MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners, vs. ALFREDO M.

JOSON, Respondent.

2011-12-12 | G.R. No. 171993

SECOND DIVISION

DECISION

PEREZ, J.:

In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein petitioners Marc II
Marketing, Inc. and Lucila V. Joson assailed the Decision1 dated 20 June 2005 of the Court of Appeals in
CA-G.R. SP No. 76624 for reversing and setting aside the Resolution 2 of the National Labor Relations
Commission (NLRC) dated 15 October 2002, thereby affirming the Labor Arbiter's Decision3 dated 1 October
2001 finding herein respondent Alfredo M. Joson's dismissal from employment as illegal. In the questioned
Decision, the Court of Appeals upheld the Labor Arbiter's jurisdiction over the case on the basis that
respondent was not an officer but a mere employee of petitioner Marc II Marketing, Inc., thus, totally
disregarding the latter's allegation of intra-corporate controversy. Nonetheless, the Court of Appeals
remanded the case to the NLRC for further proceedings to determine the proper amount of monetary awards
that should be given to respondent.

Assailed as well is the Court of Appeals Resolution 4 dated 7 March 2006 denying their Motion for
Reconsideration.

Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized and existing under
and by virtue of the laws of the Philippines. It is primarily engaged in buying, marketing, selling and
distributing in retail or wholesale for export or import household appliances and products and other items.5 It
took over the business operations of Marc Marketing, Inc. which was made non-operational following its
incorporation and registration with the Securities and Exchange Commission (SEC). Petitioner Lucila V.
Joson (Lucila) is the President and majority stockholder of petitioner corporation. She was also the former
President and majority stockholder of the defunct Marc Marketing, Inc.

Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager, incorporator, director
and stockholder of petitioner corporation.

The controversy of this case arose from the following factual milieu:

Before petitioner corporation was officially incorporated,6 respondent has already been engaged by petitioner
Lucila, in her capacity as President of Marc Marketing, Inc., to work as the General Manager of petitioner
corporation. It was formalized through the execution of a Management Contract7 dated 16 January 1994
under the letterhead of Marc Marketing, Inc.8 as petitioner corporation is yet to be incorporated at the time of
its execution. It was explicitly provided therein that respondent shall be entitled to 30% of its net income for
his work as General Manager. Respondent will also be granted 30% of its net profit to compensate for the
possible loss of opportunity to work overseas.9

Pending incorporation of petitioner corporation, respondent was designated as the General Manager of Marc
Marketing, Inc., which was then in the process of winding up its business. For occupying the said position,
respondent was among its corporate officers by the express provision of Section 1, Article IV10 of its by-laws.11

On 15 August 1994, petitioner corporation was officially incorporated and registered with the SEC.
Accordingly, Marc Marketing, Inc. was made non-operational. Respondent continued to discharge his duties
as General Manager but this time under petitioner corporation.
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Pursuant to Section 1, Article IV12 of petitioner corporation's by-laws,13 its corporate officers are as follows:
Chairman, President, one or more Vice-President(s), Treasurer and Secretary. Its Board of Directors,
however, may, from time to time, appoint such other officers as it may determine to be necessary or proper.

Per an undated Secretary's Certificate,14 petitioner corporation's Board of Directors conducted a meeting on
29 August 1994 where respondent was appointed as one of its corporate officers with the designation or title
of General Manager to function as a managing director with other duties and responsibilities that the Board of
Directors may provide and authorized.15

Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its operations, as evidenced
by an Affidavit of Non-Operation16 dated 31 August 1998, due to poor sales collection aggravated by the
inefficient management of its affairs. On the same date, it formally informed respondent of the cessation of its
business operation. Concomitantly, respondent was apprised of the termination of his services as General
Manager since his services as such would no longer be necessary for the winding up of its affairs.17

Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against petitioners
before the Labor Arbiter which was docketed as NLRC NCR Case No. 00-03-04102-99.

In his complaint, respondent averred that petitioner Lucila dismissed him from his employment with petitioner
corporation due to the feeling of hatred she harbored towards his family. The same was rooted in the filing by
petitioner Lucila's estranged husband, who happened to be respondent's brother, of a Petition for Declaration
of Nullity of their Marriage.18

For the parties' failure to settle the case amicably, the Labor Arbiter required them to submit their respective
position papers. Respondent complied but petitioners opted to file a Motion to Dismiss grounded on the Labor
Arbiter's lack of jurisdiction as the case involved an intra-corporate controversy, which jurisdiction belongs to
the SEC [now with the Regional Trial Court (RTC)]. 19 Petitioners similarly raised therein the ground of
prescription of respondent's monetary claim.

On 5 September 2000, the Labor Arbiter issued an Order20 deferring the resolution of petitioners' Motion to
Dismiss until the final determination of the case. The Labor Arbiter also reiterated his directive for petitioners
to submit position paper. Still, petitioners did not comply. Insisting that the Labor Arbiter has no jurisdiction
over the case, they instead filed an Urgent Motion to Resolve the Motion to Dismiss and the Motion to
Suspend Filing of Position Paper.

In an Order21 dated 15 February 2001, the Labor Arbiter denied both motions and declared final the Order
dated 5 September 2000. The Labor Arbiter then gave petitioners a period of five days from receipt thereof
within which to file position paper, otherwise, their Motion to Dismiss will be treated as their position paper
and the case will be considered submitted for decision.

Petitioners, through counsel, moved for extension of time to submit position paper. Despite the requested
extension, petitioners still failed to submit the same. Accordingly, the case was submitted for resolution.

On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its decretal portion reads
as follows:

WHEREFORE, premises considered, judgment is hereby rendered declaring [respondent's] dismissal

from employment illegal. Accordingly, [petitioners] are hereby ordered:
1. To reinstate [respondent] to his former or equivalent position without loss of seniority rights, benefits,
and privileges;
2. Jointly and severally liable to pay [respondent's] unpaid wages in the amount of P450,000.00 per
month from [26 March 1996] up to time of dismissal in the total amount of P6,300,000.00;
3. Jointly and severally liable to pay [respondent's] full backwages in the amount of P450,000.00 per
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 month from date of dismissal until actual reinstatement which at the time of promulgation amounted to
P21,600,000.00;
4. Jointly and severally liable to pay moral damages in the amount of P100,000.00 and attorney's fees
in the amount of 5% of the total monetary award.22 [Emphasis supplied.]

In the aforesaid Decision, the Labor Arbiter initially resolved petitioners' Motion to Dismiss by finding the
ground of lack of jurisdiction to be without merit. The Labor Arbiter elucidated that petitioners failed to adduce
evidence to prove that the present case involved an intra-corporate controversy. Also, respondent's money
claim did not arise from his being a director or stockholder of petitioner corporation but from his position as
being its General Manager. The Labor Arbiter likewise held that respondent was not a corporate officer under
petitioner corporation's by-laws. As such, respondent's complaint clearly arose from an employer-employee
relationship, thus, subject to the Labor Arbiter's jurisdiction.

The Labor Arbiter then declared respondent's dismissal from employment as illegal. Respondent, being a
regular employee of petitioner corporation, may only be dismissed for a valid cause and upon proper
compliance with the requirements of due process. The records, though, revealed that petitioners failed to
present any evidence to justify respondent's dismissal.

Aggrieved, petitioners appealed the aforesaid Labor Arbiter's Decision to the NLRC.

In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving credence to the
Secretary's Certificate, which evidenced petitioner corporation's Board of Directors' meeting in which a
resolution was approved appointing respondent as its corporate officer with designation as General Manager.
Therefrom, the NLRC reversed and set aside the Labor Arbiter's Decision dated 1 October 2001 and
dismissed respondent's Complaint for want of jurisdiction.23

The NLRC enunciated that the validity of respondent's appointment and termination from the position of
General Manager was made subject to the approval of petitioner corporation's Board of Directors. Had
respondent been an ordinary employee, such board action would not have been required. As such, it is clear
that respondent was a corporate officer whose dismissal involved a purely intra-corporate controversy. The
NLRC went further by stating that respondent's claim for 30% of the net profit of the corporation can only
emanate from his right of ownership therein as stockholder, director and/or corporate officer. Dividends or
profits are paid only to stockholders or directors of a corporation and not to any ordinary employee in the
absence of any profit sharing scheme. In addition, the question of remuneration of a person who is not a mere
employee but a stockholder and officer of a corporation is not a simple labor problem. Such matter comes
within the ambit of corporate affairs and management and is an intra-corporate controversy in contemplation
of the Corporation Code.24

When respondent's Motion for Reconsideration was denied in another Resolution25 dated 23 January 2003,
he filed a Petition for Certiorari with the Court of Appeals ascribing grave abuse of discretion on the part of the
NLRC.

On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the Labor Arbiter
has jurisdiction over the present controversy. It upheld the finding of the Labor Arbiter that respondent was a
mere employee of petitioner corporation, who has been illegally dismissed from employment without valid
cause and without due process. Nevertheless, it ordered the records of the case remanded to the NLRC for
the determination of the appropriate amount of monetary awards to be given to respondent. The Court of
Appeals, thus, decreed:

WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is DECLARED to have
jurisdiction over the controversy. The records are REMANDED to the NLRC for further proceedings to
determine the appropriate amount of monetary awards to be adjudged in favor of [respondent]. Costs against
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the [petitioners] in solidum.26

Petitioners moved for its reconsideration but to no avail.27

Petitioners are now before this Court with the following assignment of errors:

THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN DECIDING
THAT THE NLRC HAS THE JURISDICTION IN RESOLVING A PURELY INTRA-CORPORATE MATTER
WHICH IS COGNIZABLE BY THE SECURITIES AND EXCHANGE COMMISSION/REGIONAL TRIAL
COURT.

ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER THE CASE, STILL THE
COURT OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS NO
EMPLOYER-EMPLOYEE RELATIONSHIP BETWEEN [RESPONDENT] ALFREDO M. JOSON AND MARC II
MARKETING, INC. [PETITIONER CORPORATION].

ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER THE CASE, THE COURT
OF APPEALS ERRED IN NOT RULING THAT THE LABOR ARBITER COMMITTED GRAVE ABUSE OF
DISCRETION IN AWARDING MULTI-MILLION PESOS IN COMPENSATION AND BACKWAGES BASED
ON THE PURPORTED GROSS INCOME OF [PETITIONER CORPORATION].

THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN
NOT MAKING ANY FINDINGS AND RULING THAT [PETITIONER LUCILA] SHOULD NOT BE HELD
SOLIDARILY LIABLE IN THE ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH ON HER PART.28

Petitioners fault the Court of Appeals for having sustained the Labor Arbiter's finding that respondent was not
a corporate officer under petitioner corporation's by-laws. They insist that there is no need to amend the
corporate by-laws to specify who its corporate officers are. The resolution issued by petitioner corporation's
Board of Directors appointing respondent as General Manager, coupled with his assumption of the said
position, positively made him its corporate officer. More so, respondent's position, being a creation of
petitioner corporation's Board of Directors pursuant to its by-laws, is a corporate office sanctioned by the
Corporation Code and the doctrines previously laid down by this Court. Thus, respondent's removal as
petitioner corporation's General Manager involved a purely intra-corporate controversy over which the RTC
has jurisdiction.

Petitioners further contend that respondent's claim for 30% of the net profit of petitioner corporation was
anchored on the purported Management Contract dated 16 January 1994. It should be noted, however, that
said Management Contract was executed at the time petitioner corporation was still nonexistent and had no
juridical personality yet. Such being the case, respondent cannot invoke any legal right therefrom as it has no
legal and binding effect on petitioner corporation. Moreover, it is clear from the Articles of Incorporation of
petitioner corporation that respondent was its director and stockholder. Indubitably, respondent's claim for his
share in the profit of petitioner corporation was based on his capacity as such and not by virtue of any
employer-employee relationship.

Petitioners further avow that even if the present case does not pose an intra-corporate controversy, still, the
Labor Arbiter's multi-million peso awards in favor of respondent were erroneous. The same was merely based
on the latter's self-serving computations without any supporting documents.

Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with petitioner corporation.
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There was neither allegation nor iota of evidence presented to show that she acted with malice and bad faith
in her dealings with respondent. Moreover, the Labor Arbiter, in his Decision, simply concluded that petitioner
Lucila was jointly and severally liable with petitioner corporation without making any findings thereon. It was,
therefore, an error for the Court of Appeals to hold petitioner Lucila solidarily liable with petitioner corporation.

From the foregoing arguments, the initial question is which between the Labor Arbiter or the RTC, has
jurisdiction over respondent's dismissal as General Manager of petitioner corporation. Its resolution
necessarily entails the determination of whether respondent as General Manager of petitioner corporation is a
corporate officer or a mere employee of the latter.

