Yutivo Sons Hardware Co vs CTA

Yutivo is a domestic corporation engaged in importation and sale of hardware supplies

and equipment. After the liberation in 1946, resumed its business and until 1946 bout a
number of cars and trucks from General Motors (GM), an American corporation doing
business in the Philippines. As importer, GM paid sales tax prescribed by the Tax Code
on the basis of its selling price to Yutivo. Yutivo paid no further sales tax on its sales to
the public.

In June 1946, Southern Motors (SM) organized to engage in the business of selling
cars, trucks and spare parts. One of its major subscribers is Yu Tiong Yee, a founder of
Yutivo. After the incorporation of SM and until the withdrawal of GM from Phil, the cars
and trucks were purchased by Yutivo from GM then sold by Yutivo to Sm and then SM
sold these to the public.

The same way that GM used to pay taxes on the basis of its sales to Yutivo, Yutivo paid
taxes on the basis of its sales to SM. SM paid no taxes on its sales to the public.

CIR made an assessment and charged Yutivo 1.8M as deficiency tax plus surcharge.
Petitioner contested before CTA. CTA ruled that SM is a mere subsidiary or
instrumentality of Yutivo, hence, its separate corporate existence must be disregarded.

Issue: WON Yutivo and SM are two separate entities.

Held: Yes.

It is an elementary and fundamental principle of corporation law that a corporation is an

entity separate and distinct from its stockholders and from other corporation petitions to
which it may be connected. However, "when the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime," the law will regard the
corporation as an association of persons, or in the case of two corporations merge them
into one. Another rule is that, when the corporation is the "mere alter ego or business
conduit of a person, it may be disregarded.

However, the Court here held that they are inclined to rule that the Court of Tax Appeals
was not justified in finding that SM was organized for no other purpose than to defraud
the Government of its lawful revenues. In the first place, this corporation was organized
in June, 1946 when it could not have caused Yutivo any tax savings. From that date up
to June 30, 1947, or a period of more than one year, GM was the importer of the cars
and trucks sold to Yutivo, which, in turn resold them to SM. During that period, it is not
disputed that GM as importer, was the one solely liable for sales taxes. Neither Yutivo or
SM was subject to the sales taxes on their sales of cars and trucks. The sales tax
liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply
continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM
was organized purposely as a tax evasion device runs counter to the fact that there was
no tax to evade.

GOOD EARTH EMPORIUM INC., and LIM KA PING, petitioners,

vs.HONORABLE COURT OF APPEALS and ROCES-REYES REALTY
INC., respondents.

FACTS:

A Lease Contract, dated October 16, 1981, was entered into by and between ROCES-
REYES REALTY, INC., as lessor, and GOOD EARTH EMPORIUM, INC., as lessee, for
a term of three years beginning November 1, 1981 and ending October 31, 1984 at a
monthly rental of P65,000.00. The building which was the subject of the contract of
lease is a five-storey building located at the corner of Rizal Avenue and Bustos Street in
Sta. Cruz, Manila.

From March 1983, up to the time the complaint was filed, the lessee had defaulted in
the payment of rentals, as a consequence of which, private respondent ROCES-REYES
REALTY, INC., filed on October 14, 1984, an ejectment case (Unlawful Detainer)
against herein petitioners, GOOD EARTH EMPORIUM, INC. and LIM KA PING.

After the latter had tendered their responsive pleading, the lower court (MTC, Manila) on
motion of Roces rendered judgment on the pleadings in favor of ROCES.

A writ of execution was issued by the lower court. Meanwhile, the appeal was assigned
to the Regional Trial Court (Manila) Branch XLVI. However GEE thru counsel filed with
the Regional Trial Court of Manila, a motion to withdraw appeal citing as reason that
they are satisfied with the decision of the Metropolitan Trial Court of Manila, Branch
XXVIII, which said court granted in its Order of August 27, 1984 and the records were
remanded to the trial court.

Upon an ex-parte Motion of ROCES, the trial court issued an Alias Writ of Execution.

GEE thru counsel filed a motion to quash the writ of execution and notice of levy and an
urgent Ex-parte Supplemental Motion for the issuance of a restraining order. The lower
court issued a restraining order to the sheriff to hold the execution of the judgment
pending hearing on the motion to quash the writ of execution

The Regional Trial Court of Manila, finding that the amount of P1 million evidenced by
Exhibit "I" and another P1 million evidenced by the pacto de retro sale instrument were
in full satisfaction of the judgment obligation, reversed the decision of the Municipal Trial
Court.

