allegedly fraudulently assigned certificate of
indebtedness, the BSP shall merely "issue and circularize a ‘stop order’ against the transfer,
exchange, redemption of the [registered] certificate" without any adjudicative function. Once the
issue and/or sale of a security is made, the BSP would necessarily make a determination, in
accordance with its own rules, of the entity entitled to receive the proceeds of the security upon its
maturity. This determination by the BSP is an exercise of its administrative powers under the law
as an incident to its power to prescribe rules and regulations governing open market operations to
achieve the "primary objective of achieving price stability." As a matter of necessity, too, the same
rules and regulations facilitate transaction with the BSP by providing for an orderly manner of,
among others, issuing, transferring, exchanging and paying securities representing public debt.
Significantly, when competing claims of ownership over the proceeds of the securities it has issued
are brought before it, the law has not given the BSP the quasi-judicial power to resolve these
competing claims as part of its power to engage in open market operations. Nothing in the BSP’s
charter confers on the BSP the jurisdiction or authority to determine this kind of claims, arising out
of a subsequent transfer or assignment of evidence of indebtedness – a matter that appropriately
falls within the competence of courts of general jurisdiction. That the statute withholds this power
from the BSP is only consistent with the fundamental reasons for the creation of a Philippine central
bank, that is, to lay down stable monetary policy and exercise bank supervisory functions.
LAW ON SECRECY OF BANK DEPOSITS
DOÑA ADELA EXPORT INTERNATIONAL, INC. vs. TRADE AND INVESTMENT

DEVELOPMENT CORPORATION and the BANK OF THE PHILIPPINE ISLANDS
G.R. No. 201931, February 11, 2015, J. Villarama, Jr.
Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits, provides for exceptions when
records of deposits may be disclosed. These are under any of the following instances: (a) upon written
permission of the depositor, (b) in cases of impeachment, (c) upon order of a competent court in the
case of bribery or dereliction of duty of public officials or, (d) when the money deposited or invested is
the subject matter of the litigation, and (e) in cases of violation of the Anti-Money Laundering Act,
the Anti-Money Laundering Council may inquire into a bank account upon order of any competent
court. The Joint Motion to Approve Agreement was executed by BPI and TIDCORP only. There was
no written consent given by Doña Adela or its representative that it is waiving the confidentiality of
its bank deposits.It is clear therefore that Doña Adela is not bound by the said provision since it was
without the express consent of Doña Adela who was not a party and signatory to the said agreement.
Facts:
Doña Adela Export International, Inc. (Doña Adela) filed a Petition for Voluntary
Insolvency. The RTC, after finding the petition sufficient inform and substance, issued an order
declaring Doña Adela as insolvent and staying all civil proceedings against it.
Thereafter, Atty. Arlene Gonzales was appointed as receiver. Subsequently, Atty. Gonzales
filed a Motion for Parties to Enter Into Compromise Agreement incorporating her proposed terms
of compromise.
Page 344 of 434

Creditors Trade and Investment Development Corporation (TIDCORP) and Bank of the
Philippine Islands (BPI) also filed a Joint Motion to Approve the Compromise Agreement.
One of the stipulations of the agreement was the waiver of confidentiality in which Doña
Adela shall waive all rights to confidentiality provided under the provisions of Republic Act No.
1405, as amended, otherwise known as the Law on Secrecy of Bank Deposits, and Republic Act No.
8791, otherwise known as The General Banking Law of 2000. Furthermore Doña Adela will grant
TIDCORP and BPI access to any deposit or other accounts maintained by them with any bank.
The RTC approved the Compromise Agreement filed by TIDCORP and BPI.
Doña Adela filed a motion for partial reconsideration and claimed that TIDCORP and BPI’s
agreement imposes on it several obligations such as waiver of confidentiality of its bank deposits
but it is not a party and signatory to the said agreement. Furthermore, there must be an express
and written waiver from the depositor concerned as required by law before any third person or
entity is allowed to examine bank deposits or bank records.
BPI counters that Doña Adela is estopped from questioning the BPI-TIDCORP compromise
agreement because Doña Adela and its counsel participated in all the proceedings involving the
subject compromise agreement and did not object when the compromise agreement was
considered by the RTC.
The RTC denied the motion and held that Doña Adela’s silence and acquiescence to the
joint motion to approve compromise agreement while it was set for hearing by creditors BPI and
TIDCORP is tantamount to admission and acquiescence.
Issue:
Whether the waiver of confidentiality provision in the Agreement between TIDCORP and
BPI is valid despite Doña Adela not being a party and signatory to the same.
Ruling:
No.
Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits, provides for exceptions
when records of deposits may be disclosed. These are under any of the following instances: (a) upon
written permission of the depositor, (b) in cases of impeachment, (c) upon order of a competent
court in the case of bribery or dereliction of duty of public officials or, (d) when the money
deposited or invested is the subject matter of the litigation, and (e) in cases of violation of the Anti-
Money Laundering Act, the Anti-Money Laundering Council may inquire into a bank account upon
order of any competent court.
In this case, the Joint Motion to Approve Agreement was executed by BPI and TIDCORP
only. There was no written consent given by Doña Adela or its representative, Epifanio Ramos, Jr.,
that Doña Adela is waiving the confidentiality of its bank deposits. The provision on the waiver of
the confidentiality of Doña Adela’s bank deposits was merely inserted in the agreement. It is clear
Page 345 of 434

therefore that Doña Adela is not bound by the said provision since it was without the express
consent of Doña Adela who was not a party and signatory to the said agreement.
Neither can be Doña Adela deemed to have given its permission by failure to interpose its
objection during the proceedings. It is an elementary rule that the existence of a waiver must be
positively demonstrated since a waiver by implication is not normally countenanced. The norm is
that a waiver must not only be voluntary, but must have been made knowingly, intelligently, and
with sufficient awareness of the relevant circumstances and likely consequences.
Furthermore, it is basic in law that a compromise agreement, as a contract, is binding only

upon the parties to the compromise, and not upon non-parties. This is the doctrine of relativity of
contracts. The sound reason for the exclusion of non-parties to an agreement is the absence of a
vinculum or juridical tie which is the efficient cause for the establishment of an obligation. Hence,
a court judgment made solely on the basis of a compromise agreement binds only the parties to the
compromise, and cannot bind a party litigant who did not take part in the compromise agreement.
_____________________________________________________________________________________
BPI FAMILY SAVINGS BANKC, INC. vs. ST. MICHAEL MEDICAL CENTER, INC.
G.R. No. 205469, March 25, 2015, J. Perlas-Bernabe
It is well to emphasize that the remedy of rehabilitation should be denied to corporations that
do not qualify under the Rules. Neither should it be allowed to corporations whose sole purpose is to
delay the enforcement of any of the rights of the creditors, which is rendered obvious by: (a) the
absence of a sound and workable business plan; (b) baseless and unexplained assumptions, targets,
and goals; and (c) speculative capital infusion or complete lack thereof for the execution of the
business plan. In this case, not only has the petitioning debtor failed to show that it has formally
began its operations which would warrant restoration, but also it has failed to show compliance with
the key requirements under the Rules, the purpose of which are vital in determining the propriety of
rehabilitation. Thus, for all the reasons hereinabove explained, the Court is constrained to rule in
favor of BPI Family and hereby dismiss SMMCI’s Rehabilitation Petition.
Facts:
Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole proprietors of St.
Michael Hospital. With a vision to upgrade St. Michael Hospital into a modern, well-equipped and
full service tertiary 11-storey hospital, Sps. Rodil purchased two (2) parcels of land adjoining their
existing property and, on May 22, 2003, incorporated SMMCI, with which entity they planned to
eventually consolidate St. Michael Hospital’s operations. In order to finance the expansion of the
premises of the hospital, the Spouses Rodil obtained load from BPI Family Savings Bank. The
Spouses thereafter incurred problems with the first contractor, so the building was not completed.
SMMCI was only able to pay the interest on its BPI Family loan, or the amount of 3,000,000.00 over
a two-year period, from the income of St. Michael Hospital.
On September 25, 2009, BPI Family demanded immediate payment of the entire loan
obligation and, soon after, filed a petition for extrajudicial foreclosure of the real properties covered
by the mortgage. The auction sale was scheduled on December 11, 2009, which was postponed to
February 15, 2010 with the conformity of BPI Family.
Page 346 of 434

On August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation18 (Rehabilitation
Petition) before the RTC, with prayer for the issuance of a Stay Order as it foresaw the impossibility
of meeting its obligation to BPI Family, its purported sole creditor. In its proposed Rehabilitation
Plan,23 SMMCI merely sought for BPI Family (a) to defer foreclosing on the mortgage and (b) to
agree to a moratorium of at least two (2) years during which SMMCI – either through St. Michael
Hospital or its successor – will retire all other obligations. After which, SMMCI can then start
servicing its loan obligation to the bank under a mutually acceptable restructuring agreement. 24
SMMCI declared that it intends to conclude pending negotiations for investments offered by a
group of medical doctors whose capital infusion shall be used (a) to complete the finishing
requirements for the 3rd and 5th floors of the new building; (b) to renovate the old 5storey building
where St. Michael Hospital operates; and (c) to pay, in whole or in part, the bank loan with the view
of finally integrating St. Michael Hospital with SMMCI. Finding the Rehabilitation Petition to be
sufficient in form and substance, the RTC issued a Stay Order. In an Order 34 dated August 4, 2011,
the RTC approved the Rehabilitation Plan
Aggrieved, BPI Family elevated the matter before the CA, mainly arguing that the approval
of the Rehabilitation Plan violated its rights as an unpaid creditor/mortgagee and that the same
was submitted without prior consultation with creditors. In a Decision dated August 30, 2012, the
CA affirmed the RTC’s approval of the Rehabilitation Plan. Hence, this petition.
Issue:
Whether or not the CA correctly affirmed SMMCI’s Rehabilitation Plan as approved by the
RTC.
Ruling:
No. that SMMCI’s Rehabilitation Plan, an indispensable requisite in corporate rehabilitation

proceedings, failed to comply with the fundamental requisites outlined in Section 18, Rule 3 of the
Rules, particularly, that of a material financial commitment to support the rehabilitation and an
accompanying liquidation analysis, all of the petitioning debtor: SEC. 18. Rehabilitation Plan. -
The rehabilitation plan shall include (a) the desired business targets or goals and the duration and
coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which shall
include the manner of its implementation, giving due regard to the interests of secured creditors
such as, but not limited, to the nonimpairment of their security liens or interests; (c) the material
financial commitments to support the rehabilitation plan; (d) the means for the execution of the
rehabilitation plan, which may include debt to equity conversion, restructuring of the debts, dacion
en pago or sale exchange or any disposition of assets or of the interest of shareholders, partners or
members; (e) a liquidation analysis setting out for each creditor that the present value of payments
it would receive under the plan is more than that which it would receive if the assets of the debtor
were sold by a liquidator within a six-month period from the estimated date of filing of the petition;
and (f) such other relevant information to enable a reasonable investor to make an informed
decision on the feasibility of the rehabilitation plan.
It is well to emphasize that the remedy of rehabilitation should be denied to corporations

that do not qualify under the Rules. Neither should it be allowed to corporations whose sole
purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious
Page 347 of 434

by: (a) the absence of a sound and workable business plan; (b) baseless and unexplained
assumptions, targets, and goals; and (c) speculative capital infusion or complete lack thereof for the
execution of the business plan. Unfortunately, these negative indicators have all surfaced to the
fore, much to SMMCI’s chagrin. While the Court recognizes the financial predicaments of upstart
corporations under the prevailing economic climate, it must nonetheless remain forthright in
limiting the remedy of rehabilitation only to meritorious cases. As above-mentioned, the purpose
of rehabilitation proceedings is not only to enable the company to gain a new lease on life but also
to allow creditors to be paid their claims from its earnings, when so rehabilitated. Hence, the
remedy must be accorded only after a judicious regard of all stakeholders’ interests; it is not a one-
sided tool that may be graciously invoked to escape every position of distress.
In this case, not only has the petitioning debtor failed to show that it has formally began its
operations which would warrant restoration, but also it has failed to show compliance with the key
requirements under the Rules, the purpose of which are vital in determining the propriety of
_____________________________________________________________________________________
SPOUSES EDUARDO AND LYDIA SILOS vs. PHILIPPINE NATIONAL BANK

G.R. No. 181045, July 2, 2014, J. Del Castillo
Plainly, with the subject credit agreement, the element of consent or agreement by the
borrower is now completely lacking, which makes [PNB’s] unlawful act all the more reprehensible.
Accordingly, [Spouses Silos] are correct in arguing that estoppels should not apply to them,
for estoppels cannot be predicated on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppels if it is prohibited by law or public policy. It appears that by its acts,
PNB violated the Truth in Lending Act or Republic Act No. 3765 which was enacted to protect citizens
from a lack of awareness of the true cost of credit to the use by using a full disclosure of such cost
with a view of preventing the uninformed use of credit to the detriment of the national economy.
Facts:
Spouses Silos were engaged in retail business since 1980s and for which they secured several
loans from PNB. Consequently, the following agreements were executed, to wit:
1. Real Estate Mortgage to secure the credit line of PhP150,000.00;

2. Supplement to the Real Estate Mortgage to secure the credit line which was first raised
to PhP1.8 Million then to PhP2.5 Million;
3. Credit Agreement of July 1989 and Eight (8) Promissory Notes; and,
4. Amendment to Credit Agreement of August 1991 and Eighteen (18) Promissory Notes.
The original Credit Agreement provided an interest of 19.5% per annum and authorized PNB
to modify the interest rate without need of notice to Spouses Silos and depending on whatever
policy the Bank may adopt. All of the agreements and promissory notes contained stipulations
respecting this unilateral modification of interest rate.
Page 348 of 434

PNB renewed the credit line from 1990 up to 1997 and Spouses Silos religiously paid their
accounts. In 1997, due to the Asian Financial Crisis, Spouses Silos failed to make good on their
outstanding promissory note for PhP2.5 Million, which provided for a penalty clause equivalent to
24% per annum in case of default. Thus, PNB prepared a Statement of Account showing aggregate
accountabilities in the amount of PhP3,620,541.60 against Spouses Silos. Failing to heed PNB’s
demand, the mortgages were foreclosed and sold to the Bank at auction for the amount of
PhP4,324,172.96.
Spouses Silos commenced a complaint for annulment of foreclosure sale with prayer for
accounting of their credit with PNB. After hearing the opposing arguments of the parties on the
disputed stipulations, the trial court ruled in favor of PNB and upheld the accounting of debts,
foreclosure sale and agreements between the parties among others. On appeal, the CA affirmed the
judgment of the trial court but with modifications respecting the applicable interest on the unpaid
promissory note, attorney’s fees of 10% and reimbursement of the difference between the bid price
and the total amount due.
Issues:
1. Whether or not the provision conferring upon PNB the power to solely determine and
change the interest rate stated in the subject credit agreement is contrary to law.
2. What is the appropriate interest that may be applied to the remaining monetary
obligation of Spouses Silos?
3. Whether or not the penalty charge in the still unpaid promissory note is also covered by
the security.
Ruling:
1. YES, the provision runs counter to Article 1308 of the Civil Code and the Truth in
Lending Act.
In a long line of cases, the Court has struck down provisions in credit documents issued by
PNB to its borrowers, which allow it to increase or decrease interest rate within the limits allowed
by law at any time depending on whatever policy it may adopt in the future. In the cases of PNB vs.
CA circa 1991 and 1994, the Court took the position that P.D. No. 1684 and C.B. Circular No. 905,
respecting the non-application of the usury law in loans and certain forbearances, “no more than
allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate
that shall accrue on a loan or forbearance of money, goods or credits.” In other words, the parties
can agree to adjust, upward or downward, the interest stipulated. Nevertheless, the Court pointed
out that “the said law and circular did not authorize either party to unilaterally raise the interest rate
without the other’s consent.” Thus, it was held that such clause introduced by PNB ran afoul with
the principle of mutuality of contracts ordained in Article 1308 of the Civil Code.
In Spouses Almeda vs. CA, the Court also invalidated the very same provisions in PNB’s
prepared Credit Agreement and mainly ratiocinated that “[e]scalation clauses are not basically
wrong or legally objectionable so long as they are not solely potestative but based on reasonable and
valid grounds [and in this case] not only are the increases of the interest rates on the basis of
escalation clause patently unreasonable and unconscionable, but also there are no valid and
reasonable standards upon which the increases are anchored.”
Page 349 of 434

In another PNB vs. CA case, circa 1996, the disquisition went in this wise: “while the Usury
Law ceiling on interest rates was lifted by C.B. No. 905, nothing in the said circular could possibly be
read as granting PNB carte blanche authority to raise interest rates to levels which would either
enslave its borrowers or lead to a hemorrhaging of their assets.”
An equally relevant case, New Sampaguita Builders Construction, Inc. vs. PNB, this Court
pronounced that “excessive interests, penalties and other charges not revealed in the disclosure
statements issued by banks, even it stipulated in the promissory notes, cannot be given effect under
the Truth in Lending Act.”
Withal, in the light of these cases, the stipulations found in the Credit Agreement,
Amendment to the Credit Agreement and the promissory notes prepared by PNB in the instant
case must be once more invalidated. The lack of consent by Spouses Silos has been made obvious
by the fact that they signed the promissory notes in blank for PNB to fill. The witness for PNB,
Branch Manager Aspa, admitted that interest rates were fixed solely by its Treasury Department in
Manila, which were then simply communicated to all PNB branches for imple-mentation. If this
were the case, then this would explain why Spouses Silos had to sign the promissory notes in blank,
since the imposable interest rates have yet to be determined and fixed by PNB Treasury
Department.
Further, in Aspa’s enumeration of factors that determine the interest rates, it can be seen
that considerations which affect PNB’s borrowers are ignored. A borrower’s current financial state,
his feedback or opinions, the nature and purpose of his borrowings, the effect of foreign currency
values or fluctuations on his business or borrowing, etc. – these are not factors which influence the
fixing of interest rates to be imposed on him. Clearly, PNB’s method of fixing interest rates based
on one-sided, indeterminate, and subjective criteria such as profitability, cost of money, bank cost
etc. is arbitrary for there is no fixed standard or margin above or below these considerations.
To repeat what has been said in the cited cases, any modification in the contract, such as
interest rates must be made with the consent of the contracting parties. The minds of all the parties
must meet as to the proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan agreements, the rate of interest is a principal condition, if not the
most important component. Thus, any modification thereof must be mutually agreed upon;
otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in question no longer
provide that the parties shall agree upon the interest rate to be fixed; instead, they are worded in
such a way that Spouses Silos shall agree to whatever interest rate PNB fixes. Plainly, with the
subject credit agreement, the element of consent or agreement by Spouses Silos is now completely
lacking, which makes PNB’s unlawful act all the more reprehensible.
Accordingly, Spouses Silos are correct in arguing that estoppels should not apply to them,
for estoppels cannot be predicated on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppels if it is prohibited by law or public policy. It appears that by its
acts, PNB violated the Truth in Lending Act or Republic Act No. 3765 which was enacted to protect
citizens from a lack of awareness of the true cost of credit to the use by using a full disclosure of
Page 350 of 434

such cost with a view of preventing the uninformed use of credit to the detriment of the national
economy.”
However, the one-year period within which an action for violation of the Truth in Lending
Act may be filed evidently prescribed long ago, or sometime in 2001, one year after Spouses Silos
received the March 2000 demand letter which contained the illegal charges.
The fact that Spouses Silos later received several statements of account detailing its
outstanding obligations does not cure PNB’s breach. To repeat, the belated discovery of the true
cost of credit does not reverse the ill effects of an already consummated business decision. Neither
may the statements be considered proposals sent to secure Spouses Silos’ conformity; they were
sent after the imposition and application of the interest rate, and not before.
2. The loan shall be subject to the original or stipulated rate of interest and upon maturity,
the amount due shall be subject to legal interest at the rates of 12% and then 6% per
annum.
Since the escalation clause is annulled, the principal amount of the loan is subject to the
original or stipulated rate of interest and upon maturity, the amount due shall be subject to legal
interest at the rate of 12% per annum. The interests paid by Spouses Silos should be applied first to
the payment of the stipulated or legal and unpaid interest, as the case may be and later, to the
capital or principal. PNB should then refund the excess amount of interest that it has illegally
imposed upon Spouses Silos; the amount to be refunded refers to that paid by Spouses Silos when
they had no obligation to do so. Thus, the parties’ original agreement stipulated the payment of
19.5% interest; however, this rate was intended to apply only to the first promissory note which
expired in November 1989 and was paid by Spouses Silos; it was not intended to apply to the whole
duration of the loan. Subsequent higher interest rates have been declared illegal; but because only
the rates are found to be improper, the obligation to pay interest subsists, the same to be fixed at
the legal rate of 12% per annum. However, the 12% interest shall apply only until June 30, 2013.
Starting July 01, 2013, the prevailing rate of interest shall be 6% per annum pursuant to BSP
Monetary Board Circular No. 799.
3. NO, the penalty charge must be excluded for not being expressly covered by the credit
agreement.
The unpaid promissory note provides that failure to pay it or any installment thereon, when
due, shall constitute default, and a penalty charge of 24% per annum based on the defaulted
principal amount shall be imposed. This penalty charge can no longer be sustained based on the
above disquisition. Having found the credit agreements and promissory notes to be tainted, the
mortgages must likewise be accorded with the same treatment. After all, a mortgage and a note
secured by it are deemed parts of one transaction and are construed together. Being so tainted and
having attributes of a contract of adhesion as the principal credit documents, the mortgages must
be construed strictly and against the party who drafted it. An examination of the mortgage
agreements reveals that nowhere it is stated that penalties are to be included in the secured amount.
Construing the silence strictly against PNB, the Court can only conclude that the parties did not
intend to include the penalty allowed under the subject note as part of the secured amount.
_____________________________________________________________________________________
Page 351 of 434

PHILIPPINE AMANAH BANK (NOW AL-AMANAH ISLAMIC INVESTMENT BANK OF THE

PHILIPPINES, ALSO KNOWN AS ISLAMIC BANK) vs. EVANGELISTA CONTRERAS
G.R. No. 173168, September 29, 2014, J. Brion
In the present case, however, nothing in the documents presented by Calinico would arouse
the suspicion of PAB to prompt a more extensive inquiry. When the Ilogon spouses applied for a loan,
they presented as collateral a parcel of land evidenced by an OCT issued by the Office of the Register
of Deeds… and registered in the name of Calinico. This document did not contain any inscription or
annotation indicating that Contreras was the owner or that he has any interest in the subject land. In
fact, he admitted that there was no encumbrance annotated on Calinico’s title at the time of the
latter’s loan application. Any private arrangement between Calinico and him regarding the proceeds
of the loan was not the concern of PAB, as it was not a privy to this agreement. If Calinico violated
the terms of his agreement with Contreras on the turn-over of the proceeds of the loan, then the
latter's proper recourse was to file the appropriate criminal action in court.
Facts:
In July 1981, Respondent Contreras filed a complaint for annulment of real estate mortgage,
cancellation of original certificate of title, reconveyance, recovery of possession and damages before
the RTC against Spouses Calinico and Elnora Ilogon and Petitioner Philippine Amanah Bank (PAB).
Prior to the escalation of the issue to a civil suit, Contreras approached Spouses Ilogon to ask for
help in obtaining a loan from PAB. Thereafter, Contreras and Calinico executed documents to the
effect that the property owned by the former is open for mortgage as security for a loan and that
Calinico was going to facilitate this transaction with PAB.
Eventually, a loan was due for release by PAB but Contreras forthwith requested that the
same should not be released to Calinico. To her dismay, however, PAB released a total of PhP
100,000.00 to Calinico. Consequently, when he failed to settle the loan, PAB was forced to
extrajudicially foreclose the mortgage and ultimately it consolidated its ownership over the same.
Hence, Contreras had to file the complaint before the RTC.
The trial court ruled in favor of PAB, pointing out that the bank had no knowledge about
the internal agreements between Contreras and Calinico. Contreras moved for reconsideration but
it was denied for having been filed out of time and then later a petition for relief from judg-ment
which was likewise denied. The CA reversed this decision by the trial court. It found that there is
sufficient evidence showing that PAB knew of certain conflicting claims over the land and that it
ignored the Contreras’ representations that Calinoco’s title was defective.
Issue:
Whether or not PAB exercised extraordinary diligence in dealing with Calinico over the
subject property.
Ruling:
YES, PAB cannot be faulted in accepting the property as mortgage and releasing the loan to
Spouses Ilongon.
Page 352 of 434

[The Court is aware] of the rule that banks are expected to exercise more care and prudence
than private individuals in their dealings, even those involving registered lands, since their business
is impressed with public interest. The rule that persons dealing with registered lands can rely solely
on the certificate of title does not apply to banks. Simply put, the ascertainment of the status or
condition of a property offered to it as security for a loan must be a standard and indispensable part
of a bank’s operations.
In the present case, however, nothing in the documents presented by Calinico would arouse
the suspicion of [PAB] to prompt a more extensive inquiry. When the Ilogon spouses applied for a
loan, they presented as collateral a parcel of land evidenced by [an OCT] issued by the Office of the
Register of Deeds… and registered in the name of Calinico. This document did not contain any
inscription or annotation indicating that [Contreras] was the owner or that he has any interest in
the subject land. In fact, [he] admitted that there was no encumbrance annotated on Calinico’s title
at the time of the latter’s loan application. Any private arrangement between Calinico and [him]
regarding the proceeds of the loan was not the concern of [PAB], as it was not a privy to this
agreement. If Calinico violated the terms of his agreement with [Contreras] on the turn-over of the
proceeds of the loan, then the latter's proper recourse was to file the appropriate criminal action in
court.
[Contreras] also failed to prove its allegation that the petitioner bank knew, thru a letter
sent by the former’s lawyer, Atty. Crisanto Mutya, Jr., that the sale of the subject land between him
and Calinico was made only for loan purposes, and that failure of Calinico to turn over the proceeds
of the loan will invalidate the sale.
Even assuming, for the sake of argument, that the petitioner bank received a copy of Atty.
Mutya’s letter, it was still well-within its discretion to grant or deny the loan application after
evaluating the documents submitted for loan applicant. As earlier stated, [the certificate of
title]issued in Calinico’s favor was free from any encumbrances. [PAB] is not anymore privy to
whatever arrangements the owner entered into regarding the proceeds of the loan.
Finally, [the Court points] out that [PAB] is a [GOCC]. While [the OCT] issued in favor of
Calinico by virtue of the deed of confirmation of sale contained a prohibition against the alienation
and encumbrance… from the date of the patent, the CA failed to mention that by the express
wordings of the OCT itself, the prohibition does not cover the alienation and encumbrance “in favor
of the Government or any of its branches, units or institutions.”
_____________________________________________________________________________________
PHILIPPINE BANK OF COMMUNICATIONS vs. BASIC POLYPRINTERS AND PACKAGING

CORPORATION
A material financial commitment becomes significant in gauging the resolve, determination,

earnestness and good faith of the distressed corporation in financing the proposed rehabilitation plan.
This commitment may include the voluntary undertakings of the stockholders or the would-be
investors of the debtor-corporation indicating their readiness, willingness and ability to contribute
funds or property to guarantee the continued successful operation of the debtor corporation during
Page 353 of 434

the period of rehabilitation. In this case, the financial commitments presented by Basic Polyprinters
were insufficient for the purpose of rehabilitation. Thus, its petition for corporate rehabilitation must
necessarily fail.
Facts:
Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was a domestic

corporation engaged in the business of printing greeting cards, gift wrappers, gift bags, calendars,
posters, labels and other novelty items.
On February 27, 2004, Basic Polyprinters, along with the eight other corporations belonging
to the Limtong Group of Companies (namely: Cuisine Connection, Inc., Fine Arts International,
Gibson HP Corporation, Gibson Mega Corporation, Harry U. Limtong Corporation, Main Pacific
Features, Inc., T.O.L. Realty & Development Corp., and Wonder Book Corporation), filed a joint
petition for suspension of payments with approval of the proposed rehabilitation in the RTC.
Included in its overall Rehabilitation Program was the full payment of its outstanding loans
in favor of Philippine Bank of Communications (PBCOM), RCBC, Land Bank, EPCIBank and AUB
via repayment over 15 years with moratorium of two-years for the interest and five years for the
principal at 5% interest per annum and a dacion en pago of its affiliate property in favor of
EPCIBank.
Finding the petition sufficient in form and substance, the RTC issued the stay order dated
August 31, 2006. It appointed Manuel N. Cacho III as the rehabilitation receiver, and required all
creditors and interested parties, including the Securities and Exchange Commission (SEC), to file
their comments.
After the initial hearing and evaluation of the comments and opposition of the creditors,
including PBCOM, the RTC gave due course to the petition and referred it to the rehabilitation
receiver for evaluation and recommendation.
On October 18, 2007, the rehabilitation receiver submitted his report recommending the
approval of the rehabilitation plan. On December 19, 2007, the rehabilitation receiver submitted
his clarifications and corrections to his report and recommendations.
On January 11, 2008, the RTC issued an order approving the rehabilitation plan.
In the assailed decision promulgated on December 16, 2008, the CA affirmed the questioned
order of the RTC, agreeing with the finding of the rehabilitation receiver that there were sufficient
evidence, factors and actual opportunities in the rehabilitation plan indicating that Basic
Polyprinters could be successfully rehabilitated in due time.
The PBCOM claims that the CA did not pass upon the issues presented in its petition, that
the rehabilitation plan did not contain the material financial commitments required by Section 5,
Rule 4 of the Interim Rules of Procedure for Corporate Rehabilitation (Interim Rules); that,
accordingly, the proposed repayment scheme did not constitute a material financial commitment,
and the proposed dacion en pago was not proper because the property subject thereof had been
mortgaged in its favor;
Page 354 of 434

Issue:
Whether or not Basic Polyprinters can be rehabilitated.
Ruling:
No. Basic Polyprinters cannot be rehabilitated.
A material financial commitment becomes significant in gauging the resolve,

determination, earnestness and good faith of the distressed corporation in financing the proposed
rehabilitation plan. This commitment may include the voluntary undertakings of the stockholders
or the would-be investors of the debtor-corporation indicating their readiness, willingness and
ability to contribute funds or property to guarantee the continued successful operation of the
debtor corporation during the period of rehabilitation.
Basic Polyprinters presented financial commitments, as follows:

