2017 Merc

MERCANTILE LAW DIGESTS 2012-2017
LETTERS OF CREDIT
DOCTRINE OF INDEPENDENCE
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 1 of 339
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 2 of 339
_________________________________________________________________________________________________________
Hongkong and Shanghai Banking Corporation Limited v. National Steel Corporation

and Citytrust Banking Corporation
G.R. No. 183486, February 24, 2016, Jardeleza, J:
Facts:
Respondent National Steel Corporation (NSC) entered into an Export Sales Contract (the
Contract) with Klockner East Asia Limited (Klockner) on October 12, 1993. NSC sold 1,200
metric tons of prime cold rolled coils to Klockner under FOB ST Iligan terms. 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. On October 22,
1993, 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 (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.3 These documents are: (1) one
original commercial invoice; (2) one packing list; (3) one non-negotiable copy of clean on
board ocean bill of lading made out to order, blank endorsed marked 'freight collect and
notify applicant etc.
The Letter of Credit was amended twice to reflect changes in the terms of delivery. On
November 2, 1993, the Letter of Credit was first amended to change the delivery terms from
FOB ST Iligan to FOB ST Manila and to increase the amount to US$488,400. It was
subsequently amended on November 18, 1993 to extend the expiry and shipment date to
December 8, 1993.
On November 21, 1993, NSC, through Emerald Forwarding Corporation, loaded and shipped
the cargo of prime cold rolled coils on board MV Sea Dragon under China Ocean Shipping
Company Bill of Lading. The cargo arrived in Hongkong on November 25, 1993.
NSC coursed the collection of its payment from Klockner through CityTrust Banking
Corporation (CityTrust). NSC had earlier obtained a loan from CityTrust secured by the
proceeds of the Letter of Credit issued by HSBC. CityTrust sent a collection order (Collection
Order) to HSBC respecting the collection of payment from Klockner. HSBC sent a cablegram
to CityTrust acknowledging receipt of the Collection Order. It also stated that the documents
will be presented to "the drawee against payment subject to UCP 322 [Uniform Rules for
Collection (URC) 322] as instructed. It also informed SCB-M that it has referred the matter to
Klockner for payment and that it will revert upon the receipt of the amount. 17 On December
8, 1993, the Letter of Credit expired.
HSBC sent another cablegram to SCB-M advising it that Klockner had refused payment. It
then informed SCB-M that it intends to return the documents to NSC with all the banking
charges for its account. CityTrust insisted that a demand for payment must be made from
Page 3 of 339
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.
Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for the first time, demanded
payment under the Letter of Credit.
Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of money
(Complaint) docketed as Civil Case No. 94-2122 (Collection Case) of the RTC Makati. In its
Complaint, NSC alleged that it coursed the collection of the Letter of Credit through CityTrust.
However, notwithstanding CityTrust's complete presentation of the documents in
accordance with the requirements in the Letter of Credit, HSBC unreasonably refused to pay
its obligation in the amount of US$485,767.93.
HSBC denied that it has any liability under the Letter of Credit. It argued 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.
The RTC Makati rendered a decision (RTC Decision) dated February 23, 2000. It found 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 reversed the ruling of the RTC. 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.
Issue: Who among the parties bears the liability to pay the amount stated in the Letter of
Credit.
Held: The Court upheld the CA’s decision. HSCB is liable to pay NSC. 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.
Letters of credit are governed primarily by their own provisions, by laws specifically
applicable to them, and by usage and custom. Consistent with our rulings in several cases,
100 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.
Page 4 of 339
Applying this set of laws and rules, the Court ruled 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.
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. In Feati, this Court applied UCP 400 even when there is no express
stipulation in the letter of credit that it governs the transaction. On the strength of our ruling
in Feati, we have the legal duty to apply UCP 400 in this case independent of the parties'
agreement to be bound by it.
UCP 400 states that an irrevocable credit payable on sight, such as the Letter of Credit in this
case, constitutes a definite undertaking of the issuing bank to pay, provided that the
stipulated documents are presented and that the terms and conditions of the credit are
complied with. Further, UCP 400 provides that an issuing bank has the obligation to examine
the documents with reasonable care. Thus, when CityTrust forwarded the Letter of Credit
with the attached documents to HSBC, it had the duty to make a determination of whether
its obligation to pay arose by properly examining the documents.
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
Page 5 of 339
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 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
Page 6 of 339
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, 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
Page 7 of 339
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.
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

Page 8 of 339
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, 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
Page 9 of 339
[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.
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
Page 10 of 339
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
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.
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
Page 11 of 339
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.
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.
Page 12 of 339
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 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
Page 13 of 339
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 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
Page 14 of 339
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.
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.
Page 15 of 339
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 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
Page 16 of 339
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.
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).
Page 17 of 339
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.
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
Page 18 of 339
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 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
Page 19 of 339
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
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
Page 20 of 339
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, 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
Page 21 of 339
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.
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.
Page 22 of 339
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 23 of 339
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 24 of 339
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.
Page 25 of 339
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. 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.
Page 26 of 339
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 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
Page 27 of 339
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 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
Page 28 of 339
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 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.
LIFE INSURANCE
MANILA BANKERS LIFE INSURANCE CORPORATION vs. CRESENCIA P. ABAN