On further appeal, the Court of Appeals reversed the decision of the Regional Trial
Court and reinstated the Resolution of the Metropolitan Trial Court of Manila.

GEE's Motion for Reconsideration of April 5, 1988 was denied. Hence, this petition.

ISSUE: Is the payment of P1 Million, as evidenced by the pacto de retro sale, to the
Marcos Reyes and Jesus Marcos Reyes satisfy the judgment obligation?

No.

Article 1240 of the Civil Code of the Philippines provides that:

Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it.

In the case at bar, the supposed payments were not made to Roces-Reyes Realty, Inc.
or to its successor in interest nor is there positive evidence that the payment was made
to a person authorized to receive it. No such proof was submitted but merely inferred by
the Regional Trial Court from Marcos Roces having signed the Lease Contract as
President which was witnessed by Jesus Marcos Roces. The latter, however, was no
longer President or even an officer of Roces-Reyes Realty, Inc. at the time he received
the money and signed the sale with pacto de retro. He, in fact, denied being in
possession of authority to receive payment for the respondent corporation nor does the
receipt show that he signed in the same capacity as he did in the Lease Contract at a
time when he was President for respondent corporation.

Jesus Marcos Roces testified that the amount of P1 million evidenced by the receipt is
the payment for a loan extended by him and Marcos Roces in favor of Lim Ka Ping. The
assertion is home by the receipt itself whereby they acknowledged payment of the loan
in their names and in no other capacity.

A corporation has a personality distinct and separate from its individual stockholders or
members. Being an officer or stockholder of a corporation does not make one's property
also of the corporation, and vice-versa, for they are separate entities. Shareowners are
in no legal sense the owners of corporate property (or credits) which is owned by the
corporation as a distinct legal person. As a consequence of the separate juridical
personality of a corporation, the corporate debt or credit is not the debt or credit of the
stockholder, nor is the stockholder's debt or credit that of the corporation.

The fact that at the time payment was made to the two Roces brothers, GEE was also
indebted to respondent corporation for a larger amount, is not supportive of the
Regional Trial Court's conclusions that the payment was in favor of the latter, especially
in the case at bar where the amount was not receipted for by respondent corporation
and there is absolutely no indication in the receipt from which it can be reasonably
inferred, that said payment was in satisfaction of the judgment debt. Likewise, no such
inference can be made from the execution of the pacto de retro sale which was not
made in favor of respondent corporation but in favor of the two Roces brothers in their
individual capacities without any reference to the judgment obligation in favor of
respondent corporation.

Mauricia Castillo was the administratrix in charge over a parcel of land left be Felipe
Castillo. Said land was mortgaged to the Development Bank of the Philippines and was
about to be foreclosed but then Mauricia’s nephew, Santiago Rivera, proposed that they
convert the land into 4 subdivisions so that they can raise the necessary money to avoid
foreclosure. Mauricia agreed. Rivera sought to develop said land through his company,
Slobec Realty Corporation (SRC), of which he was also the president. SRC then
contracted with Bormaheco, Inc. for the purchase of one tractor. Bormaheco agreed to
sell the tractor on an installment basis. At the same time, SRC mortgaged said tractor to
Bormaheco as security just in case SRC will default. As additional security, Mauricia and
other family members executed a surety agreement whereby in case of default in
paying said tractor, the Insurance Corporation of the Philippines (ICP) shall pay the
balance. The surety bond agreement between Mauricia and ICP was secured by
Mauricia’s parcel of land (same land to be developed).
SRC defaulted in paying said tractor. Bormaheco foreclosed the tractor but it wasn’t
enough hence ICP paid the deficiency. ICP then foreclosed the property of Mauricia.
ICP later sold said property to Philippine Machinery Parts Manufacturing Corporation
(PMPMC). PMPMC then demanded Mauricia et al to vacate the premises of said
property.
While all this was going on, Mauricia died. Her successor-administratrix, Buenaflor
Umali, questioned the foreclosure made by ICP. Umali alleged that all the transactions
are void and simulated hence they were defrauded; that through Bormaheco’s
machinations, Mauricia was fooled into entering into a surety agreement with ICP; that
Bormaheco even made the premium payments to ICP for said surety bond; that the
president of Bormaheco is a director of PMPMC; that the counsel who assisted in all the
transactions, Atty. Martin De Guzman, was the legal counsel of ICP, Bormaheco, and
PMPMC.
ISSUE: Whether or not the veil of corporate fiction should be pierced.
HELD: No.
Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore
exist, the legal fiction that a corporation is an entity with a juridical personality separate
and distinct from its members or stockholders may be disregarded. In such cases, the
corporation will be considered as a mere association of persons. The members or
stockholders of the corporation will be considered as the corporation, that is, liability will
attach directly to the officers and stockholders. 12 The doctrine applies when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, 13 or when it is made as a shield to confuse the legitimate issues 14 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.