1. Additional P10 million working capital to be sourced from the insurance claim;
2. Conversion of the directors’ and shareholders’ deposit for future subscription to
common stock;
3. Conversion of substituted liabilities, if any, to additional paid-in capital to increase the
company’s equity; and
4. All liabilities (cash advances made by the stockholders) of the company from the officers
and stockholders shall be treated as trade payables.
However, these financial commitments were insufficient for the purpose.
The commitment to add P10,000,000.00 working capital appeared to be doubtful

considering that the insurance claim from which said working capital would be sourced had already
been written-off by Basic Polyprinters’s affiliate, Wonder Book Corporation. A claim that has been
written-off is considered a bad debt or a worthless asset, and cannot be deemed a material financial
commitment for purposes of rehabilitation. At any rate, the proposed additional P10,000,000.00
working capital was insufficient to cover at least half of the shareholders’ deficit that amounted to
P23,316,044.00 as of June 30, 2006.
The Supreme Court also declared in Wonder Book Corporation v. Philippine Bank of
Communications (Wonder Book) that the conversion of all deposits for future subscriptions to
common stock and the treatment of all payables to officers and stockholders as trade payables was
hardly constituting material financial commitments. Such “conversion” of cash advances to trade
payables was, in fact, a mere re-classification of the liability entry and had no effect on the
shareholders’ deficit. On the other hand, the Supreme Court cannot determine the effect of the
“conversion” of the directors’ and shareholders’ deposits for future subscription to common stock
and substituted liabilities on the shareholders’ deficit because their amounts were not reflected in
the financial statements contained in the rollo.
Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it
intended to address the low demands for their products and the effect of direct competition from
stores like SM, Gaisano, Robinsons, and other malls. Even the P245 million insurance claim that
Page 355 of 434

was supposed to cover the destroyed inventories worth P264 million appears to have been written-
off with no probability of being realized later on.
The Supreme Court observes, too, that Basic Polyprinters’s proposal to enter into the dacion
en pago to create a source of “fresh capital” was not feasible because the object thereof would not
be its own property but one belonging to its affiliate, TOL Realty and Development Corporation, a
corporation also undergoing rehabilitation. Moreover, the negotiations (for the return of books and
magazines from Basic Polyprinters’s trade creditors) did not partake of a voluntary undertaking
because no actual financial commitments had been made thereon.
Worthy of note here is that Wonder Book Corporation was a sister company of Basic
Polyprinters, being one of the corporations that had filed the joint petition for suspension of
payments and rehabilitation in SEC. Both of them submitted identical commitments in their
respective rehabilitation plans. As a result, as the Court observed in Wonder Book, the
commitments by Basic Polyprinters could not be considered as firm assurances that could convince
creditors, future investors and the general public of its financial and operational viability.
Due to the rehabilitation plan being an indispensable requirement in corporate

rehabilitation proceedings, Basic Polyprinters was expected to exert a conscious effort in
formulating the same, for such plan would spell the future not only for itself but also for its creditors
and the public in general. The contents and execution of the rehabilitation plan could not be taken
lightly.
The Supreme Court is not oblivious to the plight of corporate debtors like Basic Polyprinters
that have inevitably fallen prey to economic recession and unfortunate incidents in the course of
their operations. However, the Supreme Court must endeavor to balance the interests of all the
parties that had a stake in the success of rehabilitating the debtors. In doing so here, the Supreme
Court cannot now find the rehabilitation plan for Basic Polyprinters to be genuine and in good
faith, for it was, in fact, unilateral and detrimental to its creditors and the public.
______________________________________________________________________________
INTELLECTUAL PROPERTY LAW
PATENT
E.I. DUPONT DE NEMOURS AND CO. (assignee of inventors Carini, Duncia and Wong),
Petitioner, -versus- DIRECTOR EMMA C. FRANCISCO (in her capacity as DIRECTOR
GENERAL OF THE INTELLECTUAL PROPERTY OFFICE), DIRECTOR EPIFANIO M.
EVASCO (in his capacity as the DIRECTOR OF THE BUREAU OF PATENTS), and
THERAPHARMA, INC., Respondents.
GR. No. 174379, August 31, 2016, SECOND DIVISION, LEONEN,J.
It is the Rules of Court, not the 1962 Revised Rules of Practice, which governs the Court
of Appeals' proceedings in appeals from the decisions of the Director-General of the Intellectual
Property Office regarding the revival of patent applications. Rule 19 of the Rules of Court provides that
a court has the discretion to determine whether to give due course to an intervention. If an
administrative agency's procedural rules expressly prohibit an intervention by third parties, the
Page 356 of 434

prohibition is limited only to the proceedings before the administrative agency. Once the matter is
brought before the Court of Appeals in a petition for review, any prior prohibition on intervention does
not apply since the only question to be determined is whether the intervenor has established a right
to intervene under the Rules of Court. In this case, respondent Therapharma, Inc. filed its Motion for
Leave to Intervene before the Court of Appeals, not before the Intellectual Property Office and
therefore, the intervention of Therapharma, Inc.is not prohibited.
Rule 930 of the Rules and Regulations on Inventions, and Rule 929 of the Revised
Implementing Rules and Regulations for Patents, Utility Models and Industrial Design provide for a
period of four (4) months from the date of abandonment of a patent application to revive the same.
Section 133.4 of the Intellectual Property Code even provides for a shorter period of three (3) months
within which to file for revival. In this case, petition for revival of the patent application should be
denied. The rules do not provide any exception that could extend this four (4)-month period to 13
years.
The right of priority given to a patent applicant is only relevant when there are two or more
conflicting patent applications on the same invention. Because a right of priority does not
automatically grant letters patent to an applicant, possession of a right of priority does not
confer any property rights on the applicant in the absence of an actual patent.
A patent is granted to provide rights and protection to the inventor after an invention is disclosed to
the public. It also seeks to restrain and prevent unauthorized persons from unjustly profiting from a
protected invention. However, ideas not covered by a patent are free for the public to use and exploit.
Thus, there are procedural rules on the application and grant of patents established to protect against
any infringement. To balance the public interests involved, failure to comply with strict procedural
rules will result in the failure to obtain a patent.
When a patent application is filed and the applicant failed to respond to the Notice of Action
sent by the patent examiner, can a petition for revival be filed beyond the period under the patent
rules on the ground that the applicant only learned that its application was deemed abandoned
years later? No. According to the records of the Bureau of Patents, Trademarks, and Technology
Transfer Chemical Examining Division, petitioner filed Philippine Patent Application No. 35526 on
July 10, 1987. It was assigned to an examiner on June 7, 1988. An Office Action was mailed to
petitioner's agent, Atty. Mapili, on July 19, 1988. Because petitioner failed to respond within the
allowable period, the application was deemed abandoned on September 20, 1988. Under Section 113
[of the Revised Rules of Practice], petitioner had until January 20, 1989 to file for a revival of the
patent application. Its Petition for Revival, however, was filed on May 30, 2002. 13 years after the
date of abandonment.
Section 113 has since been superseded by Section 133.4 of the Intellectual Property Code,
Rule 930 of the Rules and Regulations on Inventions, and Rule 929 of the Revised Implementing
Rules and Regulations for Patents, Utility Models and Industrial Design. The period of four (4)
months from the date of abandonment, however, remains unchanged. The Intellectual Property
Code even provides for a shorter period of three (3) months within which to file for revival.
The four (4)-month period in Section 111 of the 1962 Revised Rules of Practice is not counted
from actual notice of abandonment but from mailing of the notice. Since it appears from the
Intellectual Property Office's records that a notice of abandonment was mailed to petitioner's
Page 357 of 434

resident agent on July 19, 1988, the time for taking action is counted from this period. Petitioner's
patent application cannot be revived simply because the period for revival has already lapsed and
no extension of this period is provided for by the 1962 Revised Rules of Practice.
Can petitioner argue, in support of its petition to revive its patent application that it has a
right of priority under the Paris Convention? No. Petitioner argues that its patent application was
filed on July 10, 1987, within 12 months from the prior filing of a U.S. patent application on July 11,
1986. It argues that it is protected from becoming part of the public domain because of convention
priority under the Paris Convention for the Protection of Industrial Property and Section 9 of
Republic Act No. 165. However, this right of priority does not immediately entitle a patent applicant
the grant of a patent. A right of priority is not equivalent to a patent. Otherwise, a patent holder of
any member-state of the Paris Convention need not apply for patents in other countries where it
wishes to exercise its patent. It was, therefore, inaccurate for petitioner to argue that its prior patent
application in the United States removed the invention from the public domain in the Philippines.
This argument is only relevant if respondent Therapharma, Inc. had a conflicting patent application
with the Intellectual Property Office. A right of priority has no bearing in a case for revival of an
abandoned patent application.
FACTS:
E.I. Dupont Nemours and Company (E.I. Dupont Nemours) is an American corporation organized
under the laws of the State of Delaware. It is the assignee of inventors Carini, Duncia, and Wong,
all citizens of the United States of America. On July 10, 1987, E.I. Dupont Nemours filed Philippine
Patent Application No. 35526 before the Bureau of Patents, Trademarks, and Technology
Transfer.The application was for Angiotensin II Receptor Blocking Imidazole (losartan), an
invention related to the treatment of hypertension and congestive heart failure. The product was
produced and marketed by Merck, Sharpe, and Dohme Corporation (Merck). The patent
application was handled by Atty. Nicanor D. Mapili (Atty. Mapili), a local resident agent.
On December 19, 2000, E.I. Dupont Nemours' new counsel, Ortega, Del Castillo, Bacorro, Odulio,
Calma, and Carbonell, sent the Intellectual Property Office a letter requesting that an office action
be issued on Philippine Patent Application No. 35526.
Patent Examiner Precila O. Bulihan of the Intellectual Property Office sent an office action marked
Paper No. 2 on January 30,2002 stating that the Philippine Patent Application No. 35526 was already
deemed abandoned as of September 20, 1988 for applicant's failure to respond to the first Office
Action mailed on July 19, 1988 within the period as prescribed under Rule 112.
E.I. Dupont Nemours filed a Petition for Revival with Cost of Philippine Patent Application No.
35526. It argued that its former counsel, Atty. Mapili, did not inform it about the abandonment of
the application, and it was not aware that Atty. Mapili had already died. It argued that it only had
actual notice of the abandonment on January 30, 2002, the date of Paper No. 2. Thus, it argued
that its Petition for Revival was properly filed under Section 113 of the 1962 Revised Rules of Practice
before the Philippines Patent Office in Patent Cases (1962 Revised Rules of Practice).
The Intellectual Property Office denied the revival of the patent application. Petitioner filed before
the Court of Appeals a Petition for Review seeking to set aside the Intellectual Property Office.
Page 358 of 434

On August 31, 2004, the Court of Appeals granted the Petition for Review. In the interim,
Therapharma, Inc. moved for leave to intervene and admit the Attached Motion for
Reconsideration and argued that the Court of Appeals' August 31, 2004 Decision directly affects its
"vested" rights to sell its own product. Therapharma, Inc. alleged that on January 4, 2003, it filed
before the Bureau of Food and Drugs its own application for a losartan product "Lifezar," a
medication for hypertension, which the Bureau granted. It argued that it made a search of
existing patent applications for similar products before its application, and that no existing
patent registration was found since E.I. Dupont Nemours' application for its losartan
product was considered abandoned by the Bureau of Patents, Trademarks, and Technology
Transfer. It alleged that sometime in 2003 to 2004, there was an exchange of correspondence
between Therapharma, Inc. and Merck. In this exchange, Merck informed Therapharma, Inc. that
it was pursuing a patent on the losartan products in the Philippines and that it would pursue any
legal action necessary to protect its product. On August 30, 2006, Court of Appeals issued the
Resolution granting the Motion· for Leave to Intervene.
In resolving the motion for reconsideration, the CA issued an amended decision denying the revival
of the patent application of the petitioner.
ISSUES:
1. Whether or not the CA correctly allowed the intervention of Therapharma, Inc. on appeal.
2. Whether or not the CA correctly denied the revival of the patent application by the petitioner.
3. Whether or not petitioner’s right of priority as a result of its earlier patent application in US
removed its invention from being part of the public domain in the Philippines.
RULING:
1. The CA correctly allowed the intervention of Therapharma, Inc. even if it was made on
appeal.
Petitioner argues that intervention should not have been allowed on appeal since the revival of a
patent application is ex parte and is "strictly a contest between the examiner and the applicant"
under Sections 78 and 79 of the 1962 Revised Rules of Practice. It argues that the disallowance of
any intervention is to ensure the confidentiality of the proceedings.
In the 1962 Revised Rules of Practice, final decisions of the Director of Patents are appealed to this
Court and governed by Republic Act No. 165. Republic Act No. 165 has since been amended by
Republic Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines
(Intellectual Property Code), in 1997. This is the applicable law with regard to the revival of
petitioner's patent application. Section 7 (7.1)(a) of the Intellectual Property Code states:
xxx The decisions of the Director General in the exercise of his appellate jurisdiction in
respect of the decisions of the Director of Patents, and the Director of Trademarks shall be
appealable to the Court of Appeals in accordance with the Rules of Court; xxx
Thus, it is the Rules of Court, not the 1962 Revised Rules of Practice, which governs the Court
of Appeals' proceedings in appeals from the decisions of the Director-General of the Intellectual
Property Office regarding the revival of patent applications. Rule 19 of the Rules of Court provides
Page 359 of 434

that a court has the discretion to determine whether to give due course to an intervention. If an
administrative agency's procedural rules expressly prohibit an intervention by third parties, the
prohibition is limited only to the proceedings before the administrative agency. Once the matter is
brought before the Court of Appeals in a petition for review, any prior prohibition on intervention
does not apply since the only question to be determined is whether the intervenor has established
a right to intervene under the Rules of Court. In this case, respondent Therapharma, Inc. filed its
Motion for Leave to Intervene before the Court of Appeals, not before the Intellectual Property
Office and therefore, the intervention of Therapharma, Inc.is not prohibited.
Respondent Therapharma, Inc. was able to show that it had legal interest to intervene in the appeal
of petitioner's revival of its patent application. While its intervention may have been premature as
no patent has been granted yet, petitioner's own actions gave rise to respondent Therapharma, Inc.'
s right to protect its losartan product. Petitioner through Merck was sending communications
threatening legal action if respondent Therapharma, Inc. continued to develop and market losartan
in the Philippines. Petitioner had no pending patent application for its losartan product when it
threatened respondent Therapharma, Inc. with legal action. The threat of legal action against
respondent Therapharma, Inc. was real and imminent. If respondent Therapharma, Inc. waited
until petitioner was granted a patent application so it could file a petition for compulsory licensing
and petition for cancellation of patent under Section 240 and Section 247 of the 1962 Revised Rules
of Practice, its continued marketing of Lifezar would be considered as an infringement of
petitioner's patent.
The petitioner cannot likewise argue the intervention should not have been allowed because there
should be absolute confidentiality in patent proceedings.
While Section 13 of the 1962 Revised Rules of Practice supports the secrecy of pending patent
applications, the same provision no longer appear in the Intellectual Property Code, in the Rules
and Regulations on Inventions, or in the Revised Implementing Rules and Regulations for Patents,
Utility Models and Industrial Design. The Intellectual Property Code now states that all patent
applications must be published in the Intellectual Property Office Gazette and that any interested
party may inspect all documents submitted to the Intellectual Property Office. The patent
application is only confidential before its publication under Section 45 of the Intellectual
Property Code.
2. The denial of revival of the patent application of the petitioner is proper.
Under Section 113 of the 1962 Revised Rules of Practices, an abandoned patent application may only
be revived within four (4) months from the date of abandonment. No extension of this period
is provided under the same provision.
Under Chapter VII, Section 111(a) of the 1962 Revised Rules of Practice, a patent application is
deemed abandoned if the applicant fails to prosecute the application within four months from the
date of the mailing of the notice of the last action by the Bureau of Patents, Trademarks, and
Technology Transfer, and not from applicant's actual notice.
According to the records of the Bureau of Patents, Trademarks, and Technology Transfer Chemical
Examining Division, petitioner filed Philippine Patent Application No. 35526 on July 10, 1987. It was
assigned to an examiner on June 7, 1988. An Office Action was mailed to petitioner's agent, Atty.
Page 360 of 434

Mapili, on July 19, 1988. Because petitioner failed to respond within the allowable period, the
application was deemed abandoned on September 20, 1988. Under Section 113, petitioner had until
January 20, 1989 to file for a revival of the patent application. Its Petition for Revival, however, was
filed on May 30, 2002, 13 years after
the date of abandonment.
Section 113 has since been superseded Rule 930 of the Rules and Regulations on Inventions, and
Rule 929 of the Revised Implementing Rules and Regulations for Patents, Utility Models and
Industrial Design. The period of four (4) months from the date of abandonment, however, remains
unchanged. Section 133.4 of the Intellectual Property Code even provides for a shorter period of three
(3) months within which to file for revival. Petition should be denied since these regulations only
provide a four (4)month period within which to file for the revival of the application. The rules do
not provide any exception that could extend this four (4)-month period to 13 years.
Petitioner argues that it was not negligent in the prosecution of its patent application since it was
Atty. Mapili or his heirs who failed to inform it of crucial developments with regard to its patent
application.
Even assuming that the four (4)-month period could be extended, petitioner was inexcusably
negligent in the prosecution of its patent application. Petitioner's resident agent, Atty. Mapili, was
undoubtedly negligent in failing to respond to the Office Action sent by the Bureau of Patents,
Trademarks, and Technology Transfer on June 19, 1988. Because of his negligence, petitioner's
patent application was declared abandoned. He was again negligent when he failed to revive the
abandoned application within four (4) months from the date of abandonment. However, petitioner
requested a status update from Atty. Mapili only on July 18, 1995, eight (8) years after the filing of its
application. It alleged that it only found out about Atty. Mapili 's death sometime in March 1996, as
a result of its senior patent attorney's visit to the Philippines. Its failure to be informed of the
abandonment of its patent application was caused by its own lack of prudence.
3. The right of priority given to a patent applicant is only relevant when there are two or more
conflicting patent applications on the same invention. Because a right of priority does not
automatically grant letters patent to an applicant, possession of a right of priority does
not confer any property rights on the applicant in the absence of an actual patent.
Petitioner argues that its patent application was filed on July 10, 1987, within 12 months from the
prior filing of a U.S. patent application on July 11, 1986. It argues that it is protected from becoming
part of the public domain because of convention priority under the Paris Convention for the
Protection of Industrial Property.
A patent applicant with the right of priority is given preference in the grant of a patent when there
are two or more applicants for the same invention. Since both the United States and the Philippines
are signatories to the Paris Convention for the Protection of Industrial Property, an applicant who
has filed a patent application in the United States may have a right of priority over the same
invention in a patent application in the Philippines. However, this right of priority does not
immediately entitle a patent applicant the grant of a patent. A right of priority is not equivalent to
a patent. Otherwise, a patent holder of any member-state of the Paris Convention need not apply
for patents in other countries where it wishes to exercise its patent.
Page 361 of 434

It was, therefore, inaccurate for petitioner to argue that its prior patent application in the United
States removed the invention from the public domain in the Philippines. This argument is only
relevant if respondent Therapharma, Inc. had a conflicting patent application with the Intellectual
Property Office. A right of priority has no bearing in a case for revival of an abandoned patent
application.
_____________________________________________________________________________________
TRADEMARKS
INTELLECTUAL PROPERTY ASSOCIATION OF THE PHILIPPINES vs. HON. PAQUITO

OCHOA, IN HIS CAP A CITY AS EXECUTIVE SECRETARY, HON. ALBERT DEL ROSARIO, IN
HIS CAPACITY AS SECRETARY OF THE DEPARTMENT OF FOREIGN AFFAIRS, AND HON.
RICARDO BLANCAFLOR, IN HIS CAPACITY AS THE DIRECTOR GENERAL OF THE
INTELLECTUAL PROPERTY OFFICE OF THE PHILIPPINES
G .R. No. 204605, July 19, 2016, BERSAMIN, J.
President's ratification is valid and constitutional because the Madrid Protocol, being an
executive agreement as determined by the Department of Foreign Affairs, does not require the
concurrence of the Senate.
There is no conflict between the Madrid Protocol and the IP Code. The IPOPHL actually
requires the designation of the resident agent when it refuses the registration of a mark. Local
representation is further required in the submission of the Declaration of Actual Use, as well as in the
submission of the license contract. The Madrid Protocol accords with the intent and spirit of the IP
Code, particularly on the subject of the registration of trademarks. The Madrid Protocol does not
amend or modify the IP Code on the acquisition of trademark rights considering that the applications
under the Madrid Protocol are still examined according to the relevant national law. In that regard,
the IPOPHL will only grant protection to a mark that meets the local registration requirements.
FACTS:
The Madrid System for the International Registration of Marks (Madrid System), which is the
centralized system providing a one-stop solution for registering and managing marks worldwide,
allows the trademark owner to file one application in one language, and to pay one set of fees to
protect his mark in the territories of up to 97 member-states. The Madrid System is governed by the
Madrid Agreement, concluded in 1891, and the Madrid Protocol, concluded in 1989.
The Intellectual Property Office of the Philippines (IPOPHL) recommended to the Department of
Foreign Affairs (DFA) that the Philippines should accede to the Madrid Protocol. After its own
review, the DFA endorsed to the President the country's accession to the Madrid Protocol.
Conformably with its express authority under Section 9 of Executive Order No. 459 (Providing for
the Guidelines in the Negotiation of International Agreements and its Ratification) dated November
25, 1997, the DFA determined that the Madrid Protocol was an executive agreement. President
Benigno C. Aquino III ratified the Madrid Protocol through an instrument of accession. The Madrid
Protocol entered into force in the Philippines on July 25, 2012.
Page 362 of 434

Petitioner IPAP has commenced this special civil action for certiorari and prohibition to challenge
the validity of the President's accession to the Madrid Protocol without the concurrence of the
Senate.
Furthermore, the IPAP has argued that the implementation of the Madrid Protocol in the
Philippines; specifically the processing of foreign trademark applications, conflicts with the IP
Code. The IPAP has insisted that Article 2 of the Madrid Protocol means that foreign trademark
applicants may file their applications through the International Bureau or the WIPO, and their
applications will be automatically granted trademark protection without the need for designating
their resident agents in the country.
ISSUES:
1. Whether or not the President's ratification of the Madrid Protocol is valid and constitutional.
2. Whether or not the Madrid Protocol is in conflict with the IP Code.
RULING:
1. President's ratification is valid and constitutional because the Madrid Protocol, being an executive
agreement as determined by the Department of Foreign Affairs, does not require the concurrence
of the Senate.
The Court has highlighted the difference between treaties and executive agreements in
Commissioner of Customs v. Eastern Sea Trading,thusly:
International agreements involving political issues or changes of national policy and those
involving international arrangements of a permanent character usually take the form of
treaties. But international agreements embodying adjustments of detail carrying out well-
established national policies and traditions and those involving arrangements of a more or
less temporary nature usually take the form of executive agreements.
The pronouncement in Commissioner of Customs v. Eastern Sea Trading indicates that the
registration of trademarks and copyrights have been the subject of executive agreements entered
into without the concurrence of the Senate.
2. There is no conflict between the Madrid Protocol and the IP Code.
The IPAP also rests its challenge on the supposed conflict between the Madrid Protocol and the IP
Code, contending that the Madrid Protocol does away with the requirement of a resident agent
under Section 125 of the IP Code; and that the Madrid Protocol is unconstitutional for being in
conflict with the local law, which it cannot modify.
The IPAP's contentions stand on a faulty premise. The method of registration through the IPOPHL,
as laid down by the IP Code, is distinct and separate from the method of registration through the
WIPO, as set in the Madrid Protocol. Comparing the two methods of registration despite their being
governed by two separate systems of registration is thus misplaced.
Page 363 of 434

The IPAP misapprehends the procedure for examination under the Madrid Protocol, The difficulty,
which the IPAP illustrates, is minimal, if not altogether inexistent. The IPOPHL actually requires
the designation of the resident agent when it refuses the registration of a mark. Local representation
is further required in the submission of the Declaration of Actual Use, as well as in the submission
of the license contract. The Madrid Protocol accords with the intent and spirit of the IP Code,
particularly on the subject of the registration of trademarks. The Madrid Protocol does not amend
or modify the IP Code on the acquisition of trademark rights considering that the applications
under the Madrid Protocol are still examined according to the relevant national law. In that regard,
the IPOPHL will only grant protection to a mark that meets the local registration requirements.
_____________________________________________________________________________________
ACQUISITION OF OWNERSHIP OF MARK
ECOLE DE CUISINE MANILLE (CORDON BLEU OF THE PHILIPPINES), INC.vs. RENAUS

COINTREAU & CIE AND LE CORDON BLEU INT'L, B.V
G.R. No. 185830. June 5, 2013
J. Perlas-Bernabe
Under Section 2 of RA No. 166, in order to register a trademark, one must be the owner thereof
and must have actually used the mark in commerce in the Philippines for two (2) months prior to the
application for registration. It is clear that actual use in commerce is the test of ownership. Thus,
under R.A. No. 166, one may be an owner of a mark due to its actual use but may not yet have the
right to register such ownership here due to the owner’s failure to use the same in the Philippines for
two (2) months prior to registration.
However, under the Paris Convention to which the Philippines is a signatory, a trade name of
a national of a State that is a party to the Paris Convention, whether or not the trade name forms
part of a trademark, is protected “without the obligation of filing or registration".
Facts:
On June 21, 1990, Cointreau, a partnership registered under the laws of France, filed before the (now
defunct) Bureau of Patents, Trademarks, and Technology Transfer (BPTTT) a trademark
application for the mark "LE CORDON BLEU & DEVICE". The application was filed pursuant to
Section 37 of Republic Act No. 166, as amended, on the basis of Home Registration No. 1,390,912,
issued on November 25, 1986 in France. The application was published for opposition.
Petitioner Ecole De Cuisine Manille, Inc. (Ecole) filed an opposition to the subject application,
averring that it is the owner of the mark “LE CORDON BLEU, ECOLE DE CUISINE MANILLE,”
which it has been using since 1948 in cooking and other culinary activities and it has earned
immense and invaluable goodwill such that Cointreau’s use of the subject mark will actually create
confusion, mistake, and deception to the buying public.
Cointreau filed its answer claiming to be the true and lawful owner of the subject mark. It averred
that: (a) it has filed applications for the subject mark’s registration in various jurisdictions,
including the Philippines; (b) Le Cordon Bleu is a culinary school of worldwide acclaim which was
established in Paris, France in 1895. Thus, Cointreau concluded that Ecole’s claim of being the
exclusive owner of the subject mark is a fraudulent misrepresentation.
Page 364 of 434

The Bureau of Legal Affairs sustained the position of the petitioner. However the IPO Director
General reversed the Bureau. CA affirmed the IPO Director General's decision. Hence, this petition.
Issue:
The sole issue raised for the Court’s resolution is whether the CA was correct in upholding the IPO
Director General’s ruling that Cointreau is the true and lawful owner of the subject mark and thus,
entitled to have the same registered under its name.
Ruling:
The petition is without merit.
Under Section 2 of RA 166, one must be the owner thereof and must have actually used the mark
in commerce in the Philippines for two (2) months prior to the application for registration. Section
2-A of the same law sets out to define how one goes about acquiring ownership thereof. Under
Section 2-A, it is clear that actual use in commerce is also the test of ownership but the provision
went further by saying that the mark must not have been so appropriated by another. Additionally,
it is significant to note that Section 2-A does not require that the actual use of a trademark must
be within the Philippines. Thus, as correctly mentioned by the CA, under R.A. No. 166, one may be
an owner of a mark due to its actual use but may not yet have the right to register such ownership
here due to the owner’s failure to use the same in the Philippines for two (2) months prior to
registration.
Nevertheless, foreign marks which are not registered are still accorded protection against
infringement and/or unfair competition in view of the foregoing obligations under the Paris
Convention to which the Philippines is a signatory. The Philippines is obligated to assure nationals
of the signatory-countries that they are afforded an effective protection against violation of their
intellectual property rights in the Philippines in the same way that their own countries are obligated
to accord similar protection to Philippine nationals.
In the instant case, it is undisputed that Cointreau has been using the subject mark in France since
1895, prior to Ecole’s averred first use of the same in the Philippines in 1948, of which the latter was
fully aware thereof. In fact, Ecole’s present directress, Ms. Lourdes L. Dayrit (and even its foundress,
Pat Limjuco Dayrit), had trained in Cointreau’s Le Cordon Bleu culinary school in Paris, France.
Cointreau was likewise the first registrant of the said mark under various classes, both abroad and
in the Philippines, having secured Home Registration No. 1,390,912 dated November 25, 1986 from
its country of origin, as well as several trademark registrations in the Philippines. On the other
hand, Ecole has no certificate of registration over the subject mark but only a pending application
covering services limited to Class 41 of the Nice Classification, referring to the operation of a
culinary school. Its application was filed only on February 24, 1992, or after Cointreau filed its
trademark application for goods and services falling under different classes in 1990. Under the
foregoing circumstances, even if Ecole was the first to use the mark in the Philippines, it cannot be
said to have validly appropriated the same.
As a final note, the function of a trademark is to point out distinctly the origin or ownership of the
goods (or services) to which it is affixed; to secure to him, who has been instrumental in bringing
into the market a superior article of merchandise, the fruit of his industry and skill; to assure the
Page 365 of 434

public that they are procuring the genuine article; to prevent fraud and imposition; and to protect
the manufacturer against substitution and sale of an inferior and different article as his product.
As such, courts will protect trade names or marks, although not registered or properly selected as
trademarks, on the broad ground of enforcing justice and protecting one in the fruits of his toil.
_______________________________________________________________________________________________________
TRADEMARKREGISTRATION
Birkenstock Orthopaedie GMBH and Co. KG vs.