While Article 217(a)229 of the Labor Code, as amended, provides that it is the Labor Arbiter who has the
original and exclusive jurisdiction over cases involving termination or dismissal of workers when the person
dismissed or terminated is a corporate officer, the case automatically falls within the province of the RTC. The
dismissal of a corporate officer is always regarded as a corporate act and/or an intra-corporate controversy.30

Under Section 531 of Presidential Decree No. 902-A, intra-corporate controversies are those 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, partnership or association of which they are
stockholders, members or associates, respectively; and between such corporation, partnership or association
and the State insofar as it concerns their individual franchise or right to exist as such entity. It also includes
controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.32

Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the controversy, the status
or relationship of the parties and the nature of the question that is the subject of their controversy must be
taken into consideration.33

In Easycall Communications Phils., Inc. v. King, this Court held that in the context of Presidential Decree No.
902-A, corporate officers are those officers of a corporation who are given that character either by the
Corporation Code or by the corporation's by-laws. Section 25 34 of the Corporation Code specifically
enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4) such
other officers as may be provided for in the by-laws.35

The aforesaid Section 25 of the Corporation Code, particularly the phrase "such other officers as may be
provided for in the by-laws," has been clarified and elaborated in this Court's recent pronouncement in Matling
Industrial and Commercial Corporation v. Coros, where it held, thus:

Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in order to be
considered as a corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw enabling
provision is not enough to make a position a corporate office. [In] Guerrea v. Lezama [citation omitted] the first
ruling on the matter, held that the only officers of a corporation were those given that character either by the
Corporation Code or by the [b]y-[l]aws; the rest of the corporate officers could be considered only as
employees or subordinate officials. Thus, it was held in Easycall Communications Phils., Inc. v. King [citation
omitted]:

An "office" is created by the charter of the corporation and the officer is elected by the directors or
stockholders. On the other hand, an employee occupies no office and generally is employed not by the action
of the directors or stockholders but by the managing officer of the corporation who also determines the
compensation to be paid to such employee.

xxxx

This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states that
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the corporate officers are the President, Secretary, Treasurer and such other officers as may be provided for
in the [b]y-[l]aws. Accordingly, the corporate officers in the context of PD No. 902-A are exclusively those who
are given that character either by the Corporation Code or by the corporation's [b]y[l]aws.

A different interpretation can easily leave the way open for the Board of Directors to circumvent the
constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the [b]y-[l]aws of
an enabling clause on the creation of just any corporate officer position.

It is relevant to state in this connection that the SEC, the primary agency administering the Corporation Code,
adopted a similar interpretation of Section 25 of the Corporation Code in its Opinion dated November 25,
1993 [citation omitted], to wit:

Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate
officers enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no power
to create other Offices without amending first the corporate [b]y-laws. However, the Board may create
appointive positions other than the positions of corporate Officers, but the persons occupying such
positions are not considered as corporate officers within the meaning of Section 25 of the
Corporation Code and are not empowered to exercise the functions of the corporate Officers, except those
functions lawfully delegated to them. Their functions and duties are to be determined by the Board of
Directors/Trustees.36 [Emphasis supplied.]

A careful perusal of petitioner corporation's by-laws, particularly paragraph 1, Section 1, Article IV,37 would
explicitly reveal that its corporate officers are composed only of: (1) Chairman; (2) President; (3) one or more
Vice-President; (4) Treasurer; and (5) Secretary.38 The position of General Manager was not among those
enumerated.

Paragraph 2, Section 1, Article IV of petitioner corporation's by-laws, empowered its Board of Directors to
appoint such other officers as it may determine necessary or proper.39 It is by virtue of this enabling provision
that petitioner corporation's Board of Directors allegedly approved a resolution to make the position of
General Manager a corporate office, and, thereafter, appointed respondent thereto making him one of its
corporate officers. All of these acts were done without first amending its by-laws so as to include the General
Manager in its roster of corporate officers.

With the given circumstances and in conformity with Matling Industrial and Commercial Corporation v. Coros,
this Court rules that respondent was not a corporate officer of petitioner corporation because his position as
General Manager was not specifically mentioned in the roster of corporate officers in its corporate by-laws.
The enabling clause in petitioner corporation's by-laws empowering its Board of Directors to create additional
officers, i.e., General Manager, and the alleged subsequent passage of a board resolution to that effect
cannot make such position a corporate office. Matling clearly enunciated that the board of directors has no
power to create other corporate offices without first amending the corporate by-laws so as to include therein
the newly created corporate office. Though the board of directors may create appointive positions other than
the positions of corporate officers, the persons occupying such positions cannot be viewed as corporate
officers under Section 25 of the Corporation Code.40 In view thereof, this Court holds that unless and until
petitioner corporation's by-laws is amended for the inclusion of General Manager in the list of its corporate
officers, such position cannot be considered as a corporate office within the realm of Section 25 of the
Corporation Code.

This Court considers that the interpretation of Section 25 of the Corporation Code laid down in Matling
safeguards the constitutionally enshrined right of every employee to security of tenure. To allow the creation
of a corporate officer position by a simple inclusion in the corporate by-laws of an enabling clause
empowering the board of directors to do so can result in the circumvention of that constitutionally
well-protected right.41

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It is also of no moment that respondent, being petitioner corporation's General Manager, was given the
functions of a managing director by its Board of Directors. As held in Matling, the only officers of a corporation
are those given that character either by the Corporation Code or by the corporate by-laws. It follows then that
the corporate officers enumerated in the by-laws are the exclusive officers of the corporation while the rest
could only be regarded as mere employees or subordinate officials. 42 Respondent, in this case, though
occupying a high ranking and vital position in petitioner corporation but which position was not specifically
enumerated or mentioned in the latter's by-laws, can only be regarded as its employee or subordinate official.
Noticeably, respondent's compensation as petitioner corporation's General Manager was set, fixed and
determined not by the latter's Board of Directors but simply by its President, petitioner Lucila. The same was
not subject to the approval of petitioner corporation's Board of Directors. This is an indication that respondent
was an employee and not a corporate officer.

To prove that respondent was petitioner corporation's corporate officer, petitioners presented before the
NLRC an undated Secretary's Certificate showing that corporation's Board of Directors approved a resolution
making respondent's position of General Manager a corporate office. The submission, however, of the said
undated Secretary's Certificate will not change the fact that respondent was an employee. The certification
does not amount to an amendment of the by-laws which is needed to make the position of General Manager
a corporate office.

Moreover, as has been aptly observed by the Court of Appeals, the board resolution mentioned in that
undated Secretary's Certificate and the latter itself were obvious fabrications, a mere afterthought. Here we
quote with conformity the Court of Appeals findings on this matter stated in this wise:

The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29 August 1994], why
did not [herein petitioners] attach it to their [M]otion to [D]ismiss filed on [26 August 1999], when it could have
been the best evidence that [herein respondent] was a corporate officer? Secondly, why did they report the
[respondent] instead as [herein petitioner corporation's] employee to the Social Security System [(SSS)] on
[11 October 1994] or a later date than their [29 August 1994] board resolution? Thirdly, why is there no
indication that the [respondent], the person concerned himself, and the [SEC] were furnished with copies of
said board resolution? And, lastly, why is the corporate [S]ecretary's [C]ertificate not notarized in keeping with
the customary procedure? That is why we called it manipulative evidence as it was a shameless sham meant
to be thrown in as a wild card to muddle up the [D]ecision of the Labor Arbiter to the end that it be overturned
as the latter had firmly pointed out that [respondent] is not a corporate officer under [petitioner corporation's
by-laws]. Regrettably, the [NLRC] swallowed the bait hook-line-and sinker. It failed to see through its nature
as a belatedly manufactured evidence. And even on the assumption that it were an authentic board resolution,
it did not make [respondent] a corporate officer as the board did not first and properly create the position of a
[G]eneral [M]anager by amending its by-laws.

(2) The scope of the term "officer" in the phrase "and such other officers as may be provided for in the
by-laws["] (Sec. 25, par. 1), would naturally depend much on the provisions of the by-laws of the corporation.
(SEC Opinion, [4 December 1991.]) If the by-laws enumerate the officers to be elected by the board, the
provision is conclusive, and the board is without power to create new offices without amending the by-laws.
(SEC Opinion, [19 October 1971.])

(3) If, for example, the general manager of a corporation is not listed as an officer, he is to be classified as an
employee although he has always been considered as one of the principal officers of a corporation [citing De
Leon, H. S., The Corporation Code of the Philippines Annotated, 1993 Ed., p. 215.]43 [Emphasis supplied.]

That respondent was also a director and a stockholder of petitioner corporation will not automatically make
the case fall within the ambit of intra-corporate controversy and be subjected to RTC's jurisdiction. To
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reiterate, not all conflicts between the stockholders and the corporation are classified as intra-corporate. Other
factors such as the status or relationship of the parties and the nature of the question that is the subject of the
controversy44 must be considered in determining whether the dispute involves corporate matters so as to
regard them as intra-corporate controversies.45 As previously discussed, respondent was not a corporate
officer of petitioner corporation but a mere employee thereof so there was no intra-corporate relationship
between them. With regard to the subject of the controversy or issue involved herein, i.e., respondent's
dismissal as petitioner corporation's General Manager, the same did not present or relate to an
intra-corporate dispute. To note, there was no evidence submitted to show that respondent's removal as
petitioner corporation's General Manager carried with it his removal as its director and stockholder. Also,
petitioners' allegation that respondent's claim of 30% share of petitioner corporation's net profit was by reason
of his being its director and stockholder was without basis, thus, self-serving. Such an allegation was
tantamount to a mere speculation for petitioners' failure to substantiate the same.

In addition, it was not shown by petitioners that the position of General Manager was offered to respondent on
account of his being petitioner corporation's director and stockholder. Also, in contrast to NLRC's findings,
neither petitioner corporation's by-laws nor the Management Contract stated that respondent's appointment
and termination from the position of General Manager was subject to the approval of petitioner corporation's
Board of Directors. If, indeed, respondent was a corporate officer whose termination was subject to the
approval of its Board of Directors, why is it that his termination was effected only by petitioner Lucila,
President of petitioner corporation? The records are bereft of any evidence to show that respondent's
dismissal was done with the conformity of petitioner corporation's Board of Directors or that the latter had a
hand on respondent's dismissal. No board resolution whatsoever was ever presented to that effect.

With all the foregoing, this Court is fully convinced that, indeed, respondent, though occupying the General
Manager position, was not a corporate officer of petitioner corporation rather he was merely its employee
occupying a high-ranking position.

Accordingly, respondent's dismissal as petitioner corporation's General Manager did not amount to an
intra-corporate controversy. Jurisdiction therefor properly belongs with the Labor Arbiter and not with the RTC.

Having established that respondent was not petitioner corporation's corporate officer but merely its employee,
and that, consequently, jurisdiction belongs to the Labor Arbiter, this Court will now determine if respondent's
dismissal from employment is illegal.

It was not disputed that respondent worked as petitioner corporation's General Manager from its incorporation
on 15 August 1994 until he was dismissed on 30 June 1997. The cause of his dismissal was petitioner
corporation's cessation of business operations due to poor sales collection aggravated by the inefficient
management of its affairs.

In termination cases, the burden of proving just and valid cause for dismissing an employee from his
employment rests upon the employer. The latter's failure to discharge that burden would necessarily result in
a finding that the dismissal is unjustified.46

Under Article 283 of the Labor Code, as amended, one of the authorized causes in terminating the
employment of an employee is the closing or cessation of operation of the establishment or undertaking.
Article 283 of the Labor Code, as amended, reads, thus:

ART. 283. Closure of establishment and reduction of personnel. - The employer may also terminate the
employment of any employee due to the installation of labor saving-devices, redundancy, retrenchment to
prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing
is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and
the Department of Labor and Employment at least one (1) month before the intended date thereof. x x x In
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case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment
or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent
to one (1) month pay or to at least one-half (1/2) month pay for every year of service, whichever is higher. A
fraction of at least six (6) months shall be considered one (1) whole year. [Emphasis supplied.]

From the afore-quoted provision, the closure or cessation of operations of establishment or undertaking may
either be due to serious business losses or financial reverses or otherwise. If the closure or cessation was
due to serious business losses or financial reverses, it is incumbent upon the employer to sufficiently and
convincingly prove the same. If it is otherwise, the employer can lawfully close shop anytime as long as it was
bona fide in character and not impelled by a motive to defeat or circumvent the tenurial rights of employees
and as long as the terminated employees were paid in the amount corresponding to their length of service.47

Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for a valid cessation
of business operations: (a) service of a written notice to the employees and to the Department of Labor and
Employment (DOLE) at least one month before the intended date thereof; (b) the cessation of business must
be bona fide in character; and (c) payment to the employees of termination pay amounting to one month pay
or at least one-half month pay for every year of service, whichever is higher.

In this case, it is obvious that petitioner corporation's cessation of business operations was not due to serious
business losses. Mere poor sales collection, coupled with mismanagement of its affairs does not amount to
serious business losses. Nonetheless, petitioner corporation can still validly cease or close its business
operations because such right is legally allowed, so long as it was not done for the purpose of circumventing
the provisions on termination of employment embodied in the Labor Code.48 As has been stressed by this
Court in Industrial Timber Corporation v. Ababon, thus:

Just as no law forces anyone to go into business, no law can compel anybody to continue the same. It would
be stretching the intent and spirit of the law if a court interferes with management's prerogative to close or
cease its business operations just because the business is not suffering from any loss or because of the
desire to provide the workers continued employment.49

A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and ceased
business operations beginning 30 June 1997. This was evidenced by a notarized Affidavit of Non-Operation
dated 31 August 1998. There was also no showing that the cessation of its business operations was done in
bad faith or to circumvent the Labor Code. Nevertheless, in doing so, petitioner corporation failed to comply
with the one-month prior written notice rule. The records disclosed that respondent, being petitioner
corporation's employee, and the DOLE were not given a written notice at least one month before petitioner
corporation ceased its business operations. Moreover, the records clearly show that respondent's dismissal
was effected on the same date that petitioner corporation decided to stop and cease its operation. Similarly,
respondent was not paid separation pay upon termination of his employment.

As respondent's dismissal was not due to serious business losses, respondent is entitled to payment of
separation pay equivalent to one month pay or at least one-half month pay for every year of service,
whichever is higher. The rationale for this was laid down in Reahs Corporation v. National Labor Relations
Commission,50 thus:

The grant of separation pay, as an incidence of termination of employment under Article 283, is a statutory
obligation on the part of the employer and a demandable right on the part of the employee, except only where
the closure or cessation of operations was due to serious business losses or financial reverses and there is
sufficient proof of this fact or condition. In the absence of such proof of serious business losses or financial
reverses, the employer closing his business is obligated to pay his employees and workers their separation
pay.