G.R. No. 175666. July 29, 2013
J. Del Castillo
Page 29 of 339
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 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.
Page 30 of 339
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.
NON-LIFE INSURANCE
Fortune Medicare, Inc. vs. David Robert Amorin

G.R. No195872; March 12, 2014
J. Reyes
Page 31 of 339
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 from sickness, injury or other stipulated contingent, the health care provider
must pay for the same to the extent agreed upon under the contract.
Page 32 of 339
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
Page 33 of 339
the warehouse where the insured property was located. When CBIC refused to pay, UMC filed
a Complaint.
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.
Page 34 of 339
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.
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
Page 35 of 339
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."
INCONTESTABILITY PERIOD
The Insular Life Assurance Company, Ltd. V. Khu et. al.

G.R. No. 195176, April 18, 2016, Del Castillo, J:
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
Page 36 of 339
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.
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.
Page 37 of 339
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.
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.
Page 38 of 339
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.
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.
Page 39 of 339
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.
_________________________________________________________________________________________________________
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.
Page 40 of 339
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
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.
Page 41 of 339
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.”
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;
Page 42 of 339
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:
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.
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.
Page 43 of 339
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.
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
Page 44 of 339
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 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.
Page 45 of 339
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 46 of 339
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
Page 47 of 339
recoverable pursuant to the average clause provision 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 the same similarly shows that the June 21, 1990 letter was
also a final rejection of Hollero Construction’s indemnity claim.
Page 48 of 339
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
Page 49 of 339
attachment bond. Apparently, MSAPL failed to appreciate that by dividing the risk through
reinsurance, 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.
TRANSPORTATION LAWS
V. COMMON CARRIERS
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
Page 50 of 339
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 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.
Page 51 of 339
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.
_________________________________________________________________________________________________________
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.
Page 52 of 339
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 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
Page 53 of 339
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 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.
Page 54 of 339
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.
VIGILANCE OVER GOODS
ASIAN TERMINALS, INC. vs. FIRST LEPANTO-TAISHO INSURANCE CORPORATION

G.R. No. 185964, June 16, 2014, J. Reyes
Page 55 of 339
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 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.
Page 56 of 339
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.
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.
Page 57 of 339
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 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
Page 58 of 339
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 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:
Page 59 of 339
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.
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.
Page 60 of 339
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.
Attorney’s Fees. Article 2208 of the Civil Code enumerates the instances when
attorney’s fees may be recovered:
Page 61 of 339
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 62 of 339
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.
Page 63 of 339
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 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
Page 64 of 339
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 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
Page 65 of 339
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 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
Page 66 of 339
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 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
Page 67 of 339
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.
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
Page 68 of 339
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.
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:
Page 69 of 339
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 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
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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 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,
Page 71 of 339
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.
Issue:
Whether or not CA correctly ruled that ESLI is liable.
Ruling:
On the liability of ESLI
Page 72 of 339
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 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
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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:
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.
Page 74 of 339
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 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.
Page 75 of 339
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.
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
Page 76 of 339
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
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.
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
Page 77 of 339
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
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.
Facts:
Page 78 of 339
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
Page 79 of 339
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.
_________________________________________________________________________________________________________
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
Page 80 of 339
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 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.
_________________________________________________________________________________________________________
Page 81 of 339
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 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
Page 82 of 339
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?
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
Page 83 of 339
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."
CORPORATION LAW
CLASSES OF CORPORATIONS
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
Page 84 of 339
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-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.
Page 85 of 339
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.
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
Page 86 of 339
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.
________________________________________________________________________________________________________
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.
Page 87 of 339
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.
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,
Page 88 of 339
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.
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.
Page 89 of 339
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.
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
Page 90 of 339
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.
_________________________________________________________________________________________________________
Philippine Geothermal Inc, Employees Union v. Court of Appeals, G.R. No.