Philippine Shoe Expo Marketing Corporation
G.R. No. 194307, November 20, 2013
J. Perlas-Bernabe
The registration of trademark, by itself, is not a mode of acquiring ownership. If the applicant
is not the owner of the trademark, he has no right to apply for its registration. Registration merely
creates a prima facie presumption of the validity of the registration, of the registrant’s ownership of
the trademark, and of the exclusive right to the use thereof. Such presumption, just like the
presumptive regularity in the performance of official functions, is rebuttable and must give way to
evidence to the contrary.
Facts:
Petitioner, a corporation duly organized and existing under the laws of Germany, applied for three
trademark registrations before the IPO. However, the registration proceedings of the applications
were suspended in view of an existing registration of the mark “Birkenstock and Device” in the
name of Shoe Town International and Industrial Corporation, the predecessor-in-interest of
respondent Philippine Shoe Expo Marketing. During sometime, the respondent failed to file the
required 10th Year Declaration of Actual Use, thereby resulting in the cancellation of such mark.
The cancellation paved way for the publication of the subject applications in the IPO e-Gazette. In
response, the respondent filed three verified notices of oppositions to the application before the
Bureau of Legal Affairs (BLA) of the IPO. In its Decsion, the BLA sustained the respondent’s
opposition and ruled that the competing marks of the parties are confusingly similar since they
contained the work “Birkenstock” and are used on the same and related goods. Aggrieved, the
petitioner appealed to the IPO Directior General, which later on rendered a decision reversing and
setting aside the ruling of BLA, thus allowing the registration of the subject applications.
Finding the reversal unacceptable, the respondent filed a petition for review with the CA. The
appellate court reinstated the ruling of BLA and disallowed the registration of the subject
applications. It held that the respondent’s failure to file the 10th Year DAU did not deprive the
petitioner of its ownership of Birkenstock mark since it has submitted substantial evidence showing
its continued use, promotion and advertisement thereof to the present. It also opined that when
respondent’s predecessor-in-interest adopted and started its actual use of “Birkenstock,” there is
neither an existing registration nor a pending application for the same and thus, it cannot be said
that it acted in bad faith in adopting and starting the use of such mark.
Page 366 of 434

Dissatisfied, the petitioner filed a Motion for Reconsideration, which was, however, denied. Hence,
the petition.
Issue:
Whether or not the subject mark should be allowed registration in the name of the petitioner.
Ruling:
Petition Granted.
RA 166 requires the filing of a DAU on specified periods, to wit:

Section 12. Duration—Each certificate of registration shall remain in force for twenty years:
Provided, That registrations under the provisions of this Act shall be cancelled by the
Director, unless within one year following the fifth, tenth, and fifteenth anniversaries of the
date of issue of the certificate of registration, the registrant shall file in the Patent Office an
affidavit showing that the mark or trade-name is still in use or showing that its non-use is
due to special circumstance which excuse such non-use and is not due to any intention to
abandon the same, and pay the required fee.
The Director shall notify the registrant who files the above-prescribed affidavits of his
acceptance or refusal thereof and, if a refusal, the reasons therefor.
The aforementioned provision clearly reveals that failure to file the DAU within the requisite period
results in the automatic cancellation of registration of a trademark. In turn, such failure is
tantamount to the abandonment or withdrawal of any right or interest the registrant has over his
trademark.
In this case, respondent admitted that it failed to file the 10th Year DAU within the requisite period.
As a consequence, it was deemed to have abandoned or withdrawn any right or interest over the
mark “BIRKENSTOCK.” Neither can it invoke Section 236 of the IP Code which pertains to
intellectual property rights obtained under previous intellectual property laws precisely because it
already lost any right or interest over the said mark.
Besides, petitioner had duly established its true and lawful ownership of the mark
“BIRKENSTOCK.” Under Section 2 of RA 166, which is the law governing the subject applications,
in order to register a trademark, one must be the owner thereof and must have actually used the
mark in commerce in the Philippines for two months prior to the application for registration.
Section 2-A of the same law sets out to define how one goes about acquiring ownership thereof.
Under the same section, it is clear that actual use in commerce is also the test of ownership but the
provision went further by saying that the mark must not have been so appropriated by another.
Significantly, to be an owner, Section 2-A does not require that the actual use of the trademark
must be within the Philippines. Thus, under RA 166, one may be an owner of a mark due to its
actual use but may not yet have the right to register such ownership here due to the owner’s failure
to use the same in the Philippines for two months prior to registration.
It must be emphasized that registration of trademark, by itself, is not a mode of acquiring

ownership. If the applicant is not the owner of the trademark, he has no right to apply for its
registration. Registration merely creates a prima facie presumption of the validity of the
Page 367 of 434

registration, of the registrant’s ownership of the trademark, and of the exclusive right to the use
thereof. Such presumption, just like the presumptive regularity in the performance of official
functions, is rebuttable and must give way to evidence to the contrary.
Clearly, it is not the application or registration of a trademark that vests ownership thereof, but it
is the ownership of a trademark that confers the right to register the same.
In the instant case, petitioner was able to establish that it is the owner of the mark
“BIRKENSTOCK.” It submitted evidence relating to the origin and history of “BIRKENSTOCK” and
its use in commerce long before respondent was able to register the same here in the Philippines.
In view of the foregoing circumstances, the Court finds the petitioner tobe the true and lawful
owner of the mark “BIRKENSTOCK” and entitled to its registration, and that respondent was in
bad faith in having it registered in its name.
_____________________________________________________________________________________
SERI SOMBOONSAKDIKUL v. ORLANE SA, G.R. No. 188996
On September 23, 2003, petitioner Seri Somboonsakdikul (petitioner) filed an application for
registration2 of the mark LO LANE with the IPO for goods classified under Class 3 (personal care
products) of the International Classification of Goods and Services for the Purposes of the
Registration of Marks (International Classification of Goods). Orlane S.A. (respondent) filed an
opposition to petitioner's application, on the ground that the mark LOLANE was similar to
ORLANE in presentation, general appearance and pronunciation, and thus would amount to an
infringement of its mark. Respondent alleged that: (1) it was the rightful owner of the ORLANE
mark which was first used in 1948; (2) the mark was earlier registered in the Philippines on July 26,
1967 under Registration No. 129961 for personal care products and (3) on September 5, 2003, it filed
another application for use of the trademark on its additional products.
Is the petitioner’s mark registrable?
Yes. There is no colorable imitation between the marks LOLANE and ORLANE which would lead
to any likelihood of confusion to the ordinary purchasers. Using the dominancy test, based on the
distinct visual and aural differences between LOLANE and ORLANE, we find that there is no
confusing similarity between the two marks. The suffix LANE is not the dominant feature of
petitioner's mark.Neither can it be considered as the dominant feature of ORLANE which would
make the two marks confusingly similar. First, an examination of the appearance of the marks
would show that there are noticeable differences in the way they are written or printed. Second, as
to the aural aspect of the marks, LOLANE .and ORLANE do not sound alike. Etepha v. Director of
Patents, et al. finds application in this case. In Etepha, we ruled that there is no confusing similarity
between PERTUSSIN and ATUSSIN.
DOCTRINE OF UNRELATED GOODS
TAIWAN KOLIN CORPORATION, LTD. vs. KOLIN ELECTRONICS CO., INC.,

G.R. No. 209843, March 25, 2015, J. Velasco, Jr.
Page 368 of 434

In trademark registration, while both competing marks refer to the word “KOLIN” written in
upper case letters and in bold font, but one is italicized and colored black while the other is white in
pantone red color background and there are differing features between the two, registration of the
said mark could be granted. It is hornbook doctrine that emphasis should be on the similarity of the
products involved and not on the arbitrary classification or general description of their properties or
characteristics. The mere fact that one person has adopted and used a trademark on his goods would
not, without more, prevent the adoption and use of the same trademark by others on unrelated articles
of a different kind.
Facts:
Taiwan Kolin filed with the IPO, then BPTTT, a trademark application, for the use of
“KOLIN” on a combination of goods, including colored televisions, refrigerators, window-type and
split-type air conditioners, electric fans and water dispensers with Taiwan Kolin electing Class 9 as
the subject of its application. Kolin Electronics opposed Taiwan Kolin’s application arguing that the
mark Taiwan Kolin seeks to register is identical, if not confusingly similar, with its registered
“KOLIN” mark covering products under Class 9 of the NCL.
BLA-IPO denied Taiwan Kolin’s application, citing Sec. 123(d) of the IP Code that a mark
cannot be registered if it is identical with a registered mark belonging to a different proprietor in
respect of the same or closely-related goods. Accordingly, Kolin Electronics, as the registered owner
of the mark “KOLIN” for goods falling under Class 9 of the NCL, should then be protected against
anyone who impinges on its right, including Taiwan Kolin who seeks to register an identical mark
to be used on goods also belonging to Class 9 of the NCL.
Taiwan Kolin appealed the above Decision to the Office of the Director General of the IPO
which gave due course to the appeal ratiocinating that product classification alone cannot serve as
the decisive factor in the resolution of whether or not the goods are related and that emphasis
should be on the similarity of the products involved and not on the arbitrary classification or
general description of their properties or characteristics.
Kolin Electronics elevated the case to the CA which found for Kolin Electronics on the
strength of the following premises: (a) the mark sought to be registered by Taiwan Kolin is
confusingly similar to the one already registered in favor of Kolin Electronics; (b) there are no other
designs, special shape or easily identifiable earmarks that would differentiate the products of both
competing companies; and (c) the intertwined use of television sets with amplifier, booster and
voltage regulator bolstered the fact that televisions can be considered as within the normal
expansion of Kolin Electronics, and is thereby deemed covered by its trademark as explicitly
protected under Sec. 138 of the IP Code.
Issue:
Whether or not Taiwan Kolin is entitled to its trademark registration of “KOLIN” over its
specific goods of television sets and DVD players.
Ruling:
Yes, Taiwan Kolin is entitled.
Page 369 of 434

Whether or not the products covered by the trademark sought to be registered by Taiwan
Kolin, on the one hand, and those covered by the prior issued certificate of registration in favor of
Kolin Electronics, on the other, fall under the same categories in the NCL is not the sole and decisive
factor in determining a possible violation of Kolin Electronics’ intellectual property right should
Taiwan Kolin’s application be granted. It is hornbook doctrine that emphasis should be on the
similarity of the products involved and not on the arbitrary classification or general description of
their properties or characteristics. The mere fact that one person has adopted and used a trademark
on his goods would not, without more, prevent the adoption and use of the same trademark by
others on unrelated articles of a different kind.
It must be noted that the products covered by Taiwan Kolin’s application and Kolin
Electronics’ registration are unrelated.
A certificate of trademark registration confers upon the trademark owner the exclusive right
to sue those who have adopted a similar mark not only in connection with the goods or services
specified in the certificate, but also with those that are related thereto.
In resolving one of the pivotal issues in this case––whether or not the products of the parties
involved are related––the doctrine in Mighty Corporation is authoritative. There, the Court held
that the goods should be tested against several factors before arriving at a sound conclusion on the
question of relatedness. Among these are:
(a) the business (and its location) to which the goods belong;
(b) the class of product to which the goods belong;
(c) the product’s quality, quantity, or size, including the nature of the package, wrapper or
container;
(d) the nature and cost of the articles;
(e) the descriptive properties, physical attributes or essential characteristics with reference
to their form, composition, texture or quality;
(f) the purpose of the goods;
(g) whether the article is bought for immediate consumption, that is, day-to-day household
items;
(h) the fields of manufacture;
(i) the conditions under which the article is usually purchased; and
(j) the channels of trade through which the goods flow, how they are distributed, marketed,
displayed and sold.
As mentioned, the classification of the products under the NCL is merely part and parcel of
the factors to be considered in ascertaining whether the goods are related. It is not sufficient to
state that the goods involved herein are electronic products under Class 9 in order to establish
relatedness between the goods, for this only accounts for one of many considerations enumerated
in Mighty Corporation.
Clearly then, it was erroneous for Kolin Electronics to assume over the CA to conclude that
all electronic products are related and that the coverage of one electronic product necessarily
precludes the registration of a similar mark over another. In this digital age wherein electronic
products have not only diversified by leaps and bounds, and are geared towards interoperability, it
Page 370 of 434

is difficult to assert readily, as Kolin Electronics simplistically did, that all devices that require
plugging into sockets are necessarily related goods.
As a matter of fact, while both competing marks refer to the word “KOLIN” written in upper
case letters and in bold font, the Court at once notes the distinct visual and aural differences
between them: Kolin Electronics’ mark is italicized and colored black while that of Taiwan Kolin is
white in pantone red color background. The differing features between the two, though they may
appear minimal, are sufficient to distinguish one brand from the other.
Finally, in line with the foregoing discussions, more credit should be given to the “ordinary
purchaser.” Cast in this particular controversy, the ordinary purchaser is not the “completely
unwary consumer” but is the “ordinarily intelligent buyer” considering the type of product involved
All told, We are convinced that Taiwan Kolin’s trademark registration not only covers
unrelated good, but is also incapable of deceiving the ordinary intelligent buyer. The ordinary
purchaser must be thought of as having, and credited with, at least a modicum of intelligence to be
able to see the differences between the two trademarks in question.
HOLISTIC TEST
UFC PHILIPPINES, INC. (NOW MERGED WITH NUTRI-ASIA, INC., WITH NUTRI-ASIA,
INC. AS THE SURVIVING ENTITY), Petitioner, v. FIESTA BARRIO MANUFACTURING
CORPORATION,Respondent.
G.R. No. 198889, January 20, 2016, LEONARDO-DE CASTRO, J.
The test of dominancy is now explicitly incorporated into law in Section 155.1 of the Intellectual
Property Code which defines infringement as the "colorable imitation of a registered mark x x x or a
dominant feature thereof.
Under the dominancy test, if the competing trademark contains the main or essential or
dominant features of another, and confusion and deception is likely to result, infringement
takes place. Actual confusion is not required. Only likelihood of confusion on the part of the buying
public is necessary so as to render two marks confusingly similar so as to deny the registration of the
junior mark.
The scope of protection afforded to registered trademark owners is not limited to protection
from infringers with identical goods. The scope of protection extends to protection from infringers
with related goods, and to market areas that are the normal expansion of business of the registered
trademark owners. Respondent's mark is related to a product, lechon sauce. Since petitioner's
product, catsup, is also a household product found on the same grocery aisle, in similar packaging,
the public could think that petitioner had expanded its product mix to include lechon sauce, and that
the "PAPA BOY" lechon sauce is now part of the "PAPA" family of sauces. Thus, if allowed registration,
confusion of business may set in, and petitioner's hard-earned goodwill may be associated to the newer
product introduced by respondent.
A person's father has no logical connection with catsup products, and that precisely makes
"PAPA" as an arbitrary mark capable of being registered, as it is distinctive.
Page 371 of 434

Facts:
Petitioner Nutri-Asia, Inc. (petitioner) is a corporation duly organized and existing under
Philippine laws.5 It is the emergent entity in a merger with UFC Philippines, Inc. that was completed
on February 11, 2009.6 Respondent Barrio Fiesta Manufacturing Corporation (respondent) is
likewise a corporation organized and existing under Philippine laws.
On April 4, 2002, respondent filed Application No. 4-2002-002757 for the mark "PAPA BOY &
DEVICE" for goods under Class 30, specifically for "lechon sauce." The Intellectual Property Office
(IPO) published said application for opposition in the IP Phil. e-Gazette released on September 8,
2006. Petition filed an opposition to his application.
In its verified opposition before the IPO, petitioner contended that "PAPA BOY & DEVICE" is
confusingly similar with its "PAPA" marks inasmuch as the former incorporates the term "PAP A,"
which is the dominant feature of petitioner's "PAPA" marks. Petitioner averred that respondent's
use of "PAPA BOY & DEVICE" mark for its lechon sauce product, if allowed, would likely lead the
consuming public to believe that said lechon sauce product originates from or is authorized by
petitioner, and that the "PAPA BOY & DEVICE" mark is a variation or derivative of petitioner's
"PAPA" marks. Petitioner argued that this was especially true considering that petitioner's ketchup
product and respondent's lechon sauce product are related articles that fall under the same Class
30.
Petitioner alleged that the registration of respondent's challenged mark was also likely to damage
the petitioner, considering that its former sister company, Southeast Asia Food, Inc., and the latter's
predecessors-in-interest, had been major manufacturers and distributors of lechon and other table
sauces since 1965, such as products employing the registered "Mang Tomas" mark.
In its comment, respondent claims that petitioner's marks have either expired and/or "that no
confusing similarity exists between them and respondent's "PAPA BOY & DEVICE' mark."
Respondent alleges that under Section 15 of Republic Act No. 166, a renewal application should be
filed within six months before the expiration of the period or within three months after such
expiration. Respondent avers that the expiration of the 20-year term for the "PAPA" mark under
Registration No. 32416 issued on August 11, 1983 was August 11, 2003. The sixth month before August
11, 2003 was February 11, 2003 and the third month after August 11, 2003 was November 11, 2003.
Respondent claims that the application that petitioner filed on October 28, 2005 was almost two
years late. Thus, it was not a renewal application, but could only be considered a new application
under the new Trademark Law, with the filing date reckoned on October 28, 2005. The registrability
of the mark under the new application was examined again, and any certificate issued for the
registration of "PAPA" could not have been a renewal certificate.
As for petitioner's other mark "PAPA BANANA CATSUP LABEL," respondent claims that its 20-year
term also expired on August 11, 2003 and that petitioner only filed its application for the new "PAPA
LABEL DESIGN" on November 15, 2006. Having been filed three years beyond the renewal
application deadline, petitioner was not able to renew its application on time, and cannot claim a
"continuous existence of its rights over the 'PAPA BANANA CATSUP LABEL."' Respondent claims
that the two marks are different from each other and that the registration of one is independent of
the other. Respondent concludes that the certificate of registration issued for "PAPA LABEL
DESIGN" is "not and will never be a renewal certificate.
Page 372 of 434

The IPO ruled in favor of the petitioner, applying the dominance test. This was reversed by the CA
(using the holistic test); hence, this petition.
Issue: Whether the CA erred in applying the holistic test
Held: Yes. The dominancy test should have been applied. This Cour has relied on the dominancy
test rather than the holistic test. The dominancy test considers the dominant features in the
competing marks in determining whether they are confusingly similar. Under the dominancy test,
courts give greater weight to the similarity of the appearance of the product arising from the
adoption of the dominant features of the registered mark, disregarding minor differences. Courts
will consider more the aural and visual impressions created by the marks in the public mind, giving
little weight to factors like prices, quality, sales outlets and market segments.
Thus, in the 1954 case of Co Tiong Sa v. Director of Patents, the Court ruled:
It has been consistently held that the question of infringement of a trademark is to be determined
by the test of dominancy. Similarity in size, form and color, while relevant, is not conclusive. If the
competing trademark contains the main or essential or dominant features of another, and
confusion and deception is likely to result, infringement takes place. Duplication or imitation is not
necessary; nor is it necessary that the infringing label should suggest an effort to imitate.
The Court agreed that respondent's mark cannot be registered. Respondent's mark is related to a
product, lechon sauce, an everyday all-purpose condiment and sauce, that is not subjected to great
scrutiny and care by the casual purchaser, who knows from regular visits to the grocery store under
what aisle to find it, in which bottle it is contained, and approximately how much it costs. Since
petitioner's product, catsup, is also a household product found on the same grocery aisle, in similar
packaging, the public could think that petitioner had expanded its product mix to include lechon
sauce, and that the "PAPA BOY" lechon sauce is now part of the "PAPA" family of sauces, which is
not unlikely considering the nature of business that petitioner is in. Thus, if allowed. registration,
confusion of business may set in, and petitioner's hard-earned goodwill may be associated to the
newer product introduced by respondent, all because of the use of the dominant feature of
petitioner's mark on respondent's mark, which is the word "PAPA."
The words "Barrio Fiesta" are not included in the mark, and although printed on the label of
respondent's lechon sauce packaging, still do not remove the impression that "PAPA BOY" is a
product owned by the manufacturer of "PAPA" catsup, by virtue of the use of the dominant feature.
It is possible that petitioner could expand its business to include lechon sauce, and that would be
well within petitioner's rights, but the existence of a "PAPA BOY" lechon sauce would already
eliminate this possibility and deprive petitioner of its rights as an owner of a valid mark included
in the Intellectual Property Code.
The Court of Appeals likewise erred in finding that "PAPA," being a common term of endearment
for one's father, is a word over which petitioner could not claim exclusive use and ownership. The
Merriam-Webster dictionary defines "Papa" simply as "a person's father." True, a person's father
has no logical connection with catsup products, and that precisely makes "PAPA" as an arbitrary
mark capable of being registered, as it is distinctive, coming from a family name that started the
brand several decades ago. What was registered was not the word "Papa" as defined in the
Page 373 of 434

dictionary, but the word "Papa" as the last name of the original owner of the brand. In fact, being
part of several of petitioner's marks, there is no question that the IPO has found "PAPA" to be a
registrable mark.
Respondent had an infinite field of words and combinations of words to choose from to coin a mark
for its lechon sauce. While its claim as to the origin of the term "PAPA BOY" is plausible, it is not a
strong enough claim to overrule the rights of the owner of an existing and valid mark. Furthermore,
this Court cannot equitably allow respondent to profit by the name and reputation carefully built
by petitioner without running afoul of the basic demands of fair play
INFRINGEMENT AND REMEDIES
REPUBLIC GAS CORPORATION, et al.

vs. PETRON CORPORATION, PILIPINAS SHELL PETROLEUM CORPORATION AND SHELL
INTERNATIONAL PETROLEUM COMPANY, LIMITED
G.R. No. 194062, June 17, 2013
J. Peralta
Trademark infringement is the unauthorized use in commerce any reproduction, counterfeit,

copy or colorable imitation of a registered mark. The mere unauthorized use of a container bearing a
registered trademark in connection with the sale, distribution or advertising of goods or services which
is likely to cause confusion, mistake or deception among the buyers or consumers can be considered
as trademark infringement.
On the other hand, unfair competition has been defined as the passing off (or palming off) or
attempting to pass off upon the public of the goods or business of one person as the goods or business
of another with the end and probable effect of deceiving the public.
Facts:
Petitioners Petron Corporation (Petron) and Pilipinas Shell Petroleum Corporation (Shell) are two
of the largest bulk suppliers and producers of LPG in the Philippines. Petron is the registered owner
in of the trademarks GASUL and GASUL cylinders while Shell is the authorized user in the
Philippines of the tradename and trademarks SHELLANE and SHELL device. These entities
respectively are the ones authorized to allow refillers and distributors to refill, use, sell, and
distribute LPG containers and products bearing such trademarks. Private respondents, on the other
hand, are the directors and officers of Republic Gas Corporation (Regasco) an entity duly licensed
to engage in the business of refilling, buying, selling, distributing and marketing at wholesale and
retail of Liquefied Petroleum Gas (LPG).
The LPG Dealers Associations received reports that certain entities were engaged in the
unauthorized refilling, sale and distribution of LPG cylinders bearing the registered tradenames
and trademarks of the petitioners. As a consequence, a letter-complaint was filed in the National
Bureau of Investigation (NBI) regarding the alleged illegal trading of petroleum products and/or
underdelivery or underfilling in the sale of LPG products.
An investigation was thereafter conducted, particularly within the areas of Caloocan, Malabon,
Novaliches and Valenzuela, which showed that several persons and/or establishments, including
Page 374 of 434

REGASCO, were suspected of having violated provisions of Batas Pambansa Blg. 33 (B.P. 33). The
surveillance revealed that REGASCO LPG Refilling Plant in Malabon was engaged in the refilling
and sale of LPG cylinders bearing the registered marks of the petitioners without authority from
the latter.
A complaint for violation of Sections 155 and 168, in relation to Section 170 of Republic Act (R.A.)
No. 8293. Assistant City Prosecutor Armando C. Velasco recommended the dismissal of the
complaint. On appeal, the Secretary of the Department of Justice affirmed the prosecutor’s
dismissal of the complaint.
Issues:
(1) Whether probable cause exists to hold petitioners liable for the crimes of trademark
infringement and unfair competition as defined and penalized under Sections 155 and 168, in
relation to Section 170 of Republic Act (R.A.) No. 8293.
(2) Whether the corporate officers of Regasco may be held individually and personally answerable
for the crime
Ruling:
(1) The Court in a very similar case, made it categorically clear that the mere unauthorized use of a
container bearing a registered trademark in connection with the sale, distribution or advertising of
goods or services which is likely to cause confusion, mistake or deception among the buyers or
consumers can be considered as trademark infringement. Here, petitioners have actually
committed trademark infringement when they refilled, without the respondents’ consent, the LPG
containers bearing the registered marks of the respondents. Petitioners’ acts will inevitably confuse
the consuming public, since they have no way of knowing that the gas contained in the LPG tanks
bearing respondents’ marks is in reality not the latter’s LPG product. The public will then be led to
believe that petitioners are authorized refillers and distributors of respondents’ LPG products.
As to the charge of unfair competition, petitioners must also be made liable. Passing off (or palming
off) is the gravamen of the offense and it takes place where the defendant, by imitative devices on
the general appearance of the goods, misleads prospective purchasers into buying his merchandise
under the impression that they are buying that of his competitors. In the present case, respondents
pertinently observed that by refilling and selling LPG cylinders bearing their registered marks,
petitioners are selling goods by giving them the general appearance of goods of another
manufacturer. There is also a showing that the consumers may be misled into believing that the
LPGs contained in the cylinders bearing the marks "GASUL" and "SHELLANE" are those goods or
products of the petitioners when, in fact, they are not.
(2) The Court finds that there is sufficient evidence to warrant the prosecution of petitioners for
trademark infringement and unfair competition, considering that petitioner Republic Gas
Corporation, being a corporation, possesses a personality separate and distinct from the person of
its officers, directors and stockholders. Petitioners, being corporate officers and/or directors,
through whose act, default or omission the corporation commits a crime, may themselves be
individually held answerable for the crime. Veritably, the CA appropriately pointed out that
petitioners, being in direct control and supervision in the management and conduct of the affairs
of the corporation, must have known or are aware that the corporation is engaged in the act of
Page 375 of 434

refilling LPG cylinders bearing the marks of the respondents without authority or consent from the
latter which, under the circumstances, could probably constitute the crimes of trademark
infringement and unfair competition. The existence of the corporate entity does not shield from
prosecution the corporate agent who knowingly and intentionally caused the corporation to
commit a crime. Thus, petitioners cannot hide behind the cloak of the separate corporate
personality of the corporation to escape criminal liability. A corporate officer cannot protect himself
behind a corporation where he is the actual, present and efficient actor.
_____________________________________________________________________________________
Century Chinese Medicine Co., et al. vs. People of the Philippines and Ling Na Nau
G.R. No. 188526; November 11, 2013
J. Peralta
Where the Search and Seizure Warrants are applied for in anticipation of criminal actions for
violation of the intellectual property rights under RA 8293, otherwise known as the Intellectual
Property Code, Rule 126 of the Rules of Criminal Procedure and not the Rules on the Issuance of the
Search and Seizure in Civil Actions for Infringement of Intellectual Property Rights applies.
Facts:
Ling Na Lau (Ling), doing business under the name and style of Worldwide Pharmacy, is the sole
distributor and registered owner of TOP GEL T.G. & DEVICE OF A LEAF papaya whitening soap.
Ling’s representative, Ping Na Lau (Ping) wrote a letter addressed to the NBI Director requesting
assistance for an investigation on several drugstores which were selling counterfeit whitening
papaya soaps bearing the general appearance of their products.
Agent Furing was assigned to the case. He conducted an investigation and was able to buy
whitening soaps bearing the trade mark “TOP GEL”,“T.G.” & “DEVICE OF A LEAF” with
corresponding receipts from a list of drugstores which included herein petitioners. The purchased
items were then brought to the NBI and had the same examined by experts. After the examination,
it was then confirmed that the whitening soaps from the drugstores were counterfeit.
Subsequently, Agent Furing applied for the issuance of search warrants before the RTC against
petitioners and other establishments for violations of Sections 168 and 155, both in relation to
Section 170 of the IP Code of the Philippines. Section 168, in relation to Section 170, penalizes unfair
competition; while Section 155, in relation to Section 170, punishes trademark infringement.
After conducting searching questions, the RTC granted the application and issue the Search
Warrants for trademark infringement against petitioners. Shortly thereafter, the petitioners
collectively filed their Motion to Quash the Search Warrants on the ground that there was existing
prejudicial question which is a case filed by Yu against Ling for damages due to infringement of
trademark/tradename and unfair competition. The trial court granted the motion. In quashing the
search warrants, RTC applied the Rules on Search and Seizure for Civil Action in Infringement of
Intellectual Property Rights. It found the existence of a prejudicial question pending before the RTC
Quezon City.
Page 376 of 434

After the denial of the motion for reconsideration, Ling filed her appeal with the CA. Subsequently,
CA rendered its decision granting the appeal. In reversing the RTC’S quashal of the search warrants,
the appellate court found that Rule 126 of the Rules of Criminal Procedure was applicable in the
application and issuance of warrants and that no prejudicial question existed. The petitioner filed
a motion for reconsideration but was denied. Hence, the appeal.
Issue:
Whether the Rules on the Issuance of the Search and Seizure in Civil Actions for Infringement of
Intellectual Property Rights is applicable.
Ruling:
Petition Denied.
The Rules on the Issuance of the Search and Seizure in Civil Actions for Infringement of Intellectual
Property Rights, is not applicable in this case as the search warrants were not applied based thereon,
but in anticipation of criminal actions for violation of intellectual property rights under RA 8293. It
was established that respondent had asked the NBI for assistance to conduct investigation and
search warrant implementation for possible apprehension of several drugstore owners selling
imitation or counterfeit TOP GEL T.G. & DEVICE OF A LEAF papaya whitening soap. Also, in his
affidavit to support his application for the issuance of the search warrants, NBI Agent Furing stated
that "the items to be seized will be used as relevant evidence in the criminal actions that are likely
to be instituted." Hence, Rule 126 of the Rules of Criminal Procedure applies.
_____________________________________________________________________________________
CATERPILLAR, INC., Petitioner, - versus - MANOLO P. SAMSON, Respondent.