The rule, therefore, is that in all cases of business closure or cessation of operation or undertaking of the
| Page 9 of 17
employer, the affected employee is entitled to separation pay. This is consistent with the state policy of
treating labor as a primary social economic force, affording full protection to its rights as well as its welfare.
The exception is when the closure of business or cessation of operations is due to serious business losses or
financial reverses duly proved, in which case, the right of affected employees to separation pay is lost for
obvious reasons.51 [Emphasis supplied.]

As previously discussed, respondent's dismissal was due to an authorized cause, however, petitioner
corporation failed to observe procedural due process in effecting such dismissal. In Culili v. Eastern
Telecommunications Philippines, Inc.,52 this Court made the following pronouncements, thus:

x x x there are two aspects which characterize the concept of due process under the Labor Code: one is
substantive - whether the termination of employment was based on the provision of the Labor Code or in
accordance with the prevailing jurisprudence; the other is procedural - the manner in which the dismissal was
effected.

Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:

(d) In all cases of termination of employment, the following standards of due process shall be substantially
observed:

xxxx

For termination of employment as defined in Article 283 of the Labor Code, the requirement of due process
shall be deemed complied with upon service of a written notice to the employee and the appropriate Regional
Office of the Department of Labor and Employment at least thirty days before effectivity of the termination,
specifying the ground or grounds for termination.

In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

The requirement of law mandating the giving of notices was intended not only to enable the employees to
look for another employment and therefore ease the impact of the loss of their jobs and the corresponding
income, but more importantly, to give the Department of Labor and Employment (DOLE) the opportunity to
ascertain the verity of the alleged authorized cause of termination.53 [Emphasis supplied].

The records of this case disclosed that there was absolutely no written notice given by petitioner corporation
to the respondent and to the DOLE prior to the cessation of its business operations. This is evident from the
fact that petitioner corporation effected respondent's dismissal on the same date that it decided to stop and
cease its business operations. The necessary consequence of such failure to comply with the one-month prior
written notice rule, which constitutes a violation of an employee's right to statutory due process, is the
payment of indemnity in the form of nominal damages.54 In Culili v. Eastern Telecommunications Philippines,
Inc., this Court further held:

In Serrano v. National Labor Relations Commission [citation omitted], we noted that "a job is more than the
salary that it carries." There is a psychological effect or a stigma in immediately finding one's self laid off from
work. This is exactly why our labor laws have provided for mandating procedural due process clauses. Our
laws, while recognizing the right of employers to terminate employees it cannot sustain, also recognize the
employee's right to be properly informed of the impending severance of his ties with the company he is
working for. x x x.

x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed upon employers
who fail to comply with the procedural due process requirements in terminating its employees. In Agabon v.
National Labor Relations Commission [citation omitted], this Court reverted back to the doctrine in Wenphil
Corporation v. National Labor Relations Commission [citation omitted] and held that where the dismissal is
| Page 10 of 17
due to a just or authorized cause, but without observance of the due process requirements, the dismissal may
be upheld but the employer must pay an indemnity to the employee. The sanctions to be imposed however,
must be stiffer than those imposed in Wenphil to achieve a result fair to both the employers and the
employees.

In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from Agabon, held
that since there is a clear-cut distinction between a dismissal due to a just cause and a dismissal due to an
authorized cause, the legal implications for employers who fail to comply with the notice requirements must
also be treated differently:

Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under Article 282 but the
employer failed to comply with the notice requirement, the sanction to be imposed upon him should be
tempered because the dismissal process was, in effect, initiated by an act imputable to the employee; and (2)
if the dismissal is based on an authorized cause under Article 283 but the employer failed to comply with the
notice requirement, the sanction should be stiffer because the dismissal process was initiated by the
employer's exercise of his management prerogative.55 [Emphasis supplied.]

Thus, in addition to separation pay, respondent is also entitled to an award of nominal damages. In conformity
with this Court's ruling in Culili v. Eastern Telecommunications Philippines, Inc. and Shimizu Phils.
Contractors, Inc. v. Callanta, both citing Jaka Food Processing Corporation v. Pacot,56 this Court fixed the
amount of nominal damages to P50,000.00.

With respect to petitioners' contention that the Management Contract executed between respondent and
petitioner Lucila has no binding effect on petitioner corporation for having been executed way before its
incorporation, this Court finds the same meritorious.

Section 19 of the Corporation Code expressly provides:

Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under this
Code commences to have corporate existence and juridical personality and is deemed incorporated from the
date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and
corporate under the name stated in the articles of incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner dissolved in accordance with law. [Emphasis
supplied.]

Logically, there is no corporation to speak of prior to an entity's incorporation. And no contract entered into
before incorporation can bind the corporation.

As can be gleaned from the records, the Management Contract dated 16 January 1994 was executed
between respondent and petitioner Lucila months before petitioner corporation's incorporation on 15 August
1994. Similarly, it was done when petitioner Lucila was still the President of Marc Marketing, Inc. Undeniably,
it cannot have any binding and legal effect on petitioner corporation. Also, there was no evidence presented
to prove that petitioner corporation adopted, ratified or confirmed the Management Contract. It is for the same
reason that petitioner corporation cannot be considered estopped from questioning its binding effect now that
respondent was invoking the same against it. In no way, then, can it be enforced against petitioner
corporation, much less, its provisions fixing respondent's compensation as General Manager to 30% of
petitioner corporation's net profit. Consequently, such percentage cannot be the basis for the computation of
respondent's separation pay. This finding, however, will not affect the undisputed fact that respondent was,
indeed, the General Manager of petitioner corporation from its incorporation up to the time of his dismissal.

Accordingly, this Court finds it necessary to still remand the present case to the Labor Arbiter to conduct
further proceedings for the sole purpose of determining the compensation that respondent was actually
| Page 11 of 17
receiving during the period that he was the General Manager of petitioner corporation, this, for the proper
computation of his separation pay.

As regards petitioner Lucila's solidary liability, this Court affirms the same.

As a rule, corporation has a personality separate and distinct from its officers, stockholders and members
such that corporate officers are not personally liable for their official acts unless it is shown that they have
exceeded their authority. However, this corporate veil can be pierced when the notion of the legal entity is
used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and
to confuse legitimate issues. Under the Labor Code, for instance, when a corporation violates a provision
declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of the
corporation.57

Based on the prevailing circumstances in this case, petitioner Lucila, being the President of petitioner
corporation, acted in bad faith and with malice in effecting respondent's dismissal from employment. Although
petitioner corporation has a valid cause for dismissing respondent due to cessation of business operations,
however, the latter's dismissal therefrom was done abruptly by its President, petitioner Lucila. Respondent
was not given the required one-month prior written notice that petitioner corporation will already cease its
business operations. As can be gleaned from the records, respondent was dismissed outright by petitioner
Lucila on the same day that petitioner corporation decided to stop and cease its business operations. Worse,
respondent was not given separation pay considering that petitioner corporation's cessation of business was
not due to business losses or financial reverses.

WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7 March 2006,
respectively, of the Court of Appeals in CA-G.R. SP No. 76624 are hereby AFFIRMED with the
MODIFICATION finding respondent's dismissal from employment legal but without proper observance of due
process. Accordingly, petitioner corporation, jointly and solidarily liable with petitioner Lucila, is hereby
ordered to pay respondent the following; (1) separation pay equivalent to one month pay or at least one-half
month pay for every year of service, whichever is higher, to be computed from the commencement of
employment until termination; and (2) nominal damages in the amount of P50,000.00.

This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct further
proceedings for the sole purpose of determining the compensation that respondent was actually receiving
during the period that he was the General Manager of petitioner corporation for the proper computation of his
separation pay.

Costs against petitioners.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

| Page 12 of 17
 ARTURO D. BRION MARIA LOURDES P. A. SERENO
Associate Justice Associate Justice

BIENVENIDO L. REYES
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned
to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that
the conclusions in the above Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Court's Division.

RENATO C. CORONA
Chief Justice

Footnotes

1
Penned by Associate Justice Salvador J. Valdez, Jr. with Associate Justices Mariano C. Del Castillo (now a
member of this Court) and Magdangal M. De Leon, concurring. Rollo, pp. 34-52.

2
Penned by Commissioner Victoriano R. Calaycay with Presiding Commissioner Raul T. Aquino and
Commissioner Angelita A. Gacutan, concurring. Id. at 124-133.

3
Penned by Labor Arbiter Pablo C. Espiritu, Jr. Id. at 81-88.

4
Penned by Associate Justice Magdangal M. De Leon with Associate Justices Edgardo P. Cruz and Mariano
C. Del Castillo (now a Member of this Court), concurring. Id. at 54-55.

5
Articles of Incorporation of Marc II Marketing, Inc. Id. at 59.

6
As evidenced by its Certificate of Incorporation bearing S.E.C. Reg. No. AS094-007318. Id. at 58.

7
Id. at 56-57.

8
It was incorporated on 24 July 1984 as evidenced by its Certificate of Incorporation bearing S.E.C. Reg. No.
121722. CA rollo, p. 228.
| Page 13 of 17
9
Per Management Contract dated 16 January 1994. Rollo, pp. 56-57.

10
CA rollo, p. 239.

11
Id. at 235-242.

12
Id. at 183.

13
Id. at 177-190.

14
Per Secretary's Certificate. Rollo, p. 69.

15
Id.

16
Id. at 70.

17
NLRC Resolution dated 15 October 2002. CA rollo, p. 20.

18
Court of Appeals Decision dated 20 June 2005. Rollo, p. 39.

19
This is pursuant to Section 5.2 of Republic Act No. 8799, known as "Securities Regulation Code," which
was signed into law on 19 July 2000. It expressly provides that: "The Commission's jurisdiction over all cases
enumerated under section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches that shall exercise jurisdiction over the cases. The
Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final
resolution which should be resolved within one (1) year from the enactment of this Code. The Commission
shall retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until
finally disposed. [Emphasis supplied.]

20
Penned by Labor Arbiter Pablo C. Espiritu, Jr. CA rollo, pp. 191-192.

21
Id. at 193-194.

22
Labor Arbiter's Decision dated 1 October 2001. Rollo, pp. 87-88.

23
Id. at 132.

24
NLRC Resolution dated 15 October 2002. CA rollo, pp. 23-24.

25
Penned by Presiding Commissioner Victoriano R. Calaycay with Presiding Commissioner Raul T. Aquino
and Commissioner Angelita A. Gacutan, concurring. Id. at 27-28.

26
Rollo, pp. 51-52.

27
Per Court of Appeals Resolution dated 7 March 2006. Id. at 54-55.

28
Petition for Review. Id. at 10-11.

29
Article 217. Jurisdiction of the Labor Arbiters and the Commission. - (a) Except as otherwise provided under
this Code, the Labor Arbiters shall have original and exclusive jurisdiction to hear and decide, within thirty (30)
calendar days after the submission of the case by the parties for decision without extension, even in the

| Page 14 of 17
absence of stenographic notes, the following cases involving all workers, whether agricultural or
non-agricultural:

1. x x x.

2. Termination disputes; [Emphasis supplied.]

30
Easycall Communications Phils., Inc. v. King, 514 Phil. 296, 302 (2005).

31
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

(a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or
partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public
and/or of the stockholder, partners, members of associations or organizations registered with the Commission;

(b) 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, partnership or association of which
they are stockholders, members or associates, respectively; and between such corporation, partnership or
association and the state insofar as it concerns their individual franchise or right to exist as such entity; and

(c) Controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.

32
Matling Industrial and Commercial Corporation v. Coros, G.R. No. 157802, 13 October 2010, 633 SCRA 12,
21-22.

33
Nacpil v. International Broadcasting Corporation, 429 Phil. 410, 416 (2002); Union Motors Corporation v.
The National Labor Relations Commission, 373 Phil. 310, 319 (1999).

34
Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must
formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be
provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person,
except that no one shall act as president and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the
by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a
majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a
quorum for the transaction of corporate business, and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the members of the board.

| Page 15 of 17
Directors or trustees cannot attend or vote by proxy at board meetings.

35
Easycall Communications Phils., Inc. v. King, supra note 30 at 302.

36
Matling Industrial and Commercial Corporation v. Coros, supra note 32 at 26-27.

37
ARTICLE IV

OFFICERS

Section 1. Election/Appointment - Immediately after their election, the Board of Directors shall formally
organize by electing the Chairman, the President, one or more Vice-President, the Treasurer, and the
Secretary, at said meeting.

The Board may, from time to time, appoint such other officers as it may determine to be necessary or proper.

Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as
President and Treasurer or Secretary at the same time.

38
CA rollo, pp. 183-186.

39
Id.

40
Matling Industrial and Commercial Corporation v. Coros, supra note 32 at 27.

41
Id. at 27.

42
Id.

43
Rollo, pp. 48-49.

Nacpil v. International Broadcasting Corporation, supra note 33 at 416; Union Motors Corporation v. The
44

National Labor Relations Commission, supra note 33 at 319.

45
Real v. Sangu Philippines, Inc. and/or Kiichi Abe, G.R. No. 168757, 19 January 2011.

46
Eastern Overseas Employment Center, Inc. v. Bea, 512 Phil. 749, 759 (2005).

47
Industrial Timber Corporation v. Ababon, 515 Phil. 805, 819 (2006).

48
Id. at 818.

49
Id. at 819. See also Alabang Country Club, Inc. v. National Labor Relations Commission, 503 Phil. 937,
952-953 (2005).