190187, September 28, 2016
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.”
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
Page 91 of 339
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 CONCOLIDATED
MINES CORP.
G.R. No. 195580, January 28, 2015, J. Velasco, Jr.
A corporation that complies with the 60-40 Filipino to foreign equity requirement can
be considered a Filipino corporation if there is no doubt as to who has the “beneficial
ownership” and “control” of the corporation. In this case, a further investigation as to the
nationality of the personalities with the beneficial ownership and control of the corporate
shareholders in both the investing and investee corporations is necessary. “Doubt” refers to
various indicia that the “beneficial ownership” and “control” of the corporation do not in fact
reside in Filipino shareholders but in foreign stakeholders. Even if at first glance the petitioners
comply with the 60-40 Filipino to foreign equity ratio, doubt exists in the present case that gives
rise to a reasonable suspicion that the Filipino shareholders do not actually have the requisite
number of control and beneficial ownership in petitioners Narra, Tesoro, and McArthur. Hence,
the Court is correct in using the Grandfather Rule in determining the nationality of the
petitioners.
Facts:
Petitioner Narra Nickel and Mining Development Corp. (Narra) filed this Motion for
Reconsideration of the Supreme Court's April 21, 2014 Decision wherein it affirmed the
appellate court's ruling that petitioners, being foreign corporations, are not entitled to
Mineral Production Sharing Agreements (MPSAs ). In reaching the assailed decision, the
Court upheld with approval the appellate court's finding that there was doubt as to
petitioners' nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI),
effectively owns 60% of the common stocks of the petitioners by owning equity interest of
petitioners' other majority corporate shareholders.
Page 92 of 339
To petitioners, the Court’s application of the Grandfather Rule to determine their

nationality is erroneous and allegedly without basis in the Constitution, the Foreign
Investments Act of 1991 (FIA), the Philippine Mining Act of 1995, and the Rules issued by
the Securities and Exchange Commission (SEC). These laws and rules supposedly espouse
the application of the Control Test in verifying the Philippine nationality of corporate entities
for purposes of determining compliance with Sec. 2, Art. XII of the Constitution that only
“corporations or associations at least sixty per centum of whose capital is owned by such
[Filipino] citizens” may enjoy certain rights and privileges, like the exploration and
development of natural resources
Issue:
Whether the Court erred in using the Grandfather rule and not the control test in
determining the nationality of the petitioners.
Ruling:
No. As defined by Dean Cesar Villanueva, the Grandfather Rule is “the method by
which the percentage of Filipino equity in a corporation engaged in nationalized and/or
partly nationalized areas of activities, provided for under the Constitution and other
nationalization laws, is computed, in cases where corporate shareholders are present, by
attributing the nationality of the second or even subsequent tier of ownership to determine
the nationality of the corporate shareholder.” Thus, to arrive at the actual Filipino ownership
and control in a corporation, both the direct and indirect shareholdings in the corporation
are determined. In other words, if there are layers of intervening corporations investing in a
mining joint venture, we must delve into the citizenship of the individual stockholders of
each corporation.
Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in

determining compliance with the minimum Filipino equity requirement vis-à-vis the Control
Test. This confusion springs from the erroneous assumption that the use of one method
forecloses the use of the other. The Control Test and the Grandfather Rule are not, as it were,
incompatible ownership-determinant methods that can only be applied alternative to each
other. Rather, these methods can, if appropriate, be used cumulatively in the determination
of the ownership and control of corporations engaged in fully or partly nationalized
activities, as the mining operation.
The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation, as it could result in an otherwise foreign corporation
rendered qualified to perform nationalized or partly nationalized activities. Hence, it is only
when the Control Test is first complied with that the Grandfather Rule may be applied. Put
in another manner, if the subject corporation’s Filipino equity falls below the threshold 60%,
the corporation is immediately considered foreign-owned, in which case, the need to resort
to the Grandfather Rule disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to foreign
equity requirement can be considered a Filipino corporation if there is no doubt as to who
has the “beneficial ownership” and “control” of the corporation. In that instance, there is no
Page 93 of 339
need for a dissection or further inquiry on the ownership of the corporate shareholders in
both the investing and investee corporation or the application of the Grandfather Rule. As a
corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the
subject or investee corporation, a resort to the Grandfather Rule is necessary if doubt exists
as to the locus of the “beneficial ownership” and “control.”
In this case, a further investigation as to the nationality of the personalities with the
beneficial ownership and control of the corporate shareholders in both the investing and
investee corporations is necessary.
As explained in the April 21, 2012 Decision, the “doubt” that demands the application
of the Grandfather Rule in addition to or in tandem with the Control Test is not confined to,
or more bluntly, does not refer to the fact that the apparent Filipino ownership of the
corporation’s equity falls below the 60% threshold. Rather, “doubt” refers to various indicia
that the “beneficial ownership” and “control” of the corporation do not in fact reside in
Filipino shareholders but in foreign stakeholders. Even if at first glance the petitioners
comply with the 60-40 Filipino to foreign equity ratio, doubt exists in the present case that
gives rise to a reasonable suspicion that the Filipino shareholders do not actually have the
requisite number of control and beneficial ownership in petitioners Narra, Tesoro, and
McArthur. Hence, a further investigation and dissection of the extent of the ownership of the
corporate shareholders through the Grandfather Rule is justified.
_________________________________________________________________________________________________________
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 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.
Page 94 of 339
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 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.
Page 95 of 339
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 PhP 825,000.00
Mining 5,997,000.00
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. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell
Total 10,000 PhP PhP 2,708,174.60
10,000,000.00
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,
Page 96 of 339
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.
Page 97 of 339
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 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,
Page 98 of 339
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 are NOT Filipino nationals
and must be considered foreign since 60% or more of their capital stocks or equity interests
are owned by MBMI.
________________________________________________________________________________________________________
Roy III, v. Chairman Herbosa, G.R. No. 207246, November 22, 2016
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 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
Page 99 of 339
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.
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
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
Page 100 of 339
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.
_________________________________________________________________________________________________________
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.
Page 101 of 339