G.R. No. 205972 and G.R. No. 164352, November 9, 2016, FIST DIVISION, BERSAMIN J,.
An action for the cancellation of trademark is a remedy available to a person who believes that
he is or will be damaged by the registration of a mark. On the other hand, the criminal actions for
unfair competition involved the determination of whether or not Samson had given his goods the
general appearance of the goods of Caterpillar, with the intent to deceive the public or defraud
Caterpillar as his competitor. In the suit for the cancellation of trademark, the issue of lawful
registration should necessarily be determined, but registration was not a consideration
necessary in unfair competition. Indeed, unfair competition is committed if the effect of the act is
"to pass off to the public the goods of one man as the goods of another; it is independent of
registration. As fittingly put in R.F. & Alexander & Co. v. Ang,"one may be declared unfair competitor
even if his competing trade-mark is registered."
FACTS:
Antecedents
Caterpillar is a foreign corporation engaged in the manufacture and distribution of footwear,
clothing and related items, among others. Its products are known for six core trademarks, namely,
"CATERPILLAR", "CAT" "CATERPILLAR & DESIGN" "CAT AND DESIGN" "WALKING MACHINES"
and "TRACK-TYPE TRACTOR & DESIGN (Core Marks), all of which are alleged as internationally
known. On the other hand, Samson, doing business under the names and styles of Itti Shoes
Corporation, Kolm's Manufacturing Corporation and Caterpillar Boutique and General
Page 377 of 434

Merchandise, is the proprietor of various retail outlets in the Philippines selling footwear, bags,
clothing, and related items under the trademark "CATERPILLAR", registered in 1997 under
Trademark Registration No. 64705 issued by the Intellectual Property Office (IPO).
G.R. No. 164352

Caterpillar alleged that Samson and his affiliate companies allegedly sell and distribute products
clothed with the general appearance of its own products.
On July 31, 2000, Caterpillar commenced a civil action against Samson and his business entities,
with the IPO as a nominal party - for Unfair Competition, Damages and Cancellation of Trademark
with Application for Temporary Restraining Order (TRO) and/or Writ of Preliminary Injunction -
docketed as Civil Case No. Q-00-41446 of the RTC in Quezon City. In said civil action, the RTC
denied Caterpillar's application for the issuance of the TRO. Subsequently, six criminal complaints
for unfair competition under Section 168.3(a), in relation to Section 123 .1, Section 131.1 and Section
170 of the IP Code, were filed in the RTC, Branch 256, in Muntinlupa City, presided by Judge Alberto
L. Lerma, docketed as Criminal Cases Nos. 02-238 to 02-243.
Upon motion filed by Samson, Presiding Judge Lerma found that there exist a prejudicial question
and suspended the arraignment and all other proceedings in Criminal Cases Nos. 02-240 to 02-243
until Civil Case No. Q-00-41446 was finally resolved. The CA found no grave abuse of discretion on
the part of RTC in suspending the proceeding in the criminal case.
G.R. No. 205972

In the meanwhile, in August 2002, upon receiving the information that Samson and his affiliate
entities continuously sold and distributed products bearing Caterpillar's Core Marks without
Caterpillar's consent, the latter requested the assistance of the Regional Intelligence and
Investigation Division of the National Region Public Police (RIID-NCRPO) for the conduct of an
investigation. Subsequently, after the investigation, the RIIDNCRPO applied for and was granted
16 search warrants against various outlets owned or operated by Samson. The warrants were served
on August 27, 2002, and as the result products bearing Caterpillar's Core Marks were seized and
confiscated. Consequently, on the basis of the search warrants issued by the various courts,
Caterpillar again instituted criminal complaints in the DOJ for violation of Section 168.3(a), in
relation to Sections 131.3, 123.l (e) and 170 of the IP Code against Samson. (Note: the criminal
complaints describe here is distinct and separate from the criminal complaints in G.R. No. 164352)
After the conduct of the preliminary investigation, the DOJ, through State Prosecutor Melvin J.
Abad, issued a joint resolution dated August 21, 2003 dismissing the complaint upon finding that
there was no probable cause to charge Samson with unfair competition. The Secretary of Justice
affirmed the dismissal. Caterpillar appealed to the CA through a petition for review under Rule 43,
Rules of Court however, the CA denied due course to Caterpillar's petition for review.
ISSUES:
1. In G.R. No. 164352 - whether or not the CA committed a reversible error in ruling that the trial
court a quo did not commit grave abuse of discretion in suspending the criminal proceedings
on account of a prejudicial question; and,
2. In G.R. No. 205972 - whether or not the CA correctly denied the petition for review filed by
Caterpillar.
Page 378 of 434

RULING:
G.R. No. 164352

Civil Case No. Q-00-41446 did not operate as a prejudicial question that justified the
suspension of the proceedings in Criminal Cases Nos. Q-02-108043-44.
Civil Case No. Q-00-41446, the civil case filed by Caterpillar in the RTC in Quezon City, was for
unfair competition, damages and cancellation of trademark, while Criminal Cases Nos. Q-02-
108043-44 were the criminal prosecution of Samson for unfair competition. A common element of
all such cases for unfair competition - civil and criminal - was fraud. Under Article 33 of the Civil
Code, a civil action entirely separate and distinct from the criminal action may be brought by the
injured party in cases of fraud, and such civil action shall proceed independently of the criminal
prosecution.
Furthermore, the present case failed to meet the elements of a prejudicial question provided in
Section 7 of Rule 111, Rules of Court, to wit: (a) a previously instituted civil action involves an issue
similar to or intimately related to the issue raised in the subsequent criminal action, and (b) the
resolution of such issue determines whether or not the criminal action may proceed.
An action for the cancellation of trademark like Civil Case No. Q-00- 41446 is a remedy available to
a person who believes that he is or will be damaged by the registration of a mark. On the other
hand, the criminal actions for unfair competition (Criminal Cases Nos. Q-02-108043-44) involved
the determination of whether or not Samson had given his goods the general appearance of the
goods of Caterpillar, with the intent to deceive the public or defraud Caterpillar as his competitor.
In the suit for the cancellation of trademark, the issue of lawful registration should
necessarily be determined, but registration was not a consideration necessary in unfair
competition. Indeed, unfair competition is committed if the effect of the act is "to pass off to the
public the goods of one man as the goods of another; it is independent of registration. As fittingly
put in R.F. & Alexander & Co. v. Ang,"one may be declared unfair competitor even if his competing
trade-mark is registered."
Clearly, the determination of the lawful ownership of the trademark in the civil action was not
determinative of whether or not the criminal actions for unfair competition shall proceed against
Samson.
G.R. No. 205972

CA correctly denied the petition for review filed by Caterpillar.
Firstly, Caterpillar assailed the resolution of the Secretary of Justice by filing a petition for review
under Rule 43 of the Rules of Court. Such resort to the petition for review under Rule 43 was
erroneous, and the egregious error warranted the denial of the appeal. The petition for review under
Rule 43 applied to all appeals to the CA from quasi-judicial agencies or bodies, particularly those
listed in Section 1 of Rule 43. However, the Secretary of Justice, in the review of the findings of
probable cause by the investigating public prosecutor, was not exercising a quasi-judicial function,
but performing an executive function.
Page 379 of 434

Moreover, the courts could intervene in the determination of probable cause only through the
special civil action for certiorari under Rule 65 of the Rules of Court, not by appeal through the
petition for review under Rule 43. Thus, the CA could not reverse or undo the findings and
conclusions on probable cause by the Secretary of Justice except upon clear demonstration of grave
abuse of discretion amounting to lack or excess of jurisdiction committed by the Secretary of
Justice.
Even discounting the technicalities as to consider Caterpillar's petition for review as one brought
under Rule 65, the recourse must still fail. In not finding probable cause to indict Samson for unfair
competition, State Prosecutor Abad as the investigating public prosecutor discharged the discretion
given to him by the law. Specifically, he resolved as follows:
It appears from the records that respondent (referring to SAMSON) started marketing his (class 25)
products bearing the trademark Caterpillar as early as 1992. In 1994, respondent caused the
registration of the trademark "Caterpillar With A Triangle Device Beneath The Letter [A]" with the
Intellectual Property Office. Sometime on June 16, 1997, the IPO issued Certificate of Registration
No. 64705 which appears to be valid for twenty (20) years, or up to June 16, 2017. Upon the strength
of this registration, respondent continued with his business of marketing shoes, slippers, sandals,
boots and similar Class 25 items bearing his registered trademark "Caterpillar". Under the law,
respondent's operative act of registering his Caterpillar trademark and the concomitant
approval/issuance by the governmental entity concerned, conferred upon him the exclusive right to
use said trademark unless otherwise declared illegal. There being no evidence to controvert the fact
that respondent's Certificate of Registration No. 64705 covering Caterpillar trademark was
fraudulently or illegally obtained, it necessarily follows that its subsequent use and/or being passed
on to the public militates malice or fraudulent intent on the part of respondent. Otherwise stated
and from the facts obtaining, presumption of regularity lies, both from the standpoint of registration
and use/passing on of the assailed Caterpillar products.
Complainant's argument(referring to CATERPILLAR) that respondent may still be held liable for
unfair competition by reason of his having passed on five (5) other Caterpillar products like "Cat",
"Caterpillar", "Cat and Design", "Walking Machines" and "Track-Type Tractor Design" is equally
difficult to sustain. As may be gleaned from the records, respondent has been engaged in the sale
and distribution of Caterpillar products since 1992 leading to the establishment of numerous
marketing outlets. As such, it would be difficult to assail the presumption that respondent has
already established goodwill insofar as his registered Caterpillar products are concerned. On the
other hand, complainant's registration of the other Caterpillar products appears to have been
caused only in 1995. In this premise, respondent may be considered as prior user, while the latter, a
subsequent one. Jurisprudence dictates that prior user of the trademark by one, will controvert the
claim by a subsequent one.
_____________________________________________________________________________________
UNFAIR COMPETITION
TORRES V. SPOUSES PEREZ

G.R. NO. 188225, NOVEMBER 28, 2012
Spouses Imelda and Rodrigo Torres are engaged in the business (RGP Manufacturing) of supplying
shoes to ShoeMart. Their daughter (Sunshine) entered into a business partnership with petitioner,
Page 380 of 434

known as Sasay’s Closet Co. (SCC), a partnership registered with the SEC on 17 October 2002. SCC
was engaged in the supply, trading, retailing of garments such as underwear, children’s wear,
women’s and men’s wear, and other incidental activities related thereto. For its products, SCC used
the trademark “Naturals with Design,” which it filed with the Intellectual Property Office on 24
August 2005 and registered on 26 February 2007. Its products were primarily supplied to SM.
When Sunshine pulled out of the partnership, Imelda took over her place. When the relationship
between Spouses Rodrigo and petitioner turned sour, Imelda informed petitioner of their decision
to dissolve the partnership. Despite the objections of petitioner, various amounts were paid to her
by respondents from January to April 2006 representing her share in the partnership assets.
Meanwhile, on 27 March 2006, petitioner established Tezares Enterprise, a sole proprietorship

engaged in supplying and trading of clothing and accessories except footwear. Also in March 2006,
she discovered that underwear products bearing the brand “Naturals” were being sold in SM using
RGP’s SM vendor code.
Hence, On 9 June 2006, petitioner filed a criminal complaint for unfair competition against
respondents. The prosecutor found probable cause to indict respondents for unfair competition,
ruling that respondents passed off the “Naturals” brand as RGP’s even if the brand was owned by
SCC. According to the prosecutor, SCC was indeed dissolved when respondent Imelda manifested
her intention to cease from the partnership. The prosecutor said, however, that it remained
operational, since the process of winding up its business had not been completed. Thus, SCC
remained the owner of the “Naturals” brand, and petitioner – being a legitimate partner thereof –
had a right to file the complaint against respondents. The DOJ reversed this ruling.
Issue: whether there exists probable cause to indict respondents for unfair competition (violation
of Section 168 in relation to Section 170) under R.A. 8293.
Held: None. In positing that respondents were guilty of unfair competition, petitioner makes a lot
of the fact that they used the vendor code of RGP in marketing the “Naturals” products. She argues
that they passed off the “Naturals” products, which they marketed under RGP, as those of SCC;
thus, they allegedly prejudiced the rights of SCC as owner of the trademark. She also claims that
she has the personality to prosecute respondents for unfair competition on behalf of SCC.
Much more important than the issue of protection of intellectual property is the change of
ownership of SCC. The arguments of petitioner have no basis, because respondents are the exclusive
owners of SCC, of which she is no longer a partner. Based on the findings of fact of the CA and the
DOJ, respondents have completed the payments of the share of petitioner in the partnership affairs.
Having bought her out of SCC, respondents were already its exclusive owners who, as such, had the
right to use the “Naturals” brand. The use of the vendor code of RGP was resorted to only for the
practical purpose of ensuring that SM’s payments for the “Naturals” products would go to
respondents, who were the actual suppliers.
Furthermore, even if we were to assume that the issue of protection of intellectual property is
paramount in this case, the criminal complaint for unfair competition against respondents cannot
prosper, for the elements of the crime were not present. We have enunciated in CCBPI v. Gomez
that the key elements of unfair competition are “deception, passing off and fraud upon the public.”
Page 381 of 434

No deception can be imagined to have been foisted on the public through different vendor codes,
which are used by SM only for the identification of suppliers’ products.
_____________________________________________________________________________________
GREAT WHITE SHARK V. CARALDE, JR.

R NO. 192294, NOVEMBER 21, 2012
On July 31, 2002, Caralde filed before the Bureau of Legal Affairs (BLA), IPO a trademark application
seeking to register the mark “SHARK & LOGO” for his manufactured goods under Class 25, such as
slippers, shoes and sandals. Great White Shark Enterprises opposed Caralde’s application for
trademark registration by claiming to be the owner of the mark consisting of a representation of a
colored shark. When compared, the only similarity in the competing marks is in the word “shark.”
Great White Shark's mark is used in clothing and footwear, among others, while Caralde's mark is
used on similar goods like shoes and slippers. Great White Shark’s mark consisted of an illustration
of a shark while Caralde's mark had a composite figure forming a silhouette of a shark.
Pending the inter partes proceedings, Great White Shark’s trademark application was granted and
it was issued Certificate of Registration for clothing, headgear and footwear, including socks, shoes
and its components.
Issue: Is Caralde’s trademark registrable?
Held: Yes. Apart from its commercial utility, the benchmark of trademark registrability is
distinctiveness. Thus, a generic figure, as that of a shark in this case, if employed and designed in a
distinctive manner, can be a registrable trademark device, subject to the provisions of the IP Code.
In determining similarity and likelihood of confusion, case law has developed the Dominancy Test
and the Holistic or Totality Test.
Irrespective of both tests, the Court finds no confusing similarity between the subject marks. While
both marks use the shape of a shark, the Court noted distinct visual and aural differences between
them. In Great White Shark's “GREG NORMAN LOGO,” there is an outline of a shark formed with
the use of green, yellow, blue and red lines/strokes. In contrast, the shark in Caralde's “SHARK &
LOGO” mark is illustrated in letters outlined in the form of a shark with the letter “S” forming the
head, the letter “H” forming the fins, the letters “A” and “R” forming the body, and the letter “K”
forming the tail. In addition, the latter mark includes several more elements such as the word
“SHARK” in a different font underneath the shark outline, layers of waves, and a tree on the right
side, and liberally used the color blue with some parts in red, yellow, green and white.
The visual dissimilarities between the two marks are evident and significant, negating the
possibility or confusion in the minds of the ordinary purchaser, especially considering the distinct
difference between the marks.
_____________________________________________________________________________________
SHANG PROPERTIES REALTY CORPORATION (formerly THE SHANG GRAND TOWER

CORPORATION) and SHANG PROPERTIES, INC. (formerly EDSA PROPERTIES
HOLDINGS, INC.), vs. ST. FRANCIS DEVELOPMENT CORPORATION
G.R. No. 190706, July 21, 2014, J. Perlas-Bernabe
Page 382 of 434

Section 168 of Republic Act No. 8293, otherwise known as the “Intellectual Property Code of
the Philippines” (IP Code), provides for the rules and regulations on unfair competition. Section 168.2
proceeds to the core of the provision, describing forthwith who may be found guilty of and subject to
an action of unfair competition — that is, “any person who shall employ deception or any other means
contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals,
or his business, or services for those of the one having established such goodwill, or who shall commit
any acts calculated to produce said result x x x.” In this case, the Court finds the element of fraud to
be wanting; hence, there can be no unfair competition.
Facts:
St. Francis Development Corporation (SFDC) — a domestic corporation engaged in the real
estate business and the developer of the St. Francis Square Commercial Center, built sometime in
1992, located at Ortigas Center, Mandaluyong City, Metro Manila (Ortigas Center) — filed an
intellectual property violation case for unfair competition, false or fraudulent declaration, and
damages arising from Shang Properties’ use and filing of applications for the registration of the
marks “THE ST. FRANCIS TOWERS” and “THE ST. FRANCIS SHANGRI-LA PLACE” against Shang
Properties before the IPO Bureau of Legal Affairs (BLA).
In its complaints, SFDC alleged that it has used the mark “ST. FRANCIS” to identify its
numerous property development projects located at Ortigas Center. SFDC added that as a result of
its continuous use of the mark “ST. FRANCIS” in its real estate business, it has gained substantial
goodwill with the public that consumers and traders closely identify the said mark with its property
development projects.
Shang Properties contended that SFDC is barred from claiming ownership and exclusive
use of the mark “ST. FRANCIS” because the same is geographically descriptive of the goods or
services for which it is intended to be used. This is because SFDC’s as well as Shang Properties’ real
estate development projects are located along the streets bearing the name “St. Francis,”
particularly, St. Francis Avenue and St. Francis Street (now known as Bank Drive), both within the
vicinity of the Ortigas Center.
The BLA rendered a decision and found that Shang Properties committed acts of unfair
competition against SFDC by its use of the mark “THE ST. FRANCIS TOWERS” but not with its use
of the mark “THE ST. FRANCIS SHANGRI-LA PLACE.” The BLA considered SFDC to have gained
goodwill and reputation for its mark, which therefore entitles it to protection against the use by
other persons, at least, to those doing business within the Ortigas Center.
Both parties appealed the BLA decision. The IPO Director-General reversed the BLA’s
finding that Shang Properties committed unfair competition through their use of the mark “THE
ST. FRANCIS TOWERS,” thus dismissing such charge. He found that SFDC could not be entitled to
the exclusive use of the mark “ST. FRANCIS,” even at least to the locality where it conducts its
business, because it is a geographically descriptive mark, considering that it was Shang Properties
as well as SFDC’s intention to use the mark “ST. FRANCIS” in order to identify, or at least associate,
their real estate development projects/businesses with the place or location where they are
situated/conducted, particularly, St. Francis Avenue and St. Francis Street (now known as Bank
Drive), Ortigas Center.
Page 383 of 434

SFDC elevated the case to the CA. The appellate court found Shang Properties guilty of
unfair competition not only with respect to their use of the mark “THE ST. FRANCIS TOWERS” but
also of the mark “THE ST. FRANCIS SHANGRI-LA PLACE.” It ruled that SFDC — which has
exclusively and continuously used the mark “ST. FRANCIS” for more than a decade, and, hence,
gained substantial goodwill and reputation thereby — is very much entitled to be protected against
the indiscriminate
usage by other companies of the trademark/name it has so painstakingly tried to establish and
maintain.
Issue:
Whether or not Shang Properties companies are guilty of unfair competition in using the
marks “THE ST. FRANCIS TOWERS” and “THE ST. FRANCIS SHANGRI-LA PLACE.”
Ruling:
No. Shang Properties are not guilty of unfair competition in using the marks “THE ST.
FRANCIS TOWERS” and “THE ST. FRANCIS SHANGRI-LA PLACE.”
Section 168 of Republic Act No. 8293, otherwise known as the “Intellectual Property Code
of the Philippines” (IP Code), provides for the rules and regulations on unfair competition. Section
168.2 proceeds to the core of the provision, describing forthwith who may be found guilty of and
subject to an action of unfair competition — that is, “any person who shall employ deception or
any other means contrary to good faith by which he shall pass off the goods manufactured by him
or in which he deals, or his business, or services for those of the one having established such
goodwill, or who shall commit any acts calculated to produce said result x x x.”
The “true test” of unfair competition has thus been “whether the acts of the defendant have
the intent of deceiving or are calculated to deceive the ordinary buyer making his purchases under
the ordinary conditions of the particular trade to which the controversy relates.” It is therefore
essential to prove the existence of fraud, or the intent to deceive, actual or probable, determined
through a judicious scrutiny of the factual circumstances attendant to a particular case.
Here, the Court finds the element of fraud to be wanting; hence, there can be no unfair
competition. What the CA appears to have disregarded or been mistaken in its disquisition,
however, is the geographically-descriptive nature of the mark “ST. FRANCIS” which thus bars its
exclusive appropriability, unless a secondary meaning is acquired.
Under Section 123.2 of the IP Code, specific requirements have to be met in order to
conclude that a geographically-descriptive mark has acquired secondary meaning, to wit: (a) the
secondary meaning must have arisen as a result of substantial commercial use of a mark in the
Philippines; (b) such use must result in the distinctiveness of the mark insofar as the goods or the
products are concerned; and (c) proof of substantially exclusive and continuous commercial use in
the Philippines for five (5) years before the date on which the claim of distinctiveness is made.
Unless secondary meaning has been established, a geographically-descriptive mark, due to its
general public domain classification, is perceptibly disqualified from trademark registration.
Page 384 of 434

The records are bereft of any showing that Shang Properties gave their goods/services the
general appearance that it was SFDC which was offering the same to the public. Neither did Shang
Properties employ any means to induce the public towards a false belief that it was offering SFDC’s
goods/services. Nor did Shang Properties make any false statement or commit acts tending to
discredit the goods/services offered by SFDC. Accordingly, the element of fraud which is the core
of unfair competition had not been established.
Besides, SFDC was not able to prove its compliance with the requirements stated in Section
123.2 of the IP Code to be able to conclude that it acquired a secondary meaning — and, thereby,
an exclusive right — to the “ST. FRANCIS” mark, which is, as the IPO Director-General correctly
pointed out, geographically-descriptive of the location in which its realty developments have been
built. While it is true that SFDC had been using the mark “ST. FRANCIS” since 1992, its use thereof
has been merely confined to its realty projects within the Ortigas Center. As its use of the mark is
clearly limited to a certain locality, it cannot be said that there was substantial commercial use of
the same recognized all throughout the country. Neither is there any showing of a mental
recognition in buyers’ and potential buyers’ minds that products connected with the mark “ST.
FRANCIS” are associated with the same source — that is, the enterprise of SFDC. Thus, absent any
showing that there exists a clear goods/service-association between the realty projects located in
the aforesaid area and herein SFDC as the developer thereof, the latter cannot be said to have
acquired a secondary meaning as to its use of the “ST. FRANCIS” mark.
_____________________________________________________________________________________
ROBERTO CO vs. KENG HUAN JERRY YEUNG and EMMA YEUNG

G.R. No. 212705, September 10, 2014, J. Perlas-Bernabe
Unfair competition is defined as the passing off (or palming off) or attempting to pass off upon
the public of the goods or business of one person as the goods or business of another with the end and
probable effect of deceiving the public. This takes place where the defendant gives his goods the
general appearance of the goods of his competitor with the intention of deceiving the public that the
goods are those of his competitor. Here, it has been established that Co conspired with the Laus in the
sale/distribution of counterfeit Greenstone products to the public, which were even packaged in
bottles identical to that of the original, thereby giving rise to the presumption of fraudulent intent. In
light of the foregoing definition, it is thus clear that Co, together with the Laus, committed unfair
competition, and should, consequently, be held liable therefor. Although liable for unfair competition,
the Court deems it apt to clarify that Co was properly exculpated from the charge of trademark
infringement considering that the registration of the trademark "Greenstone" – essential as it is in a
trademark infringement case – was not proven to have existed during the time the acts complained of
were committed.
Facts:
At the core of the controversy is the product Greenstone Medicated Oil Item No. 16
(Greenstone) which is manufactured by Greenstone Pharmaceutical, a traditional Chinese
medicine manufacturing firm based in Hong Kong and owned by Keng Huan Jerry Yeung (Yeung),
and is exclusively imported and distributed in the Philippines by Taka Trading owned by Yeung’s
wife, Emma Yeung (Emma).
Page 385 of 434

On July 27, 2000, Sps. Yeung filed a civil complaint for trademark infringement and unfair
competition before the RTC against Ling Na Lau, her sister Pinky Lau (the Laus), and Cof or
allegedly conspiring in the sale of counterfeit Greenstone products to the public. In the complaint,
Sps. Yeung averred that on April 24, 2000, Emma’s brother, Jose Ruivivar III (Ruivivar), bought a
bottle of Greenstone from Royal Chinese Drug Store (Royal) in Binondo, Manila, owned by Ling Na
Lau. However, when he used the product, Ruivivar doubted its authenticity considering that it had
a different smell, and the heat it produced was not as strong as the original Greenstone he
frequently used. Having been informed by Ruivivar of the same, Yeung, together with his son, John
Philip, went to Royal on May 4, 2000 to investigate the matter, and, there, found seven (7) bottles
of counterfeit Greenstone on display for sale. He was then told by Pinky Lau (Pinky) – the store’s
proprietor – thatthe items came from Co of Kiao An Chinese Drug Store. According to Pinky, Co
offered the products on April 28, 2000 as "Tienchi Fong Sap Oil Greenstone" (Tienchi) which she
eventually availed from him. Upon Yeung’s prodding, Pinky wrote a note stating these events.
In defense, Co denied having supplied counterfeit items to Royal and maintained that the
stocks of Greenstone came only from Taka Trading. Meanwhile, the Laus denied selling Greenstone
and claimed that the seven (7) items of Tienchi were left by an unidentified male person at the
counter of their drug store and that when Yeung came and threatened to report the matter to the
authorities, the items were surrendered to him. As to Pinky’s note, it was claimed that she was
merely forced by Yeung to sign the same.
The RTC ruled in favor of Sps. Yeung. The CA affirmed the RTC Decision. The Laus and Co
respectively moved for reconsideration but were, however, denied. Hence, Co filed the instant
petition.
Issue:
Whether or not the CA correctly upheld Co’s liability for unfair competition.
Ruling:
The petition is without merit.
Unfair competition is defined as the passing off (or palming off) or attempting to pass off
upon the public of the goods or business of one person as the goods or business of another with the
end and probable effect of deceiving the public. This takes place where the defendant gives his
goods the general appearance of the goods of his competitor with the intention of deceiving the
public that the goods are those of his competitor.
Here, it has been established that Co conspired with the Laus in the sale/distribution of
counterfeit Greenstone products to the public, which were even packaged in bottles identical to
that of the original, thereby giving rise to the presumption of fraudulent intent. In light of the
foregoing definition, it is thus clear that Co, together with the Laus, committed unfair competition,
and should, consequently, be held liable therefor.
Although liable for unfair competition, the Court deems it apt to clarify that Co was properly
exculpated from the charge of trademark infringement considering that the registration of the
trademark "Greenstone" – essential as it is in a trademark infringement case – was not proven to
Page 386 of 434

have existed during the time the acts complained of were committed, i.e., in May 2000. In this
relation, the distinctions between suits for trademark infringement and unfair competition prove
useful: (a) the former is the unauthorized use of a trademark, whereas the latter is the passing off
of one's goods as those of another; (b) fraudulent intent is unnecessary in the former, while it is
essential in the latter; and (c) in the former, prior registration of the trademark is a pre-requisite to
the action, while it is not necessary in the latter.
_____________________________________________________________________________________
COPYRIGHT
LIMITATIONS ON COPYRIG
COPYRIGHTABLE WORKS
ABS-CBN CORPORATION v. FELIPE GOZON, GILBERTO R. DUAVIT, JR. MARISSA

L. FLORES, JESSICA SOHO, GRACE DELA PENA-REYES, JOHN OLIVER T.
MANALASTAS, JOHN DOES AND JANE DOES
G.R. No. 195956, March 11, 2015, LEONEN, J.
News or the event itself is not copyrightable. However, an event can be captured and
presented in a specific medium. News as expressed in a video footage is entitled to copyright
protection.
Facts:
The controversy arose from GMA-7’s news coverage on the homecoming of OFW and
Iraqi militant hostage victim Angelo dela Cruz. ABS-CBN conducted live audio-video
coverage of and broadcasted the arrival Angelo dela Cruz at the NAIA and the subsequent
press conference. ABS-CBN allowed Reuters to air the footages it had taken earlier under a
special embargo agreement. GMA-7 subscribes to Reuters and it received a live video feed
coverage of Angelo dela Cruz’ arrival from them. Thereafter, it carried the live newsfeed in
its program “Flash Report” together with its live broadcast. Allegedly, GMA-7 did not receive
any notice or was not aware that Reuters was airing footages of ABS-CBN. GMA-7's news
control room staff saw neither the "No Access Philippines" notice nor a notice that the video
feed was under embargo in favor of ABS-CBN. ABS-CBN then filed a complaint for
copyright infringement.
Issues:
1) Whether the news footage is copyrightable under the law

2) Whether criminal prosecution for infringement of copyrightable material, such
as live rebroadcast, can be negated by good faith.
Ruling:
1) Yes. Under the Intellectual Property Code, "works are protected by the sole fact of their
creation, irrespective of their mode or form of expression, as well as of their content, quality
and purpose."
An idea or event must be distinguished from the expression of that idea or event. Ideas can be
Page 387 of 434

either abstract or concrete. It is the concrete ideas that are generally referred to as expression.
News or the event itself is not copyrightable. However, an event can be captured and
presented in a specific medium. As recognized by this court in Joaquin, Jr. v. Drilon (G.R.
No. 108946, January 28, 1999), television "involves a whole spectrum of visuals and effects,
video and audio." News coverage in television involves framing shots, using images, graphics,
and sound effects. It involves creative process and originality. Television news footage is an
expression of the news. News as expressed in a video footage is entitled to copyright protection.
2) No. Infringement under the Intellectual Property Code is malum prohibitum. The general
rule is that acts punished under a special law are malum prohibitum. "In an act which is
malum prohibitum, malice or criminal intent is completely immaterial." Unless clearly
provided in the law, offenses involving infringement of copyright protections should
be considered malum prohibitum. It is the act of infringement, not the intent, which
causes the damage. To require or assume the need to prove intent defeats the purpose of
intellectual property protection
_____________________________________________________________________________________
LIMITATIONS ON COPYRIGHTT
GMA NETWORK, INC. vs. CENTRAL CATV, INC.