50
G.R. No. 117473, 15 April 1997, 271 SCRA 247.
| Page 16 of 17
51
Id. at 254.

52
G.R. No. 165381, 9 February 2011.

53
Id.

54
Shimizu Phils. Contractors, Inc. v. Callanta, G.R. No. 165923, 29 September 2010, 631 SCRA 529,
542-543.

55
Culili v. Eastern Telecommunications Philippines, Inc., supra note 53.

56
494 Phil. 114, 122-123 (2005).
57
Reahs Corporation v. National Labor Relations Commission, supra note 51 at 255

| Page 17 of 17
CAGAYAN FISHING DEVELOPMENT CO., Inc., plaintiff-appellant, vs. TEODORO
SANDIKO, defendant-appellee.

1937-12-23 | G.R. No. 43350

DECISION

LAUREL, J:

This is an appeal from a judgment of the Court of First Instance of Manila absolving the defendant from
the plaintiff's complaint.

Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao, town of
Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 of the land records of
Cagayan, a copy of which is in evidence as Exhibit 1. To guarantee the payment of a loan in the sum of
P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National Bank a first
mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the same bank
was in April of 1930 executed by Tabora over the same lands to guarantee the payment of another loan
amounting to P7,000. A third mortgage on the same lands was executed on April 16, 1930 in favor of
Severina Buzon to whom Tabora was indebted in the sum of P2,900. These mortgages were registered
and annotations thereof appear at the back of transfer certificate of title No. 217.

On May 31, 1930, Tabora executed a public document entitled

"Escritura de Traspaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land
owned by him were sold to the plaintiff company, said to be under process of incorporation, in
consideration of one peso (P1) subject to the mortgages in favor of the Philippine National Bank and
Severina Buzon and, to the condition that the certificate of title to said lands shall not be transferred to
the name of the plaintiff company until the latter has fully and completely paid Tabora's indebtedness to
the Philippine National Bank.

The plaintiff company filed its articles of incorporation with the Bureau of Commerce and Industry on
October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of directors of the said
company adopted a resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four parcels
of land in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were thereafter made and
executed. Exhibit B is a deed of sale executed before a notary public by the terms of which the plaintiff
sold, ceded and transferred to the defendant all its rights, titles and interest in and to the four parcels of
land described in transfer certificate of title No. 217 for P25,300; and the defendant in turn obligated
himself to shoulder the three mortgages hereinbefore referred to. Exhibit C is a promissory note for
P25,300 drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof.
Exhibit D is a deed of mortgage executed before a notary public in accordance with which the four
parcels of land were given as security for the payment of the promissory note, Exhibit C. All these three
instruments were dated February 15, 1932.

The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January 25, 1934,
brought this action in the Court of First Instance of Manila praying that judgment be rendered against the
defendant for the sum of P25,300, with interest at the legal rate from the date of the filing of the
complaint, and the costs of the suit. After trial, the court below, on December 18, 1934, rendered
judgment absolving the defendant, with costs against the plaintiff. Plaintiff presented a motion for new
trial on January 14, 1935, which motion was denied by the trial court on January 19 of the same year.
| Page 1 of 3
After due exception and notice, plaintiff has appealed to this court and makes an assignment of various
errors.

In dismissing the complaint against the defendant, the court below reached the conclusion that Exhibit B
is invalid because of vice in consent and repugnancy to law. While we do not agree with this conclusion,
we have however voted to affirm the judgment appealed from for reasons which we shall presently state.

The transfer made by Tabora to the Cagayan Fishing Development Co., Inc., plaintiff herein, was
effected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was effected later on
October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five months before the
incorporation of the company. Unquestionably, a duly organized corporation has the power to purchase
and hold such real property as the purposes for which such corporation was formed may permit and for
this purpose may enter into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14,
Act No. 1459). But before a corporation may be said to be lawfully organized, many things have to be
done. Among other things, the law requires the filing of articles of incorporation (secs. 6 et seq., Act No.
1459). Although there is a presumption that all the requirements of law have been complied with (sec.
334, par. 31, Code of Civil Procedure), in the case before us it can not be denied that the plaintiff was
not yet incorporated when it entered into the contract of sale, Exhibit A. The contract itself referred to the
plaintiff as "una sociedad en vias de incorporacion." It was not even a de facto corporation at the time.
Not being in legal existence then, it did not possess juridical capacity to enter into the contract.

"Corporations are creatures of the law, and can only come into existence in the manner prescribed by
law. As has already been stated, general laws authorizing the formation of corporations are general
offers to any persons who may bring themselves within their provisions; and if conditions precedent are
prescribed in the statute, or certain acts are required to be done, they are terms of the offer, and must be
complied with substantially before legal corporate existence can be acquired." (14 C. J., sec. 111, p.
118.)

"That a corporation should have a full and complete organization and existence as an entity before it can
enter into any kind of a contract or transact any business, would seem to be self evident. . . . A
corporation, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it
into being have any power to bind it by contract, unless so authorized by the charter. Until organized as
authorized by the charter there is not a corporation, nor does it possess franchises or faculties for it or
others to exercise, until it acquires a complete existence." (Gent vs. Manufacturers and Merchants'
Mutual Insurance Company, 107 Ill., 652, 658.)

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not only between Manuel
Tabora and a non-existent corporation but between Manuel Tabora as owner of four parcels of land on
the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporation on
the other hand. For reasons that are self-evident, these promoters could not have acted as agents for a
projected corporation since that which had no legal existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not
saying that under no circumstances may the acts of promoters of a corporation be ratified by the
corporation if and when subsequently organized. There are, of course, exceptions (Fletcher Cyc. of
Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts and
circumstances of the present case we decline to extend the doctrine of ratification which would result in
the commission of injustice or fraud to the candid and unwary. (Massachusetts rule, Abbott vs. Hapgood,
150 Mass., 248; 22 N. E., 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English cases; Koppel
vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke Envelope Co. vs. U. S. Envelope
Co., 182 Mass., 171; 65 N. E., 54.) It should be observed that Manuel Tabora was the registered owner
of the four parcels of land, which he succeeded in mortgaging to the Philippine National Bank so that he
| Page 2 of 3
might have the necessary funds with which to convert and develop them into fishery. He appeared to
have met with financial reverses. He formed a corporation composed of himself, his wife, and a few
others. From the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital
stock subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife, Rufina Q. de
Tabora; and out of the P43,300, amount paid on subscriptions, P42,100 is made to appear as paid by
Tabora and P200 by his wife. Both Tabora and his wife were directors and the latter was treasurer as
well. In fact, to this day, the lands remain inscribed in Tabora's name. The defendant always regarded
Tabora as the owner of the lands. He dealt with Tabora directly. Jose Ventura, president of the plaintiff
corporation, intervened only to sign the contract, Exhibit B, in behalf of the plaintiff. Even the Philippine
National Bank, mortgagee of the four parcels of land, always treated Tabora as the owner of the same.
(See Exhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought against Tabora in the Court
of First Instance of Manila and in both cases a writ of attachment against the four parcels of land was
issued. The Philippine National Bank threatened to foreclose its mortgages. Tabora approached the
defendant Sandiko and succeeded in making him sign Exhibits B, C, and D and in making him, among
other things, assume the payment of Tabora's indebtedness to the Philippine National Bank. The
promissory note, Exhibit C, was made payable to the plaintiff company so that it may not be attached by
Tabora's creditors, two of whom had obtained writs of attachment against the four parcels of land.

If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows
that it did not possess any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko.

Some of the members of this court are also of the opinion that the transfer from Manuel Tabora to the
Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A, was subject to a
condition precedent (condicion suspensiva), namely, the payment of a mortgage debt of the said Tabora
to the Philippine National Bank, and that this condition not having been complied with by the Cagayan
Fishing Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise & Co. vs.
Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at the conclusion that the
transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc. was null because at the
time it was effected the corporation was non-existent, we deem it unnecessary to discuss this point.

The decision of the lower court is accordingly affirmed, with costs against the appellant. So ordered.

Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

| Page 3 of 3
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioner, vs. THE HONORABLE
COURT OF APPEALS and ALBERTO V. ARELLANO, respondents.

1987-06-30 | G.R. No. L-48627

DECISION

CRUZ, J.:

We gave limited due course to this petition on the question of the solidary liability of the petitioners with
their co-defendants in the lower court 1 because of the challenge to the following paragraph in the
dispositive portion of the decision of the respondent court: **

"1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of P50,000.00 for
the preparation of the project study and his technical services that led to the organization of the
defendant corporation, plus P10,000.00 attorney's fees;" 2

The petitioners claim that this order has no support in fact and law because they had no contract
whatsoever with the private respondent regarding the above-mentioned services. Their position is that as
mere subsequent investors in the corporation that was later created, they should not be held solidarily
liable with the Filipinas Orient Airways, a separate juridical entity, and with Barretto and Garcia, their
co-defendants in the lower court, *** who were the ones who requested the said services from the
private respondent. 3

We are not concerned here with the petitioners' co-defendants, who have not appealed the decision of
the respondent court and may, for this reason, be presumed to have accepted the same. For purposes
of resolving this case before us, it is not necessary to determine whether it is the promoters of the
proposed corporation, or the corporation itself after its organization, that shall be responsible for the
expenses incurred in connection with such organization.

The only question we have to decide now is whether or not the petitioners themselves are also and
personally liable for such expenses and, if so, to what extent.

The reasons for the said order are given by the respondent court in its decision in this wise:

"As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the preparation of
the project study and the pre-organizational services in the amount of P50,000.00, not only the
defendant corporation but the other defendants including defendants Caram should he jointly and
severally liable for this amount. As we above related it was upon the request of defendants Barretto and
Garcia that plaintiff handled the preparation of the project study which project study was presented to
defendant Caram so the latter was convinced to invest in the proposed airlines. The project study was
revised for purposes of presentation to financiers and the banks. It was on the basis of this study that
defendant corporation was actually organized and rendered operational. Defendants Garcia and Caram,
and Barretto became members of the Board and/or officers of defendant corporation. Thus, not only the
defendant corporation but all the other defendants who were involved in the preparatory stages of the
incorporation, who caused the preparation and/or benefited from the project study and the technical
services of plaintiff must be liable." 4

It would appear from the above justification that the petitioners were not really involved in the initial steps
that finally led to the incorporation of the Filipinas Orient Airways. Elsewhere in the decision, Barretto
| Page 1 of 3
was described as "the moving spirit." The finding of the respondent court is that the project study was
undertaken by the private respondent at the request of Barretto and Garcia who, upon its completion,
presented it to the petitioners to induce them to invest in the proposed airline. The study could have
been presented to other prospective investors. At any rate, the airline was eventually organized on the
basis of the project study with the petitioners as major stockholders and, together with Barretto and
Garcia, as principal officers.

The following portion of the decision in question is also worth considering:

". . .. Since defendant Barretto was the moving spirit in the pre-organization work of defendant
corporation based on his experience and expertise, hence he was logically compensated in the amount
of P200,000.00 shares of stock not as industrial partner but more for is technical services that brought to
fruition the defendant corporation. By the same token, We find no reason why the plaintiff should not be
similarly compensated not only for having actively participated in the preparation of the project study for
several months and its subsequent revision but also in his having been involved in the pre-organization
of the defendant corporation, in the preparation of the franchise, in inviting the interest of the financiers
and in the training and screening of personnel. We agree that for these special services of the plaintiff
the amount of P50,000.00 as compensation is reasonable." 5

The above finding bolsters the conclusion that the petitioners were not involved in the initial stages of the
organization of the airline, which were being directed by Barretto as the main promoter. It was he who
was putting all the pieces together, so to speak. The petitioners were merely among the financiers
whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to
invest in the proposed airline.

Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did
not have a separate juridical personality, to justify making the petitioners, as principal stockholders
thereof, responsible for its obligations. As a bona fide corporation, the Filipinas Orient Airways should
alone be liable for its corporate acts as duly authorized by its officers and directors.

In the light of these circumstances, we hold that the petitioners cannot be held personally liable for the
compensation claimed by the private respondent for the services performed by him in the organization of
the corporation. To repeat, the petitioners did not contract such services. It was only the results of such
services that Barretto and Garcia presented to them and which persuaded them to invest in the
proposed airline. The most that can be said is that they benefited from such services, but that surely is
no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the
corporation, including those who came in later, and regardless of the amount of their shareholdings,
would be equally and personally liable also with the petitioners for the claims of the private respondent.

The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our impression is
that it is opposed to the imposition of solidary responsibility upon the Carams but seems to be willing, in
a vague, unexpressed offer of compromise, to accept joint liability. While it is true that it does here and
there disclaim total liability, the thrust of the petition seems to be against the imposition of solidary
liability only rather than against any liability at all, which is what it should have categorically argued.

Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly and severally,
under the first paragraph of the dispositive portion of the challenged decision. So holding, we find it
unnecessary to examine at this time the rules on solidary obligations, which the parties ---- needlessly,
as it turns out ---- have belabored unto death.

WHEREFORE, the petition is granted. The petitioners are declared not liable under the challenged
| Page 2 of 3
decision, which is hereby modified accordingly. It is so ordered.

Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and Sarmiento, JJ., concur.

Gancayco, J., no part. see page 1.

---------------------
Footnotes

1. Rollo, p. 66.
** Gancayco, J., ponente, with Relova and Sison, JJ.
2. Decision, p. 16.
*** Judge Pedro C. Navarro, presiding.
3. Rollo, pp. 10, 97.
4. Decision, pp. 14-15.
5. Ibid., p. 11.

| Page 3 of 3
PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE HON.
COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

1989-07-28 | G.R. No. 84197

THIRD DIVISION

DECISION

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No.
66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The
plaintiff's complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was
dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

"WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring him to pay plaintiff the
amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly; plus 15% of
the amount awarded to plaintiff as attorney's fees from July 2, 1966, until full payment is made; plus
P70,000.00 moral and exemplary damages.