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 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.
Page 102 of 339

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.
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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 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
Page 103 of 339
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 respondents’ assertions. Further, RBSJI also failed to
Page 104 of 339
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.
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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.
Page 105 of 339

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 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.
Page 106 of 339
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 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.
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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.
Page 107 of 339
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.
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.
Page 108 of 339

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 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.
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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.
Page 109 of 339

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.
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.
Page 110 of 339
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) 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
Page 111 of 339
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 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
Page 112 of 339
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.
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
Page 113 of 339

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."
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
Page 114 of 339
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.
Hence, Jacob is absolved from any liability.
_________________________________________________________________________________________________________
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
Page 115 of 339
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.
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
Page 116 of 339

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, 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
Page 117 of 339
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.
Page 118 of 339

Issue:
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
Page 119 of 339
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.
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
Page 120 of 339

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.
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.
Page 121 of 339

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 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
Page 122 of 339

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.
_________________________________________________________________________________________________________
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.
Page 123 of 339

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.
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.
Page 124 of 339

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.
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 clearly and convincingly. It cannot be presumed.
Page 125 of 339

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. 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.
Page 126 of 339

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.
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.
Page 127 of 339

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.
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
Page 128 of 339
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.
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
Page 129 of 339

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 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
Page 130 of 339
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.
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.
Page 131 of 339

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.
_________________________________________________________________________________________________________
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
Page 132 of 339
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
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.
Page 133 of 339
“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:
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;
Page 134 of 339

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.
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_________________________________________________________________________________________________________
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.
Page 136 of 339

Issue:
Whether or not Candida A. Santos was solidarily liable with Arco Pulp and Paper Co.,
Inc.
Ruling:
Yes.
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
Page 137 of 339
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, 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
Page 138 of 339
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.
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
Page 139 of 339

(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.
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,
Page 140 of 339

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.
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
Page 141 of 339
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.
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
Page 142 of 339

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, 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.
Page 143 of 339
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.
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
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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.
_________________________________________________________________________________________________________
Agdao Landless Residents Association et. al v. Maramion et. al

G.R. Nos. 188642 & 189425
By laws
Page 145 of 339

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.

Page 146 of 339
G.R. No. 182571. September 2, 2013

J. Reyes
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
Page 147 of 339
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 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
Page 148 of 339
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.
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
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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 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
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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.
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
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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.
_________________________________________________________________________________________________________
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
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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.
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
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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.
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:
Page 154 of 339

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.
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.
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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 injuction in the Regional Trial
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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.
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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 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 Guy v. Gilbert Guy

G.R. No. 184068, April 19, 2016, Sereno, J:
Facts:
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.
O 10 September 2004, Paulino Delfin Pe and Benjamin Lim (stockholder of record of GCI)
informed petitioner that they had received a notice dated 31 August 2004 calling for the
holding of a stockholders’ meeting on 07 September 2004 at Manila Hotel. On 22 September
2004, or fifteen (15) days after the stockholders' meeting, petitioner received the
aforementioned notice.
On 30 September 2004, 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, Nullification of Acts and Resolutions,
Injunction and Damages with Prayer for Temporary Restraining Order and/or Writ of
Preliminary lnjunction.
Petitioner 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. In his Answer, respondent Gilbert G. Guy (Gilbert) argued that the stockholders'
meeting on 7 September 2004 was legally called and held; that the notice of meeting was
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signed by the authorized officer of GCI and sent in accordance with the by-laws of the
corporation; and that Cheu was not a stockholder of record of the corporation, a status that
would have entitled her to receive a notice of the meeting.
The RTC issued a temporary restraining order against the respondents. Meantime, in a
Manifestation dated 10 August 2005, the respondents disclosed that a stockholders’ meeting
has already been held and hence, the complaint by the petitioner has already been mooted.
The RTC thereafter issued a decision dismissing the complaint on the ground that
appropriate notices were sent to the petitioner. The CA affirmed the RTC’s decision in toto;
hence, this petition.
Issue: Whether the special stockholders’ meeting was not validly called and held
Held: The special stockholders’ meeting was validly conducted. For a stockholders' special
meeting to be valid, certain requirements must be met with respect to notice, quorum and
place. Under the Corporation Code, one of the requirements is a previous written notice sent
to all stockholders at least one (1) week prior to the scheduled meeting. Under the By-laws
of GCI, the notice of the meeting shall be mailed not less than five (5) days prior to the date
set for the special meeting.
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
ELECTIONS OF BOARD OF DIRECTORS AND TRUSTEES