G.R. No. 176694, July 18, 2014, J. Brion
The must-carry rule mandates that the local television (TV) broadcast signals of an
authorized TV broadcast station, such as the GMA Network, Inc., should be carried in full by the cable
antenna television (CATV) operator, without alteration or deletion. In this case, the Central CATV,
Inc. was found not to have violated the must-carry rule when it solicited and showed advertisements
in its cable television (CATV) system. Such solicitation and showing of advertisements did not
constitute an infringement of the “television and broadcast markets” under Section 2 of E.O. No. 205.
Facts:
Sometime in February 2000, GMA Network, Inc. (GMA), together with the Kapisanan ng
mga Brodkaster ng Pilipinas, Audiovisual Communicators, Incorporated, Filipinas Broadcasting
Network and Rajah Broadcasting Network, Inc. (complainants), filed with the NTC a complaint
against Central CATV, Inc. (Central CATV) to stop it from soliciting and showing advertisements
in its cable television (CATV) system, pursuant to Section 2 of Executive Order (EO) No. 205. Under
this provision, a grantee’s authority to operate a CATV system shall not infringe on the television
and broadcast markets. GMA alleged that the phrase “television and broadcast markets” includes
the commercial or advertising market.
In its answer, Central CATV admitted the airing of commercial advertisement on its CATV
network but alleged that Section 3 of EO No. 436 expressly allowed CATV providers to carry
advertisements and other similar paid segments provided there is consent from their program
providers.
After GMA presented and offered its evidence, Central CATV filed a motion to dismiss by
demurrer to evidence claiming that the evidence presented by the complainants failed to show how
Page 388 of 434

Central CATV’s acts of soliciting and/or showing advertisements infringed upon the television and
broadcast market.
The NTC granted Central CATV’s demurrer to evidence and dismissed the complaint. It
ruled that since EO No. 205 does not define “infringement,” EO No. 436 merely clarified or filled in
the details of the term to mean that the CATV operators may show advertisements, provided that
they secure the consent of their program providers. In the present case, the documents attached to
Central CATV’s demurrer to evidence showed that its program providers have given such consent.
The NTC added that since the insertion of advertisements under EO No. 436 would result
in the alteration or deletion of the broadcast signals of the consenting television broadcast station,
its ruling necessarily results in the amendment of these provisions. The second paragraph 9 of
Section 3 of EO No. 436 is deemed to amend the previous provisional authority issued to Central
CATV, as well as Sections 6.2.1 and 6.4 of the NTC’s Memorandum Circular (MC) 4-08-88. Sections
6.2.1 and 6.4 require the CATV operators within the Grade A or B contours of a television broadcast
station to carry the latter’s television broadcast signals in full, without alteration or deletion. This
is known as the “must-carry-rule.”
GMA went to the CA, which, in turn, upheld the NTC ruling. Hence, GMA filed a petition
for review on certiorari before the Supreme Court.
GMA alleges that the NTC gravely erred in failing to differentiate between EO No. 205,
which is a law, and EO No. 436 which is merely an executive issuance. An executive issuance cannot
make a qualification on the clear prohibition in the law, EO No. 205.
On the other hand, Central CATV contends that EO No. 205 does not expressly prohibit
CATV operators from soliciting and showing advertisements. The non-infringement limitation
under Section 2 thereof, although couched in general terms, should not be interpreted in such a
way as to deprive CATV operators of legitimate business opportunities. Also, EO No. 436, being an
executive issuance and a valid administrative legislation, has the force and effect of a law and cannot
be subject to collateral attack.
Issue:
Whether Central CATV, as a CATV operator, could show commercial advertisements in its
CATV networks.
Ruling:
Yes. Central CATV could show commercial advertisements in its CATV networks.
First, EO No. 205 is a law while EO No. 436 is an executive issuance. The NTC and the CA
proceeded from the wrong premise that both EO No. 205 and EO No. 436 are statutes.
EO No. 205 was issued by President Corazon Aquino. At the time of the issuance of EO No.
205, President Aquino was still exercising legislative powers. EO No. 436, on the other hand, is an
executive order which was issued by President Ramos in the exercise purely of his executive power.
In short, it is not a law. In considering EO No. 436 as a law, the NTC and the CA hastily concluded
Page 389 of 434

that it has validly qualified Section 2 of EO No. 205 and has amended the provisions of MC 4-08-88.
Following this wrong premise, the NTC and the CA ruled that Central CATV has a right to show
advertisements under Section 3 of EO No. 436. While Central CATV indeed has the right to solicit
and show advertisements, the NTC and the CA incorrectly interpreted and appreciated the relevant
provisions of the law and rules. The Court seeks to correct this error by ruling that MC 4-08-88
alone sufficiently resolves the issue on whether Central CATV could show advertisements in its
CATV networks. In other words, EO No. 436 is not material in resolving the substantive issue before
us.
Second, the CATV operators are not prohibited from showing advertisements under EO No.
205 and its implementing rules and regulations, MC 4-08-88.
MC 4-08-88 has sufficiently filled in the details of Section 2 of EO No. 205, specifically the
contentious proviso that “the authority to operate [CATV] shall not infringe on the television and
broadcast markets.” It is clear from Section 6.1 of MC 04-08-88 that the phrase “television market”
connotes “audience” or “viewers” in geographic areas and not the commercial or advertising market
as what GMA claims.
The kind of infringement prohibited by Section 2 of EO No. 205 was particularly clarified
under Sections 6.2, 6.2.1, 6.4(a)(1) and 6.4(b) of MC 04-08-88, which embody the “must-carry rule.”
This rule mandates that the local TV broadcast signals of an authorized TV broadcast station, such
as GMA, should be carried in full by the CATV operator, without alteration or deletion.
MC 4-08-88 mirrored the legislative intent of EO No. 205 and acknowledged the importance
of the CATV operations in the promotion of the general welfare. The circular provides in its whereas
clause that the CATV has the ability to offer additional programming and to carry much improved
broadcast signals in the remote areas, thereby enriching the lives of the rest of the population
through the dissemination of social, economic and educational information, and cultural programs.
Unavoidably, however, the improved broadcast signals that CATV offers may infringe or encroach
upon the audience or viewer market of the free-signal TV. This is so because the latter’s signal may
not reach the remote areas or reach them with poor signal quality. To foreclose this possibility and
protect the free-TV market (audience market), the must-carry rule was adopted to level the playing
field. With the must-carry rule in place, the CATV networks are required to carry and show in full
the free-local TV’s programs, including advertisements, without alteration or deletion. This, in turn,
benefits the public who would have a wide range of choices of programs or broadcast to watch. This
also benefits the free-TV signal as their broadcasts are carried under the CATV’s much-improved
broadcast signals thus expanding their viewer’s share.
The Court finds that the Sections 6.2, 6.2.1, 6.4(a)(1) and 6.4(b) of MC 4-08-88, which
embody the “must-carry rule,” are the governing rules in the present case. Under these rules, the
phrase “television and broadcast markets” means viewers or audience market and not commercial
advertisement market as claimed by GMA. Therefore, Central CATV’s act of showing
advertisements does not constitute an infringement of the “television and broadcast markets”
under Section 2 of EO No. 205.
_____________________________________________________________________________________
Page 390 of 434

COPYRIGHT INFRINGEMENT
MICROSOFT CORPORATION v. ROLANDO D. MANANSALA AND/OR MEL

MANANSALA, DOING BUSINESS AS DATAMAN TRADING COMPANY AND/OR COMIC
ALLEY
G.R. No. 166391, October 21, 2015, BERSAMIN, J.
The mere sale of the illicit copies of the software programs was enough by itself to show
the existence of probable cause for copyright infringement.
Facts:
Respondent, without any authority from petitioner, was engaged in distributing and
selling Microsoft computer software programs. A private investigator accompanied by an agent
from the NBI was able to purchase 6 CD-ROMs belonging to Microsoft. A search warrant was
issued against the premises of respondent, the search yielded several illegal copies of Microsoft
programs. Microsoft filed an affidavit-complaint with the DOJ. The State Prosecutor dismissed
the charge for lack of proof that it was really respondent who printed and copied the products
in his store. Microsoft filed a petition for certiorari before the CA. The CA affirmed the dismissal
by the DOJ.
Issue:
Whether printing or copying is essential in the crime of copyright infringement
Ruling:
No. The gravamen of copyright infringement is not merely the unauthorized

manufacturing of intellectual works but rather the unauthorized performance of any of the acts
covered by Section 5 of PD No. 49. Hence any person who performs any of the acts under
Section 5 without obtaining the copyright owner’s prior consent renders himself civilly and
criminally liable for copyright infringement.
There was no need for the petitioner to still prove who copied, replicated or reproduced
the software programs. The public prosecutor and the DOJ gravely abused their discretion in
dismissing the petitioner's charge for copyright infringement against the respondents for lack of
evidence. There was grave abuse of discretion because the public prosecutor and the DOJ
acted whimsically or arbitrarily in disregarding the settled jurisprudential rules on finding the
existence of probable cause to charge the offender in court. Accordingly, the CA erred in
upholding the dismissal by the DOJ of the petitioner's petition for review.
_____________________________________________________________________________________
SISON OLAÑO, SERGIO T. ONG, MARILYN O. GO, AND JAP FUK HAI, Petitioners, v. LIM
ENG CO,Respondent.
G.R. No. 195835, March 14, 2016, REYES, J.
Page 391 of 434

Copyright infringement is committed by any person who shall use original literary or artistic works,
or derivative works, without the copyright owner's consent in such a manner as to violate the
foregoing copy and economic rights. For a claim of copyright infringement to prevail, the evidence on
record must demonstrate: (1) ownership of a validly copyrighted material by the complainant; and (2)
infringement of the copyright by the respondent.
Certificate of Registration Nos. I-2004-13 and I-2004-14 pertain to class work "I" under Section 172 of
R.A. No. 8293 which covers "illustrations, maps, plans, sketches, charts and three-dimensional works
relative to geography, topography, architecture or science." As such, LEC's copyright protection there
under covered only the hatch door sketches/drawings and not the actual hatch door they depict.
A hatch door, by its nature is an object of utility. It is defined as a small door, small gate or an opening
that resembles a window equipped with an escape for use in case of fire or emergency. It is thus by
nature, functional and utilitarian serving as egress access during emergency. It is not primarily an
artistic creation but rather an object of utility designed to have aesthetic appeal. It is intrinsically a
useful article, which, as a whole, is not eligible for copyright.
Facts:
The petitioners are the officers and/or directors of Metrotech Steel Industries, Inc. Lim Eng Co, on
the other hand, is the Chairman of LEC Steel Manufacturing Corporation (LEC), a company which
specializes in architectural metal manufacturing.
Sometime in 2002, LEC was invited by the architects of the Manansala Project (Project), a high-end
residential building in Rockwell Center, Makati City, to submit design/drawings and specifications
for interior and exterior hatch doors. LEC complied by submitting on July 16, 2002, shop
plans/drawings, including the diskette therefor, embodying the designs and specifications required
for the metal hatch doors.
After a series of consultations and revisions, the final shop plans/drawings were submitted by LEC
on January 15, 2004 and thereafter copied and transferred to the title block of Ski-First Balfour Joint
Venture (SKI-FB), the Project’s contractor, and then stamped approved for construction on
February 3, 2004.
LEC was thereafter subcontracted by SKI-FB to manufacture and install the interior and exterior
hatch doors for the 7th and 22nd floors of the Project. Sometime thereafter, LEC learned that
Metrotech was also subcontracted to install interior and exterior hatch doors for the 23rd and 41st
floors.
On June 24, 2004, LEC demanded Metrotech to cease from infringing its intellectual property rights.
Metrotech, however, insisted that no copyright infringement was committed because the hatch
doors it manufactured were patterned in accordance with the drawings provided by SKI-FB.
On July 6, 2004, LEC was issued a Certificate of Copyright Registration and Deposit showing that it
is the registered owner of plans/drawings for interior and exterior hatch doors. This copyright
pertains to class work “I” under Section 172 of Republic Act (R.A.) No. 8293, The Intellectual
Property Code of the Philippines, which covers “illustrations, maps, plans, sketches, charts and
three-dimensional works relative to geography, topography, architecture or science.
Page 392 of 434

On December 9, 2004, LEC was issued another Certificate of Copyright Registration and Deposit
showing that it is the registered owner of plans/drawings for interior and exterior hatch doors
which is classified under Section 172(h) (i.e. ornamental designs or models for articles of
manufacture, whether or not registrable as an industrial design, and other works of applied art).
When Metrotech still refused to stop fabricating hatch doors based on LEC’s shop plans/drawings,
the latter sought the assistance of the National Bureau of Investigation (NBI) which in turn applied
for a search warrant before the Regional Trial Court (RTC) of Quezon City, Branch 24. The
application was granted on August 13, 2004 thus resulting in the confiscation of finished and
unfinished metal hatch doors as well as machines used in fabricating and manufacturing hatch
doors from the premises of Metrotech.
The respondent filed a complaint for copyright infringement before the DOJ. The latter, however,
quashed the motion for search warrant since the allegation was not established.
Traversing the complaint, the petitioners admitted manufacturing hatch doors for the Project. They
denied, however, that they committed copyright infringement and averred that the hatch doors
they manufactured were functional inventions that are proper subjects of patents and that the
records of the Intellectual Property Office reveal that there is no patent, industrial design or utility
model registration on LEC’s hatch doors. Metrotech further argued that the manufacturing of hatch
doors per se is not copyright infringement because copyright protection does not extend to the
objects depicted in the illustrations and plans. Moreover, there is no artistic or ornamental
expression embodied in the subject hatch doors that would subject them to copyright protection.
The DOJ initially denied the complaint of the petitioner for want of probable cause but reversed
the same upon motion for reconsideration filed by the respondents. The DOJ reversed itself again
when the petitioners moved for reconsideration and declared that the evidence on record did not
establish probable cause because the subject hatch doors were plainly metal doors with functional
components devoid of any aesthetic or artistic features. The CA, however, reversed the decision of
the DOJ, hence, this petition.
Issue: Whether there is copyright infringement in this case
Held: None.
Copyright infringement is thus committed by any person who shall use original literary or artistic
works, or derivative works, without the copyright owner’s consent in such a manner as to violate
the foregoing copy and economic rights. For a claim of copyright infringement to prevail, the
evidence on record must demonstrate: (1) ownership of a validly copyrighted material by the
complainant; and (2) infringement of the copyright by the respondent.
While both elements subsist in the records, they did not simultaneously concur so as to substantiate
infringement of LEC’s two sets of copyright registrations.
The respondent failed to substantiate the alleged reproduction of the drawings/sketches of hatch
doors copyrighted. There is no proof that the respondents reprinted the copyrighted
sketches/drawings of LEC’s hatch doors. The raid conducted by the NBI on Metrotech’s premises
Page 393 of 434

yielded no copies or reproduction of LEC’s copyrighted sketches/drawings of hatch doors. What

were discovered instead were finished and unfinished hatch doors.
Certificate of Registration Nos. I-2004-13 and I-2004-14 pertain to class work “I” under Section 172
of R.A. No. 8293 which covers “illustrations, maps, plans, sketches, charts and three-dimensional
works relative to geography, topography, architecture or science. As such, LEC’s copyright
protection thereunder covered only the hatch door sketches/drawings and not the actual hatch
door they depict.
Copyright, in the strict sense of the term, is purely a statutory right. Being a mere statutory grant,
the rights are limited to what the statute confers. It may be obtained and enjoyed only with respect
to the subjects and by the persons, and on terms and conditions specified in the statute.
Accordingly, it can cover only the works falling within the statutory enumeration or description.
Since the hatch doors cannot be considered as either illustrations, maps, plans, sketches, charts and
three-dimensional works relative to geography, topography, architecture or science, to be properly
classified as a copyrightable class “I” work, what was copyrighted were their sketches/drawings
only, and not the actual hatch doors themselves. To constitute infringement, the usurper must have
copied or appropriated the original work of an author or copyright proprietor, absent copying, there
can be no infringement of copyright.
_____________________________________________________________________________________
SPECIAL LAWS
FINANCIAL REHABILITATION AND INSOLVENCY ACT
San Jose Timber Corporation et. al. v. Securities and Exchange Commission, et. al.
G.R. No. 162196, February 27, 2012, Mendoza, J:
Rehabilitation contemplates a continuance of corporate life and activities in an effort to

restore and reinstate the corporation to its former position of successful operation and solvency. The
purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby
allow creditors to be paid their claims from its earnings. The rehabilitation of a financially distressed
corporation benefits its employees, creditors, stockholders and, in a larger sense, the general public.
A successful rehabilitation usually depends on two factors: (1) a positive change in the
business fortunes of the debtor, and (2) the willingness of the creditors and shareholders to arrive at
a compromise agreement on repayment burdens, extent of dilution, etc. The debtor must demonstrate
by convincing and compelling evidence that these circumstances exist or are likely to exist by the time
the debtor submits his ‘revised or substitute rehabilitation plan for the final approval of the court.
Given the high standards that the rules require, mere unsupported assertions by the debtor
that "the parties are close to an agreement" or that "business is expected to pick up in the next several
quarters" are not sufficient. Circumstances that might demonstrate in a convincing and compelling
manner that the debtor could successfully be rehabilitated include the following: a) the business
fortunes of the debtor have actually improved since the petition was filed; b) the general circumstances
Page 394 of 434

and forecast for the sector in which the debtor is operating supports the likelihood that the debtor's
business will revive; c) the debtor has taken concrete steps to improve its operating efficiency; d) the
debtor has obtained legally binding investment commitments from parties contingent on the approval
of a rehabilitation plan; e) the debtor has successfully addressed other factors that would increase the
risk that the debtor's rehabilitation plan would fail; f) the majority of the secured and unsecured
creditors have expressly demonstrated a preference that the debtor be rehabilitated rather than
liquidated and are willing to compromise on their claims to reach that result; g) the debtor's
shareholders have expressed a willingness to dilute their equity in connection with a debt equity swap.
Facts:
Petitioner CSDC is a corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines and the controlling stockholder and creditor of petitioner SJTC, being
the owner of more than 99% of its outstanding capital stock.
Petitioner SJTC is primarily engaged in the operation of a logging concession with a base camp in
Pabanog, Wright, Western Samar, under and by virtue of a Timber License Agreement (TLA) No.
118 issued by the Department of Environment and Natural Resources (DENR). The TLA was to
expire in 2007.
On February 8, 1989, the DENR issued a Moratorium Order (MO) suspending all logging operations
in the island of Samar effective February 1989 up to May 30, 1989. As a consequence, SJTC was
constrained to cease operations effective February 8, 1989, despite the fact that the expiration of
the period set forth in the MO was still up to May 30, 1989. The cessation of its operations caused
SJTC to lose all its income. Thus, on August 7, 1990, SJTC and CSDC filed with the SEC a petition
for the appointment of a rehabilitation receiver and for suspension of payments.
Prior to the expiration of the waiting period to commence rehabilitation, the respondents filed their
Motion For Settlement of Claims Against Petitioner. Petitioner, on the other hand, offered to pay
30% of the claims. Sometime in 1996, the SEC granted the motion. However, in 2002, the SEC En
Banc reversed the decision and ordered the liquidation of the petitioner. The CA affirmed the
decision.
On March 8, 2004, the petitioners filed a petition for review before the Supreme Court on the
ground that the CA erred in affirming the dissolution of SJTC when the vast majority of the creditors
had agreed to await the rehabilitation of SJTC. They believe that the rehabilitation was still feasible
considering that the TLA was still valid up to 2007 and under the proposed revised rehabilitation
plan of SJTC, the latter would only need 24 months after the lifting of the logging moratorium to
fully settle the claims of the creditors, except those of the affiliates.
Significantly, except for the Social Security System (SSS), which incidentally had no more claims
against SJTC, none of the creditors filed an opposition to or comment on the petition.
Meanwhile, during the pendency of the petition, the DENR issued an order allowing SJTC to resume
operations and extending the term of the TLA up to 2021.
Page 395 of 434

Consequently, on October 14, 2005, the petitioners filed their Supplemental Petitio praying for the
reversal of the CA decision and the remand of the case to the SEC for the immediate approval and
implementation of the rehabilitation plan.
Despite the same, it is of the position that SJTC’s rehabilitation is no longer feasible and viable
because it has already disposed of its properties such as various machineries and equipment and
other valuable assets which are indispensable to its logging operations. In other words, SJTC can
no longer continue its logging operations because it now lacks the necessary tools and equipment
to pursue its business operations.
Issue: Whether the CA erred in affirming the decision of the SEC
Held: No, because at the time of the promulgation of the ruling of the CA, there is lack of certainty
that the logging ban would, in fact, be lifted. It is clear from the records that the proposed
rehabilitation plan of the petitioners would depend entirely on the lifting of the logging ban either
by the lifting of the moratorium on logging activities in Samar issued by the DENR, or by the
enactment of a law on selective logging. Such lifting of the logging ban is indispensable to the
rehabilitation of SJTC. If it would not be lifted, the company would have no source of income or
revenues and no investor or creditor would come in to lend a hand in its resuscitation.
The Court, nevertheless, ordered approval of the petition for rehabilitation in view of a supervening
event (i.e. issuance of an order by the DENR allowing SJTC to resume operations and extending the
term of the TLA up to 2021).
Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. The purpose
of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby allow
creditors to be paid their claims from its earnings. The rehabilitation of a financially distressed
corporation benefits its employees, creditors, stockholders and, in a larger sense, the general public.
A successful rehabilitation usually depends on two factors: (1) a positive change in the business
fortunes of the debtor, and (2) the willingness of the creditors and shareholders to arrive at a
compromise agreement on repayment burdens, extent of dilution, etc. The debtor must
demonstrate by convincing and compelling evidence that these circumstances exist or are likely to
exist by the time the debtor submits his ‘revised or substitute rehabilitation plan for the final
approval of the court.
Given the high standards that the rules require, mere unsupported assertions by the debtor that
"the parties are close to an agreement" or that "business is expected to pick up in the next several
quarters" are not sufficient. Circumstances that might demonstrate in a convincing and compelling
manner that the debtor could successfully be rehabilitated include the following: a) the business
fortunes of the debtor have actually improved since the petition was filed; b) the general
circumstances and forecast for the sector in which the debtor is operating supports the likelihood
that the debtor's business will revive; c) the debtor has taken concrete steps to improve its operating
efficiency; d) the debtor has obtained legally binding investment commitments from parties
contingent on the approval of a rehabilitation plan; e) the debtor has successfully addressed other
factors that would increase the risk that the debtor's rehabilitation plan would fail; f) the majority
of the secured and unsecured creditors have expressly demonstrated a preference that the debtor
Page 396 of 434

be rehabilitated rather than liquidated and are willing to compromise on their claims to reach that
result; g) the debtor's shareholders have expressed a willingness to dilute their equity in connection
with a debt equity swap.
_____________________________________________________________________________________
YNGSON V. PHILIPPINE NATIONAL BANK

G.R. No. 171132, August 15, 2012
ARCAM & Company, Inc. (ARCAM) obtained a loan from PNB secured by real estate and chattel
mortgages. When ARCAM defaulted on its obligations, on November 25, 1993, PNB initiated
extrajudicial foreclosure proceedings. The public auction was scheduled on December 29, 1993 for
the mortgaged real properties and December 8, 1993 for the mortgaged personal properties.
On December 7, 1993, ARCAM filed before the SEC a Petition for Suspension of Payments,
Appointment of a Management or Rehabilitation Committee, and Approval of Rehabilitation Plan,
with application for issuance of a temporary restraining order (TRO) and writ of preliminary
injunction. The SEC issued a TRO and subsequently a writ of preliminary injunction, enjoining PNB
and the Sheriff from proceeding with the foreclosure sale.
On February 9, 2000, the SEC ruled that ARCAM can no longer be rehabilitated. Thus, the SEC
decreed that ARCAM be dissolved and placed under liquidation. The preliminary injunction was
likewise dissolved and a liquidator was appointed. With this development, PNB revived the
foreclosure case and emerged as the highest winning bidder in the auction sale, and certificates of
sale were issued in its favor.
Issue: Whether PNB, as a secured creditor, can foreclose on the mortgaged properties of a
corporation under liquidation without the knowledge and prior approval of the liquidator or the
SEC?
Held: Yes. In the case of Consuelo Metal Corporation v. Planters Development Bank, which involved
factual antecedents similar to the present case, the court has already settled the above question and
upheld the right of the secured creditor to foreclose the mortgages in its favor during the liquidation
of a debtor corporation. It is worth mentioning that under Republic Act No. 10142, otherwise known
as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured creditor to
enforce his lien during liquidation proceedings is retained under Section 114 of the law.
_____________________________________________________________________________________
EXPRESS INVESTMENTS V. BAYAN TELECOM

G.R. NOS. 17 4457-59, DECEMBER 5 2012
Respondent Bayantel is a duly organized domestic corporation engaged in the business of providing
telecommunication services. It is 98.6% owned by Bayan Telecommunications Holdings
Corporation (BTHC), which in turn is 85.4% owned by the Lopez Group of Companies and Benpres
Holdings Corporation.
Page 397 of 434

On various dates between the years 1995 and 2001, Bayantel entered into several credit agreements
with the private respondents. To secure said loans, Bayantel executed an Omnibus Agreement
dated September 19, 1995 and an EVTELCO Mortgage Trust Indenture dated December 12, 1997.
Pursuant to the Omnibus Agreement, Bayantel executed an Assignment Agreement in favor of the
lenders under the Omnibus Agreement (hereinafter, Omnibus Creditors, Bank Creditors, or
secured creditors). In the Assignment Agreement, Bayantel bound itself to assign, convey and
transfer to the Collateral Agent, the several properties as collateral security in favor of the Omnibus
Creditors.
When it defaulted, Bayantel proposed the restructuring of its debts. To facilitate the negotiations
between Bayantel and its creditors, an Informal Steering Committee was formed.
When Bayantel’s unpaid obligations continued to balloon, on July 30, 2003, The Bank of New York
filed a petition for the corporate rehabilitation of Bayantel upon the instructions of the Informal
Steering Committee. On August 8, 2003, the Pasig RTC, Branch 158, issued a Stay Order. The
Rehabilitation Receiver, Atty. Noval, submitted that Bayantel may be rehabilitated.
On June 28, 2004, the Pasig RTC, Branch 158 issued an Order approving the Report and
Recommendations attached by the Receiver to his “Submission with Prayer for Further Guidance
from the Honorable Court,” subject to the following clarifications and/or amendments:
1. The ruling on the pari passu treatment of all creditors whose claims are subject to
restructuring shall be maintained and shall extend to all payment terms and treatment of
past due interest- Said petitioners invoke a lien over the cash flow and receivables of
Bayantel by virtue of the Assignment Agreement.
xxx
3. The level of sustainable debt of the rehabilitation plan, as amended, shall be reduced to
the amount of [US]$325,000,000 for a period of 19 years.
On November 9, 2004, the Rehabilitation Court issued an Order directing the creation of a
Monitoring Committee to be composed of one member each from the group of Omnibus Creditors
and unsecured creditors, and a third member to be chosen by the unanimous vote of the first two
members.
Meanwhile, on January 10, 2005, Atty. Noval submitted to the Rehabilitation Court an
Implementing Term Sheet to serve as a guide for Bayantel’s Rehabilitation. The same was approved
in an Order dated March 15, 2005.
The Orders above mentioned (except the Stay Order) are being questioned before the Honorable
Court.
Issues:
1. Did the Court a quo gravely abuse its discretion in adopting a pari passu treatment of
creditors during rehabilitation even if the some creditors are secured by virtue of the
Assignment Agreement?
Page 398 of 434

2. Did the Court a quo gravely abuse its discretion in fixing respondent’s sustainable debt at
US$325 million payable within 19 years as against the Receiver’s proposal of US$370 million
payable in 15 years?
3. Did the Court a quo gravely abuse its discretion in empowering the Monitoring Committee
to modify, reverse or overrule the decision of Bayantel’s Board of Directors on certain
matters?
Held:
First Issue: No. In the 1990 case of Alemar’s Sibal & Sons, Inc. v. Judge Elbinias, the Court first
enunciated the prevailing principle which governs the relationship among creditors during
rehabilitation, i.e. equality in equity. During rehabilitation receivership, the assets are held in trust
for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over
another by the expediency of an attachment, execution or otherwise.
Basically, once a management committee or rehabilitation receiver has been appointed in

accordance with PD 902-A, no action for claims may be initiated against a distressed corporation
and those already pending in court shall be suspended in whatever stage they may be.
Notwithstanding, secured creditors shall continue to have preferred status but the enforcement
thereof is likewise held in abeyance. However, if the court later determines that the rehabilitation
of the distressed corporation is no longer feasible and its assets are liquidated, secured claims shall
enjoy priority in payment.
While Section 24(d), Rule 4 of the Interim Rules states that contracts and other arrangements
between the debtor and its creditors shall be interpreted as continuing to apply, this holds true only
to the extent that they do not conflict with the provisions of the plan. Here, the stipulation in the
Assignment Agreement to the effect that respondent Bayantel shall pay petitioners in full and ahead
of other creditors out of its cash flow during rehabilitation directly impinges on the provision of the
approved Rehabilitation Plan that “[t]he creditors of Bayantel, whether secured or unsecured,
should be treated equally and on the same footing or pari passu until the rehabilitation proceedings
is terminated in accordance with the Interim Rules.
Petitioners cannot rely on Section 5(b), Rule 4 of the Interim Rules which states that the terms and
conditions of the rehabilitation plan shall include the manner of its implementation, giving due
regard to the interests of secured creditors as basis for demanding that they be paid ahead of others.
“giving due regard to the interests of secured creditors” primarily entails only ensuring that the
property comprising the collateral is insured, maintained or replacement security is provided such
that the obligation is fully secured. The reason for this rule is simple, in the event that the court
terminates the proceedings for reasons other than the successful implementation of the plan, the
secured creditors may foreclose the securities and the proceeds thereof applied to the satisfaction
of their preferred claims.
Petitioners cannot rely on the non-impairment clause because said clause applies only to the
exercise of legislative power and not judicial or quasi-judicial power.
Page 399 of 434

Second Issue: No. To begin with, the matter is factual question which outside the scope of Rule
45. Notably, the Interim Rules is silent on the manner by which the sustainable debt of the debtor
shall be determined. Yet, Section 2 of the Interim Rules prescribe that the Rules shall be liberally
construed to carry out the objectives of Sections 5(d),89 6(c)90 and 6(d)91 of PD 902-A. The
underlying objective behind these provisions is to foster the rehabilitation of the debtor by
insulating it against claims, preserving its assets and taking steps to ensure that the rights of all
parties concerned are adequately protected. This Court is convinced that the Court of Appeals ruled
in accord with this policy when it upheld the Rehabilitation Court’s determination of respondent’s
sustainable debt.
Third Issue: Yes. Under Section 14, Rule 4 of the Interim Rules, the Receiver shall not take over the
management and control of the debtor but shall closely oversee and monitor its operations during
the pendency of the rehabilitation proceeding. The Rehabilitation Receiver shall be considered an
officer of the court and his core duty is to assess how best to rehabilitate the debtor and to preserve
its assets pending the determination of whether or not it should be rehabilitated and to implement
the approved plan. It is a basic precept in Corporation Law that the corporate powers of all
corporations formed under Batas Pambansa Blg. 68 or the Corporation Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the board of
directors or trustees. Nonetheless, PD 902-A presents an exception to this rule.
Section 6(d)119 of PD 902-A empowers the Rehabilitation Court to create and appoint a
management committee to undertake the management of corporations when there is imminent
danger of dissipation, loss, wastage or destruction of assets or other properties or paralyzation of
business operations of such corporations which may be prejudicial to the interest of minority
stockholders, parties-litigants or the general public. In the case of corporations supervised or
regulated by government agencies, such as banks and insurance companies, the appointment shall
be made upon the request of the government agency concerned. Otherwise, the Rehabilitation
Court may, upon petition or motu proprio, appoint such management committee. The
management committee or rehabilitation receiver, board or body shall have the following powers:
(1) to take custody of, and control over, all the existing assets and property of the distressed
corporation; (2) to evaluate the existing assets and liabilities, earnings and operations of the
corporation; (3) to determine the best way to salvage and protect the interest of the investors and
creditors; (4) to study, review and evaluate the feasibility of continuing operations and restructure
and rehabilitate such entities if determined to be feasible by the Rehabilitation Court; and (5) it
may overrule or revoke the actions of the previous management and board of directors of the entity
or entities under management notwithstanding any provision of law, articles of incorporation or
by-laws to the contrary.
In this case, petitioner neither filed a petition for the appointment of a management committee nor
presented evidence to show that there is imminent danger of dissipation, loss, wastage or
destruction of assets or other properties or paralyzation of business operations of respondent
corporation which may be prejudicial to the interest of the minority stockholders, the creditors or
the public. Unless petitioner satisfies these requisites, we cannot sanction the exercise by the
Monitoring Committee of powers that will amount to management of respondent’s operations.
_____________________________________________________________________________________
BANK OF THE PHILIPPINE ISLANDS vs. SARABIAMANOR HOTEL CORPORATION

G.R. No. 175844. July 29, 2013
Page 400 of 434

J. Perlas-Bernabe
Section 23, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation states that a
rehabilitation plan may be approved even over the opposition of the creditors holding a majority of
the corporation’s total liabilities if there is a showing that rehabilitation is feasible and the opposition
of the creditors is manifestly unreasonable. Also known as the “cram-down” clause, this provision,
which is currently incorporated in the FRIA, is necessary to curb the majority creditors’ natural
tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to the
greater long-term benefit of all stakeholders.
Facts:
Sarabia is a corporation duly organized and existing under Philippine laws with an authorized
capital stock of P10,000,000.00, fully subscribed and paid-up, for the primary purpose of owning,
leasing, managing and/or operating hotels, restaurants, barber shops, beauty parlors, sauna and
steam baths, massage parlors and such other businesses incident to or necessary in the
management or operation of hotels.
In 1997, Sarabia obtained a P150,000,000.00 special loan package from Far East Bank and Trust
Company (FEBTC) in order to finance the construction of a five-storey hotel building (New
Building) for the purpose of expanding its hotel business. An additional P20,000,000.00 stand-by
credit line was approved by FEBTC. The foregoing debts were secured by real estate mortgages over
several parcels of land and a comprehensive agreement by its stockholders. By virtue of a merger,
Bank of the Philippine Islands (BPI) assumed all of FEBTC’s rights against Sarabia.
Unfortunately, because of the delayed completion of the New Building it significantly skewed its
projected revenues and led to various cash flow difficulties, resulting in its incapacity to meet its
maturing obligations. Hence, Sarabia filed a petition for rehabilitation.
In an Order, the RTC approved the rehabilitation plan as recommended by the Receiver, finding
the same to be feasible. In this accord, it observed that the rehabilitation plan was realistic since,
based on Sarabia’s financial history, it was shown that it has the inherent capacity to generate funds
to pay its loan obligations given the proper perspective. BPI appealed to the CA but the latter
affirmed the RTC’s ruling with the modification of reinstating the surety obligations of Sarabia’s
stockholders.
Issue:
Whether or not the CA correctly affirmed Sarabia’s rehabilitation plan as approved by the RTC,
with the modification on the reinstatement of the surety obligations of Sarabia’s stockholders.
Ruling:
The petition has no merit.
The rules on corporate rehabilitation have been crafted in order to give companies sufficient leeway
to deal with debilitating financial predicaments in the hope of restoring or reaching a sustainable
Page 401 of 434

operating form if only to best accommodate the various interests of all its stakeholders, may it be
the corporation’s stockholders, its creditors and even the general public. In this light, case law has
defined corporate rehabilitation as an attempt to conserve and administer the assets of an insolvent
corporation in the hope of its eventual return from financial stress to solvency. It contemplates the
continuance of corporate life and activities in an effort to restore and reinstate the corporation to
its former position of successful operation and liquidity.
Section 23, Rule of the Interim Rules of Procedure on Corporate Rehabilitation states that a
rehabilitation plan may be approved even over the opposition of the creditors holding a majority of
the corporation’s total liabilities if there is a showing that rehabilitation is feasible and the
opposition of the creditors is manifestly unreasonable. Also known as the “cram-down” clause,
this provision, which is currently incorporated in the FRIA, is necessary to curb the majority
creditors’ natural tendency to dictate their own terms and conditions to the rehabilitation, absent
dueregard to the greater long-term benefit of all stakeholders.
Applying the foregoing requirements:
i. Feasibility of Sarabia’s rehabilitation.