"It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses
aside from P151,000.00, making a total of P184,878.74. Defendant Jacob S. Lim is further required to
pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the amount
of P184,878.74 with interest from the filing of the cross-complaints until the amount is fully paid; plus
moral and exemplary damages in the amount of P184,878.84 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary damages in the amount of
P50,000.00 for each of the two Cervanteses.

"Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another
P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

"WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco,
the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees and the
amount of P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.

"Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as
attorney's fees and costs.

"No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. The
fact that the properties of the Bormaheco and the Cervanteses were attached and that they were
| Page 1 of 11
 required to file a counterbond in order to dissolve the attachment, is not an act of bad faith. When a
man tries to protect his rights, he should not be saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for in the Rules of Court, and it was the court that
ordered it, in the exercise of its discretion.

"No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it only
secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would be liable for
damages in performing an act which is clearly within its power and which is the reason for its being,
then nobody would engage in the insurance business. No further claim or counter-claim for or against
anybody is declared by this Court." (Rollo ---- G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator
of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales
contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary
spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with
Registry No. PIC-718, arrived in Manila on June 7, 1965 while the other aircraft, arrived in Manila on July 18,
1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as
surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim,
for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto
Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds
used in the purchase of the above aircrafts and spare parts. The funds were supposed to be their
contributions to a new corporation proposed by Lim to expand his airline business. They executed two (2)
separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the
other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated
that the indemnitors principally agree and bind themselves jointly and severally to indemnify and hold and
save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges
and expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety
upon the bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums
and amounts of money which it or its representatives should or may pay or cause to be paid or become liable
to pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed
of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that
Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered with the
Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to
the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety.
Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of
Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners
of the aircrafts.

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary
attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
| Page 2 of 11
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they
were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being
exposed to litigation and for recovery of the sums of money they advanced to Lim for the purchase of the
aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's
complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against
all the defendants was dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL

OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED THE
PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT
CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE
RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo ---- G.R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

"We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of
liability under the surety bond in favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiff's instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to institute the instant
action as it does not stand to be benefited or injured by the judgment.

"Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from
defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present any
evidence that it is the attorney-in-fact of the reinsurance company, authorized to institute an action for
and in behalf of the latter. To qualify a person to be a real party in interest in whose name an action
must be prosecuted, he must appear to be the present real owner of the right sought to be enforced
(Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155.). It has been held that the real party
in interest is the party who would be benefited or injured by the judgment or the party entitled to the
avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is
meant a present substantial interest as distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank,
52 N.E. 2d 1600, 385 III, 414; Flowers v. Germana, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d
667, 669, quoting 47 C.V. 35).

"Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in interest as
it has already been paid by the reinsurer the sum of P295,000.00 ---- the bulk of defendants' alleged
obligation to Pioneer.

| Page 3 of 11
 "In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, the
former was able to foreclose extra-judicially one of the subject airplanes and its spare engine, realizing
the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the sum of P37,050.00,
to the proceeds of the reinsurance amounting to P295,000.00, it is patent that plaintiff has been
overpaid in the amount of P33,383.72 considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess of
P298,666.28 would be tantamount to unjust enrichment as it has already been paid by the reinsurance
company of the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's
liability to JDA. Well settled is the rule that no person should unjustly enrich himself at the expense of
another (Article 22, New Civil Code)." (Rollo-84197, pp. 24-25).

The petitioner contends that ---- (1) it is at a loss where respondent court based its finding that petitioner was
paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties herein
both in their answers in the court below and in their respective briefs with respondent court; (Rollo, p. 11) (2)
even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had any interest in
the matter since the reinsurance is strictly between the petitioner and the re-insurer pursuant to section 91 of
the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to recover from
respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable considering
that whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the
parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

"1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to JDA
as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim against
defendants, considering the amount it has realized from the sale of the mortgaged properties? (Record
on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

"It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor of JDA,
collected the proceeds of such reinsurance in the sum of P295,000, and paid with the said amount the bulk of
its alleged liability to JDA under the said surety bond, it is plain that on this score it no longer has any right to
collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for the amount
paid to it by the reinsurers, notwithstanding that the cause of action pertains to the latter, Pioneer says: 'The
reinsurers opted instead that the Pioneer Insurance & Surety Corporation shall pursue alone the case.' '. . . .
Pioneer Insurance & Surety Corporation is representing the reinsurers to recover the amount.' In other words,

| Page 4 of 11
insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as
attorney-in-fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has no right to
institute and maintain in its own name an action for the benefit of the reinsurers. It is well-settled that an action
brought by an attorney-in-fact in his own name instead of that of the principal will not prosper, and this is so
even where the name of the principal is disclosed in the complaint.

"'Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in the name of
the real party in interest.' This provision is mandatory. The real party in interest is the party who would be
benefited or injured by the judgment or is the party entitled to the avails of the suit.

"'This Court has held in various cases that an attorney-in-fact is not a real party in interest, that there is no law
permitting an action to be brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484;
Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinas Industrial Corporation v. San Diego G.R. No.
L-22347, 1968, 23 SCRA 706, 710-714.'"

"The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from the
reinsurers, the uninsured portion of what it paid to JDA is the difference between the two amounts, or
P3,666.28. This is the amount for which Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount realized from the sale of the mortgaged chattels
are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is
still overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants."' (Record on Appeal,
pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this
admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to the
petitioner. Therefore, the petitioner's argument that the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as insured and the reinsuring company pursuant to Section
91 (should be Section 98) of the Insurance Code has no basis.

"In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in
similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La.,
46 F 2nd 925).

"The rules of practice in actions on original insurance policies are in general applicable to actions or contracts
of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330, 126 GA. 380, 7 Ann. Con.
1134)".

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

| Page 5 of 11
 "Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by the insurance company does not fully cover
the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person
causing the loss or injury."

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil.
1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of
Appeals (154 SCRA 650 [1987]):.

"Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided
in said article that the insurer is deemed subrogated to the rights of the insured against the wrongdoer
and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one
entitled to recover the deficiency. Evidently, under this legal provision, the real party in interest with
regard to the portion of the indemnity paid is the insurer and not the insured."

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as
against the respondents for the reason that the petitioner was not the real party in interest in the complaint
and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been
dismissed on the premise that the evidence on record shows that it is entitled to recover from the counter
indemnitors. It does not, however, cite any grounds except its allegation that respondent "Maglana's defense
and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its
finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:

"Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective after
the execution of the chattel mortgage.

"Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

"Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue the
bond provided that the same would be mortgaged to it, but this was not possible because the planes
were still in Japan and could not be mortgaged here in the Philippines. As soon as the aircrafts were
brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover the bond, and this
indemnity agreement would be cancelled.

"The following is averred under oath by Pioneer in the original complaint:

| Page 6 of 11
"'The various conflicting claims over the mortgaged properties have impaired and rendered insufficient
the security under the chattel mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.'"

"This is judicial admission and aside from the chattel mortgage there is no other security for the claim
sought to be enforced by this action, which necessarily means that the indemnity agreement had
ceased to have any force and effect at the time this action was instituted. Sec 2, Rule 129, Revised
Rules of Court.

"Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and
spare parts, no longer has any further action against the defendants as indemnitors to recover any
unpaid balance of the price. The indemnity agreement was ipso jure extinguished upon the foreclosure
of the chattel mortgage. These defendants, as indemnitors, would be entitled to be subrogated to the
right of Pioneer should they make payments to the latter. Articles 2067 and 2080 of the New Civil Code
of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes
any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as
surety having made of the payments to JDA, the alternative remedies open to Pioneer were as
provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure
and the instant suit. Such being the case, as provided by the aforementioned provisions, Pioneer 'shall
have no further action against the purchaser to recover any unpaid balance and any agreement to the
contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L-24772, May 27, 1968, 23
SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is
not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as vendor,
having subrogated it in such rights. Nor may the application of the provision be validly opposed on the
ground that these defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et
al. v. Universal Motors Corporation, G.R. No. L-27862, Nov. 20, 1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged
these defendants from any liability as alleged indemnitors. The change of the maturity dates of the
obligations of Lim, or SAL, extinguished the original obligations thru novations, thus discharging the
indemnitors.

"'The principal hereof shall be paid in eight equal successive three months interval installments, the first
of which shall be due and payable 25 August 1965, the remainder of which . . . shall be due and
payable on the 26th day . . . of each succeeding three months and the last of which shall be due and
payable 26th May 1967.'"

| Page 7 of 11
"However, at the trial of this case, Pioneer produced a memorandum executed by SAL, or Lim and JDA,
modifying the maturity dates of the obligations, as follows:

"'The principal hereof shall be paid in eight equal successive three month interval installments the first
of which shall be due and payable 4 September 1965, the remainder of which . . . shall be due and
payable on the 4th day . . . of each succeeding months and the last of which shall be due and payable
4th June 1967.'"

"Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different
from that fixed in the aforesaid memorandum; the due date of the first installment appears as October
15, 1965, and those of the rest of the installments, the 15th of each succeeding three months, that of
the last installment being July 15, 1967.

"These restructuring of the obligations with regard to their maturity dates, effected twice, were done
without the knowledge, much less, would have it believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel, would have it believed that these defendants and defendant
Maglana knew of and consented to the modification of the obligations. But if that were so, there would
have been the corresponding documents in the form of a written notice to as well as written conformity
of these defendants, and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured by the indemnity agreement which
was thereby also extinguished. Applicable by analogy are the rulings of the Supreme Court in the case
of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon
David, 45 Phil. 532, 538.

"'Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the
debt has become due does not of itself constitute any extension of time referred to herein, (New Civil
Code).'"

"Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. Vl, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom
et al. (C.A.) 36 O.G. 1571.

"Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. Consequently,
Pioneer has no more cause of action to recover from these defendants, as supposed indemnitors what
it has paid to JDA. By virtue of an express stipulation in the surety bond, the failure of JDA to present
its claim to Pioneer within ten days from default of Lim or SAL on every installment, released Pioneer
from liability from the claim.

"Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity.

"'Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his
co-debtors if such payment is made after the obligation has prescribed or became illegal.'"

"These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety by

| Page 8 of 11
 reason of the filing of the instant case against them and the attachment and garnishment of their
properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants and
defendant Maglana." (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

"1. What legal rules govern the relationship among co-investors whose agreement was to do business
through the corporate vehicle but who failed to incorporate the entity in which they had chosen to invest? How
are the losses to be treated in situations where their contributions to the intended 'corporation' were invested
not through the corporate form? This Petition presents these fundamental questions which we believe were
resolved erroneously by the Court of Appeals ('CA')." (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto
partnership among them was created, and that as a consequence of such relationship all must share in the
losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore, questions the
appellate court's findings ordering him to reimburse certain amounts given by the respondents to the
petitioner as their contributions to the intended corporation, to wit:

"However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total amount of
P184,878.74 as correctly found by the trail court, with the interest from the filing of the cross-claims until the
amount is fully paid. Defendants Lim should pay one-half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant Maglana. It is established in the records that defendant Lim
had duly received the amount of P151,000.00 from defendants Bormaheco and Maglana representing the
latter's participation in the ownership of the subject airplanes and spare parts (Exhibit 58). In addition, the
cross-party plaintiffs incurred additional expenses, hence, the total sum of P184,878.74."

We first state the principles.

"While it has been held that as between themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed charter and the laws of the state relating
thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am.
S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on
business under the corporate name occupy a position of partners inter se (Lynch v. Perryman, 119 P. 229, 29
Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves together under articles to
purchase property to carry on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their rights as members of the
company to the property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co.,
84 A 268, 109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons associated themselves
as a corporation for the development of land for irrigation purposes, and each conveyed land to the
corporation, and two of them contracted to pay a third the difference in the proportionate value of the land
| Page 9 of 11
conveyed by him, and no stock was ever issued in the corporation, it was treated as a trustee for the
associates in an action between them for an accounting, and its capital stock was treated as partnership
assets, sold, and the proceeds distributed among them in proportion to the value of the property contributed
by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for ordinarily
persons cannot be made to assume the relation of partners, as between themselves, when their purpose is
that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S. Ct. 442, 116 U.S. 461, 472, 29
L.Ed. 688), and it should be implied only when necessary to do justice between the parties; thus, one who
takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business under the name of the pretended
corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution
(Ward v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders and other stockholders,
who were also directors, will not be implied in the absence of an agreement, so as to make the former liable
to contribute for payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23).
(Corpus Juris Secundum, Vol. 68, p. 464). (Emphasis supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during
the pre-trial despite notification. In his answer, the petitioner denied having received any amount from
respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court, however,
found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing the
participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes and
spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the
Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the respondents
despite his representations to them. This gives credence to the cross-claims of the respondents to the effect
that they were induced and lured by the petitioner to make contributions to a proposed corporation which was
never formed because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:

". . . that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his
airline business. Lim was to procure two DC-3's from Japan and secure the necessary certificates of public
convenience and necessity as well as the required permits for the operation thereof. Maglana sometime in
May 1965, gave Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim
acknowledged receipt thereof Cervantes, likewise, delivered his share of the undertaking. Lim in an
undertaking sometime on or about August 9, 1965, promised to incorporate his airline in accordance with their
agreement and proceeded to acquire the planes on his own account. Since then up to the filing of this answer,
Lim has refused, failed and still refuses to set up the corporation or return the money of Maglana."

(Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and
third party complaint:

"Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase two
airplanes and spare parts from Japan which the latter considered as their lawful contribution and participation
in the proposed corporation to be known as SAL. Arrangements and negotiations were undertaken by
defendant Lim. Down payments were advanced by defendants Bormaheco and the Cervanteses and
Constancio Maglana (Exh. E-1). Contrary to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the alleged chattel mortgage and surety bond agreement in
his personal capacity as the alleged proprietor of the SAL. The answering defendants learned for the first time
| Page 10 of 11
of this trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic)
allegedly executed by defendant Lim, thereby forcing them to file an adverse claim in the form of third party
claim. Notwithstanding repeated oral demands made by defendants Bormaheco and Cervanteses, to
defendant Lim, to surrender the possession of the two planes and their accessories and or return the amount
advanced by the former amounting to an aggregate sum of P178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply with them." (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of the
supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own and
not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.

Fernan, (C.J., Chairman), Bidin and Cortes, JJ., concur.

Feliciano, J., No part.

| Page 11 of 11
RIZAL LIGHT & ICE CO., INC., petitioner, vs. THE MUNICIPALITY OF MORONG,
RIZAL and the PUBLIC SERVICE COMMISSION, respondents.

1968-09-28 | G.R. No. L-20993

DECISION

ZALDIVAR, J.:

These two cases, being interrelated, are decided together.

Case G.R. No. L - 20993 is a petition of the Rizal Light & Ice Co. Inc. to review and set aside the orders
of respondent Public Service Commission 1 , dated August 20, 1962 and February 15, 1963, in PSC
Case No. 39715, cancelling and revoking the certificate of public convenience and necessity and
forfeiting the franchise of said petitioner. In the same petition, the petitioner prayed for the issuance of a
writ of preliminary injunction ex parte suspending the effectivity of said orders and/or enjoining
respondents Commission and/or Municipality of Morong, Rizal, from enforcing in any way the
cancellation and revocation of petitioner's franchise and certificate of public convenience during the
pendency of this appeal. By resolution of March 12, 1963, this Court denied the petition for injunction, for
lack of merit.

Case G.R. No. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to review and set aside the
decision of the Commission dated March 13, 1963 in PSC Case No. 62-5143 granting a certificate of
public convenience and necessity to respondent Morong Electric Co., Inc. 2 to operate an electric light,
heat and power service in the municipality of Morong, Rizal. In the petition Rizal Light & Ice Co., Inc. also
prayed for the issuance of a writ of preliminary injunction ex parte suspending the effectivity of said
decision. Per resolution of this Court, dated May 6, 1963, said petition for injunction was denied.

The facts, as they appear in the records of both cases, are as follows:

Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business address at Morong, Rizal.
On August 15, 1949, it was granted by the Commission a certificate of public convenience and necessity
for the installation, operation and maintenance of an electric light, heat and power service in the
municipality of Morong, Rizal.

In an order dated December 19, 1956, the Commission required the petitioner to appear before it on
February 18, 1957 to show cause why it should not be penalized for violation of the conditions of its
certificate of public convenience and the regulations of the Commission, and for failure to comply with
the directives to raise its service voltage and maintain them within the limits prescribed in the Revised
Order No. 1 of the Commission, and to acquire and install a kilowatt meter to indicate the load in
kilowatts at any particular time of the generating unit. 3

For failure of the petitioner to appear at the hearing on February 18, 1957, the Commission ordered the
cancellation and revocation of petitioner's certificate of public convenience and necessity and the
forfeiture of its franchise. Petitioner moved for reconsideration of said order on the ground that its
manager, Juan D. Francisco, was not aware of said hearing. Respondent municipality opposed the
motion, alleging that petitioner has not rendered efficient and satisfactory service and has not complied
with the requirements of the Commission for the improvement of its service. The motion was set for
hearing and Mr. Pedro S. Talavera, Chief, Industrial Division of the Commission, was authorized to
conduct the hearing for the reception of the evidence of the parties. 4
| Page 1 of 14
Finding that the failure of the petitioner to appear at the hearing set for February 18, 1957 - the sole
basis of the revocation of petitioner's certificate - was really due to the illness of its manager, Juan D.
Francisco, the Commission set aside its order of revocation. Respondent municipality moved for
reconsideration of this order of reinstatement of the certificate, but the motion was denied.

In a petition dated June 25, 1958, filed in the same case, respondent municipality formally asked the
Commission to revoke petitioner's certificate of public convenience and to forfeit its franchise on the
ground, among other things, that it failed to comply with the conditions of said certificate and franchise.
Said petition was set for hearing jointly with the order to show cause. The hearings had been postponed
several times.

Meanwhile, inspections had been made of petitioner's electric plant and installations by the engineers of
the Commission, as follows: April 15, 1958 by Engineer Antonio M. Alli; September 18, 1959, July 12-13,
1960, and June 21-24, 1961, by Engineer Meliton S. Martinez. The inspection on June 21-24, 1961 was
made upon the request of the petitioner who manifested during the hearing on December 15, 1960 that
improvements have been made on its service since the inspection on July 12-13, 1960, and that, on the
basis of the inspection report to be submitted, it would agree to the submission of the case for decision
without further hearing.

When the case was called for hearing on July 5, 1961, petitioner failed to appear. Respondent
municipality was then allowed to present its documentary evidence, and thereafter the case was
submitted for decision.

On July 7, 1961, petitioner filed a motion to reopen the case upon the ground that it had not been
furnished with a copy of the report of the June 21-24, 1961 inspection for it to reply as previously agreed.
In an order dated August 25, 1961, petitioner was granted a period of ten (10) days within which to
submit its written reply to said inspection report, on condition that should it fail to do so within the said
period the case would be considered submitted for decision. Petitioner failed to file the reply. In
consonance with the order of August 25, 1961, therefore, the Commission proceeded to decide the case.
On July 29, 1962 petitioner's electric plant was burned.

In its decision, dated August 20, 1962, the Commission, on the basis of the inspection reports of its
aforenamed engineers, found that the petitioner had failed to comply with the directives contained in its
letters dated May 21, 1954 and September 4, 1954, and had violated the conditions of its certificate of
public convenience as well as the rules and regulations of the Commission. The Commission concluded
that the petitioner "cannot render the efficient, adequate and satisfactory electric service required by its
certificate and that it is against public interest to allow it to continue its operation." Accordingly, it ordered
the cancellation and revocation of petitioner's certificate of public convenience and the forfeiture of its
franchise.

On September 18, 1962, petitioner moved for reconsideration of the decision, alleging that before its
electric plant was burned on July 29, 1962, its service was greatly improved and that it had still existing
investment which the Commission should protect. But eight days before said motion for reconsideration
was filed, or on September 10, 1962, Morong Electric, having been granted a municipal franchise on
May 6, 1962 by respondent municipality to install, operate and maintain an electric heat, light and power
service in said municipality - approved by the Provincial Board of Rizal on August 31, 1962 - filed with
the Commission an application for a certificate of public convenience and necessity for said service. Said
application was entitled "Morong Electric Co., Inc., Applicant", and docketed as Case No. 62-5143.

Petitioner opposed in writing the application of Morong Electric, alleging among other things, that it is a
holder of a certificate of public convenience to operate an electric light, heat and power service in the
| Page 2 of 14
same municipality of Morong, Rizal, and that the approval of said application would not promote public
convenience, but would only cause ruinous and wasteful competition. Although the opposition is dated
October 6, 1962, it was actually received by the Commission on November 8, 1962, or twenty four days
after the order of general default was issued in open court when the application was first called for
hearing on October 15, 1962. On November 12, 1962, however, the petitioner filed a motion to lift said
order of default. But before said motion could be resolved, petitioner filed another motion dated, January
4, 1963, this time asking for the dismissal of the application upon the ground that applicant Morong
Electric had no legal personality when it filed its application on September 10, 1962, because its
certificate of incorporation was issued by the Securities and Exchange Commission only on October 17,
1962. This motion to dismiss was denied by the Commission in a formal order issued on January 17,
1963 on the premise that applicant Morong Electric was a de facto corporation. Consequently, the case
was heard on the merits and both parties presented their respective evidence. On the basis of the
evidence adduced, the Commission, in its decision dated March 13, 1963, found that there was an
absence of electric service in the municipality of Morong and that applicant Morong Electric, a
Filipino-owned corporation duly organized and existing under the laws of the Philippines, has the
financial capacity to maintain said service. These circumstances, considered together with the denial of
the motion for reconsideration filed by petitioner in Case No. 39715 on February 15, 1963, such that as
far as the Commission was concerned the certificate of the petitioner was already declared revoked and
cancelled, the Commission approved the application of Morong Electric and ordered the issuance in its
favor of the corresponding certificate of public convenience and necessity.

On March 8, 1963, petitioner filed with this Court a petition to review the decision in Case No. 39715
(now G.R. No. L-20993). Then on April 26, 1963, petitioner also filed a petition to review the decision in
Case No. 62-5143 (now G.R. No. L-21221).

In questioning the decision of the Commission in Case No. 39715, petitioner contends: (1) that the
Commission acted without or in excess of its jurisdiction when it delegated the hearing of the case and
the reception of evidence to Mr. Pedro S. Talavera who is not allowed by law to hear the same; (2) that
the cancellation of petitioner's certificate of public convenience was unwarranted because no sufficient
evidence was adduced against the petitioner and that petitioner was not able to present evidence in its
defense; (3) that the Commission failed to give protection to petitioner's investment; and (4) that the
Commission erred in imposing the extreme penalty of revocation of the certificate.

In questioning the decision in Case No. 62-5143, petitioner contends: (1) that the Commission erred in
denying petitioner's motion to dismiss and proceeding with the hearing of the application of the Morong
Electric; (2) that the Commission erred in granting Morong Electric a certificate of public convenience
and necessity since it is not financially capable to render the service; (3) that the Commission erred
when it made findings of facts that are not supported by the evidence adduced by the parties at the trial;
and (4) that the Commission erred when it did not give to petitioner protection to its investment a
reiteration of the third assignment of error in the other case.

We shall now discuss the appeals in these two cases separately.

G.R. No. L-20993

1. Under the first assignment of error, petitioner contends that while Mr. Pedro S. Talavera, who
conducted the hearings of the case below, is a division chief, he is not a lawyer. As such, under Section
32 of Commonwealth Act No. 146, as amended, the Commission should not have delegated to him the
authority to conduct the hearings for the reception of evidence of the parties.

We find that, really, Mr. Talavera is not a lawyer. 5 Under the second paragraph of Section 32 of
| Page 3 of 14
Commonwealth Act No. 146, as amended, 6 the Commission can only authorize a division chief to hear
and investigate a case filed before it if he is a lawyer. However, the petitioner is raising this question for
the first time in this appeal. The record discloses that petitioner never made any objection to the authority
of Mr. Talavera to hear the case and to receive the evidence of the parties. On the contrary, we find that
petitioner had appeared and submitted evidence of the hearings conducted by Mr. Talavera, particularly
the hearings relative to the motion for reconsideration of the order of February 18, 1957 cancelling and
revoking its certificate. We also find that, through counsel, petitioner had entered into agreements with
Mr. Talavera, as hearing officer, and the counsel for respondent municipality, regarding procedure in
order to abbreviate the proceedings. 7 It is only after the decision in the case turned out to be adverse to
it that petitioner questioned the proceedings held before Mr. Talavera.

This court in several cases has ruled that objection to the delegation of authority to hear a case filed
before the Commission and to receive the evidence in connection therewith is a procedural, not a
jurisdictional point, and is waived by failure to interpose timely the objection and the case had been
decided by the Commission. 8 Since petitioner has never raised any objection to the authority of Mr.
Talavera before the Commission, it should be deemed to have waived such procedural defect, and
consonant with the precedents on the matter, petitioner's claim that the Commission acted without or in
excess of jurisdiction in so authorizing Mr. Talavera should be dismissed. 9

2. Anent the second assigned error, the gist of petitioner's contention is that the evidence - consisting of
inspection reports - upon which the Commission based its decision is insufficient and untrustworthy in
that (1) the authors of said reports had not been put to test by way of cross-examination; (2) the reports
constitute only one side of the picture as petitioner was not able to present evidence in its defense; (3)
judicial notice was not taken of the testimony of Mr. Harry B. Bernardino, former mayor of respondent
municipality, in PSC Case No. 62-5143 (the other case, G.R. No. L-21221) to the effect that the
petitioner had improved its service before its electric power plant was burned on July 29, 1962 - which
testimony contradicts the inspection reports; and (4) the Commission acted both as prosecutor and judge
- passing judgment over the very same evidence presented by it as prosecutor - a situation "not
conducive to the arrival at just and equitable decisions."

Settled is the rule that in reviewing the decision of the Public Service Commission this Court is not
required to examine the proof de novo and determine for itself whether or not the preponderance of
evidence really justifies the decision. The only function of this Court is to determine whether or not there
is evidence before the Commission upon which its decision might reasonably be based. This Court will
not substitute its discretion for that of the Commission on questions of fact and will not interfere in the
latter's decision unless it clearly appears that there is no evidence to support it. 9 Inasmuch as the only
function of this Court in reviewing the decision of the Commission is to determine whether there is
sufficient evidence before the Commission upon which its decision can reasonably be based, as it is not
required to examine the proof de novo, the evidence that should be made the basis of this Court's
determination should be only those presented in this case before the Commission. What then was the
evidence presented before the Commission and made the basis of its decision subject of the present
appeal? As stated earlier, the Commission based its decision on the inspection reports submitted by its
engineers who conducted the inspection of petitioner's electric service upon orders of the Commission.
10 Said inspection reports specify in detail the deficiencies incurred, and violations committed, by the
petitioner resulting in the inadequacy of its service. We consider that said reports are sufficient to serve
reasonably as bases of the decision in question. It should be emphasized, in this connection that said
reports, are not mere documentary proofs presented for the consideration of the Commission, but are
the results of the Commission's own observations and investigations which it can rightfully take into
consideration, 11 particularly in this case where the petitioner had not presented any evidence in its
defense, and speaking of petitioner's failure to present evidence, as well as its failure to cross-examine
the authors of the inspection reports, petitioner should not complain because it had waived not only its
| Page 4 of 14
right to cross-examine but also its right to present evidence. Quoted hereunder are the pertinent portions
of the transcripts of the proceedings where the petitioner, through counsel, manifested in clear language
said waiver and its decision to abide by the last inspection report of Engineer Martinez:

Proceedings of December 15, 1960

"COMMISSION:

"It appears at the last hearing of this case on September 23, 1960, that an engineer of this Commission
has been ordered to make an inspection of all electric services in the province of Rizal and on that date
the engineer of this Commission is still undertaking that inspection and it appears that the said engineer
had actually made that inspection on July 12 and 13, 1960. The engineer has submitted his report on
November 18, 1960 which is attached to the records of this case.