Estate of Dr. Juvencio P. Ortanez v. Jose C. Lee, et. al.
GR. No. 184251, March 9, 2016; Perez, J:
Facts:
On 6 July 1956, Dr. Ortañ ez organized and founded the Philippine International Life
Insurance Company, Inc. (Philinterlife). At the time of its incorporation, Dr. Ortañ ez owned
ninety percent (90%) of the subscribed capital stock of Philinterlife.
Upon his death on 21 July 1980, Dr. Ortañ ez 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
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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; hence, this petition.
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 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.
Page 160 of 339

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 and its premium and 13th month pay from 1996 to1998.
Page 161 of 339

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. Hence, this petition.
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,
Page 162 of 339
we hold that Ke-e and Subrado cannot be held personally liable for Cagalawan’s money
claims.
"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.
Page 163 of 339

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.
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.
Page 164 of 339

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
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
Page 165 of 339
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.
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.
Page 166 of 339

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 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.
Page 167 of 339

RESPONSIBILITY FOR CRIMES
Federated LPG Dealers Association v. Del Rosario GR 202639 November 09, 2016
In a prosecution for violation of BP 33 (Prohibited Acts Involving Petroleum Products)

committed by a corporation, can the members of the board of directors claim non-liability
on the ground that that they have already designated someone to act as the general manager
of the corporation? Yes. Sec. 4 of BP 33 enumerates the persons who may be held liable for
violations of the law, viz[.]: (1) the president, (2) general manager, (3) managing partner, (4)
such other officer charged with the management of the business affairs of the corporation or
juridical entity, or (5) the employee responsible for such violation.
The enumeration of persons who may be held liable for corporate violators of BP 33, as
amended, excludes the members of the board of directors. This stands to reason for the
board of directors of a corporation is generally a policy making body. Even if the corporate
powers of a corporation are reposed in the board of directors under the first paragraph of
Sec. 23 of the Corporation Code, it is of common knowledge and practice that the board of
directors is not directly engaged or charged with the running of the recurring business affairs
of the corporation. Depending on the powers granted to them by the Articles of
Incorporation, the members of the board generally do not concern themselves with the day-
to-day affairs of the corporation, except those corporate officers who are charged with
running the business of the corporation and are concomitantly members of the board, like
the President. Section 25 of the Corporation Code requires the president of a corporation to
be also a member of the board of directors.
A member of the Board of Directors of a corporation, cannot, by mere reason of such

membership, be held liable for 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 supported 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-Affidavit39 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.
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
Page 168 of 339
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 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
Page 169 of 339
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 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
Page 170 of 339
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 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.
_________________________________________________________________________________________________________
Chua v. People, G.R. No. 216146, August 24, 2016
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
Page 171 of 339
and close 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.
REMEDIAL RIGHTS
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 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.
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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.
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
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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
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.
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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 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
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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.
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.
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_______________________________________________________________________________________________________
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 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
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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:
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
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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 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.
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_________________________________________________________________________________________________________
Marcelino Florete, Jr. et. al. v. Rogelio Florente, et. al.

GR. No. 174909, January 20, 2016, Leonen, J:
Facts:
Spouses Marcelino Florete, Sr. and Salome Florete (now both deceased) had four (4)
children: Marcelino Florete, Jr. (Marcelino, Jr.), Maria Elena Muyco (Ma. Elena), Rogelio
Florete, Sr. (Rogelio, Sr.), and Teresita Menchavez (Teresita), now deceased.
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 its incorporation on March 8, 1966,7 it had an authorized capital stock of
₱250,000.00 divided into 2,500 shares at ₱100.00 par value per share. Twenty-five percent
(25%) of the corporation’s authorized capital stock were then subscribed.
On November 17, 1967, Berlin and Sudario resigned from their positions as General Manager
and Station Supervisor, respectively.Berlin and Sudario each transferred 20 shares to Raul
Muyco and Estrella Mirasol.
Salome died on November 22, 1980. Marcelino, Sr. suffered a stroke on July 12, 1982, which
left him paralyzed and bedridden until his death on October 3, 1990. After Marcelino, Sr.’s
stroke, their son, Rogelio, Sr. started managing the affairs of People’s Broadcasting.
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 Complaintfor Declar ation 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).
he 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 and that the former is estopped from questioning the
assailed movement of shares of People’s Broadcasting. It also ruled that indispensible parties
were not joined in their Complaint.
he Marcelino, Jr. Group filed before the Court of Appeals a Petition for Review with a prayer
for the issuance of a temporary restraining order and/or writ of preliminary injunction to
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deter the immediate execution of the trial court Decision awarding damages to Rogelio, Sr.
The Court of Appeals issued a temporary restraining order and, subsequently, a writ of
preliminary injunction.
In its Decision dated March 29, 2006, the Court of Appeals denied the Marcelino, Jr. Group’s
Petition and affirmed the trial court Decision. It also lifted the temporary restraining order
and writ of preliminary injunction. The Court of Appeals ruled that the Marcelino, Jr. Group
did not have a cause of action against those whom they have impleaded as defendants. It also
noted that the principal obligors in or perpetrators of the assailed transactions were persons
other than those in the Rogelio, Sr. Group who have not been impleaded as parties. Thus, the
Court of Appeals emphasized that the following parties were indispensable to the case:
People’s Broadcasting; Marcelino, Sr.; Consolidated Broadcasting System, Inc.; Salome;
Divinagracia; Teresita; and "other stockholders of [People’s Broadcasting] to whom the
shares were transferred or the nominees of the stockholders." Hence, this petition.
Issue: Whether the CA erred in dismissing the complaint filed by the petitioners
Held: No. 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,"1 it is a
derivative suit, not an individual suit or class/representative suit, that a stockholder must
resort to. Among the basic requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must allege in his complaint
before the proper forum that he is suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who wish to join him. Moreover, it
is important that the corporation be made a party to the case.
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,
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the PCGG initially stepped in, voted the sequestered shares, and seized control of its board of
directors to save those assets.
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.
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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.
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
Page 183 of 339
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 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
Page 184 of 339