The petition for rehabilitation should be denied to corporations whose insolvency appears to be
irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditors,
which is rendered obvious by the following: (a) the absence of a sound and workable business plan;
(b) baseless and unexplained assumptions, targets and goals; (c) speculative capital infusion or
complete lack thereof for the execution of the business plan; (d) cash flow cannot sustain daily
operations; and (e) negative net worth and the assets are near full depreciation or fully depreciated.
Keeping with these principles, the Court thus observes that:
First, Sarabia has the financial capability to undergo rehabilitation. Based on the
Receiver’s Report, Sarabia’s financial history shows that it has the inherent capacity to generate
funds to repay its loan obligations if applied through the proper financial framework. Sarabia's
financial data reveals that the latter’s business is not only an on-going but also a growing concern.
Despite its financial constraints, Sarabia likewise continues to be profitable with its hotelier
business as its operations have not been disrupted. Second, Sarabia has the ability to have
sustainable profits over a long period of time. As concluded by the Receiver, Sarabia’s projected
revenues shall have a steady year-on-year growth from the time that it applied for rehabilitation
until the end of its rehabilitation plan. Should such projections come through, Sarabia would have
the ability not just to pay off its existing debts but also to carry on with its intended expansion.
Third, the interests of Sarabia’s creditors are well-protected.
ii. Manifest unreasonableness of BPI’s opposition. In this case, the Court finds BPI’s
opposition on the approved interest rate to be manifestly unreasonable considering that: (a) the
6.75% p.a. interest rate already constitutes a reasonable rate of interest which is concordant with
Sarabia’s projected rehabilitation; and (b) on the contrary, BPI’s proposed escalating interest rates
remain hinged on the theoretical assumption of future fluctuations in the market, this
notwithstanding the fact that its interests as a secured creditor remain well-preserved.
_____________________________________________________________________________________
Page 402 of 434

Steel Corporation of the Philippines vs. MAPFRE Insular Corporation et al.

G.R. No. 201199; October 16, 2013
J. Carpio
Rehabilitation courts only have limited jurisdiction over claims against the debtor that is
under rehabilitation, not over claims by the debtor against its own debtors or against third parties.
Section 3 of Republic Act No. 10142 states that rehabilitation proceedings are “summary and non-
adversarial” in nature. They do not include adjudication of claims that require full trial on the merits.
Thus, where a distressed company has claims against its debtors, the same must be filed in a separate
action so that the parties’ respective claims and defenses may be presented and heard.
Facts:
Steel Corporation of the Philippines (SCP) is a domestic corporation engaged in the manufacture
and distribution of cold-rolled and galvanized steel sheets and coils. It obtained loans from several
creditors and, as security, mortgaged its assets in their favor. The creditors appointed Bank of the
Philippine Islands (BPI) as their trustee. Later on, SCP and BPI entered into a Mortgage Trust
Indenture (MTI) requiring SCP to insure all of its assets until the loans are fully paid. Under the
MTI, the insurance policies were to be made payable to BPI.
During the course of its business, SCP suffered financial difficulties. As a result, one of its creditors,
Equitable PCI Bank, filed with the RTC a petition to have SCP placed under corporate rehabilitation.
Subsequently, RTC issued a stay order to defer all claims against SCP and appointed a rehabilitation
receiver.
Under a Collective Master Policy, SCP insured against material damage and business interruption
its assets located in Barangay Munting Tubig, Balayan, Batangas for the period August 19, 2007 to
August 19, 2008. On June 8, 2008, a fire broke out of SCP’s plant damaging its machineries. Because
of such, pursuant to its right under the MTI, BPI demanded and received from the insurers $450,000
insurance proceeds.
SCP filed with the RTC a motion to direct BPI to turn over the $450,000 insurance proceeds for the
former to replace the damaged machineries. RTC later on issued an Order directing BPI to release
the insurance proceeds directly to the contractors and suppliers who will undertake the repairs and
replacements of the damaged machineries.
SCP then filed with the RTC a motion to direct respondent insurers to pay insurance proceeds in
the amounts of $28,000,000 property damage and $8,000,000 business interruption. Respondent
insurers entered a special appearance solely for the purpose of questioning RTC’s jurisdiction over
the insurance claim. On June 2011, RTC rendered a decision directing respondent insurers to pay to
SCP property damage and business interruption and ruling that it has jurisdiction over the
insurance claims filed by SPC in the rehabilitation proceedings.
Respondent insurers filed with the CA a petition for certiorari under Rule 65. CA declared void the
RTC’S June 2011 Order and held that SCP’s “Motion to Pay” is a collection suit; hence, it must be
filed in a separate proceeding and the corresponding docket fees must be paid. SCP filed a motion
for reconsideration, which was denied. Hence, the petition. SCP claims that RTC, acting as a
Page 403 of 434

rehabilitation court, has jurisdiction over the subject matter of their insurance claim against the
insurers.
Issue:
Whether the RTC, acting as a rehabilitation court, has jurisdiction over the insurance claim filed
by the distressed company.
Ruling:
Petition Denied.
SCP must file a separate action for collection where respondent insurers can properly thresh out
their defenses. SCP cannot simply file with the RTC a motion to direct respondent insurers to pay
insurance proceeds. Section 3 of Republic Act No. 10142 states that rehabilitation proceedings are
"summary and non-adversarial" in nature. They do not include adjudication of claims that require
full trial on the merits, like SCP’s insurance claim against respondent insurers.
The Court agrees with the ruling of the Court of Appeals that the jurisdiction of the rehabilitation
courts is over claims against the debtor that is under rehabilitation, not over claims by the
debtoragainst its own debtors or against third parties. In its 8 February 2012 Decision, the Court of
Appeals held that:
x x x Said insurance claims cannot be considered as "claims" within the jurisdiction of

the trial court functioning as a rehabilitation court. Rehabilitation courts only have
limited jurisdiction over the claims by creditors against the distressed company, not
on the claims of said distressed company against its debtors. The interim rules define
claim as referring to all claims or demands, of whatever nature or character against a
debtor or its property, whether for money or otherwise.
Even under the new Rules of Procedure on Corporate Rehabilitation, claim is defined
under Section 1, Rule 2 as "all claims or demands of whatever nature or character
against a debtor or its property, whether for money or otherwise." This is also the
definition of a claim under Republic Act No. 10142. Section 4(c) thereof reads:
"(c) Claim shall refer to all claims or demands of whatever nature or character against
the debtor or its property, whether for money or otherwise, liquidated or unliquidated,
fixed or contingent, matured or unmatured, disputed or undisputed, including, but not
limited to: (1) all claims of the government, whether national or local, including taxes,
tariffs and customs duties; and (2) claims against directors and officers of the debtor
arising from the acts done in the discharge of their functions falling within the scope
of their authority: Provided, That, this inclusion does not prohibit the creditors or third
parties from filing cases against the directors and officers acting in their personal
capacities."
Respondent insurers are not claiming or demanding any money or property from SCP. In other
words, respondent insurers are not creditors of SCP. Respondent insurers are contingent debtors
of SCP because they may possibly be, subject to proof during trial, liable to SCP. Thus, the RTC has
Page 404 of 434

no jurisdiction over the insurance claim of SCP against respondent insurers. SCP must file a
separate action against respondent insurers to recover whatever claim it may have against them.
_____________________________________________________________________________________
PUERTO AZUL LAND, INC. vs. PACIFIC WIDE REALTY DEVELOPMENT CORPORATION
G.R. No. 184000, September 17, 2014, J. Perlas- Bernabe
PALI filed petition for rehabilitation due to impossibility of meeting its debts and obligations.
The issue is whether or not such dismissal of petition by the CA is valid. The court ruled that The
validity of PALI’s rehabilitation was already raised as an issue by PWRDC and resolved with finality
by the Court in its November 25, 2009 Decision in G.R. No. 180893 (consolidated with G.R. No. 178768).
The Court sustained therein the CA’s affirmation of PALI’s Revised Rehabilitation Plan, including
those terms which its creditors had found objectionable, namely, the 50% "haircut" reduction of the
principal obligations and the condonation of accrued interests and penalty charges
Facts:
PALI is a domestic corporation engaged in the business of developing the Puerto Azul
Complex located in Ternate, Cavite into a "satellite city," described as a "self-sufficient and
integrated tourist destination community with residential areas, resort/tourism, and retail
commercial centers with recreation areas like golf courses, jungle trails, and white sand
lagoons." To finance the full operation of its business, PALI obtained loans in the total principal
amount of 640,225,324.00 from several creditors, among which were East Asia Capital, Export and
Industry Bank (EIB), Philippine National Bank, and Equitable PCI Bank (EPCIB), secured by real
estate owned by PALI and by accommodation mortgagors under a Mortgage Trust Indenture.
Foreseeing the impossibility of meeting its debts and obligations to its creditors as they fall
due, PALI, on September 14, 2004, filed a Petition for Suspension of Payments and
Rehabilitation before the RTC. On September 17, 2004, the RTC, finding PALI’s petition to be
sufficient in form and substance, issued a Stay Order pursuant to Section 6, Rule 4 of the Interim
Rules on Corporate Rehabilitation (Interim Rules). RTC approved PALI’s Revised Rehabilitation
Plan. CA granted PWRDC’s petition for review and reversed the December 13, 2005 RTC Decision,
thereby dismissing PALI’s petition for rehabilitation. It held that the causes of PALI’s inability to
pay its debts were not alleged in the petition with sufficient particularity as to have allowed the
RTC to properly evaluate whether or not to issue a Stay Order and eventually approve its
rehabilitation.
Issue:
Whether or not the CA erred in reversing the RTC Decision, thereby dismissing PALI’s
Revised Rehabilitation Plan
Ruling:
Yes. CA erred in dismissing PALI’S Rehabilitation Plan
The validity of PALI’s rehabilitation was already raised as an issue by PWRDC and resolved
with finality by the Court in its November 25, 2009 Decision in G.R. No. 180893 (consolidated with
G.R. No. 178768). The Court sustained therein the CA’s affirmation of PALI’s Revised Rehabilitation
Page 405 of 434

Plan, including those terms which its creditors had found objectionable, namely, the 50% "haircut"
reduction of the principal obligations and the condonation of accrued interests and penalty charges.
The rehabilitation plan is contested on the ground that the same is unreasonable and results
in the impairment of the obligations of contract. PWRDC contests the following stipulations in
PALI’s rehabilitation plan: fifty percent (50%) reduction of the principal obligation; condonation of
the accrued and substantial interests and penalty charges; repayment over a period of ten years,
with minimal interest of two percent (2%) for the first five years and five percent (5%) for the next
five years until fully paid, and only upon availability of cash flow for debt service.
The Court found nothing onerous in the terms of PALI’s rehabilitation plan. The Interim
Rules on Corporate Rehabilitation provides for means of execution of the rehabilitation plan, which
may include, among others, the conversion of the debts or any portion thereof to equity,
restructuring of the debts, dacion en pago, or sale of assets or of the controlling interest.
The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, per
findings of fact of the RTC and as affirmed by the CA, the restructuring of the debts of PALI would
not be prejudicial to the interest of PWRDC as a secured creditor.
There is nothing unreasonable or onerous about the 50% reduction of the principal amount
when, as found by the courta quo, a Special Purpose Vehicle (SPV) acquired the credits of PALI
from its creditors at deep discounts of as much as 85%. Meaning, PALI’s creditors accepted only
15% of their credit’s value. Stated otherwise, if PALI’s creditors are in a position to accept 15% of
their credit’s value, with more reason that they should be able to accept 50% thereof as full
settlement by their debtor. Since the issue on the validity, as well as regularity of the December 13,
2005 RTC Decision approving PALI’s Revised Rehabilitation Plan had already been resolved, the
Court, in line with the res judicata principle, is constrained to grant the present petition and,
consequently, reverse the assailed CA decision.
_____________________________________________________________________________________
ROBINSON'S BANK CORPORATION vs. HON. SAMUEL H. GAERLAN, et al.

G.R. No. 195289, September 24, 2014, J. Del Castillo
Under Rule 3, Section 5 of the Rules of Procedure on Corporate Rehabilitation, the review of
any order or decision of the rehabilitation court or on appeal therefrom shall be in accordance with
the Rules of Court, unless otherwise provided. In the case at bar, TIDCORP’s Petition for Review
sought to nullify the pari passu sharing scheme directed by the trial court and to grant preferential
and special treatment to TIDCORP over other WGC creditors, such as RBC. This being the case, there
is no visible objection to RBC’s participation in said case, as it stands to be injured or benefited by the
outcome of TIDCORP’s Petition for Review – being both a secured and unsecured creditor of WGC.
Facts:
Nation Granary, Inc. (now World Granary Corporation, or WGC) filed a Petition for
Rehabilitation with Prayer for Suspension of Payments, Actions and Proceedings before the RTC.
Page 406 of 434

WGC is engaged in the business of mechanized bulk handling, transport and storage,
warehousing, drying, and milling of grains. It incurred loans amounting to P2.66 billion from RBC
and other banks and entities such as Trade and Investment Development Corporation of the
Philippines (TIDCORP). It appears that RBC is both a secured and unsecured creditor, while
TIDCORP is a secured creditor.
The RTC issued a Stay Order staying the enforcement of creditors’ claims and prohibiting
WGC from disposing its properties and paying its outstanding liabilities. The RTC gave due course
to the Petition for Rehabilitation. Accordingly, the receiver submitted his Report with a proposal of
a pari passu– or equal – sharing between the secured and unsecured creditors of the proceeds from
WGC’s cash flow made available for debt servicing.
In its Comment, TIDCORP among others took exception to the proposed pari passu sharing,
insisting that as a secured creditor, it should enjoy preference over unsecured creditors, citing law
and jurisprudence to the effect that the law on preference of credits shall be observed in resolving
claims against corporations under rehabilitation. It likewise claimed that WGC violated its
Indemnity Agreement with TIDCORP – which required that while the agreement subsisted, WGC
shall not incur new debts without TIDCORP’s approval – by obtaining additional loans without the
knowledge and consent of the latter.
RBC filed an Opposition to TIDCORP’s Comment, arguing that giving preference to

TIDCORP would violate the Stay Order and impair the powers of the receiver; and that any change
in the contractual relations between TIDCORP and WGC relative to their Indemnity Agreement
comes as a necessary consequence of rehabilitation, which TIDCORP may not be heard to
complain.
The RTC approved WGC’s rehabilitation plan. TIDCORP filed a Petition for review before
the CA praying that the order directing that all WGC obligations be settled on a pari passu basis be
reversed and set aside. RBC filed an Urgent Motion for Intervention with attached Comment in
Intervention, which is anchored on its original claim and objection to TIDCORP’s position.
In its Opposition, TIDCORP maintained that intervention is not allowed in rehabilitation

proceedings, citing Rule 3, Section 1 of the Interim Rules of Procedure on Corporate Rehabilitation.
It argued that a final determination of the appeal does not depend on RBC’s participation since
rehabilitation proceedings are in remand binding on all interested and affected parties even if they
did not participate in the proceedings.
Issues:
1. Whether or not RBC should be allowed to participate in the petition for review;
2. Whether or not a petition for review is the proper remedy for RBC
Ruling:
1. Yes. Under Rule 3, Section 5 of the Rules of Procedure on Corporate Rehabilitation, the
review of any order or decision of the rehabilitation court or on appeal therefrom shall be in
accordance with the Rules of Court, unless otherwise provided. This being the case, there is no
visible objection to RBC’s participation in CA-G.R. SP No. 104141 as it stands to be injured or
Page 407 of 434

benefited by the outcome of TIDCORP’s Petition for Review – being both a secured and unsecured
creditor of WGC.
To recall, TIDCORP’s Petition for Review in CA-G.R. SP No. 104141 sought to 1) nullify the
pari passu sharing scheme directed by the trial court; 2) declare RBC and the other creditor banks–
which granted additional loans to WGC after the latter executed its Indemnity Agreement with
TIDCORP – guilty of violating TIDCORP’s rights; and 3) grant preferential and special treatment to
TIDCORP over other WGC creditors. These remedies would undoubtedly affect not merely the
rights of RBC, but of all the other WGC creditors as well, as their standing or status as creditors
would be somewhat downgraded, and the manner of recovery of their respective credits will be
altered if TIDCORP’s prayer is granted. Thus, the nature of TIDCORP’s Petition in CA-G.R. SP No.
104141 is such that the other creditors like RBC must be allowed to participate in the proceedings.
They have an interest in the controversy where a final decree would necessarily affect their rights.
To disallow the participation of RBC constitutes an evasion of the appellate court’s positive
duty to observe due process, a gross and patent error that can be considered as grave abuse of
discretion. Likewise, when an adverse effect on the substantial rights of a litigant results from the
exercise of the court’s discretion, certiorari may issue. If not, this Court possesses the prerogative
and initiative to take corrective action when necessary to prevent a substantial wrong or to do
substantial justice.
2. No. While TIDCORP is correct in arguing that intervention is not the proper mode for
RBC coming to the CA since it is already a party to the rehabilitation proceedings, this merely
highlights the former’s error in not allowing the latter to participate in the proceedings in CA-G.R.
SP No. 104141 just as it underscores the appellate court’s blunder in not ordering that RBC be
allowed to comment or participate in the case so that they may be given the opportunity to be heard
on TIDCORP’s allegations and accusations. And while RBC chose the wrong mode for interposing
its comments and objections in CA-G.R. SP No. 104141, this does not necessarily warrant the outright
denial of its chosen remedy; the Court is not so rigid as to be precluded from adopting measures to
insure that justice would be administered fairly to all parties concerned. If TIDCORP must pursue
its Petition for Review, then RBC should be allowed to comment and participate in the proceedings.
There is no other solution to the impasse.
Finally, the CA committed another patent error in declaring that RBC’s proper remedy was
not to move for intervention, but to file a Petition for Review of the trial court’s June 6, 2008 Order.
It failed to perceive the obvious fact that there is nothing about the trial court’s order that RBC
questioned; quite the contrary, it sought to affirm the said order in toto and simply prayed for the
dismissal of TIDCORP’s Petition for Review. There is thus no legal and logical basis for its
conclusion that RBC should have resorted to a Petition for Review just the same.
_____________________________________________________________________________________
PHILIPPINE BANK OF COMMUNICATIONS vs. BASIC POLYPRINTERS AND PACKAGING

CORPORATION

earnestness and good faith of the distressed corporation in financing the proposed rehabilitation plan.
Page 408 of 434

This commitment may include the voluntary undertakings of the stockholders or the would-be
investors of the debtor-corporation indicating their readiness, willingness and ability to contribute
funds or property to guarantee the continued successful operation of the debtor corporation during
the period of rehabilitation. In this case, the financial commitments presented by Basic Polyprinters
were insufficient for the purpose of rehabilitation. Thus, its petition for corporate rehabilitation must
necessarily fail.
Facts:
Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was a domestic

corporation engaged in the business of printing greeting cards, gift wrappers, gift bags, calendars,
posters, labels and other novelty items.
On February 27, 2004, Basic Polyprinters, along with the eight other corporations belonging
to the Limtong Group of Companies (namely: Cuisine Connection, Inc., Fine Arts International,
Gibson HP Corporation, Gibson Mega Corporation, Harry U. Limtong Corporation, Main Pacific
Features, Inc., T.O.L. Realty & Development Corp., and Wonder Book Corporation), filed a joint
petition for suspension of payments with approval of the proposed rehabilitation in the RTC.
Included in its overall Rehabilitation Program was the full payment of its outstanding loans
in favor of Philippine Bank of Communications (PBCOM), RCBC, Land Bank, EPCIBank and AUB
via repayment over 15 years with moratorium of two-years for the interest and five years for the
principal at 5% interest per annum and a dacion en pago of its affiliate property in favor of
EPCIBank.
Finding the petition sufficient in form and substance, the RTC issued the stay order dated
August 31, 2006. It appointed Manuel N. Cacho III as the rehabilitation receiver, and required all
creditors and interested parties, including the Securities and Exchange Commission (SEC), to file
their comments.
After the initial hearing and evaluation of the comments and opposition of the creditors,
including PBCOM, the RTC gave due course to the petition and referred it to the rehabilitation
receiver for evaluation and recommendation.
On October 18, 2007, the rehabilitation receiver submitted his report recommending the
approval of the rehabilitation plan. On December 19, 2007, the rehabilitation receiver submitted
his clarifications and corrections to his report and recommendations.
On January 11, 2008, the RTC issued an order approving the rehabilitation plan.
In the assailed decision promulgated on December 16, 2008, the CA affirmed the questioned
order of the RTC, agreeing with the finding of the rehabilitation receiver that there were sufficient
evidence, factors and actual opportunities in the rehabilitation plan indicating that Basic
Polyprinters could be successfully rehabilitated in due time.
The PBCOM claims that the CA did not pass upon the issues presented in its petition, that
the rehabilitation plan did not contain the material financial commitments required by Section 5,
Rule 4 of the Interim Rules of Procedure for Corporate Rehabilitation (Interim Rules); that,
Page 409 of 434

accordingly, the proposed repayment scheme did not constitute a material financial commitment,
and the proposed dacion en pago was not proper because the property subject thereof had been
mortgaged in its favor;
Issue:
Whether or not Basic Polyprinters can be rehabilitated.
Ruling:
No. Basic Polyprinters cannot be rehabilitated.
A material financial commitment becomes significant in gauging the resolve,

determination, earnestness and good faith of the distressed corporation in financing the proposed
rehabilitation plan. This commitment may include the voluntary undertakings of the stockholders
or the would-be investors of the debtor-corporation indicating their readiness, willingness and
ability to contribute funds or property to guarantee the continued successful operation of the
debtor corporation during the period of rehabilitation.
Basic Polyprinters presented financial commitments, as follows:

5. Additional P10 million working capital to be sourced from the insurance claim;
6. Conversion of the directors’ and shareholders’ deposit for future subscription to
common stock;
7. Conversion of substituted liabilities, if any, to additional paid-in capital to increase the
company’s equity; and
8. All liabilities (cash advances made by the stockholders) of the company from the officers
and stockholders shall be treated as trade payables.
However, these financial commitments were insufficient for the purpose.
The commitment to add P10,000,000.00 working capital appeared to be doubtful

considering that the insurance claim from which said working capital would be sourced had already
been written-off by Basic Polyprinters’s affiliate, Wonder Book Corporation. A claim that has been
written-off is considered a bad debt or a worthless asset, and cannot be deemed a material financial
commitment for purposes of rehabilitation. At any rate, the proposed additional P10,000,000.00
working capital was insufficient to cover at least half of the shareholders’ deficit that amounted to
P23,316,044.00 as of June 30, 2006.
The Supreme Court also declared in Wonder Book Corporation v. Philippine Bank of
Communications (Wonder Book) that the conversion of all deposits for future subscriptions to
common stock and the treatment of all payables to officers and stockholders as trade payables was
hardly constituting material financial commitments. Such “conversion” of cash advances to trade
payables was, in fact, a mere re-classification of the liability entry and had no effect on the
shareholders’ deficit. On the other hand, the Supreme Court cannot determine the effect of the
“conversion” of the directors’ and shareholders’ deposits for future subscription to common stock
and substituted liabilities on the shareholders’ deficit because their amounts were not reflected in
the financial statements contained in the rollo.
Page 410 of 434

Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it
intended to address the low demands for their products and the effect of direct competition from
stores like SM, Gaisano, Robinsons, and other malls. Even the P245 million insurance claim that
was supposed to cover the destroyed inventories worth P264 million appears to have been written-
off with no probability of being realized later on.
The Supreme Court observes, too, that Basic Polyprinters’s proposal to enter into the dacion
en pago to create a source of “fresh capital” was not feasible because the object thereof would not
be its own property but one belonging to its affiliate, TOL Realty and Development Corporation, a
corporation also undergoing rehabilitation. Moreover, the negotiations (for the return of books and
magazines from Basic Polyprinters’s trade creditors) did not partake of a voluntary undertaking
because no actual financial commitments had been made thereon.
Worthy of note here is that Wonder Book Corporation was a sister company of Basic
Polyprinters, being one of the corporations that had filed the joint petition for suspension of
payments and rehabilitation in SEC. Both of them submitted identical commitments in their
respective rehabilitation plans. As a result, as the Court observed in Wonder Book, the
commitments by Basic Polyprinters could not be considered as firm assurances that could convince
creditors, future investors and the general public of its financial and operational viability.
Due to the rehabilitation plan being an indispensable requirement in corporate

rehabilitation proceedings, Basic Polyprinters was expected to exert a conscious effort in
formulating the same, for such plan would spell the future not only for itself but also for its creditors
and the public in general. The contents and execution of the rehabilitation plan could not be taken
lightly.
The Supreme Court is not oblivious to the plight of corporate debtors like Basic Polyprinters
that have inevitably fallen prey to economic recession and unfortunate incidents in the course of
their operations. However, the Supreme Court must endeavor to balance the interests of all the
parties that had a stake in the success of rehabilitating the debtors. In doing so here, the Supreme
Court cannot now find the rehabilitation plan for Basic Polyprinters to be genuine and in good
faith, for it was, in fact, unilateral and detrimental to its creditors and the public.
_____________________________________________________________________________________
MARILYN VICTORIO-AQUINO vs. PACIFIC PLANS INC. and MAMARETO A.