"ATTY. LUQUE (Counsel for Petitioner):

". . . (W)e respectfully state that while the report is, as I see it attached to the records, clear and very
thorough, it was made sometime July of this year and I understand from the respondent that there is
some improvement since this report was made . . . we respectfully request that an up-to-date inspection
be made . . . . An inspector of this Commission can be sent to the plant and considering that the
engineer of this Commission, Engineer Meliton Martinez, is very acquainted to the points involved we
pray that his report will be used by us for the reason that he is a technical man and he knows well as he
has done a good job and I think our proposition would expedite the matter. We sincerely believe that the
inspection report will be the best evidence to decide this matter.

xxx xxx xxx

"ATTY. LUQUE:

". . . . This is a very important matter and to show the good faith of respondent in this case we will not
even cross-examine the engineer when he makes a new report. We will agree to the findings and, your
honor please, considering as we have manifested before that Engineer Martinez is an experienced
engineer of this Commission and the points reported by Engineer Martinez on the situation of the plant
now will prevent the necessity of having a hearing, of us bringing new evidence and complainant
bringing new evidence. . . .

xxx xxx xxx

"COMMISSION (to Atty. Luque):

Q "Does the Commission understand from the counsel for applicant that if the motion is granted he will
submit this order to show cause for decision without any further hearing and the decision will be based
on the report of the engineer of this Commission?

A "We respectfully reply in this manner that we be allowed or be given an opportunity just to read the
report and 99% we will agree that the report will be the basis of that decision. We just want to find out the
contents of the report, however, we request that we be furnished with a copy of the report before the
hearing so that we will just make a manifestation that we will agree.

"COMMISSION (to Atty. Luque):

| Page 5 of 14
Q "In order to prevent the delay of the disposition of this case the Commission will allow counsel for the
applicant to submit his written reply to the report that the engineer of this Commission. Will he submit this
case without further hearing upon the receipt of that written reply?

A "Yes, your honor."

Proceedings of August 25, 1961

"ATTY. LUQUE (Counsel for petitioner)

"In order to avoid any delay in the consideration of this case we are respectfully move (sic) that instead
of our witnesses testifying under oath that we will submit a written reply under oath together with the
memorandum within fifteen (15) days and we will furnish a copy and upon our submission of said written
reply under oath and memorandum we consider this case submitted. This suggestion is to abbreviate the
necessity of presenting witnesses here which may prolong the resolution of this case.

"ATTY. OLIVAS: (Counsel for respondent municipality)

"I object on the ground that there is no resolution by this Commission on the action to reopen the case
and second this case has been closed.

"ATTY. LUQUE:

"With regard to the testimony on the ground for opposition we respectfully submit to this Commission our
motion to submit a written reply together with a memorandum. Also as stated to expedite the case and to
avoid further hearing we will just submit our written reply. According to our records we are furnished with
a copy of the report of July 17, 1961. We submit your honor.

xxx xxx xxx

"COMMISSION:

"To give applicant a chance to have a day in court the Commission grants the request of applicant that it
be given 10 days within which to submit a written reply on the report of the engineer of the Commission
who inspected the electric service, in the municipality of Morong, Rizal, and after the submission of the
said written reply within 10 days from today this case will be considered submitted for decision."

The above-quoted manifestations of counsel for the petitioner, specifically the statement referring to the
inspection report of Engineer Martinez as the "best evidence to decide this matter," can serve as an
argument against petitioner's claim that the Commission should have taken into consideration the
testimony of Mr. Bernardino. But the primary reasons why the Commission could not have taken judicial
cognizance of said testimony are: first, it is not a proper subject of judicial notice, as it is not a "known"
fact - that is, well established and authoritatively settled, without qualification and contention; 13 second,
it was given in a subsequent and distinct case after the petitioner's motion for reconsideration was heard
by the Commission en banc and submitted for decision; 14 and third, it was not brought to the attention
of the Commission in this case through an appropriate pleading. 15

Regarding the contention of petitioner that the Commission had acted both as prosecutor and judge, it
should be considered that there are two matters that had to be decided in this case, namely, the order to
show cause dated December 19, 1956, and the petition or complaint filed by respondent municipality
dated June 25, 1958. Both matters were heard jointly, and the record shows that respondent municipality
| Page 6 of 14
had been allowed to present its evidence to substantiate its complaint. It can not be said, therefore, that
in this case the Commission had acted as prosecutor and judge. But even assuming, for the sake of
argument, that there was a commingling of the prosecuting and investigating functions, this exercise of
dual functions, is authorized by Section 17(a) of Commonwealth Act No. 146, as amended, under which
the Commission has power "to investigate, upon its own initiative, or upon complaint in writing, any
matter concerning any public service as regards matters under its jurisdiction; to require any public
service to furnish safe, adequate, and proper service as the public interest may require and warrant; to
enforce compliance with any standard, rule, regulation, order or other requirement of this Act or of the
Commission, . . . ." Thus, in the case of Collector of Internal Revenue vs. Estate of F.P. Buan, L-11438,
July 31, 1958, this Court held that the power of the Commission to cancel and revoke a certificate of
public convenience and necessity may be exercised by it even without a formal charge filed by any
interested party, with the only limitation that the holder of the certificate should be given his day in court.

It may not be amiss to add that when prosecuting and investigating duties are delegated by statute to an
administrative body, as in the case of the Public Service Commission, said body may take steps it
believes appropriate for the proper exercise of said duties, particularly in the manner of informing itself
whether there is probable violation of the law and/or its rules and regulations. It may initiate an
investigation, file a complaint, and then try the charge as preferred. So long as the respondent is given a
day in court, there can be no denial of due process, and objections to said procedure cannot be
sustained.

3. In its third assignment of error, petitioner invokes the "protection-of-investment rule" enunciated by this
Court in Batangas Transportation Co. vs. Orlanes 16 in this wise:

"The Government having taken over the control and supervision of all public utilities, so long as an
operator under a prior license complies with the terms and conditions of his license and reasonable rules
and regulations for its operation and meets the reasonable demands of the public, it is the duty of the
commission to protect rather than to destroy his investment by the granting of the second license to
another person for the same thing over the same route of travel. The granting of such a license does not
serve its convenience or promote the interests of the public."

The above-quoted rule, however, is not absolute, for nobody has exclusive right to secure a franchise or
a certificate of public convenience. 17 Where, as in the present case, it has been shown by ample
evidence that the petitioner, despite ample time and opportunity given to it by the Commission, had failed
to render adequate, sufficient and satisfactory service and had violated the important conditions of its
certificate as well as the directives and the rules and regulations of the Commission, the rule cannot
apply. To apply that rule unqualifiedly is to encourage violation or disregard of the terms and conditions
of the certificate and the Commission's directives and regulations, and would close the door to other
applicants who could establish, operate and provide adequate, efficient and satisfactory service for the
benefit and convenience of the inhabitants. It should be emphasized that the paramount consideration
should always be the public interest and public convenience. The duty of the Commission to protect the
investment of a public utility operator refers only to operators of good standing - those who comply with
the laws, rules and regulations - and not to operators who are unconcerned with the public interest and
whose investments have failed or deteriorated because of their own fault. 18

4. The last assignment of error assails the propriety of the penalty imposed by the Commission on the
petitioner - that is, the revocation of the certificate and the forfeiture of the franchise. Petitioner contends
that the imposition of a fine would have been sufficient, as had been done by the Commission in cases
of a similar nature.

It should be observed that Section 16 (n) of Commonwealth Act No. 146, as amended, confers upon the
| Page 7 of 14
Commission ample power and discretion to order the cancellation and revocation of any certificate of
public convenience issued to an operator who has violated, or has willfully and contumaciously refused
to comply with, any order, rule or regulation of the Commission or any provision of law. What matters is
that there is evidence to support the action of the Commission. In the instant case, as shown by the
evidence, the contumacious refusal of the petitioner since 1954 to comply with the directives, rules and
regulations of the Commission, its violation of the conditions of its certificate and its incapability to
comply with its commitment as shown by its inadequate service, were the circumstances that warranted
the action of the Commission in not merely imposing a fine but in revoking altogether petitioner's
certificate. To allow petitioner to continue its operation would be to sacrifice public interest and
convenience in favor of private interest.

"A grant of a certificate of public convenience confers no property rights but is a mere license or privilege,
and such privilege is forfeited when the grantee fails to comply with his commitments behind which lies
the paramount interest of the public, for public necessity cannot be made to wait, nor sacrificed for
private convenience." (Collector of Internal Revenue vs. Estate of F.P. Buan, et al., L-11438 and
Santiago Sambrano, et al., v. PSC, et al., L-11439 & L-11542-46, July 31, 1958)

"(T)he Public Service Commission, . . . has the power to specify and define the terms and conditions
upon which the public utility shall be operated, and to make reasonable rules and regulations for its
operation and the compensation which the utility shall receive for its services to the public, and for any
failure to comply with such rules and regulations or the violation of any of the terms and conditions for
which the license was granted, the Commission has ample power to enforce the provisions of the license
or even to revoke it, for any failure or neglect to comply with any of its terms and provisions." (Batangas
Trans. Co. v. Orlanes, 52 Phil. 455, 460; Emphasis supplied)

Presumably, the petitioner has in mind Section 21 of Commonwealth Act No. 146, as amended, which
provides that a public utility operator violating or failing to comply with the terms and conditions of any
certificate, or any orders, decisions or regulations of the Commission, shall be subject to a fine and that
the Commission is authorized and empowered to impose such fine, after due notice and hearing. It
should be noted, however, that the last sentence of said section states that the remedy provided therein
"shall not be a bar to, or affect any other remedy provided in this Act but shall be cumulative and
additional to such remedy or remedies." In other words, the imposition of a fine may only be one of the
remedies which the Commission may resort to, in its discretion. But that remedy is not exclusive of, or
has preference over, the other remedies. And this Court will not substitute its discretion for that of the
Commission, as long as there is evidence to support the exercise of that discretion by the Commission.

G.R. No. L-21221

Coming now to the other case, let it be stated at the outset that before any certificate may be granted,
authorizing the operation of a public service, three requisites must be complied with, namely: (1) the
applicant must be a citizen of the Philippines or of the United States, or a corporation or co-partnership,
association or joint-stock company constituted and organized under the laws of the Philippines, sixty per
centum at least of the stock or paid-up capital of which belongs entirely to citizens of the Philippines or of
the United States; 19 (2) the applicant must be financially capable of undertaking the proposed service
and meeting the responsibilities incident to its operation; 20 and (3) the applicant must prove that the
operation of the public service proposed and the authorization to do business will promote the public
interest in a proper and suitable manner. 21

As stated earlier, in the decision appealed from, the Commission found that Morong Electric is a
corporation duly organized and existing under the laws of the Philippines, the stockholders of which are
Filipino citizens, that it is financially capable of operating an electric light, heat and power service, and
| Page 8 of 14
that at the time the decision was rendered there was absence of electric service in Morong, Rizal. While
the petitioner does not dispute the need of an electric service in Morong, Rizal, 22 it claims, in effect, that
Morong Electric should not have been granted the certificate of public convenience and necessity
because (1) it did not have a corporate personality at the time it was granted a franchise and when it
applied for said certificate; (2) it is not financially capable of undertaking an electric service, and (3)
petitioner was rendering efficient service before its electric plant was burned, and therefore, being a prior
operator its investment should be protected and no new party should be granted a franchise and
certificate of public convenience and necessity to operate an electric service in the same locality.

1. The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the
proposition that since a franchise is a contract, 23 at least two competent parties are necessary to the
execution thereof, and parties are not competent except they are in being. Hence, it is contended that
until a corporation has come into being, in this jurisdiction, by the issuance of a certificate of
incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract as a
corporation. The certificate of incorporation of the Morong Electric was issued by the SEC on October 17,
1962, so only from that date, not before, did it acquire juridical personality and legal existence. Petitioner
concludes that the franchise granted to Morong Electric on May 6, 1962 when it was not yet in esse is
null and void and cannot be the subject of the Commission's consideration. On the other hand, Morong
Electric argues, and to which argument the Commission agrees, that it was a de facto corporation at the
time the franchise was granted and, as such, it was not incapacitated to enter into any contract or to
apply for and accept a franchise. Not having been incapacitated, Morong Electric maintains that the
franchise granted to it is valid and the approval or disapproval thereof can be properly determined by the
Commission.

Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a
municipal franchise was granted to it is correct. The juridical personality and legal existence of Morong
Electric began only on October 17, 1962 when its certificate of incorporation, was issued by the SEC. 24
Before that date, or pending the issuance of said certificate of incorporation, the incorporators cannot be
considered as de facto corporation. 25 But the fact that Morong Electric had no corporate existence on
the day the franchise was granted in its name does not render the franchise invalid, because later
Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance
with the terms and conditions thereof. This view is sustained by eminent American authorities. Thus.
McQuillin says:

"The fact that a company is not completely incorporated at the time the grant is made to it by a
municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But
such grant cannot take effect until the corporation is organized. And in Illinois it has been decided
that the ordinance granting the franchise may be presented before the corporation grantee is fully
organized, where the organization is completed before the passage and acceptance." (McQuillin,
Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec. 34.21)

Fletcher says:

"While a franchise cannot take effect until the grantee corporation is organized, the franchise may,
nevertheless, be applied for before the company is fully organized.

"A grant of a street franchise is valid although the corporation is not created until afterwards."
(Fletcher, Cyclopedia Corp. Permanent Edition, Rev. Vol. 6-A, Sec. 2881)

And Thompson gives the reason for the rule:

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 "(I)n the matter of the secondary franchise the authorities are numerous in support of the
proposition that an ordinance granting a privilege to a corporation is not void because the
beneficiary of the ordinance is not fully organized at the time of the introduction of the ordinance. It
is enough that organization is complete prior to the passage and acceptance of the ordinance. The
reason is that a privilege of this character is a mere license to the corporation until it accepts the
grant and complies with its terms and conditions." (Thompson on Corporations, Vol. 4, 3rd Ed.,
Sec. 2929) 26

The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as shown
by its action in prosecuting the application filed with the Commission for the approval of said franchise,
not only perfected a contract between the respondent municipality and Morong Electric but also cured
the deficiency pointed out by the petitioner in the application of Morong Electric. Thus, the Commission
did not err in denying petitioner's motion to dismiss said application and in proceeding to hear the same.
The efficacy of the franchise, however, arose only upon its approval by the Commission on March 13,
1963. The reason is that -

"Under Act No. 667, as amended by Act No. 1022, a municipal council has the power to grant
electric franchises, subject to the approval of the provincial board and the President. However,
under Section 16 (b) of Commonwealth Act No. 146, as amended, the Public Service Commission
is empowered' to approve, subject to constitutional limitations any franchise or privilege granted
under the provisions of Act No. 667, as amended by Act 1022, by any political subdivision of the
Philippines when, in the judgment of the Commission, such franchise or privilege will properly
conserve the public interests, and the Commission shall in so approving impose such conditions
as to construction, equipment, maintenance, service, or operation as the public interests and
convenience may reasonably require, and to issue certificates of public convenience and necessity
when such is required or provided by any law or franchise.' Thus, the efficacy of a municipal
electric franchise arises, therefore, only after the approval of the Public Service Commission."
(Almendras vs. Ramos, 90 Phil. 231)

The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not
incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro
Sandiko 27 upon which the petitioner leans heavily in support of its position. In said case this Court held
that a corporation should have a full and complete organization and existence as an entity before it can
enter into any kind of a contract or transact any business. It should be pointed out, however, that this
Court did not say in that case that the rule is absolute or that under no circumstances may the acts of
promoters of a corporation be ratified or accepted by the corporation if and when subsequently
organized. Of course, there are exceptions. It will be noted that American courts generally hold that a
contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by
the corporation when organized. 28

2. The validity of the franchise and the corporate personality of Morong Electric to accept the same
having been shown, the next question to be resolved is whether said company has the financial
qualification to operate an electric light, heat and power service. Petitioner challenges the financial
capability of Morong Electric, by pointing out the inconsistencies in the testimony of Mr. Jose P. Ingal,
president of said company, regarding its assets and the amount of its initial investment for the electric
plant. In this connection it should be stated that on the basis of the evidence presented on the matter,
the Commission has found the Morong Electric to be "financially qualified to install, maintain and operate
the proposed electric light, heat and power service." This is essentially a factual determination which, in
a number of cases, this Court has said it will not disturb unless patently unsupported by evidence. An
examination of the record of this case readily shows that the testimony of Mr. Ingal and the documents
he presented to establish the financial capability of Morong Electric provide reasonable grounds for the
| Page 10 of 14
above finding of the Commission.

"It is now a very well-settled rule in this jurisdiction that the findings and conclusions of fact made by the
Public Service Commission, after weighing the evidence adduced by the parties in a public service case,
will not be disturbed by the Supreme Court unless those findings and conclusions appear not to be
reasonably supported by evidence." (La Mallorca and Pampanga Bus Co. vs. Mercado, L-19120,
November 29, 1965)

"For purposes of appeal, what is decisive is that said testimonial evidence provides reasonable support
for the Public Service Commission's findings of financial capacity on the part of applicants, rendering
such findings beyond our power to disturb." (Del Pilar Transit vs. Silva, L-21547, July 15, 1966)

It may be worthwhile to mention in this connection that per inspection report dated January 20, 1964 29
of Mr. Meliton Martinez of the Commission, who inspected the electric service of Morong Electric on
January 15-16, 1964, Morong Electric "is serving electric service to the entire area covered by its
approved plan and has constructed its line in accordance with the plans and specifications approved by
the Commission." By reason thereof, it was recommended that the requests of Morong Electric (1) for
the withdrawal of its deposit in the amount of P1,000.00 with the Treasurer of the Philippines, and (2) for
the approval of Resolution No. 160 of the Municipal Council of Morong, Rizal, exempting the operator
from making the additional P9,000.00 deposit mentioned in its petition, dated September 16, 1963, be
granted. This report removes any doubt as to the financial capability of Morong Electric to operate and
maintain an electric light, heat and power service.

3. With the financial qualification of Morong Electric beyond doubt, the remaining question to be resolved
is whether, or not, the findings of fact of the Commission regarding petitioner's service are supported by
evidence. It is the contention of the petitioner that the Commission made some findings of fact prejudicial
to its position but which do not find support from the evidence presented in this case. Specifically,
petitioner refers to the statements or findings that its service had "turned from bad to worse", that it
miserably failed to comply with the oft-repeated promises to bring about the needed improvement, that
its equipment is unserviceable, and that it has no longer any plant site and, therefore, has discredited
itself. Petitioner further states that such statements are not only devoid of evidentiary support but
contrary to the testimony of its witness, Mr. Harry Bernardino, who testified that petitioner was rendering
efficient and satisfactory service before its electric plant was burned on July 29, 1962.

On the face of the decision appealed from, it is obvious that the Commission in describing the kind of
service petitioner was rendering before its certificate was ordered revoked and cancelled, took judicial
notice of the records of the previous case (PSC Case No. 39715) where the quality of petitioner's service
had been squarely put in issue. It will be noted that the findings of the Commission were made
notwithstanding the fact that the aforementioned testimony of Mr. Bernardino had been emphasized and
pointed out in petitioner's Memorandum to the Commission. 30 The implication is simple: that as
between the testimony of Mr. Bernardino and the inspection reports of the engineers of the Commission,
which served as the basis of the revocation order, the Commission gave credence to the latter. Naturally,
whatever conclusion or finding of fact that the Commission arrived at regarding the quality of petitioner's
service are not borne out by the evidence presented in this case but by evidence in the previous case.
31 In this connection, we repeat, the conclusion, arrived at by the Commission after weighing the
conflicting evidence in the two related cases, is a conclusion of fact which this Court will not disturb.

"And it has been held time and again that where the Commission has reached a conclusion of fact after
weighing the conflicting evidence, that conclusion must be respected, and the Supreme Court will not
interfere unless it clearly appears that there is no evidence to support the decision of the Commission."
(La Mallorca and Pampanga Bus Co., vs. Mercado, L-19120, November 29, 1965 citing Pangasinan
| Page 11 of 14
Trans. Co., Inc. vs. Dela Cruz, 95 Phil. 278)

For that matter, petitioner's pretension that it has a prior right to the operation of an electric service in
Morong, Rizal, is not tenable; and its plea for protection of its investment, as in the previous case, cannot
be entertained.

WHEREFORE, the two decisions of the Public Service Commission, appealed from, should be, as they
are hereby affirmed, with costs in the two cases against petitioner Rizal Light & Ice Co., Inc. It is so
ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon Makalintal, Sanchez, Castro, Angeles and Fernando, JJ., concur.

Footnotes

1. Hereinafter referred to as "Commission".

2. Hereinafter referred to as "Morong Electric".

3. Hereinafter referred to as "Morong Electric".

4. Not "Pedro G. Talavera" as appearing in petitioner's Brief. Mr. Pedro S. Talavera also conducted the
hearings in the main case.

5. Law List 1961, First Edition, does not contain the name "Pedro S. Talavera."

6. As amended by R.A. No. 723 which took effect on June 6, 1962, it reads: "The Commission may also,
by proper order, authorize any of the attorneys of the legal division or division chiefs of the Commission,
if they be lawyers, to hear and investigate any case filed with the Commission and in connection
therewith to receive such evidence as may be material thereto." (Italics supplied.)

7. Sessions of September 23, 1960, December 15, 1960, February 24, 1961 and August 25, 1961.

8. Everett Steamship Corp. vs. Chuahiong, L-2933, September 26, 1951; Raymundo Trans. vs. Cervo,
L-3899, May 21, 1952; Enriquez & Co. vs Ortega, L-4865, December 22, 1952; and Luzon Stevedoring
Co. vs. PSC, L-5458, September 16, 1953.

9. In Raymundo Trans. vs. Cervo, supra, it was held: "As provided for in Rule 43, Section 2 of the Rules
of Court an appellant can only raise in a petition for review questions that had been raised before the
Public Service Commission."

10. A.L. Ammen Transportation Co. vs. Froilan Japa, L-19643, July 26, 1966; Del Pilar Transit, Inc. vs.
Jose M. Silva, L-21547, July 15, 1966; Pineda vs. Carandang, L-13270-71, March 24, 1960; and Ramos
vs. Lat, et al., L-14476 & 15773, May 23, 1960.

11. Admitted by the petitioner in its Brief, pp. 3 & 11.

12. "The Public Service Commission in the exercise of its quasi- judicial and administrative functions has
the power to take into consideration the result of its own observation and investigation of the matter
submitted to it for consideration and decision, in connection with other evidence presented at the hearing
of a case." (Cebu Transit Co. vs. PSC, 79 Phil. 386; Sambrano vs. Northern Luzon Trans. Co., 63 Phil.
554; Manila Yellow Taxicab Co., Inc. vs. Araullo, et al., 60 Phil. 833; and Manila Yellow Taxicab Co., Inc.
| Page 12 of 14
vs. B. Stables Co., 60 Phil. 851.)

"The Commission can take cognizance of the facts disclosed by its own records." (Dagupan Ice
Plant Co., Inc. vs. Lucero, et al., 66 Phil. 120, 123.)

13. "Matters of which the Court will take notice are necessarily uniform or fixed, and do not depend upon
uncertain testimony, for as soon as a matter becomes disputable, it ceases to fall under the head of
common knowledge and will not be judicially recognized." (29 Am Jur 2d 61-62).

14. Petitioner's motion for reconsideration was heard on Jan. 11, 1963 and on that date said motion was
considered submitted for decision, while the testimony of Bernardino was given on January 24, 1963.

15. "Judicial notice is not judicial knowledge; and one having the burden of establishing a fact of which a
court may take judicial notice is not in consequence relieved of the necessity of bringing the fact to the
knowledge of the Court." (Francisco, Evidence, pp. 51-52 citing Shapleigh, et al., v. Mier, No. 125 (U.S.)
Jan. 1937.)

16. 52 Phil. 455, 472; see also Javier v. Orlanes 53 Phil. 468 and Bohol Trans. Co. vs. Jureidini, 53 Phil.
560.

17. See Teresa Electric & Power Co., Inc. vs. PSC, L-21804, Sept. 25, 1967; Manila Taxicab, et al., vs.
PSC, et al., 90 Phil. 301.

18. Paredes vs. PSC, et al., L-7111, May 30, 1955.

19. Ishi v. PSC, 63 Phil. 428.

20. Manila Yellow Taxicab v. Austin Taxicab Co., 59 Phil. 771.

21. Sec. 15 Com. Act No. 146; Batangas Trans. v. Orlanes, 52 Phil. 455. See also Martin, Phil.
Commercial Law, Vol. 3, pp. 1195-1196; Almario, Transportation and Public Service Law, pp. 300-301;
Agbayani, Commercial Laws of the Phil. Vol. 4 (1964 Ed.), pp. 2363-2364.

22. T.s.n., p. 89 (Session of January 11, 1963).

23. City of Manila vs. PSC, 52 Phil. 515.

24. Hall vs. Judge Piccio, 86 Phil. 603, 605; See also Fisher, The Phil. Law of Stock Corp., p. 36.

25. Tolentino, Commercial Laws of the Philippines, Vol. II 8th Ed., p. 723; See also Guevara, The Phil.
Corp. Law, New Ed., p. 18.

26. McQuillin, Fletcher and Thompson cite as authorities the cases of Clarksburg Electric Light Co. vs.
Clarksburg, 47 W. Va. 739, 35 S.E. 994, 50 L.R.A. 142 and Chicago Telephone Co. vs. Northwestern Tel.
Co., 199 Ill. 324, 65 N.E. 329.

27. 65 Phil. 223.

28. Fletcher, Cyclopedia Corporation, Permanent Ed. Vol. I, Chap. 9, Sec. 207, p. 681.

29. Marked Annex "A" of the memorandum of Morong Electric in lieu of oral arguments.
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30. p. 16, Memorandum of Oppositor (herein petitioner).

31. The close connection of the matter in controversy in the two cases warranted the Commission to
take judicial notice of the records of the previous case, the findings of fact therein and the ruling of the
Commission (See also 5 Moran, 1963 Ed., p. 42.)

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