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.
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.
Page 185 of 339

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
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
Page 186 of 339
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 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.
Page 187 of 339

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
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 v. Securities Specialist, Inc. et. al.

G.R. No.154069, 06 June 2016, Bersamin, J:
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.
Page 188 of 339
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 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.
Page 189 of 339
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.
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 v. Securities and Exchange Commission

G.R. No. 184332, February 17, 2016, Reyes, J:
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.
Page 190 of 339

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 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.
Page 191 of 339

DISSOLUTION AND LIQUIDATION
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 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
Page 192 of 339

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
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
Page 193 of 339
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, 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.
Page 194 of 339
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 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
Page 195 of 339
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.
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.
Page 196 of 339
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 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.
Page 197 of 339

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-year winding up period for a corporation whose charter is annulled by forfeiture
Page 198 of 339
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
Ching v. Quezon City Sports Club, G.R. No. 200150, November 07, 2016
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.
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
Page 199 of 339
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 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
Page 200 of 339
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.
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 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.
Page 201 of 339

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 202 of 339
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.
Hence, this petition.
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
Page 203 of 339
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.
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
Page 204 of 339
"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 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
Page 205 of 339
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 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."
Page 206 of 339
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 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
Page 207 of 339
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 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.
Page 208 of 339

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.
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
Page 209 of 339

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
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.
Page 210 of 339

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."
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
Page 211 of 339

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.
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
Page 212 of 339

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 213 of 339
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
Page 214 of 339
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 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
Page 215 of 339
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.
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.
Page 216 of 339

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 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.
INTRA-CORPORATE DISPUTES
Go, et. al. v. Distinction Properties Development and Construction, Inc.

G.R. No. 194024, April 25, 2012; Mendoza, J:
Page 217 of 339

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 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
Page 218 of 339
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
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:

corporation, partnership or association and the State in so far as its franchise, permit 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
Page 219 of 339
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 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
Page 220 of 339

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.
_________________________________________________________________________________________________________
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
Page 221 of 339
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.
_________________________________________________________________________________________________________
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.
Page 222 of 339

_________________________________________________________________________________________________________
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 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:
Page 223 of 339
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.
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.
Page 224 of 339
_________________________________________________________________________________________________________
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.
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
Page 225 of 339
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.
_________________________________________________________________________________________________________
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
Page 226 of 339
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.
An intra-corporate controversy is one which pertains to any of the following relationships:

Page 227 of 339
corporation, partnership or association and the State insofar as its franchise, permit 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
Page 228 of 339

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 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
Page 229 of 339
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.
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.
Page 230 of 339

. 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 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
Page 231 of 339
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 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.
Page 232 of 339
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.
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
Page 233 of 339
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.
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.
Page 234 of 339
______________________________________________________________________________________________________
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-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.
Page 235 of 339

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).
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
Page 236 of 339
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:
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
Page 237 of 339
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 “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
Page 238 of 339

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
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
Page 239 of 339
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.
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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.
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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.
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
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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 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:
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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.
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,
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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.
_________________________________________________________________________________________________________
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.
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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 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
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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.
BANKING LAWS
Philippine Deposit Insurance Corporation v. Citibank, N.A

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. &
Page 247 of 339

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 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
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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.
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”
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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.
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
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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 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
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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 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.
Page 252 of 339

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 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
Page 253 of 339
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 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.
_________________________________________________________________________________________________________
Oliver v. Philippine Savings Bank and Castro

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
Page 254 of 339
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.
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; hence, this petition.
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:
Page 255 of 339

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 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.
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
Page 256 of 339
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.
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
Page 257 of 339
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
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
Page 258 of 339
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.
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.
Page 259 of 339

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 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
Page 260 of 339
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 261 of 339

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.
Page 262 of 339

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 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.
_________________________________________________________________________________________________________
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:
Page 263 of 339

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.
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.
Page 264 of 339
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.”
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.
Page 265 of 339

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 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
Page 266 of 339
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.
_________________________________________________________________________________________________________
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
Page 267 of 339
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.
[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
Page 268 of 339

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 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
Page 269 of 339
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;
Issue:
Whether or not Basic Polyprinters can be rehabilitated.
Ruling:
No. Basic Polyprinters cannot be rehabilitated.