MARCELO, JR.
G.R. No. 193108, December 10, 2014, J. Peralta
While the voice and participation of the creditors is crucial in the determination of the viability
of the rehabilitation plan, as they stand to benefit or suffer in the implementation thereof, the interests
of all stakeholders is the ultimate and prime consideration.
Facts:
Respondent Pacific Plans, Inc. (now Abundance Providers and Entrepreneurs Corporation
or “APEC”) is engaged in the business of selling pre-need plans and educational plans, including
traditional open-ended educational plans. PEPTrads are educational plans where respondent
Page 411 of 434

guarantees to pay the planholder, without regard to the actual cost at the time of enrolment, the
full amount of tuition and other school fees of a designated beneficiary. Petitioner Marilyn is a
holder of two units of respondent’s PEPTrads.
On April 7, 2005, foreseeing the impossibility of meeting its obligations to the availing plan
holders as they fall due, respondent filed a Petition for Corporate Rehabilitation with the Regional
Trial Court (Rehabilitation Court), praying that it be placed under rehabilitation and suspension of
payments. The Rehabilitation Court issued a Stay Order, directing the suspension of payments of
the obligations of respondent and ordering all creditors and interested parties to file their
comments/oppositions, respectively, to the Petition for Corporate Rehabilitation. The same Order
also appointed respondent Mamerto A. Marcelo as the rehabilitation receiver and set the initial
hearing of the case on May 25, 2005.
APEC submitted to the Rehabilitation Court its proposed rehabilitation plan. Under the
terms thereof, APEC proposed the implementation of a “Swap,” which will essentially give the plan
holder a means to exit from the PEPTrads at terms and conditions relative to a termination value
that is more advantageous than those provided under the educational plan in case of voluntary
termination. On February 16, 2006, the Rehabilitation Receiver submitted an Alternative
Rehabilitation Plan for the approval of the Rehabilitation Court. Under the ARP, the benefits under
the PEPTrads shall be translated into fixed-value benefits as of December 31, 2004, which will be
termed as Base Year-end 2004 Entitlement. The creditors/oppositors did not oppose/comment on
the Rehabilitation Receiver’s ARP. Respondent commenced with the implementation of its ARP in
coordination with, and with clearance from, the Rehabilitation Receiver. In the meantime, the value
of the Philippine Peso strengthened and appreciated. In view of this development, and considering
that the trust fund of respondent is mainly composed of NAPOCOR bonds that are denominated
in US Dollars, respondent submitted a manifestation with the Rehabilitation Court on February 29,
2008, stating that the continued appreciation of the Philippine Peso has grossly affected the value
of the U.S. Dollar-denominated NAPOCOR bonds, which stood as security for the payment of the
Net Translated Values of the PEPTrads.
Thereafter, the Rehabilitation Receiver filed a Manifestation with Motion to Admit dated
March 7, 2008, echoing the earlier tenor and substance of respondent’s manifestation, and praying
that the Modified Rehabilitation Plan be approved by the Rehabilitation Court. Under the MRP, the
ARP previously approved by the Rehabilitation Court is modified. The Rehabilitation Court issued
a Resolution dated July 28, 2008 approving the MRP. Marilyn questioned the approval of the MRP
before the CA on September 26, 2008.Unfortunately for her, despite motion for reconsideration,
the CA denied the same on July 21, 2010.
Hence, this Petition for Review on Certiorari.
Issue:
Whether the MRP is ultra vires insofar as it reduces the original claim and even the original
amount that Marilyn was to receive under the ARP.
Ruling:
No, it is not.
Page 412 of 434

The “cram-down” power of the Rehabilitation Court has long been established and even
codified under Section 23, Rule 4 of the Interim Rules. Such prerogative was carried over in the
Rehabilitation Rules, which maintains that the court may approve a rehabilitation plan over the
objection of the creditors if, in its judgment, the rehabilitation of the debtors is feasible and the
opposition of the creditors is manifestly unreasonable. In Bank of the Philippine Islands v. Sarabia
Manor Hotel Corporation, where the Court elucidated the rationale behind Section 23, Rule 4 of
the Interim Rules, the Court said that “a rehabilitation plan may be approved even over the
opposition of the creditors holding a majority of the corporation’s total liabilities if there is a
showing that rehabilitation is feasible and the opposition of the creditors is manifestly
unreasonable.
Also known as the “cram-down” clause, this provision, which is currently incorporated in
the FRIA, is necessary to curb the majority creditors’ natural tendency to dictate their own terms
and conditions to the rehabilitation, absent due regard to the greater long-term benefit of all
stakeholders. Otherwise stated, it forces the creditors to accept the terms and conditions of the
rehabilitation plan, preferring long-term viability over immediate but incomplete recovery.”
Based on the aforequoted doctrine, petitioner’s outright censure of the concept of the cram-
down power of the rehabilitation court cannot be countenanced. To adhere to the reasoning of
petitioner would be a step backward — a futile attempt to address an outdated set of challenges. It
is undeniable that there is a need to move to a regime of modern restructuring, cram-down and
court supervision in the matter of corporation rehabilitation in order to address the greater interest
of the public. This is clearly manifested in Section 64 of Republic Act No. 10142, otherwise known
as Financial Rehabilitation and Insolvency Act of 2010.
_____________________________________________________________________________________
BPI FAMILY SAVINGS BANKC, INC. vs. ST. MICHAEL MEDICAL CENTER, INC.
G.R. No. 205469, March 25, 2015, J. Perlas-Bernabe
It is well to emphasize that the remedy of rehabilitation should be denied to corporations that
do not qualify under the Rules. Neither should it be allowed to corporations whose sole purpose is to
delay the enforcement of any of the rights of the creditors, which is rendered obvious by: (a) the
absence of a sound and workable business plan; (b) baseless and unexplained assumptions, targets,
and goals; and (c) speculative capital infusion or complete lack thereof for the execution of the
business plan. In this case, not only has the petitioning debtor failed to show that it has formally
began its operations which would warrant restoration, but also it has failed to show compliance with
the key requirements under the Rules, the purpose of which are vital in determining the propriety of
Facts:
Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole proprietors of St.
Michael Hospital. With a vision to upgrade St. Michael Hospital into a modern, well-equipped and
full service tertiary 11-storey hospital, Sps. Rodil purchased two (2) parcels of land adjoining their
existing property and, on May 22, 2003, incorporated SMMCI, with which entity they planned to
Page 413 of 434

eventually consolidate St. Michael Hospital’s operations. In order to finance the expansion of the
premises of the hospital, the Spouses Rodil obtained load from BPI Family Savings Bank. The
Spouses thereafter incurred problems with the first contractor, so the building was not completed.
SMMCI was only able to pay the interest on its BPI Family loan, or the amount of 3,000,000.00 over
a two-year period, from the income of St. Michael Hospital.
On September 25, 2009, BPI Family demanded immediate payment of the entire loan
obligation and, soon after, filed a petition for extrajudicial foreclosure of the real properties covered
by the mortgage. The auction sale was scheduled on December 11, 2009, which was postponed to
February 15, 2010 with the conformity of BPI Family.
On August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation (Rehabilitation
Petition) before the RTC, with prayer for the issuance of a Stay Order as it foresaw the impossibility
of meeting its obligation to BPI Family, its purported sole creditor. In its proposed Rehabilitation
Plan,23 SMMCI merely sought for BPI Family (a) to defer foreclosing on the mortgage and (b) to
agree to a moratorium of at least two (2) years during which SMMCI – either through St. Michael
Hospital or its successor – will retire all other obligations. After which, SMMCI can then start
servicing its loan obligation to the bank under a mutually acceptable restructuring agreement. 24
SMMCI declared that it intends to conclude pending negotiations for investments offered by a
group of medical doctors whose capital infusion shall be used (a) to complete the finishing
requirements for the 3rd and 5th floors of the new building; (b) to renovate the old 5storey building
where St. Michael Hospital operates; and (c) to pay, in whole or in part, the bank loan with the view
of finally integrating St. Michael Hospital with SMMCI. Finding the Rehabilitation Petition to be
sufficient in form and substance, the RTC issued a Stay Order. In an Order 34 dated August 4, 2011,
the RTC approved the Rehabilitation Plan
Aggrieved, BPI Family elevated the matter before the CA, mainly arguing that the approval
of the Rehabilitation Plan violated its rights as an unpaid creditor/mortgagee and that the same
was submitted without prior consultation with creditors. In a Decision dated August 30, 2012, the
CA affirmed the RTC’s approval of the Rehabilitation Plan. Hence, this petition.
Issue:
Whether or not the CA correctly affirmed SMMCI’s Rehabilitation Plan as approved by the
RTC.
Ruling:
No. that SMMCI’s Rehabilitation Plan, an indispensable requisite in corporate rehabilitation

proceedings, failed to comply with the fundamental requisites outlined in Section 18, Rule 3 of the
Rules, particularly, that of a material financial commitment to support the rehabilitation and an
accompanying liquidation analysis, all of the petitioning debtor: SEC. 18. Rehabilitation Plan. -
The rehabilitation plan shall include (a) the desired business targets or goals and the duration and
coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which shall
include the manner of its implementation, giving due regard to the interests of secured creditors
such as, but not limited, to the nonimpairment of their security liens or interests; (c) the material
financial commitments to support the rehabilitation plan; (d) the means for the execution of the
rehabilitation plan, which may include debt to equity conversion, restructuring of the debts, dacion
Page 414 of 434

en pago or sale exchange or any disposition of assets or of the interest of shareholders, partners or
members; (e) a liquidation analysis setting out for each creditor that the present value of payments
it would receive under the plan is more than that which it would receive if the assets of the debtor
were sold by a liquidator within a six-month period from the estimated date of filing of the petition;
and (f) such other relevant information to enable a reasonable investor to make an informed
decision on the feasibility of the rehabilitation plan.
It is well to emphasize that the remedy of rehabilitation should be denied to corporations

that do not qualify under the Rules. Neither should it be allowed to corporations whose sole
purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious
by: (a) the absence of a sound and workable business plan; (b) baseless and unexplained
assumptions, targets, and goals; and (c) speculative capital infusion or complete lack thereof for the
execution of the business plan. Unfortunately, these negative indicators have all surfaced to the
fore, much to SMMCI’s chagrin. While the Court recognizes the financial predicaments of upstart
corporations under the prevailing economic climate, it must nonetheless remain forthright in
limiting the remedy of rehabilitation only to meritorious cases. As above-mentioned, the purpose
of rehabilitation proceedings is not only to enable the company to gain a new lease on life but also
to allow creditors to be paid their claims from its earnings, when so rehabilitated. Hence, the
remedy must be accorded only after a judicious regard of all stakeholders’ interests; it is not a one-
sided tool that may be graciously invoked to escape every position of distress.
In this case, not only has the petitioning debtor failed to show that it has formally began its
operations which would warrant restoration, but also it has failed to show compliance with the key
requirements under the Rules, the purpose of which are vital in determining the propriety of
_____________________________________________________________________________________
VIVA SHIPPING LINES, INC., Petitioner, v. KEPPEL PHILIPPINES MINING, INC.,

METROPOLITAN BANK & TRUST COMPANY, PILIPINAS SHELL PETROLEUM
CORPORATION, CITY OF BATANGAS, CITY OF LUCENA, PROVINCE OF QUEZON,
ALEJANDRO OLIT, NIDA MONTILLA, PIO HERNANDEZ, EUGENIO BACULO, AND
HARLAN BACALTOS, Respondents.
G.R. No. 177382, February 17, 2016, LEONEN, J.
Rule 43 of the Rules of Court prescribes the procedure to assail the final orders and decisions
in corporate rehabilitation cases filed under the Interim Rules of Procedure on Corporate
Rehabilitation. Liberality in the application of the rules is not an end in itself. It must be pleaded with
factual basis and must be allowed for equitable ends. There must be no indication that the violation
of the rule is due to negligence or design. Liberality is an extreme exception, justifiable only when
equity exists.
The Interim Rules of Procedure on Corporate Rehabilitation covers petitions for rehabilitation
filed before the Regional Trial Court. Thus, Rule 2, Section 2 of the Interim Rules of Procedure on
Corporate Rehabilitation, which refers to liberal construction, is limited to the Regional Trial Court.
The liberality was given "to assist the parties in obtaining a just, expeditious, and inexpensive
disposition of the case."
Page 415 of 434

The Regional Trial Court correctly dismissed petitioner's rehabilitation plan. It found that
petitioner's assets are non-performing. Petitioner admitted this in its Amended Petition when it stated
that its vessels were no longer serviceable. In Wonder Book Corporation v. Philippine Bank of
Communications, a rehabilitation plan is infeasible if the assets are nearly fully or fully depreciated.
This reduces the probability that rehabilitation may restore and reinstate petitioner to its former
position of successful operation and solvency.
The plan of selling properties of petitioner's sister company to generate cash flow cannot be a
basis for the approval of the rehabilitation plan. As pointed out by the Regional Trial Court, this plan
requires conformity from the sister company. Even if the two companies have the same directorship
and ownership, they are still two separate juridical entities.
Facts:
On October 4, 2005, Viva Shipping Lines, Inc. (Viva Shipping Lines) filed a Petition for Corporate
Rehabilitation before the Regional Trial Court of Lucena City. The Regional Trial Court initially
denied the Petition for failure to comply with the requirements in Rule 4, Sections 2 and 3 of the
Interim Rules of Procedure on Corporate Rehabilitation. On October 17, 2005, Viva Shipping Lines
filed an Amended Petition.
In the Amended Petition, Viva Shipping Lines claimed to own and operate 19 maritime vessels5 and
Ocean Palace Mall, a shopping mall in downtown Lucena City. Viva Shipping Lines also declared
its total properties’ assessed value at about ₱45,172,790.00. However, these allegations were
contrary to the attached documents in the Amended Petition.
One of the attachments, the Property Inventory List, showed that Viva Shipping Lines owned only
two (2) maritime vessels: M/V Viva Peñafrancia V and M/V Marian Queen. The list also stated that
the fair market value of all of Viva Shipping Lines’ assets amounted to ₱447,860,000.00, ₱400
million more than what was alleged in its Amended Petition. Some of the properties listed in the
Property Inventory List were already marked as "encumbered" by its creditors; hence, only
₱147,630,000.00 of real property and its vessels were marked as "free assets."
In its Company Rehabilitation Plan, Viva Shipping Lines enumerated possible sources of funding
such as the sale of old vessels and commercial lots of its sister company, Sto. Domingo Shipping
Lines. It also proposed the conversion of the Ocean Palace Mall into a hotel, the acquisition of two
(2) new vessels for shipping operations, and the "re-operation" of an oil mill in Buenavista, Quezon.
On October 19, 2005, the Regional Trial Court found that Viva Shipping Lines’ Amended Petition
to be "sufficient in form and substance," and issued a stay order. It stayed the enforcement of all
monetary and judicial claims against Viva Shipping Lines, and prohibited Viva Shipping Lines from
selling, encumbering, transferring, or disposing of any of its properties except in the ordinary course
of business. Thereafter, several of the creditors of Viva Shipping Lines (including emplloyees) came
out. The RTC then lifted the stay order and denied Viva Shiping Lines’ petition.
The Regional Trial Court found that Viva Shipping Lines’ assets all appeared to be non-performing.
Further, it noted that Viva Shipping Lines failed to show any evidence of consent to sell real
Page 416 of 434

properties belonging to its sister company. Aggrieved, Viva Shipping Lines filed a Petition for
Review under Rule 43 of the Rules of Court before the Court of Appeals.
The Court of Appeals dismissed Viva Shipping Lines’ Petition for Review in the Resolution dated
January 5, 2007. It found that Viva Shipping Lines failed to comply with procedural requirements
under Rule 43. The Court of Appeals ruled that due to the failure of Viva Shipping Lines to implead
its creditors as respondents, "there are no respondents who may be required to file a comment on
the petition, pursuant to Section 8 of Rule 43."
Petitioner argues that the Court of Appeals should have given due course to its Petition and excused
its non-compliance with procedural rules. For petitioner, the Interim Rules of Procedure on
Corporate Rehabilitation mandates a liberal construction of procedural rules, which must prevail
over the strict application of Rule 43 of the Rules of Court.
Issue:
1. Whether the Court of Appeals erred in dismissing petitioner Viva Shipping Lines’ Petition
for Review on procedural grounds; and
2. Whether petitioner was denied substantial justice when the Court of Appeals did not give
due course to its petition.
Held:
1. No. The Court held that it cannot exercise its equity jurisdiction and allow petitioner to
circumvent the requirement to implead its creditors as respondents. Tolerance of such
failure will not only be unfair to the creditors, it is contrary to the goals of corporate
rehabilitation, and will invalidate the cardinal principle of due process of law. The failure of
petitioner to implead its creditors as respondents cannot be cured by serving copies of the
Petition on its creditors. Since the creditors were not impleaded as respondents, the copy
of the Petition only serves to inform them that a petition has been filed before the appellate
court. Their participation was still significantly truncated. Petitioner’s failure to implead
them deprived them of a fair hearing. The appellate court only serves court orders and
processes on parties formally named and identified by the petitioner. Since the creditors
were not named as respondents, they could not receive court orders prompting them to file
remedies to protect their property rights.
2. No. Petitioner’s rehabilitation plan is almost impossible to implement. Even an ordinary

individual with no business acumen can discern the groundlessness of petitioner’s
rehabilitation plan. Petitioner should have presented a more realistic and practicable
rehabilitation plan within the time periods allotted after initiatory hearing, or otherwise,
should have opted for liquidation.
Corporate rehabilitation is a remedy for corporations, partnerships, and associations "who

[foresee] the impossibility of meeting [their] debts when they respectively fall due." A
corporation under rehabilitation continues with its corporate life and activities to achieve
solvency, or a position where the corporation is able to pay its obligations as they fall due
Page 417 of 434

in the ordinary course of business. Solvency is a state where the businesses’ liabilities are
less than its assets.
Corporate rehabilitation is a type of proceeding available to a business that is insolvent. In

general, insolvency proceedings provide for predictability that commercial obligations will
be met despite business downturns. Stability in the economy results when there is assurance
to the investing public that obligations will be reasonably paid. It is considered state policy
to encourage debtors, both juridical and natural persons, and their creditors to collectively
and realistically resolve and adjust competing claims and property rights[.] . . .
[R]ehabilitation or liquidation shall be made with a view to ensure or maintain certainty
and predictability in commercial affairs, preserve and maximize the value of the assets of
these debtors, recognize creditor rights and respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is
in the interest of the State to facilitate a speedy and orderly liquidation of these debtors’
assets and the settlement of their obligations.
The rationale in corporate rehabilitation is to resuscitate businesses in financial distress

because "assets . . . are often more valuable when so maintained than they would be when
liquidated." Rehabilitation assumes that assets are still serviceable to meet the purposes of
the business. The corporation receives assistance from the court and a disinterested
rehabilitation receiver to balance the interest to recover and continue ordinary business, all
the while attending to the interest of its creditors to be paid equitably. These interests are
also referred to as the rehabilitative and the equitable purposes of corporate rehabilitation.
Rather than let struggling corporations slip and vanish, the better option is to allow
commercial courts to come in and apply the process for corporate rehabilitation.
_____________________________________________________________________________________
MERVIC REALTY, INC. AND VICCY REALTY, INC., Petitioners, v. CHINA BANKING
CORPORATION, Respondent.
G.R. No. 193748, February 03, 2016, BRION, J.
The Court, however, finds no legal basis to retroactively apply the 2008 Rules. Rule 9, Section
2 of the 2008 Rules allows the retroactive application of the 2008 Rules to pending rehabilitation
proceedings only when these have not yet undergone the initial hearing stage at the time of the
effectivity of the 2008 Rules. In the present case, the rehabilitation court conducted the initial
hearing on January 22, 2007, and approved the rehabilitation plan on April 15, 2008 - long
before the effectivity of the 2008 Rules on January 16, 2009. Clearly, the 2008 Rules cannot be
retroactively applied to the rehabilitation petition filed by the petitioners.
Facts:
Mervic Realty and Viccy Realty jointly filed a petition for rehabilitation before the RTC of Malabon.
The rehabilitation petition was filed under A.M. No. 00-8-10-SC dated November 21, 2000, or the
2000 Interim Rules of Procedure on Corporate Rehabilitation
Page 418 of 434

The petitioners alleged that they are duly organized domestic real estate corporations with
principal place of business in Malabon City. They disclosed that their common president is Mario
Siochi and that a majority of their stockholders and officers are members of the Siochi family. The
petitioners averred that they were financially stable until they were hit by the Asian financial crisis
in 1997. As a result of the financial crisis, they foresaw the impossibility of meeting their obligations
when they fall due.
The petitioners thus prayed that the rehabilitation court issue a stay order to suspend the
enforcement of the claims against them. As of September 30, 2006, their combined total obligations
inclusive of interests, penalties, and other charges had reached P193,156,559.00.
The RTC granted the stay order prayed for. Chinabank, one of the creditors of the petitioners
opposed the petition and likewise questioned the venue of the rehabilitation petition. Under
Section 2, Rule 3 of the Interim Rules, petitions for corporate rehabilitation shall be filed with the
Regional Trial Court having jurisdiction over the territory where the debtor's principal office is
located. According to China Bank, the Articles of Incorporation (AOI) of the petitioners show that
their principal place of business is located in Quezon City, not in Malabon City.
The rehabilitation court approved the rehabilitation plan and denied China Bank’s opposition. The
Court of Appeals granted China Bank’s petition for review and dismissed the petition for
rehabilitation on the ground of improper venue.
The petitioners invoke the 2008 Rules which allow a group of companies to file a joint rehabilitation
petition.
Issue: Whether the petitioners, which are close family corporations, can jointly file the petition for
rehabilitation under the Interim Rules.
Held: No. The rules in effect at the time the rehabilitation petition was filed were the Interim Rules.
The Interim Rules took effect on December 15, 2000, and did not allow the joint or consolidated
filing of rehabilitation petitions. In the present case, the rehabilitation court conducted the initial
hearing on 22 January 2007 and approved the rehabilitation plan on 15 April 2008, long before the
effectivity of the 2008 Rules. Clearly, the 2008 Rules cannot be retroactively filed in the
rehabilitation petition filed by the petitioners.
In Asiatrust Development Bank v. First Aikka Development, Inc., the Court held that the
consolidation of petitions involving two separate entities is not proper. Although the Corporations
had interlocking directors, owners, officers, as well as intertwined loans, the two corporations were
separate, each one with its own distinct personality. In determining the feasibility of rehabilitation,
the court evaluates the assets and liabilities of each of these corporations separately and not jointly
with other corporations.
Thus, the Court dismissed the rehabilitation petition but only with respect to the corporation
located in Pasig City. The Court found that the other corporation properly filed its rehabilitation
petition in Baguio City because its principal office is located in that city. The Court remanded the
case to the rehabilitation court of Baguio City for further proceedings but only with respect to the
corporation located in that city.
Page 419 of 434

_____________________________________________________________________________________
PHILIPPINE ASSET GROWTH TWO, INC. (Successor-In-Interest of Planters Development

Bank) and PLANTERS DEVELOPMENT BANK vs. FASTECH SYNERGY PHILIPPINES, INC.
(Formerly First Asia System Technology, Inc.), FASTECH MICROASSEMBLY & TEST, INC.,
FASTECH ELECTRONIQUE, INC., and FASTECH PROPERTIES, INC.
G.R. No. 206528, June 28, 2016, PERLAS-BERNABE, J.
The failure of the Rehabilitation Plan to state any material financial commitment to
support rehabilitation, as well as to include a liquidation analysis, renders the CA's considerations
for approving the same as actually unsubstantiated, and hence, insufficient to decree the feasibility
of respondents' rehabilitation. It is well to emphasize that the remedy of rehabilitation should be
denied to corporations that do not qualify under the Rules. Neither should it be allowed to
corporations whose sole purpose is to delay the enforcement of any of the rights of the
creditors.
FACTS:
On April 8, 2011, respondents filed a verified Joint Petitions for corporate rehabilitation
(rehabilitation petition) before the RTC-Makati, with prayer for the issuance of a Stay or Suspension
Order. Among the common creditors listed in the rehabilitation petition was PDB, which had
earlier filed a petition for extra judicial foreclosure of mortgage over the two (2) parcels of land
listed as common assets of respondents in the rehabilitation petition. The foreclosure sale was held
on April 13, 2011, with PDB emerging as the highest bidder.
Respondents submitted for the court's approval their proposed Rehabilitation Plan, which sought:
(a) a waiver of all accrued interests and penalties; (b) a grace period of two (2) years to pay the
principal amount of respondents' outstanding loans, with the interests accruing during the said
period capitalized as part of the principal, to be paid over a twelve (12)-year period after the grace
period; and (c) an interest rate of four percent ( 4%) and two percent (2%) per annum (p.a.) for
creditors whose credits are secured by real estate and chattel mortgages, respectively.
The RTC-Makati dismissed the rehabilitation petition despite the favorable recommendation of its
appointed Rehabilitation Receiver. On appeal, the CA reverse the RTC-Makati ruling. It ruled that
the RTC-Makati grievously erred in disregarding the report/opinion of the Rehabilitation Receiver
that respondents may be successfully rehabilitated, despite being highly qualified to make an
opinion on accounting in relation to rehabilitation matters. The CA likewise declared that the
Rehabilitation Plan is feasible and should be approved. Accordingly, the CA reinstated the
rehabilitation petition, approved respondents' Rehabilitation Plan, and remanded the case to the
RTC-Makati to supervise its implementation. Considering that respondents' creditors are placed in
equal footing as a necessary consequence, it permanently enjoined PDB from "effecting the
foreclosure" of the subject properties during the implementation of the Rehabilitation Plan.
In the interim, PDB was substituted by Philippine Asset Growth Two, Inc. (PAGTI) through a
motion filed by its lead counsel, DivinaLaw, averring that PAGTI had acquired PDB 's claims and
interests in the instant case.
Page 420 of 434

ISSUE:
Whether or not the rehabilitation plan is feasible.
Ruling:
The rehabilitation plan is not feasible.
Case law explains that corporate rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former position of successful
operation and solvency, the purpose being to enable the company to gain a new lease on life and
allow its creditors to be paid their claims out of its earnings. Thus, the basic issues in rehabilitation
proceedings concern the viability and desirability of continuing the business operations of the
distressed corporation, all with a view of effectively restoring it to a state of solvency or to its former
healthy financial condition through the adoption of a rehabilitation plan.
In the present case, however, the Rehabilitation Plan failed to comply with the minimum
requirements, i.e.: (a) material financial commitments to support the rehabilitation plan; and (b) a
proper liquidation analysis, under Section 18, Rule 3 of the 2008 Rules of Procedure on Corporate
Rehabilitation (Rules), which Rules were in force at the time respondents' rehabilitation petition
was filed on April 8, 2011.

earnestness, and good faith of the distressed corporation in financing the proposed rehabilitation
plan. This commitment may include the voluntary undertakings of the stockholders or the would
be investors of the debtor-corporation indicating their readiness, willingness, and ability to
contribute funds or property to guarantee the continued successful operation of the debtor-
corporation during the period of rehabilitation.
In this case, respondents' Chief Operating Officer in his executed Affidavit of General Financial
Condition averred that respondents will not require the infusion of additional capital as he, instead,
proposed to have all accrued penalties, charges, and interests waived, and a reduced interest rate
prospectively applied to all respondents' obligations, in addition to the implementation of a two
(2)-year grace period.Thus, there appears to be no concrete plan to build on respondents'
beleaguered financial position through substantial investments as the plan for rehabilitation
appears to be pegged merely on financial reprieves. Anathema to the true purpose of rehabilitation,
a distressed corporation cannot be restored to its former position of successful operation and regain
solvency by the sole strategy of delaying payments/waiving accrued interests and penalties at the
expense of the creditors.
The Court also notes that while respondents have substantial total assets, a large portion of the
assets of Fastech Synergy and Fastech Properties is comprised of noncurrent assets, such as
advances to affiliates which include Fastech Microassembly, and investment properties which form
part of the common assets of Fastech Properties, Fastech Electronique, and Fastech Microassembly.
Moreover, while there is a claim that unnamed customers have made investments by way of
consigning production equipment, and advancing money to fund procurement of various
equipment intended to increase production capacity, this can hardly be construed as a material
financial commitment which would inspire confidence that the rehabilitation would turn out to be
Page 421 of 434

successful. Case law holds that nothing short of legally binding investment commitment/s from
third parties is required to qualify as a material financial commitment. Here, no such binding
investment was presented.
Respondents likewise failed to include any liquidation analysis in their Rehabilitation Plan. The
total liquidation assets and the estimated liquidation return to the creditors, as well as the fair
market value vis-à-vis the forced liquidation value of the fixed assets were not shown. As such, the
Court could not ascertain if the petitioning debtor's creditors can recover by way of the present
value of payments projected in the plan, more if the debtor continues as a going concern than if it
is immediately liquidated. This is a crucial factor in a corporate rehabilitation case, which the CA,
unfortunately, failed to address.
The failure of the Rehabilitation Plan to state any material financial commitment to support
rehabilitation, as well as to include a liquidation analysis, renders the CA's considerations for
approving the same as actually unsubstantiated, and hence, insufficient to decree the feasibility of
respondents' rehabilitation. It is well to emphasize that the remedy of rehabilitation should be denied
to corporations that do not qualify under the Rules. Neither should it be allowed to corporations
whose sole purpose is to delay the enforcement of any of the rights of the creditors.
Even if the Court were to set aside the failure of the Rehabilitation Plan to comply with the
fundamental requisites of material financial commitment to support the rehabilitation and an
accompanying liquidation analysis, a review of the financial documents presented by respondents
fails to convince the Court of the feasibility of the proposed plan.
In the recent case of Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Inc.,the Court took note
of the characteristics of an economically feasible rehabilitation plan.
Professor Stephanie V. Gomez of the University of the Philippines College of Law suggests
specific characteristics of an economically feasible rehabilitation plan:
a. The debtor has assets that can generate more cash if used in its daily operations than
if sold.
b. Liquidity issues can be addressed by a practicable business plan that will generate
enough cash to sustain daily operations.
c. The debtor has a definite source of financing for the proper and full implementation
of a Rehabilitation Plan that is anchored on realistic assumptions and goals.
These requirements put emphasis on liquidity: the cash flow that the distressed corporation
will obtain from rehabilitating its assets and operations. A corporation's assets may be more
than its current liabilities, but some assets may be in the form of land or capital equipment,
such as machinery or vessels. Rehabilitation sees to it that these assets generate more value
if used efficiently rather than if liquidated.
In addition to the tests of economic feasibility, Professor Stephanie V. Gomez also

suggests that the Financial and Rehabilitation and Insolvency Act of 2010 emphasizes on
rehabilitation that provides for better present value recovery for its creditors. Present
value recovery acknowledges that, in order to pave way for rehabilitation, the creditor will
not be paid by the debtor when the credit falls due. The court may order a suspension of
payments to set a rehabilitation plan in motion; in the meantime, the creditor remains
Page 422 of 434

unpaid. By the time the creditor is paid, the financial and economic conditions will have
been changed. Money paid in the past has a different value in the future. It is unfair if the
creditor merely receives the face value of the debt. Present value of the credit takes into
account the interest that the amount of money would have earned if the creditor were paid
on time.
Trial courts must ensure that the projected cash flow from a business' rehabilitation plan
allows for the closest present value recovery for its creditors. If the projected cash flow is
realistic and allows the corporation to meet all its obligations, then courts should favor
rehabilitation over liquidation. However, if the projected cash flow is unrealistic, then
courts should consider converting the proceedings into that for liquidation to protect the
creditors.
Verily, respondents' Rehabilitation Plan should have shown that they have enough serviceable
assets to be able to continue its business operation. In fact, as opposed to this objective, the revised
Rehabilitation Plan still requires "front load Capex spending" to replace common equipment and
facility equipment to ensure sustainability of capacity and capacity robustness, thus, further
sacrificing respondents' cash flow. In addition, the Court is hard-pressed to see the effects of the
outcome of the streamlining of respondents' manufacturing operations on the carrying value of
their existing properties and equipment.
_____________________________________________________________________________________
Metrobank v. Liberty Corrugated

GR 184317, January 25 2017
Liberty filed a Petition for Corporate Rehabilitation. After the RTC issued a Stay Order, it heard the
petition. Metrobank opposed the petition arguing that Liberty is not entitled to corporate
rehabilitation because at the time it filed the Petition, it had already defaulted in its obligations.
The issues are whether a debtor can still file a petition for corporate rehabilitation even after it had
already defaulted and whether a rehabilitation is sufficient even if no external funding is provided?
Yes.
Petitioner argues that respondent can no longer file a petition for corporate rehabilitation. It claims
that Rule 4, Section 1 of the Interim Rules restricts the kind of debtor who can file petitions for
corporate rehabilitation. Petitioner insists that the phrase "who fore sees the impossibility of
meeting its debts when they respectively fall due" must be construed plainly to mean that an
element of foresight is required. Because foresight is required, the debts of the corporation should
not have matured.
To adopt petitioner's interpretation would undermine the purpose of the Interim Rules. There is
no reason why corporations with debts that may have already matured should not be given the
opportunity to recover and pay their debtors in an orderly fashion. The opportunity to rehabilitate
the affairs of an economic entity, regardless of the status of its debts, redounds to the benefit of its
creditors, owners, and to the economy in general. Rehabilitation, rather than collection of debts
from a company already near bankruptcy, is a better use of judicial rewards.
Page 423 of 434

Petitioner further claims that the rehabilitation plan lacked material financial commitments
required under Rule 4, Section 5 of the Interim Rules. The rehabilitation plan did not claim that
new money would be Invested in t h e Corporation. Respondent intends to source its funds from
internal operations. That the funds are internally generated does not render the funds insufficient.
This arrangement is still a material, voluntary, and significant financial commitment, in line with
respondent's rehabilitation plan. Both the Court of Appeals and the Regional Trial Court found the
Rehabilitation Receiver's assurance that the cashflow from respondent's committed sources to be
sufficient.
RECEIVERSHIP
ALFEO D. VIVAS, ON HIS BEHALF AND ON BEHALF OF THE SHAREHOLDERS OR