In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco,
ICP and PM Parts, alleging that these corporations employed fraud in causing the
foreclosure and subsequent sale of the real properties belonging to petitioners While we
do not discount the possibility of the existence of fraud in the foreclosure proceeding,
neither are we inclined to apply the doctrine invoked by petitioners in granting the relief
sought. It is our considered opinion that piercing the veil of corporate entity is not the
proper remedy in order that the foreclosure proceeding may be declared a nullity under
the circumstances obtaining in the legal case at bar.

In the first place, the legal corporate entity is disregarded only if it is sought to hold the
officers and stockholders directly liable for a corporate debt or obligation. In the instant
case, petitioners do not seek to impose a claim against the individual members of the
three corporations involved; on the contrary, it is these corporations which desire to
enforce an alleged right against petitioners. Assuming that petitioners were indeed
defrauded by private respondents in the foreclosure of the mortgaged properties, this
fact alone is not, under the circumstances, sufficient to justify the piercing of the
corporate fiction, since petitioners do not intend to hold the officers and/or members of
respondent corporations personally liable therefor. Petitioners are merely seeking the
declaration of the nullity of the foreclosure sale, which relief may be obtained without
having to disregard the aforesaid corporate fiction attaching to respondent corporations.
Secondly, petitioners failed to establish by clear and convincing evidence that private
respondents were purposely formed and operated, and thereafter transacted with
petitioners, with the sole intention of defrauding the latter.

The mere fact, therefore, that the businesses of two or more corporations are
interrelated is not a justification for disregarding their separate personalities, absent
sufficient showing that the corporate entity was purposely used as a shield to defraud
creditors and third persons of their rights.

MAMBULAO LUMBER COMPANY, plaintiff-appellant, vs. PHILIPPINE NATIONAL

BANK and ANACLETO HERALDO Deputy Provincial Sheriff of Camarines
Norte, defendants-appellees. G.R. No. L-22973, January 30, 1968

FACTS: On May 5, 1956 the plaintiff applied for an industrial loan of P155,000
(approved for a loan of P100,000 only) with the Naga Branch of defendant PNB. To
secure payment, the plaintiff mortgaged a parcel of land, together with the
buildings and improvements existing thereon, situated in the poblacion of Jose
Panganiban (formerly Mambulao), province of Camarines Norte. The PNB released
from the approved loan the sum of P27,500, and another release of P15,500.

The plaintiff failed to pay the amortization on the amounts released to and received
by it. It was found that the plaintiff had already stopped operation about the end of
1957 or early part of 1958.

The unpaid obligation of the plaintiff as of September 22, 1961, amounted to

P57,646.59, excluding attorney's fees. A foreclosure sale of the parcel of land,
together with the buildings and improvements thereon was, held on November 21,
1961, and the said property was sold to the PNB for the sum of P56,908.00, subject
to the right of the plaintiff to redeem the same within a period of one year.

The plaintiff sent a letter reiterating its request that the foreclosure sale of the
mortgaged chattels be discontinued on the grounds that the mortgaged
indebtedness had been fully paid and that it could not be legally effected at a place
other than the City of Manila.

The trial court sentenced the Mambulao Lumber Company to pay to the defendant
PNB the sum of P3,582.52 with interest thereon at the rate of 6% per annum. The
plaintiff on appeal advanced that its total indebtedness to the PNB as of November
21, 1961, was only P56,485.87 and not P58,213.51 as concluded by the court a quo;
hence, the proceeds of the foreclosure sale of its real property alone in the amount
of P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB
thereafter was more than sufficient to liquidate its obligation, thereby rendering the
subsequent foreclosure sale of its chattels unlawful;

That for the acts of the PNB in proceeding with the sale of the chattels, in utter
disregard of plaintiff's vigorous opposition thereto, and in taking possession thereof
after the sale thru force, intimidation, coercion, and by detaining its "man-in-
charge" of said properties, the PNB is liable to plaintiff for damages and
attorney's fees.

ISSUE: Whether or not PNB may be held liable to plaintiff Corporation for damages
and attorney’s fees.