Page 270 of 339
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 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.
Page 271 of 339
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
EI Du Pont De Nemours v. Dir. Francisco, G.R. No. 174379, August 31, 2016
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
Page 272 of 339

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 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.
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".
Page 273 of 339

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.
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.
Page 274 of 339
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 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.
Page 275 of 339

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.
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
Page 276 of 339
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
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.
Page 277 of 339

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.
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.
Page 278 of 339

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.
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
Page 279 of 339
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 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
Page 280 of 339
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. v. Barrio Fiesta Manufacturing Corporation

G.R. No. 198889, January 20, 2016, Leonardo-De Castro, J:
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.
Page 281 of 339
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.
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.
Page 282 of 339

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 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
Page 283 of 339

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 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.
Page 284 of 339

(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 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.
_________________________________________________________________________________________________________
Page 285 of 339

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.
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.
Page 286 of 339
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.
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, 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.
Page 287 of 339

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.” 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. GR 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
Page 288 of 339
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
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
Page 289 of 339
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.
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
Page 290 of 339
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-
Page 291 of 339

descriptive mark, due to its general public domain classification, is perceptibly disqualified
from trademark registration.
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.
Page 292 of 339

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).
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
Page 293 of 339

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, 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.
_________________________________________________________________________________________________________
CATERPILLAR, INC v. SAMSON, G.R. No. 205972, November 09, 2016
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)7 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 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
(IP0).
By virtue of a search warrant, various products bearing Caterpillar's Core Marks were seized
from establishments owned by Samson. Thus, a criminal case for unfair competition was
filed with the DOJ and a civil case for unfair competition and cancellation of trademark was
filed with the RTC. Because of the filing of the civil case, the Judge in the criminal case
suspended the proceedings on ground of prejudicial question. Caterpillar posits that the
suspension of proceedings was contrary to Rule 111 of the Rules of Court, Article 33 of
the Civil Code on independent civil actions, and Section 170 of the IP Code, which specifically
provides that the criminal penalties for unfair competition were independent of the civil and
administrative sanctions imposed by law; that the determination of the lawful owner of the
"CATERPILLAR" trademark in the Civil Case would not be decisive of the guilt of Samson for
unfair competition in Criminal Case because registration was not an element of the crime of
Page 294 of 339
unfair competition; that the civil case sought to enforce Samson's civil liability arising from
the IP Code while the criminal cases would enforce Samson's liability arising from the crime
of unfair competition.
We agree. 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. In view of its being an independent
civil action, 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.
Besides, 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. 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."
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
Page 295 of 339
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 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
H
LIMITATIONS ON COPYRIGHTT
GMA NETWORK, INC. vs. CENTRAL CATV, INC.

G.R. No. 176694, July 18, 2014, J. Brion
Page 296 of 339

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 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.”
Page 297 of 339

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 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
Page 298 of 339

“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.
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
Page 299 of 339
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 Olano, et. al. v. Lim Eng Co

G.R. No. 195835, March 14, 2016
Reyes, J:
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.
Page 300 of 339

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.
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.
Page 301 of 339
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 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.
Page 302 of 339

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 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
Page 303 of 339

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.
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
Page 304 of 339
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
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
Page 305 of 339
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.
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.
Page 306 of 339
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 307 of 339

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.
Page 308 of 339

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.
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
Page 309 of 339
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
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.
Page 310 of 339

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 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
Page 311 of 339
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.
_________________________________________________________________________________________________________
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.
Page 312 of 339

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 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:
Page 313 of 339
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 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
Page 314 of 339
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 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
Page 315 of 339

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.
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
Page 316 of 339
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 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
Page 317 of 339
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

Page 318 of 339
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, 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.
Page 319 of 339

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;
Issue:
Whether or not Basic Polyprinters can be rehabilitated.
Ruling:
No. Basic Polyprinters cannot be rehabilitated.

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
Page 320 of 339
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 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
Page 321 of 339

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 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
Page 322 of 339
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.
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.
Page 323 of 339

_________________________________________________________________________________________________________
BPI FAMILY SAVINGS BANKC, INC. vs. ST. MICHAEL MEDICAL CENTER, INC.
G.R. No. 205469, March 25, 2015, J. Perlas-Bernabe

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.
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
Page 324 of 339
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.

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
Page 325 of 339
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 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.
________________________________________________________________________________________________________
Viva Shipping Lines, Inc. v. Keppel Philippines, Inc. et. al.