EUROCREDIT COMMUNITY BANK vs. THE MONETRAY BOARD OF THE BANGKO
SENTRAL NG PILIPINAS AND THE PHILIPPINE DEPOSIT INSURANCE CORPORATION
G.R. No. 191424. August 7, 2013
J. Mendoza
At any rate, if circumstances warrant it, the Monetary Board may forbid a bank from doing
business and place it under receivership without prior notice and hearing if the MB finds that a bank:
(a) is unable to pay its liabilities as they become due in the ordinary course of business; (b) has
insufficient realizable assets to meet liabilities; (c) cannot continue in business without involving
probable losses to its depositors and creditors; and (d) has willfully violated a cease and desist order
of the Monetary Board for acts or transactions which are considered unsafe and unsound banking
practices and other acts or transactions constituting fraud or dissipation of the assets of the
institution. This is referred to as the "Close Now, Hear Later Doctrine"
Facts:
The Rural Bank of Faire, Incorporated (corporate name later changed to EuroCredit Community
Bank) was a duly registered rural banking institution. Sometime in 2006, petitioner Alfeo D. Vivas
(Vivas) and his principals acquired the controlling interest in RBFI. At the initiative of Vivas and
the new management team, an internal audit was conducted on RBFI and results thereof
highlighted the dismal operation of the rural bank. In view of those findings, certain measures
calculated to revitalize the bank were allegedly introduced.
The Integrated Supervision Department II (ISD II) of the BSP conducted a general examination on
ECBI with the cut-off date of December 31, 2007 pursuant to The New Central Bank Act. Shortly
after the completion of the general examination, BSP apprised Vivas, the Chairman and President
of ECBI, as well as the other bank officers and members of its BOD that the bank is under distress.
Series of examinations, resolutions and other transactions were conducted between the bank and
the Monetary Board. Until on June 4, 2009 the MB issued Resolution No. 823 approving the issuance
of a cease and desist order against ECBI, which enjoined it from pursuing certain acts and
transactions that were considered unsafe or unsound banking practices, and from doing such other
acts or transactions constituting fraud or might result in the dissipation of its assets. In addition on
March 4, 2010, the MB issued Resolution No. 27623 placing ECBI under receivership in accordance
with the recommendation of the ISD II. PDIC was designated as the receiver of the bank.
Page 424 of 434

Assailing MB Resolution No. 276, Vivas filed a petition for prohibition ascribing grave abuse of
discretion to the MB for prohibiting ECBI from continuing its banking business and for placing it
under receivership.
Issue:
Whether or not ECBI should be placed under receivership
Ruling:
The petition must fail.
The MB Committed No Grave Abuse of Discretion
The thrust of Vivas’ argument is that ECBI did not commit any financial fraud and, hence, its
placement under receivership was unwarranted and improper. He asserts that, instead, the BSP
should have taken over the management of ECBI and extended loans to the financially distrained
bank pursuant to Sections 11 and 14 of R.A. No. 7353 because the BSP’s power is limited only to
supervision and management take-over of banks, and not receivership. Further Vivas argues that
the implementation of the questioned resolution was tainted with arbitrariness and bad faith,
stressing that ECBI was placed under receivership without due and prior hearing.
The Court did not agree. It appears from all over the records that ECBI was given every opportunity
to be heard and improve on its financial standing. The records disclose that BSP officials and
examiners met with the representatives of ECBI, including Vivas, and discussed their findings.
There were also reminders that ECBI submit its financial audit with a warning that failure to submit
them and a written explanation of such omission shall result in the imposition of a monetary
penalty. More importantly, ECBI was heard on its motion for reconsideration.
Close Now, Hear Later
At any rate, if circumstances warrant it, the Monetary Board may forbid a bank from doing business
and place it under receivership without prior notice and hearing if the MB finds that a bank: (a) is
unable to pay its liabilities as they become due in the ordinary course of business; (b) has
insufficient realizable assets to meet liabilities; (c) cannot continue in business without involving
probable losses to its depositors and creditors; and (d) has willfully violated a cease and desist order
of the Monetary Board for acts or transactions which are considered unsafe and unsound banking
practices and other acts or transactions constituting fraud or dissipation of the assets of the
institution.
In the case at bench, the ISD II submitted its memorandum containing the findings of the inability
of ECBI to pay its liabilities as they would fall due in the usual course of its business and that its
liabilities being in excess of the assets held. Also, it was noted that ECBI’s continued banking
operation would most probably result in the incurrence of additional losses to the prejudice of its
depositors and creditors. On top of these, it was found that ECBI had willfully violated the cease-
and-desist order of the MB issued in its June 4, 2009 Resolution, and had disregarded the BSP rules
and directives.
Page 425 of 434

Vivas Availed of the Wrong Remedy
Under Section 30 of RA 7653, any act of the MB placing a bank under conservatorship, receivership
or liquidation may not be restrained or set aside except on a petition for certiorari. Granting that a
petition for prohibition is allowed, it is already an ineffective remedy under the circumstances
obtaining. Resolution No. 276, however, had already been issued by the MB and the closure of ECBI
and its placement under receivership by the PDIC were already accomplished.
Further even if the petition for prohibition is treated as a petition for certiorari it should have been
filed with the CA in accordance with Sec. 4 of Rule 65 of the Rules of Court to wit:
Sec.4 When and where petition filed.- XXX

XXX If it involves the acts or omissions of a quasi-judicial agency, unless
otherwise provided by law or these Rules, the petition shall be filed in and cognizable
only by the Court of Appeals.
That the MB is a quasi-judicial agency was already settled and reiterated in the case of Bank of
Commerce v. Planters Development Bank and Bangko Sentral Ng Pilipinas.
STAY ORDER
Pryce Corporation vs. China Banking Corporation

G.R. No. 172302; February 18, 2012
J. Leonen
A hearing is not required for the issuance of a stay order in corporate rehabilitation
proceedings. What it requires is initial hearing before it can give due course to or dismiss a petition.
Section 6 of the Interim Rules states explicitly that if the court finds the petition to be sufficient in
form and substance, it shall, not later than five days from the filing of the petition, issue an Order (a)
appointing a Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all claims.
Nevertheless, while the Interim Rules does not require the holding of a hearing before the
issuance of a stay order, neither does it prohibit the holding of one. Thus, the trial court has ample
discretion to call a hearing when it is not confident that the allegations in the petition are sufficient
in form and substance, for so long as this hearing is held within the five (5)-day period from the filing
of the petition — the period within which a stay order may issue as provided in the Interim Rules.
Facts:
A petition for corporate rehabilitation was filed by the petitioner Pryce Corporation with the RTC.
The rehabilitation court found the petition sufficient in form and substance and issued a stay order
and appointed a rehabilitation receiver. The rehabilitation court gave due course to the petition
and directed the rehabilitation receiver to evaluate and give recommendation on Pryce
Corporation’s proposed rehabilitation plan attached to its petition. On January 2005, the court
found the petitioner eligible to be placed in a state of corporate rehabilitation.
Page 426 of 434

China Bank, a creditor of the petitioner, elevated the case to the CA questioning the January 2005
order. It contended that the rehabilitation plan’s approval impaired the obligations and contracts
and argued that neither the provisions of P.D. 902-A nor the Interim Rules of Procedure on
Corporate Rehabilitation empowered commercial courts to render without force and effect valid
contractual stipulations. BPI, another creditor of the petitioner, filed a separate petition with the
CA assailing the same order by the rehabilitation court.
Subsequently, the CA granted its petition initially and set aside the order of the rehabilitation
court. The petitioner filed a motion for reconsideration but was denied. Hence, the appeal.
Petitioner Pryce Corporation contends that Rule 4, Section 6 of the Interim Rules of Procedure on
Corporate Rehabilitation does not require the rehabilitation court to hold a hearing before issuing
a stay order. Considering that the Interim Rules was promulgated later than Rizal Commercial
Banking Corp. v. IAC that enunciated the “serious situations” test, petitioner argues that the test
has effectively been abandoned by the “sufficiency in form and substance test” under the Interim
Rules.
Issue:
Whether or not a hearing is needed prior to the issuance of a stay order in corporate rehabilitation
proceedings.
Ruling:
Petition Granted.
The 1999 Rizal Commercial Banking Corp. v. IAC case provides for the "serious situations" test in
that the suspension of claims is counted only upon the appointment of a rehabilitation receiver,
and certain situations serious in nature must be shown to exist before one is appointed. However,
this case had been promulgated prior to the effectivity of the Interim Rules that took effect on
December 15, 2000.
Section 6 of the Interim Rules states explicitly that “if the court finds the petition to be sufficient in
form and substance, it shall, not later than five (5) days from the filing of the petition, issue an
Order (a) appointing a Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all
claims.”
Compliant with the rules, the July 13, 2004 stay order was issued not later than five (5) days from
the filing of the petition on July 9, 2004 after the rehabilitation court found the petition sufficient
in form and substance. We agree that when a petition filed by a debtor "alleges all the material facts
and includes all the documents required by Rule 4-2 [of the Interim Rules]," it is sufficient in form
and substance.
The Interim Rules does not require a hearing before the issuance of a stay order. What it requires
is an initial hearing before it can give due course to or dismissa petition.
Nevertheless, while the Interim Rules does not require the holding of a hearing before the issuance
of a stay order, neither does it prohibit the holding of one. Thus, the trial court has ample discretion
to call a hearing when it is not confident that the allegations in the petition are sufficient in form
Page 427 of 434

and substance, for so long as this hearing is held within the five (5)-day period from the filing of
the petition — the period within which a stay order may issue as provided in the Interim Rules.
One of the important objectives of the Interim Rules is "to promote a speedy disposition of
corporate rehabilitation cases, apparent from the strict time frames, the non-adversarial nature of
the proceedings, and the prohibition of certain kinds of pleadings." It is in light of this objective
that a court with basis to issue a stay order must do so not later than five (5) days from the date the
petition was filed.
Moreover, according to the November 17, 2000 memorandum submitted by the Supreme Court
Committee on the Interim Rules of Procedure on Corporate Rehabilitation:
The Proposed Rules remove the concept of the Interim Receiver and replace it with
a rehabilitation receiver. This is to justify the immediate issuance of the stay order
because under Presidential Decree No. 902-A, as amended, the suspension of
actions takes effect only upon appointment of the rehabilitation receiver.
_____________________________________________________________________________________
VETERANS PHILIPPINE SCOUT SECURITY AGENCY, INC., v. FIRST DOMINION PRIME

HOLDINGS, INC. G.R. No. 190907, August 23, 2012
Petitioner is engaged in the business of providing security services. Respondent First Dominion
Prime Holdings, Inc. (FDPHI) is a holding investment and management company which owns and
operates various subsidiaries and affiliates. Among its subsidiaries are Clearwater Tuna
Corporation, Maranaw Canning Corporation and Nautica Canning Corporation (FDPHI Group of
Companies).
On February 15, 2001, respondent FDPHI and its aforementioned subsidiaries jointly filed a Petition
for Rehabilitation, attaching therewith a Schedule of Debts and Liabilities, showing that Clearwater
has unpaid obligations to petitioner. After finding the petition sufficient in form and substance, the
Rehabilitation Court issued a Stay Order and appointed Atty. Jacob as receiver. Eventually the Court
also approved the rehabilitation plan.
Subsequently, petitioner filed with the MeTC a Complaint for Sum of Money and Damages against
Clearwater for its unpaid security services and/or Atty. Jacob in his capacity as appointed Receiver
averring that Clearwater had changed its business name to First Dominion Prime Holdings, Inc.
The MeTC dismissed the Complaint for having been barred by the Rehabilitation Court’s Stay Order
and by its Order finally approving the Amended Rehabilitation Plan and for failure to state a cause
of action because First Dominion and Clearwater are 2 distinct entities.
Issue: Is the dismissal proper?
Held: Yes. Petitioner’s Complaint fails to state a cause of action. Respondent FDPHI and Clearwater
are two separate corporate entities and the obligation petitioner seeks to enforce was not
contracted between petitioner and respondent FDPHI but by petitioner and Clearwater. For this
reason, both the trial court and the appellate court ruled that the Amended Complaint fails to state
a cause of action against respondent FDPHI. On this ground alone, the Amended Complaint filed
Page 428 of 434

by petitioner against respondent FDPHI was properly dismissed. Indeed, while respondent FDPHI
may be the parent company of Clearwater, these two corporations have distinct and separate
juridical personalities and therefore respondent FDPHI cannot be held liable for the debts of its
subsidiary Clearwater nor can respondent FDPHI assume the liabilities of Clearwater. The filing of
petitioner of Joint Petition for Rehabilitation for the FDPHI Group of Companies cannot in any way
be taken as an assumption by petitioner of any liability of Clearwater. It must be noted that in the
Consolidated Inventory of Assets and Consolidated Schedule of Accounts Receivables of the FDPHI
Group of Companies, Clearwater holds assets entirely separate from its parent company.
Petitioner’s Complaint is also barred by res judicata. An essential function of corporate

rehabilitation is the mechanism of suspension of all actions and claims against the distressed
corporation upon the due appointment of a management committee or rehabilitation
receiver.25Section 6(c) of PD 902-A mandates that upon appointment of a management committee,
rehabilitation receiver, board, or body, all actions for claims against corporations, partnerships or
associations under management or receivership pending before any court, tribunal, board, or body
shall be suspended. The actions to be suspended cover all claims against a distressed corporation
whether for damages founded on a breach of contract of carriage, labor cases, collection suits or
any other claims of pecuniary nature. Jurisprudence is settled that the suspension of proceedings
referred to in the law uniformly applies to "all actions for claims" filed against the corporation,
partnership or association under management or receivership, without distinction, except only
those expenses incurred in the ordinary course of business. The stay order is effective on all
creditors of the corporation without distinction, whether secured or unsecured.
Thus, petitioner’s action to collect the sum owed to it is not exempted from the coverage of the stay
order. The enforcement of petitioner’s claim through court action is likewise suspended to give way
to the speedy and effective rehabilitation of the FDPHI Group of Companies. However, in an
attempt to exempt its money claim from the coverage of the rehabilitation proceedings, petitioner
claims that Clearwater was denied rehabilitation and asserts that the Amended Rehabilitation Plan
did not include Clearwater’s obligation to petitioner. This contention, however, is bereft of merit.
The fact that Clearwater was not specifically mentioned in the Amended Rehabilitation Plan does
not mean the denial of its rehabilitation. A careful perusal of the Amended Rehabilitation Plan
would show that all the assets and liabilities of FDPHI and its subsidiaries undergoing rehabilitation
were collectively managed and a payment scheme was introduced for the settlement of all of the
FDPHI Group’s secured and unsecured creditors.
_____________________________________________________________________________________
TOWN AND COUNTRY ENTERPRISES V. QUISUMBING, JR.,

G.R. NO. 173610, OCTOBER 1, 2012
Petitioner obtained a loan from Metrobank secured by REMs on several properties. When petitioner
defaulted, the Bank foreclosed the mortgage, bought the properties on auction sale on 7 November
2001, obtained a certificate of sale and registered the same on 10 April 2002. To obtain possession,
the Bank filed a petition for issuance of a writ of possession docketed as LRC Case No. 2128-02. In
the meantime, on October 1, 2002 petitioner filed a petition for declaration of a state of suspension
of payments, with approval of a proposed rehabilitation plan, which was docketed as SEC Case No.
023-02. Both cases raffled off to the same court presided by Judge Quisumbing. With the issuance
Page 429 of 434

of a Stay Order on 8 October 2002 in the corporate rehabilitation case, petitioner filed on 21 October
2002 a motion to suspend the proceedings in LRC Case No. 2128-02 which was granted by
respondent judge in the Order dated 2 December 2002.
On 11 January 2005, the RTC issued in LRC Case No. 2128-02 an order granting Metrobank’s petition
for issuance of a writ of possession and directing the Clerk of Court to issue the writ therein sought.
Upon discovering that the Bank transferred the titles to the mortgaged properties in its name and
consolidated its ownership over the subject properties on 25 April 2003, petitioner filed its 4
November 2004 motion which was styled as one to direct the Register of Deeds to "bring back the
titles in [its] name." Petitioner argued that the bank’s act of transferring said titles in its name
amounted to contempt absent modification of the 8 October 2002 Stay Order and approval by the
Rehabilitation Court.
Issues: Can the writ of possession be issued without violating the Stay Order? Is the Bank’s
consolidation of ownership over the previously mortgaged properties violative of the Stay Order?
Held: Yes and No. Metrobank had already acquired ownership over the subject realties when
petitioner commenced its petition for corporate rehabilitation on 1 October 2002. Having
purchased the subject realties at public auction on 7 November 2001, Metrobank undoubtedly
acquired ownership over the same when petitioner failed to exercise its right of redemption within
the three-month period under Section 47 of RA 8791. With ownership already vested in its favor as
of 6 February 2002, it matters little that Metrobank caused the certificate of sale to be registered
with the Cavite Provincial Registry only on 10 April 2002 and/or executed an affidavit consolidating
its ownership over the same properties only on 25 April 2003. The rule is settled that the mortgagor
loses all interest over the foreclosed property after the expiration of the redemption period and the
purchaser becomes the absolute owner thereof when no redemption is made. By the time that the
Rehabilitation Court issued the 8 October 2002 Stay Order in SEC Case No. 023-02, it cannot,
therefore, be gainsaid that Metrobank had long acquired ownership over the subject realties.
Hence, the grant of writ of possession is also valid.
An essential function of corporate rehabilitation is, admittedly, the Stay Order which is a
mechanism of suspension of all actions and claims against the distressed corporation upon the due
appointment of a management committee or rehabilitation receiver. The Stay Order issued by the
Rehabilitation Court in SEC Case No. 023-02 cannot, however, apply to the mortgage obligations
owing to Metrobank which had already been enforced even before TCEI’s filing of its petition for
corporate rehabilitation on 1 October 2002.
_____________________________________________________________________________________
ANTI-MONEY LAUNDERING LAW
SUBIDO PAGENTE CERTEZA MENDOZA and BINAY LAW OFFICES, Petitioner, - versus -
THE COURT OF APPEALS, HON. ANDRES B. REYES, JR., in his capacity as Presiding
Justice of the Court of Appeals, and the ANTI-MONEY LAUNDERING COUNCIL,
represented by its members, HON. AMANDO M. TETANGCO, JR., Governor of the
BANGKO SENTRAL NG PILIPINAS, HON. TERESITA J. HERBOSA, Chairperson of the
Securities and Exchange Commission, and HON. EMMANUEL F. DOOC, Insurance
Commissioner of the Insurance Commission. Respondents.
Page 430 of 434

G.R. No. 216914, EN BANC, December 6, 2016, PEREZ,J.
Taken into account Section 11 of the AMLA, the Court found nothing arbitrary in the allowance
and authorization to AMLC to undertake an inquiry into certain bank accounts or deposits. Instead,
the Court found that it provides safeguards before a bank inquiry order is issued, ensuring
adherence to the general state policy of preserving the absolutely confidential nature of
Philippine bank accounts:
a. The AMLC is required to establish probable cause as basis for its ex-parte application for bank
inquiry order;
b. The CA, independent of the AMLC's demonstration of probable cause, itself makes a finding
of probable cause that the deposits or investments are related to an unlawful activity under
Section 3(i) or a money laundering offense under Section 4 of the AMLA;
c. A bank inquiry court order ex-parte for related accounts is preceded by a bank inquiry court
order ex-parte for the principal account which court order ex-parte for related accounts is
separately based on probable cause that such related account is materially linked to the
principal account inquired into; and
d. The authority to inquire into or examine the main or principal account and the related
accounts shall comply with the requirements of Article III, Sections 2 and 3 of the
Constitution.
FACTS:
In 2015, a year before the 2016 presidential elections, reports abounded on the supposed
disproportionate wealth of then Vice President Jejomar Binay and the rest of his family, some of
whom were likewise elected public officers. The Office of the Ombudsman and the Senate
conducted investigations and inquiries thereon.
From various news reports announcing the inquiry into then Vice President Binay's bank accounts,
including accounts of members of his family, petitioner Subido Pagente Certeza Mendoza &
Binay Law Firm (SPCMB) was most concerned with the article published in the Manila Times on
25 February 2015 entitled "Inspect Binay Bank Accounts" stating that Anti-Money Laundering
Council (AMLC) asked the Court of Appeals (CA) to allow the Council to peek into the bank
accounts of the law office linked to the Binay family, the Subido Pagente Certeza Mendoza & Binay
Law Firm, where the Vice President's daughter Abigail was a former partner.
The following day, 26 February 2015, SPCMB wrote public respondent, Presiding Justice of the CA,
Andres B. Reyes, Jr requesting for a copy of the ex-parte application for bank examination filed by
respondent AMLC and all other pleadings, motions, orders, resolutions, and processes issued by the
respondent court of appeals in relation thereto. In response, the Presiding justice Reyes wrote
SPCMB denying its request.
By 8 March 2015, the Manila Times published another article entitled, "CA orders probe of Binay 's
assets" reporting that the appellate court had issued a Resolution granting the ex-parte application
of the AMLC to examine the bank accounts of SPCMB.
Forestalled in the CA thus alleging that it had no ordinary, plain, speedy, and adequate remedy to
protect its rights and interests in the purported ongoing unconstitutional examination of its bank
Page 431 of 434

accounts by public respondent Anti-Money Laundering Council (AMLC), SPCMB undertook direct
resort to this Court via this petition for certiorari and prohibition.
ISSUES:
1. Whether or not the ex-parte application and inquiry by the AMLC into certain bank deposits
and investments violate substantive and procedural due process. (NO)
2. Whether or not the ex-parte application and inquiry by the AMLC into certain bank deposits
and investments violate the constitutional right to privacy. (NO)
3. Whether or not the owner of the bank account is precluded from ascertaining from the CA,
post issuance of the bank inquiry order ex-parte, if his account is indeed the subject of an
examination. (NO)
RULING:
1. The right to due process has two aspects: (1) substantive which deals with the extrinsic and
intrinsic validity of the law; and (2) procedural which delves into the rules government must
follow before it deprives a person of its life, liberty or property.
Section 11 of the AMLA providing for ex-parte application and inquiry by the AMLC into certain
bank deposits and investments does not violate substantive due process, there being no
physical seizure of property involved at that stage. It is the preliminary and actual seizure of
the bank deposits or investments in question which brings these within reach of the judicial
process, specifically a determination that the seizure violated due process.
SPCMB's constitutional right to procedural due process is likewise not violated by the ex-parte
application and inquiry by the AMLC into certain bank deposits and investments. AMLC does not
possess quasi-judicial powers and hence, it has no adjudicatory power. AMLC's investigation of
money laundering offenses and its determination of possible money laundering offenses,
specifically its inquiry into certain bank accounts allowed by court order, does not transform it into
an investigative body exercising quasi-judicial powers.
2. In the case of Rep. of the Phils. v. Hon. Judge Eugenio, Jr., et al. (Eugenio), the court laid down
the following principle:
a. The Constitution did not allocate specific rights peculiar to bank deposits;
b. The general rule of absolute confidentiality is simply statutory, i.e. not specified in the
Constitution;
c. Exceptions to the general rule of absolute confidentiality have been carved out by the
Legislature which legislation have been sustained, albeit subjected to heightened scrutiny
by the courts; and
d. One such legislated exception is Section 11 of the AMLA.
Taken into account Section 11 of the AMLA, the Court found nothing arbitrary in the allowance and
authorization to AMLC to undertake an inquiry into certain bank accounts or deposits. Instead, the
Court found that it provides safeguards before a bank inquiry order is issued, ensuring
adherence to the general state policy of preserving the absolutely confidential nature of
Philippine bank accounts:
Page 432 of 434

e. The AMLC is required to establish probable cause as basis for its ex-parte application for
bank inquiry order;
f. The CA, independent of the AMLC's demonstration of probable cause, itself makes a finding
of probable cause that the deposits or investments are related to an unlawful activity under
Section 3(i) or a money laundering offense under Section 4 of the AMLA;
g. A bank inquiry court order ex-parte for related accounts is preceded by a bank inquiry court
order ex-parte for the principal account which court order ex-parte for related accounts is
separately based on probable cause that such related account is materially linked to the
principal account inquired into; and
h. The authority to inquire into or examine the main or principal account and the related
accounts shall comply with the requirements of Article III, Sections 2 and 3 of the
Constitution.
Bound by these requirements for issuance of a bank inquiry order under Section 11 of the AMLA,
the Court are hard pressed to declare that it violates SPCMB's right to privacy.
3. Nonetheless, although the bank inquiry order ex-parte passes constitutional muster, there is
nothing in Section 11 nor the implementing rules and regulations of the AMLA which prohibits
the owner of the bank account, as in this instance SPCMB, to ascertain from the CA, post
issuance of the bank inquiry order ex-parte, if his account is indeed the subject of an
examination. Considering the safeguards under Section 11 preceding the issuance of such an
order, the Court find that there is nothing therein which precludes the owner of the
account from challenging the basis for the issuance thereof.
Note, however, that the allowance to question the bank inquiry order herein is tied to the appellate
court's issuance of a freeze order on the principal accounts. The occasion for the issuance of the
freeze order upon the actual physical seizure of the investigated and inquired into bank account,
calls into motions the opportunity for the bank account owner to then question, not just probable
cause for the issuance of the freeze order under Section 10, but, to begin with, the determination of
probable cause for an ex-parte bank inquiry order into a purported related account under Section
11. To emphasize, this allowance to the owner of the bank account to question the bank
inquiry order is granted only after issuance of the freeze order physically seizing the
subject bank account. It cannot be undertaken prior to the issuance of the freeze order.
All told, the Court affirm the constitutionality of Section 11 of the AMLA allowing the ex-parte
application by the AMLC for authority to inquire into, and examine, certain bank deposits and
investments.
The ex-parte inquiry shall be upon probable cause that the deposits or investments are related
to an unlawful activity as defined in Section 3(i) of the law or a money laundering offense under
Section 4 of the same law. To effect the limit on the ex-parte inquiry, the petition under oath for
authority to inquire, must, akin to the requirement of a petition for freeze order enumerated in
Title VIII of A.M. No. 05-11-,04-SC, contain the name and address of the respondent; the grounds
relied upon for the issuance of the order of inquiry; and the supporting evidence that the subject
bank deposit are in any way related to or involved in an unlawful activity.
If the CA finds no substantial merit in the petition, it shall dismiss the petition outright stating
the specific reasons for such denial. If found meritorious and there is a subsequent petition for
Page 433 of 434

freeze order, the proceedings shall be governed by the existing Rules on Petitions for Freeze
Order in the CA. From the issuance of a freeze order, the party aggrieved by the ruling of the court
may appeal to the Supreme Court by petition for review on certiorari under Rule 45 of the Rules of
Court raising all pertinent questions of law and issues, including the propriety of the issuance of a
bank inquiry order. The appeal shall not stay the enforcement of the subject decision or final order
unless the Supreme Court directs otherwise.
Page 434 of 434

MERC - Consolidated Case Digests 2012-2016 PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MERC - Consolidated Case Digests 2012-2016 PDF

Uploaded by

Copyright:

Available Formats

MERCANTILE LAW DIGESTS 2012-2017

RIGHTS AND OBLIGATIONS OF PARTIES

MARPHIL EXPORT CORPORATION and IRENEO LIM, Petitioners, - versus - ALLIED

The debit memo is valid.

a. Allied Bank as correspondent bank in LIC No. 21970

b. Allied Bank's right to reimbursement under the Letter Agreement

c. Allied Bank's right to debit Marphil 's account

BASIC PRINCIPLES OF LETTER OF C REDIT

THE HONGKONG & SHANGHAI BANKING CORPORATION,

Philippine National Bank vs. San Miguel Corporation

In the case ofTransfield Philippines, Inc. v. Luzon Hydro Corporation:

By definition, a letter of credit is a written instrument whereby the writer requests

LOAN SECURITY FEATURE

TRUST RECEIPTS LAW

BANGKO SENTRAL NG PILIPINAS v. AGUSTIN LIBO-ON

In the absence of such absolute conveyance of title to qualify as an assignment of credit,

Whether BSP has the authority to foreclose the mortgage

RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS IN CASE OF SALE

HUR TIN YANG vs. PEOPLE OF THE PHILIPPINES

Supermax Philippines, Inc. (Supermax) is a domestic corporation engaged in the construction

The petition has merit.

LISAM V. PHILIPPINE NATIONAL BANK

In 1989, petitioner, as President of Novachemical Industries, Inc. (Novachem), applied for

NEGOTIABLE INSTRUMENTS LAW

KINDS OF NEGOTIABLE INSTRUMENTS

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE

Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must conform to the

(a) It must be in writing and signed by the maker or drawer;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

NUNELON MARQUEZ v. ELISAN CREDIT CORPORATION

A check constitutes an evidence of indebtedness and is a veritable proof of an obligation. Under

Whether the possession of checks is sufficient to prove the existence of indebtedness.

Section 24. Presumption of consideration. – Every negotiable instrument is deemed

HOLDER IN DUE COURSE

ALVIN PATRIMONIO vs. NAPOLEON GUTIERREZ AND OCTAVIO MARASIGAN III

1. Whether Marasigan is a holder in due course.

1. No. Marasigan is Not a Holder in Due Course

(a) That it is complete and regular upon its face;

(c) That he took it in good faith and for value;

RIGHTS OF THE HOLDER

DEFENSES AGAINST THE HOLDER

RCBC SAVINGS BANK, Petitioner, - versus - NOEL M. ODRADA, Respondent.

Respondent Noel M. Odrada (Odrada) sold a secondhand Mitsubishi Montero (Montero) to

1. Whether or not Odrada is a holder in due course.

1. Odrada is not a holder in due course.

2. RCBC correctly refused the payment of the manager’s checks.

Although acquitted on reasonable doubt, Santia was found civilly liable.

Issue: Should Aglibot be held civilly liable on the checks?

METROPOLITAN BANK AND TRUST COMPANY vs. WILFRED N. CHIOK

Moreover, it seems to be fallacious to hold that the unconditional payment of

Philippine National Bank v. Sps. Chea Chee Chong

Issue: Whether PNB can be held liable for the loss

from non-compliance with his obligation.

The petition is denied.

insured or breach of material warranty under Section 69 of the Insurance Code.

PARAMOUNT LIFE & GENERAL INSURANCE CORPORATION, Petitioner, v.

CHERRY T. CASTRO AND GLENN ANTHONY T. CASTRO, Petitioners, v.

The CA correctly ruled to admit the Castros' Third-Party Complaint.

Notwithstanding the provision on Section 22 "No Assignment" of Article IV Benefit

MANILA BANKERS LIFE INSURANCE CORPORATION vs. CRESENCIA P. ABAN

The petition is denied.