HELD: Herein appellant's claim for moral damages, seems to have no legal or
factual basis. Obviously, an artificial person like herein appellant corporation
cannot experience physical sufferings, mental anguish, fright, serious
anxiety, wounded feelings, moral shock or social humiliation which are
basis of moral damages. A corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages. The same
cannot be considered under the facts of this case, however, not only because it is
admitted that herein appellant had already ceased in its business operation at the
time of the foreclosure sale of the chattels, but also for the reason that whatever
adverse effects of the foreclosure sale of the chattels could have upon its reputation
or business standing would undoubtedly be the same whether the sale was
conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place
agreed upon by the parties in the mortgage contract.

But for the wrongful acts of herein appellee bank and the deputy sheriff of
Camarines Norte in proceeding with the sale in utter disregard of the agreement to
have the chattels sold in Manila as provided for in the mortgage contract, to which
their attentions were timely called by herein appellant, and in disposing of the
chattels in gross for the miserable amount of P4,200.00, herein appellant should be
awarded exemplary damages in the sum of P10,000.00. The circumstances of the
case also warrant the award of P3,000.00 as attorney's fees for herein appellant.

MAMBULAO LUMBER COMPANY, plaintiff-appellant, vs. PHILIPPINE NATIONAL

BANK and ANACLETO HERALDO Deputy Provincial Sheriff of Camarines
Norte, defendants-appellees. G.R. No. L-22973, January 30, 1968

FACTS: On May 5, 1956 the plaintiff applied for an industrial loan of P155,000
(approved for a loan of P100,000 only) with the Naga Branch of defendant PNB. To
secure payment, the plaintiff mortgaged a parcel of land, together with the
buildings and improvements existing thereon, situated in the poblacion of Jose
Panganiban (formerly Mambulao), province of Camarines Norte. The PNB released
from the approved loan the sum of P27,500, and another release of P15,500.

The plaintiff failed to pay the amortization on the amounts released to and received
by it. It was found that the plaintiff had already stopped operation about the end of
1957 or early part of 1958.

The unpaid obligation of the plaintiff as of September 22, 1961, amounted to

P57,646.59, excluding attorney's fees. A foreclosure sale of the parcel of land,
together with the buildings and improvements thereon was, held on November 21,
1961, and the said property was sold to the PNB for the sum of P56,908.00, subject
to the right of the plaintiff to redeem the same within a period of one year.

The plaintiff sent a letter reiterating its request that the foreclosure sale of the
mortgaged chattels be discontinued on the grounds that the mortgaged
indebtedness had been fully paid and that it could not be legally effected at a place
other than the City of Manila.

The trial court sentenced the Mambulao Lumber Company to pay to the defendant
PNB the sum of P3,582.52 with interest thereon at the rate of 6% per annum. The
plaintiff on appeal advanced that its total indebtedness to the PNB as of November
21, 1961, was only P56,485.87 and not P58,213.51 as concluded by the court a quo;
hence, the proceeds of the foreclosure sale of its real property alone in the amount
of P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB
thereafter was more than sufficient to liquidate its obligation, thereby rendering the
subsequent foreclosure sale of its chattels unlawful;
That for the acts of the PNB in proceeding with the sale of the chattels, in utter
disregard of plaintiff's vigorous opposition thereto, and in taking possession thereof
after the sale thru force, intimidation, coercion, and by detaining its "man-in-
charge" of said properties, the PNB is liable to plaintiff for damages and
attorney's fees.

ISSUE: Whether or not PNB may be held liable to plaintiff Corporation for damages
and attorney’s fees.

HELD: Herein appellant's claim for moral damages, seems to have no legal or
factual basis. Obviously, an artificial person like herein appellant corporation
cannot experience physical sufferings, mental anguish, fright, serious
anxiety, wounded feelings, moral shock or social humiliation which are
basis of moral damages. A corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages. The same
cannot be considered under the facts of this case, however, not only because it is
admitted that herein appellant had already ceased in its business operation at the
time of the foreclosure sale of the chattels, but also for the reason that whatever
adverse effects of the foreclosure sale of the chattels could have upon its reputation
or business standing would undoubtedly be the same whether the sale was
conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place
agreed upon by the parties in the mortgage contract.

But for the wrongful acts of herein appellee bank and the deputy sheriff of
Camarines Norte in proceeding with the sale in utter disregard of the agreement to
have the chattels sold in Manila as provided for in the mortgage contract, to which
their attentions were timely called by herein appellant, and in disposing of the
chattels in gross for the miserable amount of P4,200.00, herein appellant should be
awarded exemplary damages in the sum of P10,000.00. The circumstances of the
case also warrant the award of P3,000.00 as attorney's fees for herein appellant.