G.R. No. 177382, February 17, 2016, Leonen, J:
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.
Page 326 of 339

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 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
Page 327 of 339

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 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.
_________________________________________________________________________________________________________
Page 328 of 339

Mervic Realty, Inv. v. Viccy Realty, Inc.

G.R. No. 193748, February 3, 2016, Brion, J:
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
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.
Page 329 of 339

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.
_________________________________________________________________________________________________________
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.
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
Page 330 of 339
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 331 of 339

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
Page 332 of 339
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.
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.
Page 333 of 339

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.
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.”
Page 334 of 339

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 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
Page 335 of 339

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 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
Page 336 of 339
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 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
Page 337 of 339
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 Vs. The Court of Appeals, et
al., G.R. No. 216914. December 6, 2016
Under Section 11 (bank inquiry) of the Anti-Money Laundering Act, application for a bank
inquiry with the CA can be done ex parte. Does this not violate substantive and procedural
due process? No. 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 does not violate
procedural due process either because the AMLC’s own determination of probable cause is
in the nature of an investigative and not quasi-judicial power.
It cannot also be said that Section 11 violates the right to privacy. First, The Constitution did
not allocate specific rights peculiar to bank deposits; second, The general rule of absolute
confidentiality is simply statutory,i.e. not specified in the Constitution, which has been
affirmed in jurisprudence; third, 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, fourth One such legislated exception is
Section 11 of the AMLA. Subjecting Section 11 of the AMLA to heightened scrutiny, we find
nothing arbitrary in the allowance and authorization to AMLC to undertake an inquiry into
certain bank accounts or deposits. Instead, we 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:
(1) The AMLC is required to establish probable cause as basis for its ex-parte application for
bank inquiry order;
Page 338 of 339

(2) 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;
(3) 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
(4) 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.
The foregoing demonstrates that the inquiry and examination into the bank account are not
undertaken whimsically and solely based on the investigative discretion of the AMLC. In
particular, the requirement of demonstration by the AMLC, and determination by the CA, of
probable cause emphasizes the limits of such governmental action. Nonetheless, the account
holder is not without the right to confirm if his account is being inquired into post issuance
of the inquiry order.
Page 339 of 339

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MERCANTILE LAW DIGESTS 2012-2017

Philippine National Bank vs. San Miguel Corporation

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

Hongkong and Shanghai Banking Corporation Limited v. National Steel Corporation

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

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

The petition has merit.

LISAM V. PHILIPPINE NATIONAL BANK, G.R. NO. 164051, OCTOBER 3, 2012

CRISOLOGO V. PEOPLE, G.R. NO. 199481, DECEMBER 3, 2012

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

NEGOTIABLE INSTRUMENTS LAW

KINDS OF NEGOTIABLE INSTRUMENTS

NUNELON MARQUEZ v. ELISAN CREDIT CORPORATION

same upon reconsideration. The CA affirmed the reversal.

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

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;

The answer is supplied by the applicable statutory provision found in Section 14 of

AGLIBOT V. SANTIA, G.R. NO. 185945, DECEMBER 5, 2012

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

Philippine National Bank v. Sps. Chea Chee Chong

Issue: Whether PNB can be held liable for the loss

ALPHA INSURANCE AND SURETY CO. vs. ARSENIA SONIA CASTOR

The petition is denied.

MANILA BANKERS LIFE INSURANCE CORPORATION vs. CRESENCIA P. ABAN

The petition is denied.

Fortune Medicare, Inc. vs. David Robert Amorin

B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL

Gaisano v. Development Insurance Corporation, G.R. No. 190702

On September 27, 1996, respondent issued a comprehensive commercial vehicle policy to

The Insular Life Assurance Company, Ltd. V. Khu et. al.

Held: Petition denied.

RESCISSION OF INSURANCE CONTRACTS

Section 5. INSURANCE WITH OTHER COMPANIES. The insurance does not

Issue: Is Malayan’s position tenable?

PARAMOUNT INSURANCE V. SPOUSES REMONDEULAZ, GR 173773, NOVEMBER 28

The petition is granted.

9. Under any of the following circumstances the insurance ceases to attach as

Malayan is entitled to rescind the insurance contract

3) the alteration is without the consent of the insurer;

Sunlife of Canada (Philippines), Inc. v. Sibya, et. al.

CLAIMS SETTLEMENT AND SUBROGRATION

Malayan Insurance Co., Inc. v. Alberto

Issue: Whether or not there is a valid subrogration in this case

H.H. HOLLERO CONSTRUCTION, INC. vs. GOVERNMENT SERVICE INSURANCE SYSTEM

COMMUNICATION AND INFORMATION SYSTEMS CORPORATION v. MARK SENSING

Philam's action has not prescribed

Westwind Shipping Corporation vs. UCPB General Insurace Co., Inc.

A customs broker cannot escape liability by claiming that it cannot be considered a

bound to observe extraordinary diligence and is presumed to be at fault or have acted

2) A customs broker has been regarded as a common carrier because transportation of